Category Archives: Uncategorized

Boeing to Build 787-10 Dreamliner in South Carolina

By Jack Harty / Published July 30, 2014

Boeing has announced that it will build the Boeing 787-10 6C7931885-787-10Dreamliner in Charleston, South Carolina. Though, it will still continue to assemble the 787-8s and 787-9s in Everett, Washington and North Charleston, South Carolina.

“We looked at all our options and found the most efficient and effective solution is to build the 787-10 at Boeing South Carolina,” said Larry Loftis, vice president and general manager, 787 program, Boeing Commercial Airplanes.. ” This will allow us to balance 787 production across the North Charleston and Everett sites as we increase production rates. We’re happy with our growth and success in South Carolina, and the continued success at both sites give us confidence in our plan going forward.”

The 787-10 will be 18 feet longer than the 787-9. 10 of the 18 feet will increase the mid-body section of the aircraft. Boeing says that the midbody is too long for it to transport efficiently to Everett so the aircraft will be assembled in North Charleston.

However, Boeing sees final assembly in North Charleston this as an opportunity for the Everett facility to continue to improve productivity.

Boeing currently produces ten 787s a month with three production lines (two in Everett and one in South Carolina), but it plans to increase to 12 aircraft per month in 2016 and 14 per month by the end of the decade.

Currently, Boeing has received 132 orders from six airlines to for the 787-10 since it was launched at the Paris Air Show last year. The aircraft is expected to be delivered to its first customer in 2018.

Some are surprised that Boeing has selected North Charleston to exclusively build the 787-10. There have been many labor issues and other issues.

When the manufacturer announced that it would build a factory in South Carolina, it strained ties with its organized labor, but a deal was reached.

Currently, the employees in North Charleston are not unionized, but unions want them to organize.

Additionally, the facility has only assembled Dreamliners that were already in production in Washington, and they have had several issues when it comes to assembling.

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Contact the author at Jack.Harty@Airchive.com.

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Boeing Delivers 500th 777-300ER

By Jack Harty / Published July 29, 2014

emirates777-300ER 500

Photo courtesy of Randy Tinseth / BoeingBlogs.com

2014 has been a year of milestone deliveries for Boeing. It celebrated its 1,500th 747 delivery, its 8,000th 737, and 20th anniversary of the 777 first flight.

Today, Boeing celebrated another milestone–it delivered the 500th Boeing 777-300ER to Emirates.

The 777-300ER (“ER” for Extended Range) was designed to fly more efficiently and farther than the -300. It can fly approximately 34% further than the -300 with a full load of cargo and passengers.

The first 777-300ER was rolled out on November 21, 2002, and the first aircraft was delivered to Air France on April 29, 2004.

Since its first delivery, it has quickly become the best-selling 777 variant. In 2010 the -300ER surpassed the -200ER in orders in 2010, and it surpassed the number of -200ER deliveries in 2013.

Currently, more than 30 airlines operate 500 -300ERs around the world, and Boeing still has more than 200 orders to fill.

The milestone delivery comes almost two months and 20 years after the first Boeing 777 took to the skies.

RELATED: Boeing 777: 20th Anniversary of Flight

You can read Randy Tinseth’s, vice president, marketing for Boeing Commercial Airplanes in Seattle, thoughts on the significant delivery on his blog here.

 

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Contact the author at Jack.Harty@Airchive.com.

Cover photo courtesy of Randy Tinseth / BoeingBlogs.com.

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Airbus Terminates Skymark A380 Order

By Jack Harty / Published July 29, 2014

On April 8, 2014, Skymark Airlines’ first A380 successfully A380 MSN162 SKYMARK TRANSFER TO  STATION 30made its maiden flight, and the aircraft was scheduled to get painted and its cabin installed in Hamburg, Germany shortly after.

However, Airbus has terminated the $1.7 billion order.

Skymark has had some financial troubles during the last year due to a weaker yen and tough competition, and the carrier says it has been in talks with Airbus to cancel the order. The carrier says Airbus had requested that it become an affiliate with a larger airline as a condition for altering the contract and that they asked for a cancellation fee after the carrier rejected the request.

According to the Wall Street Journal, “Airbus terminated the contract when Skymark made it clear that it was not going to perform its contractual obligations,” an Airbus spokesperson said in an email.

“We cannot accept a demand that would shake management independence,” Skymark said in a statement.

Even though Skymark Airlines only ordered six aircraft, the order was big for Airbus as it struggled to sell its A380s in Japan.

Unfortunately, this is the latest blow in the Airbus A380 program. The manufacturer has not been able to attract new customers in the last two years, and just recently, Qatar Airways has rejected delivery of its first three A380s.

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Contact the author at Jack.Harty@Airchive.com.

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Delta TechOps: Behind The Seven Story Tall Hangar Doors

By Jack Harty and Chris Sloan / Published July 29, 2014

Delta TechOps is the largest airline maintenance, repair and dsc00720_32912overhaul (MRO) provider in North America. Everyday, more than 9,000 Technical Operations employees come together to maintain Delta’s fleet and more than 150 other aviation and airline customers worldwide.

The Delta Technical Operations Center (TOC) Jet Base was opened on June 21, 1960. At the time, Delta only had 79 aircraft in its fleet, and it had more than 1,600 employees technical operation employees.

As Delta’s fleet grew, the base continued to grow. In 1968, it grew to 16 acres, and in 1972, TechOps more than doubled its size to 36 acres.

1983 was a big year for TechOps which is opened up to offer its services to other airlines. Until this time, it worked exclusively on Delta’s mainline fleet.

TechOps is different than other airline maintenance programs. Most airlines see maintenance programs as a cost center because there is no revenue brought in. However, Delta has a different view.

Delta sees TechOps as a profit center since it provides its services to more than 150 airline customers worldwide, and TechOps plays an important role in Delta’s fleet strategy of purchasing used aircraft and flying them longer as it provides a better return on investment.

Richard Anderson, the CEO of Delta Air Lines, explains that “our fleet strategy is contrarian to what Boeing and Airbus want us to do. But now that you have been over to TechOps and you’ve seen this tremendous capability we have and the great technicians, you can understand perfectly that the key to running a really great airline is the capability of your technicians and engineers. For instance, the manufactures think you should have a spare engine compliment of about 13%. So if you had 100 engines hanging on airplanes, you should have 13 spare engines. We generally have five to six because we have the engine shop that turns engines really fast, and the technicians are quite skilled.”

In 2009, it generated approximately half a billion dollars in revenue, and the number continues to grow.

Although TechOps has many locations, its headquarters and largest maintenance base is located at Atlanta’s Hartsfield-Jackson International Airport.

Three large buildings help make up the nearly 2.7 million square foot ???????????????????????????????facility which is located under the “Fly Delta Jets” sign at ATL. They can do anything from painting a plane to installing WiFi to overhauling an aircraft.

During a two day event, we had the opportunity to go behind the scenes of the seven story tall hangar doors.

TOC-1

Our first stop is TOC-1. This building accommodates up to two wide-body aircraft and four narrow-body aircraft simultaneously, and it also houses TechOps’ five engine test cells.

Delta completes almost all of its engine work at its engine shop in Atlanta. More than 100 employees work in the shop, and many have spent many years working in this shop on the same engine type.

In the engine shop, they correct malfunctions 24/7, ???????????????????????????????fix fan blades, and complete overhauls which can cost up to $2.5 million an engine.

After mechanics overhaul an engine, the engines are required to be tested in one of the five engine test cells. The cells are gigantic enclosed cells that are two feet thick which helps decrease the sound.The largest cells are capable of testing engines up to 100,000 pounds of thrust.

Engines are tested rigorously at sea level ???????????????????????????????at an average temperature of 59 degrees for approximately 16 hours. Each month, the facility uses 85,000 gallons each month to run the engines. From a control room, the engine’s performance is monitored, and the data is sent back to the engine manufacturer. More than 650 engines and 350 APUs are tested each year.

TOC-2

TOC-2 is one of the world’s largest cantilevered buildings. ???????????????????????????????It accommodates six widebody aircraft and six or more smaller aircraft simultaneously.

Besides routine maintenance, the airline also completes heavy C checks which are basically when mechanics check every millimeter of the aircraft every few years. When we were visiting, N395DN, one of Delta’s Boeing 737-800s, was in for a C check which is an extensive check of individual systems and components for serviceability and function approximately every two years.

Right next to N395DN was one of Delta’s newest dsc00716_32914Boeing 737-900ER aircraft which was being prepped to enter into revenue service a few days later. When visiting, mechanic were installing gogo in-flight Wi-Fi. While it did have the new aircraft smell, it did not look new inside. The top ceiling panels had to be removed to install the wire that is needed for gogo Wi-Fi.

TOC-3

TOC-3 houses four floors which are used as warehouses and shops. dsc00661_32900Additionally, it accommodates three state-of-the-art paint hangar bays that can simultaneously accommodate two widebody aircraft and one narrowbody aircraft.

