Outlook for All Airline Sectors Hurt
Click here for more news / Clique aqui para mais notícias
By Adrian Schofield
The airline industry is in precipitous decline—across all regions and categories, from the low-cost carriers to the legacy giants. Even the success stories are doing little more than treading water.
This is the stark picture that emerges from Aviation Week’s 2009 Top-Performing Companies study.
Survival was the theme last year, and it appears even more relevant today. As bad as the problems were 12 months ago—led by soaring oil prices—they pale in comparison to the demand slump airlines are now battling. Average TPC scores for the three major regions have dropped sharply (see graph, p. 48), indicating a downturn that is both broad and deep.
Reflecting the changing nature of airline challenges, the TPC metrics place strong emphasis on liquidity. This is the factor that the TPC Council of Advisers agrees will best determine which airlines come through the current downturn relatively unscathed. But liquidity alone will not be enough: Investment strategy will play an equally important role. While risky, expansion through acquisition can still work if it is done right.
Unlike past TPC studies, no common trend can be gleaned from the first 10 airlines in the mainline/legacy category. The top of the table features a broad mix of geographic locations, sizes and airline types. This underlines the lesson that no part of the world is immune, and no business model is a magic formula in this environment.
Looking at the full list of 32 major carriers, almost all saw a drop in total score. The only two that increased were Hawaiian Airlines and LAN Airlines. Hawaiian was a rare bright spot among the U.S. carriers, which are predominantly clustered in the bottom half of the table. While all regions saw a similar decline in average score, European airlines as a group were still relatively healthier than their Asia-Pacific and North American counterparts.
Singapore Airlines (SIA) is the top performer for a fifth consecutive year. However, some worrying signs are emerging even for SIA. Its total score plummeted nearly 20%, and the carrier recently recorded a rare quarterly operating loss.
The industry downturn has hit Asian airlines the hardest, and the increasing threat from local low-cost carriers is also counting against the Asian legacies. Almost all have dropped in this year’s rankings. The TPC panel believes the business model of airlines such as SIA—previously a strength—could now pose a problem.
SIA and Cathay Pacific are both based in relatively tiny markets and rely heavily on connecting traffic, says TPC adviser George Hamlin. Their home markets do not provide them with a solid demand base when long-haul connecting traffic faces more competitive pressure.
Hong Kong-based Cathay is faring particularly badly, falling from the fifth spot in last year’s study to 18th this year—with one of the largest total point declines of any major carrier (last year’s rankings have been adjusted for new scoring methodology). Cathay faces the problem that Hong Kong has become less important as a gateway to China—and between China and Taiwan—as other entry points have become more prominent.
Craig Jenks notes that SIA is in a somewhat comparable position to that of Swissair in the 1990s. Swissair was a very successful airline with strong liquidity, relying on a connecting hub in a small home market. But an aggressive strategy of investing in other carriers helped drag it down, and the airline collapsed in 2001.
While Jenks is not predicting the demise of SIA, this is a cautionary tale. As with Swissair, SIA has minority stakes in other airlines but lacks outright control. Regulators in nations such as India and China have imposed tougher acquisition hurdles for SIA than Swissair faced in Europe, for which the Asian carrier may now be thankful.
SIA is “trying to figure out a global strategy,” Jenks says, in terms of its significant investments in other entities as well as its own operations. But it has proved to be a well-managed company in recent years, and Hamlin believes the airline has plenty of opportunity—and liquidity—to adjust successfully. For example, SIA has an order for 20 Boeing 787s, which will help it take advantage of point-to-point opportunities that emerge with greater market liberalization in Asia.
Second-ranked Lufthansa is another example of an airline that is using a strong liquidity position to pursue an ambitious investment strategy. However, the TPC advisers are much more optimistic about its success. Since its acquisition of Swiss International Airlines (the successor to Swissair) in 2005, Lufthansa has this year won regulatory permission to take over Brussels Airlines and purchase a controlling stake in U.K. carrier BMI, and it is also attempting to purchase Austrian Airlines.
The advisers concur that although there is a large element of risk, Lufthansa’s acquisitions should help it in the long term. This is another airline that is “extremely well managed and extremely savvy,” says Jenks. Michael Dyment says the carrier “has a war chest it can tap without stressing its balance sheet, and it sees this economy as an opportunity to do things outside of Germany.”
