FIRST QUARTER 2014alta.aero/wp-content/uploads/2018/01/Industry-insight-first-quart-2014_18-1.pdfto its strategic location, Lima has established itself as a major hub airport. From

Industry Insights, First Quarter 2014 1

FIRST QUARTER 2014


Country Focus: Peru ........................................................................................ 1

The Evolving Alliance Model –

and Implications for Airlines ...................................................................... 5

Airbus A319-100 Appraisal ......................................................................... 9

The Great Wildcard ....................................................................................... 11

The March of LCCs Across Borders ...................................................... 13

Prepared by ICF SH&E, Inc.

INDUSTRY INSIGHTSQUARTERLY AVIATION BRIEFING

1ST QUARTER 2014


Country Focus: PERU

Source: IMF World Economic Outlook, October 2013

Exhibit 1: GDP Growth of Select South American Countries (CAGR)

1

Solid Demand Drivers

Air travel demand is highly correlated to economic growth.

From 2007 to 2012, Peru’s GDP grew at an average rate of

6.5% per year, faster than all other Latin American countries

except Panama. High demand in Asian countries for Peru’s

vast mineral resources has driven the country’s economic

success in recent years. However, abundant natural resources

alone do not off er sustainable growth, as evidenced by Peru’s

neighbors such as Argentina and Brazil. Peru has also bene-

fi ted from macroeconomic discipline and a commitment to

open markets – factors that provide stability to the economy

and encourage investment.

Despite lingering uncertainty in global markets, Peru’s econ-

omy will continue to expand rapidly in the short term, driven

by mining investments, government spending, and growth

of domestic consumption. Peru is expected to maintain its

position as the fastest growing economy in South America

over the next fi ve years, according to the IMF. (Exhibit 1)

Although economic growth is good news for air traffi c, the

critical piece is how this impacts the size of the population

that can aff ord to travel for business or leisure, and in this

regard, Peru has progressed very well. The country’s growth

and stability have resulted in an expansion of the middle

class: according to the IDB, nearly 7 out of 10 Peruvians now

belong to the middle class. At the same time, millions are

gaining access to credit – a motor of discretionary spending.

Between 2008 and 2012, the number of credit cards used by

Peruvians increased by 38%, while total credit card spending

in Peru increased 83%, according to the Peruvian Association

of Banks (ASBANC). Combined with growing internet pene-

tration, the expansion of credit has also contributed to an

increasing preference for online purchasing. Consequently, air

travel has now become accessible to a much larger segment

of the population.

Strong Traffi c Growth

Domestic & International Passengers

Between 2002 and 2012, Peru’s air traffi c increased from 4 to 14

million passengers, an average annual growth of 13% (Exhibit

2). The split of domestic to international traffi c remained stable

over the ten-year period at about half domestic.

This growth places Peru among the strongest performers in

Latin America. In fact, when compared to other major regional

economies, Peru’s performance was second only to Colombia

over the 2002-2012 period (Exhibit 3).

International Market

International service is concentrated in Lima, Peru’s capital,

which accounts for over 99% of the country’s capacity. Thanks

to its strategic location, Lima has established itself as a major

hub airport. From 2007 to 2013, Lima’s international seat ca-

Industry Insights, First Quarter 2014 4 2

pacity grew nearly 70%, and the number of destinations rose

from 25 to 40. Critical to Lima’s growth have been LATAM and

Avianca – Latin America’s two largest airlines – both of which

have major hubs in Lima. Combined, they off er over 70% of

scheduled international seats at Lima. (Exhibit 4)

A signifi cant piece of news in late 2013 was the entry of

US-based LCC jetBlue into the market, operating daily Ft.

Lauderdale-Lima service, and joining Spirit as the only LCCs

operating in Peru. (Note: As of this writing, Vivacolombia has

also announced plans to enter the Lima-Bogota route, increas-

ing the LCC presence in the Peruvian international market.)

Domestic Market

The Peruvian domestic market has also performed excep-

tionally well over the last decade, with traffi c tripling to 7.2

million in 2012. A behavioral shift in the domestic market can

be traced to 2007, when LAN adopted an LCC-like strategy

for its domestic operation, simplifying fares, and focusing on

high aircraft utilization and effi ciency. While the domestic

market grew at a rate of “only” 8% per year from 2002 to 2006,

it jumped to 24% from 2006 to 2007.

Since 2007, the domestic market has grown at 15% per year.

