Analysis for North America

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.

Aeromexico sees domestic slowdown as it places landmark aircraft order

Aeromexico has concluded the dynamism of the Mexican domestic market has slowed, and plans to focus the remainder of its growth in 2H2012 primarily on international expansion in the hopes that soft domestic yields will improve.

But even as the Mexican domestic market appears to be leveling off, Aeromexico believes the country’s economic growth overall remains promising, and is taking steps to create crucial fleet flexibility to ensure it can weather swinging economic fortunes through a pledge to purchase up to 100 Boeing 737 Max and 787-9 jets that allows the carrier to size its fleet upwards or downwards to accommodate market conditions.

San Juan airport tender won by Aerostar, an ASUR–Highstar Capital consortium

An unusual alliance between a Mexican operator of nine airports with limited experience of foreign operations and a US investment fund manager with one small airport investment in Europe has won the tender for the lease on San Juan Luis Muñoz Marín International Airport.

This is the second time Puerto Rico, a US territory, has handed over a publicly or government-owned asset to a private concern in a public-private partnership (PPP).

Puerto Rico, via its Public-Private Partnership Authority (PPPA), auctioned its Puerto Rico Highway 22 in a toll road concession in 2011. It is notable how often toll road concessions precede airport concessions in the Americas, including the US (Chicago).

Hawaiian Airlines tops off rapid expansion with plans for a new inter-island subsidiary

Fast-growing Hawaiian Airlines has broadened its significant expansion to include the establishment of a new inter-island subsidiary to operate smaller turboprop aircraft to destinations not viable for its current inter-island workhorse the Boeing 717. The recently unveiled plans occur as Hawaiian is working to reverse negative revenue performance it experienced in its inter-island network during 1Q2012 after it launched a new hub in Maui.

As Hawaiian is crafting its new regional strategy its likely rival in some of the smaller markets Island Air is planning to upgauge its fleet to higher-capacity ATR aircraft, which could create unsustainable levels of capacity on the smaller inter-island routes. All this shuffling is against a backdrop of Hawaiian’s aggressive push into long-haul markets from its Honolulu hub into Asia, joined by new expansion into Australia and New Zealand.

American’s revenue momentum continues as US Airways intensifies merger push

Top management at US Airways continues to push its argument that a combination with American Airlines would address the severe network challenges American has created for itself during the last few years as it sat out a major wave of industry consolidation in the US. There is credibility in the theory that an American-US Airways tie-up would create a carrier of significant scale to rival the giants that United and Delta have become.

But at the same time US Airways is emphasising American’s network weakness, the Dallas-based carrier is recording revenue gains that are industry-leading, which indicates US Airways maybe the the larger benefactor if the merger becomes a reality. On the same day that US Airways CEO Doug Parker lambasted American’s “cornerstone” strategy that centres American’s network around five hubs in Dallas, Chicago, Miami, New York and Los Angeles, American recorded a 2Q2012 rise in consolidated unit revenues of 9.1% and year-over-year growth in domestic unit revenues of 8.6%. The company’s 5.5% rise in revenue for 2Q2012 to USD6.5 billion was the highest in its history, according to the carrier.

Despite new air routes, traffic between Japan and the US is down from last decade

All Nippon Airways (ANA) on 25-Jul-2012 is launching a Tokyo Narita-Seattle service, one of several new routes between Japan and the US to open this year. While these services will grow the market, US-Japan traffic is 25% below 2005 levels, the peak over the past decade.

Traffic has declined between Japan and the mainland US as airlines have reduced frequencies and downgauged services, typically from Boeing 747-400s to 777s, coinciding with a global gradual reduction of the 747. The US leisure markets of Guam, Hawaii and Saipan have also seen sharp decreases.

As ANA, Japan Airlines (JAL) and United Airlines launch new services this year, many to be operated with new 787s, Japan-mainland US traffic could recover to pre-global financial crisis levels. But a complete recovery in the full Japan-US market is unlikely to occur in the medium term.