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After Alitalia’s board approved the second phase of its business plan on 22-Dec-2016, CEO Cramer Ball stressed the importance of achieving the support of its workforce. He said, “Everyone has to pull in the same direction to make Alitalia a viable, sustainable success story and help the airline achieve its ambition of long-term growth and profitability”. Alitalia suffered strike action from some flight crew in 2016.
Full details of the plan, which has received the support of Italy's government, have not yet been made public. Alitalia's network strategy includes further long haul growth and a reworking of its short haul operation, with an emphasis on feeding long haul via Rome and Milan. Other elements of the plan include cost-cutting, reduced headcount and possible changes to joint venture agreements. Details are to be presented to Alitalia’s workforce in Jan-2017.
Also on 22-Dec-2016, Alitalia's shareholders approved short-term funding and gave management 60 days to begin negotiations with key stakeholders - lessors, suppliers and distribution companies, in addition to trade unions. Alitalia needs their support for deep cost reduction measures, in order to win the long-term financing needed to secure the airline's future.
The UTair Aviation Group includes both a rotary wing (helicopter) division and a fixed wing (passenger airline) division. UTair's strategic goals for its passenger transportation division include maintaining third position and a market share of at least 10% in the domestic market; and a fleet modernisation programme through the purchase of new short and medium haul aircraft.
The passenger airline UTair Aviation achieved a 19% increase in passenger numbers in the first 11 months of 2016, after a period of capacity and traffic reduction and financial restructuring. The airline carried 5.5 million passengers in 2015, making it Russia's third biggest airline after Aeroflot and S7 Airlines, while the group carried 8.8 million passengers. UTair has orders to replace a significant proportion of its ageing fleet of aircraft (average age 19 years), but delivery dates are currently fluid.
Moscow Vnukovo is UTair's biggest airport, from where it serves mainly the domestic market. It is the biggest single airline by seats at Vnukovo, but it is outranked by the combined capacity of the Aeroflot Group's three airlines at the airport, Aeroflot, Pobeda and Rossiya. It also faces competition from Aeroflot and/or Pobeda on almost all of its biggest routes from Moscow.
Two years on from its Dec-2014 launch Aeroflot's LCC subsidiary Pobeda is firmly established as the fifth largest airline in Russia by seats, with a 6.8% share in the domestic market (week of 19-Dec-2016, source: OAG). Bucking the trend of declining traffic in the Russian market – which is being dragged down by falling international demand – Pobeda is growing rapidly.
Although still strongly domestically focused, the Moscow Vnukovo-based airline commenced international operations in Feb-2016 and will have launched 12 international routes during the course of 2016.
On a city pair basis, 23 of the 41 Pobeda routes in 2016 are not operated by other Aeroflot Group airlines. There are 17 Moscow routes (and one from Saint Petersburg) flown by both Pobeda and Aeroflot from different airports. An important part of the Aeroflot Group's multi-brand strategy, Pobeda is the only LCC in Russia and has stimulated demand among price-sensitive passengers in point-to-point markets.
On 20-Dec-2016 Flybe announced its first ever routes from London Heathrow and the appointment of a new chief executive. Europe's largest regional airline will launch Heathrow to Aberdeen and Edinburgh at the start of summer 2017. Former CityJet head, Christine Ourmieres-Widener, will become CEO of Flybe from 16-Jan-2017, replacing Saad Hammad, who left on 26-Oct-2016.
Flybe already operates to the two Scottish cities from London City in competition with British Airways. Its Heathrow turboprop services will compete directly with BA's narrowbody jets, and there is also competition from Ryanair and easyJet from other London airports on the city pairs. Flybe has previously baulked at Heathrow's high charges, but has now changed its mind.
Flybe's new Heathrow services will use slots previously used by Virgin Atlantic's Little Red on the same routes. Little Red failed to fill its aircraft and ceased operating after two years. Flybe will be hoping that its smaller aircraft and lower frequencies will be easier to fill. Extending its codeshare agreements with its long haul partners to include Heathrow routes would help. It will also do Flybe no harm that it already participates in the Avios loyalty scheme owned by IAG, the parent of Heathrow's largest airline British Airways.
