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SWISS made almost half Lufthansa Passenger Group operating profits 2009-2015, but trend slowing

23-Jun-2016 3:48 PM

From 2009 to 2015 SWISS accounted for 47% of the operating profits produced by all the airlines in the Lufthansa Passenger Airline Group, and 29% for the Lufthansa Group overall. It has also consistently been the Group's most profitable airline in margin terms. In 2015 it even managed to post a higher margin than Lufthansa's MRO business – traditionally a much more robust and profitable activity than most airlines.

Nevertheless, SWISS seems now to be struggling to maintain these achievements. Its passenger load factor, while still the highest in the group, is on the decline. Revenue is falling and SWISS suffered a drop in margin in 1Q2016. The seasonally weak 1Q may not say too much about prospects for the full year, but Lufthansa expects SWISS to report a slightly lower adjusted EBIT in 2016 relative to 2015.

With four new Boeing 777-300ER aircraft now in SWISS' long haul fleet and the first Bombardier C Series due to join its short haul fleet imminently, SWISS is not standing still.

Europe's aviation strike spike could signal a cyclical peak - with downturn to follow

21-Jun-2016 3:36 PM

One swallow does not make a spring and nor does a rash of aviation strike news guarantee a turning point for the aviation industry. But the signs are ominous. In the month of Jun-2016 (to 20-Jun-2016), there have been 136 articles on CAPA's website mentioning the word 'strike'. This compares with 81 for the first 20 days of Jun-2015. For 2016 so far (1-Jan-2016 to 20-Jun-2016), the 's' word has occurred in 594 articles – about 20% more than in the same period in each of the past two years. If this rate continues, 2016 could be the biggest year for strike-related articles since before the global financial crisis.

The vast majority of the Jun-2016 articles – 80% – relate to Europe. A significant source is air traffic control disputes, particularly French ATC. There have also been strikes and/or strike threats involving airport workers and ground handlers. Among European airlines, Air France has generated the most coverage for its ongoing dispute with its pilots, and it may also face a cabin crew strike. Lufthansa has not yet faced a strike by its employees this year, but has not yet reached new agreements with pilots or cabin crew after industrial action last year.

History tells us that labour's demands grow as profits rise. The apparent increase in industrial action this year could be a signal of an approaching peak in the airline profit cycle. There are other causes of unrest, such as impending French labour legislation, but the correlation reflects some history.

Eurowings develops innovative partnership approach, but CASK reduction may not go far enough

19-Jun-2016 2:07 PM

In a 10-Jun-2016 presentation to equity analysts in London Lufthansa's Karl Ulrich Garnadt, the executive board member responsible for Eurowings, talked of his excitement for this "very ambitious, far reaching, very important" project for the Lufthansa Group. The group is developing an innovative partnership approach to allow other airlines to join its LCC activities under the Eurowings brand.

In 2011 the combined Lufthansa/Germanwings non-hub point-to-point network served 110 destinations and offered 24 million seats, of which only approximately nine million were operated by the LCC subsidiary. In 2016 the new Eurowings network has 135 destinations and offers 26 million seats (this comprises those operated by Eurowings and those yet to be transferred from Germanwings, while none are operated by Lufthansa).

The transfer of traffic from Lufthansa to Germanwings helped to turn around losses of more than EUR200 million. Germanwings' traffic and fleet are now progressively being transferred to the lower-cost Eurowings – the umbrella brand for the group's LCC operations. Germanwings/Eurowings achieves a RASK premium compared with other European LCCs. However, its low margin suggests that this is not enough by comparison with its CASK, which will remain higher than those of other LCCs.

SAS: 2Q losses widen after six quarters of improving results. LCCs & SAS growth depress unit revenue

17-Jun-2016 6:54 PM

After improving its underlying profit in FY2015 and narrowing its losses in the seasonally weak 1Q2016, SAS suffered a widening of losses in 2Q2016. This was the first year-on-year deterioration in its underlying result for six quarters. It benefited from lower fuel prices and from its own cost savings programme, but experienced plummeting unit revenue.

This reflects the ongoing growth of LCC competition in short haul markets, but is also the result of its own capacity increase. SAS' growth is led by rapid expansion on long haul, where Norwegian is also providing LCC competition. SAS is investing in its network and product and growing its revenue from higher-yielding loyalty scheme members, but these measures do not appear to be giving sufficient support to unit revenue.

These trends are unlikely to dissipate any time soon, and there is now the real prospect that its FY2015 result represented a cyclical peak for SAS. The company recognises the need for further change in order to improve its competitiveness. Strategies to seek labour cost reform can be expected, in spite of a strike call by Swedish pilots.

