A selection of extracts from perspectives Peanuts! Weekly over 2008, providing an overview of how this unique year has unfolded.
#198/08-Jan-08: Downturn to play into LCC sector's hands? 2008 will be a challenging year for the global airline industry. High fuel prices and increasing signs of a global economic slowdown, led by the US, could make for a more difficult traffic environment than recent years. And downward pressure on yields will intensify as new capacity enters. The major airline associations are warning members to redouble their efficiency efforts, signalling that the lean, focused carriers are likely to succeed if conditions worsen in the months ahead. LCCs could find themselves in the driving seat again in 2008.
#199/15-Jan-08: Inside LCC strategy: Jan-08 outlook - North America/Europe challenges, Asian opportunities. As we enter 2008, it becomes increasingly apparent the LCCs of the mature North America/European markets, and those in emerging countries, including Asia Pacific and the Middle East, have increasingly divergent outlooks. LCCs based in North America and Europe are, to varying degrees, slowing capacity as growth stalls and load factors decline. LCC share prices, virtually across the board, have been very weak lately, as investors grow increasingly concerned about the earnings outlook facing LCCs and the wider airline sector. Conversely, there is a proliferation of LCCs in the Asia Pacific and Middle East region. Liberalisation of aviation access and rising incomes in the region are combining to provide operators of low cost airline models a massive market opportunity.
#200/22-Jan-08: Tough time for equity markets, and LCCs. The LCC sector has not been immune to the recent turbulence on global equity and credit markets, providing some challenges for share sales and IPOs, but some potential opportunistic buys are emerging. LCCs suffer in market rout. Since early Dec-07, 12 out of 14 LCC stocks have fallen, some heavily, including Frontier (-44.3%, as Southwest expands into its home base of Denver), JetBlue (-30.9%, despite Lufthansa's acquisition of a 19% stake) and Virgin Blue (-26.5%, as concerns grow of increasing competition in the Australian domestic and international markets).
#201/29-Jan-08: Capacity slowing in the US as demand holds up. Frontier Airlines has joined Southwest Airlines, JetBlue and several US majors in announcing plans to slow capacity growth in 2008. Frontier feels the pinch. After a difficult December quarter, in which Frontier's net losses doubled, the Denver-based LCC announced a reduction in its fiscal fourth quarter (ending Mar-08) and beyond.
#202/05-Feb-08: Will the aircraft orders flow in 2008? (Part 1). Aircraft orders have surged in recent years, with Airbus and Boeing each holding around 3,400 aircraft in their backlogs - or around six years of production. These are levels not seen in the history of aviation. A sizeable proportion of these orders have come from LCCs. But whether the cycle can continue is the 64 billion dollar question for the aviation industry. To date, both Airbus and Boeing have remained bullish on the prospects in the year ahead, but have they put too much faith in the strength of the current order cycle? We review this question in a special two-part Perspective.
#203/14-Feb-08: Will the aircraft orders flow in 2008? (Part 2). Last week, we reviewed the following drivers of the current strong orders cycle: Driver 1: Continued strong air traffic demand; Driver 2: Delays to new aircraft programmes - a mixed blessing; Driver 3: The push for greater fleet efficiencies. This week, we review rising liberalisation of aviation access, a lack of meaning industry consolidation and the growing environmental issues facing aviation. Driver 4: Increasing aviation liberalisation. Liberalisation will continue to play a key role in driving global aviation development. The implementation, in less than two months, of the EU-US open skies agreement will be a watershed for aviation, spurring greater freedoms for airlines to conduct their operations on the important Atlantic market.
#204/21-Feb-08: Global downturn impact: LCCs sharpen focus on corporate travel market. "When things slow down, people will trade down to a low cost carrier" -AirAsia CEO, Tony Fernandes. For 'people', read also corporate travellers. "When you can't rely as much on market stimulation and have to steal share from other airlines, you have to be relevant to business travellers" - Donald Uselmann, JetBlue Manager of Sales Products. LCCs have played a major role in the structural changes that have taken place in Europe's aviation market in recent years. IATA members, mainly full service airlines, are reporting growing weakness in premium travel demand. The industry body is now concerned the trend is spreading to other regions.
