Analysis Reports

Saudia has introduced a lie-flat business seat on a portion of its A320 fleet, joining a small but fast growing group of airlines with narrowbody lie-flat products. Saudia’s new narrowbody lie-flat product is part of a broader initiative aimed at improving its service offering and attracting more sixth freedom passengers.

Saudia plans to outfit lie-flat business seats on 22 narrowbody aircraft – seven retrofitted A320ceos and 15 new A321neoLRs. The first retrofitted A320ceo was recently completed and is currently serving Geneva. 

There are also plans for the airline to retrofit another six A320ceos over the next six months and deploy the subfleet to six existing destinations in continental Europe. Saudia also intends to deploy a new fleet of 15 A321neoLRs, slated to be delivered from 2020 with the same lie flat seats, mainly on existing European routes. New destinations in the UK and eastern India are also under consideration. 

There’s been a raft of changes in Latin America’s low cost sector during the past two to three years, with start-ups in Chile, Argentina, Peru and Central America. At the same time, some of the older LCCs in Latin America have built up sizeable seat share in two of the region's largest markets – Brazil and Mexico.

As new competitors have emerged the region’s existing airlines have adapted their models to ensure that they compete effectively, since low cost ambition in Latin America shows no sign of abating. The ULCC group Viva plans to decide on a third country for its franchise within the region over the next 12 to 24 months, and the Chilean LCC Sky also plans to launch a new airline in Peru during 2019.

All of the ambition is driven by the still untapped potential in Latin America. The country’s largest airline – LATAM Airlines Group – calculates trips per capita in its domestic South American markets at just 0.6 in 2017. Given the difficult topography of much of Latin America, where other transport modes are inadequate, this could become much higher than other markets.

The 31-Oct-2018 press release from perennial loss-maker Alitalia that its administrators had received two binding offers and a non-binding expression of interest was in accordance with the previously communicated timetable for the planned sale of the airline. However, it may turn out to be as meaningless as all the other announcements and deadlines about the sale of Alitalia since the airline entered administration in May-2017.

The most recent announcement did not divulge the names of the bidders, but easyJet publicly revealed itself to be behind the expression of interest. In addition, Italy's state-owned railway company Ferrovie dello Stato had already said that it would make an offer (in effect, as a proxy for the state). Several media outlets reported that the third bidder was Delta Air Lines, although it would only be allowed a minority stake. Lufthansa, previously a bidder, has said that it is no longer interested.

The administrators will have to propose the best offer to the government. Although the Italian state currently has no shareholding in Alitalia, the final decision will be for the Minister for Economic Development. As in the past with Alitalia, politics are likely to trump any other logic.

Los Angeles International airport (LAX) has one of the most diverse operating profiles in the US. All three US major global network airlines describe the airport as a hub, yet none of those operators has more than a 23% share of departing frequencies. Los Angeles is also a key market for other US airlines, including Southwest and Alaska.

American, Delta and United not only use LAX as a hub, but also join other airlines in working to ensure that they capture their fair share of the airport’s O&D traffic, which is the largest in the US.

Although passenger growth at Los Angeles is among the most rapid at US airports, its customer experience has been lagging. The airport authority and airlines are both working to fix the obstacles that create a negative perception of the airport, and numerous projects are under way at the airport as passenger throughput could reach 100 million annually by 2040.  However, although airlines are welcoming the upgrades, charges at LAX will inevitably grow to cover some of the construction costs.

Kazakhstan’s Air Astana and Uzbekistan Airways have adopted multi-brand strategies in response to intensifying competition in the Central Asia and CIS regions. Air Astana and Uzbekistan Airways both plan to launch LCC brands in 2019 using single class A320s that will be transferred from their existing full service operations. 

Air Astana and Uzbekistan Airways are the two largest airlines in Central Asia. There is currently only one Central Asian LCC, Kyrgyzstan’s Air Manas, but foreign LCCs have been expanding in the region and aggressive FSC competition has also pressured yields.

In the larger CIS region, there are currently only three LCCs – Air Manas, the Aeroflot subsidiary Pobeda and Azerbaijan Airlines' budget brand Buta Airways. Pobeda, and intensifying competition in the large Russia-Central Asia market, partially drove the decisions by Air Astana and Uzbekistan Airways to establish LCCs. (The CIS includes all five Central Asian countries, along with Russia, Armenia, Azerbaijan, Belarus and Moldova.)

