13-Mar-2014 5:45 PM

Aegean Airlines’ annus mirabilis, but can it maintain the momentum in 2014?

Analysis

Aegean Airlines had a good 2013. Not only did it return to profit for the first time since 2009, but it recorded its best result since its 2007 listing on the Athens Stock Exchange. All the key indicators improved: double digit passenger growth, load factor gains, a sharp increase in revenue per ASK and a fall in costs per ASK. Moreover, on the strategic front, it finally completed the acquisition of Greek rival Olympic Air after first attempting this in 2011.

The challenge for Aegean will be to maintain the momentum in 2014.

The integration of the loss-making Olympic, while giving the potential for synergies, will inevitably absorb significant management attention. Meanwhile, keeping hold of RASK gains in the face of growing competition from LCC competitors (Ryanair will open bases in Athens and Thessaloniki in Apr-2014) and continuing to reduce CASK will also be crucial to showing that the 2013 result was not just a flash in the pan.

Summary

Aegean Airlines achieved a strong improvement in profitability in 2013, with a net profit of EUR 66 million, compared to a loss of EUR 11 million in 2012.
The operating margin of 12.1% was the best in at least a decade for Aegean Airlines.
Aegean Airlines recorded double-digit passenger growth in 2013, with load factor gains and a sharp increase in revenue per ASK.
The acquisition of Olympic Air was completed in 2013, and the integration of the two airlines will be a key task for 2014.
Aegean Airlines aims to maintain its momentum in 2014 by focusing on cost reduction, developing ancillary revenues, and capitalizing on its membership in the Star Alliance.
The challenge for Aegean Airlines in 2014 will be to maintain RASK gains in the face of growing competition from low-cost carriers and continue to reduce CASK.

Aegean's strong turnaround in 2013

Aegean Airlines achieved a strong improvement in profitability in 2013, the parent company turning around a net loss of EUR11 million in 2012 to post a profit of EUR66 million in 2013. The operating result improved from a loss of EUR9 million to a profit of EUR83 million.

The operating margin of 12.1% was 13.7ppts better than the previous year and Aegean's best margin for at least a decade.

Aegean Airlines (parent company) financial highlights: 2013

EUR million except where stated	2012*	2013	Change
Revenue	562.9	682.7	21.3%
Other operating income	5.0	6.2	24.0%
EBITDAR	73.4	164.5	124.1%
EBIT	-8.9	82.6	+91.5
Operating margin %	-1.6	12.1	13.7ppts
Net profit	-10.5	66.3	+76.8
Cash & equivalent	149.3	221.5	48.4%
Net debt / (cash)	-67.0	-162.4	142.4%
Capitalised operating leases	564.0	561.6	-0.4%
Adj net debt	497.0	399.2	-19.7%
Equity	153.2	221.4	44.5%
Load factor**	75.5	79.6	4.0ppts
Pax m	6.1	6.9	12.1%
RASK EUR cent	6.2	7.0	13.0%
CASK*** EUR cent	6.3	6.2	-2.1%
CASK*** ex fuel EUR cent	4.3	4.2	-2.0%

Aegean Airlines Group results: 2013

Aegean acquired loss-making Olympic Air at the end of Oct-2013 and consolidated its results into the group's accounts for the final two months of the year. On a stand-alone basis, Olympic lost EUR14 million in 2013. The integration of Olympic will be an important task for 2014. Compared with Aegean, Olympic is smaller, has shorter average sector lengths, lower load factors, a greater domestic focus and lower profitability.

At the group level, Aegean's 2013 accounts recorded revenues of EUR699 million and a net profit of EUR58 million. If Olympic had been consolidated for the full year, combined revenues would have been EUR848 million and the net profit EUR53 million.

Most of the rest of this analysis will focus on the performance of Aegean Airlines, the parent company of the group and the larger of the two operating airlines.

