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Hong Kong Airlines IPO Part 1: reportedly profitable but with improvements needed

16-Sep-2014 8:37 PM

Hong Kong Airlines, the third largest airline in its namesake hub, has filed an application to be listed on the Hong Kong stock exchange. Its application discloses many figures for the first time in the airline’s history, but is not yet a formal prospectus. The application shows Hong Kong Airlines has been profitable, but with significant contributions from sub-leasing of aircraft. 

The first part of this report benchmarks Hong Kong Airlines’ yield, cost, labour productivity and aircraft utilisation against Cathay Pacific and Dragonair, its most significant competitors. Cathay has a yield premium over Hong Kong Airlines, while cost figures are impacted by very different average sector lengths.

Hong Kong Airlines does appear to benefit from being a younger airline in having lower labour costs, but will need to gain more cost efficiencies and yield growth. Its strategy will be examined in part two of this report. 

Air France-KLM's new plan to grow LCC Transavia has taken too long; a union confrontation looms

14-Sep-2014 2:23 PM

At its recent Investor Day, Air France-KLM gave details of its 'Perform 2020' five-year industrial plan, originally outlined in Jul-2014. Much of it is a continuation of 'Transform 2015': discipline over capacity and capital, further unit cost reduction (at 1% to 1.5% pa) and further balance sheet fixing. It also involves more restructuring of the short and medium haul passenger business, including a more aggressive expansion of LCC Transavia from 44 aircraft this summer to 100 in 2017, a further cuts in the full freighter fleet and growth in the more profitable maintenance business.

Perform 2020 moves Air France-KLM in the right direction, but the pace of change is glacial. The group's profitability lags its main rivals' as it continues to be hamstrung by legacy issues such as union power. Transavia is a genuine low-cost operator, but, since its French arm started in 2007, its total fleet has grown by 16 aircraft, close to 60%. Over the same period, the combined fleets of Ryanair, easyJet and Norwegian have more than doubled, adding over 300 units. It has taken Air France-KLM far too long to wake up to its LCC's potential.

SAS Scandinavian Airlines: 3Q profits down as yield weakness continues at Europe's high cost airline

12-Sep-2014 4:41 PM

Another quarter, another fall in yield for Scandinavian Airlines, SAS. The Nordic region's largest airline reported a year on year decline in profits in 3QFY2014 and a fall into loss for 9M. It has made good progress with its cost reduction programme, but costs are not falling fast enough to offset tumbling yields and SAS remains one of Europe's highest cost airlines.

Healthy load factor gains demonstrate that SAS has some appeal to the Scandinavian frequent flyers that it desires, but price discounting remains a key feature of this appeal. Overcapacity in its markets has contributed to yield weakness, but its many LCC competitors are better positioned to provide the lower fares demanded by the market. In spite of some easing of the supply/demand imbalance, SAS expects continued yield pressure.

SAS' number one priority is an additional cost reduction programme, full details of which will be announced by the end of 2014.

Europe's airlines: 1H2014 results season shows improving trend, but cost reduction is the key driver

7-Sep-2014 11:28 AM

Europe's airlines appear to be following a course to improved profitability, based on the 1H2014 results of the largest publicly quoted airline groups. Profits remain slender in most cases, but margins are improving in aggregate. Individually, financial performance varied widely, with LCCs both leading (Ryanair) and lagging (Norwegian) the operating profit margin rankings in 1H2014.

The European market offers volume growth, but is characterised by price pressure, with RASK falling for the majority of the larger airline groups and this points to the need for additional caution in capacity growth. The LCCs collectively enjoyed higher growth than the FSCs in 1H2014 and also achieved a more stable RASK performance (although not in all cases).

Profit improvement is largely being achieved through cost savings and CASK reduction. Although fuel prices are high on a longer term historic perspective, they are enjoying a period of relative stability and this has helped the cost picture. Although Europe's airline sector remains only thinly profitable, these 1H results hold out the prospect of better full year results in 2014 versus 2013.

Aegean Airlines Group benefits from Olympic Air integration with a strong 1H2014 profit increase

5-Sep-2014 8:00 PM

Aegean Airlines Group has continued to build on 2013's record profit with a more than doubling of its 1H2014 net profit (based on proforma figures that include Olympic Air in the prior year results). Although unit revenue (RASK) fell in 1H2014, reversing the positive trend of the previous two years, it succeeded in cutting unit cost (CASK) at a faster rate.

Aegean's 1H2014 operating margin of 6.0% makes it one of Europe's most profitable airline groups so far this year. The acquisition of Olympic in Oct-2013 appears to be providing benefits in the form of cost synergies and improved network feed, apparently without significantly distracting management attention.

Nevertheless, the competitive landscape is unlikely to become more hospitable as competitors such as Ryanair expand in Greece. In addition, geopolitical risk in Russia, one of Aegean's most important markets, is likely to add to pressure on RASK in 2H2014.

Aeroflot Group suffers first 1H net loss in many years as geopolitical backdrop starts to show

4-Sep-2014 3:00 PM

The Aeroflot Group fell into loss in 1H2014, its first 1H loss since at least 2008. Although the result was affected by a significant level of non-recurring expenses, the underlying operating result was still significantly lower than last year. Aeroflot continues to grow faster than the Russian market and its focus on increased frequencies, rather than new routes, has helped the Group to grow its RASK (revenue per available seat kilometre). Unfortunately, this growth in RASK was outpaced by growth in CASK (cost per available seat kilometre).

