Analysis Reports

Rapid LCC expansion and the introduction of premium economy at full service airlines have dramatically changed the corporate travel landscape in Asia Pacific. The increasing use of LCCs and premium economy products by corporate buyers will be addressed at the CAPA-ACTE Global Summit and Corporate Lodging Forum in Sydney on 3/4-Dec-2018.

Corporate travel buyers in the region are slowly starting to embrace LCCs for short haul and, in some cases, even long haul travel. With LCCs dominating some Asian markets and often offering the best schedules, it was inevitable they would start to gain traction in the corporate space.

Corporate buyers in some Asia Pacific markets, such as Australia and New Zealand, have embraced premium economy for several years. However, with the introduction of premium economy products by more airlines in recent years there are now premium economy options in more markets, giving corporates the opportunity to review their travel policies.

The CAPA World Aviation Summit in Berlin on 27-28 November 2018 will bring together representatives of airline management and pilot unions to debate the question: can aviation unions be a force for good?

A CAPA analysis published in Sep-2018 examined the growing imbalance between demand and the supply of new airline pilots. Global aviation has enjoyed strong traffic growth in recent years, implying that supply has been sufficient. However, this growth is tightening the supply of labour and the airline industry faces challenges in recruiting qualified pilots in the numbers needed to cope with future expansion.

Pilots are not the only labour group in the industry, but they are by far the most expensive and highly skilled. The looming shortage of pilots is strengthening their negotiating position. The discussion in Berlin will consider the challenge of servicing aviation's growth with an adequate supply of human resources.

It will also discuss whether unions have the industry's interests at heart, whether airlines are too focused on a wage race to the bottom, and whether unions can adapt to rapid change. Cost reduction remains a key priority for management, but this may be more difficult when skilled labour is in short supply.

Foreign ownership laws in North America have undergone minor changes within the past year, including the Canadian government’s decision to increase foreign ownership limits to 49% (with no foreign entity holding more than 25% of voting shares).

Legislation introduced in the US earlier in 2018 to remove ownership restrictions on the country’s airlines has – unsurprisingly – gained little traction. But at least the proposal created an opportunity for discussing changes to US airline foreign ownership stipulations.

The needle on foreign ownership levels of US airlines is not likely to move anytime soon, and the increase in foreign ownership levels in Canada’s airlines have not resulted in drastic changes in the country’s aviation landscape. The result is the status quo will remain in place for the foreseeable future as age old protectionist policies show no signs of changing.

By comparison with Western Europe, Eastern/Central Europe has very few airports with long haul connections. According to data from OAG Schedules Analyser for the week of 8-Oct-2019, there are 62 airports in Western Europe with direct flights to long haul destinations and only 16 in Eastern/Central Europe.

Moreover, while Western Europe has 25 airports with 10 or more long haul routes (and six with more than 50), in Eastern/Central Europe only the two leading Moscow airports have a double digit number of long haul routes.

Moscow Sheremetyevo has the greatest number of short haul to long haul connections in E/C Europe, mainly operated by Aeroflot. Outside Russia/CIS, Warsaw has the greatest number of short haul to long haul connections, with LOT Polish its leading operator. At Prague and Budapest, short haul to long haul connectivity is mainly provided by airlines from elsewhere.

American Airlines is in the final stages of its merger with US Airways, after reaching major milestones that included merging more than 1,300 IT systems, moving its pilots and aircraft onto a single operating platform, and completing the rebanking of strategic hubs in Miami, Dallas and Chicago.

The airline enjoys the benefit of operating the youngest fleet among its large US global network peers, and has risen to take the title of the largest US domestic airline, just passing Southwest in US market share.

But despite those achievements and positioning, American’s financial leverage is significantly higher than its peers, and the company faces short term revenue pressure that could affect the lofty financial targets that it has set for itself.

This report examines American’s strengths, weaknesses, opportunities and threats.

