Issue no. 221 November 2016

European majors: This issue includes

Degrees of rationality Page depths of the downturn following the global financial crisis, IAG, Luhansa and each of the three top network carrier groups in Europe promoted Air France-KLM 1 I strategies to return to a sustainable level of profitability by 2015. Things don’t always go as planned; and it is only IAG that has come any- US airline stocks: Not where close, generang a return on invested capital of over 13% and Trumped but Buffeed 5 operang margins of 11%. Luhansa and Air France-KLM have stopped talking about any targets for creang returns to shareholders. South Korean LCCs: All three have recently published growing by 9%. Challenging relaonships 8 their third quarter and nine month’s The three groups have all been American: Creang returns for results (with IAG capping theirs with pushing growth into their respecve stakeholders 11 the group’s annual investor day), “low cost” brands. Luhansa’s Eu- which each show broadly similar rowings increased capacity by 25% Jet values and lease rates 16 trends. Yields and unit revenues year on year in the nine months and have been under pressure — as to fortheperiodaccountedfor9%ofthe be expected, when fuel prices fall, group’s total capacity (in ASK terms) airlines pass on part or all of the and 17% of passenger numbers. Air for 22% of IAG’s passenger numbers savings to the passenger. There does France-KLM’s Transavia grew by 13% and 11% of seat capacity. however appear to have been market and now accounts for 15% of the In these earnings presentaons weakness on the Atlanc and to Asia group’s total passenger numbers and somemes what is interesng is what which has added to pricing pressure. 9% of capacity. Vueling — the only isomied.Inthisseason’sresultsIAG, For the three months to Septem- one of the three an independent for the first me since the merger be- ber — the main summer season — player — had operaonal difficules tween BA and Iberia, neglected to de- each registered a decline in revenues, but sll grew by 11%. It now accounts tail the respecve revenues and op- fall in operang profits and a boost to net income. To be fair, the under- lying performance at IAG was some- EUROPEAN MAJORS: OPERATING PROFITS 12 MONTHS ROLLING (€m) what beer but marred by losses on translaon of Brish Airway’s results 3,000 2,500 into Euros following the collapse in IAG Sterling aer the UK’s referendum re- 2,000 sult. 1,500 Luhansa The network airlines 1,000 in each group maintained “capacity 500 discipline”; although in IAG’s case, 0 Iberia, having gone through success- ful restructuring in the last few years -500 has resumed growth with capacity -1,000 Air France-KLM up by over 5% in the nine months. -1,500 BA increased capacity by 3% and Aer 2010 2011 2012 2013 2014 2015 2016 Lingus (acquired in August last year) Note: Rolling twelve months. Source: company reports. IAG - underlying operang profit. Air expanded strongly on the Atlanc, France-KLM - operang result. LHAG - “Adjusted” EBIT.

Published by Aviation Strategy Ltd Aviation Strategy erang profits by “brand”. There was the full Air France brand, so could not also a notable absence of reference possibly be described as low cost, ISSN 2041-4021 (Online) by any of the three to the Atlanc and smacks to us as an aempt to This newsleer is published ten mes a year metal neutral joint ventures. We can introduce ‘B’ scale wages in the com- by Aviaon Strategy Limited Jan/Feb and Jul/Aug usually appear as combined issues. only assume that there is some em- pany’s primary hub to force through Our editorial policy is to analyse and cover barrassment associated with this col- employee producvity. This is sort contemporary aviaon issues and airline lecve omission. of what Brish Airways managed strategies in a clear, original and objec- to do at its London Gatwick opera- ve manner. Aviaon Strategy does not Air France-KLM shy away from crical analysis, and takes a ons a decade ago: the difference global perspecve — with balanced cover- Air France-KLM meanwhile took being that Gatwick is not BA’s main age of the European, American and Asian markets. the opportunity to announce a new hub, with flights on predominantly strategic programme. Having failed point-to-point low-yield ˝leisure˝ Publisher: in its “Transform 2020” and “Perform routes. 2020” plans to persuade employees The company states that this Keith McMullan James Halstead that it really needed to transform venture will allow it to fly long- and perform, and following a change and medium-haul routes that are Editorial Team of senior management, new CEO currently uneconomic or subject to Jean-Marc Janaillac has introduced a intense compeon and give junior Keith McMullan new plan entled “Trust Together”. kgm@aviaonstrategy.aero pilots the chance to fly long-haul. On the face of it, it appears to be an Even if the unions do agree to the James Halstead jch@aviaonstrategy.aero internal message to try and mend idea, it is not clear what would badly-eroded relaons between the happen at the ten aircra limit. It Tel: +44(0)207-490-4453 Air France management and the does nothing to create significant Fax: +44(0)207-504-8298 French unions, as well as between Air producvity improvements in the France and KLM. Air France mainline operaons — Subscriptions: Alongside this the group an- or indeed change how they manage info@aviaonstrategy.aero nounced plans for what was de- pilot seniority lists. The plan seems scribed as a new long haul low cost doomed to fail. Copyright: airline based at CDG: up to ten aircra At the same me Air France has by 2020 with volunteer crew from the decided to rein back on expanding ©2016. All rights reserved Air France corpus. It would in fact be a Transavia into a pan-European brand Aviaon Strategy Ltd full service airline probably operang (which idea, for some reason, the Registered No: 8511732 (England) Registered Office: 137-149 Goswell Rd London EC1V 7ET EUROPEAN MAJORS: UNIT REVENUES AND FUEL VAT No: GB 162 7100 38 12 MONTHS ROLLING ISSN 2041-4021 (Online) 9.5 3.0 9.0 Luhansa 2.8 The opinions expressed in this publicaon 8.5 (€¢/ASK) costs unit Fuel donotnecessarilyreflecttheopinionsofthe 2.6 editors, publisher or contributors. Every ef- 8.0 fort is made to ensure that the informaon 7.5 2.4 contained in this publicaon is accurate, but no legal reponsibility is accepted for any er- 7.0 2.2 rors or omissions. The contents of this pub- 6.5 licaon, either in whole or in part, may not 2.0 be copied, stored or reproduced in any for- Unit Revenues (€¢/ASK) 6.0 Air France-KLM 1.8 mat, printed or electronic form, without the 5.5 IAG Fuel wrien consent of the publisher. 5.0 1.6 2010 2011 2012 2013 2014 2015 2016

