Both Finnair and TAP are based in peripheral corners of Europe: Finnair in the extreme northeast and TAP in the southwest. Both are based in countries with relatively small populations, but they have developed networks that capitalise on their geographic location to carry connecting traffic from across Europe and elsewhere to long haul destinations in other continents.
TAP's main long haul market is Upper South America (primarily Brazil), but it also has a secondary long haul niche in Africa. Finnair's main long haul market is Northeast Asia, with an additional presence in South and Southeast Asia. Both also operate to the US. On short haul, LCC competition has been a bigger threat to TAP than to Finnair, but cost savings are important to both.
TAP and Finnair have similar traffic volumes, unit costs and average trip lengths. Moreover, both have struggled to generate sustainable profitability. This report compares and contrasts Europe's two leading independent exponents of the location based long haul niche strategy. Both are set to accelerate their long haul growth.
For Latvia's national airline, 2016 was a pivotal year. Riga-based airBaltic completed a multi year restructuring programme, increased its passenger numbers for the first time in five years, secured a capital increase and a private investor, and became the launch customer for the Bombardier CS300. On 28-Mar-2016 it further celebrated its successes by announcing a return to positive EBIT, alongside a net profit, for last year.
It has achieved its turnaround in the face of strong competition from foreign LCCs, justifying its positioning as a "hybrid LCC". Data provided to CAPA confirm that its unit cost level is also broadly consistent with the LCC tag. It is now seeking further investment from a strategic investor – preferably another airline. It also faces a decision about the replacement of its Dash 8 turboprop fleet.
AirBaltic CEO Martin Gauss told CAPA that the airline plans for passenger growth to accelerate from 12% in the past year to 16% in 2017, taking traffic levels back above 3 million passengers. For an airline based in a country inhabited by only 2 million people, this suggests that airBaltic has been making some judicious network decisions.
In 2017 the Aegean Airlines Group will make its first cut in seat capacity and fleet numbers since 2012. This follows three years of rapid expansion by the group since its Olympic Air acquisition in 2013. Olympic's all turboprop fleet focuses on the domestic market but also helps to feed Aegean's international network, particularly through its Athens hub. Cuts will focus on the domestic market.
Aegean will also make an important longer term fleet decision in 2017, or early 2018. The majority of its aircraft leases will need to be replaced between 2019 and 2023, and it is weighing the options. Aegean currently operates Airbus narrowbodies, but will consider the Boeing 737MAX in addition to the A320neo family.
Aegean's last capacity cut was in 2012, the end of a four year period of losses when Greece was in a deep multi year recession. Since then it has made healthy profits, but while profitable its operating margin fell in 2016 for the second successive year. Greece has experienced rapid capacity growth from LCCs, led by Ryanair. A decline in Aegean's unit revenue over three years has now prompted a pause for what its Executive Vice Chairman has called "consolidation and readjustment".
Mexico’s third largest airline, Interjet, recorded a surge in international passengers during 2016, reflecting the company’s desire to capitalise on a loosened bilateral agreement between the US and Mexico that eliminated restrictions on certain routes between the two countries. Interjet added several new routes to the US in 2016, upping competition with its Mexican rivals and the US airlines.
Based on Interjet’s aircraft delivery schedule and forward looking data, the airline’s capacity is set to grow at a healthy pace in 2017 as it absorbs new route launches from 2016 and expands its fleet. The airline logged 18.3% capacity growth in 2016.
Interjet is undertaking a significant US expansion as changing political tides are creating uncertainty about future travel patterns between Mexico and the US. Interjet asserts that business travel demand on its largest international route – Mexico City to New York JFK – remains robust, and the airline is expanding frequencies on the route.
But Mexico-US relations remain fragile in the light of uneasiness about changing trade pacts, and the heightened rhetoric over construction of a border wall between the two countries that was a hallmark of (now) President’s Trump campaign.
On 15-Mar-2017 Alitalia’s Board of Directors approved yet another turnaround plan. After losses throughout this century and yet another postponement of Alitalia's planned return to profit, this time pushed back from 2017 to 2019, each successive plan becomes more vital to its survival.