It takes 40 gallons of paint to repaint a narrowbody aircraft, and it usually takes five days to strip the existing paint away. For widebody aircraft, they need 80 gallons, and it usually takes six days to strip the existing paint away.

The TechOps employees put in thousands of man hours on every aircraft to ensure Delta’s aircraft are properly maintained and ready to fly. It’s a well choreographed ballet just like all of the other airline jobs, but it is hidden behind the seven story tall doors under the “Fly Delta Jets” sign.

PHOTOS: More photos from the ATL Delta TechOps Facility can be found here

RELATED: Inside Delta Air Lines

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Contact the author at Jack.Harty@airchive.com.

Disclosure: Delta Air Lines provided round trip airfare for two, meals, and accommodation for us to attend this event. Our story remains independent.

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United Introduces New Safety Video

By Jack Harty / Published July 28, 2014

This evening, United Airlines uploaded a new safety video on its YouTube channel, and it’s a departure (no pun intended) from the old.

The theme of the new video is “Safety is Global.” In the description of the video, United explains that “nothing is more important than the safety of our customers and employees, so we’ve incorporated creative elements to maintain the interest of even our most frequent flyers flight after flight. Underscoring the message that safety is global, the video showcases locations throughout United’s broad route network.”

The video starts off just like the old one with employees welcoming you on-board in different language. But, things quickly change as we find ourselves with a United pilot at a local Paris cafe. Then, we are whisked away on a journey around the world.

Watch out for a few funny moments. Since we don’t want to spoil it, sit back, relax, and enjoy the video.

Initial reactions about the new tone appear to be very positive. Though, some are wondering if there will be different themed ones like Delta.

RELATED: United’s “Fly The Friendly Skies” Iconic Ad Campaign Returns

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Contact the author at Jack.Harty@Airchive.com.

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New and Free IFE Options Coming to a Delta Flight Near You August 1

By Jack Harty / Published July 28, 2014

On August 1, new and free inflight entertainment options are coming to more than 1,000 Delta mainline and regional aircraft near you with the “Delta Studio.”

Welcome to “Delta Studio”

Delta’s customers will have access to movies, television shows, music, and games through seat-back entertainment systems or on demand video streaming onboard Delta’s Wi-Fi-equipped aircraft, regardless of what class they are seated in. However, the Delta Studio will only available on flights longer than one and a half hours.

In a press release, Delta calls its move “the most far-reaching effort by an airline to provide hit movies, popular television shows, music and video games for free.”

“Through the introduction of Delta Studio our customers have yet another reason to choose Delta and a different travel experience,” said Tim Mapes, senior vice president – Marketing. “Delta continues to be driven by customer feedback which has consistently placed the desire to be entertained at the top of the list of ways to improve our customers’ time in the air.”

New IFE Options on International Flights

Delta customers seated in BusinessElite, First Class and Economy Comfort will have free, unrestricted access to in-flight entertainment on all international flights worldwide. Customers traveling in economy on all international flights will also have access to free content. Delta completed installation of seat-back entertainment systems on its international fleet in 2013.

New IFE Options On Domestic Flights

Customers traveling on domestic flights in BusinessElite, First Class and Economy Comfort will have free access to all in-flight entertainment. Domestic economy customers will have access to free content which includes all of Delta’s live satellite TV channels, music selections and game options through seat-back entertainment systems as well as movie or TV selections such as ‘The Hunger Games: Catching Fire’ or ‘Frozen’ on seat-back systems in August as well as streaming content through in-flight Wi-Fi.

Want More Content?

Additional premium content will be available for purchase in economy including the latest movie titles such as ‘Need for Speed’ or ‘Rio 2,’ HBO and SHOWTIME programming as well as on-demand TV shows like ‘About a Boy’ or ‘The Middle.’ Delta’s full entertainment line-up for the month of August is available in Sky magazine.

How does it work if you don’t have seat-back entertainment options?

Delta explains that “customers traveling on any domestic Delta or Delta Connection aircraft equipped with Wi-Fi will be able to stream free movies and TV options directly to their mobile devices while in flight by using Gogo’s video player app. The Fly Delta app will include an integrated player for iOS devices. Customers who have downloaded the app before their flight can easily access streamed content from Delta aircraft for playback while in-flight.”

Delta’s Current IFE

Delta currently offers 18 channels of live satellite TV and up to 250 movies, hundreds of TV shows, 2,300 songs and a selection of games on aircraft with seat-back entertainment systems on select aircraft.

There are 140 domestic aircraft with seat-back entertainment systems installed, and the carrier will be adding seat-back entertainment to 56 Boeing 757-200, 43 Boeing 737-800s and 57 Airbus A319 aircraft through 2016. Additionally, more than 100 new Airbus and Boeing aircraft are already scheduled to be delivered with seat-back entertainment through 2018.

More than 900 domestic and international aircraft are equipped with in-flight Wi-Fi, and all of its Boeing 777, 767, 747, Airbus A330 and transoceanic Boeing 757 aircraft are scheduled to receive Wi-Fi by the end of 2015.

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You can contact the author at Jack.Harty@Airchive.com.

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Can Bombardier’s Q400 Save Regional Air Service in the US?

By Vinay Bhaskara / Published July 28, 2014

KSEA 6_9-17America’s regional airlines, which are contracted by mainline airlines to provide feeder services at mainline hubs and once operated an army of 50-seat Bombardier CRJ-200s and Embraer E145s, are today faced with an acute and worsening pilot shortage. The threat of a pilot shortage was in the back of the aviation industry’s collective consciousness, even before recent events conspired to speed up the onset of the shortage. Pilot graduation rates in the US have been dropping for some time due to ever-increasing costs, and with mandatory retirements for thousands of mainline pilots coming up shortly, the pilot shortage was almost assuredly going to hit within the next decade. Meanwhile, a glut of pilots in the mid-90s and early-2000s allowed regional carriers to negotiate sparse deals with little guarantee of job ascension to pilots, who often earn less than minimum wage on a pro-rated basis.

Pilot Shortage Speeds Up

But in recent months, thanks to the combined effect of the FAA’s new 1500-hour rule (shrinking the pool of available pilots with enough experience to qualify under new guidelines) and its FAR Part 117 crew rest rules (enacted in response to the Colgan Air crash in 2009, the timeline for the pilot shortage has begun to move up rapidly. Already the economics of 50-seat regional jets were dicey at best due to rising fuel and maintenance costs, and the now worsening pilot shortage only exacerbates that problem. Carriers such as Delta have already taken the proactive step of replacing routes served multiple times daily on 50-seaters with 70-seat jets operating at a lower frequency. Routes that cannot support the larger aircraft will lose service.

Small Cities Set to Lose Service

But with the ascension of pilot shortage, there is a real danger of the same process cascading upwards into the 70-seat RJ segment of the market (replacement by mainline – such as Delta’s 717s), and once again, plenty of incremental service on the margins will be lost due to the conversion process. All of these factors taken together imply that small airports and communities, places like Texarkana, Texas, Allentown, Pennsylvania, and Cheyenne, Wyoming, are set to lose a significant proportion of their traffic, and thus a key tie to an increasingly globalized business environment. Our analysis finds that the threat of the pilot shortage, combined with the pre-existing decline in the fortunes of small air travel markets, could see between 40 and 50 US airports wiped off the commercial airline route network in the United States, and between 350 and 450 air routes from these airports and others lost over the next five to seven years. But the solution to these problems might already exist – in the form of Bombardier’s Q400 turboprop.

The Q400: Superior Economics ,up to certain Distance

Q400-1Bombardier’s Q400 turboprop is an aircraft that seats between 70-84 passengers, depending on configuration. The Q400 has a maximum range of just under 1,000 nautical miles (1,150 statue miles) at a payload of 7,000 kg (15,400 lbs), and is capable of traveling at a speed of 360 knots (414 miles per hour). This speed, higher than the 200-250 knots that rival turboprops such as the ATR 72 typically fly at, allow the Q400 to compete effectively with regional jets up to about 400-450 nautical miles according to sources at Bombardier. Essentially, on a 350 nm route, our analysis finds that the Q400 has about a 65-72% advantage in terms of fuel burn per seat versus the E170/CRJ-700, and a 100-110% advantage versus a 50-seat regional jet. This, along with rising RJ maintenance costs, translates into roughly a 15-17% and 48-52% advantage in terms of operating cost per seat on the route. However, increasing the distance to 450 nautical miles causes that cost advantage to evaporate, as the slower speeds (RJs are about 80 knots faster than the Q400) lead to longer flight times, which in turn lead to higher capital and labor costs.

However, until that threshold, the Q400 presents a unique opportunity to replace RJ services at a lower cost. The trip costs up to about 350 nautical miles for the Q400s and present day RJs are similar, which means that the same revenue pool (let alone a market stimulated with lower fares) would allow 50-seat RJ routes to be replaced. Moreover, because the Q400’s fuel costs are lower, airlines could afford to pay higher pilot salaries, thereby offsetting some of the severity of the pilot shortage while preserving CASM at a reasonable rate. At present, we estimate that the Q400 would be an effective replacement aircraft of between 50-60% of the routes in questions, and help preserve service at more than 20 airports.

