Endau Analytics

In the airline business politicians are best seen, not heard

Boeing MAS MOU 0917

Boeing’s Mou with Malaysia Airlines on Sep 12


“I think you all know that I’ve always felt the nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.” –  former US President Ronald Reagan, August 12, 1986


Thirty-one years ago and the words still ring true. The Gipper was an astute president and not ashamed to admit that many of the problems during his two terms in office were caused by the government’s long history of conflicting and haphazard policies.

On September 12 the Malaysian government, led by its prime minister (PM) and several key cabinet ministers went to the White House in Washington DC and announced that Malaysia Airlines (MH) would buy Boeing 787-9 and 737 MAX aircraft. At catalogue prices, the planes cost just over USD3 billion.

Regrettably the PM, perhaps unwisely advised, said this of the aircraft deal: “We want to help you in terms of strengthening the US economy… we intend to increase the number of Boeing planes to be purchased by MAS… We will also try to persuade AirAsia to purchase GE engines.

Additionally, he added that Malaysia’s Employees Provident Fund would make a sizeable contribution to the US economy by pumping “three to four additional billion dollars” in infrastructure redevelopment.

Predictably his remarks elicited a furore in Malaysia and understandably so as it appeared the investments were either to appease or to curry favour from the Americans.

Was there a political posture to the aircraft purchase? We think not but because the head of government said it, it is unfortunately perceived as such.

The fact is, MH had indicated its interest in buying widebody aircraft as far back as January 2017. It is well known in the airline industry MH wants to expand and was evaluating twin-aisle aircraft – either the Airbus A330neo or Boeing’s 787 Dreamliner.

Therefore, it didn’t really surprise the aviation community when the PM made that statement. What startled observers was: (i) him attributing the acquisition as a sign of Malaysia’s support of the US economy and (ii) the number of aircraft ordered.

The anger and allegations of political chicanery over the national airline inking a MoU with Boeing could have been avoided had the statement been made by MH’s managing director or its chairman or both since they were part of the PM’s delegation.

Think about it: why pay millions a year to a chief executive, fly him half way round the world to DC and not let him be accountable for the airline’s decisions and justify the move to buy planes to Malaysians back home?

The MH boss sings well and we believe he would have no problem serenading Malaysians on the virtue of spending a few billion bucks on Boeing aircraft. At an industry event in Manila last November 2016, the Irishman’s rendition of Stand By Me was pretty cool – check out this video.

Plane silly

No airline in its right mind would risk buying aircraft just to help create jobs in another country. It’s plane silly, pun intended. And Malaysians have the right to question the deal given that MYR6 billion of taxpayers money were used to bail out MH over two years ago.

This isn’t about the airline’s choice of Boeing aircraft, or even its ability to fund the planes. MH is fully backed by the sovereign, whose strong credit rating would provide easy and inexpensive access to the debt market. That’s not the issue.

The issue is about fiduciary duty. Given the airline’s tattered financial track record MH’s management has a responsibility to: (i) explain why it needs those aircraft, (ii) where it intends to deploy those aircraft, (iii) say if the planes are to be leased or purchased outright, (iv) assure Malaysians the assets would not end up like the A380s and finally, (v) ensure the purchase wouldn’t lead to uncontrollable debts (before it was nationalized end-2014 MH was paying close to USD500 million annually in interest alone).

The other burning question is this: why is the Malaysian government interfering in the running of AirAsia by trying to nudge it to buy GE engines? While it is a Malaysian carrier, AirAsia is a public listed company and answerable to its shareholders, not to Putrajaya.

Moreover, AirAsia is not the flag carrier and is being run competently. The airline makes purchases based on what’s good for the company and its equity holders, not on how it would benefit a certain engine manufacturer.

GE laggard

GE a laggard – could this be a reason to make Airasia buy GE engines? Grab pic taken off TV on Sep. 15

Pro aviation

The PM has been a staunch supporter of aviation for a long time, even when he held the defence portfolio. In his capacity as deputy PM, he personally welcomed an Airbus A380 prototype at KLIA in November 2005, after MH agreed to acquire six of the superjumbos.

Sadly the six A380s bought by Malaysia – which arrived barely five years ago – for over USD1 billion (MYR4.2 billion), have proved unsuccessful for MH. The A380s are now being refurbished (at great cost) for use on Hajj and umrah flights, a futile attempt in our view of trying to make something good out of the bad assets.

Although AirAsia is a huge success story, Malaysia’s aviation landscape is littered with the carcasses of failed airlines: Rayani Air, Pelangi Air, Silver Fly, Saeaga Airlines, Ked-Air… and the PM is well aware of it.

In March 2015 during the biannual Langkawi International Maritime and Aerospace show, the PM and transport minister witnessed a signing ceremony between a Malaysian company, Flymojo, and Canada’s Bombardier, for up to 40 regional jets. The PM made no public remarks then.

flymojo LIMA Najib March 2015

where’s the mojo gone to?

