ICBC Financial Leasing continues as company of the week while we look at an interesting sequestration story

Dino D'Amore
By Dino D'Amore October 4, 2013 09:26

ICBC Financial Leasing continues as company of the week while we look at an interesting sequestration story

Remember what we said here last week: If ILFC, ACG, GECAS and others pull back from India then the Chinese will be waiting and will take the fruits of relationships down the line. Western lessors have suffered greatly and they may need to suffer more to get to the pot of gold down the line in India, with luck airlines will look at the Indigo model and take note at some point.

This week has been all about ICBC Leasing, yesterday it was PAL, today it is AirAsia Bhd. ICBC Financial Leasing has signed a memorandum of agreement (MoA) today for aircraft financing worth US$1bn, making it the largest financial deal between Malaysia and China ever and as such the deal was witnessed by Malaysian Prime Minister Datuk Seri Najib Tun Razak and President of China, Xi Jinping.

“This US$1bn financing facility agreement does not only reflect a successful bilateral business arrangement, but also underlines the excellent relationship between Malaysia and China,” Tony Fernandez said.

In fact this deal is an extension of the existing 2011sale and leaseback deal for 10 A320s. This latest deal will allow finance lease, sale-and-leaseback or commercial loans for further A320s. The terms of this agreement state that 10 A320s is the minimum that will be financed under the agreement term.

But as everyone is focused on the US Federal shutdown and the impending debt ceiling extension, or lack thereof I thought it might be interesting to underline the astounding performance of the US airline industry by setting it against the backdrop of sequestration.

The US budget sequestration impact in $ per capita is $241, that is not a great deal, however in some areas of the US the impact per capita is significant, this of course centres around government employment centres such as Washington DC. However if you take the top ten most hard hit places in the USA and then superimpose the same over airline route maps then there are two airlines that should be hit harder than any other. They are Southwest Airlines and Alaska Airlines/Horizon Air.

Alaska Airlines has seen its main local population centres see an average fall in income of $5,000 per head over the past 12 months. The worst hit is Valdez-Cordova in Alaska which has seen the sequestration impact per capita top $6,337. This may yet filter through to see Alaska Airlines earnings hurt. Yesterday Alaska Airlines posted September and YTD results showing that traffic was falling behind capacity increases. Even so the airline posted an impressive 4.3% increase in traffic on a 5.9% increase in capacity for September year on year for the month. These numbers pushed load factors down of course by 1.2 points to 82.8%. Year to date RPMs are up by 8.2% with capacity up 8.7% and increasing. The performance of Alaska given the backdrop of its main population pool seeing incomes fall is most impressive but the airline must not let capacity run away and that should be the focus now.

Horizon Air is of course in the centre of the storm and it has reported a 3.8% increase in September traffic on flat capacity from September 2012 and this resulted in a 2.9 point increase in load factor to a record of 79.7%. RPMs are up 4.5% YTD and management seem to be doing a wonderful job of keeping the airline balanced. The Alaska Group should be watched closely as this could be among the first of US airlines to see passenger traffic slow.

This brings us onto Southwest Airlines. The Southwest/AirTran route map aligns almost perfectly with the top ten hardest hit areas of the USA. It is first or second largest carrier within the locality of the hardest hit areas of the USA under sequestration and thus the airline is, more than ever, a barometer. At this point some might argue that Southwest’s timing of the AirTran purchase was unlucky but indeed from the data to hand the AirTran purchase may well be a saving grace for investors looking for those famous dividends. It is Southwest in New Mexico that is at the centre of the worst sequestration impact per capita at an average of $6,360 down over the past 12 months. Taking matters further into the future, Southwest is likely to be hit hardest by any transition of Frontier into a ULCC airline and it is already being harmed by the expansion of Spirit and by its own loosened grip on airport charges and the like. Southwest will start to show impacts of pressures in its monthly figures and the airline must start to think harder and faster about what it wants to be. Southwest has the luxury of looking to Europe and copying the easyJet quest for business travellers and it should make some moves one way or the other soon. But one thing is for sure, Southwest, among all other airlines, is and will be the hardest hit by sequestration and the flat quarterly figures from earlier this year seem to be just the beginning of the slowdown. If management manage to balance the figures in this next quarterly report then investors will surely know that their money is in very safe hands indeed as this looks to be a very tough ask indeed.

Look to the forthcoming Issue 16 of Airline Economics for the full story on this matter.

Dino D'Amore
By Dino D'Amore October 4, 2013 09:26
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