A Potential Q400X; RJ Speeds at Turboprop Costs

But the real opportunity on the Q400 lies in a re-engined, upgraded Q400X turboprop, which has been rumored for launch since 2011. The Q400X, whether stretched or kept at the same capacity, might operate at a speed of 420 knots or more, using a new turboprop engine from GE derived from GE’s CPX 38 helicopter engine. If Bombardier opted for a higher speed Q400, the cost equalization point would bend outwards to around 700-750 nautical miles. While our sources at Bombardier do caution that a higher speed Q400X would require significant aerodynamic re-design, such a product would allow the Q400 to do 90% of RJ routes worldwide, most of them with superior economics than present and next-generation RJs (thanks to improvements on the CPX-38 derivative). For Bombardier, whose Q400 is already lagging severely behind rival ATR’s cheaper ATR 72, such a development could make a lot of sense. And most of the small town RJ service could be preserved.

Questions about Passenger Uptake

KPHX 5_22_14-12Of course there are several potential problems with this scenario, not the least of which being that the Q400X does not exist. Moreover, US passengers are notoriously skeptical of turboprop aircraft, which could leave airlines hesitant to invest in the product. Mike Arcamone, President of Bombardier Commercial Aircraft, says the perception is changing: “I think a lot of operators are starting to realize its quiet; the turboprop is quiet […]  how smooth it is. So the fear of flying a turboprop, is reduced. So there are a lot of markets where the Q400 could absolutely replace… at the lower end…. jets.” It would certainly benefit small cities if he’s right, where the profit contribution that they could make to airline networks with better operating economics, the Q400 and subsequent developments might prove to be an essential tool.

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Contact the author at Vinay.Bhaskara@Airchive.com. Jeremy Dwyer-Lindgren contributed to this report. Photos by Jeremy Dwyer-Lindgren / Airchive

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TGIF: Thank-Goodness It’s Flyday Week-End Wrap Up: July 25th Edition

By Jeremy Dwyer-Lindgren / Published July 25, 2014

Thank-goodness it’s Flyday…err Friday, everyone! In this week’s edition Southwest employees receive bonus, the A350 starts its world tour, get off my plane, and more…

AMS Iran Air A300 Jeremy Dwyer-Lindgren / Airchive1979: Was the last time any US aerospace company sold, well, anything to Iran. Thirty-five years later that may finally change, as Boeing said on Thursday that it had entered talks with Iran Air to sell it parts and safety equipment.

The move comes as relations between the US and the Islamic Republic begin to warm after decades of frosty (and sometimes dangerously hot) relations, as Iran has agreed to scale back its nuclear activities in exchange for lifting of sanctions.

Those sanctions have been especially damaging to Iran Air, which has recently operated a handful of some of Boeing’s oldest products, including the 747-100 and 747SP. As the aircraft have aged the sanctions, which prevent business ties between the two nations, have frequently prevented the airline from obtaining spare parts and up-to-date safety equipment.

Of course a deal could also position Boeing nicely for a possible sale of new airplanes down the road. Iran Air also operates a fleet of aging Airbus airplanes as well, including the A300. It is estimated that the airline would need around five-dozen new airplanes to replace the existing fleet.

Bonus: Southwest is giving each employee a crisp $200 check as a thanks for helping the company achieve its highest quarterly profit ever. Hard to knock such a move, but it’s worth keeping in mind that Southwest is in labor talks with airside ramp workers (both above and below the wing). A little grease doesn’t hurt…usually.

World tour: Airbus says the A350-900 has begun its final push for certification as it travels around the globe on various route proving tests. The airplane, MSN5, will conduct three weeks of trials, flying to destinations including Frankfurt, Iqualuit, Santiago, and Perth. Check out the map below for each trip, and sorry, US, no visit for you. The airplane remains on track for a first delivery late in 2014, says the company.
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Fear & Air Safety: The recent string of air crashes has prompted concerns about air safety, so it’s worth revisiting the topic briefly, especially while articles plugged with “Are the skies less safe?” roam the interwebz with impunity. First, yes; three major crashes in only seven days is certainly unusual, and give us understandable reason to pause. And no doubt each prompts questions that need to be answered. But the fact remains that the tragic incidents are merely coincidental, and that air travel remains the safest mode of transportation by an exceptionally healthy margin.

That isn’t likely any consolation to nervous fliers (of which I counted myself one for two decades), but let’s reject the notion that somehow aviation is less safe now than it was before this week, or before this year. I’d still get on virtually any flight going virtually anywhere on any airplane on just about any carrier without thinking twice. Heck, even carriers and airplanes with less than spectacular safety records are still safer than your drive to the airport.

SWA Day in life 2-29#GetOffMyPlane: A Minnesota family was asked to take their leave from a Southwest flight on Sunday thanks to the father’s tweet. The issue was apparently traced back to a gate agent that refused to let the man’s two young kids piggy-back on his preferred boarding status. The man took to Twitter to vent his frustration, calling the gate agent, by name, rude and otherwise expressing his displeasure. The gate agent claimed she felt threatened, and the man said he and his family were removed from the airplane. They were put on a later flight, and the airline reportedly apologized via email.

Winners: Frequent Business Traveler put out its annual GlobeRunner awards this week. Among some of the notable winners, LOT Polish took best European/Middle East/African airline, Singapore for best in Asia/Pacific, while Delta/United tied for best in the US. The winners were determined via reader vote. Check out the whole list on the site, and let us know if you agree.

In case you missed it, Airchive had a lot of great coverage right here. This week’s stories:

Farnborough 2014 Takeaways and Order Tally

Hawaiian Air Cancels A350-800, Converts to A330-800neo; Analysis

Carriers Avoid Tel Aviv Airport After Reports of Rocket Activity

Malaysia Airlines Flight 17 Shot Down Over Ukraine

Hawaiian Holdings Posts Second Quarter Results

ANALYSIS: Delta Posts Second Quarter Profit of $801 million

Developing: TransAsia Flight 222 Crashes

Air Algerie flight 5017 Crashes in Mali, 110 Feared Dead

ANALYSIS: Allegiant Posts 46th Consecutive Quarterly Profit

ANA To Receive Its First 787-9 Next Week

ANALYSIS: United Reverses Q1 Loss, Posts Big Second Quarter Profit

ANALYSIS: American Airlines Posts Record Profit in Second Quarter

ANALYSIS: Southwest Reports Big Second Quarter Profit

TGIF: Thank-Goodness It’s Flyday Week-End Wrap Up: July 25th Edition

 

 

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ANALYSIS: American Airlines Posts Record Profit in Second Quarter

By Vinay Bhaskara / Published July 24, 2014

YVR 7_10_14-8American Airlines Group reported its highest quarterly profit ever on Thursday, announcing a net profit of $864 million, or $1.17 per diluted share. Excluding special items, the Dallas-based airline reported a net profit of $1.5 billion as it continue its astoundingly quick post-bankruptcy recovery after consummating a merger in December of 2013.

Disclosure, the author owns AAL equities

Total operating revenues leapt 10.2% year-over-year (YOY) to $11.35 billion, Strong mainline revenue performance drove much of the improvement, rising 10.3% YOY to $8.21 billion. Regional revenue rose as well, climbing 4.1% to $1.70 billion, while cargo revenue rose 8.3% YOY to $221 million. Both of these figures belied the trend amongst American’s peers, as both United and Delta saw regional and cargo revenue decline. Despite the economic recovery in the United States, the air freight market remains exceedingly soft. Other operating revenue, which includes things like revenue from credit card agreements to sell frequent flyer miles, grew 20.5% YOY to $1.21 billion. Overall, a 6.5% increase in yields to 17.34 cents drove a 5.9% YOY increase in passenger revenue per available-seat-mile (PRASM) to 14.57 cents.

Broken down by geographic region, domestic PRASM was up 9.9% to 14.13 cents, while Latin American PRASM declined 2.5% to 12.75 cents. The second quarter represents a trough period for Latin America, so that figure is not too concerning to us. And Trans-Atlantic operations performed well, with PRASM up 2.7% to 12.39 cents. Pacific operations, which AA has struggled with, recorded PRASM growth of 9% to 10.81 cents.

The Pacific is an interesting growth avenue for American, who recorded strong PRASM performance from an extremely low base. Conversely, Latin America continues to be a drag on the overall revenue operation, mostly due to the situation in Venezuela. While each of the three largest US carriers has some exposure to Venezuela, American has the largest Venezuelan network by far, so it has commensurately suffered the greatest losses as a result. On the airline’s quarterly earnings call, American executives shared a telling statistic. American operated one flight per day between Caracas and San Juan and six flights per day between Miami and San Juan, yet 30% of revenue on Miami – San Juan came from passengers connecting from Caracas despite multiple daily nonstop flights between Miami and Caracas. In terms of overarching financial impact, American expects to take a one percentage point PRASM hit in the third quarter and a two percentage point PRASM hit in the fourth quarter. In the trans-Atlantic theater, American has reduced its capacity growth plans for the second half of the year by three percentage points to 2%, reflecting the fact that pre-merger US Airways’ trans-Atlantic network (particularly out of Charlotte) is likely uneconomical at the new American’s cost levels.

