Aviation Primer

Transcription

Aviation Primer

Winter 2012
Aviation Primer
A guide to navigating Asia’s increasingly busy skies
Important disclosures, including any required research certifications, are provided on the last two pages of this report.
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Aviation Primer
Winter 2012
Table of contents
Introduction
1
I
Getting off the ground
3
II
Choosing the right places
15
III
Assessing aircraft options
23
IV
Money matters: buy or lease?
49
V
Devising the right sales strategy
57
VI
Plane spotting: future trends in Asia
69
VII
Picking the winners
83
VIII
How to score an upgrade
91
Appendix
95
Aviation Primer
Winter 2012
Contributing Daiwa
Analysts
Summary
The battle over Asia’s skies is intensifying. As GDP and disposable income rise
in countries around the region, more people are getting the opportunity to fly.
Tapping into the demand are the full-service airlines, low-cost carriers, and
niche players.
Kelvin Lau
(852) 2848 4467
[email protected]
We look behind the ‘glamour’ of the industry to see what makes it tick. How
important is it for an airline to be linked to a global distribution system, what
strategies are working best in the various markets of Asia, and which aircraft
is right for a particular route? These are questions all airlines face, from
established flag carriers to fledgling low-cost carriers.
In the Aviation Primer, we look at the factors that airlines need to consider
when operating their fleets and expanding their networks. It’s a constant
balancing act, but we trust that the insights provided will put investors on the
right flight path in terms of investing in the industry.
Hitotsuyanagi Hajime
(81) 3 5555 7025
[email protected]
I would like to thank Paul Sheridan of Ascend for his invaluable contribution
on aviation-industry financing, and Daiwa’s Japan aviation analyst,
Hitotsuyanagi Hajime, for his insights into the Japan airlines sector.
Kelvin Lau
Senior Analyst, Aviation
Paul Sheridan is the head of consultancy for Asia at Ascend. He joined the
company in January 2010 after 10 years of working in the aviation industry.
Guest Author
Paul Sheridan, Head of
Consultancy Asia, Ascend
Ascend, a Flightglobal advisory service, is a leading provider of expert
advisory and valuations services to the global aviation industry. It provides
specialist, independent services that inform and shape the strategies of
aviation businesses worldwide, helping them to compete successfully in
today’s global market. Companies large and small rely on Ascend to take
their business to the next level. Ascend’s aviation expertise and experience is
backed by unique access to robust industry data.
Ascend offers an unrivalled breadth and depth of aviation expertise and
experience, backed by unique access to robust industry data. It provides an
impartial yet informed perspective to help organisations direct and manage
their investments to deliver the very best returns. As part of Flightglobal,
Ascend can also offer a single point of access to the industry’s most trusted
news, data and analytics services.
Paul Sheridan is an independent contributor as part of Daiwa's guest author
programme, which is separate from the firm's normal research coverage. The views
expressed by the guest author herein represent the opinions of the author only, and do
not necessarily reflect the opinions of Daiwa, the other authors of this report, or the
author’s employer.
-1-
Aviation Primer
Winter 2012
Introduction
The aviation industry is a highly volatile one, with many airlines globally struggling to make a profit. In Asia, where the
industry started later than in the US and Europe, the operating environment is better, resulting in the airlines there
achieving a better net-profit margin over the past five years than many big players in the US and Europe. We believe
airlines in Asia have learned some lessons from the US and Europe, and have also benefited from the fast-growing
economies in the region. We consider Asian airlines, albeit with their smaller fleet sizes, to be much more attractive
investments than their US and European peers.
In the future, we expect the major divergences to persist within the industry, with the low-cost carriers (LCCs)
focusing on the low-end market, and the premium carriers (full service carriers [FSCs]) that target business
travellers focused on the high-end market. But, several new issues for the industry are set to emerge in Asia over
the next decade, including ‘open skies’ in ASEAN, the Emission Trading Scheme (ETS) of the EU, the
development of biofuels, all of which are likely to play a key role in changing the competitive landscape.
As this traditionally capital-intensive industry is highly cyclical with low net-profit margins, every decision is crucial
to profitability. In addition, there are numerous external factors, such as economic growth, government regulation,
the industry cycle, and jet-fuel price movements that affect financial results.
Airlines globally ranked in terms of net-profit margin (2011)
Rank
1
2
3
4
5
6
7
8
9
9
10
Country
Japan
Ireland
Malaysia
Philippines
China
Russia
Japan
China
UK
Chile
US
Company
Japan Airlines
Ryanair Holdings
AirAsia
Cebu Air
Hainan Airlines
Aeroflot Russian Airlines
Skymark
Air China
Easyjet PLC
Latam Airlines
Alaska Air Group
Bloomberg code
9201 JP
RYA ID
AIRA MK
CEB PM
600221 CH
AFLT RM
9204 JP
753 HK
EZJ LN
LAN CI
ALK US
Net profit margin (%) Net profit (US$m) ROE (%)
15.5
2,360
63.6*
12.8
780
17.9
12.4
182
14.5
10.7
84
19.6
10.3
407
19.5
9.8
525
40.1
9.6
97
25.6
6.7
1,096
16.2
6.5
361
14.0
5.7
361
23.4
5.7
245
21.5
Source: Bloomberg. Note: Only listed companies included.*Japan Airlines was listed on 19 September 2012
World’s largest airlines in terms of fleet size (2011)
Rank
1
2
3
4
5
6
7
8
9
10
Country
US
US
US
US
US
Germany
France and Netherlands
China
China
China
Airline
United Continental Airlines
American Airlines
Delta Air Lines
SkyWest
Southwest Airlines
Lufthansa
Air France-KLM
China Southern Airlines
Air China
China Eastern Airlines
Fleet size
1,256
898
775
720
698
696
586
444
432
377
Orders
270
177
127
n.a
342
356
182
256
219
282
Total
1526
1075
902
n.a
1040
1052
768
700
651
659
Source: Airbus, Boeing, companies
World’s largest airlines by market capitalisation
Rank
1
2
3
4
5
06
7
8
9
10
Country
Chile
Singapore
China
Ireland
Japan
US
Japan
Germany
Hong Kong
US
Company
LATAM Airlines Group
Singapore Airlines
Air China
Ryanair Holdings
Japan Airlines
Delta Air Lines
All Nippon Airways
Deutsche Lufthansa
Cathay Pacifc
United Continental Holdings
Bloomberg code
LAN CI
SIA SP
753 HK
RYA ID
9201 JP
DAL US
9202 JP
LHA GR
293 HK
UAL US
Source: Bloomberg. Note: Only listed companies included
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Market cap (US$m)
11,690
10,024
9,807
8,890
8,722
8,309
7,336
7,160
7,127
6,732
Aviation Primer
Winter 2012
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Aviation Primer
Winter 2012
Preparing for take-off
Overview
The growth of an airline is highly dependent on numerous external factors, such as economic growth, population,
income levels, and industry-specific factors, including competition and the regulatory environment. Even though
many airlines’ founders prefer to set up their airline in their home country due to their greater familiarity with local
market conditions, understanding these external factors enables them to assess future risks and opportunities.
Economic growth
According to our regression analysis, traffic growth (as represented by revenue passenger kilometres [RPKs]) is
highly related to economic growth. We estimate that every 1% increase in GDP annually leads to a 1.5-2.0% YoY
rise in traffic growth. For example, air-traffic growth rates in China and Japan are very different, reflecting the
differing levels of economic growth. For 1992-2011, GDP increased at CAGRs of 10% in China and was flat in
Japan. This could explain why the CAGR in RPK in China was 15% over the period, while in Japan it was only
1.2%. A new airline being set up in a market with mature economic growth is likely to find it hard to expand,
especially as there will be competition from incumbent carriers.
China: GDP growth vs. RPK growth
Japan: GDP growth vs. RPK growth
(YoY % )
(YoY % )
(YoY % )
16
50
14
40
12
30
10
20
8
10
6
4
0
2
(10)
(20)
0
15
10
5
0
(5)
(10)
(15)
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
GDP (LHS)
(YoY % )
10
8
6
4
2
0
(2)
(4)
(6)
(8)
GDP (LHS)
RPK (RHS)
Source: CEIC, CAAC
RPK (RHS)
Source: CEIC
Domestic competition
Almost every country in Asia has a national carrier backed by the government. The national carrier often has a long
history and sometimes receives preferential treatment from the government. As a result, the level of dominance of
the national carrier in a country will determine whether or not there is room for competitors to survive. Some
countries restrict traffic rights in order to avoid competition among domestic carriers on a particular route. When
that is the case, new entrants may be forced to fly on secondary routes where traffic demand is weak. It is only
when the aviation market is deregulated (ie, allows new entrants) and the incumbent carrier (mostly state-owned) is
inefficient that there is more room for new players.
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Aviation Primer
Winter 2012
National carriers and their respective domestic market shares
Country
Australia
Canada
China
France
Germany
Hong Kong
India
Indonesia
Italy
Japan
Malaysia
Netherlands
New Zealand
Philippines
Singapore
South Korea
Taiwan
Thailand
United Arab Emirates
UK
Vietnam
Airlines
Qantas
Air Canada
Air China
Air France
Lufthansa
Cathay Pacific
Air India
Garuda Indonesia
Alitalia
Japan Airlines
Malaysia airlines
KLM
Air New Zealand
Philippine Airlines
Singapore Airlines
Korean Air
China Airlines
Thai Airways
Emirates
British Airways
Vietnam Airlines
Market share (%)
87
30
22
56
53
53
23
36
20
37
53
47
79
48
40
54
29
89
65
11
66
Source: Government Statistics Bureaux, various media
Population and income
The size and distribution of the population of an airline’s base country naturally affects potential demand. For
example, as Singapore has a small population of about 5.2m, the country needs to develop fifth- and sixth-freedom
rights (see pages 20-21) aggressively in other countries to remain a major player in the industry. This partly
explains why start-up airlines in Macau, where the population is just 500,000-600,000, have failed. One example of
this was Viva Macau, which went bankrupt less than five years after being set up, in 2006.
Disposable income and a population’s willingness to travel is reflected in per-capita income and the demographics
of a city or nearby area. A high per-capita income level means a high affordability level. In addition, a country with a
large population in the 30-50 age range would tend to feature a large number of people with a strong desire to
travel, as this age group also generally has a high level of disposable income.
Asia: population and growth rates
(persons m) Australia
2005
20
2006
21
2007
21
2008
21
2009
22
2010
22
(YoY %)
Australia
2005
1.3
2006
1.5
2007
1.8
2008
2.0
2009
2.1
2010
1.6
China Hong Kong
1,304
7
1,311
7
1,318
7
1,325
7
1,331
7
1,338
7
China Hong Kong
0.6
0.4
0.6
0.6
0.5
1.0
0.5
0.7
0.5
0.4
0.5
0.9
India Indonesia
1,140
227
1,157
230
1,174
232
1,191
235
1,208
237
1,225
240
India Indonesia
1.5
1.2
1.5
1.2
1.5
1.1
1.4
1.1
1.4
1.0
1.4
1.0
Japan
128
128
128
128
128
127
Japan
0.0
(0.0)
0.0
(0.1)
(0.1)
(0.1)
Source: World Bank, Taiwan National Statistics
-5-
Korea Malaysia
48
26
48
27
48
27
49
28
49
28
49
28
Korea Malaysia
0.2
2.0
0.3
1.9
0.3
1.7
0.3
1.7
0.3
1.6
0.3
1.6
Philippines Singapore Taiwan Thailand
86
4
23
67
87
4
23
67
89
5
23
68
90
5
23
68
92
5
23
69
93
5
23
69
Philippines Singapore Taiwan Thailand
1.9
2.4
0.4
1.0
1.8
3.2
0.5
0.9
1.8
4.3
0.4
0.8
1.7
5.5
0.3
0.7
1.7
3.1
0.4
0.6
1.7
1.8
0.2
0.6
Aviation Primer
Winter 2012
Asia: per-capita income and population
Country
0-14
19
19
12
31
27
13
16
30
35
17
16
21
Australia
China
Hong Kong
India
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Age profile (%)
15-64 (30-49)
68
72
76 (34)
64
67
64 (28)
72 (34)
65 (26)
61
74 (25)
74 (33)
71
65 and above
13
8
13
5
6
23
11
5
4
9
11
9
Population
(m people)
22
1,338
7
1,225
240
127
49
28
93
5
23
69
Per-capita income
(US$)
38,708
3,746
28,134
1,207
2,372
37,986
18,077
6,545
1,889
33,902
16,413
3,805
Source: World Bank, Taiwan National Statistics
The power of the unions
We believe that the more unionised the aviation industry is in a country, the less flexibility there is in terms of wage
and staff adjustments during a downcycle, which therefore limits the efficiency and profitability of the aviation
industry in the country. This is part of the reason why airlines in Asia often have lower staff costs per available seat
kilometres (ASK) than the US and European carriers, even in mature economies. In addition, in terms of RPK, ASK,
and revenue per employee, the ratios are higher for Asian carriers, which implies greater efficiency.
International airlines: comparison (2011)
Company
US
Alaska Air
Delta Air Lines
GOL Linhas Aereas Inteligentes (Brazil)
Southwest Airlines
United Continental
US Airways
Europe
Air France-KLM
Deutsche Lufthansa-Reg
Easyjet
Ryanair
Asia
AirAsia
Air China
All Nippon Airways
Cathay Pacific
China Airlines
EVA Airways
Japan Airlines
Qantas Airways
Singapore Airlines
RPK per employee
(m)
ASK per employee
(m)
Revenue per employee
(US$m)
Staff cost per ASK
(US$m)
2.81
2.46
1.68
2.15
2.39
2.26
3.32
2.99
2.44
2.66
2.90
2.75
0.48
0.45
0.37
0.35
0.43
0.41
0.12
0.09
0.08
0.10
0.09
0.07
1.67
1.68
7.94
n.a
2.01
2.17
8.97
n.a
0.33
0.35
0.72
0.72
0.08
0.08
0.08
0.07
4.10
5.05
1.79
4.90
3.02
1.69
1.71
2.31
1.70
3.27
3.90
5.08
6.19
2.65
6.09
3.88
2.14
2.11
2.96
2.54
4.08
5.04
0.29
0.50
0.52
0.61
0.43
0.22
0.20
0.37
0.50
0.44
0.52
0.03
0.06
0.09
0.09
0.11
0.02
0.02
0.04
0.09
0.11
0.08
Source: Bloomberg, companies
Note: Based on FY11 data
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Aviation Primer
Winter 2012
International airlines: power of the unions vs. profit margins (2011)
Company
US
Alaska Air
Delta Air Lines
GOL Linhas Aereas Inteligentes (Brazil)
Southwest Airlines
United Continental
US Airways Group
Europe
Air France-KLM
Deutsche Lufthansa-Reg
Easyjet
Ryanair
Asia
AirAsia
Air China
All Nippon Airways
Cathay Pacific
China Airlines
EVA Airways
Japan Airlines
Qantas Airways
Singapore Airlines
Source: Bloomberg, companies
Note: Based on FY11 data
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Net-profit margin (%)
Union
5.66
2.43
n.a
1.14
2.27
0.54
Strong
Strong
Strong
Strong
Strong
Strong
n.a
n.a
6.52
12.76
Strong
Strong
Strong
Strong
12.35
6.74
1.99
4.79
n.a
3.36
3.70
0.18
15.49
1.68
2.48
Weak
Weak
Medium
Medium
Weak
Weak
Weak
Weak
Medium
Strong
Weak
Aviation Primer
Winter 2012
Getting the timing right
Beware of the peak in the profit cycle
From deciding to set up a new airline to accumulating the financial and human resources necessary usually takes a
few years. Over that period, many external factors – such as the jet-fuel price, interest rates, and the demandsupply cycle – are likely to have changed significantly. This was the case in 1998, 2001, 2003 and 2005-06, when a
relatively large number of new airlines were set up during the Asia financial crisis (1998), the bursting of the
Internet bubble (2001), the outbreak of SARS (2003), and the high fuel price as a result of the Gulf crisis (2005-06).
It could be said that these periods were not the best time to set up an airline.
However, interest rates were low in those years, and RPK growth had been strong in previous years, resulting in
strong profits for the established airlines. The availability of financing is generally high when the industry cycle is on
an uptrend. This facilitated the entry of a large number of newcomers into this capital-intensive industry over the
1998-2006 period. In addition, the increasing adoption of the LCC model globally stimulated a rise in the number of
new airlines being set up.
Establishment of new airlines globally vs. US interest rates/jet-fuel price/GDP
(%)
8
(Units)
16
6
12
4
8
2
4
0
0
1992
1993
1994
1995
1996
1997
US interest rate (LHS)
1998
1999
2000
2001
2002
World GDP (LHS)
2003
2004
2005
2006
Newly set-up airlines (RHS)
Source: Bloomberg, CEIC, IMF
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2007
2008
2009
Jet fuel (RHS)
2010
2011
Aviation Primer
Winter 2012
Company background makes a difference
Government support still crucial in this industry
Government support often comes from a few areas, such as a reduced tax rate, low interest costs given strong
state-owned enterprises as a guarantor, capital injections, and rebates. Some governments may restrict traffic
rights to a limited number of airlines to avoid competition. In Asia, there are many players with strong government
backgrounds. In addition to the national carrier, other airlines – such as China Southern Airlines and China Eastern
Airlines, which are also state-owned – receive government funding as well.
We believe private airlines find it hard to survive if a government’s policy stance favours the state-owned airlines.
For most of the time during an economic downturn, privately-owned airlines face the biggest difficulties as they
mostly have weaker balance sheets, and a government may not be willing to bail them out unless they are large in
scale. For a state-owned airline, a government is likely to be able to provide funding or at least act as a guarantor
for financing. Government support is especially important on the financing side during a downcycle.
Government ownership and policy support
Country
China
China
China
Government-owned airlines
Air China
%
51
53
50
Singapore
Singapore Airlines
55
India
Indonesia
Air India
Garuda Indonesia
49
86
Thailand
Ireland
Oman
UAE
Thai Airways International
Aer Lingus
Oman Air Group
The Emirates Group
51
25
100
100
Government policy support
The PRC Government opened its civil-aviation sector to private sector investment in
2005.
State-owned airlines have been receiving capital injections from the government
since 2008.
The government has started to relax its policy on route permits.
The Singapore Government has been operating an ‘open skies' policy since 1997
In 2008, third- and fourth-freedom rights between ASEAN capitals came into effect.
In 2010, unlimited fifth-freedom rights between ASEAN capitals came into effect.
India’s aviation sector was deregulated in 2005.
There is full support from the government.
Gained full support from the government to become the country's leading airline, eg,
the government places restrictions on other domestic airlines for some routes.
Received direct financial support from government.
Received government financial support.
UAE deregulated the aviation industry.
Source: Companies, flightglobal, various media
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Aviation Primer
Winter 2012
Airlines that have ceased operation
Before 2003
Air L.A
Air South
Air Atlantic
Air Great Wall
Royal Aviation
Roots Air
Flandre Air
Proteus Airlines
AOM French Airlines
Access Air
Penair
China Southwest Airlines
China Northwest Airlines
Air Sicilia
National Airlines
Year
1995
1997
1998
2000
2001
2001
2001
2001
2001
2001
2002
2002
2002
2002
2002
Ownership
Private
Private
Private
Government
Private
Private
Private
Private
Private
Private
Private
Government
Government
Private
Private
2008-09
Hansung Airlines
Aloha Airlines
Air Midwest
Japan Asia Airways
Alpi Eagles
Heli-Express
NAC Air (North American Charters)
Zoom Airlines
Adam Air
Oasis Hong Kong Airlines
Galaxy Airlines
Airspeed Aviation
Alitalia - Linee Aeree Italiane
LTU International
Corporate Express
MyAir
JetAmerica
Year
2008
2008
2008
2008
2008
2008
2008
2008
2008
2008
2008
2009
2009
2009
2009
2009
2009
2003-04
Minerva Airlines
Alisea Airlines
Air Canada Tango
Airborne Express
Aero Lloyd
China Xinjiang Airlines
Air Lib
China Northern Airlines
Aeris
China Yunnan Airlines
Zhejiang Airlines
Air Atlantique
Air Vegas
Air Littoral
Japan Air System
Azzurra Air
Gandalf Airlines
Fairinc
Canada West Airlines
Orange Cargo
Val Air
Ownership
Government
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Government
Private
Private
Private
Private
Year
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2004
2004
2004
2004
2004
2004
2004
2004
2004
2004
2004
Ownership
Private
Private
Private
Private
Private
Government
Private
Government
Private
Government
Government
Private
Private
Private
Private
Mixed
Private
Private
Private
Private
Private
2005-07
Champagne Airlines
Air Paradise
Bouraq Indonesia Airlines
Chicago Express Airlines
Harlequin Air
Nakanihon Airlines
Legend Airlines
Jetsgo
Air Shenpix
Air Horizons
Air Hokkaido
Air Efata
Independence Air
QuikAir
CR Airways
Japan Airlines Domestic
Air Turquoise
Dauair
Club Air
Peace Air
Baxter Aviation
European Air Express
Hapag-Lloyd Express
Hapag-Lloyd Flug
RegionsAir
SkyValue
Harmony Airways
Skybus Airlines
Since 2010
Hamburg International
Air Nippon Network
Bremenfly
Arror Air
Deer Jet
Freedom Airlines
Blue Line
Blue Wings
Air Next
Viva Macau
Air Central
ANA & JP Express
Great Wall Airlines
ItAli Airlines
Jade Cargo International
Shanghai Airlines Cargo
Cirrus Airlines
USA3000 Airlines
Source: Companies, various media
- 10 -
Year
2005
2005
2005
2005
2005
2005
2005
2005
2005
2005
2006
2006
2006
2006
2006
2006
2006
2006
2006
2007
2007
2007
2007
2007
2007
2007
2007
2007
Ownership
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Year
2010
2010
2010
2010
2010
2010
2010
2010
2010
2010
2010
2010
2011
2011
2011
2011
2012
2012
Ownership
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Government
Private
Mixed
Mixed
Private
Private
Aviation Primer
Winter 2012
Mode of operation: LCC vs. FSC
Overview
The two major airline-business models are FSC and LCC. We see the LCC model as being more attractive recently
due to the low penetration rate of passengers in Northeast Asia. Many traditional FSCs, such as Singapore Airlines
(SIA), Qantas (QAN), All Nippon Airlines (ANA), Japan Airlines (JAL) and China Eastern Airlines (CEA), have
announced plans to set up an LCC subsidiary to attract low-income travellers. Among the FSCs, the most
successful ones are those focused on premium travellers, such as Cathay Pacific (CX). We see both models
producing winners and losers. We examine the success factors below. Over the near term, we believe the FSC
winners will be CX with AirAsia the leader among the LCCs.
FSCs vs. LCCs
Fares
Distribution
In-flight
Aircraft
Sectors
Schedules
Airports
Staff
LCCs
Simple product
Low, simple - one-way
Minimal restrictions
Avoids travel agents
Aims for 100% direct: either online or through call centres
Mostly one cabin class
High-density seating
No seat assignment
No meals or free drinks
Simple operation
Single type - maximum two
High utilisation rate (11 hours/day)
Short – 500-1,000km
Point-to-point
No hubbing or connecting flights
Used to shift demand
Secondary or uncongested (where possible)
20-30 minute turnaround
Competitive wages
Profit-sharing
High productivity
FSCs
Complex product
Round trip - complex
Numerous restrictions
Depends on travel agents
Owns ticket offices /call centre
2-3 classes
Low seat density
Assigned seats
In-flight catering
Complex operation
Multiple types - aircraft tailored to routes served
Low utilisation rate on short sectors
From very short to long distances
Hub-and-spoke network
Passengers/flights connect at hub
Responds to current demand
Focus on large airports
1 hour turnaround on short sectors
High wages
Minimal profit-sharing
Over-staffed
Source: Flying off course by Rigas Doganis
Note: In the mid-2000s some legacy carriers, in response to low-cost competition, began to adopt several low-cost features, eg, no paper tickets,
one-way fares, online selling
The factors necessary to be a successful LCC
1) Large low-income population. The larger the low-income population, the bigger the market potential for
LCCs. Traffic growth is likely to be limited by individual wealth; so when fares reach a very low level, such
as those offered by LCCs, this can stimulate demand.
2) Low-cost environment. This is crucial for the LCCs to be competitive and maintain high net-profit margins,
given that their fares are very low. There are many ‘low-fare’ carriers but these are not necessarily ‘lowcost’ carriers.
3) Incumbent airlines are not dominant. We believe that if the existing players are operating efficiently,
there is less likelihood of new entrants, including LCCs, being established.
4) Government support. Some countries implement measures to encourage the development of LCCs, such
as providing discounts on landing and take-off charges, and constructing a dedicated terminal for budget
airlines.
Given this, we see Southeast Asia as being an ideal place for LCC development. The low-cost environment
and government support for infrastructure is better than in the countries in Northeast Asia. In terms of demand,
we see strong potential given the large low-income population. This also explains why we saw a higher
penetration rate for LCCs in Southeast Asia for 1H12 (close to 50% of all the airlines operating in terms of
market share) compared with Northeast Asia (only 10-20%). We believe Southeast Asian LCCs such as
AirAsia benefit from the abovementioned factors.
