International Airlines Group partnership works

Courtesy British Airways

Courtesy British Airways

The success of International Airlines Group (IAG) in the last two to three years is proof that its strategic partnership works. The group, made up originally of British Airways (BA) and Spanish carrier Iberia and subsequently Vueling which is a budget operator, was joined by Aer Lingus in August this year.

Excluding Aer Lingus, IAG posted a pre-tax profit for Q3 (Jul to Sep) of €1.1bn (US$1.2bn), an increase of 48% from last year. Chief executive Willie Walsh said: “We’re reporting strong quarter results with a positive contribution from all of our airlines.” Encouraged by a better Q3 than Q2, the group is confident that its operating profits for the full year could be as high as €2.3bn, reaffirming its previous forecast of over €2.2bn but looking more optimistically at a higher number. Operating profits for the first nine months were €1.8bn.

Compared to Europe’s largest partnership airline Air France-KLM which continued to report deepening losses (its Q2 loss of €79m was larger than that of €11m a year ago) even as fuel costs held steady in the lower range, IAG on the other hand is gaining new strengths. If the weakening euro has affected Air France-KLM adversely, so has it affected IAG, particularly for BA as the major partner of IAG. But the state of the currency can work both ways, whether positively or negatively, depending on the specific market. In fact Air France-KLM, as does IAG, stands to gain from operations outside continental EU, particularly the United States.

It would be pretentious to suggest that there is a formulaic – even more pretentious of an inherent – magic in the IAG partnership that contributes to its success. Partnerships are forged for several reasons, and not few of them were motivated by political, even personal, reasons. Invariably the investment is almost always about synergy, or premised upon the potential for synergy. The IAG proposal was not without reservations and scepticism among analysts. The merger was completed in January 2011. In its second year, IAG plunged from a profit of €527m to a loss of €997m, prompting chief executive Willie Walsh to admit that it might have been better to delay but not scuttle the marriage as he remained convinced of its benefits.

Walsh said: “This is an important step in the process towards creating one of the world’s global airlines that will be better equipped to compete with other major airlines and participate in future industry consolidation.”

Give credit to Walsh for his vision and leadership. As the industry moved into mega alliances, BA too needed to expand and extend beyond its traditional borders, and when the industry not long after was dragged down by a global economic meltdown, the increased pressure of competition in a reduced market demanded an urgent shift to focus on cost efficiency to try and retain market share. Anti-merger Iberia supporters expressed concern that the Spanish carrier would be swallowed up by the larger British carrier. While Walsh reiterated that Ibe5ria would retain its identity, he did not mince his words when he mentioned how Iberia was lagging behind BA and was in a “fight for survival”.

In fact, the circumstances turned out to be a blessing in disguise for Iberia, which was buffered by BA for the stringent cost-cutting measures that followed and whose action was legitimized by the dire straits it found itself rather than risk going bust altogether. It was a good match, both airlines operating few overlapping routes. And as Walsh noted, “It combines BA’s strength position on the mature North Atlantic market with Iberia’s strong position in the fast growing South Atlantic market.” It was a Walsh tour de force, the kind of business intrepidity that Air France-KLM was not prepared to flaunt, perhaps wisely, when faced with the prospect of increasing its stake in the beleaguered Italian carrier Alitalia. The mega frenzy can lead to costly makeovers and adjustments, draining resources of the parent. Clearly IAG was not a passive investment for BA, unlike the lacklustre partnership between Singapore Airline (SIA) and Virgin Atlantic while it lasted before SIA sold it to Delta Air Lines at a loss.

IAG bounced back into profitability in 2013, posting a profit of €227m, which more than tripled a year later to €828m. The question now is how much stronger can IAG get with Aer Lingus coming on board. The Irish flag carrier made an operating profit of €45m from the day it joined IAG.

Courtesy PA

Courtesy PA

It was not surprising that Aer Lingus felt the same initial reservation as Iberia when approached by IAG, but the successful integration of the Spanish carrier did much to allay the concern. Aer Lingus would too retain its independent identity. The good news for IAG was that Aer Lingus was joining as a profitable partner with expanded operations across the Atlantic. Wrenching the Irish carrier from Ryanair in a possible takeover by the budget carrier was a feat for BA through IAG, literally putting a lid on the competition as low-cost carriers across Europe continue to challenge the legacy market. Air France-KLM for one is feeling the pinch.

