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There can be no doubt about the long-term growth opportunity for Chinese airlines in long haul markets. But the short term is challenged by air traffic rights being exhausted or nearly utilised in key markets such as Canada, Germany and the US. The foreign parties have sticking points – slots, overflight rights – that are not easily solved, meaning that Chinese airlines could face a few years of dancing around bilaterals that are maximised, or they may experience only incremental growth.
Yet widebody aircraft deliveries are growing. The four main Chinese airlines – Air China, China Eastern, China Southern and Hainan – will take 22 further widebodies in 2016, 18 in 2017 and then 37 in 2018. These are official figures and exclude pending deals (10x 777-300ERs for China Eastern) as well as aircraft that appear on order books at the last minute. This also excludes the growing widebody operation at secondary airlines such as Beijing Capital Airlines, Tibet Airlines and Xiamen Airlines. Air China and China Eastern have 50-80% as many widebodies on order as they do in service.
Comparing Southwest Airlines’ unit revenue trends with the rest of the US industry is difficult due to the benefits the company is enjoying from a new credit card agreement forged in 2015. On a total unit revenue basis, Southwest posted a flat performance in 1Q2016 and expects very modest growth in 2Q2016, which is the last quarter where it will enjoy gains from the credit card deal.
Southwest’s average fare and yields during 1Q2016 reflect the competitive pricing environment that lingers in the US domestic market. Few are venturing to predict when pricing traction will return, including Southwest. The company does, however, believe that it can weather what it has claimed to be an aggressive industry build-up of capacity.
Southwest’s projected capacity growth of 5% to 6% for 2016 remains unchanged. The airline will increase ASMs in 2017 and 2018, but that increase could be slower than in 2016 due to the airline's decision to accelerate the retirement of its Boeing 737 Classics by a year to 2017. The accelerated retirement was driven by training complexities, and an inability by Southwest and its pilots to reach a deal on segmentation of the Classics. Contract talks between Southwest and its pilots have dragged on for nearly four years, and remain under the guidance of a national mediator.
Mexican low cost airline VivaAerobus ended 2015 on a positive note, reversing its losses from the year prior and charting solid EBIDTAR margins. The airline is in the final stretch of a fleet revamp; this entails shedding Boeing 737 Classics operated since its 2006 launch and transitioning to a much younger fleet of Airbus narrowbodies.
Among the new crop of Mexican low cost airlines that formed in the mid-2000s (VivaAerobus, Interjet and Volaris), VivaAerobus remains the smallest measured by market share. Aeromexico, Interjet, Volaris and VivaAerobus are Mexico’s dominant airlines, but VivaAerobus’ 12% in 2015 share was a distant fourth. That could change as VivaAerobus expands its fleet with larger-gauge aircraft, taking steps to broaden the expanse of its network.
VivaAerobus suspended a number of short-lived transborder routes in 2015, and it appears to be focused on rounding out its domestic network in 2016, before resuming international expansion in 2017. During the next few years VivaAerobus could elevate its position in the Mexican market if there is enough demand to sustain the growth plans of the country’s largest airlines.
The big three US airlines – American, Delta and United – are redefining their role as global operators. Since the glory days of PanAm Clippers circling the world, for US airlines "global" has recently meant meant occasional forays beyond Europe to the east, Japan to the west, and Latin America to the south. This is changing. United Airlines will open nonstop San Francisco-Singapore service, which will become the world's third longest flight. American Airlines will add a second ultra-long haul flight to Hong Kong while Delta – which currently operates the longest flight of a US airline (Atlanta-Johannesburg) – has the strategy of leveraging a global portfolio of airlines it has invested in.
With more of a global reach, US airlines are flying their long haul aircraft further. Delta's average sector length for its A330 fleet has increased 19% since 2006, while American's 777-300ER sector length is growing 9% over just one year. United's 787s will fly to three secondary Chinese cities. Strategic reasons for the longer flying can be as important as, or more important than financial. Some routes had been aspired to for years, but pre-bankruptcy costs and labour contracts precluded sustainability.
The US ULCC Spirit Airlines is making adjustments to its fleet, moving to seize on opportunities created by owning aircraft versus renting, and retaining some smaller gauge Airbus A319s by purchasing those aircraft as their leases are up for renewal. The airline is also in discussions with Airbus about possibly switching some later delivery A321s to smaller gauge A320s. To a degree this is in reversal of a trend sweeping much of the US market, where most airlines are seeking to add seats to existing aircraft and are placing orders for larger gauge jets.
Spirit’s fleet changes and evaluations appear to be meeting two objectives. Firstly, enlarging its base of owned aircraft should allow the airline to maintain its superior cost advantage, and secondly, creating some flexibility with aircraft size allows Spirit to add smaller, less competitive markets to its network.
In early 2016 Spirit’s new CEO alluded to some small market opportunities, and indications are that the company is working to adjust its fleet in order to diversify its network composition.
LATAM Airlines Group is working to maintain adequate liquidity levels during 2016 to withstand the still challenging economic situation in much of Latin America. Although its ratios ticked up at YE2015, those metrics have actually remained relatively stable during the last couple of years.
Brazil’s recession remains a drag on the region, and as a result LATAM has decided to expand its planned capacity decreases, both in the country’s domestic market and also on routes between Brazil and North America. Although currency devaluation remains a drag in LATAM’s Spanish-speaking markets, demand in those countries continues to be relatively healthy, with Argentina in particular showing signs of strength.
LATAM has also reduced its fleet commitments for the 2016 to 2018 time period and has financing for the USD2 billion in aircraft that it plans to spend for 2016. The company is taking necessary steps to weather some of the toughest conditions it has experienced in decades – against a backdrop of a slow and uncertain recovery.