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Alitalia's "new" strategy realigns it to feed Etihad, but needs to change loss-making mindset

24-Jan-2015 8:01 PM

Alitalia has announced a new strategy to accompany its newest incarnation, following Etihad Airways' acquisition of a 49% stake in the Italian airline from 1-Jan-2015. The strategy includes the aim to return the company to profit in 2017, after a long period of losses. The five main elements of Alitalia's strategy focus on the network, cooperation with partner airlines, the fleet, "guest services" and the brand.

Alitalia's statement does not contain much of consequence that has not previously been flagged. Rather, it reiterates adjustments to its network designed to complement that of Etihad.

There will be less direct flying to Africa, a little more to Asia and a lot more to the Middle East to feed Etihad's hub. Alitalia will also increase its operations in the Americas and in Europe, where Etihad's own presence is smaller.

The crucial question that the statement does not address is how Alitalia will go about changing the mindset, developed over many years, that regards perpetual losses as the norm. Even if the necessary cuts can be achieved, such an entrenched culture is not easily redirected. Yet, for Alitalia, this is surely the last throw of the dice.

London City Airport: the changing competitive landscape at the UK capital's most expensive airport

20-Jan-2015 3:36 PM

London City Airport (LCY) reported an increase of 7.7% in passenger numbers to 3.65 million in 2014, its highest ever number and ahead of forecasts according to CEO Declan Collier. The airport attributed the growth to increased business confidence, helping to return business travel to pre-recession levels. Traffic also received a boost from the entry of UK regional airline Flybe just before the start of the winter 2014/2015 schedule at LCY.

Flybe's entry into London City, at a time when CityJet has been reducing capacity, has given a significant boost to domestic capacity and also had an impact on the list of top routes. In the current winter schedule, Amsterdam has been replaced by Dublin as the number one destination by seats, with services now from all three of the airport's biggest airlines (British Airways, CityJet and Flybe).

A number of routes have been cut this winter by airlines at London's most expensive airport (as defined by aeronautical revenue per passenger), although Flybe's entry tips the balance in favour of routes opened. The high cost of operating at the airport will lead to further route churn, but the strategy seems to be working.

SAS falls into loss in FY2014; plans more cost cuts in spite of growth in frequent flyer numbers

19-Dec-2014 3:52 PM

SAS fell back into net loss in FY2014 and its operating profit margin was only 1.0%. It is achieving its cost reduction targets and moving towards a more effcient operation. Moreover, product and network initiatives have helped to stimulate load factor improvements and growth in the number of frequent flyer members using the airline.

However, in a highly competitive market-place characterised by capacity growth and downward price pressure, unit cost did not fall enough to offset the drop in unit revenue. SAS has now announced further cost savings plans and is reorganising its regional flying activities.

SAS has achieved much over the past two years, streamlining the group and cutting costs. It has lowered its CASK by 10% since 2012, bringing it more in line with other European FSCs. The problem is that the main competitive threat comes from the LCCs and SAS' cost base is still much higher than theirs. It seems it must always work harder just to tread water.

Ryanair lags easyJet on business traveller & customer service initiatives; both have great potential

17-Dec-2014 7:00 PM

Ryanair recently raised net profit FY2015 guidance (year to March) for the second time. It now expects EUR810 million to EUR830 million, up from its previous range of EUR750 million to EUR770 million. This was thanks to faster passenger growth, stimulated by lower fares, but also reflecting improved customer service and new routes.

The largest carrier of passengers within Europe, Ryanair has rebounded very strongly from last year's profit warnings. Almost at the flip of a switch, it has raised its load factor and profit margins. It is opening new routes from more primary airports and with greater frequencies, increasing its appeal to business passengers.

Ryanair lags easyJet in its initiatives towards business travellers and regarding wider customer service improvements. Moreover, revenue per passenger is set to dip in 2HFY2015 as it absorbs strong capacity growth. Nevertheless, Ryanair has a significant opportunity to grow revenue per passenger as it follows easyJet up the yield curve. In this report, we compare the two on frequencies, presence in major airports and unit revenues. There is still room for both.

KLM: a decade after Air France merger, the smaller, but more profitable partner also needs cost cuts

12-Dec-2014 11:47 PM

KLM, the world's oldest airline still operating, turned 95 in Oct-2014, after passing the 10th anniversary of its merger with Air France earlier this year. A pioneer of the international hub and spoke model, KLM's continued operational effectiveness is illustrated by its industry leading load factor. Although, before the merger, it often struggled for profitability, it has consistently achieved higher operating margins than its sister airline Air France since their 2004 union.

In spite of these marks of success, KLM CEO Pieter Elbers, promoted to replace Camiel Eurlings in Oct-2014, is asking employees to suggest ways of making cost savings of EUR700 million over five years. This is to fund widebody upgrades and service enhancements, including new seats for 15 Boeing 777 aircraft and business lounge expansion. KLM is also placing a freeze on new cabin crew hires and giving consideration to job reductions.

Much of the commentary on Air France-KLM Group's new Perform 2020 programme has focused on Air France, loss-making since FY2009. In this report, we look at KLM's post merger track record at a time when its margin is under pressure.

Flybe: a niche occupied by few other airlines, but still with a unit cost disadvantage

9-Dec-2014 3:30 PM

At its Capital Markets Day in late Nov-2014, Flybe asserted that it "does not compete with low cost carriers, flag carriers or mid-haul leisure airlines". Moreover, our analysis shows that it rarely competes with other regional airlines. In fact, Flybe faces no competition of any kind on 78% of its city pair routes in its Dec-2014 schedule. Moreover, it is Europe's largest independent regional airline and Europe is the world's largest regional market.

