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May/June 2009 | ISSUE 2
A MAN WITH A PLAN Jazeera Airways CEO Andrew Cowen looks to emerge from the global recession with the leading low cost airline in the Middle East
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ISSUE 2 : May/June 2009
NEWS 04 International low cost airline news International LCC news from across the globe: March 2009 to April 2009 MANAGING DIRECTOR AIP Philip Tozer-Pennington Email: philipt@aviation-industry.com Tel: +44 (0)207 579 4841
EDITORS Philip Tozer-Pennington & Paul Copping
NEWS FOCUS 16
Airline Consolidation faces close antitrust scrutiny The European airline industry is undergoing a new wave of consolidation, as is illustrated by recent transactions.
DEPUTY EDITOR Jason Holland Tel: +44 (0) 207 579 4849
Journalist(s) Mary-Anne Baldwin: Tel: +44 (0) 207 579 4843 Michael Gubisch Tel: +44 (0) 207 579 4844
SPECIAL CORRESPONDENTS Africa: Kaleyesus Bekele China: Lu Haoting Russia-CIS: Vladimir Karnozov South America: Elias Gedeon Europe: Terry Spruce
MAGAZINE DESIGN & PRODUCTION Dean Cook The Magazine Production Company Tel: +44 (0)1273 467579 Website: www.magazineproduction.com E-mail: deancook@magazineproduction.com
DISPLAY ADVERTISING Philip Tozer: philipt@aviation-industry.com
Low Cost Airline World (ISSN Print: 1759-1112 – Online: 2040-3402) (USPS 022-324). Published bi-monthly. 2nd Floor, Ludgate House, 245 Blackfriars Road, London, SE1 9UY. Periodicals Postage paid at Jamaica, NY 11431. Airfreight and mailing in the USA by agent Air Business Ltd., c/o Worldnet Shipping USA Inc., 149-35 177th Street, Jamaica, New York, NY11434. U.S. POSTMASTER: Send address changes to: Airline Fleet & Network Management, Air Business Ltd, c/o Worldnet Shipping USA Inc., 14935 177th Street, Jamaica, New York, NY11434. UK annual subscription cost is £150, overseas annual subscription cost is £170 or $300(US). All subscriptions enquiries to Paul Canessa: paulcanessa@aviation-industry.com Tel: +44 (0) 207 579 4873 Fax: +44 (0) 207 579 4848 Website: www.aviationindustrygroup.com Subscription records are maintained at: Aviation Industry Press, Ltd. 2nd Floor, Ludgate House, 245 Blackfriars Road, London SE1 9UY © 2009 Aviation Industry Press. Printed in England by Headley Brothers Ltd. All rights reserved. No part of this publication may be reproduced by any means whatsoever without the express permission of the Publisher. Although care has been taken in the compilation of this magazine, Aviation Industry Press does not take responsibility for the views expressed herein.
FOCUS 18 Is there light at the end of the tunnel? Caught out badly on their fuel-price hedging positions by a 75 per cent-plus fall in prices many of the world’s low cost airlines are now posting losses.
INTERVIEW 22 Jazeera Airways – Investing in the downturn Low Cost Airlines World speaks to Jazeera Airways CEO Andrew Cowens.
AIRLINE FOCUS 28 Monarch Airlines Low Cost Airline World speaks to Tim Jeans, CEO of Monarch Airlines
ENVIRONMENT 34 Aviation and the EU Emissions Trading Scheme Legislation to incorporate aviation into the EU’s emissions trading scheme is now published — we look at the facts.
INFRASTRUCTURE 40 The competition commission’s market investigation into BAA Why has BAA been told to sell three UK airports, and what does it mean for potential acquirors and airlines?
44 New York Slot Auctions: Industry Officials hammer it out Airlines are keen to hear the new Democratic administration’s take on the DOT’s proposed sale of New York airport flight slots.
MAINTENANCE OPERATIONS 50 A320 support After close to two decades in the air the A320 is still considered to be highly reliable and a good investment.
FACTS & FIGURES 54 Transaction summary / Storage / List Prices / Engine data / Fuel prices / YTD trends
Welcome to: Low Cost Airline World An industry journal with global distribution dedicated to the low cost carriers and their suppliers.
So is this the bottom of the market?
L
ooking back over the past twelve months, it is a wonder that airlines are doing as well as they are. We have now seen the collapse of some 36 airlines across the globe. In the past quarter (Q1 09) just about every airline has fallen into the red on the back of weakening demand and fuel hedge losses. There can be no doubt that the record fuel prices of 2008 tipped many airlines over the edge, but they also helped the industry shape-up in time for the collapse in demand that came in September 2008. Of course low cost airlines by their very nature are able to withstand recessions and there is growth to be found behind the main headlines of doom and gloom. AirAsia X for example announced that it is to increase its flights between London, Stansted and Kuala Lumpur to a daily service, just six weeks after its launch. More than 10,000 passengers have flown with AirAsiaX on five flights per week during this time. The introduction of a daily route will commence July 1, 2009. In Air Asia X we have a great low cost hub and spoke system developing. So confident are AirAisa X about their plans that they announced in the past month that they are planning an IPO, surely no other airline would consider such a move in this market. Meanwhile in the Middle East Jazeera Airways has announced that it will have no debt by the end of 2010 despite the current trading conditions - a sure sign that the airline is doing well in the cushioned Middle East market. It will not be long before Jazeera Airways reaches further afield. IATA is due to report next week that a 21.4 per cent fall in global air freight demand signals that during 2009 the market has not declined further and that we may well have found the bottom of the market. This news will raise hope, but it comes just as a swine flu outbreak threatens to pile further misery upon the aviation sector. We will have to wait and see if airlines are to suffer yet another major blow along the same lines as the SARS outbreak in 2003, thus far though it is true to say that the current outbreak has had a minimal effect on travel patterns despite mass hysteria across the board from all major news outlets. Let us hope that this remains the case, but even if things remain as they are, the aviation sector should still be referring to operational risk professionals. Many thanks,
Philip Tozer-Pennington Managing Director, Aviation Industry Press. A division of UBM Aviation.
4
NEWS
Virgin Blue to lease four aircraft from BOC
Virgin Blue Airlines closed a purchase-and-leaseback (PLB) deal in early March with BOC Aviation for one late-2008 aircraft and three new 737-800 aircraft. The aircraft will be leased for an average lease term of 10 years, with delivery of the three new aircraft scheduled for the fourth quarter of this year. Virgin Blue, Australia’s second largest airline, will use the aircraft for domestic and international flying in the Pacific region. BOC Aviation is the leading Asiabased aircraft leasing company with a portfolio of 104 aircraft operated by airlines worldwide. In addition, the company has 70 aircraft on firm order for delivery through to 2013.
Finnair and Iberia sign seven-year MRO agreement Finnair Technical Services and Iberia Maintenance have signed a seven-year component support agreement whereby the Spanish MRO is to provide spare components and related repair services for Finnair’s A330 and A340 aircraft. In return, Iberia is to commission Finnair Technical to conduct A320 aircraft component repairs as well as CFM-56B engine repairs. The Finish MRO expects the component support agreement to generate around €30m in turnover. Work will begin in April, when Iberia sends an A320 to Finland for heavy maintenance.
Mexicana’s Click to lease 25 new 717s Mexicana de Aviacion, one of Mexico’s leading commercial airlines, has signed a lease agreement with Boeing for 25 new 717 twin engine jets. The aircraft has been used by Mexicana’s low fare airline, Click, as from March.
LOW COST AIRLINE WORLD
easyJet opposes EU slot rule
easyJet has opposed the move to suspend the EU’s slot rule, which dictates that carriers not using the slots for 80 per cent of the time, must return them for redistribution. The open condemnation goes against the general consensus of European airlines who have lobbied against the European Commission for removal of the rule. In a letter to the European commissioners, easyJet urged them to: “avoid narrowminded protectionism by a few legacy airlines.”
JetBlue reports February traffic JetBlue Airways’ February 2009 traffic fell 8.3 per cent year-on-year, on a capacity decrease of 5.5 per cent. Load factor for February was 74.5 per cent, falling 2.3 points from February 2008. JetBlue’s preliminary completion factor was 99.4 per cent and its preliminary passenger revenue per available seat mile for the month increased one per cent from the same period of the previous year.
Air India extends Frankfurt cargo handling agreement Air India has extended its cargo handling agreement with Fraport Cargo Services at Frankfurt airport, which exists since 2002. The freight handler is a 100 per cent subsidiary of airport operator Fraport.
Blue Wings selects Teledyne Controls’ FDIMU for A320 fleet German charter carrier Blue Wings has selected Teledyne Controls’ flight data interface management unit (FDIMU) for its new fleet of 20 A320 aircraft. The FDIMU is used to perform flight data acquisition, aircraft condition monitoring and data recording and has been installed on more than 60 per cent of all Airbus aircraft, according to the California-based manufacturer. The first FDIMU for Blue Wings is to be delivered in August 2009.
Easyjet and Ryanair call for removal of CAA
Air Berlin to divest LTU? Air Berlin, Germany’s second biggest airline, may divest its long distance business subsidiary LTU, a spokesman said on March 7, 2009. The spokesman told reporters that falling demand and high wage costs are forcing the company to consider divestment or selling. The German magazine WirtschaftsWoche, reported that the Vereinigung Cockpit union could launch strikes at the company at the end of March. Union members had already initiated a strike ballot in February, it said citing unidentified sources. Air Berlin took over LTU in 2007 and flies to destinations including Southeast Asia, the United States and the Caribbean.
Virgin America to join The Climate Registry Virgin America has become the first airline to join The Climate Registry, a not-for-profit organisation which requires all members to track and provide a rigorous report of their greenhouse gas emissions. The carrier will voluntarily provide the emissions data on an annual basis, and as part of its membership will commit to meeting CO2 reduction goals. Virgin America says it will publish a comprehensive 2008 emissions report for all six internationally-recognised greenhouse gases ‘later this spring’. “As the only California-based airline, it is in our DNA to make environmentally sustainable practices a core priority in our business model,” said Dave Pflieger, SVP of legal, government affairs and sustainability at Virgin America. “We’re proud to join visionary California leaders like Senator Boxer and Rep. Waxman in calling for transparency in reporting and controlling CO2 and other greenhouse gases. We hope to do our part to promote awareness and transparency about the impact our industry has on the environment.” It has been proposed that legislation be imposed that would require the US Environmental Protection Agency to create greenhouse gas emissions standards for aircraft and aircraft engines by the end of 2012. US legislators have also sought public input about the suggestion that airlines mandatorily report their greenhouse gas emissions.
“The CAA currently lacks the resources, expertise and, above all, credibility to be an effective regulator,” says easyJet’s Andy Harrison. The CEO of the airline was responding to the Government’s call to make the Civil Aviation Authority (CAA) responsible for economic regulation at UK airports, adding: “It would be a high risk strategy to put so much more regulatory power into such an unproven structure.” While agreeing that the current system needs vast restructuring, the low cost airline said it believes: “The only body that has shown itself to be willing and capable of controlling the BAA airport monopoly is the Competition Commission, which should be promoted not marginalised in deciding which airports should be regulated.” Ryanair has also called for a removal of the CAA, stating it has: “for many years put monopoly airport profits first and ignored passengers and airport users.”
May/June 2009
6
NEWS
Alaska agrees contract with workers Alaska Airlines and the Association of Flight AttendantsCWA announced March 11, their agreement of a two-year contract extension for the airline’s 2,830 flight attendants. The extension offers flight attendants a 1.5 per cent pay increase on May 1 of 2010 and 2011. Flight attendants also will now participate in the same performance-based incentive plan as the airline’s dispatch and management employees. The small majority of 53.8 per cent of flight attendants agreed the deal.
When Southwest lose money on a fuel hedge, you have to take note Southwest Airlines said it was in the middle of “the toughest revenue environment” in the airline’s history on April 16, as a loss was posted for the first quarter of $91m from a profit of $34m for the same period last year. $71m of the losses came directly from non-cash marketto-market fuel hedging, which included a $65m charge incurred whilst getting out of one such contract. Southwest stressed that it will still take delivery of 13 737-700s during 2009 (down from the original 28) but will retire 15 of its older aircraft as part of its plan to cut capacity by 5 per cent during 2009. Capital spending for 2009 should now come in $1.4bn lower than planned. In addition there will be job cuts throughout the airline with senior managers seeing a pay freeze for 2009. Southwest has $1bn less in immediate cash reserves than it did a year ago, down at $2.1bn from $3.1bn. The overall effect of this shock news lead to an 8.2 per cent fall in the share price on the day of the announcement, to $6.91 a share. Southwest, and therefore the low cost model, is no longer immune to the troubles of the US aviation industry — It is likely that we will all need to brace ourselves for very poor quarterly results due over the coming weeks.
LOW COST AIRLINE WORLD
Aer Lingus results disaster — Ryanair says Aer Lingus must apologise for misleading shareholders Ryanair called on Aer Lingus chairman Colm Barrington to apologise for misleading Aer Lingus shareholders and the Stock Exchange in its December 22 Defence Document, published just nine days before the year end. According to Ryanair, this has now been proven to be untrue due to the enormous losses announced by Aer Lingus for 2008. In March the Irish flag carrier posted losses of €107.8m ($144m) for 2008, and said it was unlikely to meet its previous forecast of a pre-tax profit in 2009. The former state carrier also posted a €17.6m operating loss, which it expects to increase in 2009 as passenger fares and cargo revenue fall. Ryanair demanded Barrington and the Aer Lingus board explain to shareholders why they continue to preside over an enormous collapse in shareholder value and why they recommended rejection of Ryanair’s €1.40 per share offer just ten weeks ago, at a time when they were presiding over enormous losses for 2008, increased operating losses in 2009, and a share price which has collapsed by more than 50 per cent from €1.40 to less than 70 cents in March. Ryanair’s Michael O’Leary said: “Shareholders are entitled to ask why there is no mention in today’s results about restoring or improving shareholder value. It would appear that the board and management of Aer Lingus care more about lining their own pockets with excessive and unjustified director fees and multi-million euro resignation bonuses for failed management than they do about growing Aer Lingus, delivering profitability or shareholder value. “Irish taxpayers are entitled to ask the Department of Transport why they rejected Ryanair’s €1.40 offer and claimed that ‘the €1.40 offer for Ryanair greatly undervalues Aer Lingus’, when just ten weeks later the taxpayer investment in Aer Lingus has collapsed by more than 50 per cent. What does this say about the Department of Transport’s financial judgement? ”We intend to submit formal complaints to the London and Irish Stock Exchange, the Takeover Panel and the Financial Services Regulator about the patently false claims and misleading advice given by Aer Lingus to shareholders in its December 22 Defence Document. Consumers can celebrate Aer Lingus’ continuing losses and failure as Ryanair this morning [March 12, 2009] released 108,000 free seats — 1,000 seats for every €1m after tax losses announced by Aer Lingus this morning — for travel in March and returning in the first week of April. These will be the last free flights on Ryanair from Ireland before the Government introduces its crazy €10 tourist tax in Ireland.” Tim Jeans, MD of Monarch Airlines, summed Aer Lingus’ position up very well in this March’s issue of Airline Fleet Management when he said: “[Aer Lingus] cannot hope to survive in a market where they are in fourth place out of four on a route and they are forced into dropping their prices as they have nothing else left open to them.”
Aer Lingus likely to cancel its long-haul aircraft orders Aer Lingus will review its orders for long-haul aircraft as it restructures its senior management involved in the decision making, it has been reported. Stephen Kavanagh, corporate planning director, is to head longhaul operations; Sean Coyle, chief financial officer will oversee short-haul operations; Niall Walsh, deputy CEO, extends his duties to chief operating officer. Aer Lingus in 2007 signed a purchase agreement with Airbus for six A350-900s, due for delivery from 2014, and six A330-300s, which it has already started receiving. Hit by the recession, the Irish carrier predicts an even bleaker full year financial loss than was first thought. Aer Lingus has cut its long-haul capacity by 19.5 per cent and short-haul capacity by 4.5 per cent, during the first three months of 2009. Its preliminary first-quarter figures showed yields had fallen 14.5 per cent since the start of the year.
KD Avia and Air Europa Sign Prorate Agreement
A special prorate agreement (SPA) has been signed between KD Avia and Air Europa (Spain); passengers traveling with KD Avia from Russia and Kazakhstan can now buy flight tickets for their partner, Air Europa, at a lower price. The passengers traveling with KD Avia will be able to continue their journey from Russia and Kazakhstan via Barcelona further to the Canary Islands (Tenerife, Fuerteventura, Lanzarote, Las Palmas), the Balearic Islands (Palma, Menorca, Ibiza), as well as Madrid.
Jet Republic swamped with 1000 CV Jet Republic has been deluged with 1000 pilot CVs. Both pilots and flight attendants have been applying for roles with the airline at an increase of 300 per cent in February compared to January 2009. The company, which launched in September 2008, had during one week in mid March, received a record 200 CVs from some of Europe’s leading pilots from commercial airlines and air forces. Jonathan Breeze, CEO of Jet Republic said: “We are seeing unprecedented levels of applications from some of Europe’s top pilots... we have no plans to recruit ab-initio pilots and instead will rely upon the huge level of interest we are receiving from senior, experienced pilots.” The airline has said it believes the high rate of entrants is due to the contraction and liquation of other airlines. Jet Republic has also recently appointed three senior aviation industry experts as part of their management team, including Colin Rydon, Raul Sosa and Fernando Noronha joined from British Airways, Iberia and Portugalia respectively,
May/June 2009
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8
NEWS
BMi posts record loss
BMi (British Midland), the UK-based airline recently purchased by Lufthansa, posted a record loss on March 12 and was forced to announce a harsh round of cost cutting measures. BMi made a net loss of £99.7m ($137m) for 2008 against a profit of £7m for the same period a year earlier. BMi announced that it will now look to save a further £40m this year on top of its original planned budget cuts. This will involve a 12 per cent capacity cut and a 2009 pay freeze.
