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.

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Ryanair to offer all-business class

Courtesy PA

Courtesy PA

Budget carrier Ryanair is back in the news with new offerings. The carrier will be offering an all-business flight on its Boeing 737-700 jet, but that will be operated as a corporate charter and not its mainline service.

The aircraft will be fitted with 60 leather seats with a 48-inch pitch. And, of course, what’s premium class with some fine dining? It is not budget business as the association may suggest.

Ryanair’s charter division will provide the cockpit and cabin crew and charge on an hourly basis. Likely p=routes may take up to 6 hours, a little longer than the usual flight time of the budget model.

Ryanair is known to introduce controversial ideas and go where many others dare not go. In fact, some airlines had tried the all-business class before and failed.

The Irish carrier has in the last couple of years cleaning up its image to be more service oriented even as it offers competitive no-frill services. It had at one time considered venturing into the budget long haul, but its best bet is really wider expansion in the region it is familiar with much to the displeasure of legacy airlines such as Air France-KLM and Lufthansa.

A spokesman for the airline has confidently said: “We offer the most competitive rate in Europe.”

Optimism and more good news

IT’s been a long time coming, the optimism and good news that the industry badly misses as more airlines report better, even record, performances as fuel prices show no certainty of bottoming out. From Chicago to London, Singapore and Sydney, the mood is celebratory.

American carriers were the first to celebrate. The US big three– American Airlines, United Airlines and Delta Air Lines – all reported record recovery last year, and are reintroducing snacks on domestic services (instead of lowering the fuel surcharge) as a way of giving back to their customers. (As the price of crude oil plummets, fuel surcharge holds sway, Jan 23 2016)

This article takes a look at four major airlines in three other different regions (Australia, Europe and Asia) that recently posted their report cards, and see how they measure up to the mood.

Courtesy Bloomberg

Courtesy Bloomberg

Qantas

The good run continues with Australian flag carrier Qantas’ record performance for the first half of its current financial year (Jun-Dec 2015). The airline reported an underlying profit before tax of A$921 million (US$685 million), which is A$554 million more than last year’s first half. Revenue was up 5 per cent. Chief executive officer Alan Joyce announced that every part of the Qantas Group contributed strongly to the result, with record profits reported by Qantas Domestic and the Jetstar Group.

Qantas Domestic reported earnings of A$387 million, compared to A$227 million last year, maintaining a strong market share of 80 per cent. The Jetstar Group’s earnings were A$262 million, compared to A$81 million last year. Revenue for the Australian market went up 10 per cent, and for the first time, Jetstar Japan contributed positively to the profit of the Asian network since its start-up in 2012.

Qantas International which used to be the bleeding arm of the Qantas Group reported earnings of A$279 million, compared to $59 million last year. This was its best performance since before the global financial crisis. The airline has benefitted from the weak Australian dollar which has helped boost inbound tourism for Australia. Qantas’ cornerstone alliance partnership with Emirates, American Airlines and China Eastern has strategically strengthened its global network, overcoming an apparent geographical disadvantage of its home base in a far corner of the world.

All this, Mr Joyce would be the first to tell anyone, is not a matter of luck or necessarily a given in today’s more favourable economic climate. He said: “This record result reflects a stronger, leaner, more agile Qantas. Without a focus on revenue, costs and balance sheet strength, today’s result would not have been possible. Both globally and domestically, the aviation industry is intensely competitive. That’s why it’s so important that we maintain our cost discipline, invest to grow revenue, and continue innovating with new ventures and technology.”

Give credit where it’s due. Sceptics may finally admit that Mr Joyce’s “transformation program” is not only bearing fruit but producing a good crop and reshaping Qantas into a more agile and innovative business. “Our transformation program has allowed us to save significant costs,” said Mr Joyce. “It’s never been a simple cost cutting agenda.”

Qantas expects to increase domestic capacity by 2 per cent, international by 9 per cent and Jetstar International by 12 per cent in the second half, averaging 5 per cent for the full year for the Group.

Courtesy Bloomberg

Courtesy Bloomberg

International Airlines Group

At the other end of the Kangaroo route is the unmatched success of the International Airlines Group (IAG) of which British Airways is a partner along with Iberia, Vueling and, more recently, Aer Lingus. IAG’s profits increased by almost 65 per cent to €1.8bn (US$1.98 billion) in 2015, which IAG chief Willie Walsh said had “undoubtedly been a good year”. The Group carried 88.3 million passengers last year, an increase of 14 per cent, overtaking Lufthansa to become second only to Air France-KLM in Europe.

