Barcelona El Prat: Europe's leading airport for LCCs a battleground in fight for business travellers
easyJet's recent announcement that it plans to open a new base at Barcelona El Prat Airport from Feb-2016 provides an opportunity to examine the recent traffic history of Europe's leading LCC airport. Barcelona is home to IAG subsidiary Vueling, the biggest operator at the airport and Europe's third largest LCC. Vueling's nearest competitors here are Ryanair and easyJet, ranked first and second among European LCCs.
The narrative at Barcelona remains substantially about short and medium haul and the main protagonists continue to be Europe's leading LCCs. However, there is an emerging sub-plot, albeit one that remains in the background for now. This concerns the global super-connectors, who aim to turn Barcelona's paucity of long haul destinations to their advantage.
Traffic growth at Barcelona was strong before the global financial crisis, but slumped in 2008 and 2009. It bounced back quickly in 2010 and 2011, before the demise of Spanair interrupted the resumption of rapid growth. After various twists and turns in the traffic growth path of the three leading airlines at Barcelona, all three now look ready to battle hard, particularly for business passengers.
SAS narrowed its underlying loss in 2QFY2015, after stripping out the gain on the sale of two slot pairs at London Heathrow. The Scandinavian airline is enjoying a more benign capacity environment this year, particularly in short and medium-haul markets, and is cutting its own capacity. This allowed it to grow its unit revenue at a faster pace than its unit cost, prompting a modestly more positive outlook for FY2015.
Although SAS has invested in product improvements and is growing its revenues from members of its Eurobonus scheme, low cost competition in Europe is making short-haul markets increasingly price-based. FY2015's positive unit revenue conditions may not last, especially within Europe.
Looking into 2016, SAS is planning to return to capacity growth, through long-haul expansion. It is looking at adding further long-haul aircraft to its fleet, beyond the four A330s and eight A350s currently on order. However, competition on long-haul markets is also fierce.
Flybe reported a pre-tax result for FY2015 in line with expectations, confirming that its restructuring is starting to have a positive impact. Confusingly, the reported FY2015 result fell into loss after having recovered in FY2014, but this was blurred by a series of non-recurring/non-operating items. Flybe also reported what it calls an "illustrative" pre-tax result, by which measure its profit grew and this more closely reflects the progress made under CEO Saad Hammad.
Passenger unit revenue grew, driven by capacity cuts and sharp load factor gains, stimulated by falling yield. However, revenue from contract flying and charter operations fell and the increase in underlying profit owed much to unit cost reduction.
Flybe also signed a contract flying agreement for SAS and sold its stake in its Finnish joint venture. Moreover, it made progress with a number of other legacy issues, including exiting from its Embraer E175 order and securing additional used Bombardier Q400 aircraft. A key outstanding issue is finding a solution to its surplus E195 aircraft. In FY2016, it must aim for an improved result without having to rearrange the numbers.
Reporting its first financial results since its Feb-2015 IPO, Wizz Air announced that its underlying net profit jumped by two thirds in FY2015. In another year of double digit capacity and revenue growth, it managed to grow its unit revenue while simultaneously lowering its unit cost.
Ranked by operating profit margin for the 12M period to Mar-2015, Wizz Air is equal second with easyJet and behind only Ryanair in the list of Europe's most profitable airlines. The IPO has also left it with a robust balance sheet, a useful attribute in the volatile airline industry.
Wizz Air's guidance for FY2015 implies much slower profit growth of less than 20%. Lower fuel prices and a competitive market backdrop look likely to put unit revenue under pressure. Moreover, further unit cost reduction is harder when costs are already very low. Nevertheless, Wizz Air's low cost base and impressive ancillary revenue performance, together with strong market share in Central and Eastern Europe, position it to remain one of Europe's more successful airlines.
Ryanair's FY2015 net profit jumped 66%, a return to profit growth after a rare dip in FY2014. It was helped by lower fuel prices, but, unlike many other European airlines, Ryanair would still have reported improved FY and 4Q results with no change in its average fuel cost per seat versus last year.
Average fares barely changed (up 1%), but load factor jumped to 88%, from 83% in FY2014, driving up revenue per seat, even in Q4 when average fares fell sharply. Ryanair's new customer service initiatives and improved airport network may not yet be attracting consistently higher fares, but they are persuading more passengers onto its aircraft. What's more, revenue per seat growth outpaced the resultant increase in cost per seat.
Ryanair is being cautious about fares into FY2016, but still expects another 10% growth in profit. Moreover, the combination of product and service improvements and a wide discount to competitor fares should benefit pricing in the longer term, even as further load factor gains become less dramatic.
Airberlin narrowed its operating loss in 1Q2015 compared with 1Q2014, by growing unit revenue faster than unit cost, which was almost flat year on year. Unit revenue appears to be benefiting from network changes and a new revenue management system (and also from currency movements). However, the relatively contained unit cost performance owed much to lower fuel prices, without which the operating loss would have increased. Moreover, the airline said that seasonal effects such as Easter also had a positive impact on the result.
