aviation strategy issue #205, april 2015

Issue no. 205April 2015

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Note: From various sources.

Firstly, a review of E had’s invest-ments; in 2011E hadacquiredaneq-uity stake of 29% in airberlin — Ger-many’s second largest scheduled air-line — for which it paid €75m. It sub-sequently acquired a 70% stake inairberlin’s frequent flyer programme(topbonus) for €175m, subscribed toa €300m perpetual 8% conver blebond and provided a medium termloan facility of €225m. airberlin cur-

rently has a market capitalisa on of€140m.

The perpetual conver ble is aninteres ng vehicle that has beenused by others (such as Wizz Air —see Avia on Strategy March 2015)to get round ownership rules. Foraccoun ng purposes it goes on thebalance sheet as “equity” but vo ngrights legally do not accrue un lshares are vested on conversion.

Poten ally, were this loan ever con-verted, E had would have an equitystake of over 70% in airberlin.

At theendof2014E hadfinalisedits investment of a 49% equity stakein a new Alitalia— Società Aerea Ital-iana to take over the good bits fromthedyingAlitalia—CompagniaAereaItaliana (which in turn had acquiredthe good bits of the bankrupt Ali-talia — Linee Aeree Italiane in 2008).For the equity stake it paid €387.5m.In addi on it bought five slot pairsat Heathrow from Alitalia for a re-puted €60m to lease back to the Ital-ian opera ng company and took a75% stake in Alitalia’s FFPMilleMigliafor €112m.

More minor investments in Eu-rope have involved the acquisi onof a 49% stake in Air Serbia (with afive-year management contract) anda 33% stake in Swiss regional airlineDarwin (subsequently rebranded asE had Regional).

Published by Aviation Strategy Ltd

This issue includes

Page

E had’s European strategy -the newRealpoli k 1

TAP Portugal up for sale again 5

Future of the A380 9

Quoted Airport Valua ons 11

Allegiant: Stepping up growthin an ever-expanding niche 12

Etihad’s European strategyand the new Realpolitik

E in the past few years has pursued a strategy that has beenlikened to the “Hunter Strategy” of the former SAir Group (theairline formerly known as Swissair) in the late 1990s. It has ac-

quired minority stakes in moribund airlines which without this invest-ment would normally have been expected to fail. Commentators havetried toexplain themovesasana empt to forma fourthglobal alliance,togenerateopera onal synergiesdirec ng feedto itsAbuDhabihub;oras providing E had (the smallest and youngest of the Superconnectors)with a method of compe ng efficiently with its close cousin Emirates(now the largest carrier worldwide ranked by interna onal RPK). Theseinterpreta onsmay be partly correct; it is becoming clearer that E hadis cleverly posi oning itself in theemergingRealpoli k of the global avi-a on industry.

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Meanwhile E had has also ac-quired a 24% equity stake in Indiancarrier Jet Airways for $379m (withthe sweetener of $70m for the acqui-si on of three slot pairs at Heathrowleased back and a majority of the JetAirways FFP for another $150m). Inaddi on ithasbeengradually increas-ing its stake in Virgin Australia— nowwith 24% equity involvement it is vy-ing with Singapore Airlines and AirNew Zealand for effec ve “control”of the Australian contender to Qan-tas. In addi on it has a 40% equityinvestment and a five year manage-ment contract in Air Seychelles andbuilt a 3% equity stake in Aer Lingus.

Alliance unlike any other

The E had alliance is unlike any ofthe other Global Alliances. E had,while on the face of it a minority in-vestor in its partners, is a majorityprovider of capital, and effec vely incontrol. Ithasmainboardrepresenta-on and has parachuted senior man-

agement into the companies inwhichit has invested. Apparently there aresenior management mee ngs everycouple of months to discuss strategy;although so far there does not seemto have been a great progress in cre-a ng real synergis c benefits.

There has been some ra onali-sa on — to align all operators on acommon distribu on pla orm, coor-dinate IT, purchasing power. Therehave been swaps of aircra betweenoperators (A320s from Alitalia toairberlin; 777s from Jet Airways toE had), and steps to combine thefrequent flyer programmes into asingle en ty. Apparently one of themain targets from James Hogan, CEOof E had driving the strategy, is toalign quality control par cularly forin-flight cabin service (although it isdifficult to imagine that the draco-nian control over the non-unionised

E had ex-pat cabin crew could beaccepted in Berlin or Rome).

There may be some networksynergies. Both airberlin and Alitaliaare developing routes to and throughAbu Dhabi. airberlin had successfullyapplied for and operated code-shareflights with E had from the Lu fahrt-Bundesamt (LBA) but was dealt ablow from the regulator last Winterwhen in a sudden U-turn its code-share applica on for the season wasdenied. Darwin, rebranded as E hadRegional, may be able to providesome modest feed onto E had’snetwork. Code-share agreementsbetween Alitalia and airberlin how-ever are probably of very limited use.E had has claimed that the marginaladdi onal revenue achieved fromthe airberlin link has already repaidthe original investment.

CEOJamesHogan,anastuteman-ager, avers that the investments aredone on a dis nctly commercial ba-sis. Unlike Swissair 20 years ago, it isnothun ngoutof despera on. Thereis a possibility that its highly experi-encedmanagement teamwill be ableto turn round airberlin and Alitalia. Inthe mean me it is effec vely guar-anteeing some 15,000 jobs directly(and a mul ple of that indirectly) in apoli cally highly sensi ve sector andstar ng to make itself as importanta player in European airline opera-ons as the Superconnectors collec-vely have done with their massive

aircra orders to the aircra manu-facturers in Sea le and Toulouse.

The investment strategy by E -had could therefore be regarded asaeropoli cal, a defence against theregulatory backlash that E had andthe other two Superconnectors arefacing in Europe where the Commis-sion is in the process of inves gat-ing the ques on of effec ve controlof European airlines by non-EU na-

2 www.aviationstrategy.aero April 2015

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onals. While looking at E had’s in-volvement in airberlin and Alitalia, itis also consideringKoreanAirlines’ in-vestment inCzechAirlinesandDelta’s49% stake in Virgin Atlan c. In the USthere has been an intensifica on ofthe high-profile lobbying of the Ad-ministra on to take ac on to curtailthe Superconnectors.

E had vs theUS protec onists

At a conference on this subject,organised by CAPAat the endof April,E had’s Legal Director, JimCallaghan,found himself the sole Superconnec-tor representa ve ranged againstsilver-tongued a orneys from Deltaand American, this me allied withLee Moak, ex-president of ALPA andnow fron ng “Americans for FairSkies”, a body which claims that thatit support Open Skies but thinks thatthe consequences of the US-UAE andUS-Qatar Open Skies agreements areoutrageous.

