The question of demand continues to envelope the transatlantic market this year, as airlines add capacity despite weaker results in the first half.
Carriers piled on the seats between North America and Europe with capacity increasing 5.9% to 13.1 million in the third quarter and 7.41% to 10.4 million in the fourth quarter compared to a year ago, Capstats data shows. The third quarter roughly coincides with the IATA summer schedule, which is widely seen as peak season across the Atlantic.
Airlines have added a number of new markets. Air Canada and its low-cost subsidiary Air Canada Rouge launched new service and increased frequencies from their Montreal and Toronto hubs to Amsterdam, Athens, Barcelona, Paris and Venice; Air France and KLM added new flights to Edmonton and Vancouver; Delta Air Lines entered the Philadelphia-London Heathrow market and American Airlines retaliated with additional frequencies; while United Airlines added new seasonal routes to Dublin, Newcastle, Rome and Venice.
Air Canada is one of the faster growing carriers in the market. It is scheduled to fly 10.9% more seats across the Atlantic in the third quarter and 8% more seats in the fourth quarter compared to the same periods in 2014, Capstats shows. This far outpaces growth at its Star Alliance joint venture partners Lufthansa and United.
Asked why the significant international capacity additions, the Montreal-based Star Alliance carrier’s senior director of network planning Mark Galardo said in late 2014: “We’re trying to make-up for lost ground”, referring to the restructuring and labour woes that Air Canada faced during the past decade.
He argued that with costs decreasing faster than yields, the carrier can profitably absorb the rapid growth.
Making up for lost ground or not, the combined pressure of capacity growth and the strong US dollar is taking a toll on industry yields across the Atlantic.
The euro closed down nearly 18% against the US dollar at €1.10 to $1 on 7 August compared to a year earlier, while the pound was down 7.7% at $1.55 to £1 on the same day.
The currency situation has driven declines in passenger unit revenues at the US carriers. American Airlines reported a 9.3% fall in passenger revenue per available seat mile (PRASM), Delta Air Lines an 11.5% decrease and United Airlines a 6.4% decline in the second quarter.
“In core European markets, we saw improved US point-of-sale demand, but this was more than offset by a reduced point-of-sale demand in Europe and the effect of the weaker Euro,” says Ed Bastian, president of Delta.
The SkyTeam carrier is scheduled to increase seat capacity by 9.6% in the third quarter and an 8.1% in the fourth quarter, Capstats shows. However, executives have repeatedly said the airline will reduce growth in the market from September so the actual number of additional seats is likely to be less.
Delta’s partners are growing as well. Joint seat capacity with Air France, Alitalia, KLM and Virgin Atlantic Airways will increase 7.6% in the third quarter and 9.1% in the fourth quarter.
London-based Virgin Atlantic is leading the growth. The carrier has been redeploying aircraft and adding flights to the USA and Delta hubs since the two launched their immunised partnership in January 2014, creating a more formidable competitor to the American-British Airways joint business.
“We’re seeing a little bit of a mix of pressure on yield and load factor although the summer generally is a great period for us,” said Craig Kreeger, chief executive of Delta partner Virgin Atlantic Airways, on the transatlantic market in June. “I’d describe [the revenue environment] as kind of flattish.”
However, he added that low fuel prices more than outweigh the flattish demand in the market and are likely to drive profits at the airline.
British Airways and Iberia parent IAG also saw a flat demand environment during the first half of the year. As a result, it is one of the more disciplined groups in the market with BA seat capacity down 2.7% in the third quarter and down 1.2% in the fourth quarter, Capstats shows.
Iberia seat capacity will decrease 7.8% in the third quarter and increase 2.5% in the fourth quarter.
“We’re in a really exciting phase at BA where we’re taking delivery of a lot of new aircraft and we’re pointing a lot of that new product across the Atlantic,” says Sean Doyle, executive vice-president of the Americas at the Oneworld carrier. For example, BA has deployed its new Airbus A380s on flights to Los Angeles, San Francisco and Washington Dulles and new Boeing 787s to Austin, Newark and Toronto in recent years.
Doyle is confident about BA’s strength in the London-New York market, even as Delta and Virgin Atlantic have mounted a co-ordinated effort to capture share. He says American and BA offer the “most compelling” network and range of product in the market and, from October, all of the joint business partners’ operations will be consolidated in either terminal 3 or terminal 5 at London Heathrow, further easing things for travellers.
Still, the strong transatlantic capacity growth this year echoes the weaknesses of 2014. That year, Air France-KLM and Lufthansa both lowered profit targets due in part to their own capacity additions and those of competitors across the Atlantic. Other airlines also reported weaker demand.
“Capacity growth on the Atlantic has picked back up quite a bit,” says Joe DeNardi, an airlines and aerospace analyst at STIFEL. “My expectation is capacity will be down into the winter season.”
European carriers are driving much of the growth while US carriers are more disciplined, he says. DeNardi adds that airlines are varying – or peaking – capacity more between the high demand summer season and the lower demand winter this year.
While just about every carrier cuts capacity from the summer to winter seasons, some are peaking more than others. Delta and United will both make larger cuts to their fourth quarter transatlantic seat capacity compared to their third quarter capacity this year than in 2014.
“The great thing about our network and our fleet is its flexibility,” said Jim Compton, chief revenue officer of Chicago-based United, in July. “So what you're seeing in the transatlantic is that fleet flexibility going up, allowing us to gauge appropriately to the demand we expect in the fourth quarter.”
Source: Cirium Dashboard