What full-service-airlines need to do to survive

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FOXTROTS

Fox – sly.  Trots – left-leaning (Trotsky) plus its more insalubrious meaning.

Foxtrots – leading the industry in a dance.

 

Airline Strategy

What full-service-airlines need to do to survive

 

This White Paper is addressed to what we call Airline Groups (AGs). To match our proto-definition/requirement for an ‘AG’ an airline or group needs to:

 

-Be an FSA*. Independent NFAs* and possibly LCAs* need not change their business model.

-FSAs or groups built around an FSA should be a certain size – around 50mn seats sold annually as one initial measure.

-Comprise at least three airlines, preferably of different types – FSA LCA NFA. Hybrids don’t count.

 

 

The alternative is to abandon the FSA model and operate as LCA and NFA, or NFA alone. But we cannot see airlines such as Lufthansa doing that, and there would be many complications anyway. But we believe that in broad terms the FSA and LCA business models are under threat, and possibly may not survive (in an open market).

 

There seems to be only one airline that has made that transition, almost – Aer Lingus, now part of ICAG. Presumably, up against Ryanair in its home market, it realised there was not much else it could do. It could not beat Ryanair (so far, no airline has), so it had to follow the businessplan.

 

The list of FSAs that have launched or bought NFAs that have eventually failed is long. It includes Alitalia, British (two; today, the group of which it is a part has two [different] NFAs), Delta, Iberia, Lufthansa, SAS, United.

 

The Asia Pacific region has a better record. Launched and still flying are NFA subsidiaries of All Nippon, Japan, Qantas, Singapore, Thai.

 

We believe the problems of those FSAs that have opted out will soon become apparent. Take the Cathay Pacific group . It has a LCA, Dragonair, but does not operate it as an LCA – notably by not allowing Dragon to operate alongside Cathay on some routes. And resisting the need to establish an NFA. We believe that in the next 1-2 years Cathay will need to change its strategy.

 

Obviously we cannot know what it will do – either establish its NFA, or expand Dragonair as an LCA to operate an any routes where the market needs it, even if also operated by Cathay. In such cases, Cathay would have many choices. On a specific route, it could maintain its capacity and let Dragonair take the growth traffic. Or reduce its capacity to that it decides is the market requirement on that route for an FSA.

 

Our list of FSAs or FSA AGs excludes not only some below our 50mn minimum seat sales, but some bigger ones – most notably the world’s three biggest NFAs, in order, Southwest, Ryanair, Easyjet. And all China-based airlines, and others in the US such as Delta.

 

We exclude China because the airlines but more importantly the administration of airlines in China (controlled by a slightly-reformed communist-era bureaucracy, CAAC) does not clearly define what airlines can and cannot do. And sometimes, surprisingly, still does not have full control over them.

 

In the 1980s CAAC defined which airlines could be created (such as Air China out of its own CAAC Beijing flight-operating division), but even at the beginning of those reforms, the group of airlines that began operating were never what CAAC ruled they should be.

 

We exclude the US because all airlines are primarily US domestic, and rules are different (and light) that our AG businessplan is not relevant there.

 

Our list then:

 

 

Air Asia, AAAG.

Comprising partly-owned airlines under the AA name in India, Indonesia, Malaysia, Philippines, Thailand, with one planned for Japan, plus a medium-haul airline AAX.

 

AAAG is not included in our AG strategy in that – apart from the AA launch airline in Malaysia – all are subsidiaries of that launch airline, and all are NFAs.

 

 

What to do:

Nothing. AAAG is following a different businessplan with minority ownership shares – which has different criteria.

 

 

 

Air France-KLM, AKAG.

Comprising AF, KLM, Hop, Transavia.

 

Almost right. AKAG has AF and KLM as FSAs, Hop as (almost) LCA, and Transavia as NFA. Perfect as far as names are concerned, and in this way, to use the ‘Air France’ name below ‘Hop’ in Hop’s logo is good.

 

Its proper name is actually HOP!, but we change this because it is editorially awkward.

 

The problem is that Hop is not operating alongside AF as a LCA – AF on some routes, Hop on some, both on some. Today, Hop is a lower-cost replacement for AF in the (France) cities where AF can no longer afford to operate. That said, Hop’s fares are too low – almost at NFA level – although it offers, and promotes, a service matching AF’s. That is financially foolish.