2 www.aviationstrategy.aero November 2016 EUROPEAN MAJORS: Q3 2016 RESULTS

IAG Luhansa Group Air France-KLM 2016 2015 %chg 2016 2015 %chg 2016 2015 %chg Revenues(€m) 6,486 6,756 (4.0)% 8,828 8,939 (1.2)% 6,938 7,306 (5.0)% Operang profits(€m) 1,205 1,250 (3.6)% 1,148 1,225 (6.3)% 737 880 (16.3)% Net profits(€m) 930 848 9.7 % 1,422 794 79.1 % 544 481 13.1 % Operang margin 18.6% 18.5% +0.1pt 13.0% 13.7% (0.7)pt 10.6% 12.0% (1.4)pt Pax (‘000s) 30,849 27,564 11.9 % 32,694 32,098 1.9 % 26,553 25,897 2.5 % ASK (m) 83,441 76,138 9.6 % 81,044 77,905 4.0 % 84,426 83,172 1.5 % RPK (m) 71,431 65,272 9.4 % 68,397 66,973 2.1 % 74,237 73,953 0.4 % Load factor 85.6% 85.7% (0.1)pt 84.4% 86.0% (1.6)pt 87.9% 88.9% (1.0)pt Passenger unit revenues (€¢/ASK) 7.0 8.1 (13.6)% 8.0 8.6 (7.0)% 6.8 7.3 (7.5)% Unit costs (€¢/ASK) 6.3 7.2 (12.4)% 6.8 8.1 (16.0)% 5.9 6.3 (6.3)%

French pilots never liked), and plans quarter by around 20% to €100m, giv- Luhansa Group to revert the low cost subsidiary to ing it €17m for the nine month pe- a defensive posion in Amsterdam riod up by an underlying €38m from Luhansa’s move to develop Eurow- and France. Transavia France, how- the prior year levels). Meanwhile, it ings as a low- cost point-to-point al- ever, by pilot agreement, is limited in will once again rebrand the French ternave to the mainline network op- the number of aircra it can operate. domesc point-to-point services (no eraons and catapult it into the posi- No doubt the aempt to force its way doubt sll heavily loss-making) from on of the third largest pan-European into Luhansa’s second base in Mu- a mixture of Air France and HOP! to LCChasbeengivenaboostbythepos- nich has been an unmigated disas- HOP! Air France. sible wet-lease deal from the mori- ter (although the LCC subsidiary did bund Air Berlin (see Aviaon Strat- improve operang results in the third egy, October 2016). It describes the

EUROPEAN MAJORS: 9 MONTHS 2016 RESULTS

IAG Luhansa Group Air France-KLM 2016 2015 %chg 2016 2015 %chg 2016 2015 %chg Revenues(€m) 17,272 17,119 0.9 % 23,870 24,304 (1.8)% 18,758 19,447 (3.5)% Operang profits(€m) 1,915 1,805 6.1 % 1,677 1,693 (0.9)% 955 643 48.5 % Net profits(€m) 1,484 1,180 25.8 % 1,851 1,748 5.9 % 430 -158 nm Operang margin 11.1% 10.5% 7.0% 7.0% 5.1% 3.3% ROIC 13.0% 13.6% 9.9% 9.7% 6.5% 5.8% Pax (‘000s) 77,525 66,202 17.1 % 83,946 83,022 1.1 % 70,834 68,498 3.4 % ASK (m) 226,356 203,381 11.3 % 219,130 210,478 4.1 % 230,011 227,103 1.3 % RPK (m) 185,726 166,147 11.8 % 173,864 170,831 1.8 % 197,797 195,159 1.4 % Load factor 82.1% 81.7% 0.4 % 79.3% 81.2% (1.8)% 86.0% 85.9% 0.1 % Passenger unit revenues (€¢/ASK) 6.8 7.5 (9.8)% 7.7 8.3 (7.2)% 6.6 7.0 (4.9)% Unit costs (€¢/ASK) 6.8 7.5 (10.0)% 7.7 8.8 (12.5)% 6.1 6.6 (7.4)% LCC Growth Vueling Eurowings Transavia Pax (‘000s) 17,400e 15,800e 10.1% 13,962 12,892 8.30% 10,439 8,638 20.8% ASK (m) 26,569 23,979 10.8% 18,863 15,163 24.40% 20,116 17,840 12.8% RPK (m) 22,148 19,511 13.5% 15,084 12,077 24.90% 18,041 16,164 11.6% Load factor 83.4% 81.4% 2.0% 80.0% 79.6% 0.32% 89.7% 90.6% -0.92%

November 2016 www.aviationstrategy.aero 3 Eurowings business model as being ˝sustainably successful through [a] EUROPEAN MAJORS: SHARE PRICE PERFORMANCE unique market posion˝. 500 It aims to be the largest point- to-point European operator in its 400 IAG Air France-KLM home markets (Germany, Austria, 300 Switzerland and Belgium) and hold 250 the top or second posion in all relevant German airports. It currently 200 operates around 90 aircra in seven 150 bases (Hamburg, Berlin, Hanover, Düsseldorf, Köln/Bonn, Stugart and 100 Luhansa Vienna). And following the Air Berlin Indexed (Jan 2012=100) log scale 90 and SN Brussels deals it expects to 80 70 operate 160 aircra in eleven bases 2012 2013 2014 2015 2016 — with the addion of Brussels, Mu- nich, Salzburg, Palma di Majorca and Brussels. (For some strange reason whilepushingexpansionintotheGer- The highlight was the perfor- it plans to include SN Brussels — it man market). Meanwhile industrial mance at Aer Lingus, achieving an will take full control early next year — relaons connue to ebb: strikes at operang margin for the quarter of within the Eurowings umbrella). Luhansa and Germanwings by the nearly 30%, up nearly seven points on While keeping growth at the pilots, and by the cabin aendants at the prior year level. It even achieved group’s network carriers below mar- Eurowings. a near 21% return on invested cap- ket rates (for the nine month period ital. Aer Lingus has been expanding capacity in ASK terms at Luhansa, IAG strongly, parcularly on the Atlanc. SWISS and Austrian grew by 2.5% Here the group has an opportunity to IAG was parcularly hit in the quar- year on year, while passenger de- develop Dublin as a new ˝low cost˝ ter by the fall in the value of Ster- mand in RPK terms was on a par gateway, with a disnct advantage of ling against the Euro. The operat- with prior year levels), Eurowings having US immigraon preclearance ing margins at Brish Airways were has been expanding strongly — and facilies. In one sense it provides on a par with the prior year third parcularly on long haul — with the extra runway capacity lacking at quarter at 18.6% but the collapse in ASKs and RPKs up by 25% in the nine Heathrow. The challenge will now be the pound resulted in a net €140m months (but passenger numbers up to bring Aer Lingus into the immu- lower operang profit on translaon. by only 8% and revenues by 7%). nised joint venture with American on The effects of exchange rate move- Revenues for the point-to-point the Atlanc. ments at Brish Airways overall is carrier for the period approached At the group’s Capital Markets somewhat complicated: around 40% €1.6bn, not far short of that achieved day, the management contended of revenues are each in Sterling and by Austrian, but it registered an that nothing had really changed US Dollars, with only 10% in Euros. adjusted operang loss of €35m since last year (see Aviaon Strategy, apparently down nearly €100m on Given its strength at its base at November 2015). The group has the same period last year. Heathrow — which is sll the pre- slightly reduced its long term growth Luhansa avers that it will get Eu- mier long haul gateway to Europe — plans by 1 point to 3%, cut capital rowings’ operang unit costs down it has the ability to sell into higher expenditure to an average €1.7bn to 5.8€¢ by 2020 from 8.0¢ last year. value currency markets and ˝switch over the next four years, and reduced This is sll a long way above the on˝ transfer traffic through its hub, its target of average EBITDAR to figures for European market leader awayfromUKoriginangsales(which €5.3bn from €5.6bn. It maintains its Ryanair (which has just launched a might be expected to weaken in light plans to target 15% ROIC, operang broadsideatLuhansabystarngop- of lower growth and lower value of margins of 12%-15% and earnings eraons at the Frankfurt home base the pound). growth of over 12% a year.

