AIR TRANSPORT: QUARTERLY REPORT NO 11 · • ADP floated 29.2% of its share capital, raising EUR1.2...

Cranfield University: Quarterly Report Q2 2006 for DG TREN 1

Growth of air transport in new Member States continues:

airBaltic replaced last of these RJ-70s by Boeing 737-500s already a year ago.

AIR TRANSPORT: QUARTERLY REPORT NO.11 2nd QUARTER 2006 (April to June)

1. Highlights and key developments ...........................................................................................................2

1.1 Regulatory ............................................................................................................................................2 1.2 Capacity ................................................................................................................................................2 1.3 Traffic ...................................................................................................................................................3 1.4 Financial Results...................................................................................................................................3 1.5 Airports.................................................................................................................................................3 1.6 Manufacturers .......................................................................................................................................3

2. Scheduled capacity...................................................................................................................................4 3. Air traffic ..................................................................................................................................................7

3.1 Passengers.............................................................................................................................................7 3.2 Air Cargo ..............................................................................................................................................9

4. Airline financial performance ............................................................................................................... 12 4.1 European Airlines ............................................................................................................................... 12 4.2 Other major world airlines .................................................................................................................. 17

5. Airports................................................................................................................................................... 18 5.1 General traffic trends .......................................................................................................................... 18 5.2 Traffic growth at individual airports ................................................................................................... 19 5.3 Developments in airport ownership .................................................................................................... 21 5.4 General airport developments ............................................................................................................. 22 5.5 Regulatory issues ................................................................................................................................ 22 5.6 AEA delays......................................................................................................................................... 22

6. Air Traffic Control................................................................................................................................. 23 6.1 Airspace management......................................................................................................................... 23 6.2 ATC delays ......................................................................................................................................... 23 6.3 Single European Sky ATM Research (SESAR).................................................................................. 24

7. Environmental developments................................................................................................................ 24 8. Aircraft and manufacturers .................................................................................................................. 25


1. Highlights and key developments

1.1 Regulatory

• In June the Commission issued its first quarterly update of the list of airlines banned in the EU, which is published on the Commission’s website. (http://europa.eu.int/comm/transport/air/safety/doc/flywell/2006_06_20_flywell_list_en.pdf)

• The Commission referred Greece to the European Court of Justice for failure to comply with its state aid decision of September 2005 that all unlawfully granted aid to Olympic Airways since December 2002 be quantified and recovered. It also asked Greece to suspend all further payments of aid to Olympic Airlines and Olympic Airways.

• The Commission approved the “Air routes development funds” measure under which regional authorities in the UK grant start-up aid for new air routes to and from regional airports. Approval was also given by the Commission for a state aid scheme proposed by the Scottish Executive for aid of a social character for air services to, from and within eligible regions of the Scottish Highlands and Islands.

• The Community has signed “horizontal” aviation agreements with Georgia, Moldova, New Zealand and Singapore, which brings the existing bilateral agreements between EU Member States and these four countries in line with EU law by amending the nationality restrictions previously contained therein. Similar agreements have been successfully negotiated with a further 20 countries. The number of bilaterals put in conformity is currently more than 400.

• The Community has signed the European Common Aviation Area (ECAA) Agreement with eight South-East European partners (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Former Yugoslav Republic of Macedonia, Romania, Serbia and Montenegro and the United Nations Mission in Kosovo) as well as Iceland and Norway. This Agreement will integrate South-East Europe in the single European aviation market and will ensure high safety and security standards and a uniform application of aviation rules across Europe.

• In March, the Council adopted a statement requesting the Russian Federation to abolish Siberian overflight payments and mandated the Commission to negotiate an agreement on this issue.

1.2 Capacity

• Measured in terms of the number of scheduled flights operated per week between European states, air transport capacity increased by 5% between June 2005 and June 2006. Over the same period domestic capacity within European states remained unchanged.

• Low-cost airlines added 300 new routes to their networks in Q2, generating 1,100 new weekly departures. Ryanair and Easyjet still dominate this sector, but their combined share of new weekly departures was 25% of total LCC departures, compared to almost 50% in Q1.


1.3 Traffic

• AEA member airlines reported annual passenger growth across their networks at just under 1% in the three month, March to May 2006. Domestic markets weakened over the period, but there was some growth on the important North Atlantic routes and significant improvement on services to the Asia/Pacific region. Overall, the airlines improved their average load factor slightly to 76%.

• ERAA reports regional airlines’ Q1 passenger traffic growth at 8.5% over 2005.

• The two largest Low-cost airlines, Ryanair and EasyJet reported Q2 passenger traffic up by 25% and 16% respectively. Ryanair’s load factor improved by 1.3 decimal points, and EasyJet’s by slightly less.

• Air cargo traffic carried by AEA members for January to May 2006 rose by 3% overall, with the strongest growth (5%) on Asian routes. Traffic to/from South America declined significantly. Traffic carried by the largest cargo airline, Lufthansa, advanced by 5% and the second largest, Air France by 7%. The third largest, Cargolux recorded a fall of 5%.

1.4 Financial Results

• The latest financial results are for January to March of 2006. This is generally one of the worst quarters, especially when it does not include Easter, which was the case in 2006. The low season combined with fuel prices 28% higher over the quarter resulted in operating losses for the major EU airlines Air France-KLM, Alitalia, Austrian, Finnair, Iberia, Lufthansa Group, and the SAS Group for this period. However, British Airways and Swiss recorded an operating profit as did Ryanair (easyJet do not report quarterly results). Some of the above did better in local currency terms, with the euro weakening against the dollar by around 8%.

1.5 Airports

• May’s passenger traffic at ACI Europe’s airports was 6.4% ahead of May 2005. The top performing major airport was Dublin, with passenger numbers up 24%.

• BAA recommended shareholders to accept Ferrovial’s improved bid for the UK airports company.

• ADP floated 29.2% of its share capital, raising EUR1.2 billion for the French government.

1.6 Manufacturers

• At the beginning of April the order total for the first quarter was announced with Boeing leading with 176 orders compared to Airbus’ total of 70 aircraft.

• Airbus announced they were having to put back the delivery of A380 by around seven months.

• Boeing announced that almost its entire second quarter profit could be wiped out by charges related to 737-based defence systems for Australia and Turkey totalling some $800 million.


2. Scheduled capacity

In June 2006 there were a total of 124,000 departures of scheduled air services between and within European states, up around 3% on June 2005. Most of this increase was due to intra-EU cross-border activity (number of departures up 5%) as the number of domestic flights barely changed. The analysis includes the member states of the Community, Bulgaria, Croatia, Iceland, Norway, Romania, Switzerland and Turkey. As might be expected, the Europe-wide statistics hide very large differences among countries and country-pairs.

For international services, the greatest increases again involve the less well developed air transport markets of some accession states and candidate states. For example, scheduled international departures from Bulgarian, Croatian and Slovakian airports increased by 15%, year-on-year to June 2006, by over 20% from Polish airports while scheduled flights from Romania jumped 27%.

