Analysis for The Americas

This month the Blue Swan Daily road tested the US based ultra-LCC, Spirit Airlines, on two sectors – Newark-Orlando and Orlando-Houston. For those travelling to the US and needing to get around domestically, or to/from Latin America, Spirit can be a good (and inexpensive) option, as the carrier offers a surprisingly extensive network.

The CAPA-ACTE 2017 Melbourne Aviation & Corporate Travel Summit is just around the corner, scheduled for 30-May-2017. Let’s take some time to learn about some of the incredible speakers scheduled for the event.

For years the Big 3 US carriers have failed to keep Emirates out of the US, even after spending over USD50 million on lobbying, but in two quick poorly judged moves President Trump and the US security organisation pulled it off in just a few short weeks.

As Qantas now looks to expand its own services westbound towards Europe - with the recent announcement of Perth to London direct 787-9 Dreamliner services scheduled to commence in early 2018 - looking east Christmas was almost ruined following the blow dealt to Australian’s largest carrier as a result of the US Department of Transport’s (DoT) rejection of a proposed joint venture with American Airlines (AA) across the Pacific. This, despite Australia’s Competition and Consumer Commission and New Zealand’s Ministry of Transport approving the proposed venture earlier this year.

United’s 3Q2012 financial results reflect management’s declaration that the quarter was one of the toughest of the merger integration with Continental Airlines. The challenges were reflected in its modest USD6 million profit, and the carrier’s continuing lacklusture unit revenue performance. But the carrier pledges that the challenges it faced with an IT systems cutover and aircraft redeployment that fuelled its weak performance have been met, and it expects customer sentiment to improve now that operational disruptions have abated.

The carrier’s USD6 million profit was a 99% slide year-over-year. Excluding special items, the carrier recorded a profit of USD520 million. United also saw a significant 79% slide in operating income to USD200 million as expenses grew 5% to USD9.7 billion while total operating revenues fell 2.6% to USD9.9 billion.

A 91% hike in profits during 3Q2012 at Delta Air Lines was somewhat overshadowed by rising unit costs that have challenged the carrier for most of 2012. Carrier management pledges that a two-year scheme designed to remove USD1 billion in costs will allow Delta to consistently meet its return on invested capital targets of 10% to 12% and continue to produce revenue premiums to the industry.

But accompanying those declarations is a warning that unit cost pressure will continue into 1H2013 as Delta cautions the structural changes ushered in by its cost pairing plan will take some time to implement and take effect. As the carrier works on its long-term strategy of cost containment, its outlook for the remainder of 2012 remains favourable as strong corporate demand is driving the carrier’s ability to sustain revenue and yield growth.

Warnings by Southwest Airlines that emerged during late 2011 of a cost creep are crystallising as the carrier is cautioning that a 6% hike in 3Q2012 unit costs will continue into 4Q2012. At the same time the airline is warning the industry at large faces choppiness as economic signals going forward are mixed. As a result Southwest is attempting to craft a strategy of cost cuts and revenue enhancements to bolster its defences against a potentially weaker economic environment in 2013.

The carrier recorded a profit of USD16 million during 3Q2012 that included USD81 million of negative special charges, compared to a USD140 million loss for the year-prior period. Factoring out special items, the carrier stated it has recorded a USD97 million profit for 3Q2012 versus a USD122 million profit for the year prior, which was still a 20% slide in quarterly profits. Southwest’s operating income also fell by USD174 million to USD51 million.

American Airlines is continuing a months-long trend of recording revenue strength relative to its peers, but its unit revenue performance during 3Q2012 diminished year-over-year as its net losses widened due to reorganisation costs. The company is incurring the losses as it works to regain consumer confidence after a wave of cancellations and delays during the last few weeks ushered in by labour unrest.

Even as American’s revenue performance continues to be strong, year-over-year performance for all carriers is starting to slow, and there are some slight signs that business demand could be softening as the US presidential election and general economic uncertainty make some businesses skittish about investing in non-essential corporate travel.

American’s parent company AMR widened its net loss year-over-year during 3Q2012 to USD238 million from a USD162 million loss during the year prior.

Latin America’s powerful new force LATAM Airlines Group recorded USD50 million in net income and USD23 million in operating income for 2Q2012, the first time the combined entity of LAN and TAM has reported consolidated quarterly results since the close of their historic merger on 22-Jun-2012. While the combined result was positive, the separate performance of each carrier was less favourable with TAM recording a USD14 million operating loss for 2Q2012 and LAN only turning a small operating profit of USD37 million. The combined result posted by LATAM only includes eight days of contribution from TAM as the merger was finalised near the end of 2Q2012.

TAM posted a BRL928 million (USD458 million) net loss during 2Q2012 driven by foreign exchange currency challenges and losses from the carrier’s fuel hedging portfolio. LAN recorded a 68% slide in net profits to USD5 million, driven by weaker conditions in its cargo business and one time costs associated with union negotiations and the merger with TAM. Going forward the combined company plans to focus much of its 3%-4% capacity growth in 2012 on the strong north-south routes to North America.

As in the rest of Europe, the airline industry in the continent’s Nordic region is undergoing a structural change characterised by bankruptcies and intense competition from low-cost carriers with full-service network airlines implementing cost reduction programmes aimed at securing long-term sustainability or just survival. The region saw yet another operator cease operations in 2Q2012, Air Finland, following on the bankruptcy of Cimber Sterling, Skyways and City Airline in the first three months of the year.

Finnair made outstanding progress in 2Q2012 to lower its cost base and heighten revenue although it could not attain profitability while SAS Group’s pre-tax earnings halved year-on-year to SEK371 million (EUR45.1 million ) despite a one-off SEK346 million (EUR42.1 million) capital gain attributable to property transactions. Norwegian Air Shuttle improved in all operating parameters in the three months ending 30-Jun-2012 and reported a consolidated net profit of NOK90.5 million (EUR12.4 million), up 69% over the year-ago period. The LCC’s operating profit expanded to NOK322.3 million (EUR44.3 million) from NOK72.8 million (EUR10 million) in the year-ago period, and 2Q2012 EBIT margin was a respectable 10.2%.