RICKARD GUSTAFSON Fresh for the fight after cool resolve in … · 2014. 11. 5. · executive or airline, nd out more about the event or register your interest, visit: strategyawards.com

STRATEGY FOR AIRLINE BOARDROOMS WORLDWIDE

BIG TWINS Why 777X launch puts strategies in the spotlight

VALUES Ascend analyses how the market is evolving in 2014

ENGINES Talking stops as new powerplants gear up

RICKARD GUSTAFSON

Fresh for the fight after cool resolve

in saving SAS

INTERVIEW

APRIL 2014

flightglobal.com/airlines

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CONTENTS

flightglobal.com/airlines | Airline Business | 5

ROUGH ’N‘ TUMBLE page 38

QANTAS COUNTS COSTS page 14

UNFOLDING TRAGEDY page 58

SPOILT FOR CHOICE page 54

VOLUME 30 NUMBER 3

STRATEGY FOR AIRLINE BOARDROOMS WORLDWIDE

BIG TWINS Why 777X launch puts strategies in the spotlight

VALUES Ascend analyses how the market is evolving in 2014

ENGINES Talking stops as new powerplants gear up

RICKARD GUSTAFSON

Fresh for the fight after cool resolve

in saving SAS

INTERVIEW

APRIL 2014

flightglobal.com/airlines

INTERNATIONALBPA flightglobal.com/airlines

COVER STORY20 Bridging the gap

Airline Business is published monthly by Reed Business Information. © Reed Business Information Ltd 2014. ISSN 0268-7615. Printed in the UK by Polestar, Colchester.

Annual Subscription Rate: US$198/£124 Periodicals postage paid at Rahway, NJ. Postmaster send changes to Reed Business Information, c/o Mercury International Ltd, 365 Blair Road, Avenel, NJ 07001.

For a full listing of RBI magazines, visit reedbusiness.com

AB INTERACTIVE6 Innovata joins the FG team

Strategy Awards looking for winners

BRIEFINGINTERNATIONAL8 North America sets pace

EUROPE10 Etihad’s regional master plan12 Balkan carriers fight for funding

ASIA14 Qantas counts costs after loss

ROUTESASIA17 Hong Kong constrains night slots

AirAsia X confident region has not over-ordered

AMERICAS19 Avianca focuses on partnerships

SPECIAL REPORTAIRCRAFT & ENGINES28 Numbers game Flightglobal Insight’s analysis of

2013’s vital statistics for mainline jets32 Airliner delivery rankings A breakdown of the big

spenders on airliner heavy metal over the last year34 X Factor Seattle has thrown down the gauntlet with its

777X launch38 Rough ’n‘ tumble Why Embraer has decided to tough

it out in the regional sector42 Road to recovery Ascend analyses what’s in store for

aircraft values in 201444 Power projection Our scrutiny of the airliner engine

market in 201346 Narrow minds How the market for engines in the

single-aisle sector is hotting up

COMMENT58 Unfolding tragedy: the consequences of MH370

ANALYSIS48 Airline profits give and take European carrier

fortunes at an operating level continue to improve54 Finance seekers spoilt for choice Strong investor

demand is driving attractive debt-funding deals

REGULARS50 Market outlook Reading between the lines

FORUM55 ATM history lessons 56 Airlines show of loyalty

Having brought the Scandinavian group back from the brink, SAS chief executive Rickard Gustafson must now see off the threat from low-cost carriers

April 2014

HOW TO CONTACT [email protected]

LONDON OFFICEPhone +44 (0)208 652 3842e-mail: [email protected]

Airline Business editor Max Kingsley-JonesFlightglobal Pro editor Graham DunnFlightglobal Pro managing editor Niall O’KeeffePublisher Mark Pilling

SINGAPORE OFFICEPhone +65 6 780 4314Asia managing editor Greg Waldron

WASHINGTON OFFICEPhone +1 703 548 8052Americas managing editor Stephen Trimble

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AIRLINE BUSINESS INTERACTIVE

flightglobal.com/airlines6 | Airline Business |

D oes your chief executive stand out for their strong leadership? Submit your

nomination for the 2014 Airline Strategy Awards today.

Is your airline a leading inno-vator in technology, marketing or environmental sustainability? If so, we want to hear from you. The closing date for award

nominations is 17 April. The annual Airline Business

event takes place this year on Sunday 13 July, in the historic surroundings of Middle Temple Hall, near the river Thames in central London. Proceedings start in the late afternoon this year –earlier than usual – and incorpo-rate a post-dinner networking

event taking in live coverage of the World Cup final.

The event is invitation only, but a limited number of places are reserved for purchase (see P53 for details).

To nominate your chief executive or airline, find out more about the event or register your interest, visit: strategyawards.com

Over 200 guests enjoyed last year’s Airline Strategy Awards dinner at London’s historic Lincoln’s Inn

INNOVATA JOINS THE FG TEAM

LOOKING FOR WINNERS

Innovata and Flightglobal are joining forces to bring together the leading sources of airline

schedules and fleet data under a single brand.

The US schedules specialist will sit within Flightglobal fol-lowing its acquisition by our par-ent company Reed Elsevier. Inno-vata powers timetable and mapping services for some of the best known names in air travel and transportation, from the global airline alliances through to airports and a host of online travel sites.

Innovata’s schedules files also

power booking systems and ana-lytical services around the world, including the SRS Analyser schedules data service run in col-laboration with IATA, with which Innovata is a long-term strategic partner.

The Innovata database covers flights for over 800 carriers that make up the worldwide sched-uled network, while Flightglobal is the leading source of aircraft fit, fleet and values data.

“Innovata and Flightglobal are

two extremely strong and well-established brands in the aviation information sector,” says Melanie Robson, head of Flightglobal. “The bringing together of our highly complementary data assets will accelerate the growth of Flightglobal’s data businesses and enable us to find new solu-tions for customers by combining both companies’ data and analyt-ical properties.”

The businesses are already exploring how to maximise the benefits of uniting the fleets and flights data across both Innovata and Flightglobal’s services.

DOWNLOAD

All Airline Business subscribers can view our tablet edition on an iPad, desktop or laptop for free. The tablet edition contains all the content from the print magazine in a bespoke design format. Additional features include videos and interactive tables. Subscribers can view this edition online on Macs or PCs using our web viewer. Ipad users can download our app by visiting the App Store and searching for Airline Business. New subscribers can sign up for either tablet version at:flightglobal.com/airlines

TABLET EDITION

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BRIEFING INTERNATIONAL

North America sets paceConsolidation to help region’s carriers drive over half of record industry profits in 2014

GRAHAM DUNN LONDON

Bill

yPix

April 2014

Read more on a decade of rising airline load factors at:flightglobal.com/loadfactor

AMERICAN DREAM

IATA lifts outlook further for booming

North American carrier profits

$8.6bn

SOURCE: IATA forecast

0

2

4

6

8

10

$ b

illio

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Europe North America

Africa Latin America

Middle East Asia-Pacific

PROFIT FORECAST BY REGION

CARGO RELIEF

IATA lifts expected rate of air freight traffic growth as market picks up

4%

FUELLING PAIN

Barrel price of crude oil seen back at

2013 average after Crimea tensions

$108

PROFIT CHECK

Net profit forecast trimmed $1 billion

but still set for best year

$18.7bn IATA’s latest industry outlook

underlines the improving for-tunes of airlines in mature mar-kets, as it sees North American carriers being not just the most profitable but also the only region with expectations improved.

The association’s latest quar-terly financial outlook forecasts North American carrier profits of $8.6 billion for this year. This is $300 million higher than it pro-jected for 2014 three months ago. The improvement comes despite IATA having tempered its expec-tations that fuel prices might ease slightly in 2014. That factor has prompted IATA to cut profit fore-casts for most other regions, and for the industry as a whole by $1 billion to $18.7 billion.

“The success of the North American industry demonstrates clearly the benefits of consolida-tion and joint ventures,” says IATA director general Tony Tyler, adding this has not come at a cost to the customer. “While they have strengthened their financial position, there is still a significant choice available for consumers.”

CHANGING FORTUNESNorth American carriers are expected to account for nearly half of total industry profits in 2014. Profits for carriers from another mature region, Europe, were scaled back by $100 mil-lion. But the $3.1 billion return European carriers will make is still $2 billion more than in 2013.

This means European and North American operators com-bined will generate $11.7 billion of total industry profits in 2014. Compare this with the losses the roughly $5 billion loss these car-riers incurred in 2009 and the change in fortunes of airlines in these two markets is clear.

Tyler notes it is now the devel-oped economies that are leading passenger growth. “And we see many developing markets – India, Brazil, etc – showing slower growth trends,” he adds.

IATA still expects Asia-Pacific to be the second-most profitable

region for carriers, predicting profits of $3.7 billion. However, this is $400 million lower than the figure it expected three months ago and only $700 mil-lion higher than the 2013 figure.

“The improvement in cargo prospects is helping,” says Tyler. “But this is being offset by slower growth, as countries like India and Indonesia cope with the impact of the turmoil in foreign exchange markets.”

IATA has trimmed its profit forecast for Middle East and Latin American carriers to $2.2 billion and $1 billion respectively.

Tyler points to continued strong expansion of market share among the Gulf carriers and strong cargo performance – par-ticularly on routes connecting Africa and Asia. The higher fuel burden, though, means the Mid-dle East carriers’ profitability has been scaled back $200 million.

IATA has taken $500 million off its expectations for Latin American airline profits this year. “The weak economic perfor-mances of Brazil and Argentina are dampening prospects,” says Tyler. Profit expectations for Africa are unchanged for the year at $100 million, which marks an improvement on the $100 mil-lion loss incurred in 2013.

While the passenger traffic out-look for 2014 has weakened slightly, the air freight picture is finally improving. “Instead of the previously projected 2.1% growth, it now appears that air cargo is headed for 4.0% growth in 2014,” says IATA. “And the yield decline will be moderated from the previously forecast 2.1% fall to a decline of 1.5%. Trading conditions remain chal-lenging, but positive macro-eco-nomic trends are providing a much-needed boost.”

The cargo picture provides a lift for airline fortunes, but it is the higher fuel bill that has prompted the lowering of profit expectations for the year ahead.

“The [forward oil price predic-tion] has shifted up several dol-lars in the last month, largely because of the situation in Ukraine,” says Brian Pearce, IATA’s chief economist. IATA had hoped for a slight reduction in fuel prices as a result of increased supply in North America.

The uncertainty around the political situation in Ukraine is one of the possible risks to airline profits that IATA identifies. “It is very difficult to anticipate how these geopolitical risks can develop,” says Pearce, pointing to the impact on energy prices and travel demand.

IATA also points to the possi-ble negative impact on traffic of action in several markets that might serve to slow economic growth. “Many countries have tightened monetary policy in order to protect exchange rates, slowing growth,” says Tyler.

Despite these risks, the pro-jected $18.7 billion industry profit would be nearly $6 billion up on the 2013 figure and would top the previous high of $17.5 bil-lion recorded in 2010 (an annual figure restated from $19.2 billion following the restatement of ICAO data). ■

“The North American industry [shows] the benefits of consolidation”

TONY TYLERDirector general, IATA

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BRIEFING EUROPE

Etihad’s regional master planAbu Dhabi carrier’s Swiss unit Darwin “kicks off” concept, feeding hubs of fellow equity partners as it grows network

OLIVIER BONNASSIES LUGANO

Darwin Airline – which oper-ates as Etihad Regional – is

ready to push for further growth in Europe via the equity partners of newly-formed Etihad Aviation Group, as it looks to expand with four ATR 72 turboprops.

“Etihad Regional is key because it is the first regional airline for Etihad Aviation Group. This is the kick-off of the regional concept to feed the network equity partners,” says Etihad Regional vice-chair-man Peter Baumgartner.

The four 68-seat ATR 72-500s

will arrive in the second quarter on three-year leases, complement-ing the airline’s existing 50-seat Saab fleet. Etihad unveiled a re-organisation in March into a broader aviation group covering its airline operation and its other associated businesses. It aims to “distinguish” the functions of the carrier from those needed to sup-port its subsidiaries, equity part-ners and joint-venture firms.

Chief executive James Hogan will become president of Etihad Aviation Group and relinquish the day-to-day running of the core Abu Dhabi-based airline to a new chief operating officer. Hogan says the new structure reflects the “diversification” of the company and is a “natural development”.

Etihad Aviation Group will also include divisions to manage investments in its equity part-

ners, as well as airport services, and a newly-branded arm called Hala Group, which covers the company’s travel and hospitality activities. This business is headed by Baumgartner, who was chief commercial officer.

RELEVANT DESTINATIONSRegarding the expansion at Lugano-based Etihad Regional in which the Abu Dhabi carrier holds a 33% stake, Baumgartner says the new routes will be to “rel-evant network destinations and European gateways for Etihad”.

Through June, Etihad Regional will add 21 new routes with a large emphasis on the German market, where it has a partnership with Etihad minority-owned Air Berlin. It will start services to Ber-lin, Cambridge and London City airports from Dusseldorf – one of

Air Berlin’s main bases – as well as Poznan and Wroclaw routes from Berlin. From Zurich, where Etihad Airways will open a daily service in June from Abu Dhabi, the regional will start operations to Leipzig in Germany.

In Italy – where Etihad remains in investment talks with national carrier Alitalia – it will start ser-vices from Rome to Tirana and Zagreb. In addition it will operate a Geneva-Toulouse service.

In May, Etihad Regional will start flights from Zurich to Geneva, Florence and Turin as well as add a service from Geneva to Belgrade, the base of Etihad-owned Air Serbia.

In June, flights begin from Zurich to Linz, Graz, Verona and Lyon, along with four new desti-nations from Geneva: Bordeaux, Marseilles, Nantes and Verona. ■

Etihad Regional will add 21 new routes with emphasis on

the German market

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CEOs on TrainingA SERIES


When Jat Airways was rebranded Air Serbia late

last year, it marked the symbolic end of the concept of a pan- western Balkan national carrier – but who, if anyone, will ulti-mately replace it as the dominant player in the Balkan aviation mar-ket remains an open question.

In the years following the break-up of Yugoslavia, its suc-cessor states formed their own airlines – Croatia Airlines, Mon-tenegro Airlines, B&H Airlines – to reflect their national aspira-tions, and air services fragmented.

Today, the national carrier model put in place since 1990 has come under serious threat.

Flag carriers are struggling with mounting losses and debts, demand is low and conditions have worsened following the global financial crisis, with the result that almost all of them are up for sale.

Loss-making Slovenian national carrier Adria Airways is on the market, as is Croatia Airlines, Romania’s Tarom and B&H Airlines.

Most recently, Montenegro Airlines joined the list.

Other flag carriers have been even less fortunate. MAT Mace-donian Airlines ceased opera-tions in 2009 and has not been replaced. Albanian Airlines went bust in 2011 to be succeeded by private airline Belle Air until it too ceased operations in 2013.

As Balkans-based airlines have struggled so connectivity to and

within the region has also suffered. Jat once boasted a net-work connecting it to North America, Europe and Asia, but its successors have replaced this with links primarily to leisure and visiting friends and relatives markets such as Germany, Italy and France.

But Croatia Airlines chief exec-utive Kresimir Kucko says that while conditions facing the region’s airlines are challenging, a comparison with Jat’s heyday is just not accurate.

“If you are referring to the former Yugoslavian times, then yes, there were [many more regional routes], but those were different times – you can’t com-pare them. Everything was nice and easy back then, but when you need to achieve positive results and be more efficient, it is a different story,” he says.

TOURISM CHALLENGE“You never had a Turkey, you didn’t have a Greece as strong as you do today, you didn’t have a Spain probably – the only coun-tries that [we] had a strong tour-ism challenge from were France and Italy,” Kucko adds.

He says it must be borne in mind that road and rail links between the former Yugoslav countries have improved mark-edly since 1990 – reducing the need for so many air services.

The loss of connectivity is expected to continue and deepen as the airline sector in the region contracts and consolidates fur-

ther, warns Andreas Kraus, asso-ciate partner for Europe at Luf-thansa Consulting.

“I expect to see further consoli-dation in the western Balkans airline sector,” he says. “Due to the fragmentation into small aviation markets, no leading car-rier has developed, and a multinational approach still struggles with the region’s cultural diversity.”

Kraus believes that govern-ments in the region are struggling to privatise their airlines because they are not models that appear attractive to investors.

“I expect that their attractive-ness to margin-oriented investors will be limited. In some cases, it might have been the better strat-egy to replace a legacy national carrier by a new airline model emerging from the market’s strengths, particularly the tour-ism potential of the region.”

One exception to that rule has been Air Serbia.

Through its partnership with Etihad, the Belgrade-based car-rier is overhauling its fleet to include new Airbus A320-family aircraft, and will be supported with traffic feed from new allies in Europe such as Darwin

Airline and Air Berlin.Apart from Montenegro Air-

lines’ short-lived partnership with Turkish Airlines a few years ago, Air Serbia represents the first airline in the region to be able to call in a strong backer giving it the potential to take a dominant role in the market.

