Airline Leader

AIRLINE LEaDER
ISSUE 17 | APR-MAY 2013
THE STRATEGY JOURNAL FOR AIRLINE CEOS
GLOBAL AVIATION OUTLOOK 2013

Pursuing certainty in an uncertain world
Global Aviation Industry Outlook 2013: The perennial gale
Our is to aim diffe make a renc e
machine. For an industry that is so intimately connected to every aspect of daily living, from the macro-economic effects on consumer demand to the social whims of individual lifestyles, this constant reinvention is hardly a surprise, as the world undergoes a transformation in many ways unprecedented. For aviation though there is another imperative: reinventing a regulatory structure whose roots are still firmly planted in the protectionist ideals of decades ago. Disruption is an essential part of that process. Steep inroads are being made into shifting those foundations, stripping away layers of protectionism; but they are not happening uniformly, nor do they have any clear grand plan. They are messy and hard to adjust to. Consequently, to use the often-quoted Joseph Schumpeters words, the perennial gale, of creative destruction must often appear to consist entirely of destruction, at least to those at the heart of the established system. The creation is happening somewhere else, or so it often seems. According to Professor Schumpeter it was this process of industrial mutationthat incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one. Where it doesnt happen from within and there are enormous inertial forces within the airline industry the impact of having change imposed from outside can be even more painful. That pain has not been manifest until recently. Despite numerous discussions about failed airlines, the reality still is that very few legacy airlines have gone to the wall. In the US the process of destruction and recreation has been muted by the half-death of Chapter 11 reinvention. The result has been to create some very large organisations, reducing competition and perhaps only temporarily giving them a road to profitability; yet underneath not a lot seems to have changed. In Europe, where national airlines (backed by the usual nationalism) abound, the EUs relatively doctrinaire
HE IMPACt OF CONStANtLY StORMY WEAtHER IN tHE AVIAtION INDUStRY must seem to many airline executives and indeed all employees like living life inside a washing
approach to competition is gradually sorting out the least efficient, as LCCs cut a swathe through short-haul economics of the industry. But it is a very slow process, where the exceptions prove the rule. Although a number of non-flag carrier airlines have disappeared, only a handful of national airlines has gone, sometimes re-emerging under different brands. Such are the lingering forces of the old system. In Latin America, previously a bastion of protectionism, merger has become prevalent, now creating some powerful airline groupings, led by LATAM, although some markets in Central America particularly have been through the washing machine. It is in Asia, where growth abounds (and competition law and organised labour impacts can be sparse), that the greatest inroads are being made, often apparently careless of the old norms establishing cross-border joint ventures, whose only role is to undermine antediluvian ownership restrictions, creating low-cost subsidiaries and generally adopting much more pragmatic approaches to the future. Most of the older flag carriers still persist, but like elsewhere in the world, their growth prospects are constrained. Yet they are in most cases adapting to take a role in the new world through their subsidiary low-cost operations. 2012 was in many ways a watershed in terms of long-haul alliance mutation and as low cost airlines and others sought to hybridise and adapt to their ecology; 2013 promises more surprises both operationally and around the margins, where the airline product is sold. This edition of CAPAs Airline Leader offers some thoughts on the global outlook for 2013 and beyond, with creative and sometimes destructive input from our team of analysts.
PETER HARBISON EXeCUTIVe CHAIRMAN CAPA CeNTRe FOR AVIATION
Contents
APR MAY 2013
www.airlineleader.com
12 MAIN FEaTUrE
Pursuing certainty in an uncertain world
12 28 34 40 46 52
4 AIRLINE LEADER | APR-MAY 2013
Uncertainty has become the new normal and risk reduction takes on a high priority for many airlines as Europes economy stutters and the US struggles for traction.
28 SOUTHEasT Asia
Southeast Asia continues to be a region of rapid growth driven by low-cost carriers, including budget subsidiaries and affiliates of fullservice carriers.
34 SOUTH ASIA
Indian aviation is seeing signs of revival after another difficult year marked by continuing losses, a 3% decline in traffic and the exit of Kingfisher.
40 SOUTH PaCifiC
South Pacific carriers are emerging from a period of rebuilding their long-haul networks as they direct their focus to Asia and Pacific Rim.
46 NOrTH Asia
North Asia is one of few regions where most full-service airlines are growing capacity. But the carriers are now looking to complement their expansion drive with definition.
52 MIDDLE EAST
Even for a region as fast developing as the Middle East, few years could match the changes wrought during 2012.
58
58 aFrICa
Africa is poised to be the next growth story for aviation as the world turns to the continents bountiful resources, ranging from minerals to oil and water.
64
64 EASTERN EUROPE
Eastern Europe continues to be a very active region in commercial aviation, with a number of developments in 2012 indicating the ever-unpredictable transformation of the regions aviation industry.
68 WEstErn EuropE
The European airline market has a number of dividing lines. There is little growth on routes within the continent, but steady growth on long-haul.
Opinion
6 Doing more with less through Big Data and Advanced Analytics
Leading airlines have always managed to face challenges by using resources innovatively to do more with less.
74
74 nortH amErICa
North America is on the brink of reaching full maturity thanks to the planned merger between American and US Airways and the previous tie-ups among the countrys airlines.
80
80 LatIn amErICa
Latin America has been a market characterised over the last decade by rapid growth, consolidation and significantly improved profitability.
EdIToR: Peter Harbison | MaNaGING EdIToR: Susan Tran | DesIGN: Jenny Chen | SUbedIToRs: Corinne Hitching and Neha Nagpal SeNIoR ANaLYsTs: ASEAN and Latin America: Brendan Sobie; Australasia and Africa: Roeland van den Bergh; Europe: Jonathan Wober; Middle East: Simon Elsegood; North America: Lori Ranson; North Asia: Will Horton; South Asia: Liz Pinczewski DaTa: Head of Aviation Data Research: Sharon Dai; Data Research: Janet Kim AdVeRTIsING: Neisha Turner, email: nturner@centreforaviation.com
Airline Leader is published by Airline Leader Pty Ltd. Please visit the website at www.airlineleader.com or write to us at PO Box N777, Sydney NSW 2001, Australia. To notify us of a change in address or to remove your name from our mailing list, please call +61 2 9241 3200 or email airlineleader@centreforaviation.com. Airline Leader Pty Ltd. Airline Leader is printed in Singapore by Times Printers.
AIRLINE LEADER | APR-MAY 2013
OPINION
Doing more with less through Big Data and Advanced Analytics
OPINION
BY NAWAL TAnEJA
create more competitive products from last-minute low-fare email specials, to self-service checkin, to ancillary revenues, which all involved less cost and less distribution lead-time. In 2012, Qantas, faced with increasing competition from the relatively new three full-service UAE-based carriers, developed a game-changing relationship with Emirates to serve multiple destinations in Europe, Middle East and Africa with less ultra long-haul aircraft. For all these cases, competitive data, advanced network fleet, and schedule planning techniques were used to totally overhaul the networks to achieve more market share with less flying.
EADING AIRlINES HAVE AlWAYS MANAGED TO FACE CHAllENGES by using resources innovatively to do more with less. Here are some examples from the last 30 years: In the early 1980s, faced with growing competition from low-cost airlines, American Airlines figured out how to carry more passengers at lower (more competitive) fares. Resources used were the information contained in the PNR records and advanced analytical techniques, known, at the time, as yield management. In the 1990s, Northwest and KLM lacked the scale and favourable hubs to compete with the larger carriers both sides of the Atlantic. By developing the first innovative strategic alliance, they laid groundwork to carry more traffic through their smaller hubs. In the 1990s, United led a campaign to build the case for e-tickets. Even though it was a multi-year plan, e-tickets enabled more revenue power, more control over distribution with lower expense and lower distribution lead time. E-ticketing enabled airlines to
By going beyond the transactional data that they have used up to this point, with behavioural data, they can take advantage of the early stages of customers planning cycles to become more proactive...
Why do airlines need to do more with less, again now?

First, with average load factors running in the 85% zone, aircraft are really full now. Consequently, if more passengers cannot be accommodated within existing capacity, then airlines need to figure out how to get more revenue per seat. Second, given the increase in competition, be it in long-haul markets from the Gulf-based airlines or in the new regional markets from lower cost subsidiaries, airlines need to figure out how to capture more premium fare paying passengers with less relative market presence.
How can airlines face these challenges?
OPINION
One challenge for becoming a datadriven airline, even more than the investment in technology, is the change in culture needed to acquire and retain people with the appropriate skills...
1 New Data
Airlines should recognise the potential of extracting more value from their data. By going beyond the transactional data that they have used up to this point, with behavioural data, they can take advantage of the early stages of customers planning cycles to become more proactive (1) in increasing the value of current valuable customers (by delivering better experience and generating higher levels of ancillary revenue), (2) in acquiring new valuable customers (by identifying customer behaviours indicative of high value), and (3) in warding off the defection of valuable customers (again, by identifying behaviour indicative of defection and by taking appropriate action prior to defection). Generally speaking, big data can include transactional data from traditional sources (such as PNRs, FFPs, CRM), and unstructured data derived from newer sources (such as blogs, clicks on websites, emails, posts, sensors, tweets, videos, even voice data). Given that the majority of the new data is unstructured, traditional data tools and analysis, even though they have been used creatively by leading airlines, are now inadequate to handle the quantity, nature, or the speed at which the data is appearing. In this new environment, airlines need to focus their organisations, people and processes on the following activities: Monitoring and collecting Identifying, interpreting, predicting and anticipating Taking smart and timely actions Measuring and reiterating Assuming that an airline has created the environment to collect and discover their data, next steps include identifying influencers and trends and responding to them, all in real time and on a continual basis. New
sources of data, such as social media, support customer sentiment analysis to extract feelings, trends, etc social intelligence at the point they are occurring. If an airline takes months to analyse the data, then it will most likely be too late, for example, to implement service recovery.
2 New Culture
Besides the acquisition and use of Big Data, airlines will need to change culture (just as they did with the use of yield management and e-ticketing) and (1) build organisations around the new imperatives of information and analytics (including the deployment of IT staff with knowledge of businesses), and (2) design processes to maximise the value from information (faster competitors and in a more repeatable fashion than competitors). With respect to the organisation, an airline must shift the IT function from a data collection and report production centre to one that facilitates collaboration, communication and integration within all areas of the airline. Such a shift requires a different mindset, a different set of skills, and an appropriate datarelated architecture. One challenge for becoming a data-driven airline, even more than the investment in technology, is the change in culture needed to acquire and retain people with the appropriate skills as well as the identification and implementation of the appropriate processes. Many airlines already possess a lot of data (although disintegrated) and traditional analytical tools. Some have even invested in data warehousing products. However, they have not fully leveraged big data and advanced
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OPINION
Three different departments could be working with a particular passenger (lost baggage, refund, and loyalty) and yet not know that it is the same passenger.
...companies in the top third of their industry in the use of datadriven decision making were, on average, 5% more productive and 6% more profitable than their competitors.
analytics to (1) customise their value propositions with respect to the value provided to a customer and the value received from a customer, and (2) equip their customer-facing employees with the quantity, quality and timelessness of information to provide a personalised customer experience. Such a culture demands a holistic approach knowing what happened in the past, what is happening in real time and a desire to anticipate what could happen by becoming more proactive in providing options and solutions. For example: Three different departments could be working with a particular passenger (lost baggage, refund and loyalty) and yet not know that it is the same passenger. Consequently, connecting data from different areas to create a full view of this passenger may indicate future behaviour, such as defection. The use of advanced analytics would enable management to anticipate such a scenario and take appropriate action. Big data and advanced analytics can be used to integrate previously disintegrated brands. For example, many airlines
developed low-cost subsidiaries that they closed later due to cannibalisation of traffic. Big data and advanced analytics can now be used to simulate the proposed value propositions of each subsidiary of an airline and not only anticipate and predict the response, but also optimise the different value propositions. Imagine the value of customerrelated information for an airline like Singapore with four proposed subsidiaries (Singapore, Silk, Tiger and Scoot) or to Delta with equities in a growing number of airlines (such as Gol, Aeromexico and Virgin Atlantic).
3 New Analytics
Big data and advanced analytics offer many opportunities for airlines to create value, including finer customer segmentation, thus yielding more personalised products and services to accommodate the needs of not only a single behaviour of a
Research shows that personalisation can deliver ve to eight times the ROI on marketing spend and lift sales 10% or more.
HarVarD BUSiNESS REViEW BLoG NETWorK
customer, but multiple behaviours of the same customer. Airlines cannot only leverage big data and advanced analytics to derive deeper insights for passengers, but also for competitors. For example, instead of just monitoring fares offered by competitors (and often simply matching them), they need to gain insights with respect to the rationale behind the fares offered by each competitor in real time and simulate different scenarios for an optimal response. The last step would require measurements, reviews and constant iterations. Airlines can use big data to substantially improve both customer and operational processes. A recent example is PASSUR Aerospaces RightETA which leverages multidimensional data to provide airlines more accurate predictions of estimated flight arrival times verses actual arrival times. Such a datadriven tool is integral to the airline industry where every minute matters. As Josh Leibowitz, Kelly Ungerman and Maher Masri stated in a recent Harvard Business Review Blog Network regarding the retail industry, Research shows that personalisation
can deliver five to eight times the ROI on marketing spend and lift sales 10% or more. Such personalisation can differentiate an airline and therefore create an opportunity to increase margins, as well as enhance satisfaction, therefore augmenting loyalty to the brand. For example, if a customer places a phone call into an airlines call centre but does not make a reservation, or if a customer browses a website but does not book a ticket, would making a personalised offer right on the spot help? Such tactics can be easily analysed on a controlled-experimental basis. The key is to monitor the behaviour of a web browser prior to the decision to make a purchase. In the final analysis, airlines can leverage existing but underutilised behavioural data to become datadriven organisations. As Andrew McAfee and Erik Brynjolfsson stated in a recent article in Harvard Business Review, companies in the top third of their industry in the use of data-driven decision making were, on average, 5% more productive and 6% more profitable than their competitors. Thats more profit with less resources. AL
...Airlines can leverage existing but underutilised behavioural data to become data-driven organisations.
11
MAIN FEATURE
CAPA GLOBAL AVIATION INDUSTRY OUTLOOK 2013
PURSUING CERTAINTY
A compelling, but ultimately dangerous strategy
IN AN UNCERTAIN WORLD
traction. Over recent months, certain words frequently recur in airline reports to describe their outlook for the market: challenging, volatile, uncertainty are among the most popular. These are understandably in turn accompanied by corporate goals of enhancing the financial position and paying down debt, aligning capacity to demand, reducing costs and adopting more conservative fuel hedging positions, among others. In these conditions, it is hard for a company to avoid adopting behaviour which is much more cautious and short-term reactive. Analysts and shareholders want restraint, in turn influencing share prices; executives, motivated by incentives issued by their boards, want to achieve share price targets; and in many ways the market simply leaves little option but to follow the herd. Yet, aside from the lookalike profiles being created in this way, there are real dangers where all companies in an industry adopt the same approach. This is a global market undergoing transformation, even turmoil, as age old norms are challenged, as the earths aviation axis shifts eastwards and as the apparent stability of the global alliances is threatened. Change on this scale spells threats, but it also opens up new opportunities, often one-off openings. And as the established airlines line up to follow suit by being more conservative, it is the new breed, lower cost, aggressively expansive, that are moving to centre stage. The result to embed the process of decline even more rapidly for those legacy airlines unable or unwilling to be innovative. It will not lead to overnight collapse of the old regime, but it does risk locking in that progressive erosion of an earlier pre-eminence.
Three main themes stand out for CAPAs 2013 Aviation Industry Outlook: Uncertainty has become the new normal and risk reduction takes on a high priority for many airlines as Europes economy stutters and the US struggles for traction The Gulf carriers have changed the world, seemingly impervious to the pressures of most other airlines Asia is rising particularly China and will dominate within ve years. The impact may be greater and more rapid than forecasts suggest. Some of the aviation industries of fast economic growth nations, in Latin America, Eastern Europe, India and Africa are performing well , but need to consolidate their base.
NCERTAINTY HAS BECOME THE NEW NORMAL and risk reduction takes on a high priority for many airlines as Europes economy stutters and the US struggles for
13
MAIN FEATURE
The WOrlds TOp 20 airpOrTs by capaciTy Offered
SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA WeeK startinG 31-MAR-2013
The wOrld TOp 20 airlines by seaTs Offered

SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA WeeK startinG 31-MAR-2013
RanK 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 ATL PEK HND LHR DXB ORD LAX DFW HKG CDG CGK FRA SIN BKK CAN DEN JFK PVG KUL IST
AIRLINE Atlanta Hartsfield-Jackson International Airport Beijing Capital International Airport Tokyo Haneda Airport London Heathrow Airport Dubai International Airport Chicago O'Hare International Airport Los Angeles International Airport Dallas/Fort Worth International Airport Hong Kong International Airport Paris Charles De Gaulle Airport Jakarta Soekarno-Hatta International Airport Frankfurt Airport Singapore Changi Airport Bangkok Suvarnabhumi International Guangzhou Baiyun Airport Denver International Airport New York John F Kennedy International Airport Shanghai Pudong Airport Kuala Lumpur International Airport Istanbul Ataturk Airport
TOTal SEATS 2,183,726 2,068,130 1,887,497 1,774,606 1,639,176 1,534,449 1,491,895 1,445,441 1,440,997 1,421,231 1,400,299 1,394,143 1,371,158 1,237,778 1,225,526 1,176,220 1,172,450 1,154,933 1,134,217 1,125,132
RanK 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 21 DL UA AA US CZ LH FR NH AF CA U2 BA EK G3 TK JJ JL JT
AIRLINE Delta Air Lines United Airlines American Airlines US Airways Lufthansa Ryanair All Nippon Airways Air France Air China easyJet British Airways Emirates Gol Turkish Airlines TAM Airlines Japan Airlines Air Canada Lion Air Qantas Airways JetBlue Airways SAS LAN Airlines Alaska Airlines airberlin Korean Air KLM Royal Dutch Airlines Saudia
TOTal SEATS 3,802,004 3,416,483 3,170,990 2,789,021 2,199,479 1,745,538 1,639,682 1,610,091 1,498,216 1,344,527 1,307,969 1,200,528 1,104,228 1,093,811 1,089,278 983,611 965,854 962,136 916,517 856,932 775,580 725,700 703,817 680,384 670,537 613,250 591,357 589,216 588,548
WN Southwest Airlines
China Southern Airlines 1,773,387
MU China Eastern Airlines
20 AC 22 QF 23 B6 24 SK 25 LA 26 AS 27 AB 28 KE
The wOrlds regiOns by capaciTy Offered

Available SeaT KilOMeTres
SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WeeK startinG 31-MAR-2013
RegiOn Western Europe North America Northeast Asia Southeast Asia
SeaTs
RegiOn
SeaTs
Available SeaT KilOMeTres 6,952,994,901 8,479,659,891 4,342,776,504 2,713,132,154 3,012,343,498 2,546,230,465 2,936,401,340
24,289,259 46,788,764,439 22,751,781 18,416,472 9,188,309 48,734,439,761 34,868,645,952 18,617,231,378 10,537,283,992 15,958,294,027 7,701,389,819
South Asia 3,531,719 Southwest 3,132,490 Pacific Central America North Africa Lower South America Southern Africa 2,260,845 1,443,549
29 KL 30 SV
Caribbean 1,226,240 1,048,939 953,966
Eastern/Cen6,234,640 tral Europe Middle East Upper South America 5,832,132 4,763,997
The ingredients of this uncertain world are not hard to isolate: (i) The most signicant are external risks. These are uncontrollable and are potentially the most serious: a) The threat of rising fuel prices: b) A weak economy, undermining demand: and c) The (regular) black swans There are others, but the double of fuel (cost) and weak demand (revenue) are, by a large margin, the two leading things that keep most CEOs awake at night at least according to a straw poll at the 2012 IATA AGM. They are the more worrying because they are effectively outside the scope of management to control.
as underlying ticket prices are discounted, surcharges do little more than help avoid agency commissions. But either a fuel price spike or another grind upwards will create great discomfort for airlines, progressively squeezing them to reduce capacity on marginally profitable routes or to withdraw completely. Whereas in the past full-service airlines may well have persisted with ailing routes, todays heightened levels of competition are prompting a greater focus on the short term bottom line. The long term has become a luxury few airlines can afford.
(a) Fuel:
Over a year ago, prices climbed to and remained stubbornly around USD100 a barrel for Brent Crude and this despite a soft international economy and relatively weak demand for oil. According to BP.com, OECD consumption actually declined by 1.2% in 2012 to the lowest level since 1995, but overall global consumption grew marginally, by 0.7%. Uncertainty in certain politically unstable areas of the Middle East is one factor that is keeping buyers (and speculators) nervous. Instability is not unusual for the region, but there are more potential flash points than usual, as the Syrian crisis is exported and the backwash of the Arab Spring ricochets around various countries. Most expectations are for fuel prices to remain around current levels for 2013 a relatively positive scenario, given the many variables. Almost no-one is projecting a fall. Fuel surcharges have provided partial refuge to airlines, but these can only be supported against a relatively healthy economic background; also, BrenT CrUde PriceS, Mar-2012 TO Mar-2013 (USD)
SOURCE: OIL-PrIce.NeT
Todays heightened levels of competition are prompting a greater focus on the short term bottom line. The long term has become a luxury few airlines can afford.
(b) The economy:
Some observers, talking of global commercial influence, have suggested that Europe is the past, the US the present and Asia the future. This is a sweeping assessment, but there are grains of truth, as Europes economy looks firmly rooted in debt for at least several years; the US, still a massive aviation market, appears to be forging a shaky recovery, albeit heavily founded on debt and with a political melange more appropriate to a fairground. Asia meanwhile is robust and gearing up for a bigger future, even faced with a slack global economy. Europes economic uncertainty however still contains unknowns that threaten to re-emerge. Austerity is not something that the powerful and varied underlying social forces in Europe are prepared to tolerate for extended periods. And, to continue to kick the can down the road, hoping that things will eventually get better is a journey into the unknown. Waiting for time to heal the wounds may even aggravate the initial hurt. Whatever the case, there are many potential flash points, with major banks erecting barriers to protect themselves from shocks one downstream effect being to make funding and financing more difficult. At the IATA AGM in 2012, a straw poll of airline CEOs on what kept them awake at night indicated overwhelmingly that fuel prices and the economy each non-controllable were the two leading concerns, followed closely by over-capacity. The dangerous news is that there are considerable and potentially growing problems in each of these two leading concerns. Fuel prices have fastened at levels they were at when passenger demand was strong; today it is much weaker. The fact that price increases have been steady was important, avoiding the sort of quick and highly disruptive spike that occurred in 2008. The industry has managed to adjust to the increases, but often at the price of profitability, where fuel accounts typically for around 30-40% of airline costs.
115 105 95 85 Mar-12
Jul-12
Nov-12
Mar-13
15
MAIN FEATURE
ViaBiliTY THreaTS aCCOrdinG TO IATA CEOs 2012
SoUrce: CAPA CeNtre for AViatioN (proBaBility assessmeNt By CAPA)
Fuel prices Slow economic growth High taxes
P R O B A B I L I T Y
Labour costs
Over capacity
RISK
The adjustment has been painful, but possible. Capacity management and higher load factors, usually combined with higher yields, have often made continued profitability possible. This has been against a background of surprisingly strong considering economic fundamentals business sentiment. However as that skin is stretched further, the ability to withstand further fuel price increases diminishes rapidly. Where profitability depends on static capacity combined with higher load factors and yields (and a bit of non-fuel cost reduction), any decline in demand offers few levers left for airline managers to pull. Once economic winds stiffen, so yields soften and the cost/revenue margin diminishes or disappears. Cost reduction in areas where there is some control over it is an obvious place to go. There are few airlines which do not have a continuing, often brand-name catch phrase, programme to cut costs out of their businesses. For full-service, legacy airlines, that is necessary merely to keep pace with peers; it cannot significantly narrow the margin between theirs and LCC levels (unless those LCCs are hybridising, adding costs in pursuit of higher yield traffic). Frustratingly, the proportion of costs now dedicated to fuel barely makes non-fuel cost reduction worth the effort. If so much pain is expended on reducing the residue of costs by 3% or 4% (which translates
to perhaps 2% of total), the fact that a short burst in fuel prices of USD5 a barrel can neutralise that improvement is disheartening to management and staff alike. Similar problems are arising as governments actively soften their currencies by printing money. In the year to Mar-2013, the USDeuro rate has fluctuated between USD1.20 and USD1.36; the Irish dont call the euro the yoyo for no reason. Such shifts too must be covered and accounted for. Investors meanwhile vote with their feet. No airlines treasury can today afford to front analysts without a carefully worded strategy that involves very careful capital exposure and a handy cash balance. In short, the industry has been forced to improve its risk management profile. As airlines pull all the levers, only capacity reduction remains as an option to protect against losses.
PULLING ALL THE LEVERS

