Issue no 204March 2015

-20

0

20

40

60

80

100

120

140

160

180

2009 2010 2011 2012 2013 2014 2014H1

2015H1

300

400

500

600

700

800

900

1000

1100

eurom

eurom

Wizz Air Financial Results

Opera ng Profit

Net result

Revenues

Note Year endMarch

The company sold 234m shares(138m from exis ng shareholders)at pound1150 represen ng 45 of theenlarged issued equity capital andvaluing the group at pound600m A erthe issue largest shareholder IndigoPartners retains a near 20 stakeHowever it also holds euro26m in con-ver ble debt and 48m non-vo ngnon-par cipa ng conver ble shareswhichon full conversionwould repre-sentanaddi onal 58of the total eq-uity and provide a fully-diluted mar-ket capitalisa on of pound15bn The is-sue appears to have been reasonablysuccessfulmdash the shares are currentlyquoted at pound1390 20 above the is-sue price

Wizz Air started opera ons in2004 Established in late 2003 byJoacutezsef Vaacuteradi erstwhile CEO of theformer Hungarian flag carrier Maleacutevit has pursued the strategy of devel-oping a route network connec ngthe ldquopoorerrdquo Central and EasternEuropean (CEE) na ons with theldquoricherrdquo mainstream EU marketsStar ng from a base in Budapest andtagging on the coat-tails of the 2004and 2007 EU expansion which sawthe accession of ten former EasternEuropean na ons to the trading blocit has pursued the ultra-low-cost-carrier model targe ng demand

from CEE markets deemed too weakfor the likes of Ryanair and easyJet(who up to now have had morelucra ve targets to pursue) It wasgiven a significant boost from thedemise ofMaleacutev in 2012

Opera ng in a niche area it hasbeen able to build a network of 18bases in ten CEE countries mainlyto secondary and ter ary airports inWestern Europe and operates to 91des na ons in 33 countries on 300routeswithafleetof54A320s (and57further on order) With a prime AOCin Hungary it also has an opera on intheUkrainewith its ownAOCthrough

Wizz Air Ukraine (and formerly rana subsidiary in Bulgaria before thatcountryrsquos accession into the EU) Inthe past eight years it has grown at acompoundannual rate of nearly 20For thecalendaryear2014 itachievedbooked traffic of 158m passengers

Published by Aviation Strategy Ltd

This issue includes

Page

Wizz Air 1

Aegean Very efficient veryprofitable andGreek 5

The beginning of the end forEuropersquos charter airlines 8

Copa La n Americarsquos solehigh-flyer 12

Airport Valua ons Update 17

Wizz Air Patience rewardedfor ULCC investors

F investors behind Europersquos fi h largest LCC and secondlargest ultra low cost carrier (ULCC) have been able to extractsome value from their pa ent perseverance Wizz Air Holdings

plc surrep ously floated on the London Stock Exchange in Februarythroughan IPO allowing serial airline investor Indigo to sell down someof its substan al holdingand realise returns from itsdecade long invest-ment

Aviation StrategyISSN 2041-4021 (Online)

This newsle er is published ten mes a yearby Avia on Strategy Limited JanFeb andJulAug usually appear as combined issuesOur editorial policy is to analyse and covercontemporary avia on issues and airlinestrategies in a clear original and objec-ve manner Avia on Strategy does not

shy away from cri cal analysis and takes aglobal perspec ve mdash with balanced cover-age of the European American and Asianmarkets

PublisherKeithMcMullanJames Halstead

Editorial TeamKeithMcMullankgmavia onstrategyaero

James Halsteadjchavia onstrategyaero

Tel +44(0)207-490-4453Fax +44(0)207-504-8298

Subscriptionsinfoavia onstrategyaero

Copyrightcopy2015 All rights reserved

Avia on Strategy LtdRegisteredNo 8511732 (England)RegisteredOffice137-149 Goswell RdLondon EC1V 7ETVATNo GB 162 7100 38ISSN 2041-4021 (Online)

The opinions expressed in this publica ondonotnecessarily reflect theopinionsof theeditors publisher or contributors Every ef-fort is made to ensure that the informa oncontained in this publica on is accurate butno legal reponsibility is accepted for any er-rors or omissions The contents of this pub-lica on either in whole or in part may notbe copied stored or reproduced in any for-mat printed or electronic formwithout thewri en consent of the publisher

Wizz Air Bases and Des na ons

Aalesund

Malaga

Alghero

Alicante

Arad

Antalya

Barcelona

Belgrade

Belfast

Bergen

Bergamo

Billund

Bologna

Bourgas

Bari

Brno

Bristol

Basel Budapest

Paris

Kerkyra

Cologne

CIA

Cluj

Craiova

Brussels

Catania

Cuneo

Debrecen

Doncaster

DortmundEindhoven

FCO

FriedrichshafenMemmingen

Gdansk

Glasgow

Grenoble

Girona

Groningen

Gothenburg

Geneva

Baku

Haugesund

Heraklion

Frankfurt

Hurghada

Iasi

Kiev

Nis

Chisinau

Kristiansand

Kosice

Katowice

Kutaisi

Hamburg

Larnaca

Lisbon

Ljubljana

Liverpool

London LTN

Lviv

Madrid

Malta

Malmo

Maastricht

MXP

Naples

Nuremberg

Stockholm

Ohrid

Bucharest

Perugia

Palma

Poznan

Prague

Pisa

Pescara

Rhodes

Riga

Sabiha Gokcen

Sibiu

Thessaloniki

SkopjeSofia

Split

Stavanger

Szczecin

PopradTatry

Tirgu Mures

Turku

Tel Aviv

Trondheim

Oslo

Venice Timisoara

Tuzla

Varna

Moscow

Valencia

Vilnius

Verona

Warsaw

Wroclaw

Zaragoza

Zakinthos

Lublin

Dubai

Base AirportDestinationRyanair Base

making it the fi h largest LCC in Eu-rope

Revenues have grown to justover euro1bn for the year to March2014 Profits were elusive un l threeyears ago However in the financialyear ended March 2014 it achievedopera ng profits of euro103m and netprofits of euro88m Its EBITDAR marginof 24 for the period is admirablewhile its opera ng profit of euro637 perseat is only slightly below compe torRyanairrsquos for the sameperiod For thesix months to end September 2014 itachieved a 23 year on year growthin revenues to euro727m opera ngprofits of euro166m (up by 40) andnet profits of euro158m (compared witheuro109m in the prior year period)

The strategy is firmly based onULCC principles

( point-to-point services radia ngfrom bases to secondary (ie cheap)airports( single fleet type( a truly terrible aircra paintscheme( high aircra u lisa on (127hours a day in the twelve months toSept 2014)( high load factors (863 for thesame period)( noGDS( full unbundling of fare structuresto present the lowest possible fareon the market-place shelf while en-couraging passengers to ldquotrade uprdquoby buying ancillary services

In the year to end March 2014the group achieved an average fareof just over euro47 per booked passen-

2 wwwaviationstrategyaero March 2015

Aviation StrategyISSN 2041-4021 (Online)

This newsle er is published ten mes a yearby Avia on Strategy Limited JanFeb andJulAug usually appear as combined issuesOur editorial policy is to analyse and covercontemporary avia on issues and airlinestrategies in a clear original and objec-ve manner Avia on Strategy does not

shy away from cri cal analysis and takes aglobal perspec ve mdash with balanced cover-age of the European American and Asianmarkets

PublisherKeithMcMullanJames Halstead

Editorial TeamKeithMcMullankgmavia onstrategyaero

James Halsteadjchavia onstrategyaero

Tel +44(0)207-490-4453Fax +44(0)207-504-8298

Subscriptionsinfoavia onstrategyaero

Copyrightcopy2015 All rights reserved

Avia on Strategy LtdRegisteredNo 8511732 (England)RegisteredOffice137-149 Goswell RdLondon EC1V 7ETVATNo GB 162 7100 38ISSN 2041-4021 (Online)

