My Account Menu

CAPA Login

Register to trial CAPA Membership!

Analysis for Global

CAPA airline profit outlook. Record margins from capacity restraint, but upswings are not forever


This six-monthly update of the CAPA world airline operating margin model continues to expect industry margins in 2015 to 2017 above previous cyclical peaks, albeit falling slightly in 2017. This is in spite of unexceptional global GDP growth, which has not regained its long term trend rate since 2010.

The higher level of airline operating margin from a given GDP growth rate has been due to several factors. Lower oil prices have played their part, particularly since mid-2014, as does a higher level of global traffic growth than would previously have been expected from relatively sluggish GDP growth. In addition to these external issues, perhaps the most significant factor is a greater degree of capacity discipline. This is now most deeply rooted in the US, which is now by far the most profitable airline region, helping to drive the global result.

On a more cautionary note, the IMF has recently cut its global GDP forecasts, citing Brexit and other geopolitical risks. In addition, profit warnings in recent weeks from IAG, easyJet and Lufthansa are a reminder that cyclical upswings do not last forever. A test of the airline industry's improved profitability will be its resilience in a downturn.

CAPA Australia Pacific Aviation Summit: Aviation industry leaders to gather in Brisbane, 3-5 August


Key aviation industry executives will converge on Brisbane this August to debate and discuss the strategic issues facing the region’s airline, airport and corporate travel industries.

Qantas CEO Alan Joyce, Jetstar Group CEO Jayne Hrdlicka, Etihad Airways CEO Peter Baumgartner, Garuda Indonesia CEO Arif Wibowo, Air India CMD Ashwani Lohani, Nok Air CEO Patee Sarasin, Tigerair Australia CEO Rob Sharp and Velocity Frequent Flyer CEO Karl Schuster are among the airline industry leaders who will be gathering in Brisbane for the fourth annual CAPA Australia Pacific Aviation Summit on 3-5 August.

The Summit, to be held at the Brisbane Convention & Exhibition Centre, will be hosted by Brisbane Marketing in conjunction with Foundation Partners, Brisbane Airport Corporation and K&L Gates.

AirAsia up-gauges with a 100 A321neo order; outlook improves and China in its sights


AirAsia has joined other leading LCC groups in Southeast Asia by deciding to add higher density narrowbody aircraft. The 100 A321neos ordered by AirAsia at the 2016 Farnborough Air Show will enable the group to maximise slots at infrastructure constrained airports and further reduce unit costs.

The new order also enables the AirAsia Group to meet a requirement for additional aircraft that has surfaced due to the establishment of a leasing subsidiary which is looking at potentially placing some of the group’s future aircraft with third party customers. AirAsia joins rival Lion Group and VietJet Air in pursuing potential opportunities to lease out some of 1,150 aircraft the three Southeast Asian groups have on order – a staggering number of aircraft that likely cannot be absorbed entirely by their own airline subsidiaries or affiliates - but which they need to have available in case high forecasts materialise.

The new deal lifts AirAsia’s narrowbody order book to 404 aircraft, including 304 A320neos to be delivered from 2H2016 through 2028 and 100 A321neos slated for delivery from 2019 to 2028. The group took its last A320ceo in 2Q2015 and currently operates 171 of the type from bases in five countries.

Air Europa Part 2: a record of labour productivity gains, CASK near LCC levels but RASK falling


After a period of unit revenue growth following the global financial crisis, Air Europa came under heavy pricing pressure in 2015. Renewed growth by Iberia has intensified competition to Latin America, while LCCs are putting strain on short haul yields.

Air Europa does not report profits, but it is its parent company Globalia's largest business by revenue. The privately owned Globalia group has been profitable since 2013 but suffered a fall in profits in 2015, when its Air Division's revenue declined by 3% in spite of traffic growth. The group balance sheet has low liquidity and Globalia is reportedly considering an IPO.

Widebodies now represent more than half of Air Europa's seats and 20 out of 27 outstanding orders. This reflects the importance of its Latin American network and its ambitions to continue long haul growth, as detailed in part 1 of this report. Moreover, the widebody orders are for Boeing 787s – to replace A330s, generating cost efficiency gains. CAPA estimates that Air Europa's unit cost is above that of LCCs, but closer to them than to FSCs. It has a good track record of labour productivity growth, which will be useful in its quest for further CASK reduction.

