And they are off!

Dino D'Amore
By Dino D'Amore January 15, 2014 20:56

And they are off!

Firstly, if you have not been receiving the daily news until today it is because we have been re-qualifying our distribution list. This process was completed yesterday, so what better time than a recap of this month’s news items:

Democrat Rep. Thompson, along with Sheila Jackson Lee and Cedric Richmond, have written to US Transport Committee Chairman Mike McCaul expressing concern about the Abu Dhabi preclearance facility due to open later this month and included in the funding bill. It is unlikely that this matter will cause an obstruction to the opening of the pre-clearance facility which gives Etihad another cause for cheer. Etihad had an amazing 2013 and is all set to have a blistering 2014. One of the main concerns has always been the ability of Etihad to integrate its airline investments and create a seamless global system, something that has put customers off. We are moving through a phase now where Etihad is ramping-up its integration process and 2014 will be very interesting to view the speed at which Etihad is moving to sort out Jet Airways.

But as a flurry of US airlines moan about the Abu Dhabi pre-clearance facility and the incursion of the Middle East Airlines, there is one airline that will stand back from the crowd with a smile – So why is American Airlines Group smiling? American Airlines Group is the pick of the global bunch for 2014. It has code share agreements and other rights agreements in place with all three of the big Middle East Carriers and as the likes of Etihad, Qatar and Emirates ramp-up their US expansion in 2014, the main beneficiary for connecting traffic throughout the Americas will be American Airlines Group. This is not a story to be underestimated, especially given the impact on United Continental of its loss of US Airlines from Star Alliance. But of course this is a swings and roundabouts situation for we also need to watch to see if American, JAL and British Airways can together bring in the traffic to US Airways that United and Lufthansa once did. It is this matter that investors will be looking to weigh come the summer and for American Airlines Group it is the American Airlines half of the entity that may well ride high with its Middle East traffic. The trick for us all is to make sure we separate this from the whole to view the US Airways alliance change impact. American Airlines has in 2013 been an astounding adventure for investors and they are praying that the revenues show continued improvement in early 2014 to get those share bonuses as part of the purchase agreement. Investors in AMR who stuck it out look set for a significant windfall and day by day the US Airlines deal looks more and more impressive.

It is also the case that in 2014 one should watch out for the A380 as more and more are routed to the US market by Asian and Middle Eastern airlines it seems inconceivable that some airlines will not need to think about matching the offering and upscaling. American Airlines Group does not need to think about this so much as it has the Middle East airlines feeding it and vice versa as mentioned but United Continental, looking at its fleet, does need to start thinking about the A380 more seriously. There is no better finance team at hand to pull off a good capital markets deal for an A380 or indeed to gain a good lease deal on the type but only time will tell on this.

Of course 12 months ago we were looking at the opening-up of Iran and Cuba. The former is on the long path but the latter looks set to fast track its way back onto the Americas economic map with all signs looking like sanctions will be lifted at least in part by the end of 2014. There is no question that many airlines would like to get a foothold into Cuba and Spirit along with American shares are well worth holding and buying into on the basis that they will be at the front of the charge for traffic – Spirit especially with its core market looks set for a windfall of sorts in the medium term.

It will be interesting to see what Latin American traffic is like this summer as the world’s largest sporting event rolls into Brazil. British Airways and the Oneworld network are looking strong for this and the same grouping will be hoping that Qatar does not lose the 2018 FIFA World Cup as this event is guaranteed to give the Oneworld Alliance a huge boost.

Away from the Americas, India is back in 2014 as a market in the centre of a storm due to SIA and AirAsia incursion, which in the short term will not be pretty at all. Will IndiGo, GoAir and SpiceJet survive an all-out assault by Tony Fernandes? You have to give it to the AirAsia Group of airlines. Although AirAsia X showed results that lead one to question the low cost long haul model (yet again), the rest of the group continues to roll-on regardless and only now in 2014 are we starting to see all those narrowbody aircraft deliveries have an overlapping effect in the APAC region – Can traffic increases keep pace with capacity increases? That is a question for the APAC region and if the answer looks like being a no then leasing aircraft looks to be the best option.

We have also spoken about the A340 of late and the fact that prices make this aircraft (if you can get one) a very good option indeed. This week Century Tokyo Leasing closed a deal with Air France for five Airbus A340-300s through a packaged financing transaction secured against the aircraft. The -300 with its CFM engines on wing continues to trade well in the market. So why is it that airlines are not replacing the A340-300 with 600s? Well the joke is that Airbus continues to scupper some A340 deals with new aircraft deals in their rush to compete with Boeing. Recently Kuwait Airlines had the Airbus used aircraft team competing directly against the new aircraft sales team. Kuwait wanted to go with 5-6 year lease deals for A340-600 aircraft but in the end were pushed to go for the new A350. Now, given the cost of the A340-600 for a five to six year lease right now, Kuwait has been pushed into a deal for A350s that is detrimental in the short term, unless of course the A350 price was on the floor.

Trent engine overhaul costs remain a worry as does the ability to remarket the engines and part out the same. OEMs such as GE and Rolls Royce are learning that their rush to control the aftermarket has led to a situation where they cannot make parts fast enough. The largest engine overhaul shop in the world for GE 90s/115Bs for example is taking parts from parent airline engines to service third party contracts at times because they cannot get parts fast enough from GE. The same thing is happening on the large RR engines. Large fan engine maintenance costs are pushed up to eye watering levels with one investor paying $5m for LLPs and $6.5m for service on one large fan engine recently that is an $11.5m overhaul. Obviously if your MRO does not have its own pool of large fan engines and/or a parent airline that it can rip parts from, from time to time, then turnaround times start to increase well beyond expectations, along with costs.

So again we could argue that four engines, when it comes to the A340, are better than two – at $11.5m you can overhaul all four A340 engines for the price of one competing aircraft engine.

Also 2014 will be an interesting year for Avolon – Will the Irish based lessor become the latest victim of aircraft leasing industry consolidation? That is a question which only time will tell but it is likely.

It is all go.

Dino D'Amore
By Dino D'Amore January 15, 2014 20:56
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