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Comment: Wow provides a warning

Airlines are flying into trouble, says Ian Taylor

Icelandair’s agreement to take over Wow Air is the latest act of consolidation in a European aviation sector showing increasing signs of stress.

Small Planet Airlines Germany became the latest minor carrier to cease flying this week, following the recent failures of Primera Air, Cobalt and VLM.

Alitalia remains in administration, where it has been for more than a year. In Germany, easyJet, Ryanair and Lufthansa’s Eurowings compete for the space left by the demise of Air Berlin.

Ryanair, of all carriers, issued a profit warning in October – although like all Ryanair announcements this needs putting in context. The carrier will still make a €1.2-billion full-year profit.

Cost pressures are driving the process and there will be more failures and consolidation to come.

As recently as September, Wow Air chief executive and majority owner Skuli Mogensen was touting the carrier as a candidate for a partial initial public offering (IPO), hoping to raise up to $300 million.

Instead, Wow changed hands in an all-share deal worth just $18 million at the time it was announced.

Mogensen will receive close to a 5% stake in Icelandair, so his pay-off rose to a nominal $25 million immediately following the news. But shares in Icelandair have lost half their value in the past year and the reasons for that have not gone away.

In an email to staff, Mogensen noted: “This year has been extremely challenging. The outlook for many airlines has gotten extremely tough.”

It had got so tough for Wow that the airline was unhedged on fuel and had omitted to pay the operating charges at its home airport all year.

Yet it is not alone. Icelandair announced last week that it had breached its debt covenants and asked bondholders to grant a waiver.

Wow was touted as a low-cost long-haul carrier but was not quite that. It fed traffic to its Iceland hub to connect onward to North America, using a model which Icelandair pioneered.

Both it and Icelandair have been struggling with a slump in tourists to Iceland – growth to the country in the first nine months of this year was the lowest in a decade at 5.5% – along with the higher oil price and cut-throat transatlantic competition from carriers offering direct flights between Europe and North America.

For now, the two airlines will continue flying but for how long is anyone’s guess.

Icelandair chief executive Bogi Nils Bogason insisted: “There are many opportunities for synergies.” For sure there are. We can expect Icelandair to act quickly to rationalise the schedules.

 

Scandinavia at centre of storm

Scandinavia is somewhat in the eye of the storm. Primera Air, which failed at the beginning of October, was based in Denmark and had an Icelandic owner.

Norwegian Air is poised to announce cuts to its schedule for this winter and next summer as it struggles with the engine problems of its Boeing 787 fleet and an oil price against which it is also barely hedged.

Geir Karlsen, Norwegian’s chief financial officer, confirmed last week: “We are evaluating the whole route programme – long haul and short haul. We are struggling with high oil prices.”

The fuel price is causing much damage of the damage. But it is exacerbated by the substantial growth in capacity in Europe over the past years.

Lufthansa Group chief executive Carsten Spohr warned this week that the industry has “reached its maximum growth rate” and suggested airlines need to give up the “fantasy of growth going on forever”.

Spohr said: “This industry has reached its maximum growth rate. What we need is healthy growth in line with infrastructure, manufacturer’s capacity and airline capacity.”

He added: “We can’t excuse ourselves. We are part of it.” Lufthansa announced last week that it will moderate its growth plans for 2019.

Yet airline association Iata noted this week that global airline capacity was up 5.8% year on year in September, with traffic figures – measured by revenue passenger kilometres (RPKs) – up 5.5%.

It is the increased availability of seats driving down fares and yields which is causing so many carriers pain.

Iata noted “the demand boost from lower air fares” which has kept passenger figures growing up to now is subject to “rising airline cost pressures, particularly fuel”.

The association’s director general Alexandre de Juniac added: “Heightened uncertainty about trade policies and mounting protectionist policies may also be having an impact.”

As ever, there are striking regional variations in the global aviation market. In North America, the major carriers have rarely been in such an advantageous position.

Delta Air Lines chief executive Ed Bastian noted this week that the carrier expects to recoup up to $2 billion in higher fuel costs from increased ticket prices this year.

That is extraordinary and would be unthinkable in Europe at present.

Bastian said: “Demand is strong and gives a good opportunity to price. We’re expecting fuel costs up $2 billion year on year for 2018 but we’re anticipating our overall profits to be about flat [at $5 billion].

“We recovered almost all the fuel increase, which has not been done before. We don’t see any cracks.”

Delta is not alone. Rival United expects to recoup 90% of this year’s rise in fuel costs from increased fares. US aviation analysts describe the market as “the best revenue environment in recent memory”.

The reason is that the US market consolidated almost a decade ago following a succession of airlines entering bankruptcy protection.

Four carriers now dominate the US market. Europe is heading the same way.

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