Airline Weekly - November 23, 2015
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Airline Weekly - November 23, 2015

A Kinder, Gentler Downturn: America’s Big Three appear headed for tougher times. But not that much tougher.

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A Kinder, Gentler Downturn: America’s Big Three appear headed for tougher times. But not that much tougher.

The worst part about winning streaks? They never last forever.

For America’s Big Three airline giants—American, Delta and United—2015 will mark six straight years of operating profits and five straight years of rising margins, from 4% for the three carriers combined in 2011, to 5% in 2012, 7% in 2013, 11% in 2014 and likely in excess of 15% for 2015. That’s a long string of good fortune in an industry notorious for ups and downs and booms and busts. So are the U.S. Big Three due for a downturn?

When American, Delta and United say this time is different, they have a point. First of all, they’ve never been so big, and in this business, scale confers powerful advantages like global network diversification, massive loyalty plans, enormous buying power with suppliers, the wherewithal for one airline to influence fares across the industry with unilateral capacity moves and the ability to fight localized fare wars without losses from those wars wiping out profits elsewhere. As Delta recently explained, achieving such massive scale forestalls the need and temptation to grow at all costs, as happened in the past, when airlines borrowed and borrowed to expand and expand.

Today’s U.S. airline industry is, more importantly, less competitive than it was, with just three big intercontinental airlines rather than six as recently as 2008, before Delta merged with Northwest. The practice of ancillary selling, now worth billions in revenue, is another powerful tonic against the financial storms that plagued the forebears of today’s giants. Other strong defenses today include overseas joint ventures and new technologies, from fuel-efficient aircraft to mobile sales channels and slimline seating.

The Big Three, moreover, are pricing their seats more effectively today, by using fare families, for example. They’re selling their ancillary services through more channels and getting more revenue production out of their aircraft through widespread seat densification. More joint ventures are coming (Delta-Aeroméxico, for example), and American has yet to realize all its merger synergies. Products and services are improving. Balance sheets have never been stronger and capital spending never so disciplined during boom times. As the Big Three bask in the good... (377 of 1,509 words)

Also Inside this Issue:

Strong summer travel demand across Europe could only mean one thing for easyJet: robust profits. The LCC, which has learned how to make money even during down periods, rode this year’s peak season upswell to a 20%-plus operating margin. In Europe, only Ryanair and Wizz Air did better from April through September.

Korean and Taiwanese carriers reported last week, getting a boost from cheaper fuel for sure but still beset by sluggish margins. For Korea’s airlines in particular, changes in mainland China cast an ominous shadow.

Cebu Pacific in the Philippines did well again last quarter. So too —in light of how bad things are in its home region—did Avianca. El Al’s home region has long been a geopolitical firestorm, but Israel’s calm this summer led to the carrier’s best margins ever.

Last week saw yet another terrorist attack on civilians, this time in Mali and this time involving airline crews—six of the victims worked for a Russian cargo airline. Others, including crewmembers of Turkish Airlines and Air France, thankfully escaped the besieged hotel.

Americans will give thanks for what’s right with the world this holiday week, the busiest of the year for U.S. airlines. A4A, indeed, expects carriers to fly 25m passengers during the Thanksgiving holiday period.

U.S. airlines are just as busy on the strategic front. American announced Delta- and United-like changes to its frequent flier plan. Delta itself will up its stake in Aeroméxico and begin selling its extra-legroom seats as a separate cabin. And United? It has a new pilot deal.

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