Most legacy airlines are actively applying all of these strategies - leaving little room for further policy adjustment if economic conditions deteriorate ACTION Hoard cash Tight capacity control Increase load factor Increase yields Exploit ancillary sales Strengthen partnerships Lease, not buy/sale and leaseback Hedge fuel and currency Fuel surcharges RISK COVERED Slower economy Competition/slow economy Downward yield pressure Revenue erosion Fare weakness Market isolation/ competition Debt commitments Short term uncertainty avoidance Offset fuel price rises
Where profitability depends on static capacity combined with higher load factors and yields (and a bit of non-fuel cost reduction), any decline in demand offers few levers left for airline managers to pull.
Most legacy airlines are actively applying all of these strategies - leaving little room for further policy adjustment
Airlines have only a limited capability to protect themselves against rising fuel prices. Hedging costs money and is really no more than a risk reduction strategy, a partial and temporary safety net. So, though many will have perhaps a third to a half of their fuel demand hedged for a year or even two, it is no longer realistically possible to buy a long term insurance policy that will protect comprehensively against the threat of prolonged price increases. Meanwhile, if oil prices were to increase another USD30, there is a real prospect that airlines will extensively reduce flying, with long-haul operations the most sensitive. Contingency route reduction plans are in place at most airlines or they should be. There are few options left. In todays more intensely competitive, pricecompetitive market, managements have become much more clinical in analysing marginal or loss-making routes, allowing selective capacity cuts: reduced frequency where possible, or complete route withdrawal where necessary, can occur quickly, as soon as bleeding begins. Given the stretch that airlines are already feeling, there is little space for absorbing more pain. If oil prices were in fact to increase to USD130, it is not hard to envisage as much as 15-20% reductions in long-haul seat offerings. This would not be evenly applied; route yield profile will be a main determinant, with the first to go the predominantly leisure routes. Changes on that scale could be devastating to some tourism-based economies that are heavily reliant on long-haul origin markets. Eventually, lower cost airline models might fill the breach in these markets, but there is no clear evidence yet that long-haul low-cost operations are effective beyond nine hours flying time. At that stage, fuel becomes such a high proportion of cost that differentials in other cost areas pale. There are exceptions to the pain scenario. Short-haul airlines with markedly lower costs LCCs and others have expanded and even flourished while the full-service airlines have stood still; on long-haul, the Gulf airlines are growing as fast as any airlines in history and, with their yield profile are probably best equipped to handle any such headwinds.
(c) and then there are the black swans:
Despite their supposed diffidence, so called black swans, or one-off unpredictable events, tend to plague the airline industry, a consequence of its pervasive and, in reverse, equally pervaded nature. Very little happens in the world that does not affect airline operations in one way or another. And because it genuinely is an airline system, a volcano in Iceland can play havoc with an airline in Australia, disrupting its schedules, stranding passengers all around the world. Anything from pandemic in China or Mexico, to terrorist threat in the US, to snowstorms in London, to the iconic butterfly in Brazil, can disrupt a complex assortment of personal and commercial interactions. Despite their surprise value, there can be little more certain than that there will be more black swans or what, in the wake of Chinas 2003 SARS near-pandemic (severe acute respiratory syndrome, which quickly spread through Asia and to Canada), CAPA once named the Constant Shock Syndrome. Just one more reason for airlines to keep their stocks of nuts topped up. The regulatory system is opening up new avenues of competition so that old market responses (chasing market share, discount pricing, adding seats etc) do not provide lasting solutions. For many airlines, change is more obdurate and more difficult to deal with. It is invisible, but everywhere. Older airlines are heavily constrained by legacy issues; SAS for example last year had to obtain the approval not only of its unions but also of its three government owners to introduce large cost savings. For them, the ability to be innovative and flexible crucial attributes in a volatile market is near impossible. Archaic regulation, with its rigid controls on ownership and entry, has also, paradoxically, made the industry artificially competitive; thats because inherent in the controls is a restraint on market exit. Aside from constraints against mergers, this no-exit effect is not typically explicit, but manifests itself in subsidy and other more subtle forms of protectionist support. The result is there are too many airlines and they cant merge. And, despite a handful of bankruptcies and exits, there are still many protective barriers to support seriously ailing flag carriers. The corollary of this should be that as regulation is removed, formally or tacitly, the level of competition is likely to diminish, at least in the mature markets and for the mature airlines. The legacy airlines are responding, typically by not expanding. 2013 is the Chinese year of the water snake. An important feature of the snakes year is saving money and being thrifty and ... in order to gain the greatest benefits from this year, you must control spending and use your talents wisely.
If oil prices were in fact to increase to USD130, it is not hard to envisage as much as 15-20% reductions in long haul seat offerings.
17
MAIN FEATURE
25%
THE AMOUNt SOUtHWEsts FAREs tHAt HAVE RIsEN sINCE tHE GFC
NO lOnGer an idenTiFier: AVeraGe lOad FaCTOrS OF SeleCTed MaJOr airlineS

SOUrCE: CAPA CENTrE FOr AVIaTION
100% 75%
An important feature of the snakes year is saving money and being thrifty and ... in order to gain the greatest benets from this year, you must control spending and use your talents wisely.
50% 25% 0%
So the second major response by established carriers, after stocking up on cash, is to hold capacity levels down, hoping better to match with demand and thereby to improve yields. In the US for example, the main legacy carriers, and the even bigger Southwest Airlines, have applied capacity restraint ever since the global financial crisis hit the thesis being that they would not sell seats which did not cover the cost of fuel. Raymond James estimates the prototype LCC Southwests fares have risen by about 25% during that time, very much in line with the full-service airlines. Capacity management and higher load factors, usually combined with higher yields, have in many cases and notably in the less competitive US market, thus helped make continued profitability possible. The result is that legacy airlines have also pushed towards higher load factors, to the extent that this is no longer a distinguishing factor between old and new (seating configurations still tend to be much denser on the newer cost-sensitive airlines, delivering lower unit seat costs - but lower average yields).
2010
Delta Air Lines Inc.
2011
AirAsia Ryanair Air France-KLM S.A Emirates
2012
Sideshows to this strategy, also aimed at yield enhancement, are: attempts to grow ancillary revenues. Thus for example, revenue from the baggage charges that US legacy airlines added in recent years have been larger than their aggregated profits. This unbundling of pricing, learned from LCCs in a different context, is spreading quietly across the world; recapturing control of distribution, designed to allow airlines to regain control of marketing from the GDSs and OTAs,
The yield prole of passengers has changed, inuencing whole range of airline strategic reactions. What appears to be a long term reduction in the proportion of premium travel is shifting not only attitudes towards aircraft conguration with many airlines reducing business and rst class seating, adding premium economy and generally reorganising their real estate but also affects route proles, on those sectors where premium is more signicantly reduced. In turn this raises the propensity on those routes for speedy withdrawal or frequency reduction. A reduction from around 9.5% of total to around 8% may not seem a major issue for airlines, but this represents some 15% of premium trafc and a much higher proportion of global revenues.
The premium traffic decline
PreMiUM PaSSenGerS aS a % OF TOTal

SOUrCE: IATA
10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0%
07 l-0 7 Ja n08 Ju l-0 8 Ja n09 Ju l-0 9 Ja n10 Ju l-1 0 Ja n11 Ju l-1 1 Ja n12 Ju l-1 2 Ja n13 Ju
Ja
n-
with the intention of de-commoditising the airline product (ie allowing more effective price/product discrimination and yield management, rather than merely selling based on price). There is still upside for many in the ancillary expansion, but the distribution battle, now made further engaging by the introduction by IATA of its New Distribution Capability (NDC), has a more doubtful future, encountering opposition from corporate groups in particular. S a CONSEQUENCE OF THIS CaPaCITY RESTRaINT, THE NEW GROWTH IS MOSTLY FROM NEW aIRLINES. Nowhere is the contrast between old and new more stark than in Asia and the Middle East; here full-service airlines are suffering from similar forces as their global peers. And their responses are in many ways similar: conservative capacity restraint and strategic route pull-backs, along with reshaping aircraft configuration thinking. PaSSenGerS % inCreaSe: leGaCieS STand STill
SoUrcE: CAPA CENTrE For AVIaTIoN
A
30% 20% 10% 0% -10%
by Japan Airlines ( Jetstar Japan) whose names also betray the parallel development in the region, which is for the leading low-cost carriers to establish cross-border JVs. The only high profile network airline to resist this trend is Cathay Pacific and it is seemingly only a matter of time before it finally concedes, as two new LCCs are planned for establishment at Hong Kong Airport, one of them another Jetstar subsidiary JV, daughter of Cathays arch-rival Qantas. Aside from these subsidiaries and JVs, it is the regions LCCs that are reaching for the stars, with mind-boggling order lists. The listed AirAsia Group has a modest 387 Airbus aircraft on order; Indonesias privately held Lion Air has 563 orders, for Airbus and Boeings; Indias IndiGo has 203, to name but three, accounting for over 1,100 between the three. All Western European airlines in aggregate have a smaller order book. Now, as European majors struggle with too-high costs on their shorthaul spokes, they too have resorted to attempting a similar form of subsidiary operation, at least in operational terms. EW PaRTNERSHIPS, GLOBaL aLLIaNCES aND CROSS-BORDER OWNERSHIP aRE CHaNGING TRaFFIC FLOWS aND HUBS. This global shift was dealt with in some detail in the Feb-Mar 2013 edition of Airline Leader (A seismic upheaval opens the way for next-generation alliances). The impact of the Emirates, Qatar and Etihad agreements in Sep/Oct-2012 have irreversibly altered the evolution of the world industry. Branded global alliances Star, SkyTeam, oneworld remain important, but the evolutionary direction has shifted towards alliances becoming much more pragmatic. This not only affects the airline industry, but goes also to the efficacy of airports and even national economies. Airport hubs will be dictated by these trends, shifting away from the traditional gateway transfer points to Gulf airports and, progressively to markets like China. As these changes are digested and their repercussions spread in 2013, the global map will look increasingly different, especially as new radial alliances take on more entrenched status, delivering enhanced profitability. In this evolution, on current trends US airlines look very likely to be sidelined, raising questions, for one thing, on their likely value as international partners in the global alliances beyond providing access to the protected US domestic market. Boeings long term forecasts, which have a habit of being remarkably reliable, have Asia-Pacific, Europe, and the Middle East regions accounting for more than 90% of widebody, long-haul aircraft demand in the 20-year forecast to 2031. Of the total, an astonishing 65% of aircraft will head to the Middle East and Asia alone. (Boeing Current Market Outlook 2012)
2010
Delta Air Lines Inc. Air France-KLM S.A
2011
AirAsia Emirates Ryanair
2012
Etihad Airways
There is one big difference in Asia though. There, a common legacy airline response is to establish a low-cost subsidiary or two to account for the parsimony market. In 2012, three new subsidiary/joint venture LCCs were established in the high cost/high yield Japanese market alone. Two of them are part owned by All Nippon Airways (Peach and AirAsia Japan) and one
65%
PERCENTAGE OF WIDEBODY ORDERS TO 2031 DESTINED TO ASIA AND THE MIDDLE EAST
19
MAIN FEATURE
A SnaPSHOT OF THe FUTUre: WHere TOMOrrOWS airCraFT are GOinG
UniTeS STaTeS: CUrrenT FleeT: 7426; OrderS: 1868 PrOJeCTed deliVerY daTeS FOr airCraFT On Order
SOURCE: CAPA - CENTRE FOR AVIATION | WeeK starting 31-MAR-2013
300
200
100
UAE: CUrrenT FleeT: 387; OrderS: 331 PrOJeCTed deliVerY daTeS FOr airCraFT On Order
75
50
25
The countries whose airlines industries are growing faster and the ones that are buying aircraft for the long-haul international markets. The graphs on these two pages illustrate broadly the direction of various national industries in the next two years and beyond. It can be no more than a general direction, as orders change, especially beyond 2014 and because a third of all aircraft operated by airlines are through lessors, where these data address only direct manufacturer orders and delivery dates. Certain features emerge clearly in focus however: The new aviation countries are expanding exponentially faster than the established world, whose orders often suggest little more than replacement; the US for example has a very elderly eet, which is increasingly sensitive both to fuel costs and growing environmental pressures; Despite the more competitive territory on short-haul markets, European and North American airlines are buying predominantly single aisle aircraft; long-haul aircraft are mostly the domain of the Gulf carriers; and The surge in growth of the Asian short-haul low-cost airline market could not be more apparent
GerManY: CUrrenT FleeT: 704; OrderS: 256 PrOJeCTed deliVerY daTeS FOr airCraFT On Order
60
40
20
20 20
20 22
747
777
737
787
A320
A330
A380
ERJ170
20 23
20 21
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 20 30 20 31 20 32 20 33
20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 20 30 20 31 20 32
767
737
777 A320
787 A330
747 A350
CARAVAN MRJ
ERJ170
A320
A330
A350
A380
737
777
787
IndOneSia: cUrrenT FleeT: 497; OrderS: 742 PrOJecTed deliVerY daTeS FOr aircraFT On Order
SOURCE: CAPA - CENTRE FOR AVIATION | WeeK startinG 31-MAR-2013
100 75 50 25 0
BraZil: cUrrenT naTiOnal FleeT: 528; OrderS: 266 PrOJecTed deliVerY daTeS FOr aircraFT On Order
40 30 20 10 0
9 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28
20 20
737
777 A330
787 CRJ
DHC6 72 SSJ
A320
ERJ170
737
777
A320
A350
72
CHINA: cUrrenT FleeT: 236; OrderS: 446 PrOJecTed deliVerY daTeS FOr aircraFT On Order
200 150 100 50 0
TUrKeY: cUrrenT FleeT: 368; OrderS: 230 PrOJecTed deliVerY daTeS FOr aircraFT On Order
40 30 20 10 0
20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 20
A320 A330 A350 737 777 787 C919 ARJ21 CRJ
737
777
A320
A330
rUSSian FederaTiOn: cUrrenT FleeT: 1,134; OrderS: 243 PrOJecTed deliVerY daTeS FOr aircraFT On Order
60
India: cUrrenT FleeT: 383; OrderS: 475 PrOJecTed deliVerY daTeS FOr aircraFT On Order
75
40
50
20
25
0
20 20 8 4 5 6 9 3 7
20 20 20 21 20 22 20 23 20 24
A320
A350
A380
777
787
747
737
SSJ
CRJ
42
A320
A330
A350
A380
777
787
737
20 25
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 22
20 21
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 22
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 18
20 14
20 15
20 16
20 19
20 13
20 21
20 17
21
MAIN FEATURE
THe BaTTle FOr COnTrOl OF PrOdUCT diSTriBUTiOn HaS COnTinUed UnaBaTed in 2012 and Will COnTinUe TO OCCUPY THe BaCKGrOUnd HeadlineS in 2013.
AViaTiOn and THe EnVirOnMenT in 2013

The environment was relegated to the back burner in late 2012 as the European Commission predictably (in retrospect) delayed implementation of its punishing threats included in its extra-territorial environmental tax and as economic pressures diverted attention. But the issue is scheduled to recapture the headlines later this year as ICAO recommences its search for a multilateral compromise at the 38th triennial Assembly of ICAO in Sep/Oct2013. ICAOs wide democracy is unlikely to deliver a solution sufficiently strict and far-reaching to please the Brussels hierarchy. So some sort of collision appears inevitable, again; but lessons will hopefully have been learned on all sides, sufficient to avoid a repeat of the past highly damaging confrontation. Meanwhile, high fuel prices have achieved what governments could not. The discipline imposed by US100 oil has forced airlines to (i) use more fuel efficient and younger aircraft and (ii) restrain capacity growth and increase load factors. These measures largely unrecognised by Brussels have been far more effective in reducing emissions than any carelessly and unilaterally imposed tax was ever likely to have.
There are other issues in this always complex and many layered industry. IATAs controversial entry to the distribution scene with its New Distribution Capability, while more constructive than the organisations previous attacks on the GDS, is meeting stiff headwinds, as any new initiative is sure to have where vested interests abound. Whether it is a Trojan horse, or simply a sheep in wolf s clothing, existing distributors are cautious-to-staunchly opposed, while corporate account managers and OTAs have been anything but equivocal in their opposition. All the while new forces are gathering strength in the information, Big Data, travel and associated areas; these new entities are much more tech savvy than the airlines and seem destined to collide with the existing system at some time in the next five years. As low-cost airlines exploited the internet to reshape the online sales model, so the new data-hungry entities will explore new opportunities. The combatants are not clearly defined at this stage, but there is sufficient interest in aggregating information from the top 10% of the worlds economy who can afford to travel that it is not a matter of whether, but of how and when. Just as inflight Wi-Fi opens new and mostly unexplored avenues for new sales models, airports too should be watching warily as retail opportunities emerge or threaten the status quo.
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MAIN FEATURE
SIa RISING: The contrast between the old world markets and Asia could scarcely be more stark. The rising middle classes of countries across the Asian region are creating demand levels that influence policy changes, hastening liberalisation and encouraging new airlines to order aircraft a potentially selffulfilling cycle. In particular Chinas impact on world aviation simply has no precedent. Consequently, forecasting growth levels and their patterns is near impossible. Predicting the specifics of an avalanche is beyond most means, other than to recognise that it will be bigger than anything that has preceded it. Some potential hotspots may be guessed at, for example where there has been only limited growth to date. And, with a centrally controlled aviation policy that can influence airline behaviour, further hints may be inferred. For example, encouragement from Beijing to go international has shaped management thinking of the larger airlines. The countrys aviation leaders are well aware that fundamental changes are occurring in the global market and of the dangers of not taking part in reshaping the industry, outside as well as domestically. This go-international edict is also consistent with the national trade priorities of securing resources for the long term, in Africa and elsewhere. The result: to add international capacity, but also, where economic realities have restricted expansion options, to work more at enhancing
partnerships with foreign airlines. This is not an area where Chinese carriers have been active, other than in a largely superficial way; they are frequently described by would-be American and European partners as difficult to work with. But the partnering direction is becoming more pressing, if only because, in the new world order, many airlines are seeking close bilateral links with one or other of the Chinese airlines. Now though, even equity acquisitions in foreign airlines are very much on the radar, albeit led by the independent Hainan Group, rather than Beijings chosen three, Air China, China Eastern and China Southern. To date, the great bulk of Chinese international seats are understandably dedicated to Northeast Asian near neighbours and elsewhere in Asia. Europe and North America account for paltry single figure percentages. These will only increase, perhaps quickly; meanwhile resource rich Africa, where China is one of the worlds three largest investors, is also firmly a destination for expansion. There is another facet to Chinas industry maturing: the sheer volume of Chinese travellers means that China can become the most powerful transit country in the region and probably the world. With the added advantage of high levels of end-to-end traffic flows, the sixth freedom opportunities mean Chinese airlines will be able to price very competitively on their transfer routes. CHina inTernaTiOnal caPaciTY SeaTS BY reGiOn
6.3% Asia : North East Asia Asia : South East Asia Europe : Western Europe 53.8% North America Middle East 20.6% Europe : Eastern/Central Europe Others
3.3% 5.6% 7.6%
2.9%
THe airCraFt FinanCinG diSCOnneCt and tHe Vital rOle OF leSSOrS
A growing part of an airlines financial risk management strategy is assessing its best profile of leased to owned aircraft. Gone are the days when owning long term valuable assets was a serious airline business play. The need to preserve balance sheet appearance is part of this, but also the highly effective role of leasing companies, with attractive lease and tax propositions has provoked major shifts in ownership strategies in the past decade. For example, over half of all A320s are owned by leasing companies. For many years the major aircraft manufacturers sought to limit sales leakage through leasing companies, with their buying power and their ability to intervene between the manufacturer and the end client. But the realities of financial markets and a host of new airlines has refashioned the marketplace. Another feature now appears. When a change in the world order occurs it is hardly reasonable to expect that everything will adjust in sync to the new situation. As the old worlds economies stagnate, and traditional bankers pull down the shutters and slowly migrate their attention to Asia, a considerable disconnect is created in the area of aircraft financing. It will be rectified, but meanwhile there is a divide between the demand for funding and the reality of current needs. The maladjustment has several layers. Simultaneously with the downturn in global economies and the
consequent nervousness of debt funders, this once in history shift in the balance of aviation powers inevitably creates a gap in the supply chain. The confluence of these events has been entirely coincidental, but that does little to help the airlines caught in the middle. The majority of airlines now buying aircraft and needing the funding are Asian, not American or European. Lenders were beginning to get used to that a decade ago. But the traditional banking roots are EuroAmerican and they are familiar with the longestablished airlines, the flag carriers. Now however, like other markets, it is not the recognised airlines that are expanding. It is the new names. And, in Asia and the Middle East they are ordering unprecedented quantities of new aircraft. For increasingly cautious credit committees buried in the vaults of venerable London and New York banks, names like Tiger, Lion, IndiGo, even AirAsia, have little history. The oldest of them is less than 10 years of age. They may have a future, and almost certainly do, but they do not have a history to compare with the numerous 50+ year-old flag carriers that dot the region. Yet just this handful has 1,100 aircraft on order. Some 500 of them are for delivery in the next two years alone. These new airlines are certainly not household names outside the region and, so long as the current underlying credit cautiousness continues, the disconnect between demand and supply is inevitable one reason aircraft lessors have become more active in these transactions. But lessors too have to fund their acquisitions; they can rely to some extent on their own credit ratings, but increased use of non-traditional sources will be vital. In short, until a substantial lending capability is developed in Asia itself, there may be constraints on funding sources for the new growth.
... The realities of financial markets and a host of new airlines has refashioned the marketplace.
25
MAIN FEATURE
As the future course of the industry is set, the newer airlines (short and medium haul) low cost, the hybrids, the Gulf carriers (and Turkish Airlines), promise to be the source of growth.
Living with uncertainty. It is not only the aviation industry that is affected by economic and social uncertainty. But aviation is the handmaiden of those forces; and what is bad for the master is typically worse for the servant. Older airlines are adapting to this new world as best they can, assuming cautious profiles that reduce risk, shaving costs and capacity, accumulating cash as far as possible. Having pulled most of the strategy levers, the more successful have prepared themselves reasonably well for the short term. But for the medium to long term, the outlook becomes different. As the future course of the industry is set, the newer airlines (short and medium-haul), low-cost, the hybrids, the Gulf carriers (and Turkish Airlines), promise to be the source of growth. The longer established airlines will not readily allow a process where they decline steadily, but there may be little they can do to arrest a process that is already advancing fast. One option, as regulatory controls loosen, is to forge mergers and entrench their roles through acquisition. Meanwhile though, the very strategies employed to secure the short term may be those that stifle the future. There is a whole new breed of airline thrusting remorselessly to the front of the queue. AL
...The very strategies employed to secure the short term may be those that stifle the future. There is a whole new breed of airline thrusting remorselessly to the front of the queue.
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SOUTHEAST ASIA
SOUTHeaST aSia TOP 10 AIRLINES
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 Lion Air Thai Airways AirAsia Garuda Indonesia Malaysia Airlines Singapore Airlines Vietnam Airlines Cebu Pacific Air Thai AirAsia Sriwijaya Air
SEATS 856,932 541,436 525,240 471,698 461,134 444,125 372,916 333,010 236,160 207,396
Southeast Asia Outlook