4 www.aviationstrategy.aero November 2016 US airline stocks: Not Trumped but Buffetted

Trump’s elecon appears to have been a funda- ren Buffe was perceived to be vehe- came as a bit of shock, but mental shi in the investment mently an, when it came to airline P the US airline industry — community’s atude to the main stocks, following a painful investment in contrast to the Brish reacon US airlines, which has been brought in USAirways in the early 90s. Com- post-Brexit when European airline into prominence by a decision by menng in Berkshire Hathaway’s al- shares slumped both absolutely and Berkshire Hathaway (BH), the Omaha ways entertaining annual report, Buf- relavely — has responded with based investment fund/insurance fet said at the me: “As for the future equanimity. company/industrial conglomerate performance of the airline industry, In fact as the graph below illus- headed by Warren Buffe, whose your guess is as good as mine. Actu- trates, the market dismissed any un- very investment moves are obses- ally, given my record with USAirways, certainty that the radical presidenal sively monitored in the hope of your guess will be beer than mine.” choice has caused; all the major US replicang his consistent financial He also joked to a group of busi- airline stocks moved up following the success. ness school students, “I now have an elecon result, connuing the gen- In its recently filed Form 13F, BH 800 number I call every me I think eral trend for strong growth over the revealed an investment of $0.8bn in about buying a stock in an airline. past five years. American, $0.25bn each in Delta and I say, ‘I’m Warren and I am an air- Aviaon policy did not figure United, plus, a lile later, a further aholic.”’ prominently, if at all, in Trump’s purchase of an esmated $0.25bn in But that is not the full story. BH unconvenonal campaign, but it Southwest — about $1.55bn in total, held on to USAirways converble pre- is possible to make a posive case which is about 1% of the BH’s share ferred stock which became very valu- (purely from the US industry’s porolio. able when CEO Steven Wolf started perspecve). First, if the elecon This is interesng because War- to deliver financial success at the car- promises are followed, there will be a massive increase in government spending on infrastructure at the US TOP 4: SHARE PRICE PERFORMANCE same me as corporate and personal 1,200 taxes are slashed, which — if (a rather 1,000 American big if) all the economic and fiscal mul- 800 pliers align correctly, and investors, including presumably the Chinese, 600 Delta are willing to buy US infrastructure 500 bonds — could mean that GDP 400 growth will be substanally boosted, doubled according to Trump’s claim. 300 Second, US foreign policy is now proteconist, again interpreng 200 from the campaign rhetoric. This Southwest presumably means that US carriers Indexed (1 Jan 2012=100) logscale 150 will be more protected from “unfair” United compeon from the Middle East 100 superconnectors and pesky new 2012 2013 2014 2015 2016 entrants like Norwegian. More fundamentally, there

November 2016 www.aviationstrategy.aero 5 v BH likes strong brands; its port- WORLD’S TOP AIRLINES BY MARKET CAPITALISATION folio includes Coca-Cola, Amex, Wells Fargo, Phillips, Wall Mart, etc. 40 v BH’s aim is to buy the right com- 35 pany at the right price, but even if it buys the right company at a wrong 30 price that should ulmately sort it- 25 self out because of its long-term hold- ing strategy; however, it should never 20 buy the wrong company at what ap- US$bn pears to be a bargain price. 15 v BH finds comfort in industries 10 where there isn’t or doesn’t appear to be a threat from disrupve new 5 technology — commercial aviaon mostly fits this criterion. 0 Delta SouthwestAmericanUnitedRyanairAir ChinaIAG China EasternJAL Alaska AirANA China SouthernHainanSIA Jet Blue v Conversely,BH does not generally invest in new technology, leaving that to those who understand such things; notably BH refused the temptaon to invest in dotcoms during the early rierinthelate90s,andtheshareprice up front, for investment either di- 2000s boom, was cricised for un- soared. By the end of the decade Buf- rectly in wholly owned companies or deforming the stockmarket but was fe was able to write that his air- into major stakes in publicly quoted quickly vindicated when the bubble line investment record was no longer companies, mostly American but a burst. “unblemished by success” and that few European. It’s a low cost method the “USAirways shares will produce of obtaining investment funds. The obvious change that has a decent profit — that is if my cost BH’s aim, or rather raison d’être, brought the US airlines into BH’s for Maalox is excluded.” [for non- is to achieve long-term value growth universe is the massive consolida- US readers, Maalox is an over-the- in its shares substanally above that on that has taken. As the result of counter indigeson medicine]. of the S&P500 (otherwise, as Buffe AA/US, UA/CO and DL/NW the four BH has also been the sole owner points out, investors would be bet- biggest US airlines (Southwest being ofNetJetsforthepast20years,adeci- ter off with a low cost tracker fund). the fourth) now control 76% of the sion made by Buffe because his own These are some of the, decepvely total US industry (measured in RPMs) experience of the fraconal owner- simple, principles that BH applies: compared to 55% ten years ago. As a ship operaon was so good. v BH does not play industry cycles result, the big four are producing the Now US airline stocks have been (which is what investors have mostly sort of results that appeal to BH: in accepted into the BH porolio, it is done with airline stocks) but always 2015, $122bn of revenues, $23.3bn worth asking the queson: why is invests with the aim of holding for of operang profits (23% margin) BH deemed so important? Under the very long-term, although reces- and combined net profit of $21.7bn the charismac but self-deprecatory sions are regarded as increasing buy- (18%). Warren Buffet, BH has achieved a ing possibilies. Significantly, it appears as if this stock market valuaon of $390bn, v Share purchases are made using performance is sustainable in the and generated a roughly 20% annual the same criteria as BH uses when long run, though the business cycle average increase in value since the buying companies — strong fran- has not gone away and there are 1960s (when he joined BH, it was pri- chises, consistent long-term growth always external events, because the marily a declining texle company). prospects, quality management that industry is being very moderate in The core business is insurance which are dedicated to the company (BH increasing capacity, concentrang provides the “float”, premiums paid never imposes its own managers). on unit revenue improvements and

