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.
The Aegean Airlines Group's 1H2015 operating result deteriorated against the same period last year, although the decline was not as severe in 2Q as it had been in 1Q. Although Aegean managed once again to cut unit costs, it suffered from an even greater drop in unit revenue.
Faced with strong competitive expansion (led by Ryanair) and a challenging economic backdrop, Greece's largest airline group continues to go on the offensive by growing capacity at double digit rates. These factors have locked it into a downward path of yield and unit revenue.
Even the relief of lower fuel prices has not allowed Aegean to cut unit costs fast enough to ensure operating profit growth. Europe's most profitable FSC airline of 2014 is finding that 2015 is a totally different year.
In a May-2013 report on British Airways, we called it the favourite child of parent IAG. Its good behaviour was being rewarded with new fleet toys, while sister Iberia was scolded to mend its ways.
BA should match its best ever operating margin in 2015 and better it in 2016, even covering its cost of capital - a salutary model for its European counterparts. After the global financial crisis, margin recovery was mainly due to unit revenue growth. A RASK downturn in 2014 and 1H2015 has seen margins improve through lower unit cost, but these were largely thanks to lower fuel prices. Even a premium brand cannot always rely on unit revenue growth and BA still needs to cut CASK, with a focus on labour. It remains one of Europe's higher unit cost airlines and Iberia has cut CASK more successfully.
Iberia's reformed ways have been feted like the return of the prodigal and now BA has two more siblings. Up and coming teenager Vueling has been given significant trust and responsibility for one so young, while new arrival Aer Lingus will demand much parental attention. BA will need the maturity and determination of the eldest child to graduate to full value-creating adulthood.
Finnair narrowed its operational loss for 2Q2015 and for 1H2015. In spite of broadly flat capacity (ASK growth of just 0.4%), passenger revenue increased by more than 4%, helped to some extent by currency movements. However, total revenue fell slightly and the improved operational result was achieved through a bigger reduction in costs, thanks to lower fuel prices.
Finnair noted that there were signs of recovery in the demand for consumer and business travel in all traffic areas. Its 1H2015 report shows that it has started to improve its results and it now targets a break even or slightly positive operational result for FY2015 after a EUR37 million loss last year.
Moreover, with average 2Q2015 headcount down by more than 500 (10%) year on year, Finnair's restructuring of recent times paves the way for productivity gains. Its profitability should also benefit from the introduction this autumn into its long-haul fleet of Airbus A350-900 aircraft to replace ageing A340 equipment (which currently have an average age of 12.7 years according to the CAPA Fleet Database).
Turkish Airlines' operating profit fell in 2Q2015 compared with the same period a year earlier, after three successive quarters of improving results. It suffered a very heavy fall in unit revenue, mainly due to weak yield, but also the result of a dip in load factor. Pricing softness owed much to foreign exchange movements, but also highlighted a weaker balance of demand versus supply in a number of THY's many markets.
Turkish Airlines' strategy of connecting global traffic flows through its Istanbul hub has driven sustained growth over a number of years. However, this can also leave it exposed to a wide range of external demand risks around the globe and this is undoubtedly weighing on unit revenue and profits at the moment. It is also in the middle of a period of fierce competition with LCC Pegasus Airlines at Istanbul's second airport Sabiha Gokcen, the result of capacity constraints at Ataturk before the building of a new airport by the end of the decade.
Brazilian airline Gol’s fortunes are inextricably tied to and mired in Brazil’s weakening conditions
Brazilian airline Gol continues to battle the deteriorating conditions in its home market driven by high inflation and record currency devaluation. Unlike most Latin America airlines, Gol has a much larger exposure to the domestic market and the demand fluctuations created by the macroeconomic pressure in Brazil.
