Tag Archives: Aaron Newman’s Planely Speaking

Planely Speaking: Growing in the Gulf

Assistant Editor Aaron Newman

Growing the Gulf

By Aaron Newman.

A decade ago Emirates, Qatar Airways and Etihad Airways were irrelevant. But these three airlines have become increasingly dominate on the lucrative international long-haul market, causing angst for western legacy airlines and their respective governments. For example, Lufthansa claims its Frankfurt hub has lost nearly a third of its market share on routes between Europe and Asia since 2005, with more than 3 million people now flying annually from Germany to other destinations via Persian Gulf hubs (economist.com).

This global turf war is only going to intensify as the gulf carriers continue expanding at breakneck speed. With hundreds of aircraft deliveries forthcoming (see graph below), Etihad, Emirates and Qatar Airways are destined to initiate new routes, utilizing a large order book of new aircraft scheduled. The major news outlets and our WorldAirlineNews.com have done a great job summarizing the discord between the gulf airlines and their global legacy counterparts. I’m going to use this opportunity to tackle a different question…where will these three airlines expand to next?

In May, Doha based Qatar Airways (below) made headlines, announcing it will begin flying to Atlanta, Boston and Los Angeles in 2016. Qatar Airways also said it will increase service to New York, adding a second daily flight.

Copyright Photo: Antony J. Best/AirlinersGallery.com. Qatar Airways is the launch customer for the new Airbus A350-900. Airbus added Qatar titles to this test Airbus A350-941 F-WZNW (msn 004) pictured at Farnborough.

In late March, Emirates surprised the industry, announcing new daily service from Orlando (MCO) to Dubai beginning Sept. 2015.

Copyright Photo: Antony J. Best/AirlinersGallery.com. Etihad Airways Airbus A380-861 A6-APA (msn 166) departs from London (Heathrow).

And Etihad Airways (above), just finished a six city expansion in the beginning half of 2015 to; Algiers, Edinburgh, Entebbe, Hong Kong, Kolkata and Madrid. Looking at the charts above, it’s easy to see that additional future growth is inevitable. Adding frequencies, upgauging aircraft and expanding to new cities such as the ones listed below is bound to happen given these airlines current trajectories.

Mexico City, Mexico (MEX)

With a population of nearly 22 million people and one of the most important financial centers in Latin America, I foresee a gulf carrier announcing new service shortly before their new international airport is set to open in 2018. Given the distance from the Persian Gulf, this route may need a European stopover city to make this and other Latin America cities work in the future.

Vancouver, Canada (YVR)

A major gateway for pan-pacific trade, Vancouver offers the international diversity and business climate that the gulf carriers are attracted to. Emirates expressed interest in serving Vancouver in years past, those talks quickly diminished after Air Canada expressed concern. If discussions between the Canadian government and gulf carriers were to reignite, Vancouver would be a high priority for any gulf airline.

Sapporo, Japan (CTS)

Japan’s fourth largest city and the largest city on the northern island of Hokkaido; Sapporo’s airport has largely been underserved by airlines outside of the major East Asian hubs (Seoul, Tokyo, Hong Kong and Beijing). Alternatively, Fukuoka (FUK) would also be a viable option for a gulf carrier looking to add routes in Japan.

Stuttgart, Germany (STR)

Emirates has been working hard to make this route a reality, however, the German government is currently limiting the number of routes from gulf carriers into Germany in an effort to protect national carrier, Lufthansa. If the German government ever reconsiders, this will give Stuttgart a much needed long-haul route heading east. Berlin is a potential growth target as well, but I do not see this as a possibility until the completion of the delayed Brandenburg airport—currently scheduled for 2018.

Helsinki, Finland (HEL)

Finland’s largest city and capital, Helsinki offers the large population and thriving economy to make this route work. Competition from state-owned Finnair and the fast growing Norwegian Air Shuttle may be a deterrent to this route. I foresee Qatar Airways being the first airline to launch this route given the mutual Oneworld membership with Finnair.

London Stansted, UK (STN)

A stronghold for the UK’s low-cost airlines, Stansted’s owners and operators, Manchester Airports Group strongly desire to diversify by adding a full-service airline. About 6.7 million people live within a 1-hour drive of Stansted and 12 million within 2 hours. With slot restrictions at Heathrow and Gatwick, could this be a viable option to add frequencies into the London metro area?

