Issue no. 196 May 2014
airberlin: an airline in search This issue includes of a strategy Page
a company men ons the words “going concern” more airberlin: re-engineering 1 than once in its annual report, it usually a li le concerning. W The fact that airberlin, Germany’s second largest airline, felt India’s LCCs struggle through the need to use the phrase a dozen mes in its 2013 report (twice as tough mes 6 many as in the previous year), without even once men oning its aircra Indigo ...... 8 order backlog, may perhaps suggest that it has become necessary for SpiceJet ...... 9 the directors to convince themselves and the auditors of the fact. GoAir ...... 10 The company’s annual report 2014 do not make much be er read- Air India Express ...... 11 does not make pleasant reading. In ing – although to be fair this is the JetConnect ...... 12 the year to end December capacity weakest period of the year and this fell by 5% as planned but passenger year the period did not include Easter. Gol’s ra onalisa on and numbers declined by 5.5% to 32m. The number of passengers fell by 1% revenue management Revenues dropped by nearly 4% (with but capacity had grown by 4%; the efforts pay off 13 a 5% decline in cket sales) to €4.2bn load factor fell by 4 points to 82%. while published opera ng results Published opera ng losses improved slumped to a loss of €232m, against a slightly to €182m, which prompted profit of €70m in the previous year. the company again to state that its The latest cost saving programme Turbine programme is working (the enues down by 4% (and cket sales (under the soubriquet “Turbine”) is aim is to generate a cumula ve re- were down 5%). Net losses swung in said to have generated over €200m duc on in running costs of €400m at €210m compared with €196m in in cost savings, but the underlying by the end of 2014). Unit costs fell the prior year period. As a result the EBITDAR margin slipped 2 basis by 8% but yields were down 4% and nega ve equity on the balance sheet points to an unsustainable 9% – the unit revenues by 8% giving total rev- worsened to just short of €400m. lowest level since 2003. Moreover, the €232m loss is stated a er non-recurring excep- Air Berlin plc Financial Performance 5,000 200 onal income of €60m, rela ng to Costs profits on asset sales and indemni es 4,000 100 (in the previous year the company Revenues had recorded a profit on the sale of 70% of its frequent flyer plan to 3,000 0 €m E had). €m Reported net losses came in at 2,000 -100 €316m compared with a reported €7m profit in 2012. On the balance 1,000 EBIT -200 sheet the company reported nega ve equity of €186m and a cash posi on 0 -300 of only €223m, a paltry 5% of annual 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E2015E2016E revenues. The results for the first quarter of Source: Company reports, AS analysis
Published by Aviation Strategy Ltd Aviation Strategy Air Berlin plc Share Price ISSN 2041-4021 (Online) 22 This newsle er is published ten mes a year 20 by Avia on Strategy Limited Jan/Feb and 18 Jul/Aug usually appear as combined issues. 16 Our editorial policy is to analyse and cover contemporary avia on issues and airline 14 strategies in a clear, original and objec- 12
ve manner. Avia on Strategy does not € shy away from cri cal analysis, and takes a 10 globalperspec ve–withbalancedcoverage 8 of the European, American and Asian mar- 6 kets. 4 Publisher: 2 0 Keith McMullan 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 James Halstead At the same me as the publi- the perpetual bond can be treated as Editorial Team ca on of the annual results (delayed equity on the balance sheet and thus Keith McMullan a month as the company no doubt can be seen to offset the exis ng neg- kgm@avia onstrategy.aero debated the ques on of whether it a ve equity. The conversion terms on James Halstead was a “going concern”) airberlin an- the bond (at the equivalent of €1.79 jch@avia onstrategy.aero nounced an emergency recapitalisa- a share) would poten ally give E had Heini Nuu nen on. Major shareholder E had had a 70% stake in the company – well hn@avia onstrategy.aero Nick Moreno agreed to inject a further €300m in above the 49% limit for non-EU na- nm@avia onstrategy.aero the form of a perpetual payment-in- onals. kind conver ble bond and extend its The company recognises that the Tel: +44(0)207-490-4453 Fax: +44(0)207-504-8298 exis ng shareholder loan of $255m Turbine programme is not going far (ofwhichlessthan$100mdrawn,and enough and has created a new po- Subscriptions: due to expire in 2016) by five years. si on on the management board of In addi on, the company announced a Chief Restructuring Officer to pur- info@avia onstrategy.aero the issuance of a new €250m se- sue a new restructuring programme, Copyright: nior bond (€100m of which is to re- while sta ng that E had would “fur- ©2014. All rights reserved deem exis ng debt). Because of the ther support airberlin and help the peculiari es of accoun ng standards, business restructure and return to Avia on Strategy Ltd Registered No: 8511732 (England) Registered Office: airberlin Group Fleet 137-149 Goswell Rd 180 757/767 London EC1V 7ET F100 5 7 160 10 10 VAT No: GB 162 7100 38 7 ISSN 2041-4021 (Online) 737Classic 10 13 14 10 140 7 E190 13 14 The opinions expressed in this publica on 2 3 10 Q400 120 10 donotnecessarilyreflecttheopinionsofthe 13 14 A330 12 3 65 68 100 3 editors, publisher or contributors. Every ef- 64 57 fort is made to ensure that the informa on 46 737NG 80 17 51 contained in this publica on is accurate, but 47 no legal reponsibility is accepted for any er- 60 2 rors or omissions. The contents of this pub- 41 10 40 lica on, either in whole or in part, may not 76 71 67 56 60 63 A320 be copied, stored or reproduced in any for- 20 15 42 mat, printed or electronic form, without the 15 wri en consent of the publisher. 0 2006 2007 2008 2009 2010 2011 2012 2013
2 www.aviationstrategy.aero May 2014 airberlin Capacity, demand and load factors hubs in Europe are somewhat ques- 90 90% onable – and had a burgeoning do- Load Factor 80 mes c and intra-European City Shut- tle service. 70 80% In quick succession it acquired 60 dba, to become the second largest 50 ASK 70% German scheduled carrier and a contender to Lu hansa, and 40 RPK Düsseldorf-based LTU, a charter 30 carrier with an extensive long-haul 20 opera on (both acquired airlines 10 were financiallly very weak), hoping to become a grown-up intercon - 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 nental player and described itself as a hybrid scheduled and leisure carrier. sustainable profitability”. E had has scheduled opera ons. When it came By 2008 it had grown to carry 30m apparently placed two execu ves in to the markets in its IPO in 2006 it passengers a year and had plans to the business (James Hogan, CEO of sold itself on the basis of being a low con nue to grow strongly. E had and his CFO already sit as non- cost carrier (that being the flavour of Since then growth has faltered. execu ve directors on the board) and the month). At the me half of its The number of aircra in the fleet hired a management consultancy to services were s ll on charter oper- reached a peak in 2010 at 169 units “re-engineer airberlin”. a ons from German regions to the and has since fallen to 140. The num- Hogan is nothing if not consis- short haul leisure des na ons in the ber of passengers carried peaked in tent – exactly the same strategy is Mediterranean. It had built a hub op- 2011 at 35m 11% higher than in 2013. being applied to similar crises at Jet era on in Palma to funnel demand Total capacity in ASK in 2013 was 1% Airways, E had’s Indian investment – from the disparate German regions higher than five years ago, although it see page 12. onward to Spanish leisure des na- has been able to improve load factors Re-engineering necessary? ons – although short haul transfer by 6.5 points over the period and de- airberlin should be in a rela vely airberlin Balance Sheet Analysis strong posi on. It is the second largest carrier in Germany (the €m 2013 Q1 2014 Net bond issues Proforma largest outbound tourist market in Equity (186) (399) 300 (99) the world) and with 32m passengers Intangible Assets 416 414 414 carried a year the seventh largest Adj shareholders’ funds (602) (813) (513) airline in Europe. It is the largest Long term debt 784 860 150 1,010 operator in Berlin, Düsseldorf and Short term debt 235 214 214 Palma de Mallorca. It has seemed to Cash 223 273 450 723 have had a rela vely cosy duopolis c Cash % revenues 5.4% 6.6% 17.4% rela onship in its key German speak- Net Debt 796 801 501 ing markets (Germany, Austria and Debt/CE 1.22 1.59 1.25 Switzerland) with Lu hansa – which Debt/Adj CE 2.44 4.12 1.72 has been rela vely happy to have Capitalised rentals 4,634 4,101 4,101 airberlin help keep out the European Debt†/CE 1.03 1.08 1.02 LCCs. Up to now however, its strategy Debt†/Adj CE 1.12 1.19 1.11 has appeared confused. airberlin is one of the few for- Source: Company reports, Avia on Strategy analysis. Note: CE=debt + equity mer charter carriers to convert to †Includes capitalised leases.
