Does Air Berlin’s demise signal end of the road for budget carriers?

Courtesy Reuters

Air Berlin is folding up its wings, caused by falling pasxsenger numbers. Last month alone saw a dip of 25 per cent compared to July last year. Its biggest shareholder, Gulf carrier Etihad Airways which owns a 29.2 per cent stake, is not forthcoming with the needed financial support.

Does Air Berlin’s demise signal the end of the road for unaffiliated budget carriers, many of whom are benefitting from the currtent low price of jet fuel? Or that it is at least a forewarning of a more difficult time ahead for them in the continuing battle between them and legacy airlines which are at the same time supported by their own budget offhsoots?

That’s what Ryanair fears, accusing the German government and national carrier Lufthansa of conspiring to carve up Air Berlin. Ryanair said: “This manufactured insolvency is clearly beign set up to allow Lufthansa to take over a debt-free Air Berlin which will be in breach of all known German and EU competition rules.” A Lufthansa-led monopoly, it said, would drive up domestic fares.

How then will the game play out after Air Berlin?

Ryanair’s apprehension as a competitor is real. Air Berlin’s exit will mean a stronger Lufthansa and its budget offshoot Eurowings. Yet already Lufthansa is a dominant player with 76 per cent of its capacity focused on the German market. The Lufthansa Group posted record earnings for the first six months of 2017, increasing revenue by 12.7 per cent to €17 billion and net profit by 56.6 per cent to €672 million. Eurowings and other airlines in the Group including Austrian Airlines, Brussels Airlines and Swiss Interantional Airlines, also posted positive results. So as a group, Lufthansa has quite some msucle to flex in Europe, and the vacuum left by Air Berlin is likely to be filled by Eurowings.

On the other hand, it may be countered that competition is all but dead since airlines such as Ryanair and EasyJet also have access to the German market. However, comparatively, their market share is small; Germany represents only 7 per cent of Ryanair’s capacity and 9 per cent of EasyJet’s. There is possibility that Air berlin’s demise may mean more demand for seats on these carriers, if not opening up the market for more competition. Hence the German government has denied Ryanair’s accusation that it had breached anti-trust rules.

Clearly the competition will intensify, whether it is a battle between legacy airlines and unaffiliated low-cost carriers or one between budget airlines themselves is not any more a matter of note. The competition has levelled, with budget carriers attempting to do more and legacy airlines even adjusting down to match. Legacy airlines including Lufthansa, British Airways and Air France are fighting back, and the old strategy of doing it through a subsidiary equivalent is receivign a revival. Besides Lufthansa, British Airways (as part of the International Airlines Group which is already supported by Spanish low-cost carrier Vueling) has introduced Level, and Air France annoucned plans to launch Joon which, however, it says, is not a low-cost carrier.

The competition does not stay the same for long in the aviation business. Little surprise that Etihad has decided to step back from its acquisition spree.

Etihad flies into the red

Courtesy Etihad Airways

Are you surprised that one of the big three Gulf carriers has flown into the red? For the first time since 2011, Etihad Airways reported a hefty loss of US$1.87 billion in 2016 compared with a profit of US$103 million a year ago.

Chairman of the Etihad Aviation Group Mohamed Mubarak Fadhel al-Mazrouei said “a culmination of factors contributed tot he disappointing results.”

The United Arab Emirates airline blamed it on “one-off impairment charges and fuel hedging losses”.

It is a wonder how airlines would always blame poor hedging decisions for losses as if they were not responsible for their failure to correctly read the market. Etihad’s woes include billion dollar charges on aircraft and certain assets, as well as financial exposures to beleaguered equity partners including Alitalia and Air Berlin. Etihad owns 49% of Alitalia and 29.21% of Air Berlin. This has called for some reflection on the airline’s acquisition program.

But Etihad said the core airline business remained solid and strong. Although load factor declined slightly from 79.4% to 78.6%, passenger numbers increased from 17.6 million to 18.5 million.

Etihad’s new CEO Peter Baumgartner however was cautious about the future. He said: “We are in an industry characterized by overcapacity, declining market sizes on key routes and changing customer behaviour as a weak global economy affects spending appetite.”

Understandably, this comes at a time when the United States are imposing restrictions on travel from the Middle East and the airline too is caught in the diplomatic Qatar crisis that has affected regional routes.

More Middle East airlines allow laptops in cabin

Good news for Middle East carriers as the United States gradually exempts them from the ban imposed on the carriage of laptops and other electronic gadgets in the cabin.

Etihad Airlines was the first to announce the lift of the ban, followed by Emirates Airlines and Turkish Airlines. Now Qatar Airways becomes the fourth airline to join the list this week. Saudia, the flagship carrier for Saudi Arabia, said its passengers would be able to carry the electronics on board US-bound flights from 19 July.