NETWORK DEVELOPMENT“With the new fleet, the new branding and product approach plus the enhanced network, Air Serbia has made a great step to become an important player in the region,” says Panagiotis Poli-genis, associate partner for the southeast Mediterranean region at Lufthansa Consulting. “How-ever, it remains to be seen how far Air Serbia can develop its current network and introduce new and profitable routes under the part-nership of Etihad.

Further informal co-operation between Balkan airlines is a pos-sibility, although this has been attempted and failed in the past.

Unless Air Serbia does come to dominate, the regional players still seem to have time and room to reform their businesses and become more competitive.

Interestingly, the low-cost air-lines have not yet made a major impact in several Balkan markets.

Innovata schedules shows that in Slovenia, for example, at the height of the last summer season in July, Adria Airways held a 71% seat capacity and 61% of ASKs. EasyJet accounted for just 6.8% of seats and 8.4% of ASKs. In Macedonia, which lacks a national carrier, Wizz Air has become the dominant player, but the picture overall is mixed.

Lufthansa Consulting’s Kraus believes this reticence on the part of low-cost carriers is down to the challenging combination of “strong seasonality and high price sensitivity”. ■

BRIEFING EUROPE

Balkan carriers fight for fundingContinued fragmentation of the region’s market has left many domestic players struggling to stay afloat

OLIVER CLARK ZAGREB

Low-cost airlines have not made an impact in several Balkan markets

April 2014

Air Serbia outlines growth plans after Etihad tie-up:flightglobal.com/Serbia

UP FOR SALE: STATE-OWNED BALKAN AIRLINES

Croatia Airlines The national carrier remains on the market after a government tender bid to sell a 49% stake last year failed to attract a bidder.

Adria Airways The Slovenian government is seeking to sell its more than 70% stake in Adria to a private investor. It is confident this can be achieved in 2014.

Montenegro Airlines Montenegro’s privatisation council has shortlisted Montenegro Airlines as a candidate for sale this year.

Air Serbia Etihad acquired a 49% stake and management contract of struggling Jat in 2013, relaunching it as Air Serbia.

B&H Airlines Bosnia and Herzegovina’s flag carrier continues to seek a new partner. In 2008 Turkish Airlines took a 49% stake in the carrier but returned it, free of charge, to the government in 2012.

Tarom Romania’s government is committed to privatising the airline. It extended the deadline for the sale until the end of 2013, but has so far not been linked to a buyer.

SOURCE: Flightglobal

IN A CHANGING WORLD,TRUST THE ADAPTIVE ONE


BRIEFING ASIA

Qantas counts costs after lossAfter a record half-year deficit, the Australian carrier is looking to cut staff and change ownership restrictions

ELLIS TAYLOR SINGAPORE

Seeking help from on high: Joyce (left) has forged an alliance with Emirates, led by Tim Clark (right)

Rex

Fea

ture

s

April 2014

Read our analysis of Virgin Australia’s ownership:flightglobal.com/VirginAus

Qantas is pinning its future on major overhauls to its cost

base and ownership restrictions after declaring a record A$252 million ($230 million) half-year loss.

While not unexpected, the loss for the six months to December 2013 revealed the extent to which the group as a whole has been affected by the increasing level of competition on both interna-tional and domestic routes.

The long-suffering interna-tional business saw its loss blow out to A$262 million, while earn-ings at Qantas’s domestic busi-ness slumped 74% to A$57 mil-lion. The underperformance of Qantas’s international business was hardly a surprise, given that these operations have long been a drag on the carrier.

This part of the company has also undergone the biggest changes over the past year, with a major restructuring of its network to accommodate the nearly one-year-old Emirates alliance.

Budget carrier group Jetstar also recorded an underlying loss of A$16 million, as a profitable domestic operation was dragged down by losses from its Asian affiliates. Chief executive Alan Joyce lays most of the blame for the “unacceptable” results on increasing capacity and competi-tion across its network, especially on domestic routes where rival Virgin Australia has been busily expanding.

Nevertheless, he remains ada-mant that the Qantas group will stick with its strategy of targeting a 65% share of the domestic mar-ket. To that end, the carrier plans to add 3-4% more capacity to the domestic market over the next six

QANTAS GROUP BACKLOG

Airbus A320* 107Airbus A380 8Boeing 737NG 5Boeing 787 11Total 131NOTE: *For Jetstar (including nine for Jetstar Hong Kong and four for Jetstar Japan) SOURCE: Flightglobal’s Ascend Online database

lower-cost competitor. “We will cut where we can in order to invest where we must. We’ll be a far leaner group,” says Joyce.

Nearly a quarter of the savings will come from shedding 5,000 jobs, while Qantas will also seek other savings in fleet and net-work optimisation.

That will see it drop its Perth-Singapore services from May, and retime its Melbourne-Dubai-London service to effectively free up another line of flying for its Airbus A380 fleet.

RETIREMENT PLANQantas will also accelerate the retirement of its Boeing 767-300s and oldest 747-400s and defer deliveries of its remaining A380s and three 787-8s, while Jetstar’s A320 orderbook will be “restructured”.

Flightglobal’s Ascend Online database shows that the Qantas group has 107 A320s on order (all for Jetstar) , along with a further 24 A380s, 737s and 787s.

The order reorganisation is expected to cut the airline’s capi-tal expenditure over the next two years by A$1 billion.

Longer term, Joyce has wel-comed the Australian govern-ment’s move to repeal a legislated set of shareholder restrictions – something that Qantas has argued creates an “uneven play-ing field” in the domestic market.

months – a move aimed squarely at heading off Virgin and Tigerair Australia’s expansion.

CAPACITY CONCERNS“We haven’t added as much capacity as our competitors have over the last few years,” Joyce told reporters during a briefing. “[Virgin is] absolutely implying the position of adding capacity, even though they are losing a sig-nificant amount of money and their strategy is loss making.” Vir-gin turned in a $49 million loss over the same period but refused to say how much capacity it plans to add to the market, in an effort to keep its rival guessing.

Joyce has also refused to back away from Jetstar’s focus on Asia, although Singapore-based Jetstar Asia’s growth plans for the year have been put on ice. Jetstar Hong Kong also remains in limbo, as authorities there decide if they will grant the company an air operator’s certificate.

“The prospects for Jetstar in Asia are a major opportunity that we continue to believe in, but we need to make the right decisions in accord with current market cir-cumstances and our balance sheet,” says Joyce.

In light of the poor results, Qantas will embark on a A$2 billion cost-cutting programme over the next three years aimed at making it a more nimble and

If passed, the amendment will remove the 49% foreign owner-ship cap on Qantas, as well as the 35% limit for a single share-holder and a 25% cap on a single foreign airline shareholder. It would also remove requirements for the airline to keep its mainte-nance, catering and some other parts of its business onshore.

“We fully support the govern-ment in trying to correct this dis-tortion that has taken place to date,” Joyce says. Canberra had earlier baulked at other proposals by the airline to secure its debt or offer a standby debt facility.

While the legislation passed the lower house quickly in March, the Senate has referred it to a committee inquiry. Two key parties have voiced strong oppo-sition to the proposed changes, meaning that it may not pass until a new Senate sits in July.

Joyce says that removing the caps would make Qantas more attractive for equity investment from foreign airlines.

“I think there is a likelihood that in the future a [foreign] air-line will have interests in Qan-tas,” he said, adding that it would also “create the opportunity in the long term for Qantas to be involved in consolidation”. ■

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AirAsia X confident region has not over-ordered

ROUTES ASIA

Hong Kong constrains night slotsEllis Taylor reports from Routes Asia in Kuching on how the airport’s restricted availability could threaten growth

Hong Kong Airlines says authorities have stopped

issuing new night-time slots at Hong Kong International Airport as it conducts environmental assessment work for the pro-posed third runway project.

Speaking at a briefing at Routes Asia, the airline’s assistant com-mercial director Michael Burke told attendees that “a moratorium on new night-time movements” has recently been in place.

“It’s very much a way of limit-ing the environmental impacts during the environmental assess-ment period for the third runway. There is a very strong focus by the airport to get that third run-way approved,” he adds.

Burke says that the lack of new evening slots will impact HKA’s growth plans. In addition, sister budget carrier Hong Kong Express Airways has also com-plained that the lack of slots at the airport is the single biggest

AirAsia X chief executive Azran Osman-Rani does not

believe that Asia’s carriers have ordered too many aircraft given the size of the population in the region.

“When you look at the number of aircraft against the size of the population, we have far less planes but a population size of more than three times the size [of the US or Europe],” he told attendees at Routes Asia.

Osman-Rani’s comments come after some other industry observ-

Hong Kong Airlines is worried expansion plans may suffer

Airb

us

April 2014

TOP ASIA SINGLE-AISLE ORDERS

Operator Backlog

1 Lion Air 5272 AirAsia 3293 IndiGo 1874 Jetstar 945 China Eastern Airlines 806 GoAir 747 Kingfisher Airlines 678 VietJet Air 639 SpiceJet 5910 Citilink 56

SOURCE: Flightglobal’s Ascend Online database

ers, including Air Lease’s chief executive Steven Udvar-Hazy, voiced concerns that Asia’s air-lines may have too many aircraft on order – particularly the large low-cost carriers.

Flightglobal’s Ascend Online database shows the region’s two largest backlogs are held by low-cost carriers Lion Air and AirAsia (see table).

However, Osman-Rani says that low-cost carriers still have a lack of penetration in the market, and so the aircraft on order will only

help to drive up their share to a more natural equilibrium. “LCCs still only represent 27% of the air travel market. We think the equi-librium is when there is more of a 50:50 balance between [LCCs] and full-service carriers,” he says.

AirAsia X claims it has a 10% penetration of the market in Asia, and 39% for flights within a 4-6h radius. According to Ascend, AirAsia X has 47 orders, includ-ing 37 A330-300s and 10 A350-900s. These are in addition to its fleet of 18 Airbus widebodies. ■

barrier to its growth plans.The Airport Authority of Hong

Kong (AAHK) denies there is a moratorium on new night-time slots, but admits that it is likely to hit its maximum aircraft move-ment capacity earlier than planned. It adds that all slots for the upcoming season have already been allocated. “Flight schedule for summer 2014 has been allocated with due regard to HKIA’s annual practical maxi-mum ATM capacity and the his-torical split of 80:20 daytime/

night-time slot allocation,” the authority says.

“With increasingly fewer avail-able slots for selection, it is understood that the flexibility for airlines to schedule new flights that can match their origin/desti-nation airports will become more challenging.”

TRAFFIC RISINGAAHK adds that air traffic vol-umes have been rising much faster than forecast in its 2030 master plan. Last year the num-

ber of movements the airport handled reached the level previ-ously forecast for 2016, and the authority now expects the two-runway system to reach maxi-mum capacity earlier than the 2019-2022 timeframe indicated in that plan. The authority adds that the “ultimate solution” to the airport’s capacity issues is the construction of a third runway. To that end, it is working through the environmental approval pro-cess, which is expected to con-clude by the end of the year.

Subject to gaining the required approvals, the third runway is expected to be in commission by 2023. If the moratorium remains long-term, it is also likely to affect proposed carrier Jetstar Hong Kong. The Qantas and China Eastern Airlines backed budget carrier is still awaiting its air operator’s certificate following stiff opposition from home carri-ers led by Cathay Pacific. ■

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Avianca plans to expand its European presence through

new flights and partnerships with local carriers rather than through an acquisition.

The Latin American giant also believes there could be potential for more consolidation among the region’s airlines, as a select few of the local carriers become stronger. Contrary to earlier reports that Avianca’s majority shareholder Synergy Group could acquire an airline in Europe to expand its reach in the continent, the airline’s chief rev-enue officer Estuardo Ortiz says no such plans are in the pipeline.

“We are not looking to expand in Europe [through acquisition],” he said during the Routes Ameri-cas event. Pointing to Avianca’s plan to resume flights to London in July, Ortiz says he believes there is a market in Europe for the carrier.

GOOD CONNECTIONS“We are developing good connec-tivity with EU carriers, and we are focusing on that in 2014,” he says. Avianca is a member of Star

Alliance. The airline’s owner German Efromovich was previ-ously quoted as saying that he was interested in purchasing Ali-talia or LOT, although Avianca later denied that the company is engaged in talks to purchase either carrier.

Efromovich’s Synergy Group had tried to acquire TAP Portugal

in 2012 but its bid was rejected by Portugal’s government.

Meanwhile Ortiz sees consoli-dation potentially continuing in Latin America: “There is still a number of smaller carriers in the region. It’s a question of whether they can compete efficiently in the long run,” he says. “I’m sure consolidation will continue.”

Avianca itself is completing the final leg of its integration, fol-lowing a merger with Taca that closed in 2010. It has rolled out a single commercial code covering most flights operated by the carri-ers under the Avianca umbrella.

As a result of the merger, Avi-anca has also dismantled Taca’s hub in Costa Rica, choosing to focus its international operations from Central America in San Sal-vador. Ortiz says the carrier’s San Salvador traffic rose by 9.5% in 2013 to 3.2 million passengers. “We strongly believe this is an excellent point for us to bring passengers with a 45min connec-tion time to the USA,” he adds.

“We see a lot of room to grow,” says Ortiz. “There are more than 10 cities north of San Salvador we plan to open.” ■

The regulatory environment in the USA continues to make it

challenging for airport privatisa-tions to happen in the country.

That is the view of Matt Cornelius, managing director of air policy at Airports Council International-North America (ACI-NA). “Airport privatisation hasn’t gained traction,” said Cor-nelius during Routes Americas.

Despite the US Federal Avia-tion Administration’s airport pri-vatisation programme which

allows for up to 10 airports to be privatised, very little interest has been shown, he says.

In 2013, San Juan Luis Munoz Marin International airport became the first major airport in

the USA to be privatised, but Cor-nelius does not expect that to be the norm anytime soon.

“Chicago Midway took a cou-ple of steps, but it doesn’t look like that is going to happen,” he says. The city of Chicago had pulled an up to 40-year conces-sion of Chicago Midway airport in 2013, citing a lack of competi-tion for the deal.

While Cornelius notes that there have been efforts to priva-tise airport terminals, he calls

these “incremental”. The Port Authority of New York and New Jersey has said it plans to award a contract for a new central terminal building at New York LaGuardia to a private company.

“We are again going back to the situation with defining regulations in the USA,” he says. He notes that while US aviation regulations are highly regarded, especially in the area of safety, they make airport privatisation deals complicated for interested companies. ■

Privatisation failing to gain traction at US hubs

ROUTES AMERICAS

Avianca focuses on partnershipsGhim-Lay Yeo reports from Routes Americas in San Salvador on Latin giant’s plans to grow in Europe through local deals

Post-merger, the airline dismantled Taca’s hub in Costa Rica

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April 2014

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Copenhagen’s mid-November chill could hardly have been more suitable as an atmos-phere in which to play out the endgame of a Scandinavian

political-corporate drama. But this tightly-wound finale has not been lifted from the closing pages of a Nordic thriller, nor were its actors performing for a televi-sion audience. They were fighting a real-life, minute-by-minute battle to bring SAS Group back from the brink of collapse.

“It was like a war room,” says SAS chief executive Rickard Gustafson. “We had, in one building, eight parallel nego-tiations going on. In a building next door there were bankruptcy lawyers ready to take over.”

There would be no temporary patches, no interim solutions. SAS Group’s sur-vival would depend on whether the col-lective will of its leaders and its staff could outpace the hour hand of the clock. Gustafson says he and the negotia-tors had camped out at the office for four days, “never leaving, never sleeping”.

“It was a bit surreal,” he recalls. “We had this intense thing going around with different people – there would be pro-gress here, but things going backwards over there. It was an intense situation.

“We did not have a ‘plan B’. We needed these signatures.”

SAS Group reached breaking point in November 2012, after more than a dec-ade struggling with serial losses.

Once active across a broad range of businesses – with interests in several

European airlines, flight training opera-tions and a hotel chain – the company finances suffered badly during the post-2001 air transport crisis.

SAS had emerged the victor in a war of attrition with rival Braathens in Nor-way, but found itself facing a new threat in ambitious budget carrier Norwegian. It was also under siege from rising fuel prices, a costly structure and exposure to vulnerable investments – as well as the self-inflicted burden of consequences from cartel involvement.

“The world had changed, and changed rapidly,” says Gustafson. “New players had entered the market with no heritage.”

Sixty years of existence counted for lit-tle – survival would require simplicity and humility. Several restructuring efforts had forced SAS to dismantle its empire and pare back to core elements.

However, the company’s reliance on short-haul operations – around 70% of its business – meant that it could no longer sustain its heavy cost base in the face of budget carriers. On 12 November 2012 the company laid out the 4XNG restructuring programme which would overhaul these costs, and the price its workers – particularly its flightcrews – needed to pay if SAS was to live.

“It’s hard to change, hard to take bene-fits from people and change people’s lives,” says Gustafson. “We had to take it all the way to the cliff.”

SAS was out of options, and Gustafson recalls the “enormous responsibility” of finding a way through the crisis.


Having brought the Scandinavian group back from the brink, SAS chief executive Rickard Gustafson must now see off the threat from low-cost carriers

INTERVIEW RICKARD GUSTAFSON

April 2014

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Although the talks in Copenhagen worry-ingly edged past their deadline, a final agree-ment with eight unions on 19 November threw SAS a rope with which it could begin to pull itself out of the darkest hole in its history.

