A bleak year for airlines

It looks quite certainly a bleak year for airlines as Covid-19 keeps people away from travelling. The outbreak has become more extensive than anticipated, short of being classified as pandemic by the World Health Organization.

Cutting capacity

Many airlines are cutting back or suspending services not only to destinations in China where the outbreak started but also across the world.

Among them are:

Courtesy Singapore Airlines

Singapore Airlines, which has cancelled almost 700 flights across its network through to May. Its low-cost subsidiary Scoot has cancelled all flights to China.

Cathay Pacific, which so far has seen flights reduced by more than 75 per cent till the end of March, with hints of more to be scrapped.

Qantas, which has reduced capacity to Hong Kong and suspended flights to Shanghai and Beijing. It is also reporting weak demand for seats on flights to Singapore and Japan as well. Capacity to Asian destinations will be reduced by 15 per cent until the end of May. Its low-cost subsidiary Jetstar is also adjusting capacity as a result of the weaker domestic market.

Air France, which has taken out flights to China until the end of March.

British Airways, which has cancelled not only flights to China but also more than 200 flights from London to destinations in the United States, Italy, France, Austria, Belgium, Germany and Ireland in the latter half of March.

Ryanair, which will cut up to 25% of flights in and out of Italy from 17 March to 8 April..Ryanair chief Michael O’Leary said: “There has been a notable drop in forward bookings towards the end of March, into early April.”

EasyJet, which is cancelling some flights because of “a significant softening of demand and load factors into and out of our Northern Italian bases”.

United Airlines, which has suspended flights to China and axed flights to South Korea, Japan and Singapore as demand across the Pacific has fallen by as much as 75 per cent. Delta Air Lines has also cancelled flights to China.

Air Canada, which has cancelled all flights from Toronto to Hong Kong until the end of April.

Middle-east airlines, which are affected by action taken by the Gulf authorities. Iran as the epicentre of the outbreak in the region has seen flights to its airports cancelled by neighbouring United Arab Emirates (UAE), Bahrain, Oman, Jordan, Kuwait, Iraq and Saudi Arabia.

Events cancelled

The threat of the disease spreading easily at public events has led to many of them being cancelled, which in turn will affect the airlines which would have enjoyed a boon in carriage numbers.

Courtesy United Airlines

United Airlines for one has scaled back additional flights between San Francisco/Newark and Barcelona planned for the Mobile World Congress which has been cancelled.

Now all eyes are on the 2020 Summer Olympics to be staged in Tokyo.

Business travel, as noted by British Airways chief Willie Walsh, has been affected by the cancellation of large conferences. Some large corporations are also restricting executive travel.

International cruises, which pose a similar threat following the outbreak of the disease on the Diamond Princess docked at Yokohama, have also suffered from reduced patronage or cancellations, and this in turn reduces feeds from airlines from across the globe to the ports of call.

Reduced profitability

Expectedly airlines are predicting reduced profitability although some of them are optimistic about the impact as not being as drastic as it seems.

Air France-KLM warned its earnings would be affected by as much as €200 million (US$224 million).

Qantas said the COVID-19 outbreak would cost the airline up to A$150m (US$99m).

Air New Zealand expects the impact to be in the range from NZ$35 million (US$22 million) to NZ$75 million as travel demand to Asia drops.

Finnair is expecting a significant drop in operating profit this year.

Airlines which rely heavily on Asian traffic are naturally more affected, even more so budget carriers such as AirAsia and its long-haul arm AirAsiaX. Particularly vulnerable are airlines which are struggling to stay afloat, such as Norwegian Air Shuttle, which is cutting back on long-haul operations, and Hong Kong Airlines, which is 45 per cent owned by Hainan Airlines of the HNA Group, which itself is facing a sell-off by the Chinese government.

Cost cutting

Besides reducing or cutting capacity, expectedly many airlines are looking at cutting cost.

EasyJet is looking into reducing administrative budgets, offering unpaid leave, and freezing recruitment, promotion and pay rises.

