November 10, 2010

Weekly Issue 021110

Contents:

Commentary by Bob Booth

Flight Control Waves

Waves from Europe

Commentary by David Bentley

Waves from the Pacific

Waves from the Americas

Financial Waves

Cargo Waves

Tourism Waves

Fuel Waves by Larry Weaver

Commentary

Bob Booth

It’s all about alliances

Code sharing was launched in 1990 by American Airlines and Qantas for flights between a number of domestic US cities and Australia. In one way or another, code sharing is the initial step in airline alliances which are now ruling the world. In this week’s issue of AirWaves we highlight a dozen or more code share agreements between carriers around the world. While most code share agreements stand alone, a number of them have led to major airline consolidation and alliances. Code sharing provides an opportunity for airlines to increase their markets and capacity without additional cost. There are a number of excellent examples of how code shares enable an airline to expand their presence in the market and adding destinations by joining forces.

The following are code share agreements in this week’s issue of AirWaves, which in many instances can grow to become joint venture and/or other forms of alliances between carriers in the world.

· Icelandair and Sandinavian Airlines (SAS) enter code share this monh

· Air Berlin launches code share with American Airlines

· Olympic Air activates code share agreement with Etihad Airways

· EVA Air started code share service between Taiwan China on October 31

· Jetstar Airways and American Airlines receive code share authority

· Cathay Pacific and Japan Airlines (JAL) expanding code share flights

· V Australia to expand code share with Etihad

· Avianca and Lufthansa sign code share agreement

· Continental, SkyWest and United Airlines apply for code share authority

Stay tuned – it’s all about consolidation and alliances which enhance the bottom line of the airline business.

Flight Control Waves

Airline Business Confidence Index – October 2010

While we are confident about the future of the airline business in 2011, we are publishing key points from IATA’s Business Confidence Index, released on October 19:

· Expectations for airline profitability over the next 12 months fell slightly, with 60% expecting a further improvement compared with 69% in the July survey.

· Q3 profitability appears to have been very good, with the highest proportion of respondents indicating an improvement since April 2007.

· Further growth in passenger and cargo markets is expected, however the peak has clearly been passed and expectations are starting to diminish.

· Expectations for yields over the next 12 months fell sharply with the majority expecting no change, following a very strong Q3 outcome.

· Unit costs continue to stabilize as expectations of a modest increase over the next 12 months have now improved to no change.

· Growth in employment by airlines is now starting to slow, with 42% expecting to increase over the next 12 months.

· The results of this survey are consistent with IATA’s September forecast for $8.9 billion net profit this year, followed by $5.3 billion as business conditions become less favorable.

While we don’t agree 100% with the results of the survey, it is worth noting that 60% of the respondents are still expecting a further improvement, while down from 69% respondents in July – 60% is still the majority of those surveyed. I’m willing to bet that results in the full year 2010 will exceed IATA’s $8.9 billion in profits, and that its forecast for 2011 at $5.3 billion will be way below the final results.

Bob Booth.

Waves from Europe

Icelandair and Scandinavian Airlines (SAS) enter code share this month

The code share, which went in to effect earlier this month, includes routes beyond SAS hubs of Copenhagen and Stockholm to Berlin, Gotherberg, Hamburg, Milan, Munich, Vinius, Warsaw and Zurich. Viva code share, stay tuned.

Air Berlin launches code share with American Airlines

The code share between American Airlines and Air Berlin also includes NIKI, the strategic partner of the Berlin-based airline. This comes after Air Berlin launched its twice-weekly non stop service between Berlin and Miami on November 1, operating an A330-200; and will increase the frequency to three flights weekly next May as reported last week in AirWaves. Great news, viva Air Berlin. Stay tuned.

Olympic Air activated code share agreement with Etihad Airways

The Greek airline has activated it s code share agreement with Etihad Airways for flights between Athens and Sydney/Melbourne via Abu Dhabi. The agreement was effective on October 31, 2010. Viva code share, stay tuned

Norwegian to take delivery of fist B737-800 in December 2010

This is the first of 59 B737-800s with Boeing Sky Interior which will be delivered over the next several months. The airline reports passenger growth in October reached 21% to 1.3 million passengers compared to the same month last year. Stay tuned.