#205/28-Feb-08: 2007: capacity and demand growth in the Spanish market; but at the price of load factors. The Spanish airline market is one of the most competitive in the world and it has been a rough ride for industry participants in 2007. Local LCC, Vueling, in particular, has been caught up in the turbulence. Amid shareholder strife, management changes and a redirection of strategy, Vueling looks to be a prime takeover target in a sector striving for stability, as we review in this, our annual review of the Spanish market.
#206/06-Mar-08: Cost headwinds cause ancillary revenue focus. With record high fuel prices, weakening economies and competitive pressures, airlines all over the world are looking at the idea of adding revenue from sale of ancillary products and services, as we review in this Guest Perspective by Patrick Murphy. Achieving the ancillary revenue fit. Senior airline executives are asking: "What could it be worth to my airline?"; "How does it fit with my image and reputation?"; "Are my customers willing to be subjected to hard sell of products and services they have traditionally had included in the price of a ticket?".
#207/13-Mar-08: Airports change irreversibly under LCC influence. Airport operations and behaviour have changed rapidly across the world under the influence of low cost carrier (LCC) development. Secondary airports feel the effects first. The most dramatic impacts have been on so-called "secondary" airports near large cities. These were often previously often unused, or greatly under-utilised. Life has been breathed into them by the arrival of one or more LCCs.
#208/20-Mar-08: US consolidation stalling - JetBlue says "Guten Tag"; Delta to make the French Connection? US consolidation looks dead - for now - and with a new US-EU open skies deal dawning in under two weeks, perhaps US airline executives will enjoy a European Summer this year. Delta Air Lines' pilot union has informed the carrier that it has been unable to reach an agreement on seniority integration with its counterpart at Northwest Airlines. Few were surprised.
#209/03-Apr-08: Japan and Dubai - The next LCC hotspots. A new Dubai-based low cost carrier (LCC) to be established with the support of the Emirates Group and plans by Japan's All Nippon Airways (ANA) to establish an offshore Asian LCC have massive ramifications for Middle East and North Asian aviation.
#210/10-Apr-08: The budget airline blues - ATA RIP; Skybus(t); Aloha farewelled; Champion defeated; Oasis evaporates; Adam Air banished. The low cost and charter airline industry has been rocked in the past fortnight by several high profile market exits. But more are set to come as economies slow and fuel prices remain at very high levels. Airline business models not built for USD100+ per barrel oil. The bankruptcies, liquidations or groundings of half a dozen budget and charter airlines in the US and Asia in the past few weeks have graphically demonstrated the risks the airline industry faces in this period of extreme fuel prices.
#211/17-Apr-08: Time for Branson to show his hand at Virgin Blue. Virgin Blue is in the headlines, and not all for the right reasons. Certainly its move to international service with V Australia should one day generate profits. But, meanwhile, profits are falling, fuel prices are soaring and its market share is being eaten away by leaner rivals. Even majority shareholder, Toll Holdings, is looking for the exits, but can't get through the door. However, beyond the slump in its share price - in the process inflicting collateral damage on Toll - is a potentially very exciting story for the so-called New World Carrier.
#212/24-Apr-08: Asia Pacific LCC Outlook 2008: Structural shifts ahead? LCCs could prosper in difficult times. In previous downturns, low cost/low fare airlines in the US have managed better than higher cost/higher yield competitors and the market is clearly expecting this to be repeated. There are several dynamics in this equation. Higher yielding traffic generally erodes quickly as economic conditions deteriorate and businesses - which are first to see the warning signs, of credit tightening and consumer softening - cut back on travel costs. Once the margin between cost and revenue is reduced in this way, the network carrier tends to be squeezed first.