The Fair Skiesmessage is robustlypopulist. Its website proclaims:“What US policy makers did notenvision, however, is that emirsand sheiks and their authoritariangovernments would use this asan opportunity to manipulate theunderstandings and agreementsestablished under Open Skies to un-dertake a sustained effort to steal ourpassengers and threaten the en reviability of our airline industry andthe tens of thousands of Americans itemploys”.

By contrast, the rhetoric from theUS carriers was fairly restrained —they said that they weren’t a ackingE had or Emirates or Qatar Airwaysthemselves but contended thattheir complaints were to be seenwithin the context of a trade disputebetween the US and the Middle Eastcountries. This seems tobea lawyerlydis nc on — basically they argued

that government subsidies werebehind the rapid expansion of theSuperconnectors across the Atlan c,forcing them to contract, and tonearly abandon important marketslike India; this was unfair compe onand that the US government shouldput a hold on new services from theSuperconnectors, specifically cap-ping capacity into the US at January2015 levels, un l the subsidy issueswere resolved. According to Delta,this will be when “the US stems theflow of subsidised capacity to theUS”.

This view horrified the represen-ta ve of the US travel and tourismindustry who saw the recent gains ininbound tourism being underminedby protec onist ac ons — whataboutOrlando, its hotels, restaurantsand DisneyWorld, which are to beconnected to the Emirates networkwith a new daily service star ng inSeptember?

It also revealed a profoundsplit between the US passengerairlines and the cargo business.FedEx pointed out that it and UPScombined employed three mesthe number of people as the bigthree US carriers, and it operated avery successful cargo network at itsDubai hub hugely outcarrying theSuperconnectors in terms of freighttonnage and the US passengersairlines in terms of flights. The USpassenger airlines’ trade dispute waspoten ally a serious threat to FedEx,and it was not at all impressed byAmerican saying that cargo could beexcluded from the complaint. The USposi on would then be presentedas: cargo excluded as the US has acompe ve advantage, passengertrafficonly to be considered as theUShas a compe ve disadvantage.

The FedEx a orney also intro-duced awider concept to the aeropo-

li cal argument. Trade agreementsfor the cargo integrators are not justabout the alloca on of flying rightsbetween two countries; they encom-pass, as is normal in most industries,“equal na onal treatment”. Basicallythis allows FedExorUPSorDHL toop-erate distribu on centres and fleetsof trucks in foreign countries beyondthe entry airport. The passenger air-line equivalent would be cabotage,a concept that causes an apoplec creac on in US major carriers, theirunions andmost poli cians.

Back to Jim Callaghan of E -had: he managed to draw a parallelbetween the a ack from the USMajors and the abuse Ryanair, hisprevious airline, was subjected to bythe European incumbents. Equat-ing E had with Ryanair might be astretch, but he did allude to what weconsider to be a real issue. The USmajors with their European partnershave oligopolised the North Atlan c,maybe they have monopolised it, asthe market has clearly been dividedup into Star, SkyTeam and oneworldzones of control. In this contextthe encroachment of the Super-connectors in this super-profitablesector appears intolerable, eventhough their current North Americancapacity share is only about 2%.

The US majors the have somedifficult ques ons to answer (whichthey completely failed to in theconference). If the Superconnectorswere forced to freeze or reduce theircapacity to the US, would the US air-lines bewilling or able to fill the gaps?What prices would they charge? AsCallaghan pointed out, the relevantunfair compe on clause in theUS-UAE and other bilaterals refers topredatory pricing, and no case hasbeen made for that. In effect, theDelta and American were reducedto whingeing that they couldn’t

April 2015 www.aviationstrategy.aero 3


E had Equity Alliance EuropeanDes na ons

Shared Destinations

Etihad

airberlin

Alitalia

Darwin

compete with the Superconnectorsin India, poten ally the second mostimportantgrowthmarketa erChina.

Howmuch subsidy then?

Nevertheless, E had had to addressa tricky ques on: howmuch does theEmirate of Abu Dhabi subsidise itsairline? Research commissioned bythe US carriers suggested $14bn outof a total of $40bn for the three Gulfcarriers. Callaghan’s response wasin essence that; the balance sheetamounts that had been categorisedas subsidy was the totality of AbuDhabi’s equity investment in thecarrier.

This is where things get compli-cated. Is E had’s situa on analogousto the European flag carriers in the1970sand1980swhosegovernmentspoured in subsidies for poli cal rea-sons or, to put it more posi vely,to enable commercial turn-aroundplans? Or is a ra onal investment ina na onal carrier by an oil rich stateplanning for a diversified future?

For perspec ve, the popula onof theUAE is about 9m (only 1.4mare

Emira ci zens), less than 3% that oftheUS. In such nystates it is impossi-ble to knowwhere the poli cal worldend and where the commercial sec-tor begins (indeed in difficult to dis-nguish in much larger companies),

However, it could reasonably be ar-gued thatwhat AbuDhabi, Dubai andQatar have done is invest in a sectorwhere they have a compara ve ad-vantage, which is the economic ba-sis for the benefits of free trade (seeAdam Smith, David Ricardo, etc). Andthat compara ve advantage comesfrom the geographical posi on of thehubs, the 24 hour opera ons, thenew aircra , the tax regime and thenon-unionisa onof theworkforce. Inthe present globalmarket, the Super-connectormodel is themost efficientfor inter-con nental traffic, and theold but persistent idea of fair bilateralcompe on simply does not apply.

Ambiguous Europeans

The American Airlines a orney wasasked about itsoneworld partner IAGwhich clearly strongly opposes theUS carriers’ complaint. “Disagree-

ment among close friends”, was themuted reply. However, the fact thatBA is saying that Superconnectorcompe on is a “good thing” is verysignificant. IAG, of course, is now10% owned by Qatar Airways andthe Qatar state investment fund hasa sizeable 20% stake in HeathrowAirport.

European airlines do not have aunified aeropoli cal response to theSuperconnectors in general or E -had in par cular, and cannot form aunited front with the US Majors. Al-italia and airberlin has followed BAand Iberia in exi ng the Associa onof European Airlines (AEA) which ap-peared to be suppor ng the US car-riers’ compliant. The AEA’s aeropo-li cal power has now been emascu-lated.

Lu hansa is in a dilemma. It hascomplained at length about Emirates(which has limited access into Ger-many itself but can bypass Frankfurt)and the undermining of its networkbyTHY (withno such restric ons) intothe hinterland behind its hubs. How-ever, it probably prefers to have air-berlinasaweakcompe tor ina“com-fortable duopoly” rather than see itfail and seeRyanair or easyJet expandfurther in the domes cmarket.

