The US Big 3 airlines enjoy rally in domestic & Latin markets as the Atlantic and Pacific languish


The three large US global network airlines - American, Delta and United - were reasonably positive about their outlooks in early Jan-2017 prior to the US government issuing travel restrictions for several countries. The long term effects of President Trump's executive order remain unclear, but early indications show a curb of some corporate travel just as yields in that passenger segment were starting a slow recovery.

Those three airlines were optimistic that pricing in the US market, including business travel fares, had hit the bottom and was turning a corner. For now that is still the likely scenario, with the domestic market serving as one of the stronger entities for those three airlines prior to the travel ban. Latin America had also started a solid recovery, with American, Delta and United all posting positive passenger unit revenue results for that region during 4Q2016, and they expect Latin America's momentum to continue into 1Q2017.

The trans-Atlantic and trans-Pacific remain the most challenging regions for American, Delta and United. Trans Atlantic flights are challenged by competitive capacity and currency fluctuations that show no signs of retrenching. But prospects for the trans Pacific look better in 2H2017 as service caps in the current China-US bilateral are met during that period.

  • US airlines American, Delta, and United were optimistic about their outlooks prior to the US government issuing travel restrictions for several countries.
  • The US domestic market and Latin America were performing well for the three airlines, with positive passenger unit revenue results.
  • The trans-Atlantic and trans-Pacific regions remained challenging due to competitive capacity and currency fluctuations.
  • Latin America emerged as a bright spot for US airlines, with positive passenger unit revenue results.
  • The trans-Atlantic market faced challenges from low-cost carriers and overcapacity.
  • The Trump Administration's policies and travel restrictions created uncertainty and potential adverse effects on travel demand.

Prospects remain positive for the US domestic market, for now

American recorded a 0.3% gain in its US domestic passenger unit revenue during 4Q2016, and the region was the second best performer for Delta and United year-on-year.

United, Delta and American''s 4Q2016 PRASM performance by geographical regions

Airline Domestic Atlantic Pacific Latin America
United 1.2% decrease 2.8% decrease 6% decrease 7.3% increase
Delta 2.7% decrease 6% decrease 8.8% decrease 5.2% increase
American 0.3% increase 7.7% decrease 4.9% decrease 10.2% increase

American cited improvement across all of its domestic hubs, singling out Dallas/Fort Worth and Los Angeles as revenue leaders. Flow markets were the strongest performers in the airline's domestic entity as pricing in the region stabilised.

Delta is projecting passenger unit revenue growth of 2% in 1Q2017, and the company has stated that returning to a positive PRASM performance rests largely on its domestic entity. As of early Jan-2017, broadly half of Delta's domestic network was producing positive unit revenue. The airline cited New York JFK, Seattle and Los Angeles as "bright spots" in 4Q2016, and forward trends in those markets looked positive.

In early Jan-2017 Delta advised that approximately 35% of its corporate customers planned to maintain or increase travel spend in 1Q2017, which was the best forward looking outlook the airline had gleaned during the past two years.

But corporate yields have a long road to a full recovery. Delta's corporate fares were 30% to 40% below historical highs during the past year, and it will take some time to regain lost ground in the corporate sector.

United concluded that strength in close in corporate travel in the US domestic market that began in 3Q2016 had continued into 4Q, and the airline is forecasting a flat or positive PRASM performance in its domestic entity in 1Q2017 versus a 1.2% decline in the final quarter of 2017.

Latin America emerges as a welcome bright spot for the US Big 3 airlines

Near the end of 2016 Latin America emerged as a bright spot for US airlines as trends on international routes to Brazil stabilised - in part because of capacity reductions. Data from CAPA and OAG for the week of 30-Jan-2017 show that seats between the US and Brazil have reduced by 25% year-on-year.

United States of America to Brazil (seats per week, one way): 1-Feb-2016 and 30-Jan-2017

Airline Week of 1-Feb-2016 seats Week of 1-Feb-2016 percentage share Week of 30-Jan-2017 seats Week of 30-Jan-2017 percentage share
American Airlines 26,058 seats 37.7% 19,069 seats (-26.82%) 36.82%
Azul 7,250 seats 10.49% 4,065 seats (-43.93%) 7.85%
Delta Air Lines 8,011 seats 11.59% 7,787 seats (-2.8%) 15.03%
Korean Air 654 seats 0.95% N/A N/A
TAM Airlines 18,388 seats 26.61% 12,376 seats (-32.7%) 23.89%
United Airlines 8,750 seats 12.66% 8,498 seats (-2.88%) 16.41%
Total 69,111 seats 100% 51,795 seats (-25.06%) 100%

During 4Q2016 American posted the largest PRASM increase in Latin America (among its large US global US peers) - it was 10.2% (see chart above). In addition to improving conditions on routes to Brazil, American stated that routes to Mexico, Central America and Brazil were positive during the quarter. Although its PRASM in Brazilian markets jumped 53% year-on-year, American warned that passenger unit revenues remain negative on a two year basis.

