Analysis for Global
At the Paris Airshow, Wizz Air signed a MoU with Airbus for the purchase of 110 Airbus A321neo aircraft, with deliveries to start in 2019, and uncommitted purchase rights over an additional 90 A321neo aircraft. The order is subject to a final purchase agreement and approval by the shareholders of Wizz Air, which listed on the London Stock Exchange earlier this year.
Such approval is typically forthcoming and the new aircraft should provide significant unit cost improvements. Nevertheless, Wizz Air's order is very large compared with its size today and follows large orders for narrow body aircraft in recent years for other leading European LCCs, including Ryanair, easyJet, Norwegian and Vueling (the latter as part of an IAG group order).
Norwegian has admitted that it may not be able to use all of its planned aircraft and Wizz Air's order now provides an opportunity to review the data on the number, and types, of narrow bodies on order in Europe. Narrowbody deliveries to Europe look set to rise, at a time of rising global deliveries. Success is not guaranteed for all. Meanwhile the expanding role of LCCs in both leisure and business markets continues to undermine the positions of legacy airlines on short haul routes.
CAPA is pleased to announce our flagship World Aviation Summit, to be hosted by Finavia in Helsinki on 7/8 October 2015. Host airline, Finnair, will be conducting a VIP flight for Summit delegates and guests on 6 October with a brand new Airbus A350 which will be inducted into the fleet just days prior to the event.
The World Aviation Summit will also feature a gala dinner on 7 October for the 2015 CAPA Awards for Excellence, for which nominations will be accepted through 9 July 2015.
This year's Summit will address the essential issues facing the global commercial aviation industry: Open skies, Subsidies, Ownership, Alliances, Distribution, Productivity – and delivering for the consumer.
United’s decision to drop its premium transcontinental service from New York JFK to Los Angeles and San Francisco reflects a significant shift in the product proposition in those markets during the last few years, and more broadly, is a reflection of a trend spurred by consolidation of the large US airlines leveraging strength at their largest hubs. In this case, United aims to capitalise its dominance at Newark rather than flight a losing battle at an airport where it has little concentration.
All the airlines in the New York transcontinental market with the exception of Virgin America have overhauled their product offering to cater to the important business passenger base on those routes. JetBlue has arguably been a market disruptor, both through its high quality Mint premium offering and its added capacity on those routes.
The shift is underpinned by a proposed slot swap between United and Delta at JFK and Newark, which is subject to regulatory approval by a government that could view the swap negatively, and insist that other airlines should gain slots to preserve competition.
Brazil’s fourth largest airline Avianca Brazil marks a milestone in Jul-2015 when it formally joins the Star Alliance. With Avianca Brazil finally entering Star the alliance will be able to fill some of the void left by TAM, which jumped to oneworld in 2014 as a result of its 2012 merger with LAN.
But Star has also been courting Brazil’s third largest airline Azul, whose chairman David Neeleman recently prevailed with his partners in acquiring TAP Portugal, a Star member which is also the largest carrier in the Brazil-Europe market. For now Azul does not seem interested in joining a global alliance and is instead focusing on concluding codeshare discussions with JetBlue and United. But eventually Azul could reconsider and give Star two Brazilian members.
Although Brazil is presently enduring economic weakness, Star’s pursuit of two airlines to fill the gap created by TAM’s exodus shows the long-term strategic value of the country, which is by the largest in Latin America. Star clearly sees a need for two Brazilians members in order to fully restore its presence in the Brazilian market.
The much-celebrated growth of Chinese tourism is not occurring evenly. An additional 3.8 million Chinese visitors travelled to core Northeast and Southeast Asia in 2014 compared to 2013, representing 19% growth. But this growth was concentrated exclusively in Northeast Asia while Southeast Asia actually contracted. This excludes Thailand, which is earning its "Teflon Thailand" reputation: after flat performance over much of 2014 due to political uncertainty, Chinese visitors have sprung back up to all time highs. Its neighbouring countries are far less fortunate. It is little wonder Korea, Thailand and Japan are the largest growth markets for Chinese airlines.
Despite weakness in Southeast Asia, foreign airlines are typically not planning to further reduce capacity. As one example, Singapore Airlines instead plans to link outbound China traffic with other markets, such as Australia.
Rapid growth within Northeast Asia now means that Chinese visitors have come to define tourism profiles: they accounted for 18% of all visitors to Japan in 2014, 43% to Korea and 40% to Taiwan. Such high shares become contentious locally – and risks that countries and airlines need to carefully manage.
It was not Japanese aviation's proudest day when All Nippon Airways was selected to sponsor the re-rehabilitation of bankrupt Skymark Airlines, the country's third-largest airline. Putting Skymark under the wing of ANA thereby returned air transport to an ANA-JAL duopoly that the Japanese government has for years worked in vain, and perhaps unenthusastically, to prevent.
Now foreign forces may reverse the situation in a challenge to Tokyo's preferred political outcome. Airbus and lessor Intrepid represent the majority of Skymark's debt, allowing them considerable weight over Skymark's restructuring plan – if a Tokyo court, undoubtedly under political pressure, gives airtime to non-Japanese concerns. At the centre of the dispute are Skymark's discarded A330 and A380s that are customised and difficult to place with other airlines. It appears Airbus and Intrepid expected ANA to offer a satisfactory solution for the aircraft but now there is none.
Airbus and Intrepid may prefer Skymark to restructure with the help of a different airline that will remedy the A330/A380 situation. Skymark has been shopped around to most of the world's airlines; China's HNA put in an offer; Delta could be a candidate, still lacking a Japan solution. A Skymark independent of ANA is in Japan's interest, if the country can accept a foreign airline as its partner.
Canada’s two major airlines have adopted divergent - but ultimately converging - paths during the last few years to lay the foundation for expanding margins and ensure sustained positive financial results. WestJet has opted to create a product mix to attract a higher percentage of business travellers while attempting to avoid alienating its core cost conscious customer base. Air Canada has decided to increase its reach among leisure passengers.
Overall, each airline’s respective strategy appears to be paying off in the form of solid returns, margin expansion and increased profitability. But both airlines in the short term are facing unit revenue and yield pressure for different reasons.
Similar to most US airlines, WestJet and Air Canada continue to deliver strong top-line results even if unit revenues remain under pressure. But if oil prices, which are slowly ticking upwards, suddenly start to rapidly rise, Canada’s airlines may need to revisit their capacity projections as overall supply in some regions is exceeding GDP growth.
The three large US global airlines are continuing their quest to shed inefficient 50-seat jets in favour of larger gauge aircraft, a trend sweeping the US industry with nearly every major airline undertaking some form of seat densification on existing aircraft or taking delivery of jets configured with a higher number of seats.
United and Delta are opting to replace their 50-seat jets with a mix of new and used aircraft, and American appears to be adding new jets to replace its 50-seat aircraft. Based on current fleet projections American is moving more slowly in culling its 50-seat regional jets while Delta has been the most vocal and aggressive in shedding the smaller aircraft.
Even with the big push to shrink the 50-seat jet fleet, some US majors are extending contracts with their regional partners covering a small number of those aircraft. Perhaps in a few markets lower fuel prices improve the economics of the jets; but overall airlines are marching ahead to rid themselves of aircraft that were a mainstay in regional operations a decade ago.
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