SWISS

Europe to Latin America: why European airlines are practising their samba, salsa, tango and rumba

TAM will soon defect from Star to join its sister carrier LAN in oneworld. TAP Portugal’s future alliance membership is surrounded by uncertainty until its likely renewed privatisation process is complete. These developments throw the spotlight on the strategic importance of routes from Europe to Latin America to European carriers, who dominate this market, in particular the Big Three, but TAP Portugal, Alitalia and Air Europa also have noticeable positions. The South Atlantic market is only around one fifth of the size of the North Atlantic market by RPKs. So why should Latin America matter to European airlines?

In addition to forecast passenger traffic growth rates that, while not spectacular, are still very respectable and superior to those in Europe and on the North Atlantic, Latin America is a fascinating strategic battleground for Europe’s carriers, both directly and through alliances.

It is a territory of changing alliances and emerging players and, for those that are successful, market share gains can provide significantly higher growth then the underlying market.

Lufthansa: why being the best of the Big Three is not good enough

Lufthansa is the most consistently profitable of the Big Three European legacy flag carrier groups and the only one to make a positive operating result in 2012. With 236 aircraft on order and a strong balance sheet that should facilitate funding these deliveries, it appears to be in a league of its own in Europe. However, group operating profit, which fell from EUR820 million in 2011 to EUR524 million in 2012, has been on a downward path since 2007. Results at the core Lufthansa Passenger Airline fell into loss, making it the group’s weakest performer in 2012, a shocking reinforcement of the need to change.

Lufthansa is taking radical steps to restructure non-hub short-haul routes using its LCC subsidiary Germanwings after similarly radical restructuring at its Austrian Airlines subsidiary and is determined to push through with its SCORE cost savings programme. For 2013, it is targeting only a better operating result than last year, but its 2015 target of an operating result of EUR2.3 billion would represent its best ever three year improvement.

Europe's airlines in China: Lufthansa and AF-KLM largest as British Airways/oneworld play catch up

China is the world’s most populous nation and its second largest passenger aviation market with enormous growth potential in spite of some regulatory brakes. So why is it that some European countries are under-served to China by their home carriers, in particular Spain, but also Italy and the UK? It is not an easy market to serve and yields remain low, but it is a must-do market.

Air China and Lufthansa are the biggest players on Europe-China and this is reflected in the Star Alliance controlling almost half of the seats on these routes and SkyTeam’s Air France and KLM both have strong positions in Amsterdam and Paris respectively. By contrast, British Airways finds itself in the most competitive Europe-China market, the UK and without a Chinese partner.

While BA is starting a Chengdu service and increasing its Shanghai frequency from six times weekly to daily, Iberia is absent entirely from China and IAG looks very under-represented in this large and fast-growing market. In spite of Finnair carving out a successful niche, oneworld is an also-ran on Europe-China, with only a 10% share.

Skymark switches first A380 destination from London to New York but viability remains to be proven

Skymark Airlines, Japan's third-largest domestic carrier, is switching its first A380 destination from London to New York in a bid to improve profitability amidst an atmosphere of economic uncertainty in Europe that shows no signs of relenting. But Skymark has far more work ahead of it, and success from its A380 operation seems an elusive goal. The carrier faces significant hurdles in three key areas: network, partnerships and aircraft configuration.

An entirely domestic carrier, Skymark accounts for only 5% of domestic Japanese seats, limiting feed opportunities. It has no earnest partnerships of its own despite much-bigger All Nippon Airways and Japan Airlines having joint-ventures across the Pacific and to Europe that deliver far greater traffic opportunities and a larger customer pool. Finally, Skymark intends to have the least dense A380 with a mere 394 seats in all premium economy and business configuration – and aims to have an average load factor of 60%, requiring tickets to be sold at yields too high to see profitable take up.

Turkish Airlines tie-up could give Lufthansa the solution it needs as profits continue to fall

Germany’s powerful Chancellor Angela Merkel was not to sit idly by and watch how Lufthansa would be checkmated in the ongoing challenge towards a new world order for the airline industry, so decided to move some of the pawns: bring Europe’s largest airline group together with Europe’s fastest growing airline, Turkish Airlines. The news must have come as a surprise and while nothing is decided or formally announced, a combination of Lufthansa and Turkish Airlines would make the Qatar-oneworld deal and the Etihad-Air France-KLM-airberlin codeshare agreement look like child's play. Moreover, it would keep the “subsidised” Gulf carriers at bay and halter further inroads, at least in central Europe where Lufthansa is the dominant player.  

Turkey’s Prime Minister Tayyip Erdogan revealed the talks of a potential Turkish Airlines-Lufthansa partnership in a speech to his ruling AK Party on 03-Nov-2012, saying he had agreed to a proposal by Mrs Merkel to establish joint management of the two carriers.

Even SWISS is not immune to the LCC offensive

SWISS International Air Lines has apparently decided to fully engage in a price war with easyJet try to gain back market share it has gradually lost to the LCC.

Switzerland’s de facto flag carrier has started offering low-cost flights starting at CHF49 (EUR40/USD51) from Geneva to a number of popular destinations such as Madrid and Nice. Athens and Prague are to follow from mid-Sep-2012. The price offensive is a test phase and will run until 31-Dec-2012.

SWISS still holds a leading position at Zurich Airport, its home base, but the airline that prides itself on its high standards and an impeccable service approach has lost ground to LCCs, primarily easyJet, at the country’s second largest airport Geneva. easyJet is also the largest operator at Basel/Mulhouse EuroAirport with a near 50% share of capacity expressed in seats and 40% of flight movements.

The decision by SWISS follows a survey among passengers revealing that they want the “most attractive prices” and more flexibility. SWISS’ realisation is not surprising, to say the least, as passengers have been switching to no-frill carriers for short and medium-haul in Europe for more than a decade.