Analysis Reports

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Season's Greetings, Your CAPA - Centre for Aviation Team

If an algorithm was created to track the number of times premium was used in North American airline discourse over a couple of years, the results would be significantly higher than profits at some of the region's airlines.

Premium products, ranging from seats to lounge access, are cornerstones of nearly every major North American airline's strategy - regardless of business model.

As a case in point - the decision by the ULCC Frontier Airlines to introduce a first class offering.

The push into premium products is arguably more than a decade old; but various factors have accelerated the adoption of them by unlikely airlines.

Now the question for 2025 and beyond is: if there's a risk for oversupply in the premium space.

Europe's airlines can look back on 2024 as the year when they finally completed the capacity recovery from the COVID-19 pandemic. Seat capacity is scheduled to be 100.0% of 2019 levels for 2024 as a whole, according to data from OAG and CAPA - Centre for Aviation.

LCCs are leading the way, and this seems likely to continue in 2025.

In 1Q2025 Europe's capacity is scheduled to be at 101.5%, confirming the recovery but with little further increase.

Aviation supply chain constraints and the ongoing (but slow) process of European airline consolidation are likely to contain capacity growth, and this may help to support yields in 2025.

The year 2025 will bring challenges in aircraft supply, recruitment, airspace capacity and the green transition - nevertheless, Europe's airlines are now beyond the COVID-19 recovery phase.

The Asia Pacific airline industry is set to continue its international capacity growth in 2025 and finally move past the pre-pandemic benchmark, although the growth rate will be hindered by aircraft availability issues.

Airlines in this region are collectively already close to 2019 capacity levels in the international market; so it is likely that they will exceed that mark early in the new year.

Aside from a few key international markets, the factors inhibiting capacity growth are no longer demand-related. Airlines want to grow faster, but are frustrated by engine issues, delivery delays and supply chain bottlenecks.

Aircraft orders by Asia Pacific airlines have soared over the past few years as airlines look to rebuild their fleets. This trend will continue in 2025, with some key deals looming, although possibly to a lesser extent than in 2023 and 2024.

Constrained capacity will help to keep yields and revenue relatively high, although they may moderate somewhat in 2025.

Collective profits in the region are expected to rise slightly, although financial fortunes will be mixed.

Factors such as elevated costs and geopolitical tensions will continue to put financial pressure on Asia Pacific airlines.

Two of Latin America's largest airlines - LATAM Airlines Group and Avianca - are bullish heading into 2025, driven in part by their competitive cost structures and product offerings that target a range of customer classes.

Those favourable cost structures place each airline in a competitive positions vis-a-vis their long haul rivals, and the recognition that product segmentation is key to bolstering revenues should bode well for LATAM and Avianca in the future.

Of course, challenges remain for airlines operating in Latin America, including oversupply within Colombia, which should ease somewhat next year.

And changes could occur in Brazil's aviation sector if discussions regarding potential consolidation materialise into something more market-changing.

Recent moves by the US ultra-low cost carriers - Spirit Airlines entering Chapter 11 and Frontier Airlines' recent decision to introduce a first class product - beg one simple question: has the era of the pure-play ULCC model in the country come to an end?

The answer would appear to be: yes.

Questions are arising regarding Spirit's future as a going concern, and it is yet to be revealed whether Frontier's bet on first class will pay off.

Whatever the outcome of each scenario, the original ULCC model is no longer applicable in the US, as the rush to offer upscale products to bolster revenue could push Frontier, and possibly Spirit, into the 'value' airline' category, alongside JetBlue Airways and Alaska Airlines.

Japan's major airlines are considering more aircraft orders to address their next fleet modernisation priorities, adding to already substantial order books that are helping make near term improvements.

Japan Airlines (JAL) is moving closer to ordering regional jets for its domestic operation, and All Nippon Airways (ANA) is still completing an assessment that could lead to widebody and narrowbody orders.

Deliveries from previous deals are arriving steadily, with JAL receiving its long haul flagship Airbus A350-1000s, and ANA taking delivery of Airbus narrowbodies and Boeing 787s.

Aircraft from recent orders - including some new types - are due to begin arriving over the next few years, but in some cases the timeline is uncertain due to manufacturer delays.

Also on the fleet front, ANA is affected by engine-related aircraft groundings in its widebody and narrowbody fleets.

Executives from JAL and ANA discussed their fleet situations at the Association of Asia Pacific Airlines annual meeting in Brunei on 12-13-Nov-2024.

They also talked about their expectations for international demand recovery, as detailed in this analysis.

On 29-Nov-2024 Turkish Airlines (THY) added Sydney to its network (via Kuala Lumpur) - its second destination in Australia, after launching services to Melbourne (via Singapore).

The addition of Australia to its network is another step in expanding its Asia Pacific presence. This is helping to achieve a better balance of its capacity between the three major aviation markets, Europe, North America and Asia Pacific.

Türkiye is a large and growing aviation market and provides a solid platform for THY's global connecting strategy. THY has an efficient cost structure, a relatively young fleet, and orders to ensure continued profitable growth.

Earlier this year its low cost subsidiary AJet began operations as a separately incorporated subsidiary, increasing the group's focus on high-growth short/medium haul leisure markets.

In this report, CAPA - Centre for Aviation considers Turkish Airlines Group's strengths, weaknesses, opportunities and threats.

Korean Air appears close to finally gaining all the clearances it needs for its takeover of Asiana Airlines, which would signal the end of a four-year journey through a regulatory maze involving multiple jurisdictions.

Competition authorities in several countries have weighed in on the effects of the merger in their markets, and in many cases they have raised concerns.

Korean Air has patiently worked its way through these processes, agreeing to the concessions needed to address any objections.

The regulatory scrutiny took much longer than expected, but the process is now essentially finished, prompting Korean Air to set a date for closing the acquisition.

While this would mark the end of one phase, it also represents the start of the lengthy and complex task of merging the two airlines' fleets and operations.

Air transportation in the Middle East has been developing rapidly and the Gulf area has become the epicentre of activity, its main airports being leaders in facilitating one-change travel globally, while aiding the brisk development of tourism at home.

Saudi Arabia tends to be overlooked, but is making great strides to improve its domestic air network. Even more so its international one, which it has so far done partly through co-operation with the private sector.

The country already has some of the biggest and most expensive airports under its belt.

Now it looks set to get another one: the King Salman airport at Riyadh, one that will be built around the existing King Khalid Airport, and an essential part of Crown Prince Mohammed bin Salman's 'Vision 2030'.

It is a giant project, costing close to USD30 billion, but there are warning signs about overdevelopment, both at home and abroad.

In Saudi Arabia the country is at a crossroads as it adapts to the paradigm of a world with less reliance on oil, while the US looks set to gain the ascendancy in that field, and while it reassesses its relationship with Iran.

Internationally, in the UAE, the Dubai World Central (Al Maktoum) Airport already stands as a memorial to overestimation of demand - no airport in the world is going to be handling over 200 million passengers a year anytime soon, and such an operation would simply be too big anyway.

While King Salman airport is on a smaller scale, it is still vast, and the Saudi authorities need to be absolutely certain that the planned growth will be sustained.

If there is to be any private sector participation they will definitely need to be convinced of that.