Weekly European flight departures, June 2006 v June 2005 Domestic Intra-Europe Domestic Intra-Europe

flights per increase flights per increase flights per increase flights per increase week over 2005 week over 2005 week over 2005 week over 2005

Austria 336 -13% 2,059 -4% Latvia 8 none in 2005 292 11%Belgium 0 0 1,949 0 Lithuania 2 -1 296 0Bulgaria 28 75% 323 15% Luxembourg 0 0% 381 4%Croatia 145 -15% 388 16% Malta 68 -46% 192 0%Cyprus 0 0% 369 -2% Netherlands 38 -61% 3,420 6%

Czech Republic 78 18% 1,224 4% Norway 4,773 3% 1,550 18%Denmark 670 -2% 2,230 -7% Poland 518 9% 1,497 20%

Estonia 46 0% 230 6% Portugal 916 -2% 1,477 12%Finland 1,402 10% 1,078 2% Romania 206 10% 640 27%France 6,440 0% 6,127 6% Slovakia 28 -36% 230 15%

Germany 5,833 -8% 11,299 3% Slovenia 0 0% 202 5%Greece 2,015 4% 1,276 10% Spain 8,937 0% 6,671 7%

Hungary 23 none in 2005 966 1% Sweden 2,649 -1% 1,939 1%Iceland 223 -29% 115 -17% Switzerland 288 4% 3,036 -1%Ireland 330 -1% 1,908 3% Turkey 2,075 26% 1,132 16%

Italy 5,994 4% 5,800 5% United Kingdom 8,943 1% 10,740 4% Source: OAG

Domestic activity grew strongly in many states, and fell just as strongly in others. However, the more dramatic rates of change generally reflected movement around very low levels of activity. Growth continued in the more mature domestic market of the UK, but there was a significant reduction in absolute terms in domestic activity in Germany. Of the other large domestic European markets, France, Italy and Spain, only Italy increased traffic (measured in scheduled departures). Sweden continued to record a fall in domestic capacity, while the capacity of Czeck Republic’s domestic air transport network increased by almost one-fifth over 2005.

Around 8% of European air transport capacity was dedicated to just twenty city pairs. The following table ranks Europe’s twenty busiest routes. Fifteen of these were domestic, including three operated within Norway, echoing the remark in the preceding paragraph on that country’s domestic system. The table is based on city pairs, favouring routes involving cities with multiple airport systems, although the lead position involves two cities each served by a single airport.

The table also provides an indication of the competitive climate on these busiest European routes. Frequency concentration is measured in terms of the HHI, or Hirschman-Herfindahl index, which sums the square of each competitor’s capacity share on a route, based on the number of flights scheduled. On the index, monopoly


operation is represented by 10,000 - the maximum score. High frequency concentration, with a HHI value over 5,000 (the figure representing two airlines operating with equal capacity shares) is show in red shading.

Frequency and concentration on Europe’s twenty busiest routes, June 2006

City pairs Flights per week Frequency concentration index (HHI)

Barcelona Madrid 943Milan Rome 751

Amsterdam London 703Edinburgh London 690

Dublin London 626Glasgow London 542

London Paris 496Paris Toulouse 490Nice Paris 482

Bergen Oslo 449London Manchester 449Franfurt London 378

Oslo Trondheim 375Madrid Paris 370London Milan 366Belfast London 364

Barcelona Palma de Mallorca 336Marseilles Paris 328

Istanbul Izmir 327Oslo Stavanger 324 4,300

5,500

2,700

3,600

2,500

3,100

4,300

3,700

3,100

3,900

6,800

8,100

3,400

2,600

2,800

3,100

2,200

4,800

4,400

10,000

Source: analysis from OAG data

Although the French city pairs in the table offer little or no air-based competition, TGV services offer a viable alternative to air travel.

The city pairs with lowest frequency concentration (HHI), and thus with potentially the greatest competition, are listed in the table below. The index is driven by the number of carriers operating and their relative market share, so that four airlines operating on a route with flights evenly distributed among them would generate an HHI value of 2,500. Supported by data in the previous table, it is clear that busy routes are not necessarily among the most competitive. City pairs which are relatively lightly served, such as London Split, can achieve low concentration scores, in this case driven by the spread of services across London’s five airports.

The domestic networks enjoying the most competitive environment appear to be Italy, Spain and the United Kingdom.

LCC activity During the second quarter of 2006 (including the period from Sunday 26th March when the summer scheduling season began) over 300 new routes were initiated across Europe by low-cost carriers generating some 1,100 new weekly departures. Many of these new services are likely to be summer only routes and many are operated just once or twice per week. The highest frequency new route was the launch of Air Berlin’s four times daily service between Frankfurt and Zurich. This was only made possible as a result of Lufthansa being required to give up slots as part of its closer ties with Swiss. Air Berlin also launched another UK domestic service from Belfast City to its London Stansted base raising its network of UK domestic services to three.


European city-pair routes with the lowest frequency concentration, June 2006

International city pairs HHI Domestic city pairs HHIMadrid Milan 2,100 Milan Naples 1,800London Warsaw 2,100 Catania Milan 1,800

Amsterdam London 2,200 Milan Palermo 2,000Krakow London 2,300 Bari Milan 2,500

Milan Paris 2,400 Berlin Cologne 2,600Manchester Palma de Mallorca 2,400 Madrid Palma de Mallorca 2,600

London Menorca 2,500 Glasgow London 2,600London Milan 2,500 Barcelona Palma de Mallorca 2,700Antalya Cologne 2,500 Milan Reggio Calabria 2,700

Faro Frankfurt 2,500 Palma de Mallorca Jerez 2,800Copenhagen Madrid 2,500 Berlin Stuttgart 3,000

Madrid Rome 2,600 Brindisi Milan 3,100London Tenerife 2,600 London Manchester 3,100Antalya Frankfurt 2,600 Edinburgh London 3,100

Brussels Rome 2,600 Barcelona Tenerife 3,100Arecife Munich 2,700 Barcelona Menorca 3,100

Cologne Fuerteventura 2,700 Isle of Man London 3,100Larnaca Manchester 2,700 Barcelona Las Palmas 3,200London Rome 2,700 Barcelona Seville 3,200London Split 2,700 Jersey London 3,300

Source: analysis from OAG data

Ryanair and easyJet still generated more flights on new routes than other airlines but their share of new frequencies was just 25% this quarter compared to nearly 50% in Q1. This reflects the summer season as the key season for European LCCs so every airline was looking for new markets and niche opportunities to generate revenue during the peak demand period.

Hlx was the third busiest airline for generating new routes with expansion from all of its German bases. This included a new domestic route between Stuttgart and Leipzig and replacing Germanwings on the route between Cologne/Bonn and Birmingham. Slots at Paris Orly enabled new routes from Stuttgart and Hannover to start.

Sweden’s FlyMe began operations from its new Gothenburg base on 30 March with two aircraft and nine routes including such low-cost favourites as Amsterdam, London, Malaga, Paris, Prague and Rome. Fellow Scandinavian carrier Sterling, having completed its integration of Maersk, planned to start a base in Helsinki with two aircraft from the start of the summer season. Only one aircraft was subsequently based there and by mid-July the base had been abandoned.

Vueling initiated a number of new Spanish domestic routes from its Barcelona and Madrid bases though all new routes are currently served just daily. Iceland Express finally expanded its previously small route network (just London Stansted and Copenhagen) to include several new destinations in Germany and Scandinavia and also began flights from Iceland’s second airport at Akureyri, a popular tourist destination in the north-east of the country.