May 2014 www.aviationstrategy.aero 3 mand in RPK is up by 10% compared made an underlying opera ng profit. equivalent to two months’ revenues. with 2008 – a compound average an- Since then unit costs have grown by airberlin in its current structure nual growth rate of 1.8%. 58% (or an annual average of 6.7%) is possibly incapable of being prof- The company seems to have been and unit revenues by 44% (or an itable. As it moves towards trying trying to reinvent itself as a full ser- annual average of 5.3%). Over the to be a full service network carrier vice carrier at “affordable” fares. In period airberlin has lost a total of and as it moves closer to E had, as July 2010 it announced plans to join €1.1bn and has tapped shareholders seems inevitable, the charter opera- the oneworld alliance (this came into for €480m (excluding the recently an- ons and leisure oriented European effect in March 2012 a er the usual nounced perpetual bond). routes might become increasingly eighteen month gesta on period). In The emergency recapitalisa on non-strategic. In par cular the December 2011, meanwhile, it struck probably does not go far enough. The intra-European leisure transit hub a strategic partnership with E had, balance sheet includes intangible as- in Palma, despite previous protesta- a er the super-connector increased sets of some €415m – a large part ons by the company, is probably in its equity stake to 29%, and formed of which refer to the slots at airports reality badly loss-making. There have what appears now to be the corner- capitalised on the acquisi on of dba already been some sugges ons that stoneofwhathasbeencalledE had’s and LTU. Excluding these from the the group may consider separa ng Egocentric Equity Alliance. As part of net assets give nega ve sharehold- into two – a scheduled opera on this arrangement, airberlin and E - ers’ funds of €813m at the end of based in Germany a rac ve to had have been genera ng closer co- March. On-balance sheet debt totals E had, and a charter business. opera on – with wide-ranging code- €1.1bn(aminorityofwhichrelatesdi- This in turn however may not go share agreements (including some rectly to aircra funding), but a cap- far enough. A prime problem is that with E had’s other codeshare part- italisa on of opera ng leases could whereas it has a rela vely compet- ners, Air France and KLM); pooling of add an extra €4.1bn to liabili es. i ve cost base in comparison with the airberlin 787 orders with those of Againstthisthereisonly€273min Lu hansa as a group, Lu hansa has the Gulf carrier; and reciprocal pilot cash and equivalents. The cash from been pushing its non-hub routes into exchange. the E had conver ble is due in three rela vely low cost germanwings (nar- When the company came to the tranches through the current year.On rowing the unit cost differen al on markets in 2006 it had equity on its a proforma basis (and trea ng it as like-for-like basis). It too suffers from balance sheet of €197m and man- equity)shareholders’fundswouldfall the same problems as Lu hansa in aged to publish a net profit for 2006 to a nega ve €513m against net debt the German market – the country’s of €50m up from a prior year loss of including capitalised leases of €4.4bn federal structure provides a dissemi- €116m. This was also the last year it – but at least it will provide gross cash nated popula on distribu on; and al- though its hub in Düsseldorf may be European Airlines’ Unit Cost Curve in the rela vely densely populated 14 North Rhine Westphalia, the airport SWISS Legacy trend line (the third largest in Germany a er SAS Lu hansa 12 Air France Frankfurt and Munich) is heavily con- Iberia gested with limited possibility for ex- KLM Alitalia Aer Lingus airberlin Bri sh Airways 10 pansion. At the same me – even af- Finnair ter the current Turbine plan to reduce norwegian US¢/ASK unit costs by 8% – it is at a significant 8 Vueling easyJet LCC trend line cost disadvantage to the main Euro- pean LCCs (see chart). 6 Ryanair Wizz E had’s interes ng strategy 4 E had is pursuing an interes ng strat- 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 egy (see Avia on Strategy Novem- Stage length (km) ber 2013) in trying to catch up with Source: Avia on Strategy analysis
4 www.aviationstrategy.aero May 2014 its neighbours Emirates and Qatar likely) possibility could be that a re- yet up to now seems to have been in gaining global market presence to engineering of airberlin may be con- fairly happy in having airberlin as a pushtrafficthroughitsAbuDhabihub nected in some way with E had’s weak compe tor and a shield against by buying stakes in moribund carri- plans for a recapitalised Italian flag Ryanair or easyJet. ers. While spending a small fortune carrier. If it were, this may well create Whatever the cri cisms of the on airberlin it has also taken a stake a significant nuisance to the three top level of investment by E had in air- in Darwin – a small Swiss regional air- European network carriers, in pro- berlin, it has allowed it a modicum of line – and renamed it E had Regional, viding a fourth force a er they have breathing space to carry out a wide- and acquired the maximum possible done so much work in consolida ng ranging restructuring. Pointedly stake in Air Serbia (the former JAT). It the industry. James Hogan dismissed concerns is currently also reputed to be in dis- The European Commission, about the extent of airberlin’s losses, cussions to acquire up to 49% of Ali- meanwhile, has started to inves gate saying: “If we were not convinced talia for perhaps €500m. the level of control exercised by airberlin could be re-engineered we While officially E had legally can- non-EU shareholders of EU and EEA would not have invested”. However, not be seen to have majority own- airlines (including, to keep it fair, that there may be more problems when ership or exercise control in a Euro- of Delta in Virgin Atlan c). Lu hansa airberlin seeks further equity injec- pean airline, it appears obvious that in par cular will be in a quandary. ons from shareholders in the next it is providing significant input into It has been par cularly vocal in its downturn – if not before. Meanwhile, the possible direc on that airberlin objec on to the super-connectors’ the new Chief Restructuring Officer, may take in its restructuring. One picking up traffic from behind its however permanent his posi on may strange (and perhaps logis cally un- Frankfurt or Munich gateways, and be, is in for some interes ng mes.
