Analysis for Global
Airport investment, the global geopolitical environment, airline inflight retailing and how it will affect airport retail, what do airlines want from airports, designing an aerotropolis, all of these are in the mix as the airline world rapidly changes.
Two big issues are how the policies of US President Donald Trump and the British decision to leave the European Union will affect the aviation world generally. These are already having a global impact – as already demonstrated by President Trump’s twice attempted immigrant ban and the restrictions on the carrying of laptop computers in airline cabins.
These issues will come under the spotlight at the CAPA Global Airport Leaders Forum, to be held on 16/17- May-2017 in Dubai, as an adjunct to the Dubai Airport Show 2017 (http://www.theairportshow.com/). The Airport Show is the leading B2B platform for companies to showcase airport and aviation related products and services, and is expected to attract over 300 companies and 7,500 professionals this year.
Alaska Air Group has revised projected synergies from its merger with Virgin America upwards in both costs and revenue as it leverages the power of a larger network with a broader footprint in California, and uses the combined fleet to maximise profitability on transcontinental routes by placing higher gauge aircraft in those markets.
The existing Airbus narrowbodies operated by Virgin America will remain in the combined airline’s fleet for the foreseeable future. As a result, those aircraft are being reconfigured to offer standard interiors, including Alaska’s first class seat.
Similarly to Virgin America prior to the merger, Alaska has decided that a lie flat seat offering does not fit into its strategy in the contested US transcontinental market. In fact, choosing not to develop a lie flat product could put Alaska in a more favourable position when an (inevitable) economic down cycle occurs.
Despite the more favourable synergy estimates, Alaska will face some margin pressure due to Virgin America’s overall lower margin business. However, even though its margins are likely to drop in 2017, Alaska is stressing that its pretax margin performance will best the industry average.
ULCCs Frontier and Spirit hold orders for more than 150 Airbus narrowbodies to support the proliferation of the model across the US. Frontier’s fleet is projected to grow by 83% from YE2016 to 2021 – from 66 to 121 aircraft. Spirit’s current fleet forecast shows 46% growth from YE2017 to 2021 – from 108 aircraft to 158 aircraft.
Each airline is taking nuanced approaches to financial management of its fleet. Spirit has opted to purchase some aircraft off lease in order to enlarge its number of owned aircraft, while Frontier, which is just embarking on the process of accessing public markets, will use operating leases as its primary financing vehicle.
The planned growth by each airline reflects conclusions reached by Frontier and Spirit about the opportunities for the ULCC model in the US, despite changing market dynamics – namely a push by large US global network airlines to create pricing segments to compete more effectively with ULCCs. Despite the focus on price matching by larger airlines, Frontier and Spirit remain bullish on the opportunities for stimulation in the US market.
Brazil’s fourth largest domestic airline, Avianca Brazil, has opted to branch out internationally with new service to Miami and Santiago, Chile, joining formidable competitors in each market that will compete fiercely with a new rival. Avianca Brazil’s competitors have significant strength in each market, with an ability to market vast network connections in conjunction with their partners.
Avianca Brazil’s decision to add international destinations occurs as its domestic growth continues unabated, despite warnings by its Brazilian rivals that overcapacity in the domestic market could threaten a slow recovery of yields that is just starting to take shape.
Avianca Brazil’s branching out into international markets occurs against the backdrop of a potential merger with Avianca Holdings. Each company is majority owned by Synergy Aerospace, but operates separately. After completing the evaluation of a potential merger with Avianca Brazil in 2014, Avianca is now reconsidering a potential tie up with the airline amid an ugly shareholder battle over Avianca’s pursuit of a strategic partnership with United.
China Airlines is weighing an order for Airbus aircraft that it expects will result in the French state granting traffic rights to allow China Airlines to fly to Paris, providing competition to China Airlines' local competitor EVA Air – the only nonstop operator on the route.
Since a 2016 government change in Taiwan, China Airlines – long a sleepy government airline – has shown greater interest in growth. However, Europe is not a strong market for the airline. In Paris there is opportunity to work with fellow SkyTeam member Air France. This potentially makes Paris less costly for China Airlines than its planned resumption of service to London.
China Airlines is once again planning a narrowbody order to replace and supplement its existing 737-800 fleet. The order will reflect how optimistic China Airlines is about the turbulent cross-strait market.
The A320neo is favoured, and it is unclear whether an order might also mean that China Airlines exercises its six options for the A350. China Airlines has received five of a 2008 order for 14 A350s. The correlation between Airbus aircraft orders and French traffic rights is sensitive, but this is hardly the first example. Taiwan and the US, home to Boeing, have an open skies agreement.
The three large US global network airlines – American, Delta and United – continue to tout the strength of their balance sheets; the results which they’ve achieved during the past few years by the use of various tools, including free cash flow generation and debt reduction.
Delta is using its newly minted investment grade status to tap markets for creative ways to fund its hefty pension obligations during the next two to three years. American is also working to ensure pension compensation coverage by lifting its liquidity targets as rules allowing favourable minimum funding contributions expire in 2017.
Each of those airlines is bracing for fairly substantial capital expenditures during 2017, largely driven by aircraft acquisitions, but American, Delta and United have no plans to compromise their balance sheet progress irrationally in order to support fleet revamps.
At nearly 46 years old and 17 years old, respectively, Southwest and jetBlue approach their financial priorities differently. jetBlue is in the process of buying a certain level of aircraft off lease to reduce debt and raise its levels of unencumbered aircraft. Southwest is concluding a hefty investment in a long overdue overhaul of its reservations system and making other significant technology investments.
Each airline also has a different capital allocation strategy. Southwest has engaged in some level of shareholder returns since the 1990s, whereas jetBlue’s shareholder return strategy is just starting to take shape – the airline is reaching a point in its leverage performance where it can contemplate more meaningful levels of shareholder returns in the medium term.
One area where Southwest and jetBlue hold similar visions is balance sheet strength, and the airlines have similar leverage goals: to support capex commitments, maintain manageable debt levels, and expand or sustain return to shareholders.
A two year economic downturn in Latin America has forced the region’s airlines to put even more emphasis on improving their balance sheets through improved leverage, debt reduction and decreasing capital commitments. Two of the region’s largest airline groups – LATAM Airlines Group and Avianca Holdings – have worked to strengthen their balance sheets employing a variety of methods, including renegotiating aircraft delivery schedules to defray capital costs.
Avianca Holdings is taking delivery of six aircraft in 2017, whereas LATAM’s total fleet is shrinking 5.5% year-on-year during 2017 as it slashes its capex commitments by USD2 billion during a two year period.
LATAM is enjoying a boost in its liquidity after receiving an equity infusion by Qatar Airlines in late 2016, and the investment by Qatar helped boost LATAM’s liquidity to trailing 12M revenues by 5.5ppt year-on-year at the end of 2016. Avianca has been searching for an equity provider and strategic partner since mid 2016; but its selection of United has stirred controversy between its two largest shareholders, with lawsuits and counter lawsuits overshadowing the potential commercial benefits of the tie up.
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