The company which emerged is a lighter, leaner operation. SAS is no longer a diverse group but a business focused on a single car-rier – following the integration of Scandina-vian Airlines and Blue1 – aiming ultimately to employ 9,000 personnel – less than one-third of its workforce in 2001.

Norwegian regional operator Wideroe has been sold, along with most of SAS’s third-party airline interests, and the company is in the pro-cess of divesting its ground-handling division.

New collective agreements and pension terms under 4XNG, along with restructured sales and IT, and centralised administration, have started to carve into SAS’s stubbornly-high cost base, a legacy of its unwieldy trinational structure. SAS is aiming to strip 15% from its underlying unit costs by the end of 2015.

Over the first year of 4XNG the company has turned in positive pre-tax and net income – evi-dence, says Gustafson, that the bitter remedy is doing its job.

He says the industry is characterised by “razor margins”, and the 3.3% profitability figure SAS achieved in its 2012-2013 finan-cial year is still far short of the 8% it wants to reach.

Gustafson does not think this level of prof-itability is unrealistic. “Is it stretched? Abso-lutely. But I don’t think it’s unreasonable,” he says, although he acknowledges that higher capacity and lower growth last year have pushed back the target date by a year to 2015-2016.

“You need a margin that size to have a sus-tainable business model,” he says. “We need more time to get there.”

Liquidity from the asset sales are part of SAS’s efforts to free itself, to a degree, from its dependence on external credit. It also opted for a SKr3.5 billion ($548 million) share issue in February, and cited strong demand as an illustration of confidence in its turnaround strategy.

“You can never relax, but we’re in a much better position than before. We feel we’ve been able to create a stronger balance sheet. That’s an important step,” Gustafson says.

The airline has about 31% of the Scandi-navian capacity share – ahead of Norwegian with 22% and Ryanair with 8%. But with lit-tle room to change the short- to long-haul

balance, revamping the short-haul operation in order to repel the encroachment of budget carriers is crucial to SAS’s strategy.

Scandinavian Airlines had previously dabbled in the low-cost sector through its spin-off carrier Snowflake, which used a handful of Boeing 737s, but the experiment ultimately served to highlight the costliness of its primary operation.

“We’ve seen some players outsource or establish a low-cost carrier. We’ve said we’re not going to go there,” says Gustafson.

SAS has instead brought low-cost practi-cality into its mainline short-haul network, by introducing a clearer, two-tier on-board service concept – branded SAS Go and SAS Plus – designed to make transport simple and efficient for frequent travellers. Gustaf-son says the change moves the carrier away from outdated standards in order to focus on the needs of frequent travellers – its target market – both for business and leisure.

The airline is also pushing back against the budget airlines on its network, opening over 50 new routes in 2013 – including sev-eral leisure destinations. This is in contrast to previous restructuring measures, which had aimed to establish Scandinavian Air-lines as a business carrier.

Scandinavian Airlines is creating homoge-neous modern short-haul fleets at its three bases: Airbus A320s at Copenhagen and Boe-ing 737s at Oslo and Stockholm.

Wet-leasing has enabled the airline to achieve better performance on its low-den-sity routes, and the carrier has taken advan-tage of partnerships – such as its tie-up with Danish ATR operator Jet Time – to provide regional connections.

SAS’s battle to restructure has taken place in the shadow of rival Norwegian’s ascend-ency, the most emphatic illustration of which took the form of an order for over 200 aircraft in early 2012. Gustafson, who had been scep-tical about the agreement before it was firmed, acknowledges the menace posed by Norwe-gian’s unchecked expansion in Europe.

“It’s a big threat,” he says. “They are our big-gest competitor. We take them very seriously.”

Norwegian’s long-haul venture is proving a particular irritation. SAS has joined with Star Alliance partner Lufthansa in openly scorning Norwegian’s justification for its controversial transatlantic strategy, which has involved relocating its long-haul opera-tion – at least on paper – to Ireland.

SAS describes Norwegian’s rationale as “highly suspicious” and, in a February filing to US regulators, rejects as “nonsensical” the


April 2014

AFFAIRS OF STATE

The three flags emblazoned on Scandinavian Airlines’ aircraft symbolise its joint ownership – but are also a reminder of the complexities of a tri-national workforce.

Over 30 unions represent the personnel within SAS Group, and managing the resulting web of employee agreements has sometimes proven a difficult task.

“If we would start this company from scratch, we wouldn’t design the union structure [as it is now],” admits Gustafson. “But there’s a legal environment. People have a right to join.”

If the heavy restructuring at SAS Group has been undertaken with an apparent minimum of union unrest, a large part of the credit is due to changes put in place about seven years ago.

Industrial relations had been particularly fraught over the preceding years, with SAS suffering strikes in all three base countries.

Gustafson’s predecessor, Mats Jansson, declared that the “strike culture” at the company needed to end. He oversaw the introduction of a co-operative model based on dialogue with unions, intended to promote greater mutual understanding of the company’s direction.

SAS has since experienced a long period of relative peace, illustrating the scheme’s success. “The perception is that [the union structure] is a big hurdle,” says Gustafson. “But I’d also like to remind everyone that in the last few years [we’ve] been through a massive restructuring, followed by a massive contraction – in collaboration with unions – without strikes.”



April 2014

claim that the relocation offers significant traffic rights.

It believes its rival is attempting to gain an unfair labour cost advantage by hiring Asian-based crews but circumventing restrictions which would apply in Norway, contrary to a principle of maintaining high labour stand-ards which forms part of the US-European open-skies agreement.

Norwegian’s business model, says SAS, will begin a “slow descent to the lowest common denomi-nator”, with increasingly com-plex arrangements intended to

cut labour costs and fares, at the expense of the long-term survival of established US and European carriers.

Gustafson believes the advantages of flying with a network carrier can be overlooked if passengers concentrate purely on cheap fares, and highlights Norwegian’s faltering entrance into the long-haul sector which was marred by technical problems with its Boeing 787s.

Gustafson says that Norwegian’s difficul-ties – particularly the instances when pas-sengers were stranded in Asia – clearly illus-trated the benefits of a network carrier partnership: “With Norwegian in the long-haul arena, all of a sudden customers realise ‘that’s what you get with a network carrier’.”

SAS has a 30% share of intercontinental traffic from Scandinavia. It heavily relies on Star to supplement its long-haul operation, particularly to North America, but the launch last year of its much-postponed San Francisco service – more than a decade after it was origi-nally unveiled – finally opened a long-awaited Scandinavian link to the US west coast.

“Our long-haul is doing well for us,” says Gustafson. “That’s not always been the case.”

SAS’s investment strategy includes renew-ing its long-haul fleet, initially with four Air-bus A330-300s in 2015-2016 before it intro-duces the first of eight A350-900s in 2018. The airline is modernising the passenger cabins of its current fleet with new seats, including flat-beds in business class.

Transformation of the short-haul fleet will start in 2016 with the delivery of the re-engined A320neo, 30 of which will be brought into the carrier by the end of 2019.

SAS is a consolidated airline, a situation forced upon it by the extensive Scandinavian geography – stretching from the Arctic to the Baltic – combined with a sparse population of 20 million across Sweden, Norway and Den-mark. Decentralisation of the airline into auton-omous operations between the three states was

attempted in 2004, only to be reversed in 2009.Its close operational links to Lufthansa,

particularly through Star, have not evolved into a corporate merger, and merger gossip has remained simply that.

“I think Europe needs further consolida-tion. There are too many players, too much competition, and everyone’s struggling,” says Gustafson, although he remains non-committal as to the role SAS might take in any defragmentation.

Involving SAS in any consolidation would mean addressing the tri-national own-ership under which the Swedish, Norwegian and Danish states collectively hold 50% of the company’s stock – a co-operative arrangement whereby the three act in concert to maintain overall public control.

All three governments have signalled that they would be prepared to sell if the eco-nomic conditions were suitable, but no-one has yet committed to a withdrawal.

“I don’t think it’s good for any company when shareholders say they want to exit,” says Gustafson. But he is otherwise unconcerned about the presence of the government in any future ownership, and says the structure is not an obstacle to the company’s activities.

Gustafson suggests there is a “perception” of political input arising from the states’ involvement, but insists: “No board meeting I’ve been in has had a political agenda.”

The extensive reform wrought by 4XNG does not mark an end to the reshaping of SAS. Gustafson believes there are still plenty of areas in which the company needs to refine its business.

He says there are a “lot of additional reve-nue streams” that could be exploited through partnerships. SAS also needs to “leverage a lean mindset” and trim costs further. “There are things we need to do in terms of harmo-nising the fleet. [We could also] rethink some expendables in delivery of services. Do we invest or put our costs where we get the best value for investment?

“We’ve a long way to go before the com-pany is collaborating between functions – we’re far from best-in-class.”

SAS may have escaped its near-death experience, but the airline remains in inten-sive care. “I don’t think the world will stand still,” Gustafson warns. “We need to change with our industry. The survivors will be those who embrace change.” ■

More about SAS, and a video interview with Rickard Gustafson, at:flightglobal.com/interviews

SAS AT A GLANCE

Operating revenue $m 2013 6,459Change $ 3.0%Change local 1.9%Operating margin 3.3%Net margin 0.4%Year-end 31 Oct 2013AB 2012 Financial ranking 27 AB 2012 Traffic ranking 51 RPK Growth (2013) 3.8%ASK Growth (2013) 6.0%Load Factor (2013) 73.6%

SWEDE INSPIRATION

There are no elk antlers adorning Rickard Gustafson’s walls, and no shotgun in his cupboard. For a Scandinavian, he professes to be remarkably un-Scandinavian.

“I don’t hunt and I don’t play golf,” he says. “I’m just a normal guy.”

Swedish-born Gustafson attended Linköping University’s Institute of Technology, specialising in engineering and the industrial economy.

He carved a path to SAS Group through the financial sector, joining Andersen Consulting and occupying several senior positions at GE Capital, before moving on to head insurance firm Codan.

While his career background and personal pursuits have little direct connection with aviation – he counts boating and running among sporting interests – he is a frequent traveller, and admits to being “fascinated” by the air transport industry.

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| Airline Business | 27flightglobal.com/airlines

SPECIAL REPORT AIRCRAFT & ENGINES

Airb

us

The battle for supremacy in the widebody sector has intensified, with Boeing launching several new twinjets and Airbus facing some key strategic decisions. Meanwhile, engine manufacturers are entering a crucial stage in the development of their new single-aisle powerplants, as test programmes gather pace

CONTENTS

28 Numbers game Flightglobal Insight’s analysis of 2013’s vital statistics for mainline jets, powered by Ascend Online

32 Delivery rankings A breakdown of the big spenders on airliner heavy metal over the last year

34 X factor Seattle has thrown down the gauntlet with its 777X launch

38 Rough ’n‘ tumble Why Embraer has decided to tough it out in the regional sector

42 Road to recovery Ascend analyses what’s in store for aircraft values in 2014

April 2014

View more special reports online at: flightglobal.com/airlines

44 Power projection Our scrutiny of the airliner engine market in 2013

46 Narrow minds How the market for engines in the single-aisle sector is hotting up

28 | Airline Business | flightglobal.com/airlinesApril 2014

NUMBERS GAMEFlightglobal Insight uses Ascend Online to analyse how the insatiable desire for airliners was satisfied in 2013

SINGLE-AISLES BREAK 900 DELIVERIES MARK

Narrowbody production exceeded 900 units for

the first time in 2013, with Airbus and Boeing

delivering 914 aircraft. This was a 8% increase

over 2012, and helped power the two

manufacturers’ total shipments to 1,250

aircraft. Asia-Pacific’s airlines took the largest

proportion of both single-aisles and widebodies

again, receiving over three times the number of

aircraft that were delivered to the next-largest

market, Europe. Elsewhere, North America saw

a significant rise last year as the region’s

airlines took a larger number of narrowbodies.

ALMOST $84 BILLION SPENT ON NEW TOYS

Airlines invested an estimated $83.8 billion on

updating and expanding their fleets in 2013.

Using Ascend full-life base values, Flightglobal

Insight analysis calculates that over 50%

($42.4 billion) of 2013’s investment on new

airliners was made by Asia-Pacific airlines. Base

values are more representative of the price paid

for new airliners rather than the list price which

is traditionally used for calculating values.

Europe is again ranked second in new

investment, but its spend declined by over $1

billion as deliveries were down on 2012.

AIRBUS/BOEING 2013 DELIVERIES BY CATEGORY (AIRCRAFT)

Deliveries

SOURCE: Flightglobal Insight analysis using Ascend Online database

0

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AfricaLatin AmericaMiddle EastNorth AmericaEuropeAsia-Pacific

Grand total: 1,250

Widebody total: 336Narrowbody total: 914650

214 192

88 87

19

2013 MAINLINE DELIVERIES BY REGION (VALUE)

SOURCE: Flightglobal Insight analysis using Ascend Online database NOTE: Values calculated using Ascend 2013 full-life base values

Latin America$4,902m

North America$11,429m

Asia-Pacific$42,395m

Europe$14,782m

Middle East$8,878m

Africa$1,379m

Total: $83,765m


AIRCRAFT & ENGINES AIRCRAFT MARKETS

April 2014

0

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Mainline jet deliveries 2002-13

BoeingAirbus

Del

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(air

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Year

BOEING TAKES CHARGE IN ITS HOME MARKET

The share of spend on new Airbus and Boeing

airliners is fairly even in most markets other than

the US manufacturer’s home region, North

America. Here, airlines spent more than twice

the amount in Seattle than they did in Toulouse:

$7.8 billion versus $3.6 billion. Contrast that

with Airbus’s home market, where the $14.8

billion was shared equally. Airbus can take

solace from the fact that it leads in the biggest

market – Asia-Pacific – and fast-expanding Latin

America. Overall, Boeing delivered over $2.2

billion worth more than Airbus last year.

MARKET SHARE GOES WITH REGIONAL FLOW

Boeing outstripped Airbus in overall shipments

again in 2013, slightly extending the lead it

took the year before. But from a regional

breakdown perspective, the US manufacturer

only leads its rival in two markets – North

America and the Middle East. In the former

market, Boeing’s lead is double the Airbus tally:

132 aircraft versus 62. The European

manufacturer has healthy – but not significant

– advantage in its home market and also the

preferred supplier in the Asia-Pacific and Latin

America. It also has a marginal lead in Africa.

Rex

Featu

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AIRBUS/BOEING 2013 DELIVERIES BY REGION (AIRCRAFT)

Deliveries


0

50

100

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Airbus total: 616Boeing total: 634

Grand total: 1,250

AIRBUS/BOEING 2013 DELIVERIES BY REGION (VALUE)

Value $bn

0

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Airbus total: $40,742mBoeing total: $43,023m

SOURCE: Flightglobal Insight analysis using Ascend Online database NOTE: Values calculated using Ascend 2013 full-life base values

Grand total: $83,765m

SEATTLE STEPS UP OUTPUT ADVANTAGE

Having overhauled its rival following a decade in

Airbus’s shadow in 2012, Boeing extended its

production lead slightly further last year. While

the US manufacturer’s advantage in unit terms

was less than 20 airliners (634 deliveries

versus 616 from Airbus), the gulf has widened

in value terms thanks to Boeing’s widebody

advantage. There were 208 deliveries of Boeing

747, 767, 777 and 787 widebodies worth

$40.7 billion, compared with 128 Airbus A330s

and A380s valued at $16.4 billion (full-life base

values). Airbus closed the value gap thanks to

its higher number of single-aisle shipments –

488 A320-family aircraft versus 426 737s.

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32 | Airline Business | flightglobal.com/airlines

AIRCRAFT & ENGINES MARKET ANALYSIS

AIRLINER DELIVERY RANKINGSDATA COMPILATION AND ANALYSIS BY ANTOINE FAFARD FLIGHTGLOBAL INSIGHT

April 2014

Airbus and Boeing shipped a record 1,250 aircraft to airlines globally in 2013. We examine who took what to identify which carriers were the big investors in new mainline jets last year, in this Flightglobal Insight analysis powered by the Ascend Online database

2013 DELIVERIES: TOP 10 BY VALUE

Rank Value ($m)

1 China Southern Airlines 4,2702 Emirates 3,9363 American Airlines 2,9384 China Eastern Airlines 2,6935 Air China 2,2676 Cathay Pacific 2,1767 Hainan Airlines 1,6008 Malaysia Airlines 1,5269 Lufthansa 1,50710 United Airlines 1,456TOTAL FOR ALL 2013 DELIVERIES = $83,765mNOTES: Data for deliveries to airlines. Values calculated using Ascend 2013 full-life base values. SOURCE: Flightglobal Insight analysis using Ascend Online database

2013 DELIVERIES: TOP 10 BY UNITS

Rank Units

1 China Southern Airlines 652 American Airlines 593 China Eastern Airlines 484 Air China 375 United Airlines 266= Emirates 246= Hainan Airlines 248 LAN Airlines 229 US Airways 2110= Malaysia Airlines 2010= Turkish Airlines 2010= Aeroflot 20TOTAL NO. OF 2013 DELIVERIES = 1,250NOTE: Data for deliveries to airlines. SOURCE: Flightglobal Insight analysis using Ascend Online database

