September 2006
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Aviation Strategy Issue No: 107 September 2006 Aer Lingus floats fter about ten years of indecision and procrastination the Irish CONTENTS Agovernment will privatise Aer Lingus at the beginning of October. Shares will be priced around €2.35, which would value the airline Analysis at around €775m, about €470m of which will accrue to the airline itself. The state will retain at least 25% of the company and a further 15% has been allocated to an employee stock ownership trust Aer Lingus privatisation: 1-2 (ESOT). Initial indications are of strong demand for the stock from institutional investors, though retail demand is likely to be curtailed by the minimum purchase requirement of €10,000. United Airlines: The flotation appears to have been priced to ensure a smooth merger speculation and take-off. As at the end of last year Aer Lingus had a book value of commercial reality 2-6 €403m and cash totalling €529m. More importantly, it has an impres- sive profit record - €100m pre-tax in 2005, a margin of 8.7%, and €125m in 2004 (before an exceptional cost for restructuring of Mexico: hotbed of €102m). LCC start-ups The first half of 2006 did, however, show the impact of mainly high fuel prices - a drop in profitability to €3.6m from €45.6m in the • Click Mexicana same period of last year. Intriguingly, the prospectus restates the • Avolar Aerolineas 2006 numbers to an "underlying" profitability of €16m that is slightly • Interjet up on restated 2005. The underlying results reflect the various • Volaris effects of new accountancy rules relating to the treatment of deriva- • VivaAeroBus tive costs for fuel, interest rate and currency hedging (rules which are 7-15 too complicated to explain in a short, or indeed a long article). Aer Lingus seems to be an attractive proposition. Under the pre- vious management team led by Willie Walsh, the airline defied the post-September 11 depression, and reinvented itself as a flag-carri- Databases 16-19 er operating on easyJet principles - internet distribution, dynamic yield management, cost cutting in all areas while expanding, A320 Airline traffic and financials fleet harmonisation - though retaining some key service guarantees like never stranding a passenger and frills like seat allocation. Aircraft available Walsh's successor as Aer Lingus CEO - Dermot Mannion - comes from Emirates, the highly successful, low-cost long-haul car- Regional trends rier. Combine the experience and expertise of the short and the long, and the result should be a very formidable operation - although the Orders Emirates analogy is somewhat inaccurate as Aer Lingus's Atlantic network is point-to-point rather than hub based, and so is closer to AER LINGUS GROUP RESULTS (€ millions) Jan-June PUBLISHER 2004 2005 2005 2006 Revenue 1,009.6 1,002.6 451.6 508.3 Operating Profit 122.5 89.9 46.0 -8.2 Exceptional Item -102.5 4.3 Aviation Economics Net interest (income) -7.3 -10.2 -5.0 -9.2 James House, 1st Floor Pre Tax 27.3 100.1 51.0 5.3 22/24 Corsham Street Taxes 4.4 11.1 5.4 1.7 London N1 6DR Net result 22.9 89.0 45.6 3.6 Tel: +44 (0) 20 7490 5215 Notes: Prepared under IFRS (International Financal Reporting Standard) rather than Irish GAAP; 2004 exceptional cost related to Restructuring Fax: +44 (0) 20 7490 5218 e-mail: [email protected] www.aviationeconomics.com Aviation Strategy Analysis the Virgin Atlantic model. announced that it will be flying into Madrid Inevitably, there are a series of strategic Barajas rather than low cost Don Quixote air- questions: port, so upsetting the status quo. • Can Aer Lingus retain its cost competitive- • What are the prospects for profitable long- ness? Whereas the Walsh regime wanted to haul expansion? Aer Lingus's focus for growth push ahead with another round of labour is now on long haul, with most of the flotation redundancies, a collective pay increase (of proceeds allocated to A330 fleet expansion. about 4%) was agreed in the summer in order Last November, Ireland and the US signed a to secure union and political support for the transitional agreement that changes the Aviation Strategy privatisation. In addition, Aer Lingus has com- Shannon stopover rule from the current one in is published 10 times a year mitted €104m of the flotation proceeds to top- two transatlantic flights from Dublin to one in by Aviation Economics ping up the pension fund. The ESOT is sup- three and grants Ireland three additional cities posed to align the interests of the employees in the US (Aer Lingus currently serves New Editor: with the shareholders, but the effectiveness of York JFK, Boston, Chicago and Los Angeles). Keith McMullan [email protected] such schemes at traditional airlines has been This agreement is intended to be a transition- very poor. al measure before the implementation of a full Contributing