In very much the same way that Mr Joyce was able to turn round the loss-making international division of Qantas, Mr Walsh could pride himself as the man who steered Iberia into profitability following its merger with BA in 2011. The Spanish carrier underwent a painful restructuring but it has paid off. . Unlike Qantas which prefers commercial alliances, IAG adopts a more aggressive strategy of acquisitions. The consortium of BA, Iberia and Aer Lingus stands the Group in good stead to grow trans-Atlantic traffic which forms the largest part of its business.

IAG expects similar growth next year, targeting an operating profit of €3.2bn

Courtesy Airbus

Courtesy Airbus

Singapore Airlines

In Asia
, Singapore Airlines (SIA) Group reported a third quarter (Oct-Dec 2015) profit of S$275 million (US$200 million), 35 per cent higher than that of last year’s third quarter. However Group revenue declined by 4 per cent to S3.9 billion because of lower passenger yields and the continuing lacklustre performance of its cargo operations. Parent airline SIA faces stiff competition from Middle East carriers, and its subsidiaries SilkAir, Scoot and Tigerair are not spared the rivalry from regional budget carriers. Still it is good news that falling oil prices had resulted in a reduction of the fuel costs by S$354 million, a drop of more than 40 per cent.

Characteristically diffident and not as confident as either Qantas or BA, SIA said it expects travel demand to remain volatile, citing the increased competition and the pressure that it will continue to exert on yields and loads. But all three airline groups have experienced increased loads, driven by discounted fares as a result of of intense competition and made possible by the lower fuel costs. According to International Air Transport Association (IATA), breakeven load factors are highest in Europe because of low yields from the open competition and high regulatory costs, yet the region is achieving the second highest load factor after North America and generating solid growth.

It is going to be a rosier 2016. IATA forecast air travel to grow 6.9 per cent, the best since 2010 and well above the 5.5 per cent of the past 20 years. Demand is fueled by stronger economic growth and made attractive by lower fares. It is unlikely that the oil price will rise and airlines may even expect smaller fuel bills, making up 20 per cent of an airline’s total operating costs compared to what it used to be at 40 per cent. This will be further enhanced by the acquisition of new aircraft that are more fuel efficient.

In this connection, SIA has something to crow about as it took delivery last week of the first of 63 Airbus A350 firm orders after a long wait of 10 years. The first tranche of ten aircraft which it hopes to take complete delivery by the end of the year have a seat configuration of 42 business, 24 premium economy and 187 economy. An ultra-long range version of the model will be used to resume SIA’s non-stop services from Singapore to Los Angeles and New York in 2017. The modified A350 is said to be more fuel efficient than the A340 previously used. It will be configured premium-bias.

SIA chief executive officer Goh Choon Phong said: “The A350 will be a game-changer for us, allowing for flights to more long-haul destinations on a non-stop basis, which will help us boost our network competitiveness and further develop the important Singapore hub.”

Opinions are divided as to whether SIA has moved a little too slowly and as a result is playing catch up when once it used to lead the field. By all indications of the good times finally rolling back for the industry, it is not too late to leapfrog the competition to make up for lost time. SIA is banking on the rejuvenation of the demand for premium travel, the product it has always been reputed for.

The IATA forecast points to weak markets in South America and Africa – two regions that are of little interest to SIA – but continuing robust growth for North America which has been a key market for SIA since it commenced operations thereBut the competition will be tough, particularly from Middle East carriers tapping traffic in Asia-Pacific and redirecting it through their Gulf hubs. Already United Airlines has announced its launch of a non-stop flight between San Francisco and Singapore in June this year, ahead of SIA. (United Airliens steals a march on Singapore Airlines, Feb 15 2016)

According to IATA, consumers will see a substantial increase in the value they derive from air transport this year. Indeed, air travellers will benefit from the optimism as airlines become more inclined to improve their product, and the increased competition will likely see the airlines introducing more creature comforts beyond the snacks and peanuts. Qantas for one is upgrading its airport lounge at London Heathrow as part of a program to create a flagship global lounge at important destinations started three years ago. Hong Kong, Singapore and Los Angeles are already enjoying the new facility. Qantas is also developing across its domestic network an industry-leading wi-fi service that has the ability to deliver the same speeds in flight that people expect on the ground.

Mr Joyce said: “Our record performance is the platform to keep investing in the experiences that matter to our customers and take Qantas’ service to new levels.”

