Airline Weekly Lounge

Is China’s slowing economy taking its toll on the country’s Big Three carriers? So far Air China, China Eastern and China Southern have held up well and posted a rather good 2015. But the fourth quarter of 2015 showed some signs of deterioration—even by the standards of this off-peak quarter. In the U.S., Alaska Airlines and Virgin America are, unlike a lot of mergers in the past, merging from a position of strength. But is that a good thing? Delta’s upcoming first quarter earnings report will surely be terrific and begs the question: Does the U.S. airline industry have an off-peak quarter anymore? Air New Zealand has some shares of Virgin Australia they want to sell you, Air France/KLM is looking for a new CEO, and we finish the show with our first lightning round of 2016.

Alaska Airlines clearly wants to be the dominant carrier on the West Coast, and if its purchase of Virgin America goes through, it will have four focus cities—Los Angeles, San Francisco, Portland and Seattle—all clustered on the Pacific. Such a network might look very different from the network of United, Delta, or American, but that doesn’t mean it won’t work, and it actually resembles the networks of a couple of other successful carriers. All in all, in this episode, we give our blessing to the Alaska-Virgin marriage, even if the wedding will cost a fortune. Plus, we check in on Brazil’s Gol, an airline that reported some frightful losses. And lastly, little Cebu Pacific did it again, serving up stellar profits in Q4 and making 2015 a stellar year.

If the U.S. airline market were to see even more consolidation, what kind of effect would it have? That’s one question we consider in a discussion about the possible acquisition of Virgin America by another airline. We also talk about possible consolidation in Europe, where it’s a more urgent need. There are reasonable airline pairings to be made there, including IAG tying up with Finnair. But will it ever happen? Virgin Atlantic, meanwhile, had a decent 2015. Will the profits continue in 2016 with Norwegian breathing down its neck? And lastly, Israel’s El Al had one of its best years ever despite a host of challenges—but Israel’s open skies agreement, which ushered in more competition, doesn’t seem to be a challenge at all.

Attacks at airports are rare, and Tuesday’s bombing at Brussels Airport will no doubt have repercussions around the world. Which airlines will see the worst financial impact from the attacks? Brussels Airlines, not surprisingly, is most vulnerable. Unfortunately, the airline is not starting from a position of strength. Its 2015 earnings report released last week depicts an improving airline, but not quite a healthy one. Lufthansa is another airline likely to see revenues suffer in the wake of the attacks. And although the Lufthansa group is certainly a strong company, its fourth quarter earnings report was a disappointment. Lastly, will the Brussels bombings usher in another wave of security measures at airports around the world?

It’s good to be a Gulf carrier—Gulf carriers are well positioned to connect the whole world. But it might be better to be a near-the-Gulf carrier like Turkish Airlines. Turkish offers a blend of service as an intercontinental carrier and also as a gateway to an entire continent. We discuss Turkish’s fleet, revenue concerns, growth plans and what kind of threat Pegasus poses. Cathay Pacific had a rather ordinary fourth quarter, but the Hong Kong carrier was likely happy to get that. In South America, LATAM might be thinking the same thing despite very different circumstances. Ethiopian Airlines had a terrific quarter, growing revenues and notching a 10% operating margin. And Air New Zealand and United announced a joint venture just days after we discussed it on the Lounge. Coincidence?

After hitting the floor in 2013, Qantas, has—like a boomerang—come all the way back and more. In fact, the Australian carrier set an annual profit record in 2015. Despite enjoying the same advantages inherent to the Land of Oz right now, Virgin Australia has not found the same level of fortune. But in terms of operating margin, at least, there’s one airline in that corner of the world outpacing both those carriers as Air New Zealand continues to defy gravity and surprise the editors of Airline Weekly. In Bogotá, Avianca appears to be weathering—in pretty good fashion—the economic storm that’s consuming Brazil right now. Aeroflot is doing its own bit of weathering, demonstrating its resiliency in a tough home economy. And lastly, United grapples with some shareholders who want changes to the airline’s board.

IAG, the airline group that includes British Airways, Iberia, Vueling and Aer Lingus, is continuing its run of success—a run that probably has peers such as Air France/KLM and Lufthansa feeling a bit envious. In fact, while those two companies struggle with labor pains and more, IAG just posted its most profitable fourth quarter since BA and Iberia merged in 2011. Speaking of combining airlines, the Aer Lingus acquisition is looking more and more like a smart move. Mexican flag carrier Aeroméxico has a peso problem, but it’s managing it fairly well. And like every other airline in the world (okay, not quite) it’s planning a joint venture with Delta, and history has shown that’s usually a good thing. Meanwhile, Aeroméxico’s competitor Volaris continues flexing its ultra-low-cost muscle. And, of course, we talk about Republic Airways’ unconventional bankruptcy.

What’s it gonna take to fix Air France/KLM? The airline group has a number of problems—from labor inflexibility to a soft French economy—all in a very competitive part of the world. But there are reasons for hope: Gulf carriers could one day slow their growth, Air France/KLM still has the gold standard in joint ventures and, heck, labor concessions are always a possibility. Air Canada improved its 2015 operating margin from 6% to 11%—no easy task in a country that’s seeing economic and currency headwinds. The bad news for Copa Airlines is that its operating margin dropped from 18% to 7%. The good news is that Copa still has a profit margin at all, as it’s an airline heavily exposed to troubled Brazil and Venezuela. And why doesn’t Virgin America want to offer a basic economy seat option?

Finnair, Norwegian and Icelandair all had rather forgettable off-peak fourth quarters, but not because of the chilly weather they are all enduring. Rather, each has a unique set of challenges and opportunities. Finnair’s challenges include exposure to Asia and transatlantic competition, but there’s hope in seat densification. Norwegian is painfully exposed to Norway’s struggling oil industry, but they have a grow-baby-grow strategy. And Icelandair is perhaps doing the most with less. After all, the airline has never had a profitable fourth quarter until 2015. Icelandair has managed to get a good portion of its revenues in strong-currency countries and keep its costs in a weak-currency country. Hint: That’s a good thing. We also consider Spirit’s ticket revenue pressures and how Hawaiian is handling an up-and-down Japanese yen.

Singapore Airlines swung back to solid profits in 2015. Does this turnaround mean the airline is returning to its former glory, not seen since 2010? Or are low fuel prices just making everyone look good? Korean Air and Asiana continue to struggle with profit margins that barely stayed in positive territory. And the two Korean carriers are facing a new threat by way of some possible deregulation from China’s government. India’s Jet Airways is seeing a dramatic improvement in its profits—could this carrier also be returning to its former glory? WestJet managed a nice fourth-quarter profit despite currency problems and a home market vulnerable to oil prices. And lastly, we consider Delta CEO Richard Anderson’s retirement.