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Vueling's new CEO only needs to stay ahead of rival LCCs on service quality. And keep cutting costs

25-Nov-2015 3:15 AM

Earlier in Nov-2015, Vueling's parent company IAG announced that the Spanish LCC's Chairman and CEO Alex Cruz will replace Keith Williams as head of its largest airline subsidiary, British Airways, in Apr-2016. Vueling generates the highest return on invested capital among IAG's airlines, and was the first to beat IAG's medium-term targets (before these targets were increased).

Moreover, Mr Cruz has established Vueling towards the premium end of the spectrum of LCC business models; indeed, he is not a fan of the 'LCC' epithet. He has achieved this while ensuring that Vueling's unit cost is consistent with that of a European LCC.

However, Europe's largest airline by passenger numbers, ultra-LCC Ryanair, is starting to improve its own brand offering without giving up its cost advantage. What's more, Ryanair has strong and growing positions at Vueling's two largest bases, Barcelona and Rome Fiumicino. A replacement for Mr Cruz has not yet been announced, but the new CEO will need to ensure that Vueling competes, both on service quality and on unit cost.

easyJet celebrates its 20th birthday with another record profit and 22% return on capital employed

18-Nov-2015 5:04 PM

Just after celebrating its 20th birthday, easyJet reported another record profit. From FY2010, when Carolyn McCall became CEO, to FY2015, revenue grew by nearly 60% and pre-tax profit more than quadrupled. In FY2015, it generated an industry leading 22% return on capital employed.

EasyJet has a strong pan-European network, a successful digital strategy and a very competitive cost base compared with the legacy carriers with which it mainly competes. Buoyed by its profitable growth record, easyJet has added 36 aircraft to its orders and will grow its fleet from 241 in FY2015 to 347 in FY2022. It now plans average seat growth over this period of 7.5% pa, up from 6% previously.

Nevertheless, two indicators are deteriorating. One is on time performance, which has been sliding since peaking at 88% in FY2012, although it remains healthy at 80%. The other is unit cost, which only fell in FY2015 due to currency movements and lower fuel prices. Excluding these factors, cost per seat increased by 3.5% and is expected to rise again in FY2016. With load factor above 91% and unit revenue growth harder to achieve, unit cost will be a priority for new CFO Andrew Findlay.

IAG: capital efficiency can help a European legacy airline group to "show me the money"

11-Nov-2015 6:21 PM

Speaking at IAG's capital markets day on 6-Nov-2015, CEO Willie Walsh revealed his fondness for the catchphrase made famous by Tom Cruise in the 1996 film Jerry Maguire: "Show me the money" is his preferred exhortation to management in IAG and its operating airlines, to focus on financial performance when considering any decision.

The impact of this mantra can be seen in IAG's expected 2015 results and its raised targets for 2016-2020. In 2015, IAG expects a 50% increase in earnings per share, and to pay a first-ever dividend to shareholders. Moreover, it looks set to generate a return on invested capital that is higher than its cost of capital for the first time since the group's creation in 2011 (rare among European legacy airline groups). It has also raised its return target for 2016-2020 from 12% to 15%.

One of the keys to IAG's financial performance is that in addition to initiatives to improve its profit margin, it also places emphasis on capital efficiency. It does not ignore the need for new capital investment, but it balances this with a focus on squeezing more from its existing assets.

Ryanair's "bumper summer" delivers 41% operating margin; 2016 target raised. 180 million pax by 2024

6-Nov-2015 4:35 PM

Ryanair CEO Michael O'Leary has said that the airline's strong 2Q financial performance was the result of a "bumper summer". Although the major legacy airline groups also reported improved profits for the quarter, Ryanair's operating margin of almost 41% sets it in a class of its own.

Moreover, its improvement was not mainly the result of lower fuel prices: Ryanair managed to increase unit revenue, in spite of double digit passenger growth and in contrast to the legacy airlines. This again demonstrates the success of Ryanair's customer service and network improvements. The airline has now raised its FY2016 traffic and net profit targets, thanks to higher load factors than previously expected.

In spite of the strength of its 2Q results and its positive outlook, Mr O'Leary attempted to inject a note of caution by noting that the revised profit guidance was "heavily dependent" on 4Q bookings, where there is "almost zero visibility". Nevertheless, his underlying confidence in Ryanair's strategic direction was illustrated by an increase in its FY2024 passenger target from 160 million to 180 million, which would represent a more than doubling of traffic over 10 years.