Air Berlin and TUI Travel close to agreement on cooperation German low-cost carrier, Air Berlin has confirmed that it is in talks with tour operator TUI Travel over a possible strategic alliance involving LTUfly. The proposed agreement will involve both TUIfly and Air Berlin taking up to a 20 per cent stake in the other. The deal looks set to peg all charter services against TUIfly while Air Berlin takes control over all other services. If this agreement goes forward then it would put the combined operation into a good position to ride out the recession.
V Australia chooses Lufthansa Systems navigation IT Virgin Blue’s new long-haul airline, V Australia, has selected several navigation products from Lufthansa Systems. The airline is to use Lido RouteManual navigation charts for its air and ground navigation purposes; the Lido FMS navigation database service for the central flight management; and Lido eAPM, the electronic aircraft performance monitoring solution.
LOW COST AIRLINE WORLD
Spanair and Air Europa sign a commercial cooperation agreement Air Europa and Spanair have signed a cooperation agreement that includes codesharing on their combined domestic network, enabling both carriers to offer improved connections under an expanded network. The code-share agreement covers 13 domestic routes which were effective as from March 29. It will include flights operated between Madrid and A Coruna, Alicante, Almeria, Bilbao, Jerez, Menorca, Malaga, Santiago de Compostela, Valencia and Vigo; and from Barcelona to Jerez, Malaga and Seville. Air Europa and Spanair will build their cooperation, expanding code share routes and destinations. The partner airlines estimate the enhanced network will generate a significant increase in passengers to both airlines through improving the travel options available in their core markets. Maria Jose Hidalgo, Air Europa’s CEO stated: “This alliance responds to our traditional policy of making travel easier for our passengers. For us, it is important that we make travel from any place in Spain to La Havana, Buenos Aires or Santo Domingo as accessible as possible.” Marcus Hedblom, Spanair’s CEO also made comment saying: “This agreement is an important development for the Spanish market. Spanair and Air Europa will provide a wider range of alternatives for the traveling public in both the business as well as leisure segments.”
O’Leary brands aviation regulator “useless and incompetent” Ryanair has announced a further series of route, flight and frequency cuts at Dublin Airport from July 2009, as the impact of the global recession (or, if you listen to Ryanair the €10 tourist tax and other Government price hikes, cause numbers at Dublin to decline). Dublin passenger traffic was down 12 per cent in February alone. Michael O’Leary went out on the attack saying: “This latest 12 per cent increase in Government owned ATC charges at Dublin Airport is another nail in the coffin of Irish tourism. These increases have been rubber-stamped yet again by Ireland’s useless Aviation Regulator, Cathal Guiomard, proving again how useless he is and that he should be sacked. How can any regulator approve a 12 per cent increase in ATC charges in a year when inflation will be negative? This is impossible to justify…. Ryanair calls again on the Irish Government to promote tourism by scrapping the travel tax and sacking Cathal Guiomard, the useless and incompetent Aviation Regulator.” From July 2009 Ryanair will close four routes from Dublin to Basel, Doncaster, Oporto and Teesside, and reduce frequencies on eight more routes from Dublin to Aberdeen, Biarritz, Billund, Bournemouth, Carcassonne, East Midlands, Malaga and Rome (Ciampino). These cuts will result in one additional based aircraft (five in total) being switched from high-cost Dublin Airport to a low-cost Ryanair European base in July. Ryanair’s latest cuts at Dublin for summer 2009 are confirmed as: A 22 per cent cut in Dublin based aircraft (from 22 to 17). A 20 per cent cut in weekly rotations (from over 700 to under 600). A 23 per cent drop in Ryanair’s Dublin traffic (10.8m to 8.3m pax in 2009/10). The loss of 50 Dublin based jobs (250 in total). Further cuts in Ryanair’s Dublin winter schedule will be announced later.
Sibir Airlines to buy back bonds Sibir Airlines board of directors is to buy back 2.3 million series 01 bonds in accordance with their owners’ agreement. The bonds will be bought back at the original purchase price, equal to 100 per cent of the securities’ par value, excluding accrued coupon yield payable to the seller of bonds in addition to the announced purchase price.
Ryanair announces seven new routes Ryanair has announced that it will open seven new routes to/from Memmingen (South Germany) starting April 2009. The seven new routes operate from the Bavarian airport to Alghero (Sardinia), Alicante, Barcelona (Girona), Barcelona (Reus), Dublin, London (Stansted) and Pisa.
S7 Airlines Restructures RUB985 Million Bonds
On March 18, 2009 S7 Airlines and Raiffeisen Bank, the lead manager and consultant, reached an agreement with more than 60 bond holders of S7 Airlines exceeding 985mn rubles (RUB). Upon signing, the issuer redeemed 20 per cent of bonds from investors who agreed with the terms of restructuring. S7 Airlines continues the dialogue with the rest of the bond holders. ($1= RUB33.49)
Sky Express announces operating results for February 2009 Sky Express passenger load factors for February 2009 totaled 64 per cent, an increase of 12 per cent; cargo load factor was 70.2 per cent, an increase of 5.7 per cent. The airline handled 58,351 people in February 2009, 9 per cent less than the same period of the previous year. Passenger traffic totaled 79,530,432 p-km in February 2009, down 4 per cent. The company’s cargo traffic totaled 136,830 t-km, up19 per cent. The airline handled 92.6 tons of cargo and mail, an increase of 1 per cent. Passenger charter service totaled 6,178 people. In January-February 2009 the airline handled 134,003 people.
May/June 2009
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10
NEWS
V Australia selects Sabre operations management system Virgin subsidiary V Australia has chosen Sabre Airline Solutions as a partner for the management of its flight operations and crew utilisation. The airline will use Sabre’s ‘AirCrews’ and ‘AirOps’ suites to manage its daily maintenance and flight operations, automate flight planning, produce flight plans, schedule and manage crew.
Virgin America names Nelson CFO San Francisco-based Virgin America named Holly Nelson as the airline’s CFO. She joined in April to oversee the airline’s financial operations, including treasury, tax, financial planning and analysis, accounting, financial reporting, budgets, procurement and fleet planning. Most recently, Nelson served as SVP finance and controller at XOJET. She was also SVP controller and chief accounting officer at JetBlue Airways.
Gol post loss of $600m Gol Linhas Inteligentes, the parent company of Varig and Gol posted a 1.39bn Brazil Reais (BRL) ($607m) loss for the full year (2008) from a profit of BRL272.3m for 2007. Revenues rose by 29.7 per cent to BRL6.41bn but costs rose by BRL6.5bn, which lead to an operating loss of BRL88.6m from a BRL2.4m profit for 2007. Gol issued a revised guidance for 2009 saying that it expects to handle 28 million passengers for the full year, a fall from 29 million, however the airline announced that capacity will not be cut and will stay at 40.5bn ASKs. The airline expects unit costs to increase for the period. This news follows reports from Gol over the weekend that it has approved the sale of 6.6m common shares and 19.5m preferred shares at BRL7.80 each. The share price is down at $3.22 at yesterday’s close on the NYSE. ($1 = BRL2.20)
LOW COST AIRLINE WORLD
Jazeera Airways says that it will have no debt Jazeera Airways issued a statement on March 18, saying that it expects to be debt free by the end of 2010. The airline says that it is exploring “innovative ways” to raise finance. Indeed, Jazeera Air chairman, Marwan Boodai, stated that there is “finance still available out there in the market”. He went on to say that Jazeera Air’s funding is currently being raised by its aircraft leasing unit, Sahaab Leasing, which you may recall was launched in October 2008. Boodai says that his airline will therefore not require direct financing as the leasing company will “take care of that”. Sahaab Leasing plans to have 40-50 aircraft on its books by the end of 2009. Boodai believes that his lowcost carrier does not need to cut fares further, he expects full service competitors such as Qatar, Emirates and Etihad, who have lowered their fares of late, to increase them again before the year end. Jazeera said that it expected to report a 94.4 per cent increase in full year profits (2008), increasing by 40.3 per cent due to cost cutting measures. Jazeera currently has two hubs operating out of Kuwait and Dubai and has plans to launch a third hub “within two to three hours zone from Kuwait”. Jazeera plans to operate to 59 new destinations across the Middle East by 2014 with plans to increase passenger numbers to 8.5m per annum. The target for 2009 is 2.5 million passengers. Jazeera currently has aircraft operating to 25 destinations across the Middle East with 32 aircraft on order with manufacturers. The airline currently has Kuwait Stock Exchange listing and still plans an IPO to list on the DMF (Dubai Financial Market) at some point next year.
Frontier Airlines in fuel hedging rescue deal Frontier Airlines Holdings reported an operating profit of $1.5m for February 2009. It was the fourth consecutive monthly operating profit from the airline. As is the way with most airlines at the moment the red ink is not too far away from the first paragraph of any results statement, and so Frontier also reported a consolidated net loss of $3.2m for February 2009. Excluding fuel hedging transactions Frontier would have reported an operating loss of $2.6m for the month; in fact the airline lost $4.5m on hedge contracts in place but managed to post a gain of $4.1m on market-to-market hedging activity. Frontier has reduced capacity by 15.4 per cent year on year.
Finnair plans to furlough technical staff Finnair is planning to furlough 1,600 employees of its maintenance subsidary, Finnair Technical Services, for varying periods between two weeks and three months. The company aims to thereby save seven million Euro. “The economic situation of Finnair Technical Services has weakened more strongly than expected, which results from cuts both at Finnair and with client companies from outside the Finnair Group,” says Kimmo Soini, director of the Scandinavian MRO.
AirAsiaX ups London-KL route to daily service AirAsia X will increase its flights between London, Stansted and Kuala Lumpur to a daily service, just six weeks after its launch. More than 10,000 passengers have flown with AirAsiaX on five flights per week during this time. The introduction of a daily route will commence July 1, 2009. “Advanced bookings indicated how popular the route would be especially as it links Stansted, Europe’s point-to-point airport of choice for low-cost travel, to AirAsia’s Kuala Lumpur hub and onward lowcost connections to Australia, China and India,” Nick Barton, Stansted’s commercial and development director said.
Finnair takes its first A330-300 Finnair has taken delivery of its first A330-300. The aircraft is the first of eight ordered by the airline for its medium and long haul operation. “It will help us to achieve our goal of having one of Europe’s youngest and environmentally friendly fleets,” said Jukka Hienonen, CEO of Finnair. The aircraft are powered by CF6-80E1 engines, and seats 271 passengers in a two-class cabin; 229 seats in economy and 42 in business class. The Finnair fleet now includes 35 Airbus aircraft: 11 A319s, 12 A320s, six A321s, five A340s and the first A330. Finnair was also the first airline to order the A350 XWB, signing for 11 aircraft with first delivery in 2014.
Southwest steps closer to work contract agreement Southwest Airlines has reached a ‘tentative agreement’ with the Transport Workers Union (TWU) and its 9,800 Southwest flight attendants on March 27, over work conditions. The talks concerned a new, four-year contract which would run through to May 31, 2012. Contract amendments have been in discussion since the current contract became amendable during May last year. The board voted to present its offer to the flight attendants for their approval.
S7 Airlines total volume of restructured bonds exceeds 1.3m rubles S7 Airlines and Raiffeinsen Bank have reached an agreement with more than 30 holders of nonconvertible 01 series interest bearing bonds of S7 Airlines exceeding 350m rubles (RUB). According to documents signed on March 25, 2009, the issuer made a proportional purchase of 20 per cent of bonds from investors; thus, 90 individuals agreed to the terms of restructuring with the total volume of restructured bonds worth RUB1.335m. ($1 = RUB33.49)
May/June 2009
NEWS
Air Berlin will not pay dividend (again)
Europe’s third-largest low cost carrier confirmed yesterday that it would not pay a dividend this year. Air Berlin is yet to pay a dividend since listing in 2006.
Aer Lingus to convert longhaul aircraft order? The Irish airline Aer Lingus is in talks with Airbus over the possibility it may convert some of its long-haul aircraft orders to short-haul ones as a solution to the present financial difficulties and low demand. The choice to swap orders would also allow the airline to avoid penalties for order cancellations.
Spring Airline to introduce more A320s Spring Airline, which launched in July 2005, said it expects to almost double its net profit to CNY40m ($5.8m) this year and is in talks to order 10 A320s from Airbus. Spring took delivery of an A320 during late March, purchased directly from Airbus. “We plan to introduce 15 more A320s through purchase in the coming days,” Zhang Xiuzhi, CEO, told reporters. The airline has 11 additional aircraft on lease and placed an order for six A320s two years ago. The privately run, China-based airline is also planning to hire more than 30 pilots at a cost of CNY100m. It last year reported net earnings of CNY21m in 2008 and a load factor of 95 per cent. ($1 = CNY6.83)
May/June 2009
Air Canada shares nosedive on talk that the airline is to restructure Air Canada stock plummeted 22.22 per cent to close at $0.84 on March 30.The sharp falls were triggered by the resignation of CEO, Montie Brewer, who had led the airline since 2004 but has been scraping the bottom of the financing barrel for cash of late. His replacement was none other than sword wielding restructuring supremo Calin Rovinescu. Rovinescu was a key figure in the controversial restructuring of Air Canada back in 2003 when the airline was under bankruptcy protection. He did in fact serve as VP of corporate development and strategy from 2000 before becoming chief restructuring officer in a period that will forever be associated with the terrible ways in which creditors have been treated, particularly lessors. Rovinescu made an announced upon his appointment: “While the challenges in front of us are large, we will continue to build upon the success of the airline to date and deliver a quality product for our customers, employees and shareholders.” The airline’s shares have fell from a high of $9.86 to $0.76. The pensions fund deficit has widened, in addition union contracts are due to expire soon.
Spanair sale completed Back on the 30th of January 2009, the SAS Group (SAS) reached an agreement with Initiatives Empresarials Aeronautiques, S.A. (IEASA), a consortium including, Consorci de Turisme de Barcelona, Catalana d’Inciatives, Volcat 2009 and Fira de Barcelona, whereby IEASA would acquire a majority stake of 80.1per cent in SAS’ subsidiary Spanair S.A. (Spanair) for a cash consideration of €1.00. Following the transaction, SAS remains a 19.9 per cent minority shareholding in Spanair and acts as its industrial partner to assist in the implementation of its strategic plan, which aims at further strengthening Spanair’s position in Spain and as the leading carrier in Barcelona. The transaction was completed today, following receipt of all necessary regulatory clearances by SAS and Spanair, including approval from Spain’s competition commission (CNC). The capital increase in Spanair of €100m is to be completed before the end of April 2009. In the interim period SAS has undertaken to provide a bridge loan to Spanair S.A., if needed, of up to €15m to be repaid not later than April 30, 2009.
Air Arabia arranges early delivery for A330 Air Arabia, the region’s largest low-cost carrier, will take early delivery of the first of 44 A330 aircraft on order from Airbus, the delivery has now been bought forward from 2012 to the middle of next year, the airline should now receive the remaining aircraft by the middle of 2010. The airline, which operates a fleet of 17, all of them Airbus aircraft, ordered 34 A320s in 2007 and 10 more in November when delivery slots were scarce, has said it will take early delivery instead of leasing aircraft for the interim period. Adel Ali, the group chief executive of the Sharjah-based low-cost airline told reporters he is confident the company can raise the $2.42bn (Dh8.88bn) purchase costs. Air Arabia posted a Dh510m net profit last year and has secured fuel to meet 60 per cent its requirement this year.
Virgin Atlantic promotes Griffiths to COO Virgin Atlantic Airways has promoted its director of engineering, Steve Griffiths, to succeed Lyell Strambi as COO. The new role of the former Rolls-Royce engineer will encompass engineering, operations, airports, cabin crew, product and cargo. Former COO Strambi returned to Australia at the end of last year.
FlyLAL group services appoints general representative in Russia Olga Sokolova has been appointed general representative of flyLAL group services in the Russian Federation. In her new position Sokolova is responsible for the sale development on the Russian market in all business activities of flyLAL Group Services. She is also responsible for the development of partnership relations with the Russian operators of foreignmade fleets, consulting, as well as the development and strengthening of a long-term cooperation between the Russian and Lithuanian aviation authorities.
Pilots unhappy with United Airlines, Aer Lingus JV Pilots are voicing their opposition to the recently announced joint venture between United Airlines and Aer Lingus that will not use United or Aer Lingus crews on new Aer Lingus flights between Washington, D.C., and Madrid, Spain. “The pilots of United and Aer Lingus have made enormous sacrifices throughout their careers to help their companies succeed to the point where they can expand international routes,” said Captain Paul Rice, First VP of the Air Line Pilots Association, International (ALPA-I) and deputy president of the International Federation of Airline Pilots’ Associations (IFALPA). “It is an outrage that the same pilots who helped these companies prosper are being denied their right to fly these new routes.” The flights are scheduled to begin in April 2010, and the companies plan to add service to additional cities in 2011. In 2012, the airlines intend to create a new jointly-owned European carrier to take over these employees and services.
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Aer Lingus CEO resigns Dermot Mannion, CEO of Aer Lingus resigned with immediateas from April 6. He stated that he wanted to step aside for a new person with “fresh thinking and new ideas”. Mannion joined the Irish flag carrier as CEO in August 2005 from Emirates. The company’s chairman Colm Barrington resumed responsibility until a new CEO has been named.
MexicanaClick signs up to $350m total care agreement
Rolls-Royce has signed a long-term engine service agreement worth more than $350m with Mexicana Group for a fleet of aircraft operated by its low-cost subsidiary, MexicanaClick. The TotalCare agreement covers 25 newly leased 717-200s, powered by Rolls-Royce BR715 engines. More than 55 per cent of Rolls-Royce’s modern jet engine fleet is covered by TotalCare or CorporateCare service agreements.