Adding Aer Lingus to IAG provides numerous opportunities for synergy and extensive connectivity to Ireland (as far as BA is concerned), particularly as landing slots for expansion at London Heathrow become a scarcity. Walsh, a former chief of Aer Lingus, said connecting Heathrow and Dublin would be a priority and assured the continuation of Aer Lingus’ profitable regional routes. The Irish government is cherishing the hope that Dublin would assume new importance as a hub for trans-Atlantic operations.

For Aer Lingus, tapping into the bigger IAG network would help fuel its growth. Internationally, IAG partners would be better positioned to meet the competition from other airlines, particularly Middle East carriers such as Emirates and Etihad Airways. European carriers such as Air France-KLM and Lufthansa are struggling to stave off competition by Gulf carriers, which recently were also criticized by US carriers United, American and Delta of unfair competition supported by state subsidies.

Interestingly, Qatar Airways already has a 10% stake in IAG. Qatar chief executive Akbar Al Baker saw it as “an excellent opportunity to further develop our westwards strategy,” linking the airline with two major European hubs and strong transatlantic networks. Qatar has a strong network eastwards, from the Middle East across India to Asia and Australia, and this largely complements the IAG network. The question now is how much more of IAG will Qatar eventually own as the group, additionally with a strong American Airlines alliance, looks poised to grow stronger.

This article was first published in Aspire Aviation.

Advertisements

Qatar Airways nets a prized catch, expanding westwards

IT may seem somewhat crazy, but it is definitely not surprising in today’s aviation landscape of fast changing and crisscrossed relationships, some of them making most unlikely bedfellows. The ends justify the means.

Courtesy British Airways

Courtesy British Airways

Qatar Airways has acquired a 10% stake in International Airlines Group (IAG), better known as the owner of British Airways (BA) and Iberia. IAG also owns Spanish budget carrier Vueling. The act of acquisition itself by the cash-rich Middle East carrier does not surprise. Qatar lags behind rival Etihad Airways in this respect; Etihad already owns Alitalia (49%), Air Serbia (49%), Air Serbia (49%), Air Seychelles (40%), Etihad Regional (formerly Darwin Airlines) (33.3%), Air Berlin (29.21%), Jet Airways (24%), Virgin Australia (10%) and Aer Lingus (2.987%).

But coming lately, Qatar has bagged a prized acquisition, considering IAG’s bases at two major European hubs, in particular London Heathrow, and the strong transatlantic networks of BA and Iberia. Qatar chief executive Akbar Al Baker said: “IAG represents an excellent opportunity to further develop our westwards strategy.” It should be a strong partnership. Together, their networks cover Europe, North and South America, Africa, the Middle East, India and Southeast Asia.

In 2013 Qatar became a member of OneWorld, becoming the only one of the big three Gulf carriers to join a global airline alliance. More than an apparent Qatari interest in things British, this was a step forward to forge a closer relationship with BA. Qatar said it may increase its stake in IAG for which it paid £1.15 billion (US$1.73 billion). However, EU regulations have placed a cap on non-EU ownership at 49%.

Courtesy Qatar Airways

Courtesy Qatar Airways

Quite unlike Etihad, which has entered the arena as a white knight in many cases, Qatar is buying into one of Europe’s more profitable outfits. Clearly it is a strategic move. While European carriers are becoming wary of Gulf carriers making inroads in the EU market, the competition is at the same time a race among the big three Middle East carriers themselves- Qatar, Etihad and Emirates Airlines. This has become all the more prominent in recent years as they out-compete each other within their region and seek aggressively to push out their geographical boundaries, leveraging on the success of home bases such as Dubai, Abu Dhabi and Doha as hubs for international traffic connecting Asia Pacific, Europe, Africa and the Americas.

