AFM Issue 88 by AFM Magazine

The business and financing of airline operations

Interview: NAS CEO Low-cost alliances Foreign investment Cutting airline costs

Low-cost: In it for the long-haul Published by

Januaryâ&#x20AC;&#x201C;February 2014 Issue 88 www.afm.aero

Foreword Editor Mary-Anne Baldwin Mary-Anne@afm.aero +44 (0)208 831 7511

It was some time ago now that AirAsia X turned the low-cost long-haul dream into a reality. For so long, it had seemed implausible. We imagined a cramped 14-hour flight with service akin to Ryanair’s (something no one should bear), but what AirAsia X delivered was altogether more palatable.

Contributors Chris Kjelgaard, Kathryn Creedy, Daniella Horwitz, Justin Burns and Kaleyesus Bekele. Advertising Manager Ellis Owen Ellis@afm.aero +44 (0)208 831 7519 Editorial Director Joe Bates joe@aviationmedia.aero

Yet, some mocked the very idea of long-distance budget travel and waited for AirAsia X to collapse. It didn’t, and this summer Norwegian Air Shuttle (NAS) will join its ranks to offer low-cost flights between the UK and US.

Design Andrew Montgomery andy@afm.aero Website Jose Cuenca jose@aviationmedia.aero Published on behalf of MRO Network by Aviation Media Sovereign House 26-30 London Road Twickenham, TW1 3RW, UK Managing Director & Publisher Jonathan Lee Jonathan@aviationmedia.aero AFM IS A FULLY AUDITED MAGAZINE Website: www.afm.aero AIRLINE FLEET MANAGEMENT AFM does its best to use recycled products or those from renewable sources. (ISSN 1757-8833) Online: 1757-8841 (USPS 022-324) is published bi-monthly by UBM Aviation Publications Ltd and distributed in the USA by SPP, 95 Aberdeen Road, Emigsville PA. Periodicals postage paid at Emigsville, PA. POSTMASTER: send address changes to AIRLINE FLEET MANAGEMENT, c/o PO Box 437, Emigsville PA 17318.

I must admit that, somewhat like AirAsia X’s critics, I queried NAS’ cost structure and predicted its demise, but that was not before I’d told my nearest and dearest they could soon holiday in the US for next to nothing. Having spoken to its CEO, Bjørn Kjos, for this low-cost special, I’ve learned such word of mouth has given NAS a 90 per cent load factor on its long-haul flights from Scandinavia to the US. Demise now looks pretty unlikely. WestJet and Air Canada rouge are also settling into the low-cost trans-Atlantic market. And, noting the power and prowess of budget carriers, Star Alliance is wooing LCCs into its club with all the temptations it can muster – subjects we examine on pages 18 and 30.

budget model in this issue therefore seems fitting. But the subject of low-cost air travel extends far beyond the workings of its airlines. It’s a philosophy that has also permeated the business plan of every legacy carrier; after all, who doesn’t want to save money? With that in mind, we monitor a few ways airlines can save money (page 42) and we discuss the benefits and limitations of foreign investment (page 26), something that if relaxed, could also transform this industry.

It feels as though we have turned a page in aviation’s history; this may be the start of something beautiful. Celebrating the

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afm • Issue 88 – January–February • www.afm.aero

The business and financing of airline operations AIRLINE FLEET MANAGEMENT

Interview: NAS CEO Low-cost alliances Foreign investment Cutting airline costs

Low-cost: In it for the long-haul ISSUE 88 January–February 2014

Published by

January–February 2014 Issue 88 www.afm.aero

Issue 88 January –February

In this issue

03 8 14 18 22 26

Foreword

NEWS ROUND UP

The latest on deals, mergers, appointments and more FOCUS

One to one: NAS CEO, Bjørn Kjos

Bjørn Kjos, CEO of Norwegian Air Shuttle, tells AFM about his airline’s revolutionary new low-cost long-haul services. Written by Mary-Anne Baldwin and Kathryn Creedy.

Canada’s claim on trans-Atlantic Kathryn Creedy takes a look at the aims of Canada’s WestJet and Air Canada rouge to break the trans-Atlantic market.

TRADING, LEGAL AND FINANCE

The problems with African aviation Africa’s aviation industry creates 6.7 million jobs and $6.8bn for the continent’s GDP. However, various factors are undermining its development. AFM’s Africa correspondent, Kaleyesus Bekele, reports from Mombasa, Kenya.

The future of foreign investment Current laws dictate that foreign investors can hold no more than 49 per cent of an airline, making it a minority shareholder, but some are in dire need of larger scale investment. Mary-Anne Baldwin imagines an industry where the rules are relaxed.

afm • Issue 88 – January–February • www.afm.aero

CONTENTS

FLEET OPERATIONS

Connecting low-cost: What can alliances offer?

With Star Alliance about to invite low-cost airlines into the fold and SkyTeam already recruiting, Mary-Anne Baldwin reports from London’s Future of Air Transport Conference to look at what alliances can, and can’t, offer to low-cost airlines.

Broken broking: The need for air charter legislation

38 42

The UK market for air charter broking is risky, highly competitive and has increasingly low margins. Richard Mumford, partner at Stevens & Bolton, investigates.

MAINTENANCE OPERATIONS

Complex coupling: OEM and MRO partnerships

Relationships between manufacturers and MRO providers are often complex; companies can be both competitors and partners at the same time. Chris Kjelgaard investigates.

Back to black: Innovative ways to cut airline costs

Although we have seen signs of economic recovery, many airlines are still operating at a loss and are taking radical steps to cut costs and increase profits. Daniella Horwitz reports on how airlines can safely and effectively save money.

DATA

Industry data Data including: Aircraft deals and orders; aircraft list prices and lease rates; engine market values and lease rates.

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NEWS

Airbus hikes prices after record deliveries

irbus has hiked the average list price of its aircraft by 2.6 per cent for 2014 – on the back of a record year. The French manufacturer says the new prices, which came into effect on 1 January, are calculated according to its “standard escalation formula”. Aircraft price rises were announced on the same day Airbus revealed it had a record-breaking year in 2013, smashing delivery, order and backlog targets and records. The A380 will now cost $414m, up on the $403.9m it was priced at in 2013. The cost of an A320 Neo is now $102.8m, up from $100.2m, while the A318 is now priced at $71.9m, up from $70.1m. Other aircraft prices also went up. John Leahy, Airbus, COO, customers, said: “We see continuing strong demand in all aircraft size categories as our reliable, efficient product line enables customers to grow their businesses profitably as well as pleasing passengers who will always favour the most comfortable cabin.” In 2013, Airbus delivered 626 aircraft, including 493 A320s family aircraft, 108 A330s and 25 A380s, to 93 customers, of which 15 were new clients. Deliveries were up for the 12th year in a row, surpassing the previous record of 588 set in 2012.

However, the figure was lower than rival Boeing’s in 2013, which delivered 648 aircraft last year and had a backlog of 5,080 orders. It also booked 1,531 gross commercial orders in 2013, another company record. “With solid execution on our numerous production rate increases, the Boeing team performed extremely well in 2013,” said Boeing Commercial Airplanes’ CEO, Ray Conner. “The year ahead will be exciting as we prepare to deliver the first 787-9, continue the design work on our newest programmes – the 737 MAX, 787-10 and 777X – while increasing our production rates on the 737.” Airbus also achieved a new industry record of 1,619 gross orders (377 A320 Ceos, 876 A320 Neos, 77 A330s, 239 A350 XWBs and 50 A380s), beating the previous record in 2011 by 11 aircraft. The year also delivered Airbus’ most valuable gross order intake of 1,503 at a list price of $240.5bn, higher than Boeing’s gross order intake of 1,355 for the year. Airbus’ backlog climbed to an industry-wide record of 5,559 aircraft, valued at $809bn at list prices, or eight years, worth of production. Airbus now claims a 51 per cent share of the commercial aircraft market for single-aisle and widebody aircraft at or above 100 seats. Fabrice Bregier, Airbus’ president and CEO, said: “These benchmark results are feeding nicely into our profitability targets, and I am proud to report that the trajectory is showing strongly upwards.”

NEWS IN BRIEF PEMCO forges PTF deal with COOPESA PEMCO World Air Service has forged a partnership with COOPESA (Cooperativa Autogestionaria de Servicios Aeroindustriales) for 737 passenger-to-freighter conversions. PEMCO’s expansion into Central America provides additional freighter conversion capacity to meet demand for its 737-300 and 737-400 freighters. The company says its newest passenger-tofreighter conversion operation is a “compelling option” – particularly for Latin American markets. PEMCO’s CEO, Bill Meehan, said: “The opportunity to expand into Central and South America was at the top of our priorities and the partnership with COOPESA is one that makes sense from a financial, technical and geographic perspective.”

NuMobile acquires Priority One Jets NuMobile has acquired Priority One Jets, which provides air charter, jet charter membership cards, and aircraft sales for business, leisure or government travel. Priority One had approximately $7m in revenue in its last fiscal year. After a split and the share exchange with Priority One shareholders, which is subject to regulatory approval, the company will have approximately 66,000,000 shares issued and outstanding. NuMobile’s president, Jim Tilton Jr, will continue as the company’s CFO while Priority One’s CEO, Peter Minikes, will become its CEO. After the deal has been finalised, Priority One Jets will be renamed Priority Aviation.

Ex-Im to finance MIAT 767-300s MIAT Mongolian Airlines has finalised a deal with the US Export-Import Bank for the financing of 767-300ER aircraft with GE engines. The transaction, which was guaranteed by Mongolia’s Ministry of Finance, marks the first direct order from a Mongolian airline to Boeing. MIAT is also the first Mongolian airline to receive financing from Ex-Im. “This is an important step for the aviation industry in Mongolia, and the confidence shown by Ex-Im Bank in Mongolia will have a positive impact on all industries,” said president of MIAT, Jargalsaikhan Gungaa. “There are numerous opportunities for US exporters in Mongolia,” said Fred Hochberg, chairman of the Ex-Im Bank.

afm • Issue 88 – January–February • www.afm.aero

NEWS

GA Telesis reveals new aviation investment subsidiary GA Telesis is to build a new aviation investment vehicle, GA Telesis Aviation Investments (GAIN), which will focus on aircraft and engine investment. The company has raised $500m from institutional and private clients to fund the venture, advised by Wafra Capital Partners. Together with GA Telesis’ own capital and existing credit facilities, GAIN’s capacity for investments reaches $1bn. GAIN plans to lease commercial aircraft, engines and new-generation component inventories on long-term and short-term agreements. It will also acquire assets for teardown and resale of the components. Its parent company, GA Telesis, currently owns and manages a fleet of 60 engines and 30 aircraft and has disassembled nearly 200 aircraft and 500 engines since 2002. Michael Gontar, chief investment officer of Wafra Capital Partners, said: “We are excited to be an investor in this industry-leading platform.” Abdol Moabery, CEO of GA Telesis, commented: “This capital will further expand GA Telesis’ current ability to invest in high-yielding aviation asset investment opportunities at a very exciting time in the industry.”

Finnair signs sale and leaseback MOU with GECAS Finnair has signed a memorandum of understanding (MOU) with GE Capital Aviation Services (GECAS) for the sale and leaseback of two A330s and two A350s, the latter of which are on order. The deal, which is worth approximately €320m, is part of Finnair’s long-haul fleet renewal programme. The airline will replace its A330 and A340 fleet with the new generation of A350 aircraft. The sale and leaseback agreements for the two A330 aircraft are expected to be finalised in 1H 2014. The proceeds from the arrangement will be used to finance Finnair’s future fleet investments. Finnair has ordered 11 A350s and has options for eight additional aircraft.

GECAS orders 40 737s with Boeing

GE Capital Aviation Services (GECAS) has announced it has put in an order with Boeing for 40 737s. The order has a list-price value of approximately $3.9bn, and consists of 20 737 MAX 8s and 20 Next-Generation 737-800s. Norman Liu, president and CEO of GECAS, said: “We ordered more 737 MAX 8s and Next-Generation 737-800s because demand continues to grow as our airline customers require more fuel-efficient aircraft to compete in the marketplace. “This order further strengthens the large GECAS order book.” It increases the GECAS order book for the 737 MAX to 95 aircraft and the 737NG to 387 aircraft, the most for both models by any company in the leasing industry. John Wojick, senior VP of global sales for Boeing Commercial Airplanes, commented: “GECAS is an industry leader and this follow-on order reinforces the value of the Next-Generation 737 and 737 MAX in the leasing market.”

AFC finances five 737s for unnamed airline Aviation Finance Company Limited (AFC) has announced its financing of five 737-800s. The aircraft will go to a large but anonymous international carrier with short and long-haul operations. The deal reflects the growth of the capital markets in aircraft financing. AFC said it “played an integral role [in] aligning interests and requirements of Boeing, the carrier and the investor”. Douglas Brennan, CEO of AFC, said: “With current uncertainty around bank financing, we expect ECAs to continue to play a major role, but the private placement markets represent a growing source of finance that will blossom to meet the needs of our most important customers: investors and airlines.”

Garuda to join SkyTeam in March Garuda Indonesia is to join SkyTeam on 5 March, 2014, the global airline alliance has announced. Garuda, which is the national airline of Indonesia, will become SkyTeam’s 20th member and second member from South-East Asia. Garuda operates non-stop flights from Jakarta, the nation’s capital, to seven SkyTeam hubs: Seoul, Guangzhou, Beijing, Shanghai, Taipei and Amsterdam. “Garuda is on target to meet all the membership criteria required by SkyTeam, including implementing a new IT platform and customer-focused initiatives,” said Michael Wisbrun, SkyTeam’s MD.

afm • Issue 88 – January–February • www.afm.aero

NEWS

Image courtesy of Heathrow Airport Limited.

