Endau Analytics

Why Cathay Pacific loses money, according to John Slosar

CX A350-900 TAKE OFF (1)_

Dear John, we are going to break something to you, as gently as we can.

What we are going to say may upset you and your colleagues at that most august of airline abode in Hong Kong – Swire Pacific.

Anyway, here it goes: the airline business has changed, Hong Kong has changed and Cathay Pacific Airways has not, from the look of it, embraced change. Swire Pacific, the airline’s parent company, appears averse to change.

The chairman of Hong Kong’s flag carrier, John Slosar, on March 14 attributed Cathay Pacific’s consecutive annual losses – its first since the airline was formed in 1946 – on over-capacity and declining yields which, he lamented, made it tough to make money.

When the 2016 losses were announced, he blamed weak demand for the airline’s premium cabin as well as intense competition from mainland China.

Tell us something we don’t know, John…

Blaming over-capacity and falling yields is a lame excuse. Period.

How about taking to task whoever it is in the airline that does its fuel hedging? In the 2017 financial results Cathay said losses from wrong-way fuel bets came up to HKD6.4 billion (USD816 million).

Sure, that figure is an improvement on 2016’s hedging losses (HKD8.46 billion) but Cathay seems to have perfected the art of losing heavily in the jet fuel hedging game. Hedging losses in 2015 amounted to HKD8.47 billion.

So, in three years the carrier lost over USD2 billion! Cathay clearly sucks at playing the fuel hedging roulette, but it keeps playing it. Why?

Cathay crisis

Cathay’s CEO Rupert Hogg said he was confident about market demand in Hong Kong, including those in the premium segment. Hogg said the target was to grow 4% annually until Hong Kong gets its third runway.

But the competition is going to get more intense by then. All this talk that fewer people want to come to Hong Kong to connect on to another flight as one of the key factors hurting Cathay sounds like a broken record.

Indeed, if one is traveling between Europe and Australia, it makes sense to stop over in the UAE, Qatar or Singapore, instead of in Hong Kong.

It is true the mainland Chinese carriers are impacting on Asia’s major legacy airlines –Cathay Pacific and Singapore Airlines. It is true, too, current climate of low jet fuel prices will pressure competition and we continue to witness price dumping in 2018. It is also true the premium segment remains in decline.

Everyone seems to know the reasons for the decline but how to make full service carriers like Cathay and SIA competitive again?

Could it be that Cathay is not doing enough to control its costs? Or that it doesn’t quite know what its mid- to long-term strategy ought to be?




Will there be saudade if Boeing buys 51% of Embraer?

E190-E2 Tiger nose

great hand job. the tiger livery on the e190-e2, painted by embraer’s clodoaldo quintana.


Does Dennis Muilenburg know what saudade mean?

The Boeing CEO should, or at least people around him must acquaint their boss with saudade, given that the company he leads is said to be keen to buy 51% of Brazilian aircraft maker Embraer.

Saudade is not easily translated into English, but to a Brazilian and of course, to a Portuguese, it’s a word that evokes a sense of yearning, a longing for a thing or a person.

Embraer’s employees – in São José dos Campos and around the world – are currently deep in saudade, not knowing what to expect or what will become of the company, the world’s third biggest plane-maker.

We know Boeing is after Embraer following Airbus’ 50.01% acquisition of Bombardier’s C-Series programme, the C-Series Aircraft Limited Partnership or CSALP. Apparently Airbus got it for almost nothing.

It would appear Muilenburg and his team realizes there is a significant (and potentially lucrative) market in the regional aircraft (100-130 seat) market.

It would also appear both Airbus and Boeing understand that in the near future there will likely be less orders for their A320 and B737 family of planes, respectively, judging from the backlog both manufacturers have.

That leaves the regional plane segment as the new battleground between the two giants.

“Not a must do” or till cash do us part?

Boeing and Embraer management have given vastly differing clues on how the talks are going.

Muilenburg said the deal, while desirable, is “not a must do“. Embraer CEO Paulo Cesar, on the other hand, said it would be good not just for the company but for Brazil.

Another very senior Embraer executive told us there were many aspects to the potential collaboration, not just nuts and bolts. Critically, he added, the financial figures have not been fully discussed, or even talked about in great depth.

What is a fair valuation, then? What’s Embraer E2 series worth to Boeing, for example? The military programme, it has been reported, will be kept entirely in Brazilian hands.

Various numbers have been bandied about since the talks were made public, ranging from USD3 billion to USD4 billion. That’s peanuts for Boeing. Embraer is worth a lot more than that.

The US giant anticipates total revenue of between USD96 billion and USD98 billion this year. Operating cashflow will rise to USD15 billion. And Boeing’s shares are soaring through the roof. Muilenburg’s compensation reflects that: in 2016 his total pay was USD15 million.

