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.
Air cargo to enjoy highest growth since 2010, but huge structural overcapacity still exists
In the nine months to Sep-2017 world air freight traffic, measured in freight tonne kilometres, increased by 10.1% year-on-year, according to data from IATA. The increase for the month of Sep-2017 was 9.2% year-on-year, a deceleration from 11.6% in Aug-2017, and IATA postulated that freight traffic growth may have passed its cyclical peak.
Nevertheless, it seems probable that full year growth in 2017 will exceed IATA’s forecast of 7.5%, making it the highest since it reached 19.4% in 2010. Growth in cargo traffic has been much faster than capacity growth, driving an increase in cargo load factor.
However, at just 44.4% for the first nine months of the year (broadly where it has been for years), cargo load factor should be seen as unacceptably low. Put another way, this statistic means that air cargo supply is more than twice the level of demand. In passenger belly space, the situation is even worse: only 27% of capacity is typically filled.
Little wonder that air cargo suffers from chronic yield weakness. This may be a relatively good year for air cargo, but it will not remove the huge structural overcapacity problem.
jetBlue Airways’ big challenge: can it achieve its ambitious cost targets?
JetBlue Airways remains bullish in its ability to meet cost targets the company set in late 2016: unit cost growth excluding fuel of 1% or less from 2018 to 2020. Its ambitions are based on a structural cost reduction programme in which the airline aims to reach USD250 million to USD300 million in annual savings on a run rate basis by 2020.
Nothing in jetBlue’s calculus in reaching those goals has changed. The airline continues to list numerous opportunities in four major areas – technical operations, corporate expenses, airports and distribution.
JetBlue’s targets are being met with some scepticism as the airline faces cost pressure in 2017 stemming from the effects of hurricanes that struck its system in late 3Q2017. JetBlue’s response is that, absent pressure it faces on numerous cost items in 2017, its unit costs for 2017 are essentially flat.
That argument is doing little to quell reservations about jetBlue meeting cost targets, given that the airline has historically struggled with its cost performance, and a looming pilot deal is guaranteed to create significant cost pressure.
Air Seoul SWOT: growth opportunities, a need to lower costs and secure funding
Air Seoul has surpassed one year in operation from its Jul-2016 launch, and now operates four aircraft. As expected, first year losses are high, with 9M2017 losses of USD20 million for a -30% margin. Yet by the standards of start-ups, this may be in line with expectations – and certainly could have been worse.
Air Seoul is wholly owned by Asiana – a relationship that delivers mixed outcomes. Asiana is able to hand traffic rights and slots to Air Seoul, but these may not always be the best markets for Air Seoul, or markets worthwhile for the Asiana group to maintain a presence in. These markets could be a distraction from bigger, more core, LCC opportunities.
Seizing all opportunity portfolios is challenging, given Asiana’s financial difficulties limiting capital for Air Seoul’s expansion, even if the airline becomes profitable in 2018, as Asiana forecasts. Air Seoul received the CAPA Asia-Pacific LCC Start-Up of the Year Award.
EasyJet: a digital leader growing ancillary revenue, but profit falls again as Dame Carolyn departs
EasyJet has been a leader among European airlines in digital innovation, particularly in its commercial strategy. Its digital initiatives are widening its distribution channels, facilitating a smoother customer experience and adding to payment options. This is helping to grow customer loyalty and to drive both revenue growth and cost efficiencies.
In addition to developments in distribution and customer relationship management, other innovations enabled by IT and digital technology include easyJet Worldwide (the new partner airline flight connecting product); actions in easyJet’s ‘lean’ cost saving programme; the use of iPads for pre-flight checks in Palma; predictive maintenance, and engineering initiatives to reduce fuel use and carbon emissions.
However, it will be a source of at least some disappointment to the departing CEO Dame Carolyn McCall, when looking back on her otherwise successful seven years in charge, that easyJet’s profits have fallen for the past two years.
The problem has mainly been related to weak unit revenue. Digital developments helped ancillary revenue to outpace fare revenue and to grow to 20% of the total in FY2017 from 16% two years ago. However, this was only back to the level when Dame Carolyn took over, and suggests that easyJet’s digital strategy is not yet yielding its full potential.
Thai Airways: first new order in six years to provide overdue replacements for 747-400s, older 777s
Thai Airways is pushing forward with long-overdue widebody renewal as part of the first phase of a new fleet plan. The airline intends to phase out all of its remaining 747-400s, 777-200s and 777-300s – many of which are over 20 years old – by 2022.
The airline group plans to acquire, contingent on government approval, eight to nine narrowbody aircraft and approximately 20 widebody aircraft for delivery from 2019 to 2022. Thai Airways has not placed any aircraft orders in six years, and currently has no committed deliveries after a final batch of five A350s arrive in 1H2018.
Growth at the parent airline will be modest over the next few years as Thai Airways focuses on renewing its fleet and improving profitability. The rate of growth could accelerate next decade as part of a second phase in the new 10-year fleet plan that is not yet up for government approval.
TAP Portugal: North America now an important third leg to its long haul network after LatAm & Africa
TAP Portugal is known particularly for the strength of its network to Brazil, supported by an African network that forms a significant second leg to its long haul network. However, TAP’s rapid growth on routes to North America since summer 2016 has given it a third long haul leg. TAP has even revived its old TAP Air Portugal branding as part of its efforts to promote itself in the North American market
TAP is the leading operator on all six of its routes between Portugal and North America, five of which are to the US and one to Canada (Lisbon-Toronto, launched in summer 2017). Codeshares with jetBlue and United make important contributions to feed into TAP’s North Atlantic flights.
Although Latin America is still TAP’s smallest long haul region by seats, the airline has grown much more rapidly to the US and Canada than it has to Latin America or Africa over the past two years. This superior growth in its North American network will continue this winter, helping TAP to be the second fastest growing among Europe’s top 20 airline groups.