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the temptation to grow capacity,empower startups, alter the logicof flight scheduling and oblite-rate the wisdom of buying hun-dreds of future-generation air-craft designed to ease the bur-dens of expensive fuel thats nolonger a problem.

The worst thing for airlines, asany airline will say, isnt expen-sive oil but volatile oil: con-

sistent prices, whether high orlow, at least enable airlines tomatch future capacity with de-mandand in turn extract profit-able fares from consumers. Butimplicit in that statement wasgenerally the understanding thatalthough stability was para-mount, stable and cheap was ofcourse better than stable andexpensive.

American carriers, after yearsof high oil prices, have becomemasters at the capacity manage-

Pushing Back: Inside This Issue

Copyright Notice: No part of this publica-tion may be copied, photocopied or dupli-cated in any formor by any means withoutAirline Weekly Corps prior writtenconsent. Copying of this publication is inviolation of the Federal Copyright Law (17USC 101 et seq.). Violators may be subjectto criminal penalties as well as liability forsubstantial monetary damages, includingstatutory damages up to $100,000 perinfringement, costs and attorneys fees.Copyright 2011 Airline Weekly Corp. Allrights reserved. ISSN 1942-2059.

February 11, 2013Issue No. 417

Net result; operating margin

*ex special items (operating margins are ex SI)

October-December 2012 (3 months)

Japan Airlines: $505m; 15%

Singapore Airlines: $119m/ $130m*; 3%

Asiana: $20m/ -$76m*; -1%Air Canada: $8m/ -$6m*; 2%

WestJet: $61m; 11%

Copa: $87m/ $89m*; 17%

Finnair: $2m/ $6m*; 1%

Aer Lingus*: -6%

Jazeera: $9m; 24%

*Aer Lingus does not provide net results by

quarter.

Verbulence

American and US Airways willlikely announce their long-discussed merger this week.Thorny questions of who will gethow much of the new companyand who will run the new compa-ny are now resolved, according toreports, leaving just a few details(i.e., how long will AAs TomHorton remain non-executivechairman?) to be ironed out. Thecreation of the worlds largestairline seems near.Japan Airlines is hardly theworlds largest airlinenor evenits own countrys largest follow-ing massive contraction while inbankruptcy. But among all theairlines that have reported theirQ4 operating margins so far, onlyCopas is better. (So too isJazeera Airways if you count it,although much of its profit comesfrom leasing activities.)

Be Careful What You Wish ForFor many U.S. airlines, a big drop in fuel prices could hurt, not help

CONTINUED ON p. 12

Europe, demonstrated again byFinnairs unusually good resultsfor the off-peak winter quarter.Aer Lingus tooalthough its Q4results were in the red as usualhad a good 2012.

Air Canada made money lastyear too, while WestJet producedoutstanding profits. Elsewhere,Delta has a novel new partner-ship with a hotel chain, Qantas ison the offensive in Asia and Ibe-rias unions are once againthreatening to strike.

This business model works, even in a recession.

Aer Lingus statement in its annual results presentation

Few people disagreed when, in2005, Deltas then-CFO said,No commercial airlines busi-ness model works at $50 to $60 abarrel for oil. Crude prices werehurtling toward $60, and Deltawas hurtling toward bankruptcy.

Eight years later, what is quitepossibly the biggest threat toDeltas profitability?

Cheap oil.

No, you didnt misread that.And we didnt mistype it. Deltaand its U.S. legacy competitorshave so thoroughly adapted to aworld of consistently pricey oilthat they dont just tolerate it.

They benefit from it. And afterthree years of solid profits thatcoincided with high oil prices,carriers would be wise to wishagainst a sharp decline in oilprices, a development that woulddestabilize a comfortably stableoperating environment, reignite

ment game, so much so thattheyve won control of their pric-ing like never beforean unlike-ly feat given the logic of airlinepricing. Airline seats, after all,remain more or less a commodi-ty, and airlines cant directlycontrol pricesconsumers do.But what airlines can controland what theyve learned to con-trolis supply, and supply inturn does heavily influence pric-es. Take out enough seats and thefew that remain become morevaluable, able to command high-er fares. Reacting by contracting,in fact, is a trend now evident inEurope too, with some signs of itin Asia as well.

Put another way: the cost of oil,and hence jet fuel, dictates thefares airlines need to break even.

They cant, of course, chargemore than consumers are willingto pay. But they can reduce sup-

Singapore Airlines and KoreasAsiana are not doing nearly aswell. They hope for better thingsto come in the new lunar year thatbegan this past weekend. An up-turn in cargo markers and capacityrationalization sure would help.

In Europe, as in the U.S., a giantpotential merger remains possible,although this one has gone quietin recent weeks. But whateverhappens between Lufthansa andTurkish Airlines, capacity ration-alization is under way throughout

Weekly News Review 2-3

Fleet & Finance 4

Environment 4

Marketing & Sales 5

Around the World 10-11

Routes & Networks 8-9

Labor & Airports 7

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2the weekly skiesOnce again in the fourth quarter,J apan Air-linestook its place among the worlds mostprofitable airlines, erasing memories of its pre-bankruptcy days, when it was one of theworlds most dysfunctional. But like its rivalAll Nippon, which is now quite a bit larger by

total revenues, JAL is moving in the wrongdirectionoperating margin was an excellent15% last quarter but below the 18% it earned inQ4 of 2011. Net profit last quarter was $505m.Revenues inched up 1% y/y while operatingcosts rose 3%that was on 1% more ASKcapacitywith fuel outlays up 5%. Both out-bound revenues and cost items like fuel arepressured by the now-falling value of the Japa-nese yen, whose rise played a giant role in thesuccess of all Japanese airlines in the past threeyears. The falling yen is a hot topic amongeconomists and an even hotter topic amongairlines like JAL, which hope that its drawbackswill at least be tempered by an expected boost

to the Japanese economy, particularly its ex-ports. JAL, like ANA, faced other worries toolast quarter, including a roughly $50m hit fromfalling demand on China routes due to politicaltensions between the countriesload factor onChina routes was a paltry 52%. It also lost an-other $8m this quarter due to the grounding ofits B787s, which resulted in more than 7,000flight cancellations and disrupted its futurenetwork plansit was forced to postpone itsplanned route launch to Helsinki, for example.In addition, maintenance and depreciation costshave spiked in recent quarters. And longerterm, JAL faces the uncomfortable demograph-ic reality of Japans shrinking and aging popu-

lation. Yet management is optimistic. In fact, itraised its profit forecast for the full fiscal yearthat ends next month, citing robust demandon North American, ASEAN and even Europe-an routes. It also cited favorable fuel hedges.

JAL, despite now being smaller overall thanANA, is still larger internationally in terms oftotal revenue. And just 56% of its passengerrevenues come from domestic routes, comparedto 66% for ANA. Also on the internationalfront, JAL is working closely with joint venturepartnersBritish AirwaysandAmerican(which could soon be run by US Airwaysman-agement), cultivating more North America-to-Asia connecting traffic through Tokyo and

growing capacity to North America and withinAsia. China traffic is recovering, and thus farmost B787 routes have remained in operationwith substitute B777s and B767s. Domestically,meanwhile, JAL is offering more premiumseats and defending against LCCs withJ etstarJ apan, a joint venture withQantas. To be sure,the weaker yen will prove challenging. But thisis, after all, an airline that produced a mammoth$2.3b net profit for all of 2012, together with aremarkably high 16% operating margin.

Frankfurt service. That could mean more highyielding nonstop corporate traffic for SingaporeAirlines.