6 www.aviationstrategy.aero November 2016 not entering into destrucve market Their joint shareholdings range The funds can exercise control share wars. What is rather less clear from $7.3bn in United, $7.4bn passively, just through the weight of is whether the financial gains will in Delta, $10.4bn in American to their shareholdings, or more acvely, eventually leak back to labour, and $11.1bn in Southwest — $36.1bn through for example, signalling to whether one or more of the smaller in total or about 32% of the current Wall Street analysts, whose coverage low cost carriers might be able or market capitalisaon of the four of US airline stocks appears at mes willing to aggressively take on the big airlines. This gives the crossholding to be obsessed with projecng ASM four, and challenge the status quo. funds substanal control over the and RPM trends, and issuing calls for core US industry, and actual control “capacitydiscipline”whentheformer Ownership consolidaon by is probably greater sll as the HBR exceeds the laer. cross-holding funds esmates the percentage of vong From a passenger perspecve, While the US operaonal consolida- shares held by the seven funds to be the industry and ownership con- on is obvious, there has been an- well over 40%. solidaon is perhaps not such good other development which might be From a shareholder’s perspec- news. It implies a collusive industry of equal or even greater importance ve, this is generally very good news; characterised by strengthening unit — a remarkable degree of ownership not only does it demonstrate great revenues, which means rising fares, consolidaon, idenfied in an anal- confidence in the sector, it also acts uncomfortably high load factors and ysis in the Harvard Business Review as a block to excessive compeon restricted service on thin routes. (HBR,November2016).Thetable,be- or destrucve fares wars. Wealthier business travellers might low, compiled from data in the HBR The funds are not backing one air- then be tempted to try out NetJets’ report, shows that seven huge invest- line but all four, so an aggressive ex- fraconal ownership product — ment funds, of which BH is the lat- pansion might be successful and en- clever man, that Warren Buffe. est and smallest, have each accumu- hance that airline’s value but it would lated cross-holdings in all four of the damage the others — a zero sum US largest airlines. game for the funds.

INVESTMENT FUNDS OWNERSHIP OF MAJOR US AIRLINES

$bn American Delta United Southwest Total 4 Airlines PRIMECAP 1.61 0.96 1.44 3.48 7.49 Vanguard 1.52 2.25 1.71 1.84 7.32 BlackRock 1.37 1.84 1.60 1.83 6.63 T. Rowe Price 3.79 0.05 0.79 0.32 4.94 Fidelity 0.45 0.78 0.72 2.29 4.24 State Street 0.85 1.26 0.80 1.06 3.97 Berkshire Hathaway 0.80 0.25 0.24 0.25 1.54 TOTAL 7 FULL CROSS-INVESTORS 10.39 7.38 7.30 11.07 36.14 % of Market Cap 43% 20% 31% 38% 32%

OTHER MAJOR INVESTMENT FUNDS (EST) 1.57 4.70 3.74 1.85 11.86 % of Market Cap 7% 13% 16% 6% 10% ALL OTHER SHAREHOLDERS 12.14 24.62 12.71 16.48 65.95 % of Market Cap 50% 67% 54% 56% 58% MARKET CAP (End Nov 2016) 24.10 36.70 23.75 29.40 113.95 % of Market Cap 100% 100% 100% 100% 100%

Source: Harvard Business Review, S&P,Aviaon Strategy

November 2016 www.aviationstrategy.aero 7 South Korean LCCs: Challenging relationships

LCC market has grown and three independent LCCs — From hubs at Jeju and Incheon, rapidly in South Korea over , and T’way Airlines Jeju Air operates a network of six do- T the last few years, and today — which are more exposed, both mesc desnaons and 25 interna- no fewer than six low cost airlines strategically and financially. onally, with its most important mar- compete against the legacy carriers That’s significant in a market kets being China (eight desnaons, of and where short- and medium-haul with Sanya on Hainan Island added in (although three of these LCCs are routes (parcularly to Japan and November this year) and Japan (six), controlled by those two airlines). China) are close to saturaon; in followed by two in Thailand, With a populaon of 51.5m lo- 2015 alone the five LCCs (the sixth and the Philippines, with one each cated in the centre of East Asia, South began operaons in 2016) launched in Taiwan, Cambodia, the Northern Korea was essenally a monopoly for routes to 40 new internaonal des- Mariana Islands, Guam and Malaysia. Korean Air unl the late 1980s, when naons. As a result, some of South The airline carried 7m passengers Asiana Airlines was launched, and it Korea’s LCCs are now looking at in 2015 and currently uses a fleet of wasn’t unl 2006 that the first LCC ap- long-haul routes — though that will 25 737-800s, almost all of which are peared. necessitate the abandoning of the leasedandwhichhaveanaverageage Since then, however, LCC services typical single aircra LCC model. of more than 11 years. The airline have expanded significantly — for plans to increase its fleet to 26 by the Jeju Air example, on South Korea to Japan end of 2016, with another four to five routes (which is the most important Jeju Air became the first LCC in South aircra being added each year unl country pair in Asia by passengers Korea aer launching in 2006 out of it reaches the 40 aircra mark by the carried, excluding routes to/from on Jeju, an island off the end of 2019. Four leased aircra will China), South Korean LCCs have southern coast of South Korea. Just jointhefleetin2017,althoughitisbe- expanded their share from nothing in under 82% of its equity is owned by lieved to be planning the placement 2008 to approximately 24% by 2015. the Aekyung Group — a South Korean of an order for 737-800s direct from That’s sll behind the market share chaebol(orconglomerate)—withthe Boeing someme over the next year of Korean Air (c35%), but close to Jeju regional government owning 5%. or two. Asiana (c26%) and well ahead of the combined share of Japanese airlines (which is just 14%). SOUTH KOREA LCC PASSENGERS 2015 According to the South Korean 9 ministry of land, infrastructure and 8 transport (KADA), the country’s LCCs accounted for a 15% share of the in- 7 ternaonal market as at the end of 6 September 2016 — compared with 5 11% as of September 2015 — and 4 KADA forecasts that the LCC’s market Pax (m) share will rise to 30% over the next 3 five years. 2 South Korean LCCs can be split 1 into two types: Air , Air 0 and , which are backed by Jeju Air Jin Air T’way Air Eastar Jet South Korean’s two legacy carriers;

