Low Cost Carriers (LCCs)

Aeroflot SWOT analysis. Russia's national champion is well positioned to confront new challenges

In 2013, the Aeroflot Group achieved a 38% increase in net income. ASKs and passenger numbers grew by 14%, reflecting both the strong underlying growth in the Russian market and Aeroflot's powerful market position. Revenue growth, at 12%, did not quite match this, but the Group managed to lower its unit costs and hence drive the improvement in profit.

As the leading airline group in the Russian Federation, Aeroflot has benefited from its government's smoothing of the path to consolidation, while keeping LCC competition at bay. The government is now ready to allow the development of LCCs domestically and foreign LCCs are making their presence felt on international routes.

With Aeroflot now on the verge of setting up its own LCC subsidiary, Dobrolet, CAPA reviews the Group's strengths, weaknesses, opportunities and threats.

Air China's 2013 profit suffers due to overcapacity, but long-term goals push 14% growth in 2014

Air China, like most of its domestic peers, remains focused on the long term outcome of China becoming the world's largest aviation market. It is the short term that is challenging.

Domestic economic growth lags the targets set for aviation under previously stronger years. Airport slots remain in short supply and competition is fierce amongst China's airlines, even though the majority of capacity is from state-owned carriers.

The response has been to grow as space becomes available, not as demand requires. This helps satisfy national objectives, where any increase in throughput makes a larger economic contribution than would capacity discipline designed to boost a carrier's financial position.

The outcome of these seemingly conflicting goals is that Air China has performed well in difficult conditions. Its 2013 load factor held up while yields decreased 9%, some of this offset by a change in accounting. Top level results show a 51% decrease in group operating profit to RMB4.1 billion (USD785 million), a 4.2% operating margin, helped along by forex gains. Although 2014 ASK growth will slow compared to previous years, it is still high at 14% overall, driven by 9% domestic growth, 22% international growth and 12% regional growth.

TransAsia names LCC 'V Air' and 'Wei Hang'. Cuddly bear becomes the dual brand's low price image

Airlines embarking on dual-brand full-service and low-cost strategies tend to place much focus on the low-cost unit. While discipline there is needed, often overlooked is ensuring the other component – the full-serve carrier – can attain a yield premium and does not suffer as the LCC sibling gains ground.

This is the concern in Taiwan with TransAsia Airways, whose newly-named V Air LCC subsidiary comes with a logo depicting a smiling bear (with a heart for a nose) making a familiar peace-symbol pose, which may be too cute and cuddly for some but should bode well in the regional leisure markets V Air will target. The question is where that leaves TransAsia, whose brand is nondescript compared to V and whose markets are largely better suited to a low-cost operation than full-service. Scale is a challenge: Taiwan is a small market and TransAsia only has 11 jet aircraft while V Air intends to launch with three A320/A321 aircraft and grow by two aircraft a year. V Air could quickly overshadow TransAsia, or alternatively, trying to make both brands sustainable could artificially constrain V Air.

VietJet Air plans ambitious expansion including Vietnam’s first long-haul low-cost operation

VietJet Air plans to pursue significant expansion of its international network over the next few years as the carrier rapidly expands its A320 fleet and looks to launch a widebody operation.

Singapore will in May-2014 become VietJet’s second scheduled international destination after Bangkok. Several more international destinations in Southeast and North Asia are expected to be added by the end of 2014. The airline also aims to begin serving Australia, Europe and the Americas within three years using a new fleet of widebody aircraft.

In addition VietJet is pursuing ambitious growth outside its home market: its first overseas joint venture, Thai VietJet, is preparing to launch services in Sep-2014. Thai VietJet will initially operate three A320s while in the Vietnamese market VietJet will add seven A320s in 2014 for a total of 17 aircraft. Both airlines will use the additional capacity to launch a relatively even mix of new domestic and international routes.

Kenya Airways new budget subsidiary Jambojet to focus on stimulating demand in domestic market

Kenya Airways low-cost carrier subsidiary Jambojet plans to launch operations on 1-Apr-2014 with 737-300 services on Kenya’s three largest domestic routes. Jambojet becomes only the fourth LCC brand in the intra-Africa market and the first by most measures for Kenya.

Jambojet is primarily a defensive move for Kenya Airways, which recognises that if it did not make an early move in the LCC sector a competitor would. But it also sees a budget brand as the best option for stimulating demand and growing Kenya’s domestic market.

Jambojet plans to only operate domestically in its first phase. International services could come later but Kenya Airways seems in no hurry to pursue ambitious growth for its new subsidiary.

Aegean Airlines’ annus mirabilis, but can it maintain the momentum in 2014?

Aegean Airlines had a good 2013. Not only did it return to profit for the first time since 2009, but it recorded its best result since its 2007 listing on the Athens Stock Exchange. All the key indicators improved: double digit passenger growth, load factor gains, a sharp increase in revenue per ASK and a fall in costs per ASK. Moreover, on the strategic front, it finally completed the acquisition of Greek rival Olympic Air after first attempting this in 2011.

The challenge for Aegean will be to maintain the momentum in 2014.

The integration of the loss-making Olympic, while giving the potential for synergies, will inevitably absorb significant management attention. Meanwhile, keeping hold of RASK gains in the face of growing competition from LCC competitors (Ryanair will open bases in Athens and Thessaloniki in Apr-2014) and continuing to reduce CASK will also be crucial to showing that the 2013 result was not just a flash in the pan.