KoreasAsianaposted a $20m Q4 net profit

but only thanks to one-time forex gains. Ex-clude those and it really lost $76m. Whatsmore, its operating margin was negative 1%,down from positive 4% a year earlier. Revenueswere up 2% and operating costs were up 5%,the latter inflated by a 12% rise in fuel outlaysdespite a strengthening local currency. And forall of 2012? The results were also disappoint-ing. Asianas official net profit of $79m wasreally a $13m net loss ex items, with operatingmargin falling to 3% from 7% in 2011. Alt-hough operating results for both the quarter andyear were similar to those of its archrival Kore-an Air, Asianas problems seemed less rootedin cargo weakness. In fact, its Q4 cargo revenue

was up 8% y/y on 9% more ATK capacity,while international passenger revenues were upjust 1% on 8% more ASK capacity. Indeed,international passenger yields dropped 8%,driven mostly by weakness on Japan routes.

Thats because fewer Japanese tour groupscame to KoreaAsiana blamed Japan-Koreapolitical tensionsand the weaker yen de-pressed the number of overall Japanese travel-ers visiting Korea and connecting via Seoul. Onthe other hand, the weaker yen drove a 35%increase in outbound Korean demand to Japan,while China and ASEAN routes were strong.

The ASEAN region, in fact, was the fastestgrowing passenger market. For 2013, Asiana is

aiming for a 6% operating margin on 8% capac-ity growth, 12% revenue growth and 9% RPKdemand growth. Note that Korean Air, by con-trast, is expanding capacity far less aggressive-ly, with passenger ASKs expected to rise just3% this year. Its expected operating margin,meanwhile, is just 5%.

Turning to North America, Air Canada im-proved its Q4 operating margin to positive 2%from negative 4% a year ago, boosted by a 5%y/y increase in revenues even as costs stayedwhere they were. Net profit was $8m, althoughwithout special items, that was really a $6m netloss. Thats still not bad for an off-peak quarterand helped full-year net profit for 2012 reach$131m, or $57m ex items, with operating mar-gin at 3%. Again, this marked an improvementfrom 2011, but only a modest oneAir Canadain fact had better numbers two years ago. Likeits peers south of the border, Air Canada iskeeping capacity growth to a minimum, withASMs last quarter up just 1% y/y. But its hopesrest most importantly on landmark cost-cuttingdeals with labor unions, deals that will also helpalleviate major pension obligations over time.Air Canada also moved some regional flying toa lower cost provider, negotiated new mainte-

Singapore Airlines, to put it mildly, did not doso well. Its net profit for the calendar fourthquartera peak period in the ASEAN regionwas $119m, or $130m ex special items, withoperating margin at just 4%. For the full year,net profit and operating margin were just

$245m ($259m ex items) and 2%, respectively.Not that this is shameful. But those are not theresults one would expect from an airline that fordecades earned among the industrys best profitmargins. Whereas the first three years of thecurrent decade have been exceptionally kind tocarriers likeJ apan AirlinesandDelta, theyvebeen particularly unkind to Singapore Airlines.A big reason: a tremendous increase in compe-titionfrom low-cost carriers, from Gulf carri-ers, from Indonesian carriers, from Chinesecarriers and from restructured carriers like JAL.Sure enough, passenger yields fell another 6%y/y last quarter. Even more hurtful last quarterwas a depressed freight market, which led to a

$26m loss for the large cargo operation. Over-all, revenues declined slightly y/y, and operat-ing costs rose slightly. Fuel costs fell 1% thanksto hedges and a strong currency, even as ASMcapacity increased 5%. Singapore Airlines alsofaces higher labor costs, some overstaffing at itsmainline operation and some additional revenueweakness from generating ticket sales in mar-kets with weak currencies. So whats it doing torestore its lost glory? For one, its growingSilkAir, which earned a $28m profit in calen-dar Q4 after expanding capacity 19%China,ASEAN and India are all big targets. A newlow-fare longhaul unit calledScoot, operatingwith older B777s, is also expanding. So is

Tiger Airways, which Singapore Airlines part-ly owns. And fortunately, the companysmaintenance unit still makes good moneya$26m profit last quarter. Singapore Airlinesitself is boosting frequencies to Adelaide, Mel-bourne, Fukuoka, Osaka and Moscow, whileending ultra-longhaul nonstop routes to LosAngeles and Newark. Once reluctant to partnerwith others, its now operating joint ventureswithVirgin AustraliaandSAS while sellingits 49% stake inVirgin Atlantic toDelta for$360m. It continues to spend whats necessaryto keep its premium products best in class andhas a sizeable order book for A330-300s, A350-900s and B787-9s. At the moment, Singapore

Airlines operates about 100 passenger planes,nearly all of them A380s, B777s and A330-300s. That doesnt include SilkAirs 22 A320-family planes, Scoots four B777s and cargos12 B747s. One interesting question for Singa-pore Airlines: is the loomingQantas-Emirates

joint venture an opportunity or a threat? On onehand, it will compete more ably for Australasia-Europe connecting traffic than Qantas andBrit-ish Airwaysever could. On the other hand, BAand Qantas are closing their Singapore hub and,in doing so, slashing nonstop capacity to citieslike London while completely eliminating

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3 the weekly skiesAir Canadas regional markets, just as Air Can-adas Rougeis designed partly to attackWestJets Caribbean and Mexico markets.Speaking of these, WestJet added seven newCaribbean/Mexico markets in 2012, not to men-tion New York LGA, Chicago ORD and Yu-

kons capital Whitehorse. For all its successhowever, WestJet isnt resting on its laurels.Its instead initiating a $100m cost-cutting pro-gram (see page seven). In the meantime, de-mand remains strong, and unit revenues andmargins should both expand moderately thisquarter.

WestJ et isnt the only one lighting up the air-line scoreboard. Panamas Copa is running upeven higher profit margins and faces few of theintense competitive realties characterizing mostof the airline business. With a strong balancesheet, a well placed hub, a supportive home

government, an efficient and expanding airportfacility, lowish labor costs, a close alliance withUnited, few direct competitors and a homeeconomy that grew 10% last year, Copa man-aged an $87m Q4 net profit, or $89m ex items,and a sky-high 17% operating margin. Full yearnet profit was $327m, or $337m ex items, withoperating margin at 18%. One small cause forconcern: operating margins were several pointshigher in 2011, exceeding 20% for both Q4 andthe full year. Last quarter, in fact, revenues rose

just 18% on 22% more ASM capacity, whileoperating costs increased 25% on a 31% in-crease in fuel outlaysso costs and capacitygrew more than revenue. But dont get too

worked up: Copa expects operating margin for2013 to be somewhere between 18% and 20%on less aggressive growth (just 14%).

Europes Big Three airlines havent yet report-ed Q4 results. But evidence from smaller carri-ers likeFinnair suggests favorable trends.

