Issue no. 208 July/August 2015 North Atlantic: Virtual This issue includes airlines protest too much? Page - of the US carriers’ polical aack on the Gulf super- Atlanc forces 1 connectors has been a new focus on the profitability of the A North Atlanc market, which might just provoke a regulatory re- Davies Commission exposes sponse. pre-funding dilemma 4 At first sight, it is not obvious three JV carriers, with each virtual why the US carriers have chosen airline (Star, SkyTeam and oneworld) Rolls-Royce: Under financial to aack the Gulf carriers so vehe- having varying but generally very pressure, will it be broken mently. There are, remarkably, only high degree of control in their own up? 10 two routes where the US carriers sub-markets (see table, page 2). An aviaon tour of Central compete directly with the Gulf carri- Over the past five years the North Eastern Europe 12 ers: Dubai to Washington (Emirates Atlanc market has been turned into and United) and Milan — New York the major profit generator for both JetBlue: At last, closing the (Emirates, Delta, American), using US and European network carriers. margin gap with peers 17 fih freedom rights. European airlines’ investor presen- Moreover, according to a study taons frequently allude to posive by Oxford Economics commissioned trends in Atlanc unit revenues, by Emirates, the true O&D markets though they have all stopped pro- of the two groups of carriers are viding regional profitability analyses. markedly different. For the Gulf car- The US DoT does compile this data for pean partners which in effect act as riers, the passenger profile is domi- US airlines (Form 41 data), and this one airline on the North Atlanc, nated by Asian, Middle Eastern and illustrates how important the Atlanc coordinang prices and capacity, and African originang or desned pas- has become for the profitability of ulmately sharing profits). sengers — 95% in total. By contrast the US carriers (and for their Euro- For the US Big 3, Atlanc margins these regions only account for about 18% of passengers on US airlines, their traffic being dominated by the North Atlanc Consolidaon Americas (60%) and Europe (22%). 100 Nevertheless, the Gulf carriers 90 oneworld ATI have been increasing their presence 80 on the North Atlanc market (de- 70 fined as all flights from West and Star ATI East Europe, the Middle East and 60 Africa across to North America) — 50 SkyTeam ATI their capacity share is now about 8% Seats(m) 40 of seat capacity, up from just 0.6% 30 ten years ago. It is perhaps not the 20 Others relavely small current share that is 10 important, rather it is the potenal Gulf Carriers 0 threat to the concentrated market 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 est structure on the Atlanc — about 72% of capacity is shared among Published by Aviation Strategy Ltd Aviation Strategy Oligopolisaon of the North Atlanc. ISSN 2041-4021 (Online) Capacity shares on Alliance JV European hub to North American hub routes This newsleer is published ten mes a year by Aviaon Strategy Limited Jan/Feb and STAR ALLIANCE Jul/Aug usually appear as combined issues. Our editorial policy is to analyse and cover EWR IAD ORD YYZ LAX SFO TOTAL ATLANTIC contemporary aviaon issues and airline FRA 100% 100% 100% 100% 100% 100% 87% strategies in a clear, original and objec- MUC 100% 100% 100% 100% 100% 100% 89% ve manner. Aviaon Strategy does not ZRH 100% 100% 100% 100% 100% 100% 82% shy away from crical analysis, and takes a global perspecve — with balanced cover- SKYTEAM age of the European, American and Asian JFK ATL DTW MSP SLC TOTAL ATLANTIC markets. CDG 75% 100% 100% 100% 100% 67% AMS 100% 100% 100% 100% 100% 88% Publisher: FCO 83% 100% 100% 55% Keith McMullan ONEWORLD James Halstead JFK ORD MIA DFW LAX PHL TOTAL ATLANTIC LHR 59% 61% 73% 100% 53% 84% 56% Editorial Team MAD 63% 100% 81% 100% 100% 100% 78% DUB 79% 100% 100% 71% Keith McMullan [email protected] Source: OAG, May 2015 Notes: North Atlanc includes hub to hub and all other routes to/from the hub airport. James Halstead Dublin analysis assumes Aer Lingus to join oneworld JV [email protected] Rome analysis assumes Alitalia remains in Skyteam JV Tel: +44(0)207-490-4453 in 2014 averaged 15.9%; the consol- and the overall market capacity has Fax: +44(0)207-504-8298 idated US domesc market, 10.2%; increased by 2% pa. the Pacific, where ATI alliances with The risk for the US carriers, and Subscriptions: JAL/AA and ANA/UA are currently be- some of their European partners, [email protected] ing implemented, 7.4%; the finan- is that by using aeropolical acon cially stressed Lan American mar- (in which they are supported by Copyright: ket,-5.9%;andthetotalsystem,9.4%. the labour unions) to combat the Over