The Principals and Associates of Avia on Strategy apply a problem-solving, crea ve and pragma c approach to commercial avia on projects. Our exper se is in strategic and financial consul ng in Europe, the Americas, Asia, Africa and the Middle East, covering:
Start-up business plans Turnaround strategies State aid applica ons Due diligence Priva sa on projects Asset valua ons An trust inves ga ons Merger/takeover proposals Compe tor analyses Credit analysis Corporate strategy reviews Market analyses IPO prospectuses An trust inves ga ons Traffic/revenue forecasts
For further informa on please contact: James Halstead or Keith McMullan, Avia on Strategy Ltd e-mail: info@avia onstrategy.aero
May 2014 www.aviationstrategy.aero 5 India’s LCCs struggle through tough times
’s LCCs have toiled for years Indian Domes c Market to survive and scrape a profit in 70 50% I a market with one of the highest % chg passenger growth rates in the world. 60 40% But that same growth rate and the
50 30% ch % Year-on-year opening up of the avia on market to Domes c Pax foreign investment is now encourag- 40 20% ing yet another wave of new airlines in India. Can the established Indian Pax m 30 10% LCCs survive? 20 0% As can be seen in the graphs on this page, both domes c and interna- 10 -10% onal traffic has already risen signifi- 0 -20% cantly in the last decade, and accord- 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 ing to Boeing over the next 20 years Source: AAI Note: year end March 31 India is forecast to have one of the highestpassengertrafficgrowthrates prospects for the Indian avia on in- be fatal. Many of them have strug- in the world, driven by GDP growth dustry look bright, par cularly given gled to convert the growing willing- and higher disposable incomes, par- that the Indian market is s ll hugely ness of the middle classes to travel by cularly among the growing urban- underserved, with hundreds of large air into a profitable business model, based middle classes, who number towns and ci es that have li le or no because although this market is large around 300m-400m out of a total air connec on. andgrowing,itiss llrela vely“poor” popula on of 1.3bn. ButwhileprospectsforIndianavi- by western standards of income, and The Indian government began to a on may well be bright as a whole, as a result is very sensi ve to fare liberalise significantly the avia on in- for the incumbent LCCs the impact of prices. This high elas city of demand dustry in 2004 (see Avia on Strat- this new wave of compe on could has encouraged LCCs to cut fares at egy, December 2003 and June 2007), and a number of LCCs have sprung Interna onal Market to/from India up since then to exploit this liberali- 50 18% % chg sa on. However, in September 2012 16% the government took the major step 40 14% of allowing foreign airlines to own up Interna onal Pax chg % Year-on-year to 49% of local carriers, and as a re- 12% 30 sult overseas carriers began hun ng 10% for opportuni es to enter the Indian
Pax m 8% market. E had Airways moved first 20 by paying $380m for 24% of Jet Air- 6% ways in 2013, while both Singapore 10 4% Airlines and AirAsia are se ng up In- 2% dian opera ons in the near future. 0 0% Add in purely Indian start-ups such 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 as Air Costa and Air Pegasus, and the Source: AAI Note: year end March 31
6 www.aviationstrategy.aero May 2014 every opportunity in order to boost India’s Domes c routes demand, but when all airlines do it the result is a downward spiral in SXR overall revenue and profitability. And that spiral is con nuing – a latest round of air fare cuts ini ated by SpiceJet in April 2014 has encouraged fares to fall to their lowest levels in around two years. DEL The market is also distorted by JAI LKO high airport charges and taxes on jet GAU fuel and – perhaps most significantly of all – by the compe on provided AMD by Air India, which con nues to be IDR CCU supported by the Indian state a er making colossal losses. To make mat- BBI BOM ters worse, over the last year India’s PNQ airlines have struggled to overcome HYD the impact of the rupee’s sharp de- precia on against the US Dollar (by GOI around 11% in just 12 months), which has – along with significantly higher BLR MAA fuel prices – helped to increase op- era ng costs for Indian airlines by at COK least 20% in 2013. TRV In the following pages Avia on Strategy takes a look at each of the Note: The thickness of the lines represent the volume of capacity on each route. The area of the major Indian LCCs in turn. large circles relate to total domes c capacity at the top airports.