RELATED: American Airlines Reports $480 Million Q1 2014 Profit: Analysis

Operating expenses grew 7.0% YOY to $9.95 billion. Labor costs ballooned 10.2% to $2.16 billion on 3.1% capacity growth as measured by available seat miles (ASMs). Aircraft fuel costs rose 2.8% YOY to $2.83 billion, reflecting a 1.3% uptick in consumption on a 1.5% increase in per-gallon prices to $3.03, but a reduction YOY on a per-ASM basis. Aircraft renting costs fell 6.7% to $312 million, but the decrease was offset by a 13.8 YOY increase in depreciation and amortization cost, due to changes in the composition of American’s fleet. Every other expense-line item decreased YOY on a per-ASM basis, and consolidated costs per ASM (CASM) rose 3.7% to 14.62 cents, while CASM excluding fuel and special items rose 2.5% to 9.31 cents.

American AirlinesFor the quarter, American generated nearly 1.5 billion of operating cash flow, and recorded an operating profit of $1.4 billion, good for an operating margin of 12.3%, slightly worse than that of rival Delta Air Lines, but stronger than that of United. In terms of capital deployment, American spent $630 million in the first half of the year on purchasing aircraft off of lease, and plans on utilizing an additional $370 million of cash thru 2014 on the same model. Pre-merger US Airways’ fleet philosophy erred strongly on the side of owned aircraft, and the new American appears to have abandoned Tom Horton’s final gambit of winning extremely cost effective operating leases from Airbus and Boeing while attempting to conserve capital before exiting Chapter 11 bankruptcy. Since the merger, American has prepaid nearly $420 million in aircraft debt and it plans to prepay an additional $480 million in revenue bond obligations. American’s share repurchase plans include an authorization from the board to buy back $1 billion worth of shares by December 31, 2015. And in a pair of moves that reflect the unprecedented state of the US airline industry’s finances, American plans to contribute $600 million to its pension plans in 2014 (above the $120 million base requirement), and pay out a cash dividend of 10 cents per share (American’s first cash dividend since 1980!)

Unlike United and Delta, who have had time to accrue synergies from their merger and the reduction of 50-seat regional jets in the fleet, American’s strong financial performance belies the fact that it likely has several hundred million, if not more than a billion dollars worth of synergy improvement forthcoming. Specifically on the topic of synergies, initiatives such as putting more seats in aircraft, re-banking the American hubs, and changing pre-merger US Airways’ revenue model to become more aggressive are expected to begin boosting revenue as early as the fourth quarter.

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Contact the author at Vinay.Bhaskara@Airchive.com
Jeremy Dwyer-Lindgren contributed to this report.
Photos JDL Multimedia LLC

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ANALYSIS: United Reverses Q1 Loss, Posts Big Second Quarter Profit

By Vinay Bhaskara / Published July 24,2014

KSEA 6_16-3United Airlines reported a second quarter net profit of $919 million excluding special items, or $2.34 per diluted share, up 51% year-over-year (YOY) from the same period in 2013. The beleaguered carrier also announced a $1.0 billion share repurchase program spread over the next three years, following in the footsteps of rivals Delta and American.

Total operating revenues grew 3.3% YOY to $10.33 billion, led by 3.6% growth in passenger revenues. Broken down by segment, mainline passenger revenue grew 4.7% YOY to $7.15 billion while regional passenger revenue declined 0.3% YOY to $1.83 billion. Cargo revenue decreased 1.7% YOY to $232 million, while other operating revenue, which includes things like credit card revenue from the sale of frequent flyer miles, rose 1.7% YOY to $1.12 billion despite a series of well publicized changes to United’s MileagePlus frequent flyer program that received significant negative press. Consolidated passenger revenue per available seat mile (PRASM) rose 3.7% YOY to 14.21 cents on a 0.1% decline in capacity as measured in available seat miles (ASMs) and a 3.0% increase in yields to 16.66 cents.

According to Chief Revenue Officer Jim Compton, United’s PRASM growth arose in part due to an optimized booking curve, which reduced early-cycle bookings in favor of last minute ones. During the second quarter, this drove 0.75 percentage points worth of PRASM growth, and is expected to deliver 1 percentage point of PRASM growth in the third quarter. United also accrued the benefits of restructuring premium cabin fares on domestic and short haul Latin American routes. The changes increased United’s paid premium load factor by 5 percentage points to 47%, driving 0.5 percentage points worth of PRASM.

On a related note, United’s revenues from paid upgrades to First Class rose 28% YOY. After several quarters of struggling with corporate customers due to its reliability challenges, revenue for large corporate accounts rose 3% YOY, despite a decrease in corporate revenue in April due to the shift of the Easter holiday.

RELATED: United Loses $489 Million in Q1 2014: Analysis

Broken down by geography, domestic mainline revenue jumped 6.3% to $3.52 billion on a 6.8% increase in yields and a whopping 7.8% increase in PRASM. Trans-Atlantic operations, a particular strength of United’s thanks to its integrated hub at Newark, recovered with 2.8% YOY growth in passenger revenue to $1.71 billion and a 2.5% increase in PRASM. Pacific operating revenues declined slightly YOY to $1.19 billion with PRASM falling 2.6% YOY despite new routes and a stabilization of currency values in the region. Latin American revenues leapt 10.3% YOY to $731 million, with PRASM growing 4.4% YOY.

KPDX UA RJs Courtesy JDL Multimedia LLCUnited continues to make progress in pivoting away from the dependence on 50-seat regional jets (RJs) that has been tied to many of its challenges in reliability and revenue generation. On the earnings call, United CFO John Rainey admitted that 50-seat RJs impacted revenues, noting that “When a 50-seat jet is placed side by side with a mainline jet, it’s an inferior product. And customers book away from that.” Today 8% of United’s capacity is represented by 50-seat RJs, but that will decrease to 5% by the end of 2015 thanks to the retirement of 130 50-seat RJ and RJ-equivalents (turboprops) replaced by 70 Embraer E175s (which seat 76 passengers and include a more competitive first class cabin). In terms of seat count, the retirements amount to the replacement of 6,800 seats worth of aircraft with 5,320 seats worth of aircraft, a 21.7% reduction.

We expect major frequency cuts and a few regional route eliminations from United over the next year and a half. And as Mr. Compton noted on the call, the E175s offer the kind of ancillary revenue generation opportunity (with First Class up-sells and Economy Plus) that have helped drive United’s revenue improvements.

Operating expenses rose 2.1% YOY to $9.42 billion, led primarily by an 11.8% increase in landing fees and facilities rental expense to $567 million and a 2.9% YOY increase in other operating expenses to $1.35 billion. Fuel expenses increased 1.1% YOY to $3.1 billion on 1.2% decrease in fuel consumption and a 2.3% increase in average fuel price per gallon. Labor expenses rose just 0.6% to $2.19 billion, though labor expenses will likely rise once United’s newly signed labor contracts matriculate during the second quarter. All other expense-line items declined year over year. Consolidated operating cost per ASM (CASM) rose 0.9% YOY excluding special charges to 14.64 cents, while excluding fuel, CASM was flat YOY to 9.39 cents. Mr. Rainey credited United’s Project Quality initiative, which by year-end is expected to deliver $300 million in non-fuel savings and $200 million in fuel ones.

United ended the second quarter with $6.8 billion in unrestricted liquidity, and is making steady progress towards a target of $10 billion in net debt. United repaid $333 million in debt during the quarter, and plans to pay down an additional $575 million over the remainder of the year. United also has $800 million in 6.75% secured notes that it plans to pre-pay at par in September. All of these initiatives are focused on reducing United’s non-aircraft debt. Mr. Rainey noted on the earnings call that United’s various debt initiatives have reduced United’s 2014 interest expenses by 30% versus 2010. However, unlike rival Delta, United plans to “… finance aircraft with debt. The efficiency in that [the aircraft debt] market is outstanding.”

RELATED: United Airlines Reports Strong Fourth Quarter and Full Year 2013 Net Profits

Simultaneously, United’s executives hinted at a subtle shift in strategy during the earnings call towards Delta’s strategy for capital allocation. United mentioned several times on the call that it is considering used narrowbody purchases (after spending several quarters touting the millions of dollars in savings offered by a new 737-900ER over an existing 757-200), though market conditions (specifically the high residual prices for Boeing 737-800s) were noted as a potential limiting factor. United is also following in Delta’s footsteps by investing to increase the useful life of its (relatively) young widebody fleet. These initiatives are aimed at raising United’s free cash flow, an important metric for investors.