Thanks to major cost cutting, the outsourcing of20 shorthaul planes toFlybe, the death anddownsizing of various competitors, the relativehealth of Scandinavian economies and ongoingstrength in Europe-Asia traffic via Helsinki,Finnair reported a rare Q4 profit. It was just$2m, or $6m ex special items, and operatingmargin was just 1%. But again, any profit is agood profit in the Finnish winter. One yearearlier, in fact, Finnairs Q4 operating marginwas negative 5%. And one year before that, inglorious 2010, it was negative 1%. For the fullyear, net profit was $17m, although this wasreally a $6m net loss ex special items. But oper-ating margin was positive 2%, its highest figuresince reaching 4% in 2007. Last quarter, reve-nues rose 6% y/y, but operating costs were flateven as ASK capacity rose 4% and fuel outlaysspiked 13%. Unit costs ex fuel, impressively,plummeted 9%. Nevertheless, Finnairs out-going CEO insists that [on] personnel costs,

nance outsourcing arrangements and, this sum-mer, will launch a new international LCC calledRouge. On the revenue side, hopes rest heavilywith longhaul international flying, not justRouge but just as importantly with new routeslike Toronto-Seoul and Toronto-Istanbul, more

capacity to China, new seating and loyalty planofferings (see page five), a transatlantic jointventure withUnitedandLufthansa, the newlywon right to create a transborder joint venturewith United, a push to win more longhaul cli-ents from the U.S. flying via Toronto, a neworigin-and-destination revenue managementsystem late this year, the addition of five B777-300ERs with denser economy class cabins andnew B787-8s still expected to start arriving nextyear. Sure enough, longhaul internationalroutes, especially transatlantic and transpacificones, did perform well last quarter. Domesticunit revenues increased substantially as well,but unfortunately, thats where the good news

ends. Transborder U.S. routes were a big head-ache, with unit revenues falling 9% despite aboost from new bag fees. Routes to northeast-ern business centers like New York, Boston andWashington were especially pressured by rivalcapacity expansion. South American and Carib-bean routes, meanwhile, also faced pricingpressures. So will lower labor costs, a new LCCand an ambitious longhaul strategy be enoughto produce more than just modest profits? Thepension question still hangs overhead, whileother challenges include Canadas high airportcosts, big bond maturities in 2015 and a relent-less pounding from an airline calledWestJ et.

That airline calledWestJ et, which will soonlaunch a sister regional airline called Encore,no longer has quite the cost advantage it didbeforeAir Canada reworked its labor con-tracts. But no matter. It still did remarkablywell in Q4, posting a $61m net profit and an11% operating margin, beating its Q4 2011figure of 8% and just barely falling short of itsfigure two years ago, one of the best years everfor the airline industry. It was a tremendous fullyear too, with 2012 net profit reaching $242mand operating margin reaching 11%, better thanthe 8% it achieved in 2011 andyesevenbetter than its 2012 figure of 9%. Wow, what a

great year! CEO Gregg Saretsky exclaimed.Looking again at last quarter, revenues rose10% y/y, operating costs rose 6% and ASMcapacity rose just 3%. Revenue trends wereespecially strongyield pressures insaturated eastern triangle markets notwith-standingthanks to strong demand, ancillaryrevenues and airline partnerships. WestJet isalso capturing more corporate traffic and willenhance that effort by offering new extra-legroom seats, new fare bundles with threepricing brands (Econo, Flex and Plus) and En-core, whose first routes will be announced to-day. The turboprop unit is designed to attack

we are still more expensive than our competi-tors, and this problem has to be solved. In addi-tion, maintenance costs are still higher thanplanned, and the companys maintenance divi-sion continues to lose money. More to the point,Finnairs turnaround, impressive though it might

be, must go further to produce the kind of mar-gins and cash flows that will ensure adequatefunding for new A321s (which will start replac-ing B757s later this year) and A350s (after2015). It hopes to do so by, most prominently,doubling revenues on Asia routes by 2020itslatest moves in this regard are new Hanoi andXian flights starting this summer. Still, the ines-capable question about Finnairs fate is its gov-ernments willingness to sell control, perhaps toa European rival enticed by a thriving Asiannetwork with no exposure to Gulf carriers.

Aer Lingus, a midsized European legacy carrier

with a troubled home economy, seemed scriptedfor trouble and despair. Instead, by relentlesslycutting costs and cleverly cultivating new reve-nues outside Ireland, it has transformed itselfinto one of the industrys winners. While it didlose money last quarterit didnt provide Q4net results, but operating margin was negative5%it earned a $44m net profit ($77m exitems) and a solid 5% operating margin for allof 2012. That margin will likely beat most Euro-pean rivals, including the Big Three. Revenuesand operating costs last quarter both increased8% y/y on 1% less capacity, with fuel outlays up11% on a weaker euro. Airport cost inflation atDublin and London Heathrow is another worry,

but back on the revenue side, transatlantic reve-nues soared 20% last year on just 9% more ca-pacity. Roughly 60% of the tickets sold on theseroutes are sold within the U.S. to Americantravelersexemplifying an escape from de-pendence on the hard-pressed Irish consumer.And 40% of transatlantic passengers are con-nectinghighlighting efforts to position Dublinas a gateway between the U.S. and the U.K. andcontinental Europe. Aer Lingus is also boostingU.S. traffic with new and deepening airlinepartnershipswith UnitedandJ etBlue, forexamplewhile also partnering withAir Cana-daand selling a small stake in itself to Etihad.No wonder it feels confident enough to grow

international capacity 13% this year. Retailrevenues are rising too. And its providing out-sourced flying for others, including tour opera-tors in the winter and Virgin Atlanticon short-haul U.K. routes. Better yet, forward demandappears very, very strong. But the big ques-tion is whether Ryanair will win its latest battleto buy control of Aer Lingus, contingent on animminent ruling by Europes competition regu-lators. Aer Lingus itself opposes the takeoverit is so bad for the consumerand mockedRyanairs attempt to offer remedies by transfer-ring routes to Flybe, an airline thats burnedthrough all of its equity in the last three years.

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fleet, finance & environment 4Fleet SheetAircraft Developments

Air Lease Corp. (ALC), the firm owned by ILFC founderSteven Udvar-Hzy, demonstrated its confidence in theA350 by ordering 25 of them. Twenty of these will be-900s, the first model Airbus will build, which will enterservice next year based on current plans. The other fiveorders will be -1000s, a larger variant. ALC also took op-tions for another five -1000s. It concurrently firmed op-tions for 14 A321-NEOs, giving it 50 firm orders for NEO-family aircraft.

Turkish Airlines, one of the worlds fastest growing carri-ers, added to its aircraft order book by buying two addi-tional A330-300s from Airbus. It now has 38 A330s onfirm order. I t also arranged to take three options for theplane. Partly because of B787 and A350 delays, and most-ly because its a machine with good economics in its ownright, the A330especially the -300remains one of theworlds most popular widebody planes, so much so that

Airbus is upgrading its payload and range capabilities.Another week, and Boeings B787s remain on the ground

rather than in the air. That meansNorwegian, for one,might not get its first units in late April after all. Boeingalerted the carrier to a possible delay, though Norwegianinsists flights to New York and Bangkok will launch in lateMay/early J une as planned. If necessary, it will lease re-placement airplanes for the weeks or months before itsB787s arrive.

AnAmerican-US Airwaysmerger announcement will likely, finally, come this

week. Various reports have said the boards of both airlines are planning to meet andvote on the matter sometime this week. US Airways CEO Doug Parker seemspoised to run the combined airline, with Americans Tom Horton temporarily serv-ing as non-executive chairman.

Passenger unit revenues continued to show y/y growth last month, highlighted byfigures published by Delta (January PRASM up approximately 6%),United (3% to4%), American (3%), US Airways(3%) andSouthwest (2%). Delta, more specifi-cally, said its revenue strength stemmed from corporate revenue gains, improvedtransatlantic performance and capacity discipline. And American, more specifically,cited strong improvements on domestic and transatlantic routes.

Europes low-fare airlines, represented by their advocacy group ELFAA, called onthe European Commission to staunch the flow of illegal state aid toSAS. ELFAAaccused the airline of unlawfully benefitting from a $500m emergency credit linegranted by banks but guaranteed by Scandinavian governments. ELFAAs 10 mem-

bers areRyanair, easyJ et, Vueling, Norwegian, Flybe,J et2.com, SverigeFlyg,Transavia, Volotea, andWizz Air.

