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IAG keeps FY2016 guidance in spite of weak unit revenue as 1Q2016 results benefit from low fuel

2-May-2016 6:26 PM

IAG's financial results for 1Q2016 are the first indication from a leading European legacy airline group of how this year is working out financially. For IAG the seasonally weak first quarter went well, with operating profit increasing by more than six times and the net result recording a rare positive figure.

Unit revenue weakness, seen in 2015, continued into 1Q2016 and accelerated its fall after the Brussels terrorist attacks. Coming relatively soon after the Paris attacks, this event may have a slightly longer impact than previous incidents of this nature. IAG's unit cost fell more rapidly than unit revenue, thanks to lower fuel prices. With pricing expected to remain a little softer than previously anticipated, IAG is accelerating cost measures and expects underlying ex fuel unit cost to fall by 1% in FY2016.

IAG still expects more than EUR900 million of year-on-year operating profit improvement in 2016, with a further margin increase. The IAG group is already the most profitable of Europe's three leading legacy airline groups, and the gap looks set to widen this year.

Alitalia's network benefits from Etihad partnership. Time now to shed the dependency culture

29-Apr-2016 7:49 PM

Since Etihad's Dec-2014 investment in a 49% stake in Alitalia the Italian airline has enjoyed much positive change. It has worked to move its brand and product more upmarket to differentiate itself from fierce LCC competition in Italy, where Ryanair is the biggest airline by seats.

Alitalia's long haul offering has benefited from its partnership with Etihad. This has mainly been due to codeshare access to a much wider range of destinations in the Middle East and Asia Pacific. However, this summer's launch of a Rome-Beijing service indicates growing self-confidence too. Alitalia has also shown renewed confidence by growing its small niche to Latin America, the main region where it takes the lead over Etihad. On short/medium haul the LCCs still provide a strong challenge, although Alitalia's European offering has been fortified by closer commercial ties with other Etihad investments (in particular airberlin).

However, Alitalia continues to be loss-making (to the tune of EUR199 million in 2015). This is a hard continuing habit to kick, even if the airline still insists that it will break the habit in 2017. The rest of the industry is collectively experiencing record profitability in 2016; an airline that cannot be profitable in such conditions still has much work to do.

Aegean Airlines: no longer Europe's highest-margin FSC. Competition and the economy weigh in

3-Apr-2016 7:59 PM

After two years in which the Aegean Airlines Group had the highest operating margin among European full service airlines, its crown slipped in 2015. Its financial results for the year show a fall in operating profit and in net profit.

Double-digit capacity growth in a very weak macroeconomic environment, and in the face of strong competition led by Ryanair, put downward pressure on unit revenue. Aegean was unable to cut its total unit cost enough to offset falling RASK, in spite of lower fuel prices and some progress with ex fuel unit cost reduction, including improved labour productivity.

Nevertheless, although Aegean's operating margin slipped it remained fairly healthy at very close to 10%. Moreover, given the very challenging conditions faced in 2015, the group did well to limit the decline in the way that it managed. In 2016, slower capacity growth may ease downward pressure on unit revenue and the bottom line should benefit further from lower fuel prices post hedging, but Aegean will be focusing on reducing ex fuel unit cost.

Lufthansa needs Eurowings to take it to greater heights after 2015's profit improvement

22-Mar-2016 3:27 PM

In 2015 the Lufthansa Group had its most profitable year since 2007, before the global financial crisis. Its profit recovery from the crisis has been cautious, but its increased confidence is now signalled with the restoration of dividend payments to shareholders, proposed at EUR0.50 per share.

Compared with its pre-crisis incarnation, one of the biggest changes in the Lufthansa Group is the establishment and growth of a low cost subsidiary with a clear strategic role. First under the Germanwings brand and now under Eurowings, the group's LCC is increasingly assuming point-to-point flying from the hub airlines on both short/medium haul routes and launching new long haul leisure routes. In 2015 it even made a small profit.

However, labour productivity in the mainline Lufthansa operation remains an impediment to the group's ability to join the leaders of European legacy airlines, in terms of profitability. Eurowings has greater labour flexibility and lower unit costs and has also become important to management as a way to show mainline labour representatives a glimpse of an alternative future. As competitor LCCs grow in Germany both management and unions must seize this future.