Even Air France/KLM may be be-coming a li le ambiguous, as its poorfinancial performance andweakenedbalance sheet may soon require sup-port from an investor with a deeppocket.AsMichaelO’Learyhasrudelysuggested,Air France’s ul mate strat-egy should be to de-merge KLM andseekaMiddleEastairlinepartnerwill-ing to take a substan al equity stake.



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D repor ng a large netloss in2014, TAPPortugalhasagain been put up for sale by

thePortuguesegovernment.As it cel-ebrates its 70th anniversary, will Por-tugal’s flag carrier find a new ownerthis me around?

The Portuguese state — whichhas always owed 100% of TAP— pre-viously tried to priva se the airlinein 2011 (see Avia on Strategy, June2011), but without success. A erreceiving 12 offers of interest, theonly firm bid the state received wasfrom Polish/Brazilian businessmanGerman Efromovich, whose Brazil-basedSynergyGroupownsamajorityof Avianca Holdings (which controlsthe Avianca group of airlines). Butthis was turned this down a er thegovernment cri cised the bidder’sapparent inability to provide ade-quate financial guarantees. Sourcesindicate that Efromovich offered€35m in cash for the airline, plus a€316m injec on into the balancesheet as well as the assump on ofthe airline’s €1.1bn debt.

The latest plan to offload theairline was announced in November2014, with the state aiming to sell66% of its stake, with 61% going toinvestors and 5% reserved for TAP’s7,500 employees (at a discount to thefinal sale price). The state says it mayalso sell its remaining 34% in the fu-ture, at no earlier than 24 monthsa er the sale of the first tranche,thoughof course that’sdependentonge ng the first away successfully —whichwill be no easy task.

Condi ons for a sale are, if any-thing, worse for TAP this year than

they were back in 2011. A er pos nga€20.1mnet loss in2012, in2013TAPposted a 1.9% increase in revenueto €2.7bn, with opera ng profit up8.1% to €44.1mand the net loss com-ing down to €1m. In 2014, however,while revenue rose 1.1% to €2.7bn,theopera ngprofit plunged94.3% tojust €2.6m, with the net loss increas-ing 93 fold to €80.1m.

TAP blamed the results on vari-ous causes — theWorld Cup in Brazilin June and July (when the airlinesaid that no-one wanted to leave thecountry, preferring to stay at homeand watch the tournament instead),the latearrivalofnewaircra , 22daysof strikes through the year and “op-era onal issues” which, combined,took €108m off the bo om line. Thestrikes alone cost more than €25m,the airline claims, and one of the keyproblems facing any acquirer is man-agement’s rela onship with its work-force, which is poor.

TAP’s unions are vehemently op-posed to the saleof thegovernment’s

stake, which they argue will only leadto redundancies and cuts in pay andcondi ons. But a er a coali on of12unions represen ng theworkforcethreatened to strike for fourdaysoverthe Christmas holiday period as aprotest against the sale, the govern-ment backtracked and said it wouldimposeastrict condi onuponanyac-quirer whereby they couldn’t makeany mass lay-offs once they acquiredTAP.

30monthsmoratorium

According to the terms of thatagreement signed between thegovernment and TAP’s unions inJanuary, there will be a 30-monthmoratorium on collec ve redun-dancies or for as long as the stateremains a shareholder. Anotheragreed pre-condi on of a sale (thereare nine major ones in all) is thefull implementa on of all exis ngcollec ve bargaining agreementsbetween unions and TAP, as wellas maintaining TAP’s status as the


TAP Portugalup for sale again


TAP Route Network

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Portuguese flag carrier, preservingthe company headquarters and mainhub in Lisbon, as well as “effec vemanagement” remaining in Portugal.Those condi ons will be a majorstumbling block for investors, whoare likely to want to make cost sav-ings and at least trim the exis ngTAP workforce, but they are notinsurmountable; if the price wereright, an acquirer would wait the 30months before making the necessarycost ra onalisa on.

TAP states that it has already cut€250mfrom its cost baseover the lastthree years, and the airline is in thelast two years of a 2012-2016 strate-gic plan that has three goals — net-work growth, unit cost improvementand unit revenue increase.

That is a fairly generic set of ob-jec ves, and any purchaser wouldlook very closely at the underlyingcost structure of TAP, and par cularlyat the network structure and strat-egy. The Portuguese domes c mar-ket is small by any European standard(around 70% of TAP’s revenue is gen-erated outside of Portugal) so in ef-fect the airline’s strategy depends oninterconnec ngpassengersat theLis-bon hub from Africa and Brazil to andfrom Europe.

TAP carried 11.4m passengersin 2014, 6.6% higher than in 2013,with a 30:70 split between long- andshort/medium-haul passengers. TAPcurrently operates to 84 des na onsin 35 countries, across Europe, Africa,North America and South America,

with the largest route network beingin Europe, with nine ci es served inPortugal and 44 in the rest of Europe,withinwhich Spain is themost impor-tant market, with eight des na ons,followed by France, with seven, andGermany (six).

In 2014 Europe accounted for thelargest propor on of TAP’s turnover— at 38.4%— but the South Atlan cmarket was close behind, providing34.4% of revenues (of which the vastmajority comes from the Brazilianmarket) and certainly a much higherpropor on of overall profit

Faced with extensive LCC compe-on, most of TAP’s European routes

are loss-making, but a reasonable Eu-ropean network is necessary in orderto a ract feed into/onto its long-haulroutes, which are the profit-driversof the airline. But this brings TAP intocompe on with the much biggerand efficient (and higher yieldingbecause of a higher propor onof business traffic) hubs operatedby IAG, AF-KLM and Lu hansa. TheSuperconnectors’ hubs in the Gulfare also filtering off connec ng trafficfrom what were strong Africa-Lisbonroutes.

On long-haul TAP serves 15African des na ons (includingformer Portuguese colonies) plusthree in central and North America(Panama City, Miami and Newark),and 13 in South America. 11 of thela ermarket are to Brazil, whichwith84 flights a week clearly is the keymarket for TAP. The airline’s trafficflows between Portugal and Brazildepend on the businessmarket bothways, the VFR market from Brazil toEurope, and holiday traffic to Brazil.

From its Lisbon hub to Brazil, TAPenjoys a monoply on every route asLatam, which absorbed the failedflag-carrier Varig, has not replacedVarig’s services. Latam is concen-



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tra ng its Atlan c opera ons onthe north European hubs, but it willsurely add Lisbon to its network inthemedium term.