Flymojo was capitalized at MYR3 million and planned to have its bases in Johor Bahru and Kota Kinabalu. Its management team was helmed by chairman Alies Nor Abdul, coincidentally a former political secretary to the PM when he was deputy PM. Flymojo is believed to have lost its mojo and is now no longer active.

That the PM continues to be an active supporter of Malaysian carriers and the aviation industry is indisputable. Not many leaders pay such close attention to their countries airlines. Fewer still have the gumption to make tough decisions, even if it appears irrational and rash.

During a visit to China in May this year, he witnessed the MoU signing between AirAsia and Everbright Group and Henan Government to launch a discount carrier in mainland China. Much to his credit, the PM refrained from speaking publicly about it.


AirAsia Everbright Najib

airasia & china’s everbright group to form lcc jv




Adieu A380


Building the A380, from scratch. Pic/Shukor Yusof


“The more sand that has escaped from the hourglass of our life, the clearer we should see through it.” – Sartre

What would Jean-Paul Sartre make of the Airbus A380? Imagine, if you will, Sartre expressing his love for Simone de Beauvoir in the sumptuous Suite of a Singapore Airlines A380 as he coos, “Try to understand me: I love you while paying attention to external things. At Toulouse I simply loved you…”

In Toulouse today, they are more focused on profits than on philosophy, on “Love at First Flight” than on decoding what de Beauvoir means when she says, “One’s life has value so long as one attributes value to the life of others.”

It is a safe bet that Fabrice Brégier and Tom Enders, the two Airbus helmsmen, understand perfectly the philosophy of making money. Both know and recognise why the A380 hasn’t succeed and that it probably never will in years to come. But can Airbus turn it around?

The A380 programme is living on borrowed time, in our view. Inject a couple more billion euros in it or cut the losses? Airbus has broached this idea before – read it here. The European planemaker has cut A380 production to 12 in 2018 and eight in 2019.

A380 MSN 2 - a

the A380 MSN 4 while on a visit to changi in 2006. pic/shukor yusof


Last week the first A380 operated by SIA (the A380 launch customer) reportedly has been taken out of service. The airline said it plans to hand it back to its German owners instead of renewing the 10-year lease. Three other SIA A380s are also slated to return to the lessor by June 2018.

To rub salt to the wound ratings agency Moody’s has downgraded bonds issued by transport financier Doric due to worries over the fate of the A380 programme.

SIA took delivery of the world’s first A380 on October 25, 2007 amidst much fanfare and expectations. We’ve been skeptical of the A380 since Airbus first announced it was building it.

First, there wasn’t a market big enough for such a huge plane, so the economics were off. Even under the current climate of low fuel prices, it’s still costly to run the four-engined A380 – ask Malaysia Airlines or Thai Airways. Second, the trend is pointing to (more) people flying point-to-point, rather than from hubs. Third, there’s a case to be made of an over-capacity in long-haul flights.

Turn back the clock a decade ago and these were our comments on the A380 – here and here.

A380 wing Broughton

a cross section of an a380 wing at broughton, north wales. pic/shukor yusof


The A380 is a marvelous aircraft from a technology standpoint: cosy, efficient and quiet. It’s fun to ride in, too, especially on SIA and Qatar Airways, but definitely not on British Airways’ Club World – never understood how they could allow those odd backward and front-facing seats to be installed in the first place.

The A380 has mostly benefitted just one carrier in the past decade – Emirates – with 96 currently in service. Even SIA, with 19 in its fleet, has discovered the plane isn’t a cinch to make money. And so SIA deploys some of its A380s to destinations that appear tricky to extract good yields, such as Auckland, Hong Kong and Zurich.

Dubai-based Emirates has ordered 140 A380s, which is 40% or almost half the total A380s on order. It works for Emirates because Dubai is a mega air hub that connects passengers from say, the Far East or Australasia, to those in Europe and the UK (especially slot restricted Heathrow).

Unfortunately, for second-tier airlines such as THAI and Malaysia Airlines, this sort of strategy isn’t for them. So why on earth did they buy the A380s? They aren’t very smart carriers to begin with… does anyone seriously think the A380s will rake in money from Hajj flights?

To paraphrase Sartre, more money will likely escape from the Airbus hourglass, but can the folks at Toulouse see any clearer?

Cathay Pacific to be more “innovative” – is it just Hogg-wash?

CX screenshot innovation

Image: Cathay pacific. screenshot by Shukor yusof

In a tweet announced following its disastrous 1H17 results, Cathay Pacific Airways (CX) said it was “committed to be a more innovative airline for customers”. See the results here.

CX, which is majority owned by the Swire Group, posted a loss of HKD2.05 billion (USD262 million) for the six months ended June 2017, compared to a profit of HKD353 million for the same period in 2016.