2013 DELIVERIES: TOP FIVE AIRLINES BY VALUE AND REGION

ASIA-PACIFIC ($42,395m/650) EUROPE ($14,782m/214) NORTH AMERICA ($11,429m/192)Rank Airline Value ($m) Units Rank Airline Value ($m) Units Rank Airline Value ($m) Units

1 China Southern Airlines 4,270 65 1 Lufthansa 1,507 18 1 American Airlines 2,938 592 China Eastern Airlines 2,693 48 2 British Airways 1,392 12 2 United Airlines 1,456 263 Air China 2,267 37 3 Turkish Airlines 1,272 20 3 US Airways 1,370 214 Cathay Pacific 2,176 18 4 Aeroflot 1,101 20 4 Southwest Airlines 828 185 Hainan Airlines 1,600 24 5 Norwegian 992 17 5 UPS Airlines 704 8MIDDLE EAST ($8,878m/88) LATIN AMERICA ($4,902m/87) AFRICA ($1,379m/19)Rank Airline Value ($m) Units Rank Airline Value ($m) Units Rank Airline Value ($m) Units

1 Emirates 3,936 24 1 LAN Airlines 1,312 22 1 Ethiopian Airlines 386 42 Saudia 1,429 15 2 GOL 736 16 2 Libyan Airlines 245 33 Qatar Airways 1,303 13 3 TAM 693 13 3 Air Namibia 239 34 Etihad Airways 1,155 14 4 Aeromexico 486 6 4 Afriqiyah Airways 147 25 Air Arabia 343 7 5 Volaris 343 7 5= Tunisair/SAA 98 2NOTE: Values calculated using Ascend 2013 full-life base values. Total value/units delivered for each region in brackets SOURCE: Flightglobal Insight analysis using Ascend Online database

2013 NARROWBODY DELIVERIES

Rank Airline Units

1= American Airlines 511= China Southern Airlines 513 China Eastern Airlines 404 Air China 255 United Airlines 24Rank Region Units

1 Asia-Pacific 4872 Europe 1633 North America 1514 Latin America 725 Middle East 316 Africa 10NARROWBODY TOTAL 914SOURCE: Flightglobal Insight analysis using Ascend Online database

2013 WIDEBODY DELIVERIES

Rank Airline Units

1 Emirates 242 Cathay Pacific 183 China Southern Airlines 144 Qatar Airways 135 Air China 12Rank Region Units

1 Asia-Pacific 1632 Middle East 573 Europe 514 North America 415 Latin America 156 Africa 9WIDEBODY TOTAL 336SOURCE: Flightglobal Insight analysis using Ascend Online database

2013 DELIVERIES: TOP FIVE AIRLINES BY MANUFACTURER

AIRBUS: BY VALUE AIRBUS: BY UNITSRank Airline Value ($m) Rank Airline Units

1 Emirates 2,743 1 China Eastern Airlines 322 China Eastern Airlines 1,978 2 China Southern Airlines 263 China Southern Airlines 1,658 3 US Airways 214 US Airways 1,370 4 American Airlines 205 Air China 1,228 5= Air China/IndiGo 17AIRBUS TOTAL AIRLINE DELIVERIES = 616 ($40,742m)BOEING: BY VALUE BOEING: BY UNITSRank Airline Value ($m) Rank Airline Units

1 China Southern Airlines 2,612 1= American Airlines 392 American Airlines 2,018 1= China Southern Airlines 393 Cathay Pacific 1,716 3 United Airlines 264 United Airlines 1,456 4 Air China 205 All Nippon Airways 1,279 5 Southwest Airlines 18BOEING TOTAL AIRLINE DELIVERIES = 634 ($43,023m)NOTE: Values calculated using Ascend 2013 full-life base values. SOURCE: Flightglobal Insight analysis using Ascend Online database

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When Boeing launched the 777X at last year’s Dubai air show, backed by commit-ments for over 300 aircraft from four customers, Tou-

louse’s worst nightmare became a reality. Having suffered at the hands of Boeing in the “big-twin” sector for much of the last decade, Airbus has been making good headway with

its A350 XWB, racking up sales of more than 800 aircraft – only for Boeing to come out with an enhanced derivative of its bestseller.

Unsurprisingly, Airbus is dismissive of the threat posed by the new big-twin. But given its backing from blue chip customers like Cathay Pacific, Lufthansa and the Gulf’s tri-umvirate of global network carriers, should the European manufacturer be taking the

The arrival of the Boeing 777X creates challenges for both the major aircraft manufacturers, but Airbus faces the big dilemma as it evaluates what it should do about the competitive threat

X FACTOR

REPORTMAX KINGSLEY-JONESLONDON

ARTWORKTIM BICHENO-BROWN

threat from the 777X more seriously? And do the airlines once again find themselves with just one go-to vendor when seeking the largest twin-engined “seat-production machine”?

Airbus’s new generation widebody prod-ucts comprise four models – the A380 super-jumbo and three variants of the Rolls-Royce Trent XWB-powered A350. Its only in-pro-duction widebody twinjet is the A330. Series


Cathay Pacific is a launch customer for both the A350-

1000 and the 777-9X (pictured)

Boe

ing

production of the A350 is beginning as Airbus works towards the first delivery of the initial variant, the -900, to launch customer Qatar Airways in the fourth quarter of 2014.

The two-member 777X family in the 350- to 400-seat category slots in at the top of Boe-ing’s widebody twinjet line-up, above its three variants of 787 and below the 747-8I. The 777X, which is due to enter service in 2020, is

the successor to today’s strong-selling 777-300ER, and ultra-long range -200LR.

The 777-9X is the larger variant, featuring a slight stretch over the -300ER and raising seat-ing by around 14 passengers in similar typical layouts (see graphic). The 350-seat -8X is developed from the 777-200 airframe, with a 10-frame stretch.

Other major changes on the 777X include a larger, composite wing, which incorporates folding tips to allow it to use 777-sized parking bays and taxiways, all-new General Electric GE9X engines and a revised cabin.

RANGE ADVANTAGE“The 777-8X sits right on top of the A350-1000 in terms of size, but has a range advantage and is more fuel efficient. And then we have the [larger] -9X, which gives us the ability to go into that territory that is unchal-lenged, which is really great,” says Boeing’s marketing vice-president Randy Tinseth.

The A350 and 787 met for the first time on the tarmac at February’s Singapore air show, prompting a rise in the rhetoric about the rival manufacturers’ contrasting widebody strate-gies. Airbus argues that its product line offers simplicity, while Boeing points to an even spread of aircraft across the 200-400 seat sec-tor. “Boeing has been waxing eloquent about how impressive their widebody product line is. Well actually it looks like a bit of a dog’s breakfast to me,” says Airbus chief operating officer for customers John Leahy. “If they’ve got the sweet spot in the market, there are an awful lot of sweet spots.”

Leahy argues that airlines want simplicity, and that Boeing’s multi-faceted line-up is “not reasonable” in the current age.

“My competitor has eight different models competing with four of ours. Those eight dif-ferent models represent four aircraft families within them – different cockpits, different engines, different support.”

However, Boeing highlights its sales success in the widebody sector as evidence that it has called the strategy right. The market is currently voting slightly in favour of Seat-tle, with Boeing holding a 55% share of the widebody twinjet backlog.

“We’re very pleased with how we’re posi-tioned with our widebody product offering – from 200-400 seats we have a complete line of 787s and 777s in the market-place.

“From orders to deliveries to backlog, we lead the competition,” says Tinseth. “Airbus has a lot of questions it has to answer – what does it do about the A330, about the A350-800 – I think the writing is on the wall

already – and about the A350-1000.“They signed up a great customer in Cathay

Pacific for the -1000, and now all of a sudden it is also a 777X customer, so it really limits what the -1000 can do.”

Sales of the 777-300ER have outpaced even Boeing’s most optimistic forecasts, with total sales standing at 721 aircraft – including 263 on backlog. Tinseth attributes the -300ER’s surprise success to two main factors: “It crushed the competition – the A340-600 just wasn’t a viable competitor, which helped us, and while we recognised that a lot of airlines bought the 747 for its range, frankly we got that percentage wrong, and more bought it for this capability than for its size.”

Some observers see the A350 family poten-tially being under threat at both ends. Cus-tomers have been abandoning the A350-800 like rats on a sinking ship, switching their orders to the larger variants. This has raised questions over the future of the smallest vari-ant, and comes as Boeing expands its 787 line-up with the launch of the -10 at last year’s Paris air show. Meanwhile, the arrival of the 777-9X could force Airbus to respond with a bigger derivative of the A350-1000.

“At face value, Airbus faces some interest-ing challenges with their widebody product strategy,” says Rob Morris, head of advisory at Flightglobal’s Ascend advisory service.

ECONOMICALLY UNCOMPETITIVE“Boeing has its 787 family covering 240-320 seats, and then 777X at 350-400 seats,” he says. “By comparison, Airbus will potentially have the A350 spanning 270-350 seats, with the family probably starting at 315 seats if the -800 fails to make the light of day.

“We also suspect that the A330-200/300 will exit passenger variant production towards the end of this decade, largely because the similarly sized A350-900 renders new-build A330-300s economically uncompetitive.”

“The Airbus conundrum is do they con-sider a family below the A350 – potentially covering 220 to 300 seats – or do they con-sider a 380-450 seat family to close the gap between A350-1000 and 558-seat A380?” asks

“To put new engines on the A330’s wings is a big job. It’s not a

decision you’re going to make quickly or easily”

TOM WILLIAMSAirbus AVP Programmes


AIRCRAFT & ENGINES WIDEBODIES

April 2014

AIRBUS/BOEING BIG-TWIN SPECIFICATIONS

A350-800 787-9 A330-300 777-200LR A350-900 787-10 777-8X A350-1000 777-300ER 777-9X

Length (m) 60.5 63 63.7 63.7 66.8 68 69.5* 73.8 73.9 76.3*

Span (m) 64.8 60 60.3 64.8 64.8 60 71.1 64.8 64.8 71.1MTOW (t) 248 250.8 242 347.5 268 250.8 352 308 351.5 352Passengers (3-class) 276 280 295 301 315 323 350 369 386 400Range (nm) 8,250 8,200 6,100 9,400 7,750 7,000 >9,300 8,000 7,800 >8,200List price ($m) 260.9 249.5 245.6 296 295.2 288.7 349.8 340.7 320.2 377.2Service entry 2016 2014 1993 2006 2014 2018 2022 2017 2004 2020Engine thrust (lb) 79,000 73,800 72,000 110,100 84,000 78,000 102,000 97,000 115,300 102,000NOTES: 777X data provisional *Unconfirmed. Aircraft arranged by passenger capacity – lowest to highest SOURCE: Manufacturers and industry sources

Morris. “In demand terms, the 220- to 300-seat sector will probably have greater demand, but the challenge of creating an eco-nomically competitive twin-aisle of this size is considerable.

“And if Airbus chooses this route, then it would probably leave the 777-9X to itself in the market, creating the potential monopoly space that would allow Boeing to manage pricing in that space to its benefit – as it has been able to over the past few years with the 777-300ER.”

COMPLEMENTARY RIVALSCathay Pacific, which is a launch customer for both the A350-1000 and the 777-9X, is the world’s second-largest 777-300ER operator, with a total of 53 in service and on order.

The Hong Kong airline’s engineering director Christopher Gibbs sees the two rival twinjets as complementary, and is not con-cerned that one manufacturer could gain a monopolistic position. “Competition is use-ful, but I’m not sure it’s sufficient to com-pletely duplicate one each other,” he says. “We see the positioning between the 777-9X and the A350-1000 as a bit different – the -9X is bigger. So for routes that need a smaller demand, the -1000 is appropriate, and for routes with bigger demand, the -9X is right.”

Airbus chief executive Fabrice Brégier attributes Boeing’s decision to add a stretch to the 777-9X (over the -300ER) to the need for competitive economics, but he leaves the door open to a competitive response with the A350. “The 777X has to be slightly bigger because it could not compete against the A350-1000,” says Brégier. “So they were in the sweet spot [with the 777-300ER] – which was 360 passengers in three classes – and we just took over this sweet spot.

“So we believe the A350-1000 and A380 should be more than sufficient.

“However, in the long run we are improv-ing our product, so we have no short-term/mid-term plan to do that [a stretch], and we

don’t think we have to do that, but we could well envisage additional members of the A350 family.”

Cathay’s Gibbs says the airline selected the 777-9X “most importantly” because it offers around 14 more seats than its 777-300ERs.

“So it’s a plane for growth on our long-haul routes which need more capacity. And it will fly long-haul routes extremely effi-ciently,” he says. Gibbs says that fuel accounts for 65-70% of Cathay’s incremental costs on long-haul operations, “so fuel-burn

efficiency is really paramount and is a really important factor”.

Despite Boeing’s early sales success with the 777-9X, Ascend’s head of market analysis Chris Seymour is not convinced Airbus needs to respond, as the A350-1000 is “ideally placed” to replace 777-300ERs – combining similar capacity and better economics.

“Emirates Airline president [and A350-1000 customer] Tim Clark says it’s the ideal aircraft for 10-hour missions with no crew-rest requirements. The 777-9X also

BOEING 777-9X – CHANGES OVER 777-300ER

NOTE: Provisional data. SOURCE: Boeing/industry sources Tim Bicheno-Brown

1 Revised flightdeck incorporating 787 technology

2 New interior with revised architecture featuring larger windows, wider cabin and new lighting 3 Enlarged CFRP wing – span increased by 6.3m to 71.1m

4 Folding wingtips (outer 3.4m, reducing span to 64.8m)

5 Revised operating weights

6 Overwing exit removed and replaced by new emergency exit aft

7 Advanced General Electric GE9X engines incorporating laminar flow nacelles delivering 10% lower fuel burn. Provisional 102,000lb thrust is around 13,000lb lower than -300ER’s GE90-115B

8 Four-frame stretch increasing capacity by 14 seats to 400 passengers (777-8X has 10-frame stretch over -200LR, increasing seating by 49 to 350 passengers)

9 Tailfin incorporates 787-style rake and hybrid laminar-flow control drag reduction on leading edge

12

3

4

5

6

9

7

8

8


BOEING 777X CUSTOMERS

Cathay Pacific 21Emirates* 150Etihad Airways 25Lufthansa 34Qatar Airways 50Total 280NOTE: *Plus 50 purchase rights SOURCE: Boeing

looks to be very good in terms of range, eco-nomics, cargo capacity and 30-40 seats more – ideal for growth over -300ERs at carriers like Emirates,” he says.

“Airlines are ordering and will order both – so does Airbus need to try to stretch into an ‘A350-1100’? Maybe not. Will every long-haul market served by A330-300s or 777-200ERs grow into a 400-seat market? Probably not – more like 350 seats first, and the 777-8X may then be too heavy and have too much range compared to the -1000,” he adds.

Airbus aims to decide this year how it will tackle the market below the A350 – which could include addressing the -800’s sector – as it evaluates whether to develop an upgraded “A330neo” powered by new gener-ation engines.

“To put new engines on the wings, it’s a big job. It’s not a decision you’re going to make quickly or easily. It’s a significant engineering task,” says Tom Williams, Airbus’ executive vice-president of programmes.

He adds that making small tweaks to opti-mise the aircraft could also bring about “pretty good improvements”.

“We’re not going to go back to the same sit-uation with the original A350, where we got into a loop chasing weight, then went into the carbon wing,” he says.

Although the A330 has been in production for more than two decades, Williams believes that there is still “a very good market” for the twinjet, especially for operators who do not need the range of the A350 or Boeing 787, because of its lower price tag.

THROUGH THE DECADE“We think there is an opportunity to keep fly-ing the A330 alongside the A350 for quite a period of time. We don’t see it as a case where the A350 comes in and suddenly the A330 disappears. We think we can keep building the A330s, certainly through this decade,” says Williams.

The 777X’s arrival potentially creates a few headaches for Boeing’s long-term product strategy, namely around how it manages the transition – both production and sales – from the current 777, and the implications for the slow-selling 747-8I.

From a transition perspective, Boeing’s current backlog for the -300ER (and 777 Freighter) of approximately 300 aircraft repre-sents around three years of production at cur-rent rates, which means it still has some way to go in sales to bridge to the introduction of the 777X in 2020. Observers expect there will be a one- or two-year overlap between the

777-300ER and the 777X, which would mean production ending in around 2022.

Boeing has “a plan” for when production will switch over, “but we’ve not shared that”, says Tinseth.

“We can take a similar approach from when we went from the 737NG to the Max – that was a successful strategy, and we can do many of the same things,” says Tinseth. “When we went to our customers with the Max, we coupled those with NGs to help with their transition as well as with ours.

“We’re going to take that same mentality into our 777 campaigns.”

The 777F could also come into play, says Tinseth. “Our competition doesn’t have a freighter, so if the cargo market turns around as we expect it will, we have the 777F to help with the transition.”

But Ascend’s Morris believes the plan to use the 737 Max transition may not be quite as straightforward as Boeing anticipates. “When said quickly, it sounds easy to run the same

transition plan. However, the 777 customer base is a little different, with less operators and more concentration. So I wonder how big fleet operators will react to the prospect of having to take some last-off-the-line 777-300ERs whilst they wait for their 777Xs,” he says.