The opinions expressed in this publica ondonotnecessarily reflect theopinionsof theeditors publisher or contributors Every ef-fort is made to ensure that the informa oncontained in this publica on is accurate butno legal reponsibility is accepted for any er-rors or omissions The contents of this pub-lica on either in whole or in part may notbe copied stored or reproduced in any for-mat printed or electronic formwithout thewri en consent of the publisher

Wizz Air Bases and Des na ons

Aalesund

Malaga

Alghero

Alicante

Arad

Antalya

Barcelona

Belgrade

Belfast

Bergen

Bergamo

Billund

Bologna

Bourgas

Bari

Brno

Bristol

Basel Budapest

Paris

Kerkyra

Cologne

CIA

Cluj

Craiova

Brussels

Catania

Cuneo

Debrecen

Doncaster

DortmundEindhoven

FCO

FriedrichshafenMemmingen

Gdansk

Glasgow

Grenoble

Girona

Groningen

Gothenburg

Geneva

Baku

Haugesund

Heraklion

Frankfurt

Hurghada

Iasi

Kiev

Nis

Chisinau

Kristiansand

Kosice

Katowice

Kutaisi

Hamburg

Larnaca

Lisbon

Ljubljana

Liverpool

London LTN

Lviv

Madrid

Malta

Malmo

Maastricht

MXP

Naples

Nuremberg

Stockholm

Ohrid

Bucharest

Perugia

Palma

Poznan

Prague

Pisa

Pescara

Rhodes

Riga

Sabiha Gokcen

Sibiu

Thessaloniki

SkopjeSofia

Split

Stavanger

Szczecin

PopradTatry

Tirgu Mures

Turku

Tel Aviv

Trondheim

Oslo

Venice Timisoara

Tuzla

Varna

Moscow

Valencia

Vilnius

Verona

Warsaw

Wroclaw

Zaragoza

Zakinthos

Lublin

Dubai

Base AirportDestinationRyanair Base

making it the fi h largest LCC in Eu-rope

Revenues have grown to justover euro1bn for the year to March2014 Profits were elusive un l threeyears ago However in the financialyear ended March 2014 it achievedopera ng profits of euro103m and netprofits of euro88m Its EBITDAR marginof 24 for the period is admirablewhile its opera ng profit of euro637 perseat is only slightly below compe torRyanairrsquos for the sameperiod For thesix months to end September 2014 itachieved a 23 year on year growthin revenues to euro727m opera ngprofits of euro166m (up by 40) andnet profits of euro158m (compared witheuro109m in the prior year period)

The strategy is firmly based onULCC principles

( point-to-point services radia ngfrom bases to secondary (ie cheap)airports( single fleet type( a truly terrible aircra paintscheme( high aircra u lisa on (127hours a day in the twelve months toSept 2014)( high load factors (863 for thesame period)( noGDS( full unbundling of fare structuresto present the lowest possible fareon the market-place shelf while en-couraging passengers to ldquotrade uprdquoby buying ancillary services

In the year to end March 2014the group achieved an average fareof just over euro47 per booked passen-

2 wwwaviationstrategyaero March 2015

002

004

006

008

010

012

014

800 1000 1250 1500 1750 2000 2250

Unitcosts($)

Stage length (km)

European Carriersrsquo Unit Costs

Air Berlin

Air France

FinnairAlitalia BA

Iberia

Aer Lingus KLM

Lu hansaSWISSSAS

THYeasyJetnorwegianVueling

WizzRyanair

Aegean

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2012 2013 2014 2014H1

2015H1

Pax(m

)

Wizz Air Passenger Traffic

195

compou

ndann

ualgro

wth

173

ch

Note Financial year endingMarch

ger but average ancillary sales of euro25represen ng 33 of total revenuemdash the highest rate published by anyof the European LCCs One of themore intriguing service fees they of-fer is an ldquoon- me performance guar-anteerdquo for euro10 It should be notedthat they have unbundled the faressomuch that ancillary fees include in-escapable booking fees and check-infees of euro18 per pax

It has a single type fleet mdash firmlybased on the A320 family The groupcurrently has 54 A320s in opera onwith a full economy high density 180seat configura on It has plans todouble the size of the fleet to 106units by end of 2018 27 of the newaircra to be delivered over the pe-riod are expected to be the higherdensity A321 This is likely to providea con nued 15-20 annual growth incapacity for the foreseeable future

The strategy is also firmly basedon the core principle of transport-ing passengers between CEE coun-tries andWestern Europe The newlyaccededCEE countries to the EUhavesubstan ally lower per capita incomethan the more mature Western Eu-ropean na ons but their economiesare growing at a significantly fasterpace and as the per capita incomegrows Wizz sees expanding propen-sity to travel by na onals of thesecountries

At the same me the companyhas recently started to increase thenumberof routes fromCEEeastwardsto countries outside the EU in EasternEurope the Caucasus and the Mid-dle East as part of its ldquoGo Eastrdquo ini-a ve with routes launched to Geor-

gia Israel and Macedonia in 2012Azerbaijan Bosnia and HerzegovinaMoldova Russia Turkey and the UAEin 2013 and Egypt in 2015

LCCs are not known for adher-ing to established norms Wizz Air

seems to have taken this one stagefurther The holding company is in-corporated in Jersey (in the UK butoutside the EU) the corporate headoffice is based in Geneva (outsidethe EU but in the EEA mdash but we un-derstand they got a good tax deal)the main AOC is in Hungary (outsidethe Euro-zone but in the EU) whilethe majority of traffic is generatedin Poland (29) and Romania (24)Hungary accounts for 17 of passen-gers It reports its results in Euros andis quoted on the (Sterling oriented)

LondonStockExchangeAllweird andpresumablywonderful

Wizz remarkably operates witha unit cost not too dissimilar fromthat of Ryanair mdash the paragon ULCCin Europe mdash of eurocent368ASK some3 higher than that of the Irish car-rier (although it does have a slightlyhigher average stage length) and 25lower than other LCCs On a per seatbasis however for the year endedMarch 2014 its opera ng costs ofeuro56 per seat were some 25 higherthan Ryanairrsquos mdash the greatest dif-

March 2015 wwwaviationstrategyaero 3

Wizz Air Passenger TraffictofromHomeMarkets H1 2015

Poland28

Romania24

Hungary17

Bulgaria7

Lithuania5

Ukraine 4

Macedonia 4

Serbia 3

Czech 3

Latvia 2Other 2

Wizz Air Fleet Plan

Aircra 2013 2014 2015 2016 2017 2018

A320 45 54 63 63 63 79A321 2 11 23 27

Total 45 54 65 74 86 106

Note Calendar year end

Europersquos ULCCsPer Seat Revenues and Costs

euroseat Wizz Air Ryanair

Ticket revenue 4053 3851Ancillary revenue 2173 1268

Total Revenue 6226 5119Staff costs 420 471Fuel costs 2219 2046

Distribu onampmarke ng 067 196Maintenance 298 118

Rentals 692 103Handling 1540 1158

Deprecia on 156 358Opera ng cost 5589 4449

Opera ng Profit 637 669

Note year endMarch 2014

ference being in aircra ownershipcosts where Wizz has li le real hopeof achieving Ryanairrsquos economies ofscale mdash (see table below) Howevernot surprisingly its staff costs aresome 10 below that of Ryanairrsquos ona per seat basis

