Endau Analytics

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.

 

 

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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?

MH 737 @ CHANGI

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.

IMG_5129

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.

 

 

There are some things money can’t buy. For everything else, there’s Qatar Investment Authority.

QR 772LR GRU Nov 2015 - a

a qatar airways boeing 777-200lr. pic/shukor yusof

 

At HKD5,162,266,000 (USD662 million) or HKD12.35 per share, Qatar Airways felt the 378,188,000 shares of Cathay Pacific Airways it bought from Hong Kong-listed Kingboard Chemical Holdings were value for money.

Indeed they were, and the Qataris now own a 9.6% stake in one of Asia’s (if not the world’s) top carriers – for a song.

The Qataris are astute and smart investors, a lot smarter than their Gulf brethren at Etihad who, as part of ex-CEO James Hogan’s ill-thought “equity investment strategy”, bought into now bankrupt Air Berlin and perennially loss-making Alitalia.

Etihad also made other foolish equity investments in Air Serbia, Jet Airways and Air Seychelles.

What’s behind Qatar’s purchase then?

Akbar al-Baker, the airline’s often bellicose and brusque chief executive, is a very clever man with very deep pockets. Deeper in fact than Etihad and Emirates combined, some people in Doha tell us.

There is method to his madness. He sees opportunities in the face of adversities. Politically Qatar is facing a horrendous time from its neighbours, including Saudi Arabia and the UAE (where Emirates and Etihad are based), after the two countries and several others cut off diplomatic relations and imposed a blockade on June 5.

Almost five months on, Qatar and its flag carrier remain very much in business. Nobody has become destitute in that tiny peninsular. Dairy products and other foodstuff are airflown daily from Turkey and Iran.

More importantly, Qatar Airways continues to grow and ever hungry to buy new aircraft and new assets. It has some 200 planes in its fleet with almost 100 on order. The airline flies probably the world’s youngest fleet, with an average age of five years.

OLYMPUS DIGITAL CAMERA

clever guy with deep pockets: qatar airways ceo akbar al-baker. pic/shukor yusof

For Qatar, buying into foreign airlines isn’t so much about return on investment (ROI), more about getting something intangible – influence. That’s what money buys: the ability to exert (soft) power and to go into places where the next phase of growth is located.

China is one of those places. And that is why HKD12.35 a share in Cathay Pacific was a bargain in al-Baker’s arithmetic. The share price is now hovering around HKD13, thanks to Qatar’s move. Expect to see the stock move up at least 5% to 10% by Christmas.

Al-Baker had tried to buy a 10% stake in US carrier American Airlines (AA) back in June, at the height of the blockade, but the Americans rebuffed him. AA’s boss then said he wasn’t particularly “excited about Qatar’s outreach” and found it “puzzling”.

Qatar already had a 10% stake in International Airlines Group (IAG), the holding company of British Airways, Aer Lingus, Iberia and Vueling, when it paid EUR444 million (USD515 million) for another 10% share in August 2016.

The purchase came right after the UK decided on Brexit and stock prices had tanked. The share is trading around GBp620. This acquisition gives Qatar access to the lucrative trans-Atlantic market.

The airline is also part owner of South America’s biggest carrier, the Latam Airlines Group, after buying a 10% stake in December 2016 for just over USD600 million.

As with IAG and Latam, Qatar’s investment in Cathay Pacific is partly to diversify its assets and get a piece of the action on mainland China, given that Air China is also a co-owner of Cathay Pacific with 30%. The Swire Group remains a majority shareholder with 45%.

This purchase of Cathay Pacific equity has to be seen beyond a mere investment in a world class carrier; it’s Qatar Inc, via sovereign wealth fund Qatar Investment Authority (QIA), making a carefully crafted move into the planet’s largest aviation market.

For those who feel this latest Qatari excursion is an alliance fraught with cultural conflicts that could lead to a complex cohabitation, fret not. Qatar is the world’s richest country, now with a direct link to Air China – flag carrier of what will soon be the globe’s largest economy.

As al-Baker will probably tell you – if he’s in a good mood – money can’t buy love, but it improves your bargaining position…

 

 

Does Malaysia need a national airline?

MAS 3 - MAS 777 Landing K61992

gone but not forgotten. a MAS B777-200ER about to land.

Malaysia Airlines (MAS) is once again in the centre of a maelstrom following the departure of Peter Bellew, its second expatriate chief executive in as many years.

