August 2006 North Atlantic Trends Wo Trends Emerge from the Latest, First Half 2006, Traffic Num- CONTENTS Tbers for the North Atlantic
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Aviation Strategy Issue No: 106 July/August 2006 North Atlantic trends wo trends emerge from the latest, first half 2006, traffic num- CONTENTS Tbers for the North Atlantic. First, while the market is growing only slowly (around 3%), and, despite the 2004 rebound, there is little evidence of a return to the pre-September 11 trend. Second, Analysis load factors remain very high - this year will again see average loads on the Atlantic around 82%, about five percentage points up North Atlantic trends 1 on the late 90s average. Capacity constraint among the US Legacies and intercontinen- Network carriers: tal hub rationalisation by the Euro-majors lies behind the tight sup- post-LCC strategies ply/demand balance, and this is translating into some good bottom- • Lufthansa and Germanwings line results. BA's 20% increase in first quarter (April-June) operat- • BA and BA Connect ing profit was attributed to "record load factors and better cabin mix". • Qantas and Jetstar Not everyone, however, can make money in this environment. 2-10 United has just announced the sale of its daily New York JFK - London LHR route to Delta, which will operate it from Gatwick, for US LCCs: Star performers a relatively modest $21m. It is perhaps surprising that United has and puzzling trends failed to make this prestigious route work, but it has apparently not • Southwest been able to achieve the same average yields as its competitors, • US Airways which is partly due to its low frequency compared to the multiple • AirTran frequencies offered by BA and Virgin Atlantic, an element that busi- • jetBlue ness travellers and corporations value highly. • Frontier This may also raise a question about the strategies of the new 11-16 business-only transatlantic operators like Eos and MaxJet, whose Varig: offering appears to have been well received, especially by the Volo rescue plan independent business traveller, but whose low frequencies leave 17-19 them exposed when they have to cancel or postpone a flight. In the background European and US LCCs are observing the Databases 20-23 Atlantic market with increasing interest. But it will probably take a technological step to induce them to expand intercontinentally - Airline traffic and financials such as transferring 787 operating economics to a 737 model. Aircraft available Av. NORTH ATLANTIC TRAFFIC Traffic PLF % (AEA and ATA airlines) growth % Regional trends 84 15% 82 Orders 10% 80 78 5% PUBLISHER 76 0% 74 Aviation Economics -5% 72 James House, 1st Floor 22/24 Corsham Street 70 -10% London N1 6DR Tel: +44 (0) 20 7490 5215 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1H2006 Fax: +44 (0) 20 7490 5218 e-mail: [email protected] www.aviationeconomics.com Aviation Strategy Analysis Lufthansa: Network reorganisation and product differentiation nitially, the response of the flag carriers to year compared with 2005 (and compared Ithe LCCs was mixed, with some recognis- with zero growth for long-haul flights this ing the LCC threat and responding, while oth- summer). Aviation Strategy ers went into denial. Today, however, almost Lufthansa's mainline and Regional flights is published 10 times a year all of the world's network airlines have devel- have realigned to a new strategy that assigns by Aviation Economics oped sophisticated strategies to combat the 737s on all mainline routes and CRJs on at the beginning of LCC threat, and in this survey Aviation regional routes. Crucially, beginning in 2003 the month Strategy looks at the different responses of most non-hub flights have been operating a three airlines - Lufthansa, British Airways and "ping-pong" strategy, enabling aircraft to fly Editor: Keith McMullan Qantas. back and forth between two airports all day in [email protected] Lufthansa's response to the LCCs is still a regular pattern, thus minimising crew plan- evolving, but for the moment is based pri- ning and schedule complexity. Lufthansa Contributing Editor: marily on network reorganisation (including says is does not introduce ping-pong flights Heini Nuutinen depeaking at hubs and regional flights ping- for scheduling reasons alone - there has to Contributing Editor: ponging between non-hub airports) com- be sufficient city-pair demand as well - but Nick Moreno bined with a greater role for Germanwings as this tactic appears successful: non-hub turn- part of a strategy of clear product differentia- around times have now reduced from an Production/Subscriptions: tion and lower fares (including "Economy average of 30 minutes to 25 minutes, and Julian Longin Budget" at the mainline and a no-frills prod- overall productivity is up by 11% thanks to [email protected] uct from Germanwings). "more efficient use" of cockpit & cabin crew. Tel: +44 (0)20 