Wizz Air

LOT majority stake attracts airline interest, but restructuring and potential synergies will be key

Recent legislation allows the government of Poland to sell a majority stake in state-controlled national carrier, LOT Polish Airlines (LOT). According to media reports, LOT has appointed Rothschild as its privatisation adviser and a number of carriers have indicated their interest in investing. A lifeline loan from the government in Dec-2012 has been approved by the European Commission, partly conditional on a new restructuring plan expected in Jun-2013.

With losses for each of the four years 2008 to 2011 and a fifth loss expected for 2012, LOT’s cost base is too high for its revenue-generating capabilities. Moreover, it is inefficient versus the LCCs that compete on short/medium-haul, which accounts for 88% of LOT’s seat capacity and where its ageing 737 fleet needs replacing.

A handful of long-haul monopoly routes are finally benefitting from new 787s, but it is difficult to find many other features for LOT’s advisers to highlight. Interest in buying LOT will depend very much on the pricing and potential synergies a buyer might bring to the table.

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.

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.

Slovakia poised for low-cost airline growth, led by Ryanair

Slovakia is seeing growth in the low-cost carrier market with Ryanair expansion and Wizz Air reportedly planning to resume operations. LCCs already account for about 80% of seat capacity in Slovakia, with Norwegian Air Shuttle also operating to the small Eastern European country.

Slovakia is poised to see significant growth in aviation activity in the coming years with Ryanair stating its intention to establish a base at the country’s main international airport, Bratislava Ivanka Airport.

In early Apr-2013 Ryanair announced plans to operate 16 routes from Slovakia's Bratislava Airport in summer 2013 including one new service to Trapani in Sicily, Italy. The airline expects to transport over 800,000 passengers through Bratislava in 2013 and support over 800 associated jobs.

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.