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Aviation Strategy Issue No: 163 May 2011 The revenue recovery CONTENTS Analysis ne of the main elements of the industry recession and recov - Oery over the past two years has been the remarkable revenue Revenue, yield performance and yield performance. In the recessionary year of 2009 total and industry consolidation 1-3 industry revenues fell by an estimated 14%, with passenger demand down by just over 2% and yields down by an unprece - American Airlines: dented estimated 14%. The 2010 recovery has seen a significant Continued losses looming 3-5 bounce back with traffic volumes overall expected to have grown by over 7%, yields up by a possible 6% and total industry revenues up by 14% - not still not quite back to the peak year of 2008. Briefing Admittedly in this period the revenue performance has been a little confused by the volatility in fuel costs – the average price United Continental: Combine per gallon of jet fuel paid by the US industry rose by 18% to outperforms peers 6-11 $2.24/gal in 2010 after a 38% decline in 2009, and total fuel costs account once again for almost 30% of the US industry's total S7 Airlines: Aeroflot’s costs (having reached an all time peak of 37% for the US industry domestic challenger 12-14 in 2008) - although only an estimated 26% of total world indus - try costs, down from the 33% peak in 2008. On a global basis, Transaero Airlines: Aeroflot’s excluding fuel from the revenue equation suggests that there international challenger 15-17 may have been an underlying 4% yield weakness in 2009 but a near 10% strengthening in 2010 as demand (and premium demand especially) recovered. Databases 18-21 Meanwhile in the last two years industry consolidation has accelerated. It is not just consolidation of capital in local or region - European, US and Asian al markets (such as the mergers between Delta and Northwest, airline traffic and financials 125 US AIRLINE YIELDS Regional trends 120 Orders 115 Pacific 110 105 100 Domestic PUBLISHER 95 90 Aviation Economics 85 James House, 1st Floor Atlantic 22/24, Corsham Street 80 London N1 6DR 75 Jan May Sep Jan May Sep Jan May Sep Jan Tel: +44 (0)20 7490 5215 08 08 08 09 09 09 10 10 10 11 Fax: +44 (0)20 7490 5218 Note: Jan 2008 = 100 email: [email protected] www.aviationeconomics.com Aviation Strategy Analysis United and Continental, BA and Iberia or by 13% year on year – and within interna - LAN-TAM). In these cases the potential ben - tional routes the Atlantic was up by 18%, efits of the combination of carriers should Latin America by 9% but the Pacific by over become clear through analysis of the pub - 20% - with the Pacific itself showing yields lished accounting statements (see briefing above the peak achieved in 2008. on United, page 6). The less tangible ele - The monthly performance has been ment of this consolidation phase is the even more dramatic – with a near 30-40% development of inter-regional joint ven - year on year growth in yields on the tures; as pointed out in the March edition Atlantic and Pacific in selected summer of Aviation Strategy , the Atlantic in particu - months. At the same time the performance lar is now dominated by the three effective of Delta and United/Continental in particu - Aviation Strategy virtual mergers in the form of “metal neu - lar seems to have been superior to the is published 10 times a year by tral” joint ventures of the main branded industry average – each showing a dramat - Aviation Economics global alliances. ic unit revenue increase on the Atlantic of In these cases, the results, performance over 20% in 2010 - compared with Publisher: and benefits of the joint ventures are hidden American's more lacklustre 16% growth. Keith McMullan from public view – as indeed are the terms Numbers for the European partners [email protected] of the joint ventures themselves, being may not be strictly comparable (apart from Contributing Editor: shrouded in commercial secrecy; and the the exchange rate element, each has a Heini Nuutinen underlying benefits to each individual carrier slightly different definition of their route perhaps only being analysable from anecdo - analysis from the DoT standard) but sug - Production Editor: tal comments from senior management. For gest at least for Lufthansa that a similar Julian Longin [email protected] example, Air France being amazed, but with - performance had been achieved. However, out specifying, to find how much higher an this strong performance throughout 2010 Subscriptions : operating margin KLM and Northwest had has not really been carried through on the [email protected] been achieving on the Atlantic through their Atlantic into 2011, possibly because of Tel: +44 (0)20 7490 5215 joint venture; or Lufthansa management prior year comparisons