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more creative than what has hap- pened in Lima during the pastdecade and a half. Like mostcountries, Peru had its own flagcarrier, Aeroperu. Like too manycountries, that flag carrier wasn’tviable. Like not enough coun-tries, Peru’sgovernmentallowed it toexit the mar-ket. It perished in 1999 and onlylasted that long thanks to supportnot mostly from its government

 but from Aeromexico, which had  bought 47% of it in the early1990s. Peru’s other major airlineFaucett also went bankrupt in thelate 1990s.

Together, Aeroperu and Fau-cett left a giant vacuum that wasat first filled by an airline called Aero Continente, which— although now long since forgot-ten—was Peru’s busiest airlinefrom 2000 through 2003. But

Pushing Back: Inside This Issue

Copyright Notice: No part of this publica-tion may be copied, photocopied or dupli-cated in any form or by any means withoutAirline Weekly Corp’s 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 for substantial monetary damages, includingstatutory damages up to $100,000 per infringement, costs and attorney’s fees.Copyright 2011 Airline Weekly Corp. Allrights reserved. ISSN 1942-2059. 

March 4, 2013 Issue No. 420

Net result; operating margin

*ex special items (operating margins are ex SI)

Oct.-Dec. 2012 (3 months)

BA/Iberia: -$1.1b/-$540m*; -1%

 Alitalia: -$138m/-$19m*; 0%

 Vueling: -$17m; -9% Thai Airways: $85m/$37m*; 1%

Malaysia Airlines: $17m/-$10m*; 1%

 AirAsia: $147m/$101m*; 18%

Republic/Frontier: $13m/$19m*; 9%

Frontier alone: $2m/$7m*; 3%  

 July-Dec. 2012 (6 months)

 Virgin Australia: $24m/$47m*; 3%

 Air New Zealand: $82m/$80m*; 7%

 Jan.-Dec. 2012 (12 months)

 TAP Portugal: $20m; 2%

Pegasus: $86m; 10%

 Jan. 2013 (1 month)

 American: $44m; 4%

“ Verbulence

British Airways insists it’s hap- pily married. But underneath therhetoric, there’s surely somesense of regret about eloping withits Spanish partner. As BA/Iberiashowed once again, the Londonmarket is more or less healthy,while the Spanish market is any-thing but. Tellingly, traffic withinSpain fell a shocking 17% y/y lastquarter.

Vueling is feeling the pain too,although much less so than Iberiathanks to its lower costs. Alitaliais feeling similar pain in Italy,where domestic traffic plummet-ed 13% y/y last quarter. TAPPortugal is in better shape thanksto its enviable Brazilian and Afri-can networks. But as with Alita-lia, only a takeover would free itfrom existential uncertainties.

The economic situation is hard-ly so rough in East Asia. But the

Lima LightningPeru’s capital city is quietly one of the world’s fastest growing airline hubs

CONTINUED ON p. 12

structured its longhaul businessand having harvested more reve-nue from its alliance with Virgin.Meanwhile another Virgin part-ner, Etihad, was busy buyingHeathrow slots from Jet Airways.

The U.S. market was largelyquiet last week, aside from someupdates on Republic’s plans for Frontier and some new routes for American, which also disclosed 

January profits. Today, major U.S. airlines will present at a JPMorgan investor conference. 

”

It shows what can be done and shows what needs to be done.

 —BA/Iberia CEO Willie Walsh,

highlighting the success of Iberia Express

In a fast-growing region, it’s

the fastest growing hub of all.

Among sizeable hub airportsthroughout the world, in fact,only the bigger and globally

 better-known superstar Istanbulis growing as quickly on a per-centage basis as Peru’s capitalLima.

But unlike Istanbul, Lima isactually two hubs in one. Twohubs, no less, that are growingnot only rapidly but also profita-

 bly for two well-regarded and  profitable airlines. Two well-regarded and profitable airlines,no less, that aren’t even fromPeru. How’s that for intrigue?

Lima is, in other words, notonly one of the most dynamicairports for air service growth.It’s also one of the most interest-ing.

Destruction doesn’t get any

during that time, something moreimportant had happened. Anairline that was then called LanChile, successful in its homemarket but recognizing that mar-ket’s geographical limitations,worked in the late 1990s along-

side Peruvian businesspeopleto establish anairline called 

LanPeru. At first it was a fran-chise and partner airline, and by2002 LanChile had purchased 49% of LanPeru (at about thesame time, by the way, thatLanChile was establishing asimilar partner and part-subsidiary airline in Ecuador).

Sometimes, life is about beingin the right place at the righttime. And LAN, as it had cometo be known, was in the right

 place at the right time when AeroContinente suddenly ceased op-

competitive situation there is evenrougher, especially for carrierslike Malaysia Airlines and ThaiAirways. AirAsia alone will add hundreds of new planes in thecoming years. So will Lion Air,which is about to take on AirAsiain its own backyard.

In the land down under, VirginAustralia saw earnings slip asdomestic yields fell on a surge in

industry capacity. But across theTasman, Air New Zealand is do-ing better than ever, having re-

Weekly News Review  2-3

Fleet & Finance 4

Marketing & Sales 5

Labor & Airports 7

Around the World  10-11

Routes & Networks 8-9

Environment  8

See also:

• Lima’s top international airlines, p. 12

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2the weekly skiesThe tale of two airlines continues—one, a Brit-ish carrier doing fairly well and the other, aSpanish carrier drenched in red ink. BA/Iberia,the product of a merger announced in the springof 2010, had a decent year in 2011 but lostmoney in 2012 as BA’s operating margin fell

from 5% to 3% and Iberia’s operating marginworsened from negative 2% to negative 7%.Overall, the company’s net loss for all of 2012was $1.2b, or $451m excluding special items,with an operating margin slightly below break even. These figures were only slightly better than those produced by troubled Air France/ 

KLM, whose 2012 operating margin was nega-tive 1%. Nor was life better for BA/Iberia in thefinal quarter of the year. Net loss for Q4 alonewas $1.1b, or $540m ex items, while operatingmargin was negative 1%, again about a point

 better than Air France/KLM. (Based on prelim-inary figures, Lufthansa did better than its twomain rivals for the full year but worse than both

in Q4.) In Q4, BA/Iberia’s revenues rose 11%y/y but its operating costs rose 13% on just 1%more ASK capacity, a phenomenon stronglyinfluenced by currency trends. Although BAisn’t exactly setting the world on fire with itsroughly 1% Q4 operating margin, BA/Iberia’s

 biggest problems are Iberia problems. TheSpanish carrier posted a $107m Q4 operatingloss, pummeled by Spain’s economic depres-sion and aggravated by a sharp rise in airportcosts. The longhaul network to Latin America,Iberia’s crown jewel, faces intensified competi-tion from rivals like LAN/TAM and Air France/KLM, made no easier by still flyingobsolete four-engined A340s. And the shorthaul

network… don’t even ask. The good news:restructuring is under way, with A330s nowarriving and Iberia Express off to a “stunning”start—profitable after just three months of oper-ation. Iberia is now shrinking capacity another 15% and cutting another 4,000 jobs while ham-mering down compensation yet again, never mind if that means disruptive strikes. BA, after all, endured similar unrest a few years agowhen it too felt compelled to cut labor costs.Today, BA’s strength remains its longhaul pre-mium business in London, where trends are

 positive. Its most important market—NorthAmerica—is particularly strong thanks to ca-

 pacity cuts and a maturing joint venture with

American. That joint venture, of course, standsto get more powerful still with the addition of the US Airways network. In the other directionfrom London, BA is targeting East Asia, whereit recently launched service to Seoul and willsoon follow with flights to Chengdu in China. Ithas more Heathrow slots to work with after 

 buying British Midland, the integration of which is progressing smoothly. And longhauloperations at London Gatwick are profitabledespite the hated air passenger duty that dispro-

 portionately burdens Caribbean routes. Butanother fee hike at Heathrow is a concern, and 

airports, so its strikes affect Vueling. Thus far,the impact has been minimal, but ongoing un-rest would hurt.

