Wizz Air CEO Josef Varadi told a recent meeting of the Aviation Club in London that he ran a very disciplined airline. "We never grow for growth's sake", he said, explaining that the airline had clear financial targets and that growth was an output from this process.
Earlier this year, Wizz Air pulled out of a planned initial public offering (IPO) of its shares, which would have seen it floated on the London Stock Exchange. Investor appetite was dulled by geopolitical issues, a fuel price spike and profit warnings from other airlines, rather than any problems at the airline itself. Indeed, its most recent accounts show that it is now one of Europe's most profitable airlines, with significant cash reserves. An IPO could come back onto the agenda, but, Mr Varadi said, "we are not desperate".
Its results have not always been strong in the 10 years since its 2004 launch, but our analysis of its accounts suggests that it is now on a firm footing, supporting Mr Varadi's claim that "financial performance is at the core of the airline – we are not doing it for charity".
SAS Scandinavian Airlines: 3Q profits down as yield weakness continues at Europe's high cost airline
Another quarter, another fall in yield for Scandinavian Airlines, SAS. The Nordic region's largest airline reported a year on year decline in profits in 3QFY2014 and a fall into loss for 9M. It has made good progress with its cost reduction programme, but costs are not falling fast enough to offset tumbling yields and SAS remains one of Europe's highest cost airlines.
Healthy load factor gains demonstrate that SAS has some appeal to the Scandinavian frequent flyers that it desires, but price discounting remains a key feature of this appeal. Overcapacity in its markets has contributed to yield weakness, but its many LCC competitors are better positioned to provide the lower fares demanded by the market. In spite of some easing of the supply/demand imbalance, SAS expects continued yield pressure.
SAS' number one priority is an additional cost reduction programme, full details of which will be announced by the end of 2014.
The government of Cyprus is currently assessing the expressions of interest it has received in connection with its controlling stake in the national carrier Cyprus Airways. The highest profile potential bidders are Ryanair and Aegean Airlines, who also happen to be the two most profitable European airlines in the first six months of calendar 2014.
For the outside observer, up to date analysis of Cyprus Airways' financial performance is not possible. Nevertheless, our previous analysis suggested that its unit costs were higher than those of its main competitors in the Cyprus market and it is unlikely that this situation has fundamentally changed. Moreover, its share of seats at its Larnaca base and in Cyprus overall is continuing to flow to others.
The sale of the airline could be its last chance of survival, although potential buyers may be tempted to use the process to find out as much as possible about an ailing competitor before letting it wither.
Aegean Airlines Group has continued to build on 2013's record profit with a more than doubling of its 1H2014 net profit (based on proforma figures that include Olympic Air in the prior year results). Although unit revenue (RASK) fell in 1H2014, reversing the positive trend of the previous two years, it succeeded in cutting unit cost (CASK) at a faster rate.
Aegean's 1H2014 operating margin of 6.0% makes it one of Europe's most profitable airline groups so far this year. The acquisition of Olympic in Oct-2013 appears to be providing benefits in the form of cost synergies and improved network feed, apparently without significantly distracting management attention.
Nevertheless, the competitive landscape is unlikely to become more hospitable as competitors such as Ryanair expand in Greece. In addition, geopolitical risk in Russia, one of Aegean's most important markets, is likely to add to pressure on RASK in 2H2014.
The Aeroflot Group fell into loss in 1H2014, its first 1H loss since at least 2008. Although the result was affected by a significant level of non-recurring expenses, the underlying operating result was still significantly lower than last year. Aeroflot continues to grow faster than the Russian market and its focus on increased frequencies, rather than new routes, has helped the Group to grow its RASK (revenue per available seat kilometre). Unfortunately, this growth in RASK was outpaced by growth in CASK (cost per available seat kilometre).
The current geopolitical backdrop is clearly providing Aeroflot with some serious challenges. Demand for international flights has been weakened and EU sanctions forced the suspension of operations of Aeroflot's nascent LCC Dobrolet. Plans by the Russian government to reduce its stake in Aeroflot to 50% plus one share may now meet with delays as investors are likely to want to wait for the geopolitical situation to become more stable.
Benefiting both from a large and growing home market and from its strategy to increase transfer traffic, Turkish Airlines (THY) continues to achieve double digit growth in traffic and revenues. Nevertheless, THY reported a year on year drop in its operating profit in 2Q2014 for the fourth successive quarter (although net profit increased due to non-operating items). It was also the fifth successive quarter to suffer a fall in unit revenue (RASK, expressed in USc).
Although it has an efficient cost structure by FSC standards, it has struggled in recent quarters to lower CASK enough to offset downward pressure on RASK. In this report, we put THY's recent quarterly results performance into a more strategic perspective by looking at its strengths, weaknesses, opportunities and threats.