This follows strengthened security to meet US standards, which include measures such as enhanced screening, more thorough vetting of passengers and the wider use of bomb-sniffer dogs.

Morocco, Jordan, Egypt and Kuwait have yet to announce similar exemption. The UK government which followed the US in imposing similar restrictions on flights originating from Turkey, Lebanon, Jordan, Egypt, Tunisia and Saudi Arabia have not indicated its readiness to also lift the ban.

For all the initial outcry against the ban and questions about its wisdom, one might concede that the good that came out of it was the greater awareness of in-flight security. But for the airlines compliance means holding up the bottom line. Emirates for one had reported a drop in business because of the ban.

Liquids, laptops and now books

Courtesy Getty Images

AS security screening at airports in the United States gets more stringent as part of the enhanced security program, air travellers can expect longer lines as more items become suspect and subject to more thorough checks.

Added to a host of restrictions on items to be carried into the cabin – objects such as liquids and laptops( if you begin your journey at certain airports in Africa and the Middle East) – are, believe it, books. Under new guidelines issued by the Transportation Security Administration, passengers at some airports have been asked to remove books (even magazines) from carry-on luggage to be screened separately.

Well, we’ve heard of false books or read about them in mystery stories, haven’t we?

There was a time before the advent of electronic devices, a book was almost an essential travelling companion. To be clear, the new rule does not forbid the carriage of a book into the cabin but that it should be screened like your laptop or shoes, and truth be stranger than fiction, there is the odd chance for some reason someone may end up not being allowed to take that book on board!

Indeed, as I had mentioned before in an earlier blog, a time may come when all an air traveller needs to bring with him or her on board are his travel documents and what the administration would define as essentials (such as prescribed mediation) – everything else would or could be provided on board, whether free or at a cost.

Airlines such as Qatar Airways affected by the ban on laptops are already providing loans on board. Looks like a good time for an airline to start an in-flight library of popular books (most likely electronic to avoid carrying additional weight and the cumbersome logistics). Maybe as you book a flight, you may request a copy to be made available. Or bookshops inside the sterile zone could arrange pick-ups of a physical book like your bottle of liquour from Duty Free.

However, in today’s context, the laptop and other electronic devices are likely to be missed more than the physical book by many travellers. So there is good news for Etihad Airways customers as it announced that its plan to conduct “enhanced inspections” had convinced the US to grant it an exemption. Etihad passengers travelling out of Abu Dhabi will go through US customs and border screening before boarding rather than after they touch down in the US.

Cathay Pacific axes 800 jobs: Is this the answer?

TIMES are hard for legacy airlines, it seems, when major airlines such as Singapore Airlines (SIA) and Cathay Pacific are beset with economic woes.

Courtesy Cathay Pacific

SIA announced a plan to transform the airline after reporting a last quarter loss of $S41 million (US$ 29 million) (see SIA’s transformation is long overdue, 27 May 2017). Cathay, losing HK$585 million (US$103 million) in 2016 – its first annual loss in eight years – is set to cut 800 jobs. Both airlines cited intense competition, mainly from the big three Middle East carriers of Emirates Airlines, Etihad Airways and Qatar Airways, and carriers from China. Cathay additionally suffer substantial fuel hedging losses.

Invariably cost cutting is almost every airline’s clarion call to try to get back into the black. It helps, of course, and such an exercise can eliminate wastage and improve productivity when in good times the airline has lost the discipline. However, more may be needed to be done if the issues are structural and operational. It calls for a deeper review of product, procedures and processes, and marketing strategies against a changing aviation landscape that renders old successes irrelevant and demands new innovative approaches.

Like SIA, Cathay is caught in a price-sensitive market where competitors have been able to provide comparable services at lower fare, and that’s not talking about low-cost carriers (LCCs) alone. Cathay risks losing its position as the gateway airline at the door of the huge China market as more carriers from the mainland commence direct services to destinations beyond China and offer connections out of Shanghai and Beijing. Also, partnerships between China carriers and other airlines are also threaten to cut Cathay out of the game.

Some analysts think Cathay is disadvantaged by the absence of budget arms, unlike SIA which is supported by Scoot and Tigerair. The solution really is not for Cathay to go budget, but to make that difference between flying low-cost and flying full-service in its favour.

SIA’s transformation is long overdue

Courtesy Bloomberg

Singapore Airlines (SIA) announced it will be taking “bold radical measures” in a major business transformation plan after the parent airline incurred a fourth-quarter operating loss of S$41 million (US$30 million). SilkAir and Budget Aviation Holdings (Scoot and Tiger Airways) reported lower profits for the same quarter: the former down 19 per cent to S$27 million and the latter more than 50 per cent to S$22 million.

