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:
- Emirates’ options on an A380 replacement are complex. Use 777s, cut capacity, grow frequencies?
- Virgin Atlantic: entry into Air France-KLM/Delta JV welcomed by rivals as AF-KLM plans 31% stake
- Vietnam Airlines & Bangkok Airways respond to rapid Thailand-Vietnam LCC growth with new partnership
- Airberlin files for insolvency. Lufthansa to cherry pick from its operation; easyJet also looking
- Cathay Pacific: depressed results but there may be rays of hope. Time to regain the initiative
Emirates’ options on an A380 replacement are complex. Use 777s, cut capacity, grow frequencies?
The A380 is almost synonymous with Emirates, which operates 96 A380s – 45% of the global A380 fleet. Emirates has a further 46 on order while ANA, Qatar and SIA have 10; other outstanding orders may not be realised. Less well remembered is that, as important as Emirates is to the A380, the superjumbo is intertwined with Emirates. Most airlines use their small A380 fleet as a showpiece flying a handful of flights.
For Emirates the A380 is a workhorse, reaching 47 airports with 172 daily flights. Since Airbus is unlikely to proceed with an A380neo update, Emirates faces the difficult question of how to restructure its production model with inevitably smaller aircraft: endure capacity cuts or grow frequencies.
With the 747-8 also fading, the next largest aircraft is the 777-9, of which Emirates has ordered 115. Replacing an A380 with a 777-9 one for one could mean a 25% capacity cut.
If Emirates wanted to maintain capacity on London Heathrow, for example, it would have to replace six A380s with eight 777-9s. Even if the cost of additional flights were accepted and manpower were found, slots (e.g. London Heathrow), hub congestion (Dubai) and traffic rights (Sydney) may stymie frequency growth.
Virgin Atlantic: entry into Air France-KLM/Delta JV welcomed by rivals as AF-KLM plans 31% stake
Senior executives of competitors to the two Delta led North Atlantic joint ventures have welcomed plans to consolidate the two into one. The plans effectively bring Virgin Atlantic into the SkyTeam-centric JV of Delta, Air France-KLM and Alitalia (but Virgin is not joining SkyTeam).
This strengthens this JV’s position against the other two JVs centred on members of Star and oneworld. Nevertheless, both IAG’s CEO and Lufthansa’s CFO have called the move positive. This may reflect their concern at the rise of fast growing smaller competitors in this lucrative route region.
In addition to the merger of this JV with the Delta/Virgin JV, a series of equity tie ups is also planned.
In Jul-2017 Air France-KLM announced that it would buy 31% of Virgin Atlantic from Sir Richard Branson’s Virgin Group. In addition, Delta (which owns 49% of Virgin Atlantic) and China Eastern are to invest fresh equity in Air France-KLM, each taking a 10% stake. Air France-KLM shareholders will be asked for approval on 4-Sep-2017.
Although bringing Virgin Atlantic into the wider JV with Air France, KLM, Alitalia and Delta seems to be a sensible move and was not unexpected, Air France-KLM’s decision to buy into Virgin Atlantic was more surprising.
Vietnam Airlines & Bangkok Airways respond to rapid Thailand-Vietnam LCC growth with new partnership
Bangkok Airways and Vietnam Airlines are planning a new codeshare partnership which will significantly bolster their position in the fast growing, but intensely competitive, Thailand-Vietnam market. The two airlines are ideal partners as Bangkok Airways is expanding in Vietnam by focusing on niche secondary routes, while Vietnam Airlines only serves the core Hanoi and Ho Chi Minh to Bangkok routes.
Capacity in the Thailand-Vietnam market has increased by approximately 30% over the past year, and has nearly doubled over the past five years, driven by rapid LCC expansion. Five LCC groups now serve the Thailand-Vietnam market, compared to just one five years ago. Thailand-Vietnam has become the first and only country pair within Southeast Asia with five LCC competitors.
VietJet has particularly emerged as a strong competitor, using its Thai affiliate to launch new Thailand-Vietnam routes and offer domestic connections beyond Bangkok. Rival Vietnam Airlines will be able to offer its passengers similar connections under the new Bangkok Airways partnerships, as well as a nonstop product on Bangkok Airways’ growing network of niche Thailand-Vietnam routes.
Airberlin files for insolvency. Lufthansa to cherry pick from its operation; easyJet also looking
Air Berlin PLC, the parent of airberlin and NIKI, has filed for provisional insolvency proceedings in a court in Berlin-Charlottenburg (NIKI is not included). Lufthansa has said that it is supporting airberlin’s restructuring efforts jointly with the German government and is in talks to take over parts of its operations.
The Lufthansa Group already wet leases Airbus narrowbodies from airberlin and the government is to provide a EUR150 million loan to airberlin, allowing it to continue to operate during its administration. Noises from the government suggest that closer ties between Germany’s two biggest airline groups may not attract close regulatory scrutiny. Etihad called the filing “extremely disappointing” given its “extensive support” since it invested in 29% of Air Berlin PLC’s equity in late 2011. It is also extremely costly for Etihad, hard on the heels of Alitalia’s Jun-2017 entry into administration.
Given airberlin’s long history of losses, it is no surprise that it is filing provisional insolvency proceedings, particularly as Etihad has run out of patience and cash to support it. Lufthansa has played a canny waiting game over a number of years and is now well placed to cherry pick those parts of airberlin’s operation that suit it best without buying the whole loss-making enterprise. EasyJet also has a reported interest in airberlin assets. Lufthansa’s priority will be to keep Ryanair out. The German Federal Cartel Office and the EU Commission will be watching with great interest.
Cathay Pacific: depressed results but there may be rays of hope. Time to regain the initiative
Cathay Pacific on 16-Aug-2017 reports financial results for 1H2017. These results follow from 2016 when Cathay for the first time since 2008 posted a group loss and became a whipping post: Bloomberg referred to “a horror story when it comes to Cathay”. The South China Morning Post described “a flawed business model in a changing world”.
No reprieve is expected in 1H2017, when Cathay embarked on a restructuring programme, which as is typical has a ramp-up period but front-loaded transformation costs. Fuel hedges are winding down but losses will still be pronounced. Cargo is the bright spot with an unexpected boost in yields. Passenger over-capacity persists in all key markets, and exacerbated especially in Europe and from Cathay’s A350 deliveries. Declining passenger yields are closely watched and now may be re-balanced with less aggressive load factors.
There is considerable work ahead for Cathay. Yet any “horror story” would have been magnified by uncertainty. This may be fading with a change in practices and management. Cathay will now seek vindication of its premium hub strategy, geography and brand. While lack of detail will invite criticism, Cathay’s future is in focus.