When measured in terms of yield (the amount of money an airline makes from carrying a passenger over a kilometer), the picture looked even worse. CX’s yields continued to slump, down 5.2% to 51.5 HK cents. By comparison, Singapore Airlines’ latest yield stood at 10.3 Singapore cents, just over 1 SG cent higher than CX.

Rupert Bruce Grantham Trower Hogg – if there’s a prize for the poshest airline CEO name he’d probably win it – took over as new boss at CX on May 1 this year, and he vowed to return the carrier to “its winning ways”.

Innovation isn’t just a buzzword at CX. The airline takes innovation so seriously that it’s formed the Innovation Council, essentially a team of general managers with emphasis on using state-of-the-art technology to better streamline operations and customer comfort.

There’s no doubt CX has been innovative before, which led to it winning Skytrax’s coveted World’s Best Airline four times in the past 15 years.

And we are sure many flyers will agree that the Betsy Beer is one of CX’s most creative compositions. The amber nectar is supposedly “10% carbonated, which offsets the numbing of the senses in-flight for a lively sensation on the tongue”… And you thought being a member of the mile-high club was cool!

Sadly, the Betsy brew isn’t likely to improve CX’s yields, battered relentlessly by low-cost carriers, Chinese airlines offering direct routes to other countries (meaning less people going to Chek Lap Kok to connect on CX) and partly also due to CX’s decision to “shrink” its economy class seats, from 9-abreast to 10-abreast and insisting that passengers won’t feel squeezed.

CX A350-900 TAKE OFF (1)_

Apart from structural issues the airline faces, CX hasn’t been very good at playing the hedging game. The airline has lost huge sums betting on jet fuel. In 2016 CX lost HKD8.4 billion on fuel hedges. The year before that it blew HKD8.5 billion. The clever boys at Swire weren’t so clever after all…

So it isn’t all about intense competition (yes, go on, blame Akbar al-Baker and his Gulf gang for your woes) or the absence of a discount carrier for CX’s current plight. It’s about complacency and it’s also to do with the cost of CX staff. This is after all, one of the costliest airlines to run in the world.

CX pays its people really well, partly due to the high cost of living in Hong Kong and partly because they could afford it before. Those days are over. CX has to drastically cut expenses and people at least until the bleeding stops.

In 2016 Hogg (then the COO) was paid HKD11.2 million, up from HKD6.52 million the previous year. He was the highest paid director last year. CX said an independent committee determines directors’ compensation.

We think the answer to CX’s problems is new blood, and not another transfusion from Swire. Hogg is on a three-year contract but CX is unlikely to sufficiently recover during his reign. The board ought to consider an outsider if results by end-2018 show further deterioration. Now that would be a real innovation.

Talking tosh, the Singapore Airlines way

Screen Shot Singapore Girl

The Singapore Girl (the one on the right) – Surplus or deficit? *Image: SIA website / screenshot by shukor yusof

Here’s proof the standard (in and out of the aircraft) at Singapore Airlines (SIA) has gone down another notch in recent times.

As part of an on-going review of its operations, SIA announced on August 3 it was offering voluntary unpaid leave to its cabin crew for three months starting September this year.

There’s nothing wrong for an airline to do that. Indeed, we think it’s a wise move. The problem, in our view, is the language used to convey the message to the media.

Bloomberg quoted an SIA spokesperson as saying: “Having temporary surpluses or deficits of cabin crew is not unusual due to the nature of our business… The intention is to offer it from time to time going forward.”

But wait, someone at Airline House in Changi clearly wasn’t done yet, to paraphrase Financial Times columnist Lucy Kellaway, in talking tosh.

“The division will need to exercise flexibility and nimbleness to better manage crew resources. VNPL and the leave buy-back scheme are measures that the division will take from time to time to achieve this objective,” SIA said in a notice to its cabin crew.

Say what?

First, the airline’s cabin crew are “surpluses” and “deficits”? And what is “the nature of our business”? Can’t they simply say: “It’s normal in the airline business to sometimes have more and sometimes fewer flight attendants than are needed.”

Deficits and surpluses – if you must know – belong in the financial sphere; for instance, when speaking about budgets, or goods and services. Your cabin crew, lest you forget, are of flesh and blood. Human beings. They made SIA “a great way to fly”, they’re not just digits on the balance sheet.

And what’s this “going forward” thing? Hasn’t anyone told your communications team such clichés are meaningless and vacuous? Nobody expects a top tier airline like SIA to go anywhere but forward!

Second, are employees in the division now expected to morph into contortionists so they can “exercise flexibility and nimbleness”?

You’d thought a world-class carrier could have done better than to send out banal, jargon-laden communiqués that are not only demeaning to its own staff, but devoid of creativity and originality, something SIA once excelled in.

We give you another example, this time of lazy copywriting: in May this year SIA announced it was flying to Stockholm, Sweden. And here’s how it described the Swedish city – “a vibrant capital with something to offer business and leisure travellers of all ages. From soaking in the rich culture of Gamla Stan…” Read it here.