RESIDUAL VALUESMorris also thinks that there could be issues around residual values: “777-300ERs will typically be on 12-year finance terms or oper-ating leases, so how will Boeing incentivise operators to keep those last-off-the-line -300ERs for 12 years in the face of their fuel burn penalty over 777Xs? “I guess that will depend on where fuel prices are in the 2020s, but it seems likely that some deep discounts will be required to place -300ERs rolling off the line through the transition phase.”

Despite being slightly smaller than the 747-8I, if the 777-9X delivers on its operating cost promises then it will clearly pile pressure on the Boeing’s four-engined legend. But Boe-ing is confident the 747 programme can cope with some sibling rivalry.

“We’ve positioned the 747-8I to be 15% larger in seat count than the larger 777X, the -9X,” says Scott Fancher, Boeing’s general man-ager of airplane development. “The 747-8 is also a great freighter – it’s a great ‘switcher’, to use an American baseball term – and that gives it great

legs in the marketplace to run the distance.”Tinseth says Boeing was pleased to secure

17 gross orders for the 747-8 during 2013, but he warns that it has “got to do that every year” to ensure continued production of the big jet is viable. Boeing would not have to do much to the 777X to create a single-deck airliner sized to replace the 747-8 in capacity terms, and Fancher does not rule out the suggestion that there could one day be a “777-10X” derivative.

So the 777X creates challenges for both major airframers, but it is Airbus that has the most questions to tackle, and we should begin to see some answers before 2014 is out. ■Additional reporting by Mavis Toh

Boeing’s incremental-step-in-size strategy for widebodies (top) “looks more like a dog’s breakfast” to Airbus (bottom)

2020Expected entry-into-service

for Boeing’s 777X family

April 2014

Watch our interview about widebody strategies with Airbus’s Leahy and Boeing’s Tinseth:flightglobal.com/twintussle


The regional aircraft sector is a brutal business littered with numerous casualties, but that hasn’t stopped new players entering the market and one old hand - Embraer - deciding to tough it out for the long run

AIRCRAFT & ENGINES REGIONAL JETS

ROUGH ’N‘ TUMBLE

REPORTSTEPHEN TRIMBLEWASHINGTON DC

Selling airliners in the regional market is a tough business. In the past 30 years, the short-haul seg-ment has spawned and slain whole companies and aircraft.

From turboprops like the BAe ATP and Saab 340/2000 to jets like the Fokker 100 and the Fairchild Dornier 728, entire aircraft pro-grammes have been snuffed out by intensely competitive market forces.

Small-jet production lines that were slow to adapt when Bombardier and Embraer stormed into the sector in the early 1990s – such as the BAe 146/Avro RJ and Fokker’s twinjet family – passed out of business. The regional market has always suffered from hav-ing too many participants fighting over small opportunities to make a profitable business, which is why it has been littered with so many casualties over the years.

Deliveries of the four-engined BAe 146 – an aircraft conceived around the concept of a quiet, efficient small jet able to transport pas-sengers between city centre and city centre – began in 1983. But the appearance of the twin-engined Bombardier CRJ100/200 (nee “Canadair Regional Jet”) and Embraer ERJ-145 family a decade later completely changed the paradigm. Rather than a short-haul, point-to-point aircraft, these new 50-seat-class jets could operate as medium-haul network feeders – replacing the more efficient but slower turboprops, as well as larger jets on off-peak services. Despite being

Promised reduction in fuel burn for Embraer E-Jet E2

versus E-Jet Enhanced

7%

April 2014

less efficient than either of the alternatives, these second-generation regional jets offered passengers a more comfortable ride and more convenient frequencies.

FRANCHISE BUILDINGThat was enough for aircraft manufacturers from Brazil and Canada to start building a franchise. By the middle of the last decade, the third-generation regional jet was entering service with the arrival of the 70-seat-class Embraer 170 in March 2004. Although only marginally more fuel efficient than its 50-seat forebears, the E-Jet and the CRJ700/900/1000 series built on the foundation laid by the BAe 146s and Fokker 100s of the same class.

Now in development comes the fourth gen-eration, in the form of the E-Jet E2 and the Mitsubishi Regional Jet (MRJ). Both are sched-uled to enter service in the second half of this decade, promising to provide the network connections desired by passengers at a fuel economy more closely resembling the turbo-props that the regional jets largely replaced two decades ago.

The generational leap is enabled with the introduction of more efficient propulsion. The General Electric CF34 powerplant that was adapted from the US Air Force A-10 fighter for the regional market is being replaced. Pratt & Whitney is offering custom-ised versions of the PW1000G geared turbo-fan, and it has been eagerly adopted by Mit-subishi and Embraer.

Bombardier has decided to stay in the seg-ment between 70-110 seats without a new or re-engined product. As the company stays focused on development of the 110-160-seat CSeries family, it hopes to leverage the proven appeal of the CRJ family – especially the CRJ900 and CRJ1000.

That leaves only one incumbent offering a new product from a market-leading position still in the competition – Embraer.

Paulo Cesar Silva, Embraer’s executive vice-


Rex

Fea

ture

s

Embraer has shared a goal with Bombardier

to exit the large regional jet segment

April 2014

president of Embraer commercial aviation, says the company is not taking its position for granted with the re-engined and re-winged E-Jet E2 family still in early development.

“There is a competition out there,” Silva says. “There is also the Japanese with the MRJ, although they are late in their programme. What we are concentrated and focused on is to develop the best aircraft in the category with the lowest operating cost, the best cabin.”

WANTING OUTEmbraer never wanted to be in this position – a sign, perhaps, of how brutal the segment remains. For several years, Embraer has shared a goal with Bombardier to exit the large regional jet segment and push its way into the small narrowbody market.

Bombardier moved first in 2008 by launch-ing the CSeries to occupy the low-end of the

narrowbody segment, which at that time was assumed to soon be vacated when Airbus and Boeing replaced the A320 and 737 with clean-sheet designs by the end of this decade.

In 2010, however, Airbus decided to capital-ise on P&W’s geared turbofan architecture as well and re-engine the A320. The rapid popu-larity of the A320neo, which amassed 800 orders in less than eight months, forced Boeing to follow suit in 2011 with the re-engined 737 Max powered by the A320neo’s alternative engine, the CFM International Leap-1.

At the time, Embraer was still reviewing plans to launch an all-new five-abreast design, but the re-engining decision by Airbus and Boeing meant it would have at least four major competitors: A319neo, 737 Max 7, CS100, CS300 and China’s Comac C919. Wisely, Embraer decided to remain in the large regional jet segment, launched the E2 family in November 2011.

“Of course, we would like to tap into the 130-150-seater market,” Silva says. “It’s a larger market there. However, we are seeing there is not a good business case still. Maybe in the future, 10 years or more, as the two larg-est manufacturers will develop larger narrow-bodies in order to take advantage of the opportunity of the need for a larger aircraft. Maybe at that moment we can grow with the lower segment. Right now, we are not seeing a good business case for us.”


AIRCRAFT & ENGINES REGIONAL JETS

2013 REGIONAL AIRCRAFT DELIVERIES BY CATEGORY

0

10

20

30

40

50

60

70

80

AfricaEuropeLatin AmericaNorth AmericaAsia-Pacific

Total deliveries: 231Regional jet total: 131

Turboprop total: 100

NOTES: Data for for ATR, Bombardier, Embraer and Sukhoi. Excludes corporate and military operators.


71

5651

48

5

2013 REGIONAL AIRCRAFT DELIVERIES BY MANUFACTURER

0

10

20

30

40

50

60

70

80

AfricaEuropeLatin AmericaNorth AmericaAsia-Pacific

Total deliveries: 231

ATR total: 71Bombardier total: 55Embraer total: 90Sukhoi total: 15

NOTES: Data for ATR, Bombardier, Embraer and Sukhoi. Excludes corporate and military operators.


71

56

51 48

5

Turboprop100

Jet131


2013 REGIONAL AIRCRAFT DELIVERIES

NOTES: Data for ATR, Bombardier, Embraer and Sukhoi. Excludes

corporate and military operators.

Total deliveries: 231

Comac** 9%

ATR 16%

Embraer 30%

Bombardier*

22%

Mitsubishi12%

Sukhoi 12%


REGIONAL AIRCRAFT BACKLOG

NOTES: *Bombardier's backlog includes CSeries. **Comac ARJ21.Data at 31 December 2013, exludes corporate and military operators

Total backlog: 1,426

TOP FIVE REGIONAL CUSTOMERS 2013

Rank Operator Deliveries

1 Azul 21

2 Republic Airlines 19

3 Endeavor Air 12

4 Conviasa 10

5 Garuda 9

TOTAL NUMBER 2013 DELIVERIES: 231NOTE: Data for ATR, Bombardier, Embraer and Sukhoi. Excludes corporate and military operators.


The company’s primary challenge is filling the four-year backlog between now and the scheduled arrival of the E190 E2 in 2018.

The long-awaited re-fleeting of the North American regional carriers in 2013 helped Embraer re-stock an almost depleted commer-cial aircraft backlog. The backlog is full through 2015, but Embraer has more than a year of production still open.

BREACHING THE DIVIDE“As we approach the [entry into service] of the E2 in the first half of 2018, it’s going to be more and more challenging to us to make this bridge,” Silva says. “However, what helps us too and is key for us is we have a family of aircraft.”

Brendan McHenry, who is a senior analyst with Flightglobal’s Ascend consultancy arm, believes Embraer can capitalise on its strong market position to bridge the gap, but may have work on pricing too. “Embraer do have a significant customer base to market these last-off-the-line first-generation aircraft to,” he says. “But inevitably there will be some element of price discounting required to incentivise those customers to accept these aircraft and offset their fuel-burn penalty relative to the E2s.”

Another potential advantage Embraer may enjoy is good timing. Silva anticipates a sec-ond wave of major orders by North American carriers in 2017, as union contracts expire and scope-clause agreements limiting the size of the aircraft in the regional fleet are reviewed.

“I believe there will be a second wave of 76-seater orders, in maybe three years’ time, as airlines will replace old 50-seaters not only because it’s old but also because of the possibil-ity to be more efficient with larger aircraft,” Silva says.

This second wave of demand could peak, if Silva’s calculations are accurate, three years before the scheduled entry into service of the E175 E2 variant, which fills the 75-80-seat segment.

Embraer has released a package of perfor-mance improvements for the base version E-Jet fleet, which was scheduled to enter ser-vice imminently. The E175 Enhanced pack-age that includes a winglet redesign and aero-dynamic clean-ups is expected to lower specific fuel consumption by 6% compared with the base model.

The E-Jet E2 family will enter service in 2018 with a promised further reduction of 7% of fuel burn compared with the E-Jet Enhanced, Silva says.

It has been a dynamic first decade of opera-tions for the E-Jet family. Embraer launched the programme in 1999 with no experience building commercial aircraft beyond 50 seats, and facing a wide range of competitors.

The move put the company head-to-head with upstart Fairchild Dornier and its all-new five abreast 728 which had been launched with the backing of Lufthansa, no less. At the time, Embraer’s expectations were tempered by cau-tion. Embraer knew there was a replacement

market for the BAe 146 and Fokker 100, but beyond that demand there was only specula-tion. Total E-Jet orders now stand at almost 1,450 (including 150 E2s).

“We knew it would be a good market,” Silva says. “However, maybe it has exceeded what we had imagined. It turned out to be well beyond of what we would expect.”

What Embraer didn’t know at the time, of course, was that Fairchild Dornier’s ambitions would go up in smoke, with the programme collapsing shortly after the first 728Jet had broken cover at its roll-out ceremony. One thing’s for sure: the regional sector is a play-ground where only the strong survive. ■

April 2014

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George Dimitroff, chair of the values review board at Flightglobal’s advisory arm Ascend, looks at how the market is faring as we progress through early 2014

AIRCRAFT & ENGINES VALUES

ROAD TO RECOVERY

The airline industry ended 2013 in a good state of health: another year of profits, stronger balance sheets, sta-ble fuel prices and overall opti-mism. In fact, IATA predicts even

higher traffic growth and profits for 2014. Yet airline profits are not a new thing: the

last four years saw airlines churn out reason-able profits thanks to capacity discipline, while aircraft values still suffered because older equipment was largely unwanted. Shiny new units rolled off the production lines in increasing numbers, and continue to do so – but it appears demand is picking up to a sufficient level to be able to start absorbing some mid-life aircraft as well.

With the arrival of a new year, the Ascend values review board takes these factors into account as we conduct the scheduled market values and lease rates update (most other changes are “non-scheduled” in that they occur as and when we see market changes). The principal driver behind this discipline is the introduction of a new year-of-build, and the consequential impact on other vintages, which are now all a year older.

In a positive move, Ascend has already moved Airbus A320 lease rates modestly upward since the beginning of the year, to reflect firmer pricing on new leases of mid-life aircraft, generally defined as post-2000 vintage. The availability of new single-aisle types from lessors’ speculative orderbooks has more or less dried up for the next couple of years, so if

an airline wants to get its hands on one, it has to start looking at some mid-life examples that have come off their first lease. The improve-ments so far have been very modest, but we can say confidently that the worst is behind us.

As most five- to seven-year leases signed before 2008 have now expired and lease terms have become longer, there will also be a reduced number of lease expiries over the next couple of years.

Data from Flightglobal’s Ascend Online database shows that the number of used air-craft sales picked up in 2013 for aircraft aged under five years or five to 10 years. Sales of air-craft in the 10- to 15-year age bracket could be next (they were flat in 2013), although this hinges on several prerequisites. Historically, an increase in trading eventually results in improved values. There are still a lot of poten-tial obstacles, a lot that could go wrong, but overall, leading indicators point towards an improvement in values and lease rates for good-quality mid-life aircraft. One of the driv-ers behind this is the increase in investors

seeking to enter the mid-life aircraft space over the past year. Yields are inevitably higher when financing mid-life aircraft, reflecting the higher risks that investors have to take, but with more buyers competing in the space and competing against each other for the same acquisition opportunities, we may see aircraft values pushed up a little.

The chart (right) shows constant-age market value curves for new, five- and 10-year-old A320s and Boeing 737-800s, the two most liq-uid types in the single-aisle market. New val-ues show the most distinct improvement, with sharklet-equipped A320s now close to the market-leading 737-800. Five-year-old A320s also show some improvement, while 737-800s are more stable because their values recovered earlier, back in 2010. But most interestingly, the line for the 10-year-old A320 also shows a gentle, albeit small, improvement.

ORDER UPSIZINGThere continues to be order upsizing to the A321 and 737-900ER and their value move-ments were in line with expected annual depreciation. The smaller A319 and 737-700 have seen improvement in their market per-ception, and depreciation was small in Janu-ary, after values took several hits in 2013.

The older generation single-aisle types con-tinue to be phased out and their markets focused on cash sales in emerging markets. For example, 737-300/400 market values fell by 10-18% but this further boosts freighter

Decline in values for the Boeing 747 at the start of 2014

25%

April 2014


conversion opportunities. Boeing MD-80 val-ues are already at low levels but fell further, by up to 20% for some younger vintages.

On the twin-aisle front, the market for new-production types has been improving consist-ently. The market’s enthusiasm is more focused on newer models such as the Boeing 787 and Airbus A350, with sales and lease-backs of the 787-9 and A350-900 eagerly anticipated. There is still plenty of activity involving new 777-300ERs and A330s, and newer values have continued to go up in early 2014 as a result mostly of new price escala-tion (driven by longer lead-times), with used values falling as expected, by around 6-8%. Previous generation models continue to fall in

value, with Airbus A340-300s and low-gross-weight (pre-1999) A330-300s declining by around 17-19%. Values of older, high-gross-weight A330-300s will probably remain fairly stable this year while A330-200s are still under some pressure.

The Boeing 767-300ER and 777-200ER are starting to see more availability and their val-ues have decreased by 7-10%. The latter may see values decline further if we see more being broken for spares, although the part-out companies have expressed the view that they are staying away from the Rolls-Royce Trent 800-powered version.

The Boeing 747 is now pretty much a part-out story regardless of age, and values fell by

25% at the start of 2014. The cargo market also continues to be marked by significant long-haul overcapacity and 747-400 freighter values fell by 10-15%, the higher end reflect-ing converted examples.

The 50-seat jets continue to be under pres-sure with US fleet phase-outs and have expe-rienced value reductions of 7-20% in the past four months. There is a more positive picture for the larger regional jets, with the Embraer 175 and 190 in line with the expected annual values depreciation.

The turboprops are still shining brightly, as their economics on the shortest-haul routes are unrivalled. Values have either remained stable (for example, the Saab 340), moved in line with expectations (the ATR 72) or even increased (smaller Bombardier Q Series late last year).