Air Berlin passenger numbers fall 5.6 per cent in March
Air Berlin’s passenger numbers for March fell 5.6 per cent compared to the same month last year. The number of passengers totaled 2.05 million. The airline said it had cut the number of seats on offer by 0.8 percent in March while the load factor fell 3.7 percentage points to 74.1 per cent. However, fare yields rose 4.2 per cent from a year earlier, meaning the company improved its profitability per seat sold.
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AirAsia X in IPO and A350 drama AirAsia X made a flurry of announcements during the first week of April, one of which stated that it is looking to raise capital via an initial public offering (IPO). It seems that AirAsia X has had an offer that it cannot refuse from Airbus and so the airline is floating ideas out into the market to see if anyone will bite, giving them the money to push the huge aircraft order for some 25 to 50 A350 XWBs. During 2007 AirAsia X raised startup cash through private placements to lessor Orix Corp, Manara consortium of Bahrain and Sir Richard Branson, so the airline has recent success in this field. It is known though that investment bankers are working on an IPO scenario at this moment. Indeed AirAsia X could well be one of the few airlines in profit for the 2008 year of account with figures in the MYR150m to MYR200m range off of revenue at MYR1bn, if this were to be the case then an IPO might well be a good option to go for with a listing on the KL Composite Index. It is believed the airline hope to use the aircraft on routes to the US’ Los Angeles and New York and it is thought they may be ready to do this by July this year. ($1 = MYR3.579)
Southwest clasp capital in sale and leaseback deals Reports hit in early April that Southwest Airlines has arranged a sale and lease back deal for six aircraft with BOC, while other reports suggest the airline has arranged a sale and leaseback deal worth $105m for three 737-700s. The average lease period in its deal with BOC is thought to be 14 years. The first tranche of three aircraft closed on April 2, and the second tranche is expected to close in the second quarter of 2009. The lease period for the three 737s is thought to be 12 years made of monthly payments of around $4.6m during the first six months, rates thereafter will be reset every six months.
easyJet chairman to step down British low-cost airline easyJet has announced that Sir Michael Rake, the chairman of BT Group, has been appointed as deputy chairman and that current chairman Sir Colin Chandler will step down on July 1. Ryanair chief Michael O’Leary, made the cutting statement that David Begg, the current President of ICTU should be the new CEO in recognition of the fact that the airline is run by the trade unions at the expense of passengers and shareholders. O’Leary went on to say “No worthwhile CEO would wish to work for a company like Aer Lingus where the vested interests of government and the trade unions repeatedly frustrates or gets rid of effective management and destroys shareholder value.”
Flybe takes its 50th Q400 Flybe, the UK airline, has taken delivery of its 50th Q400 airliner. Flybe is the largest operator of the Q400, having placed orders in 1999, 2003, 2005 and 2007. The airline operates 190 routes in 13 countries and is the largest of Europe’s regional airlines. Firm orders for the Q400 airliner have reached 347 aircraft, with 233 having been delivered as of January 31, 2009. The delivery also marks the 1000th installation of the Ultra Electronics’ Active Noise Control (ANC), the Active Noise and Vibration Suppression (ANVS) system used on Bombardier aircraft.
Aer Lingus appoints Goldman Sachs to search for consolidation partner Aer Lingus has made sounds that it now wishes to form an alliance with one of the other big EU-based airlines has appointed Goldman Sachs to look at strategic options. Lufthansa, Air France-KLM and British Airways (BA) have all been mooted as possible strategic alliance partners. Lufthansa however, is concerned with its consolidation with Austrian Airlines and possible deals with SAS that would further enhance its central European plans. Additionally, Lufthansa has already purchased BMI, one of Aer Lingus’s big competitors on the Heathrow/Dublin route. Likewise, BA is distracted but its decision whether or not to merge with Iberia and with American Airlines, the latter being the priority for BA. Air France-KLM is the most likely of the three airlines, but if Aer Lingus does form a strategic alliance with one of the EU’s big three then it will have to think about alliance membership, which in turn will affect its codeshare agreements running across all three major alliances.
Ryanair promotes O’Toole director for new route development Ryanair has appointed Ken O’Toole director of new route development where he will be responsible for the further expansion and management of the airline’s route network, the allocation of aircraft fleet, commercial relationships with airports and reduction of airport costs. A chartered accountant, O’Toole joined the company in 2006 as yield manager and was responsible for the revenue management of the route network. Since 2008 he has held the position of head of scheduled revenue with specific responsibility for the Scandinavian, German and Dutch markets.
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Lufthansa states its intention to buy 50 per cent stake in BMI Lufthansa has formally stated to the European Commission its plans to acquire an additional 50 per cent stake in bmi, boosting its ownership to 80 per cent. The carrier wishes to purchase all of the additional 50 per cent plus one share stake from Michael Bishop, bmi’s chairman. The commission is also reviewing Lufthansa’s plans to takeover SN Airholding, parent company of Brussels Airlines.
Spring Airlines awaits approval to purchase 3050 aircraft Shanghai-based Spring Airlines has expressed its intention to order 30-50 aircraft from Airbus, the company’s chairman Wang Zhenghua said. The order has yet to be approved by the CAAC and it is thought may be barred by the body as it believes Chinese airlines should cancel or delay aircraft orders, yet Spring is China’s most profitable private carrier with a net income of CNY20m ($2.9m) last year and a profit of CNY15.9m in the first quarter of 2009. Spring currently operates 12 A320s and plans to take delivery of 15 more in the next three years. ($1 = CNY6.8)
ExelTech selected by JetBlue for Embraer 190 work JetBlue Airways has selected ExelTech to provide airframe heavy maintenance services for its Embraer 190 aircraft. Donald Kamenz, ExelTech’s VP of sales and marketing, commented: “Our intent is to be a long term player in the Embraer maintenance market and JetBlue is definitely the kind of airline that we are proud to partner with.”
May/June 2009
Aer Lingus celebrates debut Gatwick takeoff Aer Lingus has flown its first European flight from London Gatwick Airport, taking 170 holiday-makers to Malaga. Aer Lingus will fly from Gatwick to eight European routes. Malaga and Knock were the first destinations launched, with Vienna, Nice and Munich launching on April 20, with Faro and Zurich to follow on April 26. Enda Corneille, Aer Lingus’ corporate affairs director said it was ”the first major step towards internationalising the Aer Lingus brand and growing our business in Europe’s biggest aviation market”. Aer Lingus will initially use four A320 short-haul aircraft at Gatwick, but within 12 months the new base is expected to grow to eight aircraft with the potential for up to 2.5 million passengers a year.
Wizz Air selects Honeywell avionics and APUs for 70 A320-family aircraft
Wizz Air Hungary has contracted Honeywell to provide a suite of its safety and navigational avionics products and the 131-9A auxiliary power unit (APU), including a long-term service agreement, for 70 new A320-family aircraft. The avionics suite includes the IntuVue 3-D weather radar system, an enhanced ground proximity warning system (EGPWS), airborne collision avoidance system (ACAS II) with ADS-B and Mode S, the manufacturer’s Quantum line communication and navigation equipment (CNS), air data inertial reference system (ADIRS), emergency locator transmitters (ELTs), solid state flight data and cockpit voice recorders, and the flight management system (FMS). The 70 aircraft are to be delivered between 2009 and 2014. The agreement also includes an optional 25 aircraft delivered between 2014 and 2016.
Skywest reports lower than anticipated 1Q results SkyWest, the parent company of regionals SkyWest Airlines and Atlantic Southeast Airlines, has said it will report a “lower than anticipated” first-quarter profit of $4.5-$7.5m. This compares to a $29.2m profit made during the first three months of 2008. SkyWest is scheduled to release its first-quarter results on May 6.
Sky Express announces operating results for Q1 2009 Sky Express’ first quarter of 2009 passenger load factor totaled 60.7 per cent, up 8.1 per cent. Passenger traffic totaled 256.276 million p-km in the reported period, a decrease of 4.2 per cent. In the first quarter of 2009 the airline handled 186, 683 people, a fall of 13.7 per cent. In the reported period the company’s cargo traffic totaled 380 700 t-km, up 17.2 per cent. The company handled 265.9 tons of cargo and mail, an increase of 2 per cent.
Ryanair threatens Dusseldorf officials over flight restrictions Ryanair threatened to close its base at Dusseldorf Weeze, on April 21, if restrictions on the airport’s operating hours were not overturned by the OVG Court, Munster. Ryanair handles 2.5 million passengers at the airport each year but on the day of the announcement stopped taking bookings on fights affected by the restrictions. The carrier has six aircraft based at the airport.
Air Canada and TAP sign codeshare agreement Air Canada and TAP Portugal have announced a codeshare agreement. TAP will place its code on AC flights between Canadian cities and international gateways including Newark, London Heathrow and Madrid, while Air Canada will place its code on TAP flights from Lisbon and Porto to the same gateways.
Finnair to part with two Embraer E170s
Finnair is to place two Embraer aircraft on the market. The two E170s, which are currently operated by Finnair, are to be offered for sale or lease through a deal arranged by Jetscape. Jetscape currently owns and manages 26 aircraft with 18 airline operators in 13 countries. It placed an order with Embraer in January 2008 for up to 30 E-jet family aircraft and said it will “continue making selective acquisitions of Airbus and Boeing narrowbody aircraft.”
Blue wings to cancel A320 order? Fears were raised as Blue wings, may cancel its 2006 order for 20 A320s after its operating certificate was withdrawn on 31, 2009. It was thought the German airline, which now faces liquidation, might be saved by its sister company, RedWings Airlines, which is expanding its services, but it was later reported that Blue wings may not need this assistance and that it may acquire its license swiftly after the airline signed with Abu Dhabi’s Elite Aviation to operate two A320s. Its owner, Alexander Lebedev, has reportedly said that he has offered a 49 per cent stake in the airline to Aeroflot or 1 ($1.30).
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Airline consolidation faces close antitrust scrutiny The European airline industry is undergoing a new wave of consolidation, as is illustrated by recent transactions such as Iberia’s acquisition of Vueling and Clickair, as well as Lufthansa’s proposed acquisition of SN Brussels Airlines.
Photo: Gregor Schlaeger. © Deutsche Lufthansa AG
A
irline mergers and acquisitions must, however, receive approval from antitrust regulators before they are allowed to proceed. In most cases, airline mergers are reviewed by the European Commission. National competition authorities will be competent where the merger does not have a community dimension, as was the case in the acquisition of GB Airways by easyJet. In cases where the merging parties are competitors, the European Commission will only grant clearance and allow the merger to proceed in exchange for acceptable remedies. Remedies are usually required on routes where the transaction leads to monopoly or significantly reduces competition. Typically, this is the case where the merged entity will have a high share of passengers transported or of slots available on these routes. Commitments normally take the form of slot releases. For example, Iberia had to release a certain amount of slots on identified routes in order to acquire both Vueling and Clickair. The aim in requiring such a commitment is mainly to facilitate the entry of new competitors and to maintain competitive pressure on the newly merged, expanded airline. However, the European Commission will carefully assess whether the remedies offered are adequate to address the competition concerns identified. The European Commission recently rejected commitments that were proposed by Lufthansa in the course of its proposed acquisition of SN Brussels Airlines, on the ground that these were insufficient to alleviate competitive concerns. In particular, the European Commission fears that the merger would lead to a monopoly situation on a number of routes between Brussels and Germany. The Commission has now opened an in-depth investigation into the take-over and will only give the go-ahead if Lufthansa is able to come up with revised commitments. Observers will be watching developments in this case closely as this may set a precedent for how remedies will be assessed in the future. n
LOW COST AIRLINE WORLD
Photo: Rolf Bewersdorf. © Deutsche Lufthansa AG
Press conference of the partnership by Brussels Airlines and Lufthansa
May/June 2009
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Is there light at the end of the tunnel? Caught out badly on their fuel-price hedging positions by a 75 per cent-plus fall in oil prices in less than six months as the world recession hit, many of the world’s low cost airlines posted losses for the last three months of 2008 and first quarter of 2009. As global economic clouds continue to darken in 2009, however, the one silver lining for airlines is that fuel prices should remain far below their mid-2008 peak.
LOW COST AIRLINE WORLD
May/June 2009
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R
eeling like a punch-drunk boxer from a one-two-three combination of soaring fuel prices, the onset of the deepest world recession since the 1930s, and then a precipitous drop in the price of oil that mocked their fuel hedges, many of the world’s leading low cost airlines were as pleased to see the back of 2008 as a losing fighter would be to leave the ring after being knocked out in a prize bout. But while the world’s economic woes only deepened during the first quarter of 2009, making the chances of a quick comeback less likely for most airlines, the fundamental supplyand-demand relationship between global economic performance and the price of crude oil should give hope in what otherwise is set to be a bad year for the air transport industry. Jet fuel prices are volatile, depending in any given market on dayto- day factors such as climatic temperatures, natural disasters, accidents affecting refineries and pipelines, the short-term proportions of refinery capacity allocated to different distillate fuels and — most important of all — the global political situation as it affects major oil-producing countries. However, analysts’ forecasts for crude oil prices throughout 2009 are fairly tightly grouped into a range of $40 to $60 per barrel, according to Vaughn Cordle, CEO of Virginia-based consulting firm AirlineForecasts.
May/June 2009
Forecast range “We cover a lot of [forecasting] organisations, around 70,” says Cordle. “What’s reasonable is a range of $40 running up to maybe $60 as we see more fiscal stimulus [in the USA], averaging out to maybe $50 this year and $60 next year.” Meanwhile, he says, the “crack spread” for jet fuel is likely to fall as much as 25 per cent from its unprecedented 2008 peak of $24-$25 to as low as $18. The crack spread is the additional price that oil companies charge to refine jet fuel from crude oil. From day to day, and location to location, it largely depends on how much of a refinery “run” is dedicated to jet-fuel production rather than to other distillate fuels competing for the portion of the refinery’s fractionating capacity not given over to gasoline. Other fuels such as heating oil and diesel compete with jet fuel for fractionating capacity and usually they are demanded in much greater quantities than is jet. John Heimlich, chief economist for the Air Transport Association of America, is largely in accord with Cordle’s view. “I think what we saw last year was a tremendous amount of volatility with regard to the fuel-price side” of the airline economic picture, says Heimlich, who held off throughout the first quarter from making his usual annual economic forecast for the US airline industry because of the huge uncertainties now dominating the global economy. “It now looks
like there is a reasonable amount of stability with regard to price; the volatility has shifted to demand,” he says, with every week bringing a new round of bad economic news from all over the world.
Softening demand The softening industrial demand for oil in the US and other economies should bolster analysts’ forecasts that oil should stay relatively inexpensive this year. In January, Deutsche Bank’s chief energy economist Adam Sieminski reduced his forecast for the average 2009 price for West Texas Intermediate (WTI) crude by $2.50 to $45. Sieminski forecast an average price per barrel of $45 in the first quarter of the year, $50 in the second quarter, $45 in the third quarter and $40 in the last three months of the year. “I think in part the US, especially at Cushing (a big US pipeline hub), is awash in inventory,” says Heimlich. In Sieminski’s opinion, however, prices will strengthen going forward. Looking ahead to 2010, Sieminski forecast an average annual WTI price of $55 per barrel; and pushed his forecast average price up to $80 for 2011. How does this outlook square with other informed views? Quite well, it seems. By midFebruary, Stephen Depow, an investment adviser specialising in fuel contracts for Wellington West Capital in Fredericton, New Brunswick,
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Owen Geach, commercial director of Surreybased aviation consulting firm IBA Group, states: “I can’t see in the current climate that governments are going to be keen to see oil prices increase. I think there will be governmental pressure on OPEC to keep prices down.” Even at today’s low oil prices though “a number of airlines are trying to keep their heads above water”.
Fuel-price factors internationally
felt the precipitous fall that had seen crude oil prices decline from a peak of $147 per barrel in mid-2008 to just $35 in less than six months was reaching a floor. Prices should start to climb as excess inventories at oil supply hubs such as Cushing, Oklahoma (a major settlement point for WTI on the New York Mercantile Exchange), gradually stop building and start being drawn instead, says Depow.
heavily away from oil into gold in late 2008. A return into oil “emphasises the move” upward, he says. So what does this mean for the price of jet fuel? Recall that the price of crude oil is only one of the two main components of the distillate’s price: the crack spread is also very important. A third factor must also be taken into account: the taxes that state and national governments levy on fuel purchases.
Oil prices bottoming out
Crack spreads and jet fuel prices
“There are lots of little things in trading that can change things on any one day, but in general the market appears to be forming a bottom,” Depow told Low Cost Airline World on February 20. The crude-oil production cuts announced by the members of OPEC (the Organisation of Petroleum-Exporting Countries) “are working their way through”; and, meanwhile, “a lot of [oilextraction] projects are being held back” because recent low oil prices have not made it worthwhile for the developers to sanction the investment required. “Last week there was a slight draw for the first time [in months] and once we get a few weeks of inventories not building, even though there is still an excess of oil on the market, at least things will come under control,” Depow stated. “From there, the cuts should have worked their way through by summer and in general there should be higher demand for the whole spectrum of distillates — except heating oil. In the second half and into 2010, because of the low price, demand should start to make a comeback.” Meanwhile, says Depow, if the oil price starts looking like it has bottomed out and is on its way up, “It is likely that fund flows will increase towards energies” trading after having moved
LOW COST AIRLINE WORLD
While in late January jet-fuel crack spreads in the USA “were still bouncing up and down in the low 20s, consistent with 2008, in theory they should soften this year as more and more refinery capacity comes online outside the US,” says Heimlich. “There will be pressure for US crack spreads as refiners continue to respond to weak gasoline margins, which will cut refinery runs,” he adds. “By default this reduces everything else as well as gasoline. I would think [2009 crack spreads] will end up in the low teens rather than the low 20s. That’s still three to four times more than the historical average of $5, and jet fuel is still more expensive than gas and diesel. Jet fuel is the most expensive transportation fuel.” Add the taxes that airlines pay on every barrel of fuel purchased to the crack spread and the basic price of crude oil, and the per barrel price paid in 2009 by US (and other international) airlines should largely be within a range of $60 to $85 — for the US airlines, “probably a 62 to 64 per cent reduction in the jet fuel cost” compared with 2008, says Cordle. This assumes there is no major international crisis, and on a regional scale does not take into account the effects of potential supply disruptions such as a refinery fire.