In spite of these advantages and what looks to be a relatively efficient cost base by comparison with other European regional airlines (according to our analysis), Flybe has yet to re-establish sustainable levels of profitability. Much has been achieved since the change of senior management in 2013, but the regional airline's fundamental CASK disadvantage will remain a challenge even as it increases its focus on turboprops rather than regional jets.

Aeroflot acts to relaunch its LCC project with Pobeda after Group profits fell again in 3Q2014

3-Dec-2014 3:39 PM

The Aeroflot Group suffered a 31% drop in its operating profit and reported a net loss in 3Q2014, the seasonally strongest quarter. Although the net result was weighed down by foreign exchange movements and non-recurring items, the underlying profitability of the Group suffered due to RASK falling while CASK increased.

Demand on international routes has suffered as a result of the geopolitical backdrop, forcing Aeroflot to focus its growth in the domestic market.

Geopolitical events also led to the cessation of Aeroflot's fledgling LCC subsidiary Dobrolet in Aug-2014. However, the Group has acted rapidly in launching a new low cost venture, Pobeda, which started operating between Moscow Vnukovo and Volgograd this week.

Aegean Airlines' good results continue in 3Q2014, but competition with Ryanair is growing

1-Dec-2014 8:55 PM

The Aegean Airlines Group's string of good financial results continued with 3Q2014 operating profit increasing by more than a quarter compared with the same period a year earlier (based on proforma figures with Olympic in the comparable). Aegean is growing its capacity at a double digit rate, with particularly strong growth in the domestic market and on international routes from Athens, just as Ryanair is expanding rapidly in Greece. This has led to downward pressure on yields and RASK, but Aegean has successfully cut CASK even more quickly to drive up its margins.

Competition between Aegean and Ryanair looks set to intensify in 2015, when the battle may extend to Cyprus, regardless of whether or not one of them is successful in biding for Cyprus Airways.

As Aer Lingus will testify, having Ryanair as your nearest and biggest competitor focuses the mind. Aegean will need to prove that its recent good run can be extended.

Airberlin: new restructuring plan appears not radical enough as 3Q profitability slips

17-Nov-2014 6:07 PM

After narrowing its operating loss in 1H2014, airberlin's 3Q result was in profit, but at a lower level than last year in what is the seasonally strongest quarter. Unit revenues continued to fall and the airline was unable to reduce unit costs sufficiently to compensate for this (even after allowing for restructuring costs). Another heavy loss is on the way for FY2014.

Airberlin has also given a further update on its new restructuring programme. In spite of indications earlier this year that the new programme might lead to fundamental strategic change, there is also little, if anything, that appears radical in the plan. Airberlin will remain in the same business segments, but redouble its efforts to do the same things more efficiently. Moreover, it has not really addressed one of the key themes we have identified in our analysis of the airline for some time, namely establishing its core purpose.

Pegasus Airlines: one of Europe's most profitable airlines returns to improving profitability trend

14-Nov-2014 3:40 PM

After four successive quarters of year on year declines in its underlying operating result, Pegasus Airlines reported an increase in 3Q2014. Its operating margin was at the same level as 3Q2013, after falling in 1H, and second in Europe only to Ryanair (of those to report thus far).

As always, Pegasus' results are complicated by foreign exchange, especially as Turkey's currency has weakened against EUR and USD. Expressed in its functional currency of EUR, rather than its reporting currency of TRY, Pegasus' CASK (cost per available seat km) edged up slightly in 3Q, reversing the decline of 1H. Fortunately, RASK (revenue per available seat km) also increased at a similar rate, ending a four quarter falling trend. This was helped by a relative slowing of its capacity growth in addition to less aggressive pricing by Turkish Airlines at Sabiha Gökçen.

Pegasus has reiterated its FY2014 guidance, although there now seems to be scope for it to do better. Our suggestion after 2Q results, that Pegasus may have turned a corner and be ready to leave the path of deteriorating margins, seems to be gaining credibility.

Turkish Airlines: 3Q underlying profit back on upward path after four falling quarters

13-Nov-2014 9:19 PM

With its 3Q2014 results, Turkish Airlines (THY) has returned to a path of improving underling profitability after four quarters of year on year declines. Not only did RASK growth turn positive once more (after falling for five quarters), but also CASK was held flat.

The better RASK trend appears to reflect slightly slower capacity growth. THY has also recently lowered its FY2014 growth plan, which should be positive for unit revenues. Although 9M underlying operating profit was slightly down year on year, the return to profit growth in 3Q raises the prospect of THY's recording an increase in its FY2014 result.

THY is more profitable (by pre-exceptional operating margins so far in 2014) than any of Europe's Big Three legacy airline groups. It has developed a hub strategy that allowed it to carry more international to international transfer passengers in 2013 than Etihad carried on its entire network, with particular strength in attracting European passengers into its Asia, Middle East and African networks. Complemented by a sizeable domestic and point to point international market, THY is certainly capable of delivering annual profit growth.

WestJet Airlines faces capacity pressure as it still continues to record solid financial results

10-Nov-2014 4:44 PM

Canada’s WestJet is preparing to face some pressure from competitive capacity increases in CY2015 as rival Air Canada ratchets up its supply through the expansion of its low cost unit rouge and aircraft upgauging.

At the same time WestJet is facing cost pressure in CY2015 as the shorter stage lengths performed by its regional subsidiary Encore become more pronounced in the airline’s results. Even as Encore continues to create some cost headwinds for WestJet, the company believes its regional airline continues to stimulate demand in markets too thin for narrowbody aircraft.

Despite some external and internal pressures, WestJet’s fundamentals remain strong.  The company holds strong cash balances and favourable debt ratios while continuing to deliver shareholder returns.

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