Wizz Air SWOT: ultra-low costs drive high growth and margins, in spite of Ryanair competition

5-Nov-2015 4:00 PM

In late Oct-2015, ultra-LCC Wizz Air carried its 100 millionth passenger, just 12 years after its 2003 launch. In a further sign that it has joined the ranks of Europe's well established airlines, this year also saw its Feb-2015 floating of its shares on the London Stock Exchange. Wizz Air's 1H results for FY2016 confirmed the ongoing strength of its performance in its first full financial year after its share listing. Wizz Air's underlying net profit grew by 34% and its operating profit increased by 28%. Revenues grew by 15%, with passenger numbers up 20%, and the operating margin gained 2.6 ppts to reach 25.4%.

Wizz Air's success has been built organically and with a largely stable management team under founding CEO Josef Varadi. In this respect, the recent departure of long-serving CFO Mike Powell creates some uncertainty pending his replacement.

Nevertheless, as CAPA's analysis of Wizz Air's strengths, weaknesses, opportunities and threats highlights, the airline is strongly placed to drive further profit growth, provided that it can continue to live with competition from Ryanair.

Norwegian Air's new Dreamliner order will give it 38 widebodies by 2020. 3Q2015 profit doubles

23-Oct-2015 5:00 PM

Norwegian's new order for 19 Boeing 787-9 Dreamliners demonstrates its renewed confidence that 2015 marks the return of financial and strategic momentum. It has eight 787-8s already in operation, alongside 91 Boeing 737-800s (projected at end 2015), and now has a total of 30 787-9s due for delivery as it continues to focus its growth on long haul routes.

The new order comes as Norwegian's long haul operation starts to prove itself financially ahead of schedule, with a positive net contribution now expected in 2015. The group has also reported a more than doubling of its operating profit in 3Q2015, helped by record load factor and low fuel prices. Norwegian should comfortably surpass its 2012 record operating profit in 2015.

The new order also suggests that Norwegian's hopes of a US foreign carrier permit for its Irish subsidiary Norwegian Air International are growing. Since filing its application in Dec-2013, Norwegian has modified its approach, offering to employ only EU and US flight personnel on NAI's transatlantic services, announcing US services from Ireland and applying for a UK AOC. Such pragmatism should serve it well in securing future long haul traffic rights.

Air France: Seven years of losses before Works Council clash reveals a cracked mirror

16-Oct-2015 6:18 PM

Jumping from specialist media and the business pages, Air France's struggle to restore profits by confronting industrial relations issues has received the attention of global mainstream media. Images of Air France managers stripped of the shirts have been seen across the world.

Air France failed to agree with flight crew unions on improved labour productivity by its self-imposed deadline of 30-Sep-2015. As a result, it decided to implement its alternative plan of cutting back on long haul operations and staff numbers. Although the employees that attacked management presenting the plan to the Works Council may not be fully representative of the Air France workforce, the episode holds up a mirror to both labour and management.

The mirror is cracked and Air France has had seven years of losses. It does not report separate results, but CAPA has pieced together an analysis of Air France's financial performance since the KLM merger in 2004. Its margins have been below KLM's throughout and also lag other European airlines. At the heart of its problem is low labour productivity. Improvements in this area will be vital to a sustainable future for Air France.

Etihad's first joint financing with equity partners further tests archaic airline ownership rules

1-Oct-2015 3:39 PM

Etihad continues to implement new forms of cooperation with its equity partner airlines, pushing beyond the limits of other partnerships not involving a controlling stake. The Etihad equity alliance goes beyond codesharing and revenue-generating activities to also seek cost synergies, which partnerships and alliances have seldom managed to achieve.

Etihad is now moving from specific operational synergies (crew resources, aircraft) to macro financing across the group via a USD700 million joint bond financing transaction in the capital market. The allocation of the funds is nearly 20% each to Etihad, Etihad Airport Services, airberlin and Alitalia; 16% to Jet Airways; and the remainder to Air Serbia and Air Seychelles. This is the first time that Etihad and its equity partners have raised funds together and may be the first such joint financing anywhere in the airline industry.