Ryanair is also its main real com-pe tor The two carriers competehead-to-head on eight routes andindirectly on a further 59 routesaccoun ng for 30 of Wizz Airrsquosseat capacity (but 5 of Ryanairrsquos)although they only share two air-cra bases Wrocław and BudapestHowever 38 of Wizzrsquos capacity isoperated in 160 market pairs wherethere is no scheduled compe onand a further 20 in 60 market pairswith no low-cost compe on For

most of the CEE markets in whichit operates it has the advantage ofhaving weak (or non-existent) localflag carrier compe on

Unlike Ryanair there is no neednor desire to turn cuddly In the cur-rent stage of the cycle and whileRyanairrsquos a en on is focussed on lu-cra ve Western markets Wizz looksset to be able to provide strong re-turns There will however come apoint when Indigo Partners look tosell (they as non-Europeans are notofficially allowed to own more than49 of a European airline) Althoughat an investor day a few years agoMichael OrsquoLeary stated that hewouldnot buy Wizz Air even for a euro2 cointheremay come a day when he couldchange hismind

4 wwwaviationstrategyaero March 2015

Reminder

All back issues of

Avia on Strategy

are available on ourwebsite

wwwavia onstrategyaero

If you need login detailscontact us

infoavia onstrategyaero

-40

-20

0

20

40

60

80

100

120

140

160

2009 2010 2011 2012 2013 2014300

400

500

600

700

800

900

1000

eurom

eurom

AegeanGroup Financial Results

EBIT

Net Result

Revenues

G has suffered terribly inthe recessionmdashrealGDPhasfallen by 25 since 2007 un-

employment is out of control tradi-onal poli cal par es are in disgrace

and a neo-Marxist party Syriza wonthe recent elec on but has as it hasrapidly discovered almost no con-trol over the austerity measures anddebt repayments demanded by theTroika to bring down na onal debtYet Athens-based Aegean Airlines ahybrid carrier is showing a level ofprofitability second only to Ryanair

At the end of March Aegean an-nounced its 2014 financial and oper-a onal results

( Capacity (ASKs) increased by136( Average load factor increased to773 from744( Revenue for 2014 amounted toeuro9118 m 7 up from euro8500m in2013( Opera ng profit totalled

euro1464m a margin of 160 (com-pared to easyJet at 13 and Ryanairat about 18)( Netprofit amounted toeuro756m amargin of 83( The balance sheet has zero debt(liabili es from financial leasingcontracts amount to euro84m) whilecash and cash equivalents stand ateuro2184m

Ifnothingelse thesefiguresshowhow successful some companies inthe Greek private sector can be incontrast to the profligate chaos of thepublic sector There are three interre-lated factors behind Aegeanrsquos perfor-mance

First Aegean has found a rareniche where the hybrid airline modelworks The airline has a fleet of 36A320 Family aircra plus 12 Q400sand two Dash 100s (essen al forthe ny PSO airports inherited fromOlympic) carrying 101m passengerslast year The A320s are operated

with a business class sec on at loadfactors in the upper 70s comparableto network carriers rather than LCCswhich are now averaging loads in thelow 90s Although there is impor-tant connec ng traffic between theGreek islands and Athens Aegeaninterna onally is a point-to-pointairline

Aegean achieves average rev-enue per passenger of just undereuro100 compared to euro94 for easyJet(with a much higher propor on ofancillaries in the total) but Aegeanmanages to control unit costs atLCC-type levels mdash its 46 cents perASKex-fuel is almost exactly the sameas easyJetrsquos

The main base is at Athens (AIA)a modern efficient airport is a ma-jor asset despite the fact that it leviesthehighest airport charges in EuropeSignificant discounts on new routesand services have however been im-plemented following the 2013 sale byHoch ef of its 40 share to a Cana-dian pension fund AIA unsurpris-ingly rejected Ryanairrsquos offer of de-livering 10m passengers if fees werehalved

For Aegean the charge structureaffords some protec on from mas-sive LCC incursion at its main baseIn the summer peak 2014 Aegean ac-counted for 49 of seat capacity atAthens compared to 4 for easyJetand 6 for Ryanair

Athensrsquo geographical posi on onthe southeast corner of Europe alsolimits compe on from the majornetwork carriers whose main inter-est in this market is for feeder traf-fic supplemented by high yield lo-

March 2015 wwwaviationstrategyaero 5

Aegean Very efficient very profitableand Greek

1

2

3

4

5

6

7

8

9

2007 2008 2009 2010 2011 2012 2013 2014 2015

euro

Aegean Share Price

AegeanGroup Fleet

Aircra In service On order

A320 28 7A321 6A319 2Q400 10

Dash 100 4

Total 50 7

cal passengers to their main hubsAegean can easily compete on pricefor local trafficwithBAandAir Francewhile in the Germanmarket it code-shares with Lu hansa as a Star Al-liancemember

Second Aegean was finally ableto take over Olympic in 2013 Aegeansince its start-up in 1999 had toendure state-subsidised compe-

on from the grossly inefficientflag-carrier But when Olympic wasfinally put up for priva sa on in2008 using an innova ve structurewhich insulated the purchaser fromlegacy labour agreements and legalproblems Aegean did not join thebidding assuming logically that theprocess would fail as the previousfive a empts had failed In theevent Olympic was bought by MarfinInvestment Group (see Avia onStrategy April 2010) and Aegeanand Olympic immediately embarkedon a vicious domes c fare war justbefore air traffic volumes collapsedas the economic crisis envelopedGreece The ra onal response withOlympic making huge losses andAegean itself in the red (see graphon page xx) was a merger of the twocarriers However the EuropeanCommission blocked this ac on

ci ng compe on concerns un la deal was agreed in 2013 whenAegean in effect took over Olympic

The Aegean CEO DimitrisGerogiannis has a reputa on forefficiency (his background was in en-gineering in Germany) and under hisdirec on the integra on of Olympicappears to have gone smoothlyIndeed the Olympic brand is beingra onalised out of existence

Third Greek prices have fallenmarkedly as a result of the reces-sion restoring thecompe venessofthe Greek tourism industry and caus-ing traffic to rebound Tourist arrivalsin Greece rose by 154 in 2014 toabout 23m At Athens total passen-ger volume increased 22 to 152mthoughthiswass llonemillionbelowthe 2007 total

Aegean is in expansionist modegrowing with the recovery in Greektourism In 2014 it increased itsinterna onal des na ons to 47from 32 in 2013 and grew capacityby over 1m seats In 2015 it willadd a further 16 des na ons mdashHelsinki Toulouse Deauville MetzPisa Malta Amsterdam AlexandriaSharm-el-Sheikh Paphos RiyadhTallinn Oslo Tehran Yerevan andDubrovnic mdash and increase frequency

throughout the network About 2mseats will be added with seven newA320s being delivered throughoutthe year (one more than previouslyscheduled)

The strategic focus is on Larnacain Cyprus where Aegean is in ad-vanced nego a ons with the Cypriotgovernment to take over Cyprus Air-ways which has been in bankruptcyand grounded since last NovemberIt is not clear what exactly Aegeanwould be buying but it plans to flyfrom Larnaca where is bases fourA320s to London Paris Munich Mi-lan Zurich Tel Aviv Kiev and BeirutRyanair strangely is also a bidder forCyprus Airways though Aegean man-agement now think that Ryanair willconcentrate on more tradi onal ser-vice to Paphos the other major air-port on the island

Ryanairrsquos expansion into theGreekmarket is perceived as a threatto Aegean But although it has ins -gated 13 routes into Athens (and willadd Berlin later this year) Ryanairrsquosfocus appears to be on interna onaland seasonal services to the islandairports and Thessaloniki Greecersquossecond city in the province of Mace-donia In the peak season last yearonly 20 of Ryanairrsquos Greek capacitywas allocated to Athens Because ofthe different networks and productsAegean should be able to live withRyanair just as Aer Lingus adapted its

