Flybe has sold its 25 Gatwick slot pairs to easyJet for £20m ending 22 years of flying from the London airport. Jim French, chief executive of Flybe, stated that landing costs have increased at the airport by 100% over five years. Flybe services from London Gatwick will cease on 29 March 2014. The airline is also deferring its E175 deliveries until 2017/19.
It remains to be seen if these actions will save Flybe from continued decline however one thing is absolutely certain, these are the very best measures that Flybe could have taken and it is sure to go down well with investors.
I, along with many others, would like to see Flybe sort itself out and then move into the far superior London City airport where it should do well with the fleet it has.
And yet in all of this clueless UK politicians have raised concerns over the future of the Gatwick-Inverness route. UK Transport Minister Keith Brown said he had been in contact with Easyjet to ensure the timings on the route were kept, saying that the whole thing was “deeply worrying and I have requested an urgent meeting with Easyjet to ensure capacity is maintained”. Well we are very surprised at Mr Brown’s concern given that he was totally silent over the introduction and increase in UK Air Passenger Duty and that to date he along with UK government colleges have shown nothing but contempt for the aviation sector – I would expect both EasyJet and Flybe to jump all over the UK transport minister over this “concern”.

As we move into the final weeks before Paris and wonder where on earth our car passes have got to, how long the traffic jams will be and just how wet we are going to get this time, it is worth taking note of the big story of the show – It is of course the task of filling A380 and 747-8 delivery slots. John Leahy at Airbus needs to fill A380 delivery slots for 2015 so parts can be ordered this year without worry of a whitetail and of course for Boeing they already have a 747-8 whitetail and could do without any more. See more on that in the bumper Airline Economics Issue 14 at the show.

But Paris 2013 is no time to be having a go at Boeing and Airbus – It is however time to start asking serious questions of Chinese regulators, COMAC and AVIC:

Senior aviation figures are coming forward to Airline Economics stating that there is distressing news coming out of China on the C919 program. Sources state that there will now not be a Chinese engine on the C919 in the timeline stated as they simply will not have their act together in time to assemble a LeapX engine or to stick another Chinese engine on the same. The Chinese side involved at AVIC have proven themselves to date to be more than difficult to deal with and many at Safran have been left banging their heads against the wall.
An important element of this is Chinese requirement for Chinese pre-registration of anything that is built in China. Up until now Western aviation companies have produced goods in China on the basis that the Chinese facilities are off shoots of the main factory and they are operating under the company’s global quality standards procedures. The Safran quality system and anything that comes out of that factory is approved by EASA with a European production sticker. Now the Chinese are saying that they want the Chinese Production Sticker, which means that the Chinese factory has to respond to Chinese laws of production – that have not been defined yet – and need to be approved in accordance with a Chinese quality control systems – that do not even exist. So at this time if this goes ahead nothing will be able to come of out China until this system is completed and ratified by Beijing.
At the moment the Chinese are working well with the FAA to align standards but the EASA has had convoluted contact on agreeing standards because China has been stalling talks over the EU ETS issue. Something, which from the ICAO talks last week, looks like it is going to get worse before it gets better.
The fact is that a senior Chinese government official woke up one day and just decided that from now on everything has to have a Chinese stamp on without realising the consequences of that decision. Now they are realising that they have to put all the requirements in place fast and they have no idea of how to do it, thus ruining their own system and delaying everything. This will either set the whole Chinese Aviation industry back a decade or someone will have to climb down and recognise defeat on the issue.
So it is time to ask: With labour rates rising fast and the new requirements hindering operations, were the big aviation manufacturers too quick to jump into China? And given that the C919 will not be ready on time as things stand, were Bombardier, Boeing and Airbus too quick to launch their latest narrow-body offerings in reply?
Given that all three offerings are based on new engines with little by way of design change I think the answer is yes. They were two years too soon and in the event the engines will require a string of updates and tech insertions. One senior figure in the industry points to the new GE engine for the 777X as an example – ceramics are being used throughout the engine and this technology should now be applied to the LeapX and GTF. So given that upgrades are the order of the day are we finding ourselves in the same situation as say the V2500 A1 Vs the V2500 A5 in the late 1980s/early 90s? Best make sure your Neo or Max engine is not an A1!
The full story will appear in the Paris Air Show issue of Airline Economics.
To ensure you receive your own copy, subscribe today by emailing John Pennington at john@aviationnews-online.com. An annual subscription (six issues of Airline Economics per year) costs just £149 (UK/EMEA/US and Canada) and £189 (Rest of the world), which also includes various additional supplements and aircraft/maintenance guides published throughout the year.

