Low Cost Carriers (LCCs)
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After over a year of very public discussion about home-grown low-cost carriers, Taiwan in a matter of weeks has received commitments from both China Airlines and TransAsia Airways to start LCC subsidiaries in the next year, making Taiwan the last major market in Asia to have an LCC. The unusually public – and sometimes fanciful – discussion has perhaps rushed these decisions ahead of what a normal commercially-oriented process would produce. These "LCCs" are still sometime away from having a coherent strategy, and then maturing. But the upside seems to be support, both internally and from the government – critical and sometimes overlooked.
In announcing their own LCC subsidiaries, China Airlines and TransAsia are each embarking on a dual-brand strategy, a popular concept seldom achieved proficiently. The dual-brand strategy will be very different for these carriers, as between each other and from other global examples. Hub carrier China Airlines has 54 aircraft, only a quarter of which are narrowbodies. The use of narrowbodies is increasing as regional liberalisation opens thinner routes and expands frequencies. So as China Airlines begins to work through the intricacies of an LCC operation, it is also seeing its own business transform rather significantly. This creates opportunity to mould the future but also adds complexity. Meanwhile TransAsia only has 11 regional aircraft, creating a challenge to gain scale on the existing operation and new LCC.
There will be much reconfiguration as the carriers test the market and discover what it means to be an LCC (as opposed to merely a low fares airline) and as the region itself undergoes much change. So perhaps Taiwan's second-largest carrier, EVA Air, will also be well advised to reconsider its past statements that it has no interest in operating an LCC. But nor is there rush for it to move from its current position of sitting on the sidelines.
easyJet's FY2014 pre-tax profit increased by more than 50% to its highest ever level and its operating margin returned to double digits after more than a decade at less than 10%. Its pursuit of a more passenger-focused and business-serving LCC model has driven it to improve and innovate in terms of product, with features such as allocated seating and a user-friendly website now being copied by the likes of Ryanair.
This customer focus, together with what the company has called “a benign capacity environment”, as competitors were forced to reduce seat numbers, has led to impressive unit revenue growth, while management has not lost sight of cost control. Its confidence in the future was signalled by a dividend totalling GBP308 million.
Looking into FY2014, however, the outlook for unit revenues is less certain as capacity growth steps up a little, and profits are unlikely to grow as rapidly as they did in FY2013. Nevertheless, easyJet's business model remains robust and should deliver sustained healthy returns.
Pegasus is demonstrating strong profitability following its IPO in Apr-2013, since when its share price has doubled. It is now among Europe’s more profitable airlines and one of its lowest-cost practitioners. In 3Q2013, the underlying operating result of the core operation increased by 18% compared with last year and this result has more than doubled over the first nine months of the year.
However, net profit fell in 3Q2013 as the weakening Turkish lira led to adverse foreign exchange impacts on the profit and loss statement. In addition, the operating margin declined year-on-year in the quarter as RASK growth was outpaced by CASK growth. It is not time to take any drastic evasive action, but it seems even the more financially robust airlines cannot avoid some turbulence at times.
Following dramatic declines in airport passenger numbers in 2012 and 2013, Spanish airports operator AENA has decided to introduce an airport charge discounting scheme to offer incentives to airlines to grow their traffic in Spain once more. With plans being formulated to privatise Spanish airports, the success of this initiative will be closely watched by both industry participants and potential investors.
In this report, we examine traffic trends at AENA and consider whether they have been affected by higher airport charges. Our analysis suggests that there is a clear link and so action to reverse falling traffic numbers through lower charges seems a logical step.
The questions then are whether the discounts offered will have the desired effect and how sustainable will be any resultant growth in passenger numbers.
Ryanair is the biggest carrier in Spain by passenger numbers and its CEO Michael O’Leary has called AENA’s discount scheme “almost unachievable”.
Aer Lingus saw operating profit growth in 3Q2013, after a fall in the 1H result. Nevertheless, ongoing yield weakness on short-haul led it to reiterate guidance for lower profits in FY2013 versus FY2012.
The airline's rapid Atlantic capacity expansion has met with some success, but has also provoked a dispute with cabin crew union IMPACT. Assuming this can be resolved and that wet-lease partner ASL proves to be a successful operator, its long-haul niche looks like being a source of growth.
The bigger challenge is on short-haul, where ultra-LCC rival Ryanair is pushing out lower fares in large quantities. It seems that the battle between the two is intensifying just as Ryanair is being directed to sell its 30% stake in Aer Lingus.
Ryanair saw its 1HFY2014 net profit increase, reversing the decline posted in 1Q. Indeed, its 2Q profit was its highest ever quarterly result. The quarter saw an increase in average fares, strong growth in ancillary revenues and a fall in sector length-adjusted costs per passenger. However, Ryanair also gave its second profit warning in two months, a reflection of what it sees as a weak fares outlook across Europe.
For an airline that saw compound average growth in passenger numbers of 18% per annum in the 10 years to FY2013, does planned growth of 2% in FY2014 and 3% in FY2015 mean that opportunities are drying up?
Announcing a return to allocated seating and a host of customer service initiatives and product enhancements, is Ryanair moving away from the purist LCC model?