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US airline fleet strategy and finance Part 2: Alaska and Southwest differ in leveraging their fleets
The two US investment grade airlines – Alaska and Southwest – have steady delivery streams planned from Boeing during the next couple of years as they work to ensure that the average age of their respective fleets remain optimal.
But Alaska and Southwest are taking different approaches to their fleet fortification. Alaska is choosing to stick with new-build aircraft to replace 737 Classics exiting its fleet while Southwest is opting to add a mix of new and pre-owned aircraft to sustain its fleet at around 700 aircraft in 2015.
Both airlines own a solid portion of their respective fleets, allowing for a certain level of flexibility if market conditions change. Although each airline’s investment grade status allows for favourable market rates, Alaska for the moment has no plans to finance aircraft through debt, but is not ruling out the possibility in the future.
The three large US global network airlines are busy undertaking re-fleeting projects, taking advantage of favourable interest rates as they replace ageing aircraft in their mainline fleets. American and United in particular have touted favourable rates they have garnered in 2015 to fund a portion of their aircraft deliveries.
But each airline is taking a slightly different approach to mainline re-fleeting. American is focussed on adding new build aircraft to replace ageing MD-80s while United has tapped the used narrowbody market during 2015. The attractiveness of used aircraft obviously increases in a low fuel-cost environment, but those jets also become more attractive as deliveries of next generation narrowbodies drive down values of existing models.
Delta Air Lines has long adopted a philosophy of sourcing used narrowbodies, concluding that the lower ownership costs of those aircraft provide overall financial benefits. The airline is also taking delivery of new narrowbodies, but is opting to stick to current generation models, reflecting a conservative approach to hastily adopting new aircraft technologies.
Weak economies in Latin America continue to drag down the results for Panama’s Copa Airlines, reflected in a 10.4ppt drop in its 2Q2015 operating margin to 9.1%. The airline’s results were worse than expected, driven by a particularly challenging Jun-2015.
Central American poster airlines Copa has been battling difficult dynamics in Venezuela and Brazil for roughly a year, and during 2Q2015 some challenges emerged in its Colombian markets. The airline is taking steps to adjust its network to lessen its exposure to those regions, but they still comprise a sizeable portion of Copa’s operations.
Copa does foresee some slight sequential improvement in its yield performance from 2Q2015 to 3Q2015, but third quarter yields are still expected to decline in the double digits.
The company has issued a second downward revision to its unit revenue and operating margin guidance for CY2015, and it seems some of the obstacles Copa has faced throughout the last year are lingering into 2016.
IAG grows quarterly profit once more. Iberia long-haul growth to accelerate with additional aircraft
With its 2Q2015 results, IAG took another step towards achieving its longer term financial targets. Its 2Q operating profit grew by 39% year on year and its rolling 12M return on invested capital increased by 0.7ppts. Both revenue and operating costs were inflated by currency movements, with a net positive impact. Nevertheless, adjusting for foreign exchange, IAG cut unit cost at a faster rate than the drop in unit revenue.
At the level of the operating airlines, both BA and Iberia enjoyed improved operating profits. Vueling remains the most profitable airline in the group, but the Spanish LCC's result dipped slightly. Its business is highly seasonal and 3Q should be its strongest quarter, so it still has a chance to end the year with better figures.
IAG's results for the quarter were again stronger than those of its major European legacy airline group rivals Lufthansa and Air France-KLM. Its growing confidence is reflected in its decision to exercise options with Airbus for additional narrowbody and widebody aircraft, including up to five A330-200 growth aircraft for Iberia.
Volga-Dnepr Group's MoU to acquire 20 Boeing 747-8F aircraft, signed at the Paris Air Show in Jun-2015, will result in a significant capacity expansion for the operator of the aircraft, AirBridgeCargo Airlines - making it one of the world's largest operators of the 747 and the biggest with the 747-8.
Assuming it is finalised, a firm order will also be a major boost for Boeing and the 747 programme, increasing the total number of 747-8s on order to 51, including 33 freighters.
Aeromexico transitions to 787s, phasing out 767s; non-stops Mexico City-Tokyo and upgrade for London
Aeromexico has made significant improvements to its long haul operation following the transition to 787s on two of its three European routes and schedule changes on its two Asian routes. Further improvements are expected as Aeromexico takes delivery of additional 787s, enabling it to phase out its remaining 767s and 777s and pursue growth.
London, which was launched in late 2012 with three weekly 767 frequencies, has performed particularly well since the transition to 787s in 2014, prompting the carrier to add two more frequencies. The new five times per week schedule gives Aeromexico a better product for the key corporate market.
Aeromexico hopes eventually to serve all its long haul markets, including Shanghai and Tokyo, with at least five weekly flights and potentially a daily service. Newly available higher thrust ratings for its 787-8s will also enable Aeromexico to begin serving Tokyo non-stop from Mexico City by the end of 2015.