Interesting airline observations

Dino D'Amore
By Dino D'Amore August 14, 2015 16:22

Interesting airline observations

There is so very much going on across the globe that it is easy to lose sight of those airlines that deserve particular attention at this time, namely: Jet2, Tui/Thomas Cook, AirBerlin and AirAsia X. The latter two airlines have been on a watch list for at least 24 months, but with regard to Jet2, Tui and Thomas Cook, it must be remembered those airlines are taking a hit during this peak period from the loss of a great deal of North African business due to terrorism, while on top of that, they are losing business through the fact that Sicily along with Kos, Lesbos and many other Greek islands are now overrun with migrants, which is deterring tourists.

For Air Berlin on the other hand it is a matter of turning the long corner into the black, but it has its work cut out to survive. The airline reported today a second-quarter net loss of €37.5m ($42m), from a loss of €8.6m for the same period last year. The first-half net loss was €247.6m from €201.2m for H1 2014. All the while Air Berlin continues to miss the benefit from lower fuel prices as it is being offset by fuel hedging and USD currency losses.

Second-quarter revenue actually fell 7% to €1.07 billion, as capacity was cut by 7.1% pushing yield up 0.7% to €119.8. While revenue for the first half fell 2.3% to €1.87bn.
CEO Stefan Pichler stated: “We are optimistic about the outlook for the second half of the year. I am convinced that Air Berlin is well positioned, thanks to the efficiency improvement measures we have introduced. [In the future] Considerable improvements in yield, capacity utilization and RASK are expected.”

There is a fair bit of red ink to be seen on the Air Berlin books yet for this year but were it not for the fuel hedging loss, the airline would have been moving into the black. Although there is a way to go yet in rehabilitating Air Berlin, there is cause to hope that things are moving in the right direction. That said, you cannot ignore the fact that this low cost airline is slowly being surrounded on all sides by Wizz, Ryanair, easyJet and NAS and now perhaps most worrying of all Eurowings is starting to emerge as a real competitor following the very big hit it took after the French alps mass murder by one of its co-pilots flying under the Germanwings brand, a story that may yet damage the newly branded airline as the class action in the USA takes form. Even so the bottom line is that Air Berlin needs to be in a position to compete against these brilliant low-cost powerhouses that surround it. We should wonder if that is possible given the rate of expansion by its rivals. Air Berlin is not able to fight rivals on price or offering while it is in the red, as such until the carrier is able to state how it is going to carve out a sustainable core market we have to ask: Should investors (that include the Etihad – The white knight) be worried? We all know the answer is: Yes.

Meanwhile, we have been far harsher than most when it comes to AirAsia X over the past few years and unfortunately this manner continues to be fully justified: AirAsia X has provisionally reported a massive 20% year on year fall in Q2 2015 passenger traffic and a 12% fall in average load factor to 68%, 12ppts lower year on year from 80% (that is a very bad statistic for the airline), meaning the airline is hemorrhaging passengers well in excess of cuts in capacity. The airline carried 811,000 passengers in Q2 2015 from over 1m in Q2 2014, while capacity was cut from 1.26m seats in Q2 2014 to 1.21m for the reported period. The airline actually increased the size of its fleet during the reported period from 20 to 26 A330-300s, which have been put to work logically on short-term lease and charter agreements, that dynamic approach to utilize aircraft deliveries and gain US Dollar revenue during a lean period is perhaps the only silver lining on the books at this time.

AirAsia X blames MAS for its woes, stating that MAS is slashing prices on competing routes, which it is, but AirAsia X is supposed to be a low-cost operation that should be able to blow MAS out of the water on price-point. The airline has had to compete under the shadow of the Korean MERS outbreak during the reported period, sure, but silly things such as the failed Melbourne-Bali route lunch are showing us once again that the airline is not trying to connect the AirAsia dots but is more concerned with doing its own thing without the support of the various AirAsia airlines feeding it. This is the reason for the failure to date. Should investors be worried? With shares down over 63% so far this calendar year and a huge 72% over the past 12 months, there is no doubt that private shareholders have little choice but to stick it out. They would be forgiven if they took flight that is for sure, however with the correct management this airline has everything required to be a success. It just needs to connect the AirAsia airlines across South East Asia so the many parts start to feed each other as they should have done from the very start – it is not rocket science. If, however, AirAsia X has another quarter/half like this one with more routes trying to be added that make no sense at all, the only possible advise has got to be to pick up the phone, sell off, take a drink and do what so many passengers have done of late – walk away from AirAsia X. I hope I am wrong.

To finish off this week where most of you reading this are not in the office, another interesting dimension in play at the moment concerns US airline stocks. You may have noticed of late that US airline stocks are no longer rallying in line with fuel price falls. Many airlines remain caught paying fuel hedging costs fuel cost per mile flown ranged lower by 20% to 45% during Q2. This shows that investors think that fuel savings will be offset by lower ticket prices due to overcapacity fears, which to date have not been universally justified. In fact it is the case that most US airlines will offset rising labour costs with fare increases which should leave fuel cost savings on the balance sheet.

Dino D'Amore
By Dino D'Amore August 14, 2015 16:22