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Analysis for Global

Aeromexico and Volaris increase international spread to strengthen yields; and VivaAerobus follows

25-Sep-2014 8:30 PM

Mexican airlines Aeromexico and Volaris are sticking to their proclaimed strategies of deploying most of their capacity into international markets as the Mexican economy slowly rebounds from a sluggish 2013. Through the first eight months of 2014 each airline increased their international capacity and traffic significantly, betting that yields are stronger in international markets.

The competitive overlap between Aeromexico and Volaris on each airline’s top US transborder markets is not overwhelming, and Volaris has previously stated that it is targeting routes with a higher percentage of visiting, friends and relatives (VFR) travellers.

Aeromexico’s and Volaris’ rival VivaAerobus is also making a new transborder push during 2014, upping competition with Aeromexico and Interjet on some of its international services. It is tough to determine if the push is creating oversupply; but the international growth indicates Mexico’s airlines are attempting to counter weaker yields on the country’s domestic routes.

US investment grade airlines deliver consistent returns, and pledge to continue full steam ahead

24-Sep-2014 7:03 PM

It is no surprise that the two US investment grade airlines have recorded the most consistent shareholder returns during the past few years. Neither Alaska Air Group nor Southwest Airlines shows signs of slowing their shareholder reward schemes, reflected in Southwest doubling its dividend in May-2014 and Alaska’s consistent share repurchases and dividend pay-outs in 2013 and 2014.  

The two other US hybrid airlines Hawaiian and JetBlue have less definitive plans for the form their shareholder returns will take. But reflecting the increasingly vocal base of US airline shareholders, Hawaiian has declared it would outline some form of capital allocation by YE2014.

JetBlue appears to be the one US airline furthest away from offering a timeframe and structure of its shareholder rewards; but it is likely to be top of the airline’s agenda as a new CEO takes the helm in Feb-2015.

This is Part 2 of a two-part series examining US airline shareholder returns.

Gol receives some recognition for its prolonged restructuring. Now the goal is profitability

18-Sep-2014 8:00 PM

Large Brazilian airline Gol is gaining some attention for the restructuring it has undertaken during the past three years as market conditions in its home country deteriorated driven by a weakening economy.

Despite a still tenuous economic environment Gol has worked to improve its financial situation through capacity reduction, the restructuring of debt, network changes and a heightened focus on the corporate customer.

The results are improved leverage, a shrinking of losses and increases in its margins. Gol is refraining from declaring any definitive targets of when it will return to profitability, but believes it could be on a clear path to positive net income by YE2015 as it braces for continued higher fuel costs and currency devaluation.

WestJet Airlines continues to evolve its business strategy with first bag fees. Air Canada next

17-Sep-2014 11:33 PM

After acting coy during the past year about possibly introducing a fee for a first checked bag, WestJet has opted to add the charge into the lowest level of its tiered fare bundles as it seems to be catering to all types of passenger segments.

Of course WestJet’s rationalisation is that it is simply migrating toward the new industry normal of a fee for service model that most airlines promote as giving customers more choice and control over their travel experience. But the reality is the new fee should produce a nice revenue bump for WestJet as it works to fully exploit product unbundling for cost conscious travellers. However, the airline needs to carefully manage how its new charges are perceived among its passengers as the fees have already generated some backlash in social media.

Obvious questions are also lingering about whether Air Canada will join its domestic rivals WestJet and Porter in introducing a fee for the first checked bag on domestic flights. After a suitable time to allow the dust to settle Air Canada will almost certainly follow suit. But WestJet’s fellow hybrid-like airline JetBlue is also likely watching WestJet’s moves since JetBlue has indicated its new fare bundles debuting in 2015 create a framework for it to introduce a first checked bag fee.

Delta Air's refinery shows some positive promise, but the learning curve to success remains steep

3-Sep-2014 8:28 PM

Two years after Delta Air Lines made an unprecedented move to control its largest input cost by purchasing an oil refinery, no definitive conclusions can be drawn about the success of the endeavour. Ironically however, according to one analyst, Delta's investment has had sizeable benefits for its competitors; by using its own facility, Delta has reduced consumption in the open market, causing prices to fall.

Production at the airline’s Trainer refinery has had fits and starts, and Delta has acknowledged that the learning curve in running a refinery was greater than its initial expectations.

But viewed through the lens of helping Delta improve its fuel cost management, Trainer is for the moment making a positive contribution to the airline’s fuel strategy. However, is it only one element in Delta’s fuel cost mitigation scheme, and much road lies ahead in effectively managing Trainer to deliver consistent returns.

Brazil’s domestic aviation market remains stable despite macroeconomic uncertainty

30-Aug-2014 6:48 PM

Brazil’s domestic airline market appears to remain in a rational state as the country continues to battle economic weakness. Its two largest airlines TAM and Gol are maintaining capacity discipline, which is helping each company’s respective performance in the domestic market.

The country’s other two main airlines, Avianca Brazil and Azul, are continuing their solid growth trajectories, but their supply expansion and traffic growth appear in line, which does not seem to be triggering a scenario of oversupply within Brazil.

Brazil’s economy could take a slight upswing in CY2015 as its GDP growth is forecast  at 2.7% versus a more sluggish 1.8% in CY2014, according to estimates from the IMF. If capacity remains rational in the market place, then Brazil’s slightly more promising economy should create some positive momentum for the country’s airlines.

Allegiant cites strong opportunities in the US market as new Mexico service falls in importance

29-Aug-2014 11:36 AM

Allegiant Air continues to stress there are ample opportunities to expand in the US domestic space as its planned transborder service to Mexico appears to be diminishing in priority.

The company believes that its niche is still highly relevant within the US market, highlighting its major advantage of being largely shielded from competition in its markets, a theme consistent with Spirit's thinking too. The logic is prominent in Allegiant’s new routes coming online in late 2014 from Florida leisure markets to small cities, which epitomise Allegiant’s strategy.

But despite strong top line financial results Allegiant is facing cost headwinds in FY2014 from a transaction it concluded earlier in the year to acquire Airbus narrowbodies and crew training expense that could drive up unit costs excluding fuel in 2014 by as much as 8%.

Aircraft manufacturers revel in another likely record year of orders, after strong Farnborough

26-Aug-2014 7:21 PM

With the Farnborough International Airshow over, the major aircraft manufacturers have reported their July orders and deliveries and 2014 is shaping up as another exceptionally strong year for the global airliner market.

Despite the talk of an aircraft ordering bubble, demand remains strong despite some regional weaknesses, order backlogs continue to hit record highs and the major problem for manufacturers is getting their aircraft into the hands of their customers at rates that satisfy them.

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