Airline profits - Volume I - Issue 4 - August 2015

Volume I—Issue 4

A Magazine for Aviation Leaders & Influencers

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FEATURED

Is the industry on track with IATA’s projections for 2015?

More articles inside...

Air Canada: What Did the Airline What Business Is an Airbus A380: Has a Once Profits Sustainability Index Reveal? Airline Really Engaged In? Promising Market Dried Out?

Release date: August 2015

Volume I—Issue 4

August 2015

Airline Profits

Contents 6

Editorial: Airlin e Profits m a ga zin e : What Is New?

10

Profile: Air Ca n a da : W ha t Did the Air lin e Pr ofits Sustainability Index Reveal?

16

Perspective: Ca n W e Rea son a bly Com pa r e Apple to

Airlines?

20

Performance: Is the Air lin e In dustr y on Tr a ck w ith IATA’s Projections for 2015?

26

Platform: Air b us A3 80: Ha s the On ce Pr om isin g

Market Dried Out?

32

Paradigm: W ha t B usin ess Is a n Air lin e Rea lly Engaged In?

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HEAD OF PROGRAMS:

Kofi Sonokpon

All rights reserved. No part of this publication may be reproduced, duplicated, stored in any retrieval system or transmitted in any form by any means without prior written permission of the Publishers.

kofi.sonokpon@airlineprofits.com

Airline Profits is r elea sed bi-monthly in February, April, June, August, October and December.

PUBLISHED BY: Airline Profits Publications

CP 53506 CSP Norgate Saint-Laurent, QC, Canada

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Airline Profits is a v a ila ble in m u ltip le fo r m a ts: o nline, m o bile, digital and print. The online and mobile versions are free to all aviation and non-aviation subscribers.

Digital and print formats are chargeable based on an annual subscription.

For more information about the various subscription packages offered, visit www.airlineprofits.com Airline Profits is a tr a d em a r k of M a ck so n Av ia tio n.

Š2015 Airline Profits ISSN 2368-7800 (Print) ISSN 2368-7819 (Online)

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Airline Profits

August 2015

Volume I—Issue 4

Editorial Airline Profits magazine: What Is New? Kofi Sonokpon editor@airlineprofits.com

In the April edition of Airline Profits, the first aviation magazine devoted to promoting a more profitable airline industry, we presented an overview of the publication. The main components of our multimedia plan were revealed. A key piece of that puzzle is the Airline Profits Blog. In the aforementioned edition, we suggested that the blog was going to be available shortly. In fact, that is now a reality. You can access our blog posts at www.airlineprofits.com or http://magazine.airlineprofits.com.

Once there, you can read, like and share our magazine articles and posts. You can also enjoy

and keep up-to-date with our selection of daily international aviation

headlines,

the

Airline

Profits Headlines Today series, the Airline Profits Weekly Reviews and our Regional Digests. You will

You can read, like and share our magazine articles and posts. You can also enjoy and keep up-to-date with our selection of daily and weekly international aviation headlines and more...

also find some quotes as food for thought to start or end your day on a positive note.

More content (including audio and video) will be added on an ongoing basis, so we encourage you to stay tuned. In fact, we have added an easy option so you can get notified via RSS feed, any time we post new content to

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the Airline Profits Blog. With a simple click, you can follow our RSS feed, so you won’t miss a thing. As you would notice once you get to the blog, articles or posts are regrouped into “Most Viewed”, “Featured Posts” and “Latest Posts” to facilitate your navigation and maintain an

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enjoyable reading experience.

To read an article, simply click on its title and you will access the full post accordingly. To like or share an article, there is a bar right below the title of the post, simply click on the applicable icon to proceed.

Image: Laptop featuring a section of the Airline Profi ts Blo g. www.airlineprofits.com or http://magazine.airlineprofits.com

Below each post, there is a sugges-

tion of similar posts. There is also a sidebar that offers different categories of posts and some display

advertising.

At the bottom of the page, you will find a brief description of the magazine, contact information as well as Airline Profits twitter feed and some advertising.

The Airline Profits Blog will be progressively upgraded over the next few weeks to allow readers to comment and rate articles and other posts.

The Airline Profits Blog will be progressively upgraded over the next few weeks to allow readers to comment and rate articles and other posts. For now, we hope you will enjoy your visit to the Airline Profits Blog and do look forward to your comments, feedback and rating in the near future.

Airline Profits

August 2015

Volume I—Issue 4

“ Efforts and courage are not enough without purpose and direction.

― John F. Kennedy

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August 2015

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Profile Air Canada: What Did the Airline Profits Sustainability Index Reveal?

