Airline profits - Volume I - Issue 4 - August 2015

Volume I—Issue 4 A Magazine for Aviation Leaders & Influencers www.airlineprofits.com

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FEATURED

Release date: August 2015

Air Canada: What Did the Airline

Profits Sustainability Index Reveal?

What Business Is an

Airline Really Engaged In?

Airbus A380: Has a Once

Promising Market Dried Out?

Is the industry on track with IATA’s projections for 2015?

Volume I—Issue 4 August 2015 Airline Profits

Contents

6 Editorial: Airline Profits m agazine :

What Is New?

10 Profile: Air Canada: W hat Did the Air line Profits

Sustainability Index Reveal?

16 Perspective: Can W e Reasona bly Com pare Apple to

Airlines?

20 Performance: Is the Airline Industry on Track with

IATA’s Projections for 2015?

26 Platform: Air bus A380: Has the Once Prom ising

Market Dried Out?

32 Paradigm: W hat Business Is an Airline Really

Engaged In?

3 www.airlineprofits.com

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©2015 Airline Profits

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Kofi Sonokpon

[email protected]

PUBLISHED BY:

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Airline Profits August 2015 Volume I—Issue 4

Editorial


Airline Profits magazine:

What Is New?

In the April edition of Airline Profits, the first aviation magazine devoted to promoting a more profitable air-

line industry, we presented an overview of the publication. The main components of our multimedia plan

were revealed. A key piece of that puzzle is the Airline Profits Blog. In the aforementioned edition, we sug-

gested that the blog was going to be available shortly. In fact, that is now a reality. You can access our blog

posts at www.airlineprofits.com or http://magazine.airlineprofits.com.

You can read, like and share our magazine articles and

posts. You can also enjoy and keep up-to-date with our

selection of daily and weekly international aviation headlines and more...

Once there, you can read, like

and share our magazine articles

and posts. You can also enjoy

and keep up-to-date with our se-

lection of daily international avi-

ation headlines, the Airline

Profits Headlines Today series, the

Airline Profits Weekly Reviews and

our Regional Digests. You will

also find some quotes as food for

thought to start or end your day

on a positive note.

More content (including audio

and video) will be added on an

ongoing basis, so we encourage

you to stay tuned. In fact, we

have added an easy option so

you can get notified via RSS feed,

any time we post new content to

the Airline Profits Blog. With a

simple click, you can follow our

RSS feed, so you won’t miss a

thing. As you would notice once

you get to the blog, articles or

posts are regrouped into “Most

Viewed”, “Featured Posts” and

“Latest Posts” to facilitate your

navigation and maintain an

enjoyable reading experience.

To read an article, simply click on

its title and you will access the

full post accordingly. To like or

share an article, there is a bar

right below the title of the post,

simply click on the applicable

icon to proceed.

Kofi Sonokpon

[email protected]

http://www.airlineprofits.com

http://magazine.airlineprofits.com

Airline Profits Volume I—Issue 4 August 2015

Below each post, there is a sugges-

tion of similar posts. There is also

a sidebar that offers different cate-

gories of posts and some display

advertising.

At the bottom of the page, you

will find a brief description of the

magazine, contact information as

well as Airline Profits twitter feed

and some advertising.

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The Airline Profits Blog will be progressively upgraded over

the next few weeks to allow readers to comment and rate

articles and other posts.

The Airline Profits Blog will be progressively upgraded over the next few weeks to allow readers to com-

ment and rate articles and other posts. For now, we hope you will enjoy your visit to the Airline Profits Blog

and do look forward to your comments, feedback and rating in the near future.

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Efforts and courage are not

enough without purpose and

direction.

― John F. Kennedy

“

Airline Profits @AirlineProfits www.airlineprofits.com


Profile


Air Canada: What Did the Airline Profits

Sustainability Index Reveal?

In the June edition of Airline Profits, we have introduced the Airline Profits Sustainability Index (APSI). This

is an integrated metric, which takes into account three dimensions: People, Performance and Agility.