Air France KLM in talks with Mexico City International Airport

The JV airlines are discussing the possibility of an investment of $10-20 million to enable the airlines to operate A380 flight from Paris in 2012. They have also said that if the investment is not approved they will consider either Rio de Janeiro or Sao Paulo for the A380 service. Stay tuned.

Commentary

By David Bentley

Is the A380 getting too big?

If security was the talking point last week (the ‘print and toner cartridge bombs’), then this week it is safety, following the exploding engine incident on a Qantas A380 over Indonesia en route Sydney from London and Singapore. There is never a dull moment in this business.

There are two ways of looking at the incident I suppose. One says that engine shutdowns happen all the time, this was nothing new, the A380 can operate perfectly safely on three engines (or less), no-one was hurt, just a little inconvenienced, what are you worrying about?

The other says a big hole was blown in the engine cowling so that large pieces of it fell to the ground where fortunately they did not kill anyone, (and a critical piece of the machinery is still missing) a puncture wound appeared in the aircraft wing (hardly a mere ‘engine shutdown’), the other engine on that wing couldn’t be shut down when it landed – indicating damage to control units – and it is a miracle there was no fire, which could have spelt the end for everyone on board.

There are two main aero engine manufacturers now, Rolls Royce and the Engine Alliance, which is an amalgam of Pratt & Whitney and General Electric (GE). They are rivals every bit as fierce as Airbus and Boeing with the same degree of politics attached. Rolls Royce did not develop its Trent engines specifically for the A380; they are in use on the A330, A340 and B777 as well as the A380 and will be deployed on the B787 and A350XWB in the future, being the only option on the A350. However, the Trent 900 was specifically designed for the A3XX, which later became the A380 and it was the aircraft’s ‘launch engine’ in October 2007 (Singapore Airlines). The Trent engine (it is named after a river that flows through the East Midlands of England where Rolls Royce Aero Engines is headquartered) has helped make Rolls Royce the second largest supplier of large turbofan engines after GE.

However, not all the existing five A380 operators (SIA, Emirates, Qantas, Air France, and Lufthansa) have the Trent 900 in their A380’s (it’s roughly 50:50) – Emirates, the largest operator of the type for example uses the Engine Alliance GP7000 and is standing back aloof from the current controversy, as Emirates does.

For now, Qantas’ A380s remain grounded, while the other operators using the Trent engine inspect their aircraft between flights. Qantas is saying that oil was found to have leaked in some of the engines and that it is unusual given they are only two years old. Could the suspension of production of the engines for a year between 2006 and 2007 while Airbus dealt with other delay issues have anything to do with it? I’m no engineer, but I once stood and watched an aircraft mechanic stick a rag into the nose cone of a Ryanair B737-200 Classic at Dublin Airport and panic when it came out covered in oil, like it was bleeding to death, and I’ve wondered ever since how much we really know about how these pieces of machinery perform under pressure.

And ‘pressure’ might prove to be the operative word here. As I write this Qantas is admitting that it worked its A380s harder than the other operators. No sooner had this one touched down after a 15 hour flight from London than it was back up in the air again heading for Australia and it was probably intended to commence the reverse journey the same day. Are we driving technology harder than it can stand? London buses used to clock up a million miles crawling around the capital over a period of 25 years without the need for anything more than routine servicing but that was a very basic technology that did not have to cater for concerns about ‘the environment’. My television set is over 15 years old and has never failed while the new Dell computer and Microsoft software I’m using to type this seems to break down for fun.

Airbus is worried of course. Its share price is all over the place with the city suits hanging on every fresh word about the incident. It isn’t that long ago that a Trent 1000 engine blew up while being tested for the B787.

But should we all be worried? Not just because technology might be getting ahead of itself but because so many of the airplanes we will be flying on in the future will be powered by this gear? More than that, now the A380 programme is back on track and gaining fresh orders (I stick by my prediction from 2005 that it will never make money, but that’s a separate issue), the number of passengers they will carry will grow. The five existing users, especially Emirates, have kept capacity down in the 450-550 seat range, but a recent order came from Air Austral, the airline of the French protectorate of Reunion, in the Indian Ocean for use on the Reunion – Paris route. Air Austral ordered two in a – get this – 840 seat version!