As reported yesterday, US Airways Group completed a $500m senior notes offering. The news that came in after the newsletter went out however was that the airline notes priced to par at 6.125% yield. Demand was so high that there is talk of a $100 upsizing. The notes are rated CCC+/Caa2/B-, which is lower than United’s recent deal although the US Airways notes priced more tightly.

Joint bookrunners on this deal were: Goldman Sachs, Citigroup, Barclays, Morgan Stanley and Credit Suisse.

US Airways also allocated a senior secured refinancing yesterday, which consists of a $1 billion six-year B-1 term loan (L+325, 1% LIBOR floor including six months of 101 soft call protection) and a $600 million, 3.5-year B-2 term loan (L+250, 1% floor). Leverage Commentary Data (LCD) reports that the $1 billion B-1 term loan breaking for trading at 100.5/101, from issuance at 99.5. At 99.5, the loan yields about 4.42% to maturity. The yield narrows to 4.17% at the midpoint of the opening market.
The $600 million B-2 term loan also broke into a 100.5/101 market, from issuance at par. The 3.5-year tranche is priced at L+250, with a 1% floor, and also includes six months of 101 soft call protection.

At par, the short-dated tranche yields 3.55% to maturity. This is the tightest print on record for a loan issued by a B-/B3 rated borrower, according to LCD. At a price of 100.75, the yield narrows to 3.31%.

Also, both loans include a 25 bps step-down to the spread upon the closing of the airline’s planned merger with American Airlines, says LCD.

The term loan is rated B+/B2, with a 1 recovery rating from S&P.

Sources yesterday told Airline Economics that the high-yield tranche was selling well.
Joint bookrunners on the loan are Goldman Sachs, Citi, Barclays and Morgan Stanley.
Meanwhile, Substantial demand drove pricing for ILFC’s $500 million floating-rate notes launched yesterday to sub-200bps. The three-year floating-rate notes offering launched at L+195.

Active bookrunners on this deal are: Goldman Sachs, Deutsche Bank, and UBS and passive bookrunners Bank of America, Barclays, Citi, Credit Suisse, JP Morgan, Morgan Stanley, and RBC.

Proceeds from the SEC-registered deal will be used for general corporate purposes, including debt repayment and the purchase of aircraft. Investors are guided toward expected ratings of BBB-/Ba3/BB.

ILFC expects to close the offering on May 24, 2013, subject to the satisfaction of customary market and other closing conditions. The Notes will be unsecured and will not be guaranteed by ILFC’s parent, any of ILFC’s subsidiaries or any third party.

Meanwhile, today is the last day in the office for Marc S. Allinson as VP Financial Services at Rolls Royce. Marc is leaving to “down-shift to a 50/50 work/life balance” – Marc will remain on the board of ISTAT and will also be doing some board work in the leasing industry. So I am sure we will all continue to see him around. Best of luck Marc!

US Airways Group has launched a $400million unsecured note offering. The senior notes are structured as a five-year bullet similar to the recent United Airways deal. This launch comes off the back of the tightening in terms and pricing of US Airways’ previously announced $1.6bn secured term loan, which is due to allocate shortly. Goldman Sachs is a joint lead on both the bond and loan transactions. Citigroup, Barclays, Morgan Stanley and Credit Suisse are also joint bookrunners.
US Airways intends to use the proceeds from the senior notes offering for general corporate purposes.
Also today, International Lease Finance Corp (ILFC) has announced a $550 million senior unsecured floating rate note offering. The notes have a three-year tenor and are non-call life. The transaction will not grow and is targeting completion later today. ILFC intend to use the net proceeds from this offering for general corporate purposes, including the repayment of other existing indebtedness and the purchase of aircraft.
Goldman Sachs is left-lead bookrunner on this transaction. Joint bookrunners are Bank of America Merrill Lynch, Deutsche Bank, Citigroup, Credit Suisse, JP Morgan, UBS, Morgan Stanley and RBC Capital Markets.
Floating rate note issuances are rare for the aviation market but initial reports suggest this issuance is being very well received by the market.