OUTHEAsT AsIA CONTINUEs TO BE A REGION OF RAPID GROWTH DRIVEN BY LOW-COsT CARRIERs, including budget subsidiaries and affiliates of fullservice carriers. For the first time LCCs accounted for over 50% of seat capacity within Southeast Asia in 2012. The region has seen a steady rise in LCC penetration rates since the turn of the century from a base of virtually zero ...
SOUTHeaST aSia TOP 10 AirpOrTS
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 Jakarta Soekarno-Hatta International Airport Singapore Changi Airport Bangkok Suvarnabhumi International Kuala Lumpur International Airport Manila Ninoy Aquino International Airport Ho Chi Minh City Tan Son Nhat Airport Surabaya Juanda Airport Denpasar Bali Ngurah Rai Airport Bangkok Don Mueang Int'l Airport Sultan Hasanuddin International Airport
SEATS 1,400,299 1,371,158 1,237,778 1,134,217 824,383 482,968 452,707 381,732 359,626 330,293
SOUTHeaST aSia CapaCiTY SEATS per WeeK
SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WeeK startinG 31-MAR-2013 856,932 541,436 525,240 471,698 461,134 444,125 372,916 333,010 236,160 3,714,324
Lion Air Thai Airways AirAsia Garuda Indonesia Malaysia Airlines Singapore Airlines Vietnam Airlines Cebu Pacic Thai AirAsia Other
0M
1M
2M
3M
4M
SOUTHeaST aSia FleeT
SOUTHeaST aSia PrOJeCTed deliVerY daTeS FOr airCraFT On Order

200
2,000
1,456 1,533
150
1,500
100
1,000
50
500
67
0
20 20 20 22 20 25 20 23 20 18 20 14 20 15 20 16 20 13 20 17 20 28 20 26 20 27 20 24 20 19 20 21
In service
In storage
On order
ATR 777
CRJ 787
A320 DHC6
A330 SSJ
A350 YUN7
A380 ARJ21
737
SOUTHeaST aSia BreaKdOWn FOr airCraFT in SerViCe

SOUTHeaST aSia MOST POPUlar airCraFT TYPeS in SerViCe

SOURCE: CAPA - CENTRE FOR AVIATION
9.3%
0.5% 1.4% 0.1%
20.1%
Narrowbody Jet Widebody Jet Turboprop Small Commercial Turboprop Regional Jet Piston Engine Aircraft Military Transport
26.9%
A320 737 777 ATR A330
13.0%
2.1% 3.6% 7.3%
747 CARAVAN Others
24.0% 51.6%
8.5% 8.6%
23.0%
SOUTHeaST aSia CaPaCiTY SEATS SHare BY allianCe

0.2%
LCC CAPACITY SHARE (%) OF TOTAL SEATS: 2001-2013

Source: CAPA - Centre for Aviation witH data provided By OAG
70 60
52.0% 57.4%
11.2%
50
15.3%
Unaligned SkyTeam Star oneworld oneworld (affiliate)

40 30
23.2% 30.9% 30.7% 26.8% 18.1% 13.6% 9.8% 3.3% 4.6% 4.0% 32.4%
20 10 0
15.6%
57.7%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 JanMar 2013
29
SOUTHEAST ASIA
... The four largest domestic markets in Southeast Asia Indonesia, Philippines, Malaysia and Thailand all now have LCC penetration rates exceeding 50%. The Philippines has the worlds highest domestic LCC penetration rate among medium and large size countries 80% in 2012, which is likely to increase to about 85% in 2013. But there is still room for more LCC growth in Southeast Asia as the size of the overall market, and in many cases LCC penetration rates, continue to increase. 2013 will again see more LCC capacity pouring into Southeast Asia. Based on CAPA data, the regions LCC fleet will grow by between 25% and 30% in 2013 to approximately 530 aircraft. This includes almost 300 aircraft from Asias top two LCC groups AirAsia and Lion - and over 100 aircraft from affiliates or subsidiaries of Southeast Asian full-service carriers. Singapore Airlines, Thai Airways, Garuda Indonesia, Philippine Airlines and Vietnam Airlines are all now participating in the budget end of the market, allowing these groups to pursue growth while demand for long-haul and premium passenger services remains relatively flat and as demand in the cargo sector continues to be depressed. There are now 25 LCCs operating in Southeast Asia, five of which have launched since the end of 2011. More new LCCs will enter the market in 2013, including Malaysias Malindo, and most of the regions existing LCCs continue to expand rapidly. Some LCC markets in Southeast Asia may be approaching saturation and some routes will suffer from over-capacity in 2013. But market conditions overall remain favourable and can support rapid growth, driven by the continued strength of the regions economy and the continued rapid rise of the middle class. The increase in discretionary incomes feeds into the hands of LCCs as a larger portion of the population can afford to fly but generally only on budget airlines. Southeast Asian flag carriers are also growing, particularly their budget and regional full-service subsidiaries, albeit at slower rates. Indonesia, the regions largest market by a wide margin, has emerged as one of the most dynamic and biggest growth markets in the world. Indonesias domestic market grew 20% in 2012 to 72.5 million passengers, making it the worlds fifth largest domestic market after US, China, Brazil and Japan. It has been growing at a double-digit clip since 2008 and this is expected to continue in 2013 despite the bankruptcy and suspension of operations in Jan-2013 of Batavia, which accounted for about 8% of the domestic market. Indonesias four LCCs have quickly filled the void left by Batavia and will add approximately 50 aircraft in 2013, more than twice the size of the fleet Batavia operated in 2012. With Batavia exiting, the outlook has improved for market leader Lion, Garuda budget subsidiary Citilink, Indonesia AirAsia and new Tiger affiliate Mandala. All four LCCs are growing at rapid clips easily exceeding 20%. Garuda also continues to expand its domestic and regional full-service operation rapidly while Lion plans to launch in 2013
50%
PROpORTION OF LCC SEAT cApAcITY IN SOUTHEAST ASIA
Based on CAPA data, the regions LCC fleet will grow by between 25% and 30% in 2013 to approximately 530 aircraft.
new full-service subsidiary Batik Air. Smaller domestic carriers also continue to expand and enter the market. But some will likely fail as they are stuck in the middle of the market, wedged between the low-cost and full-service business models. The combination of the worlds fourth largest population, a rapidly expanding middle class, a booming economy and an archipelago geography are driving soaring demand for domestic air travel. Indonesias much smaller international market, which consisted of less than 10 million passengers in 2012, also has big potential. Indonesias international market is now primarily exploited by Gulf carriers and the big airline groups of Asia as Indonesian carriers generally remain domestic-focused. Thailand will also see more LCC expansion in 2013, led by Thailands two main LCCs, Thai AirAsia and Nok. Thai AirAsia completed an IPO in 2012, giving it the capital to accelerate domestic and international expansion. 2013 will see IPOs from Nok and full-service carrier Bangkok Airways. Nok, which now only operates scheduled services in the domestic market, plans to launch international services in 3Q2013. 2013 will also see growth for new Thai Airways regional unit Thai Smile, which launched services in Jun-2012 following a hybrid model. The expansion of Thai Smile and Nok are important components of Thai Airways new multi-brand strategy as the group looks to reduce its reliance on long-haul routes to Europe, where market conditions remain challenging. Thai Airways is also investing in fleet renewals and cabin retrofits as part of an attempt to improve yields and boost premium traffic. But competing at the top end of the market with Asias leading premium carriers and Gulf carriers, which have expanded rapidly in Thailand, is difficult while fast-growing LCCs led by Thai AirAsia pose a threat at the other end. 2013 will be a landmark year for Malaysia as
the countrys flag carrier attempts to turn the corner and a new LCC aims to launch services. Malaysia Airlines (MAS), which spent most of 2012 in restructuring mode, entered the oneworld alliance on 01-Feb-2013. oneworld membership was a major milestone for MAS and a key component of its new strategy, which focuses on the premium market. Like most other Southeast Asian flag carriers, MAS is focusing capacity growth in 2013 on the regional market within Asia as conditions on long-haul routes remain challenging. Of Southeast Asias six main flag carriers, MAS is now the only one without a budget subsidiary. This puts it in a weak position as it is unable to participate in the faster growing bottom end of the market. It also creates a void in the Malaysian market for a second LCC, which is now being exploited by Lion. Malindo, a joint venture between Indonesias Lion and a Malaysian company, aims to launch services at the end of Mar-2013 and operate a fleet of about 12 737-900ERs by the end of the year. Malaysia-based AirAsia in recent years has been pursuing more ambitious expansion in other markets but is re-focusing on Malaysia in 2013 as part of an effort to fend off Malindo. AirAsia Malaysia plans to add 10 A320s in 2013 for a total of 74 aircraft. Long-haul sister AirAsia X also plans to add seven aircraft. As a result, Malaysias total LCC fleet is expected to grow by 40% in 2013 to 102 aircraft, outstripping the LCC growth at the other five major ASEAN countries. The sudden surge in LCC capacity will likely lead to over-capacity on some domestic and regional international routes but there is also still room in Malaysia to stimulate demand through lower fares as Malindo breaks the AirAsia-MAS duopoly. Singapore will see slower growth in 2013 than the 10% increase in passenger traffic recorded in 2012, as its LCC market is now approaching saturation. LCCs now account for 30% of capacity at Singapores Changi Airport, which in 2012 passed the 50 million passenger milestone, an incredible achievement for a country of only five million people. Singapores three largest LCCs AirAsia, Jetstar and Tiger will continue to expand but
Indonesia, the regions largest market by a wide margin, has emerged as one of the most dynamic and biggest growth markets in the world.
at modest levels. Faster growth will come from Scoot, SIAs new longhaul low-cost carrier which launched in mid-2012. Unlike short-haul routes within Southeast Asia, medium-haul markets to Australia and North Asia remain relatively untapped by LCCs. Scoot and Jetstar, which has a small widebody operation in Singapore, are trying to fill this void. SIA regional subsidiary SilkAir also plans to pursue rapid expansion in 2013, growing capacity at a clip exceeding 20%. SilkAir and Scoot, as well as increased involvement in Tiger, have emerged as important components in the new SIA Group strategy, which aims to pursue growth at the budget end of the market and within the region to offset weak market conditions on long-haul routes. The Philippines will see the launch of at least one and possibly two long-haul low-cost operations in 2013. The new long-haul unit from short-haul Philippine market leader Cebu Pacific which will launch in mid-2013 with services to Singapore, Seoul and Dubai will open a new chapter in the Philippines dynamic LCC market. LCCs will account for about 85% of domestic passenger traffic in the Philippines in 2013, but there are still huge opportunities for LCCs to make inroads in the international market. Cebu Pacific will become the fourth widebody low-cost operator in Southeast Asia, joining Jetstar, Scoot and AirAsia X. Philippine Airlines (PAL) is planning to fight off its rival by also expanding its LCC subsidiary, AirPhil Express, into the long-haul market by the end of 2013. PAL is also planning to expand its own long-haul operation as the carrier takes delivery of another batch of 777-300ERs. PAL has struggled in recent years but is investing significantly in upgrading itself, including through fleet renewal, following the sale of a majority stake in 2012 to Philippine conglomerate San Miguel. 2013 could see further strategy changes as San Miguel looks to make its mark at PAL. Long-haul expansion could be unlocked if the Philippine authorities succeed at getting off the EU blacklist and being upgraded by the US FAA to Category 1 status. Consolidation in the highly competitive Philippine market is also likely, with the Mar-2013 equity tie-up between LCCs Zest and AirAsia Philippines a potential first move. There are now five LCCs competing in the domestic market, which is clearly too many. Over-capacity and irrational competition already resulted in losses throughout 2012 at all
Of Southeast Asias six main flag carriers, MAS is now the only one without a budget subsidiary.
31
SOUTHEAST ASIA
Overall market conditions in Southeast Asia remain favourable and conducive for growth.
Philippine carriers except Cebu Pacific. Vietnam will see significant LCC growth as it starts to catch up with the more mature markets elsewhere in Southeast Asia. VietJet, which launched services in Dec-2011, has already surpassed Jetstar Pacific as Vietnams largest LCC. VietJet expanded into the international market in Feb-2013 with the launch of a Ho Chi Minh-Bangkok service and is expected to add at least two more international routes by the end of the year. Jetstar Pacific will also likely enter the international market in 2013. The carrier, which is partly owned by Australias Jetstar, has new life after a majority stake was transferred to Vietnam Airlines in early 2012. Vietnams fast-growing economy and increasing popularity as a tourism destination should also support further rapid growth at Vietnam Airlines. The flag carrier is preparing for an initial public offering in late 2013, which would unlock a new phase of growth. The carrier already has ambitious plans to expand its fleet by 35 aircraft over the next three years and grow its long-haul operation, which is very small compared to its Southeast Asian peers. Of Southeast Asias six main flag carriers, Vietnam Airlines is now the only group that is not publicly traded and remains 100% government-owned. Among Southeast Asias four smaller markets, Myanmar is a clear stand out. International seat capacity in Myanmar surged by over 60% in 2012 as the country opened up following the landmark election of Apr-2012. Capacity will continue to increase at a very rapid clip in 2013 as carriers from abroad look to exploit the opportunities in this frontier market. Domestically several local carriers are also expanding as they aim to profit from the boom
The Philippines will see the launch of at least one and possibly two long-haul lowcost operations in 2013.
in tourism and business travel. In Jan-2013, the countrys first LCC, Golden Myanmar Airlines, launched services and is now operating domestic and international routes. There is huge potential for LCCs in both the domestic and international markets as Myanmar continues to open up. Cambodia also has seen rapid growth, with total passenger traffic growing 18% in 2012, making it quietly one of the fastest growing countries in Asia. More expansion is expected in 2013 as Cambodia Angkor Air, one of the smallest flag carriers in the region, expands its network to greater China. For Laos, 2013 should also bring more growth albeit on a very small scale. Laos has seen capacity double since 4Q2011, when Lao Airlines added two A320s. Previously there were no jet aircraft operating in the small country. More capacity will be added in 2013 as Lao Airlines continues to expand its A320 fleet and start-up Lao Central Airlines, which launched services in May-2012, adds 737s and Sukhoi Superjet 100s. In the smallest ASEAN country of Brunei, Royal Brunei Airlines (RBA) will mark a significant milestone in 2013, as it becomes the first carrier in Southeast Asia to operate the 787. RBAs five 787s, all of which are slated to be delivered by early 2014, will replace 777s and allow the flag carrier to complete a restructuring it began in 2011. Overall market conditions in Southeast Asia remain favourable and conducive for growth. Rising discretionary incomes and rapid growth in the middle class is creating particularly favourable conditions for LCCs. Demand for travel within the region and to other parts of Asia-Pacific will once again grow rapidly in 2013. Long-haul markets will remain challenging but should see some outbound growth as an increasing portion of the population is able to afford overseas trips. AL
Vietnam will see significant LCC growth as it starts to catch up with the more mature markets elsewhere in Southeast Asia.
SOUTH ASIA
SOUTH aSia TOP 10 AIRLINES
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 IndiGo Air India Jet Airways SpiceJet Pakistan International Airlines GoAir JetLite SriLankan Airlines Air India Express Biman Bangladesh Airlines
SEATS 500,580 442,828 413,303 375,833 132,880 129,240 114,448 95,606 83,538 34,032
South Asia Outlook

NDiAN AViATiON iS SEEiNG SiGNS OF REViVAL after another difficult year marked by continuing losses, a 3% decline in traffic and the exit of Kingfisher, which up until less than two years ago was the largest single domestic airline in the country ...
SOUTH aSia TOP 10 AirpOrTS

RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10
SEATS 919,165 831,365 352,124 332,111 309,142 278,652 252,504 140,679 133,442
Delhi Indira Gandhi International Airport Mumbai Airport Chennai Airport Bengaluru International Airport Dubai International Airport Kolkata Netaji Subhas Chandra Airport Hyderabad Rajiv Gandhi International Airport Kochi Airport Karachi Quaid-E-Azam International Airport
Colombo Bandaranayake International Airport 187,126
SOUTH aSia CapaCiTY SEATS per WeeK

IndiGo Air India Jet Airways SpiceJet Emirates Pakistan Intl Airlines GoAir JetLite SriLankan Airlines Other
185,924 132,880 129,240 114,448 95,606
SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WeeK startinG 31-MAR-2013 500,580 442,828 413,303 375,833
1,024,457
0K
250K
500K
750K
1,000K
SOUTH aSia FleeT
SOUTH aSia PrOJeCTed deliVerY daTeS FOr airCraFT On Order

75
800
50
600
577 504
400
25
200
62
0
20 20 20 22 20 25 20 23 20 24 8 4 5 6 9 3 20 21 20 1 20 1 20 1 20 1 20 1 7 20 1 20 1
In service
In storage
On order
A320
A330
A350
A380
777
787
737
DHC6
SOUTH aSia BreaKdOWn FOr airCraFT in SerViCe

2.8% 0.3%
SOUTH aSia MOST POPUlar airCraFT TYPeS in SerViCe

8.9%
15.9%
Narrowbody Jet Widebody Jet Turboprop Small Commercial Turboprop Regional Jet
12.5%
29.6% 4.2% 4.3% 5.9% 6.2% 7.8% 26.0%
A320 737 ATR 777 DHC6 A330 DHC8 Others
17.7% 57.7%
Piston Engine Aircraft
SOUTH aSia CaPaCiTY SEATS SHare BY allianCe

