LUIS GALLEGO Halfway there in his campaign to …s3-eu-west-1.amazonaws.com/fg-reports-live/pdf/AB...

XXXXXX 2014STRATEGY FOR AIRLINE BOARDROOMS WORLDWIDESTRATEGY FOR AIRLINE BOARDROOMS WORLDWIDE

flightglobal.com/airlines

IRAN Why opportunity knocks for lessors after nation’s nuclear pact

ALLIANCES Tie-ups mature but some old friends become foes

POND LIFE How capacity shapes up across Atlantic

LUIS GALLEGOHalfway there inhis campaign totransform Iberia

INTERVIEW

SEPTEMBER 2015STRATEGY FOR AIRLINE BOARDROOMS WORLDWIDESTRATEGY FOR AIRLINE BOARDROOMS WORLDWIDE


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Welcome to Vienna: Where we fulfil your heart’s desire. The city annually greets more than 13 million guests from around the world. It is here that culture enthusiasts, innovative minds and bon vivants alight in order to discover a city worth visiting, time and again. This is a powerful recipe for success —and Vienna Airport is your host.

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HOST CLOSER TO PREMIUM GUESTS

CONTENTS

flightglobal.com/airlines | Airline Business | 5

LEADING LIGHTS page 56

DEMANDING CONDITIONS page 36

STANDING UNITED page 10

PEOPLE WATCHING page 46

VOLUME 31 NUMBER 7

XXXXXX 2014STRATEGY FOR AIRLINE BOARDROOMS WORLDWIDESTRATEGY FOR AIRLINE BOARDROOMS WORLDWIDE


IRAN Why opportunity knocks for lessors after nation’s nuclear pact

ALLIANCES Tie-ups mature but some old friends become foes

POND LIFE How capacity shapes up across Atlantic

LUIS GALLEGOHalfway there inhis campaign totransform Iberia

INTERVIEW

SEPTEMBER 2015STRATEGY FOR AIRLINE BOARDROOMS WORLDWIDESTRATEGY FOR AIRLINE BOARDROOMS WORLDWIDE



AB INTERACTIVE6 Flightglobal fleet forecast

BRIEFINGINTERNATIONAL8 Neeleman taps Europe link for Azul

AMERICAS10 LATAM stands united in rebranding

EUROPE 12 Costing out pan-European ambitions

ASIA13 IndiGo and Qatar flirt over tie-up

MIDDLE EAST & AFRICA14 Changing of the guard again at SAA

FINANCE15 Deal clears path for Iran fleet renewal

DISTRIBUTION18 Sparks fly as Lufthansa takes direct action

SPECIAL REPORTALLIANCES28 Alliance evolution Snapshot shows dynamics at play

30 After the gold rush Big three members battle tensions

36 Demanding conditions Transatlantic capacity is rising

38 Eastern opening Delta’s equity strategy in new territory

40 Alliances Codeshare and partnership developments

FEATURES46 People watching How to better manage crew costs

ANALYSIS48 Airlines see past fuel gains Profits among European

and US operators improved again in the second quarter

50 Airlines follow steady growth path Traffic among the leading operators grew 6% in the first half of 2015

51 Will entrants widen narrow focus? Ascend’s Rob Morris examines the competition facing the incumbents

52 Discerning the GDP multiplier effect Cost base and fares are key in capacity decisions

FORUM56 Leading lights Report from the Airline Strategy Awards

59 United seeks new balancing act Outgoing finance chief leaves the airline in better financial shape

FEEDBACK60 Social inception How airlines can tackle perceptions

in the era of instant sharing

COMMENT62 Divided loyalties

September 2015

Airline Business is published monthly by Reed Business Information. © Reed Business Information Ltd 2015. ISSN 0268-7615 (Print) ISSN 2059-3449 (Online). Printed in the UK by William Gibbons and Sons Ltd.

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COVER STORY20 SPANISH REVIVAL Iberia is already unrecognisable

from the ‘zombie’ Luis Gallego took

over, but there will be no let-up in his

efforts to revamp the culture

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LONDON OFFICEPhone +44 (0)208 652 3842Airline Business editor Max Kingsley-JonesFlightglobal premium news editor Graham DunnFlightglobal premium news managing editor Niall O’Keeffe

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AIRLINE BUSINESS INTERACTIVE

LATIN LEADERS HEAD TO ALTA

The movers and shakers from Latin America’s air-line industry will gather in

San Juan, Puerto Rico, in Novem-ber for the 12th annual ALTA Air-line Leaders Forum.

This, the largest event of its type in the region, will take place at the Sheraton Puerto Rico Hotel and Casino on 15-17 November. Hosted by ALTA executive direc-tor Eduardo Iglesias, the forum sets out to stimulate international dialogue to create a safer and more efficient air transport sector for the region. The event also cre-ates a platform for networking among members.

Attendees include airline chair-men and senior executives as well as leaders from manufacturers, aviation-related organisations and local airline associations. Speak-ers include chief executives from several of the region’s major air-lines as well as ALTA president

Andres Conesa and IATA director general Tony Tyler.

Flightglobal is an official part-ner of the event and the Airline Business team will be on hand in San Juan to cover all the news in three daily papers and online.flightglobal.com/ALTA

ALTA chief Iglesias hosts event

Bill

yPix

EVENTS

DIGITAL

WEBINAR

Airline executives will

gather on 30 August-1

September at the Bellagio

Las Vegas for the Boyd

Group International Aviation

Forecast Summit. Speakers

include Spirit boss Ben

Baldanza (above) as well as

the chief executives of

JetBlue, Virgin America, and

Frontier Airlines.

flightglobal.com

/ForecastSummit

FESTIVAL TIME

This year’s World Low-Cost

Airlines Congress is part of

the Aviation Festival event

taking place on 15-16

September at London’s

Business Design Centre.

Airlines include Virgin

America, Ryanair and KLM.

Other events taking place

include AirXperience, Aviation

IT Show, Air Retail Show and

Aviation Interiors.

flightglobal.com/Festival

The tablet edition of Airline Business is now compatible

with android mobile devices,

adding to existing

compatibility offered with

iPads, desktops and laptops.

Digital editions are available

every month in tablet and

print replica format. Visit the

Airline Business online library

to download your free digital

editions by signing in at:

flightglobal.com/

AirlineBusiness

Flightglobal consultancy

arm Ascend holds its latest

commercial aviation

webinar on 8 September

(14:00 GMT), where our

leading consultants will

examine the key

developments in the industry

and discuss the latest

Flightglobal Fleet Forecast.

Areas in the spotlight include

leasing markets and the rise

in lessor ownership; aircraft

values and lease rates; and

the recovery of air freight.

Our long-term appraisal

of airliner deliveries and

retirements will examine

whether demand can

justify the current and

planned production rates

as well as the outlook for

main-deck freighters.

For details on how to

register for free, visit:

flightglobal.com/webinar

FORECAST FORUM

ANDROID MOBILITY

MARKET DEVELOPMENTS

September 2015

2015 FLEET FORECASTF

lightglobal’s latest annual long-term market forecast predicts that almost 41,000

commercial jets and turboprops will be delivered over the next 20 years, worth over $2.8 trillion.

Produced by Flightglobal’s consultancy arm Ascend, the report also examines the cargo sector and forecasts that almost 2,000 passenger aircraft will be converted to freighters over the 20-year period.

The value of new deliveries is estimated using Ascend’s 2015 full-life base values which pro-vide a more realistic benchmark than the inflated list prices often used in forecasts.

Ascend also evaluates the retirement trend, estimating that around 19,000 jets and turbo-props will leave passenger ser-vice, some of which will be con-verted for freighter use.

Overall, the global commercial

aircraft fleet in service is expected to increase by 82% to 48,760 aircraft in 2034.

The forecast examines key demand drivers and predictions for deliveries by manufacturer and annual fleet growth. An in-depth commentary examines issues such as traffic growth, oil prices and aircraft financing.

More on our forecast report and a summary download at: flightglobal.com/FleetForecast

I. EXECUTIVE SUMMARY

Ascend Flightglobal Consultancy | 7

III

IV

V

II

I

VI

VIIVIII

Turboprop

Regional jet

Single-aisle

Twin-aisle

Freighter

2%(59.6)

46%

(1,292.3)

5%(135.3)4%

(122.4)

43%

(1,219.9)

Turboprop

Regional jet

Single-aisle

Twin-aisle

Freighter

2%(833)

7%(2,898)

11%(4,364)18%

(7,506)

62%

(25,354)

The 2015 Flightglobal Fleet Forecast estimates that some

40,955 new commercial jet and turboprop aircraft will be

delivered into passenger and freighter airline service between

2015 and 2034. In addition to those new deliveries, a further

1,950 passenger aircraft are expected to be converted to

freighter use over the 20-year period of the forecast.

The total value of these new deliveries, estimated using

Ascend’s 2015 Base Full-Life Values, is expected to total

around $2,830 billion. Base Values are used to estimate future

delivery values since in our view these are a more pragmatic

manufacturer list prices often used in other forecasts.

Around 16,750 passenger jets and 2,380 passenger turboprops

are expected to be removed from passenger service, with

around 1,540 of the former and 415 of the latter converted

to freighter service. A small minority of the remaining aircraft

may be converted to other non-commercial roles, but the vast

majority of the remainder is expected to be dismantled for

Some 1,860 freighters will also be retired and in total, 71% of

the next 20 years.

increase by 82% to 48,760 aircraft in 2034 including 40,940

passenger jets, 4,220 passenger turboprops and 3,600

(of 5% and 8% respectively) will see those regions remain the

key drivers for growth and new aircraft demand in the next 20

years.

Airbus and Boeing are expected to remain the two largest

commercial aircraft original equipment manufacturers

(OEMs), between them delivering an estimated 85% by value

of the world’s commercial jet aircraft through 2034. However,

demand, between them accounting for at least $320 billion of

delivery value in the forecast period.

The twin-aisle market remains the last duopoly in the

commercial aircraft sector today. Comac and Irkut are studying

a joint 300-seater programme and there is a potential $55bn

of additional deliveries forecast for new 250-300 seaters from

the mid-2020s from the existing or new OEMs in the sector.

The turboprop niche is expected to be worth $60 billion over

the next 20 years. The majority of this value is focused on

the larger aircraft segments. The 70-seat sector, is expected

to account for at least $36bn of this opportunity, with a larger

we expect one or more manufacturers to eventually launch a

product for this market.

EXECUTIVE SUMMARY

FORECAST 2015-2034 DELIVERIES

FORECAST 2015-2034 DELIVERY VALUE ($BN)

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VI. FORECAST BY REGION


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Year

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400

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1,200

1,400

1,600

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Year

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FreighterPax twin-aislePax single-aislePax regional jetPax turboprop

FORECAST SUMMARY

past 20 years and is forecast to grow by a CAGR of 1.1% in

situation, but is predicted to resume modest growth, with most

FORECAST BY REGIONAfricaANNUAL HISTORICAL AND FORECAST FLEET - AFRICA

ANNUAL HISTORICAL AND FORECAST DELIVERIES - AFRICA

ncy | 63

VIII034

034

with most

Y REGIGI

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GII III. COMMERCIAL AIRLINER FLEET TRENDS


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2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

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20142012201020082006200420022000199819961994

Regional jet Single-aisle Twin-aisle Global passenger traffic growth

% g

row

th in

RP

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-3%

0%

3%

6%

9%

12%

15%

PASSENGER JET FLEET EVOLUTION

More than 90% of historical commercial jet airliner deliveries

operation, including those built in the Soviet Union and now

the Commonwealth of Independent States, has grown by an

average of 2.9% per annum over the past 20 years (2.7% in

the most recent decade). It was only in two years, 2001 and

2008, that the numbers of in-service aircraft did not increase

resumed the following year.

Consequently, there were a total of some 19,850 passenger

jet aircraft in service at the end of 2014.

Growth rates have differed according to aircraft size, with

single-aisle jets seeing a higher growth rate in the past 10

years (3.3% annually) compared with the long-term trend

which has extended beyond North America and Europe to

risen from 60% to 64% in the past 10 years, with its share of

seat capacity rising from 55% to 58%.

to 3,770, with marginally increased growth (2.3%) in the past

10 years. The growth in seat capacity has been similar over

20 years but faster (2.5%) in the past 10, as higher capacity

aircraft have been delivered. The twin-aisle share of the jet

annually over 20 years to 3,400, driven by the rapid growth of

the 50-seaters in the mid-1990s to mid-2000s. However, this

annual growth has slowed to only 1.2% in the past 10 years

total jet numbers, in terms of seat capacity, it has remained at

8% for 10 years.

COMMERCIAL AIRLINER FLEET TRENDS

HISTORICAL FLEET DEVELOPMENT

COMMERCIAL PASSENGER JET AIRLINER FLEET TREND

Source: Ascend Fleets from Flightglobal & IATA

TRENDS

al Consultancy | 17

IIIIV

VV

III

VIVVII

VIII

2014

growth

% g

row

th in

RP

Ks

-3%%

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3%%

6%%

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h its share of

%) in the past

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s. However, this

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has remained at

DS

FlightglobalFleet Forecast2015 – 2034Independent outlook of theglobal commercial passengerand freighter aircraft market

Ascendworldwide.com

Geneva Airport

A new pier dedicated to wide-body aircraft

Geneva is famous for its unique high-yield market: an ideal mix of business people, international delegates, expatriates, upmarket tourists and a uent local consumers

o help airlines serve their customers e ciently, reliably and comfortably, Genève Aéroport is launching a new pier dedicated to wide-body aircraft

his ma or investment re ects our commitment to quality and service, international reputation and openness to the world


A350-900s in exchange for 14 A330-900neos, which Neeleman reckons will better fit TAP’s future network plans. Neeleman also announced that TAP would acquire 39 A321/A320neos.

BIG IN BRAZILThe acquisition of a stake in TAP would help Neeleman’s Azul gain a foothold in Europe – a continent that may be a possibility for Azul’s network when the airline receives the first of its A350-900s in 2017.

TAP currently serves 12 cities in Brazil, data from Flightglobal’s schedules specialist Innovata shows. The airline’s “strong pres-ence in Brazil” was a big reason behind Neeleman’s interest in acquiring a stake in the carrier, he says. TAP is the only airline oper-ating nonstop between Portugal and Brazil, offering more than 670 flights for July.

The Portuguese carrier serves 11 of the 12 cities nonstop from Lisbon, and also operates from Porto nonstop to both São Paulo

While Brazil is increasingly gripped by economic and

political challenges, fortunes are high at David Neeleman’s fast-developing operator Azul.

Interest in the carrier is strong, with United Airlines investing in Azul and Star Alliance courting the Brazilian operator. At the same time Neeleman, who launched Azul in 2008, has been looking further afield for the carrier by leading a consortium to acquire a 61% stake in another Star carrier, TAP Portugal.

In June Neeleman’s Atlantic Gateway consortium, which also includes Portuguese ground trans-port entrepreneur Humberto Pedrosa, won the race for TAP as Portugual secured an investor at the second time of asking. In August Brazil’s competition authority approved the acquisi-tion of TAP Portugal and Neele-man expects the deal to close at the end of the third quarter.

Neeleman’s involvement in helping to turn around TAP will let the Portuguese carrier and Azul work together in numerous areas, he tells Airline Business. These range from joint procure-ment of aircraft to negotiating joint contracts for ground handling, fuel, airport and catering services in Brazil among others, he says.

The two airlines already have some fleet commonalities. TAP operates an all-Airbus fleet com-prising the A320 family, A330s and A340s. Azul operates A330s on its US long-haul flights and has committed to the A320neo.

No sooner had Neeleman’s con-sortium been chosen as the win-ning bidder than plans for TAP’s fleet renewal were announced. TAP would drop its order for 12

BRIEFING INTERNATIONAL

Neeleman taps Europe link for AzulBoss looks to close deal for stake in TAP Portugal as United and Star Alliance step up interest in Brazilian carrier

GHIM-LAY YEO SÃO PAULO & WASHINGTON DC

Neeleman wants a European foothold for Azul via a stake in TAP

Jane S

hauck

September 2015

Read our 2014 cover interview with David Neeleman at:

flightglobal.com/interviews

Guarulhos and Rio de Janeiro. TAP also flies nonstop between Manaus and Belem in Brazil.

Neeleman believes there is ample potential for TAP to grow its network in North and South America, besides expanding in Europe and Africa. Of particular interest is the US east coast. “A lot of cities along the eastern sea-board have Portuguese immi-grants. There are people who want to access not only Lisbon, but also beyond the Lisbon hub to cities in Europe,” he says.

TAP now serves only Miami and Newark Liberty in the USA, while Azul operates to Orlando and Fort Lauderdale – and plans to add New York JFK in 2016.

Azul’s move comes as TAP gets a new Brazilian partner through Star Alliance’s new recruit Avi-anca Brazil, on top of its existing Brazilian codeshare partner Gol.

TAP Portugal chief executive Fernando Pinto believes there is room for the airline to work with several Brazilian carriers. Speak-

ing in São Paulo in July as Avianca Brazil formally joined Star, Pinto said TAP looks forward to the feed that Avianca Brazil will be able to provide to TAP’s network. He says TAP and Avianca Brazil will likely look at opportunities to codeshare in the future.

While Neeleman’s plans for TAP include a close partnership with Azul, Pinto suggests “that’s not a problem”, when asked about the potential conflict since Azul and Avianca Brazil are competi-tors. More partners in Brazil will “give more choices to customers”, he says.

As for the codeshare with Gol, Neeleman says that TAP will retain that partnership “for now”, but Azul will receive priority for future Brazil-related co-operation.

UNITED FRONT For its part Star Alliance sees room for second Brazilian mem-ber and has Azul in its sights. Links also tightened after Azul agreed to sell a 5% stake to Star carrier United Airlines for $100 million. Initially focusing on a codeshare relationship and fre-quent flier agreement, further down the road, an immunised joint venture is “an option”, says Neeleman – especially when US-Brazil open skies are fully implemented from October.

Despite drawing closer to United, Neeleman says there are no immediate plans to join the alliance – even though Star is known to be courting Azul.

“They are for sure,” says Neele-man. “There are no plans… we don’t see a great need for that.” ■

AVIATION PARTNERSHIP SUMMIT NH Barbizon Palace, Amsterdam29th - 30th September 2015

www.fl ightglobalevents.com/APS2015

In association with:VIEW

ATTENDING AIRLINES


LATAM Airlines Group says its new single branding is an

essential milestone in its journey to becoming a unified airline, while justifying the investment during a time of weakness in Latin American economies.

The group, which controls LAN Airlines and TAM, ex-pects to spend at least $40 mil-lion rolling out the new brand-ing across aircraft, airports and uniforms, among others, and will invest more in related ex-penditures like marketing and advertising.

LATAM declines to disclose the total it expects to spend uni-fying under a single brand.

The livery will debut on the group’s aircraft in the first half of 2016, with the branding rolled out gradually across the fleet over the next three years.

“We will keep on investing in our business [despite the eco-nomic difficulties],” says LATAM chief executive Enrique Cueto. “The idea behind a single brand is to be recognised by our passen-gers as a single carrier.”

Latin American countries have faced slowing economic growth and currency devaluation during recent months. Brazil, which LATAM subsidiary TAM oper-ates in, has been hit the hardest.

LAN and TAM closed their merger in 2012, creating Latin America’s biggest airline group, with local subsidiaries in seven countries. While the group re-

ports financial earnings on a joint basis, it still operates under separate brands in the different countries.

MORE COMPETITIVELATAM chief marketing officer Jerome Cadier says the airline group would be less competi-tive if it continued operating with two brands. He acknowl-edges that the airline would prefer unveiling the new brand-ing during better economic con-ditions in the region, but adds: “Changes are not only for good times. We see this time as a time

for opportunities.”The airline expects to launch a

new website for ticketing in 2016, at LATAM.com, as it works to bring both LAN and TAM on to the same reservations system pro-vided by Sabre. TAM currently uses Amadeus. Cadier says that all the airlines should be on Sabre by 2017.

LATAM president Mauricio Amaro acknowledges that the creation of a new branding was not easy, as the process involved “heated discussions” from both sides and each brand had evoked strong emotions. “A new

BRIEFING AMERICAS

September 2015

LATAM stands united in rebrandingParent defends timing of decision to launch single identity for LAN and TAM as region endures tough economic conditions

GHIM-LAY YEO SÃO PAULO

Rebranding followed “heated discussions”, says Amaro – pictured (second left) with (left to right) Cadier, Sender and Cueto

LATA

M

The livery will debut on the group’s

aircraft in the first half of 2016

Avianca’s chief executive Fabio Villegas will leave the

airline with effect from 2016, after more than a decade with the Bogota-based carrier.

The Star Alliance carrier says Villegas is planning to pursue other professional interests, without elaborating on his likely next moves.

He will continue to work in his current positions at Avianca

through the end of 2015 as the airline seeks a successor.