In Central Europe Wizz Air and SkyEurope launched nearly 40 routes in total but only four were with frequencies of more than four per week. These were all at SkyEurope’s new base in Prague to Amsterdam, Milan, Paris and Rome. Amongst Wizz Air’s new routes were five from their mini-base at London Luton to Bourgas, Ljubljana, Sofia, Split and Zagreb.


3. Air traffic

3.1 Passengers

3.1.1 Scheduled Passengers carried by AEA members in the three-month period to May 2006 totalled just short of 82 million, of which 31% were carried on domestic flights and a further 47% on cross-border services within geographical Europe. However, in terms of passenger-kms, domestic and European services contributed far less, 8% and 23% respectively.

Although traffic increased by just under 1% overall, measured as year-on-year passengers carried in the three months, there was much stronger traffic growth on routes to some regions than on others. Those to the Middle East and Africa, and on the South Atlantic, grew strongest, while Asia/Pacific passenger traffic also continued to show relatively strong growth. Domestic markets, one of the most important in terms of passenger numbers, weakened, perhaps as AEA member airlines felt the continuing impact of low-cost competition.

Scheduled services of AEA members, March to May 2006

Passengers ASK RPK Load factor thousands millions millions % Domestic 25,622 20,548 13,869 67% Geographical Europe 38,054 57,863 39,742 69% Europe / N Africa Mid East 2,732 10,877 7,798 72% North Atlantic 6,928 56,937 47,372 83% South/Mid Atlantic 2,672 26,500 21,637 82% Europe/rest Africa 1,742 15,928 11,638 73% Europe /Far East, Australasia 4,119 44,181 34,443 78% Other 41 84 55 65%

TOTAL 81,911 232,919 176,554 76% Indeed, the domestic market was the only one where AEA carriers cut capacity, managing to increase average load factors in spite of reduced demand.

Scheduled services of AEA members, March to May 2006, growth over 2005

Passengers ASK RPK Load factor (% points) Domestic -0.6% -0.9% 0.3% 0.8 Geographical Europe 1.0% 0.7% 2.4% 1.1 Europe / N Africa Mid East 6.2% 3.2% 5.1% 1.3 North Atlantic 0.4% 0.0% 0.5% 0.4 South/Mid Atlantic 3.8% 1.6% 3.6% 1.6 Europe/rest Africa 0.6% 1.6% 0.4% -0.9 Europe /Far East, Australasia 3.7% 3.6% 3.5% -0.1

TOTAL 0.8% 1.2% 2.0% 0.6

Passenger load factors increased overall, with the greatest rise seen on the South Atlantic. On the important North Atlantic routes, a brake was placed on capacity


growth, allowing the modest increase in passengers carried to feed through into improved average load factors.

Of the ten AEA carriers featured in the following chart, Alitalia and SAS were the only ones recording a reduction in capacity (measured in ASK) over the twelve month period. This was reflected in increases in load factor for both airlines of around four decimal points. Of the other eight airlines only Turkish recorded a deterioration in load factor, with a rather large increase in capacity not attracting sufficient passengers to maintain the previous year’s average load factor.

Scheduled service RPK: selected AEA members, March to May 2006, growth over 2005

0 5,000 10,000 15,000 20,000 25,000 30,000

OS

TK

SK

VS

AZ

IB

KL

LH

BA

AF

RPK (million)

2006

2005

Source: AEA

IATA reported 7% year-on-year growth in international passenger traffic in May, down from 9.9% growth in April, when demand was boosted by Easter. Year to date growth is an above average 6.8%. IATA also notes improved capacity utilisation, with ASK expanded by only 4.9%, driving load factors to 73.6%, 1.4 points higher than in May 2005.

Air Transport Association of America reports a 5.0 percent year-over-year growth in capacity (ASMs) between the U.S. and foreign destinations for 2006, contrasting with a 1.4 percent reduction domestically.

Passenger traffic for the Association of Asia Pacific Airlines members increased by 4% in May of 2006 compared to May 2005. Capacity rose by only 1% in the same period, giving an improvement in average passenger load factor of 2.1 points to 71.2%. This follows April passenger figures up by 6.7%.

3.1.2 Low cost carriers Ryanair’s continued aircraft delivery schedule has seen the airline carry nearly two million passengers more than the next largest low cost carrier, easyJet in the second quarter. Both airlines are achieving loads of about 85%.

Air Berlin’s listing on the stock exchange has meant their figures can now be reported quarterly. The airline is about half the size of easyJet but is growing at a similar rate to the UK company. It has also achieved a load factor in excess of 80%.


Selected LCCs: traffic, April to June 2006 (Q2)

Passengers Load factor (%)

thousands % change (%) Change (% points)

Ryanair 10,665 24.8 84.6 1.3

EasyJet 8,780 15.9 85.9 1.0

Air Berlin 4,175 15.1 82.8 4.8

Norwegian 1,290 48.5 78.9 1.7

SkyEurope 702 45.7 74.5 -6.1

Smaller carriers SkyEurope and Norwegian are growing at remarkable levels, but while Norwegian has been able to maintain a healthy load factor, SkyEurope’s additional capacity has exceeded its 45% year-on-year increase in passenger numbers, resulting in its load factor losing 6 percent points.

3.1.3 Regional airlines At the end of June the ERAA published figures for the first quarter of 2006 which showed that intra-European traffic carried by its members was up 8.5% on the previous year. ASK growth was 7.3%, a marginal increase on the 7.2% reported last year.

The average scheduled load factor for the quarter was up 0.9 percentage points to 57.9%, continuing the increase reported in our Q1 report, and the highest recorded figure in the organisation’s history.

It should be noted that membership of ERAA covers airlines acting as subsidiaries to network airlines, as well as carriers not based in the EU; additionally there are airlines who could be described as regional who are not members.

3.2 Air Cargo

3.2.1 European airlines Air cargo traffic carried by AEA members increased by 3% overall for the five month period to the end of May 2006.

Air Freight Traffic of AEA carriers by region, Jan-May 2005 vs Jan-May 2006

Jan - May 2005

TFTK (millions) Jan - May 2006

TFTK (millions) change

Domestic 54.0 51.3 -5.0

Geographical Europe 313.2 308.5 -1.5

Europe / N Africa Mid East 445.0 480.2 7.9

North Atlantic 4,023.4 4,128.0 2.6

South/Mid Atlantic 1,570.1 1,487.8 -5.2

Europe/rest Africa 1,215.3 1,259.1 3.6

Europe /Far East, Australasia 6,564.5 6,905.9 5.2

Other 65.5 0.8 -98.8

TOTAL 14,251.1 14,621.6 2.6


Traffic on the North Atlantic was up by 2.6%, with the fall on Mid- and South Atlantic routes (most of it coming from South Atlantic routes), offset by a 5% growth on routes to/from Asia and the Far East.

Traffic out of Asia is growing stronger than volumes into Asia, with upward pressure on yields for traffic from the region. Traffic carried by air within Europe accounted for only 2.5% of the total FTKs, most being trucked to the European hubs. Intra-European air traffic declined by 1.5% for the latest five months.

Looking at the major AEA carriers over the same five month period, Lufthansa’s traffic rose by just under 5%, while Cargolux experienced a fall of a similar magnitude. Air France grew strongly by 7% and its wholly owned partner, KLM, by 2.4%. Together they accounted for 30% of total AEA FTKs. The other important freight carrier, British Airways advanced by 4.8%, with the smaller Alitalia’s drop of 9.2% indicating retrenchment and cost cutting.

