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CAPA’s top 15 most read reports of 2013; a chronicle of global transformation, region by region

This end-of-year wrap reviews 15 of the most read reports from CAPA analysts in 2013. The most popular report from CAPA’s analysts this year looked at the impending impact of the big three Middle East airlines on the US market, Emirates, Etihad and Qatar Airways, once they establish there more widely. In particular it looked at the direction of Emirates, shortly after commencing a remarkable joint venture agreement with Qantas which commenced on 1-Apr-2013.

In Asia, much of the attention is towards the rise and rise of LCCs and their various international joint venture operations, all accelerating the process of change away from the old bilateral restrictions. For Europe too, most of the action has derived from the main LCCs, as the established airlines struggle to reduce costs and find new models to help them adapt to the new environment – including partnerships with the former enemies from the Gulf.

Latin America too has seen several key cross border mergers, including the LATAM consolidation to create the largest airline group in the region. Africa, with one or two exceptions, sadly still struggles to overcome inefficiencies and government meddling, while gradually opening up to private, more efficient models. And Russia looks forward to a new 2014 with renewed vigour.

Underlying these themes is one fundamental of the industry – liberalisation. It is happening fast, while ironically the origin of the open market – the US – is increasingly associated with calls for government protection.

Without liberalisation, the Gulf carriers’ expansion would not have been possible, nor Asia’s and Europe’s transformation by LCCs. But there are self interested hold-outs; in the US’s case in particular, Delta has enlisted the support of some of the members of the country’s trade body, Airlines4America to generate support for restrictions on access to US markets.

The threat is more cogent, noted the report, because “...the Gulf airlines, with their extremely high quality inflight product, are capturing the lion’s share of global premium traffic, just as many airlines are cutting back on front-end capacity”.

Report #1: Why Emirates and friends will soon reshape American aviation: 11th May 2013

Shortly after Emirates Airline announced its remarkable breakthrough partnership with Qantas in Sep-2012, Emirates CEO Tim Clark said he had also been talking to American Airlines for some time and publicly expressed hopes that the two would also establish a close relationship. This was despite the fact that American already had an extensive codeshare relationship with Etihad while the third Gulf carrier, Qatar Airways, one month later was invited to join the oneworld alliance – which American leads.

The Gulf airlines, and particularly Emirates, have had a devastating impact on European long-haul hub carriers. The impact will be different for US airlines, but despite the different geography, it will be much bigger than most expect. For one thing they will cut across the developed boundaries of the global alliances.

Emirates is the world’s largest international long-haul operator by a wide margin; even on a seat basis, only three European airlines (Ryanair, easyJet and Lufthansa) head it, thanks to their high density short-haul operations.

… The US is still underdone when it comes to Gulf carrier penetration. This is both because it is early days and because the hub proposition is different for the US.

Although Emirates is undoubtedly well placed to service Indian travellers between the US and the sub-continent, the hub value for the US market deteriorates the further east the origin point is.

So, few would think of flying between Shanghai and San Francisco via Dubai; but Shanghai-New York over the Gulf becomes potentially competitive, as a search on Expedia will show. And, the further south the East Asian point, the more competitive it becomes – for example, a daily Ho Chi Minh City service by Emirates over the Gulf, one-stop to New York offers a direct challenge to any other product (as a combination of elapsed time, inflight quality, frequency, network coverage, price etc).

Then, for Bangkok, where Emirates has a five-times daily operation, or Singapore, with thee daily non-stops from Dubai, connecting with three-times daily New York flights, the “product”, especially for business/premium travellers, emerges as a winner for travellers to the Big Apple. This is one reason the Gulf airlines, with their extremely high quality inflight product, are capturing the lion’s share of global premium traffic, just as many airlines are cutting back on front-end capacity.

For the still small, but fast growing and high yielding African market, the Gulf carriers are becoming a more and more attractive proposition from US points. Their extensive networks in the region and their explosive entry into partnerships with many of the key African carriers are positioning the Gulf airlines to compete aggressively with European hubs, where the rare direct services are not available.

Yet it takes time to build network strength. For the time being the US (and Canada) does not have adequate capacity, frequency and network to have the pulling power the hub carrier enjoys in Europe.

Thus, strategically, Emirates must achieve two goals:

  • First, enhance its partnership/reciprocal codeshare linkages. This will allow it to feed its network via third party airlines, both providing Emirates with more traffic and its partner with greater access to a global network; then
  • Secondly, having constructed its foundation, expand its own services.

As European, Australian and African based airlines have learned, the first part of this equation becomes almost unavoidable, on the basis of “if you can’t beat them join them”. Air France for example had been so sternly opposed to the expansion of the Gulf carriers that, when the carrier last year agreed to codeshare with Etihad, IAG CEO Willie Walsh described the about-face as being the equivalent to Air France “talking to the devil.” Mr Walsh had meanwhile persuaded Qatar Airways to join oneworld and Emirates was dealing with Qantas.

Consequently, working with Emirates offers a highly attractive alternative, even though it may appear to limit the longer term options of the foreign airline. And, if it does so limit the airline, well, the reality is that the Gulf carriers have changed the world – there is no looking back.

But holdouts remained, as the report continued….

Not all countries are so enlightened. These simultaneously present short term barriers to entry, while holding out the promise of mid-term future opportunities as liberalisation inevitably erodes government support for nationalist protectionism. Austria is a case in point, where Lufthansa-owned Austrian Airlines is able to use obscure bilateral wording to prevent either Emirates operating its A380 into Vienna or allowing partner Qantas to offer seats on a third country codeshare basis – despite Australia having bilateral access rights.

As noted above, Air France and its government also maintained a typically protectionist/mercantilistic approach against admitting the Gulf carriers. But once Etihad secured a toe in the door with its announcement of a codeshare agreement with Air France, the opening is likely to be followed by fellow SkyTeam member Kenya Airways also joining forces with the Abu Dhabi carrier. This does not directly help Emirates, but it indicates clearly that the last defences are crumbling.

See related report: Etihad ties up with Air France-KLM; next Qatar-oneworld and the aviation world turns on its head

In Europe Emirates makes the point forcefully that protecting the relatively lower economic value of the national airline is illogical where Emirates is the largest single buyer of Airbus aircraft and notably of the iconic A380. In Apr-2013, Mr Clark noted that his airline contributes EUR200 million annually into the French economy as a result.

The expansion has become a more sensitive issue where even the slightest challenge to the north Atlantic closed shop ATI-protected alliance JVs arises:

Yet another dimension was added to Emirates’ operations when on 08-Apr-2013 it announced the launch of the airline’s first trans-Atlantic (Europe-US) operation since it dropped Hamburg-New York in 2008. Emirates from 1-Oct-2013 has operated 777-300ER service between Milan and New York JFK as an extension of one of Emirates’ existing three times daily Dubai to Milan flights, making for a total of three times a day service by Emirates into New York (the other two being non-stop from Dubai).

Mr Clark said at the announcement, “Operating a trans-Atlantic route has been on our agenda for some time. Having carefully monitored traffic flows we have identified strong demand for both a direct connection and, importantly, for the Emirates product. The route is currently underserved, particularly with a strong premium product offering this is where we see a clear opening for Emirates. We intend to capitalise on this opportunity, stimulating further demand and encouraging additional traffic flow in both directions.”

The partnership dynamics are made even more intriguing as Emirates will also leverage its relationships with JetBlue (also an American partner) in the US and, in Europe, its frequent flyer partnership with easyJet to help feed each end of the operation.

