February 11, 2013 Issue No.

417
Weekly News Review Fleet & Finance Environment Marketing & Sales Labor & Airports Routes & Networks Around the World
2-3 4 4 5 7 8-9 10-11

Be Careful What You Wish For

For many U.S. airlines, a big drop in fuel prices could hurt, not help Few people disagreed when, in
2005, Deltas then-CFO said, No commercial airlines business model works at $50 to $60 a barrel for oil. Crude prices were hurtling toward $60, and Delta was hurtling toward bankruptcy. Eight years later, what is quite possibly the biggest threat to Deltas profitability? Cheap oil. No, you didnt misread that. And we didnt mistype it. Delta and its U.S. legacy competitors have so thoroughly adapted to a world of consistently pricey oil that they dont just tolerate it. They benefit from it. And after three years of solid profits that coincided with high oil prices, carriers would be wise to wish against a sharp decline in oil prices, a development that would destabilize a comfortably stable operating environment, reignite the temptation to grow capacity, empower startups, alter the logic of flight scheduling and obliterate the wisdom of buying hundreds of future-generation aircraft designed to ease the burdens of expensive fuel thats no longer a problem. The worst thing for airlines, as any airline will say, isnt expensive oil but volatile oil: consistent prices, whether high or low, at least enable airlines to match future capacity with demandand in turn extract profitable fares from consumers. But implicit in that statement was generally the understanding that although stability was paramount, stable and cheap was of course better than stable and expensive. American carriers, after years of high oil prices, have become masters at the capacity management game, so much so that theyve won control of their pricing like never beforean unlikely feat given the logic of airline pricing. Airline seats, after all, remain more or less a commodity, and airlines cant directly control pricesconsumers do. But what airlines can control and what theyve learned to controlis supply, and supply in turn does heavily influence prices. Take out enough seats and the few that remain become more valuable, able to command higher fares. Reacting by contracting, in fact, is a trend now evident in Europe too, with some signs of it in Asia as well. Put another way: the cost of oil, and hence jet fuel, dictates the fares airlines need to break even. They cant, of course, charge more than consumers are willing to pay. But they can reduce supCONTINUED ON p. 12

Net result; operating margin

*ex special items (operating margins are ex SI)

October-December 2012 (3 months)

Japan Airlines: $505m; 15% Singapore Airlines: $119m/$130m*; 3% Asiana: $20m/-$76m*; -1% Air Canada: $8m/-$6m*; 2% WestJet: $61m; 11% Copa: $87m/$89m*; 17% Finnair: $2m/$6m*; 1% Aer Lingus*: -6% Jazeera: $9m; 24% *Aer Lingus does not provide net results by quarter.

Pushing Back: Inside This Issue

American and US Airways will likely announce their longdiscussed merger this week. Thorny questions of who will get how much of the new company and who will run the new company are now resolved, according to reports, leaving just a few details (i.e., how long will AAs Tom Horton remain non-executive chairman?) to be ironed out. The creation of the worlds largest airline seems near. Japan Airlines is hardly the worlds largest airlinenor even its own countrys largest following massive contraction while in bankruptcy. But among all the airlines that have reported their Q4 operating margins so far, only Copas is better. (So too is Jazeera Airways if you count it, although much of its profit comes from leasing activities.) Singapore Airlines and Koreas Asiana are not doing nearly as well. They hope for better things to come in the new lunar year that began this past weekend. An upturn in cargo markers and capacity rationalization sure would help. In Europe, as in the U.S., a giant potential merger remains possible, although this one has gone quiet in recent weeks. But whatever happens between Lufthansa and Turkish Airlines, capacity rationalization is under way throughout Europe, demonstrated again by Finnairs unusually good results for the off-peak winter quarter. Aer Lingus tooalthough its Q4 results were in the red as usual had a good 2012. Air Canada made money last year too, while WestJet produced outstanding profits. Elsewhere, Delta has a novel new partnership with a hotel chain, Qantas is on the offensive in Asia and Iberias unions are once again threatening to strike.

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Verbulence

This business model works, even in a recession.

Aer Lingus statement in its annual results presentation

the weekly skies

Once again in the fourth quarter, Japan Airlines took its place among the worlds most profitable airlines, erasing memories of its prebankruptcy days, when it was one of the worlds most dysfunctional. But like its rival All Nippon, which is now quite a bit larger by total revenues, JAL is moving in the wrong directionoperating margin was an excellent 15% last quarter but below the 18% it earned in Q4 of 2011. Net profit last quarter was $505m. Revenues inched up 1% y/y while operating costs rose 3%that was on 1% more ASK capacitywith fuel outlays up 5%. Both outbound revenues and cost items like fuel are pressured by the now-falling value of the Japanese yen, whose rise played a giant role in the success of all Japanese airlines in the past three years. The falling yen is a hot topic among economists and an even hotter topic among airlines like JAL, which hope that its drawbacks will at least be tempered by an expected boost to the Japanese economy, particularly its exports. JAL, like ANA, faced other worries too last quarter, including a roughly $50m hit from falling demand on China routes due to political tensions between the countriesload factor on China routes was a paltry 52%. It also lost another $8m this quarter due to the grounding of its B787s, which resulted in more than 7,000 flight cancellations and disrupted its future network plansit was forced to postpone its planned route launch to Helsinki, for example. In addition, maintenance and depreciation costs have spiked in recent quarters. And longer term, JAL faces the uncomfortable demographic reality of Japans shrinking and aging population. Yet management is optimistic. In fact, it raised its profit forecast for the full fiscal year that ends next month, citing robust demand on North American, ASEAN and even European routes. It also cited favorable fuel hedges. JAL, despite now being smaller overall than ANA, is still larger internationally in terms of total revenue. And just 56% of its passenger revenues come from domestic routes, compared to 66% for ANA. Also on the international front, JAL is working closely with joint venture partners British Airways and American (which could soon be run by US Airways management), cultivating more North America-toAsia connecting traffic through Tokyo and growing capacity to North America and within Asia. China traffic is recovering, and thus far most B787 routes have remained in operation with substitute B777s and B767s. Domestically, meanwhile, JAL is offering more premium seats and defending against LCCs with Jetstar Japan, a joint venture with Qantas. To be sure, the weaker yen will prove challenging. But this is, after all, an airline that produced a mammoth $2.3b net profit for all of 2012, together with a remarkably high 16% operating margin. Singapore Airlines, to put it mildly, did not do so well. Its net profit for the calendar fourth quartera peak period in the ASEAN region was $119m, or $130m ex special items, with operating margin at just 4%. For the full year, net profit and operating margin were just $245m ($259m ex items) and 2%, respectively. Not that this is shameful. But those are not the results one would expect from an airline that for decades earned among the industrys best profit margins. Whereas the first three years of the current decade have been exceptionally kind to carriers like Japan Airlines and Delta, theyve been particularly unkind to Singapore Airlines. A big reason: a tremendous increase in competitionfrom low-cost carriers, from Gulf carriers, from Indonesian carriers, from Chinese carriers and from restructured carriers like JAL. Sure enough, passenger yields fell another 6% y/y last quarter. Even more hurtful last quarter was a depressed freight market, which led to a $26m loss for the large cargo operation. Overall, revenues declined slightly y/y, and operating costs rose slightly. Fuel costs fell 1% thanks to hedges and a strong currency, even as ASM capacity increased 5%. Singapore Airlines also faces higher labor costs, some overstaffing at its mainline operation and some additional revenue weakness from generating ticket sales in markets with weak currencies. So whats it doing to restore its lost glory? For one, its growing SilkAir, which earned a $28m profit in calendar Q4 after expanding capacity 19%China, ASEAN and India are all big targets. A new low-fare longhaul unit called Scoot, operating with older B777s, is also expanding. So is Tiger Airways, which Singapore Airlines partly owns. And fortunately, the companys maintenance unit still makes good moneya $26m profit last quarter. Singapore Airlines itself is boosting frequencies to Adelaide, Melbourne, Fukuoka, Osaka and Moscow, while ending ultra-longhaul nonstop routes to Los Angeles and Newark. Once reluctant to partner with others, its now operating joint ventures with Virgin Australia and SAS while selling its 49% stake in Virgin Atlantic to Delta for $360m. It continues to spend whats necessary to keep its premium products best in class and has a sizeable order book for A330-300s, A350900s and B787-9s. At the moment, Singapore Airlines operates about 100 passenger planes, nearly all of them A380s, B777s and A330300s. That doesnt include SilkAirs 22 A320family planes, Scoots four B777s and cargos 12 B747s. One interesting question for Singapore Airlines: is the looming Qantas-Emirates joint venture an opportunity or a threat? On one hand, it will compete more ably for AustralasiaEurope connecting traffic than Qantas and British Airways ever could. On the other hand, BA and Qantas are closing their Singapore hub and, in doing so, slashing nonstop capacity to cities like London while completely eliminating