3.4% 0.3%

60 50
47.3% 42.8% 38.6% 57.0% 55.8%
5.4% 7.7%
50.0% 50.0%
Unaligned oneworld Star SkyTeam oneworld (affiliate)
40 30
22.7%
20 10
5.8% 0.1% 0.9%
83.3%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 JanMar 2013
35
SOUTH ASIA
... Many of the structural challenges in Indian aviation such as the uncertain and unpredictable policy environment, intervention by the regulator on commercial matters, high sales taxation on fuel, and the low productivity of airports and airspace remain unaddressed. However, two key developments in recent months have given rise to greater optimism. Firstly, Kingfishers exit in Oct-2012 has positively impacted market dynamics for the remaining carriers. The withdrawal of capacity, combined with pricing discipline, resulted in higher yields and improved financial performance in FY2013, at least up until 4Q when aggressive discounting returned. And secondly, the historic decision by the government in Sep-2012 to allow foreign airlines to invest up to 49% in Indian carriers is a vital step in establishing a more professional and corporatised sector in India. It offers the promise not only of introducing strategic capital and expertise into the market, but also delivers a much needed confidence factor for other institutional funding. CAPA estimates that Indias carriers will report a combined loss of approximately USD1.6 billion in the 12 months ending 31-Mar-2013, with most of this accounted for by Air India and Kingfisher Airlines. Air India has delivered a significant improvement in its operational and financial performance in FY2013, but its beleaguered business plan is under attack on all fronts. With poor aircraft utilisation, a huge interest burden, a bloated workforce, insufficient recapitalisation and regular government intervention, the challenges are huge. If the carrier is to have any chance of success it must be radically restructured both financially and operationally. This will require a level of political will to take tough decisions, a feature that has been absent to date. If decisive action is postponed as we expect Indian taxpayers will bear the cost. Taking advantage of the foreign investment reforms, Etihad looks set to acquire a stake in Jet Airways, Indias second largest international and domestic carrier. There is likely to be an extensive codesharing arrangement between the two new partners, network and scheduling coordination and integration of frequent flyer programmes. The Jet Airways-Etihad deal has the potential to be a game-changing combination. It brings together one of the most successful airlines in India with a well-capitalised Gulf carrier with global ambitions. Critically for Jet this deal will provide it with the capital that it requires at this time. Jet Airways is expected to place an order in the coming months for up to 100 narrowbodies. Following the conclusion of the Etihad transaction, Jet Airways is also expected to have the capital to implement a clearer market segmentation strategy, in particular the establishment of a strong hybrid model under the JetKonnect brand. IndiGo remains the leading performer in the market, both financially and from a brand perception perspective. The carrier continues to grow
100
JET AIRWAYS EXPECTED ORDER OF NARROWBODIES
Kingfishers exit in Oct-2012 has positively impacted market dynamics for the remaining carriers.
aggressively on domestic and short-haul international routes and is also evaluating the possibility of launching a domestic regional subsidiary utilising turboprop aircraft. IndiGos international network strategy is founded on connecting multiple Indian cities to hightraffic destinations such as Dubai, Bangkok and Singapore. This is in contrast to SpiceJet, which has instead launched services on routes less travelled such as Kabul, Male and Guangzhou. SpiceJet is another potential candidate for securing a foreign investor in 2013. The airline is understood to be in quite advanced discussions with more than one party, including foreign airlines as well as private equity funds. A narrowbody order may be finalised in the second quarter of 2013 after a new investor comes on board. The Boeing 737 MAX is the most likely equipment, particularly as there are no available A320neo delivery slots within the required timeframe. SpiceJet remains undecided on whether to exercise its options for a further 15 Q400s, however CAPA expects that the carrier will increase its regional fleet in due course. When the Indian Government decided to allow foreign airline investment, the primary intention was to open a source of capital to support the recovery of the incumbent carriers, rather than enabling the entry of well-capitalised start-ups to compete with them. However in Mar-2013 the Foreign Investment Promotion Board (FIPB) ruled that foreign airline investment is not limited to existing carriers and as a result it approved a 49% investment by AirAsia in a proposed joint venture with the Tata Group and Telestra Trading. The carrier, to be named AirAsia India, intends to launch domestic services from a hub in Chennai to non-metro cities across the country. FIPB approval is just the first step of the regulatory process and the joint venture
will now need to apply for a licence from the Directorate General of Civil Aviation (DGCA). If AirAsia India is successful in securing a licence it will introduce a formidable new entrant into Indias airline industry. The venture combines a highly successful and aggressive LCC with one of the most respected and financially sound Indian business houses. It is also an important test case on the governments stance towards foreign investment in general and the airline industry in particular, as well as the Ministrys position on the award of new licences. With intense competition on domestic routes which could increase further if new licences are awarded Indias airlines have been keen to expand overseas. However, the Indian Governments stance on bilaterals has lacked clarity and transparency, which has made it virtually impossible for Indian carriers to plan their international strategy. One of the critical impacts of the Jet-Etihad deal is likely to be a liberalisation of the India-UAE bilateral. This will benefit not only those two carriers, but also Emirates, flydubai and Air Arabia. Meanwhile Qatar Airways, Turkish Airlines and Singapore Airlines are all waiting in the wings seeking an expansion of bilaterals as they have exhausted their current entitlements. Aircraft lessors, and the banks financing them, will also be watching the Indian market with interest in 2013. India is a signatory to the Cape Town Convention (subject to local regulations), which should in theory facilitate the repossession of aircraft in the event of default by carriers, as in the case of Kingfisher. However, this is proving to be a challenge as related government agencies have not allowed lessors access to aircraft due to their own outstanding dues with Kingfisher. Large global banks have taken a serious view of the situation. The Ministry of Civil Aviation has recently adopted a more cooperative stance with respect to resolving the situation. Unless addressed, this experience is likely to negatively impact future financing of Indian aircraft orders and increase lease charges due to a perceived higher risk rating. Elsewhere in South Asia, SriLankan
Airlines is struggling to take advantage of the boom in inbound tourism to Sri Lanka following the end of the civil war. International visitor numbers have doubled in three years from 448,000 in 2009 to just over one million in 2012. However, SriLankan Airlines, which has been lossmaking since 2008, reported a record loss of USD135 million for FY2012 and a similar result is expected this year. Europe contributed 60% of last years loss due to weak economic conditions and strong competition from the Gulf carriers. As a result the airline plans to re-orient its network towards India and North Asia over the next few years. With SriLankan expected to become a full member of the oneworld global alliance in the next 12 months a stronger relationship is likely to emerge with Cathay Pacific. As a result Hong Kong could provide a useful gateway for the airline into this region. In the Maldives, the two locally-based international carriers are targeting complementary growth markets. Maldivian, the governmentowned airline, which was earlier limited to domestic routes and a shorthaul service to Trivandrum in India with its fleet of turboprops, took delivery of an A320 in Nov-2012. The aircraft has been deployed to open up routes to Mumbai, Chennai and Dhaka, with a second A320 expected to join the fleet in Apr-2013. The airline has stated that its primary focus at present is in developing Indian and other South Asian markets. Meanwhile, private carrier Mega Maldives Airlines took delivery of a Boeing 757 in Jan-2013, to join its two Boeing 767 widebodies. The carrier is targeting a fleet size of seven aircraft by the end of 2014. Its international network includes scheduled services to China, Hong Kong and Korea, with several additional Chinese points served on a seasonal charter basis. Inbound tourism from China to the Maldives has been growing at over 50% per annum over the last three years, positioning China as the single largest source market, accounting for 24% of foreign arrivals in 2012. Mega Maldives is keen to expand its operations to North Asia and has also identified Australia and South Africa as key markets. Bangladesh saw the launch of a fourth domestic operator in Jan-2013 with Novo Air joining Biman Bangladesh Airlines, Regent Airways and United Airways. The new carrier entered the market less than 10 months after GMG Airlines suspended operations. Despite being a pricesensitive market with very short domestic sectors, there are no LCCs operating domestically. Novo Air continues the status quo by positioning itself as a full-service airline. The domestic market remains small with less than one million passengers per annum. International traffic to/ from Bangladesh has experienced steady growth in recent years, but it is dominated by foreign operators, which have a capacity share of over 70%.
The historic decision by the government in Sep-2012 to allow foreign airlines to invest up to 49% in Indian carriers is a vital step in establishing a more professional and corporatised sector in India.
37
SOUTH ASIA
International traffic in Nepal registered 8% growth in 2012 to reach three million passengers. However the market is dominated by foreign carriers with Nepal Airlines accounting for just under 7% of traffic. The national carrier has recently resumed discussions with Airbus on a new aircraft order to replace its two ageing Boeing 757s. A second international Nepalese airline, privately-owned BB Airways, launched in Oct-2012 with services to Kuala Lumpur and Hong Kong using a Boeing 757 aircraft. However by Feb-2013 the leased aircraft had been returned and services suspended. BB Airways reportedly plans to resume operations later in 2013 with a different aircraft. The Pakistan Federal Cabinets Economic Coordination Committee (ECC) reportedly approved an interim business plan presented by struggling Pakistan International Airlines (PIA) for the next five years. The ECC allowed the Ministry of Finance to issue continuing fresh guarantees amounting to PKR49 billion (USD500 million) during the current year. The ECC also agreed to the request of the Ministry of Defence for USD46 million of funding to enable the carrier to lease five narrowbody aircraft in 2013 to address its capacity shortage. At present the airline is operating only 24 of its 38 aircraft with eight aircraft grounded temporarily for maintenance and six permanently. South Asia remains a market with huge potential, but is encumbered at present by weakness across its policy, regulation and fiscal frameworks. Policy settings are in many cases negatively influenced in an effort to support struggling government-owned flag carriers. India, as by far the dominant market in the region, has the potential to present itself as a case study to emulate. The decision to allow foreign airline investment will deliver greater integration with the global aviation industry and exposure to best practice. As a result, there will be much needed additional pressure to address structural challenges, paving the way for a more efficient, professional and viable industry. However, until a host of bureaucratic and political issues are squared away, investing in such a market can be a lottery. That is a fundamental issue for any government serious about encouraging measures which will generate consumer (and corporate) benefits. AL
South Asia remains a market with huge potential, but is encumbered at present by weakness across its policy, regulation and fiscal frameworks.
... until a host of bureaucratic and political issues are squared away, investing in such a market can be a lottery.
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SOUTH PACIFIC
SOUTH PACIFIC TOP 10 AIRLINES
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 Qantas Airways Virgin Australia Jetstar Airways Air New Zealand Tiger Airways Australia Regional Express Air Niugini Air Pacific Air Tahiti Airlines PNG
SEATS 758,452 523,669 371,721 326,019 63,720 44,846 40,204 30,157 20,862 12,138
South Pacic Outlook

OUTH PACIFIC CARRIERs ARE EMERGING FROM A pERIOD OF REBUILDING THEIR LONG-HAUL NETWORKs as they direct their focus to Asia and Pacific Rim and away from the traditional markets in Europe for which they will rely on newly formed alliances. The regions three biggest carriers, Qantas, Air New Zealand and Virgin Australia, have formed deep alliances with foreign carriers to create virtual long-haul networks, none bigger than the seismic partnership between Qantas and Emirates ...
SOUTH PACIFIC TOP 10 Airports

SEATS 982,032 759,790 550,586 360,914 333,851 190,128 141,956 137,378 137,356 99,744
Sydney Kingsford Smith Airport Melbourne Tullamarine Airport Brisbane Airport Auckland International Airport Perth Airport Adelaide Airport Wellington International Airport Christchurch International Airport Gold Coast Airport Cairns Airport
SOUTH PACIFIC capacitY SEATS per WeeK

Qantas Airways Virgin Australia Jetstar Airways Air New Zealand Emirates
Singapore Airlines
Source: CAPA - Centre for Aviation and Innovata | WeeK startinG 31-MAR-2013 758,452 523,669 371,721 326,019 87,482 80,602 63,720 53,084 44,846 576,209
Tiger Airways Australia United Airlines Regional Express Other
0K
200K
400K
600K
800K
SOUTH PACIFIC fleet
SOUrCE: CAPA - CENTrE FOr AVIaTION | WEEK sTarTING 31-MAR-2013
SOUTH PACIFIC proJected deliVerY dates for aircraft on order

SOURCE: CAPA - CENTRE FOR AVIATION | WEEK sTarTING 31-MAR-2013
1,000
40
877
30
750
20
500
10
278
250
13
In service
In storage
On order
SOUTH PACIFIC fleet BreaKdoWn for aircraft in serVice

SOUTH PACIFIC Most popular aircraft tYpes in serVice

5.1% 14.7%
0.9%
35.6%
31.4%
Narrowbody Jet Turboprop Small Commercial Turboprop Widebody Jet Regional Jet
20.9% 27.0%
Business Jet
SOUTH PACIFIC capacitY SEATS share BY alliance

4.1% 18.2%
SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEK sTarTING 31-MAR-2013
IATA SOUTH PACIFIC PREMIUM TRAFFIC: 2009-2013

SOUrCE: CAPA - CENTrE FOr AVIaTION aNd IATA
Premium Traffic Growth%
Unaligned oneworld Star SkyTeam
47.7% 30.0%
20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 20 30 20 31 20 32 20 33
ATR
A320
A330
A380
DHC8
737
787
20.0%
737 DHC8 A320 SAAB340
14.0%
ATR F28 A330
4.3% 4.7% 4.8% 6.3%
10.4%
Others
40 30 20 10 0 -10 -20 -30 -40 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
41
SOUTH PACIFIC
SOUrCE: CAPA - CENTrE FOr AVIaTION WITH DaTa prOVIDED By OAG
45 40 35 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 JanMar 2013
3.8% 9.3% 14.9% 22.6% 18.7% 28.1% 30.2% 31.1% 35.0% 31.5% 37.4% 39.0% 39.4%
25%
PERCENTAGE OF FIJIS GDP dERIVEd FROM TOURISM
... Virgin Australia has gathered the most comprehensive set of partners, including Etihad and Delta Air Lines for long-haul reach, and more locally Air New Zealand for trans-Tasman links. As end of line carriers, more such relationships will need to be established by these three over the coming year as a means of overcoming the tyranny of distance using their own metal. Australia became the centre of attention when national carrier Qantas announced a global alliance with Gulf heavyweight Emirates as the key plank of a strategy to turn around its loss making international business. While the alliance was timed to take effect on 31-Mar-2013 to allow time for regulatory approvals, route and schedule changes including a decision by Qantas to move all its European flying from transiting through Singapore to Emirates Dubai hub it also helped Qantas to return an AUD111 million (USD113.6 million) after tax profit in the first half of FY2013. Qantas international, while still posting a loss, was vastly improved and on track to meet its target to breakeven in FY2015. Having cemented its alliance with Emirates, Qantas has turned its attention to Asia where the future of the mainline brand lies. Extensive schedule changes will take effect over the fourth quarter of FY2013 to create more favourable Asian connections and fill the effective 40% increase in capacity between Australia and Singapore, which previously accommodated passengers bound for Europe. But as Qantas new Asian strategy rolls out, there are many more parts
Qantas announced a global alliance with Gulf heavyweight Emirates as the key plank of a strategy to turn around its loss making international business.
of the jigsaw to be filled in. More extensive partnerships will be necessary behind the main gateways of Singapore, Bangkok and Hong Kong. The Australian flag carrier intends to use its Jetstar affiliates as part of this process, but it will be a hard sell for Qantas to convince premium passengers to connect to an LCC for onward flights to other points in Asia. Thus, even with the schedule changes and improved onward Asian connections, Qantas will need partners in Singapore other than its LCC Jetstar Asia if it is to combat the growing threat from an allied Virgin Australia and SIA. Virgin Australia has formed a formidable codeshare partnership with SIA, now also a 10% equity holder, providing access to its extensive Asian network which is important in growing Australian premium traffic. The carrier relies on other partners Etihad and Delta for network links to Europe and the Americas while an alliance with Air New Zealand has been instrumental in competing on the Tasman. Options for Qantas in the Star alliancedominated Singapore hub are few. Its oneworld partners Cathay Pacific and Japan Airlines provide limited destinations from Singapore and may be reluctant to work with Qantas given the competitive overlap. Qantas and Virgin Australia are both in need of finding a North Asian partner to provide greater access to the region than is possible via their existing Southeast Asian partners or in the case of Qantas, services to more southern hubs like Singapore, Bangkok and Hong Kong. Promising candidates include Cathay for Virgin and China Eastern for Qantas. Virgin Australia continues to take the fight to Qantas in the Australian domestic market with a capacity war placing yields and profits under pressure. Capacity has reached saturation point or more on the Sydney-Melbourne-Brisbane golden triangle main routes. As a result the focus has now moved to transcontinental
routes where Boeing 737-800s are being replaced with A330s and cabins are being refitted with international level seats, including lie-flat business class, in a bid to win or retain passengers. Having achieved its target share of the corporate and government market, and completing its transformation from an LCC to full-service carrier, Virgin Australia is looking to come full circle by re-entering the domestic LCC market through a 60% acquisition of Tiger Australia. The move, if approved by the competition regulator, will allow Virgin Australia to compete with Qantas dual brand strategy using Jetstar on level terms. The ACCC, however, is concerned that allowing Virgin Australia to control Tiger Australia will reduce competition to the detriment of the flying public. Tiger Australia may well leave the domestic market if the ACCC does not approve the deal. The carrier has been aggressively rebuilding its network since resuming operations following its six week grounding on safety concerns in Jul-2011, but losses continue to mount for the part SIA-owned LCC. Virgin Australia is also strengthening its regional position through the takeover of Skywest, allowing it to challenge Qantas dominance in that market. Virgin Australia sees regional Australia as a key source of growth, while Qantas is bolstering capacity on routes it currently holds a monopoly on to defend its position. As the two heavyweights slug it out, regional carrier Regional Express (Rex) runs the risk of being caught in the crossfire. Rex is Australias largest independent regional airline, operating a fleet of 47 Saab340 aircraft on some 1,300 weekly flights to 35 destinations throughout New South Wales, Victoria, Tasmania, South Australia and Queensland. The carrier competes head-tohead with Qantas on its two biggest routes, Adelaide-Port Lincoln and Sydney-Dubbo, and is the sole operator on half of its top 10 routes. Rex blamed a 33% profit slump to AUD12.5 million (USD12.8 million) in the first six months of FY2013 on the introduction of a carbon tax and other government imposed
costs exacerbating the effects of already slowing demand. The competitive dynamic on the Tasman looks set to change with the Qantas-Emirates alliance likely to be extended to the route with the approval from the ACCC and the New Zealand Minister of Transport. The ACCC has given draft approval for the Tasman leg, on condition that Qantas and Emirates maintain pre-alliance overall capacity on the Sydney-Auckland, Melbourne-Auckland, Brisbane-Auckland and Sydney-Christchurch routes, all of which are serviced by both airlines. (The New Zealand Government was due to make its decision by the end of Mar-2013.) A combined Qantas and Emirates will act as a counter-balance to the Air New Zealand (Air NZ) and Virgin Australia alliance created in 2011, giving the pair a combined market share of a little over 50%. A combined Qantas-Emirates operation on the Tasman will command about 35%, or about 45% when Jetstar is included. Air NZ says its alliance with Virgin Australia and the introduction of its seats to suit packaged fare structure has returned the Tasman to profit. However, Qantas says its New Zealand mainline brand subsidiary, Jetconnect, continues to lose money on the route. Qantas considers the Tasman suffers from over capacity. Jetstar does not provide route specific financials, but says the route is meeting expectations. The Tasman remains one of the most competitive routes in the world, contested by seven carriers, albeit that five of those operate in two blocs, including Jetstar under Qantas. But Qatar Airways appears eager to join the fray which also includes LAN Airlines and China Airlines as fifth freedom carriers operating via Australia. New Zealand and Qatar are in talks to create a possible air services agreement which would allow Qatar Airways to join Emirates in extending their Australian long-haul routes to New Zealand. Qatar Airways currently operates from Doha to Perth and Melbourne as well as multiple points in Southeast Asia. Qatar Airways current Melbourne schedule does not, however, permit a Tasman crossing, with a 90-minute turnaround before departing for Doha just before midnight. The New Zealand domestic market is growing with Air NZ replacing its Boeing 737-300 fleet with A320s, while rival Jetstar has built itself into a genuine competitive force on the main trunk routes between Auckland, Wellington, Christchurch, Dunedin and Queenstown. Jetstar has carved out about a 30% capacity share on those routes, but Air NZ holds sway on the highly profitable regional network where it enjoys a monopoly position served largely by turboprop aircraft. Air NZ has returned its long-haul business to profit after a review of the network that led to its China operations being consolidated to a daily Auckland-Shanghai service, dropping the twice weekly Beijing service.
Virgin Australia is looking to come full circle by re-entering the domestic LCC market through a 60% acquisition of Tiger Australia.
43
SOUTH PACIFIC
... it will be a hard sell for Qantas to convince premium passengers to connect to an LCC for onward ights to other points in Asia.
The difficult Hong Kong-London route was also dropped in Mar-2013 after the review found it was unlikely to become viable in the foreseeable future. Air NZ is also pursuing a strategy of implementing an alliance-based Pacific Rim network. The decision to pull off Hong Kong-London coincided with the airline entering into a codeshare agreement with Cathay to codeshare on each others Hong Kong-Auckland services. Air NZ and Cathay also have unspecified commercial arrangements for onward network access connections to mainland China and India. Air NZ lacks mainland China connections from Shanghai, where fellow Star alliance member Air China has only a fraction of capacity. Air NZ has leased its Hong Kong-London Heathrow slot to Cathay, but this does not include a codeshare arrangement. The carrier continues to operate daily to London Heathrow via Los Angeles. The resulting freed-up fleet capacity will be redeployed to Los Angeles and San Francisco. Air NZ held a monopoly to North America since Qantas pulled off Auckland-Los Angeles in May-2012. That monopoly disappears, onestop via Hawaii at least, in Mar-2013 when Hawaiian Airlines enters the Honolulu-Auckland market with a three-times weekly service. There appears to be little prospect, however, of Air NZ being challenged on its long and skinny US west coast destinations or Vancouver, Canada. United Airlines in Jun-2012 cancelled plans to operate Houston-Auckland with one of its first Boeing 787-8 aircraft on which Air NZ would have placed its code. New Zealand tourism and the national carrier are poised to benefit from the huge growth in Asian tourists as part of a fundamental shift in global travel demographics, offsetting the decline in demand from financially stretched Britain and Europe. But the country will have to compete with equally appealing, but easier to reach, markets for its share of business from the rising Asian middle class. In the Pacific, Fijis national Air Pacific is in the process of rebranding back to its 1958 name, Fiji Airways, as part of an on-going 360 degree transformation programme which has seen the flag carrier reverse record losses, improve its schedules and network, and make significant investments in new aircraft and its on-board product. A fleet of three new A330-200s arrive during the course of 2013, replacing two Boeing 747-400s and adding capacity on key routes while also opening new ones. With these changes Air Pacific hopes to recapture
Air New Zealand is also pursuing a strategy of implementing an alliancebased Pacific Rim network.
some of the 50% market share it has lost in recent years to Australian carriers Virgin Australia and Jetstar, by trying to match price, frequency and product. Tourism has become the backbone of Fijis economy, accounting for about 25%* of GDP in 2010, with visitor numbers more than doubling in the last decade despite political ructions, including a military coup in 2006 which has left the country under the control of a dictatorship. The Fiji Governments tourism development plan targets annual visitor arrivals to reach one million by 2022 from 675,000 in 2011. To achieve that, Fiji will need to diversify its inbound markets, which are heavily weighted to Australia, improve its international links and create a more stable political environment to encourage international investment. The new long-haul fleet makes growing the US market a more realistic proposition, while Chinese inbound tourism has gone from a standing start to more than 24,000 a year in just three years and Japanese visitors to the South Pacific are beginning to recover after a sharp decline since 2009. South Pacific carriers have re-established or repositioned themselves over the past two years. The challenge now is to capitalise on the growing economic power of Asia and the boom in Asian middle class travel, supported by suitable partners. AL
Sydney, 7-9 August 2013

A meeting of CEOs to discuss the regions key issues
Alan Joyce, CEO Qantas
Kerrie Mather, CEO Mike Mrdak, Sydney Airport Secretary, Department ofInfrastructure and Transport
Andrew McEvoy, MD Tourism Australia
Azran Osman-Rani, CEO, AirAsia X
Campbell Wilson, CEO Julieanne Alroe, CEO Scoot Brisbane Airport
Marnix H Fruitema, SVP Asia Pacific Air France-KLM
Jason Bitter, CEO Skywest Airlines
Garry Filmer, COO, Regional Express Policy Debate Moderator
Dennis Chant, MD Queensland Airports Destination Airports day Chairman
Peter Pallot, General Manager, Sunshine Coast Airports
Rob Porter, GM Mackay Airport
Kurt Knackstedt, Michael Blythe, Global Category Leader Chief Economist, Commonwealth Bank for Travel and Expense Management, Rio Tinto Group
David Speers, Sky News Political Editor
Richard Davis, HWL Ebsworth Partner
ANCILLARY
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IT FLY-INFLY-OUT INNOVATION
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The CAPA Australia-Pacific Aviation Summit will be the pre-eminent aviation strategy summit for the region in 2013. CEOs from airlines and airports across Australia, New Zealand and the Pacific Islands, plus a selection of leaders from airlines serving the region will debate the hot topics facing aviation at this years CAPA Summit. For more information please visit: http://centreforaviation.com/events
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NortH Asia
NOrTH aSia TOP 10 AIRLINES
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 China Southern Airlines China Eastern Airlines All Nippon Airways Air China Japan Airlines Korean Air Hainan Airlines Xiamen Airlines Shenzhen Airlines Cathay Pacific
SEATS 1,773,387 1,638,692 1,498,216 1,305,777 962,136 587,253 549,565 523,280 519,178 512,796
North Asia Outlook