Elsewhere in Europe’s somber south, Italy’s

Alitalia is in big trouble again. After a modest$99m net loss in 2011—not bad for an airlinethat lost $224m in 2010—Alitalia returned tomisery in 2012. Its net loss for the year was$366m, or $248m ex items, and operating mar-gin was negative 3%. Like a candle in the wind,Alitalia never knows who to cling to when therains set in. Well the rains are as heavy as ever now, but the government has no money, and nobody seems interested in buying it, so it’sclinging at the moment to Air France/KLM

and other shareholders, which are keeping italive with an emergency loan. Net debt rose20%, and cash at year end fell to less than$100m, down from $400m a year earlier. No

surprise, therefore, that Alitalia’s CEO is step- ping aside. The good news: losses stabilized to just $19m ex items in Q4 (its accounting netloss was $138m), and the airline actually brokeeven at the operating level, not bad at all for what’s an off-peak period. Alitalia’s operational

 performance is much better than it was in the past, and its Air One unit grew traffic 45% lastyear as new Venice and Catania bases opened.A big re-fleeting exercise is now done, meaningno more MD-80s or B767s, and longhaul routesare presumably doing well, especially NorthAtlantic routes thanks in part to the joint ven-ture with Air France/KLM and Delta. Thisyear, Alitalia is looking east for new revenues,

entering markets like Tbilisi, Prague and vari-ous Russian cities. It’s also experimenting witha new route to Fortaleza in Brazil. What Alita-lia really needs, however, is for Air France/KLM to buy it.

TAP Portugal needs a buyer too—and almosthad one in Avianca’s parent company. ButPortugal’s government rejected the bid, and ishoping to re-attempt privatization in the near future. Regrettably, it missed a golden oppor-tunity a few years ago when Europe’s BigThree were eager to acquire exposure to fastgrowing markets like Brazil and Africa, whereTAP has a formidable presence. Today, the BigThree are too busy nursing their own wounds,focusing on capacity cuts and cutting costs, notempire building. Naturally, Portugal’s crummyeconomy doesn’t help TAP’s attractiveness.

 Nor does its weak balance sheet and stronglabor unions—another strike is set for later thismonth. But potential suitors should recognizethis: TAP has now made money four years in arow, ending 2012 with a $20m net profit and a2% operating margin. It grew revenues 7% y/y(to more than $3b, making it roughly the samesize by this measure as Finnair) and grew pas-

Gatwick’s shorthaul network continues to incur losses even after reducing headcount there by25%. The company also lost corporate trafficduring the London Olympics and saw fuelhedges lose their effectiveness throughout2012. In summary, it was a difficult year for 

BA/Iberia, or as management prefers, “a year intransition.” If Iberia’s latest cost restructuringsucceeds, 2013 should see brighter skies. Loss-es from British Midland should dissipate thisyear, and groupwide capacity will decline an-other 2%. Then there’s the inescapable ques-tion: did BA make a mistake by merging withIberia? Willie Walsh insists it was a good idea,

 pointing to $400m in merger synergies last year alone. But it does make one think: imagine if BA and KLM, the more profitable part of itscompany, had  completed their near-merger lastdecade. BA/Iberia, of course, isn’t done withconsolidation just yet: it’s now offering to buy

the 54% of Vueling it doesn’t already own.

Speaking of Vueling, the Barcelona-based LCCovercame the ordeals and misfortunates of theSpanish market to earn a $34m net profit and a3% operating margin for all of 2012. That wasup from a 2% operating margin in 2011 alt-hough still well below the 8% figure it achieved in 2010. In the off-peak fourth quarter, Vuelingwas thoroughly in the red, with net loss at $17mand operating margin at negative 9%. Thatnonetheless marked a y/y improvement as wellthanks to a 25% jump in revenues, compared toa 24% increase in operating costs. Vueling gota big break in early 2012 when its hometown

rival Spanair went belly-up, allowing it toexpand ASK capacity 23% for the year and 25% last quarter. But a weaker euro pushed inthe opposite direction, causing fuel to be moreexpensive than it otherwise would have been.Still, the biggest concern is the weakness of theSpanish domestic market, where traffic plum-meted 17% y/y in Q4. Vueling has thereforefocused on international traffic and now getshalf of its sales from outside of Spain. It has

 bases in Paris Orly, Amsterdam and RomeFiumicino and will soon open another in Flor-ence. In addition, it’s now chasing more busi-ness in Scandinavia and Germany too. On the

 product front, Vueling is expanding its appeal

to business travelers, growing connecting trafficthrough Barcelona and signing more codeshareand interline deals. It will also place a big fleetorder, with a decision expected sometime in thenext six months. This year, it will grow ASKsanother 15% to 20% and will remain inde-

 pendently managed by the same executive teameven if BA/Iberia’s full takeover attempt suc-ceeds. Unfortunately, airport costs in Spain and Italy are way up. But fortunately, many rivalsare cutting capacity. Also fortunately, the eurohas strengthened so far this year. But also un-fortunately, Iberia handles its flights at many

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3 the weekly skiesland doesn’t seem an attractive business—amedium-sized airline with a small and remotehome market, now controlled by its government

 because it ran out of money at the turn of thecentury. But the paper is wrong. ANZ, in fact,enjoyed its best July-to-December results in

five years, earning an $82m net profit, or $80mex items, and a solid 7% operating margin.Revenues were up 3% y/y, and operating costswere flat on modest 3% capacity growth. Fullcalendar year 2012 results were good too: a$109m net profit, or $127m ex items, and a 5%operating margin. How does ANZ pull it off?Don’t overlook the benefits of an appreciating

 New Zealand dollar during the past few years,which softened the impact of higher fuel prices.

 Novel new products, clever marketing, aggres-sive cost management, Australia’s strong econ-omy and more inbound tourism from Asia haveall helped too. And last half, longhaul routesmade money for the first time since the global

financial crisis, boosted by the replacement of B747-400s with B777-300ERs. There was alsolonghaul addition by subtraction: ANZ sus-

 pended service between Auckland and Beijing,for example, and Hong Kong-London flightsend today. The Virgin alliance is helping onTasman routes to Australia, while Star Alliance

 partner All Nippon helps in Japan, and a new partnership with Cathay Pacific will help inChina. Unit costs fell 5%, and cargo revenuesincreased 9% last half. ANZ feels positioned togrow its longhaul network again, for which itwill lease an extra two B777-300ERs from Air Lease Corp. next year. The domestic market, bycontrast, grew more slowly than expected, but

new A320s and ATRs are easing the pain fromfalling yields. ANZ is unsurprisingly seeingless revenue from Europe, but never mind that.The carrier’s new executive team expects y/yearnings this half to be up “comfortably.”

