The motivation of the KAL-CZA is not immediately apparent.  It takes a slightly deeper look before the deal begins to look strategically sound, even elegant.

On March 13, 2013 the Czech government granted Korean Air Lines Co. LTD (KAL) approval to acquire a 44% stake in the loss making Czech  Airlines (CZA).  One month later the ink was drying and the champagne flowing on the completion of the transaction.   The deal was valued at  2.64MM EUR/2.25MM GBP/3.4MM USD in shares.

As of tomorrow, June 1, 2013, scheduled services start between Seoul and Prague, with KAL providing the majority of the metal for the six-day a week service.   KAL will operate on Monday, Wednesday, Friday and Saturday with Czech picking up the Tuesday and Sunday slots, with a plan to start a Thursday service at a future date.

On the surface the deal looks a bit unusual for several conventional reasons.

The first is Czech Airlines was heading towards extinction and had not seen consistent profits in quite some time.  Things were indeed so bad that Czech Finance Minister Miroslav Kalousek was quoted as saying, “We only had two options: either find a strategic partner or consider liquidation of the airline.” So this helps explain the bargain price for the 400,000+ shares, and legislative speed with which the Czech authorities cleared the deal.

The second question is what is behind KAL’s decision to acquire such a stake in a failing carrier?  How does it benefit?   The evidence is not clear to me using the traditional measurement models that are generally accepted in the airline business.   The fifteen new city pairs on sale in the Asia-Pacific market are, with the exception of those on Japan, not a likely European passengers’ first choice.

I believe that the key to this deal is a unique and visionary mix of the product above the wing, high-load factors below the wing, and the ground game at destination/transit airport: Incehon.

In my view one of the areas where KAL excels is its cargo network. Clearly, from a components and manufacturing point-of-view the Republic of Korea (South Korea) has been in an enviable position for many years.   Being the home of several world class brands in electronics, bio-medical, automotive, and manufacturing- the likes of Samsung, LG, Hyundai, CJ put South Korea firmly on the map as a global powerhouse.

Then you have to look at what the Czech Republic has on offer and you start to see some startling synergies. The Czech Republic has an enviable reputation in the engineering, design, and manufacturing of automotive parts and products.   Taking a closer look you see that there are already strong ties between the two Republics . There are several strong pharmacutical and electronics firms, but where the synergies are even more apparent is in the automotive sector.  There is a rather large scale Hyundai automotive plant in Nižní.  This plant, according to Hyundai, has annual sales of 47MM EUR/40MM GBP/60.0MM USD, and “The plant contributes significantly to the €1,3 billion of parts ordered from within Europe by Hyundai each year.”

If KAL had a truly burning desire to make a European acquisition, there were perhaps more traditional airlines that it could have targeted for an ownership stake.   It was the carrier thinking outside of the box and risking some above the wing capacity that makes this remarkable.  Surely there were alternatives that would have served the growing cargo demand, such as just putting in KAL Cargo aircraft.   KAL has two not-so-secret weapons.  The first is its in-flight product offering which rivals that of Gulf carriers whilst the second is one of the world’s leading airports is its home. Seoul’s Incheon Airport is consistently voted among the world’s top airports by passengers from around the globe.   Having been there three times in the past twelve months myself I can vouch for the fact that it is indeed a truly unique and enjoyable experience to arrive at Incheon.

While the deal may seem a bit unconventional on the surface, I believe that the decision to acquire the stake in CZA shows vision and an appetite for risk on the part of KAL. It is something that has paid off for them in the past. I believe that it will continue to delineate itself from the competition and attract a larger share of the European traffic heading for Asia.  With the revived partnership in Prague KAL and CZA they are in a unique pricing position to offer competitive fares (somewhat like the Finnair model) but providing a higher quality of in-flight product and service than is generally reserved for transits through the Gulf.  The below-the-wing Cargo business should continue to thrive and over time there is potential for investment in CZA’s other European operations.

So perhaps, as with so many things in life, this deal has a very unique beauty and grace that some of us may not have immediately seen.

Article Overview

-EU ETS will include Aviation from 01 JAN 2012

-The UK Deadline for filing your benchmarking and emissions plans is 31 March 2011

-Are you included on the latest list of operators issued by EUROCONTROL in early February 2011?

-Do you know if you are covered by EU ETS?

-Do you know what flights are exempt from EU ETS, and are your included?

-If you are not sure what to do in regard to EU ETS, or even are unsure if you are covered by the new regulations please feel free to get in touch.  We can help!

 The EU Emissions Trading Scheme (EU ETS) is set to include aviation from 01 JAN 2012.   EU ETS brings with it a whole new level of new dynamic market pricing that aircraft operators will need to  factor into their formulas, and if initial estimates are correct we could be talking about anywhere from €5-18 per passenger (depending on the route) if prices for EUAs stay at today’s levels.   

Before we get to that point, however, there are many foreign carriers and aircraft operators who may not be aware that they have been listed on the latest version of EUROCONTROL’s ANNEX I.    Are you?   If you are not sure you can refer  http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:039:0001:0120:EN:PDF

While many of the US carriers have filed suit to contest this EU Directive (and the individual EU Member State Laws related to it) and that the has not yet been ruled on by the European Court of Justice.  The US airlines involved are still, as we understand it, voluntarily complying with the requirements of the scheme.  For other carriers this means those who are not exempt from the scheme have hopefully already applied for the “allocation of free credits” as well as submitted benchmarking plans, obtained certifying bodies, and put in place monitoring plans that are acceptable to their respective EU State they have been allocated to by 31 MAR.  Carriers are due to hear in September of this year from their regulatory EU Member State as to what their share of the “special reserve” or other “free credits” are to be.   

