Mark Broadbentpresents an overview of some of the big trends affecting full-service airlines in different markets worldwide
COMMERCIAL NETWORK AIRLINES
There have been positive results recently among many of the world’s network or full-service airlines, the carriers with big fleets, large passenger flows and operations at multiple hubs.
The United States majors have performed particularly well. Delta Air Lines, the world’s biggest network carrier by fleet size and passengers, posted pre-tax revenues of $1.1 billion for Q4 2017 and an 85% load factor.
American Airlines had a $1 billion pre-tax profit for the third quarter of last year, with revenues up to $10.9 billion and passenger yields growing in every region for the first time since 2014. United Airlines reported pre-tax earnings of $1 billion and an 84% load factor for Q3 2017.
Strong results
The good performances have not just been in the United States. In Europe, the International Airlines Group (IAG), the parent company of British Airways, Iberia, Aer Lingus, Vueling and Level, posted a 20.7% improvement in operating profit for Q3 2017 to €1.4 billion and a load factor of 82.9% across the group.
The Lufthansa Group reported a €1.4 billion operating profit for Q3 and in January 2018 announced 130 million passengers had flown on the group’s airlines during 2017, a record for the company. Turkish Airlines posted revenues of $1.5 billion for Q3 and an operating profit for the first nine months of 2017 of $956 million. Scandinavian Airlines’ Q4 results, released in December, show it improved its earnings by 12% compared to the previous quarter to SEK 1,054 million and its Nordic rival Finnair recorded what it described as the best quarter in its history with revenues increasing by 17.4% to €735 million in Q3.
Despite all these strong results, the European market has consolidated a little; 2017 saw Alitalia enter administration and Air Berlin file for insolvency. In December 2017, the European Commission approved an agreement between Air Berlin’s administrators and easyJet for the UK low-cost carrier (LCC) to acquire part of Air Berlin’s operations at Berlin-Tegel. The UK airline will acquire 25 Airbus A320 Family jets from the former second-largest German airline, take over other assets, including slots and offer employment to Air Berlin crews.
On December 29, IAG announced it is to buy assets (including 15 A320neos) of Niki, formerly part of Air Berlin, which will become an Austrian subsidiary of Vueling Along with Lufthansa and private equity firm Cerberus, easyJet is also interested in acquiring parts of Alitalia, which was put into administration last May. A sale by the Italian government, Alitalia’s major shareholder, had been anticipated by the end of 2017, but the process is now not expected to begin until April 2018, meaning further changes to the make-up of Europe’s big airlines later this year.
There have been good results, too, for Africa’s leading network carrier Ethiopian Airlines. It increased passenger numbers by 18% to 7.6 million in the 2015-2016 financial year, the last year for which results are available, with profits rising by 70% to $265 million.
Ethiopian’s results are fuelling a big expansion programme. The carrier aims to grow its fleet by more than a third to 140 aircraft by 2025 (it has in recent months ordered more A350-900s, Boeing 737 MAX 8s and 777s and Bombardier Dash 8 Q400s) and plans to grow its training, catering and ground businesses, as well as passenger and cargo services.
Contrasts in Africa and Asia
The current solid performances by all these big network airlines, together with the continued low aviation fuel prices (low relative to where prices were a few years ago, at least) helping the bottom line, suggest this is a time of growth and opportunity for full-service airlines.
However, the reality is more complex than a rosy picture for all network airlines everywhere. Ethiopian’s expansion is a marked contrast to the fortunes of another major African network carrier, South African Airways (SAA), which has received a SAR 10 billion bail-out from the South African government. The carrier has a new chief executive officer, Vuyani Jarana, who told the South African channel Eyewitness News SAA’s management’s goals are to improve liquidity and reduce costs within a year.
