Analysis for Global
Greater cooperation between Lufthansa and Etihad reflects their local and global challenges growing in quantity and complexity. Contact between the two has led to speculation that the partnership could radically expand to include an equity tie up, with rumoured merger talks.
Their initial Dec-2016 codeshare announcement was, in practical terms, small but showed the possibility, as they stated, to expand cooperation. However, it would be a leap to go from their handful of codeshares to a 17-Jan-2017 article from Italian daily newspaper Il Messaggero that Etihad could invest in Lufthansa on the way to a possible merger between the two. A subsequent denial in a Reuters story that "A financial stake is out of the question at the moment", does little to dispel the rumour. Were it not for the last three words of that statement the rumour would lack credibility.
There is certainly logic for a deeper partnership - and the two have danced this waltz before. Equity involvement from airlines can cement partnerships, add to board influence and partially allow one side to gain financially from any matter it feels it is compromising away. Nevertheless, there are obstacles to a full blown merger, and even to Etihad's taking a 30% to 40% stake. A marriage between the new bedfellows does not seem an immediate prospect. Nonetheless the logic is there for a move; and the mere fact of a potential move is sufficient to rock the equilibrium.
For the first time ever in Europe, in 2016 a low cost airline carried more passengers than any other airline or airline group, as Ryanair's 117 million passengers pushed Lufthansa Group's 110 million into second place. Ryanair had beaten Lufthansa itself, but not the whole Lufthansa Group. IAG's first full year of including Aer Lingus helped it to take third place from Air France-KLM. Europe's number two LCC, easyJet, was ranked fifth.
The big five can be expanded into a big seven to include Turkish Airlines and the Aeroflot Group, although these two had contrasting growth rates in 2016. A chasing pack of middle sized airline groups includes three LCCs (Norwegian, Pegasus and Wizz Air) and three legacy airlines with varying challenges to establishing sustainable profitability (SAS, Air Berlin Group and Alitalia).
Most of the faster growing airline groups in the top 20 are LCCs and the main growth drivers for Europe's big three legacy groups are their LCC subsidiaries. Just outside the top 20 are some fast growing legacy airlines in Eastern Europe, demonstrating the potential there. Nevertheless, unless there is a big merger or acquisition, Ryanair looks set to remain at number one for some time.
The global commercial aircraft fleet grew by 4% in 2016 and the year ended with an order backlog of more than nine years of production. Among the regions, North America still has the biggest and oldest fleet, but the lowest ratio of orders to aircraft in service. By contrast, Middle East has the fewest in service, but the highest ratio of orders to current fleet numbers.
This report gives an overview of the number of commercial aircraft deliveries in 2016 and the outlook into 2017 and beyond. It also looks at numbers in service and on order by region. It is based on preliminary numbers from the CAPA Fleet Database and guidance on 2016 deliveries from Airbus and Boeing, who have yet to announce final numbers.
The data indicate that total worldwide deliveries fell in 2016, the first such decline for six years, as a result of delays to new aircraft programmes. Boeing delivered more aircraft than Airbus for the fifth straight year, but its deliveries fell short of its 2015 level, while Airbus increased its numbers year-on-year. Total deliveries will likely rise again in 2017, but this may prove to be a peak year.
The AirAsia Group is accelerating expansion in 2017 after deciding to lease 15 additional A320ceos which were not previously in its fleet plan. AirAsia now plans to take delivery of 32 A320s in 2017 (11 A320neos and 21 A320ceos) while returning three aircraft, for a net gain of 29 aircraft, marking its biggest expansion since 2013.
The AirAsia Group took delivery of only 10 aircraft in 2016 and originally was planning to take delivery of just 10 aircraft again in 2017. It initially slowed its fleet growth in 2015, with four deliveries, after several years of rapid double digit fleet expansion.
The AirAsia Group’s active fleet grew by only two aircraft in 2016 and shrank by two aircraft in 2015, when aircraft sales, leases outside the group and lease returns are taken into account. Fleet growth peaked in 2013 with 36 aircraft, before initially slowing to 18 aircraft in 2014 as market conditions became more challenging.
