Low-cost flights hit air pocket

A ferocious price war has killed off the weaklings in the airline sector. But the survivors are well placed to thrive. Chris Carter reports.

The no-frills airline sector has hit major turbulence. The “ferocious” price war that tipped Alitalia (Italy’s flag carrier), Monarch (Britain’s fifth-biggest airline) and Air Berlin (Europe’s No. 10) into insolvency has also dragged easyJet into the fray, says Robert Lea in The Times.

Revenues per seat at the low-cost airline had fallen by 3.7% over the summer, “indicating that it had cut fares to keep flights flying close to full”. Profits for the year to the end of September are expected to have fallen by 17%, and will be 40% lower than two years ago. Terrorism in north Africa and Turkey hasn’t helped matters, while the fall in the pound has cost easyJet £100m. Outgoing chief executive Carolyn McCall “will spend her last three months in charge… trying to redraw easyJet’s map”.

On the plus side, easyJet will be enjoying plenty of schadenfreude over rival Ryanair’s woes. Michael O’Leary, the pugnacious chief executive, sent a “grovelling” letter to pilots last week to stop them leaving for rivals such as Norwegian Air Shuttle, notes Bloomberg Gadfly’s Chris Bryant. “That O’Leary felt compelled to turn on the charm suggests his labour relations are badly bruised.”

Still, “one might expect shareholders to cheer such a gesture”. They didn’t. The share price promptly fell by almost 2%. “Repairing the damage will be expensive, even if the company’s fat profit margins will cope.” The problem is, as one pilot told the BBC, the airline is “run like a communist regime. It’s dictated from the top and you are just expected to get on with it.”

Europe’s problem is that there are just too many airlines relative to the size of the market, says Annabel Fenwick Elliott in The Daily Telegraph. In the US five major airlines “provide some 80% plus of scheduled capacity and that may be where the European market will head over time”.

But it’s not all gloom. The demise of Alitalia and Monarch is a “reminder that airlines are fragile constructs” with thin margins and exposure to shifts in the economy, says Fenwick Elliot. But it also means that easyJet and Ryanair will face less competition. And they will keep benefiting from a structural tailwind, as Aristofanis Papadatos points out on SeekingAlpha. More people are flying than ever before as living standards constantly improve. Global air traffic reached a five-year high early this year. Moreover, estimates the International Air Transport Association, it will expand by 3.7% a year until 2035.

HSBC plays it safe with new CEO

HSBC is keeping mum. But the word on Threadneedle Street is that the high-street lender has asked the Bank of England for permission to install John Flint as its new CEO, The Sunday Times revealed, citing unnamed “City sources”. He would take over from Stuart Gulliver, who has headed HSBC for almost seven years and is heading for retirement.

Replacing Gulliver with Flint – who joined HSBC back in 1989 and now heads its retail-banking and wealth-management operations – would continue a long-held tradition of promoting from within, note John Ainger and Stephen Morris on Bloomberg. Every one of its previous 21 leaders spanning over 150 years have been drawn from its own ranks. “[Flint’s] top concerns will likely include improving the bank’s technology, entailing more job cuts; continuing Gulliver’s ‘pivot to Asia’ and $100bn investment in China’s Pearl River Delta region; and growing the asset-management unit.”

“Such lack of radical change is hardly galling,” says Christopher Thompson on Breakingviews. Gulliver has left the bank with a “solid” capital ratio of 14.7% at the end of June, “well in excess of its 13% target, underpinning dividends”. HSBC’s shares have also bettered the STOXX Europe 600 Banks index by a “whopping” 45% over the last two years. Now, shareholders in Europe’s biggest bank by assets want more of the same. And who could blame them?

City talk

“Chat to any City high-ups and the conversation always eventually turns to the question: how long do you give Jes Staley?”, says Jim Armitage in the Evening Standard. The longevity of the Barclay’s CEO, a post he has held for two years, is the “debate de nos jours”. The Financial Times “has given the issue an acre of pink space”, citing plenty of frustrated shareholders.

Yet he hasn’t done badly at all. Staley “took down the ‘Do Not Resuscitate’ notice” at the troubled investment bank when he joined, and “turned the oxygen back on”, making big hires and investing in technology. Yes, there’s still plenty to do, but impatient observers should cut him some slack.

Moya Greene’s credibility is on the line, says Nils Pratley in The Guardian. The Royal Mail boss agreed an “agenda for growth” deal with the union when the service was privatised in 2013 – pledging to protect jobs in return for five weeks of arbitration before any walkouts could take place.

So Greene needs to be able to show that “the wording was legally watertight” now that the matter has come to court. Similarly, union leaders, who plan to strike next week and insist that mediation has already happened, will look foolish if their argument fails. Whatever the High Court decides, the loser will be on the back foot.

Tesla boss and founder Elon Musk is a risk-taker, says Charley Grant in The Wall Street Journal – a quality that has endeared him to analysts and investors alike. But there is a fine line between “setting aggressive goals” and “misleading shareholders” and the company is inching closer to that line.

It turns out that only three of the “highly anticipated” Model 3 electric cars were being made per day in the third quarter. So Musk must have known he was never going to hit the target of 1,500 by the end of September – a shortfall the company put down to “production bottlenecks”.


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