03-Apr-2016 7:59 PM

Aegean Airlines: no longer Europe's highest-margin FSC. Competition and the economy weigh in

Analysis

After two years in which the Aegean Airlines Group had the highest operating margin among European full service airlines, its crown slipped in 2015. Its financial results for the year show a fall in operating profit and in net profit.

Double-digit capacity growth in a very weak macroeconomic environment, and in the face of strong competition led by Ryanair, put downward pressure on unit revenue. Aegean was unable to cut its total unit cost enough to offset falling RASK, in spite of lower fuel prices and some progress with ex fuel unit cost reduction, including improved labour productivity.

Nevertheless, although Aegean's operating margin slipped it remained fairly healthy at very close to 10%. Moreover, given the very challenging conditions faced in 2015, the group did well to limit the decline in the way that it managed. In 2016, slower capacity growth may ease downward pressure on unit revenue and the bottom line should benefit further from lower fuel prices post hedging, but Aegean will be focusing on reducing ex fuel unit cost.

Summary

Aegean Airlines Group's operating profit and net profit fell in 2015 due to double-digit capacity growth and strong competition.
Despite the decline, Aegean's operating margin remained healthy at close to 10%.
The acquisition of Olympic Air in 2013 has been successfully integrated, with revenue, operating profit, and net profit showing significant growth since then.
Aegean's liquidity is strong, with a net cash increase and a year-end cash balance equivalent to 85 days of revenue.
Passenger numbers increased by 15.2% in 2015, driven by international markets, which accounted for more than half of the group's traffic for the first time.
Revenue grew by 7.8% in 2015, slower than the growth in capacity, reflecting the weak economic backdrop in Greece and intense competition in the airline market.

Operating profit falls by 8%: Aegean loses title as Europe's most profitable FSC

In 2014 the Aegean Airlines Group's net profit fell by 15% to EUR68 million. Its operating profit fell by 8% to EUR97 million, in spite of revenue growth of 8% to EUR983 million. The group's operating margin fell by 1.8ppts to 9.9%.

In spite of the fall in profits, Aegean's board proposes a dividend maintained at EUR0.70 per share.

Aegean Airlines Group financial highlights 2014 and 2015

EUR million except where stated	2014	2015	Change
Revenue	911.8	983.0	7.8%
Other operating income	9.7	18.8	93.8%
EBITDAR	209.5	217.3	3.7%
Operating profit, EBIT	106.2	97.2	-8.5%
Operating margin %	11.6	9.9	-1.8ppts
Net profit	80.4	68.4	-14.9%
Pax million	10.1	11.6	15.2%
ASK million	12,194	14,668	20.3%
Load factor*	78.6	76.9	-1.7ppts
RASK EUR cent	7.48	6.70	-10.4%
CASK** EUR cent	6.69	6.17	-7.8%
CASK** ex fuel EUR cent	4.78	4.69	-1.8%

In both 2013 and 2014 the Aegean group reported the highest operating margin among European full service airlines. However, Aegean's crown as the most profitable European FSC slipped in 2015. This title was claimed by Icelandair, with an operating margin of 11.9%, very fractionally ahead of British Airways.

Aegean's margin places it in fifth place among FSCs and in eighth place overall among European listed airlines and their subsidiaries. Its 9.9% margin is still a fairly healthy level of profitability, but its fall in margin contrasts with margin improvement for every airline and group ranked ahead of it in 2015.

Operating margins for listed European airline companies and subsidiaries (% of revenue) 2014 and 2015

Although - a good record of profit since Olympic Air acquisition in 2013

Although its operating margin dipped in 2015 relative to 2014, the Aegean Group has demonstrated that its 2013 acquisition of Olympic Air has been successfully integrated. Compared with 2013 proforma group figures (which show 2013 as if Olympic had been consolidated for the full year), Aegean's 2015 revenue was up by 16%, whereas its operating profit was up by 27% and its net profit by 30%.

Moreover, its 2015 results put further distance between Aegean and its loss-making years of 2010 to 2012.

Through a combination of organic growth and the Olympic acquisition, the group has expanded dramatically over the past decade. Compared with 2005, Aegean's 2015 revenue was up nearly three times (+189%), its operating profit increased almost fourfold (+283%) and its net profit more than quintupled (+407)%.

Aegean Airlines revenue, net profit and operating profit (EUR million) 2004 to 2015

Aegean has good liquidity

The Aegean group's net cash (the surplus of cash over debt) increased from EUR160 million to EUR174 million. However, adjusted net debt (adding operating leases capitalised at eight times annual rental payments to debt) increased from EUR566 million to EUR675 million.

Aegean's 2015 year-end cash balance of EUR228 million (including restricted cash and financial assets held for sale) was up by EUR11 million over the 12M and was equivalent to 85 days of revenue.

Aegean Airlines Group development of cash and net debt 2004-2015

ASKs up 20.3%; load factor slips

In 2015, the Aegean Airlines group increased ASKs by 20.3%, but RPK growth fell slightly short, growing by only 17.7%.

Load factor (total RPK divided by total ASK) dipped by 1.7ppts to 76.9% in 2015, the second successive decline in load factor and taking it well below industry average levels, broadly 80%.

Aegean Airlines Group development of passenger numbers (million) and load factor* (%) 2002-2015

Passenger numbers up 15.2%, driven by international markets

Total passenger numbers increased by 15.2% to 11.6 million, outpacing the 8% growth in the Greek market as a whole. International passenger growth outpaced this, growing at 23.6% to account for more than half of the group's traffic for the first time. Domestic passenger numbers grew by 7.3% to 5.6 million.