Flybe: back in profit, but still one of Europe's least profitable listed airlines

16-Jun-2016 6:03 PM

Flybe returned to profit in FY2016 – according to its latest definition of adjusted pre-tax profit, this was its first positive result since before its stock market flotation in 2010. Quibbles over profit definitions aside, it is apparent that Flybe's restructuring under CEO Saad Hammad since 2013 is continuing to make progress. Nevertheless, with an operating profit margin of just 1.4%, Flybe was one of the least profitable listed European airlines in 2015 (or nearest financial year).

Flybe is now into what Mr Hammad calls the 'Profitable Growth' phase of its turnaround. In FY2016 it returned to capacity and revenue growth after declines in the previous year. In FY2017 it is accelerating its capacity growth at a time when market conditions are producing very soft yields, but Flybe is determined to maintain cost discipline.

Of course, the achievement of profitability is only the first step in profitable growth. FY2016 will benefit from fuel cost tailwinds and this should help it to take the next step – even if it faces unit revenue headwinds.

Air Malta: perennial loss-maker struggles with rising LCC competition. Alitalia considers investing.

12-Jun-2016 9:26 PM

On 27-Apr-2016, Alitalia signed an MoU with the Maltese government over the possible acquisition of up to 49% of Air Malta. The two airlines are linked through geographical proximity and by cultural and commercial ties between Malta and Italy. However, both are perennial loss-makers and Alitalia is focusing on its own turnaround eighteen months or so after receiving investment from Etihad. The Italian national airline will only proceed if it is confident that Air Malta can both complement its strategic development, yet not compromise its own restructuring programme.

Air Malta is now a Europe-only airline. Under its Nov-2015 three year plan, it is cutting overall capacity in 2016 and has discontinued its North Africa routes. Compared with 2013, when CAPA last analysed Air Malta in detail, its seat capacity this summer will be lower by 9% and it has reduced its fleet size by two, to eight aircraft. Air Malta's highly seasonal and strongly leisure-focused network is facing growing competition from LCCs. It has struggled to compete profitably with a short haul, non-premium, point-to-point product that has little with which to differentiate itself.

Avianca works to attain its leverage leverage goals by slashing its capex commitments through 2019

6-Jun-2016 11:27 PM

Latin American airline group Avianca Holdings is joining its counterparts based in the region by taking steps to de-lever in order to equip itself properly to withstand continuing economic weakness in the region. One of the most important changes Avianca has undertaken in 2016 is re-engineering its order book with Airbus to cut deliveries from 2017 to 2019, which is pivotal in order for Avianca to reach its leverage targets.

Nearly every Latin American airline group during the past year has taken several steps to slow its fleet growth as the region’s economy is forecast to contract for a second consecutive year in 2016. Although Avianca’s yield declines improved (reduced) sequentially from 4Q2016 to 1Q2016, the second quarter is typically the weakest period for the airline, which could mean that its yield performance will slide before possibly showing some slight improvement in 2H016.

Despite the tough conditions, Avianca has a relatively optimistic outlook as it works to rework its fleet commitments and cut costs. Avianca still plans to expand capacity in 2016, but its growth is falling well below the 8% increase that the company posted in 2015.

Finnair accelerates long haul growth based on Europe-Asia niche, thanks to A350 and labour deals

6-Jun-2016 9:17 PM

Finnair's 2016 Capital Markets Day on 25-May-2016 was an opportunity to mark the progress made in CEO Pekka Vauramo's first three years at the airline. Since his arrival on 1-Jun-2013 Finnair has completed its entry into the oneworld trans-Atlantic JV and the JAL-BA JV; implemented cost reduction initiatives, including the renegotiation of labour agreements; and taken delivery of its first Airbus A350 aircraft. After falling into loss in 2014, it returned to profit in 2015 and its 1Q2016 results show further progress, although it remains short of Mr Vauramo's medium-term margin targets.

Finnair is now reinvigorating and accelerating its long haul growth plans, based on its niche in Europe-Asia connecting traffic. A target to double its 2010 Asia ASKs by 2020 has been brought forward to 2018, and this can be achieved with minimal additional investment. Through a refocused commercial strategy, Finnair hopes to stay ahead of market RASK performance in a weak unit revenue environment. Through growth, fleet upgrades and improved labour productivity, Finnair aims to make significant CASK reductions. Finnair management certainly appears to be more confident about the future than at any other time in the past three years and more.

