Friday, 24 February 2012

Ryanair Vs Airports: The Supply Chain Battle ©

EI-EVF Boeing 737-8AS Ryanair at Cork Airport picture courtsey of Paul Daly

Ryanair announced on Tuesday 21st February that it was not proceeding with plans to launch four new routes from it's Edinburgh Base which it announced a few weeks ago citing being unable to agree a competitive cost base, as a result it is reducing the base fleet from 7 to 6 Boeing 737-800s.

However deeper analysis suggest that the carrier may be leveraging its position at Edinburgh as the BAA narrows the bidding process into the second round of bidders ahead of the sale as directed by the Competition Authority.

The airline indicated it may reduce the base fleet further in the winter as negotiations continues to extend the five year base deal from October 2012, and in the medium term hinted that RAF Leuchars could have potential as a joint civil-military airport.

Thus the carrier has flexibility to deploy the aircraft where they can earn the highest rate of return (Existing or New Bases), as the model matures like Southwest Airlines, they will use a mix of primary and secondary airports.

A key trend for the airline is the rising cost of fuel which accounted for 41% of the cost base in Q2 versus 38% in 2010 thus putting pressure to further reduce non-fuel unit costs, as consolidation will create opportunities to reduce airport unit costs.

The carrier is mirroring the low-cost retail model using economies of scale as passenger volumes grow from 73 million to 75 million, thus extracting unit cost reduction from suppliers (Airports) as existing 156 airports on its network actively compete against each other for traffic and routes, the on-going consolidation process within the EU will accelerate this competitive tendering process, to extract unit cost reduction.  

The Edinburgh dispute highlights the carrier obsession to drive airport unit costs, as it is a cost line with scope to achieve significant savings given multiple airport suppliers, given current fuel costs at $123 per barrel and as Ryanair fuel hedges unwind (It indicated €350 million fuel cost challenge for FY2013), it is highly unlikely that Edinburgh Airport will be the only airport put under the spot light ahead of the Winter 2012 Schedule.   

Irish Aviation Research Institute © 24th Feburary 2012 All Rights Reserved. 

Thursday, 23 February 2012

Aer Lingus Sale: A Step closer ©

The sale of Aer Lingus moved closer as yesterday after months of speculation the government announced that it would dispose of its remaining 25% stake in Aer Lingus as part of the disposal of state assets under the Torika agreement. The government indicated there would be no fire sale of stake stating it would be when market conditions were favourable and at an acceptable price.  

Aer Lingus becomes the latest EU flag carrier to join the growing list of mid-sized carriers for sale as the Czech Government wants to open an tender for the sale of CSA Czech Airlines, the Cypriot government has indicted it wants to sell its 86% stake in Cyprus Airways to a strategic investor, while the Polish government aims to privatise LOT Polish Airlines by the end of the year.

Portugal’s national carrier TAP-Air Portugal is to be privatised under the terms of their Torika Bail-out, the competitive pressures on Finnair mean the Finnish Government is considering reducing its shareholding to give the carrier more flexibility to compete in the market through alliances and joint-ventures.

The consolidation process will continue to evolve as the year progresses as the sale of the carriers begins in earnest, the recent spike in fuel costs to $123 per barrel and countinued weak demand and economic growth in the EU will put further pressure on carriers to reduce costs to make them attractive to investors.

Irish Aviation Research Institute © 23rd Feburary 2012 All Rights Reserved.