TAP, remarkably, says it has am-bi ons to fly to Asian markets (whichit has served in the past) as wellas the Americas and Africa, but isconstrained by its fleet. The fleet to-tals 61 aircra . comprising 21 A319s,19 A320s, three A321s, 14 A330sand four A340s. In addi on, its re-gional subsidiary, PGA (PortugaliaAir-lines), operates eight Embraer 145s,six Fokker 100s and two ATR 42-600son domes c and interna onal routesfrom its base at Lisbon and a sec-ondary hub at Porto.

The only aircra on order for TAPare 12 A350-900s, which will start ar-riving in 2017 and all be delivered by2020, toreplaceA330sandA340sandto underpin growthon long-haul. TheA340s will be the first to leave thefleet, followed by the older A330s (al-though most of the A330s are newermodels), but it’s only once the A350sarrive that the airline can expand itslong-haul opera ons.

TAP’s A320s (a type TAP is happywith) have an average age of 14 yearsand a replacement fleet also needs tobe ordered for these, but TAP simplydoesn’t have the finances necessaryfor a new order, and clearly the de-cision will not be made this side of anew investor coming in.

Deep pockets needed

But ra onalising a European networkand examining the cost base will notbe the only challenges that a newowner will face. TAP also has debts ofaround €1bn ($1.3bn), and of coursethe airline can no longer be proppedup by a state injec on of capital.The government is clear as to whatits priority is, with Sergio Monteiro,Portuguese transport minister, say-

ing that “the state does not intendto obtain financial gains from this pri-va sa on; rather it wants to guar-antee that TAP is adequately capi-talised˝.

Originally TAP’s priva sa on wasjust one part of a mandated saleof state assets that was imposed onPortugal as a condi on of a massiveEU, European Central Bank and IMFbailout signed in May 2011, whenthose ins tu ons provided €78bn offinancial assistance over a three yearperiod ending May 2014 in order tohelp the country out of its economictroubles. Condi ons included a se-ries of tax increases and cost-cu ng

programme in order to reduce Portu-gal’s budget deficit, the la er includ-ing priva sa on of na onal assets —and TAP Portugal was at the top ofthat list.

Over the last fouryearsmorethan€9.4bn has been raised from salesof stakes in energy companies, banksand other state en es — substan-ally more than the €5.5bn target

given to the Portuguese governmentfor the sale of assets. However thegovernment s ll wants to sell off TAP,as itwants tooffload theairline’sdebtandfindsomeoneable to fundtheair-line going forward. Or, as FernandoPinto, CEO of TAP Portugal, puts it



TAP Fleet

In Service Orders Total

A319 21 21A320 19 19A321 3 3A330 14 14A340 4 4A350 12 15100 6 6

ERJ-145 8 8

Total 75 12 90

—ge ng rid ofmajority governmentownership will give the airline “moreliber es”.

Government sources indicatethat this me around the state islooking for a minimum of €300m incash and investment in the airline(on top of the assump on of debtcommitments) — which is some€50m less than Efromovich offered in2012.

There is no official metablefor the latest priva sa on a empt,though the government says it ideallywants to select a preferred investorby the end of the first half of 2015,with an unofficial deadline of May15th for binding bids from interestedpar es.

Monteiro says that the govern-ment “is more op mis c now andwe face this process with redoubledconfidence that it will be successful— though we will only know whenwereceive the formalproposals˝.Butcomplica ng the process is substan-al opposi on to the move, not just

from unions but from a significantpartofPortuguesesocietyasawhole.Theupcominggeneral elec on inPor-tugal (being held in September andOctober) puts the sale even more atthe forefront of the news pages, and

the centre-right government’s is fac-ing intense opposi on from themainopposi on, the Socialist Party (PS)which opposes the plan to priva seTAP.

PS argues that a sale is no longerneeded for bailout reasons, and thatTAP is “one of the pillars of na onalsovereignty” as it connects Portugalwith its interests in South AmericaandAfrica,withPS instead sugges ngthat the state should IPO a minoritypart of TAP while retaining a majoritystake in the flag carrier. To add to themix a number of Portuguese celebri-eshaverecordedvideomessagesat-

tacking the government’s sales, andthe Pilots’ Union has now announcedanother strike protes ng against thepriva sa on, to run from May 1st toMay 10th (and which will severelyaffect TAP’s opera on even a er a“minimum services” provision thatwill be set by an arbitra on tribunaland which the union will have to ad-here to).

The usual suspects?

Against this background, who willstep forward and make a con-crete offer? The usual poten albuyers have been men oned inthe Portuguese press — the Gulfsuper-connectors (though of courseinvestors from outside the EuropeanUnion couldn’t acquire a majoritystake), IAG, Lu hansa, Spanish groupGlobalia (which owns Air Europa),US/Brazilian entrepreneur DavidNeeleman (who founded JetBluein the US and Azul in Brazil) andGerman Efromovich (yet again), aswell as a number of Portugueseentrepreneurs that include MiguelPais do Amaral, who reportedly maybid jointlywith Frank Lorenzo, formerchairman of Con nental Airlines.

If it has a choice (and that’s a verybig if), the government will choose

an airline investor who has the verydeepest pockets — but there are nottoomanyof thosecandidatesaround.

A bid from Interna onal AirlinesGroup might make some strategicsense, as a combina on of the Lis-bon and Madrid hubs would provideIAG a with a dominant grip on traf-fic flows between South America andEurope — although that’s somethingthat regulators would be concernedabout. Itmightbemore logical for IAGto wait and see if an independent in-vestor can start to turn TAP around,thenmake amove.

E had’s deep pockets wouldmake a deal rela vely easy to financeand the Abu Dhabi carrier alreadyoperates a codesharewith TAP acrossthe South Atlan c and theremight beaeropoli cal advantages.

Lu hansa might be tempted.TAP joined the Star alliance in 2005and has codeshare deals with manyStar members, while TAP’s Lisbongateway into South America couldbe developed into an alterna ve tooneworld’sMadrid hub.

Reports from Portugal, however,suggest that TAP’s managementwould prefer not to be acquiredby a large rival of the size of BA,Lu hansa or Qatar, as it would thenbe subservient to the managerialexperience of the larger and moreefficient acquirer. But that’s thekey point of the deal — to bring inbe er, more ruthless managementthat can do away with many of TAP’sinefficiencies, and make the toughdecisions over routes, fleet andworkforce that a state-owned TAPhas avoided for far too long.



