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Airport ground handling – industry overview 2014. Part 1: Liberalisation, efficiency & compensation

18-Nov-2014 8:00 PM

Long considered, perhaps unfairly, to be the ‘bottom feeder’ of the air transport business, the global airport ground handling business is now estimated to be worth over USD80 billion per annum according to its trade association, ASA - while some say USD100 billion.

By comparison the airline industry turned over around USD700 billion in 2013.

Ground handling’s status may be growing but this particular business segment has unique issues that frequently dominate its agenda.

Part 1 of this report deals with the impact of liberalisation, the counter-intuitive inefficiency of multiple ground handlers and the recent UK Supreme Court's potentially disruptive decision on claims for delayed flights. Part 2 will review the consolidation of the ground handling industry and emerging alliances.

Toulouse-Blagnac Airport deal signals rekindling of airport privatisation in France

18-Nov-2014 1:24 PM

France's traditionally conservative aviation policy has meant that air services have focussed around Paris. The result is that there are few large airports outside the capital.

Moreover, the privatisation of France’s airports has been a long drawn out, stop-start process, which involved Aeroports de Paris at one end of the scale and a number of secondary level airports serving small cities at the other.

Sat patiently in the middle have been the primary level airports (only one of which handles more than 10 million ppa despite that designation).

But with the forthcoming privatisation of Toulouse Blagnac airport their time may have come at last.

Airberlin: new restructuring plan appears not radical enough as 3Q profitability slips

17-Nov-2014 6:07 PM

After narrowing its operating loss in 1H2014, airberlin's 3Q result was in profit, but at a lower level than last year in what is the seasonally strongest quarter. Unit revenues continued to fall and the airline was unable to reduce unit costs sufficiently to compensate for this (even after allowing for restructuring costs). Another heavy loss is on the way for FY2014.

Airberlin has also given a further update on its new restructuring programme. In spite of indications earlier this year that the new programme might lead to fundamental strategic change, there is also little, if anything, that appears radical in the plan. Airberlin will remain in the same business segments, but redouble its efforts to do the same things more efficiently. Moreover, it has not really addressed one of the key themes we have identified in our analysis of the airline for some time, namely establishing its core purpose.

Pegasus Airlines: one of Europe's most profitable airlines returns to improving profitability trend

14-Nov-2014 3:40 PM

After four successive quarters of year on year declines in its underlying operating result, Pegasus Airlines reported an increase in 3Q2014. Its operating margin was at the same level as 3Q2013, after falling in 1H, and second in Europe only to Ryanair (of those to report thus far).

As always, Pegasus' results are complicated by foreign exchange, especially as Turkey's currency has weakened against EUR and USD. Expressed in its functional currency of EUR, rather than its reporting currency of TRY, Pegasus' CASK (cost per available seat km) edged up slightly in 3Q, reversing the decline of 1H. Fortunately, RASK (revenue per available seat km) also increased at a similar rate, ending a four quarter falling trend. This was helped by a relative slowing of its capacity growth in addition to less aggressive pricing by Turkish Airlines at Sabiha Gökçen.

Pegasus has reiterated its FY2014 guidance, although there now seems to be scope for it to do better. Our suggestion after 2Q results, that Pegasus may have turned a corner and be ready to leave the path of deteriorating margins, seems to be gaining credibility.

Garuda Indonesia outlook brightens as slower international expansion leads to financial improvement

14-Nov-2014 11:13 AM

Garuda Indonesia’s decisions to slow its international expansion and raise domestic fares have led to a significant improvement in profitability in recent months following a dismal 1H2014. The airline group remained in the red in 3Q2014 but the loss was very small compared to 1H2014 and Garuda had a profitable month in Sep-2014.

Garuda is planning to resume some international growth in 2015. But the growth will be relatively modest and Garuda has made sensible adjustments to its fleet plan, deferring some deliveries and opting against acquiring additional widebody aircraft.

Garuda’s ability to recover from the challenges of 1H2014 puts the group in a relatively strong position as longstanding CEO Emirsyah Satar exits after 10 years at the helm. Mr Satar’s replacement will still face challenges but Garuda is now a vastly more capable force than a decade ago to compete in the increasingly difficult Southeast Asian marketplace.

Turkish Airlines: 3Q underlying profit back on upward path after four falling quarters

13-Nov-2014 9:19 PM

With its 3Q2014 results, Turkish Airlines (THY) has returned to a path of improving underling profitability after four quarters of year on year declines. Not only did RASK growth turn positive once more (after falling for five quarters), but also CASK was held flat.

The better RASK trend appears to reflect slightly slower capacity growth. THY has also recently lowered its FY2014 growth plan, which should be positive for unit revenues. Although 9M underlying operating profit was slightly down year on year, the return to profit growth in 3Q raises the prospect of THY's recording an increase in its FY2014 result.

THY is more profitable (by pre-exceptional operating margins so far in 2014) than any of Europe's Big Three legacy airline groups. It has developed a hub strategy that allowed it to carry more international to international transfer passengers in 2013 than Etihad carried on its entire network, with particular strength in attracting European passengers into its Asia, Middle East and African networks. Complemented by a sizeable domestic and point to point international market, THY is certainly capable of delivering annual profit growth.

IAG sets ambitious goals for 2016-20, including regular dividend, and declares its confidence

10-Nov-2014 7:15 PM

IAG and its CEO Willie Walsh are becoming increasingly confident. The group's new plan for 2016 to 2020 aims to achieve operating profit margins in the range 10% to 14%, with each of the operating airlines also reaching this level. To illustrate how ambitious this target is, IAG's 2013 margin was 4.1% and British Airways' cyclical peak margin was 10.0% in 2007/08, before the merger with Iberia. The latter did not record a margin in excess of 8% in the decade before the merger and has been in loss since, although it should be back in profit in 2014. Vueling, the most profitable of IAG's airlines, recorded a margin of 9.7% in 2013.