Courtesy Airbus

Courtesy Airbus

Thai Airways International

Positive signs of the times are best presented by the performance of Thai Airways which posted a quarterly profit of 5.1 billion (US$141.7 million) baht ending Dec 31, 2015 reversing a loss-making trend. This compared to a 6.4 billion baht a year ago, and softened the full year’s loss to 13.05 billion baht, 16 per cent lower than 15.57 billion baht last year, partly attributed to a decrease in fuel costs of 20 per cent. The airline introduced a program “to stop the bleeding” last year aimed at introducing cost-saving measures, cutting unprofitable routes and down-sizing the fleet.

Plagued by political problems at home and safety concerns based on the findings of the International Civil Aviation Organization (ICAO), Thai Airways has been struggling to stay afloat amidst increased competition from regional carriers. It is to be expected that stronger-muscled airlines such as Qantas, British Airways and SIA are likely to rise faster with improved economic conditions, but when things are beginning to look up for the more troubled carriers while noting that in good times as in bad the fortunes of various airlines can be widely diverse, the industry can at last be a little more confidently optimistic.

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.

Is budget long haul but a pipe dream?

Courtesy PA

Courtesy PA


Only days after announcing plans to launch transatlantic flights in five years, Ryanair retracted its position, abandoning the plans. In a statement, it said it “has not considered or approved any transatlantic project and does not intend to do so.” This ran contrary to the earlier announced approval by its board to mount budget flights between various European and US cities. Why the sudden turnaround?

The budget long haul challenge continues to entice entrepreneurs who dare go where others fear to tread. We hark back to the days when Sir Freddie Laker pioneered the low-cost model and Laker Airways took to the sky in 1977 flying between London Gatwick and New York’s JFK Airport. It went bankrupt in 1982.

Others have tried and failed. Most notable among them, Oasis Hong Kong Airlines that operated scheduled non-stop services from Hong Kong to both London Gatwick and Vancouver International Airport. Voted “World’s Leading New Airline” at the Annual Travel Awards 2007, Oasis folded its wings a year later, ending a three-year run. It went down the same path as Canada’s Harmony Airways which started services within North America in 2001, then mounted a service to Manchester in UK and announced plans to expand into Asia. It collapsed in 2007, a lesson that might have come too late for Oasis.

AirAsia X, which is an offshoot of Asia’s largest budget carrier AirAsia, commenced services in 2007, flying from Kuala Lumpur in Malaysia to the Gold Coast in Australia. It was a tactical move to build up Australian traffic feed into its subsequent services to London and Paris. Three years seem to be as long as such services could last. In 2012 AirAsia X withdrew its services to both European destinations, along with others including Delhi, Mumbai, Abu Dhabi, Tianjin (China) and Christchurch. It cited high fuel prices and taxes, and a weak market. But AirAsia X is keeping the dream alive with plans to reintroduce services to London and Paris, and adding other new destinations such as Sapporo in Japan. As recent as the end of last year, AirAsia chairman Tony Fernandes announced that “reopening of KL-London is definitely on the card.”

Courtesy Norwegian Air Shuttle

Courtesy Norwegian Air Shuttle

The latest foray into that arena is Oslo-based Norwegian Air Shuttle, which began services in 2013 to the US and Bangkok in Thailand. It has plans to also fly to Hong Kong and India. The airline, which has been profitable before flying long-haul, is reporting losses and blamed it on the costs of expansion and disputes with US regulators and competitors who aren’t too welcoming of its intrusion.

Yet the temptation to prove that the budget long haul formula can work is irresistible to many a visionary, to whom we must give credit for their derring-do. In a price sensitive market, it should work but it seems not for the long haul as the short haul. It is widely accepted that beyond four hours, at most five, passengers have different needs and their demands begin to change inversely to cost. For one thing they are likely to carry more bags and could do with some pampering to break the monotony of the journey. Harmony Airways boasted low-cost with full service, and Oasis Airlines too tweaked the Spartan low-cost model to include some element of that. But running an extremely lean outfit in an unpredictable environment of volatile fuel prices, uncertain travel demand, potential flight delays and cancellations, and unforeseen natural disruptions among other things, is a big challenge.