ORTH ASIa IS OnE OF FEW REGIOnS WHERE MOST FULLSERVICE aIRLInES aRE GROWInG CaPaCITY. But the carriers are now looking to complement their expansion drive with definition. With the market having higher expectations and more travel options, airlines that could once relatively easily fill an aircraft now need greater differentiation and to deliver on it. It makes for a more complex region, but overall North Asia is still sleepy without much strategic growth like bilateral alliances and revenue innovation. And despite a burgeoning and promising LCC scene, many flag carriers are flat out ignoring this growth. Whatever definitions are established will surely change ...
NOrTH aSia TOP 10 AirpOrTS
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 Beijing Capital International Airport Tokyo Haneda Airport Hong Kong International Airport Guangzhou Baiyun Airport Shanghai Pudong Airport Seoul Incheon International Airport Tokyo Narita Airport Shanghai Hongqiao Airport Kunming Airport Taipei Taoyuan International Airport
SEATS 2,068,130 1,887,497 1,440,997 1,225,526 1,154,933 989,264 929,830 858,577 769,137 765,655
NOrTH aSia CapaCiTY SEATS per WeeK

China Southern Airlines China Eastern Airlines All Nippon Airways Air China Japan Airlines Korean Air Hainan Airlines Xiamen Airlines Shenzhen Airlines Other
1,773,387 1,638,692 1,498,216 1,305,777 962,136 587,253 549,565 523,280 519,178
6,998,329
0M
2M
4M
6M
8M
NOrTH aSia FleeT
NOrTH aSia PrOJeCTed deliVerY daTeS FOr airCraFT On Order

300
4k
3,239
200
3k
2k
1,030
100
1k
63
20 20
20 22
20 25
20 23
20 26
In service
In storage
On order
A320 787
A330 C919
A350 ARJ21
A380 AN148
737 MRJ
747
767
CSERIES
ATR
NOrTH aSia BreaKdOWn FOr airCraFT in SerViCe
NOrTH aSia MOST POPUlar airCraFT TYPeS in SerViCe

6.4%
1.3% 2.7% 0.1%
11.9% 3.1%
Narrowbody Jet
32.1%
737 A320 777 A330 747
27.6%
Widebody Jet Regional Jet Turboprop Small Commercial Turboprop Military Transport
4.1% 5.9%
7.7% 7.7% 27.6%
767 ERJ170 Others
62.0%
NOrTH aSia CaPaCiTY SEATS SHare BY allianCe

1.8% 31.6%

10 9.5%
10.4%
9.0%
8 6.8%
SkyTeam Unaligned Star oneworld oneworld (affiliate)
6 3.9% 2.7% 2.7% 2 0.8% 0.4% 0.4% 0.3% 0.6% 1.8%
5.9%
27.7%
28.5%
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 JanMar 2013
20 27
20 24
20 18
20 14
20 15
20 16
20 19
20 13
20 21
20 17
777
47
NORTH ASIA
... At the most macro level, driving change is the strong economy relative to other regions, even if Chinas growth is slowing and liberalisation. Japan remains the leading example of liberalisation in North Asia. Not only were open skies agreements reached with China, Taiwan and European nations, Japan even allowed greater air services, but no open skies, to the Middle East network carriers despite ANA and JAL not serving the region; Japan put national economic interests ahead of its airlines. Korea has a number of open skies agreements too, but is stubborn with countries (like Singapore) whose airlines pose too much threat. Japan has also facilitated the entry of LCCs, three of which launched in 2012: Peach, Jetstar Japan and AirAsia Japan. Domestic routes are so far their staple but there have been short-term challenges: AirAsia Japan gained a new CEO as it became clear its performance lagged that of Jetstar Japan despite a similar network, while Jetstar Japan will reduce its Osaka Kansai base. Peach is holding strong, and is beginning to be defined by its emphasis on international, not domestic, expansion, which will force change in markets. Peach passengers can avail themselves of day trips to Seoul for shopping, a practice that would have seemed extravagant just a few years ago. This is despite South Korea being the original domain of LCCs in North Asia, and a number of those Korean LCCs serving Japan. While their fares may be lower than the legacy FSCs, their cost base is high and they run low on willingness to change. Jeju Air, an independent LCC and arguably the most successful in South Korea, knows that it will need to drive ancillaries and a lower cost base. First it wants Korean passengers to acclimatise to no-frills Japanese LCCs. This will likely result in change definition under duress, but at least Jeju is thinking of it; others reckon they can maintain the status quo, arguing as other
Japan remains the forefront example of liberalisation in North Asia.
airlines have infamously said their country is different. It is a similar story in Taiwan but with fewer players. China Airlines, EVA Air and TransAsia are still catching up to the growing cross-Strait market with mainland China that has seen the carriers accelerate and also re-direct growth. There has been little time to properly consider the looming change of greater LCC penetration; Peach, barely a year old, serves Taipei twice daily. China Airlines and EVA are, perilously, unconcerned about LCCs while TransAsia is considering if and when to respond to LCCs. TransAsia has a moderate grasp on the change in the region and after a successful if monotonous last few years is defining itself as a modern, premium full-service carrier. Having undergone a re-branding with new uniforms, meals and lounges, next is a refresh of in-flight entertainment, the carrier seeing IFE as a necessity if it is to be a FSC and wedge itself into more key routes: Bangkok and Tokyo but also a greater presence in China. The cross-Strait growth that is benefitting Taiwanese and Chinese carriers is coming at the expense of Hong Kong, and to a lesser extent Macau. Hong Kong-Taipei is the worlds largest international route based on seat capacity, but 2012 capacity was flat on 2008 levels a rare case in growing Asia. That is a reflection of more China-Taiwan traffic going direct, and will further change as the market opens. Flights in 2013 are capped at
NUMBER OF JAPANESE LCCS STARTED UP IN 2012
616 a week but may expand more later in 2013. While China may push for greater access, Taiwan is concerned about being over-run and its carriers not being able to secure slots at Chinas congested airports. Macau was a lesser transit point between mainland China and Taiwan, a market Air Macau relied on but is now, finally, building traffic coming from mainland China for Macaus local scene still heavy on casinos but diversifying with shopping, family entertainment and conferences, which bodes well with Beijings wish for a more holistic destination. Hong Kong still relies on sixth freedom traffic from Taiwan, but this weakness is becoming clear as nascent Hong Kongmainland China routes see traffic dips or unprofitability as the Taiwan market dries up. As a result, Hong Kong-Taipei now has over-capacity. The impact on Cathay Pacifics Dragonair is great, especially as fledging Hong Kong Airlines captures the local and regional Hong Kong-Taiwan markets. Hong Kong Airlines boasts a lower cost base than Dragonair and, until recently, a more modern service. Dragonair had been left as something of an ugly sister to Cathay with an ambivalent brand and positioning (many mistakenly believed it to be an LCC). But the growth pressure from Hong Kong Airlines amongst others saw Dragonair in early 2013 adopt Cathays cabin outfit with high-quality seats and in-flight entertainment rarely found on short flights, and for a reason: it adds weight and cost. However, Cathay saw Dragonair needed better definition and effectively is allowing Dragonair to piggyback on Cathays renowned premium positioning. (Cathay is the sole major fullservice carrier not growing capacity, largely a result of replacing 747-400s with 777300ERs, although this will improve economics. Dragonair, however, is growing.)
Further branding alignment may be next, cementing other changes including modern uniforms and service flows. The stakes are high: Dragonair is the largest foreign carrier in mainland China. It will maintain its lead, but even slight pressure from Hong Kong Airlines and Spring Airlines, now targeting the Hong Kong-mainland China market, changes economics. They will fuel growth at non-congested Chinese cities. China has tremendous potential but its airlines face internal and external challenges: the government limits growth by approving aircraft purchases, and Chinese carriers lack savvy international marketing and revenue management. As a result, there is a healthy sixth freedom market out of China being cleaned up by Japanese and Korean carriers who use hubs at Seoul Incheon and Tokyo Narita primarily for onward service to North America, seen as a more profitable destination from China than Europe or Australia. Korean Air already boasts service to 12 North American cities while ANA and JAL are using 787s to open secondary cities like Boston and San Jose. A worry on the Japanese side, however, is their high cost base (although this could be offset by the more direct routings their hubs offer). Secondary cities are also being opened in China. European carriers KLM and Lufthansa in particular have led the pack, and British Airways forthcoming entry into Chengdu represents the final European heavyweight to have a secondary Chinese point. The growth is being made out of opportunity, geography (the secondary cities are often closer to Europe than Beijing and Shanghai staples) and necessity: slots are scarce and, when available, typically given to Chinese carriers. Services from secondary Chinese cities to North America are the next to be opened (Sichuan Airlines already links Chengdu to Vancouver via Shenyang), and it will likely be United and Air China leading this push. On the US side, American Airlines and Delta are still heavily reliant on Japan for their Asian presence; United is more diversified. Chinas airport construction bonanza will ensure long-term growth of new destinations, but it takes time for airports and their cities to spool-up demand: secondary cities served by intercontinental carriers are largely limited to a handful of airports despite China having hundreds. And where carriers serve a secondary point, frequency is typically less than daily. Chinese carriers will continue to open long-haul services that can be reached with A330s. Any notion of a big bang expansion year will likely be around 2015 when China Southern takes 10 777-300ERs and China Eastern 20 of the type, although this includes replacement for six A340600s. China Eastern wants to add another daily service to Los Angeles, New York and Paris and also add new points. By around the time China Eastern catches up, Air China should be opening secondary North
The cross-Strait growth that is benefitting Taiwanese and Chinese carriers is coming at the expense of Hong Kong ...
49
NORTH ASIA
Cathay saw Dragonair needed better denition and effectively is allowing Dragonair to piggyback on Cathays renowned premium positioning.
Short-haul international expansion will occur as carriers like China Southern seek to tap potential but also enlarge their sixth freedom capability.
the state-owned giants) to Cathay Pacific (not wanting competition in oneworld). The CAACs route restrictions have resulted in equity joint ventures: Hainan has taken a stake in Frances Aigle Azur in order to operate Beijing-Paris with a French AOC. Spring Airlines will open a Japanese subsidiary to operate a greater range of Japan-China routes than those it can serve on its Chinese AOC (the Japanese unit will also fly domestically and to other countries). Short-haul international expansion will occur as carriers like China Southern seek to tap potential but also enlarge their sixth freedom capability, leveraging geographically convenient hubs: Beijing and Shanghai for North Asia, Kunming and Guangzhou for Southeast Asia, Chengdu and Urumqi for West Asia/CIS (and even Europe). But it will be challenging growth: China-Southeast Asia can be unprofitable at certain times of the year because of heavy Southeast Asian LCC competition. Private carriers Juneyao and Spring, both based in Shanghai, are expanding short-haul internationally and have a lean cost base and a hearty following. Also lean is Xiamen Airlines, which is majority-owned by China Southern but a world apart in efficiency; China Southern is looking to adopt Xiamens best practices. Xiamen is gearing up for international services in 2014 with 787s. Domestic expansion is continuing, with a bent on western cities where slots are more readily available and economic growth is highest. New carriers are being established, but only in partnership with existing carriers: Hainan will establish Fuzhou Airlines and Urumqi Airlines while Air China is a partner for a new inner Mongolia carrier (locallyheadquartered airlines receive regional government incentives). Meanwhile the threat from high-speed rail has proven overblown so far: competition is greatest on routes under 800km, and those are a minority for Chinese carriers. The 15 largest domestic routes by ASKs, representing 19% of domestic capacity (and a high share of profit), are all over 1,000km. HSR can be a friend to airlines by offering inter-modal tickets. China Eastern has formed initial partnerships it is happy with but has found them encumbering as expansion must be negotiated with each regional railway division. So the news that Chinas new reform-minded government will dismantle the railway fiefdom to make it more efficient and less corrupt is a welcome sign for the long-term, even if it means stalling on airline-HSR partnerships in the short-term. Middle East network carriers could shake-up the market as they have done in other regions, but their growth remains curtailed; Etihad has reached the bilateral maximum. It has strategic partnerships with
American cities with 787s (it already has an extensive European network with A330s). China Southern, Asias largest airline by size, is having long-haul difficulty. It has small widebodies like A330s and 777-200s, but then nothing until its five A380s, which are quickly becoming white elephants. Guangzhou-Los Angeles is the only route China Southern has been able to open that it expects to be profitable. There is a plethora of options from other cities, but Chinas regulatory environment generally limits a long-haul route to one airline, and those promising potential A380 routes are already served by other carriers. Air Chinas absence on Beijing-Chicago, for example, is allowing Hainan to enter later this year, representing the carriers first major longhaul route. Being privately owned (or as much as is possible in China), Hainan faces hurdles with the government, but it is a respected carrier known to be the most internationallyminded and efficient of the majors. It would make a great addition to the oneworld alliance, but that ascension faces obstacles from parties ranging from the CAAC (being lobbied by
Services from secondary Chinese cities to North America are the next to be opened...
The threat from high-speed rail has proven overblown so far: competition is greatest on routes under 800km, and those are a minority for Chinese carriers.
China Eastern and Hainan Airlines, the latter of which in late 2012 shifted its Dubai service to Abu Dhabi to facilitate connections. Other Etihad partners like airberlin and Garuda Indonesia went into Abu Dhabi as well, but they announced this at the same time as their general partnership; moving to Abu Dhabi took Hainan a year, indicating how slow even the efficient can be. China Eastern is interested in expanding its partnership with Etihad, but does not yet have the management resources to do so. China Eastern is also interested in a deeper partnership with Qantas, and the feelings are reciprocated, but again time and management is limited. One destination China Eastern is interested in reaching with Etihad is South Africa. Africa-Asia (and China in particular) is a promising market with growth, albeit from a lower base, projected to be higher than intra-Asia growth. Ethiopian and Kenya Airways both plan to expand. While the passenger outlook is strong, cargo is uncertain. China Airlines wants to reduce its revenue reliance on cargo while Cathay is pondering a future that may not have dedicated cargo aircraft. Increased passenger flights translate to more belly room. At the same time, a shift in manufacturing from Chinas east coast to the lower cost west is changing route dynamics. These new western manufacturing hubs are also where new passenger services are opening. There is a long-term concern of manufacturing leaving China: Mexico has quietly emerged as a competitor, the greater prevalence of robots means cost-effective manufacturing can be done closer to home where there is a growing social movement not to outsource (Apple has said it will manufacture an unspecified number of items in America). As much as carriers need to define their growth, there are factors they cannot yet incorporate. North Asia may offer promising growth, but like any other region agility will be essential. AL
While the passenger outlook is strong, cargo is uncertain.
There is a long-term concern of manufacturing leaving China: Mexico has quietly emerged as a competitor ... Apple has said it will manufacture an unspecied number of items in America.
51
MIDDLE EAST
MIDDLE EAST TOP 10 AIRLINES
RanKinG CARRIER NAME 1 2 3 4 5 6 7 Emirates Saudi Arabian Airlines Qatar Airways Etihad Airways Flydubai Oman Air Air Arabia Gulf Air El Al Israel Airlines Iran Air
SEATS 138146 88275 65680 38904 26073 18768 17982 17136 16796 14941
Middle East Outlook

VeN FOR A ReGION AS FAST DeVeLOPING AS THe MIDDLe EAST, few years could match the changes wrought during 2012. The year saw the most influential carriers in the region engage with the rest of the airline industry in a way that has profound implications for global aviation. 2013 will be the year that this dramatic reshaping begins to make its effects felt on the global competitive landscape ...
8 9 10
MIDDLE EAST TOP 10 Airports

SEATS 1,639,176 604,630 568,138 466,557 394,258 265,145 241,591 211,896 208,001 176,202
Dubai International Airport Doha International Airport Jeddah King Abdulaziz International Airport Riyadh King Khaled International Airport Abu Dhabi International Airport Tel Aviv-Yafo Ben Gurion International Airport Kuwait International Airport Muscat Seeb International Airport Bahrain International Airport Cairo International Airport
Middle East CapaCitY SEATS per WeeK
Source: CAPA - Centre for Aviation and Innovata | WeeK startinG 31-MAR-2013
21.0% 39.2%
Emirates Saudia Qatar Airways Etihad Airlines Flydubai Air Arabia Oman Air Gulf Air Others
12.2%
2.5% 2.6% 2.9%
9.9% 3.9% 5.8%
Middle eaST FleeT
Middle eaST PrOJeCTed deliVerY daTeS FOr airCraFT On Order

150
1,250 1,000 750 500 250
1,1796
100
699
50
45
In service
In storage
On order
Middle eaST FleeT BreaKdOWn FOr airCraFT in SerViCe

MIDDLE EAST mOST POPUlar airCraFT TYPeS in SerViCe

5.7% 6.5%
1.6% 3.5% 0.1%

Widebody Jet Narrowbody Jet Small Commercial Turboprop Regional Jet Turboprop Military Transport
47.7%
4.0% 17.8% 4.3% 7.3% 7.3% 9.3%
35.0%
Piston Engine Aircraft
Middle EaST CaPaCiTY SEATS SHare BY allianCe

0.0%
IATA Middle EaST PREMIUM TRAFFIC: 2009-2013

SOURCE: CAPA - CENTRE FOR AVIATION AND IATA
7.2% 14.2%
SkyTeam oneworld Star oneworld (affiliate)
Unaligned
16.0%
62.6%
20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 20 30 20 31 20 32 20 33
A320 787
A330 777
A350 ERJ170
A380 CRJ
737
21.8% 28.1%
A320 777 A330 737 A300 747 A340 Others
40 30 20 10 0 -10 -20 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
53
MIDDLE EAST
18 16 14 12 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 JanMar 2013
0.9% 0.1% 3.5% 1.9% 5.6% 7.4% 8.3% 11.6% 11.3% 13.3% 15.3%
... Outside of this competitive re-ordering, the region continues to produce outstanding levels of growth. During 2012, Middle Eastern airlines lead growth rates for international passenger and cargo traffic. With the global economy slowly warming up again, particularly in advanced economies, the rest of the world will catch up, although the region is still expected to lead growth in 2013.
The Big Three: The super connectors take sides

A generation ago, travellers to Europe swapped aircraft in London, Paris, Frankfurt or Amsterdam. Travellers to Asia connected in Hong Kong, Singapore or Bangkok. They flew typically with Lufthansa, British Airways, Cathay Pacific and Singapore Airlines. Increasingly though, these traditional carriers and their hubs have been superseded by Dubai, Doha and Abu Dhabi and their home carriers: Emirates, Qatar Airways and Etihad Airways. The rapidity of the shift has been breathtaking. In the past five years, London Heathrow, Paris Charles de Gaulle, Frankfurt and Amsterdam added a total of 11.7 million new passengers between them, growth of just 5%. In Asia-Pacific, Hong Kong, Singapore and Bangkok Suvarnabhumi have added 34.4 million passengers over the same period, an increase of 27%. In comparison, the three upstart Middle East hubs have added 35 million passengers, an increase of just under 60%. In 2012, the three Middle East hub airports handled 93 million passengers. In 2013, if their traffic projections are correct, the three hubs will handle a combined 110 million. Dubai, the largest hub in the region and almost wholly dedicated to international traffic, has seen its traffic increase from 34.5 million in 2008 to 57.7 million in 2012. The airport is now the third largest hub in the world by international passengers, and plans to eclipse London Heathrow as the largest international airport within five years. The transformation is being wrought by three state-owned but commercially focused airlines. Emirates, Qatar Airways and Etihad Airways are not only there to funnel traffic into and
Middle east traffic: 2008-2013

30 25
Revenue Passenger Kilometres %
20 15 10 5 0
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
Increasingly though, these traditional carriers and their hubs have been superseded by Dubai, Doha and Abu Dhabi and their home carriers: Emirates, Qatar Airways and Etihad Airways.
EUrOPean, ASian and Middle EaST HUB airPOrT TraFFiC: 2008-2012

SOUrCE: CAPA CENTrE FOr AVIaTION & aIrpOrT rEpOrTs
300 250 200 150 100 50 0 2008 2009 2010 Asia Pacific hubs 2011 2012
n 11il0 lio m
PROJECTED PASSENGER THROUGHPUT FOR ABU DHABI, DUBAI AND DOHA IN 2013
Middle East hubs
European hubs
Middle EaST GlOBal PremiUm TraFFiC marKeT SHare: APr-2008 TO AUG-2012

SOUrCE: IATA aND CAPA CENTrE FOr AVIaTION
15% 14% 13% 12% 11% 10% 9% 8% 7% 6%
Premium traffic share
12 month moving average
through their hubs, they are also there to make money. The airlines, and the forward and far thinking governments behind them, have married geographic advantage, modern and integrated infrastructure and tourism support from their home governments along with ambitious expansion plans. Around 80% of the worlds population lies within 10 hours flight of Dubai. This puts the fast growing economies of China, Southeast Asia, Africa and India, along with their rapidly expanding and increasingly travel-inclined middle classes, within the extended catchment areas
of the Middle Eastern hub carriers. This advantage means that these airlines have been able to tap into the burgeoning global travel growth, capturing an ever-increasing share of international long-haul traffic, particularly the important business and premium market segments. Like the shifting centre of gravity of global economic power, the balance of global aviation is gradually moving east. For years, the traditional hub carriers, as well as some governments, fought a vocal battle to stem the shift and the threat of the Middle Eastern sixth freedom carriers. However, 2012 saw them move away from antagonism and more towards embracing their opponents. In doing so, each of the three Middle Eastern carriers picked a different strategy. Emirates chose to enter a partnership with Qantas, in a deal that will see the Australian carrier shift its European transit hub from Singapore to Dubai, ending a 17-year strategic codesharing agreement with British Airways, as well as another codeshare deal with Cathay Pacific. Emirates is also eager to enter a tie-up with American Airlines, although a partnership may depend on the outcome of the carriers merger with US Airways. During 2012, Etihad Airways also entered a major partnership, this time with Air France-KLM. Less than a month after the Emirates-Qantas deal, Etihad Airways and the Franco-Dutch airline group sealed a joint codeshare deal covering destinations in Europe, the Middle East, Asia and Australia. As a part of the deal, Air France also entered a new codeshare agreement with airberlin, Europes
The transformation is being wrought by three stateowned but commercially focused airlines.
55
MIDDLE EAST
Middle EaST LCC caPaciTY: 2004-2012
SOUrCE: CAPA CENTrE FOr AVIaTION & OAG
sixth largest airline, in which Etihad Airways holds a 29.21% stake. Since its launch in 2004, Etihad Airways has built an extended network of codeshares, investments and strategic agreements, developing what it terms the worlds first equity alliance. Aside from airberlin, it controls shares in Air Seychelles, Virgin Australia and Aer Lingus. The relationships have allowed Etihad Airways to dramatically expand its global coverage. The airline now boasts a total of 248 codeshare destinations, compared to just 86 destinations it serves with its own metal. The equity alliance looks set to expand in 2013, with Etihad interested in a 24% stake in Jet Airways, an investment estimated at around USD300 million. The carrier could take its shareholding up to 49% the limit allowed under Indian regulations at a later date. Qatar Airways has chosen a third route, announcing that it will join the oneworld alliance in either late 2013 or early 2014. The airline will join Qantas, Cathay Pacific and British Airways in the grouping. After Emirates, Qatar Airways was the second largest full-service airline in the world not involved in one of the three major global airline alliances. The carriers move into the alliance will allow oneworld to redirect much of its east-west traffic through Qatar Airways Doha hub, providing superior routing alternatives across many hundreds of city pairs.
million
16 14 12 10 8 6 4 2 0 2004 2005 2006 2007 2008 2009 Intra-Middle East 2010 2011 2012
To/from Middle East
BOeinG 737NG ranGe cHarT