6 wwwaviationstrategyaero March 2015

Aegean European Route Network

ADB

AMM

ARN

AUH

BCN

BEG

BEY

BHX

BOD

BRU

BUD

CAI

CDG

CGN

CPH

CTA

DME

DUS

FCO

FRA

GVA

HAJ

HAM

IEV

IST

LCA

LED

LGWLHR

LYS

MAD

MAN

MRS

MUC

MXP

NTE

NUE

OTP

PRG

ROV

SOF

STR

TBSTIA

TLV

TXL

VCE

VIE

WAW

ZRH

AegeanDomes c Route Network

ADB

AOK

ATH

AXD

CFU

CHQ

EFL

HER

IOA

IST

JIK

JKH

JKL

JMK

JNX

JSH

JSI

JSY

JTR

JTY

KGS

KIT

KLX

KSJ

KVA

LRS

LXS

MJT

MLO

PAS

RHO

SKG

SKU

SMIZTH

model to Ryanair compe on andbenefi ed as a result

The huge threat is Greexit Thelargemajority of Aegeanrsquos costs are ineuros or dollars and would remain inthem if Greece abandoned the euroAs a rough es mate 50 of its cketrevenuewouldhave tobe sold inNewDrachmae a currency which almostinevitably would depreciate rapidlyWhile it might be argued that join-ing the euro using very dodgy na-onal accounts was a huge mistake

forGreece and theEU leaving the Eu-rozone would be catastrophic for dy-namic Greek enterprises like Aegeanwhich are essen al to the countryrsquosfragile economic recovery

March 2015 wwwaviationstrategyaero 7

Wewelcome feedbackfrom subscribers on theanalyses contained in thenewsle er If youwouldlike to suggest a company

or a subject that youwould like to see

covered please contactus

Emailinfoavia onstrategyaero

or go towwwavia onstrategyaero

0

50

100

150

200

250

300

350

400

1987 1990 1995 2000 2005 2010 201410

15

20

25

30

35

40ASKbn Pct

Rela ve Capacity of UK Airlines

Scheduled

Charter

Charter percentage

Source UK CAA

16

18

20

22

24

26

28

30

32

34

36

2000 2005 2010 2014

Pax(m

)

The Decline of UK Charter Passengers

Source UK CAA

2014 was yet another year ofstructural decline for the AllInclusive Tour (AIT) market

and 2015will be no different despitethe a empts of Europersquos ldquoBig Twordquotour operators mdash TUI Group andThomas Cook Group mdash to differen-ate their products and shore up

margins But while the AIT marketmay survive for a while longer itlooks like the beginning of the end forthe remaining charter airlines

Avia on Strategy has been track-ing thedeclineof theAITmarket since2002 (see the April 2013 issue for ourlast ar cle) and the diminishing im-portance of the charter sector con-nues year-a er-year As seen in the

chart (right) the number of UK char-ter passengers fell yet again in 2014(for the 13th year in a row) by some22m passengers in just 12 monthsand the current annual total of 171mis a mere 50 of the level it was in2002 In terms of the split of sched-uled versus non-scheduled capacityoffered by UK airlines (see chart topright) non-scheduledASKs fell to14in 2014 its lowest ever propor on

This erosion of themarket comesdespite improvements in outboundeconomies through Europe In itslatest quarterly report (releasedin February) the European TravelCommission says that visitor nightsoutbound from Germany to Spaingrewbyalmost15 in2014with visi-tor nights to Spain out of theUK risingby an even be er 16 The problemhowever is that whereas 30 yearsago the vastmajority of summer tripsto Spain from the UK and Germanywere package holidays in todayrsquos

world a huge part of this demandldquoleaksrdquo (from a charter industry pointof view) onto scheduled airlines andmost specifically the LCCs

The only good news is that aprocession of managers at EuropersquosAIT operators who held an a tudethat the fundamentals of the charter

industry were inviolable has finallybeen broken and a new breed of ex-ecu ves have realised that structuraldeclinemdashduetotheeaseof travellersbeing able to put their own packagesof flights and hotels together fromLCCs and independent travel web-sitesmdashwill never go away

8 wwwaviationstrategyaero March 2015

The beginning of the end forEuropersquos charter airlines

100

150

200

250

300

350

400

450

500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GBp

TUI Travel Share Price

Note TUI Travel delisted December 2014

TUI Group Aircra Fleet

Aircra Arke Corsair Jetairfly Thomson TUIfly TUIflyNordic Total

737 5 17(1) 33 25(3) 6 86(4)757 14 14767 2 1 5 2 10787 2(1) 1 7(2) 10(3)

A330 4 4747 3 3E190 2 2

Total 9(1) 7 21(1) 59(2) 25(3) 8 129(7)

Note Orders in brackets

As we covered in our last ar -cle the new emphasis from tour op-erators is on je soning lower mar-gin holidays becoming more flexible(par cularly in terms of owning ver-sus leasing assets) and building up apor olio of more profitable special-ist holidays and related services Atthe same me both TUI and ThomasCook have been cu ng costs relent-lessly throughtheir travelempires In-evitably the spotlight is now falling ontheir charter airlines which are usu-ally the lowestmarginpart of the touroperator value chain mdash and there-fore themostvulnerable tobeingout-sourced

TUI Group

In June last year TUI Travel (formedin 2007 by the merger of the UK-based First Choice Holidays and thetour opera ng division of TUI AG theHannover-based German travel andshipping conglomerate) announcedplans for a full merger with TUI AGmdash which at that point owned 56 ofTUI Travel mdash with TUI Travel formallyde-lis ng from the London stock ex-change In December 2014

The share price chart (right)shows the marketrsquos posi ve viewof the progress that Crawley-basedTUI Travel had made in changing itsstrategy in the two years prior tothat de-lis ng Though the newly-named TUI Group has had li leme to build up a track record its

first quarter results for the 201415financial year (covering October toDecember 2014) saw a 54 rise inrevenue (on a like-for-like basis withthe cons tuent parts of TUI Groupunder their previous ownerships) toeuro35bn with an underlying EBITA lossof euro120m compared with a euro141mas of the same quarter a year ago(Itrsquos important to note that westerntour operators usually post losses in

the first-half of their financial yearsas they have significant costs butrela vely li le revenue in the periodbefore the summer holiday season)The grouprsquos net debt stood at euro16bnas at December 31 2014 (comparedwith euro18bn a year earlier)

Clearly TUI Group can only beassessed properly once the ongoingprocess of integra on betweenTUI Travel and TUI AG (which owns323 hotels and four cruise ships) iscompleted Some analysts have beenscep cal of the tangible benefits of amerger though TUI es mates theywill produce euro45m of cost savings onan annual basis

The immediate implica ons for

TUIrsquos mix of assorted charter airlinesand myriad aircra types (see tableabove)mdashall inherited fromTUITravelmdash are s ll unclear the fleet was notmen oned once in TUI Grouprsquos 64-page first quarter report

There is an obvious need for a re-duc on in airline brands and aircratypes The TUI Group fleet has a to-tal of 120 aircra (with 68 on order)comprising 33 737s 14 757s five 767sand seven 787s at Thomson Airways25 737s at TUIfly 17 737s one 767one 787 and two Embraer 190s at Je-tairfly four A330s and three 747s atCorsair and six 737s and two 767s atTUIflyNordicOnorderare three737-800s and 60 737Maxs (the la er or-

March 2015 wwwaviationstrategyaero 9

Thomas Cook Aircra Fleet

Thomas Cook Airlines

Aircra UK Belgium Scandinavia Condor Total

757 13 8 21767 12 3(1) 15(1)

A320 16(7) 4 10 15 45(7)A330 4 4 8

Total 41(7) 4 14 30 89(8)