Look, “vibrant” and “soaking” don’t quite go hand in hand, unless it’s in a vat of (Absolut) vodka. Most people we know go to Stockholm for the sex, snow and Smörgåsbord, or to find the Girl with the Dragon Tattoo, not necessarily in that order. The more adventurous ones will probably go shop at Ikea.

We understand there’s quite a lot SIA needs to do these days, what with profits plunging and pesky low-cost rivals pressuring yields 24/7. But there’s no excuse in coming up with these sort of BS going forward – if you get the drift.

SIA has a tidy surplus of cash in its coffers but one can’t help feeling there’s a deficit in its emotional quotient.

Who’s the fairest of them all?

Everett widebody plant

boeing everett factory, the world’s largest building by volume. pic/shukor yusof

It’s earnings season for airlines and aircraft manufacturers. With the exception of a few airlines, they all seem to be doing swimmingly well but…

Do you believe Boeing is a better stock buy following its recent success over Airbus at Le Bourget? Indeed, shares of the US aircraft manufacturer soared (now hovering over USD230) end-July after the Chicago-based company reported 2Q core earnings per share of USD2.55/share, above the Street’s estimates of USD2.31. A year ago Boeing reported a loss of 44 cents per share.

Look closely at the latest earnings and one will see a drop in commercial aircraft deliveries (minus 16 aircraft from a year ago – that’s an 8% reduction). That equates to a revenue miss, down USD22.7 billion, from analysts’ expectations of USD23 billion.

That said, Boeing has done well in managing its cashflow, shedding jobs and transiting from the current 737 production to the MAX , an aircraft that is expected to win more orders in coming years. It’s impressive by any measure, but we think the share upside potential is limited.

Of the four major aircraft makers – Boeing, Airbus, Bombardier, Embraer – which one offers the best value for money, if you’re an investor? Airbus announced its 2Q figures that were about 3% behind analysts’ estimates – sales came in at USD18 billion and operating profit came in a tad over USD1 billion (the Street had anticipated closer to USD1.1 billion).

Airbus has a few issues it needs to get a grip on: (1) engine woes for its A320 new engine option, or neo; (2) delays over its A400M military transporter; and (3) declining interest in the A380.

A380 tailfin

what does the future hold for the a380? pic/shukor yusof

Toulouse-based Airbus is on course to deliver over 700 planes, but the problem with the A320neo is not with the manufacturer, rather with supplier Pratt & Whitney, according to the European aerospace company. Meanwhile delays on the A400M programme meant a EUR2.2 billion bill.

The A380, meanwhile, is altogether another headache for Airbus, with production now adjusted to 12 (from 27) in 2018. In our view, the A350 is the future for Airbus, not the A380. And the quicker Airbus sorts out what to do with the mammoth plane programme, the faster it will reinvigorate investor confidence.

Boeing is now touting a plane which it calls “middle of the market” or MOM, a product that lies in between a single and twin-aisle aircraft. Boeing’s head of commercial aircraft Kevin McAllister thinks there’s a demand for up to 4,000.

We’re not convinced, given that Airbus’ A321neo (with 236 seats) is already serving that market and has been outselling Boeing’s 737 MAX 9 (220 seats). Orders for the A321neos is close to 1,400. And the A321neo has an added advantage – a long-range version in the form of the A321neo LR, offering a 4,600 mile range, compared to the B737 MAX 10’s 3,700-mile range. Expect to see more future orders for the A320neo/A321neo as well as the A350.

BA 747s LHR 0616

not “middle of the market” but proven workhorses – boeing’s 747-400s at lhr. pic/shukor yusof

The regional aircraft makers, Bombardier and Embraer, seem to be doing relatively well, too. Canada’s Bombardier reported an unexpected profit of 2 cents per share for 2Q17 (Apr-Jun), beating the 1 cent loss estimate by analysts polled by Bloomberg.

Bombardier, which has been bailed out time and again by the Canadian authorities, expects to deliver 30 C Series planes this year, subject to available PW1500G geared turbofan engines. The C Series is a “nice little aircraft”, observed Airbus chief salesman John Leahy, but it hasn’t sold well, notwithstanding delays that plague the project. And it is positioned in a tricky segment – competing head-on against the A320neo and 737 MAX.

That brings us to Embraer, the world’s 3rd largest aircraft manufacturer (bet you didn’t know that!) whose latest product, the E190-E2, is slated for entry into service in the first half of 2018. The E190-E2 is powered by PW1000G engines and can seat up to 114 passengers in a single class configuration.


Embraer’s E190-E2 all set to samba… pic/Embraer

The launch operator for the E190-E2 is Norwegian carrier Wideroe, the largest regional airline in Scandinavia. Wideroe currently operates 41 Bombardier Dash-8 turboprop aircraft but has opted to switch to an all-jet fleet with up to 15 of the new E190-E2s.