Last Monday the EU made the formal announcement about the final CO2 caps, and the simple math says that while approximately 80% of the carbon credits needed by the industry will be part of the free allocations, that leaves 20% subject to market forces.  With an EUA trading at around €15-16 at the moment, there is some level of exposure to the several thousand of the world’s carriers operating into the EUROCONTROL zone. 

Some analysts are looking for a price correction with the introduction of AAs to the ETS marketplace, with some projections taking them up to €18-20 per credit.  I believe the number will be somewhere between €19-22 when AAs are introduced to the market, based on the projected shortfalls, and also a number of non-EU carriers who did not meet the criteria for a “free allocation” scramble to cover their exposure not fully understanding that the first point of surrender of these credits is not until MAR-APR 2013. So airlines, and other air carriers, have time to play the market a bit and participate in EU Member State auctions to make up their shortfalls.  Though we would not want to be in the market for significant AAs or EUAs in early 2013!

Many of our foreign carrier aircraft operators have required some assistance with the regulations, compliance, and even just the overall processes involved in the scheme.   If you are need of assistance or support, we would be happy to help!  Please feel free to contact us today at +44 208 588 0602 for an initial consultation.

The ever-increasing number of individuals around the globe who are over-sized for the average airline seat will have a major impact on aircraft interior design. Two separate trends in body types, the larger passenger and the taller passenger, will require that airlines revisit their design approach and focus on people centred innovation to provide solutions.

Obesity, as measured by medical professionals in terms of BMI (Body Mass Index) and the prevalence of taller people are an undeniable part of our future. Trends also show that this very BMI may have a flaw in the future, due to the fact that some people are now growing taller than their ancestors. In some cultures, primarily Asian and South American, there have been dramatic changes that are beginning to be seen by medical professionals.

While there is a lot of discussion around the core reason for these changes, that is not as important to the commercial airline industry as what to do with the changing size and shapes of passengers. Some carriers already have a policy about “obese” passengers, but they are defined by a set of inconsistent factors. One of the more common measurements (and one that got a certain amount of notoriety from actor Kevin Smith while attempting to fly Southwest Airlines) is if a passenger “can comfortably lower the armrest”. I am relatively confident that this will be an issue in years to come.

Airlines and Obese Passengers
Another common policy that airlines follow is to have larger passengers purchase two seats on a flight, or to pay to upgrade their travel to another cabin. As capacity reduction continues to put some pressure on the ability of airlines to deliver these seats on short notice, there will also be a need to identify passengers ahead of the flight.  This has some potential legal and social implications that may be unpalatable to most carriers.

Often lost in this discussion is the comfort of other passengers who are sharing the space with the obese passenger.   There is a potential customer service issue for airlines as other passengers potentially complain about the loss of personal space already at a premium.

There are potential issues around aircraft safety, as passengers changing shape and sizes may cause some to question if some aircraft emergency exits are even accessible to these individuals.

What can airlines do for Super-size Passengers?
What new innovations are available to carriers to deal with this evolving need in all classes of service? There are some changes with so called “sliding seats” that may allow for airlines to offer slight adaptations to seat size. However, these represent safety challenges with the size of the aisle being potentially reduced.

I believe that there are not commercially available economy seats to deal with this issue, as airlines do not fell that they need or want to invest in this area of development. I believe that a more proactive approach is called for, and developing adjustable seating or even select seating that is truly wider will offer both passengers and airlines a better solution to addressing this emerging “mega-trend”.

At the same time, there are premium seating solutions in forward cabins that do make flying more comfortable for people of all sizes. However, these may be economically unfeasible for many passengers.  In this case, I do see a day where additional potential legal challenges may be faced by air carriers in places like the USA by an obese person who may claim that their size is due to a disability and is therefore protected by law. Carriers will need to proactively examine the potential range of solutions that could be available.

Airlines and the Taller Passenger
In a completely separate issue, there is obviously better news for taller passengers and travel on some airlines.  Some airlines have a gate control policy that allows them to “gate control” the seats with more legroom for passengers they feel could benefit from the additional space.

There are also a number of carriers offering “extra legroom” or “premium seats” in the economy cabin. That said, some carriers also charge for these seats, which some taller passengers may feel is unfair. In addition, with the increase in Low Cost Carriers (LCCs) over the last decade, there has also been ever so slight erosion in seat pitch (the distance between one row and the next). This presents the taller passenger with comfort challenges, but may give some carriers an advantage with this segment of the traveling public.

What can airlines do for taller passengers?
For this particular trend, most carriers have a product that is already available in their economy class, including on some smaller regional jet services. Overall, while there may be an increase in demand for more legroom in economy class, I do not foresee airline economics allowing for what American Airlines used to refer to as “More Room throughout Coach”- a product that offered the entire cabin more space.

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If you are you interested in knowing more about this subject, here are a few links that talk about the core of the issue and offer additional insight on the causes and social impacts in a broader sense:

Inside Government Workshop on Obesity
http://www.insidegovernment.co.uk/health/obesity/index.php

US National Institute (NIH) of Health on Obesity
http://health.nih.gov/topic/Obesity