Airline Weekly Feb18

7/28/2019 Airline Weekly Feb18

1/12

cidentally but more likely not,they were also the only twowhere it seemingly earned con-sistent profits.

Kirby and his boss, CEO DougParker, will no longer be first insome of their hub cities, includ-ing the bigthree. Howthey handlethe far more competitive situa-

tion in which they will soon findthemselvesone that will re-quire less doctrine and morenuance than beforewill deter-mine Americans prospects.

In taking control of American,Parker and Kirby have willinglygiven up a rather comfortablespace in the industry. US Air-ways could always be selectiveabout which of its competitorsproduct attributes to match.Economy plus or economycomfort? Forget it. Shorthaul

Pushing Back: Inside This Issue

Copyright Notice: No part of this publica-tion may be copied, photocopied or dupli-cated in any formor by any means withoutAirline Weekly Corps prior writtenconsent. Copying of this publication is inviolation of the Federal Copyright Law (17USC 101 et seq.). Violators may be subjectto criminal penalties as well as liability forsubstantial monetary damages, includingstatutory damages up to $100,000 perinfringement, costs and attorneys fees.Copyright 2011 Airline Weekly Corp. Allrights reserved. ISSN 1942-2059.

February 18, 2013Issue No. 418

Net result; operating margin

*ex special items (operating margins are ex SI)

October-December 2012 (3 months)

Aeromexico: $47m/ $29m*; 7%

Norwegian: $4m/ $12m*; 3%

Air Arabia: $23m; 11%Philippine Airlines: -$64m; -13%

Air Mauritius: $8m; 9%

SkyWest: $14m; 5%

July-December 2012 (6 months)

Comair/ Kulula: $9m; 5%

Verbulence

As expected, the American-USAirways mergerthe last in thegreat wave of U.S. airline consol-idationis now a reality, or willbe following what should be rou-tine approvals by various stake-holders. First America-West USAirways in 2005, then Delta-Northwest in 2008, United-Continental in early 2010, South-west-AirTran in late 2010 and

now American-US Airways in2013. A new U.S. airline sectorstructure is now in place, possiblyfor a long time to come.

Fewer airlines certainly meanbetter times for Aeromexico,which had another good year in2012, albeit with some downwardmomentum. Norwegian too mademoney on rising yields as thenumber of European airlinesshrank. And unlike nearly allother airlines in Europe, including

The UnAAnswered QuestionsThe NewAmerican has arrived, and with it newquestions about product and network

CONTINUED ON p. 12

E.U. regulators wont allow it. Sothat leaves the European airlinelandscape less consolidated thanit otherwise would be, althoughthe story isnt finished yetnotwith Lufthansa presumably stilltalking with Turkish Airlines, andwith Alitalia again facing existen-tial questions.

Back in the Americas, WestJetfired its latest shot in an escalat-

ing war with Air Canada, whileJetBlue and Virgin scuffled overroutes from San Francisco.

[The merger] is great value creation, but its all dependent onexecution, of course. Weve seen that around the industry. Executionmakes all the difference.

Tom Horton, chairman of the new American, hinting at the distinctionbetween Deltas rather smooth merger and Uniteds messier one

So much for, If youre notfirst, youre last.

That has long been one of USAirways President Scott Kirbysfavorite quotesborrowed fromthe filmTalladega Nightstodescribe why US Airways wasperfectly content to be the big-gest fish in medium-sized pondslike Charlotte, Washington, Phil-adelphia and Phoenix, much as

the old Northwest once made agood living dominating Minne-apolis, Detroit and Memphis.New York, Los Angeles andChicago? Let other airlines fightthose bloody battles in the threebiggest U.S. cities.

Americans approach was theopposite. It was proud of itscornerstone cities: those bigthree plus the smaller but stillsizeable Dallas and Miami mar-kets, which were the only twowhere it was first. Perhaps coin-

inflight entertainment? Bringyour own book or device andentertain yourself. (Another non-coincidence: Northwest had asimilar view of IFE before merg-ing with Delta.) US Airways,unlike United, Delta and Ameri-

can, doesnteven servemeals in firstclass on flights

lasting less than three and a halfhours. Implied: Feel free tocompare our first-class product toSouthwests, Mr. Philly- or Phoe-nix-based business traveler. Atleast Marie Antoinette did, ifnothing else, let them eat cake.

For all the many benefits ofbroader exposure, one downsideis that its harder to optimize aproduct for every market in amore diverse network. The cur-rent US Airways shorthaul in-flight product might have been

Ryanair and easyJet, Norwegian isstill practicing extreme growth,with positive results thus far. Onthe other hand, Norwegian is still

just a modestly profitable airline atbest, with questions about its abil-ity to even cling to that distinctionas it debuts risky longhaul flights,competes with a restructured SASand navigates Europes economicdoldrums.

Elsewhere in Europe, Ryanairsthird attempt to buy control of AerLingus ended like the last two:

Weekly News Review 2-3

Fleet & Finance 4

Marketing & Sales 5

Labor & Airports 7

Around the World 10-11

Routes & Networks 8-9

Environment 8See also:The new American: a closer look, p. 6


2/12

2the weekly skiesIts been nothing but good news forAeromexi-cosince the summer of 2010, when its closestrival Mexicanafiled for bankruptcy andstopped flying. That year, Aeromexicos long-troubled operation suddenly earned a 10%operating margin, followed by another 10%

operating margin in 2011. Well the good timessoured a bit last year, when operating marginfell to 7%net profit was $101mpressuredby a 6% depreciation in the Mexican peso rela-tive to the U.S. dollar. Naturally, this reducedpurchasing power for Mexicos internationaltravelers and made already high fuel priceseven more expensive. The final quarter of theyear also saw financial performance slip, withnet profit at $47m ($29m ex special items) andoperating margin falling to below 7% ex itemsfrom above 8% a year earlier. The peso didactually rise in value during Q4, but revenuesstill grew only 2% despite 4% ASK capacitygrowth. Why? Because 1) unit costs increased

as management shrank ASM production toimprove on-time performance and 2) unit reve-nues weakened on lower load factors, the con-sequence of a momentary slowdown in theMexican economy, which weighed on traveldemand. But Aeromexico expects the econo-my, which expanded a healthy 4% in 2012, toregain its footing in 2013 as the U.S. economygrows slowly but surely and as rival exportersin China face rising labor, energy and transportcosts. Mexicos critical tourism sector is doingwelldespite ongoing episodes of drug-relatedviolence in certain areas, the bustling resorts ofplaces like Cancun are largely problem free.And Mexicos oil exports are of course stillbooming, albeit shrinking year by year due inpart to lack of adequate investment in explora-tion and production technology. Mexicos air-line sector is booming too: the countrys air-ports handled 86m passengers last year andAeromexico, Volaris, Interjet andVivaAero-busare all more or less healthy companies,unlike their many predecessors (Mexicana,Aerocalifornia, Aviacsaand so on), whichtoday populate a large airline graveyard. As forAeromexico itself, its enjoying its position asthe countrys only true business-oriented air-line, ensconced in the SkyTeam alliance andclosely allied withDelta, which owns some of

its shares. Aeromexico and Delta will soonopen a joint venture maintenance business inQuertaro and might even one day form a jointventure on passenger routes, although a U.S.-Mexico open skies agreement would be neededfirst. Thanks to three years of profitability,Aeromexico has money to invest in its future,meaning money to buy large numbers of fu-ture-generation planes, namely B737-MAXsand B787s (see page four). I ts also rejuvenat-ing its regional fleet with E-Jets, although itwill only grow its fleet count by one shell thisyear. Still, with larger planes replacing smaller

from a 20% y/y surge in revenues on 15%more ASK capacity. Operating expenses,meanwhile, moved in tandem with capacity:similarly up 15%. As for the full year, net prof-it was $116m, or $108m ex items, underpinnedby a 12% operating margin. The Indian sub-

continent is still the biggest piece of Air Ara-bias business, and Indian expats are still flyingin droves to and from their construction, oilsector and service jobs in the Gulf. Other stra-tegic markets include Saudi Arabia, Iraq andthe former Soviet Union, while a separate unitin Morocco seeks more flying rights to sub-Saharan Africa. A smaller Egyptian unit basedin Alexandria remains stunted by Egypts polit-ical and economic troubles, and a once-plannedunit for Jordan has been shelved for now.

