EU on collision course with USA over Iran sanctions; people moves; Nigerian aircraft dumped at MROs; ANZ offloads its Virgin Australia stake

Dino D'Amore
By Dino D'Amore June 10, 2016 19:29

EU on collision course with USA over Iran sanctions; people moves; Nigerian aircraft dumped at MROs; ANZ offloads its Virgin Australia stake

It was stated by some airline CEOs that the corner is turned and airlines are now profit machines, this was then interpreted as a portent that operating leasing might no longer be required in the future. But it is truthful to state that while a few airlines are doing well at this time, the airline industry as a whole remains securely wedged to the fortunes of fuel, labour and airport costs and all of these are going up across the globe. In many areas it is also truthful to state that currency movement is far more damaging to the bottom line for an airline outside of the USA than high fuel prices, so the risks to the bottom line remain and for some they are far worse now than ten years ago. Take Nigeria for example: Some Nigerian airlines are unable to release its aircraft from MRO shops due to the fall in the Naira against the US dollar. The Nigerian Civil Aviation Authority (NCAA) has confirmed that about 25% of existing aircraft owned by commercial airlines registered in Nigeria are classified as AOG at this time. Aircraft are literally being grounded as maintenance fees are now so high having tripled due to FX rates and they cannot be maintained

At N361 per $1 Nigerian airlines are unable to keep their fleets maintained and with falling load factors on the back of a rapidly weakening economy it is the case that we might be seeing the death of a number of Nigerian airlines in 2016. A great shame.
So when thinking about the “new normal” for airlines, it should be remembered that they can, and will, see huge profits turn to losses on and off as the market remains proliferated and the risks to the bottom line from competition, macro-economic stability and costs remains real and as fluid as ever. So airlines will need to fall-back on lessors from time to time unless all of that were to fundamentally change. As yet, there has not been such a change over a sustained period of time save for a select band of US-based airlines, but even these will see current profit levels eroded over time as unions demand wage increases and airport fees increase. This is added to fact that as sustained profits become the norm the politicians start to think about possible new taxation methods.

Indeed, IATA stated that airfares dropped nearly nine per cent in US dollar terms and are expected to drop further with oil prices remaining low.

Average global fares in reported US dollar terms (excluding taxes, fees and surcharges) have fallen by around nine per cent year-on-year to the end of March, IATA said, adding that “adjusting for the impact of earlier gains in the dollar, we estimate that airfares fell by around 5% in constant exchange rate terms in early-2016… Airfares are expected to decline further in the near future as prior declines in jet fuel prices feed through.”

Premium fares have held up better though, increasing slightly on the North Atlantic market even with NAS plying the routes.
Since March US airlines have been able to increase (and make stick) fares that more than cover any such year on year decline, but we have not seen this in any other region with Europe expected to show a marked decline in fares for 2016. In China airlines are seeing labour costs and airport fees increase rapidly but air fares have not dramatically increased and as such pressure is building in the Chinese market.

Meanwhile, Virgin Australia is set to be more than one-third owned by two Chinese companies after Air New Zealand agreed to sell most of its stake to Chinese conglomerate Nanshan Group in a deal worth $301.4 million.
Nanshan Group owns Qingdao Airlines and many thought this company might be interested in Aviation Capital Group in 2015. “We believe Nanshan Group will be a very strong, positive and complimentary shareholder for Virgin Australia,” ANZ chairman Tony Carter said on Friday.

Under Australian law, a foreign company that buys more than 20 per cent of an Australian company needs approval from the Foreign Investment Review Board, thus ANZ will sell 19.98 per cent of its 25.89 per cent stake to Nanshan Group at 33 cents a share, while HNA increases its shareholding in Virgin to 19.99 per cent.

ANZ said Nanshan intends to support the outcome of a capital structure review currently under way at Virgin. Virgin plans to meet with Nanshan representatives in coming weeks to discuss the proposed transaction, and will also consider the group’s nomination for a representative on the board.

Virgin will also issue new shares to HNA, which controls China’s fourth biggest airline, Hainan Airlines, for $159 million as part of the alliance and give HNA a seat on its board. Etihad Airways, Singapore Airlines and Richard Branson’s Virgin Group will all see their Virgin shareholdings diluted because of the share issue.

ANZ is said to be considering its options regarding its remaining Virgin shareholding.

In other news, Mahan Air will add Paris to the list of European destinations it is already serving, including Athens, Copenhagen, and Dusseldorf on June 20, 2016 but Mahan Air is on the US Treasury’s Specially Designated Nationals (SDN) list. According to the Treasury’s Office of Foreign Assets Control (OFAC), Mahan Air has moved troops and equipment for the Iranian Revolutionary Guard Corps and has provided support and transport to the Assad regime in Syria. US nationals are prohibited from any transactions with an SDN, on the other hand non-US nationals who transact with SDNs may themselves become subject to US sanctions, either as so-called sanctions evaders or as SDNs and have their assets frozen with banks and other businesses will then be unable to deal with them.

It remains to be seen if Capitol Hill go after Charles de Gaulle airport owners Paris Aéroport, a public-private partnership that is majority-owned by the French Government, and potentially other airports along with all the ground handling companies.
State and privately-owned entities within Europe are right now openly contracting with a known SDN. These are large companies in full awareness of the status of the airline. Is the OFAC going to uphold its sanctions list and go after these companies as it did in 2015 for those selling parts to Mahan Air or is it going to turn a blind eye?

No wonder banks are worried about financing aircraft going into Iran. OFAC has the power and the mandate to at any time to turn around and cripple these large EU-based airport operators and ground handlers etc. After the US election that might well be just what they do if the new Oval Office incumbent is so inclined. This is a minefield.

And finally, as the Lufthansa CFO leaves (see news below) we also learn that Nico Bezuidenhout has resigned from Mango to take up the post as CEO for FastJet. Bezuidenhout said: “Whilst it is truly an emotional period for me and an emotional experience to be leaving Mango, I do so comfortably knowing that there’s team of professionals and committed individuals at Mango.”

Dino D'Amore
By Dino D'Amore June 10, 2016 19:29