Air Freight Traffic of largest AEA carriers, Jan to May 2006 and 2005

0 500 1,000 1,500 2,000 2,500 3,000 3,500

SAS

Iberia

Swiss

Alitalia

Virgin

KLM

British Airways

Cargolux

Air France

Lufthansa

FTK (million)

Jan-May 06Jan-May 05

Source: AEA

3.2.2 Integrators FedEx international priority packages (IP) revenue grew 14% for the year to end May 2006, with domestic US package revenues up by 6%. IP average daily package volume grew 8%, due to strong growth in Asia and Europe. IP revenue per package grew 6% due to higher fuel surcharges and improved regional mix, partially offset by currency exchange rate impacts. U.S. domestic revenue per package increased 7%. FedEx’s non express LTL business expanded 19% in revenue terms to reach $2.6 billion for the year, of which only 16% is international. Average daily LTL shipments were up 6% to 67,000 for the year to end May 2006.


DHL reported 10% higher revenues for their Express Corporate Division for the first three months of 2006, reaching €4.6 billion of which 63% was from Europe, 24% from the Americas and 12% Asia Pacific. Their European express division experienced 3.7% higher revenues, with international express growth especially strong in Italy, Spain and central Europe.

UPS (at the corporate level) reported 16.5% growth in total revenues for January to March 2006 compared to the same quarter in 2005. International package volumes were helped by strong US export performance with international revenues up by 17.3%. However, international package revenues accounted for only 19% of total consolidated revenues in the quarter (versus 65% for US domestic packages). Their supply chain and freight business accounted for 16% of the total, but grew by 54% in this period.

UPS reported an increase in international air cargo FTKs of 8.5% for the first two months in 2006, with strong growth of almost 17% on the Atlantic routes. However, their Pacific operations still acounted for their largest share of international traffic (57%) in this period. FedEx carried 897m international FTKs over January to February 2006 compared to UPS’s 560m; together they accounted for 50% of total US carrier international FTKs. In terms of US domestic FTKs, FedEx had a 52% share of the total in this period, followed by UPS with 27% and ABX Air (owned by DHL) third with only 4%. This shows the dominance of the integrators within the US. Total domestic air traffic was little changed from the same quarter in 2005.

3.2.3 Other world regions Freight traffic for IATA member airlines increased by 5.4% in the first five months of 2006 compared to the same period of 2005. The Middle East was the area of strongest growth, up 19.6% over the same period in 2005, followed by North America with 6.5%. Airlines based in the European region exhibited the slowest growth with only 2.1%, while Asia/Pacific carriers advanced by 5.2%.

Freight traffic for the Association of Asia Pacific Airlines members (17 international scheduled airlines based in the Asia/Pacific region) increased by 5.2% in the first five months of 2006 compared to the same period of 2005. Freight load factor improved by 1.2% points to 66.4%. May traffic was up by just over 3% suggesting some slowing of air freight markets to/from and within this region.

Figures were only published for US airlines for January to February 2006. Their international air cargo FTKs increased overall by 4.3% for the two months, with their trans-Atlantic traffic up by 5.2%, Pacific up by 1.9% and Latin America down by 0.3%, all compared to the first two months in 2005.


4. Airline financial performance

4.1 European Airlines

Results for the first quarter of calendar year 2006 were available for the majority of larger EU airlines, and are shown in the table below. This quarter is off-peak, and did not have the advantage of Easter falling in March. Taking this into account, British Airways’ 4.4% operating margin was remarkably good, as was that of Swiss which has achieved a significant turnround. None of the other network carriers reported a positive operating margin, reflecting both the low quarter already mentioned as well as continued pressure from higher oil prices. Most airlines had increased their fuel surcharges, but these do not capture the full effect of higher kerosene costs. Finnair reported a small operating loss, more dependent as it is than others on the peaked leisure traffic.

Financial performance of major EU carriers for January to March 2006

January to March 2006

Revenues ($m)

Operating result ($m)

Net result ($m)

Op.margin %

Net margin %

Air France-KLM 6,251 -5 8 -0.1 0.1 Alitalia 1,160 -155 -188 -13.4 -16.2 Austrian Airlines 680 -65 -83 -9.6 -12.2 British Airways 3,715 163 140 4.4 3.8 Finnair 585 -6 -5 -1.0 -0.9 Iberia 1,452 -76 -54 -5.2 -3.7 Lufthansa Group 5,348 -55 -118 -1.0 -2.2 Ryanair 454 53 34 11.6 7.4 SAS Group 1,859 -149 -137 -8.0 -7.4 Swiss 725 18 3 2.5 0.4 Total above 22,229 -277 -400 -1.2 -1.8

British Airways, Lufthansa and Swiss returned better operating results in US dollar terms than for the previous first quarter especially Swiss, while Iberia, Finnair and Air France-KLM showed some deterioration. Alitalia was largely unchanged, while Austrian showed a small improvement, albeit still operating at a loss.

Of the carriers doing worse, Finnair’s traffic and load factors were up significantly, but yields poor. Iberia also experienced strong traffic growth but with passenger load factor up by only 0.9% points. Traffic growth was also no problem for AF-KLM, but again load factor advanced by only 0.4% in the first three months of the year. However, their yields improved strongly; their unit costs measured in equivalent available seat kilometers (EASK) rose by 4.5%, but were down by 2.3% on a constant currency and fuel price basis. The €/$ exchange rate was an important factor, and their published financial results for January to March showed a small improvement in euro terms (as opposed to small decline in the dollar ones shown above).

Interestingly, none of the three network airlines that recorded improved results in dollar terms were helped by especially strong traffic or passenger load factors. However, BA had a local currency yield increase of 3.7% over the first quarter in


2005, and net operating expenditure down by 1.8% despite higher fuel costs. Swiss’s turnround was due mainly to non-fuel cost reductions and control of yields in spite of a very competitive environment (and little help from exchange rate changes). The Lufthansa Group was helped by an 8.5% yield improvement in € terms, a reduction in passenger services operating loss from €113m to €78m and an increased operating result contribution from their technical division (MRO) from €58m to €73m.

The exchange rate was undoubtedly a key factor in the results, in particular the $/€ rate that fell from $1.314 to the €, averaged over the first quarter of 2006, to $1.209. This meant that the € weakened against the dollar by around 8%, tending to favour those airlines (such as BA and Lufthansa Group) with higher overseas revenues. It also makes dollar denominated expenses such as fuel more expensive in euros.

Air Berlin, recently listed on the stock exchange, announced first-quarter operating losses of €58 million. Losses increased by 56% which the airline is attributing to fuel costs and the relatively late Easter holiday. Revenues in the three months to 31 March 2006 rose by 3.7% to €224 million while operating expenses increased by 12%. Net losses improved by 20% to €31 million and an 8.5% rise in passenger numbers, despite the absence of Easter traffic, has prompted optimism that the airline will be profitable during 2006.

EasyJet lifted its earnings outlook for the rest of the year after reporting a pre-tax loss of £40.3 million for the fiscal first half ended 31 March, versus a loss of £21.6 million in the same period of the previous financial year. Revenue increased 14% during the period, to £629.5 million from £553.3 million, while operating costs increased 16%, to £602.2 million from £519.6 million. After-tax loss widened to £28.9 million from £15.4 million. Ancillary revenues were up 31% during the half while the number of passengers carried increased 10.1% to 14.9 million.