In this edition, we are presenting our first airline review on the basis of the APSI: that of Air Canada.

Based on the data available as of July 2015, our analysis revealed that on a scale of 1 to 10, Air Canada has an

Airline Profits Sustainability Index of 6.8.

Our analysis covered a period of

10 years, starting 2005 through

2014. We have also considered

pieces of information available

on Air Canada’s website and

other reputable sources such as

Flightglobal at the time our re-

view was conducted.

Based on the data available as of

July 2015, our analysis revealed

that on a scale of 1 to 10, Air

Canada has an APSI of 6.8.

In the next few lines, we are

going to offer a breakdown of

this rating. However, let’s begin

with a brief overview of the com-

pany by highlighting some key

facts.

Creation and History

Founded in 1937 as Trans-

Canada Air Lines (TCA), the flag

carrier and largest airline of

Canada began operations as Air

Canada only 28 years later in

1965.

In the year 2000, Air Canada ac-

quired and merged with Canadi-

an Airlines, their main rival. The

company filed for bankruptcy

protection three years later. They

emerged from bankruptcy in

2004 and organized under ACE

Aviation Holdings.


Business Model, Network and

Fleet

A mainline carrier, Air Canada

currently serves 178 destinations

across five continents, about 62

percent of which are located in

North America.

Air Canada operates a mixed

fleet of 167 in-service airplanes,

including Embraer 190, Airbus

A319 and A320, as well as Boeing

767 and 777 aircraft types.

The current in-service fleet has an

average age of 13.8 years. The

airline also has 92 aircraft on or-

der.

Ownership, Subsidiaries and

Alliances

Air Canada has a hybrid owner-

ship structure: ACE Aviation

Holdings owns 11 percent equity

stake in the airline, while the re-

maining 89 percent is publicly

traded.

Besides, Air Canada fully owns

subsidiaries such as Air Canada

Jetz and Air Canada Rouge.

Moreover, a member of the glob-

al airline network, Star Alliance,

Air Canada has close to 30 addi-

tional codeshare agreements.

Leadership, People and Opera-

tions

Air Canada is currently headed

by Calin Rovinescu, in the role of

Air Canada’s Boeing 787-800 Dreamliner. Photo Credit: Air Canada


Profile


President and Chief Executive

Officer. And as of 2014, the air-

line employed over 24 thousand

people.

Headquartered in Montreal, Que-

bec, Air Canada uses Toronto’s

Pearson International Airport as

its largest operational hub. Other

hubs include Calgary, Alberta

and Vancouver, British Colum-

bia.

Airline Profits Sustainability

Profile

As mentioned at the beginning of

this review, our analysis covered

a 10-year period ranging from

2005 to 2014.

People Index

The Airline Profits People Index

is based on a scale of 1 to 10. Air

Canada has a relatively high Peo-

ple Index of 8.2. Five factors were

considered in our calculation.

The People Index has a 45%

weight in the overall APSI.

Performance Index

The Airline Profits Performance

Index is based on a scale of 1 to

10. Air Canada has a below aver-

age Performance Index of 4.8.

Five factors were considered in

our calculation.

The Performance Index has a 40%


Agility Index

The Airline Profits Agility Index

is based on a scale of 1 to 10. Air

Canada has a relatively high

Agility Index of 7.9. Seventeen

factors were considered in our

calculation.

The Agility Index has a 15%


Summary

Air Canada’s Airline Profits Sus-

tainability Index of 6.8 is essen-

tially driven by the Performance

Index, which in this case happens

to be average. This is mainly due

to the fact that over the past dec-

ade (2005-2014), Air Canada was

profitable only five years out of

ten. In addition to that, the airline

has posted low operating and net

profit margins.

With relatively high People and

Agility indices, our primary re-

commendation is that Air Cana-

da would do well to focus on im-

proving their Performance index.