Air France-KLM and British Airways have not performed as well as Lufthansa. Air France is ranked about mid-table—the same as last year—and British Airways fell well down the list. Both, however, are also active in investing outside their borders. Air France-KLM has purchased a 25% stake in Alitalia and wants to buy into Czech Airlines, while BA is pursuing a merger with Iberia.
Christian Torrego says the main European theme is obviously the increasing dominance of the three giants. Various mergers could create a concentration of hubs in a small area, and this could lead to a rationalization of the hub structure in Europe. Hubs that were previously competing could operate in a more complementary manner within a merged network, he says.
In general, the future looks good for the larger airlines. But what are the ramifications of consolidation for the smaller European mainline carriers? They do not appear to be faring well in the downturn. Airlines such as Iberia, Aer Lingus and Finnair were some of the star performers in last year’s TPC study, but they have all dropped this year.
“The natural advantages [of the giants] are coming into play, and the smaller carriers are being marginalized,” Hamlin says.
Torrego notes that many second-tier airlines operate in particularly dire economies such as Ireland’s and Spain’s. They also tend to be based on the fringes of Europe, which makes it tougher to win a greater share of connecting traffic.
However, one midsize carrier on the outskirts of Europe is bucking this trend. In fact, its location is proving to be an advantage. Turkish Airlines is among the most improved in terms of rankings, jumping to fourth place from 13th (see profile, p. 46). Jenks says Turkish has a strong home market in terms of traffic, and its Istanbul hub is perfectly situated for connecting flights between Europe and the Middle East.
In South America, LAN is another carrier that is expanding to dominate its region. LAN managed to increase its total score 6%, the second best improvement this year, which moved it into sixth place from 16th last year.
Raymond Neidl believes that aside from Copa—which is grouped with the low-cost airlines—LAN is the strongest of the Latin American carriers. He says LAN is becoming “one of the first truly transnational carriers.” The airline began in Chile, but has established operations in Peru, Ecuador and Argentina. Neidl says LAN’s strategy is to target markets with good growth potential, or those with weak incumbents like Aerolineas Argentinas.
For the North American majors, the TPC study once again reveals few positives. Hawaiian is the highest ranked, climbing to 11th, and saw its total score rise 40%—far and away the biggest improvement of any airline this year. Hawaiian’s first-quarter net profit of $23.5 million was a notable turnaround from a loss of about the same size the previous year.
External factors, primarily the demise of major competitors ATA and Aloha, certainly helped Hawaiian a lot. In this market at least, the disappearance of two airlines eliminated excess capacity—always the bane of the U.S. airline industry. This proves that “a rapid drop in capacity can result in an airline performing reasonably well [during a demand downturn] . . . because they regain pricing power,” Dyment observes.
After Hawaiian, Alaska Airlines and Continental Airlines are again the best of the U.S. majors. Continental relies on its Newark, N.J., hub that is the envy of other airlines that operate out of the New York metropolitan area. Its dominance there allows it to feed a wide array of point-to-point narrow-body flights to Europe. And while both are still far down the table, Delta Air Lines has jumped above American Airlines in this year’s study.
The U.S. industry has helped itself in the past year by getting serious about cutting capacity, but the TPC advisers agree that much more must still come out. Neidl says Delta has the greatest ability to implement cuts after its merger with Northwest; to a lesser extent, others could also reduce further.
Particularly if fuel prices continue to climb while demand remains weak, Neidl believes one or two U.S. carriers could disappear or be taken over in the next few years. While previously it has “seemed that airlines never die,” tight credit markets could make it difficult for them to find the financing they would need to operate through Chapter 11 bankruptcy protection.
The current leading contenders for extinction would be United Airlines and US Airways, which are lodged at the foot of the major carriers’ table. Neidl regards US Airways as being in a particularly tenuous position. The airline has limited ability to monetize assets, and it has also reached a point where cutting more mainline capacity will be tough because of expensive aircraft leases.
However, smart management teams can be found even at the foot of the rankings table, and US Airways “will not sit around waiting to get its butt kicked,” Neidl says.
Photo: Airbus