8 www.aviationstrategy.aero November 2016 and one each in Guam, the Philip- JEJU AIR SHARE PRICE PERFORMANCE pines, Cambodia, Vietnam and Mon- golia. A seventh Chinese desnaon 50,000 will be added in December this year with the commencement of a service 45,000 between Seoul and Sanya on Hainan island. 40,000 Although not majority-owned by Asiana Airlines, Air Busan has taken 35,000 over some routes that were previ- ously operated by the legacy carrier, though there tends to be an overlap 30,000 ofoperaonbeforeAsianawithdraws from a route that Air Busan has en- 25,000 2015 2016 tered. Jin Air Jeju Air became one of the eight gapore Airlines, with negoaons ap- Jin Air was founded by Korean Air in founding members of the Value Al- parently carrying on for five months 2008 as a domesc LCC to compete liance — an alliance for Asia/Pacific- before collapsing. against the country’s high-speed rail based LCCs — in May this year. Set In the first-half of 2016 Jeju Air service, called KTX, and which was up as a rival to U-FLY, the Value Al- recorded revenue of ₩335.3bn launched in 2004. liance also includes Tigerair, Scoot (US$284m) — 17% higher than Jin Air added its first internaonal and Nok, and enables passengers to January-June 2015 — although op- routes in 2009 and has concentrated book flights on any other partner’s erang profit fell 47% year-on-year on expanding its internaonal net- routes through the websites of each to ₩16.2bn (US$14m), thanks partly work ever since. Today it operates member. to higher maintenance costs on its to five domesc desnaons and 21 Jeju Air is considering long-haul ageing aircra. internaonally, comprising five in routes, with Ken Choi — its president Air Busan China, four in Japan, two in the Philip- and chief execuve — saying that it is pines, Thailand and Vietnam, and one also looking at the potenal for joint Based at Gimhae Internaonal air- each in Guam, Laos, Malaysia, the ventures: “Bangkok is a very good port in the Gyeongsang province in Northern Mariana Islands, Taiwan market and Thailand is relavely flex- the south-east of the country, Busan and the US (Honolulu). In December ible in allowing the establishment of a Internaonal Airlines was established two new routes are launching, from new carrier.” in 2007 before changing its name to Seoul to Cairns and to Kitakyushu in Jeju Air is the only LCC to be Air Busan the following year, when southern Japan. quoted—itlistedontheKoreanStock it began operaons. Air Busan oper- Jin Air operates these routes from ExchangeinNovember2015,andwas ates a fleet of 10 A321-100s and six two hubs — Gimpo Internaonal (lo- the first South Korean airline to list A320-200s, all of which are leased cated 17km west of Seoul) and In- since Asiana Airlines in 1999. On de- and which have an average age of 13 cheon Internaonal (located 47km but Jeju Air immediately rose from its years. It carried around 5m passen- west of the capital). Incheon is now IPO price of ₩30,000 to more than gers in 2015. the largest airport in South Korea ₩48,000, but ever since it has been Asiana Airlines owns 46% of the and opened in 2001 to partly replace on a gradual but steady downwards LCC, with the city of Busan and as Gimpo, which now largely serves do- path (see chart above), with the price many as 13 local companies holding mesc routes and secondary airports standing at under ₩30,000 as at the the remainder of the equity. Air Bu- in China, Japan and Taiwan. middle of November. The lisng was san operates to four domesc des- Jin Air carried 5.3m passengers made only aer Jeju Air was unable to naons and 17 abroad, with six in in 2015 (almost 50% up on 2014), of close a deal for an investment by Sin- China, four in Japan, two in Taiwan which 2.0m were domesc and 3.3m

November 2016 www.aviationstrategy.aero 9 internaonal. Its fleet comprises 18 gers in 2015 and operates a fleet of Asiana’s second LCC has been in 737-800s and four 777-200ERs — the 17 leased aircra, comprising 14 737- the planning stage for at least two laer being used on longer routes; Jin 800s and three 737-700s, which com- years, with the raonale being that Air was the first South Korean LCC to bined have an average age of more Asiananeededalowcostoperaonat launch a long-haul route — between than 12 years. It plans to add another one of its main hubs in Seoul in order Incheon to Honolulu — in Decem- two aircra to its fleet by the end of tobeerchallengeKoreanAirandthe ber 2015. The majority of the fleet 2017. other LCCs based there (and an LCC is leased, and the average age is just that was 100% owned by its parent — T’way Airlines over 11 years. unlike Air Busan). The LCC is formally owned by the T’way Airlines is based at Gimpo In its most important market, Hanjin Group, a South Korean chae- Internaonal in Seoul and was Japan, Air Seoul largely operates to bol that also took control of Korean launched in 2010 by the South Ko- secondary airports, which Asiana Air in 1969. Interesngly, where Jin rean private equity company Shinbo has previously struggled to break- Air has launched a service on a route Investment Corporaon (which owns even on given its legacy airline cost that Korean Air already has an estab- a 95% share) aer it acquired the structure. lished operaon, more oen than not AOC of an effecvely defunct regional However Air Seoul’s launch was Korean Air has tended not to cease its airline called Hansung Airlines. Under delayed partly due to concern by Air serviceorevenreduceitscapacitysig- an LCC model, T’way Airlines began Busan’sothershareholders(asAsiana nificantly (in contrast to the strategy operaons with a couple of 737-800s only holds a minority stake), but more of Asiana Airlines and Air Busan). on domesc routes. significantly by concerns from South In 2015 Jin Air earned revenue of Today it operates 15 737-800s to Korean regulators following the 2013 ₩461bn (US$400m) — 76% higher sixdomescand22internaonaldes- crash of an Asiana aircra at San than 2014 — and posted a ₩29.7bn naons, including eight in China, Francisco airport, resulng in three operang profit, 73% up compared seven in Japan, two in Vietnam, two deaths, and another (non-fatal) in- with 2014. in Taiwan and one each in Guam, Laos cident at airport in April and Thailand. This December the LCC 2015. Eventually however, Air Seoul Eastar Jet will launch two new routes — be- received an AOC, allowing operaons Owned by the Korea Investment tween Daegu in the east of South to start this year. Corporaon (KIC) — the sovereign Korea and Cebu in the Philippines, Unlike Air Busan, the 100% wealth fund of South Korea — Eastar and between Seoul and Saipan in the controlled Air Seoul is taking over Jet launched operaons in 2009 and Northern Mariana Islands, completely some of Asiana’s exisng is based in Seoul, with hubs at Gimpo The fleet is enrely leased and routes, though how many of Asiana’s and Incheon airports. It operates has an average age of 10 years. T’way routes to more than 90 desnaons between five domesc desnaons Airlines carried 3.6m passengers in will eventually move over to its LCC and 17 internaonally, including five 2015. offshoot remains to be seen. in China, four in Japan, two in each of Thailand and Taiwan, and the rest Air Seoul in Vietnam, Taiwan, Malaysia and Asiana Airlines launched an LCC sub- There are also plans to launch a sev- Cambodia. sidiary in July this year, called Air enth LCC in South Korea, provision- Eastar Jet has been codesharing Seoul. Based at Incheon airport, Air ally to be called Nambu Air. It will with another LCC — T’way Airlines — Seoul currently has just three leased be based at Busan airport and report- on the Seoul-Taipei route since 2013, aircra — A321-200s — with an av- edly is to be funded 10% by the local but in July this year it joined the U-FLY erage age of four years. They operate Gyeongsang government and the rest alliance of LCCs, which largely com- from Incheon to 10 internaonal des- from five local companies, who be- prises airlines owned by China’s HNA naons, seven of which are in Japan tween them will provide start-up cap- Group but which has been looking and one each in Cambodia, China ital of around US$87m. No other de- for new, independent members (with (Macau) and Malaysia. Two more air- tails are available as yet, other than Eastar Jet being the first of these). cra will be added to the fleet by the that there is a tentave launch date of Eastar Jet carried 3.4m passen- end of 2017. December 2017.

