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Indian Aviation in 2013/14 Part 3: Global operators bid for Chennai and Kolkata airport management

This is the third in a four-part series of extracts from the full 200+ page India Aviation Outlook Report for 2013/14. The first extract looked at the changing dynamics of the airline sector on domestic and international routes, while the second examined the policy vacuum that persists in India and the impact this has on the viability and development of the sector.

This third part addresses key issues in airport and airspace infrastructure, in particular the AAI's challenges in offering management contracts for two of India's major airports and the prospects for regional hub operations - or not.

The next and final extract will consider this year’s outlook for traffic, capacity, yields and airline profitability.

easyJet sets course for record FY profits - and another clash with Sir Stelios...

easyJet’s 1H2013 pre-tax result improved by GBP51 million to a loss of GBP61 million. This puts it comfortably on course to achieve the current consensus forecast for record pre-tax profits of GBP410 million in FY2013. It may also be on another collision course with founder and largest shareholder Sir Stelios Haji-Ioannou over aircraft orders.

CEO Carolyn McCall believes easyJet can take further market share from non-LCCs on point-to-point routes. At its top 20 existing airports, where easyJet has 46 million seats (a share of 22%), she puts this potential additional market at 86 million seats. This analysis appears to pave the way for a large aircraft order after easyJet completes a review of its future fleet strategy later this year, although it insists that no decision has yet been taken.

This would not please Sir Stelios who said: “Good things happen to airlines that don’t order more aircraft.” Under Ms McCall's guidance easyJet's share price has more than doubled over the past year and not just because it didn't grow. It may be time for Sir Stelios to let go.

IAG profit guidance is dropped after first quarter loss, but can it still reach its previous target?

These are challenging times for IAG. The only one of the European Big Three to report a wider operating loss for 1Q2013 and to see net debt increase year-on-year, it also took significant new labour restructuring provisions in connection with Iberia. It has also dropped its previous ambitious target of exceeding 2011’s EUR485 million operating profit in 2013 for the time being.

The first quarter operating loss was affected by two factors whose negative impact should fall away over the rest of the year: first, the lag between Iberia’s capacity cuts and headcount cuts and, second, by a mirror image factor at British Airways, namely headcount increases ahead of the introduction of the A380 and 787 later this year.

Nevertheless, five years after the global financial crisis and more than two years into the British Airways/Iberia merger, IAG will need to show it can still match its previous 2013 profit target if it is to allay growing doubts over its ability to reach its 2015 goal of EUR1.6 billion in operating profit.

Saudia faces new competitive threats in 2013 as Saudi Arabia loosens the regulatory reins

The Saudi Arabian General Authority of Civil Aviation (GACA) has confirmed that Qatar Airways and Gulf Air will launch domestic operations in the country before the end of 2013. The granting of the licences to two foreign carriers to operate domestic service is an unparalleled move of openness in the Middle East. It will start a new era for travel within the country.

The opening of the Saudi Arabian market presents a new challenge to national airline Saudia. However, after several years of facing competition from domestic carriers and a thorough modernisation ahead of its entry into SkyTeam in 2012, as well as the extended international reach that alliance membership offers it, the carrier is in a better position now to meet the latest threat.

Air France-KLM: it may be unfair to compare its 1Q2013 with Lufthansa's, but…

Two of the European Big Three reported 1Q2013 results within two days, so we can’t resist a comparison. Air France-KLM’s quarterly operating loss of EUR530 million was EUR171 million below Lufthansa’s. Air France-KLM shaved net debt from EUR6.0 billion at the end of 2012 to EUR5.9 billion; Lufthansa’s net debt is less than one third of this. AF-KLM’s 1Q RASK grew by 1.2%; Lufthansa’s by 2.8%.

Air France-KLM makes losses in Europe, where Lufthansa now claims a profit. In an attempt to fix this, Air France-KLM has Transavia for some leisure routes, Hop for French regional point-to-point and some hub feed, Air France’s provincial bases strategy (under review) for non-hub French routes and both Air France and KLM for everything else. Lufthansa has Germanwings for non-hub routes and Lufthansa for hub feed in Germany.

For FY2013, Air France-KLM isn’t saying whether it can improve on 2012’s EUR300 million operating loss, only that it aims to cut unit costs (ex fuel and currency) and net debt, whereas Lufthansa aims to beat last year’s EUR524 million profit.

Gulf Air turn around plan offers a glimmer of hope for the beleaguered flag carrier

Gulf Air’s latest attempt at a turn around, launched in late 2012, appears to be quickly producing concrete results for the struggling Bahraini national carrier. The latest in a long line of revival attempts, the plan has dramatically downsized the Gulf’s oldest airline in an attempt to end the years of heavy losses.

At the end of 1Q2013, Gulf Air announced it achieved a 21% cut in overall costs during the quarter, crediting the improvement to a reduction in aircraft leasing fees, cuts to flight-related charges and staff expenses and the closure of loss-making routes.

Yields were up 21% year-on-year in the quarter, thanks to stronger traffic demand in the region and significantly higher sales in Bahrain, as well as its broader fleet and network restructuring. As a consequence, the carrier reported that losses in 1Q2013 were approximately half what they had been in 1Q2012.