7490 5215 Lufthansa has backed up this success up via Hub modifications the launch of its largest ever "non-hub" flight Copyright: marketing campaign. Aviation Economics Combined with this hub/non-hub change All rights reserved Starting in 2004, Lufthansa has been in strategy, Lufthansa has revamped its man- Aviation Economics smoothing peaks and fattening troughs at its agement structure. In 2005 Lufthansa estab- Registered No: 2967706 two main hubs - Frankfurt and Munich - via lished "hub management" teams at Frankfurt (England) simplifying scheduling complexity and aircraft and Munich, dedicated to the needs of each rotations, as well as reorganising regional particular hub and with specific regard to Registered Office: flights via its Lufthansa Regional unit, based quality, costs and suppliers. And from James House, 1st Floor 22/24 Corsham St on waves of feeder flights into Frankfurt and October 2005, all point-to-point services from London N1 6DR Munich. Lufthansa's other 11 German airports have VAT No: 701780947 However, depeaking at the two hubs has been run by a separate unit within the airline, ISSN 1463-9254 not been radical - for example, at Frankfurt analogous to the units at Frankfurt and The opinions expressed in this publica- Lufthansa has moved no more than 20-30 Munich, with responsibility for everything tion do not necessarily reflect the opin- flights per day from peaks around 9am, mid- from pricing to strategy. This unit is also ions of the editors, publisher or contribu- tors. Every effort is made to ensure that day, 4-5pm and 9-10pm to other times, and responsible for the commercial and opera- the information contained in this publica- tion is accurate, but no legal reponsibility the vast majority of those have been to times tional running of Lufthansa Regional. is accepted for any errors or omissions. that are on peak shoulders, rather than the In October 2005 Lufthansa spent €170m The contents of this publication, either in least busy times of day. There are three in buying a 4.95% stake in Fraport, the oper- whole or in part, may not be copied, stored or reproduced in any format, print- peaks at Munich, but comparable changes ator of Frankfurt airport (Lufthansa's biggest ed or electronic, without the written con- have been made there too. This year, hub), which it increased to 9.1% in March sent of the publisher. Lufthansa is aiming to "maximise profitability" 2006. This gives Lufthansa some opportunity at the Frankfurt hub and grow at its Munich to influence Frankfurt airport strategy. hub, and - overall - Lufthansa has increased Moreover Fraport owns a 65% stake in short-haul summer capacity by 4.6% this Frankfurt-Hahn GmbH, the operator of Hahn July/August 2006 2 Aviation Strategy Analysis airport, which is the German base of Ryanair. of 83% and carried 5.5m Lufthansa has previously complained about passengers in 2005 LUFTHANSA FLEETS the low fees Ryanair pays there, but any (57% up on 2004), and Orders attempt to influence the charging structure expects to carry 7.5m Fleet (Options) would provoke the usual temperate reaction passengers in 2006 and Lufthansa A300 12 from Michael O’Leary. 10m in 2007. A319 18 A320 36 Germanwings oper- A321 26 (6) Germanwings ates to 54 destinations A330 12 with a fleet of 19 A319s, A340 39 7 two leased from A380 15 In December 2005 the European Lufthansa and the rest 737 62 747 30 Commission gave approval for Lufthansa to from GECAS, and three CRJ 12 take operational control of Eurowings (it A320s leased from Total 236 23 (6) already held a 49% equity stake) - which ILFC. 18 156-seat Lufthansa Cityline CRJ 59 owns Germanwings - through acquiring a A319s are on order, for Avro 18 Total 77 majority of voting rights, but conditional on delivery in September Germanwings A319 17 18 (12) the surrender of slots at Vienna and Stuttgart. 2006 - June 2008, when A320 3 With a staff of 700, Germanwings is now the fleet will grow to Total 20 18 (12) clearly positioned as the no-frills part of the around 40 aircraft (the Lufthansa group, and the airline's operation airline also has 12 A319 options). is based on has four hubs - although most of Germanwings' main distribution channel these are primary airports, so they are not is its website (it has no travel agent distribu- classically low cost. tion), although it is looking at other innovative distribution methods, such as via mobile • Cologne/Bonn (the main hub) attracts pas- phones. Its fares are typically around €60- sengers to/from the west of Germany, with 41 €80 per return trip, with 10-15% of seats international and four domestic routes. offered within the €19-€29 range. 40%-50% Eleven aircraft are stationed there. of the airline's passengers are business cus- • Stuttgart covers the south-west, with 21 tomers, many of them attracted by international and four domestic routes. Germanwings' "corporate deals", with Seven aircraft are stationed there.