The E2 programme has been quite amazing: on time and on budget. We think sales will pick up once the first E2 is flying and once airlines, especially those second-tier carriers in Asia who aren’t making pots of money (if at all) with their Airbus and Boeing planes, start to understand that sometimes, smaller is better and smarter.

While the costs to the E2 programme have inevitably eroded Embraer’s stock price, currently floating just above USD20/share, there’s a good reason to believe – after the company’s latest 2Q earnings – there’s more room for upside. Embraer said it earned 32 cents per share and that revenue rose close to 30%, to USD1.77 billion, which is higher than the USD1.62 billion the Street was expecting.

The Brazilian company reaffirmed guidance for 2017; it expects revenues between USD4.9 billion and USD5.7 billion. Weakened defence and business jet segments are also affecting its profit. But the commercial side is doing quite well, thank you very much and we think the stock is undervalued and could outshine its peers in North America and Europe.

Clearly, there’s room for more growth. In China, for example, the government is telling its super rich to cut back on lavish spending, including private jets. Jackie Chan, the effervescent Hong Kong actor and an Embraer ambassador, will need to do more than say a few nice things about his Legacy 650

Qatar Airways suffers from blockade, but only just

QR A350 J class

Inside a Qatar Airways A350 business class section. Pic/Shukor Yusof

A month after Saudi Arabia and five other nations cut diplomatic ties with Qatar, the former British protectorate, located on a 11,586 sq km peninsula that protrudes into the Persian Gulf, is still alive and kicking.

Some denizens of Doha, Qatar’s modern capital city, tell us there is no panic, no rationing or shortage of food, no hoarding of petrol and politically, no surrender by the Al-Thani family that runs the gas-rich state.

Indeed, it’s business as usual, according to Malaysians and Singaporeans living in that Gulf state, adding they are now enjoying more tantalizing Turkish food than before. Fresh supplies from Turkey and Iran, close allies of Qatar, have been airflown since the embargo on Jun 5. Some dairy products, say the residents, are cheaper and taste better than those from Saudi Arabia!

What about Qatar Airways, the national carrier? Eighteen regional destinations were automatically severed and several long-haul flights now need to be rerouted via Oman and Iran, adding to operational costs.

As expected QR is experiencing less capacity, about 20% lower while duty free revenue at Hamad International Airport is reportedly down 25%. That’s to be expected given fewer flights and therefore, fewer visitors.

QR’s combative CEO Akbar al-Baker has vowed the schism between his country and the other Arab states won’t stop the airline from expanding during the unveiling of the carrier’s latest product –  the Qsuite – at the Paris Airshow last month.

And he’s got every reason to feel positive: QR was voted the world’s best airline for 2017, it has won reprieve from the dubious laptop ban imposed on Gulf carriers and has got unexpected business from British Airways (QR has a 20% stake in IAG) for the lease of nine A320/321 planes while BA cabin crew goes on a 16-day strike. That has helped to somewhat offset some of the losses within the Gulf region.

QR 772LR GRU Nov 2015 - a

A qatar Airways B777-200LR. Pic/shukor yusof

And to reassert its influence in the industry, QR has scrapped orders for four A350s due to delays at Airbus. QR was the launch customer for the A350 and took delivery of its first aircraft late December 2015. In our view QR’s A350 fleet has the best products in both business and economy classes.

More importantly, QR has the backing of Qatar Investment Authority, one of the world’s largest sovereign wealth fund with USD335 billion worth of assets, is still keen to take a 10% stake in American Airlines. Both are oneworld members but AA is among the three US carriers (together with Delta and United) that are up in arms against the Gulf airlines (QR, Emirates and Etihad), accusing them of operating on an unlevel playing field by being heavily subsidized.

QR is investing in AA not because of hubris but out of necessity. Al-Baker has already approached AA CEO Doug Parker but we aren’t privy to all other details other than AA reiterating its opposition to the Gulf carrier’s alleged unfair practices.

QR has deep pockets, in fact deeper than Emirates. It can easily mop up AA shares in the market and having a larger stake in a US airline would help show Congress it is investing in American jobs. While the laptop ban has been lifted there’s no saying when other limitations on Gulf flights to the US might be imposed, hence QR is buying insurance.

Additionally, Qatar probably expects the standoff with Saudi Arabia and the others to continue indefinitely. Thus, investing more outside of the Gulf makes more business sense especially given that US carriers have been among the most profitable in the world the past couple of years.

A few things to note about Qatar: despite having been downgraded by Standard & Poor’s to AA- (from AA) on June 8, its financial fundamentals are strong and sound. That said, we feel while Qatar may resist and continue to operate as normal now and the near future, the longer this drags on, the more difficult QR will find to operate as the block on air traffic ultimately will result in less business and therefore, less interest from potential investors.

