Every week, CAPA – Centre for Aviation, produces informative, thought provoking and detailed market analysis of the aviation industry. With supporting data included in every analysis, CAPA provides unrivalled and unparalleled intelligence.
In this week’s edition, our global team of experts deliver you a wealth of insightful commentary on the latest news and trends affecting the commercial aviation industry, including:
- Icelandair enters Berlin, benefiting from airberlin’s woes; is confident of more room to grow
- Spirit Airlines faces questions about its strategy as unit revenue remains under pressure
- Brazil airport privatisation: “Steak with bone” as the economy slowly recovers
- GOL Airlines SWOT: network expansion and cost containment are key in the new competitive era
- Malaysia-India air capacity surges as AirAsia, Malindo Air/Lion Group circumvent bilateral limits
Icelandair enters Berlin, benefiting from airberlin’s woes; is confident of more room to grow
Icelandair, which celebrates its 80th anniversary this year, is to make Berlin Tegel its newest destination on 3-Nov-2017. The 18-Aug-20017 announcement coincided with news of the insolvency of airberlin, whose main hub is Berlin Tegel and whose only strong growth area has been the North Atlantic.
Icelandair has a well established strategy of connecting passengers between Europe and North America via its Reykjavik hub. It has enjoyed double digit traffic growth for a number of years, stimulated by a strong increase in tourism to Iceland, but driven mainly by its own strategy of expanding trans-Atlantic transfer traffic. This traffic growth has given Icelandair Group a good track record of profitability since the global financial crisis, but its results dipped in 2016 and again in 1H2017.
Intense competition, due to the growth of the Icelandic LCC WOW air (which also offers trans-Atlantic connections) and also from LCCs such as Norwegian (operating nonstop trans-Atlantic flights), has put unit revenue under pressure just as Icelandair is suffering a rise in unit cost.
Nevertheless, Icelandair is implementing a profit improvement plan and still expects plenty of room for growth, as illustrated by its move into Berlin.
Spirit Airlines faces questions about its strategy as unit revenue remains under pressure
Spirit Airlines’ unit revenue turnaround in 2Q2017 has been short lived, as the familiar foes of capacity creep and pricing pressure have returned to squeeze the ULCC’s performance in that metric for 3Q2017. The airline’s projected unit revenue decline of 2% to 4% is the bleakest forecast offered by US operators for 3Q2017, and Spirit is warning its outlook for 2H2017 has dimmed.
Some of Spirit’s unit revenue weakness is driven by pilot related cancellations that spooked customers away from booking travel with the airline in the US summer high season. Those cancellations are also driving up Spirit’s unit costs in 2017, which has obviously created market anxiety and affected the ULCC’s stock value.
Spirit holds the view that new basic economy fares offered by US majors are not responsible for the latest episode of pricing pressure, and instead core fares are undergoing major discounting.
After many quarters of the airline’s weak unit revenue results, and its return to a negative performance in 3Q2017, scrutiny of the viability of the ULCC model in the US is growing. Spirit finds itself fielding questions over its future plans for positioning itself in the market.
Brazil airport privatisation: “Steak with bone” as the economy slowly recovers
A further round of concessions to privatise the operation of airports in Brazil is in the process of being announced. It comes just as the concessionaire of one of the first auctioned airports returns it to the government.
The optimism with which the first concession round was greeted has given way to concerns that the asking price for these 25- and 30-year deals is too high in the light of Brazil’s still uncertain economy, aggravated by continuing political unrest.
This report looks at the reasons behind the concessionaire’s decision to surrender its licence, at the (negative) economic state of Brazil, and at the slightly more positive tourism outlook and aircraft order books.
It concludes that the forthcoming fourth tranche of concessions – the precise nature of which is yet to be decided in what is a very fluid situation – could be successful, but only if a more realistic appreciation of the state of the economy is taken into account.
GOL Airlines SWOT: network expansion and cost containment are key in the new competitive era
Brazilian airline GOL holds a special position in Latin American aviation, having ushered in the low cost model in South America during the early 2000s. Since that time it has faced competition from start-ups that have included Azul and a reinvigorated TAM, after its merger with LAN to create the LATAM Airlines Group.
After a recession swept over Brazil in late 2014, GOL was forced to undertake a financial restructuring in 2015 as credit for Brazilian companies dried up. GOL worked to create a more stable capital structure to withstand the downturn so that it could maintain its leading position in GOL’s domestic market.
GOL has also evolved its product over the past few years to capture more lucrative corporate customers; it holds a leading share among Brazilian corporate travellers, which puts the airline in a favourable position as the country’s economy starts a slow recovery. But GOL also faces formidable challenges, including a heavy reliance on Brazil’s domestic market, where competition remains fierce. It also faces rising fuel costs in 2018, which ups the stakes in keeping its non-fuel costs at bay as a means to sustaining low fares.
To read on, visit GOL Airlines SWOT: network expansion and cost containment are key in the new competitive era
Malaysia-India air capacity surges as AirAsia, Malindo Air/Lion Group circumvent bilateral limits
The AirAsia and Lion groups are pursuing significant expansion in the Malaysia-India market by taking advantage of available fifth freedom rights for Indonesian airlines. Malaysian carriers are currently not able to expand to Indian metros due to bilateral constraints, but two competitors have cleverly seized the opportunity to add flights to three Indian metros using sister airlines in Indonesia.
The AirAsia Group has been able to resume services from Kuala Lumpur to Mumbai using A330s operated by Indonesia AirAsia X, and is planning to add capacity on the Kuala Lumpur-Kolkata route using A320s operated by Indonesia AirAsia. The Lion Air Group has been able to launch services in the Kuala Lumpur-Chennai market using 737-900ERs operated by Batik Air.
AirAsia Group’s Malaysia-India capacity is increasing by more than 20%, to nearly 20,000 weekly seats, as flights operated by Malaysia based AirAsia and AirAsia X are supplemented by the new flights operated by Indonesia AirAsia and Indonesia AirAsia X.
At the same time, Lion Group’s capacity in the Malaysia-India market is increasing by nearly 30%, to more than 11,000 weekly seats as flights operated by Malindo are supplemented by the new Batik flights. The Malaysia Airlines Group, which is the only other competitor in the Malaysia-India market and is also keen to expand, loses out as it does not have an Indonesian affiliate.