Lufthansa

LATAM Airlines Group continues to battle pressure in long-haul and Brazilian domestic markets

Weakness in long-haul markets from Brazil continued to pressure LATAM Airlines Group during 1Q2013 as competitive capacity increases triggered depressed loads and unit revenues in its international network. But LATAM’s efforts to restore strength in the Brazilian domestic market and the relative strength in the group’s Spanish speaking companies should help to offset some of the continuing pressure in LATAM’s international network.

The company’s attempts to bolster international service during the last year to offset some of the continuing weakness in the Brazilian domestic market have faltered somewhat due to competitive capacity increases by American and United in the US-Brazil market, and LATAM’s own expansion of supply in the market. The company’s overall capacity increase in its international markets during 1Q2013 was 12.3%.

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.

Air France-KLM: it may be unfair to compare its 1Q2013 with Lufthansa's, but…

Two of the European Big Three reported 1Q2013 results within two days, so we can’t resist a comparison. Air France-KLM’s quarterly operating loss of EUR530 million was EUR171 million below Lufthansa’s. Air France-KLM shaved net debt from EUR6.0 billion at the end of 2012 to EUR5.9 billion; Lufthansa’s net debt is less than one third of this. AF-KLM’s 1Q RASK grew by 1.2%; Lufthansa’s by 2.8%.

Air France-KLM makes losses in Europe, where Lufthansa now claims a profit. In an attempt to fix this, Air France-KLM has Transavia for some leisure routes, Hop for French regional point-to-point and some hub feed, Air France’s provincial bases strategy (under review) for non-hub French routes and both Air France and KLM for everything else. Lufthansa has Germanwings for non-hub routes and Lufthansa for hub feed in Germany.

For FY2013, Air France-KLM isn’t saying whether it can improve on 2012’s EUR300 million operating loss, only that it aims to cut unit costs (ex fuel and currency) and net debt, whereas Lufthansa aims to beat last year’s EUR524 million profit.

Lufthansa juggles more balls more quickly as it reports unchanged 1Q2013 operating loss

Lufthansa on 2-May-2013 reported a 1Q2013 operating loss of EUR359 million, an identical loss as in the same period in 2012. All the main business segments improved their operating result, but restructuring costs weighed on the group result.

The quarter was characterised by capacity cuts, yield and load factor increases, and restructuring aimed at future profit improvements. Labour unrest, never far from the surface, returned during the quarter. Recent union agreements have reduced the risk in this area, although talks with the pilot union are on-going.

Pricing was generally fairly healthy, with yield and load factor growing, but weakness was again apparent in Asia-Pacific. On the analyst conference call to discuss 1Q2013 earnings, Lufthansa CFO Simone Menne did not rule out the possibility of using new partnerships as a more offensive solution to Lufthansa’s Asian problems, than the more defensive approach of capacity cuts and cabin mix changes.

Management will need to keep juggling these and other key issues – such as the ‘new’ Germanwings, office closures and headcount reductions – if it is to have a chance of reaching its FY2015 operating result target of EUR2.5 billion.

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.

Airlines in Transition 5. Lighting Candles: Innovating to make profits: Big Data, Advanced Analytics

“It is better to light a candle than to curse the darkness” – Confucius

The size, variety, speed and complexity of data available to the airline industry is growing rapidly, as with other industries. The importance of data use, the roles of intermediaries, the arrival of new players into the aviation data arena – such as social media, Google and Apple – and developments in consolidation, partnerships and collaboration along the supply chain make innovation essential.

Moreover, airlines need to work with airports, to facilitate connections and passenger flows, to reduce costs and to enhance revenues; and with IT solution providers to improve data interfaces across the “aviation ecosystem”, to improve efficiency and to enhance the revenue-generating opportunities arising from data sources. In this fifth report on CAPA’s Airlines in Transition conference, we examine the framework presented by airline strategist Nawal Taneja and the subsequent panel discussion.