Until 2011, LAN had a 72% seat share. However, in 2011, Avi-

anca (TACA Peru at the time) began to expand domestically,

and newcomer Peruvian Airlines launched operations. (Exhibit

6) This increased competition has helped push down fares,

further stimulating domestic air travel.While LATAM and Avianca have grown aggressively over the

past several years, other ALTA-member airlines that have bet

on Peru’s potential include Aeroméxico and Copa. Mean-

while, American and Iberia – two traditional players in the

South American long-haul market – have kept capacity fl at.

(Exhibit 5)

Source: DGAC

Source: Aerocivil (Colombia), ANAC (Brazil), DGAC (Mexico, Peru),

JAC (Chile), ACI (Argentina), ACI (Latin America)

Exhibit 3: Average Annual Air Passenger Growth(2002–2012)

To contend with the strong domestic growth, LAN is now

up-gauging its all-A319 fl eet in favor of A320s. Introduced

in late 2012, the A320s now account for one third of LAN’s

domestic operation, and have allowed the carrier to grow

capacity 23% in the last two years on 4% frequency growth.

Note: Avianca includes Aerogal, Taca and Lacsa.

Source: OAG Schedules

Exhibit 4: Share of Departing International Seats at LIM

(2013)

Exhibit 2: Peru Air Traffi c(Millions of Passengers)


The vibrant growth of domestic aviation in Peru has also

been made possible by concession programs started in

2006 that transferred the development, maintenance and

operation of Peru’s main provincial airports to the private

sector. Aeropuertos del Peru (AdP) and Aeropuertos Andinos

del Peru (AAdP) have invested large sums in much-need

infrastructure improvements to allow airlines to increase ca-

pacity. The results are apparent: passenger traffi c at AdP’s 12

airports has increased considerably under its management,

from 1.4 million in 2007 to 3.8 million in 2013. Since 2006, the

company has invested over US$50 million in infrastructure

improvements to the airports.

Upside Potential

Although Peru’s air traffi c has grown rapidly in the last

decade, absolute volumes are still low in comparison to

regional peers such as Chile and Colombia. There is sig-

nifi cant room for upside, as evidenced by the country’s

low travel propensity compared to countries with similar

geographic and personal income characteristics. (Exhibit

7) As the country’s middle class continues to grow in size

and wealth, it’s reasonable to expect Peru to experience a

rise in the number of trips per capita.

In addition, several cities in Peru are experiencing strong

economic growth, but lack suitable airport infrastructure,

thus forcing passengers to fl y to alternate airports or use

other means of transport. This issue is being addressed by

the concession programs, which are upgrading regional

airport infrastructure to support larger narrow-body aircraft.

As these upgrades come online, scheduled commercial air

service should soon follow.

Exhibit 6: Share of Domestic Seats(2013)


Exhibit 7: Domestic Travel Propensity and GDPper Capita for Peru and Select Countries

(2012)

Source: IMF WEO October 2013, PaxIS

Exhibit 5: Average Annual InternationalSeat Growth in Peru by Carrier

(2007–2013)

Note: Avianca includes Aerogal, Taca and Lacsa; LATAM

includes TAM capacity since 2007 for comparison purposes.



Challenges to Growth

However, the Peruvian aviation market is not without its

challenges, many of which are self-infl icted. Although the

forecast for the short-term is bright, Peru’s growth prospects

may diminish in the medium term if certain structural adjust-

ments are not made. Investment in areas such as infrastructure

and human capital – two critical areas where the country is

lacking – is needed to solidify the economic gains made in

the last decade, help to diversify away from mining, and to

establish a more sustainable foundation for growth looking

forward. If these issues are not addressed, the latent threat of

political and social unrest will persist.

Beyond policy, the country’s primary international airport

must be expanded to cope with future demand. The airport

is operating at peak capacity, although the concession-

aire – Lima Airport Partners (LAP) – has done a good job of

optimizing the current facility to minimize the impact on

airlines and passengers. Unfortunately, LAP has yet to receive

all of the necessary land for the airport’s US$1 billion plus

expansion – land that should have been transferred over in

2005. It now appears that the last tranche won’t be handed

over until late 2015, pushing the opening of the second run-

way to the end of the decade, according to the Ministry of

Transport. Without any interim solutions, it is unlikely that the

airport can support anything close to the growth witnessed

over the last decade.