CAA limits Heathrow’s airline charges

he Civil Aviation Authority (CAA) has announced that Heathrow can only increase its airline charges by less than the rate of inflation. London Heathrow says it will “review its investment plans” following the regulator’s decision. The CAA has cut Heathrow’s airport charges by retail price index (RPI) by 1.5 per cent from 2014–2019, down from RPI 1.3 per cent in April 2013. This will see Heathrow’s charges per passenger airline fall in real terms from £20.71 ($34.30) in 2013/14 to £19.10 ($31.61) in 2018/19. Heathrow’s CEO, Colin Matthews, says: “We are concerned by the degree of change since the CAA’s final proposals just a short while ago. “In October, the CAA accepted the need for changes to their April proposals, but has now reverted to a draconian position. “We want to continue to improve Heathrow for passengers. We will review our investment plan to see whether it is still financeable in light of the CAA’s settlement.” Heathrow says the CAA’s decision includes “aggressive operational, commercial and passenger forecasts”, requiring it to reduce operational expenditure by more than £600m ($994m), and stretch commercial revenue targets in excess of £100m ($166m).

Heathrow says the settlement leaves little spare resource available to manage the consequences of potential disruption. London Gatwick has also reacted to the CAA’s decision on economic regulation, which starts from April 2014. It is “disappointed” with key elements of the CAA’s final decision, including the over-optimistic long-term passenger forecasts, the reduction in the cost of capital and the more onerous monitoring regime. CAA said Gatwick has substantial market power (SMP), and as a result requires an economic licence. Gatwick is concerned that the CAA has changed the definition of the Gatwick airport market. Dame Deirdre Hutton, chairman of the CAA, says today’s decisions are good news for air passengers using the airports. She added: “They will see prices fall, whilst still being able to look forward to high service standards, thanks to a robust licensing regime. London’s airports have benefited from substantial investment over the past decade, which has created world-class facilities for passengers. But prices have risen substantially in that time, with service quality sometimes failing to match the standards passengers have every right to expect.”

NEWS IN BRIEF Russia’s central bank approves Aeroflot share sale The Central Bank of Russia has approved the circulation of up to 25 per cent of Aeroflot’s currently issued ordinary shares. The company plans to be listed on one or several international stock exchanges as it seeks international investors. Aeroflot Group, which includes Russia’s leading airline, consists of five Russian airlines servicing more than 200 destinations globally. In 2012, Aeroflot Group carried 27.5 million passengers and had a revenue of $8.2m. As of 28 November 2013, Aeroflot had 141 aircraft.

Cathay orders 21 777-9Xs Cathay Pacific will become Asia’s first 777X customer, having placed an order for 21 777-9Xs worth $7bn. “We think it will be an ideal fit for long-haul destinations in North America and Europe, in particular those routes where we carry high volumes of passengers and cargo each day,” said John Slosar, CEO of Cathay Pacific Airways. He added: “The 777-300ER has done a superb job for us and Cathay Pacific is now the second largest operator of this type. We are now delighted to be an early customer for this next generation of the 777 aircraft.”

Synergy increases PDP facility for Airbus order Synergy, the majority owner of Latin American airline Avianca, has increased its pre-delivery payment (PDP) facilities for its order of A330 to over $294m. Aviation Finance Company (AFC) supplied the followon financing. This follows the first ever multi-tranche debt capital market $263m PDP financing, which was completed last year and covers eight A330. Airbus will deliver nine A330-200s to Synergy. The aircraft will operate in the group’s expanding network around the globe.

afm • Issue 88 – January–February • www.afm.aero

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NEWS: People

On the

move Airbus appoints Allan McArtor as chairman and CEO Airbus has appointed Allan McArtor as its new chairman and CEO after Sean O’Keefe steps down. McArtor will take over from O’Keefe on 1 March. O’Keefe is stepping down due to on-going medical issues after injuries he suffered in a 2010 aircraft accident in Alaska. McArtor is currently chairman of Airbus Americas and in his new role he will also be a member of the Airbus Group Executive Committee.

Virgin Australia appoints new COO Virgin Australia has appointed Gary Hammes as its new COO. He will start the role on 11 February. Hammes will have responsibility for the group’s operations, including ground handling, flight operations, line maintenance and engineering, as well as the safety, catering and network operations teams. He takes over from Lawrie Turner, who has been acting COO. Hammes has previously held senior operational and technical roles with ASTAR Air Cargo, Northwest Airlines and United Airlines and was most recently COO at World Airways.

Bogsan steps down from GOL Adalberto Cambauva Bogsan has stepped down from his role as operational VP officer of GOL Linhas Aéreas Inteligentes.

He will leave on the 31 January, 2014. The Latin American budget airline has so far not announced a replacement.

Ryanair reshuffles senior management Ryanair has made a series of senior management appointments, effective on 1 February. The Irish low-cost carrier says they are part of its strategy to improve customer service, lower air fares and expand its route network and bases across Europe. Michael Hickey will be promoted to group director of operations and David O’Brien to CCO. Adrian Dunne will be director of operations, Derek Quinn ,director of engineering, and Carol Sharkey, director of safety and security. Kenny Jacobs will join to become new chief marketing officer and Peter Bellew will become head of sales and marketing. Dara Brady will become head of web development and Lesley Kane, head of groups and corporate sales.

Meijer appointed MD of KLM UK Engineering Arjan Meijer has been appointed MD of KLM UK Engineering. He will replace Paul Chün. Meijer has a degree in Aerospace Engineering from Delft University of

afm • Issue 88 – January–February • www.afm.aero

Technology and an Executive MBA (International Master’s in Management). Meijer said: “I hope that the knowledge acquired in my previous functions – and in particular that of technical director at KLM Cityhopper – will have a positive impact on KLM UK and its clients.”

JetBlue Airways appoints Hayes as president JetBlue Airways has promoted Robin Hayes to the position of president, effective 1 January, 2014. Hayes rises from his current role of EVP, chief commercial officer for the airline. Prior to Hayes’ promotion, JetBlue’s CEO, Dave Barger, held the roles of both CEO and president. Hayes joined JetBlue as chief commercial officer in August 2008 after working at British Airways.

Avinco announces appointments Avinco has appointed a new commercial VP and a new marketing manager. Henri De Sulzer Wart, former Airbus VP for contracts in the Middle East, will join the company having spent his entire career so far at EADS. De Sulzer Wart has worked in the design department in Toulouse, then in finance, and later in the commercial department. Kriti Anastassakis will join as marketing manager. She comes from the gas and power industry and has spent several years with Shell Oil Company.

The business and financing of airline operations

Airline Fleet Management (AFM)

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Issue 89 of AFM, our environment special, will contain: 44 Bio-fuel initiatives 44 Engine efficiency 44 Singapore Air Show report 44 Fuel conservation

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FOCUS: Norwegian Air Shuttle

One to one: NAS CEO, Bjørn Kjos Bjørn Kjos, CEO of Norwegian Air Shuttle, tells AFM about his airline’s revolutionary new low-cost long-haul services. Written by Mary-Anne Baldwin and Kathryn Creedy.

ow-cost long-haul has long seemed the final frontier: the last part of the market yet to be reached, and conquered, by our industry’s ever-evolving airlines.

Could Norwegian Air Shuttle (NAS) – or rather its long-haul subsidiary, Norwegian Air International (NAI) – have mastered what so many others couldn’t? In July 2014, NAS will launch game-changing low-cost long-haul routes from the UK to the US. At £149 ($245)

for a one-way trip from London Gatwick to New York JFK, NAS’ new routes will revolutionise not only the long-haul market, but also the customer’s potential to travel. NAS will also offer flights from London Gatwick to Fort Lauderdale from £179, each way, and to Los Angeles from $199 one way. It already flies long-haul to five US cities from Oslo, Stockholm and Copenhagen, as well as to Bangkok. By the end of 2014, it will expand to include 14 routes between the US and Europe.

afm • Issue 88 – January–February • www.afm.aero

FOCUS: Norwegian Air Shuttle “Norwegian´s goal is to bring innovative service at a low fare to the US market with brand new Boeing 787 Dreamliners,” says CEO, Bjørn Kjos, articulating the reason for the company’s expansion across the Atlantic. “Our goal is that everyone should be able to afford to fly. In our opinion, air fares between the US and Europe have been far too expensive.” NAS has pointed to the historical role of LCCs, saying they have the potential to double total traffic volumes. It noted that the trans-Atlantic market has been controlled by three immunised alliances – Star Alliance, oneworld and SkyTeam – which have kept fares high and capacity under tight control. “Norwegian has succeeded in the short-haul market and we intend to do so in the long-haul game where high fares have dominated,” the airline tells AFM. “New aircraft, which have lower maintenance and fuel costs, enable us to offer high-quality flights at a low fare. By keeping low costs throughout the company, we are able to offer much lower fares.”

drive 25,000 kilometres, or maybe up to 50,000, then put it into service. An old car you’d drive 5,000 kilometres before needing that.” Another thing crucial to any LCC’s long-haul dream is a large network of existing routes. NAS already flies to 133 destinations in 39 countries. It is also launching five new European routes from next spring and summer, including: Santorini; Corfu; Sicily (Catania); Cyprus; and Budapest. The carrier will also add frequencies to existing destinations: Malaga; Ibiza; Split; Dubrovnik; Majorca; Faro; Tenerife; Copenhagen; and Barcelona. NAS moved its Stansted operations to Gatwick in 2009 and is increasing its network there from 25 to 33 destinations in Europe and the US as from the summer of 2014. Speaking on the announcement of NAI’s US–UK routes, Stewart Wingate, CEO of London Gatwick, said: “This is one of the most exciting route developments since Gatwick’s change of ownership four years ago and shows

Our goal is that everyone should be able to afford to fly. In our opinion, air fares between the US and Europe have been far too expensive The tools for the job “The response has been very extremely good… Load factors have been in the mid 90s,” says Kjos. “It has definitely met our expectation. The only problem was the start-up with the Dreamliners.” The CEO explains that the subsidiary delayed the start of its long-haul operations from May to late June due to issues with Boeing’s 787 Dreamliner aircraft. Not wanting to wait any longer, it then wet-leased aircraft in order to start the routes. “Obviously the only aircraft available to fly low-cost long-haul is the Dreamliner,” he says. “We tried to find out if it was possible with aircraft like the A340 and found it is not possible; it is too high an operational cost. Fifty per cent of the cost is fuel and it’s [the A380] by far the most fuel-efficient aircraft. The Dreamliner or the A350 are the only aircraft we could work it out with.” Not only does the 787 have lower fuel burn and operational costs, it also has a range crucial to long-haul operations and costs less to maintain compared with other aircraft. “It’s exactly like a new car. A new car you would

the benefits to passengers of Gatwick competing with Heathrow on routes, price and service.” But its Gatwick–US move is not without controversy. US Air Line Pilots Association, joined by US international carriers, objects to how NAI is registering its long-haul aircraft in Ireland where it is establishing itself as an Irish airline to take advantage of Open Skies regimes just as Ryanair and easyJet have. Observers suggest Norwegian is only living up to the promise of Open Skies, which brings competition to a new level, despite the fact that it is really just adding several hundred weekly seats to its new markets. According to Kjos, the reason for setting up NAI as a subsidiary was to obtain an air operator’s certificate. He calls the subsidiary “just a daughter company”, but others suggest the motivation extended further. The Airline Pilots Assocation (ALPA) believes the airline was shopping for lenient labour laws to evade those imposed in Norway. It is doubtful, however, that US regulators will push the issue as this competition is just the kind of LCC service both the US Department of Transportation and the Department of Justice are trying to encourage.

afm • Issue 88 – January–February • www.afm.aero

FOCUS: Norwegian Air Shuttle

Rival offerings According to Kjos, who attempts to simplify what must be an extremely complex web of considerations, LCCs can easily transition from short- to long-haul operations, because many of the key elements are the same. When asked how NAS’ short-haul operations differ from its subsidiary’s long-haul ones, he answers: “It’s very much the same. We fly out of large catchment areas, have a short turnaround and high utilisation.” So considering this simplicity, it seems inevitable that many more LCCs will enter the low-cost market. Indeed, the most infamous LCC of all, Ryanair, has already made clear its ambitions to do so. Although Ryanair’s Michael O’Leary has said he has no immediate intentions to go long-haul, it does have a plan should it become viable. It all depends on aircraft. O’Leary said he would require between 40 and 50 long-haul aircraft at a rate of seven a year. These would initially be used on three European and three US city destinations, building to 10 routes per region. “I think it will happen in time,” he told delegates at an industry conference, Low Cost Airlines World Congress, last year. “We’d like to do long-haul trans-Atlantic routes, but unless you come up with cheaper long-haul aircraft it won’t happen.” O’Leary wants to offer a one-way trans-Atlantic flight for just £10 – despite its lowest existing fare already being a cut-price £14.99 ($25). Ryanair is looking at a number of ways to do this, including lowering airport costs, raising engine and fuel efficiency and increasing the number of seats on its aircraft.

Despite all this, the CEO wasn’t optimistic about NAI’s attempts to break the market. As candid as ever, O’Leary, who was sitting next to Frode Foss, CFO of NAS, argued that NAS wasn’t low-cost outside Scandinavia and that it will have trouble mastering the low-cost model. O’Leary noted that NAS’ focus must be on how it competes with other European low-cost carriers, which have both lower cost bases and lower fares. But with a load factor of 90 per cent, it seems NAI is certainly managing well so far. Indeed, the concern is whether budget airlines can deliver the quality and standards needed for long-haul flying. NAS, which is known for offering a quality service, has managed the balance of cost versus comfort well. Its customers have their own built-in inflight entertainment system and they can order drinks and food from their seat if they haven’t already pre-paid. “We also have a premium class where customers don’t have to pay extra. It’s actually more or less our own business class, with a 46in pitch [seat]“. The main cabin has seats of a comfortable 31in. “Even some legacy carriers are going to 30 or even 29,” notes Kjos.

