November 11, 2013 Issue No. 454 The Silent Killer Foreign exchange volatility quietly inflicting cost and revenue pain across the industry Weekly News Review 2-3 For one airline after another— ues on the global airline industry that’s the exception not the rule. in geographies as diverse as isn’t new. But during the first Look around the world and the Fleet & Finance 4 Brazil and Australia, India and decade of the 2000s, it was more U.S. dollar is up in value, in Hawaii, Japan and Europe—a often a force for good than for some cases dramatically, against Marketing & Sales 5 silent killer is on the loose. This ill, outside the U.S., anyway. most currencies. Today, U.S. time it’s not fuel, the global mar- That’s because the U.S. dollar government finances are rapidly Labor & Airports 7 ket for which is actually soften- lost value against most major improving, America is importing ing. It’s not a demand shock— currencies, which meant most less oil, commodity prices are non-U.S. carriers got a break on down, the U.S. economy is Routes & Networks 8-9 not with worldwide traffic still growing at a healthy pace. Nor their dollar-denominated costs— growing as others are slowing labor costs, which are falling in most importantly fuel, aircraft and some countries are taking Environment 9 many markets as carriers restruc- and borrowed money. deliberate steps to The dollar fell in value See also: weaken their own cur- ture. Nor distribution costs, for • Forex trends, p. 5 Around the World 10-11 which technology and innovation as America’s budget rencies in a bid to are driving down prices. Air- deficits soared, interest boost their exporters, planes and airports are becoming rates fell, trade deficits ballooned never mind the negative impact more efficient too. So what is (partly due to pricier oil imports) this has on their big importers, this mysterious force that’s caus- and the U.S. economy grew including fuel and plane- ing so much grief for so many more slowly than the world aver- importing airlines.

carriers? age as emerging markets Japan is the poster child for Net result; operating margin boomed. that. It has boosted its money Ask airlines what their biggest July-September 2013 (3 months) headache is at the moment, and Well times have changed. supply to help companies like Now, though the U.S. dollar Toyota and Sony sell more stuff BA/Iberia: $763m; 13% many will point to the whims of the foreign exchange market. remains historically weak against overseas. But yen devaluation Air Canada: $288m/$351m*; 12% some currencies like the euro, has been nothing but trouble for The influence of currency val- WestJet: $63m; 11% CONTINUED ON p. 12 Turkish Airlines: $358m; 15% Asiana: $57m/-$5m*; 3% Ryanair: $689m; 32% Pushing Back: Inside This Issue Aer Lingus: $125m op. profit**; 20% The list of third-quarter disap- attesting to just how strong the nonstop links into and out of the Garuda: -$11m/-$43m*; -3% pointments grew larger last week transatlantic market was this sum- country—new routes by Hainan SpiceJet: -$90m; -43% as Turkish Airlines saw margins mer. But Air Canada, joined by Airlines, Sichuan Airlines and Air Mauritius: $7m; 8% drop sharply, Asiana unveiled British Airways, also added evi- Qatar Airways, for example— SkyWest: $26m; 7% distressingly slim summertime dence that Asian longhaul markets can’t be good. And a Chinese profits, Garuda fell into the red from North America and Europe economic bust would be even Republic: -$14m/$17m***; 16% and SpiceJet had its brains splat- alike remain difficult due to three worse. tered across the floor. Even per- unhelpful “C” factors: competi- In labor news, Norwegian pilots *ex special items (operating margins are ex SI) ennially profitable WestJet had to tion, currency and cargo. called off a strike, Qantas will **Aer Lingus did not provide net results hang its head a bit as its foe Air Asiana has an even bigger cargo close a maintenance base and ***Republic results are continuing ops only Canada raced ahead of it. problem. But the “C” factor it Azul hopes to unify pilot pay. That made Air Canada rightful- worries about most is China. Ko- This week: more airline earnings, ly triumphant—and rightfully in rean carriers depend on Chinese including the giants LAN/TAM the ranks of Q3’s success stories. traffic, so the proliferation of new and Singapore Airlines. Copyright Notice: No part of this publica- Right next to it was BA/Iberia, tion may be copied, photocopied or dupli- cated in any form or by any means without which raced past Air France/ Verbulence Airline Weekly Corp’s prior written KLM and Lufthansa. Also among consent. Copying of this publication is in the winners: Ireland’s two airlines BA has widespread availability at £220 where Norwegian is pricing violation of the Federal Copyright Law (17 “ USC 101 et seq.). Violators may be subject Ryanair and Aer Lingus, never often well in excess of that. £149? I hope they sell all their seats at to criminal penalties as well as liability for mind the shorthaul yield softness £149 because they’ll lose a hell of a lot of money given that APD substantial monetary damages, including statutory damages up to $100,000 per they both described. [next year] will be £69. They’re not going to make money at £149. infringement, costs and attorney’s fees. Air Canada and Aer Lingus Copyright 2011 Airline Weekly Corp. All both joined the chorus of airlines —BA/Iberia CEO Willie Walsh rights reserved. ISSN 1942-2059. ” Licensed to [email protected]; may not be shared or forwarded unless otherwise agreed by Airline Weekly Corp. Personalization by DocMonk the weekly skies 2