 

KLM is something of a problem in all this strategic rethink – in that it is doing well. Nevertheless, there are some routes where Hop should be operating instead of KLM – although Hop is AF’s subsidiary, not AF-KLM’s. (Don’t ask.)

 

Hop’s business results are unknown. We believe they are combined with AF’s to hide any weakness – although AF is also weak now and Hop may actually be performing better than its parent. Be-that-as-it-may, we are surprised that investors do not require AF to at least break out Hop’s traffic figures.

 

AKAG’s Transavia NFA is doing well. Is AKAG doing with Transavia which AF unions said it could not – grow Transavia into a Vueling-type airline? And pulling AF out of trouble (KL is ok)? Transavia is still small – under half the size of Vueling – but its +19% H1 is unheard of at AF, whose calculators we thought stopped at +5%. Transavia’s share of the AF-KL group total is already 13%.

 

 

What to do:

AKAG needs to expand Hop to operate on other routes (short- medium- or long-haul) where profitable operation is hard, traffic is light, market is low-spend, or a new market. And not just those little local routes that it has today.

 

For instance, AF started and stopped a route to Kuala Lumpur within 12 months. Hop should have taken over from AF.

 

Also, AKAG keeps Hop out of the main hubs in France – Marseille, Nice, Paris CDG, Toulouse. But why is not Hop operating, say, Nice-Paris in competition with Easyjet rather than AF – which must be losing a lot of money on that route? And why not inter-continental flights from Marseille and Nice? Amazingly, MRS – France’s 2nd-largest city – has no US route, and from NCE only a US airline operates. And nothing from either city to Asia – giving the market to Emirates over Dubai.

 

 

 

Etihad, EAG.

In 2016, Abu Dhabi’s Etihad renamed itself Etihad Airlines Group. EAG comprises eight airlines in which it owns a share – Air Berlin, Air Serbia, Air Seychelles, Alitalia, Darwin (Switzerland), Etihad itself, Jet Airways (India), Virgin Australia.

 

Although total annual seat sales of these eight are around 120mn, EAG is not close to our definition of an AG in that all are FSAs. Some change may come from Darwin, which operates as Etihad Regional (we think its name should be ‘Union Airlines’), and thus in some way is an LCA – although it does not ‘serve’ an FSA.

 

 

What to do:

Nothing. EAG, as AAAG, is following a different businessplan with minority ownership shares – which has different criteria.

 

 

 

ICAG, International Consolidated Airlines Group.

Comprising mainly Aer Lingus, British, Iberia, Vueling.

 

Only 10% smaller than Europe’s biggest group, LSAG, in 2015, now on track to overtake LSAG this year – albeit partly because LSAG as much as ICAG is strong.

 

And ICAG has a better mix. It has two FSAs (British, Iberia), one NFA (Vueling), plus what may be considered a hybrid (Aer Lingus). AL is almost an NFA on Europe routes, but an FSA on its transAtlantic flights. Probably something must be done with this business model (hybrids do not seem to work in today’s aviation environment) although AL is currently performing well.

 

At present, Iberia is performing better than British, as Spain pulls out of its economic slowdown and the UK falls following its Brexit decision to leave the European Union.

 

ICAG does not publish all the measures we track. But we believe AL is growing at around twice the pace it was pre-ICAG, about +10%. But AL is still small; less than half the size of the group’s Vueling. And Vueling is growing faster – probably +18%.

 

That said, seat factors of both need to be improved – both are around 80%. Does this mean that ICAG does not have the management skill to run NFAs? Vueling is copying Easyjet and Ryanair and flying outside its home (Spain) base – Rome-Malta, for instance. Yet Vueling’s loads are 5-10pts lower than those two.

 

In addition, British has owned two NFAs (Go, DBA) and sold them both, and Iberia shut down its NFA (Click). Only after ICAG was formed by the merger of British and Iberia was management interested in NFAs – buying Vueling then Aer Lingus. The other factor is that if AL is, or does become an NFA – why have two NFAs when, for instance, Vueling could easily operate all AL’s intraEurope flights?

 

The big shadow over ICAG is Brexit – the UK’s decision to leave the European Union, probably in 2019.

 

If, as currently expected, the UK fails to reach agreement with the EU on a trade agreement (which includes aviation) similar to actualities today, AL might be restricted on its UK flights, British will probably be stopped from flying France-US with its Open Skies subsidiary airline (sic; yes, that really is its name). After 2019, a UK airline would likely be limited once again to flying routes just to-and-from the UK, and not third countries.

