Industry Monitor the EUROCONTROL Bulletin on Air Transport Trends

Issue N°124. 30/11/10

Industry Monitor The EUROCONTROL bulletin on air transport trends

 European air traffic increased by 3.8% in EUROCONTROL Statistics and Forecasts 1 October Other Statistics and Forecasts 1  German tax cited as Air Berlin and Ryanair Passenger Airlines 2 curb winter capacity expansion plans Cargo 4  easyjet to target business passenger market Aircraft Manufacturing 5  Five European airlines fined by the EU for Airports 6 operating cargo cartel Environment 6  Widespread recovery in European airlines’ Regulation 6 profits during Q3 Financial results of airlines 7  Oil prices edge up to around $86 per barrel Economy 7 Fares 8 Oil 8

EUROCONTROL Statistics and Forecasts European flights increased by 3.8% in October on 12 months before (Figure 1) Traffic growth has been boosted by an extra week of summer timetable (compared to last year) (EUROCONTROL, November).

Preliminary data shows average delay per delayed flight (for departures and from all causes) increased by 14% on October 09 to 28 min (Figure 2). The percentage of flights delayed on departure (>5 min) amounted to 45% in October, a 9 percentage points (pp) increase compared to 2009. As in recent months, the most important change comes from ATFCM delays whose share of all delays increased by 10 pp to 38% in October, compared to same month last year (EUROCONTROL, November).

Other Statistics and Forecasts In October, international passenger (RPK) and freight traffic (FTK) growth (resp. +10% and +14% year-on-year) remained above historical trend rates and are expected to further continue. Respective rates of growth for Europe (+10% and +12%) are in line with the global industry ones. IATA expects further gains in traffic volumes for Q410 (IATA, 25 November).

Boeing revised upwards its outlook for China, expecting a demand of 4,330 new commercial aircraft by 2029 (from 3,770 in last release). Over the next 20 years, the rapidly growing economy will triple its fleet size when compared to 2009, being the second largest market for aircraft after the US (Boeing, 3 November).

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Figure 1. European traffic

Honeywell Aerospace estimated 2010 new jet deliveries to step back 17% on 2009 due to the continuing global economic weakness. The business aviation market is expected to stagnate in 2011 with less than 700 new deliveries but another period of expansion should start from 2012 (Honeywell Aerospace, 17 October).

Passenger Airlines The US low-cost airline Southwest Airlines is to acquire AirTran Airways and will consequently gain key access to/from Atlanta as well as Washington, enjoying a relatively young all-Boeing combined fleet. The acquisition still remains subject to the AirTran shareholders’ approval (Southwest, 27 September and 9 November).

As part of its long-haul expansion plans (IM122), Norwegian signed an agreement with ILFC, US leasing company, to lease two B787s from Q412 over a period of 12 years (Norwegian, 8 November). easyJet plans to target the short-haul business travellers market. The low-cost airline will introduce flexible fares, improve its average frequency on its business routes (e.g. UK, Switzerland, France) as well as start new routes (EasyJet, 16 November).

Regional Swiss Darwin plans to take over the Geneva-based Baboo services to expand its activities. Darwin, aiming at preserving some flights branded as Baboo, would count more than 20 destinations in Switzerland, Italy, France and other European cities operated by a fleet of 6 turboprops. The acquisition, subject to regular authorities’ approval, is due to the beginning of 2011 (Darwin, 25 November).

KLM will reportedly expand its fleet with 3 leased A330-300s to be delivered in 2012, a strategic integration into the fleet to offset the 10 MD11s to be phased out by 2016 and to delay the uncertain A350s or B787s orders (Luchtvaartnieuws.nl, 18 November).