Ugh: Fastjet is already running into legal tussels. The new African LCC, backed byeasyJ et founder Stelios Haji-Ioannou, got into the market by buying a companycalled Lonrho Aviation, which ran three small airline unitsone based in Angola,one based in Ghana and one based in Tanzania. The Tanzania operation is nowmarketed with the Fastjet brand using A319s and an easyJet-like business model.But the problem: in Angola and Ghana, operations still use the licensed brandFly540, and the owner of that brand (Five Forty Aviation) has suspended the licens-ing agreement, alleging failure to pay licensing fees and failure to provide criticalsafety reports. FastJet, which strongly denies the allegations, currently flies threeFly540-branded planes in Angola and two in Ghana. It flew two planes using theFly540 brand in Tanzania until November 2012.

SkyMoneyAirline Finance

JetGreenEnvironment, Conservation &FuelIts been a tough few weeks for defenders of the airline

industrys environmental record. First, there was the dubi-ous claim that airlines pocketed windfall profits as aresult of the E.U. stopping the clock in applying its Emis-sions Trading System to non-E.U. airlines. Next, U.S. Pres-ident Barack Obama mentioned climate changemoreloudly than usualin his inauguration speech, which led tosome grim conversation in the media about the grave topicof climate change. Thats never a good thing for an indus-try that literally runs on fossil fuel, and sure enough airlinestook some flak.The New York Timesscience reporter wrotea column under the headline Your Biggest Sin May BeAir Travel. Ouch. And thenThe Economistpiled on with,Airline Emissions: A business travelers footprint, inwhich the editors, incidentally, expressed a lack of confi-dence that the International Civil Aviation Organization

(ICAO) will come up with a global plan to significantlyreduce airline emissions. Further evidence that airlinescant catch a break lately: both articles referenced avia-tions portion of the worlds carbon footprint as 5%, morethan double the 2% figure thats usually applied to avia-tions greenhouse gas contribution.

British Airways, meanwhile, grabbed some good attentionon the environmental front as it signed on last week withthe Leaders of Sustainable Biofuels, a group of companiesseeking to accelerate development of advanced orsecond-generation biofuels in Europe. The other six sig-natories are biomass energy companies, with BA being theonly transportation company.

Abu DhabisEtihad, the smallest of the Gulfs Big Three but growing no less furi-ously, said it earned a $42m net profit in 2012, up from just $14m in 2011. The carri-er is wholly owned by its government and has no publicly traded shares, meaning it

has no obligation to report results. But it does so perhaps to refute critics who ques-tion its commercial viability. Operating margin for the year was 4%, equal to 2011sfigure as revenues and operating costs both increased 17% on 20% more ASK capaci-ty. Etihad is perhaps most notable for buying stakes in one airline after another: AirBerlin, Air Seychelles, Virgin Australia, Aer Lingusand soon, perhaps, IndiasJ etAirways. CEO Paul Hogan acknowledged advanced talks with Jet but dismissed, onthe other hand, any notion of interest in buying part ofAlitalia. Etihad does of course,have a codeshare partnership with Alitalia and now another with its partnerAirFrance/KLM too. Back on the topic of equity stakes, meanwhile, Hogan brushed offcomparisons to the oldSwissair strategy of buying pieces of multiple airlines, a strat-egy that proved disastrous. Etihad, he saidunlike Swissairis not taking control ofany airlines, just buying minority stakes, a lower-risk proposition.

KuwaitsJ azeera Airways, although with just seven A320s in passenger service, had

another extremely strong quarter, earning $9m from October to December, and astunning 24% operating margin. Its full-year numbers were even more impressive: a$50m net profit and a 30% operating margin. But keep in mind that only 76% of

Jazeeras revenues and 59% of its profits come from scheduled air servicethe restcomes from leasing out 12 A320s to other airlines.

IndiasKingfisher remains an entity still hopeful that it will fly again. But in themeantime, it lost $140m in calendar Q4 as revenues were zero but bills for fixed costskept coming. Maybe, as Andrea Bocelli once suggested, its time to say good-bye.

The Weekly SkiesCONTINUED FROM p. 3

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5 marketing & salesAirBuzzMarketing, Price, Promotion &Alliances

The BackendSales, Distribution, Tourism&Corporate Travel

Airline/hotel loyalty partnerships in general are nothing new.But a new one betweenDeltaand Starwood Hotels, whichowns nine hotel brands including Westin and Sheraton, is

more deeply integrated than any other in memory. Most intri-guingly, in what appears to be a first for both industries, theairline and hotel group will each recognize each others mem-bers elite status. Crossover Rewards, as theyre calling it,provides Delta platinum medallion members (what Deltacalls its elites) benefits like free in-room internet and theability to check out as late as 4 p.m. SPG platinums, on theother hand, will get priority check-in, priority boarding andone free checked bag when they fly Delta. In addition to theusual ability to accrue airline miles when staying in a hotelthat part isnt novelDelta medallions will earn bonus mileswhen they stay at Starwood hotels, just as Starwood eliteswill earn bonus starpoints when they fly Delta.

Air Canadawill start offering a true premium economy class

product on international flights starting this summertrue inthe sense that seats wont merely have more legroom but alsomore width, better meals and other perks like two freechecked bags and various priority and premium amenities.Its more akin, in other words, to what carriers likeAirFranceandCathay Pacific offer rather than what U.S. carri-ers offer. The airline is also preparing to unveil an all-new,cabin-wide product refresh in conjunction with the arrival ofits first B787s next year, and it is now adding two new elitestatus loyalty tiers as well. Its also studying the possibility ofexpanding its program of charging for economy seats thathave more legroomexit row seats, for example.

As expected,American will take advantage of relaxed re-strictions in its new pilot to codeshare on 22 more AlaskaAirlinesroutes (mostly transcon routes and Hawaii routesfrom the San Francisco Bay area). Alaska, in turn, willcodeshare on 19 more American routes (linking the PacificNorthwest to Texas cities via DFW, and transcon flying toand from Los Angeles). Separately American expanded itscodeshare relationship with the regional carrier Cape Air torebuild some of its scaled-down presence between San Juan,Puerto Rico, and other points in the Caribbean.

The large but struggling travel conglomerateThomas Cook,now under new management, will merge three of its airlineunits: Thomas Cook U.K., Thomas Cook Belgium andCon-dor in Germany. In an investor update last week, the compa-ny added that business is improving with robust winter andsummer bookings.

AlitaliasAir Oneunit is allowing its customers to booksummertime flights without paying for them until 30 daysprior to departure if they pay a non-refundable 15 ($20) fee.So someone can book a flight for, say, J uly and cancel byJune without penalty, save for that 15 fee.

A massive winter storm in the northeastern U.S. caused morethan 5,000 cancellations late in the week, according toFlightAware data.J etBlue, with large hubs at both Boston(the most affected airport) and New York JFK, was hardesthit. But airlines were surely glad the storm hit last week,when flights are still rather empty, rather than even a weeklaterthe upcoming Presidents Day holiday weekend in theU.S.when demand begins to pick up as spring approaches.