2
Frankfurt service. That could mean more high yielding nonstop corporate traffic for Singapore Airlines. Koreas Asiana posted a $20m Q4 net profit but only thanks to one-time forex gains. Exclude those and it really lost $76m. Whats more, its operating margin was negative 1%, down from positive 4% a year earlier. Revenues were up 2% and operating costs were up 5%, the latter inflated by a 12% rise in fuel outlays despite a strengthening local currency. And for all of 2012? The results were also disappointing. Asianas official net profit of $79m was really a $13m net loss ex items, with operating margin falling to 3% from 7% in 2011. Although operating results for both the quarter and year were similar to those of its archrival Korean Air, Asianas problems seemed less rooted in cargo weakness. In fact, its Q4 cargo revenue was up 8% y/y on 9% more ATK capacity, while international passenger revenues were up just 1% on 8% more ASK capacity. Indeed, international passenger yields dropped 8%, driven mostly by weakness on Japan routes. Thats because fewer Japanese tour groups came to KoreaAsiana blamed Japan-Korea political tensionsand the weaker yen depressed the number of overall Japanese travelers visiting Korea and connecting via Seoul. On the other hand, the weaker yen drove a 35% increase in outbound Korean demand to Japan, while China and ASEAN routes were strong. The ASEAN region, in fact, was the fastest growing passenger market. For 2013, Asiana is aiming for a 6% operating margin on 8% capacity growth, 12% revenue growth and 9% RPK demand growth. Note that Korean Air, by contrast, is expanding capacity far less aggressively, with passenger ASKs expected to rise just 3% this year. Its expected operating margin, meanwhile, is just 5%. Turning to North America, Air Canada improved its Q4 operating margin to positive 2% from negative 4% a year ago, boosted by a 5% y/y increase in revenues even as costs stayed where they were. Net profit was $8m, although without special items, that was really a $6m net loss. Thats still not bad for an off-peak quarter and helped full-year net profit for 2012 reach $131m, or $57m ex items, with operating margin at 3%. Again, this marked an improvement from 2011, but only a modest oneAir Canada in fact had better numbers two years ago. Like its peers south of the border, Air Canada is keeping capacity growth to a minimum, with ASMs last quarter up just 1% y/y. But its hopes rest most importantly on landmark cost-cutting deals with labor unions, deals that will also help alleviate major pension obligations over time. Air Canada also moved some regional flying to a lower cost provider, negotiated new mainte-

3
nance outsourcing arrangements and, this summer, will launch a new international LCC called Rouge. On the revenue side, hopes rest heavily with longhaul international flying, not just Rouge but just as importantly with new routes like Toronto-Seoul and Toronto-Istanbul, more capacity to China, new seating and loyalty plan offerings (see page five), a transatlantic joint venture with United and Lufthansa, the newly won right to create a transborder joint venture with United, a push to win more longhaul clients from the U.S. flying via Toronto, a new origin-and-destination revenue management system late this year, the addition of five B777300ERs with denser economy class cabins and new B787-8s still expected to start arriving next year. Sure enough, longhaul international routes, especially transatlantic and transpacific ones, did perform well last quarter. Domestic unit revenues increased substantially as well, but unfortunately, thats where the good news ends. Transborder U.S. routes were a big headache, with unit revenues falling 9% despite a boost from new bag fees. Routes to northeastern business centers like New York, Boston and Washington were especially pressured by rival capacity expansion. South American and Caribbean routes, meanwhile, also faced pricing pressures. So will lower labor costs, a new LCC and an ambitious longhaul strategy be enough to produce more than just modest profits? The pension question still hangs overhead, while other challenges include Canadas high airport costs, big bond maturities in 2015 and a relentless pounding from an airline called WestJet. That airline called WestJet, which will soon launch a sister regional airline called Encore, no longer has quite the cost advantage it did before Air Canada reworked its labor contracts. But no matter. It still did remarkably well in Q4, posting a $61m net profit and an 11% operating margin, beating its Q4 2011 figure of 8% and just barely falling short of its figure two years ago, one of the best years ever for the airline industry. It was a tremendous full year too, with 2012 net profit reaching $242m and operating margin reaching 11%, better than the 8% it achieved in 2011 andyeseven better than its 2012 figure of 9%. Wow, what a great year! CEO Gregg Saretsky exclaimed. Looking again at last quarter, revenues rose 10% y/y, operating costs rose 6% and ASM capacity rose just 3%. Revenue trends were especially strongyield pressures in saturated eastern triangle markets notwithstandingthanks to strong demand, ancillary revenues and airline partnerships. WestJet is also capturing more corporate traffic and will enhance that effort by offering new extralegroom seats, new fare bundles with three pricing brands (Econo, Flex and Plus) and Encore, whose first routes will be announced today. The turboprop unit is designed to attack