Another area of sensitivity comes as “The second phase of Gulf airline expansion targets regional centres”

At first when Emirates began serving non-capital “regional” cities such as Manchester and Birmingham in the UK, or even Dublin (with its population of just over a million), there were cries of “capacity dumping”. The market response has generally given the lie to that, as new global one-stop travel opportunities opened up..

Today, Greater Manchester, a regional centre with a population of around 2.5 million, and only 290km (180 miles) from London, is host to seven widebody services each day from the three Gulf carriers: an A380 and two 777s from Emirates; two A330s from Etihad; and two A330s from Qatar Airways – well over 2,000 seats daily.

These airlines have the power to transform the landscape, and not just around major hubs.

Report #2: AirAsia Japan collapses after AirAsia Group was too bearish while ANA lacked experience: 28-Jun-2013

Asia’s low cost airline cross border joint ventures have transformed the region in short to medium haul operations, just as the Gulf airlines are doing on a global basis. In 2012, genuine LCC operations arrived in Japan with a bang; three new low cost airlines took to the skies, each subsidiaries or part-subsidiaries of the two Japanese majors, All Nippon Airways and Japan Airlines.

They were Peach Aviation and AirAsia Japan (each ANA-related) and Jetstar Asia (JAL, partnered with Qantas’ Jetstar). Not all of them survived the complex meeting of airline cultures.

Diagnosing the exact cause of failure at AirAsia Japan, which will end operations with that name on 31-Oct-2013, is subject to opinion of joint venture partners AirAsia Berhad and All Nippon Airways (ANA), as well as third parties. But most would agree that there have been fundamental structural problems.

Many of the challenges have faced not only AirAsia Japan but also Jetstar Japan and Peach Aviation. Some problems were spotted in advance and intentionally avoided by peers. Collectively, they point towards LCCs having a long-term future in Japan but only under the right circumstances.

AirAsia Japan’s troubles stem from its ownership structure that gives ANA majority control; something that a Japanese carrier does not have in Jetstar Japan or Peach. This allows LCC professionals, not legacy managers, to run the airline.

All of the other AirAsia affiliates have local partners from outside the full-service airline sector. AirAsia is not able to own a majority of any of its affiliates outside Malaysia but it has cooperative partners, allowing the group to make sure the AirAsia LCC DNA is embedded with every new carrier launched. ANA was AirAsia's first full-service carrier partner and will almost certainly be its last. 

AirAsia was also too bearish in the globalisation of its product, ignoring local distribution systems as well as Japanese nuances that it is now turning towards – supporting the theory of "glocalisation". This is somewhat surprising as AirAsia previously learned a similar lesson in Indonesia, where its affiliate in the initial years struggled as the group ignored local nuances including the need for a local distribution solution.

CAPA’s analysis concluded that ownership structures were critical to the failure: “AirAsia erred in giving majority control to ANA”

AirAsia Japan differed from Jetstar Japan and Peach in that it was established with just two partners, the AirAsia Group taking a 49% stake and ANA 51%. The JV, like others before it, stems from near universal restrictions on foreign ownership of airlines. Without those, AirAsia Japan would have gone for majority control.

Jetstar Japan and Peach were established with Japanese airlines, too: Japan Airlines for Jetstar and ANA (also) for Peach. But in those structures the Japanese airline had a minority share.

Report #3: easyJet SWOT analysis - Is Sir Stelios strength, weakness, opportunity and threat all in one?: 5th February, 2013

At a time when easyJet’s founder, Sir Stelios Haji-Ioannou, was still actively challenging easyJet’s management strategies, CAPA’s SWOT report asked if in fact he was becoming a major threat to the airline’s future.

The airline’s major strengths were seen as being:

Pricing. In competing against legacy carriers, easyJet’s main advantage is its price structure, which sees its average fares somewhere around 50% lower than those of the major carriers on short haul routes and 20% to 40% below those of most other lower cost competitors. In addition to this average fare advantage, easyJet’s highly dynamic revenue management system adjusts fares to demand levels in order to maximise revenues, rather than always to charge the lowest fare. The only significant European airline with average fares below those of easyJet is Ryanair.

Unit cost. The only way to sustain a price advantage is to have a sustainable unit cost advantage. easyJet’s cost per seat advantage relative to the major flag carriers is similar to the average price differential noted above. This unit cost advantage stems from a number of factors, including high seat density (as noted above), high load factors (88.7% for easyJet in the year to September 2012 versus just below 80% for AEA carriers), a point-to-point strategy that allows high aircraft utilisation, a young and efficient fleet, lean overheads, labour productivity and a lack of legacy pension costs.

Airport network and market share. easyJet has a presence in 49 of the top 100 market pairs in Europe, more than any other carrier (see Chart 1). Crucially, 46 of these involve primary airports, versus 24 primaries for Ryanair and 34 for IAG. This presence puts easyJet within reach of a large proportion of the European population and its primary airports are beneficial to its yields. Across Europe as a whole, it is number two by passengers, with a share of 9%, just behind Ryanair with 12%.

Its opportunities included:

Business passengers. In 2011, 18% of easyJet’s passengers were flying for business purposes and easyJet aims to increase this to 20%-24% over three to five years. Success in this initiative should be beneficial for yields, given that business travellers book later and pay a premium as a result. Indeed, CEO Carolyn McCall stressed on the Q1 analyst conference call that yield benefit and not market share is the goal for its business passenger initiatives.

Attractions for business travellers include its primary airports, a relative focus on higher frequencies (compared with other LCCs) and its flexible fares product, which allows a passenger free date changes. In addition, and in contrast to LCCs such as Ryanair, easyJet inventory is available through GDSs and easyJet has recruited a sales force to target TMCs and corporate travel departments. Allocated seating should also help to attract business travellers.

And, as for the threat posed by Sir Stelios:

Sir Stelios’ public campaign against a number of aspects of easyJet strategy has helped to focus management on increasing the shares’ appeal to shareholders by targeting more steady growth, Return On Capital Employed and paying dividends.

However, any return to more frequent public spats between him and management would not be helpful. Perhaps his recent implied threat to sell his shares if management places an aircraft order in the next four to five years points to the only real solution to such disagreements.

The airline has since gone from strength to strength. As CAPA’s report, “easyJet: ‘benign capacity environment’ helps strong 3Q revenue growth and improved profit outlook“ noted, “in its 3QFY2013 (Apr-Jun) trading update, easyJet has again beaten expectations, with revenue per seat up 6.7% versus previous guidance of around 4%. According to CEO Carolyn McCall, “easyJet has delivered a strong performance in the third quarter in a benign capacity environment” as competitors continued to cut capacity on its routes.

“Moreover, easyJet sees better revenue performance continuing into 4QFY2013. Its newly announced FY2013 pre-tax profit target range of GBP450 million to GBP480 million, 40% to 50% higher than last year, is ahead of the GBP430 million consensus forecast.”

And, over the calendar year 2013, easyJet’s share price has almost exactly doubled; meanwhile, arch-rival Ryanair’s has increased by only a third.

Report #4: The A380 becomes mainstream, with 103 now in service: which airlines, destinations, stage lengths?: 20th May, 2013

A surprise order for A380s came out of the Dubai Airshow, as leading customer Emirates on 23-Dec-2013 confirmed it had concluded a firm contract for another 50 of the type. But even prior to that the leading Gulf carrier was already the biggest operator, with 33 of them:

There are 103 A380s in service as of early May-2013. Emirates has 33 and Singapore Airlines has 19, so when assessing network scheduling, these two and their hubs predominate: of the 1,048 weekly A380 flights, 402 are from Emirates alone. Dubai and Singapore airport see the most A380 flights.

But there are some less predictable statistics. The airport to see the most A380 operators is Hong Kong followed by Paris and Los Angeles. The largest A380 destination that is not (yet) an A380-hub is London Heathrow. The UK and USA are the most common A380 destinations after Australia, Singapore and the UAE. Asia, not the Middle East, sees the most A380 flights; South America sees none. Guangzhou-Shanghai Pudong is the shortest A380 route at 1,202km while Los Angeles-Melbourne is the longest at 12,751km. Qantas and Lufthansa have the highest average sector length while Thai Airways is placing the most number of cycles – about two – on its aircraft per day. Qantas and Air France are placing the least (just over one).

Four out of every five A380s in operation are based in Asia and the Middle East.The biggest uptake of the A380 has been among the airlines of the faster growing regions of Asia and the Middle East. Just under 83% of the aircraft are operated by airlines based in the countries of these regions. This profile is likely to continue in almost similar vein, as 123 of 160  of the aircraft type currently on order are also destined for these regions, according to CAPA's Fleet Database.

The report concluded:

As larger numbers and varieties of airline accept their A380 orders, so the variety of usages will increase, but, as the manufacturer anticipated, the predominance is for very long-haul and, frequently (Frankfurt, Hong Kong, London, Paris CDG and now Dubai) at congested airports.

Asia's dominance is clear, and even with the large number of A380s still to be delivered to Emirates (with more orders on the way if Emirates can find space at Dubai), it will be challenging to see the Middle East collectively challenge Asia as the largest A380 hub.

With growth in South America and Africa to come over the next years and decades, no doubt these destinations will see a growing share of A380 routes.

Report #5: Singapore Airlines is falling behind Cathay Pacific as Asia's network airline giants diverge: 8th September, 2013

A combination of the expansion of the vast China market and the impact of the Gulf carriers on long haul hub operations has helped undermine Singapore’s once dominant role as a southeast Asian gateway. Although it is far from becoming a minor player, Singapore’s decline has not helped Singapore Airlines, as this report outlined:

Asia's aviation axis has shifted from Singapore Airlines (SIA) to Cathay Pacific as the region undergoes both cyclical and structural change. SIA is more exposed than Cathay to the weak economies of Europe while Cathay can more effectively serve North America, currently a strong market. Cathay's Hong Kong hub is far better suited to capturing Chinese growth than is Changi, and Hong Kong's more northerly location than Singapore means diversions through the Middle East on Gulf carriers are less of a threat than at SIA.

Cathay's decision to offer premium economy – which SIA is still hesitant to do – is bearing fruit. SIA however has made more significant and bolder change than Cathay, embarking on new partnerships and launching long-haul LCC Scoot. These will take time to mature – Scoot especially.

These factors are unlikely to change in the short term, but the long term contains much greater uncertainty. The possibilities of deep partnerships, acquisition, consolidation, changes in bilaterals or a surge in growth out of India and Indonesia, to name but a few, could potentially re-balance not only SIA and Cathay, but all of Asian – and probably global – aviation. This report looks at where Cathay and SIA compare today and what the future may hold as they pursue different strategies.”

As a sign of the times, the report concluded:

Where each once saw the other as their main competitor, this has diminished as Middle East carriers become the major concern for SIA while Cathay watches out for China Southern and other carriers in specific markets. These are some of the much more competitive scenarios emerging, and quickly.

The Chinese airlines, the rise and rise of Asian LCCs, short and long haul, the Gulf carriers and then – probably the most threatening – full liberalisation. Each can learn from the other's example and mistakes, but they are benchmark quality airlines and as long as they are able to adjust to the new environment, they should retain the ability to capture a yield premium sufficient to steer them through many hazards.

Report #6: European airlines' labour productivity. Oxymoron for some, Vueling and Ryanair excel on costs: 15th February, 2013

This telling CAPA report analysed the relative cost of labour among Europe’s leading airlines:

Historically, labour was the biggest operating cost for airlines, before the oil price hikes of the early 2000s pushed up fuel costs. Even now, labour remains the biggest cost for many carriers and is probably the most important ‘controllable’ cost for all. At the same time, labour is the main agent for service delivery in any service industry and airlines must balance labour cost reduction with maximising the output of labour.

This tension remains a key dynamic for European airlines, whether they are legacy carriers looking to restructure in the face of unions' foot dragging, or low-cost carriers looking to maintain their advantage based on greater labour mobility and flexibility across the continent.

CAPA's analysis of the labour productivity of 14 European airlines reveals a wide range of levels of performance, pointing to what could be an irreconcilable gap between those that will succeed and those that may disappear. It again highlights the success of the low-cost model, particularly Ryanair and easyJet, and the significant challenge faced by legacy flag carriers, who, in some cases, still need dramatic – not just incremental – improvements in productivity.

Perhaps not surprisingly, labour is a much lower cost as a percentage of revenues for Europe’s LCCs than it is for the legacy carriers. What may be more surprising is how wide a range there is in this percentage. For Vueling and Ryanair, labour cost is less than 10% of revenues, while for Air France-KLM and SAS is more than 30%.

It is no coincidence that the latter two are among the least profitable European airlines and that they are focusing sharply on restructuring and improving labour productivity.

It is also striking that IAG and Lufthansa are a significant step below Air France-KLM in labour costs as a percentage of revenue. In spite of this, they too are focusing on productivity gains, since the gap to the LCCs remains even more significant. Note that the composition of the different companies’ activities has an impact here. Those with significant ground-based activities (eg maintenance and catering), such as the Lufthansa Group, have a higher percentage of revenues eaten up by labour as such activities tend to be very labour-intensive and do not generate as much revenue per employee as flying activities.

One key measure of productivity was employees per unit of traffic:

Combining employee costs per employee with ATK per employee tells us how much one employee has to be paid to produce one unit of traffic. On employee cost per ATK, Ryanair is again the pick of the crop, while SAS is in danger of rotting before the harvest. Norwegian, strong on traffic per employee, is only in the middle of the pack on employee cost per ATK due to the high sums it pays to each employee. Flybe is again worryingly at the high end on this measure.

Among the big three legacy flag carrier groups, Lufthansa performs the best, especially if its ground-based businesses are removed from the calculations. Also of note, here and in the other charts, is the strong performance of Turkish Airlines. As a full service carrier, it is containing its employee costs with productivity levels approaching those of the LCCs and comfortably ahead of other European full service competitors (being outside the Eurozone does help in this respect). Finnair too performs well on this measure.

Report #7: Southwest Airlines reinforces San Diego, La Guardia, adds routes, withdrawing from smaller airports

This report towards the end of the year looked at how Southwest was refocusing its strategy as new winds blew through the US market, as consolidation brought new pressures and as Southwest’s own rising cost base attracted its own challenges.

Southwest Airlines plans to create additional pressure on Alaska Air Group during 2014 as Delta continues its raid on Alaska’s Seattle hub. Just as Delta invades some of Alaska’s top markets from Seattle, Southwest is upping competition with Alaska from San Diego – an airport from which Alaska has been steadily expanding during the past couple of years to support its network diversification strategy. Southwest apparently believes an opportunity exists to leverage its leading position at the airport to add both transcontinental flights and service along the US west coast during 2014. It intends to add three new markets – Orlando, Portland and Seattle – and re-launch service to New Orleans after discontinuing flights in 2005.

At the same time the carrier has also outlined plans for the additional LaGuardia slots it secured as a result of the American-US Airways merger. It plans to bolster service from the closest airport to Manhattan to its strongholds of Chicago Midway and Houston Hobby as well as Nashville and Akron-Canton.

The small market casualties resulting from Southwest’s acquisition of and merger with AirTran Airways are also continuing as service from Branson, Missouri, Jackson, Mississippi and Key West, Florida is being eliminated. Other cuts include flights from Atlanta to Dayton, Norfolk and Louisville. It seems capacity in those markets is shifting to other points from Atlanta where Southwest can possibly target more local traffic.

An important feature of the process is Southwest’s reduction of focus on smaller airports, as the report concluded:

Southwest’s latest network changes reflect the carrier’s continuing abandonment of small markets that cannot support its Boeing 737s, which are growing from 137 to 142 seats on its -700 models while the -800s coming online feature 175 seats. The carrier is trading smaller markets and reassigning capacity elsewhere, where it can leverage the strong Southwest brand and existing substantial base of passengers to connect the dots in more densely populated regions.

The problem, of course, is that is the game plan of essentially all US airlines, even ultra low-cost airline Spirit is connecting large population centres with its proposition of low-fare stimulation.

Obviously Southwest can no-longer boast about the stimulative “Southwest Effect” since its fares are steadily rising in tandem with a cost creep that puts its unit costs somewhere between legacy carriers and ULCCs.

While it still may be able to compete on price against network carriers, they are attempting to bring their costs down, which ultimately will level the playing field. In order to keep its edge Southwest will need to fortify its competitive arsenal and think outside the box as it evolves its product proposition.”

Report #8: Boston Logan Airport establishes new links to the Middle East by luring Emirates to start service: 1st October, 2013

JetBlue meanwhile was fast evolving its hybrid strategy, one that Southwest so far has foresworn. Another partnership, this one a two way codesharewith Emirates, has helped entrench JetBlue’s role at Boston. JetBlue added this to earlier relationships with airlines like Turkish:

Boston Logan Airport’s recent spree of attracting new international service continues as direct flights to Dubai are scheduled to come online in Mar-2014. Emirates Airline is to begin new service that will offer connections throughout its expanding network that covers the Middle East, Africa, Europe, Asia and Australasia.

The service caps off an interesting round of new and key international destinations from Boston. JAL during 2012 introduced direct flights to Tokyo Narita followed by Copa’s launch of direct flights to Latin America’s key connection point in Panama. Emirates’ new service to Dubai will be followed by the introduction of flights to Istanbul by Turkish Airlines in May-2014.

Emirates’ service to Boston further solidifies its leading-carrier status among the three big Gulf Airlines to the United States. But as has been the case for the last couple of years, its competitors Etihad and Qatar plan to catch up as Etihad has previously stated it plans to table new North American destinations and Qatar has listed Boston as a potential new market in the US.

Given the quickly changing competitive dynamics those three carriers are ushering into the global market place, there is sure to be an interesting response from Emirates’ rivals to these latest moves in North America. Hopefully this will be in the marketplace rather than in the corridors of Congress.

The two-way codeshare allows Emirates to tap JetBlue’s established and growing customer base in Boston for the new service to Dubai, which should net both O&D passengers and connecting customers onwards to destinations throughout the Emirates network. Logic would dictate that both Emirates and JetBlue would gain some revenue benefit from the new service to Dubai, as some of the effort Emirates needs to dedicate to build-up a passenger base is eased by the JetBlue partnership.

Emirates is operating higher-capacity Boeing 216-seat 777-200LRs versus the 186-seat Boeing 787s flown by JAL on its long-haul flights between Boston and Tokyo. (Although the 777-200LR is smaller than Emirates' long-haul A380 and 777-300ER workhorses.) JAL has an interline partnership with JetBlue that includes the Boston-Narita route as well as flights at New York JFK and Los Angeles International Airport.

Turkish Airlines also becomes a candidate for a Boston-JetBlue link, given the two carriers’ interline agreements over JFK and Washington Dulles:

JetBlue also has an interline agreement with Turkish Airlines covering flights from JFK and Washington Dulles. It is highly likely that Boston will be folded into their partnership once Turkish starts new Logan flights in May-2014 to Istanbul, which is also a major connecting point for service to the Middle East and Europe. Istabul’s 4,196nm distance from Logan is roughly 1,594nm less than the 5,790nm from Boston to Dubai, and the shorter distance may be attractive to JetBlue passengers making connections onwards to Africa, Asia and the Middle East.

Report #9: Malaysia Airlines 2013 outlook clouded by increasing competition and launch of Malindo: 6th March, 2013

Malaysia’s flag carrier, intent on staging a comeback, is finding a lot of competition in each of its market segments, as this CAPA report assessed:

Malaysia Airlines (MAS) faces a challenging 2013 as low-cost carrier competition intensifies in the Southeast Asian market. The new oneworld member is back in the black, having posted profits for 3Q2012 and 4Q2012. But MAS remained in the red for the full year and will struggle to meet its goal of returning to full year profitability in 2013.

MAS operates in a highly competitive home market, competing against AirAsia on a majority of its routes. Competition will intensify after new Lion Air Group affiliate Malindo launches services in late Mar-2013, becoming the second LCC in the Malaysian market. Meanwhile challenges remain on long-haul routes, where MAS one year ago reduced capacity significantly as part of a new business plan, due to rising fuel prices and unfavourable global economic conditions.

In seeking renewed vigour, Malaysia Airlines has looked increasingly to Asia’s growth markets, as the report noted:

MAS is banking on Asia, where there is rapid growth and generally more profitability. MAS in early 2012 slashed nearly half of its long-haul network, dropping service to Buenos Aires, Cape Town, Dammam, Dubai, Johannesburg and Rome.

The carrier now only serves seven long-haul destinations – Amsterdam, Frankfurt, Istanbul, Jeddah, London, Paris and Los Angeles. While MAS has increased capacity to London and Paris by introducing A380 services, MAS has reduced its overall exposure to long-haul markets and cut costs by eliminating several stations.

The changes to the long-haul network have helped MAS improve profitability as it has reduced its exposure to the European market, which has been impacted by the economic downturn and intensifying competition from Gulf carriers. Middle East carriers currently offer approximately 25,000 weekly one-way seats from Malaysia while MAS’ entire long-haul network consists of only about 17,000 weekly one-way seats. MAS has significantly smaller long-haul networks than its two main Southeast Asian rivals, Singapore Airlines and Thai Airways, putting it at a competitive disadvantage as it tries to focus more on corporate accounts and premium passengers as part of its new business plan.

But the increased focus on short and medium-haul flights within the Asia-Pacific region is logical given the growth in the intra-Asia market and MAS’ position in oneworld. MAS is the first member from Southeast Asia and significantly boosts the alliance’s position in several regional markets. For MAS, oneworld membership allows the carrier to virtually offer a comprehensive global network, a key component in winning back corporate customers, without having a large long-haul operation. (MAS, however, has not yet been able to fully exploit the benefits that oneworld can bring to its long-haul offering as it has not yet forged a codeshare deal with any of oneworld’s members from Europe or the Americas with the exception of niche carrier Finnair.)

As with its European counterparts, cost reduction has to be a key goal for the airline, as the report concluded:

MAS will need to continue reducing costs if it is to overcome the current competitive challenges. MAS says it is now working on several initiatives aimed at further reducing costs and improving unit revenues in 2013, including even higher aircraft utilisation, improved fuel efficiency and renegotiation of supplier contracts.

But the carrier has a long way to go to achieving a cost base that is needed for sustainable profitability. It will not be an easy task given the company’s history of failing to implement cuts due to union opposition and political interference.

MAS CEO Ahmad Jauhari Yahya remains confident, saying the “massive swing” in the carrier’s financial performance from 2H2011 to 2H2012 “shows our business plan is working” and that “we continue to gain traction in multiple initiatives that focus on increasing revenue and managing costs”.

Indeed MAS had several noteworthy accomplishments in 2H2012 and early 2013, including improved profitability, introducing A380s and joining oneworld. The carrier claims its investment in its new flagship aircraft has paid off, with its A380s spurring new demand. MAS reported an 88% load factor in the first four months the A380 operated on Kuala Lumpur-London (July to October) and said projected initial loads on Kuala Lumpur-Paris also exceed 85%. The accomplishments of the last several months represent a major change compared to a tumultuous 1H2012 characterised by capacity cuts, major business plan revisions and the unbundling of the AirAsia stock swap.

But MAS cannot celebrate just yet. The carrier will potentially face more challenges in 2013 than 2012. As MAS has learned with previous failed restructuring attempts, two or three quarters of profitability does not ensure a successful turnaround. With increasing competition in its home market, MAS could be in for a long and difficult 2013.

Report #10: Turkish Airlines turns its attention to Latin America with four new destinations in 2014: 18th June, 2013

Much lower key globally than the nearby Gulf carriers, Turkish was on its way to becoming CAPA’s Airline of the Year when this report was written in Jun-2013:

The highly successful carrier was at this stage moving to redress a relative gap in its network, that of the powerful Latin American markets:

Turkish Airlines (THY) is pursuing aggressive expansion in Latin America, where it plans to triple the size of its network in 2014 to six destinations. THY will still be a relatively small player in the Latin America-Europe market but its launch of services to Bogota, Caracas, Havana and Mexico City is primarily targeted at the faster-growing and under-served Latin America-Asia market.

THY will offer the Colombian, Cuban, Mexican and Venezuelan markets the fastest connections to the Middle East, most of Asia and parts of Africa. With the expansion the Star Alliance carrier emerges as an attractive partner to Latin American carriers, which have a very limited presence in any of these regions.

THY is also accelerating expansion in the US market, where it plans to grow its network from five to eight destinations next summer. The carrier will open up new connections to parts of Asia, the Middle East and Africa from Atlanta, Boston and San Francisco. But the THY product from these new destinations will not be as exclusive as is the case with its new Latin American cities.”

In an in depth analysis gained from insights from CEO Temel Kotil, CAPA noted the differentiation in Turkish’s strategy allowing it to corner a valuable market:

THY has a much different product proposition in the Latin America market from its European peers. As the carrier’s Istanbul hub is at the eastern edge of Europe, THY focuses on offering Latin American passengers connections to Africa, Asia and parts of Eastern Europe.

Turkish Airlines CEO Temel Kotil recently told CAPA that its Latin America passengers accept longer “detour routes” than in other markets. He says backtracking by two hours is common for passengers coming from Sao Paulo and Buenos Aires with connections to the Ukraine, Russia and even some parts of Italy particularly popular. He expects Turkish’s new Latin American destinations to have similar success in drawing a wide swath of connecting passengers.  

THY has a particularly strong network in CIS and Central Asian countries, where it has over 30 destinations. This is a rapidly growing and under-served region in which there is limited competition. Demand for service between cities such as Almaty or Kiev to Sao Paulo or Houston is growing rapidly across both economy and business class.

THY also serves eight destinations in South Asia, seven in Northeast Asia and five in Southeast Asia, according to Innovata data. It is actively growing all of these networks, which opens up even more city pairs in the fast-growing Latin America-Asia market. It also has over 30 destinations in Africa, including over 10 in North Africa that can be served from Latin America without significant backtracking.

In connecting Latin America to most of these markets, THY competes mainly with the Gulf carriers rather than European carriers. Emirates and Qatar Airways have particularly recognised the opportunities in the Latin America-Asia market, providing connections that Asian, Europe or Latin American carriers simply cannot match.”

The report saw the move as an indicator of the airline’s wider strategy towards more long haul operations and the engagement of the 777ERs as an important ingredient of this direction:

THY is now starting to turn its attention to opening more long-haul routes as it takes more widebody aircraft. The carrier currently operates only 40 widebody passenger aircraft compared to 151 narrowbodies, according to the CAPA Fleet Database. But its fleet plan calls for adding 34 widebodies over the next 30 months for a total of 74 aircraft by the end of 2015 while growing the narrowbody fleet by 38 aircraft for a total of 189.

Expansion in the Americas is being made possible with the arrival of a new batch of 777-300ERs which will be delivered starting in 2014. The carrier also has an additional number of A330s which will be delivered from Sep-2013.

THY uses its A330s mainly on routes to East Asia, where it also plans ambitious expansion including extending one of its Southeast Asian flights to Australia in 2014. Mr Kotil says most likely THY will serve Sydney from Bangkok. Australia is currently the only continent not served by the carrier.

THY’s rapid ascent to become one of the world’s largest international carriers is entering a new chapter as it accelerates expansion in the Americas as well as opens new long-haul markets in Asia-Pacific. The carrier has long talked about a much bigger network in both the US and Latin America. Adding three US destinations and four Latin American destinations in a single year may seem like a challenge. But THY has the network and the global brand to make it work – particularly if it also prompts the establishment of a strong local partner like Avianca in Latin America.

Report #11: The “new” American Airlines' hubs: Part 1 - Philadelphia has potential to retain trans-Atlantic flying: 1st July 2013; and Part 2 – Phoenix may have a better survival chance than logic suggests: 2nd July, 2013

In a multiple part report, CAPA looked at the likely strategies and success factors once the “new” American emerged from its consolidation with US Airways. Two of the hubs considered in this analysis were Philadelphia and Phoenix:

As American and US Airways move to close their merger in Jul-2013 and set out on a complex integration process, speculation over the status of the nine hubs comprising the backbone of the combined network was revived after a report from a US government watchdog questioned Philadelphia’s role in the combined network. Similar queries have also arisen over the status of Phoenix once integration is complete.

The network optimisation that occurs during a merger integration inevitably results in some service cuts and eliminations as unprofitable flights are culled. Southwest has been weeding out AirTran’s unviable routes for the last year (notably, without a huge amount of criticism) as it attempts to complete integration of the two carriers.

While it is natural to assume some hubs might lose prominence in the combined American-US Airways network, the reality is that during the last few years all the major American carriers have undergone network overhauls that resulted in concentrating flying at their hub strongholds, leveraging strength where they have a commanding presence. US Airways and American have notably embraced that strategy, evidenced by US Airways placing 99% of its flying at its Charlotte, Philadelphia, Phoenix and Washington National hubs while American continually touts its cornerstone strategy that entails building its network around Dallas/Fort Worth, Chicago, Los Angeles, Miami and New York.

Arguably, in some ways American and US Airways have already done a lot of pruning in their separate networks prior to the merger announcement. American pulled down Boston and essentially wiped out its long-standing hub in Puerto Rico. US Airways significantly cut down its footprint in Las Vegas and shuttered its Pittsburgh hub, 489km from Philadelphia.

For Philadelphia the report observed:

The opportunities to synergise New York and Philadelphia in the combined American and US Airways network could lie in joint scheduling of trans-Atlantic service and capacity management of the international network from the combined hubs. Many of US Airways’ trans-Atlantic routes from Philadelphia are seasonal, so perhaps combined the two carriers could optimise how they manage their trans-Atlantic capacity seasonally from the two airports at a fraction of the effort to attain USD1 billion in projected synergies from the merger beginning in 2015.

Meanwhile , “on paper”, it noted that “the deck is stacked against Phoenix”, given its proximity to American’s Los Angeles hub – although possibly not…

Phoenix Sky Harbor’s hub status in the combined network of American and US Airways raises as much speculation as the fate of Philadelphia, in part based on the premise that its proximity to American’s hubs in Dallas and Los Angeles will render Phoenix obsolete in the network that emerges under the "new" American.

Given Phoenix’s role in the US Airways network as its lowest revenue-generating hub as a result of its larger base of leisure traffic, it could face an uphill battle in emerging as a viable hub once the network optimisation at the merged carrier is complete.

But given LA’s fragmentation and the differing passenger profile of Dallas, Phoenix’s chances of continuing to play a major role in the combined network could prove to be better than expected.

Based on calculations from the Philadelphia International Airport, Phoenix recoded the lowest revenues amongst US Airways' three major hubs in CY2011. Charlotte’s USD2 billion was significantly higher than Phoenix’s USD1.2 billion. But Charlotte’s business traveller mix is likely higher given its strong ties to the banking industry, and the fact that Charlotte’s top domestic markets are largely business oriented routes that include Atlanta, New York LaGuardia, Dallas, Chicago, Boston and Newark.”

“But”, it observed, “similar to Philadelphia, there are certain strengths Phoenix could bring to the new network even though it is sandwiched between American’s mega hub in Dallas (1,710km from Phoenix) and another hub in Los Angeles (a distance of 598km from Phoenix).

In another similarity to Philadelphia, Phoenix has a higher concentration of O&D passengers than Charlotte, and American’s hub in Dallas, a market whose geographical proximity is often mentioned when the fate of Phoenix is discussed. Dallas/Forth Worth’s passenger base is split roughly between 56% connecting and 42% local (based on 2011 data), while Phoenix is 42% connecting and 58% O&D based on data compiled by the city’s aviation department covering 2012. Even though Phoenix’s O&D traffic is largely tilted toward leisure travellers targeting the market as their final destination, it also supports a solid portion of business traffic given several well-known large employers in the Phoenix area including Honeywell, Wal-Mart, Wells Fargo, Boeing, Bank of America and Intel.

The report continued:

US Airways could actually improve American’s position in Los Angeles (and) Phoenix may rise after all.

The international market in Los Angeles is even more fragmented, with approximately 60% of the seats allocated to other carriers. Given the fact that the new American needs to preserve a strong presence in Los Angeles, it would appear that US Airways' traffic flowing in from its hub markets served from Los Angeles – Charlotte, Philadelphia and Phoenix – would actually contribute to American's improved revenue generation. Also as important, the passenger flows US Airways brings to Los Angeles from its east coast strongholds can also strengthen the passenger flows to the international service offered by American and its oneworld partners from Los Angeles.

Those routes include London Heathrow, Madrid, Tokyo, Sydney, Brisbane, Los Cabos, and Hong Kong.

While Phoenix may face a tougher fight than other US Airways’ hubs, its fate as a hub shouldn’t be dismissed simply because of its geographical proximity to Los Angeles.

The passenger proposition between the two airports is quite different, and the overall contribution Phoenix would make to the combined network should not readily be dismissed. If the goal is to dominate all the large metro US markets that generate higher passenger numbers, then Phoenix stands to retain a strong presence in the combined network.

Report #12: China air travel: airline CEOs jump on the express train about to steam through world aviation: 13th December 2013

CAPA’s World Summit in Amsterdam included among its key issues the emerging role of China, with over 20 leading airline CEOs present to offer their views. There were many significant insights, some of them summarised in this report of the Summit:

In the first CEO panel at the CAPA World Aviation Summit in Amsterdam in Nov-2013, the heads of four airline companies from Asia, the Middle East, Africa and Europe discussed their strategies towards China. With the centre of gravity in world aviation moving east, and China the largest market in Asia-Pacific, this is an express train that must be boarded before it becomes unstoppable.

While Ethiopian Airlines, IAG, Emirates and Air Astana have very different experiences and approaches, all agree that China represents a huge opportunity for air travel. Chinese airlines remain more focused on domestic markets than on international markets, but this is starting to change as demand for goods from Europe and America grows. This may lead to new developments in partnerships with international carriers.

Constraints on growth in air travel to and from China include cultural differences, traffic rights and visa restrictions. Concerning airport capacity, China is undertaking massive investment in infrastructure to accommodate expected traffic growth. This is a lesson that more than one of CAPA’s panellists would like their own government to heed.

The visa issue is a real and present one:

Demand for air travel between China and the UK is growing, but is being held back by artificial constraints: IAG CEO Willie Walsh laments the UK’s “restrictive tourist visa regime”, noting that a visa for Shengen Europe costs three quarters of the price of a UK visa, which has to be applied for separately.

Travellers skip the UK”, said Mr Walsh, adding that, while the UK government highlights China as a priority (it is “talking a good talk”), such restrictions contradict this rhetoric. He asserts that BA’s newest China route, Chengdu, is performing well, but “visa restrictions still bite”. With the right regime, the opportunity for air traffic between the UK and China is “unlimited”, in Mr Walsh’s view.

A further constraint is the lack of slots at BA’s London Heathrow hub, although the acquisition of bmi has brought additional slots and this has eased the situation for BA.

…as is the predeterminist policy of China towards market access:

According to Emirates' president Tim Clark, the Chinese government is “pre-determinist” in its thinking on air links with the rest of the world and this is restricting access for foreign carriers.

The result is that “China is a play in our network, but not a major play”. Emirates flies only to three cities in mainland China – Beijing, Guangzhou and Shanghai – and also to Hong Kong, but the potential is there to do more: “China is a colossal story” and it has “fantastic plans for infrastructure”.

The aeropolitical platform has moved, but not significantly enough to embrace all foreign carriers” that want to access growth in the Chinese market, said Mr Clark.

Mr Clark is hopeful that the recent 10 year change of government will lead to a more open stance from China, but “it is important that the opening of China is open for all”. Until now, China has been fuelled by demand from elsewhere for Chinese products, but pressure is now coming from China as demand grows for goods from Europe and America.”

But for others, the China market is a very different proposition:

For Air Astana CEO Peter Foster, investment in China is the result of “a fluke of nature and a fluke of geography”. The border between China and his airline’s home country Kazakhstan is one of the longest land borders in the world and Kazak natural resources are a target for investment by its neighbour. “Chinese involvement in extractive industries has grown massively,” he noted, adding that this is a “geopolitical issue”. This has also helped to motivate the interest China shows in Africa that Ethiopian’s Mr GebreMariam highlighted.

Moreover, according to Mr Foster, Chinese organisations bring people in numbers when they invest. “This is good for airlines”, he noted, although it is “not always good for the investee country… it can lead to visa retaliation issues”.

Mr Foster sees significant potential in northwest China, the closest part of the country to Kazakhstan. “Traditionally, south and southeast China drove economic growth, leaving a gap in northwest China… The Chinese government is now trying to spread the wealth there”. Air Astana flies to Urumqi, the capital of Xinjiang province in northwest China, in addition to Beijing (and Hong Kong).

The bottom line though is that China is a one-off opportunity, however it is looked at:

There were some differences among CAPA’s CEO panellists regarding issues such as partnerships with Chinese carriers and on constraints relating to traffic rights, visa restrictions and infrastructure at their own end of the routes. Yields too were a constant undercurrent, as the market matures. Nevertheless, all agreed on the significance of the opportunity represented by China.

Recent policy moves by the Chinese government will allow more private start-ups. In addition to stimulating the development of domestic LCCs, this and other liberalising moves are also likely to lead to more private Chinese carriers flying to Europe and the rest of the world. There may also be more investment by Chinese carriers in European airlines.

What is certain is that Europe and other regions will see inbound tourism flows on an unprecedented scale. IAG’s Mr Walsh sums up the largely untapped potential: “It is different to do business with Chinese companies, but very positive when you do. Growth will be massive… It’s a very different country today than it was five years ago. The opportunity is limitless”.

Report #13: Pressure mounts on Star and SkyTeam to secure Brazilian members as TAM confirms switch to oneworld: 9th March, 2013

The much feted merger of LAN and TAM not only made for a new world force in aviation, but also entrenched the position of the oneworld alliance in Latin America, as this report described:

LATAM Airlines Group announced on 07-Mar-2013 that its TAM, TAM Paraguay and LAN Colombia subsidiaries would join its sister carriers in oneworld, confirming moves which had been considered a foregone conclusion for 18 months. The Star Alliance now faces the risk of not having a member in Brazil, one of the world’s most important growth markets, after TAM shifts from Star to oneworld in 2Q2014. But the void will not last long as Brazil’s fourth largest carrier, Avianca Brazil, will almost certainly join its sister carriers in Star, potentially by the end of 2014.

Meanwhile, Brazil’s second largest carrier Gol continues to be wooed by SkyTeam. With TAM moving to oneworld and Avianca Brazil expected to join Star, the stakes mount for SkyTeam while the benefit of maintaining independence for Gol diminishes.

Star is now the leading alliance in Latin America by a wide margin, accounting for about 28% of total seat capacity in the region, compared to about 15% for oneworld and about 12% for SkyTeam. But it has been known for some time that its preeminent position in Latin America, which was reinforced when Copa, Avianca and TACA joined in Jun-2012, would be short-lived. With the inevitable now confirmed, Star will see its share of capacity to, from and within Latin America slip to about 17% while oneworld will surge to about 27% and SkyTeam will stay at least for now at 12%.”

The global alliance balance in the region is now stabilising, with oneworld a clear leader – but the other two are not standing still…

oneworld has always been strong in Latin America, thanks to LAN’s always-growing portfolio of carriers and American Airlines, which has by far the most foreign carrier capacity in the region (over 400,000 weekly seats). But Brazil was a big white spot in its network and in the LAN portfolio.

Brazil accounts for almost 40% of all seat capacity in Latin America. Having Latin America covered without Brazil is like having Asia covered without China – a situation oneworld is all too familiar with.

Hence, oneworld breathed a collective sigh in Aug-2010, when LAN decided to merge with TAM with LAN the leading entity in the transaction. Essentially that is when oneworld won TAM and Brazil, although technically the victory did not occur until 07-Mar-2013, when oneworld was finally able to vote in TAM along with TAM Paraguay and LAN Colombia as new members during a board meeting in Hong Kong. (TAM Paraguay and LAN Colombia will be affiliate members.)

The pressure now turns to Star to confirm Avianca Brazil as a replacement for TAM in Brazil and to SkyTeam. Gol so far has resisted SkyTeam’s courtship, even after SkyTeam founding member Delta Air Lines acquired a minority stake in Gol and gained a board seat at the Brazilian carrier in late 2011.”

And, finally,

As Latin America has emerged as an important growth market, the region has deservedly captured the attention of the alliances. Latin America’s leading airlines have also improved their standards over the last decade, making them suitable for the global alliances.

Consolidation in Latin America, meanwhile, has helped the alliances grow their penetration in the market while also creating tumultuous situations. The dust has now settled with oneworld at the top. But Star and SkyTeam should soon have enough of the market covered to conclude that all three in this case are winners.”

Report #14: Aeroflot Group: LCCs in Russia have been notable for their absence. Aeroflot will start one: 2nd August, 2013

Russia is a serious under-performer in airline terms, with a heavily underdeveloped domestic market, marked by an absence of LCC operations – despite one or two unsuccessful attempts by independents. In Aug-2013, Aeroflot announced plans for its own LCC subsidiary, later to be titled Dobrolet.

This CAPA report reviewed Aeroflot’s role in the market and Russia’s aviation outlook:

The Aeroflot Group is the leading airline group in the Russian Federation by some distance. Its airlines have strong market positions at its hubs across the country, which extends from Europe to within a short distance of China, Korea and Japan. The group has been profitable for over twenty years and its passenger traffic is growing at double digit rates.

Its market position has benefited from a government “national champion” policy, through the 2011 acquisition of a number of state-owned regional carriers. Nevertheless, its 2012 profits were diluted by losses in the newly acquired subsidiaries.

In an attempt to address this, its two carriers in Russia’s Far East are to be merged. Moreover, the major European country with the lowest LCC penetration looks as if it may soon have its very own no-frills airline after Aeroflot’s recent announcement that it plans to establish a new LCC subsidiary.

The Aeroflot Group of airlines consists of Aeroflot, Donavia (based in Rostov), Rossiya (St Petersburg), Orenair (Orenburg) and two carriers based in the Russian Far East, Vladivostok Air and SAT Airlines. The latter four subsidiaries were acquired in Nov-2011, while Donavia has been a 100% subsidiary since 2007.

The Aeroflot Group is the leading player in the Russian Federation overall by number of seats, with a share of 34% of seats (week of 29-Jul-2013, source: Innovata). Its nearest competitors have much lower market shares: S7 and Transaero each have 10% share and UTAir Group has 8%, but these three appear on many of Aeroflot Group’s biggest routes.”

The CAPA analysis considered an LCC subsidiary would be a valuable addition to Aeroflot’s armoury, as the western European LCC invasion continued:

Aeroflot's new LCC would have prices at a 20% to 40% discount to traditional carriers and could even compete on price with rail travel, according to Aeroflot. Its initial focus would be the European part of Russia, before expanding across the Russian regions and abroad.

Perhaps Aeroflot is looking anxiously at the arrival of major European LCC easyJet at Moscow Domodedovo. Moreover, the hinted-at on-going weak performance of the group’s less strongly branded subsidiaries perhaps indicates a growing commoditisation of air travel away from Aeroflot’s Sheremetyevo hub.

The group has been profitable for many years, with no annual losses for at least 22 years (although the subsidiaries acquired in 2011 weighed on its 2012 profits).

Over this period, other major European national carriers have all made losses more than once and have seen a large chunk of their short/medium-haul business taken away by LCCs.

Russian domestic prices are high to very high and Russia's bilateral policy is not generous, helping protect its favoured carrier. Domestic LCC entrance by Indigo Partners-backed Avionova has illustrated that there is plenty of room for demand stimulation – perhaps part of the reason the private airline was ushered out of the market.

So there can be little doubt that the Russian market is ready for some real LCC presence. Aeroflot is right to act before it gets too late, although the successful fruition of its plans for a LCC subsidiary will be all about execution.”

Report #15: South African Airways needs to move forward with new strategic plan, starting with Buenos Aires cut: 4th November, 2013

Few airlines have undergone such a turbulent recent past as South African Airways.....

Its board resigned en masse after yet another CEO left and with a new restructuring plan under final consideration. Now that plan is on paper and must be implemented, with a new CEO in place. Whether the constant government intervention will cease (unlikely) and some stability is returned (to be hoped) will be determinants of how the rainbow nation’s flag carrier fares in the critical next year or so – as CAPA’s report pointed out:

South African Airways (SAA) faces a pressing need to start moving forward with its new strategic plan, which includes pursuing expansion within Africa and cutting unprofitable long-haul destinations such as Buenos Aires. The new business plan, which was initially completed in Apr-2013, represents a critical step in finally fixing the long floundering carrier. But SAA has not yet implemented any major components of the plan although most of the pieces have secured the required layers of approval.

Under the new strategic plan, SAA will increase operations within Africa while cutting unprofitable long-haul routes and potentially hand more domestic routes to low-cost subsidiary Mango. SAA could also start operating alongside new partner Etihad on the Johannesburg-Abu Dhabi route, using the capacity freed up from axing highly unprofitable long-haul services, as it increases its reliance on partnerships to provide a stronger network beyond Africa.