Villegas joined Avianca in 2005 as president, shortly after the airline emerged from Chap-ter 11 bankruptcy protection. The airline was then undergo-ing restructuring after German Efromovich’s Synergy Group purchased a majority stake in the carrier.

Villegas came to the airline

from a Colombian financial institution association, and had also previously worked for the Colombian government.

Villegas was named chief executive of Avianca in 2010 and subsequently led the air-line through its merger with Central American airline group Taca, which closed in 2010 to form one of Latin America’s largest airlines. ■ Villegas: Next move unclear

Avianca seeks chief as Villegas says ‘adios’

brand is a child that needs to be born. When you raise a child, you want them to be better than you,” he says.

COLOUR COMBINATIONLATAM says the new logo incor-porates the colour indigo as it was the “best of both worlds” be-tween TAM’s red and LAN’s blue. The livery will be applied to its fleet of more than 300 aircraft as they come through maintenance. “We are doing it in an intelligent way,” says Cadier.

Cadier says the group’s first Airbus A350, to be operated by TAM and expected to be deliv-ered by year-end, will feature the TAM livery rather than the new branding.

“We have a window in which any change to the livery has to be done 12 to 18 months in ad-vance,” he says.

Meanwhile TAM chief execu-tive Claudia Sender says the air-line is pushing ahead with plans for a new hub in the Brazilian northeast, despite scaling back on domestic capacity. She says it will serve as a gateway between South America and Europe. ■

Bill

yPix


Air France-KLM and Luf-thansa are taking further

steps to build pan-European operations through their low-cost brands as they continue attempts to restructure their costs on the highly competitive short-haul sector.

The SkyTeam carrier is revisit-ing its plans to develop its leisure unit Transavia outside of its home markets of France and the Netherlands while Lufthansa in August established a new subsidiary in Austria to build up pan-European operations for budget unit Eurowings.

Air France-KLM Group ini-tially proposed expanding lei-sure arm Transavia as a pan-European low-cost carrier with bases outside France and the Netherlands last summer. But it prompted a two-week strike by Air France pilots in September 2014. Management eventually droped the proposal in order to end the walkout – which the airline said had been responsi-ble for a €500 million ($633 mil-lion) drag on EBITDA – and agreed to pursue a “made-in-France” solution for Transavia’s operations in the country.

However, Air France-KLM chief executive Alexandre de Juniac on revealing wider first half group losses, said pilot union SNPL – which represents two-thirds of Air France pilots – sig-nalled at the end of June that it would be willing discuss a poten-tial expansion of Transavia out-side its two home countries.

De Junaic argues such discus-sions are “urgently” required to “boost” the establishment of Transavia as a European low-cost carrier outside its home market. He adds that the first

Transavia base outside France and the Netherlands is to be opened during the summer of 2016. However, he declines to specify potential locations or the number of such bases.

Subsequent fresh setbacks in talks reported in the French media suggest there is some way to go on the issue yet.

Transavia led Air France-KLM expansion over the summer, capacity increasing almost 8%, while overall group capacity was capped at under 2%.

Transavia’s passenger numbers increased nearly 9% during the second quarter and almost 10% across the first half of 2015.

However, Transavia’s operat-ing loss widened 17% to €75 million. Air France-KLM attrib-utes this mainly to seasonal ca-pacity changes at Transavia’s Dutch operation, which is being restructured from its leisure car-rier role to a budget model.

SPREADING ITS WINGSUnder Lufthansa’s group strategy, Eurowings is envisaged as becoming Europe’s third- largest low-cost carrier after EasyJet and Ryanair, establishing several bases across the conti-nent. This will see Eurowings merged with its existing low-cost unit Germanwings, the latter

name ceasing to be a customer-facing brand.

The first of these bases is being established in Vienna and was incorporated in August as Eurowings Europe. The unit will “serve as the starting point for further growth”, says Lufthansa.

A first Airbus A320 is to be based in the Austrian capital this winter, with a second to follow next March. Eurowings will serve Barcelona, London Stansted, Majorca and Rome from Vienna.

Lufthansa management has for some time said growth initiatives will be directed to subsidiaries such as Eurowings for as long as there is no reduc-tion in costs at Lufthansa’s mainline operation.

The group expects increased pressure from EasyJet and Ryanair in the autumn as the two low-cost carriers grow their operations in Germany.

Group finance chief Simone Menne says Germanwings’ performance over the past two-and-a-half years shows the success of the unit’s hybrid busi-ness model. The group says Ger-manwings will finish this year in profit for the first time.

However, she says German-wings’ unit costs are higher than those of EasyJet and Ryanair,

while Eurowings and sister carrier Austrian Airlines have unit costs “comparable” to EasyJet’s.

Lufthansa has also indicated it could deploy Eurowings on routes from its main hubs. Eurowings does not operate from Frankfurt and Munich, but Menne says the possibility of flights from Munich “cannot be excluded”, albeit that there are no “short-term plans” for such a move.

WHEN IN ROMETransavia and Eurowings have some ground to make up if they are to close the gap behind pan-European duo EasyJet and Ryanair. Closer behind is IAG unit Vueling, Europe’s fourth larg-est low-cost operator by passenger number, which has already expanded with bases beyond its home market – most notably at the Italian capital, Rome.

But Vueling chief executive Alex Cruz does not foresee any “Rome-style” base openings for the Spanish low-cost carrier in the next couple of years.

Cruz says the Barcelona-based carrier does not intend to make any “multiple aircraft base investment[s]” but could “open up tactically another airport or two” in Europe using single air-craft, as it has done previously at Amsterdam and Brussels.

Vueling opened its Rome Fiu-micino airport base in March 2012, and Cruz says routes there are “trading well”. The carrier is “seeing improvement on unit revenues on the routes”, espe-cially on domestic services to southern Italy, he adds. ■

BRIEFING EUROPE

Costing out pan-European ambitionsNetwork carriers Air France-KLM and Lufthansa eye expansion of their low-cost arms in battle for short-haul sustainability

MICHAEL GUBISCH LONDON

Air France-KLM is keen to push Transavia beyond its home market

Sipa

/Rex

Shu

tters

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Eurowings is envisaged as the

third-largest budget airline in Europe

9%Increase in

Transavia second quarter passengers

September 2015

Read more on low-cost carriers via our premium news service: flightglobal.com/dashboard


BRIEFING ASIA

IndiGo and Qatar flirt over tie-upPartnership talks as India’s largest low-cost airline prepares IPO prompt speculation that Gulf carrier could invest

AARON CHONG SINGAPORE

Airbus

12Cities served by Qatar Airways on

Indian sub-continent

September 2015

The home of Airline Business on the web is on the Airline Channel of flightglobal.com:


The potential tie-up under dis-cussion between IndiGo and

Qatar Airways could enable the Gulf carrier to gain a strong foot-hold in India and access to sig-nificant local traffic flows via the country’s largest low-cost air-line.

IndiGo has long been in Qatar Airways’ sights, with chief exec-utive Akbar Al Baker saying last year that he was “very interested to talk” to the Indian carrier about some form of partnership. Speculation about a tie-up has been growing since Qatar Air-ways recently dismissed talk of plans to acquire a stake in Indi-Go’s local rival SpiceJet and stated that IndiGo was the sole Indian carrier it was talking to.

However IndiGo, which is in the midst of launching an IPO, called reports of a stake sale to Qatar Airways “completely baseless”, clarifying that it was only in preliminary discussions about “potential marketing arrangements”.

Analysts say such open flirta-tion between the two carriers could result in them getting inti-mate, although chances are this will only happen after IndiGo completes its listing. In early July, IndiGo parent InterGlobe Avia-

tion filed a draft IPO prospectus, disclosing plans to raise Rs12.7 billion ($78 million) through the sale of 30.1 million shares.

RIVAL ADVANTAGEThe consistently profitable IndiGo is an attractive option for Qatar Airways, given its consist-ent performance in recent years while other Indian carriers have struggled. Gulf rival Etihad Air-ways has already gone down the acquisition path to gain access to the Indian market, taking a 24% stake in Jet Airways, and the two carriers have been working closely to align their networks.

“IndiGo is a lucrative airline after posting six straight years of profit, while majority of the Indian carriers made losses,” says Michael Hui, an analyst at Flightglobal’s Ascend consul-tancy.

He adds that Qatar could also be on a “shopping spree” after it

took a 10% stake in IAG earlier this year. Unlike Etihad, Qatar is also likely to be “more conserva-tive” with its investment, and any acquisition will likely start small in order to “test waters”, Hui says.

Rajiv Chih, director of aero-space and defence at Pricewater-houseCoopers, says IndiGo’s pri-ority is, however, getting listed, which will also drive up the value of the airline.

“At present, the IPO is of fore-most importance to IndiGo and would value [it] at $4 billion, six-and-a-half times the market value of its nearest competitor Jet Airways, and 18 times that of SpiceJet,” he elaborates. He is of the view, however, that Qatar will aim to take a 49% stake in Indigo, since it will want to have a significant say in the airline.

This corroborates a recent media report quoting Al Baker as saying: “We don’t go and just

do 5%. We would always take a bigger share.”

LACKING CODESHAREThe analysts add that a partner-ship with IndiGo will also further expand Qatar’s Airways’ reach into India, since it does not have a codeshare partner in the region.

FlightMaps Analytics from Flightglobal’s Innovata sched-ules specialist shows Qatar Air-ways flies to 12 cities in the sub-continent from Doha. IndiGo, however, does not operate ser-vices to Qatar’s Doha base, but rather to Dubai and Muscat from 11 cities in India.

Chih believes such a partner-ship would likely benefit Qatar more, as it could make Doha “the gateway to the West” by lev-eraging IndiGo’s passengers orig-inating from India’s Tier 2 cities.

Hui, however, warns of a potential stumbling block: “It will be difficult to work with connectivity between these two airlines, as one is a premium car-rier and one is a budget carrier.”

Amid the Qatar speculation, SpiceJet also rebuffed talks of a stake sale but says it is open to raising funds via an issue of new shares. Chief financial officer Kiran Koteshwar tells Airline Business that any finan-cial movement by the airline will most likely “be an issue of fresh equity”. ■

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With no clarity around any strategy for an outside

investor at South African Air-ways, acting chief executive Nico Bezuidenhout has returned to his position at the helm of low-cost subsidiary Mango. He has been replaced by the flag carrier’s general manager of human resources, Thuli Mpshe, also in the acting role.

The Star Alliance carrier says the decision was taken “follow-ing consultation between the boards of directors at both SAA and Mango”, and that it was based on “internal operational requirements within the entire SAA group”.

It adds: “He [Bezuidenhout] led the implementation of the 90-day action plan at SAA and his deployment there was always

BRIEFING MIDDLE EAST & AFRICA

Changing of the guard again at SAAActing chief Nico Bezuidenhout returns to Mango after implementing action plan but long-term investment questions remain

understood to be in an acting capacity.” Bezuidenhout added the acting SAA role to his exist-ing position as the head of Mango for the second time in as many

years in November 2014 in the wake of a board investigation into Monwabisi Kalawe for alleged misconduct. Kalawe resigned from his post in April.

Bezuidenhout immediately embarked on a 90-day plan to stem losses as the carrier’s finan-

cial problems grew critical, which put the airline back on a firm enough footing for it to final-ise its financial results and secure an additional finance ministry guarantee of R6.48 billion ($565 million). SAA is aiming to return to an EBIT profit in the next year and generate a bottom-line profit in the next five years.

Further ahead an investment partner could be an option to ensure long-term sustainability of the airline, with the Gulf carriers closely linked with interest in the southern African market.

ETIHAD OR EMIRATES?SAA has extensive codeshares with Etihad and in August signed a codeshare agreement with Jet Airways – in which Eti-had holds a 24% stake – cover-

ing flights between Abu Dhabi, India and South Africa. SAA pulled its own Johannesburg-Mumbai service in April as part of its network overhaul.

But SAA has also been linked with Emirates, with whom it already has a codeshare. Local media reports suggested that in June it pulled out of plans at the last minute to sign a partnership deal with Emirates. The two car-riers have said only talks have taken place within the context of their existing partnership.

Another South African carrier, Comair, which operates British Airways franchise flights and budget operation Kulula, earlier this summer secured an airline investor after China’s HNA Group acquired a 6.2% stake in the airline. ■

SAA has extensive codeshares with Etihad and now a

deal with Jet Airways


There’s no doubt huge poten-tial exists for manufacturers

to sell a large number of aircraft into Iran following the recent nuclear agreement between six nations – but exactly what the fleet will look like and how it will be financed is still being ham-mered out by the sector.

Iran is littered with aircraft at the end of their useful lives, as US and European sanctions – some in place since the Islamic Revolution in 1979 – have pre-vented the nation from purchas-ing aircraft and spare parts.

However, the pact that Iran, the USA, Germany, France, the UK, China and Russia signed on 14 July in Vienna would lift these sanctions – including those preventing the sale of commercial aircraft – in return for a halt to Tehran’s nuclear weapons programme.

The 160 western-built jets fly-ing with Iranian airlines have an average age of around 23 years, Flightglobal’s Ascend Fleets da-tabase shows. This compares with an average age of 10 years for the 20,500 commercial jets that are in airline passenger ser-vice globally.

Leading operators include Iran Air, Iran Aseman Airlines and Mahan Air, which between them operate more than half of the country’s jet fleet.

Iranian officials have said the

BRIEFING FINANCE

Deal clears path for Iran fleet renewalFollowing nuclear pact, analysts see leasing as most likely route for airlines looking to replace their ageing inventories

LAURA MUELLER LONDON

Mahan Air has the largest jet fleet, the bulk of which are Airbuses

Image

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September 2015

county needs to spend about $20 billion on purchasing 400-500 aircraft over the next decade to rejuvenate the ageing fleet.

However, Ascend’s head of consultancy Rob Morris suggests that this may be an overestima-tion of around 100-200 units.

“The replacement challenge is evident with largely the whole fleet required to be replaced in the next 10 years, and with some element of growth,” he says. “I’d hesitate to agree that there is demand for 400 aircraft in the next decade, but probably agree that it could be in the [vicinity of] 300 or so.”

Demand in Iran, which is in-cluded in the Middle East region in Ascend’s Flightglobal Fleet Forecast long-term outook, is “probably masked” by growth from the Gulf states, adds Morris.

By applying generic delivery values for the seating capacities

of the aircraft that need to be re-placed and estimating demand for 300 aircraft, Morris calculates that the financing required for those aircraft, based on 2015 de-livery pricing, will be in the re-gion of $18 billion.

The forecast shows the mix of regional aircraft, single-aisles and twin-aisles remaining the same as in the current fleet. That results in demand for around 80 regional aircraft, 130 single-aisles and 90 twin-aisles, says Morris.

He assumes average delivery pricing of $30 million for region-al aircraft, $50 million for single-aisles and $110 million for twin-aisles “on the basis that there will be a healthy slug of A330s in there”.

OUT WITH THE OLDThe most logical step, an operat-ing lessor argues, would be for the region to “opt for vintage air-craft and a bunch of spare parts, and ramp up almost overnight”. The lessor dismisses the pros-pect of a wave of new aircraft orders “anytime soon” – for Boe-ing at least.

Long lead-times for in-demand aircraft such as 787s and A350s

could “almost force” Iranian air-lines towards used aircraft, sug-gests another lessor.

“These airlines need aircraft sooner rather than later, so I can’t really see how they can hold out, even though the lifting of the sanctions will take time. It will most certainly have to be used aircraft, unless some slot-swap-ping goes on.”

Airbus declined to comment on what the agreement with the six nations would mean for Iran’s aviation sector, saying: “It has yet to be formalised and implement-ed. Once this takes place, we will evaluate what commercial impli-cations it has in strict compliance with the accord.”

Boeing likewise declined to comment on the implications.

Regardless of the aircraft type selected, some financiers believe leasing is the natural choice for Iranian airlines.

“I don’t see direct orders, as I imagine second- and third-tier les-sors – and those that are not pub-lic – would be very eager to put planes to work in Iran,” says one.

Leasing is the best method of acquiring aircraft when “the odds are stacked against you, as in the case of Iran”, notes a Eu-ropean banker. He adds: “Leas-ing is the first option when you need modern equipment, you have to be quick, your credit is not bankable, your capital base and funding capabilities are thin, and you have no access to export credit support.”

However, the idea that leas-ing will be the preferred option in Iran is disputed by an airline fleet planning source, who in-sists that buying the aircraft will be a priority.

“Outright purchases mean the airlines control the aircraft long term should the positive sentiment erode in the future,” the source says.

“This is extremely important as they have been flying certain aircraft since the Islamic Revo-lution, and they don’t want to be caught out again. ■

IRANIAN AIRLINES – JET FLEETS

Airbus Boeing Others Fleet total

Mahan Air 29 2 15 46

Iran Air 13 5 10 28

Iran Aseman Airlines 4 3 7 14

Zagros Airlines 5 9 - 14

Qeshm Airlines 5 - 7 12

Kish Air - 7 3 10

Iran Airtours - 9 - 9

Taban Air 2 6 1 9

ATA Air 2 6 - 8

Caspian Airlines - 5 - 5

Iranian Naft Airlines - - 3 3

Atrak Air 2 - - 2

GRAND TOTAL 62 52 46 160NOTE: Data sorted largest to smallest for western-built passenger jet fleets in service

SOURCE: Flightglobal's Ascend Fleets database

The most logical step is for the

region to ramp up almost overnight

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mover,” Schindler adds. “But we are only a first mover on the net-work carrier side – the LCCs already did [this].”

One of Lufthansa’s complaints about the existing GDS channels is that they do not enable airlines to sell and personalise all options across the travel journey.

This coincides with Lufthan-sa’s roll-out of a new branded concept for economy class on short-haul flights, split into three bundled packages offering differ-ent levels of service options.

“It’s about having the freedom of what we sell where, like other industries have. GDSs are not completely offering all the capa-bilities. We’ve had to drive that change. We pay a higher price, but we don’t get the service we need,” argues Schindler.

That addresses the other key complaint from Lufthansa: cost. With the GDS channel, “the cost is much higher than other chan-nels”, says Schindler. “From our side, we want to put them on an equal footing.”

The €16 figure is the extra amount Lufthansa calculates bookings made through the GDS cost the operator.

But emotions continue to run high in the global corporate travel community. Many industry lead-ers believe the scheme is a tactic to cut segment fees paid to the GDSs, despite the fact that airlines like Lufthansa generate most of their revenue from the channel. Others believe it is an attempt to wrestle back control of customer data by forcing them to book directly.

And there are those who con-tend the carrier is capitalising on the current strength of the airline sector to disrupt the traditional distribution chain.

Lufthansa’s move to establish an agency portal, through which bookings can be made by the TMC without incurring the tax, has done little to appease corpo-rations. Buyers and TMCs argue this does not allow comparison-shopping, ticket changes, refunds and a long-list of other standard GDS capabilities.

A number of major corpora-tions across Europe and North America have already instructed their TMCs to direct bookings to alternative airlines. While a source from one major independ-ent TMC based in the City of Lon-don says the volume of segments it is booking on Lufthansa Group carriers is already plummeting.

EXPLANATIONS WANTEDWhile consternation about the implications of the levy continues to flower, the resentment levelled at the German airline hitherto has been equally strong about the man-ner in which it was introduced – especially given that corporate travel brings the airline its highest yielding customers.

The global travel procurement

director of a major Swiss invest-ment bank – one of Lufthansa’s biggest customers – revealed he has since written to Lufthansa chief executive Carsten Spohr demanding an explanation. “I was shocked when I heard,” he admits. “Our budgets are drawn

Three months since Lufthansa disclosed its surprise move

reigniting efforts to tackle its distri-bution costs, the Star Alliance car-rier is pressing ahead with the introduction of a charge on tickets booked through GDSs which con-tinues to cause consternation in the corporate travel sector.

The German carrier will from the start of September add a €16 ($18) fee to all fares booked on the Amadeus, Sabre and Travel-port GDSs.

Lufthansa is no stranger to forcing the pace of change in dis-tribution after a lengthy wrangle followed its move to transfer booking fees to travel agents in 2008, before a new full-content agreement with Amadeus was brokered in 2010.

Now the Star Alliance carrier, which generates around 70% of its bookings through the GDSs, is again pushing for change in the model. “We think we can do it. It might be a rocky road,” said Christian Schindler, Lufthansa’s regional director for the UK and Ireland, during a media roundta-ble in July.

“We assume the industry will move forward and we want to be a mover.

EARLY STAGES“The reaction has been very diverse and a very emotional reaction,” he acknowledges, but adds: “We have had very produc-tive talks as well. Talks are ongo-ing with the TMCs [travel man-agement companies], the GDSs and the big companies that are using our services.

“It’s all early stages. The emo-tional part is fading away and we are talking about business.

“The financial analysts said this is the right thing to do. From an outside point of view we are doing the right thing.