Delta is often the financial benchmark against which United and American are compared, and by that standard, United is still a laggard, with free cash flow of $650 million in the second quarter; less than half of Delta’s $1.54 billion figure for the same metric. Trailing 12-month return on invested capital totaled 10.3%, strong, but still behind Delta. And at 8.8%, United’s operating margin for the quarter lagged sharply behind those of Delta and American.

Despite not yet approaching the industry’s gold standard in financial performance, United has begun to take steps towards returning capital to shareholders, with $200 million in repurchases occurring over the next three months. United also pre-empted an increase of 1.5 million shares in its total pool by paying of $62 million in convertible notes. And the carrier is actively evaluating a dividend.

United’s strong financial performance implies that the breathless reports of United’s impending demise that emerged after weaker than expected first quarter results have been rather exaggerated. We cautioned readers at the time not to read too deeply into United’s first quarter performance given its network composition, and this quarter validated that mindset. Admittedly, United still lags behind Delta and American given where it is on the post-merger timeline and the intrinsic strength of its network. But after being battered by the press for the past three months, United’s financial results may have won the airline a temporary respite.

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Contact the author at vinay.bhaskara@airchive.com

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ANA Receives Its First 787-9

By Jack Harty / Published July 29, 2014

KBFI-4_9_14-7ANA has received its first Boeing 787-9 Dreamliner.

The airline will begin flying the jet on domestic flights next month, and it will be deployed on international routes in April 2015.

Before paying passengers will fly on the 787-9, ANA will be operating a special commemorative flight “Dreamliner” with American and Japanese elementary school children in Japan on-board. The aircraft will fly over Mount Fuji, after departing from Haneda. Additionally, the TOMODACHI logo will be displayed on the aircraft to support the initiative to strengthen Japanese-US ties.

“The 787 Dreamliner is a key element in our growth strategy and we are proud to be the first airline to fly both models of the 787 family,” said Osamu Shinobe, ANA president and CEO. “The new 787-9 will build on the exceptional efficiency of the 787-8 and will allow us to meet growing demand that is anticipated ahead of the 2020 Tokyo Summer Olympics. Our customers have expressed their pleasure with the comfort of the 787′s innovative cabin features and we are excited to introduce the new 787 variant into our fleet.”

“This milestone delivery adds yet another chapter in our long and successful relationship with ANA,” said John Wojick, senior vice president of Global Sales and Marketing, Boeing Commercial Airplanes. “ANA continues to demonstrate the market-leading efficiency and comfort of the 787 family.”

The first 787-9 will arrive with domestic route specifications with 395 seats; 60 more than the 787-8.

Currently, ANA has 28 787s in its fleet, and in a press release last week, the carrier said that “The fuel savings achieved from the 787 aircraft already in service are sufficient to operate 500 round trips from Tokyo to Frankfurt and are reducing CO2 emissions by 150,000 tons a year. When all 80 Dreamliners are in operation, the CO2 reduction will be 450,000 tons, with enough fuel saved to operate 1,400 round trips to Frankfurt.”

Two weeks ago, Air New Zealand became the world’s first airline to take delivery of the new 787-9.

United will take delivery of its first 787-9 next month, and the carrier plans to begin flying it in September. Virgin Atlantic will fly its first 787-9 flight at the end of the October, and Etihad will fly its first 787-9 flight in December.

RELATED:

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Contact the author at Jack.Harty@airchive.com.
Photos by Jeremy Dwyer-Lindgren / Airchive

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ANALYSIS: Allegiant Posts 46th Consecutive Quarterly Profit

By Vinay Bhaskara / Published July 24, 2014

Allegiant AirlinesAllegiant Travel Company, the parent company of Allegiant Air, announced a $33.49 million second quarter profit on Wednesday, or $1.87 per diluted share. The figure represents a 29.9% year-over-year increase year-over-year (YOY) versus the same period of 2013, and marks Allegiant’s 46th consecutive quarter of profitability.

Operating revenues for the Las Vegas based carrier rose 13.6% YOY to $290.54 million. Scheduled passenger revenues grew 14.4% to $189 million as yields rose 6.5% to 9.45 cents, and passenger revenue per available seat mile (PRASM) rose 6.4% to 8.45 cents. Load factors and average per-passenger remained stable, reflecting a 7.5% YOY growth in capacity as measured in available seat miles (ASMs), and a 12.4% increase in traffic to 2.11 million passengers.

Ancillary revenues, which are critical to Allegiant’s a-la-carte business model, grew 9.8% YOY to $95.44 million. Air-related ancillary revenues, which include items ranging from bag fees to on-board food purchases, rose 12.1% to $85.78 million. Conversely, third party product revenue declined 6.9% to $9.66 million, or $4.58 per person. The increase translates to roughly $45.23 in fees and third party revenue per passenger, down 2.2% YOY. However, Allegiant’s average stage length is down about 3.0%, which means that on a per-ASM basis (PRASM contribution), average ancillary and third party revenue rose slightly.

We’ve been warning on Allegiant’s third party revenue figures for some time, and this quarter’s figures did nothing to dispel that worry. In nominal terms, these revenue figures represent just about 3% of Allegiant’s top-line numbers, but third party services are a critical portion of Allegiant’s overall value proposition. Many of Allegiant’s sales are driven by package customers (perhaps up to 10%) and a decline in third party sales thanks to less hotel room discounting (hotel room nights purchased decreased 19.8%) could close off a market that had been a strong growth driver for Allegiant over the past couple of years. On the airline’s quarterly earnings call, President Andrew Levy admitted that the third party revenue figures were a challenge.

RELATED: Allegiant Posts First Quarter 2014 Profit – Analysis

“[We] see the primary reasons for the decline particularly in the Last Vegas hotel market, which is the still the dominant portion of the hotel revenue. So I think you have the combination of declines here associated with just a less favorable contract than what we entered in to back in the really bad times when the hotels were had a little less leverage…. And in addition to that, [there is the] continued shifting of the network, so that a greater percentage of our capacity is away from Las Vegas, which is helpful on the car side. [T]here [are] no new updates as far as how we plan to reverse the trend obviously, the lasting effect of this will certainly help as far as the year-over-year comps. But more important are some of the IT tools that are coming; some of which we have at our disposal now.”

Operating expenses for the airline grew 9.9% YOY in the second quarter to $234 million. Labor expenses rose fastest, reflecting Allegiant’s aging workforce, with a 19.3% rise to $47.30 million. Fuel costs rose 7.6% to $104 million, reflecting both a 5.1% increase in consumption, as well as a 2.6% increase in per-gallon price to $3.20, though overall fuel costs were essentially flat on a per-ASM basis. While Delta continues to see reductions in fuel price, the benefit to the rest of the industry from Trainer has begun to recede. Operating cost per ASM (CASM) grew 2.5% YOY to 10.23 cents, though it rose a more alarming 4.2% excluding fuel.

RELATED: Allegiant Posts First Quarter 2014 Profit – Analysis

For the trailing 12-month period, Allegiant delivered a 17.5% return on capital employed, though that figure is sure to decline as Allegiant continues to refleet with A319s (including a recent purchase of 12 airframes) and A320s. Capital expenditures for the quarter totaled $257.0 million, nearly three times as much as they did during the same period in 2013.

Allegiant ended the quarter with $548.2 million in unrestricted cash versus $619.4 million in total debt, positioning Allegiant with a net debt of $71.2 million after it ended 2013 with no net debt. The rise in debt primarily occurred due to the uptake of 12 A319s from a European operator, which added $142 million in debt to the balance sheet. For the quarter, Allegiant recorded an operating profit of $56.4 million and an operating margin of 19.4%, up from 16.8% in the second quarter of 2013. Allegiant, along with fellow ULCC Spirit Airlines, continues to lead the US airline industry in terms of operating margin, though Delta (and potentially American) are quickly catching up.

Allegiant Air finds itself in an interesting position strategically. Years of consolidation and fare increases by legacy and network carriers have created a massive growth opportunity for ULCCs in the United States. Passengers around the country are starved for low fares, and pent up, organic demand at the fare levels Allegiant provides is perhaps upwards of 40 million passengers per year (extrapolating from previous years with similar economic conditions). But what aircraft can Allegiant use to fly these passengers?

The McDonnell Douglas MD-80s that form the backbone of Allegiant’s fleet are rapidly approaching the end of their life, not so much due to a lack of virtue on the part of the airframe but rather due to the heightening scarcity of parts. Allegiant’s current fleet plan calls for 53 MD-80s, 6 757s, 10 A319s, and 10 A320s in its fleet by the end of 2016, though a recent transaction could push the number of A319s up to 22. Even with those aircraft, Allegiant is only pushing a 32% increase in fleet size, much smaller than the near-doubling that Spirit and Frontier are likely to pursue over the same period. But as mentioned before, the MD-80 fleet is on its last legs and A319/A320 secondhand demand around the world is still robust (driving up acquisition costs). The 757 could be an interesting add in limited markets, but it’s nearly as old as the MD-80 (admittedly with more cannibalization potential) and likely too big for most of Allegiant’s markets.