Air Arabias close rival FlyDubai is not apublic company and therefore does not publish

audited financial results. But it did declare a$41m net profit on $757m in revenues for allof 2012, along with a 6% operating margin.Launched in June 2009, the LCC first becameprofitable in the second half of 2011 and nowserves more than 50 cities with 28 planes. Lastweek it began flying to Hail in Saudi Arabia,where oil riches continue to drive air travel.And next month it will enter two additionalPakistani markets: Multan and Sialkot. FlyDu-bai, which likeEmirates is owned by Dubaisgovernment but plans its business autonomous-lyit even competes with Emirates on manyroutesis also (like Air Arabia) growing ag-gressively to Russia and the former Soviet

space. Ancillaries are a big part of its businessmodel too, accounting for a full 17% of totalrevenues.

Philippine Airlines is not, to put it mildly, thetoughest kid on the block. Its neighborhood isbuzzing with new and expanding carriers, fromLCCs likeAirAsia toglobal conquerors likeEmirates. But Philippine Airlinesnursing along history of labor woes, financial distrustand underwhelming marks for service is noteven an alliance member. No surprise, there-fore, that its Q4 net result was a shameful$64m net loss, accompanied by a negative 13%

operating margin. Revenues were flat y/y butoperating expenses jumped 7%, never mindthat fuel outlays dropped. For all its competi-tive headaches, no competitor is more bother-some than hometown rival Cebu Pacific,which will soon add longhaul flights to itsrepertoire. Philippine Airlines does, however,have new owners with deep pockets and bigplans to re-fleet the airline.

South AfricasComair recovered from a rough2011 and early 2012 to register a $9m net prof-

ones, ASM capacity will still expand roughly6%, with more emphasis on internationalgrowth. Separately, Aeromexicos largestshareholder, a bank controlled by Citigroup,sold a large portion of its holding to new inves-tors.

Norwegian, another airline waiting for itsB787s, has had less success thanAeromexicoin recent years, earning just small operatingprofits in 2010 and 2011. Things improved in2012, however, as full-year operating marginreached nearly 6% excluding special items,with net profit at $77m, or $83m ex items.During the fourth quarter alone, Norwegianmanaged a $4m net profit, or $12m ex items,and a 3% operating margin ex items, not badfor a wintry off-peak period in Norway. TheLCC remains one of the fastest growing carri-ers worldwide, expanding ASKs last quarter by

19% y/y, achieved through fleet growth andreplacing smaller B737-300s with larger -800s.Impressively, revenue growth (22%) exceededcapacity growth thanks to strong yields. At thesame time, operating costs ex items rose just17%, with solid gains in labor productivity anda big drop in maintenance costs. Fuel outlayswere up 19%, comfortably in line with capacitygrowth. A further strengthening of Norwayscurrency surely helped, both in boosting de-mand and holding down costs. In addition,longer average sector lengths depressed unitcosts while boosting ancillary salesthe long-er the flight, the more likely people will buystuff. Management did highlight, however,

maturing markets for ancillary products. Thisyear, Norwegian faces a giant test as its giantambitions are put into action. It will growASKs another 25% this year, which includes arisky foray into longhaul markets. I ts openingthree bases in Spain, a move largely motivatedby the ability to hire cheaper crews there. Itsalso opening a longhaul crew base in Bangkokfor the same purpose, generating somepushback from unions and politicians. Notstopping there, its also opening a LondonGatwick base and has (gulp) 276 undeliveredaircraft on order, including many A320-NEOsand B737-MAXs. In the meantime, rival SASis dramatically cutting its costs. For now, ad-vance bookings look fine and yield pressuresare actually easing as smaller rivals disappearand downsize. But Norwegian acknowledgesthe economic uncertainty weighing on Europe,and the ongoing competitive pressures even asrivals cut capacity.

Air Arabia, despite serving a number of mar-kets disrupted by political unrest, neverthelesshad a another strong quarter and year. In Q4,the Sharjah-based LCC posted a $23m netprofit and an 11% operating margin, benefiting


3/12

3 the weekly skiesearlier. Revenues shrank 4% y/y as flights toMilan, Geneva and Frankfurt got the axe. Butoperating costs dropped 9%, helped by man-agements seven-step recovery plan. Part ofthat plan involves increasing capacity to Afri-can markets like South Africa, Kenya and

Madagascar to offset weakening inbound tour-ists demand from Europe. And it also includesa buildup in China, demonstrated most recentlywith last months launch of twice-weeklyflights to Shanghaithe number of Chinesetourists visiting Mauritius grew 38% last year.But Air Mauritius still has a lot to prove, hav-ing ended 2012 with a full-year net loss of$15m and an operating margin of negative 2%.

The U.S. regional giantSkyWest, which un-characteristically lost money in 2011, turnedthings around in 2012: net profit was $51m andoperating margin was 5%. The story was simi-

lar in the fourth quarter alone, when net profitwas $14m and operating margin likewise 5%.SkyWests chief business is flying sub-100 seatairplanes for DeltaandUnited, an activity thatwas under stress as both carriers lost interest inthe 500-plus 50-seaters that SkyWest was fly-ing for them. But then came good news: a newpilot contract allowed Delta to outsource moretwo-class CRJ-700s and CRJ-900s, larger re-gional jets with far more attractive operatingeconomicsUS Airwaysrevealed last week,in fact, that the CRJ -900 is one of its mostprofitable aircraft types. Then some more goodnews: American reached a new pilot contractof its own, and although it ultimately decided

to go with SkyWests rival Republic for thenew large RJ s it will add, American did awardSkyWest some 50-seater flying. As it happens,SkyWest started flying a handful of 50-seatersfor US Airwaystoo, and the American-USAirways merger could create more opportuni-ties. But wait, theres more: United has a newpilot contract with relaxed scope clauses too,and it might look to SkyWest for more large-RJ flying. In winning its latest Delta deal, ofcourse, SkyWest did commit itself to earlytermination of agreements on 66 CRJ-200s, a50-seat plane that Delta regards as economic

it for the six months from July through Decem-ber. Operating margin for the period was asolid 5% as revenues jumped 17% y/y even asoperating costs rose only 9%. For all of calen-dar year 2012, Comairs net profit was $15m.Its operating margin was 4%. The continued

weakness of South Africas currency certainlydidnt help the turnaround, but Comair did geta boost from fuel surcharges onBritish Air-ways-branded franchise flights. Besides work-ing with BA, Comair operates an LCC calledKulula, which itself benefited from a newrevenue management system. In addition, thecompany received new fuel-efficient B737-800s, which helped reduce unit costs withoutthe need to lay off workers. Still, its a toughenvironment for Comair, which operates in adomestic market that shrank 6% y/y in thesecond half of 2012, without any anticipationof near-term recovery, according to manage-ment forecasts. Also a worry are the growing

number of flights to southern Africa by Gulfcarriers and others. This means a passenger in,say, Lusaka (Zambias capital) no longer needsto fly to Johannesburg to pick up a longhaulflight. It also means more longhaul competitionfor Comairs partner BA. In addition, the newAfrican LCC Fastjet has undisguised designson the South African market, manifested by itspurchase of the carcass left by Kululas formerLCC rival 1Time. On the other hand, SouthAfrican Airways, the state-owned behemoth,is facing monumental difficulties, getting byonly thanks to government assistance. Comairalso sees good prospects for its non-airline

business units: tourism, catering, training andairport lounges. Next month, it will launchKulula flights from Johannesburg JNB to EastLondon. And in May, it will start BA-brandedflights from Johannesburg JNB to Maputo inneighboring Mozambique. Its also cautiouslyoptimistic about further profit improvement inthe current half year.