Xi’an, China (XIY)

Xi’an’s pillar industries; equipment manufacturing, software development, aerospace technology, and high tech R&D are driving a blossoming economy in Xi’an. This route prediction may be a bit premature, however, gulf carriers will continue to tap into China’s growing middle class and flying to secondary Chinese cities. Chongqing, Wuhan, Xiamen, Kunming, and Qingdao should all be considered as future options.

Detroit, MI (DTW)

Detroit’s automotive industry supplies a large amount of lucrative business travel between Asia and the United States, Detroit also has about 400,000 residents of Middle East origin, the highest total for any U.S. city, with many from Lebanon, Iraq and Yemen. However, this route would be in direct competition with Delta and Skyteam members Air France and KLM. Has this competition kept these three airlines from stepping in?

Bamako, Mali (BKO)

Bamako’s annual growth rate is hovering around 4.5%, which makes it the sixth-fastest-growing city in the world, and the fastest on the African continent. African cities like Bamako have become important for gulf carriers because of their location between the continent and Asia, which are developing commercial links. While few Africa-Asia routes generate enough traffic for direct flights, Persian Gulf carriers can funnel small numbers of people from many places through the airlines’ hubs.

My list above is purely speculation from an industry enthusiast, but I’d also like to hear your thoughts below in the comments section. Where do you see or where do you want to see these airlines expanding to in the future and why?

Planely Speaking: The Battle for the Big Peach

Assistant Editor Aaron Newman

The Battle for the Big Peach

By Aaron Newman.

The world’s busiest airport will become the latest low-cost battleground this spring and summer as Spirit Airlines and Frontier Airlines deem Atlanta as their newest expansion target. By September 2015, Spirit will provide service to 15 cities from Atlanta; while Frontier will expand to 16 cities by the end of this month. With competition from Southwest and of course the hometown favorite, Delta Airlines; does Spirit and Frontier stand a chance at success in the big peach?

Frontier Airlines and Spirit Airlines routes from Atlanta

In the case of Frontier, Delta serves all of the above markets, and Southwest will compete on seven of the markets. In the case of Spirit, Delta operates service to all of the above markets except Atlantic City; while Southwest again competes on seven of the above routes.

It’s likely this aggressive growth stems from the purchase of AirTran Airways by Southwest; AirTran’s disappearance from ATL left a void for a true low-cost carrier in Atlanta. Frontier and Spirit perceive Atlanta as an opportunity to use their low-cost model to attract cost conscious north Georgia residents to travel where they otherwise wouldn’t.

Data from the US Department of Transportation demonstrates that during the 3rd quarter of 2014, Atlanta’s average domestic fare was $439, while, the average US domestic fare was $397–Spirit and Frontier advertise fares starting as low as $19 one-way.

Source: Spirit Airlines.

In a contrast to Cleveland, another market where Frontier and Spirit are doing battle in 2015, Atlanta is not an airport where any major airline has made a substantial cutback. Southwest has made some minor changes to its route network post-merger, but nothing like the 60% capacity reduction seen by United Airlines at Cleveland. Frontier and Spirit are aware that they are in for a battle before one airline eventually wins out. Can both of these airlines survive the threat from each other, as well as the size of Delta and the loyal followings of Southwest’s customers?

Source: Frontier Airlines.

Who wins out?

Above Copyright Photo: Tony Storck/AirlinersGallery.com. Spirit Airlines Airbus A319-132 N503NK (msn 2470) prepares to land at its Fort Lauderdale-Hollywood International Airport (FLL) base.

Spirit has been growing quickly and their experience as an established ULCC (ultra-low cost carrier) gives them the upper hand in this turf war with Frontier. Spirit has a slightly lower CASM (cost per available seat mile) than Frontier (marketrealist.com), giving them the ability to offer lower fares while still maintaining profitability. The newly announced routes come at a time in which Spirit is preparing for a wave of aircraft deliveries (15 aircraft in 2015) that will push its fleet to 80 aircraft by the end of 2015–an added incentive to make Atlanta work for their bottom line. Spirit had long considered an Atlanta expansion, calculating that the Southwest Airlines acquisition of AirTran Airways would increase fares. What Spirit may not have expected, however, was that Frontier Airlines would try the same approach at the same time.

Copyright Photo Above: Ken Petersen/AirlinersGallery.com. Frontier Airlines’ Airbus A320-214 N227FR (msn 6184) is pictured at Raleigh/Durham.