 

 

What to do:

Various options. Convert AL into a LCA (although its name may not be good for that). Or convert Open Skies (which might have to stop flying anyway after UK leaves the EU in 2019) into ICAG’s LCA. At least then its OS name may not seem quite so silly.

 

 

 

Lufthansa, Swiss; LSAG.

Comprising three FSAs – Austrian, Lufthansa, Swiss – and one unworkable hybrid, Eurowings (EW).

 

LSAG management is doing its task very well – running three FSAs and one hybrid. The problem is that task is wrong! (Somewhat like one of our corporate slogans – ‘Without The Right Analysis, More Data Just Gives A Better Estimate Of The Wrong Thing.’)

 

We are not sure that LSAG recognises its problems. Through September 2016, seat sales growth was weak for two of its FSAs – Austrian +3%, Lufthansa -1%, Swiss +1%. And EW is not yet clearly pulling LSAG out of slow growth, although its Y-Sep seat sales were +8%.

 

EW has the potential to be a LCA, but LSAG has mixed the message by adding NFA flights, holiday destinations, charters, some LH FSA replacements. A hopeless mix.

 

But as a hybrid – part FSA, LCA, NFA, and charter airline – and recently-strengthened with new routes, missions, EW should be growing faster. We think at least +10%. However, its seat factor is a low 80%. We are not sure what it should be, given EW’s hybrid status; 85%?

 

We find it hard to categorise EW but we think its businessplan will need to be rewritten (although this hybrid-EW is already a rewrite!).

 

After all, Germany has an 80mn population as a start market (so near 100mn including Austria and Switzerland). Currently, LSAG has left that NFA market potential in its three home markets to Easyjet and Ryanair. UK-registered Easyjet will probably be shut out after the UK leaves the EU in 2019 (including from its big operational base in Geneva), but LSAG should move before that.

 

 

What to do:

LSAG needs simply to make EW a LCA to support FSA flights of Austrian, Lufthansa, Swiss, whether short- medium- or long-haul. And it needs to extract from EW what was merged into it – Germanwings, a failed NFA.

 

It is important to remember that GW did not fail because of its pilot-suicide/murder crash in 2015, but because LSAG did not want it to attract passengers from Lufthansa’s own flights. If management is strong enough – for the well-being of LSAG, not just Lufthansa – then a re-launched/named GW should work.

 

Given the sad link with the GW name (following that 2015 crash), it must find another name. It should be a neutral one (rather than a link with one market, Germany), and we can think of a few – but will wait for when someone offers us fees.

 

 

 

Qantas, QAG.

QAG comes close to fitting our AG guideline, including selling (precisely, in 2015) 50mn seats. Comprising its Qantas FSA, Jetstar NFA on domestic Australia routes, and a different airline type operating as an LCA on international routes from Australia, but also named Jetstar.

 

And other Jetstars operating as NFAs. Singapore-based J Asia, J Japan (with Japan Airlines as one of its equity partners), plus the outcome of a inexplicably-bad decision – J Pacific, a domestic airline in Vietnam, despite that name.

 

JAsia sells around 4.5mn seats annually, JAustralia domestic 14mn, JI 6mn. Others are not reported – we estimate 5mn for JJ, under 2mn for JP.

 

 

What to do:

To complete its conversion, QAG needs only to change the name of its Australia-based international operation – sometimes called Jetstar International, although that JI name does not exist. And operate it properly as an LCA according to our definitions. One immediate benefit would be its Europe flights (JI has none), which QAG has abandoned to a partnership with Emirates. That agreement that is so one-sided that we see zero benefits for QAG, and all for Emirates.

 

 

 

Singapore, SAG

A badly-structured mess, comprising FSAs Singapore Airlines and Silk Air, and NFAs Scoot and Tiger. All Singapore-based.

 

As what seems obvious from running that list of its airlines, there seems little advantage in having two sets of airlines doing the same thing.

 

SAG argues that they do not do the same thing. SA is medium- and long-haul with some shorthaul routes, Silk is shorthaul routes. Scoot is short- and medium-haul (although conceived as longhaul, and still promising that), and Tiger shorthaul.

 

Yet these explanatory definitions also illustrate the duplication – which in one case has two NFAs operating on the same Thailand-Singapore route, and Tiger giving up one route, Perth-Singapore, to let in Scoot.

 

On one route – Singapore-Kuala Lumpur – SA and Silk operate as we propose for an FSA/LCA operation.