Air Mauritiusshrank its way to profitabilitylast quarter, managing an $8m net profit and anencouraging 9% operating margin, a sharpreversal from losses in the same quarter a year

kryptonite. More prosaically, SkyWest is re-storing its fortunes by improving operations atitsExpressJet unit and flying more blockhours. I ts balance sheet is as strong as ever, andRepublic is its only true competitor left. Andalthough it, unlike Republic, doesnt operate

E170s or E175s, management says its readyand willing to do so if thats what it takes towin a future deal. I t also, dont forget, has or-ders for 100 Mitsubishi MRJ s, a next-generation plane with the same turbofan en-gines adopted by Airbus for the A320-NEO andBombardier for the CSeries. All told, SkyWestsees hundreds of aircraft worth of opportuni-ties.

Here we go again: Ryanair said the EuropeanCommission, for the third time, will oppose itstakeover ofAer Linguson the grounds of be-ing harmful to consumers. Manifestly unfair!

exclaimed Michael OLeary, whose airline bentover backwards to alleviate concernsit of-fered routes to bothBritish AirwaysandFly-be. Ryanair says the decision is based on poli-tics not competition law, which is hard to dis-pute given all the other mergers the E.C. hasrubber stamped, including the British Airways-British Midland takeover, which reduced com-petition at an airportLondon Heathrowwhere new entrants have a notoriously difficulttime entering. Next, the E.C. must decide on thelegality ofAegeans second attempt at mergingwithOlympic, which was preposterously re-jected the first time. This time, it if it says yes,it will make the Ryanair rejection appear even

more outlandish. And if it says no... well, youdont win any points for being consistent ifconsistency means consistently wrong.

On the European economic front, Germanyseconomy grew a measly 0.4% last quarter,while the French, Italian, Dutch, Spanish, Bel-gian, Portuguese, Finnish, Greek, Czech andHungarian economies all shrank as well, ac-cording to Eurostat. The euro area as a whole,which includes 17 countries, suffered a 0.6%economic contraction.

J etBluefollowed its peers and announced pas-senger unit revenue estimates for J anuary. Itsaid PRASM was flat y/y and also expects asimilar trend for this month. JetBlue, by theway, is currently entering the thick of its peakFlorida flying, with hordes of northeasternersflocking like birds to the sunshine state.

In aWall Street Journal op-ed piece, two hotelexecutives mentioned a statistic that will warmthe heart of every airline: last year, for the firsttime ever, more than one billion of the earthspeople traveled outside their home countries.

746 NE 7th Avenue, Fort Lauderdale, FL 33304, USA

+1 954 524 8855 airlineweekly.com

Who We Are and How to Reach UsAirline Weekly is a product of Airline WeeklyCorp., an independent company of journalists andformer industry professionals with a shared interestin commercial passenger aviation worldwide. Air-line Weekly is a subscriber-based publication anddoes not accept advertising from airlines. Editorialpolicy forbids staff members from owning stock orany other stake in airlines.

PricingIndividual annual subscriptions (48 issues) are$695; multiple-reader discounts and enterpriselicenses are available.

Editorial inquiriesJay Shabat, [email protected]

Media inquiriesSeth Kaplan, Managing [email protected]

Subscriptions and advertisingJason Cottrell, Marketing [email protected]


4/12

fleet & finance 4

Another dead airline on the runway: Bahrain Air,launched in 2008 to compete withGulf Air, stopped fly-ing and plans to liquidate. It blamed the government, aswell as political unrest, for steep losses. Although it wassmalljust four narrowbody planesits demise shouldhelp Gulf Air in its efforts to recover from its own losses:airline liquidations are often highly positive for close com-petitors that remain standing.

Will Alitaliameet the same fate? The long strugglingairline, a symbol of its sclerotic and unreformed homeeconomy, faces another need for more capital, only mo-mentarily relieved, as it was, by a new convertible loanfrom shareholders for $200m. Air France/KLM, whichowns 25% of the company, might yet buy full control,wary of losing important feed traffic into Paris and Am-sterdam, especially from northern Italy. A less likely pos-sibility is a partial takeover by Aeroflot, which is report-

edly interested, and not for the first timethe Russiancarrier weighed a bid to buy Alitalia back in 2007. TheItalian carrier will hold a board meeting to discuss its op-tions later this month.

One saving grace for European carriers: since last summerthe euro has appreciated more than 10% against the U.S.dollar. That could go a long way toward relieving costpressures for airlines likeAlitalia, although it might betoo little too late for others likeLOT Polish, whichalthough the zloty has risen toois fighting for dear life.

SkyMoneyAirline Finance

Fleet SheetAircraft Developments

Iberia took delivery of its first A330, a -300 model ordered to replace the manyobsolete four-engined A340s in its longhaul fleet. By the end of the year, it will havefive A330s, outfitted (as previously announced) with updated business and economycabins. But somewhat surprisingly, Iberia did not use the occasion to unveil a newlivery, sticking for now with the yellow and orange ensemble from the Franco era.

Icelandair firmed an order for 16 B737-MAXs, selecting both -8s and -9s, whilealso acquiring purchase rights for another eight units. This stems from a non-firmcommitment made in December, when it envisioned buying just 12 units. Icelandair,by the way, plans to continue operating some of its B757s well into the next decade.

Aeromexicois yet another airline with a corporate plan frustratingly disrupted bythe grounding of all B787s. Although Boeing hasnt yet notified it of any deliverydelays, its acting conservatively and assuming that its first unit wont start flying inthe third quarter, as planned, but in the fourth quarter instead. Management down-played the financial impact, saying it will save on pilot training and extend leases onsome B767s. Nevertheless, having to wait yet another few weeks or even months isclearly disappointing after years of delay. Aeromexico, after all, has big plans for theB787, which will first fly to London Heathrow, then Paris and then New York

JFKall three routes are still slated to be B787 routes before the end of 2013. Andthen in 2014, Aeromexicos B787s will head all the way to Tokyo, flying nonstopfrom Mexico CityAeromexico currently serves Tokyo with B777s via Tijuanabecause Mexico City is too far. Eventually, the carrier will send B787s to Santiagoand Buenos Aires in deep South America as well.

Speaking of troubled new aircraft types, the Russian-built SSJ Superjet 100s haveexperienced a number of reliability issues, notably at Aeroflot. Several of its units,in fact, were temporarily grounded, although theyre gradually re-entering service.

The problems coincide with the painting ofInterjets first SSJ, which should arrivein Mexico shortly.

MORE INFORMATION:

http://www.insightinfo.com/aircraftregistry2013?utm_source=AirlineWeekly&utm_medium=banner&utm_campaign=ATF_avc13597


5/12

5 marketing & salesAirBuzzMarketing, Price, Promotion &Alliances

The BackendSales, Distribution, Tourism&Corporate Travel

Finnair badly wants to be the premier airlinebetween Europe and Asiaits life, in fact,depends on it. But to do that, it will need to

maintain leading levels of inflight service, allthe more so because these routes are long,and business passengers demand more com-fort on long routes. So Finnair will installlie-flat business class seats, manufactured byZodiac Aerospace, on most of its longhaulplanes starting next January. It already offerslie-flat seating on four of its newest A330s,but this will now be true of all widebodyplanes, minus a few older shells that will exitthe fleet when A350s start arriving in 2015.Separately, Finnair also plans to revamp itslonghaul meal service in both business andeconomy classes. Unlike many other airlinesflying between Europe and Asia, it does not

offer a separate first class product.