the weekly skies

Air Canadas regional markets, just as Air Canadas Rouge is designed partly to attack WestJets Caribbean and Mexico markets. Speaking of these, WestJet added seven new Caribbean/Mexico markets in 2012, not to mention New York LGA, Chicago ORD and Yukons capital Whitehorse. For all its success however, WestJet isnt resting on its laurels. Its instead initiating a $100m cost-cutting program (see page seven). In the meantime, demand remains strong, and unit revenues and margins should both expand moderately this quarter. WestJet isnt the only one lighting up the airline scoreboard. Panamas Copa is running up even higher profit margins and faces few of the intense competitive realties characterizing most of the airline business. With a strong balance sheet, a well placed hub, a supportive home government, an efficient and expanding airport facility, lowish labor costs, a close alliance with United, few direct competitors and a home economy that grew 10% last year, Copa managed an $87m Q4 net profit, or $89m ex items, and a sky-high 17% operating margin. Full year net profit was $327m, or $337m ex items, with operating margin at 18%. One small cause for concern: operating margins were several points higher in 2011, exceeding 20% for both Q4 and the full year. Last quarter, in fact, revenues rose just 18% on 22% more ASM capacity, while operating costs increased 25% on a 31% increase in fuel outlaysso costs and capacity grew more than revenue. But dont get too worked up: Copa expects operating margin for 2013 to be somewhere between 18% and 20% on less aggressive growth (just 14%). we are still more expensive than our competitors, and this problem has to be solved. In addition, maintenance costs are still higher than planned, and the companys maintenance division continues to lose money. More to the point, Finnairs turnaround, impressive though it might be, must go further to produce the kind of margins and cash flows that will ensure adequate funding for new A321s (which will start replacing B757s later this year) and A350s (after 2015). It hopes to do so by, most prominently, doubling revenues on Asia routes by 2020its latest moves in this regard are new Hanoi and Xian flights starting this summer. Still, the inescapable question about Finnairs fate is its governments willingness to sell control, perhaps to a European rival enticed by a thriving Asian network with no exposure to Gulf carriers.

Aer Lingus, a midsized European legacy carrier with a troubled home economy, seemed scripted for trouble and despair. Instead, by relentlessly cutting costs and cleverly cultivating new revenues outside Ireland, it has transformed itself into one of the industrys winners. While it did lose money last quarterit didnt provide Q4 net results, but operating margin was negative 5%it earned a $44m net profit ($77m ex items) and a solid 5% operating margin for all of 2012. That margin will likely beat most European rivals, including the Big Three. Revenues and operating costs last quarter both increased 8% y/y on 1% less capacity, with fuel outlays up 11% on a weaker euro. Airport cost inflation at Dublin and London Heathrow is another worry, but back on the revenue side, transatlantic revenues soared 20% last year on just 9% more capacity. Roughly 60% of the tickets sold on these routes are sold within the U.S. to American travelersexemplifying an escape from deEuropes Big Three airlines havent yet report- pendence on the hard-pressed Irish consumer. ed Q4 results. But evidence from smaller carri- And 40% of transatlantic passengers are coners like Finnair suggests favorable trends. nectinghighlighting efforts to position Dublin Thanks to major cost cutting, the outsourcing of as a gateway between the U.S. and the U.K. and 20 shorthaul planes to Flybe, the death and continental Europe. Aer Lingus is also boosting downsizing of various competitors, the relative U.S. traffic with new and deepening airline health of Scandinavian economies and ongoing partnershipswith United and JetBlue, for strength in Europe-Asia traffic via Helsinki, examplewhile also partnering with Air CanaFinnair reported a rare Q4 profit. It was just da and selling a small stake in itself to Etihad. $2m, or $6m ex special items, and operating No wonder it feels confident enough to grow margin was just 1%. But again, any profit is a international capacity 13% this year. Retail good profit in the Finnish winter. One year revenues are rising too. And its providing outearlier, in fact, Finnairs Q4 operating margin sourced flying for others, including tour operawas negative 5%. And one year before that, in tors in the winter and Virgin Atlantic on shortglorious 2010, it was negative 1%. For the full haul U.K. routes. Better yet, forward demand year, net profit was $17m, although this was appears very, very strong. But the big quesreally a $6m net loss ex special items. But oper- tion is whether Ryanair will win its latest battle ating margin was positive 2%, its highest figure to buy control of Aer Lingus, contingent on an since reaching 4% in 2007. Last quarter, reveimminent ruling by Europes competition regunues rose 6% y/y, but operating costs were flat lators. Aer Lingus itself opposes the takeover even as ASK capacity rose 4% and fuel outlays it is so bad for the consumerand mocked spiked 13%. Unit costs ex fuel, impressively, Ryanairs attempt to offer remedies by transferplummeted 9%. Nevertheless, Finnairs outring routes to Flybe, an airline thats burned going CEO insists that [on] personnel costs, through all of its equity in the last three years.
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fleet, finance & environment

The Weekly Skies
CONTINUED FROM p. 3

Fleet Sheet
Aircraft Developments

Abu Dhabis Etihad, the smallest of the Gulfs Big Three but growing no less furi Air Lease Corp. (ALC), the firm owned by ILFC founder ously, said it earned a $42m net profit in 2012, up from just $14m in 2011. The carriSteven Udvar-Hzy, demonstrated its confidence in the er is wholly owned by its government and has no publicly traded shares, meaning it A350 by ordering 25 of them. Twenty of these will be has no obligation to report results. But it does so perhaps to refute critics who ques-900s, the first model Airbus will build, which will enter tion its commercial viability. Operating margin for the year was 4%, equal to 2011s service next year based on current plans. The other five figure as revenues and operating costs both increased 17% on 20% more ASK capaciorders will be -1000s, a larger variant. ALC also took opty. Etihad is perhaps most notable for buying stakes in one airline after another: Air tions for another five -1000s. It concurrently firmed opBerlin, Air Seychelles, Virgin Australia, Aer Lingus and soon, perhaps, Indias Jet tions for 14 A321-NEOs, giving it 50 firm orders for NEOAirways. CEO Paul Hogan acknowledged advanced talks with Jet but dismissed, on family aircraft. the other hand, any notion of interest in buying part of Alitalia. Etihad does of course, Turkish Airlines, one of the worlds fastest growing carrihave a codeshare partnership with Alitalia and now another with its partner Air ers, added to its aircraft order book by buying two addiFrance/KLM too. Back on the topic of equity stakes, meanwhile, Hogan brushed off tional A330-300s from Airbus. It now has 38 A330s on comparisons to the old Swissair strategy of buying pieces of multiple airlines, a stratfirm order. It also arranged to take three options for the egy that proved disastrous. Etihad, he saidunlike Swissairis not taking control of plane. Partly because of B787 and A350 delays, and mostany airlines, just buying minority stakes, a lower-risk proposition. ly because its a machine with good economics in its own right, the A330especially the -300remains one of the Kuwaits Jazeera Airways, although with just seven A320s in passenger service, had worlds most popular widebody planes, so much so that another extremely strong quarter, earning $9m from October to December, and a Airbus is upgrading its payload and range capabilities. stunning 24% operating margin. Its full-year numbers were even more impressive: a Another week, and Boeings B787s remain on the ground $50m net profit and a 30% operating margin. But keep in mind that only 76% of rather than in the air. That means Norwegian, for one, Jazeeras revenues and 59% of its profits come from scheduled air servicethe rest might not get its first units in late April after all. Boeing comes from leasing out 12 A320s to other airlines. alerted the carrier to a possible delay, though Norwegian Indias Kingfisher remains an entity still hopeful that it will fly again. But in the meantime, it lost $140m in calendar Q4 as revenues were zero but bills for fixed costs kept coming. Maybe, as Andrea Bocelli once suggested, its time to say good-bye. insists flights to New York and Bangkok will launch in late May/early June as planned. If necessary, it will lease replacement airplanes for the weeks or months before its B787s arrive.