10 www.aviationstrategy.aero November 2016 American: Creating returns for stakeholders

Airlines Group (AAG), large cost increases are now behind In 2015 CEO Doug Parker gave up his the world’s largest airline American while many of its peers will salary, opng instead to be paid only A by traffic, has accomplished connue to face significant labour in stock. And earlier this year he gave some impressive feats in the three cost pressures in 2017. up his contract (and associated ben- years since the closing of the AMR-US Theearlylabourdealswerepossi- efits and protecons) and switched Airways merger and AMR’s exit from ble because American’s management to working on the same “at will” ba- Chapter 11 in December 2013. recognised that, in light of the his- sis as the airline’s employees. “Noth- First, it took the new American toryofcontenouslabourrelaonsat ing about having a contract felt like less than a year to close the profit gap both AMR and US Airways, the only a shared commitment to working to- with Delta and United; for a brief pe- way to clinch joint contracts would be gether”, Parker wrote in a leer to riod, American even reported higher to build trust and restore pay rates. employees. operang margins than its peers (al- In March 2016, in a major policy All of those moves were aimed at beit because of its lack of fuel hedges reversal, American’s leadership also mending labour relaons and achiev- and profit sharing). unilaterally instuted a profit-sharing ing a good employee culture, which Second, American has passed the programme, retrospecve to January is crical for a service-oriented com- tough merger integraon hurdles on 2016, which will pay employees 5% pany, especially a global carrier seek- schedule and largely without a hitch. of the company’s pretax profit before ing to capture premium traffic (some- Aer combining the two FFPs in early special items, starng in early 2017. It thing many airlines sll don’t realise). 2015, in July-October last year Amer- brought the carrier in line with Delta, As another accomplishment, ican moved to a single reservaons United and Southwest, though Amer- American has dealt effecvely with system. It was a smooth and suc- ican’s unions had not asked for it. the LCC/ULCC threat in its key do- cessful cutover, contrasng with the The management has also made mesc markets. In 2015 American highly disrupve event that United some extraordinary special gestures. was disproporonately affected by Connental experienced in 2012 (ap- parently the trick was to do it over 90 days, rather than on a single day). AMERICAN AIRLINES GROUP: FINANCIAL RESULTS Last month (October 1), Amer- 44 ican completed flawlessly the key 8,000 Revenues flight operang system (FOS) inte- 42 graon — an extremely complicated 6,000 Adjusted undertaking that has led to opera- Net Result 40 onal disrupons at other airlines. GAAP 4,000 Net Result 38 $bn

Being able to freely schedule pilots $m and aircra across the combined 2,000 network is crucial for unlocking the full potenal of the merger. 0 Third, American has already reached new joint agreements with -2,000 all of its work groups, bringing every- 2013 2014 2015 2016F 2017F one on new pay scales — a process Notes: 2013 revenues are AMR and US Airways combined revenues. 2013 financial results are that has oen dragged on in other AMR full-year results plus US Airways results for 22 days in December 2013. 2016E and 2017E mergers. Having the deals done will are analysts’ consensus esmates as of November 21. boost morale. It also means that

November 2016 www.aviationstrategy.aero 11 On the negave side, the early TOP 3 US CARRIERS’ ADJUSTED NET MARGIN TRENDS labour deals have caused American’s costs to soar and profit margins to 16% 2016E dip below those of Delta and United. 2015 2017E 14% In the third quarter, American’s ad- 2018E 12% justed operang margin, while an ex- tremely healthy 16.3%, lagged Delta’s 10% by 2.5 points and United’s by half a 2014 8% point. Its adjusted pretax margin of 14% lagged Delta’s by 4.2 points and 6% United’s by 1.7 points. 4% And the downside of the aggres- 2% sive use of cash to repurchase stock is that American has had to take on 0% American Delta United significant addional debt to fund aircra purchases. The strategy con- Source: Data from JP Morgan’s October 31 report on US airlines. trasts with Delta’s and United’s focus on debt reducon; those two airlines incursions into its DFW hub by Spirit “powerful draw” for both business also have more modest new aircra and other low-cost operators. It partners and customers. order books and acquire used aircra began to match the LCCs on fares. The new American was unusu- more frequently. The strategy seems to have worked; ally quick to start returning capital American’s management feels American recently noted that LCC to shareholders aer bankruptcy. The that increasing leverage is jusfied, compeon had eased off, while airline introduced a $1bn share buy- among other things, because of the yields had also benefited from the back programme and brought back current availability of extremely ending of Southwest’s inial growth dividends in July 2014 — just seven low interest rates (3% or less) for spurt at Dallas Love field. months aer exing Chapter 11. As long-term aircra financings. Also, In July American stunned the of September 30, American had re- American protects itself by maintain- world with the announcement of turned more than $9bn to sharehold- ing a strong liquidity posion. new credit card agreements with its ers in the form of share repurchases But in recent months analysts AAdvantage partners (Ci, Barclay- and dividends. have begun to comment more on card US and Mastercard) that are American is, of course, noted for American’s debt levels. Many have expected to boost its pretax income its aggressive fleet renewal and sig- suggested that while gearing may not by a staggering $1.55bn in the next nificant investment in new aircra maer in the current environment 2.5 years ($200m in the second half and the product, as it strives to re- where revenue trends are improving, of 2016, $550m in 2017 and $800m store itself as “the greatest airline in were the environment to deterio- in 2018). the world”. Its gross capex ($5.6bn in rate, or RASM trends turn posive Unl those deals American was 2016 and $5bn in 2017, though de- (expected by mid-2017), investors disadvantaged in that many of its clining to $4bn in 2018 as a result would pay more aenon to leverage competors (including United and of A350 order deferrals last summer) and American’s shares could suffer. Southwest) had secured lucrave is massive compared to Delta’s and The queson many are asking is: new credit card agreements in recent United’s, but as a result American has Will American start deleveraging its years. But American made up for a younger and more efficient fleet balance sheet in 2017 or 2018, when the delay by clinching deals not just than its peers. On the product front, its fleet renewal programme nears with one but with two credit card American has become the first US air- compleon? Will it at least start pro- providers (apparently an industry- line to offer premium economy seat- vidingfinancial and balance sheettar- first). CEO Doug Parker aributed ing internaonally — a new class that gets (like Delta does) for profit mar- that and the magnitude of the benefit the carrier will roll out over the next gins, earnings growth, leverage raos to the combined network being a 18-24 months. and suchlike?