There are other factors such as aircraft utilization with quick turnrounds, fleet support in the event of delays and cancellations, and competition. Legacy airlines can no longer afford to ignore budget carriers as niche players outside their turf for the short haul, as they spawn offshoots to check the competition. Air France-KLM and Lufthansa introduced Transavia and Germanwings respectively to compete with the likes of Ryanair and easyJet. Australian flag Qantas carrier has its Jetstar brand. Even Singapore Airlines reputed for premium service is adding yet another budget carrier, Scoot, to its fold, the new carrier literally sharing the same arena with older sibling Tigerair although it is pitched as a medium-range operator. So if the competition heats up, you bet the big boys will flex their muscles.

It is so tempting for an airline such as Ryanair as it succeeds and grows to look for new opportunities. That it did not work for others in the past does not necessarily dictate the formula cannot work for Ryanair, which has succeeded in the short haul where many others too had failed. Others such as AirAsia and Norwegian Shuttle which have gone ahead are still testing the ground. Apparently Ryanair is treading carefully as it has been seven years since it first expressed the desire to cross the big pond in 2008. In the earlier announcement before it changed its mind, it said, quite rightly so, it would be “dependent on attaining viable long-haul aircraft”. Consider how when the oil price soars, budget carriers are the hardest hit. It will take another four to five years in Ryanair’s estimate for such an aircraft to emerge. The airline’s spokesman revealed that it was talking to plane manufacturers. So, again, the question: why the turnabout?

Is the answer close to what easyJet chief Carolyn McColl said about sticking to what it does best? Ms McColl reportedly told the BBC: “We have no intention to do long haul because we think it’s a different kind of business.” It would be too high a risk to change its short-haul strategy. But Ryanair chief Michael O’Leary is known for suggesting game-changing ideas, as revolutionary as “standing room only” flights and charging for the use of the aircraft loo, and for setting trends in the industry such as charging for printing a boarding pass at the airport, so we wait to be surprised.

Interestingly, a new “ultra low cost” concept is rearing its head. While an airline such as Qatar Airways is demonstrating that there is almost no limit to dressing up a premium product with its latest offering of a private cabin furnished like a hotel suite, a new airline in Canada, Jetlines, has big plans to offer rock-bottom airfares said to be below 40 per cent what rivals Air Canada and WestJet are charging. Jetlines chief David Solloway said the airline is ready to take to the sky. He cited Ryanair, easyJet and Allegiant Air as models. “The model of buying a seat and a seatbelt and only paying for goods and services each passenger may choose individually,” he said, “is known all over the world and is the fastest growing segment in the airline industry.”

Apparently some five million Canadians cross borders to board flights out of neighbouring US airports because of ultra low fares offered by US airlines such as Allegiant Air. Mr Solloway hopes to stem the outflow by offering not only very low fares but also the convenience of flying from the home base. The question is: How low can you go? So much for nomenclature. The only thing certain about Mr Solloway’s proposal is that Jetlines will be much cheaper than other Canadian carriers. He probably already knows that the leaner the model, the stricter is the demand on discipline and efficiency. And the best bet for survival is flying into secondary airports rather than the main hubs, though this is somewhat tricky considering customer preferences. You fly where customers want to go. Apparently Mr Solloway has done his homework. He said: “If you’re asking the question whether Canada could have a third airline, the answer is no. But if you ask whether Canada can support an ultra low-cost, low fare airline, the answer is overwhelmingly yes.”

While US carriers are trying to stop the thrust of Norwegian Air Shuttle, the same question may be asked of the budget long haul: Is there a market, if not ready but potential, for the business? There has to be something out there for the many enterprising founders since Freddie Laker to wager their millions. Yet as they came and went all too soon, something seemed to be missing in the formula. Or is the budget long haul but a pipe dream?

This article was first published in Aspire Aviation.

Air France/Union dispute reflects a divisive and unsure industry

AFTER two weeks, the dispute between Air France and the pilots’ union SNPL was finally called off. One may be tempted to ask: Who wins, who loses? That aside, the dispute clearly reflects not only a divisive industry but also an unsure one trapped without clear strategies in place in the throes of uncertainty.

The pilots’ strike is costing Air France hundreds of millions of euros, estimated to be as much as 15m euros (US$19m) a day. Yet a day after the announcement last Saturday, the airline was still operating with half its scheduled number of flights though with the hope that flights would gradually return to normal in the week that follows. An agreement is still pending, the only consolation being that according to SNPL, negotiations could now “continue in a calmer climate.”

