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Uncertain Times: The global airline industry’s 2017 watch points

Jan 3, 2017by Karen Walker in ATW Editor's BlogIN
 
No matter your industry or priorities, the common feeling entering 2017 is one of uncertainty about how this year will turn out. The airline industry is no exception, so here are a few thoughts on five watch points that could make the difference between a good and a not-so-good year
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The global economy: As always, the fortunes of the airline industry are linked to (and also a driver of) GDP. However, there has been an interesting split in recent years. Despite a sluggish GDP, the airline industry has collectively enjoyed three consecutive years of record profit. The large majority of that profit has been achieved by North American carriers, a trend expected to continue. Most predictions, including the IATA 2017 forecast, are for another profitable year – but not for another record. Expectations are that the global airline industry will make a net profit of almost $30 billion this year, which would be some $5 billion down on the $35.6 billion collective profit anticipated for 2016. That $30 billion is still a healthy sum, but it will represent just a 4% margin. Oil prices and labor costs are expected to be higher, but what will really swing the difference this year will be consumer confidence. And the consumer, like everything else in 2017, is uncertain. Depending on which travel survey you read, there’s either a willingness to travel if the price is right, or a lot of belt-tightening, or a simple reluctance to plan travel because of security concerns. Demand for air travel will continue to grow overall, but yields will be softer. How soft depends on the levels of confidence in the economy by individuals and businesses.

Oil prices: Airlines can likely manage their books even if oil climbs back up to over $100 a barrel. Two big reasons for this is that most airlines have learned how to increase utilization of their aircraft – making them more revenue generating -  and have also twigged to ancillary fees, which also generate revenue vital to this industry’s financial health. But if oil prices spike, everything becomes more expensive – gas for vehicles, utility bills, food; the cost of living. So there’s an effect on consumer confidence and willingness to spend that impacts air ticket sales. Oil prices are not just about an airline’s cost – significant as that is; they shape passenger demand patterns.

New aircraft orders & deliveries: 2017 is expected to be another slow year for new aircraft sales, but deliveries will continue apace as all those big orders of new-generation, super-efficient airliners enter service. The question will be whether the pace of deferrals will also pick up? Airlines and manufacturers make a fanfare of new orders; they tend to be much quieter about deferrals, so not all of the 2017 slippages will be apparent. On the other side, there are plenty of airlines that would like to take delivery of their new aircraft sooner: after some high-profile delays in 2016, the pressure will be on the aircraft OEMs and their suppliers to synch production rates with promised schedules. The Boeing 737 MAX is the next of these new-gen airliners to enter service – in mid-2017 with Southwest Airlines. All eyes will be on Boeing and CFM for a smooth EIS.

Security: The global air transport industry is far more secure and safe than it was before the 9/11 attacks and compared to other modes of transport. But events such as the attacks on airports in Belgium and Turkey demonstrate that those with ill intent still seek to target the air transport industry if they believe they can find a weak link. It’s no coincidence that those airport attacks were on the pre-security sides of the terminals; ironically, it shows how it is almost impossible to get a bomb past screening and on to a plane. And tragically, 2016’s high-profile attacks on crowds in markets, event venues and gathering places also illustrate that terrorists recognize these are easier targets. But airlines do not have to be directly attacked to be affected financially; people’s desire for travel is dampened when they have safety concerns regardless of the cause of fear.

The political arena: At least we go into 2017 knowing where we stand; last year’s twin political shocks of the UK Brexit vote and the US presidential election outcome are just that – last year’s shocks. But, to paraphrase Donald Rumsfeld, there are known knowns, but there are also unknown unknowns. Politically, we are entering a world where there are things we don't know we don't know.

The airline and aerospace industries will be monitoring certain areas for indications of any major policy changes in 2017. Will the new US administration understand the importance of markets like China, and now Iran, to the US aerospace industry and to US high-tech jobs? Access to global markets – including China and now Cuba – is essential for airlines. Will protectionism or open markets be king? The global air transport industry needs the latter; its business health depends on being able to transport all people and goods to wherever they want to go, not merely to move local populations within their national borders.  