The achievement of this margin range would allow IAG to beat its cost of capital. This would be rare in an industry that typically destroys value, an unfortunate fact that Mr Walsh recognises. Nevertheless, he says, "we are in this business to exceed our cost of capital and to remunerate shareholders". He identifies the keys to IAG's future success as capacity discipline and cost discipline.

IAG's recent capital markets day set out what it sees as the key drivers of profit improvement.

Aer Lingus: 2014 guidance raised again after strong 3Q as unions vote for pensions progress

6-Nov-2014 4:29 PM

Aer Lingus has had another very respectable quarter, increasing its 3Q operating profit by 19%. Its North Atlantic capacity expansion continues to drive its total ASKs up at a double digit rate of growth. Although costs grew slightly more rapidly than ASKs, its revenue grew faster still in 3Q.

The new services to Toronto and San Francisco and increased frequencies on other North American routes, appear to have been well received by passengers, thanks to a combination of Dublin's geographic location, US customers pre-clearance and feed from the UK and continental Europe. Aer Lingus' North Atlantic capacity grew by 29%, traffic by 30% and fare revenue by 34% in 3Q.

The strength the 3Q results has prompted Aer Lingus to increase its FY2014 guidance, which now anticipates an operating result above that of last year. Perhaps more importantly, a staff ballot has voted in favour of a proposed solution to the pension funding issue, paving the way for improved industrial relations.

Ryanair: Europe's most profitable airline "not cheap and nasty". FY target raised after strong 2Q

5-Nov-2014 4:43 PM

Ryanair has again achieved double digit growth in net profits in 2QFY2015. This was the result of revenue per seat growth outpacing cost per seat growth. After Ryanair's dip in profits in FY2014, it has now reported two quarters of earnings growth and reconfirmed its position as Europe's most profitable airline. It has again raised its FY2015 net profit guidance and expects a result that is around 45% higher than last year.

With a slight fall in average sector length in 2Q, the increased revenue per seat was the result of network and product/service improvements and greater overlap with higher fare competitors. It seems that Ryanair has made good progress with its 'Always Getting Better' programme and this is feeding through to the numbers.

Remarkably for Ryanair, it is even starting to make positive progress in brand rating surveys. As CEO Michael O'Leary said to analysts at the 2Q results presentation, "It's not cheap and nasty any more," he said, "it's cheap and very good."

Bangkok Airways stock debut reflects tough market conditions but long-term outlook remains bright

4-Nov-2014 1:30 PM

Bangkok Airways saw its stock drop by 12% in the first day of trading on 3-Nov-2014 as it completed an initial public offering despite challenging market conditions. Bangkok Airways raised THB13 billion (USD400 million) as it sold 520,000 shares at THB25 (USD77 cents), but the share prices immediately dropped and ended the first day of trading at THB22 (USD68 cents).

The lacklustre debut is likely more a reflection of the difficult conditions confronting the Southeast Asian airline sector rather than Bangkok Airways’ long-term outlook. Of the 11 publicly traded airlines in Southeast Asia, eight have seen their stock drop over the past year. Of the six which had IPOs since 2010, five are now trading below their IPO price.

Overcapacity throughout Southeast Asia and political instability in Thailand has made conditions extremely challenging for all of the region’s carriers. But Bangkok Airways was one of only a few Southeast Asian airlines that was profitable 1H2014 and enjoys a strong niche due to a unique boutique full-service regional model that relies heavily on partnerships with foreign carriers.

IAG confirms its leadership among Europe's Big Three after growing 3Q profit and raising 2014 target

2-Nov-2014 2:26 PM

International Airlines Group (IAG) has improved its profitability once more in 3Q2014 and raised its target for FY2014. This sets IAG well apart from Air France-KLM and Lufthansa and confirms its leadership position among Europe's Big Three legacy airline groups. For the group as a whole, unit cost reduction more than compensated for weaker unit revenues.

Nevertheless, the development of its principal airlines was not uniform. IAG's LCC subsidiary Vueling Airlines is still the only profitable LCC subsidiary of any Big Three parent, but its margin fell as its rapid expansion into new markets led to costs being added faster than revenues. British Airways recorded a solid improvement in its margin, built on the performance of its long-haul network (North America in particular). Iberia's turnaround was confirmed by a more than doubling of its 3Q operating profit as its lease-adjusted margin equalled that of BA.

IAG must continue to improve its financial performance, so that it can meet its cost of capital, a target that it has set for 2015. Achieving this will require some assistance from the market, but this is a valuable prize that is now within its grasp.

Lufthansa: 2015 outlook lowered again as 3Q2014 results show ongoing unit revenue weakness

31-Oct-2014 8:31 PM

According to Lufthansa Group CEO Carsten Spohr, 3Q2014 "was no walk in the park". The group's business was affected by weak revenue conditions, external events such as Ebola and the Ukraine crisis - and more strikes by Lufthansa pilots.

In spite of this, Lufthansa remains on course to meet its 2014 operating profit target of EUR1 billion (although this was lowered at the half year point and is lower than the 2013 result on a like for like basis). However, Lufthansa has abandoned its 2015 operating profit target of EUR2 billion (which was cut from EUR2.65 billion in mid 2014), citing a "darkening economic outlook".

Mr Spohr's agenda continues to be very full. He must seek further cost reduction in the network airline business, while continuing to position as a premium product; repair relations with Lufthansa's pilots; develop and grow new lower cost point to point airline platforms; and capture growth in the more stable aviation services markets. And he must return Lufthansa to a profit growth trajectory after years on a falling trend.

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