As you may recall this week, Intrepid Aviation Group Holdings priced an offering of US$120m in aggregate principal amount of senior notes due 2017. The Notes will be co-issued by Intrepid’s wholly-owned subsidiary, Intrepid Finance Co and will bear interest at a rate of 8.250% per year and were priced at par.
Now the follow-on question from this has been: Why are Intrepid issuing unsecured debt? The answer is fairly straight forward – this issuance is a very short-term financing measure and it is priced inside of where current Intrepid bonds are trading. This financing arrangement is all about the ability of Intrepid to deal with the Skymark situation from a position of strength. The Greece situation, terror attacks and other market movers such as the Aeroflot announcement during Paris 2015 did affect the pricing and sent it out wider than was hoped no doubt, but still this is the right move at the right time for Intrepid and gives the lessor a platform to move forward upon. Look out for Airline Economics Issues 27 and 28 where Intrepid, along with CIT, CALC and others will be focused upon in detail following on from the article with a listed lessor focus from Airline Economics Issue 26 published last month.
From aircraft leasing we turn to UK aviation and the prospects for Heathrow Airport expansion. Even though the Airports Commission report confirms that Heathrow should get a third runway, there is still a long way to go until ground is broken on the same and a bitter political war of words and a fair few demonstrations will take place before any works starts on a third runway.
Meanwhile, it is important to remember that Southwest Airlines is now the only option in the US airline market for travellers seeking to fly without paying extra for checked baggage, following the decision by JetBlue to start charging for the first checked bag. Passengers who booked JetBlue flights before Tuesday will still check a suitcase at no charge, but from today all must pay $25 for their first checked bag.
The ramifications from this are that JetBlue now has an opportunity to unbundle the fares and offer a lower base fare to certain customers which should allow it to compete far better for economy class passengers, all the while the MINT premium product is powering ahead with strong yields, thus JetBlue is in a good position. Now though Southwest has an opportunity to benefit either by holding out as the only LCC not charging for checked bags or by following suit, if Southwest chose to fall-into the new norm of charging for bags then earnings will increase dramatically. Be on the lookout for news out of Southwest.
On a final note, it is interesting – given that so many airlines have increased cargo capacity of late – that IATA shows today data for global air freight markets shows continued contraction in May year on year. Growth in freight tonne kilometers (FTK) was 2.1%, the slowest rate this year and outpaced by a capacity expansion of 4.3%. On a year-to-date basis, freight volumes are up 4% on the previous year, but much of that growth was realized in the latter part of 2014.
IATA states that carriers in most regions, with the exception of those based in the Middle East, saw weak growth or even contractions. In aggregate, airlines in North and Latin America and Europe reported that their freight business was smaller in May 2015 than in the same month of 2014. Carriers in Asia-Pacific experienced slow growth as a result of poor import/export performance.
“Cargo growth has undoubtedly come off the boil. The expansion in volumes we saw in 2014 has ground to a halt, and load factors are falling. Some economic fundamentals still point to a rebound in the second half of the year, but we have to recognize that business confidence is flat and export orders in decline” said Tony Tyler, IATA’s Director General and CEO.
IATA stated that Asia-Pacific carriers reported demand growth of 2.8% in May compared to May 2014, below a capacity expansion of 6.7%. At the end of Q1, trade volumes for emerging Asia markets were down 10% compared to Q4 2014, although there have been signs of improvement at the start of Q2, which if sustained, would help ease downward pressure on air freight demand.
European carriers saw demand decline by 1.3% in May, compared to a year ago while capacity grew by 2.7%.
North American airlines reported a fall in demand of 2.9% year-on-year while capacity was cut by 4.2%. Stronger growth is expected in coming months as the effects of poor weather and US seaport congestion fade.
Middle Eastern carriers saw demand grow by 18.1%, on the back of increased trade within the region, as well as shippers taking advantage of the Gulf carriers’ hub strategy. Capacity expanded 19.4%.
Latin American airlines reported a fall in demand of 10.5%, while capacity grew by 4.7%. These stats represent a very worrying trend indeed for this region.
Great cheer is to be had though on the back of African figures for May – African airlines experienced a 3.0% rise in demand on a 1.3% increase in capacity. This is despite West African underperformance in 2015 due to Ebola and Nigerian volatility, as West Africa bounces back we might yet see even more good figures being returned from Africa during the remainder of 2015.