Alitalia's latest plan envisages revenue growth of 30% and cost reductions totalling EUR1 billion by 2019. It includes narrowbody fleet cuts, offset by seat densification, load factor gains and improved utilisation. It plans modest widebody growth, with expansion of capacity to the Americas in particular.
A major focus is to improve Alitalia's competitiveness on short/medium haul, which is increasingly dominated by LCCs, and which is vital to feed its long haul. All the usual features of becoming more competitive versus LCCs are in the plan: lower unit costs, unbundling and a simplified fare structure as a result of headcount reductions and other savings in operating costs.
Labour productivity improvement remains crucial to the plan's success. The plan’s funding, and Alitalia's future growth, will be subject to trade union agreement to a new collective agreement and headcount reductions. However, the immediate union response was to call a strike after management presented the plan to employees. Surely this has to be the last chance.
The Lufthansa Group's juggling act continues to impress with the sheer number of balls that it has sought to keep in the air over the past year.
Striving for labour productivity improvements in its mainline operations, while also attempting to minimise industrial unrest; expanding its Eurowings low cost brand through organic growth, while also integrating the acquisition of Brussels Airlines and the wet lease of aircraft from airberlin; facing the growing threat of Ryanair's entry into its biggest hub at Frankfurt, while seeking to maintain a good relationship with the airport's owner Fraport; keeping positive momentum in its financial performance after earning more than its cost of capital in 2014-2016, while the global cycle may have reached a peak.
In the same week as reporting solid, if unspectacular, financial results for 2016, Lufthansa has achieved a break through agreement with its pilots over pay and conditions. As a strategic tool, Eurowings helped it to reach this agreement, but the LCC subsidiary now needs to become financially successful.
Later in Mar-2017, Ryanair will start its first four Frankfurt routes, to which it will add 20 more next winter. Eurowings will need to be part of Lufthansa's response to this growing competitive threat.
Ukraine: traffic recovery prompts Ryanair to join Wizz Air in LCC growth. Ukraine Int'l also expands
Two announcements by leading LCCs in quick succession may mark a significant development in Ukraine's aviation market. One came on 13-Mar-2016 from Wizz Air, the largest low cost airline in Eastern/Central Europe; the other on 15-Mar-2016 from Ryanair, the largest LCC (and largest airline) in all Europe.
Both expect opportunity in Ukraine's very low levels of air travel and low LCC seat share. Wizz Air, already Ukraine's leading low cost airline, will add four more new routes in summer 2017, to the four previously announced. Ryanair will enter Ukraine with 11 routes, adding competitive tension to the emerging low fares market there. The battle between the two for supremacy in Eastern/Central Europe opens up a new front.
Meanwhile, Ukraine's air traffic levels are enjoying a recovery from the slump of 2014 and 2015 caused by major geopolitical disruption and a severe recession. Passenger numbers jumped 21% in 2016.
The country's flag carrier and biggest airline, Ukraine International Airlines, has taken part in the traffic growth, but will need to ensure it can do this profitably after a period of losses. Risks remain, but the conditions are in place for further growth in Ukraine's air traffic.
Brazil’s largest domestic airline, Gol, is maintaining a cautious outlook for 2017 as concerns about capacity additions by Azul and Avianca Brazil create an overhang for a recovery in the country’s domestic market. Gol and its main competitor LATAM Airlines Brazil have maintained a rational supply during the last couple of years, but forward looking schedules for 2017 show double digit ASK growth for Azul and Avianca Brazil year-on-year in early May-2017.
Gol made progress in unit revenue and yield recovery in 2016, but remains concerned about the effects of competitive capacity growth on fares, and ultimately yields. The airline is forecasting slower yield growth in 2017, and is warning a lack of industry capacity discipline could create additional yield pressure. Gol plans to keep its own system capacity in check for 2017, with projections of flat growth to a 2% decrease as its fleet shrinks, before growing in 2018 when the airline takes first deliveries of its 737 Max jets.