Finnair improved its load factor in 2Q2014 after a dip in 1Q and made further progress with its cost reduction programme. It has reached agreement with many employee groups over further cost efficiencies, but did not reach full agreement with flight attendants. Management's consequent decision to begin implementing plans to outsource part of its cabin services activities displays a commendable resolve to achieve the necessary savings.
Nevertheless, in the words of CEO Pekka Vauramo, "the second quarter of 2014 was difficult".
Weak market conditions meant that unit revenue declined more rapidly than unit costs and the airline fell into loss in 2Q2014. It now expects a significant operational loss for FY2014, which would mean a second year of falling results.
Pegasus Airlines' fourth successive fall in underlying quarterly profit, but perhaps turned a corner
Although Turkish LCC Pegasus Airlines reported a year on year increase in 2Q net profit, the underlying operating result was less than the same period last year. This was the fourth successive quarter of year on year declines in the underlying operating result.
Reading Pegasus' results is complicated by foreign exchange movements, since the majority of its revenues and, particularly, its costs are denominated in hard currency (mainly EUR and USD). Expressed in EUR terms, rather than in Pegasus' reporting currency of TRY, Pegasus lowered its CASK (cost per available seat km) in 2Q, but enough to compensate for the drop in RASK (revenue per available seat km).
Nevertheless, Pegasus reiterated its FY2014 guidance amid some signs that it may have turned a corner and be ready to leave the path of deteriorating margins.
In 2013, Brussels Airlines narrowed its losses, mainly as a result of cost reduction, with labour productivity making real improvements. However, unit revenues fell last year reflecting a soft market environment.
Downward pressure on pricing looks likely to intensify in 2014: Brussels Airlines is accelerating its capacity growth, particularly on its long-haul (African) network, and its hub has seen the entry of LCCs Vueling and Ryanair. Its previous target of returning to profit in 2014 may now be in doubt.
Meanwhile (and as predicted by CAPA), Lufthansa allowed its call option over the 55% of Brussels Airlines that it does not already own to lapse in Apr-2014.
Air Europa's seat capacity will be 13% higher in 2014 than in 2013, according to OAG data. In spite of strong recent growth, however, it is still only the sixth biggest airline in Spain by seat numbers, with a share of just over 5%. Its strongest network region is Latin America, where its 23% share puts it second only to Iberia and where it is growing most rapidly.
As we highlighted in our 5-Aug-2014 analysis of Air Europa, a number of key financial indicators improved in 2013. Although its profit recovery may be a little ahead of that of its rival Iberia, the latter is also moving into a more confident phase after years of losses and restructuring.
With competition between Air Europa and Iberia intensifying on long-haul and LCCs continuing to increase their share of the Spanish market on short-haul, we take an analytical look at Air Europa's network and strategic positioning.
IAG's recent announcement that Iberia is to receive 16 new widebodies marks a shift of emphasis for Iberia from internal restructuring towards a new competitive growth phase. Rival Air Europa has taken advantage of Iberia's capacity cuts in recent years to pursue international growth, particularly to Latin America. Parent company Globalia does not report profits for Air Europa, but the group's annual report shows 2013 was very successful for increased revenues, load factor and RASK. It also saw Globalia's return to profit, while Iberia was still posting losses in 2013. Moreover, Air Europa already has its own widebody order (eight Boeing 787-8s and options for eight more).
However, Iberia returned to profit in 1H2014 and its CEO Luis Gallego is relaxed about competing with Air Europa, saying Iberia is "three times [its] size at [Madrid Airport] and twice its size in Spain" and can now "compete with anyone" thanks to its new cost structure (Europa Press/Preferente, 22-Jun-2014).
This analysis of the available data on Air Europa's traffic and financial performance will be followed by our updated analysis of its strategic positioning.
International Airlines Group (IAG)'s 2Q2014 results revealed another strong improvement and 1H2014 recorded the first positive operating result for IAG since 2011. Unit revenues were under pressure and so the profit improvement was achieved by unit cost reductions.
All three of IAG's operating airlines - British Airways, Iberia and Vueling - improved their 2Q operating profit year on year, with BA and Iberia also recording higher margins.
Recognising the progress made by Iberia, which returned to operating profit in 2Q and 1H, IAG has announced that the Spanish airline will see 16 new wide bodies enter its fleet from 2015 to 2020 to replace A340 aircraft. A year ago, CAPA suggested that IAG might have reached a turning point. Its results since then, and its reiteration of its profit targets, appear to confirm that this was the case as it has outperformed its major European rivals Lufthansa and Air France-KLM.