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Following easyJet's fall back into loss in 1H2016 (six months to Mar-2016), it still expected that the summer months would more than offset this, allowing another year of profit growth. A profit warning after the UK's Brexit vote dashed this hope in late Jun-2016. EasyJet's 3Q2016 (April to June) trading statement casts a bigger shadow over its outlook, as weak unit revenue is not being offset by unit cost reduction. According to CAPA calculations, easyJet's 3Q2016 pre-tax profit fell by 59% year on year.
European LCCs Norwegian and Wizz Air have reported improved profits for the same quarter and are on track to achieve stronger full year results, but easyJet is not alone among European airlines in lowering earnings expectations in recent weeks. IAG and Lufthansa have also issued profit warnings. Growing macroeconomic and geopolitical uncertainties are weighing on unit revenue. For some, there is no longer a sufficient release coming from lower fuel prices, which also contribute to unit revenue weakness by encouraging additional capacity.
The majority of European airlines have yet to report April-June results, most notably Ryanair, Air France-KLM and IAG. Nevertheless, the reporting season seems likely to herald a more cautious phase of the airline cycle.
Norwegian Air continued its trend of improving profitability in 2Q2016, when it marked its sixth successive quarter of year-on-year increases in its operating margin. It achieved a further gain in load factor, in spite of double-digit capacity growth. The biggest sources of its growth were its US widebody routes and its operations in Spain, where it has recently opened a seventh base at Palma de Mallorca.
To a large extent its recent positive trend of growing profits has been the result of lower fuel prices. Ex fuel unit costs have been rising for several quarters, outpacing increases in unit revenue. Norwegian has only managed to achieve margin gains because of lower fuel CASK.
Norwegian's operations should become more efficient if it received US foreign airline permits for its Irish and UK subsidiaries, although there is currently little sign that this is about to happen. A new order for 30 A321LRs (part of the A320neo family) should also help Norwegian's unit cost performance and give it more choice over aircraft deployment on shorter long haul routes.
Odessa International Airport lies in the south of the Ukraine on the Black Sea. Although it is removed from the fighting in eastern Ukraine and the annexed Crimea those events have inevitably impacted on it, as they have elsewhere in a country that is trying to effect an economic recovery.
The airport is business-oriented, without much exposure to low cost airlines, but it represents a city-region that retains a robust and multi-faceted economy. A modernisation project has been delayed but the first part of it should be completed in 2016, thus giving it the opportunity to compete directly with the much larger airport at the capital, Kiev.
This two part report examines Odessa International Airport (OIA) by way of several sets of metrics, looks at the airports that are rivals to it, at its construction activities and its convoluted ownership.
After a period of unit revenue growth following the global financial crisis, Air Europa came under heavy pricing pressure in 2015. Renewed growth by Iberia has intensified competition to Latin America, while LCCs are putting strain on short haul yields.
Air Europa does not report profits, but it is its parent company Globalia's largest business by revenue. The privately owned Globalia group has been profitable since 2013 but suffered a fall in profits in 2015, when its Air Division's revenue declined by 3% in spite of traffic growth. The group balance sheet has low liquidity and Globalia is reportedly considering an IPO.
Widebodies now represent more than half of Air Europa's seats and 20 out of 27 outstanding orders. This reflects the importance of its Latin American network and its ambitions to continue long haul growth, as detailed in part 1 of this report. Moreover, the widebody orders are for Boeing 787s – to replace A330s, generating cost efficiency gains. CAPA estimates that Air Europa's unit cost is above that of LCCs, but closer to them than to FSCs. It has a good track record of labour productivity growth, which will be useful in its quest for further CASK reduction.
Air Europa's 28-Jun-2016 launch of a new daily Madrid-Bogota service returns the spotlight to its Latin American network. This is the airline's most important route region both by capacity and by revenue, and it remains at the heart of its future plans. Air Europa has 13 Latin American destinations – compared with Iberia's 19 – and has been linked with plans for several more.
By seat capacity on Spain-Latin America Air Europa is half as big as Iberia but its share has increased by 10ppts over the past decade, while Iberia's has fallen. Iberia was four times Air Europa's size in this market in 2006. Nevertheless, a re-energised Iberia remains a formidable competitor and there is a small, but growing, band of new entrants.
Air Europa's parent company Globalia is reportedly considering an IPO, having previously been in talks with HNA Group about a possible investment by the Chinese conglomerate. Air Europa is likely to defer plans for the launch of routes to China while it concentrates on Latin America.
Part 2 of this analysis will look at Globalia's financial track record. It will also examine Air Europa's unit revenues, fleet and unit cost positioning.
Monarch Airlines restructure 2: lower fuel, labour productivity drive return to profit. Risks remain
Part 1 of CAPA's analysis of Monarch's restructuring examined capacity cuts and the shrinking of the fleet and network. An obvious sign of success is that the Monarch Group and Monarch Airlines returned to profit in FY2015. The restructuring helped to stabilise load factor, reduce the seasonality in the business and improve its on-time performance. However, average daily aircraft utilisation continued to fall and load factor has fallen again in the first part of FY2016.
Part 2 of CAPA's analysis examines how the restructuring improved Monarch's financial performance. The return to profit by the UK LCC was driven both by a rise in unit revenue and a fall in unit cost – that cost itself helped by lower fuel prices and improved labour productivity.
Looking ahead, Monarch's Boeing 737MAX deliveries from 2018 should benefit the bottom line. However, in the meantime leisure-focused markets face considerable volatility from geopolitical and macroeconomic uncertainties, not helped by the UK's recent Brexit vote. Although back in profit, Monarch still needs shareholder support to fund its liquidity needs and there have been some reports – denied by the airline – that its owners may be considering a sale. The restructuring now gives it a base from which to address its challenges.