Transatlantic woes

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By admin July 9, 2014 09:49

Transatlantic woes

The shadow of overcapacity has fallen on Western-based airlines’ long-haul operations. For Delta, Air France-KLM and Lufthansa, transatlantic operations have been cited as being the number one problem area, and yet it is on these routes between Europe and North America where new services are being launched. These services would not yet have made any impression on the forward bookings of Delta, Air France-KLM and Lufthansa let alone filtered through the books, so it could be argued that things are going to get a whole lot worse as Norwegian International bites into economy demand while the two start-up all-business class airlines bite into the premium passenger segment. In addition, if there is a trend developing then why has IAG not been forced to issue a profit warning also as yet? Of course, the markets have already priced-in the fact that IAG will be down also when shares have been tumbling after both the Lufthansa and the Air France-KLM warnings.

Where share price is concerned, it is a fact that we here warned you that airline shares would be checked in 2014, because they were being shorted so very heavily, if nothing else. As soon as there is bad news the profit taking starts but then again so does the investing when the underlying figures are as good as those of Delta or the cash position as good as that of Lufthansa. This week though we have the markets also concerning themselves with ECB QE updates and US data from the Federal Reserve, which is also weighing on all stocks. Some airline executives point to a trend where Western airlines are losing transatlantic traffic to Middle East majors. In the case of Delta this is a possible argument but I would more readily argue that these profit warnings from Lufthansa and Air France-KLM might well point to weakening demand from their home markets that stems from economic uncertainties. Maybe this hypothesis would be backed by figures that show IAG is still doing well at London Heathrow on transatlantic routes, we will find out on August 1 when IAG reports its traffic figures.

But in all this Delta does have the ability to work with Virgin Atlantic to reduce capacity at speed, but it can be argued with certainty that things are going to get worse for legacy and flag carriers on the Atlantic routes before they get better. It may be that reducing the number of flights but keeping premium capacity high by using A380s or 747-8Is is the answer to the low-cost 787s of NI, the all-business class start-ups and the A380s of the Middle East. In this regard only Delta is lagging.

Meanwhile we would do well to remember that overcapacity is a problem getting worse with each aircraft delivery and this too extends to Ghana in West Africa where losses with all the major domestic airlines are getting out of hand – a situation made worse by the weakening local currency (the Cedi). The likes of Starbow, Antrak and AWA are all in the eye of this storm averaging between them GH¢600,000 a month of losses each. This is a situation that is worsening and these airlines should be watched closely to see if they begin to pull out markets or close services. Those with assets on lease might want to seek re-assurances as to the validity of business models going forward for peace of mind if nothing else.

It would be wrong not to end the day on a good note and as such here is something for all those Brazilian football supporters totally at a loss today after the England-style rubbish performance of their team last night. Look to Chile, yes Chile for a ski break as the season opened yesterday. Chile has been throwing money into ski resorts for some time now and they are starting to show real promise including having won best global resort prizes recently – Now Chile is ramping-up ski related advertising across the Americas. This is one really exciting potential growth area for the likes of LATAM and other Latin American airlines, this year Chile expects to increase ski tourism to 1 million and that is a great deal of potential for airlines serving the region.

admin
By admin July 9, 2014 09:49
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