After a strong 2010, Thai Airways had a rough2011, its peak season spoiled by flooding thatkept tourists and business travelers away fromBangkok. Well 2012 was somewhere in be-tween: a return to profits, but only modest prof-its. The carrier earned $210m net for the year,or $106m ex items, along with a 3% operatingmargin. And this time, Thai made money in the

 peak fourth quarter: an $85m net profit, or $37m ex items. But Q4 operating margin was

 just 1%, signaling a definitive end to the erawhen Thai would simply funnel in massivevolumes of tourists from Europe and elsewhereand earn fat margins while doing so. Todayfewer Europeans are coming. That suggests

 buying A380s might have been a mistake. And competition is far more intense—from LCCslike AirAsia, Gulf carriers like Emirates, inter-nationalizing Chinese carriers like China

Southern and reformed legacy carriers likeGaruda. To adjust, Thai is redeploying capaci-

senger counts 4%, exceeding 10m for the firsttime in its history. It also reduced its debt 17%and curtailed losses at its maintenance unit. Soany takers?

Far away from Europe in the Antipodes, VirginAustralia had none of the economic worries of its peers in Europe. Its earnings dropped for adifferent reason: industry-wide domestic capac-ity spiked 11% in the final six months of 2012,the highest pace of growth since Qantas launched Jetstar in 2004. As a result, Virgin’snet profit from July through December was just$24m, or $47m ex items, and its operating mar-gin was just 3%, down from 6% in the same

 period a year earlier. Revenues increased 5%y/y, but operating costs rose 8%, all on 6%more ASK capacity. Domestic markets, in fact,

 produced just a 2% operating margin, offset bya healthier 5% margin on international routes.

Its Virgin Samoa joint venture, meanwhile,contributed about $1m in profits. Virgin Aus-tralia also felt cost pressure from Australia’snew carbon tax. But in general, its “gamechange” business plan remains on track. Inter-national markets are doing well in large partthanks to the alliances it has formed, most im-

 portantly with Air New Zealand, which owns20% of its equity. Etihad is another equity and 

 joint venture partner. So is Singapore Airlines.Delta too jointly manages Australia-Los Ange-les routes with Virgin, although without anownership stake. Back at home, Virgin hopes togenerate more corporate traffic with its newreservation system (see page five) and has high

hopes for its Velocity frequent flier plan— mindful, no doubt, of how much profit QantasFrequent Flyer generates. It’s also upgrading

 products and services, buying new B737s, fly-ing A330s on transcontinental routes, growingASK capacity about 5% to 7% this half and anticipating profits this fiscal year (which endsin June) to be up y/y. It recently acquired theregional carrier Skywest to tap mining marketswith ATR turboprops and is now pursuing aneven more ambitious acquisition: 60% of Tiger

Airways Australia. If successful, it will run theLCC as a joint venture with Tiger. But Austral-ia’s competition regulators are concerned. Onone hand they’re thrilled that someone would 

come in and rescue Tiger Australia, preventingits closure. But on the other hand, with thatsomeone being Virgin, a duopoly would re-emerge. Those regulators expect to announce adecision March 14, perhaps issuing a condition-al approval: yes the deal can happen, but only if Virgin promises to grow the Tiger network over time. Separately, Virgin’s soon-to-be subsidiarySkywest (the deal hasn’t yet closed) said it lostabout $2m net in the second half of 2012.

On paper, Virgin’s close partner Air New Zea-

ty from intercontinental routes to intra-Asiaroutes, operating a new shorthaul carrier called Thai Smile and limiting capacity growth— ASKs were up just 1% in 2012 and 4% in Q4.Thai also raised its stake in the LCC Nok Air

from 39% to 49% and effectively now controls

its board of directors. Indeed, Nok Air’s results,although Thai didn’t break them out, are nowincluded in Thai’s results.

Malaysia Airlines, one of East Asia’s mosttroubled legacy carriers in recent years, is show-ing moderate signs of a turnaround. In 2012, itsnet loss was $139m, or $201m ex items, and itsoperating margin was negative 3%. Not great,

 but that beats the negative 8% it registered in2011, when it flew 6% more ASKs. In Q4,meanwhile, it recorded its second straight quar-terly operating profit after six straight losses,with operating margin at 1%. Net profit was

$17m, although this was really a $10m net lossex special items. Q4 revenues increased 5% y/yon slightly less capacity while operating costswere up just 3%. Malaysia Airlines is funding amajor re-fleeting program involving lots of newA330-300s and B737-800s. It also started re-ceiving A380s that, like those flown by Thai

Airways, were ordered in a different era. More precisely, Malaysia Airlines ordered them 10years ago, in January 2003. More relevant to itscurrent needs are ATR turboprops, which itsFirefly and Wings units are using to cultivateregional traffic. Back at mainline, MalaysiaAirlines is a now a oneworld member and oneof many Asian carriers desperate for a cargo

rebound. But even that might prove trivial in theface of AirAsia’s relentless pounding, never mind the grand ambitions of Malindo Air (see

 page eight).

AirAsia’s growth in Malaysia has actuallyslowed in recent years as the group deployed new aircraft to Thailand (capacity up 15% y/ylast quarter), Indonesia (up 14%) and newstartups in the Philippines and Japan. Malaysiancapacity was, by contrast, up just 9%. But wher-ever it grows, AirAsia makes big money, as itdid again last year, including last quarter. For allof 2012, groupwide net profit was $680m, or $251m ex items, and operating margin was13%. And for the peak fourth quarter, net profitwas $147m, or $101m ex items, with operatingmargin at 18%. With probably the lowest coststructure of any LCC worldwide, AirAsia nowthinks it can tackle the tough Indian market,even as it grows its other units. In fact, it willadd 10 planes to Malaysia this year after severalyears of focusing on other hubs. Thai AirAsia isnow flying from Bangkok’s old airport, Indone-sia AirAsia has a new hub in Makassar, AirAsiaJapan will start flying from Nagoya and so on.The arrival of Malindo Air is something to

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fleet & finance 4

Still no deal between Etihad and Jet Airways —or no deal on an equity investment, more pre-

cisely. But Etihad did agree to buy three pairs of London Heathrow slots from Jet for $70m.The Indian carrier will continue to use them under lease, mimicking the sort of balance sheet

 building sale-leaseback deals Jet is also doing with many of its planes.

The European Commission, as expected, formally rejected Ryanair’s bid to acquire Aer Lin-

gus, saying it “would harm consumers” on 46 routes and that Ryanair’s proposed remediesfailed to address its concerns. Ryanair complained bitterly and will appeal the decision.

The U.S. will surely approve the American and US Airways merger, if for no other reasonthan the big support it has among both management and labor unions. But Congress nonethe-less held testimony on the matter last week, giving legislators a chance to air their concernsabout the cost of flying from their districts. The hearings were, as expected, more theater thansubstance.

Gulf Air said its losses for the month of January declined 34% y/y, helped by closing four loss-making routes and progress in cutting labor and aircraft costs. Revenues and yields, it said,were coming in ahead of plan.

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watch, but management says the AirAsia group’searning potential remains “massive” but currently

undervalued by equity investors.