 

 

What to do:

Silk to become a proper LCA to its SA FSA, which would mean operating medium- and long-haul, not just shorthaul. And for Scoot and Tiger to merge. They are already under a newly-created division, and we believe this will eventually lead to a merger – even if SAG might not call it that.

 

 

 

Others

All small FSAs (call them SFSAs) based in the 28 markets of the European Union (UK expected to leave 2019; applicant countries are Albania, Macedonia, Montenegro, Serbia, Turkey). We take Air Malta as our example; other SFSAs include Air Portugal, LOT-Polish.

 

If these about-20 FSAs are independently-owned, they have no (profitable) future. One solution is to sell out (such as Aer Lingus into ICAG, Brussels into Lufthansa).

 

The problem is that few travellers are ready to pay their fares that are necessarily higher than the NFAs for slight service advantages (mini-frills). If the fares are not higher, then the SFSA is losing money when matching or near-matching NFA fares.

 

If the SFSA is privately owned, the owners will either shut-down or pay the cost of running a ‘trophy’ airline. If state-owned, EU rules do not allow – in most cases in theory – state financial support.

 

And SFSAs cannot match NFA cost levels because SFSAs’ cost base – as FSAs – is unavoidably higher. And fast-expanding NFAs are offering a wider choice of routes/destinations to the traveller. And thus turning yet more passengers to them, ergo away from the SFSAs.

 

For us the only other option is as follows:

 

SFSAs to provide traffic-feed flights for the bigger intercontinental FSAs into their main hubs. So for Air Malta (AM) that would be from Malta to Paris for Air France; to Rome for Alitalia; to London for British; to Madrid for Iberia; to Frankfurt and Munich for Lufthansa; to Copenhagen for SAS; to Zurich for Swiss; and so on.

 

Of course, most of these routes are already operated, as well as others – such as Malta-Lyon/Marseille in France. Those ‘others’ should continue.

 

But those main routes we listed are main departure points for most of the medium- and long-haul flights of those intercontinental FSAs.

 

These flights by Air Malta to Paris, for example, should:

 

-be frequent; at least 3 daily?

-scheduled to fit timings of flights to main medium/long-haul destinations from Malta; Malta-Paris-New York?

-be tailored to requirements of ‘receiving’ airline, such as Air France. At least on the busiest flight times. To give a crude example, a special/better meal service on the Malta-Paris flight, with croissants and a choice of French wines for example. So that ‘code-share’ becomes more than nominal. And because the idea is that AM flights would replace those of AF on the Malta-Paris route, something else; an AF stewardess for instance on each AM flight Malta-Paris?

-give loyalty-program points to the program of the ‘receiving’ airline, whether One, Sky, or Star.

 

 

AM would clearly become primarily a small feeder FSA – and that might be loss of face for the nation, even if such a sentiment should have no value in the business world. The upside is that although AM would be ‘serving’ those bigger FSAs, there would be many of those airlines, and so that would leave it some independence. And, as noted, those ‘other’ routes – Lyon etc – would continue, and more could be added.

 

To encourage AF and others to drop their flights to Malta, AM would have to be generous with the code-share financial deal. That said, those FSAs are struggling to keep/make many of their intraEurope flights profitable, and might be grateful to offload them to an airline that might be able to make a profit. (Although not if that other airline has created an LCA – the main theme of this study – to operate such FSA-unprofitable flights such as Paris-Malta.

 

 

 

‘Parent’ airline share of Airline Groups

Airline
Group Share*,% ‘Parent’
AAAG 43 Air Asia Malaysia
QAG 54 Qantas
SAG 61 Singapore
AKAG 57 Air France
ICAG 63 British
LSAG 59 Lufthansa
EAG┼ 15 Etihad

Notes: Most are TBA calculation/estimate. See text and Abbreviations at end of this report. *Of seat sales. ┼Total seat sales of EAG’s airlines, even if EAG is part-owner. Source: companies, Travel Business Analyst.

 

 

 

*Notes:

-FSA = full-service-airline. Offering first/business/economy, travel agency bookings, meals/bookings/baggage/cancellations included, etc. As its name indicates – full service.

 

-LCA = low-cost-airline. (Not a no-frills-airline; see next.) An FSA but with lower operating costs – cheaper longer-hours flight-deck crew, younger/new longer-hours cabin crew, tighter cost control (twinned 3-star hotel rooms, for instance), fewer fare types, which may have first and business cabins, and which allows bookings through travel agencies etc. If relevant, usually similar to the parent airline, but a different name, and competition against parent airline allowed.