Frontier’s route network is accustomed to change and though I believe one ULCC can gain market share in Atlanta, I predict Frontier will eventually leave or drastically reduce service in Atlanta due to disappointing bookings and slim margins caused by over-capacity. Ultimately, consumers will make the decision, regarding which ULCC they prefer, specifically on routes in which the two carriers overlap, such as Atlanta to Chicago (O’Hare) and Las Vegas. But, as mentioned, Spirit is believed to retain a slight cost advantage over Frontier, ultimately giving them the upper hand.

Surviving the big guys

In a recent presentation to investors, Spirit Airlines estimated Delta has an adjusted cost per available seat mile (CASM) 59% higher than Spirit (Atlanta Journal Constitution). Even though Delta has created a new low-fare class with limited perks in an attempt to compete with ULCC’s, Spirit predicts legacy carriers will eventually narrow their focus to high-yield passengers on over-lapping routes. This allows Spirit to concentrate their efforts on their favorite audience—the leisure traveler. Additionally, Spirit has historically coexisted well in other fortress hubs, like; Detroit, Minneapolis, Houston (IAH), and Dallas (DFW), proving they can effectively compete with larger, legacy carriers.

I conclude that Spirit and Frontier are not entering Atlanta to gain market share from Delta, but rather Southwest. Delta’s numerous frequencies, extensive network, and corporate contracts are no match for Frontier and Spirit. The two ULCC’s believe they can use their ultra-low fares to stimulate cost-sensitive passengers that have otherwise been priced out of air travel. This business model does not directly compete with Delta, but rather Southwest.

The decisions by Spirit and Frontier to grow in Atlanta demonstrate that Southwest is no longer the low fare leader it once was. Their cost structure is higher than that of the ULCC’s competing for lower yield passengers. In a recent interview, Frontier’s president Barry Biffle called Southwest a “mid-cost carrier,” and said that in Atlanta, “fares are relatively high compared to the average,” (Atlanta Journal Constitution) creating an opportunity for a ULCC to come in and thrive.

Planely Speaking: Power Shift; Gulf Carriers Threat to Alliance Airlines

Guest Editor Aaron Newman

Guest Editor Aaron Newman

Power Shift; Gulf Carriers Threat to Alliance Airlines

By Aaron Newman

There are not many days that go by without seeing news come from the Middle East’s emergent airlines. Emirates Airline (Dubai), Etihad Airways (Abu Dhabi) and Qatar Airways (Doha) have been populating the headlines with large aircraft orders, launching new routes, new state-of-the art airports, and lavish onboard improvements. These three airlines have made established legacy carriers across the globe uneasy as they present a real threat to the established airlines bottom line. Alliance airlines like British Airways, KLM-Air France, Lufthansa, American and United have long dominated trans-oceanic high-yielding business markets. Are these industry mainstays slowly losing their grip?

Emergence of Gulf Carriers

Rapid economic development of Persian Gulf countries in the 1970’s and 80’s were due largely in part of the discovery of vast oil and gas reserves and the growth of OPEC. This caused large amounts of capital to flow into these small Gulf nations. Over time, small oil nations began looking for ways to diversify their country’s portfolio in a fear that oil reserves will eventually run out. These three state owned airlines are now an integral part of their countries respective economies. Qatar Airways for example, claims to count for 11% of the state’s GDP. Supported by friendly regulatory environments, government spending on airport infrastructures, and new, reliable long-haul aircraft, these carriers have transitioned from small regional airlines to global mainstays in a decade’s time.

Keys to Success

Access to cheap capital; the Gulf States have access to large cash reserves from oil and gas resources. This enables Persian Gulf nations to finance rapid growth, and offers support with airport development and infrastructure.

Graph Source: wsj.com

Regional competition; the Gulf airlines cooperate on many issues but also vigorously compete with each other, creating the need for efficient operations and continual product development to attract new customers.

Geography; the Middle East is ideally placed to link major global population centers. It sits at a cross-road between Europe, Africa and Asia.

Emerging market demand; demand from emerging markets is rising fast as a rapidly growing middle class has the time and money to consider travelling by air for leisure and business. The Gulf is located between the mature economies of Europe and the emerging markets of South East Asia, India, China and Africa.