In São José dos Campos, Embraer employees aren’t as well paid as their Seattle counterparts. But what they lack financially, they make up in artistry and passion – check out the fantastic hand painted livery of the 190-E2 aircraft recently exhibited at the Singapore Airshow – executed by an Embraer worker named Clodoaldo Quintana.

Legacy 500 Malaysia_resized

fly in style: malaysia’s first legacy 500 will be making its way to johor bahru in early march.


The bottom line is, what can a Boeing-owned Embraer do that the Airbus-Bombardier partnership can’t, or won’t? We know Embraer does very well in the US; in fact much of its revenue is derived from North America. But what about in Asia Pacific, where the markets are more complex and more challenging?

Here, in this region, we feel the Airbus CSALP venture might have the upper hand because: (a) the CS aircraft are seriously good, and appeal to many Asian airlines, (b) Airbus traditionally has a more imaginative approach to pricing its aircraft (read whatever you want into that), and (c) Bombardier has sold more airplanes in Asia than Embraer – whether those planes (turboprops and jets) made money to the airlines that bought them is another debate – but the Canadians have a pretty strong track record.

There is a chance the deal might not happen but one gets the impression Embraer’s management wants it to happen. Will Embraer be severely disadvantaged if the deal doesn’t go through?

Not necessarily. The E2 series has solid potential, provided Embraer plays its cards well and reads the market (especially in Asia) astutely. It needs to take a leaf from Brazil’s other great export – its football. Joga bonito, Embraer!





Airbus is in good shape but…

Airbus chalet SG airshow

Airbus needs to sell more planes. or does it? Pic/shukor yusof


Airbus announced on Feb. 15 that it registered an 8% rise in adjusted 2017 operating profit of EUR4.25 billion (USD5.26 billion) on revenues of EUR66.8 billion. That’s despite the European plane maker disclosing that it took a hit of EUR1.3 billion on its problematic A400M military plane programme.

See the full release here.

Strong demand in the commercial aircraft sector is underpinning the manufacturer’s solid market position. As of end-2017 the company’s order backlog stood at 7,265 aircraft valued at just over USD1 trillion.

The backlog (almost 10 years) is focused mostly in the single-aisle, narrowbody segment of the A320 family of aircraft. This reflects the market demand for this plane. Airbus’ friends in Seattle, however, sold more aircraft in 2017 – for the sixth consecutive year.

The widebody, twin-aisle market remains controlled by Boeing as Airbus struggles to sell its A380. The European company is doing better with the A350XWB (it delivered 78 of these in 2017, up almost 60% year-on-year).

In our view, Airbus’ backlog is its main strength. It provides investors with a positive view over the medium term on the company’s forward revenue. That said, the backlog is a double-edged sword, as there is a long waiting period for customers.

Airbus has said it will ramp up production in Europe (Hamburg and Toulouse), the US (Mobile, Alabama) and at its plant in Tianjin, China to 60 aircraft per month by mid-2019. It also plans to produce 10 A350XWB by end-2018.

From the profitability standpoint, Airbus appears to perform below average in this sector but it is making good progress with the development of the A320neo (new engine option) programme.

But ramping up production and developing new engine options (for the A320 and A330) costs money, so there will be volatility in the company’s financial performance near-term.

Compounding this is the EUR:USD exchange rate, and we expect Airbus’ margins this year and next to be affected by fluctuations in the forex market. A large chunk of Airbus’ costs are denominated in EUR while its revenues (at least 65%) are received in USD. Airbus does have a long-term hedging plan in place and is also doing much to raise its assets in the US.

Which is the (financially) stronger airplane maker – Airbus or Boeing?

Right now and until the end of this decade, it’s Boeing.

Just take a look at Boeing’s share price (around USD355 as of Feb. 16). It’s gained quite a lot in 2H17 but we think it has more upside, particularly in 2019 and 2020 when the B777X starts to make its appearance. Simply put, Boeing’s return on capital and equity is just awesome.

Boeing is also in talks with Brazil’s Embraer for a possible tie-up, although it’s unclear in what form at this stage. What is clear is that Boeing has sufficient cash to buy up all of São José dos Campos – lock, stock and barrel.

Meanwhile, Airbus (its share price is hovering under EUR95) will be looking to officially seal its collaboration with Bombardier on the C Series programme by year-end.

And it does have an advantage over Boeing with that backlog, which is fantastic, but does Airbus have the capacity to build more aircraft annually than what it is currently doing (under 700 planes)?

So while it’s great to have almost 10 years of production locked in, Airbus may not be able to sell more planes in the coming years. Unless they can churn out over 750 per year, which begs the question: how do you do that with the existing facilities?

