O'Leary: "Ryanair in robust good shape". Europe's highest margin airline despite revenue seasonality
Ryanair is on course to record a positive net income in both of its winter quarters for only the second time in eight years, consolidating last year's achievement. Its 3Q2016 net income more than doubled and it has yet again almost certainly closed calendar 2015 as Europe's most profitable airline by operating margin (even before many airlines report their results).
Since embarking on its programme to improve its product, network and customer service two years ago, Ryanair has achieved impressive results. Load factor has leapt forward, driving up unit revenue, while unit cost has remained under control. Interestingly, however, unit revenue growth has been highest in the already strong summer quarters. Although Ryanair is now achieving year round profitability, the seasonal variation in its revenues is even more pronounced than before.
FY2016 could be Ryanair's most profitable year in eleven years, and it also looks set to become Europe's largest airline group by passenger numbers in the next twelve months. As Michael O'Leary said of the airline that he has led for 22 years, "the business is in robust good shape".
Wizz Air's trading update for 3Q2016 paints a picture of an airline enjoying robust health. The number one airline between Central/Eastern Europe and Western Europe is growing rapidly, increasing its profit margins, raising its FY2016 profit target, and generating cash.
Moreover, Wizz Air may now be Europe's lowest cost airline, defined by its CASK over 12 months, although a lack of comparable data from current CASK king Ryanair means it's not currently possible to confirm this. Falling fuel prices (and its lower levels of fuel hedging) have helped Wizz Air's cost position, but it has shown consistent ex fuel cost control for many years.
Wizz Air's first two Airbus A321ceo aircraft joined its previously all-A320 fleet during the quarter, which also witnessed shareholder approval of its A321neo order. It will add 97 aircraft over the nine years from the end of FY2015 and the combination of larger aircraft with newer technology should help to take unit costs even lower. This will be crucial in its ongoing competition with Ryanair, the biggest airline in Europe and second biggest in Wizz Air's markets.
EasyJet has let slip that winter profits are falling, in spite of fuel price reductions. For the first time, its trading update for Oct-2015 to Dec-2015 (1Q of its financial year FY2016) gives a cost per seat figure, in addition to the usual revenue per seat. Europe's second largest LCC did not announce a 1Q pre-tax profit figure, but it can be calculated from the other reported data that it dropped 25% year on year.
This was due to revenue per seat falling more than cost per seat. The weakness in unit revenue was the result of terrorist activity affecting demand in Sharm El Sheikh and Paris in Nov-2015. EasyJet actually performed better than expected on costs, but weak unit revenue has become a trend in recent quarters and is set to continue in 2Q.
Of course, the airline makes all its money in the summer, and so - large percentage changes in the small winter profits do not say much about the full year. EasyJet still expects a higher pre-tax profit this year, but the strong double digit earnings growth of recent years is becoming harder to repeat.
Paris Orly Airport: Air France shrinks as its LCC Transavia grows, but easyJet & Vueling grow faster
The Paris terrorist attacks on 13-Nov-2015 interrupted a healthy year of traffic growth at Paris Orly Airport but did not prevent it from posting record passenger numbers for the year. Its traffic suffered more in the global downturn than that of its larger sibling airport, Paris CDG, but it also recovered more strongly. However, Orly's growth has been slower than CDG's in the past two years, since Air France's network cuts at its number two airport have offset LCC expansion there.
As a low cost market Orly is relatively small, but it has the distinction of being an important base for the LCC subsidiary of two of Europe's Big Three legacy airline groups. It is the second largest base for Air France-KLM's Transavia, and the third largest for IAG's Vueling. However, both have much less capacity there than easyJet, for whom Orly is only the tenth largest airport.
Transavia's growth, while Air France shrinks, is little more than maintaining Air France-KLM's traffic at Orly. It is not maintaining the group's market share, since Vueling and easyJet are growing faster. A 2014 agreement with pilots limits Air France-KLM's room for manoeuvre.
Austrian Airlines: Lufthansa Group's poor relation may have improved revenue & profit growth in 2015
In 2015, Austrian Airlines' passenger numbers fell for the third successive year, to the same level as in 2006. Its ASKs fell during the global financial crisis and have changed little since. Revenue looks likely to have grown in 2015, but is also well below its pre-crisis levels. With only three years of positive operating profit in the decade, Austrian has consistently been the least profitable Lufthansa Group airline.
One of Austrian's big challenges has been to hold on to unit revenue increases when they have occurred. Moreover, its cost base is among the highest in Europe for an airline with its relatively short average trip length. Its short/medium haul focus brings significant competition with LCCs, whose share of the Austrian market has grown over the past decade.
Austrian can take some heart from an improved profit margin in 9M2015, which should presage a stronger FY2015 result (to be published by Lufthansa on 17-Mar-2016). In addition, the Group has established a base for its growing LCC Eurowings at Austrian's hub in Vienna, the no-frills subsidiary's only base outside Germany.
On 12-Jan-2016, Turkish Airlines (THY) published detailed targets for 2016 on the development of its fleet, network, traffic, workforce, revenue and earnings. It expects 2016 to be a year of strong capacity growth, led by expansion in America and Africa. The fleet will expand further across the network, while retaining its narrow body bias. The labour force will grow, but with improved productivity, enabling THY to continue on its existing strategic network development path. Although its expects a fall in unit revenue, it also anticipates improving profitability thanks to lower fuel prices and control over ex fuel costs.