Note Orders in brackets

derwas placed in July 2013)Itrsquos inevitable that ra onalisa on

(or ldquobundlingrdquo as TUI Group some-mes refers to it) will occur though

this may not be easy given the age-ing profile of some of the aircra Anini al a empt to simplify the fleethas already run into trouble accord-ing to a report by Bloomberg whenin early March nego a ons betweenTUI and Group Dubreuil (which ownsGuadeloupe-based Air Caraiumlbes) forthe la er to acquire the Corsair fleetfrom TUI group broke down

WithA330sand747-400sCorsairis by far the most ldquoill-fi ngrdquo of theTUI Group airlines as its aircra aresimply too big for charter opera ons(the 747s for example operate 533seats in a two-class layout) As a re-sult Corsair has been loss-making forTUI Travel (and now TUI Group) since2008 but remarkably the previousTUI Travel did li le to rec fy the sit-ua on Sources indicate that Corsairwill s ll be sold sooner rather thanlater with the emphasis then beingon uni ng the remaining airlines inthe TUI Group alongside model sim-plifica on

Thomas CookGroup

Like TUI the Thomas Cook Grouphas changed strategy over the lastfew years largely thanks to chief ex-ecu ve Harriet Green who was ap-pointed in July 2012 and set abouttransforming the tour operator byselling non-core assets cu ng costsby at least pound350m annually (of whichpound140mare in theUK business and an-other pound210mbeing group-wide ini a-ves)In 201314 (the 12 months

ending September 30th 2014) thegrouprsquos revenue fell 78 to pound86bnEBIT crept up to pound54m from pound13ma year earlier and the net loss im-proved from pound163m in 201213 to

pound114m in 201314 For the October-December 2014 period (as withTUI the first quarter of the 201415financial year) Thomas Cookrsquos rev-enue fell 83 to (pound15bn) with anunderlying EBIT loss of pound53m a slightimprovement on the pound56m loss in thecompara ve quarter a year earlier

Significantly however ThomasCookrsquos effec ve turnaround com-menced later than at TUI and as aresult therersquos much s ll to domdashmostnotably with the grouprsquos debt pilewhich s ll stood at pound13bn as theend of December 2014 just pound24mlower compared with 12 monthspreviously That debt includes pound78mof commercial paper that maturedin February this year and a he ypound311m Euro bond that matures inanother fewmonths in June

It therefore came as a shockto many analysts when Green lesuddenly in November 2014 to bereplaced by the then COO PeterFankhauser In the statement an-nouncing her immediate departureThomas Cook men oned the shareprice had recovered from a low of14p to around 130p over the periodshe was at the helm mdash but despitedenials by Green and Thomas Cookit was clear to most analysts that theturnaroundwas not yet complete

As with its key rival the ThomasCook Group has an assorted mix of

airlines and models the fleet cur-rently includes 86 aircra at ThomasCook Airlines (14 A321 four A330seight 757s and three 767s) ThomasCook Airlines Scandinavia (one A320eight A321s and four A330s) ThomasCook Airlines Belgium (one A319 andthree A320s) and Condor (10 A320sfive A321s 13 757s and 12 767s)Andonorder at ThomasCookAirlinesScandinavia are four A321ceos

As we noted in our last ar cleon the AIT market progress to-wards fleet ra onalisa on has beenldquoglacialrdquo mdash though there is nowmuch be er co-ordina on betweenthose group airlines in areas such asprocurement finance and IT

However amajor shi in strategyappears to be occurring The groupalready buys in 45 of its seat ca-pacity (split equally between charterand scheduled airlines) and in its lat-est annual report (released in Jan-uary) Thomas Cook says that ldquoin re-centyears therehasbeenasignificantincrease in airline capacity specifi-cally in low-cost carriers which hasled to very compe ve pricingrdquo

It may be coincidental with theming of Greenrsquos departure (and

maybenot according tooneanalyst)but there is significant cha er amonganalysts that the group is tou ng itsairline assets to other airlines AllThomas Group will say on the ma er

10 wwwaviationstrategyaero March 2015

0

50

100

150

200

250

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Thomas Cook Group Share Price

Monarch Airlines Fleet

Aircra In service Orders

A320 35 1A330 2

737MAX 8 30757 2

Total 39 31

is that ldquowe see it as an importantpart of our business and a supportof our profitable growth strategybut of course we are always openfor opportuni es˝ Thatrsquos clearlynot an outright denial and a saleof all (or at least a major part) ofits aircra capacity) must now berealis c possibility in the short- tomedium-term

Thatrsquos assuming a buyer can befound at the right price as TUI foundout with Corsair prospec ve buyerswillnodoubtbeextremelyhardnego-ators on price inwhat is effec vely a

fire sale of an eclec c mix of aircrain an overwhelmingly buyersrsquo marketfor second-hand aircra

Though itrsquos unlikely to reverseanystrategic decision to sell the fleet itrsquosinteres ng to note that in March theShanghai-based conglomerate FosunInterna onalboughta5stake in theThomas Cook Group for pound92m andhas vowed to increase its share to10 over me through buying shareson the openmarket

Fosun acquired French tour oper-ator Club Med for euro939m in Febru-ary this year and though ini al ex-ternal analysis has focussed on thepoten al for a rac ng Chinese hol-idaymakers into Europe in a state-

ment Thomas Cook Group calls Fo-sunrsquos move a ldquostrategic partnershiprdquoand specifically men ons the poten-al for ldquocollabora on opportuni es

with Fosunrsquos other travel and leisurebusinesses including ClubMedrdquo

Monarch Airlines

Monarch will disappear from the di-minishing ranks of charter airlines inJune this year when it fully turns intoan LCC The troubledairline (seeAvia-on StrategyOctober 2010)was sold

to London-based Greybull Capital inOctober 2014 just hours before its li-cence with the CAA expired Greybullnow owns 90 with the remainderheld by the companyrsquos pension fund

Based at London Luton airportthe airlinersquos fleet has eased downto 40 aircra comprising 27 A321seightA320s twoA330s two757sand

a single A300 In October last year mdashjust a week a er its change of owner-ship mdash it ordered 30 737 Max 8s fordelivery from 2018 un l 2020 whichjoin an order for two A321s that willbe delivered this year

The airlinersquos new strategy is clearmdashtheA330s757sandA300will all goin the short-term and eventually theairline will become a 737 Max 8 spe-cialist concentra ng (from this sum-mer) on European short-haul routeson a scheduled basis and under a lowcost opera ngmodel

700 redundancies from the pre-deal workforce of 3200 are beingaccompanied by a reduc on in payof as much as 30 for the surviv-ing posi ons and Monarchrsquos oper-a ons at East Midlands will closethis summer leaving five opera onalbases mdash Luton plus London GatwickManchester Birmingham and Leeds-Bradford

As an LCC Monarch will competehead-on with easyJet Ryanair andothers but ironically maybe its char-ter heritage will help pick it up sub-stan al seat business from ThomasCook Group if that company does selloff its charter assets

March 2015 wwwaviationstrategyaero 11

0

100

200

300

400

500

600

20032004

20052006

20072008

20092010

20112012

20132014

0

500

1000

1500

2000

2500

3000

US$m

US$m

Coparsquos Financial Results

Opera ng profit

Net result

Revenues

L America is currently a toughmarket for airlines because ofthe regionrsquos economic slow-

down currency woes weakeningdemand and plumme ng yields Butonce again Panamarsquos Copa standsout from the crowd for its resilienceand con nued lo y profitmargins

Copahasseen its shareof thepastyearrsquos challenges Its heavy exposureto the Venezuelan market (about 9of its revenues in 2014) has meantthat it has been hit hard by Venezue-lan currency remi ance issues It hashad to reduce capacity by 40 inthose markets and scramble to shito US dollar sales resul ng in a sharpdecline in yields and revenues Atyear-end 2014 Copa s ll had $485m(42 of its total cash) trapped inVenezuela