The current geopolitical backdrop is clearly providing Aeroflot with some serious challenges. Demand for international flights has been weakened and EU sanctions forced the suspension of operations of Aeroflot's nascent LCC Dobrolet. Plans by the Russian government to reduce its stake in Aeroflot to 50% plus one share may now meet with delays as investors are likely to want to wait for the geopolitical situation to become more stable.

Airberlin's first 2Q profit since 2009 shows promise from its business model restructuring

22-Aug-2014 8:05 PM

Airberlin has made its first 2Q net profit since 2009, although its operating result was still negative and both its net and operating results were in loss for1H. It seems unlikely that 2014 will see a full year operating profit, but losses are at least becoming narrower. Airberlin is now seeing the benefits of its Turbine cost reduction programme and its sharper network focus.

In Apr-2014, recognising that Turbine was not enough to restore sustainable profitability, airberlin announced a more fundamental review of its business model.

This review will continue until the end of Sep-2014, but CEO Wolfgang Prock-Schauer has provided some insight into the early results of airberlin's new thinking.

Turkish Airlines SWOT: a recent pattern of falling quarterly profits, but many strategic strengths

21-Aug-2014 7:00 PM

Benefiting both from a large and growing home market and from its strategy to increase transfer traffic, Turkish Airlines (THY) continues to achieve double digit growth in traffic and revenues. Nevertheless, THY reported a year on year drop in its operating profit in 2Q2014 for the fourth successive quarter (although net profit increased due to non-operating items). It was also the fifth successive quarter to suffer a fall in unit revenue (RASK, expressed in USc).

Although it has an efficient cost structure by FSC standards, it has struggled in recent quarters to lower CASK enough to offset downward pressure on RASK. In this report, we put THY's recent quarterly results performance into a more strategic perspective by looking at its strengths, weaknesses, opportunities and threats.

Virgin America SWOT Analysis Part 2: Opportunities for an IPO in a more benevolent environment

20-Aug-2014 9:37 PM

Shortly before Virgin America reported one of its best financial performances in its history during 2Q2014 as profits trebled year-on-year to USD37 million, it announced an imminent IPO for 2014.

After a 1Q2014 loss of USD22 million Virgin America still managed a USD15 million profit during 1H2014.

This is the second part of a SWOT Analysis of Virgin America.

The first part was published on 18-Aug-2014.

Finnair's 2Q and expected 2014 losses highlight challenges for smaller full service airlines

20-Aug-2014 6:10 PM

Finnair improved its load factor in 2Q2014 after a dip in 1Q and made further progress with its cost reduction programme. It has reached agreement with many employee groups over further cost efficiencies, but did not reach full agreement with flight attendants. Management's consequent decision to begin implementing plans to outsource part of its cabin services activities displays a commendable resolve to achieve the necessary savings.

Nevertheless, in the words of CEO Pekka Vauramo, "the second quarter of 2014 was difficult".

Weak market conditions meant that unit revenue declined more rapidly than unit costs and the airline fell into loss in 2Q2014. It now expects a significant operational loss for FY2014, which would mean a second year of falling results.

Pegasus Airlines' fourth successive fall in underlying quarterly profit, but perhaps turned a corner

19-Aug-2014 5:49 PM

Although Turkish LCC Pegasus Airlines reported a year on year increase in 2Q net profit, the underlying operating result was less than the same period last year. This was the fourth successive quarter of year on year declines in the underlying operating result.

Reading Pegasus' results is complicated by foreign exchange movements, since the majority of its revenues and, particularly, its costs are denominated in hard currency (mainly EUR and USD). Expressed in EUR terms, rather than in Pegasus' reporting currency of TRY, Pegasus lowered its CASK (cost per available seat km) in 2Q, but enough to compensate for the drop in RASK (revenue per available seat km).

Nevertheless, Pegasus reiterated its FY2014 guidance amid some signs that it may have turned a corner and be ready to leave the path of deteriorating margins.

Virgin America SWOT: Announcing its IPO, Virgin records a profitable 2Q2014. Sustainability is key

18-Aug-2014 9:50 PM

Virgin America recorded one of its best financial performances in its history during 2Q2014 as profits trebled year-on-year to USD37 million. After a 1Q2014 loss of USD22 million Virgin America still managed to eke out a USD15 million profit during 1H2014.

The airline has also officially submitted the necessary information to US regulators for an initial public offering, something Virgin America has frequently discussed during the past year. Its prospects of successfully executing an IPO remain challenging. Virgin America’s financial track record and, albeit improving, its balance sheet remains only limitedly attractive to potential new investors.

Despite progress in its financial performance, Virgin America’s challenges for now continue to outweigh its strengths, a scenario it needs to turn around for the long term. Its current investors may be pressing for an IPO, but accessing the public market does not guarantee long term staying power. In this Virgin may be helped by the current "restraint" of the newly consolidated majors, providing greater stability not only for themselves, but also for other quality incumbents.

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