The prospects of a takeover bid for budget airline Easyjet appear to have fallen after Icelandic firm FL Group sold its stake in the carrier. Speculation had risen earlier this year that FL Group, which owns Icelandair, might make a bid for Easyjet after it increased its stake in the airline. However, FL has now sold its 16.9% stake for about €325 million, making a profit of 140m euros.

FlyMe losses for the first quarter have more than doubled as a result of expansion investment in spite of a 66% increase in revenue. FlyMe is aiming to double its turnover through organic growth and simultaneously launched 11 new routes during the three months to the end of March. But this expansion took a SKR51.5 million toll on the airline’s profitability, with losses deepening to SKR63.2 million from SKR23.9 million. Net turnover totalled SKR151 million, generated off the back of a 57% rise in passenger numbers to 206,000. Just under 1,000 of these were carried on international flights, which did not feature in the airline’s programme a year ago. The airline is continuing its acquisition of Lithuanian carrier FlyLAL. Flyme is aiming to complete due diligence and secure its own board approval by 30 June.

Ryanair has posted €302 million in adjusted net profits for the year ended 31 March 2006, marking a 12% increase on 2004-05 and exceeding the airline’s expectations by €7 million. Ryanair revenues were up 28% to €1.7 billion. It achieved this off the back of a 26% increase in passenger numbers, which stood at 35 million. Yields climbed 1%, while the airline’s unit costs excluding fuel fell by 6%. Fuel costs for the period totalled €462.5 million, 74% up on 2004-05. The adjusted net profit figure excludes €11.9 million in goodwill from Ryanair’s acquisition of Buzz and €5.2


million from an insurance claim. Operating profits before exceptional items rose by 10% to reach €369 million and pre-tax profits stood 9.6% up at €338.9 million. In the coming year Ryanair expects traffic to increase 20%, taking it to 42 million passengers, but yields will be flat and profit growth will be “more modest” in the region of a 5-10% increase if oil prices remain at $70 per barrel.

Icelandair parent FL Group, which completed its acquisition of Sterling in January, says that Sterling achieved an EBITDA loss of ISK1.6 billion, excluding restructuring charges. Taking account of restructuring costs, its EBITDA loss deepened to ISK2.4 billion. Pre-tax losses totalled ISK1.8 billion, but reached ISK2.6 billion after restructuring. Turnover for the period stood at ISK7.7 billion, reflecting passenger growth and “favourable” yield development. Despite the recent acquisition, Sterling is the subject of fresh takeover interest from Swedish budget carrier FlyMe.

Key developments and announcements- network carriers Cost reduction: Alitalia’s first quarter financial performance was below expectation especially on domestic routes because of strikes and bad weather. This forced the airline to cancel flights, at a time when competition was increasing from foreign based LCCs.

Scandinavia’s SAS Group announced in June 2006 that it is to exit its hotel business by listing its Rezidor SAS division through an initial public offering, enabling the company to focus on its core flight operations activities. In the same month, the airline announced that it intended to close its Stavanger MRO base with resultant savings of SKr 200m. This comes only a month after McKinsey released a study that proposed a new organizational model for diversified airlines.1 The study suggests that over the past decade the traditional airlines have, in pursuit of higher profits, diversified into related businesses. Their prescription is to switch to a business unit structure. This was introduced by Lufthansa back in April 1997

Labour costs: In July 2006, Swiss failed to make a new agreement with their A320 pilots’ union, after the previous one had expired. This follows their agreement with their pilots’ union referred to in our previous quarterly report. In June, Finnair announced that it would cut 670 jobs over the period 2006/07 from its technical services and administration, mainly through early retirement and outsourcing.

Iberia is also facing industrial unrest over plans to close all routes out of Barcelona, except for the Madrid shuttle, and to set up its own low-cost airline. The pilots’ union, Sepla, sees a clear link between the two, fearing job losses or a reduction in salaries, and had called a seven-day strike for July. In fact the union called off their strike which lasted only three days, although the airline estimated that it had cost around €20 million. Iberia’s cabin crews had also scheduled a strike in July, but this was cancelled, after they reached agreement with management.

Lufthansa signed an 18-month agreement in June 2006 with its pilot union (Vereinigung Pilot) which increases salaries by 2.5% in July 2006 and a further 1.5% in March 2007.

Product development: Changes to the amount of hand baggage air travellers can carry on board British Airways' aircraft will be introduced from July 2006. All

1 A new organizational model for airlines, by Yael Heynold and Jerker Rosander, The McKinsey Quarterly (electronic version only), May 2006


passengers will be able to carry one standard-sized bag and one briefcase, laptop computer bag or equivalent on all flights. A single allowance system for checked-in baggage will be introduced from October 11, based upon a set number of bags. The number of bags that can be checked-in will vary according to the class of travel and route. The maximum weight for any checked bag will be reduced to 23kg to comply with health and safety recommendations.

From July, Air France will be running a trial with Radio Frequency Identification (RFID) tags to label and track passenger baggage on flights between Paris-CDG and Amsterdam Schiphol. KLM starts trials at two baggage drop-off points in Departure Hall 2 at Schiphol. The RFID tags will be used for all baggage dropped off at these points, regardless of the destination. Later this year, all drop-off points in Departure Hall 2 will be equipped to handle RFID tags. KLM developed RFID together with Schiphol Airport, responsible for the facilitation.

Mergers and alliances: British Airways and Malév Hungarian Airlines have signed an agreement that will enable the two airlines to begin codesharing on each other's flights from November 1, 2006. Malév will become a member of the oneworld alliance early next year.

The Russian airline Aeroflot joined the SkyTeam Alliance in April this year. On 12 June, nine SkyTeam carriers signed a Memorandum of Understanding with BAA to co-locate their facilities in Terminal 4 at London’s Heathrow airport (LHR), providing easier connections and more convenience to the nearly 3.5 million SkyTeam passengers traveling through LHR each year. According to the agreement, by 2008 carriers with existing LHR service, including Aeroflot, Air France, Alitalia, Czech Airlines and Korean Air, will join KLM, currently serving its passengers in this terminal. Other carriers, Aeroméxico, Delta Air Lines, and Northwest Airlines, will have the option to operate in this terminal should they serve LHR in the future. On 28 June, SkyTeam signed a Global Airline Alliance Adherence Agreement (GAAAA) with China Southern Airlines, the largest in the People's Republic of China, indicating the carrier is on track for official alliance membership.

Skyteam received a statement of objection from the Commission which is a step in a competition investigation by the Commission.

LCC competition: In June, Air France lodged a complaint with French civil court Conseil d’Etat against Marseille Provence airport’s new low-cost terminal, which is to become a base for Ryanair later this year. Ryanair decided to open a base at Marseille after the airport launched a €15.2 million project to redevelop its existing freight facility into a low-cost terminal. The carrier plans to base two aircraft at the airport. Passenger charges at the new terminal are planned to be just €1 per head, against current charges of €2.75 for domestic and €5.96 for international services.

It was alleged in June 2006 that SAS Braathens gained access to yield-sensitive data from low-cost competitor Norwegian through the Amadeus GDS. Norwegian claimed SAS Braathens was able to use access codes on the GDS to find the number of passengers in different price categories on every Norwegian flight from late 2002 until November 2005. If found guilty, SAS could face a significant fine.

