Monday Briefing – 5 November 2018

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Emirates "Fly Better" Advertisement
Emirates “Fly Better” Advertisement (Image Credit: Emirates)

Welcome to our Monday Briefing for the week beginning 5 November 2018, summarising the main developments in air travel over the past week.

IAG’s Capital Markets Day

IAG held its annual Capital Markets Day last Friday. We covered the major BA announcements and group wide initiatives on the day.

Whilst there were no surprises at the individual airline announcements, looking back a couple of days on there were a couple of interesting changes.

These presentations are usually dense on hard financial information and IAG’s uncompromising mantra of rational, disciplined, investment by a “brand agnostic” parent.

This year, it was noteworthy that IAG spent a lot of time discussing the relative brand positioning of its airlines.

IAG was quite candid that there were some areas its brands, such as BA, fall behind others in terms of perception. In the eyes of passengers, perception is of course reality.

Two of these airlines were easyJet and Emirates. To illustrate the the point, the day afterwards Emirates debuted the first of two new TV ad spots on UK television under the brand promise “Fly Better”. The first ad shows a passenger boarding an Emirates aircraft and being taken on a fantastical journey as cabin crew morph into different style dancers to demonstrate the breadth of its in-flight entertainment.

What Emirates does extremely well is hammering home its points of differentiation, such as its advanced in-flight entertainment systems. And selling a positive vision of the future “Hello Tomorrow”. The huge amount of attention given to Qantas’ launch of direct flights from London to Perth shows the power of the perception of progress. The suggestion is also that being that by flying Emirates you are part of something. As does easyJet with “Generation easyJet”.

It has been more than five years since BA ran a major brand-led marketing campaign. The last being “To Fly. To Serve. Today. Tomorrow”.

With BA’s centenary next year, there is clearly going to be a huge marketing push. Irrespective of budget and technical prowess, for any marketing campaign to be successful there has to be an underlying truth that customers can buy in to.

It has be said that BA’s preparation for its centenary feels a bit like the 2012 London Olympics. Until it happens you’ve no idea whether it will be an absolute triumph or beset by unforeseen problems.

IAG can claim to have delivered on the promises of its initial formation, namely cost and revenue synergies. Many legacy structural issues such as BA’s pension deficit have also been addressed. Whilst IAG does monitor customer Net Promoter Scores across all its airlines, there is no central group marketing / brand development function. Arguably, this should be the next stage of IAG’s evolution.

IAG’s Growth Ambitions

IAG also announced on Friday that it plans to increase capacity over the next five years from 5% to 6% per annum.

This may sound like a small increase, but for a group the size of IAG, this is significant.

International Airlines Group Capital Markets Day
International Airlines Group Capital Markets Day (Image Credit: International Airlines Group)

There are plans to grow IAG’s fleet from 386 short-haul aircraft this year to 467 in 2023. Long-haul aircraft are expected to increase from 201 this year to 249 in 2023.

To fulfil this ambition IAG will need to order an additional 128 short-haul and 44 long-haul aircraft. Some of the long-haul growth will be accounted for by LEVEL. For long-haul growth, IAG could exercise existing order options which includes 7 Airbus A380s, 52 Airbus A350s and 18 Boeing 787s or look to order new aircraft types such as the Boeing 777X.

This is all of course subject to economic and geopolitical events that could easily see such plans reversed and the retirement of aircraft accelerated.

Air France-KLM and Lufthansa

Both Air France-KLM and Lufthansa also provided updates to investors last week.

Air France-KLM reported a third quarter operating profit of €1,065m. According to press reports from Les Echos its new CEO Benjamin Smith has taken little time to see what needs to be done to shore-up the group’s performance.

Areas of focus are going to be the number of brands in the group, with greater focus on Air France and KLM; duplicate management functions between Air France and KLM; the efficiency of operations at Paris Charles de Gaulle; and the number of different aircraft types operated by Air France and KLM. Benjamin Smith has also questioned whether Air France should continue to operate the Airbus A380.

Given the French state owns 14% of Air France-KLM and 23% of its voting rights, this is all easier said than done.

Lufthansa also indicated that, in contrast to IAG, it is going to moderate its growth in 2019 citing infrastructure constraints in the air and on the ground.

Airline Joint-Ventures Meet Regulatory Hurdles

As local ownership laws and bilateral traffic rights prevent full cross-border mergers of airlines outside of Europe, airlines have used joint-ventures with anti-trust immunity to co-ordinate schedules and fares.

The big benefit is taking advantage of the partner airline’s local corporate and frequent flyer base. However, there are signs that regulators are taking a tougher line.

Nearly three years ago, BA, Iberia and LATAM announced plans for an immunised joint-venture covering flights between Europe and Latin America. Last week, the Chile’s Free Competition Defence Court approved the joint-venture but with regulatory concessions that were given a very guarded welcome by IAG and LATAM.

Regulatory approval for Aer Lingus to join the existing transatlantic joint-venture with American Airlines, BA, Finnair and Iberia is taking much longer than expected, with many requests for additional information from the Department of Transportation in the US. This suggests that Delta’s plans to combine its transatlantic joint-ventures with Virgin Atlantic and Air France-KLM into one may not be as straightforward as first thought.

Piccadilly Line Strike

Wednesday is not going to be a good day on The Tube.

There will be no service on the Central and Waterloo & City lines all day due to industrial action.

There will also be industrial action on the Piccadilly Line from 12:00 Wednesday 7 November to 12:00 Thursday 8 November 2018. In actuality, it takes a while for the service to wind down with progressively larger gaps between services until the line completely closes. It will also take time for services to restart on Thursday.

Transport for London expects the the last Piccadilly line service from Cockfosters to Terminal 4 to depart at 12:41 and arrive at 13:45. The last train from Cockfosters to Terminal 5 should depart at 12:59 and arrive at 14:01.

(Update: Strike action on the Piccadilly Line has been suspended.)

In case you missed it:

BA launches London Gatwick – Lyon (London Air Travel)

BA closes Munich lounge (London Air Travel)

BA suspends London Heathrow – Tallinn (London Air Travel)

Christmas may seem a long time away for some. But the festive traditions are underway. The Christmas TV ads have started and rail closures have been announced for Gatwick and Heathrow. (London Air Travel)

Also of note this week:

Virgin Atlantic’s “Human Factors” internal safety training. (Virgin Atlantic)

South African Airways should be shut down according to South Africa’s Finance Minister (Financial Times)

Late Post Publication Updates:

Icelandair is to acquire its transatlantic rival Wow Air in all share transaction. The acquisition is subject to the appproval of Icelandair’s shareholders and the competition authorities. (Icelandair Investor Relations)

[Reserved for updates during the day.]

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