- 11 -
Aviation Primer
Winter 2012
Global LCC penetration rate
(%)
60
50
40
30
20
10
0
2001
2002
2003
2004
Asia Pacific
2005
Europe
2006
2007
2008
N. America
2009
SE Asia
2010
2011
Nov-12
N.E Asia
Source: CAPA
Note: as of 7 November 2012
Supportive measures for LCCs
Japan
Some airports provide incentives for LCCs, eg, Osaka’s Kansai International Airport waives landing fees for LCCs
The government stimulated the domestic air-travel market by increasing landing slots and working towards lowering landing fees in 2005.
The aviation market was deregulated in 2008, though restrictions remained on the amount of discounting allowed.
India
In 1992, the government liberalised the aviation sector, which had long been dominated by the national carriers.
In 2000, the government eased restrictions for new airlines entering the industry.
To protect local budget airlines, the government closed four large and high-potential cities, Medan, Jakarta, Surabaya and Denpasar, to nonIndonesian budget airlines in 2005.
The Malaysian government supported the establishment of AirAsia in 2001.
Built a low-cost air terminal in 2005, which will be replaced by a larger budget terminal in 2013.
Indonesia
Malaysia
Philippines
Domestic routes were deregulated in 1995.
In March 2011, the government introduced a more liberal aviation policy designed to improve the country's competiveness as a tourism
destination and investment location.
Under the new policy, the aviation authorities plan to pursue open-skies agreements, eliminating capacity restrictions in regulated markets
and offering fifth-freedom rights for overseas carriers.
Singapore
Thailand
Europe
The government established a budget airline terminal at Changi in 2005 and lowered passenger taxes to attract LCCs.
The airline industry was deregulated and the government adopted an Open Skies policy in 2001 to attract more new entrants.
In 1992, deregulation in Europe gave carriers from one EU country the right to operate scheduled services between other EU states.
Full deregulation of the aviation industry was implemented in Europe in 1997.
In 1989, Ryanair was granted the sole carrier licence on some routes by the Irish government to protect it from predatory pricing by rivals on
certain routes.
US
Deregulation in 1978, lowered federally controlled barriers for new airlines.
Source: Financial Times, companies, various media
Asia: per-capita income and population by country (2010)
Population
(m people)
22
1,338
7
1,225
240
127
49
28
93
5
23
69
Australia
China
Hong Kong
India
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan*
Thailand
Source: World Bank, *Taiwan National Statistics
- 12 -
Income per capita
(US$)
38,708
3,746
28,134
1,207
2,372
37,986
18,077
6,545
1,889
33,902
16,413
3,805
Aviation Primer
Winter 2012
The factors necessary to be a successful FSC
1) Large population with high disposable income. Unlike LCCs, demand for FSCs requires a certain level
of spending power in the population, as these airlines do not often use low fares to stimulate passenger
traffic.
2) Niche market. FSCs operating in niche markets that are protected from foreign competition, such as China,
benefit from less competition.
3) Business-traffic demand. This is highly dependent on commercial activity in the city or hinterland. The
financial industry seems to be the most important sector for business travel. Capital cities, such as Beijing
and Tokyo, see more government-related travel.
4) Minimising costs. The operating costs of FSCs are generally higher than for LCCs due to higher catering
expenses, ground-handling expenses, and staff costs. However, successful FSCs are still careful about
spending, and try to increase fleet utilisation rates as much as possible. Many FSCs are emulating parts of
the LCC model to improve their cost efficiency.
5) Well-developed revenue-management system. Successful FSCs generally have well-developed
revenue-management systems that allow them to understand market demand and the impact of their
promotional fares. The requisite IT investment means these systems are usually employed by airlines of a
certain scale, which have a large number of aircraft and destinations, and therefore are able to enjoy high
economies of scale on the IT investment.
6) Government support. Rather than offering discounts on landing fees, government support for FSCs often
involves limiting new entrants and government-backed financing. This is usually the case for state-owned
airlines.
LCCs and FSCs: comparison of utilisation rates, costs and load factors (2011)
Company
Bloomberg code
Type
Average daily utilisation (hours per day)
PLF (%)
Cost per ASK (US$)
Yield per RPK (US$)
Air China China Southern
753 HK
1055 HK
FSC
FSC
6.74
3.70
9.58
9.80
81.47
81.00
0.09
0.09
0.11
0.10
CEA
670 HK
FSC
3.36
9.80
78.90
0.10
0.11
CX
SIA
QAN
293 HK
SIA SP
QAN AU
FSC FSC + LCC FSC + LCC
4.80
2.50
1.68
12.30
n.a
n.a
80.40
77.40
80.10
0.09
0.07
0.11
0.09
0.09
0.11
AirAsia Tiger Airways
ANA
AIRA MK
TGR SP
9202 JP
LCC
LCC FSC + LCC
12.35
(16.87)
1.99
12.30
n.a
n.a
80.00
81.50
65.80
0.04
0.05
0.16
0.07
0.06
0.21
JAL
9201 JP
FSC
15.49
n.a
66.9
0.15
0.21
Skymark
9204 JP
LCC
9.60
n.a
81.90
0.08
0.16
Source: Bloomberg, Companies
LCCs and FSCs: comparison of utilisation rates, costs and load factors (2011)
Company
Bloomberg code
Type
Average daily utilisation (hours per day)
PLF (%)
Cost per ASK (US$)
Yield per RPK (US$)
Korean Air
003490 KS
FSC + LCC
(2.55)
n.a
76.93
0.07
0.16
Asiana
20560
FSC + LCC
0.31
12.43
76.50
0.07
0.16
Thai Airways
THAI TB
FSC + LCC
(5.20)
11.90
65.40
0.08
0.09
Malaysia Air China Airlines
MAS MK
2610 TT
FSC + LCC
FSC
(18.10)
(1.37)
10.90
n.a
75.00
78.00
0.09
0.11
0.07
0.09
- 13 -
EVA Airways
2618 TT
FSC
0.18
n.a
78.03
0.11
n.a
Garuda
Indonesia
GIAA IJ
FSC
2.98
8.24
75.20
0.08
0.10
Cebu Pacific
CEB PM
LCC
10.70
12.74
86.30
0.06
0.06
Air New
Zealand
AIR NZ
FSC
1.87
9.92
83.40
0.09
0.13
Aviation Primer
Winter 2012
Summary of major players’ strategies
Developing countries are performing the best
In our selected pool of airlines, Air China (AC) and AirAsia are based in China and Malaysia, respectively, which
are developing countries with high traffic growth, while CX, SIA, ANA, JAL and QAN are based in the mature
markets of Hong Kong, Singapore, Japan and Australia, respectively. This is reflected in the higher passenger
traffic growth for the former two over the past five years (CAGRs of 15-29% YoY) compared with the latter three
(CAGRs of 0-8% YoY).
Overall, we regard AC’s operating environment as being better than that of its peers, given the high growth
potential of outbound traffic from the country, a regulated market where competition can be limited, and strong
government support in the event of any difficulty in financing.
In our view, the toughest operating environment is in Australia, where passenger traffic growth is relatively low,
there is intense competition on international routes, there are powerful unions, and the country is a good distance
from the major economic powers in Asia (eg, China, Japan, Korea, and India).
Key macro metrics for Asian carriers
Economic growth (2011 GDP, (YoY %)
Competition (local)
Local market share (2011) (%)
Population in home country (m people)
Income per capita (US$)
GDP per capita
GDP growth (past five years)(%)
Traffic growth (RPK) (past five years) (%)
Strength of union power
Getting the time right (year established)
Company background
Mode of operation
AC
AirAsia
CX
9.2
5.1
5
Dominant position in
Dominated by the big
Mainly between
Malaysia Airlines and
Hong Kong
three airlines
AirAsia
24
1,338
3,746
4,428
11
15
Weak
1988
State-owned
FSC
55
28
6,545
8,373
5
29
Weak
1993
Private
LCC
51
7
28,134
31,757
4
8
Medium
1946
Private
FSC
Source: Companies, World Bank, government websites, Daiwa
- 14 -
QAN
SIA
ANA
JAL
2.2
4.9
0.0
0.0
Mainly between
Dominant position in Dominant position Mainly between
ANA, JAL &
ANA, JAL &
in Singapore, but
Australia
the market is open
Skymark
Skymark
to foreign
competition
87
37
49
40
22
5
128
128
38,708
33,902
37,986
37,986
65,497
41,120
45,920
45,920
3
7
(1.52)
(1.52)
4
1
0
0
Strong
Weak
Medium
Medium
1920
1947
started in 1952
Started in 1953
Private
State-owned
Private
Private
FSC + LCC (Jetstar) FSC + LCC (Scoot FSC + LCC (e.g. FSC (but will have
and Tiger Airways) Peach and AirAsia LCC JV - JetStar
Japan)
Japan)
Aviation Primer
Winter 2012
- 15 -
Aviation Primer
Winter 2012
Key factors in deciding on destinations
Overview
For an airline, deciding on where to fly is a crucial step, as the wrong choice of destination can lead to long-term
issues unless there is flexibility about launching and cancelling of a route. Also, management needs to consider the
operating constraints, such as traffic rights and slots (the availability of landing and take-off times at an airport).
Factors that airlines look at when deciding to operate on a route include the population at the destination, income
levels for the destination, extent of competition on the route, and the related regulatory constraints (eg, visa
restrictions).
Comparison of population, per-capita income, dominant airlines and visa restrictions
Australia
China
Hong Kong
India
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan*
Thailand
Population
(m people)
22
1,338
7
1,225
240
127
49
28
93
5
23
69
Per-capita income
(US$)
38,708
3,746
28,134
1,207
2,372
37,986
18,077
6,545
1,889
33,902
16,413
3,805
Competition
Major domestic airlines
QAN
AC, China Southern Airlines, CEA
CX
Air India
Garuda Indonesia, Cebu Pacific Air
Japan Airlines, ANA
Korean Air, Asiana
Malaysia Airlines, AirAsia
Philippine Airlines
SIA, Tiger Airways, SilkAir
China Airlines, Eva Airways
Thai Airways
Source: World Bank, *Taiwan National Statistics
- 16 -
Visa restrictions
Visa-free countries
166
40
149
53
11
170
163
158
41
164
127
63
Aviation Primer
Winter 2012
Population and income levels
Determining the imbalance of traffic demand
As discussed in Chapter 1, the population and income level in an airline’s home country affects passenger demand.
Similarly, the population and income level of the destination and its hinterland affects the passenger demand
coming from there. Some routes with weak passenger traffic from the destination city may still be warranted given
the potential for strong traffic from the home country. Such destinations often cater to leisure travellers. For
example, the route from Hong Kong to Xi’an (the home of the terracotta warriors) caters mostly to passengers
originating in Hong Kong. So, the population and income level of the destination is more relevant when the demand
in an airline’s home country is not sufficient to fill a certain number of seats.
Passenger traffic on selected routes in terms of citizenship
(No. of passengers)
To
From
Beijing
Beijing
Hong Kong
Shanghai
Taiwan
Hong Kong
434,223
264,456
n.a.
91,753
479,536
764,033
Source: Shanghai Tourism Bureau, Tourism Bureau of Taiwan
- 17 -
Shanghai
n.a.
176,091
95,261
Taiwan
282,751
2,156,760
632,464
Aviation Primer
Winter 2012
Competition
Competition on a route and at nearby hubs
On international routes, there is usually at least one foreign competitor on the same route due to reciprocal traffic
rights. Gaining an understanding of the intensity of competition on a route or within a region requires a close
examination of the number of airlines flying the route, as well as the market-share split among competitors on
specific routes. In addition to direct competition on a route, an airline’s management needs to consider whether
there are nearby destinations that compete with the route. For example, the airports in Guangzhou, Shenzhen, and
Hong Kong compete to some extent with each other as they are very close geographically.
Airports in the Pearl River Delta region
Guangdong
Guangzhou
Shenzhen
Zhuhai
Hong Kong
Macau
Shenzhen Airport
Baiyun Airport
Hong Kong International Airport
Zhuhai Airport
Macau International Airport
Source: Airports, Daiwa
- 18 -
Aviation Primer
Winter 2012
Asia: number of competitors on major passenger routes
Hong Kong
n.a
Singapore
Tokyo
Delhi
Tiger, Jetstar, HK Delta, HKA, JAL, Jet Airways, CX
Air, SIA, United, ANA, United, CX
CX
Singapore
Tiger, Jetstar,
n.a
Delta , JAL ,SIA , SIA ,Air India,Jet
HKA, SIA, United,
ANA , United
Airways
CX
Tokyo
Delta, HKA, JAL, Delta , JAL ,SIA ,
n.a
JAL
ANA, United, CX
ANA , United
Hong Kong
Delhi
Kuala
Lumpur
Sydney
Beijing
Jet Airways, CX
SIA ,Air India,Jet
JAL
Airways
AirAsia, MAS, CX AirAsia, Tiger,
MAS, JAL
Jetstar, SIA, MAS
Virgin Atlantic,
BA, QAN, SIA
QAN, JAL
QAN, CX, Virgin
Aus.
CSA, HKA, AC, Jetstar, AC, SIA AC, CEA, PIA,
ANA, CSA, JAL,
Dragonair, CX
Delta
Shanghai
HKA, CEA, SHA,
CX, Dragonair
SIA, CEA
Taipei
HKA, CAL, EVA,
CX, Dragonair
Tiger, Jetstar,
SIA, EVA, CAL
Seoul
CEA, SHA, AC,
ANA, JAL, Delta
EVA, ANA,
CAL, JAL, Delta,
United, CX
Jin Air, Korea Air, Korea Air, Asiana, Korea Air, Asiana,
Asiana, CX, Thai
SIA
ANA, United,
Air
JAL, Delta
Kuala Lumpur
AirAsia,
MAS, CX
Sydney
Virgin Atlantic,
QAN, CX,
Virgin Aus.
BA, QAN, SIA
Beijing
CSA, HKA, AC,
Dragonair, CX
Jetstar, AC, SIA
Shanghai
HKA, CEA,
SHA,
CX, Dragonair
SIA, CEA
Taipei
Seoul
HKA, CAL, EVA, Jin Air, Korea Air,
CX, Dragonair
Asiana, CX,
Thai Air
Tiger, Jetstar,
Korea Air,
SIA, EVA, CAL
Asiana, SIA
BA, QAN, SIA
Jetstar, AC, SIA
SIA, CEA
Tiger, Jetstar,
SIA, EVA, CAL
Korea Air,
Asiana, SIA
n.a
n.a
CEA
n.a
Asiana
n.a
AirAsia,
Tiger, Jetstar,
SIA, MAS
AirAsia,
Tiger, Jetstar,
SIA, MAS
MAS
MAS
n.a
AirAsia, MAS
MAS, AC
MAS, CEA
AirAsia,MAS, CAL
n.a
AirAsia, MAS
n.a
AC
CEA, AC, QAN
n.a
AirAsia,
Korea Air, MAS
Korea Air, Asiana
n.a
MAS, AC
AC
n.a
HNA, AC, CAL,
EVA
CSA, Korea Air,
AC, Asiana
CEA
MAS, CEA
CEA, AC, QAN
AC, Juneyao
Airlines, CEA,
HNA, CSA,
SHA, SZA
n.a
n.a
AirAsia,
MAS, CAL
n.a
Asiana
AirAsia, Korea Air, Korea Air, Asiana
MAS
AC, Juneyao
Airlines, CEA, HNA,
CSA, SHA, SZA
HNA, AC, CAL, CSA, AC, CEA,
EVA
CAL, EVA
CSA, Korea Air,
AC, Asiana
CSA, AC, CEA, CSA, CEA, SHAr,
CAL, EVA
Korea Air, Asiana
n.a
CSA, CEA,
Korea Air, Thai
SHA, Korea Air, Air, Asiana, EVA,
Asiana
CAL, CX
Korea Air, Thai
Air, Asiana, EVA,
CAL, CX
n.a
Source: Companies
Note: BA: British Airways, CAL: China Airlines, CEA: China Eastern Airlines, Delta: Delta Air Lines, Eva: EVA Airways, HNA: Hainan Airlines, HKA: Hong Kong Airlines, JAL: Japan Airlines,
MAS: Malaysia Airlines, SHA: Shanghai Airlines, Tiger: Tiger Airways, United: United Continental
Asia: frequency of flights on major passenger routes
Hong Kong
Singapore
Tokyo
Delhi
Kuala Lumpur
Sydney
Beijing
Shanghai
Taipei
Seoul
Hong Kong
n.a
23
25
2
13
6
27
48
48
12
Singapore
23
n.a
14
4
40
10
7
9
9
9
Tokyo
25
14
n.a
1
2
2
14
26
21
32
Delhi
2
4
1
n.a
2
n.a
n.a
1
n.a
1
Kuala Lumpur
13
40
2
2
n.a
3
3
3
3
3
Sydney
6
10
2
n.a
3
n.a
1
3
n.a
2
Beijing
27
7
14
n.a
3
1
n.a
51
5
14
Shanghai
48
9
26
1
3
3
51
n.a
15
24
Taipei
48
9
21
n.a
3
n.a
5
15
n.a
12
Seoul
12
9
32
1
3
2
14
24
12
n.a
Source: Companies, Skyscanner
On domestic routes, which are often not open to foreign airlines, the competitive landscape is determined by a
country’s policy on granting traffic rights. Some countries limit the number of airlines operating on the same route to
avoid competition, while other routes are open to any new domestic entrants.
Policy on airline ownership and attitude towards foreign competitors
Country
Afghanistan
Australia
Brazil
Canada
China
India
Japan
Kenya
New Zealand
Peru
Saudi Arabia
Korea
Taiwan
UAE
US
Policy
International air carriers are able to operate freely in the domestic market.
Foreign ownership of domestic airlines is set at 49%.
The government suspended flights by Emirates to protect Canadian carriers.
Foreign ownership of domestic airlines is set at 25%
Foreign airlines permitted to take a stake of up to 49% in local carriers as at September 2012.
Considering opening its domestic market to airlines from other Gulf Cooperation Council member nations, to improve its aviation market.
The government has no open-skies policy for international airlines.
Foreign ownership of domestic and international US airlines is restricted to no more than 25% of voting shares.
Source: CAPA, Flightglobal, various media
- 19 -
Aviation Primer
Winter 2012
Traffic rights and airport slots
Increased liberalisation
Traditionally, traffic rights have been limited in most Asian countries and are considered by governments as
important resources for airlines. The governments state clearly which airlines can use the traffic rights granted and
some include frequency or capacity limitations. In the past, incumbent airlines tried to keep out new entrants by
holding on to all the traffic rights on the major routes. However, many of the countries in Asia are encouraging
tourism in order to boost their economies, and so are moving towards an ‘open-skies’ policy (such as ASEAN), in
which there is no limitation on traffic rights, by 2015. Holding on to traffic rights to prevent the entry of newcomers is
becoming less effective nowadays.
‘Open skies’ refers to the liberalisation of the rules and regulations of the aviation industry among countries in order
to create a free-market environment for airlines to expand. The primary objective is to allow airlines to expand
flights freely within the region and therefore be able to promote air-traffic growth and tourism, which will benefit the
economies of the countries involved.
In the past, some airlines had to pay royalties to receive traffic rights. This was most often the case when the airline
was the sole operator of a route. Following the spread of liberalised aviation policies over the past 20 years or so,
such payments have become much rarer.
Nowadays, most countries are willing to provide third- and fourth-freedom rights. However, fifth-freedom rights and
those above are still restricted, especially those involving domestic markets. This is mainly due to the objections of
the incumbent airlines in a country.
Traffic rights: first- to fifth-freedom rights
Source: Daiwa
- 20 -
Aviation Primer
Winter 2012
Traffic rights: sixth- to ninth-freedom rights
Source: Daiwa
Traditional bilateral and open-skies agreements: comparison
Market access
Designation
Capacity
Tariffs
Traditional bilateral agreement
Open skies agreement
Airlines can fly only to specified points
Open access: airlines can fly between any two points*
Limited fifth-freedom rights granted
Extensive fifth-freedom rights granted
Charter rights are not included
Unlimited charter rights granted
Single or multiple airlines
Multiple airlines
Airlines must be 'substantially owned and effectively controlled ' by nationals of the designating state (this is true for both agreement
types)
Capacity agreed or shared 50:50
No frequency or capacity limitations
Need for negotiation on future capacity/frequency increases
To be agreed using IATA procedures
Country of origin rules
Source: Flying off course by Rigas Doganis
Note:*While US 'open-market' bilateral agreements give US airlines the right to fly from any point in the US, foreign airlines are restricted to flying
from only a handful of named points in the country
In addition to traffic rights, airport slots are an important asset for an airline, especially at busy airports such as
those in Beijing, Shanghai, Tokyo, Hong Kong and Singapore. Airport slots are limited, as most airlines prefer to
have the same time daytime slot, and dislike operating evening or ‘red-eye’ flights as they are usually unprofitable
(expect for freighters). In Asia, some airports are close to or already exceed their design capacity, meaning further
infrastructure spending is needed. Such spending is essential for an airport to maintain its hub status.
Asia: current and future airport capacity
Airport Name
Beijing Capital Airport
Singapore Changji Airport
Korea Incheon Airport
Shanghai (Pudong) Airport
Hong Kong International Airport
Guangzhou Baiyun Airport
Thailand Suvarnabhumi Airport
Shanghai (Hongqiao) Airport
Indonesia Soekarno Hatta Airport
Taiwan Taoyuan Airport
Shenzhen Airport
Hainan Meilan Airport
Sanya Airport
Tokyo Narita Airport*
Designed passengerthroughput capacity (m)
82
66
62
60
55
45
45
40
35
32
18
9
7
220
Passenger throughput
in 2011 (m)
79
47
35
41
54
45
48
33
49
25
28
10
12
183
Note:*In terms of aircraft movements (’000 times)
- 21 -
Utilisation rate
(%)
90%
71%
54%
68%
93%
91%
95%
78%
126%
78%
147%
94%
143%
96%
Planned capacity
Year due to
(m) be completed
120
2015
82
2017
100
2020
80
2020
97
2030
75
2020
65
2016
60
2015
62
2014
60
2018
45
2012
30
2016
20
2020
300
2012
Aviation Primer
Winter 2012
More competition in Southeast Asia
We believe AC has a better operating environment and growth potential than its peers. However, limits on airport
slots due to the insufficient availability of airspace will be a major obstacle to the industry expanding further in
China. We expect the issue to be addressed over the long term given that flight delays are now common in the
country, which has drawn the attention of the public and the government to the problem.
In terms of competition on international routes, we see it as being more intense in Southeast Asia than Northeast
Asia (ie, Korea, Japan, Taiwan and Hong Kong). With an open-skies policy implemented in ASEAN and new LCCs
being established, we expect Southeast Asian airlines to face the most competition by 2015. In Northeast Asia,
capacity growth over the next decade is likely to be from existing players. Given that GDP growth in Northeast Asia
is likely to be slower than in Southeast Asia for the near term, their capacity plans for the next three years are likely
be less aggressive than those in Southeast Asia. In addition, the limited availability of airport slots at the major
Northeast Asian airports, such as Tokyo, Hong Kong, Beijing and Shanghai, will slow the passenger-traffic growth
of the airlines there.
Summary of competitive landscape in different countries
Competitive edge
Air China
Low pricing
Traffic rights
Traditional bilateral
agreement
Airport slots
Very tight for major
airports such as
Beijing and
Shanghai
AirAsia
Very low pricing and low
cost
Benefit from open skies
policy in ASEAN
No major problem
Cathay Pacific
Premium brand
Qantas
Premium brand
Traditional bilateral
agreement in which CX
still covers most of the
routes
Tight
Third- and fourthBenefit from open skies Traditional bilateral but Traditional bilateral but
freedom rights available policy in ASEAN
not too open
not too open
domestic market open
to competition
No major problem
Tight
Tight in Tokyo
Tight in Tokyo
Source: Daiwa
- 22 -
Singapore Airlines
Premium brand
ANA
Premium brand
JAL
Premium brand
Aviation Primer
Winter 2012
- 23 -
Aviation Primer
Winter 2012
Picking the right aircraft
Overview
There are several factors to consider when choosing one type of aircraft over another. The most important
consideration is the maximum payload, which is the carrying capacity in terms of tonnage, and the flying range.
These determine the passenger capacity and the destinations than can be flown to. In the following section, we
compare the specifications of different aircraft types from various manufacturers, mainly Airbus, Boeing,
Bombardier, and Embraer. Aircraft types can be broken down into regional jets, narrow-body, and wide-body
aircraft, and further divided based on their typical passenger capacity.
Payload/range example
Payload
1,000kg 1,000lb
GE Engines
875,000lb (396,900kg) MTOW
80
150
70
800,000lb (362,880kg) MTOW
60
120
50
416 passengers
40
80
30
20
40
10
0
0
0
2
4
6
8
10
Range – 1,000nm
Source: Ascend, Boeing
Note: B747-700 used as an example; MTOW: maximum takeoff weight
- 24 -
Aviation Primer
Winter 2012
Types of aircraft
A regional jet is an aircraft used mainly to transport passengers on short- and medium-haul routes (flying times of
up to six hours). The original focus of regional jets was short-haul routes within the US and EU. The popularity of
this type of aircraft was supported by the deregulation of the aviation market in the US in the 1970s. Regional jets
are generally smaller than narrow-body aircraft, and vary in terms of their dimensions and capacity. They are used
on some domestic routes in China and short-haul routes in Southeast Asia.