SkyMoney
Airline Finance
An American-US Airways merger announcement will likely, finally, come this week. Various reports have said the boards of both airlines are planning to meet and vote on the matter sometime this week. US Airways CEO Doug Parker seems poised to run the combined airline, with Americans Tom Horton temporarily serving as non-executive chairman. Passenger unit revenues continued to show y/y growth last month, highlighted by figures published by Delta (January PRASM up approximately 6%), United (3% to 4%), American (3%), US Airways (3%) and Southwest (2%). Delta, more specifically, said its revenue strength stemmed from corporate revenue gains, improved transatlantic performance and capacity discipline. And American, more specifically, cited strong improvements on domestic and transatlantic routes. Europes low-fare airlines, represented by their advocacy group ELFAA, called on the European Commission to staunch the flow of illegal state aid to SAS. ELFAA accused the airline of unlawfully benefitting from a $500m emergency credit line granted by banks but guaranteed by Scandinavian governments. ELFAAs 10 members are Ryanair, easyJet, Vueling, Norwegian, Flybe, Jet2.com, SverigeFlyg, Transavia, Volotea, and Wizz Air.

JetGreen

Environment, Conservation & Fuel

Its been a tough few weeks for defenders of the airline
industrys environmental record. First, there was the dubious claim that airlines pocketed windfall profits as a result of the E.U. stopping the clock in applying its Emissions Trading System to non-E.U. airlines. Next, U.S. President Barack Obama mentioned climate changemore loudly than usualin his inauguration speech, which led to some grim conversation in the media about the grave topic of climate change. Thats never a good thing for an industry that literally runs on fossil fuel, and sure enough airlines took some flak. The New York Times science reporter wrote a column under the headline Your Biggest Sin May Be Air Travel. Ouch. And then The Economist piled on with, Airline Emissions: A business travelers footprint, in which the editors, incidentally, expressed a lack of confidence that the International Civil Aviation Organization (ICAO) will come up with a global plan to significantly reduce airline emissions. Further evidence that airlines cant catch a break lately: both articles referenced aviations portion of the worlds carbon footprint as 5%, more than double the 2% figure thats usually applied to aviations greenhouse gas contribution.

Ugh: Fastjet is already running into legal tussels. The new African LCC, backed by easyJet founder Stelios Haji-Ioannou, got into the market by buying a company called Lonrho Aviation, which ran three small airline unitsone based in Angola, one based in Ghana and one based in Tanzania. The Tanzania operation is now British Airways, meanwhile, grabbed some good attention marketed with the Fastjet brand using A319s and an easyJet-like business model. on the environmental front as it signed on last week with But the problem: in Angola and Ghana, operations still use the licensed brand the Leaders of Sustainable Biofuels, a group of companies Fly540, and the owner of that brand (Five Forty Aviation) has suspended the licensseeking to accelerate development of advanced or ing agreement, alleging failure to pay licensing fees and failure to provide critical second-generation biofuels in Europe. The other six sigsafety reports. FastJet, which strongly denies the allegations, currently flies three natories are biomass energy companies, with BA being the Fly540-branded planes in Angola and two in Ghana. It flew two planes using the only transportation company. Fly540 brand in Tanzania until November 2012.

5 AirBuzz

marketing & sales

The Backend Sales, Distribution, Tourism & Corporate Travel

Marketing, Price, Promotion & Alliances

Airline/hotel loyalty partnerships in general are nothing new. Expedia, the worlds largest online travel retailer, grew its revenue from airline But a new one between Delta and Starwood Hotels, which tickets by 10% y/y in Q4, but partly thanks to the acquisition of a smaller rival owns nine hotel brands including Westin and Sheraton, is called VIA Travel. The number of tickets sold increased 12%, and average more deeply integrated than any other in memory. Most intriairfares were up 2%. But Expedias revenue per ticket still fell 2% because of guingly, in what appears to be a first for both industries, the lower fee revenue from interline bookings. Although airline bookings generate airline and hotel group will each recognize each others memjust 8% of Expedias total revenues, selling airline tickets serves as a loss leader bers elite status. Crossover Rewards, as theyre calling it, of sorts, luring people to the website to then book higher margin products, most provides Delta platinum medallion members (what Delta notably hotels. Expedias websites attract about 50m unique visits per month, calls its elites) benefits like free in-room internet and the many to shop and book the almost 300 airlines that sell though its platforms. ability to check out as late as 4 p.m. SPG platinums, on the Expedia sites are also the only third-party websites to sell AirAsia flights. Othother hand, will get priority check-in, priority boarding and er units include Hotwire and Hotels.com, the corporate booking tool Egencia, eone free checked bag when they fly Delta. In addition to the Long in China and an affiliate network, which provides non-air content to webusual ability to accrue airline miles when staying in a hotel sites like Delta.com. Most airline bookings through Expedia are processed that part isnt novelDelta medallions will earn bonus miles through the Sabre GDS (although it uses Travelport and Amadeus in some caswhen they stay at Starwood hotels, just as Starwood elites es too), so IATAs push for changing the traditional airline-GDS relationship is will earn bonus starpoints when they fly Delta. clearly of interest. At the same time, Expedia is watching Googles efforts to attract more travel business through a Kayak-like meta-search model, while Air Canada will start offering a true premium economy class also watching Kayak itself as Pricelineperhaps Expedias toughest competiproduct on international flights starting this summertrue in torassumes control of it. Note that some big LCCs like Southwest, Ryanair the sense that seats wont merely have more legroom but also and easyJet still do not sell their tickets through Expedia, nor through any other more width, better meals and other perks like two free online travel agency for that matter. checked bags and various priority and premium amenities. Its more akin, in other words, to what carriers like Air WestJet signed a multi-year agreement with Farelogix, the distribution IT comFrance and Cathay Pacific offer rather than what U.S. carripany that will help it develop more personalized offers to customers. Farelogix, ers offer. The airline is also preparing to unveil an all-new, which works with many of the worlds airlines, is a vocal proponent of a new cabin-wide product refresh in conjunction with the arrival of distribution model in which all customerswhether shopping themselves or via its first B787s next year, and it is now adding two new elite travel agents using GDSsobtain fare and product offers that are constructed status loyalty tiers as well. Its also studying the possibility of personally for them by airlines. Thats different from how most GDS bookings expanding its program of charging for economy seats that work: GDSs construct the offer based on fares and schedules that airlines have have more legroomexit row seats, for example. passively filed with companies like ATPCO (fares) and OAG and Innovata (schedules). Some airlines are, to be sure, filing more than just fares and sched As expected, American will take advantage of relaxed reules nowtheyre filing some ancillary service offerings too. But the idea of strictions in its new pilot to codeshare on 22 more Alaska GDSs obtaining offers from within an airlines own systems just like airline Airlines routes (mostly transcon routes and Hawaii routes website shoppers do hasnt yet caught on, and its a fight IATA is now taking from the San Francisco Bay area). Alaska, in turn, will on with its New Distribution Capability (NDC) initiative. GDSs, like many of codeshare on 19 more American routes (linking the Pacific the travel management companies that use them, are wary of the idea. Northwest to Texas cities via DFW, and transcon flying to and from Los Angeles). Separately American expanded its Transavia Netherlands, a low-fare leisure airline operated for many years by codeshare relationship with the regional carrier Cape Air to KLM, hired Travelport to boost its IT capabilities. More specifically, Transavia rebuild some of its scaled-down presence between San Juan, wants to be able to easily codeshare and interline with other airlines. Puerto Rico, and other points in the Caribbean. SriLankan Airlines, as it prepares to join oneworld, will convert many of its The large but struggling travel conglomerate Thomas Cook, crucial IT functionsincluding its reservation systemto the Amadeus Altea now under new management, will merge three of its airline platform. It will be the first airline in the Indian subcontinent to use Altea, altunits: Thomas Cook U.K., Thomas Cook Belgium and Conhough hardly the first worldwide. In fact, more than 120 airlines use it, includdor in Germany. In an investor update last week, the compaing recent converts Singapore Airlines and Cathay Pacific. More than half of ny added that business is improving with robust winter and oneworlds members use it too, including (along with Cathay) BA/Iberia, summer bookings. Qantas, Air Berlin, Finnair, LAN and Royal Jordanian. Also joining SriLan Alitalias Air One unit is allowing its customers to book kan in converting to Altea, by the way, is its sister airline Minhin Lanka. summertime flights without paying for them until 30 days prior to departure if they pay a non-refundable 15 ($20) fee. JetBlues VP of sales and revenue management Dennis Corrigan, in an interview with Business Travel News, explains the carriers campaign to win corpoSo someone can book a flight for, say, July and cancel by rate contracts, especially in Boston. To do so, its offering flat fares at a disJune without penalty, save for that 15 fee. count in exchange for certain commitmentsbuying a certain number of tickets A massive winter storm in the northeastern U.S. caused more perhaps, or reaching certain revenue targets. JetBlue is finding it easier to atthan 5,000 cancellations late in the week, according to tract Boston-based companies in particular as it adds big corporate routes like FlightAware data. JetBlue, with large hubs at both Boston Dallas DFW and Philadelphia, and as it adds a new elite tier to its loyalty plan (the most affected airport) and New York JFK, was hardest and new high-speed Wi-Fi capability to its aircraft cabins. JetBlue admits, howhit. But airlines were surely glad the storm hit last week, ever, that some accounts are hard to penetrate because it doesnt offer longhaul when flights are still rather empty, rather than even a week international service and isnt an alliance member. To these companies it essenlaterthe upcoming Presidents Day holiday weekend in the tially says: work with us and well save you so much money on domestic routes U.S.when demand begins to pick up as spring approaches. that even if you have to pay rack rate for international, itll still be worth it.