Now I learn that the first LCC, the Japanese airline Skymark, has come to a ‘basic agreement’ with Airbus for four A380s to be configured in a 700-seat capacity for use on both domestic (where there is heavy demand in Japan) and (primarily) international services. Whether it ever intended to or not, at a stroke Airbus is marketing seriously low cost aircraft.

Can you imagine what would happen if Michael O’Leary was to become a fan of the ‘superjumbo’? He’d put over 1000 seats in a stretched version, I’m certain (even Branson at Virgin has mused over that possibility) and charge others ‘taxes only’ to strap-hang or squat in his ‘vertical seats’ for hours on end. The prospect of hundreds of people queuing up with their pound or euro coins to use the single toilet is the stuff of nightmares.

On a more serious note, what would be the consequences for aviation if one of these gargantuan tubes fell out of the sky with 800 people on board? The passengers on QF32 might have been lucky – time will tell.

David Bentley is Joint Managing Director of Big Pond Aviation, a British-Canadian air transport research and consulting company and who has been an industry media commentator and analyst for much of the last decade. During this time he has researched and written 12 management reports on a variety of subjects including airport privatization and financing; low cost airports, airport security and airline financing. www.bigpondaviation.com

Waves from the Pacific

EVA Air started code share service between Taiwan China on October 31

The Taiwan based carrier, with its subsidiary UNI Air launched code share flights

between Taiwan and China with Air China and its subsidiary, Shenzen Air for its winter schedule. Viva code share, stay tuned.

Jetstar Airways and American Airlines receive code share authority

The authority from the US regulators is based on intra-New Zealand flights for the US carrier’s code share traffic on Qantas flights from the United States. Another good one, stay tuned.

Cathay Pacific and Japan Airlines JAL expanding code share flights

The code share agreement was expanded on October 31 on JAL flights between Hong Kong and Japan including 13 domestic routes. Cathay Pacific is also expanding code share flights via Hong Kong, Bangkok and Singapore to destinations to destinations in Asia, Africa, Australia and Europe. Viva code share, stay tuned.

V Australia to expand code share with Etihad

The expanded code share agreement will include flights operated by Etihad to Dublin, Frankfurt, London Heathrow, Manchester, Moscow and Munich. Stay tuned.

AAPA predicts Asia Pacific to become world’s biggest aviation market

Andrew Herdman, director general of the Association of Asia Pacific Airlines (AAPA), predicts Asia Pacific to become world’s biggest aviation market, saying region’s carriers already carry 25% of global passengers and 40% of global cargo. Stay tuned.

Waves from the Americas

British Airways, Virgin America, Delta and Continental to Cancun

As a result of efforts by the ASUR group of airports and the Tourism sectors in Quintana Rio, British Airways has announced plans to launch non stop flights between London and Cancun, Mexico in early 2011; at the same time Virgin America will launch flights from the US west coast to Cancun. Shortly afterwards, Delta and Continental will also launch new flights to Cancun from the United States. Viva Cancun and tourism drives. Stay tuned.

Avianca and Lufthansa sign code sharing agreement

The two airlines announced last week they will launch the code sharing flights between Colombia and Europe as soon as the necessary authority has been granted. Initially Avianca will have its code placed on flights operated by Lufthansa between Bogota and Frankfurt, while Lufthansa will place its code on flights operated by Avianca between Bogota and domestic points in Colombia. In a second stage Avianca will be able to offer flights operated by the German carrier between Frankfurt and Munich, Milan and Dusseldorf. Viva code sharing! Stay tuned.

Aerolineas Argentinas to sign MOU to reinstate membership in IATA

The national airline has announced that it plans to reinstate membership in IATA Clearing House, necessary step to join SkyTeam alliance. It is also phasing out part of its B737-500 fleet as part of its plan to increase it s total fleet. Stay tuned.

Continental, SkyWest and United Airlines apply for code share authority

The three (soon to become two) US airlines have applied to the US DOT for authority for code share between the US and Mexico utilizing CRJ700 aircraft, beginning in March 2011. Way to go, stay tuned.

Aeromexico announces new flights to Montreal

The Mexican legacy airline will launch daily non stop flight between Mexico’s AICM airport and Montreal on December 15. The airline will operate the route with B737 aircraft and is promoting its hub in Mexico City for Canadian connecting traffic to Asia, Europe, Central and South America. Viva Aeromexico. Stay tuned.