Narrow-body aircraft have a single aisle inside the cabin. They can fly longer distances than regional jets, and
can carry a larger number of passengers. It is also common for narrow-body aircraft to carry small amounts of
cargo in their holds, which regional jets may not always be able to do. They are capable of operating on longer
journeys than regional jets, and are used on intra-Asia routes and domestically in China, or transcontinental
services.
Wide-body aircraft have two passenger aisles. They are larger than narrow-body planes, used over longer
distances and carry more passengers (which can make them more economical to operate on some short-haul
routes with high levels of traffic). As they are larger, wide-body aircraft can carry a lot more cargo than narrow-body
planes. They are often used as freighters as well.
Regional jet
Narrow-body – A320 (economy class)
Source: Embraer
Source: Airbus
Wide-body – A380 (economy class)
Source: Airbus
Summary of aircraft types and models
Type of aircraft
Regional jets
Regional jets and
narrow-body
Regional jets &
narrow-body
Narrow-body
Wide-body
Wide-body
Wide-body
Seat range
50-110
100-120
Aircraft model
Bombardier CRJ-900/C-series, COMAC ARJ21, Embraer 145/190/195/Ejets, MRJ (Mitsubishi)
Airbus A318, Boeing B737-500/-600, Bombardier C-series
125-160
Airbus A319/320, Boeing B737-300/-400, B737-7/ B737-8/ B737-600 -800/MD80/MD90, Bombardier CS-300,
COMAC C919
Airbus A321, Boeing B737-900/B737-900ER/B737-9/B757-200
Airbus A330-200/A300-300/A350-800, Boeing B757-300/ B767-300/B767-300ER/B787-8/ B787-9
Airbus A340-300/A340-500/A340-600/A350-900/A350-1000, Boeing B777-200ER/B777-200LR/B777-300ER
Airbus A380, Boeing B747-8/B747-400
180-220
200-300
300-400
400 above
Source: Ascend, companies
- 25 -
Aviation Primer
Winter 2012
Performance analysis of selected aircraft
Performance Analysis of Selected Aircraft
10000
777-200LR
9000
A350-800
787-8
8000
A350-1000
A350-900
A380-800
747-8I
777-300ER
'Heavy' Widebody
777-200ER
A330-200
7000
Widebody
6000
Range (nm)
767-300ER
A330-300
5000
4000
A319-100
737-700
737-600
A318-100
3000
CS100
E190
2000
1000
CRJ900
A320-200
C919
A321-200
Narrowbody
CS300
E195
E170 E175
CRJ700
757-200
737-800 737-900ER
CRJ1000
Regional Jet
0
0
100
200
300
Seat (typical max)
400
500
600
Source: Ascend
Selected 2000-built aircraft market values trends
Market Value (US$m)
120
100
80
60
40
20
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Assumptions: generic specifications, single aircraft 'arms-length' transaction, 'Half-life' conditions and no lease attached
A320-200
A330-300
737-800
767-300ER
Source: Ascend
- 26 -
2012
Aviation Primer
Winter 2012
Comparison of aircraft
Regional jets (50-110 seats)
The regional jet market concentrated on the 50-seater product initially (in the 1950s), but over the years the
capacity of the aircraft has risen. Bombardier’s CRJ700, launched in 2001, was the most popular 70-seater
launched that year. Competition increased in 2004 with the introduction of Embraer’s 70-seater, the E170, which
had a much larger cabin size than the CRJ700 and was a good replacement for the 70-seater turboprops that were
in use at the time, and represented an upgrade from the 50-seater jets. However, in the past decade, the regional
jet market has been moving towards even larger sizes – 85-110 seats – such as the CRJ900/1000 and E175/E190.
The CRJ900, launched in 2003, was the first new generation type in the 85-seater market. Its major competitor was
the E175, which had a larger cabin and more size variations (from 78-88 seats). We believe the E175 has become
the benchmark type in its market sector based on order backlog and compared with the CRJ900. In the 100-seater
segment, the CRJ1000 faces fierce competition from the E190 and E195. Meanwhile, Mitsubishi is developing the
MR190, which should be available in the market in 2013 and be a new competitor.
An example of regional jet (50-110 seats) – Embraer E170
Economy class
Source: Embraer, Skytrax
- 27 -
Aviation Primer
Winter 2012
Regional jets – 50-110 seats
Most popular
Manufacturer
Country
Aircraft model
Status
√
Bombardier
Bombardier
Bombardier
Canada
Canada
Canada
CRJ700 (NG) CRJ900 (NG) CRJ1000 (NG)
In production In production In production
Seat capacity
MTOW (lb)
Typical 70
Typical 88
72,750 80,500 75,000
84,500
18,800-19,995 22,750-23,350
1,218 - 1,504 1,048 - 1,515
(70 pax)
(88 pax)
550
590
Payload (lb)
Range (nm)
Cargo capacity (cu
ft)
Fuel capacity (US
gal)
High speed cruise
(Mach)
Max altitude (ft)
Entry into service
Number built
Order Backlog
Fuel consumption
per km (ton)
Fuel consumption
per km per seat
Fuel consumption
per hr (ton)
Top three operators
(in-service, order,
stored)
Typical 98
85,970 91,800
26,400
971 - 1,622
(100 pax)
690
COMAC
China
ARJ21-700
In
development
Typical 78
89,287 95,901
19,698
1,200 - 2,000
√
√
√
COMAC
Embraer
Embraer
Embraer
Embraer
China
Brazil
Brazil
Brazil
Brazil
ARJ21-900
E145
E170
E175
E190
In
Out of
In production In production In production
development
production
Typical 78
Typical 50
Typical 70
Typical 78
Typical 94
96,156 48,501~53,13
79,344 82,673 105,359 104,018
1
85,098
89,000
114,199
24,793
13,027
20,000-21,700 22,200-22,800
28,800
1,200 - 1,800 1,550-2,000 1,800 - 2,100 1,800 - 2,100 1,800 - 2,400
√
Embraer
Brazil
E195
In production
Typical 106
107,564 115,280
30,100
1,400 - 2,200
Mitsubishi
Japan
MRJ70
In
development
Typical 70
81,200 85,970
n.a
860 - 1,510
Mitsubishi
Japan
MRJ90
In
development
Typical 82
87,300 90,378
n.a
920 - 1,360
12.416
827
n.a
n.a
n.a
n.a
n.a
n.a
n.a
1,057
1,057
1,057
3,360
3,360
4,174
9,335
9,335
12,971
12,971
n.a
n.a
0.825
0.83
0.82
0.8
0.8
0.8
0.82
0.82
0.82
0.82
0.78
0.78
41,000
2001
315
9
0.517
41,000
2003
257
11
n.a
41,000
2010
23
33
n.a
39,000
Late 2012
6
132
n.a
39,000
TBC
n.a
n.a
37,000
1996
890
n.a
0.620
41,000
2004
182
6
n.a
41,000
2005
143
47
n.a
41,000
2005
389
150
0.495
41,000
2006
88
43
n.a
39,000
TBC
n.a
n.a
n.a
39,000
Late 2013
n.a
65
n.a
0.007
n.a
n.a
n.a
n.a
0.012
n.a
n.a
0.005
n.a
n.a
n.a
1.505
n.a
n.a
n.a
n.a
1.120
n.a
n.a
2.114
n.a
n.a
n.a
Air Nostrum,
Brit Air,
Garuda
Indonesia
Henan
Airlines,
Chengdu
Airlines,
Shandong
Airlines
n.a
JetBlue
Airways,
Tianjin
Airlines, Air
Canada
Azul,
Lufthansa
Cityline, Flybe
n.a
ANA, Trans
States
Holdings
SkyWest
Pinnacle
Airlines,
Airlines, Mesa
American
Airlines,
Eagle Airlines, Eurowings
ExpressJet
Airlines
ExpressJet
Shuttle
Republic
Airlines,
America,
Airlines,
American
Republic
Compass
Eagle Airlines, Airlines, Saudi Airlines, Flybe
Chautauqua
Arabian
Airlines
Airlines
Source: Ascend, companies
Regional jets and narrow-body jets (110-125 seats)
Nowadays, operators of 100-120-seat narrow-body aircraft have started to focus more on alternatives, such as the
Embraer E190/195 and Bombardier C-series regional jets. For example, Bombardier’s new CS100 (due to start
commercial operation in 2013) has a seat capacity of 110-125, and is comparable to the A318-100, B737-500, and
B737-600. However, we believe the most common aircraft types for commercial airlines’ short-haul routes are 125190 seaters, due to the better payload and thus passenger capacity.
- 28 -
Aviation Primer
Winter 2012
An example of narrow body (110–125 seats) – Airbus A318
Exit & Emergency Exit
Wings location
Moveable curtain divider
Lavatory
Seats for unaccompanied minors travelling in UM
Cradles for European destinations
Economy class
Source: Air France, Skytrax
- 29 -
Aviation Primer
Winter 2012
Regional jets and narrow-body aircraft details – 110-125 seats
Most popular
Manufacturer
Country
Aircraft model
Status
Seat capacity
MTOW (lb)
Payload (lb)
Range (nm)
Cargo capacity (cu ft)
Fuel capacity (US gal)
High speed cruise (Mach)
Max altitude (ft)
Entry into service
Number built
Order Backlog
Fuel consumption per km (ton)
Fuel consumption per km per seat
Fuel consumption per hr (ton)
Top three operators (in-service, order, stored)
Airbus
France, Germany, Spain, UK
A318-100
In production
Typical 107
149,900
30,780-34,090
3,200
749
6400gal
0.82
39,000
2003
77
2
n.a
n.a
n.a
Air France, Avianca,
LAN Airlines
Boeing
US
737-500
Out of production
108-122
115,500-133,500
31,960-32,700
1,415-2,375
546-822
5,311-6,295
0.84
37,000
1987
389
n.a
0.427
0.004
2.390
n.a
Boeing
US
737-600
In production
Typical 110
145,500
n.a
3,050 - 3,225*
756
6,875
0.82
41,000
1998
69
0
0.429
0.004
2.046
SAS, WestJet,
Tunisair
√
Bombardier
Canada
CS100
In development
110 -125
121,100 - 128,200
TBA
2,200 - 2,950
820
n.a
0.82
41,000
Late 2013
n.a
61
n.a
n.a
n.a
Swiss, two unannounced
customers
Source: Ascend, companies, various media
Regional jets and narrow-body aircraft (125-190 seats)
For aircraft with 125-190 seats or more, the market is mostly dominated by Airbus and Boeing (especially after
McDonnell Douglas was acquired by Boeing in 1997). They produce the most common types of aircraft for shorthaul routes in Asia. The most popular choices are the A320 (including A318/319) and the B737 series.
The A320 (launched in 1984) was the first new 150-seater to be introduced in over 20 years, and has since taken
market share from the original B727s and MD-80s. In response, in 1991, Boeing initiated the development of its
advanced 737 Next Generation family (NG series), with the B737-700 model competing head-to-head with the
Airbus A319, and the B737-800 pitted against the A320. Since its launch in 1993, the B737-700 has achieved good
traction with the LCCs over the A319, but both aircraft are now falling out of favour due to the high jet-fuel prices
given that they are less fuel efficient than new types of aircraft. Bombardier is trying to take share in this market
with its relatively more fuel-efficient CS100 and CS300. For larger sizes, the B737-800 has proven to be the most
successful member of the Boeing family.
The Airbus A320neo, currently in development, should help Airbus regain the market share it lost in the 150-seater
segment. In response, Boeing is developing its B737 Max, which is likely to be the replacement for the B737-700.
So far, the A320neo and B737 Max have received orders of 1,278 and 451, respectively. The C919 aircraft from a
new player from China, COMAC, is likely to enter the market at nearly the same time as the new Airbus and Boeing
aircraft (2016). However, we believe its customers will mainly be Mainland Chinese airlines, and that it will find it
hard to compete with the new A320neo and B737 Max series in terms of quality.
- 30 -
Aviation Primer
Winter 2012
An example of narrow-body aircraft (125-190 seats) – COMAC - C919
Mixed class: 156 seats
All economy: 168 seats
Economy class
Source: COMAC, Xinhua
- 31 -
G: Galley
S: Storage
L: Lavatory
A: Attendant seat
W: Walking closet
Aviation Primer
Winter 2012
Narrow-body aircraft details – 125-190 seats
Most popular
Manufacturer
Country
Aircraft model
Status
Seat capacity
Airbus
France,
Germany,
Spain, UK
A319-100
In production
MTOW (lb)
Typical
124
166,450
Payload (lb)
Range (nm)
√
√
Airbus
Airbus
Airbus
France,
France,
France,
Germany,
Germany,
Germany,
Spain, UK
Spain, UK
Spain, UK
A319neo
A320-200
A320neo
In
In production
In
development
development
124 - 156
Typical 150
150 - 180
√
Boeing
US
√
Boeing
US
√
Boeing
US
737-300
Out of
production
128-140
737-400
Out of
production
146-159
737-700
In
production
Typical 126
138,500150,000
37,20039,480
1,907-2,060
154,500
737-800
In
production
Typical
162
174,200
41,420
Boeing
US
Boeing
US
Boeing
US
MD-90
Out of
production
Typical 110
Bombardier
Canada
Comac
China
133,000
155,500
n.a.
n.a.
n.a.
3,365 3,440*
766
3,060 3,115*
1555
TBC
1,990-3,060
n.a.
n.a.
1,013-1,253
n.a.
1100
n.a.
5,311-6,295
6,875
6,875
n.a.
n.a.
5,779-6,970
n.a.
n.a.
n.a.
0.84
0.84
0.82
0.82
TBC
TBC
0.8
n.a
0.82
0.785
TBC
2015
n.a.
1167
37,000
1981
1113
n.a.
37,000
1986
486
n.a.
41,000
1997
1,081
305
41,000
1998
2522
1530
TBC
2017
n.a.
451
TBC
2017
n.a.
451
35,000
1980
1,191
n.a.
35000
1995
n.a.
n.a.
41,000
Late 2014
n.a.
72
39,000
2016
n.a.
180
n.a.
0.387
0.364
0.370
0.309
n.a.
n.a
n.a.
0.385
n.a.
n.a.
n.a.
0.003
0.002
0.003
0.002
n.a.
n.a.
n.a.
0.004
n.a.
n.a.
n.a.
2.361
2.523
2.231
2.430
AirAsia,
ALAFCO,
IndiGo
n.a.
n.a.
172,040
TBC
n.a.
n.a.
41,030
n.a.
3,600
TBC
3,200
TBC
124,500138,500
32,90036,260
1,635-2,255
n.a.
792-1,068
1,097-1,373
n.a.
5,311-6,295
0.82
Southwest
Ryanair,
Airlines,
American
United
Airlines, GOL
Continental,
WestJet
737-7
737-8
In
In
development development
126
160
Boeing
US
MD-80
Out of
production
Typical
130
128,000139,500
39,57943,451
1,565-2,504
TBC
Cargo capacity
975
n.a.
1,321
(cu ft)
Fuel capacity (US 6400-7980
n.a.
6400-7980
gal)
High-speed cruise
0.82
0.82
0.82
(Mach)
Max altitude (ft)
39,000
TBC
39,000
Entry into service
1990
2016
1988
Number built
1,331
n.a.
459
Order Backlog
152
35
1595
Fuel consumption
0.377
n.a.
0.322
per km (ton)
Fuel consumption
0.003
n.a.
0.002
per km per seat
Fuel consumption
2.333
n.a.
2.499
per hr (ton)
Top three
EasyJet, US
Frontier
CEA, Jetblue
operators (inAirways,
Airlines,
Airways,
service, order,
United
Avianca/Taca
AirAsia
stored)
Continental Group, Qatar
Airways
Boeing
US
156,000168,000
CS300
C919
In
In
development development
120 - 145
168 - 190
131,300 139,100
38,200
159,900 170,500
45,200
2,085-2,172 2,200 - 2,950 2,200 - 3,000
n.a.
n.a.
n.a.
2.865
n.a.
n.a.
Lion Air,
Southwest
Airlines,
Norwegian
Lion Air,
Southwest
Airlines,
Norwegian
American
Airlines,
Delta,
Allegiant Air
Delta,
Saudia,
Japan
Airlines
Republic
Airways, LCI,
Korean Air
Sichuan
Airlines,
Hainan
Airlines,
CSA/CEA/AC
Narrow-body aircraft (180-220 seats)
The original player in this category was Boeing with its B757-200, which was built from 1983, with the last delivery
in 2005. The B757-200 was popular on US domestic, European and Chinese routes, but was gradually replaced by
the A321 (except on relatively long-haul flights operated by US carriers). Production ceased in 2005. As the A321
is part of the A320 family (popular within the industry), it can share flight equipment and parts, and has become
more popular than the B757.
For Boeing, the B737-900 was launched in 2001 and has had limited success in terms of regaining market share,
as its seat capacity and range are smaller than those of the A321. As it has the same fuel capacity and maximum
take-off weight (MTOW) as the B737-800, the range factor was sacrificed for more passenger capacity. In order to
fill the gap in the 200+seat size market after production of the B757 ended in late 2003, and in a bid to develop a
more competitive product against the A321, Boeing launched the B737-900ER in 2007, which has a longer range
but slightly less capacity than the A321. The next round of competition is likely to occur from 2016-18, when
Airbus’s A321neo and Boeing’s B737-9 (Max series) will be launched. For a longer range of close to 4,000 nautical
miles (nm), Boeing is working on a replacement for the B757-200.
- 32 -
Aviation Primer
Winter 2012
An example of narrow-body aircraft (180-220 seats) – Boeing B737-900
Business class
Economy class
Source: Korean Air, Skytrax
Narrow-body aircraft details – 180-220 seats
Most popular
Manufacturer
Country
Aircraft model
Status
Seat capacity
MTOW (lb)
Payload (lb)
Range (nm)
High-speed cruise (Mach)
Max altitude (ft)
Entry into service
Number built
Order Backlog
√
Airbus
A321-200
In production
Typical 185
206,200
47,100
3,000
1,827
6350-7930
0.82
39,000
1997
711
325
0.306
0.002
2.726
US Airways, CSA, Lufthansa
√
Airbus
A321neo
In development
185 - 220
TBC
n.a.
TBC
n.a.
n.a.
0.82
TBC
2016
n.a.
87
n.a.
n.a.
n.a.
Cebu Pacific, ILFC, Qatar
Airways
- 33 -
Boeing
US
737-900
Out of production
Typical 177
174,200
n.a.
2,745*
1,835
6,875
0.82
41,000
2001
52
n.a.
0.289
0.002
2.592
Alaska Airlines, Korean
Air, United Continental
√
Boeing
US
737-900ER
In production
Typical 174
187,700
n.a.
3,265
1,852
7,837
0.82
41,000
2007
118
328
n.a.
n.a.
n.a.
Lion Air, Delta, United
Continental
√
Boeing
US
737-9
In development
Typical 180
>187,700
n.a.
3,200
n.a.
n.a.
TBC
TBC
2017
n.a
451
n.a.
n.a.
n.a.
Lion Air, Southwest
Airlines, Norwegian
Boeing
US
757-200
Out of production
Typical 200
220,000-255,000
55,125-55,620
3,000-4,000
1,790
11,276
0.8
42,000
1983
994
n.a.
0.328
0.002
3.227
American Airlines, Delta,
BA
Aviation Primer
Winter 2012
Narrow-body and wide-body aircraft (200-300 seats)
The first generation of medium-range aircraft, such as the A300, A310, B767 and B757-300, have gradually been
replaced by the A330 and then the B787 (the Dreamliner). The B787 is the first aircraft to use an all-composite
fuselage. The B787 was designed as a replacement for the B767-300ER, and has more seats, a wider fuselage
and a range comparable to the B777 (8,000nm). Its lower capacity enables airlines to explore new long-haul routes
where demand would be thin initially.
To compete with Boeing’s new B787, Airbus has developed its A350 series, most of the models for which, eg, the
A350-800, A350-900 and A350-1000, are larger than the B787. The A350-800, which is due to start flying in 2016,
will be positioned between the B787-8 and B787-9, and should therefore replace the B767-300ER, and
complement the A330-200. Similar to the B787, its capacity and range would enable the airlines to test new longhaul markets. In our view, both the A350 and B787 series will be the major players in the medium-to-long-haul
markets going forward.
An example of wide-body aircraft (200-300 seats) – Airbus A330-300
Business class
Economy class
Source: SIA, Skytrax
- 34 -
Aviation Primer
Winter 2012
Wide-body aircraft details – 200-300 seats
Most popular
Manufacturer
Country
Aircraft model
Status
Seat capacity
MTOW (lb)
Payload (lb)
Range (nm)
Fuel capacity (US
gal)
High speed cruise
(Mach)
Max altitude (ft)
Entry into service
Number built
Order Backlog
Fuel consumption per
km (ton)
km per seat
hr (ton)
Top three operators
(in-service, order,
stored)
√
Airbus
France, Germany,
Spain, UK
A330-200
In production
√
Airbus
France, Germany,
Spain, UK
A330-300
In production
Airbus
France, Germany,
Spain, UK
A340-200
Out of production
√
Airbus
France, Germany,
Spain, UK
A350-800
In development
Typical 253-293
Max 524,700
80,200
7,250
4,800
36,750
Typical 295-335
Max 518,300
96,400
5,850
5,700
25,760
Typical 263
568,800
97,000
7,200
3,540
37,150
Typical 276
571,000
TBA
8,500
4,452
34,100
Boeing
US
Boeing
US
Boeing
US
Boeing
US
757-300
Out of
production
Typical 243
240,000
n.a
2,345
1,670
11,466
767-200
Out of production
767-200ER
Out of production
Typical 181
282,000-315,000
67,887-73,350
2,350-4,000
3,070
12,140-16,700
Typical 181
278,000-285,000
71,650-78,500
5,650-6,600
3,070
20,450-24,140
767-300ER
In
production
Typical 218-269
412,000
84,157
5,990
4,030
24,140
√
Boeing
US
√
Boeing
US
787-8
In production
787-9
In production
210-250
502,500
105,000
7,600 - 8,200
4,826
33,528
250-290
553,000
145,700
8,000-8,500
5,452
33,384
0.86
0.86
0.86
0.89
0.8
0.86
0.86
0.86
0.89
0.89
41,000
1998
459
106
41,000
1994
401
165
41,099
1993
n.a
n.a
43,000
2016
n.a
118
42,000
1998
55
n.a
43,000
1984
128
0
43,000
1984
121
0
43,000
1988
563
21
43,000
2011
11
508
43,000
2014
n.a
335
0.293
0.322
n.a
n.a
n.a
0.344
n.a
n.a
n.a
n.a
0.001
0.001
n.a
n.a
n.a
0.002
n.a
n.a
n.a
n.a
5.176
4.992
n.a
n.a
n.a
4.252
n.a
n.a
n.a
n.a
Air Caraibes,
Emirates, CEA
CX, SIA, Thai
Lufthansa, Iberia,
SIA
Qatar Airways,
Aeroflot, US
Airways
ATA Airlines,
Northwest Airlines,
Condor
ANA, United
Continental, Delta
American Airlines,
Continental
Airlines, Air
Canada
American Airlines,
Delta, LAN
ANA, United
Continental,
Air Canada
Etihad Airways,
ILFC, Qantas
Wide-body aircraft (300-400 seats)
At the time of the introduction of the A340-200 and A340-300, both in 1993, the main competitor was the
McDonnell Douglas MD-11. Airbus aimed for the A340-200 and A340-300 to replace the McDonnell Douglas DC10 and Lockheed L1011. However, as the MD-11 had problems with payload and range, most of those aircraft
were converted to freight aircraft. It was the introduction of the B777-200ER in 1997 that created the main
competition.
The B777-200ER can carry more passengers than the A340 over similar ranges (7,000-9,000nm). The fourengined A340 series (including the A340-300/500/600) has not been particularly welcomed by the airlines due to
rising fuel prices since 2005; its competitor, the twin-engined B777 series (including the B777200ER/200LR/300ER) has been the preferred choice. For example, the B777-300ER gained the lion’s share of
new business over 2005-10, which led to production of the A340-600 to cease in 2011. The B777-300ER has even
replaced the B747-400 on some long-haul routes.
In response to the loss of market share, Airbus moved its focus to develop new twin-engined aircraft, the A350-900
and A350-1000, to compete with the B777-200ER and B777-300ER, respectively. However, the first deliveries will
not be made until 2014 and 2017, respectively. Boeing, meanwhile, is likely to promote the 787-10X and 777-9X as
the new competitors to Airbus’s new A350 series.
- 35 -
Aviation Primer
Winter 2012
An example of wide-body aircraft (300-400 seats) – Boeing - B777-300ER
Business class
Economy class
Source: CX, Skytrax
Wide-body aircraft details – 300-400 seats
Most popular
Manufacturer
Country
Aircraft model
Status
Seat capacity
MTOW (lb)
Payload (lb)
Range (nm)
High-speed cruise
(Mach)
Max altitude (ft)
Entry into service
Number built
Order backlog
Fuel consumption per km
(ton)
per seat
Fuel consumption per hr
(ton)
Top three operators (inservice, order, stored)
Airbus
√
Airbus
France, Germany,
Spain, UK
A350-900
In development
Typical 315
598,000
168,375
8,100
5,682
36,456
0.89
√
Airbus
France, Germany,
Spain, UK
A350-1000
In development
Typical 350
679,024
TBA
8,400
6,996
41,211
0.89
√
Boeing
US
Boeing
US
√
Boeing
US
777-200ER
In production
Typical 301
656,000
120,500
7,725
5,720
45,220
0.89
777-200LR
In production
Typical 301
766,000
n.a
9,380
5,720
47,890
0.89
777-300ER
In production
Typical 365
775,000
n.a
7,930
7,640
47,890
0.89
n.a.
