Airline Weekly - January 25, 2016
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Airline Weekly - January 25, 2016

From Europe to Asia: A tale of dreamers, tweeners and other trans-Siberian schemers

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Cover Story

From Europe to Asia: A tale of dreamers, tweeners and other trans-Siberian schemers

When Europe’s airlines look west, they see a transatlantic market buzzing with joint ventures, LCC new entrants and carriers like Air Canada, SAS and Aer Lingus all growing rapidly. But when Europe’s airlines look east, they see a landscape no less dynamic.

Indeed, the airline market between Europe and East Asia is busy, competitive and changing, so much so as to heavily influence the broader corporate strategies of some of the world’s largest airlines. The Europe-East Asia market is also a front row seat to some of the industry’s most important developments: the war between established carriers and Gulf carriers, the emergence of longhaul LCCs, the rise of Chinese carriers, the formation of joint ventures and so on. Now, moreover, these developments are unfolding in the context of cheap fuel, itself a new and powerful force sure to bring additional change and disruption.

To be sure, the trans-Siberian market, as some call it, is neither as large as the transatlantic market in terms of total capacity (not even half as large, in fact) nor growing as rapidly right now. According to an Airline Weekly analysis of Diio Mi schedule data for next quarter, total seats from Europe to East Asia will rise just 3% y/y, less than half the 7% growth in seats flying from Europe to North America. This growth gap, in fact, grows widens as the year progresses. That’s no surprise given the current strength of the U.S. economy relative to the weakness of many Asian economies.

The Lufthansa Group is the largest player in the trans-Siberian market, and its capacity plans there reflect one of the central thrusts of its restructuring efforts: downsizing high-cost mainline capacity while expanding with lower-cost platforms. IATA’s latest report on traffic trends by class, for the month of November, shows premium travel between Europe and Asia down by 2% y/y, which gives Lufthansa another reason to shrink its premium-heavy mainline operation. Next quarter, its Lufthansa-branded seats to East Asia will shrink 2% y/y. But Swiss, by deploying its large new B777-300ERs to cities like Bangkok and Hong Kong, will grow 6% (and then 16% in Q3). Austrian, for its part, has a new route to Shanghai starting in April.

This, however, only tells part of Lufthansa’s story in East Asia. To build on its strength in northeast Asia, it’s forming a joint venture with Air China, supplementing a JV it already runs with Japan’s All Nippon. And in southeast Asia (in other... (427 of 1,709 words)

Also Inside this Issue:

Four big U.S. airlines, while trumpeting giant fourth quarter profits, had mostly good things to say about the demand environment in early 2016. United spoke in somewhat gloomier tones than Delta, Southwest and Alaska, reflecting the Chicago-based carrier’s unique revenue headaches in Houston. But even it agreed that demand for air travel is resilient, especially in the domestic market, albeit at substantially lower price points. That’s okay, though, with fuel prices substantially lower too. In fact, there seems to be no end to fuel’s downward trajectory.

Like the U.S., India is an oil-importing country benefiting from a crash in prices. Its economy, in fact, is now growing faster than China’s, and its airlines are producing U.S.-like mega-margins accompanied by torrid traffic growth. IndiGo and even SpiceJet both reported margins exceeding 15%.

Conditions appear less favorable in the ASEAN region, where Tigerair made money last quarter, but not much. It too enjoyed cheaper fuel, but the benefits of that were eroded by forex, hedges and yield pressure.

On the labor front, Lufthansa, United and Ryanair all reached important new pay deals with workers. In the aircraft market, the first A320-NEO made its way to Lufthansa. And up in the skies, Iberia will—for the first time—fly to Asia.

But that wasn’t the only big route announcement. Ethiopian is heading back to New York. American is expanding again in Los Angeles. And Singapore Airlines will serve the capitals of Australia and New Zealand.

More U.S. airlines report Q4 results this week, joined by several carriers from elsewhere.

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