Airline Weekly - January 4, 2016
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Airline Weekly - January 4, 2016

Passport to the Future: Delta, still trying to solve its Asia dilemma, lays out its vision for long-term growth abroad

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Passport to the Future: Delta, still trying to solve its Asia dilemma, lays out its vision for long-term growth abroad

It’s as fickle as fashion: One moment they’re hot. One moment they’re not. And right now, international markets from the U.S. are decidedly cold, at least relative to booming U.S. domestic markets.

But for all the troubles in the world beyond U.S. borders—weak European economies, China’s slowdown, imploding production in emerging markets, plummeting currencies and so forth—Delta still sees international expansion as its long-term ticket to sustained success.

That doesn’t mean it’s expanding abroad right now. Quick to call the overseas landscape “choppy,” Delta’s international ASM capacity will be flat to down 2% this year—Brazil, Japan and the Middle East will see the steepest cuts. In the meantime, foreign carriers, facing domestic and shorthaul weakness—and for whom flights between the U.S. and elsewhere are their best opportunities, not (as for U.S. carriers right now) their worst—are shoveling capacity into U.S markets at a blazing pace. And it’s not exactly as if leading economists are forecasting a return to bullish worldwide growth for 2016—the IMF sees global GDP rising less than 4%.

There’s more to Delta’s international gloom. Think headwinds like an $800m hit from adverse foreign exchange trends last year, and a complete write-off of all the money it’s owed by the Venezuelan government—it will never see that money, Delta’s accountants concluded. Until recently, its Japan network lost money. Unsurprisingly, Brazil has been a growing challenge. And the Paris attacks indeed hurt demand, with France a much more important market for Delta than it is for either American or United.

But it’s also true that the U.S. domestic market is a mature market, whereas many aviation markets abroad that are struggling right now are still likely to grow more quickly over time. It’s also true that Delta—especially in recent years, as its reliability reached unprecedented levels and as its inflight product improved—already commands yield premiums in domestic markets: Delta executives claim passengers pay about 14% more on average per seat per mile to fly Delta than to fly its competitors, with the figure rising to as high as 20% more recently. But its revenue premiums internationally are less overwhelming. To Delta, that signals opportunity.

Make no mistake: Even right now, Delta’s vast international network is not losing money. Not with fuel so cheap. And not, to its great credit, with the masterful strategic steps it has taken in Europe. United and Lufthansa make no secret of the early difficulties they had in forming an effective joint venture, even just a revenue-sharing joint venture at that.

But Delta and... (442 of 1,769 words)

Also Inside this Issue:

How’s this for a great start to the New Year: $37 oil and the prospect that prices could fall further still. If you’re an airline, that’s a bigger party than the one in New York’s Times Square.

Unless, that is, you’re an airline where low oil prices destroy the local economy, i.e., Russia or some Middle Eastern nations. It’s in these places, and in commod-ity-exporting nations more generally, where the phenomenon of falling revenues is mostly—and sometimes totally—neutralizing the benefits of falling fuel costs. Ask Brazilian carriers about that.

On the opposite end of the spectrum are U.S. carriers, where the race to the bottom between falling fares and falling fuel prices has thus far been easily won by the latter. Same for Chinese and European carriers. And to be clear, the vast majority of the world’s airlines are currently seeing their profits rise. In fact, of all the airlines that reported Q3 earnings, just a handful—Gol, Copa, Aegean, Air Arabia, TransAsia and Nok Air—didn’t (see page three).

In Scandinavia, SAS reported solid financial results for the quarter that covered August, September and October. Will a big expansion to the U.S. be enough to offset what are expected to be less favorable capacity trends this year?

As Delta plots its partner-focused future in Europe, Latin America and East Asia, it’s more quietly filling a white spot in India by cooperating with Jet Airways.

In Australia, Qantas looks forward to another strong year. In Korea, Asiana is undertaking a tough restructuring. And in Japan, All Nippon is buying—surprise—A380s.

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