Air Europa Part 1: Latin America drives growth. Iberia and new entrants provide challenges


Air Europa's 28-Jun-2016 launch of a new daily Madrid-Bogota service returns the spotlight to its Latin American network. This is the airline's most important route region both by capacity and by revenue, and it remains at the heart of its future plans. Air Europa has 13 Latin American destinations – compared with Iberia's 19 – and has been linked with plans for several more.

By seat capacity on Spain-Latin America Air Europa is half as big as Iberia but its share has increased by 10ppts over the past decade, while Iberia's has fallen. Iberia was four times Air Europa's size in this market in 2006. Nevertheless, a re-energised Iberia remains a formidable competitor and there is a small, but growing, band of new entrants.

Air Europa's parent company Globalia is reportedly considering an IPO, having previously been in talks with HNA Group about a possible investment by the Chinese conglomerate. Air Europa is likely to defer plans for the launch of routes to China while it concentrates on Latin America.

Part 2 of this analysis will look at Globalia's financial track record. It will also examine Air Europa's unit revenues, fleet and unit cost positioning.

US airlines cut capacity to trigger PRASM momentum from rising fuel prices


Delta Air Lines and jetBlue Airways are the latest US airlines to trim their capacity forecasts, after the US major global network airlines American and United made adjustments to their projections in early 2016. The latest cuts initiated by US airlines appear to be driven by a continuing depressed pricing environment and rising fuel prices, as oil touches USD50pb again.

By reducing capacity airlines hope to restore a supply-demand balance that allows for fare increases to shore up passenger unit revenues, which have been on the decline for more than a year. Overall airline valuations show that investors remain anxious over negative PRASM, and are essentially ignoring the record profits and margins recorded by US airlines.

Delta has previously missed two separate time periods in which it aimed to return to a flat PRASM performance and has pledged to reach that goal by YE2016. As targets have slipped, most US airline executive management teams continue to stress the importance of positive PRASM and the weight it carries with investors.  

Brexit and aviation Part 2: lower air traffic, economic uncertainty. UK-EU relations up in the air


The British exit from the European Union will have a negative impact on UK air traffic as a result of weaker GBP – an immediate effect – and a weaker GDP outlook. Air freight is also likely to be negatively affected by lower levels of international trade. The impact on air traffic is also likely to be felt in the rest of Europe, while economists are also warning that Brexit adds to the uncertainties facing the global economy.

European airline share prices have been hard hit since the UK referendum result was announced early on 24-Jun-2016, particularly those of easyJet and British Airways' parent IAG. This reflects the likely lowering of demand, but also the significant regulatory uncertainty surrounding the sector, particularly with respect to market access.

UK membership of the European Common Aviation Area would preserve existing market access and is the expected route. However, UK political turmoil and question marks concerning its ongoing commitment to EU principles may compromise its access in the future. Profit warnings from IAG and easyJet point to at least a slowing of profit growth. It is difficult to see the world airline profit cycle continuing the upswing of recent years.

Spirit Airlines makes some progress in operations, but still lags its peers in key metrics


Operational improvement is a top priority for Spirit Airlines' new CEO, who has held the position for just six months. Data from the US government show that Spirit is making progress in some areas of operations, but still lags behind other US airlines. As the busy summer season kicks into full force, Spirit’s commitment to improving operations could be put to the test.

As Spirit’s rivals hone their product segmentation strategies to match Spirit’s low fares, operational improvement takes on a whole new level of importance for the ultra-low cost airline and its particular business model. Spirit’s ULCC rival Frontier is outperforming Spirit in some operational metrics.

Spirit is in undergoing other changes, including a change in its fleet mix to smaller-gauge Airbus narrowbodies. The company has intimated that it would examine smaller markets in the future to decrease competition with larger airlines. Many of the new routes that Spirit has introduced in 2016 feature Southwest and Delta as competitors and it appears that Spirit now has the largest network overlap with Southwest, rather than with American Airlines.

Page 1 of 153 [1,224 total analysis articles]

Next >>