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Avianca Holdings:under pressure in the region, but believes yield declines could stabilise in 2H2016
After recording sequential quarterly improvements from 4Q2015 to 2Q2016, the Latin American airline group Avianca Holdings believes that its yield performance should stabilise in 1H2016. However, despite improving trends on a sequential basis, Avianca’s year-on-year yield declines remain in the double digits, and currency fluctuations could affect its current outlook for yield stabilisation.
Although the airline group’s largest market – Colombia – is facing economic pressure the challenges are not as severe as Brazil’s dire economic circumstances, and at present Avianca believes that the Colombian domestic market and routes from Colombia to North America are beginning to recover.
The duration of a recovery in those markets remains unknown, and Avianca and its Latin American rivals continue to adapt to the overall weakness in the region. A major focus for all airlines in Latin America is decreasing costs, as yields and unit revenue remain under pressure. Avianca’s unit costs excluding fuel have also fallen in the double-digit range for the last three quarters, and the company has outlined a cost-cutting scheme to save millions annually by YE2018.
At the turn of the century it would have been heresy to describe Southwest Airlines as embattled. The venerable low cost airline was a perennial passenger favourite, and its employee relations were the most positive and successful among US airlines. But during recent years the company’s admirable relationship with labour has soured, culminating in the recent declaration by Southwest’s union leaders that the company’s top two executives should vacate their positions.
The labour discontent and years-long negotiations have not only damaged management’s credibility in the eyes of many employees, but have also prevented Southwest from taking important steps to create more outlets to generate revenue – including establishing potentially valuable codesharing relationships. As Southwest moves closer toward having the proper technology to support those partnerships, the likelihood that labour groups will approve codeshares is decidedly low as rifts between management and employees deepen.
Southwest had reached an inflection point in its frayed labour relations. Its golden image has tarnished, and the longer that contract talks drag on, the more that scrutiny over management’s ability to mend the strained relationships will continue to intensify.
Niche US ULCC Allegiant Air should be embarking on a period of greater stability after reaching an agreement with its pilots and completing a safety review with the US FAA. The airline also recently placed its first order for new aircraft with Airbus, which will help to accelerate the retirement of its ageing MD-80s that are creating reliability challenges for Allegiant.
Although the pilot agreement and aircraft deal will drive long term benefits for Allegiant, the airline faces some cost pressure going forward from increased labour expense and inefficiencies in operating more than one fleet type. As it braces for some cost inflation, Allegiant is also facing increased competitive overlap with fellow ULCCs Frontier and Spirit, which reflects subtle changing dynamics in the US domestic market.
For the moment, the overlap between Allegiant and other ULCCs remains small. But the likelihood of increasing competition is strong as the opportunities in medium sized markets created by consolidation among the US’ largest airlines continue to grow.
Thailand’s Nok Air is planning to focus on international expansion over the next two years with a focus on China and India. The primarily domestic LCC needs a bigger international operation to diversify its business, improve profitability and unlock a new phase of growth.
Nok has struggled over the last two and a half years to contend with intensifying domestic competition, leading to losses in 2014 and 2015. A pilot shortage led to even steeper losses in 1H2016 as Nok was forced to temporarily reduce domestic capacity and aircraft utilisation levels.
The airline is confident it can return to profitability in 4Q2016 as domestic capacity is restored and is bullish on its medium term outlook as it grows its international operation. China expansion will be the priority in 2017 followed by India in 2018, which will be served with Nok’s new fleet of 737 MAX 8 aircraft and supported by a potential new Indian partner.
Hawaiian Airlines’ unique geography continues to benefit the company in 2016 as favourable capacity trends are one factor in its industry outperformance in unit revenue metrics. Hawaiian’s outlook for the remainder of 2016 remains positive as industry capacity on its routes to North America and long haul destinations remains relatively benign.
The airline is acknowledging slight pressure in its inter-island operations due to heightened competition with the smaller operator Island Air. Hawaiian plans to adjust its inter-island schedule later in 2016 to maximise peak flying and cut some off-peak flights.
Hawaiian is expanding service to the Tokyo market in 2016 after being awarded new slots at Haneda airport. But the expansion is not affecting Hawaiian’s overall growth targets of a 2.5% to 5.5% increase in capacity, which is significantly lower than the double-digit expansion it recorded from 2011 to 2013.
Air Canada is undertaking a significant international push, just as the UK has voted to exit the European Union and terrorist attacks have swept Belgium, France and Turkey. Despite the pressure those circumstances are creating for revenue and yields, Air Canada has a reasonably positive outlook for demand in 3Q2016.
The airline has posted declines in yields and unit revenues for numerous quarters, but stresses that outcome remains a by-product of its strategy to grow internationally. Expansion by the company’s low cost subsidiary rouge has increased Air Canada’s mix of leisure customers and its growing average stage lengths have also pressured unit revenues. However, the company continually declares that its expansion is margin-accretive.
Air Canada no longer provides specific capacity guidance but has no plans to slow its growth in 2016, the bulk of which is directed to international markets. The company’s message is that its capacity increases should in fact be absorbed, even accounting for a major capacity push that started in late 2Q2016.