Lessons from the past Certainly, the introduction of the 787 and A350 will allow many airlines to fly considerably long distances for less money. When asked about his future competition, the CEO replies: “I think most of them [LCCs] will do long-haul in the future. There isn’t too much differentiation from short-haul, it’s the same principle. You have to be a lean and efficient airline with high utilisation; you have to have short turnarounds, fly direct. All those things are actually the same on long-haul

afm • Issue 88 – January–February • www.afm.aero

FOCUS: Norwegian Air Shuttle

and short-haul. You fly one or two hours instead of eight hours, but the principle is still the same.” In addition to calling itself the “non-stoppable airline”, NAI touts its point-to-point service compared with its rivals. Organising its service on a point-to-point model is far less expensive than complex, mainline hub-and-spoke systems. “It is very different from a hub-and-spoke model,” Kjos explains. “Those airlines are waiting for the waves, filling up the planes, flying, waiting for the waves, then coming back. But we don’t do that.” NAI flies from big catchment areas offering prices that will guarantee high load factors. Of course, some have already tried low-cost long-haul and failed, somewhat astoundingly. In 2004, Canadian carrier, Zoom Airlines, started trans-Atlantic flights from Canada to the UK from as little as £89 ($146). It planned to expand into long-haul flights between the US and India but liquidated in 2008 due to high fuel costs. However, since then a number of airlines have succeeded, namely Jetstar, Cebu Pacific, which kick-started its long-haul flights with a service between Manila and Dubai in October 2013, and AirAsiaX. The latter is the most successful with 16 long-haul flights across Asia, Australia and the Middle East and 13 A330-300s servicing those routes. According to Kjos, one major failing his predecessors suffered was an inability to master online sales. “Some failed because they never entered the digital world,” he says. “Like Freddie Laker. He had to rely on the travel agencies and when the big guys said ‘Hey, if you sell tickets for Freddy Laker, forget us.’ Obviously they [the agencies] forgot Freddy Laker”. Most of NAS’ and NAI’s tickets are sold digitally. But, of course, Laker – one of the original entrepreneurs who

launched the low-cost Laker Airways in 1966 – also went bust because rival airlines colluded to drop their fees, pricing him out of the market. While price cartels are now illegal and their potential existence is scrupulously monitored, NAI will likewise face heavy competition from rival airlines. One wonders, however, how any airline could drop its prices lower than NAI’s already are. Another advantage NAI has is that it got in early. This will allow it to build vital customer loyalty, develop crucial market knowledge and adapt quickly to changing customer demands. However, passenger prices are largely dictated by external costs such as fuel and airport fees. Kjos admits that ticket prices “depend on the airport charges”. It is something NAI will have to bargain for in its discussion with airport partners and in its route development plans. Yet, Kjos says: “The lowest prices shouldn’t be much more than $300 over the Atlantic on a round trip”. Should those uncontrollable costs stay low enough, NAI also expects to roll out more long-haul flights, particularly in the Far East. “There is a big catchment area in the Far East,” says Kjos. “Wherever you have the big trunk routes, that is where we will go with the low-cost model: London–Beijing, London– Hong Kong. There are a lot of opportunities. Some countries you have access to, some will have Open Skies in the future.” Indeed, with so many opportunities, paired with so much optimism and belief, NAI is set for big things. Its low-cost rivals may taunt it, and others may scratch their heads at its cost structure, but if NAI can pull off its plans, long-haul travel may never be the same.

afm • Issue 88 – January–February • www.afm.aero

FOCUS: Trans-Atlantic

Canada’s claim on trans-Atlantic Kathryn Creedy takes a look at the aims of Canada’s WestJet and Air Canada rouge to break the trans-Atlantic market.

lower-cost airlines to compete in these markets. History has shown that new competition always shows up when the business cycle turns and after industry rationalisation that increases concentration and average fares.”

“The Atlantic region has been one of the weakest regions because of very slow EU economic growth, but it has turned the corner as the US and European economies stabilise and slowly recover,” Ionosphere Capital’s partner, Vaughn Cordle, tells AFM.

Clearly, the most intriguing new entrant in the trans-Atlantic market is NAS with its subsidiary Norwegian Air International. Leveraging its highly efficient, 291-seat Dreamliner as a major competitive advantage, NAS is entering the London–US market. By the end of 2014, the carrier will expand to include 14 routes between the US and Europe.

o some, the entrance of LCCs into the market is no surprise and comes right on schedule, but, interestingly, each of the new-entrant, trans-Atlantic LCCs – such as WestJet, Air Canada rouge and Norwegian Air Shuttle (NAS) – has different strategies for success.

“With falling fuel prices, I believe fares will not go up as high as would otherwise be the case, given the historically high load factors. I think load factors will go higher. The timing is right for

While WestJet and Air Canada rouge focus on “competitive” fares, only Norwegian is offering significantly lower fares.

afm • Issue 88 – January–February • www.afm.aero

FOCUS: Trans-Atlantic check-through baggage. We think that is unmatched by our competition because they are not part of a legacy network.” The two carriers provide an interesting contrast to NAS as one is a traditional LCC seeking expansion and the other is a new entrant benefiting from the largess of its parent company. Rouge has learned the lessons of past legacy-LCC failures, the most important of which is having the right aircraft in the market and capitalising on legacy synergies. “The real lesson is to have the right aircraft on the right route and with that you can create a brand customers enjoy and offer a value proposition with Air Canada that will make it commercially successful,” says Smith-Valade. “You don’t have to re-invent the wheel. You create differentiation where it makes sense and capitalise on the synergies where it makes sense. That is a formula for success.” Rouge launched services using 767-300ERs between Toronto and Edinburgh, Venice and Athens as well as Montréal to Athens. Next summer it will up the ante by adding services from Toronto to Dublin, Barcelona, Lisbon and Manchester, in addition to flights from Montreal to Rome, Barcelona and Nice. It also serves leisure markets in Florida, Latin America and the Caribbean. Rouge brings secondary markets into the Air Canada network by adding Manchester, while Air Canada serves London Heathrow. Similarly, Air Canada serves Toronto–Rome and Paris, while rouge will serve Montreal–Rome and Nice and Toronto–Venice.

In July, NAS will launch its new trans-Atlantic service between London Gatwick and San Francisco (OAK), Los Angeles, Fort Lauderdale, Orlando and New York. It will offer fares between $478 and $578 for a round trip, saving about $860.

Rouge While NAS clearly wants to upset the high-fare apple cart, rouge and WestJet are offering what they call “competitive” fares. These fares take advantage of their lower cost base, but they are not dramatically dropping fares to NAS’ levels. “We have reduced costs on the operating side,” says rouge’s VP of customer experience, Renee Smith-Valade. “We want to always make sure our fares are competitive and we offer an overall value package that includes the Aeroplan loyalty programme, Maple Leaf lounge access, connections and opportunities to both Air Canada and Star Alliance flights and

“That is pretty ambitious growth for a carrier that is only seven months old,” Smith-Valade says. “We are expanding far more quickly than we originally anticipated. We look at anywhere our competitors are flying, but also where Air Canada is flying but not flying viably. We study where people are going on vacation as well as emerging hot spots such as Croatia. Our operating costs are lower so we are taking over routes Air Canada could not operate viably. We may be unique in that regard because we have a built-in customer base.” It also benefits from being able to take Air Canada’s 767s, which are being replaced by higher-density Dreamliners and 777s. They would have been returned to lessors were it not for the opportunity with rouge. “We dense them up, adding about 40 seats, which increases passengers and lowers operating costs,” she continues. “We also reduce labour costs by hiring new flight attendants at a lower scale. However, we use unionised Air Canada pilots for fixed periods at lower salaries, but with the advantage of keeping their seniority number. Many view it as a good career move since they upgrade to new equipment.” Even so, rouge is limited to 50 aircraft by contract, including 20 767s and 30 A319s.

afm • Issue 88 – January–February • www.afm.aero

FOCUS: Trans-Atlantic Atlantic yields and load factors 12 per. Mov. Avg. (Load factors RIGHT)

12 per. Mov. Avg. (Yields (2013$) LEFT) 16

83 15

12 11

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 YEARS

Despite record load factors in the Atlantic market and the sharp rise owing to fuel costs since the post-9/11 lows, real yields in November 2013 were below those in the mid 1990s. Source: Ionosphere Capital LLC.

2013 full year (preliminary) System AA+US

Domestic

259.9

Regional

146.2

28.0

Atlantic

Latin 36.0

Pacific 40.1

9.6

Delta

232.7

138.0

28.5

47.2

18.3

29.3

United

245.4

106.8

32.3

46.8

20.5

38.8

AMR

168.3

89.3

13.8

22.1

33.5

9.6

91.6

57.0

14.2

13.9

6.5

0.0

Delta, especially with its 49 per cent stake in Virgin Atlantic, has the largest available seat mile (ASM) share. Source: Ionosphere Capital LLC.

WestJet Compared with Air Canada and rouge, WestJet readily admits it is merely sticking its toe into trans-Atlantic waters. But it is inevitable that it will make a larger move in order to stay competitive with its Canadian rivals. The seasonal service, the crux of which could potentially turn St John’s Newfoundland into a hub, includes flights between Toronto and Ottawa to St. John’s, the jumping-off point for seasonal European service. “With only one major Canadian scheduled airline accounting for a large majority of the market, WestJet has no choice but to examine ways it can create a successful strategy to penetrate long-haul international routes,” says CAPA, which provides airline analysis. “Dublin is likely just the beginning. Presently, WestJet represents about 14 per cent of the international seat deployment from Canada, versus 33 per cent for Air Canada.” It is using the 737-300 and is competing against rouge’s 767 non-stop services between Toronto and Dublin, a heavy market that also includes competitors Aer Lingus and seasonal charter services from Air Transat and Sunwing. WestJet has said that any widebody additions would not come before 2018, which matches the long lead times for new

aircraft. However, widebodies are available sooner from lessors should WestJet want to accelerate its plans. The airline is really limited to non-stop and/or direct flights in a single market Toronto–St John’s–Dublin. However, it offers a connection between Ottawa and St John’s competing against the only other service – Air Canada’s – to boost feed traffic. While one would imagine it would have to discount fares for its one-stops, the fares of WestJet and rouge are similar. WestJet has identified four or five other markets in which it is interested. In addition, expansion could include partnerships and it already codeshares with British Airways and Air France. Analysts are already worried about fare erosion with the new entrants, but Air Canada’s CEO, Calin Rovinescu, put the competition in perspective when talking about WestJet. He told the media it was a “non-event”. The same, he believes, holds true for NAS and its US competitors. And, he would be right, except for two things – the potential for growth and the pent-up demand for lower trans-Atlantic fares. Legacies, after all, have become quite skilful in responding strategically to competitive threats. Still, easyJet and Ryanair will be watching.

afm • Issue 88 – January–February • www.afm.aero

TLF: African aviation

frica has seen many airlines come and go. They each rise with a wave of optimism, but crash with crippling debt and defeat. Air Afrique, Nigeria Airways, Ghana Airways, East African Airlines and Uganda Airlines are just some to have fallen into liquidation.

Indeed, a number of African countries have lost their national carriers, forcing customers to depend on neighbouring airlines in order to fly to the rest of the world. Yet despite all this defeat, Africa’s aviation industry continues to battle on. It is, after all, a significant

afm • Issue 88 – January–February • www.afm.aero

TLF: African aviation

Dr Elijah Chingosho, secretary general of AFRAA, making

growth market and worth the fight. So, as old airlines disappear, new start-up carriers arrive. Some are more successful than others. Air Malawi, 1Time, Cameroon Airlines and Air Nigeria have recently gone bust. However, Air of Nigeria, ASKY, Pan African Airlines and Air Rwanda are thriving. So what is behind all these casualties, and how can the existing carriers protect themselves from failing like their counterparts?

Meeting of minds In late November 2013, African airline CEOs and civil aviation authorities gathered in Mombasa, Kenya, for the African Airlines Association (AFRAA) annual general assembly (AGA) to discuss the challenges Africa’s aviation industry faces. The three-day conference was held under the theme of ‘Challenging times – Africa’s strategic alignment’. It brought together over 360 high-profile delegates from 55 countries across the world. Among the issues, speakers highlighted poor airport infrastructure; high airport fees; market restrictions; exorbitant taxes; aviation fuel; and competition. In his opening remarks, the secretary general of AFRAA, Elijah Chingosho, singled out excessive airport

a keynote address.

taxes, poor infrastructure and fuel prices that are above industry average as major challenges confronting airlines. “The generally high cost of operations is making African airlines less competitive,” he argues. South African Airway’s CEO, Monwabisi Kalawe, stresses the need for African airlines to co-operate. He believes the region’s most significant challenge is the cost of doing business in Africa. As an example, he notes that aviation fuel prices are much higher than the world average. “In some countries, airport fees are exorbitant and these have to be reviewed,” he says. Adding to this, Tony Tyler, director general of IATA and guest speaker at the AGA, was critical of African governments. Tyler argues that African governments levy cumbersome airport fees and taxes on jet fuel and airfares. In particular, he cites the Kenyan and Ethiopian governments, and adds that the nation’s conflicting rules hinder the airline industry growth. But the problems with government run deep and downward to airline chief executives. Africa’s aviation industry is renowned for being laced with corruption, nepotism and bureaucracy. And it’s these things that link the government to some of the continent’s less scrupulous business leaders. For example, Khaya Ngqula, former South African Airlines CEO, has been accused of fraud totaling almost $3m (R30.8m), although it is something he contests.

afm • Issue 88 – January–February • www.afm.aero

TLF: African aviation

ng the challenges facing them

African Airlines CEOs discussi

Still, this reputation impedes business and has resulted in many chief executives losing or changing roles. According to Inati Ntshanga, CEO of SA Express, this instability is a major problem for African airlines. “Airline management is changed now and then. CEOs are removed more often. In some countries the management of the airline is changed when there is a change in the government,” Ntshanga explains. “There should be continuity in leadership. Look at Dr Titus [Naikuni], he led KQ for 12 years. Look at Tewolde [GebreMariam, CEO], he served Ethiopian since 1985. When a person stays with an airline, he will have the time required to implement his vision.”

Union, engage with the EU on what he considers is the unfair banning of African airlines. Naikuni, who is now president of the AFRAA and CEO of Kenya Airways, splits the problems into two categories: internal and external. “Safety is a major concern. If we have an unsafe airline, nobody is going to fly [with] us. We have to admit that. This is an internal problem. Of course, inappropriate government policies affect airline operations. Change in governments also impact airline management. We have four or five elections in Africa every year and these could have their own effects on the countries’ stability, and that translates to the airlines’ performance.”

Global standards Safety at stake Another contentious issue for Africa is safety, for which it also holds a poor reputation.

Tyler argues that aviation’s economic and social benefits can be undermined by the unintended consequences of government action, which are not aligned with the established framework of global standards.