Tuesday, 14 February 2012

Dublin Airport A Stimulus Plan ©

Dublin Airport Terminal 1 Pier B on a Sunday Afternoon

The Irish Financial crisis of 2008 and subsequent recession which caused an economic contraction of 14% has an adverse impact on air travel demand coped with cost inflation from the €3 Air Travel Tax & the increased DAA pricing introduced in 2009 to fund airport develpments. Since the downturn began in 2008 traffic at Dublin Airport has collapsed from its peak at 23.5 million passengers to 18.8 million passengers in 2011, with corresponding loss of 4,500 direct jobs at the airport.
The loss of 4,500 jobs can be directly correlated to the loss of passenger traffic as 1 million passengers =  1,000 jobs (ACI ) accordingly per 1 million passenger decline would lead to the loss of 1,000 jobs.The closure of SR Technics Ireland Ltd operation in 2009 with the loss of 1,200 jobs although some of these have been recovered through new jobs in Aer Lingus Ireland, Dublin Aerospace, Eirtech, M50 Limited.

Therefore a new stimulus plan is now required to restore Dublin Airport to drive economic growth and jobs for Dublin and the wider economy.

Dublin Airport Terminal 1 Pier D on a Sunday Afternoon

Dublin Airport traffic growth of 1% in 2011 is well below that of all four ACI Group Airport categories which all recorded growth in excess of 10%, therefore greater emphasis needs to be placed on these airports for benching marking competitive purposes by the Commission for Aviation Regulation.

Dublin Airport Terminal 1 Departures on a Saturday Evening


The Dublin Airport situation is compounded by the fact that two terminals are operating well below their optimum levels of efficiency, which results in higher unit costs per passenger, as the fixed costs are spread across a lower passenger volume base. Therefore to reduce unit costs in real terms a stimulus plan is required to increase passenger volumes to reduce unit costs per pax.

Terminal 2 is well placed for future growth with Aer Lingus leveraging its network for connections and the expansion of Etihad Airways is expected to increase to double daily next year from 10 to 14 weekly flights, and Emirates Airlines is to increase capacity on the route from an Airbus A330-200 to a Boeing 777-300ER from the 1st of July.United Airlines is to launch a new daily service to Washington Dulles from the 9th of June, and US Airways increasing its service to Philadelphia to double daily at the weekends.  

Dublin Airport Mezzaine Level on a Saturday Evening
However the situation with Terminal 1 requires a radical strategy due to the loss of airlines Air Southwest, Luxair, Malev Airlines and Spanair.Air Baltic plan to resume a seasonal service, Ryanair has indicated that it is likely to remove more aircraft from its Dublin Base this year.  

                                                           Market Trends:

-The Airport regulatory framework is changing in Europe opening up to competitive market forces, as the BAA is to sell Edinburgh Airport & loses appeal against the sale of London Stansted & in Poland Warsaw Modlin Airport has received approval to set its own level of charges creating a competitive environment between Warsaw Chopin and Warsaw Modlin airports .

-The increasing trend of seasonality to a summer peak business of T1 customers (Blue Air, Iberia Airlines, Lufthansa, SAS Airlines, THY Turkish Airlines) (Summer Peak/Winter Valley) , the opposite of MRO Model (Winter Peak/Summer Valley). Implications for T1 efficiency & model of operation.

-The Trend of customers moving from IT package to Hybird & LCC Carriers for summer breaks. Thomas Cook reported a 33% decline in Summer bookings.

-Airline conslidation BMI Airlines currently using T1 is to be acquired by IAG subject to EU Commission approval a decision expected on the 16th of March.

-The growing trend of airlines to use mobile device for check-in and boarding process (Infrastructure).

-The Aer Lingus CEO Christoph Muller noted in a conference call last year a 60% difference between peak and valley business.

-The cost pressure on legacy carriers in the short-haul market (Air France, Iberia Airlines,Lufthansa).

-The growing trend of EU Carriers evolving their short-haul model (Cimber Sterling Outsouricng B737-700 operations to Jet Time & Finnair seeking a joint-venture partner for its EU operations).

-Legacy carriers in short-haul markets downsize to Embraer E-Jets (Air Europa/Belavia/Estonia Air)

                                                        Dublin Airport T1 & T2 Options:

-To examine T1 differential pricing.

-The creation of a new DAA company to run Terminal 1-A new business model.

-To launch new off-peak discounting charges for T1 & T2.

