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Boeing is a leading manufacturer of commercial and military aircraft, rotorcraft, electronic and defense systems, missiles, satellites, launch vehicles and advanced information and communication systems. Headquartered in Chicago, Boeing employs more than 170,000 people across the United States and in 70 countries.
Boeing is organised into two business units: Boeing Commercial Airplanes and Boeing Defense, Space & Security. Supporting these units is Boeing Capital Corporation, the Shared Services Group and Boeing Engineering, Operations & Technology.
Boeing’s main commercial products are the B737, B747, B767 and B777 families of aircraft and the Boeing Business Jet. New product development efforts are focused on the B787 Dreamliner, 737Max, 777X and the B747-8. The company has nearly 12,000 commercial jetliners in service worldwide, which is roughly 75% of the world fleet.
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ULCCs Frontier and Spirit hold orders for more than 150 Airbus narrowbodies to support the proliferation of the model across the US. Frontier’s fleet is projected to grow by 83% from YE2016 to 2021 – from 66 to 121 aircraft. Spirit’s current fleet forecast shows 46% growth from YE2017 to 2021 – from 108 aircraft to 158 aircraft.
Each airline is taking nuanced approaches to financial management of its fleet. Spirit has opted to purchase some aircraft off lease in order to enlarge its number of owned aircraft, while Frontier, which is just embarking on the process of accessing public markets, will use operating leases as its primary financing vehicle.
The planned growth by each airline reflects conclusions reached by Frontier and Spirit about the opportunities for the ULCC model in the US, despite changing market dynamics – namely a push by large US global network airlines to create pricing segments to compete more effectively with ULCCs. Despite the focus on price matching by larger airlines, Frontier and Spirit remain bullish on the opportunities for stimulation in the US market.
The three large US global network airlines – American, Delta and United – continue to tout the strength of their balance sheets; the results which they’ve achieved during the past few years by the use of various tools, including free cash flow generation and debt reduction.
Delta is using its newly minted investment grade status to tap markets for creative ways to fund its hefty pension obligations during the next two to three years. American is also working to ensure pension compensation coverage by lifting its liquidity targets as rules allowing favourable minimum funding contributions expire in 2017.
Each of those airlines is bracing for fairly substantial capital expenditures during 2017, largely driven by aircraft acquisitions, but American, Delta and United have no plans to compromise their balance sheet progress irrationally in order to support fleet revamps.
At nearly 46 years old and 17 years old, respectively, Southwest and jetBlue approach their financial priorities differently. jetBlue is in the process of buying a certain level of aircraft off lease to reduce debt and raise its levels of unencumbered aircraft. Southwest is concluding a hefty investment in a long overdue overhaul of its reservations system and making other significant technology investments.
Each airline also has a different capital allocation strategy. Southwest has engaged in some level of shareholder returns since the 1990s, whereas jetBlue’s shareholder return strategy is just starting to take shape – the airline is reaching a point in its leverage performance where it can contemplate more meaningful levels of shareholder returns in the medium term.
One area where Southwest and jetBlue hold similar visions is balance sheet strength, and the airlines have similar leverage goals: to support capex commitments, maintain manageable debt levels, and expand or sustain return to shareholders.
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.
Brazil’s largest domestic airline, Gol, is maintaining a cautious outlook for 2017 as concerns about capacity additions by Azul and Avianca Brazil create an overhang for a recovery in the country’s domestic market. Gol and its main competitor LATAM Airlines Brazil have maintained a rational supply during the last couple of years, but forward looking schedules for 2017 show double digit ASK growth for Azul and Avianca Brazil year-on-year in early May-2017.
Gol made progress in unit revenue and yield recovery in 2016, but remains concerned about the effects of competitive capacity growth on fares, and ultimately yields. The airline is forecasting slower yield growth in 2017, and is warning a lack of industry capacity discipline could create additional yield pressure. Gol plans to keep its own system capacity in check for 2017, with projections of flat growth to a 2% decrease as its fleet shrinks, before growing in 2018 when the airline takes first deliveries of its 737 Max jets.
Although the corporate market within Brazil remains in tenuous shape, Gol believes it has expanded its share among business travellers – driven in part by network changes it adopted in 2016 to make schedules more attractive to corporate customers. However, the size of Brazil’s corporate travel market remains stagnant, and predicting expansion of business travel remains difficult.
Peter Bellew spent a decade at Ryanair before joining Malaysia Airlines in late 2015, initially as COO before being promoted to CEO in mid 2016. Mr Bellew held a wide range of positions during his tenure at Ryanair – including in operations, training, sales and marketing – providing ample exposure to Michael O’Leary’s unique approach to running an airline.
The new Malaysia Airlines strategy being implemented by Mr Bellew is decidedly non LCC. In recent months the government owned airline has reinforced its premium position, invested in its full service product, resisted unbundling, and pursued closer relationships with travel agents. However, Mr Bellew’s approach with supplier negotiations and media seems at times Ryanair-esque.
Mr Bellew has been extremely blunt in media interviews, public speeches and private meetings. He is not shy to talk about industry weaknesses and challenges – as well as opportunities to secure additional aircraft at bargain basement prices.