That’s the billion euro question for Airbus’ new chief salesman Eric Schulz and whoever replaces current CEO Tom Enders in April 2019, to answer…



The tiger (air)show

E190-E2 SG airshow

message to boeing: you can’t negotiate with a tiger when your head is in its mouth. pic/shukor yusof

A tiger show without stunts involving darts, ping-pong balls and beer bottles? You bet!

The Singapore Airshow (from Feb 6-9) has been devoid of any major aircraft deals, save for a USD120 million ATR contract from Bangkok Airways for four turboprop planes from the Italian manufacturer and two orders from Malaysia’s Berjaya Hotels & Resorts. It’s not a big deal. Really.

There was a smaller but significant deal: US-based HondaJet struck a deal with France’s air taxi company Wijet for 16 planes. The company showcased its 7-seater business jet, each with a catalogue price of USD4.9 million, at the Changi Exhibition Centre.


HondaJet – value for money?

But back to the tiger show…

Brazilian plane maker Embraer brought its hard-nosed “tiger” – the latest E190-E2 aircraft – to the airshow. The “tiger”, also dubbed “profit hunter”, was possibly the most photographed item on static display. Read more about it here.

The E2 is Embraer’s latest iteration of its popular E-jet series, used mostly in North America and Europe. The first E2 jet is slated for delivery to Norwegian carrier Wideroe this coming spring.

The airshow pitted Embraer’s products against its biggest and fiercest rival, Canada’s Bombardier.

On offer from Bombardier is the CSeries, namely the -100 and -300 variants, although only the CS300 was on display at the airshow, in airBaltic livery. It is an impressive plane, with a very comfortable cabin (we didn’t like the middle seat, though) and a sleek cockpit.

CS300 air baltic specs

c is for cool. the cs300 in airbaltic livery. pic/shukor yusof

The market for regional jets is small. It’s a niche market but one that has a big upside in Asia, particularly Southeast Asia where many countries are archipelagic in nature.

There’s a lot to be said about right-sizing in a marketplace marked by overcapacity. Regional planes are a lot cheaper to operate and much more fuel-efficient. It’s a matter of time before some airlines in the region look at flying the right size, right type of aircraft.

It’s becoming a crowded market for regional jet players. Bombardier and Embraer aside, Mitsubishi remains optimistic about its MRJ plane, which has been delayed five times. The Japanese company aims to sell over 650 of the MRJs. It’s unlikely to happen.

China is a ripe market for regional aircraft and the Chinese has come up with its own model, the ARJ21 made by local state-owned manufacturer Comac. The Russians are at it, too, with the Sukhoi Superjet 100.

Sukhoi Superjet 100

toys for the oligarchs? the sukhoi superjet 100. pic/shukor yusof

But the battle royale will be between the Bombardier CSeries (with Airbus soon to provide the know-how) and Embraer’s E2 (perhaps soon to be acquired by Boeing?)…

Embraer and Boeing have been careful with their words, about any potential tie-up. The Brazilians have got a good thing going. Let’s see if the price reflects that.



A dragon looms in the year of the dog

China Airlines A330 @ Taoyuan

A China Airlines (CAL) A330 at Taoyuan airport. Pic/Shukor Yusof


There is a good chance that Tsai Ing-wen has read Immanuel Hsu’s brilliant tome, “The Rise of Modern China”, a book that describes China’s transformation from a traditional empire into the modern, technologically advanced, global power that it is today.

Taiwan’s president shouldn’t mess with Beijing. It isn’t good for her and especially for the 23 or so million people on that island just 180km off the southeastern coast of mainland China.

Since Tsai took office in May 2016 relations between Beijing and Taipei have soured. That’s because Tsai refused to acquiesce to Beijing’s demand that Taiwan accept the “1992 Consensus” and along with it, the “One China” principle.

Rise of Modern China

a very good read: The Rise of Modern China, by Immanuel Hsu. Pic/shukor yusof

This past week it has gotten worse after two Chinese carriers cancelled almost 200 flights to Taiwan. With the Lunar New Year fast approaching (Feb. 16-17), expect to see a lot of cross-strait air travel chaos as we approach the Year of the Dog.

On Jan. 4 Beijing announced the opening of four new flight routes over the Taiwan Strait. The new paths comprise of one northbound route (M503) and three east-west extension routes. This is one Taiwan’s newspaper take on it.

Tsai and her government protested Beijing’s decision, saying it violated a 2015 accord and could cause passenger safety issues. Taipei also interpreted China’s move as undermining the island’s sovereignty.

What Taiwan did next was to refuse to approve new flights by China Eastern and Xiamen Air. Both airlines therefore had little choice but to cancel almost 180 flights during the upcoming holidays. This mainly affects the 50,000 Taiwanese living on the mainland. Taiwan says it will deploy military planes to ferry its people home but there’s a snag: the planes can only transport less than a thousand people a day.