KLM, which happens to be one of thosecarriers that (likeFinnair) only offers twoclasses of longhaul service, announcedchanges to its shorthaul offering last week. Itwill soon follow the lead of its sister airlineAir Franceand before it many LCCs andU.S. carriersand impose bag fees for someeconomy class shorthaul passengers. But inKLMs case, theres a major exception: allFlying Blue members (not just elites) areexempt, meaning everyone can avoid the feefor now by establishing a frequent flier ac-count. Of course, it could always choose to

make the policy more rigid in the future.The U.S. DOT published its final consumer

metric data for 2012. Among the Big fourintercontinental carriers, Deltawas a clearNo. 1 andUS Airwaysa clear No. 2, withUnitedandAmerican a distant third andfourth in various categories. The three maincategories measured are on-time perfor-mance, baggage handling and customer com-plaints. Including all U.S. airlines, Hawaiianunsurprisingly had the best punctuality, fol-lowed by Alaska AirlinesandSouthwestsAirTran unit, which all ranked ahead ofDelta.J etBlueandFrontier werelowerdown, slightly better thanUnitedandAmer-

ican, whileSouthwest (ex AirTran) andVirgin Americawere somewhere in themiddle of the pack.

Emirates launched an inflight entertainmentservice called ice TV Live, offering pas-sengers four channels of live television:BBC News in English, BBC News in Ara-bic, Euronews and Sport24.

Never one to shun an opportunity for atten-tion-grabbing irreverence, Ryanairs Mi-chael OLeary dressed up like the Pope for awebsite ad selling flights to Rome. OLeary,it proclaimed leaves Ryanair for new job.

Singapore Airlinessigned an updated content distribution agreement with Sabre, which getsaccess to all of its fares, flights and seat inventory. There was no mention of distribution of thecarriers ancillary services. Sabre did say it would market and promote Singapore Airlinesthrough its GDS, which likely means steps to make the airline more visible among travel agents.

Farelogix, a supplier of airline distribution technology, unveiled its new airline commerce gate-way, which the company described as a way for airlines to easily, efficiently, and dynamicallydeliver content, including custom-tailored product offers, to travelers across multiple distributionoutlets. Farelogix CEO J im Davidson, speaking at a media event in Miami, demonstrated a relat-ed user interface for travel agents, which he said disproves the idea that different kinds of airlineofferings cant be displayed side by sideAmericans new fare bundles (with explanations aboutwhat they include) appeared alongsideUniteds traditional fare structure. Both airlines, in thesimulation, could make offers based on what they knew about customers, such as their elite status.

Traditionally, airlines file schedules and fares, and travel agents use those to assemble offers forpassengers without the airlines knowing who those passengers are until they book.

Farelogix, by the way, says its system will adapt as IATAs new distribution capability (NDC)standards emerge. GDSs, along with most travel management companies that have taken a posi-tion on the matter, have been resistant to all of this. They argue that they actually provide greatvalue precisely by providing corporate travelers rather standardized offers that, among otherthings, fit easily within corporate travel policiesand that anyway, they can handle much of whatairlines are demanding, such as ancillary sales.

One of those GDSs, Travelport, andAir Canadaactually speak glowingly of each other and theAgencia tool that they jointly offer travel agents in Canada, who can rather easily offer the car-riers various fare bundles and ancillary products to customers. This does lend some support to theidea that challenges in this area are often commercial rather than technical: Air Canada is ratherdominant in its home market, whereas Travelport is eager to make inroadsSabre is CanadasNo. 1 GDS by a sizeable margin. And Travelport hasnt made the interface available outside Can-ada, where Air Canada needs more help selling. Is Travelport succeeding in taking any share fromSabre? Keith Wallis, Air Canadas manager of distribution business development, revealed at lastweeks Farelogix event (see above) that the airline was meeting with Sabre in Dallas last weekand that it had years ago actually first discussed an Agencia-type product with Sabre before pro-ceeding with Travelport.

Carlson Wagonlit, the giant travel management company, said it sold nearly $28b worth of travelin 2012. This was down by about 1% y/y. The number of transactions executed fell slightly aswell. Some regions like Latin America saw strong growth, and transaction volumes even grew amodest 2% in North America. But business shrank in Asia and Europe. The company, whichearns money through client fees and GDS incentives, also negotiates with airlines for access todiscounted fares and perks like upgrades.

SITA, a company founded by a group of airlines to provide IT services to the industry, publisheda research report identifying four key trends for air travel in the coming three years. First, the waypeople buy travel will change, with websites and mobile devices becoming the top two sales chan-nels for airlines, and with shopping becoming more personalized and customized. Second, passen-gers will have more control over their journeys, being able to check-in and board using theirphones, for example. Third, customer services will become more mobile and social, with airlinesand airports using apps to provide flight status updates, for example. And finally, airlines willimprove service by using better business intelligence, deploying for instance, information about

passengers gleaned from social media and integrating it into their marketing systems. SITA, bythe way, expects the number of worldwide air travelers to double by 2030.

Etihadwill adopt the Sabre reservation system this weekend, a project its calling the bigswitch. Because res system cutovers are so complicated, and because history is replete with ex-amples of airlines facing operational meltdowns during conversions, Etihad is advising passengersto arrive at the airport four hours before their flight and to bring printed copies of their itineraries.

What do online travel retailers think of theAmerican-US Airwaysmerger? In general, consolida-tion isnt welcome, especially if its pushes up fares, reduces the market supply of seats and boostsairline negotiation clout. One more direct impact, meanwhile, will be on fees that consumers payfor booking interline ticketsin other words, tickets involving travel on more than one airline.Expedia, for example, says its interline fee revenue dropped after UnitedandContinentalmerged, because previously, if a traveler booked a connecting itinerary that involved both airlines,it charged a fee. Now its of course one airline. So theres no interliningand no fee.


6/12

6trends 6

The NewAmerican: A Closer Look

trends

The deal: Upon closing the transaction (anticipated in the third quar-ter), US Airways shareholders will own 28% of the new company,

while Americans creditors (the large group of companies to whomAmerican owed money when it filed for bankruptcy) will own roughly68.5%. The remaining 3.5% percent will surprisingly go to those whoowned Americans old shares, which explains why they have nearlyquadrupled in value during the past year (see page 10). Usually, stock-holders in bankrupt companies lose everything. Note also that Ameri-cans unions are among its major creditors. Employees will own 24%of the new airline.

Promised synergies:The new American, whose headquarters willremain in the Dallas-Fort Worth Metroplex, anticipates $1.05b inannual synergies by 2015: $900m in revenue synergies, $550m in costsynergies and $400m in dis-synergies from bringing all workers up tothe better of the two contracts for each labor group. On the revenuefront more specifically, American pointed out that Deltas largestdriver of synergies was fleet integrationmoving B747s to Atlanta

and B767s to Minneapolis, for example. Americans revenue synergyestimates also include expected value from connecting the two net-works and winning a larger share of corporate contracts. Managementcan start planning integration now, although it cant actually do any-thing until the deal closes and wont be able to integrate operationsuntil qualifying for a single operating certificate from the FAA.

Other benefits: Bigger does often mean better in the airline business,and creating the worlds largest airline by traffic (191m passengerscarried in 2012) and most other measures too means a stronger net-work, a stronger oneworld alliance, stronger joint ventures withBA/Iberia, Japan Airlines and Qantas, a more attractive frequent flierplan, a stronger balance sheet, more negotiating clout with businesspartners and suppliers (including suppliers of capital) and more lever-age when negotiating corporate contracts. To highlight just one exam-

ple of its increased power, Citibank and Barclays, the co-brandedcredit card partners of American and US Airways, respectively, willlikely offer princely sums to be chosen the exclusive partner of thenew American, with its 101m AAdvantage members. Also, like bigbanks, airlines of this size are arguably too big too failstakeholdersthat depend on it simply wont let it happen (as everyone saw when,for example, American Express repeatedly rescued Delta last decadebefore it finally found its own footing).