Aegean Airlines: wider 1Q loss exposes growing seasonality. Ryanair maintains competitive pressure

28-May-2016 12:38 PM

The Aegean Airlines group suffered another fall in its operating result in 1Q2016, when winter losses widened. As is the case for almost every other European airline, it suffered a fall in unit revenue. However, whereas many others managed to lower unit costs at a faster rate, Aegean's cost efficiency gains were not enough to offset the RASK decline, in spite of lower fuel prices. This adverse RASK versus CASK trend seems to have established itself and Aegean has now had six successive quarters of contraction in its operating margin.

One of Aegean's biggest structural challenges is the high degree of seasonality in its business. The summer quarters, particularly 3Q, are much more significant than the winter to its capacity and traffic and must generate sufficient profits to offset winter losses. Moreover, the extent to which Aegean depends on a strong summer is growing.

By contrast with Aegean, ultra LCC Ryanair, which is the second largest airline in Greece, is now enjoying year-round profitability and margin expansion. Ryanair is matching Aegean's overall rate of growth in Greece and gaining market share in the domestic market. Aegean is unlikely to see an end to downward unit revenue any time soon.

Wizz Air: more strong FY results for ultra-LCC. A321 to solve problem of further unit cost reduction

26-May-2016 3:50 PM

Wizz Air's second annual results since its Feb-2015 IPO show it going from strength to strength. Almost all the key indicators moved positively in FY2016. Capacity and revenue grew rapidly once more and load factor went up. Wizz Air's market share in Central/Eastern Europe increased. Net profit was higher and operating margin expanded. Moreover, unit cost fell.

However, behind the headlines, Wizz Air cannot sit back and relax. Firstly, after years in which unit revenue was driven by strong ancillaries compensating for weak ticket pricing, total RASK fell in FY2016. Ancillaries remained strong, but not strong enough to offset falling fares. The RASK outlook remains weak. Secondly, unit cost only fell because of lower fuel prices. Ex fuel CASK has barely moved for six years and is already the second lowest in Europe. It is difficult to cut non-fuel costs further (although containing them, as Wizz Air has done, is a creditable achievement).

Of course, well-managed companies do not sit back and relax. Wizz Air's is building its future on the A321, whose greater seat count will give lower unit costs versus the A320s. Wizz Air judges that this unit cost benefit will compensate for the larger aircraft's dilutive impact on yield.

Ryanair's best margin since 2005 illustrates the success of 'Always Getting Better' programme

24-May-2016 7:00 PM

Ryanair achieved another strong increase in net profit in FY2016, following up on FY2015's 66% growth with a 43% gain. Passenger growth accelerated to 18% – its highest rate for seven years, helped in no small measure by a second successive 5ppt gain in load factor, taking it to 93%.

This was achieved with only a 1% fall in average fares, demonstrating the success of the customer service and network improvements that Ryanair has introduced over the past two years under its 'Always Getting Better' programme. Overall, Ryanair managed the rare combination of an increase in revenue per seat and a fall in cost per seat (although the latter owed much to lower fuel prices). This gave it its highest operating margin since FY2005.

Looking into FY2017, Ryanair expects profit growth to slow down, but at a figure around 13% it still aims for a double-digit rate. Moreover, it is likely to retain its position as the airline with Europe's highest operating margin.

Pegasus Airlines: 1Q loss grows; pricing comes under pressure from capacity growth and macro factors

16-May-2016 3:51 PM

In 1Q2016 Pegasus suffered another fall in its operating margin, after being one of only a very small number of listed European airlines to experience margin contraction in FY2015.

The main cause of this slide in profitability for Pegasus is unit revenue weakness, which is partly due to external macroeconomic and geopolitical factors, and partly due to its own rapid capacity growth. Low fuel prices have not been a sufficient influence for Pegasus to lower its unit cost enough to offset falling unit revenue. Low fuel prices have actually even contributed to low unit revenue – by encouraging competitor capacity growth.

Pegasus' unit cost is around one third below that of its biggest competitor Turkish Airlines and one of the lowest in Europe. This gives its business model some robustness against weak pricing, but this environment also places greater pressure on its cost base.

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This content is exclusively for CAPA Membership Subscribers

CAPA Membership gives you the latest aviation news and alerts, access to CAPA articles, reports, and our leading aviation data with optional premium add-ons.

This content is exclusively for CAPA Membership Subscribers

CAPA Membership gives you the latest aviation news and alerts, access to CAPA articles, reports, and our leading aviation data with optional premium add-ons.