Indian LCC Fleets
Fleet (orders) IndiGo SpiceJet GoAir Air India Express JetKonnect
A320 78 (7) 18 A320neo (160) (74) A321neo (20) 737-700 5 737-800 37 (17) 17 4 737-900 2 737-900ER 6 737MAX (42) Dash 8 Q400 15 (15) ATR 72 5
Total 78 (187) 58 (74) 18 (74) 17 16
May 2014 www.aviationstrategy.aero 7 Indigo
at Gurgaon, IndiGo was paid-for meals and no in-flight enter- weak rupee and high fuel prices are launched in 2006 by Rahul tainment. Perhaps because of that fo- pu ng pressure on margins”, but B Ba a, owner of Indian con- cus it has a 30% leading share of the that “the religion in IndiGo is to keep glomerate InterGlobe Enterprises, Indian domes c market – and unlike prices low, otherwise I don’t think we and Rakesh Gangwal, a former CEO of many of its rivals IndiGo is profitable. can grow at 20-30% annually”. US Airways who now runs US-based Some analysts have speculated The longer-term plan is to keep Caelum Investments. Those two that IndiGo makes a substan al book growing by around 10-15 aircra a en es hold 51.1% and 48% stakes profit by selling and leasing back its year for the next decade, which ap- respec vely in the airline. aircra , but the airline has denied pears sustainable, and a poten al IPO Today IndiGo has the largest fleet this, and it’s difficult to verify either in 2015 or 2016 is a dis nct possibil- of all the Indian LCCs, with its 78 way given that as an unlisted com- ity. IndiGo took a long look at doing A320s having an average age of less pany IndiGo releases rela vely few fi- an IPO back in 2010 a er hiring no than three years. With its main base nancial details. less than five financial advisors, but at Delhi and with secondary bases IndiGo has yet to post results for decided to not go ahead at that point. at Mumbai and Kolkata, IndiGo op- the financial year ending March 2014 However, prior to an IPO it‘s possi- erates to 31 domes c and five inter- (they are likely to be revealed around ble that the airline may a ract a for- na onal des na ons; it started in- September, as is customary among eign investor; Qatar Airways is appar- terna onal opera ons in 2011 and almost all Indian airlines), but in the ently interested in acquiring a stake. currently operates from Mumbai and 2012/13 financial year it reported a The two airlines know each other well Delhi to Bangkok, Dubai, Kathmandu, substan al six fold rise in net profit to – in May 2013 Qatar and IndiGo ap- Muscat and Singapore. Rs7.9bn (US$143m), its fi h straight parently held talks about a codeshare The airline has a he y 187 air- year of profitability. The increase was deal, though this came to nothing. cra on order (the largest order book based on a 39% rise in capacity and A financial e-up would make of any Indian LCC), comprising 167 20% rise in average yield over the strategic sense for both carriers. The A320s and 20 A321s, the majority of year, with revenue up 65% year-on- Middle East has proved an a rac ve which are neo models. IndiGo placed year to Rs95bn (S1.7bn). Opera ng market for IndiGo – it operates more an order for 180 Airbus aircra in profit for the 2012/13 financial year than 20 flights week between India 2011, worth $15bn at list prices, and totalled Rs9.9bn ($181m). and the Gulf regions, with its routes 160 A320neos will start arriving from Aditya Ghosh, president at to Dubai and Muscat proving popular 2016 and 20 A321neos will be deliv- IndiGo, says the secret to its prof- with the Indian expat and working ered from the following year, with all itability is a relentless pursuit of community in the region. the neo being delivered by 2025. cost cu ng and a focus on a basic Qatar may be looking to match ri- IndiGo is likely to add substan al and simple product. “We haven’t val E had’s purchase of a stake in Jet new orders some me this year (for as tried anything fancy, or bizarrely Airways, though the Doha-based car- many as 250 aircra , one analyst be- different,” he says, and the airline’s rier has also been linked with an in- lieves) and it would be a shock if they reputa on for reliability and con- vestment in SpiceJet, as well as re- were for anything other than further sistent products allows it leeway portedly looking for codeshares with A320neos – although the airline has to charge higher fares than many virtually the en re Indian avia on in- previously indicated that it may look of its LCC compe tors – and even cluding Go Air, IndiGo, SpiceJet and at regional aircra at some point in more than full-service compe tors even Air India. the future if market economics make Air India and Jet Airways on certain sense. routes. But not too high – Rahul IndiGo ghtlyfollowsatradi onal Bha a, group MD of InterGlobe LCC model, with single aircra type Enterprises, which owns IndiGo, says and a single class product that has that as with all Indian airlines “the
8 www.aviationstrategy.aero May 2014 SpiceJet
at Chennai airport, Spice- firm order, though for the moment ing SpiceJet”. Load factor fell signifi- Jet’s origins date back to early the -800s s ll remain in the Boeing or- cantly in the three month period to B 1990s when ModiLu was der book. December 2013, from 75% to 70.5%, launched by entrepreneur S K Modi The 15 Q400s in SpiceJet’s fleet and overall revenue per ASK fell 6% in in partnership with Lu hansa to connect SpiceJet’s main bases to sec- the quarter. become one of the first full-service ondary and ter ary ci es in India, and SpiceJet is a emp ng to return carriers to emerge to provide compe- another 15 of the type will expand to profitability through a series of on to Air India. ModiLu ceased this network. measures that include cost reduc- opera ons in 1996 but its AOC was SpiceJet is the second-largest LCC ons, produc vity improvements taken over by Royal Airways. The in India with an approximate 20% and “a complete network and sched- owners of Royal, by this me a dor- share of the domes c market, but de- ule redesign”. This includes a greater mant airline, made the bold move of spite that and even with the deep emphasis on a ract higher margin planning and se ng up India’s first pockets of its owners, SpiceJet has passengers. While an LCC, the airline LCC and ordering new 737-800s. The struggled to make a profit. has been straying into full-service Mumbai and Delhi investor presen- In the first three-quarters of the enhancements. SpiceJet offers pre- ta ons not only raised the necessary 2013/14 financial year (the nine mium seats, with priority check-in capital but accidently helped launch months to 31st December 2013), and extra baggage allowance, and two other rival LCCs. SpiceJet saw revenue rise by 12.6% the airline is reconfiguring its 737 In 2010 a 37.7% share of SpiceJet to Rs47.7bn ($772m), although the aircra to offer five seat rows with was acquired by Indian conglomerate opera ng result turned from a profit enhanced legroom. SpiceJet also the Sun Group, which is controlled by in the first nine months of 2012/13 recently launched an FFP for business billionaire Kalanithi Maran, and this to a Rs5.9bn ($96m) opera ng loss in travellers called Corporate Frequent has since risen to at least 49% (with April to December 2013. The net re- Flyer, where customers booking the rest on a free float). sult similarly plunged from a Rs5.4bn through corporate accounts gain one SpiceJet’s first LCC opera ons be- ($97m) loss to a Rs6.8bn ($110m) free flight for every six ckets booked. gan in 2005 and today SpiceJet oper- loss over the same compara ve And this May SpiceJet also launched ates a fleet of 58, with an average age nine-month period. its biggest adver sing campaign of 4.5 years, to around 41 domes c The airline blames the weaker ru- for more than three years, which and seven interna onal des na ons. pee, which inflated lease and fuel reportedly will include television In December last year SpiceJet signed costs by around Rs630m ($10m) in adverts in the coming months. athree-yearinterlineagreementwith the last three months of 2013. It adds Some analysts believe that Singaporean LCC Tigerair, becoming that fuel prices were 9% higher in the though laudable, these efforts will the first Indian LCC to agree such co- same quarter year-on-year, with fuel not succeed in make the airline opera on with a foreign airline. costs accoun ng for 52% of revenue profitable, and that the real prob- SpiceJet has 74 aircra on firm in the October-December 2013 pe- lem is that SpiceJet is significantly order, comprising 17 737-800s, 42 riod, compared with 45% a year pre- undercapitalised, with an urgent 737MAXs and 15 Dash 8 Q400s. The viously. need to a ract new investors and 737 MAX 8 order was announced Overall costs per ASK rose 10% in capital. Indeed the airline is expected this March (though it was reportedly the quarter, which was not offset by to post a loss of as much as Rs10bn agreed between Boeing and the air- a 3% rise in passenger yield in the ($162m) for the full 2013/14 financial line last October), in a deal worth same period. SpiceJet adds that “de- year, which would be not far off its $4.4bn at list prices, and with the first mand for air travel so ened during accumulated losses over the previous aircra due to be delivered in 2018. the year, exacerbated by more seats seven years. The MAX order has apparently taken due to planned addi onal aircra by The inten ons of SpiceJet’s cur- the place of the outstanding 737-800 the Indian avia on industry – includ- rent owners are unknown, but the
