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.
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.
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.
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.
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.
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.
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.
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…
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.
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.
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.
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…
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.
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…
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.
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.
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.
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.
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…
Discount carrier VietJet announced its earnings for 1Q17 on April 22, with revenue of around VND5,095 billion (USD225 million), or 44.2% higher than the same period in 2016. The airline said profit was up 6.8%, compared with 1Q16.
VietJet carried 3.7 million passengers in the first three months of 2017, an increase of almost 30% from 1Q16. It launched three new international routes in the same period, and said its load factor averaged 88%
The budget airline was listed end-February; at that time the company was valued at USD1.2 billion. It is majority owned by Madam Nguyen Thi Phuong Thao – she has direct and indirect shares of around 33%. Singapore sovereign wealth fund GIC holds a 5.4% stake.
It is understood VietJet is currently preparing for a bond issue of up to USD300 million and the funds will be used for aircraft payments. BNP and JP Morgan are thought to have been mandated to arrange the issuance.
Interestingly, VietJet’s finance director Yvonne Abdullah, a Malaysian who formerly worked for AirAsia X as CFO, is said to have left the company after barely four months on the job!
The carrier is growing very quickly. Last week it received shareholder approval to raise the cap on foreign ownership to 49% (from the current 30%). But that needs the approval of Vietnam’s premier – he will need to convince, among others, flag carrier Vietnam Airlines – that such a move is beneficial to the country and not the company. Not easy.
Norwegian to start LGW-SIN flights
Does anyone remember Air Madrid? Long before AirAsia X or Norwegian Air Shuttle there was this Spanish discount carrier owned by, among others, Spanish tycoon Herminio Gil, Spanish supermarket Eroski and a couple of hotel chains. The business model was simple: to capture the high-volume flights for millions of immigrants and tourists between South America and Spain.
Air Madrid was launched in May 2004. By end-2006 its operations were grounded. The airline failed for various reasons, including an inability to manage costs, running different types of aircraft, a diverse route network and expanding staff nearly 10-fold within two years.
We’ve said before that low-cost, long-haul isn’t impossible, but it’s just very, very tricky to succeed.
Norwegian announced it is starting flights from London Gatwick (LGW) to Singapore end-September this year using Boeing B787 Dreamliner planes. Read it here.
The move comes at a time when AirAsia X is also planning to relaunch flights to LGW from Kuala Lumpur. AirAsia X previously flew to Stansted but suspended the sector due to high operating costs.
Norwegian says it will initially fly 4x weekly to Singapore and then increase frequencies to 5x weekly in October 2017. Basic one-way fare is GBP179 while from Singapore the single fare is SGD199.90. There is also a premium option on the Dreamliner, starting at GBP1,339.
This will likely make the Gulf carriers (offering daily flights via the Gulf) take notice, for sure. What it means from September this year is that one can skip Dubai, Abu Dhabi and Doha and at a very competitive price to boot.
It won’t bother Singapore Airlines much because SIA and British Airways cater to a different segment.
It is a cause for concern to SIA subsidiary Scoot though… this summer it starts flying to Athens. It’s interesting to see if SIA (Scoot) might be tempted to collaborate with Norwegian. Norwegian is already flying direct from Scandinavia to Bangkok.
Indeed, AirAsia X might want to hook up with Norwegian, too. But Kuala Lumpur isn’t quite the same as Changi so we suspect there won’t be much interest from the Scandinavian airline.
To put things in perspective, there are over a million passengers flying between Singapore and London annually, and none of that is on a budget airline.
All things being equal, can Norwegian make low-cost, long-haul finally work?
No doubt Norwegian has been performing very well in recent years, expanding in Europe and across the Atlantic to the US and making healthy profits. All these were achieved in an environment of low fuel prices, which the B787 exploits exceptionally well.
There’s a good chance Norwegian will succeed, given Changi’s attractive location as a global air hub and the connections there provide a competitive edge.
On March 31 AirAsia signed an agreement with Vietnam’s Gumin Co Ltd, Hai Au Aviation Joint Stock Company and Tran Trong Kien (owner of the two firms), to start a low-cost carrier in the country. The plan is for the airline to launch flights early 2018.
AirAsia is hoping it will be third time lucky in 10 years in penetrating the Vietnamese market, having failed twice – once in 2007 (in a planned partnership with Vinashin) and then in 2010 with VietJet.
The project is slated to require an investment of about USD44 million, of which AirAsia needs to inject just 30% and the rest from Gumin.
However, a news portal in Vietnam is casting doubts on the JV, raising the plan’s legitimacy and feasibility. It claims that AirAsia has yet to submit an application to form the JV with Gumin and Hai Au Aviation.
In any case, AirAsia’s desire to have Vietnam is understandable. The country is Southeast Asia’s fastest growing market, with an annual growth of 17% in the past decade. Passenger traffic for the next 10 years is likely to continue to post double-digit figures.
Vietnam has a population of around 90 million, and some 70% are between the ages of 15 and 64. Vietnam is also Southeast Asia’s fifth largest aviation market, after Indonesia, Thailand, Malaysia and Singapore. It is estimated that the middle class comprises between 25% and 35% of Vietnam’s population.
That said, Vietnam’s economic growth slowed to around 5.1% in 1Q17 – the slowest in three years – with the industrial sector suffering from its smallest expansion since 2011.
Annual inflation in March was around 4.6%, the slowest pace since November 2016. But a hike in higher food demand and fuel prices rising 35% in 1Q17 pushed the CPI up an average 5% year-on-year. That’s a four-year high. Read Bloomberg’s report on Vietnam’s economy here.
AirAsia’s thrust into Vietnam makes commercial sense, as it pushes for a pan-Asian discount carrier and it is relatively inexpensive, too, with the 30% investment amounting to less than MYR60 million. It’s a cheap price to pay to get a foothold in a market that still has strong upside in the next decade.
But AirAsia may find the going considerably tough, given that VietJet now controls almost half of the domestic market, with Vietnam Airlines and Jetstar Pacific sharing the remainder.
Indeed, the competition is going to become more intense following VietJet’s recent IPO and aggressive fleet expansion. In our view, Vietnam will see close to 50 million passengers in 2017 as low fuel prices ensure lower fares amongst the key players.