#213/01-May-08: The airline 'Haves and Have-nots' - Survival of the nimblest. Airlines around the world are scrambling to head off the potentially devastating impacts of a sustained period of extremely high fuel prices. Non-fuel costs are under attack, while airlines are also attempting to raise revenues where they can. Despite strong past year results, it is clear that all airlines are now feeling the chill winds of economic downturn sweeping across the world. What are the keys to surviving times such as these?
#214/08-May-08: Price war in Malaysia exposes shifting airline business models. Malaysia Airlines ready to take on AirAsia. Idris Jala has achieved many things at Malaysia Airlines (MAS) during his tenure as Managing Director & CEO. The architect of MAS's remarkable turnaround, Idris this week declared the carrier was "confident" of succeeding in his most ambitious quest to date - beating AirAsia at its own game of low fare leadership. In the process, the Malaysian market is becoming a test case in airline business model evolution.
#215/15-May-08: Falling demand in the US this Summer. ATA forecasts marginal demand. The US Air Transport Association forecasts US domestic passenger numbers would decline 1.3% year-on-year to 211.5 million for the three months ended 31-Aug-08 (the peak Summer travel period). ATA expects load factors to be "approaching 85%", which is similar to levels in the previous corresponding period. Record-high jet fuel prices, a weakening economy and capacity reductions are the main reasons for the expected reduction in the passenger numbers. ATA also expects these factors to result in an "inevitable" increase in airfares.
#216/22-May-08: Airlines bunker down and hope their rivals will perish. As fuel prices soar towards USD130 per barrel and hard evidence emerges of a traffic slowdown outside the US, airlines worldwide are talking up the prospect of more airline failures, but aside from some small-scale market exits, little has yet changed to the structure of the industry. The run-up in oil prices this month, due to ever-present supply concerns, has prompted Goldman Sachs to forecast an average oil price at USD141 per barrel in the second half of the year. If that plays out, the predictions of imminent airline failures by many industry CEOs, will surely follow. Or will they?
#217/29-May-08: AirAsia 1Q08 Report: Net margin of 30.1% on revenues up 35%; 25th consecutive quarter of profitability. Through a difficult period, AirAsia appears to have turned in an extremely solid performance in the three months ended 31-Mar-08 (1Q08), combining expansion effectively with profitability. Revenues were up 31.7% year-on-year, to USD164.5 million in the period, while operating profit improved 34.2%, to USD45.3 million.
#218/05-Jun-08: The death of LCCs? Soaring fuel prices and slowing economies in the lead-up to a major industry talk-fest (the IATA AGM in Istanbul) have triggered some fascinating comments by industry participants about the future of the airline industry, and LCCs in particular. IATA Director General, Giovanni Bisignani, stated high fuel prices would affect low-cost airlines more, as fuel is a higher proportion of LCC operating costs, while several LCCs are "already in difficult waters and will probably be more easy to collapse". (Conversely, following Mr Bisignani's argument, larger legacy carriers would be "more difficult" to collapse, which is certainly true of his former carrier, Alitalia, and other flag carriers around the world). We review whether LCCs are more vulnerable in the current environment.
#219/12-Jun-08: Raising expectations - The challenge of increasing fares. In last week's Perspective, we reviewed the question whether the LCC sector was more or less likely to collapse in the current extreme fuel price environment. The conclusion was that predictions about the imminent death of the LCC model are incorrect and that LCCs in many major markets could emerge from the current crisis with a stronger market position, as has occurred in previous market downturns. In this follow-up Perspective, we review recent statements by KLM and the challenge airlines are facing in passing on higher costs to passengers.
#220/19-Jun-08: Crunch time for US carriers. In a sign of an increasingly desperate US airline industry, the Air Transport Association of America (ATA), whose members include LCCs Southwest Airlines, JetBlue and AirTran, has made an urgent plea to Congress to act on what it called the "overwhelming odds now favouring index speculators" in the oil market. ATA President, James May, added, "we are asking for Congress to take steps now - not 60 to 90 days from now - to totally close the loopholes and make the market more transparent and balanced, to ensure a level playing field for all".