Eric Toler

ICF SH&E Analyst

eric.toler@icfi .com

Carlos Ozores

ICF SH&E Principal

carlos.ozores@icfi .com


The Evolving Alliance Model –and Implications for Airlines

The partnership and alliance options available to airlines today

are becoming more numerous and complex, ranging from

simple cooperation on interline agreements and frequent

fl yer programs, to immunized joint ventures and equity-driven

ventures. Airlines can dramatically increase their competitive

advantage by partnering with other carriers or groupings – or

watch as competitors conclude increasingly far-reaching and

more powerful cooperative agreements.

The carriers most threatened are those that remain outside of

the global alliance structure altogether or have not pursued

a comprehensive alternative partnership strategy or business

model. Smaller members of the global alliances may be at risk

as well, as alliances continue to grow and members’ networks

increasingly overlap.

Recent Developments in Airline Alliances

Global alliances continue to add members and increase their

strength. Since 2010, Star, SkyTeam and oneworld have col-

lectively added more than 20 new members.

Latin America has been part and parcel of the alliance expan-

sion in recent years, with Avianca, Taca and Copa joining Star

and Aerolineas Argentinas joining SkyTeam. As of November

2013, the three global alliances accounted for nearly 60% of

intra-Latin America ASK’s, and more than 80% of ASK’s be-

tween Latin America and other world regions.

New Alliance Members Added orAnnounced Since 2010

Year of joining

alliance is shown

in parentheses


Despite the continuing relevance and strength of global alli-

ances, in recent years there have been a number of discernible

trends that have altered the alliance landscape:

Recent Alliance Trends

• Increases in immunized joint ventures

• Noteworthy minority equity investments

• Noteworthy strategic code-sharing agreements

outside of the global alliance framework

• Alliance membership shifts

• Increasing low cost carrier partnerships

Increases in immunized joint ventures: The important

benefi ts that immunized joint ventures off er have led in recent

years to a proliferation of such agreements. Joint ventures

now account for nearly 70 percent of the seat capacity be-

tween North America and Europe.

Noteworthy expansions of immunized JV’s in recent years

include Virgin Australia’s partnerships with Delta, Air New Zea-

land, Singapore and Etihad; the American/British transatlantic

JV launched in 2010, with Iberia and Finnair subsequently

added to the partnership; the United/ANA joint venture

launched in 2011; the Delta/Virgin Atlantic JV between the

US and UK, following Delta’s acquisition of Singapore Airlines’

49% interest in Virgin; and the British Airways/Japan Airlines

JV launched in late 2012.

Noteworthy cross-border minority equity investments:

In the last two years, there has been a series of noteworthy

cross-border minority investments between airlines, with

considerable activity by Delta and Etihad in particular.

These investments have been occurring worldwide, including

Latin America, where Delta has acquired 4% of Aeromexico

(a fellow SkyTeam member) and 3% of Brazil’s Gol.

Each of these investments has been a highly strategic initiative

on the part of the investing carrier, accompanied by extensive

codesharing, coordination on network planning, pursuit of

immunized joint ventures (in the case of Delta and Virgin

Atlantic) and initiatives to seek meaningful effi ciencies from

cooperation on operations and procurement (particularly in

the case of Etihad and Air Berlin). They demonstrate that for

a number of major carriers in particular, a minority investment

in a partner carrier is the “glue” that will ensure sustainable,

long-term and maximum value-added cooperation.

Noteworthy strategic codesharing agreements outside of

the global alliance framework: A number of major network

carriers worldwide continue to pursue “go it alone” partnership

strategies, electing not to join one of the three global alliances,

or are pursuing signifi cant partnership approaches outside

of the alliance framework altogether.

In 2012, Etihad, a non-aligned carrier, concluded a broad

partnership agreement with SkyTeam anchor carriers Air

France-KLM, including extensive codesharing between and

beyond the partners’ hubs.

In 2013, Emirates, also a non-aligned airline, concluded a

broad, 10-year bilateral partnership agreement with Qantas, a

member of oneworld, including broad network cooperation,

with extensive reciprocal codesharing, between and beyond

the partners’ hubs, coordination on pricing and scheduling,

as well as terminal and lounge sharing.

The Etihad-AirFrance-KLM and Qantas-Emirates agreements

do not represent a signifi cant alteration of the global alliance

structure, and it is clear from the recent growth of alliance

membership that Star, SkyTeam and oneworld continue to

off er signifi cant value to their members. Nonetheless, these

bilateral partnership agreements do demonstrate how airlines

are increasingly considering partnership options above and

beyond the pure global alliance framework.