Aegean Airlines Group passenger numbers (million) 2014 and 2015

	2014	2015	Change	% of 2015 passengers
Domestic	5.2	5.6	7.3%	48.3%
All international	4.9	6.0	23.6%	51.7%
Total	10.1	11.6	15.2%	100.0%

Aegean's focus on international traffic growth, particularly at its main Athens base, took its share of international passengers at Greece's largest airport up to 35% in 2015, an increase of 10ppts since 2012.

This has mainly been driven by inbound tourism, which has grown faster in Athens than in the rest of Greece. According to data presented by Aegean, total tourist arrivals by air in Greece were flat in 2015, but increased by 24% in Athens.

Athens International Airport: international passenger numbers (millions) and Aegean Airlines share 2012-2015

Revenue up 7.8%

Revenue growth of 7.8% was slower than growth in ASKs and passenger numbers, reflecting both the weak economic backdrop in Greece and the highly competitive nature of the airline market.

Scheduled passenger revenue increased by 10.5%, while charter revenue fell by 25.5%. According to CAPA calculations, total revenue per ASK (RASK) fell by 10.4%.

Aegean Airlines Group revenues (EUR million) 2014 and 2015

EUR million	2014	2015	Change	% of 2015 revenue
Scheduled	748.6	827.4	10.5%	84.2%
Charter	61.4	45.7	-25.5%	4.7%
Other	101.9	109.8	7.8%	11.2%
Total	911.9	983.0	7.8%	100.0%

Costs higher by 10.9%

Total operating costs increased by 10.9%, which was less than the increase in ASKs but faster than the growth in revenue. Fuel costs, the largest category, fell by 7.1% despite capacity growth, thanks to lower market prices.

Ex fuel costs increased by 18.1%, which was faster than the ASK capacity increase. To some extent, this was due to items that are largely outside management control, most notably airport charges (+35.6%) and navigation charges (+24.5%). However, maintenance costs (+25.8%) and distribution costs (+20.6%) were also up sharply.

Labour costs, the second highest category, grew by 8.9%, slower than ASK growth and slower than the 17.9% increase in head count.

According to CAPA calculations based on cost at the EBIT level, unit cost (cost per ASK, CASK) fell by 7.8%, less than the drop in RASK. Ex fuel CASK fell by 1.6%.

On a conference call with analysts to discuss the 2015 results, Aegean management admitted that it was now more difficult to make further cost savings, but said that distribution and maintenance costs would be areas of focus.

Distribution cost savings are anticipated from an increase in direct sales and reduced GDS distribution. In particular, Aegean is to use the Olympic brand in the domestic market, where sales will no longer be available through the GDSs.

Aegean Airlines operating costs (EUR million) 2014 and 2015

	2014	2015	Change	% of 2015 costs
Fuel	232.8	216.3	-7.1%	23.9%
Labour	100.5	109.4	8.9%	12.1%
Distribution/marketing	73.5	88.4	20.3%	9.8%
Maintenance	77.6	97.6	25.8%	10.8%
Navigation	53.9	67.1	24.5%	7.4%
Handling	51.5	60.4	17.3%	6.7%
Airport charges	37.4	50.7	35.6%	5.6%
Catering	21.1	24.4	15.6%	2.7%
Leases	90.7	106.1	17.0%	11.7%
Depreciation	12.6	14.0	11.1%	1.5%
Other	63.8	70.2	10.0%	7.8%
Total	815.4	904.6	10.9%	100.0%
Total ex fuel	582.6	688.3	18.1%	76.1%

2016 capacity growth to slow versus 2015

In 2016, Aegean plans to add three aircraft to the group fleet, fewer than the eight added in 2015. It will increase seat capacity by 1.1 million to 16.2 million - growth of 7%, a slower rate than in 2015. Growth will be focused on international routes, of which Aegean plans to add 14, while the number of domestic routes will remain unchanged.

Speaking on the FY2015 conference call management said that 80% of the group's growth in 2016 would be at Athens, with Heraklion and Rhodes taking the balance of the capacity increase. Bases at Kos and Corfu have been discontinued. Aegean is optimistic that Greek tourism trends will be positive in 2016 and anticipates that Russian passengers could come back since other destinations are not open to them.

Management also referred to indications of demand from elsewhere, but added that this had faded somewhat in the past two weeks following the attacks in Brussels.

Aegean's international capacity at Athens will grow at a double-digit rate in 2016, while management expects competitor capacity in this market to grow at mid-single-digit rates. This is around half the competitor growth rate of 2015, making for a more benign market environment this year, and Aegean expects a further market share increase in the international market.

Domestic competition, led by Ryanair, is set to remain fierce and Aegean anticipates a further fall in domestic market share in 2016. Moreover, the Greek consumer remains "challenged by unemployment and increasing taxes", according to Aegean management.

Aegean Airlines Group 2016 expansion plans

2015 was a good effort in a very challenging environment

The Aegean Airlines group's results in 2015 were highly creditable in spite of the decline in operating profit and operating margin. It faced significant challenges from the Greek macroeconomic and political environment, including very weak GDP and the imposition of capital controls. On top of these issues, it faced very strong competition from Ryanair in both the international and the domestic markets. In addition, Aegean had another year of double-digit capacity growth.

Little wonder that RASK fell. Aegean's priority in such an environment must be to ensure that CASK falls at a greater rate. In spite of lower fuel prices (Aegean's average fuel CASK fell by 22.8%), it was unable to do this in 2015.

In 2016, Aegean's slower rate of capacity growth may help to ease downward pressure on unit revenue. Slower competitor growth in Athens should also help in this regard. There should also be further help in CASK reduction from fuel prices. Nevertheless, ex fuel CASK reduction should remain a priority.