#221/26-Jun-08: Risky business - The challenges facing low cost airports. The challenges facing the LCC sector and wider airline industry are having an inevitable flow-on effect for the airport sector that serves them. Unlike airlines, which can implement capacity decisions virtually overnight, airport planning horizons are counted in years - sometimes decades. Several airports are continuing with plans to provide dedicated infrastructure for LCCs, as they chase the strong rates of growth the sector can offer. We review some of the latest developments - and the challenges - facing low cost airports and terminals.
#222/03-Jul-08: Market uncertainty triggers booking windows review. A review of airline booking windows by the Centre for Asia Pacific Aviation reveals LCCs tend to offer much narrower booking windows than their full service counterparts. In recent months, Southwest Airlines reduced its booking window to less than 100 days to enable it to "better react in its schedule planning to the capacity reductions announced by its rivals". Up until late Jun-08, passengers were unable to book tickets after 30-Oct-08 - ruling it out of early Thanksgiving and Christmas travel bookings. (Southwest recently released its schedule for the Northern Winter for bookings up to 09-Jan-09).
#223/10-Jul-08: Who has the biggest ancillary revenue of them all? A review of airline's ancillary revenue sources by the Centre for Asia Pacific Aviation reveals a rapid increase in LCC focus on ancillary revenues to boost revenues, to help them maintain the low fares that passengers have come to expect. This has become increasingly important in the current challenging environment facing airlines worldwide. Yield increases of 15% and more have resulted. In this first part of a three part benchmarking study, Peanuts! Weekly examines the range of ancillary revenue options currently available by airlines. In the next two of the series, we will look more specifically at LCCs offering passengers the ability to carbon offset their travel, followed by an examination of the increasingly broad range of in-flight entertainment options offered by LCCs.
#224/17-Jul-08: LCCs take the green challenge. In this second part of a three part benchmarking study, Peanuts! Weekly examines the increasing adoption of carbon offsetting programmes and other environmental initiatives by LCCs. Commercial aviation is currently responsible for approximately 2% of carbon emissions globally, although the industry has received a disproportionate amount of negative - and sometimes hysterical - media attention. As the Pacific Asia Travel Association recently asserted, newspaper headlines in Europe such as, "Travel: The New Tobacco", or "Announcement: Your Flight to Malaga is Destroying the Planet" suggests aviation is being unfairly targeted. Putting the scientific and political arguments of climate change to one side, we review a sample of initiatives the LCC sector is taking on the environment issue. Our sampling reveals airlines, and European and Asian LCCs in particular, are increasingly adopting various environmental programmes, as part of a proactive approach to the issue. Several of these programmes have become important marketing and efficiently tools for the airlines. Anecdotal evidence also suggests the LCC platform of online distribution and product add-ons also lends itself to carbon offset purchasing.
#225/24-Jul-08: Ancillary Revenues #3: In-flight options. In this final part of a three part benchmarking study, Peanuts! Weekly examines the increasingly broad range of in-flight entertainment options offered by LCCs. Some LCCs, predominantly those pursuing a stricter adherence to the LCC model (including AirAsia, Ryanair, Allegiant and Spirit), are becoming increasingly innovative with the provision of in-flight service options.
#226/31-Jul-08: June quarter LCC earnings: The glimmers in the gloom. Good news week - for some. Airline shares have had a good few weeks - with the price of oil now trading around USD27 below its record highs just shy of USD150 per barrel. But the past week's April-June quarter financial results announcements by several airlines have given investors further food for thought.
#227/07-Aug-08: US LCCs on the March. LCCs can flex their muscles. Record fuel prices, a weak economy and crisis-ridden network carriers are providing US LCCs their biggest expansion opportunity since the start of the century. As network airlines elsewhere in the world scale back, the same principle may well apply. As the US Departments of Justice and Transportation sit down to review the Delta-Northwest merger (and others to follow), a new Government Accountability Office (GAO) report into the airline industry has provided food for thought.