Amidst the escalating tensions, Taiwan on Jan. 30 staged live firing exercises to simulate fending off an invasion. Not a very well thought out move.

Taipei 101 city view - 3

You can’t see mainland china from the Taipei 101 but it’s out there, and closer than you think… pic/shukor yusof

Will Beijing compromise? Unlikely. Although both sides agreed in 2015 that before China were to open new routes, it needs to consult Taiwan, that’s not going to happen under President Tsai’s reign. That’s because her party – the Democratic Progress party – has a negative stance towards the mainland, with a more pro-independence posture for the island.

The danger in this altercation in the realm of commercial aviation is clear: if Taiwan isn’t involved in the opening of new routes, there are higher risks from miscommunication and thus, harmful to airline safety.

It is estimated some 60 million passengers pass through Taiwan’s Flight Information Region (FIR). President Tsai has made Taiwan’s opposition to China’s unilateral move known to the International Civil Aviation Organisation (ICAO). ICAO is a member of the United Nations. Taiwan is neither a member of the UN nor the ICAO. To make matters a bit more complex, the secretary general of the ICAO is a Chinese national.

Any future negotiations between Beijing and Taipei are fraught with difficulties because China doesn’t see Taiwan as an equal. President’s Tsai’s defiance of China will need to be tempered by the realisation that: (i) China isn’t going to give up on its One China, reunification policy (similar to Hong Kong and Macau) and (ii) Taiwan’s economy is becoming more and more dependent on the mainland.



China gets an offer, India makes one

Airbus building Hamburg

there’s one just like this in tianjin. pic/shukor yusof


Airbus makes China an offer that it can (and should) refuse

Fresh from his China tour with the French president in early Jan., outgoing Airbus COO & President Commercial Aircraft Fabrice Brégier said his company has outsold Boeing in 2017.

The Toulouse-based aircraft maker said on Jan. 15 it had surpassed its 2017 target by delivering 718 planes to customers, compared to Boeing’s 763. Orders were up 52% to 1,109 last year, against Boeing’s 912 .

But we are obliged to point out that Boeing remains the world’s largest airplane manufacturer – for the sixth consecutive year – and made considerably more money in 2017 than its European rival. Check it out here.

Boeing’s share price soared 25% in 3Q17; on Friday (Jan. 12) it closed just a tad above USD336, a remarkable value indeed.

Brégier, who is leaving Airbus next month, said Airbus faces “challenges” although these were “manageable”. He added the company plans to ramp up production this year and next and has aimed to deliver more planes than Boeing by 2020.

Whilst in China, Brégier announced the Airbus plant in Tianjin would up production of the A320 to six a month in 2020 (from the current four). The Tianjin FAL (final assembly line) was opened in 2008 and has produced over 350 A320s.

Additionally Airbus said it was in talks with the Chinese on some sort of partnership on the A380, possibly handing over some menial tasks like painting and doing up the interiors of the plane’s cabin. However Airbus will only let China do this if Chinese carriers buy more A380s.

Today only one Chinese airline – China Southern – operates the A380, and then only five of them. Putting on finishing touches on an A380 is an offer the Chinese can refuse and we suspect they will unless politics come into play (as it almost always does when politicians are involved).

Air India 787 screenshot

nice plane, shame about the carrier. an air india b787 dreamliner. screenshot photo taken from airline website.

India puts national airline up for sale

Here’s another offer, this time by the Indian government, for a 49% stake in troubled flag carrier Air India. Read the FT article here.

Air India was founded by the Tata family in 1932. It was known as Tata Airlines until Jul. 29, 1946 (about a year before the country’s independence) when it was changed to Air India.

It is thus quite understandable that the Tata Group is now contemplating reacquiring its baby 85 years after it was taken away. Tata and Singapore Airlines (SIA) together own an Indian carrier known as Vistara. A week ago Vistara’s Singaporean CEO said SIA is keeping “an open mind”. But why even bother?

Air India has debts close to USD8 billion. It is saddled with bureaucracy and any new buyer will have to contend with thousands of workers who will likely make restructuring almost impossible. To make matters worse, the government will retain a 26% stake in the carrier. And the government has been known to interfere in how the airline is run.

Granted, the potential in India is huge and air traffic will no doubt grow rapidly in the next few decades. The airline also has some lucrative slots, including those at London Heathrow. Air India reportedly also has some very lovely land bank worth over USD1 billion.

However, Air India only has about 15% of the domestic market and 44% of the international market among Indian airlines. It appears unlikely – especially with the likes of Indigo and Spicejet aggressively capturing the local market share – Air India can grow profitably domestically.

Moreover, nobody really can say how much the airline is worth. It hasn’t published its annual report for the past two years. All we have to go by are some figures from IATA: almost 80 million Indians took to the skies between April and November 2017. IATA adds that India will be the world’s third biggest market by 2025 (after China and the US). Read it here.

