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  1. 1. Airline Industry Update Sandy Rederer Aviation Planning & Finance April 2016 JFK Terminal 5 Original Design by Eero Saarinen for TWA
  2. 2. Presentation Contents • Overview • Success Factors and Coming Threats • Cuba-A New Opportunity • Other Strategic Shifts • Big 3 Airlines (AAL, UAL, DAL) • Southwest and Other Airlines • Regional Airlines • Airports • Airline Valuations • Q & A 1
  3. 3. Overview • Unprecedented profitability was based on industry consolidation and severe cost reductions – Remarkable capacity restraint kept supply and demand in favorable balance. – Strong revenues more than offset high fuel prices. • Sustained lower fuel prices are changing the game – Deferred aircraft retirements provide capacity growth. – Capacity discipline has weakened but declining unit revenues so far have been offset by fuel-cost savings – LCCs Spirit, JetBlue, Frontier and Virgin America 2
  4. 4. Six Airlines Generate 95% of Mainline US-Flag Operating Revenues 3 Source: Airline Financial Reports Mainline Total flat at $156B
  5. 5. Success Factors and Coming Threats • Growth of long-haul intercontinental routes has been an important success factor for Delta, American and United. • They have advantages in selling to US passengers, who are traveling abroad in record numbers. • The strong US$ makes foreign airlines more cost competitive and more interested in flying US routes. • International profitability is declining with United and Delta most affected – AAL is 62% domestic, DAL 56% and UAL 50% (ASMs). 4
  6. 6. Cuba: A New Opportunity • The US-Cuba Memorandum of Understanding (MOU) for scheduled service was signed in Havana Feb 16 – The MOU allows scheduled service for the first time since 1961. – Limits Havana to 20 daily roundtrip frequencies with 10/day for each of 9 other Cuban airports. – DOT immediately instituted a frequency allocation proceeding. 5
  7. 7. US-Cuba Frequency Allocation Proceeding • US airlines requested 58 daily Havana frequencies with just 20 available. • Requests for other Cuban airports are well short of their 10/day limits. • DOT’s initial decision is expected in 4 to 6 weeks – Will favor AAL, LUV, JBLU and DAL – Focus on Miami, Tampa and NYC plus Atlanta • Cuba may not be ready until September. 6
  8. 8. US-Cuba Passenger Market • 950 thousand passengers flew on US-Cuba charters last year, including – 700 thousand Havana passengers. – About 12 flights/day, including 8/day for HAV. – AAL was the largest charter operator. • With scheduled service, seat capacity will more than double for Havana and grow for other Cuban airports. – Fares will decline a lot with all those seats. – Traffic could reach 2.0 million US-Cuba passengers in 2017 and 2.5 million in 2018. – Treasury Department (OFAC) travel rules remain restrictive. 7
  9. 9. Geopolitics and Bilaterals • US-Mexico Agreement for Almost-Open- Skies has not yet been ratified by the Mexican Senate – It will enable DL-AM joint venture with ATI. • Troubles in Venezuela, Brazil and Argentina affect AAL, DAL, JBLU and particularly Panamanian airline Copa. 8
  10. 10. Geopolitics and Bilaterals • Brussels: The bombing is bad for AA, DL and UA with other US airlines little affected. • Japan – UA and DL have been shrinking Narita hubs • Strong USD and growing Haneda competition undermine NRT economics. – Haneda Slots • Effective Oct 1, increase from 4 to 6 daily flights • 5 daylight (0600-2355) and 1 night (2200-0655) • Current holders extended through Mar 1, 2017 • HA-HNL, AA-LAX, DL-LAX and UA-SFO • Likely winners HA (night) and AA-JFK or DL-DTW 9
  11. 11. New Long Haul Routes • New long-haul aircraft models enable nonstop services between the US and cities in China beyond Beijing, Shanghai and Guangzhou – UA uses the B787’s range and efficient size for SFO routes: Chengdu (2014), Xi'an (2016- seasonal) and Hangzhou (2016). – Xiamen Airlines opening new B787 routes to North America from Shenzen and Fuzhou. • Other long-haul routes overflying hubs – UA SFO-TLV 10
  12. 12. American Airlines 11 Source: Airline Websites MIA DFW LAX PHL JFK ORD PHX DCA CLT AA Hubs
  13. 13. American Airlines • AAL leads the industry in revenues and aircraft fleet. • The integration of AA and US has been well executed. • American has been adding LAX-Asia flights but acknowledges the new routes will not be profitable right away. • Largest US-Caribbean/Latin America carrier with dominance at the key Miami hub. 12