The airline has had a chequered past, marked by persistent losses (over MYR20 billion or USD4.8 billion, in two decades), mismanagement and most recently the loss of over 500 lives on board two of its aircraft.

In view of the debate currently raging in Malaysia over the future of MAS, which unfortunately has spilled into the political arena, it is timely to ask if some countries actually need a national airline.

Consider this: Malaysia has injected billions into MAS since the late 1990s, buying aircraft (like the Airbus A380) that didn’t fit into its fleet and network, and serving many unprofitable destinations.

The airline’s sole shareholder, Khazanah Nasional, has dabbled in numerous turnaround plans for MAS, including the latest one costing taxpayers MYR6 billion. Embarrassingly MAS has seen nine CEOs come and go in less than 20 years.

It is evidently clear MAS has failed, and failed miserably.

At a time when low cost carriers are gaining more influence and Malaysia’s AirAsia growing larger, stronger and crucially making money domestically and internationally, what is MAS’ raison d’être?

Much has been argued about its role in serving Malaysia and promoting its interests and brand name globally, but at what price to its taxpayers and for how long?

Is there a case to continue using public money to support a carrier with such a dismal financial record? Why should MAS be treated differently from any other unprofitable companies?

Likewise, where’s the pride in having a national airline that consistently misuses and loses money? In Malaysia, AirAsia is already performing the role of a national carrier – it has a larger fleet and flies to more destinations.

The irony is, despite having Khazanah as its own ATM, MAS still needs cash and that’s the reason it’s now looking for a minority (foreign airline) shareholder.

Many national airlines have gone the way of the dodo, including Greece’s Olympic, Belgium’s Sabena and Ghana Airways. Even the wealthy Swiss have no flag carrier. Germany’s Lufthansa is now the owner of the flag carriers of Austria, Belgium and Switzerland.

Other European flag carriers are in trouble. Korean Air rescued CSA Czech Airlines in 2013 and Italy’s Alitalia is once again on the brink of bankruptcy.

While privatising airlines (as Khazanah has done with MAS) appears a logical move, many have failed or stagnated, such as Air Malawi, Air Jamaica, Air Botswana and Kenya Airways. Air India is also considering privatisation.

One airline privatisation success was British Airways in 1997, although the airline later became part of the International Airlines Group (IAG), which counts wealthy Qatar as one of its major shareholders.

Interestingly the United States, the world’s largest economy and the country with the most number of carriers, has no ‘national airline’. But then the US has seen the demise of some of the industry’s iconic names, including Pan American (PanAm) and Trans World Airlines (TWA).

* This opinion piece first appeared in the Singapore Business Times on October 24, 2017. Click here (for subscribers only)

The French Connection

Airbus Bombardier management

the four musketeers. l-r: pierre baudoin (bombardier chairman), tom enders (airbus president & ceo), alain bellemare (bombardier president & ceo), and fabrice bregier (airbus coo & president commercial aircraft). pic/airbus

Apart from AirAsia, at least two Southeast Asian carriers are believed to have expressed interest in Bombardier’s CSeries planes after Airbus announced it would take 50.01% control of the troubled programme on October 17.

It is understood informal talks have started. Although details are sketchy, the carriers are exploring acquiring between 20 and 30 planes. So far in Asia Pacific, only Korean Air has placed orders, for 10 CS300 aircraft.

In August this year AirAsia co-founder and CEO Tony Fernandes visited Mirabel in Montreal and said his company was keen on both the CS100 and CS300 variants.

In spite of Bombardier’s widely reported funding problems with the CSeries, the aircraft itself has been well received by airlines and those who have flown in it. Among the wow factors include generous seat layout, a very quiet cabin and low fuel burn (at least 30% less than an Airbus or Boeing narrowbody plane, according to Bombardier).

CSeries aircraft are currently in service with Swiss and Air Baltic. Both carriers said the planes have performed better than expected.

Malaysia appears to be a perfect launching pad for the CSeries in Southeast Asia. Other than AirAsia, the CSeries had also attracted interest from smaller startups.

In March 2015 Malaysia’s prime minister witnessed a signing ceremony between Flymojo and Bombardier for up to 40 regional jets. Unfortunately, the planned acquisition did not materialize because of financial issues as well as delays and uncertainty surrounding the CSeries programme.

Regional jets are perfect for Southeast Asia, given its geography and economic growth. The planes, typically between 70- and 160-seaters, offer certain airlines opportunities to operate in sectors that are currently either not served or underserved.