Alliance membership shifts: Airlines have occasionally

shifted allegiance from one alliance to another since the dawn

of the global alliance era in the late 1990’s. As early as 1999,

Austrian Airlines decided to switch from Swissair’s Qualifl yer

Alliance to the newly-launched Star Alliance. More recently,

airlines generally have moved from one alliance to another

as the result of a merger or acquisition between carriers be-

longing to two separate alliance groupings.

In Latin America, the LAN-TAM merger has resulted in the

Star Alliance losing Brazilian carrier TAM to oneworld. Star

still has a strong presence in Latin America via its members

Avianca, Taca and Copa, but the loss of a signifi cant foothold

in the massive Brazilian market has been a blow. Star and its


members have recently taken steps to rebuild presence in

Brazil, including extending alliance membership to Avianca

Brazil, as well as separate interline agreements recently signed

by TAP and United with Azul.

The switching costs of moving from one alliance to another

have tended to limit member migration between alliances

in circumstances other than M&A. Nonetheless, further

switches are certainly not out of the question. Alliances are

increasing their scope and adding multiple members within

geographic regions – SkyTeam now has three member car-

riers in mainland China, for example -- raising the potential

for traffi c “cannibalism” and intra-alliance confl ict between

member carriers.

There is also at least one example of an alliance member leav-

ing its alliance altogether and electing to pursue a go-it-alone

strategy: Aer Lingus left oneworld in 2007 after changing its

business model to become a hybrid legacy/low cost carrier.

Increasing low cost carrier partnerships: Low cost carriers

have heretofore tended to pursue a mostly “go-it-alone” strat-

egy with regard to alliances; there are currently no low cost

carrier members of any alliance grouping. There has been

a reluctance among some LCC’s to limit their autonomy by

tying themselves to an alliance grouping. Other reasons for

hesitation may include the perceived cost of alliance mem-

bership, diffi culty of integrating carriers with diff erent business

models and products, and the challenge of integrating IT,

distribution and reservations systems.

However, an increasing number of low cost and hybrid car-

riers, among them JetBlue, Gol, Westjet, Air Asia and Jetstar,

are starting to pursue bilateral marketing arrangements with

other airlines, often full service airlines that are themselves

anchor members of global alliances.

Low cost carriers are seeking these partnerships for the

same reasons that full service carriers pursue partnerships –

“presence”. Partnerships generate additional feed traffi c and

revenue, expand the carrier’s network scope, and, in the case

of Air Asia and Jetstar, seek additional effi ciencies and cost

savings. Other contributing factors include the increasing

network maturity among LCC’s and corresponding need to

identify new growth opportunities, the requirement to serve

more complex demands of their customers, and the search

for a potentially higher yield traffi c base to off set the higher

costs of growth and providing a hybrid, quality product to

their customers.

With low cost carriers accounting for a very large proportion

of the remaining non-aligned airlines worldwide, the global

alliances have taken notice of these developments, and are

actively working to recruit low cost carrier members.

Implications and Recommendations for Airlines

The trends discussed above do not signify that the global

alliance structure is devolving. Rather, it is becoming clear

that carriers have many more partnership options available

to them than they did previously, which may serve as a com-

plement or alternative to global alliance membership.

Key questions that carriers are facing include not only “should

we join a global alliance?” or “which alliance should we join?”,

but also, “are we getting the maximum benefi t from our cur-

rent partnerships or alliance membership?”, “what is the total

set of partnership choices that we have available?”, “which set

of partnership strategies will give us the greatest overall ben-

efi t?”, and “what are our competitors doing regarding alliances

and partnerships – and how does it aff ect us?”

While the strategic choices available to carriers are broader

than ever, the decisions to be made are also more complex

Recent Alliance Membership Shifts


than ever, and should be made with a full assessment of the

relative costs and benefi ts.

The continued evolution of the alliance landscape has serious

competitive implications for any carrier. As airlines continue to

increase their scale, scope and market power via codesharing,

alliance membership, JV’s, equity ties or other strategic part-

nerships, such moves can result in loss of market share, loss of

high yield traffi c and/or yield dilution for competing airlines.