Overall, Ascend sees 2014 as a year in which we will see continued recovery, par-ticularly trickling down to mid-life aircraft. We expect that lease rates will see a more pro-nounced recovery in the short to medium term than values, as airlines and investors hesitate to take on longer-term residual value risk, but are willing to pay extra to get capac-ity in the short term in order to meet rising traffic demands. Values of mid-life aircraft have potential to see improvement, but this would be driven more by competing investors entering the space than by demand from air-lines to purchase such aircraft. ■

The values of sharklet-equipped A320s are now close to 737-800s

Airb

us

April 2014

SOURCE: Flightglobal's Ascend Online Values database

Market value ($m)

A320 AND 737-800 CONSTANT-AGE VALUES

0

10

20

30

40

50

737-800 (new)A320 sharklets (new)

A320 (new)737-800 (5 years old)

A320 (5 years old)737-800 (10 years old) A320 (10 years old)

Year of value20142013201220112010200920082007200620052004


AIRCRAFT & ENGINES ENGINE MARKETS

April 2014

ENGINE MANUFACTURER RANKING

2013 deliveries Backlog*

Rank Manufacturer Engines Share Engines Share

1 CFM International 1,386 53% 10,280 48%

2 International Aero Engines 442 17% 1,382 6%

3 General Electric 436 17% 2,004 9%

4 Rolls-Royce 234 9% 2,672 12%

5 Pratt & Whitney 36 1% 1,716 8%

6 Engine Alliance 64 2% 308 1%

Undecided - - 3,274 15%

TOTAL 2,598 21,636NOTES: *At 31 December 2013. Data for installed engines based on Airbus/Boeing types. Excludes corporate and military operators. SOURCE: Flightglobal Insight analysis using Ascend Online database

A330 ENGINE MANUFACTURER SHARE


Manufacturer Aircraft Share Aircraft Share

General Electric 14 14% 41 16%

Pratt & Whitney 10 10% 30 11%

Rolls-Royce 79 77% 153 58%

Undecided - - 38 15%

TOTAL 103 262NOTES: *At 31 December 2013. Excludes corporate and military operators. SOURCE: Flightglobal Insight analysis using Ascend Online database

A380 ENGINE MANUFACTURER SHARE



Rolls-Royce 9 36% 44 24%

Engine Alliance 16 64% 77 43%

Undecided - - 60 33%


767 ENGINE MANUFACTURER SHARE



General Electric 17 81% 44 98%

Pratt & Whitney 4 19% 1 2%


A320 FAMILY – ENGINE MANUFACTURER SHARE

InternationalAero Engines

45%CFMInternational

55%

SOURCE: Flightglobal Insight analysis using Ascend Online databaseNOTES: *At 31 December 2013. Excludes corporate and military operators.

Pratt & Whitney19%

CFM International 35%

InternationalAero Engines

16%Undecided

30%


Total deliveries: 488 Total backlog: 4,293

787 – ENGINE MANUFACTURER SHARE

SOURCE: Flightglobal Insight analysis using Ascend Online databaseNOTES: *At 31 December 2013. Excludes corporate and military operators.


Total deliveries: 65 Total backlog: 908

Rolls-Royce 31%

General Electric47% Undecided

21%

Rolls-Royce31%

General Electric69%

POWER PROJECTIONDATA COMPILATION AND ANALYSIS BY ANTOINE FAFARD FLIGHTGLOBAL INSIGHT

The battle in the single-aisle engine arena is intensifying as the re-engined Airbus A320neo family moves from paper project to reality and incumbent supplier CFM International looks to see off the threat posed by new entrant Pratt & Whitney and its geared turbofan. Meanwhile, the widebody market is moving up a gear as Rolls-Royce seeks to benefit from its exclusive position on the A350 XWB and fight off the advance from the newly launched General Electric GE9X-powered 777X. We analyse the market trends with data from Flightglobal’s Ascend Online database

Snec

ma

| Airline Business | 45flightglobal.com/airlines April 2014

SuperJ

et In

tern

ational

AIRBUS/BOEING FLEET BY ENGINE MANUFACTURER

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Engine AllianceRolls-RoyceInternational Aero Engines

General Electric

Pratt & Whitney

CFM International

9,260

Grand total: 19,021

Airbus total: 7,399Boeing total: 11,622

NOTES: In-service & parked fleet at 31 December 2013. Boeing includes former MDC types. Excludes corporate and military operators.


2,849 2,4772,510

1,864

61

REGIONAL AIRCRAFT ENGINE MANUFACTURER MARKET SHARE


2013 deliveries* Backlog**

Total deliveries: 231 Total backlog: 1,426

Pratt & Whitney***

53%

General Electric35%

Powerjet12%

NOTES: *Airframe. **At 31 December 2013. Excludes corporate and military operators. ***Including P&W Canada.Data for firm orders for ATR, Bombardier (including CSeries), Comac, Embraer, Mitsubishi and Sukhoi.

Pratt & Whitney43%

General Electric50%

Powerjet6%

Rex

Featu

res

Rolls

-Royc

e


Pratt & Whitney and CFM trade blows as data from test programmes for their new single-aisle engines emerge

AIRCRAFT & ENGINES NEW POWERPLANTS

NARROW MINDS

REPORTMARK PILLING SINGAPORE MURDO MORRISON DERBY

CFM

Inte

rnat

iona

l

Pratt & Whitney and CFM Interna-tional are putting their money where their mouths are, as they gear up for test programmes for powerplants that are central to

delivering double-digit improvements on fuel consumption promised for the next genera-tion of narrowbodies.

Meanwhile, powerplants are set to be cen-tral to Boeing’s studies into a new airliner that will address the market between the existing narrowbody families and the entry-level widebodies.

As data from the test programmes begins to flow, the claims and counterclaims over the performance of Pratt & Whitney’s PW1000G geared turbofan (GTF) and CFM’s Leap are turning from “words and Power-Points” to facts and figures.

“We have now tested 31 GTF engines since initiating testing in September 2010,” says David Brantner, president of P&W Commer-cial Engines. The engine family has accumu-lated over 7,600h and 17,000 cycles of full testing, including 850h of flight time.

The initial application for the GTF is the PW1500G powering the Bombardier CSeries. This engine variant was certificated in Febru-ary 2013 by Transport Canada. CSeries flight-testing began in September last year and three aircraft are now flying, with certification and service entry slated for 2015.

Next up is the PW1100G, which along with the Leap-1A, equips the Airbus A320neo. The Leap-1B is the exclusive engine on the Boeing 737 Max and the Leap-1C on China’s all-new narrowbody, the Comac 919.

The PW1100G is the lead engine on the A320neo, and Brantner says that P&W is working with Airbus for the first flight in the third quarter.

He adds that the engine has validated P&W’s efficiency claims by meeting its tar-gets. “We are seeing fuel burn really hit its mark,” he says. “This is the first time in Pratt & Whitney’s history we have an engine doing this well.”

CFM ran its first Leap in September last year (pictured, left) and has achieved 274

April 2014

“This engine, when built to specification, will

deliver the performance we promised customers”

CHAKER CHAHROURExecutive vice-president, CFM


Bypass ratio for Rolls-Royce’s UltraFan

engine concept

15:1

April 2014

“We are going to hit our mark at entry into service... Any improvements will

be extra value”DAVID BRANTNER

President, P&W Commercial Engines

starts, 310h and over 400 cycles on the first engine, says CFM executive vice-president Chaker Chahrour. A further four test engines were due to join the certification programme by the end of March, with a total of 20 on test by year-end.

CONFIDENT STANCECFM describes the early results of the Leap tests as “fantastic”. According to Chahrour: “The engine went to full power just a couple of hours after we broke it in, and went to over 33,000lb-thrust [147kN] on the second day of testing.”

The positive test results are leading both manufacturers to be confident in their offer-ings. “This engine, when built to specifica-tion, will deliver the performance we prom-ised customers,” says Chahrour of the Leap.

Brantner is adopting an equally strident stance about the GTF: “We are going to hit our mark at entry into service. Any improve-ments will be extra value.”

The Leap-1C configuration for the C919 will be the first of CFM’s new family of engines to enter flight testing on joint ven-ture partner General Electric’s Boeing 747 flying testbed in May. The Leap-1B for Boe-ing’s 737 Max will enter flight testing in mid-June with the Leap-1A for the A320neo fol-lowing in September.

As both manufacturers wind up their test engine programmes and the massive supply chains to build them, the orderbooks are bulg-ing. P&W has racked up over 5,000 commit-ments, including options, for its GTF, from more than 50 airlines and lessors. CFM now has 6,000 Leaps on order. “To be at that level so early in a programme is unprecedented,” says Chahrour.

200-300 SEATERBoeing caused a bit of stir at the recent Singa-pore air show when it revealed a significant amount of detail about its evaluation of the market for a new 200-300 seater. This market was left vacant when Boeing ended produc-tion of the 757 narrowbody in 2004 after just over 1,000 deliveries.

The 757 was unique in widebody circles, as it offered a range in the 4,000-5,000nm (7,400-9,250km) category. Such a capability sits in the niche between the top of the single-aisle products occupied by the 737-900ER/Max 9 and Airbus A321, and the bottom end of the 787 and A330 widebody families.

Speaking at the Singapore show, Boeing’s senior vice-president of global sales, John Wojick, said the project is in the “study and

customer requirement phase” and the com-pany has “an awful lot of discussions to go with our customers”.

Sources indicate that the timing of any new mid-sized airliner would see service entry after the last of Boeing’s recently launched programmes, the 777X, deliveries of which begin in 2020.

Observers believe the requisite engine is likely to be in the 30,000-50,000lb-thrust bracket, with potential suppliers including the existing narrowbody powerplant special-ists CFM and P&W, along with Rolls-Royce.

Wojick says the studies have not yet reached the stage where Boeing has entered detailed discussions with engine suppliers about the powerplant technology that could be adopted for any new 200-300 seater.

Brantner says that P&W has “a technology roadmap to advance the next-generation GTF.

“Suffice to say that the GTF platform is scal-able, we are working on the technologies that can scale us to provide for any future platforms that come along. Of course, when they come along, we evaluate the business case... and make sure our technology is ready.”

FIRST REFUSALCFM – which is a joint venture between Gen-eral Electric and Safran – says it has “first refusal” over its shareholders on engine pro-grammes with up to 50,000lb-thrust, although any final decision would be discussed at shareholder level.

“We’re working with [Boeing], we’re talk-ing about it... It’s just a study at this point. If it ends up needing an engine in the thrust class where CFM plays, we will be there to contrib-ute,” says CFM’s Chahrour.

Rolls-Royce, which was the launch engine supplier on the 757 with its RB211 powering a large number of the aircraft delivered, has unveiled plans for two new engine concepts incorporating advanced technology.

According to Eric Schulz, president of R-R civil large engines, the company is “prepar-ing to re-enter the mid-market with convic-tion” as one of its “two big strategies” for the next decade (the other being to protect its 50% share in widebody orders). This move

comes only two years after R-R walked out on its partners in the International Aero Engines consortium.

Schulz says R-R “stands by” its decision to abandon IAE, and consequently the narrow-body sector. However, he insists: “Going for-ward, it is a segment in which we intend to continue to play.”

He says technology being developed for large fans might be deployed into smaller engines. Ironically – given its opposition to IAE adopting P&W’s GTF architecture – one of these technologies is a geared multistage intermediate-pressure turbine being pro-posed for UltraFan, the second of its two new engine concepts.

The UltraFan will have a bypass ratio of 15:1, and the introduction of a geared fan is an “option for later”, says R-R. So having rejected P&W’s geared turbofan design for the A320neo, a geared core may end up being one of the critical elements of R-R’s future engine strategy.

After years of the single-aisle sector being effectively a two-horse race, the race to power narrowbodies is starting to look like a more dynamic market. ■Additional reporting by Max Kingsley-Jones, Ellis Taylor, Stephen Trimble and Ghim-Lay Yeo

Bill

yPix

For our interactive coverage of this year’s Singapore air show, visit:flightglobal.com/singapore


EUROPEAN FULL-YEAR FINANCIAL RESULTS 2013

Airline group Group revenues ($m) Operating result ($m) Operating margin Net result ($m)2013 change 2013 2012 2013 2012 2013 2012

Aegean Airlines 908 21.3% 110 -12 12.1% -1.6% 88 -14Aer Lingus 1,895 2.3% 81 92 4.3% 5.0% 45 45Air France-KLM 33,927 0.4% 173 -447 0.5% -1.3% -2,429 -1,629Finnair 3,191 -2.0% -12 45 -0.4% 1.4% 15 14Icelandair Group 1,023 13.8% 73 51 7.1% 5.7% 56 44IAG 24,686 2.5% 701 -815 2.8% -3.4% 195 -925Lufthansa Group 39,920 -0.4% 927 1,115 2.3% 2.8% 416 1,633Norwegian 2,634 21.2% 164 68 6.2% 3.1% 54 77Turkish Airlines 9,743 27.2% 643 591 6.6% 7.7% 354 600TOTAL 117,925 3.0% 2,860 689 2.4% 0.6% -1,205 -155

Collective operating profits jumped from nearly $600 million in 2012 to almost $3.1 billion in 2013. Lufthansa and Turkish Air-lines also enjoyed strong operat-ing performances.

NET PAINSThe financial picture at a net level serves as a reminder of the difficult journey many European network carriers have under-taken. Net losses reached around $1.2 billion – double the same period last year. While SAS and IAG enjoyed notably improved fortunes over 2012, Lufthansa’s net profit fell to a quarter of the high of the previous year – a year boosted by the sale of shares in Amadeus – while Air France-KLM’s net losses deepened to more than $2.4 billion.

The decline for Air France-KLM is due to a tax impairment worth €937 million and a €122 million loss associated with the ongoing sale of Air France’s regional unit Cityjet to German investor Intro Aviation. On an adjusted basis, the net loss almost halved from €696 million in 2012 to €349 million last year.

Chief executive Alexandre de Juniac says 2013 was an “impor-tant stage in the group’s turna-round” where its operations were “clearly benefiting from… new working conditions”. Despite a “persistently challenging [eco-nomic] environment”, the group generated a “robust free cash flow” and reduced debts beyond “initial targets”, he says.

Lufthansa’s operating profit fell nearly 17% in 2013, but the German airline group insists it is “on track” to meet its earnings objectives under the Score effi-ciency programme.

Departing chief executive Christoph Franz says Lufthansa Group is “well prepared” for future challenges after improving earnings performance and becom-ing “noticeably more dynamic”. The task of ensuring the carrier

European network carrier results over the final quar-ter of 2013, at least at an

operating level, offered further signs that network carriers’ restructuring efforts and an improving economic climate and are helping the region’s operators emerge from heavy losses.

Quarterly figures for eight European airline groups in the three months ending December 2013 show a collective profit of $83 million. This marks a big swing from the $1.15 billion these carriers lost at the same stage last year. While the extent of the shift is distorted by the strong improvement by British Airways and Iberia parent IAG – itself in

ANALYSIS FULL-YEAR FINANCIALS

Airline profits give and takeEuropean carrier fortunes at an operating level continued to improve into the last quarter as the region’s economy picked up – but their peers in the Asia-Pacific have found pressure mounting on their black ink

GRAHAM DUNN LONDON ELLIS TAYLOR SINGAPORE

April 2014

part reflecting extraordinary costs in the last quarter of 2013 – all of Europe’s major carriers kept oper-ating losses in check during the loss-making fourth quarter.

IAG’s strong last quarter con-tributed to full-year group operat-ing profits of $701 million, a turnaround of $1.5 billion on the previous year.

While British Airways drove a majority of that profit, the group also reported better news from its Spanish interests. New group member Vueling lifted operating profits by more than €100 million while Iberia more than halved its losses to €166 million.

“I think the impact they’ve had in the short time they’ve been

running the business has been truly phenomenal,” says IAG chief executive Willie Walsh of the turnaround at Iberia.

After a year of major cuts to stem losses at the Spanish carrier – which involved more than 3,000 job cuts and a significant reduction in capacity – Iberia is also set to finalise crucial produc-tivity deals with its staff. This positions the carrier to return to growth, although airline manage-ment has stressed this will only come when there is an improve-ment in travel demand in Spain.

The strong IAG figures contrib-uted to a turnaround among European carriers’ financial per-formance across 2013 as a whole.