If you like this article and are cu-

rious in finding out more, we in-

vite you to stay tuned as we

share more airline profiles and

ultimately the 2015 Airline

Profits ranking based on the APSI in

a future edition of Airline Profits.

In the meantime, you can access

our detailed review of Air Cana-

da’s APSI report at: http://bit.ly/

air-canada-apsi-review.

http://bit.ly/air-canada-apsi-review

http://bit.ly/air-canada-apsi-review

Art

“The purpose of art is washing the dust of daily life

off our souls. ”

— Pablo Picasso


Inspirational leaders need to have a

winning mentality in order to

inspire respect. It is hard to trust in

the leadership of someone who is

half-hearted about their purpose, or

only sporadic in focus or

enthusiasm.

― Sebastian Coe

“



Perspective


Can We Reasonably Compare Apple to

Airlines?

Provided you have read the editorial of the previous edition, entitled: “IATA’s 71st AGM: Was the Apple ana-

logy from Miami Beach refreshing enough?” you may be puzzled by the topic of this article. The last editorial

story, which was derived from a remark made by Tony Tyler, Director General and CEO of IATA, assumed

that there was a strong basis for comparing Apple’s financial performance to that of the airline industry.

It is obvious that Apple and airlines operate in different

industries and environments. However, there are many

instances where a comparison can be made.

In other words, we were con-

vinced that we were comparing

Apple to “apples”. Although the

wordplay may seem amusing,

we share the opinion that the air-

line industry has the potential to

equal, if not exceed the perfor-

mance of Apple many times over.

And we do hope that airline lea-

ders and influencers will catch

the significance of that potential

and take the necessary steps to

set the airline industry on the

path to sustainable growth and

profitability.

In response to the comments we

received from readers of the last

edition, we found it necessary to

re-evaluate our initial assump-

tion in order to establish its

soundness. Hence the question:

can we reasonably compare Ap-

ple to airlines?

In responding to that question,

some would say “no”, others

would say “yes”.

An interesting, yet complex fact

is that both answers are valid,

depending on the angle from

which we look at the question. It

is even more pertinent when one

realizes that Apple made close to

US$200 per unit sold, while the

airline industry made on average

9 June 2015. Thomas Windmuller, SVP of IATA APCS presenting passenger trends. Photo Credit: IATA


less than US$10 per passenger.

While we may be inclined to

offer a philosophical point of

view, a plain approach may be

more effective.

It is obvious that Apple and air-

lines operate in different indus-

tries and environments. Howe-

ver, there are many instances

where a comparison can be

made. 1) There are many Apple

customers who are also airline

customers. And while the reverse

may not be applicable, all Apple

customers can potentially be-

come airline customers.

2) Apple and airlines are engaged

in mass production. The former

produces, markets and sells elec-

tronic devices, while the latter

produce, market and sell seats on

scheduled flights.

3) Apple and airlines are engaged

in enabling the satisfaction of a

specific human need: the need to

communicate.

Now, whether you share the

opinion that Apple can be com-

pared to the airline industry or

not, there is one fact worth re-

membering. Like the vast majori-

ty of airlines, Apple has not al-

ways been successful. So, we will

end this article with the follo-

wing questions. What did Steve

Jobs do differently to put Apple

back on track upon his return to

the company in 1997? Can air-

lines learn something from that

experience?

The object of all work is production

or accomplishment and to either of

these ends there must be

forethought, system, planning,

intelligence, and honest purpose,

as well as perspiration.

― Thomas A. Edison

“


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Performance


Is the Airline Industry on Track with

IATA’s Projections for 2015?

As reported in the June edition of Airline Profits, IATA has raised their projected target for airline profitability

for 2015. Instead of the US$25 billion initially announced in December 2014, airlines are now anticipated to

reach an all-time record of US$29.3 billion by the end of the year. The updated projections were announced at

the AGM in Miami in June.

Instead of the US$25 billion initially announced in

December 2014, airlines are now anticipated to reach an

all-time record of US$29.3 billion by the end of the year.

