Turkish Airlines: capacity and network growth stay strong in 2013; profit growth is more challenging
In 2013, Turkish Airlines' growth in its underlying operating profit stalled as its margin slipped by 1.4ppts. The competitive environment increased the pressure on unit revenues in the latter part of the year and the carrier was unable to contain unit costs sufficiently to drive profits upwards. The weakening of the Turkish lira had the effect of inflating both revenues and costs when reported in TRY, but this does not change the underlying weaker development of RASK versus CASK. Currency losses and higher interest charges resulting from increased borrowing led to a fall in the net result in 2013.
Operationally, Turkish Airlines remains very successful, with sales enjoying another year of growth in excess of 20% and load factor making further gains. However, the fall in operating margin in 2014 and an uncertain outlook into 2014 show that converting this into sustained profit growth is proving to be less than straightforward.
IAG returned to profit in 2013 after a dip into red ink in 2012. The improved results were driven mainly by unit cost reduction and by a first contribution from LCC Vueling after its acquisition on 26-Apr-2013. The group’s operating profit of EUR770 million was better than the target of EUR740 million set in Nov-2013 and broadly in line with analysts' forecasts. It was much better than the target set in early 2013, before the Vueling acquisition, to beat 2011's EUR485 million. Deducting Vueling’s contribution, the like for like operating result was EUR602 million compared with a EUR23 million loss in 2012.
Inevitably, challenges remain. IAG must implement its new labour agreements with Iberia pilots and cabin crew and conclude negotiations with Iberia ground staff. It must manage BA's long-haul expansion and switch to higher gauge aircraft, while retaining control of its costs. Regarding Vueling, the key will be to allow it to keep its independence and low-cost culture, while allowing it to pursue its rapid growth.
The signs are growing that IAG can meet these challenges.
As anticipated by the company, Aer Lingus’ 2013 operating result was below that of 2012. The profit recovery from heavy losses in 2009 had been driven by mainly unit revenue growth, but, in 2013, RASK growth was outpaced by CASK growth. Unit revenues were particularly weak on short-haul in the second half of the year, reflecting fierce price competition in European markets. Strong growth in revenues from Aer Lingus’ new contract flying business helped, but not enough to drive earnings growth.
Against this backdrop, a concerted push on cost reduction is necessary and Aer Lingus has recognised this priority in a new profit improvement programme, dubbed CORE. Although revenue initiatives are also part of it, the weak pricing environment of 2H2013 underlines the need for a competitive cost base and CORE includes a EUR30 million cost reduction target over two years. With savings largely expected to come from the payroll, the quality of industrial relations will be a key feature in the programme’s success.
Air France-KLM’s 2013 results saw its operating result return to profit for only the second time in six years, but the operating margin of just 0.5% (and another net loss) highlights that its Transform restructuring programme still has work to do. A return to profit in the passenger business was instrumental in the improved group result, while the cargo segment remained in loss and the maintenance division continued to produce healthy results.
2014 will see a modest increase in ASKs of around 1% overall, down 2% on medium-haul and up 2% on long-haul. The strongest area of growth will be Latin America and the group’s position in that market should be enhanced by a newly announced partnership with GOL (including the acquisition by Air France-KLM for USD52 million of a 1.5% equity stake in the Brazilian carrier) that broadly mirrors SkyTeam partner Delta’s relationship with GOL.
The North Atlantic JV within SkyTeam delivers significant unit revenue benefits, but the deal with GOL expands Air France-KLM's options. This, and its indication that it is seeking to deepen its relationship with Etihad, are further signs that SkyTeam cannot satisfy all its needs.
Norwegian Air Shuttle’s 2013 net profit fell by 30% in the face of rapid capacity expansion, the launch of its first long-haul routes, delays to Boeing 787 deliveries, the negative impact on demand of good summer weather and a very price competitive market place. In short, anything but a run-of-the-mill year. The upshot was that, while its unit cost (CASK) fell in line with its target, its unit revenue (RASK) dropped more rapidly.
The granting by Irish regulators of an air operator’s certificate and operating licence to Norwegian’s Dublin-based long-haul operator and its recent order for four more 787s (bringing the total to 14: eight 787-8s and six 787-9s) are positive steps in its expansion into long-haul markets, where it has a cost advantage against legacy carriers. Nevertheless, there are some lower cost rivals on short-haul, where most of Norwegian’s business still lies.
The downward pressure on RASK looks likely to continue in 2014, particularly given Norwegian’s planned capacity growth of 40% (in ASK terms). A return to profit growth will therefore, it seems, need a further significant CASK cut.
Finnair’s 2013 results saw an unwelcome return to losses at the operational level, although the net result remained positive (just) due to non-operating items. In spite of achieving its Phase 1 cost savings target six months early and establishing a creditable track record of lowering its ex fuel CASK in recent years, unit revenue weakness remains a less predictable wildcard.
Most of the group’s organisational restructuring, including the outsourcing of maintenance and catering, the reorganisation of its travel services business and the switch to an all Airbus fleet, is now complete. Further cost savings will depend on the outcome of employee negotiations, a process that led to a strike warning in 4Q2013. Although it did not materialise, the strike threat then contributed to a particularly weak quarterly result, with both RASK falling and CASK rising in the quarter.