“We are aware it’s a bold move. It’s always a bold move as a first

BRIEFING DISTRIBUTION

Sparks fly as Lufthansa takes direct actionGerman carrier holds its ground as it prepares to implement controversial GDS booking charge in the face of continued opposition from the corporate world

GRAHAM DUNN LONDON MARTIN FERGUSON ORLANDO

Some believe the scheme is a tactic to drive down fees

paid to GDSs

€16Lufthansa’s fee on all fares booked on

GDS systems

September 2015

up against predicted volumes and negotiated rates with all pre-ferred suppliers. This surcharge has the potential to add millions to the bill.”

The Institute of Travel and Meetings – a professional body that represents travel buyers and managers in the UK and Ireland – also wrote to Lufthansa, urging it to scrap, or at least delay, the plan. Simone Buckley, the organ-isation’s chief, wants the airline’s bosses to engage with customers and partners to map out a mutu-ally beneficial strategy.

“Travel buyers appreciate a company’s right to manage its own affairs and develop its own commercial strategy, but the bla-tant disregard for their interests in relation to this matter has left many people angry,” she says.

“It is beyond disappointing that the Lufthansa Group treats its loyal high-yield customers in the same way as one-time book-ers in the leisure sector.”


managed-travel community, Luf-thansa Group would, of course, create substantial collateral dam-age and not just transfer costs, but create new costs within the indus-try by effectively insisting on its direct-connect strategy for its con-tracted customers,” he says.

Mitchell and his US associates made their voices heard at the recent Global Business Travel Association convention in Orlando. In addition to a protest networking drinks party – where beverages could only be purchased with €16 vouchers – a discussion group was organised to evaluate the potential consequences of the direct distribution cost.

Lufthansa intends to roll out the charge during September

Lufth

ansa

We assume the industry will move

forward and we want to be a mover

September 2015

Read more on LCCs’ multi-channel approach at: flightglobal.com/ LCCdistribution

The President of the American Antitrust Institute, Diana Moss, argues that the current strength of the sector has given airline chiefs the power and confidence to push through bold changes.

“These types of tools and tech-niques we are currently seeing would never have survived years ago and would be thrown out of the market, but now these ideas are gaining traction,” she says.

“[It] is another move by an air-line to frustrate the industry, price discriminate, and hamper compe-tition and control. This could be very detrimental in forms of higher prices and less availability.”

TWIST IN THE TALEPerhaps the most ironic twist in this saga to date was Lufthansa’s announcement in late July that it had reached an agreement with Travelport GDS to use its content and branding technology, which allows airlines to better sell prod-ucts and services through travel

intermediaries. Kurt Ekert, chief commercial officer at Travelport, told Airline Business: “We repre-sent [Lufthansa’s] most profitable channel of distribution. Direct distributions cost is making booking through the channel more punitive for its most valua-ble, highest yielding customers. “The strategy eliminates choice and hampers comparison-shop-ping,” he says. “But by agreeing to use our merchandising tech-nology, the airline is embracing the channel on one side, but mak-ing it more punitive to use on the other. It doesn’t make sense.”

Lufthansa acknowledges the importance of the GDS to its busi-ness. “Seventy percent of our tickets are sold by GDS – we don’t want to change that,” says Schindler. “We want to work with the GDS and TMCs. They offer a variety of services we will not offer. We are very open to what comes from the other end. We are talking to the GDSs con-tinuously [and] they will be our partners in the future.

“We are convinced distribu-tion costs can be lower than they are today with the GDSs. This is a great opportunity to lower the costs and increase the options for the booker,” he argues.

“We don’t have time to wait and wait: the demand [for per-sonalisation] from the traveller is there today. Cost and technology both need to move,” he adds.

Thus far no other airlines have followed Luthansa’s lead in intro-ducing a fee on GDS bookings, though Lufthansa group finance chief Simon Menne says she expected others to follow. As September arrives plenty will be watching to see how Lufthansa’s move plays out. ■

In July the European Travel Agents Association went down a legal avenue by filing a com-plaint against the Lufthansa Group with the European com-petition regualtors.

The group argues the charge breaches the computer reserva-tions system code of conduct in addition to other EC statutes. Time will tell if Europe’s manda-rins feel Lufthansa is abusing its dominant position.

Across the Atlantic, the Busi-ness Travel Coalition – Washing-ton-based lobby group – formed the Air Channel Choice. The new pressure group is being positioned as a broad coalition of global stake-holders promoting travel distribu-tion system choice for travel agen-cies and customers.

Its chairman Kevin Mitchell says the charge would have nega-tive worldwide implications for the competitive structure of the industry. “In the process of seeking to extract more revenue from the

flightglobal.com/airlines20 | Airline Business | flightglobal.com/airlines20 | Airline Business |

Iberia is already unrecognisable from the ‘zombie’ Luis Gallego took over in 2013, but there will be no let-up in his efforts to revamp the corporate culture

INTERVIEW LUIS GALLEGO

September 2015

REPORTOLIVER CLARK MADRID

PHOTOGRAPHYTOM CAMPBELL

SPANISHREVIVAL

flightglobal.com/airlines | Airline Business | 21flightglobal.com/airlines | Airline Business | 21

You don’t have to go further than Iberia’s Madrid headquarters to get a sense of the new direction in which chief executive Luis Gal-lego is seeking to take the airline.

After more than 40 years at its old Campos Velazquez base and with offices spread across four other locations around the city, the IAG-owned Spanish flag carrier made the decision to move to the sleek towers of Madrid’s MV49 business park in 2013.

Not only do the modern facilities of MV49 provide the 88-year-old airline with some-thing of a facelift – the building is equipped with an onsite padel tennis court, for one thing – the move allowed Iberia to consoli-date its staff at one location, making opera-

tions more efficient and cutting costs.Such a pragmatic approach to mod-

ernisation is emblematic of what Gal-lego sees as his role at Iberia: to alter the carrier’s ethos. “We are changing

the way of thinking of the organisation,” Gal-lego tells Airline Business. “We need an organi-sation [that is] leaner: we are developing new processes, we are still doing the restructuring of a lot of areas.”

While he says the Spanish carrier is only at the “middle of the path” of its restructuring efforts, there can be no doubt that it has come a long way since Gallego took the helm in March 2013. Back then Iberia was haemor-rhaging some €1 million ($1.1 million) a day. Efforts to restructure the company and down-size operations were stalled amid deadlocked talks with unions, and relations between the two sides were at an all-time low. A €351 mil-lion loss was posted for 2012.

It is difficult to understate the parlous nature of Iberia’s finances during this period, which Gallego recalls as a time that the airline was “in a very difficult situation: we were almost dying”. He describes Iberia as having been like a “zombie” and says fears it could

disappear altogether were not unfounded.He explains Iberia’s 2012 response thus:

“We launched the transformation plan to stop the bleeding.” The target was a turnaround in profitability of at least €600 million from 2012 levels, to bring Iberia up to IAG’s target of a 12% margin by 2015. To accomplish this, tough targets were set – including 4,500 redundancies, removal of 25 aircraft from the fleet and a 15% cut to the network.

Gallego acknowledges that efforts to restructure the company were in motion before he became chief executive, and says the main challenge when he arrived lay in

September 2015

“We were almost dying... We launched the

transformation plan to stop the bleeding”


winning the unions over to IAG’s plans.“We had a big gap in our costs with our

competitors,” he notes. His blunt message to unions: “We change Iberia or we kill Iberia.”

After that, “it took more than one year to reach an agreement”, Gallego recalls. “We had difficult moments but we were convinced that if it we wanted a future for Iberia we needed to have an agreement, so at the end it was a question of [the unions] understanding that we wanted the best for Iberia.”

The breakthrough came in February 2014, when Iberia agreed new productivity pacts – including voluntary redundancy programmes up to 2017 – with cabin crew unions CCOO, CTA Vuelo, SITCPLA and UGT, and with pilot union SEPLA.

A month later, the airline closed a labour deal with ground staff unions, bringing to an end a volatile period of labour relations. The benefits of those agreements were quickly felt.

Losses were reduced to €166 million in 2013 and transformed into a €50 million oper-ating profit before exceptional items in 2014 – a result that helped to lift IAG’s profits 80% to €1.39 billion that year.

With transformation complete, Iberia has moved to the next phase in its restructuring programme, dubbed the “plan de futuro”.

The plan includes 32 initiatives bro-ken down into five pillars, which Gallego describes thus: “First is to have a solid revenue base; second is to have simplicity and flexibil-

ity; the third one is to have a sustainable, com-petitive model; fourth, [for] the businesses that are not the airline – like the maintenance and [ground] handling – we need them to help the result of the company and we need them profitable… and the last pillar is the cul-tural change.”

Gallego says the airline has in place “all the measures” required to reduce costs as part of a restructuring process set to run from 2017 to 2020. He foresees Iberia making profits “in line” with those of IAG sister carriers British Airways and Vueling in 2016.

The carrier is still hopeful that 1,427 peo-ple will leave the company. Gallego says pro-gress has been made, with 230 pilots having agreed to voluntary redundancy out of a com-pany target of 244. He says the carrier is now seeking 1,183 ground staff to accept redun-dancy “in order to have the right ratio of peo-ple to aircraft that we need for Iberia”.

Iberia’s decision to now start hiring new pilots after a 11-year hiatus is “a message that things are improving, that we are moving in


September 2015

IBERIA AT A GLANCE

Operating revenue $m 2014 5,626

Change $ -0.1%

Change local 0.8%

Operating margin 1.2%

Net margin n/a

Year-end 31 Dec 2014

AB 2014 financial ranking n/a

AB 2014 traffic ranking 37

RPK growth (2014) 2.9%

ASK growth (2014) 3.6%

Load factor (2014) 78.6%

SPORTY GAMES

As he was born in the Spanish capital, it

was inevitable Luis Gallego would have to

choose between the city’s bitterly rivalrous

football clubs Real and Atletico. He plumped

for Real – but also harbours an allegiance to

a less well-known team.

“Since I was a child, I was a supporter of

Read Madrid... but I spent my life in Getafe

– that is a village to the south of Madrid we

can see from these windows,” says Gallego,

pointing into the distance from the Iberia

offices. “So I was a supporter of Getafe and

also of Read Madrid, as Getafe was not in

the premier league.

“So usually on Sundays I went first in the

morning to see Getafe and then in the

afternoon I would see Real Madrid.”

Though he loves watching football,

Gallego concedes he is “very bad” at playing

himself and prefers padel – a racquet game

that has taken Spain by storm.

the right direction, and it’s a message of hope to everybody”, Gallego says.

While being a member of IAG has helped Iberia in its turnaround thanks to efficiencies – for example, in procurement and fleet orders – an outsider may wonder how much freedom each airline has to choose its own path, given the strategic goals handed down by chief executive Willie Walsh and his team.

However, Gallego denies that he feels con-stricted by membership of IAG. “Really we are in a group where operators have a lot of freedom, because we have a holding company but the operators are responsible,” he says. “It is a group where you can do a lot of things as an operator that you cannot do in other groups in the industry, so to be honest I don’t see the group as a restriction – I see the group as an opportunity.”

Having sealed the productivity deal with ground staff unions, Iberia was able to enter and win a round of tenders to provide ser-vices at Spanish airports in May. Gallego sees this as the start of a new period of profitability for its ground handling division.

He also has high hopes for Iberia’s MRO division, which he says has an opportunity to provide services not “only to Iberia, but to the rest of the group because with the things we are doing in Iberia [with] the four businesses that we have – line maintenance, heavy main-tenance, components and engines – we can be a provider of reference to the group”.

The closure of labour agreements with staff also allowed Iberia to begin growing its net-work again after a period of retrenchment.

Gallego describes the carrier’s route devel-opment strategy as a “blank sheet of paper”. This is not to suggest that there is no strategy, but to emphasise that Iberia is being open-minded in its approach to new opportunities.

Following the decision by IAG to firm up a number of Airbus A330-200 and A350-900 orders on the back of Iberia’s strong financial performance, the carrier is now undertaking “profitability studies” into possible routes to cities including Tokyo, Doha, Johannesburg, Toronto, Guadalajara, Managua, San Juan in Puerto Rico, Brasilia and Asuncion.

The Latin American markets are at the core of Iberia’s business and Gallego says that, even during the difficult days, the carrier remained a “market leader” in traffic between South America and Europe – a position he is determined to maintain and enhance.

From its Madrid Barajas hub, Iberia now operates to 19 destinations in Latin America, spanning most of the region’s biggest cities.

Iberia marked its return to the Cuban market

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in June after a two-year hiatus, with a five-times-weekly service to Havana. Other destina-tions that have returned to the network include Montevideo and Santo Domingo.

On 3 July, the carrier began serving the Colombian cities of Cali and Medellin for the first time – underscoring the point that Iberia is seeking to go where growth is. “We have started Havana again: why? Mainly because now we have the right cost structure, because we also have an agreement with pilots,” says Gallego. “If the route goes well, we will increase the capacity in the future in the same way we have done for example in Santo Domingo.” To cement the carrier’s position in the market, Gallego is looking at a joint venture with One-world partner LATAM covering routes on the South Atlantic market, on similar lines to the venture on the North Atlantic that Iberia oper-ates with American Airlines and BA.

“What we are doing also is try to see if a new JV can make sense for Iberia, for example in the South Atlantic where, as we said before, we are the leaders in that market and some alliances there can help with the profit-ability of the routes,” says Gallego, who also sees opportunities to make Madrid a connect-ing point for traffic between South America and Europe and onwards to Asia and Africa.

Gallego says Iberia is also analysing “if Asia can make any sense for us”, noting traffic flows between Asia and South America that could be directed through Madrid.

To support its long-haul expansion, Iberia will receive the first of eight A330-200s at the end of the year. The carrier has a further five A330-200s and 16 A350-900s on order, with the first due for delivery in 2018. These aircraft will be used to replace 16 A340s in the airline’s long-haul fleet.

With IAG having signed a letter of intent for 12 Boeing 787-9s, could Iberia be in line to receive Dreamliners? Gallego stresses that “at some moment we will say what we are going to do with them”, but for the time being there are no plans for additional aircraft.

The Spanish carrier is currently mulling whether to follow BA in introducing a pre-mium economy product on its long-haul fleet.

“What we are evaluating [is] whether the premium makes sense, but we are analysing in which fleet because perhaps it is not good for all of them... For example, maybe we will need more densified aircraft to compete in other destinations,” says Gallego.

While Iberia has managed to restructure its businesses and return to growing its long-haul


September 2015

CLICK AND GROW

Luis Gallego’s career was propelled by the

rise of the low-cost carrier concept in Spain.

After a stint with the Spanish air force,

Gallego worked at airline Aviaco, telecoms

company Indra and, between 1997 and

2006, in several positions with Iberia

franchise partner Air Nostrum.

But it was with the founding of Clickair in

Barcelona in 2006 that Gallego began to

carve out a niche for himself. He was

appointed chief operating officer of the

airline under chief executive Alex Cruz,

marking the beginning of a partnership that

would see the two men’s careers

intertwined from then on.

With the decision by Clickair and

low-cost carrier Vueling to merge in 2009,

Gallego and Cruz shifted their roles over to

the Barcelona-based carrier, which became

the sole brand, and continued to expand

the business.

In November 2011, a new challenge

presented itself when Gallego was chosen

by IAG to become chief executive of its new

operation Iberia Express, where he applied

what he had learnt at Vueling.

“When we developed Iberia Express the

concept was the same, we wanted to

develop a company we wanted the cost

structure to be similar to the one we had at

Vueling, and that’s the cost structure they

have now,” he says.

The success of Iberia Express helped

propel Gallego to his promotion to chief

executive of Iberia, where his close

partnership with Cruz continues within the

IAG fold.

network, its short-haul operations have fol-lowed a very different path.

At the end of 2011, approximately two-thirds of the carrier’s losses were related to the short and medium-haul business, with low-cost rivals such as Ryanair and EasyJet mak-ing inroads into Iberia’s core markets.

This prompted Iberia to establish its own standalone carrier on the low-cost model in 2012 – Iberia Express – with a fleet of four A320s in a two-class configuration on services to feed Iberia’s Madrid hub.

Gallego knows Iberia Express inside out, having been appointed as its first chief execu-tive. Indeed, he already had the low-cost ethos in his blood (see box).

“In 2011, Iberia took the decision to launch Iberia Express – and the idea of Iberia Express was first of all to feed Iberia in the hub, because Iberia could not have the right cost structure to do that,” Gallego says. “It was also to take [advantage of] the opportunity and experience that we have, because a big part of the thinking that developed [at] Iberia Express came from Vueling where we were develop-ing a point-to-point operation in Barcelona.

“We considered that Iberia Express could also be an important tool to develop the point-to-point operation in Madrid... and we consider that Iberia had enough experience in the low-cost world to develop a company with the right cost structure, and that was Iberia Express.”

What makes the carrier successful is its cost and management structures. Gallego says Ibe-ria Express’s costs are in the range of €0.04 per ASK excluding fuel: a similar level to Vueling, EasyJet and Norwegian. It was also “key”, he says, to ensure that the company could develop “without influence from the parent company... Otherwise you are going to end up with the cost of the parent company”.

Hence, Iberia Express has a standalone management structure and is physically sepa-rated from Iberia, being based at Madrid’s Barajas airport rather than MV49.

Today, it has a fleet of 20 A320s and is expanding its network to destinations not pre-viously served by its parent – but while the budget arm is doing well, Gallego rules out the idea of it taking on a similar role to IAG sister carrier Vueling. Iberia Express will remain a feeder for the mainline business.

Iberia may only be in the middle of its restructuring effort, but all the indications are that the carrier is on the right track. ■

Watch our interview with Luis Gallego, along with videos of other airline leaders, at:

flightglobal.com/interviews

DEPARTURES

0 9 : 1 0 P A R I S T 4 9 4 6 1 0 9 : 5 0 M A D R I D F 2 4 5 2 7

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0 9 : 3 5 B E R L I N V 2 9 0 1 8 1 0 : 1 5 P A L M A L 1 3 8 9 2

0 9 : 4 0 A M S T E R D A M B 1 3 6 8 2 1 0 : 2 0 I S T A N B U L F 7 2 7 5 6

0 9 : 4 5 R O M E Q 5 5 6 4 6 1 0 : 2 5 N A I R O B I D 8 7 8 2 9

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SPECIAL REPORT ALLIANCES

Desig

n P

ics In

c/R

ex

Shutt

ers

tock

Approaching two decades after their inception, the global alliances have reached a maturity, meaning their development now is less about recruitment and more around enhancing value for their members – no easy task, given the combination of widely differing models and the sometimes contradictory nature of airline partnerships

CONTENTS

28 Alliance evolution Our snapshot shows the dynamics at play across the groupings

30 After the gold rush The big three are striving to overcome members’ tensions

36 Demanding conditions Transatlantic capacity is rising despite yield pressures

38 Eastern opening Delta’s investment in China Eastern took its equity partnership strategy into new territory

40 Alliances and joint ventures Our annual review details the latest airline codeshare and partnership developments

September 2015

All our special reports are available online at :



ALLIANCES SNAPSHOT

September 2015

Planned joint

venture with Qantas

ONEWORLD15 MEMBERS

Equity and codeshare

deal with United, while

owner Neeleman has

acquired stake in TAP.

Being courted by Star

AER LINGUS

ETIHAD

Set to rejoin

following

acquisition

by IAG

Equity and codeshare

deal with Air Berlin. To

sell Aer Lingus stake

after IAG dealAcquired stake

in IAG, but has

threatened to leave

Oneworld over Gulf

carrier subsidy row

QATAR AIRWAYS

AZUL

EMIRATES

Joint venture

with Qantas

CHINA EASTERN

As the big three groupings mature so the pace of recruitment has slowed, with just one new member in the last 12 months, amid deepening relationships – and tensions – with non-aligned airlines

ALLIANCE EVOLUTION

flightglobal.com/airlines | Airline Business | 29September 2015

Joined July 2015

Partnerships with shareholders SIA and

Air New Zealand

Partnerships with shareholders Delta and Air France-KLM

Joint venture with Delta

Joint venture with shareholder Delta

Planned joint venture with

China Eastern

Codeshare with Air France-KLM, acquisition of

stake in Alitalia

VIRGIN AUSTRALIA

AVIANCA BRAZIL

VIRGIN ATLANTIC

GOL

ETIHAD

STAR ALLIANCE28 MEMBERS

SKYTEAM20 MEMBERS

QANTAS

Equity and codeshare deal with

Virgin Australia

VIRGIN AUSTRALIA


lines. All have codeshares and partnerships with airlines across the alliances, with Bang-kok Airways, for example, saying it prefers to remain independent to enjoy the freedom to work with any carrier it desires.

The fundamental question facing the big three alliances in the region is not the addi-tion of new carriers, of which there a few qualified candidates, but providing value for existing members. Given the ownership pro-files of major carriers in the region, it is clear alliances have reached a certain status quo in Asia-Pacific.