Courtesy Getty Images

Courtesy Getty Images

The union’s protest concerned Air France’s plans to expand low-cost operator Transavia across Europe as part of the strategy to better compete with budget carriers such as Ryanair and Easyjet. Transavia would operate from regional hubs. The pilots expressed two main concerns: a possible loss of jobs, and transfers to Transavia whose employees are paid lower wages and in accordance with local terms. Air France chairman Alexandre de Juniac and chief executive Frederic Gagey said in a statement: “Our Transavaia project is a 100 per cent pro-France project. It is about developing Transavia to encourage growth in France and quickly create more than 1,000 jobs in France.” Refuting the union’s concern about job security, the airline said an additional 250 pilot jobs would be created.

It is easy to understand how the opposition might treat that public spirited bit as a red herring. But the reason for survival is as difficult an argument to refute, and that does not do the pilots any favour when British operator Monarch Airlines announced at the same time that its employees have agreed to pay cuts of up to 30 per cent to secure the future of the airline, supported by the British Airline Pilots’ Association (Balpa) which said its pilots had made “major sacrifices”. But, of course, the British issue was not complicated by the suggested disparity in wage and employment terms between the parent airline and its budget subsidiary in the French dispute.

The differences between Air France and its pilots are far from being resolved at this stage even as the airline has conceded to expanding its Transavia operations only within France and guaranteed there would be no job relocation while maintaining its prerogative to vary the terms for employment with the low-cost subsidiary. SNPL insisted on similar wage and terms, and issued a statement to say its “determination remains intact.” It proposed the appointment of an independent mediator which Air France rejected, supported by the Government which has a 16-per-cent stake in the loss-making airline.

French government spokesperson Stephan Le Foll had said the Transavia expansion project “strategically, is important to the company. We have to find ways and means for Air France to extend its activity in low-cost flights.” French Prime Minister Manuel Valls said: “The creation of Transavia in France has to go forward.”

Clearly Air France is smarting from losses which it attributed to the competition posed by low-cost operators. There are some 40 budget carriers operating across Europe, and these apparently have taken a large chunk of the business away from not only of Air France but also other legacy European carriers. But is Transavia the answer to Air France’s woes, as an alternative cheap option to stem its losses?

British Airways (BA) had a short run with Go Fly, founded in 1998 and operating flights between Stansted Airport and destinations in Europe until it was sold first in 2001 to a private equity firm and then in 2002 to BA’s rival Easyjet. There had to be reasons for its divestment, among them one of synergy and how Go Fly was attracting BA customers to cross over as well. Other established airlines have gone down that path, in most cases the result of a push rather than pull factor as a way to maintain rather than grow the market and, hopefully, muscle out the competition.

But not all subsidiary low-cost operators managed the challenge as successfully as the likes of Ryanair and Easyjet, although it is to be also noted that only a third of the independent upstarts have survived. However the demise of many budget carriers could be attributed largely to wider economic factors and not necessarily the intimidation of the big boys. On the contrary, it is the threat posed by low-cost carriers that had the established airlines sending their second liners into the game.

Yet that is no argument for Air France to abandon its expansionary plan via Transavia, which the Air France-KLM merger inherited 100 per cent from the Dutch entity, if that is the way to regain its grounds. The paradox is that this then lends some credence to SNPL’s fear particularly if Transavia grows at the expense of the parent airline, and that which must necessarily bring into question what makes a budget carrier tick if not low cost?

Beyond the lure of the budget model that has reshaped the traditional market across the globe, a more pertinent question to ask is why airlines such as BA and Cathay Pacific are profitable but not Air France-KLM and Qantas, with or without the complement of low-cost offshoots.

Frederic Gagey

The big challenge of overhauling Malaysia Airlines

Courtesy Heathrow Airports Limited

Courtesy Heathrow Airports Limited


WHATEVER form it takes, change at the beleaguered Malaysia Airlines (MAS) is inevitable. The airline suffered two tragic disasters within four months of each other. The first concerned the mysterious disappearance of MH370 in March, flying from Kuala Lumpur to Beijing, resulting in a loss of 239 lives. The second involved an aircraft brought down by a missile while flying over the war zone in eastern Ukraine – MH17 departing from Amsterdam and heading for Kuala Lumpur. There were no survivors among the 298 people on board.

No lesser a person than Malaysian Prime Minister Najib Razak had said that the twin incidents “will change the way MAS operates.” No doubt the tragedies have hastened the process for change, but the Malaysian carrier has been struggling in the red long enough and without any sign of a recovery. It lost 4.1 billion ringgit (US1.29 billion) between 2011 and 2013. In the second quarter (Apr-Jun) of the current year, it lost 306 million ringgit, adding to a half-year loss of 748 million ringgit. Revenue for the latest quarter not only failed to catch up with capacity increase of 9% but declined by 7% instead.

