19-Jan-2016 6:50 PM

Austrian Airlines: Lufthansa Group's poor relation may have improved revenue & profit growth in 2015

Analysis

In 2015, Austrian Airlines' passenger numbers fell for the third successive year, to the same level as in 2006. Its ASKs fell during the global financial crisis and have changed little since. Revenue looks likely to have grown in 2015, but is also well below its pre-crisis levels. With only three years of positive operating profit in the decade, Austrian has consistently been the least profitable Lufthansa Group airline.

One of Austrian's big challenges has been to hold on to unit revenue increases when they have occurred. Moreover, its cost base is among the highest in Europe for an airline with its relatively short average trip length. Its short/medium haul focus brings significant competition with LCCs, whose share of the Austrian market has grown over the past decade.

Austrian can take some heart from an improved profit margin in 9M2015, which should presage a stronger FY2015 result (to be published by Lufthansa on 17-Mar-2016). In addition, the Group has established a base for its growing LCC Eurowings at Austrian's hub in Vienna, the no-frills subsidiary's only base outside Germany.

Summary

Austrian Airlines' passenger numbers have fallen for three consecutive years, reaching the same level as in 2006.
Revenue has remained below pre-crisis levels, with a decline of 18.7% from 2006 to 2014.
Austrian Airlines has struggled to maintain unit revenue increases and has one of the highest cost bases in Europe for an airline with its average trip length.
The airline has only had three years of operating profit in the past decade and has consistently been the least profitable airline in the Lufthansa Group.
Austrian Airlines' load factor dipped in 2015, partly due to geopolitical events in the Middle East, Russia, and Ukraine.
Low-cost carriers (LCCs) have increased their market share in Austria, posing significant competition for Austrian Airlines.

Austrian Airlines' passenger numbers fall for three straight years, back to the 2006 level in 2015

Austrian Airlines carried 10.8 million passengers in 2015, down 3.0% on 2014 and the third successive year of falling traffic. This 2015 total was 5.5% below Austrian's 2012 figure of 11.5 million passengers, and the same number as in 2006.

After the global financial crisis, traffic did bounce back quickly from the 7.2% drop in numbers that Austrian suffered in 2009, with a 9.6% increase in 2010.

Nevertheless, Austrian has effectively had a decade of stagnation in passenger numbers.

Austrian Airlines passenger numbers (million, left hand axis) and revenue (EUR million, right hand axis) 2005 to 2015*

Revenue remains below pre-crisis levels

Austrian's FY2015 financial results have not yet been reported, but its revenue performance over the past decade has been even weaker than its performance on passenger numbers. From 2006 to 2014, its total operating revenue fell by 18.7%.

At the 9M2015 stage, it had resumed modest growth in total operating revenue, at a rate of 3.4% year on year. If this rate continued for the full year, this would still mean that its total operating revenue for 2015 was down 16.0% on its 2006 level.

The financial crisis caused a significant slump in Austrian's revenue per passenger, from which it had not recovered by 2014, although 9M2015 demonstrated the start of something more positive in this respect.

ASKs almost flat since 2009; load factor has grown, but dipped in 2015

In ASK terms, the picture is slightly different. Austrian maintained virtually the same level of ASKs in 2015 as in 2014 (they were reduced by just 0.1% in 2015), and this level has been kept at a similar level since 2009. ASKs in 2015 were only 0.9% higher than in 2009, the year that marked the low point of the global financial crisis, but were 9.4% below the pre-crisis peak of 2006.

Austrian's passenger load factor dipped in 2015, falling 0.9 ppts to 78.0%, still less than the 80.2% recorded by parent Lufthansa including Eurowings, and the 82.8% of sister company SWISS. This dip was partly attributable to the geopolitical events in the Middle East, Russia and Ukraine, which hit demand - RPKs fell by 1.3% in 2015.

However, Austrian's 2015 load factor was still 4.2ppts better than its 2011 level of 73.8%. With the exception of the global financial crisis period and 2011, Austrian's load factor had been on an upward trend since 2005. It will be keen to resume this trend in 2016 after the dip in 2015.

Austrian Airlines development of ASK (million, left hand axis) and load factor (%, right hand axis) 2005 to 2015

Only three years of operating profit between 2004-2014, but 2015 should be better

Austrian's operating profit has broadly followed the cycle of the industry, but at lower levels than the global airline average each year. Its pre-crisis operating margin peaked at 2.2% in 2007, when the global average was 3.9% and the Lufthansa Group made 6.1%.

At the bottom of the cycle, in 2009, Austrian's operating margin fell to -4.6%, compared with a global margin of 0.4% (the global margin had fallen to -0.2% in 2008), while the Lufthansa Group maintained a positive margin of 0.6%.