43,000
2014
n.a.
372
43,000
2017
n.a.
69
43,000
1997
416
12
43,000
2006
54
3
43,000
2004
332
275
0.374
n.a.
n.a.
n.a.
0.305
n.a.
n.a.
0.001
n.a.
n.a.
n.a.
0.001
n.a.
n.a.
8.187
Airbus
France, Germany,
Spain, UK
A340-500
Out of production
Typical 313
811,300
95,500
8,650
5,384-5,435
56,750
0.86
Airbus
France, Germany,
Spain, UK
A340-600
Out of production
Typical 260
804,675
122,600
7,500
7,280-7,331
51,750
0.86
41,099
1993
n.a.
n.a.
41,000
2002
41,000
2002
n.a.
0.300
n.a.
0.001
A340-300
Out of production
Typical 295
568,800
104,100
6,500
5,700
37,150
0.86
6.173
Lufthansa, Iberia, SIA
129
Lufthansa, Iberia, Virgin Atlantic
n.a.
n.a.
n.a.
5.530
n.a.
Emirates, Qatar
Airways, CX
Emirates, Qatar
Airways, Ethiad
Airways
United Continental,
American Airlines, BA
Delta Air, Emirates,
Qatar Airways
Emirates, CX, Air
France
- 36 -
Aviation Primer
Winter 2012
Wide-body aircraft (more than 400 seats)
The Boeing 747 series, launched in 1969, was for many years the largest aircraft in terms of capacity. This record
was not broken until 2007, when the A380 was introduced. The older versions of the passenger B747 Classic
(100/200/300) were replaced by the B747-400, which in turn, have now been replaced by the B777-300ER and
A380.
Currently, the A380-800, the first of which was delivered in 2007, is the world’s largest aircraft, with a typical
seating capacity of 525 passengers (maximum seat capacity is 853). It has replaced the B747-400 on a number of
trunk routes (considered the major routes for an airline, eg, SIA now uses the A380 on Singapore-New YorkFrankfurt route, which previously was operated by B747s), primarily between hub cities in Asia, North America, and
Europe. The drivers of the need for such a large aircraft were: the industry’s long-term traffic growth forecast of 5%
a year, the need to start replacing the B747-400, because it was less fuel-efficient than newer planes, airport
congestion at major hubs (such as London, Tokyo, Beijing, and Hong Kong), and lower fuel burn per seat cost
(17% lower than the 747-400 and 6% lower than the 747-8, according to Airbus).
In response to the mega-sized A380, Boeing launched its fourth-generation Boeing 747 version, the B747-8I, which
has a typical passenger capacity of 467. The first passenger aircraft was delivered on 1 May 2012. The size was
designed to slot in between the B747-400 and A380-800. We expect the B747-8I to face keen competition from the
A380, as the A380 has proved to be popular since its entry into service and provides more flexibility for premium
cabins because there is more room. As at the end of April 2012, Boeing had received orders for 36 B747-8I aircraft,
while Airbus had recieved 253 orders for its A380.
- 37 -
Aviation Primer
Winter 2012
An example of wide-body aircraft (more than 400 seats) – Airbus - A380
First class
Business class
Economy class
Source: SIA, Airbus, Skytrax
Wide-body aircraft details – more than 400 seats
Most popular
Manufacturer
Country
Aircraft model
Status
Seat capacity
MTOW (lb)
Payload (lb)
Range (nm)
High speed cruise (Mach)
Max altitude (ft)
Entry into service
Number built
Order backlog
√
Airbus
A380-800
In production
Typical 525
1,235,000
197,000
8,300
6,200
84,600
0.89
43,000
2007
75
178
n.a
n.a
n.a
Emirates, QAN, SIA
Boeing
US
747-400
Out of production, in service
Typical 400
800,000
138,858
6,000
n.a
53,765
n.a
n.a
1988
442
n.a
0.338
0.003
9.535
BA , CX, Korean Air, Lufthansa
- 38 -
Boeing
US
747-8I
In development
Typical 467
987,000
169,100
8,000
5,705
60,755
0.92
43,000
2012
n.a
36
n.a
n.a
n.a
Lufthansa, Korean Air, Arik Air
Aviation Primer
Winter 2012
Operating old or new aircraft
Overview
The decision to buy a new aircraft as opposed to a second-hand one depends on several factors, including
financing, purchase discount on the price of a new aircraft compared with the second-hand price, and other
company- or country-specific issues. Most of the time, the aircraft value and lease rates move in line with economic
growth. Although the current lease rate is at a low level, most Asian airlines are continuing to buy new aircraft, due
to the better economic-growth outlook and their stronger balance sheets compared with US and EU peers.
Selected aircraft market lease rates (aircraft built in 2000)
Market Lease Rate (US$m per month)
0.8
0.6
0.4
0.2
0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Assumptions: generic specifications, 5 year lease term to a reasonably good credit airline
A320-200
A330-300
737-800
767-300ER
Source: Ascend
New aircraft – B787
Source: Boeing
Second-hand aircraft – B707
Source: Global aircraft org (website)
- 39 -
2011
2012
Aviation Primer
Winter 2012
Financing
The availability of financing is the most fundamental question faced by airline managements when deciding to
purchase an aircraft. Such a decision depends on the interest-rate cycle and also the cash available from the
individual airline. From the following chart it can be seen that airlines with strong cash positions, such as SIA and
Southwest, tend to pay cash up front rather than through finance leases.
Net debt-to-equity ratios vs. fleet ratios of airlines (2011)
2011
Net debt-to-equity ratio (x)
Fleet ratio (%)
Self-owned
Finance lease
Operating lease
CX
0.40
SIA
net cash
AC
1.60
CSA
1.67
CEA
2.89
Qantas
0.49
ANA
2.00
JAL
1.12
Southwest
Airlines
0.08
United
Continental
2.75
Delta
n.a
37
31
31
61
3
36
47
21
32
47
18
35
65
n.a.
35
64
n.a.
36
73
n.a
27
73
n.a
27
71
1
28
51
n.a.
49
74
14
12
Source: Bloomberg, companies, Daiwa
Purchasing new aircraft at a discount vs. second-hand
Airlines often negotiate a much lower price for new aircraft than the tag price. But this depends on the size of the
order and reputation of the airline’s brand. Also, some customers that purchase aircraft when they are launched,
such as Singapore Airlines with the A380 and ANA with the B787, are likely to receive a better deal than other
customers. Large airlines have a higher tendency to buy new aircraft as they are often able to get a favourable
discount from manufacturers because they buy in bulk. The following chart shows the discount that can be offered
is huge compared with the listed price.
Newly set-up airlines often opt to lease aircraft or purchase second-hand planes due to a lack of capital, their
inability to obtain a good discount, and also as the delivery schedule may not meet their demands. Many incumbent
airlines are buying new aircraft as the new models are often more fuel-efficient than old, second-hand aircraft.
Discount on listed prices of some aircraft
US$m
A319
A320
A330-200
B737-800
B737-900ER
B777-300ER
Listed price 2012
81
88
209
84
90
398
Market price
30
40
84
41
45
149
Discount
(63%)
(55%)
(60%)
(51%)
(49%)
(50%)
Source: Airbus, Boeing, Ascend
Other company- and country-specific issues
Some airlines prefer to maintain their fleets at a certain age. This enables the airline to provide state-of-the-art
inflight entertainment and also make use of the most fuel-efficient aircraft. For example, Singapore Airlines starts to
seek buyers of its aircraft when they reach five years or above. Such a practice is commonplace among those
airlines with strong balance sheets (or availability of funding) and good maintenance records. From the following
chart, it can be seen that due to SIA’s policy on aircraft sales and its strong balance sheet, it has a relatively young
fleet.
Average age and net debt-to-equity ratio of airlines
2011
Average age
Net debt-equity ratio (x)
CX
10.70
0.40
SIA
6.25
net cash
AC
7.03
1.60
CSA
6.20
1.67
Source: Companies
- 40 -
CEA
<7
2.89
Qantas
8.1~8.8
0.49
AirAsia
3.3
1.41
ANA
n.a
2.00
JAL
9.0
1.12
Aviation Primer
Winter 2012
Also, the competitive environment and an airline’s brand affect the choice of aircraft. For example, in the US,
airlines can compete with older aircraft as most of the US airlines do not have strong balance sheets to replace
their fleet with newer aircraft. However, in Asia, it is difficult for the airlines to compete if their fleets include old
aircraft. Even LCCs such as AirAsia are buying new aircraft currently.
For some countries, aircraft purchases are becoming part of the political activity between developing countries and
Western nations. For example, the diplomatic visits by Chinese leaders to the EU and US often include a
discussion about a sizeable framework agreement for an aircraft purchase from Airbus and Boeing, respectively.
Does size really matter?
Many airlines have been attracted to mega aircraft by the fact that the average seat cost per passenger would be
reduced using mega-sized aircraft, such as the Airbus A380 or Boeing 747. Also, airline managements tend to
expand their fleets due to possible economies of scale. In the following, we will discuss the actual benefits and
risks of doing so.
Size of aircraft
In our view, apart from the constraints in terms of flying range, the use of wide-body or narrow-body aircraft differs
depending on the markets they serve. Wide-body aircraft are best deployed on routes with high traffic levels,
especially those popular with business travellers, as these aircraft have better inflight facilities than narrow-body
jets and can accommodate more premium-class passengers, who are more lucrative than economy-class
passengers. Therefore, many airlines try to deploy wide-body aircraft on key trunk routes to attract more high-yield
premium-class passengers. Narrow-body jets are best deployed on routes where frequency of operation is a key
factor. Airlines that dominate the best airport slots can take a higher market share, but often this requires the use of
smaller aircraft. Also, narrow-body aircraft are often used to launch new destinations, as traffic may not be high
during the first few years after the launch.
For mega-sized jets (such as the A380 and B747), we believe they are best deployed at airports where traffic is
busy (especially where there is an abundance of business travellers) and slots are tight. The flying distance
between airports must be long enough to enjoy the better fuel efficiency of the mega-sized aircraft such as the
A380. In our view, there are only a few routes globally that best suit large aircraft, eg, from Asia (Hong Kong, Tokyo,
Singapore, Shanghai, Beijing) to the US (such as New York) and UK (London).
Another benefit of operating mega aircraft like the Airbus A380 or Boeing 747 is that if flights are full, the average
seat cost per passenger is reduced. However, the downside of owning large aircraft is the lower flexibility in terms
of capacity reduction or capacity redeployment during economic downturns. Average seat costs rise significantly if
flights are not full. If the route is serviced by two smaller aircraft, an airline may choose to lower utilisation, parking,
or redeploy one of the aircraft elsewhere.
- 41 -
Aviation Primer
Winter 2012
Mega aircraft order book (as at 31 July 2012)
(No. of aircrafts)
100
80
60
40
20
A380
Lufthansa
Korean Air
Arik Air
Air Austral
Virgin Atlantic
Transaero Airlines
Thai Airways
Skymark Airlines
SIA
Qatar
Qantas
Malaysia Airlines
Lufthansa
Korean Air
Kingfisher Airlines
Hong Kong Airlines
Etihad Airways
Emirates
CSA
British Airways
Asiana
Air France
0
B747-8
Source: Airbus, Boeing
Comparison of cost per ASK (2011)
(US$)
0.22
0.18
0.14
0.10
0.06
0.02
AC
CSA
CEA
CX
SIA
QAN
AirAsia
Tiger
ANA
Skymark Korean
Air
Asiana
Thai
Airways
MAS
CAL
EVA Garuda
Airways
Cebu
Pacific
Air NZ
Note: Figures for SIA, Tiger, and ANA are based on Mar 2012 year-end
Using large aircraft often leads to fewer frequencies and therefore reduced connectivity for transit passengers.
Therefore, a crucial decision for network carriers is whether they opt for higher frequencies but higher operating
costs, or sacrifice some transit passengers in exchange for a lower cost per seat.
As LCCs have a high-frequency, short-haul business model, their fleets mostly comprise short-haul aircraft, such
as the A320 or B737 series. For FSCs in Asia, the choice depends on the network and revenue contribution from
different regions. The FSCs with high long-haul exposure, such as SIA and QAN, are more aggressive in buying
mega aircraft than other FSCs in the region, such as Thai Airways and Malaysia Airlines. This is mainly because
mega aircraft provide greater advantages on long-haul routes.
Carriers such as ANA and CX focus on relatively small long-haul aircraft such as the B787 and B777-300ER,
respectively, because they are well located in North Asia, allowing them to fly shorter distances to major cities in
the US and Europe as compared with their peers in Southeast Asia.
- 42 -
Aviation Primer
Winter 2012
Fleet size
In our opinion, globally, airlines with larger fleets do not necessarily have better operating margins than those
operating smaller fleets. Elevated operating margins are often achieved through good cost management, and
having a competitive edge in niche markets, like the LCCs and/or premium traffic. Most of the economies of scale
are achieved during the airline’s initial build-up stage. The cost of holding spare parts, crew training and
maintenance are areas where economies of scale can be achieved in the early build-up stage.
The following table shows the operating-profit margin of an airline does not improve even with a large fleet size. For
example, the operating-profit margin of US Airways, with a fleet size of 340, is lower than that of CX, which has a
fleet size of only 175 aircraft. Meanwhile, the margins of CX and SIA have not improved even though they have
expanded their respective fleets. This may due to high competition in the region, high jet-fuel price, and high staff
costs over the past 20 years. Therefore, we see the economies of scale achieved from having a large fleet size as
being insignificant.
Operating margins vs. fleet size
2011
Operating-profit margin
Fleet size
CX
4
175
SIA
2
100
AC
9
432
CSA
4
444
CEA
4
377
Qantas
3
283
ANA
6.9
226
JAL
17
215
AirAsia
19
103
Southwest
Airlines
4
698
United
Continental
5
701
Delta
6
775
US
Airways
3
340
Ryanair
16
294
Source: Companies
Operating margin vs. fleet size – CX
(unit)
180
150
120
Operating margin vs. fleet size – SIA
(%)
25
(unit)
(%)
120
18
15
90
5
60
(5)
30
(15)
0
14
10
60
30
1991
1992
1993
1994
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
6
Fleet size (LHS)
Source: Company
2
(2)
1991
1992
1993
1994
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
90
OP margin (RHS)
Fleet size (LHS)
Source: Company
- 43 -
OP margin (RHS)
Aviation Primer
Winter 2012
Aircraft selection is becoming more focused
Over the past decade, AC has retired many of its old aircraft, such as the A319, A340, B757, B767 and B747
models, and the old B737 models. The company has accelerated its rate of replacing old models with new ones in
recent years, leading it to record impairment losses in its 2010 and 2011 results. Regarding replacement activity,
AC now focuses on a few aircraft types, such as the A320 and B737 for short-haul routes, the A330 for mediumhaul routes and the B777 for long-haul routes. We believe AC, like most other airlines, is likely to continue to use
models from both Airbus and Boeing in the future. This would help Air China to save costs, as the fewer types of
aircraft an airline has, the fewer types of equipment and spare parts it needs.
For premium airlines, our research shows that they have more balanced fleets, comprising Airbus and Boeing
models (thereby ensuring good relationships with both manufacturers), and that they focus on buying the most
efficient models available. This enables them to achieve higher efficiency (especially in terms of fuel) in their
operations, which is important for premium airlines flying long-haul routes. For example, CX recently replaced its
old B747-400s with more fuel-efficient B777-300ERs. This is similar to FSCs such as ANA and JAL, which both will
be using more fuel-efficient B787s in place of their old B767s.
LCCs usually focus exclusively on a single model. In AirAsia’s case, this is the A320 aircraft type: it does not need
medium- or long-haul aircraft as it serves only short-haul routes in Asia. As an LCC, it is important for AirAsia to
keep its aircraft portfolio as streamlined as possible. Having a single aircraft model in its fleet allows it to do this,
reducing maintenance costs (fewer different types of spare parts), and making the rotation of aircraft easier (as
they have the same passenger capacity and configuration). In addition, it enjoys greater bargaining power from
buying a large number of a single type of aircraft.
- 44 -
Aviation Primer
Winter 2012
Fleet profiles and upcoming delivery schedules of airlines
Air China
2011
2012
2013
Reported Delivery Delivery
fleet size schedule schedule
Cathay Pacific Group
2011
2012
2013
Singapore Airlines
2011/12 2012/13
Reported Delivery
fleet size schedule
AirAsia
2011
2012
2013
Qantas
2011
2012
2013*
ANA
JAL
2011
2012
2013
2011
2012
2013
Reported Delivery Delivery Reported Delivery Delivery
fleet size schedule schedule fleet size schedule schedule
Airbus
A300
A310
A319
A320
A321
A320/A321
A330
A340
A380
Sub-total
43
106
22
6
17
7
34
183
28
24
717
737
747
757
767
777
787
190
9
10
5
14
18
26
Sub-total
228
11
6
2
48
13
6
78
8
6
14
4
4
97
20
13
56
6
9
80
25
19
5
16
1
27
2
1
3
10
2
2
60
4
99
13
83
25
11
65
26
2
12
11
51
8
97
20
13
0
0
Boeing
21
1
25
6
24
Cargo
A300-600F
737-300SF
747-8F
747-400F
757-200F
767-300
777F
MD-11F
10
Sub-total
12
2
9
2
6
41
32
2
62
5
8
5
8
4
2
0
0
0
0
127
14
2
15
59
49
6
6
14
6
7
49
46
2
7
4
26
173
20
13
156
9
4
0
0
59
60
59
8
4
4
23
2
13
1
0
35
4
2
13
0
0
0
0
5
7
0
0
7
Other
ATR-72
Business jet
CRJ-200
EMB-145
EMB-145LR
EMB-170
EMB-190
Hawker 800
MD-90
Tupolev Tu-204
DHC-8-Q100
DHC-8-Q300
DHC-8-Q400
SAAB340
Others
9
10
1
13
4
1
11
11
Sub-total
9
2
0
Total
fleet size
432
56
56
175
17
14
133
4
97
20
13
52
8
8
21
3
2
52
8
8
21
3
2
59
1
0
283
35
117
226
23
15
215
10
4
Source: Company
Note: *Data for QAN shown in the 2013 column is for its FY13-18 financial years
Aircraft purchasing activity remains high in Asia
The global economic slowdown in 2008-09 led to only a temporary softening in aircraft purchasing activity
globally/in Asia over that period. Many airlines, especially Asian ones, continue to buy aircraft to replace their aged
aircraft or increase capacity for future business growth. For example, China plans to increase its fleet size at a
CAGR of 11% over 2011-15 (only slightly below the CAGR of 13% over 2006-10). LCCs such as AirAsia continue
to expand their fleets to cover different markets including Thailand, Indonesia, the Philippines and Japan. This may
be due to pent-up demand for the low-cost model in Asia.
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Aviation Primer
Winter 2012
Traditional premium carriers, especially those with strong balance sheets like SIA, appear to be expanding their
fleets steadily each year. Due to its strong balance sheet and clear corporate strategy, SIA usually buys its aircraft
with its own cash and resells them in the market after five years. This business model enables SIA to maintain a
young fleet and high fuel efficiency, but it requires a good brand name, efficient aircraft maintenance and a strong
balance sheet (attributes which SIA has) to implement this model. CX also has a significant number of aircraft on
order, but all of them are for medium- to long-haul routes. Many of the orders, mainly for the A350, are to replace
aircraft to improve fuel efficiency. This is similar to ANA’s strategy regarding the B787, with the company targeting
greater fuel efficiency on its medium- to long-haul routes.
Compared with the developed nations in North America and Europe, aircraft per population ratios are significantly
lower in Asia. With the more robust traffic-growth outlook and stronger balance sheets of the Asian airlines, we
expect aircraft orders over the next 2-3 years to come mostly from airlines in the region.
Current order book vs. fleet size (aggregate data for global airlines)
(no. of aircraft)
30,000
(% )
45
25,000
36
20,000
27
15,000
18
10,000
9
5,000
0
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
In service (LHS)
Orderbook (LHS)
Order book to fleet ratio (RHS)
Source: ASO Fleets, Ascend
Note: airline-operated, Western-built jets only
ASK growth of airlines since 2006
(YoY % )
44
36
28
20
12
4
(4)
(12)
2006
2007
AC
2008
AirAsia
2009
CX
Source: IATA, Companies
- 46 -
SIA
2010
QAN
2011
Global
Aviation Primer
Winter 2012
Summary of airlines’ aircraft
Regional jets
Short-haul aircraft
Medium-haul
aircraft
Long-haul aircraft
Ownership (%)
Current fleet size
On order
AC
Business jet
A320/A321/B737
A330
AirAsia
No
A320
A330 (AirAsiaX)
CX
No
A320/A321 (Dragonair)
A330
Qantas
No
B737
A330
SIA
No
A319/A320 (SilkAir)
A330
ANA
No
B737/A320/DHC-8
B767
JAL
Yes
B737/MD-90/DHC-8
B767/B787
B777
47
432
103
A350 (AirAsiaX)
87
73
270
B777
37
167
83
B787/A380
64
149
174
A350/A380/B777/B787
61
100
60
B747/B777
73
226
63
B777
73
215
39
Source: Airbus, Boeing, Companies, Daiwa
Aircraft per capita worldwide (2011)
Source: Ascend
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Buying vs. leasing
Overview
Aircraft are by far the largest capital cost that an airline has to meet. Typically, an airline can expect to pay US$4050m for a single-aisle (narrow-body) aircraft, about US$100m for a medium-sized twin-aisle (wide-body) aircraft
and over US$150m for a large twin-aisle aircraft.
Because of the high amounts involved, financing appropriately the aircraft in an airline’s fleet is crucial in order to
maximise the airline’s return on capital. Most airlines cannot afford to pay cash for their aircraft and will need to
source finance in some form in order to purchase aircraft. Start-up airlines have even less capital to deploy than
established airlines and need to lease most of their aircraft in order to start operating. The next chart shows how
the number of leased aircraft has risen over the past 30 years to account for more than 35% of the world’s aircraft
fleet today.
Number of aircraft leased globally by airlines vs. those owned
25,000
40%
35%
20,000
30%
25%
15,000
20%
10,000
15%
10%
5,000
5%
0%
Operating Lease
Owned
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0
% on lease
Source: Ascend
Leasing vs. self-financing of fleets
Leasing companies provide many important services to an airline.
Airlines can transfer the asset risk to the lessor
Aircraft are depreciating assets and, while their future value is relatively predictable, it will vary in line with the
economic cycle and the profitability cycle of the airline industry. The volatility of this value movement varies for
different aircraft. Leasing companies can evaluate and take on this asset risk.
Airlines have greater flexibility to manage their fleets
When airlines get into financial difficulty, this is usually during periods of low passenger demand. Airlines
struggle to deal with this overcapacity by selling aircraft because the process is generally slow and aircraft
values are depressed in an industry downturn. Having a portion of their fleet on operating leases gives airlines
the ability to manage their capacity by not renewing leases.
Leasing companies offer 100% financing and a lower cost of capital than banks
For start-up airlines, the option to finance their aircraft through leases without the need to pay equity for the
aircraft is crucial for these airlines to get through their first years of operation. Also, in industry downturns airlines
need to conserve cash and financing aircraft via the sale-and-leaseback method offers a way of doing this.
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Aviation Primer
Winter 2012
Leasing companies offer additional capacity
Airlines will look to leasing companies for additional aircraft at a time when their new aircraft on order are
insufficient to meet their business growth.
Deciding whether to buy or lease the aircraft is determined by the airline’s need for the leasing benefits described
above over owning the aircraft. In addition, airlines generally look to diversify their sources of finance so almost all
airlines will take some aircraft on operating leases.
Airlines will have more success selling modern, mainstream assets to leasing companies. While leasing companies
are willing to take on the asset risk, they have a clear preference for mainstream aircraft with the most up-to-date
technology. Leased fleets comprise mainly in-production narrow-body aircraft. This aircraft category makes up 52%
of aircraft on operating leases but 39% of the global fleet at present (according to Ascend). The chart below shows
the proportion of the global fleet currently under lease by aircraft class and production status.
In-production narrow-body aircraft are the most widely-used aircraft worldwide, and offer a leasing company the
widest range of options for re-leasing and sale, and are also among the least volatile aircraft in terms of value.
They are also significantly less costly than wide-body aircraft to prepare for re-lease because they are more
standardised and the interior configuration is simpler. Airlines will be more likely to find a leasing company to buy
their aircraft if they are in-production narrow-body aircraft.
Since 2008, leasing companies have been increasingly willing to take on asset risk on in-production regional jets,
especially the Embraer E-jet family and on wide-body jets, especially the Airbus A330 family and the Boeing 777300ER. The E-jets have shown similar value-retention characteristics to narrow-body aircraft. Wide-body aircraft
have become more popular with leasing companies because of their importance in Asia. Airlines in the Asia-Pacific
region generally use wide-body aircraft for ‘short-haul’ flights of up to five hours and there is relative under-capacity
in this market. This has meant that wide-body aircraft have shown low volatility in their values through the globalfinancial-crisis period from 2008-09.