If Lima is perhaps the world’s most under-recognized growth market (see cover story), Tur-key’s Pegasus Airlines is perhaps its most unrec-ognized growth airline. In a regulatory filing inadvance of an initial public share offering, theLCC unveiled strong financial results—a 2012net profit of $86m and a 10% operating margin— and stunning revenue growth of 29%. That wason just 14% more ASKs y/y, with operating costsup just 17%. Pegasus is certainly an airline towatch. It recently placed a giant A320/21-NEOorder and operates from a nation that grew air traffic to 98m passengers last year, up 10% from

2011 and up from a mere 30m in 2003. It fliesabout 40 B737s, mostly -800s packed with 189

seats. It also owns part of Air Berlin.

Republic, warring with SkyWest for U.S. re-gional contracts, earned a $13m Q4 net profit, or $19m ex items, and a $51m full-year net profitfor 2012, or $57m ex items. Operating marginsfor the quarter and year, respectively, were 9%and 8%. The carrier’s core business of flying sub-100 planes for several U.S carriers benefited fromcost restructuring at its Chautauqua unit, whichhandles the 50-seater flying that nobody seems towant anymore. And the company recently won a

tentative deal to fly E-Jets for American. But themost interesting question for Republic is whatwill it do with Frontier, which it ill-advisedly

 bought in 2009 after beating Southwest in a bankruptcy auction. Thanks to benign capacitytrends in Denver, Frontier’s earnings have started to improve—its Q4 net profit was $2m, or $7mex items, and its Q4 operating margin was 3%.For the year, meanwhile, net profit was $24m, or $30m ex items. Operating margin was also 3%.Republic says it is discussing a potential divesti-ture with several interested parties and will makea decision on its “path forward in the next coupleof months.” In the meantime, Frontier is densify-ing aircraft cabins, phasing out A318s, driving

more ancillary revenues and—after shuttering afailed base in Colorado Springs—experimentingwith another in Trenton, N.J. Nevertheless, it’s asDenver dependent as ever, and Denver is a rareairport with three major hubs. United and South-west operate the others.

American, as it readies its merger with US Air-

ways, is clearly showing the fruits of its bank-ruptcy restructuring. In the very off-peak monthof January, it earned a $44m net profit and a 4%operating margin. Last January, it lost $53m exspecial items.

Air China, one of just three prominent airlines buying passenger B747-8s (Lufthansa and  Korean Air are the others), added two units to its order book. The -8 is the latest generation

version of Boeing’s iconic B747 and a competitor to the A380. Air China didn’t stop therethough. It also ordered an additional B777-300ER and 20 additional B737-800s, with an optionto change four of these 20 into one B777-300ER. Air China, together with its close equity part-ner Cathay Pacific, also ordered—but at the same time canceled and sold—some cargo aircraftlast week. For East Asian airlines, cargo has gone form being a strength to a weakness.

Air Lease Corp. further brightened Boeing’s week by ordering 10 additional B777-300ERs,nine of which will arrive in 2014. In its Q4 earnings presentation, ALC reported strong leasingdemand for widebodies and generally stable lease demand overall. It also sees opportunities tohelp the new American optimize its combined fleet and mentioned that A320 lease rates arefirming but “not where they need to be.”

British Airways will adopt not one but two new fleet types in the coming months, starting withA380s in July and B787s in... well... one of these months. In the coming weeks, it will an-nounce its first A380 route. Hong Kong, Tokyo, Beijing, Shanghai, Singapore and New York are some contenders. As for the B787, BA remains bullish on it and dismissed the impact of thelatest delivery delay as “negligible,” in part because it only planned to use initial units on exist-ing routes where it can simply delay the retirement of B767s. It also mentioned an upside to thedelay: it creates an option to reduce capacity by retiring B767s as originally planned, even be-fore their replacements arrive. B787 delays are more disruptive for an airline like All Nippon,which entered new markets like San Jose based on the plane’s capabilities and economics.

Mesa Air, a regional carrier that emerged from bankruptcy in early 2011, still operates 38 two-class CRJ-900s for US Airways, whose No. 2 man Scott Kirby loves these planes. He lovesthem so much, in fact—he said recently they’re one of the airline’s most profitable fleettypes—that US Airways hired Mesa to induct nine more of them to fly from the Phoenix and 

Charlotte hubs. Mesa also works with United and operates its own small airline within Hawaii.

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The Weekly Skies

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5 marketing & salesAirBuzz 

Marketing, Price, Promotion & Alliances

The BackendSales, Distribution & Corporate Travel

Make no mistake: these are uncertaintimes for global distribution systems. Theworld’s airlines are coalescing to advance

new ways of distributing airline tickets— ways that could upend long-held practic-es. At the same time, segments booked through GDSs grew 1% in 2012 and bare-ly at all in Q4. In regions like Asia, LCCsare becoming more prevalent, many of them either not selling through GDSs or only selling through them on a limited 

 basis. Nevertheless, Amadeus is doingwell thanks in part to winning share fromrivals. In addition, more airlines are usingits reservation system, its ancillary reve-nue solutions and its other IT products.

Virgin Australia said its proportion of 

GDS bookings has jumped fivefold sinceconverting to the SabreSonic reservationsystem. And while GDS bookings comewith a fee, they also produce what Virginestimates is a 10% yield premium to non-GDS bookings. Air New Zealand added that Virgin’s adoption of SabreSonic hashelped make their alliance more effective.

In a move to cut costs, Frontier pulled itsschedules and fares from Expedia. It was,it said, “unable to reach an agreement.”

Japan Airlines has been codesharing with Jetstar for a half decade on routes between Japan and Australia. Well now it’s going to codeshare domestically with the young Jetstar Japan, a joint ven-ture between itself and Qantas. JAL and Jetstar Japan will also offer reciprocal mileage benefits.But the only Jetstar Japan tickets that JAL will market with its “JL” code will be those booked as

 part of a connecting itinerary involving one of its own international flights. An example: someoneconnecting from a Sapporo-Tokyo Jetstar Japan flight to a Tokyo-New York JFK JAL flight.

Elsewhere in the oneworld family, British Airways signed a codeshare deal with Cathay Pacific

with the intention of helping its passengers get to Australia. This follows a divorce with Qantas,

which left BA for Emirates. BA, though, still flies to Sydney via Singapore with its own metal.

Etihad began a new global advertising campaign featuring the tag line: “The World is Our Home,You Are Our Guest.” A television spot features the airline’s premium products as well as AbuDhabi’s attractions. It’s most definitely an aspirational campaign seeking to re-romanticize the won-ders of air travel—not one that emphasizes low fares or convenience.