Because of concerns aboutVenezuela Coparsquos share priceplummeted by 40 from around$150 to $87 between late Julyand mid-December 2014 Sincethen the price has recovered only

modestly to the low $100sThe combined effect of the

Venezuelan changes and demandweakness in many South Americanmarkets was to cause Coparsquos yieldand unit revenues to fall by 11and 13 respec vely in the fourthquarter

Coparsquos total revenues fell by 38and opera ng income by 26 in Q4Adjusted net profit declined by 12to $1253m That was before sizableextraordinary losses $891m associ-ated with the mark-to-market of fuelhedge contracts (and $04m relatedto the devalua on of the Venezuelanbolivar)

Yet Copa s ll achieved a 177opera ng margin in the fourth quar-ter mdash down from 23 in the year-earlier period but among the highestfor airlines in the Americas

Thereasonofcoursewasasharpdecline in unit costs which par allyoffset the RASM shor all While totalCASM fell by 69 ex-fuel CASM sawa4 reduc onOther than fuel Copa

benefited from lower sales-relatedcosts 104 growth in ASMs and a72 increase in the average stagelength

For 2014 Copa reported an op-era ng profit of $5381m which wassimilar to 2013rsquos and an underlyingnet profit of $4946m up by 6 Rev-enues roseby43to$27bn Theop-era ngmarginwas 198

Copa has been profitable at thislevel for more than a decade Its an-nual opera ng margins have been inthe 17-21 range since 2003 despiteits brisk capacity growth in that pe-riod

Copa has roughly doubled its ca-pacity every 4-5 years though it hasalways reduced growth in difficulteconomic periods including the late2000s 2011 and 2012 saw brisk 23annual ASM growth but the ratemoderatedto144 in2013and95last year

Recent months have seen a fur-ther weakening of economic growthand air travel demand in La n Amer-ica especially in key markets suchas Brazil and Chile as well as con-nued weakening of South American

currencies against the US dollar Al-though Coparsquosmonthly traffic growthhas slowed only slightly to 7-8 andload factors are holding up it hasbeen at the expense of yield (which isalso affected by Coparsquos increased av-erage length of haul)

In responseCopahas trimmed itsplanned 2015 ASM growth to around7 This is to try to mi gate a sharpdecline in unit revenues which theairline currently expects to be down99 in 2015

12 wwwaviationstrategyaero March 2015

Copa Latin Americarsquossole high-flyer

0

5000

10000

15000

20000

25000

20032004

20052006

20072008

20092010

20112012

20132014

2015F

0

10

20

30

40

50

ASM

(m) Y-Y

chg

Coparsquos Capacity Growth

Capacity

Pct Chg

But Copa is benefi ng from lowerfuel prices and is an cipa ng a 16-18 opera ng margin in 2015 Fur-thermore given its history of conser-va ve forecasts and the fact that its2015 guidance is s ll based on an as-sump on of crude oil averaging $75perbarrel this yearmanyanalysts be-lieve that higher profits will materi-alise

Copa has one of the strongestbalance sheets in the industry Atthe end of 2014 it had only $11bnof aircra other equipment-relatedbank debt Excluding the moneytrapped in Venezuela adjustednet debtEBITDAR ra o was only 16mesandcashamounted to$6753m

or 25 of last yearrsquos revenuesCopa also treats its shareholders

well It pays 40 of its net income asdividends In November the boardapproved the carrierrsquos first-evershare repurchase program totalling$250m

Some investors have wonderedwhy Copa s ll has rela vely sizeableopera ons to Venezuela The rea-son Panama-Venezuela is s ll a vi-ablemarketwith significant businesstraffic and regular ethnic traffic gen-erated by the large Venezuelan com-munity in Panama The market is notas lucra ve as it used to be but it iss ll ldquovery profitablerdquo

Although there appear to be nosolu ons in sight for the repatria-on of the Venezuela funds Copa

has taken successful ac on to mi -gate further damage It has managedto shi 90-95 of the sales in thatmarket to points outside Venezuela(based mainly in US dollars) Copa isalso burning its huge stockpiles of bo-livars at a rate of $4-5m a month topay down local expenses

With some of that clarified byCoparsquos management in February andwith the share price so low more an-

alysts have raised their recommen-da on on the stock to ldquobuyrdquo Copawhich made its debut on the NYSE inDecember 2005 looks set to recap-ture its former imageamongmany in-vestors as a safe and a rac veway topar cipate in the La n American air-line industryCoparsquos unique strengths

Coparsquos con nued success is due to amul tudeof factors including the fol-lowing

(Businessmodelthe Tocumen hubCopa has a hugely successful ldquoHub ofthe Americasrdquo strategy which chan-nels trafficbetweenNorth South andCentral America via the Panama Cityhub The airline operates a stream-lined modern fleet of 737NGs andE190s and focuses on underservedthin markets where in most casespoint-to-point service is not an op-onThe strategy works because the

Panama hub is highly efficient andbecause Copa offers convenientschedules high-quality service andexcellent on- meperformance Copastrives to be the ldquobest op on forintra-La n America travelrdquo

The Panama hub is geographi-callywell located allowing737NGs to

fly nonstop to prac cally anywherein the Americas The airport ben-efits from a sea-level loca on andfavourableweather

Because of its manageable sizeand Panamarsquos policies accommodat-ing transfer passengers the airportoffers easy transfers and short con-nec ng mes

Tocumen is the only airport inCentral Americawith twoopera onalrunways It is oneof the fewmajorair-ports in the region where infrastruc-ture provision has kept pace with air-linesrsquo needs

Twoexpansion phases since 2004have increased Tocumenrsquos total gatesfrom 14 to 34 and have provided newtaxiwaysandrampandsupportareasThe current expansion phase whichis due to be completed by 2017 willadd a new $680m south terminalwith 20 addi onal gates and new ar-eas for customs immigra on secu-rity and baggage handling

But Copa execu ves noted re-cently that although the airport wasbuilding ldquothe right capacity at therightmomentrdquo it was none too soonAt peak mes the airline is alreadyshort of gates and has to use remoteposi ons The execu ves felt that bythe me the 20 new gates are ready

March 2015 wwwaviationstrategyaero 13

Coparsquos PanamaHubNetwork

ADZ

CUN

FLL

GDL

GUA

HAV

LAS

LAX

LIR

MCO

MEX

MGA

MIAMTY

ORD

PTY

SAL

SAP

SJO

TGU

TPA

YYZ

GYE

ASU

BGA

BOG

BSB

CLO

CNF

COR

CUC

EZE

GEO

GIGGRU

IQT LET

LIM

MAO

MDE

MVD

PEI

POA

REC

SCL

UIO

VVI

AUA

BAQ

BOS

CCSCTG

CUR

IAD

JFK

KIN

MAR

MBJ

NAS

PAP

POS

PUJSDQ SJU

SMR

STISXM

VLN

YUL

Note Azimuthal Equidistant map projec on centred on Panama Great circle routes appear asstraight lines

the airportwill have toembarkon thenext expansion phase of building 10addi onal gates

Another advantage is that Toc-umen has compe ve user fees Itis operated by a government-owneden ty that is by law required to usea significant por on of its revenuesfor airport expansion and improve-ments Since Copa accounts for some80 of Tocumenrsquos traffic it wieldsmuch influence with the airport au-thority and can ensure that the newfacili es are op mised for its hub op-era ons and connec vity

( Panamarsquos strong economyCopa benefits from Panamarsquos stabledollar-based economy free-tradezone and growing tourism Panamahas been one of the fastest growingLa n American economies overthe past decade recording 84average annual real GDP growthin 2004-2013 Copa faces less of acurrency risk than other major La nAmerican carriers (also because ofits diversified network) And thanksto Panamarsquos low tax environmentCoparsquos effec ve income tax rate in2015 is only 10-12

