As 2014 draws to a close, passenger aviation has experienced much of the same as previous years:
- Continuing challenges to the cost restructuring of the legacy carriers including debilitating strike action by pilots for Air France and Lufthansa that effectively wiped out their profits for the year.
- The service upgrading strategies of low-cost Carriers as direct threats to the legacy carriers to include product innovations for frequent travellers.
- Continuing product dilution from the legacy carriers and aggressive pursuit of incremental revenue strategies such as charging for luggage, onboard meals and the like.
- Copycat moves by legacy carrier executives each seeking to not be worse than their competitors.
- The emergence of ‘Gulf Carriers’ and Turkish Airlines as direct threats to US and European long-haul operators as customers switch from the European and US hubs to transfer through Abu Dhabi, Dubai, Doha and Istanbul.
- Rapid growth in budget travel in Asia as rising incomes and greater tourism drive both ASKs and RASKs.
- Capacity constraints at European hubs with continuing debates about runway growth in London and other European capitals
- The arrival of ultra low-cost carriers such as Allegiant in the US threatening the position of Southwest Airlines and JetBlue
All of these developments presage greater pressures for further consolidation within European passenger aviation with the prospects of smaller national airlines being rather bleak. The few remaining national carriers such as Finnair, LOT Polish Airlines, SAS Scandinavian Airlines and TAP Portugal are likely to end up being acquired by larger groups. In the US, there is less room for consolidation with airline concentration already high. Expect accelerated downgrading of inflight service and weakening of frequent flyer programs to control costs and liabilities. Asia and Africa appear to be the best opportunities for growth with rising demand and incomes. The airlines best positioned to exploit this growth will be the Gulf Carriers, Turkish Airlines (sometimes dubbed the ‘Fourth Gulf Carrier’) and low-cost competitors from Asia such as Air Asia, Fly Dubai and SpiceJet.
Tragedies were not far away during the year – Malaysian Airlines in particular suffered due to the disappearance with all passengers on board of flight MH370 somewhere in the Indian or Southern Ocean. Malaysian Airlines then suffered the double tragedy of the MH17 being shot down over Ukraine again killing” all passengers. The company’s future is in doubt and massive restructuring will follow these tragedies. SwiftAir – a Spanish wet lease operator – lost one of its ageing DC jets in a sandstorm in Africa killing all passengers too. Despite these tragedies, passenger aviation remains one of the safest means of transport known to mankind.
Etihad Airways launched a new equity alliance. Called the “Etihad Equity Alliance“, it is composed of: Aer Lingus (4.1%), Air Serbia (49%), Air Seychelles (40%), Air Berlin (29.21%), Alitalia (49%), Darwin Airlines (34%), Jet Airways (24%) and Virgin Australia (22.9%). Etihad has deliberately avoided taking majority stakes in these airlines in order to avoid additional regulatory constraints related to ownership of air transport providers. Nevertheless, the debate over effective control of these carriers (Alitalia and Air Serbia in particular) remains. Etihad insists that the airline management of these carriers will remain independently appointed but doubts remain as to the effective firewalls in place. Moreover, the strategic logic of such alliances is surely questioned if managerial synergies are limited.
RyanAir and easyJet committed themselves to upgrading their product offering – aimed at frequent flyers. Ryanair passengers will be allowed to board with a second “small” carry-on bag and the airline’s boarding pass re-issue fee is to be cut from $120 to $25.Other developments are a 50 percent drop in the charge for checking luggage at the airport. In response to growth in business travellers, easyJet have introduced a business-focused product similar to Ryanair providing ticket re-booking flexibility, seat selection and baggage check-in in a single fare rather than un-bundled services typical of the LCC. These moves are a direct threat to the legacy carriers in Europe whose executives appear to be blind to the fact that as they lower their value proposition, the cash rich LCCs such as RyanAir and easyJet can upgrade their offering leading to further passenger defections – especially as they grow new routes from traditional, primary airports rather than secondary ones.
On the ground, the European Union continued to push its de-regulation agenda forcing further competition in ground services both at check-in/gate and ramp. This pro-competition agenda may bring down the cost of ground services but what cost to service quality?
Into 2015…
Perhaps the single biggest boost to the airlines will be the falling price of aviation fuel. IATA predicts that in 2015, the full-year average price expected to be $85/barrel based on Brent Crude. This will be the first time that fuel prices will have fallen below $100/barrel since 2010. Airlines will be hoping to convert this cost reduction into improved financial results. However, greater competition may mean that much of this fuel cost drop will feed through to lower airfares. After adjusting for inflation, IATA predicts that average return airfares (excluding taxes and surcharges) are expected to fall by some 5.1% on 2014 levels and cargo rates are expected to fall by a slightly bigger 5.8%.
The pilots will face down the legacy carrier groups again. Of note, how Lufthansa Group resolves its dispute with Vereinigung Cockpit will foretell much of the year ahead.
Turkish Airlines should continue its march to the top table of airlines in 2015. Their aggressive growth will be partially held back by capacity constraints at Istanbul and service sourcing challenges. They will emerge as Africa’s #1 airline in 2015.
First Class long-haul will increasingly become the preserve of the Gulf Carriers and Singapore Airlines as other long-haul players focus on intermediate products such as Premium Economy and phase out First Class products. The development of ‘suites’ on the A380s of Emirates, Etihad and Singapore Airlines will continue to be the industry gold standard and it will be difficult for other airline groups to respond.
Things to watch out for in 2015… Can Alitalia and Air Berlin recover as part of the Etihad family? Which of the European national carriers will be acquired? Finnair, TAP? My money is on TAP being acquired by a larger European group. How will US carriers respond to the new competition in long-haul transatlantic offered by the A380s and B787s operated by the Gulf Carriers?
Wishing everyone a very Happy New Year and looking forward to more exciting developments in 2015!
Airline Analysts 