Air France to “boost” performance with new low-cost carrier

Legacy airlines in Europe have long been feeling the pinch from low-cost carriers such as Ryanair and Easyjet. Now it looks like Norwegian Air Shuttle and WOW Air are pushing them to look farther before they lose more ground.
Lufthansa already offers a low-cost trans-Atlantic option from Europe to Las Vegas, Orlando, Miami and Seattle in the United States.

The International Airlines Group which owns British Airways, Iberia, Aer Lingusm and Vueling has just added another low-cost carrier – Level – to its stable. Level, based in Barcelona, will fly to Los Angeles and Oakland in California USA, Punta Cana in the Dominican Republic, and Buenos Aires in Argentina. Fares start at the familiar €99 reminiscent of the Norwegian and WOW Air’s promotions.

Courtesy Air France

Following in their footsteps is Air France, which announces the formation of a new subsidiary low-cost airline – Boost as its working name – planned to commence operations in winter. The airline will fly from the main hubs of the Air France/KLM group to destinations in Italy, Spain and Turkey initially, and then farther to destinations in Asia. Norwegian is already flying to Bangkok and will in October connect London with Singapore.

But Boost will be taking on full-service airlines as well, such as the Middle East carriers of Emirates Airlines, Etihad Airways and Qatar Airways which are already ruffling the feathers of the regional big birds of Singapore Airlines and Cathay Pacific.

The developments point to a gradual convergence of the low-cost and full-service product perceived value wise. It’s the antithetical success of low-cost carriers pushing to bridge the gulf and the failure of legacy airlines not being able to maintain if not increase the differentiation. It looks like the European tug-of-war is pulling the legacy airlines towards the centre line.

Airlines brace for the hard times of a troubled Europe

Two British Airways aircraft, with British Airways plane taking off in background.

Two British Airways aircraft, with British Airways plane taking off in background.

IT is easy to blame Brexit. International Airlines Group (IAG) which owns British Airways (BA) and EU carriers Iberia, Vueling and Aer Lingus, says the weak pound has caused its operating profits for Q2 (Apr to Jun) to fall below forecasts, even the number (€555m) (USD618m) is higher than a year ago ((€530m). The weak pound has cost the airline €148m.

But, of course, BA is a key contributor to IAG’s bottom line. IAG is not too upbeat about the immediate future as it “continued to experience a weaker trading environment in our UK point-of-sale business, which represents around one third of total revenue.”

The situation is definitely not helped and in fact made worse by the slew of terror attacks across the continent. Other European airlines such as Air France-KLM and Lufthansa are also under a lot of pressure to keep the numbers up, warning that travellers would avoid coming to popular destinations in their home countries.

Air France-KLM reported a 5% dip in revenue for Q2 to €6.22bn. The airline said: “The global context in 2016 remains highly uncertain… resulting in an increasing pressure on unit revenues and a special concern about France as a destination.”

So the problem is not entirely Brexit. And as the pound weakens and reduces purchasing power, and so too as travellers stay away from popular tourist destinations across Europe, the paradox is that airlines will be persuaded to reduce fares to shore up the demand for seats.

Ryanair CEO Michael O’Leary, referring to recent bombings, said: “Airlines have to respond with lower prices to keep people flying.” This will at the same time exert pressure on rival airlines to similarly take the same course. Mr O’Leary predicted average fares to fall approximately 7% this year.

Fortunately the continuing low fuel prices are working in the airlines’ favour although many are already complaining about the need to lower prices. So don’t expect the fuel surcharge to come down.

Budget phobia grips European airlines

Courtesy Getty Images

Courtesy Getty Images

THE strike by German airline Lufthansa’s pilots may be over a different personnel issue, but it reflects similar circumstances faced by Air France (see Air France/Union dispute reflects a divisive and unsure industry, Oct 3, 2014).

European airlines are gripped by budget phobia as both Air France and Lufthansa have blamed the strikes not only for the costly disruption of flights but also for hindering their efforts to effectively compete with the likes of Ryanair and easyJet through their respective subsidiaries, Transavia (Air France) and Germanwings (Lufthansa).

On the one hand, it is an issue of fair employee compensation and welfare, and the integrity of the human resource administration. On the other, it is a matter of survival in the competition that ultimately must address the issue of costs.

The imbroglio can only benefit the budget carriers, as disgruntled travellers switch their allegiance. easyJet announced a windfall riding on the Air France/union dispute, which had boosted its revenue by £5m (US$5.35m) (see Easyjet rides on Air France’s troubles, Oct 8. 2014).

Lufthansa management has offered to retain the pension scheme for employees who joined the company before this year. The scheme allows pilots to retire at age 55 but they will continue to receive up to 60 per cent of their pay before regular pension payments kick in at 65. However, Lufthansa will increase the retirement age for new recruits.

Apparently the pilots union has proposed a plan to cover the costs of retaining the current scheme. It would be interesting to find out what.

The industrial action has cost Lufthansa 70m euros (US$89m). The airline failed to get the court to declare the strikes as illegal, and the Vereinigung Cockpit (VC) union does not rule out further action.