Mr Razak also said: “We believe our national carrier must be renewed. This means wholesale change… Only through a complete overhaul of the company can we deliver a genuinely strong and sustainable carrier.”

MAS has announced a recovery plan that will cost the airline 6 billion ringgit. As already made known earlier, the airline will be delisted and come under state control with the state investment company Khazanah taking 100% ownership from its current 69%. The plan includes reducing the 20,000 workforce by 6,000 workers and the appointment of a new chief executive. Khazanah promised drastic changes to MAS’s “operations, business model, finances, human capital and regulatory environment.” Khazanah managing director Azman Mokhtar has set an ambitious target for the carrier to return to profitability by 2018.

Observers are generally encouraged by the proposal for change as a way to revive the ailing carrier. Short of knowing the details, the question is whether as stringent as the measures are supposed to be, are they sufficient? Interestingly, former Malaysian Prime Minister Mahatir Mohamad was quick to throw cold water on the proposal. He said: “Khazanah has been in full control of Malaysia Airlines all this time. And all this time Malaysia Airlines has been bleeding profusely. So why should anyone believe that with 100 percent control Khazanah will not keep on losing (money).”

While Khazanah has viewed accountability for use of public funds positively, history is filled with examples of the failure of state-owned companies. This, Mr Mokhtar was quick to recognize. He qualified his optimism of the airline’s revival with the caution that “success is by no means guaranteed.” Much will depend on how the form of the proposed restructuring shapes up. A visionary new man at the helm always promises new beginnings, particularly if he or she is an import who is not weighed down by the diehard baggage of the past, who comes to the table with new perspectives and ideas, and who is unafraid of making the necessary changes. That much MAS can hang its hope on the road to recovery.

In the meantime, MAS has decided to do what most, if not all, companies in dire straits do first: downsize the workforce. It would appear to be an expected albeit painful outcome particularly when the carrier is also considering downsizing its operations for a start. Airlines such as British Airways and Air France/KLM have gone down that path with some measure of success to boost the bottom line. Successful airlines have become increasingly conscious of the need to do more with less, and MAS may do well to benchmark against these airlines in the way that they manage a tighter outfit. According to a BBC report, MAS’s close rival Singapore Airlines (SIA) manages with some 5,000 fewer staff although both airlines operate a similar sized fleet. Yet SIA has enjoyed years of profits compared to the losses incurred by MAS.

MAS attributed its poor performance to the intense competition posed by low-cost carriers. It also cited the high costs of operating unprofitable long haul routes which it has said it would slash. The situation has been aggravated by the sharp decline in bookings following the two air disasters. However, it seems so self-serving that any airline should blame the competition for its woes and not ask why it fails to measure up to it. Competition is the name of the game; how you play it decides whether you win or lose.

In the years that other airlines including low-cost operators such as Malaysian compatriot AirAsia – which even launched long-haul flights to Paris and London – were making strides in the arena, MAS seemed satisfied with cruising, winning or losing. It was among the last few airlines in the region to join a global alliance, but membership has not helped it in any substantial way to regain lost grounds. It also missed the opportunity to collaborate with Qantas to enhance Kuala Lumpur International Airport’s hub status and benefit from that relationship. Qantas subsequently entered into a mega alliance with Emirates and boosted the Dubai hub.

The gripe about competition has to cut deeper and across a wide spectrum of issues, hence the realization by Khazanah and the Malaysian government of the urgent need for an overhaul, not piecemeal changes, to revive MAS. Khazanah had said: “Nothing less will be required in order to revive our national airline to be profitable as a commercial entity and to serve its function as a critical national development entity.” A key phrase to note with enlightened awareness is “commercial entity”, which encapsulates the very essence of doing business, yet at the same time there is the constant reminder of the carrier’s “national development entity”. The relationship may be as complementing as they are conflicting sometimes.

Other airlines have clawed back from mishaps, so there is hope for MAS. The Malaysian carrier whose crew was ranked fifth in the 2014 Skytrax World Airlines survey deserves a second chance. Until more details of the proposed overhaul are made known, opinions are divided but the consensus is one of an uphill task. As the regional competition heightens in a fast shifting environment, the sooner it sets new directions, the better its chances of an early recovery.

This article was first published in Aspire Aviation.