 

-NFA = no-frills-airline. We believe that among the many essential elements that make a successful NFA are: market freedom in terms of routes and aircraft choice; single aircraft type; where relevant, competition against parent airline allowed; fares that are extremely low when booked at least three months in advance, say US$25; one fare at one time (no wholesale rates, travel agency commissions, etc); no refunds; no service frills; single economy-class cabin; paid seat selection; two toilets for 150-seat aircraft; 25-minute turnaround time; cabin crew do daytime cabin cleaning; name and flight change charged at least US$25 each; no trade shows; plenty of consumer advertising and promotion; and much more.

 

 

*Abbreviations:

AG=Airline Group, AAAG=Air Asia, AKAG=Air France/KLM, CAAC=Civil Aviation Administration of China, EAG=Etihad, ICAG=International Consolidated Airlines Group, LSAG=Lufthansa/Swiss, QAG=Qantas, SAG=Singapore.

 

 

 

 

The Fox

Remember, I’ll be famous after I’m dead.

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Thailand’s King and Kempinksi

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FOXTROTS

Fox – sly.  Trots – left-leaning (Trotsky) plus its more insalubrious meaning.

Foxtrots – leading the industry in a dance.

 

Thailand’s King and Kempinksi

An excerpt from our monthly People-in-Travel report.

 

What will happen to the Kempinksi hotel group (KHG) following the death of Thailand’s King Bhumibol earlier this month under the presumed new king, Prince Vajiralongkorn?

 

Since 2004, the company has been ‘majority-owned’ by Thailand’s Crown Property Bureau (CPB) – but still billed craftily as ‘Europe’s oldest luxury hotel group’.

 

Although not secret, the KHG/CPB link is not transparent either. The CPB does not mention KHG in its annual reports, and KHG and all other analysts/commentators note ‘majority’ but never clarify further. We estimate around 80%.

 

Despite that high share, CPB has no (apparent) representative on the KHG board, although we presume there is a strong communications channel through CPB’s management head, Dr Chirayu Isarangkun Na Ayuthaya.

 

If Thailand’s crown prince becomes king, he would presumably be a supporter, and perhaps even strengthen the link. Although KHG is registered in Switzerland, its origins were with Mr Berthold Kempinski in Germany. At one time it was owned by Lufthansa.

 

The crown prince has spent many recent years in Bavaria, and was a frequent guest at the Munich Kempinski before buying his own home in the region. That hotel is one of the few owned, rather than managed, by KHG. And KHG still has one of its two corporate offices in Munich.

 

Will Thailand’s Dusit Thani hotel group (DT) get involved again? Earlier, DT made a disastrous foray in buying around 40% of KHG in 1994 – and which seemed to us a good fit.

 

DT eventually owned 83% but with a presumed-equal partner, Siam Sindhorn. But that all fell apart in 1998 with DT selling to SS. The ownership/corporate change from SS to the CPB is a mystery, with none of the three involved – KHG, CPB, SS – offering any amplification.

 

 

 

The Fox

Remember, I’ll be famous after I’m dead.

 

TinT: Air Malta, Alitalia, Etihad

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FOXTROTS

Fox – sly.  Trots – left-leaning (Trotsky) plus its more insalubrious meaning.

Foxtrots – leading the industry in a dance.

 

TinT: Air Malta, Alitalia, Etihad

TinT (Truth in Travel) Rides Again!

 

Much has been written recently about these three airlines and their links and would-be-links. Perhaps too much. Because speculation has been so repeated, amplified, and widespread, that some have become near-truths. And the ‘truth’ almost lost.

 

Some facts and factual observations, then:

 

 

Air Malta, KM.

Almost 100% of KM is owned by the Malta state.

 

This small airline (nine A320 series; 1500 seats) is the centre of this story because it has been reported that AZ is interested in buying 49% of KM.

 

Running a small FSA in the European Union without partners is hard. And probably cannot succeed – profitably. If the airline is state-owned, and losing money – as at KM – then getting financial support is hard, almost impossible in theory.

 

Finance for a privately-owned airline in the EU is easier. But what private company would take over a tough-market lossmaking airline?

 

Ironically, AZ is one example. Most of the non-EY shareholders in AZ are (Italian) government, semi-government, or government-friendly (‘I help you; you help me’) bodies.