Etihad's equity alliance consists of non-controlling stakes. Nevertheless, as the airline itself said in a release on 21-Sep-2015, the partners collaborate "through measures which otherwise would only be available through mergers or takeovers". Etihad Airways Partners is looking and feeling more and more like a consolidated group of companies under common ownership and control.

Iberia: the Futuro looks bright for IAG's star pupil as its confidence and growth are transformed

30-Sep-2015 4:36 PM

Iberia is emerging as the star pupil in the IAG airline academy, studiously following its 'Plan de Futuro' restructuring programme. It has learnt how to achieve labour productivity improvements and unit cost reductions. With Iberia Express, it has demonstrated it is possible for legacy airlines to launch subsidiaries that combine an LCC cost base with a full service brand.

After receiving punitive beatings in the form of capacity reductions, its diligence is now being rewarded with new aircraft orders and double digit ASK growth in 2015, thanks largely to Latin American expansion (and returning to routes suspended during its restructuring). Brimming with new-found confidence, Iberia is IAG's biggest contributor to ASK growth in 2015.

Iberia is not yet qualified to graduate by recovering its cost of capital, but is on track to achieve this, in accordance with IAG's target, by 2017. As with all airlines, sustainable profitability may require some benevolence from the macro environment, which can deliver harsh movements in unit revenue and in fuel prices. However, Iberia's sharp focus on labour CASK, fuel efficiency and non-fuel overheads should soften the impact of any deterioration in external conditions.

CAPA's new CASK database allows global airline unit cost benchmarking and strategic mapping

18-Sep-2015 11:31 AM

One of the key competitive dynamics in the aviation industry is the relative cost efficiency of different airlines, as measured by cost per available seat kilometre (CASK). CAPA's new CASK Database plots CASK against average trip length, giving its members an important graphical tool for comparing competing airlines and highlighting broad differences between them.

A direct comparison of CASK, or unit cost, for different airlines is not straightforward as it varies with the average distance flown. In general, the cost of producing a seat kilometre falls as average trip length increases since fixed costs are amortised over more seat kilometres and variable costs, such as fuel, are more efficiently consumed in longer flights. Plotting CASK versus average trip length allows the relative cost efficiency of different airlines to be compared visually.

SAS capacity cuts help return to 9M operating profit as Hong Kong launch signals expansion for 2016

11-Sep-2015 6:54 PM

Scandinavian airline flag SAS followed up on its reduced operating loss in 1H2015 with a healthy increase in profit in 3Q2015. This was sufficient to take its 9M2015 operating result back into profit after making a loss a year earlier. As in 1H2015, SAS' yield benefited from a better balance of supply and demand compared with last year. This helped unit revenue to grow faster than unit cost, in spite of a significant currency headwind on costs.

SAS' capacity cuts this year, led by charter operations and the long haul network, seem to have had a beneficial effect on unit revenue in spite of falling load factor. Long haul expansion, starting this autumn with a new Stockholm-Hong Kong route and continuing in 2016 with three new US routes, will lead to ASK growth next year and this may put some downward pressure on unit revenue.

Airport financial results 1H2015 – primary airports, hubs, alliances, retail, sustain profitability

8-Sep-2015 11:00 PM

Recently, Airports Council International (ACI), the airports global trade representative, observed that, “in many instances, airlines are not paying the cost of the airport infrastructure they use.

"In fact, some airlines are now pushing for even lower airport charges, arguing that such cuts would save passengers money and thereby boost employment opportunities.

"We believe such arguments are flawed and make overly optimistic assumptions of how directly passengers would benefit from such cost reductions.”

Airports are now deriving on average 62% of revenues from passengers, through retailing and other activities, and only 38% from the airlines they serve.

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Financial Results

This content is exclusively for CAPA Membership Subscribers

CAPA Membership gives you the latest aviation news and alerts, access to CAPA articles, reports, and our leading aviation data with optional premium add-ons.

This content is exclusively for CAPA Membership Subscribers

CAPA Membership gives you the latest aviation news and alerts, access to CAPA articles, reports, and our leading aviation data with optional premium add-ons.

This content is exclusively for CAPA Membership Subscribers

CAPA Membership gives you the latest aviation news and alerts, access to CAPA articles, reports, and our leading aviation data with optional premium add-ons.