Full-year operating profit for SIA was S$386 million, a decline of S$99 million or 20 per cent year-on-year. For SilkAir it was a fall of 11 per cent and for Scoot and Tiger a combined drop of 60 per cent.

SIA chief executive officer Goh Choon Phong said: “The transformation is not just about how we can cut cost but also how we can generate more revenue for the group, how we can improve our processes more efficiently, …so that we can be lot more competitive going forward.”

If anyone is surprised at all, it is not because it is happening but that it has taken so long coming. The writing has been on the wall since the global financial crisis when the airline suffered a loss of S$38.6 million in FY 2008/09, and from then onward the margin has averaged less than three per cent compared to seven per cent in the five years leading to it.

SIA cited intense competition that is affecting its fortune. Lower fuel costs that contracted by S$780 million (down 17.2 per cent) didn’t help. Capacity reduction trailed the reduction in passenger carriage, and passenger load factor as a result dipped lower to 79.0 per cent.

While details of the transformation are yet to be announced, it will do SIA well to recognise that the aviation landscape has changed dramatically over the years and will continue to shift. Competition in the business is a given, and we cannot help but recall how the fledgling airline from a tiny nation leapfrogged its more experienced rivals in its early days to become the world’s best airline and one of the most profitable in the industry. No doubt the competition has intensified, but the salient point here is that it can never be business as usual.

What then has changed?

Low-cost carriers are growing at a faster rate than full-service airlines and are now competing in the same market, and while SIA may have answered that threat with setting up its own budget subsidiaries, the parent airline is not guaranteed it is spared. Until the merger of Scoot and Tiger under one umbrella, there had been much intra-competition. And while the subsidiaries compete with other low-cost carriers, the concern should be that they are not growing at the expense of the parent airline. That calls for clearly defined product and route differentiation such that they are not substitutes at lower fares.

Low-cost carriers are also venturing into the long-haul, aided by the current low fuel price and technologically advanced and more fuel-efficient aircraft. The launch of Norwegian Air Shuttle’s service between Singapore and London in October at drastically lower fares poses a challenge to SIA on one of its most lucrative routes.

The market is becoming increasingly more price sensitive since the global financial crisis, and that favours the low-cost model of paying for only what a passenger needs. Dwindling may be the days when one is more willing to pay a higher fare for SIA’s reputable in-flight service as other carriers improve their products and services, often the reason cited for the competition laid on by the big three Middle East airlines of Emirates Airlines, Etihad Airways and Qatar Airways.

These rivals are also offering a slew of connections out of their home bases and reduced layover times which are the forte of the SIA network. The growing importance of airports such as Dubai and Hong Kong as regional gateways may disadvantage not only Changi Airport but also SIA in the competition against airlines such as Emirates and Cathay Pacific. In 2013, Qantas shifted its hub on the Kangaroo Route from Singapore to Dubai, and is now planning to build a hub out of Perth for the same route. SIA will have to heed the geographical shift that may affect the air traveller’s preference for an alternative route.

Along with this is also the increased number of non-stop services between destinations, particularly out of the huge, growing Chinese market. This may eliminate the need for travellers to fly SIA to connect out of Singapore, say from Shanghai to Sydney when there are direct alternatives offered by Qantas and China Eastern Airlines. It has thus become all the more imperative for SIA and Changi to work even closer together.

Well and good that SIA is constantly looking at improving cost efficiency and productivity. But more has to be done. As Mr Goh had said, it calls for a “comprehensive review on whatever we are doing and how we can better position ourselves for growth.”

The key word is “transformation”, in the same way that Qantas chief executive Alan Joyce went about restructuring the Australian flag carrier following the airline’s hefty losses four years ago. Drastic measures were introduced that include the split between international and domestic operations for greater autonomy and accountability, and concrete targets were set over a specific timeline. The continuing programme seems to have worked for Qantas as it bucks the trend reporting record profits while other airlines such as Cathay are hurting.

SIA will have to look beyond its own strengths at the strengths of others. It has thrived on the reputation of its premium product, but that has taken a toll as business travellers downgrade to cheaper options. Although that business segment is slowly recovering, other airlines have moved ahead to introduce innovative options, such as the premium economy which Cathay revitalised as a class of its own and which SIA was slow in embracing, reminiscent of how SIA too did not foresee the increased competition posed by low-cost carriers. It is a pity that SIA, once a leader in innovation, has lost much of that edge.

Timing is everything in this business to cash in on early bird advantages, but this is not made easy by abrupt geopolitical changes and new aviation rules and the long lead time in product innovation and implementation. All said, SIA may begin by looking at what worked for it in the past and ask why it is no longer relevant.