The risk: Everything looks great on paper, but execution is key, asUnited discovered last year when integrating cultures and systems. USAirways itself had a rough time integrating IT systems after adoptingthose used by America West, the smaller airline. But this time it plansto adopt Americans systems, learning from Delta that adopting thelarger airlines system, all things being equal, is the way to avoidheadaches. Separately, the new American will take delivery of about

five aircraft per month, an extremely aggressive pace that will createits own operational challenges. In addition, the combined airline muststandardize its products, services and policies, while convincing anti-trust regulators that this deal wont harm consumers. It will have toconvince the U.S. Senate too, which will hold hearings on the matter,although this will surely be more theater than substance.

The fleet:The new American will have more than 1,500 aircraft,more than any airline worldwide. Of these, 948 are mainline and 563are regional. Of the mainline planes, 147 are widebodies (82 B767s,49 B777s and 16 A330s). Fleet synergies are not much of an issuebecause each fleet is so large, with the exception of those 16 A330s,which management suggested might not fit well with future plans.Speaking of future plans, the new American will inherit Americans

giant order book for 531 aircraft, including hundreds of B737- andA320-family planes, both current- and future-generation, as well as 18

B777s and 42 B787-9s. US Airways, anticipating a merger, wiselywaited before doing a big future replacement order, although it doeshave legacy orders for 42 more A320-family aircraft, plus eight moreA330s and 22 A350s. Manufacturers will surely be flexible aboutletting American modify orderssay, A350s instead of A330s.

Labor relations: Airline unions, historically a force of resistanceagainst mergers, have come to support them following the Delta-Northwest merger. Most unions now see consolidation as a way fortheir employers to become more profitable, which in turn means moremoney for workers. The single most important piece of leverage thatUS Airways had in forcing this deal, in fact, was support from Ameri-cans main unions. A deal still might have otherwise happened, butonly after American exited bankruptcy, and with Tom Horton ratherthan Doug Parker probably in charge. But the hard work isnt finished.Although the unions have already agreed to transition-period compen-

sation and a framework for seniority integrationand this does give ita head start relative to other past mergerslong-term joint deals muststill be negotiated, with whatever unions the combined groups of em-ployees choose as their representatives. Dont forget: US Airwaysown pilots still arent integrated after their last merger (with AmericaWest) eight years ago! But this time, theres simply far more revenueto go around to buy labor peace in a way that merger couldnt justify.One major union, by the way, publicly opposed the merger: the IAM,representing US Airways mechanics. As for layoffs, managementpromised none, with the exception of some management staff.

The global network: Its hard to not be impressed with the newAmericans Latin America network, already extremely powerfulthanks to Americans Miami hub and its alliance with LAN. Now adda huge amount of US Airways flow traffic from the east coast, plus

TAM in Brazil. Plus LAN now has a presence in Colombia, and bothBrazil and Colombia will soon be open skies markets for U.S. carriers.Charlotte is a decent Caribbean hub too. Europe too will be strong,with Americans extremely strong presence in London, complementedby many smaller markets served by US Airways, plus the BA/Iberia

joint venture and other oneworld partners like Air Berlin and Finnair.The Asian network will be less impressive: just four markets servedeven after American launches new Seoul flights. But Tokyo is thelargest Asian market, and Americantogether with its joint venturepartner Japan Airlinesis strong there. That makes Tokyo arguablystronger for American than for Delta, which has a Narita hub but noalliance partners there. On the other hand, oneworld does not have anymembers in mainland China, and Cathay Pacifics Hong Kong hub istoo far south for U.S. travelers heading to the big markets of northeastAsia. American has thus far neglected Africa and the Middle East, but

perhaps that will now change. Whos happy, whos sad? Long before the merger was consummat-

ed, BA/Iberia could hardly contain its glee, while even U.S. rivalsUnited and Delta welcomed more consolidation. Spirit, in particular,could see a wealth of new opportunities if fares rise, while Southwestand JetBlue will eagerly grab Washington DCA slots if they becomeavailable (see page 12). But make no mistake: the new American willpose challenges for Delta, especially in New York, and for United,especially in Chicago. Those truly unhappy with the deal includesome consumer and corporate travel groups thatalthough acknowl-edging the benefits of a stable airline industrys ability to invest innew planes, new products and new routesdont accept that as a fairtradeoff for the higher fares that will likely result.


7/12

7 labor & airports

State of the UnionsWorkforce Developments

Deltaemployees enjoyed their third consecutive year of profit-sharing checks,

which this year amounted to nearly 7% of their annual pay. In total, Deltashared $372m of the more than $1b in profits it earned during 2012. Andthroughout the year, the company also shared another $91m with workerswhen it achieved certain operational goals.

Unitedmoved a step closer to long-term labor certainty by agreeing to a jointcontract with airport workers represented by the IAM union. The deal coversmore than 28,000 employees, who will have a chance to vote on the matter. Ifratified, Uniteds crew schedulers will no longer need to schedule pre-mergerContinental and pre-merger United workers separately.

Iberiastarted feeling the first wave of mass strikes, affecting (by its count)about 70,000 passengers. But it also said it managed to re-book 60,000 ofthese travelers on other flights, with the remainder promised full refunds. Inthe meantime, the company pressed ahead with the legal process for cutting

jobs. Flights operated by other airlinesVuelingand the regional carrier Air

Nostrum,for examplewere in some cases impacted too, in markets whereIberias staff were responsible for the ground handling.

Israels El Al announced 200 layoffs in a bid to cut costs. Its also discussinga possible investment from a private equity firm and simultaneously negotiat-ing a new contract with a large union that represents many of its workers.

In discussing their merger deal with investors,US AirwaysandAmericanacknowledged that both airlines will face lots of upcoming pilot retirements,although no significant operational troubles are envisioned. If anything, a pilotshortage for regional planes might present some challenges.

In May, Deltawill debut its upgraded New York JFK airport

terminal, including an expansion of the current terminal four,which it partly occupies. But that wont be the end to improve-ments there. Together with the Port Authority of NewYork/New Jersey and terminal fours management company(which is a subsidiary of Amsterdams Schiphol Airport), Deltawill embark upon a project to add another 11 gates, enabling itto completely replace its outdated regional jet terminal(terminal two). At the moment, Deltas JFK operations arespread across three terminalstwo and three, which are adja-cent to each other and linked by walkway, and four, which isnot connected but is next door. This is an airline clearly deter-mined to win the New York City business traveler, demonstrat-ed by its willingness to invest in facilities, greatly expand itspresence at LaGuardia, spend $360m to buy 49% ofVirginAtlanticand allocate big money for marketingin sportsalone, Delta sponsors baseballs Yankees and Mets, basket-balls Knicks and hockeys Rangers.

Frankfurt airport saw a 5% y/y drop in its traffic last month,reflecting wintertime capacity cuts by Lufthansaand others.The decline was also influenced by weather-related cancella-tions, which accounted for at least two percentage points ofthe drop. The number of flights, or aircraft movements, wasdown 7%.