Expedia, the worlds largest online travel retailer, grew its revenue from airlinetickets by 10% y/y in Q4, but partly thanks to the acquisition of a smaller rivalcalled VIA Travel. The number of tickets sold increased 12%, and averageairfares were up 2%. But Expedias revenue per ticket still fell 2% because oflower fee revenue from interline bookings. Although airline bookings generatejust 8% of Expedias total revenues, selling airline tickets serves as a loss leaderof sorts, luring people to the website to then book higher margin products, mostnotably hotels. Expedias websites attract about 50m unique visits per month,many to shop and book the almost 300 airlines that sell though its platforms.Expedia sites are also the only third-party websites to sell AirAsia flights. Oth-er units include Hotwire and Hotels.com, the corporate booking tool Egencia, e-Long in China and an affiliate network, which provides non-air content to web-sites likeDelta.com. Most airline bookings through Expedia are processedthrough the Sabre GDS (although it uses Travelport and Amadeus in some cas-es too), so IATAs push for changing the traditional airline-GDS relationship isclearly of interest. At the same time, Expedia is watching Googles efforts toattract more travel business through a Kayak-like meta-search model, while

also watching Kayak itself as Pricelineperhaps Expedias toughest competi-torassumes control of it. Note that some big LCCs likeSouthwest, RyanairandeasyJ et still do not sell their tickets through Expedia, nor through any otheronline travel agency for that matter.

WestJ et signed a multi-year agreement with Farelogix, the distribution IT com-pany that will help it develop more personalized offers to customers. Farelogix,which works with many of the worlds airlines, is a vocal proponent of a newdistribution model in which all customerswhether shopping themselves or viatravel agents using GDSsobtain fare and product offers that are constructedpersonally for them by airlines. Thats different from how most GDS bookingswork: GDSs construct the offer based on fares and schedules that airlines havepassively filed with companies like ATPCO (fares) and OAG and Innovata(schedules). Some airlines are, to be sure, filing more than just fares and sched-ules nowtheyre filing some ancillary service offerings too. But the idea ofGDSs obtaining offers from within an airlines own systems just like airlinewebsite shoppers do hasnt yet caught on, and its a fight IATA is now takingon with its New Distribution Capability (NDC) initiative. GDSs, like many ofthe travel management companies that use them, are wary of the idea.

Transavia Netherlands, a low-fare leisure airline operated for many years byKLM, hired Travelport to boost its IT capabilities. More specifically, Transaviawants to be able to easily codeshare and interline with other airlines.

SriLankan Airlines, as it prepares to join oneworld, will convert many of itscrucial IT functionsincluding its reservation systemto the Amadeus Alteaplatform. It will be the first airline in the Indian subcontinent to use Altea, alt-hough hardly the first worldwide. In fact, more than 120 airlines use it, includ-ing recent convertsSingapore AirlinesandCathay Pacific. More than half ofoneworlds members use it too, including (along with Cathay) BA/Iberia,Qantas, Air Berlin, Finnair, LAN andRoyal J ordanian. Also joining SriLan-

kan in converting to Altea, by the way, is its sister airlineMinhin Lanka.J etBlues VP of sales and revenue management Dennis Corrigan, in an inter-

view withBusiness Travel News, explains the carriers campaign to win corpo-rate contracts, especially in Boston. To do so, its offering flat fares at a dis-count in exchange for certain commitmentsbuying a certain number of ticketsperhaps, or reaching certain revenue targets. J etBlue is finding it easier to at-tract Boston-based companies in particular as it adds big corporate routes likeDallas DFW and Philadelphia, and as it adds a new elite tier to its loyalty planand new high-speed Wi-Fi capability to its aircraft cabins. JetBlue admits, how-ever, that some accounts are hard to penetrate because it doesnt offer longhaulinternational service and isnt an alliance member. To these companies it essen-tially says: work with us and well save you so much money on domestic routesthat even if you have to pay rack rate for international, itll still be worth it.

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-4,000,000

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-2,500,000

-2,000,000

-1,500,000

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0

0

1,000,000

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6trends 6by the numbers

The Worlds Fastest Growing Airports in 2012Ranked by the number of additional seats scheduled in 2012 vs. 2011 (source: Diio Mi)

East Asian airports, shown in black, dominate the list of fast growing airports,fueled by economic growth and LCC expansion. J akarta leads the way in the region,but all of East Asia is enjoying a boomthe ASEAN region, all areas of greaterChina, neighboring Korea and even Japan thanks to new LCCs and new airport ca-pacity. But the grand master of growth is none other than Istanbul, spearheaded bythe remarkable expansion ofTurkish Airlines. Mexico City, interestingly, is thechampion of the Americas, courtesy ofAeromexicoand LCCs filling theMexicanagap. In the U.S. San Francisco tops the list thanks in large part toVirgin America.

The Worlds Fastest Shrinking Airports in 2012Ranked by the decline in seats scheduled in 2012 vs. 2011 (source: Diio Mi)

Whats happening in Spain is not a recession. Its a depression, and thesymptoms are clear at Madrids airport, where Iberia, easyJ et and others haveslashed service. Rome, Athens and other European airports (shown in red) aresimilarly suffering from economic catastrophe, while Damascus is sufferingfrom an even greater catastrophethe Syrian civil war. Note also the manyU.S. airports on this list, broadly symptomatic of industry-wide capacity cut-ting. Memphis continues to be a victim ofDeltadownsizing, Milwaukee longsfor days whenSouthwest, AirTranandFrontier were fighting a three-waybattle and Chicago lost many seats asAmerican restructured in bankruptcy.

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7 labor & airports

State of the UnionsWorkforce Developments

Ive done this before, and Ill do this again. So saysBA/IberiaCEO Willie

Walsh, speaking toBloomberg Newsabout his determination to make Iberiaprofitable. That means downsizing and big job cuts, prompting flight attend-ants, mechanics and airport staff to announce 15 days worth of strikes spreadover three separate five-day periods: one later this month and two next month(although not during the busy Easter holiday weekend, March 30-31). Thusfar, pilots have yet to join in on the strike threat, although they still might. Sodoes Willie Walsh regret buying Iberia? In theBloomberginterview, he saysno. But he does acknowledge that the Spanish economic downturn is provingfar more severe than anticipated at the time of the merger.

Speaking of mergers, US Airwayspilots voted yes to the memorandum ofunderstanding governing post-merger pay and work conditionsand aframework for seniority integrationoriginally negotiated byAmerican, USAirways and Americans pilot union. The deal, which would be in place onlyuntil a long-term joint collective bargaining agreement is reached, providesample pay hikes for US Airways pilots, although some noted less generous

health care coverage. US Airways pilots, by the way, are still divided intotwo bankruptcy-era contractsone for crew previously employed by Ameri-ca West and the other for pre-merger US Airways crew. Because of a seniority integration dispute, the two workforces were never integrated, andthey never managed to jointly negotiate a more generous contractto the delight of US Airways, which enjoys lowish labor costs as a result.

Now thatAir Canadahas less expensive labor contracts in place, WestJ et feels the need to slice $100m from its cost base during the coming threeyearsin other words, it wants to restore the cost advantage versus Air Canada that it previously had. It certainly wont lay off anyone, although itmight offer early retirements to bring average seniority down, and it will generally look to enhance employee and asset productivity. It will boostautomation with more airport kiosks and mobile platforms. It will push sales through lower cost distribution channels. Its using home-based reser-vation agents. It might rely more on in-house full-time workers. It hopes to improve operational reliability. And its densifying seating configura-tions on some of its planes.

Singapore Airlinesmight have lost a bit of its mojo, but Singa-

pores airport has been growing just as dynamically as ever (seepage six). So to ensure enough handling capacity in the future,Changi Airport will build a fourth terminal, to be ready by 2017.

This will enable it to process more than 80m passengers a year,well in excess of the 51m in handled in 2012. (Note that growthdoes, however, look likely to flatline for a time in 2013 as QantasandBritish Airwaysunwind their joint venture and de-hub Sin-gapore.) The airports busiest airlines by seats scheduled, otherthan Singapore Airlines andSilkAir,areTiger Airways,J etstar,AirAsia, Qantas, Cathay Pacific, EmiratesandLion Air.

Airports in mainland China willstarting in Aprilbe allowedto charge Chinese airlines the same fees they charge foreign ones.