On the regulatory side, will government interference increase or loosen? Will US airlines be freer to operate like normal businesses, or will personal whims rain down on practices such as ancillary fees because they make for popular tweets? Or could 2017 be a turning point in removing the political hurdles to US air traffic management system reform?

Since the Wright Brothers, nothing has reversed the overall growth trend of the global air transport industry. People want to go places and they are doing so in record numbers. That’s the one certainty this industry has as it goes to work in 2017.

Karen Walker Karen.walk

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Airlines gearing up to protect flights to Cuba

By Melanie Zanona - 01/31/17 06:00 AM EST
 
Airlines gearing up to protect flights to Cuba
© Getty Images

U.S. airlines began lobbying Washington on Cuba last year as they fought to win commercial flight routes to the island nation for the first time in 50 years.

But travel advocates expect to see an even bigger lobbying push around the issue this year, with questions hanging over the new administration’s policies, including whether President Trump will reverse the historic opening of relations with Cuba. Those concerns have the powerful airline industry, which invested a significant amount of time and resources into competing for and setting up the new flight routes, ramping up their efforts in Washington to preserve those changes.

“The airlines will not cease their advocacy with respect to Cuba, but they’re going to change their strategy from focusing on seeking more [concessions] to focusing on preserving what they have,” said John Kavulich, president of the U.S.-Cuba Trade and Economic Council.

More than a year after former President Barack Obama  announced he was restoring diplomatic relations with Cuba, the U.S. struck a deal with the Cuban government in February 2016 to allow scheduled air service to resume between the two countries

The announcement sent the airline industry scrambling to secure slots — activity that was reflected in their year-end lobbying disclosure forms, filed last week.

JetBlue Airways, American Airlines, United Airlines, Southwest Airlines and Alaska Airlines all lobbied on Cuba at some point last year, as did the trade group Airlines for America (A4A).

“Our members serve new and emerging markets all over the world, and our focus is on ensuring an adequate framework is in place to help facilitate the movement of people and goods between our two nations,” said a spokesman for A4A, which represents most of the nation’s major air carriers, with the exception of Delta Air Lines.

None of the companies had previously mentioned lobbying on the issue in the last five years, with the exception of Alaska Airlines, which started working on the “topic of renewal of U.S. commercial air carrier service between U.S. and Cuba” in 2015.

“There was a time when U.S. companies, not just airlines, would do whatever it took legally to avoid the ‘C’ word in the lobbying disclosure forms,” Kavulich said. “It does show quite a bit of evolution to see ... the types of industries that haven’t been afraid to show that they have an interest in Cuba.”

Delta didn’t specifically mention Cuba in its disclosure forms, but said it lobbied on “International Air Service Rights Issues (U.S. Government Bilateral Negotiations).” A spokeswoman for the airline said that includes, but is not limited to, efforts around Cuba.

The competition for a limited number of slots turned fierce as airlines submitted their proposals and took aim at their rivals. Delta, for example, called American’s “request for ten (10!) of the 20 flights ... out of proportion,” while American called Southwest’s application “seriously flawed.”

The biggest Cuba lobbying push from airlines came in the third quarter of last year, which is when the Transportation Department finished divvying up the 110 daily flights to the island.

Ultimately, 10 airlines were awarded flight routes, which included 20 daily round-trip flights to Havana and 10 flights to nine smaller airports around the communist country. The carriers are: Alaska, American, Delta, Frontier Airlines, JetBlue, Southwest, Spirit Airlines, United, Sun Country Airlines and Silver Airways.

But being granted a flight route wasn’t the only hurdle for those seeking air service to Cuba. Traveling to Cuba is still subject to numerous restrictions, despite the new U.S. policy toward the island.

While the Obama administration loosened travel restrictions for Cuban-Americans who are visiting family, as well as government officials, journalists, students and volunteers on humanitarian projects, tourism is still prohibited.

