Etihad’s exit from Alitalia, Air Berlin signals shake-up of European airline industry

Air Berlin aims to strike deals to sell assets to two or more buyers by the end of September. (AFP)
Updated 27 August 2017
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Etihad’s exit from Alitalia, Air Berlin signals shake-up of European airline industry

PARIS: A dogfight over the assets of troubled Alitalia and Air Berlin heralds a new shake-up in the European airline industry — but unless other carriers cut costs they may meet a similar fate themselves, analysts warn.
Facing insolvency after key investor Etihad threw in the towel after years of trying to keep them flying despite losses, both airlines may now be snapped up whole or carved up by rivals interested in getting ahold of their planes and airport landing slots.
But the overhaul is unlikely to end there.
“The sector will continue to consolidate because the business models are in the process of changing,” said Stephane Albernhe, managing partner at Archery Consulting.
“It is an underlying trend in Europe and the US, where four ‘consolidators’ are in the lead: American, Delta, United, and low-cost Southwest.”
For Europe, consultant Jerome Bouchard at Oliver Wyman believes that eventually “there will be an oligopoly centered around Lufthansa, IAG and Air France-KLM”.
International Airlines Group is the parent company of British Airways, Aer Lingus, Iberia and Vueling.
Before major consolidation can take place, however, Bouchard believes the airlines need to find a business model where they are no longer operating on the brink of bankruptcy.
Alitalia and Air Berlin had both been operating at losses for years. Low-cost airlines had eaten away at Alitalia’s market share in particular, with Ireland’s Ryanair having eclipsed it as the largest operator in Italy.
They were spared by Etihad, which took equity stakes in both as the flush Gulf airline tried to buy its way into Europe, but it lost its gamble that it could turn them around.
“Etihad’s exit from Alitalia’s capital will contribute to the acceleration of consolidation,” Albernhe said. “Alitalia will very likely join, either in whole or in part, Air France-KLM, Lufthansa, IAG, or even easyJet or Ryanair.”
Low-cost Ryanair has soared to become Europe’s top airline by number of passengers. Fellow budget operators easyJet and Norwegian are also major players.
While former flag carriers still offer a full range of services on both medium- and long-range flights, low-cost airlines offer fewer services and until recently have focused mostly on shorter journeys.
“It is the never-ending battle between a super generalist and super specialist,” said Bouchard.
The situation is similar in Asia, where carriers such as Cathay Pacific and Japan Airlines have seen profits plunge amid intense competition from lower-cost rivals.
Australia’s Qantas was able to staunch the red only by undertaking in 2014 a major restructuring that saw it axe thousands of jobs, sell off dozens of aircraft and defer orders for new ones.
The pressure on former national carriers will only continue as low-cost airlines push into the long-haul segment, which has until now been an area where they enjoyed comfortable profits.
With profit margins already tight, airlines are going to have to attack their high fixed costs on planes, fuel and labor.
“Worldwide competition is so fierce with yields declining continuously that cost reduction is paramount,” said Mark Bobbi, an analyst at IHS Markit.
In this context “mergers, takeovers and joint ventures will be increasingly important,” said John Strickland, director of JLS Consulting.
Airlines took their first step toward consolidation in the 1990s with alliances which allowed them to share flights and run joint loyalty programs.
But “in the end the expected synergies did not really happen,” said Bouchard.
Airlines in the alliances kept their own separate fleets of planes and their own maintenance operations, thus not making much in savings in two large cost areas. Alliances did not even address the delicate issue of salaries.
Wages are a major competitive drag for former flag carriers. For example, the salaries of Air France pilots are 20 to 25 percent higher than those of low-cost easyJet, according to industry experts.
Airline alliances may be about to get a bit tighter.
Air France-KLM recently decided to allow Delta and China Eastern, both partners in the Sky Team alliance, to take stakes in its equity capital.
The equity stakes make the airlines “more cooperative on their business model” and “more interested in synergies”, said Bouchard.
Air France-KLM also took a stake in Virgin Atlantic alongside Delta to gain market share in the competitive North American and Asian markets.
With global traffic growing by four percent per year, there could be room for both former flag carriers and low-cost airlines, said Bouchard, but he warned “positions are changing quickly” and high fixed costs “do not leave any room for mistakes”.


Oil up on OPEC uncertainty regarding production levels

Updated 58 min 29 sec ago
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Oil up on OPEC uncertainty regarding production levels

  • Saudi Arabia and Russia are in favor of raising output. Other OPEC-members including Iran have opposed this, resulting in a flurry of backdoor diplomacy ahead of the meeting
  • Phillip Futures said in a note that it expected “an approximate 300,000–600,000 barrels per day (bpd) hike by Saudi Arabia and Russia collectively”

SINGAPORE: Oil prices rose by around 1 percent on Friday, lifted by uncertainty over whether OPEC would manage to agree a production increase at a meeting in Vienna later in the day.
Brent crude oil futures were at $73.78 per barrel at 0502 GMT, up 73 cents, or 1 percent, from their last close.
US West Texas Intermediate (WTI) crude futures were at $66.26 a barrel, up 72 cents, or 1.1 percent.
The Organization of the Petroleum Exporting Countries (OPEC), a producer group with top exporter Saudi Arabia as the de facto head, is meeting together with non-OPEC members including No.1 producer Russia at its headquarters in the Austrian capital to discuss output policy.
The group started withholding supply in 2017 to prop up prices. This year, amid strong demand, the market has tightened significantly, pushing up crude prices and triggering calls by consumers to increase supplies.
Saudi Arabia and Russia are in favor of raising output. Other OPEC-members including Iran have opposed this, resulting in a flurry of backdoor diplomacy ahead of the meeting.
“The actual decision by OPEC and its partners — which may not actually become apparent until Saturday — is the big one traders are watching,” said Greg McKenna, chief market strategist at futures brokerage AxiTrader.
Phillip Futures, another brokerage, said in a note that it expected “an approximate 300,000–600,000 barrels per day (bpd) hike by Saudi Arabia and Russia collectively.”
US investment bank Jefferies said an increase in “the range of 450-750,000 bpd seems the most likely outcome” of the meeting, driven largely by Russia and Gulf OPEC members Saudi Arabia, the United Arab Emirates and Kuwait.
Jefferies said these increases “would essentially offset Venezuelan declines and falling Iranian exports,” but the bank warned that global “spare capacity could fall globally to around 2 percent of demand – its lowest level since at least 1984.”
That would leave markets prone to supply shortages and price spikes in case of large, unforeseen disruptions.
The other big uncertainty is potential Chinese tariffs on US crude imports that Beijing may impose in an escalating trade dispute between the United States on one side and China, the European Union and India on the other.
Asian shares hit a six-month low on Friday as tariffs and the US-China trade battle start taking their economic toll.
Should the 25 percent duty on US crude imports be implemented by Beijing, American oil would become uncompetitive in China, forcing it to seek buyers elsewhere.
Chinese buyers are already starting to scale back orders, with a drop in supplies expected from September.
“If China’s import demand dries up, more than 300,000 bpd of US crude will have to find a new destination,” energy consultancy FGE said.
“This will certainly depress US Gulf Coast prices,” it said.