The CS100 is typically configured with 108 to 133 seats while the CS300 comes with 160 seats (in a single configuration) or 130 in a two-class configuration. Endau Analytics understands a couple of airlines are already revving up their interest following Bombardier’s tie-up with Airbus.

What the Airbus acquisition means

The dynamics behind this marriage of convenience are quite obvious for both parties. Airbus pays nothing for a 50.01% interest in C Series Aircraft Limited Partnership (CSALP) while Bombardier and Investissement Quebec (IQ) own some 31% and 19%, respectively.

Airbus clearly sees a demand for the CSeries, even at the expense of its own (not so popular) A318 and A319 models. It also opens up a new dimension for the European manufacturer. For example, there is a possibility of developing a middle of the market (MoM) plane that rival Boeing has been bullish on by stretching the CS300.

For Bombardier, having Airbus as a stakeholder lends not only credibility and better sales and marketing reach, but would critically overcome the 300% import levy imposed by the US after Delta bought 75 CSeries aircraft Boeing alleged at “absurdly low” prices.

Politically, too, the deal seems to be kosher. It ensures 1,000 jobs in Northern Ireland, where the CSeries wings are made, are safe. Airbus already has a factory in Alabama, where future CSeries production will be added, thus circumventing the US imposition of tariffs.

Could this arrangement have been achieved if John Leahy, Airbus’ acerbic American chief salesman, isn’t retiring at the end of 2017? After all he had dismissed the CSeries aircraft as a “cute little airplane.”

Look at the photo above. Check out the bonhomie between Airbus’ Fabrice Bregier and Bombardier’s Alain Bellemare – it isn’t just about broadening business between two aerospace companies – it’s about the bond between two Francophones.

All this leaves Boeing in a not so very nice spot and it should be worried. The pendulum has swung to Toulouse.

Will Boeing try to seduce Brazil’s Embraer – the world’s third biggest aircraft maker – into some sort of partnership? Embraer has a large footprint in the US. In 2012 both companies signed an accord to work together on many areas, including airplane “efficiency, safety and productivity.”

Embraer hasn’t said much, other than saying this latest development underscores big opportunities in the 100-150-seat market. The folks in São Paulo will have to come up with a clever game plan. Soon.

 

The greatest turnaround flop?

Bellew in Manila

read my lips: malaysia is the most wonderful country…

Ravi’s Banana Leaf Restaurant in Mont Kiara, located in a leafy, upmarket suburb in Kuala Lumpur, is about to bid farewell to a loyal customer.

Malaysia Airlines Berhad (MAB) CEO Peter Bellew has done a U-turn. He is leaving his job after just a year as boss of the beleaguered airline and is heading back to Ryanair and to Ireland, his homeland.

But what made Bellew’s departure intriguing was this: apparently his employer was unaware of it until news of his move was made official by Ryanair via the London Stock Exchange. To say the MAB board and stakeholder were left with red faces is an understatement.

MAB Bellew statement

Barely a month ago Bellew was at pains to convince the Malaysian media that he had no intention whatsoever of leaving MAB and Malaysia. He described Malaysia as “the most wonderful country…” and that he was “perfectly happy” as chief of the airline. Read here.

Maybe Ryanair CEO Michael O’Leary made Bellew a deal he can’t refuse. Maybe Bellew missed the Irish/UK rugby scene, and its affiliated attractions: having a pint or two of Guinness with mates after a hard fought game. Or could it be something simpler… maybe at heart he felt MAB was a lost cause?

He declared publicly that helping MAB to turn around would be “the greatest achievement of my life”. Indeed, Bellew’s ego was boosted by the hacks touting him as the one to finally rejuvenate the troubled carrier. He was said to have the “Irish touch”.

Malaysia’s national airline is in a deep rut. Not only did it lose two B777-200 aircraft and over 500 lives in 2014, the carrier subsequently lost its first foreign CEO when Christoph Mueller departed in mid-2016 after just a year on the job. Now it has lost its second CEO in as many years. Has the airline also lost its credibility?

The short answer is yes.

Malaysians would be remiss if they do not question why their national airline, bailed out using MYR6 billion (USD1.42 billion) of taxpayers’ hard-earned money in 2014, is in such a sorry state of affairs, notwithstanding the prime minister’s gallant effort to “rehabilitate MAS now” and to “save MAS now“.