Thailand-China has emerged as one the largest and fastest growing air travel markets in the world. There are currently close to 1,300 weekly flights from Thailand to China, generating 250,000 one-way seats. Seven years ago there were 200 weekly flights, generating only 40,000 one-way seats.

Thailand has become the most popular destination for Chinese travellers outside Greater China. Chinese visitor numbers to Thailand are on pace to exceed 11 million in 2018, compared to less than two million in 2011. 

Airlines of all types from both countries have benefitted from the rapid growth in Thailand-China travel. However, LCCs in particular have grown rapidly. The LCC penetration rate in the Thailand-China market has grown over the past seven years from only 7% to 44%, and is poised to increase further as all of Thailand’s LCCs are now banking heavily on China as they expand.

Urumqi has emerged as one of China’s fastest growing airports. Passenger traffic has nearly quadrupled over the past decade, from only 5.8 million in 2018 to 21.5 million in 2017. Traffic increased by 6% in 2017 and was up another 9% in the first seven months of 2018.

However, Urumqi is still relatively underserved from an international perspective, despite its strategic location on the Silk Road and only 300km from Kazakhstan. Urumqi is closer to Central Asia than eastern China and is within narrowbody range of several markets benefitting from China’s 'Belt and Road Initiative' (BRI). Urumqi also has a large Central Asian ethnic population and has become a hub for international companies seeking to increase their presence in Central Asia or the Silk Road Economic Belt. 

China Southern has operated a hub at Urumqi for several years and currently links Urumqi with 15 international destinations – all of which are along the Silk Road. However, the China Southern hub consists predominantly of domestic services and 96% of Urumqi’s total seat capacity is in the domestic market. International traffic has declined over the past three years, whereas domestic traffic has grown rapidly.

VietJet Air is poised to become the first airline to operate scheduled nonstop flights connecting Vietnam and India. The Vietnamese LCC plans to operate four weekly services initially, from Ho Chi Minh to Delhi, but over the next several years could add several routes to India. 

The Vietnam-India market is relatively small but has been growing rapidly. From a small base, traffic has nearly tripled over the past five years and was up 30% in 2017, driven by a 30% increase in Indian visitor numbers to Vietnam.

Vietnam and India are among the 10 most populated countries in Asia and are only four to six hours apart by air. Vietnam is also an increasingly popular tourist destination and India is one of the fastest growing outbound markets. While there is now sufficient demand to support direct services, VietJet will have to overcome stiff competition from sixth freedom competitors, which have the advantage of offering multiple Vietnam-India city pairs.

The wave of LCC and ULCC start-ups that has swept over Latin America during the past couple of years has moved to the Caribbean, with the establishment of the ULCC Flycana in the Dominican Republic.

Flycana aims to launch operations by the end of 2018 after securing the AOC of Dominican Wings. The airline is aiming initially to serve the New York-Dominican Republic market, and then branch out to North and South America, as well as other Caribbean destinations.

The Caribbean is a tough market for an LCC or any other type of airline start-up. The region is notorious for levying heavy taxation on aviation and shows no immediate signs of softening its stance on long-standing egregious fees and taxes. But Flycana has a seasoned management team confident that now is a prime time to establish a low cost carrier in the Dominican Republic.

US regulators have two outstanding antitrust, JV applications in their rosters – Hawaiian Airlines’ request to forge a JV with Japan Airlines (JAL), and American’s and Qantas’ desire to develop a joint venture. Qantas and American are making a second attempt at gaining antitrust immunity.

The ultimate decision rendered by US regulators regarding Hawaiian and Japan Airlines and the American and Qantas request for antitrust immunity is tough to determine. Generally, the administration of US President Trump presides over antitrust immunity on a more ad hoc basis, rather than from a more established policy perspective. Opponents to JVs have also gained a voice during the past couple of years, and those antagonists have won some small victories in the JV approval process during that time.

Antitrust in the US airline industry has been a standard operating procedure for large US airlines for more than a decade as the largest operators have formed JVs instead of cross-border mergers, and for some of those airlines the monetary value of those partnerships is significant.