Brexit gloom overstated for airlines

THE day after the Brexit referendum, it looked like all gloom and doom as the pound plummeted and the global stock market reeled. The share price of British low-cost carrier EasyJet went down 22 per cent. For their discernible dependence on the UK market, Ryanair and the International Airlines Group (IAG, which owns British Airways besides Iberia, Vueling and Aer Lingus) also suffered declines above 20 per cent. Even American carriers across the pond with the exception of domestic operators took a hit.

Reduced profits for the second half of the year are all but certain. IAG said it would not be able to match the 2015 level. EasyJet warned that fares may increase. Ryanair said it will cut back investment in the UK and focus instead on growth in the EU.

The immediate concern was that the weak sterling may mean British holidaymakers will now count their pennies before committing to an overseas vacation. UAE Director-general of the General Civil Aviation Authority, Saif Mohammed Al Suwadi, foresaw a decline of travel from the UK to the Gulf region, and this is not good news for Middle East carriers which are also benefitting from onward travel by the Brits to places in Asia and Australia. But consider what a weaker British pound could do for Britain to attract tourists into the UK. It may be more than just rephrasing the equation, and airlines including Singapore Airlines which fly to British destinations could benefit from the fallout.

So far the world’s reaction seems unduly lopsided in its view of the dire impact on the UK. Doomsayers are mistaken if they were waiting to see the UK punished indefinitely. At least for the airline industry, the gloom has been overstated. In fact, IAG believed that the UK vote to leave the EU would not have a long term material impact on its business. So too Ryanair which reassured its customers that it “will continue to offer the lowest fares in Europe and the UK.” British carrier Monarch Airlines said it is not raising fares and “will continue to remain competitive.”

Courtesy easyJet

Courtesy easyJet

It is easy to blame Brexit as the shock of the unexpected outcome takes its toll. Understandably, low-cost carriers such as EasyJet are more concerned about losing access to the single EU market, which has spurred their growth across a wider region. EasyJet for one has seen its profit increase manifold from GPD22.1m in 2000 to GPD548m in 2015, and its passenger load from 5.8m to 68.6m making it the second largest operator in Europe after Ryanair. Today it boasts a load factor above 90 per cent and operates from 24 bases across Europe. It may be one, being British, to lose the most if new regulations limit its operations or make it difficult for it to access its present markets. In truth, EasyJet is already facing what it described as “extremely challenging” conditions in the past two months with demand being affected by severe weather, airport issues and industrial strikes in France which resulted in flight disruptions.

Despite the harsh warning from EU leaders that Britain cannot expect to enjoy EU privileges post-Brexit, it is hard to believe that Open Skies which has come a long, long way globally will suffer a substantive setback. The UK could still negotiate access to the EU single market a la the model used by non-EU members Norway and Iceland if Britain then joins as a member of the European Economic Area (EEA). It must abide by EU rules but cannot participate in the Union’s decision-making.

The UK could also look at other models such as one adopted by Switzerland, which is not a member of the EEA but the European Free Trade Association, gaining access through a number of bilateral agreements though not for all sectors. Or, the post-Brexit negotiations could knock up a deal specific to the UK. Outside those jurisdictions, peculiar to the airline industry is the number of complex cross-border partnership agreements that have blurred regional lines.

Britain is a large market, so it is in the interest of all parties concerned to negotiate a win-win deal. The silver lining in the dark Brexit cloud is how commercial considerations will prevail over political deliberations. Politically driven regulatory restrictions will do neither the UK nor EU members any favour. It is in their interest to continue keeping the channels open for competition.

The resilience of the business in adjusting to change cannot be underestimated. Many people take comfort that the due process for any change may take up to two years. The real comfort is that implicitly, any change is unlikely to be unduly drastic or disruptive.

Ryanair attributes success to its business model

Courtesy PA

Courtesy PA

FOLLOWING the good results announced by rival easyJet (See easyJet rides on Air France’s troubles, Oct 8, 2014), Ryanair too has good news for its shareholders. The budget carrier reported a half-year net profit of €795m (US$998m), an increase of 32 per cent compared to last year’s performance. While passenger numbers rose by 4 per cent, the “slightly higher” summer fares were also contributory to the good result.

Consequently Ryanair has revised its forecast for full-year profit upwards from €650m to between €750m and €770m. Although passenger numbers are likely to continue to grow, the carrier expects the first half-year to make up for lower winter fares which would flatten the profitability curve somewhat.

Ryanair chief executive Michael O’Leary said: “The strong H1 results demonstrate our business model is performing.”

This only exacerbates the concern of legacy airlines about the market within Europe shifting in favor of low-cost carriers. Air France and Lufthansa are trying to compete with the likes of Ryanair and easyJet through their respective budget offshoots: Transavia (Air France) and Germanwings (Lufthansa). The International Airlines Group (IAC) which also owns British Airways and Iberia Airlines have successfully turned round budget subsidiary Vueling Airlines.

However, as many budget operators too have come and gone. The issue may be one of staying true to the “no frills” model in a price sensitive market for the short haul. Monarch Airlines which is cutting 700 jobs as well as the pay of employees of up to 30 per cent is ending long-haul operations to concentrate on scheduled short-haul European leisure routes.

Beyond five or six hours of travel time, passenger demands change drastically and the market becomes less price sensitive. But that has not stopped pioneering airlines such as Norwegian xxx to boldly go where others fear to tread, noting the number of failures that include Hong Kong’s Oasis Airlines. (See Norwegian venture into budget long-haul raises the same viability question, Jun 18, 2013) Ryanair too talked about doing a Freddie Laker, but that would mean tweaking the “business model”. What works for the short-haul may not necessarily guarantee success for the long-haul.

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