The 2013 results of Aegean represented a very strong turnaround after three years of losses at both the operating and the net level to record its highest profits for at least 10 years. This appears to have been driven by strong revenue growth, up 21% in 2013 after increasing by only 7% over the previous four years (2008 to 2012). Note that Aegean changed the way it accounts for passenger airport charges in 2013, removing these charges from both revenues and costs (with no impact on profits).

Aegean Airlines revenues, net profit and operating profit (EUR million): 2004 to 2013

Aegean's balance sheet strengthens

The higher profitability of Aegean in 2013, together with low levels of capital expenditure, helped to drive improvements in the company's balance sheet.

Net cash (the surplus of cash over debt) increased from EUR67 million to EUR162 million and adjusted net debt (adding operating leases capitalised at eight times annual rental payments to debt) fell from EUR497 million to EUR399 million, while book equity grew by 45% to EUR221 million. Aegean's end 2013 cash balance of EUR222 million (up 48%) is equivalent to 118 days of revenues.

Aegean Airlines development of cash, net debt and equity: 2004-2013

A return to double digit passenger growth, with strong load factor gains

Aegean Airlines development of passenger numbers (million) and load factor* (%): 2002-2013

In 2013, Aegean's passenger numbers increased by 12.1%, with international passengers outpacing this by 2ppts and domestic passenger numbers up 9.3%. International growth was driven by incoming leisure demand and was focused on regional airports, although Aegean also achieved growth in international passenger numbers at Athens in spite of an overall fall of 2% in international traffic at the Greek capital.

Growth was heavily weighted towards 2H2013, with an increase in total passenger numbers of 19% (versus 3% in 1H2013). International passenger growth accelerated from 11% in 1H to 17% in 2H, but the greater change across the year was in the domestic market, which saw Aegean's passenger numbers fall by 5% in 1H and then grow by 22% in 2H.

Aegean's growth in the domestic market contrasts with an overall market decline in passenger numbers of 3% in 2013 (source: Aegean Airlines Annual Report 2013).

Aegean's ASKs increased by 7% and RPKs grew by 13%. Overall load factor increased by 4.0 ppts to 79.6%, similar to the AEA average for 2013 and an improvement of around 10 ppts over the past two years (14 ppts over the past four years). ASK growth was -1% in 1H and +14% in 2H.

Aegean Airlines passenger numbers (million): 2012 and 2013

	2012	2013	Change	% of 2013 passengers
Domestic	2.6	2.8	9.3%	41.5%
All international	3.5	4.0	14.1%	58.5%
Total	6.1	6.9	12.1%	100.0%

Aegean Airlines Group traffic statistics: 2013

Revenues were up a healthy 21%

Aegean's revenue growth of 21% outpaced growth in ASKs and passenger numbers. Total revenue per ASK (RASK) increased by 13%, reflecting improvements in both yield per RPK (up 7%) and load factor.

RASK growth slowed from 23% in 1H2013 to 6% in 2H2013 as capacity growth accelerated. The growth in revenues was fairly uniform in both halves of the year, although the main driver of this growth shifted from unit revenues in 1H to capacity in 2H.

Aegean Airlines revenues (EUR million): 2012 and 2013

EUR million	2012	2013	Change	% of 2013 revenue
Scheduled	461.5	559.6	21.3%	82.0%
Charter	67.8	78.8	16.2%	11.5%
Other	33.6	44.2	31.5%	6.5%
Total	562.9	682.6	21.3%	100.0%

...while costs were up only 4%

Aegean successfully controlled growth in costs to a rate of 4%, well below growth in revenues and capacity. Fuel costs, which made up more than half of the total (52%) grew by 5% and ex fuel costs increased by just over 2%. Labour costs, the second biggest category, fell by 1% in spite of an 8% increase in headcount.

The only significant cost item to outpace growth in revenues (and ASKs and passenger numbers) was airport charges, which were up by 23%. Distribution and marketing costs also grew faster than capacity, rising by 12%.