Indeed, African carriers dominate the European Union’s (EU) blacklist, which bans certain airlines from flying into EU airspace. Among those banned are all 50 from the Democratic Republic of Congo; all four from Equatorial Guinea; all 17 from Mozambique; all 10 from São Tomé and Príncipe; all seven from Sierra Leone and all 18 airlines from the Republic of Sudan. Added to these are every airline from the Republics of Benin, Congo and Gabon, which each have eight airlines.

“Global standards are the foundation upon which a safe, secure and integrated global air transport system is built. The system is so reliable that we don’t often think about the enormous co-ordination that makes it possible. That is why we need to remind governments of the value of global standards that support aviation and the vibrancy of their economies,” Tyler says.

Clearly more needs to be done in terms of safety, as well as the legislation, documentation and enforcement that surrounds it. Speaking at the conference, Chingosho called on African states to take safety seriously and, together with the African

Safety is the prime example of what can be achieved with a consistent, global approach. The IATA Operational Safety Audit (IOSA) is the global standard for airline operational safety management. Over the decade since it was established, there has been a clear trend showing that the aggregate safety performance of airlines on the registry is superior to those airlines that are not on the registry.

afm • Issue 88 – January–February • www.afm.aero

TLF: African aviation

African airlines on the IOSA registry are performing in line with global averages. And in 2012 there was not a single Western-built jet hull loss by any of IATA’s 25 African member airlines. “Improving safety is the biggest issue on Africa’s agenda, and global standards play a crucial role in this area. Last year, nearly half of the fatalities on Western-built jets occurred in Africa. African governments recognise the need to improve safety in the Abuja Declaration’s goal of reaching world-class safety levels by 2015. IATA is actively contributing its expertise and resources to all the Abuja Declaration’s commitments,” says Tyler. Of course, once this new level of safety is reached, Africa can look forward to market liberalisation. Naikuni notes that the slow pace of air transport liberalisation is hurting the growth and development of Africa. The AFRAA AGA called upon governments to demonstrate commitment towards liberalising the air transport industry and creating an environment conducive to airline operations. This will increase regional and domestic traffic and create a bigger base market. Naikuni urges governments to remove barriers to co-operation and replace them with policies and regulatory framework. But once one hurdle is overcome, another is soon met. Although some airlines may not be prepared for competition in a liberalised environment, Naikuni argues that protecting such airlines puts back the whole industry. Non-African carriers have dominated African skies and hold 80 per cent of the passenger traffic on intra-Africa routes. How can African airlines regain control of Africa’s air industry?

Unfortunately, this is a question the airline CEOs could only ask, and not answer. According to GebreMariam, African carriers were operating under an unfriendly regulatory framework. He adds that markets are protected by bilateral air service agreements. “Unfortunately, there are African countries that prohibit African airlines from flying into their countries. There are countries that deny African airline traffic rights and grant rights to non-African airlines,” GebreMariam laments. According to him, African nations should open their skies for African airlines. “We need to whole heartedly implement the Yamoussoukro Declaration [a 1988 agreement by African countries to open their skies for African airlines].” Some speakers raised concerns about the increasing dominance of Gulf carriers in Africa. Mega-carriers such as Emirates, Gulf Air and Etihad are dominating African skies. How can African airlines compete with giant carriers that are backed by their governments and that have access to cheaper fuel? Naikuni does not believe in banning. “We need to have a sound business development strategy that would enable us to compete with any airline,” he told participants. His vision is founded on a clear and justified confidence. The future of aviation in Africa has the potential to be very bright. Africa’s population of one billion people is spread across a vast continent with a wealth of untapped resources. The African economy is rapidly developing, its people are growing wealthier and governance is more stable. “Africa is the continent of opportunity for aviation. The future is still being created. By keeping global standards at the heart of our efforts, I am convinced that the future will be bright,” Tyler surmises.

afm • Issue 88 – January–February • www.afm.aero

TLF: Foreign investment

J 26

ohn Sullivan, MD and head of Europe and Middle East at Seabury Consulting, says the 49 per cent cap on foreign investment into airlines is not working for the industry. Sullivan asks why airlines aren’t free to accept more foreign investment, particularly when foreign investors own many other industries – such as telecommunications and waste management.

David Cameron, claimed: “No country in the world is more open to investment.”

The day prior to speaking to Sullivan, news broke that the UK government is seeking a billion pound investment from China for Britain’s high-speed rail links and combined with that, somewhat contentiously, nuclear power. UK Prime Minister,

“We set up a regulatory framework around these ideas 60 years ago and it’s complicated to untangle now; it takes a lot of time and energy to undo and nobody’s had the impetus, the direction or the drive to do so. “

When asked why there is a gulf between what is acceptable for aviation and what is acceptable for other industries, Sullivan says: “It’s just one of those bad ideas that sticks around. It’s just the way it always has been.

afm • Issue 88 – January–February • www.afm.aero

TLF: Foreign investment were to change the laws to say ‘if the airline is truly operated from Italy, we don’t care where the ownership capital happens to come from’, then Alitalia could be bought by a Libyan airline. But, all of the reciprocal route rights that Alitalia has gained through bilaterals with third parties would need to be renegotiated. But what many companies and governments are most twitchy about is sharing power and intelligence with countries that are not our political allies. The Middle East, Russia and China all offer huge investment potential, but is it safe to let them control our airlines? “We let them own our banks, waste systems, telephone companies, our water treatment systems,” says Sullivan. He maintains that throughout years of war, no country has seized another’s aircraft to use them against them. When quizzed about the intrinsic link between aviation and military operations, and the concerns over non-Western countries gaining the intellectual property from the West, Sullivan was unfazed. In March 2012, the Commercial Aircraft Corporation of China (COMAC) and Boeing announced a partnership for the C919 jet and ARJ21 regional jet, in which the two companies have worked together on fuel-efficient technologies. Bizarrely, the agreement is helping COMAC to develop the C919, which rivals Boeing’s 737, but it is thought that Boeing will have divulged only the most public of information and not any that could compromise its own programmes. In a separate tie-up, Bombardier has partnered with COMAC to deliver intelligence supply chain services, flight training, flight-test support, and sales and marketing. The Canadian airframer is also acting as an adviser to COMAC on the ARJ21 regional jet programme.

Catalogue of concerns But perhaps there’s more to it than that. Such an amendment to legislation would create a ripple of change spreading across many other areas of jurisdiction. That’s not to mention the inherent fear many have about giving power to other nations. For example, foreign investment can have an impact on route allocations. The country of domicile is a large factor in awarding an airline its routes; a carrier majority-owned by a foreign airline could therefore be rejected for what it deems are local route slots. “Let’s come up with a farcical example to illustrate the point,” says Sullivan. “If you’re an airline in Libya and you want to buy Alitalia today, you can’t do that. You can buy up to 49 per cent, but the Italians wouldn’t let you buy any more than that. If they

These agreements have been viewed as controversial, if not foolish, because China has proven itself willing to copy aviation designs in the past; the ARJ21 is much like the DC9 and China’s failed Shanghai Y-10 was much like Boeing’s 707. As a result, many feel that OEMs should be more protective of their intellectual property. There is some concern that majority ownership by countries such as China and Russia could support not only their growing market share but also their military operations, which in turn could be used against the West. However, Sullivan argues that China buys hundreds of aircraft, which it disassembles and puts back together for maintenance purposes. “They already understand commercial aviation technology very well. But, it’s not surprising to me that big companies would not trust China’s legislation of intellectual property.”

afm • Issue 88 – January–February • www.afm.aero

TLF: Foreign XXX investment Another concern is that a huge airline conglomerate, formed through multiple foreign investments, could create an airline so large that it has political sway with Western manufacturers. Take Etihad, which holds shares in airberlin, Air Seychelles, Aer Lingus, Virgin Australia and Air Serbia. It recently ordered 199 aircraft. The more affiliates it has, the larger its orders will be; this means it has power with the manufacturers. Such entities could also have an effect on the natural evolution of small market players. Sullivan admits: “It could have a marginal impact. It could do either one of two things. You would either have airlines that are insistent on subsidising the smaller airlines to no end, which would keep them in business

Benefits But aside from these serious concerns lie a wealth of benefits, most chiefly financial security and stability, which leads to healthy and prosperous airlines. For example, Air Canada invested $75m in US Airways during the latter’s restructuring in 2005. “Without that investment, US Airways wouldn’t be around today, nor would we see the world’s largest airline [the merged US Airways and American Airlines] forming out of it.” Furthermore, foreign investment counteracts the need for governments to subsidise state carriers. Where they saw a

Paul Gretch, director of the Office of International Aviation, at the US Department of Transportation

The issue of ownership and control has been at the top of Europe’s list. when they really shouldn’t be. Or, you’ll have very disciplined cross-border investors who know how to run big carriers and insist that the small carriers work at the same standard. My guess is that there would be some instances of the first, but the predominant behaviour would be the second.” Despite majority ownership, IAG has stood aside and let Vueling run itself, aware that British Airways’ model would not suit the Spanish airline’s operations. Would other carriers take such a relaxed approach and, if not, would it be to the detriment of the small airlines seeking to carve their own mark on the industry? Taken further, large scale investment could lead to monopolies or to a number of large airline entities swallowing smaller airlines and their disparate business models. A market governed by just a few models runs the risk of becoming stale, not to mention anti-competitive. But Sullivan questions whether you need numerous models. He cites Avianca, which has 200 operating companies working together under the same brand so the customer feels as though they have just one point of contact. AirAsia has done something very similar with its numerous airlines. “You can contrast that with IAG, or Lufthansa Group, or Air France-KLM,” says Sullivan. “If you have a ticket on Air France and something’s gone wrong with the airplane, they make you walk over to the Transavia desk to catch their flight. They don’t have a seamless process. I would argue that having a large airline gobble up the smaller ones provides a huge amount of consumer benefit. It doesn’t necessarily mean that the smaller brand goes away. You could have two airlines that run completely separately but can integrate everything.”

business case, foreign airlines could step in and give the airline not only the capital it needs, but perhaps more crucially, the business acumen to turn a profit. A lot of carriers need that capital and know-how right now. For example, Alitalia needs money but no one in Europe is willing to give it. But when we look at how much airlines have benefited from foreign investment – Jet Airways, Virgin Australia and airberlin being good examples – it seems unwise to cap it. When asked whether the reticence towards foreign investment comes from the legislators or airlines, Sullivan says: “They [airlines] would absolutely pursue it [foreign investment] more aggressively if there were no holds barred. Look at what Virgin Australia has done. They are basically owned by the New Zealand government, the Singaporean government and the UAE government through their airline entities because there are no holds barred there, so they went where they could find the capital when they needed it. Airlines love to have a diverse capital base.”

Time to change Speaking at the Future of Air Transport conference in November last year, Paul Gretch, director of the Office of International Aviation, at the US Department of Transportation, said that the lack of foreign investment is not due to a lack of effort. “The issue of ownership and control has been at the top of Europe’s list.” And while the US has also worked hard to address this issue, he added that “there have been enormous issues” stopping any reform. “It would be a good thing if these archaic rules change,” said Gretch. “The issue is how we deal with those political road blocks.”

afm • Issue 88 – January–February • www.afm.aero

TLF: Foreign investment

Also at the event, Andrew Herdman, director general of the Association of Asia Pacific Airlines (AAPA) backed Sullivan by saying that in terms of investment, other industries are not as constrained as aviation. He argued that it is wrong that airlines are not able to fully access international capital markets. He noted that codeshares and bilateral co-operation are ways to counteract that, and that market-based quasi-mergers, such as the deal between IAG, Vueling and Iberia, will shape the regulatory environment. Herdman argued that liberalisation is not an ideology. It is there to make the industry better; to deliver growth, innovation, competition and value. “Liberalisation hasn’t stopped the growth of travel… Liberalisation does not control the rate of growth,” he said. “Listen to the market, don’t tell the market what you think it should know.” Matthew Baldwin, director for aviation and international transport policy, DG Move, at the European Commission, admitted: “We are ambitious, but frankly, we have a lot to be ambitious about.” He also observed that aviation is a global industry, “it is treated like a local hairdresser”, adding: “We restrict the flow of capital with mid 20th Century concerns.” One place where rules have been relaxed is India, but it still only permits a maximum 49 per cent stake. Since the change, very few investors have shown interest, bar Etihad, which took a 24 per cent stake in Jet Airways last year. When asked why, Sullivan explains: “It’s complicated to invest in new business in India. India’s domestic aviation

market is a disaster zone. I don’t know if anyone is making money there; it’s the most expensive place to fly airplanes in the world.” He believes that India isn’t a fair reflection of what looser foreign investment rules could do for global industry, as India does not have a great number of investment opportunities. The best opportunity for wider investment is between the US and Europe. “We already have Open Skies between the countries, which I would argue should come after open currency. It’s far more dangerous for home country airlines to have an Open Skies provision than it is to have an open currency provision,” Sullivan puts forward. “It [foreign investment on a larger scale] will take a long time to change unless the legislators find a way to do that between like-minded countries. That might happen if politics don’t get in the way. “It has to start with the legislators giving policy guidance to the regulators so that they can then negotiate. Without that there is really no first step,” says Sullivan. “It’s finding opportunities for legislators to recognise how xenophobic they have been, and that it doesn’t really make sense in this day and age that aviation is a global business but it has to be locally controlled.” Although change will take time, it is for this reason that the industry should act now, because as Sullivan points out: “In reality this would take at least 10 years, even if they started now.”

afm • Issue 88 – January–February • www.afm.aero

FLEET OPS: Low-cost alliances

Connecting low-cost: What can alliances offer? With Star Alliance about to invite low-cost airlines into the fold and SkyTeam already recruiting, Mary-Anne Baldwin reports from London’s Future of Air Transport Conference to look at what alliances can, and can’t, offer to low-cost airlines.

t often seems that low-cost airlines are taking over the global air travel market. But while their model has been copied and success applauded, they have yet to infiltrate one corner of the market – that being airline alliances.

Today, more than half of the world’s air passengers travel on a carrier that is within an alliance. Yet, at the same time, LCCs – which typically avoid alliances – are growing in number and market share.