Internationally, other factors will affect the basic prices that airlines in different areas of the world pay for their fuel in 2009. An important factor for non-US airlines is foreign exchange rates. Since oil is priced in US dollars, the recent strengthening of the dollar against various other major currencies has helped correct a competitive disadvantage under which the US airlines have laboured for several years. “It doesn’t help our bills per se — there’s no change in the cost of fuel,” says Heimlich. “It just reduces our competitive disadvantage regarding Asian and Latin American carriers. What changes is their cost of fuel. The competitive advantage, which used to be 50 to 60 per cent at times last year and could be $50 a barrel, has abated greatly — though there is obviously still a gap.” For US airlines, he says: “The hope is that we can increase our nondollar- denominated revenues, where we would have an advantage, repatriate in dollars and this then translates into an effective fare increase without having to do a fare increase. But it’s a tough environment in which to increase our non-US point of sale.” Another factor is that WTI is only one of two major crude-oil benchmark price measures, the other being Brent. Recently supply factors saw the prices of Brent and WTI move in opposite directions — while the price of WTI was trending down to what has appeared to be a bottoming, the price of Brent was moving up.
The longer term However, this is not important in the longer term, says aviation economist Adam Pilarski, senior vice president of Virginiabased consulting firm Avitas. “Oil prices are international in dollars, so some people benefit from a cheaper dollar — but, overall, oil prices have very high volatilities,” he says. “So unless one [price benchmark] goes to $25 and the other to $150, it’s unimportant. In the short term, if they move in different directions, it doesn’t mean anything. There can be big regional differences, such as [Hurricane] Katrina and a fire in a refinery in Rotterdam. Individual benchmarks may depend on
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different things.” Adds Pilarski: “In aviation we are more concerned about the long term. In 2008, when prices became super-high, fuel became the largest expense for aviation. In the 1980s, when we had the previous high numbers, that was not the case — labour was still the highest. This is the other thing that is important. You can argue with labour — you can’t argue with oil. If you’re in deep trouble, you can go back to labour. You can’t go back to the oil companies and say ‘we in aviation have problems’. You can only buy or not buy.” The meteoric rise of oil prices last year actually did the world’s airlines a service, says Pilarski: “Luckily for the airline industry, high oil prices happened before the economic meltdown. The first eight or nine months of the year were not good; the last three or four were a disaster. There were highly negative [traffic] numbers, not related to oil but related to the economy. But the airlines had already started parking planes — not because they could sense the economy slowing, but because of high oil prices.” This was particularly true for airlines in the US, notes Heimlich. “Because of the domestic weakness last year and currency exchange rates, and the disproportionate toll this took on the US airlines, I think we are a little better prepared than our non-US competitors for 2009 — but only 2009,” he says. “But there are still significant issues for 2010 and beyond. I think we have taken our lumps a little bit earlier than others. Other international markets lagged the US a bit in deteriorating.”
The post-recessionary period After 2009 — when for the first time in recent memory IATA expects the US airlines to lead all of the world’s carriers in terms of profitability, simply because as the first to encounter problems they cut capacity and costs before all other airlines did — the ability of the global airline industry to withstand higher oil prices could once again quickly become a significant concern as the developed world looks to emerge from recession. While Pilarksi believes that Saudi Arabia and other leading OPEC nations are “interested in oil prices being fairly high, but not high enough so there are real incentives to find alternatives, and so from a pure economic point of view there is no justification for $100-and-above oil prices,” these nations may not represent the prime fuel-price threat to airlines in the immediate postrecessionary period. “Politically a faction in the oil industry is very much interested in short-term high oil prices,” says Pilarski. “Unconventional leaders” such as Russia’s Vladimir Putin, Iran’s Mahmoud Ahmadinejad and Venezuela’s Hugo Chavez
May/June 2009
“are all spending large amounts of money to buy popularity, and because of this there is a chance when we get out of the recession that oil prices may go to a higher level than is justified — for instance, to $70 a barrel”. He states: “I actually believe the recession will be with us a year and, when it stops, oil prices will go up to $70.” At such prices for crude, jet fuel could easily reach $100 per barrel, forcing carriers to maintain restrictions on capacity and continuing to make life difficult for airlines and aircraft manufacturers alike.
No reason to see mid-2008 levels again But while stressing that any major political trouble — particularly in Saudi Arabia or another Middle East nation — could have severe repercussions for oil prices, Pilarski believes that, all things being equal, there is no reason oil should shoot up again to the levels seen in mid-2008. “I totally disagree with the long-term view of some analysts that oil prices will go to $150
to $300,” he says. “The best solution for high oil prices is high oil prices. If oil prices stay very high for the longer term, we’ll come up with alternatives. At $100 a barrel there are plenty of alternatives and plenty of money to go into it.” Additionally, he believes, oildemand arguments based on China’s former double-digit-percentage annual growth rate are spurious. “These are Looney Tunes. Even when China’s economy was growing 10 per cent for the average product, oil demand was only going up five per cent,” he comments. What is certain, says Pilarski, is that “we in aviation will probably be one of the last users of oil”. He concludes: “We try things in aviation because there is a lot of abuse [from anti-aviation environmentalists] right now, especially in Europe and particularly in England. But, in the long term, if cars move away from oil there will be a lot less demand — and there will be less of an economic incentive for aviation to find alternatives.” So oil prices are likely to remain of the most acute interest to all airlines for the imaginable future. n
AIRLINE FUEL PRICE HEDGE POSITIONS — A Low Cost Selection from the US and EU Alaska Air Group
Southwest Airlines
*All of our 2008, 2010 and 2011 positions and the majority of our 2009 positions are call options, which are designed to effectively cap our cost of the crude oil component of our jet fuel purchases. With call options, we benefit from a decline in crude oil prices, as there is no downward exposure other than the premiums we pay to enter into the contracts. AAG is 50% hedged for 2009 at an approximate crude oil price per barrel of $76. It is 33% hedged for 2010 at an approx price of $70 and is 11% hedged for 2011 at an approx price of $80. Quarterly hedge levels as of 25 Feb 2009: 1Q09, 50% at approx crude oil price per barrel of $81; 2Q09, 50% at $71; 3Q09, 50% at $76; 4Q09, 50% at $76; 1Q10, 42% at $68; 2Q10, 34% at $68; 3Q10, 29% at $67;’ 4Q10, 24% at $78; 1Q11, 17% at $91; 2Q11, 15% at $73; 3Q11, 11% at $74; 4Q11, unhedged.
“As of December 31, 2008, the Company held a net position of fuel derivative instruments that effectively represented a hedge of approximately 10% of its anticipated jet fuel purchases for the years from 2009 through 2013.” Statement was made in Southwest’s 10-K annual results filing to SEC. As of 31 Dec, 2008, Southwest’s cash collateral obligations for fuel derivatives for the years 2009-2013 totalled $992m (based on the contractual settlement dates of those derivatives). Obligations for 2009 were $246m, for 2010, $239m; for 2011, $236m; for 2012, $146m; and for 2013; $125m.
for 2009”, and would procure “additional fuel options with cost limiting effects (volume Ø +4% for 2009)”.
Easyjet For the year to 30 Sep 2009, easyjet is 73% hedged at $1,094/tonne. For the year to 30 Sep, 2010, it is 27% hedged at $926/tonne. In first half of FY2009, easyJet’s estimated fuel cost per tonne is $1,040. Each $10/tonne movement in fuel price impacts easyJet’s full-year unhedged fuel cost by $4.6m. EasyJet’s average effective fuel cost per tonne was $948 for FY2008 ($840 average in first half and $1,031 in second half).
Air Berlin
Ryanair
In Q1 2009, Air Berlin was 78% hedged at $1,000-$1,100/ tonne; in Q2, 59% at approx $1,000/tonne; in Q3, 37% at approx $1,000/tonne; in Q4, 6% hedged at $1,000-$1,200/ tonne. On 27 Nov, 2008, Air Berlin said it was “using current market situation to further strengthen its hedging position
In FY2010, starting 1 April 2009, Ryanair is 75% hedged on fuel price in 1Q at $660/ tonne; in 2Q, 75% hedged at $650/tonne; in 3Q, 50% hedged at $660/tonne; 4Q, unhedged. Ryanair’s fuel price/tonne in FY 09 (ended 31 March 2009): 1Q, $1,170; 2Q, $1,320; 3Q, $1,170; 4Q, unhedged.
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Jazeera Airways — investing in the downturn
Looking to emerge from the global recession as the leading low-fare airline in the Middle East by investing in assets now, Jazeera Airways is implementing innovative ideas whilst taking inspiration from unlikely sources such as the hotel industry. Low Cost Airline World spoke to CEO Andrew Cowen.
What is the state of play at Jazeera Airways? How has the current economic climate affected your operations? The crisis is obviously having a dampening effect on economies here [in the Middle East] and demand generally; if nothing else the reduction in the oil price is leading to reduced financial in-flows. Many people here have lost money on the global stock markets. On the other hand, the oil boom of the last couple of years has brought a significant amount of wealth into the region, and that has been sensibly invested in a lot of infrastructure-type projects rather than just consumption. That’s meant that economic conditions have stayed quite favourable. This has had a trickle-down effect on the airlines. In Kuwait, we are seeing a continued, reasonable economic and consumer health. Customers, or guests as we call them, are continuing to travel. At our other base in Dubai the economic conditions there, with people leaving, have made it a little bit more challenging, but things seem to be improving. There’s a lot of good news coming out of Dubai. So compared LOW COST AIRLINE WORLD
to many airline markets I think the Middle East is a bit of a haven of calm. It is not unaffected but it’s not in crisis either.
Jazeera has announced plans to be “debt-free” by early 2010 — how will this be achieved? Our founder and chairman Marwan Boodai saw much of the current airline turmoil coming, as the bust was fairly inevitable. What he’s put in place is to establish a leasing company with a number of finance institutions, called Sahaab Leasing, and this company is steadily taking on all of Jazeera’s aircraft and delivery positions, and will lease the aircraft on dry operating lease back to Jazeera. So effectively the objective is primarily about separating the ownership of the asset from the operation of the asset, and we are following a strategy that has been very prevalent in, for example, the hotel industry. Whenever you go to a Crowne Plaza or a Radisson, it’s those brands that are managing the hotel, but the owners of the building are perhaps a property company. So the advantage to the airline is that May/June 2009
INTERVIEW
cash-positive in the balance sheet. We floated on the Kuwait Stock Exchange in 2008 so that was also well-timed. It really does mean that the underlying business has that existing and emerging balance sheet strength to support it both through this downturn but position it well for the eventual upturn. the whole issue of aircraft financing ceases to be an issue for us; we don’t have to go through that quite complex work of securing financing for, in our case, 40 aircraft, (Jazeera has on order 40 A320s, with eight already delivered). But secondly, in today’s market there are all sorts of issues around asset valuations — what’s an A320 worth at the moment? Airline management people are less able to answer those questions than aircraft asset specialists, so it’s been a very well-timed move and Sahaab Leasing is fully established — the first six aircraft have been transferred, with the rest in the process of being transferred. We’ve obviously got quite a close relationship at the moment. This is an example of a business being incubated, but of course it steadily becomes more arms-length and separate, and Sahaab may go down the path of taking other aircraft types and sizes. From our perspective, when all that’s completed the airline will be debt-free and
May/June 2009
How unique is this relationship between Sahaab and Jazeera? It’s one of the more explicit and perhaps public examples [of a relationship between an airline and a leasing company]. Whether that qualifies as unique I’m not sure, but certainly somewhere in that direction. On the other hand, many airlines around the world have their aircraft owned in all sorts of special purpose vehicles, and they are managed off balance sheets. So it’s hard to say we are complete pioneers but it’s fair to say we’ve taken the concept a significant step forward. What matters more is how this has benefited the airline and the future opportunities that it presents for both the airline and for Sahaab. Would you see any other airlines following this concept? I am sure some are looking at it. A lot of airlines are facing severe difficulty in securing finance to pay for the aircraft that they’ve ordered. This
“If all goes well and we meet our ambitions we would like to be the leading and preferred low-cost airline in the Middle East. That’s what we’re working towards – a lot has been accomplished and there is a lot still to do.” LOW COST AIRLINE WORLD
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is a means of taking that issue away from the day-to-day management of the airline. So that’s got to be a positive thing at this point in time; how long the difficult credit conditions persist is anyone’s guess. We think we are following a model that seems to be successfully working in a related industry, namely hotels. I wouldn’t like to say this is the definitive way to go because the markets are constantly changing but it’s certainly a very good strategy that works well for us.
“The underlying business has that existing and emerging balance sheet strength to support it both through this downturn but position it well for the eventual upturn.” LOW COST AIRLINE WORLD
What are the main difficulties in translating the model from the hotel to the airline industry? The biggest difference is that if you put your hotel in the wrong place you really are stuck whereas if you put your aircraft in the wrong place you just move it! Hotels have other positives but we are pleased to be in a market that’s holding up well in current conditions. The demographics in this region are fantastic. Nobody thinks that oil is going to go down to $5-10 a barrel, so it’s a good place to be. We’re investing into the downturn, picking up talent and good quality assets (aircraft), we have brought forward some deliveries, and we think that will position us well for the upturn. May/June 2009
INTERVIEW
Andrew Cowen, CEO
You claim to be one of the “most profitable airlines in the world” — how does your low-cost business model work and how is this position attained? There are a couple of things. There’s not going to be very many airlines that record a profit for 2008 — we may in fact be able to count them on one or two hands. We are one of them so I think we’re justified in making that claim. With all due humility I do think that we rode the [high oil price] storm reasonably well. The business model has a large part to play in all of that. If you have that low-cost model you can afford to be more flexible with your prices according to economic conditions. This is because you have got more margin to reduce your prices, if that’s what it takes to keep the passenger flying. The other thing that follows from this is that there are many companies worldwide that haven’t been able to put into place blanket travel bans and have applied economy-only travel policies or else have, as in our case, actively sought corporate travel agreements to enable them to substantially reduce their travel costs. Similarly, individuals are worrying about money, so are more cautious of their spending. This plays into the hands of the low-cost airline model, because we can offer much more attractive fares but still enable them to make those trips that are all-important both for individuals and companies. We are quite actively chasing the corporate customer, and many have signed with us. But we’ve also tried to meet their needs, so recently we expanded our offering of fare products to four — Jazeera Plus for our Premium May/June 2009
“If you have that lowcost model you can afford to be more flexible with your prices according to economic conditions. This is because you have got more margin to reduce your prices, if that’s what it takes to keep the passenger flying.” LOW COST AIRLINE WORLD
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cabin; Jazeera Freedom, a fully flexible fare type; Jazeera Light, an everyday low-fare that most people would go for; and Jazeera Easy, the cheap, promotional fare that has got a lot more restrictions. With those different fare types, we appeal [to a range of customers] from the time-sensitive businessman to the price-sensitive student. It’s another aspect of our investment where we are trying to create or refine our products to better meet the needs of our customers. We are also running other innovations. For example, if you go to our website between 1 and 2 o’clock we have a happy hour, so it’s lots of things like this that we think are important. They are little extras, [things] that don’t cost anything more to manage and run, but do provide a little bit more energy and interest in the market. That’s really important when the consumer and businesses are being a little bit more cautious.
How has Jazeera’s business model changed since its inception? There has been some development within the low-cost airline sector. I’m not a believer in one-size-fits-all, I think you have to adapt the model to a degree, particularly to take account of cultural and local differences. On the other hand, history has shown that if you mess around with the model too much what happens is costs creep in and before you know it you’ve ended up as a loss-making legacy carrier. It’s about finding the right balance and not losing sight of the costs; finding ways to improve the quality of the service without adding to your costs. A classic example is that if you travel on a Jazeera aircraft then you’re in a comfortable leather seat — leather costs twice as much as cloth but it lasts twice as long. This is where you can get that quality/cost tradeoff nicely balanced without any meaningful impact on the model. How has the recent competition from full service carriers affected you in terms of nearly matching prices? What sets you apart from them? The key thing that sets us apart is that we truly believe in what we do and the structure of our model and business is built from the bottom up to be a low-cost airline model. The traditional carriers, faced with the revenue decline that they’ve got, are having to cut costs wherever they can. But that doesn’t mean that structurally or culturally they’re equipped to adopt many of the facets of the low-cost model that we’ve got designed in our DNA, if I can call it that. The cost-cutting that the traditional carriers are doing does make life more challenging for us as it allows them to drop their fares and be more competitive, but I also think that the consumer knows full-well that when the good times return the legacy airline is going to go LOW COST AIRLINE WORLD
“Our low-cost model does more naturally play into the way the economy here is evolving, and the demographics of the region.”
back to gouging the passengers, as they have always done. The real question is how lasting some of those legacy carrier changes are. Certainly some of the measures that lowcost airlines have pioneered, such as internet booking, traditional airlines have got hold of that and are following. So that will last, and we have to make sure our website is as, if not more, effective than theirs. But it also legitimises further, if any legitimacy was needed, the lowcost model and genre. There have been snobs that have in the past said the low-cost model would run out of steam in the U.K. and would not spread anywhere else. That’s proved to be just wishful thinking.