Airberlin still expects that yield improvement will lead to a "noticeable" improvement in earnings in 2015 after heavy losses in 2014. However, it says that "current foreseeable business development in 2Q has so far not fulfilled expectations". It continues to face significant challenges in its turnaround.
easyJet's 1H2015 results statement made for interesting reading. On the one hand, it reported its first positive pre-tax profit figure for the winter half in more than a decade (effectively due to lower fuel costs).
On the other hand, easyJet's outlook statement predicted a fall in 2H revenue per seat at constant currency, in contrast with the increase achieved in 1H. This is partly because of faster capacity growth, both by easyJet and competitors in its markets (to use easyJet's own words, "inefficient capacity is likely to stay in the market longer"), but also reflects the impact of lower fuel prices on air fares.
EasyJet is still set to record double digit growth in FY2015 pre-tax profit and to remain one of Europe's most profitable airlines. Nevertheless, after a very successful five year period between FY2009 and FY2014, when its pre-tax profit increased by a factor of eleven, it is perhaps not surprising that it is now in a more sustainable growth phase.
Finnair narrowed its operational loss in the seasonally weak 1Q2015. After capacity cuts and restructuring in 2014, it has returned to modest capacity growth. Revenue was stable as growth in passenger and ancillary revenue was offset by falling cargo and travel services sales. The narrower loss was thanks to decreased costs, with lower fuel prices playing a significant part. Ex fuel unit costs were up slightly, even after stripping out currency movements.
New labour agreements reached last year and the delivery in 2H2015 of Finnair's first four A350 aircraft should provide cost benefits in the future. In addition, Finnair has announced a new strategic focus placing the "customer experience" and "world-class operations" at its heart, presumably hoping this will bolster unit revenue. Finnair has also broadly reiterated its medium to long term financial goals, but remains a long way from achieving them.
One of Finnair's strategic focus areas is Northeast Asia, where it retains an ambitious growth target, but this does not square with last year's capacity cut and this year's slow growth in Asia. The A350 is expected to reinvigorate its Asia strategy.
IAG, Lufthansa & Air France-KLM: don't risk RASK. Lessons from 1Q2015 unit revenue & capacity growth
The 1Q2015 financial results of Europe's Big Three legacy airline groups again highlight their diverging pathways. Although all three recorded improved results versus last year, IAG underlined its superiority by posting a positive operating profit in what is seasonally the weakest quarter.
CAPA analysis often highlights the importance of cost discipline and much of IAG's success relative to Air France-KLM and Lufthansa is due to the head start it gave itself in pushing restructuring, particularly of labour costs. This remains crucial.
However, the focus of this report is to analyse the 1Q2015 unit revenue (RASK) performance of the Big Three and the relationship between RASK growth and ASK growth. Our analysis confirms that RASK performs better under conditions of tight capacity discipline, but also highlights some crucial differences between the Big Three and between their major route regions.
While IAG's major competitors are confronted with precarious labour and financial situations, the Group continues its strong march towards profitability. Its 1Q2015 results provided a first ever positive operating profit in the seasonally weak 1Q. Currency movements (mainly the strong USD) inflated both revenue and costs, with the net impact only very mildly negative. The swing to an operating profit from a loss in 1Q2014 was driven by unit revenues rising more rapidly than unit costs (or, excluding exchange rate effects, unit revenue falling less rapidly than unit costs).
At the individual airline level, British Airways returned to 1Q operating profit for the first time since before the global financial crisis and both Iberia and Vueling narrowed their margins of loss. What's more, in spite of Vueling's teething problems at its new Rome base, its rolling 12 month return on invested capital is above the group's 2016 target of 12%.
IAG as a whole and its other two subsidiaries remain short of this hurdle, but the group has reiterated its 2015 operating profit target and is confident it can reach its 2016 goals.
Norwegian narrowed its losses in 1Q2015, the first quarter in over a year when its adjusted operating result improved on a year-on-year basis. This was achieved as growth in unit revenue was higher than growth in unit costs although the loss was still its second highest first quarter loss.
Moreover, the containment of unit costs was entirely due to lower fuel prices, whereas non-fuel unit costs increased. Norwegian can point to costs related to a pilot strike as contributing to this, and adverse currency movements also hurt its result, but it does underline the need for cost efficiency improvements.
Meanwhile, Norwegian is still awaiting a definitive decision regarding its Ireland-registered subsidiary Norwegian Air International's US foreign carrier permit application. Approval would be positive for labour productivity on its long haul network. As the US DOT continues to drag its feet, Norwegian may soon be forced to consider alternative plans.
As is usually the case, Aer Lingus reported another first quarter loss in 1Q2015. The seasonally weakest quarter is never a good guide to the rest of the year, but the good news for Aer Lingus is that its margin of loss narrowed. This was driven by healthy growth in unit revenues, which outpaced the growth in unit costs.
Nevertheless, unit costs remain stubbornly on an upward path. To a large extent, this is because Aer Lingus has been adding costs associated with its long haul expansion ahead of the stronger summer season. The growth in its North Atlantic network has been well received in the market, with strong unit revenues in spite of double-digit capacity growth.
However, the company is focusing on initiatives to reduce the level of fixed cost in the winter and has indicated that it plans to extend its CORE restructuring programme. This is to be welcomed.