A380Deployment

KeyEmirates

Other operators

Note: thickness of lines relate to weekly

frequencies

I since the first flightof theA380. So far it haswononly317 orders, less than a third of

the 1,200 Airbus originally projectedfor its first 20 years. So what can Air-bus do to revive sales: should it investin a re-engined version for be erfuel economy, or try to squeeze outbe er numbers by less ambi ousperformance improvement pack-ages? The aircra is cer fied to carry853 passengers, but the standardversion now is being offered with544 seats, and most operators put inonly 525 seats, preferring to marketthe comfort of superior roomy, quietcabins, especially in economy. Seatsare being sacrificed for cocktail bars,just like in early 747s.

There is no doubt the aircrais generally popular with its passen-

gers, but no new airline order hasappeared for two years. Last yearthe only order came from Amedeo, aleasing company, whose sole lesseeis Emirates. In December 2014 anAirbus execu ve’s careless remark tojournalistsgave the (false) impressionthemanufacturer was contempla ngstopping produc on in a few years.But now there are signs of life, reviv-ing hope for the aircra ’s prospects.

The most significant is the cam-paign by Emirates, by far the biggestbuyer and operator, to persuade Air-bus and Rolls-Royce to comeoutwitha re-engined and upgraded version ina few years. Emirates CEO Tim Clarksuggests he would buy up to 200 ex-tra A380s, were it to get updated en-gines.

Numbers are being crunched in

Toulouse and Derby to jus fy spend-ing an addi onal $2 billion on de-veloping a plane whose sales havestalled. It will take cool nerves and along view to jus fy the investment.But the decision, announced in April,by Emirates to put Rolls-Royce en-gines for the first me on its latestorder batch of A380s could be inter-preted as a step towards an A380neo.(Orders for 30 announced at theParis air show, another 30 later at theDubai air show?).

But there are also strong voicesboth in Airbus and Rolls-Royce whichsay that there is no business case un-less other airlines commit to a newversion.

Tim Clark cri cises other carriersfor not making the best use of theA380. Emirates builds up traffic on a


Future of the A380


A380Order BookMay 2015

Orders Delivered Backlog

Air Austral 2 2Air France 12 10 2Amedeo 20 20Asiana 6 2 4

BA 12 9 3China Southern 5 5

Emirates 140 59 81E had 10 1 9Korean 10 10

Lu hansa 14 13 1MAS 6 6

Qantas 20 12 8Qatar 10 4 6SIA 24 19 5Thai 6 6

Transaero 4 4Virgin Atlan c 6 6Undisclosed 10 10

Total 317 156 161

Source: Airbus

route enabling the airline tomove upfrom serving it with A330s and 777sto the A380. Higher density versionsservedes na ons in India. Across theboard Emirates says its A380 load fac-tors aremore than 75-80%.

The map below traces the cur-rent pa ern of A380 schedules. Un-surprisingly, the Middle East hubs,essen ally Dubai at present, domi-nate the picture accoun ng for 48%of total A380 departures. The otherconcentra ons are around the Euro-hubs, especially Heathrow, and SIA’sChangi hub. They account for 18%

and 15%of departures respec vely.The Middle East market depends

on uncongested airports and 24 houropera ons, enabling a huge numberof connec ng flows to be channeledthrough thehubs. The Europeanmar-ket depends on congested airports,with traffic being consolidated in toever-larger aircra . However, thereare limits: to fill A380s, except oncertain routes and mings, requiresfeeder flights which do not alleviateconges on at the airport, and thedemand for frequency on high vol-ume but business-orientated routes

means the use of smaller gauge air-cra .

North American airlines con nueto focus on 777 and now 787 typesequipment for their long-haul routes,and the chances of Airbus making abreak-through into thismarketare re-mote.

Airbus s ll argues for demandfor 1,500 super-widebodies over thenext 20 years, convinced that airportconges on will eventually haul upsales, assuming that, as themanufac-turers’ forecasts contend, air trafficcon nues to double every 15 years.A recent analysis by the United Na-ons suggests by 2030 about 9% of

theworld’s popula onwill be living in41“megaci es”ofmore than10m in-habitants. That is double the share in36 such ci es at the turn of the cen-tury. By defini on these ci es will bethe richest spots on earth, genera ngdemand for long-haul air travel con-nec ng them, while their geographicsprawl will limit airport expansion.The argument is that demand forscarce take-off and landing slots willeventually force airlines to buy A380types.

But, as Airbus chief execu veFabrice Bregier ruefully remarkedrecently, the A380 may have beenlaunched ten years too early. Al-though the A380 has sold only ahandful in China, which is set to betheworld’s largest avia onmarket byabout 2030, the ul mate fate of theA380 could lie in Chinese hands.


The Principals and Associates of Avia on Strategy apply a problem-solving, crea veand pragma c approach to commercial avia on projects. Our exper se is in strategicand financial consul ng in Europe, the Americas, Asia, Africa and theMiddle East

For further informa on please contact:James Halstead or KeithMcMullan,e-mail: info@avia onstrategy.aero



0

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350

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Index(Jul07

-Jun

08average=100

)inEu

ro

European Airports Share Price Performance

Aéroports de Paris

Fraport

FlughafenWien

Flughafen Zürich

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Far East/Pacific Airports Share Price Performance

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Sydney

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8

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Base Carrier and its Airport

2015

Fraport

Lu hansa

N there are rela velyfew airport operators world-wide with shares open to

public investment; and those that areseem to a ract valua onswell belowlevels achievable in private and tradetransac ons. The European airportgroups in the chart top right currentlytrade on forward EV/EBITDA ra osof around 11 mes compared withrecent trade and private transac onsof other airports at the 15-18x level.

Following the 2008 financial cri-sis Fraport took three years to beforeits share price recovered to pre-peaklevels — and in the mean me wasspending vast amounts on a new run-way. It has only recently returned togenera ng free cash flow but will beshortly embarking on a €3bn new ter-minal andwith profits flat, the shareshave flatlined.

Vienna was hit harder in thedownturn partly because of concernsover the survival of its base carrierAustrian; but with an acceptancethat it may not need to build a thirdrunway before 2022 and with Aus-trian’s recovery under Lu hansamanagement the shares have beenperforming strongly.

The strongest performer hasbeen Zürich — again with aLu hansa-backed base carrier ofSwiss — helped of course by therecent strength in the Swiss Franc.

In the Far East, it is notable thatMalaysian Airports has been par cu-larly hard hit by the combined catas-trophes of its two base airlines inKuala Lumpur—MAS and AirAsia.

For investor reac ons to the rel-a ve value of investments in avia onwe show the chart bo om right: anairport can be a rac ve when an air-line is not and vice versa.