#228/14-Aug-08: Missing the GOL: Yet another difficult year and disappointing quarter. South America's LCC champion continues to struggle to capture its former glory. GOL Linhas Aéreas Inteligentes, the parent company of Brazilian airlines GOL Transportes Aéreos (GOL) and VRG Linhas Aéreas (VRG), reported a USD106.0 million consolidated net loss in the three months ended 30-Jun-08, a significant increase from the USD21.9 million net loss reported in the previous corresponding period. The result was the third straight quarterly loss by the airline, whose results were dragged down by the prolonged and problematic VRG integration processes.
#229/21-Aug-08: Who's your daddy? Virgin Blue falls back to earth. The mid-Jul-08 announcement by Toll Holdings to offload its stake in Virgin Blue (in the form an "in specie dividend" to shareholders), combined with a 24% reduction in the oil price put a rocket under Virgin Blue's shares. The stock more than doubled in a month, before thudding back to earth with this week's profit announcement and forecast of a very challenging outlook for 2008/09. The carrier's high-flying margins have fallen and it has admitted it will be hard pressed to break even in the current financial year.
#230/28-Aug-08: Korea steps back into the dark. Airline protectionism flourishes in Seoul. The Korean Ministry of Land, Transport and Maritime Affairs this week failed to reject a protectionist request led by its national airline to turn back the clock of liberalisation in the region. The request from several vested interests - worded in clear aviation nationalism overtones - was designed solely to protect local airlines from added competition - and the lower fares that competition would bring.
#231/04-Sep-08: AirAsia's profits slashed, but "untold fortunes await" with contrarian strategy. AirAsia's second quarter profit result contained few surprises. Net profit fell 95% and operating margins slipped below 5%. CEO, Tony Fernandes, stated it was nonetheless a "commendable performance" given that unit fuel price increased by 65% to USD142.5 per barrel. AirAsia is maintaining its contrarian approach of continuing to grow strongly as its competitors cut back.
#232/11-Sep-08: Structural change on the way in Asia. Oil Shock! Crude at USD100 per barrel. It's not so long ago that the forecast of oil at USD100 per barrel shocked the airline industry. Today, it is almost a cause for rejoicing. But there is another, darker side to the new scenario. The rapid deflation in the price of oil is surely more worrying for some airlines than the rally. The air is being quickly sucked out of the global economy, and with it the strong premium demand and high load factors that helped airlines ride out the fuel price storm and crises before it.
#233/18-Sep-08: Turkey's LCC sector on the rise. Turkey is on the rise. Invigorated flag carrier, Turkish Airlines, is scouting for foreign investment opportunities while Turkish airport operator/developer, TAV, is blazing a trail across emerging markets, picking up multiple lucrative airport modernisation and management projects. Turkey also has a vibrant low cost airline scene, with SunExpress, Anadolujet and Pegasus all undergoing rapid expansion. Strong traffic growth as economy performs.
#234/25-Sep-08: easyJet's banking on airline failures as bleak Winter looms. easyJet is one of a handful of well positioned European carriers that is set to increase its market share this Winter as its rivals reduce capacity or exit the market. The massive spike in the price of oil on 22-Sep-08 back above USD120 per barrel could accelerate the process of change in Europe. easyJet CEO, Andy Harrison, stated recently, "I'm pretty certain easyJet will win market share from airlines that cut back or disappear, while as economic pressures (on passengers) increase, we should win market share from the legacy airlines".
#235/02-Oct-08: Kuala Lumpur-Singapore to be among world's fastest growing routes, as LCCs ramp up presence. Singapore-Kuala Lumpur is expected to be one of the fastest growing routes in the world next year, as LCCs from both sides rush to take advantage of market liberalisation. Tiger Airways Singapore Managing Director, Rosalynn Tay, stated, "this is a huge milestone in Asian low-fare aviation...the customer is the big winner here".