Thats good for the airports themselves, some of them like Bei-jing Capital and Guangzhou Baiyun with publically traded shares.Its also good for foreign airlines. But its not so good for Chineseairlines likeAir China, China Eastern andChina Southern.

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8routes & networksWhos Flying Where Qantashas a longhaul problem, as it freely admits. And the centerpiece of its solution is a grand alliance with Emirates. But thats not the only

piece of its solution. Qantas is also Growing with Asia, the name for its strategy to cultivate business in a booming region thats economically

intertwined with Australia. To do so, it will move in four steps, starting with better links to Singapore and Hong Kong, where capacity will in-crease 40% and 10%, respectively. It will also re-time flight schedules to foster more connections, no longer forced to fly in conjunction withonward flights to EuropeEurope flights will now be handled through Dubai instead. More specifically, Sydney-Singapore and Brisbane-HongKong will receive additional frequencies, although the Adelaide-Singapore and Perth-Hong Kong markets will end. Its also reducing frequen-cies between Perth and Singapore while exiting Frankfurt six months earlier than planned. So thats the first step. Secondly, it will upgrade itsproducts and services on Asian routes. Thirdly, it will expand its Asian presence through cooperation with oneworld partnersJ apan Airlines,Cathay PacificandMalaysia Airlines, as well as with codeshare partnerJ et Airwaysand withJ etstar Hong Kongcollaborator China East-ern. Finally, Qantas will consider new cities with its own metal starting in 2016, when it hopes to start receiving B787-9s. Markets under con-sideration: Beijing, Seoul, Mumbai and Tokyo Haneda.

Iberia will leave Montevideo inApril, part of a restructuring exercise.So that leaves the door open toAirFrance, which will start operatingtag service to Uruguays capital as acontinuation of its B777-200 flightsfrom Paris to Buenos Aires. AirEuropa, Iberias Spanish rival and aSkyTeam member like Air France,also said recently it would enterMontevideo later this year, directlyfrom Madrid like Iberia. For AirFrance/KLM, the city will be its 15thin South America (see chart).

Emiratesis now flying to Warsaw,the latest move in its relentless as-sault on European markets. Thatleaves Paris Orly, Oslo, Stockholm,Berlin Tegel, Brussels, LondonStansted and Helsinki as the busiest

airports in Europe it doesnt yetserve. Notice how Scandinavia, despite its rather healthy economies, doesnt seem to interest Emirates much relative to other sub-regions(though it does serve Copenhagen).

AirAsia J apanwill expand its low-fare presence in the worlds third largest economy. Next month it will launch flights from Nagoya Chubu,first to Fukuoka and then to Sapporo the following month.

Deltawon final DOT approval to fly from Seattle to Tokyos conveniently located Haneda airport, which currently has just a handful of long-haul international flights. Delta originally began Haneda service from Detroit but later decided that Seattle would work better. Among otherissues, Detroit connections were poorly timed because of restrictions regarding when longhaul flights can operate from Haneda. At Seattle, onthe other hand, connections (mostly with partner Alaska Airlines) will work well. Also unlike Detroit, the shorter Seattle-Tokyo route requiresonly one aircrafta small and cheap-to-own B767-300ER, no less. In other words, Seattle offers lower risk and higher rewards. Flights willbegin in June.Delta already flies from Seattle to Tokyos Narita airport as well as to Osaka, Beijing andalso starting in JuneShanghai.

Virgin Americais based in San Francisco, where it has helped make the local airport one of the worlds fastest growing (see page six). But nowits adding a flightto Los Angelesfrom SanJose in Silicon Valley, just down the road fromSan Francisco International. Never mind thatSouthwest flies that same route 10 times a day,American six times a day,Alaska three times aday andUnited twice a day. Virgin will fly itfour times per day and points out that it will bethe only one offering a true first-class producton the route. (What kind of revenue premiumsis will get for its lovely first-class product on a308-mile flight is another matter.) After fiveyears of losing money, Virgin America plans todramatically curtail its growth this year, though

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Europes South American PowersRankedby number of cities served(source: Diio Mi)

TAP Portugal (11 destinations):Sao Paulo, Rio, Brasilia, Belo Horizonte, Fortaleza, Natal, Recife,Porto Alegre, Salvador, Sao Paulo Campinas, Caracas

Air France (9): Sao Paulo, Rio, Buenos Aires, Montevideo, Santiago, Lima, Bogota, Caracas, Cayenne

Iberia (8): Sao Paulo, Rio, Buenos Aires, Santiago, Lima, Bogota, Caracas, Guayaquil

KLM (6): Sao Paulo, Rio, Buenos Aires, Lima, Guayaquil, Paramaribo

Air Europa (6): Buenos Aires, Salvador, Lima, Caracas, Santa Cruz, Montevideo

Lufthansa (5): Sao Paulo, Rio, Buenos Aires, Bogota, Caracas

Alitalia (5): Sao Paulo, Rio, Buenos Aires, Caracas, Fortaleza

British Airways (3): Sao Paulo, Rio, Buenos Aires

Swiss (1): Sao Paulo

Air Caraibes (1): Cayenne

Note that a number of tour operator-linked carriers like Condorand Air Italy operate scheduled flights to South American as well.

CONTINUED ON p. 9

Which are the major South Americancarriers flying to Europe?TAM, LAN,AviancaandAerolineas Argentinasalloperate a number of routes.Air ChinaandSingapore Airlinesalso fly fromSpain to Sao Paulo.

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9999 routes & networksWhos Flying WhereCONTINUED ON p. 8

not before adding Newark flights in April, followed by these new San Jose flights in May. By then it will have a network of 21 cities. It currently

has 52 aircraft (a mix of A319s and A320s). Alaska Airlines is working with the FAA for clearance to fly from Paine Field in Everett, Wash., outside of Seattle. But not because it really

wants to. On the contrary, its move is clearly a warning to Allegiantor any other potential rivals that if they were to enter Paine Field, Alaska isready and able to retaliate. I t even named the markets it would serve: Honolulu, Maui, Las Vegas and Portland the first year, and Los Angeles,Phoenix and San Diego thereafter. To further deter any challengers, Alaska notes that Paine Field doesnt even have an adequate passengerterminal.

Grand Rapids, a city in Michigan, will be the latest market in which AirTran-branded serviceto Chicago MDW, Baltimore BWI and Orlan-dowill convert toSouthwest. And in conjunction with that milestone, new service to Denver and St. Louis will start. On the other hand, it willend Saturday-only Grand Rapids to Tampa flights. Elsewhere in Michigan, Southwest will also take over for AirTran in Flint, where new LasVegas service will join existing service to Tampa, Orlando and Baltimore BWI. Memphis, Tenn., where AirTran serves just Atlanta, will keepAirTran-branded service for now but will get some new routes: Chicago MDW, Baltimore BWI and Orlando.

Ethiopian, as it waits for its B787s to clear again for take-off, appearsto be planning an Asian offensive. According toAirline Route, the fast-expanding carrier is looking to serve Manila, Seoul ICN and Ho Chi

Minh City later this year. The LCC SpiceJ et has two new destinations on offer from its home

city Delhi: Allahbad and Dharamsala. Its also offering new connec-tions from Chennai to Mysore, and from Bangalore to Mysore andPondicherry.

Airlines are always eager to chase the oil, and nowhere is oil flowingmore spectacularly than in North Dakota (see graph). SoUnited (fromDenver) andDelta (from Minneapolis) both announced new flights toDickinson, not far from the Bakken oil fields and site of a new refineryunder construction. Fortunately, yields to markets like these are high,which makes for good use of 50-seat regional jets that have high unitcosts.