Airline Q4

AirAsia 18%Copa 17%

Japan Airlines 15%

Allegiant 11%

WestJet 11%

Air Arabia 11%

Spirit 10%

Air Mauritius 9%

Republic 9%

All Nippon 8%

Alaska 7%

Jet Airways 7%

Airline Q4

SpiceJet 7%Tiger Airways 7%

Air New Zealand* 7%

Aeromexico 7%

Chorus/Jazz 6%

Delta 6%

SkyWest 5%

Comair/Kulula* 5%

US Airways 4%

JetBlue 4%

Ryanair 4%

Singapore Airlines 3%

Airline Q4

Virgin Australia* 3%Southwest 3%

 Norwegian 3%

Hawaiian 2%

Qantas* 2%

 American/US Air. 2%

Air Canada 2%

Thai Airways 1%

Malaysia Airlines 1%

American 1%

Finnair 1%

Alitalia 0%

Airline Q4

United  0%Korean Air  -1%

BA/Iberia -1%

Asiana -1%

Skymark  -2%

Air France/KLM -2%

Air Berlin** -3%

Lufthansa** -4%

Icelandair  -4%

Aer Lingus -6%

Vueling -9%

Philippine Airlines -13%

Leading and Lagging the WorldFourth-quarter 2012 operating margins among airlines that have reported so far

*Figure is for July-Dec., not Oct.-Dec. **Lufthansa and Air Berlin figures are preliminary

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6trends 6

Growers and Slowers in 2012: Traffic and capacity data for selected airlines 

by the numbers

AirlineRPM/K

traffic y/yAirline

ASM/Kcapacity y/y

Airline 2012 pax in m

Turkish Airlines 27% Copa 24%  American/US Airways 170

Vueling 27% Vueling 23% Delta 165

Copa 23% Hawaiian 22% United 140

Etihad 23% Spirit 21% Southwest 134

Spirit 21% Etihad 20% American 108

Hawaiian 20% Turkish Airlines 18% Lufthansa Group 103

Aeroflot 19% Norwegian 18% China Southern 87

 Norwegian 17% Allegiant 18% Ryanair 80

Allegiant 16% Cebu Pacific 15% Air France/KLM 77

Porter 14% Porter 14% LAN/TAM 65

Garuda 12% China Southern 12% US Airways 63

China Southern 11% Garuda 11% easyJet 59

AviancaTaca 10% AviancaTaca 10% BA/Iberia 55Finnair 10% AirAsia 9% Air China 49

Cebu Pacific 10% JetBlue 8% Qantas 48

JetBlue 9% Asiana 7% All Nippon 47

AirAsia 9% All Nippon 7% Turkish Airlines 39

All Nippon 9% EVA Air 7% Japan Airlines 36

Asiana 9% Alaska Airlines 6% AirAsia 34

EVA Air 8% Aeromexico 6% Air Berlin 33

Singapore Airlines 8% Singapore Airlines 6% Air Canada 33

WestJet 8% Korean Air 5% JetBlue 29

Alaska Airlines 8% SAS 5% SAS 28

LAN/TAM 8% LAN/TAM 4% Aeroflot 28

Korean Air 6% Air China 4% Alaska Airlines 26

SAS 6% China Airlines 4% Alitalia 24

TAP Portugal 5% TAP Portugal 4% AviancaTaca 23

Aeromexico 4% Finnair 4% Singapore Airlines 21

China Airlines 3% WestJet 4% Garuda 20

Air China 3% Qantas 3% Norwegian 18

Aer Lingus 3% US Airways 2% Jet Airways 17

Qantas 3% Air Canada 1% WestJet 17

US Airways 3% Aer Lingus 1% Aeromexico 15

BA/Iberia 3% BA/Iberia 1% Vueling 15

Air Canada 3% Lufthansa Group 1% Malaysia Airlines 13

Lufthansa Group 2% Air France/KLM 1% Frontier 13

Air France/KLM 2% Southwest 0% Cebu Pacific 13

Japan Airlines 1% American -1% Spirit 10

American 0% Delta -2% Etihad 10

Delta 0% Air Berlin -3% TAP Portugal 10

Southwest -1% Japan Airlines -3% Aer Lingus 10

United  -4% Jet Airways -3% Hawaiian 10

Jet Airways -5% United  -5% Finnair 9

Frontier  -6% Malaysia Airlines -6% EVA Air 8

Malaysia Airlines -6% Frontier  -8% Allegiant 7

Source: company reports. The above airlines are from among those that have reported their 2012 traffic data.

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7 labor & airports

State of the UnionsWorkforce Developments

The mediator between deeply troubled Iberia (see page two) and its striking

unions might rule early this week, according to Spanish news reports. Theairline wants to cut some 3,800 jobs (19% of its workforce) and reduce payand benefits for everyone else. But first it’ll endure… yes… another week of 

strikes beginning today, forcing hundreds of flight cancellations.

Employees tend to like fixed pay rather than variable pay—understandablyso, given the certainty a fixed paycheck entails. But when you work for acompany that’s performing exceptionally well, variable pay can be lucrative.Alaska Airlines proved that last week, awarding its employees handsomeyear-end bonuses equivalent to about a month’s pay. Including monthly bo-nuses awarded for meeting operational goals throughout the year, Alaska’semployees collectively earned $88m in variable pay for 2012. In fact, annual

 bonuses have averaged about 8% of pay for the past four years, exceeding thecompany’s 5% target. It’s important to remember that many airline workers,including those at Alaska, have over the years endured harsh pay and benefitcuts. But for this industry and for this economy, the fact that many U.S. air-lines are able to afford substantial bonus pay is a good story—for an industry

and an economy that can use good stories.

US Airways flight attendants approved their first contract since the 2005America West merger. It includes an immediate pay increase, in advance of another potential pay increase if they sign a joint contract with American’sflight attendants. But that’s jumping ahead—the merger isn’t yet a done deal.Even once it is, attendants from both groups will have to hold an election todecide which union will represent the combined workforce. The AFA repre-

sents US Airways attendants. The independent APFA represents AA’s.

For all the rapid growth in Asia, and all the capacity cutting inAmerica, Atlanta remained the world’s busiest airport yet againin 2012, welcoming more than 95m passengers. That was up3% y/y with domestic traffic—accounting for some 90% of Atlanta’s passengers—up closer to 4% and international trafficdown a bit. But will Atlanta grow again in 2013? That dependson Delta but also on whether Southwest’s total presence there 

continues to shrink as it integrates AirTran.

Beijing remains a distant No. 2 in the world airport rankings— for the third straight year—with 82m passengers handled in2012. And don’t look now, but Beijing is no longer the fast-growth airport it once was. After expanding traffic 17% in2009 and 13% in 2010, passenger counts were up just 5% in2011 and 4% last year. One interesting fact: just 18 airlines

serve Atlanta. Ninety-four serve Beijing.

Airlines sometimes complain that airports are comfortablemonopolists, not subject to the same intense market forces asairlines, who are content to just pass along costs to airlines and their passengers. But airports themselves see themselves com-

 peting for air service—and then passengers to fill the flights. Arelatively new trend— airport loyalty schemes, much like theairline programs on which they’re modeled—speaks to this.Tiny South Bend, Ind., which loses some traffic to Chicago’sgiant airports, just lauched one. But airports as large as giant

Dallas-Fort Worth have launched similar programs.

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8routes & networks

Who’s Flying Where Malaysia starts with the letters “M-a-l.” And Indonesia starts with the letters “I-n-d-o.” So what better name for a new Indonesian-owned airline

 based in Malaysia than Malindo Air? If all goes as planned, this new airline will take to the skies later this month, starting with flights within

Malaysia before venturing to the near abroad with B737-900ERs and—ultimately—the far abroad with B787s. Malindo’s formation, more inter-estingly, represents an impending head-to-head brawl between Lion Air, its grandly ambitious Indonesian backer, and AirAsia, the even moreambitious LCC. Lion and AirAsia, of course, already do battle in Indonesia itself, and Malindo, to be clear, will offer two classes of service and various inflight amenities like food and entertainment—quite different from AirAsia, in other words. But new capacity is new capacity, and Malaysian consumers are surely in for some cheaper airfares. Malindo is actually a joint venture between Lion Air and a state-owned Malaysiandefense company, which seems intent on making life miserable for state-owned  Malaysia Airlines, perhaps the biggest victim of Malindo’slaunch. Malindo last week received its first plane, a B737-800, while actively recruiting staff via its new website, which features the same brand-

ing as Lion Air—just the name is different. Its marketing pitch: “Not just low cost.”

