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Airline new entrants still falling after the GFC. Low oil prices could spark a 2016 entry resurgence
In a Jan-2016 report on the world airline profit outlook, CAPA flagged the potential emergence of ideal conditions for new entry into the airline sector. Barriers to entry have never been very high compared with some other capital-intensive, cyclical industries. Access to aircraft and finance is probably the most important pre-requisite, and it does provide at least something of a barrier.
However, the effectiveness of access as a barrier has been weakened by factors including a long term increase in the importance of lessors (and their fondness for ordering aircraft before securing a customer), historically low interest rates, and the large volume of aircraft orders and deliveries over the past decade. Nevertheless, new entry is at historically low levels and has not picked up since the global recession.
This report considers the main barriers to entry for airlines and, in particular, examines data on the relationship between the annual number of new entries and together - fuel costs and interest rates. Low oil prices have extended the life, and therefore the availability, of older, cheaper aircraft. This could provide the spark to ignite a resurgence of new starts.
Wizz Air's trading update for 3Q2016 paints a picture of an airline enjoying robust health. The number one airline between Central/Eastern Europe and Western Europe is growing rapidly, increasing its profit margins, raising its FY2016 profit target, and generating cash.
Moreover, Wizz Air may now be Europe's lowest cost airline, defined by its CASK over 12 months, although a lack of comparable data from current CASK king Ryanair means it's not currently possible to confirm this. Falling fuel prices (and its lower levels of fuel hedging) have helped Wizz Air's cost position, but it has shown consistent ex fuel cost control for many years.
Wizz Air's first two Airbus A321ceo aircraft joined its previously all-A320 fleet during the quarter, which also witnessed shareholder approval of its A321neo order. It will add 97 aircraft over the nine years from the end of FY2015 and the combination of larger aircraft with newer technology should help to take unit costs even lower. This will be crucial in its ongoing competition with Ryanair, the biggest airline in Europe and second biggest in Wizz Air's markets.
EasyJet has let slip that winter profits are falling, in spite of fuel price reductions. For the first time, its trading update for Oct-2015 to Dec-2015 (1Q of its financial year FY2016) gives a cost per seat figure, in addition to the usual revenue per seat. Europe's second largest LCC did not announce a 1Q pre-tax profit figure, but it can be calculated from the other reported data that it dropped 25% year on year.
This was due to revenue per seat falling more than cost per seat. The weakness in unit revenue was the result of terrorist activity affecting demand in Sharm El Sheikh and Paris in Nov-2015. EasyJet actually performed better than expected on costs, but weak unit revenue has become a trend in recent quarters and is set to continue in 2Q.
Of course, the airline makes all its money in the summer, and so - large percentage changes in the small winter profits do not say much about the full year. EasyJet still expects a higher pre-tax profit this year, but the strong double digit earnings growth of recent years is becoming harder to repeat.
Austrian Airlines: Lufthansa Group's poor relation may have improved revenue & profit growth in 2015
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.
On 12-Jan-2016, Turkish Airlines (THY) published detailed targets for 2016 on the development of its fleet, network, traffic, workforce, revenue and earnings. It expects 2016 to be a year of strong capacity growth, led by expansion in America and Africa. The fleet will expand further across the network, while retaining its narrow body bias. The labour force will grow, but with improved productivity, enabling THY to continue on its existing strategic network development path. Although its expects a fall in unit revenue, it also anticipates improving profitability thanks to lower fuel prices and control over ex fuel costs.
Over the past decade, THY has increased its ASKs at an average rate of 18% pa, doubling its ASKs every four or five years. Such rapid and relentless capacity growth puts downward pressure on unit revenue. Moreover, in 2016, macroeconomic uncertainties and geopolitical events add to the risk of a further weakening in unit revenue.
Nevertheless, it has a solid track record of riding out such risks. Its relatively unusual decision to publish such detailed guidance at the start of 2016 suggests that it is feeling confident about the year ahead.
The airline industry was more profitable in 2015 than it has been for almost five decades, according to the Jan-2016 update to CAPA's global operating margin model. And it doesn't stop there. CAPA’s base case scenario projects world airline operating margins rising further above previous historic peak levels in 2016. These new levels of profitability are thanks to the low oil price environment, now expected to continue this year, coupled with strong demand growth in spite of global economic growth rates that are far from exceptional. The macroeconomic and geopolitical backdrops provide the main risks to this forecast.
CAPA also flags the potential emergence of ideal conditions for new entry. As oil prices remain low, fleet replacement rates are reducing, just as new aircraft delivery rates step up in 2016/2017, implying downward pressure on aircraft prices. Money is still cheap and so conditions begin to imitate those of a dozen years ago – the halcyon period for a spurt in LCC growth.
Last month, Flybe announced that it would establish a new base at Robin Hood Doncaster-Sheffield Airport in summer 2016. The airport is only ten years old and among the UK's smallest, ignored by most of its leading airlines and mainly used by Wizz Air to serve destinations in eastern Europe. Sheffield is the UK's fourth biggest city, but it lacks connectivity.