The airline cited competitive capacity additions from the US to the Caribbean during 2016, which created a weak pricing environment. Capacity pressure in Caribbean routes is creating some pressure on American's Miami hub that the airline believes should continue for the next few months or quarters.

Delta expects that the positive momentum it is experiencing in Latin America should continue, noting that Brazil has led a turnaround in the region. Additionally, Delta stated that each Latin American subentity had posted a positive PRASM for the first time since 3Q2011.

United also believes its positive results in Latin America will continue after its PRASM on Brazilian routes grew 40% year-on-year in 4Q2016. However, the airline is forecasting lower PRASM growth on its Latin routes in 1Q2017.

Delta looks to adjust its trans-Atlantic model as LCC competition intensifies

During the past year the large US global airlines have cited tough conditions in the trans Atlantic, with the UK Brexit vote, terrorist attacks, currency fluctuations, and competitive capacity serving as the pressure points in the region.

American has said that the Atlantic was its worst performing region during the last quarter of 2016. In addition to the factors listed above, the airline stated that it was highly exposed to the GBP, with half of its trans Atlantic capacity deployed to the UK. The UK's currency suffered after the Brexit vote, and as of early Feb-2017 the GBP was trading at 0.79 to the USD.

Delta also cited capacity, currency pressure (the EUR was trading at 0.93 to the USD in early Feb-2017) and capacity additions as challenges in the trans Atlantic.

American cited low cost capacity in the region as one driver of negative PRASM.

Iceland's WOW Air and Norwegian Air Shuttle have upped their presence in the trans-Atlantic market during the past year, and schedules from CAPA and OAG for the week of 30-Jan-2017 show that WOW Air's seats are up 247% year-on-year, and Norwegian's seats have grown 82%.

However, their respective shares remain small; WOW has a 1% share and Norwegian's share is 3.5%. Icelandair has grown its seats between the US and Western Europe by 25% year-on-year, but its share is 2%. Overall, seats between the US and Western Europe are up 5.5% year-on-year.

United States of America to Western Europe (seats per week, one way): 1-Feb-2016 and 30-Jan-2017

Airline Week of 1-Feb-2016 seats Week of 1-Feb-2016 percentage share Week of 30-Jan-2017 seats Week of 30-Jan-2017 percentage share
Aer Lingus 9,439 seats 1.79% 14,352 seats (52.05%) 2.58%
Air Europa Lineas Aereas 1,260 seats 0.24% 2,072 seats (64.44%) 0.37%
Air France 27,931 seats 5.31% 29,419 seats (5.33%) 5.29%
Air India N/A N/A 768 seats 0.14%
Air New Zealand 2,324 seats 0.44% 2,324 seats (0%) 0.42%
Air Tahiti Nui 592 seats 0.11% 592 seats (0%) 0.11%
Alitalia 7,412 seats 1.41% 7,280 seats (-1.78%) 1.31%
American Airlines 56,638 seats 10.76% 51,555 seats (-8.97%) 9.28%
Austrian Airlines 4,920 seats 0.93% 4,275 seats (-13.11%) 0.77%
British Airways 77,312 seats 14.68% 80,222 seats (3.76%) 14.44%
Brussels Airlines 1,624 seats 0.31% 1,704 seats (4.93%) 0.31%
Condor Flugdienst 747 seats 0.14% 992 seats (32.8%) 0.18%
Delta Air Lines 70,809 seats 13.45% 69,614 seats (-1.69%) 12.53%
Emirates Airline 3,570 seats 0.68% 3,612 seats (1.18%) 0.65%
Ethiopian Airlines 810 seats 0.15% 810 seats (0%) 0.15%
Eurowings N/A N/A 620 seats 0.11%
Finnair 2,800 seats 0.53% 2,730 seats (-2.5%) 0.49%
Iberia 7,089 seats 1.35% 6,210 seats (-12.4%) 1.12%
Icelandair 7,449 seats 1.41% 9,303 seats (24.89%) 1.67%
Jet Airways 2,012 seats 0.38% N/A N/A
KLM Royal Dutch Airlines 18,746 seats 3.56% 20,827 seats (11.1%) 3.75%
La Compagnie 1,036 seats 0.2% 518 seats (-50%) 0.09%
Lufthansa 52,018 seats 9.88% 56,234 seats (8.1%) 10.12%
Norwegian Air Shuttle ASA 10,767 seats 2.05% 19,605 seats (82.08%) 3.53%
SAS 13,618 seats 2.59% 16,361 seats (20.14%) 2.94%
SATA International 888 seats 0.17% 888 seats (0%) 0.16%
SWISS 15,793 seats 3% 17,511 seats (10.88%) 3.15%
Singapore Airlines 3,115 seats 0.59% 4,380 seats (40.61%) 0.79%
TAP Portugal 2,061 seats 0.39% 5,680 seats (175.59%) 1.02%
TUI Airlines Belgium 588 seats 0.11% 588 seats (0%) 0.11%
TUI Airlines Netherlands 576 seats 0.11% 582 seats (1.04%) 0.1%
United Airlines 76,305 seats 14.49% 72,642 seats (-4.8%) 13.07%
Virgin Atlantic Airways 36,679 seats 6.97% 34,649 seats (-5.53%) 6.24%
WOW air 1,800 seats 0.34% 6,252 seats (247.33%) 1.13%
airberlin 7,750 seats 1.47% 10,440 seats (34.71%) 1.88%
Total 526,478 seats 100% 555,611 seats (5.53%) 100%