Pegasus Airlines' waiting game. Take a margin hit now to keep market share, pending fuel price rises

9-Mar-2016 1:11 AM

Pegasus Airlines is playing a waiting game. The Turkish LCC's 2015 operating profit and margin contracted for the second year running, bucking the trend of the majority of European listed airlines. For most, lower fuel prices more than offset downward pressure on unit revenue, and margins expanded in 2015.

At Pegasus, changes to its cost structure prevented it from lowering its unit cost to offset falling yield and load factor in 2015, in spite of lower fuel. Although there are market-related pressures on pricing, including geopolitical concerns, Pegasus also acknowledges that its own capacity growth contributed to falling yield.

Nevertheless, Pegasus will accelerate its capacity growth in 2016. Its argument is that the low fuel price environment is stimulating competitor growth, and that it is important for Pegasus to retain its position. Then it will be able to benefit from any shake-out in the market if and when fuel prices rise, to the detriment of weaker players that are currently propped up by low fuel. Such longer-term thinking is commendable, but Pegasus must nevertheless refocus on non-fuel costs.

Turkish Airlines improves 2015 margins thanks to lower fuel; growth to accelerate in 2016

6-Mar-2016 9:10 PM

Turkish Airlines reported its highest absolute profits for at least a decade in 2015. Both unit revenue and unit cost were lowered by the weakness of TRY versus USD (the airline reports its financial results in USD). With the benefit of lower fuel prices, Turkish managed to reduce CASK somewhat faster than RASK.

However, its 2015 operating margin (operating profit as a percentage of its revenue), while slightly better than in 2014, was still little more than half its 2008 peak level. Moreover, its profit improvement was not evenly spread through the year, instead relying mainly on a strong 3Q result.

Rapid expansion sustained over many years, and exposure to markets with geopolitical and macroeconomic uncertainties, make Turkish Airlines vulnerable to volatility in unit revenue. Capacity growth will accelerate in 2016, when the airline should again benefit from lower fuel prices. However, it will need to continue to focus on further labour productivity improvements and other non-fuel cost efficiencies in order to maintain or improve its margins, without help from low fuel prices.

Aeroflot: second best 2015 operating margin of European legacy airlines despite Russian recession

4-Mar-2016 3:40 PM

Aeroflot Group's operating profit almost quadrupled in 2015. Among listed European legacy airlines, its 10.6% operating margin placed it behind only Icelandair, but ahead of IAG (these were the only others in double digits). This was achieved in spite of the severe recession in Russia, a nation which has been badly affected by falling oil prices and geopolitical events.

Aeroflot has benefited from the consolidation of Russian aviation and from capacity cuts by foreign airlines. The demise of Transaero accelerated the consolidation process in 2015, and Aeroflot will benefit further from this in 2016. The biggest contributor to the Group's 13% rise in passenger numbers was its low cost subsidiary Pobeda, which completed its first full year of operations in 2015. International transfer traffic through Aeroflot's Moscow Sheremetyevo hub also grew.

This year Aeroflot Group plans an acceleration of ASK growth to double-digit rates. Pobeda has launched its first international routes and the Group's regional airlines Rossiya, Donavia and Orenair will return to growth under the single consolidated brand of Rossiya, helped by routes and aircraft taken on from Transaero. The Group's longer-term goal to become one of Europe's top five airlines looks feasible.

IAG has its best ever profit in 2015, helped by fuel and strategic vision and pragmatism

29-Feb-2016 10:04 PM

In 2015 IAG achieved a return on invested capital of 12.7% against its estimated cost of capital of 10%, giving it the rare distinction among European legacy airline groups of creating economic value for investors. As with other airlines its 2015 results were helped by lower fuel prices, but IAG's strong improvement owes much to its determination to stick to its goals.

It was the first (arguably the only) airline among the larger European legacy groups to tackle labour cost restructuring. In addition, its 2013 acquisition of Vueling gave it an advantage over Air France-KLM and Lufthansa in dealing with the short/medium haul threat from LCCs. On long haul, it has avoided anti-Gulf airline rhetoric with its Qatar Airways partnership, including codeshare and an equity stake. On the North Atlantic, it is now benefitting from its acquisition of Aer Lingus.