The airlines also found themselves playing defense against legislation in Congress that would have halted commercial flights to Cuba until an airport security review was conducted. U.S. airlines and A4A all reported lobbying on that bill last year. The measure was advanced by committee but never considered on the House floor.

“U.S. airlines have been critical in helping to lift 55 years of failed policy,” said James Williams, president of Engage Cuba. “Now, with newly re-established direct commercial service to 10 Cuban cities, we expect the airline industry will continue to push for changes that will get rid of arbitrary restrictions on traveling to Cuba.”

The industry could face even tougher battles this year, however.

Trump has threatened to reverse the opening of relations with Cuba if the communist government doesn’t adopt changes, though he has not yet revealed specific plans to change the U.S.-Cuba relationship.

“I have to follow up with you. We’ve got nothing that we’re ready to announce at this point,” said White House press secretary Sean Spicer when he was recently pressed on the issue.

Any regulatory rollbacks could mean fewer aircraft passengers, hotel guests and travel customers, which could all result in less revenue for the airlines.

As a result, Kavulich expects air carriers to ramp up their lobbying efforts — especially with lawmakers who represent their headquarters or have Trump’s ear — in an effort to convince the new president to keep the current policies in place.

“Last year, they were excited about the potential of getting more,” Kavulich said. “This year, they’re hysterical over losing what they have.”

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28 minutes ago, DEFCON said:

Where does all the new American traffic plan on staying on the Island?

 

Are you asking about crews and airplanes or the customers ???

The crews will probably all do turn-arounds and there are an awful lot of resorts on that island for customers. I would think that once Cuba is wide open for US tourists one would have to make a reservation much further in advance than we did as Canadians.

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Will Mid-East airlines' slowdown mean better news for rivals? The Straits Times | Karamjit Kaur | Saturday, Feb 11, 2017

Falling oil prices have affected the global oil and gas industry and economies in the Middle East, softening the demand for corporate travel. This has hurt the profitability of Middle Eastern carriers. The strength of the US dollar against major global currencies has also impacted revenues for Emirates, for instance.

 Karamjit Kaur The Straits Times Saturday, Feb 11, 2017

After a fast climb, Emirates, Qatar Airways and Etihad Airways - dubbed "super connectors" for their significant transit traffic - have hit some turbulence. Dubai-based Emirates, the biggest of the three, saw year-on-year profits for the six months to the end of September nosedive by 75 per cent to 786 million dirhams (S$302 million) - after more than four years of solid growth. The numbers are less gloomy for Qatar and Abu Dhabi's Etihad, but the headwinds are just as strong. Emirates and Qatar are expected to record their slowest capacity growth this year, in at least five years. For the first time, Etihad will cut capacity - the number of seats offered multiplied by total distance flown - reports industry think-tank Centre for Aviation. The developments beg the question: Is this the start of the fall of the Middle Eastern airlines and how will that impact other global carriers such as Singapore Airlines (SIA)? Asked what ails his carrier, the chief of one of the fastest-growing airlines in the world said - a tad ironically - that the skies are getting crowded.

The industry is extremely competitive, said Emirates president Tim Clark. This has prompted some governments to turn protectionist to protect domestic carriers, when, in fact, competition and international air connectivity will result in job creation and economic benefits. For years, carriers - the European airlines being the most vocal - have slammed Emirates, Qatar and Etihad for "dumping" capacity. Aggressive expansion by these carriers has created an oversupply of seats which has forced fares down and, in turn, profits and yields for many airlines, including SIA. Flush with cash, the Middle Eastern carriers have enjoyed growing market share and profitability, until now. Falling oil prices since 2014 have dampened the trading landscape. That has affected the global oil and gas industry and economies in the Middle East, softening the demand for corporate travel. The strength of the United States dollar against major global currencies has also impacted revenues for Emirates, for instance.