Kenya Airways, traditionally one of the strongest-performing African network carriers, recorded losses for four straight years in 2013–2016. Its first-half 2017 results issued late in November showed it narrowed its first-half loss to KES 3.8 billion from KES 4.7 billion a year earlier, with its load factor rising by 5.4% to 76.9% and revenue per passenger-km by 6%. The airline says rising consumer spending power in Africa and a prediction for 4.3% GDP growth on the continent for 2018 present potential for further recovery.
Other network airlines elsewhere are encountering headwinds, with John Strickland of JLS Consulting commenting to AIR International: “In Asia we’ve seen the traditional strong performers having a torrid time.”
Singapore Airlines posted a surprise $99.5 million net Q4 loss for the 2016-2017 financial year, although it has since rebounded with a $312 million net profit for the first half of 2017-2018. More strikingly, Cathay Pacific Airways posted a HKD 2.05 billion loss for January–June 2017, not just down from a HKD 353 million profit a year previously, but also its worst first-half loss in 20 years.
In response, Cathay Pacific has started a three-year turnaround programme, but the airline’s Chairman, John Slosar, said in 2017 the company did not expect the operating environment to improve in the short term: “The passenger business will continue to be affected by strong competition from other airlines and our results are expected to be adversely affected by higher fuel prices and our fuel hedging positions.” He added the company would see its transformation programme “accelerate in 2018”.
Strickland said intensified regional competition is a big factor in the carrier’s fortunes: “Cathay Pacific used to funnel all sorts of traffic through its Chinese points, but the Chinese carriers have opened more direct flights, particularly taking more new-generation aircraft like the 787, which allow non-stops, and that’s taken away some of their business.”
Gulf super connectors
Further competition for the Asia-Pacific network airlines has come from the big three Gulf carriers, Emirates, Qatar Airways and Etihad Airways. These carriers, sometimes called the super connectors thanks to their strategies of feeding passengers from extensive global networks through their respective Dubai, Doha and Abu Dhabi hubs, have over time taken a larger share of the air transport market between east and west. However, these three giants have themselves had an unsettling time recently.
Emirates’ full-year profit for 2016-2017 slumped by 70% to AED 2.5 billion and although things have rebounded, with a AED 1.7 billion profit for the six months to September 2017, the airline has nevertheless reined in its expansion plans; another purchase of new A380s expected at the Dubai Airshow in November 2017 didn’t happen.
Meanwhile, Qatar Airways has been affected by the dispute between Qatar and other Arab countries and Etihad is undergoing a strategy review following the departure of former CEO James Hogan. The carrier has already said it will not take on more majority stakes in airlines in addition to the ones it acquired earlier in the 2010s. Two of those stakes were in Alitalia and Air Berlin; the latter filing for insolvency was a direct outcome of Etihad choosing not to make more financing available for the German carrier.
The laptop ban and visa restrictions from the United States on several Muslim countries also affected the big three Gulf carriers, but lower oil revenues due to falling prices, regional conflict and the growth of Turkish Airlines, which International Air Transport Association identifies as another super connector providing fresh competition, have been other factors that have clipped the Gulf carriers’ wings.
New competitors
Aside from geopolitical and macroeconomic factors affecting specific regions, network airlines in more mature travel markets have another challenge with which to contend: the rise of the low-cost long-haul airlines.
Although Laker Airways pioneered this concept of air travel 40 years ago, only in recent years has the market really grown, taking root first in Asia-Pacific with AirAsia X, Cebu Pacific and Scoot and now most visibly in the North Atlantic, which with more than2,000 flights per day according to the UK air navigation services provider NATS is one of the busiest pieces of airspace in the world. Europe’s third-largest LCC is Norwegian. This carrier now operates to various points in the United States from a dozen European airports using Boeing 787-8s and 737 MAX 8s.
The Canadian carrier WestJet flies 767-300ERs and 737-800s from Toronto and Calgary to Edinburgh, Gatwick and Dublin and Icelandbased WOW Air operates A330-200s and A321s from Reykjavik to North American destinations.