The coming battle for Malaysia highlights intensifying competition in East Asia. But the situation is quite the opposite in the U.S. There, consol-idation means diminished competitive intensity, although still in the context of looming battles for global supremacy among the new Big Three:United, Delta and American, which will combine with US Airways. Even before its merger is completed, American is preparing for the battle

 by strengthening its position where it’s already strong: Latin America. Now that TAM is hitched to American’s longtime oneworld partner LAN, Brazil become a fertile market for expansion, facilitated further by a phased-in U.S.-Brazil open skies pact and new airport capacity under construction in Sao Paulo. So American applied to serve Sao Paulo from both Los Angeles (late this year) and Chicago O’Hare (late next year).

It already serves Latin America’s largest airline market from Miami, New York JFK and Dallas DFW.

American is also, more modestly, boosting its Mexican network from Dallas DFW, its most lucrative hub. It will send 44-seat ERJ-140s— terrible planes at current fuel prices, but it has to fly them somewhere—to Hermosillo and Zacatecas. Those will be the carrier’s 19th and 20thdestinations in Mexico. Separately, American will by June serve 115 cities nonstop from Miami, its second most lucrative hub, when it launches

service to San Diego using 150-seat B737-800s.

As it awaits a fateful ruling from competition regulators weighing its proposed investment in Tiger Airways, Virgin Australia is fortifying itsdomestic network with some organic growth. It will enter two new regional markets from Brisbane using ATR turboprops: Bundaberg and Mo-

ranbah. And more relevantly for cross-country travelers, Virgin will begin deploying widebody A330-200s between Brisbane and Perth.

 No airline likes when an airport raises fees. But there’s something deep down in Ryanair thatseems to take pleasure in receiving news about a fee hike and then beating up on the offendingairport with a barrage of service cuts and acid-tongued press releases. This time it’s a repeat of-

CONTINUED ON p. 9

JetGreenEnvironment, Conservation & Fuel 

Don’t look now, but unless you live on Antarctica, you might soon be surrounded by “sharklets.” Since their debut with AirAsia in December, Airbus’s fuel-saving wing tips have surfaced on three more continents. Last week Lufthansa became the first carrier in Europe to take delivery of asharklet-equipped A320—the first of 22 on order for the airline. The week before that, the sharklet reached the shores of North America by way of JetBlue, the first carrier in the region to add the wingtips. And perhaps more significantly, JetBlue announced it had agreed to retrofit 110 A320s— nearly 90% of that fleet—with the sharklets. Like AirAsia, all of JetBlue’s new A320s going forward will come with the wingtip option. Earlier inFebruary Avianca became the first South American airline to sport the nearly eight-foot-tall Sharklets. Jetstar Japan, Cebu Pacific Air and  In-dia’s GoAir and IndiGo all have them as well. Through better aerodynamics, an A320 equipped with sharklets can reduce fuel burn and emissions

 by “up to four percent,” says Airbus.

On the topic of aviation’s challenge to reduce its emissions, the biggest happening last week was that the European Parliament’s environment com-mittee voted nearly unanimously in favor of suspending for a year the application of the Emissions Trading System (ETS) to flights into and out of (but not within) the E.U. Although it wasn’t much of a surprise, the vote moves the so-called “stop the clock” measure closer to becoming law,which should happen in mid-April. The whole point of the suspension is to give momentum to the International Civil Aviation Organization(ICAO), which is tasked with creating and negotiating a global aviation emissions mitigation agreement. Europarl ministers emphasized in last

week’s discussions that the ETS suspension would be limited to a year unless they see “clear and sufficient” progress made by ICAO.

ICAO’s plan very well might include what carbon regulators call “market-based measures” (MBMs), examples of which include carbon offsets or carbon trading. IATA and others in the industry have been publicly supportive of MBMs for a while now. For one thing, it gives the industry theflexibility to continue growing in the short term while essentially buying the right to pollute. In other words, “cap and trade” is better than just“cap.” Speaking in Hong Kong at the Greener Skies conference, IATA’s CEO and Director General Tony Tyler continued to show enthusiasm for MBMs while cautioning that whatever global plan ICAO delivers must delicately preserve fair competition. With aviation’s “razor-thin” margins,he said, any skewing of the markets could be “severe.” He went further, saying that airlines should get deeply involved in this process. If aviationis to achieve carbon-neutral growth through MBMs, it will require a grand compromise between the countries with established, slow-growingairline industries and the countries with younger, fast-growing industries. Tyler suggested that a compromise dreamed up and agreed upon byairlines themselves would be more “palatable” than having governments do it for them. Citing the E.U. ETS as evidence, he said, “things can goterribly wrong” when governments are left “to decide how we should run our businesses.” If the industry is to take Tyler’s advice, it would likelyhave to come up with that grand compromise before late September, when ICAO will likely be defining a global emissions plan.  

Correction: in last week’s issue, we said China Easternhas A310s. It actually has A300s. Also, we incorrectlywrote that Nok Air received its first B737-800. It wasactually its 10th unit, although it was the first receiveddirectly from Boeing, according to ch-aviation.

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9999 routes & networks

Who’s Flying WhereCONTINUED FROM p. 8

fender—London Stansted—whose departing owners decided to hike fees another 6%. So Ryanair said it will cut traffic at Stansted by 9%, re-

versing previous plans to grow 5%. It also called the move “a parting slap to Stansted’s airlines and passengers.” Stansted did get a new route from easyJet, which launched flights last week to Sharm el Sheikh, an Egyptian Red Sea resort city largely immune

from the political unrest crippling other parts of the country. To celebrate the occasion, easyJet brought a real-life camel to greet passengers atthe check-in area. Stansted, for the record, is only easyJet’s third busiest base in London. It’s smaller than Luton and much smaller than Gat-

wick, which is its busiest base overall.

JetBlue is now flying to Charleston, a port city along South Carolina’s Atlantic coast that’s popular with tourists. It began double-daily E190

service from New York JFK and once-daily E190 service from Boston. The carrier’s route map now features 76 cities.

A few years ago, Emirates tried flying nonstop between Hamburg and New York JFK with fifth-freedom rights to sell nonstop itineraries. Thatdidn’t work. But the airline is now apparently considering nonstop flights between Milan Malpensa and New York JFK. According to ch-

aviation, the Dubai-based giant wants slots and flight rights to operate the route, which would supplement its Dubai-Milan and Dubai-New York 

nonstops.

Hong Kong’s Dragonair, wholly owned by Cathay Pacific, is getting ready for the summer peak. At the end of this month, it will increase fre-quencies to Wuhan (mainland China), Kota Kinabalu (Malaysia), Jeju (Korea), Chiang Mai (Thailand) and Kaohsiung (Taiwan). These are mar-kets generally considered too small for Cathay and its widebodies. Cathay, for its part, is increasing summer frequencies to Toronto, Los Ange-

les and Bangkok, while making Mumbai flights—some currently operated via Bangkok—nonstop.

