The Silent Killer
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November 11, 2013 Issue No. 454 The Silent Killer Foreign exchange volatility quietly inflicting cost and revenue pain across the industry Weekly News Review 2-3 For one airline after another— ues on the global airline industry that’s the exception not the rule. in geographies as diverse as isn’t new. But during the first Look around the world and the Fleet & Finance 4 Brazil and Australia, India and decade of the 2000s, it was more U.S. dollar is up in value, in Hawaii, Japan and Europe—a often a force for good than for some cases dramatically, against Marketing & Sales 5 silent killer is on the loose. This ill, outside the U.S., anyway. most currencies. Today, U.S. time it’s not fuel, the global mar- That’s because the U.S. dollar government finances are rapidly Labor & Airports 7 ket for which is actually soften- lost value against most major improving, America is importing ing. It’s not a demand shock— currencies, which meant most less oil, commodity prices are non-U.S. carriers got a break on down, the U.S. economy is Routes & Networks 8-9 not with worldwide traffic still growing at a healthy pace. Nor their dollar-denominated costs— growing as others are slowing labor costs, which are falling in most importantly fuel, aircraft and some countries are taking Environment 9 many markets as carriers restruc- and borrowed money. deliberate steps to The dollar fell in value See also: weaken their own cur- ture. Nor distribution costs, for • Forex trends, p. 5 Around the World 10-11 which technology and innovation as America’s budget rencies in a bid to are driving down prices. Air- deficits soared, interest boost their exporters, planes and airports are becoming rates fell, trade deficits ballooned never mind the negative impact more efficient too. So what is (partly due to pricier oil imports) this has on their big importers, this mysterious force that’s caus- and the U.S. economy grew including fuel and plane- ing so much grief for so many more slowly than the world aver- importing airlines. carriers? age as emerging markets Japan is the poster child for Net result; operating margin boomed. that. It has boosted its money Ask airlines what their biggest July-September 2013 (3 months) headache is at the moment, and Well times have changed. supply to help companies like Now, though the U.S. dollar Toyota and Sony sell more stuff BA/Iberia: $763m; 13% many will point to the whims of the foreign exchange market. remains historically weak against overseas. But yen devaluation Air Canada: $288m/$351m*; 12% some currencies like the euro, has been nothing but trouble for The influence of currency val- WestJet: $63m; 11% CONTINUED ON p. 12 Turkish Airlines: $358m; 15% Asiana: $57m/-$5m*; 3% Ryanair: $689m; 32% Pushing Back: Inside This Issue Aer Lingus: $125m op. profit**; 20% The list of third-quarter disap- attesting to just how strong the nonstop links into and out of the Garuda: -$11m/-$43m*; -3% pointments grew larger last week transatlantic market was this sum- country—new routes by Hainan SpiceJet: -$90m; -43% as Turkish Airlines saw margins mer. But Air Canada, joined by Airlines, Sichuan Airlines and Air Mauritius: $7m; 8% drop sharply, Asiana unveiled British Airways, also added evi- Qatar Airways, for example— SkyWest: $26m; 7% distressingly slim summertime dence that Asian longhaul markets can’t be good. And a Chinese profits, Garuda fell into the red from North America and Europe economic bust would be even Republic: -$14m/$17m***; 16% and SpiceJet had its brains splat- alike remain difficult due to three worse. tered across the floor. Even per- unhelpful “C” factors: competi- In labor news, Norwegian pilots *ex special items (operating margins are ex SI) ennially profitable WestJet had to tion, currency and cargo. called off a strike, Qantas will **Aer Lingus did not provide net results hang its head a bit as its foe Air Asiana has an even bigger cargo close a maintenance base and ***Republic results are continuing ops only Canada raced ahead of it. problem. But the “C” factor it Azul hopes to unify pilot pay. That made Air Canada rightful- worries about most is China. Ko- This week: more airline earnings, ly triumphant—and rightfully in rean carriers depend on Chinese including the giants LAN/TAM the ranks of Q3’s success stories. traffic, so the proliferation of new and Singapore Airlines. Copyright Notice: No part of this publica- Right next to it was BA/Iberia, tion may be copied, photocopied or dupli- cated in any form or by any means without which raced past Air France/ Verbulence Airline Weekly Corp’s prior written KLM and Lufthansa. Also among consent. Copying of this publication is