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Since Etihad's Dec-2014 investment in a 49% stake in Alitalia the Italian airline has enjoyed much positive change. It has worked to move its brand and product more upmarket to differentiate itself from fierce LCC competition in Italy, where Ryanair is the biggest airline by seats.
Alitalia's long haul offering has benefited from its partnership with Etihad. This has mainly been due to codeshare access to a much wider range of destinations in the Middle East and Asia Pacific. However, this summer's launch of a Rome-Beijing service indicates growing self-confidence too. Alitalia has also shown renewed confidence by growing its small niche to Latin America, the main region where it takes the lead over Etihad. On short/medium haul the LCCs still provide a strong challenge, although Alitalia's European offering has been fortified by closer commercial ties with other Etihad investments (in particular airberlin).
However, Alitalia continues to be loss-making (to the tune of EUR199 million in 2015). This is a hard continuing habit to kick, even if the airline still insists that it will break the habit in 2017. The rest of the industry is collectively experiencing record profitability in 2016; an airline that cannot be profitable in such conditions still has much work to do.
SunExpress Germany is probably not an airline that springs to mind for most European air travellers. However, this could be changing. The airline plans to launch 34 new routes in summer 2016, taking its total to 93, versus 59 in summer 2015. Only four of the new routes will be to its core destination market – Turkey.
SunExpress Germany is a subsidiary of SunExpress, an Antalya-based leisure airline 50% owned by each of Lufthansa and Turkish Airlines, and Lufthansa. Set up in 2011, Frankfurt-based SunExpress Germany operates under a German licence and the SunExpress brand, using a fleet of 12 Boeing 737-800s on leisure routes from Germany to leisure destinations in Mediterranean countries, in the main.
In 2016 the airline will continue to move away from its previous concentration on routes between Germany and Turkey, significantly broadening its network. Spain and Bulgaria are also becoming significant and it will add Italy this summer. SunExpress Germany is also Lufthansa's operator of the long haul part of its LCC brand Eurowings. As Lufthansa continues to create options for itself in the development of new operating platforms, SunExpress Germany's steps in a more pan-European direction are intriguing.
After two years in which the Aegean Airlines Group had the highest operating margin among European full service airlines, its crown slipped in 2015. Its financial results for the year show a fall in operating profit and in net profit.
Double-digit capacity growth in a very weak macroeconomic environment, and in the face of strong competition led by Ryanair, put downward pressure on unit revenue. Aegean was unable to cut its total unit cost enough to offset falling RASK, in spite of lower fuel prices and some progress with ex fuel unit cost reduction, including improved labour productivity.
Nevertheless, although Aegean's operating margin slipped it remained fairly healthy at very close to 10%. Moreover, given the very challenging conditions faced in 2015, the group did well to limit the decline in the way that it managed. In 2016, slower capacity growth may ease downward pressure on unit revenue and the bottom line should benefit further from lower fuel prices post hedging, but Aegean will be focusing on reducing ex fuel unit cost.
In 2015 the Lufthansa Group had its most profitable year since 2007, before the global financial crisis. Its profit recovery from the crisis has been cautious, but its increased confidence is now signalled with the restoration of dividend payments to shareholders, proposed at EUR0.50 per share.
Compared with its pre-crisis incarnation, one of the biggest changes in the Lufthansa Group is the establishment and growth of a low cost subsidiary with a clear strategic role. First under the Germanwings brand and now under Eurowings, the group's LCC is increasingly assuming point-to-point flying from the hub airlines on both short/medium haul routes and launching new long haul leisure routes. In 2015 it even made a small profit.
However, labour productivity in the mainline Lufthansa operation remains an impediment to the group's ability to join the leaders of European legacy airlines, in terms of profitability. Eurowings has greater labour flexibility and lower unit costs and has also become important to management as a way to show mainline labour representatives a glimpse of an alternative future. As competitor LCCs grow in Germany both management and unions must seize this future.