Singapore Airlines is implementing paycuts of 10 to 15 per cent for senior executive management. General staff will be offered a voluntary no-pay leave scheme.

Cathay Pacific is asking employees to take unpaid leave.

Courtesy Airbus

Perhaps the impact is most felt at Hong Kong Airlines which has slashed in-flight services to a bare minimum and dismissed staff, targeting 400 of them.

What’s next?

While the industry contnues to grapple with the prolonged saga of the B737 Max jet predicament, the coronavirus outbreak could not have come at a worse time on its heels. In both cases, it is the uncertainty that poses the biggest problem. Soem airlines are pessimistic that the threat will blow over by the end of March, which is unlikely, while others are more cautious in their forecast, looking at the end of May. It is this uncertainty that makes one wonder if any of them might not survive the wait.

Size matters in the air

Courtesy Getty Images

Ryanair chief Michael O’Leary predicted that “within the next four to five years you are seeing the emergence of four or five large European airline groups.” He even named the airlines, Ryanair among them in a mix of full-service and low-cost operators: Lufthansa, IAG (International Airlines Group which owns British Airways, Iberia, Aer Lingus, Vueling and Level), Air France-KLM and, probably, Easyjet.

This sentiment has been opined before by others at a time when mergers, assimilations and acquisitions across the industry were trending as competition broke barriers of entry and intensified, and so-called safe niche markets became every player’s game.

Air France-KLM as the name suggests is a merger of the two European airlines in 2004. Rival British Airways (BA) viewed it as a step in the expected direction, predicting further consolidation within Europe. And in 2011 IAG came into being when BA and Iberia merged. BA chief executive Willie Walsh said at the time that the merger would enable the airline to compete effectively with low-cost carriers.

So there came a time when budget carriers began to pose a threat to full-service airlines, with Ryanair leading the pack. Many of the legacy airlines today have adopted the budget model of charging for ancillaries, and introducing a basic economy class to keep cost-conscious travellers from switching. However, many low-cost carriers have become victims of the competition – the reason why Mr O’Leary named only one other carrier, EasyJet, as a probable survivor.

EasyJet, founded in 1995 and headquartered in London Luton, UK, is Ryanair’s closest rival which has grown and spread its wings across Europe. It too has made a number of acquisitions which include Swiss TEA-Basle and Go.
Elsewhere around the world, the vibes are not unfamiliar, New in the circuit is Air Canada’s interest in Sunwing and Cathay Pacific’s interest in Air Hong Kong Express, And where acquisitions and mergers are not on the plate, airlines are working to form alliances that are more than mere code-sharing. Qantas did it in 2013 with its tie-up with Emirates, and now Malaysia Airlines and Japan Airlines have applied for waiver of government restrictions to form an alliance that will enable easier connections between the two carriers.

It looks like size matters in the air.

Ryanair affirms market for budget travel

courtesy PA

Despite problems with pilot rosters last year that led to cancellation of flights, Ryanair has reported record annual profits for the full year ending March 31, 2018. Profits after tax rose 10 per cent to €1.45 billion (US$1.71 billion).

The results yet again affirm the strength of the budget market even as the global economy continues to improve. The improved economy should favour legacy airlines as they begin to give more attention to their premium product. However, the competition continues to be a thorn at their side, and legacy airlines are also offering basic economy without the full entitlements of normal economy.

Ryanair chief Michael O’Leary warned though that not all budget carriers can survive the future as oil prices rise. The outlook for 2018/19, he said, would be “on the pessimistic side of cautious.” In an interview with CNBC, he added: “Those airlines that couldn’t make money when oil was at $40 a barrel last year, I don;t think will survive this winter when oil remains at these elevated levels.”

It is tough competition. Many budget carriers have come and gone, and the last few years have been good to them as the fuel price holds steady, leading to the growth of budget long-haul as well. Their ability (and willingness) to offer lower airfares than legacy carriers make them attractive alternatives – the key reason why passenger numbers for Ryanair increased by 9 per cent to 130 million last year. But the Irish carrier is paring down its expectation to only 7 per cent increase this year. The good news for customers is that fares are likely to remain unchanged.