With this in mind, Star Alliance is looking to offer a new platform for low-cost and hybrid carriers, much as rival SkyTeam has done with SkyTeam Connect. In 2012, SkyTeam announced that it would be the first alliance to welcome low-cost and hybrid airlines. Like SkyTeam Connect, Star Alliance would not offer full membership to non-legacy carriers, but it does want to allow LCCs to partner with legacies in order for both to develop their networks. The benefit to

afm • Issue 88 – January–February • www.afm.aero

FLEET OPS: Low-cost alliances

low-cost subsidiaries and it is important for alliances to recruit those budget offshoots as well. Currently, 16 alliance members have low-cost derivatives. Some existing members are looking to build low-cost airlines and other potential new alliance members already have them.

Flying solo Global airline alliances – oneworld, Star Alliance and SkyTeam – are of great benefit to many full-cost carriers, which have used them to dramatically increase their network and, in turn, their passenger numbers. So why haven’t low-cost airlines wanted to come on board too? Speaking on behalf of budget airline Vueling, Fernando Estrada Maggie, strategy, alliance and business development director at IAG, says the airline “doesn’t need any alliance to grow”. He adds: “We see opportunities to grow on our own.” Mirroring the views of many low-cost airlines, he explains that joining an alliance would add to the airlines’ “costs and complexity”. Otherwise, it would consider it. In 2010, Vueling had 123 routes moving 11 million passengers, 47 per cent of which were on international flights. In 2013, it had 222 routes flying more than 17 million passengers, 57 per cent of which were on international flights. All this was through organic growth and its ties to British Airways (BA) and the IAG group. Indeed, airlines – specifically small and low-cost ones – are finding new ways to partner, which decreases the need for them to join alliances. For example, Vueling benefits from what is essentially a small alliance within the IAG group.

LCCs is that they could avoid membership fees while still building their routes. The budget carriers would also be exempt from rules that would limit other partnerships. Of course, those legacies connecting with the LCCs would also expand their networks. However, legacies have argued that it is unfair for LCCs to get this reduced service for free. Regardless of the criticisms, it does seem an astute way to encourage the growing market of low-cost airlines to join. In a bid to grab a share of the budget market, many legacy carriers are developing new

Estrada says that although Vueling remains independent of BA and retains “100 per cent of the decision making”, the parent group does bring a stronger brand awareness and a number of synergies. “The most tangible of which is the fleet order... We get a better price,” he boasts. Willie Walsh, CEO of the IAG Group, notes the importance of such consolidation. He says that the top three US airlines held 57 per cent of the market in 1996; by 2013 this had risen to 84 per cent (or 91 per cent if including a merged American Airlines and United Airways). The same airlines’ domestic capacity rose from 46 per cent in 1996 to 58 per cent in 2013 (or 68 per cent, including AA/UA).

afm • Issue 88 – January–February • www.afm.aero

FLEET OPS: Low-cost alliances

Too big to steer However, Isaiah Cox, CEO of WheelTug, argues that it is wise for LCCs to stay outside of alliances, claiming that the larger an airline, the longer it takes to adapt. He compares airlines to a greedy monster that wants to grow ever larger and more dominant. The larger it grows, the more monstrous it becomes. “A successful airline will keep its monster under control,” says Cox. He adds that not only are smaller airlines able to adapt quickly, they can also be the “master of a niche”. This is crucial to low-cost airlines, which are extremely competitive and share many commonalities yet rely on their individual company model and brand for differentiation. Like Vueling’s Estrada, Craig Kreeger, CEO of Virgin Atlantic, says his airline continues “to be open-minded about an alliance” but deems its partnership with Delta as more important. He argues that rather than irrefutably building partnerships, alliances can cut existing ties with other airlines. For example, joining an alliance could affect its bond with Delta. “Without being constrained by an alliance, we are the belle of the ball,” says Kreeger. Asked whether low-cost carriers will ever join alliances, SkyTeam’s VP of sales, Oretti notes that budget airlines are adopting the “bells and whistles” commonly attributed to legacy carriers, for example lounges and inflight connectivity. Horst Findeisen, VP of business development at Star Alliance, adds that, similarly, legacy carriers are adopting

low-cost attributes. With this dual convergence and the emergence of hybrid airlines, he believes that in the future we will not ask if low-cost airlines will join alliances as there will be no differentiation between the airlines. Indeed, if airlines do adopt a hybrid model, there will be no barriers to joining an alliance – theoretically. Findeisen notes that low-cost and legacy carriers are already connecting on flight operations and he believes this will increase. While clearly a full advocate of alliances, SkyTeam’s Oretti admits that when alliances first started, airlines wanted the same things as each other; now their needs are varied and “sometimes almost irreconcilable”. Findeisen observes that small airlines argue that only large airlines benefit from alliances, while the large airlines claim the opposite. However, he posits that because alliances are optional, all alliance carriers must see a benefit, otherwise they would not join. While some small alliance members have claimed to be overshadowed by larger carriers, Findeisen says that even small airlines can have their voice heard – be they low-cost or not. Indeed, oneworld’s VP of public relations, Michael Blunt, believes that in terms of profit, small airlines benefit most from additional flights feeding into their network. But perhaps the argument about size is no longer relevant – LLCs are not the small operations they once were, in fact they are often the market drivers.

afm • Issue 88 – January–February • www.afm.aero

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FLEET OPS: Charter legislation

Broken broking: The need for air charter legislation The UK market for air charter broking is risky, highly competitive and has increasingly low margins. Richard Mumford, partner at Stevens & Bolton, investigates.

rom the outside, air charter broking can look like folly. There is little or no regulation of the market and anybody with a telephone and a client list can set up in their bedroom and begin to trade as an air charter broker.

Yet the amounts of money involved can be colossal and the potential risks are enormous. So why is the market

unregulated? The US has addressed this issue and regulation is being introduced. So shouldn’t the UK follow suit? Broking is of course a broad concept, encapsulating a range of markets. The most common examples are in financial services. Both aviation and the financial services involve important transactions, however, the differences are profound.

afm • Issue 88 – January–February • www.afm.aero

FLEET OPS: Charter legislation hedged by restrictive rules) does not sign on behalf of the client as an agent. The broker does not handle money belonging to the client (unless subject to further heavy regulation, including the setting up of ring-fenced trust accounts). In general, that money goes directly to the insurer or other financial institution. Following strict rules, an agent is required to act in the best interests of the client and to disclose its commissions.

How air charter broking is conducted Unlike the financial markets, there is no single, settled approach to air charter broking. Because the market is unregulated, there is no legally defined role for the broker. The market has evolved from the fear of transparency and the fear that the broker might be used for introductory purposes and then cut out by the operator and the client. Indeed, without careful contractual protection, this may happen. This fear has a major impact on the risk profile adopted by most air charter brokers. Instead of acting as the facilitator of a direct relationship between the operator and client, the broker sits in the middle, often as a re-seller of aircraft capacity. This presents a massive risk to the broker. A major series charter can carry risk running to millions of pounds, and yet it might carry a margin yield of only a few per cent on the flight costs. Yet, the typical broker might sign the operator contract without disclosing the name of the underlying client, or indeed without expressly disclosing that there is an underlying client at all. The operator will generally insist on operating the flights on its own standard terms, using the law of its domicile. If the broker signs those terms as principal, he is liable if the client defaults.

The role of a financial broker

On the flip side, well-organised brokers teach clients terms that limit the liability of the broker in the transaction, particularly where the operator might fail to run the flights. However, because the broker failed to disclose the operator’s terms to the client, the client is unaware of those terms and can claim not to be bound by them. Furthermore, because the commission structure is generally undisclosed (and indeed in many instances deliberately concealed by the broker from both the operator and client), this arguably puts the broker in conflict with his duties to his client.

Contracts are entered into directly by the customer and the financial institution. The broker might have the delegated authority to write a policy on behalf of an insurer, but the broker is virtually never principal to a transaction and (save for very limited circumstances

Operators are vexed by a large number of ill-considered and unfulfilled enquiries. For example, some of the prices, available aircraft and legs are illusory. Why? Because the market is not regulated.

Financial broking is heavily regulated. No one can trade as a financial broker without authorisation from a regulator and without complying with a raft of rules, processes and principles.

afm • Issue 88 – January–February • www.afm.aero

FLEET OPS: Charter legislation

While Avinode, an internet-based trading platform for the purchase of charter aircraft, might seek to police the market, they have a tough job and limited ammunition with which to do so. By cutting out the middleman and offering an online alternative, Avinode is arguably a major threat to the broking community, but can it match human interaction? A broker will cut through swathes of information, matching the client to the appropriate operator, aircraft, route and timings. Does the broker add value to the transaction? A good one undoubtedly does. So why doesn’t the broker community have the confidence to operate on a fully disclosed basis? The answer is complex, but largely down to a lack of regulation. For all the safety rules and guidance by which airlines generally operate, there is a contrasting and incongruous freedom in other parts of the market. So is the market in crisis? Interestingly, the answer to that is ‘not really’. It has its problems; there is a lot of bad practice and sometimes risks cause catastrophic losses to brokers, operators and clients. Yet overall, the market does work and it has done so for many years. Nonetheless, there is a swell of expectation that it is time to introduce some form of regulation.

Why not the easy way? The easiest way for a broker to protect himself in the market is to work with absolute transparency. He should declare to both the client and operator that are at each end of the transaction. He could make the underlying client sign the contract with the operator; he could disclose its commissions; he could sign up the client on robust terms, limiting his liability and including covenants preventing it from cutting him out of the transaction or future transactions. Any broker who does all of these things will significantly reduce their risk – and, if the market is to be believed, will go out of business within a year. Because the market is unregulated, there is no glue holding the broker to the transaction. The operator may fear that they will lose business; nothing stops the operator and client from simply getting together and forming an agreement without the broker who introduced them. This contrasts with other markets where the transaction and broker are regulated, which keeps the broker involved in many cases. Perhaps, therefore, a regulated market would benefit brokers, or at least the good ones. However, one should be careful what they wish for. At the beginning of the century, the UK government of the day sought to simplify the regulation of financial services by

afm • Issue 88 – January–February • www.afm.aero

FLEET OPS: Charter legislation

consolidating various markets under one regulator, the Financial Services Authority. ‘Simplification’ came with a 9,000 page rulebook. Leaving regulation to the public sector, which has little or no understanding of the market, asks the market to conform to regulation, not the other way around. It only takes a moment’s consideration of how the government addresses the aviation market (runway capacity, emissions trading, passenger duties, the list is long) to realise that sitting back and waiting for the inevitable tidal wave of financial services-style regulation could be a bad idea. So what is the alternative? The market could carry on just as it is and the government may never get around to imposing regulation. Alternatively, operators could seek to minimise risk by either keeping their brokers on as principals or as jointly liable for the actions of the underlying client. Brokers could move the sliding scale of risk by increasing the degree of transparency between operator and client. Or, clients could minimise risk by demanding financially secure operators and transparency on operator terms. If that is not sustainable (and certainly an increasing proportion of the market considers that it is not), then the

real alternative is for the market to regulate itself. If we look back at the old days of financial regulation, the markets were self-regulated. That became politically unacceptable, and the Financial Services Authority was born, staffed with civil servants who didn’t understand and could not effectively police the market. The banking crisis, payment protection insurance, interest rate swap claims, LIBOR and a host of other major market disasters suggest it may not have worked. So, with hindsight, perhaps self-regulation wasn’t so bad. It is time to debate how to take things forward. What are the benefits of regulation? What are the costs and impact on market participants, from the smallest bedroom broker to the major brands? What would regulation achieve? Do the benefits outweigh the costs, administration and other downsides? How would regulations be formed, what would they look like and who would police them? Do we risk simply sending much of the market offshore? In effect, a business case needs to be put together so that the future can be properly assessed. It would be wise to do this now, while the issue is live, rather than waiting until the government shines its spotlight onto the market. By then, the opportunity to control and mould the market might have been lost.

afm • Issue 88 – January–February • www.afm.aero

MRO: OEM & MRO partnerships

Complex coupling: OEM and MRO partnerships Relationships between manufacturers and MRO providers are often complex; companies can be both competitors and partners at the same time. Chris Kjelgaard investigates.

he maintenance, repair and overhaul (MRO) business – which includes engines, components and airframes – has changed profoundly over the past 15 years. Once, MRO shops – whether airline-affiliated or independent – were each other’s greatest competitors, but nowadays original equipment manufacturers (OEMs) represent significant and sometimes overwhelming competition for them both. According to Ludovic Loisel, SVP of strategy for Air France Industries KLM Engineering & Maintenance (AFI KLM E&M), there are several reasons why OEMs emerged as major competitors to MRO companies.

While new aviation technologies have become highly expensive for OEMs to develop, competition for the initial sale of aircraft, engines and components has also intensified considerably – whether the sale is to an airline or an aircraft-programme integrator. “With new aircraft platforms, the choice is much less than before,” says Loisel. In aircraft programmes such as the 787, 777X and A350 XWB, the airframer asks a limited number of major suppliers to assume some of the huge financial risks of development. Agreeing to risk-share allows a component or engine manufacturer to request a ‘privileged position’, ensuring that, where MRO is concerned, it gets first access to airline operators, explains Loisel.

afm • Issue 88 – January–February • www.afm.aero

MRO: OEM & MRO partnerships warranties that they can’t be bothered” to enter the low-margin, labour-intensive airframe MRO business. So airframe MRO work has remained very competitive. That said, because they are intimately familiar with all the design and engineering data involved, aircraft manufacturers see a profitable niche role as integrators of the operating and maintenance of their aircraft. For a long time, Boeing and Airbus have owned specialist companies involved in training, as well as companies, such as Jeppesen, which provide operational information and services. Now, notes Loisel, Airbus and Boeing are progressively offering integrated-support products for their aircraft. Meanwhile, “they are increasingly leveraging their position with component OEMs as well”. Keen to maximise the return on the intellectual property they have created, the airframers “don’t want to stick to their [traditional] role as airframe integrators”.

