Issue no. 221 November 2016
European majors: This issue includes
Degrees of rationality Page depths of the downturn following the global financial crisis, IAG, Lu hansa and each of the three top network carrier groups in Europe promoted Air France-KLM 1 I strategies to return to a sustainable level of profitability by 2015. Things don’t always go as planned; and it is only IAG that has come any- US airline stocks: Not where close, genera ng a return on invested capital of over 13% and Trumped but Buffe ed 5 opera ng margins of 11%. Lu hansa and Air France-KLM have stopped talking about any targets for crea ng returns to shareholders. South Korean LCCs: All three have recently published growing by 9%. Challenging rela onships 8 their third quarter and nine month’s The three groups have all been American: Crea ng returns for results (with IAG capping theirs with pushing growth into their respec ve stakeholders 11 the group’s annual investor day), “low cost” brands. Lu hansa’s Eu- which each show broadly similar rowings increased capacity by 25% Jet values and lease rates 16 trends. Yields and unit revenues year on year in the nine months and have been under pressure — as to fortheperiodaccountedfor9%ofthe be expected, when fuel prices fall, group’s total capacity (in ASK terms) airlines pass on part or all of the and 17% of passenger numbers. Air for 22% of IAG’s passenger numbers savings to the passenger. There does France-KLM’s Transavia grew by 13% and 11% of seat capacity. however appear to have been market and now accounts for 15% of the In these earnings presenta ons weakness on the Atlan c and to Asia group’s total passenger numbers and some mes what is interes ng is what which has added to pricing pressure. 9% of capacity. Vueling — the only isomi ed.Inthisseason’sresultsIAG, For the three months to Septem- one of the three an independent for the first me since the merger be- ber — the main summer season — player — had opera onal difficul es tween BA and Iberia, neglected to de- each registered a decline in revenues, but s ll grew by 11%. It now accounts tail the respec ve revenues and op- fall in opera ng profits and a boost to net income. To be fair, the under- lying performance at IAG was some- EUROPEAN MAJORS: OPERATING PROFITS 12 MONTHS ROLLING (€m) what be er but marred by losses on transla on of Bri sh Airway’s results 3,000 2,500 into Euros following the collapse in IAG Sterling a er the UK’s referendum re- 2,000 sult. 1,500 Lu hansa The mainline network airlines 1,000 in each group maintained “capacity 500 discipline”; although in IAG’s case, 0 Iberia, having gone through success- ful restructuring in the last few years -500 has resumed growth with capacity -1,000 Air France-KLM up by over 5% in the nine months. -1,500 BA increased capacity by 3% and Aer 2010 2011 2012 2013 2014 2015 2016 Lingus (acquired in August last year) Note: Rolling twelve months. Source: company reports. IAG - underlying opera ng profit. Air expanded strongly on the Atlan c, France-KLM - opera ng result. LHAG - “Adjusted” EBIT.
Published by Aviation Strategy Ltd Aviation Strategy era ng profits by “brand”. There was the full Air France brand, so could not also a notable absence of reference possibly be described as low cost, ISSN 2041-4021 (Online) by any of the three to the Atlan c and smacks to us as an a empt to This newsle er is published ten mes a year metal neutral joint ventures. We can introduce ‘B’ scale wages in the com- by Avia on Strategy Limited Jan/Feb and Jul/Aug usually appear as combined issues. only assume that there is some em- pany’s primary hub to force through Our editorial policy is to analyse and cover barrassment associated with this col- employee produc vity. This is sort contemporary avia on issues and airline lec ve omission. of what Bri sh Airways managed strategies in a clear, original and objec- to do at its London Gatwick opera- ve manner. Avia on Strategy does not Air France-KLM shy away from cri cal analysis, and takes a ons a decade ago: the difference global perspec ve — with balanced cover- Air France-KLM meanwhile took being that Gatwick is not BA’s main age of the European, American and Asian markets. the opportunity to announce a new hub, with flights on predominantly strategic programme. Having failed point-to-point low-yield ˝leisure˝ Publisher: in its “Transform 2020” and “Perform routes. 