There is more to do. Although Iberia's restructuring has been impressive, its returns still lag those of other IAG airlines. Labour unit costs increased at both British Airways and Vueling in 2015. Moreover, IAG's profitability falls short of its own targets for 2016-2020, and the profitability achieved by the leading European LCCs. Nevertheless, it can be substantially pleased with its progress.

easyJet: how the pricing model is being challenged as Ryanair moves into its territory

25-Feb-2016 4:14 PM

Since autumn 2015 easyJet has been running a UK TV advertisement celebrating its first 20 years. Ending with the line "Europe still from £29.99", it echoes the LCC's debut advertisement in 1995 offering GBP29 tickets from London Luton to Edinburgh or Glasgow, "the same as a pair of jeans". It is a powerful testament to easyJet's business model that 20 years on it can still offer GBP29 tickets. Moreover, it has become one of Europe's most profitable airlines.

The ad throws the spotlight on the development of easyJet's average prices (total revenue per passenger) since the 1990s and their divergence from Ryanair's average prices since that period. Both LCCs had a major impact on legacy airlines in the late 1990s/early 2000s, when BA's UK/Europe network suffered a heavy fall in average revenue per passenger, and then after the global financial crisis, since when prices on the Lufthansa Group's Europe network have not recovered.

For several years easyJet's discount from Lufthansa has been narrowing, while Ryanair's discount from easyJet has been widening. With both LCCs now aiming at similar strategic territory, easyJet seems to face the bigger challenge in growing its revenue per seat.

Cologne/Bonn Airport illustrates many of the strategic themes in European aviation

23-Feb-2016 3:42 PM

Cologne/Bonn ranks only among Germany's mid-sized airports. Its traffic suffered in the global financial crisis and did not recover its pre-crisis level until 2015. It is not a major hub and barely has a long haul network. Nevertheless, it provides much of interest to students of Europe's airline industry.

Cologne/Bonn is now one of Germany's fastest-growing airports, with this expansion stimulated by Europe's lowest cost airline, Ryanair. The Irish LCC chose Cologne/Bonn to launch its re-entry into the German domestic market in 2015. The airport is also the biggest base for the Lufthansa Group's low cost brands (whether Germanwings or Eurowings) and the first base for its low cost long haul operation (under the Eurowings brand). Meanwhile, long haul connections to Asia Pacific are increasing with the growth at Cologne/Bonn of super connector Turkish Airlines.

Size is most certainly not everything.

Air France-KLM makes progress in 2015, but still has more to do. Labour productivity is at the heart

19-Feb-2016 5:35 PM

Air France-KLM's 2015 was a big improvement on its strike-hit 2014, but it highlighted the progress that it still needs to make. It returned to net profit for the first time in six financial years and achieved its best operating margin since before the global financial crisis, although this was below its previous peak.

In the passenger network business, long haul profits soared and medium haul losses narrowed. LCC brand Transavia made another loss, but laid plans for its first base outside the Netherlands and France, to be established in Munich in Mar-2016. In the cargo segment, losses deteriorated in spite of capacity cuts, especially in its full freighter operation.

Air France-KLM generated a return on capital employed of 8.6% in 2015, a leap from 1.7% in 2014, but short of its 2017 target range of 9% to 11%. As the world airline industry already approaches levels of profitability higher than previous cyclical highs, Air France-KLM will need continued assistance from the global cycle. It will also need a new agreement on labour productivity, particularly with Air France flight crew.

Norwegian Air back in profit, signals aggressive long haul expansion. DoT help would be welcome

12-Feb-2016 5:00 PM

Norwegian resumed positive financial progress in 2015, returning to profit after two years of deteriorating results, including losses in 2014. The positive results of 2015 are welcome, but Norwegian's margins were unimpressive by comparison with other leading European LCCs. Even SAS achieved a higher operating margin in 2015.

Norwegian's profit slide coincided with the launch of its long haul network in 2013, and the recovery has coincided with the fall in fuel costs. This, together with a lack of separate data by network, makes it impossible to assess the relative profitability of the different parts of its network.

Nevertheless, Norwegian remains firmly committed to long haul, which it plans to grow at an average ASK growth rate of 40% pa to 2020, compared with 10% pa for short haul. Although not conditional on US approval of applications for traffic rights by its Irish and UK subsidiaries, its long haul growth options would be wider if 2016 became the year when it finally received this approval.

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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.