In the June edition of Airline Profits, we have introduced the Airline Profits Sustainability Index (APSI). This is an integrated metric, which takes into account three dimensions: People, Performance and Agility.

In this edition, we are presenting our first airline review on the basis of the APSI: that of Air Canada.

Our analysis covered a period of 10 years, starting 2005 through 2014. We have also considered

pieces of information available on Air Canada’s website and other reputable sources such as

Flightglobal at the time our review was conducted.

Based on the data available as of July 2015, our analysis revealed that on a scale of 1 to 10, Air Canada has an Airline Profits Sustainability Index of 6.8.

Based on the data available as of July 2015, our analysis revealed that on a scale of 1 to 10, Air Canada has an APSI of 6.8.

In the next few lines, we are going to offer a breakdown of this rating. However, let’s begin with a brief overview of the company by highlighting some key facts.

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Creation and History Founded

in

1937

as

Trans-

Canada Air Lines (TCA), the flag carrier and largest airline of Canada began operations as Air Canada only 28 years later in 1965.

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In the year 2000, Air Canada acquired and merged with Canadian Airlines, their main rival. The company filed for bankruptcy protection three years later. They emerged from bankruptcy in 2004 and organized under ACE Aviation Holdings.

Air Canada’s Boeing 787-800 Dreamliner. Photo Credit: Air Canada

Business Model, Network and

The current in-service fleet has an

Besides, Air Canada fully owns

Fleet

average age of 13.8 years. The

subsidiaries such as Air Canada

airline also has 92 aircraft on or-

Jetz and Air Canada Rouge.

A mainline carrier, Air Canada

currently serves 178 destinations

der.

Moreover, a member of the glob-

across five continents, about 62

Ownership,

percent of which are located in

Alliances

North America.

Subsidiaries

and

Air Canada has close to 30 addi-

Air Canada has a hybrid owner-

Air Canada operates a mixed

ship structure: ACE Aviation

fleet of 167 in-service airplanes,

Holdings owns 11 percent equity

including Embraer 190, Airbus

stake in the airline, while the re-

A319 and A320, as well as Boeing

maining 89 percent is publicly

767 and 777 aircraft types.

traded.

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al airline network, Star Alliance,

tional codeshare agreements.

Leadership, People and Operations Air Canada is currently headed

by Calin Rovinescu, in the role of

August 2015

Volume I—Issue 4

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August 2015

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Profile President and Chief Executive

Officer. And as of 2014, the airline employed over 24 thousand people.

Performance Index

The Airline Profits Performance Index is based on a scale of 1 to 10. Air Canada has a below aver-

profitable only five years out of

ten. In addition to that, the airline has posted low operating and net profit margins.

Headquartered in Montreal, Que-

age Performance Index of 4.8.

With relatively high People and

bec, Air Canada uses Toronto’s

Five factors were considered in

Agility indices, our primary re-

Pearson International Airport as

our calculation.

commendation is that Air Cana-

its largest operational hub. Other hubs include Calgary, Alberta

The Performance Index has a 40% weight in the overall APSI.

da would do well to focus on improving their Performance index.

and Vancouver, British Columbia.

Agility Index

Airline

Profits

Sustainability

Profile

The Airline Profits Agility Index is based on a scale of 1 to 10. Air Canada has a relatively high

As mentioned at the beginning of

Agility Index of 7.9. Seventeen

this review, our analysis covered

factors were considered in our

a 10-year period ranging from

calculation.

2005 to 2014.

People Index

The Agility Index has a 15% weight in the overall APSI.

The Airline Profits People Index is based on a scale of 1 to 10. Air Canada has a relatively high Peo-

Summary

ple Index of 8.2. Five factors were

Air Canada’s Airline Profits Sus-

considered in our calculation.

tainability Index of 6.8 is essen-

The People Index has a 45%

weight in the overall APSI.

tially driven by the Performance Index, which in this case happens to be average. This is mainly due to the fact that over the past decade (2005-2014), Air Canada was

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If you like this article and are curious in finding out more, we invite you to stay tuned as we share more airline profiles and ultimately the 2015 Airline Profits ranking based on the APSI in a future edition of Airline Profits.

In the meantime, you can access our detailed review of Air Canada’s APSI report at: http://bit.ly/ air-canada-apsi-review.

Art

“The purpose of art is washing the dust of daily life

off our souls. ” — Pablo Picasso

Airline Profits

August 2015

Volume I—Issue 4

“ Inspirational leaders need to have a winning mentality in order to

inspire respect. It is hard to trust in the leadership of someone who is half-hearted about their purpose, or

only sporadic in focus or enthusiasm.