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Aviation Primer
Winter 2012
Financing options
Overview
Airlines have sought diversified financing for their fleets for many years, and this has become increasingly
important since the global financial crisis of 2008-09. In this section we discuss the commonly used finance
structures for an airline that wishes to own its aircraft. We do not discuss unsecured borrowing by airlines or other
short-term financing methods but focus instead on how airlines can finance aircraft deliveries.
Pre-delivery payment (PDP) loans
Airlines need to make PDPs to an aircraft manufacturer in stages during the two years prior to an aircraft delivery.
These PDPs typically amount to up to 35% of the aircraft cost and can cause a significant drain on the airline’s
capital. A small number of banks will provide loans for PDPs and will often treat these as unsecured loans.
Mortgage finance
This is the simplest form of aircraft finance. A bank will provide a term loan to the airline to buy the aircraft. The
bank will typically advance 70-75% of the aircraft’s value and the loan will usually be for a 10- or 12-year term for a
new aircraft and a shorter term for an older one. As aircraft are valued in US dollars, the loan will in almost all
cases be a US dollar loan. Airlines with good credit ratings can usually borrow in their own currency but this is an
exception. These loans can be paid back via fixed or floating interest rates and are fairly flexible, usually allowing
for pre-payments during the term of the loan.
Export credit agency- (ECA) backed loan
In an ECA-backed loan, a bank will lend money to an airline but with a guarantee from the export credit agency of
the country or countries of the aircraft manufacturer. For Boeing, this is the US Export-Import Bank (Ex-Im Bank).
For Airbus, this is a combination of the Export Credits Guarantee Department (ECGD, in the UK), Euler Hermes
(Germany) and Coface (France).
The airline pays the ECA for the guarantee and pays interest on the loan from the bank. Because the bank looks at
the sovereign risk of the ECA country, this interest rate will be lower than the interest rate that the bank would
charge the airline for a loan with no guarantee. The amount of the fee and the advance rate will depend on the
airline’s credit rating with the ECA – this is governed by a set of rules called the Aircraft Sector Understanding. The
terms of an ECA-backed loan are not particularly flexible. Airlines will generally choose these loans because of the
fairly low overall cost or if they cannot access finance from other sources.
Tax lease
Some airlines can lease their aircraft on an operating lease or finance lease that offers tax benefits to the leasing
company. These types of lease are attractive to airlines because they offer a lower cost of funds and often offer 100%
financing up front with a purchase option during the lease, thereby giving the airline a present value (PV) benefit
(where the PV of the payments under the lease including the purchase option is lower than the purchase price of the
aircraft at the beginning of the lease). The most common tax lease structures are the Japanese Operating Lease with
a Call Option (JOLCO) and the Spanish Operating Lease (SOL). Tax leases are usually quite inflexible and do not
allow prepayment without a large premium. Airlines will choose these types of lease because of their low cost.
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Aviation Primer
Winter 2012
Secured bond issue
Secured bonds are currently only used by airlines in the US, which issue what are called Enhanced Equipment
Trust Certificates (EETC). Most major airlines in the US have a standalone credit rating of around B currently, and
so would struggle to issue any corporate bonds. An EETC offers the airlines the ability to issue bonds by offering
security over the aircraft plus other enhancements.
Rating agencies will rate these bonds based on the timely payment of interest and the ultimate payment of principal.
Therefore, by including a liquidity facility that pays up to 18 months of interest and by borrowing on a conservative
loan-to-value ratio, the airline can get a BB+ or an investment grade rating for its bonds. Since 2008, airlines have
also had to allow the security pool to be cross-collateralised.
This has been a very successful source of finance for airlines in the US and works because of the educated
investor market there and the US bankruptcy code, which offers certainty to bondholders in the event of an airline
bankruptcy. Like other bond issues, airlines will need to pay a premium to prepay an EETC bond. The advantage of
the structure to an airline is that the airline can finance a large portfolio of both new and old aircraft at an attractive
overall cost.
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Aviation Primer
Winter 2012
Impact of financial crises on aviation finance
Overview
The 2008-09 global financial crisis has made the aircraft finance market considerably less certain. The main
reasons for this are:
•
•
•
•
Aircraft finance was hitherto dominated by European commercial banks, almost all of which have scaled
back all lending since 2008.
Aircraft finance is a US dollar business and the cost of providing finance in US dollars has greatly
increased.
Aircraft finance is a global, product-led business. This does not suit many banks’ post-crisis business
models, where banks prefer to be relationship-led and to focus on local regions rather than acting globally.
The crisis has been accompanied by a period of heavy losses at the airlines, and banks’ appetite to lend to
airlines will always diminish in these times.
In 2009 there were fears of a ‘funding gap’, where aircraft manufacturers would not be able to deliver all of the
aircraft they had on order because the airlines would not have the money to buy them. This did not happen for new
aircraft because the export credit agencies increased their activity in the market to ensure that new aircraft on order
would be financed and delivered.
The availability of ECA-backed financing and the large increase in the cost of financing for commercial debt
effectively made ECA-backed financing the first choice for many airlines, despite its relatively inflexible terms. This
led to the renegotiation of the ASU to increase guarantee fees and make other terms less attractive to airlines and
return ECA-backed financing to being the last resort rather than the first choice.
The market stabilised somewhat in 2010 and banks became more certain about the amounts that they could lend
to airlines. New leasing companies also entered the market and offered a valuable new source of capital. Through
2011, however, the market worsened as the Eurozone crisis took hold and many of the remaining European banks
in the market either exited or scaled back their operations.
The outlook for 2012 is uncertain because of the continuing issues with European banks. This situation is
exacerbated by the increase in deliveries by the aircraft manufacturers – based on the airlines’ current delivery
schedules, we expect deliveries to rise by 40% from 2011 to 2015, making the challenge of financing the aircraft
even more difficult.
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Aviation Primer
Winter 2012
Trends in aviation finance and leasing
Overview
The aircraft finance market is now characterised by a number of significant trends:
•
•
•
•
New aircraft are being financed by commercial banks but airlines of low credit quality find it extremely
difficult to obtain financing.
These airlines will continue to use ECA-backed finance and sale-and-leaseback deals with leasing.
Many banks prefer to lend money to leasing companies for lower-quality airlines because they have a
motivated leasing company between them and the airline to manage the aircraft if something goes wrong.
Airlines and leasing companies have very few sources of finance for aircraft over five years of age. That
such aircraft are considered old is a concern in the market.
In March 2012, Ascend conducted a survey of over 600 aviation finance professionals at airlines, banks and
leasing companies to gauge their levels of confidence in sourcing finance. The survey showed an unprecedented
level of uncertainty about financing aircraft. It found that 73% of aviation professionals are seeking financing
outside their current relationships with banks and established lenders. Prior to 2008, this level of difficulty in aircraft
financing was unthinkable. The survey found a serious lack of confidence among financiers looking to borrow in US
dollars, with 43% of respondents saying they were not very, or not at all, confident in its availability. This again is a
level of uncertainty previously unseen in the aviation industry. Before 2008, this question would not even have
been asked, such was the level of confidence in US dollar availability back then.
On the subject of government guarantees, the majority of survey respondents believed that borrowers will choose
to go to the commercial bank market for finance over using ECA-supported finance. In seeking creative financing
alternatives, respondents said they would turn to Asian financial institutions and capital markets; other capital
markets; hedge funds; private debt facilities; and regional and local banks. In fact, 50% of respondents said they
would seek finance on the capital markets – again indicating a huge shift in lending patterns.
This high percentage shows that airlines and leasing companies are preparing for big changes to their sources of
finance. Before 2008, they were well served by European banks and only leasing companies and US airlines
tapped the capital markets with any regularity. Now, all airlines and leasing companies should be thinking about it.
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Aviation Primer
Winter 2012
Asian players should easily obtain financing
On average, the Asian airlines enjoy lower interest rates on their fleet financing than US airlines due to the better
traffic and earnings growth in Asia. Moreover, financing is more readily available in Asia than in Western countries.
The table below shows that airlines in Asia typically receive better interest rates than their counterparts in other
markets, while Asian airlines with strong balance sheets, such as SIA, do better still. Other airlines that have strong
government backing, such as AC, are likely to continue to obtain strong financial support from local banks. New
airlines that have world-class brands, such as AirAsia, should also secure favourable financing terms. Still, airlines
at which traffic growth is relatively slow and government support lacking, such as ANA, typically bear higher
operating lease expenses, since their cash positions may not be strong enough to support planned aircraft
purchases, while they are unable to obtain good terms on financing leases owing to their high gearing and
prospects for slow traffic growth. For JAL, as it has just resurfaced from its debt restructuring, its bank loans should
be relatively small in the near term.
In general, credit policies in Asia are looser than in the US and the EU. As such, Asian airlines are enjoying lower
borrowing costs than their US and EU counterparts. This has encouraged more Asian airlines to buy brand-new
aircraft rather than lease second-hand ones over the past decade.
Interest-cost comparison of airlines (2011)
Interest costs as a percentage of operating costs (%)
Effective interest rate (%)
AC
1.78
1.86
AirAsia
0.01
4.81
CX
1.84
4.36
SIA
0.51
3.64
QAN
2.11
5.31
MAS
0.98
4.30
Thai
2.91
3.87
Air FranceKLM
1.87
4.35
IAG
1.39
4.73
United
Delta Southwest
Ryanair Continental Airways
Airlines
2.95
2.69
2.72
1.30
2.99
6.27
5.91
5.74
Source: Companies
Leverage of airlines (2011)
Net debt-to-equity ratio (x)
Bank borrowings as a proportion of total debt (%)
Financing leases as a proportion of total debt (%)
Operating leases as a proportion of total operating
expenses (%)
AC
1.6
76
24
AirAsia
1.4
82
18
CX
0.4
54
46
QAN
0.5
74
8
SIA
Net cash
83
17
ANA
2.0
73
3
JAL
1.1
28
72
5
2
3
4
4
16
3
Source: Companies, Daiwa
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Aviation Primer
Winter 2012
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Winter 2012
Fare structure
Segmentation is key
An airline aims to structure its pricing so as to sell all the seats for an optimal fare – often referred to as revenue
management. Airlines globally have long been focusing on how to offer the most suitable fares to meet demand
and at the same time to generate a profit. As shown in the following chart, which uses SIA as an example, the
breakeven load factor is inversely related to yield movements. Airlines try to segregate the demand by setting
different criteria when offering discount fares.
The fare structure breaks down into two major categories. The first comprises the different fare types, which mostly
follow the standard set by the International Air Transport Association (IATA). These include the segregation of First,
business and economy class fares, as well as some preferential fares such as those for children, infants, etc. The
second major category is the detailed and complex conditions attached to each individual fare within each fare type.
Common restrictions include a minimum/maximum length of stay, deadlines for ticket issuance and departure, and
whether the ticket can be rerouted, etc. Promotional fares are offered mostly for short-haul flights in economy class.
SIA: maximising yield reduces the breakeven load factor of an airline
(S¢/pkm)
(%)
100
13
12
90
11
80
10
70
9
60
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
8
Passenger yield (LHS)
Pax breakeven LF (RHS)
Source: SIA
Comparison of current fares for premium class and economy class
Premium class (US$)
SIA (from Singapore)
CX (from Hong Kong)
AC (from Beijing)
CSA (from Guangzhou)
CEA (from Shanghai)
QAN (from Sydney)
Economy class (US$)
SIA (from Singapore)
CX (from Hong Kong)
AC (from Beijing)
CSA (from Guangzhou)
CEA (from Shanghai)
QAN (from Sydney)
To New York
6,719-11,497
11,817-24,735
7,520
8,697
9,272-11,227
8,137
To New York
1,826
1,753
3,559
1,908
2,566
1,616
To London
5,671-9,322
8,358-24,735
6,515
4,551- 7,807
5,972
11,526-13,953
To London
1,359
972
2,032
743
985
1,877
Source: Companies
- 58 -
To Beijing
2,564-4,195
1,315-1,669
n.a
1,095 - 1,362
600 - 783
5,921-11,136
To Beijing
583
717
n.a
355
159
1,214
To Shanghai
2,253-3,845
933 - 1,182
676
592 - 823
n.a
5,913-11,142
To Shanghai
513
525
157
212
n.a
1,131
To Tokyo
2,641-5,127
2,680-3,319
1,627
1,466
1,301- 2,285
7,059-13,083
To Tokyo
637
972
534
662
449
1,076
Aviation Primer
Winter 2012
Low marginal costs lead to aggressive pricing
As the airlines’ products, ie, aircraft seats, are limited in terms of capacity and time span (they must be sold before
the flight departs), the timing and scale of promotional activity are crucial. The industry is characterised by short-run
marginal costs of close to zero, ie, the marginal cost of carrying an extra passenger including an additional meal
and a little extra fuel burnt as a result of the extra weight carried is negligible. Therefore, airlines tend to sell as
much capacity as possible even at low prices, due to the low marginal costs incurred. However, there is a general
concern among airlines that considerable promotional activity may lead to downward pressure on future fares, as
passengers have come to expect large discounts. Therefore, many premium airlines, such as CX and SIA, are
trying their best to maintain or increase passenger yields.
CX and SIA: passenger yields since 1997
(S¢)
(HK¢)
13
70
65
12
60
11
55
10
50
9
45
8
Cathay Pacific (LHS)
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
40
Singapore Airlines (RHS)
Source: Bloomberg,Companies
The LCCs generally have a relatively simple fare structure compared with that of the FSCs. The LCCs usually offer
one or only a few types of fare (mostly economy) on a particular flight. They also allow one-way fares, while
traditional FSCs seldom offer one-way tickets at a discount. The fare restrictions are mostly uniform on all tickets,
such as no refund if not used, specific to a certain flight, etc.
Comparison of current fares between FSCs and LCCs
Singapore to
Hong Kong (US$)
Conditions
CX
296
United Continental SIA
313
296
Ticket includes
baggage fee, meal
Ticket includes
baggage fee
HK Airlines
400
Ticket includes
Cancellation/
baggage fee, meal refund fee applies
Cancellation/refund No special meal
Cancellation/
offered
fee applies
refund fee applies
Cancellation/refund
fee applies
Cebu
492
Jetstar
260
Tiger
196
Flight can be
rebooked/transferred
subject to applicable
fees and penalties
Extra pay for baggage
(US$23 for 20kg)
Extra payment for
baggage
(US$15 for 20kg)
Extra payment for baggage
(US$23 for 20kg)
No meal included
No meal included
Fares are non-refundable Fares are non-refundable
Limited changes are
Flight can be changed up to four
permitted, charges apply hours before departure; the
booking can be changed but this
does not apply to certain
selected promotional fares
Not allocated any particular seat
Source: Companies
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Aviation Primer
Winter 2012
Cabin configuration
What works best?
While there is high segmentation of passenger air fares, cabin configurations are generally not so flexible due to
the high capex involved. Currently, most of the traditional airlines use the 3-class cabin system (first, business and
economy) for their wide-body aircraft and the two-class system (business and economy) for their narrow-body
aircraft. LCCs mostly start with a single-class economy-only configuration, while some may add business or firstclass cabins for their long-haul products. Cabin configurations also depend on the flight distance and passengers’
reasons for travelling.
On short-haul routes, there is generally no need for a first-class cabin, and so a two-class configuration may be a
better choice for those routes, especially as narrow-body aircraft are used for most short-haul routes. The FSCs
may not go for the single-class configuration even on leisure-travel oriented routes, due mainly to the need to rotate
their aircraft in case any of disruptions on other routes (eg, due to engineering works).
For long-haul flights, where premium inflight facilities can make a big difference to passengers’ comfort, most of the
airlines still use their three-class configuration. However, we have seen that First-class cabins have become underutilised and therefore more airlines are opting to dispense with first-class cabins. This may due to improvements in
business-class cabin facilities and changes in corporate travel policies. Nowadays, business-class facilities are
generally very comfortable (most have flat beds) and meet most business travellers’ needs.
Business class – current style
Source: CX
Business class – old style
Source: Airline.net
Recently, some airlines (such as ANA, EVA, and CX) have started promoting a four-class cabin configuration by
adding a premium economy class. We believe this is due partly to there being a wide range of fares available for
economy class seats. Therefore, some airlines would like to differentiate between the service they offer high-yield
passengers (ie, those paying the normal full fare) and that for low-yield passengers (ie, group or leisure travellers).
By offering some additional services or better facilities, airlines aim to generate incremental revenue in this niche
market. We believe the premium economy class is likely to work best on medium-to-long-haul routes, where
passengers tend to be more willing to pay a premium for service and inflight facilities. However, we also see a
possible risk that bringing in extra revenue for the airlines, some passengers might downgrade from business class
to premium economy class during periods of economic weakness.
- 60 -
Aviation Primer
Winter 2012
CX: premium and standard economy class configurations
No. of seats
First
Business
Premium economy
Economy
Total
Economy
A330-300
0
44
0
267
311
Premium economy
A330-300
0
39
28
175
242
Economy
B777-300ER
6
53
0
238
297
Premium economy
B777-300ER-3
0
40
32
268
340
Premium economy Premium economy
B777-300ER-4
B747-400
6
9
53
46
34
0
182
324
275
379
Premium economy
B747-400
9
46
26
278
359
% of total seats
First
Business
Premium economy
Economy
Total
Economy
A330-300
0
14
0
86
100
Premium economy
A330-300
0
16
12
72
100
Economy
B777-300ER
2
18
0
80
100
Premium economy
B777-300ER-3
0
12
9
79
100
Premium economy Premium economy
B777-300ER-4
B747-400
2
2
19
12
12
0
66
85
100
100
Premium economy
B747-400
3
13
7
77
100
Source: CX
Premium economy class
Source: CX
Standard economy class
Source: CX
- 61 -
Aviation Primer
Winter 2012
Direct sales vs. agency sales
The Internet changes the rules of the game
In the past, airlines often relied on travel agents to sell tickets, mainly because agents could consolidate all the
price information from the airlines and hotels and offer customers attractive travel packages. This was a labourintensive process requiring many sales and ticketing offices, and hence airlines found it difficult to penetrate the
agency-sales market in the past.
The advent of the Internet has transformed the ticket-sale process over the past decade. Through the airlines’
websites and online travel agencies, customers can easily compare fares, schedules, seat availability and tour
packages among the different airlines. This has increased customers’ bargaining power and brought about three
positive effects. First, the Internet enables the airlines to bypass traditional travel agents and sell directly to
customers. Second, the information obtained from Internet sales enables the airlines to understand their
customers’ profiles and how effective particular promotional fares are, thereby enabling the airlines to provide more
tailor-made services. Third, the airlines can easily find out what their competitors are offering in the market, which
enables them to react promptly to fare discounts by competitors.
% of online air-ticket sales globally
(%)
45
36
27
18
9
0
US
UK
Japan
Germany
2009
France
2010
Spain
2011
China
Italy
India
Singapore
2012
Source: PhoCusWright
Note: 2010 figures are estimates, 2011-12 figures are forecasts
Due to such radical change in industry practice, the role of the travel agent has diminished in many western
countries, where the airlines tend to offer better discounts on their own websites (most often in their home country
where they have greater brand recognition and customer loyalty). As such, the commissions paid by airlines to
travel agents have been on a declining trend over the past decade. In many western countries, ‘zero commissions’
are now proposed, whereby the airlines offer a fare (net of commission) to the travel agents and the travel agents
decide how much commission or service charge to charge the customers. This has increased the transparency on
the commissions charged by travel agents and has led to profit-margin compression for many travel agents due to
competition.
- 62 -
Aviation Primer
Winter 2012
Changes in commission rates globally
Airline
China*
AC
Air Canada
Air France-KLM Group
ANA
CEA
CSA
Lufthansa
Swiss International Airlines
Commission (%)
Effective date
3%+
3%
0%
3%
3%+
3%+
1%
1%
Jul-10
Jul-10
Apr-10
Jul-10
Jul-10
Jul-10
Aug-10
Aug-10
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Nov-08
Nov-08
Nov-08
Nov-08
Nov-08
Nov-08
Nov-08
Nov-08
Nov-08
Nov-08
Nov-08
Nov-08
0%
Aug-08
0%
Jun-00
India*
Air Canada
Air France - KLM
Austrian Airlines
British Airways
Continental Airlines
Delta Air Lines
Japan Airlines
Lufthansa
Northwest Airlines
Qatar Airways
SIA
Silk Air
Malaysia
Malaysia Airlines
Singapore
SIA
Airline
Europe
Aer Lingus
Aeroflot Russian Airlines
Air Canada
Air France
Alitalia
Austrian Airlines
British Airways
Brussels Airlines
Finnair
Iberia
KLM
LOT Polish Airlines
Lufthansa
Qatar Airways
Scandinavian Airlines
SNBrussels Airlines
Tarom Airlines
US
Delta Air Lines
Hawaiian Airlines
US Airways
Commission (%)
Effective date
1%
0%
0%
0%
1%
0%
0%
0%
0%
0%
0%
1%
0%
0%
0%
0%
1%
2003
2004
Jan-10
2005
2004
Feb-10
2005
Apr-10
2003
2007
2003
2004
2004
late 2007
2003
2005
2006
0%
0%
0%
2002
Jul-10
Jan-10
Source: Amadeus, companies, various media
Note:* for foreign airlines flying to China and India
Global distribution systems: also affected by the Internet
The airlines’ reduced reliance on travel agents for ticket sales leads to lower operating margins for the Global
Distribution System (GDS) companies. These companies have electronic systems that link the airlines with travel
agents. Airlines relied heavily on the GDS during the 1980-90s, when the GDS market was dominated by a few
providers, namely Amadeus, Sabre and Galileo. The dominance and high profit margins of the GDS business were
eroded following the deregulation of the air-travel industry in the US and the EU after 2000. Currently, Asian
airlines rely heavily on the GDS companies, as their online sales platforms are still immature. However, given the
trend in the US and the EU, where many airlines are bypassing travel agents, we believe the GDS companies’
profitability will come under pressure in the future as Asian airlines, too, start to bypass the travel agents and sell
their products directly online.
GDS providers and global market shares (2011)
GDS
Amadeus
Travelport (combines Galileo and Worldspan)
Sabre
Abacus
Infini
Axess
Topas
TravelSky Technology
Major market
Europe (excluding the UK)
North America, the UK, Australia and New Zealand
North America
Southeast Asia
Japan
Japan
Korea
PRC
Source: Travelport, Amadeus, Daiwa estimates
- 63 -
Share of world market
38%
30%
27%
Combined five providers: around 5%
Aviation Primer
Winter 2012
Growth stages of a GDS company
Revenue
US
Travelsky
Pioneer
stage (1960-70s)
– airlines create GDS
and travel agents start to use
GDS.
Pioneer
Growth stage (1970-90s)
– fast expansion in which
GDS see market share
rising .
Mature stage (19902004) – network reaches
most of the world’s
prosperous regions. The
increasing use of the
Internet for reservations
and ticketing encourages
airlines to begin divesting
GDS.
Growth
Mature
Source: Daiwa
- 64 -
Mature to slightly
declining stage (2004
onwards) – GDS
deregulation, more
competition leads to
declining margins, more
M&A in the industry.
