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Portugal is widely expected to relaunch the privatisation of TAP Portugal before the end of 2014, possibly offering a 49% stake and a management contract. It is likely to seek assurances on issues such as the retention of TAP's Lisbon hub and connectivity with the Azores.
Although debt is falling, TAP needs fresh equity to increase its fleet expansion options. The privatisation must ensure that the airline, and not the government, benefits from external investment. Through operating leases, TAP has grown its fleet in 2014 (the first time since 2010), but its first Airbus A350 deliveries had to be pushed out to 2017 from 2015.
The delay since the first attempt at privatisation has allowed for some improvement in financial results, but the TAP Group remained in loss at the net income level in 2013 and in 1H2014. Selling or closing loss-making activities such as the Brazil Maintenance division may help the privatisation. In this first part of our analysis, we review TAP's financial track record.
In Part 2, we will look at TAP Portugal's competitive position and its appeal to potential bidders.
Virgin Atlantic SWOT. Little Red's demise further re-emphasises the Atlantic and the Delta ownership
The decision by Virgin Atlantic Airways (VA) to close its fledgling UK domestic operation Little Red in 2015 came as no surprise. Its load factor in the 12 months to Jun-2014 was less than 42% and, although the trend was improving, this was clearly not sustainable. In spite of the likely losses at Little Red, VA said last month that it was on target to deliver an annual profit by the end of 2014, which would be its first in four years.
Historically an exclusively long-haul point to point carrier, it seems that it does not need to try to generate its own feed through loss-making short-haul activity.
This development comes as VA is set to take delivery of its first Boeing 787 Dreamliner. It also follows recently announced changes to the airline's long-haul network that will see it increase its already sharp focus on the part of the world that is included in its name - the Atlantic - and the US where its 49% owner, Delta resides. In this report, we consider Virgin Atlantic's main strengths, weaknesses, opportunities and threats.
Gulf Air’s latest round of restructuring continues to produce results ahead of its original targets. Without releasing figures, the airline reported a 30% year-on-year net reduction in losses for 1H2014, significantly bettering its target of 12%.
The airline is now 18 months into its latest round of restructuring, its fourth in a little more than a decade, but is finally emerging as a leaner and more appropriately structured carrier.
Improving operational and financial results show promise for the struggling airline. Operating costs declined 28% in the first half of the year and operational indicators have continued their sustained improvement.
Croatia Airlines celebrated its 25th anniversary this summer, after reporting a return to profit in 2013 and a narrowing of losses in the seasonally weak first half of 2014. It also underwent a recapitalisation in 2013 and the Croatian government now appears to be ready to restart the on-off privatisation of the airline.
Potential acquirers will be encouraged by the improving profit trend, driven mainly by cuts in unit costs (CASK). However, Croatia Airlines still has one of the highest levels of CASK in Europe.
Moreover, the balance sheet may be out of intensive care after the recapitalisation, but it is in need of further strengthening, given that the airline has four Airbus A319s due for delivery in 2015 and is considering a further order of aircraft to fill the gap between its Airbus fleet and its Bombardier Q-400s.
In this first of two reports, we analyse Croatia Airlines' finances and its track record of unit revenue versus unit cost. This analysis will be followed by a second report looking at its network and market position.
UK aviation policy may well be substantially changed in the wake of the 18-Sep-2014 vote on the independence of Scotland, even though Scotland remains part of the UK. In this report we speculate on some of the possible aviation outcomes.
Roughly 55% of the electorate voted against independence versus 45% for, although four of 32 areas did vote in favour, including the biggest city, Glasgow. But that decision has hardly settled the matter; indeed the process of electioneering has opened up a Pandora’s Box of issues that possibly threaten the 307 year old Union even more than Scottish independence alone would have done. As ever, aviation will be dragged into the melee.
One thing now apparent is that there are no longer any certainties and that the Airports Commission especially needs to be aware, at a critical moment in its deliberations, of the many new forces at play - and the potential new scenarios.
easyJet: more aircraft come in as more cash to shareholders goes out. Stelios' baby is in good hands
After exercising its last 27 purchase rights over current generation A320s, easyJet's fleet now looks set to grow from 226 aircraft currently to 304 in FY2019. Although it will remain Europe's number two LCC fleet after Ryanair, it will be able to match the latter's growth rate before its A320 neo deliveries come on stream.
This increased fleet plan reflects easyJet management's confidence in its ability to continue to generate a value-creating return on capital, which was sector-leading in FY2013 and looks set to rise once more in FY2014. Total shareholder returns, which include both capital gains and dividends, have also led the industry. easyJet now proposes to increase its ordinary dividend payout ratio from one third to 40% of net profit.
The company's biggest shareholder, Sir Stelios Haji-Ioannou, a vocal supporter of higher dividends, has been critical of its fleet expansion. At easyJet's recent Investor Day, the airline's management team gave some strong reasons for all shareholders to trust its track record.
Wizz Air CEO Josef Varadi told a recent meeting of the Aviation Club in London that he ran a very disciplined airline. "We never grow for growth's sake", he said, explaining that the airline had clear financial targets and that growth was an output from this process.
Earlier this year, Wizz Air pulled out of a planned initial public offering (IPO) of its shares, which would have seen it floated on the London Stock Exchange. Investor appetite was dulled by geopolitical issues, a fuel price spike and profit warnings from other airlines, rather than any problems at the airline itself. Indeed, its most recent accounts show that it is now one of Europe's most profitable airlines, with significant cash reserves. An IPO could come back onto the agenda, but, Mr Varadi said, "we are not desperate".
Its results have not always been strong in the 10 years since its 2004 launch, but our analysis of its accounts suggests that it is now on a firm footing, supporting Mr Varadi's claim that "financial performance is at the core of the airline – we are not doing it for charity".
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.
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
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
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 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.