That places Allegiant is in the awkward position of having to replace at least 50% of its present-day fleet while simultaneously growing overall fleet count by upwards of 50%. Surveying the state of the secondhand aircraft market today, that doesn’t seem possible without so much capital expenditure that investors become extremely antsy. And if refleeting is as hard as projected, it won’t necessarily affect Allegiants profitability figures, but it will represent a massive opportunity lost.

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Contact the author at Vinay.Bhaskara@Airchive.com
Jeremy Dwyer-Lindgren contributed to this report.

Photo credits, from top: JDL Multimedia; Chris Sloan / Airchive

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Air Algerie flight 5017 Likely Crashed, 110 Feared Dead

By Airchive Staff / Published July 24, 2014
Last Updated: July 24, 2014 at 1952ET

Air Algerie-1Air Algerie flight 5017 crashed on Thursday in Mali near the city of Gao, according to Malian state TV. Officials had lost contact with the jet, an MD-83, fifty minutes after it departed Ouagadougou, Burkina Faso bound for Algier’s Houari Boumediene Airport.

The flight carried 110 passengers, two pilots, and four cabin crew members. According to reports, 51 French, 27 Burkina Faso nationals, eight Lebanese, six Algerians, five Canadians, four Germans, two Luxemburg nationals, one Swiss, one Belgium, one Egyptian, one Ukrainian, one Nigerian, one Cameroonian and one Malian were on-board the flight.

The airplane was one of two MD-83 aircraft that Air Algerie has in its fleet, both are currently on lease from Spanish charter-carrier Swiftair.

Radar at the time showed stormy activity in the vicinity, though nothing has been confirmed. The region has also seen extensive fighting between French/Malian forces and local insurgents. The US has banned carriers from over-flying the African nation due to the threat of RPGs, rockets, and other dangers. It was not known if there was any connection between such activity and the crash.

Initial reports differed on whether wreckage had been found, and where.

July 24, 2014 0905: Reuters is reporting that an Algerian aviation officials has said the aircraft has crashed, and there have been other reports saying the aircraft crashed in Mali.

July 24, 2014 0900: Swiftair said: “We have lost contact with the plane. At this moment, emergency services and our staff are working on finding out more on this situation.”

On Twitter, Air Algerie said: “Unfortunately, for the moment we have no more information than you do. We will give you the latest news live.”

There have been unconfirmed reports that there have been up to 50 French nationals on-board the flight, and France is actively seeking information.

“We are entirely mobilized in Paris as well as in Algiers and Ouagadougou where our embassies are in constant contact with local authorities and the airline,” the Foreign Ministry said in a statement.

PlaneFinder Tweeted a map that shows large storm clouds over Burkina Faso. Reuters is reporting, citing a diplomat in West Africa, that there may have been a large storm in the area about the same time the plane disappeared.

Stay tuned…

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Jack Harty and Jeremy Dwyer-Lindgren contributed to this story.
Cover Image by Gerry Stegmeier via Wiki Commons
Story photo by Jeremy Dwyer-Lindgren / Airchive

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ANALYSIS: Delta Posts Second Quarter Profit of $801 million

By Vinay Bhaskara  / Published July 23, 2014

Delta 767 SEA JDL-1Delta Air Lines reported a second quarter profit of $801 million, or $0.94 cents per diluted share, up 16.9% year-over-year (YOY) from $685 million in the second quarter of 2013. The superb financial performance was driven by strong mainline growth in the domestic and Trans-Atlantic operating regions, as well as reduced fuel costs thanks to the substitution of more fuel efficient mainline Boeing 717s for regional jets (fuel efficiency per available seat mile [ASM] increased 1.2%) and lower fuel prices.

Operating revenues leapt up 9.4% YOY to $10.62 billion, led by consolidated passenger revenues, which rose 9.1% YOY to $9.2 billion on a 3.8% YOY increase in yields to 17.37 cents. The improvements in yields helped drive a 5.4% YOY increase in passenger revenue per available seat-mile (PRASM), once again positioning Delta amongst industry leaders in PRASM growth after two to three quarters of (relative pullback). Delta delivered the impressive figures despite a 3.2% YOY increase in ASMS, though traffic as measured in revenue passenger miles (RPMs) increased 5.0% YOY.

The 3.2% increase in capacity represents an interesting up-shift in capacity growth on the part of Delta after years of impassioned rhetoric on the virtues of aggressive capacity discipline. Part of the increase certainly arises from fleet effects. As Chief Financial Officer Paul Jacobson noted on the carrier’s quarterly earnings call, Delta’s domestic capacity grew 3% despite 4% fewer departures, largely because of Delta’s introduction of the 717. However, because the capacity increase occurs due to up-gauges, the operating cost per seat is better and trip costs (based on a reduction in frequencies) are similar, which means that the capacity increases are margin-expansive.

Delta 767 CDG-SEA-2Broken down by segment, mainline domestic passenger revenues rose 15.7% YOY to $4.49 billion on a 10.2% increase in unit revenues and a 7.4% YOY increase in yields. Latin America revenues jumped 22.6% to $604 million on a massive YOY capacity expansion of 23.5%. The capacity growth did put pressure on fares, driving a minor 0.7% reduction in unit revenues on a 0.4% drop in yields. Trans-Atlantic flying recovered after several quarters of revenue and unit revenue declining, with revenue rising 5.5% YOY to $1.66 billion on a corresponding 7.2% increase in unit revenue and a 5.6% rise in yields. Pacific flying continues to struggle thanks to increases in competitive capacity and the general slowdown of economies in the region, with revenues falling 2.6% YOY to $819 million on a 3.2% reduction in unit revenues and a 1.9% drop in yields. Regional domestic revenues fell 0.8% to $1.68 billion, though yields still edged up 0.2% over 2013. Cargo revenues fell 1% YOY to $230 million.

After several quarters of successive devaluation, the value of the Japanese yen has stabilized after several quarters thanks to a shift in focus to fiscal matters in the economic plan of Japanese premier Shinzo Abe. Delta is the US carrier most exposed to fluctuations in the yen on an absolute basis thanks to its hub at Tokyo Narita, and despite the stabilization, net of hedges, the currency effect still cost Delta $10 million.

Asian operations as a whole are likely to struggle financially thanks to the steady spool up of operations in Seattle. However, despite a 30% increase in capacity, international unit revenues ticked upwards by 2% and domestic unit revenues grew 6% YOY on a 25% increase in capacity. As with any YOY comparisons, the basis of comparison is important, and for the moment, Seattle (by Delta standards) remains a low-revenue hub. Conversely, high fare hubs at New York and Atlanta continued to drive profitability, with double digit unit revenue increases in both markets, buoyed particularly by trans-continental operations in New York.

Delta’s equity investments, a small-scale facsimile of Etihad’s famed “equity alliance,” also paid dividends with Heathrow revenue rising 24% and unit revenues growing 5% thanks to the partnership with Virgin Atlantic. In Latin America, partnerships with Gol and Aeromexico deliver feed equivalent to one fourth of Delta’s traffic on routes to Brazil and Mexico respectively, and helped drive $36 million in incremental revenues in the quarter. Venezuela offsets some of the improvement in Latin America, with $190 million in trapped revenues and a RASM hit of 3-4 percentage points in coming quarters.

 Image Credit: Lonnie Craven / Miami-Dade Aviation Department


Image Credit: Lonnie Craven / Miami-Dade Aviation Department

Operating expenses rose just 2.8% in the second quarter to $9.04 billion. Rising labor costs (up 6% YOY to $2.04 billion) were offset by a 6.2% decrease in fuel costs to $2.43 billion (down from$2.59 billion in Q2 2013), which reflected a 3% drop in fuel prices per gallon to $2.93. Overall cost-line performance was mixed; maintenance and landing fee expenses declined while depreciation and sales expenses increased. Profit sharing expenses skyrocketed 188.1% YOY to $340 million. Consequently, consolidated operating costs per ASM (CASM) fell less than 0.1% YOY to 14.63 cents, while CASM excluding fuel remained flat YOY.

After several quarters of operational losses (even as it remained margin positive thanks to the reduction in crack spread), Delta’s controversial Trainer refinery recorded an operating profit of $13 million and is projected to break-even in the third quarter. And Delta CEO Richard Anderson noted on the earnings call that Delta continues to make incremental improvements on an operating basis with changes in oil supply.

“The important thing for our strategy is to continue to lower the overall input costs for the plant through domestic crudes,” stated Mr. Anderson, “[Thus]… we can help to create that cushion in a low distillate crack environment where we can make a little bit money at the refinery while also enjoying the full benefits lower crack spreads at the airline.”

Third quarter operating margin came in at a sizzling 14.9% on a near doubling of operating profit to $1.58 billion. And third quarter operating margin (leveraging Delta’s strength in the Atlantic) is expected to jump even higher to 15-17%. Free cash flow came in at $1.54 billion, cementing Delta’s market leadership in the metric thanks to a conservative capital allocation strategy and a deferred tax asset.