Although the corporate market within Brazil remains in tenuous shape, Gol believes it has expanded its share among business travellers – driven in part by network changes it adopted in 2016 to make schedules more attractive to corporate customers. However, the size of Brazil’s corporate travel market remains stagnant, and predicting expansion of business travel remains difficult.
Since adopting its strategy of rapid growth, driven by capturing global connecting traffic flows via its Istanbul Ataturk hub, Turkish Airlines (THY) has expanded its capacity in ASKs at double digit rates for 13 consecutive years. However, in 2016 it plans ASK growth of only approximately 3%, with cuts in the winter 2016/2017 season. Moreover, its long haul capacity will be almost flat in 2017, and it seems probable that it will not repeat its habitual increase in the number of passengers transferring between international flights this year.
The prompt for this unprecedented change in THY's growth path was a slump into loss in 2016, also unprecedented – at least, since the airline adopted its connecting strategy in 2004. This loss was itself the result of a slump in demand for air travel to/from Turkey, coupled with overexpansion. The consequent slide in unit revenue could not be mitigated by a matching cut in unit cost, in spite of lower fuel prices.
Recent management changes at THY raise the possibility of a new approach, but the airline cannot hide its pride over its history of growth and market share gains. It will need to balance this against the imperative to restore profitability.
Panama’s Copa Airlines is planning markedly increased capacity year-on-year in 2017 as demand patterns in Latin America continue to build on strength that began to emerge in 2H2016. That followed two years of economic contraction in the region. Most of Copa’s growth in 2017 stems from higher utilisation, given that its fleet is expanding by just a single aircraft during the year. The airline also plans to add back, in the lower season, the capacity that it cut in 2016 to adjust to Latin America’s weakened supply demand scenario.
Copa’s outlook is based on its determination that demand is holding steady in Latin America, and it is joining other airlines in the region in expanding capacity as a slow economic recovery begins to take effect. Its approach, that there is strengthening demand, stretches broadly across its network, even in Brazil, whose deep economic recession drove Latin America’s overall two year long economic contraction.
Copa has no concerns about its fellow Star Alliance partners Avianca and United potentially deepening their partnership through a proposed equity stake by United in Avianca. Although Copa has not publicly confirmed that it courted Avianca during its evaluation process for a strategic partner, the airline now believes United is the best partner for Avianca.
Pegasus fell into loss in 2016, extending an unbroken trend of falling operating margins from the peak in the year of its stock market flotation in 2013. A series of geopolitical and terrorist events in Turkey weighed on market demand, leading to a drop in traffic in 2016.
Against this difficult backdrop, Pegasus slowed its expansion to single digits after years of double digit growth, but this remained ambitious in a falling market. In addition, its fleet grew faster than its traffic, piling on cost that did not generate sufficient revenue. It is now wet leasing aircraft to other airlines and deferring some new deliveries.
Pegasus' capacity growth is set to slow further in 2017, but it still looks fairly aggressive in a market that is again falling (according to OAG data). An increased focus on cost management may bring down ex fuel unit cost, but against this are rising fuel prices. Pegasus is likely to find a return to break even in 2017 to be a real challenge. In 2013 its margin was similar to those of its fellow ultra LCCs Ryanair and Wizz Air, but it has followed a worryingly divergent path since then.
In recent years, the Aeroflot Group has undergone a significant transformation. From 2009 to 2016 the group's passenger numbers increased fourfold, its load factor improved by 11.3ppts and its revenue grew almost five times.
During this time the group's structure has moved from one of non integrated subsidiary airlines to a clearly focused multi brand approach targeting different market segments. The Aeroflot Group has also refocused its fleet strategy, reducing the number of aircraft types from 18 in 2011 to seven in 2016.
Some measure of the success of Aeroflot's transformation, beyond the obvious growth in scale, can be seen from its improved financial results. In 2016 it reported record profits, in spite of a second successive year of a shrinking economy in Russia. These results were helped by lower fuel prices and by currency movements, but Aeroflot Group's operating margin of 12.8% was better than those of other major European legacy airline groups.
Aeroflot's achievements also owe much to the government directed consolidation of the Russian market in recent years. Indeed, the Russian government's influence has long been a guiding force in Aeroflot's development.