Low Cost Carriers (LCCs)
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847 total articles
Pegasus Airlines is Turkey's self-styled ‘network low-cost carrier’. It operates many of the features of the classic LCC business model: low fares, single cabin class, modern fleet, focus on internet distribution and a short/medium-haul network. But it also offers network feed (27% of international passengers in 2013) and product features that, until recently at least, have been less typically associated with LCCs in Europe. These include belly cargo, assigned seating and the use of both GDS and travel agents.
In spite of these ‘deviations’ from the purist LCC model, Pegasus has the second lowest unit costs among European airlines, bracketing it with Ryanair and Wizz Air in the ultra-LCC category.
In 2013, Pegasus increased its core operating profit by 40%, although currency movements hit the net result and a trend of rising CASK in recent years will need to be controlled. Although partly driven by exchange rate movements, and offset by a rising RASK trend, CASK increases do not sit well with any version of the LCC model.
IAG returned to profit in 2013 after a dip into red ink in 2012. The improved results were driven mainly by unit cost reduction and by a first contribution from LCC Vueling after its acquisition on 26-Apr-2013. The group’s operating profit of EUR770 million was better than the target of EUR740 million set in Nov-2013 and broadly in line with analysts' forecasts. It was much better than the target set in early 2013, before the Vueling acquisition, to beat 2011's EUR485 million. Deducting Vueling’s contribution, the like for like operating result was EUR602 million compared with a EUR23 million loss in 2012.
Inevitably, challenges remain. IAG must implement its new labour agreements with Iberia pilots and cabin crew and conclude negotiations with Iberia ground staff. It must manage BA's long-haul expansion and switch to higher gauge aircraft, while retaining control of its costs. Regarding Vueling, the key will be to allow it to keep its independence and low-cost culture, while allowing it to pursue its rapid growth.
The signs are growing that IAG can meet these challenges.
The world’s aviation sector ended 2013 with another record backlog for aircraft orders, as the highest ever number of annual orders added to what was already a record backlog. The number of outstanding orders is equivalent to almost half of the fleet in service. In this report, we examine aggregate orders data from the CAPA Fleet Database to highlight trends regarding the winners and losers by region, business model and aircraft category.
For a low margin industry, the challenge of financing all these orders remains significant. For decades, annual capital expenditure has almost always exceeded operating cash flow generated by the world’s airlines. The industry has had to rely on ever more imaginative forms of external financing, demonstrating that, historically, this is a challenge to which they have risen.
These themes will feature in the CAPA Airline Fleet & Finance Summit, which will take place in Singapore from 25-Mar-2014 to 26-Mar-2014.
What is exciting about the next act of Chinese aviation is that a new script is now emerging.
China’s ascent from a single national airline in the 1980s to dozens of airlines in what is today the world’s second-largest market has occurred over many acts, but to date they have largely been highly choreographed.
There were surprises as some characters assumed roles larger than they were written and as some unscripted characters appeared, but mostly the state has applied a rubric of growing the market while ensuring a predominant role for the three protagonists: Air China, China Eastern and China Southern.
This is changing now as China looks to generate higher growth rates: home grown LCCs are to be permitted formally for the first time. Highly successful models like Spring Airlines have led the way; now others will have the opportunity to follow the precedent.
Norwegian Air Shuttle’s 2013 net profit fell by 30% in the face of rapid capacity expansion, the launch of its first long-haul routes, delays to Boeing 787 deliveries, the negative impact on demand of good summer weather and a very price competitive market place. In short, anything but a run-of-the-mill year. The upshot was that, while its unit cost (CASK) fell in line with its target, its unit revenue (RASK) dropped more rapidly.
The granting by Irish regulators of an air operator’s certificate and operating licence to Norwegian’s Dublin-based long-haul operator and its recent order for four more 787s (bringing the total to 14: eight 787-8s and six 787-9s) are positive steps in its expansion into long-haul markets, where it has a cost advantage against legacy carriers. Nevertheless, there are some lower cost rivals on short-haul, where most of Norwegian’s business still lies.
The downward pressure on RASK looks likely to continue in 2014, particularly given Norwegian’s planned capacity growth of 40% (in ASK terms). A return to profit growth will therefore, it seems, need a further significant CASK cut.
Israel’s air travel market seems to be attracting attention. In recent weeks, there have been headlines about new routes from Vueling, TAROM, Arkia, Transavia, Jetairfly, Wizz Air, Yan Air, Med-View Airline, easyJet, Meridiana, Air Serbia and Air Onix; and increased frequencies by TAROM, Norwegian, easyJet, El Al, Alitalia, Lufthansa and airberlin.
Following the signing of an EU-Israel open skies agreement in 2012, a factor in increased services from the EU, countries including Russia, the Philippines and Kenya are also considering developing new air services agreements with Israel. In addition, a security-related restriction on Israeli carriers operating to Turkey (one of the few major aviation markets outside Western Europe and the US that has links to Israel) looks set to be lifted.
For a country of above average levels of wealth, as defined by GDP per capita, air travel penetration is also high, but lower than for other similarly wealthy nations. The Israeli market has generally seen healthy growth in recent years, but this has been uneven. Israel has significant potential for the airline industry, but its realisation will continue to be subject to politically-driven developments on traffic rights.