Airport Valuations


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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014†0

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US$m

US$m

Allegiant’s Financial Results

Opera ngprofit

Net profit

Revenues

†Note: Adjusted for a $43.3mwritedown of the 757 fleet.

A Air, a Las Vegas-based ultra-low cost carrier,has achieved fame for its

unusual but highly profitable strategyof opera ng cheap fuel-guzzlingMD-80s in low-frequency servicebetween small ci es and popularleisure des na ons and deployingRyanair-style revenue strategies.

Now Allegiant is in the news fortwo addi onal reasons this spring:becoming the first sizable airline inmemory to earn a 33% opera ngmargin (in the first quarter), and get-ng perilously close to becoming the

first US airline since 2010 to be hit bya pilot strike.

Adding to the intrigue,Allegiant isstepping up growth significantly thisyear, in what some scep cs had ar-gued was a limited niche. The airlineplans to grow its ASMs by 16-20%in Q2 and by 21-25% in Q3, follow-ing only 6.1% growth in Q1. In full-year 2015, ASMs are projected to in-creaseby15-18%,a er10.1%growthin 2014.

Some of those plans, however,could be scuppered by a pilot strike.Allegiant obtained a temporary re-straining order that averted a strikeover the Easter holiday. On April 22the management stated that theywere confident of securing, within aweek or two, a preliminary injunc onruling that would bar the pilots fromstagingastrike, sick-out, slowdownorany other ac ons. However, in somepress interviews the pilots painted avery different picture of the situa on.

There are obviously two impera-ves: the need to avert a strike and

the need to properly resolve the is-

sues with the pilots’ union for thelonger term. If the la er is not accom-plished, Allegiant’s growth plan coulds ll be jeopardised.

Allegiant Travel Company, theairline’s parent, has been profitablefor 12 consecu ve years. It achieveddouble-digit opera ng marginsthrough the challenging industryyears in the late 2000s. In 2014 ithad the US airline industry’s second-highest opera ngmargin (17.6%, justbelow Spirit’s 19.2%). In the fourthquarter, Allegiant took the lead witha 20.8%margin.

In this year’s first quarter, Alle-giantwas in a category of its ownwitha stunning 32.8% opera ng margin.Its opera ng profit almost doubledto $108m, net income surged by 90%to $65m and revenues rose by 9% to$329m.

Because of its lack of fuel hedges,limited profit sharing and leisuretraffic focus, Allegiant is one of the

biggest beneficiaries of the declinein fuel prices. In the first quarter, itsaverage fuel cost per gallon declinedby 40% and its total CASM fell by 15%to 8.73 cents.

Allegiant is also benefi ng fromstrong ancillary revenue growth,which has helped offset weakness inits yield and average cket revenues.In the first quarter, ancillary revenueper passenger reached a record $52.Total revenue per passenger fell by2.9% to $142.

Allegiant is able to step upgrowth, in the first place, becauselower fuel prices have improved theeconomics of opera ng its old fleet.The carrier has also resolved the pilotavailability and training issues thatplagued it last year. And there areplenty of good used aircra available,enabling Allegiant to pick up A320sfor just $10meach.

Importantly, Allegiant has en-hanced its growth prospects by


Allegiant: Stepping up growthin an ever-expanding niche


0

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4,000

6,000

8,000

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12,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015†

System

ASM

s(m)

Allegiant’s Capacity Growth

†Note:Mid-point of the 15-18% forecast

making some major changes to itsbusiness model since the late 2000s.When Avia on Strategy last tookan in-depth look at the company inthe Jan/Feb 2007 issue, investorswere concerned about two thingsthat could limit Allegiant’s growth.First, there was the ques on of howlong the airline could rely on anaircra type that was no longer inproduc on (the MD-80). Second,there were fears that Allegiant wasbeginning to reach the limits of itssmall-ci es-to-Las~Vegas/Floridaniche.

Allegiant has successfully re-solved both those issues. It hasdiversified its fleet from MD-80sto three types (also 757-200s andA319s/A320s). It has diversified itsnetwork to include the East Coast,medium-sized origin ci es and manynew leisure des na ons, includingHawaii. (The 757/Hawaii plans werecovered in the July/August 2010 issueofAvia on Strategy.)

Allegiant’s background

Founded in 1997, the airline ini allyoperated charters and a small net-work of high-frequency services fo-

cusing on the business traveller in theWest using DC-9s. The strategy wasunsuccessful and the company filedfor Chapter 11 in December 2000.A er two-years’ restructuring, Alle-giant emerged from bankruptcy inMarch 2002with a new strategy.

The company’s two largest orig-inal investors — CEO Maurice Gal-lagher and Robert Priddy—were thefounders and top execu ves at Valu-Jet, the hugely successful early 1990sLCC that was grounded following itsDC-9 crash in 1996. (That said, theexecu ves were not directly blamed,andPriddyoversawValuJet’s success-ful transforma on into AirTran andremained CEO formany years.)

As part of Allegiant’s reorganisa-on, Gallagher’s debt was restruc-

tured and he injected addi onal cap-ital, becoming the majority owner,with a stake of about 80%. He tookover as CEO in August 2003.

In subsequent years, Allegiantsold equity to four of its seniorofficers and brought in addi onal in-vestors through private placements.A holding company structure wasintroduced in April 2006. Allegiantwentpublic inDecember2006,which

reduced Gallagher’s ownership staketo around 23%.

Gallagher remains Allegiant’slargest single shareholder, with a21% stake at year-end 2014. Sucha holding by a CEO is unusual fora major carrier; Allegiant is thetenth largest US airline, with $1.1bnrevenues in 2014. But it aligns themanagement’s interests well withthose of other shareholders, keepingthe financial community happy.Analysts o en comment on how“shareholder-friendly” Allegiant’smanagement is.

Allegiant has been a steady buyerof its stock. As of March 31, it hadreturned around $514m to share-holders through share repurchasessince 2007. A er many years of pay-ing special cash dividends, in JanuaryAllegiant’s board approved the pay-ment of a regular quarterly dividendof $0.25 per share, which started inMarch.

Allegiant has a healthy balancesheet. At the end of March, unre-stricted cash was $438m (38.5%of last year’s revenues), total debt$617m and stockholders’ equity$302m. Return on capital employedin the 12 months ended March 31was 21.3%.

But debt has crept up in recentyears, with the result that Allegiant’scredit metrics, which used to be sim-ilar to Southwest’s, are now measur-ably worse. For example, Allegiant’syear-end 2014 debt/adjusted EBIT-DAR ra owas 2.3 mes, compared toSouthwest’s 1.5 mes.

