ANALYSIS: Europe airline market outlook April 2014

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Attention shifted further onto foreign investments in EU carriers this month after regulators opened an investigation into whether these are complying with ownership and control rules.

The launch of the European Commission probe will focus scrutiny on a number of deals where non-EU carriers hold significant stakes in airlines. Specifically, this covers stakes held by Delta Air Lines, Korean Air and Chinese investment firm HNCA in, respectively, Virgin Atlantic, Czech Airlines and Cargolux, as well Etihad’s investments in Air Berlin, Air Serbia and the former Darwin Airline operation.

While ownership is typically the disputed issue, and control is subsumed within it, the main issue at play is whether foreign parties effectively control these European airlines through some means other than majority ownership.

Control issues are often raised by one airline against another, but there is no sign that this probe is triggered by airline complaints. More likely, the Commission foresees a need to clarify how it will apply the foreign control regulations in view of other imminent investment in European carriers – such as Etihad’s move for a stake in Alitalia.

The easiest part of the Commission’s probe will be to scan bylaws and shareholder agreements for special rules that impose super-majority votes. The tougher question will be how much foreign management control the Commission will tolerate. Etihad, for instance, has a contract to manage Air Serbia. Does this automatically violate the ban on foreign control – or will the Commission take a more nuanced approach, and consider such questions as the duration and extent of control granted by the contract? No one knows.

The probe will be closely watched no doubt by several European countries seeking investors for their ailing carriers – not least in Italy, where Etihad’s move for Alitalia remains deadlocked over the labour and debt restructuring conditions the UAE carrier is seeking before investing in the loss-making Italian carrier.

The importance of such investors for struggling European carriers was further magnified in late April by the continued difficulties at Air Berlin. The carrier finally disclosed the scale of its losses in 2013 and is now embarking on a restructuring aimed at giving sufficient breathing space for a deeper restructuring.

It will lean on Etihad – a 29% shareholder – as part of this recapitalisation. Etihad is making a €300 million ($416 million) cash injection by subscribing to subordinated convertible bonds that have no maturity date. It has extended a €255 million credit line until 2021. But despite the significant capital injection, Air Berlin says its ownership structure will not change as a result of the refinancing plan. It says Etihad’s €300 million cash injection will be used as equity capital to reduce debts and serve other corporate purposes

Another German carrier, Lufthansa, is not planning any immediate action despite this month passing the 40% foreign ownership threshold. It has decided not to buy back its own shares after foreign investors increased their shareholding to nearly 40.7% of the total stock, because the German carrier sees no “immediate danger” of excessive foreign control. It says it will not intervene in share trading as long as this level remains “sufficiently” short of the 50% mark.

EUROPEAN AIRLINE NEWS: APRIL SNAPSHOT

Shareholders in Luxembourg-based freight operator Cargolux are to to increase the carrier’s share capital by $175 million through an issue of new stock, after completion of Chinese investment firm HNCA’s acquisition of a 35% stake in the airline;

Flybe is to make London City airport its principal base for serving the capital after signing a five-year traffic deal under which it will start five routes from October;

Air Astana is to add flights to Paris and Prague next summer as part of cautious European expansion following the lifting of growth restrictions imposed as part of the 2009 European Commission blacklisting of Kazakh carriers;

A group of Valencia-based entrepreneurs which includes Air Nostrum chief executive Carlos Bertomeu took majority ownership of the Spanish regional carrier after winning a tender to recapitalise the company;

New Aeroflot low-cost subsidiary Dobrolet has picked Moscow Sheremetyevo airport as the base for its operations, while Transaero will move the bulk of its Moscow operations from Domodedovo airport to Vnukovo airport and make it “practically” its principal base for flights to the capital by year-end.

EUROPEAN AIRLINE TRAFFIC: MARCH

The busy Easter travel period falling in April rather than March had a big impact on European airline traffic last month. Passenger traffic data for 20 airlines collated by Flightglobal shows traffic growing less than 2% in March. This is well below the more than 4% capacity added in the month. Consequently, passenger load factor slipped more than two points for these carriers in March versus the same month last year.

Load factor slipped for all but a handful of European operators, with low-cost operators enjoying the better fortunes. Only three of the 20 carriers to have so far reported ASK/RPK data increased lead factor in March and these include Norwegian, and most notably, Vueling. EasyJet and Ryanair, neither of which break out montly ASK/RPK data, both reported load factor up a point in March, even though the grounding of aircraft over winter and a hiatus in aircraft deliveries meant March was a rare month of traffic decline for the Irish carrier.

Traffic growth of less than 2% is far below the 6% and nearly 8% recorded by European operators in February and January respectively. But the later timing of Easter will boost April traffic figures in comparison with the same month last year.

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AEA MEMBER TRAFFIC BY MARKET: FEBRUARY

Growth of Association of European Airlines (AEA) member traffic in February outpaced capacity to help lift passenger load factor half a point. Capacity and load factor both grew most sharply on routes to North Africa and the Middle East, the latter a region where several European carriers have implemented new partnerships and codeshares with the big Gulf carriers.

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EUROPEAN AIRLINE FLEET SUMMARY: APRIL

The active European airline fleet in April was 5,882 aircraft, around 1,000 of them widebodies.

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