Pegasus Airlines' waiting game. Take a margin hit now to keep market share, pending fuel price rises
Pegasus Airlines is playing a waiting game. The Turkish LCC's 2015 operating profit and margin contracted for the second year running, bucking the trend of the majority of European listed airlines. For most, lower fuel prices more than offset downward pressure on unit revenue, and margins expanded in 2015.
At Pegasus, changes to its cost structure prevented it from lowering its unit cost to offset falling yield and load factor in 2015, in spite of lower fuel. Although there are market-related pressures on pricing, including geopolitical concerns, Pegasus also acknowledges that its own capacity growth contributed to falling yield.
Nevertheless, Pegasus will accelerate its capacity growth in 2016. Its argument is that the low fuel price environment is stimulating competitor growth, and that it is important for Pegasus to retain its position. Then it will be able to benefit from any shake-out in the market if and when fuel prices rise, to the detriment of weaker players that are currently propped up by low fuel. Such longer-term thinking is commendable, but Pegasus must nevertheless refocus on non-fuel costs.
Turkish Airlines reported its highest absolute profits for at least a decade in 2015. Both unit revenue and unit cost were lowered by the weakness of TRY versus USD (the airline reports its financial results in USD). With the benefit of lower fuel prices, Turkish managed to reduce CASK somewhat faster than RASK.
However, its 2015 operating margin (operating profit as a percentage of its revenue), while slightly better than in 2014, was still little more than half its 2008 peak level. Moreover, its profit improvement was not evenly spread through the year, instead relying mainly on a strong 3Q result.
Rapid expansion sustained over many years, and exposure to markets with geopolitical and macroeconomic uncertainties, make Turkish Airlines vulnerable to volatility in unit revenue. Capacity growth will accelerate in 2016, when the airline should again benefit from lower fuel prices. However, it will need to continue to focus on further labour productivity improvements and other non-fuel cost efficiencies in order to maintain or improve its margins, without help from low fuel prices.
Aeroflot Group's operating profit almost quadrupled in 2015. Among listed European legacy airlines, its 10.6% operating margin placed it behind only Icelandair, but ahead of IAG (these were the only others in double digits). This was achieved in spite of the severe recession in Russia, a nation which has been badly affected by falling oil prices and geopolitical events.
Aeroflot has benefited from the consolidation of Russian aviation and from capacity cuts by foreign airlines. The demise of Transaero accelerated the consolidation process in 2015, and Aeroflot will benefit further from this in 2016. The biggest contributor to the Group's 13% rise in passenger numbers was its low cost subsidiary Pobeda, which completed its first full year of operations in 2015. International transfer traffic through Aeroflot's Moscow Sheremetyevo hub also grew.
This year Aeroflot Group plans an acceleration of ASK growth to double-digit rates. Pobeda has launched its first international routes and the Group's regional airlines Rossiya, Donavia and Orenair will return to growth under the single consolidated brand of Rossiya, helped by routes and aircraft taken on from Transaero. The Group's longer-term goal to become one of Europe's top five airlines looks feasible.
In 2015 IAG achieved a return on invested capital of 12.7% against its estimated cost of capital of 10%, giving it the rare distinction among European legacy airline groups of creating economic value for investors. As with other airlines its 2015 results were helped by lower fuel prices, but IAG's strong improvement owes much to its determination to stick to its goals.
It was the first (arguably the only) airline among the larger European legacy groups to tackle labour cost restructuring. In addition, its 2013 acquisition of Vueling gave it an advantage over Air France-KLM and Lufthansa in dealing with the short/medium haul threat from LCCs. On long haul, it has avoided anti-Gulf airline rhetoric with its Qatar Airways partnership, including codeshare and an equity stake. On the North Atlantic, it is now benefitting from its acquisition of Aer Lingus.
There is more to do. Although Iberia's restructuring has been impressive, its returns still lag those of other IAG airlines. Labour unit costs increased at both British Airways and Vueling in 2015. Moreover, IAG's profitability falls short of its own targets for 2016-2020, and the profitability achieved by the leading European LCCs. Nevertheless, it can be substantially pleased with its progress.
