Analysis

IAG vows it will take legacy out of Iberia as losses deepen

7 August, 2012

International Airlines Group (IAG) is drafting a comprehensive restructuring plan for Iberia that will include short-term downsizing, network reshaping to deliver higher unit revenues and a re-evaluation of all aspects of the business. Job cuts will be an inevitable consequence of the overhaul. Efforts to address the Spanish carrier’s uncompetitive cost structure are not new and date from before the merger with British Airways (BA) in Jan-2011, but results have been insufficient and losses are spiraling out of control as the economic crisis in Spain worsens and the onslaught of LCCs persists.

While Iberia’s pilots continue to fight change other legacy carriers are restructuring and this is threatening Iberia’s leadership position in the Europe-Latin American market. The doubling of the departure taxes at Iberia’s main Madrid and Barcelona bases since 01-Jul-2012 is putting salt on the wound and diminishing the airline’s appeal.

Lufthansa Group presses forward with cost cuts as 2Q profits fall 24%

3 August, 2012

Europe’s largest airline group has decided to further revise full-year capacity growth downwards to 0.5% and rigorously pursue its SCORE restructuring programme to protect yield and combat the dire operating environment marked by economic uncertainties in Europe, a night-flight ban at its main hub in Frankfurt, increased air traffic taxes and above all high fuel prices. Lufthansa Group’s decision follows an unsatisfactory performance in 1H2012 in its passenger airline business segment, which recorded an operating loss of EUR179 million, widening the EUR100 million operating loss recorded in the year-ago period despite a 7.2% increase in revenue to EUR11.2 billion.

The Group’s airlines recorded diverging results and highlights the need to cut costs at its largest unit Lufthansa while simultaneously increasing synergies between the different airlines. Lufthansa German Airlines amassed a 1H2012 operating loss of EUR300 million (nearly double the EUR146 million operating deficit reported 1H2011) while SWISS and Austrian Airlines earned EUR48 million and EUR26 million, respectively. Austrian’s operating performance reflects the ruthless restructuring implemented by CEO Jaan Albrecht and the noteworthy turnaround is in contrast to the declining performance of Lufthansa Group’s long-standing star SWISS.

WestJet’s cost pressures mount as 2Q profits surge

2 August, 2012

Canadian low-cost star WestJet delivered a 66% rise year-on-year in 2Q2012 profits to CAD42.5 million (USD42.2 million) as strong demand helped lift the carrier’s revenues by 9% to CAD809 million (USD804 million). But despite showing confidence that positive revenue trends will continue, WestJet has further revised its full-year 2012 unit cost guidance upwards driven by hiring staff to accommodate its winter schedule, shorter stage-lengths and a slight capacity reduction stemming from an aircraft reconfiguration project to install a premium economy section on its fleet of 100 Boeing 737s.

Similar to its US codeshare partner Delta, WestJet believes the costs it is incurring from certain investments in the short term will produce favourable margin expansion over the long term, particularly the addition of eights seats on its 17 737-800s as part of the reconfiguration project scheduled to begin in Aug-2012. The carrier is also increasing its technology spend to improve its product merchandising. But those investments along with other cost pressures has resulted in WestJet issuing its second revision to unit costs guidance excluding fuel for the full year to 3%-3.5% from 1.5% to 2.5%.

Ryanair's profits fall as it ponders stakes in Aer Lingus and London Stansted

1 August, 2012

Dublin-based Ryanair recorded a near 30% fall in earnings for the three months ending 30-Jun-2012 in spite of a 6% rise in passenger numbers and a 4% increase in average fares. Net profit for its fiscal first quarter came in at EUR99 million compared to EUR139 million in the year-ago period as revenues rose 11%. But the airline's total operating expenses grew at a higher rate of 17% primarily due to sharply higher fuel costs.

Ryanair’s decrease in net profit was in line with its own guidance, but below consensus forecasts of EUR114 million. Despite the fall in earnings during its fiscal first quarter the carrier is maintaining its full-year outlook and expects to earn between EUR400 million and EUR440 million for its fiscal year ending 31-Mar-2013 as continuing austerity measures, recession in Europe and lower yields at new bases will restrain fare growth. It anticipates growing passenger numbers by 5% to 79 million. Europe’s largest LCC in terms of passengers posted a net profit of EUR503 million in FY2012 and EUR403 million in FY2011.

Air France-KLM sinks deeper into the red as it further revises capex and capacity

31 July, 2012

In spite of growing its passenger revenues nearly 7%, Air France-KLM Group saw its 2Q2012 net loss widen year-over-year as a result of provisions for restructuring and a drop in the value of fuel hedging contracts. The Franco-Dutch group recorded a deficit of EUR895 million for the three months ending 30-Jun-2012, more than quadruple of the EUR197 million net loss accrued in the year-ago period.