0%

20%

40%

60%

80%

100%

120%

Williston GrandForks

Dickinson Fargo Minot

BoomTownsAt U.S. airports overall, scheduleddepartingseats will be upless than1%thissummer. What about at airports inNorthDakota? (Source: Diio Mi)

North Dakotas fastest growing airports,ranked by seats scheduled for August2013 vs. August 2012. (Yes, Williston

really is up 110% y/y.)

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markets

Some stocks traded on multiple exchanges; not intended for trading purposes

10

AirlineSharePrice

Changefrom last

week

Changefrom last

year

Comment

United 26.31 9% 11% Boasting loudly of its improved punctuality; more than 80% of flights on time in January

Delta 14.62 6% 34% Loves to be seen with celebrities: hosted a pre-Grammy party in Los Angeles on Friday

American 1.46 17% 143% US Airways deal would still leave it weak in Asia; would only serve Tokyo, Beijing, Shangha

US Airways 14.75 4% 67% Would switch from Star to oneworld; UA/Cont. & Delta/NW involved no alliance switches

Southwest 11.64 4% 21% Will make a big Atlanta-related announcement Tuesday, according toAtl. Business Chronicl

Alaska 48.67 5% 31% Sold 54% of its tickets through its website last year; wants to increase that a few points

J etBlue 5.92 2% 1% Passengers will be able to use inflight Wi-Fi for free, for at least the first year

Virgin America Will this be the year it manages to do an initial public share offering (IPO)

Hawaiian 5.80 4% -4% Upcoming Auckland flights offer attractive connections to and from U.S. mainland

Spirit 19.51 2% 7% Ended 2012 with 45 planes; will end 2013 with 54 and 2015 with 71

Allegiant 78.12 4% 45% Jan. PRASM fell 11% y/y but more meaningfully, total RASM fell just 3-4%; ASMs up 15%

SkyWest 12.71 -1% -4% Has crew bases in 15 different cities, plus maintenance bases in eight cities

Republic/Frontier 8.89 4% 51% Still trying to find a buyer for Frontier, which cut ASM capacity 25% y/y last month

Air Canada 2.32 -5% 111% Mentions the world pension 110 times in its Q4/year-end 2012 results report

WestJ et 21.39 -3% 60% Says costs are still 10% to 15% below those at Air Canada

Aeromexico 17.36 -5% -29% LCC rivals Volaris and Interjet both arrange sale-leaseback deals with GECAS for new A320

LAN/TAM 17.71 -4% -11% Currently the second most valuable airline in the world by market cap behind only Air China

Gol 6.99 -4% -4% Pushing ahead with plan to sell shares in its Smiles frequent flier program

Copa 102.91 -7% 44% Plans to add seven new B737-800s this year; not interested in adding more -700s or E190s

AviancaTaca 4425 0% 9% Venezuela devaluing its currency again, the fifth time in a decade; cold worsen inflation

Emirates The second largest buyer of A350s after Qatar Airways; Airbus has 617 A350 orders in total

Air Arabia 0.89 0% 36% Grew traffic 13% in 2012, to more than 5m passengers

Turkish Airlines 6.60 1% 150% Still operating Anadolujet unit but only domestically now

Kenya Airways 10.75 1% -42% Nigerias Arik Air marketing connections from NY JFK to cities throughout Africa via Lagos

South African Air. IATA to hold its annual general meeting in Cape Town this June

J et Airways 592 -5% 82% Plans to grow capacity by about 10% to 12% in the coming fiscal year that begins in April

Aeroflot 133.72 8% 8% Will form a Russian maintenance joint venture with Switzerlands SR Technics

Crude oil futures(WTI, for delivery next month;source New York Mercantileexchange)

$96 -2% -3%WTI oil prices, depressed because so much of it is sitting in storage tanks in Oklahoma with-out the proper infrastructure to get it to markets, fell last week. But Brent prices, currentlymore relevant to airlines, rose to $119, the highest level since May.

Around the WorldA Look at the Worlds Airlines, Including Endweek Equity Prices

(not publicly traded)

(not publicly traded)

(not publicly traded)

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Some stocks traded on multiple exchanges; not intended for trading purposes

11

AROUNDTHE WORLD A L O O K A T T H E WO R L D S A I R L I N E S , I N C L U D I N G E N D W E E K E Q U I T Y P R I C E S

AirlineSharePrice

Changefrom last

week

Changefrom last

year

Comment

Lufthansa 14.82 0% 39% Security concerns compel Lufthansa and Austrian to suspend service to Tripoli in Libya

Air France/KL M 8.28 1% 70% Reports financial results Feb. 22, BA/Iberia goes Feb. 28; Lufthansa goes March 14

BA/Iberia 219 2% 23% Premium RPKs up 3% y/y in Jan.; BA seeing continued firmness; Iberia business still weak

SAS 13.15 -4% 59% Forex adjusted RASK fell 4% y/y in Dec.; blamed on holiday date shift; Says Jan. will be up

Alitalia Suspended regional outsourcing to Romanias Carpatair after safety scare on ATR flight

Finnair 3.11 0% 25% Will be the first airline in Europe to fly A350s (in late 2015, according to current plans)

Aer Lingus 1.37 7% 47% Premium cabin generated 22% of its total longhaul revenues last year

Virgin Atlantic Virgin, BA, Ryanair and easyJet hire PwC to study the APDs economic impact

easyJet 981 2% 114% Newest route from London Southend: Edinburgh, which starts in May

Ryanair 5.74 1% 37% Passenger counts declined 1% y/y in Jan.; grounded 80 planes after busy Christmas season

Air Berlin 1.93 5% -19% Cut ASK capacity 10% y/y in January; says it has eliminated many unprofitable flights

Norwegian 176.70 3% 120% Unit revenues rose 3% y/y in January despite 24% more ASK capacity; driven by yield gains

Vueling 7.63 -5% 46% Marketing its punctuality: in 2012, more than 90% of its Barcelona flights departed on time

Aegean 2.48 5% 85% Fellow Star Alliance member LOT Polish hires a new CEO; job number one: survival

J apan Airlines 4390 16% x Domestic load factors still just 65%; an opportunity to stimulate traffic with lower prices?

All Nippon 193 7% -19% Configures its B787s with just 158 seats, 31 fewer than Ryanair puts on its B737-800s

Korean Air 44000 -1% -23% Partner Delta exiting the Tokyo-Seoul ICN route; flown by Korean plus six other airlines

Cathay Pacific 15.02 0% -4% Adding a fifth daily frequency between Hong Kong and London Heathrow

Air China 6.84 3% 6% In 2012, China surpassed the U.S. as the largest trading nation by value of imports/exports

China Eastern 3.54 -2% 16% Jetstar Hong Kong, as it awaits regulatory clearance, appoints a CEO

China Southern 4.58 1% 11% Hired Aviareps to boost its marketing and sales presence in Latin America

Singapore Airlines 6.58 -1% 1% Rival Garuda, whose only Euro. city is Amsterdam (via Abu Dhabi), plans to add Lon. LGW

Malaysia Airlines 0.69 0% -56% In Europe and the U.S., most LCCs are growing slowly if at all; not so in Asia

AirAsia 2.66 -4% -30% AirAsia X offering child-free quiet zone seating for a fee, of course

Thai Airways 22.70 -2% -14% AirAsia says its considering JVs in China, India and Myanmar but nothing imminent (WSJ )

Cebu Pacific 67.15 7% -9% 52% of its ASK capacity was international last year, same as in 2011

Qantas 1.59 3% 0% Still expects its first B787, to be flown by Jetstar, to arrive in August

Virgin Australia 0.43 1% 23% Australian competition regulator clearly concerned about impact of Virgin-Tiger JV

Air New Zealand 1.02 2% 42% Stock has outperformed that of Australias two major airlines during the past year

markets

(not publicly traded)

(not publicly traded)

Around the WorldA Look at the Worlds Airlines, Including Endweek Equity Prices

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ply so that when they essentially auction theirseats through revenue management, the consum-ers who are willing to pay the least dont get to

fly, and average fares rise. Expensive oil leads tocapacity cuts, which lead to higher average fares.