So far just one airline – Indigo – has officially expressed real interest in Air India. Qatar Airways and Spicejet are also said to be keen. As for SIA’s position, here’s what we think of it.

Investors considering putting money in a loss-making flag carrier should study the slew of national airlines that have gone bust recently (Alitalia, Malaysia Airlines). Both examples revealed that it’s tough to drain the swamp.



Boeing-Embraer tie-up: É melhor esperar sentado*

Embraer E2190 office model

The latest iteration of embraer’s e-jets: the E190-E2. entry into service in the first half of 2018. pic/shukor yusof


There is a steakhouse in downtown Seattle appropriately named The Grill from Ipanema and it serves caipirinhas to complement the exotic Brazilian dishes and the mesa de frios.

Apparently Brazilian fare is quite popular in that part of Washington state and our friends in Seattle (to paraphrase John Leahy) certainly seem to have acquired an appetite for Brazilian products, notably its airplanes.

On Dec. 21, 2017 The Wall Street Journal reported that Boeing was keen to buy Embraer, the Brazilian aerospace company and the world’s third biggest aircraft maker, for USD3.7 billion. Both companies confirmed the WSJ article.

Why is Boeing interested in Embraer?

Few people out here in Asia know Embraer (or have even heard of the company) but the São Paulo-based company is a top class aircraft manufacturer, particularly in regional planes (typically those with 70 to 120 seats). See our previous review of the company here.

Boeing’s sudden zest for Embraer clearly was sparked by Airbus’ acquisition of Bombardier’s CSeries aircraft programme, announced in October. The CSeries planes (CS100 and CS300) have gained considerable attention and praise for its efficiency and versatility. And yes, it is a cute little aircraft.

Go regional in 2018

Airlines in North America and Europe have embraced Embraer’s hardworking E-jets but demand for the Brazilian planes in Southeast Asia can be best described as lukewarm. It is actually quite poor. But then, ironically, the deployment of regional aircraft isn’t such a popular concept amongst Southeast Asian carriers who mostly opt for either Airbus or Boeing narrowbodies.

That is likely to change in 2018.

Some airlines have already had informal talks with Bombardier since its CSeries was adopted by Airbus, signaling a changing mindset. Embraer, too, is also making progress – in Northeast Asia – with Fuji Dream Airlines (Japan) and Korea Express Air (South Korea) both flying its planes.

But the regional market is extremely tough in Southeast Asia where many carriers would rather an A320 or a B737 instead of a CS100 or an E2 jet. However, with overcapacity and intense pricing competition, there’s every reason to believe an airline can make money using regional aircraft.

Source: Embraer

Amidst intense competition, right-sizing is critical. That means aircraft offering fewer seats could extract higher yields. Granted a bigger plane can generate higher overall profit but the number of seats sold at very low fares will cut the unit revenue. It’s all about yields: an aircraft with a high load factor do not necessarily equate to profitability.

Over-capacity is an issue in the industry and will continue to be in 2018. Imagine deploying a plane with the “right” capacity – this would ensure seat and revenue management are maximized leading to better yields. Of course this concept isn’t applicable to all airlines, but for several carriers (particularly in Southeast Asia), this could transform their cashflow.

Can the takeover succeed?

Unlikely. Brazil’s president Michel Temer has already voiced his disapproval. The Brazilian government has a golden share in Embraer and can use it to veto any attempts of a takeover.

Temer had planned to tour Southeast Asia in the week of Jan. 8, with planned state visits to Indonesia, East Timor, Singapore and Vietnam but has cancelled the trip following minor surgery late December. He was keen to, among others, peddle Embraer’s products (including its business jets, such as the Legacy 450 shown below), especially in Indonesia and Vietnam, two countries that are geographically perfect for regional planes (if the airlines there could only see the value).

Embraer Legacy 450

Embraer Legacy 450. Jackie Chan has one… Pic/Shukor Yusof


The market for planes in the 70-120 seat segment is small – perhaps 7% at most – but this is bound to rise significantly in the next decade (mostly in Asia) where demand for air travel is growing at a phenomenal pace.

If Boeing succeeds in the takeover, it would – just as Bombardier did by seceding its CSeries programme to Airbus – give the new E2 jets a further outreach (particularly in Asia, where Embraer is weak) and a solid marketing and branding supporting power. But that’s a big if

Even if a deal were to take place, Boeing likely won’t have full control of the Brazilian company. And Embraer isn’t as desperate as Bombardier was, when it gave 50.01% of the CS programme to Airbus for almost nothing.

Our view is that Brasilia will have a hard time telling Embraer’s management to spurn Boeing’s offer. That said, Boeing needs Embraer more than Embraer needs Boeing, following Airbus’ coup with the CSeries.