in the winners: Ireland’s two airlines BA has widespread availability at £220 where Norwegian is pricing violation of the Federal Copyright Law (17 “ USC 101 et seq.). Violators may be subject Ryanair and Aer Lingus, never often well in excess of that. £149? I hope they sell all their seats at to criminal penalties as well as liability for mind the shorthaul yield softness £149 because they’ll lose a hell of a lot of money given that APD substantial monetary damages, including statutory damages up to $100,000 per they both described. [next year] will be £69. They’re not going to make money at £149. infringement, costs and attorney’s fees. Air Canada and Aer Lingus Copyright 2011 Airline Weekly Corp. All both joined the chorus of airlines —BA/Iberia CEO Willie Walsh rights reserved. ISSN 1942-2059. ” Licensed to [email protected]; may not be shared or forwarded unless otherwise agreed by Airline Weekly Corp. Personalization by DocMonk the weekly skies 2 During the first two quarters of 2013, than yield, generally speaking. But more on that ly, domestic Canadian markets—to which Lufthansa earned the best margins among Eu- and other initiatives later this week, at a man- WestJet has greater overall exposure than Air rope’s Big Three intercontinental carriers, with agement investor event. Executives did say last Canada—saw substantial yield pressure. Disrup- Air France/KLM way behind and BA/Iberia week, however, that the company would earn tions from floods in Alberta also led to some Q3 somewhere in the middle. close to $1b in operating profits for all of 2013. revenue loss. Looking ahead, WestJet has lots of But all that changed last See also: new initiatives in the works, including more quarter, when—as an- • Global earnings efficient flight attendant staffing, more airline nounced last week— ...scoreboard, p. 5 BA/Iberia isn’t the only success story of the partnerships, bundled fares, extra-legroom seats, BA/Iberia climbed to the top third quarter. Across the Atlantic, Air Canada densified non-premium seats, the sale of some with excellent summertime results. Q3 net profit enjoyed what it described as its best quarter B737-700s to Southwest and a major B737- was $763m and operating margin was 13%, up ever, not only earning a $288m net profit MAX order. It’s also considering first-bag from the mere 5% the company managed last ($351m ex special items) and a 12% operating charges on U.S. transborder flights and claims summer—and besting the 9% and 8% Q3 fig- margin but also outperforming its LCC rival success in winning more corporate business, ures posted by Air France/KLM and Lufthansa, WestJet for the first time in memory. Revenues including some from Canada’s giant energy respectively. British Airways itself did well rose 5%. Operating expenses, excluding special firms. Air Canada, though, as WestJet readily thanks to strong London demand, especially to items from last year, rose just 1%, all on 3% admits, has been responding aggressively. more ASM capacity. A modestly weaker Cana- North America. It (like the group) earned a 13% operating margin as revenues rose 8% y/y and dian dollar meant fuel outlays rose 4%. But operating costs rose just 2% on a 1% increase in overall non-fuel unit costs fell 3% as the airline The remarkable Turkish Airlines released its ASK capacity. Iberia is still the problem child. reaps the benefits of major transformation initi- Q3 financial results, which—by its own lofty But it’s improving, earning a 6% operating mar- atives including new labor contracts, new con- standards—weren’t terribly impressive. Net gin as revenues fell 12%, operating costs fell tracts for regional flying, the refinancing of profit was $358m and operating margin was 17% and ASK capacity fell 15%. Vueling, expensive debt and the creation of Rouge, a 15%, which doesn’t sound bad until looking at meanwhile, was a smash success as strong peak- low-fare unit flying to sunshine destinations what its Q3 margin was last year: 23%. In fact, season demand to and from Barcelona led to an south and European destinations east. Air Cana- this summer’s result was similar to Q3 2011, impressive 25% operating margin on 33% reve- da also noted improved operational perfor- when oil prices were higher and when Turkish nue growth despite just 22% ASK growth, with mance, especially at its regional partner Jazz, faced major market disruptions from the Arab operating costs up just 20%. Like many of its and deepening relationships with Star Alliance Spring. So what’s the problem this time? You peers, BA/Iberia took a hit on forex, in its case a partner Air China and Toronto’s Pearson Air- guessed it: foreign exchange. A significantly $55m drag as the values of sterling, euros and port.