Latvia’s airBaltic will switch its Riga-Milan flights from Linate airport to Malpensa airport. By doing so, it gets better slot times to facilitateconnections to and from the Baltics, Scandinavia, Russia and elsewhere in the former Soviet region via its Riga hub. The move will also allowits passengers to connect to and from the longhaul flights that Malpensa has but Linate doesn’t. The downside is that for local passengers, Mal-

 pensa is farther from Milan’s city center. For this summer, by the way, airBaltic has already announced six new destinations: Larnaca, Malta,Prague, Heviz-Balaton, Olbia and Rijeka. Not all of these are household names, but that’s the point: airBaltic is doing its best to cultivate oppor-

tunities in markets neglected by larger and lower-cost rivals.

Peach, the new ANA-backed Japanese LCC celebrating its first birthday, told Kyodo News it’s eying flights to ASEAN cities like Hanoi and Bangkok from Naha, Okinawa, later this year. It might connect Naha with Hong Kong and Taipei too. It already flies to Hong Kong and Tai-

 pei—as well as to Seoul and Busan in Korea—from Osaka.

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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 27.38 4% 31% On-time performance for February again exceeds 80%; employees awarded bonuses

Delta 14.82 8% 52% Adding new Atlanta and even Los Angeles service to Montana during the summer peak 

American 2.52 -8% 414% Expects to emerge from bankruptcy and close merger with US Airways in Q3

US Airways 13.61 0% 78% New AA board: 5 members chosen by AA creditors, 3 current AA directors and 4 from US

Southwest 11.82 2% 32% Amadeus says work on its res system for int’l bookings will be ready by the first half of 2014

Alaska 52.40 3% 52% United announces new B757 Newark-Anchorage service for the peak summer season

JetBlue 6.15 1% 21% Keeping an eye on developments in San Juan, where the airport is trying to privatize

Virgin America Transcontinental routes account for more than 70% of total ASM capacity

Hawaiian 5.77 -1% 8% Flight attendants ratify agreement on terms for flying newly ordered A321-NEOs

Spirit 20.70 -1% 8% Stock price in the past year up the least among U.S. LCCs

Allegiant 81.26 1% 65% Stock price in the past year up the most among U.S. LCCs

SkyWest 14.22 3% 27% Air Mekong, a Vietnamese carrier it partly owned, ceases operations

Republic/Frontier 9.96 3% 89% If it does sell Frontier, it expects a deal would close by the end of the second quarter 

Air Canada 2.42 3% 157% Revamped “Altitude” elite status program now in effect; features five different tiers

WestJet 22.60 5% 60% Has a marketing partnership with baseball’s Toronto Blue Jays

Aeromexico 17.67 -3% -26% Began flying from Toluca near Mexico City to Cancun, Monterrey, Guadalajara & Acapulco

LAN/TAM 17.61 0% -14% In their first joint sale, LAN and TAM are promoting Latin American itineraries to Europeans

Gol 6.40 -3% -24% Will report Q4 and full-year 2012 financial results March 25

Copa 105.51 1% 45% Panama remains one of the world’s fastest growing economies, with 11% growth in 2012

AviancaTaca 4575 0% 11% Expanding its flight offerings between Lima and secondary Colombian cities

Emirates Launched flights to Algiers, its 22nd destination in Africa and 130th overall

Air Arabia 0.92 3% 24% Newest route will be Sharjah service to Mattala, its second destination in Sri Lanka

Turkish Airlines 7.34 8% 180% Will spend $120m on advertising this year (Gulf Business); Kobe Bryant doesn’t come cheap

Kenya Airways 10.50 -1% -40% Still evaluating whether to launch a new LCC called Jambo Jet ( Airlines International) 

South African Air. Rival Comair furious about the government assistance it’s getting; will turn to the courts

Jet Airways 538 2% 83% Labor costs falling as it relies more on Indian rather than foreign pilots

Aeroflot 126.67 -12% -5% Flying its first B777-300ER; plane’s first assignments will be Bangkok, Phuket, N.Y., HKG

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

exchange) 

$91 -3% -15% Prices dip to their lowest level thus far in 2013

Around the WorldA Look at the World’s 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

 AROUND   T H E W ORL D   A L O O K    A T   T H E W O 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

yearComment

Lufthansa 15.44 3% 47% Back in labor negotiations with the large Verdi union, which represents mostly ground staff 

Air France/KLM 8.20 6% 83% New cabin crew work rules will take effect next month

BA/Iberia 238 5% 42% About 14% of the group’s revenue comes from points of sale within Spain

SAS 14.40 1% 78% Banned from giving FFP awards within Norway but will do so anyway for corp. customers

Alitalia Vueling to have two planes based in Florence; Meridiana retreated from the city in response

Finnair 3.00 -2% 26% Moving some finance work to Estonia in a bid to cut costs

Aer Lingus 1.14 -10% 30% Stock drops by a tenth following the E.U.’s official statement on blocking the Ryanair bid 

Virgin Atlantic “Little Red” is the branding it will use for its new intra-U.K. flights operated by Aer Lingus

easyJet 1017 2% 129% BA/Iberia using its cost structure as a benchmark for Iberia shorthaul

Ryanair 5.75 1% 36% New route announcement: Dublin to Bremen in Germany, starting in the fall

Air Berlin 2.33 -9% -1% Latest update to its Etihad partnership: codesharing to China and Japan

Norwegian 227.00 4% 176% One of the best preforming airline stocks anywhere in the past year; rose again last week 

Vueling 7.82 0% 60% Aside from Barcelona, it’s also the No. 1 airline by traffic in the Basque city Bilbao

Aegean 2.70 12% 96% Russia’s S7 to start flying twice weekly between Moscow DME and Athens next month

Japan Airlines 4400 0% x Aside from oneworld friends, JAL has mileage pacts with Air France, Emirates, China Eastern

All Nippon 191 -1% -25% Reworking its corporate structure, in part to facilitate acquisitions of stakes in other airlines

Korean Air 44200 -1% -16% Received the first B777 that Boeing has produced at its new accelerated rate of 100 per year 

Cathay Pacific 14.56 1% -6% Dragonair unit agrees to 2% pay hike for its flight attendants

Air China 6.50 5% 11% Its new Chengdu-Frankfurt flights begin in May; will operate 3x a week with A330-200s

China Eastern 3.32 3% 11% Tells IATA’s Airlines International it makes most of its money on domestic routes

China Southern 4.38 5% 11% Owns 39% of Sichuan Airlines, which launched new Chengdu-Melbourne flights last week 

Singapore Airlines  6.60 0% 0% Discussing an order for more Airbus widebodies, according to Bloomberg News 

Malaysia Airlines 0.72 4% -49% Received its fifth 492-seat A380; now able to offer daily A380 K.L. service to Paris CDG

AirAsia 2.95 12% -19% Plans to expand routes in eastern Malaysia as well as from Johor near Singapore

Thai Airways 25.50 1% 1% Leases on three B777-300ERs expiring; will return them to their owner, India’s Jet Airways

Cebu Pacific 65.90 1% -3% Air Phil Express, owned by Philippine Airlines, has abruptly exited Manila Clark 

Qantas 1.62 -1% -7% Jetstar increased capacity on the Sydney-Melbourne route by 57% from July to December 

Virgin Australia 0.41 -7% -11%  New airport terminal in Canberra, Australia’s capital, set to open this month

Air New Zealand 1.14 12% 65% Still expects to get its first B787 at the end of 2014; these will be the newer -9 versions

markets

(not publicly traded)

(not publicly traded)

Around the WorldA Look at the World’s Airlines, Including Endweek Equity Prices

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erations in 2004. Authorities in the U.S. and other countries had alleged Aero Continente wasas much a drug-running operation as an airline.

