January 2002 2002 Outlook CONTENTS

Aviation Strategy Issue No: 51 January 2002 2002 outlook CONTENTS his year will be better than 2001 - how could it be worse? Traffic Analysis Tis now showing definite signs of recovery but it will not be until well in the second half of the year that a really significant upturn in traffic takes place. Yields are still very weak, so the traffic recovery Industry trends 1-2 by itself will not help financial results as much as might be expect- ed. There could be a false dawn before the financial turnaround Belgian exertions occurs. to resurrect flag-carrier 2-3 The situation has at least stabilised in the US where the government is providing a safety net and has entered for the first time the airline ownership game, having taken warrants which it could Implications of America convert into 33% of America West's stock - see page 3. However, West aid package 3-4 the government is charging a very high price for its support and some carriers may even decide that Chapter 11 is a better option. BA thinking the Southwest, perhaps surprisingly, welcomes the state aid. It rea- sons that it would prefer to compete against government-aided car- unthinkable 4-5 riers than Chapter 11 airlines. And there is the possibility that carriers might take the opportunity of bankruptcy restructuring to re- RJs: brighter prospects 5-6 invent themselves as point-to-point airlines, as opposed to network airlines, so increasing potential competition to Southwest (see page 7 ). Briefing In Europe there are a couple of small flag-carriers that could well follow Sabena and Swissair into bankruptcy (and their suc- Southwest: how to overcome cessor companies are going to face huge difficulties - see page 2). September 11 crisis 7-10 It is becoming blindingly clear that carriers such as Olympic and, perhaps, Aer Lingus will not survive by just modifying their present Russian airlines: operating structures (network, fleet, variable costs, etc.). Could traffic recovers but they possibly convert to a low-cost model? bureaucracy remains 11-15 The low-cost carriers are of course thriving in the post September 11 environment. But their continued expansion depends on their ability to build rapidly at new bases in countries which are not used to the low-cost concept (Easyjet at Geneva and Macro trends 20-21 Paris and Ryanair at Brussels Charleroi and Frankfurt Hahn). It will be challenging, but their strength is that they have tapped into a Micro trends 22-23 rich vein of consumer demand at the same time as carriers like BA are cutting their intra-European services. While Air France and Lufthansa are fairly confident are their business focus, BA is still struggling to find a new strategic direc- PUBLISHER tion. Its managers are asking the correct questions (see page 4) but the answers are proving elusive at the moment. In terms of industry consolidation, 2002 will see more specula- Aviation Economics tion about BA/KLM. Alitalia/ Air France has a certain amount of James House, LG, commercial logic, but the resistance within and outside the two airlines to a merger will be intense. 22/24 Corsham Street London N1 6DR Tel: +44 (0) 20 7490 5215 Fax: +44 (0) 20 7490 5218 www.aviationeconomics.com e-mail: [email protected] Aviation Strategy Analysis Belgian exertions to resurrect flag-carrier n December 21, the investors group SN Air early November (the loan was originally destined OHolding led by Belgian luminaries Etienne for Sabena but the European Commission agreed Aviation Davignon and Maurice Lippens acquired all the that it could be transferred to DAT). The airline is Strategy shares of DAT, the former Sabena regional sub- now kept alive by short-term bank loans, which is published 11 sidiary, from the bankruptcy administrators for may be transformed into equity at a later stage. times a year by one "symbolic" Euro. The airline will be headed The pledge made by Belgium to repay the bridge Aviation Economics by Dutchman Rob Kuijpers, 63, former CEO of loan within six months - a condition imposed by at the beginning of DHL Worldwide Express. the European Commission - appears to have the month The investors group has pledged to invest become academic. Euro 200m in the "new Sabena" under two condi- Editor: tions: Linguistics Keith McMullan • SIC (the former Sabena financial coordination centre) must renounce its EUR 111 million claim At the best of times, Belgian politics are com- Subscription on DAT; and plicated by the linguistic divide between North enquiries: • Leasing contracts for 28 aircraft (out of a fleet of and South, and the sharing of power between Keith McMullan 32) must be revised 40% down on current levels. powerful trade unions and the political parties that Tel: +44 (0) 20 The investors group will walk away from the is enshrined in the system. Adding insult to injury, 7490 5215 airline if both conditions are not met by mid- the collapse of the national