After three successive quarters of reporting falling operating results, Aegean achieved a EUR10 million improvement in its 3Q2015 operating profit. Its result for the seasonally strong peak summer quarter helped to offset the reduction in profit suffered in 1H2015, bringing its 9M2015 operating result to the same level as last year.
However, Aegean is having to work harder by growing revenue to get the same profit. Moreover, even achieving the same profit has required a considerable helping hand from lower fuel prices. In 3Q2015, Aegean did manage to bring down its ex fuel unit cost, but total unit cost only managed to keep pace with the reduction in unit revenue thanks to savings from fuel.
Aegean's key challenge remains the very soft pricing environment in Greece, the result of economic weakness and strong competition from ultra LCC Ryanair, the country's second biggest airline. In 2014, Aegean was the highest margin full service airline in Europe and should remain close to the top of this category in 2015. However, it cannot let up in the battle to remain competitive with the likes of Ryanair.
Earlier in Nov-2015, Vueling's parent company IAG announced that the Spanish LCC's Chairman and CEO Alex Cruz will replace Keith Williams as head of its largest airline subsidiary, British Airways, in Apr-2016. Vueling generates the highest return on invested capital among IAG's airlines, and was the first to beat IAG's medium-term targets (before these targets were increased).
Moreover, Mr Cruz has established Vueling towards the premium end of the spectrum of LCC business models; indeed, he is not a fan of the 'LCC' epithet. He has achieved this while ensuring that Vueling's unit cost is consistent with that of a European LCC.
However, Europe's largest airline by passenger numbers, ultra-LCC Ryanair, is starting to improve its own brand offering without giving up its cost advantage. What's more, Ryanair has strong and growing positions at Vueling's two largest bases, Barcelona and Rome Fiumicino. A replacement for Mr Cruz has not yet been announced, but the new CEO will need to ensure that Vueling competes, both on service quality and on unit cost.
Just after celebrating its 20th birthday, easyJet reported another record profit. From FY2010, when Carolyn McCall became CEO, to FY2015, revenue grew by nearly 60% and pre-tax profit more than quadrupled. In FY2015, it generated an industry leading 22% return on capital employed.
EasyJet has a strong pan-European network, a successful digital strategy and a very competitive cost base compared with the legacy carriers with which it mainly competes. Buoyed by its profitable growth record, easyJet has added 36 aircraft to its orders and will grow its fleet from 241 in FY2015 to 347 in FY2022. It now plans average seat growth over this period of 7.5% pa, up from 6% previously.
Nevertheless, two indicators are deteriorating. One is on time performance, which has been sliding since peaking at 88% in FY2012, although it remains healthy at 80%. The other is unit cost, which only fell in FY2015 due to currency movements and lower fuel prices. Excluding these factors, cost per seat increased by 3.5% and is expected to rise again in FY2016. With load factor above 91% and unit revenue growth harder to achieve, unit cost will be a priority for new CFO Andrew Findlay.
Ryanair's "bumper summer" delivers 41% operating margin; 2016 target raised. 180 million pax by 2024
Ryanair CEO Michael O'Leary has said that the airline's strong 2Q financial performance was the result of a "bumper summer". Although the major legacy airline groups also reported improved profits for the quarter, Ryanair's operating margin of almost 41% sets it in a class of its own.
Moreover, its improvement was not mainly the result of lower fuel prices: Ryanair managed to increase unit revenue, in spite of double digit passenger growth and in contrast to the legacy airlines. This again demonstrates the success of Ryanair's customer service and network improvements. The airline has now raised its FY2016 traffic and net profit targets, thanks to higher load factors than previously expected.
In spite of the strength of its 2Q results and its positive outlook, Mr O'Leary attempted to inject a note of caution by noting that the revised profit guidance was "heavily dependent" on 4Q bookings, where there is "almost zero visibility". Nevertheless, his underlying confidence in Ryanair's strategic direction was illustrated by an increase in its FY2024 passenger target from 160 million to 180 million, which would represent a more than doubling of traffic over 10 years.
Conditions in Mexico’s aviation market continue to improve as domestic passenger growth remains steady. The stabilising conditions are helping Mexico’s two publicly traded airlines Aeromexico and Volaris regain some lost ground with unit revenues and yields.
One major challenge that remains for those airlines is the rate of depreciation of the MXP against the USD, which was 26% at the end of 3Q2015. Aeromexico and Volaris seem to be weathering the effects of the depreciation as their profits and revenues grew steadily in the quarter.
Both Aeromexico and Volaris feel confident that the improvements in the Mexican market will continue as their respective outlooks for 4Q2015 remain stable. Volaris has expanded its domestic supply growth targets for 2015 as some markets show strong demand from passengers switching from bus travel.
In late Oct-2015, ultra-LCC Wizz Air carried its 100 millionth passenger, just 12 years after its 2003 launch. In a further sign that it has joined the ranks of Europe's well established airlines, this year also saw its Feb-2015 floating of its shares on the London Stock Exchange. Wizz Air's 1H results for FY2016 confirmed the ongoing strength of its performance in its first full financial year after its share listing. Wizz Air's underlying net profit grew by 34% and its operating profit increased by 28%. Revenues grew by 15%, with passenger numbers up 20%, and the operating margin gained 2.6 ppts to reach 25.4%.
Wizz Air's success has been built organically and with a largely stable management team under founding CEO Josef Varadi. In this respect, the recent departure of long-serving CFO Mike Powell creates some uncertainty pending his replacement.