trends by the numbers

The Worlds Fastest Growing Airports in 2012
Ranked by the number of additional seats scheduled in 2012 vs. 2011 (source: Diio Mi)
6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0
East Asian airports, shown in black, dominate the list of fast growing airports, fueled by economic growth and LCC expansion. Jakarta leads the way in the region, but all of East Asia is enjoying a boomthe ASEAN region, all areas of greater China, neighboring Korea and even Japan thanks to new LCCs and new airport capacity. But the grand master of growth is none other than Istanbul, spearheaded by the remarkable expansion of Turkish Airlines. Mexico City, interestingly, is the champion of the Americas, courtesy of Aeromexico and LCCs filling the Mexicana gap. In the U.S. San Francisco tops the list thanks in large part to Virgin America.

The Worlds Fastest Shrinking Airports in 2012

Ranked by the decline in seats scheduled in 2012 vs. 2011 (source: Diio Mi)

0 -500,000 -1,000,000 -1,500,000 -2,000,000 -2,500,000 -3,000,000 -3,500,000 -4,000,000

Whats happening in Spain is not a recession. Its a depression, and the symptoms are clear at Madrids airport, where Iberia, easyJet and others have slashed service. Rome, Athens and other European airports (shown in red) are similarly suffering from economic catastrophe, while Damascus is suffering from an even greater catastrophethe Syrian civil war. Note also the many U.S. airports on this list, broadly symptomatic of industry-wide capacity cutting. Memphis continues to be a victim of Delta downsizing, Milwaukee longs for days when Southwest, AirTran and Frontier were fighting a three-way battle and Chicago lost many seats as American restructured in bankruptcy.

7
State of the Unions
Workforce Developments

labor & airports

Ive done this before, and Ill do this again. So says BA/Iberia CEO Willie Singapore Airlines might have lost a bit of its mojo, but SingaWalsh, speaking to Bloomberg News about his determination to make Iberia pores airport has been growing just as dynamically as ever (see profitable. That means downsizing and big job cuts, prompting flight attendpage six). So to ensure enough handling capacity in the future, ants, mechanics and airport staff to announce 15 days worth of strikes spread Changi Airport will build a fourth terminal, to be ready by 2017. over three separate five-day periods: one later this month and two next month This will enable it to process more than 80m passengers a year, (although not during the busy Easter holiday weekend, March 30-31). Thus well in excess of the 51m in handled in 2012. (Note that growth far, pilots have yet to join in on the strike threat, although they still might. So does, however, look likely to flatline for a time in 2013 as Qantas does Willie Walsh regret buying Iberia? In the Bloomberg interview, he says and British Airways unwind their joint venture and de-hub Sinno. But he does acknowledge that the Spanish economic downturn is proving gapore.) The airports busiest airlines by seats scheduled, other far more severe than anticipated at the time of the merger. than Singapore Airlines and SilkAir, are Tiger Airways, Jetstar, AirAsia, Qantas, Cathay Pacific, Emirates and Lion Air. Speaking of mergers, US Airways pilots voted yes to the memorandum of understanding governing post-merger pay and work conditionsand a Airports in mainland China willstarting in Aprilbe allowed framework for seniority integrationoriginally negotiated by American, US to charge Chinese airlines the same fees they charge foreign ones. Airways and Americans pilot union. The deal, which would be in place only Thats good for the airports themselves, some of them like Beiuntil a long-term joint collective bargaining agreement is reached, provides jing Capital and Guangzhou Baiyun with publically traded shares. ample pay hikes for US Airways pilots, although some noted less generous Its also good for foreign airlines. But its not so good for Chinese health care coverage. US Airways pilots, by the way, are still divided into airlines like Air China, China Eastern and China Southern. two bankruptcy-era contractsone for crew previously employed by America West and the other for pre-merger US Airways crew. Because of a seniority integration dispute, the two workforces were never integrated, and they never managed to jointly negotiate a more generous contractto the delight of US Airways, which enjoys lowish labor costs as a result. Now that Air Canada has less expensive labor contracts in place, WestJet feels the need to slice $100m from its cost base during the coming three yearsin other words, it wants to restore the cost advantage versus Air Canada that it previously had. It certainly wont lay off anyone, although it might offer early retirements to bring average seniority down, and it will generally look to enhance employee and asset productivity. It will boost automation with more airport kiosks and mobile platforms. It will push sales through lower cost distribution channels. Its using home-based reservation agents. It might rely more on in-house full-time workers. It hopes to improve operational reliability. And its densifying seating configurations on some of its planes.

routes & networks

Whos Flying Where

Qantas has a longhaul problem, as it freely admits. And the centerpiece of its solution is a grand alliance with Emirates. But thats not the only piece of its solution. Qantas is also Growing with Asia, the name for its strategy to cultivate business in a booming region thats economically intertwined with Australia. To do so, it will move in four steps, starting with better links to Singapore and Hong Kong, where capacity will increase 40% and 10%, respectively. It will also re-time flight schedules to foster more connections, no longer forced to fly in conjunction with onward flights to EuropeEurope flights will now be handled through Dubai instead. More specifically, Sydney-Singapore and Brisbane-Hong Kong will receive additional frequencies, although the Adelaide-Singapore and Perth-Hong Kong markets will end. Its also reducing frequencies between Perth and Singapore while exiting Frankfurt six months earlier than planned. So thats the first step. Secondly, it will upgrade its products and services on Asian routes. Thirdly, it will expand its Asian presence through cooperation with oneworld partners Japan Airlines, Cathay Pacific and Malaysia Airlines, as well as with codeshare partner Jet Airways and with Jetstar Hong Kong collaborator China Eastern. Finally, Qantas will consider new cities with its own metal starting in 2016, when it hopes to start receiving B787-9s. Markets under consideration: Beijing, Seoul, Mumbai and Tokyo Haneda. Iberia will leave Montevideo in April, part of a restructuring exercise. So that leaves the door open to Air France, which will start operating tag service to Uruguays capital as a continuation of its B777-200 flights from Paris to Buenos Aires. Air Europa, Iberias Spanish rival and a SkyTeam member like Air France, also said recently it would enter Montevideo later this year, directly from Madrid like Iberia. For Air France/KLM, the city will be its 15th in South America (see chart).

