Analysis for North America

Saudi Arabia reports strongest passenger growth in a decade as market prepares to expand

After several years of sagging performance, Saudi Arabia’s aviation market reported its strongest growth in passenger traffic in more than a decade in 2011, even against the background of the Middle East’s regional social unrest. Despite the Arab Spring uprisings in North Africa and some of the Gulf states, Saudi Arabian passenger traffic boomed in 2011, up 13.6% year-on-year in 2011, to just over 54 million passengers, as the national economy expanded 6.8% (real GDP estimate) on expanding oil output and renewed government and private sector investment. Large infrastructure investments are fuelling high movements of migrants workers from around the Gulf as well as India, Southeast Asia and China.

TAM and Gol continue to rein in capacity as Brazil's economy slows

Continued downward revisions of Brazil’s economic growth for 2012 have weakened domestic demand in the country, forcing its two largest carriers Gol and TAM to continue to trim capacity to ensure their supply growth is in line with the moving GDP target.

Gol’s new CEO Paulo Kakinoff in a 14-Aug-2012 discussion with investors outlining the company’s 2Q2012 loss of BRL715 million (USD409 million) stated the Brazilian economy “has disappointed many of us during the first half of the year”, noting that originally GDP growth was projected at roughly 4% for 2012. During 1H2012 growth was essentially flat, said Mr Kakinoff, and now GDP is expected to grow in 2012 by only 2%.

Gol, which has been reducing domestic capacity throughout 2012 has further refined its guidance as Brazil’s economy appears to be slowing. Previously, Gol has estimated its domestic capacity would drop by roughly 2%. Under its latest revision Gol now expects its domestic supply to decrease between 2% and 4.5% during 2012.

JetBlue keeps focus on Florida and Caribbean with new routes as it plans up to 8.5% growth in 2012

JetBlue’s plan to grow its capacity on the high side for the US industry by 6.5% to 8.5% in 2012 is reflected in a planned roll-out of new destinations to the Caribbean, Florida and Latin America during 4Q2012. Those regions, particularly the Caribbean and Latin America, are the primary growth vehicles for the carrier as some other US airlines retrench in those areas. The airline’s new Florida markets build on JetBlue’s strong brand awareness in the region as the airline expands into Florida from the less dense market of Providence, Rhode Island.

Executives at JetBlue recently stated the carrier continues to grow profitably in the Caribbean and Latin America, with those regions representing 10% of the 7% to 9% capacity growth the carrier expects to record during 3Q2012. The airline’s other major growth market, Boston, is accounting for about 7% of the 3Q2012 capacity growth.

Frontier’s ongoing network overhaul shows promise through solid revenue improvement

A network overhaul undertaken by Frontier Airlines in 2011 that entailed significant pull-downs in Kansas City and Milwaukee in favour of new point-to-point markets and a focus in Denver and Colorado Springs appears to be bearing fruit as the carrier in 2Q2012 recorded pre-tax income of USD14 million, reversing a USD33 million pre-tax posted in the prior year. Much of the improvement can be attributed to the network revamp that served at the centre of a restructuring at Frontier that delivered a total of USD136 million in cost improvements.

Frontier parent Republic Airways Holdings estimates that network and fleet changes represented USD50 million in the cost improvement programme as both unprofitable markets and aircraft were eliminated from Frontier’s operations.

Between 3Q2010 and 3Q2012 the relevance of Milwaukee and Kansas City in Frontier’s network dropped markedly. During 3Q2010 Milwaukee and Kansas City accounted for 16% and 5%, respectively, of Frontier’s capacity. By 3Q2012 Milwaukee represented just 1% of the carrier’s available seat miles while Kansas City dropped 3 ppts to 2%.

Allegiant’s addition of A319s offers both network expansion opportunities and fleet flexibility

Underpinning the economics behind Allegiant Air’s decision to introduce 156-seat Airbus A319 narrowbodies into its fleet during 4Q2012 are the network expansion opportunities the aircraft provide and a new level of fleet flexibility to ground nearly depreciated aircraft if market conditions take a change for the worse. At the same time the carrier’s third fleet type comes online, Allegiant is adding new Boeing 757 service to Hawaii, giving the small US domestic markets of Boise, Idaho and Spokane, Washington direct access Honolulu.

The Boeing MD-80 was the foundation of Allegiant’s fleet from the early 2000s until the carrier began operating 757s in 2011 as it worked to gain requisite approvals to operate those aircraft on their original mission to Hawaii. Allegiant inaugurated flights from its Las Vegas base and Fresno, California to Honolulu in late Jun-2012, and during 4Q2012 and 1Q2013 the carrier plans to add more service to Hawaii, expanding its strategy of connecting small cities to large leisure destinations beyond the US mainland.

US low-cost carriers offer little insight beyond 3Q as they attempt to contain cost creep

Low-cost and niche carriers in the US enjoyed robust 2Q2012 earnings growth fuelled by solid demand that is carrying over into 3Q2012. But at the same time the country’s top LCCs are facing challenges in their core strength as nearly every airline in that category recorded rising unit costs during 2Q stemming mainly from a spike in maintenance spend. As is the case with demand projections, most of the low fare carriers are not offering insight of when the cost creep might abate.

US leading low-cost carriers JetBlue, Alaska Air Group and Spirit Airlines grew their 2Q2012 profits by 108%, 24% and 35% (Alaska and Spirit’s rise exclude special items), respectively, joining 42% profit growth at Southwest Airlines. The strong year-over-year profit growth was driven by what the carriers deemed a solid demand environment, which helped to drive solid unit revenue growth at all four of the airlines.

Alaska Air concludes service gaps to Hawaii are largely filled

Alaska Airlines’ aggressive push into Hawaii after the nearly overnight demise of Aloha Airlines and ATA in 2008 appears to be leveling off as the carrier has determined that the rapid growth it has engineered to the islands will slow as the service gaps created by the abrupt exodus of those carriers have largely been filled. At the same time the carrier is seeing some competitive pressure at its Portland hub while taking advantage of a less competitive market with the addition of new service from San Diego.

Alaska expects its service to Hawaii to account for about 20% of its supply in 2012, a 13 ppt jump from the 7% of its flights dedicated to Hawaii in 2009. The carrier has adopted a strategy of launching service to Hawaii from US markets that do not have a large service footprint to the islands, and as a result has shielded itself from competition on those routes from mainland US carriers. At the end of 2011 Alaska estimated that more than 60% of its Hawaiian markets were not served by other carriers, driven by the carrier’s strategy to largely shun Honolulu in favour of direct flights to other markets in Hawaii. The carrier does offer flights to Honolulu from its Anchorage, Portland and Seattle hubs, and from the California cities of Oakland, San Jose and San Diego. It also serves Honolulu from Bellingham, Washington. Alaska competes with Hawaiian Airlines in four of those markets – San Jose, San Diego, Portland and Seattle.