This year, Primera Air will enter the low-cost fray across the North Atlantic with services from London Stansted, Paris Charles de Gaulle and Birmingham to New York Newark, Boston-Logan and Toronto with the new A321LR, the higher-capacity, longer-range variant of the A321neo, while in 2019 WestJet will put 787-9s on transatlantic routes.
All these new operators have unsurprisingly spurred responses from the established full-service carriers which for decades have dominated transatlantic air travel. Air Canada launching Rouge with former Air Canada mainline 767-300ERs and the Lufthansa Group setting up Eurowings long-haul with A330-200s were early moves by network airlines into this market. In 2017, IAG launched Level, which operates A330-200s transferred from Iberia along with pilots and crew. Level is to expand this year, with a second base at Paris Orly from where it will fly to New York, Montreal, Guadeloupe and Martinique.
Network carriers are tackling the lowcost long-haul challengers in other ways, apart from setting up new business units.
Some are opening services on the same routes as the newcomers. American, for instance, will start a new Dallas-Fort Worth to Reykjavik service this year competing directly with both WOW Air and Icelandair routes from the Icelandic capital to the Texas hub. In 2019, IAG will resume lapsed Aer Lingus flights from Dublin to North American destinations using seven leased A321LRs, competing with the Norwegian and WestJet services from the Irish capital.
The full-service airlines are also repurposing mainline equipment with more seats to improve unit costs. For example, IAG is retrofitting Iberia A340-300s and A340- 600s with premium economy class and upgauging British Airways’ London Gatwickbased 767-200ERs from 280 to 332 seats.
Does network airlines’ response to the newcomers, together with the extra capacity provided by the market entrants, not mean Atlantic low-cost long-haul will become over-saturated? Strickland thinks it’s a danger: “Some of these routes can perform strongly in the middle of summer, but in a small Irish regional market to a secondary United States market in the middle of the week in the middle of February, my questions are, how well is that going to work [and] will it work at all?”
He noted how in 2017 American and United pulled the routes they’d started from New York Newark to Birmingham: “They’ve got all that power to fill the aircraft with the hubs at the other end and they can’t make it work. That says a lot, I think.”
Speaking at the latest IAG Capital Markets Day, IAG Chief Executive Willie Walsh acknowledged network airlines had to be prudent with low-cost long-haul. According to a transcript of the day’s presentations published on the group’s website, Walsh said:
“Should every airline do it? Absolutely not, because if you are going to try and compete on price – and you have to, to stimulate the market and fill the aircraft – if you do not have a low-cost base you are going to lose a lot of money.”
There has been conjecture for a few years on whether other large LCCs might follow Norwegian and move into long-haul. Walsh said he does not see it happening in the short term and a network carrier’s expertise would prove decisive. He told analysts at the Capital Markets Day: “I do not think they have anything or any chance of doing it better than us, to be honest with you. We have a much better chance of doing it because we have experience in those markets that is very different to the normal, short-haul operating market.”
Partnerships
Low-cost long-haul’s growth is set to continue being an influence on the network airline business, along with wider factors.
Strickland observed: “There are far more [issues] than there normally are running simultaneously. There’s a lot of political uncertainty, lots of points of conflict and friction: US-North Korea, issues in the Gulf, uncertain political conditions across Europe, Brexit.”
Perhaps this multifaceted, complex web of geopolitical and macroeconomic factors lies behind another noticeable trend in the network airlines business: an increase in partnership activities.
Partnerships between the full-service carriers are nothing new, of course; it’s now 20 years since the wave of alliancebuilding that resulted in the Star, SkyTeam and oneworld groupings. However, network airlines are nevertheless continuing to deepen ties to strengthen their market presence, and 2017 proved to be another busy year in this respect.
Air France, KLM, Delta Air Lines and Virgin Atlantic announced a four-way strategic joint venture (JV) on flights across the Atlantic, which the airlines said would offer 300 daily flights. Delta also had a JV with Korean Air Lines approved by the US Department of Transportation in November 2017, while Delta and Air France-KLM also announced a partnership with Jet Airways on flights to Europe and the United States from India.