Thedebthas increasedmainlybe-cause of higher aircra capex, whichwas$279m in2014and is expected tobe around $260m this year. Allegiantstresses that it only raises debt “op-portunis cally”, when it can securea rac ve terms.



Targetmarkets

Allegiant targets price-sensi veleisure travellers in underservedci es that otherwise have few op-ons to travel to what the company

calls “world class leisure des na-ons”. There are a large number of

“origin ci es” throughout mainlandUS (81 as of February 2) and a rela-vely small number of “des na on

ci es” (15 currently).Themarkets targetedbyAllegiant

are typically too small for nonstopserviceby legaciesor tradi onal LCCs,or they are so low-yield that theyare not a priority for other carriers.While some of the markets might besuitable for RJs, Allegiant’s CASM issignificantly lower and its larger air-cra offer a comfortable alterna veto travellers. Consequently, Allegianthascompe onononly24,or11%,ofits 229 routes (as of February).

Since the late 2000s, there havebeen threenotable networkdevelop-ments. First, the number of des na-on ci es has increased significantly.

In 2007 therewereonly three: LasVe-gas, Orlando and Tampa/St. Peters-burg.Nowthe list also includesplacessuch as Honolulu, Phoenix, Los Ange-les, San Francisco, Palm Springs andNew Orleans, as well as addi onalFlorida des na ons.

Second, Allegiant has expandedits network to include medium-sizedorigin ci es, seizing opportuni esthat arose from the US legacy consol-ida on. Allegiant noted in a recentpresenta on that between 2007and 2014, medium-sized hubs in theUS saw a 20.9% reduc on in totaldomes c seats, compared to 15.3%and 3.3% reduc ons for “small” and“large” hubs, respec vely.

This new strategy has broughtAllegiant to larger origin ci es such asIndianapolis, Pi sburgh and Cincin-

na . The la er has apparently beenthe carrier’s “fastest-ever growingcity”.

Third, Allegiant has made a ma-jor—andevidently very successful—push for the East Coast. Most of lastyear’s growth was in the East, whichnow accounts for more than 50% ofthe airline’s systemASMs.

All of those changes meant notjust revenueopportuni esbut riskdi-versifica on. Allegiant is now moreprotected from regional varia ons inthe economy, airport issues or com-pe tors’ ac ons.

The East Coast con nues to bethe focus of Allegiant’s expansionin 2015, seeing almost 20% ASMgrowth, while the Las Vegas marketswill see flat capacity. Growth willkick off in May, when Allegiant addsfive new ci es and 22 new routes.Based on the published schedule,total routes will increase from 233 atyear-end 2014 to 271 by November.There will be another batch of cityand route announcements in theautumn.

So Allegiant’s niche is showing nosign of reaching its limits. It is evi-dentlyavery largeniche. In the longerterm, themanagement envisages an-nual ASM growth in the “mid-teens”,based on a net addi on of aroundseven aircra per year.

Flexible, low costmodel

But Allegiant’s “small ci es, big des-na ons” niche is only possible be-

cause of a unique fleet and operat-ing strategy. Profitable opera on of150-seat or larger aircra in rela velysmall markets calls for very limitedfrequencies. Depending on the pe-riod (peak or off-peak), 60-80% of Al-legiant’s routes have only twoweeklyfrequencies.

This gives the airline very low av-erage daily aircra u lisa on — just

5.3 hours in 2014, compared to 11-13 hours typical for LCCs. But Alle-giant compensates for that by buyingor leasing used aircra at extremelylow prices. Its earlier MD-80 acquisi-on and introduc on costs averaged

less than $6m per aircra — up to80% below what other LCCs paid fornew 150-seaters.

The low aircra ownership costsgive Allegiant excep onal flexibilityto fly when demand dictates. The air-linecan tailorflight frequencies to theneeds of the market on a daily andseasonal basis. It can more easily en-ter or exitmarkets.

Despite the low u lisa on andhigher maintenance costs associatedwith the old fleet, Allegiant is one ofthe lowest-cost producers in the US,with ex-fuel CASM of 6.61 cents in2014. This is because it employsmanyaspects of the LCCmodel.

In addi on to the low aircraownership costs, Allegiant’s low coststructure stems from a highly pro-duc ve workforce, a simple product,a cost-driven schedule, low distribu-on costs and the use of cheaper

small airports.The cost-driven schedule is an in-

teres ng concept. The airline designsits flight schedule so that most air-cra return to thecrewbasesatnight,thereby reducing maintenance andflight crew overnight costs and pro-vidinga “qualityof life”benefit toem-ployees.

Evolving fleet strategy

A er opera ng only MD-80s, inMarch 2010 Allegiant signed anagreement to acquire six used 757-200s for the purpose of servingHawaii. The airline obtained ETOPScer fica on for the 215-seat aircra ,which were all delivered by the endof 2011.

In mid-2012 Allegiant began



40

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160180200

2012 2013 2014

US$

(logscale)

Allegiant Share Price

2015

Allegiant

Rela ve toARCAAirline Index

Allegiant Fleet Profile

Aircra Type In service

757 6A319 5A320 9

MD-80 53

Total 73

acquiring A320-family aircra forgrowth. The first transac on wasfor nine leased 156-seat A319s fromGECAS, for delivery from mid-2013.The management noted that A319asset values had declined signifi-cantly to “mirror the environmentwe saw when we first began buyingMD-80s”.

Later that year Allegiant an-nounced the purchase of nine177-seat A320s, which averaged 12years in age and had been operatedby Iberia. The deal was described asa “tremendous opportunity to pur-chase a sizeable fleet of sister-shipswith CFM powered engines at verya rac ve price”.

Since thenAllegiant has grown itsA320-family fleet and commitments

in a series of opportunis c transac-ons. Most of the aircra have been

purchased with cash, but the airlinehas o en subsequently raised debtsecured on the A319/A320s.

In June 2014 there was a seriesof transac ons that included the pur-chase of 14 addi onal A319/A320s,conversion of future opera ng leaseobliga ons to forward purchases, a$300mpublic debt offering and an in-teres ng sale-leaseback type deal.

The la er involved Allegiantbuying 12 A319s that were alreadysubleased to a European carrier,keeping that arrangement un l theleases expire in 2018 and then usingthe aircra for growth. In the shortterm it is collec ng $30m annuallyin lease revenues. However, Alle-giant does not intend to become aleasing company; the ra onale isthat sale-leasebacks can “provideaircra commonality and greaterfleet plan certainty than spot markettransac ons”.