8/12

8routes & networksWhos Flying Where As ifWestJ etsperformance wasnt good enough, its now giving passengers an encore. An encore, more specifically, in Canadas smaller popu-

lation centers, where a B737 is too much aircraft. An encore, even more specifically, called WestJetEncore, whose first four markets were un-

veiled last week: Vancouver-Victoria, Calgary-Fort St. John, Vancouver-Fort St. John and Calgary-Nanaimo. The first of these is an example ofconnecting two cities already on WestJets route map, while Fort St. John and Nanaimo, both in British Columbia, are new to the network. Servicewith Q400s begins in June, but not withoutAir Canadamaking a preemptive moveit recently scheduled a big buildup of Q400 flights in west-ern Canada, operated by its regional partnerJ azz using the Air Canada Express brand. One of the markets its targeting, in fact, is Vancouver-Fort St. John.

Thats not the only fight betweenWestJ et andAir Canada thats about to escalate. Air Canada is also hoping to throw a wet blanket onWestJets Caribbean expansion by sending its new LCC Rougeto places like Cuba, the Dominican Republic, Costa Rica and Jamaica, all from

Toronto. And while Rouge isnt targeting U.S. routes, theres a fight going on there too, demonstrated by WestJets decisionannounced lastweekto send B737s from Toronto Pearson to the economic center Dallas-Fort Worth and the golf destination Myrtle Beach. DFW flights, whichwill get traffic help from codeshare partner American, will operate daily starting in April, up against Air Canadas three daily nonstops, withAmerican itself flying that market thrice daily as well. As for Toronto-Myrtle Beach, which overlaps withPorters service to Myrtle from Toron-tos Bishop airport, flights will run twice a week starting in May.

Fortunately forAir CanadaandWestJ et, Porters Q400s cant reach the Caribbean from Canada. But the two dueling Canucks still must con-tend with competing tour operators likeAir Transat andSunwing, which fly from various Canadian cities. Sunwing, for its part, said last week it

will operate more flights from Toronto to both Veradero in Cuba and Cancun in Mexico, which it labeled this winters best selling destinations. Better late than never: Southwests codeshare link withAirTran is now in operation, with a gradually growing number of joint itineraries availa-

ble for sale. In the days when it competed on low costs and largely nothing else, Southwest could get away with rudimentary IT systems. But thesesystems proved incapable of even a codeshare alliance withWestJ et (which eventually dumped Southwest for DeltaandAmerican) and barelycapable, only after a long time and a lot of work, of codesharing with an airline it now owns. In any event, with both carriers now truly operatingas one network, Southwest stands to get a revenue jolt as many more joint itineraries become available for sale (as an example, think Cancun toPhoenix via Atlanta, with the first leg on AirTran and the second on Southwest). In time of course, AirTrans brand will be phased out and thiswont matter. But that will take years. And one more point about the two carriers codesharing: the selling carriers rules and policies apply to res-ervations and ticketing, while the operating carriers procedures apply to boarding, seating, and the onboard experiencewith one big exception:a passenger booking through southwest.com wont have to pay bag fees even if AirTran operates the flight.

Virgin America is expanding rather quickly for an airline that supposedly stopped expanding. Its decision to curtail capacity growth notwith-standing, the struggling carrier announced daily nonstops between San Francisco and Austin starting in May, as well as six weekly flights betweenSan Francisco and Anchorage, Alaska, running in the June-to-September summer travel season. Virgin says that after it started flying from SanFrancisco to Dallas DFW in 2010, and from San Francisco to Chicago ORD in 2011, fares on these routes dropped by a third. Next up on its ex-pansion list with Austin and Anchorage: Newark, N.J ., in April and San Jose, Calif., in May.

Hold on, Virgin America:J etBlueis watching what you do and responding in kind. Unamused by this incursion on its San Francisco-Austinroute, where it currently competes with just United, JetBlue is doubling down on the route with a second daily frequency for the summer. And

just in case Virgin doesnt get the message, its also adding a second daily San Francisco-Fort Lauderdale frequency, upping the ante in a marketwhere the two already compete head to head. The difference between JetBlue and Virgin America is that the much larger and more profitable

JetBlue can far better afford to fight wars of attrition in a few markets. JetBlue recently added a second daily Los Angeles-Fort Lauderdale flightas well and will soon add additional frequencies from Boston to both Seattle and San Diego, in this case to throw a punch at Alaska Airlines.

Speaking of which, Alaska is adding service to (of all places) Alaska, unveiling new summer time service connecting Portland, Ore. with Fair-

CONTINUED ON p. 9

JetGreenEnvironment, Conservation &FuelIATA isnt letting up in pushing for a Single European Sky (SES). In the quest to reduce aviation emissions, the biggest piece of unpicked low-

hanging fruit is arguably a seamless, rationalized air traffic management system in the all-too-fragmented European airspace. One of the statedgoals of the SES is to shrink the environmental footprint of flights by 10%a huge strideas soon at 2020. But progress on the SES has beenelusive despite IATAs ongoing appeals. The latest installment came last week in Madrid. Speaking to the World ATM Congress, IATA CEO andDirector General Tony Tyler went so far as to question the money being spent on improving Europes ATM technology when the actual reality isthat SES is a political challenge, not a technological one. And, Tyler continued, IATA cant recommend putting new technology into old airspacearchitecture. But IATA isnt stopping at mere criticism. Along with the Association of European Airlines and the European Regions Airline Asso-ciation, IATA released a 20-plus page paper titled, A Blueprint for the Single European Sky. It suggests a series of reforms, including reducingair traffic control centers from 63 to 40, adding binding performance obligations and creating an independent regulator to enforce those obligations.

It wasnt all stern words last week for government, which got its share of glory, too. IATA, Airlines for America (A4A), Airbus and otherscheered the International Civil Aviation Organizations (ICAO) Committee on Aviation Environmental Protection (CAEP) which agreed to rec-ommend lowering the noise standard for new aircraft by 7 decibels. Indeed, airports will be quieter in coming years, but not entirely because ofthis new regulation. Most planned aircraft are already running ahead of the new standard anyway. If enacted, the standard will apply to some air-craft entering service after 2017. The ICAO Council will consider CAEPs recommendation later this year.


9/12

9999 routes & networksWhos Flying WhereCONTINUED FROM p. 8

banks. Southbound flights will run overnight, always a good way to boost aircraft utilization. Normally, shorthaul planes sit idly on the ground

overnight, because people dont like spending their overnight hours running to, from and through airports with only a short nap aboard a flight. Anotable exception in the U.S. are some rather shortSpirit red-eye flights that only highly price-sensitive travelers would tolerate and who payfares at which only an ultra-LCC could profit. Example: flights from Plattsburgh, N.Y., to Fort Lauderdale leaving at 1:55 a.m.

The still-booming Arabian peninsula is still overflowing with whats still the global economys single most important natural resource (hint: itstarts with o and rhymes with spoil). So aviation there is booming too, and Air Arabiawill take advantage by heading to Baghdad. Based inSharjah, just a short drive from Dubai, the LCC will start service to the Iraqi capital next month.

Royal J ordaniandoes not have an oil-rich home market. And although Jordan is one of the regions more dynamic economies, its political, eco-nomic and demographic pressures are intenseafter a huge inflow of Iraqi refugees last decade, many war weary Syrians are now coming. Butthere are plenty of oil markets for the airline to chase, including Algiers in North Africa, which RJ will link with Amman later this month. Itstargeting more than just oil traffic though, citing pharmaceutical business and also medical tourism, a growing sector for Jordan. In addition, Am-man is well positioned to handle Algerian religious pilgrims connecting to Saudi Arabia.

How much juice can you get out of this lemon? Hawaiian Airlines is still squeezing, not content with just four Japanese cities in its network. Itwill now make Sendai its fifth starting in Junethe other four are Tokyo (Haneda), Osaka, Fukuoka and Sapporo. But the lemonade is tasting lesssweet due to a weakening Japanese yen, which makes it more expensive for Japanese tourists and newlyweds to visit Hawaii.

Deltahas a new route to Mexico City, home of its SkyTeam partner Aeromexico. This summer, it will start flying there from Fort Lauderdale.