As an ongoing and continuous process, every airline should

be closely evaluating the potential impact on their own results

that could occur from competitors’ partnership and alliance

initiatives, and determine counter-moves that should be

pursued to regain competitive advantage. Airlines, especially

members of large alliances, should continually measure the

benefi ts that their partnership agreements provide, as well

as the direct and indirect costs incurred.

its product with its competition, and regularly refi nes its

distribution strategy and more. It should be no diff erent in

the alliances space – especially given the constant change

in the gameboard.

Airline Alliance Audit – Key Questions

• Have your alliance relationships settled into

complacency, with little change from year to year

and uncertain value generation?

• Are your alliances contributing incrementally to

your growth – every quarter? Or are they more

ballast than valuable cargo?

• Do you know what ALL the costs of alliance

membership are? From GDS costs to time spent

in management meetings?

• Is the structure of your current relationships

optimal? What can you do to make them better?

• Are the other partnerships of your alliance partners

aff ecting the value of your own alliance? What can

you do about it?

• Have you charted a specifi c growth path for value

to be gleaned from your alliances? With milestones

along the way?

• Should you be thinking dramatic thoughts?

Changing horses? Evaluating an equity

interest? Focusing on bilateral partnerships?

Are your partners’ joint ventures causing a dilution

in the value from your alliance partners? What are

your options?

• Are your partners’ joint ventures causing a dilution

in the value from your alliance partners? What are

your options? Performing an Alliance Audit

ICF SH&E strongly recommends a periodic “Alliance Audit”

– to methodically update of the value of an airline’s alliance

strategy and verify whether the alliance is measuring up to

expectations, or whether changes in the overall alliance en-

vironment have created opportunity or caused a diminution

in benefi ts.

The typical airline conducts fi nancial audits, safety and IOSA

audits, refreshes its fl eet plan on a regular basis, benchmarks

Measuring Alliance Benefi ts and Costs

Mark Diamond

ICF SH&E Principal

mark.diamond@icfi .com

Subodh Karnik

ICF SH&E Vice President

subodh.karnik@icfi .com


Airbus A319-100 Appraisal

This opinion does not constitute an appraisal.

Assumptions:

Engine: IAE V2500-A5 / CFMI CFM56-5B

MTOW (lbs): 154,000

Airbus A319-100 Technical Description

The second smallest member of the highly successful Airbus

A320 family, the A319-100 current engine option (“ceo”),

entered service with Swissair in 1996. As of September 2013

there were 1,306 in commercial service and an additional 93

on order (excluding the Airbus Corporate Jet ACJ319 in all

instances). Positioned in the 125-seat market segment, the

A319-100 faces competition principally from the in-produc-

tion 737-700 (1,073 in active service/197 on order) as well as

from products under development such as the Bombardier

CSeries, Boeing 737 MAX 7, and A319neo (“new engine op-

tion”).

Airbus off ers the A319-100 in two commercial variants, the

A319-100 typically seating 124 passengers in a two-class

confi guration with a range of 3,700 nautical miles (“nm”). A

long range variant operated by Air France and Qatar Airways,

the A319-100LR, is fi tted with two additional fuel tanks in the

rear fuselage cargo area conferring a range of up to 4,500 nm.

Two engine model series are off ered on new-build A319-100

aircraft; the International Aero Engines AG (“IAE”) V2500-A5

and the CFM International (“CFMI”) CFM56-5B/3, both derated

versions of those engines fi tted on the A320-200 model. The

CFMI engine exhibits a notably larger market share (approx-

imately 65%) among current aircraft in operation. Both IAE

and CFMI off er retrofi ttable upgrade packages (CFMI Tech

insertion and IAE SelectOne) for their respective engines to

reduce fuel burn and CO2 emissions, and to improve on-wing

maintenance life.

Airbus A319-100 Current and Future Market Outlook

As of September 2013, the A319-100 had built up a large user

base of over 120 operators which is indicative of good de-

mand for the type. There are 1,285 A319-100 aircraft in active

commercial service, of which 850 are CFMI-powered and 435

are IAE-powered. An additional 21 aircraft are currently parked.

easyJet is the largest A319-100 operator with 153 aircraft in

its fl eet, or approximately 12 % of the active A319-100 fl eet. In

the United States, major carriers Delta Air Lines, United Airlines

and US Airways operate a combined total of 205 aircraft A319s.

The A319-100 has also enjoyed reasonable market success

in Latin and South America where 128 aircraft are operated

by 16 airlines including Avianca (11), LAN Airlines (26), TACA

Airlines (10), TAM Linhas Aereas (29) and Volaris (22).