LAN pounced. By 2005, it was triple the size ithad been in 2003, Aero Continente’s last fullyear of operation. LAN had both depth and 

 breadth: service to virtually all key markets fromLima along with the frequencies that businesstravelers demanded, not to mention an operationthat was safer and more reliable than any of its

 predecessors. Lima featured a large and growinglocal economy—not as wealthy as Chile’s capitalSantiago but, as LAN recognized, with far better geography to offer connections between many

 points throughout South America and the rest of the world. Argentina’s second largest city Cordo-

 ba, for example, can’t support nonstop service toMiami. So traffic must pass through a hub, and if that hub isn’t Copa’s Panama City hub—in thiscase like many cases the most geographically“perfect” hub—then Lima ranks a close second.

In the early 2000s, TACA had the opposite problem to LAN: a string of rather well-located hubs throughout Central America that it had insome cases developed (El Salvador) and in other cases acquired (San Jose) when it bought other airlines. But these hubs served economies thatwere either small or poor or both. The answer?TACA Peru. The setup was similar to that of LanPeru: 49% ownership, use of a well-regarded 

 brand and access to its training capabilities, loy-alty program and so forth. Early on TACA, like

LAN, began developing an extensive domesticnetwork, but TACA later dialed down its domes-tic ambitions and focused more on internationalflights from Lima, serving both the local market

 plus sixth-freedom traffic (i.e., connections be-tween two other countries—say, Paraguay and Bolivia). The same distinction between LAN and TACA continues today: LAN (including TAM’smodest presence) schedules about twice as manyseats as No. 2 TACA (including Avianca) fromPeruvian airports overall. But LAN is manytimes larger in the domestic market, where twoother local carriers, Star Peru and Peruvian Air-lines, are also each about twice as big as TACA.

Today, of course, TACA is a part of AviancaT-

aca. This might seem a theoretical threat to Lima, because the merged airline has Avianca’s power-

cover story   12

CONTINUED FROM p. 1

Much Ado About Peru: Lima enjoying one of the biggest airline booms anywhere

Cuzco follows through on plans to build a newairport, which would presumably be operation-ally less challenging than the current one.

But even with tourism-driven Cuzco capacity

accounting for a quarter of Lima’s growth, bydefinition, three quarters comes from else-where. That elsewhere is mostly the world’sother two broad categories of traffic aside fromleisure: corporate travel and visiting friends and relatives (VFR). With scores of Peruvians liv-ing abroad in expat communities in the U.S.,Spain, Chile and elsewhere, it’s no surprise thatLima features not only most of the biggest lega-cy airlines from South America, North Americaand Europe but also low-cost carriers likeAmerica’s Spirit, Spain’s Air Europa and Chile’s Sky Airline. Among legacies, Lufthansais for now notably absent from Lima but is said to be thinking about re-starting service from

Frankfurt, last flown pre-9/11.

The boom in business travel is no surpriseconsidering Peru’s overall resource-driven eco-nomic growth in recent years. Some businessleaders even hope for service to one of the bigthree Arabian Gulf hubs. That’s probably fanci-ful for now: even much larger Buenos Airesdoesn’t have such service (just tag flights con-tinuing from Brazil). But Peru does unquestion-ably punch above its weight in terms of connec-tivity to the world. It has ethnic and commerciallinks with faraway Japan, to cite one example— no surprise that, according to PaxIS data pro-vided by IATA Consulting, a fair number of 

 passengers on Delta’s flights from Atlanta toTokyo begin their journeys in Lima. They payan average of about $2,000 each way, inci-dentally, probably making Lima-Tokyo amongDelta’s better connecting origin-and-destinationmarkets in the world. No wonder American,albeit a little tardy to the party, will launchLima-Dallas DFW flights next month, timed toconnect with its DFW-Tokyo flights.

Of course conversely, any broad national or hemispheric economic slowdown would surelyimpact Lima’s air travel market. Among vari-ous potential warning signs, The Economist 

recently noted that exports could come under  pressure if Peru’s currency continues appreciat-

ing, as it has been doing more rapidly than evenother appreciating South American currencies.

 No, Lima won’t continue growing 20% annu-ally forever. Just as Istanbul’s growth has begunslowing a bit on a percentage basis, so too willLima’s—that’s almost a given as the absolutenumbers continue getting bigger. But if Limakeeps doing as good of a job controlling what itcan and adapting to what it can’t as it’s done inrecent years, this underappreciated hub air-

 port—as dynamic and interesting as any in theworld—should continue becoming a measuringstick against which other aspiring airportsmeasure themselves.

 

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

ful Bogota hub and shouldn’t “need” Limaquite as much as TACA did individually. LAN,for that matter, now has its own unit in Colom-

 bia. Like Lima, Bogota has good geography, a

large local population, a large and growinglocal economy and a government that’s gener-ally supportive of it all. So what’s wrong withthe Bogota hub? Mostly that it isn’t… well…much of a hub. Even after a new passenger terminal opened there last year, it’s extraordi-narily congested. Capacity constraints do pushup local yields and make Bogota a rather prof-itable market. But precisely the fact that localyields are so high, along with the severe chal-lenges of scheduling well-timed connections,mean AviancaTaca and LAN have little abilityor incentive to optimize for lower-yieldingconnecting traffic—especially with Lima sucha good alternative, an alternative that will be-

come even better when a new terminal and second runway open, hopefully in 2014.

What, then, are more plausible threats? For one thing, the Lima story is, to an extent, also aMachu Picchu story. The once “lost” city of theIncas was very much found, first by archeolo-gists about a century ago and more recently byhundreds of thousands of tourists each year who want to visit what’s now a UNESCOWorld Heritage Site. Almost all of them arrivevia air, to the nearest airport in Cuzco. And almost all of those that arrive by air, in turn,connect in Lima. Cuzco has virtually no inter-national service—just some less-than-dailyflights to Bolivia. LAN runs as many as 15

flights each day, each way between Cuzco and Lima. Statistics ostensibly about Peru’s overalldomestic market are, in truth, largely statisticsabout just the market between Lima and thecountry’s No. 2 airport Cuzco, where sched-uled seats this month are up no less than 30%y/y, according to an Airline Weekly analysisusing Diio Mi. (No. 3 Arequipa has barely half the activity of Cuzco and is not growing nearlyas rapidly.) Of Lima’s astounding 20% y/ygrowth in 2012, measured by scheduled seats,fully a quarter of that overall growth was inseats to Cuzco alone—never mind growth to

 places like Miami, Bogota and Santiago, whichare all growing by double-digit percentages

too. But preservationists and some governmentofficials are deeply concerned that tourism isruining the very thing that draws all the touriststo Machu Picchu—the Incas didn’t design it towithstand the masses. Any further restrictionson tourism—the number of permits for hikingthe famous Inca Trail from Cuzco to MachuPicchu has been reduced in recent years— could likewise cap Lima’s own growth. On theother hand, even if Machu Picchu tourism doescontinue its current trajectory, any futureflights from alternative hubs like Panama Cityor Santiago could likewise dent Lima’s growtha bit. That service could become more likely if 

Lima’s Top International Airlines LAN/TAM is No. 1. AviancaTaca is No. 2. Here’s who’s next:

Ranked by weekly seats this month. Source: Diio Mi