FX worries and Frontier shake-up

Dino D'Amore
By Dino D'Amore November 8, 2013 12:48

FX worries and Frontier shake-up

There is much to interest even the most jaded of aviation industry observers today but top of the pile for all should be FX movements today. The ECB has cut interest rates this morning by a quarter of a percent sending Sterling to a ten month high against the Euro. Now this move is s surprise to all and although a quarter of one percent was in the days of normality nothing, today it is quite some move. This surprise move suggests that deflation is far more of a reality in the Euro Zone than one would have thought just 24 hours ago. Euro Zone inflation is at just 0.7% and of late the Euro has been climbing fast against the USD leading to exporters being hit hard. Just before the ECB the Bank of England stated that it will leave its own interest rate unchanged at 0.5%, and the total value of assets held under QE at £375bn. Later today we have US jobless claims figures along with the Q3 GDP report and thus the Euro interest rate move has been timed to give maximum impact as US results are expected to show a small improvement. 2013 has thus far been the year not of oil cost problems but of FX movements sending some to the brink. Today, as we told you would be the case back in the summer, SpiceJet provided terrible results on the back of FX problems and these I fear will be compounded over the coming months as tapering comes back on the agenda more prominently as Indian and Brazilian (among others) exports continue to slow. Argentina’s economy is also showing worrying signs of further weakness. Airlines across all these areas of the globe have in 2013 been hit hard by FX movements and 2014 should be a year when all of this comes to a head. But what if the investigation into manipulation of foreign exchange rates by banks finds anything untoward? Would airlines have some sort of a claim given the amount of purchases in USD against local currency income? Airlines might well be at the fore of the global pile of big business loosers, especially given that we are in an aircraft delivery phase.

In good news Indigo Partners will go ahead with the $36m (plus debt) purchase of Frontier even though they cannot reach agreement with the flight attendant union. This news is significant as it now means that low cost options will be rolled-out to American Eagle, Delta Connection, United Express and US Airways Express.

I argue that the sale of Frontier may well cause a far more reaching effect in the US airline market than many realized and it is not so much about Frontier itself becoming an ultra low cost but it is more about the legacy airlines and their ability to tap into the low cost market through their regional operations. So to that end are we seeing the beginning of the end for a stable US domestic airline market and the very first throws of serious sustained competition and fare decreases? You might want to think about that one if you hold US airline stocks.

Meanwhile: As reported would be the case; Beijing has scrapped the rule requiring airlines to keep a minimum domestic ticket price – Get ready for the boom as at this time China’s low cost market is just 6% represented by Spring Airlines alone. Expect that figure to be a good 25% within this decade. No wonder Minsheng Financial Leasing entered the market with Minsheng Commercial Aviation. The problem is the Chinese lessors are already undercutting the market so very heavily that they are almost certain to run into problems down the line, over 2013 they have taken the extend, pretend and pray model to new levels, from the evidence we have to hand here there seems to be no reason for some of the terms offered by some Chinese based lessors.

Dino D'Amore
By Dino D'Amore November 8, 2013 12:48
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