During the first two quarters of 2013, than yield, generally speaking. But more on that ly, domestic Canadian markets—to which Lufthansa earned the best margins among Eu- and other initiatives later this week, at a man- WestJet has greater overall exposure than Air rope’s Big Three intercontinental carriers, with agement investor event. Executives did say last Canada—saw substantial yield pressure. Disrup- Air France/KLM way behind and BA/Iberia week, however, that the company would earn tions from floods in Alberta also led to some Q3 somewhere in the middle. close to $1b in operating profits for all of 2013. revenue loss. Looking ahead, WestJet has lots of But all that changed last See also: new initiatives in the works, including more quarter, when—as an- • Global earnings efficient flight attendant staffing, more airline nounced last week— ...scoreboard, p. 5 BA/Iberia isn’t the only success story of the partnerships, bundled fares, extra-legroom seats, BA/Iberia climbed to the top third quarter. Across the Atlantic, Air Canada densified non-premium seats, the sale of some with excellent summertime results. Q3 net profit enjoyed what it described as its best quarter B737-700s to Southwest and a major B737- was $763m and operating margin was 13%, up ever, not only earning a $288m net profit MAX order. It’s also considering first-bag from the mere 5% the company managed last ($351m ex special items) and a 12% operating charges on U.S. transborder flights and claims summer—and besting the 9% and 8% Q3 fig- margin but also outperforming its LCC rival success in winning more corporate business, ures posted by Air France/KLM and Lufthansa, WestJet for the first time in memory. Revenues including some from Canada’s giant energy respectively. British Airways itself did well rose 5%. Operating expenses, excluding special firms. Air Canada, though, as WestJet readily thanks to strong London demand, especially to items from last year, rose just 1%, all on 3% admits, has been responding aggressively. more ASM capacity. A modestly weaker Cana- North America. It (like the group) earned a 13% operating margin as revenues rose 8% y/y and dian dollar meant fuel outlays rose 4%. But operating costs rose just 2% on a 1% increase in overall non-fuel unit costs fell 3% as the airline The remarkable Turkish Airlines released its ASK capacity. Iberia is still the problem child. reaps the benefits of major transformation initi- Q3 financial results, which—by its own lofty But it’s improving, earning a 6% operating mar- atives including new labor contracts, new con- standards—weren’t terribly impressive. Net gin as revenues fell 12%, operating costs fell tracts for regional flying, the refinancing of profit was $358m and operating margin was 17% and ASK capacity fell 15%. Vueling, expensive debt and the creation of Rouge, a 15%, which doesn’t sound bad until looking at meanwhile, was a smash success as strong peak- low-fare unit flying to sunshine destinations what its Q3 margin was last year: 23%. In fact, season demand to and from Barcelona led to an south and European destinations east. Air Cana- this summer’s result was similar to Q3 2011, impressive 25% operating margin on 33% reve- da also noted improved operational perfor- when oil prices were higher and when Turkish nue growth despite just 22% ASK growth, with mance, especially at its regional partner Jazz, faced major market disruptions from the Arab operating costs up just 20%. Like many of its and deepening relationships with Star Alliance Spring. So what’s the problem this time? You peers, BA/Iberia took a hit on forex, in its case a partner Air China and Toronto’s Pearson Air- guessed it: foreign exchange. A significantly $55m drag as the values of sterling, euros and port. Among the airline’s most important initia- weaker lira caused operating costs to explode by U.S. dollars ended up helping on costs but hurt- tives: growing internationally, with new flights 40% as fuel outlays spiked 35%, never mind ing even more on revenues. BA also happens to to Milan, Manchester, Lisbon and Nice (the last that ASK capacity was up just 21%. Revenue be big in India and Japan, where revenue gener- three with Rouge); new planes like densified growth wasn’t bad—up 28% which outpaced ation was weak due to forex trends. Still, the B777s and B787s; and new products like premi- capacity growth—thanks to generating a lot of company was happy to get a cost tailwind, with um economy seats. Last quarter, transatlantic sales in Europe, which was actually Turkish’s fuel outlays falling 3% and labor costs falling markets boomed, helped by its A++ JV with fastest growing market. The Americas and Afri- 8%, the latter trending downward as Iberia’s United and Lufthansa. And U.S. transborder ca were its two other big expansion markets, restructuring progresses—and there’s still more routes saw strong unit revenue gains too. On the with domestic revenues up nearly 30% y/y as to come, management insists. Less favorably, other hand, domestic markets faced tough com- well. Turkish was far less aggressive, on the airport and air navigation fees spiked 17% on petition, especially on shorthaul routes in the other hand, in the Far East and Middle East. The ever-escalating charges at London Heathrow. east and on some regional routes where WestJet question now is what happens to the lira when Cargo, meanwhile, was weak once again. Never Encore is now deployed. Asia routes similarly U.S. monetary policy tightens, a question partic- shy about expressing his opinions, group CEO faced pressures, most importantly from new ular relevant because of Turkey’s large current Willie Walsh emphatically dismissed the threat competition in China, a weaker yen and slowing account deficit. If the lira does fall further, costs of Norwegian flying longhaul seven times a economic growth in Australia. But that doesn’t at Turkish Airlines will inevitably balloon, week to the U.S. from London Gatwick, com- dilute the impressiveness of Air Canada’s sud- which could ultimately be the force that derails pared to its 30 flights a day from Heathrow: “I den surge in profits, which management be- a decade of stunning global expansion. Rival think it’s being hyped up in the media more than lieves will only grow larger as the company’s Gulf carriers, keep in mind, enjoy home curren- it deserves.” In contrast, he praised his counter- strategy unfolds. Investors are clearly im- cies that are fixed to the U.S. dollar, implying part Richard Anderson at Delta for a disciplined pressed, judging from Air Canada’s status as the less forex risk, as discussed in this week’s cover approach to investor returns and application of best performing airline stock worldwide in the story. that discipline at BA’s longtime archrival Vir- past year, among airlines not in bankruptcy or not based in Greece, anyway—American and gin Atlantic, which Delta now partly owns. When an Asiana B777 crashed in San Francisco Aegean have done better. Walsh is also hopeful that his JV partner Amer- this summer, the large number of Chinese vic- ican will succeed in merging with US Airways. tims showed just how dependent Korean carriers He hopes to further develop a JV with Japan Getting out-margined by Air Canada for the are on the Chinese market. Seoul itself is a good Airlines, which is still at a “very early stage,” first time wasn’t fun. But WestJet still had a hub for many reasons, including Korea’s strong and envisions an eventual JV with LAN/TAM. good Q3, characterized by a $63m net profit home economy, its proximity to Japan, its close Another big groupwide initiative: fleet renewal, and an 11% operating margin. Revenues rose military and educational ties with the U.S., its with BA getting A380s, B787s and B777- 7%. But operating costs increased 9%, causing many citizens vacationing in the ASEAN region 300ERs, and Iberia replacing uneconomical a y/y degradation in margins that had a lot to do and its well-regarded Incheon airport. But In- A340-300s with A330-300s. With some new with the airline’s own 11% ASM capacity ex- cheon’s status as a gateway into and out of Chi- capacity coming online, BA will look to boost pansion. Some of that was new Encore flying, na is first and foremost central to Asiana’s strat- unit revenues by emphasizing load factor rather which will mature over time. But more general- egy, and to Korean Air’s too, which means

Licensed to [email protected]; may not be shared or forwarded unless otherwise agreed by Airline Weekly Corp. Personalization by DocMonk 3 the weekly skies more nonstop competition to and from China— are in fact under pressure throughout the it can strike another great bargain with Boeing and a slowing Chinese economy—are danger- ASEAN region, where the opposite of U.S.-like or Airbus, unlikely at the moment given robust ous developments. Sure enough, both Korean capacity discipline is proliferating. Garuda worldwide widebody demand. Air and Asiana are having rough years, with the itself nearly doubled the capacity of its LCC latter managing just a 3% operating margin in Citilink unit, and let’s not even talk about the peak third quarter. Net profit was just $57m, Garuda’s jet order addict rival Lion Air. Indo- Air Lingus, having escaped Ryanair’s takeover and even that’s overstated—exclude one-time nesia undoubtedly has the population and geog- designs with some help from the Eurocracy, gains, and the net result was actually a $5m raphy to have a much larger airline industry reported similar trends to those cited by Ryanair. loss. Just like its rival Korean Air, Asiana saw than it currently has. But if the rupiah keeps Those include weaker yields throughout Europe, revenues fall 3% y/y while operating costs depreciating, and if everyone and their cousin in Aer Lingus’ case exacerbated on the cost side stayed flat. But unlike Korean Air, which grew keeps growing capacity by double digits, Garu- by slower-than-expected labor reforms: imple- passenger ASKs just 1%, Asiana expanded da might need to rethink its extremely ambi- mentation of an early retirement program is capacity 5%. One thing Korean carriers don’t tious fleet strategy. behind schedule due to lingering pension plan uncertainties. On the other hand, the airline is have right now is a cost problem, thanks to a stronger won. But revenue problems are acute, downright ecstatic about the booming transatlan- Now back to Europe, where Ryanair com- and not just because of trends in China. Cargo, tic market, where it expanded ASK capacity plained of a weak yield environment, not so accounting for 23% of Asiana’s revenues—it 16%, with more bullish growth planned for next much due to industry capacity growth—that operates 11 dedicated freighters—continues to summer. Retail revenues were up too, supple- shrink on weaker demand. And passenger de- happens to be pretty mild continent-wide—but mented by new revenues from Aer Lingus re- aggressive discounting, still-sluggish econo- mand is weaker too, with revenues falling 4% gional flights and wet-leasing planes and crews and yields falling 7%. Though outbound de- mies and a warmer-than-usual July that discour- to Virgin Red. In the end, Q3 operating margin aged southbound holiday travel. Close-in, high- mand from Korea is solid and ASEAN routes came it at 20%, up a bit y/y as total revenues er-yield bookings were actually affected most. are booming, demand from Japan is weak, the increased 1% y/y while operating costs were flat And yes, forex was an issue too, with 25% of consequence of not just a weaker yen but also (it did not publish net results). Total ASKs were Ryanair’s revenues generated in weaker U.K. flaring political tensions between Japan and actually up just 3% due to shorthaul cuts. The Korea. Asiana is also saddled with heavy debts pounds. So Ryanair had a bad calendar third question, as always, for Aer Lingus is whether it quarter, right? Um, not exactly. Net profit was a and orders for A380s it probably doesn’t need, can mitigate inevitable off-peak losses. It be- especially with China slowing. Fortunately, massive $689m. Operating margin was (holy lieves it can: management expects a full-year O’Leary!) 32%, matching last summer’s figure. routes to the U.S. and Europe are recovering, operating profit of about $80m. It doesn’t expect Revenues and operating costs both rose 5% y/y. the weaker yen is boosting Japanese car part any shorthaul improvement for the remainder of But Ryanair is concerned about winter yields, exports through Seoul and efforts are under way 2013, however, and still faces some open-ended enough for it to downgrade its profit forecast to rework capacity and fleet assignments on questions regarding pensions, threatened labor for the fiscal year than ends in March—and strikes (see page seven) and ownership after Japan routes. enough for it to plan to ground 70 to 80 planes Ryanair sells down its 30% stake, as regulators during low season. At the same time, it sees demand. The Irish government also holds a 25% Just like Turkish Airlines, Garuda has cost many growth opportunities with new cost- stake, which it could eventually sell to private problems, and these cost problems are really cutting deals at London Stansted and Warsaw investors. In the meantime, Aer Lingus plans to forex problems. But it has a fair share of reve- Modlin airports, with Irish aviation taxes upgrade longhaul products and deepen coopera- nue problems too. The fast-growing state- scrapped, with another round of B737s coming, tion with its minority shareholder Etihad. owned carrier, operating in an Indonesian econ- with Alitalia being Alitalia and with Wizz Air omy that until very recently stood as one of the turning its attention to Russia and the Middle hottest economic boom stories worldwide, East. Ryanair is also—stop the presses—trying, Someone’s got a droopy rupee problem. Actual- slipped to a Q3 net loss of $11m, or $43m ex for once, to be nice to customers (see page ly, all of Indian aviation does, and SpiceJet items. Operating margin was negative 3%, a five). It will grow capacity 4% in calendar Q4, showed why with some of the most horrific huge swing from last year’s positive 9% Q3 when it expects a modest profit, and then shrink quarterly results you’ll ever see from an airline. figure. Q3 isn’t a peak period in the ASEAN 1% in Q1, when it expects a loss. Whatever The LCC, which grew ASKs 17% y/y, watched region, but that’s beside the point. What’s ines- happens this winter, Ryanair remains a profit its operating costs blow up 32%, with revenues capable is Garuda’s 24% y/y pop in operating machine, thanks in part to perhaps the greatest up a paltry 6%. And the result was a gargantuan costs, outpacing its 21% ASK growth. Even aircraft deal ever (just after 9/11). It now has a calendar Q3 net loss of $90m, accompanied by a worse, revenues increased a mere 10%. Yields business plan ready for U.S. flights, but only if grotesque negative 43% operating margin. SpiceJet saw a giant spike in maintenance costs and now spends 56% of its entire revenue on Who We Are and How to Reach Us Editorial inquiries fuel. Yields fell 7% due to a “weak” pricing Airline Weekly is a product of Airline Weekly Jay Shabat, Publisher environment, well before AirAsia and Singa- Corp., an independent company of journalists and [email protected] pore Airlines even enter the market. To mitigate former industry professionals with a shared interest Media inquiries this unfettered disaster, SpiceJet is for one thing in commercial passenger aviation worldwide. Seth Kaplan, Managing Partner adding more international routes, eying better Airline Weekly is a subscriber-based publication [email protected] plane utilization and more non-rupee revenues. and does not accept advertising from airlines. Subscriptions and advertising It’s also working on a new strategic plan to im- Editorial policy forbids staff members from Jason Cottrell, Marketing Manager prove revenues, lower costs, enhance customer owning stock or any other stake in airlines. [email protected] service and optimize the network. This was sup- Pricing posed to be a honeymoon period for Indian air- Individual annual subscriptions (48 issues) are lines following the collapse of Kingfisher, $695; multiple-reader discounts and enterprise 746 NE 7th Avenue, Fort Lauderdale, FL 33304, USA which was once the market’s largest carrier. And licenses are available. +1 954 524 8855 • airlineweekly.com speaking of the King Fish, it’s still paying work- CONTINUED ON p. 4

