Alitalia

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.

Heathrow Airport's slot machine: hitting the jackpot again?

British Airways now holds more than 50% of the slots at capacity-constrained Heathrow, thanks to its bmi acquisition. Nevertheless, BA had managed to grow its holding for years, mainly due to secondary slot trading. After years of uncertainty over its legality in EU law, the EU clarified its position in 2008 and allowed the practice. It went on to commission a 2011 study which concluded that slot trading had clear beneficial impacts at Heathrow.

In this report, CAPA analyses the small proportion of the total number of Heathrow slot trades where slot values have been reported in the media and elsewhere. For many years until the mid 2000s, the average traded value per daily slot pair calculated from such transactions was around GBP4 million. A series of trades at more than GBP20 million per pair captured headlines in 2007 and 2008 before the market went underground. Surprisingly, after such a long quiet period, 2013 has seen two deals valuing Heathrow slots at GBP15 million per daily pair.

Virgin scores an important bilateral victory against Qantas on Australia-Italy route

Virgin Australia has scored an important victory against Qantas in the battle for access to bilateral capacity between Australia and Italy, being awarded 300 of the 1000 weekly seats available on the route.

The Italy decision is likely to set the scene for other markets where Virgin Australia may seek to challenge Qantas’ dominant third country carrier codeshare seat allocation as they come up for review over the next few years. Both carriers are competing for bilateral seat capacity to maximise the benefits of their largely virtual networks to Europe.

Qantas had previously held Australia’s entire codeshare capacity entitlement on the Italy route under two determinations. The carrier had to have the first of these involving 600 seats renewed for a further five years by the Australia’s International Air Services Commission (IASC). The remaining 400 seats held by Qantas are not due for renewal until 2015, at which point it can expect a further challenge from Virgin Australia.

Virgin Australia on 08-Apr-2013 was granted 300 of the 600 seats available for five years. It will offer the seats between Australia and Rome via Singapore and between Australia and Milan via Singapore and via Abu Dhabi.

European airlines’ financial results in 2012; Net profit of biggest 13 down 72% for the year

The biggest 13 European airline companies for whom 2012 accounts are available reported an aggregate fall in net profit of 72% in 2012 to just EUR69 million. At the level of operating profit, which provides a more accurate view of underlying performance, the aggregate result fell by a more creditable 17% to EUR 1,662 million (71% of this from the four LCCs in the sample) and the operating margin fell by 0.5ppts to 1.5%.

Total revenues grew by a healthy 8.0%, but total costs grew faster, by 8.5%.

Costs were inflated by an 18.9% increase in fuel costs, whose share of revenues increased to 28%, up from one quarter in 2011. Excluding fuel, all other costs grew by 4.8%, appreciably slower than revenues.

LCCs grew faster, had higher load factors and, while their collective operating margin fell slightly, from 9.8% to 9.5%, this was vastly superior to the legacies’ collective 2012 margin of just 0.5%.

Alitalia battles for survival in 2013, again, despite operational improvements

In 2012 Alitalia lost EUR280 million, bringing its cumulative net loss to EUR843 million since the ‘new Alitalia’ was created in 2009. In Feb-2013, with its cash reserves almost evaporated, it had to ask its shareholders for a EUR150 million loan to fund its operations. Following the 2012 results announcement, CEO Andrea Ragnetti resigned his position after only a year with the company. A permanent replacement is being sought while chairman Roberto Colaninno takes the controls on an interim basis.

Since 2009, there have been operational improvements, leading to rising load factors and much improved on-time performance, and a major fleet replacement and renovation programme. Unfortunately, these positive developments have not set Alitalia on the path to financial health. Moreover, while its cost base is fairly competitive against full service network carriers, it remains very high cost compared with the short-haul point-to-point LCCs with whom it increasingly competes. Alitalia looks strategically isolated between these two sets of competitors and it now seems unlikely that Air France-KLM will throw it the once anticipated life vest. Loss-making, bleeding cash and currently leaderless, Alitalia faces a battle for survival in 2013.

For trans-Atlantic airlines, JV benefits are less than obvious as they mature. A US perspective

SkyTeam partners Air France-KLM, Alitalia and Delta are approaching the fifth anniversary of the launch of their immunised trans-Atlantic joint venture. But the major strategic moves by those airlines during the last year were squarely outside that umbrella, as Air France warmed to the Gulf carriers through its new partnership with Etihad, and Delta moved to improve its position in the London Heathrow market through an equity stake and partnership with Virgin Atlantic.

Star joint venture partners Air Canada, Lufthansa and United have been preoccupied throughout most of the last year with getting their own respective houses in order and have done little publicly to play up any advantages they are enjoying through their business partnerships. oneworld joint venture partners American Airlines and sister carriers British Airways and Iberia have been equally distracted with Chapter 11 restructurings, mergers and strikes – and meanwhile, Qatar Airways has been welcomed into the fold, further complicating the evolution of the global alliances.