SOUrCE: BOEINg
The Middle East LCCs

2013 will see the 11th year of the low-cost model in the Middle East. In 2012, LCCs in the Middle East reached a milestone 10% of overall regional capacity. Even with the rapid growth the LCC model remains underdeveloped in the region. In Europe, North America and even in developing areas such as Southeast Asia and India, low-cost carriers account for a far greater proportion of traffic. A number of bankruptcies have seen smaller, privately-owned LCCs fall by the wayside, with Sama and most recently Bahrain Air declaring bankruptcy. There are only four LCCs left in the Middle East regional market, down from six a few years ago. However, the surviving carriers represent the fastest growing segment in a region characterised by high levels of growth. If anything, the impact that LCCs have in the market belies their status. Most LCCs in the Middle East deploy the majority of their capacity to destinations within the region. This is perhaps a surprising statistic given the fact that there are two billion people within 4.5 hours flying time of Dubai. However, the regions fast growing population and developing tourism markets, as well as the number of underdeveloped markets, have ensured the strong growth.
There are only four LCCs left in the Middle East regional market, down from six a few years ago.
The trend indicates that the upward trajectory of the region is sustainable and part of a reordering of the way the world travels.
There are a number of opportunities for further development in 2013. Even with their dwindling numbers, the Middle East LCCs are still entering new markets, taking more aircraft into their fleet and offering their customers an enhanced and increasingly sophisticated array of product and services.
Compared to developed markets such as North America and Europe, load factors, particularly on inter-regional flights remain low.
Developing markets and ailing airlines, the rest of the Middle East
Outside of the Gulf sixth freedom carriers and the LCCs, airlines in the Middle East suffer a variety of mixed fortunes. The region has few listed airlines, but those that are such as Royal Jordanian have generally been profitable. The smaller state-owned carriers have typically struggled with heavy losses, which were only exacerbated due to the disruption of the Arab Spring period. These carriers are typically over staffed, under financed and saddled with ageing fleets and inefficient business structures. The results are losses that would be unsustainable without state support. However, there is hope yet for the regions smaller state-owned carriers. Efforts are under way at perennial loss-makers of the region to transform them into commercially viable airlines. For some, such as Kuwait Airways and Saudia, this is taking place via thorough modernisations ahead of planned privatisations, although political pressures have ensured that the process is a drawn-out one. Others, including Gulf Air, Iraqi Airways and Oman Air, are undergoing bottom-up restructurings, often in the face of politically and socially painful choices. The Middle East became increasingly connected to the alliance network in 2012. Apart from Qatar Airways impending membership of oneworld, Saudia and Middle East Airlines both became members
of SkyTeam during the year. The ascension of these airlines fills a long-standing Middle East black spot in the alliances global network coverage. For the airlines, it holds the promise of boosting yields by increasing their attractiveness to foreign travellers and business passengers.
Growth is likely to continue unabated

Growth continues in the Middle East at a rate that has confounded the critics of airlines in the region. According to IATA, airlines in the Middle East contributed almost a third of the growth in international passenger travel in 2012. The region also led the world in terms of freight growth, defying the global contraction in cargo traffic. There are still areas that carriers in the region can improve. Compared to developed markets such as North America and Europe, load factors, particularly on inter-regional flights remain low. Secondary airports, particularly ones favourable to the low-cost carrier models, are a rarity in the region, stifling the potential for growth in some of the larger domestic markets. Government ownership and government protectionism remains high in the Middle East, with state-owned carriers controlling all of the largest markets. Despite the unparalleled levels of aircraft on order in the region, passenger and freight traffic levels in the Middle East in 2012 grew ahead of capacity. The trend indicates that the upward trajectory of the region is sustainable and part of a re-ordering of the way the world travels. AL
57
AFRICA
AFRICA TOP 10 AIRLINES
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 South African Airways Egyptair Royal Air Maroc Ethiopian Airlines Air Algerie Kenya Airways Tunisair Arik Air Comair Aerocontractors
SEATS 38,242 32,736 22,376 21,977 15,924 14,054 13,621 13,124 8,749 8,355
Africa Outlook
FRICa IS POISED TO BE THE NEXT GROWTH STORY FOR aVIaTION as the world turns to the continents bountiful resources, ranging from minerals to oil and water. An emerging middle class, with higher propensity to travel, will drive regional aviation as will the upswing in local and international tourism traffic ...
AFRICA TOP 10 Airports
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 Johannesburg Oliver R Tambo International Airport Cairo International Airport Cape Town International Airport Casablanca Mohammed V Airport Lagos Murtala Muhammed Airport Algiers Houari Boumediene Airport Nairobi Jomo Kenyatta International Airport Addis Ababa Bole Airport Tunis Carthage Airport
SEATS 477,146 369,036 197,327 193,065 174,652 158,678 156,144 151,901 131,316
AFRICA capacitY SEATS per WeeK

South Africa Airways EgyptAir Royal Air Maroc Ethiopian Airlines Air Algerie Emirates British Airways Air France Kenya Airways Other
260,427 249,786 160,885 144,652 126,246 126,046 108,110 106,312 99,012
Source: CAPA - Centre for Aviation and Innovata | WeeK startinG 31-MAR-2013
1,642,273
500K
1,000K
1,500K
2,000K
AFRICA fleeT
AFRICA PrOJecTed deliVerY daTeS fOr aircrafT On Order

60
1,500
1,293
40
1,000
20
500
111 169
20 20
In service
In storage
On order
737 777 747 787 ERJ170 A320 A330 A350 A380 ATR YUN7 DHC6 SSJ
AFRICA BreaKdOWn fOr aircrafT in SerVice
AFRICA MOST POPUlar aircrafT TYPeS in SerVice

0.6% 3.3% 0.5% 11.7% 35.7%

Narrowbody Jet Small Commercial Turboprop Turboprop Regional Jet Widebody Jet Military Transport Piston Engine Aircraft Business Jet
21.5% 46.9%
737 A320 ATR DHC8
11.8%
9.5%
B1900 CARAVAN DHC6 Others
5.7% 4.6% 3.6% 3.9% 4.1%
17.2% 19.3%
AFRICA caPaciTY SEATS SHare BY alliance

2.7%
IATA AFRICA PREMIUM TRAFFIC: 2009-2013

6.8% 11.6%
30 25 20
Unaligned Star SkyTeam oneworld oneworld (affiliate)
15 10 5 0 -5 -10 -15
26.4%
52.6%
-20 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
20 22
20 18
20 14
20 15
20 16
20 19
20 13
20 21
20 17
59
AFRICA
14 12 10 8 6 4
2.6% 3.1% 3.3% 6.9% 9.9% 9.1% 10.3% 11.7% 11.8% 10.7%
2
0.3% 0.6%
1.7%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 JanMar 2013
AFRICA traffic: 2008-2013
25 20 15
10 5 0 -5 -10 -15 -20

2008 2009 2010 2011 2012 2013
Aviation on the continent is beset by a range of impediments to growth including strong state protectionism...
... Aviation on the continent is beset by a range of impediments to growth including strong state protectionism leading to a lack of desire to liberalise air services, high taxes and charges, a poor safety record stemming from ageing aircraft, weak finances and inadequate regulatory supervision, under-developed infrastructure across most of the continent and a lack of professional expertise and wide-spread corruption. All of this makes it difficult for airlines to remain sustainable and for fares, which are well above the world average, to reduce, even via the entry of LCCs. But the potential upside from economic growth, which includes having seven of the worlds 10 fastest growing economies, is attracting a new breed of carrier like fastjet, Starbow and African World which are prepared to take the shorter term risk for big long-term gains. The powerbase among the established big four, South African Airways, EgyptAir, Ethiopian Airlines and Kenya Airways, continues to shift to Eastern Africa as an embattled SAA continues its slide from grace and its end of line base becomes increasingly isolated from the new European-Asia trade routes. Kenya Airways and Ethiopian are the continents stand-out performers, expanding their networks to Asia to take advantage of the growing trade and investment opportunities. The two carriers are competing aggressively to build their respective hubs at Nairobi and Addis Ababa as the eastern gateway to Africa. But their small size offers little resistance to the Gulf carriers which are taking advantage of the lack of intercontinental services. Eastern Africa is home to two of Africas most successful and consistently profitable airlines, Kenya Airways and Ethiopian, as well as LCC start-up fastjet which has aspirations of developing a pan-Africa network. China-Africa is one of the worlds fastest growing markets and both Kenya Airways Nairobi hub and Ethiopians Addis Ababa hub are well positioned to exploit this growth providing geographically convenient connections between Asia, Africa and Europe.
China-Africa is one of the worlds fastest growing markets...

Both carriers are gradually expanding their presence deeper into Asia to tap into key growth markets. Ethiopian Airlines plans to expand its Asian network with the addition of Ho Chi Minh City, Manila and Seoul Incheon from Jun2013. Hong Kong will also become a direct route from Addis Ababa, rather than operating via Bangkok. Ethiopian will give Addis Ababa a competitive edge with plans to become the only African carrier to link three of the biggest growth regions in the world, Latin America and China via Africa. However, Ethiopians protective government which strictly limits foreign carrier access to Addis Ababa, especially those from Gulf states which are rapidly expanding their African presence, will stand in the way of the hub achieving its true potential. Kenya Airways is also expanding its influence in the African market by aligning itself with smaller carriers, promoting greater crossborder cooperation and fostering economic development among nations which jealously guard their independence. The carrier aims to operate to all African capitals by 2014. Kenya Airways aggressive 10-year growth plan, launched in 2011, is based on taking advantage of the surge in East to West traffic, driven by new investment and the rapidly growing middle classes in Asian economies. This strategy calls for seven new routes into China, six into the Indian subcontinent and three across North and Southeast Asia as well as increasing its presence in Europe and the Middle East. Currently Kenya Airways operates to Guangzhou and Hong Kong in China, as well as Bangkok, Delhi and Mumbai. Despite their local rivalries, Kenya Airways and Ethiopian Airways have a mountain to climb to overcome the massive advantage of the Gulf carriers. Dominated by Emirates and its strong Asian links, Etihad and Qatar Airways too are able to funnel traffic between East, West
and South into Africa over their United Arab Emirates hubs, all the time strengthening their network power. Both Kenya Airways and Ethiopian Airways will need to draw on their respective alliance partners, Star for Ethiopian and SkyTeam for Kenya Airways, for help to compete with the onslaught of Gulf carriers. Kenya Airways CEO Titus Naikuni has repeatedly called for Kenya Airways, Ethiopian and possibly South African Airways to merge, creating a carrier of sufficient scale to compete against the foreign carriers that account for about 80% of intercontinental traffic to and from Africa. In particular he is concerned that Kenya Airways and Ethiopian are eating each other with their neighbouring hubs. The lack of political will, however, makes such a union unlikely. Newcomer fastjet, launched with two domestic routes from Dar es Salaam in Tanzania in Nov-2012, is rebranding and re-fleeting its newly acquired Fly540 operation in the country with A319s. London Stock Exchange-listed fastjet also owns the Fly540 regional operations in Angola and Ghana. But the carrier has become embroiled in a bitter legal dispute with Five Forty Aviation, the former owner of the Fly540 brand, over alleged outstanding debts and fees. fastjet has the backing of easyJets Sir Stelios Haji-Ioannous easyGroup and has secured funding to finance its growth plans which include building a fleet of up to 15 A319s by the end of 2013. It is also in negotiations with regulators and the liquidator to buy the assets of defunct South African LCC 1time which it hopes to relaunch. But growth is likely to be slow, with approval yet to be granted in Angola and Ghana to rebrand the Fly540 operations there. The regional LCC model is also untested in Africa where regulatory hurdles and costs are much higher than in Europe and the United States. On the other side of the continent in Western Africa the picture is less rosy. The region is dominated by two markets, Nigeria and Ghana. Nigeria is rich in oil, while Ghanas main export is gold, both of which are attracting significant international investment, which in turn is driving development of aviation in the region. However the collapse of once promising Air Nigeria, the Dana Airways MD-83 crash, which killed 163 people, and its subsequent on and off grounding, has left Nigeria with an effective duopoly between Arik Air
Nigeria is rich in oil, while Ghanas main export is gold, both of which are attracting signicant international investment, which in turn is driving development of aviation in the region.
61
AFRICA
D US
M GOVERNMENT GUARANTEE GIVEN 6 TO SAA 54
and Aero. Arik, one of Africas biggest carriers by seats but not network reach, and Aero have both been hamstrung by debts to the state due to bailouts in the wake of the global financial crisis. The Nigerian Government is now hoping to encourage investment in the scheduled aviation sector by fast tracking the registration of as yet unidentified new competitor airlines as well as establishing a new national carrier, aided by cheap funding for aircraft. Arik has recently held preliminary talks with Ivorian national carrier Air Cte dIvoire about providing Ivory Coast with domestic services. As is the case in Eastern Africa, Nigeria and Ghana are competing to establish Western gateways at their respective Lagos and Accra hubs. Ghana has had more success in attracting domestic airlines despite its smaller population of about 24.7 million but stronger regulations. Well-funded Africa World Airlines, Fly540 owned by fastjet, and Starbow have all established, adding to incumbent carrier Antrak Air. EgyptAir could further bolster the nations air transport if it takes its planned stake in domestic carrier CityLink which has suspended operations. However, Ghana lacks the level of intercontinental traffic of Nigeria and does not have its own long-haul carrier. North African carriers are continuing to recover from the massive upheaval during the Arab Spring which had its genesis in Tunisia in 2010 before spreading to Libya and Egypt. EgyptAir plans to launch services from Cairo to Manchester and Toronto in Jun-2013 and is progressing plans to take about a 50% stake in dormant Ghana domestic carrier CityLink to expand its presence in Western Africa. The carrier is also reportedly considering options to develop its fleet, including replacing and refitting a number of older aircraft. Europes largest low-cost carrier Ryanair
will establish two bases in North African tourism hotspot Morocco in Apr-2013, just six months after the Irish-based carriers decision to cut capacity, including several routes entirely, in protest at rising costs at the countrys airports. Ryanair claimed ONDA, the state-owned airports authority, had reneged on its agreement with the airline by imposing a new monopoly handling company on Ryanair which would have resulted in a massive increase in charges for the airline. But in a major turnaround Ryanair will base two aircraft at Marrakech and another at Fes while also adding two new Moroccan bases at Essaouira and Rabat as it looks to grow its Moroccan operations to 60 routes and eight airports, delivering up to 2.5 million passengers a year to the country. Morocco accounts for only about 1% of Ryanairs total network capacity, but the carrier is critical to the North African nations fortunes, where tourism contributes about 7% of GDP. The decision by Ryanair first to reduce capacity and now reinstate it offers a significant boost for Moroccos struggling economy, heavily reliant on European tourism. But it will also put further pressure on state-owned Royal Air Maroc (RAM). RAM for its part continues to look for a strategic equity partner after receiving a USD193 million bailout from the Moroccan Government in 2011. An additional USD900 million in public financing is available for the carrier through to 2016. RAM has been hit hard by the arrival of LCCs, including Ryanair and Air Arabia Maroc, on its routes after signing an open skies agreement with the EU. While the agreement allowed the Kingdom to achieve its target of 10 million tourist arrivals in 2010, RAM had been unprepared for the onslaught of competition the agreement would bring. Libya has mounted a strong economic recovery, enticing international carriers to rapidly rebuild their capacity, withdrawn after a bloody revolution engulfed the northern African state in Feb-2011. Turkish Airlines, Tunisair and EgyptAir led the way, while Western European carriers, led by Alitalia, also resumed services during 2012, including Lufthansa, Austrian Airlines and British Airways. The countrys two state-owned airlines, Libyan Air and Afriqiyah Airlines, which both suffered extensive damage to aircraft, are gradually re-establishing their pre-war networks as aircraft return to service. A merger of the two carriers is also progressing slowly though earlier expectations of a union in the first half of 2013 appear to have been put back to at least early 2014. South African Airways, however, is the continents basket case. The state-owned carrier suffered a mass resignation of its board in Sep2012 over political interference, followed by the departure of its CEO and several senior executives. Its new acting CEO Vuyisile Kona was suspended in Feb-2012 over undisclosed allegations, leaving the airline in the hands of Nico Bezuidenhout, seconded from LCC subsidiary Mango. The South African Government has given SAA until the end of Mar-2013 to deliver a strategic plan needed to support on-going state financial assistance of the troubled carrier, including details of financing
Kenya Airways CEO Titus Naikuni is concerned that Kenya Airways and Ethiopian are eating each other with their neighbouring hubs.
for the airlines planned purchase of short and long-haul aircraft, ahead of the appointment of a new permanent CEO. SAA is surviving on a ZAR5 billion (USD564 million) government guarantee, allowing the carrier to borrow on the financial markets. SAA has repeatedly had to ask the government for assistance over the last several years as multiple restructuring attempts have failed. But, faced with repeated government reluctance to support substantial restructuring of the company, it is hard to see any new moves achieving more than a temporary respite. During the year, LCCs 1time and start-up Velvet Sky failed, providing some competitive and yield relief to SAA and domestic competitor Comair and their respective subsidiaries, but that could be short lived if their objections to fastjets takeover of 1time are not heard by the government. The power-base of African aviation is moving from the continents biggest economy, South Africa, to East Africa where Ethiopian and Kenya Airways are building substantial hubs, leveraging their geographic advantage and extensive African networks. At the same time, privately funded carriers like fastjet and Starbow could, in time, be the answer to Africas lack of domestic and intracontinental air services, which is holding back economic development, bring more route options and lower fares, making air travel affordable for the growing middle class. But without liberalisation and a political will to deal with protectionism and corruption, aviation will continue to be thwarted in its ability to unlock Africas economic riches for the benefit of the continents people. AL
The power-base of African aviation is moving from the continents biggest economy, South Africa, to East Africa where Ethiopian and Kenya Airways are building substantial hubs...
63
EASTERN EUROPE
EaSTern eUrOPe TOP 10 AIRLINES
RanKinG CARRIER NAME 1 2 3 4 Turkish Airlines Aeroflot Pegasus Airlines Wizz Air S7 Airlines Transaero Airlines UTair Aviation LOT - Polish Airlines Rossiya - Russian Airlines CSA Czech Airlines
SEATS 972,677 459,435 305,424 248,400 213,056 165,438 164,688 125,487 79,706 73,862
Eastern Europe Outlook

ASTeRN EUROPe CONTINUeS TO Be A VeRY ACTIVe ReGION IN COMMeRCIAL AVIATION, with a number of developments in 2012 indicating the ever-unpredictable transformation of the regions aviation industry. Across the region, restructuring processes at full-service carriers began or continued as pressure from international carriers from Western Europe grew. Low-cost competition also grew and will continue to do so in 2013, although not at the rate seen in recent years in Western Europe. The next specific area to watch for low-cost carrier growth will be Russia as the Russian Government plans to amend existing legislation to make way for low-cost carrier operations ...
5 6 7 8 9 10
EaSTern eUrOPe TOP 10 AirPOrTS
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 Istanbul Ataturk Airport Moscow Domodedovo Airport Moscow Sheremetyevo Airport Istanbul Sabiha Gokcen Airport Athens International Airport Warsaw Frederic Chopin Airport Prague Vclav Havel Airport Ankara Esenboga Airport Saint Petersburg Pulkovo Airport Moscow Vnukovo Airport
SEATS 1,125,132 603,184 596,057 304,585 255,410 242,805 226,843 225,944 216,130 204,695
... It seems few Eastern European countries were left unscathed by airline restructuring or failures in 2012, with major airlines from Hungary, Latvia, Estonia, Poland, Slovenia, Ukraine and Czech Republic either launching restructuring processes or shutting down operations. The European Commission has also been kept busy with the multiple instances of state aid being involved in many cases. As a result of these restructurings and failures of vulnerable state carriers, airline networks across the region have been reduced while multi-type fleets have also been curtailed. The start of 2012 began with the collapse of 66-yearold Malv Hungarian Airlines on 03-Feb-2012. The Hungarian national carrier initially left a significant hole
EaSTern eUrOPe CaPaCiTY SEATS Per WeeK

Turkish Airlines
SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WeeK startinG 31-MAR-2013 972,677 459,435 305,424 279,153 248,400 232,204 213,056 165,438
EaSTern eUrOPe PrOJeCTed deliVerY daTeS FOr airCraFT On Order

100
Aeroot
Pegasus Airlines
Ryanair Wizz Air Lufthansa S7 Airlines

Transaero Airlines UTair Aviation
75
50
25
20 20
20 22
Other
2,577,262
A320 A330 737 747 A350 SSJ A380 ERJ170 CRJ 42 777 YUN7 787
0K
500K
1,000K
1,500K
2,000K
2,500K
EaSTern eUrOPe BreaKdOWn FOr airCraFT in SerViCe

EaSTern eUrOPe MOST POPUlar airCraFT TYPeS in SerViCe

3.9% 9.4%
3.3%
21.4% 39.3%
Narrowbody Jet Turboprop
A320 737 AN24 AN26 CRJ
11.9%
Regional Jet Widebody Jet Small Commercial Turboprop Military Transport
21.2% 2.8% 3.0%
TU154 IL76 Others
19.6%
51.9%
3.4% 3.7%
5.2%
EaSTern eUrOPe CaPaCiTY SEATS SHare BY allianCe