Europes South American Powers

Ranked by number of cities served (source: Diio Mi)
TAP Portugal (11 destinations): Sao Paulo, Rio, Brasilia, Belo Horizonte, Fortaleza, Natal, Recife, Porto Alegre, Salvador, Sao Paulo Campinas, Caracas Air France (9): Sao Paulo, Rio, Buenos Aires, Montevideo, Santiago, Lima, Bogota, Caracas, Cayenne Iberia (8): Sao Paulo, Rio, Buenos Aires, Santiago, Lima, Bogota, Caracas, Guayaquil KLM (6): Sao Paulo, Rio, Buenos Aires, Lima, Guayaquil, Paramaribo Air Europa (6): Buenos Aires, Salvador, Lima, Caracas, Santa Cruz, Montevideo Lufthansa (5): Sao Paulo, Rio, Buenos Aires, Bogota, Caracas Alitalia (5): Sao Paulo, Rio, Buenos Aires, Caracas, Fortaleza British Airways (3): Sao Paulo, Rio, Buenos Aires Which are the major South American Swiss (1): Sao Paulo carriers flying to Europe? TAM, LAN, Air Caraibes (1): Cayenne Avianca and Aerolineas Argentinas all

Emirates is now flying to Warsaw, the latest move in its relentless assault on European markets. That leaves Paris Orly, Oslo, Stockholm, operate a number of routes. Air China Berlin Tegel, Brussels, London Note that a number of tour operator-linked carriers like Condor and Singapore Airlines also fly from Stansted and Helsinki as the busiest and Air Italy operate scheduled flights to South American as well. Spain to Sao Paulo. airports in Europe it doesnt yet serve. Notice how Scandinavia, despite its rather healthy economies, doesnt seem to interest Emirates much relative to other sub-regions (though it does serve Copenhagen). AirAsia Japan will expand its low-fare presence in the worlds third largest economy. Next month it will launch flights from Nagoya Chubu, first to Fukuoka and then to Sapporo the following month.

Delta won final DOT approval to fly from Seattle to Tokyos conveniently located Haneda airport, which currently has just a handful of longhaul international flights. Delta originally began Haneda service from Detroit but later decided that Seattle would work better. Among other issues, Detroit connections were poorly timed because of restrictions regarding when longhaul flights can operate from Haneda. At Seattle, on the other hand, connections (mostly with partner Alaska Airlines) will work well. Also unlike Detroit, the shorter Seattle-Tokyo route requires only one aircrafta small and cheap-to-own B767-300ER, no less. In other words, Seattle offers lower risk and higher rewards. Flights will begin in June. Delta already flies from Seattle to Tokyos Narita airport as well as to Osaka, Beijing andalso starting in JuneShanghai. Virgin America is based in San Francisco, where it has helped make the local airport one of the worlds fastest growing (see page six). But now its adding a flightto Los Angelesfrom San Jose in Silicon Valley, just down the road from Who We Are and How to Reach Us Editorial inquiries San Francisco International. Never mind that Jay Shabat, Publisher Airline Weekly is a product of Airline Weekly Southwest flies that same route 10 times a day, jayshabat@airlineweekly.com Corp., an independent company of journalists and American six times a day, Alaska three times a former industry professionals with a shared interest Media inquiries day and United twice a day. Virgin will fly it in commercial passenger aviation worldwide. AirSeth Kaplan, Managing Partner four times per day and points out that it will be line Weekly is a subscriber-based publication and skaplan@airlineweekly.com the only one offering a true first-class product does not accept advertising from airlines. Editorial Subscriptions and advertising on the route. (What kind of revenue premiums policy forbids staff members from owning stock or Jason Cottrell, Marketing Manager is will get for its lovely first-class product on a any other stake in airlines. jcottrell@airlineweekly.com 308-mile flight is another matter.) After five Pricing years of losing money, Virgin America plans to Individual annual subscriptions (48 issues) are dramatically curtail its growth this year, though 746 NE 7th Avenue, Fort Lauderdale, FL 33304, USA
$695; multiple-reader discounts and enterprise licenses are available.
+1 954 524 8855 airlineweekly.com

CONTINUED ON p. 9

routes & networks

Whos Flying Where

CONTINUED ON p. 8

not before adding Newark flights in April, followed by these new San Jose flights in May. By then it will have a network of 21 cities. It currently has 52 aircraft (a mix of A319s and A320s). Alaska Airlines is working with the FAA for clearance to fly from Paine Field in Everett, Wash., outside of Seattle. But not because it really wants to. On the contrary, its move is clearly a warning to Allegiant or any other potential rivals that if they were to enter Paine Field, Alaska is ready and able to retaliate. It even named the markets it would serve: Honolulu, Maui, Las Vegas and Portland the first year, and Los Angeles, Phoenix and San Diego thereafter. To further deter any challengers, Alaska notes that Paine Field doesnt even have an adequate passenger terminal. Grand Rapids, a city in Michigan, will be the latest market in which AirTran-branded serviceto Chicago MDW, Baltimore BWI and Orlandowill convert to Southwest. And in conjunction with that milestone, new service to Denver and St. Louis will start. On the other hand, it will end Saturday-only Grand Rapids to Tampa flights. Elsewhere in Michigan, Southwest will also take over for AirTran in Flint, where new Las Vegas service will join existing service to Tampa, Orlando and Baltimore BWI. Memphis, Tenn., where AirTran serves just Atlanta, will keep AirTran-branded service for now but will get some new routes: Chicago MDW, Baltimore BWI and Orlando. Ethiopian, as it waits for its B787s to clear again for take-off, appears to be planning an Asian offensive. According to Airline Route, the fastexpanding carrier is looking to serve Manila, Seoul ICN and Ho Chi Minh City later this year. The LCC SpiceJet has two new destinations on offer from its home city Delhi: Allahbad and Dharamsala. Its also offering new connections from Chennai to Mysore, and from Bangalore to Mysore and Pondicherry. Airlines are always eager to chase the oil, and nowhere is oil flowing more spectacularly than in North Dakota (see graph). So United (from Denver) and Delta (from Minneapolis) both announced new flights to Dickinson, not far from the Bakken oil fields and site of a new refinery under construction. Fortunately, yields to markets like these are high, which makes for good use of 50-seat regional jets that have high unit costs.