Air France-KLM took a special charge of EUR368 million related to its Transform 2015 restructuring programme, principally to fund a voluntary redundancy plan announced at Air France in Jun-2012. It also took a EUR372 million accounting charge related to the hedging of fuel prices. Excluding these non-cash items the Group’s net loss for 2Q2012 would be “by no means abnormal”, Air France-KLM Group CFO Philippe Calavia noted during a discussion of the company's results.

Integration challenges continue to plague United’s financial performance

27 July, 2012

Special charges stemming from the integration of United and Continental after their 2010 merger were a major contributor to the company’s 2Q2012 profits falling 37% year-over-year. Despite echoing comments made by other carriers that demand remains relatively stable against a backdrop of macroeconomic uncertainty, United’s revenue performance continues to lag behind its US industry peers, and it is not clear when the gap will be closed.

United recorded USD206 million in special charges during 2Q2012, of which USD137 million, or 66%, stemmed from integration costs related to the merger. The charges pressured the carrier’s quarterly profits, which year-over-year fell from USD538 million to USD339 million. Excluding those items United’s profit for 2Q2012 grew to USD545 million.

Delta’s cost pressures mount as revenue growth remains solid

26 July, 2012

Delta Air Lines enjoyed strong revenue growth during 2Q2012 as demand remained steady despite the negative macro economic headlines from Europe that continue to fuel global jitters. The carrier’s forward bookings for 3Q2012 indicate both corporate and leisure demand is holding steady despite underlying economic uncertainty. But as the carrier’s revenue performance continues to be strong, Delta is facing steady cost headwinds throughout the remainder of the year as a result of capacity cuts and product investments that the carrier assures will produce margin gains in the future.

Unfavourable settlements in its fuel hedging portfolio drove Delta to a 2Q2012 loss of USD168 million. Excluding special items that included the losses on fuel hedges and expenses associated with 2,000 employees opting to take early-out packages, Delta’s profit during the quarter was USD586 million, compared with a USD198 million profit in 2Q2011.

easyJet counters Europe’s pessimistic mood and raises full-year profit expectations

26 July, 2012

easyJet beat the continuous run of disappointing economic data in Europe and has lifted its full-year pre-tax profit guidance after recording a strong performance for the three months ending 30-Jun-2012. Europe’s second largest LCC in terms of passenger numbers now expects to report a profit before tax of between GBP280 million and GBP300 million for its fiscal year ending 30-Sep-2012, above analyst estimates and above the company’s reported pre-tax profit of GBP248 million in FY2011 and GBP154 million in FY2010.

easyJet’s revenues in 3QFY2012 (three months ending 30-Jun-2012) rose 11% year-over-year to GBP1 billion as passenger numbers increased 11% to 16 million and total revenue per seat grew 2.8%. The airline increased the number of seats flown year-on-year by 7.5% to 17.9 million and load factor improved 2.8ppt to 89%. The solid operating performance was coupled with a 3% reduction of cost per seat excluding fuel and follows an enhanced operating and financial performance in its typically weak 1HFY2012.

Southwest remains cautious as it records strong 2Q2012 earnings

20 July, 2012

Executives at Southwest Airlines are remaining cautious even as the carrier recorded a healthy 42% increase in 2Q2012 profits on a nearly 12% rise in revenue. But the carrier’s cost creep continued throughout the first six months of 2012, and Southwest warns of rising unit costs throughout the remainder of the year. The anticipated cost pressure coupled with uncertain domestic economic trends have led Southwest to remain subdued in its outlook even as demand and pricing continue to remain strong.

Southwest’s 2Q2012 performance was strong across all the key financial metrics as net income increased from USD161 million to USD228 million year-over-year. Operating revenues increased from USD4 billion to nearly USD5 billion, aided by a 5% rise in average fares to USD150. The carrier also reported a impressive 122% jump in operating income during 2Q2012 to USD407 million. Southwest’s performance during the quarter was a marked improvement from the USD18 million net loss and 90% drop in operating income the carrier recorded in 1Q2012.

Etihad targets second year of profitability with 30% increase in revenue and declining cost base

5 July, 2012

Etihad Airways in 1H2012 reported another period of remarkable growth as revenue for the six months to 30-Jun-2012 rose 30% compared to 1H2011 to USD2.24 billion as the carrier increased capacity, added new destinations and improved its load factors. It did not disclose bottom-line profitability.

Six new aircraft were delivered in the six month period, including the carrier’s first three class Boeing 777-300ER. Etihad added services to Basra, Sahnghai Pudong and Nairobi in 1H2012. Lagos service was also launched on 01-Jul-2012.

With the new aircraft and expanded network, passenger numbers for the half year rose 30% to 4.89 million, while revenue passenger kilometres also rose 30%, reaching 22.73 billion. Capacity was up only 23%, to 29.5 billion available seat kilometres. With demand growth well ahead of capacity, passenger load factors rose 4.2ppt to 77.1%.

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