Over the past decade, THY has increased its ASKs at an average rate of 18% pa, doubling its ASKs every four or five years. Such rapid and relentless capacity growth puts downward pressure on unit revenue. Moreover, in 2016, macroeconomic uncertainties and geopolitical events add to the risk of a further weakening in unit revenue.
Nevertheless, it has a solid track record of riding out such risks. Its relatively unusual decision to publish such detailed guidance at the start of 2016 suggests that it is feeling confident about the year ahead.
In 2013, Stansted and its biggest customer Ryanair signed a 10 year agreement over lower airport charges and increased traffic targets that led to a resumption of growth at the airport. This followed a multi-year traffic slump caused by strong airport charge increases. The effect of the new agreement has been dramatic. After losing more than 6 million annual passengers from 2007 to 2012 (a fall of 26%), the airport had recovered 5 million annual passengers by the end of Nov-2015 (an increase of 29%), bringing the total close to 23 million.
As Ryanair's biggest base, London Stansted airport claims the title of Europe's largest airport for low cost airline seats in the current northern winter schedule (based on data from OAG for the week of 4-Jan-2016), although it slips to third behind the more seasonal Barcelona and Gatwick in the northern summer schedule.
Nevertheless, the dominance of Ryanair makes for an unequal relationship and the airport is keen to attract a legacy airline. As the UK continues to delay a decision over new airport capacity, no wonder Stansted's owner Manchester Airport Group is keen for its planning cap of 35 million passengers to be lifted in order to facilitate more airline competition at the airport.
Last month, Flybe announced that it would establish a new base at Robin Hood Doncaster-Sheffield Airport in summer 2016. The airport is only ten years old and among the UK's smallest, ignored by most of its leading airlines and mainly used by Wizz Air to serve destinations in eastern Europe. Sheffield is the UK's fourth biggest city, but it lacks connectivity.
Flybe will offer a combination of leisure and business routes, together with vital links to major hubs in Paris and Amsterdam. And the airport will suit Flybe's strategic preference for avoiding competition. It will launch eight routes from Robin Hood, and has indicated that it will also have ten other new routes from other airports in 2016.
Flybe has undergone a lengthy period of restructuring, including more than two years under current CEO Saad Hammad and is now growing once more. The airline's results for the first half of its FY2016 indicate that it may indeed now be entering what Mr Hammad calls the profitable growth chapter of its story.
SAS has had a relatively good year by comparison with its troubled past. In the year to Oct-2015 its net result returned to profit, and its operating margin was its best for at least a decade. It also managed to reverse a multi-year trend of declining unit revenue. This was partly due to favourable currency movements, but also reflected tight capacity management and SAS' focus on enhancing its product for frequent flyers.
On a less positive note, SAS' unit cost also increased, in spite of lower fuel prices. This increase was partly currency-related, but ex fuel currency adjusted unit cost also rose. Moreover, although FY2015 produced a high margin by its standards, SAS remains less profitable than the airline industry as a whole.
Looking ahead to FY2016, SAS plans to expand its long haul network, where ASKs will grow by 25%, driving an overall ASK increase of 10%. This growth should help to lower CASK, but will also have a negative effect on RASK. The trade-off between these two variables will determine whether or not SAS can further improve its profitability in FY2016.
SWISS is set for an eventful 2016, taking on a new CEO and two aircraft types new to its fleet. Thomas Klühr will move from his current position, as head of hub Munich for SWISS parent airline Lufthansa, to succeed Harry Hohmeister, who takes on responsibility for all Lufthansa Group's premium airlines in Feb-2016. That month SWISS will also deploy its first Boeing 777-300ER on the Zurich-New York route. The airline is the launch customer for the Bombardier CSeries, the first of which it expects to have in the middle of the year.
In this report we review SWISS' financial performance, which receives little attention separate from analysis of its parent group. For some years the most profitable airline in the Lufthansa Group, SWISS has consistently managed to lower its unit cost more rapidly than the fall in unit revenue. However, as LCC competition intensifies and Gulf airlines make further inroads into its market, SWISS cannot afford to rest on its laurels. It is among Europe's high unit cost airlines and our analysis indicates that labour productivity measures have declined. This should be an area of focus for Mr Klühr.
Although Air Canada is one of the most venerable brands in North American aviation, its executives stress the airline remains in the midst of a business transformation with a major focus on strategic long haul expansion, reflected by significant growth in international markets during 2015 that is continuing full force into 2016.
The company still trades below most of its full service North American peers, and Air Canada executives attribute part of the weaker valuation to markets adopting a “wait and see” approach to the company’s current expansion strategy.
In the meantime, Air Canada remains focused on strengthening its balance sheet in order to gain favourable aircraft financing. It has a steady stream of 787 deliveries scheduled for the next couple of years before its 61 Boeing 737 Max aircraft begin delivery in 2018.
Weak economic conditions are hovering over Latin America well into 2016, forcing the region’s airlines to adjust their capacity, and expectations for a recovery in yields. Those airlines are also strengthening an already laser-sharp focus on controlling cost, which becomes even more important as revenue softness persists.
Latin America’s two consolidated airlines LATAM and Avianca Holdings have recorded favourable unit cost performances during 2015, driven in part by lower fuel expense, while yields have remained under pressure. LATAM is in the midst of an initiative to shed millions in operating costs by 2018 and fuel hedging headwinds Avianca faced in 2015 should settle down in 2016.
Maintaining a flat or decreasing cost structure takes on a different level of importance in an environment where revenues and yields continue to be squeezed. But LATAM and Avianca are working to wring out inefficiencies in their cost base, and working to scale back fleet growth in order to reduce financial commitments.