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Analysis for Global

CAPA Americas Summit: Latin America remains promising as open skies drives US international growth


The evaluation process that airlines use to determine the viability of international routes goes far beyond merely calculating potential profitability. Myriad considerations need to be undertaken, including ease of doing business with governments, infrastructure constraints and the customer experience of passengers travelling to the end destination.

Although American and Delta continue to trumpet the need for government-to-government consultations between the US and the UAE and Qatar regarding open skies agreements with those countries, fully liberalised air service pacts remain the cornerstone for international expansion from the US. Particularly so for airports outside the hub systems of the three large global US network airlines.

A pending open skies agreement with Brazil, a new bilateral with Mexico and the recently concluded agreement to resume scheduled flights between the US and Cuba have created new opportunities for US airlines to broaden their reach in Latin America and the Caribbean. But there are obviously inherent risks in undertaking expansion to those regions, and the rewards from growing on routes to those countries may only manifest themselves in the medium to long term.

VivaAerobus starts 2016 with positive momentum. Profitable growth is the key to its future


Mexican low cost airline VivaAerobus ended 2015 on a positive note, reversing its losses from the year prior and charting solid EBIDTAR margins. The airline is in the final stretch of a fleet revamp; this entails shedding Boeing 737 Classics operated since its 2006 launch and transitioning to a much younger fleet of Airbus narrowbodies.

Among the new crop of Mexican low cost airlines that formed in the mid-2000s (VivaAerobus, Interjet and Volaris), VivaAerobus remains the smallest measured by market share. Aeromexico, Interjet, Volaris and VivaAerobus are Mexico’s dominant airlines, but VivaAerobus’ 12% in 2015 share was a distant fourth. That could change as VivaAerobus expands its fleet with larger-gauge aircraft, taking steps to broaden the expanse of its network.

VivaAerobus suspended a number of short-lived transborder routes in 2015, and it appears to be focused on rounding out its domestic network in 2016, before resuming international expansion in 2017. During the next few years VivaAerobus could elevate its position in the Mexican market if there is enough demand to sustain the growth plans of the country’s largest airlines.

European airline consolidation Part 2: M and A potential of major groups; benefits and hurdles


Part one of this report on European airline market structure and consolidation highlighted that the top twenty airline groups in Europe hold 75% of seats. This is the same share as the top six groups in North America. This equivalence, in market share terms, between Europe's top 20 and North America's top six underlines the huge gap in consolidation progress between the two regions' airlines. It would take a large number of merger and acquisition deals to recreate North America's market structure in Europe, consolidating 20 into six.

This second part of the report is a kind of fantasy, a hypothetical. It suggests an illustrative series of combinations among Europe's top 20 that would approximately replicate the market shares, in terms of seat share, held by North America's top six.

This would require large merger and acquisition transactions involving pairings between members of Europe's smaller top six of Lufthansa Group, IAG, Ryanair, Air France-KLM, Turkish Airlines and easyJet. It would also mean several deals involving second-tier FSCs and LCCs. However, for now the larger deals in Europe remain relatively unlikely, and there are even hurdles to the smaller deals.

European airline consolidation and profitability Part 1: top 5 airline groups have only 43% share


Consolidation among Europe's airlines has always been fitful, and truly sizeable deals have ground to a halt in recent years. By comparison, North America has become the benchmark of airline consolidation progress. The announcement that Alaska Airlines is to acquire Virgin America once again highlights the differences in pace between Europe and North America.

This first part of CAPA's analysis of European airline market structure and consolidation compares market concentration in Europe with that of other world regions and looks at the link with profitability. It mainly focuses on comparing Europe with the other two large aviation markets, North America and Asia Pacific, but also gives data on market concentration for all of the other regions: Middle East, Latin America and Africa.

Europe's fragmented airline market is less profitable than its much more consolidated North American counterpart (although, on most measures, Europe is less fragmented than Asia Pacific). Europe's top 20 airline groups have the same seat share as North America's top 6.

Part two of this report considers a possible set of combinations to reassemble Europe's top 20 into six groups matching North America's top six.