carrier took place dur- Copyright: January. ing the Belgian presidency of the European Aviation The creation of the so-called "private" Union, causing huge embarrassment to the ruling Economics investors group has not been smooth sailing and coalition of Liberals, Socialists and Greens. All rights reserved tensions still exist within the group itself. Banks It was therefore inevitable that no effort would that are creditors of Sabena and which have been be spared by the federal government to ensure Aviation asked to transform their claims into equity in the that Sabena would be resurrected in one form or Economics Registered No: new airline are not pleased. another - or at least to be perceived to make such 2967706 (England) Curiously, the investors group will not reveal an effort. the names of its members. It is up "to them to say Regional subsidiary DAT was spared the fate Registered Office: whether they have joined or not." The Flemish of its parent Sabena and allowed to operate James House, LG 22/24 Corsham St Region, for one, has steadfastly refused to inject under court protection. DAT, having no real equi- London N1 6DR its proposed share of EUR 24.7 million. The ty of its own, was then given the bridge loan orig- VAT No: 701780947 Flemish Region is however willing to put money inally intended for Sabena. At the same time, the ISSN 1463-9254 into Brussels International Airport Company government assembled a posse of business lead- The opinions expressed in BIAC), the state-owned airport operator. BIAC, ers whose tasks were to corral investors from the this publication do not nec- which is to be privatised, is not so keen on the private sector. Recognising the challenge of essarily reflect the opinions of the editors, publisher or offer. seeking private investment in a failing airline at contributors. Every effort is made to ensure that the The Virgin Group (not Virgin Express, which the worst of times, and unable to intervene itself information contained in this could not afford it) has replaced the reluctant under EC regulations, the federal government publication is accurate, but no legal reponsibility is Flemish Region in the investors group, and has also attempted to convince the three regional accepted for any errors or reported injected Euro 25m. Virgin's position is governments (Flanders, Brussels and Wallonia) omissions. complicated by the fact that it is a partner to DAT to join the investors group. Brussels and The contents of this publication, either in whole or in on some routes and in direct competition with the Wallonia, normally more inclined to favour state part, may not be copied, stored or reproduced in any airline on others. Talks to reduce "overcapacity" intervention in the economy than Flanders, format, printed or electronic, on the latter are currently taking place. agreed. without the written consent of the publisher. Meanwhile, time is running out fast for DAT. But the private sector needed more convinc- The airline has used up all of the Euro 124m ing arguments. Discreet but firm entreaties were bridge loan received from the Belgian state in made to the leading companies in Belgium. The January 2002 2 Aviation Strategy Analysis banks, of course, because they were already declined the offer, then was persuaded to join, involved as creditors of Sabena, but perhaps and finally decided against it on legal grounds. more surprisingly a range of industrialists Another state-controlled institution, the insur- engaged in the chemical, brewing and retail sec- ance company SMAP, has refused to contribute a tors, as well as utilities, were contacted by teams share of EUR 8m. Conversely, family-controlled set up by Davignon and Lippens. Solvay chemical group has pledged its share, Public calls for patriotism (we need a national despite objections raised by US institutional airline) were quietly supported by generous tax investors. inducements. It has been reported that investors This enormous collective effort will come to in the new airline will be allowed to fiscally deduct naught if leasing companies do not cooperate, or their entire investment in one year. if EU law is found to have been breached. But State-owned air traffic control provider even if it is relaunched under a new name, Belgocontrol was also asked to join the investors according to the current plan, DAT will face angry group. The state-appointed board of directors first competitors on all of its major routes. America West loan approved, government safety net in place y approving America West's revised $380m pants. AWA will also issue $120m of seven-year Bfederal loan guarantee application, the Air debentures convertible into shares at a price of Transportation Stabilization Board (ATSB) effec- $12 as consideration for the concessions provid- tively ensured that there would be no major carri- ed by aircraft lessors.

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