Licensed to [email protected]; may not be shared or forwarded unless otherwise agreed by Airline Weekly Corp. Personalization by DocMonk fleet & finance 4 The Weekly Skies CONTINUED FROM p. 3 for America’s large scheduled airlines. It ground longer. In addition, many of its planes ers and aircraft suppliers and still reporting achieved its high margin despite tough summer are A319s, a plane with relatively high unit quarterly results despite zero revenues—its weather and extremely high load factors, which costs. (Then again, the same is true of Spirit, calendar Q3 net loss was $115m, a lot to lose make it more difficult to run a smooth operation. which, as Frontier plans to do too, is upgauging for doing nothing. Grounded for more than a And although it didn’t provide detailed results as it grows.) Unlike Spirit though, Frontier has year now, Kingfisher still insists it has “detailed for Frontier, it did say the LCC’s fuel costs fell expensive seat-back televisions installed. And plans for renewal of its operations.” There and its RASM increased. Republic is now pre- it has a more unionized workforce . might be a better chance of Elvis coming back. paring for new FAA pilot rest rules that will require greater staffing levels and changes to some crew scheduling practices. And it has new Republic’s last standing rival SkyWest isn’t Air Mauritius had a better summer this year E175 flying for American and Q400 flying for doing quite as well: Q3 net profit was $26m and than last, earning a $7m Q3 net profit and an United. But most importantly, Republic needs operating margin just 7%. This is really a tale of 8% operating margin. Revenues rose 5%. Oper- to come to terms with pilots on a new contract. two airlines: the core non-union SkyWest unit ating costs were up just 1%, evidence of re- Because without a long-term deal, the airline itself, which is thriving, and the company’s structuring progress. A strong euro makes Mau- doesn’t have enough clarity about its cost base unionized ExpressJet unit, which is losing ritius cheaper for European tourists. And with to place bids for new flying assignments. Pro- money and unlikely to see profits until 2015. new Beijing flights, tourism from China is spective partners, too, might be reluctant to do ExpressJet, which includes the old Atlantic growing. Air Mauritius expects further profit deals with a carrier whose pilots could ultimate- Southeast Airlines, accounts for nearly half of improvement as its turnaround plan develops. ly strike. Back to Frontier for a moment: Will SkyWest’s revenues and can’t seem to clinch Indigo manage to replicate what Spirit is do- the labor deals it needs. It’s also burdened with two contracts covering about 300 50-seat RJs, Good news for Republic Airways: Its sale of ing? Spirit’s chief himself, speaking at two conferences last week (see page six), praised which account for most of its losses. An aging Frontier to Indigo Partners will soon be final- fleet is also a headwind. Separately, SkyWest is ized, after Indigo agreed to waive some labor Indigo’s founder William Franke but also point- ed to some unique cost challenges Frontier will worried about the MRJs it ordered as a bridge conditions. Even better, Republic reported ex- aircraft until its Embraer E2s start arriving in cellent Q3 results, excluding Frontier’s opera- face as it transforms its business model. For one thing, it gets a large percentage of revenues earnest next decade. The Japanese-built plane tion. Net profit for continuing operations only, might now be delayed until 2018, in which case excluding special items, was $17m. Operating from connecting traffic in Denver, and schedul- ing an airline to optimize for connections isn’t SkyWest might cancel the order. SkyWest, by margin was 16%. Republic is thus back to do- the way, operates 75% of United’s regional ing what it does best: providing regional feed good for unit costs because planes sit on the flying and 45% of Delta’s. Fleet Sheet SkyMoney Aircraft Markets Airline Finance Lion Air, now 13 years old and best known outside Indonesia as a October unit revenue data is in for several major U.S. carriers, includ- plane-buying shopaholic, received its 100th B737-NG last week. The ing Delta, which saw a 2% y/y rise in PRASM for the month. Unit- milestone aircraft was a -900ER, of which its core Indonesian carrier ed’s PRASM was flat y/y, American reported a 7% jump, US Air- now has 67, supplemented by 19 -800s. The other 14 are assigned to ways saw a 1% increase, Southwest an increase of 1% to 2% and affiliates Malindo Air in Malaysia, Thai Lion (which will soon launch Allegiant a 6% rise. The October data was noisy, however, with fig- from Bangkok) and Batik Air, a full-service carrier in Indonesia. The ures skewed by last year’s impact from Hurricane Sandy, last year’s group still has hundreds of B737- and A320-family aircraft on order pilot disruptions at American and this year’s government shutdown. and appears to have its eyes set on (no kidding) a CSeries order as well. Delta did add that Atlanta, New York and transatlantic markets are It’s been a long time since Airbus has won any orders for its ultra- still going strong and that yen depreciation is still somewhat of a jumbo A380s. In fact, many carriers that ordered the plane years ago drag. United cited yen depreciation as a headwind too but also noted are deferring deliveries. But one leasing company, Doric, placed a ten- some mysterious end-of-month revenue adjustments that boosted tative order for 20 units at this year’s airshow in Paris, an order that the PRASM. firm’s CEO, speaking on Bloomberg Television, says should be final- SAS, whose oddball fiscal calendar means Q3 earnings won’t come ized by year end, perhaps at the Dubai air show, which starts Nov. 17. until Dec. 19, said last week that market conditions have weakened These aircraft will come with a twist, however. They’ll have higher since the end of its fiscal Q2 in July. Responsible are “intensified density seating, possibly with 11 economy seats across, enabling 600- competition” and “overcapacity on certain routes,” especially be- plus passengers, even with some premium seats on the upper deck. But tween Scandinavia and the rest of Europe. Longhaul routes are thank- who will lease these? Turkish Airlines, one rumored A380 buyer que- fully much stronger, and routes within Scandinavia more stable. In ried by Bloomberg, says not me. September, unit revenues dropped 7% y/y, adjusted for forex. Note Steven Udvar-Hazy’s Air Lease Corp. (ALC) continues to envision 1) that unlike the euro, Norway’s currency is solidly down this year air traffic growing faster than global GDP, 2) large fleet replacement against the U.S. dollar. Denmark and Sweden are more stable. needs and 3) notably strong demand for its planes in Europe, the Mid- The European Commission is again investigating LOT Polish, ques- dle East and parts of Asia, including China. It also noted strong A320 tioning the legality of $260m in aid delivered in June. This follows and A321 demand and a significant increase in B737-800 demand, such approval of an emergency loan earlier this year, linked to government that all of ALC’s narrowbodies are leased out for the next three years. aid provided when LOT was on the verge of bankruptcy in Decem- The lessor was an early bullish buyer of Boeing’s new B787-10 and ber. The E.C. has also investigated state aid cases at SAS, Latvia’s expects an official Boeing B777-X launch at the Dubai Airshow. airBaltic, Estonian Airlines and Slovenia’s Adria Airways.