The Centre for Aviation's Will Horton said that while all airlines have been impacted by the slowdown in corporate travel, more unique to the Gulf carriers is the downturn in their point-to-point business following the collapse in oil prices. "Point-to-point traffic at Gulf airlines is around 10 to 30 per cent. While that may seem small, the value was very high," he said. It is cheaper, for example, to buy a Hong Kong-Europe than Hong Kong-Dubai/Abu Dhabi/Doha ticket despite the huge difference in distance. There are two schools of thought when it comes to the future of the Middle Eastern giants. No doubt they feel the pinch from more robust competition from other carriers, but this does not spell doom, said Mr Saj Ahmad, chief consultant at StrategicAero Research . "A better indicator of hitting a peak would be either slower organic growth or a move to curtail deliveries of new jets to rein in capacity. Neither of these two are happening yet," he said.

This year, Emirates will still take delivery of more than 20 new aircraft, including Airbus 380s and Boeing 777s. By the end of the year, the airline will have more than 100 A-380s in its fleet. While Etihad will shrink this year, Qatar continues to expand. Last year, it added 14 new destinations to its network and 19 new aircraft to its fleet, taking the count to 192. The airline is also preparing to launch a new business-class seat next month. Endau Analytics' Shukor Yusof has a conflicting view. "The growth that we have seen at Emirates over the years is not sustainable. There will come a point when their A-380s will hamper progress, instead of supporting growth," he said. Within three to five years, a huge fleet of A-380s could put the airline at risk, financially and operationally.

Despite a grand debut a decade ago in SIA colours, the four-engined A-380 is not popular with many airlines that are unable to fill the huge plane in order to reap its operating benefits. For SIA, Cathay Pacific and other international carriers, a slowdown in the Middle East market is certainly good news if overall capacity falls. Still, challenges remain. On Tuesday, SIA reported a 35.6 per cent drop in profits for the three months from October to December. At the operating level, it was slightly better, with profits up 1.7 per cent. The future will be challenging for SIA amid tepid global economic conditions and geopolitical concerns, as well as aggressive pricing by competitors. Loads and yields for the passenger and cargo businesses are seen to remain under pressure.

On the plus side, an expanding, fuel-efficient Airbus 350 fleet will help SIA grow with better operating economics. The airline has ordered 67 of the planes, which started arriving last year. Integration between Scoot and Tigerair will continue as SIA moves to position the group to capture a bigger share of the budget travel market for short- and long-haul flights. Even with the slowdown in the Middle East, Emirates, Qatar and Etihad will continue to be formidable foes. New challenges will also come from Chinese carriers that have been growing aggressively in recent years. To stay a key player, SIA will have to work harder to improve its operating margins and seek new opportunities in existing and new markets. Equally, if not more important, the airline must listen to its customers and tailor its products and services accordingly, and keep staff happy so that they can continue to provide the quality service that SIA has built its reputation o - See more at: http://news.asiaone.com/news/asian-opinions/will-mid-east-airlines-slowdown-mean-better-news-rivals#sthash.eZhCEZ2I.dpuf

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Boeing's 777X Finally Breaks Its Order Drought With Singapore Airlines Deal

By Adam Levine-Weinberg Published February 11, 2017Markets

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Boeing (NYSE: BA) launched the next-generation 777X with great fanfare in late 2013. The airplane held the promise of driving the next wave of growth in long-haul air travel while also replacing fuel-guzzling jumbo jets like the Boeing 747 and Airbus (NASDAQOTH: EADSY) A380 and serving as a successor to the popular 777-300ER.

Unfortunately, a combination of lower fuel prices and economic weakness in multiple regions of the world have undermined sales of the 777X. However, Boeing finally got a much-needed order last week, as Singapore Airlines agreed to take 20 of the larger 777-9 model.

The 777X falls into a rut

The 777X launched in November 2013 with 259 orders and commitments from four of the biggest international airlines: Emirates, Lufthansa, Qatar Airways, and Etihad Airways. Boeing said that this was a record number of commitments for a widebody aircraft at launch. The following month, Boeing received another 21 orders, this time from Cathay Pacific.