Austrian remained in negative operating result territory until 2013, when it reached a positive margin of 1.1%. In 2014 the margin fell to just 0.5%, but it was back on a recovery path at 9M2015, when it was 3.6% (based on adjusted EBIT, which is a slightly different measure from the operating result previously used by the Lufthansa Group).

In spite of the improvement in 9M2015, Austrian remained the least profitable airline in the Lufthansa Group, as measured by adjusted EBIT margin, and the second least profitable business of all the Group's units. When Lufthansa announced its 9M results in Oct-2015, it said that it expected Austrian's restructuring programme to improve earnings in 2015, with a "significant increase" in adjusted EBIT expected.

Austrian Airlines operating profit* (EUR million, left hand axis) and operating margin (% of revenues, right hand axis) 2005 to 2014, and 9M2014 & 9M2015

Adjusted EBIT margin* for Lufthansa Group businesses 9M2014 & 9M2015

RASK increases have been hard to maintain

The chart below shows the development of AUA's unit cost (CASK) and unit revenue (RASK) from 2005 to 2014, both indexed to 100 in 2005 and calculated by CAPA. Note that our RASK calculation is based on total operating income.

The recovery from 2005's operating loss was the result of RASK rising faster than CASK, but the subsequent fall back into loss in 2009 came because Austrian could not cut unit cost fast enough to compensate for the fall in unit revenue. It returned to profit in 2013 through the rare combination of stable RASK increase coupled with a CASK decline. In 2014, CASK fell (by 4.3%), but RASK fell more quickly (by 5.0%) and so the margin narrowed.

The chart below suggests that AUA has, in general, been able to pass on cost increases (only just), but has typically not been able to hold on to price increases when costs have fallen.

Austrian Airlines: index of total revenue per available seat kilometre (RASK) and cost per available seat kilometre (CASK) 2005 to 2014 (EUR data, indexed to 100 in 2005)

9M2015 results: rising RASK and falling CASK

In 9M2015, Austrian enjoyed the very rare combination of a decrease in CASK (-1.2%) and an increase in RASK (+3.0%), helped by other operating income, without which it was up 0.6%. The cut in CASK was entirely due to a 13.4% reduction in fuel CASK. Ex fuel CASK grew by 2.6%, similar to the increase in RASK, with labour CASK up 1.3%, and other CASK up 3.0%.

The increase in 9M RASK came in spite of a 1.1ppt fall in load factor, thanks to growing yield. Lufthansa's 9M2015 statement referred to the positive impact on Austrian's yield of "significant adjustments to its capacity and marketing activities". It introduced new fare structures, with a more unbundled approach.

A challenge for 2016 will be to maintain yield growth into a second year of falling fuel prices.

Austrian Airlines RASK and CASK (EUR cent) 2011 to 2014 and 9M2014 & 9M2015

Labour productivity improvements from 2011 to 2014, but labour CASK grew in 9M2015

The small year on year increase in labour CASK in 9M2015 reversed what had been a broadly falling trend (although there was an increase in 2013). This led to an improved labour productivity measure from 2011 to 2014. Labour CASK in 2014 was 4.5% below its 2011 level.

Austrian has been reducing the size of its workforce over a number of years, and average headcount in 2014 was 10.5% below its 2011 level, in spite of a broadly stable level of ASKs. Its labour cost in EUR was also down, by 7.6%, over the same period. Employee cost per employee rose from 2011 to 2015, but ASK per employee improved by 8.2%. Revenue per employee also improved, by 11.8%, over this period.

The reduction in the Austrian Airlines workforce since 2011 has been matched to quite a degree by an increase at sister airline SWISS. This signals the relative importance of the two Lufthansa subsidiaries to the group over this period.

In 9M2015 there was a further reduction in the workforce, and a further improvement in ASK per employee. However, an increase in labour cost per employee more than offset this, driving a 1.3% increase in labour CASK. Revenue per employee continued to grow.

Austrian Airlines labour productivity measures 2011 to 2014

Group labour productivity	2011	2012	2013	2014	Change 2014 vs 2013	Change 2014 vs 2011	9M2014	9M2015	9M2015 vs 9M2014
Ave headcount*	6,860	6,507	6,222	6,138	-1.4%	-10.5%	6,205	6,027	-2.9%
Total labour cost EUR million	408	349	389	377	-3.1%	-7.6%	283	288	1.8%
Employee cost per employee (EUR)	59,475	53,639	62,520	61,426	-1.8%	3.3%	45,608	47,787	4.8%
ASK per employee	3,517	3,559	3,621	3,803	5.0%	8.2%	2,863	2,961	3.4%
Employee costs per ASK (EUR c)	1.69	1.51	1.73	1.62	-6.5%	-4.5%	1.59	1.61	1.3%
Revenue per employee EUR	315,306	347,191	353,263	352,587	-0.2%	11.8%	265,270	282,408	6.5%

Austrian is still among Europe's high CASK airlines

In spite of a 9.6% reduction in its CASK from 2008 to 2014, Austrian was still among Europe's higher CASK airlines in 2014, taking account of its average trip length. According to the CAPA CASK database, Austrian's unit cost in 2014 was around 75% higher than an LCC with a similar average trip length. Even allowing for costs associated with hubbing and business class, that is a massive cost differential.

