Airline Weekly - March 28, 2016
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Airline Weekly - March 28, 2016

Mergers on their Minds: Will Europe’s anemic airline sector see more consolidation? Lufthansa seems to hope so.

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Mergers on their Minds: Will Europe’s anemic airline sector see more consolidation? Lufthansa seems to hope so.

Airlines are often the chief economic victims of terrorism. But last week’s incidents in Brussels hit even closer to home than usual, with one of the attacks happening at the city’s airport. That raises the gloomy specter of higher security costs, as well as another demand shock during the busy Easter holiday period—and perhaps more importantly in the prime booking season for peak summer holiday travel. The airport, meanwhile, will remain closed for at least another few days, forcing Brussels Airlines and others to temporarily operate from other airports—Ryanair, for one, moved its flights to Charleroi Airport south of the capital.

It was a somber way to end the final days of 2016’s first quarter, presenting yet another concern for the region’s carriers, some of whom are thriving—IAG, Ryanair, easyJet and Wizz Air, for example—but most of whom are underperforming. Collectively, the 10 European carriers that reported Q4 financial results (Lufthansa, Air France/KLM, IAG, Ryanair, SAS, Norwegian, Finnair, Aegean, Wizz Air and Icelandair) managed just a 4% Q4 operating margin and a 7% operating margin for all of 2015, compared to 17% in both periods for the 10 largest U.S. airlines.

Unsurprisingly in the context of this lackluster performance, the bells of consolidation are once again ringing. At the center of many conversations last week was easyJet’s reported interest in buying all or part of Air Berlin, the German carrier whose largest shareholder is Etihad. Air Berlin hasn’t yet reported its Q4 results, but they’re expected to again be lousy, moving it closer to a doomsday scenario of filing for bankruptcy, finding a buyer or begging Etihad for yet another rescue.

Lufthansa would sure be happy to see Air Berlin go away, as the ailing carrier nearly did before Etihad’s earlier largesse. But it might not wait for others to do the dirty work. Lufthansa itself is talking consolidation, not regarding Air Berlin per se but about the low-cost segment more broadly, which Lufthansa thinks has too many players. Ryanair and easyJet, it says, have achieved critical scale, but others haven’t. Can Eurowings help change that? Lufthansa’s executives think so, speaking openly about it being a platform for further consolidation.

But who might it buy? It’s hard to imagine Wizz Air or Norwegian giving up control, which Lufthansa and Eurowings would surely want. Which leaves a few shorthaul LCCs like Monarch, whose largest investor is reportedly looking to sell, and Jet2.com, among other smallish players. But because of their small size, the... (433 of 1,734 words)

Also Inside this Issue:

In addition to the devastating human toll, will last week’s attacks in Brussels spoil what would likely have been a strong peak summer season for transatlantic markets? The Paris attacks in November certainly affected airline demand, if only temporarily. Other past attacks, including the London Tube bombings in 2005, had less of an impact. Fortunately for airlines on both sides of the Atlantic, the busiest part of the summer is still a few months away.

Virgin Atlantic is one airline with a lot at stake, given its outsized transatlantic exposure, even though the London-based airline has no direct exposure to Paris or Brussels. In any case, Virgin is for now flying high, earning what would have been strong profits last year if not for big fuel hedge losses.

Its Californian cousin Virgin America is posting strong profits too. But compared to its U.S. peers, those profits look weak. So should Virgin America sell itself? A much-discussed Bloomberg News report suggests it’s trying.

United is trying to boost its earnings, caught in the same situation as Virgin America: Its profits are strong in absolute terms but weak in relative terms. One tactic: deeper overseas partnerships, including a new arrangement with Air China.

Air China will be among several Chinese carriers reporting financial results this week. Hainan Airlines showed last week that conditions are still good, underpinned by strong traffic growth and cheap oil. The most striking trend among Chinese carriers, though, is their breakneck overseas expansion.

Well, this week marks the end of the first quarter, one airlines will remember for cheap oil—but also for a challenging revenue landscape.

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