12 www.aviationstrategy.aero November 2016 JP Morgan analysts see Basic AMERICAN: ROUTE NETWORK Economy essenally as a “corporate fare increase”, because most corpo- Hong Kong rate contracts prevent employees

Beijing Shanghai from booking those fares given the Seoul onerous restricons. The analysts Tel Aviv−Yafo wrote: “Apart from bag fees, we Haneda Tokyo Narita Athens consider Basic Economy to be one of

Munich Venice Düsseldorf FrankfurtZürich Rome the industry’s most creave revenue Amsterdam BrusselsMilan Edinburgh Paris GlasgowMANBHXLondon Dublin Barcelona concepts of the past decade”. Shannon Madrid Internaonally, American will Lisbon see a gradual revenue benefit from the rollout of its Premium Economy cabin, which came out in October on the 787-9s and will be added to the Kauai Island Honolulu Bermuda Kahului Kona exisng 777/A330 long-haul fleet by June 2018. It is American’s version of the type of cabin already offered Barranquilla MaracaiboCaracas Medellin by a number of Asian and European Bogota Cali Recife airlines, and Delta will be joining Quito Manaus Guayaquil Salvador the fray in 2017. American expects Brasilia Lima La Paz Belo Horizonte Sydney Santa Cruz to inially monese it through its Rio De Janeiro São Paulo Curitiba exisng “main cabin extra” product Auckland Porto Alegre unl it gets to crical mass. The main Santiago Montevideo Buenos Aires impact will be in 2018. American is benefing from That said, there are many rea- American could now be the first US a robust RASM/yield recovery on sons to be excited about American’s carrier to return to posive RASM US-Lan America routes, to which prospects. While most US airlines’ growth next year. In an October 31 it has the highest exposure among (including American’s) earnings are report, JP Morgan analysts predicted the US carriers. Lan America was likely to decline modestly in 2016 that American will see the highest the first region to turn posive with and 2017, American would seem to RASM growth among the US carriers 1.8% PRASM growth in Q3, driven haveespeciallypromisingcostcung in 2017 (around 2.1%). by a 25% improvement in Brazil unit and revenue-boosng opportunies, Domescally, American will soon revenues as capacity in that market which could boost its profit growth benefit from its version of Basic was raonalised and the Brazilian from 2018. Economy — a product technically currency strengthened. Outperforming in RASM trademarked by Delta but now also While American sees connued being introduced by United and strength in Mexico, it could reap ben- The easing of LCC compeon in the American during the first half of efitsfromLanAmericanrecoveryfor Dallas markets, the ending of South- 2017. It is basically an unbundled, atleastacoupleofyears,aseconomic west’s inial growth spurt at Dal- ULCC-type product. United an- growth resumes and accelerates in las Love Field, the recovery in Lan nounced details of its Basic Economy key markets such as Brazil. America, and the incremental rev- in mid-November. American will Unfortunately, it looks like the enue from the new credit card deal follow suit in January, when it plans Atlanc has taken over from Lan have already led to American outper- to start rolling out its new product. America as the enty to experience forming the industry in unit revenues. American has described it as a ˝game a prolonged slump. Connued ca- In the third quarter, American’s changer˝ that will allow it to “meet pacity growth — especially from RASM fell by only 2.2% — a much competors’ prices without the same LCCs and the MENA carriers, collapse lesser decline than at competors. amount of diluon”. of the Brish pound and lingering

November 2016 www.aviationstrategy.aero 13 growth. Next year domesc capacity deal provided industry-leading base AAG’s MAINLINE FLEET is likely to be flat and internaonal up pay but le total compensaon be- by 3.5%, driven by the annualised im- low Delta’s. Now, under the latest No. of aircra at end: pact of this year’s Pacific expansion. agreement being finalised, Delta’s pi- lot pay will soar even higher. Thanks Sep-16 Dec 2016E Cost saving opportunies to a snap-back provision, United’s pi- A319 125 125 A320 51 51 American was fortunate to secure lots will see pay automacally in- A321 193 199 two key labour deals early in the inte- crease to that of the highest-paid A330-200 15 15 graon process. New five-year joint pilots in the industry. And South- A330-300 9 9 collecve bargaining agreements west is awaing raficaon of tenta- 737-800 279 284 757 52 51 with pilots and flight aendants ve agreements with all three major 767-300 35 31 became effecve in January 2015. labour groups that grant hey pay in- 777-200 47 47 Other groups followed, and American creases. 777-300 20 20 now has agreements in place with all In addion to the favourable 787-8 17 17 of its contract employees. 787-9 1 4 impact of the normalisaon of E190 20 20 Costs have soared as a result labour expenses, American can MD-80 58 57 of the wage increases. American achieve more cost savings in 2018 Total 922 930 projects that its mainline ex-fuel and beyond as a result of eliminat- CASM will increase by 8-10% in the ing duplicate tasks, processes and current quarter, of which six points excess headcount in certain areas, will be driven by labour agreements. made possible by the recent FOS effects from recent terrorist aacks The new deals signed this year will integraon. Much of the work in contributed to an 11.2% decline in add about two points to next year’s 2017 will focus on achieving such cost American’s Atlanc PRASM in Q3. core ex-fuel CASM growth, which efficiencies. The workforce reducon Many see tough condions conn- would otherwise have been just 2%. will be achieved through voluntary uing through 2017 and 2018, and Butthegoodnewsisthatbecause means such as arion and early American is reducing its Atlanc the key deals were signed early and rerements. capacity by 6% this winter, with the because the rest of the industry has cuts focusing on markets where it seen, or is about to see, much labour Network and fleet plans has partners. With about 15% of cost escalaon, American now has a American’s network expansion this its consolidated capacity on the relave labour cost advantage over year has focused essenally on grow- Atlanc, American is less exposed to Delta, United and Southwest. ing its Los Angeles hub, connuing to that region than United and Delta Two years ago, American’s pilot addnewservicetoAsia-Pacificandin- (both 21%), though when immunised partners are included the three have broadly similar exposure. AAG’S MAINLINE AND REGIONAL AIRCRAFT FIRM The other problemac enty is ORDER BOOK the Pacific, where much of Ameri- can’s growth has focused this year. In At end of Sep 2016 Delivery schedule the third quarter, American’s PRASM A320 family 26 2016-2017 in that region fell by 10.5% as its ca- A320neo 100 From 2019† pacity surged by 28.7%. A350 XWB 22 From 2018 Likeitspeers,Americanconnues 737-800 25 2016-2017 totakeadisciplinedapproachtoover- 737 MAX 100 From 2017 787 family 24 2016-2018 all capacity growth, which will help in ERJ175 18 2016-2017 the quest to restore posive unit rev- Total 315 enue trends. It currently expects sys- tem capacity to increase by only 1% Note: † Originally from 2017 (deferred in June 2015). in 2017, compared to this year’s 1.5%