Editor: EU/US Open Skies treaty, but it is not totally Heini Nuutinen • Is Ryanair going to be aggressive? Sharing clear whether the proposal would contravene a base airport with Ryanair has been an the EU's policy on individual member states Sub-editor: instructive experience for Aer Lingus, but not negotiating their own liberalised bilaterals Julian Longin [email protected] Ryanair until recently hasn't been growing with the US. from Dublin, because of its objection to the It is also not certain that additional US Subscriptions: airport charges. But this year it has launched cities (San Francisco, Miami and [email protected] a series of new routes including Madrid, Washington?) will be able to generate enough Tel: +44 (0)20 7490 5215 Berlin, Venice, Valencia and Salzburg which point-to-point, higher yielding traffic to make compete with Aer Lingus, while Aer Lingus the new routes profitable, and reducing the Copyright: has launched to Newcastle, a Ryanair city. Shannon stop requirement potentially increas- Aviation Economics Direct competition has been mitigated by air- es US carrier competition into Ireland. In the All rights reserved port strategy, with Aer Lingus always flying to old days Aer Lingus would have been grateful the primary airport and Ryanair usually to the for the protection offered by the Shannon pol- Aviation Economics Registered No: 2967706 secondary, but there are now overlaps - for icy; these days, it expects Europe's most (England) instance, Aer Lingus and Ryanair both oper- buoyant economy to be able to generate the ate to Berlin Schoenfeld, and Ryanair has required business and leisure volumes. Registered Office: James House, 1st Floor 22/24 Corsham St London N1 6DR United: M&A posturing VAT No: 701780947 ISSN 1463-9254 mong the large US network carriers, United United as a potential acquirer when it is one of the continues to be an enigma. The airline, the financially worst-performing US airlines outside The opinions expressed in this publica- A tion do not necessarily reflect the opin- second largest in the world, has so much going Chapter 11? ions of the editors, publisher or contribu- tors. Every effort is made to ensure that for it - a powerful global franchise, unrivalled United's parent UAL Corporation emerged the information contained in this publica- exposure to high-yield traffic and, as a result of its from its three-year Chapter 11 reorganisation in tion is accurate, but no legal reponsibility is accepted for any errors or omissions. Chapter 11 restructuring, LCC-level labour costs February 2006 with what was effectively a strong The contents of this publication, either in also. Yet, United seems chronically incapable of vote of confidence from the financial community whole or in part, may not be copied, capitalising on its strengths. (see Aviation Strategy briefing, April 2006). But, stored or reproduced in any format, print- ed or electronic, without the written con- Instead of solid results, we are getting a lot of despite all the hard work - including $7bn cost sent of the publisher. hype about turnarounds and arrogant posturing cuts, debt and lease restructuring and the shed- about mergers and acquisitions. How can CEO ding of pension obligations - UAL has continued Glenn Tilton claim, as he did in a recent speech, to post below-par financial results. that United is now "on a solid footing to participate The first quarter saw a $306m net loss before in mergers and acquisitions"? How can he portray special items - similar to the $302m year-earlier September 2006 2 Aviation Strategy Analysis loss. And although UAL returned to profitability in the second quarter, with operating and net earn- $m UAL CORP.’S REVENUES.. ings of $260m and $119m respectively, the 20,000 results trailed those of other solvent network car- riers. UAL's operating margin was only 5.5%, 18,000 compared to US Airways' 11%, AMR's 8% and Continental's 7%. 16,000 The results were certainly an improvement over the second quarter of 2005, when UAL 14,000 earned a meagre $48m operating profit (1.5% of revenues). The airline outperformed competitors 12,000 on the revenue front, recording 19.7% growth in 1999 2000 2001 2002 2003 2004 2005 domestic mainline passenger revenues, com- pared with 9.5% for the industry. Domestic main- $m ..AND FINANCIAL RESULTS line unit revenues (PRASM) were up by 14%, despite 5% higher capacity (contrasting with com- 2,000 Op. petitors' capacity reductions, but United had cut 1,000 result heavily in 2005). Also, it was UAL's first second- quarter net profit since 2000. 0 But investors expect to see at least industry- par financial performance in the wake of a suc- -1,000 cessful Chapter 11 reorganisation - after all, -2,000 Chapter 11 is the ultimate opportunity to put one's house in order, get rid of unwanted aircraft, get -3,000 Net out of undesired contracts, etc.