Norwegian Air Shuttle

SAS’ restructuring plan is still on course after improved 2Q2013 results

In 2QFY2013 (Nov-2012 to Apr-2013), SAS has turned around pre-tax losses to report a profit (before non-recurring items) and reversed the pattern of 1QFY2013, when its losses widened. It has made progress with cost reduction and looks to be on track to achieve its FY2013 financial targets. It has also recently agreed to sell its Wideroe subsidiary and made further progress in its fleet modernisation programme.

SAS' recent launch of new fare classes SAS Go and SAS Plus scarcely looks to be the “new service concept” that it claims, but at least the Nordic region’s largest carrier is attempting to differentiate itself from its many and growing competitors. In 2012, President and CEO Rickard Gustafson said the restructuring plan was a “final call” for SAS. It seems that, at least for now, the group has not yet missed the flight.

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.

Wizz Air to significantly boost LCC penetration in Bosnia and Herzegovina

Wizz Air has unveiled plans for significant expansion in Bosnia and Herzegovina, an under-served market that has traditionally fallen outside the spotlight of low-cost carriers. The Bosnian market has not had much attention in recent years but is poised to see a sudden surge of capacity as Wizz Air plans to connect the country with several new destinations including Malmö, Basel Mulhouse and Gothenburg.

The expansion from Wizz Air would provide Tuzla, the third largest city in Bosnia and Herzegovina, with scheduled commercial service. LCC expansion may also follow for the country’s other airports including in Sarajevo and Mostar.

LCCs currently account for less than 20% of seat capacity to and from the southeastern European country. But the recent launch of services by Turkish LCC Pegasus has already doubled LCC capacity in the market. Wizz Air’s entry will push the LCC penetration rate up further, approaching 30%, with more increases possible in 2014 as Wizz and other European LCCs ponder further expansion in Bosnia and Herzegovina.

Norwegian improves its 1Q2013 results, but widebody profits may be one for the long-haul

Norwegian Air Shuttle narrowed its net loss in 1Q2013 and turned its operating result around from a loss of NOK574.6 million (USD99 million) to a profit of NOK69.2 million (USD12 million). Capacity continues to grow rapidly, with ASKs up 21% (11% due to longer average sectors), but load factor dipped by 1ppt to 76%.

Nevertheless, RASK grew 2% and revenues were up 23%, while unit costs were down 8%. Further CASK reduction remains a key target and the establishment of new bases outside high wage Scandinavia, both in Europe and in Asia, provides an opportunity to lower labour costs.

Norwegian recently announced a seventh widebody route (Oslo-Fort Lauderdale) for its long-haul network, which will launch on 30-May-2013 along with Oslo-New York. Its strategy of growing long-haul operations through new routes at the expense of frequency will help it to establish a wider presence more rapidly, but will reduce the available cost efficiencies at remote bases and restrict its appeal mainly to the leisure passenger. Norwegian’s long-haul network may struggle to be profitable for some time.

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.

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%.