A New Formidable Opponent

The Gulf airlines have combined home markets of only 7.5 million people, and so must rely on connecting passengers with a hub and spoke system. European airlines have been particularly hard hit by this, watching their natural customers travel on Gulf carriers instead of the country’s national carrier. Christoph Franz, former CEO of Lufthansa Group, highlights the challenging future of his prior company on a new Emirates route from Lisbon to Dubai saying , “we are talking about passengers who until now were primarily attracted by flights from Lisbon to Munich, in order to go on to Asian destinations. At least part of them are not flying via Germany anymore,” he says. “In the beginning we were talking about a competitive threat on paper – now we are talking about reality in our markets” (ft.com).

Copyright Photo: Keith Burton/AirlinersGallery.com. Etihad Airways Airbus A340-642 A6-EHF (msn 837) departs from London’s Heathrow Airport.

In a June warning to its investors, Lufthansa cautioned the possibility of downward revisions to the airlines earnings outlook. Chief Financial Officer Simone Menne cited pricing pressure from the Gulf carriers’ expansion into Europe as a major contributing factor. Gulf airlines, which are adding capacity in major European cities such as Paris and London, are also ramping up service in secondary cities like Barcelona and Hamburg. This means that they’re grabbing market share from the European carriers not only at their hubs, but also at their spokes.

Competing on American Soil

The Gulf three now send nearly 120 large, new planes weekly to a growing number of American cities (WSJ.com). Though the United States and Canada are geographically better positioned than their European counterparts, the Gulf carriers still pose a credible threat. Airlines and governments in North America have been fighting back where they can. In Canada, the government has limited the number of planes that Etihad, Emirates and Qatar can land at its airports–a move to protect Air Canada, and its partner Lufthansa.

Graph Source: Emirates.

“Essentially, these are not airlines—they’re governments,” said Delta CEO Richard Anderson. “They have the ability to gain advantages in markets because profitability doesn’t matter.” He said the U.S. government should revisit its air treaties with other nations to ensure there is “equity” in commerce (wsj.com). Many industry analysts say U.S. opposition has slight chance of slowing down the Gulf carriers in the deregulated era. Washington is unlikely to alienate its Mideast allies, and Boeing, the U.S.’s biggest exporter, gets 10 percent of its wide-body orders from the Gulf carriers.

Looking Into the Future

With a backlog of more than 500 wide body aircraft orders, do not expect these airlines growth to subside. According to a recent report by Credit Suisse, Etihad Airways, Emirates, and Qatar Airways will increase the number of seats offered on their Europe-to-Asia flights between 8 and 18 percent a year between now and 2020 (thefinancialist.com). I believe you will continue to see these airlines enter more secondary markets to grab market share from legacy carriers. I envision cities like Chengdu, Sapporo, Brasilia, and Charlotte N.C. as cities that Gulf carriers will have their eyes on for future growth. With new airports and new aircraft, growth is inevitable; at this point it is not a matter of if Gulf carriers will continue to grow, but it appears to be a matter of when and where.

What can European, Southeast Asian and North American airlines do in response to the new threat to their long-haul business? Airlines must first cut costs. This is critical, particularly for European airlines to remain competitive. For example, Lufthansa needs to reduce costs on flights to Southeast Asia by 40 percent to stay competitive. Another example, according to Credit Suisse, Air France and IAG (British Airways Parent Company) has 30 percent higher unit costs on flights to Southeast Asia than some Asian competitors, Turkish Airlines, and Emirates (thefinancialist.com). Secondly, airlines could reduce route competition and shelter revenue by developing mutual partnerships with the Gulf carriers. These relationships would make it easier for both Eurasian and North American carriers to get more customers into the Middle East, India and developing nations in Africa with little investment required. As the saying goes; if you can’t beat em,’ join em.’

Emirates:

Etihad Airways:

Qatar Airways:

Bottom Copyright Photo: Stefan Sjogren/AirlinersGallery.com. Airbus A380-861 A6-EDJ (msn 009) of Emirates arrives at London (Heathrow).

Planely Speaking: All Slotted Up: The new American Airlines and DCA

Planely Speaking

Guest Editor Aaron Newman

All Slotted Up: The new American Airlines and DCA

By Aaron Newman

By now we’ve all heard of the Justice Departments lawsuit filed on Aug. 13 to stop the $11 billion deal between US Airways Group (US Airways) and AMR Corporation (American Airlines). The DOJ argues the merger would violate antitrust laws because it will lead to higher airfares, less competition on high profile routes and therefore higher costs to the traveling public. In November, a judge will hear the case without a jury and decide whether the merger should go forward. With just under two months before the November 25th antitrust case involving American Airlines and U.S. Airways, I will be spending the next 2-3 months dissecting three topics in depth likely to be crucial topics in the courtroom.