All things considered, the E2 programme will benefit under Boeing’s wings and with Brazil’s national debt (78% of GDP in 2016) growing rapidly, flogging Embraer to the Americans would bring in much needed greenbacks – not a bad deal given that the workers at São Jose dos Campos are paid in Brazilian real (BRL). But that’s only part of the issue here.

At the end of it, there probably will be no deal or at most, a mini-deal, where both will just upgrade their existing partnerships.

* It’ll take a while, if it ever gets done



Airbus loses its elan

Airbus Face Art Toulouse

artwork at airbus. take a guess – in toulouse or hamburg? pic/shukor yusof


Forget about Macron vs. Merkel or Les Bleus vs. Die Mannschaft. Franco-German rivalry goes back a long, long way, well before European aircraft manufacturer Airbus was born.

France and Germany each has an 11.1% stake in Airbus, a giant aerospace company created in 1970 as a European industrial initiative to compete with Boeing. On the surface cooperation between the two appears cordial. In reality it is anything but that.

Whenever there’s an industrial dispute or production issues, old enmities come into play. In 2006 when the A380 production delays resulted in major financial woes, the French (under Noel Forgeard) blamed the Germans allegedly over problems at its Hamburg plant. Rubbish, replied Tom Enders, his German co-CEO.

Enders was appointed sole CEO in 2007 when Airbus finally saw its folly and did away with the double CEO and double Chairmen structures.

In a release on Dec. 15, 2017 Airbus announced it had made drastic changes to its top management lineup. Read it here. Herr Enders, 59, will not seek his third mandate as CEO when his term expires in April 2019. Airbus has not identified the person who will replace Enders.

Airbus also stated that its chief operating officer (COO) Fabrice Brégier is to leave the company end-February 2018. The Frenchman will likely make his final international public appearance at the Singapore Airshow on Feb. 6 before he bows out, reportedly with a golden handshake worth two years’ salary.

Guillaume Faury, 49, the current CEO of Airbus Helicopters, will take over Brégier’s position as President of Airbus Commercial Aircraft. The 56-year-old Brégier told the firm’s Board of Directors he had no intention to take part in the selection process for a new CEO – he knew he was not in the running for it. “The time has come for me to seek new opportunities,” he said in a statement.

Airbus Bregier Hamburg

how are you getting on with the germans, monsieur brégier? the airbus coo with the media in hamburg. pic/shukor yusof


Vive la France

The differences between Brégier and Enders are quite stark; the Frenchman is suave, subtle, the epitome of amour propre while his German colleague is precise, disciplined and obdurate. These aren’t stereotypes of the two nationalities, just the personalities of the two as observed by people who have followed them over the past decade.

Those who know Brégier well say he is very intelligent, demanding and doesn’t suffer fools gladly. The German media clearly dislikes him as evident in this article that portrays him as cunning and ungentlemanly.

Enders and Brégier have been tussling for several years, each trying to claim credit for Airbus’ sterling performance in aircraft sales. That success, ironically, was largely the work of John Leahy, a New Yorker who was instrumental in Airbus nudging ahead of arch-rival Boeing.

Whilst acknowledging that Airbus needs “fresh minds”, Enders was also quick to stress “many of the achievements this company can be proud of over the past decade were led by Fabrice and me, together.” We italicise the word “together” because Enders wanted to show the world Brégier could not have done it himself.

It would be interesting if Leahy does write a no-holds barred autobiography when he retires in early 2018, about his (very successful) days in Airbus and how he navigated and weaved through the French and German minefield.

Granted, Enders and Brégier steadied the ship, together, but it was Leahy who made Airbus what it is today. An American was the face of Airbus. Everyone knew that.

In any case, Leahy’s departure will leave a gaping hole, unlikely to be plugged anytime soon (if at all) by French-born Eric Schulz, head of Rolls-Royce civil engines unit. Schulz is to start work as Airbus chief salesman in January 2018.

There’s also the pressing issue of the conglomerate facing a slew of probes in France, Germany and the UK over alleged bribery and the use of middlemen to help win orders.


Airbus Enders 2010

you will fly when i tell you to… enders at an event in broughton, uk. pic/shukor yusof


Deutschland über alles

It would appear the Board of Directors – comprising 3 French, 4 Germans, 2 British, 1 American, 1 Portuguese and 1 Spaniard – is keen to avoid a ban on Airbus taking part in public contracts and is hoping to quickly resolve the corruption allegations.

Anyone who has shook hands with Enders knows how firm his grip is, and how physically dominating the former paratrooper can be. Although German in mannerism and outlook, he is influenced by American business ethics, likely from his years as a PhD student at UCLA.

The risk to Airbus, while all these personality and cultural clashes are being played out, is that it loses its focus and naturally, its grip on global aircraft sales. At this year’s Paris and Dubai airshows Boeing obliterated Airbus with a slew of big-ticket orders.

