Ryanair's Christmas Gift
- Good news for Ryanair. The Christmas/New Year travel rush, it said, was stronger than expected, especially with respect to higher-yield, close-in bookings. The first four months of 2020, moreover, show stronger-than-expected forward bookings. As a result, the airline raised its net profit guidance for the fiscal year that ends in March. It previously gave a range between about $890m and $1b. Now its range falls between $1.1b and $1.2b. It’s a comforting sign that Ryanair’s higher labor costs and current B737-MAX problems aren’t damaging its ability to earn huge sums of money. Of course, in the short term, missing MAX capacity throughout Europe is probably more helpful to unit revenues than it is hurtful to unit costs. Ryanair did say that one area of its business is doing worsethan expected. Lauda Air, its Austrian subsidiary, blamed the Lufthansa Group for what it called “below-cost selling” during the holiday peak, driving down average fares. Lauda’s busiest market by seats (Cirium) is actually in Spain: Palma de Mallorca. And after Vienna, its third- and fourth-busiest markets are in Germany: Düsseldorf and Berlin. With average fares roughly $17 below plan, Lauda’s net loss for the fiscal year to March will likely widen to something close to $100m.
- Holy Goly! In Brazil, the low-cost carrier Golis poised to report an enormously high operating margin (excluding special items) for the October-to-December quarter. How high? As high as 27%, or at worst 26%. Recall that in late October, the airline forecasted a 17% operating margin for all of 2019, and a 19% operating margin for all of 2020. Life is good in the Brazilian domestic market right now, in the absence of Avianca Brasil, which disappeared last June. Brazil’s economy happens to be doing somewhat better as well, driving more corporate traffic. As a result, Gol’s Q4 unit revenues likely jumped 11% y/y, while non-fuel unit costs declined about 10%. Fuel costs dropped too, some 21% on a unit basis. Never mind an increase in payroll taxes, further exchange rate depreciation, and higher depreciation expenses linked to 15 B737-NGs added to address a MAX-related capacity shortage. Even with the MAX disruption, Gol managed to grow ASK capacity about 6% last quarter. Fortuitously, while undertaking a major financial restructuring in 2015 and 2016, it purposely built lots of flexibility into its fleet plan, with the means to quickly grow or shrink in accordance with the extreme ups and downs of the Brazilian economy. This flexibility would come in handy for dealing with the MAX disruption, as well as capacity loss linked to pickle fork issues on B737-NGs. As Gol discussed at an investor event in São Paulo last week, 2020 begins with management trying every which way to buy back full ownership of its Smiles loyalty plan. It’s also developing a new maintenance unit, new regional partnerships, new international routes, and a plan — perhaps — to replace its defunct Delta partnership with a deeper Americanpartnership (it interlines with United as well, notwithstanding United’s partial ownership of Azul). The MAX, to be sure, remains a critical component of Gol’s plan to maintain cost competitiveness and grow margins as it turns 20 next year. Currently, its unit costs are more than 20% lower than those of its closest competitor, it claims. And Brazil-specific hassles like high taxes and airport infrastructure constraints account for the lion’s share (almost three-quarters) of its stage-adjusted unit cost differential with Ryanair. (Gol’s superior amenities like airport lounges and extra-legroom seats are responsible for the other quarter). Air France/KLM, it insists, remains a partner, helping it develop an international hub in Fortaleza (its other international gateways are São Paulo, Rio de Janeiro, and Brasilia). Gol says corporate customers account for 27% of all passengers but 50% of all revenues. More than one-fifth of these corporate customers are with large multinational organizations in sectors like energy and finances. It’s lately seen more government travel, with the Brazilian economy ministry now one of its top accounts. Smiles, even while semi-independent, accounts for 6% of Gol’s revenues but 18% of its operating profits excluding depreciation and amortization (Ebitda). More than half of customers on new flights operated by regional partners Passaredo, MAP, and TwoFlex are connecting. Around 58% of sales come through travel agencies, who mostly use Gol’s own distribution platforms rather than global distribution systems. Executives are separately bullish on cargo as e-commerce develops in Brazil. The future, it seems, looks good.
- Or does it? While unreservedly bullish about its longterm prospects, and unequivocally delivering enormously high profits at the moment, Gol tempered its enthusiasm with rather bearish comments about next quarter. The rest of Q1 still looks good, it said. But Q2, an offpeak season coinciding with the end of summer, shows signs of distress. The problem is a surge in new capacity, especially in the São Paulo market. Sure enough, schedule data from Cirium show Azul’s Q2 seat capacity from Sao Paulo Guarulhos up an eye-popping 37% y/y. At São Paulo’s downtown Congonhas airport, favored by many business travelers, Azul’s seats will increase 62%. It’s also growing 9% at its home base in Campinas on the outskirts of São Paulo. Latam’s Guarulhos capacity will jump 19%. Gol itself will grow 45%, fueled mostly by its new regional routes flown by partners. The volatile Brazilian domestic market could see another competitive jolt if Air Europa, JetSmart, or another foreign carrier enters the scene, as government policy seems to be encouraging. Keep in mind that domestic passenger volumes remain lower today than they were in 2012, when Brazil’s economy was still growing rapidly.
- No surprise that Hong Kong markets are performing poorly. United, which flies to the city from Newark and San Francisco, used to fly there from Chicago and Guam as well. Those two routes were suspended late last year amid mass protests against Beijing’s rule. The market is so troubled in fact, that the carrier’s accountants felt it necessary to reflect the depressed value with a $90m accounting charge. Separately, Cathay Pacific’s parent company said cargo demand, which was relatively healthy in Q4, is looking bad again.