#236/09-Oct-08: Beginning a new cycle of airline entry? Aircraft and fuel prices revive the prospects of would-be investors. "We won't do this until we are at the bottom of the business cycle... The only time to set up an airline is when they are parking planes in the desert. We are not very far from that at the moment. We would plan to do long-haul 18 months after we secure a fleet of aircraft." - Ryanair CEO, Michael O'Leary, announcing he would consider establishing an LCC sister company to launch long-haul operations, in the event aircraft prices fall next year. The economic signals are hardly positive. Even the optimists are forecasting (merely) a worldwide recession. But even the fiercest pessimist would not suggest there will be complete grounding of air services. And as long as aircraft fly, there will be those who lust to start up an airline.
#237/16-Oct-08: Crunch time in Europe? European economies are slowing dramatically, prompting a wave of activity by the region's airlines to adjust their strategies. Lower fuel prices will support a grab for market share by LCCs, as several expand - often retaining load factor levels. For the three majors, British Airways, Air France-KLM and Lufthansa, this means reduced market share. The big question - can the expanding LCCs make profits, while expanding market share? The main determinants: fuel prices and consumer price sensitivity. easyJet, looking set to become even more expansive as fuel prices fall, appears well placed also to maintain good yield levels in this environment.
#238/23-Oct-08: Allegiant Air shines in a dark sky. A sound strategy and a little bit of good fortune have helped Las Vegas-based LCC, Allegiant Air, to rise above the pack. Allegiant Air is the only US mainline carrier to have posted profits in every quarter so far in 2008, with the consistently profitable LCC likely to be one of a handful of US carriers to have booked a net profit in the third quarter (three months ended 30-Sep-08). It is also set to report record profits in the final quarter. We review one of the few good-news stories and the keys to Allegiant's success.
#239/30-Oct-08: Ancillary revenues increasingly important in current difficult operating environment. In the current challenging operating environment, carriers worldwide are increasingly keeping an eye on the potential for new ancillary products and associated revenues. Such products provide a way for airlines to grow revenues by, in many cases, converting traditional cost centres into revenue items - or, as a minimum, recouping sunk costs related to the specific service provided.
#240/06-Nov-08: Ryanair plots the fall of Europe - 20% cut in fares planned. Ryanair unveiled a 31% reduction in second-quarter profit (slightly worse than market expectations), but reaffirmed it is confident of breaking even in the full year (ending 31-Mar-09). It previously predicted potentially deep losses for the full year.
#241/13-Nov-08: Air Arabia - the world's most profitable airline. Air Arabia is the world's most profitable airline, thanks to its unique geographic position in the growing Middle East market, relentless control of costs and highly efficient operations. Against the trend of falling airline profitability, even in the Middle East, the Sharjah-based carrier's net profit surged 29.7% in the third quarter.
#242/20-Nov-08: Just as things were looking good, along came Stelios... Arguably the best-positioned airline in Europe at present, easyJet looked to be well on track to carve a valuable niche in the European industry, as economic conditions slide. With a relatively low cost base, easyJet's strategy of flying to main gateways, in parallel with full service airlines, was starting to look good for it, as premium business passengers moved down the price curve.
#243/27-Nov-08: Southwest buys LaGuardia slots as DoT auction plan debate intensifies. The US Department of Transportation's highly controversial plans to auction slots at New York area airports is intensifying, with the Air Line Pilots Association this week joining the growing list of industry groups expressing their staunch opposition to the move.
#244/04-Dec-08: Indonesia's fast-growing LCC says the "name of the fame is flexibility" in seizing opportunities. "The market is changing very fast, so the name of the game is flexibility in seizing the opportunities and changes in the industry". That is the view of Mandala Airlines CEO, Warwick Brady, who talks exclusively to the Centre for Asia Pacific Aviation.
#245/11-Dec-08: SkyExpress: Russian LCC secures financial backing after rumours of financial problems. In a turbulent and lopsided marketplace, there has been a lot of speculation in the media over recent months about the future of Russia's airline system is, at best, in a process of restructuring. Indeed, had it not been for the surprisingly sudden slip in fuel prices, meltdown might have been the relevant noun.