Shares in Singapore Airlines fell 4.54% on the Singapore Stock Exchange following on from falls on Friday after its fourth quarter operating losses widened and the company issued a warning for its current financial year to 31 March 2014. SIA operating losses widened to S$44.2 million ($35 million) in the three months ending March 31 from S$5.2 million for the same period last year. Net income was S$68.3 million for Q4, compared with a S$38.2 million loss a year earlier on the back of aircraft and engine sales.
The fact is that SIA is in the same situation that the European majors found themselves in some years ago with the Middle Eastern airlines attacking long haul routes while LCCs attacked the short-haul market. Therefore we are able to argue that the mighty SIA has no real excuse not to have got itself into good shape by now. The European majors had all of this fall upon them at breakneck speed while governments propped up smaller national airlines to ensure overcapacity reigned. The EU majors have been racing to catch-up ever since, but SIA has seen the very same situation develop in slow motion on its core routes. So at risk of being deleted from the party invite lists at SIA we have to ask – What have management been doing all these years? The answer is they have been distracted from the main brand by the development of an LCC-feeder network through Scoot and Tiger. SIA has a surplus of crews and a surplus parts inventory – it is carrying more than it should be and claims that all this is “temporary” over the past two years have worn all too thin. The worry for many is that SIA has no room to cut costs by any great margin – this is wrong, there is a great deal of fat that can, and should have been, shed by now.
SIA shares falling by 4.5% means that for the year it is showing a gain of 1.7% to date against an 8.9% gain for the Straits Times Index. You can write that up as terrible or you can state the truth which is that the stock is correcting. SIA has been riding high on reputation alone for some time now and all the while passenger demand has been flat at best. At the same time SIA has been increasing capacity while fares have been falling
Falling prices, increasing competition, increasing capacity and flat demand – the confluence is toxic, but SIA has the strength. SIA is holding on in core markets well with 78.6% load factor from 77.6% last year. The problem is with passenger yield falling to 11.2 Singapore cents from 11.7 cents and cargo yield falling to 33 cents from 35.2 cents.
I would argue that the full effect of recent market moves in the APAC region are yet to be seen by SIA and the increased Qantas/Emirates competition will be interesting to watch out for. The fact that Chinese airline combined profit fell 30% year on year to ¥1.4 billion ($227.92 million, $1 = ¥6.14) in April is another good gauge that an economic slowdown and the new strain of bird flu has cut demand for air travel in the region. In fact Chinese airlines made a combined gain of ¥1.6 billion on FX fluctuations – take that out of the mix and you get the real picture within China and that will filter through the APAC region over the coming months.
SIA must reduce costs across the board at the main brand to remain a regional market leader.
SIA has 57% of its fuel hedged at $119 a barrel for the current year and also has 19.9% of Virgin Australia which in turn holds 60% of Tiger.

Meanwhile look out for Sri Lankan Airlines. It has sought regulatory permission from local government to purchase aviation fuel from Singapore. If this is granted it will cut their overall cost base by a double-digit margin.

The European Commission is considering fining and even barring from European airports, ten Chinese and two Indian airlines that are yet to comply with rules aimed at regulating emissions. The fines are not going to be large in any event but this is a warning message.  The carriers have not provided emissions data to the EU by the deadline. The volumes of carbon dioxide that the European Commission said the ten carriers emitted in Europe last year was comparable to the emissions from burning about 130 rail cars of coal.

The European Commission confirmed that during the first year of emissions responsibility, in accordance with the provisions of the “stop the clock” decision, aircraft operators may limit their responsibility for 2012 to flights within Europe only, in which case they may also take a further step by 27 May to return free allocations for flights outside Europe. It also stated that “All cases of non-compliance will be examined by the competent authorities of the responsible Member States in accordance with established procedures.”

The message is clear. China, India and others can tell their airlines not to comply with the EU ETS but at the end of the day it is EU airspace and they can bar airlines from flying in. Airlines across the globe are being caught out now as they were under the impression that this was a government-to-government issue. Home governments outside of the EU might have given that impression with threats of trade wars etc but in fact the EU has always stated that this is an airline issue. The Indian government told Air India and Jet Airways not to file any data to the EU on carbon emissions, now they face a fine and a possible ban. 