Do airline industry associations have a future?: CAPA Airlines in Transition


Following two conspicuous airline defections from regional airline associations in 2015 there must be questions about the role of industry bodies in future – Delta left A4A and IAG left AEA. The issue is further complicated when a European, cross-association grouping is set up to achieve a special purpose.

Whereas Delta's departure from A4A was over fees and ATC privatisation, IAG left AEA on broader policy grounds in a disagreement over liberalisation versus protectionism. IAG then became a member of ELFAA, previously the stronghold of LCCs. Adding further to the density of the manoeuvres, IAG then joined Air France-KLM, Lufthansa, easyJet and Ryanair in forming a new body, A4E, with a very focused agenda.

CAPA's Airlines in Transition (AIT) event in Dublin in Mar-2016 assembled a panel bringing together the heads of four of Europe's airline bodies (AEA, A4A, ELFAA and ERA), the head of its airport trade body (ACI Europe) and the experienced head of the Arab Air Carriers Organisation. Moderated by Kurt Knackstedt, President of the Association of Corporate Travel Executives, the panel addressed the relevance and future of these associations.

How FSCs can regain short haul share from LCCs Part 2: high level. CAPA Airlines in Transition.


Part 1 of the report on the ways full service airlines can regain short haul market share from LCCs considered more detailed issues at the 'coal face' of the business. These included pricing strategy, ancillary revenues, the approach to cost reduction, changes to the product and service and, crucially, how to gain the support of employees.

This second part looks at three higher-level issues, namely distribution strategy, establishing new business models and the use of partnerships. Both parts of the report are based on themes arising from a panel discussion under the chairmanship of Professor Rigas Doganis at the CAPA Airlines in Transition conference in Dublin on 10 and 11-Mar-2016, and the related votes taken on these topics by delegates.

Since CAPA's first Airlines in Transition event four years ago, there has been considerable movement in the business models of both LCCs and FSCs, mostly towards each other. In spite of the emergence of a hybrid model, LCCs still have a unit cost advantage and FSCs still face a competitive challenge. However, LCC seat share has levelled off since 2013.

US Big 3 vs Gulf 3 a year on: open skies, playing fields and policy: CAPA Airlines in Transition


It is more than a year since Delta, United and American Airlines published their 'White Paper' alleging state subsidies to Emirates, Qatar Airways and Etihad. CAPA's Airlines in Transition (AIT) event in Dublin assembled a panel of senior industry figures moderated by John Byerly, a former Deputy Assistant Secretary for Transportation at the US State Department, to review the arguments.

The US big three claimed that subsidies to the Gulf three distorted the market. They called on the US government to open consultations under the relevant bilateral air services agreements and, in the meantime, to freeze new passenger services. A ponderous bureaucratic process to examine whether action should be taken is still under way. European airlines have also been dragged into the debate.

At the same time, the Gulf airlines have continued to add and announce new routes to the US. Ultimately, the US big three's aims contemplate the termination, or modification, of the relevant 'open skies' bilaterals, which allow the Gulf airlines unlimited capacity on routes to the US (the bilaterals reciprocally offer the same to the US airlines). From airlines faced with unexpectedly effective competition this cynical approach was little more than an attempt to further distort an already protective bilateral system.

Spirit Airlines fleet changes reflect a potential shift to smaller markets, still growing at 15-20%


The US ULCC Spirit Airlines is making adjustments to its fleet, moving to seize on opportunities created by owning aircraft versus renting, and retaining some smaller gauge Airbus A319s by purchasing those aircraft as their leases are up for renewal. The airline is also in discussions with Airbus about possibly switching some later delivery A321s to smaller gauge A320s. To a degree this is in reversal of a trend sweeping much of the US market, where most airlines are seeking to add seats to existing aircraft and are placing orders for larger gauge jets.

Spirit’s fleet changes and evaluations appear to be meeting two objectives. Firstly, enlarging its base of owned aircraft should allow the airline to maintain its superior cost advantage, and secondly, creating some flexibility with aircraft size allows Spirit to add smaller, less competitive markets to its network.

In early 2016 Spirit’s new CEO alluded to some small market opportunities, and indications are that the company is working to adjust its fleet in order to diversify its network composition.

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