All things being equal, Qatar is an exceptionally wealthy state. Here are some facts: it has enough gas to last 143 years, it has the highest per capita income in the world, Qatar’s bank assets amount to QAR1.1 trillion (USD302 billion), it has the highest quality of education among Arab states and, for what it’s worth, is ranked among the least corrupt countries in the Middle East.

Qatar Airways in a quandary


what, me worry? qatar airways ceo akbar al baker on board a QR a350. pic/shukor yusof

There were reports that Akbar Al Baker, the CEO of Qatar Airways (QR), left the 73rd IATA AGM in Cancun in a hurry on a private plane early Monday morning. Al Baker isn’t one who would exit a major event such as the IATA AGM unless something major has come up.

Indeed, something big is happening in Qatar. The Gulf state is in crisis after Saudi Arabia, the UAE, Bahrain, Yemen, Egypt and Libya severed diplomatic ties on June 5. The move, presumably designed to isolate Qatar and starve it into submission, was ostensibly taken by the six nations due to Qatar’s support for the region’s Islamist groups, including Egypt’s Muslim Brotherhood, and its cosy ties with Iran, a perennial enemy of the Saudis.

That’s what it looks like on paper although some suspect the real reason behind it is nothing more than gas, specifically natural gas. Here’s Bloomberg’s  take on it. It’s possible this is the cause of the schism; in 1995 Qatar made its first shipment of LNG from the world’s largest reservoir that it shares with Iran.

The wealth gas has generated for Qatar is staggering: it has an annual per capita income of USD130,000 and is the world’s largest LNG exporter, second only to Russia’s Gazprom. Qatar has a population of just 2.7 million but in recent years have grown increasingly influential and vocal on the international stage. Standard & Poor’s has a sovereign credit rating of AA with negative outlook on Qatar.

Its flag carrier Qatar Airways now ranks among the world’s best. Its publicly funded international network Al-Jazeera has lured many top anchors from other stations, it is the major sponsor of one of the world’s best soccer clubs (Barcelona), and it has won the right to stage the FIFA World Cup in 2022.

But it is QR and the Hamad International Airport (HIA) in Doha that will be hardest hit by this blockade. In 2016 Al Baker said the airline’s full-year profit quadrupled, driven by cheaper oil and a growing international network.

Since the punitive measures were announced on Monday, Emirates and Etihad have stopped flying to Doha. Discount carrier FlyDubai, Bahrain’s Gulf Air and Egyptair are also suspending flights. One doesn’t need to be a mathematician to calculate the losses QR and HIA will suffer daily until the crisis is resolved – it’s huge.

Just within the Middle East region alone, QR flies to 50 destinations. Geographically it will be squeezed – Saudi airspace to the west is blocked with Bahrain controlling much of the airspace to the south. The Saudis can block its airspace as it isn’t a signatory in a 1945 transit accord allowing for open skies and airlines to fly freely through a country’s airspace. Bahrain and the UAE, however, are signatories. Question is, will they revoke it?

QR operates a 14x daily shuttle service between DOH and DBX that’s been stopped. Additionally there are many international flights that traverse Saudi and Egyptian airspace, including those to Europe and Africa and South America. These will have to be rerouted. Rerouting costs money and time. To make matters worse for Qatar, its citizens aren’t even allowed to transit in the UAE (home of Emirates and Etihad) on their way home.

Doha airport bear

there’ll be less transit passengers at hamad international airport. pic/shukor yusof

So, how deep will the losses be? It depends on how long this goes on. The sanctions will continue unless Qatar capitulates, something it isn’t likely to do. In April this year Al Baker said he was expecting record profits for 2017.

Our analysis suggests optimistically QR could see a decline in second half (2H17) revenue of around 20%-30%, and pessimistically up to 40% if ties aren’t restored soon. It goes to say the revenues at Emirates and Etihad will also be affected although not dramatically.

What will happen next? The six countries that imposed the blockade will wait to see how Qatar respond; there are reports Kuwait is trying to mediate but the Arab states are generally divided and if Qatar does submit, it stands to lose not just its credibility but its pride.

That said, Qatar could, alternatively show the middle finger to all six and leverage on whatever strengths it can use: there’s a major US base in Qatar, there’s the gas exports it controls and most crucially, there’s the relationship with Tehran which will be strengthened. Can the Saudis and the US swallow that?

Let’s wait and see…

A Premium Problem


will the premium passengers please wave their hands… pic/sim kok chwee

In a move that showed it is still a believer in the economics and viability of the premium segment despite recent trends indicating otherwise, Singapore Airlines (SIA) has announced more perks and privileges for its most valuable customers, the PPS-card carrying passengers.

SIA said the changes were made in response to feedback from PPS members – those who have spent at least SGD250,000 (about USD179,000) – over five consecutive years. Premium (business and first) passengers generate around 45% to 50% of SIA’s passenger revenue.

Read the full release here.