Panamarsquos GDP growth slowed to64 in 2014 and is projected to bearound 6 in 2015 but it will s ll faroutperformtherestof theregionTheIMF predicted in January that La nAmericaCaribbean would see only13 GDP growth in 2015 mdash a figurethat many now believe is an overes -mate

The expansion of the PanamaCanal has provided an enormouseconomic boost The project whichbegan in 2007 and is due to be com-pleted by 2016 (at least 16 monthsbehind schedule) will double theCanalrsquos capacity and allow the newgenera on of super-containershipsto transit

In 2010 the three main ra ngagencies all upgraded Panamarsquossovereign ra ngs to investmentgrade As a result Panamawhich haslong been home to many regionaloffices of mul na onal corpora onshas a racted significant new foreigninvestment and strengthened its roleas a major financial trade shippingand interna onal business centre

Panama is also a growing touristdes na on following in Costa Ricarsquosfootsteps Recent years have seena construc on boom fuelled bytourism and re rees from the USCanada and Spain buying second andthird homes in Panama

These trends combined withPanamarsquos steady popula on growthand emerging middle classes have

meant rapid growth in local trafficWhileCopahashistorically dependedon transit traffic (Panamarsquos popula-on is only 37m) by 2013 its traffic

was equally split between PanamaOampD and transit traffic Point-to-point traffic tends to be higher-yieldA strong local traffic component willmake Coparsquos business model moresustainable in the longer term

( Premium unit revenues low unitcostsCopa enjoys the very unusual com-bina on of premium unit revenuesand low unit costs Despite thehigh transit traffic volumes CoparsquosRASM is strong because of its highbusiness traffic content (about50) and the lack of compe onA world-class product offering

14 wwwaviationstrategyaero March 2015

8

9

10

11

12

13

14

15

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F

UScentASM

Coparsquos Unit Revenues andUnit Costs

Unit Revenues

Unit Costs

and a strong brand also helpA comparison by Morgan Stan-

ley Research in 2012 showed thatCopa had the highest length-of-hauladjusted PRASM among a group ofleading carriers that included DeltaUnited and LAN The analysis alsofound that Copa had LCC-level unitcostsmdashamazing for a hub-and-spokecarrier

Copa a ributes its low unit coststo a modern fleet efficient opera-ons and Panamarsquos low labour costs

Its aircra u lisa on is rela vely high(11 hours daily in 2014) helped by anaverage stage length of 1213miles

Copa reduced its ex-fuel CASMby7 between 2007 and 2011 (to 673cents) thanks to ASM growth distri-bu on cost savings and efficiency im-provements through technology andautoma on Since then ex-fuel CASMhas fallen further s ll to 66 cents in2014 and isexpected to remainflat in2015

( Long me alliancewithCon nentalUnitedCopa has benefited enormouslyfrom its unusually deep partnershipwith Con nental which transi onedseamlessly to United a er the 2010merger The rela onship datesback to 1998 when the two sides

forged a comprehensive alliance andCon nental acquired a 49 stake inCopa Since Panama had signed anopen skies ASA with the US in 1997the alliance secured early an trustimmunity (ATI) in the US

From the start Coparsquos brand wasclosely associatedwith Con nentalrsquosIts logo livery and aircra interiorswere similar Copa also adopted Con-nentalrsquos OnePass FFP (nowMileage-

Plus) and par cipates in the airportlounge programme Copa noted inits 2013 annual report that the co-branding ldquohelped leverage the brandrecogni on that Con nental alreadyenjoyed across La n Americardquo andhad enabled Copa to compete moreeffec vely against Avianca Americanand others

Copa has also benefited from itsUS partnerrsquos technology know-howandeconomiesof scaleAmongotherthings it shares its partnerrsquos Scep-tre inventory management systemwhich allows it to pool spare partswith the larger carrier The partner-shiphasenabledCopa tosecuremorecompe ve rates for aircra insur-anceand fuel purchasesand for third-partymaintenancework

Although Con nental fullydisposed of its stake in Copa in 2005-

2008 the partnership was so strongthat Copa le the SkyTeam allianceconcurrently with Con nental inOctober 2009 and followed it to Starin June 2012 A UAL execu ve s ll sitson Coparsquos board (currently UALrsquos SVPfor Alliances)

( Benign compe ve condi onsAt first glance Coparsquos business modelmight seem very vulnerable to otherairlines such as LCCs launchingpoint-to-point services that bypassPanama but so far at least thatthreat has not materialised The vastmajority of Coparsquos OampD marketsare so small (typically less than 50passengers per day) that other air-lines cannot serve those des na onsprofitably on a nonstop basis

Compe on for Copa is mainlyfrom other hubs but even on thatfront it seemsfar fromfierceAviancaformerly one of Coparsquos main rivals isnow a Star partner the two joined atthe same me in2012andhave code-shared since June 2013

(High-qualitymanagementCoparsquos CEO Pedro Heilbron is one ofthe longest-servingand is regardedasone of the most capable CEOs in theglobal airline industry He has been atthe helm since three families (includ-ing his own) and other local investorsbought 99of Copa in the late 1980sHeilbron ins gated and guided Copathrough key strategies such as theTocumen hub opera on (1992) in-terna onal alliances (mid-1990s) andcomplete fleet renewal (1999-2005)

Copa has a highly regarded man-agement teamOneof its lessobviousaccomplishments has been to createa SouthwestJetBlue-style employeeculture ldquobased on teamwork and fo-cused on con nuous improvementrdquo(Recent years have seen labour ten-sions but evidently the culture andservice standards have not suffered)

March 2015 wwwaviationstrategyaero 15

0

20

40

60

80

100

120

140

160

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US$

Copa Holdings Share Price

Growth plans

Coparsquos network strategy is to con-nue to strengthen the intra-La n

America opera ons and theTocumenhub with more des na ons and fre-quencies and to capitalise on oppor-tuni es at Copa Colombia

The past two years have seenmany newdes na ons In 2014 Copaadded Montreal (its second Cana-dian city) Ft Lauderdale George-town (Guyana) Campinas (8th pointin Brazil) and Santa Clara (secondpoint in Cuba) That brought the net-work to 59 des na ons in 30 coun-tries

Of the ldquoseveral newdes na onsrdquoplanned for 2015 so far only one hasbeennamedNewOrleanswhichwillbecome Coparsquos 11th US city in JuneBut most of 2015rsquos 7 ASM growthwill come from the full-year effect ofthe flights added in 2014

In 2015 Copa originally plannedto take eight 737-800s from Boeinglease another three 737-800s and re-turn five aircra to lessors resul ngin a net addi on of six aircra ButCopa now wants to limit the net ad-di on to two aircra at most andit has been evalua ng op ons to re-duce this yearrsquos deliveries

At year-end 2014 Copa and itsColombian unit operated a 98-strongfleet consis ng of 54 737-800s 18737-700s and 26 E190s There arefirm purchase or lease commitmentsfor at least 34 addi onal 737NGs plus10 op ons The plan is to add 737-800s and slightly reduce the 737-700fleet over me

Copa secured a foothold inColombia in 2005 when it acquiredan ini al 856 stake (now 999) inAeroRepublica now Copa ColombiaColombia is La n Americarsquos thirdlargest market in terms of popula-on shares a border with Panama

and represents a significant marketfor many Panamanian businesses(for historic cultural and businessreasons) But Copa also faced thechallenge of turning the smaller car-rier around financially while fendingoff growing domes c compe on inColombia