May 2014 www.aviationstrategy.aero 9 carrier will reportedly get a new CEO join Philippine Airlines. An American round of fare wars in India earlier this this summer when Sanjiv Kapoor is ci zen, Kapoor was previously CEO of year, which was inevitably copied promotedfromhiscurrentposi onof Bangladesh’s GMG Airlines. by its compe tors even though COO (which he became in November The first item in his in-tray will be one of them called SpiceJet’s move 2013). The previous incumbent CEO whether to con nue with deep fare “suicidal”. was Neil Mills, who le last year to cu ng. SpiceJet ini ated another GoAir
A was founded in Novem- with two more aircra being added complete five years of domes c oper- ber 2005 by Jehangir Wadia, by the end of this year and further a onsandhaveaminimumfleetof20 G a member of the family that leased aircra in 2015. aircra . run the Wadia group, an Indian con- GoAir’s main opera on is based The airline has lobbied un- glomerate that dates back to the 18th at Mumbai, with a secondary base at successfully to overcome these century and which today has inter- Delhi, and flights to and from Delhi restric ons, although some analysts ests in everything from chemicals to and Mumbai account for approxi- believed they may finally be scrapped health care. mately half of all services, with the by the government this summer – With Jehangir Wadia as CEO, the Mumbai-Delhi trunk route by far its which will be irrelevant to GoAir as airline has grown slowly, though the most important route. its 20th aircra should be delivered company says that this has been in- GoAir has an approximate 8% to in July or August anyway, which will ten onal as it priori ses profitabil- 9% share of the Indian domes c mar- then fulfil the last of these criteria. ity ahead of winning market share. ket, and it par cularly gained share Either way, GoAir will start inter- GoAir currently operates a fleet of a er the exit of Kingfisher Airlines in na onal opera ons by the end of this 18 A320s (with less than four years’ 2012. In the 2012/13 financial year year at the latest, with at least 10% average age) to more than 20 des- (ending March 31st) it made a Rs1bn of its capacity being dedicated to in- na ons in India. It offers a partly ($19m) net profit, compared with a terna onal services – though this will tradi onal LCC model, with a single Rs1.3bn ($26m) loss in 2011/12 – al- depend on securing traffic rights into model fleet and paid-for meals, al- though all of the profit came from the the markets it targets. These are be- though it also offers a premium ser- sale and leaseback of aircra ; exclud- lieved to be in the Gulf region and vice called GoBusiness that includes ingsaleandleasebacks,GoAir’slosses neighbouring south-east Asia coun- meals, a spare middle seat in be- would have been Rs793m ($14m). tries, with GoAir likely to priori se in- tween passengers on selected routes However, in the first six months terna onal services from second er (such as Mumbai-Delhi). It also offers of the 2013/14 financial year (April- ci es – i.e. not from Mumbai and an FFP called Go Club, which was the September 2013) GoAir saw passen- Delhi, where interna onal compe - first FFP to be offered by an Indian gers carried rise more than 30%, to on is fierce. LCC. 2.6m, and the airline says it’s on tar- Domes cally, growth will also be GoAir has 74 A320neos on or- get to record another profit in the seenprimarilyonroutestosecondary der, of which 72 were placed in 2011 2013/14 financial year. ci es, such as Patna, Lucknow, Jaipur, in a deal worth S5.4bn at list prices. GoAir’s fleet will reach around 37 Kochi, Chandigarh, and Jammu and Deliveries are due to begin in 2016, aircra by the end of 2017 and it is Kashmir, with De Roni saying that with aircra arriving at around 15 per keen to launch interna onal services, “metro to metro business has not wit- year a er that. Un l then growth will although as a result of its current nessed a similar pace of growth˝. A come by further leased aircra , ac- size GoAir is prohibited from operat- number of other secondary ci es will cording to CEO Giorgio De Roni, (who ing these under government regula- beaddedoverthenexttwoyears,and has been in the posi on since 2011 ons called the 5/20 rules, whereby inpar cularintheeastofthecountry, and who was previously chief rev- domes c airlines are not allowed to which the airline believes is par cular enue officer of Italian carrier Air One) operate interna onally unless they underserved.
10 www.aviationstrategy.aero May 2014 Along with SpiceJet, GoAir is also ways. Last year De Roni said that: for a “partner”, and sources suggest men oned by analysts as being po- “The shareholders are not interested that nego a ons are advanced with ten ally available for foreign invest- in selling the company, but they want at least one carrier. ment, and the Indian press has re- a partner to support the growth of ported that talks have been held with the company˝. JP Morgan has been Lu hansa, Emirates and Qatar Air- appointed to help with the search Air India Express
I established its LCC nextthreeyears,andithasalreadyre- available for Air India Charter is for subsidiary – Air India Express leased a tender for the dry lease of the 2011/12 financial year ending A – in 2005 to operate to des- eight aircra . However, the process March 31st 2012. Reported revenue na ons within a four hour flying of acquiring new aircra is somewhat for the year was Rs13.8bn ($267m), me from the country, with a typical complicated for Air India Express as a 2.2% rise on the previous finan- LCC turnaround of no more than one it needs to get government permis- cial year, with net loss totalling Rs6bn hour at all airports. sion for major new expenses, which ($116m), compared with a Rs3.9bn Air India Express operates a fleet given the precarious financial posi- loss in 2010/11. The improvement in of 17 737-800s (four others were on of Air India is not an easy process. revenue was due largely to a 2.5% recently returned to lessors), with Nevertheless, poten al new des- increase in load factor to 71.0% in an average age of more than six na ons believed to be under analy- 2011/12, and a 7.6% rise in yield. Dur- years. The carrier is headquartered sis include Iran, Russia and other CIS ing the 12 month period Air India Ex- at Cochin airport in and has two countries – although as yet Air India presscarried2.31mpassengers,com- other main opera ng bases – Calicut Express will not confirm those tar- pared with 2.38m in the previous fi- airport in Kozhikode and Trivandrum get markets. Sundar and other senior nancial year. airport in Thiruvananthapuram. As Air India Express execu ves believe Air India Express now operates in- such most of its flights operate to and that there is significant demand for dependently of its parent airline and from the south of the country, with LCC services to the Middle East and is building up its own pilot workforce. 12 domes c and 13 interna onal Asia that is currently going to com- Despite having its own AOC in pre- des na ons served. pe tors, and that an expanded Air In- vious years the LCC has faced prob- The majority of Air India Express’s dia express network will win passen- lemsasitusedAirIndiapilotsforallits interna onal focus is on routes to gersthatwanttobeloyaltotheIndian flights, and they were inevitably pri- the Middle East – including to Dubai, flag carrier. ori sed to Air India flights, with Air Sharjah, Abu Dhabi, Al Ain, Muscat, The airline offers a single class India Express ge ng pilot hours only Salalah, Bahrain, Doha and Kuwait – service, although free in-flight meals when it suited their parent’s sched- where the carrier serves Indian ex- and entertainment are included with ules. This even led to flights being pat communi es in those countries. all fares, and passengers can now pre- withdrawn, and two years ago the air- The remaining interna onal des na- select seats for a fee. However, last line told the Indian avia on ministry ons are Singapore, Kuala Lumpur, year Air India Express reduced its free that it needed at least 200 more pilots Columbo and Dhaka. baggage allowance from 30kg to 20kg in order to operate effec vely. However, under a new CEO ap- per passenger, charging for any extra That shor all has now been made pointed in April this year – K. Shyam weight, which was met with cri cism up, with direct hires to the company Sundar – Air India Express has plans from some passengers. and the building up of its own pi- to significantly increase its interna- In terms of financial repor ng Air lot training resources. The extra pilots onal network outside of the Middle India Express is part (and the only havealsohelpedincreaseaircra u l- East as part of an expansion that will part) of Air India Charters Limited, isa on,whichaccordingtoonereport see the fleet rise to 36 by 2017. 19 which in turn is a subsidiary of Air was as low as six hours a day in 2012, more737-800swillbeleasedoverthe India, and the last full report made well below standard.