  14. 14. American Airlines • Route Network – Very Strong in the East and across the Southern Tier. – Dominant at the very large and profitable DFW hub. – Strong at MIA and JFK but little other Florida Service. – CLT is growing and prospering; PHL is ok; ORD and PHX hubs are challenging. – LAX remains very competitive. – AAL trails UAL and DAL in the Northwest and Rocky Mountain Regions. 13
  15. 15. Delta Air Lines 14 Source: Airline Websites SLC LAX JFKMSP DL Hubs LGA ATL DTW SEA
  16. 16. Delta Air Lines • DAL has been shrinking its Tokyo Narita (NRT) connecting services and adding Seattle-Pacific routes. • Delta is the largest US-Europe carrier and benefits from strong SkyTeam hubs plus a London codeshare relationship with Virgin Atlantic. • The NRT hub has been hurt by the opening of Haneda Airport (HND) to US and Asian international flights. Local passengers prefer HND, which also has much more domestic service than NRT. Delta was able to limit but not stop negotiation of US-HND expansion. 15
  17. 17. Delta Air Lines • Delta’s strategy of life extension for older aircraft looks good as fuel prices decline. DAL finally ordered A350s with delivery starting next year – 350s will replace the remaining B747s. – Delta probably will not consider new longer-haul routes with the A350s until at least 2018. – DAL also ordered B787s with deliveries starting in 2020. 16
  18. 18. Delta Air Lines • Delta has been very aggressive and successful at Seattle – Built hub in competition with former connecting partner Alaska Airlines. Daily departures have grown from 42 in June 2013 to 118 in June 2015 and about 140 this summer. – Further growth is constrained by SEA gate availability. – DAL says SEA expansion is ahead of projections. • New US-Mexico agreement will open the way for Delta-AeroMexico joint venture with antitrust immunity. 17
  19. 19. United Airlines 18 Source: Airline Websites LAX EWR ORD UA Hubs SFO DEN IAD IAH
  20. 20. United Airlines • United is very strong in the Midwest, Rocky Mountains and California and in the NYC area. – Chicago and Denver hubs have been successful for a long time. – UAL has strengthened its Newark hub and dropped JFK service as NYC booms. – Washington Dulles hub is hurt by high airport costs and strong DCA growth. – SFO is the largest US-Asia gateway, bypassing Tokyo Narita Airport. 19
  21. 21. United Airlines • Some alliance partners complain about UAL not sharing traffic. • UAL has had reliability and customer service issues. Turmoil in the executive suite undermines performance. 20
  22. 22. Open Skies and Fair Skies • The Big 3 US airlines, AAL, DAL and UAL, have a lobbying and PR campaign to limit the use of negotiated international operating authority by carriers from countries where they argue foreign governments are providing unfair support. They ask for “Fair Skies” in place of “Open Skies”. • Government-owned Emirates (Dubai), Etihad (Abu Dhabi) and Qatar Airways are the fastest growing major airlines in the world. 21
  23. 23. Open Skies and Fair Skies • Limiting negotiated rights is difficult – The Gulf carriers are among the largest customers for Boeing and other OEMs, spending $billions annually on equipment designed and built in the US. – The United Arab Emirates (led by Dubai and Abu Dhabi) and Qatar are important US military allies. • The Big 3 have also mounted regulatory opposition to Norwegian Air based on issues of its nationality. • If Norwegian is unable to get approval or work out alternative route rights, other airlines will adopt the trans-Atlantic LCC strategy – Ryanair has been hinting at development of a new long-haul carrier. – WOW Air is a small but aggressive carrier building an Iceland hub with A320, A321 and new A330 aircraft. 22
  24. 24. Southwest Airlines • Pilot contract negotiations continue. • Love Field growth is completed. • Adding international routes at dominant focus cities Houston Hobby and BWI as well as at Ft. Lauderdale. – Competition is fierce at FLL with JBLU and SAVE. – FLL is the focus of Southwest’s Cuba service proposal. • International routes from Tampa may follow. 23
  25. 25. Virgin America • Quality LCC Virgin America has agreed to acquisition by ALK after JBLU dropped out of the bidding. • VA’s future without a merger was murky. • VA should have been more valuable for JBLU than ALK – Fleet commonality with A320-family aircraft. – Route system extension and improvement. 24