Declining
Aviation Primer
Winter 2012
Clients of worldwide GDS companies
GDS provider
ameliaRES
Abacus
AccelAero
Amadeus
Axess
Internet Booking Engine
KIU
Airline
InteliSys Aviation Systems
ANA
CX
China Airlines
Dragonair
EVA Airways
Garuda Indonesia
Mihin Lanka
TransMaldivian Airlines
Over 2 airlines and low-cost carriers
Adria Airways
Aegean Airlines
Air Astana
Air Berlin
Air Caraïbes
Air Corsica
Air France-KLM
Air Mauritius
Air Pacific
Air Vanuatu
airBaltic
Aircalin
Austrian Airlines
Binter Canarias
Blue1
British Airways
British Midland International
Bulgaria Air
CX
Cimber Sterling
Corsairfly
Croatia Airlines
Czech Airlines
Dragonair
EgyptAir
El Al
Estonian Air
Etihad Airways
Finnair
Hex'Air
Iberia
Icelandair
Jat Airways
Jin Air
LACSA
Japan Airlines
Qatar Airways
Sri Lankan Airlines
AeroGal
Aeropostal Alas de Venezuela
Air Cuenca
Avolar
CATA Línea Aérea
EasyFly
Guinea Líneas Aéreas
Interair South Africa
LADE
LAER
LASER Airlines
LC Busre
Línea Aérea Amaszonas
Airlines
Other 20 LCC & airlines
Malaysia Airlines
Philippine Airlines
Royal Brunei Airlines
SABRE
SilkAir
SIA
LAN Airlines
LAN Argentina
LAN Ecuador
LAN Perú
Libyan Airlines
LOT Polish Airlines
Lufthansa
Malév Hungarian Airlines
Middle East Airlines
Montenegro Airlines
Niki
OpenSkies
PLUNA
QAN
Qatar Airways
Rossiya
Royal Air Maroc
Royal Brunei Airlines
Royal Jordanian
Safi Airways
SAS
SATA Air Açores
SATA International
Saudi Arabian Airlines
Spanair
South African Airways
TACA Airlines
TAM Airlines
TAM Mercosur
TAP Portugal
Toumaï Air Tchad
Tunisair
Twin Jet
Widerøe
XL Airways France
Lloyd Aéreo Boliviano
MAYAir
Peruvian Airlines
Regional Paraguaya
SAEREO
Sol América
Sol Líneas Aéreas
Southern Winds Airlines
Star Perú
Tiara Air
Transportes Aéreos Cielos Andinos
Venezolana
VIP Ecuador
GDS provider
Mercator
Navitaire
PARS/SHARES by EDS
Patheo
Sabre
TravelSky
- 65 -
Airlines
Emirates
Air Algérie
Air Malawi
Air Pacific
Air Tanzania
Air Transat
Air Zimbabwe
Citilink
CTK – CiTylinK
Comair
Danube Wings
Emirates
flydubai
1Time
Aer Arann
AirAsia
AirAsia X
Air Greenland
Air Mekong
AirTran Airways
Airlink
Alliance Airlines
Amerijet International
Azul Brazilian Airlines
Batavia Air
Blue Air
bmibaby
CanJet
Cebu Pacific
Cobham Aviation Services Australia
Eastar Jet
Firefly
germanwings
Gol Transportes Aéreos
IndiGo
Interjet
Jazeera Airways
Air Nigeria
Brussels Airlines
Continental Airlines
COPA Airlines
Flybe
Finnair
KLM
Lufthansa - > Moved to Amadeus
Aeroflot
Aerolíneas Argentinas
Aeroméxico
Air Jamaica
Air Malta
Air Tahiti Nui
Alaska Airlines
Avior Airlines
Bahamasair
Canadian North
Central Mountain Air
Comair (South Africa)
Cyprus Airways
Era Alaska
Ethiopian Airlines
First Air
AC
Air Macau
CEA
CSA
Hainan Airlines
Airlines
InterSky
JetLite
Kuwait Airways
Malaysia Airlines
Merpati Nusantara Airlines
People's Viennaline
Philippine Airlines
Safi Airways
Sky Work Airlines
Surinam Airways
Syrian Air
Yemenia
Zest Airways
Jet4you
Jetstar Airways
Jetstar Asia Airways
Jetstar Pacific Airlines
LIAT
Lion Air
Mandala Airlines
Monarch Airlines
Nas Air
Nok Air
Porter Airlines
Ryanair
Skywest Airlines
Spirit Airlines
SpiceJet
Strategic Airlines
Tiger Airways
Transavia.com
TUIfly
Virgin Australia
Thomas Cook Airlines
Wizz Air
Virgin Blue
Hawaii Island Air
Swiss International Air Lines
United Continental
US Airways
Virgin Atlantic Airways
Frontier Airlines
Gulf Air
Hawaiian Airlines
Jet Airways
JetBlue Airways
Kenya Airways
Kingfisher Airlines
kulula.com
Midwest Airlines
PenAir
TRIP Linhas Aéreas
Vietnam Airlines
Virgin America
Virgin Australia
Volaris
WestJet
Hong Kong Airlines
Hong Kong Express Airways
Shandong Airlines
Shanghai Airlines
Sichuan Airlines
Aviation Primer
Winter 2012
High segmentation
Airlines still face the issue of how to maximise the revenue from every available seat. LCCs such as AirAsia have
low fares, while premium carriers such as CX and SIA charge a premium for business class and even premium
economy compared with economy class. Those airlines operating in a market with strong demand growth, such as
AC and Jet Airways, may enjoy some pricing advantage due to less competition. However, others, such as QAN,
JAL and ANA, may continue to lose market share.
AirAsia: fare promotion
Source: Company
Direct sales through loyalty programmes
Most Asian airlines rely on the services provided by GDSs, as the contribution from Internet sales remains limited.
One exception is AirAsia, which relies solely on Internet sales. However, given the high GDS fees and commission
expenses airlines have to pay, they are keen to expand direct sales to their customers. At ANA, for example,
commission expenses were equivalent to 6% of its revenue in 2011, which we consider to be significant given the
airlines net-profit margin was only 2% for 2011. In recent years, JAL, ANA, CX, SIA, and AC have been promoting
special fares and tour packages on their websites to attract more individual travellers. In addition, they send special
promotions through their frequent-flyer programmes (FFP).
However, as direct sales for many airlines are still not the sole distribution channel (they account for only 30% of
revenue for AC and 50% for CX), we believe the airlines’ reliance on GDSs will continue for the next five years, as
it will take time for customer behaviour to change and the airlines to develop the IT infrastructure for such a change.
The growing number of online travel agents should help speed up this process.
- 66 -
Aviation Primer
Winter 2012
Frequent-flyer programmes
FFPs aim to encourage travellers, especially those who travel frequently, to use an airline as much as possible.
The concept originated in the US in 1979. A customer can accumulate FFP miles or points when flying with the
airline, and these can be redeemed for free tickets or other services, such as a cabin-class upgrades.
In addition, the FFPs allow the airlines to collect useful information about these high-spending customers, eg, travel
patterns, and enable their marketing efforts to be more targeted.
An example of the benefits offered in a FFP – CX’s Marco Polo
Benefits
Reservation
Flight reservations via dedicated 24-hr Club Service Line
Advance Seat Reservation
Priority waitlisting
Guaranteed Economy Class seat
Guaranteed Premium Economy Class seat
(on CX flights only)
Guaranteed Business Class seat
(on Cathay Pacific flights only)
Extra-legroom Seats
Extra-legroom Seats redemption
Check-in
First Class counters
Business Class counters
Designated Club counters
Baggage privileges
Additional checked baggage allowance
Extra baggage redemption
Priority baggage handling
Special cabin baggage allowance
Lounge access
Cathay Pacific First Class lounges
Cathay Pacific Business Class lounges
Dragonair lounge
Arrival lounges
Guests
Lounge access redemption
Additional benefits (applicable to all tiers)
Personalised baggage name tags
Priority boarding
Dedicated Club Service Desk at Hong Kong International Airport
Dedicated Club Service Centre
(24-hr worldwide toll-free service line)
The Club digital magazine
Exclusive promotions and offers
Green
Silver
Gold
Diamond
√
√
√
√
√
√
√ (High)
√*
√
√
√ (Top)
√**
√**
√
√
√
√
√
√**
√
√
√
√
√
√
√
√
√
√
10 kg
√
√
10 kg
15 kg or 1 pc
√
√
10 kg
20 kg or 1 pc
√
√ (First Priority)
15 kg
√
√
√
√
√
√
2
√
√
Source: CX
Note: * 72 hours prior to departure
** 24 hour prior to departure
- 67 -
√
√
√
√
√
1
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
Aviation Primer
Winter 2012
Airline loyalty programmes
AC
CEA
QAN
CX
Source: Companies
Direct sales vs. GDS
Use of GDS
Direct sales as a % of total sales
Commission expenses as a % of revenue
(2011)
AC
Yes
30
AirAsia
No
85
CX
Yes
50
QAN
Yes
67/30*
SIA
Yes
n.a
ANA
Yes
n.a
JAL
Yes
n.a
3.1
n.a
0.8
n.a
2.2
5.8
1.9
Source: Company, Daiwa
Note:*QAN: 67% was from domestic bookings, about.30% was from international bookings
- 68 -
Aviation Primer
Winter 2012
- 69 -
Aviation Primer
Winter 2012
Industry divergence
LCCs vs. premium airlines vs. niche players
We believe the future winners in the industry will be either premium-class airlines (such as CX and SIA), LCCs
(such as AirAsia) or those with an advantage in a niche market (such as AC and Jet Airways). We expect those in
between to continue to struggle to make a profit, although they may not necessarily go bankrupt as many of them
receive government support.
We expect the recent rise in the number of LCCs being established to continue for a while, as many airlines
consider the current penetration rate of LCCs to be low in most Asian countries. However, we believe the situation
will be similar to that from 2004-06, with not all of them succeeding. Ultimately, we believe those in Southeast Asia,
where we see greater unsatisfied demand due to low income levels and less regulated aviation markets, have
higher chances of succeeding. Leaders such as AirAsia will enjoy first-mover advantage, in our view.
In recent years, increasing numbers of FSCs, including ANA and SIA, have established a LCC branch (eg, Peach
and Tiger Airways) in a bid to capture the low-end travel market. As it stands, however, the consolidated FSC+LCC
model does not seem to have delivered a better profit margin when compared with operating either a FSC or a
LCC. For example, CX and AirAsia had net-profit margins of 6% and 12% respectively, while for SIA, ANA and
QAN the equivalent figure was only 2% for 2011. Some airlines pursuing the FSC+LCC model, such as Thai
Airways and Malaysian Airlines, are even loss-making (see page 71).
Development timeline of LCCs in Asia
Indonesia AirAsia
(No. of new set-up)
8
Air Next
7
Air India Express
6
Spring Airlines
VietJet Air
5
Thai
AirAsia
Valuair
Tiger
Airways
Nok Air
AirAsia
Japan
4
Orient Thai
Airlines
StarFlyer
Thai Smile
Mihin Lanka
3
Zest
Airways
JetLite
Cebu
Pacific
AirAsia
Solaseed Kingfisher Jetstar
Air
Red
Asia
Jetstar
Airways
Oasis
Airlines
Firefly
GoAir
Indi Go
AirAsia
X
Scoot
2
Jetstar
Pacific
Shaheen
Jet
Air
Airways
Airphil
Express
Skymark
JAL
Express
Air Do
Citilink
Lion Air
Batavia
Air
Airblue
SpiceJet
Spirt of
Manila
Air
AirAsia
Mekong Philippines Peach
Jetstar
HK
1
0
1990
1992
1994
1996
1998
2000
2002
- 70 -
2004
2006
2008
2010
2012
(Year)
Aviation Primer
Winter 2012
LCCs: share of total seat capacity (domestic)
LCCs: share of total seat capacity (international)
(YoY %)
(YoY %)
50
80
40
60
30
40
20
20
10
Nov-12
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
Nov-12
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
0
2001
0
Japan
Malaysia
Philippines
Japan
Malaysia
Philippines
India
Indonesia
China*
India
Indonesia
China*
Source: CAPA
Note:*China data includes Hong Kong and Macau
Source: CAPA
Note:* China data includes Hong Kong and Macau
Business class
Economy class
Source: SIA
Source: SIA
Comparison: FSCs and LCCs
Company
Category
AC
FSC
6.7
CX
FSC
5.6
SIA
QAN
ANA
FSC + LCC FSC + LCC FSC + LCC
2.3
2.1
2.0
Note: Data based on 2011 reports
- 71 -
JAL
FSC
15.5
Thai
Malaysia
Airways
Airlines
FSC + LCC FSC + LCC
(5.3)
(18.5)
AirAsia
LCC
12.4
Skymark
LCC
9.6
Aviation Primer
Winter 2012
Open skies
ASEAN to spark liberalisation in the region
The member countries of ASEAN are due to implement open skies by 2015. This includes multiple designations
(more than one airline permitted to operate on one route), and the liberalisation of fifth- and possibly seventhfreedom rights with ASEAN countries. So far, only five countries (Singapore, Malaysia, Myanmar, Thailand, and
Vietnam) have third- to fifth-freedom rights with each other, while three countries (Brunei, Laos and Cambodia) only
allow these to their capital cities. However, we believe that most ASEAN countries will be able to meet the
schedule of full liberalisation by 2015.
Following the trend of open skies in ASEAN, we believe there will be increased liberalisation of traffic rights in Asia
in the near future, with the liberalisation of third- and fourth-freedom rights the first steps down this path. Politics, as
is the case with Mainland China and Taiwan, may help speed up the process as well.
In strong economies, such as China, India, and Japan, we expect objections to the liberalisation of fifth-freedom
rights and above from the major players, mainly due to them being worried about increased competition, while
there is little incentive to explore the markets of smaller Asian countries. The liberalisation of traffic rights between
countries is often related to the relative economic strength of the economies, with stronger nations more reluctant
to open their market to competition, while countries with weaker economies hope to attract traffic from stronger
nations to boost the profitability of their airlines.
We believe the North Asian countries will monitor closely the impact of ASEAN’s open-skies policy on their
incumbent carriers. Over the past five years, competition has increased in the ASEAN region. We believe it will
intensify as ASEAN airlines had placed large aircraft orders in preparation for open skies in ASEAN.
ASEAN: phases for implementing open skies
Phase 1: 2005 – 2007
Double designation, move to substantial ASEAN ownership; unlimited 3rd and 4th freedom within ASEAN; and opening of secondary gateways
Phase 2: 2008 - 2010
Multiple designation; restricted 5th freedom beyond rights; completion of opening up of gateways, remove restrictions on fares
Phase 3: 2011 - 2012
Principal place of business for ownership; 5th freedom within ASEAN; possible 7th freedom within ASEAN, charter liberalization
Source: ADB Institute
SIA vs. Changi Airport traffic growth
Malaysia Airlines and AirAsia Airlines vs. Kuala
Lumpur International Airport traffic growth
(YoY) %
(YoY) %
25
40
30
15
20
10
5
0
(5)
(10)
(20)
(15)
2001
2002
2003
2004
2005
2006
SIA
Source: Airport International Council, companies
2007
2008
2009
2010
2001
2011
2002
2003
MAS
Singapore airport
2004
2005
2006
Malaysia airport
- 72 -
2007
2008
2009
2010
AirAsia
2011
Aviation Primer
Winter 2012
Thai Airways vs. Suvarnabhumi Airport traffic
growth
(YoY) %
40
30
20
10
0
(10)
2002
2003
2004
2005
2006
Thai Air
2007
2008
2009
2010
2011
MAS
2001
LionAir
(20)
Suvarnabhumi Airport
Asian airlines: aircraft orders
(No. of aircrafts)
400
350
300
250
200
150
100
50
Narrowbody
Source: Airbus, Boeing
- 73 -
Qatar
Etihad
Emirates
QAN
SIA
JAL
Korean Air
Widebody
Garuda
EVA
CX
CSA
Cebu
CEA
CAL
Asiana
ANA
AirAsia
AC
0
Aviation Primer
Winter 2012
Emission Trading Scheme
EU ETS to push forward the development
This year, the EU started implementing its aviation ETS (see section below for details), with the first payments due
to be made in 2013. Airlines from many countries, including the US, China, Russia, India, and even IATA – have
complained about the scheme. The major objection is the calculation of the charges, which are based on where the
aircraft originated from (even if it was outside the EU) rather than from where it entered EU airspace.
Airlines from emerging countries have been the most resistant to the scheme, with those from China and India not
submitting the required carbon emission data by the deadline of June 2012. The Civil Aviation Administration of
China (CAAC) prohibits any PRC airline from joining the EU’s ETS. Meanwhile, India has said it will retaliate if the
EU bans any Indian airlines from entering the EU. The political tension, therefore, surrounding the issue, is high.
However, as we believe the EU and other countries do not want to ruin their political relationships because of the
ETS, we expect them to seek a solution in the near term.
A possible solution is that each country develops its own ETS (maybe just a framework and a schedule) and asks
for exemption from the EU scheme. However, there is a risk that the countries over which an aircraft flies will also
want a ‘piece of the pie’ by raising overflying charges, using carbon emissions as an excuse. Over the long term,
once all countries have established their own ETS, we believe each country will only be responsible for those
flights departing from their airports, which would be easier administratively. The International Civil Aviation
Organization (ICAO) is seeking a solution for airlines globally currently, but we believe it may not be able to meet
the deadline of March 2013.
EU ETS: news flow on opposition to the scheme
Date
Jun-12
Mar-12
Feb-12
Oct-11
Mar-11
Detail
Chinese airlines will snub a mid-June 2012 deadline for submitting carbon-emissions data to the EU
India proposes asking Indian airlines not to share emissions data with the EU or not to buy any carbon credits
29 nations join Russia in signing a declaration against the EU's ETS carbon tax. The declaration was signed at an international conference in Moscow by Armenia, Argentina, Belarus,
Brazil, Cameroon, Chile, China, Cuba, Guatemala, India, Japan, South Korea, Mexico, Nigeria, Paraguay, the Russian Federation, Saudi Arabia, Seychelles, Singapore, South Africa,
Thailand, Uganda, and the US
US House of Representatives rejects ETS and passes bipartisan legislation that prohibits the implementation of a new carbon-trading regime for aircraft flying from the US to the EU
China Air Transport Association says ETS violates international law and is ‘not reasonable’
Source: BBC, Xinhua, various media
What is the EU’s ETS
The EU ETS was the first largest international scheme for the trading of greenhouse gas emission allowances,
such as CO2. It was launched in 2005 and is based on a ‘cap and trade’ principle. According to the European
Commission, this means there is a limit on the amount of greenhouse gases allowed by a particular business.
Annually, each company receives free emission allowances. If the companies’ emissions are higher than their
allowance, they need to buy the additional amount in the market. If their emissions are less, they can keep the
residual allowances for future use by themselves or sell them to another company that has exceeded its allowance.
The number of allowances is reduced over time. By 2020, emissions will be 21% lower than 2005, according to
European Commission. The aviation sector aims to lower its emissions by 50% by 2050 compared with 2005 (see
the following chart).
According to the European Commission, airlines are due to join the scheme in 2012. The allowance set for airlines
this year is 0.6797 of emissions per thousand tonne kilometres. For 2013-20, the benchmark is 0.6422 allowance
of emissions per thousand tonne kilometres metres. The total quantity of allowance for each airline is calculated by
using this benchmark rate and multiplying the tonne-kilometres flown during 2010.
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Timeline for cutting carbon emissions by the airline industry
Known technology, operations
and infrastructure measures
Bio-fuels and additional
new-generation technology
1
Improve fleet fuel efficiency by 1.5% per
year from now until 2020
2
Cap net emissions from 2020 through
carbon neutral growth
3
By 2050, net aviation carbon emissions
will be half of what they were in 2005
Economic measures
Net emissions trajectory
‘No action’ emissions
Source: Airbus, Daiwa
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Aviation Primer
Winter 2012
In search of greater fuel efficiency and
alternative energy
Increasing need for improved fuel efficiency
The jet-fuel price has risen sharply over the past decade, increasing by 438%, from US$22.6/bbl at the end of 2001
to US$121.5/bbl at the end of 2011. For most airlines, fuel costs as a percentage of total operating expenses have
increased from about 20-25% in 2001 to 35-40% recently.
Jet-fuel price since 2001
Fuel efficiency vs. capacity growth
900
700
80
500
40
(80)
(100)
Jan-01
Aug-01
Mar-02
Oct-02
May-03
Dec-03
Jul-04
Feb-05
Sep-05
Apr-06
Nov-06
Jun-07
Jan-08
Aug-08
Mar-09
Oct-09
May-10
Dec-10
Jul-11
Feb-12
Jet fuel price (LHS)
Fuel efficiency
YoY (RHS)
Source: Bloomberg
Capacity growth
2010
0
2009
100
2008
(40)
1999
40
2007
300
0
2006
80
2005
120
2004
120
2003
160
(% )
2002
(%)
160
2001
200
2000
(US$/bbl)
Jet fuel price
Source: CAAC
Growth of cost per ASK
Fuel cost to operating expenses
(YoY % )
35
(% )
45
20
40
5
35
(10)
(25)
30
(40)
2007
2008
Cost per ASK
2009
2010
Cost per ASK (ex . fuel)
2011
25
2007
Cost per ASK (fuel)
Source: Companies
Note: Average no. of six Asian airlines: AC, CSA, CEA, CX, SIA, QAN
2008
2009
2010
2011
Source: Companies
Note: Average no. of six Asian airlines: AC, CSA, CEA, CX, SIA, QAN
To mitigate the impact, many airlines are using oil derivatives to hedge against the volatility in the jet-fuel price.
However, the huge loss made by the industry in 2008 and the high cost premium on oil derivatives have
discouraged the managements of many airlines from entering into new contracts since 2008. Most airlines reduced
their hedging ratios in 2011 compared with 2008.
Fuel-hedging comparison
hedge loss
2008 ($m)
Hedge % - 2008
Hedge % - 2011
AC
1,137
50%
0
CSA
n.a
0 - 20%
0
CEA
900
0 - 30%
0
Source: Companies, HKEX
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CX
984
38%
20%
SIA
249
30 - 60%
20%
ANA
n.a
50%
40%
JAL
n.a
n.a
n.a
Aviation Primer
Winter 2012
Apart from hedging oil derivatives, the improving fuel efficiency of aircraft, due to increases in seat capacity, the
use of lighter materials and more efficient fuel burning by engines, will help airlines use less fuel per kilometre of
travel. Indeed, fuel efficiency is arguably the biggest selling point of the B787 Dreamliner, for which ANA is a
launch customer. According to Boeing, the B787 consumes 20% less fuel than similar-sized aircraft. We believe
this is a big factor in ANA’s purchasing decision, since the airline needs more fuel-efficient aircraft to replace its
B767s.
In addition, the introduction of aviation biofuel (see below) in the future should help the industry to be less reliant on
traditional kerosene as jet fuel. However, IATA expects biofuel to account for only 6% of the total global
consumption of aviation fuel by 2020, making it only a long-term solution for the industry.
China: jet-fuel consumption
(Tonnes m)
(Tonnes per km)
1
18
15
0.8
12
0.6
9
0.4
6
0.2
3
0
Fuel consumption
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0
Source: CAAC
Aviation biofuel development
Aviation biofuel was first approved for commercial use in July 2011. Before then, there were a number of test flights
by airlines, starting from 2008. For example, in October 2011, AC operated a flight using jatropha oil that flew for
two hours above Beijing, and in January 2012, Etihad Airways operated a biofuel flight from Abu Dhabi to Seattle
using a combination of jet fuel and vegetable cooking oil. So far the aviation biofuel used in the test flights is mostly
made from algae, jastropha, and camelina. Other common sources of biofuel include salicornia, wood waste, and
yeast.
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Aviation Primer
Winter 2012
The need for co-operation
Battle among the airline alliances
Airlines today are co-operating more than ever before. In the early 1990s, they started to cooperate through
codeshare agreements (see pages 79-80), which we consider to be a loose type of co-operation given the low
commitment among the companies to cross-sell each others’ seats.
This co-operation evolved in the early 2000s into the big three alliances: Star Alliance, SkyTeam, and oneworld.
Alliances offer members the opportunity to reduce their operating costs through joint purchases of fuel and flight
equipment, and the sharing of ground and engineering services at common airports, such as airport lounges.
Meanwhile, members can expand their networks through codesharing, which can reduce the risks of expanding
and the time and effort needed to launch flights on a route. By codesharing, airlines can also operate in some
restricted markets (eg, domestic markets). Nowadays, most of the major airlines belong to one of the three major
alliances.
In our view, future competition in the aviation industry will no longer simply be on an airline-to-airline basis, rather it
will be at the alliance-to-alliance level. Alliances need to maintain a competitive network to attract passengers. We
believe Star Alliance is currently the strongest, with most of its members based in different countries and therefore
providing travellers with a much more comprehensive network.
Co-operation between airlines with different business models
In addition to the alliances, we are seeing a trend of more joint ventures (JV) being set up by airlines. A joint
venture is a closer form of co-operation than codesharing and membership of an alliance. It involves the sharing of
revenue and costs (there are no sharing of costs in codesharing). Recent examples include CEA and Jetstar Asia
forming a JV to set up an LCC in Hong Kong, Jetstar Hong Kong, AirAsia and ANA establishing a JV for AirAsia
Japan, and AC and CX forming a cargo JV in Shanghai. We have seen a growing trend for mature airlines (such as
CX in the above case) form JVs with fast-growing airlines (such as AC) in order to benefit from new business
opportunities. Also, some FSCs (such as CEA and ANA in the above case) have established JVs with LCCs (such
as AirAsia and Jetstar Airways) to explore opportunities in the low-end market.
Some airlines are even becoming major shareholders in other airlines. For example, AC and CX own strategic
stakes in each other. Meanwhile, some recent examples of M&A include CEA acquiring Shanghai Airlines in 2009,
AC acquiring Shenzhen Airlines in 2010, and AirAsia’s proposed acquisition of Batavia Air in Indonesia in July 2012.
We believe there have been more cases of M&A in recent years due to it being difficult for airlines to make a profit
and many small players being in financial trouble. However, as some countries restrict ownership levels of
domestic airlines by foreign airlines (often set at no more than 50%). Therefore, for the foreseeable future, M&A is
likely to be restricted among domestic players.
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Aviation Primer
Winter 2012
Airline alliances (2011)
Countries
Destinations
Passengers (m people)
Revenue (US$bn)
Members
Star Alliance members
190
1,293
649
161
Adria Airways
Aegean Airlines
Air Canada
AC
Air New Zealand
ANA
Asiana Airlines
Austrian Airlines
Blue1
Brussels Airlines
Croatia Airlines
EgyptAir
Ethiopian Airlines
LOT Polish Airlines
Lufthansa
SIA
Silkair (affiliate of SIA)
South African Airways
Swiss International Air Lines
TAP Portugal
TAM Airlines
Thai Airways
Turkish Airlines
United Continental
US Airways
SkyTeam members
173
958
506
n.a.
Aeroflot
AeroMexico
Air Europa
Air France
Alitalia
China Airlines
CEA
CSA
Czech Airlines
Delta
Kenya Airways
KLM
Korean Air
Saudi Airlines
Tarom
Vietnam Airlines
Middle East Airlines*
oneworld members
149
800
325
106
Airberlin
American Airlines
British Airways
CX
Dragonair (affiliate of CX)
Finnair
Iberia
Japan Airlines
LAN
QAN
Royal Jordanian
S7 Airlines
Source: Star Alliance, SkyTeam, and oneworld
Note: *Joined the alliance at 28 June 2012
What is a codeshare agreement?
