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
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 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
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.
Turkish Airlines suffered a wider operating loss in the 1Q2016. Its capacity growth, consistently at double-digit rates, is accelerating in 2016 as it pursues new markets and increases frequencies – particularly in the US and Africa. However, its load factor slipped by 2.9ppts and its total revenue per ASK fell by 17.2%.
Demand was weakened by the aftermath of geopolitical events but there are also gathering macroeconomic uncertainties in Turkish Airlines' markets, which increasingly embrace the globe. This highlights the risks associated with very high capacity growth when the robustness of demand is faltering. Although its unit cost also fell (thanks to lower fuel prices), this was not sufficient to offset the drop in unit revenue.
Turkish Airlines strategy of high growth, based on the geographic advantage offered by its Istanbul hub in attracting global transfer traffic, now ranks it among the world's leading airlines. Although the seasonally weak 1Q may not be a reliable guide to FY2016, the airline will need to generate improved trends in load factor, RASK and margins over the rest of the year if it is to assuage concerns that it is pursuing growth at the expense of profitability.
airberlin must aim for a profit in 2016 after eighth straight operating loss in 2015 and 1Q2016 loss
Airberlin was the only listed European airline to record an operating loss in 2015. Moreover, both its operating loss and its net loss were wider than in 2014. Its 1Q2016 losses show little sign of progress, although they represent the seasonally weakest quarter and airberlin expects an improvement for FY2016.
Airberlin's restructuring programme led to network adjustments and capacity reduction in 2015. Helped also by new fare classes and other commercial developments, this drove an increase in load factor and unit revenue. However, its unit cost rose more rapidly than its unit revenue in 2015. After seeing both measures fall in 2014 (with CASK falling more quickly), this marked a return to the trend of several years - one that has left it mired in eight straight years of operating losses.
Since the end of 2015 when airberlin's cash balance was at a new low it has secured fresh debt funding, thanks in no small measure to its largest shareholder, Etihad. In 2016 further fuel cost benefits and expected yield growth may just provide the conditions for airberlin to return to profit. Although airberlin has not yet given a target for the year, achieving this should be a minimum goal.
Air Serbia's transformation from the loss-making carrier Jat Airways in 2013 to one with the possibility of sustainable levels of profitability took another step forward in 2015, with another positive result. After receiving investment from Etihad and the Serbian government in 2H2013, it had recovered from heavy losses to a small profit in 2014. This was based on an impressive reduction in unit cost, with a realignment of the network and its commercial positioning.
In 2015 Air Serbia again increased its net profit, although this remained slim at only 1% of revenue. Buoyed by its success in establishing a track record of positive results, Air Serbia is growing its European network. Perhaps more significantly, it is also launching its first long haul route, Belgrade-New York, this summer.
Its unit cost is efficient versus legacy airlines and not very much higher than LCCs such as easyJet. It has the good fortune to face only a relatively small amount of competition from LCCs (it only has competition from any other airline on a minority of its routes). However, the ultra-LCC Wizz Air, which has a much lower unit cost than Air Serbia, is its leading LCC competitor and could provide a greater threat over time.
Most airlines in Europe make losses in the winter. It was a sign of the strength of easyJet's business model and the success of CEO Dame Carolyn McCall's leadership that its 1H loss (Oct to Mar, coinciding with the winter) narrowed every year from FY2011 until it made a profit in 1H2015. Alas, its return to loss in 1H2016 puts it back among most airlines in this respect.
The airline's FY2016 outlook is slightly more positive; all its profits come in 2H, the summer, and modest earnings growth is expected. Moreover, its high margins set it apart from most airlines, as does its plan to pay 50% of net profit as dividends to shareholders.
The deterioration in easyJet's 1H result was due to falling unit revenue – a persistent problem. In spite of lower fuel prices, cost per seat did not fall fast enough in 1H to offset this. Revenue per seat was adversely affected by geopolitical events and currency movements, but it is becoming increasingly apparent that easyJet faces a challenge to grow its revenue per seat. Its load factor is already about as high as it can get, and easyJet is currently unable to drive pricing up.