Brazil is the most important country for Spain’s Banco Santander

An article in the November 5^th issue of the Inter-American Dialogue’s Latin America Advisor, it reports on the bank’s CEO, Emilio Botin’s visit to Rio de Janeiro where he stated that Brazil is the most important country in the world for Banco Santander’s global strategy. He also predicted that Brazil’s economy would be the world’s fifth largest within the next decade because of its response to the global economic crisis. The bank is planning to open 600 new offices in Brazil in 2013; and intends to invest $446 million to build administrative and technical offices in Campinas, in Sao Paulo state. Viva Banco Santander and Brasil, with an “S”.

Jazz Air takes delivery of first two of six B757-200s

The Canadian airline will also take delivery of four additional B757-200s in December. The aircraft are from Thomas Cook Airlines. Jazz to operate the aircraft to the Caribbean, Mexico and Central America from Toronto, Ottawa, Montreal and Halifax for Thomas Cook Canada. The inaugural flight from Toronto to Montego Bay and Cancun began on November 5. Viva Jazz Air and Thomas Cook.

Financial Waves

ALTA reports September traffic (RPKs) increased 11.0%

The Latin American and Caribbean Air Transport Association (ALTA) reports the member passenger traffic in September increased 9.1% while RPKs were up 11%. The member airlines carried 11.1 million passengers in the month, year-to-date passengers were up 14.4%. Capacity increased 2.8%, pushing the load factor up 5.6 points to 76.1%. Freight ton kilometers increased 16.3% in September and 33.9% year to date. For details of the report go to www.alta.aero. Viva ALTA.

Delta Airlines reports October traffic up 8.6%

System RPMs in October increased 8.6% year over year, on a capacity increase of 9.5%, decreasing the load factor by 0.7 points to a still profitable 83.4%. While domestic traffic declined 6.4%, international traffic was up a healthy 12%. The Pacific led the international traffic results with an increase of 22.6% on 13% increase in capacity, decreasing the international load factor by 0.8 points to 84%. Passenger cargo ton miles were up 34.2% in October. Stay tuned.

Alaska Air Group reports RPMs grew 15.9% in October y/y

The group which includes Alaska Airlines and Horizon Air reported RPM traffic increased 15.9% in October on a 9.1% increase in capacity, moving the load factor up 4.8 points to 81.8%. Year-to-date RPM traffic was up 10.1% on 4.1 points increase in capacity, moving the y/y load factor to 83%. Viva Alaska Air Group.

Cargo Waves

Air Transat has launched Air Transat Cargo on November 1

The Canadian subsidiary has launched air cargo service between Canada and all Air Transat destinations and beyond using belly space on current fleet of wide body aircraft, supported by representatives in 50 countries. Way to go, stay tuned.

Emirates Sky Cargo launched new cargo service from Dubai to Sao Paulo

The new non stop all cargo service was launched on November 1 with B747-400F aircraft. The airline also reported increase in revenue during the fiscal 1H 2010 of 48.4% to $1.19 billion, with cargo tons up 23.7% to 897,000 tons. The parent company, Emirates, also reported net income in the 1H 2010 up 351% to $925 million, with revenue up 35.5% to $7.2 billion. Viva Emirates. Stay tuned.

ABXAir to begin ACMI service for DHL and JAL

The all cargo ACMI service for DHL begins this month with daily transatlantic flights between UK and the US with B767-300F, leased from third party under 45-month agreement. It is also launching ACMI B767-200F for Japan Airlines (JAL) in Asia, under an agreement for at least two years. Way to go ABXAir! Stay tuned.

Tourism Waves

Jamaica is focusing on Latin America to promote tourism

During the Jamaica Product Exchange conference, held on October 24 in Jamaica, Minister of Tourism, Edmund Bartlett, announced that as part of the country’s tourism development effort, it is focusing on new markets – which includes Latin America. He also stated that diversification is extremely important and he is working closely with the Ministry of Foreign Affairs to review visa requirements in order to facilitate visitors from Latin America and Europe. Tourism is the driver, viva Jamaica.

