Analysis for North America

China Southern to finally commence long-haul A380 services, but operation still faces challenges

A year after taking delivery of its first A380, China Southern Airlines has finally received permission from the Chinese government to operate the aircraft on long-haul routes, allowing China Southern to take its four aircraft off three daily loss-making short-haul flights. China Southern would only quantify the A380's losses in the first six months of 2012 as under RMB100 million (USD15.85 million).

But China Southern still has work ahead of it. Its first of two planned long-haul routes, Guangzhou-Los Angeles, will see capacity increase 77.8% once the A380 is deployed in Oct-2012. There will likely be a significant period for China Southern to spool-up profitable demand and appropriately market its sixth freedom network. Its second route, Beijing-Paris CDG, is not the outcome the carrier would have hoped for: it will have to partner with Beijing-based competitor Air China, which as the national carrier enjoys elements of protectionism. But without the cooperation China Southern would have struggled to find alternative routes.

Delta keeps select small markets through new Silver Airways partnership and adjusts LaGuardia flying

Delta Air Lines is retaining ties to a handful of some of its economically unviable smaller markets through a new partnership with Florida-based Silver Airways, which will serve the markets with 30-seat Saab 340 turboprop aircraft. Delta is partnering with the small turboprop operator after opting to shed the Saab 340s operated by its Delta Connection partner and former subsidiary Mesaba Airlines.

While one scenario does not constitute a trend, Silver Airways’ ability to assume those routes could give some credence to theories offered by some industry observers that as 50-seat jets continue to become undesirable, there is a niche market for smaller turboprops.

At the same time Delta is carefully selecting small markets where it plans to retain a presence, the carrier is making some tweaks at its newly-minted LaGuardia hub. This includes service cuts to Albany in New York, Dayton in Ohio, Ottawa in Canada and Philadelphia in Pennsylvania.

SkyTeam plans new partnership platform to attract hybrids and LCCs, especially in Brazil and India

In the past year, the global marketing alliances – oneworld, SkyTeam and Star – have found themselves facing two large dilemmas. First, almost all of the world's major airlines have become aligned to a global alliance, making it difficult to increase value. The standouts are largely low-cost carriers and Middle East network carriers. Second, internal segmentation has occurred as member carriers, under pressure to be smarter and more strategic, form tight relationships outside of alliance lines. That inverts the loyalty proposition: where carriers once associated themselves with a marketing alliance, now the primary association is often to key members, with the alliance alignment secondary.

SkyTeam's solution is consideration of a hybrid partnership platform. Details are being worked through but the framework would target the low-cost and hybrid carriers that largely comprise the unaligned standout carriers.

Air Canada and WestJet cite steady demand as they work to launch new subsidiaries

Canada’s two largest carriers, Air Canada and WestJet, are voicing no concerns about declining demand even as some indicators show that high debt levels and high unemployment rates are weakening Canadian consumer confidence. If that weakness intensifies, both carriers could face significant headwinds in 2013 as they endeavour to launch new airlines to broaden their reach into new markets. If domestic conditions worsen it could affect the necessary cash flow generation required by those airlines to support the launch of their new business platforms.

But in the meantime Air Canada and WestJet are confident the demand that helped each carrier to achieve strong operational results in Aug-2012 will continue. Air Canada recorded a 88% load factor on essentially flat traffic and capacity growth while WestJet recorded 5.6ppt growth in loads to 89% on 9.2% growth in traffic and 2.3% expansion of supply year-over-year.

United seeks to combat merger challenges and shore up its balance sheet

United Airlines believes the pain it has endured from its merger integration with Continental throughout much of 2012 is a regular byproduct of the complex process required in combining two companies. But the carrier is not disregarding the operational integrity that has vanished from its service during the last few months, and is working to correct those issues while working to get its financial performance in order to consistently deliver a return on invested capital in excess of 10%.

During the busy summer months between Jun-2012 and Aug-2012 United’s on-time performance fell by 4.6 ppts, 10.2 ppts and 4 ppts, respectively. Based on data reported to the US Department of Transportation (DoT) in Jun-2012, United reported the lowest on-time arrival of US carriers rate at 70%. United CFO John Rainey recently declared to investors that the carrier’s operational performance during the summer was unacceptable to its customers, while CEO Jeff Smisek admitted the less than stellar performance was triggered by “some mistakes on our part”.

Emirates continues courting American as ink dries on Qantas deal

Emirates is continuing a year-long pursuit of a codeshare tie-up with American Airlines as its landmark deal with American’s fellow oneworld partner Qantas continues to rattle age-old assumptions about the value of alliances in the current aviation marketplace. Emirates’ attempts to forge strategic agreements with two oneworld partners should not be interpreted as a prelude to alliance membership. Of the three large Gulf carriers Emirates remains steadfast in its strategy of pursuing organic growth, while Etihad and Qatar seem more inclined to forge equity stakes in other carriers or explore fully-fledged alliance membership.

Should Emirates prove successful in persuading American to forge a partnership, it could create thorny issues in American’s current relationship with Etihad and Qatar’s reported interest in joining oneworld. Emirates president Tim Clark outlined the carrier’s desire to partner with American on 12-Sep-2012 near Washington, DC, at a celebration marking the inaugural flight of Emirates’ new service from Dubai to Washington Dulles International Airport.

Delta’s unconventional fuel hedging strategy to be put to the test as its refinery opens

Scrutiny over Delta’s controversial decision earlier in 2012 to purchase an oil refinery located south of Philadelphia, Pennsylvania will be revived in the coming days as the idle facility prepares to restart production at the end of Sep-2012. With the rapid run-up in jet fuel prices during the last 60 days Delta’s latest efforts to combat fuel price volatility will be closely watched by its competitors and the greater energy industry at large to determine if the carrier’s carefully constructed gamble to control fuel costs pays off.

As the start of full-scale production approaches, Delta’s enthusiasm for the project continues to grow as it aims to seek to alleviate the alarmingly rising rate of crack spreads, which during 2011 accounted for roughly 18% or USD2.2 billion of the carrier’s total USD12 billion fuel costs.

Hawaiian, JetBlue and Southwest see some weakness in demand heading into 3Q2012

Some US carriers are conceding slight softness in leisure demand and yields as the typically weaker travel period ushered in at the beginning of Sep-2012 continues to take hold. Against the backdrop of the diminished demand is an underlying concern by all carriers of rapidly rising fuel prices that continue to drive a hard to manage volatile pricing environment. Yet despite the softness cited by some of the lower-cost airlines operating in the US, their growth plans remain unchanged as they prepare for new market roll-outs beginning in 4Q2012 to coincide with some typical improvement in demand patterns.

The overall sentiment among the US lower-cost carrier group appears to be less bullish than the outlook expressed by the country’s legacy airlines. Those carriers believe demand remains relatively stable as 3Q2012 comes to a close, and for the moment expect that stability will continue throughout the remainder of 2012.