Ireland

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.

London City Airport talks aviation: 'In the city, there’s a thousand things I want to say to you'.

British band The Jam’s debut single included the lyrics: “In the city, there’s a thousand things I want to say to you… In the city there’s a thousand faces all shining bright, and those golden faces are under 25”.

London’s City Airport is no longer growing with the youthful energy captured by The Jam. Indeed, it turned 25 last year, but it has matured into a successful airport with an increasingly diversified route portfolio. Business routes remain very important, but you are now also likely to find business people there looking to recapture their lost youth in one of the several leisure destinations served.

In London City, there might not be a thousand things to say, but it does reflect a number of key trends and issues in European aviation today: airline consolidation, the battle between the alliances, EU liberalisation, capacity constraints, the importance of high yield passengers, the development of surface infrastructure and the shift to new generation aircraft technology are all evident at the airport.

The only shining bright faces that are missing are the low-cost carriers.

Ryanair: Europe's lowest cost producer wins again, reporting record profit of EUR569 million

Ryanair reported a record net profit of EUR569 million for FY2013, 13% up on last year, and its operating margin of 14.7% is comfortably the highest among European airlines. Even after returning EUR1.5 billion in cash to shareholders over the past five years, the LCC had EUR3.6 billion in cash at the end of Mar-2013, equivalent to almost nine months of sales.

Results like these, achieved in the teeth of the weakest economic backdrop in Europe for decades, underline the strength of Ryanair’s low-cost model. Already Europe’s lowest cost producer, and with relatively little scope to cut unit costs, earnings growth in recent years has been driven by the pricing power resulting from tighter capacity expansion than in the past, aided by restructuring and capacity cuts by many competitors.

These conditions should help Ryanair make progress towards its target of a 20% market share over the next five years, after which a possible order for the Boeing 737MAX may be the key to longer term earnings growth.

Iberia: a new hammer can crack an old nut, but sometimes the new ones taste better

Following Luis Gallego’s promotion in Mar-2013 from CEO of Iberia Express to be CEO of Iberia, changes to Iberia’s management structure had been anticipated. On 10-May-2012, Iberia announced changes aimed at better implementing its Transformation Plan and restoring competitiveness and profitability to the carrier. While it is often worth taking a new hammer to crack an old nut, IAG has simultaneously been squirreling away some tastier new ones.

Based on comments at CAPA’s Airlines in Transition conference by Willie Walsh, CEO of Iberia’s parent IAG, that Iberia Express has ex fuel unit costs 40% lower than Iberia’s, we estimate that its CASK is similar to those of easyJet and Vueling. Mr Walsh also said that it is better to restructure what you have than to start something new. However, given fierce resistance to change at Iberia, he has given himself a good deal more leverage by establishing Iberia Express and also by taking over Vueling. Iberia Express has even helped the group to grow its passenger share in Madrid this year.

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.

CAA’s price proposals for London’s airports: the battle begins as airlines go on the attack

It’s a familiar story as we approach the next five-year regulatory period for airport charges at London’s Heathrow, Gatwick and Stansted airports starting from Apr-2014. The airports seek big price increases, while the airlines want them cut and the Civil Aviation Authority (the regulator) tries to make proposals in the middle that displease both sides. A CAA-commissioned study shows that all three airports have significantly increased their realised airport charge yield over the past decade and are above the averages of their comparator airport baskets.

The CAA’s initial proposals were met on 30-Apr-2013 with immediate howls of displeasure from airline chiefs describing the proposed Gatwick price increases as “completely unjustifiable, totally unacceptable”, referring to Stansted’s “absolute pricing power” and calling Heathrow “over-priced, over-rewarded and inefficient”. For their part, the airports complained about “heavy handed regulation”, fearing that the proposals “will put passenger service at risk by not attracting the necessary investment”.