May 2014 www.aviationstrategy.aero 11 JetConnect
(or JetKonnect as var- Airways bought a 24% stake in Jet Air- varied fleet it has other “non-LCC” iously spelled by the company) ways for around $380m last year (see a ributes, such as two classes on se- J is an LCC based in Delhi that has Avia on Strategy, November 2013). lected services, with a Première class a somewhat complicated history. The Most immediately the Gulf car- offering in-flight meals, improved carrier was previously known as Jet rier’s injec on of investment and re- seat pitch, dedicated check-in coun- AirwaysKonnectandpriortothat(un- sources at least makes JetConnect’s ters and lounge access, as well as an l 2012) it was called Jetlite. That air- parent a more stable en ty, but the FFP called JetPrivilege (effec vely line previously operated as Air Sa- deal also opens up the ques on of exactly the same as Jet Airways’ FFP). hara, an Indian carrier that began just how E had sees JetConnect fit- JetConnect has an es mated 6- life under the name Sahara Airlines ng into an overall strategy for Jet Air- 7% market share of the Indian do- back in 1993. Sahara was a strong ways. mes c market, which it maintains brand in India in its rôle as a micor- Although flights and schedules at through constant fare wars with its ri- lender. Sahara Airlines became Air JetConnect have been altered in or- vals – in January this year it slashed Sahara in 2000, and in 2007 it was der to connect be er with Jet Airways fares by 50% via a 30-day advance bought by Jet Airways for $340m, and E had flights, there were reports purchase fares on certain routes (a a er which it was immediately re- last year that in an cipa on of the discount that ran un l April). named as Jetlite. Finally, in March E had deal Jet Airways may want to JetConnect’s results are not sep- 2012 Jetlite was submerged into Jet convert JetConnect into a full service arated out from its parent, though Airways low cost brand JetConnect airline,inordertobringitclosertothe in the first three-quarters of the (which had launched in 2009), then Jet Airways product and to avoid so- 2013/14 financial year (the nine becoming a separate airline under called “brand confusion” with its par- months ending December 31st 2013) that name. ent. That hasn’t happened so far, al- Jet Airways reported a net loss of Parent company Jet Airways was though just how much JetConnect is Rs15bn ($245m), with domes c founded (and is s ll chaired) back in an actual LCC is open to debate. opera ons (including both Jet Air- 1993byNareshGoyal,oneoftherich- Today the airline operates an ways and JetConnect) accoun ng for estmeninIndia,andtodayitoperates assorted mix of 16 aircra – com- Rs52bn ($849m), though this was 114 aircra domes cally and inter- prising five 737-700s, four 737-800s, down 3.9% compared with the April na onally. However it has been loss two 737-900s and five ATR 72s – to December period of 2012. making for a considerable number of on a solely domes c route network years, although white knight E had linking 55 des na ons. As well as a
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12 www.aviationstrategy.aero May 2014 Gol’s rationalisation and revenue management efforts pay off
Brazil’s prolonged eco- 2014, given likely changes to the US help and exper se, TAM has turned nomic slowdown, currency interest rate policy and Brazil’s gen- around its Brazil domes c oper- A woes and World Cup chal- eral elec on in October. The Real at a ons, which are now profitable. lenges, Gol, La n America’s leading that level is keeping Gol’s fuel prices Also, Latam has almost eliminated LCC, has staged a surprisingly robust at record levels. TAM’s balance sheet exposure to the financial turnaround. But because Gol, like its Brazilian peers, faces Brazilian Real (see Avia on Strategy, the airline has had to dig itself out of a a challenging June-July period cater- April 2014). very deep hole, its opera ng margins ingforaspikeinlow-yielddemandbe- are s ll in the low-to-mid single digits cause of the World Cup. It will be a fi- Revenue-led turnaround – a significant improvement from the nancial nega ve for the airlines in the According to its Q1 presenta on, Gol nega ve 11.2% margin seen in 2012 short term, because business travel is achieved the highest EBIT margin im- but nowhere near sa sfactory. expected to be down sharply during provement among 15 interna onal Gol’s problem is that there is no the Cup. carriers in the 12 months ended let-upfromexternalchallenges.Brazil And compe tors are making bold March 31. Its margin rose by 13.4 is in its fourth consecu ve year of moves. Azul, Brazil’s third largest car- percentage points, compared to modest GDP growth, with more of rier, recently announced plans to en- runner-up IAG’s 10.6, Alaska’s 6.4 and the same expected in 2015. The latest ter the Brazil-US market in early 2015, Delta’s 4.5 point improvements. projec on is for only 1.6% growth in ini ally with six A330-200s and later The key reason was Gol’s out- 2014, followed by 2% in 2015 (a mid- with A350-900s. The planned daily standing unit revenue performance. May survey of some 100 financial in- nonstop, low-fare flights from Azul’s Its RASK rose by 17.7%, compared to s tu ons in Brazil). Infla on is on the São Paulo Campinas hub (from where the 4% increase seen by the next- rise, currently projected to be 6.4% in it serves 104 domes c des na ons) bestcarrier(Alaska).Golhasalsoseen 2014. to various US gateways could poten- strong yield and load factor improve- In the past year the Brazilian Real ally undermine Gol’s strategy of op- ments; in the first quarter,its load fac- has hovered in the 2.2-2.5 to the dol- era ng one-stop flights to the US. tor rose by nine points to 76.1%. lar range – a low level not seen since Gol’s main compe tor TAM is The drama c RASK and load fac- 2008. More weakening and vola lity now much stronger because it is part tor shi s were possible because Gol are on the cards for the second half of of the Latam Group. With Latam’s contracted in size and because capac- ityandpricingdisciplinehasprevailed Gol’s Revenues and Opera ng Margins in the Brazilian airline industry since 10,000 early/mid 2012 – at least at Gol and 29% 30% TAM, which s ll account for 75% of 24% 8,000 23% the domes c market. 18% 20% Gol is now 14% smaller in terms Opera ng margin 6,000 of ASKs than two years ago (March 10% 10% quarter figures). It is unusual for