Key developments and announcements- low-cost carriers Ryanair is citing a revenue boost from its initiative to start charging passengers for checked-in baggage, and sees ancillary revenue growth outpacing increased traffic for


the year ahead. For the financial year ending 31 March 2006 the airline reported a 35.7% growth in ancillary revenues, representing 15.3% of total revenues. This was aided by better-than-expected results from the carrier’s decision to start charging passengers for checked-in baggage. The airline intends to further boost ancillary revenues by implementing onboard gambling in the second quarter of 2007 and in-flight mobile telephony services.

FlyMe is in negotiations to acquire Danish LCC Sterling Airlines and is also eyeing Finnair’s Swedish subsidiary FlyNordic. Sterling, recently merged with Maersk Air, was acquired by Icelandair parent FL Group in January. FlyMe looks to play a key role in Scandinavian low-cost airline consolidation.

There are a number of structural changes taking place in the Spanish market. Iberia announced a significant restructuring of its network in the face of severe competition from low cost operators, particularly Ryanair and easyJet. The Spanish national airline is to launch a low cost carrier in October to take on rivals. The new carrier will be based at Barcelona and initially fly on domestic routes and to Germany and the UK. Iberia will put up €24m of the €50m launch costs. The rest will come from its four partners, Cobra Group, a part of the ACS building group, Iberostar, a tour operator, Nefinsa, a holding company of the Serratosa family and Quercus, a private equity company. The new operator will start with five Airbus A320s aircraft but hopes to increase that to 30 by 2008. The scaling back of many services at Barcelona has led Vueling to apply for all available slots at the airport to expand and strengthen its network. As the market changes in Barcelona, EasyJet and Ryanair have both been awarded slots at Madrid Barajas for this winter season by Aena, fueling speculation that the budget carriers will select the airport as their southern European base. EasyJet has been granted permission to increase Barajas operations by 135%, while Aena says Ryanair is among Barajas Airport’s predicted new operators.

Key developments and announcements- charter/leisure airlines Cyprus Airways has sold its charter subsidiary, Eurocypria, to the Cyprus Government. The sale, which raised US$29.1 million, forms part of Cyprus Airways’ contribution to its restructuring plan. Eurocypria currently operates a fleet of five B737-800 aircraft.

The proportion of passengers taking charter flights from the UK in 2005 was the lowest in 20 years, according to the UK CAA. Only 13.4% of passengers flew on UK charter airlines, equivalent to 34.9 million journeys, a decrease of two million compared to 2004. The demise of the traditional package holiday, the growth of low-cost airlines, and the rise in the number of charter airlines now operating scheduled flights are the key reasons for the change. In contrast, the proportion of passengers at UK airports flying on UK scheduled airlines reached 50.5% in 2005, its highest level for 20 years and an increase of 7.3 million passengers on 2004. The latest figures also show a considerable rise in the use of regional airports. Over the last 10 years terminal passenger numbers at regional airports have doubled to 95 million in 2005.

Four start up Turkish charter carriers have been established. Best Air, Golden International and TTAir are based at Istanbul, Izair operates from Izmir.


4.2 Other major world airlines

Five US majors (Alaska, American, Continental, Southwest and US Airways) showed positive operating ratios for the period January to March 2006. However, this result was only just above breakeven for Alaska and Continental. AMR improved its operating margin from 0.5% to 2.2%, with US Airways also achieving a 2% margin in 2006. Southwest maintained their operating margin on 21% higher revenues.

Delta Air Lines made a huge operating loss of $476m, presumably taking advantage of Chapter 11 to include as many restructuring costs as possible. The other major in Chapter 11, however, Northwest fared better with a small ($15m) loss. United Airlines has recently emerged from Chapter 11 but still reported a large loss of $171m for the quarter, albeit much improved from the previous quarter.

The US majors as a whole (eight airlines) recorded a $385m operating loss and $1,871m net loss for the quarter.

In May 2006, JAL Group reported an operating loss of Y26.8 billion for financial year 2005/06 compared to a profit of Y69.8 billion the year before (and the Y34 billion loss that was forecast for 2005/06 in their latest business plan). They made a net loss of Y47.2 billion versus net profit of Y30 billion in the previous financial year.

In May 2006, Singapore Airlines reported an operating profit of S$1.213 billion for their financial year 2005/06, down 8% from the year before. They made a net profit of S$1.241 billion, also 8% down from the previous financial year. The small difference between operating and net profit reflected the airlines very low gearing. The passenger side of the group accounted for 54% of the latest year’s operating profit, followed by 15% from Singapore Airport Terminal Services, 14% from SIA Cargo and 11% from SIA Engineering. The group made an operating profit of S$255 million for the period January to March 2006, down by 10% over the previous quarter, on revenues that were 12% up.

Malaysian Airlines announced a loss of MYR321 million for their first quarter to end March 2006, which was better than their target of MYR349m. It was not clear whether this was an operating or net loss. The airline indicated that the results were improving in 2006: a loss of MYR184m in March, a loss of MYR143m in February, and a small profit of MYR7m in March.

Korean Air reported an operating profit of KRW91.124 billion for the quarter ending March 2006, versus KRW61.044 billion in the previous quarter. In spite of higher fuel prices, operating cost only increased by 7.5% in this quarter. Their net result more than doubled to KRW 127.3 billion helped by a sizeable foreign exchange gain.

Air Asia’s third quarter (to end March 2006) EBITDAR was down by 4% at MYR54.8m, on total revenues that had increased by 23%. However, net income was down by 44% compared the same quarter in 2005 at MYR22.8m, partly due to one-off heavy maintenance costs.

Emirates released their financial results for the 12 months ending 31 March 2006. Revenue was up 27% compared to the previous financial year, with an operating profit of US$722m (an operating margin of 11.5%) and a net profit of $674m. These results rate them amongst the top airlines in terms of margin and growth, more akin to some of the LCCs rather than the network airline that they are.


5. Airports

5.1 General traffic trends

Year-on-year growth of passenger traffic at Europe’s ACI member airports was 6.4% in May 2006 (compared with the same month in 2005). This level of growth in Europe was above the increase seen over the same period at ACI airports worldwide (4.3%), placing Europe towards the top of ACI’s growth table.

Middle East airports lead the growth league at 12.6%, but from a very low base (ACI Middle East airports generated less than one percent of ACI total traffic, European airports represent 37%). Strong positive performance in Europe, and at ACI’s Asia Pacific airports (up 7.7%) compensated for North American airports, which recorded no growth at all in passenger traffic.

Cargo traffic performance recorded the same ranking among regions. ACI airports worldwide recorded 5.0% growth year-on-year. The corresponding increase in European cargo traffic was very slightly higher than the global figure, at 5.1%. ACI’s North American airports again underperformed the other ACI airports, recording an increase of just 2.2% year-on-year to May 2006..

Year-on-year growth, May 2005 v May 2006 at ACI airports

7.7%7.0%

6.4%

5.1%

0.0%

2.2%

4.3%5.0%

Passengers Freight

Asia Pacific Europe North America Total ACI

Source: ACI

The chart below shows the position of European airports among the twenty busiest in the world in terms of passenger throughput in April 2006. The league is dominated by US airports, where traffic is mainly domestic, reflecting the size and economic activity of the United States.