Norwegian Air International is planning to launch flights with 737Max jets from Europe to secondary US airports such as Stewart International and Providence later in 2017, which could put further pressure on fares in the trans Atlantic market. American Airlines has warned of a tough competitive environment in the trans Atlantic, particularly over the next year as capacity continues to grow.

Delta is aware of the changing competitive dynamics in the trans Atlantic market. The airline is using its first mover advantage in product segmentation to address the new competition. It plans to offer its basic economy product system wide by 2018, and is also in the process of adding a premium economy product on some of its routes. American is also rolling out a premium economy product on its widebody fleet.

"We need to adjust to that new paradigm as high quality products for leisure customers who are willing to pay more than just standard coach fares", said Delta President Glen Hauenstein. "So we have some adjustments to make in our model."

Caps in the China US bilateral should ease capacity pressure in the trans-Pacific

Pacific passenger unit revenues for American, Delta and United during the past year have also been challenged by overcapacity.

Delta is in the process of restructuring its Pacific operation to de-emphasise its hub at Tokyo Narita and focus on partner airline hubs in Shanghai and Seoul. Delta expects 4Q2016 to be tough for its Pacific passenger unit revenue performance as industry capacity growth moderates, particularly in Shanghai and Beijing where capacity growth has created pressure during the past few years.

Capacity in those markets is being mitigated by airlines reaching service caps in the US-China bilateral later in 2017, and United also cited the easing of capacity growth in 2H2017 on Pacific routes. The company is stopping short of predicting a return to positive PRASM on those routes, but is encouraged by a tapering off of capacity pressure. In the short term, United expects a lower 1Q2017 PRASM performance on its Pacific routes compared to 4Q2016, when passenger unit revenue fell 6% year-on-year.

American also expects its 1Q2017 Pacific PRASM to fall at similar levels year-on-year to 4Q2016's decline of 4.9%. Its challenges in the Pacific are somewhat self imposed. Its capacity in 4Q2016 was up 39% year-on-year due to new routes launched from Los Angeles to Hong Kong, Sydney and Auckland.

Early days of the Trump Administration cause uncertainty and headaches for airlines

Although all three of the large US global network airlines attributed better than expected 4Q2016 unit revenue results to a bump in demand after the US presidential election in Nov-2016, the effects of Mr Trump's policies on travel are tough to predict.

Airlines are welcoming the potential easing of regulatory burdens, and the Big 3 are also preparing to voice their arguments over alleged subsidies of the ME3 (Middle Eastern/Gulf airlines) to a new administration - although, for the first meeting with President Trump, the agenda revolved around ATC reform and the FAA.

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But an overall protectionist stance, including the debate over erecting a wall on the Mexican border, could have adverse effects on travel, as well as Mr Trump's 90 day ban on travel to the US from citizens of Iraq, Syria, Iran, Libya, Somalia, Sudan and Yemen. The Association of Corporate Travel Executives (ACTE) conducted a survey of its members in which 22% held the view that a lasting impact of the ban would be new and intensified threats to travellers abroad - a real concern where corporate travel brings with it high levels of duty of care for employers. The Global Business Travel Association GBTA recently polled its members, and 31% stated that they expect the restrictions to result in a reduction in corporate travel.

Any change to travel patterns or demand to the US would hamper US airlines' efforts to restore positive unit revenue.

In the short term Mr Trump's executive order has wreaked havoc at US airports, creating unsettling situations for US airlines. "Crews, reservation agents and airport teams have witnessed turmoil in our airports that shows how divisive this order can be", stated American CEO Doug Parker.

The Trump Administration remains a wild card as US airlines work to restore revenue

American, Delta and United all believe they will return to positive unit revenue in early 2017 after trends in the US market began to stabilise in late 3Q2016. All of those airlines are keeping system capacity growth below 2% in 2017 as a means to ensure a proper supply demand balance.

But some level of uncertainty belies those positive sentiments as the Trump Administration settles in.

In the early days Mr Trump has created a confusing portrait of the US on the world stage that could have far reaching effects on demand to and from the US, and that is set to hurt the revenue recovery for US airlines over the long term.

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