Copa has replaced the unitrsquosold fleet significantly reduced itsdomes c opera ons and refocusedit on the interna onal market out ofColombia The Bogota-based carrierhas taken over most or all of CoparsquosColombia-Panama opera ons andalso expanded its network to 10-plusinterna onal des na ons elsewhere

in the Central AmericaCaribbeanregion and Mexico The indica onsare that Copa Colombia has turnedthe corner financially

While Copa has no plans to oper-ate to other world regions Panama ispoised to a ract many new 787 andA340 services from distant corners ofthe globe especially when addi onalcapacity becomes available at Tocu-men Much of it will mean increasedfeed to Coparsquos services

Star alliance member Lu hansarecently announced plans to launchFrankfurt-Panama A340-300 flightsfrom November 2015 the Germancarrier will be selling 50 beyond-Panama des na ons as part of anexpanded partnershipwith Copa

Inves ng to improve the pas-senger experience is a top priorityfor Copa Current ini a ves includeadding more Copa Clubs and launch-ing its own loyalty programme in July2015 The la er will be in addi on toCoparsquos par cipa on in MileagePlusand there will be full reciprocity withStar programmes

Copa has also invested inSabreSonic CRS mdash a move thatshould bring about a rac ve newancillary revenue opportuni es

While Coparsquos business model isclearly very ldquodefensiblerdquo the airline iswise to diversify with ventures suchas Copa Colombia and to explore an-cillary revenues because in the fu-ture some of its larger (and mostlucra ve) markets are likely to at-tract point-to-point operators Theeconomic slowdown has slowed ev-eryone in their tracks but when de-mand recovers LCCs will become in-terested in some of those city pairs

By Heini Nuu nenhnuu nennyctnet

16 wwwaviationstrategyaero March 2015

0

5

10

15

20

25

30

35

1985 1990 1995 2000 2005 2010 2015

EVEBITD

A

Airport Transac on Values

Equitymarket issuesMinority salesTrade sales

BAAVienna

Copenhagen

ViennaASURAuckland

Malaysia

Beijing

Florence

Zurich

FraportADR

Venice

AdPAENA

BirminghamDusseldorf

Hannover

Luton

Mexico Pacific

Mexico SE South AfricaHamburgMexico NC

ADR

APAC

ASUR

Birmingham

Brisbane

Brussels HainanMeilanJAT

Sydney

AdPAmsterdam

London City

Puerto Rico

Heathrow

Manchester

Toulouse

BristolPrestwick

Cardiff

Belfast

Australia IAustralia II

WellingtonADR

Bristol

EastMidlands

Sydney

Brussels

Norwich

Budapest

Bra slava

London City

BelfastBudapest

ChicagoMidway

DCA

Exeter

Leeds Bradford

Lima

Cairns

Gatwick

Edinburgh

Sao Paolo Viracopos

ANAStanstedBAA rump

Ljubliana

T chart below is our latestupdate from our databaseof airport transac ons and

valua ons and includes LjubljanaToulouse the former BAA airportsnow known as AGS (Aberdeen Glas-gow and Southampton) and AENASpanish Airports Infrastructurefunds remain keen on airport invest-ments viewing themas rela vely lowrisk medium return assets airportowners may have become morewary of the funds and the debt thataccompanies transac ons

Recent transac ons haveproduced valua ons (EnterpriseValueOpera ng Cashflow) averag-ing around 15 generally well belowthe ra ngs achieved in the specula-ve boom pre-Lehmans and in the

recent round of La n American air-port sales However it is probably not

wise to read toomuch into the pricesreported for the recent transac onsas they ranged from Fraportrsquos minorinvestment in Ljubljana to the mostimportant IPO in Spain since the mid2000s

The long awaited IPO of Spanishairport monopoly AENA took placein January this year the governmentselling 49 on the Madrid stock ex-change Priced at euro58 a share andmarketed as a ldquoturn-aroundrdquo invest-ment hopefully indica ve of a recov-ery in the whole Spanish economyAENA currently has its shares quotedat euro97 and a market capitalisa onof about euro145bn AENA boasts thatit is the largest airport group in theworldmdashwith 46 airports and two he-liports in Spain majority 51 own-ership of London Luton two airportsin Colombia and a 6 stake in Grupo

Aeroportuario del Pacifico in MexicoOverall in 2014 it claims responsibil-ity for 196m passengers throughoutits airports and recently announcedfull year results showing EBITDA ofeuro19bn up by 16 on the previousyear on turnover of euro32bn up by 8

The sale of French regional air-ports has been under discussion forthe past twenty years Finally in 2014the first mdash that of Toulouse mdash wasachieved Surprisingly the buyer wasnot French but a Chinese consor umof state-owned Shandong Hi-SpeedGroup and Hong Kong-based invest-ment firm Friedmann Pacific AssetManagementwho acquired a 4999stake for euro308m The airport handlesaround 75m passengers per yearandhasanannual turnoverofeuro117mWith the success of the Toulouse saleit is expected that more French re-

March 2015 wwwaviationstrategyaero 17

Airport ValuationsUpdate

1k

10k

100k

05m1m2m5m

10m20m50m

Madrid-Barajas

Barcelona-ElPratPalm

aDeMallorca

Mlaga

Gran

CanariaAlicante

TenerifeS

IbizaLanzaroteFuerteventuraValenciaBilbaoSevillaTenerife

NMenorca

Girona

Sanago

Murcia

Asturias

ACorua

LaPalm

aReusSantanderJerezAlm

eriaVigoGranada

ZaragozaMelilla

SanSebas

anValladolidElH

ierroPam

plonaBadajozLa

Gom

eraLeonBurgosSalam

ancaLogrooVitoriaCordobaCeutaSabadellSon

BonetMadrid-4

VientosAlgeciras

Albacete

Huesca-Pirineos

Madrid-Torrejon

-50

-40

-30

-20

-10

0

10

20

30

40

mpp

a

PctChg

AENA Spanish Airports Traffic 2013Pax

Pct chg

gional airports will be put up for salemdash including Lyon St-Exupeacutery andNiceCocircte drsquoAzur

HeathrowAirport Ltd (the airportgroup formerly known as BAA) an-nounced the saleof the three remain-ing non-Heathrow airports to a con-sor um of Ferrovial and Macquariein a deal worth pound105bn Ferrovialremains the largest shareholder inHeathrowwith a 25 stake

However the finalisa on of thesaleofGreek regional airportshasbe-come mired in poli cs Fraport wona bid for the 40-year concession inpartnership with Greek energy group

Copelouzos to run 14 regional air-ports for euro12bnwhichwasat the topendof expecta ons Thenewgovern-ment thenabsurdly froze thesalebutseems since to have relented as itsstruggles to find money to meet itsdebt repayments The ques on nowis whether Fraport shareholders ares ll happy for the deal to be com-pleted

The Japanese regional airportsales process part of the Abenomicseconomy recovery package appearsto be moving ahead slowly directedby the Ministry of Transporta on(MLIT) At present nego a ons are

taking place for the gran ng of a 45year concession for opera ng OsakaAirports which consist of KansaiInterna onal (domes c and interna-onal services with a new LCC base

handling 19m passengers a year) andItami (a downtown airport domes conly 15m passengers a year) Thesuccessful bidder is likely to be aninterna onal infrastructure fundallied to local Japanese interests Theasking price is an upfront payment ofup to yen500bn ($42bn) and an annualfee of around yen50bn

18 wwwaviationstrategyaero March 2015

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For further informa on please contactJames Halstead or KeithMcMullan

Avia on Strategy Ltde-mail infoavia onstrategyaero

The Principals and Associates of Avia on Strategy apply a problem-solvingcrea ve and pragma c approach to commercial avia on projects

Our exper se is in strategic and financial consul ng in Europe the Americas AsiaAfrica and theMiddle East covering

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Avia on Strategy Ltd

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