In the USA, Southwest Airlines has stated that it expects capacity to increase 7% this year and by between 5% and 6% in 2016. This comes as third quarter 2015 revenue per available seat mile fell 1% year on year, which is impressive given the capacity increase. Full year unit costs are forecast to decline 2% excluding fuel. Fuel costs are forecast to decline by 24.5% to $2.22 a gallon in Q3.
But Southwest is not positioned to benefit from the opening-up of Cuba as new relaxed rules implemented this week allow more travel, corporate expansion, and make it easier for companies to set up new operations in the island nation. JetBlue and American Airlines are very well placed and Spirit Airlines should be the real winner in the long term given its core support base.
American Airlines Group meanwhile continues to pay down debt at steady rate and refinance as and when it can. American CEO Doug Parker has made it clear that debt to equity ratios are not a primary concern at the airline, but the reality is that by the month end this airline becomes more investor friendly. American recorded a liquidity balance of $11.5bn (including $629million held in Venezuelan currency) at the end of Q2 2015, which confirms that this airline above all others is both showing value in its share price and has the positioning to reward shareholders in the near future. Indeed the price-to-cash ratios of major US carriers puts American in a very good light: American 3.28, Delta 9.8, JetBlue 9.26, Southwest 8.31, and United 4.57.
But investors will be watching performance closely since US market airline fares fell 3.1% month on month in August 2015 on the back of the 5.6% decline the month before. This takes the average fare in the US 6% lower year on year (unadjusted). This comes as carriers are spending 30-45% less on fuel year on year for August and as such investors should not worry so long as load factors remain steady, which they are across the board on all core routes.
Internationally though over 42% of global air traffic (measured in RPKs) now routes through the Asia Pacific region with APAC carriers now responsible for 33% of total passengers carried globally with the five busiest international and domestic city-pair air routes all in the APAC region. Four of the top five city pairs are out of/to Hong Kong with Hong Kong-Seoul traffic showing the most growth. This not only reiterates the fact that HKIA needs to expand quickly but it also highlights how well the now defunct JetStar Hong Kong might have performed; it could have been a jewel in the crown of Qantas. Two of the five city pairs involve flights to and from Singapore with Hong Kong/Singapore traffic showing strong growth. The top five domestic city pairs in the world have Jeju/Seoul in the lead with 5.1m passengers, while Japanese domestic routes out of Tokyo to Fukuoka and Sapporo remain in second and third spot while, Sydney/Melbourne and Beijing/Shanghai also show.
So what can we draw from all this? Although traffic is increasing, it is the same routes, which make-up the APAC top five both internationally and domestically, that made up the top five a decade ago. Much of this is due to Hong Kong traffic increasing faster than other areas to serve the huge influx of people that has transformed the HKNT area with skyscrapers of domestic dwellings still going up by the month. This, if anything, underscores the future prospects of Cathay Pacific and Dragon Air, which remain the dominant players at HKIA.