Given the conditions in Brazil, Gol has revised its planned capacity targets downward in the domestic market for 2015, but at a lower rate than rival TAM, part of the LATAM Airlines Group. Gol reasons that its rival is catching up after Gol undertook a significant capacity reduction in late 2012. However, Gol cites some fleet flexibility if market conditions dictate a further capacity reduction.
Gol for the last couple of years has been working to strengthen its balance sheet as the BRL has devalued significantly against the USD. It recently brokered a financing deal with Delta, which upped its equity stake in Gol. But currency devaluation is pressuring Gol’s leverage position, diluting some of the balance sheet clean-up it has undertaken during one of the most challenging periods in Brazilian aviation.
Air Canada yields declines as capacity grows, with a focus on strategy instead of short term profits
Similar to other North American airlines, Air Canada finds itself in a position of defending its business strategy as capacity increases and unit revenues and yields fall. The company is stressing that it has evolved to a point where it can focus on profits, margin expansion and ROIC. At the same time it is trumpeting progress it has made in meeting or exceeding certain financial targets, and reiterating a recent decision to raise its performance goals in some of those metrics.
Air Canada’s yields and unit revenue began their downward trajectory earlier than other North American airlines that have endured a sagging performance in those metrics throughout 2015 due to currency appreciation and lower fuel surcharges in many international geographies. Air Canada’s slide started in 2014 as the airline increased its mix of leisure passengers and grew its stage length, pillars of its plan to achieve sustainable profits.
Those same factors along with surcharge pressure have driven Air Canada’s unit revenues and yields down for 1H2015. Even as the airline states that its margin expansion will continue, it is not clear if the markets have totally shaken off being spooked by the declines in certain metrics. However, Air Canada does have the benefit of having an increasing stock price during the last year when its yields and unit revenues have trended down.
In 2Q2015, Pegasus Airlines' operating result fell into loss in what is usually a profitable quarter for the Turkish LCC. Foreign currency movements served to inflate both revenue and costs, with a net negative impact on profitability.
However, the negative result was largely driven by the weakness of unit revenue (RASK), which was dragged down both by poor yields and falling load factors. It seems that the competitive landscape at Sabiha Gokcen, Pegasus' main base, remains highly competitive thanks to Turkish Airlines' expansion and the LCCs own strong capacity growth.
If it is to meet its FY2015 profitability target, Pegasus will have to perform more strongly in 2H2015, in particular in 3Q (which typically accounts for the vast bulk of annual profit).
This CAPA report looks at the European Commission’s Investment Plan for Europe, which is also known as the European Fund for Strategic Investments (EFSI) and the ‘Juncker Plan’ after the EC President Jean-Claude Juncker, who instigated it in Nov-2014.
Its purpose is to unlock public and private investments into the "real economy" (which means the part[s] of the economy that are concerned with the production of goods and services, as opposed to the part that is concerned with buying and selling on financial markets.
Those investments are expected to total at least EUR315 billion (USD348 billion) over the three fiscal years Jan-2015 to Dec-2017.
IAG grows quarterly profit once more. Iberia long-haul growth to accelerate with additional aircraft
With its 2Q2015 results, IAG took another step towards achieving its longer term financial targets. Its 2Q operating profit grew by 39% year on year and its rolling 12M return on invested capital increased by 0.7ppts. Both revenue and operating costs were inflated by currency movements, with a net positive impact. Nevertheless, adjusting for foreign exchange, IAG cut unit cost at a faster rate than the drop in unit revenue.
At the level of the operating airlines, both BA and Iberia enjoyed improved operating profits. Vueling remains the most profitable airline in the group, but the Spanish LCC's result dipped slightly. Its business is highly seasonal and 3Q should be its strongest quarter, so it still has a chance to end the year with better figures.
IAG's results for the quarter were again stronger than those of its major European legacy airline group rivals Lufthansa and Air France-KLM. Its growing confidence is reflected in its decision to exercise options with Airbus for additional narrowbody and widebody aircraft, including up to five A330-200 growth aircraft for Iberia.