Our view remains that premium air travel demand is anemic at best. And legacy carriers such as SIA and Cathay Pacific, both heavily dependent on business class, are in denial. This over-reliance on the J Class segment and inability to accept reality will ultimately do them in.

The reality is the legacy carrier model is under intense pressure. Yields from business class have shrunk every year post-9/11, and especially since the Lehman debacle of 2008. SIA posted a net loss of SGD138.3 million in its 4Q (Jan-Mar 2017) but registered an annual net profit of SGD360.4 million (USD257 million).

Now compare that to Ryanair’s latest earnings: almost EUR1.32 billion (USD1.47 billion) net profit. It flew 120 million passengers in its last financial year and charged customers an average of just EUR41, 13% less than the previous year! This year the airline said it is expecting an 8% rise in profits, to EUR1.45 billion.

Nobody disagrees that business air travel is still relevant and a key part of many airlines. It’s just that it isn’t as lucrative as what it was before. Consumers, including corporate travellers, are more price-sensitive and companies are looking at airlines that provide value for money.

Does SIA give value for money on the front-end of its aircraft? The short answer, in our view, is no. Take a look below at the fares SIA is charging for a return trip to London, and compare that with those being offered by Qatar Airways. It’s a no-brainer, really.

If SIA and Cathay continue to build their strategies around business class, they will get hurt, if they haven’t already. You go too far and too aggressively after high-yielding traffic, you will feel the pain.

In a sign that it’s feeling the pain and strain, for the past year or two SIA has been offering discounts (yes, you read that right) for its business seats – something the carrier had very rarely done, if ever.

AMEX SQ promo

any takers? SIA’s latest promo together with amex

The dynamics of the industry have changed. Forever. Many passengers are quite happy to fly 3-4 hours, or even 6, on economy if the price is right. And many low-cost carriers are getting them right. Now that SIA has shown that it can cut its J class fares, who in their right mind would pay the old fares?

We’ve had many queries on what SIA and Cathay should do, apart from just creating a Transformation Office or cutting management jobs. They can hope and pray that the good old days will return or they can radically change.

To its credit SIA is changing but not enough, and the change has come a tad too late. The airline is being reactive, not proactive. Our point is: why didn’t they do anything 4-5 years ago when the signs already pointed to a permanent decline in premium?

On a separate note, SilkAir is starting 3x weekly non-stop flights to Hiroshima (HIJ) in October 2017. SilkAir is SIA’s regional airline, not low-cost but catering to high-end leisure travellers. It will fly the B737-800 and looks like this will be SilkAir’s longest route.

Can the sector make money? Possible but not easy. The three major mainland Chinese carriers all fly into HIJ as do Korea’s Asiana and Taiwan’s China Airlines. HIJ has no direct expressway connection; neither does it have a railway station, but then again SilkAir’s passengers are typically those who have a bit of cash to burn…

What next for Singapore Airlines after 4Q loss?


sia is banking on the a350s to revive its revenues. pic/sim kok chwee

As it prepares to celebrate its 70th year of operations, Singapore Airlines (SIA) is facing bleak prospects in the near term. SIA announced on May 18 it had posted annual net profit of SGD360.4 million (vs. SGD804.4 million profit in the previous financial year) but in the fourth quarter (January-March 2017) it registered a net loss of SGD138.3 million (vs. SGD224.7 million profit in 4QFY16).

Read the official release here.

The airline attributed the loss to weaker operating profit and SIA Cargo’s SGD132 million provision for competition-related issues. Unlike many other regional airlines, whose losses were due to poor management and leakages, many of SIA’s problems are structural and some beyond its control.

For instance, its over-reliance on the premium segment of the business, which had previously contributed immensely to its coffers, means SIA now has to find new sources of revenue as profits from the front-end of the aircraft has deteriorated every year following the Lehman financial crisis in 2008.

SIA was also slow to react to the advent of low-cost carriers (LCCs) in the region and it wasn’t adequately prepared for the onslaught brought about by the Gulf carriers as well as mainland China’s three main airlines.

In order to compete with the Middle East airlines and China’s rapidly improving carriers, SIA has had to lower its fares. Hence, the severe yield decline (down 3.8% to 10.2 Singapore cents) in both the premium and economy sectors.

The positive for the SIA Group, as has been observed for the past 2-3 years, is in its discount segment, with Tiger Airways and Scoot – housed under Budget Aviation Holdings – registering an operating profit of SGD22 million.

SY with Rico BBC

Endau Analytics discussing sia’s financials with the bbc’s rico hizon at the beeb’s singapore studio mid-week

What can SIA do to reverse the slump? Not much, really. What it can do, the airline has already done it. The reality is, the dynamics and landscape of the commercial airline business have changed – permanently.

In Southeast Asia it began with the arrival of the discount airlines post-9/11, the growth of the Gulf and mainland Chinese carriers and the development of new, more fuel-efficient aircraft that can bypass key hubs such as Changi and Chek Lap Kok.