Rolling out the service The best-known example of an aerospace OEM successfully competing for the MRO aftermarket is Rolls-Royce. Like other engine OEMs, it first sought to understand the flow of parts for its engines. Once it had done so, it created partnerships with major engine-MRO shops in strategic locations worldwide in order to offer a reliable, highquality and guaranteed MRO service. Mark Kerr, Rolls-Royce’s head of marketing for services, says the company’s MRO network and service offering has evolved hugely in the past 25 years. In the 1980s, Rolls-Royce only had its main MRO facility at Derby and “a thin network of regional representatives” scattered throughout the world. Today, in addition to its Derby facility and smaller shops elsewhere, Rolls-Royce has a network of joint ventures and partnerships in: Hong Kong (with Cathay Pacific Airways); Singapore (with Singapore Airlines Engineering Company); Europe (with Lufthansa Technik); and North America (with American Airlines). When ordering a new aircraft type, airlines now have less – or perhaps no – ability to select a particular OEM for their equipment fit and even less opportunity to haggle over MRO providers and MRO cost. “The airline community fears a maintenance-cost boom following a restricted MRO competition,” emphasises Loisel. To some degree this is inevitable, says Ernest Arvai, president of aviation consulting firm, Arvai Group: “OEMs have been forced to discount massively on list prices – these are now meaningless – and now they have to make their money in the aftermarket.” Airframe manufacturers are involved in this process too, although they don’t perform much MRO themselves. Paul Brooker, chief technical manager of IBA Group, says airframers “are so behind in their backlog and their

Its latest partnership is with Mubadala Aerospace in Abu Dhabi. “We’re very keen to support the development of engine MRO capability in the region, supporting our own online activities and spare-engine capabilities,” says Kerr, maintaining that such partnerships bring important benefits to both the OEM and its MRO partners. For Rolls-Royce, the benefit is “about getting an engine restored and back into service as quickly as possible,” claims Kerr. Rather than being done by Rolls-Royce itself, Kerr says: “When we do a deal with a long-term service agreement, the engine maintenance generally will be done by a partner in the network.” He adds: “In Hong Kong, they’re not going to fly an engine to Derby – they’re going to take it across the airport to HAESL [Hong Kong Aero Engine Services].”

afm • Issue 88 – January–February • www.afm.aero

MRO: OEM & MRO partnerships

Air France KLM Component Solutions.

For the MRO partner, the benefits are increased business volume and detailed knowledge of Rolls-Royce’s engines – information it can use to win business other than that brought by Rolls-Royce itself. Kerr says Rolls-Royce does not have a controlling interest in any of its MRO joint ventures and each acts as an independent company, responsible for its own accounting and profit and loss performance: “They compete [against Rolls-Royce] for workloads of time and materials business, as well as being service providers to us.”

Head to head Complex relationships between OEMs and airlines are common in the MRO business. OEMs supply airlines with most of their parts – and the OEMs’ share will only increase as warranty provisions progressively ban the use of PMA parts, says Brooker. Additionally, while OEMs and MRO compete, they also need each other’s knowledge and experience. MRO shops need manufacturers to provide engineering data and repair instructions – even if an OEM is sometimes unwilling to provide it. Last year, the US Federal Aviation Administration reminded OEMs and other aviation authorities of their obligation to provide such data to ensure safe maintenance and operation of commercial aircraft, Loisel notes. Meanwhile, however, each OEM is “desperate” to obtain as much operational data as it can from airlines flying its aircraft, as well as the MRO shops that maintain them, says Brooker. He recalls Boeing’s initial attempts to provide fault-reporting and fault-isolation manuals for the 757 and the 737 Classic families: “They were absolute rubbish, and

the likes of Monarch, BA and Lufthansa rewrote the books for them,” turning the manuals into useful faultidentification tools for maintenance technicians. Co-operation between airlines and OEMs provides business opportunities both for the airline’s MRO shop and for the manufacturer. As a sizeable operator of the 777, Air France KLM was able to set up a joint component support programme with Boeing for the 777. According to Loisel, this gave AFI KLM E&M the opportunity “to leverage the strength of the airframer” as the first entity contacting customers when selling its aircraft. Boeing acts as an integrator for the support programme and airline customers are reassured and “attracted” by the participation of AFI KLM E&M as the specialist componentsupport provider.

Co-operation is key Loisel says exercises in OEM co-operation can help an MRO facility to increase its business, in two ways. Firstly, the MRO shop can sometimes persuade the OEM to sanction repairs rather than just selling more parts, and by doing so can save money for customer airlines. Secondly, a partnership with an OEM can give the MRO facility earlier access to a potential customer, thus offering a competitive edge. While being a competitor of GE Aviation on different engine types (especially the GE90), AFI KLM E&M also has co-operative agreements with GE – notably on parts procurement and repairs. His company also has a joint venture in Dubai with Aircelle, Safran’s nacelle and aerostructures unit. This company helps ensure that Aircelle can provide MRO to service its guarantees when required.

afm • Issue 88 – January–February • www.afm.aero

MRO: OEM & MRO partnerships

Air France KLM Engine Solutions.

Even when an OEM customer is an airframer rather than an airline (for example, when an engine is a sole choice on an aircraft type), its position can give it a powerful advantage in the MRO market. As the integrator responsible for designing its product and collecting all the relevant, subsequent operational data, it has uniquely extensive intellectual property. This provides a compelling selling point. “On average, it would take any individual operator of a Trent fleet about 100 years of operational experience to replicate the experience [Rolls-Royce receives] from our network in one year,” says Kerr. Rolls-Royce thinks it is only fair that it should seek as much MRO work on its engines as it can, because its outlook is different from that of third-party shops – as are its advantages and responsibilities. By pricing its TotalCare support packages on a dollar-per-flight-hour rather than a time and materials basis, “We’re incentivised to do things to the engine that makes it as reliable as possible,” remarks Kerr. Independent shops operating on a time and materials basis don’t have this incentive, he says. Rolls-Royce believes its data shows that the engines supported by TotalCare stay on wing 20–30 per cent longer than do Rolls-Royce engines handled independently by airlines; and that, for these engines, the total life-cycle costs are lower. One reason is that its contracts “take on board all the service directives, shop and repair activity that needs to be included,” says Kerr. Another benefit Rolls-Royce can offer airlines – although some MRO shops can too – is providing additional spare engines if customers need them. “That tends to be at our expense,” says Kerr. “There is a lot of risk transfer [to

Rolls-Royce] involved” in its TotalCare agreements. “We get feedback from customers that they like this.” Also important is that Rolls-Royce adapts to changing times. Its TotalCare packages have changed significantly since Rolls-Royce introduced the concept 15 years ago. TotalCare has evolved from a fixed calendar-term contract that left an engine in whatever condition it was in on the day the contract ended, to customised packages that are based on the engine life. Nowadays, a TotalCare deal can continue even after the engine’s owner sells it, by offering the next operator the opportunity to continue coverage by transitioning to its own TotalCare agreement. “Effectively, the engine has life in it at any particular point and there is life in the contract,” says Kerr. At the time of press, the TotalCare concept was about to evolve again to let Rolls-Royce take account of customer requirements at different stages of every engine’s life cycle – requirements customers may not yet even know they will need. Component MRO is evolving too, says Arvai. As smaller components are becoming throwaway, it is more cost-effective for the OEM to replace them entirely with new components than to repair them. If funded effectively and priced competitively, such exchange programmes will represent the future and will help OEMs to dominate the component MRO sector, says Arvai. The OEM is the most competent entity to evaluate whether a component should be repaired or replaced. Because it produces in volume, it will be able to replace a component cheaper than an independent shop, and the OEM’s repair tag is acceptable everywhere.

afm • Issue 88 – January–February • www.afm.aero

MRO: Cutting costs

Back to black: Innovative ways to cut airline costs Although we have seen signs of economic recovery, many airlines are still operating at a loss and are taking radical steps to cut costs and increase profits. Daniella Horwitz reports on how airlines can safely and effectively save money.

he end of 2013 saw Australia’s national carrier, Qantas, declare that it would axe at least 1,000 jobs and trim the pay of its CEO, Alan Joyce, and its board as it tries to achieve cost savings of $2bn over the next three years.

In the US, United Airlines announced plans to reduce costs by $2bn annually, and increase its revenue by $700m.

Flybe, a British low-cost regional airline, plans to close six bases as part of its cost-cutting plan to save £85m ($139m) over the next few years. Unfortunately, although market growth is picking up, this sample indicates that airlines are still bleeding money and new measures are needed to staunch the wound. LCCs seem to have the edge on cost-cutting, thanks to cheaper operating costs and quicker turnaround times.

afm • Issue 88 – January–February • www.afm.aero

MRO: Cutting costs But legacy carriers have been copying the LCC model and many customers now feel there is little difference between them on short-haul flights. KPMG’s research into airline unit costs reveals that the difference between the cost base of LCCs and legacy airlines has narrowed significantly. KPMG’s 2013 Airline Disclosures Handbook, which reviews the financial reports of the world’s top 25 airlines and six of the largest low-cost airlines, shows that the cost gap between legacies and LCCs shrunk from 3.6 to 2.5 US cents per available seat kilometre (ASK) between 2006 and 2011, a reduction of over 30 per cent. However, that cost-saving has stalled and now airlines must find other ways to claw back the cash if they are to survive. But unfortunately there is no panacea. A solution has to be

MRO labour costs are also an important consideration. In the past, US airlines saved money by moving airframe maintenance overseas to countries such as South America. However, rising offshore labour rates, the cost of getting the aircraft to the location and paying for offsite management have mitigated much of the savings. Nowadays, airframe maintenance tends to stay closer to home. MRO software is another area in which airlines can save money. Swiss AviationSoftware (a subsidiary of SWISS) provides AMOS, a maintenance management software solution for airlines and MRO providers. Ronald Schaeuffele, CEO of Swiss-AS, says: “AMOS helps our customers to optimise all kinds of processes in order to reduce costs – material and labour – as well as to maximise the availability of the fleet.”

Wolfgang Reinert, LHT spokesman

It is very important to really understand the individual needs of customers. A low-cost carrier with a homogeneous narrowbody fleet needs different services and MRO models than a classic airline tailor-made to the airline’s size, fleet type and business model. In addition, there are many cost factors over which airlines have no control – fuel price being the main culprit. IATA forecasted that 2013’s global airline fuel bill would hit $214bn, accounting for around 31 per cent of operating expenses at $108 per barrel (Brent). The good news is that lower jet fuel prices are forecast for 2014 and there are other areas where considerable savings can still be made – most notably MRO, software management and fuel management.

Optimising MRO According to Germany-based Lufthansa Technick (LHT), one of the world’s leading MRO providers, MRO can cost 10–20 per cent of an airline’s operating costs. Wolfgang Reinert, LHT spokesman, says the right type of MRO can really help airlines to lower their cost bases by optimising the MRO structure and maintenance schedules of the fleet. “It is very important to really understand the individual needs of customers. A low-cost carrier with a homogeneous narrowbody fleet needs different services and MRO models than a classic airline, which runs mixed fleets of narrow- and widebody aircraft and which often keeps at least certain MRO capacities in-house... It is the common task of MRO suppliers and customers to analyse precisely the needs and possibilities to optimise the maintenance cost structure.” MRO savings can be achieved by outsourcing requirements to an MRO supplier, by optimising maintenance schedules, and by increasing repair instead of replacement.

Reducing DMC AMOS modules can reduce direct maintenance costs (DMC) and increase aircraft utilisation, which in turn will deliver higher revenue. In addition, airlines can plan for their material requirements; this means they can reduce their consumable and rotable stock levels, identify surplus and avoid keeping the aircraft on the ground. AMOS also offers warranty tools to optimise cost recovery and enhance cost control functions. The programme can give accurate calculations, allowing airlines to reach the maximum intervals between maintenance, therefore keeping the aircraft flying for longer and potentially reducing the number of ship visits. Maintenance activities are timed to the flight schedule and analysis of component and airframe trends means that airlines can make proactive (rather than reactive) maintenance plans. The system can be customised to the user’s profile and, making it yet more user-friendly, the programme offers technical assistance whenever the user needs help. What’s more, AMOS is an adaptable product, continuously moulding itself to meet the changing requirements of a big user community and fast-moving industry. Generally, the most up-to-date technology saves airlines time and money. “Technology, in the context of maintenance software, has often eased the daily business of mechanics,” says Schaeuffele. “New technology allows the use of mobile devices, [the] browsing of manuals instead of pouring over paper-based documents, commissioning with handhelds and computerised diagnostic systems.”

afm • Issue 88 – January–February • www.afm.aero

MRO: Cutting costs

Completing night maintenance records at Lufthansa’s Hamburg base.

But as Reinhardt points out, technology can be a double-edged sword. “On the one hand, new technologies usually need less maintenance than older generations and have functions to detect failures or even avoid them through real-time condition monitoring. “On the other hand, this increased reliability has been reached by the use of more complex technologies, which, in case of necessary maintenance, need access to IP-relevant data and also the appropriate skills of MRO staff and modern technical equipment, which has to be financed”. He notes that there has been an increase in the number of IT solutions used in MRO, starting from MRO management systems to condition-monitoring systems or electronic error code reading and other tools.