A vote on 14-Dec-2016 by British Airways 'mixed fleet' cabin crew raises the real threat of strike action - and, as is often the case, in the lead up to a peak holiday period. This would be the first serious industrial action since strikes by cabin crew protesting at the 2010 introduction of mixed fleet crew. BA, and its parent IAG, have been praised by many observers (including CAPA) for their resolve in driving through important restructuring programmes in legacy airlines, while their European peers have fallen behind the field. A crucial part of this has been to generate labour productivity improvements, often in the face of union resistance.
British Airways has a good track record in improving the efficiency of its workforce, as measured by ASKs per employee. In 2015 it made its highest-ever operating profit margin, beating Europe's other major legacy airlines, and it looks likely to improve on this once again in 2016. However, it does not have a great record of lowering unit labour cost.
Moreover, BA is currently experiencing falling unit revenue. With help from lower fuel prices receding, cutting ex fuel unit cost will be vital if BA is to fight off the margin squeeze resulting from unit revenue weakness. Labour is a key element of ex fuel cost, so the cabin crew dispute is a test of BA's resolve.
A harsh truth for SAS is that improvements to its network and product, and its focus on Scandinavia's frequent travellers, have not isolated it from unit revenue weakness. Moreover, in spite of very creditable progress with unit cost reduction, it still has a high cost base. In FY2016 its operating margin started to turn down again. In addition to further targeted cost savings SAS is now considering further, more radical, changes to its production model.
In particular, it is assessing whether or not to establish operations outside Scandinavia for some of its European traffic. The European airline market includes a fast-growing and price-sensitive leisure segment, where SAS tries to compete against much lower cost operators that are not weighed down by Scandinavia's very high labour costs.
Even Scandinavia's most significant LCC, Norwegian, has established bases in the UK and Spain, and many other LCC competitors have bases across the continent. Indeed, it would seem that SAS, once an opponent of Norwegian's plans to use Ireland as a trans-Atlantic base in search of lower labour costs, has borrowed a page from its rival's book on how to re-write airline strategy.
Vueling's new CEO, Javier Sanchez-Prieto, is leading a programme ('Vueling NEXT') to improve its profitability, both through revenue enhancement and cost efficiency gains. Among other aims this hopes to reduce Vueling's high levels of seasonality, to raise aircraft utilisation and to improve labour productivity. Given ambitious financial targets by IAG – action is needed.
Part 1 of CAPA's analysis of Vueling examined its capacity growth and profitability trends since its acquisition by IAG in 2013. Vueling's operating margin and return on invested capital are on a downward trend, hence the new initiative to reverse these trends.
This second part of CAPA's analysis considers the profit improvement programme. During this programme Vueling's fleet will remain broadly flat to 2018, before resuming growth thereafter. Focus markets for Vueling are domestic Spain and Spain-Europe. It has strengths in these markets but faces growing competition from its lower-cost rival Ryanair, which has also been raising its service quality – closing the gap to Vueling's more premium positioning on the LCC spectrum.
Since the end of 2015 Vueling has slipped from being IAG's best performer on the key financial metric of return on invested capital to its worst performer for the four quarters ended 3Q2016. The group's LCC has suffered more than its sister airlines from disruption in Europe, caused by ATC strikes and terrorist activity.
However, since its acquisition by IAG in 2013 Vueling's revenue growth has not matched its capacity growth and unit costs have grown. The benefits of lower fuel prices have been dissipated by higher ex-fuel unit costs, including lower labour productivity. Vueling's new CEO, Javier Sanchez-Prieto, is now leading a programme ('Vueling NEXT') to improve its profitability.
Part 1 of this CAPA analysis of Vueling examines its capacity growth and profitability trends since becoming part of IAG. It also looks at the development of its RASK and CASK. Part two will highlight the seasonality in Vueling's schedule and look at the profit improvement programme.