Since then, sales have slowed to a crawl. Japan's All Nippon Airways ordered 20 777-9s in 2014, but Boeing hasn't officially announced any significant new customers since then. In fact, Boeing didn't sell a single 777X during 2016.

After a strong start, Boeing 777X sales dried up after 2014. Image source: Boeing.

As a result, Boeing's firm order backlog for the 777X totaled 306 planes as of last month, barely more than the 2014 year-end total. This doesn't include the 15 777-9s that Iran Air officially plans to buy Opens a New Window. , because heightened tensions between the U.S. and Iran make it quite possible that this order will fall through.

The first 777X isn't scheduled for delivery until 2020, so getting more orders hasn't been an urgent priority. Still, while 306 orders seems like a sizable backlog, some of those orders stretch out as far as 2030. There are open slots at least as early as 2021. Boeing would obviously like to fill those slots well before the situation becomes critical two or three years from now.

A new order, at long last

Boeing finally broke its 777X order slump last week. On Thursday, Singapore Airlines announced plans to buy 20 777-9 aircraft, along with an additional 19 787-10 Dreamliners.

Winning this order was significant for two reasons. First, Singapore Airlines is a very prestigious carrier, and its aircraft orders can influence other airlines' fleet decisions. Indeed, with the Singapore Airlines deal, Boeing has now sold the 777X to each of the six best airlines in the world, according to the Skytrax 2016 World Airline Awards Opens a New Window. .

Second, Singapore Airlines' decision to order the 777X is a blow to Airbus' two competing aircraft programs: the A350 and A380. Singapore Airlines is the second-largest customer for both of those aircraft types, with 67 total orders for the A350 and 24 for the A380. It would have been easy for it to stick with those Airbus models if they were a match for the 777X.

Singapore Airlines chose the 777X over ordering more A350s. Image source: Airbus.

Instead, the 777X order is just one more sign that Singapore Airlines wants to reduce its reliance on the A380 jumbo jet or get rid of it entirely. It also helps undermine the case for a stretched version of the Airbus A350 Opens a New Window. that would compete directly with the 777-9. The market for planes of this size isn't that big, so every order won by Boeing erodes the business case for Airbus.

Time to sell more planes

Singapore Airlines has said that it will receive its first 777-9s during the 2021-2022 financial year. This will start to fill in some of the gaps in Boeing's firm order book for the 777X.

Still, 20 planes is a relatively small number, considering that the 777 production line currently churns out seven airplanes per month (down from 8.3 per month for the last few years). Thus, Boeing needs to keep working hard to bring in new customers for the 777X program in the face of weak demand for widebody jets.

Qantas and Turkish Airlines have both expressed interest in the 777X. Boeing should also try to sell the model to at least one of the major aircraft leasing firms, in order to make it available to smaller airlines. China's three big state-owned airlines (China Southern, China Eastern, and Air China) are obvious targets for a 777X sales campaign as well. Boeing can't rest on its laurels. It needs to use the Singapore Airlines deal as a springboard for further orders.

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It seems that the rush of Americans to visit Cuba was a non event and there will be lots of hotel accommodation left for Canadians.

 
 

Airlines downsizing service to Cuba due to low demand

February 21, 2017 By Robert Pursell

Last week, JetBlue announced that — effective May 3 — it would be reducing the capacity of its flights to Cuba, according to the Miami Herald.

As reported by USA Today, JetBlue is now the third U.S. airline to reduce the size of its service to Cuba, which has many travel experts speculating that demand for travel to the island nation isn’t what airlines thought it would be.

RELATED: How to enjoy Havana, Cuba, on a budget

In August, JetBlue became the first U.S. passenger airline to complete a commercial flight to Cuba in 50 years, only months after Cuba and the United States agreed to resume scheduled air service.

But now, JetBlue has announced that it will be downsizing to smaller aircrafts on several of its Cuban routes, effectively eliminating 300 seats a day from its current Cuban flight schedule.

The demand for air travel from the United States to Cuba hasn’t been as high as what multiple airlines expected. 