“Once an airline is in an alliance, it takes something pretty big to make them want to leave it,” says IATA chief executive Tony Tyler. “One thing that can cause this is owner-ship changes, which can push them to change

alliances, and we have seen a bit of that, but that is not a major issue in Asia because own-ership is pretty stable owing to government involvement in the industry. Alliances will continue increasing their presence here and keep driving competition.”

Michael Wisbrun, managing director of

After almost two decades of partner recruitment and expansion, the big three alliances are striving to ensure value for members, aiming to overcome the tensions inherent in having such diverse business models working together

ALLIANCES STRATEGY

AFTER THE GOLD RUSH

REPORTGRAHAM DUNNLONDONMICHAEL GUBISCHWARSAWGREG WALDRONSINGAPORE

When Avianca Brazil joined the ranks of Star Alliance in late July it was the first new addition to one of the three major groupings

since Air India joined the same alliance a year ago.

This illustrates the maturity of the alliances after the recent growth spurts at both One-world and SkyTeam. Between 2011 and 2014 there were 19 new members – although that includes two which switched camps – among the three alliances. By comparison, this year Avianca Brazil could be the only new addi-tion to an alliance, depending on how quickly Aer Lingus rejoins Oneworld should IAG complete its acquisition of the Irish carrier. Beyond that, none of the alliances have new members pending.

Getting on for two decades and 63 live members – and five ex-members – since their inception, the alliances predominantly have most of their battlegrounds covered. Much of what recent activity there has been was driven by consolidation. For example, US Airways and TAM switched to Oneworld fol-lowing their respective mergers, and TAM’s move prompted Star to seek Avianca Brazil to help fill the void in Brazil.

Others, such as last summer’s revived recruitment by Star of Air India, addressed some of the few remaining holes for the alli-ances. While some gaps remain – Star, for example, continues to see room for a further

“Alliances have to accommodate growth

at different paces”GIORGIO CALLEGARI

Deputy general director, Aeroflot

September 2015

member in Brazil – the emphasis has moved from recruitment to deepening relationships.

There is no “theoretical limit” to the num-ber of members, Star Alliance chief Mark Schwab told Airline Business as executives gathered for the alliance’s board meeting in Warsaw in June. But 18 years after its founda-tion, the alliance has reached a mature phase and its “focus is shifting from building a net-work to building value”, says Schwab.

This is echoed by his counterparts at One-world and SkyTeam.

TAPPING ASIAMuch of the recent recruitment activity – rep-resenting almost half of the new alliance members over the last five years – has been focused on Asia. But with the alliance entries of SriLankan Airlines and Air India to One-world and Star Alliance respectively in 2014, more or less all of the flag carriers in the region have found a home in one of the camps.

Outliers include Philippine Airlines, Paki-stan International Airlines, Biman Bangla-desh and North Korea’s Air Koryo. In theory, Myanmar could one day produce a large flag carrier, but for the time being its airline sector is highly fragmented. Cambodia has no major airline to speak of, and Lao Airlines is a modest operation.

High-profile, non-flag outliers with no alli-ance affiliation include Thailand’s Bangkok Airways, Virgin Australia and Hainan Air-


SkyTeam and becoming chairman of the group, notes that in a world where consolida-tion of airlines across national borders is often restricted by law, alliances offer “the next best thing to consolidation”, as they provide scope for carriers to enjoy economies of scale. He estimates that codeshare growth among air-lines outpaces organic growth on a scale of three to one.

“It is far more effective to expand your reach through codeshares than through your own fleet,” Wisbrun says. “For the Chinese carriers, it makes a lot of sense to partner with carriers overseas, rather than grow organically. Bringing capacity to a place is one thing, but you need a market on the other side to fill this capacity in a decent, profitable way.”

SkyTeam’s roster includes two of China’s top three airlines, China Eastern and China Southern. Its other Asian carriers include Tai-wan’s China Airlines, Garuda Indonesia,

Korean Air and Vietnam Airlines.Oneworld has enjoyed strong growth in the

region as well. The alliance’s cornerstone in the region is Cathay Pacific Airways, and it added Malaysia Airlines in 2013 and SriLan-kan last year.

“With that hectic period of growth behind us, and with fewer significant unaligned air-lines remaining as potential recruits, our focus for the past year has been on generating more revenues for our member airlines,” says Oneworld chief executive Bruce Ashby.

Star Alliance’s Asia-Pacific line-up features

Air China, Shenzhen Airlines, Air India, Air New Zealand, All Nippon Airways, Asiana Airlines, EVA Air, Thai Airways and Singa-pore Airlines.

“Airline alliances were driven by the need to reach a broader market, while constrained by the limits of the airline regulatory frame-work,” says Joanna Lu, head of the Asian arm of Flightglobal’s Ascend advisory service.

“They were initially most effective as mar-keting alliances rather than a means of cost reduction. A key benefit was offering a broader network to customers, meaning in many cases better connections through key alliance hubs. The hubs offering the best con-nections will gain the biggest share of con-necting traffic. A recent study we conducted for a major Asian airport implies that alli-ances have greater impact for hub airports rather than for airlines.”

Smaller airlines have pointed to the costs of joining an alliance as a disincentive, and there

Rex

Fea

ture

s

September 2015

63Number of ‘live’ members in

the three major global airline alliances


is the sheer scale of work involved in signing up. Lu reels off an imposing list of items carri-ers need to deal with when joining an alliance. These include agreements around ticketing, baggage, joint fares and reciprocal airports. Other items include blocked-space relation-ships, computer reservations systems, joint ventures, joint sales offices, e-commerce joint ventures, frequent flyer programme alliances, traffic/revenue pooling, and codesharing.

And if the recent experiences of SriLankan and Malaysia Airlines are anything to go by, alliance membership is by no means a rem-edy for all challenges. Although improved revenue was one of SriLankan’s reasons for joining Oneworld, it is still losing money.

As for Malaysia Airlines, it was haemor-rhaging cash even before the disasters of MH370 in March 2014 and MH17 four months later. A few weeks before MH370 van-ished it reported that its annual net loss for 2013 tripled to MYR1 billion ($263 million). Exactly 12 months before this, company exec-utives had described its 2012 entry into One-world as the “dawn of a new era”.

“An airline’s profitability is based on its local position,” says SkyTeam’s Wisburn. “If they are getting attacked locally, they have to find their own solution. There is no one rec-ipe for dealing with this situation.”

AFFILIATE SCHEMESWith the key battlegrounds covered, the alli-ances are turning their attention to plugging smaller gaps across the globe. Both Star Alli-ance and SkyTeam initially ran regional or

ALLIANCES STRATEGY

Star has welcomed just one member annually over the last three years

Sta

r Alii

ance

September 2015

forms, where it makes sense, is another opportunity,” Schwab adds.

Rival alliance Oneworld offers affiliate membership to carriers linked to its major members, such as Iberia Express and Cathay Pacific’s Dragonair unit. More recently, Bang-kok Airways’ flights have been added to its round-the-world fare offering.

Wisbrun says that its “SkyTeam Connect” programme is still in a development phase, but will be aimed at allowing for easier con-nections with member carriers.

“We are discussing with, for instance, Gol,” he says. “It makes sense for Gol, which is co-operating with 13 members of SkyTeam to make operational connections with SkyTeam technology.”

SkyTeam carriers Air France and Delta have deep partnerships with the Brazilian carrier, while Korean Air is the latest SkyTeam member to codeshare with it. That could allow for easier rebooking in the case of a flight disruption, and access to the alliance’s other airport services.

Wisbrun says that as a low-cost carrier, SkyTeam Connect would mean that the car-rier would not have to be a part of the other working groups and meet requirements of full membership. Similarly, smaller Chinese car-riers could also join the platform, allowing the alliance to fill smaller gaps between its mem-ber carriers there.

SMALL GAINSThe question of whether alliance membership delivers equal value for both large and small carriers is “a good one”, acknowledges Rick-ard Gustafson, chief executive of long-time Star member SAS Group.

Alliances are especially important for small carriers as they provide access to global net-works, but while such carriers represent “no downside” for large members, traffic on the “global highways” of long-haul travel is largely determined by a sub-group of airlines within Star forming individual partnerships, says Gustafson.

He still believes Star provides “significant” benefits for all members, but sees a need for the alliance to “reinvent” itself in line with the shift from establishing a global network and seamless travel for passengers to sharing more resources and data between airlines.

Elsewhere in Star, EgyptAir chief Sameh El-Hefny sees no conflict in having a two-tier system. Large alliance members need to have exclusive privileges, he argues, and the smaller members still gain “lots of benefits” from participating in the alliance, including

associate memberships – under which Star recruited Adria Airways, Blue 1 and Croatia Airlines, while SkyTeam added Air Europa and Kenya Airways – before absorbing the carriers as full members. Both are now study-ing an affiliate option.

“We continue to explore this idea – are there smaller regional carriers that we could plug into the ends of our network without having them become full members of Star Alliance?” says Star’s Schwab.

While those airlines involved would be required to have IATA operational safety audit (IOSA) registration and undergo a Star safety audit, they would not be required to offer the full range of the alliance’s services.

Schwab says that markets such as Aus-tralia, parts of South America and Africa are the major geographies where such a model could help to plug gaps not covered by its pre-sent roster of 28 carriers.

That second tier could be opened to low-cost and regional carriers, as well as those affiliated to its members.

“Many of the full service carriers are mov-ing a lot of their regional services on to differ-ent platforms, and connecting those plat-

“For Chinese carriers, it makes sense to partner with carriers overseas”

MICHAEL WISBRUNManaging director, SkyTeam


access to shared facilities, such as London Heathrow’s Terminal 2, and more attractive frequent-flyer programmes. In any case, joint ventures between airlines tend to reflect not carrier size but geographical location, argues El-Hefny.

For Lufthansa Group chief Carsten Spohr, joint ventures are “a further step toward con-solidation” – which, he says, is “urgently” required. In Spohr’s view, the future develop-ment of airline alliances will be a factor both of the number of airlines competing in the marketplace – particularly in Europe – and of differences in airlines’ corporate make-up.

“Alliances provide no protection from con-solidation,” he says, albeit that “perhaps they slow it down” for small operators. Consolida-tion has not taken place yet because, Spohr asserts, airlines “do not adhere to the law of business economics”. While some carriers compete on a purely commercial basis, others depend on state support.

Spohr accepts that joint ventures are avail-able primarily to large carriers. But he con-tends that such tie-ups create neither disad-vantages nor benefits for small alliance members.

Sebastian Mikosz, chief executive of Polish flag carrier LOT, takes a different view, how-ever. He sees joint ventures as “very problem-atic” because they create sub-organisations with a mutually shared business that is “much closer” than is typical within an alli-ance framework.

In July LOT detailed an expansion strat-egy, centred on long-haul growth, to be pur-sued when a state-funded restructuring pro-gramme concludes at the end of 2015, freeing the carrier from European Commis-sion-imposed capacity restrictions. Now, LOT must find an investor – or raise capital through share issuance – to fund a planned doubling of the fleet.

Mikosz says LOT benefits from access to Star’s network, the alliance’s terminal facili-ties and, crucially, its brand – which, he admits, is much more globally recognised than that of LOT. But the advantages for the carrier have so far been “at a much lower level than they should be”, he adds.

He believes LOT must play “a more active role” within Star including through efforts to build joint ventures with other members. Shortly after the Star board meeting in War-saw, LOT unveiled formative co-operation plans with Star partner Turkish Airlines as a first move towards a future joint venture.

And as LOT requires external investment to pursue its growth strategy – ideally from

to be “cornered” by American, “then there is no purpose to be in an alliance”.

American for its part says it is working with Qatar to find a solution for the airline’s gate needs at JFK. “The times that Qatar has requested for gates conflict with the times we use our gates, and a solution will take some time to work out,” it says, adding it has turned down similar requests from other partner airlines.

If nothing else, it illustrates the difficulty air-lines will have in separating the spiralling sub-sidy battle from the wider operational picture.

“Tensions” within airline alliances over how to deal with rapidly expanding carriers need to be addressed or members “will look for alternatives”, warns Aeroflot’s deputy general director for strategy and alliances Giorgio Callegari.

“Alliances have to be flexible enough to accommodate airlines growing at different paces and, as a result of that, airlines that are making different kinds of investments,” he says.

The Russian carrier, a SkyTeam member since 2006, has previously pressed for an easing of restrictions on deals with airlines from other alliances, and in 2013 hired US consultancy Oliver Wyman to make a com-parative study of benefits from operating within SkyTeam and collaborating with out-sider airlines.

“If alliances are too dependent on protect-ing the incumbent carriers, that’s where we have an issue, because instead of representing progress they represent a straitjacket.”

The three alliances have different positions on carriers working with non-alliance – or competing alliance – members, with One-world appearing the most relaxed. Schwab though says Star has also “liberalised” some of regulations around how carriers interact with non-aligned carriers or those in rival alliances.

“There are genuine commercial needs in certain sectors in certain parts of the world that cannot be solved within the alliance fam-ily,” he says. ■

NEW GLOBAL ALLIANCE MEMBERS – LAST FIVE YEARS

Star Alliance SkyTeam Oneworld

2015 (1) Avianca Brazil – –

2014 (5) Air India Garuda Indonesia TAM*, US Airways*, SriLankan Airlines

2013 (3) Eva Air – Qatar Aiways, Malaysia Airlines

2012 (8) AviancaTaca, Copa, Ethiopian, Shenzhen Airlines

Saudia, MEA, Aerolineas Argentinas, Xiamen Airlines

Air Berlin

2011 (2) – China Airlines, China Eastern Airlines

–

*Switched from Star Alliance following merger with Oneworld member. SOURCE: Flightglobal

another airline – Mikosz supports the consoli-dation argument too. “We [as an industry] should consolidate,” he says, as today’s frag-mented airline landscape “is not helpful in the long term”.

Mikosz also sees a need for “a new bal-ance” between general airline alliances and joint ventures among select members.

SkyTeam and Oneworld face similar bal-ancing acts between the larger members, which have established joint ventures in key markets, and the smaller operators within the group.

WIDENING GULFSimilarly further adding tension to harmony within the alliances is the divided positions in the industry over the expanding Gulf carri-ers. Etihad and Emirates – avowed non-alli-ance members – have key relationships with alliance carriers, while Qatar Airways has been a Oneworld member since 2013.

The latter provides the most high-profile challenge, given that its alliance partner American Airlines is one of the three US car-riers at the heart of the dispute with the Gulf carriers over subsidies.

Already Qatar’s outspoken chief executive Akbar Al Baker has raised the spectre of quit-ting the grouping over the row.

“If we find that we can’t find a settlement to this issue, than yes, we will exit Oneworld,” Al Baker said during the Paris air show.

He suggests that American was “blocking inventory” on passenger booking systems and preventing gate access for Qatar at New York JFK airport, and argues if his carrier continues

“Alliances provide no protection from consolidation”

CARSTEN SPOHRChief executive, Lufthansa Group

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its Star Alliance joint venture partners Luf-thansa and United.

When asked to explain the reason for sig-nificant international capacity additions, the Montreal-based Star Alliance carrier’s senior director of network planning Mark Galardo said in late 2014: “We’re trying to make-up for lost ground,” referring to the restructuring and labour woes that Air Canada faced during the past decade.

He argued that with costs decreasing faster than yields, the carrier can profitably absorb the rapid growth.

Making up for lost ground or not, the com-bined pressure of capacity growth and the strong US dollar is taking a toll on industry yields across the Atlantic.

The euro was down almost around a fifth against the US dollar at €1.10 to $1 in early August compared with a year earlier, while the pound was down 7.7% at £1.55 to $1 on the same day.

The currency situation has driven declines in passenger unit revenues at the US carriers. American Airlines reported a 9.3% fall in pas-

Overall airline capacity across the Atlantic remains on the rise despite pressures on yields, exacerbated for US carriers by the weakness of European currencies against the strong dollar

ALLIANCES TRANSATLANTIC

DEMANDING CONDITIONS

REPORTEDWARD RUSSELLWASHINGTON DC

The question of demand continues to envelope the transatlantic mar-ket this year, as airlines add capac-ity despite weaker results in the first half.

Carriers are piling on seats between North America and Europe, with capacity increas-ing 5.9% to 13.1 million in the third quarter and 7.4% to 10.4 million in the fourth quarter compared with a year ago, Capstats data shows. The third quarter roughly coincides with the IATA summer schedule, widely seen as peak season across the Atlantic.

Airlines have added a number of new markets. Air Canada and its low-cost subsid-iary Air Canada Rouge launched new ser-vices and increased frequencies from their Montreal and Toronto hubs to Amsterdam, Athens, Barcelona, Paris and Venice; Air France and KLM added new flights to Edmonton and Vancouver; Delta Air Lines entered the Philadelphia-London Heathrow market and American Airlines retaliated with additional frequencies; while United Airlines added new seasonal routes to Dub-lin, Newcastle, Rome and Venice.

CANADIAN EXPANSIONAir Canada is one of the faster growing carri-ers in the market. It is scheduled to fly 10.9% more seats across the Atlantic in the third quarter and 8% more seats in the fourth quar-ter compared with the same periods in 2014, Capstats shows. This far outpaces growth at

“We’re seeing a little bit of a mix of pressure on yield and load factor”

CRAIG KREEGERChief executive, Virgin Atlantic

September 2015

senger revenue per available seat mile (PRASM), Delta Air Lines an 11.5% decrease and United Airlines a 6.4% decline in the sec-ond quarter.

“In core European markets, we saw improved US point-of-sale demand, but this was more than offset by a reduced point-of-sale demand in Europe and the effect of the weaker euro,” says Ed Bastian, president of Delta.

DELTA CONNECTIONSThe SkyTeam carrier is scheduled to increase seat capacity by 9.6% in the third quarter and 8.1% in the fourth quarter, Capstats shows. However, executives have repeatedly said the airline will reduce growth in the market from September so the actual number of additional seats is likely to be less.

Delta’s partners are growing as well. Joint seat capacity with Air France, Alitalia, KLM and Virgin Atlantic Airways, with whom it operates transatlantic joint ventures, will increase 7.6% in the third quarter and 9.1% in the fourth quarter.

London-based Virgin Atlantic is leading the growth. The carrier has been redeploying aircraft and adding flights to the USA and Delta hubs since the two launched their immunised partnership in January 2014, cre-ating a more formidable competitor to the American-British Airways joint business.

“We’re seeing a little bit of a mix of pres-sure on yield and load factor although the summer generally is a great period for us,”


Rex

Shu

tter

stoc

k

“Capacity growth on the Atlantic has picked back

up quite a bit”JOE DENARDI

Aerospace analyst, Stifel

September 2015

TRANSATLANTIC SEAT CAPACITY THIRD AND FOURTH QUARTERS 2015

Q3 2015 Q4 2015Seats Change % Seats Change %

American, British Airways, Finnair and Iberia 3.1m 0.6 2.5m 3.9Air France, Alitalia, Delta Air Lines, KLM and Virgin Atlantic

3.9m 7.6 2.9m 9.1

Air Canada, Lufthansa and United Airlines 3.5m 6.0 2.5m 2.7INDUSTRY TOTAL 13.9m 5.9 10.4m 7.4

SOURCE: Capstats, covers transatlantic JV operations, Delta has separate JVs with Virgin and with Air France-KLM & Alitalia

said Craig Kreeger, chief executive of Virgin Atlantic, on the transatlantic market in June. “I’d describe [the revenue environment] as kind of flattish.”

However, he added that low fuel prices more than outweigh the flattish demand in the market and are likely to drive profits at the airline. British Airways and Iberia parent IAG also saw a flat demand environment dur-ing the first half of the year. As a result, it is one of the more disciplined groups in the market with BA seat capacity down 2.7% in the third quarter and down 1.2% in the fourth quarter, Capstats shows.

Iberia’s seat capacity is set to decrease 7.8% in the third quarter and increase 2.5% in the fourth quarter.

FRESH DELIVERY“We’re taking delivery of a lot of new aircraft and we’re pointing a lot of that new product across the Atlantic,” says Sean Doyle, execu-tive vice-president of the Americas at the Oneworld carrier.

For example, BA has deployed its new Air-bus A380s on flights to Los Angeles, San Francisco and Washington Dulles and new Boeing 787s to Austin, Newark and Toronto in recent years.

Doyle is confident about BA’s strength in the London-New York market, even as Delta and Virgin Atlantic have mounted a co-ordi-nated effort to capture share. He says Ameri-can and BA offer the “most compelling” net-

work and range of product in the market and, from October, all of the joint business part-ners’ operations will be consolidated in either Terminal 3 or Terminal 5 at London Heath-row, further easing things for travellers.

Still, the strong transatlantic capacity growth this year echoes the weaknesses that was seen by many in 2014. That year, Air France-KLM and Lufthansa both lowered profit targets due in part to their own capacity additions and those of competitors across the Atlantic. Other airlines also reported weaker demand conditions.

“Capacity growth on the Atlantic has picked back up quite a bit,” says Joe DeNardi,

an airlines and aerospace analyst at Stifel. “My expectation is capacity will be down into the winter season.”

