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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.

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.

WestJet Airlines faces capacity pressure as it still continues to record solid financial results

10-Nov-2014 4:44 PM

Canada’s WestJet is preparing to face some pressure from competitive capacity increases in CY2015 as rival Air Canada ratchets up its supply through the expansion of its low cost unit rouge and aircraft upgauging.

At the same time WestJet is facing cost pressure in CY2015 as the shorter stage lengths performed by its regional subsidiary Encore become more pronounced in the airline’s results. Even as Encore continues to create some cost headwinds for WestJet, the company believes its regional airline continues to stimulate demand in markets too thin for narrowbody aircraft.

Despite some external and internal pressures, WestJet’s fundamentals remain strong.  The company holds strong cash balances and favourable debt ratios while continuing to deliver shareholder returns.

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."

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.

Air France-KLM 3Q operating profit tumbles due to pilot strike, but underlying trend is also down

30-Oct-2014 8:20 PM

The fall in Air France-KLM's 3Q2014 operating profit more than offset improvements recorded in 1H2014. This deterioration in 3Q2014 was largely as a result of the 14 day pilot strike in Sep-2014, which hit the operating result by EUR330 million. Nevertheless, even without the strike effect, unit revenue weakness weighed on the underlying performance of the group and lowered the like for like operating result.

Air France-KLM expects passenger capacity growth in long-haul markets from Europe to slow a little from 6.3% in 3Q2014 to 5.5% in 4Q2014. It plans to keep its own passenger capacity flat, with significant cuts in point to point capacity, but these price pressures look unlikely to dissipate quickly.

The company says that its Transform 2015 programme, which mainly focused on cost and debt reduction, is on track and it is already implementing key initiatives under its new Perform 2020 plan. The ratification by pilot union membership of the recent draft agreement over the growth of Transavia would provide an important psychological boost.

Norwegian Air Shuttle's fall in 3Q profit underlines the challenges faced in 2014

27-Oct-2014 3:50 PM

Norwegian Air Shuttle reported its third fall in quarterly profits this year, with the seasonally strong 3Q2014 seeing a 14% drop in its net result. It has been an unusual year. Additional costs associated with the introduction of its 787 fleet on its nascent long-haul network, delays to its US foreign carrier permit application and currency movements have weighed on this year's profits.

But Norwegian cannot blame these factors entirely. It has also experienced heavy falls in unit revenue in 2014, not entirely unrelated to its very rapid capacity expansion. Unit cost has declined too, but not fast enough. Pioneering a new business model on long-haul and growing very rapidly certainly provide challenges.

Norwegian's 2013 profits were lower than in 2012 and it now looks certain to make a significant loss in 2014. In 2015, it is planning much slower growth, which should be beneficial to unit revenue. It must also silence its detractors by proving that it can generate a more favourable profit trend next year, while also managing its new aircraft leasing subsidiary.

Air cargo: few other industries would tolerate its structural overcapacity

22-Oct-2014 5:48 PM

IATA's most recent air freight market analysis, published 1-Oct-2014, said "The outlook for air freight markets has started to look better again", but it added that "the extent of future gains could be limited". IATA cautioned that trade volumes are expanding at a slower pace than global economic growth and that gains in business confidence have been slow due to the presence of political and economic risks. Recent concerns in the financial markets about the outlook for global economic growth add to this note of caution about future air cargo demand.

However, air cargo faces much more fundamental problems. It accounted for just 8.6% of total airline industry revenue in 2013, down from 12.4% a decade earlier. Freight load factor was just 45.3% in 2013, compared with almost 80% for the passenger business.

Very few other industries would tolerate such a degree of overcapacity. Perhaps the approach of many LCCs - to ignore cargo - is the right one.

TAP Portugal Part 1: the national carrier needs privatisation to tap fresh capital

10-Oct-2014 8:12 PM

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.

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