2020” plans to persuade employees The company states that this Keith McMullan James Halstead that it really needed to transform venture will allow it to fly long- and perform, and following a change and medium-haul routes that are Editorial Team of senior management, new CEO currently uneconomic or subject to Jean-Marc Janaillac has introduced a intense compe on and give junior Keith McMullan new plan en tled “Trust Together”. kgm@avia onstrategy.aero pilots the chance to fly long-haul. On the face of it, it appears to be an Even if the unions do agree to the James Halstead jch@avia onstrategy.aero internal message to try and mend idea, it is not clear what would badly-eroded rela ons between the happen at the ten aircra limit. It Tel: +44(0)207-490-4453 Air France management and the does nothing to create significant Fax: +44(0)207-504-8298 French unions, as well as between Air produc vity improvements in the France and KLM. Air France mainline opera ons — Subscriptions: Alongside this the group an- or indeed change how they manage info@avia onstrategy.aero nounced plans for what was de- pilot seniority lists. The plan seems scribed as a new long haul low cost doomed to fail. Copyright: airline based at CDG: up to ten aircra At the same me Air France has by 2020 with volunteer crew from the decided to rein back on expanding ©2016. All rights reserved Air France corpus. It would in fact be a Transavia into a pan-European brand Avia on Strategy Ltd full service airline probably opera ng (which idea, for some reason, the Registered No: 8511732 (England) Registered Office: 137-149 Goswell Rd London EC1V 7ET EUROPEAN MAJORS: UNIT REVENUES AND FUEL VAT No: GB 162 7100 38 12 MONTHS ROLLING ISSN 2041-4021 (Online) 9.5 3.0 9.0 Lu hansa 2.8 The opinions expressed in this publica on 8.5 (€¢/ASK) costs unit Fuel donotnecessarilyreflecttheopinionsofthe 2.6 editors, publisher or contributors. Every ef- 8.0 fort is made to ensure that the informa on 7.5 2.4 contained in this publica on is accurate, but no legal reponsibility is accepted for any er- 7.0 2.2 rors or omissions. The contents of this pub- 6.5 lica on, either in whole or in part, may not 2.0 be copied, stored or reproduced in any for- Unit Revenues (€¢/ASK) 6.0 Air France-KLM 1.8 mat, printed or electronic form, without the 5.5 IAG Fuel wri en consent of the publisher. 5.0 1.6 2010 2011 2012 2013 2014 2015 2016
2 www.aviationstrategy.aero November 2016 EUROPEAN MAJORS: Q3 2016 RESULTS
IAG Lu hansa Group Air France-KLM 2016 2015 %chg 2016 2015 %chg 2016 2015 %chg Revenues(€m) 6,486 6,756 (4.0)% 8,828 8,939 (1.2)% 6,938 7,306 (5.0)% Opera ng profits(€m) 1,205 1,250 (3.6)% 1,148 1,225 (6.3)% 737 880 (16.3)% Net profits(€m) 930 848 9.7 % 1,422 794 79.1 % 544 481 13.1 % Opera ng margin 18.6% 18.5% +0.1pt 13.0% 13.7% (0.7)pt 10.6% 12.0% (1.4)pt Pax (‘000s) 30,849 27,564 11.9 % 32,694 32,098 1.9 % 26,553 25,897 2.5 % ASK (m) 83,441 76,138 9.6 % 81,044 77,905 4.0 % 84,426 83,172 1.5 % RPK (m) 71,431 65,272 9.4 % 68,397 66,973 2.1 % 74,237 73,953 0.4 % Load factor 85.6% 85.7% (0.1)pt 84.4% 86.0% (1.6)pt 87.9% 88.9% (1.0)pt Passenger unit revenues (€¢/ASK) 7.0 8.1 (13.6)% 8.0 8.6 (7.0)% 6.8 7.3 (7.5)% Unit costs (€¢/ASK) 6.3 7.2 (12.4)% 6.8 8.1 (16.0)% 5.9 6.3 (6.3)%
French pilots never liked), and plans quarter by around 20% to €100m, giv- Lu hansa Group to revert the low cost subsidiary to ing it €17m for the nine month pe- a defensive posi on in Amsterdam riod up by an underlying €38m from Lu hansa’s move to develop Eurow- and France. Transavia France, how- the prior year levels). Meanwhile, it ings as a low- cost point-to-point al- ever, by pilot agreement, is limited in will once again rebrand the French terna ve to the mainline network op- the number of aircra it can operate. domes c point-to-point services (no era ons and catapult it into the posi- No doubt the a empt to force its way doubt s ll heavily loss-making) from on of the third largest pan-European into Lu hansa’s second base in Mu- a mixture of Air France and HOP! to LCChasbeengivenaboostbythepos- nich has been an unmi gated disas- HOP! Air France. sible wet-lease deal from the mori- ter (although the LCC subsidiary did bund Air Berlin (see Avia on Strat- improve opera ng results in the third egy, October 2016). It describes the
EUROPEAN MAJORS: 9 MONTHS 2016 RESULTS