Licensed to [email protected]; may not be shared or forwarded unless otherwise agreed by Airline Weekly Corp. Personalization by DocMonk 5 marketing & sales AirBuzz The Backend Marketing, Price, Promotion & Alliances Sales, Distribution, Tourism & Corporate Travel Ryanair provided more details about its widely discussed customer service initia- The distribution and travel technology firms Amadeus tive, which includes opening a Twitter account, relaxing bag rules and bag fees and and Travelport, best known for their global distribution operating quiet flights in early mornings and late evenings (on which flight attend- systems, both updated stakeholders on Q3 trends. For ants won’t loudly hawk lottery tickets and smokeless cigarettes), among other moves Amadeus, market share gains in the U.S.— thanks to it has already announced. Also, it will build a new website (“Our [current] website is new deals with Expedia and American—drove an 8% crap,” Michael O’Leary says) and move, on Feb. 1, to 100% assigned seating— y/y increase in air segments booked, outpacing the in- travelers can pay for a seat assignment in advance or be assigned one free at the dustry average. It also saw growth in usage of its Altea airport on the day of departure. One other new update will be a “My Ryanair” fea- passenger service system, with Garuda and Thai Air- ture that allows repeat customers to store their personal information, including pay- ways the latest adopters—Southwest will be a giant ment information, on ryanair.com. This will save time when booking. newcomer next year, perhaps giving it the flexibility to Wizz Air, which models itself on Ryanair, also has a new initiative to enhance do things like codeshare and charge for bags. Travelport, service, in its case for passengers flying to and from a specific place. On flights to for its part, saw segments up 1% in Q3, with Canada and and from Dubai World Central—which Wizz now connects to Bucharest, Budapest, Russia two notable markets where it’s winning share. Kiev and Sofia—travelers can purchase its “Wizz Xtra Space” option. This provides Both GDSs, like their rival Sabre, are booking more seating in certain rows, where middle seats are left vacant. Those who choose to pay LCC flights, more ancillary products and more transac- for this option, which costs €10 per flight, also receive priority boarding. Transla- tions via mobile platforms, all while attempting to en- tion: these are rather low-volume but high-yield routes, for an ultra-LCC anyway. hance productivity for their travel agency customers. Separately, Wizz published its all-important summer schedule for 2014 last week. It GDSs are also, of course, engaged with IATA on its features service to 35 countries from 18 bases. proposed “NDC” standards. According to chief Tony Well that didn’t take long: Less than a week after the FAA said U.S. airlines could Tyler, speaking at IATA’s world passenger symposium allow tablet and smartphone use (including Wi-Fi but not cellular connectivity) from in Dublin late last month, NDC is awaiting U.S. DOT wheels up to wheels down, most U.S. airlines had already met the agency’s require- approval, as several pilot programs have launched to test ments and were inviting passengers to use their devices with abandon. The notable the concept—American, Swiss, Hainan Airlines and Air New Zealand are some of the carriers involved. exception for now among major airlines: Southwest, including its AirTran unit. IATA expects airlines to begin using the standards to Meanwhile Gogo, whose air-to-ground technology serves most U.S. carriers’ short- sell tickets in 2015, with a full roll-out planned for 2016. haul flights (Southwest and JetBlue are the major exceptions), said its technology is now ready to support voice calls and SMS text messages. But Gogo acknowledged Orbitz, the online travel agency backed by Travelport, that U.S. airlines and their passengers, who worry that lady at the supermarket reported a drop in airline booking business due to higher checkout line last night might be sitting next to them on their next flight, have average fares and its own emphasis on higher margin shown little enthusiasm for voice calls. So it said SMS should be available soon, hotel bookings. Standalone air bookings are now down to just 27% of the company’s revenue, though tour pack- whereas voice calls will wait for another day. ages—which include airline bookings—account for another 17%. Orbitz by the way, like some other OTAs, Foreign Exchange Change now has its own loyalty plan which it calls Orbucks. What’s up, what’s down y/y: A look at selected currencies. (Source: The Economist) Israel Q3 Earnings Scoreboard, So Far Denmark Ranked by operating margin, ex special items Eur ozone (Source: company reports and Airline Weekly calculations) The Israeli shekel is up 10% against Pol and Czech Rep. Rank Airline Margin Rank Airline Margin the U.S. dollar y/y, reflecting discovery Sw itzerland and development of major natural gas Sw eden 1 Ryanair 32% 21 JetBlue 11% finds, as well as heavy foreign invest- South Korea 2 Hainan Airlines 24% 22 American 10% China ment in the country’s high tech sector. New Zealand 3 Aer Lingus 20% 23 Volaris 10% Most European currencies have stayed U.K. 4 Spirit 20% 24 Southwest 10% strong too despite the regional econom- Hungary Taiwan 5 Japan Airlines 20% 25 China Eastern 9% ic sluggishness, partly because the Vi etnam 6 Skymark 17% 26 China Southern 9% European Central Bank, for one, has Mexico less of a mandate than the U.S. Federal Thailand 7 Alaska 17% 27 Air France/KLM 9% Singapore 8 Republic 16% 28 Air Mauritius 8% Reserve to loosen monetary policy. On Russia the other hand, many emerging market Malaysia 9 Norwegian 15% 29 Lufthansa 8% nations, plus Japan and Australia, have Norway Canada 10 Turkish Airlines 15% 30 Aeromexico 8% seen their currencies plummet in value Phillippines 11 Air China 14% 31 United 7% against the U.S. dollar. Colombia Chile 12 Shandong Airlines 14% 32 SkyWest 7% Australia 13 Delta 13% 33 Finnair 6% Brazil Egypt 14 BA/Iberia 13% 34 Korean Air 5% Turkey 15 Allegiant 13% 35 Alitalia 3% India Indonesia 16 Air Canada 12% 36 Asiana 3% South Africa 17 US Airways 12% 37 Garuda -3% Japan Argentina 18 Hawaiian 12% 38 Tigerair -8% Venez uela 19 All Nippon 11% 39 Jet Airways -15% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20 WestJet 11% 40 SpiceJet -43%

Licensed to [email protected]; may not be shared or forwarded unless otherwise agreed by Airline Weekly Corp. Personalization by DocMonk trends 6 Conference Chatter Highlights from some airlines presenting at last week’s Boyd Group International and Raymond James conferences in Baltimore and New York, respectively