“We are continuing to operate our schedule of nearly 50 weekly round trip Cuban flights but have made adjustments to our fleet utilization,” JetBlue spokesman Philip Stewart told the Miami Herald. “It’s common practice to adjust schedules and fleet type based on customer preferences, especially on routes that are new to the network.”

As USA Today notes — having gone a half century with no commercial air travel between Cuba and the U.S. — airlines had almost no data to base their projections for demand. Despite that, airlines scrambled to secure flight routes in an out of the island nation.

Karen Esposito, the general manager of Cuba Travel Network, told the Chicago Tribune that the initial rush by airlines to schedule a large amount of flights to Cuba, “Wasn’t based on demand but speculation. They had no history to look at.”

Some experts point to the lack of infrastructure in Cuba as a reason why travel to the country isn’t as popular as other Caribbean nations.

Andrew Levy, the chief financial officer for United Continental Holdings Inc. told Bloomberg in November that “It’s going to take a really, really long time for [Cuba] to become a Caribbean destination that’s as popular as some of the other ones that are out there today. The infrastructure just isn’t there. I’m personally skeptical about the opportunity.”

The Miami Herald reports that American Airlines was the first to announce it was scaling back service to Cuba in November, cutting service to multiple cities on the island from twice daily to once daily. Then, in December, Silver Airways followed American’s lead, trimming flights on six of its nine routes to the island.

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An editorial comment on Cuba:

Editorial: The Cuban Conundrum

Mar 24, 2017Karen Walker
 

In the space of six months, the re-opened US-Cuba commercial aviation market has gone from hot to lukewarm.

American carriers rushed last year to secure slots to the Caribbean island after the US and Cuba signed an agreement that re-established scheduled air services for the first time in more than 50 years. The US Department of Transportation (DOT), then under the Obama administration and headed by Transportation Secretary Anthony Foxx, lauded the agreement as something of great benefit to US airlines, shippers and travelers. More than 100 daily roundtrip slots were made available to US carriers, and they responded swiftly. 

US airlines began their services in late summer, beginning with JetBlue Airways’ historic first flight from Fort Lauderdale, Florida, to Santa Clara in central Cuba on Aug. 31. But then a strange thing happened. For most airlines, especially those operating to cities outside of Havana, demand has been disappointingly low. By late 2016, some carriers were already trimming capacity—reducing frequencies and/or using smaller aircraft. In March, two airlines—Silver Airways and ultra-low-cost carrier Frontier Airlines—threw in the towel and dropped service altogether.

Airline conversation about the Cuban market has changed significantly—from excited anticipation to caution and talk of longer-term potential. 

In truth, US airline optimism was overblown. With little-to-no data on a market that was non-existent for more than five decades, it was difficult to predict accurately how fast it would grow. There were, however, well-documented infrastructure and capacity constraints in Cuba that should have indicated to airline forecasters that the pace would likely be slower rather than faster.

Nevertheless, the Obama administration also left the airline industry hanging. The 2016 aviation memorandum of understanding with Cuba, though significant, was simply not sufficient in itself to release the largest market opportunity—tourism. Any US citizen who fancies a vacation in Cuba now has any number of US airline route options. But the State Department sternly warns the would-be American tourist: “Tourist travel to Cuba remains prohibited. You must obtain a license from the Department of Treasury or your travel must fall into one of 12 categories of authorized travel.”

There’s the Cuban conundrum that the Obama administration bequeathed to US airlines and American tourists. You can fly there, but you can’t be a tourist. 

Infrastructure and distribution challenges will certainly hinder US-Cuban aviation market growth, but they can be addressed. The real roadblock is political. And the biggest question is whether the Trump administration will remove that hurdle or make it even more difficult? The future of this fledgling market depends on the answer.   Story Link: http://atwonline.com/opinions/editorial-cuban-conundrum?NL=AW-05&Issue=AW-05_20170321_AW-05_614&sfvc4enews=42&cl=article_4&utm_rid=CPEN1000003028964&utm_campaign=9174&utm_medium=email&elq2=24957172d74949bca9406008f9699bb2

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