  26. 26. Alaska Airlines • ALK is thriving despite DAL competition at Seattle hub. • Has increased marketing cooperation with AAL and foreign airlines. • VA acquisition is expensive and maybe not be a great fit – ALK fleet is all Boeing; VA all Airbus. – N-S West Coast and Hawaii markets will remain hotly competitive. – ALK strength will boost VA position in the NYC- West Coast markets, where VA is in fourth place. – VA acquisition puts ALK into more competition with AAL. 25
  27. 27. JetBlue Airlines • JBLU is doing very well at JFK – Mint service and A321 aircraft have boosted long- haul profits. – Has increased marketing cooperation with foreign airlines. – United is completely out of JFK. – Lifting the LaGuardia perimeter rule is postponed pending progress on airport renovation. – Acquiring VA would have reduced competition on the important transcon routes, enhanced JBLU’s presence on the West Coast and extended its system to Hawaii. – Acquiring Hawaiian Airlines seems a logical response for consideration. 26
  28. 28. Hawaiian Airlines • HA will start flying A321neo aircraft next year, a transformative addition to the fleet. HA is retiring last B767-300s and will fly the efficient A321s in place of A330s on West Coast and shorter South Pacific routes. • HA would be a good acquisition for JBLU. Its share price has doubled in the last year but the company remains affordable based on the usual merger metrics as well as the ratio of market cap to operating revenues. 27
  29. 29. Other Airlines • Prosperity has encouraged growth by ultra low-cost carriers (ULCCs), which have entered competitive markets. • Spirit (SAVE) pioneered the ULCC category. It grew 30% last year but the CEO was replaced – New CEO is pursuing a more customer-friendly approach without raising costs. – Growth is down to about 15% this year. – Spirit is the second largest airline at Ft. Lauderdale, after JetBlue and slightly ahead of Southwest. – Spirit is also starting service on hotly competitive Seattle- LAX and -LAS routes. • Frontier (privately held) is adding 18 aircraft this year to a fleet of 59 A320-family aircraft. • ALGT grows more gradually and avoids competitive routes. 28
  30. 30. Alliances • Some alliance partnerships mean more than others. Joint ventures (JVs) have become more important – Some partners outside JVs complain about AA, DL and UA hogging traffic. – Delta has difficult relationships with Korean Airlines and China Airlines but touts relationships with China Eastern (CEA) and Jet Airways (India). – Some significant relationships are outside alliances (e.g., DL-VS JV). – ALK and JBLU remain independent but work with multiple international connecting carriers. 29
  31. 31. Regional Airlines • Major airlines speed replacement of 50-seat and smaller regional aircraft with 70-seat and larger • Larger hubs need larger aircraft. • Dropping price of fuel is offset by pilot cost increases. • Mainline carrier consolidation has pushed down regional carrier margins • Mainline growth makes pilot hiring and retention difficult for regional carriers and pushes up wage rates. 30
  32. 32. Regional Airlines • Republic (RJET) filed Chapter 11 bankruptcy on February 25 • Bungled pilot negotiations dragged on far too long. • Delta sued over excess flight cancellations caused by shortage of pilots. • SkyWest has benefited from RJET problems; managed 50-seater and pilot challenges better. 31
  33. 33. Airport Update - New York Area • New York is a key market for UAL, DAL, AAL and JBLU. • United shut down its JFK operation but carried 68.4% of Newark passengers last year and led in the NYC area with a 23.5% share. • Delta is largest at LGA and JFK and 2nd in the area with 22.2%. • American is 2nd at LGA, 3rd at JFK and in the area with 14.6%. • JetBlue is 2nd at JFK and 4th in the area with 11.3%. 32
  34. 34. NYC Airline Passenger Shares 33 CY 2014-15 shares from PANYNJ reports United’s lead slipped as it discontinued JFK operations.
  35. 35. New York Kennedy Airport 34 Data from PANYNJ reports. United discontinued JFK operations effective October 25, 2015.
  36. 36. Airport Update - LaGuardia • Port Authority launched $4 Billion LaGuardia terminal rebuilding project – Newark gets a $2 Billion upgrade. – PANYNJ has gone silent on eliminating the LGA perimeter rule • DFW, IAH and DEN hubs all have nonstop service but not SLC, PHX, LAX, SFO & SEA. • NYC-LAX and NYC-SFO are huge high-yield markets. • At JFK, AAL, DAL, VA and JBLU all mount premiere LAX/SFO services along with UAL from Newark. • DAL would be big gainer from perimeter rule elimination with JBLU and VA the biggest losers. 35
  37. 37. New York LaGuardia Airport 36 Data from PANYNJ reports.