Flybe will offer a combination of leisure and business routes, together with vital links to major hubs in Paris and Amsterdam. And the airport will suit Flybe's strategic preference for avoiding competition. It will launch eight routes from Robin Hood, and has indicated that it will also have ten other new routes from other airports in 2016.
Flybe has undergone a lengthy period of restructuring, including more than two years under current CEO Saad Hammad and is now growing once more. The airline's results for the first half of its FY2016 indicate that it may indeed now be entering what Mr Hammad calls the profitable growth chapter of its story.
SAS has had a relatively good year by comparison with its troubled past. In the year to Oct-2015 its net result returned to profit, and its operating margin was its best for at least a decade. It also managed to reverse a multi-year trend of declining unit revenue. This was partly due to favourable currency movements, but also reflected tight capacity management and SAS' focus on enhancing its product for frequent flyers.
On a less positive note, SAS' unit cost also increased, in spite of lower fuel prices. This increase was partly currency-related, but ex fuel currency adjusted unit cost also rose. Moreover, although FY2015 produced a high margin by its standards, SAS remains less profitable than the airline industry as a whole.
Looking ahead to FY2016, SAS plans to expand its long haul network, where ASKs will grow by 25%, driving an overall ASK increase of 10%. This growth should help to lower CASK, but will also have a negative effect on RASK. The trade-off between these two variables will determine whether or not SAS can further improve its profitability in FY2016.
SWISS is set for an eventful 2016, taking on a new CEO and two aircraft types new to its fleet. Thomas Klühr will move from his current position, as head of hub Munich for SWISS parent airline Lufthansa, to succeed Harry Hohmeister, who takes on responsibility for all Lufthansa Group's premium airlines in Feb-2016. That month SWISS will also deploy its first Boeing 777-300ER on the Zurich-New York route. The airline is the launch customer for the Bombardier CSeries, the first of which it expects to have in the middle of the year.
In this report we review SWISS' financial performance, which receives little attention separate from analysis of its parent group. For some years the most profitable airline in the Lufthansa Group, SWISS has consistently managed to lower its unit cost more rapidly than the fall in unit revenue. However, as LCC competition intensifies and Gulf airlines make further inroads into its market, SWISS cannot afford to rest on its laurels. It is among Europe's high unit cost airlines and our analysis indicates that labour productivity measures have declined. This should be an area of focus for Mr Klühr.
airberlin SWOT: even Etihad's millions can't help it to profit in year of peak airline sector margin
James Hogan, the CEO of Etihad Airways, which owns a 29% stake in airberlin in addition to minority stakes in other European airlines, was recently reported saying that Etihad would not increase these holdings, even if the EU were to change foreign ownership limits. Etihad has already provided more than EUR800 million in various forms to airberlin since 2012. The German airline now needs time to implement its fourth restructuring plan since 2011.
After several years of losses, airberlin's results for 9M2015 – another operating loss that only narrowed slightly due to asset disposals – suggest that it will not fulfil its Mar-2015 promise of "significantly improved results" in 2015. Another big loss looks likely, in a year when the global airline industry is set to record margins consistent with historic cyclical peaks and fuel prices are lower than they have been since airberlin last made an annual operating profit.
In this report, we assess airberlin's strengths, weaknesses, opportunities and threats. It seems that Etihad is right not to throw more good money after bad.
Air France-KLM's low cost subsidiary Transavia will open its first base outside the group's home markets of France and the Netherlands. From Mar-2016, it will base four Boeing 737-800 aircraft in Bavarian state capital Munich. The airport will be Transavia's seventh base, after Dutch airports Amsterdam, Rotterdam/The Hague and Eindhoven and the French airports Paris Orly, Nantes and Lyon.
Flights from Munich will operate under Transavia's Dutch AOC, thereby presumably avoiding the need for agreement with Air France pilots, using mainly German pilots and cabin crew. However, Munich is by no means a low cost airport and Transavia will need to increase its initial fares, typically starting at EUR29 on many routes. The relative lack of LCC competition at Munich may be an attraction, but Lufthansa may eventually respond with its LCC Eurowings.
In addition to analysing Transavia's plans in Munich, this report also reviews Transavia's track record and compares it with the LCC subsidiaries of IAG and the Lufthansa Group. Judging by the size of its fleet, network and profitability, Transavia currently trails the other two. All three trail behind Europe's leading LCCs Ryanair and easyJet.
Aeroflot focuses multi-brand strategy as 3Q operating profit doubles, benefits from Transaero demise
The Aeroflot Group more than doubled its operating profit for 3Q2015 and 9M2015. The weakness of RUB served to inflate both revenue and costs, but these two factors cancelled each other. As with other airlines, low fuel prices helped Aeroflot's results, but the underlying driver of its profit improvement was its growing market share and the positive impact this had on unit revenue.
Already Russia's largest airline group, it is benefiting from the weakness of domestic rivals and capacity cuts in Russia by foreign competitors. It is no longer buying a majority stake in Transaero, but is to take over some of its bankrupt rival's routes and this will further extend its market leadership.
Moreover, a successful first nine months for its LCC Pobeda and a plan to merge three of its regional airlines under the Rossiya brand help to sharpen Aeroflot's multi-brand strategy, making it the leader in each main market segment.