IAG Lu hansa Group Air France-KLM 2016 2015 %chg 2016 2015 %chg 2016 2015 %chg Revenues(€m) 17,272 17,119 0.9 % 23,870 24,304 (1.8)% 18,758 19,447 (3.5)% Opera ng profits(€m) 1,915 1,805 6.1 % 1,677 1,693 (0.9)% 955 643 48.5 % Net profits(€m) 1,484 1,180 25.8 % 1,851 1,748 5.9 % 430 -158 nm Opera ng margin 11.1% 10.5% 7.0% 7.0% 5.1% 3.3% ROIC 13.0% 13.6% 9.9% 9.7% 6.5% 5.8% Pax (‘000s) 77,525 66,202 17.1 % 83,946 83,022 1.1 % 70,834 68,498 3.4 % ASK (m) 226,356 203,381 11.3 % 219,130 210,478 4.1 % 230,011 227,103 1.3 % RPK (m) 185,726 166,147 11.8 % 173,864 170,831 1.8 % 197,797 195,159 1.4 % Load factor 82.1% 81.7% 0.4 % 79.3% 81.2% (1.8)% 86.0% 85.9% 0.1 % Passenger unit revenues (€¢/ASK) 6.8 7.5 (9.8)% 7.7 8.3 (7.2)% 6.6 7.0 (4.9)% Unit costs (€¢/ASK) 6.8 7.5 (10.0)% 7.7 8.8 (12.5)% 6.1 6.6 (7.4)% LCC Growth Vueling Eurowings Transavia Pax (‘000s) 17,400e 15,800e 10.1% 13,962 12,892 8.30% 10,439 8,638 20.8% ASK (m) 26,569 23,979 10.8% 18,863 15,163 24.40% 20,116 17,840 12.8% RPK (m) 22,148 19,511 13.5% 15,084 12,077 24.90% 18,041 16,164 11.6% Load factor 83.4% 81.4% 2.0% 80.0% 79.6% 0.32% 89.7% 90.6% -0.92%
November 2016 www.aviationstrategy.aero 3 Eurowings business model as being ˝sustainably successful through [a] EUROPEAN MAJORS: SHARE PRICE PERFORMANCE unique market posi on˝. 500 It aims to be the largest point- to-point European operator in its 400 IAG Air France-KLM home markets (Germany, Austria, 300 Switzerland and Belgium) and hold 250 the top or second posi on in all relevant German airports. It currently 200 operates around 90 aircra in seven 150 bases (Hamburg, Berlin, Hanover, Düsseldorf, Köln/Bonn, Stu gart and 100 Lu hansa Vienna). And following the Air Berlin Indexed (Jan 2012=100) log scale 90 and SN Brussels deals it expects to 80 70 operate 160 aircra in eleven bases 2012 2013 2014 2015 2016 — with the addi on of Brussels, Mu- nich, Salzburg, Palma di Majorca and Brussels. (For some strange reason whilepushingexpansionintotheGer- The highlight was the perfor- it plans to include SN Brussels — it man market). Meanwhile industrial mance at Aer Lingus, achieving an will take full control early next year — rela ons con nue to ebb: strikes at opera ng margin for the quarter of within the Eurowings umbrella). Lu hansa and Germanwings by the nearly 30%, up nearly seven points on While keeping growth at the pilots, and by the cabin a endants at the prior year level. It even achieved group’s network carriers below mar- Eurowings. a near 21% return on invested cap- ket rates (for the nine month period ital. Aer Lingus has been expanding capacity in ASK terms at Lu hansa, IAG strongly, par cularly on the Atlan c. SWISS and Austrian grew by 2.5% Here the group has an opportunity to IAG was par cularly hit in the quar- year on year, while passenger de- develop Dublin as a new ˝low cost˝ ter by the fall in the value of Ster- mand in RPK terms was on a par gateway, with a dis nct advantage of ling against the Euro. The operat- with prior year levels), Eurowings having US immigra on preclearance ing margins at Bri sh Airways were has been expanding strongly — and facili es. In one sense it provides on a par with the prior year third par cularly on long haul — with the extra runway capacity lacking at quarter at 18.6% but the collapse in ASKs and RPKs up by 25% in the nine Heathrow. The challenge will now be the pound resulted in a net €140m months (but passenger numbers up to bring Aer Lingus into the immu- lower opera ng profit on transla on. by only 8% and revenues by 7%). nised joint venture with American on The effects of exchange rate move- Revenues for the point-to-point the Atlan c. ments at Bri sh Airways overall is carrier for the period approached At the group’s Capital Markets somewhat complicated: around 40% €1.6bn, not far short of that achieved day, the management contended of revenues are each in Sterling and by Austrian, but it registered an that nothing had really changed US Dollars, with only 10% in Euros. adjusted opera ng loss of €35m since last year (see Avia on Strategy, apparently down nearly €100m on Given its strength at its base at November 2015). The group has the same period last year. Heathrow — which is s ll the pre- slightly reduced its long term growth Lu hansa avers that it will get Eu- mier long haul gateway to Europe — plans by 1 point to 3%, cut capital rowings’ opera ng unit costs down it has the ability to sell into higher expenditure to an average €1.7bn to 5.8€¢ by 2020 from 8.0¢ last year. value currency markets and ˝switch over the next four years, and reduced This is s ll a long way above the on˝ transfer traffic through its hub, its target of average EBITDAR to figures for European market leader awayfromUKorigina ngsales(which €5.3bn from €5.6bn. It maintains its Ryanair (which has just launched a might be expected to weaken in light plans to target 15% ROIC, opera ng broadsideatLu hansabystar ngop- of lower growth and lower value of margins of 12%-15% and earnings era ons at the Frankfurt home base the pound). growth of over 12% a year.
4 www.aviationstrategy.aero November 2016 US airline stocks: Not Trumped but Buffetted