The rivalry for supremacy is clear in a jibe made by Mr Al Baker on the race to top the chart for extreme luxury in the air, something that carriers outside the Gulf are less disposed to think about at the same level. He said: “We always raise the bar for our dear friends around the area to try to copy us.” (The big deal about extreme luxury, Jan 19, 2015)

Courtesy PA

Courtesy PA


The timing could not have been better for Qatar as IAG looks likely to succeed in a new takeover bid of Irish carrier Aer Lingus after two failed attempts previously. This would gain IAG more take-off and landing slots at Heathrow. What is interesting is the composition of Aer Lingus partners, which include Ryanair (29.8%) and Etihad. Any opposition to the deal is likely to come from the Irish government which owns 25% of Aer Lingus, but it may be a price well worth paying for the crucial air links between cities in Ireland and Heathrow as the world’s largest hub (until topped by Dubai recently) and beyond. Ryanair has itself attempted unsuccessfully to take over Aer Lingus and objected vehemently to IAG’s proposal in the past for reasons that are not difficult to see. IAG’s chief executive officer Willie Walsh and Ryanair’s chief Michael O’Leary are not exactly the best of friends. But if money talks, the latest offer of €1.3billion (US$1.47 billion) by IAG may well carry the day.

Airline relationships in today’s industry are more complex, if not blatantly promiscuous. While global alliances offer the broad framework for cooperation, it is not uncommon to find rival airlines connected in some way through a third party. The numerous cross-border codeshare arrangements are testimony to the multi-faceted connections. Less than half the world’s airlines belong to any of the three global alliances: Star (27 members), SkyTeam (20 members), and OneWorld (15 members). Although many major carriers are already members, there are notable exclusions such Virgin Atlantic (although CEO Richard Branson who made an about turn in 2012 announcing Virgin might join one of the alliances soon) and the other two of the big three Gulf carriers Emirates and Etihad. While Aer Lingus itself is unaffiliated, and so are part owners Ryanair and Etihad, IAG’s influence cannot be precluded although it has said Aer Lingus would continue to operate independently.

It is best to adopt a detached view of the business. Alliance membership may but not necessarily suggest a like-mindedness that brings friends to the same table. There is no reason why friends and foes alike may not put their money in a common proposition that will help further their respective positions. OneWorld membership may have eased Qatar’s way into the IAG stable, making it easier for Mr Walsh to be “delighted to have Qatar Airways as a long term supportive shareholder.” Not sure if he would be any less delighted if it had been Emirates or Etihad. But for Qatar, as part owner of IAG which is set to take over Aer Lingus, it is stealing a march on rival Etihad.

This article was first published in Aspire Aviation.

Europe’s aviation challenges

HOPE of Europe-based airlines bouncing back into good times on the back of an improved economy is not turning out to be as expected. Much of the good news reported last year seems to be short-lived.

Air France-KLM is among the airlines that have issued profit warnings, even though it expects higher earnings compared with 2013. The issue is the trending back down in growth. The airline is expecting to fall short of the forecast with revenue falling from 2.5 billion euros (USD 3.39 billion) to between 2.2 billion and 2.3 billion euros. It has cited rising competition from other carriers on the long-haul especially to North America and Asia, over-capacity as a consequence of the competition, weak cargo demand, and currency restrictions in Venezuela for the negative impact on its profitability.

Courtesy Reuters

Courtesy Reuters


Lufthansa has already announced a similar profit warning ahead of Air France-KLM. The German flag carrier is expecting lower than forecast profits – 1 billion euros compared to a high of 1.5 billion euros. Consequently it is also reducing its 2015 earnings forecast from 2.65 billion euros to 2 billion euros. Also citing competition for its woes, Lufthansa faces the same currency restrictions in Venezuela, which would reduce its profitability by 60 million euros. Additionally, the airline was plagued by a pilot strike in April that cost it another 60 million euros. The slowdown is evident in reduced seats offered over the winter, according to Lufthansa chief financial officer Simone Menne.

Irish airline Aer Lingus has also issued a warning on reduced profits estimated to be 10 to 20 per cent lower than last year’s, following a strike by cabin crew last month that caused disruption to some 200 flights and, according to a statement issued by the airline, “significant damage to Aer Lingus’ trading and forward bookings for several months into the future.”