Boom Towns
120% 100% 80% 60% 40% 20% 0% Williston

At U.S. airports overall, scheduled departing seats will be up less than 1% this summer. What about at airports in North Dakota? (Source: Diio Mi) North Dakotas fastest growing airports, ranked by seats scheduled for August 2013 vs. August 2012. (Yes, Williston really is up 110% y/y.)

Grand Forks

Dickinson

Fargo

Minot

markets
Airline United Delta American US Airways Southwest Alaska JetBlue Virgin America Hawaiian Spirit Allegiant SkyWest Republic/Frontier Air Canada WestJet Aeromexico LAN/TAM Gol Copa AviancaTaca Emirates Air Arabia Turkish Airlines Kenya Airways South African Air. Jet Airways Aeroflot Crude oil futures
(WTI, for delivery next month; source New York Mercantile exchange)

10
A Look at the Worlds Airlines, Including Endweek Equity Prices

Around the World

Share Price 26.31 14.62 1.46 14.75 11.64 48.67 5.92

Change from last week

Change from last year

Comment Boasting loudly of its improved punctuality; more than 80% of flights on time in January Loves to be seen with celebrities: hosted a pre-Grammy party in Los Angeles on Friday
US Airways deal would still leave it weak in Asia; would only serve Tokyo, Beijing, Shanghai

9% 6% 17% 4% 4% 5% 2%

11% 34% 143% 67% 21% 31% 1%

Would switch from Star to oneworld; UA/Cont. & Delta/NW involved no alliance switches Will make a big Atlanta-related announcement Tuesday, according to Atl. Business Chronicle Sold 54% of its tickets through its website last year; wants to increase that a few points Passengers will be able to use inflight Wi-Fi for free, for at least the first year Will this be the year it manages to do an initial public share offering (IPO) Upcoming Auckland flights offer attractive connections to and from U.S. mainland Ended 2012 with 45 planes; will end 2013 with 54 and 2015 with 71
Jan. PRASM fell 11% y/y but more meaningfully, total RASM fell just 3-4%; ASMs up 15%

(not publicly traded) 5.80 19.51 78.12 12.71 8.89 2.32 21.39 17.36 17.71 6.99 102.91 4425 4% 2% 4% -1% 4% -5% -3% -5% -4% -4% -7% 0% -4% 7% 45% -4% 51% 111% 60% -29% -11% -4% 44% 9%

Has crew bases in 15 different cities, plus maintenance bases in eight cities Still trying to find a buyer for Frontier, which cut ASM capacity 25% y/y last month Mentions the world pension 110 times in its Q4/year-end 2012 results report Says costs are still 10% to 15% below those at Air Canada
LCC rivals Volaris and Interjet both arrange sale-leaseback deals with GECAS for new A320s

Currently the second most valuable airline in the world by market cap behind only Air China Pushing ahead with plan to sell shares in its Smiles frequent flier program Plans to add seven new B737-800s this year; not interested in adding more -700s or E190s Venezuela devaluing its currency again, the fifth time in a decade; cold worsen inflation The second largest buyer of A350s after Qatar Airways; Airbus has 617 A350 orders in total Grew traffic 13% in 2012, to more than 5m passengers
Still operating Anadolujet unit but only domestically now Nigerias Arik Air marketing connections from NY JFK to cities throughout Africa via Lagos

(not publicly traded) 0.89 6.60 10.75 0% 1% 1% 36% 150% -42%

(not publicly traded) 592 133.72 $96 -5% 8% -2% 82% 8% -3%

IATA to hold its annual general meeting in Cape Town this June Plans to grow capacity by about 10% to 12% in the coming fiscal year that begins in April
Will form a Russian maintenance joint venture with Switzerlands SR Technics

WTI oil prices, depressed because so much of it is sitting in storage tanks in Oklahoma without the proper infrastructure to get it to markets, fell last week. But Brent prices, currently more relevant to airlines, rose to $119, the highest level since May.
Some stocks traded on multiple exchanges; not intended for trading purposes

11
A ROUND TH E WORLD Around the World
Airline Lufthansa Air France/KLM BA/Iberia SAS Alitalia Finnair Aer Lingus Virgin Atlantic easyJet Ryanair Air Berlin Norwegian Vueling Aegean Japan Airlines All Nippon Korean Air Cathay Pacific Air China China Eastern China Southern Singapore Airlines Malaysia Airlines AirAsia Thai Airways Cebu Pacific Qantas Virgin Australia Air New Zealand Share Price 14.82 8.28 219 13.15
Change from last week Change from last year

markets
Comment Security concerns compel Lufthansa and Austrian to suspend service to Tripoli in Libya Reports financial results Feb. 22, BA/Iberia goes Feb. 28; Lufthansa goes March 14
Premium RPKs up 3% y/y in Jan.; BA seeing continued firmness; Iberia business still weak

A LOOK AT THE WORLDS AIRLINES, INCLUDING ENDWEEK EQUITY PRICES

A Look at the Worlds Airlines, Including Endweek Equity Prices

0% 1% 2% -4%

39% 70% 23% 59%

Forex adjusted RASK fell 4% y/y in Dec.; blamed on holiday date shift; Says Jan. will be up Suspended regional outsourcing to Romanias Carpatair after safety scare on ATR flight Will be the first airline in Europe to fly A350s (in late 2015, according to current plans) Premium cabin generated 22% of its total longhaul revenues last year Virgin, BA, Ryanair and easyJet hire PwC to study the APDs economic impact Newest route from London Southend: Edinburgh, which starts in May Passenger counts declined 1% y/y in Jan.; grounded 80 planes after busy Christmas season Cut ASK capacity 10% y/y in January; says it has eliminated many unprofitable flights Unit revenues rose 3% y/y in January despite 24% more ASK capacity; driven by yield gains Marketing its punctuality: in 2012, more than 90% of its Barcelona flights departed on time Fellow Star Alliance member LOT Polish hires a new CEO; job number one: survival Domestic load factors still just 65%; an opportunity to stimulate traffic with lower prices? Configures its B787s with just 158 seats, 31 fewer than Ryanair puts on its B737-800s Partner Delta exiting the Tokyo-Seoul ICN route; flown by Korean plus six other airlines Adding a fifth daily frequency between Hong Kong and London Heathrow In 2012, China surpassed the U.S. as the largest trading nation by value of imports/exports Jetstar Hong Kong, as it awaits regulatory clearance, appoints a CEO Hired Aviareps to boost its marketing and sales presence in Latin America Rival Garuda, whose only Euro. city is Amsterdam (via Abu Dhabi), plans to add Lon. LGW In Europe and the U.S., most LCCs are growing slowly if at all; not so in Asia
AirAsia X offering child-free quiet zone seating for a fee, of course

(not publicly traded) 3.11 1.37 0% 7% 25% 47%

(not publicly traded) 981 5.74 1.93 176.70 7.63 2.48 4390 193 44000 15.02 6.84 3.54 4.58 6.58 0.69 2.66 22.70 67.15 1.59 0.43 1.02 2% 1% 5% 3% -5% 5% 16% 7% -1% 0% 3% -2% 1% -1% 0% -4% -2% 7% 3% 1% 2% 114% 37% -19% 120% 46% 85% x -19% -23% -4% 6% 16% 11% 1% -56% -30% -14% -9% 0% 23% 42%