A hot topic in talks between the Justice Department and the corporations is whether the airlines will agree to sell slots; takeoff and landing rights, to reduce their dominance at Reagan National Airport outside Washington, D.C. Airlines must possess slots which give them rights to one takeoff or landing per day. Three miles south of downtown Washington D.C., DCA is the preferred airport in the D.C. beltway. The airport provides easy transit points for politicians and professionals looking to be downtown within minutes. The only problem…the airport is slot restricted in an effort to direct passengers to the suburban and more distant Dulles International Airport (IAD).

Source: Nationalrealitybiz.com

DCA is one of a few airports in the nation where regulations limit the number of flights. Slots at DCA are particularly valuable for airlines, since many people will pay a premium to fly from convenient DCA instead of more distant Dulles or BWI. For example, JetBlue recently leased 8 daily round trips from US Airways at a cost of $40 million, used for increased frequencies to Boston. U.S. Airways currently claims DCA as its fourth largest hub and provides nonstop service to 71 airports from Reagan National, and faces no nonstop competitors on 55 of those routes (as of July 2013). Doug Parker, CEO of U.S. Airways and post-merger American, says DCA will remain a critical east coast hub for the new airline. Post-merger, US Airways will lessen capacity to existing American Airlines destinations. This will allow US Airways to expand its hub operations at Reagan, adding new small city destinations in the eastern half of the United States, a strong argument in the airlines attempt to retain all 68% of its slots.

Source: U.S. Department of Transportation

With U.S. Airways already claiming 56% of slots at DCA, the new airline will claim 68% post-merger, it’s anticipated by industry insiders that the new American will be forced to concede slots in order to satisfy the courts and complete a merger. United and Continental had to lease slots at Newark Liberty to Southwest in order to complete their 2010 merger, according to this report by Business Travel News. One argument against divesting slots at DCA is that many are used for small regional cities throughout the East Coast. US Airways surprisingly only carries 35% of all passengers at DCA despite holding 56% slots. This is due to the fact that many of the flights are used for smaller cities on turboprops and regional jets. CEO of U.S. Airways, Doug Parker has been arguing that if his airline has to divest slots, other airlines will simply use them to fly to large hub cities. Some members of Congress have even sent a letter asking for US Airways/American to keep its slots so their own constituencies can keep their flights.

In this report by Reuters, it gives detail of a recent attempt by JetBlue management and CEO, David Berger to persuade lawmakers to take away a portion of DCA slots in the name of anti-competitiveness. Berger suggests that the new American should not exceed the current 55% threshold at DCA. “JetBlue believes that the merger, absent meaningful action by the Department of Justice, will make an unbalanced competitive situation at Ronald Reagan Washington National Airport (DCA) even worse,” Robert Land, JetBlue’s senior vice president stated in a recent letter to Senator Charles Schumer (D-New York).

My Take

It’s unlikely that the new American will escape the trial without conceding slots at DCA. I suspect the new American will retain between 55 and 59 percent of slots at DCA. This will result in some regional cities losing service, cities like Huntsville AL, Bangor ME, and White Plains, NY. It’s probably important to note that the combined American will hold roughly a 49% market share at Reagan National, US Airways today only holds a 35% market share despite holding 56% of the slots. Regional flights are made possible because US Airways has such a large slot allotment at Reagan. The US Airways operation at DCA is a secondary connecting airport because of the frequency enabled by the slot holdings. If the new airline were forced to divest a larger percentage of slots the hub operation would begin to look different than it does today – the economics of regional flights make it unworkable.

The bigger question is how the remaining 8-12 percent of slots be divided among other airlines? This will be an interesting development going forward. I agree with Parker that large hub cities will be the winners in this case. Cities like Newark NJ, Atlanta GA, Chicago IL Midway, etc. In conclusion, there are currently four major slot restricted airports in the U.S.; New York JFK, La Guardia (LGA), Newark (EWR), and Washington Reagan (DCA). Two different airlines have a market share that is greater than the important 49% number; Delta at La Guardia and United at Newark. Both of those market conditions were granted approval by the DOJ without going to trial. So, why is this merger and DCA suddenly being treated differently?

Top Copyright Photo: Marcelo F. De Biasi/AirlinersGallery.com.

American Airlines: