Traffic and Capacity
Airlines seek to match capacity (supply) with traffic (demand), to produce consistently high load factors, to help them maintain their pricing and yields (see CAPA's Aviation Glossary for more background in traffic terminology). It is a difficult balancing act, made more challenging by volatile global economic conditions. Traffic is generally growing much faster in the emerging markets of the Asia Pacific, Middle East, Africa and Latin America and Eastern Europe regions, compared to the more mature aviation markets of Western Europe and North America.
CAPA covers hundreds of traffic reports from airports, airlines and industry bodies every month. Our Diamond Members can opt to receive them as they happen via CAPA Alerts.
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Mexico’s third largest airline, Interjet, recorded a surge in international passengers during 2016, reflecting the company’s desire to capitalise on a loosened bilateral agreement between the US and Mexico that eliminated restrictions on certain routes between the two countries. Interjet added several new routes to the US in 2016, upping competition with its Mexican rivals and the US airlines.
Based on Interjet’s aircraft delivery schedule and forward looking data, the airline’s capacity is set to grow at a healthy pace in 2017 as it absorbs new route launches from 2016 and expands its fleet. The airline logged 18.3% capacity growth in 2016.
Interjet is undertaking a significant US expansion as changing political tides are creating uncertainty about future travel patterns between Mexico and the US. Interjet asserts that business travel demand on its largest international route – Mexico City to New York JFK – remains robust, and the airline is expanding frequencies on the route.
But Mexico-US relations remain fragile in the light of uneasiness about changing trade pacts, and the heightened rhetoric over construction of a border wall between the two countries that was a hallmark of (now) President’s Trump campaign.
An upward revision to United’s 2017 capacity guidance has created a minor market panic, fearing that US airline capacity discipline has been abandoned just as pricing in the domestic market was beginning to stabilise. The timing of United’s revised capacity guidance was unfortunate – occurring just days after its rivals American, Delta and Southwest revised 1Q2017 unit revenue guidance downward. United, which initially offered a more conservative forecast, has kept its guidance intact.
The ensuing plunge in United’s stock price is hardly surprising given underlying market fears that domestic capacity could creep up in 2017. In some aspects United, which has been a strict adherent to keeping capacity growth in line with GDP, took markets off guard, stoking fears that the capacity discipline integral to the industry’s turnaround is evaporating.
United’s argument is that the company is engaged in a comprehensive network review, and the changes triggering the capacity growth are ultimately margin accretive. The company and its new management are refreshingly unapologetic for the capacity increase, arguing that it is necessary regain lost ground in the US domestic market. The logic for that argument is sound, but United finds itself balancing the short term focus of investors with its efforts to close margin gaps with its peers. The big question - will others respond?
During 2016 LATAM Airlines Group recorded its first annual profit since 2011, and its first quarterly increase in revenues during 4Q2016 after nine consecutive quarters of decline.
Much of the improvement was driven by a slow recovery in the company’s largest market, Brazil. However, unit revenues in Brazil remain below their historical highs. The country’s two largest airlines – LATAM Airlines Brazil and Gol – continue to practice capacity discipline while other Brazilian airlines plan to expand supply in 2017, which could affect the tenuous recovery just beginning in the country.
Even as overall conditions in Latin America appear to be improving, LATAM is still feeling some macroeconomic pressure in its Spanish speaking markets. In certain geographies, LATAM is facing competitive pressure from capacity increases by its rivals as well as the debut of new low cost airlines in Peru and Chile that is likely to intensify pricing pressure in those regions.
Despite growing signs of a recovery, LATAM remains one of the more cautious operators in the region, with planned capacity growth for 2017 that is lower than that of some of its larger rivals, which feel confident that demand is robust enough to absorb their planned growth.
On 15-Mar-2017 Alitalia’s Board of Directors approved yet another turnaround plan. After losses throughout this century and yet another postponement of Alitalia's planned return to profit, this time pushed back from 2017 to 2019, each successive plan becomes more vital to its survival.
Alitalia's latest plan envisages revenue growth of 30% and cost reductions totalling EUR1 billion by 2019. It includes narrowbody fleet cuts, offset by seat densification, load factor gains and improved utilisation. It plans modest widebody growth, with expansion of capacity to the Americas in particular.
A major focus is to improve Alitalia's competitiveness on short/medium haul, which is increasingly dominated by LCCs, and which is vital to feed its long haul. All the usual features of becoming more competitive versus LCCs are in the plan: lower unit costs, unbundling and a simplified fare structure as a result of headcount reductions and other savings in operating costs.
Labour productivity improvement remains crucial to the plan's success. The plan’s funding, and Alitalia's future growth, will be subject to trade union agreement to a new collective agreement and headcount reductions. However, the immediate union response was to call a strike after management presented the plan to employees. Surely this has to be the last chance.
The Lufthansa Group's juggling act continues to impress with the sheer number of balls that it has sought to keep in the air over the past year.
Striving for labour productivity improvements in its mainline operations, while also attempting to minimise industrial unrest; expanding its Eurowings low cost brand through organic growth, while also integrating the acquisition of Brussels Airlines and the wet lease of aircraft from airberlin; facing the growing threat of Ryanair's entry into its biggest hub at Frankfurt, while seeking to maintain a good relationship with the airport's owner Fraport; keeping positive momentum in its financial performance after earning more than its cost of capital in 2014-2016, while the global cycle may have reached a peak.
In the same week as reporting solid, if unspectacular, financial results for 2016, Lufthansa has achieved a break through agreement with its pilots over pay and conditions. As a strategic tool, Eurowings helped it to reach this agreement, but the LCC subsidiary now needs to become financially successful.
Later in Mar-2017, Ryanair will start its first four Frankfurt routes, to which it will add 20 more next winter. Eurowings will need to be part of Lufthansa's response to this growing competitive threat.
A desire to cut capex commitments and keep capacity in check has resulted in airlines based in the Americas undertaking comprehensive reviews of their fleets, engaging in early retirement of aircraft and deferrals. A major focus for those airlines as they scrutinise their fleet composition is widebody aircraft.
Due to the production and delivery schedules of the Airbus A350, some airlines in the Americas are opting to defer or transfer their aircraft to their partners. Earlier in 2017 United made the boldest move in declaring it was placing heavy focus on its 35 A350 widebodies on order, and possible alternatives to the aircraft.
United’s decision to consider alternatives for its A350 order is based on an overabundance of used widebody capacity and the favourable economics those aircraft can deliver with respect to ownership costs as lease rates remain soft. Airlines in South America are taking advantage of newly forged financial partnerships to alleviate some of their A350 commitments made during better economic times.