Delta CFO Paul Jacobsen, justifiably triumphant before investors at fense of the Spirit model to both conferences, attempted to debunk the Raymond James conference, trumpeted his airline’s strong profits; what he claims are a number of myths about his airline. In the end, he disciplined approach to plane buying; and surging cash flows that says, what Spirit provides is what customers want. It has no debt and mean more money to reward investors, upgrade service for customers, lots of cash, doesn’t care about market share or Zagat ratings, sees repay debt, boost worker pay and fund pension plans. Delta hasn’t huge growth opportunity based on what Ryanair in Europe has been immune to unit cost pressure in the past few years. But it’s a achieved and says its rivals are really not other airlines but firms like problem made far less worrisome by excellent unit revenue perfor- Amazon and Best Buy, which compete for discretionary dollars. Never mance. Fleet renewal should help lower unit costs going forward, and missing an opportunity to mock JetBlue for its higher fares, Baldanza revenue momentum should continue with new airport facilities (in claims that Spirit’s average all-in fares, including ancillaries, are up Atlanta and New York), new products (like more lie-flat seats), new IT 12% since 2006, while JetBlue’s are up 41%. Baldanza’s biggest wor- initiatives (like enhancements to delta.com and the mobile app), new ry for his high-growth airline: execution. network offensives (Seattle, for example) and new partnership syner- Azul’s founder and CEO David Neeleman, who also founded or co- gies (with Gol, Aeromexico and, most importantly, Virgin Atlantic). founded JetBlue, WestJet and Morris Air, reminded Boyd Group at- Extolling the fruits of Delta’s operational initiatives, Jacobsen said so tendees that Brazil’s domestic market is the world’s third largest after far this year, Delta has canceled 1,300 fewer flights with 12,000 more the U.S. and China. But he admits the market was “overhyped,” at flights arriving on time—and that’s despite a 55% increase in days least until this past summer, when the country experienced riots. Still, with irregular operations this year due to weather. the economy continues to grow rapidly in Brazil’s farm belt, where Southwest CFO Tammy Romo spoke, also at the Raymond James Azul has a heavy presence—often with no competition. TAM, in fact, event, about her carrier’s Big Five initiatives: 1) frequent flier plan exited many small cities when it stopped flying F100s. And remarka- improvements (already reaping big revenue benefits), 2) adopting bly, Azul has quietly become Brazil’s largest airline by some B737-800s and densified seating (it announced more -700 to -800 measures—not by ASKs or seats but certainly by destinations served. order conversions last week), 3) AirTran integration (slowly but sure- Neeleman said Sao Paulo Guarulhos, which he never really wanted to ly), 4) a new Amadeus reservation system (which will enable South- serve but where he got slots after merging with TRIP, has become one west to fly abroad, codeshare with partners and adopt more dynamic of Azul’s most profitable markets. Now Azul is about to get slots at ancillary strategies) and 5) fleet modernization (200 B737 MAXs on Sao Paolo’s downtown airport. International routes are likely to come firm order, 170 -800s and 30 of them -700s). Aside from these five, soon too. Clearly bitter about his ousting from JetBlue in 2007, Southwest will also get to grow at Dallas Love Field next year and Neeleman said his old airline is caught in the middle and perhaps internationally from Houston Hobby the year after. But it won’t grow should charge for a first checked bag. And with no shortage of scha- overall until it achieves its 15% return-on-invested-capital (ROIC) denfreude, he noted that JetBlue’s stock price is down (as of today, goal. As for Southwest’s Q4 outlook, revenues look solid despite 29%) from where it was when he left. Back in Brazil, meanwhile, $20m to $25m in lost business from the government shutdown. And Azul is nearing approval of a new joint, post-merger pilot contract. nonfuel unit costs should be flat y/y. At the Boyd Group event, mean- Before the merger, TRIP pilots saw their pay linked to total ASKs while, marketing chief Kevin Krone dodged questions about bag fees flown, which created a big gap between the highest and lowest paid but said codesharing opportunities might exist. And that buy-on-board pilots after the airline bought longer-range E-Jets. food is a possibility too, although the logistics would be complex, Korean Air’s John Jackson, the airline’s marketing VP for the Ameri- given limited storage space on Southwest’s aircraft. He separately cas, hinted at U.S. expansion next year. And in 2016, B787s will start opined that Spirit is not stealing passengers, just creating new ones. arriving. Speaking at the Boyd Group event, Jackson explained Kore- JetBlue CEO Dave Barger, at both conferences, emphasized the an Air’s unusual investment in Czech Airlines, which will provide it “silent story” of the carrier’s improved balance sheet and evolving cost with a gateway into Europe. And he acknowledged some bickering reductions from fleet renewal, sharklets, easing maintenance burdens, with Delta, which wants a joint venture: “It is well known we have our airport technology and benefits from government NextGen initiatives. disagreements.” On the other hand, “We know that we have cost creep,” he admitted, Air Berlin’s Titus Johnson, the airline’s marketing chief in the Ameri- mentioning higher pilot costs expected next year. And again, Barger cas, told Boyd Group conference attendees that U.S. markets are de- noted how JetBlue’s success absolutely depends on maintaining a cost veloping well and that more business is coming from U.S. points of advantage versus legacy rivals. On the revenue side, initiatives include sale than one might think. For example, on Air Berlin’s Chicago “Mint,” the new transcon premium product, plus new and maturing flights, the majority of passengers are people buying their tickets in partnerships, new loyalty plan and credit card synergies, maturing the U.S. And even in Miami, mostly a leisure destination for European markets, ancillaries and growth in Fort Lauderdale. As for demand tourists, more than 20% of business is generated on the U.S. side. more generally, Barger is “very pleased,” highlighting “robust” winter Johnson also noted his airline’s efforts to improve ground services, holiday bookings in particular. JetBlue calls itself a “tweener,” not invoking the worlds of former SAS chief Jan Carlzon: “The battle for ultra-low-cost nor ultra-high-revenue but something akin to the U.S. the air will be won on the ground.” retailers Nordstrom or Target (but hopefully not Sears or J.C. Penney) or to Enterprise Rent-a-Car. Besides, it could never be ultra-low-cost British Airways CEO Willie Walsh spoke of Iberia’s Latin America- operating from markets like New York and Boston. On a separate note, to-Asia hub potential at the Boyd Group gathering and also explained Barger acknowledged the shortcomings of E190s: “When we pur- that Vueling won’t be like BA’s former LCC Go, which was actually chased that aircraft, oil was at a different price.” But he did say JetBlue successful but only by realizing its best opportunity was to compete is evaluating the next-gen E2 version. And it’s even open to buying against BA. There’s now a management structure in place to prevent widebodies one day too to serve deep South America. that from happening with Vueling. Walsh also called for an E.U. in- vestigation into Alitalia state aid and praised Ryanair’s Michael Spirit’s Ben Baldanza, delivering his high-energy, unapologetic de- O’Leary for giving people exactly what he promises: nothing.

Licensed to [email protected]; may not be shared or forwarded unless otherwise agreed by Airline Weekly Corp. Personalization by DocMonk 7 labor & airports State of the Unions Workforce Developments At the Boyd Group International Aviation Forecast Summit last week, consultant Mi- That was close: With negotiations running well past chael Boyd predicted sluggish U.S. traffic growth for the next decade, with activity gen- their deadline, Norwegian and its pilots finally erated less these days by economic factors than by airline strategies, including efforts to agreed to new contract terms, thereby avoiding a restrain capacity expansion, dump 50-seat jets, focus on international markets and order threatened strike. The dispute centered on the air- planes mostly for replacement rather than growth. In fact, comparing 2013 to 2008, U.S. line’s unrealized desire to create separate Scandinavi- airline departures are down 11% while seat counts are down 8%—even though the econ- an bases in different countries, with each base having omy and population are bigger today. And even looking at this winter versus last, depar- its own contracts administered by separate staffing tures are down 4% and seats down 3%. Nevertheless, there will be some growth leaders subsidiaries. Pilots felt this would weaken their bar- in years ahead, led among big airports by Charlotte, where Boyd sees traffic growing by gaining power. 19% from now through 2022, driven by new international flying by US Airways and its In May 2012, Qantas said it would close its heavy likely successor American. Dallas DFW will grow just shy of 19%, with Delta’s De- maintenance base at Melbourne Tullamarine. And last troit, Atlanta and Salt Lake City hubs rounding out the top five. One notable loser, ac- week, it said it would close another heavy mainte- cording to Boyd: Phoenix, whose traffic is forecast to shrink 3% as connecting traffic nance base in Avalon, Victoria, in March, leaving just diverts to better positioned hubs like Dallas DFW. one of these facilities (in Brisbane) left. The reason: JetBlue says airport costs at Fort Lauderdale are just a fifth of those at Miami, which it its maintenance workload is much lighter with old calls “Toronto-like” with its $25-plus cost per enplanement. Fort Lauderdale’s costs are B747-400s leaving the fleet. In fact, said Qantas, in “the mid-single digits.” In fairness to Miami, though, it’s also generally the higher- during the next four years there would be 22 months revenue airport and includes some ground services in its high fees that Fort Lauderdale with no work at all scheduled at Avolon. As for the does not. 15 B747s still in the fleet, the airline is evaluating American’s Will Ris, who will stay on as government relations chief if the US Airways whether to do heavy overhauls in Brisbane or abroad. merger goes through, made the case for privatizing U.S. air traffic control in the same Aer Lingus cabin crew continue to threaten strikes way that Canada has done. Speaking at the Boyd Group event, Ris explained how air over a planned base closure in Shannon, but CEO journey times between New York and Washington are no shorter now than they were in Christophe Mueller downplayed the risk during the the 1950s despite much faster airplanes. The problem: air traffic congestion that he says airline’s Q3 earnings presentation. He recalled eight the FAA-managed air traffic control system isn’t managing well. What’s more, the enor- recent strike ballots by unions, none of which resulted mous taxes airlines and their passengers pay go primarily to fund ATC, which Ris cate- in any work stoppages. gorizes as one of the four great costs for an airline, along with fuel, labor and planes.