Do you have any plans to defer or cancel any aircraft on order and will you be affected by delivery delays? We don’t see that at all, in many respects the opposite. Low-cost airline penetration in the Middle East, and these figures are a little rough, is somewhere in the order of 3-5 per cent, whereas in Europe or the U.S. it is up to 25-35 per cent. The upside is absolutely enormous and there are hundreds
of airports within the flying range of an A320 in the Middle East. You’ve also got no real surface transport alternatives. The distances are enormous as well as being physically hostile. The one challenge will be deregulation. There has been a significant amount of this in the aviation arena. Indeed, this is how Jazeera was able to come into being. Deregulation has still got a long way to go and we are active in encouraging the decision-makers that just because there is a downturn it isn’t in everyone’s interests that they should default back to just protecting the flag carrier at all costs. What happens then is that the flag carrier just jacks up the prices again, making it difficult for the public to travel and we are back to square one. Part of keeping the economy moving is to keep people moving. Business orders are placed by people sitting in front of each other and making their case, but you can’t do that if you can’t get to where you need to be because air fares are too expensive. Accelerating the pace of deregulation would also give more teeth to the emerging single market that is happening here.
May/June 2009
INTERVIEW
You are set to launch a third hub later this year; do you have any updates on where it will be? We have no real updates. We have ambitions to spread the Jazeera story, so a third base is key for us in that respect, to build on what we’ve done with Dubai and Kuwait. There’s always a challenge on the regulatory approval side but we are making good progress. The launch of the hub will be in the second half of the year. Are environmental concerns being taken more seriously in the Middle East now? Does Jazeera have any firm policies in this regard? Yes and no [to the subject being taken more seriously]. The Middle East is certainly part of the world community and understands its need to make realistic and positive steps to reduce carbon emissions. From Jazeera’s perspective, we have got a very specific policy of investing in brand new aircraft — with the latest in fuel efficiency innovation built in. We have an ongoing programme of identifying ways to minimise fuel burn. We certainly take this seriously.
How difficult has it been to operate the low-cost model in the Middle East? What are the unique challenges? A unique challenge is the hostile aspects of the environment; temperatures and sand. These are not very good for aircraft health, so we’ve got to work a bit harder in that respect. That’s a unique aspect but there are a lot of suppliers here. The other thing is the sheer diversity of the customer segments that you have here. It’s not just your usual business or leisure traveller, there’s a major religious segment with people making pilgrimages to Islamic holy sites, so that’s a quite unique market that we don’t have anywhere else in the world. Jazeera is working hard to service those customers, so this is less of a challenge but more of an opportunity. How do you see the aviation industry in the Middle East developing over the next few years? What trends do you foresee? I think it’s going to be an exciting time but the wildcard is the whole economic side. The Middle East seems to be holding its own quite well, but it’s not immune. That aside, we’ll May/June 2009
see a vibrant aviation market emerging. There is true and meaningful competition in place which is generating a lot more passenger choice and putting pressure on fares and bringing those back into equilibrium with the rest of the world.
You currently operate 25 routes. What expansion plans do you have in place? We’ve got another six destinations coming on-stream in the summer. We’ve got two more A320s arriving in June and we’ve just announced where we’ll be flying those destinations [Aleppo, Syria; Antalya, Turkey; Hurghada, Egypt; Isfahan, Iran; Larnaca, Cyprus; and Shiraz, Iran]. We are really expanding our services to all points of the compass. Our summer year-on-year growth is in the order of about 60 per cent, so this is what I mean by us investing in the downturn and those destinations have been on sale now for a couple of weeks and they’re selling well. It plays to a trend of when economies are softening and people are more cautious they are keener on holidaying closer to home, and we are tapping into that.
What goals can you set for the next five years and how will these be achieved? The ambition of Jazeera is to bring its services and operation, its low fares, and its value for money to all points of the Middle East and North Africa, and the sub-continents. Over that time span we will have taken all 40 aircraft we have on order, and we expect to be flying to 80-120 destinations — so we certainly expect to be one of the biggest regional airlines in operation. If all goes well and we meet our ambitions we would like to be the leading and preferred low-cost airline in the Middle East. That’s what we’re working towards — a lot has been accomplished and there is a lot still to do. We’re conscious of what our competitors are doing, and they’d also like to hold that top spot, but on the other hand what perhaps the U.K. and Europe shows is that you can have two or three very large carriers that can coexist quite comfortably, and it doesn’t really matter whose absolutely the largest. What matters is that they are growing the industry and providing more opportunities for travel. You had excellent financial results for 2008, but what are your expectations for 2009? Our objectives continue to be to grow our profits significantly year-on-year, and that’s what we’re working towards and what our shareholders want from us. But our lowcost model does more naturally play into the way the economy here is evolving, and the demographics of the region. We hope and expect we can benefit from that. n LOW COST AIRLINE WORLD
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airline focus
Monarch Airlines Monarch Airlines is part of the Monarch Travel Group, founded in 1967. The group has grown steadily instature and now employs some 2,800 people under an umbrella of household names.
LOW COST AIRLINE WORLD
May/June 2009
airline focus
“You can take the man out of Ryanair but you can’t take the Ryanair out of the man.” Tim Jeans, Managing Director, Monarch Airlines
M
onarch Airlines has a fleet of 32 aircraft operating scheduled and charter services out of a number of UK airports including Birmingham, London Gatwick, Manchester and its main base at London Luton. The airline flies to more than 100 destinations worldwide carrying over seven million passengers a year. Monarch Aircraft Engineering is the technical division, catering for all the engineering requirements of the Monarch fleet as well as providing a range of extensive third-party engineering services to a number of other well known airlines. Monarch Aircraft Engineering employs some 830 engineering staff and is based out of London Luton and Manchester airport with line maintenance stations across the UK and worldwide. Monarch Airlines and Monarch Aircraft Engineering are both subsidiaries of Monarch Holdings, which includes under its extensive banner household names in the UK travel market such as Cosmos Holidays, Avro, Archers Direct and Cosmos Tourama along with the online hotel booking service somewhere2stay.com. So, with both the airline and the maintenance provider being subsidiaries of, in effect, a tour group, you would think that times are hard and
May/June 2009
the economic crunch is biting hard. The reality is that steady diversification by the airline has put the company in a strong position going into this new recessionary period. Philip TozerPennington caught up with Tim Jeans, MD of Monarch Airlines, as he travelled between the various Monarch UK bases.
So Tim, just how bad is it out there in this new economic world? I sit here and think of the far off halcyon days of two or three years ago and yes it is a different world now, nonetheless the summer is beginning to resolve itself to a level that is absolutely liveable with. Things are not fantastic but it is definitely there; there is definitely a market out there. We are not looking at the sort of decline in numbers that we are seeing reported elsewhere, so to that extent we can take some comfort. There is something about the first part of this new financial year which for us is a November 1st start. In the first quarter we have absolutely no complaints at all. It’s almost as if there is momentum that was built up from a very good summer. Obviously the collapse of XL Airways at the back end of summer 2008 created a not insignificant halo which has carried us through LOW COST AIRLINE WORLD
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to the end of January. The softness in the market has begun to manifest itself through this second quarter into February and March. There is a reasonable expectation that Easter will deliver.
“Monarch is the last man standing in that leisure/-charter bracket and when you consider that the leisure market still comprises some 80 per cent of all travel that is undertaken to and from the UK that is not a bad place to be, it has to be said.� Tim Jeans, Managing Director, Monarch Airlines LOW COST AIRLINE WORLD
So do you see the collapse of XL as the main reason/factor in your riding out the 2008/09 winter season? Rather than assign it specifically to XL who did not compete with us on the scheduled service sector at all and their charter market was really a summer market including the Greek islands, Turkey and Egypt, which is more of a year round destination. What has been material to us is the reduction in capacity in the UK leisure market. XL had around 26 aircraft, TUI has taken ten aircraft out of its fleet and the two smaller operations Flightline and European Air Charter have also left the market. So now the guts of some 40 aircraft have been taken out of the market. Astraeus obviously went over to BMA CMI operator only rather than retailing or commercialising their own capacity or stock so Monarch is the last airline standing in that leisure/charter bracket. When you consider that the leisure market still comprises some 80 per cent of all travel that is undertaken to and from the UK that is not a bad place to be. So things are looking up? Things are looking good, certainly we have reflected that but you have to take into account that we downsized our fleet at the end of last summer. We were able to do that because we were exiting leases on four 757s, very elderly 757s that we had operated for some 25 years from new. Those went out of the fleet at various stages during the winter and we also sub-leased a 767 to the French operator Air Mediterranea. So we had already taken steps to baton down the hatches by reducing the May/June 2009
airline focus
decline of the overall transatlantic market, that yields are still being hugely subsidised by premium traffic, be it premium economy or full J or F class. I frankly do not see that that there is room for a low-fare operator flying point-to-point across the Atlantic. We have seen, in particular, a decline in regional services which would have been one of our key strengths. In places like Birmingham the decline in regional longhaul shows just how finely balanced those markets can be. If BA could not make Manchester/ New York work as a point-to-point business then I would believe that there were more lucrative markets out there than operating flights to the East Coast of the US. Once you start looking at the West Coast, it becomes very difficult to get the frequency out of the aircraft because you can’t rotate the aircraft once every 24 hours.
So with that in mind where do you see the 787s being deployed? Well our staples are places like Goa, the Caribbean, Mexico, places like Cancun, so for the moment, rather than saying ‘we are going to be flying to Honolulu or Perth Australia, just because we can’, I think that at the moment, certainly looking at the market, it will be a somewhat less adventurous use of the 787 than was perhaps originally planned. But we would still like to exploit that performance capability out of some of our regional gateways so places like Birmingham, which at the moment is payload restricted, would be able to operate a pretty well unrestricted operation with a 787.
amount of capacity we were going to fly this winter. We have effectively reinvested by starting to re-equip the fleet. With our shareholders, we have purchased and then leased two A321s, which we bought from easyJet, and we are in the process of acquiring a third A321 that will take our fleet back to 32 aircraft. This is the same number that we operated at the beginning of last summer. Effectively what we have done is to keep capacity very close to the levels that we had last year but by swapping out elderly aircraft such as inefficient 757s for more fuel efficient A321s. This of course brings us onto that 787 order, which was not ordered directly through Monarch but through its shareholders the Mantegazzas themselves. Again the Monarch model involves shareholder interests in the aircraft but essentially the plan was that they would always be ordered and that they would then be flown by Monarch as a replacement for our A300 fleet which is coming up to 20 years of age for each one of those aircraft — the 787s were the natural replacement for those machines.
A while back you set the industry alight when you mentioned that you might use the 787s on a low-cost transatlantic route. Is that still the case? We have certainly looked at the numbers on deploying A300s on high-density, low-fare transatlantic routes. I think that the experience of others, not least at one end of the market with Silverjet, Eos and Maxijet and at the other end of the market with Zoom, and to an extent people like FlyGlobeSpan getting a bloody nose on transatlantic low cost has made it unlikely that we will look at starting a low-cost transatlantic service. The 787 does indeed have incredible economics. The aircraft, in terms of seat-mile costs will be the best in the market but frankly such has been the May/June 2009
When are your 787 deliveries due now? Have you been affected at all by the Boeing delays? Yes, we are certainly affected. We are on the order books after ship set 100 and so at the moment the best information that we can get from Boeing is about a 30 month delay, the ramp-up in production was extremely aggressive, it mirrored the schedule for the 777. Boeing have told us, using the best information that they have available, that they will not be able to ramp-up production in the same way that they were able to do with the 777 and therefore if the first 787 with ANA goes into service 24 months late then we will be thirty months late. So has that affected the original order price which your shareholders paid? I think that the whole issue of how those delays are managed financially is still very much on the table. We have reached no conclusions on that score but it is clearly a very material issue for us, we are having to operate four widebody aircraft beyond the date where we would have taken them out of service and relayed the value of those aircraft as potential freighter conversions or something like that, so it is quite a serious material issue for us. Obviously everyone remembers you at Ryanair, I wonder if you feel that once we are out of this downturn, or if we had never gone into it in the first place, you might draw on your Ryainair experience and look at additional routes? Well, I think that you can take the man out of Ryanair but you cannot take the Ryanair out of the man, is what they always say. I think that the principles on the way our businesses are run are ones that any airline and frankly any business would do well to take note of, if not exactly copy. We have to remember that Ryanair is not just run by Michael O’Leary, it is run by an extremely able team of managers and people on the front line and whilst you only see Michael O’Leary’s, the same passion for the business exists right across it. If nothing else, the great thing about Monarch is that people actually care about this business, they are proud of the brand and they are proud to see what we are doing as an independent player in a market full of extraordinarily aggressive and able competitors. LOW COST AIRLINE WORLD
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We have taken Ryanair principles and applied them to Monarch but not as far as customer service is concerned — in fact I would say that we are the polar opposite of Ryanair. Service to our customers actually matters and we take care and take note of what our customers actually say to us. It does not matter if they are on a scheduled flight to Barcelona, a charter fight going to Goa or a tour operator flying people from Mercedes Benz to a car launch. But on the other hand, for example, if we look at our scheduled business, we may not be the biggest player in the market overall, but in the markets we do serve, we set out to be number one and I think that is a very important principle. There is no point in being in a market, with let’s say four competitors, and being number three or four because you will never get market presence, you will never be able to command the market and therefore you will never be able to command the pricing in that market. A very good example of this is Aer Lingus in Gatwick, they are competing with us, easyJet, British Airways and are effectively the fourth player in that market, which is why they are having to charge £9.99 to £199.99 [London to Orlando is £199.99] across a vast range of their inventory because they have no other basis on which to compete. The last refuge of any airline trying to scramble their way into a market is to compete on price but unless you are the lowest cost operator, and this is the Ryanair principle, then you simply cannot charge the lowest cost and expect to survive, it simply does not add-up. I am not saying that Aer Lingus are doing the wrong thing, I am simply saying that it is difficult to have a successful business model if you are not number one or an aspiring number two and capable of getting to number one. That is a principle we have applied right across our scheduled service business, if you look at the stats of market share for Monarch, you will see that in the overwhelming majority of city pairs we serve, we are number one or number two in these markets. In fact Monarch Airlines is now the number one scheduled airline in Manchester, number two in Birmingham and number four in Gatwick. On our scheduled service, because we operate large aircraft, mainly 214seat A321s, we are providing the guts of around 13,000 seats per month with daily flights going into those routes, and some of our routes are operating three times a day — Manchester/Arecife for example — so we are carrying upwards of 30,000 per month on what were previously charter dominated routes which have now pretty much been completely given across to low-fare operators such as ourselves. If Monarch can claim any sort of success outside its peer group, it is that we are the only ones that have been able to successfully build a low-fare scheduled business out of a charter parent. I don’t think that there is any other model like that of Monarch, or at least of a similar type, in the UK. Thompson tried it, First Choice tried it, XL obviously tried it, Dan Air tried it, but none could make it work. Some of Monarch’s success is due to the fact that it has not concentrated on London, instead we chose five years ago to give real focus to Manchester. The good thing that we now have in Manchester, Birmingham and London, is the service delivery on routes, particularly where people have property overseas, which is our core business, who travel five or six times a year and they know what they like and they like what they get from Monarch and that is why they come back.
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We have a very sticky, loyal customer base and we, pretty much uniquely in our sector, have a frequent flyer programme with 60,000 members who are loyal and that is a great asset to have. We also have a somewhat older demographic than our competitors, such as Ryanair and easyJet, so we have now found it perfectly possible to compete head to head with Ryanair, which we have done for the first time this winter in Birmingham on airport pair to airport pair and it is fine, honestly, because Ryanair have made a virtue out of zero customer service! People can choose by price or they can choose by price and customer service and it is absolutely possible for a service driven offer to coexist with an absolutely price driven offer such as that of Ryanair. People may look and see Monarch as a low fare airline with service values, this is true, but the bottom line is on customer service. If I go back to when I first joined Monarch, I can remember that we were still serving four course meals with wine with cutlery and a free newspaper, headsets and hot towels, we are at a different place from that now but what we continue to invest in is people. I know that sounds a little trite but I think that the value we put into our training and how we recruit people does translate itself into a different experience for passengers onboard. You will never see a tatty Monarch aircraft, either internally or externally.