EUROPEAN AIRLINE GROUP FINANCIAL RESULTS OCTOBER-DECEMBER 2013


Aer Lingus 411 -1.7% -24 -24 -5.8% -5.7%Air France-KLM 8,362 -2.2% -89 -208 -1.1% -2.4% -1,607 -333Finnair 766 -8.5% -25 -5 -3.3% -0.6% -19 -5Icelandair Group 213 12.3% -11 -8 -5.1% -4.3% -9 -8IAG 6,086 -1.6% 244 -849 4.0% -13.7% 96 -967Lufthansa Group 9,915 -0.7% 49 -93 0.5% -0.9% 90 725Norwegian 626 21.9% -30 -9 -4.8% -1.7% -33 4Ryanair 1,317 -0.5% -31 47 -2.4% 3.6% -48 25TOTAL 27,696 -1.1% 83 -1,148 0.3% -4.1% -1,530 -559

EUROPEAN FULL-YEAR FINANCIAL RESULTS NOVEMBER 2012 TO OCTOBER 2013


SAS Group 6,459 -0.6% 211 -101 3.3% -1.6% 27 -461General note for all tables: Results are for airline groups including non-aviation businesses. All figures are in US dollars exchanged at average rate for period. All changes given in local currency terms or at constant current rates.SOURCE: Flightglobal


More results insight on the Flightglobal dashboard:flightglobal.com/dashboard

ASIA-PACIFIC AIRLINE GROUP FINANCIAL RESULTS OCTOBER-DECEMBER 2013


AirAsia 444 -0.4% 98 99 22.0% 22.3% 76 94All Nippon Airways 4,061 9.3% 252 316 6.2% 8.5% 129 150Asiana 1,269 -4.7% -34 -25 -2.7% -1.9% -81 23Japan Airlines 3,241 7.4% 408 451 12.6% 14.9% 407 401Jet Airways 758 10.6% -9 61 -1.2% 9.0% -43 14Korean Air 2,745 -2.4% 15 -11 0.6% -0.4% -91 209Malaysia Airlines 1,209 0.8% -71 14 -5.9% 1.1% -106 16Singapore Airlines 3,093 0.4% 121 105 3.9% 3.4% 40 114TOTAL 16,820 3.3% 778 1,009 4.6% 6.2% 332 1,020

ASIA-PACIFIC HALF-YEAR FINANCIAL RESULTS JUL-DEC 2013


Air New Zealand 1,889 -1.6% 178 138 9.4% 7.2% 113 81Qantas 7,200 -4.1% -192 220 -2.7% 2.9% -214 99Virgin Australia 2,027 5.6% -55 44 -2.7% 2.3% -76 21

ASIA-PACIFIC FULL-YEAR FINANCIAL RESULTS 2013


AirAsia 1,685 5.5% 322 324 19.1% 20.3% 115 249Asiana 4,986 -3.1% -56 121 -1.1% 2.4% -131 46Cathay Pacific 12,955 1.1% 485 208 3.7% 1.6% 374 138Korean Air 10,688 -4.5% -16 254 -0.2% 2.3% -266 237Malaysia Airlines 4,765 9.9% -177 -114 -3.7% -2.6% -368 -136Thai Airways 6,685 -1.3% -94 199 -1.4% 2.9% -389 211TOTAL 41,763 -0.2% 463 992 1.1% 2.4% -664 746NOTES: Results are for airline groups. All figures are in US dollars exchanged at average rate for period. All changes given in local currency terms and previous year net profits at constant current rates.

meets its profit objectives will in May be handed over to Franz’s successor, Carsten Spohr.

He takes on the airline at a time when Europe’s carriers can take confidence from the improving economic outlook in the region. But given political uncertainty in Ukraine and its impact on oil prices and the fragility of several markets – plus an operating envi-ronment where low-cost carriers in Europe are increasingly target-

ing business traffic – the hard work continues. Increased com-petition and adverse currency movements took their toll on car-riers in the Asia-Pacific during the last quarter of 2013.

Overall operating results for the region were down a quarter to $778 million, as margins were squeezed by intensifying compe-tition. A number of carriers also cited volatility in key currencies across the region for the decline in profitability.

Japanese carriers All Nippon Airways and Japan Airlines felt the impact of their government’s ongoing action to weaken the yen, driving up operating costs and eroding their profits. ANA though expresses some optimism

about the longer-term benefits of the policy. “The economic recovery in Japan is anticipated to continue supported by govern-ment policies,” it says. “The weaker yen and persistently high fuel prices will result in increased operating costs despite decisive action by management.”

CURRENCY CONCERNSCurrency was also blamed for India’s Jet Airways’ sliding into a $9 million operating loss for the quarter. That came despite the airline reporting a 20% lift in domestic yields and the start of its alliance with Eithad Airways.

Singapore Airlines stood out from the pack, managing a 15% rise in operating profit, to $121

million. That came despite the airline cutting yields in order to “stimulate demand amid the competitive environment”.

Qantas turned in a loss for the last six months of 2013. It posted an operating loss of $192 million as its international losses bal-looned. Competition with Virgin Australia also impacted the prof-itability of its domestic opera-tions, while the budget carrier group Jetstar also turned in its first loss. The move prompted Qantas plans to cut 5,000 jobs, accelerate the retirement of air-craft and defer deliveries of some Airbus A380s and Boeing 787s.

Virgin recorded a $55 million operating loss over the period. Chief executive John Borghetti says the result “reflects tough trading conditions” across the entire aviation industry. But he says: “We’ve outperformed the competitor in revenue growth, yield growth – you name it.”

Amid what it called “an irra-tional competitive environment”, AirAsia kept operating profits stable, although its net results fell sharply to $115 million. Weaker results from its Indonesian, Thai and Philippines affiliates over-shadowed a largely stable operat-ing result from its core Malaysian business. In response, the low-cost carrier says it will sell some of its oldest Airbus A320s to cut costs and defer deliveries of 19 aircraft due to arrive over the next two years.

Cathay Pacific enjoyed a sharp rise in operating profit to $485 million, as its passenger business seemed to turn the corner. Never-theless, chairman Christopher Pratt says that cargo continues to be a drag. “There is no sign of any sustained improvement in the market and some changes in the business appear to be structural rather than cyclical,” he says. ■

Europe’s carriers kept operating

losses in check in the fourth quarter


While Asia remains the key to future growth, cargo is

still weak

Being thorough in analysing results can reveal an airline’s future path – and that of the industry as a whole

Reading between the lines

PLANNED CAPACITY GROWTH – NORTH ATLANTIC: APRIL

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

British Airways 1,308 4.8% 721 +38 195 4.4%United Airlines 1,196 0.9% 849 -13 181 0.4%Delta Air Lines 1,133 -6.8% 704 -44 171 -6.5%Lufthansa 1,026 -1.5% 430 -24 139 -1.6%American Airlines 736 0.6% 458 -18 108 -0.4%Air France 634 8.6% 260 +10 93 7.3%Virgin Atlantic 569 2.3% 238 +0 84 2.5%Air Canada 522 12.3% 282 +8 84 11.2%US Airways 415 15.6% 252 +32 65 14.1%KLM 391 2.9% 190 +8 56 3.3%TOTAL MARKET 10,055 4.8% 5,543 +148 1,489 4.5%

Although a company’s results will only reveal what has happened dur-

ing the reporting period – rather than what the future outlook might be – they do provide an opportunity to take a view on how the financial position of the business has changed.

In particular, and in reasonably simple terms, this is how its bal-ance sheet and that all important item – cash – have changed. While headlines tend to focus only on reported profits – and at times fail to take into account the

JET KEROSENE SPOT PRICES

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

Mar 297.7 -8.2% -9.4%Apr 281.0 -5.6% -13.1%May 276.8 -1.5% -7.9%June 281.3 1.6% 4.7%July 292.1 3.8% 1.6%Aug 301.1 3.1% -4.5%Sept 298.6 -0.8% -7.2%Oct 295.7 -1.0% -6.0%Nov 292.2 -1.2% -3.0%Dec 302.5 3.5% 0.8%Av. 13 296.2 -3.7%Jan 295.7 -2.2% -4.9%Feb 297.5 0.6% -8.2%NOTES: Prices are world average = median of Europe/Singapore cargo and US pipeline spot prices in US¢/gallon. SOURCE: ICIS

impact of one-offs, whether positive or negative – there is no escaping that it is the cash posi-tion of any business that matters more than anything else – and particularly how it has changed and why.

In any event, it is always im-portant to get behind the head-lines and go through the full set of reports and accounts when it has been published.

However, in the first instance the main source of information is the preliminary results an-nouncement, and any related ma-terial in the form of analysts’ presentations and press releases.

For a number of major airlines, their results and the reasons for particular outcomes have already been analysed at length.

However, the outcome is a re-flection not only of the external operating environment – in par-ticular the geographic focus and presence of the airline – but also a range of other factors. These in-clude costs – not all of which are under the direct control of man-agement – and earlier decisions in respect of capacity.

It should come as no surprise that the consequences of a better operating environment for the in-dustry in 2013 – not least with what is best described as a benign

fuel price environment – were not universally evident. Not only are generalisations dangerous, but management is more inter-ested in how the particular set of circumstances it faces impacts upon its business.

Changes in the external values of currencies are an ongoing issue for airlines.

In an ideal world, a weaken-ing of currencies where you have higher costs than revenues and a strengthening of those where you

Number of AirAsia deliveriesto be deferred in 2014/2015

19Decline in jet kerosene spot price over 12 months to February 2014

8.2%Operating profit reported by Cathay Pacific for 2013 in Hong Kong dollars

3.7bnANALYSIS MARKET OUTLOOK

April 2014

CHRIS TARRY CTAIRA

ANALYSIS BYFLIGHTGLOBAL INSIGHT

ANALYSIS MARKET OUTLOOK

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some 3% of group revenues. Cargo was also seen as a problem area.

While Asia remains key to fu-ture growth – as the results for Cathay Pacific and other airlines show – cargo remains weak. De-spite this, Cathay reported an op-

erating result of HK$3.7 billion ($477 million) in 2013 – a margin of 3.7% – up from HK$1.6 bil-lion, on turnover that was effec-tively flat (up 1.1%).

On the other side of the profit and loss account – within a de-cline of just over HK$1 billion – the fuel bill after hedging was some HK$2.3 billion better.

In an economy where cargo is likely to be challenging – but the recovery in the passenger busi-ness is expected to continue – im-provement is expected in 2014 compared with 2013, amid a focus on maintaining the finan-

PLANNED CAPACITY GROWTH BETWEEN REGIONS – INNOVATA SCHEDULE DATA: APRIL

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

North America Total West Europe 10,055 4.8% 5,543 +148 1,489 4.5%North America Total Asia 6,068 8.2% 2,019 +216 584 7.9%North America Caribbean 1,858 6.1% 5,667 +202 839 4.7%

Central 2,096 18.4% 6,718 +729 919 15.1%South America 1,945 10.5% 1,743 +132 353 9.8%Total Latin Am 5,898 11.7% 14,128 +1,063 2,111 9.9%

West Europe East Asia 4,449 3.6% 1,766 +132 504 4.2%Southeast Asia 2,654 8.6% 813 +90 274 9.0%South Asia 1,285 4.6% 723 +55 195 5.3%Total Asia 8,389 5.3% 3,302 +277 973 5.7%

West Europe Latin America 4,688 9.0% 1,839 +92 560 8.9%West Europe Middle East 4,442 10.7% 4,780 +538 1,128 12.6%Asia Middle East 6,129 18.4% 6,291 +605 1,524 14.2%TOTAL SELECTION 45,668 8.9% 37,902 +2,939 8,370 9.3%WORLD 147,042 7.2% 623,753 +17,279 84,341 5.3%NOTES: Data is based on schedules for 7-13 April 2014 against 15-21 April 2013 extracted from SRS Analyser. Figures reflect airlines operating non-stop 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

Changes in the external values of currencies are an

ongoing issue

have higher revenues than costs would be ideal, but unfortunately is a rare event.

The depreciation of the yen has not only had an impact on Japan Airlines and All Nippon Airways, but also airlines for which Japan is an important mar-ket. Finnair reported that “the main factor slowing down turnover growth was the fall in euro-denominated revenue due to the substantial depreciation of the Japanese yen”. Yen-based rev-enues on conversion fell from €305 million in 2012 to €230 mil-lion in 2013 – a fall equivalent to

cial strength of the business. Weakness in cargo is one reason for IATA’s recent downward ad-justment to its forecast.

Meanwhile, AirAsia’s manage-ment has announced it will defer some aircraft deliveries in 2014 (seven) and 2015 (12).

This sends a message of how the management sees the near-term future, against a backdrop where the operating margin for fiscal year 2013 was 19.6%, the EBITDAR margin was 35.5% and headline operating profit was flat on revenues that were up 5%.

Looking at the figures an-nounced on the Malaysian stock exchange, we can see that amounts due from associates in-creased from M$780 million ($237 million) at the end of 2012 to M$993 million at the end of 2013. Cash shown in the balance sheet declined from M$2.23 bil-lion to M$1.38 billion, whereas long-term debt increased from M$7.3 billion to M$9.1 billion.

Unsurprisingly perhaps, in the analysts’ presentation a slide on how the management planned to

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A4A AEA AAPA ALTAAACO


create value from the group’s bal-ance sheet.

This includes establishing an in-house leasing company and realising value in owned aircraft, with a programme starting in 2017 and a target of reaching an annual saving of almost $310 million by 2023.

There are also cost-saving and revenue enhancement measures included in the programme.

Cash and a strong balance sheet offer options in respect of ensuring the most effective asset/fleet management model, against a market where aircraft delivery rates are rising. From a review of the backlog it is clear there are

ARAB AIRLINES (AACO MEMBERS): JANUARY*

Passenger traffic RPK Capacity Load factorsmillion change change percent change

Intra Arab world** 4,301 8.8% 15.1% 50.5% -2.9With Other Regions 33,508 6.9% 12.6% 69.4% -3.7TOTAL MONTH 37,810 7.1% 13.0% 66.6% -3.7FULL YEAR 428,539 11.1% 13.5% 67.8% -1.5NOTES: *Estimates. **Includes domestic. SOURCE: Arab Air Carriers Organisation

EUROPEAN MAJORS (AEA MEMBERS) TRAFFIC: JANUARY

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

Domestic 3,419 5.7% 0.4% 68.1% 3.4 5 0.2%Intra-Europe 13,186 5.4% 4.0% 66.8% 0.9 61 15.6%North Atlantic 13,437 6.5% 5.3% 80.7% 0.9 651 0.9%Mid Atlantic 5,466 1.4% 1.3% 86.2% 0.1 150 -4.1%South Atlantic 5,348 5.2% 6.7% 86.9% -1.2 182 9.1%Far East/Australia 13,842 5.3% 3.7% 81.8% 1.2 1,007 9.0%Sub Saharan Africa 5,634 4.1% 3.3% 81.4% 0.6 204 1.5%N.Africa/M.East 3,355 8.0% 4.3% 71.3% 2.5 92 -0.4%TOTAL MONTH 63,713 5.3% 3.9% 77.2% 1.0 2,430 6.8%FULL YEAR 878,943 2.7% 1.8% 80.1% 0.7 33,359 2.1%SOURCE: Association of European Airlines

US MAJOR PASSENGER YIELD: A4A AIRFARE REPORT

Route 2013 2014Unit Jul Aug Sep Oct Nov Dec Jan

Domestic ¢/RPK 10.52 10.38 10.19 10.60 10.22 10.98 10.28change 5.0% 5.4% 5.2% 3.9% -0.1% 9.9% 1.9%

North Atlantic¢/RPK 9.46 9.05 9.19 8.81 9.07 8.53 9.04change 4.4% 7.9% 4.1% 3.1% 2.4% 1.6% 1.3%

ASIA-PACIFIC AIRLINES (AAPA MEMBERS) INTERNATIONAL TRAFFIC

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

November 65,753 5.1% 5.6% 76.3% -0.4 5,510 5.4%December 72,039 5.4% 6.1% 78.1% -0.5 5,188 0.7%January 78,933 8.1% 7.2% 79.0% 0.7 4,782 3.9%FULL YEAR 814,108 5.3% 4.9% 78.2% 0.2 58,930 -0.9%SOURCE: Association of Asia Pacific Airlines

LATIN AMERICAN AIRLINES (ALTA MEMBERS): JANUARY

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

Total Intra-LatAm* 16,440 6.8% 5.1% 80.0% 1.2 131 10.9%Total Other Int’l 6,801 3.0% -0.4% 82.2% 2.7 277 3.4%TOTAL SYSTEM 23,241 5.6% 3.5% 80.6% 1.7 407 5.7%FULL YEAR 243,166 7.2% 5.4% 77.7% 1.3 5,032 2.6%NOTE: *Domestic and International flights. SOURCE: Associacion LatinoAmericana de Transporte Aereo

US MAJORS (A4A MEMBERS) PASSENGER STATISTICS: JANUARY

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

Domestic USA 57,589 1.7% -0.6% 81.4% 1.8 1,458 0.4%North Atlantic 10,943 1.7% 1.8% 74.8% 0.0 804 3.2%Latin America 11,195 8.6% 7.3% 82.6% 1.0 170 -0.3%Trans Pacific 8,605 1.3% -0.5% 84.6% 1.5 884 -2.6%All international 30,742 4.0% 3.0% 80.1% 0.7 1,858 0.0%TOTAL MONTH 88,331 2.4% 0.7% 80.9% 1.4 3,316 0.2%FULL YEAR 1,159,013 2.1% 1.7% 83.6% 0.3 41,196 -0.4%SOURCE: Airlines for America

Traffic volume is not the only factor

that will ensure financial success

Planned rise in number of weekly seats offered between Asia and the Middle East during April

14.2%

FRESH OUTLOOKKeep up to date on market data with the analysis and special reports section of our premium news service, Flightglobal Pro. Subscribers can enjoy regular monthly analysis of key markets, including a range of region-specific airline capacity, traffic and fleet data. You can also access Flightglobal Insight’s full range of industry reports and briefings. These include the recently-published Aircraft Finance 2014, which

provides an overview of the leasing market and includes lessor rankings, a breakdown of aircraft finance transactions and analysis of the financing outlook for 2014 deliveries.flightglobal.com/insight

provides an overview of

ANALYSIS MARKET OUTLOOK

April 2014

cases where airlines with large orders have thin balance sheets, which may represent a challenge for them – but an opportunity for other market players.

While India remains a market of opportunity, it is clear that while traffic volume is necessary, it is not the only factor that will ensure financial success.