The EU ETS is a mess and it does little to cut carbon emissions. The fact is the 192-member countries of the UN need to get their act in gear fast as carbon dioxide is currently topping 400ppm on the Hawaiian Mauna Loa scale (the best measure). This means that the rate of increase is now 2.1ppm per annum, three times faster than the 1960s. This news I am afraid all but confirms that we will not be able to keep global warming below 2 degrees C and at current rates we will hit 450ppm by 2037. So we are in real serious trouble. We need to start lobbying to have any aviation emission scheme channelled into R&D for low emission technology, as does power generation and shipping. Governments cannot keep throwing the money into a budgetary hole and then lambast transportation which keeps the tax receipts and the global economy flowing. I hope that at Paris next month senior aviation figures will be brave enough to bring this issue to the fore in simple but strong terms for the masses.

Meanwhile – Beware all lessors, remarketers and suppliers: The US government yesterday blacklisted Syrian Arab Airlines – deal with them at your peril. 

The European Commission raided the offices of BP, Royal Dutch Shell and Norway’s Statoil, as well as the oil-price reporting firm Platts, which administers the Brent oil contract of several oil industry-related companies, on May 14 as part of an investigation into possible petroleum price fixing.

In a statement, the Commission expressed its concern that “the companies may have colluded in reporting distorted prices to a Price Reporting Agency [Platts] to manipulate the published prices for a number of oil and biofuel products” and the companies may also “have prevented others from participating in the price assessment process, with a view to distorting published prices”.

The prices assessed and published by Price Reporting Agencies, such as Platts, serve as benchmarks for trade in the physical and financial derivative markets for a number of commodity products in Europe and globally. Even small distortions of assessed prices may have a huge impact on the prices of crude oil, refined oil products and biofuels purchases and sales, potentially harming final consumers.

The Commission issued a very stern warning to the companies involved that if any such behaviour is established, it would “amount to violations of European antitrust rules that prohibit cartels and restrictive business practices and abuses of a dominant market position”. It added however that unannounced inspections are a “preliminary step to investigate suspected anticompetitive practices” and such inspections “do not mean that the companies are guilty of anti-competitive behaviour nor does it prejudge the outcome of the investigation itself”.

During the raids in the EU, Commission officials were accompanied by their counterparts from the relevant national competition authorities. In the EEA Member State, Commission officials accompanied their counterparts from the EFTA Surveillance Authority and from the national competition authority.

There is no legal deadline to complete inquiries into anticompetitive conduct. Their duration depends on a number of factors, including the complexity of each case, the extent to which the companies concerned co-operate with the Commission and the exercise of the rights of defence.

A Royal Dutch Shell spokesperson said: “We can confirm that Shell companies are currently assisting the European Commission in an enquiry into trading activities” and that it is “fully cooperating with the investigation”.

BP also stated that the company was “cooperating fully” with the investigation.

Statoil’s Stavanger office was inspected by the EFTA Surveillance Authority (ESA) and the Norwegian Competition Authority (Konkurransetilsynet) for the European Commission. Statoil stated that it is “cooperating with the authorities in their inspection”. The company statement added that the “suspected violations are related to the Platts’ Market-On-Close (MOC) price assessment process, used to report prices in particular for crude oil, refined oil products and biofuels, and may have been on-going since 2002”.

Platts too has commented that “the European Commission has undertaken a review at its premises in London this morning in relation to the Platts price assessment process” and that
“Platts is cooperating fully with the European Commission’s review”.

Robert Martin, Rich Wiley and Peter Barrett all took to the stage at ISTAT Asia this week and reiterated that airlines will become operating lessors. The conversation that has been on going now for many years, with airlines such as Jet leading the way and doing well, was given fuel once again by comments recently that Lion Air will build a leasing venture. Of course Lion Air would have to say that as at the moment everyone is questioning what it plans to do with 469-odd aircraft on order.
Although it is true to say that airlines have all the various pieces in play to become operating lessors on an ad hoc basis at any time with relative ease subject to third party support in most cases, it is also true to say that Lion Air, in stating that part of its giant order book is for an operating lessor venture, is confirming that it has gone down the road of speculative aircraft order. Now that is one dangerous business plan in this market.
The real worry for lessors is the fact that large ad hoc orders of aircraft for leasing purposes means lease rate pressure down the line. So there is a niggling worry for many lessors today across the globe about orders such as that for Lion Air as there is a question mark over the future of lease rates on the types it has on order, especially the A320 and A320neos & A321neos. Those worries will remain until we all know for sure what Lion Air is going to do with the orders – if indeed it takes them at all. Will there be a flood of certain aircraft types on the leasing market in the near future – The answer is yes if Lion Air is indeed being sincere in its recent statements.
In related news: Air India CMD Rohit Nandan today announced that the airline is set to replace its eight 777-200LRs as the 787 is introduced saying that it will either sell or lease the 777s with the help of Boeing Capital.