Mexican Airlines are starting 2017 under a cloud of uncertainty driven by the country’s slower economic growth and the increasing rhetoric by president-elect Donald Trump against US companies planning to sustain or expand their operations in that country. The US auto manufacturer Ford recently back-pedalled on plans to construct a new plant in Mexico, and GM has also drawn ire from the president-elect over its Mexican operations.
The threat of dissolving trade pacts, and Mr Trump’s general anti-immigration stance, sent the MXP plummeting after the US Presidential election, and the latest round of threats of taxation on automobiles manufactured outside the United States has put additional pressure on Mexico’s currency, which has been weaker during the last year and that has created pressure for Mexican airlines. However, for now, Mexico’s air passengers continue to grow at a steady rate. The country’s domestic airlines charted approximately 12% growth in passengers from Jan-2016 to Nov-2016, and international passengers among those airlines for the same time period strengthened by 11%.
Predicting whether those levels of growth will continue in 2017 is a challenge, given the level of uncertainty the US election has created for Mexico, along with internal strife the country is dealing with – including growing inflation and discontent over rising fuel prices.
US low cost carriers and ULCCs observed many of the same trends in the country’s marketplace at the end of 2016 as their large global network rivals – namely, that weak pricing trends in the domestic market were improving. Each airline has its own nuanced view of that general operating environment, but they feel encouraged by what they hope is an inflection point in pricing that will lay the groundwork for a return to positive unit revenue.
Those lower cost and ultra-low cost airlines also face similar challenges to their larger counterparts – cost pressure from new labour contracts and rising oil prices. And like their larger rivals, most of the lower cost US airlines are plotting lower capacity growth in 2017 as a means to improve their respective revenue performances.
For now, pricing improvement that began in late 3Q2016 and a bump in demand after the US presidential election are sustaining the cautious optimism expressed by US airlines as 2017 gets under way. But no US airline is ready to declare that pricing traction in the country’s domestic market is on a sustained upswing.
This is Part 2 of two reports examining the outlook for US airlines in 2017.
Lion Group significantly slowed its rate of expansion in 2016 and cancelled 21 Boeing 737 orders. The Indonesia-based airline group took 36 aircraft in 2016 compared to 57 aircraft in 2015, as the rate of 737 deliveries was slashed in half from an average of two per month to one per month.
Most of the growth in 2016 was at Lion Group’s two full service airlines, Indonesia’s Batik Air and Malaysia’s Malindo Air. Malindo expanded its fleet by a staggering 15 aircraft, for a total of 42, making it one of the fastest-growing airlines in the world. Batik expanded its fleet by eight aircraft in 2016, for a total of 41.
The rate of expansion slowed at all three of Lion Group’s low cost airlines – Lion Air, Thai Lion Air and the turboprop operator Wings Air. The fleet at the main Lion Air brand only expanded by three aircraft, while Wings added four turboprops. The group’s JV in Thailand added six aircraft, which was fewer aircraft than initially planned.
A likely major focus for the US ULCC Frontier Airlines in 2017 is forging collective bargaining agreements with two of its largest employee groups – pilots and flight attendants. Although the airline’s transition to the ULCC business model is complete, Frontier’s employees weathered several challenges prior to the strategy change, including a bankruptcy during 2008 in which the company was sold. Now employees believe they should share in Frontier’s newfound profitability. When the company reaches new collective bargaining agreements with its pilots and flight attendants Frontier will face the challenge of offsetting the cost inflation generated by those new labour deals with higher revenue generation.
Frontier’s financial turnaround has spurred speculation during 2016 that the airline’s majority owner Indigo Partners was preparing the company for an initial public offering. Nothing has materialised in 2016 but Indigo has expressed interest in investing in other regions, so an IPO could become a more distinct possibility in the not too distant future.
As a privately held company Frontier does not offer forward-looking guidance on capacity growth or network plans, but it appears the airline should post double-digit increases in seat expansion for 2016, and with a steady stream of Airbus deliveries planned for 2017 Frontier’s growth for the year is likely to remain similar to 2016 levels.
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