Following the opening of the Istanbul New Airport at the end of Oct-2018, eyes will inevitably turn to the delayed opening of the Willy Brandt Berlin Brandenburg International (BBI) airport, now scheduled for Oct-2020 to be at full capacity.

Much has been made of the delay and the reasons for it, but this report is concerned with the state of the business at the two existing Berlin airports as preparations for operational transfer begin.

Despite being a hugely significant capital city, Berlin mainly hosts ‘low-cost’ airlines, and passenger traffic is quite low compared to other European capital cities. Lufthansa’s longstanding commitment to Frankfurt and Munich does not help.

What Berlin needs is a boost, and the much-anticipated opening of the new airport may provide one in itself.

LCCs operating in North America are the most mature in the world and some of the veterans, including Southwest and WestJet, are facing challenges as they work to keep costs competitive and expand revenue. Those companies are tackling headwinds in different ways.

Southwest is adopting its historically more conservative approach, whereas WestJet has arguably ripped up the LCC playbook during the past six years – launching a regional and ULCC subsidiary and taking the low cost model across the Atlantic.

The hybrid LCCs Alaska and JetBlue are also evolving, embracing the product segmentation their larger FSC peers have adopted in order to bolster their revenues and remain competitive in the marketplace. Each of those companies is also working to maximise value from its respective premium offerings while also attempting to contain costs.

The largest North American ULCCs – Spirit and Frontier – have built up a combined 6.4% US domestic market share. Spirit is enjoying a revenue and margin upswing while, for now, maintaining an impressive cost performance.

San Jose Mineta International is enjoying a record period of growth and the airport has recently earned the distinction of as one of the fastest growing mid-size airports in North America.

But the airport is experiencing some ebbs and flows during 2018 as Air China and Lufthansa have ended service to Shanghai and Frankfurt. San Jose’s proximity to San Francisco and Oakland airports may be resulting in some airlines offering long haul flights from those larger airports to re-evaluate their service footprints for California’s Silicon Valley region.

Even as some long haul flights from the airport are disappearing, San Jose is enjoying growth both domestically and in near international markets as well as expanded service to New York JFK, one of the airport’s key US transcontinental routes.

Nearly a year after announcing their plans to establish a joint venture,  Delta Air Lines and WestJet have formally applied to gain antitrust approval for their proposed tie-up from US authorities. It would be surprising if the Department of Transportation (DoT) issued an outright rejection of the JV given Air Canada’s heft if the US-Canada transbroder market.

Delta and WestJet do have ambitions to grow 20% in the transborder market, and add six new markets. Unsurprisingly, the two airlines are not disclosing those markets; but WestJet has already announced new service from its Calgary hub to Delta’s largest hub Atlanta in 2019, and more new service to Delta’s US hubs seems logical, following a service pattern adopted by Aeromexico after it established a JV with Delta.

The remaining unanswered question is how Delta and WestJet’s competitors will respond. Air Canada and United do no seem to be rushing to create their own JV even as they have held antitrust immunity since 1997. But the long standing Star Alliance partners are no doubt examining their options as transborder competitive dynamics change. An interesting development in Canadian aviation during the last year is changes in how JVs in the country are approved, which could make it easier for Air Canada and United if they choose to revive plans to establish a JV.

Low fuel prices and new competition forced airlines to pass on savings to consumers, which drove traffic growth as price sensitive travellers took advantage of low fares. Nevertheless, unit revenue fell at a slower rate, partly thanks to ancillaries.

Rising oil prices now put the focus on revenue growth, although fare increases could temper demand from leisure markets. As airlines adjust to the new operating conditions, they are seeking alternative revenue optimisation strategies.

Finding the right mix of unbundled fares and fare families and also developing genuine ancillary (i.e. new) revenues will be crucial.

The CAPA World Aviation Outlook Summit 2018 on 27-28 November in Berlin will include a panel discussion on the commercial outlook for airlines and their revenue optimisation strategies. This report provides some background for that discussion.