14 www.aviationstrategy.aero November 2016 That figure is well in excess of the AMERICAN: SHARE PRICE PERFORMANCE $6.5bn minimum the company seeks to maintain. 60 Second, as American’s fleet re- American newal will be substanally complete 50 in 2017, and assuming that healthy cash flow generaon connues, debt raos will probably start improving 40 from 2018. Some analysts have noted that even as debt increased in re- cent years, American’s EBITDAR gen- 30 eraon was so strong that the lever- age metrics remained unchanged. 25 Third,withliquidityproteconsin Relave to Arca Airline Index place and the debt levels passing ap- propriate stress tests against reces- 2014 2015 2016 sion, American’s execuves feel that it would not be right or in sharehold- troducing scheduled service to Cuba. make it hard to sell in Cuba; most ers’ best interest to pass up oppor- Since the merger, American has of the US carriers’ sales are in the tunies to lock in long-term aircra more than doubled its Asia-Pacific US. Making those routes profitable finance at today’s rock-boom rates. desnaons. This year’s new services will clearly be a struggle. “We’re in it New aircra are long-lived assets and have connected Los Angeles with for the long haul”, CEO Doug Parker good investments. “The right thing is Hong Kong, Tokyo Haneda and Auck- stated recently. to take debt rather than use cash to land. Following a hot contest with American will essenally com- pay for aircra”,the execuves noted Delta (because US airlines are coming plete its narrowbody fleet renewal in recently. up against the limits of the US-China 2017 with the last A320, 737-800 and Fourth, American feels that the bilateral), in early November Amer- ERJ175 deliveries. There will then be new fleet will give it a significant com- ican secured tentave approval to a brief pause (of sorts) before the peve advantage, both in terms of operate Los Angeles-Beijing. start of the deliveries of the latest- lower costs and a beer product. The The Asia routes are a natural fit generaon aircra mostly in 2018 new fleet offers “an absolute cus- for the 787, which American began or 2019 (the 737 MAX, the A320neo tomer advantage”, and American is taking delivery of in 2015. By year- and the A350XWB). At the end of this well ahead of other US airlines in end American will have received half year, the MD-80 fleet is projected to terms of modernising its fleet. of the 42 787s it has ordered — sev- stand at 57, down from 96 a year ago However, under pressure from enteen 787-8s and four 787-9s. Its and 132 in early 2015. analysts, American’s execuves have first 787-9 entered internaonal ser- indicated in recent months that they Shi of focus to deleveraging? vice on the DFW-Madrid and DFW- are considering providing long-term São Paulo routes in early November. At the end of September, American’s guidance and financial targets, American began its first sched- totaldebtandcapitalleasesstoodata which would help the investment uled flights to Cuba in September, $23.6bn, which included current ma- community monitor trends and with service inially to two secondary turies of $1.8bn. However, the top performance. cies from Miami, and Havana flights execuves connue to insist that they are due to follow at the end of are comfortable with that level for November. Having long served several reasons. By Heini Nuunen Havana with charters, American is First, American maintains a heini@theaviaoneconomist.com determined to be the leading US strong liquidity posion, which carrier to Cuba. However, there are amounted to $9.2bn in September sll many restricons in place that or about 23% of this year’s revenues.

November 2016 www.aviationstrategy.aero 15 Jet values and lease rates

tables reflect the contact details) and are not based vice, number on order and backlog, current values (not “fair mar- exclusively on recent market trans- projected life span, build standard, T ket”) and lease rates for nar- acons but more generally reflect specificaon etc. rowbody and widebody jets as at the AVAC’s opinion of the worth of the Lease rates are calculated inde- end of October 2016. Figures are pro- aircra. In assessing current values, pendentlyofvaluesandareallmarket vided by The Aircra Value Analy- AVAC bases its calculaons on many based. sis Company (see following page for factors such as number of type in ser-

JET VALUES ($m)

Years old Years old New 5 10 20 New 5 10 20 CRJ 900NG 25.9 20.2 Emb 175/ 28.3 CRJ 1000 28.0 21.6 Emb195 33.2 23.8 15.4 CRJ300-ER 35.1 Regional MRJ90 33.6 S100-95 23.0 16.6 A318 15.8 9.0 717-200 7.8 A319† 36.6 25.1 737-300‡ 2.3 A320-200§ 19.3 9.5 737-400‡ 2.8 A320NEO 47.6 737-500‡ 1.8 A321-200†$ 50.9 35.3 737-600‡ 9.3 4.0 A321NEO 56.9 737-700†v 24.6 17.0 737-800†v 32.6 23.4

Narrowbody 737 MAX 7 40.6 737 MAX 8 53.5 737 MAX 9 54.2 757-300† 7.6 A300B4-600† 4.8 747-400 12.2 A310-300§ 2.9 747-8I 152.9 112.2 A330-300/§ 102.8 83.6 767-300ER‡v 25.1 14.4 A340-300 ER 9.6 777-200ER 54.1 39.8 11.1 A350-900 142.8 777-300ER 157.6 122.8 87.9 A350-1000 168.0 787-800 119 82.9 Widebody A380-800‡ 215.7 155.0 787-900 139.9 A380-800† 226.1 787-1000 159.1

Source: AVAC. Notes: As at end-October 2016, lease rates assessed separately from values †=HGW, ‡=LGW, §=IGW, v=Winglets, $=Sharklets, /=Enhanced

16 www.aviationstrategy.aero November 2016 JET LEASE RATES ($’000s per month)

Years old Years old New 5 10 20 New 5 10 20 CRJ 900NG 191 172 Emb 175/ 233 CRJ 1000 226 194 Emb195 257 214 169 CRJ300-ER 284

Regional MRJ90 273 S100-95 148 137 A318 118 86 717-200 107 A319† 295 214 737-300‡ 66 A320-200§ 200 134 737-400‡ 59 A320NEO 379 737-500‡ 38 A321-200†$ 415 315 737-600‡ 96 155 A321NEO 455 737-700†v 184 164 737-800†v 270 227 737 MAX 7 346 737 MAX 8 431 Narrowbody 737 MAX 9 468 757-300† 97 A300B4-600† 81 747-400 156 143 A310-300§ 70 747-8I 1,212 1,028 A330-300/§ 843 740 322 174 767-300ER‡v 269 211 A340-300 ER 161 777-200ER 578 474 204 A350-900 1,121 777-300ER 1,544 1,229 1,051 A350-1000 1,629 787-800 922 697

Widebody A380-800‡ 1,727 1,304 787-900 1,173 A380-800† 1,830 787-1000 1,332

Source: AVAC. Notes: As at end-October 2016, lease rates assessed separately from values †=HGW, ‡=LGW, §=IGW, v=Winglets, $=Sharklets, /=Enhanced

. AIRCRAFT AND ASSET VALUATIONS Contact Paul Leighton at AVAC (Aircra Value Analysis Company)

Website: www.aircravalues.net Email: pleighton@aircravalues.net Tel: +44 (0) 20 7477 6563 Fax: +44 (0) 20 7477 6564

November 2016 www.aviationstrategy.aero 17 The Principals and Associates of Aviaon Strategy apply a problem-solving, creave and pragmac approach to commercial aviaon projects. Our experse is in strategic and financial consulng in Europe, the Americas, Asia, Africa and the Middle East, covering:

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