In a May-2013 report on British Airways, we called it the favourite child of parent IAG. Its good behaviour was being rewarded with new fleet toys, while sister Iberia was scolded to mend its ways.
BA should match its best ever operating margin in 2015 and better it in 2016, even covering its cost of capital - a salutary model for its European counterparts. After the global financial crisis, margin recovery was mainly due to unit revenue growth. A RASK downturn in 2014 and 1H2015 has seen margins improve through lower unit cost, but these were largely thanks to lower fuel prices. Even a premium brand cannot always rely on unit revenue growth and BA still needs to cut CASK, with a focus on labour. It remains one of Europe's higher unit cost airlines and Iberia has cut CASK more successfully.
Iberia's reformed ways have been feted like the return of the prodigal and now BA has two more siblings. Up and coming teenager Vueling has been given significant trust and responsibility for one so young, while new arrival Aer Lingus will demand much parental attention. BA will need the maturity and determination of the eldest child to graduate to full value-creating adulthood.
Finnair narrowed its operational loss for 2Q2015 and for 1H2015. In spite of broadly flat capacity (ASK growth of just 0.4%), passenger revenue increased by more than 4%, helped to some extent by currency movements. However, total revenue fell slightly and the improved operational result was achieved through a bigger reduction in costs, thanks to lower fuel prices.
Finnair noted that there were signs of recovery in the demand for consumer and business travel in all traffic areas. Its 1H2015 report shows that it has started to improve its results and it now targets a break even or slightly positive operational result for FY2015 after a EUR37 million loss last year.
Moreover, with average 2Q2015 headcount down by more than 500 (10%) year on year, Finnair's restructuring of recent times paves the way for productivity gains. Its profitability should also benefit from the introduction this autumn into its long-haul fleet of Airbus A350-900 aircraft to replace ageing A340 equipment (which currently have an average age of 12.7 years according to the CAPA Fleet Database).
Turkish Airlines' operating profit fell in 2Q2015 compared with the same period a year earlier, after three successive quarters of improving results. It suffered a very heavy fall in unit revenue, mainly due to weak yield, but also the result of a dip in load factor. Pricing softness owed much to foreign exchange movements, but also highlighted a weaker balance of demand versus supply in a number of THY's many markets.
Turkish Airlines' strategy of connecting global traffic flows through its Istanbul hub has driven sustained growth over a number of years. However, this can also leave it exposed to a wide range of external demand risks around the globe and this is undoubtedly weighing on unit revenue and profits at the moment. It is also in the middle of a period of fierce competition with LCC Pegasus Airlines at Istanbul's second airport Sabiha Gokcen, the result of capacity constraints at Ataturk before the building of a new airport by the end of the decade.
Brazilian airline Gol’s fortunes are inextricably tied to and mired in Brazil’s weakening conditions
Brazilian airline Gol continues to battle the deteriorating conditions in its home market driven by high inflation and record currency devaluation. Unlike most Latin America airlines, Gol has a much larger exposure to the domestic market and the demand fluctuations created by the macroeconomic pressure in Brazil.
Given the conditions in Brazil, Gol has revised its planned capacity targets downward in the domestic market for 2015, but at a lower rate than rival TAM, part of the LATAM Airlines Group. Gol reasons that its rival is catching up after Gol undertook a significant capacity reduction in late 2012. However, Gol cites some fleet flexibility if market conditions dictate a further capacity reduction.
Gol for the last couple of years has been working to strengthen its balance sheet as the BRL has devalued significantly against the USD. It recently brokered a financing deal with Delta, which upped its equity stake in Gol. But currency devaluation is pressuring Gol’s leverage position, diluting some of the balance sheet clean-up it has undertaken during one of the most challenging periods in Brazilian aviation.
Air Canada yields declines as capacity grows, with a focus on strategy instead of short term profits
Similar to other North American airlines, Air Canada finds itself in a position of defending its business strategy as capacity increases and unit revenues and yields fall. The company is stressing that it has evolved to a point where it can focus on profits, margin expansion and ROIC. At the same time it is trumpeting progress it has made in meeting or exceeding certain financial targets, and reiterating a recent decision to raise its performance goals in some of those metrics.
Air Canada’s yields and unit revenue began their downward trajectory earlier than other North American airlines that have endured a sagging performance in those metrics throughout 2015 due to currency appreciation and lower fuel surcharges in many international geographies. Air Canada’s slide started in 2014 as the airline increased its mix of leisure passengers and grew its stage length, pillars of its plan to achieve sustainable profits.
Those same factors along with surcharge pressure have driven Air Canada’s unit revenues and yields down for 1H2015. Even as the airline states that its margin expansion will continue, it is not clear if the markets have totally shaken off being spooked by the declines in certain metrics. However, Air Canada does have the benefit of having an increasing stock price during the last year when its yields and unit revenues have trended down.
In 2Q2015, Pegasus Airlines' operating result fell into loss in what is usually a profitable quarter for the Turkish LCC. Foreign currency movements served to inflate both revenue and costs, with a net negative impact on profitability.
However, the negative result was largely driven by the weakness of unit revenue (RASK), which was dragged down both by poor yields and falling load factors. It seems that the competitive landscape at Sabiha Gokcen, Pegasus' main base, remains highly competitive thanks to Turkish Airlines' expansion and the LCCs own strong capacity growth.