Licensed to [email protected]; may not be shared or forwarded unless otherwise agreed by Airline Weekly Corp. Personalization by DocMonk routes & networks 8 Who’s Flying Where Air New Zealand will be the world’s first carrier to operate Boeing’s souped-up B787, the -9 version. But where? Last week, the state-owned airline, which is surprisingly profitable given its size and network, said the new birds will fly from its Auckland hub to Perth in Australia’s far west (about a 3,330-mile journey) beginning next autumn, or about a year from now. After Perth, the B787-9s will fly to Tokyo and Shanghai. ANZ also said it would configure the planes with 302 seats, including 18 lie-flat business class seats, 21 premium economy seats and 263 economy seats, including 14 Skycouch rows. Virgin Atlantic, by the way, will be the second carrier to fly B787-9s. Hainan Airlines, which enjoyed a strong peak summer, did so mostly because of profits on domestic routes. But China’s fourth largest airline wants to be a bigger international player too, despite having one hand tied behind its back by government route right policies intended to protect Air China, in particular. In the U.S., it did manage to win Beijing rights for Chicago, and it serves Seattle too. And soon it will formally announce its first east coast gateway, which will almost certainly be Boston, judging from years of speculation and indications. Separately, Hainan’s Seattle flights to Beijing now continue onward to Xian and Dalian with no change of plane and expedited customs clearance. The Chicago route, mean- while, will be served with B787s before the year ends, with Seattle getting B787s early next year. And after Boston? Hainan Airlines, like other Chinese carriers, is watching closely to see how United, JAL and ANA fare with their new B787 Japan service to secondary U.S. markets like Boston, San Diego, Denver and San Jose. One market Hainan Airlines has considered: Newark. Qatar Airways officially announced new service to Hangzhou, a Yangtze River Delta city along China’s eastern seaboard. It’s the carrier’s fifth new market announced so far for 2014, the others being Sharjah, Dubai World Central, Philadelphia and Miami. The new Hangzhou flights will operate with A330s four times per week. Last decade, intercontinental service to mainland China grew rapidly but centered on just three markets: Beijing, Shanghai and Guangzhou. This decade that’s changing, with a flurry of new service to secondary cities like Chengdu, Chongqing, Wuhan, Xiamen and Hangzhou. Qatar itself just touched down in Chengdu earlier this year. Another example: the city of Chongqing will get new twice-weekly A330 nonstops to Sydney courtesy of Sichuan Airlines. It’s a bit of an odd announcement, given that Sichuan’s major hub is Chengdu—and that it already serves Melbourne from Chengdu. But it also happens to serve Van- couver from Shenyang, its only other longhaul international route. Lufthansa said its summer 2014 schedule will include several new routes, including Munich-Mexico City (starting in April) and Munich-Toronto (starting in June). It already serves both cities from Frankfurt. In addition, the German airline will operate summer flights from Frankfurt to Mon- treal, which in this case already has service from Munich. Kuala Lumpur will now be served nonstop from Frankfurt rather than via Bangkok, and CONTINUED ON p. 9

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9 routes & networks Who’s Flying Where CONTINUED FROM p. 8 these Kuala Lumpur flights will continue onward to Jakarta. A Frankfurt-Valencia shorthaul route will appear as well. On the other hand, a number of news reports suggest Lufthansa will exit the Khartoum, Sudan, market. Lufthansa won’t be so happy about this: Vueling—already one of the fastest growing airlines in Europe—will grow some more with a new base in Brussels, home of the Lufthansa Group’s partly owned affiliate Brussels Airlines. Vueling will launch 11 new routes from Europe’s capital city, namely Rome, Lisbon, Oporto, Venice, Santiago de Compostela, Ibiza and Palma. And don’t be surprised, says, BA/Iberia boss Willie Walsh, if future Vueling bases are announced in the months ahead. For the record, Paris, Rome and Amsterdam are its busiest markets outside of Spain. Israel’s El Al is the latest in a long line of airlines fighting heightened low-fare competition with a low-fare unit of its own. Details are still murky, but according to Globes, an Israeli publication, the carrier will apply LCC tactics like bag fees on flights operated by five of its B737-800s to Eu- rope next summer. Destinations targeted are those with lots of leisure traffic like Budapest, Berlin, Prague and perhaps Cyprus. El Al is responding to pressures brought on by the recently signed E.U.-Israel open skies pact, which enabled LCCs like easyJet, Vueling, Pegasus and Wizz Air to enter Tel Aviv. By the way, what’s the second busiest airline in Tel Aviv after El Al? The answer: Turkish Airlines, which connects Israel to the world much as Korean Air connects China to the world, or as Singapore Airlines connects Indonesia to the world, to cite just two examples. Nobody likes a bully. Except in Italy’s airline industry. There it’s the bullied that no one likes, namely Alitalia, whose rivals seethe at its status as teacher’s pet—or make that government’s pet, which continuously breaks the rules of good business behavior but never gets punished for it. So a fist in the face from easyJet represents deliverance of some street justice. This time the U.K.-based LCC is punching with flights to Catania in Sicily from both London Luton and Manchester. The U.S.-Canadian exchange rate is no longer quite as favorable to Canadian travelers crossing the border to catch flights. But there are other rea- son to do so, including expensive taxes and airport charges in Canada and the availability of low-fare flights. Example: new Allegiant flights from Burlington, Vt., to Orlando Sanford starting in February. Burlington is a bit farther from Montreal than Plattsburgh, N.Y., which Allegiant also serves (as does Spirit). But it’s still less than a two-hour drive, and it’s even closer to some Canadians living southeast of Montreal. Plus Burling- ton has a larger local population of its own than Plattsburgh. Cebu Pacific is in for a tough fight on the longhaul battlefield. Gulf carriers aren’t the only ones adding overlapping service. So is Cebu’s local rival Philippine Airlines—or more precisely, its low-fare PAL Express unit. Becoming the latest LCC to go longhaul, PAL is now flying from Manila to Dubai as well, also with 400-plus seat A330-300s. As it defends against Cebu on price-sensitive longhaul routes favored by migrant workers, Philippine Airlines is also expanding mainline service to Europe, launching London Heathrow flights last week. This marks its return to Europe after a 15-year absence. The airline is said to be looking at Frankfurt next—and at having six European cities in total by the end of next year. In the meantime, two large questions linger: will Philippine Airlines sell part of itself to another airline, perhaps All Nippon? And will it join a global alliance? With Russia’s extremely oil- and gas-dependent economy slowing, Aeroflot is hoping for some traffic growth in the country’s less developed east. Following government-orchestrated consolidation, Russia’s largest carrier grew larger by swallowing several competing carriers, among them SAT Airlines and Vladivostok Air in the Far East. Now it’s combining them and rebranding them as Aurora Airlines, which aims to expand from 30 to 128 destinations using 40 airplanes by 2018. The bad news about Russia’s Far East is that few people live there. The good news is that Vladivos- tok in particular lies close to the booming cities of northeast Asia, making it an airline market to watch. Aeroflot will actually hold 51% of Aurora, with the rest in the hands of local governments in the region. Etihad and Air Arabia are both expanding in Saudi Arabia again, the former with new service to Medina, its fourth destination in the kingdom, and the latter with new service to Hofuf, its 10th Saudi destination. Finally, in news of the absurd, South African Airways said it would end service to Buenos Aires. That’s not the absurd part. The absurd part was Argentine diplomats angrily accusing the carrier of making a political decision not based on commercial criteria. Really? That’s like Ronald McDonald getting angry at someone for wearing too much makeup. JetGreen Environment, Conservation & Fuel A bio-jet fuel off-take agreement—the lever of choice in the quest to bring biofuels to commercial scale—emerged last week. But this one came with a twist, in that it doesn’t involve an airline. Jet engine maker GE Aviation announced an agreement starting in 2016 to buy up to 10m gallons per year of cellulosic synthetic jet fuel to be used in its engine testing, which consumes more than 10m gallons per year. The biofuel would be purchased from The D’Arcinoff Group, a Washington D.C. company whose alternative energy subsidiary promises a 65% reduction in the lifecy- cle carbon footprint of its biofuel as compared to conventional jet fuel. GE has agreed to purchase at comparable-to-market prices a minimum of 500,000 gallons per year and up to 10m gallons. While even 10m gallons a year isn’t a lot of jet fuel (the U.S. market alone consumes about 55m gallons each day), make no mistake: this is a large off-take agreement. For perspective, United’s agreement with AltAir Fuels—one of the most heralded examples to date—is for just 5m gallons per year. GE, Boeing, Airbus and others may be into biofuels, but JetBlue and Azul founder David Neeleman is not. He’s “given up on the bio-stuff,” he said at last week’s Boyd Group summit. Instead, he repeated his call for the airline industry to back natural gas-to-liquid (GTL) fuels, which Qatar Airways is now using regularly on flights out of Doha. Neeleman suggests that airlines fund an “X prize” award to anyone who can bring GTL fuel down to a cost of $40 per barrel. Obviously, he believes the technological advancement needed to reduce the price is within reach. But without a carbon capture element, environmentalists would cry foul: GTL is still a fossil fuel with a bigger carbon footprint than standard jet fuel.