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Departure Delay Causes – All causes of delay (based on the Total Delay in Minutes from 1 minute onwards)

Primary Delay Distribution for October 2010 Preliminary data eactionary eactionary R Delay = 45% Primary Primary Delay = 55% Share of Primary & Reactionary Delay - October 2010

Figure 2. Delays (Source EUROCONTROL/CODA)

To resume its expansion strategy, Air France-KLM will reportedly:  develop point-to-point business from June, progressively opening regional bases in Nice, Marseille, Toulouse and Bordeaux to serve France and Europe. The carrier aims notably at reducing costs generated by the organisation of the staff rosters historically concentrated in Paris,  increase capacity on long-hauls, by both adding destinations (+5% ASK annually, on average) and using larger aircraft by 2013. First class will be abandoned and business class will be downsized on the to-be-delivered B777-300s so as to add 58% more seats in economy (317 seats instead of 200). Current B777s are re-configured to get denser economy seating too. Last but not least, 8 more A380 will be incorporated by 2013 (Air France, 18 November and La Tribune, 23 November).

Capacity, costs and jobs Lufthansa received its 4th A380 which entered in service on 18 November replacing 10 flights previously operated by B747s and A340s. The German flagship respectively added 2 and 3 A380 weekly flights on the Frankfurt-Beijing and Frankfurt-Johannesburg current existing routes (Lufthansa, 16 November).

Ryanair will cut 9 routes (corresponding to 148 weekly flights) from Frankfurt Hahn in summer 2011, citing the negative impact of the forthcoming German tourist tax (IM122). The low-cost airline will consequently remove 3 aircraft out of the 11 based at Frankfurt (Ryanair, 27 October).

As German travel tax is to take effect as of January 2011, Air Berlin reversed its already announced expansion plans and will cut capacity by 5% as well as reduce its fleet by 7 aircraft in summer 2011. The German airline consequently signed an agreement with ICBC, a Chinese financing leasing company, to sell 10 of its aircraft (4 B737s and 6 A320s) and to sell-and-lease-back 8 other aircraft (2 A319s, 2 A320s and 4 B737s) in the course of 2011- 2012 (Air Berlin, 18 and 25 November).

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Figure 3. Main carriers’ traffic statistics.

Codeshare SAS Group and Icelandair entered into a code-share agreement, offering their customers an enhanced choice of destinations between northern Europe and Iceland. The partnership agreement will notably apply on selected routes beyond SAS’ hubs (Copenhagen and Stockholm) to Berlin, Gothenburg, Hamburg, Milan, Munich, Vilnius, Zurich and Warsaw (SAS, 4 November).

Routes Wizz Air announced its 14th base in Vilnius with 1 aircraft based and 8 new routes from April (Wizz Air, 29 October).

From end April, Vueling will open its 8th base in Toulouse (first one outside Spain since its merger with Clickair) with 1 aircraft based and 7 new European routes (Vueling, 9 November).

Traffic Statistics: October update Figure 3 and Figure 4 compare October 10 figures with October 09 ones. Passenger capacity is measured in available seat kilometres (ASK) and traffic is measured in revenue passenger kilometres (RPK).

All carriers followed in this bulletin (for which data is available) have improved their traffic statistics in October (see Figure 3), indicators were notably pushed up by an extra week of summer timetable (company reports, November).

Cargo Boeing revised upwards its world cargo traffic growth to 5.9%/year over the next 20 years (from 5.4% in the past release). Cargo volumes (RTK) are expected to triple by 2029, compared to the 2009 levels. Domestic China and intra-Asia markets will lead the industry with rates of growth of 9.2% and 7.9% (respectively) over the next two decades. North America and Europe markets, more mature, will grow at slower pace: 4.2% for North America- Europe and 3.6% for intra-Europe (Boeing, 18 November).

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Figure 4. Main carriers’ load factors.

TNT Express will operate 3 times per week a B747 freighter service between Liège and Chongqing to serve one the fastest growing manufacturing (high-tech) and trade centre located in western China (TNT, 26 October).

Eleven cargo airlines, amongst which five European ones, have been fined to a total of €800 million by the EU regulatory authorities for their participation in an alleged cartel affecting cargo services between 1999 and 2006 within the European Economic Area. Most severely hit Air France-KLM (€340 million, including Martinair) will appeal. British Airways, Cargolux and SAS have also been fined (€104, €80 and €70 million respectively) whereas Lufthansa (and Swiss), the whistleblower, remained exempted from any penalty (Europa and Le Figaro, 9 November).