― Sebastian Coe

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August 2015

Volume I—Issue 4

Perspective Can We Reasonably Compare Apple to Airlines?

Provided you have read the editorial of the previous edition, entitled: “IATA’s 71st AGM: Was the Apple analogy from Miami Beach refreshing enough?” you may be puzzled by the topic of this article. The last editorial story, which was derived from a remark made by Tony Tyler, Director General and CEO of IATA, assumed that there was a strong basis for comparing Apple’s financial performance to that of the airline industry.

In other words, we were convinced that we were comparing Apple to “apples”. Although the

wordplay may seem amusing, we share the opinion that the airline industry has the potential to

equal, if not exceed the performance of Apple many times over.

And we do hope that airline lea-

It is obvious that Apple and airlines operate in different industries and environments.

However, there are many instances where a comparison can be made.

ders and influencers will catch the significance of that potential

profitability.

re-evaluate our initial assumption in order to establish its soundness. Hence the question: can we reasonably compare Apple to airlines?

In response to the comments we received from readers of the last edition, we found it necessary to

In responding to that question, some would say “no”, others would say “yes”.

and take the necessary steps to set the airline industry on the path to sustainable growth and

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An interesting, yet complex fact is that both answers are valid, depending on the angle from which we look at the question. It is even more pertinent when one realizes that Apple made close to US$200 per unit sold, while the airline industry made on average

9 June 2015. Thomas Windmuller, SVP of IATA APCS presenting passenger trends. Photo Credit: IATA

less than US$10 per passenger.

While we may be inclined to offer a philosophical point of

view, a plain approach may be more effective.

It is obvious that Apple and airlines operate in different industries and environments. However, there are many instances where a comparison can be made. 1) There are many Apple customers who are also airline customers. And while the reverse

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may not be applicable, all Apple customers can potentially become airline customers.

2) Apple and airlines are engaged in mass production. The former produces, markets and sells electronic devices, while the latter produce, market and sell seats on scheduled flights.

3) Apple and airlines are engaged in enabling the satisfaction of a specific human need: the need to communicate.

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Now, whether you share the opinion that Apple can be compared to the airline industry or not, there is one fact worth remembering. Like the vast majority of airlines, Apple has not always been successful. So, we will end this article with the following questions. What did Steve Jobs do differently to put Apple back on track upon his return to the company in 1997? Can airlines learn something from that experience?

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“ The object of all work is production or accomplishment and to either of these ends there must be

forethought, system, planning, intelligence, and honest purpose, as well as perspiration. ― Thomas A. Edison

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Performance Is the Airline Industry on Track with IATA’s Projections for 2015?

As reported in the June edition of Airline Profits, IATA has raised their projected target for airline profitability for 2015. Instead of the US$25 billion initially announced in December 2014, airlines are now anticipated to reach an all-time record of US$29.3 billion by the end of the year. The updated projections were announced at the AGM in Miami in June.

The adjustment in IATA’s forecast was necessary, given the fact that many leading airlines, espe-

cially in the USA have reported their strongest first quarter performance ever.

Just a few weeks later in July, some S carriers started disclosing

Instead of the US$25 billion initially announced in December 2014, airlines are now anticipated to reach an all-time record of US$29.3 billion by the end of the year.

their second quarter financial results. Other airlines will be releasing their performance data by the end of August.

As the second quarter results were being disclosed, many carriers were again reporting their best second quarter ever.

Carriers in other regions of the world have also reported a strong performance, for instance, Air Canada, Lufthansa, Ryanair and the International Airlines Group (IAG), which includes British Airways.

Our sample of 21 major carriers,

mainly in North America and Europe, has shown that these airlines have cumulated close to

US$10 billion in net profits in the first semester of 2015. That represents nearly a 140% increase over

the same period last year.

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8 June 2015. Airline Industry Profitability Outlook for 2015. Source: IATA

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Performance

This group of airlines contributed about 61% of the overall US$16.4 billion of total profits that the airline industry posted in 2014.

Clearly, airline profits are on the rise compared to 2014. Assuming the 61% contribution rate applies to 2015 also and remains constant throughout the year, the industry is well on track to not only meet, but also exceed IATA’s revised forecasts. However, it may be too early to suggest that this select group airlines that we have con-

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Our sample of 21 major carriers, mainly in North America and Europe, has shown that these airlines have cumulated close to US$10 billion in net profits in the first semester of 2015. sidered will contribute at least another US$10 billion in total profits over the third and fourth quarters. In fact, that would be the minimum contribution that it will take to attain the anticipated US$29.3 billion in total airline profits in 2015.