And as legacy airlines (and their subsidiaries) in Europe undergo what looks like an annual affliction of industrial strikes by staff, Ryanair is there to fill the gap and rake in the hay.

Big Mess at Ryanair

Courtesy Getty Images

The world’s biggest budget airline has found itself floundering in a big mess. An apaprent mistake in leave schedulign of pilots as it claimed has led the airline to cancel 2,100 flights over six weeks until November – 40 to 50 flights a day. That means inconveniencing some some 300,000 customers who would receive or had already received emails informing them of the cancellations.

Ryanair said it would arrange alternative flights or refund the fares. Under the European Passenger Rights legislation, passengers are entitled to compensation for flight cancellations. Ryanair estimates it will cost the carrier 20m euros (US$24m).

The unpredented slew of cancellations may also subject Ryanair to penalties imposed by the authorities. Italy’s competition regulator – Italian Competition and Market Authority – has started a probe into the matter, on whether the cancellations could have been prevented. It is hard to believe that Ryanair had nto anticipated the problem and, if found guilty, could be fined as much as 5m euros.

Ryanair chose to cancel flights first at its busiest airports so that it would be eassier to arrange alternative flights. But, of course, in the mess of events, this has a knock-on effect.

Ryanair chief Michael O’Leary denied the airline was experieicning a shortage of pilots, even as many as 140 of them have left to join new rival Norwegian Air Shuttle. Mr O’Leary insisted it was because the airline had “messed up” the rosters which left it without enough pilots to operate all the scheduled flights.

One thing for sure, Ryanair will certainly feel the heat of the competition brought on by Norwegian and other carriers such as EasyJet, if advanced bookings for October at 70 per cent comapred to September at 90 per cent are any indications.

Will this mess cause Ryanair any further loss of customers in the future? The airline has a dotted history of going from zero customer service to attempting improving that aspect in the face of rising competition. Much depends on how it handles the current crisis. In a price sensitive market, people’s memories tend to be short while most people are actually more forgiving than expected under the circumstances. The real threat for Ryanair remains the competition particularly if the rivals are seen to be more reliable.

Standing room only on this flight

Those of us who go to the theatre often enough will be familair with the term “Standing Room Only” (SRO). But SRO on a flight?

Budget airline Viva Colombia has just that in mind. Its founder and CEO William Shaw told The Miami Herald: “There are people out there right now researching whether you can fly standing up. We’re very interested inanything that makes travel less expensive.” So, wey not? After all, he said, “Who cares if you don;t have an in-flight entertainment system for a one-hour flight? Or that you don;t get peanuts?”

This thought isn’t new. As far back as 2010, Ryanair flaoted the idea. (See Standing room only up in the air, July 23, 2010) Actually, instead of standing upright as in a bus, passengers will have “vertical seats” to leab against, complete with seatbelts and a small cushion to support the lopwer back – which is said to be good for people with back problems.

Ryanair chief Michael O’Leary was of the opinion that people flying very short hauls (say, up to two hours) wouldn’t mind standing all the way if the fare was that dirt cheap. Then he was thinking of fitting only the rear of the aircraft with vertical seats as a choice.

Vertical seats, otherwise known as saddle seats. Courtesy Airbus.

In fact Airbus put forth the concept in 2003 with the hope that it might be implemented by 2010. Now the South American carrier based in Medellin, Colombia, is reviving the idea. Guess what, the low-cost operator is partly owned by the founders of Ryanair.

Still, the question that hangs in the air is when and if it happens the regulators will approve the operations as safe-worthy.

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.

Which Asian airlines might be interested to buy into Virgin America?