AirAsia says its considering JVs in China, India and Myanmar but nothing imminent (WSJ) 52% of its ASK capacity was international last year, same as in 2011 Still expects its first B787, to be flown by Jetstar, to arrive in August
Australian competition regulator clearly concerned about impact of Virgin-Tiger JV

Stock has outperformed that of Australias two major airlines during the past year

Some stocks traded on multiple exchanges; not intended for trading purposes

cover story
Cheap Fuel, Not Cool: Big U.S. airlines would love a steep drop in fuel prices. Or would they?
CONTINUED FROM p. 1

12
policed its capacity growth: to the whole industrys benefit, it recently and dramatically shifted from growing by double digits to shrinking slightly, more soberly waiting for its existing planes and routes to profit before justifying any future growth. High oil prices reward discipline and punish a lack thereof. Aside from policing young upstarts and precluding the birth of new ones, expensive oil is helpful to legacy airlines like Delta, United and American for another reason: It masks their unit cost disadvantages versus their low-cost rivals. All airlines want to keep their costs low and their revenues high. And almost all legacy airlines have both higher unit costs and higher unit revenues than their low-cost competitors. Their success, then, depends on whether their unit revenue advantage is greater than their unit cost disadvantage. Fuel costs, more than anything else, determine which differential will be greater andto a surprising degreewhich kind of carrier will be more profitable. Thats because low-cost carriers get their cost advantage thanks to nonfuel costs: employees who either earn less or are at least more productive, aircraft with little ground time and thus high utilization and so forth. Every airline, on the other hand, pays roughly the same amount for fuel. So when fuel is cheap, the non-fuel coststhose that are indeed considerably lower at LCCsmake up a greater percentage of the overall cost base, and LCCs tend to have massive cost advantages that can more than make up for their revenue disadvantages. An expensive fuel environment, on the other hand, causes non-fuel costs to make up a smaller percentage of the overall cost base. They become less important, so to speak. So legacy airlines are better equipped to win the revenue game, whereas LCCs are better equipped to win the cost game. When fuel is expensive, the revenue game is simply more winnable. Note another irony here: costs matter less in determining airline profitability when costs are highest, when the biggest cost item (fuel) is at its most expensive. This is not just theory. For all the challenges of the past decade, one useful fact is that the airline industry has experienced, and can learn from, every imaginable kind of operating environment. Perhaps no legacy carrier and LCC in the world competed as directly as Delta and the former AirTran (now a shrinking unit of Southwest), which both had their biggest hubs in Atlanta. Delta unsurprisingly always had a unit revenue advantage and a unit cost disadvantage against AirTran. Well the most expensive average fuel costs ever occurred in the second quarter of 2008, when WTI oil was working its way toward $147 per barrel (before tumbling). That quarter, yes Delta had a 30% unit cost disadvantage against AirTran, but it had an even greater 37% unit revenue advantage. Sure enough, Delta was profitable; AirTran was not. By the first quarter of 2009, in the depths of the recession, fuel costs were the cheapest they had been in many years before or since. Delta maintained its unit revenue advantage, now at just 30%. But its unit cost disadvantage was now a whopping 42%. AirTran, remember, had far lower non-fuel costs, which now mattered more. Guess which of the two airlines was profitable that quarter? Not Delta. Luckily for Delta and its legacy peers, oil has been expensive more often than it has been cheap in recent years. Is it any wonder why, for the first time in decades, Delta is consistently more profitable than Southwest? To be perfectly clear, a sudden drop in fuel prices would be a short-term windfall for all airlines, legacy and low-cost alike (hedges aside anyway), because they would find themselves paying less for fuel while operating a schedule designed for high oil prices, with customers paying high-oil-price-era fares. But in the longer term, the industry would begin expanding againrationally from an individual airlines perspective, because growth means lower unit costs, and cheaper fuel means lower breakeven fares. Marginal markets would become viable; so might marginal aircraft like 50-seat RJs, which could get a stay of execution. But with everyone thinking alike, industry-wide capacity increases would depress unit revenues, likely putting downward pressure on profitability (even though this might be great news for airports, suppliers, consumers and other key stakeholders). A newly cavalier Virgin America once again expanding rapidly in important markets, not to mention an altogether new startup airline or two, could easily tip the balance and make the industry less profitable again. To be equally clear, lower fuel prices would mean massive benefits for industrialized economies around the world, none more so than the U.S., whose automobile-dependent households would suddenly feel wealthy. And some of their newfound spending power would translate into demand for air travel. Low oil prices could also have huge geopolitical benefitsyou tell us when oil drops in price, and well tell you when despots from Ahmadinejad to Chavez will lose their grip on power, which by the way will also mean new opportunities for airlines (imagine B777-200LR service from Atlanta to Tehran). But airlines have indeed lived through every kind of environment, and U.S. legacy airlines, for their part, like this one best. So too might their legacy peers around the world as they continue pursuing the consolidation and capacity cutting that has worked so well in the U.S. Turns out, plenty of airline business models do work at $50 to $60 oil after all. More surprisingly, some of them work even better at $95.

ply so that when they essentially auction their seats through revenue management, the consumers who are willing to pay the least dont get to fly, and average fares rise. Expensive oil leads to capacity cuts, which lead to higher average fares. That might sound simple, but airlines rarely managed to achieve it in the past. Why? Largely because of fragmentation and excessive competitionwith about a dozen major U.S. airlines as recently as a decade ago, an individual airlines impact on industry capacity was rather small, and economic game theory took over. If only Airline A cut capacity, those capacity cuts would benefit Airline Bs unit revenues just as much, but Airline A would bear the full unit cost penalty of shrinking its capacity while perhaps even handing its customer to Airline B or Airline C, D, E, F or G, all of which were often competing in the same origin-and-destination markets. So Airline A didnt bother. But today? Assuming American and US Airways complete their merger, four giant airlines American, Delta, United and Southwestwill account for fully 86% of U.S. airline ASM capacity, according to an Airline Weekly analysis of Diio Mi data. Add in sizeable JetBlue and Alaska, and youre at 94%. Consolidation impacts the competitive environment in numerous ways, but in no way more important than the fact that a giant airline now does benefit significantly from its own capacity cuts. Its competitors, meanwhile, feel emboldened to make the same moves, recognizing that nearly every airline is of the same mind. That, in turn, begins to explain why cheap oil is a specific threat. All things being equal, airlines might now be agnostic about fuel prices (again, assuming they dont move rapidly in one direction or the other). But all things are rarely equal, and todays highly consolidated industry is itself the result of a decade of high oil prices. Even once-reluctant merger partners like Continental concluded consolidation was the cure for much of what ailed an excessively fragmented industry. Perhaps even more importantly, high oil prices dramatically raise barriers to entry. Which other airlines would today be part of that top 94% of ASMs had consolidation not happened? Northwest, Continental, America West and an independent US Airways. But also missing are the young airlines that died of oil inflicted wounds, or the would-be startups that never got off the drawing board because no one would finance an airline with such high oil prices. Remember Skybus? Sure, it likely would have failed no matter what. But it could have first caused a lot more damage to incumbent airlines had 2008s exorbitant fuel prices not hastened its demise. Deeperpocketed Virgin America survives, but high oil prices have likewise exposed its flaws and