Financial

Etihad Airways’ bright profit result against a dark background

Etihad Airways has joined an elite club of airlines in the Middle East, reporting its first ever annual profit. Outside standouts such as Emirates, few of the region’s state-owned carriers have been able to report regular profits. Indeed, state-owned carriers in the region typically report heavy losses, when their results are made public at all.

The result is all the more remarkable in Etihad’s case, because the airline is not only the fastest growing network carrier in history – it only commenced operations in 2003 and today operates a fleet of 63 mostly widebody aircraft, with another 102 on order – managing to report a modest net profit of USD14 million for 2011, which just bettered its target of breakeven. The result comes as little surprise, as the carrier has been reporting month-to-month operating profits for several quarters and forecasting a breakeven result since early last year.

Etihad Airways stake in Air Seychelles gives 'realistic way forward' to the island carrier's future

Etihad Airways's 40% stake in Air Seychelles gives a much-needed second lease of life to Air Seychelles, who says the stake offers a "realistic way forward" for growth, critical as the carrier has scaled back almost its entire network. For Etihad, the opportunity to be a partner in building traffic to the Seychelles, a destination Etihad sees gaining prominence, especially from the alluring Chinese market. Etihad singled out the Seychelles' geographic positioning as a strength in linking the emerging Africa-China market, but it is difficult to see short-term development in that market.

Asia Pacific airlines' "ambitious fleet plans" threaten excess capacity, lower load factors in 2012

Asia Pacific airlines are coming off a difficult 2011, thanks to stubbornly high fuel prices and weaker yields in a challenging global economic environment. But not all the problems are necessarily external. Overcapacity is looming as a threat in 2012 as the region's full service airlines gear up for a period of growth and change in the coming decade. Balancing capacity and demand in choppy and unpredictable economic times is not easy and the coming year looks like being one in which at least temporary oversupply is very likely.

Record aircraft delivery levels are being maintained even as traffic growth slows. The upshot of that combination of factors is lower load factors and reduced yields, made more notable as the finance sector - a key user of premium services - is undergoing sometimes savage staff cutbacks. That in turn implies damage to airlines' bottom lines in what is now an intensely competitive market, with low cost airlines, Gulf carriers and Chinese airlines each vying for larger shares of markets which were historically the territory of the region's flag carriers.

Changes - and perhaps conflict - ahead for Austrian Airlines as it seeks a return to profitability

Austrian Airlines is facing a testing period after posting operating losses of well over EUR100 million (USD129 million) over the past two years. The carrier, under the leadership of new CEO Jaan Albrecht, is aiming to return to profitability in 2012 but significant changes will have to occur for this to become a reality. Austrian has stated that it suffers from multiple historical structural disadvantages, forcing it to implement a restructuring programme to stabilise the carrier and ensure its future “once and for all”. But rumblings from staff suggest this might not be plain sailing.

Cost reductions reaching EUR200 million (USD255 million) in 2012 are going to be key factors in the airline’s mission to return to the black. This year will also see continued uncertainty in the airline’s focus markets, with the crisis in the Eurozone and increased expenses resulting from the European Union’s Emissions Trading Scheme likely to affect plans at the carrier.

Aeroflot goal of 36% Russian market share by 2015 seems achievable following string of acquisitions

Russia’s largest passenger carrier Aeroflot is entering 2012 with a clear aim in sight of achieving 36% market share in Russia by 2015 and 40% market share by 2020. This goal is looking increasingly achievable as the planned takeover of more Russian regional carriers will give it a 33% share of capacity in the market.

Fleet expansion at Aeroflot is planned to ensure further increases in market share over the next several years. The flag carrier’s outlook for 2012 and beyond is also looking bright after recording strong results for the nine months ending Sep-2011.

Aeroflot initially revealed on Oct-2011 plans to increase its market share to 36.3% by 2015, 40.4% by 2020 and 45.4% by 2025. To meet these goals, Aeroflot is increasing its expenditure over the next several years. In 2012, there will be further aircraft acquisitions and network development, both internationally and domestically.

Dnata expands again with IT and catering acquisitions

Fresh from a rebranding and corporate repositioning conducted earlier this year, dnata embarked on another round of international acquisitions in late 2011. The flight services group is pursuing a strategy of growth through acquisitions, the latest of which will further broaden its already considerable international reach.

In mid-December, the company announced the purchase of a 50% interest in Wings Inflight Services, a South African-based in-flight catering services provider with operations in Johannesburg and Cape Town. The remaining 50% in the company remains in the hands of Mentor Africa Limited and company management. The deal was finalised in mid Dec-2011.

Virgin America closes 3Q facing stiff headwinds for 2012, but still breaking even

As most of the US airline industry was collectively earning over USD1 billion in the third quarter, Virgin America joined Southwest and American in posting losses. The San Francisco-based carrier posted USD3.3 million in losses – a paltry sum compared to the USD140 million loss at Southwest, and relatively positive news considering the airline's overall financial performance.

The story for Virgin America was much the same as for the rest of the US industry and is likely to be repeated in the fourth quarter and the new year. That story is a frustrating one of rising revenue on falling profits, meaning costs often outstripped revenues.