 

Even a partnership deal looks unattractive – partly why we were sceptical about a possible AZ/KM partnership. Malta is a small market (population 450k, outbound 430k, visitors 2mn). But, as part of the EU, it is super-served by many airlines including the EU’s heaviest NFAs – in order of ‘threat’ Ryanair, Easyjet, Vueling.

 

We can see only one solution for KM, which we laid out before. See http://wp.me/pTv9-jB 

 

 

 

Alitalia, AZ.

51% of AZ is owned by CAI, 49% by EY. Biggest shareholders in CAI-ergo-AZ are Intesa Sanpaolo, a bank, 21%; Poste Italiane 19%; Uni Credit, a (troubled) bank 13%. Other notables: Benetton 7%; Pirelli (now China owned) 3%. Air France-KLM bought 25% in 2009 but after staying out of various capital injections for AZ, their share is now down to 7%.

 

At the time EY bought its 49%, we said (paraphrased):

 

‘We knew AZ was in bad shape, and ergo probably a bad buy. Surely EY’s owner and management also knew? Did they also know it might not be possible to make it profitable? Or is EY’s Australian CEO simply on a CV-boosting ego-ride?’

 

We stick with this view.

 

EY recently complained about restricted access Linate, one of Milan’s three airports. This is a minor matter. AZ’s outlook seems hopeless until it cuts half its staff.

 

 

 

Etihad, EY.

100% of EY is owned by the Abu Dhabi emirate/state. EY calls itself the airline of the UAE. It is not; it is the airline of Abu Dhabi, one (albeit the richest) emirate in the 7-emirate UAE. (In the same way, and despite its name, Emirates is not UAE’s airline, but Dubai’s.)

 

Although running and expanding-fast what is generally considered an excellent airline, there are no clear examples to show that EY management is good at running other airlines. EY owns shares in half-a-dozen.

 

Of its two biggest: Air Berlin has just announced a downsizing that seems to be around 40%; AZ has been in trouble for at least 10 years – see above.

 

 

 

An Aside.

The pitch is often made that Malta’s visitor business needs the marketing support given by KM. It is a seductive argument, and few question it.

 

We look at Malta’s neighbouring holiday island in the Mediterranean sun, Cyprus. Its state-owned airline shut down at the start of 2015, after an EU decision that it must repay €65mn in what it found was illegal state aid.

 

In 2015 visitors to Cyprus +8.9%; Malta +6.0%. (Broadly Cyprus counts over 2.5mn visitors, Malta touches 2mn.) In 2016 YTD, Cyprus +19.2%; Malta +10.1%.

 

 

 

Abbreviations:

AZ=Alitalia, EU=European Union, EY=Etihad, KM=Air Malta.

 

*Notes:

-FSA = full-service-airline. Offering first/business/economy, travel agency bookings, meals/bookings/baggage/cancellations included, etc. As its name indicates – full service.

-LCA = low-cost-airline. (Not a no-frills-airline; see next.) An FSA but with lower operating costs – cheaper longer-hours flight-deck crew, younger/new longer-hours cabin crew, tighter cost control (twinned 3-star hotel rooms, for instance), fewer fare types, which may have first and business cabins, and which allows bookings through travel agencies etc. If relevant, usually similar to the parent airline, but a different name, and competition against parent airline allowed.

-NFA = no-frills-airline. We believe that among the many essential elements that make a successful NFA are: market freedom in terms of routes and aircraft choice; single aircraft type; where relevant, competition against parent airline allowed; fares that are extremely low when booked at least three months in advance, say US$25; one fare at one time (no wholesale rates, travel agency commissions, etc); no refunds; no service frills; single economy-class cabin; no seat selection; two toilets for 150-seat aircraft; 25-minute turnaround time; cabin crew do daytime cabin cleaning; name and flight change charged at least US$25 each; no trade shows; plenty of consumer advertising and promotion; and much more.

 

 

 

The Fox

Remember, I’ll be famous after I’m dead.

 

PAGPFT. Air Berlin surprise – why did it take so long?

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FOXTROTS

Fox – sly.  Trots – left-leaning (Trotsky) plus its more insalubrious meaning.

Foxtrots – leading the industry in a dance.

 

PAGPFT. Air Berlin surprise – why did it take so long?

PAGPFT (pronounced PAG-puffed); People Are Getting Paid For This.

We are surprised that observers are surprised about AB’s planned substantial (about 33%?) downsizing*.

 

PAGPFT.

