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:
- Philippines-Middle East market: Philippine Airlines resumes expansion as Cebu Pacific Air retreats
- ULCCs and US airline majors drive widespread discounting. Revenue starts to suffer
- Ukraine International Airlines Part 2: long haul expansion to resume in 2018 as 777s are added
- Aegean Airlines: operating leases will dominate new refleeting orders for 45-60 Boeing or Airbus
- Sun Country converts to a ULCC, as full service airlines increase pressure on the model
Philippines-Middle East market: Philippine Airlines resumes expansion as Cebu Pacific Air retreats
Philippine Airlines (PAL) is resuming expansion to the Middle East after adjusting its strategy for competing in the intensely competitive Philippines-Middle East market. The flag carrier is introducing business class on all Middle East routes after serving the market for nearly four years with all-economy aircraft.
PAL will be operating 33 weekly nonstop flights to seven destinations in the Middle East in Dec-2017, compared to 24 weekly nonstop flights to four destinations in Dec-2016. Seat capacity will be up 22%.
PAL will need to overcome intensifying competition from Middle East airlines, which will be operating 101 weekly flights to the Philippines in Dec-2017, compared to 76 frequencies in Dec-2015. PAL has benefited from Cebu Pacific’s recent suspension of three Middle East routes but the LCC’s decision to cut capacity to the region highlights how difficult it is for a Philippine carrier to be profitable in the Middle East market.
ULCCs and US airline majors drive widespread discounting. Revenue starts to suffer
Many major US airlines were facing weakening revenue conditions before the hurricanes Harvey and Irma struck the country’s southeast region in late Aug-2017 and early Sep-2017, and now those storms are driving revenue estimates lower, against a backdrop of concern about a potential fare war erupting in the market.
Delta, United Southwest and Spirit are among the airlines that have issued downward revisions to their unit revenue forecast for 3Q2017, driven in part by what those companies deem as widespread fare discounting.
American and United have been aggressively matching fares of ultra low cost airlines, and are continuing their commitment to match prices as a strategy for defending their respective hubs. At the same time, Spirit is evaluating its pricing strategy after focusing more on its yield management during the last nine months.
The result appears to be a lot of pricing churn in the US market place as new pricing tiers introduced by the country’s three large global network airlines take hold and discounters adjust to the new reality of aggressive price matching. Revenue hits from the storms, coupled with competitive pricing manoeuvres, are tempering expectations as oil prices begin to creep up.
Ukraine International Airlines Part 2: long haul expansion to resume in 2018 as 777s are added
Ukraine International Airlines (UIA) is planning to resume long haul expansion in 2018 as the airline adds 777s to its fleet. Delhi, Shanghai, Toronto and a second destination in the US are expected to be launched, doubling the size of UIA’s long haul network.
UIA currently only has four long haul destinations – Bangkok, Beijing, Colombo and New York JFK. The airline is predominantly a narrowbody operator, and has been slow to expand its widebody fleet since adding its first widebodies, 767s, in 2013.
UIA believes it now has the short/medium haul network to support more long haul routes, which will rely heavily on transit traffic. Expansion of the long haul network and widebody fleet is part of an overall ambitious plan to double UIA’s fleet over the next five years.
Aegean Airlines: operating leases will dominate new refleeting orders for 45-60 Boeing or Airbus
Earlier this year, Aegean Airlines talked of an important longer term fleet decision to be made in 2017, or early 2018, since the majority of Aegean’s leases will need to be replaced between 2019 and 2023. It issued a tender for the supply of 45-60 narrowbody jets earlier this summer.
Aegean currently operates Airbus narrowbodies, but is equally evaluating the new generation A320neo family and Boeing 737MAX. A decision is expected before the end of 2017. It will continue to use operating leases as its preferred means of funding aircraft acquisitions, and believes that lessors have ample capacity to place.
After three years of falling margins from 2014 to 2016, caused largely by falling unit revenue as a result of rapid capacity growth by Aegean and competitors in Greece, Aegean is pausing in its growth plans in 2017. So too is the leading competitor, Ryanair. This helped Aegean to drive up RASK and margin in 1H2017.
Aegean has used its Athens hub and its domestic subsidiary, Olympic Air, to help combat strong competition. The fleet decision will help to position it for the longer term.
Sun Country converts to a ULCC, as full service airlines increase pressure on the model
For most its existence the Minneapolis based Sun Country Airlines has operated under the radar, offering seasonal flights to sun destinations and turning its attention to domestic services in the off season. It co-existed with Northwest, and then Delta, at the major airlines’ Minneapolis hub, and built up a loyal following in the local market.
Sun Country has also served its time under US bankruptcy protection twice, and endured a fraud scandal that engulfed one of its previous owners. Since the beginning of the current decade, Sun Country’s operations have stabilised, but its profits and operating margins fell year-on-year in 2016.
In order to strengthen its financial position, Sun Country has adopted the ULCC strategy of product unbundling. Sun Country’s strategy shift occurs just as the ULCC model comes under close scrutiny by investors in the US, after Spirit Airlines has battled robust price matching in its markets and Frontier Airlines has put its planned IPO on hold.
As it works to transition its business model, Sun Country has signalled that its fleet could ultimately double in size, to 50 aircraft, and a distinct possibility is network diversification into larger metro markets to capture warm weather leisure travellers. Any significant shift in strategy for an airline is a major gamble, and even as Sun Country remains a small player, its product and network changes will garner ample attention.