International Airlines Group (IAG) has issued €390 million convertible bonds, maturing on May 31, 2018 to fund it acquisition of Vueling. The bonds will accrue a fixed rate of interest of 1.75 % per annum, payable semi-annually in arrears. Equal installments of interest will be payable on November 30 and May 31 each year, starting on November 30, 2013
The conversion price has been set at €4.2503 per ordinary share, which represents a premium of approximately 35% over the volume weighted average price of ordinary IAG shares on the London Stock Exchange from launch to pricing.
The net proceeds of the offer will be used by IAG to fund its acquisition of Vueling, enhance liquidity and lower its cost of capital.
IAG anticipates the bonds to be admitted to the Official List maintained by the UKLA and admitted to trading on the Professional Securities Market (PSM) of the London Stock Exchange.
Subscription and payment for the bonds will take place on the closing date, which is anticipated to take place on May 31, 2013, provided that certain conditions precedent set out in the subscription agreement have been fulfilled.
Banco Santander, Barclays, Deutsche Bank AG, London Branch, Morgan Stanley and UBS Investment Bank are joint book runners and joint lead managers

Meanwhile, Hawaiian Airlines has announced its inaugural $444.540 million EETC. Citi is acting as Sole Structuring Agent and Joint Bookrunner. The transaction consists of $328 million Class A notes, with a 12.6yr tenor and 9yr weight annual life, rated Ba1 from Moody’s / BBB+ by S&P / A- by Fitch, with a 52.8% initial/max LTV. The Class B notes total $116million, with an 8.6yr tenor and 6.9yr WAL, the notes were rated B1 / BB- / BB with an initial/max LTV of 71.5%.
The collateral consists of six new Airbus A330-200 aircraft.

Right here in November 2012 and in the 2013 forecast in December 2012 we told you that thing to look out for in 2013 was the spread of the novel coronavirus infection. Then in March 2013 upon the news that bird flu was taking hold in the Shanghai area we advised people again to drop airline shares, ETFs etc.
Now this last weekend, the WHO report confirmed that the novel coronavirus infection can indeed spread from human to human, something that the scientific community had stated was the case back in November 2012 (which we looked into). Upon this news both IAG and Air France-KLM shares fell by over 4% in trading this morning with Lufthansa falling 3.5%. For IAG it was the most significant drop since April 5th when bird flu hit the press.
Now what we stated in December 2012 here and what remains the case is that the Middle East is the hub of this novel coronavirus infection and the most recent case in France once again involves a person recently arrived from Saudi Arabia. It is now known that 34 people have contracted the virus with more than half of this number being fatal cases.
The reason why this weekend’s confirmation is so significant is because it confirms that a person infected with the novel coronavirus can indeed pass it on to others on an aircraft and that the confinement of an aircraft would indeed be one of the best methods for the virus to spread. Of course our interest initially last year on this matter was due to the fact that Coronaviruses are a family of pathogens that cause illnesses ranging from the common cold to Severe Acute Respiratory Syndrome, or SARS which affected some 8,000 people and killed 774 in 2002 and 2003.
Any mention of SARS and/or bird flu, more than anything else, can crush airline stocks and indeed can affect non-essential passenger transits. The fact that the Middle East, with its large hubs, large ex-pat population and fragmented health services, is at the centre of this outbreak increases the concern.
If this outbreak continues to gather pace then we have to ask – Can the already weak European airlines and new APAC low costs handle the hit? The answer for a great swath of flag carriers and regionals must be no. The setback for the giants in the middle of cost cutting programs and re-fleeting will be significant. Even the plans of the mighty US airline market may need adjustment.
Let us hope that I am verging on the side of melodramatic but come what may we can all agree on one thing – When it comes to the markets it is the thought of what could be and not what is that rules the day and nothing does it quite like the mention of SARS.