A codeshare agreement is an arrangement between airlines to share their operating aircraft. The seat sold by one
airline (airline A) can be operated by another airline (airline B). The flight number of the flight may be different
depending on whether you buy the ticket from airline A or B. The airline that operates the flight (airline B, for
example) is called the ‘operating carrier’. The airline that sells the seats on the flight but does not operate it is
known as the ‘marketing carrier’. For example, in the following chart, AC codeshares with CX on a flight from Hong
Kong to Beijing. Assuming CX is the operating carrier, it would sell the flight using its airline code, CX, and the flight
number might be CX391. However, for the same flight, AC (as the marketing carrier) would be selling the seats
under its own airline code, CA, flight number CA6603. Codeshare flight numbers for the marketing carrier often
have four digits: for the operating carrier, three digits are used).
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Winter 2012
Examples of codesharing
Source: Hong Kong International Airport
Advantages of codesharing
By entering into a codeshare agreement with another airline on a route on which both operate, an airline can
increase the number of flights available to offer to its customers. Meanwhile, if the codeshare agreement is
between airlines on a route on which they do not both operate, the marketing carrier is able to offer a new
destination without operating to it. This may also help to provide access to routes on which there are traffic-right
restrictions. For example, by codesharing with American Airlines on domestic flights in the US, CX is able to sell
directly flights within the US, which are normally not available to overseas airlines. It also allows the airlines to
provide an expanded route network to their customers. Meanwhile, the codeshare partners flying on a route on
which both operate tend to have less incentive to increase capacity aggressively as they have higher flight
frequencies from codesharing.
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Aviation Primer
Winter 2012
Increased network coverage from codesharing: CX/AA
Cathay Pacific Services
Dragonair Services
Joint operating services or codeshare services
Source: CX , Daiwa
Pricing
Codeshare partners agree a settlement price for each codeshare seat sold. Prices vary depending on the flight
times (arrival and departure) and the time of year. Normally, it is more expensive for flights that are considered to
have good departure times and those during peak seasons (eg, on public holidays). The operating carrier will
usually try not to set a price lower than the normal market fare. Otherwise, its partner (the marketing carrier) can
sell seats at a cheaper price and earn a greater profit. However, if the price is set too high, there is less incentive
for the marketing carrier to sell at the settlement price as the price may not be competitive compared with other
airlines. As a result, it can take a long time before a consensus is reached between the two parties.
Overall, we believe that many codeshare agreements tend to set prices within a high range in order to protect the
interests of the operating carrier. Therefore, the incentive for a marketing carrier to promote and sell seats on a
codeshare flight is normally low, making the effectiveness of codesharing limited, in our view.
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Aviation Primer
Winter 2012
Shortage of pilots
The situation favours the existing players
According to Aviation Media, quoting the International Civil Aviation Organization (ICAO), the global demand for
pilots should reach 980,000 by 2030. This implies a need to recruit 52,500 pilots every year between now and then.
However, the current number of new joiners was 44,534 per year in 2011, which means a shortfall of 8,146 pilots
every year.
The biggest problem area globally is Asia Pacific, for which the ICAO has estimated a shortage of 9,048 pilots a
year. If we combine this with the situation in the Middle East, the total shortage is 10,646 pilots a year in Asia. This
is particularly significant in Northeast Asian countries such as China, and is likely to lead to high staff costs for new
entrants as they are likely to use higher wages to attract experienced pilots from existing airlines. However,
according to our market research, the opposite situation is occurring in ASEAN. For example, in Malaysia, there is
an oversupply of pilots, as many cadets have not been able to find jobs. Many places such as Hong Kong and
China impose restrictions on importing pilots from other countries, which is causing an imbalance in the supply and
demand of pilots to persist.
Many existing airlines probably have their own pilot-training schools to recruit and train new pilots. For example,
AirAsia has set up a pilot-training school, the Asia Aviation Academy, to do this. Also, the Big-3 PRC airlines have
their own training schools in China. CX has flight simulators at its Hong Kong headquarters. Thus, the pilot-training
costs for new entrants are likely to be higher than for existing players.
Shortage of pilots worldwide (a year from 2012-30)
Europe
(7,597)
North America
17,206
Middle East
(1,598)
Asia Pacific
(9,048)
Africa
(2,804)
Latin America
(4,305)
Enough pilots
Shortage of pilots
Source: ICAO, Daiwa
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Revenue management
A good IT system is crucial
This is the most important aspect in maximising the revenue generated from every seat. Due to the abundance of
historical data, most airlines have sophisticated inventory control and revenue-management systems to analyse the
impact of ad-hoc promotional fares. Investing in such systems is important as it can provide a competitive
advantage to the airline. We believe a well-developed revenue-management system helps an airline perform better
analysis of market demand, and facilitates its decision-making process.
Although we do not know how each system works, we can see how well it performs by how the yield moves the
relative to the passenger load factor. These systems enable airlines to reduce the yield during bad times and raise
the yield significantly during good times.
IT system makes a difference: using CX as an example
30
82
20
10
78
0
(10)
74
(20)
(30)
70
2003
2004
2005
2006
2007
2008
2009
2010
2011
Net profit (US$bn) (LHS)
IATA passenger yield (YoY %) (LHS)
CX passenger yield (YoY %) (LHS)
Passenger load factor (%) (RHS)
Source: IATA, CX
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Aviation Primer
Winter 2012
Fleet structure
Simplified is best
Most airlines with a high operating margin have simplified fleet structures. They identify 1-2 aircraft types each for
their short-haul fleet and long-haul fleet. Airlines with too many aircraft types face high maintenance and crewing
costs, due to the need to store additional spare parts and train crew on different types of aircraft.
One of their cost advantages of LCCs comes from the simplified fleet structure, from which they can derive
considerable economies of scale in maintenance and crew training.
Comparison of operating margin and fleet
2011
Operating margin
Current fleet size (including freighters)
Short haul (%)
Long haul (%)
AC CSA CEA
9
4
4
432 444 377
81
91
85
19
8
14
CX
4
175
23
77
SIA AirAsia
2
19
133
97
15
100
85
0
QAN
3
283
72
28
ANA
7
226
60
40
JAL Southwest Airlines
17
4
215
698
79
100
21
0
United Continental
5
1,256
75
25
Delta Airways
6
775
79
21
US Airways
3
340
92
8
Source: Companies
Summary of aircraft type
Regional jets
Short-haul aircraft
Medium-haul aircraft
Long-haul aircraft
Current fleet size
(including freighters)
On order
AC
CSA
CEA
CX
SIA
AirAsia
QAN
ANA
Business
Yes
Yes
No
No
No
No
No
jet
A320/A321 A320/A321 A320/A321 A320/A330 A319/A320 A320
B737 B737/A320/
DHC-8
/B737
/B737
/B737 (Dragonair) (SilkAir)
A330
A330
A330
A330
A330
A330
A330
B767
(AirAsiaX)
B777
A380/B747 A340
B777
A350/A380/ A350 B787/A380 B747/B777
/B777
B777/B787 (AirAsiaX)
432
444
377
175
133
97
283
226
167
256
282
67
65
306
Source: Airbus, Boeing, Companies, Daiwa
- 85 -
65
63
JAL
Yes
Southwest United
Delta
Airlines Continental Airways
No
Yes
Yes
US
Airways
Yes
B737/MD90/DHC-8
B767/B787
B737
B777
No
215
698
1,256
775
340
39
342
270
127
261
B737
A319/A320 A319/A320 A319/A320/A321
/B737
B737
A330
A330
B747/B777 B777/B787
A350
Aviation Primer
Winter 2012
Expansion strategy
The industry tends to over-expand
We believe most airlines are tempted to own a large fleet. This can be due to political considerations, or due to the
airline chasing revenue growth to satisfy shareholders or owners. In bad economic times, aircraft financing is
relatively tight, and so many airlines (especially those with weak balance sheets) may not have enough cash to
expand rapidly even though aircraft prices are at low levels. The airlines usually have to wait until financing
becomes more readily available, which may be at a time when the industry is reaching the peak of its cycle.
Therefore, aggressive orders for aircraft by airlines may signal the peak of the industry cycle.
Order book to profit and traffic cycle
(US$bn)
(% )
20
45
10
35
0
25
(10)
15
(20)
5
(5)
(30)
2003
2004
2005
Net profit (LHS)
2006
2007
RPK YoY (LHS)
2008
2009
2010
2011
Orderbook to fleet ratio (RHS)
Source: IATA, Ascend
Most airlines in Asia are tempted to expand rapidly, as most are located in countries with a fast-growing economy.
However, those with more prudent expansion strategies tend to have higher profit. We believe airlines with tight
capacity find it relatively easy to raise their yields to improve profitability. It is rare for an airline to have to sacrifice
profit due to a lack of capacity, but it is common to see one sacrifice profit due to overcapacity.
Some airlines, especially those in countries with high levels of GDP growth, tend to be more aggressive in terms of
capacity expansion, partly due to the financial support they receive from the government. As shown in the following
charts, net profit tends to be weak for them (such as CSA and CEA) compared with those pursuing a more prudent
capacity-expansion strategy (such as CX and SIA). We believe this is partly due to aggressive capacity expansion
leading to pressure on yield and a rise in costs.
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Winter 2012
The link between net profit and capacity management – CX and SIA
($bn)
(% )
20
30
20
10
10
0
0
(10)
(10)
(20)
(20)
(30)
(30)
(40)
2003
2004
2005
2006
Global net profit (LHS)
Global ASK growth (RHS)
2007
2008
2009
CX net profit (LHS)
CX ASK (RHS)
2010
2011
SIA net profit (LHS)
SIA ASK (RHS)
Source: Companies, IATA
Note: For CX and SIA, net profit is in local currency; for global net profit the unit is US$. For ease of reference, we use a multiple of 5x for SIA’s net profit.
The link between net profit and capacity management – CSA and CEA
($bn)
(%)
60
50
30
20
0
(10)
(30)
(40)
2003
2004
2005
Global net profit (LHS)
Global ASK growth (RHS)
2006
2007
2008
CSA net profit (LHS)
CSA ASK (RHS)
Source: Companies, IATA
Note: For CSA and CEA, net profit is in local currency; for global net profit the unit is US$.
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2009
2010
2011
CEA net profit (LHS)
CEA ASK (RHS)
Aviation Primer
Winter 2012
Positioning
Focus is the key to success
As mentioned in chapter 6, we believe that for a player to be successful in the future they must be either a premium
carrier, an LCC, or operate in a niche markets. Among the Asian airlines, this trend is already happening, with the
profit leaders, such as CX and SIA, focusing on being premium-class airlines, AirAsia being a successful LCC, and
AC supported by the large Mainland China outbound market. Many other Asian airlines are finding it hard to
positioning themselves and so their profit margins may start to deteriorate.
In practice, however, many airlines are unable to position themselves successfully. For example, a premium carrier
has to invest heavily to ensure it has state-of-the-art facilities. Airlines may not be able to commit the high capex
necessary if they have a weak balance sheet. Meanwhile, LCCs have to control costs carefully and avoid offering
services to passengers that provide no return. There are cases where LCCs have started to offer new services that
start to erode their margins.
Airlines: operating-profit margin
Airlines: net-profit margin
(% )
(% )
35
45
35
25
25
15
15
5
CX
SIA
MAS
Thai
CX
AirAsia
SIA
MAS
Thai
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1991
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
(15)
1992
(15)
1991
(5)
1992
5
(5)
AirAsia
More ‘bimodal’ airlines emerging
There are numerous cases of airlines losing focus on how they should operate, and moving into markets or
segments that are new to them. For example, many FSCs have established an LCC subsidiary after seeing this
model develop in the US, Europe, and Asia. Examples include ANA, which established its Peach LCC and plans
another LCC with AirAsia (AirAsia Japan), and SIA, which has two LCCs (Tiger Airways and Scoot). However, most
FSC plus LCC models are unsuccessful, and have not produced the synergies that were expected to help the FSC
turn around its business. Many of the LCC subsidiaries are struggling more than their FSC parent company. Indeed,
there are only a few successful examples – one is QAN and Jetstar – where the LCC subsidiary is more profitable
than the FSC parent.
The major problem we see is that airline managements consider setting up an LCC as a way to survive when the
FSC model is not working for them. In addition, many of them believe they will be able to attract high-income
travellers with the FSC and low-income travellers with the LCC. They also believe this model will provide
economies of scale. However, as historical data shows, the synergy effect is limited. This may be due to timing: the
decision by the FSC to set up the LCC subsidiary was taken at the end of the bull cycle in the industry. We value
highly management that focuses on what it does best.
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Aviation Primer
Winter 2012
FSCs with LCC subsidiaries
FSC
Subsidiary/
Associate (LCC)
CEA
SIA
QAN
ANA
Jetstar HK
Tiger
Airways
Jetstar Asia
Peach
Aviation,
Air Next
AirAsia
Japan
Scoot
JAL
Jet Star
Japan
Korean
Air
Jin Air
Asiana
Airlines
Air Busan
Thai
Airways
Nok Air
Malaysia
Airlines
Firefly
Garuda
Indonesia
Citilink
Iberia
Iberia
Express
Thai Smile
Lufthansa
Germanwings
SunExpress
Source: Companies
Net-profit margin: FSCs vs. LCCs
Company
Category
Net-profit margin (with LCC) (%)
Net-profit margin (w/out LCC) (%)
AC
FSC
6.7
6.7
CX
FSC
5.6
5.6
SIA
QAN
ANA
JAL
Thai Airways Malaysia Airlines
FSC + LCC FSC + LCC FSC + LCC FSC + LCC FSC + LCC
FSC + LCC
2.3
2.1
2.0
15.5
(5.3)
(18.5)
8.7
3.0
2.0
15.5
9.3
(1.0)
Source: Companies
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AirAsia
LCC
12.4
12.4
Skymark
LCC
9.6
9.6
Southwest Airways
LCC
1.1
1.1
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How to score an upgrade
This is a common question and, alas, there is no definitive answer. There are, however, factors that can increase
the likelihood of landing an upgrade on a busy flight.
1) Chances are higher during peak leisure-travel seasons. Obviously, to stand any chance of getting into a
premium cabin, there needs to a seat available in it – and economy class needs to be overbooked. As many
tickets allow passengers to change the date of their travel, airlines tend to overbook a flight in order to maximise
revenue, and assume that a certain number will not show up for the flight. In the event that all the booked
passengers show up, the airline may have to upgrade passengers or, in the worst case, offer them guaranteed
seat on the next flight and provide compensation as well as a meal and perhaps hotel accommodation.
Flights are often overbooked in peak leisure-travel seasons, and so this is when it is most likely that economy
class will be full and you can receive an upgrade. But it should also be remembered that premium-class cabins
on long-haul routes see a high number of business travellers and so are often full. Therefore, it is relatively hard
to obtain an upgrade on long-haul routes such as Hong Kong-New York and Singapore-London.
You may stand a better chance of an upgrade to these destinations during the summer
Source: Bali.net
Source: Phuket.net
2) Go by yourself. Airlines tend not to upgrade passengers who are flying with other people (especially those with
small children). This is due mainly to the additional hassle involved in arranging seats together. In addition, other
premium-class passengers might complain if the children are being noisy or running around the cabin. In order to
avoid such problems, airline staff are more likely to upgrade single travellers who are seen as being more flexible.
This group probably isn’t going to land an upgrade
Source: Stock photo
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3) Dress appropriately. There are times when airline staff will consider your appearance when deciding whether
or not to give you an upgrade. There is greater flexibility on leisure-travel routes, but overall smart casual is
likely to give you a better chance. The reason is similar to why some high-end restaurants impose a dress code:
brand image.
Dress is an important consideration on some routes
Source: Stock photo
4) Arrive at the check-in counter early. It takes time to arrange an upgrade, so do not arrive just before the
check-in counter is due to close (or the boarding gate if you check in online). Usually, airline staff choose who
they are going to upgrade before passengers start to arrive at the check-in counter. Some staff may just
upgrade the last passenger(s) who check in. However, this is contrary to most airlines’ working procedures. If
you are travelling on a well-managed airline, arriving early is the best policy.
Someone like this passenger probably has better chance
Source: SIA
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Glossary of industry terms
Air-traffic rights
Codeshare agreement
European Union Emission Trading
Scheme
Frequent-flyer programme
Full-service carrier
Global distribution system (GDS)
Long-haul
Low-cost carrier
Marketing carrier
Maximum take-off weight
Medium-haul
Narrow-body aircraft
Open skies
Operating carrier
Payload
Premium carrier
Premium class
Regional jet
Short-haul
Wide-body aircraft
The right that allows an airline to operate on a particular route or to a region.
An agreement between two or more airlines to share their operating aircraft. The seats sold by one airline on a flight are actually on an aircraft operated by
another airline.
This is the largest international scheme for the trading of greenhouse gases (including CO2). It provides a certain level of free emission allowances to airlines,
but they need to buy credits from the market when they exceed their allowance.
A loyalty programme that allows members to accumulate miles or points when they travel with an airline, and use them to redeem free tickets or other services
such as travel-class upgrades. The airlines use these to instil a sense of loyalty in travellers.
An airline that provides a wide range of pre-flight and inflight services (included in the ticket price), including check-in baggage allowance, inflight meals, and an
inflight entertainment system. It often has multiple classes of travel, eg, first, business, and economy classes.
A reservation system that travel agents use when booking air tickets, hotels, the hire of a car, or other travel-related services. It is linked directly to the internal
system of the airline, hotel, or related company.
A flight with a flying time of more than six hours.
An airline that provides only the flight, and charged for every additional service, eg, check-in baggage, inflight meals, and priority boarding. It often provides a
single class of service, meaning all economy-class seats.
The airline that sells the tickets on a codeshare flight but does not operate it.
This is the maximum weight an aircraft can carry during take-off. It is unique to each type of aircraft and is often used as the benchmark for the landing/take-off
charges by an airport.
A flight with a flying time of more than three hours but less than six hours.
A single-aisle aircraft that can fly a longer distance than a regional jet. It often can carry a larger number of passengers than a regional jet and also a small
amount of cargo in the hold.
An agreement between countries that allows airlines to expand international passenger and cargo flights without restrictions in terms of capacity (including flight
frequencies and aircraft type)
The airline that operates the aircraft on a codeshare flight.
This is the maximum carrying capacity (passengers and cargo) of an aircraft.
An airline that focuses on attracting high-end passengers (flying in first class and business class).
First class and business class
A single-aisle aircraft that is used mainly on short- to medium-haul routes.
A flight with a flying time of less than three hours
A twin-aisle aircraft that is larger than a narrow-body aircraft and can carry more passengers over longer distances. Can be used as a freighter as well.
Source: Daiwa
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Aviation: major listed players by segment
Airline
Name
Bloomberg
code
Description
China
Air China Ltd-H
753 HK
China Southern Airlines Co-H
1055 HK
China Eastern Airlines Co-H
Hainan Airlines Co-A
670 HK
600221 CH
As at the end of 2011, AC was the largest commercial airline in China in terms of market capitalisation, operating 432 aircraft. China National Aviation Holding Company holds a
51% stake in AC.
As at the end of 2011, CSA was the largest commercial airline in China in terms of fleet size, operating 444 aircraft. China Southern Air Holding holds a 53% stake in China
Southern Airlines.
As at the end of 2011, CEA was the largest Shanghai-based airline in China, with 377 aircraft. China Eastern Air Holding Company holds a 50% stake in the company.
Hainan Airlines the fourth-largest China airline, and is controlled by the HNA Group. It flies to more than 90 cities in total. The airline operates both scheduled and charter
services.
Asia
Air New Zealand Ltd
All Nippon Airways Co Ltd
AIR NZ
9202 JP
Asiana Airlines
020560 KS
Cathay Pacific Airways
China Airlines Ltd
293 HK
2610 TT
EVA Airways Corp
2618 TT
Garuda Indonesia
GIAA IJ
Japan Airlines
9201 JP
Korean Air Lines Co Ltd
003490 KS
Malaysian Airlines System Bhd
MAS MK
Qantas Airways Ltd
QAN AU
Singapore Airlines Ltd
SIA SP
Thai Airways International
THAI TB
LCCs
AirAsia Bhd
AIRA MK
Cebu Air Inc
CEB PM
Tiger Airways Holdings Ltd
TGR SP
Virgin Australia
VAH AU
Airports
China
Beijing Capital Intl Airport -H
694 HK
Guangzhou Baiyun International -A
600004 CH
Hainan Meilan Intl Airport-H
357 HK
Shanghai International Airport-A
600009 CH
Shenzhen Airport Co-A
000089 CH
Xiamen International Airport-A
600897 CH
Asia
Airports Of Thailand Pcl
AOT TB
Auckland Intl Airport Ltd
AIA NZ
Japan Airport Terminal Co
9706 JP
Malaysia Airports Hldgs Bhd
MAHB MK
Sydney Airport Corporation Ltd
SYD AU
The national carrier of New Zealand, Air New Zealand is based in Auckland. It is member of Star Alliance.
Founded in 1952, Tokyo-based ANA is a major Japanese airline with hubs in Tokyo, Kansai, and Osaka airports. In addition to its mainline operations, ANA controls several
subsidiary passenger carriers, including its regional airline, Air Nippon, charter carrier Air Japan, and LCC Air Next.
Asiana Airlines is the second-largest airline in South Korea and an increasingly important player in the East Asia region. It is majority-owned by one of South Korea's largest
conglomerates, the Kumho Asiana Group. Asiana is a member of Star Alliance.
CX is an international airline based in Hong Kong. As at 31 December 2011, and together with Dragonair and Air Hong Kong, the company operated 175 aircraft.
China Airlines is the flag carrier of Taiwan. Its majority shareholder is China Aviation Development Foundation; wholly-owned subsidiary by the Taiwan Government. China
Airlines Cargo is the airline's freight division. China Airlines is considering joining the Sky Team alliance.
EVA Airways Corp. provides passenger and cargo air-transportation services. It operates both scheduled and non-scheduled flights. As at the end of 2011, it operated 59
aircraft.
Garuda Indonesia is the national airline of Indonesia. In June 2010, it resumed services to Europe (initially Amsterdam via Dubai) after an extended EU-imposed ban. Garuda
Indonesia has undergone a thorough restructuring that it called The Quantum Leap, which involved a significant shift in the airline's strategic direction, its network, brand and
fleet. The airline was listed in 2011.
Founded in 1951, it became Japan’s national flag carrier in 1953. Its main hubs are Tokyo Narita International Airport, Haneda Airport, Nagoya Chubu Centrair International
Airport and Osaka Kansai Internal Airport. The carrier served 33 destinations in 18 countries excluding Japan as at 31 March 2012. On 19 September 2012, Japan Airlines was
relisted on the Tokyo Stock Exchange.
Established in 1962, Korean Air is the largest airline in Korea, and the country’s flag carrier. Korean Air Cargo is the third-largest cargo airline in the world and it together with
Korean Air wholly owns a low-cost airline subsidiary, Jin Air. Korean Air is a founding member of the SkyTeam alliance.
Malaysia Airlines is the flag carrier of Malaysia. It has a strong presence in East and Southeast Asia, and on the ‘Kangaroo Route’ between Australia and the UK. In June 2011
it announced its intention to join the oneworld alliance in late 2012. MASkargo is the cargo division of Malaysia Airlines and operates scheduled and charter air cargo services.
Qantas Airways is operated as part of the publicly listed Qantas Group. It is the national airline of Australia. As at June 2011, the group operated 283 aircraft. Qantas is a
founding member of the oneworld alliance.
Singapore Airlines is an international airline based in Singapore. As at the end of March 2012, together with SilkAir and SIA Cargo, the group operated 133 aircraft. Temasek
Holding Pte. has a 55% stake in Singapore Airlines.
Based at Bangkok’s Suvarnabhumi Airport with secondary hubs in Phuket and Chiang Mai, Thai Airways is the national airline of Thailand and is majority-owned by the Thai
Ministry of Finance. Thai Airways is a founding member of Star Alliance.
AirAsia is an LCC based at Kuala Lumpur International Airport, Malaysia. The carrier, which was formed out of Tune Air in 2002, is led by CEO Tony Fernandes and pioneered
cross-border joint ventures in Asia, establishing Thail and Indonesian units with bases in Bangkok and Jakarta, respectively. AirAsia's extensive domestic and regional network
includes services within Malaysia and to China, Southeast Asia and the subcontinent.
Cebu Pacific is one of the largest LCCs in Asia. It is wholly-owned by the Gokongwei family-controlled JG Summit Holdings. Using a fleet that includes Airbus A319/320 and
ATR72-500 aircraft, Cebu Pacific’s network consists of domestic and international services within Asia.
Tiger Airways is an LCC based in Singapore. It is owned by Tiger Airways Holdings, a consortium that includes Singapore Airlines, Indigo Partners Singapore, and Tony Ryan’s
RyanAsia Ltd.
Virgin Australia is Australia’s second-largest airline and one of the few airlines to have made a full transformation from LCC to FSC. Virgin Australia started operations in 2000
as Virgin Blue, and is wholly owned by Virgin Group.