Licensed to [email protected]; may not be shared or forwarded unless otherwise agreed by Airline Weekly Corp. Personalization by DocMonk markets 10 Around the World A Look at the World’s Airlines, Including Endweek Equity Prices Share Change Change Airline from last from last Comment Price week year United 35.36 -1% 79% A4A forecasting 1.5% y/y rise in pax volumes during the 12-day Thanksgiving peak Delta 26.89 1% 177% Spirit attacking its Minneapolis hub with new winter service to L.A., Phoenix and Florida

American 9.62 22% 2432% Stock up again as investors more and more confident merger will indeed happen

US Airways 23.21 3% 85% Will retire its final 15 B737-400s next year; replacing them with A321s Southwest 17.69 1% 96% Pensacola, Richmond and Memphis now served with Southwest-branded airplanes

Alaska 72.74 0% 86% Axed most of its int’l codesharing in deference to Delta; not BA though—would anger AA

JetBlue 7.71 6% 45% Starts Worcester flights to Fort Lauderdale & Orlando, just in time for the New England winter

Virgin America (not publicly traded) JetBlue expresses interest in flying to Mexico/Central America from Long Beach if permitted Hawaiian 8.27 -1% 38% Expects $100m in incremental cash flow from new co-branded credit card deals

Spirit 43.30 1% 154% Utilizes its A320-family planes about 14 hours a day, including for some overnight flights

Allegiant 106.20 1% 46% Nov. schedules show it with 193 flights on Sundays and just eight on Tuesdays (Diio Mi)

SkyWest 15.75 4% 39% About 9% of its flying (59 aircraft) is pro-rate in which it controls pricing/scheduling

Republic/Frontier 10.92 -7% 145% Frontier announces several new routes from both Trenton, N.J., and Wilmington, Del.

Air Canada 6.01 2% 240% Will announce a major narrowbody aircraft order in the “coming months”

WestJet 27.85 2% 56% Revenue from airline partnerships increased 50% y/y in Q3; now has 33 partners in total

Aeromexico 17.80 -1% -13% Flight attendants again threatening strikes; not happy with implementation of new contract

LAN/TAM 11.99 -1% -36% Will announce Q3 financial results today; separately, United notes Latin Am. routes softening

Gol 4.59 -10% -5% Etihad tells Arabian Business it’s looking for partners in South America

Copa 151.64 0% 62% Will announce Q3 financial results Wednesday; how much money did it make this time?

Avianca 3480 -17% -22% Listed its shares in NYC thinking it would boost company’s value; lo and behold, stock tanked

Emirates (not publicly traded) Skywards loyalty plan now part of Amex’s popular Membership Rewards program Air Arabia 1.45 0% 112% Air Seychelles, controlled by Etihad, more than doubled its Q3 ASKs y/y

Turkish Airlines 7.54 -5% 80% Turkish and its Gulf rivals eager to serve Kano in northern Nigeria

Kenya Airways 12.35 18% 0% Wants rights to serve U.S.; threatens to stop buying Boeing if not granted (Bloomberg)

South African Air. (not publicly traded) Many smaller airports in Africa only operational in daylight hours; inhibits plane utilization Jet Airways 340 -1% -6% India to hold a national election in the spring; will determine next prime minster

Aeroflot 125.90 -5% 29% With 140m people, Russia has 20m state-sector workers and 40m pensioners (The Economist)

Crude oil futures Iran signaling a desire to re-welcome international oil companies, which would help (WTI, for delivery next month; $95 0% 11% source New York Mercantile modernize facilities and boost production. exchange)

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Licensed to [email protected]; may not be shared or forwarded unless otherwise agreed by Airline Weekly Corp. Personalization by DocMonk 11 markets AroundA ROUND the THE World WORLD A LookLOOK at the AT World’s THE WAirlines,ORLD Including’ S AIRLINES Endweek, I NCLUDINGEquity Prices ENDWEEK EQUITY PRICES Share Change Change Airline from last from last Comment Price week year Lufthansa 14.50 1% 18% Says Brussels Airlines restructuring mirroring Austrian; now earning small profits ex items Air France/KLM 7.26 -2% 7% Flight attendants threatening to strike Nov. 20 through 24; unhappy with proposed labor moves

BA/Iberia 377 6% 123% Again says it’s open to more acquisitions, but nothing interests it at the moment

SAS 17.20 -9% 165% Denmark’s central bank sells its ownership stake, but Danish finance ministry still has shares

Alitalia (not publicly traded) Rival Meridiana complaining about Italian policies allegedly favoring LCCs. Whatever.

Finnair 2.79 0% 26% October ASK capacity flat y/y, RPK traffic up 4%; Asian ASKs up 1%, RPKs up 6%

Aer Lingus 1.43 0% 36% About 65% of the tickets it sells on U.S. flights are sold in the U.S.

Virgin Atlantic (not publicly traded) TUI’s Thomson Airways starts London Gatwick nonstops to Phuket in Thailand

easyJet 1225 -5% 93% Ryanair says media ignores easyJet’s allegedly inferior ops; flies from busier airports though

Ryanair 5.76 -6% 27% O’Leary: if the Italian post office goes bust, the Italian gas company will have to save Alitalia

Air Berlin 1.79 3% 15% Increasing Berlin frequencies to NYC and Chicago next summer; hopes to capture connect pax

Norwegian 222.90 -8% 80% bmi Regional entering the lucrative if high-cost Norwegian domestic market

Vueling (not publicly traded) Parent company of Spanish rival Air Europa considering an IPO Aegean 6.36 -1% 308% Six flights cancelled and 31 forced to reschedule as Greek air traffic controllers strike again Japan Airlines 5490 -3% x Japan’s transport ministry rejects JAL’s appeal to reconsider its recent Haneda slot allocation

All Nippon 212 3% 27% Skymark, for some reason, bought A380s; now looking for ways to pay for them (Bloomberg)

Korean Air 32900 -2% -41% Biggest long-term threat: more (and better quality) nonstop int’l service into and out of China

Cathay Pacific 14.92 -4% 3% Scoot, the longhaul LCC owned by Singapore Airlines, starts Hong Kong flights this week

Air China 5.10 -4% -8% Chinese gov’t relaxing restrictions on discounts, warming to more industry fare competition