6.7%
EaSTern eUrOPe FleeT
2,500
14.4%
2,000
Unaligned Star SkyTeam oneworld
2,295
1,500 1,000
618
48.3%
500
138
30.6%
In service
In storage
On order
20 25
20 23
20 24
20 14
20 18
20 15
20 16
20 19
20 13
20 17
20 21
164,688
65
EASTERN EUROPE
in the market however this was soon filled and exceeded, especially by low-cost carriers such as Hungarian Wizz Air and Irelands Ryanair which subsequently established a base in Budapest. A number of Eastern European carriers commenced restructuring processes in 2012 including airBaltic, Estonian Air, LOT Polish Airlines, Adria Airways and CSA Czech Airlines. 2013 will be a formative year for cementing these airlines futures. airBaltics ReShape plan, launched in 2012, was reported to be a success by CEO Martin Gauss in Nov-2012 with the airlines labour cost reduced by 15% and the airline on track to breakeven in 2014. The airline is planning to reduce capital expenditure in 2013 while renegotiating existing leases on its aircraft. The European Commission launched an investigation in Nov-2012 into various public support measures from the Latvian Government to ensure they were in line with EU state aid rules. Fellow Baltic carrier Estonian Air also launched plans to turn its operations around in 2012. The airline is attempting to secure its future with significant reductions to both its network and fleet. The airline has received almost EUR25 million in loans from the Estonian Government, which are now under investigation by the European Commission. LOT Polish Airlines latest restructuring was launched in late 2012 following the granting of an emergency EUR96.4 million loan from the Polish Government. This was followed by a leadership change in early 2013. The airlines turnaround has also been hampered by the fleet-wide grounding of Boeing 787-8 aircraft since late Jan-2013. These aircraft are a key factor in the airlines fleet and network restructuring and a compensation settlement will be expected to follow their re-entry into service. A new restructuring plan is to be announced in Mar-2013 under which approximately 700 jobs are expected to be lost and its fleet size potentially halved. Meanwhile the Polish Government is also planning a law change which would allow for a potential sale of the carrier. Slovenias Adria Airways also underwent a restructuring process in 2012. The airline
As a result of these restructurings and failures of vulnerable state carriers, airline networks across the region have been reduced while multi-type fleets have also been curtailed.
hired a privatisation advisor in early 2012 to assist the airline in finding strategic partners and/or investors. The European Commission also launched an investigation into the airline in Nov-2012 due to concerns of illegal state aid. CSA Czech Airlines was yet another legacy carrier in the region which underwent restructuring in 2012 with its network and fleet reorganised and new employee collective agreements signed ahead of privatisation. The airlines privatisation was launched in Dec-2012 and received a boost in early Mar-2013 with Korean Air submitting a bid for a 44% stake in the carrier as part of efforts to strengthen its network in Europe. Korean Air said it recognises the rapid growth of the Eastern European market and intends to establish a stronger presence in the region. The airlines bid for a large slice of the Czech national carrier and subsequent agreements between the airlines may be an interesting development in 2013. Also in privatisations, Romanias TAROM may be looking into options in 2013 after the companys privatisation was postponed to the end of 2013. This delay followed government elections during which the privatisation of state controlled entities were postponed. In late 2012 and early 2013, the Ukrainian aviation market was shaken up by the bankruptcy of Aerosvit. The previously largest carrier in the Ukrainian market substantially reduced its network over the first two months of 2013 and has since suspended all operations. It reportedly plans to resume a select number of long-haul services in northern hemisphere summer 2013 however time will tell whether Aerosvit will return to its former flag carrier status. Ukraine International Airlines (UIA), as well as Air Onix, UTair Ukraine and Wizz Airs Ukrainian unit, Wizz Air Ukraine, have since stepped up to take over much of Aerosvits previous network, enlarging and strengthening their operations. Wizz Air Ukraine will see its fleet double in the coming months while its network will also significantly expand. Much of this is as a result of it taking advantage of network gaps left by Aerosvits bankruptcy. Wizz Air Ukraines Hungarian parent, Wizz Air, also continued to expand its network and fleet across not only Eastern Europe but in Western Europe in 2012. The airline opened a number of new routes and bases across Europe in 2012 with its total network increasing from 203 routes to over 250 routes in 2012. This is set to continue in the coming
In late 2012 and early 2013, the Ukrainian aviation market was shaken up by the bankruptcy of Aerosvit.
Russia will be a major country to watch in 2013 as the Russian Government plans to amend legislation which would allow for the establishment of true low-cost carrier operations in the country.
years with a significant number of aircraft on order. Russia will be a major country to watch in 2013 as the Russian Government plans to amend legislation which would allow for the establishment of true low-cost carrier operations in the country. The countrys only home-based low-cost carriers in the past were Sky Express (operational from 2007 until 2011) and Avianova (operational from 2009 until 2011). Avianova entered bankruptcy while Sky Express merged with Kuban Airlines (which itself collapsed in Dec-2012). Current Russian legislation requires airlines to provide refundable fares, checked luggage and in-flight service on all flights. All parts of the traditional fare product which is unbundled by low-cost operators in order to offer low cost fares. The Russian Government is planning to amend legislation to allow for true low-cost carrier operations in the country. Russias largest carriers Aeroflot and Transaero have both indicated interest in establishing low-cost carrier subsidiaries. Aeroflot has said it will be able to launch a low-cost airline within six months of the necessary law changes. Meanwhile the Russian Federal Air Transport Agency (Rosaviatsia) plans to reduce the number of aircraft required by scheduled airlines from the current requirement of three aircraft with capacity of up to 55 seats or eight aircraft with more than 55 seats. This is expected to see new airlines emerge with small fleets from 2013. While this is underway, British budget airline easyJet commenced services to the country in Mar-2013, further increasing the overall presence of low-cost carriers in the eastern-most country of Eastern Europe. Ryanair has also signalled interest in potentially launching services to/from and maybe within the country. Further plans may be announced if or when the relevant law changes come about. Elsewhere in the region, new Georgian start-up carrier FlyGeorgia launched in Aug-2012. Other new airlines may be launching in 2013,
2013 will see low cost carrier capacity continue to grow across the region, and into new markets including Russia.
including Georgias Air Caucasus and Lithuanias Air Lituanica. The future of some existing carriers in the region is uncertain however, including that of Bosnia and Herzegovinas B&H Airlines and Russias Red Wings. While many of the aviation developments in Eastern Europe in 2012 seemed to be somewhat negative, the end result of these airline restructurings will hopefully be the creation of a new era in Eastern European aviation. Stronger, more dynamic airlines with more effective route networks and efficient fleets will bring about more effective competition and improved services. 2013 will see low-cost carrier capacity continue to grow across the region, and into new markets including Russia. New start-ups will also see new developments and potentially new destinations on the departure boards across airports in the region. AL
67
WESTERN EUROPE
WeSTern eUrOPe TOP 10 AIRLINES
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 Lufthansa Ryanair Air France easyJet British Airways SAS airberlin KLM Royal Dutch Airlines Iberia Norwegian Air Shuttle
SEATS 1,739,886 1,604,799 1,329,819 1,200,528 1,025,222 703,817 609,008 571,584 534,125 494,828
Western Europe Outlook

HE EUROPEAN AIRLINE MARKEt HAS A NUMBER OF DIVIDING LINES. There is little growth on routes within the continent, but steady growth on long-haul. Most of the growth within Europe goes to low-cost carriers, while the major legacy groups restructure their short/medium-haul activities. The big Western countries see little or negative traffic growth, while the East enjoys a growth spurt ...
WeSTern eUrOPe TOP 10 AirPOrTS
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 London Heathrow Airport Paris Charles De Gaulle Airport Frankfurt Airport Amsterdam Airport Schiphol Madrid Barajas Airport Munich Airport Rome Fiumicino Airport Barcelona El Prat Airport Paris Orly Field London Gatwick Airport
SEATS 1,774,606 1,421,231 1,394,143 1,052,624 1,016,791 1,007,000 812,178 768,004 683,097 622,909
... On the other hand, the big Western airline groups continue to lead consolidation, while many in the East struggle to survive. Many legacy flag carriers post losses, while LCC profits grow. Among the LCCs, the two larger established players make record profits with relatively slow traffic growth and the newer, smaller ones have less consistent profits but double-digit traffic growth. All these divides were clear in 2012 and will remain sharp in 2013. IATA reported that European airlines saw passenger traffic (RPK) growth of 5.3% in 2012, driven by long-haul, while cargo traffic fell by 1.5%. Association of European Airlines (AEA) members RPKs grew by 4.1%, although passenger numbers grew by only 2.2%. Members of the European Low Fares Airline Association (ELFAA) carried
WeSTern eUrOPe CaPaCiTY SEATS Per WeeK

Lufthansa Ryanair Air France easyJet Britis Airways SAS airberlin KLM Royal Dutch Airlines Iberia Other
1,739,886 1,604,799 1,329,819 1,200,528 1,025,222 703,817 609,008 571,584 534,125
WeSTern eUrOPe PrOJeCTed deliVerY daTeS FOr airCraFT On Order

150
100
50
0
20 20 20 22 20 25 20 23 20 28 20 26 20 27 20 24 20 14 20 15 20 16 20 18 20 19 20 13 20 21 20 17
8,249,594
747 A350
777 A380
737 ERJ170
787
ATR CSERIES
A320 CRJ
A330 AN148
0M
2M
4M
6M
8M
WeSTern eUrOPe BreaKdOWn FOr airCraFT in SerViCe

WeSTern eUrOPe MOST POPUlar airCraFT TYPeS in SerViCe

0.2% 5.2% 0.1% 9.9%

Narrowbody Jet Widebody Jet Regional Jet Turboprop Small Commercial Turboprop Piston Engine Aircraft Military Transport
31.5%
28.8%
A320 737 A330 CRJ ERJ170
12.3%
3.7% 3.7% 3.9% 3.9% 3.9% 20.6%
777 747 Others
18.6%
53.8%
WeSTern eUrOPe CaPaCiTY SEATS SHare BY allianCe

0.4% 15.7% 41.5%
WeSTern eUrOPe FleeT
5k
4,396
4k
Unaligned Star
3k 2k 1k 0
190 915
17.0%
SkyTeam oneworld oneworld (affiliate)
In service
In storage
On order
25.4%
69
WESTERN EUROPE
7.2% more passenger than in 2011. In spite of this growth in passenger traffic, Eurocontrol reported that the number of flights in Europe fell by 2.4% in 2012. The apparent discrepancy is explained by a trend towards higher load factors, reflecting tight capacity control, and a higher average number of seats per aircraft. The latter point is explained by the superior growth of high seat density LCCs and of long-haul traffic. Spain was the weakest major European market, with a 6.5% drop in the number of flights, and none of Europes five biggest countries saw growth in flight numbers in 2012. By contrast, Turkey saw strong growth, followed by Norway, Poland and Ukraine. This pattern of a decline in flights in Western Europe, but positive growth in Turkey and Central/Eastern Europe, is forecast to continue in 2013, albeit at a lesser rate (Eurocontrol forecasts total movements will fall by 1.3%). For charter carriers, 2012 brought some welcome relief as flight numbers recovered from the impact of the Arab Spring in 2011, although they are still on a longer-term downward trend. Traditional carriers saw a fall in their share of flights in 2012 and this looks set to continue as LCCs are projected to increase their share further. The main point of comfort for traditional carriers is that growth rates to destinations outside Europe are forecast by Eurocontrol to be higher than within Europe. Passenger traffic growth should again be positive in 2013, outpacing the change in flight numbers. Western Europe is likely to be sluggish overall, with passenger growth led by Turkey and the Eastern countries and by LCCs. 2012 was a year of losses for many legacy carriers, including IAG, Air France-KLM, SAS and Alitalia, while Finnair, Aer Lingus and the Lufthansa Group managed positive results. AEA, which mainly represents legacy carriers, estimates a combined 2012 EBIT loss for its members. By contrast, the principal LCCs Ryanair, easyJet, Vueling and Norwegian Air Shuttle all saw their profits grow. According to IATA, European airlines posted an aggregate breakeven financial result in 2012 (IATA forecasts this again in 2013).
This pattern of a decline in flights in Western Europe, but positive growth in Turkey and Central/Eastern Europe, is forecast to continue in 2013...
In 2012, the Big Three legacy flag carrier groups made moves to restructure their short/medium-haul operations. IAG launched Iberia Express, a lower cost subsidiary to feed its Madrid hub, in spite of a series of strikes by staff protesting against its lower wage structure. IAG later announced a wider Iberia transformation plan that led to a further series of strikes in early 2013. Lufthansa announced plans to phase the transfer of all domestic and European flights outside its Frankfurt and Munich hubs to its LCC subsidiary Germanwings from summer 2013. Air France-KLM proceeded with its French regional bases plan and, in early 2013 created a new regional subsidiary Hop, the merger of a group of regional carriers Brit Air, Regional and Airlinair. The Big Three intend to continue with a cautious approach to capacity growth in 2013. IAG plans a capacity cut of 1.9% with Iberia capacity down 10% and BA capacity up around 2%, fuelled by its first A380 deliveries. BAs launch route for its A380 will be Los Angeles. Air France-KLM plans passenger capacity growth of 1.5% in 2013 (+2.4% long-haul, -2.1% medium-haul). Lufthansas 2013 plan indicates capacity growth of 1.0% (+2.9% long-haul, -2.6% short-haul). All three either continued with existing cost reduction programmes, or announced new ones. IAGs bullish target to exceed 2011s EUR485 million operating profit in 2013 will depend on a successful implementation of the Iberia transformation plan. Air France-KLM has not set a profit target for the year, noting that 2013 started amid an uncertain environment. It will maintain strict control over capacity and investments and expects a reduction in unit costs excluding fuel, currency effects and pension charge increases. Lufthansa aims to beat 2012s EUR524 million operating profit in 2013. SAS proceeded with its own cost cutting plan, referred to by its CEO as the final call if there is to be a SAS in the future. Alitalia turned to its shareholders for a life support loan in early 2013 after almost running out of cash at the end of 2012. The Italian flag carrier then parted company with its CEO, while Finnairs boss left to join a cargo handler. Both airlines are seeking replacements. Virgin Atlantics long-serving CEO announced his retirement in 2012, to be replaced by Craig Kreeger, formerly SVP customers at American Airlines, whose first challenge will be to tackle an expected annual loss for 2012-13. Virgin Atlantic also signed an alliance deal with Delta Air Lines after the latter agreed to acquire the 49% stake in Virgin Atlantic
In 2012, the Big Three legacy flag carrier groups made moves to restructure their short/medium-haul operations.
previously owned by Singapore Airlines. In a busy period for Virgin Atlantic, the carrier is starting short-haul services for the first time in its 29 year history, with flights from Heathrow to Manchester, Edinburgh and Aberdeen under the new brand Little Red and using aircraft and crew wet-leased from Aer Lingus. Ryanair delivered another record profit in 2011-12 and is set for yet another in 2012-13 after carrying 79.6 million passengers in calendar 2012 (4.2% up on 2011, in spite of cutting capacity and traffic in the winter months). In 2013, Ryanair will establish its first non-European bases at Fes and Marrakech in Morocco. easyJet also achieved record profits and increased its regular dividend, pleasing its founder and largest shareholder Sir Stelios Haji-Ioannou. Less pleasing to Sir Stelios was the airlines consideration of a possible major new aircraft order. The easyJet share price increased two and a half times from the start of 2012 to midMar-2013, suggesting that his fellow shareholders are happier than Sir Stelios. Norwegian Air Shuttle grew passenger numbers by 21% and equalled its best ever pre-tax profit in 2012. In 2013, when it plans a 25% increase in ASKs, it will establish its first base in a major capital city outside Scandinavia (at London Gatwick) and set up a base in the highly competitive mainland Spanish market. Moreover, Norwegian will also launch its first long-haul routes, from Oslo and Stockholm to New York and Bangkok. Vueling became the object of an IAG takeover bid and reported the second highest profit in its history after seeing passenger growth of 20% in 2012. Emboldened by this, and by its knowledge that IAG needs Vueling more than it needs IAG, it is holding out for a higher price. There were a number of European airline bankruptcies in 2012, most notably Spanair, Malev, and Wind Jet, but also including Denmarks Cimber Sterling, Iceland Express (operations acquired by Wow Air), Czech Connect, Germanys Cirrus Airlines, Strategic Airlines Luxembourg, Polands OLT Airlines and Swedens Skyways. The demise of Spanair led to a rush of new capacity at its principal hub Barcelona El Prat from Vueling and Ryanair. The latter also moved significant new capacity into Budapest to fill the space left by Malev. In other consolidation moves, ownership of bmi was transferred from Lufthansa to IAG, with bmi baby subsequently closed, and Ryanair made a third attempt to buy Aer Lingus (only to be blocked yet again by the EU competition authorities, a decision that Ryanair intends to appeal). TAP Portugals privatisation fell at the final hurdle when the Portuguese Government abandoned the process after receiving a bid from Synergy Aerospace and no major European airline, although it may restart it in 2013. The end of the long-standing British Airways-Qantas joint venture was announced in 2012 after Qantas eye was turned by new partner
21%
NORWEGIAn AIR SHUTTLE PAssEnGER nUMBERs GROWTH In 2012
There were a number of European airline bankruptcies in 2012, most notably Spanair, Malev, and Wind Jet...
Emirates. BA got over it soon enough, sponsoring Qatar Airways application to join oneworld (expected in late 2013 or 2014), and signing a codeshare with Cathay Pacific on Hong Kong to Australia routes. airberlin joined oneworld in 2012, but also announced a three-way codeshare with SkyTeam member Air France-KLM and airberlin shareholder Etihad. Etihad also took a stake in, and signed a codeshare with, Aer Lingus. On the regulatory front, there are hopes for progress on emissions trading and the Single European Sky in 2013, both areas that have been stuck in a political quagmire. Aviation was officially brought into the European Emissions Trading Scheme in 2012, despite opposition from the industry and almost every significant non-EU nation. To allow more time to reach a global solution at the ICAO General Assembly in autumn 2013, the EU exempted flights into and out of Europe for the time being, while enforcing the scheme for intraEuropean flights. Progress towards a Single European Sky faltered again as a number of member states missed the Dec-2012 deadline to create Functional Airspace Blocks. Following the European Commissions proposal on a charging framework for air navigation services for the period 2014-2019, Europes airline bodies (AEA, European Business Aviation Association, ELFAA, European Regions Airlines Association, and the International Air Carrier Association) jointly said: All initiatives to achieve a harmonised and efficient European airspace have so far failed to deliver. The airlines are likely to keep up the pressure on the Commission to improve the proposals before they are finalised in Dec-2013. Meanwhile, most airline managements cast regular looks over their shoulder at the tortured debt positions and political manoeuvring in many eurozone countries, hopeful that none of the trouble spots erupts into something worse. AL
71
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NORTH AMERICA
NOrTH AMeriCa TOP 10 AIRLINES
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 Delta Air Lines United Airlines Southwest Airlines American Airlines US Airways Air Canada JetBlue Airways Alaska Airlines AirTran WestJet
SEATS 3,734,822 3,349,883 3,170,990 2,789,021 2,199,479 913,027 725,700 670,537 509,707 443,294
North America Outlook

ORTH AMERICa IS On THE BRInK OF REaCHInG FULL MaTURITY as the planned merger between American and US Airways and the previous tieups among the countrys airlines will result in three large full-service network airlines, one major low-fare carrier, roughly three hybrid airlines and a couple of fringe airlines operating under the ultra low-cost carrier model. Canada is also moving into a new level of maturity as its two major airlines are in the midst of creating new businesses to enlarge their revenue, and one strong niche player adds some rationalisation to their duopoly.
NOrTH AMeriCa TOP 10 AirpOrTs

SEATS 2,183,726 1,534,449 1,491,895 1,445,441 1,176,220 1,172,450 1,045,480 1,022,360 977,104 961,942
Atlanta Hartsfield-Jackson International Airport Chicago O'Hare International Airport Los Angeles International Airport Dallas/Fort Worth International Airport Denver International Airport New York John F Kennedy International Airport Phoenix Sky Harbor International Airport Charlotte Douglas Airport Miami International Airport San Francisco International Airport
NOrTH AMeriCa CapaCiTY SEATS per WeeK

Delta Air Lines United Airlines Southwest Airlines American Airlines US Airways Air Canada JetBlue Airways Alaska Airlines AirTran Other
913,027 725,700 670,537 509,707
SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WeeK startinG 31-MAR-2013 3,734,822 3,349,883 3,170,990 2,789,021 2,199,479
3,761,245
0M
1M
2M
3M
4M
NOrTH AMeriCa FleeT
NOrTH AMeriCa PrOJeCTed deliVerY daTeS FOr airCraFT On Order

300
10k
8,488
200
7.5k
100
5k
0
20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 20 30 20 31 20 32
1,964 409
2.5k
767
On order
777 A350
787
737 DHC8
747 ERJ170
A320 MRJ
In service
In storage
A330
NOrTH AMeriCa FleeT BreaKdOWn FOr airCraFT in SerViCe
NOrTH AMeriCa MOST POPUlar airCraFT TYPeS in SerViCe

6.7% 12.4%
0.4% 1.2% 0.1%

Narrowbody Jet
35.7%
43.5%
Regional Jet Widebody Jet Small Commercial Turboprop Turboprop Business Jet Piston Engine Aircraft Military Transport
18.2%
737 CRJ A320 757 EMB145 DC9 CARAVAN Others
11.8%
13.6%
4.8% 5.7% 6.4% 6.8%
10.5%
22.2%
NOrTH AMeriCa CaPaCiTY SEATS SHare BY allianCe

0.1% 14.6% 34.6%
IATA NOrTH AMeriCa PREMIUM TRAFFIC: 2009-2013

30 20
10 0 -10 -20 -30 -40 Jan-09
Unaligned Star SkyTeam oneworld oneworld (affiliate)
18.7%
32.1%
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
75
NORTH AMERICA
35 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 JanMar 2013
19.8% 17.6% 24.0% 21.9% 24.9% 26.0% 27.1% 28.5% 28.0% 28.7% 29.7% 30.1% 30.1%
North AMerica traffic: 2008-2013