Qatar Airways set to join oneworld by late 2013

Qatar Airways CEO Akbar Al Baker announced earlier this month the carrier intends to join the oneworld alliance by Oct-2013, only 12 months after it announced that it had been selected for membership. The 2012 announcement that the airline planned to join the alliance system sent ripples of reaction through the aviation landscape of the Middle East, as well as globally, helping to bring about a major commercial reshaping.

Joining oneworld will usher in a new era for Qatar Airways. After years of setting its own path and growth trajectory, the airline has decided to hitch itself to the alliance system, albeit to the most loosely based of the international airline groupings. Its membership is being sponsored by British Airways. The airline’s membership in oneworld will see it coordinate flights, schedules and systems with other member airlines, including Iberia, Qantas, Royal Jordanian, Cathay Pacific, Malaysian Airlines, LAN and Japan Airlines.

Restructuring rigour from Riga: airBaltic narrows 2012 net loss

Latvia’s national carrier airBaltic recently reported a narrowing of its net loss in 2012, with RASK up 15%. The carrier is just over a year into a five year profit improvement plan. It says that it is surpassing its original turnaround plans and is on track to achieve targeted profitability by 2014. Network restructuring, improved revenue management and the relative economic health of the Baltic region compared with other parts of Europe are providing tail winds.

With only modest capacity growth planned for 2013 and monthly profitability exceeding management’s plan for the first three months of the year, there may be potential for airBaltic to improve on its 2013 target of stable RASK and perhaps to reach a positive net result ahead of schedule.

Nevertheless, its unit costs are not as low as the LCCs with whom it increasingly competes and labour productivity lags peers. Its fleet modernisation programme should help to narrow the unit cost gap, but management will be hoping it can retain its current pricing power.

nasair plans ambitious expansion in 2013 ahead of further liberalisation in Saudi Arabian market

nasair has long been the junior partner in the Saudi Arabian aviation market, but five years into operations its fortunes have begun to change. In 3Q2012, the airline reported its first-ever quarterly profit. It also managed to breakeven in the final quarter of the year, ending 2012 with a small loss. Load factors have hit a record 75% and nasair has turned its operational performance around to generate more revenue.

With the improving financial momentum and promising passenger traffic, the carrier is optimistic about its prospects for 2013. Sulaiman Al-Hamdan, Group CEO of NAS Holding – the parent of nasair – has announced the carrier is targeting a 50% increase in passenger traffic for 2013. As if that wasn’t ambitious enough, the carrier is also targeting a 100% increase in revenue and its first ever full-year profit.

Norwegian improves its 1Q2013 results, but widebody profits may be one for the long-haul

Norwegian Air Shuttle narrowed its net loss in 1Q2013 and turned its operating result around from a loss of NOK574.6 million (USD99 million) to a profit of NOK69.2 million (USD12 million). Capacity continues to grow rapidly, with ASKs up 21% (11% due to longer average sectors), but load factor dipped by 1ppt to 76%.

Nevertheless, RASK grew 2% and revenues were up 23%, while unit costs were down 8%. Further CASK reduction remains a key target and the establishment of new bases outside high wage Scandinavia, both in Europe and in Asia, provides an opportunity to lower labour costs.

Norwegian recently announced a seventh widebody route (Oslo-Fort Lauderdale) for its long-haul network, which will launch on 30-May-2013 along with Oslo-New York. Its strategy of growing long-haul operations through new routes at the expense of frequency will help it to establish a wider presence more rapidly, but will reduce the available cost efficiencies at remote bases and restrict its appeal mainly to the leisure passenger. Norwegian’s long-haul network may struggle to be profitable for some time.

Dubai Airport continues ascent over traditional international hubs

Dubai International Airport (DXB) continues its inexorable march to become the world’s largest airport by international passenger traffic. At the end of Mar-2013, the airport announced it had been confirmed as the world’s second busiest airport for international passenger traffic, moving ahead of Paris’ Charles de Gaulle airport for the first time on a month to month basis.

Only London Heathrow Airport remains a bigger hub for international traffic. Given the pace of traffic growth in Dubai, the capacity constraints at London Heathrow and the dithering by UK authorities about runway capacity in southeast England, it is only a matter of time before Dubai becomes the world’s largest international passenger hub.

Dubai Airports believes DXB can take the top spot by the end of 2015.

Aegean Airlines: caught between the devil and the deep blue sea after three annual losses in a row

Aegean Airlines seems to be caught between the devil and the deep blue sea, challenged both by a very weak domestic market and by an increasingly competitive international market where it has neither cost leadership nor a global network. If approved by the EU this year, will its planned acquisition of Olympic Air provide a route to safety?

Aegean reported its third successive loss in 2012, albeit a narrower one than in 2011, as passenger numbers fell by 6%. Aegean managed to reduce costs at a similar rate and to limit the revenue fall to 2% by cutting domestic traffic and international traffic from Athens while growing international traffic from provincial Greek cities. Double digit passenger growth from 2003 to 2009 has been followed by domestic-led decline, with Athens (Aegean’s main hub, where it is the biggest carrier) a falling market. Although it has leading positions at its other Greek bases, LCCs are increasingly making their presence felt there.