Saving fuel Managing and controlling operational fuel through the use of an IT system can provide airlines with a significant cost advantage. Discretionary fuel management is a well-known ‘best practice’ area, helping an airline to save weight and reduce fuel burn. Optimised Systems and Solutions (OSyS), a UK-based subsidiary of Rolls-Royce, provides a fuel management solution to shape, support and underpin an airline’s fuel management programme. Clients include Qatar Airways, easyJet, Virgin Atlantic and US Airways, among others. Siow Litingtung, OSyS fuel consultant, explains that to implement a successful fuel-saving campaign, it is crucial to address pilots’ concerns and support them with assured data analysis. This gives them confidence to run operational models that avoid risks but also achieve the desired outcome. Graham Smith, analytical capability engineer at OSyS, says that route analysis is an initial step in understanding the factors that

contribute to the difference between actual fuel burn and that estimated from the flight plan. One approach is to examine the average variation of fuel burn against that predicted. Looking at elements such as traffic congestion, seasonal variation and even the use of airspace will generate another level of understanding, allowing users to assess the potential risks. Smith explains that once all these factors have been assessed, fuel loads and burn profiles can be generated, along with calculations on how much fuel should remain once the aircraft has landed. A comparison of the actual fuel upon landing against the ideal amount will then provide a good idea of where savings can be made. It is well known that engine washing reduces fuel consumption, but data needs to be analysed in order to calculate the optimum time between engine washes. Smith says: “Such a programme requires robust data collection but delivers clear operational benefits; when to wash, regular feedback of the operational savings achieved and year-to-year monitoring to ensure that the value of the initiative is maintained.” Litingtung points out that an effective data analysis programme can be a powerful ally for airlines in a highly competitive and unforgiving business environment. “Utilised appropriately, data is the key to unlocking complexity, providing insights into the business, identifying potential cost reductions and underpinning accurate forecasts. This enables better operational planning, budgeting and evidence-based decision making.” There is no single solution for increasing airline profitability, but the market is offering an increasing amount of approaches to help carriers cut costs and, hopefully, get back to black.

afm • Issue 88 – January–February • www.afm.aero

INDUSTRY DATA: Deals

Industry data

47 50

Aircraft deals

List prices and lease rates

Firm orders

Engine data Data supplied by IBA’s JetData. www.ibagroup.com

Aircraft deals 21 October to 2 January MSN

Manfacturer

5808 35307 41527 1112 786 285 303 428 41818 1140 2457 5822 927 35134 2222 25052 398 5252 5832 28111 2156 5642 1439 33014 55179 3105 1159 5830 42101 593 572

Airbus Boeing Boeing ATR Airbus ATR ATR ATR Boeing Airbus Airbus Airbus Airbus Boeing Airbus Boeing Airbus Airbus Airbus Boeing Airbus Airbus Airbus Boeing Boeing Airbus Airbus Airbus Boeing ATR ATR

Model A321-200 787-8 777-300ER 72-600 A330-300 72-200 72-200 72-200 777-300ER A319-100 A320-200 A320-200 A330-200 737-800 A319-100 737-400SF A330-200 A320-200 A320-200 767-300ER A320-200 A320-200 A320-200 737-800 717-200 A320-200 A319-100 A320-200 777-300ER 72-500 72-500

Current Owner/Operator EVA airways Aeromexico Thai Airways LIAT Air Asia. Leased from ILFC Douniah Airlines. Leased from Helitt Lineas Aeras Royal Air Maroc. Leased from Helitt Lineas Aeras Darwin Airline. Leased from Helitt Lineas Aeras Kenya Airways Air Serbia. Leased from Etihad Wow air. Leased from AWAS VietJetAir Aril Air. Leased from Pembroke Sunwing Airlines. Leased from Thomson Airways Aurora. Leased from GECAS Jettime. Leased from Kahala Thomas Cook airlines. Leased from ILFC Chengdu Airlines. Leased from CALC China Southern Airlines Ikar. Leased from Nordwind Turkish Airlines Evelop Airlines. Leased from GECAS Air Armenia. Leased from BOC Enter Air. Leased from CIT Cobham Aviation. Leased from BCC Shaheen Air. Leased from ILFC Air Serbia. Leased from Etihad Citilink Garuda Indonesia Ethiopian Airlines Passaredo Transportes Aereos Passaredo Transportes Aereos. Leased from Aircraft International Renting

Date 22/10/2013 22/10/2013 22/10/2013 23/10/2013 24/10/2013 24/10/2013 24/10/2013 24/10/2013 25/10/2013 28/10/2013 29/10/2013 29/10/2013 29/10/2013 30/10/2013 31/10/2013 31/10/2013 31/10/2013 01/11/2013 01/11/2013 01/11/2013 02/11/2013 02/11/2013 04/11/2013 04/11/2013 04/11/2013 05/11/2013 06/11/2013 07/11/2013 07/11/2013 08/11/2013 09/11/2013

Source: IBA’s JetData.

afm • Issue 88 – January–February • www.afm.aero

INDUSTRY DATA: Deals Data supplied by IBA’s JetData. www.ibagroup.com

Aircraft deals 21 October to 2 January MSN 636 5844 5849 24492 37768 37769 813 658 1464 802 1119 37262 33465 1429 28202 529 1180 1247 3281 5841 5857 407 1446 2602 692 1466 5873 1437 35145 35132 133 19000373 1115 32738 358 27902 5868 5879 19000649 3252 1113 5901 529 2366 19000373 19000372 24546 33622 364 1129 1132 5823 39334 41308

Manufacturer Model ATR Airbus Airbus Boeing Boeing Boeing ATR ATR Airbus Airbus ATR Boeing Boeing Airbus Boeing Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Boeing Boeing Airbus Embraer ATR Boeing Airbus Boeing Airbus Airbus embraer Airbus ATR Airbus ATR Airbus Embraer Embraer Boeing Boeing Airbus ATR ATR Airbus Boeing Boeing

72-500 A320-200 A321-200 737-300 737-800 737-800 72-500 72-500 A330-300 A330-200 72-600 737-800 737-700 A319-100 737-400 A330-200 A319-100 A319-100 A319-100 A320-200 A320-200 A330-300 A330-200 A320-200 A330-300 A330-200 A320-200 A330-300 737-800 737-800 A380-800 E190AR 72-600 737-700 A330-200 767-300ER A319-100 A320-200 E190 A319-100 72-600 A320-200 72-500 A320-200 E190 ERJ-190AR 737-300 737-800 A330-200 72-600 72-600 A320-200 737-800 737-800

Event Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Operating lease Sale & leaseback Sale & leaseback Sale & leaseback

Current Owner/Operator

Date

BQB Lineas Aereas Vanilla Air EVA Airways Grand Cru Airlines. Leased from ILFC Hainan Airlines. Leased from GECAS Hainan Airlines. Leased from GECAS EWA Air. Leased from Air Austral MWG Ltd. Leased from NAC Asiana Airlines Meridiana. Leased from CIT Garuda Indonesia Sunwing Airlines. Leased from Thomson Airways Jettime. Leased from ALC Air Cote d-Ivoire. Leased from ACG Tajik Air Turkish Airlines Myanmar Airways. Leased from ILFC Myanmar Airways. Leased from ILFC Aurora. Leased from GECAS Avianca Brazil Thai Smile Air Transat. Leased from ILFC Air Namibia. Leased from Intrepid Turkish Airlines. Leased from BOC AirAsia X. Leased from ILFC Air Namibia. Leased from Intrepid Aeroflot Iberia. Leased from BOC Sunwing Airlines. Leased from SMBC Sunwing Airlines. Leased from Thomson Airways Emirates. Leased from Doric TAME. Leased from Denim Air Azul. Leased from NAC SAS. Leased from GECAS Aerolineas Argentinas. Leased from ILFC Privilege style. Leased from AWAS Sichuan Airlines Pegasus KLM Cityhopper. Leased from BOC Air Serbia. Leased from CIT Azul Linhas Vanilla Air Blue Island Bangkok Airways TAME. Leased from Jetscape TAME. Leased from Jetscape Atlantic Airlines Orenair (Orenburg Airlines) Aerolineas Argentinas. Leased from ILFC Aer Arann Garuda Indonesia China Eastern Airlines Malaysia airlines China Eastern Airlines

09/11/2013 12/11/2013 12/11/2013 12/11/2013 12/11/2013 12/11/2013 12/11/2013 13/11/2013 14/11/2013 15/11/2013 15/11/2013 16/11/2013 18/11/2013 19/11/2013 19/11/2013 19/11/2013 20/11/2013 20/11/2013 20/11/2013 20/11/2013 20/11/2013 20/11/2013 21/11/2013 22/11/2013 22/11/2013 22/11/2013 25/11/2013 25/11/2013 26/11/2013 27/11/2013 27/11/2013 27/11/2013 27/11/2013 28/11/2013 28/11/2013 28/11/2013 29/11/2013 29/11/2013 29/11/2013 03/12/2013 16/12/2013 17/12/2013 19/12/2013 23/12/2013 23/12/2013 23/12/2013 02/01/2014 02/01/2014 02/01/2014 02/01/2014 02/01/2014 23/10/2013 24/10/2013 25/10/2013

Source: IBA’s JetData.

afm • Issue 88 – January–February • www.afm.aero

INDUSTRY DATA: Deals Data supplied by IBA’s JetData. www.ibagroup.com

Aircraft deals 21 October to 2 January MSN

Manufacturer Model

Event

Current Owner/Operator

Date

5821 136 136 5833 5882 39932 5852 41792 134 41310 41311 39886 1450 1470 5882 31177 28416 387 28492 27904 15272 25258 836 25530 25532 25536 265 28621 24627 885 24118 27156 29487 37769 55152 55037 883 53002 434 24548 24844 575 28151 7700 7705 55038 23974 35 400 28172 837 28085

Airbus Airbus Airbus Airbus Airbus Boeing Airbus Boeing Airbus Boeing Boeing Boeing Airbus Airbus Airbus Boeing Boeing Airbus Boeing Boeing Bombardier Boeing Airbus boeing Boeing Boeing ATR Boeing Boeing Airbus Boeing Boeing Boeing Boeing Boeing Boeing Airbus Boeing ATR Boeing Boeing ATR Boeing Bombardier Bombardier Boeing Boeing ATR ATR Boeing Airbus Boeing

Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sale & leaseback Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease

Etihad Airways Emirates Emirates Jazeera Airways Etihad Airways. Leased from Avolon Chna Eastern Airways China Eastern Airlines Xiamen Airlines Emirates Garuda Indonesia Air China China Eastern Airlines China Airlines Malaysia airlines Etihad American Airlines GA Telesis Philippine Airlines Falcon Aviation Inc Automatic LLC Bombardier SF Airlines EAT Leizig Ukraine International Airlines Ukraine International Airlines Ukraine International Airlines Farnair Transaero Airlines Boeing Etihad Sky Holding Company Bank of Utah. Petrus Asset Management GECAS Delta Air Lines Delta Air Lines Ames Camo Delta Airlines Island Air Reliance Aircraft. Sold for Part-out Reliance Aircraft Passaredo Transportes Aereos WFBN Elite Airways Elite Airways Delta Air Lines KMW Leaseing DGI LLC WFBN L-3 Communications Advanced Aviation EAT Leizig Cara Capital corp

30/10/2013 30/10/2013 30/10/2013 01/11/2013 01/11/2013 08/11/2013 12/11/2013 13/11/2013 14/11/2013 15/11/2013 15/11/2013 20/11/2013 01/12/2013 02/12/2013 17/12/2013 18/12/2013 21/10/2013 22/10/2013 23/10/2013 24/10/2013 24/10/2013 30/10/2013 30/10/2013 30/10/2013 30/10/2013 30/10/2013 30/10/2013 31/10/2013 01/11/2013 01/11/2013 04/11/2013 04/11/2013 04/11/2013 04/11/2013 04/11/2013 07/11/2013 08/11/2013 08/11/2013 08/11/2013 10/11/2013 10/11/2013 10/11/2013 12/11/2013 13/11/2013 13/11/2013 14/11/2013 14/11/2013 14/11/2013 14/11/2013 18/11/2013 18/11/2013 20/11/2013

A320-200 A380-800 A380-800 A320-200 A320-200 737-800 A320-200 737-800 A380-800 737-800 737-89L 737-800 A330-299 A330-300 A321-200 737- 800 777-200ER A340-300 737-400 737-300 CRJ-900 757-200 A300B4-600 767-300ER 767-300ER 767-300ER 72-200 737-800 757-200 A330-200 757-200 737-400 737-400 737-800 717-200 717-200 A320-200 MD-82 72-200 737-400 767-300ER 72-500 737-400 CRJ-200ER CRJ-200ER 717-200 767-200ER 42-300 42-300 757-200 A300B4-600 737-300

Source: IBA’s JetData.

afm • Issue 88 – January–February • www.afm.aero

INDUSTRY DATA: Deals Data supplied by IBA’s JetData. www.ibagroup.com

Aircraft deals 21 October to 2 January MSN 27674 3179 28573 23991 2828 34320 4768 410 431 797 1019 943 35131 32740 30724 4661 35275 29669 30719 23788 2540 2596 32907 34902 25052

Manufacturer Model Boeing Airbus Boeing Boeing Airbus Boeing Airbus ATR ATR Airbus Airbus Airbus Boeing Boeing Boeing Airbus Boeing Boeing Boeing Boeing Airbus Airbus Boeing Boeing Boeing

737-400 A319-100 737-300 737-400 A320-200 737-700 A319-100 72-200 72-200 A300B4-600R A330-200 A330-200 737-800 737-800 737-800 A320-200 737-800 737-800 737-800 737-300 QC A320-200 A320-200 737-800 737-800 737-400F

Event Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold off lease Sold with lease Sold with lease Sub-leased Sub-leased Sub-leased Sub-leased Wet-leased Wet-leased Wet-leased Wet-leased Wet-leased Wet-leased Wet-leased Wet-leased Wet-leased

Current Owner/Operator

Date

Petrus Asset Management Donavia WFBN NewGen Airways Aegean Airlines Transaero Airlines Aviation Link Company STS Component Solutions STS Component Solutions EAT Leipzig Archway Aviation Archway Aviation Sunwing Airlines. Leased from Thomson Airways Sunwing Airlines. Leased from Travel Service Sunwing Airlines. Leased from Smartwings BQB Lineas Aereas. Leased from Vueling Sunwing Airlines. Leased from Travel Service Sunwing Airlines. Leased from Travel Service Sunwing Airlines. Leased from Travel Service Air Kasai. Leased from Gomair AirBlue AirBlue Sunwing Airlines. Leased from Smartwings Canjet Airlines. Leased from Transavia TNT Airways. Leased from Jet Time

21/11/2013 22/11/2013 22/11/2013 24/11/2013 28/11/2013 30/11/2013 01/12/2013 02/12/2013 02/12/2013 20/12/2013 28/10/2013 06/11/2013 28/10/2013 12/11/2013 18/11/2013 28/11/2013 22/10/2013 23/10/2013 25/10/2013 31/10/2013 01/11/2013 01/11/2013 04/11/2013 05/11/2013 07/11/2013 Source: IBA’s JetData.