Is the Enders-Brégier schism an accurate reflection of the relationship between the French and the Germans? Can Gallic grace, elegance and panache find a balance with a Teutonic neighbour that always seems to be too rigid, too precise, too technocratic and worse, too good at football?

We shall soon find out…



What’s in store for airlines in 2018?


How will airlines fare in 2018? Pic/Shukor Yusof

There’s an air of optimism in the Asian airline industry following the International Air Transport Association’s (IATA) proclamation that airlines in this region will make a profit of USD9 billion in 2018.

IATA expects 2018 to be the fourth consecutive year of sustainable profits with a return on invested capital (ROIC) of 9.4%. This figure exceeds the industry’s average cost of capital of 7.4%.

Collective net profit for all airlines is expected to rise to USD38.4 billion in 2018 (from USD34.5 billion projected in 2017). Here’s IATA’s industry economic performance.

According to IATA passenger market conditions vary across Asia Pacific. IATA’s latest figures also corroborate what we have seen – intense competition in the low cost segment that continues to put pressure on profits, assuming some of these LCCs are making money.

One bright spot for the region is in freight. A strong uptick in the cargo markets has provided support for Asia Pacific carriers as they account for almost 40% of global cargo capacity. Anticipated growth in demand of 7% is going to surpass capacity increases of 6.8%.

World’s strongest market

There is no doubt Asia Pacific is the world’s strongest aviation market today and will continue for the foreseeable future. The Association of Asia Pacific Airlines (AAPA) in October noted an 8.3% increase in the number of passengers ferried by Asia Pacific carriers, or a combined total of 26.4 million. Demand in revenue passenger kilometres (RPK) grew almost 10%.

Read the AAPA release here.

While we generally concur with IATA and AAPA on its findings and see 2018 as generally strong for some carriers, many things can go wrong quickly in this business.

Oil remains an unknown next year. Our friends in the energy market say oil prices will probably stay along the same range as they did in 2017, or move at most 3%-5% higher.

We don’t quite believe that. We have a hunch it could get very sticky for those airlines that haven’t had the foresight to hedge (at least 50%) beyond 12 months when jet fuel was trading in the 60s per barrel.

THAI monk blessing

THAI needs more blessings. Pic/Thai Airways

But some are weak in a strong market…

The earnings numbers of some regional flag carriers suggest that while oil prices had stayed relatively low in 2017, many airlines have not quite profited from it.

Thai Airways International (THAI) in November reported a 3Q17 (Jul-Sep) operating profit of THB739 million (USD22.5 million). That’s nice compared to the THB836 million loss for the same period in 2016. But THAI reported a net loss of THB1.8 billion for the 3Q, wider than the THB1.6 billion a year ago. The Bangkok Post has all the details here.

THAI is 51% owned by the government. Like Malaysia Airlines and Garuda Indonesia, political interference and poor management have plagued THAI. Just look at its fleet: many aircraft types that need massive maintenance costs. All 10 of its Airbus A340s are grounded . THAI also flies six A380s, each with 507 seats.

Although the International Civil Aviation Organisation (ICAO) recently dropped its red flag for Thailand, problems at THAI persist, largely due to lack of leadership and ideas. Thailand had been under ICAO’s red alert since 2015 when an audit raised significant safety concerns about Thailand’s oversight of carriers, especially when it comes to the award of air operator certificates (AOC).

That led to the closure of Thailand’s Department of Civil Aviation and gave rise to the new Civil Aviation Authority of Thailand. Read it here.

The lifting of the red flag is good news for THAI and other carriers in Thailand but it also means everyone’s going to start applying for new international routes and competition will heat up and costs will rise.

THAI shares have been trading under THB22 for the past six months, and under THB17 this past week. Airline stock is not necessarily a good gauge of how a carrier is performing and investors are not naturally attracted to airlines.


A Garuda 737 model at its HQ. Pic/Shukor Yusof

Indonesian flag carrier Garuda is another perennial underperformer. Much of the good work done by ex-CEO Emirsyah Satar appear to have been eroded in the past two years. Garuda lost USD222 million in the 9M17 period, while operating revenue soared to USD3.11 billion (from USD2.9 billion during 9M16).

The huge losses were partly attributed to higher fuel costs (only 20% hedged, the rest bought via spot) and a one-off tax amnesty payment of USD137 million. In 2016 Jakarta launched a nine-month tax amnesty scheme aimed at bringing billions back into the country.

According to Garuda, 3Q forex losses were USD16 million while tax losses were USD53 million. The carrier stressed that 3Q17 saw a net profit of USD19.6 million (down 12% YoY). Much of the revenue came from hajj and umrah pilgrim charter flights that airline officials said will remain a key source of income for Garuda.