15 10
5 0 -5
-10 -15
2008 2009 2010 2011 2012 2013
58%
PERCENTAGE OF US MARKET HELD BY AMERICAN, DELTA, UNITED, ONCE AMERICANs MERGER Is COMPLETE
... But the full maturation of those markets does not mean challenges in achieving viable business models have been wiped out. While a high level of maturity deters some start-ups from introducing junk capacity into the market place, established airlines need to ensure they have a solid foundation to weather the wild cyclicality that remains the only predictable pattern in the airline business. Once American and US Airways reach full integration about 18 months after closing on their merger during 3Q2013, three carriers will account for approximately 58% of the US domestic market based on current O&D data from trade group Airlines For America (A4A). Adding Southwests roughly 25% share, four carriers (including regional feed for the majors) will represent roughly 83% of the US domestic market. The speedy pace of US consolidation during the last few years is a rapid change from 2005, when seven carriers accounted for about 90% of the market. The stage is essentially set in the US to support traditional network, hybrid low fare airlines offering medium frills, and ultra lowcost carriers to serve the market place. Most of the airlines that fall into those three categories have focused during the last few years on creating seemingly viable growth models while ensuring fragile profitability is sustainable. Collectively the 10 largest US carriers have recorded three straight years of profitability, a commendable feat given the wild volatility in oil prices. But the margins are razor thin falling from 2.2% in 2010 to 0.1% in 2012 as fuel continued to be a permanent blight on airline performance in 2012 amidst capacity rationalisation and some pricing traction. During 2012 fuel accounted for 36% of the collective operating expenses recorded by the largest US carriers, according to A4A, nearly a 6% rise from the year prior. Observers from inside and outside the industry in 2013 will closely monitor Deltas attempt to partially mitigate fuel price volatility through its acquisition of the Trainer refinery outside of Philadelphia, Pennsylvania, which closed during 2012. US superstorm Sandy that struck the US east coast late in 2012 derailed Trainer from making a positive contribution to Deltas financial results in 4Q2012, but the
... integration headaches resulted in United recording lacklustre nancial results for most of 2012
36%
PROpORTION OF 2012 OpERATING COSTS DUE TO FUEL
airline remains bullish that its estimates of a USD300 million reduction in annual fuel costs resulting from the Trainer purchase remain sound. Deltas agility in quickly moving to purchase a refinery stems from the competitive gap it enjoys from its still-merging US competitors. United in 2013 is attempting to finish picking up the pieces of a fragmented 2012 that began with a painful IT system cutover and hit a crescendo mid-year when an aircraft redeployment snafus triggered significant operational disruptions that sent some high-yielding customers elsewhere. Overall integration headaches resulted in United recording lacklustre financial results for most of 2012, so the carrier will spend much of 2013 working to deliver the full USD1.2 billion in merger synergies it predicted were achievable when it announced its tie-up with Continental in 2010. But the carrier has already given itself some leeway indicating that it might be 2014 before it can completely harvest the targeted synergies. American and US Airways will just be starting the arduous process of integration during late 2013. Southwest Airlines will also spend 2013 fleshing out its position in the US market place as it continues its integration with AirTran
after acquiring its smaller rival in 2011. Southwest has pledged to deliver USD400 million in merger synergies in 2013, ahead of completing its AirTran integration in 2014. As airline business models in the US become more defined, Southwest finds itself caught in between the hybrid carriers and the full-service airlines. Based on US Department of Transportation data from Dec-2011 to Nov-2012, Southwest held a 15% share of the US domestic market, third behind Deltas 16.3% share and Uniteds 15.6% share. With Spirits transition to an ultra low-cost carrier and Allegiant Air recording lower unit costs than Spirit, Southwest can no longer declare itself a low-cost leader and has acknowledged it is battling cost creep similar to its legacy colleagues. While Southwest has made a marked push to expand its corporate traveller base, it does not quite fit into the hybrid category that neatly defines Alaska Air Group and JetBlue Airways. With the elimination of AirTrans business class and assigned seating, Southwest appears to prefer remaining in the nebulous area between full-service and hybrid carriers. The emergent hybrids Alaska and JetBlue plan significantly higher capacity expansion than their legacy peers and Southwest during 2013, following a similar pattern from 2012. Despite higher than industry average supply growth both carriers sustained profits during 2012, and appear to be targeting their growth in 2013 in certain pockets where they either hold a position of strength or are shielded from competition. JetBlue plans to continue building out its Boston focus city and its points in Latin America and the Caribbean, while Alaska is turning its attention away from the US west coast-Hawaii market to flesh out its transcontinental network from its Seattle hub and from San Diego, which
As airline business models in the US become more defined, Southwest finds itself caught in between the hybrid carriers and the full-service airlines.
77
NORTH AMERICA
As WestJet attempts to ratchet up its corporate traveller base, Air Canada is focusing on the opposite end of the spectrum by launching its low-cost leisure carrier Rouge...
became a long-haul destination for the carrier in 2012. Both Alaska and JetBlue have somewhat unique positions in their respective bases and headquarters in Seattle and New York JFK. Those markets are major gateways from Asia and Europe, which make both carriers attractive to a range of partners. Alaska has long-standing relationships with American and Delta, and is leveraging its relationship with Delta as it grows its presence from Seattle into Asia, providing feed to Deltas long-haul flights. JetBlue has long touted its prime position at JFK to partners looking for feed in the continental US, building up to more than 20 interline and one-way codeshare relationships. During 2013 the carrier plans to foster some two-way codeshares, further distinguishing itself as more of a hybrid value carrier than a pure low-cost airline. The other well-known hybrid carrier in the US, Virgin America, is putting the brakes on growth during 2013 as it works to record its first annual profit since launching operations in 2007. The carrier has deferred and cancelled some Airbus deliveries to ease its financial commitments and cut its supply after growing capacity roughly 72% during the 20102012 time period. But unlike Alaska and JetBlue, Virgin America does not hold a relative position of strength at its San Francisco base, accounting for just approximately 9% of the seat share in the market. Virgin Americas network is built around major metropolitan areas where legacy carriers are dominant and have no intention of ceding their corporate share to Virgin America even if the younger carrier has a slick onboard product. Pressure will be intense on Virgin America during 2013 to right its financial course and give investors some hope of a promise of profitability. US ultra low-cost carrier Spirit Airlines has made a major push from legacy strongholds during the last couple of years, turning its attention away from a focus on growing service from its Fort Lauderdale base into the Caribbean and Latin America. Spirit will continue to press forward with that strategy in 2013, fleshing out some markets from Baltimore, Denver, Detroit, Houston, Minneapolis and Philadelphia. So far the carrier has largely proven its theory that it can stimulate low-yielding traffic in those already-crowded markets that are undesirable to the legacy carriers, evidenced by its steady financial performance in 2012 despite suffering significant disruptions from superstorm Sandy. The other well-know ultra low-cost carrier Allegiant Air will spend a large portion of 2013 trying to prove it can replicate its strategy of linking small markets to major tourist destinations, such as Las Vegas and Orlando, in Hawaii. Allegiant had a limited time in the Hawaiian market during 2012, so 2013 is the year when the carriers growth plan will be put to the test. As American and US Airways start the arduous process of merger integration, the US domestic space is reaching a relative level of maturity and rationality. The next area for shifting sands could be on the alliance level as carriers participating in trans-Atlantic joint business ventures appear to be realising those tie-ups may not quite meet their needs in building truly global networks. Deltas decision to take an equity stake in Virgin Atlantic reflects the reality that alliance JVs are not a completely foolproof tactic to flesh out a true global network.
The next area for shifting sands could be on the alliance level as carriers participating in trans-Atlantic joint business ventures appear to be realising those tie-ups may not quite meet their needs in building truly global networks.
Canadas domestic space is also undergoing a shift in 2013 as its second largest carrier WestJet launches its new regional subsidiary Encore, further pressuring Air Canada in smaller domestic markets where it was once shielded from competition from its main domestic rival. WestJet is also attempting to expand its 10% share of managed corporate travel during 2013 with the introduction of a premium economy cabin and three tiers of product bundling, the top of which is designed for highvalue customers who need maximum flexibility in their travel schedules. As WestJet attempts to ratchet up its corporate traveller base, Air Canada is focusing on the opposite end of the spectrum by launching its low-cost leisure carrier Rouge during 2013 to ensure it retains a healthy portion of leisure travellers. A contract imposed on the carriers pilots by the Canadian Government allows for the establishment of the new carrier with a lower cost base, which Air Canada argues will allow it to compete more effectively in the leisure space. Rouge is launching during 2H2013 with Boeing 767s on long-haul flights to Edinburgh and Venice, and Airbus A320 narrowbodies to sun destinations. Rouge is expected to garner close scrutiny after Air Canadas previous attempt to operate a lower cost subsidiary ended in 2003 with the shuttering of Tango. While Air Canada and WestJet dominated 2012 with the hype leading up to the announcements of their planned subsidiaries, smaller carrier Porter Airlines continues to exert its own competitive pressure in the Canadian market. Porter carried roughly 2.5 million passengers in 2012 a 15% increase year-over-year; but despite its smaller scope relative to its two larger rivals, the carrier creates just enough pressure in busy corporate markets to potentially dilute revenue of its two competitors. All three carriers maintain a significant presence in the contested eastern triangle of Montreal, Ottawa and Toronto, and in many transborder business markets. WestJet during 2011 made a concerted push in the eastern triangle bolstering frequencies that resulted in a significant amount of capacity being introduced in the markets. Since that time
...Intense competition among the regions airlines that now have a pronounced focus on generating profits, delivering decent returns and building and preserving balance sheet strength, is driving a new set of dynamics in the region in 2013.
Air Canada has admitted the added supply has pressured its performance in the eastern triangle and in transborder markets. WestJet during the last year has also introduced flights to New York LaGuardia, further intensifying competition in the busy Toronto-New York market. Even as the North American market reaches a level of maturity not enjoyed in other regions, intense competition among the regions airlines that now have a pronounced focus on generating profits, delivering decent returns and building and preserving balance sheet strength, is driving a new set of dynamics in the region in 2013. AL
79
LATIN AMERICA
LaTin AMeriCa TOP 10 AIRLINES
RanKinG CARRIER NAME 1 2 3 4 5 6 7 8 9 10 VARIG-Gol Airlines/vrg Linhas Aereas Sa TAM Linhas Aereas Lan Airlines Azul Airlines Avianca Aeromexico Copa Airlines Interjet Volaris Aerolineas Argentinas
SEATS 156,124 141,140 90,886 77,560 57,786 55,899 41,387 31,500 27,918 26,354
Latin America Outlook

ATIN AMERICA HAS BEEN A MARKET CHARACTERISED OVER THE lAST DECADE BY RAPID GROWTH, consolidation and significantly improved profitability. 2012 saw more healthy growth in every major market and a key milestone with the completion of the LAN-TAM merger, which puts about onethird of the regions capacity in the hands of one very powerful airline group ...
LaTin AMeriCa TOP 10 AirporTs

SEATS 879,636 762,866 589,330 517,256 442,544 432,410 380,816 375,026 304,426 297,274
Sao Paulo Guarulhos International Airport Mexico City Juarez International Airport Bogota Eldorado International Airport Sao Paulo Congonhas Airport Rio De Janeiro-Galeo International Airport Brasilia International Airport Lima J Chavez International Airport Cancun Airport Rio De Janeiro Santos Dumont Airport Belo Horizonte Tancredo Neves International Airport
LaTin AMeriCa CapaCiTY SEATS per WeeK

Gol TAM Airlines LAN Airlines Azul American Airlines AVIANCA Aeromexico COPA United Airlines Other
1,089,278 965,854 673,546 474,202 435,840 402,806 380,655 291,874 265,996
3,379,250
0M
1M
2M
3M
4M
LaTin AMeriCa FleeT
LaTin AMeriCa PrOJeCTed deliVerY daTeS FOr airCraFT On Order

100
2,500
75
2,000 1,500
1,983
50 25
1,000
635
20 20
20 22
20 23
500
136
ERJ170
767 A320
737 A330
777 A350
787 SSJ
In service
In storage
On order
ATR
LaTin AMeriCa BreaKdOWn FOr airCraFT in SerViCe

LaTin AMeriCa MOST POPUlar airCraFT TYPeS in SerViCe

SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA
7.7% 13.1%
0.2% 0.1%
Narrowbody Jet Small Commercial Turboprop Regional Jet Turboprop Widebody Jet
33.0%
22.0%
A320 737 ERJ170 ATR DC9 767
48.4%
13.9%
Military Transport Business Jet
3.1% 3.6% 3.7% 6.5% 8.1%
19.9%
CARAVAN Others
16.8%
LaTin AMeriCa CaPaCiTY SEATS SHare BY allianCe

0.7% 44.5%
IATA LaTin AMeriCa PREMIUM TRAFFIC: 2009-2013

11.6%
60 50 40
14.8%
Unaligned Star oneworld SkyTeam oneworld (affiliate)
30 20 10 0 -10
-20
28.4%
-30 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
20 24
20 21
20 1
20 1
20 1
20 1
20 1
20 1
20 1
Jul-12
81
LATIN AMERICA
50
40.8% 41.5% 43.3% 42.6% 43.3%
40
31.0% 26.2% 32.8%
30
28.3% 21.7%
29.9%
31.8% 31.6% 32.6%
20
14.2% 15.6% 10.6% 6.4% 3.2% 5.7%
18.3% 14.3% 9.6%
17.6%
10
7.2% 7.8%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 JanMar Within Central & South America Within lower South America 2013
Latin AMerica traffic: 2008-2013
30 25 20
15 10 5 0 -5
-10 -15
2008 2009 2010 2011 2012 2013
The establishment of new LAN and TAM parent LATAM Airlines Group is the biggest component of a massive consolidation trend...
... The establishment of new LAN and TAM parent LATAM Airlines Group is the biggest component of a massive consolidation trend which has also included the mergers of Avianca and TACA, Gol and Webjet, and Azul and TRIP. In addition, consolidation has come in the form of casualties as several Latin American carriers of all sizes have suspended operations in recent years, with Uruguay flag carrier Pluna and Bolivias largest carrier Aerosur joining the list in 2012. The result of the consolidation has been the emergence of a healthier industry with the leading six airline groups accounting for about 75% of total capacity among Latin American carriers and having generally positive outlooks for 2013 and beyond. The success of cross-border models has contributed to the consolidation and overall profitability of Latin Americas aviation industry. Unlike in Asia, where the cross-border model has been used to accelerate low-cost carrier growth, in Latin America the model has been primarily used among full-service carriers. LATAM and Avianca-TACA represent the worlds best examples of successful crossborder models in the full-service carrier sector. LATAM now includes passenger airline subsidiaries in seven countries while AviancaTACA has passenger airline subsidiaries in eight countries, plus a sister carrier in a ninth country. 2013 will see further integration at Avianca-TACA as all the carriers in the group take on the Avianca brand, representing a final step in a merger which was completed in early 2011. LATAM, meanwhile, will continue to pursue synergies made possible by the completion of their merger in mid-2012. The Viva Group, backed by Ryanair founders Irelandia Aviation, has begun the first attempt at testing out the cross-border model in Latin Americas emerging LCC sector. VivaColombia launched services in May-2012, joining Mexican sister carrier VivaAerobus. The Viva Group is now looking at potential markets for a third affiliate, with a selection likely in 2013. Chile has emerged as the most likely market. Chile has the fourth largest and fastest growing domestic market in Latin America. But not a single LCC currently serves Chile
domestically or from other countries. Chile is the largest aviation market in the world that is still not touched by an LCC. But LANs domination of its original home market will make it challenging for any new entrant. In 2012 LATAM handled 76% of Chiles domestic passengers and 67% of the countrys international passengers.
30%
PROPORTION OF TOTAL LATIN AMERICAN CARRIER CAPACITY HELD BY LEADING 6 AIRLINE GROUPS
LCCs have so far successfully only penetrated Latin Americas two largest domestic markets Brazil and Mexico. LCCs now account for over 50% of passenger traffic in both countries. VivaColombia is just starting to scratch the surface in Colombia, where it captured only 3% of domestic passenger traffic in 2012. But VivaColombia is planning rapid expansion, entirely in the domestic market for at least the medium-term, which will drive up Colombias LCC penetration rate and overall growth. Colombias domestic market expanded by 15% in 2012 to 18.8 million passengers and will likely again see double-digit growth in 2012, led by VivaColombia and to a lesser extent Avianca and LAN Colombia. LCCs have not yet entered any other Latin American domestic market and are only operating a very small number of international services within Latin America. The intraLatin America market has been one of the fastest growing markets in the world, driven by the regions rapidly expanding economy and growing economic ties between Latin American countries as reliance on the US gradually reduces. Full-service carriers are capturing nearly all of this growth and will continue to do so in 2013 as the regions LCCs at least for now remain domestic-focused. Panamas Copa has been the biggest beneficiary of the boom in intra-Latin America travel. Copa is significantly smaller than LATAM and Avianca-TACA but has the largest intra-Latin America network, which
connects over 50 destinations in the region. Copa has consistently been one of the most profitable airlines in the world, with annual operating profit margins of at least 17% since it went public in 2005. Its consistent track record of double-digit growth and high profitability will almost certainly continue in 2013 given its strong position in a fast-growing segment of the market that has virtually zero LCC penetration. LATAM and Avianca-TACA also have benefitted from the rapid growth in the intra-Latin America international market but also have domestic operations in several countries and long-haul operations to Europe. Copa only has a small domestic operation in one market, Colombia, and doesnt operate a single widebody aircraft. All of Latin Americas main domestic markets recorded rapid growth in 2012. But in most cases the profitability of domestic operations is not nearly as high as regional international operations as competition is much more intense domestically. Brazil recorded 7% domestic passenger growth in 2012, representing a major slowdown from the 16% growth from 2011 and 24% growth from 2010. Brazils domestic market will likely again see only singledigit growth in 2013 as the markets two largest carriers, TAM and Gol, continue to cut capacity in an attempt to improve profitability. Azul and TRIP, which are expected to complete their merger in 2013, will continue to expand at the expense of TAM and Gol. More modest expansion will come from Avianca Brazil. While Brazils domestic market has been impacted by over-capacity and irrational competition, particularly on trunk routes, the medium to long-term outlook is bright, given that 99% of the market is now controlled by just four airline groups (two LCCs and two FSCs). Brazil, which has the worlds sixth largest economy and fourth largest domestic airline market, is still an emerging market with huge growth potential. Foreign carriers also continue to add capacity to Brazil, led by the US carriers. The US-Brazil market saw an increase in capacity of about 30% in 2012. The capacity was in response to growing demand although in some cases the capacity added was too much and has impacted yields. Mexicos domestic market grew 10% in 2012 to 28 million passengers, marking the first time the market has seen double-digit growth since 2007. Mexicos aviation industry in recent years has under-performed the rest of Latin America as Mexicos economy, which is heavily dependent on the US, has been relatively weak. But the Mexican economy has now recovered with healthier growth expected in 2013. The profitability and long-term outlook of Mexicos aviation industry has also significantly improved as a result of consolidation. Six Mexican airlines or airline groups ceased operations between 2006 and 2010,
LCCs have so far successfully only penetrated Latin Americas two largest domestic markets Brazil and Mexico.
83
LATIN AMERICA
... rapid and successful expansion in the US by some Latin American carriers particularly LAN, TAM and Copa has levelled the playing eld.
concluding with the Aug-2010 demise of Grupo Mexicana. About 95% of the market is now controlled by Grupo Aeromexico and three LCCs Interjet, Volaris and VivaAerobus. Aeromexico had a successful IPO in 2010 while all three LCCs are now considering IPOs, with VivaAerobus seeking a possible listing in 2013. Mexicos trio of LCCs are planning further expansion in 2013 with a focus on the domestic market as the Mexico-US transborder market is highly competitive and challenging for Mexican carriers. US carriers accounted for 71% of passenger traffic between the US and Mexico in 2012 and continue to dominate some other US-Latin American markets. But rapid and successful expansion in the US by some Latin American carriers particularly LAN, TAM and Copa has levelled the playing field. Chile, somewhat surprisingly, saw the fastest growth of all Latin American markets in 2012, with domestic growth of 19% to 8.3 million passengers and international growth of 16% to 6.9 million passengers. Chile is a relatively mature and small market. As its 17 million citizens are already relatively affluent, Chile also doesnt have the middle class growth seen in the regions larger markets such as Brazil. But Chile has a strong and growing economy, a geography that is favourable for aviation and a population that has the income to travel frequently. Chile has seen steady and rapid
Aerolineas continues to be the exception in an otherwise profitable and healthy Latin American airline industry.
growth since 2009 and will likely see more double-digit growth in 2013. Latin Americas other two major markets, Argentina and Peru, also saw double-digit growth in 2012. Growth in Peru was particularly impressive and second only to Chile. Perus domestic market grew by 17% to 7.2 million passengers while its international market grew 18% to 6.8 million passengers. Peru has seen rapid expansion from the Peruvian subsidiaries of LATAM and Avianca-TACA, both of which use Lima as an intra-Latin America international hub. More rapid growth is expected in 2013 as Peru continues to be a battleground between Latin Americas two largest airline groups. But further growth in Argentina is limited as the government continues to protect flag carrier Aerolineas Argentinas with policies that make it nearly impossible for new domestic carriers including potential LCCs to enter, for LAN Argentina to expand, and for foreign carriers to enter markets other than Buenos Aires. Aerolineas continues to be the exception in an otherwise profitable and healthy Latin American airline industry. But the carrier is still working on a restructuring which began when it was renationalised at the end of 2008. Aerolineas entered the SkyTeam alliance in 2012, a major component of its new strategy, and hopes to finally progress in 2013 in fixing its highly unprofitable long-haul operation. Venezuelas market is also impacted by protectionist policies. As the sixth most populous county in the region, Venezuela has potential should it open up in future. But for now it remains the only medium or large size Latin American market without a local carrier that is part of Latin Americas top six airline groups. 2013 will see more passenger growth across Latin America, following 8% average growth in 2012 as reported by Latin American airline association ALTA. The big six groups along with a few medium size carriers (primarily LCCs) will continue to be the main beneficiaries. While there are potential opportunities for new LCCs to enter, most of the growth will continue to be captured by the leading cross-border full-service groups and the regions five existing LCCs. The strong will get stronger and more consolidation among the smaller carriers is likely. AL
Brazils domestic market will likely again see only single-digit growth in 2013
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ISSUE 17 | APR-MAY 2013

THE STRATEGY JOURNAL FOR AIRLINE CEOS

GLOBAL AVIATION OUTLOOK 2013

Global Aviation Industry Outlook 2013: The perennial gale

Our is to aim diffe make a renc e

PETER HARBISON EXeCUTIVe CHAIRMAN CAPA CeNTRe FOR AVIATION

Pursuing certainty in an uncertain world

AIRLINE LEADER | APR-MAY 2013

6 AIRLINE LEADER | APR-MAY 2013

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The wOrld TOp 20 airlines by seaTs Offered

China Southern Airlines 1,773,387

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115 105 95 85 Mar-12

AIRLINE LEADER | APR-MAY 2013

ViaBiliTY THreaTS aCCOrdinG TO IATA CEOs 2012

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PreMiUM PaSSenGerS aS a % OF TOTal

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SOUTHeaST aSia TOP 10 AirpOrTS

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SOUTHeaST aSia PrOJeCTed deliVerY daTeS FOr airCraFT On Order

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