Aviation Strategy Issue No: 114 April 2007 Ryanair on the Atlantic ransatlantic open skies appears to have acted as a catalyst for CONTENTS Tstartling change in the long haul sector. Ryanair's announcement that it will enter the long haul business, in approximately four years time, with an upcoming order for 50 787s or maybe A350s, repre- sents potentially a big shake-up in the Europe-US market. It is an Analysis indication that Ryanair had serious operational ambitions when it built up its stake in Aer Lingus, now frustrated by the EC's competi- tion concerns. It may also be a recognition of the limits to growth in Long-haul LCC? 1 the intra-European LCC market. For the European network carriers, Ryanair on the long haul hori- zon must be a worry despite their initial dismissive reactions. Delta Air Lines: Lufthansa and Air France have been willing to absorb very heavy From bankruptcy to losses on their intra-European operations, as LCCs have captured industry-leading financials? point-to-point traffic and undermined yield, in order to assure feed to 2-10 their intercontinental hubs. Now they face the prospect of an LCC attacking their point-to-point long haul business, and not just econo- my passengers, as Ryanair also plans to offer a premium cabin. There are, however, a series of questions about how Ryanair will make its long haul airline work, how it will establish its cost advan- Briefing tage, and when it will be able to start up. The key may be the 787 price that Boeing will be able to provide Aeroflot Russian Airlines: to one of its most favoured customers. But Boeing isn't under any Dealing with the permeating particular pressure to discount, having a firm orderbook of about 550 Soviet legacy and its lasting units and delivery slots booked up until 2011/12. Maybe Ryanair, complications which is one of five airlines consulting with Boeing on the 737 11-20 replacement programme, has already started to negotiate (specula- tion surrounds a 30-unit order for an "undisclosed" purchaser revealed in mid April). The alternative is a deal with Airbus on the Spring Airlines: A350. Breaking the mould, the self- Ryanair will transfer its economies of simplicity to the long haul declared first Chinese LCC sector, selling only point to point tickets and only through the inter- survives its early trials net. Marketing will be high-profile but low cost; the €10 headline 20-23 fares have already generated great publicity. The carrier will contin- ue to eschew interlining and connecting services, though at its main bases, Stansted in particular, it should pick up a significant volume of self-connecting business passengers flying into STN from obscure points on the Ryanair network, flying out on the long-hauls (without, of course, any hope of compensation if they miss their connection). Presumably coordinated coach services will transport passengers to PUBLISHER city centres, a source of ancillary income to add to onboard sales, car hire agreements and hotel booking commissions. Ryanair could potentially launch transatlantic services from Aviation Economics Frankfurt Hahn, Marseilles and probably Bergamo, though Paris James House, 1st Floor Beauvais, Rome Ciampino and Girona are runway restricted. It will be interesting to observe customer reaction - fares are of course the 22/24 Corsham Street main selling point but long haul non-connecting travellers might also London N1 6DR be attracted to the lower stress levels offered by some relatively Tel: +44 (0) 20 7490 5215 uncongested, simple lay-out airports compared to the majors' hubs. Fax: +44 (0) 20 7490 5218 e-mail: [email protected] www.aviationeconomics.com Aviation Strategy Analysis Delta: From bankruptcy to industry-leading financials? aving fended off a hostile takeover bid The unsecured creditors, which will be Hfrom US Airways back in January, Delta major shareholders in the reorganised com- Aviation Strategy Air Lines is now on course to emerge from pany, merely wanted to make sure that is published 10 times a year Chapter 11 as a standalone entity at the end Delta's board and leadership would be open by Aviation Economics of April. The Atlanta-based carrier, which has to potential future mergers and acquisitions, Editor: been in bankruptcy since September 2005, should such opportunities arise. But those Keith McMullan has made a comprehensive effort to reshape moves certainly added an unusual twist to [email protected] itself. It looks to be a perfect example of the final months of Delta's Chapter 11 reor- Chapter 11 transformation, but are its busi- ganisation. Contributing Editor: ness plan forecasts realistic? In recent weeks, Delta and the creditors Heini Nuutinen Delta still needs final creditor and bank- have finalised the company's post-bankrupt- Contributing Editor: ruptcy court approvals for its Plan of cy compensation