The adjustment in IATA’s fore-

cast was necessary, given the fact

that many leading airlines, espe-

cially in the USA have reported

their strongest first quarter per-

formance ever.

Just a few weeks later in July,

some S carriers started disclosing

their second quarter financial re-

sults. Other airlines will be re-

leasing their performance data by

the end of August.

As the second quarter results

were being disclosed, many car-

riers were again reporting their

best second quarter ever.

Carriers in other regions of the

world have also reported a

strong performance, for instance,

Air Canada, Lufthansa, Ryanair

and the International Airlines

Group (IAG), which includes

British Airways.

Our sample of 21 major carriers,

mainly in North America and

Europe, has shown that these air-

lines have cumulated close to

US$10 billion in net profits in the

first semester of 2015. That repre-

sents nearly a 140% increase over

the same period last year.

8 June 2015. Airline Industry Profitability Outlook for 2015. Source: IATA



Performance


Our sample of 21 major carriers, mainly in North America and Europe, has

shown that these airlines have cumulated close to US$10

billion in net profits in the first semester of 2015.

sidered will contribute at least another US$10 billion in total profits

over the third and fourth quarters. In fact, that would be the minimum

contribution that it will take to attain the anticipated US$29.3 billion in

total airline profits in 2015.

This group of airlines contributed

about 61% of the overall US$16.4

billion of total profits that the air-

line industry posted in 2014.

Clearly, airline profits are on the

rise compared to 2014. Assuming

the 61% contribution rate applies

to 2015 also and remains constant

throughout the year, the industry

is well on track to not only meet,

but also exceed IATA’s revised

forecasts. However, it may be too

early to suggest that this select

group airlines that we have con-

Education


“The purpose of education is to replace an empty mind

with an open one. ”

— Malcolm Forbes

What is success? I think it is a

mixture of having a flair for the

thing that you are doing; knowing

that it is not enough, that you have

got to have hard work and a

certain sense of purpose.

―Margaret Thatcher

“



Platform


Airbus A380: Has a Once Promising Market

Dried Out?

To many the launch of the Airbus A3XX program in the year 2000, not only triggered a high level of excite-

ment and interest from the aviation community as well as the general public. It also held the prospect of a

promising future. A new era in aviation history had begun.

The timing seemed perfect, the new very large aircraft (VLA) was about to inaugurate the second century of

aviation.

Considering the possible introduction of the A380neo

by 2020, one may conclude that Airbus has not yet given up on the quest of dethroning

the current “Queen of the Skies”, the rival Boeing 747.

A Promising Future

The idea of entertaining secrecy

about the last two digits of the

type designation was brilliant. It

sparked and reinforced the cu-

riosity of many aviation fans.

Moreover, the anticipated Super-

jumbo was intended to end the

long-standing supremacy of the

Jumbo jet, the rival Boeing 747.

The later revealed A380, was

going to be superior to the 747

not only in terms of technology,

but more importantly as far as

capacity, operational as well as

environmental performance were

concerned. Indeed, the A380

could carry up to 525 passengers

in a three-class configuration and

as much as 853 passengers in an

all-economy class configuration.

In terms of economics, the possi-

bility of carrying as many pas-

sengers as the A380 on a single

flight seemed to outweigh by far

the direct operating costs of the

aircraft.

The Maiden Flight and Entry-

into-Service

The maiden flight of the Super-

jumbo occurred on January 18,

2005. Upon the completion of its

flight test program and certifica-

tion, the delivery and entry-into-

service (EIS) of the A380 was de-


layed three times over a period of

two years. As reported by Air-

bus, the delays were mainly due

to wiring and configuration ma-

nagement issues during its pro-

duction phase.

Nonetheless, the first aircraft was

finally delivered to Singapore

Airlines in mid-October 2007 and

entered service a few days later

on a flight from Singapore to

Sydney, Australia on October 25,

2007.