Air France-KLM makes progress in 2015, but still has more to do. Labour productivity is at the heart
Air France-KLM's 2015 was a big improvement on its strike-hit 2014, but it highlighted the progress that it still needs to make. It returned to net profit for the first time in six financial years and achieved its best operating margin since before the global financial crisis, although this was below its previous peak.
In the passenger network business, long haul profits soared and medium haul losses narrowed. LCC brand Transavia made another loss, but laid plans for its first base outside the Netherlands and France, to be established in Munich in Mar-2016. In the cargo segment, losses deteriorated in spite of capacity cuts, especially in its full freighter operation.
Air France-KLM generated a return on capital employed of 8.6% in 2015, a leap from 1.7% in 2014, but short of its 2017 target range of 9% to 11%. As the world airline industry already approaches levels of profitability higher than previous cyclical highs, Air France-KLM will need continued assistance from the global cycle. It will also need a new agreement on labour productivity, particularly with Air France flight crew.
Virgin Australia: Delivering on goals, but stronger performance expected in a favourable environment
Virgin Australia has made significant inroads in its return to profitability; a commitment to cost leadership has contributed to decreasing costs, driving domestic yield growth, while the airline has made impressive inroads into increasing its corporate and government travel share. Despite significant odds, Virgin has also made advances in the lucrative freight business.
But given an extremely favourable operating environment, many expected the result to be better. Virgin’s results for the six months to 31-Dec-2015 showed that the market is again stable, with its domestic operations improving markedly to an AUD130 million (USD94.0 million) EBIT profit, up 86.5%. Promisingly, domestic market growth is now delivering significantly improved yield – albeit with a lower traffic figure.
International operations have continued as an area of poor performance for the group for as many periods, primarily a result of its exposure to Southeast Asia and volcanic activity in the region, resulting in an AUD30.8 million (USD22.3 million) EBIT loss, compared with a loss of AUD39.5 million (USD28.6 million) in 1HFY2015. Deploying Tigerair Australia to take over leisure routes will be positive; it is better suited to Virgin’s full service proposition and cost base, but success is not guaranteed.
Optimism about the future for Iran’s aviation sector abounded at the CAPA Iran Aviation Summit 2016. With sanction barriers now coming down, Iran’s airlines, airports and tourism operators are finally able to look beyond mere survival and begin making plans for the future. Western airlines, leasing companies and financiers, as well as industry suppliers are also exhibiting strong interest in the market and its long term potential.
This positive outlook at the Summit was tinged with recognition that there are also significant deficiencies that Iran needs to address. The decades of economic and political isolation from the mainstream have left aviation in Iran well behind the rest of the world. A concerted effort across numerous fronts will be necessary before Iran achieves a modern aviation industry.
In discussions at the CAPA Iran Aviation Summit, participants suggested three main areas that represent potential brakes on Iran’s aviation development and growth: infrastructure, policy/regulation, and human resources. In addition, questions of financing - who will fund modernisation development and how it will be financed - remained a key topic of discussion at the summit.
Norwegian resumed positive financial progress in 2015, returning to profit after two years of deteriorating results, including losses in 2014. The positive results of 2015 are welcome, but Norwegian's margins were unimpressive by comparison with other leading European LCCs. Even SAS achieved a higher operating margin in 2015.
Norwegian's profit slide coincided with the launch of its long haul network in 2013, and the recovery has coincided with the fall in fuel costs. This, together with a lack of separate data by network, makes it impossible to assess the relative profitability of the different parts of its network.
Nevertheless, Norwegian remains firmly committed to long haul, which it plans to grow at an average ASK growth rate of 40% pa to 2020, compared with 10% pa for short haul. Although not conditional on US approval of applications for traffic rights by its Irish and UK subsidiaries, its long haul growth options would be wider if 2016 became the year when it finally received this approval.