Once again, Delta has delivered market-leading financial results. Moreover, Delta is in a unique position that allows it to maintain that level of financial performance. Its hubs in New York, Los Angeles, and Seattle are all in a nascent developmental stage, which means that a clear pathway to PRASM and profit growth exists.

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Contact the author at Vinay.Bhaskara@Airchive.com
Jeremy Dwyer-Lindgren contributed to this report.

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Hawaiian Holdings Posts Second Quarter Results

By Vinay Bhaskara & Jeremy Dwyer-Lindgren / Published July 23, 2014

Photo courtesy jplphoto

Photo courtesy jplphoto

Hawaiian Holdings, parent company to Hawaiian Airlines, announced a second quarter net profit of $27.37 million, or $0.43 cents per diluted share on Tuesday. The results represent a 58% year-over-year (YOY) increase from Q2 2013’s $11.31 million dollar profit.

Operating revenues grew 7.8% over 2013 to $575 million. Passenger revenues rose 5.3% YOY to $506.8 million on a 5.7% YOY climb in yield to 14.94 cents; which drove a 4.1% YOY rise in passenger revenues per air seat mile (PRASM) to 11.90 cents. The remainder came from other operating revenues, which jumped 31.4% YOY to $68.92 million. Cargo revenues played a major role in the growth of non-passenger revenues, growing 24% YOY to $19 million.

Capacity as measured in available seat miles (ASMs) increased just 1.2% YOY, due to route cancellations across the Pacific and the back-loading of a domestic expansion into June. ASM growth for the second quarter will likely be a percentage point or two higher, but the broader trend remains.

Broken down by region, PRASM for routes to the mainland United States rose 4% YOY with said routes generating 50% of Hawaiian’s passenger revenue in the quarter (roughly $252 million) despite a four percentage point decrease in load factor. Hawaiian expects industry capacity in the third and fourth quarter to grow by 9%, and that adverse tailwind will likely affect PRASM figures downwards in the second half of the year. PRASM on inter-island routes, which Hawaiian predictably refers to as “Neighbor Island routes,” grew 8.3% YOY, though this figure was skewed upwards by the Ohana turboprop operation. Inter-island operations represented 24% of Hawaiian’s passenger revenue ($122 million), with international operations making up the remaining 26% ($132 million).

RELATED: Hawaiian Posts First Quarter 2014 Loss

International operations continued to weigh down Hawaiian’s revenue numbers, with PRASM falling 1.6% YOY. However, as Hawaiian CEO Mark Dunkerley noted in the carrier’s quarterly results conference call, the “results continue a trend of sequential improvements driven in part by lapping of the period last year where the strengthening U.S. dollar undermined the value of our foreign currency sales.” In particular, the value of the Japanese yen has stabilized as Premier Shinzo Abe moves into a phase of his Abenomics reform plan not centered around massive monetary stimulus.

After several consecutive quarters worth of growth into the Pacific, Hawaiian has retrenched by canceling services to Fukuoka, Manila, Taipei, and Tokyo Narita, as well as reducing frequencies to several other destinations. These aircraft have been redeployed to stronger markets like South Korea and in particular the West Coast of the United States, with 35 new frequencies added in the second quarter, including 28 to Kona, Maui, and Lihu’e.

After years of becoming increasingly superseded by Alaska Airlines on services to secondary Hawaiian airports, Hawaiian has begun to fight back in the market segment, in particular adding services from Los Angeles and Oakland to Kona and Lihu’e in June. Commensurately, overall PRASM growth performance, at 4.1% was strongly improved, though that figure was certainly skewed by the launch of Ohana by Hawaiian, which operates on routes that are so short that PRASM over $0.50 is not uncommon.

Operating expenses conversely, rose 5.6% YOY to $524.2 million. Fuel cost increased modestly, rising 2.9% on a 2.3% increase in per-gallon prices and the aforementioned 1.2% rise in ASMs. While fuel costs are not low per-se, they have been exceedingly stable over the past year-and-a-half by the standards of the market. This is an enormous boon to airlines, even if it’s not as visible on financial statements, because it allows them to make decisions with relatively precise information (frequently leading to crisper and more decisive action).

RELATED: Hawaiian Posts 2013 Profit

Labor expenses, rose sharply, jumping 8.8% YOY to $112.5 million in the quarter, while maintenance expenses rose 10.1% to $58.4 million. Landing fees and non-aircraft rental expenses grew 10.3% YOY to $21.7 million, while depreciation and amortization expenses rose to $23.8 million. The various cost-line increases drove up the carrier’s cost per ASM (CASM) to 12.30 cents, a 4.4% increase YOY. Excluding fuel, CASM rose roughly in line with expenses overall; 5.8% to 8.21 cents.

The airline ended the quarter with $564 million in cash and short term investments, as well as available borrowing capacity of $69.4 million under a Revolving Credit Facility. Outstanding debt and capital lease obligations totaled $1.07 billion. As compared to the end of the first quarter of 2014, Hawaiian’s cash position at the end of the second quarter was $85 million higher, while debt and capital lease obligations were $131 million higher, tied to secured loan agreements to help finance the purchase of two further Airbus A330-200 aircraft.

Capital expenditures for the quarter totaled $165 million, but after delivery of the remainder of Hawaiian’s A330-200 order over the next year, that number should decline sharply. This will allow a recovery in Hawaiian’s mediocre free cash flow numbers.

On an operating basis, Hawaiian recorded an operating profit of $51.6 million, which translates to a 9.0% operating margin, up from 7.0% a year prior. Pre-tax return on invested capital (ROIC) totaled 13.5%, while post-tax ROIC came in at 8.1%. Despite middling net profit figures, Hawaiian tends to deliver above average ROIC performance, likely because the compensation of Mr. Dunkerley and other executives is tied to that metric.

RELATED: Hawaiian Air Cancels A350-800, Coverts to A330-800neo; Analysis

Hawaiian’s revenue performance was promising and the profit improvement was driven largely by that element of its operations. Expenses rose in the quarter, but a large element of that was increased investment and headcount due to the Ohana operation. As Ohana spools up, revenue figures should get an added boost. A slowdown in growth (even the uptake of the A330-800neo and A321neo are only expected to drive “single-digit” capacity increases annually) will allow Hawaiian to crystallize Pacific operations and solidify dominance over inter-island service.

More importantly, the carrier is entering a new strategic phase, one that doesn’t completely eradicate the growth ethos we outlined in our analysis of the carrier’s first quarter results but more accurately, tones it down. “What we are recognizing is that we’re going into a new period,” opined Mr. Dunkerley on the call, noting that Hawaiian is entering, “a period that feels very different from the period that we’re [Hawaiian are] exiting this year.”

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Contact the author at Vinay.Bhaskara@Airchive.com

 

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Carriers Avoid Tel Aviv Airport After Reports of Rocket Activity

By Luis Linares / Published July 22, 2014

Photo  Nicolás Lope de Barrios - Creative CommonsCarriers around the world have been suspending or diverting service to Tel Aviv’s Ben Gurion International Airport on Tuesday following a Gaza-based rocket launch that landed within a mile of the busy airfield.

Delta Airlines announced it would suspend its flights indefinitely from New York’s JFK International Airport first, following a diversion of company flight 468 to Paris. The pilots of the Boeing 747-400 made the decision following reports of rocket activity in the area. United Airlines, which flies 777-200 service from Newark, and US Airways, which flies A330-200 service from Philadelphia, soon followed suit, though each plan to resume flights on Wednesday.

Not that either would have much choice for much longer. One hour after Delta’s decision, the Federal Aviation Administration (FAA) prohibited all U.S. airlines from flying to Tel Aviv for 24 hours, effective 12:15 P.M. Eastern Time today.

Since then the area, according to flightradar24.com, several foreign carriers have diverted their flights bound for Israel after the FAA’s directive. The European Aviation Safety Agency (EASA) has since urged European carriers not to fly to Tel Aviv.

Before the EASA’s warning, Lufthansa and its subsidiaries cancelled all flights to Ben Gurion for 36 hours, while British Airways and Air France-KLM said they would cancel their flights until further notice. The EASA plans to issue a bulletin on Wednesday that will “strongly recommend” airlines avoid Ben Gurion Airport.

Israel’s Transportation Ministry is asking carriers to reconsider their decision, claiming the airport is safe for take-offs and landings. In a statement, the ministry said that the airport is “safe and completely guarded and there is no reason whatsoever that companies would stop their flights and hand terror a prize.”

The FAA says it will continue to monitor the situation and provide an update to U.S. carriers before the 24-hour ban expires.

Fighting between Israel and Palestinian militants began on July 8. Palestinian militant organization Hamas has launched over 2,000 rockets since hostilities began. Israel relies on the “Iron Dome” missile intercept system to protect itself from these attacks.  Ben Gurion Airport is located 50 miles from Gaza.