Compared with many other regions in Central and Latin America, Mexico’s stable economy is benefiting the country’s two publicly traded airlines Aeromexico and Volaris. There are apparent opportunities for both companies to stimulate traffic, but their business models are completely different. Volaris characterises itself as an ultra-low cost airline while Aeromexico is Mexico’s only full service airline, leveraging its position at Mexico City Juarez international airport to build what it considers to be a major connecting hub and gateway in Latin America.
Ratification of a revised bilateral with the US by the Mexican Senate, and tentative Mexican government approval of a joint venture between Aeromexico and its fellow SkyTeam partner Delta Air Lines, are major steps in Aeromexico’s strategy to distinguish itself as Mexico’s only global, full service airline.
Volaris continues to strengthen its business foundations of VFR (visiting friends and relatives) traffic, and diversifying its network into more US transborder routes. Although Volaris is planning healthy capacity growth in 2016, the company believes that there is enough demand to absorb its projected expansion.
Air France-KLM: 1Q margin gain beats IAG & Lufthansa, but lack of 2016 target betrays low confidence
Air France-KLM narrowed its operating loss in 1Q2016 – mainly thanks to lower fuel prices, and also helped by lighter downward pressure on unit revenue than was felt by either IAG or Lufthansa. This probably reflects its tighter capacity management. Moreover, Air France-KLM's operating margin improvement from a year earlier was greater than both IAG's and Lufthansa's.
However, Air France-KLM's margin remained well below those of its rivals, both for the group as a whole and also for its LCC subsidiary Transavia in comparison with the LCC divisions of the other two. Emphasising the uncertain outlook for unit revenue (and echoing comments made by both IAG and Lufthansa in this respect), it does not expect its relative strength in 1Q to continue throughout the year.
Furthermore, Air France-KLM is still the only one of the three leading European legacy airline groups without a 2016 profit target. It rightly continues to prioritise capacity discipline, unit cost reduction and the lowering of net debt, while working to gain pilot union agreement to vital productivity improvements. However, as the global industry is enjoying cyclically high margins, Air France-KLM's reticence over profit guidance reveals its lack of confidence. The incoming CEO, Jean-Marc Janaillac, will need to rebuild this.
Comparing Southwest Airlines’ unit revenue trends with the rest of the US industry is difficult due to the benefits the company is enjoying from a new credit card agreement forged in 2015. On a total unit revenue basis, Southwest posted a flat performance in 1Q2016 and expects very modest growth in 2Q2016, which is the last quarter where it will enjoy gains from the credit card deal.
Southwest’s average fare and yields during 1Q2016 reflect the competitive pricing environment that lingers in the US domestic market. Few are venturing to predict when pricing traction will return, including Southwest. The company does, however, believe that it can weather what it has claimed to be an aggressive industry build-up of capacity.
Southwest’s projected capacity growth of 5% to 6% for 2016 remains unchanged. The airline will increase ASMs in 2017 and 2018, but that increase could be slower than in 2016 due to the airline's decision to accelerate the retirement of its Boeing 737 Classics by a year to 2017. The accelerated retirement was driven by training complexities, and an inability by Southwest and its pilots to reach a deal on segmentation of the Classics. Contract talks between Southwest and its pilots have dragged on for nearly four years, and remain under the guidance of a national mediator.
The Lufthansa Group narrowed its operating loss in the seasonally weak 1Q2016, in spite of a fall in revenue. A weak pricing environment was more than offset by a reduction in unit costs. This was principally thanks to lower fuel costs, but there was also a welcome fall in underlying ex fuel CASK at constant currency.
However, although Lufthansa Passenger reported higher profits than in 1Q2015, there was a decline for SWISS, Eurowings, Cargo, MRO and Catering. For LCC Eurowings, this was partly due to start-up costs in long haul and at Vienna, but it also reflected strong LCC competition in Germany. Lufthansa is still considering whether to add Brussels Airlines to its Eurowings operation. Austrian only improved its result because of a one-off gain and, moreover, it seems that the improvement in operating profit at the Group level compared with 1Q2015 was due to one-off items.
Lufthansa still expects to post a slightly higher adjusted EBIT result in 2016 than in 2015. Nevertheless, its 1Q2016 report demonstrates that, for all its restructuring progress, it is not achieving results that are consistent with the broader cyclically high margins of the global airline industry. Further CASK reduction remains the focus.