New CEO Pahala Mansury’s focus is on cost-cutting and he has deferred deliveries of aircraft until 2019 including Boeing 737 MAX and Airbus 320neos for its low cost subsidiary Citilink. Garuda has a fleet of 199 planes, of which 177 are on lease.

Aircraft utilisation is an area Garuda would need to drastically improve on. The airline’s B737 planes run just over nine hours a day while 18 of its Bombardier CRJ1000s and 12 ATR-72s clock an appalling five to seven hours daily. Likewise, Garuda’s load factor internationally is quite dismal. Load factor to London (via Amsterdam) is just 65%.

Garuda is struggling financially. Income is growing at 6% but costs are up 21%. Productivity is low, and on some domestic routes it competes with its own unit, Citilink. Pahala has made Garuda integration with Citilink a priority in 2018 but intense competition with Lion Air, which controls 55% of the local market, means it has to continue to dump fares.

What lies ahead?

It’s never easy to guess what the year ahead holds for airlines. Crude prices will, as always, determine the plight of many carriers. Intense competition among airlines, especially within Southeast Asia, will continue to dampen airfares. Full service carriers have little choice but to compete head-on with LCCs, resulting in many different types of fares being offered.

Asia Pacific will see up to 3% rise in 2018 pricing. As IATA has stated, domestic demand in India and China will rise. Weakness in airport infrastructure in Indonesia and Vietnam will become more apparent as growth in both markets exceeds 5% in the next 2-3 years.

Having seen failures in Europe in 2017 (AirBerlin, Monarch), it’s possible one or even two Asian carriers could end up in a similar fate in 2018, mainly due to very intense competition, lack of funds, higher fuel prices, safety issues or a combination of all factors.

The last Asian airline to fold was Taiwan’s TransAsia Airways in November 2016.



Being John Leahy

Leahy 2006

is he indispensable? airbus coo-customers john leahy. pic/shukor yusof

Eleven or so years ago John Leahy took a 13-hour flight from London to Singapore, arrived on schedule and was briefed over breakfast by the local Airbus team. Before lunch he had met the media and proceeded after that to his main mission – a critical meeting with the Singapore Airlines (SIA) chief executive. By midnight Leahy was on a plane back to Europe, mission accomplished.

He successfully reassured SIA over delays in the delivery of the A380 (the airline was the aircraft’s launch customer) and even convinced it to add another nine to the 10 superjumbos already on order. According to people who were privy to the negotiations, Leahy made an offer SIA couldn’t refuse.

Leahy is Airbus’ Chief Operating Officer – Customers, and the European consortium credits him for raising the company’s market share from 18% in 1995, to over 50% by the new millennium. It is no small feat, not least for an average-sized American in a fiercely Gallic and Teutonic environment.

The 67-year-old Leahy has said he wants to retire by end-2017, ending 32 years of association with Toulouse-based Airbus. Those who know him, even if just peripherally, will appreciate his guile and wit, likely a result of his liberal arts background at university.

He has a wicked sense of humour and revels in taunting his countrymen, “our friends in Seattle” he likes to say, preferring not to name his rivals at Boeing.

It’s unclear who will replace Leahy as chief salesman. His own choice, Kiran Rao, has ruled himself out of the running, sensing (perhaps rightly) that it’s too hot a seat, especially in a year where Boeing has comprehensively and conclusively beaten Airbus, notably at the Paris Airshow in the summer and most recently in Dubai.

Leahy Hamburg 0516

leahy holds court at an airbus event. pic/shukor yusof

Leahy is a very hard, almost impossible, act to follow. He can be explicitly colourful with his language in informal settings, as some of us found out when we were invited to his swanky hotel suite overlooking the Chao Phraya many years ago, after a long day debating the merits of purchasing either an Airbus or a Boeing widebody.

There are reports that Christian Scherer and Eric Schulz, from ATR and Rolls-Royce, respectively, are the leading candidates to replace Leahy. They appear unlikely, in our view, because each seems to lack Leahy’s charisma and the three I-s: imagination, ingenuity and inventiveness.

Asia is the world’s largest aviation market and unless Leahy’s successor is able to cajole, court and woo many of the egotistical owners and chief executives of airlines in this region the way the New Yorker has, then Airbus will struggle to sell its planes.

Whoever Airbus appoints as its new sales head will have to not only feel at home in the 3-Michelin star Fat Duck where Leahy once sealed a mega deal with Emirates over dinner, but similarly at ease with some of the exotic culinary tastes found in Southeast and East Asia.

In the meantime the European manufacturer will hang on to Leahy until end-2017. There are suggestions, however, he might bid adieu after the Singapore Airshow in mid-February 2018 where, it is thought, Leahy will go out in a blaze of glory with a multibillion dollar order from an Asian customer.



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