Membership in the A320 family (about 5,400 of all models

in service as of September 2013) is also a plus as the com-

monality across family members should assist remarketing

opportunities for the A319-100.

Up until the late-2000s, the 125-seat segment had been very

active as airlines employed aircraft in this size category in

high frequency operations in an eff ort to gain market share

– particularly in mature markets such as the United States

and Europe. However, as fuel prices and airport and airway

congestion increased many operators shifted preference to


larger single-aisle equipment off ering increased revenue

generation opportunities and better economics. As a result,

values and lease rates for most types in the 125-seat segment

have softened over the past fi ve years and sales of new en-

trants in this space have been slow. The low number of fi rm

orders for the A319neo and 737 MAX 7 -- only 35 and 30 units

respectively as of September 2013 -- as well as relatively few

sales for the CSeries and the demise of the Boeing 717 off ers

further evidence that demand for aircraft in this segment is

waning. The introduction of the A319neo in 2016 will further

impair values of current A319-100 aircraft in the longer term.

Exhibit 1: Airbus A319-100Family Fleet Statistics

Note: Excludes Airbus Corporate Jet variants.

Source: Flightglobal ACA 3.0, September 2013

Note: Excludes Airbus Corporate Jet variants.

Source: Flightglobal ACA 3.0, September 2013

Exhibit 2: Airbus A319-100Active Fleet and Backlog by Region

John Mowry


john.mowry@icfi .com


The Great WildcardWhat lower fuel costs

could mean for aviation

The most fundamental change which has shaped the aviation

industry in recent years is the inexorable rise in the price of

fuel. A decade ago, the world’s airlines spent some $44B on

aviation fuel, accounting for 14% of operating costs. Today,

the collective fuel tab is $211B and a whopping 31% of oper-

ating costs. Most industry executives assume that oil prices

will remain at or around $100/bbl. for years to come – a driving

force behind the record backlog for new fuel effi cient aircraft.

Yet there is mounting evidence that consistently high oil

prices may not be a sure bet after all. Consider the following:

• Oil demand in OECD countries is declining, and at 44/

million barrels (bbl.) per day is 10% lower than in 2005

• New energy effi ciency standards in everything from

buildings to new model cars and continued growth

in renewable energy sources promise to ameliorate

future oil demand

• Oil production leveraging new technology, including

horizontal drilling and hydraulic fracturing (i.e.

fracking) , could add 3 million barrels/day of supply

in the US and are just now being deployed in other

countries

• Current geopolitical trends, from a potential

rapprochement with Iran to a signifi cant change in the

Mexican Constitution allowing foreign investment in

the energy sector, will add to global oil supply

The Economist magazine recently cited the possibility of peak

oil demand in the not-to-distant future. What a change from

the peak oil supply fears from several years ago! Whether or

not this outcome is simply rosy-eyed optimism, it behooves

industry executives and stakeholders to at least consider

a lower-fuel cost environment as a plausible scenario for

capital allocation planning. Financial markets are currently

leaning this way, with the 2019 futures price of Brent Crude

Oil at $85/bbl. This begs the question: what would $85/bbl.

oil mean for aviation?

Airlines could reap a fi nancial bonanza. A 15-20% decline in

fuel costs could mean ~$35 billion in lower operating costs.

This would bolster airline profi tability – particularly compared

to today’s paltry aggregate profi t of just $12 billion. Airline

shareholders would be a major benefi ciary, as would passen-

gers as a consequence of ticket price reductions.

Airfare reductions could also stimulate air travel demand,

providing a much-needed kick start to the stagnant North

American and European markets while further bolstering

emerging market demand. We could also see a new wave of

airline start-ups. All of this would be good news for airports

and aviation service suppliers.

Historical Airline Fuel Costs


The losers in this scenario are aircraft manufacturers, which

have built up record backlogs on a cocktail of high fuel

prices, low cost of capital, and new technology. Lower oil

prices mean that new aircraft models promising 15-20% fuel

consumption reduction aren’t as attractive from a fi nancial

perspective. Coupled with the current trend of increasing cost

of capital, this could mean a wave of cancellations of sexy new

aircraft models. Or it could mean that manufacturers need to

revisit pricing assumptions. What is a fair price for a new wide

body like the B777-X, for example, in $85/bbl. world where its

annual fuel cost falls by $3-4 million per year?