In terms of growth at the largest world airports, Beijing far outstrips the others, yet another indication of China’s rapidly developing economy. Madrid is in top growth position among the European airports included in this ranking.


Passenger traffic and growth, April 2006 at the top World airports

0

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Source: ACI

5.2 Traffic growth at individual airports

Average year-on-year growth of passenger traffic in April 2006 at Europe’s top twenty airports was a solid 9.8%, helped by Easter falling in April this year but in March in 2005. All the top twenty European airports posted positive growth. Inevitably, the overall figure masks very high growth at a number of airports and less encouraging performance in passenger terms at others. While Dublin recorded a year-on-year growth of 23% in passenger traffic, Stockholm performance reflected Sweden’s depressed domestic air transport market with an increase of just under one-half a percent. At Madrid, where additional capacity came on stream, passenger traffic growth was comfortable in double-digits.

At all the airports in ACI Europe’s top twenty, featured in the following chart, year-on-year changes in commercial air transport movements (ATM) were well below changes in passenger number. For example, at the two congested hubs of Heathrow and Frankfurt, there was very little change in April ATMs. The London airport dropped by 1% while Frankfurt’s total of landings and take-offs remained unchanged, suggesting a combination of higher load factors and larger aircraft to account for their gains in passenger numbers.


Passenger traffic, April 2006 at the top ACI Europe airports

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Source: ACI Europe

As in the previous quarter’s report, it is clear that the low-cost impact on traffic distribution around major cities continues, reflecting also the capacity constraints at major hubs. At Frankfurt 3% growth in passenger traffic was below average for the top-twenty airports, while Hahn recorded a 23% increase. At London Gatwick passenger numbers jumped by 12%, but climbed a more modest 4% at Heathrow. Rome’s airports recorded increases of 47% at Ciampino and but 8% at Fiumicino.

At smaller European airports the impact of low-cost operators continues to be significant. For example, at Bratislava passenger traffic increased by 75% between April 2005 and the same month in 2006. Basle airport’s LCC activity lifted passenger traffic by 35%, well ahead of a 12% increase at Geneva and 16% at Zurich.


Passenger traffic, April 2006: selection of smaller airports in the study region

0

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75%

Source: ACI Europe and airports

5.3 Developments in airport ownership

After a long and protracted take-over battle, BAA finally recommended its shareholders accept the £9.55 per share offer from Spanish construction company Ferrovial. The offer was an improvement on a previous offer of £9.00 per share. Ferrovial secured the shares ahead of rival bidder Goldman Sachs. By the end of June Ferrovial had secured around 80% of BAA share capital.

The French government launched its long-awaited initial public offering of shares in state airports operator Aéroports de Paris (ADP) on June 16. The government raised €1.2 billion from the floatation of 29.2% of shares on the Euronext stock exchange with company employees offered an allocation of 3.2%. The government will retain a majority stake in the company, a requirement under French law. Institutional investors secured a price of €45per share while employees took advantage of a discounted price of €35.20 per share. The French government is expected to use the funds generated from the transaction to assist ADP’s capital expenditure programme.

The Polish Airport State Enterprise (PPL) announced that it has plans to establish Rzeszow airport as a separate commercial entity in order to help facilitate its future development. The new management model involves shared ownership between PPL and the local regional government of Wojewodztwo Podkarpackie.


Fraport has secured a 35-year concession to operate Bourgas and Varna airports in Bulgaria. The transaction was secured ahead of Copenhagen Airport who were previously disqualified by a Bulgarian court from bidding. Under the terms of the agreement Fraport will take a 60% stake in the two airports and will to commit €403 million in capital investment. The other shareholder is BM Star. Fraport is required to pay 19.2% of annual revenues generated at both airports to the government.

5.4 General airport developments

Polish state-owned airports operator PPL indicated it will develop Modlin, a former military base located 30km northwest of Warsaw, as a secondary airport to be offered to low cost carriers.

The company managing the development of the new Berlin Brandenburg International Airport secured €350 million of funding to help finance initial construction costs. Funding has been secured through a consortium led by Commerzbank.

Fingal County Council in the Irish Republic has granted approval to the Dublin Airport Authority to construct a new runway. The new runway will run parallel to the existing runway and is expected to become operational in six to seven years.

5.5 Regulatory issues

The UK government announced existing restrictions on night flight movements at BAA London airports would remain until 2012. The government also announced that over the winter period, night flying allowances would be reduced at London Gatwick.

The UK Office of Fair Trading announced that it was investigating BAA’s dominance of the UK airports market. At present the company owns Heathrow, Gatwick and Stansted, accounting for a significant proportion of the London travel market. In addition, BAA dominates the Scottish airports market with three airports, Aberdeen, Edinburgh and Glasgow, accounting for over 90% of Scottish air passenger traffic.

In April IATA initiated legal proceedings against the French government over its decision to allow airports operator ADP to increase airport charges by 26% over the next five years. IATA described the move as “unfair and unjustifiable”. The basis of the complaint relates to alleged deficiencies in the economic regulation contract between the state and ADP. In April IATA called on the European Commission to implement a directive on more robust national economic regulation of airports.

5.6 AEA delays

AEA reported their punctuality statistics for the first quarter of 2006. The share of short/medium haul departures on time or within 15 minutes of scheduled time was 77.4%, an improvement of 1.5 percentage points on same quarter of 2005.

The average figure masks significant differences associated with airports. While London Gatwick and Dusseldorf recorded 17.6% of intra-Europe flights delayed by over fifteen minutes, at Madrid the figure was 33.3%. At Madrid, the airport’s heaviest users Iberia and Spanair reported average intra-Europe departure delays of fifty minutes, with delays of over fifteen minutes hitting more than one in three of Iberia’s European services and over a quarter of Spanair’s.


6. Air Traffic Control

6.1 Airspace management

Four countries have reinvigorated efforts to consolidate Central European upper airspace, abandoning the heavily-criticised single-centre concept in favour of a functional-block approach. Austria, Bosnia, Hungary and Slovakia took a formal decision to commit to a new approach on 24 May. The new programme will be based on current infrastructure and only move towards functional consolidation when clear cost benefits are demonstrated. CEATS members, Croatia, Italy and Slovenia, as well as the Czech Republic, will decide if they will join the revised programme.

Eurocontrol expects the European fleet of business aircraft to rise by around 4% annually to some 3,000 by 2015. The projections follow concerns that growth in very light jets could present a problem for ATM in Europe. Eurocontrol says the business aviation segment has grown twice as fast as the rest of the traffic since 2001. Flights by business jets up by 8.9% in 2005, and turboprop flights rose by 2.4%.

The airspace authorities of Sweden, Denmark and Ireland have initiated a joint purchasing agreement to ease modernisation of their ATM systems. Under COOPANS (Co-operation in the Procurement of Air Navigation Systems) the authorities entered agreement with French manufacturer Thales ATM to allow them to pursue joint upgrades. Other air navigation providers could enter the pact.

Commission Regulation (EC) No 730/2006 of 11 May 2006 adopts new rules on airspace classification as part of the continuing effort to unify air traffic operations under the Single European Sky programme. The regulation creates a common classification for airspace above flight level 195 and lays down a set of rules to create a transparent framework for flights operating over European borders and facilitates access for aircraft operating under visual flight rules. The regulation is the latest step to establish a regulatory framework under the Single European Sky initiative. These steps have included creation of a common requirements regulation for air navigation service providers, a regulation governing flexible use of airspace, and a common air traffic controller licensing scheme.