The Market and Orders

In 2006, Airbus anticipated de-

mand for about 1700 very large

aircraft (VLA) by 2025. Whereas,

Boeing had a less optimistic fore-

cast of 700 airplanes for the same

category. In fact, Airbus had ini-

tially considered offering the

A380F, a freighter version of the

Superjumbo, but the concept was

later abandoned in order to focus

exclusively on the all-passenger

A380 jetliner.

Apart from Singapore Airlines

with 19 A380s and five yet to be

delivered, 15 other airlines also

operate the double-deck aircraft.

Among them is Emirates Airline

with the largest fleet of A380.

Emirates currently have 65 in-

service with 75 on order, for a

total of 140 A380s.

As of July 2015, Airbus has deli-

vered 169 of this type of aircraft

with an additional backlog of 118

airplanes.

21 July 2014. Airbus A380 Jetliner at Farnborough Airshow. Photo Credit: Airbus S.A.S.


Platform


With that said, there are a few

facts that triggered our questio-

ning about the market for very

large aircraft like the A380.

Firstly, based on Airbus’s 2006

forecast, one would have as-

sumed an order of at least 500 to

900 A380s by 2015. Instead, there

are less than 350 units sold to-

date. Secondly, there has not

been any new A380 sales since

2013. Thirdly, Airbus currently

has six A380 white-tails that need

to be reallocated to other custom-

ers. As reported by Flightglobal,

Airbus is looking at reallocating

the planes, but with no details as

to which customer. According to

the same source, two of the air-

planes have already been built

and are stored in Toulouse,

France. The six airplanes were

ordered by Skymark in 2011, but

Airbus cancelled the order last

minute in 2014, when the Japa-

nese operator indicated that they

could no longer support the de-

livery schedule. Fourthly, All

Nippon Airways (ANA) who

now control Skymark have sug-

gested that they were not neces-

sarily interested in taking the air-

planes.

Fifthly, Malaysia Airlines amid

their restructuring efforts also

indicated their intention to retire

their A380 fleet, a total of six air-

planes. Sixthly, United reported

that the A380 was not working

for them. They preferred allocat-

ing smaller airliners on their

routes. Finally, British Airways

also comments earlier this year

that although impressed by the

performance of the aircraft type,

they did not see the need for ad-

ditional A380s in their fleet. They

currently operate nine of them

and have three more on order.

Summary

One may wonder whether the

once promising market has dried

out. Well, it depends.

On one hand, if one compares the

decline of interest in the A380 to

the excitement that prevailed at

the launch of the program, one

could say “Yes”.

On the other hand, when one

considers the success of the air-

craft in service and the possible

introduction of a larger and more

fuel-efficient variant, the

A380neo by 2020, one may con-

clude that Airbus has not yet giv-

en up on the quest of dethroning

the current “Queen of the Skies”,

the rival Boeing 747, over 550 of

which are currently operated by

75 airlines worldwide.

Training

“The purpose of training is to tighten up the slack, toughen

the body, and polish the spirit. ”

— Morihei Ueshiba


There is one quality which one

must possess to win, and that is

definiteness of purpose,

the knowledge of what one wants,

and a burning desire to possess it.

― Napoleon Hill

“


Available in Kindle Book on Amazon

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Paradigm


What Business Is an Airline Really

Engaged In?

To most people such a question may seem like a joke, because it has an obvious answer. They will tell it

straight: “Come on…who in the world doesn’t know that an airline is engaged in air transportation?”

Some may think that such a basic question is an attempt to insult their intelligence.

The ability to pinpoint precisely what business an

organization is engaged in is a key determining factor for its

success. This is the type of question, which cannot be

neglected or omitted.

To seasoned entrepreneurs, busi-

ness leaders and savvy marketers

however, a clear and probably

not so obvious answer to this

fundamental question is im-

portant and essential to the suc-

cess of any business endeavour.

In other words, to the astute busi-

ness person, the ability to pin-

point precisely what business an

organization is engaged in is a

key determining factor for its

success. This is the type of ques-

tion, which cannot be neglected

or omitted.