Nevertheless, as CAPA's analysis of Wizz Air's strengths, weaknesses, opportunities and threats highlights, the airline is strongly placed to drive further profit growth, provided that it can continue to live with competition from Ryanair.
Norwegian's new order for 19 Boeing 787-9 Dreamliners demonstrates its renewed confidence that 2015 marks the return of financial and strategic momentum. It has eight 787-8s already in operation, alongside 91 Boeing 737-800s (projected at end 2015), and now has a total of 30 787-9s due for delivery as it continues to focus its growth on long haul routes.
The new order comes as Norwegian's long haul operation starts to prove itself financially ahead of schedule, with a positive net contribution now expected in 2015. The group has also reported a more than doubling of its operating profit in 3Q2015, helped by record load factor and low fuel prices. Norwegian should comfortably surpass its 2012 record operating profit in 2015.
The new order also suggests that Norwegian's hopes of a US foreign carrier permit for its Irish subsidiary Norwegian Air International are growing. Since filing its application in Dec-2013, Norwegian has modified its approach, offering to employ only EU and US flight personnel on NAI's transatlantic services, announcing US services from Ireland and applying for a UK AOC. Such pragmatism should serve it well in securing future long haul traffic rights.
As the largest city in Greece and also its commercial centre, Athens' air traffic was badly affected by the global financial crisis. Athens International Airport is now growing rapidly once more, with 2015 looking set to match 2014's passenger growth rate in excess of 20%. In 2014, it was the second fastest growing primary airport in Europe (after Istanbul Ataturk). Overall traffic is still down from pre-GFC levels but catching up.
Athens' recovery has been staged in spite of ongoing political and economic uncertainty. Indeed, in recent years, Greek air traffic and GDP growth have de-coupled in an unprecedented manner. The European regulatory environment, or, more particularly, European deregulation created the opportunity for Athens to achieve this. Without liberalisation Ryanair's entry and rapid growth and Aegean's consolidation of Greece's airline sector would not have happened. The airport's innovative pricing structure has also played a part.
Jumping from specialist media and the business pages, Air France's struggle to restore profits by confronting industrial relations issues has received the attention of global mainstream media. Images of Air France managers stripped of the shirts have been seen across the world.
Air France failed to agree with flight crew unions on improved labour productivity by its self-imposed deadline of 30-Sep-2015. As a result, it decided to implement its alternative plan of cutting back on long haul operations and staff numbers. Although the employees that attacked management presenting the plan to the Works Council may not be fully representative of the Air France workforce, the episode holds up a mirror to both labour and management.
The mirror is cracked and Air France has had seven years of losses. It does not report separate results, but CAPA has pieced together an analysis of Air France's financial performance since the KLM merger in 2004. Its margins have been below KLM's throughout and also lag other European airlines. At the heart of its problem is low labour productivity. Improvements in this area will be vital to a sustainable future for Air France.
Brussels Airport: Ryanair tests itself against Vueling and Gulf airlines offer long haul connections
Brussels Airport's passenger traffic was badly hit in the global financial crisis. Although it recovered in 2011, it was only when two leading LCCs established bases at the airport in 2014 that traffic growth really took off. Ryanair's battle with Vueling at Brussels, also played out in a number of airports across Europe, provides the Irish LCC with a meaningful calibration of its attempts to improve customer service and its appeal to business passengers. It also seems to have stimulated the airport's leading airline Brussels Airlines into its own European route expansion.
Although there has been an increase in traffic to intercontinental destinations over the past decade, this rapid growth of LCCs has further sharpened the airport's already high focus on European traffic. Long haul accounts for fewer than one in five seats at Brussels and is mainly centred on North America and Africa. Destinations in Asia Pacific are reached mainly via other airports (principally Frankfurt and other Lufthansa Group hubs). The growth of Gulf airlines at Brussels provides competition to these hubs in providing long haul connectivity to the Belgian capital.
Iberia is emerging as the star pupil in the IAG airline academy, studiously following its 'Plan de Futuro' restructuring programme. It has learnt how to achieve labour productivity improvements and unit cost reductions. With Iberia Express, it has demonstrated it is possible for legacy airlines to launch subsidiaries that combine an LCC cost base with a full service brand.
After receiving punitive beatings in the form of capacity reductions, its diligence is now being rewarded with new aircraft orders and double digit ASK growth in 2015, thanks largely to Latin American expansion (and returning to routes suspended during its restructuring). Brimming with new-found confidence, Iberia is IAG's biggest contributor to ASK growth in 2015.
Iberia is not yet qualified to graduate by recovering its cost of capital, but is on track to achieve this, in accordance with IAG's target, by 2017. As with all airlines, sustainable profitability may require some benevolence from the macro environment, which can deliver harsh movements in unit revenue and in fuel prices. However, Iberia's sharp focus on labour CASK, fuel efficiency and non-fuel overheads should soften the impact of any deterioration in external conditions.
Scandinavian airline flag SAS followed up on its reduced operating loss in 1H2015 with a healthy increase in profit in 3Q2015. This was sufficient to take its 9M2015 operating result back into profit after making a loss a year earlier. As in 1H2015, SAS' yield benefited from a better balance of supply and demand compared with last year. This helped unit revenue to grow faster than unit cost, in spite of a significant currency headwind on costs.
SAS' capacity cuts this year, led by charter operations and the long haul network, seem to have had a beneficial effect on unit revenue in spite of falling load factor. Long haul expansion, starting this autumn with a new Stockholm-Hong Kong route and continuing in 2016 with three new US routes, will lead to ASK growth next year and this may put some downward pressure on unit revenue.