How do you think that the sale of Gatwick will affect you? Is it something that you have kept tabs on or is it not really a worry to you at this time other than the hope of future lower landing fees? One thing that we will not have is lower landing fees unfortunately because the UK regularity system mitigates strongly against that happening. There has been a bit of a comprehensive beauty parade in front of all the airlines from the bidders, it is almost the airport equivalent of ‘I want to work with children and I love puppies’, they are trying to say that they are going to be the most user-friendly, that they will not spend too much money on useless capital projects and the like and at the moment it is fairly hard to choose between them, so I in no sense have a preferred bidder. But I would say that frankly anything has got to be better than the way that BAA runs its airports. It was the right thing to do to force the sale of Gatwick or for BAA to put their hands up and put the thing onto the market. I would be equally as anxious to see the monopoly broken up in Scotland. There is the same vice like grip on the Scottish airport system which is a difficult regime to work within. We should remember that Scotland has a very important base of inbound traffic from Europe that we do not tend to see in England/Manchester. How have you been affected by shifting fuel costs? We have a fuel hedging strategy in place at this time that insulated us against the worst of the excesses last summer, but by the same token we, just like a number of others, have seen the flipside since oil started to fall heavily during this current winter so we have only been able to take limited advantage of the low fuel prices that currently prevail. The true impact of the low fuel rates will be felt during summer 2009 and into winter 09/10 and summer 2010. The one thing that you can say about aviation is that we are extraordinarily adept at adapting to shocks, whether they are shocks in the form of 9/11 or shocks in the form of APD being doubled overnight or fuel prices trebling in the space of 18 months. Because we have historically traded on such narrow margins we are able to respond to those cost pressures and what I have noticed in the current recessionary climate is a far greater willingness on even the most regulated and monopolistic of suppliers to come to the party. The only exceptions that I would single out would be Eurocontrol and air traffic providers who seem to live in some parallel universe of monopoly supply. May/June 2009
airline focus
How does Monarch expect to be affected by the EU Emissions Trading Scheme? On an environmental note it is clear that ATC amalgamation will play a great part in reducing emissions but what we have is the EU Emissions Trading Scheme (ETS). We in common with most other airlines have now got ETS coming very definitely onto our radar. ETS has been out there largely in the province of the policy makers but we have been keeping in touch with this through our own industry affairs people and what we see in the press. It is quite clear that it has the potential to be a massive cost burden on this industry of material proportions, I have set up working parties within Monarch to report back within the next two months as to what we believe are the current proposals and what impact that would have on our business. If, as we think, this is going to be coming in as early as 2011 then we have to take into account the fact that we are going to be pricing that period for tour operators within six months [from now] for that season, so we will have to understand at a granular level of detail what impact that is going to have on us and by extension our customers — certainly by the end of this summer. It is a big concern. Again, the ETS reflects the scattergun approach that the government and the regulators have on this whole issue. On the one hand you have got the UK government trying to pretend that APD increases are in some way a surrogate for environmental responsibility which frankly it is obviously not. Gordon Brown, in his last hike in APD took £2bn out of our industry or out of our passengers’ pockets, and the question has to be asked as to how long this can go on for? Obviously if ETS were to come into effect around 2011/2012 then obviously the delivery delay on the 787s compounds on the Monarch bottom line even further. By 2011 we would have had half of our deliveries on the existing schedule. The 787 will give us a greater advantage if ETS is brought into effect but the industry didn’t need ETS to force it into flying newer, more fuel efficient, aircraft because we have to do that by the very necessity of the economics of this business. If your competitor has got a machine that is going to fly 20 per cent further at 20 per cent lower fuel burn than your machine then you are not going to stay the course for too long if your economics are that far adrift of where the market is set. On the other hand, the more hysterical demands for caps on people’s ability to travel by air are now not being uttered with quite the same force as they were this time last year. It was almost like the lobby against air travel was gaining momentum on the back of the rapid expansion in our sector; now people see that aviation is not immune form the economic downturn just like every other business. I have been talking to major airports this past week that are seeing traffic declines in double digits at the moment, which is absolutely unprecedented. Even 9/11 didn’t produce that level of downturn. My view is that this current downturn will run well into next year — I do not see green shoots appearing until the spring of 2010. None of us yet understand the impact on the macro economy of the borrowing/debt burden that we have taken on to keep the financial system intact. I have to wonder if there is going to be any appetite to finance aircraft going forward, there is not much going on at the moment! There are still plenty of bankers able to come to meetings, but when it comes to material worthwhile results, there are very few out there able to deliver.
What strategies are in place to combat the economic downturn? If the downturn does continue to take effect when we have the 787s delivered then it is unlikely that we will consider sub-leasing them. They are more worthwhile to us cutting the current cost of flying our current A330s, which are flying 5,000 hours a year; that by any standard is spectacular utilisation. We are still managing to get very high dispatch reliability on our A300s despite the fact that they are 17/18 years of age. All of this is due in no small part to the fact that Monarch has managed to retain a very large engineering infrastructure through Monarch Aircraft Engineering. Monarch is a mini vertically integrated operator in that we have Cosmos holidays as a part of our portfolio and the online presence of that brand is now becoming Monarch Holidays, so we have entered the holiday market now with this brand. We are now looking at starting a joint venture in 2010 with Co-Operative travel group, which is one of the largest UK travel retailers, which will add a further string to our bow. We continue to have three fully equipped base maintenance hangers, two in Luton and one in Manchester performing maintenance for us and a variety of third party customers employing some 800 people in that business. In terms of MROs we are the largest independent MRO provider in the UK now. What we have seen with regard to our MRO business is that the customer base is changing. On one side we lost out on the sale of GB Airways and the combining of BMed into British Midland, but we have new customers which are both embarking on a first round of checks and keeping older aircraft in the fleet. Notwithstanding the big reductions that people like SR Technics have embarked upon in Dublin I feel that the MRO business is set for a better time than the airlines through the current recession. n
AIRCRAFT OWNERSHIP Type
Registration
Ownership
Lease Period
A330
G-EOMA
shareholders
long-term
A330
G-SMAN
shareholders
long-term
B767
G-DIMB
lease from Thomas Cook
Apr 2010
A300
G-MONS
shareholders
long-term
A300
G-MONR
shareholders
long-term
A300
G-OJMR
shareholders
long-term
B757
G-MONJ
MAL
n/a
B757
G-MONK
shareholders
long-term
B757
G-DAJB
MAL
n/a
A321
G-MARA
MAL
n/a
A321
G-OJEG
MAL
n/a
A321
G-OZBE
MAL
n/a
A321
G-OZBF
MAL
n/a
A321
G-OZBG
MAL
n/a
A321
G-OZBH
MAL
n/a
A321
G-OZBI
MAL
n/a
A321
G-OZBL
lease from AERCAP
May 2011
A321
G-OZBM
lease from AERCAP
May 2012
A321
G-OZBN
lease from AERCAP
May 2012
A321
G-OZBO
lease from AERCAP
May 2012
A321
G-OZBP
lease from GECAS
Mar 2015
Tim Jeans Biography
A321
G-OZBR
lease from AERCAP
Apr 2016
A321
G-OZBS
lease from GECAS
Nov 2015
Tim, whose career in aviation has spanned over 20 years, joined Monarch in 2004. He previously held the position of commercial director for nofrills airline Ryanair for seven years, and was responsible for driving its European expansion, including the establishment of their first continental bases at Brussels and Frankfurt. Tim then moved to MyTravel as MD of MyTravelLite. A spell as chief operating officer at MyTravel Airways preceded his appointment at Monarch.
A321
G-OZBT
shareholders
long-term
A321
G-OZBU
shareholders
long-term
A320
G-MONX
MAL
n/a
A320
G-OZBB
MAL
n/a
A320
G-MPCD
lease from AIRCASTLE
Feb 2012
A320
G-OZBK
lease from AIRCASTLE
Feb 2012
May/June 2009
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Aviation and the EU Emissions Trading Scheme On January 13, 2009 legislation to incorporate aviation into the EU’s Emissions Trading Scheme (EU ETS), the EU’s flagship scheme to tackle CO2 emissions from the airline industry, was finally published. This means that while a number of design elements of the scheme are still to be finalised, it is now certain that as from January 2012, all airlines operating to and from Europe will be subject to the scheme. LOW COST AIRLINE WORLD
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ENVIRONMENT
“The use of cap is intended to create a scarcity of allowances which will allow the market to develop.�
T
HIS ARTICLE Will examine how the eu ets will operate, and in particular what action is required over the coming months from airlines. It will also consider possible legal challenges to the legislation as well as briefly look at the prospects for a global scheme.
The existing EU ETS Operational since 2005, the EU ETS is a cap and trade system which establishes an overall cap on greenhouse gas emissions from participating industries throughout the EU. Since the start of 2008, the scheme also includes Iceland, Liechtenstein and Norway.
May/June 2009
The current trading period, the second phase of the EU ETS, runs from 2008-2012, and the third phase will start in 2013. The use of a cap is intended to create a scarcity of allowances which will allow the market to develop. Now in phase II of its operation, only installations which are caught by the requirements of the Kyoto Protocol (which does not cover emissions from aviation) and those which use a high level of energy in product manufacture are included in the EU ETS. Currently, approximately 11,000 high energy consuming installations are covered by the
EU ETS. Although the scheme is designed at the EU level, in practice it is administered by Member States who are responsible for allocating allowances to participating installations. Each Member State draws up a National Allocation Plan for each trading period under which EU Allowances (EUAs) are allocated to participating companies. Within this cap, participants can buy and sell EUAs, as well as other approved instruments. One allowance is equal to one tonne of CO2. At the end of each compliance year, installations must surrender the number of EUAs equivalent to their verified emissions for that year.
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“It is currently estimated that there will be a shortfall of approximately 30 per cent between the number of AAs issued to the aviation industry and the number of allowances required to cover its CO2 emissions.” Inclusion of aviation in the ETS As from January 1, 2012 all airlines operating flights arriving in or departing from the EU, including intercontinental flights, will be required to surrender Airline Allowances (AAs) to offset against their CO2 emissions. Under the scheme the “aircraft operator” will be responsible for compliance with the scheme. The aircraft operator will most commonly be the person with control over the aircraft, and in the absence of proof to the contrary, will be deemed to be the aircraft owner. With certain types of leasing structures, e.g. wet leasing, it may not always be clear who the operator is and the Commission is expected to produce guidelines to clarify this. Each aircraft operator will be administered by a particular Member State. For EU operators, this will be the Member State which issued its operating licence. Operators from outside the EU will be allocated to the EU Member State to which the majority of their emissions are attributable. In principle, all operators will fall under the EU ETS, except where they are subject to equivalent obligations in their home jurisdiction. This provision is intended to exclude carriers from the obligations of the scheme where they are subject to equivalent measures to fight climate change in their home country. The EU hopes it will be possible to link the EU ETS with other national or regional CO2 trading schemes in the future. Although aviation will only be brought into the EU ETS in 2012, under the legislation, airline operators will have to begin compliance procedures as early as this year. This is because an individual airline’s allocation of AAs will be calculated on the basis of its tonne-kilometre
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emissions in the reference year, which has been set as 2010. While it is not yet clear how monitoring, reporting and verification will work for the aviation industry, it is expected that airlines will be required to submit their monitoring plans as early as July 2009 to their administrating Member State in order that all necessary administrative steps can be taken in time to begin monitoring in 2010. Further guidance on monitoring is expected imminently from the Commission. However, if airlines do not have the required measures in place by the July deadline, there is a risk that they will not be able to apply for their free allocation of AAs to surrender against CO2 emissions. It is therefore crucial that airlines, if they have not already done so, put in place the necessary data collection and reporting systems to allow for monitoring. In addition, airlines should be aware of the wider business issues which EU ETS compliance encompasses and consider long-term strategies for dealing with the scheme and the opportunities it will generate. It will be possible for new entrants to the market, as well as rapidly growing airlines, to apply for additional allowances from a special reserve which will be created, amounting to approximately 3 per cent of the total EUAs issued under the emissions cap. Rapidly growing airlines have been defined as those whose tonne-kilometre data increases by an average of more than 18 per cent annually between the relevant monitoring year and the second calendar year of the relevant period. Although these provisions were originally conceived of as a means to level the playing field for emerging Eastern European airlines, any airline which meets the criteria can apply to the special reserve.
The overall number of AAs to be allocated under the EU ETS will be calculated by reference to the average emissions from aviation in the years 2004- 2006. This amount will be fixed by the Commission later on this year. In the first period (2012), allowances are to be capped at 97 per cent of this average. This cap will then be lowered to 95 per cent in 2013 and will be subject to further ongoing review. One of the more controversial aspects of the inclusion of aviation within the EU ETS was the decision that only 85 per cent of an airline’s allowances are to be freely allocated on the basis of a common European tonne-kilometre benchmark, with the remainder of allowances to be auctioned off. Tonne-kilometres are defined in the legislation as the product of distance and payload. Distance, in this case, means the circle distance between origin and destination together with an additional fixed
May/June 2009
ENVIRONMENT
factor of 95km, while payload is defined as the total mass of freight, mail and passengers combined. Under the scheme, operators can choose to use the actual payload or to accept a default value of 100kg for each passenger and his or her checked baggage. In the first operational period, the remaining 15 per cent of AAs will be auctioned at the Member State level. Currently, there are a number of question marks over how exactly auctioning will operate, who will be able to participate in the auctions and how auctioning is to be harmonised throughout the EU. Following much debate, the legislation states that the proceeds from auctioning are to be used to tackle climate change in both the EU and third countries, for example for research into clean aircraft and low emission transport. However, although Member States are obliged to report on the use of auctioning proceeds, due to
May/June 2009
legal difficulties, it is not mandatory for Member States to use revenues for such environmentally sound purposes. It is currently estimated that there will be a shortfall of approximately 30 per cent between the number of AAs issued to the aviation industry and the number of allowances required to cover its CO2 emissions. Airlines can cover this shortfall by purchasing surplus AAs from other airlines or EUAs issued in the broader EU ETS. In addition, and up to a maximum limit of 15 per cent, airlines can purchase Certified Emission Reduction (CERs) and Emission Reduction Units (ERUs) issued under the Kyoto Protocol. Although the obligation to surrender allowances will only be effective in 2013, airlines may wish to consider whether to purchase such instruments now as a way to manage their exposure. Not all aircraft operators will be caught by the
operation of the EU ETS. As well as test and military flights, the legislation exempts small aircraft (with a take off weight of less than 5,700kg) and airlines which operate fewer than 243 flights for three consecutive four month periods or those whose flights emit less than 10,000 tonnes of CO2 per year. The airline industry has voiced concerns that these exemptions will create distortions of competition, and that carriers with EU hubs will bear a much higher burden under the scheme than those based outside the EU. Indeed, research suggests that up to 80 per cent of carriers flying to the EU will be excluded from the operation of the scheme, on the basis that their flights will fall under one of the exemptions. This has led to fears, particularly on US routes, that international operators who remain under the 2 per cent threshold will pose a serious threat to EU based carriers. Concerns
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ENVIRONMENT
have also been expressed that non-EU airlines will re-schedule international flights away from the EU to avoid being caught by the EU ETS, so-called carbon leakage. According to the Commission, it will be possible to adjust the amount of free AAs allocated under the scheme to address such issues should the need arise.
Penalties Airline operators that fail to surrender the requisite number of AAs at the required date will be subject to a penalty of â‚Ź100 for each tonne of CO2 of the shortfall. This payment does not however release the airline from the requirement to surrender the allowance and the shortfall will have to be made up the following year. Ultimately, the legislation contains provisions under which non-compliant airlines may be banned from flying in the EU, although it is likely that such a provision would only ever be invoked in extreme circumstances, where other enforcement measures had failed.
Potential legal challenges The application of the EU ETS to all flights to and from EU airports regardless of the nationality of the airline operator has been the most contentious aspect of the scheme, attracting much international criticism, and threats of legal challenges. While many critics are not against the idea of an emissions trading scheme in itself, they object to the unilateral imposition of obligations on carriers outside the EU. IATA and a number of its member airlines have questioned the legality of the inclusion of aviation into the EU ETS, with talk of legal and other retaliatory measures against the EU. IATA has talked publicly about a potential legal challenge under the Chicago Convention 1944 before the International Civil Aviation Organisation (ICAO) or the International Court
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of Justice, but to date no such proceedings have been raised. Any legal challenge under the Chicago Convention is likely to be based either on Article 15 or Article 24. Essentially, the argument would be that the obligation on non-EU airlines to purchase allowances is a charge (prohibited by Article 15) or a duty (prohibited by Article 24) and that the EU ETS interferes with the sovereignty of non-EU states. However, it is widely thought that such a
challenge is unlikely to succeed and that the EU would successfully be able to argue that all the EU ETS does is to regulate obligations relating to the arrival in and/ or departure from the EU and that emissions outside the EU serve only as a calculation parameter. As the EU ETS applies equally to all airlines, regardless of nationality, there is no question of discrimination. Separately, the US has also voiced concerns that the EU ETS may violate the EU US Open Skies
May/June 2009
ENVIRONMENT
auspices of ICAO appear to be limited. There is however a recognition that environmental concerns are a major threat to the future growth of the airline industry and as such must be addressed internationally. On a national level, the Australian government has announced a cap and trade scheme for aviation. The new US administration has also said that it will establish a federal cap and trade system, although as yet it is not clear whether this will extend to aviation. The EU has repeatedly stated that it is keen to work with third countries as they develop their own ETS, and has built in flexibility to the EU ETS to allow for the possibility of integrating it with similar schemes.
Conclusion
Agreement as, by implementing the scheme, the EU is unilaterally limiting the volume and frequency of trans-Atlantic traffic. However, this argument may be countered by relying on the environmental purpose behind the scheme and the fact that it applies uniformly to both EU and US aircraft, consistent with Article 15 of the Chicago Convention. EU officials hope however that the recent regime change in the US, and particularly its environmental stance may lead to a softening of this position.
May/June 2009
Towards a global scheme ICAO, through its Group on International Aviation and Climate Change, is currently examining various options to establish a plan of action to address climate change issues, and is expected to announce its findings by September 2009. The implementation of an emissions trading scheme by ICAO would likely require changes to the Chicago Convention, and as a result the prospects for the establishment of a global scheme under the
Although the 2012 start date for the inclusion of aviation in the EU ETS is still some way off, it is clear that airlines must begin their preparations now. As well as ensuring that the necessary data collection and reporting requirements are in place for the monitoring phase, airlines should already start to think about how they will obtain sufficient allowances to meet their future obligations. Compliance with the EU ETS is not simply an environmental question and airlines must act now to address the operational issues which will be affected by the scheme. While the threat of a legal challenge to the EU ETS remains a possibility, the majority agree that a European emissions trading scheme which includes aviation is here to stay. Indeed, an emissions trading scheme for CO2 may just be the beginning. Plans are already being developed by the Commission to extend the EU ETS to include other aviation emissions, such as nitrous oxide, and these are likely to be made public later this year. n Gabrielle Somers, Associate, Norton Rose LLP
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INFRASTUCTURE
The competition commission’s market investigation into baa Why has BAA been told to sell three UK airports, and what does it mean for potential acquirors and airlines?
A
s a result of the funding challenges faced by airport operators, the recent fall in passenger demand and the financial difficulties of airlines, there is genuine uncertainty in the aviation sector. A primary catalyst for the changes expected to happen in the sector in the UK this year is, however, regulatory rather than commercial — the UK Competition Commission (CC) requiring BAA to dispose of three attractive airport assets: Gatwick, Stansted and Edinburgh. In that divestments are to be required in a market investigation, this intervention is unprecedented. In this article, we explore:
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• the progress of the CC’s investigation to date; • the implications of its conclusions for BAA, potential acquirors and airlines; and • the application of competition rules which potential acquirors will need to consider.