With 84% of its passengers flying on European routes in 2015, Austrian's network is dominated by the short/medium haul routes that are increasingly the domain of LCCs. As with other smaller legacy airlines, it has neither the cost base of the LCCs, nor the long haul network of the bigger legacy airlines.

Of course, Austrian has access to the long haul networks of the Lufthansa Group, but these are facing growing competition from foreign airlines, such as the Gulf carriers. As illustrated by the week of 30-May-2016, the combined seat capacity of Emirates and Qatar Airways will be 37% higher in summer 2016 than it was three years earlier.

Cost per available seat kilometre (CASK, USc) for Austrian Airlines and other European airlines 2014

Lufthansa's Eurowings now has a base in Vienna. LCC competition grows in Austria

Low cost airlines have increased their share of seats to/from Austria over the past decade, up from 13% in 2005 to 22% in 2015. This share had not grown much since 2008, although it increased in each of 2014 and 2015.

In the first two weeks of 2016 it has grown to almost 26%, although this partly reflects steps taken by Lufthansa to expand its LCC Eurowings in Vienna.

This is evidence of one strategy of the Lufthansa Group's development of Eurowings (gradually replacing its Germanwings subsidiary) - to combat LCC competition in Germany and elsewhere in Europe.

LCC capacity share (%) of total seats in Austria: 2003 to 2015 Jan-Dec*

Austrian is, by some distance, the largest airline in Austria, with almost 42% of seats in summer 2016 (based on OAG schedules data for the week of 30-May-2016). However, this share has fallen from 45% three years earlier. The combined share of all Lufthansa Group airlines is 54%, down from 57% three years earlier.

This is in spite of an increase in the share held by Eurowings/Germanwings from 3% to 5%, which is mainly a switch from the Lufthansa brand. Vienna is now the principal Eurowings base outside Germany. The LCC has launched three new routes from Vienna this winter, and plans a further two in the summer 2016 schedule.

The airberlin Group (airberlin plus its Austrian LCC subsidiary NIKI) has borne a dip in its share from 21% to 20% over the same period, reflecting a fall in NIKI's share. Europe's second largest LCC, easyJet, has almost quadrupled its seat numbers in Austria over the past three years, taking it to the number six rank in the country, from number 18 in summer 2013.

Top ten airlines in Austria by seats 30-May-2016 to 5-Jun-2016

Rank	Airline	Share of seats summer 2016*	Share of seats summer 2013**	Change in share of seats v summer 2013 (ppts)**	Change in number of seats v summer 2013**
1	Austrian Airlines	41.5%	45.0%	-3.4	7%
2	NIKI	12.5%	14.0%	-1.5	3%
3	airberlin*	7.3%	7.0%	0.4	21%
4	Lufthansa*	6.6%	8.2%	-1.6	-7%
5	Eurowings/Germanwings*	4.9%	3.0%	1.9	91%
6	easyJet*	2.4%	0.6%	1.8	362%
7	Turkish Airlines*	2.2%	2.1%	0.1	22%
8	British Airways*	1.9%	1.5%	0.4	48%
9	Emirates Airline*	1.3%	1.2%	0.1	26%
10	SWISS*	1.2%	1.1%	0.1	27%

Eurowings in Vienna may help the Lufthansa Group, but could challenge Austrian

After a period of extended negotiations over labour terms and conditions, including the temporary transfer of operations into subsidiary Tyrolean Airways, it appears that Austrian has found a clearer path through its industrial relations challenges. Tyrolean was merged with Austrian in Apr-2015.

See related reports:

Austrian Airlines: questions raised over Tyrolean transfer and Austrian's long-haul future

Austrian Airlines: a perennial loss-maker undergoing radical restructuring

Nevertheless, it is clear from the Lufthansa Group's cabin crew hiring plan for 2016 that Austrian is not yet regarded by Lufthansa as a reliable growth vehicle. Eurowings is favoured, the Group member that Lufthansa claims to have unit costs similar to those of other European LCCs.

As noted above, Austrian's workforce continues to shrink, setting it apart from the rest of the Lufthansa airlines. Profit improvement in 2015 will be very good news for Austrian, but it will have to work very hard to maintain this trend. Likely lower fuel costs in 2016 should help, but this could eventually also lead to downward yield pressure, particularly as the market becomes ever more accustomed to LCC-style product and pricing.

Eurowings may help to defend the Lufthansa Group in Vienna, but, if successful, it also has the potential to become a growing challenge to Austrian in its own backyard. Further cost efficiency gains will be vital for Austrian.