CAPA's previous analysis of the 3Q2016 results of Europe's big three legacy airline groups highlighted a fall in their collective operating margin, after growth in 1H2016. This report shows that Europe's five leading LCCs, in aggregate, also suffered a fall in profit and margin in the quarter.
Three of the five – Ryanair, Norwegian and Wizz Air – improved their profit margin in the quarter, but easyJet's drop in margin was heavy enough to bring down the collective result. Pegasus' margin also declined.
Nevertheless, the LCC five remain collectively far more profitable than the legacy three. Moreover Europe's two most profitable airlines, Ryanair and Wizz Air, look set to increase their margin lead this year. Even easyJet, which has had a bad year by its standards, achieved a higher margin for calendar 9M2016 than the most profitable of the big three legacy groups, which was IAG.
The divergence of results in the European sector suggest that not all airlines are following the same cycle. However the collective margin decline for the continent's leading LCCs, and its major legacy airline groups, at least gives reason to question whether or not the cyclical upswing may have run its course.
In spite of challenging market conditions and falling profits, easyJet remains on the offensive in its fight for market share with legacy airlines. It is also making contingency plans to apply for an EU AOC to ensure continued intra-European traffic rights in the post-Brexit future.
easyJet's revenue per seat, pre-tax profit and return on capital employed all fell in FY2016 (year to Sep-2016), the first reversal since before CEO Dame Carolyn McCall took the helm in FY2010. In spite of lower fuel prices, easyJet could not lower its cost per seat fast enough to offset the drop in unit revenue. Load factor was just above flat at 91.6%, so the drop in revenue per seat was all price-related. A series of external events put pressure on pricing – including terrorism, ATC strikes and the UK's Brexit vote.
Some airlines might tighten their capacity growth in the face of weak pricing, but easyJet plans to accelerate its seat growth from 6% in FY2016 to 9% in FY2017. It has its sights on an opportunity to take share from legacy airlines in airports where it already has a strong market position.
IAG's Capital Markets Day on 4-Nov-2016 was the first since its formation in 2011 when it lowered any of its medium term financial targets. It cut its 2016-2020 average EBITDAR goal, in spite of adding in Aer Lingus for the first time. This followed two cuts to 2016 operating profit guidance during the course of this year, as a result of "a tough operating environment". It has been hit by adverse currency movements, mainly resulting from the UK's Brexit vote, in addition to ATC strikes and terrorist events.
To its credit, IAG has responded to the more challenging trading conditions by lowering its planned capacity growth and capital expenditure during its 2016-2020 strategic plan. These steps are necessary if it is to have a chance of meeting its ambitious goal to sustain a 15% return on invested capital. This target is unchanged, despite the lower profit outlook.
In 3Q2016, IAG's rolling four quarter return on capital fell, after rising more or less continuously since it began to target this measure in 2013. It has consistently been more profitable than either of its two main European legacy airline group rivals (Air France-KLM and Lufthansa). Nevertheless, the downward step highlights the challenge in meeting its own demanding target.
Ryanair and Fraport announced on 2-Nov-2016 that the Irish ultra-LCC will open its 85th base at Frankfurt Airport, Lufthansa's main hub. Ryanair will base two aircraft at the airport and launch four new leisure routes in Mar-2017. With a daily departure to each of Alicante, Faro, Malaga and Palma de Mallorca, it expects to attract 400,000 passengers pa.
Although Ryanair has been increasing its primary airport presence for some time, CEO Michael O'Leary had previously said that Frankfurt Airport was one of the few, alongside London Heathrow and Paris CDG, that Ryanair would not serve. Frankfurt was seen not only as too expensive, but also as too congested for Ryanair's short turnaround times. Details of Ryanair's agreement with Frankfurt Airport have not been disclosed, but it is likely that the airline has secured favourable terms in return for traffic growth targets.
Ryanair's move into Frankfurt is relatively small compared with its operations in Berlin Schoenefeld and Cologne/Bonn, but this development supports its growth ambitions in Germany. Ryanair's average revenue per passenger is half that of Lufthansa's network airlines. Its move increases the competitive pressure on Germany's national airline.