An interesting twist in this scenario is renewed life for today’s

aircraft models that are slated for early retirement. This could

slow the current “retirement tsunami” that is harming operator

and lessor balance sheets, as well as reducing MRO activity

and aftermarket revenues.

In the late 1960s, Royal Dutch Shell popularized the modern

strategic planning function by presciently planning for a sce-

nario with geopolitical unrest and sharply higher oil prices…

just years before the OPEC oil embargo and 1973 Oil Shock.

While the future price of oil is by defi nition unpredictable, and

the global economy is just one exogenous event away from

another oil price spike, today’s industry leaders and stake-

holders would be wise to include a lower oil price scenario

in their strategic thinking.

Kevin Michaels


kevin.michaels@icfi .com


The March of LCCsAcross Borders

It’s no secret that Low Cost Carriers (LCCs) have staked a

permanent claim to roughly a third of the U.S. domestic

market and to an even higher percentage in Canada and

Mexico. After successes in domestic markets the LCCs turned

to trans-border growth and a review of what the LCCs have

achieved in those is discussed here.

The large Mexico-United States market has resumed growth

again after the global downturn and following are compar-

isons of the pre-downturn capacity compared to current

seats off ered by type of airline; Full Service (FSA) or LCC.

During the period 2008-2014 LCCs in both the United States

and Mexico grew by a CAGR of 17% and the Mexican FSA,

Mexicana, ceased operations. As a result, the share of weekly

seats operated by LCCs in the market grew from 9% to 22%.

Mexican LCC Volaris has aggressively entered the “Visit Friends

and Relatives” (VFR) market between Mexico and the United

States, replacing Mexicana on many traditional routes and

going further in serving this niche. Mexican LCC, Interjet has

entered markets in the US such as New York, Miami, Orange

County and Las Vegas with a focus on vacation and business

travelers who originate in both countries.

The US-based LCCs also began to move across the border

during this period. Southwest, using its AirTran brand, entered

the Los Cabos market from traditional points such as Denver

and from the new gateway of Orange County, California. Spirit

has added to the innovative trend by inaugurating routes

such as San Diego-Los Cabos, using a US gateway that is not

its traditional international hub of Fort Lauderdale.

The market between the Caribbean and the United States is

comprised of both leisure and VFR segments and LCCs are

taking a share of both. While FSA capacity has declined at

a CAGR of -4% in this large market, LCCs have grown at 19%

per year which resulted in an LCC seat share of 29% this year.

Most of the LCC capacity in the Caribbean-USA market is

fl own by US-based carriers but some is operated by the Bra-

zilian LCC, GOL, now connecting the Dominican Republic to

Orlando and Miami.

Southwest/Air Tran has built on Air Tran’s earlier Caribbean

operations and has grown to Aruba, Jamaica, Dominican

Republic from the gateways of Atlanta, Baltimore and Chica-

go-Midway. More growth by Southwest to the Caribbean

can be expected given the recent announcement about

own-aircraft international fl ying and the 2015 opening of

Houston-Hobby to international fl ights.

jetBlue has grown during this period in both ethnic and lei-

sure markets from JFK, Boston, Orlando and Fort Lauderdale.

The market from Canada to the Caribbean has been trans-

formed in recent years due to a strong period for both the

Canadian economy and currency. These factors and partic-

ularly the energy boom in Western Canada have enabled the

dynamic Westjet to grow within Canada and internationally.

Between 2008 and 2014, FSAs (Air Canada and others) have

grown at an ordinarily-impressive10% per annum and the LCC

group (including Westjet, Air Transat and SunWing) has seen

Mexico – United States

Source: Innovata Published Schedules


a tremendous 47% CAGR. These growth rates have resulted

in the LCC group coming to dominate the region with more

than half the weekly seats.

While the Canada-Caribbean market has seen a signifi cant

shift to LCC capacity, the story in Mexico is even more extreme.

A CAGR of 58% for the LCCs has seen their share of market

move to 59% during the period 2008-2014. All of Canada

has seen growth to the globally-known Cancun, and western

Mexico has seen substantial growth in Los Cabos, Puerto

Vallarta, Ixtapa and Mazatlan.

There is no reason to think that the growth of LCCs in these

regions will slow. With the exception a the major business

cities Mexico and the Caribbean, business in these markets

is often leisure or VFR – segments which are very successfully

served by LCCs around the world.