CUTS AHEADEuropean carriers are driving much of the growth while US carriers are more disciplined, he says, adding that airlines are varying – or peaking – capacity more between the high demand summer season and the lower demand winter this year. While almost every carrier cuts capacity from summer to winter, some are peak-ing more than others. Delta and United will both make larger cuts to fourth quarter transatlantic seat capacity compared with third quarter capacity this year versus 2014.

“The great thing about our network and our fleet is its flexibility,” says Jim Compton, chief revenue officer of Star Alliance carrier United. “So what you’re seeing in the transatlantic is that fleet flexibility going up, allowing us to gauge appropriately to the demand we expect in the fourth quarter.” ■

Reaching out: Delta’s partner, Virgin Atlantic, is leading transatlantic growth


Delta’s stake in China Eastern took its equity partnership strategy into new territory, becoming the first overseas carrier to invest in one of the big Chinese airlines

EASTERN OPENING

REPORTEDWARD RUSSELLWASHINGTON DC

Del

ta A

ir Li

nes

Delta Air Lines is taking its grow-ing equity partnership model to China with an investment in its SkyTeam partner China Eastern Airlines, improving both carri-

ers’ positions across the Pacific.This follows nearly two years of comments

on the importance of China to the Atlanta-based carrier’s Asia strategy by chief execu-tive Richard Anderson and other executives.

“In a decade, it would be nice to replicate the joint venture structures we have in Europe and move them to China,” Anderson said in October 2013. He has repeated the sentiment multiple times since.

While not a joint venture – that requires open skies between the USA and China – the $450 million investment in Shanghai-based China Eastern includes an expanded codeshare part-nership, a new joint corporate sales office for the market and joint investment in new products and technology. The carriers became co-located in terminal 1 at Shanghai Pudong International airport in April, a move aimed at easing connec-tivity between their networks.

Delta chief revenue officer Glen Hauenstein said in January that the airline connects on average 200 passengers daily between its net-work and China Eastern over Shanghai.

Delta and China Eastern have filed a joint notice with the US Department of Transporta-tion to expand their codeshare. Delta will place its code on China Eastern’s flights between Nanjing and Los Angeles, as well as between its gateways in China – Beijing and Shanghai Pudong – and six Chinese cities including Guiyang, Tianjin and Zhengzhou.

WINNING CODEChina Eastern will place its code on Delta’s new flights between Shanghai and Los Angeles, as well as on all Delta flights from its US gateways – Los Angeles, New York JFK and San Francisco – to 15 US cities including Austin, Denver and Raleigh-Durham.

This will complement Delta and China Eastern’s existing codeshare that covers 30

September 2015

ALLIANCES CHINA

domestic routes in the USA, 43 in China and seven transpacific routes.

The investment and codeshare expansion will improve the airlines’ position in the dynamic US-China market. Delta had a 10.5% share and China Eastern a 15.1% share of seats between the two countries in July, Innovata FlightMaps Analytics shows. This places them fifth and third, respectively, in the market.

Their combined market share of 25.6% is second to only the partnership of market lead-ers Air China and United Airlines.

Airlines have rapidly expanded in the US-China market in recent years. Seat capacity was up 30% this July compared with a year ago and nearly 63% since July 2013, Innovata shows. Every airline has added new routes and flights since 2013. This includes Delta flights from Los Angeles and Seattle to Shanghai, and China Eastern flights linking Nanjing to Los Angeles and Shanghai to San Francisco.

The investment will likely be a boon to Delta in Asia. Cowen Securities analyst Helane

Becker sees “further upside” from the deal over the $100 million benefit Delta anticipates from the restructuring of its Asia-Pacific network.

“The investment will give Delta access to another connecting hub in Asia and enhance Delta’s Asia-Pacific strategy,” she says.

NEW GATEWAYDelta began restructuring its Asia network around a new gateway at Seattle-Tacoma Inter-national airport in 2013. It has launched new services to Hong Kong, Shanghai Pudong, Seoul Incheon and Tokyo Haneda (discontin-ued from 30 September) from the gateway and reduced flying to Japan and its Tokyo Narita hub, including axing its Seattle-Osaka service.

The aim is to increase direct flights into Asia from the USA and reduce the reliance on Tokyo Narita as a connecting hub.

“We now have a very detailed plan together over the next decade to grow Shanghai into a strong hub,” Anderson says. “China Eastern and Delta [will] share flying across the Pacific, Delta does the domestic flying in the USA for the part-nership and, of course, China Eastern does all of the flying in China beyond Shanghai.”

Delta already has stakes in Aeromexico, its SkyTeam partner, as well as Gol and Virgin Atlantic Airways. The US carrier has taken its partnership with Virgin one step further with an immunised joint venture between the USA and UK, and is seeking a similar partnership with Aeromexico, pending regulatory approval.

Delta’s planned investment will net it 10% of China Eastern’s H shares on the Hong Kong stock exchange, equal to a 3.55% stake. It will also gain an observer seat on China Eastern’s board of directors. It marks the first overseas stake in a Chinese state-owned carrier.

But the US carrier’s interest in participating in the restructuring plan for Japan’s Skymark Airlines came to nothing, after creditors voted in favour of Star Alliance carrier ANA Holdings.

It is a further sign of an increased invest-ment appetite among the highly profitable US carriers, which also saw United Airlines take a small stake in Brazilian partner Azul. ■

Delta gains a connecting hub in Asia

WHERE AIRLINES, AIRPORTS AND DESTINATIONS MEETThe 21st World Route Development Forum

Durban’s Golden Mile and Moses Mabhida Stadium

1

If you want to develop your airline’s route network, increase air services to your airport or region or raise

visit routesonline.com

World Routes 2015


ALLIANCES SURVEY

DATA COMPILED BY FLIGHTGLOBAL INSIGHT ANALYSIS BY GRAHAM DUNN & FLIGHTGLOBAL INSIGHT

September 2015

ALLIANCES AND JOINT VENTURESOur annual review of the industry's groupings details new codeshares, joint venture developments and partnership news for members of the three main global alliances, as well as those for the most active non-aligned carriers

Star Alliance, still the largest of the global

alliances, is the only one of the groupings to

have added a new member in the last 12

months, with the addition of Avianca Brazil in

late July.

Brazil, the largest domestic market in the

region, had become a high priority again after

the loss of TAM, which switched allegiances

to Oneworld last year after its merger with

LAN – a long-term member of Oneworld. TAM

had itself marked Star’s second Brazilian

partner after the demise of Varig.

The São Paulo-based carrier will add 15

new destinations in Brazil to Star’s network,

on top of the 12 its members already serve.

Sister carrier Avianca is already a Star

member. “We are back again where we

belong,” says Star Alliance chief executive

Mark Schwab.

Avianca Brazil has over 200 daily flights to

24 destinations, predominantly in Brazil. The

carrier, which operates 41 aircraft, serves

only Bogota outside its home country.

While the airline re-establishes Star’s

presence in Brazil, the grouping is also still

keen on Azul as a member. Azul is the

third-largest Brazilian domestic carrier in

terms of market share, followed by Avianca

Brazil, which has a 9% share. “The alliance

has always maintained the position that the

market is large enough to sustain two

members,” says Schwab.

“We have had ongoing discussions with

their team,” he says, but he notes that Azul

has been “extremely busy” of late and that

the grouping wants to wait for “the dust to

settle” before resuming talks. Azul founder

and chief executive David Neeleman has just

bought a stake in TAP Portugal, while another

Star partner, United Airlines, has bought a

share in Azul.

Neeleman told Airline Business in July that

the airline had not decided if it wanted to join

Star, although he acknowledged that the

alliance had been actively pursuing the carrier.

STAR ALLIANCE

STAR HOPES TO MAKE IT THIRD TIME LUCKY IN BRAZIL

ADRIA AIRWAYSMember since: 2004

Codeshares: 11

New: Air India

AEGEAN AIRLINESMember since: 2010

Codeshares: 14

New: Air Serbia, Ethiopian Airlines

AIR CANADAMember since: 1997

Codeshares: 26

New: Germanwings

Partners/stakes: Joint venture

with United Airlines on USA-Canada

flights and with Lufthansa and

United on flights to Europe

AIR CHINAMember since: 2007

Codeshares: 30

New: Air Serbia, Swiss

Ceased: US Airways

Partners/stakes: Holds 30% of

Cathay Pacific plus majority stakes

in Dalian Airlines (80%), and

Shenzhen Airlines (51%), as well as

31% in Tibet Airlines. Planning joint

ventures with Lufthansa and Air

New Zealand

AIR INDIAMember since: 2014

Codeshares: 14

New: Adria Airways

AIR NEW ZEALANDMember since: 1999

Codeshares: 21

Partners/stakes: Joint venture on

Trans-Tasman routes with Virgin

Australia, in which it now owns 26%.

Planned JV with Air China

ALL NIPPON AIRWAYSMember since: 1999

Codeshares: 30

Ceased: Qatar Airways

Partners/stakes: JV now on cargo

and passenger flights with United

on Japan-US routes, and Lufthansa

carriers to Europe. Stake in Peach

Aviation; control of Vanilla Air

ASIANA AIRLINESMember since: 2003

Codeshares: 26

New: Copa, SriLankan Airlines

Partners/stakes: Air Busan (46% )

AUSTRIANMember since: 2000

Codeshares: 31

Partners/stakes: Lufthansa Group

carrier and part of its transatlantic

and Japanese JVs

AVIANCAMember since: 2012

Codeshares: 12

Partners/stakes: Part of wider

group since TACA merger

AVIANCA BRAZILMember since: 2015

Codeshares: 1

BRUSSELS AIRLINESMember since: 2009

Codeshares: 27


carrier and part of its transtlantic

JV with United Airlines

COPA AIRLINESMember since: 2012

Codeshares: 8

New: TAP Portugal

CROATIA AIRLINESMember since: 2004

Codeshares: 13

New: KLM, LOT, Singapore Airlines

EGYPTAIRMember since: 2008

Codeshares: 19

ETHIOPIAN AIRLINESMember since: 2009

Codeshares: 22

New: Aegean Airlines

EVA AIRMember since: 2013

Codeshares: 10

New: Turkish Airlines

LOT POLISH AIRLINESMember since: 2003

Codeshares: 18

New: Air Serbia, Croatia Airlines

Partners/stakes: Signed LoI on

possible JV with Turkish Airlines

LUFTHANSAMember since: 1997

Codeshares: 30

Partners/stakes: Group includes

Austrian, Germanwings, Swiss,

Eurowings, as well as part-owned

Air Dolomiti and Brussels Airlines.

Sold JetBlue stake. JVs with group

partners from Europe to North

America with Air Canada and

Third time around: Avianca Brazil fills a

gap left by TAM, but Azul interest remains

Sta

r Alli

ance


United Airlines and to Japan

with ANA; working on JV with

Air China

SCANDINAVIAN AIRLINESMember since: 1997

Codeshares: 24

New: Etihad AirwaysENCeased: Aeroflot

SHENZHEN AIRLINESMember since: 2012

Codeshares: 12

Partners/stakes: Part of Air China

group, 80% stake in Kunming

SINGAPORE AIRLINESMember since: 2000

Codeshares: 26

New: Croatia AirlinesENPartners/stakes: Partnership with

Virgin Australia, in which it has

22%. Tigerair stake raised to 56%

SOUTH AFRICAN AIRWAYSMember since: 2006

Codeshares: 23

SWISS INT'L AIR LINESMember since: 2006

Codeshares: 24

New: Air China


carrier and part of its transatlantic

and Japanese JVs

TAP PORTUGALMember since: 2005

Codeshares: 25

New: Copa Airlines

Partners/stakes: Consortium led

by Azul owner David Neeleman is

acquiring 61%

THAI AIRWAYSMember since: 1997

Codeshares: 23

New: Oman Air

Partners/stakes: Nok Air (49%)

TURKISH AIRLINESMember since: 2008

Codeshares: 36

New: EVA Air, Philippines Airlines

Partners/stakes: Signed LoI on

possible joint venture with LOT

UNITED AIRLINESMember since: 1997

Codeshares: 30


with Air Canada/Lufthansa Group

on transatlantic, ANA on Japan, Air

Canada on Canadian flights. Taken

small stake and partnering Azul

GLOBAL ALLIANCES IN NUMBERS

NOTES: Based on RPKs for 2014 Top 200 passenger

rankings and alliance members outside top 150

Non-aligned36.2%Oneworld

19.0%

Star Alliance24.0%

SkyTeam20.8%

ALLIANCES: MARKET SHARE

63.8%Alliance traffic share

SKYTEAM

Revenue $156bnNet profit

Net profit

$0.5bn

$2.1bn

Operating profit $4.2bn

ONEWORLD

$148bnOperating profit $4.0bn

SOURCE: Airline Business World Airline Rankings

STAR ALLIANCE

Net profit $3.7bn

Operating profit $8.9bn$196bnRevenue

ALLIANCE NETWORKS WEEKLY SCHEDULED OPERATIONS

Weekly global operations September 2015 Destinations Countries Frequencies Capacity (ASK)

Total Duplicates Served (’000) (bn) Share

Star Alliance 1,213 470 192 133 38.8 23.5%

Oneworld 954 355 154 95 28.5 17.3%

SkyTeam 1,037 347 177 116 31.3 19.0%

TOTAL ALLIANCES 98.6 59.9%NOTES: Analysis based on weekly Innovata schedules for 14-20 September 2015. ASK = Available seat-kilometre. 1 mile = 1.609km. Share is of total nonstop scheduled capacity offered. Destinations are airports served


After a recent partner recruitment drive swelled

its ranks to 20 member airlines and as it

marks its 15th anniversary, the focus for

SkyTeam has shifted to the next stage of the

grouping’s development.

Garuda Indonesia, which joined SkyTeam in

March 2014, is the only new airline addition

over the last two years.

But the alliance is working on an affiliate

programme that would allow airlines on the

periphery of the alliance to access parts of its

technology platform.

SkyTeam chief executive Michael Wisbrun,

who replaces Leo van Wijk as chairman of the

grouping this November, says that the

SkyTeam Connect programme is still in a

development phase but will aim to allow for

easier connections with member carriers.

“We are discussing with, for instance, Gol,”

he says. “It makes sense for Gol, which is

co-operating with 13 members of SkyTeam, to

make operational connections with SkyTeam

technology.” SkyTeam carriers Air France and

Delta both have deep partnerships with the

Brazilian carrier, while Korean Air is the latest

SkyTeam operator to codeshare with it.

That could allow for easier rebooking in the

case of a flight disruption, as well as access to

the alliance’s other airport services.

Wisbrun says that for a low-cost carrier,

SkyTeam Connect would mean that the airline

would not have to be a part of the other

working groups and requirements of full

membership.

Delta Air Lines executive Perry Cantarutti will

succeed Wisbrun as SkyTeam Team chief

executive. Cantarutti is Delta’s senior

vice-president for Europe, the Middle East and

Africa. He joins the alliance management team

during September.

CANTARUTTI TAKES ON CEO ROLE AT CONSOLIDATING SKYTEAM

AEROFLOT

Member since: 2006

Codeshares: 27

New: Garuda Indonesia

Ceased: SAS

AEROLINEAS ARGENTINASMember since: 2012

Codeshares: 8New: Etihad Airways, Korean Air

AEROMEXICOMember since: 2000

Codeshares: 13

Partners/stakes: Plans to launch

JV on US-Mexican routes with

minority stakeholder Delta in 2016

AIR EUROPAMember since: 2007

Codeshares: 15

New: Korean Air

AIR FRANCEMember since: 2007

Codeshares: 51

Partners/stakes: Part of Air

France-KLM Group. With KLM and

Alitalia, is part of transatlantic JV

with Delta. Stake has dwindled in

Alitalia, which is renegotiating the

JV on Franco-Italian routes. Holds

small stake in Gol. Extensive

codeshare with Etihad

ALITALIAMember since: 2001

Codeshares: 32

Partners/stakes: Etihad owns

49% stake. Transatlantic joint

venture partner with Air France,

KLM and Delta. Seeking to

renegotiate JV covering Franco-

Italian routes with former key

stakeholder AIr France-KLM

CHINA AIRLINESMember since: 2011

Codeshares: 17

New: Bangkok Airways

CHINA EASTERN AIRLINESMember since: 2011

Codeshares: 23

New: Virgin America

Partners/stakes: Majority stakes in

Shanghai Airlines and China

Eastern Airlines Wuhan, and 33% of

still-to-launch Jetstar Hong Kong.

Seeking JV with Qantas on Australia-

China. Planned link-up with Delta,

which is set to take a stake

CHINA SOUTHERN AIRLINESMember since: 2007

Codeshares: 20

Ceased: Malaysia Airlines

Partners/stakes: Holds a 39%

stake in Sichuan Airlines and

majority stake in Xiamen Airlines

CZECH AIRLINESMember since: 2001

Codeshares: 20

Partners/stakes: Korean Air owns

44% stake, Travel Service 34%

DELTA AIR LINESMember since: 2000

Codeshares: 20

New: Shanghai AIrlines

Partners/stakes: Holds 49%

shareholding in Virgin Atlantic

Airways, with which it operates

a UK-USA route JV. Transatlantic

JV with Air France, KLM and

Alitalia. Minority stakeholder and

partner with Aeromexico and Gol.

JV with Virgin Australia on

USA-Australia flights. Planned

stake and partnership with

China Eastern

GARUDA INDONESIAMember since: 2014

Codeshares: 24

New: Aeroflot, Bangkok Airways,

Hong Kong Airlines, Oman Air

KENYA AIRWAYSMember since: 2007

Codeshares: 16

Ceased: TAAG Angola

Partners/stakes: KLM holds 27%

stake in the airline; Kenya Airways

hold 49% stake in Tanzanian

regional carrier Precision Air

KLMMember since: 2000

Codeshares: 46

New: Croatia Airlines, Oman Air

Partners/stakes: Part of Air

France-KLM Group, which has JV

with Alitalia. Together with Air

France and Alitalia, is part of

transatlantic JV with Delta. Holds

a minority stake in Kenya Airways.

Wide-ranging codeshare with

Etihad

KOREAN AIRMember since: 2000

Codeshares: 33

New: Aerolíneas Argentinas, AIr

Europa, American Airlines, Gol


stake in Czech Airlines

MIDDLE EAST AIRLINESMember since: 2012

Codeshares: 10

SAUDIAMember since: 2012

Codeshares: 8

TAROMMember since: 2010

Codeshares: 13

VIETNAM AIRLINESMember since: 2010

Codeshares: 21


stake in Vietnamese low-cost JV

Jetstar Pacific

XIAMEN AIRLINESMember since: 2012

Codeshares: 10

Partners/stakes: Majority-owned

by China Southern Airlines

SKYTEAM

Top job: Delta’s Cantarutti becomes CEO as Wisbrun takes SkyTeam chairman role

Sky

team

September 2015

ALLIANCES SURVEY


After its busiest period of expansion, it has

been a quiet year for Oneworld, with no new

additions. But a familiar face, in the shape of

Aer Lingus, is set to return.

Oneworld membership was boosted with the

arrival between October 2013 and April 2014

of Qatar Airways, former Star Alliance pair US

Airways and TAM, and SriLankan Airlines.

Oneworld membership stands at 15 after US

Airways was integrated into American Airlines.

US Airways and TAM switched camps as a

result of their mergers with Oneworld members

American Airlines and LAN, respectively. Now

another carrier, Aer Lingus, seems to be

following a similar path. IAG, the parent of

Oneworld carriers British Airways and Iberia, is

closing in on its acquisition of Aer Lingus after

securing shareholder support and conditional

approval from European regulators for the deal.

IAG plans to retain Aer Lingus’s brand and

have the Irish airline enter Oneworld and its

transatlantic joint venture – with Oneworld

partners American Airlines and Finnair – if its

takeover bid succeeds.

It would be familiar ground for Aer Lingus,

which was one of the earliest members of

Oneworld, having joined the grouping in 2000.

But the airline quit the alliance in April 2007 to

pursue its own low-fare strategy and form new

partnerships with other carriers.

Should it rejoin Oneworld, Aer Lingus –

already the only airline to leave one of the global

alliances to become independent of its own

volition – would become the first airline to rejoin

the same grouping.

Etihad Airways had also moved to include the

Irish carrier as part of its equity-alliance

partnership strategy, acquiring a 4% stake in Aer

Lingus. But Etihad has said it will sell this stake

if IAG gains control of the Irish operator.

AER LINGUS SET FOR SECOND ONEWORLD

AIR BERLINMember since: 2012

Codeshares: 22

New: Bulgaria Air, Jet Airways

Partners/stakes: Etihad holds a

29% stake in the airline and Air

Berlin codeshares with a number

of Etihad’s main partners

AMERICAN AIRLINESMember since: 1998

Codeshares: 33

New: Interjet, Korean Air, SriLankan

Airlines

Partners/stakes: A merger

with US Airways, which brought

the latter carrier into Oneworld in

April 2014, has now been

completed and the carriers

have been operating under a

single AOC since April.