-Introduce new incentives to extend Seasonal routes into the winter schedule in collobration with Tourism Ireland.

-To Launch an new long-term route incentive scheme for base deals to existing and new airlines in excess of 3/5 year agreements for short & long-haul routes currently on offer.

-The re-development of Terminal 1 into a dedicated low-cost facility to reflect market segmentation as is the case with primary airports across Europe i.e. Amsterdam, Barcelona & Paris CDG T3.

-The participation of Joint-Venture partners to manage and operate T1 & T2.

-The Commission for Aviation Regulation should undertake a mid-term review of the existing CAR 2010-2014 price-contol period.

-The Commission for Aviation Regulation should be re-directed by the Department of Transport to engage with stakeholders in aviation industry to grow passenger volume at the airport to drive GDP Growth.

-The Dublin City Mayor should be given a greater role in the economic development of Dublin Airport reflecting best practice of airports in Europe and the United States as the airport becomes a key tool to drive economic growth in Dublin and the wider economy.

-Transfer the DAA lands to the Fingal County Council and put out to tender operation or sale of T1 & T2.  

-The development of the Cargo market segment to leverage the export lead recovery.

-Mandate Fingal County Council & Enterprise Ireland/IDA to develop ancillary business at the airport aircraft developing market segments: FBO Operations, Aircraft Leasing, MRO operations, Aviation R&D and the establish of an small business micro center to encourage business activity.  

-Establish of a new tax-free zone at the airport to develop an 'Aviation center of excellence' for existing and new start-up aviation companies.

The status quo cannot continue at Dublin Airport as passenger traffic levels will be challenged by the rapid pace of airline consolidation and weak economic conditions, as driving lower unit costs will take centre stage for airlines in a increasingly competitive environment, the airport is an integral part of the supply chain needs to adjust accordingly.

                            "When their is competition there is evolution"-Seth Godin

An interesting report from Anna.Aero puts Dublin into prospective: European airports passengers up 7% in 2011 to over 1.6 billion: which countries and airports saw the highest growth?

Irish Aviation Research Institute © 14th Feburary 2012 All Rights Reserved.

Monday, 6 February 2012

Irish Airlines Report January Traffic ©

Aer Lingus announced that it carried 563,000 passengers in January up 6% with a load factor of 62.3% up 0.1%. The airline carried 49,000 long-haul passengers up 2.1% with a load factor of 61.8% down 3.9% and 514,000 short-haul passengers up 6.2% with a load factor of 62.5% up 2%.

The Aer Lingus Regional Franchise operation carried 53,000 passengers up 26.2% and as usual the figures exclude traffic on the UAL Washington Dulles-Madrid JV route. Aer Lingus Regional is to base a second ATR72 in Shannon from the 26th of March and increase frequencies from its Cork and Dublin Bases and launch a new route from Dublin to Bournemouth.

Ryanair announced that it carried 4.39 million passengers in January down 6% with a load factor of 71% and in the rolling 12 months to the end of January it carried 76.2 million passengers.

The carrier flagged the reduction due to the 80 parked Boeing 737-800s but the passenger number should improve with the opportunities to place a number of the parked aircraft into Barcelona (Spanair) and Budapest (Malev), as opportunities arise as a result of on-going consolidation.

The carrier announced last Friday it was establishing a new base in Budapest following the collapse of Malev Airlines with four Boeing 737-800s and 26 routes with 2 million passengers, the airline prior to the base announcement launched re-instated five routes to Budapest including Dublin which will now operate four times weekly instead of the planned twice weekly prior to the collapse of Malev Airlines.

Aer Lingus and Ryanair will be in a position to leverage their market strength ex Ireland as the airline industry continues to consolidate at a rapid rate, with strong balance sheets and low unit costs, with the flexibility to match capacity to demand.  A key issue for airlines yet to be resloved is airport access costs.

Irish Aviation Research Institute © 6th Feburary 2012 All Rights Reserved.