Aircraft Manufacturing Outside the Zhuhai Air Show, Airbus announced a large amount of orders from Asia in November:  BOC Aviation, the Singapore-based aircraft leasing company, has placed a firm order for the purchase of 30 A320s (Airbus, 3 November),  China‘s government ordered 102 Airbus of which 66 new aircraft, including 10 A350s, 6 A330s and 50 A320s. Air China has been reportedly identified as the A350s’ customer (Airbus, 4 November),  Skymarck Airlines, first Japanese carrier to order superjumbos, signed a MoU for 4 A380s (Airbus, 12 November),  Taiwan-based Transasia Airways placed a firm order for 2 A330s and 6 A321s (Airbus, 16 November) The manufacturer revised upwards its 2010 expected gross orders number to 500 (from 400) due to the commercial aircraft upturn while deliveries target remains unchanged around 500 (EADS, 12 November).

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Figure 5. Carbon prices.

Airports Ferrovial reached an agreement to sell Swissport, the ground handling company, to a private equity firm for €655 million. The transaction, subject to regulatory authorities’ inspection, is expected to be finished by early 2011. The Spanish transport management company also intends to divest 10% shareholding of BAA, the UK airport operator, while remaining the largest shareholder (currently owns 56% of BAA) (Ferrovial, 2 November and 22 October).

Environment More than 100 routes araree shortened at night in the joint airspace FABEC (Belgium, France, Germany, Luxembourg, the Netherlands and Switzerland), enabling airlines to save 800,000 NM annually corresponding to savings of 4,800 tonnes of kerosene and 16,000 tonnes of CO2 (FABEC, 11 November).

Regulation UK Air Passenger Duty Tax, to be paid by passengers flyingflying from UK airport for compensate st the UK CO2 emissions, has been increased for the second time in one year as from 1 November. Depending both on class fare and distance flown, the rise varies between 9% and 55%, with highest increase of rates on furthest trips (HM Revenue & Custom, November).

Austria, like Germany (IM122), decided to introduce an airline ticket tax as part of austerity packages. The tax is expected to bring a €60 million extra income in 2011 (oesterreich.gv.at, 2 November).

The European Council agreed on visa-free proposal for Albania and Bosnia-Herzegovina. The citizens of the two States will be allowed to travel with a biometric passport only to EU countries with common visa policy or those associated with the Schengen area (Europa, 8 November).

Figure 6. Main European airlines financial results. Air Malta has been granted a €52 million State loan following EU authorization to keep the airline in business over the next 6 months. (Europa, 15 November and Air Malta, 11 November).

Member States’ experts in civil aviation security agreed on a series of recommendations for EU air carriers to reinforce cargo security from countries outside the EU. The proposals addressed legislation, enhanced cargo and mail inspections as well as improvement of detection technologies. The EU also recommended a global approach to be coordinated with ICAO (Europa, 29 November).

Financial results of airlines Apart from SAS, all European airlines followed in this bulletin have posted profits during Q310 (Figure 6) thanks to the generalised recovery, the favourable seasonal effect, strict costs control and structural changes across airlines models (e.g. traffic mixes, prices). Air France- KLM and British Airways, both in the red since Q3081, finally posted positive results in line with Lufthansa Group’s ones. SAS’ Q310 results have been affected by the €70 million EU fine (see Cargo section) related to the cargo cartel investigation amongst other things.

Economy Euro zone economy indicator updates: annual inflation is expected to be 1.9% in November 10 according to a flash estimate, GDP increased by 1.9% during Q310 (vs Q309) but only increased by 0.4% compared to Q210, unemployment remained stable at 10% in October 10 (compared to both September 10 and October 09), (Eurostat, 12 and 30 November)

The EC autumn’s forecast expects a continuation of the economic recovery in the next two years in the EU27 with unbalanced progress over the region. GDP is forecast to grow by around 1.8% in 2010 (from 1% in spring release), 1.7% in 2011 and by around 2% in 2012 (Europa, 29 November).

Figure 7. Brent and Kerosene prices.

Fares Preliminary data show that deflated ticket prices in Europe slightly decreased by 1.6% in October year-on-year (Eurostat, November).

Oil Oil prices closed at around $86 per barrel on 26 November (Brent), after having reached $88 mid-November, its highest all year. Converted price indices for Kerosene and Brent up to November are shown in Figure 7 (Brent and WTI cushing).

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