  38. 38. Longer Flights at LGA? 37
  39. 39. Longer Flights at LGA? Airport winners: LGA would gain more than a million annual passengers as average aircraft size increases. – LAX, SFO, SEA, SLC, PHX, LAS and SAN would get new nonstop flights. DCA, IAD, ATL and CLT would gain connecting passengers from N-S routes losing nonstop flights. Airport losers: CLE, PIT, PHL, SRQ, ORF, RSW, JAX, SAV, SDF, GSO, TPA and MCO could lose some LGA nonstop flights. JFK would lose passengers and a few flights with Newark effect similar but smaller. 38
  40. 40. Airport Update – Washington DCA • Slot transfers required for the AA-US merger helped DCA passenger traffic increase 10.6% last year to 23.0 million; IAD traffic was up 0.4% to 21.6 million. • DCA schedules are about the same as last year after 12% seat growth 2015. • AAL operates about 250 weekday departures with a seat share of 50.3%. – The airport is developing a commuter facility that will enable AAL to fly more with large RJs. • Southwest is a distant second with a 12.9% seat share followed by Southwest with an 11.7% seat share. 39
  41. 41. Airport Update – Love Field • Dallas Love Field was tightly controlled by the Wright Amendment until October 2014, when new terminal facility also opened – Remaining restrictions allow an airline to operate large aircraft at Love Field or DFW but not both and prohibit international flights at DAL. – DOJ blocked Delta’s bid for two gates in favor of Virgin America, which has no obvious path to profitability at the airport. • DAL passengers were up 52% in 2015 to 14.5 million. Southwest’s market share is over 90%. • DFW passenger volume rose 1% to 64.2 million. 40
  42. 42. Airport Update – Houston Hobby • Southwest has started international flights to and from Houston Hobby Airport, where it is dominant. • LUV in recent months launched HOU services to ten destinations in Mexico, Central America and the Caribbean. 41
  43. 43. Airport Update Los Angeles International Airport • LAX improvements will give AAL, DAL and UAL better facilities for connecting domestic and international routes – All three are competing fiercely at LAX. – AAL and UAL are adding nonstop Asia routes based on long-run strategic value. DAL has been more conservative but seeks LAX-Beijing route. • US-Mexico bilateral liberalization will allow: – added carriers on the key LAX-MEX route. – Delta JV with AeroMexico • Southwest is gaining gates to expand in T1. 42
  44. 44. Scorecard • Airlines – Mega-Carriers American, United and Delta are competing hard but not yet over-supplying the market. – Southwest has grown profitably at DAL and HOU, now adding flights at competitive TPA and FLL. – JetBlue has a reprieve on NYC long-haul routes but lifting the LGA perimeter rule remains a threat. – Alaska Airlines has been growing at PDX and SEA and gaining from relationships with AAL and foreign airlines. – Virgin America also has a reprieve from long-haul flights at LGA. N-S West Coast routes are increasingly competitive. Cash sale to Alaska is a big win for shareholders. 43
  45. 45. Scorecard (Cont’d) • Airlines – Regional carriers continue to be under pressure from pilot shortage and declining 50-seat RJ demand and pilot shortage. – Bankrupt RJET appears to be reorganizing effectively. – Hawaiian Airlines will be a stronger competitor next year with efficient A321NEO aircraft and phase out of 767s. • Airports – LAX continues rapid growth as a key market for all three legacy carriers. Growth at SEA is limited by gate availability and DAL gates are capped by law. – NYC airports are all prospering as major rebuilding projects launch. 44
  46. 46. Airline Valuations Combined Market Cap $143B 45 Mainline airlines are listed in declining order of annual revenues. Source: Yahoo Finance
  47. 47. Airline Valuations 46 Mainline airlines are listed in declining order of annual revenues. Sources: Airline Financial reports and Yahoo Finance
  48. 48. Market Caps vs Revenues 47 2015 Revenues and March 29, 2016 Market Caps Mainline airlines are listed in declining order of annual revenues. Sources: Airline Financial Reports and Yahoo Finance
  49. 49. Questions? 48
  50. 50. Thank You For Further Information: Sandy Rederer Aviation Planning & Finance rederer01@aol.com