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Education

“The purpose of education is to replace an empty mind

with an open one. ” — Malcolm Forbes

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August 2015

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“ What is success? I think it is a mixture of having a flair for the thing that you are doing; knowing

that it is not enough, that you have got to have hard work and a certain sense of purpose. ―Margaret Thatcher

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August 2015

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Platform Airbus A380: Has a Once Promising Market Dried Out?

To many the launch of the Airbus A3XX program in the year 2000, not only triggered a high level of excitement and interest from the aviation community as well as the general public. It also held the prospect of a promising future. A new era in aviation history had begun.

The timing seemed perfect, the new very large aircraft (VLA) was about to inaugurate the second century of aviation.

A Promising Future The idea of entertaining secrecy about the last two digits of the type designation was brilliant. It sparked and reinforced the curiosity of many aviation fans.

Moreover, the anticipated Superjumbo was intended to end the long-standing supremacy of the Jumbo jet, the rival Boeing 747.

The later revealed A380, was going to be superior to the 747 not only in terms of technology, but more importantly as far as capacity, operational as well as environmental performance were concerned. Indeed, the A380 could carry up to 525 passengers

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Considering the possible introduction of the A380neo by 2020, one may conclude that Airbus has not yet given up on the quest of dethroning the current “Queen of the Skies”, the rival Boeing 747. in a three-class configuration and as much as 853 passengers in an all-economy class configuration.

In terms of economics, the possibility of carrying as many passengers as the A380 on a single flight seemed to outweigh by far the direct operating costs of the aircraft.

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The Maiden Flight and Entry-

into-Service The maiden flight of the Superjumbo occurred on January 18, 2005. Upon the completion of its flight test program and certification, the delivery and entry-intoservice (EIS) of the A380 was de-

21 July 2014. Airbus A380 Jetliner at Farnborough Airshow. Photo Credit: Airbus S.A.S.

layed three times over a period of two years. As reported by Airbus, the delays were mainly due to wiring and configuration management issues during its production phase.

Nonetheless, the first aircraft was finally delivered to Singapore Airlines in mid-October 2007 and entered service a few days later on a flight from Singapore to Sydney, Australia on October 25, 2007.

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The Market and Orders In 2006, Airbus anticipated demand for about 1700 very large

aircraft (VLA) by 2025. Whereas, Boeing had a less optimistic forecast of 700 airplanes for the same

category. In fact, Airbus had initially considered offering the A380F, a freighter version of the

Superjumbo, but the concept was later abandoned in order to focus exclusively on the all-passenger

A380 jetliner.

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Apart from Singapore Airlines with 19 A380s and five yet to be delivered, 15 other airlines also operate the double-deck aircraft.

Among them is Emirates Airline with the largest fleet of A380.

Emirates currently have 65 inservice with 75 on order, for a total of 140 A380s.

As of July 2015, Airbus has delivered 169 of this type of aircraft with an additional backlog of 118 airplanes.

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Platform With that said, there are a few

Fifthly, Malaysia Airlines amid

once promising market has dried

facts that triggered our questio-

their restructuring efforts also

out. Well, it depends.

ning about the market for very

indicated their intention to retire

large aircraft like the A380.

their A380 fleet, a total of six air-

Firstly, based on Airbus’s 2006

forecast, one would have assumed an order of at least 500 to 900 A380s by 2015. Instead, there

are less than 350 units sold todate. Secondly, there has not been any new A380 sales since

2013. Thirdly, Airbus currently has six A380 white-tails that need to be reallocated to other custom-

ers. As reported by Flightglobal, Airbus is looking at reallocating the planes, but with no details as

to which customer. According to

planes. Sixthly, United reported that the A380 was not working for them. They preferred allocat-

decline of interest in the A380 to the excitement that prevailed at

the launch of the program, one could say “Yes”.

ing smaller airliners on their routes. Finally, British Airways also comments earlier this year that although impressed by the performance of the aircraft type, they did not see the need for additional A380s in their fleet. They

currently operate nine of them and have three more on order.

Summary One may wonder whether the

the same source, two of the airplanes have already been built

and are stored in Toulouse, France. The six airplanes were ordered by Skymark in 2011, but Airbus cancelled the order last minute in 2014, when the Japanese operator indicated that they could no longer support the delivery schedule. Fourthly, All Nippon Airways (ANA) who now control Skymark have suggested that they were not necessarily interested in taking the airplanes.

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On one hand, if one compares the

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On the other hand, when one considers the success of the aircraft in service and the possible introduction of a larger and more fuel-efficient variant, the A380neo by 2020, one may conclude that Airbus has not yet given up on the quest of dethroning the current “Queen of the Skies”, the rival Boeing 747, over 550 of which are currently operated by 75 airlines worldwide.