Beijing Capital International Airport (BCIA) is engaged mainly in aeronautical and non-aeronautical businesses at Beijing Airport. As at the end of 2011, aircraft movements and
passenger throughput at Beijing Airport were 533,257 and 79m, respectively. The Capital Airport Holding Company has a 56.6% stake in BCIA.
Guangzhou Baiyun International Airport serves the city of Guangzhou. The airport is located in the Pearl River Delta, competing with Hong Kong, Macau, Shenzhen and Zhuhai
airports. Providing domestic, regional and international passenger and cargo services for over 30 airlines, the airport is a hub for airlines including China Southern Airlines and
FedEx Express.
Hainan Meilan International Airport is located in Haikou and is the gateway to Hainan Island. Providing domestic and international passenger and cargo services for over 15
airlines, the airport is a key base for Hainan Airlines and China Southern Airlines.
Shanghai International Airport Co Ltd, together with its subsidiaries, provides airport services in Pudong International Airport in Shanghai, China. The company offers groundhandling services to domestic and foreign airlines and passengers, and manages and leases aviation operation space, commercial space, and offices inside the airport. It also
operates a domestic trade and advertising business and supplies air fuel.
Shenzhen Bao’an International Airport is the gateway to Shenzhen and a key airport in the powerhouse Guangdong Province of Southern China. Close to Hong Kong in the
Pearl River Delta and hosting domestic, regional and international passenger and cargo services for over 15 airlines, the airport is a hub for Shenzhen Airlines, while China
Southern Airlines also has a major presence at the airport.
Xiamen International Airport Co Ltd is principally engaged in the provision of ground services for domestic and international flights and passengers. The company is also
involved in commercial property leasing and concession services, cargo station and cargo services, as well as ground support services. As at the end of 2011, it handled about
16m passengers and about 260,600 tonnes of cargo and mail.
Airports of Thailand (AOT), originally a state enterprise, was corporatised in 2002 and a subsequent partial listing (30% institutional and retail investors) took place in 2004. The
state retains 70% through the Ministry of Finance. (AOT) operates the two Bangkok airports and four others (Chiang Mai, Chiang Rai, Hat Yai, and Phuket).
Auckland Airport, operated by Auckland International Airport Ltd, is the largest airport in New Zealand. Providing domestic, regional and international passenger and cargo
services for over 20 airlines, Auckland Airport is the main hub of Air New Zealand.
Japan Airport Terminal Co. Ltd is a Tokyo-based corporation engaged in the construction and management of passenger terminal facilities at Tokyo's Haneda International
Airport. The company is listed on the Tokyo Stock Exchange and the main investors include Macquarie Bank, JAL, ANA, Mizuho Corporate Bank, Mitsubishi Tokyo UFJ Bank,
and Morgan Stanley.
Malaysia Airports Holdings (MAHB) manages and operates 39 airports in Malaysia:five international, 16 domestic, and 18 short take-off and landing ports. It was the first airport
company to be listed in Asia. MAHB co-operates extensively with India's GMR Group, a company that invests in ariports, energy, highways and urban infrastructure, and holds
an 11% stake in Hyderabad International Airport Ltd, a 10% stake in Delhi International Airport Ltd through Malaysia Airports (Mauritius) Pvt Ltd, a 20% stake in Sabiha Gocken
Airport, Istanbul with GMR and Limak, as well as the 25-year contract to construct, operate, modernise and expand Male International Airport in the Maldives through the GMRMAHB consortium. MAHB also holds a 40% stake in CAMS, which operates the Phnom Penh-Pochentong Airport in Cambodia.
Sydney (Kingsford Smith) Airport is the only major airport serving Sydney, and is a primary hub for Qantas. In 2011, Sydney Airport handled 36m passengers and 280,910
aircraft movements. The airport is managed by Sydney Airport Corporation Limited and the current CEO is Kerrie Mather. Flights from Sydney link with all states and territories
of Australia. Currently, 47 domestic destinations are served directly from Sydney.
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Aviation: major listed players by segment
Korea Airport Services Col Ltd
005430 KS
Korea Airport Service Co Ltd provides aircraft ground-handling, aircraft fuelling and refuelling, air-cargo handling, cargo/baggage loading/unloading, and aircraft-maintenance
services to domestic and international airlines in South Korea. The company is also engaged in producing mineral water under the Hanjin jejupurewater trademark; and
tomatoes and green peppers, paprika, cherry tomatoes, lettuce, and other vegetables. In addition, it operates Jeju Folk Village Museum, provides laundry and forklift-rental
services, is engaged in mining limestone, and raises beef, cattle and chicken. The company sells vegetables online. Korea Airport Service Co Ltd was founded in 1968 and is
based in Seoul, South Korea.
Aviation IT
China
Travelsky Technology Ltd-H
696 HK
TravelSky Technology is the dominant service provider of aviation IT in China. For 2011, the total number of bookings processed by the company was 319m. The China
TravelSky Holding Company has a 29.3% stake in the company.
Aviation manufacturing
China
AVIC Aero-Engine Controls-A
AVIC Heavy Machinery Co Lt-A
AVIC International Holding Ltd.
000738 CH
600765 CH
232 HK
AVIC Sanxin Co Ltd-A
Avichina Industry & Tech-H*
002163 CH
2357 HK
China Aviation Optical -A
China AVIC Avionics Equip-A
China Dongfanghong Spacesat-A
002179 CH
600372 CH
600118 CH
Citic Offshore Helicopter-A
000099 CH
Hafei Aviation Industry Co-A
Hubei Aviation Precision-A
600038 CH
002013 CH
Jiangxi Hongdu Aviation-A
600316 CH
Sichuan Chengfa Aero-Science &
Technology Co. Ltd.
Sichuan Chengfei Integration
Technology Co. Ltd
Sichuan Haite High-Tech Co-A
600391 CH
AVIC Aero-Engine Controls designs and manufactures a variety of motorcycles, engines, and related parts. The company also provides aircraft parts and repair services.
AVIC Heavy Machinery develops, manufactures, and markets hydraulic pumps and motors, Rzeppa constant-velocity joints, and other related products.
AVIC International Holding manufactures and markets aircraft. The company produces fighters, trainers, bombers, helicopters, transporters, general aviation aircraft associated
airborne equipment, and spare parts.
AVIC Sanxin designs and builds glass, aviation materials, and (PV) manufactures and installs curtain walls.
AviChina Industry & Technology Company Ltd (AVC) is mainly engaged in the development, manufacture, sales and upgrading of aviation equipment and related products. The
major shareholder of the company's H shares is Aviation Industry Corporation of China, with a 56.7% stake.
China Aviation Optical develops and manufactures electric connectors, optical device and cable components.
China AVIC Avionics manufactures and markets a series of cars, vans, and related parts, and also provides after-sales and consulting services.
China Spacesat Co Ltd is principally engaged in the research, manufacture, and application of satellites in China. Its satellites are primarily used for satellite communication,
satellite navigation and ground integrated appliance systems. The company is based in Beijing. It operates as a subsidiary of China Aerospace Science and Technology
Corporation.
CITIC Offshore Helicopter Co Ltd provides general aviation transportation services and aviation maintenance services. The company was incorporated in 1999 and is
headquartered in Shenzhen.
Hafei Aviation Industry designs, develops, manufactures, and sells helicopters, airplane parts, and aviation-related products, and also manufactures auto parts.
Hubei Aviation Precision manufactures and markets precision punching products, including angle modulation devices for auto seats, sliding rails, seat-lifting devices, and other
related products.
Jiangxi Hongdu Aviation designs, manufactures, and markets training planes, planes for agricultural and forestry use, other aviation products and spare parts, and also
processes consumer products and provides aviation services.
Sichuan Chengfa Aero-Science produces and markets a variety of parts for the manufacturers of aircraft engines and combustion turbines. The company’s products include
cartridge receivers, blades, ring-shape parts, and metal plates.
Sichuan Chengfei Integration Technology Co Ltd researches, designs, and manufactures car moulds, aircraft moulds, and frames.
Tianma Microelectronics-A
Wisesoft Co Ltd -A
000050 CH
002253 CH
Xi'An Aero-Engine Plc -A
600893 CH
Xi'An Aircraft Intl Corp-A
000768 CH
Asia
Korea Aerospace Industries
047810 KS
Singapore Tech Engineering
STE SP
Ground services
Asia
SATS Limited
SATS SP
SATS provides integrated ground-handling and in-flight catering services at Singapore Changi Airport. The company also provides aviation security, airlines laundry, and airport
cargo delivery management services
Maintenance services
Asia
AGP Corporation
9377 JP
Hong Kong Aircraft Engineering
SIA Engineering Co Ltd
44 HK
SIE SP
AGP Corporation is primarily engaged in the power business and the maintenance and management of buildings and facilities. The company operates in three business
segments: power segment, maintenance segment, associated business segment. The maintenance segment is engaged in the maintenance and management of buildings and
facilities such as airplane hangars, airplane meal plants, cargo terminals and hotels, as well as the maintenance of airport-related special facilities such as jet way and carry-on
luggage transportation facilities.
Hong Kong Aircraft Engineering maintains and overhauls commercial aircraft. It performs comprehensive checks, refurbishments and reconfigurations of airframes and engines.
SIA Engineering provides aviation engineering services worldwide. The company provides airframe maintenance and component overhaul services, line maintenance, and
technical ground-handling services. Through its subsidiaries, it is also engaged in the manufacture of aircraft cabin equipment, refurbishment of aircraft galleys, and the
provision of technical and non-technical handling services, the repair, and overhaul of hydro-mechanical aircraft equipment, and airframe-maintenance services. On January 18,
2010, SIA Engineering signed a definitive agreement to participate in Pratt & Whitney's PurePower PW1000G engine Risk-Revenue Sharing Program.
002190 CH
002023 CH
Sichuan HAITE High-tech Co Ltd, through its subsidiaries, is engaged in the research, development, manufacture, repair, and inspection of aircraft appliances, mechanical
accessories, and small engines. The company was founded in 1992 and is based in Chengdu.
Tianma Microelectronics manufactures and markets liquid crystal displays and liquid crystal display modules.
Wisesoft is a software and heavy-equipment provider. The company's major products include air traffic management (ATM) products, including ATM real-time strategic
command systems and ATM simulation training systems, and surface intelligent traffic-management products, including traffic management application systems for vehicle
automatic recognition.
Xi'an Aero-engine PLC is principally engaged in the manufacture and distribution of aero engines. The company provides aero products, including low-pressure compressor
rotors, turbine nozzle boxes, low-pressure turbine shaft blocks, turboelectric power units and turbo-starters, among others. Export products include high-pressure turbine
forward shafts, turbine disks, cartridge receivers, turbine blades, set collars, blades, loop-forming parts and guide vanes, as well as non-aero products.
Xi'an Aircraft Intl' manufactures large and mid-sized aircraft components and aluminium materials. The company primarily contracts and produces vertical stable board,
horizontal stable board, front inspection doors for Boeing 737s, and components for Boeing 747s and ATR-42s, and produces decorating materials and automobile parts.
Korea Aerospace Industries was established by Samsung Aerospace, Daewoo Heavy Industries (aerospace division), and Hyundai Space and Aircraft Company. The company
develops and manufactures fixed-wing aircraft, helicopter aircraft, and satellites.
Singapore Technologies Engineering, an investment holding company, provides engineering and related services worldwide. It operates in four segments: aerospace,
electronics, land systems, and marine. The aerospace segment provides a range of maintenance and engineering services comprising airframe, engine, and component
maintenance, repair, and overhaul services, engineering design and technical services, and aviation materials and management services, including total aviation support.
Singapore Technologies Engineering is a subsidiary of Temasek Holdings (Private) Ltd.
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Common industry metrics
Metric
Passenger
RPK (revenue passenger kilometres)
ASK (available seat kilometres)
PLF (passenger load factor)
Yield per RPK (revenue passenger kilometres)
Cost per ASK (available seat kilometres)
Freight
RFTK (revenue freight tonne kilometres)
AFTK (available freight tonne kilometres)
CLF (cargo load factor)
Yield per RFTK (revenue freight tonne
kilometres)
Cost per AFTK (available freight tonne
kilometres)
Overall
RTK (revenue tonne kilometres)
Unit
Definition
Passenger km
Seat km
%
Currency
Currency
Number of passengers carried x distance flown
Available capacity (number of seats) x distance flown
RPK (revenue passenger kilometres)/ASK (available seat kilometres)
Passenger revenue/RPK (revenue passenger kilometres)
Operating cost/ASK (available seat kilometres)
tonne km
tonne km
%
Currency
Cargo tonnage carried x distance flown
Available capacity (cargo space) x distance flown
RFTK (revenue freight tonne kilometres) / AFTK (available freight tonne kilometres)
Cargo revenue/RFTK (revenue freight tonne kilometres)
Currency
Operating cost/AFTK (available freight tonne kilometres)
tonne km
Number of passengers carried (including baggage) is converted into weight (90-95kg) to become PTK (passenger tonne kilometres)
and is added to RFTK (revenue freight tonne kilometres)
Passenger capacity is converted into weight (90-95kg) to become ASTK (available seat tonne kilometres) and is added to AFTK
(available freight tonne kilometres)
RTK (revenue tonne kilometres)/ATK (available seat kilometres)
Passenger and cargo revenue/RTK (revenue tonne kilometres) – generally excludes other revenue
Operating cost/ATK (available tonne kilometres)
ATK (available tonne kilometres)
tonne km
Total load factor
Yield per RTK (revenue tonne kilometre)
Cost per ATK (available seat kilometre)
%
Currency
Currency
Source: Daiwa
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Daiwa’s Asia Pacific Research Directory
HONG KONG
Nagahisa MIYABE
Regional Research Head
SOUTH KOREA
(852) 2848 4971
[email protected]
Chang H LEE
(82) 2 787 9177
[email protected]
Head of Korea Research; Strategy; Banking/Finance
John HETHERINGTON (852) 2773 8787
Regional Head of Product Management
[email protected]
Pranab Kumar SARMAH (852) 2848 4441
Regional Head of Research Promotion
[email protected]
Sung Yop CHUNG
(82) 2 787 9157
[email protected]
Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles;
Shipbuilding; Steel
Mingchun SUN
(852) 2773 8751
[email protected]
Head of China Research; Chief Economist (Regional)
Dave DAI
(852) 2848 4068
[email protected]
Deputy Head of Hong Kong and China Research; Pan-Asia/Regional Head of Clean
Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China)
Anderson CHA
Banking/Finance
(82) 2 787 9185
[email protected]
Mike OH
(82) 2 787 9179
[email protected]
Capital Goods (Construction and Machinery)
Sang Hee PARK
Consumer/Retail
(82) 2 787 9165
[email protected]
Kevin LAI
(852) 2848 4926
[email protected]
Deputy Head of Regional Economics; Macro Economics (Regional)
Jae H LEE
(82) 2 787 9173
[email protected]
IT/Electronics (Tech Hardware and Memory Chips)
Chi SUN
(852) 2848 4427
Macro Economics (China)
Thomas Y KWON
(82) 2 787 9181
[email protected]
Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game
[email protected]
Jonas KAN
(852) 2848 4439
[email protected]
Head of Hong Kong Research; Head of Hong Kong and China Property; Regional
Property Coordinator; Property Developers (Hong Kong)
Jeff CHUNG
(852) 2773 8783
Automobiles and Components (China)
[email protected]
Grace WU
(852) 2532 4383
[email protected]
Head of Greater China FIG; Banking (Hong Kong, China)
Shannen PARK
Custom Products Group
(82) 2 787 9184
[email protected]
TAIWAN
Mark CHANG
(886) 2 8758 6245 [email protected]
Head of Research; Regional Head of Small/Medium Cap; Small/Medium Cap (Regional)
Jerry YANG
(852) 2773 8842
Banking/Diversified Financials (Taiwan)
[email protected]
Birdy LU
IT/Technology Hardware (Handsets and Components)
Leon QI
(852) 2532 4381
Banking (Hong Kong, China)
[email protected]
Christine WANG
IT/Technology Hardware (PC Hardware)
Joseph HO
(852) 2848 4443
[email protected]
Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics
Equipments and Machinery (Hong Kong, China)
Bing ZHOU
(852) 2773 8782
Consumer/Retail (Hong Kong, China)
[email protected]
Hongxia ZHU
(852) 2848 4460
[email protected]
Consumer, Pharmaceuticals and Healthcare (China)
Eric CHEN
(852) 2773 8702
[email protected]
Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)
Felix LAM
(852) 2532 4341
[email protected]
Head of Materials (Hong Kong, China); Cement and Building Materials (China,
Taiwan); Property (China)
John CHOI
(852) 2773 8730
[email protected]
Head of Multi-Industries (Hong Kong, China); Small/Mid Cap (Regional);
Internet (China)
Kelvin LAU
(852) 2848 4467
[email protected]
Head of Transportation (Hong Kong, China); Hong Kong and China Research
Coordinator; Transportation (Regional)
Jibo MA
(852) 2848 4489
[email protected]
Head of Custom Products Group; Custom Products Group
Thomas HO
Custom Products Group
(852) 2773 8716
[email protected]
PHILIPPINES
Rommel RODRIGO
(63) 2 813 7344
[email protected]
ext 302
Head of Philippines Research; Strategy; Capital Goods; Materials
Danielo PICACHE
(63) 2 813 7344
ext 293
Property; Banking; Transportation – Port
[email protected]
Chris LIN
IT/Technology Hardware (Panels)
INDIA
Punit SRIVASTAVA
Head of Research; Strategy; Banking/Finance
Navin MATTA
(91) 22 6622 8411
Automobiles and Components
[email protected]
Saurabh MEHTA
Capital Goods; Utilities
(91) 22 6622 1009
[email protected]
Mihir SHAH
FMCG/Consumer
(91) 22 6622 1020
[email protected]
Deepak PODDAR
(91) 22 6622 1016
[email protected]
(91) 22 6622 1018
[email protected]
Materials
Nirmal RAGHAVAN
Oil and Gas; Utilities
SINGAPORE
Adrian LOH
(65) 6499 6548
[email protected]
Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and
China); Capital Goods (Singapore)
Srikanth VADLAMANI
Banking (ASEAN)
(65) 6499 6570
[email protected]
David LUM
Property and REITs
(65) 6329 2102
[email protected]
Ramakrishna MARUVADA (65) 6499 6543
[email protected]
Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)
- 103 -
Aviation Primer
Winter 2012
Daiwa’s Offices
Office / Branch / Affiliate
Address
Tel
Fax
DAIWA SECURITIES GROUP INC
HEAD OFFICE
Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111
(81) 3 5555 0661
Daiwa Securities Trust Company
One Evertrust Plaza, Jersey City, NJ 07302, U.S.A.
(1) 201 333 7300
(1) 201 333 7726
Daiwa Securities Trust and Banking (Europe) PLC (Head Office)
5 King William Street, London EC4N 7JB, United Kingdom
(44) 207 320 8000 (44) 207 410 0129
Daiwa Europe Trustees (Ireland) Ltd
Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland
(353) 1 603 9900
Daiwa Capital Markets America Inc
Financial Square, 32 Old Slip, New York, NY10005, U.S.A.
(1) 212 612 7000
(1) 212 612 7100
Daiwa Capital Markets America Inc. San Francisco Branch
555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A.
(1) 415 955 8100
(1) 415 956 1935
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5 King William Street, London EC4N 7AX, United Kingdom
(44) 20 7597 8000 (44) 20 7597 8600
Daiwa Capital Markets Europe Limited, Frankfurt Branch
Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main,
Federal Republic of Germany
(49) 69 717 080
Daiwa Capital Markets Europe Limited, Paris Representative Office
36, rue de Naples, 75008 Paris, France
(33) 1 56 262 200
(33) 1 47 550 808
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50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland
(41) 22 818 7400
(41) 22 818 7441
Daiwa Capital Markets Europe Limited,
Moscow Representative Office
Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002,
Russian Federation
(7) 495 641 3416
(7) 495 775 6238
Daiwa Capital Markets Europe Limited, Bahrain Branch
7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069,
Manama, Bahrain
(973) 17 534 452
(973) 17 535 113
Daiwa Capital Markets Hong Kong Limited
Level 28, One Pacific Place, 88 Queensway, Hong Kong
(852) 2525 0121
(852) 2845 1621
Daiwa Capital Markets Singapore Limited
6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809,
Republic of Singapore
(65) 6220 3666
(65) 6223 6198
Daiwa Capital Markets Australia Limited
Level 34, Rialto North Tower, 525 Collins Street, Melbourne,
Victoria 3000, Australia
(61) 3 9916 1300
(61) 3 9916 1330
DBP-Daiwa Capital Markets Philippines, Inc
18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village,
Makati City, Republic of the Philippines
(632) 813 7344
(632) 848 0105
Daiwa-Cathay Capital Markets Co Ltd
14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C.
(886) 2 2723 9698 (886) 2 2345 3638
Daiwa Securities Capital Markets Korea Co., Ltd.
One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu,
Seoul, 150-876, Korea
(82) 2 787 9100
Daiwa Securities Capital Markets Co Ltd,
Beijing Representative Office
Room 3503/3504, SK Tower,
No.6 Jia Jianguomen Wai Avenue, Chaoyang District,
Beijing 100022, People’s Republic of China
(86) 10 6500 6688 (86) 10 6500 3594
Daiwa SSC Securities Co Ltd
45/F, Hang Seng Tower, 1000 Lujiazui Ring Road,
Pudong, Shanghai 200120, People’s Republic of China
(86) 21 3858 2000 (86) 21 3858 2111
Daiwa Securities Capital Markets Co. Ltd,
Bangkok Representative Office
18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road,
Lumpini, Pathumwan, Bangkok 10330, Thailand
(66) 2 252 5650
Daiwa Capital Markets India Private Ltd
10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex,
Bandra East, Mumbai – 400051, India
(91) 22 6622 1000 (91) 22 6622 1019
Daiwa Securities Capital Markets Co. Ltd,
Hanoi Representative Office
Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street,
Hoan Kiem Dist. Hanoi, Vietnam
(84) 4 3946 0460
HEAD OFFICE
15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan
(81) 3 5620 5100
MARUNOUCHI OFFICE
Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011
(81) 3 5202 2021
New York Research Center
11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A.
(1) 212 612 6100
(1) 212 612 8417
London Research Centre
3/F, 5 King William Street, London, EC4N 7AX, United Kingdom
(44) 207 597 8000 (44) 207 597 8550
(353) 1 478 3469
(49) 69 723 340
(82) 2 787 9191
(66) 2 252 5665
(84) 4 3946 0461
DAIWA INSTITUTE OF RESEARCH LTD
- 104 -
(81) 3 5620 5603
Aviation Primer
Winter 2012
Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent
expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure,
distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group
Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness
of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon
this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the
securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation,
opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers,
servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with
respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.
Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have
other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the
issuer of such securities. The following are additional disclosures.
Japan
Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.
Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc.
Investment Banking Relationship
Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of
the securities of the following companies: Rexlot Holdings Limited (555 HK); China Outfitters Holdings Limited (1146 HK); Beijing Jingneng Clean Energy Co. Limited (579 HK); Infraware
Inc. (041020 KS); Jiangnan Group Limited (1366 HK); Huadian Fuxin Energy Corporation Limited (816 HK).
*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited, Daiwa Capital Markets Singapore
Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.
Hong Kong
This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this
research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.
Ownership of Securities
For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationship
For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Relevant Relationship (DHK)
DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
DHK market making
DHK may from time to time make a market in securities covered by this research.
Singapore
This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional
investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of
investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to
disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets
Singapore Limited in respect of any matter arising from or in connection with the research.
Australia
This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the
Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.
For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
India
This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be
considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no
representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability
whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of
or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information
contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and
analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as
maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query
from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or
in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and
buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor
or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a
financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which
is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA
and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and
issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report.
This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied
with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.
Taiwan
This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed
recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to
Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.
Philippines
This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines
Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the
research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory,
tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of
the markets mentioned in the publication or may have performed other services for the issuers of such securities.
For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.
United Kingdom
This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland,
Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (“FSA”) and is a member of the London Stock
Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing
transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the
Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe
Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the
extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.
- 105 -
Aviation Primer
Winter 2012
This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail
Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the
protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at
http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at
https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Germany
This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is
regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.
Bahrain
This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm –
Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452
Fax No. +973 535113
This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion
and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the
information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise
changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets
Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your
own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted
without prior consent.
United States
This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views
at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to
update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any
recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine
whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of
DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S.
entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local
jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a
process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report
should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).
For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships
For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
DCMA Market Making
For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who
prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member
of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during
the past 12 months except as noted: no exceptions.
Research Analyst Certification
For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any
and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views
of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no
individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next six months.
"2": the security is expected to outperform the local index by 5-15% over the next six months.
"3": the security is expected to perform within 5% of the local index (better or worse) over the next six months.
"4": the security is expected to underperform the local index by 5-15% over the next six months.
"5": the security could underperform the local index by more than 15% over the next six months.
Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law
(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the
following items.
• In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in
the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
• In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
• For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the
amount of the transaction will be in excess of the required collateral or margin requirements.
• There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,
real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
• There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
• Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.
*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of
each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions
regarding the signing of the agreement with us.
Corporate Name: Daiwa Securities Co. Ltd.
Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108
Memberships:
Japan Securities Dealers Association, The Financial Futures Association of Japan
Japan Investment Advisers Association
Type II Financial Instruments Firms Association

Aviation Primer

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