Transatlantic joint venture with

British Airways, Finnair and Iberia

in April. JV on Pacific flights with

Japan Airlines. Expanding

partnership with Qantas on

Australian-USA flights. Recent

codeshare deal with SkyTeam

member Korean Air

BRITISH AIRWAYSMember since: 1998

Codeshares: 20

Partners/stakes: Is part of IAG,

along with Iberia and Vueling, and

potentially soon Aer Lingus.

Operates an immunised

transatlantic joint venture with

American Airlines and European

partners Finnair and Iberia; Joint

venture on Japanese routes with

Japan Airlines and Finnair

CATHAY PACIFICMember since: 1998

Codeshares: 19

New: Flybe

Partners/stakes: Part-owned

(30%) by Star Alliance carrier Air

China. Cathay owns Oneworld

affiliate Dragonair

FINNAIRMember since: 2000

Codeshares: 21

Partners/stakes: Part of American

Airlines, British Airways and Iberia’s

transatlantic JV, and BA’s joint

venture with Japan Airlines on

routes from Europe to Japan

IBERIAMember since: 2000

Codeshares: 27

New: AirBaltic, Interjet, TAM

Partners/stakes: Part of IAG along

with British Airways and Vueling;

operates immunised transatlantic

JV with American Airlines and

European partners British Airways

and Finnair

JAPAN AIRLINESMember since: 2007

Codeshares: 28

New: TAM

Partners/stakes: Part of JV with

American Airlines on flights to the

USA, and with British Airways and

Finnair on European services

LAN AIRLINES Member since: 2000

Codeshares: 12

New: Interjet

Partners/stakes: The merger with

TAM to create LATAM Airlines

Group also saw the Brazilian

carrier join it in Oneworld in

March 2014. Has unveiled plans

to operate with TAM under single

LATAM brand

MALAYSIA AIRLINES Member since: 2012

Codeshares: 29

Ceased: China Southern

QANTASMember since: 1998

Codeshares: 25

New: JetStar Japan

Partners/stakes: Launched

wide-ranging partneship with

Emirates in April 2013, ending

Kangaroo route joint venture with

British Airways. Is expanding its

partnership with American

Airlines on Australian-USA flights

and is also seeking authority for

JV with China Eastern on

Australia-China flights. Its Jetstar

low-cost unit is involved in a

number of carriers in the region

QATAR AIRWAYSMember since: 2013

Codeshares: 15

New: Royal Jordanian

Partners/stakes: Acquired a

near 10% stake in British Airways

and Iberia parent IAG in early

2015

ROYAL JORDANIANMember since: 2007

Codeshares: 13

New: Qatar Airways

S7 AIRLINESMember since: 2010

Codeshares: 21

New: Air Moldova, Montenegro

Airlines

SRILANKAN AIRLINESMember since: 2014

Codeshares: 13

New: American Airlines, Jetstar

Asia

TAMMember since: 2014

Codeshares: 13

New: Iberia, JAL, Passaredo

Partners/stakes: The merger with

LAN to create LATAM Airlines

Group also saw the Brazilian

carrier leave Star Alliance after

four years to join rival Oneworld.

Parent LATAM has unveiled plans

to operate with LAM and TAM

under single LATAM brand

ONEWORLD

Coming home? Aer Lingus set to rejoin Oneworld eight years after leaving

Image

Bro

ker/

Rex

Shutt

ers

tock

September 2015


SURVEY NOTESThis year's Airline Business alliance survey features codeshare, joint

venture and partnership highlights for all the global alliance members, as

well as partnership activity for selected non-aligned carriers. Total number

of codeshares are listed for each carrier. New and ceased codeshares

highlight some of the main changes since August 2014, but is not an

exhaustive list of all changes. Partner/stakes details do not necessarily

cover all those owned by the airline, but focus on key relationships and

joint ventures. Information is sourced from survey returns, company

information and Flightglobal. A full listing of codeshares is available to

subscribers on Flightglobal’s dashboard. For more on this premium news

service, visit: flightglobal.com/dashboard

ALASKA AIRLINES Codeshares: 13

EMIRATES

Codeshares: 16

New: Bangkok Airways, Flybe


with Qantas on flights between

Australia and Europe via Dubai

ETIHAD AIRWAYSCodeshares: 46

New: Aerolíneas Argentinas, Hong

Kong Airlines, SAS

Partners/stakes: Its equity alliance

strategy includes stakes in Air

Seychelles (40%), Air Berlin (29%),

Virgin Australia (24%), Air Serbia,

(49%), Etihad Regional (33%), Jet

Airways (24%) and most recently

Alitalia (49%), though will sell 4%

Aer Lingus stake. Wide-ranging

partnerships across these airlines,

while co-operating with carriers from

the global alliances, including Air

France, KLM and Air Canada

GOLCodeshares: 10

New Korean Air

Partners/stakes: Close ties with

SkyTeam partners – Air France-KLM

and Delta both hold small stakes

HAINAN AIRLINES Codeshares: 11

Partners/stakes: Part of HNA

Group, which also has stakes in

China’s Lucky Air (68%), Aigle Azur

(48%) and now Comair (6%)

JET AIRWAYSCodeshares: 20

New: Air Berlin, Air Seychelles,

Bangkok Airways

Partners/stakes: Wide-ranging

co-operation with Etihad and its

partners, after the Gulf carrier

acquired a 24% stake in the airline

JETBLUE

Codeshares: 11

New: Royal Air Maroc

Partners/stakes: Lufthansa sold

its 19% stake in JetBlue

JETSTAR

Codeshares: 4Partners/stakes: Qantas unit has

developed several JV carriers,

including Jetstar Japan and Jetstar

Hong Kong

TRANSAEROCodeshares: 9New: Ural Airlines

VIRGIN ATLANTICCodeshares: 8Partners/stakes: SkyTeam carrier

Delta holds a 49% stake in the

airline, with which it operates a JV

covering routes between the UK

and USA. This is separate from

Delta’s transatlantic JV with Air

France-KLM and Alitalia

VIRGIN AUSTRALIACodeshares: 10

Partners/stakes: JV with 26%

shareholder Air New Zealand on

trans-Tasman flights. Operates in

partnership with Singapore

Airlines, which holds a 22% stake;

operates a partnership with Etihad

Airways, which holds a 24%

shareholding. Also operates a JV

partnership on US routes with

Delta Air Lines

WESTJET Codeshares: 13

New: Philippines AirlinesNA

After its busy period of acquiring airline stakes

in support of its equity-alliance partnership

strategy, Etihad has put the focus on

deepening co-operation across its partners.

In unveiling the Etihad Airways Partners

concept last October, the boss of the Abu

Dhabi carrier, James Hogan said the initiative

will create “synergies and efficiencies for

participating airlines on the one side, and

enhanced network choice, service and

frequent-flyer benefits for the consumer on the

other”. He argues that Etihad Airways Partners

differs from legacy airline alliances by offering

benefits beyond pure commercial co-operation.

Etihad Airways Partners consists of Etihad,

Air Berlin, Air Serbia, Air Seychelles, India’s Jet

Airways and Darwin Airline, which operates as

Etihad Regional. However, Etihad says any

airline can become an Etihad Airways Partners

member even if it is part of an existing alliance.

Alongside its equity partners, it has a struck a

series of codeshare deal as part of its efforts

to rapidly gain scale.

The new brand included “standardised

mileage and tier benefits across all partners,

no blackout periods and priority services”,

adds Etihad.

That was supported by the appointment of

former Air France executive Bruno Matheu to

the new position of chief operating officer

equity partners, last December.

The airline has not added to its ranks,

though it did in January lift its stake in Virgin

Australia to 24% using “creep provisions”

provided for in Australia’s corporation laws.

Star Alliance carriers Air New Zealand and

Singapore Airlines hold 26% and 22% stakes

respectively in the Australian carrier.

Of the non-aligned carriers, only Aer Lingus

is on course to join an alliance – or in its case

rejoin – as it is set to be reacquainted with

Oneworld once IAG completes acquisition of

the Irish carrier.

Despite the recent capture of Avianca Brazil,

Star Alliance continues to eye Brazilian

operator Azul to boost its presence in that

market. Oneworld already has TAM in its camp

following the latter’s merger with LAN, while

SkyTeam has a close relationship with Brazilian

operator Gol. Air France and Delta Air Lines

both have small investments in Gol, while

Korean is the latest to codeshare with it.

Royal Air Maroc meanwhile is hoping to

reach a preliminary decision on alliance

membership by the end of this year, as it

reinforces its preference for Oneworld.

ETIHAD FINDS STRUCTURE FOR PARTNERSNON-ALIGNED

Joined-up thinking: Etihad aims to maximise co-operation through its partner initiative

Etihad

September 2015

ALLIANCES SURVEY


rupted pairings are small, the actual cost could be very high because both the origi-nal crew and the covering crew have to be paid, potentially at overtime rates. In one example, an airline spent approximately $2 million annually for company (non-union) business.

■ Crew behaviourAs crew members earn seniority and gain flexibility in scheduling, they are able to “game the system”, taking advantage of loop-holes that can dramatically increase their pay while offering no added benefit to the airline. Although legal, such practices drive up over-all crew costs unnecessarily and confound crew optimisers, which create the pairings before crew members bid for their schedule. Because crew payroll doesn’t perform a pro-ductivity/effectiveness audit, airlines rarely discover these abuses. For the typical mid-

size airline, this could lead to some pilots earning up to and in excess of double their base pay by gaming the system. Add it all up and it can equal $4 million to $6 million per year in additional crew cost for a typical mid-size airline with little or no increase in flying hours or productivity.

FOCUS CREW MANAGEMENT

September 2015

With budget overruns a potentially significant issue for airline management teams, LEK Consulting’s John Thomas examines ways that crew costs can be better managed

PEOPLE WATCHING

Most airline chief executives, chief financial officers and chief operating officers believe crew costs (cockpit and cabin crew), which typi-

cally can account for up to 18% of their cost base regardless of business model, are low-ered through the use of crew scheduling opti-misers. Although optimisers do increase crew efficiency, airlines still experience crew cost overruns. Lacking understanding of the root cause of overruns, airlines often fail to take effective corrective actions, thereby missing their targeted budget for crew costs.

This exposure takes many forms:

■ Management actions and behaviourAutomated crew planning systems may con-struct a number of pairings that appear optimal and legal on paper, but in fact provide little buffer to absorb disruptions. Some airlines pre-fer longer pairings (approximately six days) versus shorter pairings (approximately two days), as the former may offer a lower cost, according to the optimiser. In reality, though, certain scheduling practices leave little room for error and often result in crew costs that are significantly higher than the budget permits. The delay in recognising the crew cost overrun also leads to an ineffective feedback loop, repeating the same poor pairings and schedul-ing practices month after month.

Furthermore, scheduling of additional crew activities, such as internal meetings, trainings and check rides/initial operating experience, often disrupts pairings. While management may think the number of dis-

Manual mistakes can increase crew

costs by about 5% for a mid-size airline

■ Post-processing system limitationsGiven the complexity of the typical collective bargaining agreements, crew payroll is either handled by a pre-programmed “black box” or, at some airlines, calculated manually. Yet this process, which incorporates no effective checks and balances, is biased against the air-line; an underpaid crew member makes sure it is corrected, whereas overpayments go uncorrected. Compounding the error are the additional personnel costs for the staff needed to respond to and act on crew inquiries over pay discrepancies. Our analysis across air-lines indicates that manual mistakes alone can account for an increase in crew cost of approximately 5% for a mid-size airline.

■ Compensation design versus realityGiven the highly complex nature of crew compensation, many airlines design their pro-grammes or union agreements to “intuit” the most efficient and effective structure of crew compensation plans. However, reality does not match the conditions present when the compensation plan was designed. And the optimisers adjust according to the current set of rules and pay – they don’t say when certain conditions in the plan are unduly driving up overall compensation.

In addition, without knowing the potential cost of its actions, the crew planning group must often make a number of policy decisions by the seat of its pants, such as the following:■ Optimal level of reserves versus overtime■ Level of reserves required in order to cover irregular operations■ Optimal mix of long and short pairings


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■ Optimal length of pairings versus potential for broken pairings■ Potential cost savings of longer pairings ver-sus increased cost to cover broken pairings■ Part 117 (and its global equivalent) duty hour-related challenges■ Trade-off between out-and-back crew rota-tion versus “fly around the network” crew rotation practices■ Keeping cabin and cockpit crews together versus optimising crews separately

All in all, few airlines have the right tools to accurately forecast crew costs. Given the mag-nitude of crew cost overruns airlines are

likely experiencing now, they simply must devote more resources to understanding the root cause of these cost overruns. Airline crew planning and scheduling systems often are focused on publishing the next month’s pair-ings and on matching bids to pairings.

They often fail to spend enough time and resources on analysing the effect of their policy decisions, not to mention the cause of cost overruns. The incremental costs of suboptimal crewing should motivate airlines to conduct deeper analysis and acquire advanced analyti-cal tools. Better tools would not only allow them to optimise their policies, but also build in proper buffers, pay crew correctly, under-

stand potential work rule changes during labour negotiations and reduce total crew cost.

There are specialised vendors (not suppliers of the current crew optimiser systems) that effectively help airlines reduce their crew costs through tackling this problem. One such vendor that has worked successfully with LEK Consult-ing is Rainmaker Technologies, which offers a crew analytics and crew pay rules engine.

On a recent deployment, the Rainmaker suite was able to identify and support the implementation of improved reserve utilisa-tion/productivity and reduced related pre-mium through improved modelling of both operational and crewing demands and proac-tively manage pairing length/mix to mitigate the impact of crew “self-rostering” by dropping trips for leave or sick leave during peak months. It also supports a significant reduction in training and line-check-related disruptions.

Immediate savings for a mid-sized carrier based on its existing performance was roughly $4 million per annum.

The C-suite may treat these products and services as yet another “optimiser”, but in real-ity, the current process of optimise-bid-award-modify-fly-pay is sub-optimal. It neither affords the airline feedback nor provides an effective tool for analysing the root cause of cost overruns. Applying analytical tools allows airlines to avoid creating expensive pairings, identify and potentially prevent expensive abuses of the system, and determine and avoid the costs of various management actions. ■

Many systems focus on the next month’s pairings and matching bids to those pairingsJohn Thomas is managing director and regional head for Asia-Pacific at LEK Consulting


from lower fuel costs, which for US carriers are not tempered by exchange losses resulting from the stronger US dollar. Delta for example, which lifted operating revenue 1%, cut its operating costs 9% in the quarter, including a 40% drop in fuel expenses.

But the weaker demand envi-ronment has prompted North American carriers to scale back capacity growth planned for the second half.

American Airlines, for exam-ple, sees no increased domestic demand improvement in the third quarter, after passenger unit revenue fell 5% in the second quarter. “We don’t see any improvement in the domestic

a stronger performance at Luf-thansa Group, which increased its adjusted operating profit more than 50% to €635 million ($696 million) in the second quarter.

Revenue climbed 9% to €8.39 billion as, finance chief Simone Menne says, its passenger air-lines “gained extra momentum in the second quarter”. But she adds: “The fall in fuel costs is largely responsible for the improvement in our results.”

That leads her to sound a note of caution: “We assume that the price level for airline tickets will not recover. We will therefore continue to work consistently on

the competitive focus of the Luf-thansa Group.”

Menne adds that the increases were partly attributable to “weak” results in 2014 and that it will be difficult to maintain the performance during the second half of the year.

Competition is likely to increase especially in the short-haul arena from September as EasyJet and Ryanair expand their operations in Germany, while for Lufthansa’s long-haul business the benefit of favourable currency effects will lessen, says Menne.

Unit revenue rose 2.8% during the first six months, especially on the back of strong performance on routes to North America. But without exchange-rate effects, unit revenue declined 4.1% dur-ing the January-June period.

Lufthansa Group has con-firmed its full-year outlook. It foresees an adjusted operating profit of more than €1.5 billion “before strike costs”.

Air France-KLM Group mean-

There was a familiar ring to results as North American and European carriers dis-

closed profits during the second-quarter earnings season.

Amid an environment of sharply lower fuel costs, airlines on both sides of the Atlantic have largely been able to improve prof-its. But while US carriers’ profit run continues almost unabated, much of the talk from Europe’s pressured network carriers is of not allowing lower fuel expendi-tures to mask the requirement to restructure their cost base.

Second-quarter operating prof-its covering a dozen North Amer-ican carriers topped $8 billion in the three months ending June 2015. That is more than $2.5 bil-lion higher than in the same stage in 2014. Collective net profits were more than $2 billion higher at $5.7 billion.

American Airlines, Delta Air Lines, Southwest Airlines and United Airlines all posted operat-ing profits in excess of $1 billion and combined generated profits of almost $7 billion.

This was achieved despite col-lective revenue among North American carriers falling more than 1% compared with the sec-ond quarter last year amid weaker passenger yields.

This was offset by the gains

ANALYSIS Q2 RESULTS

Airlines see past fuel gainsProfits among European and US operators improved again in the second quarter as the lower oil price cut their costs, but on both sides of the Atlantic carriers are taking action to safeguard their fortunes

GRAHAM DUNN & MICHAEL GUBISCH LONDON

September 2015

No improvement in the US domestic

market, but its not getting worse

US MAJOR AIRLINE GROUP FINANCIAL RESULTS APRIL-JUNE QUARTER 2015

Group/airline Revenues Operating result ($m) Operating margin Net result ($m)2015 change 2015 2014 2015 2014 2015 2014

Alaska Air Group 1,437 4.5% 372 263 25.9% 19.1% 234 165Allegiant Travel Company 322 10.9% 93 56 28.8% 19.4% 54 33American Airlines Group 10,827 -4.6% 1,921 1,399 17.7% 12.3% 1,704 864Delta Air Lines 10,707 0.8% 2,474 1,579 23.1% 14.9% 1,485 801Hawaiian Holdings 571 -0.8% 91 52 16.0% 9.0% 49 27JetBlue Airways 1,612 8.0% 282 141 17.5% 9.4% 152 230Republic Airways Holdings 338 -1.6% 38 63 11.2% 18.4% 4 20SkyWest inc 788 -3.4% 70 13 8.9% 1.6% 31 -15Southwest Airlines 5,111 2.0% 1,085 775 21.2% 15.5% 608 465Spirit Airlines 553 10.8% 122 105 22.1% 21.1% 77 65United Continental 9,914 -4.0% 1,445 906 14.6% 8.8% 1,193 789Virgin America 401 0.5% 68 47 16.9% 11.8% 65 37TOTAL 42,582 -1.2% 8,061 5,400 18.9% 12.5% 5,657 3,482

market, but it’s not getting any worse,” says Scott Kirby, presi-dent of the Oneworld carrier.

United Airlines executives made a similar statement with the carrier’s result, saying domes-tic demand had levelled off from the drop it experienced during the first half of the year.

EUROPEAN CONCERNSWhile overall European carriers enjoyed improved financial for-tunes in the second quarter of the calendar year, airline executives at the region’s network carriers were largely stressing the need for more cost savings.

The improved profits among European carriers in part reflects

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De Juniac: Will reduce Air France long-haul network if no savings


but we have been prudent in terms of the risks we were willing to expose the business to in exploiting that opportunity.

“I think those two dynamics fundamentally change as we grow more confident in our abil-ity to grow.”

IAG at the end of July again extended the deadline for Aer Lingus shareholders to accept its takeover offer, adding that the 90% acceptance condition has been waived. Shareholders repre-senting almost 62.5% of Aer Lin-gus share capital had accepted IAG’s offer as of 30 July. ■

performance over the third quar-ter and the full year.

Aer Lingus says it experienced “adverse effects” from unfavour-able currency exchange but expects these to “moderate” in the second half, as higher propor-tions of US dollar revenues emerge. “Both short- and long-haul capacity are set to expand into the peak season, and we are very satisfied with forward yield and load-factor profiles at this time,” says chief executive Ste-phen Kavanagh.

He adds that he is “very confi-dent” that the Irish carrier can achieve a 10-14% operating profit margin target set by IAG if successfully acquired by the UK-based airline group.

“Our margins have been con-sistent, but they haven’t seen a step change,” says Kavanagh. “Now what gives us the confi-dence is that we can continue to grow the top line, but in the past we have been constrained by costs related to our scale of activ-ity. We haven’t been constrained in terms of network opportunity,

while is to implement new cost-saving measures immediately after its latest financial figures showed operating profit down a fifth for the quarter. These meas-ures will include cutting routes and restricting winter capacity.

It sees savings on fuel expendi-ture offset by unit revenue pres-sures and the negative effects of currency exchange, in a repeat of what happened in the first half.

This “more challenging reve-nue environment”, it adds, has spurred the company to acceler-ate implementation of its Perform 2020 turnaround programme.

A “significant” proportion of Air France’s long-haul network is not profitable, says group chief executive Alexandre de Juniac. If negotiations with unions cannot be concluded by the end of Sep-tember, he says, “we have to reduce significantly the long-haul network at Air France”.