Summary of the BAA market investigation Set out below is a summary of the key stages of the BAA market investigation to date, and a table showing the progress in this investigation:
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INFRASTRUCTURE
Photo © BAA Limited
Photo © BAA Limited
Photo © BAA Limited
Photo © BAA Limited
The market investigation reference — “Why BAA is under scrutiny”. In June 2006, following the takeover of BAA by a consortium led by Ferrovial, the OFT conducted a market study into UK Airports and, in March 2007, referred BAA Airports to the CC as a market investigation. Although the CC’s findings are “provisional” and may then be subject to appeal, it would be unusual for them to change significantly.
The CC’s provisional findings — “BAA must sell three airports” As the provisional result of the investigation, in August 2008, the CC proposed to force BAA to sell three of its UK airports: Gatwick, Stansted and either Edinburgh or Glasgow. The CC identified the following problems and solutions:
May/June 2009
The commercial response by BAA — “Gatwick for sale”: BAA responded to the CC’s provisional conclusions, and pre-empted the CC’s final report, by commencing an auction process to sell Gatwick in September last year. In a typical market investigation, the CC publishes its final report and, where divestments are required, these normally only occur after the publication of the report and the remedies coming into force. However, in this case, since BAA pre-empted the normal remedies process by putting Gatwick up for sale before being forced to do so, the CC has itself sought to be involved in the sale process, in a move likely to add complexity to the process. The CC provisional findings on remedies — “CC to tell BAA how and to whom to sell”: December 2008 saw the CC confirming its provisional view that Gatwick, Stansted and Edinburgh should be sold (although it has asked for views on whether BAA should be given the choice to sell either Glasgow or Edinburgh in order to remedy the competition concerns). A successful bidder will not just have to offer an attractive deal to the seller, but also satisfy the CC’s prescriptive criteria, namely to find a “suitable” acquiror, which will compete effectively with and independently from BAA without creating further competition concerns.
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INFRASTRUCTURE
Photo © BAA Limited
Photo © BAA Limited
Photo © BAA Limited
Photo © BAA Limited
BAA’s response — For now, threaten to challenge everything and play for time: BAA has rejected the CC’s provisional conclusions and has threatened to use “all available mechanisms at its disposal”, suggesting that it may challenge the CC’s findings before the courts, whether by judicial review or an action under human rights legislation for “interference” with its possessions. No company has yet been successful in a judicial review of a CC decision, which may explain why BAA is also considering a separate legal challenge on human rights grounds. It is possible that any legal challenge will be accompanied by an application by BAA to postpone the requirement to sell the airports, pending the outcome of that challenge. However, the legal challenge of a CC decision does not automatically lead to suspension of that decision and, for BAA to be awarded interim relief and have the CC’s remedy suspended, it would have to meet a high legal threshold, for example, that it would suffer serious and irreparable damage if the remedy was allowed to proceed.
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Photo © BAA Limited
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INFRASTRUCTURE
and staff prior to the divestiture. The CC recognises that the simultaneous forced sale of a number of airports could prove challenging, and is consulting on this. However, it has also noted that the sole incentive for BAA securing planning permission for the additional runway at Stansted is to increase the sale price, whereas all other incentives point to BAA not pursuing planning permission “with vigour”. Therefore, the CC has suggested it may demand a sale of Stansted by end 2009 or early 2010 in order not to delay the planning process. In conclusion, the sales process may not be straightforward, due to the tension between the CC and BAA, the prescriptive criteria for the sales process and the number of other stakeholders involved, as well as the potential uncertainty from legal challenges BAA might bring.
Photo © BAA Limited
Photo © BAA Limited
The implications of the CC’s actions Criteria to be applied to any purchaser: The CC has set out the criteria it intends to apply in assessing the suitability of a purchaser of the airports which BAA will be required to sell. Prospective buyers must demonstrate: • independence from BAA and its owners; • appropriate expertise in the operation of airports; • adequate financial resources; • ability effectively to compete with BAA’s remaining airports; and • that the acquisition will not in itself give rise to further competition concerns. Information the CC expects to receive during the sale process to enable it, the DfT and the CAA to assess a purchaser’s suitability: The CC has set out the process for assessing the suitability of purchasers, with a high degree of regulatory involvement in the sales process not just by the CC but also by the Department for Transport (DfT) and the Civil Aviation Authority (CAA). In sequence, bidders will be required to demonstrate: • independence from Ferrovial/BAA, and an absence of overlapping activities with the target airport; • sufficient operational expertise and financial resources; and • that the terms of the sale and any transitional arrangements will not impede competition. In terms of timing, the CC proposes that the divestiture process will take nine months, starting immediately after the remedies come into force, which may occur after the publication of the CC’s final report. Prior to the remedies coming into force, the businesses of each divested airport will have to be separated from BAA, with transitional service agreements and restrictions on the transfer of key management
May/June 2009
Implications for the airlines: Airlines may see opportunities to reopen commercial terms of agreements with airport operators. There may also be moves towards airlines entering into long-term commitments on capacity with new airport owners, presumably in return for favourable landing fees. The findings in the CC report may give airlines greater scope to deploy competition law arguments when challenging airport operators’ terms of use. With the CC finding that certain airports form a narrow market, and that the operators of certain airports may have substantial market power, airlines (and other customers) may wish to consider whether that market power has been abused, and their options (including actions for damages) under competition law.
Regulatory process for potential airport acquisitions As well as having to comply with the criteria provided for by the CC, potential acquirors, including non-trade buyers such as financial institutions or pension funds, may see their bids subject to scrutiny under competition laws concerning the control of mergers if the relevant jurisdictional thresholds are met. Acquirors will need to assess which competition authority, if any, will have jurisdiction to review a proposed deal, based on the turnover and market shares of the parties. The starting point for any evaluation of a prospective merger is an assessment of the markets in which the companies operate. The relevant market is likely to be seen as airport infrastructure services — which could be further segmented (i) by customer (full service scheduled, low cost and charter airlines), or (ii) between long- and short-haul services. If any competition issues are raised in that market (for example, because the acquiror is a competitor or customer of the target), the parties will have to assess the prospects of the acquisition (a) being referred for an in-depth investigation which is more lengthy, costly and complex, or (b) in the worse case, ultimately being prohibited or only being cleared subject to conditions (likely to involve disposals or, possibly, price caps, capacity commitments and access guarantees). There have been competition reviews of relatively recent mergers in the sector, which provide useful guidance on how the authorities are likely to approach their assessment of the market. In 2006, the European Commission approved the acquisition of BAA by a consortium led by Ferrovial, as there were no overlaps between the airports controlled by the acquirors and the target. In 2005, the European Commission and the UK authorities considered the abortive bid for Exeter Airport by Macquarie and Ferrovial, owners of nearby Bristol Airport, and had concerns that the merger would lead to increased charges and reduced investment, as a result of the loss of competition between the airports which they saw as close competitors with substantial overlap of catchment area. n Mark Jones is a partner and Jeremy Simon is an associate in the Competition and Regulation Group, Norton Rose LLP, London
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New York Slot Auctions: Industry officials hammer it out The inauguration of new US President Barack Obama has the country’s aviation industry holding its breath with anticipation. Airlines are particularly keen to hear the new Democratic administration’s take on the DOT’s proposed sale of New York airport flight slots. Mary-Anne Baldwin asks if everything really is for sale.
“Under the former administration’s plans, as many as 10 per cent of slots for flights to and from New York’s metropolitan airports would be sold off to the highest bidder.” LOW COST AIRLINE WORLD
F
ormer Us Transportation Secretary Mary Peters’ plan to rush through the auctions of New York airport landing slots on January 12 before President George W. Bush’s term in office ended were blocked by a stay order issued by a federal Court of Appeals in December. Although the court case — which was instigated by the Air Transport Association (ATA), the main US airline trade body — is still pending, it’s unclear whether new President Barack Obama and his new Transportation Secretary
May/June 2009
INFRASTRUCTURE
Ray LaHood will support Peters’ plans to sell off the slots in a move to cut congestion. As yet no hearing date has been arranged, but the stay order is still in effect and ATA is resolute it will prove illegal the sale of New York airport slots proposed by the Federal Aviation Administration (FAA) and the US Department of Transportation (DOT) during the latter days of the Bush Administration. Current delays at New York’s John F. Kennedy, LaGuardia and Newark Liberty airports are costing the aviation industry about $10bn a year, says David Castelveter, vice president of communications for ATA. The Bush administration previously offered $5bn and $10bn in loan
May/June 2009
guarantees for an industry nearly crippled by the consequences of the September 11, 2001 terrorist attacks, but it seems Bush was unhappy to keep pouring money into an industry which has had a big hole. Under the former administration’s plans, as many as 10 per cent of slots for flights to and from New York’s metropolitan airports would be sold off to the highest bidder. That’s around 140 flights from Kennedy alone. With estimated prices per slot reaching up to hundreds of thousands of dollars, some airlines would most likely lose existing flights to rivals with more capital. Airlines argue that flight slots are assets and that to sell them off to competitors would unfairly hinder their original owners.
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and airline growth — not logic — that dictate they’re kept. The sale and redistribution of slots would also raise a collective $50m per airport over a fiveyear period, estimates the DOT — a figure that airlines should be happy to see invested in ways to increase the number of on-time take-offs and landings, as the DOT plans.
“The FAA argues the sales would open the market to start-ups and create healthy competition in the massive New York market.” It’s the airlines that have suffered most during the current recession that are more likely to be ‘unfairly’ priced out of the New York market, they claim. While the FAA argues the sales would open the market to start-ups and create healthy competition in the massive New York market, Castelveter thinks otherwise, arguing that forcing further competition on those already suffering in the wake of high oil prices and recession-induced low demand is like adding another blow in a round of punches. “If you understand the New York market… there is no shortage of competitors, either from the international carriers, legacy carriers or the low-fare carriers,” he says. ATA believes the auction sales would hammer nails into the coffins of bleeding airlines and that it is only reasonable for those airlines already operating
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to seek firm ground and support before the path is opened to others. “There is no reason to believe some airlines should be given preference to fly in and out of New York at the expense of a carrier that’s invested billions of dollars in the investment of that route. It‘s pure confiscation, we think it‘s illegal and that’s why we are taking this matter up with the courts,” says Castelveter. The US airline industry believes there is more strength in profit figures than in numbers. ATA argues that rather than increasing the number of airlines, it would make more sense for the government to help the ones that already exist. However, when it comes to slots at congestionrestricted airports, industry critics argue that airline numbers must be changed. Logically, a reduction in flights would ease congestion and decrease delays, but it‘s passenger demand
Statistics Data compiled by the DOT’s Bureau of Transportation Statistics ranking US airports’ year to date on-time arrival performance showed the percentage of on-time arrivals at Kennedy during the year ending 2007 was a paltry 11 per cent. Yet by November 2008 the percentage of on-time arrivals recorded by the BTS Air Travel Consumer Report saw a dramatic increase in on-time performance; Kennedy had improved by 65 per cent to 76.0 per cent. Newark airport also bettered its arrival time, seeing a 10.12 per cent improvement from 55.68 per cent in 2007 to 65.8 per cent in November 2008. LaGuardia’s on-time arrivals rose by 16.98 per cent from 60.52 per cent in 2007 to 77.50 per cent in 2008. Looking at departures, Kennedy again performed considerably better in 2008, improving its on-time departure rate by 16.47 per cent to 82.0 per cent from 65.53 per cent in 2007. Newark showed a 10.15 per cent
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INFRASTRUCTURE
improvement from 67.65 per cent in 2007 to 77.8 per cent in 2008. LaGuardia was 13.5 up per cent, from 71.1 per cent of on-time departures in 2007 to 84.60 per cent in 2008. Although the airports have markedly improved their on-time performances, the numbers of flight delays — which customers would hope to be close to zero — are still a concern. Waiting for delayed flights can cause untold hindrances, especially for those taking connecting flights or traveling under tight timescales — such as for short business stays. Unfortunately the passenger has little choice but to suffer the consequences of poor management.
The debate According to the ATA, New York is responsible for 45 per cent of the nation’s flight delays, yet it covers just 12 per cent of the country’s commercial flights. It’s clear the dilemma must be tackled, but the solution is much less apparent. “The Department of Transportation and FAA do not have statutory authority to auction the slots,” says Castelveter, adding that the roundup and sale of the slots is, “in other words … [to] confiscate hundreds of millions if not billions of dollars in infrastructure investments and market development.” In response to questions put to it by AFM, the FAA responded: “The matter is in litigation and slot auctions have been stayed by the court. The
May/June 2009
administration is reviewing its options.” When Indianapolis-based ATA Airlines (formerly American Trans Air) grounded its aircraft in April 2008 and sheltered under bankruptcy protection, Southwest Airlines was eager to snap up ATA’s slots at LaGuardia, paying $7.5m to secure the deal and strengthen its position in the domestic market by serving one of the major New York airports for the first time. Also, Nigeria’s Arik Air has recently secured flight slots to an undisclosed New York airport, though the details have not yet been released. Under the FAA and DOT’s policy, airlines such as these would have to relinquish a large percentage of their investments. The argument gets trickier when looking at larger-scale investments, particularly those from which the airports benefit. Continental, for example, has invested $2bn into
Newark over the past decade, while JetBlue has ploughed $80m into the three year construction of Terminal Five at Kennedy airport. The building, which opened in October, cost a collective $700m, the rest being paid by the Port Authority of New York and New Jersey. JetBlue’s contribution has afforded it a 30year lease as the sole airline operating from the terminal. But while JetBlue has a monopoly on flights to and from the terminal, obviously it also has a monopoly on delays to those flights. The proposed auction sales have hung a question mark over JetBlue’s stranglehold on Terminal Five (which, admittedly, is no greater than American’s steely grip on JFK’s massive new Terminal Eight, which was even more expensive than Terminal Five). Should JetBlue be allowed to retain its monopoly on flights as it believed it would when it signed the cheque? If
“The round-up and sale of the slots is, in other words … [to] confiscate hundreds of millions if not billions of dollars in infrastructure investments and market development,”
the FAA
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“Not only have the proposed sales threatened individual airlines, but their effects would ripple out to unsteady many industries.” were to make allowances for the likes of JetBlue, would it open the floodgates for other airlines to ask — or request in a court of law — for similar changes to the guidelines? Not only have the proposed sales threatened individual airlines, but their effects also would ripple out to unsteady many industries. ThePort Authority raised specific concerns that those airlines which could not afford to retain their slots would counteract the fall in traffic by using larger aircraft. If this strategy were to be adopted by the majority, many of the smaller US airports that are limited to receive only smaller aircraft would see a slump in flights. The dropoff would affect all trades working within and attached to the airports, among them retailers, taxi drivers, caterers and ground operators. As many as 2,300 communities could be affected, says the Port Authority. On an even greater scale is the effect the sales would have on customers. The cost to purchase airport slots must be covered somehow and it is Castelveter’s belief that cost will be incurred by the passenger. “The carriers‘ operating margins are better, yet they are slim. The industry has made two years of profits since the year 2002,” he says. “The question remains: How much can they pass through to customers?“ Adds Castelveter: “The government looks at the aviation industry as a piggy bank and a supplier of funds. No matter who you talk to they want to come at the airlines and add another tax.” He recalls that California wanted to add a cent and a half to the fuel tax and the Transportation Security Administration wants airlines to fund biometric testers “to the tune of billions of dollars”. Castelveter continues: “Everyone wants to tack on another cost to airlines, thinking customers are willing to pay those added costs, and they’re not. There is a price limit where customers will decide to take other forms of transport — or not travel at all, as we saw post-9/11 and as we’re seeing now.”
