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- British Airways Plc,
PO Box 365,
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- London Heathrow Airport
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British Airways (BA) is the national carrier of the United Kingdom, a subsidiary of publicly-listed International Consolidated Airlines Group (IAG). BA’s extensive network, including that of franchise partners SUN-AIR and Comair (South Africa), includes services to Europe, North America, Latin America, Canada, Africa, Asia and Australia. Using a fleet of wide and narrow-bodied aircraft, the carrier operates freight and passenger services from it's three London hubs - Heathrow Airport, Gatwick Airport and London City Airport. BA is a founding member of the oneworld alliance.
Location of British Airways main hub (London Heathrow Airport)
International Airlines Group share price
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Enter Qatar Airways. As Etihad Airways looks to bed down its investments in other airlines, Qatar is gradually expanding its airline investment portfolio. Qatar's 15% stake in IAG is now being followed with a 10% stake in LATAM for USD613 million – nearly 1.5 times Qatar's net profit of USD446 million, disclosed (for the first time) on the day prior to the LATAM equity announcement. It is a safe investment; LATAM group has a strong market position and its share price has remained strong even in the face of a brutal downturn in Latin American economies.
Qatar gives LATAM needed cash and a distant shareholder. Latin America is the smallest market by far for Gulf airlines, but while currently in the economic doldrums, has a longer term potential for growth. It is also a key future market for US airlines, albeit very small on the Gulf airlines' networks. Qatar is spending nearly EUR2.5 billion on equity investments, still smaller than Etihad's but illustrating a willingness to acquire airline assets, for investment and strategic reasons. In this case the immediate strategic purpose for Qatar is less apparent.
Star Alliance's privately owned Avianca is also considering a strategic shareholder; that would mean five of Latin America's eight largest airline groups could have an airline investor from outside the region.
Over 20 years the responses of Europe's big three legacy groups to the short/medium haul LCC revolution have all been through phases of denial, submission, retreat, and counter-attack.
Now all three now have a more clearly defined LCC strategy than in the past. IAG, with Vueling and Iberia Express, has the largest, most pan-European and most profitable LCC, helping the group to grow its short/medium haul traffic. The Lufthansa and Air France-KLM LCCs are more defensive, to preserve market share. Both have only recently started LCC bases outside their original home markets. Lufthansa (after a false start with high cost Germanwings, now transferring to Eurowings) has replaced mainline capacity with LCC capacity, route-for-route. Air France-KLM has grown Transavia while cutting mainline capacity, but without substitutions route-for-route.
Only Lufthansa has taken its LCC onto long haul routes, albeit on a limited scale. Facing the more complex challenges on long haul, all three are developing a growing range of partnerships with other airlines. They have also sought to improve labour productivity in their legacy network airlines, with varying degrees of success, but again led by IAG. A next step may even be to connect with their arch rivals.
IAG's financial results for 1Q2016 are the first indication from a leading European legacy airline group of how this year is working out financially. For IAG the seasonally weak first quarter went well, with operating profit increasing by more than six times and the net result recording a rare positive figure.
Unit revenue weakness, seen in 2015, continued into 1Q2016 and accelerated its fall after the Brussels terrorist attacks. Coming relatively soon after the Paris attacks, this event may have a slightly longer impact than previous incidents of this nature. IAG's unit cost fell more rapidly than unit revenue, thanks to lower fuel prices. With pricing expected to remain a little softer than previously anticipated, IAG is accelerating cost measures and expects underlying ex fuel unit cost to fall by 1% in FY2016.
IAG still expects more than EUR900 million of year-on-year operating profit improvement in 2016, with a further margin increase. The IAG group is already the most profitable of Europe's three leading legacy airline groups, and the gap looks set to widen this year.
On 9-Feb-2016, British Airways announced the addition of London Stansted to its airport network from May-2016. It will be BA's fourth London airport after Heathrow, Gatwick and City. At first glance, this move does not appear significant. BA's four leisure routes from Stansted will make it the airline's 196th biggest airport, taking just 0.03% of its 2016 summer peak seats (week of 1-Aug-2016, source: OAG).
However, BA's decision is noteworthy for one simple reason. More than any other airport, Stansted has been synonymous with the rise of LCCs in Europe. The scourge of legacy airlines across the continent, LCCs contributed to BA's near-death experience in the years after 9/11, when it fell into loss. The most successful LCC incarnation, Ryanair, has more than 80% of seats at Stansted.
Just a few years ago, during the global financial crisis, BA was again loss-making and would not have had the temerity to enter Ryanair's stronghold. Now, emboldened on the strength of its highest ever operating margin in 2015, BA seems prepared to take on all comers. It is taking only a very small step into Stansted, but every journey starts with a step.
In 2015 IAG achieved a return on invested capital of 12.7% against its estimated cost of capital of 10%, giving it the rare distinction among European legacy airline groups of creating economic value for investors. As with other airlines its 2015 results were helped by lower fuel prices, but IAG's strong improvement owes much to its determination to stick to its goals.
It was the first (arguably the only) airline among the larger European legacy groups to tackle labour cost restructuring. In addition, its 2013 acquisition of Vueling gave it an advantage over Air France-KLM and Lufthansa in dealing with the short/medium haul threat from LCCs. On long haul, it has avoided anti-Gulf airline rhetoric with its Qatar Airways partnership, including codeshare and an equity stake. On the North Atlantic, it is now benefitting from its acquisition of Aer Lingus.
There is more to do. Although Iberia's restructuring has been impressive, its returns still lag those of other IAG airlines. Labour unit costs increased at both British Airways and Vueling in 2015. Moreover, IAG's profitability falls short of its own targets for 2016-2020, and the profitability achieved by the leading European LCCs. Nevertheless, it can be substantially pleased with its progress.
The A380 continues to be intertwined with London Heathrow. Malaysia Airlines has cut both its European and A380 scheduled network to just twice daily Heathrow A380 services. Emirates will introduce a sixth daily A380 flight to Heathrow and British Airways is evaluating taking second-hand A380s. London Heathrow is not the busiest A380 airport: that title goes to Dubai, home of Emirates, which operates more A380s than any other airline.
London Heathrow stands out among major A380 airports, as only 30% of its A380 flights are flown by a local airline (British Airways). At Bangkok, Sydney and Melbourne foreign airlines also have more A380 flights than local operators. At Seoul Incheon, 82% of A380 flights are flown by local airlines. Of the 15 largest airports with A380 operations, all but three – Los Angeles, New York JFK and Hong Kong – are the hub of an A380 operator. Qantas flies the world's longest A380 route (to Dallas) and Emirates the shortest (to Kuwait City). China Southern and Qatar have the shortest average sector lengths, which are half those of Malaysia and Qantas, which have the longest.