Analysis for Global

Delta Air Lines aims to usher in lasting business model change with new shareholder rewards

Delta Air Lines’ scheme to return USD1 billion to shareholders during the next three years is the latest example of how the carrier is widening the competitive distance as its merger with Northwest Airlines is essentially done and dusted. The airline unveiled its plans for shareholder returns after months of prodding by investors that have watched Delta pare down its debt, keep capital spending costs in line and generate solid free cash flow.

At the same time the carrier has set new debt reduction targets, it hopes all its efforts to get its financial house in order will lay the groundwork to achieve investment grade status, something Delta admits it will not attain anytime in the near future.

Through its latest moves Delta is also attempting to prove that the newfound stability in the US airline business has staying power after a decade of bankruptcies and economic turmoil have forced airlines to undergo a major reset.

LATAM Airlines Group continues to battle pressure in long-haul and Brazilian domestic markets

Weakness in long-haul markets from Brazil continued to pressure LATAM Airlines Group during 1Q2013 as competitive capacity increases triggered depressed loads and unit revenues in its international network. But LATAM’s efforts to restore strength in the Brazilian domestic market and the relative strength in the group’s Spanish speaking companies should help to offset some of the continuing pressure in LATAM’s international network.

The company’s attempts to bolster international service during the last year to offset some of the continuing weakness in the Brazilian domestic market have faltered somewhat due to competitive capacity increases by American and United in the US-Brazil market, and LATAM’s own expansion of supply in the market. The company’s overall capacity increase in its international markets during 1Q2013 was 12.3%.

Gol shows some signs of financial improvement despite posting a 1Q2013 loss

Brazil’s second largest carrier Gol recorded mixed fortunes during 1Q2013 as its overall losses widened year-over-year but yields and unit revenues improved at what appears to be at the expense of load factor. After recording annual losses for the last two years Gol is hoping an aggressive capacity reduction in the Brazilian domestic market place and a significant reduction in its workforce will help the carrier slowly improve its fortunes.

But Gol faces challenges in achieving its turnaround as company management believes it is uncertain that Brazil will record 2.5% GDP growth in 2013 while inflation is rising. The carrier feels positive about its position heading into the slow season in South America, but the timing of a full recovery for the carrier seems far from uncertain.

Indian Aviation in 2013/14: Jet Airways expected to place 737 MAX and A320neo order

CAPA will shortly release its keenly anticipated annual India Aviation Outlook Report for 2013/14. In this first of a four-part series of extracts from the full 200+ page report, we look at the changing dynamics of the airline sector on both domestic and international routes.

Part 2 examines the policy vacuum that exists in India and the impact this has on the viability and development of the sector. Part 3 will address key issues in airport and airspace infrastructure while Part 4 will consider the outlook for traffic, capacity, yields and airline profitability.

This article reviews some of the key points from the Outlook Report.

WestJet’s solid 1Q2013 performance is dampened by concerns over capacity expansion

WestJet’s significant 33% growth in profits year-over-year during 1Q2013 is being overshadowed by the airline’s planned 9% to 10% capacity growth during 2Q2103 amidst a softer yield environment that shows no immediate signs of retrenchment. The carrier is repeatedly stressing that its decision to expand capacity is sound, highlighting passenger spill it experienced during 2012 when it achieved record load factors of nearly 83%.

While the bulk of WestJet’s planned 6%-7% domestic capacity expansion during 2Q2013 will be dedicated to transcontinental routes, the carrier’s launch of its new regional carrier Encore is occurring as demand patterns are somewhat unpredictable given a slight uptick in the Canadian unemployment rate in Mar-2013 and more profitable close-in bookings showing some signs of weakness.

Air Canada plagued by soft yields in 2Q after helping to trigger a 1Q2013 loss

Air Canada’s achievement of profitability during 2012 was dampened by a 1Q2013 loss driven by a weak yield environment in some of its most competitive markets as premium travel softened. While the carrier concludes booking trends during 2Q2013 are on the upswing, yields are still under pressure as Air Canada continues work on its cost base to withstand pricing actions by its competitors.

A key tenet of the carrier’s strategy going forward is leveraging its international network through a widebody fleet upgrade encompassing Boeing 777s and 787s as it works to shed six older Airbus A340 aircraft during 2013. But in order to execute strengthening its international offerings Air Canada needs to ensure it has enough domestic and transborder feed to support long-haul service, which means it needs to ensure its domestic product remains competitive with WestJet and Porter, which have ambitious expansion plans for the Canadian domestic market.

A recent agreement between Air Canada and the Canadian Government to extend the current pension funding structure until YE2020 was significant in that it helps the carrier stave off increasing funding requirements, but the deal comes with stipulations that essentially prohibit any rewards to shareholders.

Spirit Airlines posts consistent profitability despite rapid-fire new route introductions

Spirit Airlines’ rapid growth during the last couple of years has not compromised the carrier’s profitability. During a time when it is not uncommon for the carrier to introduce 20 new route pairs during a half-year period, Spirit has maintained and grown its profits while undergoing a fundamental shift in its business.

As it continues to turn its attention to the US domestic market, Spirit seems unfazed by JetBlue’s moves into some of Spirit’s Latin American markets, as JetBlue by YE2013 will compete with Spirit on all its markets from Fort Lauderdale to Latin America. But Spirit’s US domestic growth remains unabated, and will account for the bulk of the roughly 22% capacity increase Spirit plans during 2013.

Spirit also declares that it has one of the most enviable cash positions in the industry, which at YE2012 was nearly 32% of the last trailing 12 months revenue. But the carrier’s relatively young status in some ways diminishes the prospect of cash dispersion or other shareholder reward, as Spirit continues work to prove its business model has staying power.

It will be interesting to see how long it is before other airlines feel the need to head off Spirit's growth.

JetBlue Airways continues to exploit Fort Lauderdale with new flights to Lima

JetBlue plans to introduce its first destination south of the equator in Nov-2013 with new daily service from Fort Lauderdale in South Florida to Lima in Peru. The move is consistent with the carrier’s plan to use Fort Lauderdale as a springboard into Latin America as JetBlue indicates more international service from the airport is in the pipeline.

JetBlue is also seizing a prime opportunity to introduce low-cost competition in market where the only LCC presence is a single weekly flight operated by Spirit Airlines. Other carriers operating in the South Florida-Lima market are oneworld partners American Airlines and LAN and Star Alliance member TACA Peru.

Services JetBlue has launched from Fort Lauderdale to Latin America appear to have a short maturation time, which results in the carrier looking to harvest more of those opportunities to balance out new market introductions that take longer to mature. JetBlue has identified about 20 potential new markets in Central America, South America and the Caribbean that are viable from Fort Lauderdale.