Photo courtesy Virgin America

Photo courtesy Virgin America

UP for sale, Virgin America has some suitors lining up. It has received takeover bids from JetBlue Airways Corp and Alaska Air Group Inc. In this era of the mega carriers (consider the mergers of United Airlines and Continental Airlines, Delta Air Lines and Northwest Airlines, and American Airlines and USAir), a tie-up with another carrier strengthen Virgin’s competitive ability. And while it is almost certain that the merger would be with another American carrier, with analysts placing bets on JetBlue as the best fit, apparently some unidentified Asian carriers have also expressed interest. Still, be that as a remote possibility, one cannot help but be curious and speculate who the likely candidates might be.

Two big names come to mind immediately because of their successes, networks and financial capability, namely Cathay Pacific Airways and Singapore Airlines. Both airlines are keen on expanding their US market. Cathay flies to Boston, Chicago, Los Angeles, New York and San Francisco while Singapore Airlines (SIA) operates to Houston, Los Angeles, New York and San Francisco. Both airlines have codeshare access to several other destinations. Cathay’s codeshare partners include Alaska Airlines and American Airlines while SIA already codeshares with Virgin and with JetBlue.

So it looks like SIA more than Cathay would be favoured on relationships alone. Since foreign ownership rules governing US airlines require the bid to be submitted jointly with a US partner. It would be convenient for SIA to join hands with JetBlue. Of course, Cathay may partner Alaska Airways, but historically Cathay is not quite interested in equity participation. Although it has a 20.3% stake in Air China and 49% in Air China Cargo, that could be a matter of expedience to secure its market in the growing China mainland market.

SIA on the other hand, limited by a hinterland market, tried in its early years to grow through acquisitions. In 1999, it bought 49% of Virgin Atlantic and subsequently 25% of Air New Zealand. Although both buys subsequently proved to be lemons, resulting in heavy losses, the misstep might be less strategic than circumstantial. Unfortunately that has hurt SIA deeply more psychologically than financially as the airline became more cautious about such moves. In subsequent years it failed in its seemingly reluctant bid for a stake in China Eastern Airlines, and the SIA Group was plagued by the poor decisions of its budget subsidiary Tigerair in joint ventures in Indonesia and the Philippines. In Oct 2012 SIA bought a 10% stake in Virgin Australia, joining tow other foreign partners namely Air New Zealand and Etihad Airways. In much the same way that Cathay needed to secure its market in China partnering with Air China, SIA needed to secure its Australian market against the competition by Qantas. Six months after, SIA increased its stake to 19.9%.

But is SIA even interested in a stake in Virgin when its codeshare partnership with JetBlue already places it in an advantageous position to benefit from a JetBlue takeover of Virgin? Would a bid jointly with an Asian partner jeopardise JetBlue’s chances if the powers that be preferred an all-American merger a la the big three of United, Delta and American?

Besides Cathay and SIA, one should not ignore the voracious appetite of the China carriers in the national trend to acquire foreign assets. And why must it be premised on full-service carriers that are already serving destinations in the US? What about a budget carrier with dreams of new frontiers? Maverick AirAsia chief Tony Fernandes who models himself after Virgin guru Richard Branson and who had been where others were hesitant, even afraid, to go may yet surprise with an expression of interest even if it is no more than just that. He is one of the few airline chiefs who, like Ryanair’s Michael O’Leary and Qantas’ Alan Joyce, understood what an opportune good dose of publicity could do.

All this, of course, is speculative. Asian carriers are likely to be less concerned this time than when the mergers of the American big three took place. Together with Southwest Airlines, the big three control 80% of the American market. Virgin and its alleged interested parties JetBlue and Alaska are all largely domestic carriers. Even if Southwest throws in a bid (but for its size that may not pass the antitrust law as easily), it is still the same scenario. SIA’s connections with JetBlue and Virgin will continue to stand it in good stead, but if it’s Alaska that carries the day, then it is Cathay that stands to benefit from the new, extended connection. Or does it really matter when there are already subset agreements across partnership lines that allow you to fly an airline of one alliance and connect on another in a rival group? That’s how complex today’s aviation has become.