plans, corporate bylaws Nick Moreno Reorganization (POR), which was originally and the board of directors. The new board, filed on December 19 and amended in late announced on March 30, includes seven Sub-editor: January. The plan must be approved by at new appointees - all current or former exec- Julian Longin least 51% of the creditors and two-thirds of utives of large US companies. Ex- [email protected] the dollar amount of claims. The voting Continental chief Gordon Bethune, who Subscriptions: deadline is April 9, and the bankruptcy court acted as advisor to the creditors' committee [email protected] has scheduled a confirmation hearing for on the US Airways bid, is not included, but April 25. If all goes well, Delta hopes to ex-Northwest CEO Richard Anderson is. Ex- Tel: +44 (0)20 7490 5215 emerge from Chapter 11 on April 30 or short- Eastman Kodak CEO Daniel Carp will be Copyright: ly thereafter and re-list its stock on the NYSE chairman. The one director guaranteed a Aviation Economics (under its historic ticker symbol "DAL") in the board seat is Delta's CEO - currently Gerald All rights reserved first week of May. Grinstein, 74, who will retire after the post- Creditor approval is virtually certain. The bankruptcy board has named a successor. Aviation Economics official committee of unsecured creditors Delta has had Chapter 11 exit financing Registered No: 2967706 (England) and the two official retiree committees all commitments in place since late January. support the plan; after all, they have worked Unlike US Airways, but like UAL, it has Registered Office: very closely with Delta's management in the raised no new equity. It has lined up $2.5bn James House, 1st Floor past two months in finalising key aspects of in secured debt financing from a group of 22/24 Corsham St the POR. No major new objections have prestigious financial institutions, including JP London N1 6DR VAT No: 701780947 been raised. And, as of the end of March, Morgan, Goldman Sachs, Merrill Lynch, there appeared to be no competing plans in Lehman Brothers, UBS and Barclays ISSN 1463-9254 the works. Capital. The financing, which has competi- The opinions expressed in this publica- tion do not necessarily reflect the opin- Back in January, Delta made some tive terms and comprises a $1bn first-lien ions of the editors, publisher or contribu- important concessions and ceded authority revolving credit facility and $1.5bn in tors. Every effort is made to ensure that the information contained in this publica- in return for the creditors' committee not secured term loans, will replace Delta's tion is accurate, but no legal reponsibility is accepted for any errors or omissions. supporting US Airways' hostile bid, which $2.1bn DIP financing and boost its cash was withdrawn on January 31. Most impor- position. Since it is all secured financing The contents of this publication, either in whole or in part, may not be copied, tantly, the creditors' committee gained the backed by attractive collateral, risks to the stored or reproduced in any format, print- ed or electronic, without the written con- right to appoint 10 of the 11 post-bankruptcy lenders are obviously minimal. sent of the publisher. board directors (of which three had to be Finally, Delta has accomplished some- current directors). Delta also agreed to thing that bankrupt companies usually avoid exclude from its new charter and bylaws any until well after their emergence from Chapter poison-pill provisions that could be used to 11: it held a "2007 Investor Day" at its Atlanta block future merger deals. headquarters on March 27. This was despite April 2007 2 Aviation Strategy Analysis the fact that many shareholders got burned DELTA’S OPERATING MARGIN FORECAST in the lead-up to the Chapter 11 filing and % those still hanging on will receive nothing when the current stock is cancelled upon 15 Chapter 11 exit. But, based on what hap- 10 pened with US Airways and United, many analysts will be keen to quickly reintroduce 5 coverage of Delta. The many hours of man- agement presentations (also via the 0 Internet) were extremely helpful. -5 Delta's ability to hold an investor day at this stage may be another example of the -10 reduced stigma associated with bankruptcy. But another reason is that Delta has a great 2000 2001 2002 2003 2004 2005 2006 2007F 2008F 2009F 2010F story to sell. First, the airline has achieved Note: Excludes projected profit sharing payments in 2007-2010 an impressive financial turnaround in the Source: Forecasts from Delta Investor Presentation, 27 March 2007 past 18 months. Second, like United a year ago, Delta emerges from bankruptcy with a $bn DELTA’S PRE-TAX INCOME FORECAST formidable global network. 3 Financial turnaround 2 1 Ironically, Delta entered the post- September 2001 industry crisis in great 0 financial shape.