Firm orders – From 21 October 2013 to 3 January 2014 Manufacturer Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus ATR ATR ATR Boeing Boeing Boeing Boeing Boeing

Variant

Customer

A321 A321neo A319 A320 A321 A320 A319 A380 A330-200F A330-200F A320neo A350 A320 A330-300 A350-1000 A380-800 A320 72-600 72-600 72-600 737-800 737-900ER 737 MAX BBJ2 787

JetBlue JetBlue Oha Centre Street Aircraft Holdings EasyJet AIG AIG Lerner Enterprises Emirates Qatar Airways Etihad Etihad Etihad Private customer AirAsia Air Caraibes Emirates Zhejiang Loong GECAS Alpha Star Aviation PLC Aerolineas Argentinas EL AL Israel Airlines Unidentified Private customer Korean Air

Data supplied by IBA’s JetData. www.ibagroup.com

Order date 29/10/2013 29/10/2013 30/10/2013 31/10/2013 06/11/2013 06/11/2013 12/11/2013 17/11/2013 17/11/2013 17/11/2013 17/11/2013 17/11/2013 18/11/2013 18/12/2013 20/12/2013 23/12/2013 30/12/2013 18/11/2013 19/11/2013 16/12/2013 21/10/2013 22/10/2013 23/10/2013 24/10/2013 25/10/2013

No of Aircraft 15 20 1 6 4 10 1 50 5 1 36 50 1 25 3 50 20 5 1 5 20 2 42 1 1

Engines Trent XWB Trent XWB PW127M PW127M PW127M CF CF CF CF GE

Source: IBA’s JetData.

afm • Issue 88 – January–February • www.afm.aero

AIRPORTS INDUSTRY & ROUTES:DATA: Airport List charges prices

Firm orders – From 21 October 2013 to 3 January 2014 Manufacturer Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Bombardier Bombardier Bombardier Comac Embraer Embraer

Variant

Customer

777-300ER 747-8 737 MAX 737 MAX 737 MAX BBJ 777F 787-10 777X 737-700 777X 787-8 737 MAX 737-800 737 MAX 787-10 787-9 767-300F 777-9X 737 MAX 737-700 737-800 747-8 777-300ER 737 MAX 737-800 747-8 777-300ER 747-8 737 MAX 737-800 737 MAX 737-800 Q400 CRJ900 CS300 C919 E190 E175

Korean Air Korean Air Unidentified Southwest Unidentified Private customer Etihad Etihad Etihad Unidentified Lufthansa TUI Unidentified Unidentified Unidentified British Airways British Airways FedEx Cathay Unidentified Unidentified Unidentified Unidentified Unidentified Unidentified Unidentified Cathay Cathay Transaero Airlines Unidentified Unidentified flydubai flydubai Nok Air China Express Airlines Iraqi Airways Industrial Bank Financial Leasing BA city flyer American Airlines

Data supplied by IBA’s JetData. www.ibagroup.com

Order date

No of Aircraft

Engines

25/10/2013 25/10/2013 04/11/2013 04/11/2013 11/11/2013 15/11/2013 17/11/2013 17/11/2013 17/11/2013 18/11/2013 19/11/2013 19/11/2013 02/12/2013 02/12/2013 03/12/2013 05/12/2013 05/12/2013 12/12/2013 20/12/2013 21/12/2013 21/12/2013 21/12/2013 21/12/2013 21/12/2013 26/12/2013 26/12/2013 27/12/2013 27/12/2013 27/12/2013 30/12/2013 30/12/2013 31/12/2013 31/12/2013 19/11/2013 02/12/2013 04/12/2013 28/10/2013 26/11/2013 12/12/2013

6 5 6 20 4 1 1 30 25 3 20 2 5 4 8 12 6 2 21 6 8 75 2 1 20 20 1 3 4 10 25 75 11 2 3 5 20 1 60

GE GE CF CF CF CF GE GE GE GE CF CF CF RR GE GE CF CF CF GE GE CF CF GE GE GE CF CF CF CF PW150A GE PW1500G LEAP1C PW1900 PW1900

Source: IBA’s JetData.

Firm orders – From 21 October 2013 to 3 January 2014

Data supplied by IBA’s JetData. www.ibagroup.com

Source: IBA’s JetData.

afm • Issue 88 – January–February • www.afm.aero

MRO-network AIRLINE E&M: CHINA & EAST ASIA 18-20 MARCH 2014 / NOVOTEL CENTURY, HONG KONG

UNDERSTAND THE WEALTH OF OPPORTUNITIES IN THIS GROWTH REGION AND MEET THE PEOPLE CREATING THEM

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Visit: www.mro-network.com/cea

AIRPORTS INDUSTRY & ROUTES:DATA: Airport List charges prices Data supplied by IBA’s JetData. www.ibagroup.com

List prices and lease rates – January 2014 Current Market Value Manufacturer Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Airbus Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing McDonnell Douglas Boeing McDonnell Douglas Boeing McDonnell Douglas Boeing McDonnell Douglas Boeing McDonnell Douglas Boeing McDonnell Douglas Boeing McDonnell Douglas Bombardier (Canadair) Bombardier (Canadair) Bombardier (Canadair) Bombardier (Canadair) Bombardier Bombardier Bombardier Embraer Embraer Embraer Embraer Embraer Embraer Fokker Fokker Sukhoi Sukhoi ATR ATR ATR ATR

Average List Price $67.70m $80.70m $88.30m $103.60m $208.60m $211.50m $231.10m $389.90m $74.80m $89.10m $94.60m $352.00m $160.20m $182.80m $185.40m $258.80m $291.20m $295.70m $315.00m $206.80m $37.30m $42.80m $30.00m $21.58m $28.02m $38.66m $41.61m $46.08m $48.67m $18.10m $18.90m $21.90m $22.70m

Type A300-600R A310-200 A310-300 A318-100 A319-100 A320-200 A321-100 A321-200 A330-200 A330-200F A330-300 A340-200 A340-300 A340-500 A340-600 A380-800 B717-200 B737-300 B737-400 B737-500 B737-600 B737-700 B737-800 B737-900 B737-900ER B747-400 B747-8F B757-200 B767-200ER B767-300ER B767-300F B777-200 B777-200ER B777-200LR B777F B777-300 B777-300ER B787-8 MD-11 MD-81 MD-82 MD-83 MD-87 MD-88 MD-90 CRJ-100/200 CRJ-700/705 CRJ-900 CRJ-1000 Q200 Q300 Q400 ERJ-135 ERJ-145 E170 LR E175 LR E190 LR E195 LR Fokker 70 Fokker 100 SSJ 100-95B SSJ 100-95LR ATR 42-500 ATR 72-500 ATR 42-600 ATR 72-600

Oldest

Newest

$4.00m $1.50m $3.30m $11.00m $8.00m $3.60m $9.00m $15.00m $28.00m $78.00m $16.00m $7.00m $7.00m $20.00m $20.00m $135.00m $6.00m $1.00m $2.50m $1.00m $8.00m $11.50m $14.50m $14.50m $30.00m $9.00m $160.00m $4.40m $2.80m $7.00m $25.00m $18.00m $30.00m $75.00m $130.00m $40.00m $88.00m $100.00m $9.00m $0.50m $0.50m $0.50m $0.50m $1.00m $4.00m $1.20m $8.50m $11.00m $22.00m $4.50m $5.30m $9.50m $1.50m $2.40m $13.00m $16.00m $19.00m $21.00m $2.30m $2.30m $21.50m $22.30m $4.20m $6.40m -

$10.50m $2.00m $6.50m $19.00m $34.30m $41.00m $13.00m $48.00m $87.00m $91.00m $100.00m $12.00m $35.00m $60.00m $60.00m $215.00m $10.00m $4.30m $5.50m $3.80m $14.00m $34.50m $46.00m $22.00m $48.50m $35.00m $180.00m $17.30m $12.00m $59.00m $65.00m $45.00m $113.00m $140.00m $165.00m $65.00m $165.00m $113.00m $14.00m $0.50m $1.00m $1.40m $1.00m $2.00m $4.40m $4.60m $22.00m $25.00m $27.50m $8.50m $11.50m $21.00m $4.50m $7.70m $27.00m $29.20m $32.50m $34.50m $3.00m $3.50m $24.00m $24.70m $13.00m $17.00m $15.50m $20.00m

% Change -6% 0% -11% -18% -1% -1% -5% -2% -3% -1% -1% -2% -10% -22% -23% 1% 0% -16% -6% -19% -8% -1% -1% -1% 0% -8% -1% -15% -14% -7% -1% -8% -7% -2% 0% -6% 0% 0% -12% 0% -21% -23% -21% 0% -1% -9% -3% -1% -1% 0% 0% 0% -5% -6% -2% -1% -1% -1% -4% 0% -1% -1% 0% 0% 0% 0%

Dry Lease Rate Oldest $0.070m $0.050m $0.070m $0.120m $0.105m $0.060m $0.090m $0.165m $0.250m $0.700m $0.180m $0.140m $0.140m $0.250m $0.250m $0.130m $0.070m $0.040m $0.050m $0.040m $0.080m $0.130m $0.190m $0.145m $0.250m $0.150m $1.300m $0.080m $0.080m $0.170m $0.260m $0.220m $0.350m $0.750m $1.200m $0.350m $0.750m $0.900m $0.140m $0.025m $0.025m $0.030m $0.025m $0.035m $0.070m $0.035m $0.085m $0.110m $0.190m $0.035m $0.045m $0.090m $0.030m $0.040m $0.130m $0.150m $0.180m $0.190m $0.040m $0.045m $0.177m $0.182m $0.060m $0.080m -

Newest $0.150m $0.090m $0.135m $0.230m $0.270m $0.330m $0.185m $0.390m $0.850m $0.800m $0.900m $0.280m $0.350m $0.450m $0.500m $2.000m $0.135m $0.080m $0.090m $0.060m $0.150m $0.300m $0.365m $0.210m $0.390m $0.410m $1.500m $0.210m $0.250m $0.460m $0.580m $0.350m $0.850m $1.150m $1.400m $0.600m $1.500m $1.100m $0.200m $0.035m $0.045m $0.060m $0.040m $0.060m $0.090m $0.065m $0.200m $0.220m $0.250m $0.080m $0.120m $0.190m $0.050m $0.075m $0.230m $0.250m $0.280m $0.300m $0.070m $0.090m $0.225m $0.230m $0.140m $0.180m $0.150m $0.190m

% Change -4% 0% -2% 0% -1% 1% -5% 1% -6% -2% 0% -5% -9% -30% -32% -36% -5% 0% 0% 0% -8% -2% 1% -4% -2% -13% 0% -3% -3% 0% -2% -12% -8% 0% 0% -10% -4% 0% -8% 0% 0% -5% 0% 0% -7% -5% -2% -3% -2% 0% 0% 0% 0% -4% -4% -4% -1% -2% 0% 0% 0% 0% 0% 0% 0% 0%

Source: IBA’s IBA’s JetData. JetData. Source:

afm • Issue 87 – November–December • www.afm.aero

AIRPORTS & INDUSTRY DATA: ROUTES: Engine Airport datacharges Data supplied by IBA’s JetData. www.ibagroup.com

Engine data – January 2014

B737 B737 B737 A321 A319 A340 B737 B737 B737 B737 CRJ -300 -400 -500 -200 -100 -300 -600 -700 -800 900ER -200

CRJ -700

E170/ E190/ A300 B767 MD-11 A330 B777 A320 MD-82 B747 A310 B757 Fokker A340 A330 B777 A380 ERJ B717 175 195 -600R -300ER -200 -300ER -200 -400 -300 -200 100 -600 -300 -200ER -800 -145ER -200

Source: IBA’s JetData.

Data supplied by IBA’s JetData. www.ibagroup.com

Engine data – January 2014

standfirst Type

Engine

B737-300 B737-400 B737-500 A321-200 A319-100 body A340-300 B737-600 B737-700 B737-800 B737-900ER CRJ-200 CRJ-700 E170/175 E190/195 A300-600R B767-300ER MD-11 A330-200 B777-300ER A320-200 MD-82 B747-400 A310-300 B757-200 Fokker 100 A340-600 A330-300 B777-200ER A380-800 ERJ-145 ER B717-200

CFM56-3B1 CFM56-3B2 CFM56-3C1 CFM56-5B3/P CFM56-5B5/P CFM56-5C4/P CFM56-7B22 CFM56-7B24 CFM56-7B26 CFM56-7B27 CF34-3B1 CF34-8C5 CF34-8E5 CF34-10E6 CF6-80C2A5 CF6-80C2B6F CF6-80C2D1F CF6-80E1A3 GE90-115B V2527-A5 JT8D-217C PW4056 PW4152 RB211-535E4 Tay 650-15 Trent 556-61 Trent 772B-60 Trent 895 Trent 970 AE3007-A1 BR715A

Full-life market value January 2014 $1.15m $1.80m $2.30m $8.20m $6.40m $5.85m $7.00m $7.60m $8.20m $8.50m $2.20m $4.60m $4.70m $6.50m $5.50m $7.10m $5.80m $14.80m $30.74m $7.75m $0.95m $7.00m $6.30m $4.20m $2.20m $14.48m $14.58m $21.10m $19.80m $2.30m $4.00m

Current half-life market value January 2014 $0.60m $0.95m $1.20m $6.00m $4.40m $4.00m $4.80m $5.40m $6.10m $6.50m $1.15m $3.20m $3.30m $5.00m $2.80m $4.40m $3.10m $9.90m $22.95m $5.40m $0.60m $4.00m $3.40m $2.80m $1.30m $8.60m $8.60m $13.80m $13.80m $1.30m $2.50m

Market lease rate $0.020m $0.022m $0.028m $0.065m $0.045m $0.045m $0.047m $0.056m $0.065m $0.066m $0.017m $0.045m $0.045m $0.065m $0.040m $0.055m $0.045m $0.120m $0.250m $0.060m $0.025m $0.055m $0.045m $0.050m $0.025m $0.110m $0.120m $0.170m $0.170m $0.025m $0.042m Source: IBA’s JetData.

afm afm •• Issue Issue88 88––January–February January–February••www.afm.aero www.afm.aero

Lock in the best fuel efficiency There’s a lot of security in choosing LEAP. Not only does it yield the very best performance out of the box, but it will also pay long-term dividends in the form of best-in-class fuel burn retention. Add in CFM’s legendary reliability and you’ve made one savvy investment. Go to cfmaeroengines.com CFM International is a 50/50 joint company between Snecma (Safran) and GE.

Superior performance | Lower cost of ownership | Greater reliability

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