Until the dispute is settled, budget carriers can look forward to a better year-end season as travellers make advance bookings for Christmas and the New Year. easyJet announced it has sold 25 per cent of its seats for the next six months.

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.

The lure of the budget long-haul dream

THE elusive dream of the budget long haul continues to lure the few venturists who are bold enough to go where others had failed and many would shun, ever since Sir Freddie Laker launched the first such service in 1977. The Laker Airways flight flew from London Gatwick Airport to New York’s JFK Airport, a journey that would take some eight to nine hours, double the conventional budget standard. Laker ceased operations five years later.

It is a bigger dream today, to fly budget long-haul over a greater distance, say, between Europe and Asia.

Notable failures that followed include Hong Kong’s Oasis Airlines that operated services from Hong Kong to London and to Vancouver. It launched its first commercial flight in 2006 and ceased operations two years later. That it was voted “World’s Leading New Airline” at the Annual World Travel Awards in 2007 did little to save it from falling over the edge. A subsidiary of Malaysian budget carrier AirAsia based in Kuala Lumpur, AirAsia X which introduced services from Kuala Lumpur first to London in 2007 and then to Paris had a relatively short run too when it suspended operations in 2012.

Courtesy Norwegian

Courtesy Norwegian


Norwegian Airlines became the latest operator to take up that challenge when it launched thrice-weekly services from London’s Gatwick Airport to Los Angles, to be followed by flights to Fort Lauderdale and New York.

So it looks like what’s in there for pioneer Laker and his followers is but a commendable dash of derring-do!

Not quite the same story for established carriers faced with the stiff competition posed by rivals offering lower fares. Singapore Airlines launched Scoot (which in reality is still very much a short to medium range operator). Air Canada launched Rouge for services from Toronto to the Caribbean and to Europe with its eye also set on Asian destinations. Lufthansa has announced plans to launch similar services to Asia and possibly to Australia as well, packing in more seats in its wide-body jets to lower seat costs which will in turn mean lower fares.

Lufthansa’s CEO Carsten Spohr has taken issue in particular with the competition posed by the Gulf carriers – Emirates Airlines, Etihad Airways and Qatar Airways – which, advantaged by lower cost bases and plenty of cash, he alleged, are not competing on a level playing field. But if it is a matter of joining them when you can’t beat them, hopefully to beat them at their game, it is clear that Lufthansa and the like are no longer in command of the market.

IAG’s performance augurs well for industry

WHILE Ryanair paints a gloomy picture of the future of aviation out of London, warning that the market will soften resulting in dip of profits despite expected falls in fares, British Airways (BA) all but dispels that as a myth. BA chief Willie Walsh even went as far as suggesting that it was a publicity ploy adopted by Ryanair chief Michael O’Leary to shape the market to the Irish budget carrier’s advantage.

Courtesy British Airways

Courtesy British Airways


The International Airlines Group (IAG) which owns BA, Iberia and Vueling, turned in a triumphant performance, reporting pre-tax profits of 609m euros (US$680m), an increase of % year-on-year, for the quarter July to September. This was an impressive recovery from the last full year operating loss of 418m euros even though BA was profitable because of the huge loss incurred by its Spanish partner Iberia.

So if any one should doubt BA’s wisdom in merging with Iberia, it is time to realign that thinking. The honour goes to Mr Walsh for his tough hand in restructuring the Spanish carrier, introducing drastic cost-cutting measures that include reducing staff numbers. Profits at Iberia for the July-September quarter rose from 1m euros last year to 74m euros. Indications are that it will be a good turnaround full year for IAG, which reported a pre-tax profit of 103m euros for the first nine months of the current year compared with a loss of 121m euros last year.

Between Ryanair and BA, the interesting question should be what all this augurs for the future of the travel industry.

Mr Walsh said: “The mood across Europe is improving.” He attributed this in particular to the growth of traffic out of London. Indeed, that has long been coming – a prospect that is being monitored closely not only by British carriers but also long haul operators from around the world based as far away from the British hub as Cathay Pacific, Singapore Airlines (SIA) and Qantas. Delta Air Lines which acquired a 49-per-cent stake in Virgin Atlantic would have made a fortuitous investment.

Cathay reported improved performance for European routes last month, singling out London as a star performance. Overall it has been seeing revenue growth staying above the increase in capacity. Cargo is the bugbear, but there are signs that the world economies are improving. Cathay reported that exports out of Europe in particular are growing.

Yet under immediate circumstances, European carriers such as Lufthansa and Air France/KLM are still falling short of expectations and struggling with cost issues. Therein lies the reason why IAG’s performance was all the more impressive, and therein lies the challenge of competition in good and bad times. Both Walsh and O’Leary are visionaries, market movers and risk takers. In their own ways, they are preparing their airlines ahead of time.

What may have favoured BA is the return of the lucrative business class travel, especially for trans-Atlantic flights. The British flag carrier reported an increase of four per cent for premium passengers in October. “That’s all coming out of London,” said Mr Walsh. “The London economy has performed most strongly, and we’re benefiting from that.”