and the weak recently suggesting a “strong” improvement nature of the first quarter. Copyright: in joint Atlantic operations as a direct result It is however debatable whether yield Aviation Economics of the introduction of the revenue sharing benefits all derive from the joint ventures All rights reserved agreement with fellow Star members; or themselves. In the cases of Delta and indeed United management stating at their United the strong unit revenue and yield Aviation Economics Q1 results that they were “very comfortable performance on Atlantic and Domestic Registered No: 2967706 (England) with how the Joint Ventures are developing”. route networks could well be explained by Indeed the only element that may occa - other factors. Indeed the performance on Registered Office: sionally be required to be published is the the Pacific was far stronger in percentage James House, 1st Floor balancing cash transfer between the respec - terms; perhaps more to do with the bank - 22/24 Corsham St tive partners – and United's statement of a ruptcy at JAL and opening of Haneda than London N1 6DR $100m transfer liability seemed to have con - any joint venture agreement – and in fact VAT No: 701780947 fused some in the investment community the joint ventures on the Pacific between ISSN 2041-4021 (Online) suggesting an understandable lack of under - American and JAL, and United and ANA, The opinions expressed in this publication do standing of the workings of the metal neu - only started in April this year following the not necessarily reflect the opinions of the edi - tors, publisher or contributors. Every effort is tral joint venture . signing of the US-Japan open skies agree - made to ensure that the information con - Any underlying benefits should surely ment last October. It could indeed just be tained in this publication is accurate, but no legal reponsibility is accepted for any errors turn up in the published unit revenues and that as demand has recovered from the or omissions. yield performance. Whereas the industry as depths of the recession it has been strong The contents of this publication, either in a whole is estimated to have achieved a 6% enough for the major players to be able to whole or in part, may not be copied, stored or reproduced in any format, printed or elec - increase in underlying yields in 2010, the recover the increases in fuel costs suffered tronic, without the written consent of the performance of the US industry has been far through the last year as well as some of the publisher. more positive. In the domestic markets – ground lost from the cyclical utter loss of where the players last year showed extraor - demand in 2009. Interestingly, on the pub - dinary capacity constraint – average yields lication of the Q1 results there seemed to grew by 9%, but international yields jumped be an agreement that the higher fuel sur - May 2011 2 Aviation Strategy Analysis JV PARTNERS - YIELD AND UNIT REVENUE YEAR-ON-YEAR PERCENTAGE CHANGE SYSTEM ATLANTIC Q1 2011 FY 2010 1Q 2011 FY 2010 Unit Unit Unit Unit Yield revenues Yield revenues Yield revenues Yield revenues IAG 8.8% 5.2% 13.3% 13.9% n/a 5.6% n/a n/a American 6.2% 5.0% 8.7% 10.4% 3.4% -2.4% 12.1% 15.9% Lufthansa 5.1% 1.5% 8.4% 10.2% 7.3% 3.1% 17.9% 18.4% United 12.7% 9.9% 15.2% 17.9% 8.5% 1.3% 19.4% 22.6% Air France/KLM n/a n/a 13.1% 15.1% n/a n/a 18.7% 20.5% Delta 12.0% 7.0% 13.0% 12.0% 8.0% -1.0% 18.0% 21.0% Notes: Local currencies. AF-KL nine months ended Dec 2010. Source: Company reports charges are not (at least yet) having any pete with each other, but at the same time dampening impact on the underlying level they can be prohibited from discussions of demand. with each partner's partners not included The US DoT's insistence on the creation in the joint venture with whom each is of binding “metal neutral” joint ventures as required to compete fully. well as an open skies agreement as prereq - It is hardly surprising that Lufthansa has uisites of granting anti-trust immunity may signalled a wish to create an immune joint be a pragmatic way of encouraging a de- venture partner with United's new joint facto globalisation of airline brand, product venture partner ANA; BA may not be far and service while being hampered by the behind in wanting to link formally with US's own nationalistic adherence to the AA's joint venture partner JAL. Air France local capital ownership rules. Of course KLM is even looking to foster a joint ven - these immunised joint ventures can create ture agreement with a partner in China problems: the partners are allowed to col - (while it and Delta already have an agree - By James Halstead lude on capacity and pricing as part of their ment with Korean) even without an open [email protected] ATI and are in effect required not to com - skies agreement in place.