US & UK ban laptops on board: Will this become the security standard?

Courtesy Emirates

SOON after the United States bars passengers on foreign airlines taking off at ten airports in Africa and the Middle East from carrying electronic devices larger than a cellphone, the United Kingdom announced a similar ban although the list of airlines and airports may be different.

The ban will affect items such as laptops, tablets, e-readers, cameras, printers, electronic games and portable DVD players. However, these articles may be carried in checked baggage.

Affected airlines and airports

The US restriction affects nine airlines: EgyptAir, Kuwait Airways, Royal Air Maroc, Royal Jordanian Airlines, Saudi Arabian Airlines, Turkish Airlines, and the Gulf big three of Emirates, Etihad Airways and Qatar Airways. The airports affected are sited in Amman (Jordan), Cairo (Egypt), Casablanca (Morocco), Doha (Qatar), Dubai and Abu Dhabi (United Arab Emirates), Istanbul (Turkey), Jeddah and Riyadh (Saudi Arabia), and Kuwait City (Kuwait). It is estimated about 50 flights daily would be affected.

The British ban affects 14 airlines arriving from Egypt, Jordan, Lebanon,Saudi Arabia, Tunisia and Turkey. While the US ruling exempts US carriers flying from the listed airports, the British restriction applies as well to home-based airlines British Airways and EasyJet.

Why the restrictions?

The reason for the bans is of course one of security, aimed at preventing terrorist attacks on commercial airlines. The US Department of Homeland Security said: “Terrorist groups continue to target commercial aviation and are aggressively pursuing innovative methods to undertake their attacks, to include smuggling explosive devices in various consumer items.”

The British government said it recognised the inconvenience these measures may cause but “our top priority will always be to maintain the safety of British nationals.”

Few air travellers, if any, will take issue with enhanced security measures since it means a safe flight. Any averse reaction is to be expected, as when full-body x-ray and search became mandatory at US airports. The inordinately long wait to clear security at US airports has since then become an accepted practice.

However, it will do well not to ignore the arguments put forth by experts who may not yet be fully convinced. Technology experts have questioned the premises which in their mind appear to be at odds with basic computer science.

What goes with the ban?

The ban on laptops means no one will be able to work during a flight, something that businessmen and women will sorely miss. Keeping yourself or your kids entertained with electronic games of your personal selection will be a thing of the past if you do not like what the airline offers in its system. What about that novel you thought you might at last be reading during the long journey, having loaded it in your e-book?

Sure, you can pack these (and your camera) in your checked baggage to loaded in the aircraft hold, but it defeats the purpose if they are intended for use during the flight. Also, if these are expensive equipment, passengers are often reluctant to pack them in checked baggage for fear of losing them or having them damaged. Some observers are predicting a rise in incidents of theft in the baggage holding area and cargo hold, and airlines will be confronted with the messy business of handling claims. Apparently baggage theft skyrocketed when Britain imposed a similar ban in 2006.

Laptops, tablets, cellphones and cameras are among the items that are already being subjected to additional security checks before they are cleared as carry-ons. It can only point to the suspicion that the current procedures are not robust enough.

Looking at the bigger picture, some experts fear the ban seems lopsided. First, if a laptop as an example may be used as an incendiary device, it is equally dangerous in the cabin as it is stowed in the baggage hold. Second, the ban targets named originating airports, but a terrorist suspect could always connect a flight from a presumed safe airport or fly on a presumed safe airline. Third, in the case of the US, to make exceptions for flights originating in the US is turning a blind eye to the possibility that mischief could also be traced to a home source.

Some airlines may benefit from the ban

It looks like an unexpected turn of events for the US big three of American Airlines, Delta Air Lines and United Airlines in their quest to get the US government to act against the perceived unfair competition by the Gulf big three (Emirates, Etihad and Qatar). The ban may well benefit the American trio as travellers are likely to want to travel with their electronic devices on board than to have them stowed in the baggage hold. A pertinent question would be how the US carriers would ensure the devices brought on board are safe the way that other carriers may not be able to do so?

Similarly, in the case of the UK ruling which covers also budget carriers, legacy airlines will have the edge if, unlike budget carriers, they do not charge for checked baggage. Easyjet, for example, will be challenged to think up an innovative approach to this issue.

And will airlines across the industry introduce loans of security-screened laptops on board for a fee?

The future

Although the ban is said to be temporary (as indicated by the US), will there be a change of mind to make it permanent, like the ban on liquid obtained before security clearance? Amuse yourself about a future when all you are allowed to bring on board are the clothes you are wearing and a wallet. Everything else needed or desired for the journey as determined by the authorities and the airlines may be purchased after take-off.

For now, some airlines may mull over the use or disuse of a happy passenger working on his or her laptop in their ads.