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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.
The three large US global network airlines – American, Delta and United – continue to tout the strength of their balance sheets; the results which they’ve achieved during the past few years by the use of various tools, including free cash flow generation and debt reduction.
Delta is using its newly minted investment grade status to tap markets for creative ways to fund its hefty pension obligations during the next two to three years. American is also working to ensure pension compensation coverage by lifting its liquidity targets as rules allowing favourable minimum funding contributions expire in 2017.
Each of those airlines is bracing for fairly substantial capital expenditures during 2017, largely driven by aircraft acquisitions, but American, Delta and United have no plans to compromise their balance sheet progress irrationally in order to support fleet revamps.
At nearly 46 years old and 17 years old, respectively, Southwest and jetBlue approach their financial priorities differently. jetBlue is in the process of buying a certain level of aircraft off lease to reduce debt and raise its levels of unencumbered aircraft. Southwest is concluding a hefty investment in a long overdue overhaul of its reservations system and making other significant technology investments.
Each airline also has a different capital allocation strategy. Southwest has engaged in some level of shareholder returns since the 1990s, whereas jetBlue’s shareholder return strategy is just starting to take shape – the airline is reaching a point in its leverage performance where it can contemplate more meaningful levels of shareholder returns in the medium term.
One area where Southwest and jetBlue hold similar visions is balance sheet strength, and the airlines have similar leverage goals: to support capex commitments, maintain manageable debt levels, and expand or sustain return to shareholders.