For its part, Virgin posted an operating profit of USD16.2 million for the third quarter resulting in a 5.6% operating margin, the carrier said, which was down 4.8 points from 3Q2010, when Virgin posted its first net profit, indicating the carrier is still working towards sustainable profitability.

Spirit earns USD50 million in successful bag policy

In Aug-2010, Spirit raised industry interest and Congressional hackles by announcing it was imposing a carry-on bag fee as part of an effort to speed boarding and deplaning. It remains the only airline to have such a fee and it is setting a new standard for fees in the US airline industry.

The airline, which generates about 30% of revenues from ancillaries, not only made the fee stick but earned USD50 million from the effort. In a hearing last spring, Louisiana Senator Mary Landrieu was so furious that she would not let CEO Ben Baldanza get a word in edgewise to counter her charges that his airline was a consumer rip off. Given the 25% increase in passengers after the fee was imposed, apparently passengers do not agree.

Outlook 2012: India’s loss-making aviation sector facing its most critical phase in almost a decade

Indian aviation enters 2012 facing its most critical challenges since the advent of the 2004 industry reforms. The paradox of India’s airline sector is that it serves one of the world’s fastest growing economies and is posting double-digit traffic growth, yet CAPA estimates Indian carriers combined will lose USD2.5 billion in the 12 months ending 31-Mar-2012. This is on total revenues of just under USD10 billion – a worse result even than in FY2008/09, when traffic was declining and fuel prices spiked at USD150/barrel. In the domestic market, India’s airlines lose USD25-30 every time a passenger boards an aircraft. This situation has prompted unprecedented intervention by the Prime Minister, who has outlined a 12 point agenda upon which the Ministry of Civil Aviation must report every month.

TO ORDER the CAPA India Aviation Outlook 2012, which will be released on 15-Jan-2012, please download the order form attached top left or for more information contact Shuchita Gupta on sg@centreforaviation.com or +91 11 2341 4440. The form outlines special discounts for CAPA Members.

Vanilla Islands carriers Air Seychelles and Air Austral make capacity cuts

Under what has been dubbed a “restructuring effort”, Air Seychelles has cut 77% of its total seat capacity. Between Nov-2011 and Mar-2012, the airline will cut all routes except for its domestic services, which includes one scheduled service to Praslin Island and a handful of chartered services operated on behalf of hotels, and its twice weekly service to Mauritius. The carrier in Oct-2011 had a restructuring plan, CEO changes and corporate re-branding, which were intended to result in a renewed focus on high-end tourism, as CAPA wrote at the time. Just two months later, the carrier announced deep capacity cuts, suggesting more drastic measures were needed.

Fellow Vanilla Islands Group (an affiliation of the island nations Seychelles, Madagascar, La Reunion, Mauritius and Comoros that are supposed to work together to promote tourism and investment) carrier Air Austral, based in La Reunion, will also make capacity cuts to its long-haul network although it is looking to Asia Pacific and remains intent on keeping its European services operating. Meanwhile, Air Mauritius recently reported an unexpected net loss in its 2QFY2011 results, Air Madagascar can only operate to the European Union through a charter agreement with EuroAtlantic Airways due to its presence on the EU Airspace blacklist, and Comores Aviation only operates a handful of destinations around the Vanilla Islands Group and Eastern Africa. Overall, future prospects for the group look bleak unless collaboration efforts are taken more seriously.

Juneyao Airlines and Spring Airlines to use IPOs to grow fleets and expand the LCC model in China

In a country with a very small LCC penetration rate – 3.5% internationally and 6.1% domestically in FY2011 – Spring Airlines, and Juneyao Airlines to a lesser degree, have shown success is possible in China's heavily regulated market that favours the larger, state-owned ‘Big Three’ carriers. While challenges exist, the potential is huge for the nation's LCC market.

LCCs first entered the China market in 2005, with Spring Airlines, Juneyao and Okay Airways all launching operations with the low-cost model, although in less than eight months, Tianjin-based Okay Airways gave up the model. Spring Airlines in particular has had considerably success in carving out a niche, with the carrier maintaining industry-leading load factors and reporting consistent profitability, often while the state-owned carriers have reported losses. Spring and Juneyao are now looking towards their next phase of expansion and both are planning to launch IPOs in 2012 to help fund continued fleet and network expansion. 

American Airlines charts a course through bankruptcy

Last week’s Chapter 11 filing by American Airlines (AA) and American Eagle (AE) parent AMR marks the end of the post-deregulation period as well as possibly signalling the beginning of the end of US legacy consolidation as many believe the shedding of American’s baggage will position it for the US industry’s final merger with the only other independent legacy, US Airways (LCC).

Across the board the feeling is this is the best thing for both AMR and the US industry because it means more capacity cuts. Delta and United are expected to be the principal beneficiaries. JP Morgan expects a 10% capacity cut from American, which translates to a USD1.4 billion, or 1-3% revenue jump for United, Delta Air Lines, US Airways, Alaska Airlines, Southwest and JetBlue in 2012. US Airways was already slated to benefit from the capacity cuts of competitors this quarter.