Panama’s Chamber of Tourism is optimistic about new air service to Panama

Arnette Cardenas, president of Panama’s Chamber of Tourism stated recently that increasing air service to Panama is important for the development of new tourist visitors to the country. In addition to the recently announced launch of six-times weekly service by Ecuador’s TAME on December 1, and Germany’s Condor to launch service in November, she also expects new flights in 2011 by Qantas from Australia, as well as new service by Emirates, Flydubai and All Nippon Airways (ANA). Viva Panama, stay tuned.

Fuel Waves

By Larry S. Weaver

The U.S. Federal Reserve announced last week that they were going to inject $600 Billion into the economy. This amount, cf additional dollars can only put more pressure on inflation and a weakening of the U.S. Dollar in the world economy. In a separate – but possibly related note - China's central bank said Wednesday it will raise banks' reserve requirement ratio by half a percentage point from Tuesday, the fourth such increase this year, as concerns about excessive liquidity increase. This move will require banks to keep more money at the central bank will drain funds from the financial system, relieving some of the pressures on inflation within China which continues to grow at a rapid rate despite sluggish growth in the developed world.

These combined actions are forcing down the value of the US dollar and raising the price of petroleum. WTI (the U.S. Marker crude) on the NYMEX has moved to a new 2010 high, climbing over $87.50 per bbl on Tuesday and – at the time of writing this – shortly after Noon on Wednesday – is at $87.87 per bbl while Brent crude on the ICE is at $89.11 per bbl. Since October 1st to date the price of WTI crude has averaged $82.55/bbl. According to the US EIA's latest forecast, however, states that WTI will be at $83/bbl this winter (October 1 to March 31). This is an increase of $5.50/bbl over last winter and $3/bbl more that what the EIA projected just last month. They are forecasting that by this time next year, the average price of crude will then be at the current level of $87/bbl. (So much for the expert's forecasts.)

The EIA forecast for world supplies estimates OPEC crude oil excess capacity to be 5 million bpd while OPEC says they currently have 6 million bpd of extra capacity – that can be brought on-line immediately in the event of a shortage or a price spike due to perceived shortage. This spare capacity compares to 4.3 million bpd experienced in 2009 and 1.5 million bpd in 2008. On jet fuel demand, the EIA report forecast U.S. jet fuel demand for the fourth quarter will drop to 1.37 million b/d from 1.46 million b/d in the third quarter. This is barely over the 1.36 million bpd number from the fourth quarter of 2009.

To counter/support the US EIA, the International Energy Agency (IEA) issued its World Energy Outlook 2010 covering their forecast for energy demand through 2035. The IEA says the rate of economic growth will affect short-term petroleum demand, while long-range (the 25 year forecast) the response of governments’ to climate change and energy security will shape petroleum's future. The IEA forecasts petroleum demand will grow 1.2 percent annually over the next 25 years, which would be a 35 percent rise over the 2009 levels with consumption reaching 99 million bpd in 2035 – some 15 million bpd over the consumption level of 2009. The IEA report states the net growth in consumption will be from non-OECD countries, with about half coming from China. Demand in the OECD sector is forecast to actually decline by about 6 million bpd. Petroleum, however, will remain the major fuel in the energy mix at least through 2035. The percentage that petroleum demands will shrink as higher oil prices and government measures to promote fuel efficiency. The IEA forecasts the price of oil to increase to $113/bbl by 2035 using 2009 dollars compared to the $60/bbl in 2009.

Larry Weaver is an Aviation Fuel consultant headquartered in Tampa, Florida with over forty years experience in aviation fuels. He is the founder and President of Dellem, LLC. Prior to starting Dellem, he was employed in the Aviation Sales Department of Texaco Inc, and was Manager of Texaco Aviation's Worldwide Operations. In this capacity he was responsible for aviation fuel quality control and wrote the Texaco international Quality Control Manual. He has provided training and consulting in quality control and product handling to Petroleos de Venezuela, the National Science Foundation and his expertise to various other private companies. Dellem has provided worldwide Fuel Acquisition and Management services to airlines for over twenty-five years and has managed in excess of 25 million gallons of fuel per month for Dellem's clients. Contact Larry Weaver at lweaver@dellem.com or airwaves@avnews.com.

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