In 2014, it will be crucial to demonstrate that management can return both of these indicators to a healthy path and restore the group to profit.
Flybe’s trading statement for 3QFY2014, while not giving details of costs and profitability, suggests it is making good progress with its restructuring programme. In the UK airline, revenues per seat grew by 2.3% and costs per seat (excluding fuel and restructuring costs) fell by 5.2%. In addition, its confidence appears to be growing that it will achieve the cost reduction targets in its Turnaround Plan.
In a sign that Flybe’s new CEO Saad Hammad is not content simply to cut, Flybe has recently announced seven new international routes from Birmingham. It has no competitors on four of these routes, but faces LCC competitors on three. Even after cost reduction, Flybe will still have a significant disadvantage in unit costs against the LCCs.
Its challenges involve attempting to build on its strong market share in the UK regional domestic market to expand in international markets without confronting the LCCs too frequently, while seeking new opportunities across Europe for contract flying on behalf of other airlines and continuing to take costs out of the business.
Ryanair’s 3QFY2014 saw it slip into loss, dragging its 9MFY2014 net profit down by almost 8%, mainly because of a 9% drop in its 3Q average fares. However, this yield decline was in line with Ryanair’s guidance and the carrier says that market pricing is no longer declining. Moreover, it reiterated FY2014 guidance for net profit between EUR500 million and EUR520 million. While this is below the EUR569 million net profit recorded in the previous year, the re-confirmed target allayed the fears of some that Ryanair would once again lower its guidance.
As the start of deliveries in Sep-2014 under Ryanair’s new Boeing order approaches, the airline remains committed to its passenger growth targets. In addition to its core attraction of offering the lowest average fares in the European short haul market, Ryanair is aiming to enhance its appeal through a series of customer service and distribution initiatives. In spite of a likely dip in profits this year, if it can achieve its passenger targets without further heavy yield declines, it should retain its position as Europe’s most profitable airline.
Since the Saudi Arabian Government ended the monopoly of national carrier Saudi Arabian Airlines (Saudia) in 2007, the aviation market in the Kingdom of Saudi Arabia has been one of the Middle East’s most rapidly evolving, if not expanding.
The country has the largest domestic market in the Middle East, with a population of 29 million people spread over 2.1 million sq km, but has not been able to replicate the rapid growth its GCC neighbours have enjoyed because of regulatory impediments. A longstanding protectionist policy supporting Saudia is giving way to a scenario in which competition and growth are key elements.
After growing its revenues by 11% in FY2013, easyJet managed further revenue growth in 1QFY2014 (Oct to Dec-2013), albeit at the slightly slower rate of 7.7%. Revenue per seat growth dropped from 7% in FY2013 to around 3% in 1QFY2014. The shift in the timing of Easter has prompted it to forecast a wider 1H loss, but this should not detract from an underlying solid performance. This is a seasonal business, but easyJet has managed to contain winter losses in recent years.
Nevertheless, the outlook for revenue per seat remains cautious. With load factors at consistently high levels, the scope for further growth will depend mainly on capacity. EasyJet and competitors look set to step up capacity growth in the summer schedule, although most of the legacy carriers are still cutting capacity or keeping growth low. This may increase downward pressure on easyJet's yields and unit revenues, increasing the need to continue to manage yields upwards by attracting business passengers, and developments such as allocated seating and improved website distribution.
On 19-Dec-2013, Intro Aviation made a firm offer to Air France-KLM to acquire its loss-making regional subsidiary CityJet (including CityJet’s subsidiary VLM). The deal is expected to close in 1Q2014 after consultation with employee representative bodies. According to the statement from Air France-KLM, the offer provides for “ongoing commercial co-operation with Air France as part of a new industrial plan”.
A wholly owned subsidiary of Air France since 2000, CityJet acquired VLM in 2007 and fully integrated it into its activities in 2009 under the CityJet brand. CityJet is an Irish-registered carrier with its head office in Dublin, although its main base is London City Airport, and VLM is a Belgian company.
CityJet’s biggest asset is its leading share of slots at the high yield LCY, which remains an LCC-free airport. Nevertheless, its perennial losses suggest a greater cost focus is required. Intro has a record of turning around under-performing carriers and then selling them. Does it already have an eye on its exit strategy?
The SAS Group returned to net profit in FY2013, mainly through successful cost reduction. There was no growth in revenues, in spite of 6% ASK growth by the core SAS airline. In addition to cost cutting, the group’s restructuring in the year also included the sale of 80% of its Norwegian regional subsidiary Widerøe and the sale of 10% of its ground handling operation to Swissport as a first step in what is intended eventually to be a full disposal.
Improved profitability was essentially the result of SAS lowering its unit costs, CASK, faster than the decline it suffered in unit revenues, RASK. In both cases, this extends the trend of recent years. However, in spite of attempts to shore up demand (with some success – it has grown membership of its EuroBonus FFP), the slide in RASK accelerated in 4Q2013. This was partly currency related, but also reflects tough competitive dynamics in SAS’ markets.
Moreover, its CASK reduction in the year, while commendable, still leaves it with one of the highest levels of unit costs in Europe. SAS is not out of the woods yet - but the profit is a welcome result.