If it is to meet its FY2015 profitability target, Pegasus will have to perform more strongly in 2H2015, in particular in 3Q (which typically accounts for the vast bulk of annual profit).
This CAPA report looks at the European Commission’s Investment Plan for Europe, which is also known as the European Fund for Strategic Investments (EFSI) and the ‘Juncker Plan’ after the EC President Jean-Claude Juncker, who instigated it in Nov-2014.
Its purpose is to unlock public and private investments into the "real economy" (which means the part[s] of the economy that are concerned with the production of goods and services, as opposed to the part that is concerned with buying and selling on financial markets.
Those investments are expected to total at least EUR315 billion (USD348 billion) over the three fiscal years Jan-2015 to Dec-2017.
IAG grows quarterly profit once more. Iberia long-haul growth to accelerate with additional aircraft
With its 2Q2015 results, IAG took another step towards achieving its longer term financial targets. Its 2Q operating profit grew by 39% year on year and its rolling 12M return on invested capital increased by 0.7ppts. Both revenue and operating costs were inflated by currency movements, with a net positive impact. Nevertheless, adjusting for foreign exchange, IAG cut unit cost at a faster rate than the drop in unit revenue.
At the level of the operating airlines, both BA and Iberia enjoyed improved operating profits. Vueling remains the most profitable airline in the group, but the Spanish LCC's result dipped slightly. Its business is highly seasonal and 3Q should be its strongest quarter, so it still has a chance to end the year with better figures.
IAG's results for the quarter were again stronger than those of its major European legacy airline group rivals Lufthansa and Air France-KLM. Its growing confidence is reflected in its decision to exercise options with Airbus for additional narrowbody and widebody aircraft, including up to five A330-200 growth aircraft for Iberia.
The Lufthansa group grew its adjusted EBIT by 52% in 2Q2015, in spite of the negative impacts of pilot strikes and currency movements. Lower fuel costs were a significant factor in the improved result. The Passenger segment was the biggest contributor to the improvement and MRO also helped, but Lufthansa Cargo suffered a fall in its result in 2Q after an advance in 1Q. For FY2015, the group still aims for an adjusted EBIT of more than EUR1.5 billion and perhaps now has a little more headroom for this aim.
Meanwhile, the Lufthansa group is attempting to push forward with a number of important developments. It is expanding its Eurowings subsidiary, which will progressively take over from Germanwings on short haul point to point routes. In addition, Eurowings will launch low cost long haul leisure routes this winter, using wet lease capacity from SunExpress (jointly owned by Lufthansa and Turkish Airlines). This LCC initiative runs in parallel with ongoing attempts at improving mainline labour productivity. The group is also introducing a new commercial strategy, including charging a fee for GDS ticket sales.
Ryanair's customer refocus delivers 1Q load factor and 25% profit rises; Germany the next big target
Ryanair has continued its impressive growth with a 25% increase in net profit and a 15% increase in passenger numbers in 1Q of its FY2016. This is more evidence of the success of its 'Always Getting Better' customer service initiatives. Profit growth was helped by lower fuel prices, although the benefit was limited by fuel hedging at last year's higher prices driven in part by another jump in load factor. More significantly, a jump in load factor more than offset lower average fares to drive up revenue per seat.
With 35 aircraft deliveries in FY2016 and 50 in FY2017, Ryanair continues to add to its network. The coming winter will see it open bases in Berlin Schoenefeld and Gothenburg. It is also in talks with many other airports across Europe that are interested in the traffic growth that Ryanair can bring. The strength of its network is such that it can happily continue to serve former bases by serving them from other airports, as demonstrated by its recent decision to close its Copenhagen base.
Aer Lingus' FY2016 outlook strong as IAG's bid nears acceptance; new era to begin for the Irish flag
Aer Lingus suffered a slight fall in its 2Q2015 operating profit. Healthy revenue growth, driven by strong trading on the long-haul network more than offsetting a dip in short-haul revenue, was not enough to counterbalance cost increases. Currency movements inflated both revenue and cost, but the net impact was detrimental to the result.
Aer Lingus expects these currency effects to be less in 2H and says it is satisfied with forward bookings. It is prevented by stock exchange rules from issuing FY2015 profit guidance while under offer from IAG, but it says that it expects an improved operating performance for 3Q and for the full year.
Meanwhile, the IAG offer looks very close to being accepted by Aer Lingus. This could be its last set of results as an independent airline. As it continues to battle powerful local rival Ryanair, Aer Lingus can look forward to a new phase of its history as part of Europe's strongest legacy airline group.
All is not well in Air France-KLM. The group has reported another decline in quarterly profits. Its 2Q2015 operating result was down by 2% and insufficient to bring 1H2014 into positive territory after an operating loss in 1Q2015. Currency movements, specifically the weaker EUR versus USD, had the effect of inflating both revenue and costs, but the net impact accounted for the deterioration in the operating result.
Nevertheless, this should not detract from Air France-KLM's very weak unit revenues, which appear immune to attempts at improving the product and may only respond to capacity cuts. Either way, unit cost reduction will remain crucial if the group is to return to a sustainable profit path. Long haul routes in particular are under threat.
The development of its medium haul low cost airline, Transavia, continues to be rapid in France, but the scale and profitability of this operation are weak compared with Europe's leading LCCs. However, the establishment of Transavia Europe, with bases beyond France and the Netherlands, could be back on the agenda after a change in leadership at the French pilot union.