The continued delays in implementing the long-term turnaround plan are costly as SAA continues to bleed. It needs to move quickly to build on its position in the intra-Africa market, with more flights from South Africa and a possible new base in West Africa, as competition within Africa is starting to intensify. SAA also needs to finally move forward in acquiring new widebody aircraft, which were identified in the plan as essential for a sustainable long-haul operation.

And, ominously:

SAA does not have the luxury to continue delaying the implementation of solutions aimed at improving profitability. The carrier, which already has a debt-ridden balance sheet, continues to incur losses. SAA reported a loss of ZAR1.32 billion (USD143 million) for the fiscal year ending 31-Mar-2012 (FY2012) and was again in the red in the fiscal year ending 31-Mar-2013 although it has again delayed publicly reporting its financial results for FY2013. SAA for now continues to be propped up by a ZAR5 billion (USD510 million) loan guarantee from the government which was put in place in late 2012 and expires in Sep-2014.

The outlook for SAA remains bleak as long as it does not move forward with restructuring its network and other critical elements of its new business plan. The road ahead is challenging regardless but by sitting idle it will be impossible to fix the problems that have dragged down the flag carrier for several years.”

And a bonus report from CAPA's India office!

India's evolving global alliance mosaic: Star/SIA-Tata, oneworld/Air India-Qatar; SkyTeam/Jet-Etihad: 7th October, 2013 

No country in the world has squandered its opportunities as effectively as India. A country with vast potential, it has been beset by poor policy making and inertia. Finally, in 2013, it looks as if things may be turning around. If so, a lot of this will have to do with the intervention of the Gulf carriers and Etihad in particular. Behind this is the emerging battle among the global alliances for a position in the inevitably massive market that is India. This report took a speculative look at how these elements might evolve, now that some key policy directions have been reset:

Breathtakingly rapid changes in India are exposing a whole new panorama of the country's future international airline status. Just over two years ago, Star rejected Air India as a member, and the following year oneworld placed the admission of member-elect, Kingfisher on hold due to the carrier’s financial challenges. India's airlines were basket cases and its regulatory constraints promised to keep it that way. Today, thanks to some important (and long overdue) liberalising moves by the government, the country is shaping up as a potentially well balanced centre for each of the major BGAs.

Etihad clearly will have the first mover advantage, with its equity investment in Jet now having received regulatory approval to proceed, along with a substantial increase in seats in the Indian market. Meanwhile though, the long term pickings are so rich that other groups can no longer ignore the pressure to make a move.

All that is needed now is for India to remove its "5/20 rule" on international operations and - astonishingly - the country could leap from international dysfunctionality to commercial coherence in one bound. The impact for the national economy would be enormous.

But - there are one or two more barriers to be cleared. In India there always are. Perhaps this time the government will get it right, but don't bet on it just yet. And, although the alliances may be interested, they will remain wary of Indian pitfalls.

It's hard to argue with the assertion that India's international aviation system has been thoroughly dysfunctional.

Constant dithering at central government level, the excessive pressures imposed by vested interests and a series of stop-start regulatory decisions have conspired to ensure that India's undoubtedly enormous aviation potential would not be reached. Even the simplest look at the country's geography makes it obvious that Delhi and Mumbai could, in an enlightened regulatory regime, have been among the world's leading international hubs.

Instead, a litany of uninspiring, supposedly protectionist, measures have ensured that even the aviation hubs serving India's own international market have been outside the country - first in Sri Lanka and Germany, today more in the Gulf airports. To achieve such an outcome has required enormous ingenuity.

Yet now, in response to a momentum initiated by an aggressive and forward looking move by Etihad investing in Jet Airways, it looks at last as if despite itself, India's government may be stumbling into a position where rationality and a benevolent outcome might open up.

It is too late to become a full service hub centre (as its geography should have mandated), but possibly India now has the opportunity to become a centre for LCC activity:

India possesses a huge home market, an advantageous geographical location and, if and when the necessary fiscal and regulatory reforms take place, a potentially low cost structure. These are the core ingredients for a potentially powerful long haul low cost hub serving not only the point-to-point market to/from India, but acting as a bridge for low cost services between Europe, Africa, the Middle East and Asia.

The 5/20 rule has prevented such an opportunity from being realised since any start-up carrier with plans to launch a long haul low cost carrier would first have to operate a domestic airline and then entirely change its fleet and network strategy after five years.

The availability of affordable and reliable air services between Kerala and the Gulf has long been an important objective for state politicians...

AirAsia India could establish an international base in Cochin operating high density routes to the Gulf which are dominated by price sensitive expatriate labour traffic. The availability of affordable and reliable air services between Kerala and the Gulf has long been an important objective for state politicians.

Air India’s international low cost subsidiary, Air India Express, was established in part for political reasons and Kerala accounts for the majority of the carrier’s capacity. But an airline born out of meeting political ends is unlikely to deliver commercially. The carrier lacks a dedicated corporate structure while being neglected by its parent. And the focus on Kerala means that other important markets across the country have been left open to Indian or foreign LCCs to develop.

Possible developments such as the lifting of the 5/20 rule, the rise of long haul LCCs and the induction of Indian carriers into global alliances will have a significant impact on the airport traffic mix, with implications for how airports should be developed and operated. International terminals that were primarily designed for full-service wide body operations will need to consider how best to accommodate the needs of a growing share of low cost and narrow body operators. While alliance members will seek co-location within terminals and the ability to establish branded, shared facilities.  

The changing market structure in turn has implications for passenger mix, which influences retail spend and the need for facilities such as lounges and food and beverage outlets.

Increasing affordability of international air travel as a result of the growth of LCCs will drive demographic changes by enabling more first time travellers and young passengers to enter the market, each with their own unique needs. Where the first time traveller may need human touch points to guide them through the airport, younger travellers are more likely to be comfortable with technology solutions such as self-service and mobile platforms.

The changing nature of the international market could trigger the opening of integrated domestic/international LCC terminals at Delhi, Mumbai and Chennai.

Some reforms may be accidental, but the outcome will be positive:

The unprecedented opening up of the India-Abu Dhabi bilateral agreement just hours before the announcement of the Jet Airways-Etihad deal created a negative perception of how aviation is managed in India and resulted in a political uproar.

This may in turn have prompted the decision to fast-track approvals for AirAsia, and likely for Tata-SIA and others, as well as the growing momentum to remove the 5/20 rule in an effort to re-balance the market. If the consequence is the dismantling of some of the key structural challenges in Indian aviation the outcome will be highly positive for the sector:

  • Traffic growth will be unleashed delivering benefits for trade, tourism and employment generation;
  • Indian carriers will have the opportunity to become financially stronger as a result of growth and more efficient capacity allocation;
  • As Indian carriers strengthen and seek to expand internationally, bilaterals can be further liberalised;
  • Airports will not only benefit from increased market access and traffic growth but there will be improved prospects for hub development;
  • Investor interest in the 15 airports which the AAI plans to offer on a PPP basis could increase.
  • Carriers such as GoAir and SpiceJet may become more attractive to potential investors.

Foreign airline investment and the lifting of the 5/20 rule will in particular have a lasting and positive impact on the outlook for Indian aviation. In India's unique environment none of this should be taken for granted; but an opportunity exists now that could be transformative.

CAPA's unique website analysis is provided by the CAPA team around the world. Headquartered in Sydney, our analysts also report from Singapore, Hong Kong, Washington and London. For details on our team of senior analysts, see http://centreforaviation.com/about-capa/team/

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