With parent airline SIA in decline, the Group is understandably aggressively pushing Scoot – its low-cost, long-haul arm – to maintain the momentum, at least in trying to increase the volume of passengers. This summer Scoot, with its fleet of B787 Dreamliners, will begin flights to Athens. Honolulu is probably next and it isn’t unthinkable that the Group may even offer discount travel (via Scoot, of course) to newer destinations in Europe and North America by 2020.

China Airlines Flyaway PhotosJessica Oliver rms276872 cns2014nef

a scoot b787-9. pic/boeing

Fortunately for SIA, it has deep pockets. As of March 2017, the company has cash reserves of at least SGD3.3 billion. The carrier will take delivery of close to 100 aircraft within the next 5-8 years, including Airbus A350s and Boeing 777-9s and 787-10s. Seven A350ULRs will be deployed next year for direct flights from Changi to New York and Los Angeles; SIA is banking on these Airbus planes to rejuvenate its premium income.

In the short-term, SIA is also likely to expand its joint venture Vistara outfit in India as well as continue to explore potential business deals in China.

But how will SIA react to this latest setback? The good old days are gone forever, as are the days when SIA could almost guarantee its investors decent returns. The airline’s stock price has stagnated for several years now and will no doubt take a hit in the coming weeks as the market digests those feeble figures.

Auguri, Alitalia

Rosaria C @ AZ A320

Ciao Alitalia! An AZ staff posing with two of the carrier’s A320s at vincenzo bellini airport. pic/rosaria c

There is a Sicilian proverb that goes: chiu scuru e mezzanotte non po fari, which literally means it can’t get any darker than midnight.

It is an apt description for the circumstances that Italian flag carrier Alitalia now finds itself, having been forced into administration just a day after Labour Day. The airline has debts of about EUR3 billion as of end-February.

The problems are too many to enumerate and have been too long in the making. And, like many of the other major European flag carriers, the unions wield far too much power and influence, limiting the critical changes that management need to perform in order to stay solvent.

But hey, it’s Italy, land of la dolce vita and la bella figura; ah yes, the beautiful figure – a philosophy of life whose meaning remains hard to grasp for outsiders, even for those who have lived there.

The Italians are fabulous at many things: fashion, food, football. They just suck at running an airline. Big time. And Alitalia’s been in dire straits for a long time, kept afloat by successive governments fearful of the loss of jobs, and loss of face. So while Alitalia bled, it nevertheless did so beautifully, elegantly, in true la bella figura style.

Alitalia A319 door

one thing that will always be there: passion! pic/shukor yusof

Philosophy aside, what would an Alitalia collapse do to the real Italian economy? Italy’s Industry Minister reckons it would have grave repercussions on the overall well-being of the country.

He’s right. Alitalia’s importance to the Italian economy is quite significant. Last year it carried over 23 million passengers on over 200,000 flights to destinations within Italy and globally.

In terms of core contribution, Alitalia roughly is responsible for about EUR2 billion of Italy’s GDP while nearly 30,000 jobs are directly and indirectly linked to the carrier. But will the bankruptcy cripple the economy? Will Silvio Berlusconi no longer hold “bunga bunga” parties? Of course not!

The airline has already received from Rome a short-term lifeline of EUR600 million to tide things through; judging by Alitalia’s track record that cashpile would be depleted well before Christmas.

There are some striking similarities between the Italian flag carrier and Malaysia Airlines Berhad (MAB). One of the three commissioners selected to manage Alitalia while under administration, Luigi Gubitosi, noted the airline’s costs for leasing, fuel and maintenance were above market rates.

MAB’s short-lived ex-CEO Christoph Mueller made similar remarks on the carrier paying above market lease rates for aircraft prior to his arrival. Between 2001 and 2014, MAB reported cumulative net adjusted losses of MYR8.4 billion. The airline was paying close to half a billion on interests on debts alone before it was delisted.

The similarities don’t end there. Etihad’s James Hogan, he being the guy who bought a 49% stake in Alitalia in 2014 for EUR560 million, just a year ago said the Italian’s turnaround “has been the most radical and the fastest plan…” Not surprisingly, the Arabs have caught on and Hogan will leave later this year.

Not to be outdone, Peter Bellew the current boss of MAB, went on to pronounce (barely three months into the job) that the greatest turnaround would instead be that of MAB. As far as we know, Peter doesn’t smoke, but whatever he may have inhaled during that interview – mate, it’s certainly more potent than any Irish poteen!

Why are airlines such as Alitalia and indeed, MAB – airlines that have persistently siphoned taxpayers’ money – have the gall to demand more bailouts? An Alitalia demise would be painful for Italy, sure, but Italy won’t die. Low-cost carriers such as Ryanair, easyjet and others will very quickly ensure the system will readjust itself. It always does. La vita va avanti…

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