So, 2013 and into 2014 repre-sents the point where for many – but by no means all airlines – the outcome was one that was better, rather than just less worse.

However, there are a number of airlines where – whether they are merely ensuring the survival of the business, able to effectively compete or enjoying a state of competitive prosperity – there are small but significant numbers where the issue of survival is again at the top of the manage-ment agenda.

The key requirement is how to address the pressing need for more cash. ■

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Winners will be announced at a prestigious awards dinner on Sunday 13 July at

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Organised by AIRLINE BUSINESSIn association with


three percentage points from 2013. In terms of dollar funding this translates into $28 billion worth of new deliveries for this year, compared with $29.1 bil-lion in 2013, Boeing estimates.

Back in 2010, commercial banks represented 24% –- or $15 billion worth of annual deliveries. This year the capital markets will absorb 22% of the total deliveries – up from 14% in 2013. This translates into $24.6 billion worth of deliveries this year.

INVESTOR DEMANDEmirates and Ryanair are calling for the structuring of more locally-based EETC financings, in order to take advantage of robust demand for aviation paper in the capital markets.

“What we want is an Islamic EETC – we want to see if it can work,” says Nirmal Govindadas, vice-president of financing at Emirates Airline, speaking at an aviation event in January. “We think there is a market because Islamic structures have an excel-lent linkage with aircraft, so it is something we want to look at.”

Ryanair is also keen to take advantage of the EETC market, but says one problem with the US capital markets, where these financings typically occur, is that they are dependent on the US dollar.

Airlines can pick and choose how to fund their bulging orderbooks this year,

thanks to strong investor demand spurring attractively-priced deals widely available across the capital and banking markets.

This is in contrast to just over a year ago, when commercial debt financings were considered costly and banks were trying to digest higher funding costs brought about by the 2008 financial crisis.

Boeing Capital’s managing director of capital markets and leasing, Kostya Zolotusky, high-lighted the pricing divergence between the financing segments in a December 2012 interview with Flightglobal.

SOURCES OF FUNDINGZolotusky noted that in United Continental Airlines’ 2012 enhanced equipment trust certifi-cates (EETC) offering, the airline received “12-year money at 4%”, or a “high 200 basis points over Libor spread equivalent”.

He also noted the capital mar-kets deal has a “longer tenor”, and “probably gives a higher advanced rate than you would see with the commercial banks”.

In contrast, Zolotusky added, commercial bank deals were being priced higher, in the 300-400 bps range over Libor.

Fast-forward to 2014 and the capital markets and banks “have become quite attractive”, says Ray Sisson, president of operating lessor AWAS. Gerry Laderman, senior vice-president of finance and treasurer of United Airlines, said at an industry event in January: “We have done some bank debt recently and we would love to do more.”

ANALYSIS FUNDING

Finance seekers spoilt for choiceStrong investor demand is driving attractive debt-funding deals available in both the capital and banking markets

LAURA MUELLER LONDON

Banks are green-lighting airlines for ever-cheaper funding deals

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25%Commercial bank

funding of Boeing’s 2014 requirements

April 2014

But Laderman admits EETC funding is the airline’s “base form of finance” that he expects to con-tinue. He adds: “Whatever we don’t do in the other markets, we will pick up in the EETC market.”

Pricing on commercial debt has fallen due to an increase in the number of banks offering capital to the sector, and the return of certain financiers that pulled back on funding follow-ing the 2008 crisis.

An interesting case in point is Philippine Airlines, which closed various A330 financings in the space of a few months last year, from a variety of global banks.

The airline received funding from JP Morgan and Citibank in the USA, from DVB Bank and BNP Paribas in Europe and from Manila-based Banco de Oro Uni-bank (BDO Unibank) for its air-craft deliveries. Back in 2011 the airline would have had a harder time securing so many sources, as fewer banks were active in this sector due to funding constraints at the parent levels.

Although the capital and bank-ing markets have become more attractively priced for airlines, Boeing anticipates bank debt financing will decline this year in percentage point terms.

Commercial banks will account for 25% of this year’s funding requirement – a drop of

“Our business is based in euros, so we would like to see the devel-opment of a euro-based EETC, or a local currency-based EETC, to eliminate the currency risk,” says Ryanair’s treasurer, James Demp-sey. He says Ryanair is “toying” with funding part of its orderbook through the EETC market.

“We are in the process of getting the company rated, so that outcome will determine the mar-ket access that we have,” he adds. He acknowledges that the favour-able interestrate environment is encouraging Ryanair to pursue opportunities in the capital mar-kets in the next couple of years.

REFINANCINGSAn abundance of attractively-priced funding will result in a profusion of refinancings – as Korean Air demonstrated in Janu-ary, when it launched a $193.4 million US Export-Import Bank-guaranteed bond to refinance two loans that closed in 2009.

The deal priced at attractive rates of market swaps plus 64 basis points for a coupon of 1.859%, says a financier.

No doubt the increased availa-bility of attractively-priced fund-ing could also lead to fewer export credit agency (ECA) financings – a move already in progress due to the Aircraft Sector Understanding legislation that came into effect in 2012.

Boeing Capital expects the ECAs will support 18% of new commercial jet aircraft deliveries in 2014 – down from 23% in 2013. ECAs accounted for 31% of the new deliveries in 2010, or $19.2 billion.

Meanwhile, Airbus anticipates the ECAs will probably support 15-16% of its output this year. Last year, 57% of Airbus deliver-ies were funded by cash and commercial debt. ■

Download our 2014 finance report at flightglobal.com/AircraftFinance


The leaders of Emir-ates, Qatar Airways, Etihad and Dubai Air-ports – Tim Clark, Akbar Al Baker, James

Hogan and Paul Griffiths, respectively – all agree on one thing: that airspace capacity is the biggest single issue now threatening the growth of air transport in the Middle East.

Relentless traffic growth and conse-quent increasing airspace demand has created the need for airspace struc-tures that governments have so far been unable to deliver. Today the Middle East as a region is more con-strained by airspace capacity than most other areas in the world. Unless properly resolved at a regional level, airspace inefficiency there will stran-gle and eventually halt further air transport growth.

The system, where each nation pro-vides air traffic control services for its own territory, has served the needs of global air transport industry well. But, as the importance of air transport con-tinues to grow, this global system is now struggling to cope with the demands and the flexibility required by the evolution of air transport.

The capacity of any air transport system is dependent on more than the aircraft used to transport passengers and goods: it needs efficient infra-structure on the ground and in the air.

Airspace is managed like a system of roads in the air. Some are multi-lane highways in the sky and some are single tracks. When commercial aviation began, each country estab-lished its own network of single tracks. Many have since invested in the policies and technologies needed to support highways – but many have not. Airlines are now flying modern and technically sophisticated aircraft, capable of operating optimum routes and without needing ground-based systems. Yet these aircraft are still rou-tinely using airspace structures that

were in some cases defined by the placement of terrestrial navigation aids in the 1950s and 1960s. Other air-space users, including the military, have long operated in the areas not utilised for air transport, making any change today more difficult.

Even so, the investments and poli-cies established by governments extend only to their own national boundaries. A typical international flight will always be restricted by the airspace throughput capacity of the least efficient part of any route (the single-lane track). To illustrate the challenge, consider the immediate impact to flights of airspace capacity reductions arising from air traffic con-trol labour disputes.

These actions affect aircraft operat-ing from and to points not themselves subject to labour action. Aircraft either wait their turn or fly around the affected area. Similar capacity limits exist elsewhere every day because of inadequate airspace infrastructure.

To make gains in airspace capacity, far-reaching co-operation is necessary. It requires a global vision, with wider planning perspectives. It requires

implementation of facilities, services and procedures over larger geographi-cal areas. ICAO has provided the nec-essary framework at the global level, but the definition and delivery of cohesive outcomes at the regional level has proven to be elusive, not just in the Middle East. Multilateral action is essential.

In locations where regional air-space capacity solutions have been attempted, such as with the Single European Sky, airspace is neverthe-less subject to national regulations. This creates many other challenges, but the airspace system improve-ments in Europe have without ques-tion been substantial.

Elsewhere, the “Inspire” Indian Ocean initiative to reduce emissions is a successful multilateral partner-ship between air navigation service providers, and airlines, emulating the precedent set by the “Aspire” pro-gramme for the Asia/Pacific region. These initiatives share a common overall objective to make tangible improvements to the environmental performance of aviation through incremental harmonised changes to the ATM system. Inspire involves stakeholders from the Middle East, Africa, India and Australia. Substan-tial improvements to transoceanic efficiency have been achieved.

Similar incremental collaborative initiatives, sanctioned at government level, led by the airspace users, lever-aging the lessons learned elsewhere, could transform the airspace land-scape of the Middle East. Thereby releasing the capacity needed to sus-tain the growth in the region. But progress so far has been too slow for the airlines. ■

Graham Lake is a principal at Aviation Management and has spent his career in aviation services and air traffic control, most recently serving as director general of air navigation body CANSO

ATM HISTORY LESSONS

FORUM FEEDBACK

It is essential that the Gulf recognises other regions’ mistakes, to prevent inefficient capacity management strangling potential future growth, says Graham Lake, principal at Aviation Management

“The capacity of any air transport

system is dependent on more than the

aircraft used”GRAHAM LAKE

Principal at Aviation Management

April 2014

Landmark ATM agreements were reached at ICAO in October last year:flightglobal.com/ICAOatm


FORUM LOYALTY

AIRLINES SHOW OF LOYALTYGRAHAM DUNN AMSTERDAM

Delta Air Lines’ move to become the first of the US majors to switch its frequent flyer pro-

gramme to a revenue-based model underlines the evolution in thinking as carriers continue to look at how to make the most of the assets they have built up.

Those assets have become large businesses in their own right and are often more profitable than the core airline operation. Airlines, however, face a challenge in mak-ing the most of these schemes, be it driving passenger loyalty or monetising this value.

The move formally announced by Delta at the end of February to overhaul its SkyMiles programme aims to address an issue in part created by the success of airline loyalty schemes. As a growing number of members are accruing more miles than before, the oppor-tunities to spend those miles on flights has failed to keep pace.

“The population of the SkyMiles programme is growing. It’s 50% higher than a decade ago,” said Delta director SkyMiles global programme management Edward Smith at the Airline Business/Global Flight-organised Loyalty 2014 conference in Amsterdam.

Specifically, the airline is switching its distance-based programme for a scheme under which members earn miles based on the fare paid. “In some cases, the distance flown has little bear-ing on the price of a ticket,” says

Smith. “In the future, we feel the number of miles should be in line with the amount they are paying for the ticket.”

While changes to loyalty programmes risk a backlash from those who will earn less, the airline is opening up more ways to spend miles. “We believe we can increase the number of awards that are available,” says Smith. “We are improving one-way route options, adding more miles and cash options.”

The airline is also ending black-out dates during which flights cannot be redeemed.

Delta’s new mileage-earning plan begins next January and it says it will not only recognise fre-quent business travellers, but also less frequent leisure customers who purchase premium fares. That requirement for loyalty

schemes to cater for less frequent travellers as well as top tier mem-bers is echoed by Bram Graber, executive vice-president passen-ger experience at Air France-KLM. “Yes, we have the high-value fly-ers, but we have to have a clear strategy for all customers. It is very dangerous to focus only on high-level customers,” he says.

“[Customers] want recognition when travelling,” he says, but points out: “Earning and burning – that is still the cornerstone.”

Some of the innovations the carrier has worked on are around developing instant benefits. For example, Flying Blue’s platinum members can upgrade to an Econ-omy Comfort seat for free. “For an FFP, having this direct benefit is extremely appreciated,” he says.

At the other end are the low-cost carriers, some of which, like AirA-sia, have launched their own fre-quent flyer programme. Think Big Asia launched at the end of 2011.

”If you look at most loyalty pro-grammes in our region, they focus

on the front of the plane. This 25% segment of frequent travel-lers, they get access to every-thing,” says Loh Wai Meng, chief operating officer of Think Big Asia. “We have an opportunity to create a loyalty programme – not an FFP – for the other 75%.

“We have accessibility. There are no blackouts. All seats are available for redemption.”

He notes one advantage AirAsia has is passengers can reach enough miles to fly quicker than full-service rivals because fares are lower. The flip side, though, is the relatively higher level of mileage earned from its retail partners in the scheme – he estimates that only 20% of miles are earned via flights.

“We’ve tried to find non-tradi-tional airline partners. We are working with telcos, petrol sta-tions. One of the most unique is a funeral parlour in Malaysia,” he says. The AirAsia programme has secured enough interest that loyalty giant Aimia in February agreed to take a 25% stake.

Meanwhile Etihad Airways, which has acquired a majority stake in Air Berlin’s topbonus scheme, has been cleared to do likewise with the JetPrivilege scheme of partner Jet Airways.

It forms part of Etihad’s ambi-tions to roll out a widened pro-gramme across its equity alliance partners. “You’ll see this year the development of a global loyalty programme that will include Air Seychelles, Air Serbia, obviously Etihad Regional, Jet Airways and Air Berlin,” Etihad chief execu-tive James Hogan recently said.

Elsewhere Lufthansa is the lat-est to spin their loyalty prgramme as a separate entity. It stresses this is not a step to selling it to external investors, but a way of “realising greater entrepreneurial freedom and growing the business”. ■

Delta’s move towards a revenue-based frequent flyer programme from next year was among the major talking points during our Loyalty 2014 forum, as experts debated ways to maximise customer engagement

Panel beaters: (l-r) Vueling’s Samuel Lacarta, Amadeus’ Mikael Isaksson, Christopher Barnard from Points, and Avios’ Iain Pringle

April 2014

For pictures and details of the Loyalty award winners, go to:flightglobal.com/loyalty

Delta will move from a distance to a revenue-based scheme in 2015

Big thinking: Loh Wai Meng on AirAsia loyalty

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W hen a Rome-bound Ethiopian Airlines Boeing 767 landed in Geneva on 17 February, the story

was only briefly in the headlines. The diversion was the result of the co-pilot hijacking his own aircraft while the captain was outside the cockpit, in a bid to claim political asylum.

The Ethiopian incident was extraordinary, for it marked the first time in living memory that an airline pilot employed by a reputable international carrier had done such a thing. But fast-forward less than three weeks and – the evidence so far suggests – flightcrew are again suspected of commandeering their own airliner. But this time the consequences were far more tragic.

It is worrisome that pilot suicide is one of the prime theories being consid-ered for the loss of Malaysia Airlines flight MH370, particularly as it is strongly suspected in another recent accident. Last November, a LAM E-Jet is believed to have been deliberately flown into the ground by the captain after he locked the co-pilot out of the cockpit, killing all 33 people on board.

The idea of any professional pilot taking such dreadful action is abhor-rent, but the pain of the MH370 trag-edy has been made even worse by the way the aircraft simply disappeared. While some of this can be explained by suspected deliberate actions in the cockpit, it still seems extraordinary to the public, media and aviation profes-sionals alike that such a thing can hap-pen to a modern jet in the 21st century.

The fact that the aircraft then apparently flew through the airspace of several countries without being detected has also raised some embar-rassing national security questions for those involved.

The circumstances surrounding the 777’s disappearance are not unlike those five years ago involving Air

France flight AF447. Both crashed into the ocean at night while in the cruise and between air traffic control handovers. And both disappearances took too long to be recognised.

AF447 compelled the industry to revisit the subject of real-time flight tracking and emergency airborne data transmission. After the crash these subjects were reviewed, but nothing changed.

Aviation is at the leading edge of technological innovation, so it is difficult for travellers to understand why the pilots still communicate by radio while their passengers talk to col-leagues on mobile phones via satellite;

or why pilots can apparently disable systems critical to tracking the aircraft or identifying faults; or why flight data can be datalinked but is not continu-ously streamed – or transmitted in an emergency.

No pilot would be comfortable hav-ing a piece of equipment on board that cannot be isolated in the event of a mal-function. Significantly, a Boeing 787 was badly damaged by fire last year while parked after a suspected fault with its emergency locator transmitter.

Real-time data streaming could allow accident investigations to com-mence as soon as an aircraft crashed or went missing without the need to locate the data recorders. But such a system is costly and limited by avail-able bandwidth.

So unless ICAO agreed to make such usage standard and it was mandated globally, no airline could afford to do it unilaterally without putting itself at a cost disadvantage.

The sensible solution is compro-mise: ICAO should lead the debate – again – because communications technology is becoming better and more affordable, so a technical solution that did not make sense just a few years ago might today be viable.

But difficult though this may be, a way forward for the industry around streaming may be the easier challenge emanating from the MH370 tragedy. Legislating for rogue flightcrew behaviour – if this indeed is the cause – will prove much harder for the industry to address. ■

UNFOLDING TRAGEDY

COMMENT

The worrying disappearance of Malaysia Airlines flight MH370 looks likely to have wide-reaching consequences for the industry. But what can be done to prevent such a terrible event recurring?

“The idea of any pilot taking such

dreadful actions is abhorrent, but the tragedy has been

made even worse by the way the aircraft simply disappeared”

April 2014

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Documents

RICKARD GUSTAFSON Fresh for the fight after cool resolve in … · 2014. 11. 5. · executive or airline, nd out more about the event or register your interest, visit: strategyawards.com