Caribbean – United States


LCCs are fl ying anywhere their narrowbody aircraft can go,

including as far south as the Andean countries, with service

by Spirit and JetBlue to Bogota, for example. Growth of LCC

service within Central and South America has been decidedly

diff erent than the more northern experience and this contrast

will be the subject of a future article in this space.

Canada – Caribbean


Canada – Mexico


14

Mobeen Hassan

ICF SH&E Associate

mobeen.hassan@icfi .com

Jared Harckham


jared.harckham@icfi .com


ICF SH&E Inc.

Since 1963, ICF SH&E has been dedicated to serving the air transportation

industry, providing its aviation and aerospace expertise to airports, airlines,

governments, international agencies, manufacturers, and fi nancial institutions.

The company’s core capabilities include airport strategy and development,

marketing and customer service strategy and implementation, demand

management; airport planning; air service marketing; and cost-benefi t

analysis of environmental regulations as well as airline strategy, planning,

and operations; cargo studies; revenue management; appraisals, maintenance

management, and asset management; safety and security audits; fi nancial due diligence; privatization, mergers, and allianc-

es. With a staff of 100+ professionals, ICF SH&E has offi ces in New York, Boston, London, Sao Paulo, Beijing, Singapore,

Hong Kong, Chicago and Ann Arbor, as well as a network of associates worldwide.

Formerly known as Simat, Helliesen & Eichner, Inc. (SH&E), the fi rm and its staff joined ICF International in December 2007,

further expanding its breadth of services, off erings, and expertise.

The fi rm’s expertise stems from its staff , its research eff orts, and the quality of the fi rm’s proprietary databases,

methodologies, and analytic support. In order to off er our clients the highest level of service, ICF SH&E professionals repre-

sent all segments of the aviation industry, as well as fi nancial institutions, government organizations, and the

academic community.

On a yearly basis, ICF SH&E performs over 200 projects worldwide - more projects than any other fi rm of its type.

Committed to providing expert and impartial advice, ICF SH&E projects are both result and value driven. The

company’s continuous growth has been due in large part to a high level of repeat business from an established

client base, testifying to a high degree of customer satisfaction. By participating directly in many emerging trends,

ICF SH&E is especially well equipped to assist its clients in adapting to a rapidly changing environment.

Copyright© 2014 ICF SH&E, Inc and ALTA. All rights reserved.

IMPORTANT NOTICE:

REVIEW OR USE OF THIS PUBLICATION BY ANY PARTY (“YOU”) CONSTITUTES ACCEPTANCE OF THE FOLLOWING TERMS.

Read these terms carefully. They constitute a binding agreement between you, ALTA and ICF SH&E, Inc. (“ICF”).

This publication and information and statements herein are based in whole or in part on information obtained from

various sources. ALTA and ICF make no assurances as to the accuracy of any such information or any conclusions

based thereon. ALTA and ICF are not responsible for typographical, pictorial or other editorial errors. The publication is

provided AS IS.

NO WARRANTY, WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FIT-

NESS FOR A PARTICULAR PURPOSE IS GIVEN OR MADE BY ALTA AND/OR ICF IN CONNECTION WITH THIS PUBLICATION.

You use this publication at your own risk. In no event shall ALTA and/or ICF be liable to any party as a result of use of

this publication for any direct, indirect, special, incidental, or consequential damages (including, without limitation,

damages for lost profi ts, lost data, or business interruption), whether such claims are based on warranty, contract,

negligence, tort, or any other legal theory, even if ALTA and/or ICF has been advised of the possibility of such damages.

ICF SH&E, Inc., ICF, ICF International, and ICF Consulting, the ICF International logo and ICF Consulting logos and the

other logos, taglines, and slogans in this publication are service marks, trademarks, or registered trademarks of ICF

International, Inc. Other product or company names may be the trademarks or service marks of their respective owners.

Latin American and Caribbean Air Transport Association, ALTA, Latin American and Caribbean Air Transport Association

logo and ALTA logo and the other logos, taglines, and slogans in this publication are service marks, trademarks, or regis-

tered trademarks of Latin American and Caribbean Air Transport Association. Other product or company names may be

the trademarks or service marks of their respective owners.

15

Documents

FIRST QUARTER 2014alta.aero/wp-content/uploads/2018/01/Industry-insight-first-quart-2014_18-1.pdfto its strategic location, Lima has established itself as a major hub airport. From