 

Those responsible – 30% owner Etihad, its CEO James Hogan, AB’s CEO Stefan Pichler – should be smart enough to see not only that its hybrid businessplan was not working, but also that it was fairly clear that it would not work.

 

We are not wise after the event. We said in:

 

[] 2006. ‘AB’s costs are higher, and we are not yet convinced that it will survive with its current cost structure.”

 

[] 2007.

-‘We wonder about AB’s potential, now a hybrid.

-‘We asked Joachim Hunold, CEO, if he will change the company’s name (on the basis that today only 8% of its business is to/from Berlin)? “No, because when people hear the name ‘Berlin’ they think of ‘Germany’.” He is wrong; we believe most people think of AB only when they are flying to/from Berlin.

 

[] 2008. ‘We do not have great confidence in AB’s hybrid businessplan.’

 

[] 2009. ‘AB is trying to be everything – NFA┼, charter airline, FSA┼ – and which no longer inspires confidence.’

 

[] 2011.

-‘Joachim Hunold, CEO 1991-2011, has left. However, he constantly made changes to core strategy. AB has been a small FSA, a charter airline, and an NFA. It is currently all three; a hybrid.

-‘We have long criticised Hunold’s hybrid strategy as “dysfunctional”, adding “we do not have great confidence in the hybrid businessplan for smaller airlines”.

-‘Before he left, and the reason he left, Hunold cut the airline’s capacity by 1mn seats. Although that looks a lot, it is only about 3%; it sold 32mn seats in 2010. But AB’s seat factors are low, and that is bad. They were in the 70s in the first few months of the year, and although they have since increased, YTD is still only 77%.

-‘Four years ago, we noted AB’s seat factors needed attention: “AB does not follow the proven NFA business model – it offers free meals on some flights, for instance – and so these practices would increase its costs, and possibly push breakeven SF back up to near 80%.”

-‘However, AB seems have wanted to become a FSA, and it is still due to join the Oneworld alliance in 2012.

-‘AB’s acquisitions include another mixed-bag, raising questions again on strategy. They included: Niki, a failing NFA in Austria; Belair, a charter airline in Switzerland; part of Condor, a Lufthansa-owned hybrid; DBA, once a British Airways subsidiary that was an FSA, but converted to a NFA operation before being sold; and part of tour-operator TUI’s failing airline business. Will all these parts work together?

-‘Before he left, Hunold cut back some routes and hubs, to concentrate on Berlin, Dusseldorf, Mallorca, Vienna. This is still too many for a hybrid, and workable only if AB becomes an NFA-only.

 

[] 2012.

-‘AB needs help, but Etihad has no apparent expertise in solving their problems. Etihad has made no strategy-related statement on its acquisition, and its activity so far has been limited to cross-marketing activity. Given the markets involved, these seem unlikely to make any great difference.

-‘What will James Hogan, head of Abu Dhabi’s Etihad Airways, do with Etihad’s ownership of AB?

-‘He is known as a competent airline executive (despite the fact he made no impression at Gulf Air, which he ran before moving down the gulf to Etihad). And AB is in trouble – bad, as far as we are concerned.

-‘The long-time previous head, Joachim Hunold, changed the airline into a hybrid – NFA, charter, and FSA – as well as buying Austria-based Niki, which is not doing as well as it should as an NFA.

-‘Hogan has three choices, worst first:

  1. ‘Make AB a FSA feed for Etihad. That means changing its route plan so that, for instance, it could feed from all European Union markets into Abu Dhabi for onward carriage by Etihad.
  2. ‘No change, although that might mean continuing losses. In turn, that would seem a flawed idea for a costly investment, although there is ‘prestige’ in the Middle East in owning a German airline. Plus, Germany’s economy looks good, so business may get better. However, ‘no change’ must mean some tweaking of AB’s losing hybrid businessplan.
  3. ‘Replicate Etihad’s businessplan – which it had copied from neighbour Emirates, which copied from Singapore Airlines. That would involve AB feeding traffic to/from all over Europe to/from all over North America via Germany. There are a few changes needed before that can happen, the most important of which is for AB to concentrate its operations in Berlin; despite its name, it does not do that at present. But that would probably mean dropping some routes, such as Bangkok.

 

[] 2013.

-On AB’s Wolfgang Prock-Schauer, taking over as AB CEO from Hartmut Mehdorn, interim CEO 2011-3, who took over from Joachim Hunold.

-‘We interpreted that Mehdorn/Hunold change as an admission that the airline was in trouble.

