Analysis for Global
In a Jan-2016 report on the world airline profit outlook, CAPA flagged the potential emergence of ideal conditions for new entry into the airline sector. Barriers to entry have never been very high compared with some other capital-intensive, cyclical industries. Access to aircraft and finance is probably the most important pre-requisite, and it does provide at least something of a barrier.
However, the effectiveness of access as a barrier has been weakened by factors including a long term increase in the importance of lessors (and their fondness for ordering aircraft before securing a customer), historically low interest rates, and the large volume of aircraft orders and deliveries over the past decade. Nevertheless, new entry is at historically low levels and has not picked up since the global recession.
This report considers the main barriers to entry for airlines and, in particular, examines data on the relationship between the annual number of new entries and together - fuel costs and interest rates. Low oil prices have extended the life, and therefore the availability, of older, cheaper aircraft. This could provide the spark to ignite a resurgence of new starts.
CAPA’s Iran Aviation Summit 2016, the first international aviation conference in Iran for nearly four decades, opened on 24-Jan-2016.
More than 400 delegates and attendees – airlines, airports, aircraft and engine manufacturers, lessors, GDS and technology providers and suppliers – listened to aviation leaders and decision makers talking about the future of Iran’s aviation market.
Some of the highlights from Day 1 were the announcement by Iran's Deputy Minister of new aircraft orders from Airbus and ATR, Iran Air's 10 year development plan, including making Tehran Airport a major transit hub, and Turkish Airlines' prediction of a doubling of tourism demand within two years.
The CAPA Iran Aviation Summit – the first international business event in Iran in any sector of the economy since the lifting of international sanctions – opened in Tehran today with 400 delegates and media in attendance. The Summit was inaugurated by the Minister of Roads & Urban Development, Dr. Abbas Akhoundi, Government of Iran.
The summit brings together senior Iranian government and aviation officials and international guests from leading aviation and travel organisations to explore the prospects for market development in the post-sanctions environment in Iran.
Peter Harbison, CAPA’s Executive Chairman, said, “The aviation market potential in Iran is immense due to the pent up demand after decades of sanctions. We are honoured to have been part of this landmark international event and wish to thank Iran Airports Company and the Iran Civil Aviation Organization for their invaluable support”.
In Jan-2014 and Jan-2015, CAPA published airport construction reports based on the CAPA Airport Construction Database, which was added to the portfolio of airport data suite products in Feb-2013. The database lists current and anticipated projects and expenditure at existing airports, new airport projects that are under way or planned, and recently completed products. In total, CAPA is aware of 394 new airports under construction, or planned for.
The 2014 report found airport construction projects to the value of USD385 billion globally, and the 2015 report found a value of USD543 billion globally - either new ones, or continuations of existing ones previously listed. As at 18-Jan-2016), and including new-build projects, that total comes to over USD900 billion, though it should be noted that speculative (and sometimes vague) proposed country-wide projects, such as those in Iraq and Iran for example (total USD60 billion), are included for the first time. Notable once again for the low level of investment, relative to market size, is the US.
While the number of existing airport projects has increased since the beginning of 2015, new airport projects have increased dramatically, by over 25%. For that reason this year’s report gives an overview of the main projects and investments at existing airports, but focuses more than previously on the new-build airports.
The airline industry was more profitable in 2015 than it has been for almost five decades, according to the Jan-2016 update to CAPA's global operating margin model. And it doesn't stop there. CAPA’s base case scenario projects world airline operating margins rising further above previous historic peak levels in 2016. These new levels of profitability are thanks to the low oil price environment, now expected to continue this year, coupled with strong demand growth in spite of global economic growth rates that are far from exceptional. The macroeconomic and geopolitical backdrops provide the main risks to this forecast.
CAPA also flags the potential emergence of ideal conditions for new entry. As oil prices remain low, fleet replacement rates are reducing, just as new aircraft delivery rates step up in 2016/2017, implying downward pressure on aircraft prices. Money is still cheap and so conditions begin to imitate those of a dozen years ago – the halcyon period for a spurt in LCC growth.
The First Vice President of Iran, four Cabinet Ministers and over 20 CEOs of Iranian aviation and tourism companies will headline the delegation attending the CAPA Iran Aviation Summit on 24/25 January in Tehran.
The Iranian delegation comprises the 100 most influential people in Iranian aviation and travel. They will be joined by more than 150 industry leaders from around the world, meeting to discuss the potential of the market in a post-sanctions environment.
This will be the first major international aviation summit to be held in Iran in almost 40 years and has been convened with the full backing of Iran’s aviation authorities and industry leaders.
Canada’s largest airline Air Canada continues its march to slash unit costs even as the devaluation of the CAD against the USD creates some temporary headwinds for the company. It believes that many opportunities lie ahead to further draw down its costs including a new agreement with regional partner Jazz and the introduction of the Boeing 737 Max beginning in 2017.
The company has revised its 2015 unit cost projections excluding fuel from a 1% to 2% decline year on year to a 1% decrease, driven by several factors, including currency pressure. Absent the depreciation of the CAD, Air Canada maintains its unit cost decreases would be greater year on year for 2015.
Given its complexity, Air Canada’s cost on an absolute basis will likely never equal that of its main rival WestJet; but keeping fuel and currency costs constant, the airline remains confident of lowering its unit costs by 21% between 2012 and 2018,. Air Canada's fleet strategy and the continued favourable performance of its low cost subsidiary rouge are major components of its cost cutting strategy.
Virgin America is welcoming competitive capacity reductions in early 2016, in one of its most challenging markets of 2015 – Dallas Love Field. Southwest’s massive push from the airport, started in late 2014 and continuing through 2015, has resulted in a weak revenue environment, affecting all airlines that serve the greater Dallas market.
Just as capacity growth in Dallas begins to moderate, Virgin America is planning 13% to 16% capacity growth in 2016, after culling its growth of supply in 2014 and part of 2015. Most of the capacity growth is driven by frequency additions in markets that Virgin America had to cull to support growth in Dallas, but new markets in Hawaii and the addition of Denver are also driving the airline’s 2016 capacity expansion.
The company is capping off 2015 by striking a deal to lease 10 Airbus A321neos, scheduled for delivery from 2017. Those new generation jets are necessary for Virgin America to meet its stated average annual capacity growth targets of approximately 10% for the medium term.
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