Analysis Reports

A proposed merger between Air Nostrum and CityJet could create Europe's largest regional airline by fleet size. The two airlines announced at the Farnborough air show on 17-Jul-2018 that they had signed heads of terms to create a new holding company and a group with around EUR700 million in revenue.

Based on data in the CAPA Fleet Database, currently the biggest regional airline in Europe by fleet size is Air France-KLM's Hop, with Flybe at number two. Air Nostrum, which operates a franchise for Iberia, is ranked at five and CityJet at six. Both operate Bombardier regional jets, while CityJet also deploys Sukhoi SuperJets and a legacy BAE146 fleet and Air Nostrum also has a small ATR turboprop fleet. In addition, both have significant third party wet lease operations.

The CAPA Fleet Database Europe records 67 regional airlines operating a fleet of 1,043 aircraft currently in service (as at 17-Jul-2018). This report looks at the composition of Europe's regional airline fleet in service and on order.

Airbus is reportedly withholding delivery of new A330 jets destined for HNA unit airlines according to Reuters HNA's financial issues may be the cause. The CAPA Fleet Database shows that a number of HNA airline units had A330s manufactured as late as the end of 2017 and throughout 2018, and that these aircraft should have been delivered by now.

There may be other influences at play. Since last autumn mainland Chinese airlines overall have taken longer on average than non-Chinese airlines to receive an A330 on delivery after manufacture, according to CAPA's Fleet Database, but HNA Group airlines have taken even longer than the average of other mainland Chinese airlines.

The A350 has been delayed in delivery to Chinese airlines due to slow Chinese regulatory certification processing, but once this clears shortly, there are lingering concerns because a number of mainland Chinese HNA airlines have ordered the A350.

In late Jun-2018 LOT Polish Airlines took delivery of its third Boeing 787-9 aircraft and its fourth 737MAX-8. As at 26-Jun-2018, LOT had outstanding orders for 18 aircraft: nine 737MAX-8s, five 787-9s and four Embraer E190s. The Polish carrier has enjoyed a strong return to growth since 2016 after emerging from a lengthy period of restructuring.

LOT's CEO Rafał Milczarski told CAPA TV in early Jun-2018 that LOT is aiming to become "Central Europe's favourite airline". Currently, LOT is number three by seat capacity in Central Europe, behind the leader Wizz Air and third placed Ryanair. However, LOT is already the biggest airline on routes within Central Europe and the region's only significant long haul operator.

Seat growth from Central Europe is 10.5% in 2018, according to data from OAG Schedules Analyser, and LOT is the region's fastest growing airline by seat capacity. Wizz Air and Ryanair have a strong presence in a number of countries across the region. This summer, LOT has also established a base outside Poland, launching two new trans Atlantic services from Budapest to New York JFK and Chicago.

Europe vs the Asia Pacific: Two regions challenged by exorbitant demand for better air and ground infrastructure

The airline industries of the Asia Pacific and Europe are both expected to deliver robust net profits of above USD8 billion in 2018, with each region anticipated to account for around 25% of the forecast industry total. The average profit per passenger, according to IATA, is expected to be USD7.58 for Asia Pacific and USD5.10 for Europe.

While 2017 saw the Asia Pacific and Europe record similar traffic growth of 9.4% and 8.2%, both markets include countries at varying levels of aviation development. The bottom line though is much more rapid growth than previous trends.

For air navigation service providers (ANSPs), already congested segmentations of airspace generally continue to get busier, while recent economic and aviation development has spurred new air traffic growth in traditionally quieter areas.

Based on customer reviews, Jet2.com is the only European airline in TripAdvisor's top 10 world airlines ranking, reflecting the UK low cost airline's focus on customer service. This, and its close relationship with sister company Jet2holidays, allows it a partial escape from the commoditisation associated with competing only on price.

Jet2.com and Jet2holidays (which provides almost half of the airline's passengers) are managed as one business within the leisure travel segment of Dart Group PLC. The group achieved a 38% increase in revenue and a 27% increase in operating profit in the year to Mar-2018, but its operating margin dipped by 0.5ppts to 5.5%. The leisure travel segment typically achieves slightly higher margins than the group overall, but it also experienced a small decline for the second year running.

This report considers Jet2.com's strengths, weaknesses, opportunities and threats. The balance is currently tipped in favour of strengths and opportunities, but weaknesses and threats are visible.

Thai Airways is evaluating the introduction of a premium economy product, which over the last few years has become more mainstream in the Southeast Asian market and globally. There are now over 12 full service airlines in Asia Pacific and over 20 FSCs globally offering premium economy.