In our view the airline is beyond rehabilitation and saving until and unless certain hard-nosed decisions are made. That means the immediate removal of those who are incompetent and inept.

That’s just a start. Ironically MAB is in no better position today despite having been “transformed” by Malaysia’s sovereign wealth fund, the airline’s owner. Is the sovereign wealth fund prescribing the wrong medication? Is the sovereign wealth fund the problem?

Bellew has spoken – almost as frequently and as fervently as when he dines at his favourite Indian joint – about how great the airline’s load factor is. But as most astute airline CEOs know, load factors are meaningless if yields aren’t positive.

Unfortunately for MAB, when the CEO leaves in December, its reputation is yet again in tatters and its future uncertain. What is certain is the arrival of eight Boeing Dreamliners, six Airbus A350s and six A330-200s. And it would seem nobody is quite sure what to do with all those planes.

For Bellew though, the experience in MAB and living in Malaysia appeared to have been a thoroughly enjoyable one, banana leaf meals included. He traveled extensively since becoming CEO and probably visited more places in the past year than he ever did in his decade with Ryanair.

The next CEO…

Is likely to be someone close to either the sovereign wealth fund or the powers that be in MAB.

The government-owned New Straits Times has its own take. Read it here. Both men have something in common: they have good pals in the sovereign wealth fund.

Oddly, however, there was no mention of one Capt Izham Ismail, a veteran at the company with almost 36 years experience as cockpit crew and in management (briefly with MAB subsidiary MASWings). He is currently the airline’s Chief Operations Officer, the position Bellew held before becoming CEO.

In 2016 Capt Izham completed an Advanced Management Programme at Harvard Business School, a hint perhaps of what’s in store for him? More importantly, he is said to be well-liked by MAB’s influential chairman.

Whoever is eventually chosen by the stakeholder and board of directors to replace Bellew will make little (if any) difference.

It’s akin to watching a sandiwara, or as the Brazilians call it, a telenovela. The plots and themes are predictable. And many of the characters are unsavoury, repugnant rodents.

As long as MAB continues to be funded by the government, and the government is unwilling to let it be run by responsible, trustworthy professionals who truly understand the business, then the airline is bankrupt of ideas. It is no longer relevant or viable. It lives, but only just.

 

 

Big Data

Endau-Payload-121017-3

Discussing big data. l-r: Stephen Leung (Lazada), Venky Pazhyanur (UNISYS), Endau Analytics, Luqman Azmi (MASkargo) & didier Lenormand (Phoenix aero Consult)

 

What’s big data analytics and how can this be used to drive profits in the aviation industry?

That was the big question posed in one of the sessions at the Payload Asia Conference on Oct 12 in Singapore. Endau Analytics was invited by the organiser, Payload Asia (a publication focusing on the global airfreight industry), to moderate the discussion on big data.

According to Google big data is a “buzzword to describe a massive volume of both structured and unstructured data that’s so large it’s difficult to process using traditional database an software techniques.”

Big data itself essentially is a high volume of data stream that originates from multiple sources and in a variety of forms. Analysing and interpreting it can be extremely tough due to the many factors involved, but it’s too important to ignore and neglect.

The panellists came from diverse sectors of the industry:

  1. Luqman Azmi, CEO of MASkargo;
  2. Venky Pazhyanur, Senior Director Freight Solutions at UNISYS;
  3. Didier Lenormand, Founder of Phoenix Aero Consult;
  4. Stephen Leung, SVP – Crossborder, Lazada eLogistics
Luqman-Payload-Big Data 121017-1

maskargo ceo luqman azmi sharing with the audience how his company is embracing big data

Actionable knowledge

In a nutshell the panellists agreed businesses linked to the airline industry, such as logistics and software solutions, can now better understand their customers and how to communicate better using big data analytics.

But the true value of big data is, in our view, not fully exploited yet. For instance, airlines and MRO (maintenance, repair & overhaul) are not always sharing the data with their partners.

In any case, not everything in big data is of value. The intrinsic value is in the ability to extract relevant information and then analysing that to help in making accurate decisions.

What does the future hold for big data? Clearly there are challenges, such as filtering the huge amount of data and translating it to make the right decisions. Data analytics on the weather, for example, can be transformed into actionable knowledge.

There’s massive potential when big data is mined by specialists. Hence, having the right talent is critical in enabling information to be used accurately and responsibly to increase revenue and improve safety in the aviation industry.

 

 

 

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