The International Air Transport Association (IATA) was optimistic about a positive year for the global industry, expecting 2014 profits (US$3.2 billion) to almost double that of 2013 (US$1.7 billion). Although it has revised its forecast a little downward on account of new uncertainties in fuel prices as a consequence of geopolitical risks threatening Ukraine and the Middle East, and of capital outflows moving away from emerging economies largely to a strongly revived US economy, it will still be a much better year globally. But compared with other regions, the latest performance statistics for June showed that breakeven load factors are highest in Europe – the result of low yields and high regulatory costs. So, even though the region scored the second highest load factors, its financial performance fell behind the United States, the Middle East and Asia Pacific.

Of the top 10 countries ranked by the number of international passengers identified by IATA, five are in Europe: United Kingdom, Germany, Spain, France and Italy. About a quarter of the world`s tourist arrivals are concentrated in Europe (excluding Russia). Yet the situation is not all that rosy. The weakness of Europe seems to stem from inherent issues that have caused home airlines to direct their umbrage at the competition posed by foreign carriers, rather than the other way around as impacted first by external factors.

While foreign carriers in the Middle East and Asia Pacific have often been accused of unfair competition from a lower cost base and in some cases allegedly supported by government subsidies, the corollary is that airline operations in Europe are faced with high costs that include wages and airport charges, high taxes, cumbersome regulations and the propensity of costly industrial strikes. Some of the costs are levied directly on air travellers or through the airlines, since invariably the fees are passed on to the passengers. The UK is notorious for the suite of fees, among them the Air Passenger Duty which continues to escalate and which has become a significant source of revenue for the authorities. A new carbon tax would have been introduced in 2013 if not for the protest by the international community.

Courtesy Etihad Airways

Courtesy Etihad Airways

On the competition posed by foreign carriers, the biggest threat appears to come from cash-rich Middle East airlines. When Lufthansa`s newly appointed CEO Carsten Spohr took over the helm in May, he identified the Gulf carriers as the most daunting challenge for his tenure, and that tackling this would be a priority for him. The Gulf carriers are widely recognized as the big three in the Middle East, namely Emirates Airlines, Etihad Airways and Qatar Airways. Mr Spohr suggested that Gulf carriers are not competing on a level playing field. The rate at which Etihad picked up stakes in European carriers (and around the world) has raised concerns of a Middle Eastern dominance that would be detrimental to their survival. Among the carriers that Etihad has bought into are Air Berlin, Air Serbia, Darwin Airlines and most recently Alitalia. Etihad`s CEO James Hogan defends his airline`s strategy as one of rescuing ailing European carriers on the brink of collapse, though not denying it is at the same time seeking growth through partnership.

Yet, to be fair, European carriers themselves have seen much consolidation among themselves too. Air France and KLM have merged. Lufthansa owns Swiss International. British Airways, Iberia and Vueling make up the International Airlines Group. According to IATA, improved profitability in Europe may be attributed in part to efficiencies brought about by consolidation, not necessarily among airlines within the region itself but also across borders such as the partnership between British Airways and American Airlines and the acquisition of a 49-per-cent stake by Delta Airlines in Virgin Atlantic. But it is a hard fact to swallow when, as an example, Air France-KLM could have had upped their ante in Alitalia and become majority stakeholder but have had their stake reduced substantially instead with the participation of Etihad.

Mr Hogan said: “Gulf carriers are not the cause of Europe’s aviation challenges.” Rather, an airline like Etihad has seized the opportunity availed by the region’s weakness, itself blessed by its rich resources and thanks no less to Europe’s liberal aviation policies for which it (Europe) should be commended.

European carriers have said that the competition has forced down ticket prices and resulted in over-capacity. It is easy to see what happens to margins if costs are not similarly managed, Interestingly Lufthansa sees the answer in low-cost services to be launched to Asia and possibly extended to Australia, packing in more seats in its wide-body jets to lower seat costs which will in turn mean lower fares. The elusive dream of a viable budget long-haul in spite of the failed Hong Kong-London run by Hong Kong’s Oasis Airlines and the short-lived services to London and Paris from Kuala Lumpur by AirAsia X continues to lure. Norwegian Air Shuttle became the latest operator to take up that challenge when it launched services from London’s Gatwick Airport to Los Angles, Fort Lauderdale and New York. But Norwegian’s derring-do is on a different plane as Lufthansa’s strategy aimed at countering the cheap fares offered by the competition, that if you can’t beat them, join them and hopefully beat them at their game.