That spells good news for legacy airlines that made most of its money from flying premium travellers before the global economic meltdown. In good times, airlines such as SIA earned more than 40% of its profits from filling up the front end of the aircraft. However, the anticipated recovery has taken a long and painful road. In the interim, airlines such as Cathay and Qantas have introduced new or improved premium economy class products to stimulate the market. Cathay reported loads to Frankfurt, London and Paris exceeding 80%.

IAG’s performance augurs well for the industry. It remains to be seen if this holds true as more airlines post their earnings in the coming weeks.

What some airlines say about themselves

United Airlines used to “fly the friendly skies”, which have proven to be far from being so for competing airlines as more of them spread their wings. The sky may not be the limit after all. In 2010, United merged with Continental Airlines which has promised its customers: “We really move our tail for you.” Well, it’d better be, as no airline can afford to sit idle on the tarmac. The partnership realized a dream of United to “fly united”, professed through the depiction of two mating geese in the air.

BA to fly to serve
British Airways (BA) prides itself as “the world’s favourite airline”. But is it really, even when no one bothers to challenge the claim? Little wonder that Iberia Airlines, which has merged with BA, claims it is “one of the world’s best airlines”. There is no jostling with the dominant partner. The UK carrier says it swears by four words which have “always been at the heart of everything we do”: To Fly. To Serve. Isn’t that what is expected, you may ask. Trust the Brits to go nano on the language they own and to assume that foreigners do not quite understand the finer or deeper meaning of words as simple as “fly” and ”serve”. BA explains: “It’s what we do. It’s who we are.” Apparently those four words were painted on the tailfins of early aircraft and the pilots still wear them in the lining of their jackets and on the peaks of their hats. Do they even need to be reminded of their jobs? BA has said that will never change. It is after all British tradition.

qantas2
It is distant cousin Qantas that puts it better: “You’re the reason we fly”. It goes on to say: “While you might fly for many different reasons, we fly for one. You’re the reason we fly.” The attention shifts from the flyer of the airplane to the rider in the plane, and from the server to the person who is being served. Qantas clearly demonstrates a better understanding of marketing principles.

But Cathay Pacific Airways decided it might rephrase BA’s pride in reaching out to its customers when it rolled out a series of ads in 2011 under the banner: “People. They make an airline.” The campaign intended to showcase a team that would go the extra mile to assist someone, who, by implication, could be a customer. But when a scandal involving flying crew on board an aircraft began circulating on the internet, it had to curb its enthusiasm in extolling its staff.

Courtesy Singapore Airlines

Courtesy Singapore Airlines


Does the crew make it a great way to fly? Yes, very much so. Yet no one makes a better case of the ambiguity than Singapore Airlines (SIA) whose tagline – “Singapore Girl, You’re a great way to fly” – has become a self-fulfilling prophecy of sorts. The sarong-clad stewardess has become synonymous with the airline and everything that it represents; its name might well be Singapore Girl. Feminist activists have derided it as being sexist, but it has done the airline wonders. However, the Singapore flag carrier’s latest ad campaign, which draws on the theme of “the lengths we go to” to demonstrate its commitment to the customer, pales by comparison to the early poetic catch phrases such as “You’re as young as you feel” and “It’s the journey, not the destination”. While SIA insists that the Singapore Girl remains the protagonist in its latest ads, sometimes you wonder if you need to go to that length to drive home the point. When the Singapore Girl smiles, enough is said.

Lufthansa tries to go one-up. It says, “There’s no better way to fly.” But don’t we want to know why, if not how? But listen to American Airlines: “We know why you fly. We’re American Airlines.” That sounds a bit too arrogant, doesn’t it? In the same vein, the Northwest Airlines tagline: “Northwest Airlines. Some people just know how to fly.” Maybe it is an American thing; modesty has no place on the world stage. Yet Delta Air Lines simply promises: “Delta gets you there.” We certainly hope so, as says Air New Zealand: “Being there is everything.” Southwest Airlines wants to be known as “a symbol of freedom”, whatever that means – another American thing?

By comparison, European airlines are more down to earth. Austrian Airlines is “the most friendly (sic) airline” and Virgin Atlantic “no ordinary airline.” Or, they are simply factual. Alitalia is “the wings of Italy” the way that EVA Air in Asia is “the wings of Taiwan” but not quite what Cathay Pacific claims to be “the heart of Asia.” Cut the French some slack about “making the sky the best place on Earth.” They have the airs. But when Swiss becomes “the most refreshing airline in the world”, it suggests a toothpaste-like struggle to impress anew. Sadly, speaking the truth may be detrimental to one’s fate, as when British Caledonian Airlines confessed before it was bought by BA: “We never forget you have a choice.”

Many of the airlines pay big bucks to have those words coined and put into their mouths. Yet does it matter what airlines say or how they say it when the test of the pudding is in the eating? Think it this way – it dresses the pudding to make it look more palatable. In advertising, it is referred to as “recall”. What happens after is reinforcement or disappointment. That is why SIA has for a long time become a great way to fly and BA, whether proven or not, the world’s favourite airline, but Austrian Airlines is forgettable as one of the world’s best airlines, an epithet that is universally applicable to one and many in fluid time. You do wonder though whether for some airlines, considering the cost of their words, what has been said may best be left unsaid.