Some airlines move to cut routes across the globe as passenger numbers fall

By Victoria May 21, 2012 10:52

Some airlines move to cut routes across the globe as passenger numbers fall

If you were going to speak to somebody today that wished to invest in airlines and they asked you what the score is in the market then you would be forgiven for saying – not much other than best of luck with that idea mate! But if you were in a more positive mood this Monday then you might wish to at least give the investor a little pointer. I would have to put the point across strongly that high fuel prices are nothing at the outset of an investment – it is overcapacity that you need to watch out for at that initial stage as this is what kills airlines, fuel is a nail in the coffin if the airline is under pricing pressure. So with that in mind the APAC region is more or less a no-go-zone at this time. Massive overcapacity is just around the corner on short and medium haul, and on long haul even the mighty Singapore Airlines is seeing business travellers fall away and remains under heavy competition from the Middle East carriers on top of those it has been up against for two decades or so. SIA recently began offering some of its pilots up to two years of unpaid leave to seek work with other carriers. They are under pressure and if they are, then all are.

Also in APAC steer clear of Chinese airlines for the remainder of this year. The trade war between China and other nations over territorial waters (mentioned here in July 2011) is spilling over into the commercial aviation sector and Chinese airlines have been ordered to stop flying to the Philippines and there are restrictions on routes to Vietnam, Thailand and other nations, which are being cut back.

In Europe, consolidation is happening at pace and this will gather momentum and therefore it is a time of investment opportunity. Easyjet is without doubt the best option for investment with Ryanair, down 6.6% in trading last week, showing massive value today.

In the US market things are hot right now. American Airlines is looking like being forced down the US Airways route and American Eagle looks more or less set to be sold off at best or closed down at worst. Good news either way for solving overcapacity problems. Willie Walsh and co are in touch to keep the airline a Oneworld partner in any event and are seeking reassurances. We have spoken to creditors and the train of thought is one track towards US Airways at this time.

Meanwhile, bankrupt Pinnacle Airlines has won approval to borrow as much as $74.3 million from Delta Airlines after a judge overruled objections from a group of shareholders. US Bankruptcy Judge Robert Gerber in Manhattan court last week approved the company’s request for the so-called debtor- in-possession loan that will fund operations in bankruptcy. The loan requires Pinnacle to take on money-losing contracts to provide services to Delta and sets a timeline for it to renegotiate labour terms with its unions and file an exit plan.

“It’s undisputed that Delta is the only game in town and that the debtor desperately needs this money,” Gerber said, as he heard hours of testimony over whether Delta had tilted Pinnacle into bankruptcy and created onerous loan terms for its own benefit.

A group of shareholders had objected to the loan, saying Delta was strong-arming Pinnacle. The group includes Nantahala Capital Partners and Blackwell Partners, among others, according to court papers. Gerber said objectors failed to consider that without the loan, the company would run out of money as of June 1, and ruled that poor operational performance and increased expenses, not Delta, forced the company into bankruptcy.

As it restructures, Pinnacle, which provides flights for Delta, United Continental, and US Airways, said it plans to wind down regional services for United by the end of November and cease flying for US Airways by June. It will halt United Express services by the start of August.

So you would have thought that the Pinnacle resolution would have helped Delta shares but this was more than offset by an announcement that the giant plans to cut capacity on its trans-Atlantic routes 5% after Labor Day. Delta shares tumbled 6.9% to 10.94 on the news.

All other US airlines fell in trading last week as markets corrected across the board but Spirit Airlines was down 6% on top of recent downward trends due to bad baggage press – This is an open invitation to get in now.

All credit to Southwest last Thursday after it deferred delivery of 30 737-800s it was due to receive over the next two years, with the airline willing to reduce capital spending by more than $1 billion until it hits return-on-capital targets. This is an overt sign that Southwest at last is showing the way forward. Responsibility has entered the airline market. So with this in mind where does that leave all these low cost and/or start-up airlines with monster aircraft orders on the books? Will Boeing and Airbus hit a wall of responsibility over the coming months or will the overcapacity chaos just roll on regardless? I would argue that the outcome of the Eurozone problems over the next month will decide that one.

Look to inflation in India and recent figures coming out of China for reasons other than the Euro to be worried about overcapacity in the airline market.

I have glossed over matters at speed here but we round it all up in detail with supporting facts in our annual investing in airlines feature for Airline Economics May/June issue. We say who to avoid and who represents a good investment in a traditionally poor market for the brave only. If you wish to receive the issue then subscribe today – just email me and we will get you off the ground.

By Victoria May 21, 2012 10:52
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