The carrier’s economic perfor-mance is “not sustainable in the long term”, adds Air France chief Frederic Gagey.

Air France-KLM is accelerat-ing its Perform 2020 restructuring plan. While cost savings were previously to be realised over a five-year period, that schedule has been shortened to three years for both carriers, says de Juniac.

Gagey says Air France will return to growth only if targeted cost reductions are implemented. But if this is achieved soon, he indicates, the carrier could start growing again in 2016 or 2017.

Its sister carrier KLM reached labour agreements for pilots, flight attendants and ground per-sonnel during the first half of this year. But group finance chief

September 2015

We assume the price level for

airline tickets will not recover

$6.9bnQ2 operating profits among four biggest

US carriers See Flightglobal’s dashboard for full coverage of the US and European earnings season:flightglobal.com/dashboard

Pierre-Francois Riolacci says any savings would be realised only if the agreements were imple-mented during the second half.

British Airways and Iberia par-ent IAG turned in a second-quarter operating profit of €530 million ($580 million), a rise of almost 40%. This allowed the group to more than double operating profit for the half-year to €555 million.

At constant currency, revenue for the quarter was down by 1.2%, with passenger unit reve-nue down 6.6%. Non-fuel unit costs fell by 6.9% and fuel unit costs by 12%.

IAG chief executive Willie Walsh says the figures show the company is continuing to “take cost out of the business”.

He says IAG is “on track” to reach its full-year targets. It has maintained its expectations of a full-year operating profit exceed-ing €2.2 billion.

First-half operating losses deepened at IAG’s planned new recruit, Aer Lingus. But the car-rier insists it is “well-positioned” to deliver improved operating

EUROPEAN AIRLINE GROUP FINANCIAL RESULTS APRIL-JUNE QUARTER 2015

Group/airline Revenues Operating result ($m) Operating margins Net result ($m)2015 change 2015 2014 2015 2014 2015 2014

Aer Lingus 521 7.1% 38 43 7.4% 8.8%

Air Berlin 1,190 -6.6% -18 -8 -1.5% -0.6% -42 10

Air France-KLM 7,382 3.0% 206 264 2.8% 3.7% -86 -12

IAG 6,285 11.2% 589 422 9.4% 7.5% 398 311

Icelandair Group 294 -1.2% 50 45 17.1% 15.2% 22 22

Lufthansa Group 9,326 8.9% 626 448 6.7% 5.2% 588 192

Norwegian 759 16.2% 166 73 21.9% 11.2% 42 17

Ryanair 1,837 10.5% 320 258 17.5% 15.5% 272 219

TOTAL 27,593 7.1% 1,978 1,546 7.2% 6.0% 1,195 758

EUROPEAN AIRLINE GROUP HALF-YEAR FINANCIAL RESULTS JANUARY-JUNE 2015

Group/airline Revenues Operating result ($m) Operating margins Net result ($m)2015 change 2015 2014 2015 2014 2015 2014

Aer Lingus 830 7.4% -15 -11 -1.9% -1.4% -14 -14

Air France-KLM 13,639 2.4% -257 -230 -1.9% -1.7% -706 -686

IAG 11,491 11.6% 615 255 5.4% 2.5% 368 106

Lufthansa Group 17,038 8.5% 477 215 2.8% 1.4% 1,058 -88

TOTAL 42,998 7.2% 820 230 1.9% 0.6% 706 -681NOTE: Results are for airline groups including non-aviation businesses. All figures are in us dollars exchanged at average rate for period. SOURCE: Flightglobal


Passenger traffic among leading airlines increased 5.9% in the first half, sus-

taining recent steady growth.--

-

ANALYSIS TRAFFIC

Airlines follow steady growth pathPassenger traffic among the leading operators grew 6% in the first half of 2015, with European and US network carriers keeping capacity tight but above-average expansion among low-cost and Asia-Pacific operators

GRAHAM DUNN LONDON

September 2015

NORTH AMERICAN AIRLINES FIRST-HALF TRAFFIC

Traffic (RPK) Capacity (ASK) Load factorAirline Million Change % Million Change % Percent Change

Air Canada 51,136 9.7 61,895 9.3 82.6 0.3

Alaska Airlines 23,581 9.1 27,886 11.2 84.6 -1.6

Allegiant Air 7,238 9.4 8,393 11.7 86.2 -1.9

American Airlines 155,238 -0.8 189,498 0.0 81.9 -0.6

Delta Air Lines 162,455 3.1 193,927 4.2 83.8 -0.9

Hawaiian Airlines 11,164 4.7 13,952 4.5 80.0 0.2

JetBlue Airways 32,329 9.8 38,062 8.5 84.9 1.0

Republic Airways 8,953 -0.7 11,454 0.5 78.2 -1.0

SkyWest Airlines 23,630 -4.9 28,751 -4.6 82.2 -0.3

Southwest Airlines 91,262 7.5 110,657 6.5 82.5 0.8

Spirit Airlines 13,675 24.8 15,998 27.6 85.5 -1.9

United Continental 142,427 1.2 172,441 2.1 82.6 -0.7

Virgin America 8,009 1.2 9,685 0.7 82.7 0.4

WestJet 17,320 4.0 21,678 6.0 79.9 -1.5

TOTAL 748,417 3.4 904,277 3.9 82.8 -0.4NOTES: Jan-jun 2015, American Airlines includes US Airways; SOURCE: Flightglobal

ASIA-PACIFIC AIRLINES FIRST-HALF TRAFFIC


Air China 82,176 9.5 102,881 10.5 79.9 -0.7

Air India 18,831 7.3 24,700 5.9 76.2 1.0

Air New Zealand 15,535 12.2 18,440 11.6 84.2 0.4

AirAsia 27,808 7.6 35,675 8.2 77.9 -0.4

All Nippon Airways 36,170 6.1 53,884 3.1 67.1 1.9

Cathay Pacific 59,836 9.4 69,689 6.4 85.9 2.3

China Airlines 18,287 3.7 23,384 4.3 78.2 -0.4

China Eastern 69,221 12.6 86,107 11.9 80.4 0.4

China Southern 91,306 17.1 112,935 14.8 80.8 1.6

Eva Air 16,982 16.3 20,802 13.5 81.6 2.0

IndiGo 16,819 35.6 19,681 23.1 85.5 7.9

Japan Airlines 27,714 16.2 38,474 16.6 72.0 -0.3

Jet Airways 19,103 21.3 22,460 13.5 85.1 5.5

Singapore Airlines 44,657 -3.1 58,612 -1.7 76.2 -1.1

Thai Airways Int’l 29,745 9.7 40,875 0.9 72.8 5.8

TOTAL 574,190 10.9 728,599 9.0 78.8 1.3NOTES: Jan-Jun 2015, AirAsia is group traffic figure; SOURCE: Flightglobal

LATIN AMERICAN AIRLINES FIRST-HALF TRAFFIC


Aeromexico 15,468 11.9 19,729 12.7 78.4 -0.6

Avianca Holdings 19,541 26.1 24,944 26.1 78.3 0.0

Copa Airlines 12,955 2.8 17,365 7.1 74.6 -3.1

Gol Linhas Aereas 20,167 10.4 26,096 8.1 77.3 1.6

LAN Airlines 9,769 7.7 11,528 7.6 84.7 0.0

TAM Linhas Aereas 29,592 1.6 36,268 1.8 81.6 -0.2

Volaris 8,364 13.0 10,257 12.5 81.5 0.3

TOTAL 115,856 9.5 146,187 9.8 79.3 -0.2NOTES: Jan-Jun 2015; SOURCE: Flightglobal

EUROPEAN LOW-COST CARRIERS FIRST-HALF TRAFFIC

Airline Pax: Jan-Jun 2015 Pax: Jan-Jun 2014 Change %

EasyJet 33.1m 31.3m 5.6

Ryanair 46.5m 38.5m 20.8

TOTAL 79.5 69.8 14.0SOURCE: Flightglobal

EUROPEAN AIRLINES FIRST-HALF TRAFFIC


Aer Lingus 7,702 5.9 9,833 3.0 78.3 2.2

Aeroflot 34,165 9.6 44,416 9.0 76.9 0.4

Air Berlin 22,035 -3.0 26,627 -3.7 82.8 0.6

Air Europa 10,768 4.9 13,081 5.1 82.3 -0.2

Air France-KLM 112,368 0.3 134,055 0.3 83.8 0.0

Austrian 8,267 -3.0 11,013 0.0 75.1 -2.3

British Airways 68,225 2.8 85,872 2.4 79.4 0.3

Finnair 12,212 1.1 15,536 1.7 78.6 -0.5

Iberia 22,359 12.1 28,200 10.0 79.3 1.5

Lufthansa 76,581 5.0 98,053 3.9 78.1 0.8

Norwegian 19,352 14.8 22,976 7.2 84.2 5.5

SAS 15,455 -5.0 21,156 -2.6 73.1 -1.9

Swiss 17,775 4.2 21,890 4.8 81.2 -0.5

Turkish Airlines 55,202 8.2 71,087 10.1 77.7 -1.4

Vueling Airlines 10,291 14.2 13,171 15.5 78.1 -0.9

TOTAL 492,757 4.0 616,966 3.8 79.9 0.2NOTES: Jan-jun 2015; SOURCE: Flightglobal

--

MIXED PICTURE

-

- -

-

-

-

-

-

■


1,256 CSeries5%

1,320 A320ceo

5%

1,808 737NG7%

9,137 737 Max36%

9,806 A320neo39%

SINGLE-AISLE DELIVERY MARKET SHARE 2015-2034

SOURCE: Flightglobal Fleet Forecast 2015-2034

767MC-21 3%

1,254 C9195%

A1.1%

E:Flightglobal Ascend????

25,348Total deliveries

ANALYSIS SINGLE-AISLES

September 2015

Ascend consultancy head Rob Morris examines the competition facing the single-aisle incumbents over the next 20 years

Will entrants widen narrow focus?

This year’s Flightglobal Fleet Forecast predicts the deliv-ery of 41,000 new commer-

cial turboprop and jet aircraft over the next 20 years, worth an estimated $2.83 trillion in 2015 delivery values. More than 60% of those deliveries and almost 50% of that value is expected to be in single-aisle aircraft types, which explains why this sector of the market remains of much in-terest to the industry today.

With Airbus and Boeing’s ubiquitous A320 and 737 fami-lies about to see next generation variants entering service in the next couple of years, plus the Bombardier CSeries, Comac C919 and Irkut MC-21 also fi-nally becoming operational re-alities, the sector seems set for real change over the next few years. But what is the real shape of that change?

DUOPOLY DOMINANCEAirbus and Boeing enjoy a manu-facturing duopoly in the single-aisle sector today that has endured since the latter’s acquisi-tion of McDonnell Douglas in 1997. Close to 11,500 A320 and 737 family aircraft have been delivered to airline operators globally since that duopoly was created, resulting in a single-aisle fleet of around 13,000 aircraft in airline passenger service at the end of last year. Despite the entrance of new manufacturers, little is expected to change, with more than 85% of the total deliv-eries predicted through 2034 still expected to come from Airbus and Boeing.

With today’s fleets dominated by those two manufacturers, this will result in Airbus and Boeing still accounting for close to 90% of the fleet of single-aisle passen-ger aircraft in service at the end of 2034. So does this mean that the upstart manufacturers will see commercial failure for their programmes? Success is of course relative and the CSeries,

C919 and MC-21 are between them predicted to deliver over 3,200 aircraft. But while these programmes will each see out-put volumes averaging around 60 aircraft a year through their production runs, Airbus and Boeing are talking about increas-ing their production beyond cur-rent committed plans to each produce that number of aircraft every month.

However, the forecast suggests that demand would not be suffi-cient to justify such production rate increases. Under the base case scenario, assuming global passenger capacity growth of 4.8% per annum over the next

20 years – which itself services average traffic of around 5% as load factors continue to grow globally, albeit at slightly slower rates than seen previously – together with productivity hikes driven by increasing aircraft size, sector length and utilisa-tion, the highest production rate foreseen in the single-aisle sector for any single manufacturer is 50 aircraft per month.

Airbus is committed to increasing production from the current 42 aircraft per month to 50 per month by the first quarter of 2017, while Boeing is commit-ted to driving its rates from 42 to 47 by that time and further to 52 aircraft per month in 2018. At face value, the final Boeing rate increase appears unjustified by the Fleet Forecast, but it would only need a minor change in some forecast assumption – mar-ket growth, retirement rates or productivity adjustments – to absorb the slightly higher pro-duction rate. However, further

increases, potentially to 60 air-craft per month from each of the two current duopolists, would require more fundamental changes in these assumptions for increments in supply to be justi-fied. Retirements of the existing fleet would have to be higher, aircraft productivity (read effi-ciency) would have to decline, or traffic would have to grow at faster rates than hypothesised.

Or alternatively, that supply would be absorbed by demand which the forecast currently allo-cates to production programmes of the single-aisle entrants, thereby weakening the market imperative and reducing market penetration for those aircraft.

DEMAND CYCLEFinally, the Fleet Forecast is a long-term trend forecast, with no attempt to predict the enduring global economic cycle which itself will impact aviation, creat-ing its own demand and supply cycle. We are now seven years into the current cycle which commenced with the downturn in 2008. Every cycle is of course different but previous cycles have typically lasted seven to 10 years. So the risk of some soften-ing of demand over the next few years must increase as the cycle endures, perhaps coinciding with those single-aisle rate increases from the two incum-bent manufacturers, bringing obvious consequences for the single-aisle markets. ■

The CSeries, C919 and MC-21 are

predicted to deliver over 3,200 aircraft

For more on our forecast report, and to download a summary: flightglobal.com/FleetForecast

Basic assumptions must change to justify this rate

60


As a conduit for the economy’s impact on underlying travel demand, cost base and fares are key in capacity decisions

Discerning the GDP multiplier effect

PLANNED CAPACITY GROWTH – NORTH ATLANTIC: SEPTEMBER

Airline Weekly capacity ASK Weekly frequency Weekly seats offeredmillion change total change no. thousands change

Delta Air Lines 1,516 4.8% 928 +24 228 4.5%

United Airlines 1,379 3.2% 929 -1 205 2.8%

British Airways 1,309 -3.6% 691 -34 192 -5.2%

Lufthansa 1,280 3.7% 512 +2 174 3.6%

Air Canada 874 9.0% 509 +60 141 9.4%

American Airlines 867 10.1% 546 +56 128 9.8%

Air France 743 -0.4% 316 +4 109 -1.5%

Virgin Atlantic 681 21.6% 304 +62 100 21.9%

US Airways 578 10.7% 364 +29 91 11.2%

KLM 448 -1.6% 210 -4 63 -2.5%

TOTAL MARKET 12,975 5.4% 7,159 +344 1,923 5.1%

As attention turns to sum-mer 2016 schedules and the slot co-ordination

process for the season, it is timely to examine the likely operating environment and how economic expectations are changing, as well as the likely implications involved.

In recent results we have seen a number of airlines – particu-larly the US majors – reduce their already modest capacity plans to reflect actual and ex-pected economic develop-ments. These include a general

JET KEROSENE SPOT PRICES

Month Fuel price Change over period¢/US gal 1 month 1 year

Aug 283.8 -1.1% -5.8%

Sep 272.6 -3.9% -8.7%

Oct 247.4 -9.2% -16.3%

Nov 232.7 -5.9% -20.3%

Dec 186.8 -19.7% -38.2%

Av.14 272.1 -8.1%Jan 154.0 -17.6% -47.9%

Feb 178.7 16.0% -39.9%

Mar 167.5 -6.2% -42.1%

Apr 172.6 3.0% -40.6%

May 186.1 7.8% -35.8%

Jun 178.4 -4.1% -38.9%

Jul 158.8 -11.0% -44.7%

NOTES: Prices are world average = median of Europe/Singapore cargo and US pipeline spot prices in US¢/gallon.

SOURCE: ICIS

response to reduced forecasts for 2015 GDP growth compared with when capacity plans were being decided – and more spe-cific reactions, for example in the case of United Airlines, with further reductions in the US “energy markets”.

This column often focuses on the importance of traffic value rather than volume alone, and how less capacity will generally result in more in terms of the fi-nancial outcome. This was a point underlined by United chief executive Jeff Smisek as the most recent results were re-leased, when he said that man-agement would “continue to take the necessary capacity and network decisions to deliver value to our shareholders”.

TRAFFIC MULTIPLIERMoving a little further north, we have also seen the WestJet chief executive Gregg Saretsky ap-pear to question the link be-tween GDP and traffic, while analysts seem to take the view that the airline is adding too much capacity.

It is differences in view that make a market for any compa-ny’s shares, but it must be recog-nised that the supposed GDP/traffic multiplier does not have a constant value along the fare curve, and that for any given rate of GDP growth, an airline offering lower fares will demon-strate a higher multiplier. The extent to which this is “struc-turally different” and sustaina-ble depends first, of course, on whether such fares are profita-

ble – and secondly on how much further they might fall, which in turn will be deter-mined by the airline’s cost base, even allowing for adjustment lags. A race to the bottom that fails to result in a structural ad-

vantage is essentially self-in-flicted damage.

The reality is that there is a high-level link between GDP and underlying travel demand (even though it is a revealed re-lationship). More accurately

World GDP growth forecast for 2015, down from 3.3% predicted a year ago

2.7%GDP growth expected for the USA, versus an earlier 3.0% forecast by PwC

2.3%ANALYSIS MARKET OUTLOOK

September 2015

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ANALYSIS BYFLIGHTGLOBAL INSIGHT

Russia’s GDP set to contract, versus a 1.5% rise forecast by PwC last year

5.0%


order of 2.8% for 2014 and 3.3% for 2015. In the event, the out-come for 2014 was in line with the forecast but, as we move through 2015, forecasts have been cut back and the current expectation is for this year to have an outcome clos-er to 2.7%. This reflects the effect of a number of movements in dif-ferent directions at a country level compared with the forecasts made a year ago.

GREATEST IMPACTFor these purposes, we have taken the forecasts from PwC’s Global Economy Watch (July

2015 and August 2014 as the comparator), which demon-strate no change for the euro-zone (1.5% versus 1.4%) and an increase for India (7.5% versus 6.6%). Among those where the current forecast is now lower than a year ago are the USA

PLANNED CAPACITY GROWTH BETWEEN REGIONS – INNOVATA SCHEDULE DATA: SEPTEMBER

Regions Region/ Weekly capacity ASK Weekly frequency Weekly seats offeredsubregion million change total change no. thousands change

North America Total West Europe 12,975 5.4% 7,159 +344 1,923 5.1%

North America Total Asia 7,190 8.4% 2,373 +181 689 8.5%

North America Caribbean 1,198 1.8% 3,880 -4 571 2.1%

Central 1,525 11.0% 5,138 +370 695 10.1%

South America 1,993 8.7% 1,757 +149 358 9.9%

Total Latin Am 4,715 7.6% 10,775 +515 1,624 7.1%

West Europe East Asia 5,131 6.5% 2,014 +123 585 6.9%

Southeast Asia 2,599 -0.9% 803 -4 267 -0.9%

South Asia 1,276 -2.2% 702 -28 196 -0.9%

Total Asia 9,006 3.0% 3,519 +91 1,049 3.3%

West Europe Latin America 4,663 3.0% 1,828 +52 552 2.9%

West Europe Middle East 5,182 10.8% 5,499 +514 1,329 11.5%

Asia Middle East 6,807 11.5% 7,345 +957 1,756 13.5%

TOTAL SELECTION 50,538 6.7% 38,498 +2,654 8,922 7.9%WORLD 164,594 6.6% 665,651 +24,724 93,368 6.1%NOTES: Data is based on schedules for 14-20 September 2015 against 8-14 September 2014 extracted from SRS Analyser. Figures reflect airlines operating nonstop unrestricted scheduled passenger services. East Asia = China, Hong Kong, Japan, the Koreas, Macau, Mongolia and Taiwan. South Asia = Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Southeast Asia = Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. Central America = Belize, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua and Panama. South America = All countries south of Central America. North America = Continental USA and Canada only. Middle East = Bahrain, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen.

GDP should be seen as a proxy for a range of other economic factors that should feature in traffic forecasting models.

There is also a need to get be-hind the high-level figures to examine local circumstances and take a close look at longer-term trends. A myopic view al-ways has the potential to dam-age the business by missing out on something.

Twelve months ago, when the capacity decisions for the current summer season were being con-sidered, the consensus forecast for world GDP growth was in the

(2.3% versus 3.0%), China (7.0% versus 7.3%), Russia (-5.0% versus 1.5%) and Brazil (-0.9% versus 2.5%).

However, since these fore-casts were released in July there have been a number of purchasing manager surveys; those most recently published by Markit and JP Morgan “sig-nal a rate of global growth of approximately 2% per annum” and suggest the greatest impact will be felt in some of the emerging markets.