For instance, Robert T. Kiyosaki

provided a good illustration of

the topic in one of his Rich Dad,

Poor Dad books. It was reported that

the late Ray Kroc, founder of the

McDonald’s corporation deli-

vered an address to a class of

business students at the Univer-

sity of Texas at Austin in 1974.

After the lecture, M. Kroc asked

the students:

“What business am I in?”

The entire group started laugh-

ing, because they thought Ray

Kroc was joking, since the ques-

tion appeared too basic to be ta-

ken seriously.

To emphasize his point, Mr. Kroc

rephrased the question:

Photo Credit: Envato Photodune


“What business do you think I

am in?” The entire group

laughed again, still convinced

that he was fooling around.

Then one student offered boldly:

“Ray, who in the world doesn’t

know that you are in the ham-

burger business?”

Well, that is pretty obvious! Isn’t

it? Just imagine Ray Kroc inter-

jecting: “That’s what I thought

you would say.”

Then adding “Ladies and gentle-

men, I am not in the hamburger

business. My business is real es-

tate.”

Robert Kiyosaki reported that

while Mr. Kroc admitted that

selling hamburger franchises was

his primary business focus, he

nevertheless made the point that

the selection and acquisition of

the precise location of a franchise

was by far of much greater im-

portance.

As of 2013, McDonald’s Corpora-

tion was reported to have over

36,000 locations worldwide. Most

of these locations are prime real

estate near high value road inter-

sections.

What a shock! The obvious an-

swer to a supposedly foolish

question, was not so obvious af-

ter all. There are more details to

be added to this anecdote, but

let’s focus on the essential.


Paradigm


In summary, it becomes clear that

the real business an organization

is engaged in, is what guides or

at least should guide key deci-

sion-making in that organization.

Yet even at this point, the ques-

tion remains without a clear an-

swer. And like in the case of

McDonald’s, it is the leaders,

owners or founders who can ac-

curately state what a business is

really about. When it comes to

commercial aviation, while the

general and obvious understand-

ing is that airlines are in the busi-

ness of carrying people and

goods from point A to point B,

there is a statement worth men-

tioning. It is a quote by Colleen

Barrett,

President Emeritus of Southwest

Airlines: “We’re in the Customer

Service business. We just happen

to fly airplanes.”

As the airline industry is striving to improve its sustainability and

profitability, it may be worthwhile for the airlines to reflect on this fun-

damental question both individually and collectively. The reason being

that even though airline operations is capital intensive, the majority of

their customers perceive them as being in the business of simply carry-

ing them from point A to point B, just like a bus or a train. And for that

very reason, they want the air fares to be as cheap as possible.

There is a statement worth mentioning. It is a quote by

Colleen Barrett, President Emeritus of Southwest Airlines: “We’re in the

Customer Service business. We just happen to fly

airplanes.”

Based on what Mr. Kroc taught these very fortunate business students, if they were asked: “What business is

an airline really in?” there are at least two things we could expect.

Firstly, they would not find the question so simple. Secondly, they would most probably suggest that

“carrying passengers and goods by air” is simply a vehicle for the real business an airline is engaged in.

In other words, air transportation is a means to an end: not the end itself.

Purpose

“The purpose of human life is to serve, and to show

compassion and the will to help others.”

— Albert Schweitzer


When you're surrounded by

people who share a passionate

commitment around a common

purpose, anything is possible.

― Howard Schultz

“


Available in Kindle Book on Amazon

http://bit.ly/talent_book_com

Be daring, be different, be

impractical, be anything that will

assert integrity of purpose and

imaginative vision.

― Cecil Beaton

“


Available in Kindle & Paperback on Amazon

http://bit.ly/value-kindle

True happiness... is not attained

through self-gratification, but

through fidelity to a worthy

purpose.

―Helen Keller

“


Airline profits - Volume I - Issue 4 - August 2015

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