This latter addition to the initiative was adopted under the Community air traffic controller license directive (2006/23/EC, 05 April 2006) and is intended to increase safety standards and to improve the operation of the Community air traffic control system through the issuing of air traffic controller licenses recognized throughout the Community. The license will be issued and administered by authorities in each member state independent of air navigation service providers and training providers.

6.2 ATC delays

There has been little comment on ATC delays in the technical press in Q2, probably because the average delay per movement has varied between 1.6 and 2.0 minutes. This compares favourably with previous years, particularly as for the first five months on 2006 traffic has increased by 4.1%.


6.3 Single European Sky ATM Research (SESAR)

The SESAR Programme is on schedule. The definition phase of SESAR launched in November 2005, is proceeding as planned. This first phase will set the detailed content of the programme for the modernisation of Air Traffic management in terms of technology, components, organisation and schedule. The total cost of €60 million is equally shared by the Community, under the Trans-European Network programme (€30 million) and Eurocontrol (the European Organisation for the Safety of Air Navigation).

The first task of the SESAR consortium carrying out the work of this phase, under the responsibility of Eurocontrol, was to assess the existing ATM system in Europe. The consortium will deliver by July 2006 a detailed description of the present system’s strengths and shortcomings and the major aspects which shape and influence today’s air transport industry, namely: the macro-economic situation; the future expectations, the roles and the relationship between the major stakeholders of the sector. The results of this first task will constitute the basis for developing the future ATM operational concept and performance requirements.

On the other hand, the Commission has progressed in preparing the “Development phase” which is the next step of the programme which will produce the required new generation of technological systems and components as defined in the definition phase. The European Council expressed its full support to SESAR in its meeting of June 9th 2006. At this meeting, the Transport Ministers agreed on a general approach on the proposed Council Regulation, presented by the Commission, to create the SESAR Joint Undertaking for the management of the development phase of the Programme. The adoption of the Regulation is foreseen by end 2006, after reception of the European Parliament and European Economic and Social Committee’s opinions. In the meantime, the Council asked the Commission to start preparatory work for the set up of the Joint Undertaking, which is expected in the beginning of 2007.

7. Environmental developments

The issue of ‘night’ aircraft flights continues to make the news. In the past, the debate has been about aircraft operations into airports and a number of airports in Europe have, at present, a night-time ban on aircraft or the numbers of night-time aircraft movements are severely restricted.

The debate took a new twist with the presentation of the results of a recent study to look at the effects of aircraft condensation trails (contrails) at different times of the day and different seasons. The study by Reading University’s meteorology department shows that although night flights account for only a quarter of movements over the United Kingdom, they generate at least 60% of the climate warming associated with contrails; the conclusion of the study being that aircraft flying at night can have a greater impact on the environment and that flights between December and February contribute half the annual mean climate warming, even though they account for less than a quarter of annual air traffic.

The study combined high-resolution aircraft flight data supplied by Eurocontrol with routine weather balloon data to model the interaction of solar and infrared radiation with the atmosphere. The study focused on contrails that remain for around an hour


in an entrance region to the North Atlantic flight corridor site over Herstmonceaux in south-east England.

Nevertheless, European legislators continue to favour tightening current rules on marginally compliant aircraft, rather than banning night flights across the European Union, to control noise around airports, despite there being strong calls from a number of groups campaigning against aircraft noise to introduce an EU-wide ban on all night time flights. Such a ban would potentially lead to conflicts with Europe’s partners in international aviation, impose unnecessary economic and social costs at those airports where there is no noise problem and unfairly export the problem to non-EU countries, as well as causing chaos to airline schedule planning for long-haul operations if such a ban were to be implemented on a world-wide basis.

8. Aircraft and manufacturers

Despite the rivalry between the two leading aircraft manufacturers for orders, co-operation is on-going on issues related to fuel efficiency and the environment and this was shown in April when Airbus and Boeing announced their co-operation in developing fuel-cell technology including the testing of an APU powered in such a way on an A320 scheduled for summer 2007.

At the beginning of April the order total for the first quarter was announced with Boeing leading with 176 orders compared to Airbus’ total of 70 aircraft.

Airbus The quarter began for Airbus with pressure being applied by ILFC, among others, to redesign the A350 to produce a better competitor to Boeing’s 787, the knock-on effect of any redesign then caused concerns to the airlines who had ordered the aircraft, including Qatar who threatened to cancel their order.

Airbus suffered a major crisis in June 2006. On 13 June they announced that due to production problems with the A380 – including “bottlenecks formed in the definition, manufacturing and installation of electrical systems” – they were having to put back the delivery of aircraft by around seven months, though the initial customer Singapore Airlines was still expected to receive its first aircraft by the end of 2006.

The fallout from this announcement was major. EADS share price dropped by around 26%, in turn this led to allegations of improper actions on the part of the heads of EADS and by the end of the quarter the future role of Noel Forgeard was in question.

At the same time BAE Systems had just exercised its put option which gave EADS the option of buying out its 20% stake, with the fall in the share price, BAE Systems was facing a lower revenue than it expected and it appointed the Rothschild Bank as arbitrator to negotiate a “fair price” for its stake.

Boeing


On 20 April the final 717 rolled off the Long Beach production line, ending nearly 50 years of jet production at the plant which had produced the DC-8, DC-9 and DC-10 families and their derivatives.

On 8 June Boeing announced its May order book which included its first 747-8 passenger order for one aircraft from an unnamed airline, Boeing already hold orders for 48 of the freighter variant. Also amongst the orders in May were 20 777s (14 –300ERs and 6 777-200LRs): again the airline was not named.

At the end of June, Boeing announced that almost its entire second quarter profit could be wiped out by charges related to 737-based defence systems for Australia and Turkey totalling some $800 million and this is in addition to a previously announced charge of $500 million over “a deal with US federal investigators over the handling of a rival’s proprietary information and suspect hiring practices of former US military personnel.”

On 30 June, Boeing marked the start of major assembly of the 787 at Fuji Heavy Industries plant at Handa in Japan with the production of centre wing sections.

Bombardier On 4 April Bombardier Aerospace’s President and COO announced production of its corporate jet aircraft would increase in the coming year as that sector continued to expand, while regional aircraft would somewhat stagnate. Reliance on the higher margin corporate market helped its financials in the FY06 as the revenues from corporate aircraft increased by over 50% while revenue from regional aircraft fell by just under 20%.

In June Bombardier was still weighing up the options of either further stretching the CJ900 to exploit the 90-110 seat market or reviving the dormant C-Series design.

Embraer On 3 April Embraer announced record revenues and profits for 2005 with increases of 11% and 17% respectively over 2004 figures. At that date its outstanding orders included 440 E-Jet, with total firm orders totalling around $10.4 billion.

Later that month they announced that production rates for the 190/195 series would increase to around eight a month by mid-2007 (the current rate being four).

On 16 June Embraer received Brazilian certification for the E195 paving the way for EASA certification and delivery of the first aircraft of the type to flybe in August.

AIR TRANSPORT: QUARTERLY REPORT NO 11 · • ADP floated 29.2% of its share capital, raising EUR1.2...

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Transcript of AIR TRANSPORT: QUARTERLY REPORT NO 11 · • ADP floated 29.2% of its share capital, raising EUR1.2...