Costs per ASK (CASK) fell by 2% in 2013, although the 4% CASK decline in 1H was not repeated in 2H, when CASK was flat.

Aegean Airlines operating costs (EUR million): 2012 and 2013

	2012	2013	Change	% of 2013 costs
Fuel	186.0	195.1	4.9%	52.4%
Labour	69.9	69.2	-1.0%	18.6%
Airport charges	42.1	51.6	22.6%	13.9%
Leases	47.9	47.8	-0.2%	12.8%
Maintenance	38.6	41.4	7.3%	11.1%
Distribution/marketing	32.6	36.5	12.0%	9.8%
Navigation	27.2	26.9	-1.1%	7.2%
Handling	18.1	16.7	-7.7%	4.5%
Catering	70.5	70.2	-0.4%	18.9%
Depreciation	11.8	11.7	-0.8%	3.1%
Other	32.0	39.1	22.2%	10.5%
Total	358.7	372.0	*3.7%*	*100.0%*
Total ex fuel	172.7	176.9	2.4%	47.6%

Aegean saw improvements in labour productivity in 2013. Employee costs per employee fell and, although ATK per employee also fell (because growth in headcount exceeded growth in capacity), employee costs per ATK fell by 8%. Moreover, revenue per employee increased by 12%.

Aegean Airlines labour productivity measures: 2012 and 2013

	2012	2013	Change
Total full time equivalent headcount	1347	1459	8.3%
Total labour cost EUR million	70	69	-1.0%
Employee cost per employee (EUR)	51,893	47,430	-8.6%
ATK* per employee	678	672	-0.9%
Employee costs per ATK (EUR)	7.65	7.05	-7.8%
Revenue** per employee	417,892	467,923	12.0%

RASK growth was the key to profit recovery in 2013

The key to Aegean's jump in profitability in 2013 was the strong increase in RASK (+13%), the first increase since 2008.

However, it was also crucial that Aegean maintained the downward path of CASK (-2% in 2013). Ex fuel CASK (-2% in 2013) has fallen every year since at least 2006, although this largely reflects increases in average sector length over the period.

Typically, both CASK and RASK tend to fall as average sector length increases and Aegean's CASK has broadly reflected this in recent years. However, whereas its RASK slump in the period from 2008 to 2011 was more dramatic than could be explained just by increased sector lengths, a result of the financial crisis and increased LCC competition, the RASK increase of 2013 totally bucks the trend.

Aegean Airlines index of operating cost per ASK and total revenues per ASK (each indexed to 100 in 2008): 2006 to 2013

Aegean Airlines index of operating cost per ASK and total revenues per ASK (each indexed to 100 in 2008) against average sector length (km) for the period: 2006 to 2013

Further RASK growth may be more difficult - so CASK reduction must be an option

The RASK increase in 2013 appears to have been the result of strong demand for tourism in Greece from international passengers and was helped by Aegean's capacity restraint in 1H and the capacity reduction of Olympic in the domestic market. As competitor capacity grows, for example from LCCs such as Ryanair (both on international and domestic markets), it may be difficult to repeat this RASK performance in 2014.

This challenge is acknowledged by Aegean, which aims to develop ancillary revenues per passenger and to focus on further cost reduction (partly as a result of Olympic synergies). The carrier also aims to capitalise on its membership of the Star Alliance, presumably to maintain, or increase, load factor through feed from partners and thereby to support RASK.

Aegean plans to continue to prioritise expansion on international markets and says that the early indications for tourism demand in 2014 are "very positive". Twelve new international destinations will be added from Athens in 2014: Birmingham, Marseille, Nantes, Zurich, Hamburg, Copenhagen, Catania, Abu Dhabi, Beirut, Stockholm, Amman and Izmir. This is likely to lead to further increases in average sector length.

In 2014, the key will be to ensure that any RASK weakening is offset by CASK reduction, while managing the integration of Olympic in to the Group.