Training

“The purpose of training is to tighten up the slack, toughen the body, and polish the spirit. ” — Morihei Ueshiba

Airline Profits

August 2015

Volume I—Issue 4

“ There is one quality which one

must possess to win, and that is definiteness of purpose, the knowledge of what one wants,

and a burning desire to possess it. ― Napoleon Hill

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Available in Kindle Book on Amazon

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Paradigm What Business Is an Airline Really Engaged In?

To most people such a question may seem like a joke, because it has an obvious answer. They will tell it straight: “Come on…who in the world doesn’t know that an airline is engaged in air transportation?”

Some may think that such a basic question is an attempt to insult their intelligence.

To seasoned entrepreneurs, business leaders and savvy marketers however, a clear and probably not so obvious answer to this fundamental question is important and essential to the success of any business endeavour.

In other words, to the astute business person, the ability to pinpoint precisely what business an organization is engaged in is a key determining factor for its success. This is the type of question, which cannot be neglected or omitted.

For instance, Robert T. Kiyosaki provided a good illustration of the topic in one of his Rich Dad, Poor Dad books. It was reported that the late Ray Kroc, founder of the

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The ability to pinpoint precisely what business an organization is engaged in is a key determining factor for its success. This is the type of question, which cannot be neglected or omitted.

McDonald’s corporation delivered an address to a class of business students at the University of Texas at Austin in 1974.

After the lecture, M. Kroc asked the students: “What business am I in?”

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The entire group started laugh-

ing, because they thought Ray Kroc was joking, since the question appeared too basic to be ta-

ken seriously.

To emphasize his point, Mr. Kroc rephrased the question:

Photo Credit: Envato Photodune

“What business do you think I

Then adding “Ladies and gentle-

As of 2013, McDonald’s Corpora-

am

group

men, I am not in the hamburger

tion was reported to have over

laughed again, still convinced

business. My business is real es-

36,000 locations worldwide. Most

that he was fooling around.

tate.”

of these locations are prime real

Then one student offered boldly:

Robert Kiyosaki reported that while Mr. Kroc admitted that selling hamburger franchises was his primary business focus, he nevertheless made the point that the selection and acquisition of the precise location of a franchise was by far of much greater importance.

in?”

The

entire

“Ray, who in the world doesn’t

know that you are in the hamburger business?”

Well, that is pretty obvious! Isn’t it? Just imagine Ray Kroc interjecting: “That’s what I thought you would say.”

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August 2015

estate near high value road intersections.

What a shock! The obvious answer to a supposedly foolish question, was not so obvious after all. There are more details to be added to this anecdote, but let’s focus on the essential.

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Paradigm

Based on what Mr. Kroc taught these very fortunate business students, if they were asked: “What business is an airline really in?” there are at least two things we could expect.

Firstly, they would not find the question so simple. Secondly, they would most probably suggest that “carrying passengers and goods by air” is simply a vehicle for the real business an airline is engaged in.

In other words, air transportation is a means to an end: not the end itself.

In summary, it becomes clear that the real business an organization is engaged in, is what guides or at least should guide key decision-making in that organization.

Yet even at this point, the question remains without a clear answer. And like in the case of McDonald’s, it is the leaders, owners or founders who can accurately state what a business is

There is a statement worth mentioning. It is a quote by Colleen Barrett, President Emeritus of Southwest Airlines: “We’re in the Customer Service business.

We just happen to fly airplanes.”

really about. When it comes to commercial aviation, while the general and obvious understanding is that airlines are in the business of carrying people and

As the airline industry is striving to improve its sustainability and

goods from point A to point B,

profitability, it may be worthwhile for the airlines to reflect on this fun-

there is a statement worth men-

damental question both individually and collectively. The reason being

tioning. It is a quote by Colleen

that even though airline operations is capital intensive, the majority of

Barrett,

their customers perceive them as being in the business of simply carry-

President Emeritus of Southwest

ing them from point A to point B, just like a bus or a train. And for that

Airlines: “We’re in the Customer

very reason, they want the air fares to be as cheap as possible.

Service business. We just happen

to fly airplanes.”

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Purpose

“The purpose of human life is to serve, and to show compassion and the will to help others.”

— Albert Schweitzer

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August 2015

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“ When you're surrounded by people who share a passionate

commitment around a common purpose, anything is possible. ― Howard Schultz

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“ Be daring, be different, be impractical, be anything that will

assert integrity of purpose and imaginative vision. ― Cecil Beaton

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“ True happiness... is not attained through self-gratification, but

through fidelity to a worthy purpose. ―Helen Keller

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