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El Al: new LCC start UP should not excuse the mainline airline from urgent cost cutting

7-Apr-2014 8:50 PM

El Al's return to a net profit in 2013 should not be allowed to hide a wide range of challenges facing the newly appointed management team of CEO David Maimon and CFO Dganit Palti. The list is long: an ageing fleet, stagnant traffic growth, falling market share, a high cost structure, an open skies agreement between Israel and the EU, growing competition from European LCCs and network carriers such as Turkish Airlines and an under-capitalised balance sheet all need urgent attention.

El Al is clearly aware of its challenges. Its summer 2014 timetable sees more aggressive growth than for some years and it has reduced average headcount over the past two years. More importantly, its new LCC subsidiary UP commenced operations on 30-Mar-2014 with five destinations in Europe.

However, it is not yet clear whether UP will be a genuinely low-cost operation. Its establishment should certainly not be used as an excuse to avoid a radical cost restructuring programme in the core airline.

Lufthansa: 2013 underlying profits back on a rising trend ahead of CEO change

18-Mar-2014 6:46 PM

In 2013, Lufthansa showed the first signs that its SCORE restructuring programme may be having an impact on its results. While its operating result fell from its 2012 level, this was affected by restructuring costs and project implementation costs, which should produce benefits in future years. Adjusting for these one-off costs, underlying profitability improved for the first time since 2010, mainly due to lower unit costs.

Ahead of an imminent change of leadership at the top of the group, Lufthansa has also announced a couple of small, but fairly radical, changes. First, it will separately incorporate its FFP and, second, it will bring its aircraft depreciation policy more in line with market practice.

Lufthansa is now somewhere close to half way through SCORE. Outgoing CEO Christoph Franz, who will leave on 30-Apr-2014, can be credited with instigating the programme and delivering a fairly solid start. As with all restructuring programmes, their success or failure can only really be judged when they are complete and it will be the responsibility of new CEO Carsten Spohr to steer the group to the right result at the programme’s end in 2015.

Aegean Airlines’ annus mirabilis, but can it maintain the momentum in 2014?

13-Mar-2014 5:45 PM

Aegean Airlines had a good 2013. Not only did it return to profit for the first time since 2009, but it recorded its best result since its 2007 listing on the Athens Stock Exchange. All the key indicators improved: double digit passenger growth, load factor gains, a sharp increase in revenue per ASK and a fall in costs per ASK. Moreover, on the strategic front, it finally completed the acquisition of Greek rival Olympic Air after first attempting this in 2011.

The challenge for Aegean will be to maintain the momentum in 2014.

The integration of the loss-making Olympic, while giving the potential for synergies, will inevitably absorb significant management attention. Meanwhile, keeping hold of RASK gains in the face of growing competition from LCC competitors (Ryanair will open bases in Athens and Thessaloniki in Apr-2014) and continuing to reduce CASK will also be crucial to showing that the 2013 result was not just a flash in the pan.

Turkish Airlines: capacity and network growth stay strong in 2013; profit growth is more challenging

10-Mar-2014 6:45 PM

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 back in profit. British Airways' profit doubles, Iberia losses narrow & Vueling shows its worth

3-Mar-2014 4:45 PM

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.

Aer Lingus: putting cost at the CORE after 2013 profit growth stalls

25-Feb-2014 7:52 PM

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 back in operating profit. GOL purchase expands its partner options beyond SkyTeam

21-Feb-2014 8:37 PM

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 profit falls. Not yet low-cost enough?

14-Feb-2014 11:50 PM

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 thin air: 2013 operational profits vanish, employee cost savings talks take centre stage

12-Feb-2014 3:20 PM

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 makes progress with its turnaround in 3QFY2014, but big challenges remain

5-Feb-2014 5:15 PM

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 slips into loss in 3Q FY2014 on average fare weakness, but hints at a more stable outlook

4-Feb-2014 8:10 PM

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.

Saudi Arabia aviation: an evolving market is about to undergo another rapid transition in 2014

29-Jan-2014 7:00 PM

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.

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