To build on a cliché, the only certainty in the airline industry is uncertainty. The past few weeks provided all the evidence necessary to reinforce that this is correct.
Following airline news has been the kind of spectator sport that leads to whiplash lately.
Deal. No deal. Deal? After pummeling each other for years, Icelandair and Wow Air agreed to a truce by way of a merger. But the merger fell through. Now Wow Air may be finding comfort with serial airline investor Indigo Partners. What will that mean for both airlines? We discuss it on the most recent episode of the Airline Weekly Lounge.
Aeroflot apparently finds comfort in being big. In fact, the Russian airline is looking to nearly double its fleet size in just five years. Meanwhile, Mexico’s airline industry nervously watches as Mexico City’s one-third-built airport looks less and less likely to be completed. Lastly, U.S. airlines are getting bullish about the fourth quarter after fuel prices slid in November.
Here are five takeaways from the conversation:
Icelandair might be left out in the cold.
A merger between Icelandair and Wow Air would have solved a lot. The two have been waging a war of attrition, bludgeoning each other with excess capacity. But the merger has been pronounced dead. Instead, Wow Air is in talks to be bought by Indigo Partners, the force behind such successful carriers as Spirit, Wizz Air, Volaris, and Frontier. If the Indigo deal happens, it presents two key questions. First, what are Indigo’s plans for Wow? Indigo has a terrific track record developing low-cost carriers. But Wow has a low-cost long-haul business model, which is an unproven — if not downright dubious — model. Second, where does that leave Icelandair? On the face of it, it looks to be the worst of both worlds with Icelandair being denied relief from the crowded market yet still facing a financially healthier competitor. But at the very least it should be facing a more rational competitor, which would be a good thing — just not as good as a merger.
Russia could be a hot airline market.
Russia’s biggest airline Aeroflot wants to expand from 267 planes to 520 — nearly double— in the next five years. Is that a reasonable expectation? Russia is an enormous country, underserved by airline service. So there’s opportunity domestically. But there’s also opportunity internationally. Moscow, Aeroflot’s biggest hub, has the geography to take advantage of more global traffic flows — say, Chicago (which it doesn’t serve) to Tel Aviv (which it serves frequently), or Mumbai (which it doesn’t serve) to Stockholm (which it does). In both cases, no airline offers nonstop flights, and Moscow is geographically positioned to offer convenient connections. Russia has so much potential. Another way to look at it: Because Russia’s government makes traveling to Russia rather difficult right now, there’s much more upside than downside. What if Russia relaxes its visa policies? What if the government tacks away from its aggressive, combative geopolitical approach? What if it starts seriously developing tourism? Any of those things would make Aeroflot’s growth plan possible. Is it reasonable to expect any of those things to happen? That’s a harder question.
A third of an airport is pretty useless.
Construction has stopped on the most important airport in Mexico, and it might remain stopped. In fact, this looks increasingly likely. If the availability and efficiency of air service is as important to an economy as the airline industry thinks it is, this could be catastrophic economically. Not to mention, it could hamper Aeromexico’s ambitions. Mexico City’s current main airport is beyond capacity. Instead of finishing the replacement airport, which is one-third constructed, the current thinking is to instead utilize two regional airports and have three airports serving both domestic and international passengers. That could conceivably mean connecting passengers having to change airports as well as planes. Is that a realistic strategy?
SAS continues its resurgence.
Scandinavia’s SAS had a solid fiscal fourth quarter, which runs August through October. Why do we care? Because SAS is an airline that not too long ago was on death’s doorstep. Every successful quarter it puts between itself and those dark days in 2012 is significant for the European airline sector. So, how well did SAS do? It posted an 8 percent operating profit margin, down from 10 percent in the same quarter last year. But it did so in the face of a whopping 38 percent fuel cost increase. All in all, not bad, considering.
U.S. airlines should finish strong.
Quarterly earnings reports from U.S. airlines in 2018 had gotten a bit repetitious. For many U.S. airlines all year, the story has been: Revenues were great, but not great enough to overcome rising fuel and labor costs. Thus margins decreased quarter after quarter. But that trend looks to be broken in the final quarter of the year. In other words, because of the fuel price crash, most U.S. airlines should be turning in positive year-over-year comparisons for the fourth quarter. That was unexpected just a month ago.
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Photo credit: A Wow Air plane is shown at St. Louis Lambert International Airport. The plight of the low-cost carrier is featured in this podcast from Airline Weekly. David Ackerman / Flickr