half the $2bn improvement in Gulf carriers they may provoke a ©2015. All rights reserved the Big 3’s operang profit between regulatory backlash. The US DoJ is Aviaon Strategy Ltd 2013 and 2014 was generated by the showing signs of unease with the Registered No: 8511732 (England) North Atlanc sector. degree of consolidaon within the Registered Office: 137-149 Goswell Rd The US carriers’ economic ra- US, launching an invesgaon into London EC1V 7ET onale then becomes clearer. Their possible price and capacity collusion. VAT No: GB 162 7100 38 aim is to protect their major profit- It seems unlikely at present that ISSN 2041-4021 (Online) generator — the North Atlanc — by they will find any damning evidence maintaining “disciplined” capacity for this, but next the US DoJ could The opinions expressed in this publicaon growth which the Gulf carriers are turn to the Atlanc where it has donotnecessarilyreflecttheopinionsofthe beginning to threaten, and to stem always been unhappy about the an- editors, publisher or contributors. Every ef- the traffic loss to the Gulf carriers trust immunity afforded to former fort is made to ensure that the informaon contained in this publicaon is accurate, but from their European partners on competors. no legal reponsibility is accepted for any er- Asian, Middle East and African routes One issue might be that the aca- rors or omissions. The contents of this pub- to North America, which directly demic economic analysis which was licaon, either in whole or in part, may not impacts their joint services across the used by the US DoT to jusfy the vir- be copied, stored or reproduced in any for- mat, printed or electronic form, without the Atlanc. Over the past five years the tual mergers — “horizontal double- wrien consent of the publisher. three JVs have grown in total by 1% marginalisaon” (don’t ask). Essen- pa, the Gulf carriers have expanded ally though, the assumpon was by 20% pa but from a low base, that virtual mergers would result in 2 www.aviationstrategy.aero July/August 2015 lower fares, net of fuel and other centraon in sub markets can only nance on its hub-to-hubs, with the ex- external cost changes. Intuion and be jusfied if there is clear effecve ceponofthewellcontestedJFKmar- evidence suggest otherwise; to take inter-network compeon. ket. one example, a July 2015 survey by The table on page 2 summarises oneworld cannot achieve the CWL Soluons (a travel consultancy, the current situaon as regards same degree of dominance simply owned by Carlson Wagon Lit) ob- transatlanc hub to hub traffic flows, because its hubs at London and served that bookings on North At- showing capacity shares on routes New York are also top global des- lancJVshadjumpedfrom16%ofthe between each alliance’s Euro-hubs naons, served from numerous total in 2009 to 94% in 2014 and that and those of the partner airline in other alliance hubs, and the volume the average fare recorded for the At- North America. of Atlanc traffic at LHR, Europe’s lanc had risen by 17%, compared to Star has been able to build up to- prime O&D point, is over twice that 11% on average for all interconnen- tal dominance. All the traffic between at CDG or FRA. There is also of course tal routes. Star’s Euro-hubs and its US hubs be- the presence of a local rival, Virgin Rising fares by themselves do not longs to the JV. Connecng traffic at Atlanc: allied with Delta, this virtual necessarily point to an-compeve both ends is guaranteed to be fun- airline commands 39% of the LHR-JFK behaviour; the industry has to rao- nelled into the JV, ie onto one single market and 23% of the total LHR-US nalise to earn its cost of capital over virtual airline. market against oneworld’s 59% on the long term. But the degree of con- SkyTeamhas achievedneardomi- LHR-JFK and 56% on the total market. 9 – 12 November 2015 Investing In Airports – 9 & 10 November Airport Strategy, Finance & Jos A. Nijhuis Management – SCHIPHOL GROUP 11 & 12 November Hotel Okura, Amsterdam www.icbi-gad.com John Holland-Kaye George Casey HEATHROW AIRPORT VANTAGE AIRPORT HOLDINGS GROUP ● The Largest Community Of Global Airport Leaders Sani Şener Nicolas Notebaert TAV AIRPORTS ● Connecting Airports, VINCI AIRPORTS HOLDING Operators & Investors Catalysing Airport Finance & ● Martin Eurnekian Edward Arkwright CORPORACIÓN Development AEROPORTS DE AMÉRICA - PARIS AIRPORTS G.V. Sanjay Reddy GVK 400+ 80+ Panels, 22 Years As 100+ 50+ 50+ 40+ 150+ Senior 4 Days Of Interviews, The World’s Global Airport Airport CEOs Powerful Countries Infl uential Industry Networking Debates & Leading Operators & CFOs Investors Represented Speakers Leaders Roundtables Airport Event This year’s GAD conference is taking place in Amsterdam on 9th-12th November.