Clearly there is downside risk to some of the key economies for the remainder of 2015. It is inevitable that economic fore-casts for 2016 will also be re-duced from the current levels, where the expectation was that there would be a bounce-back to the rates of growth that were previously forecast.

However, given the role that ex-perience and behaviour play in conditioning expectations the risk is that although the current fore-casts will be cut, the resulting outcomes may be over-pessimistic

September 2015

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A4A AEA AAPA ALTAAACO

GDP should be seen as a proxy for

a range of other economic factors

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US MAJOR PASSENGER YIELD: A4A AIRFARE REPORT

Route 2014 2015Unit Dec Jan Feb Mar Apr May Jun

Domestic ¢/RPK 10.71 10.34 10.50 10.91 10.65 10.32 10.54

change -2.5% 0.6% -0.8% 0.6% -1.9% -3.6% -5.5%

North Atlantic¢/RPK 8.71 9.37 9.48 9.19 8.80 8.97 9.61

change 2.1% 3.6% 3.7% 0.2% -0.3% -5.1% -6.4%

ASIA-PACIFIC AIRLINES (AAPA MEMBERS) INTERNATIONAL TRAFFIC

Month Passenger traffic RPK Capacity Load factors Freight FTKmillion change change percent change million change

April 80,588 8.2% 5.7% 78.1% 1.8 5,384 3.7%

May 80,870 9.6% 6.7% 76.3% 2.0 5,460 2.9%

Jun 80,960 6.6% 6.1% 77.8% 0.3 5,348 -0.5%

YEAR-TO-DATE 484,351 8.1% 6.5% 77.7% 1.1 32,108 5.2%SOURCE: Association of Asia Pacific Airlines.

ARAB AIRLINES (AACO MEMBERS): JUNE*

Passenger traffic RPK Capacity Load factorsmillion change change percent change

Intra Arab world** 5,340 -7.3% 3.1% 53.4% -6.0

With Other Regions 38,694 11.4% 15.9% 68.5% -2.7

TOTAL MONTH 44,035 8.7% 13.8% 66.2% -3.0YEAR-TO-DATE 261,315 8.7% 13.4% 66.9% -2.9NOTES: *Estimates. **Includes domestic. SOURCE: Arab Air Carriers Organisation.

EUROPEAN MAJORS (AEA MEMBERS) TRAFFIC: JUNE

Region Pax traffic RPK Capacity Load factors Freight FTKmillions change change percent change million change

Domestic 3,563 5.9% 8.4% 78.3% -1.8 3 6.0%

Intra-Europe 17,643 4.6% 5.2% 80.2% -0.5 60 4.8%

North Atlantic 14,860 5.3% 5.4% 88.6% -0.1 609 2.6%

Mid Atlantic 3,281 4.7% 2.6% 88.5% 1.8 98 -12.6%

South Atlantic 3,547 1.3% 1.2% 85.5% 0.1 214 -2.7%

Far East/Australia 13,642 7.5% 5.2% 84.9% 1.8 1,001 -1.8%

Sub Saharan Africa 4,063 1.8% 2.8% 77.9% -0.7 218 -7.5%

N.Africa/M.East 2,772 -3.3% 1.2% 74.7% -3.5 85 7.5%

TOTAL MONTH 63,392 4.7% 4.7% 83.2% 0.0 2,410 0.3%YEAR-TO-DATE 357,235 3.3% 3.6% 79.0% -0.2 14,159 -0.8%SOURCE: Association of European Airlines

LATIN AMERICAN AIRLINES (ALTA MEMBERS): JUNE

Pax traffic RPK Capacity Load factors FreightRegion million change change percent change million change

Total Intra-LatAm* 15,029 3.3% 3.6% 76.2% -0.2 127 -2.1%

Total Other Int’l 7,154 8.9% 7.9% 84.4% 0.8 255 -4.1%

TOTAL SYSTEM 22,183 5.1% 4.9% 78.7% 0.2 381 -3.4%YEAR-TO-DATE 136,787 5.9% 5.2% 79.2% 0.5 2,342 -7.5%NOTE: *Domestic and International flights. SOURCE: Associacion LatinoAmericana de Transporte Aereo.

US MAJORS (A4A MEMBERS) PASSENGER STATISTICS: JUNE*

Region Pax traffic RPK Capacity Load factors Freight FTK*

million change change percent change million change

Domestic USA 75,176 5.2% 5.3% 87.7% -0.1 1,451 -1.9%

North Atlantic 18,427 0.7% 2.6% 85.3% -1.6 812 -9.7%

Latin America 11,157 3.9% 1.5% 81.6% 1.9 197 -4.6%

Trans Pacific 10,296 2.0% 1.3% 87.0% 0.6 924 -4.0%

All international 39,880 1.9% 2.0% 84.7% 0.0 1,933 -6.5%

TOTAL MONTH 115,055 4.0% 4.1% 86.6% 0.0 3,384 -4.6%YEAR-TO-DATE 601,385 3.1% 3.7% 83.0% -0.4 17,036 0.8%NOTE: *Freight data is May as June n/a. SOURCE: Airlines for America.

in some cases – which will tend to reinforce the associated uncertainty.

What, then, of the changes that have taken place in airline capacity? For summer 2015, the schedules from DIIO SRS Ana-lyser suggest that overall there will be 3.4% more flights, 5.7% more seats and 6.6% more ASKs – with larger aircraft fly-ing longer distances.

For the forthcoming winter season, it appears that the trend will continue, with 4.8% more flights, 5.4% more seats and 6.5% more ASKs scheduled. While the summer 2015 out-come appears “within limits”, we would expect the actual out-come for winter to reflect slower and lower growth than indicat-ed at present.

BACK TO BASEBut there are two other factors to consider, which will bring us back to where we started. It is

the cost base of an airline and the fares it is able to profitably offer that will determine the ap-parent GDP multiplier.

Recently, fuel has fallen back to levels last seen at the start of the year, and this (depending on the speed at which the ben-efit flows through) enables fares to be more competitive if that is necessary.

However, now is perhaps the time for airlines to retain as much of the benefit from lower fuel as they can and, given how economics work, adjust capaci-ty rather than adapting prices to a weaker underlying demand environment. ■

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Overall capacity growth forecast for global airlines in summer 2015, in terms of ASKs

6.6%

September 2015

It is inevitable that economic forecasts

for 2016 will also be reduced

Senior executives joined Airline Business at Middle Temple in London on 12 July, to recognise the industry’s top leaders at this year’s Airline Strategy Awards.

This year marked the 14th running of this an-nual event, which is organised by Airline Busi-ness and executive search firm Spencer Stuart.

Following the welcome reception, guests took their seats in the exquisite surroundings for dinner and the awards ceremony, where IAG chief executive Willie Walsh was present-ed with the Executive Leadership award. This was in recognition of leading IAG to a string of successes, including the restructuring and turnaround at Iberia.

Other executives recognised for their leader-ship included Aditya Ghosh of Indian low-cost

carrier IndiGo, along with Christoph Mueller for steering the turnaround at Aer Lingus. Mu-eller, who has moved on to head Malaysia Air-lines, was joined by his successor, Stephen Kavanagh, who was part of the Aer Lingus leadership team during the restructuring and is now chief executive at the carrier.

The Airline Business Award recognised Alex Cruz for his advances in the European low-cost arena at the helm of IAG unit Vueling.

Other 2015 winners include American Air-lines, Virgin America and Gol, who were rec-ognised for leadership in finance, marketing and the environment, respectively. ■


STRATEGY AWARDS

September 2015

The industry’s top executives and carriers were recognised at this year’s Airline Strategy Awards

LEADING LIGHTS

(Main and below): The awards were once again held in the impressive surroundings of Middle Temple

Airline Business editor Max Kingsley-Jones (front-left) with this year’s winners

BillyP

ix

More about the winners, along with pictures and a video from the event, at: strategyawards.com


(Clockwise from top right): Willie Walsh of IAG accepts Executive Leadership Award from SITA’s

Dave Bakker; Spencer Stuart’s Thierry Lindenau presents Regional Leadership Award to Christoph

Mueller in recognition of turning around Aer Lingus; IndiGo’s Aditya Ghosh picks up Low-Cost

Leadership Award from Neil Siddons of CFM; Spencer Stuart’s Michael Bell collects Technology,

Environment and Operations Award on behalf of Gol from Sabre’s Jeremy Sykes; Tampa

International Airport’s Joe Lopano hands award for Marketing to Stuart Dinnis of Virgin America;

Flightglobal’s Terry Dawson presents Finance Award to Tom Weir of American Airlines; Aer Lingus

past and present: former CEO Christoph Mueller celebrates with successor Stephen Kavanagh;

Vueling’s Alex Cruz receives Airline Business Award from DFW airport’s John Ackerman

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for the role. An airline veteran, he is well known in the finance community for managing the car-rier’s debt raising activity in recent years, including many of its EETC issues.

While Laderman considered a very capable financial leader, some on Wall Street see Rainey’s departure as an opportunity for new blood at United.

“UAL has an opportunity to bring in a true airline outsider with a solid reputation and no cultural baggage who can bring fresh, out-of-the-box ideas to UAL as UAL searches for innova-tive ways to close the margin gap relative to peers,” writes Hunter Keay, an analyst at Wolfe Research, in a report.

Keay highlights United’s “methodical” approach to share repurchases as an opportunity for the new finance chief to make some investor-friendly improve-ments.

Rainey, who joined Continen-tal Airlines in 1998 and came to United through the merger of the two carriers in 2010, leaves the company in undeniably better financial shape than when he joined the c-suite.

“There are a lot of investors, I believe, that are still skeptical because of our checkered past, and deservedly so,” he says.

“If we can demonstrate through an economic cycle that we can still earn our cost of capi-tal and not have to go out and borrow a bunch of money at high interest rates because we’re dis-tressed, I believe that’s when we’ll see the earnings multiples really begin to expand.” ■

After debt reduction, United is using that cash for share repur-chases and capital expenditures. It will wrap up a $1 billion share repurchase programme in the third quarter and has already embarked on a new $3 billion programme that will run through to the end of 2017.

The carrier’s share price increased more than three-fold to $58.32 at closing on 3 August, the day before Rainey’s departure was announced, from the same day in 2012. This jump increased its market capitalisation by more than $15 billion to $22 billion.

NEW INVESTMENTSUnited invested more than $6.2 billion in its business, including in new aircraft, updated interiors and technology upgrades, during his tenure. In June, it announced plans for a $100 million investment in Brazilian carrier Azul and a $30 million investment in biofuel pro-ducer Fulcrum BioEnergy – some of its first outside the company.

Gerry Laderman, previously senior vice-president of finance and treasurer, has stepped into the interim chief financial officer role at United as it considers both internal and external candidates

FORUM INTERVIEW

UNITED SEEKS NEW BALANCING ACTEDWARD RUSSELL WASHINGTON DC

United Airlines loses a trusted leader with the departure of its chief finan-

cial officer John Rainey to PayPal.Well liked on Wall Street, ana-

lysts considered him frank and as he emphasised a balanced approach to the Chicago-based carrier’s post-merger balance sheet, reducing debt, returning value to shareholders and mak-ing much-needed investments in the company.

“We’ve been an industry, and a company, that has been way too heavily levered for way too long,” said Rainey in an interview in his Chicago office with Airline Busi-ness in June, two months before his departure to PayPal. “We need to improve our balance sheet; we also need to invest in our business, which means buy-ing airplanes; and I need to return cash to shareholders as well.”

Under his tutelage, United reduced its long-term debt and capital lease obligations by 7.1% to $10.5 billion at the end of June compared with March 2012 before he took over the chief financial role. Its underfunded pension obli-gations also fell during his tenure.

REPAYING DEBTRainey focused on repaying high interest rate debt, while continu-ing to raise low coupon secured debt, for example in the enhanced equipment trust certificate (EETC) market, for new aircraft.

“In this business, it makes sense, given how capital inten-sive we are, to borrow money to buy airplanes,” he says. “We can go out and borrow money at a 3% interest rate, for example, at investment grade ratings to bor-row money for aircraft. That’s a prudent use of capital.”

Rainey leaves United with lit-tle of the high-coupon debt he targeted, giving his successor fewer levers to pull in further deleveraging the carrier’s bal-ance sheet.

“If you want to continue to de-

Rainey (left) is succeeded by Laderman on an interim basis

Outgoing finance chief John Rainey has strived for the right mix when investing US carrier’s new-found cash and leaves the airline in better financial shape than when he took control of the coffers

United

September 2015

United’s market capitalisation has

grown by $15bn over last three years

lever, you can effectively do that by borrowing less money on the incremental aircraft that you’re purchasing,” says Rainey. The airline can also pay cash for new deliveries, as it did for some of the 25 aircraft it took during the second quarter.

He also leaves United with ample liquidity. It had $6.34 bil-lion in liquidity at the end of June, including $4.99 billion in cash, cash equivalents and short-term investments and $1.35 bil-lion available under its revolving credit facility.

“Our target liquidity balance is between $5 and $6 billion,” he says. “[Since the merger] the composition has changed so that we’ve got a lower cash balance, which is actually a good thing because we’ve still got an ade-quate level to run the business, but we’re utilising that cash where we can get a return.”

United’s liquidity at the end of June 2015

$6.34bn


diverting to a remote island off the coast of Alaska. Ethan Williams was following the crew’s instructions dili-gently, by putting on the life jacket for a potential water landing, practicing the brace position and reading the evacuation guide.

At the same time, he had his iPhone video camera turned on and he later posted a video on YouTube, which was professionally edited and clipped to focus on the most important parts of the emergency landing. The video had over half a million views in the days that followed, and was featured on news outlets around the world.

Many viewers noted how profes-sional the crew were and Cathay was praised for taking good care of the pas-sengers while they waited to be trans-ferred to Los Angeles.

The airline was also active on its social media channels; clarifying facts with journalists and calming con-cerned relatives.

Perceptions spread. Reality Matters. And information spreads instantly through social media. Often, it is the first person to post the incident online who becomes an accidental spokesper-son for the airline. Contingency man-agement and crisis planning depart-ments at airlines need to learn how perceptions spread.

Every airline operation centre should have a live Flightradar24 and a Twitter feed display. Communica-tions staff should be trained in the new ways on how to leverage the accidental spokesperson, as well as straighten out the facts.

Airlines must take lessons from events like these, rather than wait for something to happen to them. It’s no use dig-ging a well when you are thirsty, is it? ■

In the age of social media, perceptions can spread like wild-fire – whether they are

right or wrong. Airline executives today have the responsibility to bring reality to the fore, often taking to the same mediums that are being used by passengers.

Three recent incidents highlight the vulnerability of airlines, as well as how the situations can be turned in their favour.

Jason Taylor was at the gate at Nash-ville airport on 7 August when, sud-denly, a bright flash caught his eye. A Delta Air Lines flight being operated by Skywest, on pushback, was on fire! Jason tweeted a photo with his smart-phone, clearly stating that “the fire is out and the airplane looked ok”.

He also copied Nashville ABC’s Twitter handle. Within minutes, he was being bombarded with requests from news channels and journalists from all over the world for the rights to use the photos he took of the event on their networks.

REALITY CHECKThe reality was a little different. Phil Cobucci was comfortably seated inside the affected aircraft, and all he felt was a sudden stop. The Captain then came on the loudspeaker and said there had been a misfire and everything was under control. That was the reality. Yet perception on the outside was com-pletely different.

Some news outlets sensationalised the fire to boost ratings, while others stated that things were under control within seconds. Throughout the day though, both Delta and Skywest were quiet on Twitter about the incident – a missed opportunity for quick brand recovery by sharing the reality from a credible source, like the Captain or the airline’s safety chief.

Across the Atlantic, a couple of months earlier, Adam Wood had just

SOCIAL INCEPTION

FORUM FEEDBACK

SimpliFlying chief executive Shashank Nigam examines how airlines can tackle perceptions in the era of instant sharing

September 2015

flightglobal.com/AirlineBusiness

The home of Airline

Business on the web

is the airlines

channel of

Flightglobal.com:Shashank Nigam is the CEO of SimpliFlying, one of the largest airline marketing strategy firms, which has worked with over 60 airlines and airports: [email protected]

“Often, the first person to post the

incident becomes an accidental airline spokesperson”

SHASHANK NIGAMChief executive, SimpliFlying

Sim

pliF

lyin

g

taken a seat on his EasyJet flight. He saw a maintenance worker applying tape around the edges of an engine and tweeted a photo saying: “Always wor-rying when EasyJet is duct-taping the plane together.”

RESPONSE MATTERSThis time though, the airline was on the ball and immediately replied to Adam that this was just “paintwork and nothing structural”. Despite the clarification, Adam was re-tweeted over 1,200 times!

While it is common for incidents to be captured and shared when the plane is on the ground, it is increas-ingly becoming a cool thing to take a selfie with an oxygen mask on! But a recent video, taken during a diversion, shows the extent to which this phe-nomenon has evolved.

Cathay Pacific flight 884 from Hong Kong to Los Angeles on 29 July was

flightglobal.com/airlines September 2015 I Airline Business I 61


Should Aer Lingus join British Airways and Iberia in Oneworld as expected following its acquisition by IAG, it will become the

first airline to walk in, walk out and then rejoin the same alliance.

It is the latest in a series of partner-ship moves across the industry that underlines the schizophrenic nature of airline relationships, as competition and economic realities push carriers to take a more brutal approach to their partnerships. As has never been so evi-dent before, airline partners can be friend and foe, and increasingly it seems, are seldom one or the other.

So, within the Oneworld camp Qan-tas ditched its long-standing partnership with British Airways on the Kangaroo route to team up with Emirates, but is deepening its partnership with BA part-ner American Airlines. The Texas air-line, of course, is part of the triumvirate of US majors challenging the expansion of the Gulf mega-carriers. And one of them – Qatar Airways – has recently taken a stake in the parent of American’s vital transatlantic partner, BA. All of them sit together in Oneworld.

The dynamics of these relationships mean that American Airlines boss Doug Parker – who was left as the frontman for the US position during IATA’s AGM in Miami – finds himself hitting out at Gulf-carrier US expan-sion one day, then discussing further co-operation with Oneworld partners including Qatar Airways the next.

And Parker’s is a far from isolated situation. Delta Air Lines’ SkyTeam co-founder, Air France, voices concerns around the subsidy issue while dis-cussing further co-operation with codeshare partner Etihad. And Luf-thansa vocally backs the view from the US majors while counting what many describe as “the fourth Gulf carrier”, Turkish Airlines, as a partner.

The ripples keep coming. Few could have predicted that the subsidy

DIVIDED LOYALTIES

COMMENT

The dynamics in play across the world of alliances and partnerships are testing allegiances, with the revolving-door strategies resulting from new tie-ups, aeropolitical rows, and mergers and acquisitions

Few could have anticipated the sight of five rival rock stars

from across the European airline spectrum on the

same podium showing each other a whole lotta love

Isopix

/R

ex

Shutt

ers

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September 2015

DESTINATION DUBAI Flightglobal will have this year’s

Dubai air show covered online and in

print. The show takes place on 8-12

November where Flightglobal will be

producing four issues of Flight Daily News and reporting developments

from the event online at:

flightglobal.com/Dubai

The home of Airline Business on the web is on the Airlines Channel of flightglobal.com:


spat would help trigger a reform of Europe’s lobbying groups – not to men-tion the even more unlikely sight of five rival “rock stars” from across the region’s airline spectrum showing each other a “whole lotta love”.

Well, it happened in June when Wil-lie Walsh, Alexandre de Juniac, Carsten Spohr, Michael O’Leary and Carolyn McCall gathered on the same podium at Brussels airport to highlight their common ground.

And few now can avoid the ripples. But the rapid expansion of the Gulf carriers is developing into a major fault line. As ever, Emirates boss Tim Clark summed up the situation eloquently

when he described what IATA chief Tony Tyler had called “underlying ten-sions” at the AGM as “measuring 7.3 on the Richter scale”.

Through their own action or the response of rivals, the big Gulf players are shifting dynamics. Who would have thought Alitalia, seemingly back on its knees 18 months ago, would be bold enough to seek to rebalance a partner-ship agreement on Franco-Italian routes struck at a time when its SkyTeam part-ner Air France-KLM held all the cards?

All of this applies further strains to relationships within the three big global alliances, where joint ventures have taken centre stage.

The global alliances, by their very nature a surrogate for consolidation, have always been seen as a stepping stone, rather than an endgame in itself. But the blocks to global consolidation – which necessitated the creation of alliances in the first place – largely remain. For this reason, the global groupings will stay central for some time, but will not be a constraint to air-line partnerships. Restrictions around co-operation with non- or competing alliance members are easing, and affili-ate membership to account for differ-ent types of partner is in the works.

As the attempted joint venture between Oneworld’s Qantas and SkyTeam’s China Eastern further under-lines, competitive realities mean airline strategies will go where they need to. To this end, the current structure of alli-ances may help shape future airline part-nerships, but it will not dictate them. ■

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