R$m 7% 4% 4,000 3% an LCC to shrink like that, though 0% 0% Gol had boosted its size through -1% 2,000 -3% two acquisi ons – Varig in 2007 Revenues -10% and Webjet in 2011. The Webjet -11% 0 integra on definitely helped the 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132014v latest restructuring efforts in 2012 Note: v Mid-point of the 3-6% forecast Gol reaffirmed on May 15. and early 2013, because Gol opted to
May 2014 www.aviationstrategy.aero 13 end Webjet’s opera ons and dispose offers the “largest number of cate- fight to get the funds repatriated at of its 20 737-300s. gory A seats” (an ANAC classifica on) the original exchange rates.) Be er yield management and in Brazil. There are efficiency bene- Because of the cost headwinds, a new focus on more profitable fits associated with having only one Gol achieved only a 3.9% adjusted routes have also contributed to Gol’s type of configura on for each aircra opera ng margin in Q1. The reported strong RASK trends. In early 2013 model. And the move makes it easier opera ng profit of R$144m (5.8% Gol implemented what it described to keep capacity in check this year. of revenues) included a R$48m gain as a “new route network”, which So Gol has done a lot of work from a sale-leaseback transac on. involved elimina ng some routes, on the revenue side. Notably, a The net loss for the quarter was reducing night flights, strengthening new leadership took over in June R$96m. São Paulo Guarulhos hub opera ons, 2012, when Paulo Kakinoff, formerly Although Gol achieved a R$266m improving connec vity with partners Audi’s Brazil head and a Gol director, ($120m) opera ng profit in 2013, it and increased focus on the corporate replaced founder Constan no de has had net losses for three consec- market. Oliveira Jr. as CEO. u ve years, losing R$3bn ($1.4bn) in Of course, the main benefit of the Terrible cost headwinds aggregate in 2011-2013. R$70m Webjet acquisi on was that The 2012 restructuring included A lot to Smile about it strengthened Gol’s slot holdings at some promising cost cuts (notably six key airports: Guarulhos, Brasilia, Smiles, the FFP that Gol listed publicly from a 20% headcount reduc on), Galeao, Santos Dumont, Confins and in April 2013 but s ll includes in its which enabled Gol to keep its total Porto Alegre’s Salgado Filho. consolidated results (54.5% owned), unit costs flat in 2013, despite the Despite its sharp contrac on (and has truly been a bright spot finan- ASK reduc on. But recent months because TAM also contracted), Gol cially. In addi on to helping Gol at- have seen terrible cost headwinds, as actually improved its domes c mar- tract and retain passengers, Smiles is was illustrated by the 17% and 22% ket share (in RPKs) by 1.8 points in highly profitable. It earned net prof- surges in Gol’s CASK and ex-fuel CASK the past year, to 36.6% in Q1 2014. its of R$208m and R$78m ($94m and in the March quarter. In that period TAM’s share fell by 3.1 $35m) in 2013 and Q1 2014, respec- The main culprit has been the points to 38.1%, Azul’s remained un- vely, represen ng 36% and 42% of Brazilian Real’s decline against the changed at 16.7% and Avianca Brazil’s revenues. dollar (18% year-on-year in Q1). Be- increased by 1.2 points to 7.9%. The IPO raised R$1.1bn ($495m). cause of that, Gol paid record fuel Gol’s revenue performance may In April Smiles’ board approved a prices. Leasing costs per ASK surged also have benefited from the move R$1bn ($450m) “capital reduc on” by 36%, mainly because more aircra more upmarket with JetBlue-style or a special dividend, which will be were on opera ng leases but also be- products like “GOL+Conforto”, which in addi on to R$160.3m ($72m) cause of the weaker currency. There was first introduced on the 737- of dividends paid for 2013. It will were infla onary pressures in many 800s on the Rio-São Paulo shu le essen ally mean a big chunk of cost categories, including labour. late last year. The product features cash redistributed to Gol from the In the non-opera ng categories, more comfortable seats, with extra Smiles/consolidated balance sheet Gol incurred sharply higher interest legroom and more space between and a modest increase in consoli- expenses because of the Real’s de- seats, in the first seven rows of the dated debt because Smiles is taking cline. Gol had to pay income tax be- aircra . The seats are offered free of a R$700m ($315m) loan from a cause of profits earned at its FFP unit charge to elite FFP members and sold financial ins tu on. Smiles. There were odd items such as from R$30 to other customers. Like Smiles had 9.9m members and a R$56m “interest hedge” expense. JetBlue, Gol has found the strategy so 218 commercial partners at the end And Gol conserva vely recognised a successful that it is now expanding it of March. The membership grew by R$76m ($34m) loss from the devalua- to its en re domes c fleet, including 10% in 2013 and by 7.4% in Q1 2014. on of the Venezuelan bolivar against 737-700s. By the end of May, 80% of the dollar. (Gol had R$351m cash Airline partnerships Gol’s fleet will have those seats. trapped in Venezuela at the end of Gol is benefi ng significantly from Gol can soon adver se that it March and will of course con nue to airline partnerships, especially since
14 www.aviationstrategy.aero May 2014 it has secured equity investments The fact that Delta and AF-KLM stop. The flights are med to arrive from two major global carriers – are both members of SkyTeam may in Santo Domingo at about the same Delta and Air France-KLM. Gol was make it easier for Gol to coordinate me, allowing passengers to switch. able to forge two such “exclusive” its systems with AF-KLM, but Gol will In the Q1 call Gol’s management long-term strategic partnerships, not join SkyTeam. It remains commit- described the US services as “very, because it had something really ted to the “open architecture” type very successful”. The flights have special to offer: long-term access to alliance strategy similar to those of enjoyed strong demand and are very the huge Brazilian market. JetBlue and WestJet. important for Smiles. Gol will be Delta paid $100m for a 3% stake Gol also has codeshare agree- adding São Paulo (Campinas)-Santo in Gol, a board seat, an exclusive ments in place with Iberia, Alitalia, Domingo-Miami flights in July. codeshareagreementintheBrazil-US Qatar, Aerolineas Argen nas and But what about the poten al im- market and two 767s in December TAP. The TAP deal, announced on pact of Azul’s plans to operate non- 2011. Codeshare coopera on now April 11, is interes ng because TAP stop to the US with larger, longer- gives the airlines access to some 400 is the Europe-Brazil market leader, range