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The domestic aviation sector in Sweden has seen dramatic changes in the past decade. Despite a general decline in the domestic market due to expansion of better roads and rail connections, deregulation has seen the number of air operators increase. New groupings in the form of air-travel organisers (which provide aircraft and crews to other airlines), and more low-cost carriers (LCCs) have entered the domestic market, bringing increased competition for certain destinations. SAS is still the dominant player in the Swedish air travel market. This holds for both domestic and international service, given that the company’s hub, located at Stockholm-Arlanda Airport, is where a large part of Swedish air traffic connects. The Swedish Civil Aviation Department is responsible for regulatory oversight, while Swedavia manages the country’s major airports. LFV is the state-run air navigation services provider.
Sweden is dependent upon efficient air travel connections both on the domestic front and to important European and global markets. Through a combination of increased competition, attractive prices and a wide variety of destinations, the Swedish air travel market is likely to grow over the coming years.
Airports in Sweden
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Part 1 of CAPA's Brexit follow-up report assessed the ASK exposure of UK and non-UK airlines to market segments where existing traffic rights could potentially change once the UK finally leaves the European Union. This second part reviews recent comments by leading European-listed airlines on how they see the impact of Brexit, both in the short term and in the longer term. Most of them acknowledge that there are considerable uncertainties, while simultaneously insisting that they will not be significantly affected in the long run.
There have been two initial impacts on airlines. First, Brexit has added to economic uncertainty, thereby muting demand and lowering yields. The magnitude and duration of this impact is unpredictable. Secondly, the consequent weakening of the GBP has made outbound international travel from the UK more expensive and less appealing, and lowered the value of GBP revenue earned by airlines.
The longer term impact will depend on whatever new traffic rights regime is negotiated between the UK and the EU. As a number of the airlines have acknowledged, this remains unknown and is, indeed, unknowable until the UK formally triggers its exit from the EU and then completes its two-year exit negotiations.
CAPA's previous analytical coverage of the UK referendum vote to leave the European Union flagged several questions surrounding UK airlines' future access to the European single aviation market. Traffic rights post-Brexit will depend heavily on the wider relationship between the UK and the EU and its markets. In turn, this may depend on how far the UK is prepared to go in embracing the EU's four key freedoms: the movement of capital, goods, services and people.
The UK has not yet triggered its formal two-year exit negotiation period and all aspects of its future relationship with the EU remain unknown. However, politicians in the UK are very reluctant to accept the continued freedom of movement of people, so existing airline market access is likely to be compromised in some way.
Rather than speculate on how negotiations might proceed, this report identifies the main market segments that could be affected by changes to the traffic rights regime, and evaluates the ASK exposure of airlines from the UK and from countries in Europe's single aviation market to these segments. A further report will review recent comments by Europe's leading listed airlines on how they see the impact of Brexit.
One swallow does not make a spring and nor does a rash of aviation strike news guarantee a turning point for the aviation industry. But the signs are ominous. In the month of Jun-2016 (to 20-Jun-2016), there have been 136 articles on CAPA's website mentioning the word 'strike'. This compares with 81 for the first 20 days of Jun-2015. For 2016 so far (1-Jan-2016 to 20-Jun-2016), the 's' word has occurred in 594 articles – about 20% more than in the same period in each of the past two years. If this rate continues, 2016 could be the biggest year for strike-related articles since before the global financial crisis.
The vast majority of the Jun-2016 articles – 80% – relate to Europe. A significant source is air traffic control disputes, particularly French ATC. There have also been strikes and/or strike threats involving airport workers and ground handlers. Among European airlines, Air France has generated the most coverage for its ongoing dispute with its pilots, and it may also face a cabin crew strike. Lufthansa has not yet faced a strike by its employees this year, but has not yet reached new agreements with pilots or cabin crew after industrial action last year.
History tells us that labour's demands grow as profits rise. The apparent increase in industrial action this year could be a signal of an approaching peak in the airline profit cycle. There are other causes of unrest, such as impending French labour legislation, but the correlation reflects some history.
SAS: 2Q losses widen after six quarters of improving results. LCCs & SAS growth depress unit revenue
After improving its underlying profit in FY2015 and narrowing its losses in the seasonally weak 1Q2016, SAS suffered a widening of losses in 2Q2016. This was the first year-on-year deterioration in its underlying result for six quarters. It benefited from lower fuel prices and from its own cost savings programme, but experienced plummeting unit revenue.
This reflects the ongoing growth of LCC competition in short haul markets, but is also the result of its own capacity increase. SAS' growth is led by rapid expansion on long haul, where Norwegian is also providing LCC competition. SAS is investing in its network and product and growing its revenue from higher-yielding loyalty scheme members, but these measures do not appear to be giving sufficient support to unit revenue.
These trends are unlikely to dissipate any time soon, and there is now the real prospect that its FY2015 result represented a cyclical peak for SAS. The company recognises the need for further change in order to improve its competitiveness. Strategies to seek labour cost reform can be expected, in spite of a strike call by Swedish pilots.
Numerous media reports have speculated that Lufthansa may be on the acquisition trail. Group CEO Carsten Spohr told Bloomberg that consolidation in Europe is needed and that Lufthansa wants to be a part of it (Bloomberg, 22-Apr-2016), but did not identify specific targets. Moreover, Mr Spohr said the Group was concentrating on making sure that its LCC platform Eurowings worked first.
Interestingly, however, the reports have specified three possible acquisitions, in each case suggesting that they could be used as part of the Eurowings project. The three are SAS, Brussels Airlines and Condor Flugdienst (part of the Thomas Cook Group). In all three cases, there are historical and/or cultural reasons to suggest that some form of closer cooperation, including the possibility of acquisition (or partial acquisition), could feasibly be up for discussion.
Lufthansa's partnership with SAS goes back to the time before they were both involved in setting up the Star Alliance, while Lufthansa is already a minority shareholder in Brussels Airlines and a former shareholder in Condor. Of the three, only Condor could be a realistic candidate to become part of the Eurowings operation. None of these possible Lufthansa acquisitions would significantly change European airline market structure.
Norwegian Air: 1Q results continue improving trend thanks to lower fuel. Long haul strategy develops
The Norwegian Air Shuttle group is enjoying a period of good news. It narrowed its underlying operating loss for the seasonally weak first quarter, after returning to full-year profit in 2015 following a loss in 2014. Its 1Q2016 results demonstrate that this improving trend is continuing. Norwegian's 1Q results came soon after the US Department of Transportation (DoT) had given tentative approval of a US foreign carrier permit to Norwegian's Irish-registered subsidiary, NAI.
However, this is not the time for Norwegian to sit back and relax. Its improved profitability is in no small measure due to lower fuel prices, while ex fuel unit cost increased in 1Q2016. In addition, contracts for the leasing out of Norwegian's first A320neo deliveries have been temporarily delayed, highlighting the added challenge of running this new and growing line of business. Moreover, until the DoT approval is final, there may be some nervousness surrounding it.
Meanwhile, Norwegian is growing NAI at its new Rome Fiumicino base, which joins Madrid and Barcelona as major NAI airports with no Norwegian intercontinental routes. As it pursues 40% pa ASK growth over the next several years, these are likely candidates to be its next long haul bases.