In recent months Allegiant hasbeen extremely ac ve in the usedA319/A320 market. Since the begin-ning of this year, it has commi edto 15 addi onal aircra , including anApril 22 purchase of three A320s thatwere repossessed fromHamburg Air-

ways. The 15 aircra will be deliveredfrom late 2015 through 2017.

At the end of March, Allegiant’s73-strongopera ngfleet consistedof53 MD-88/82/83s, six 757-200s, fiveA319s and nine A320s. The MD-80s’age range is 19-29 years and the757s’21-23 years.

Allegiant does not an cipatemuch, if any, reduc on in its MD-80 fleet over the next two years— unless good A320 acquisi onopportuni es arise. The MD-80’smaintenance costs have been stableand the aircra are nowhere neartheir FAA-approved cycle or flighthour limits.

However,Allegiant tooka$43.2mwrite-down on the value of its 757fleet in December. Residual valueswere reduced from $6m to $3m,based onwhat the company believedwas a permanent decline in the used757 market. Allegiant is now project-ing its 757 fleet to decline from six tofour units by year-end 2016.

Allegiant remains on the look-out for high-quality usedA319/A320sthat fit its specifica ons. Because ofthat, it does not have exact fleet pro-jec ons. Current plans suggest that itcould operate 44-46 A320-family air-cra by 2018, accoun ng for around45% of its total fleet of perhaps 99-103 aircra .

The Airbus aircra can fly longerroutes andmakemarginal flying prof-itable. They also achieve higher av-erage daily u lisa on (7.9 hours in2014) than the non-Airbus fleet (4.9hours).

Expediawithwings

Another key piece in the puzzle thatmakes Allegiant successful is that it ismore than an airline: it is in the busi-ness of selling travel. Some years agothe management described it as “Ex-pedia withwings”. It has the ability to



Allegiant Route Network

Allentown

Appleton

Austin

Asheville

Wilkes−Barre

Chandler

Bangor

Billings

Bismarck

Bellingham

Belleville

Bloomington−Normal

Boise

Burlington

Bozeman

Chattanooga

Charlottesville

Cedar Rapids

ClarksburgColorado Springs

Casper

Hebron

Duluth

Des MoinesElmira

Eugene

Fargo

Fresno

Kalispell

Fort Lauderdale

Sioux Falls

Fort Wayne

SpokaneGrand Forks

Grand Junction

Grand Island

Grand Rapids

Greensboro/High Point

Greenville

Great Falls

Hagerstown

Huntington

Niagara Falls

Wichita

Idaho Falls

Islip

Lansing

Las Vegas(Intl)

Los Angeles

Columbus

Lexington

Little Rock

Laredo

Harrisburg

McAllen

Medford

Manhattan

Moline

Minot

Monterey

Missoula

Montrose

Myrtle Beach

Oakland

Ogden

Oklahoma City

Owensboro

Plattsburgh

West Palm BeachPunta Gorda

Newport News

Peoria

Saint Petersburg

Pasco

Portsmouth

Palm Springs

PVU

Rapid City

Rockford

Reno

Roanoke

Rochester

San Diego

South Bend

Stockton

Orlando

Springfield

Shreveport

Santa Maria

Springfield

Saint Cloud

Newburgh

Syracuse

Toledo

BristolTulsa

KnoxvilleBentonville

Youngstown

access and sell inventory for hotels,cars and other third-par es atwhole-sale rates, sell it combined with anair seat andmanage themargins as itsees fit.

Allegiant owns and manages itsown air reserva on system, whichmakes it easier to fine-tune productofferings. The company believes thatthe control of its automa on systemshas allowed it to be an industry inno-vator with travel services and prod-ucts.

Last yearAllegiant derived36%ofits revenues from non- cket sources— a li le less than Spirit’s 41%. ButAllegiant has an unusually diversifiednon- cket revenue structure. Its ac-vi es also include fixed-fee flying

and aircra leasing.

There are many ancillary rev-enue ini a ves in the works thatshould sustain growth in non- cketrevenues. At its investor day theairline talked about fare buckets, seatassignments, prepaid bag pricing, acharge for check-in and “TripFlex”pricing. Growth areas include con-venience fees and priority boardingfees.

Labour risks

Allegiant’s pilots unionised in August2012, elec ng to be represented bythe Teamsters (IBT). Two years ofnego a ons produced no contract(which is not unusual for airlines),but the two sides have not talkedsince October or November. It isnot all about pay. IBT claimed thatAllegiant’s management unilater-ally changed exis ng work rules inviola on of the Railway Labor Act,especially when they implementeda new flight duty crew schedulingsystem in January 2014. IBT filed alawsuit in federal district court,whichlast summer ordered Allegiant torestore the work rules. Allegiant hasnot complied because it is appealingagainst the court ruling.

In January 2015 IBT asked theNa-onal Media on Board to proffer ar-

bitra on with respect to the contracttalks, to which the management ob-jected. The pilots then voted over-whelmingly in favour of a strike. TheNMB has ordered the two sides backto the nego a ng table.

The management has spent a lotof me in the courts trying to prevent

strike ac on. Moreover, in a unilat-eral move, in late April the manage-ment also granted the pilots a 5-7%rise in their hourly rate, ci ng Alle-giant’s strong opera ng margin per-formance in the past 12 months. ButIBT could see such an offer as an-other a empt to circumvent the nor-mal contract nego a ngprocess. Themanagement appears not to havebudged at all on the crew schedulingissue.

Because of the labour situa on,Allegiant is under heightened surveil-lance by the FAA, which will not ap-prove addi onal growth plans for thecarrier at least as long as a strikethreat remains.

When the strike threat first sur-faced at the end ofMarch, Allegiant’sshare price plummeted by 17% overthree days, and the price has re-mained at the new low level. Butmany analysts s ll rate Allegiant as a“buy”, basedonabelief that theman-agement will avoid a strike. In thatcaseAllegiantmaywell see the indus-try’sbestopera ngmarginexpansionin 2015. There will be a huge fuelwindfall. Non-fuel CASM is expectedto fall by 4-7% because of the accel-era on of ASM growth. And demandfor Allegiant’s low-cost leisure prod-uct remains strong.

By Heini Nuu nenhnuu [email protected]



The Principals and Associates of Avia on Strategy apply a problem-solving,crea ve and pragma c approach to commercial avia on projects.

Our exper se is in strategic and financial consul ng in Europe, the Americas, Asia,Africa and theMiddle East, covering:

� Start-up business plans� Due diligence� An trust inves ga ons� Credit analysis� IPO prospectuses

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aviation strategy issue #205, april 2015

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