aircra ? In response to ques- des na ons in over 62 countries. opera ng 74 weekly flights from ons,Golexecu vesindicatedinmid- The February 2014 deal with Air Portugal to as many as 10 ci es in May that the airline had not yet de- France-KLM was modelled a er the Brazil. cided whether to grow the Santo Delta agreement. It is exclusive in the Interna onal expansion Domingo opera ons, though there Brazil-Europe market and will mean a was “clear poten al”. (The original joint reach of 318 des na ons in 115 In early 2013 Gol announced a new plans envisaged SD as a poten al hub countries. The deal was also valued at interna onal expansion drive that for the carrier.) $100m and includes a board seat, but would serve two purposes: diversify Of course, the US is just one of 15 there were some interes ng differ- revenue sources (given the sluggish interna onal markets for Gol. The air- ences. First, it comprised of two main demand in Brazil) and give it a natural line is adding new routes to Chile and parts: a $52m investment in Gol’s pre- exchange rate hedge (through an in- Argen na this summer (Guarulhos- ferred shares (1.5% ownership stake) creaseforeigncurrencydenominated San ago and Fortaleza-Buenos Aires) and $48m “for purposes of enhanc- revenues). and expects to announce more inter- ing the effec veness of the strate- Gol had just entered the Brazil-US na onal expansion before the year- gic commercial partnership”. Gol has market (December 2012) with daily end. Gol is on track with the strat- not disclosed exactly what the $48m São Paulo-Orlando and Rio-Miami egy to growits interna onalrevenues relates to, other than that $23m is flights, which are operated via Santo from 8% to 17% of total revenues for “commercial and synergies” and Domingo (Dominican Republic) within three years; the current level is $15m is “due over two years as cash because the 737-800s need a fuel 12%. flow from the agreement”. Second, AF-KLM paid a steep pre- GOL’S Unit revenues and domes c capacity trends mium for the 1.5% stake (170% above 13,000 30% the stock’s closing price that day). AF- Unit revenues 25% Domes c ASKs -14.2% KLM,whichcon nuestoreportlosses 12,500 pct change and is trying to restructure, evidently 20% change % Year-on-year very badly wanted that foothold in 12,000 15% Brazil. The deal gained mely regu- 10% latory approval from Brazil’s CADE in ASK m 11,500 early May, enabling AF-KLM to take 5% advantage of the World Cup-related 0% 11,000 demand surge (as well as obviously -5% nextyear’sOlympics).AFbegananew 10,500 -10% route to Brasilia in March and also Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 plans Paris-São Paulo A380 flights. 2011 2012 2013 2014
May 2014 www.aviationstrategy.aero 15 Steady improvement in Gol’s EBIT Although the forecast has some 500 5% level of nega ve financial impact 3.3% EBIT 3.0% from the World Cup built in, that is one area of uncertainty. It is hard to 0 0% predict how much business travel demand will decline in June-July and much will also depend on Gol’s
R$m -3.0% -500 -5% pricing strategy. Preparing for the World Cup has -6.1% Margin been one big hassle for Brazil’s air- -1,000 -10% lines. They have been subjected to -10.1% increased ANAC monitoring and are Q1 Q2 Q3 Q4 Q1 under the threat of penal es for de- 2013 2013 2013 2013 2014 Source:Gol. LTM = Latest twelve months lays, overpricing, “misuse of slots” and such-like during the Cup. And, of Balance sheet considera ons returned to lessors) and is expected course, each airline wants to “put its Gol does not have any liquidity is- to remain at 140 in 2015 and 2016. best foot forward” for the throngs of sues, because it has made it a pol- The total firm orderbook with Boeing foreign visitors that will be flying do- icy to maintain strong cash reserves is impressive: 133 aircra , valued at mes cally in Brazil. ever since it narrowly escaped a cash R$34.1bn ($15.3bn). Gol has provided 974 extra flights crunch a er the Varig acquisi on. To- Golaimstobefreecashflow(FCF) or flight- me changes for the Cup. It tal cash at the end of March was neutral this year but hopes that from has invested in a “new visual iden ty” R$2.8bn – a very healthy 30% of an- 2015 be er margins and con nued at the 12 host airports and on its web- nual revenues. capital discipline would lead to posi- site and mobile pla orms, which in- Gol remains highly leveraged, ve FCF. As long as EBITDAR margins cluded adding three new languages. though, with total debt of R$5.5bn remain high (17-18% in recent quar- It has provided special training to em- ($2.5bn) and adjusted debt (including ters), there will be no cash constraints ployees, hired addi onal staff and re- leases) of R$10.8bn ($4.9bn) as of or pressure to reduce capex. allocated personnel. Four of its air- March 31. But growth in EBITDAR has Outlook cra have received special paint jobs. greatly improved debt ra os, and Analysts say that if the financial The steady improvement trend in there are no major repayments due impact of the Cup is not too bad, Gol’s opera ng profit in the past this year. Gol remains commi ed to Gol could report a posi ve EBIT mar- five quarters (see chart) offers much reducing short-term obliga ons and gin for the June quarter for the first hope for the future. Even in this keeping a strong cash posi on. me since 2010. But, because ex- very difficult external environment, EventhoughGolpostponedmany change rates are not coopera ng, a Gol has been able to improve its deliveries when it began cu ng ca- net loss is expected for a fourth con- opera ng margins. pacity, its aircra capex remains siz- secu ve year. Of course, the long- Gol is projec ng a 3-6% opera ng able, at R$1.1-1.2bn ($495-540m) an- term prospects for Brazil and Gol re- marginfor2014. The forecastis based nually in 2015-2016. But the new air- main excellent. on realis c assump ons: Brazilian cra will be for replacement, and the GDP expanding by 1.5-2%, the Real year-end 2015 and 2016 opera onal weakening further to R$/US$ 2.40- fleets will actually be smaller than 2.50 and fuel prices increasing from what Gol had three years ago (though the Q1 level. Gol expects its domes c By Heini Nuu nen totalseatswillincreasebecauseGolis ASKs todecline by 1-3%, interna onal hnuu [email protected] receiving 737-800s and re ring 737- ASKs to increase by 8%, RASK growth 700s). The March 31 opera onal fleet to exceed 10% and ex-fuel CASK to comprised of 141 737-NGs (not in- increase by 10% or less in 2014. cluding six aircra that were being
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