Cancun Airport

Spirit Airlines' network legacy market expansion continues as financial performance remains solid

Executives at Spirit Airlines believe the airline’s favourable financial performance during 4Q2012 and full year 2012 demonstrates the soundness of the carrier’s business model built on offering a comparatively lower base fare and garnering a large portion of ancillary revenue from various add-on products. At the moment the carrier holds a solid outlook for 2013, reflected by its planned supply expansion of roughly 22%. The carrier continues to move into legacy and low-cost stronghold markets in the continental US as part of its larger strategy to diversify from the lower-yielding south Florida market. Beginning in Feb-2013 and continuing over the year Spirit is introducing additional flights from Baltimore, Detroit, Denver, Houston, Minneapolis and Philadelphia.

A USD25 million hit to its revenue, resulting from operational disruptions from “superstorm” Sandy that struck the US east coast in Oct-2012, triggered an 18% drop in Spirit’s 4Q2012 profits year-over-year to USD20 million. Spirit has a large presence in Atlantic City, New Jersey, which chief marketing officer Barry Biffle stated was the epicentre of the storm. Spirit is the only carrier serving the airport, and presently (18-Feb-2013 to 24-Feb-2013) operates flights to Fort Lauderdale, Fort Myers, West Palm Beach, Orlando and Tampa, Florida and to Myrtle Beach, South Carolina.

Mexico returns to double-digit domestic growth in 2012, boosting outlook for Aeromexico and LCCs

Mexico’s domestic market recorded double-digit growth in 2012 for the first time in five years and only the second time this century. The Mexican aviation industry has reached its healthiest point since deregulation led to the launch of five low-cost carriers seven years ago. The market now features a strong legacy airline group and three LCCs which are seeking to cash in on their relatively strong positions by holding initial public offerings.

Mexican carriers flew 28.1 million domestic and 5.9 million international passengers in 2012, according to newly released statistics from Mexico’s DGAC. Domestically the market grew by 10% while the much smaller international market grew by 23%. Foreign carriers serving Mexico recorded much more modest growth of 3%, but still dominate Mexico’s international market with 21.2 million passengers carried in 2012.

JetBlue sees an opportunity to mine Fort Lauderdale as Spirit turns its attention elsewhere

JetBlue Airways believes more opportunities exist to expand into Latin America from its southern Florida stronghold of Fort Lauderdale so it can capitalise on the short ramp-up to profitability afforded by those routes. Shifting market dynamics make the opportunity more ripe for JetBlue as Fort Lauderdale’s other major carrier Spirit Airlines has turned its attention to US domestic expansion from the airport.

At the same time JetBlue is not hesitating to increase competition with Spirit, betting that its higher-end product at an only marginally higher fare will entice some travellers away from Spirit’s bare-bones, no-frills service.

Fort Lauderdale was JetBlue’s first destination from its JFK base when it launched scheduled flights 13 years ago. Since that time Fort Lauderdale has played a key role in the carrier’s build-up of North-South passengers along the US eastern corridor. But during the last few years the airport and its geographical location in South Florida have played a particularly strategic role as the carrier worked to aggressively expand into the Caribbean and Latin America.

Southwest Airlines plots course to meet previously missed ROIC targets

Southwest Airlines plans to aggressively grow its return on invested capital (ROIC) by 8 ppts in 2013 to 15%, driven by USD1.1 billion in revenue gains derived from schedule adjustments, new ancillary fees and an improved revenue management system. The carrier must close a wide gap in order to meet its goal after recording a 7% ROIC for the 12M ending in Sep-2012, and admitting it fell short of an original 15% target for 2012. But Southwest management is confident that 2013 is the year it will attain its often-cited return goals as it seeks to contain unit cost growth and capture USD400 million in estimated synergies from its acquisition of AirTran.

Carrier executives are tempering some of the confidence they are exuding about meeting ROIC goals with a cautious declaration that there is no guarantee that 15% returns will be displayed in the airline’s year-end 2013 results.

Southwest CEO Gary Kelly told investors in late Dec-2012 “it is not a promise, but we’re sharing with you our plan”. Previously Southwest has struck a cautious tone for 2013 as its operating profit during 3Q2012 plummeted USD174 million to USD51 million.

VivaAerobus and VivaColombia focus on domestic expansion as Irelandia ponders third Viva franchise

VivaAerobus and VivaColombia are planning further expansion in the Mexican and Colombian domestic markets in 2013 while they remain separate entities without any network or operating synergies. But the two low-cost carriers could start exploring a closer partnership in 2014 as VivaAerobus looks to potentially join VivaColombia as an A320 operator and launch services to other Latin American countries.

Meanwhile, Irish investment firm Irelandia Aviation, which owns stakes in VivaAerobus and VivaColombia, continues to study establishing a third Viva affiliate in a new Latin American market. With the Viva brand already established in Colombia and Mexico, and as the Brazilian market is currently over-saturated, smaller Latin American markets that lack any local LCCs are being studied. The Viva group could ultimately consist of several LCCs, with most of the carriers being small in size but enjoying economies of scale by being part of a pan-Latin American group.

Mexico’s LCC Volaris plans more rapid domestic expansion in 2013

Mexico’s Volaris is planning another year of rapid expansion as the low-cost carrier sees further opportunities in the Mexican domestic market. The airline also expects to further expand during 2013 in the US, where it now has a network of 10 destinations, but for the second consecutive year faster capacity growth will be pursued domestically.

Volaris, which serves 27 destinations in Mexico, is now the third largest carrier in Mexico’s domestic market on a seat capacity basis but the largest on an ASK basis. Volaris expanded its fleet by seven aircraft in 2012, ending the year with 41 A320 family aircraft.

The airline expects to end 2013 with at least 44 aircraft but could end up with up to 48 aircraft if it decides to postpone the phase out of A319s.