Jamaica has a new airline calledFly J amaica Airways, which began flying B757s between Kingston and New York JFK. It hopes to start Toron-to and Guyana flights in the future.

WithAerosvit all but gone, Wizz Air wants in on the Ukraine. And its going to get in, according toanna.aero, which reports plans to launch 14new routes from Zhulyany airport, an alternative facility for Kiev, beginning this April. But that might be only a start. In total Wizz Air has ap-plied for 20 new Ukrainian destinations, although government approval is uncertain. Desired routes from Kiev include Moscow, Istanbul, Dubaiand Tel Aviv. In addition, one of the places Wizz will connect to the Ukraine is Georgia, another former Soviet Republic. It recently gave Kutaisia nonstop link from Kiev, and now it will connect Kutaisi to the Ukrainian cities Donetsk and Kharkiv as well. In addition, it will fly from War-saw to Kutaisi. Georgia wants to make the city, not far from the Black Sea coast, a tourist attraction.

IndonesiasMandala, part of theTiger Airwayscollection of carriers, will begin a number of new routes from Pekanbaru on the northern islandof Sumatra. This includes Jakarta, Medan and Singapore.


10/12

markets

Some stocks traded on multiple exchanges; not intended for trading purposes

10

AirlineSharePrice

Changefrom last

week

Changefrom last

year

Comment

United 26.37 0% 12% Became a symbol of how to botch a merger integration; can it make people forget that?

Delta 14.45 -1% 33% Suing (jointly with ALPA and Hawaiian) the U.S. Ex-Im Bank for supporting foreign rivals

American 2.54 74% 370% First talked with US before filing for Ch. 11 but ultimately felt it needed to restructure first

US Airways 14.50 -2% 63% Not quite the biggest news from last week, but regional unit PSA did reach a new pilot deal

Southwest 11.60 0% 22% Opening new pilot base in Atlanta; has nine other pilot bases systemwide

Alaska 48.98 1% 28% Presumably happy to have a larger American with which to codeshare

J etBlue 6.03 2% 2% Now offering boarding passes that are downloadable to mobile devices

Virgin America Newest city Austin reflects its fondness for tech hubs similar to the San Francisco bay area

Hawaiian 5.84 1% -3% To avoid concern, Airbus will change the battery type on its initial A350-900 deliveries

Spirit 19.38 -1% -2% Will announce Q4 and full-year 2012 financial results on Tuesday

Allegiant 80.44 3% 45% American-US Airways merger could make more MD-80s and B757s available (Reuters)

SkyWest 12.99 2% 0% Says it would take about six to 12 months to incorporate E-J ets if it were to fly them

Republic/Frontier 9.58 8% 67% Newest route: summertime seasonal service from Denver to Greensboro, N.C., with A319s

Air Canada 2.40 3% 131% Expanding North American low-fare guarantee to entire global network

WestJ et 21.88 2% 57% Dallas DFW and Myrtle Beach will be its 19th and 20th U.S. destinations

Aeromexico 17.93 3% -28% Says it has the flexibility to shrink its fleet this year if necessary

LAN/TAM 17.99 2% -15% Domestic ASK capacity in Brazil down another 5% y/y in January; loads up 7 points though

Gol 6.79 -3% -23% Latin/Caribbean carriers flew 150m pax in 2012, up from just 66m eight years ago (ALTA)

Copa 104.91 2% 38% 10% of revenue comes from Venezuela; latest bolivar devaluation will hurt (Wolfe Trahan)

AviancaTaca 4530 2% 3% Plans to fly A320s with new fuel-saving sharklets

Emirates Has a new five-year marketing agreement with Formula One auto racing

Air Arabia 0.92 3% 37% Ended the year with 32 A320s flying to 82 cities

Turkish Airlines 7.08 7% 157% Will work with the African nation of Niger in its efforts to launch a new national airline

Kenya Airways 10.75 0% -40% Etihad upping capacity to Khartoum in Sudan; Gulf carriers and others expanding in Africa

South African Air. Recently hired CEO dismissed for unspecified reasons; CEO of LCC Mango put in charge

J et Airways 618 4% 88% Air India moving headquarters from Mumbai to Delhi; maybe that will stanch the losses

Aeroflot 143.00 7% 9% Rival S7 improving its same-day out-and-back flight schedules for Moscow business pax

Crude oil futures(WTI, for delivery next month;source New York Mercantileexchange)

$96 0% -7%Whats next after Chavez? Venezuelan oil market could face big changes tied to futurepolitical developments; was the worlds 10th largest net oil exporter worldwide in 2011,according to the U.S. Energy Information Administration.

Around the WorldA Look at the Worlds Airlines, Including Endweek Equity Prices

(not publicly traded)




11/12

Some stocks traded on multiple exchanges; not intended for trading purposes

11

AROUNDTHE WORLD A L O O K A T T H E WO R L D S A I R L I N E S , I N C L U D I N G E N D W E E K E Q U I T Y P R I C E S

AirlineSharePrice

Changefrom last

week

Changefrom last

year

Comment

Lufthansa 15.36 4% 42% Austrians ASK capacity shrank 10% y/y in January; longhaul intl ASKs fell 15%

Air France/KL M 8.43 2% 76% Says Transavia France was, for the first time, profitable last year (La Tribune)

BA/Iberia 228 4% 33% BA and Iberia sporting new-look websites, although Iberia hasnt yet refreshed its stale brand

SAS 13.75 5% 71% Evaluating nonstop Stavanger-Houston flights for oil sector, according to media reports

Alitalia Italy to hold important national election this weekend; results will influence economic policy

Finnair 3.08 -1% 24% Partner Flybe disappointed that Ryanair-Aer Lingus deal wont happen

Aer Lingus 1.25 -9% 34% Remains at loggerheads with unions over pension deficit

Virgin Atlantic Outsourcing some B747-400 heavy maintenance to Taikoo Engineering in Xiamen, China

easyJet 999.5 2% 110% Reacts angrily to fee hikes proposed by London Gatwick, its busiest base by far

Ryanair 5.71 -1% 32% Purchases a building near Dublins airport to serve as its new headquarters

Air Berlin 1.89 -2% -19% Signs codeshare pact with Air Seychelles; both carriers partly owned by Etihad

Norwegian 196.10 11% 144% Gets another 14 B737-800s this year; will have just nine older generation -300s left at year end

Vueling 7.74 1% 47% Big expansion this summer will see new routes to Germany, Scandinavia, France and Italy

Aegean 2.62 6% 91% Greek economy shrank another 6% y/y in the fourth quarter

J apan Airlines 4365 -1% x Considering nonstop Tokyo flights to Brisbane, Australia, according toBrisbane Times

All Nippon 186 -4% -26% Japans economy shrank again last quarter, the third straight y/y decline; exports still weak

Korean Air 44200 0% -24% Still rumored to have an interest in buying a piece of SkyTeam partner Czech Airlines

Cathay Pacific 15.20 1% -5% Hong Kong Airlines proved less threatening than feared; will Jetstar Hong Kong be different?