-‘There is no clear indication that AB is making sizeable changes from the policies that lead it into difficulty in the first place. In general, this is its hybrid businessplan –FSA, charter airline, and still some remnants of a NFA.

-‘It has a market image that matches that structure – confused. Worse, Berlin is not really its home in the route sense. Then there is its new membership of the Oneworld alliance. That may give AB more FSA credibility, but the hard truth is that Oneworld needed a member in Germany, and as Lufthansa is a founding member of the rival Star alliance, OW had no choice.

 

[] 2014.

-‘AB’s name, because of its network, should be Air Germany. It has a reasonable network, not just within Europe, but to North America as well.’

-‘AB has major problems. Despite statements of its contributions in passengers to Etihad, in total it sold 2% fewer seats in 2013, and 1% fewer YTD-2014.’

-On AB’s Stefan Pichler new CEO, from Fiji Airways:

 

‘Before FA, he ran Jazeera, a Kuwait-based no-frills-airline that is comfortably profitable. Before Jazeera he was deputy CEO at Virgin Australia. That period was not so successful – although he was not CEO. AB says Pichler launched V Australia, VA’s failed longhaul venture, and which has now been largely dismantled.

 

‘Before VA, he headed Germany’s Thomas Cook, but was fired. At that time, TC was more closely controlled by Lufthansa – where he had also worked, including running sales and marketing worldwide.

 

‘AB credits Pichler with directing many things at these companies where he was simply one of the actors.

 

‘There are serious strategic problems for AB, and now for Pichler. Yet his operational flexibility will be limited by Etihad management.’

 

[] 2015.

-‘AB is an unsustainable hybrid operation.

-‘AB’s 2014 revenue hardly grew – +0.3% to US$4.62bn. But losses grew a frightening 31% to US$338mn. AB targets profits in 2016.

-‘The growth/profitability strategy from hereon appears to be to rely on partners, particularly Etihad and Alitalia, also part-owned by Etihad.

-‘There is no clear future for Niki, the AB subsidiary that was a NFA, but which now appears to have no place in the new Etihad-driven strategy. We presume it will be shut down, or become an Etihad regional airline, as Swiss-based Darwin (sic).’

 

[] 2016.

-‘Wizz, Hungary-based NFA but with extensive coverage in many parts of East Europe, is on track to overtake hybrid AB in 2017.

-‘Traffic for Q1 shows that Norwegian from nano Norway overtook AB from giant Germany in terms of seat sales. And it is growing faster as well – +17% against -7%’.

 

 

 

*NOTES

End-September, AB announced many changes, including:

-Pichler said restructuring was necessary due to “significant external market pressures which dictate a change to our current complicated business model”.

-Just two hubs – Dusseldorf, Berlin.

-What AB calls its ‘tourist’ operations will be moved into a new company, and presumably put up for sale.

-Reduce fleet from around 150 to 75, -50%, with around 40 A320s going to Lufthansa’s Eurowings hybrid subsidiary, with most of those on wet leases, which means cockpit crew included. That would leave AB with 17 A330s, 40 A320s. And 18 Q400s – Bombardier’s 90-seater previously known as Dash-8.

 

 

┼Our definitions:

-FSA = full-service-airline. Offering first/business/economy, travel agency bookings, meals/bookings/baggage/cancellations included, etc. As its name indicates – full service.

-LCA = low-cost-airline. (Not a no-frills-airline; see next.) An FSA but with lower operating costs – cheaper longer-hours flight-deck crew, younger/new longer-hours cabin crew, tighter cost control (twinned 3-star hotel rooms, for instance), fewer fare types, which may have first and business cabins, and which allows bookings through travel agencies etc. If relevant, usually similar to the parent airline, but a different name, and competition against parent airline allowed.

-NFA = no-frills-airline. We believe that among the many essential elements that make a successful NFA are: market freedom in terms of routes and aircraft choice; single aircraft type; where relevant, competition against parent airline allowed; fares that are extremely low when booked at least three months in advance, say US$25; one fare at one time (no wholesale rates, travel agency commissions, etc); no refunds; no service frills; single economy-class cabin; no seat selection; two toilets for 150-seat aircraft; 25-minute turnaround time; cabin crew do daytime cabin cleaning; name and flight change charged at least US$25 each; no trade shows; plenty of consumer advertising and promotion; and much more.

 

 

 

The Fox

Remember, I’ll be famous after I’m dead.