airberlin

airberlin 1Q losses widen, but restructuring will deliver benefits later. Pain now for gain later

airberlin’s losses widened in 1Q2013 on restructuring costs, but the message from CEO Wolfgang Prock-Schauer is that today’s pain will lead to tomorrow’s gain as the group’s “Turbine 2013” restructuring programme starts to show in the results.

Capacity cuts, network refocusing, headcount reductions and supplier renegotiations are all under way and the positive impact should be more visible from 3Q2013 onwards. Meanwhile, codeshare relationships with Etihad and oneworld partners are delivering growing passenger numbers.

Etihad, airberlin’s 29% shareholder and benefactor, has ploughed close to EUR500 million of cash into its German partner since last year. airberlin’s efforts on many fronts will need to translate into profits and a strengthening of airberlin’s flimsy balance sheet if Etihad is to see a return. Etihad's network traffic feed has been stimulated by the partnership, but it will want to see airberlin profits in due course.

European airline consolidation to enhance financials? Few deals to be done, at least locally

European airline margins have underperformed other regions for years. There are many reasons for this, but our analysis suggests that Europe’s relative lack of consolidation may be a significant one, since margins appear to be correlated with market concentration. Even after a number of significant deals over the past decade, the European market is less concentrated than North America, where consolidation has gone further, to the benefit of margins. Europe is also less concentrated than Asia-Pacific (analysed as its sub-regions), whose margins have consistently been the highest.

If consolidation brings structural benefits, are there still European deals that can make a difference? Europe has a long tail of small carriers, which are unlikely to have a significant impact, but comparison with North America points to the potential for further combinations among the top five. Nevertheless, there are hurdles to such deals, not least of which are the ongoing restructuring programmes at Europe’s Big Three and the incompatibility of LCC/FSC mergers, but some second tier groups could be targets.

Pegasus Airlines: a true LCC growing traffic and earnings at a winged gallop

Shares in Turkish LCC Pegasus Airlines commenced trading on 26-Apr-2013 after an IPO that raised TRY649 million (EUR277 million). The IPO prospectus reveals that Pegasus is not only Europe’s second most profitable airline (based on 2012 operating margin), but also one of its fastest growing (2008-2013 CAGR in passenger numbers of 33% p.a.). Its unit costs (CASK) place it with Wizz Air and Ryanair as one of Europe’s three truly low-cost carriers.

Although Turkey was not immune to recession in 2009, air traffic continued to grow and Pegasus is still on a structural volume growth path not led by the economic cycle. Such a path does not guarantee earnings growth and Pegasus made a loss in 2011. Nevertheless, its low costs and strong presence in fast-growing Turkey and Central/Eastern Europe, should allow it to grow earnings in the future. Indeed, its breakeven operating result for the core business for the traditionally loss-making first quarter (reported 09-May-2013), with RASK up sharply and CASK falling, augurs well for FY2013.

No hamburgers or frankfurters, but Ryanair will be serving Germany more

Germany is Europe’s number two aviation market (after the UK) by seats. However, although Ryanair is Germany’s third largest carrier, its share of seats there is only about 6%. It has a 14% share of capacity across all its markets and a significantly higher share in other major countries such as Italy, Spain and the UK. This under-representation in Germany may be about to change.

Although high charges at the main hubs and a well-organised main competitor have hindered Ryanair’s growth in Germany, it has shown at bases such as Duesseldorf Weeze and Frankfurt Hahn that it can build a dominant position.

Now, just as that competitor is focusing inwardly on its own restructuring, Ryanair is opening 47 routes from Germany in 2013, including three new airports. Looking further ahead, it has declared that it is in talks with 20 German airports with a view to adding five or six to its route network. We assess Ryanair’s current position and prospects in Germany, including consideration of which airports might attract it.

European airline labour productivity: CAPA rankings

This analysis updates CAPA's previous study of European airlines’ labour productivity ("European airlines’ labour productivity. Oxymoron for some, Vueling and Ryanair excel on costs") to reflect the most recent financial results and adds four carriers not included in the original article (Wizz Air, Aegean Airlines and the two IAG subsidiaries British Airways and Iberia).

The contrasting performance of LCCs and legacy carriers is clear, although there are some notable exceptions to the pattern. BA and Iberia’s different labour cost productivity is significant, while Air France-KLM and SAS are weak performers.

We introduce an overall CAPA European airline labour productivity ranking, revealing the carrier with Europe’s most productive workforce, based on six measures.

Germanwings rebrands: you say you want a revolution? To be led by cost and operations

Recently reported comments from Germanwings CEO Thomas Winkelmann draw attention to transitional IT issues and its costs relative to competitors. This highlights the challenges in scaling up its operations and redefining its product and pricing in order to become Lufthansa’s vehicle for all non-hub European traffic.

Lufthansa has gained several years of experience in owning a low-cost carrier, even if it was run fairly autonomously for much of that time, and aims to combine this with its expertise in premium travel to return its non-hub short/medium-haul business to profit. But will it have the right combination of product/service quality and low costs?

Our analysis suggests that, while Germanwings’ unit costs are well below those of Lufthansa, the cost gap to other LCCs is even greater. In addition, its unit revenues are further below those of Lufthansa than are its unit costs. It also faces a significant operational challenge in growing from 7-8 million passengers to its 20 million target in 2015, while improving Lufthansa’s short/medium-haul earnings by EUR200 million.