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American Airlines' recent pursuit of China Southern, and Norwegian’s partnership discussions with Ryanair, reflect the multiple changing dynamics that airlines operating across all business models must face as they maximise network connectivity to remain relevant and competitive. American had to drift outside oneworld to gain an important foothold in China, while Norwegian stresses that traditional airline partnership structures are not viable for its business model.
But despite American’s attention grabbing decision to take a small equity stake in China Southern, the agreement appears to be a one off event. American has no plans to join rival Delta in pursuing stakes in airlines around the world to attain network longevity. American's position is that its current and prospective joint venture agreements provide anchors in the most important global regions.
For Norwegian, a potential tie up with other low cost airlines allows the company to offer network breadth to the pool of passengers it intends to stimulate with new narrowbody service to the US, but without the frills and expense inherent in more complex airline partnerships.
Hawaiian Airlines continues to ride a wave of positive unit revenue momentum, outshining competitors
As most US airlines suffered from a negative unit revenue performance during the past year, Hawaiian Airlines enjoyed positive results in that metric. This result was driven by its unique geography and benign industry capacity growth in its markets that appears to be continuing throughout most of 2017. As many US airlines believe they will finally recover to a positive unit revenue result in 2Q2017, Hawaiian expects another strong performance in that metric, despite continued capacity pressure in its interisland markets. Despite tougher year-on-year unit revenue comparisons as 2017 progresses, Hawaiian believes much upside remains in the sales of premium products.
Due to the timing of new Airbus A321neo deliveries, Hawaiian’s capacity growth targets for 2017 have moved around. But the airline now believes its supply should increase between 2% and 5% as Hawaiian works to adjust its fleet to meet higher levels of travel demand at YE2017.
Hawaiian was one of the few US airlines that actually posted an increase in pretax margins year-on-year in 1Q2017, and it appears as if the company’s valuation in 2Q2017 is reaping some rewards from that performance.
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.