The incident comes at a sensitive time for the worldwide aviation community. Only days ago a Malaysian Airlines Boeing 777-200ER was shot down in Ukrainian airspace, killing all 298 souls on board.

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Contact the author at luis_f_linares@hotmail.com.
Photo by  Nicolás Lope de Barrios – Creative Commons

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Hawaiian Air Cancels A350-800, Converts to A330-800neo; Analysis

By Jeremy Dwyer-Lindgren & Vinay Bhaskara / Published July 22, 2014

HAWAIIAN AIRLINES LOGOHawaiian Airlines will acquire six A330-800neo jets in a memorandum of understanding announced on Tuesday. The jets will replace the carrier’s current order for six A350-800 XWB aircraft.

The deal sets Hawaiian as the launch customer for the -800neo, and includes options for up to six additional airplanes. If all options are exercised the deal is worth $2.9 billion at list prices ($242mil per -800). The jets will begin delivery in 2019.

“The A330-800neo’s fuel efficiency, additional range and commonality with our existing A330 fleet makes the A330-800neo an elegant solution to our need for growth aircraft toward the end of this decade,” said Mark Dunkerley, Hawaiian Airlines president and chief executive officer in a prepared statement.

The airline already operates a fleet of eighteen A330-200s, which will retain commonality with the coming neos.

Hawaiian’s deal is yet another nail in a coffin already sealed tight for Airbus’ A350-800. Hawaiian had been one of only a handful of carrier’s holding out for the jet, which has become increasing unpopular with carriers. It was widely expected that the airline would flip to the A330neo after the jet was announced last week at the Farnborough air show. Today’s announcement reduces the A350′s commitments to a mere 28.

While several customers for the A350-800 do remain, it is widely expected that they will either convert orders to the A330neo or up-gauge to the A350-900. Hawaiian was the one carrier that, at least publicly, was almost intractable in maintaining that it would take delivery of the A350-800 as ordered. While some viewed this position as an obstacle to Airbus killing off the expensive and (relatively) inefficient A350-800, it is now clear that the statements made by CEO Mark Dunkerly and other Hawaiian executives were mainly aimed at creating leverage to win a better deal for the A330neo from Airbus.

The substitution of the A330-800neo for the A350-800 is also a tacit admission on the part of Hawaiian that its strategy of aggressive expansion into markets around the Pacific has limitations. The airline has aggressively expanded into markets like Brisbane, Fukuoka, and Taipei over the past 3-4 years, and while some of these markets have been successful, they have also generated steady downwards pressure on Hawaiian’s revenue figures because they are low yield. Hawaiian has already begun to retrench to its core strength of flights between the US mainland and Hawaii, and some of the pressures on its passenger revenue growth have begun to recede. Thus the A350-800, which was billed as an avenue to long haul growth for Hawaiian, has become almost secondary to the airline’s more muted strategic outlook.

Indeed amongst the 20 largest Asian destinations by origin and destination (O&D) from Hawaii, only Singapore and Bangkok (as well as the pipe dream of European service to London) are beyond the capabilities of the A330-800neo. And as an added bonus, Hong Kong, which cannot be effectively served by the A330-200, lies well within the A330-800neo’s capabilities, thanks to a 400-nautical mile increase in range.

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Contact the authors at Jeremy.Lindgren@Airchive.com and Vinay.Bhaskara@Airchive.com

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Farnborough 2014 Takeaways and Order Tally

By Jeremy Dwyer-Lindgren & Vinay Bhaskara / Published July 21, 2014*

With the 2014 Farnborough air show now formally wrapped up, our team talks takeaways and the final order tally in our show wrap-up.

ALC Chairman and CEO Steven F. Udvar-Házy speaks at the A330neo launch at Farnborough.

ALC Chairman and CEO Steven F. Udvar-Házy speaks at the A330neo launch at Farnborough.

Lessors dominate headlines: The majority of the order-action from this show came not from airlines, but from leasing companies. Indeed, the likes of AerCap, ALC, Avolon, BOC, CIT Aviation, and SMBC were busy throughout the week. In particular ALC, Avolon, and CIT Aviation bought from the big two, including competing products.

As to why lessors assumed most of the action, two related reasons. First, all of the present generation of in-demand aircraft (737 MAX, A320neo, A330neo, A350, 787, 777X) are all sold out at least until 2019, and in many cases past 2021. There’s no need for an airline with replacement (or growth) needs to commit capital to aircraft purchases that far out when it could be de-leveraging, or investing in other product factors as well. We still expect lots of fleet replacement action in North America, Europe, and particularly China but not quite yet. Second, at any given moment in the airline industry, there exists a balance of power between leasing and buying aircraft. Buying aircraft tends to be more attractive (from a cost perspective), when the cost of capital is low and access to capital is high. Leasing in other conditions. Given the slowdown in economic growth in many emerging markets and tightening access to capital, the balance of power is shifting towards lessors.

RELATED: Find all of our Farnborough 2014 content and stories here!

Bombardier Commercial Airplanes president Mike Arcamone certainly had reason to toast the show.

Bombardier Commercial Airplanes president Mike Arcamone certainly had reason to toast the show.

Bombardier surprises: The French-Canadian manufacturer surprised with 76 total orders and purchase commitments for the show, far outdoing its normally lackluster showings at such events. The majority, 71, came from the company’s Cseries jet, which has recently been battling its share of demons in flight testing. The orders, though none of them firm, bolster support for the airplane and mutes critics that have been too quick to write the project off.

Of particular note, aside from the surprisingly high number, were the orders from China. Bombardier has been working on building inroads to China for some time now, and it appears to be paying off a bit. That, plus the company has been providing support to COMAC for its projects, leading to rumors that the two could wind up in a more substantial tie-up down the road.

Still, that places it in fifth for order count, behind competitors ATR and Embraer (plus Airbus and Boeing). Plus the Q400 turboprop didn’t do so hot, only tallying up eight orders despite the company now having three distinct varieties of the turboprop (regular, high density, cargo combi). It’s CRJ-900, which the company says provides a better value proposition against the re-engined Embraer E-Jet E2s, failed to book any orders, though an undisclosed order for 24 CRJ-900s was revealed before the show (full disclosure, Bombardier flew the two-strong Airchive Farnborough team to and from the show on the jet).

Still not enough: Orders for the A330ceo and 777 classic are likely to make Airbus and Boeing, respectively, rather happy. But while encouraging, the orders don’t bring either program anywhere close to closing expected production gaps between the current and coming generation types. Boeing’s 777 classic orders, for example, don’t even amount to two months worth of work. It needs to fill about three years. Lots of work still to go here. Despite a good show, locking in 130 commitments and options, Embraer is in a similar position between the E-Jet and the new E2, facing a one-year gap.

That being said, we are confident that all three manufacturers will manage to fill their respective production gaps. Ultimately, selling an aircraft with higher operating costs is all about lowering capital costs (as Delta so vividly illustrates). For the case of Boeing and Airbus, since the 777 and A330 production lines are fully amortized at this point, each manufacturer can literally sell the aircraft at marginal cost. Even up against fuel efficient 787s and A350s, 60%+ discounts on current generation widebodies is a steal.

Bye-bye A350-800: No real surprise, but the formal launch of the A330neo will eventually kill off the A350-800. No one said it exactly, but it’s going to happen. On the other end, the company strongly hinted at the A350-1100 becoming a reality down the road. Related, the A380neo, which Emirates has been badly pining for, is still on the table too.

FARN1300D4-26VLA Market nears absolute zero: Both Airbus and Boeing have struggled to sell the A380 and 747-8 respectively over the past 18 months. Neither aircraft won an order at the show and Boeing’s 747-8 appears destined to fade into the sunset once an Air Force One replacement order is completed. The A380 lives on for now, though serious orders are unlikely to come without a re-engining (the 777X has the A380 beat on operating costs including capital). But re-engining would be a tough pill to swallow for Airbus, who have already invested billions into a program that won less than 330 orders.

Order tally (includes options and converts to firm):

Airbus, 495:
A330-900neo: 121
A330ceo: 8
A350-900: 4
A321neo: 90
A320neo: 227
A321ceo: 5
A320 family (unassigned): 43

ATR, 130:
ATR 42/72 600: 130

Boeing, 251:
777-9X: 100
777-300ER: 12
777F: 4
787-9: 18
737 MAX: 111
737: 6

Bombardier, 79:
Cseries: 71
Q400: 8

COMAC, 5:
ARJ 21: 5

Embraer, 158:
E175 E2: 100
E195 E2: 50
E190: 2
E175: 6

Mitsubishi, 50:
MRJ90: 50

Sukhoi, 15:
SSJ100: 15

Viking Air, 2:
Twin Otter: 2

Show Total: 1,185

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Contact the author at Jeremy.Lindgren@Airchive.com
Photos by Jeremy Dwyer-Lindgren / Airchive
*Reposted on July 22nd, 2014.

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