That might sound simple, but airlines rarelymanaged to achieve it in the past. Why? Largelybecause of fragmentation and excessive competi-tionwith about a dozen major U.S. airlines asrecently as a decade ago, an individual airlinesimpact on industry capacity was rather small, andeconomic game theory took over. I f only AirlineA cut capacity, those capacity cuts would benefitAirline Bs unit revenues just as much, but Air-line A would bear the full unit cost penalty ofshrinking its capacity while perhaps even hand-ing its customer to Airline B or Airline C, D,E, F or G, all of which were often competing in

the same origin-and-destination markets. SoAirline A didnt bother.

But today? Assuming American and US Air-ways complete their merger, four giant airlinesAmerican, Delta, United and Southwestwillaccount for fully 86% of U.S. airline ASM ca-pacity, according to anAirline Weeklyanalysis ofDiio Mi data. Add in sizeable JetBlue and Alas-ka, and youre at 94%. Consolidation impacts thecompetitive environment in numerous ways, butin no way more important than the fact that agiant airline now doesbenefit significantly fromits own capacity cuts. Its competitors, mean-while, feel emboldened to make the same moves,recognizing that nearly every airline is of thesame mind.

That, in turn, begins to explain why cheap oil isa specific threat. All things being equal, airlinesmight now be agnostic about fuel prices (again,assuming they dont move rapidly in one direc-tion or the other). But all things are rarely equal,and todays highly consolidated industry is itselfthe result of a decade of high oil prices. Evenonce-reluctant merger partners like Continentalconcluded consolidation was the cure for muchof what ailed an excessively fragmented indus-try.

Perhaps even more importantly, high oil pricesdramatically raise barriers to entry. Which other

airlines would today be part of that top 94% ofASMs had consolidation not happened? North-west, Continental, America West and an inde-pendent US Airways. But also missing are theyoung airlines that died of oil inflicted wounds,or the would-be startups that never got off thedrawing board because no one would finance anairline with such high oil prices. Remember Sky-bus? Sure, it likely would have failed no matterwhat. But it could have first caused a lot moredamage to incumbent airlines had 2008s exorbi-tant fuel prices not hastened its demise. Deeper-pocketed Virgin America survives, but high oilprices have likewise exposed its flaws and

cover story 12CONTINUED FROM p. 1

Cheap Fuel, Not Cool:BigU.S. airlines wouldlove a steepdropin fuel prices. Or wouldthey?policed its capacity growth: to the wholeindustrys benefit, it recently and dramaticallyshifted from growing by double digits toshrinkingslightly, more soberly waiting for its

existing planes and routes to profit before justi-fying any future growth. High oil prices rewarddiscipline and punish a lack thereof.

Aside from policing young upstarts and pre-cluding the birth of new ones, expensive oil ishelpful to legacy airlines like Delta, United andAmerican for another reason: I t masks theirunit cost disadvantages versus their low-costrivals. All airlines want to keep their costs lowand their revenues high. And almost all legacyairlines have both higher unit costs and higherunit revenues than their low-cost competitors.

Their success, then, depends on whether theirunit revenue advantage is greater than their unitcost disadvantage.

Fuel costs, more than anything else, deter-mine which differential will be greater andtoa surprising degreewhich kind of carrier willbe more profitable. Thats because low-costcarriers get their cost advantage thanks to non-fuel costs: employees who either earn less orare at least more productive, aircraft with littleground time and thus high utilization and soforth. Every airline, on the other hand, paysroughly the same amount for fuel. So whenfuel is cheap, the non-fuel coststhose that areindeed considerably lower at LCCsmake upa greater percentage of the overall cost base,and LCCs tend to have massive cost ad-vantages that can more than make up for theirrevenue disadvantages. An expensive fuel en-vironment, on the other hand, causes non-fuelcosts to make up a smaller percentage of theoverall cost base. They become less important,so to speak. So legacy airlines are betterequipped to win the revenue game, whereasLCCs are better equipped to win the cost game.When fuel is expensive, the revenue game issimply more winnable. Note another ironyhere: costs matter less in determining airlineprofitability when costs are highest, when thebiggest cost item (fuel) is at its most expensive.

This is not just theory. For all the challengesof the past decade, one useful fact is that the

airline industry has experienced, and can learnfrom, every imaginable kind of operating envi-ronment. Perhaps no legacy carrier and LCC inthe world competed as directly as Delta and theformer AirTran (now a shrinking unit of South-west), which both had their biggest hubs inAtlanta. Delta unsurprisingly always had a unitrevenue advantage and a unit cost disadvantageagainst AirTran. Well the most expensive aver-age fuel costs ever occurred in the second quar-ter of 2008, when WTI oil was working its waytoward $147 per barrel (before tumbling). Thatquarter, yes Delta had a 30% unit cost disad-vantage against AirTran, but it had an even

greater 37% unit revenue advantage. Sureenough, Delta was profitable; AirTran was not.By the first quarter of 2009, in the depths of therecession, fuel costs were the cheapest they had

been in many years before or since. Delta main-tained its unit revenue advantage, now at just30%. But its unit cost disadvantage was now awhopping 42%. AirTran, remember, had farlower non-fuel costs, which now matteredmore. Guess which of the two airlines was prof-itable that quarter? Not Delta. Luckily for Deltaand its legacy peers, oil has been expensivemore often than it has been cheap in recentyears. Is it any wonder why, for the first time indecades, Delta is consistently more profitablethan Southwest?

To be perfectly clear, a sudden drop in fuelprices would be a short-term windfall for allairlines, legacy and low-cost alike (hedges aside

anyway), because they would find themselvespaying less for fuel while operating a scheduledesigned for high oil prices, with customerspaying high-oil-price-era fares. But in the long-er term, the industry would begin expandingagainrationally from an individual airlinesperspective, because growth means lower unitcosts, and cheaper fuel means lower breakevenfares. Marginal markets would become viable;so might marginal aircraft like 50-seat RJ s,which could get a stay of execution. But witheveryone thinking alike, industry-wide capacityincreases would depress unit revenues, likelyputting downward pressure on profitability(even though this might be great news for air-

ports, suppliers, consumers and other key stake-holders). A newly cavalier Virgin America onceagain expanding rapidly in important markets,not to mention an altogether new startup airlineor two, could easily tip the balance and makethe industry less profitable again.

To be equally clear, lower fuel prices wouldmean massive benefits for industrialized econo-mies around the world, none more so than theU.S., whose automobile-dependent householdswould suddenly feel wealthy. And some of theirnewfound spending power would translate intodemand for air travel. Low oil prices could alsohave huge geopolitical benefitsyou tell uswhen oil drops in price, and well tell you whendespots from Ahmadinejad to Chavez will losetheir grip on power, which by the way will alsomean new opportunities for airlines (imagineB777-200LR service from Atlanta to Tehran).

But airlines have indeed lived through everykind of environment, and U.S. legacy airlines,for their part, like this one best. So too mighttheir legacy peers around the world as theycontinue pursuing the consolidation and capaci-ty cutting that has worked so well in the U.S.

Turns out, plenty of airline business models dowork at $50 to $60 oil after all. More surpris-ingly, some of them work even better at $95.