China Eastern 2.61 -6% -8% Juneyao eying launch of a Guangzhou-based LCC; LCC Spring eying Taiwan & Singapore

China Southern 2.76 -5% -27% Western China increasingly becoming the engine of nation’s economic growth

Singapore Airlines 6.08 0% -10% Changi airport breaks ground on construction of a new fourth terminal to open in 2017

Malaysia Airlines 0.34 0% -29% Royal Brunei Airlines, now flying B787s, preparing to place a narrowbody order

AirAsia 2.63 -1% -14% Reorganizing group mgmt. structure; founders to take more active role in gov’t lobbying

Thai Airways 18.60 -6% -20% AirAsia introducing Fly-Thru product, which facilitates connections, at Bangkok Don Muang Cebu Pacific 53.50 1% -6% Fierce typhoon hits the Philippines and disrupts flights

Qantas 1.25 1% -3% All of its B787-9 orders are actually options; won’t exercise until int’l profits are restored Virgin Australia 0.42 1% -13% Expands codeshare with SilkAir, owned by Singapore Air., to cover more cities in Indonesia Air New Zealand 1.45 0% 56% Launch date for new B787-9 flights to Perth will be Oct. 15, 2014

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Licensed to [email protected]; may not be shared or forwarded unless otherwise agreed by Airline Weekly Corp. Personalization by DocMonk cover story 12 The Silent Killer: Foreign exchange volatility quietly inflicting cost and revenue pain across the industry

CONTINUED FROM p. 1 a cost phenomenon. As Japanese carriers deal routes to U.S. passengers from U.S. points of Japanese airlines, highlighted by the huge jump with the yen’s pernicious impact on fuel out- sale, in U.S. dollars. But there are exceptions. in their fuel outlays last quarter. When the world lays, they also grapple with weaker outbound Hawaiian Airlines has a growing collection of looks back on the years 2010 through 2012, they demand in a nation where there’s lots more Asian routes tailored to Asian travelers paying will be remembered as a golden age for Japanese outbound travel than inbound travel—Japan in Asian currencies. Chief among them: Japa- carriers. And there’s no more palpable charac- has lots of wealthy business and leisure travel- nese vacationers paying in yen, whose roughly teristic of this golden age than a very strong yen ers but doesn’t rank high as a tourist destina- 20% decline versus the dollar means that every relative to the U.S. dollar. tion. Put another way, a weak yen means it’s time Hawaiian sells a ticket in Japan, it’s get- Australia is another market where forex is more expensive for Japanese travelers to fly ting only 80% of what it was getting before. To causing headaches. For years, Qantas— frustrat- abroad, meaning less demand. Theoretically, a be precise, half of Hawaiian’s international ed that foreign tourists and business travelers weak yen should also mean more prosperity sales are in yen, while another 20% are in simi- were staying away from the country because it for Japan’s big export companies, which larly weak Australian dollars. To a lesser de- was too expensive—complained about a strong should translate into greater demand for airline gree, United and Delta are exposed to a weaker Australian dollar. But be careful what you wish tickets. But although this might be true to yen, given their Tokyo hubs with heavy Japan for. With prices of Australia’s commodity ex- some degree, revenues for all Japanese carriers point-of-sale revenues. American, whose yen ports falling, so is the value of its currency. But are rising at a significantly slower pace than exposure has increased thanks to its virtual what’s not falling is the oil price that Qantas their costs, perhaps because Japanese corpora- Tokyo hub with joint venture partner Japan must pay. Its fuel outlays, in fact, are at their tions face other problems such as weaker glob- Airlines, also has heavy Latin American cur- highest levels ever, and not because of consump- al demand for their goods overall. Why? In rency exposure, notably in markets like Vene- tion growth. The airline still insists a weaker part because emerging markets like Brazil, zuela (one of American’s most profitable), home currency will be beneficial in the long run. Indonesia and Turkey, their economies suffer- Brazil and Argentina. But that’s a tough argument to make given the ing, are buying less. For those airlines that are being battered by impact weak Australian dollars have on its costs. In nearby South Korea, the won is one of the adverse forex movements, is there any medi- The impact is unambiguously bad in Brazil, few currencies that has held its value versus cine available—any palliative to relieve the where nobody argues that recent depreciation of the dollar this year. But a strong home curren- pain? Yes. Throughout the industry, carriers the real has been good for airlines. Just ask LAN cy doesn’t always mean good things for an are retooling their networks, adjusting their and Delta, whose investments in TAM and Gol, airline. Sure enough, Korean carriers are en- revenue management systems and re-thinking respectively, came just as those carriers saw joying less fuel inflation than many of their their distribution to increase U.S. dollar sales. their fuel and other dollar-denominated costs peers. But their revenue is taking a hit as they All Nippon, to cite one example, said it’s skyrocket. Like Australia, Brazil exports a lot of lose a lot of Japanese passengers, who are no boosting its marketing budget in the U.S. for commodities. And when commodity prices rise, longer visiting or connecting in Seoul as much this very purpose. Brazilian carriers are boost- so—usually—does the value of that export na- because doing so has become more expensive. ing their U.S. flying. Air Canada and WestJet tion’s currency. This, in turn, can make industri- Exchange rates, of course, affect cargo reve- might recapture border-crossing Canadians alization difficult for emerging economies, be- nues too. catching flights in Bellingham, Buffalo and cause selling manufacturing goods abroad be- So what about European carriers? Here too, Plattsburgh if the Canadian dollar continues to comes difficult when priced in an expensive fuel costs are down thanks to a strong euro and depreciate. And conversely, Delta is downsiz- currency. This “Dutch disease,” as economists even a stronger U.K. pound relative to the ing its yen-heavy beach market business from call it, makes emerging market governments dollar. But carriers like Air France/KLM, Japan. Hedging currency risk can ease the pain wary of strong currencies. But again, be careful Lufthansa and especially Finnair, with heavy too. what you wish for: now that Brazil’s currency is revenue generation in Japan, are watching Airlines in countries that use the U.S. dollar weak, its economy is barely growing and its helplessly as their revenues there erode. Brit- as their currency, like Panama, or those that fix airlines are barely coping, surviving only ish Airways and Lufthansa, moreover, have the value of their currencies to the dollar, like through draconian capacity- and job-cutting. substantial exposure to rupee revenues from many Gulf nations, are somewhat protected There is no better example of the ravages India. During the mid-2000s, when oil prices from forex volatility, especially on the cost wrought by a weak currency than India. There, were skyrocketing, a strong euro was an inval- side. But Copa, Emirates and others, to be sure, airlines are reporting horrific financial losses. uable weapon for European airlines. Now fuel generate revenues in a multitude of currencies. And one of the better managed of the bunch, Jet is softening anyway, so the benefit is less dra- And think, for example, about India-heavy Air Airways, felt compelled to sell a large part of matic, and it’s increasingly overshadowed by Arabia’s exposure to the weak rupee. Chinese itself to Etihad, in part because it was unable to all the forex-induced revenue pressures carriers, for their part, with a home currency manage the dramatic decline of the rupee. abroad. Of course, some shorthaul carriers like loosely tied to the dollar, have benefited from Ryanair and easyJet face heavy exposure to slow and steady appreciation during the past The list of victims goes on. In South Africa, the euro/pound exchange rate, which has gen- few years, avoiding the severe volatility seen Indonesia and Turkey, countries subject to some erally strengthened in favor of the euro this elsewhere. of the most severe currency depreciation this year. And easyJet in particular has some reve- year, airlines are, sure enough, feeling the pinch. Exchange rates are a crucial factor shaping nue exposure to currencies that have weak- international commerce—so crucial, in fact, In fact, it’s difficult to think of a tighter correla- ened, such as Norway, Turkey and Russia. tion that the one between currency values and that forex trading is the largest financial market airline financial performance—more difficult Are U.S. airlines immune? For the most part, in the world. Airlines certainly understand that even, yes, to find examples of airlines prosper- yes, because most of both their revenues and importance, at times enjoying powerful bene- ing in the face of currency shocks than it was to costs are in the same currency, the U.S. dollar. fits from currency movements and at times find ones that prospered despite the fuel spike. Even carriers with many international routes suffering devastating blows. Unfortunately, sell most of their tickets on most of these right now it’s the latter. And the impact of foreign exchange is not just

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