Jetrader - September/October 2011 - 21

continue—perhaps not in the way of full mergers but via strategic equity stakes and alliances, which deliver high efﬁciency gains and a host of marketing opportunities. A deﬁnite trend for all Euro-carriers is the fact that they are all ﬂying further. With the intra-European (very) short-haul sector reaching saturation point and a bustling arena of ﬁerce, cut-throat competition, average sector length is increasing. With longer sectors, it all comes down to effective utilization if you are to take advantage of the higher revenues while having to beat the cost factor. Flying further, however, tempts the LCCs to break their mould, in addition to increasing operational and security costs. In addition, many ﬂag carriers have traditionally, yet unofﬁcially been aided by their state stakeholders. With heightened and strict scrutiny on European economies, such assistance will have to be waived, which could in turn trigger a wave of void creation.

LCC share of intra-European market: June 2006 to June 2011

90,000

40%

80,000

35%

70,000 30% 60,000 25% Capacity (000) LCC Share 50,000 20% 40,000 15% 30,000 10% 20,000

10,000

5%

0 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11

0%

Total Intra Europe Capacity

LCC Share of Intra Europe Capacity

Source: OAG

% revenues

0.0 -2.0 -4.0
Net post-tax losses (right scale)

0 -5 -10 -15 -20 2011F 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Going forward, increased ancillary revenue streams should also aid in bolstering proﬁtability and expense management of most operators. Indeed, we are seeing an increased number of carriers mirroring their LCC counterparts in charging for check-in and boarding e-services, baggage, in-ﬂight services and ancillary products in the hope of boosting their sales ﬁgures. Another challenge facing the region is the evolving and mounting competition from international carriers, namely airlines of the Middle East and Asia Pacific regions. With true giants, such as Singapore Airlines and Emirates, budding from these regions, with a view and objective of global dominance, the competitive threat to European carriers increases. The economy and competition are not the only regional concerns and upsets. The European Union’s decision to impose an Emissions Trading Scheme (ETS) has sparked hostility from within the global airline industry. All carriers wishing to ﬂy to, from or through European Union airspace, as from the beginning of 2012, will be obliged to buy permits or submit allowances for the emissions their aircraft generate. The industry is in uproar as they feel that given the fragility of the economy, additional operating expenses will cause a significant adverse impact. Increased costs will undoubtedly be recouped

-6.0 -8.0

Source: IATA

Cash flows coming under pressure
20% 15% % revenues 10% 5% 0% -5% 2006 2007 2008 2009 2010 2011 Source: Bloomberg EBITDA as % revenues seasonally adjusted Asia-Pacific airlines US airlines European airlines

Jetrader 21

US$ billion

Being spoiled with records of double-digit growth for several years is not sustainable, and for those carriers operating in established markets the real challenge is in finding new routes and allocating new capacity.

2011 not expected to be repeat of 2008
Global commercial airline profitability 8.0 6.0 4.0 2.0
EBIT margin (left scale)

20 15 10 5
Jetrader - September/October 2011

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