Three Southeast Asian flag carriers have introduced premium economy over the past three years – Philippine Airlines (PAL), Singapore Airlines (SIA) and Vietnam Airlines. The Vietnam Airlines and PAL examples indicate there is a potential niche for premium economy in leisure markets. Thailand is primarily an inbound leisure market, although premium economy would help Thai Airways compete for sixth freedom corporate traffic. 

Thai Airways is considering including a premium economy cabin on new widebody aircraft that it will soon order for delivery from late 2019 or 2020. Thai Airways is also considering fitting a premium economy cabin in the upcoming retrofit of its 777-200ER fleet.

Despite the trade rift between the US and Canada triggered by tariffs imposed by the US, the air travel market between the two countries remains stable. All of the largest airlines serving the market have increased their seat capacity between the two countries as the high season in the Northern Hemisphere kicks in.

The largest airline operating between the US and Canada – Air Canada – is forecasting continued solid revenue growth in its transborder markets for 2Q2018, as it continues to execute its transit strategy for international travel through its hubs from smaller US markets. Some of its new introduced routes reflect its efforts to shore up its transit traffic.

It remains to be seen whether the trade dispute will affect the ambitions of Delta and WestJet to form a cross-border joint venture, as well as the potential similar tie-up between Air Canada and United. Trade spats shouldn’t have any bearing on those pacts materialising, but uncertainty driven by US trade policy could change the calculus for those tie-ups.

Taiwan is one of the few markets that are linked to Australia only via foreign airlines. Last year there was (remarkably) 28% growth with China Airlines' expansion as part of a bold bid to pursue Australia-Europe Kangaroo Route transfer traffic via Taipei. Growth is continuing in peak 2018/2019, with a forecast 5% expansion consisting of upgauging in Brisbane and Melbourne offset by frequency reductions in Sydney.

EVA Air has a considerably smaller footprint than China Airlines, with service only to Brisbane. EVA will operate greater capacity in Australia as it replaces A330-200s with its forthcoming 787-9s.

Qantas and Jetstar do not have nonstop services from Australia to Taiwan (Qantas does codeshare with China Airlines). Taipei is on the lower end of route priorities for the group. Recent Asian growth has resulted in new/resumed service to Beijing and Osaka. Seoul was a contender, and likely to receive services before Taipei.

David Neeleman’s potential return to the US market with Moxy has drawn considerable attention, both for his proposed business plan and the boost a 60 aircraft order would give the CSeries aircraft programme (now the A200) in North America.

There is no denying Mr Neeleman’s positive track record in establishing successful airlines, and in theory, the business plan for Moxy (the working title for the airline) is viable. But the US’ largest airlines will not rest on their laurels in competing with new entrants, even if the plan is to operate from secondary airports that have got lost in the shuffle of consolidation.

Moxy’s product proposition is more attractive than those on offer from some of the ULCCs serving secondary airports in the US, but it is tough to conclude that the passenger base from secondary airports could sustain an airline with 60 aircraft.

JetBlue, an airline founded by Mr Neeleman in the early 2000s, also just gave the CSeries programme a boost by ordering the same model as Moxy has reportedly ordered.

The aircraft are replacements for JetBlue’s Embraer 190s, and the timing of JetBlue’s order and Moxy’s plans surfacing in the market could be coincidental.  JetBlue has a different mission for the aircraft, and is stressing that its latest aircraft order is simply a replacement for its Embraer 190s rather than signalling a change in its network strategy.

Lion Group is now in line to become the first A330neo operator in Asia, overtaking AirAsia X. Indonesia-based Lion Air and Thai Lion Air each plan to take an initial batch of two A330-900neos in 2019, which will make the two Lion branded airlines the third and fourth LCCs to operate the new type after WOW air and Azul.

Airbus is now in the final stages of certifying the A330-900neo ahead of delivery to launch operator TAP Portugal. The aircraft will be on flying display this week at the 2018 Farnborough Airshow, where Airbus will be keen to announce new commitments for the A330neo programme after a sluggish initial four years. 

AirAsia X is still on the books as the biggest customer for the A330-900neo, accounting for 66 of a total 232 orders, and was originally slated to be the first operator in Asia as well as the first LCC operator. However, AirAsia X has repeatedly delayed deliveries and at times has threatened to instead order 787s. AirAsia X is reportedly now close to recommitting to A330-900neos, with a potential announcement this week at Farnborough, but will not take delivery of its first A330-900neo until at least 2020.