On that score, Lufthansa may have already been defeated if Mr Spohr is thinking of targeting the Gulf carriers, which have so far deemed it not necessary to go down that road which continues to be lined with the usual financial risks of high costs and low yields, and the traveller’s reservations about the lack of basic creature comforts for the long hours of flying. It is therefore not the safest of bets for Lufthansa.

Mr Spohr has not decided whether Lufthansa would go it alone or join hands with Turkish Airlines. There is a redeeming feature here. Turkish and Istanbul’s Ataturk Airport could be the challenge to Gulf carriers and Dubai International in the race to be the hub connecting Europe and the rest of the world with some help. This is the kind of counter move that can really reshape the competition rather than merely playing the same game that has been mastered by the competitor.

This article was first published in Aspire Aviation.

Ryanair says fares will continue to rise

Jan 29, 2013

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons

 

THINGS are looking up for budget carrier Ryanair, which reported improved Q3 (Oct-Dec 2012) profits – 18.1m euro (US$24.3m), up 21 per cent. Consequently the airline has revised its full-year profit forecast from the previous high-end of 520m euros to 540m euros.

This may indicate a slow recovery of the aviation market since rival Easyjet also reported reduced losses for the first half of the year on the back of rising revenues. Ryanair has benefited from robust bookings particularly during the Christmas travel peak, lower costs including that of fuel slightly below the expected level, and higher airfares averaging an 8 per cent increase in the costs. Reportedly, increased demand for priority boarding has also contributed to the carrier’s performance vis-à-vis ancillary revenue.

Ryanair has said the fares will continue to rise in its new financial year while capacity increase will slow down at 3 per cent the most compared to the current 4 per cent. This should further boost the bottom line if bookings continue to improve.

An interesting development in the offing for Ryanair is its third attempt to take over rival Aer Lingus – the former already owns close to 30 per cent of the latter. Ryanair deputy chief executive Howard Millers has said he could not see why the European Commission would block the 694m euro deal and does not rule out an appeal if that happens.

For all the hard knocks that Ryanair gets about its “harsh” product, it seems to be doing well. So, what price service when cost becomes the primary driver in a consumer’s choice?

 

Ryanair challenges authorities on volcanic ash advisory

TRUST Ryanair chief Michael O`Leary, known for shaking the commercial aviation scene with controversial outbursts, to challenge the authorities on its volcanic ash advisory when Iceland sent out what looked like an annual blowout of ash.

The Grimsvotn volcano started erupting last week and resulted in flight disruptions across Scotland and some other parts of Europe. Airlines that cancelled flights include British Airways, KLM, Aer Lingus and, yes, Ryanair.

Fortunately, the disruption was not long-lived as anticipated. Not anywhere near the scale of last year`s eruption of Eyjafjallajokull volcano that caused weeks of air travel chaos across Europe affecting more than a million air travelers. Then, as airlines faced Brobdinagian losses, a debate ensued as to how real was the threat of volcanic ash to the safety of aircraft and whether the authorities were being overly and unnecessarily cautious. Hopefully, at the end of it, all parties concerned should have arrived at a better understanding of the various risk levels.

But it seems Mr O`Leary remained unconvinced, being of the opinion that the “red zone” over Scottish airspace where ash has been classified “high-density” was invented by the Met Office and the Civil Aviation Authority. According to reports, Ryanair said it had conducted a test flight and found “no visible volcanic ash cloud or evidence of ash on the airframe, wings or engines.”

This was refuted by British Transport Secretary Philip Hammond who believed from information he received that the Ryanair flight “did not actually fly in any areas” affected by ash.

Now, give Mr O’Leary credit for initiative and always challenging the norm, and if Ryanair’s challenge did not go down well with its customers, the comforting news is that it complied anyway. It must know when discretion is always the better part of velour.