The solution Several resolutions have been suggested. While LaGuardia slots have been capped for some time, DOT officials took the controversial move to cap flights at both Newark and Kennedy. As part of its strategy to reduce the cap at La Guardia from 75 flights per hour to 71, the DOT announced to airlines on January 14 that they had until February 2 to choose which flights to relinquish. Airlines would be allowed to retain
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a number of slots for take-offs and landings, but after this date the DOT would take the rest. Carriers would select half the slots they were to surrender, while the government would select the remaining half. These flights would then be sold — or more correctly leased — to the highest bidder for a period of 10 years. Slots voluntarily returned by this date would provide credits towards any further slot reductions that may happen as a result of future sales. Those returned after the due date or retrieved by the government would be retired in order that the lowered cap rate could be met. The DOT has said the new cap restrictions are a “near-term step” towards a reduction in delays and that longer-term solutions should involve “market-based solutions”. The extended cap at LaGuardia is expected to reduce delays by up to 41 per cent and save an annual $178m. While some believe this saving will support investment into workable “market-based solutions”, others fear it will allow officials to become complacent about investment and instead reliant on fees paid by airlines and flight restrictions. Again the ATA stresses its argument: “ATA has long advocated that the most meaningful way to reduce delays is to fully implement operational and technological improvements — not to artificially constrain demand by measures such as slot reductions and auctions — and to accelerate development and deployment of technology and systems modernisation,” says Castelveter. “The government is too slow to implement the changes we need to allow growth at very important airports. We are taking baby steps when we should be taking leaps and bounds. Countries like the UK, Australia, Canada, Mongolia are using satellite-based technology that we in the United States are just looking at. If the government can work to modernise the technology we use to operate the airspace, we can add volume. As we add volume everybody should have the right to fly.” Apparently unwilling — or more likely unable — to fund the modernisation of technology to the requisite degree, the FAA has proposed a number of alternatives, including re-routing air traffic to utilise New York’s airspace better — a suggestion met with fierce disapproval from residents close to the airports who would be situated under the proposed flight paths. The FAA also suggested that airports be given greater power in setting and assessing fees for peak-hour flying. The amount collected
in fees would then be used to fund airport improvements, with everyone seeing the benefits. But airlines were disgruntled with the notion that airports could levy an uncapped fee while the carriers were already haemorrhaging from a recession and soaring fuel prices. It seemed to be a ‘damned if you do and damned if you don’t’ situation. While airlines have balked at the idea of airports having autonomy over landing fees, it is possible that a reform of the current fee pricing strategy would help reduce delays. Currently fees are based on the weight of the aircraft, despite it costing the airport the same amount for the take-off or landing of any aircraft. While
May/June 2009
INFRASTRUCTURE
light aircraft operators gain from the current system, a levelled cost structure not only seems fairer but more logical. Some argue that charging a flat rate could not only bring greater short-term profits to airports but also reduce traffic in the longer term. Yet nothing seems the ideal solution. Lightaircraft operators have suffered in the shadow of the recession. Flights on private jets both for business and leisure have slumped as people cut luxuries in order to cut costs. Increasing the fees may mean light-aircraft operators are simply priced out of action. It seems there is no ‘fix-all’ solution and it is unlikely that President Obama will be able
May/June 2009
to please everyone. “We don’t know as an association what President Obama is going to do in terms of reducing congestion. We know from his campaign he, like Senator McCain, both were very clear they feel the need to reduce the delays in this country,” says Castelveter. But while senators Schumer, Clinton and Murray all have voiced opposition to the sales, Obama has chosen Republican Congressman Ray LaHood to be Transportation Secretary. Having served in the House of Representatives since 1995, La Hood still has what many believe to be only a loose knowledge of transport and it is thought he has been selected as a bipartisan
link between the Democrats and Republicans. A recent statement by Continental Airlines said that La Hood viewed the proposal for auctions as ‘misguided’ and that they would not reduce congestion. It quoted the secretary calling for “a commitment to the end user” and saying that “an aviation system that focuses on the safety, convenience and confidence of the traveling public will be a successful system.” The fate of the airlines in New York is still shaky. While Castelveter is hopeful that with “such strong support from the industry and government“, the president will view the matter as “an experiment that has no merit“, only time will tell.. n
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MAINTENANCE OPERATIONS
A320 support After almost two decades of operation the A320 is considered a highly reliable investment. Maintenance glitches such as problems with the air conditioning and brakes have been ironed out and fly-by-wire technology is fully accepted.
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May/June 2009
MAINTENANCE OPERATIONS
well for them. According to Stuart Mann, Airbus’ director of product marketing, A320 family, airline response to MDP 28 has been favourable. “Airlines love the extra flexibility that MPD 28 gives them and, naturally, they get the maximum time out of all the components between overhauls,” he says. A popular maintenance option on the A320 is the Airbus AIRMAN system which allows the aircraft to transmit faults to the ground during flight. This software tool enables the necessary resources and maintenance personnel to be in place when the aircraft touches down and thus reduces the time the aircraft spend not in revenue service. CSA is preparing to start AIRMAN utilisation this winter. “We expect AIRMAN to support our line maintenance operations and to increase effectiveness of our preventive maintenance, leading to further improvement of technical dispatch reliability of our A320 fleet,” states Daniela Hupáková, a spokeswoman for CSA.
Upgrades
A
irbus is aware that airlines are constantly looking to reduce maintenance costs and MPD Revision 28 allowed operators to extend the intervals between maintenance checks. A checks could be conducted every 600 hours (previously 500 hours), C checks every 20 months (previously 15 months) and heavy checks after six years and 12 years (previously five and 10 years). Equalised checks that focus on optimised usage of each part have also been introduced. CSA Czech Airlines is an example of a carrier that has adopted the intervals offered by MPD Revision 28 and so far it is working
May/June 2009
“Airlines love the extra flexibility that MPD 28 gives them and, naturally, they get the maximum time out of all the components between overhauls.”
In early 2006 Airbus conducted a research programme on winglets for the A320 family. The company tested two different winglet designs on two different aircraft in over 80 hours of flight testing. Initial testing was done on a prototype aircraft and then, because the prototype was not production-representative, an aircraft was borrowed from JetBlue (prior to delivery) for further testing. Results showed the aerodynamic advantage expected from the wingtips, but increased loads were introduced to the wings. Mann explains: “Obviously if you have a higher load you have to reinforce the structure. If you reinforce the structure, you add weight and with the designs that we have tested thus far, the aerodynamic benefit was
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“It is not just us that continue to invest in the programme; it is our suppliers as well.” effectively negated. We have done a lot of work and we have a research programme that has not brought us where we hoped to be... Now we need to reflect on how the knowledge acquired can be used.” Then, at the 2008 Farnborough Air Show, it was revealed that leasing company AerCap had become the launch customer for the A320-/321 passengerto-freigh-ter conversion, with an order for 30 freighters. The aircraft will come from AerCap’s portfolio and will be converted at EADS EFW in Dresden. Meanwhile, a parallel conversion line will be set up by Russia’s Irkut, part of UAC, a 50-50 partner in the A320 P2F programme. For the A320 family, the future looks positive;
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May/June 2009
MAINTENANCE OPERATIONS
demand and various improvements are in the pipeline, such as an aerodynamic revamp introducing a new engine pylon and a tidy-up of various vents on the wing. There are also plans for a new passenger cabin with more overhead stowage, better lighting and sidewall panels. And what of a replacement for the A320 family? It is thought that Airbus will release this around 2020, possibly a couple of years after Boeing unveils a 737NG replacement. “At the moment the deals are there,” says Mann. “It is not just us that continue to invest in the programme; it is our suppliers as well. CFM has come out with its tech insertion engine, which is reducing maintenance cost and fuel burn. IAE has come out with its SelectOne engine, again improving maintenance costs and fuel burn. We have a lot of development going into the aircraft to make sure it stays at the top of the pile. I am delighted to say our biggest problem at the moment is producing them fast enough.”
May/June 2009
“We have done a lot of work and we have a research programme that has not brought us to where we hoped to be…..Now we need to reflect on how the knowledge aquired can be used.” LOW COST AIRLINE WORLD
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FACTS & FIGURES
TRANSACTION SUMMARY 6 february - 2 march 2009 Sale Date
A/C Model
Variant
Reg. No.
Serial No.
Owner Name
Operator Name
Event Remarks
06-Feb-09
Boeing 737 (CFMI)
300 Winglet s
N636WN
11-Nov-75
Southwest Airlines
Purchased - subject to existing lease
10-Feb-09
Airbus A320
210 (CFM)
VQ-BAX
05-May-10
Undisclosed Bank / Broker / Lessor AerVenture Leasing 1 Ltd
Boeing 737 (JT8D)
200 Advanced
ZS-SGE
31-Mar-61
Star Air Cargo
Aeroflot Russian Airlines Star Air Cargo
Purchased - sale & lease-back on delivery
10-Feb-09 11-Feb-09
Airbus A320
230 (IAE)
N634AW
31-Mar-00
AeroTurbine Inc
AeroTurbine Inc
Purchased - parked
11-Feb-09
Boeing 737 (CFMI)
300 Winglets
N635SW
10-Nov-75
Southwest Airlines
Purchased - subject to existing lease
15-Feb-09
30-Jan-00
OH-BLC
12-May-46
Blue 1
Purchased - subject to existing lease
30-Jan-00
OH-BLD
05-Aug-46
Blue 1
Purchased - subject to existing lease
30-Jan-00
OH-BLE
10-May-46
Blue 1
Purchased - subject to existing lease
30-Jan-00
OH-BLF
04-Aug-46
Blue 1
Purchased - subject to existing lease
30-Jan-00
OH-BLU
11-May-46
Blue 1
Purchased - subject to existing lease
15-Feb-09
Boeing (McDonnellDouglas) MD-90 Boeing (McDonnellDouglas) MD-90 Boeing (McDonnellDouglas) MD-90 Boeing (McDonnellDouglas) MD-90 Boeing (McDonnellDouglas) MD-90 Boeing 737 (CFMI)
26-Oct-00
5N-BMB
29-Aug-68
Undisclosed Bank / Broker / Lessor SAS Struktur Gรถta Kommanditbolag SAS Struktur Gรถta Kommanditbolag SAS Struktur Gรถta Kommanditbolag SAS Struktur Gรถta Kommanditbolag SAS Struktur Gรถta Kommanditbolag Chanchangi Airlines
Chanchangi Airlines
Purchased - parked
15-Feb-09
Boeing 737 (CFMI)
26-Oct-00
5N-BMC
08-Sep-68
Chanchangi Airlines
Chanchangi Airlines
Purchased - parked
17-Feb-09
Airbus A319
110 (CFM)
N790MX
17-May-10
Whitney Ireland Leasing Ltd
Mexicana
19-Feb-09
Airbus A320
210 (CFM)
N303US
03-Feb-00
19-Feb-09
Boeing 737 (NG)
800 Winglets
N512AS
22-Nov-06
GECAS Asset Management Services BOC Aviation (USA) Corp
Purchased - sale to S.P.C. by lessor on delivery Purchased - parked
GECAS Asset Management Services Alaska Airlines Purchased - sale & lease-back
19-Feb-09
Boeing 737 (NG)
800 Winglets
N513AS
07-May-96
BOC Aviation (USA) Corp
Alaska Airlines
Purchased - sale & lease-back on delivery
19-Feb-09
Boeing 737 (NG)
800 Winglets
N516AS
23-Nov-06
BOC Aviation (USA) Corp
Alaska Airlines
Purchased - sale & lease-back on delivery
20-Feb-09
Airbus A320
230 (IAE)
VH-VQA
10-May-10
Wombat VI Leasing Pty Ltd
Jetstar
Purchased - sale & lease-back on delivery
20-Feb-09
Boeing 737 (CFMI)
400SF
N211BF
26-May-77
27-Mar-00
N399NV
14-Apr-35
Undisclosed Bank / Broker / Lessor Allegiant Air
25-Feb-09
Boeing (McDonnellDouglas) MD-80 Airbus A321
Undisclosed Bank / Broker / Lessor Allegiant Air
Purchased - parked
23-Feb-09
230 (IAE)
G-OZBT
15-Sep-09
Monarch Airlines
Monarch Airlines
Purchased - parked
25-Feb-09
Boeing 737 (NG)
800 Winglets
N506AS
17-Sep-97
Alaska Airlines
Purchased - sale & lease-back
25-Feb-09
Boeing 737 (NG)
800 Winglets
N592AS
05-May-96
Alaska Airlines
Purchased - sale & lease-back
26-Feb-09
Airbus A321
230 (IAE)
G-TTII
14-Oct-09
Undisclosed Bank / Broker / Lessor Undisclosed Bank / Broker / Lessor Monarch Airlines
Monarch Airlines
Purchased - parked
15-Feb-09 15-Feb-09 15-Feb-09 15-Feb-09
Purchased - parked
Purchased - parked
Storage Summary 2 MARCH 2009 Mfr & Type
Fleet Stored
Total Fleet
Fleet Stored %
Seats Stored
Total Seats
Seats Stored %
Airbus A318
4
67
5.97
69
6974
0.99
Airbus A319
18
1149
1.57
1760
148605
1.18
Airbus A320
54
2027
2.66
9010
321149
2.81
Airbus A321
11
501
2.2
2273
94401
2.41
ATR ATR 72
34
403
8.44
2146
24888
8.62
Avcraft 328JET
2
3
66.67
20
30
66.67
BAE SYSTEMS (Avro) RJ Avroliner
12
164
7.32
1046
14933
7
BAE SYSTEMS (HS) 146
74
184
40.22
6502
13996
46.46
BAE SYSTEMS (HS) 748
32
90
35.56
482
1055
45.69
Boeing (McDonnell-Douglas) MD-80
299
1032
28.97
43376
148672
29.18
Boeing (McDonnell-Douglas) MD-90
-
110
0
0
16351
0
Boeing 737 (CFMI)
262
1897
13.81
32863
243523
13.49
Boeing 737 (JT8D)
264
611
43.21
28041
61694
45.45
Boeing 737 (NG)
87
2801
3.11
11196
423163
2.65
Boeing 757
81
1026
7.89
14458
166094
8.7
Bombardier (Canadair) CRJ Regional Jet
84
1045
8.04
3699
49910
7.41
Bombardier (Canadair) CRJ1000 Regional Jet
-
1
0
0
15
0
Bombardier (Canadair) CRJ700 Regional Jet
3
286
1.05
210
19515
1.08
Bombardier (Canadair) CRJ900 Regional Jet
6
201
2.99
517
16188
3.19
Embraer 170
1
153
0.65
76
11016
0.69
Embraer 175
-
119
0
0
9492
0
Embraer 190
3
211
1.42
292
20560
1.42
Embraer 195
-
30
0
0
3442
0
LOW COST AIRLINE WORLD
May/June 2009
FACTS & FIGURES
List Prices, CMV’s Lease Rates Manufacturer Boeing Boeing Boeing McDonnell Douglas Boeing McDonnell Douglas Boeing McDonnell Douglas Boeing McDonnell Douglas Boeing McDonnell Douglas Bombardier (Canadair) Bombardier (Canadair) Bombardier (Canadair) Bombardier Bombardier Bombardier Embraer Embraer Embraer Embraer Embraer Embraer Fokker Fokker ATR ATR
Type
$162.00m
$29.50m $33.90m $14.70m $15.70m $25.00m $17.67m $25.04m $29.47m $31.71m $35.12m $37.09m
$15.20m $18.80m
Average List Price B757-200 B787-8 MD-81 MD-82 MD-83 MD-87 MD-88 CRJ-100/200 CRJ-700/705 CRJ-900 Q200 Q300 Q400 ERJ-135ER ERJ-145ER E170 LR E175 LR E190 LR E195 LR Fokker 70 Fokker 100 42-500 72-500
CMV Newest
Oldest
% Change
Oldest
Dry Lease Rate Newest
% Change
$8.10m
$24.05m
0.0%
$0.125m
$0.240m
0.0%
$0.60m $1.20m $2.50m $3.00m $2.60m $4.65m $12.30m $15.90m $4.00m $3.60m $9.60m $5.00m $6.30m $15.90m $17.80m $22.10m $23.80m $5.50m $3.70m $6.10m $6.00m
$1.50m $3.15m $4.70m $3.00m $4.00m $11.20m $19.90m $27.40m $9.45m $15.60m $18.80m $7.30m $12.00m $23.55m $24.95m $28.35m $30.05m $5.50m $4.70m $14.80m $18.75m
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
$0.025m $0.030m $0.045m $0.040m $0.050m $0.055m $0.130m $0.160m $0.050m $0.055m $0.120m $0.055m $0.060m $0.150m $0.165m $0.200m $0.215m $0.090m $0.070m $0.070m $0.075m
$0.040m $0.060m $0.075m $0.040m $0.070m $0.130m $0.200m $0.240m $0.080m $0.135m $0.190m $0.075m $0.130m $0.220m $0.225m $0.245m $0.260m $0.090m $0.095m $0.135m $0.170m
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Seating* (Typical C+Y) 188 220 144 144 144 109 144 50 70 86 37 50 70 37 50 70 82 100 108 80 108 48 70
Engine data Manufacturer
Type
Engine Manufactuer
Engine
Full-life value
% change
Current Half-life Market Value
% change
Market Lease Rate
Airbus Airbus Airbus Airbus Airbus Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Boeing Bombardier (Canadair) Bombardier (Canadair) Embraer Embraer Boeing McDonnell Douglas
A300-600R A310-300 A319-100 A320-200 A321-200 B717-200 B737-300 B737-400 B737-500 B737-600 B737-700 B737-800 B737-900ER B757-200 CRJ-200 CRJ-700 E170 ERJ-145 ER MD-82
GE PW CFMI IAE CFMI RR Deutschland CFMI CFMI CFMI CFMI CFMI CFMI CFMI RR GE GE GE RR Allison PW
CF6-80C2A5 PW4152 CFM56-5B5/P V2527-A5 CFM56-5B3/P BR715A CFM56-3B1 CFM56-3B2 CFM56-3C1 CFM56-7B22 CFM56-7B24 CFM56-7B26 CFM56-7B27 RB211-535E4 CF34-3B1 CF34-8C1 CF34-8E5 AE3007-A1P JT8D-217C
$8.38m $7.39m $6.33m $7.47m $8.03m $3.72m $3.03m $3.23m $4.08m $7.00m $7.55m $8.00m $8.50m $7.43m $2.63m $3.65m $4.06m $2.48m $1.88m
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -14.2% -13.4% -10.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -5.1%
$5.00m $3.30m $4.50m $5.40m $6.10m $2.39m $1.50m $1.70m $2.50m $5.20m $5.70m $6.10m $6.60m $4.20m $1.50m $2.30m $2.80m $1.85m $0.90m
0.0% -8.3% 0.0% 0.0% 0.0% 0.0% -25.0% -22.7% -16.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -10.0%
n/a n/a $0.070m $0.082m $0.090m $0.045m $0.035m $0.040m $0.045m $0.076m $0.080m $0.084m $0.086m $0.050m $0.025m $0.032m n/a $0.030m 0.03
% change
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
kerosene type jet fuel – spot prices march 2008 - march 2009
May/June 2009
LOW COST AIRLINE WORLD
55
56
FACTS & FIGURES
Trend in the YTD – number of seats 2001-2009: worldwide
Trend in the YTD – number of seats 2001-2009: WITHIN europe
Trend in the YTD – number of seats 2001-2009: USA (DOMESTIC)
LOW COST AIRLINE WORLD
May/June 2009
6th annual event
Gold sponsors:
Silver sponsors:
co uk
Organised by:
BOOK NOW! online www.lowcostairlinesworld.com | email bianca.geldenhuys@terrapinn.com | phone +44 (0)20 7242 2324 | fax +44 (0)20 7242 2320