Air China 6.84 0% 9% The most profitable of the Big Three, but the other stocks rose more from lower starting points

China Eastern 3.54 0% 18% China Southern has A380s, Air China will get B747-8s but no ultra-jumbos for China Eastern

China Southern 4.54 -1% 12% Extreme air pollution in Beijing a potential threat to inbound tourism

Singapore Airlines 6.52 -1% -1% Swiss preparing to launch Zurich-Singapore A340 flights in May, as announced last fallMalaysia Airlines 0.69 -1% -54% Increasing free bag allowances and lowering bag fees to boost its competiveness

AirAsia 2.70 2% -26% Grew groupwide ASK capacity 9% in 12 (Malaysia unit up 9%, Thai 14%, Indonesia 6%)

Thai Airways 25.25 11% -3% Thai Smile now up to eight destinations on offer, all within Thailand except for Macau

Cebu Pacific 67.00 0% -10% New Manila-Bali flights start March 16; Manila-Dubai flights start in October

Qantas 1.63 3% -1% Jointly announces detailed reciprocal frequent flier benefits with Emirates

Virgin Australia 0.45 5% 29% Australian competition regulators expected to decide on Virgin-Tiger JV March 14

Air New Zealand 1.03 0% 49% N.Z. dollar, which has been and remains strong, is a big contributor to its recent success

markets



Around the WorldA Look at the Worlds Airlines, Including Endweek Equity Prices


12/12

perfect for Charlotte: why spend more enticingpeople who will fly you no matter what? But asParker and Kirby seem to realize, it will be woe-

fully inadequate for battling Delta, United, Jet-Blue, Alaska and Virgin America in Americasbiggest cities. One small dis-synergy of the mer-ger, then, is that because American surely wontoffer different inflight products at different hubs,it could end up spending more than was previ-ously necessary at the old US Airways fortresshubs, where it mostly competes against eitherSouthwests rather Spartan product or nothing atall.

But while inflight product will matter, nothingis more important than networkand in particu-lar, the decisions management will have to makeabout how to turn around Americans fortunes inAmericas three biggest cities. Americans cur-rent management team has long seemed to viewthem as too important to concede even if theywere too competitive to conquer, especially withthe airlines old cost structure andfor the mostpartits inability to use jets with between about50 and 140 seats, a massive gauge gap. Happily,bankruptcy and the merger instantly solve someof the challenges. Bankruptcy solves the cost andscope issues (even after giving some of the gainsback to labor to make the merger possible). Andas for if youre not first, youre last, hows thisfor a day-one merger synergy: American actuallywill be first at Los Angeles LAX by scheduledseats, surpassing United just by adding US Air-ways modest service there to Americans largenetwork (even though Southwest will remain acomfortable No. 1 in the metro area, countingother nearby airports). For the same reason,American will instantly become a closer No. 2behind United in Chicago and will rise from No.4 to No. 3 (surpassing JetBlue) in New Yorkcounting all three major airports, or No. 2 dis-counting Newark, which competes againstLaGuardia and JFK for lucrative Manhattantraffic but not for the many millions of travelersliving east of the city. Incidentally, the newAmerican would have been far stronger in New

York had US Airways not given so many of itsNew York LGA slots to Delta in exchange forsome of Deltas slots at Washington DCA.

Thats a deal Parker and Kirby might now regret(because to please regulators and complete themerger, they will likely soon have to give upmuch of what they gained in Washington)anda deal Delta will be happier than ever it executed.

Day-one synergies are nice, but theyre notenough to justify the merger. So whats next forAmerican in the three biggest cities?

New York, the biggest of all, is probably thesmallest question mark. The choices there willmostly be tactical rather than broadly strategic.At slot-controlled LaGuardia, the merged airlinemight improve schedules by shuffling some slots

cover story 12CONTINUED FROM p. 1

Let ThemEat Cake?In Charlotte maybe, but not in Americas bigthree mega-marketsaround. At JFK , any changes will largely beabout optimizing the longhaul network in con-

junction with Philadelphia, where US Airwayswas more aggressive to continental Europe

than American was at JFK. The most likelyscenario: much like what happened when amerged United got control of both Newark andWashington Dulles and shifted some flightsbetween the hubs, but without any huge netchange in the importance of the two hubs rela-tive to each other. In this case, Philadelphiawill have the better shorthaul connecting feedand no competition for its modest local non-stop demand, whereas JFK will have morelocal nonstop demand, but it will face morecompetition for that traffic and has inferiorshorthaul feed (although an expanding partner-ship with JetBlue will help). So for example,American might decide to keep its Brussels

flights at Philadelphialess local demand butbetter connections, and no nonstop competitionrather than two nonstop competitors at JFK .But it might move its Glasgow flights fromPhiladelphia to JFK, because no one serves

JFK-Glasgow nonstop. (Philadelphia, in turn,might finally get the Asian service it has longsought: Japan Airlines flights to Tokyo Narita,after B787s begin flying againremember,American plans the transpacific network to-gether with its joint venture partner JAL.)

At Los Angeles LAX, the new American willserve 44 destinations (or 47 counting jointventure destinations) if it doesnt make anychanges. By all indications, American has long

struggled to make money there, likely beyondeven anything that lower costs and scope reliefwill solve. So in one sense, it might seem like abig problem carrying some big decisions. Butin another sense, consider this: fully 68% of itsASM capacity at LAX (assigning half credit to

JV capacity, where it shares revenues) is onjust 12 routes to other American and JV partnerhubs, according to an Airline Weeklyanalysisusing Diio Mi. Most of that capacity wouldexist with or without LAXs status as a hub,

just because Los Angeles is a major destinationfrom other major U.S. and global cities.

But while American might soon be a nominal

No. 1 at LAX, that status will give it just apaltry 20% of the hypercompetitive airportsscheduled seat capacity, according to OAGdata. Its hard to find a less dominant No. 1position at any airport on the planet. Profitingthere will never be easy.

Americans No. 2 position at ChicagoOHare, on the other hand, will give it fully38% of scheduled seats there (or even 29%counting Midway, where Southwest has a hub).Chicago might be Americans best opportunityto use bankruptcy and the merger together toturn a loss maker into a profitable hub. And thenew management team seems to realize this: in

their January presentation to woo Americanscreditors, disclosed in a regulatory filing lastweek, only one hubOHaregot its ownslide as an example of where putting the two

airlines together could quickly yield outsizedgains.

In recent years, American seemed to find thatthe more it did in Chicago, the more money itlost: better to end horrifically unprofitableflights to Frankfurt, regardless of what moveslike that might do to its already poor share ofcorporate contracts in the city, than to keepbleeding. But that was when American had bothinferior schedules and higher costs relative toUnited. American is now the lower-cost carrierof the two and will remain so for at least a fewyears, even after doling out merger-related rais-es. It will soon have true lie-flat business classlonghaul seats. It will have competitive regional

capacity options rather than costly, one-class 50-seaters. It will quickly become the preferredcarrier between Chicago and cities like Char-lotte, Philadelphia and Phoenix, which nowbecome hub-to-hub trunk routes, even if it de-cides to push up yields by trimming a few of itspost-merger combined frequencies in thosemarkets, as it likely will.

The big question, then, is whether it shouldreallocate that trimmed capacity, along withsome other capacity from elsewhere in its net-work, to some of the many Chicago marketswhere United provides the better service today.

Thats important because, back to the idea ofoutsized gains, Uniteds somewhat better net-work and schedules give it far more than justsomewhat better revenue. A perfect example:Chicago-Paris, a route where neither Americannor United has a natural advantage becauseneither has a partner hub on the other end. Ac-cording to anAirline Weeklyanalysis of PaxISdata provided by IATA Consulting, United andAmerican actually do carry roughly the sameshare of passengers from Chicago to Paris. Butcritically, the fares they get among Chicago-originating passengers are anythingbut roughlythe same: an average of $986 each way forUnited in 2012, an incredible 36% higher thanAmericans $724. United takes the corporate

fliers; American takes the backpackers.But theres no law saying United has to domi-nate corporate contracting quite like that, evenin its own headquarter city. To make inroads,though, American would have to make somedifficult decisions, such as whether to servecities that corporate customers want to accesscustomers in Chicago itself plus those in small-er cities whose connecting global gateway isChicagoeven if those markets might neverproduce fully allocated profits. Those are thekinds of questions that will soon face Kirby,who now must accept not always being first.

Documents

Airline Weekly Feb18