21 April 2017, Global – In an earlier Crucial Perspective report (24 March 2017), we highlighted the impending impact of US, UK electronics ban on Middle-East flights and how that could benefit airlines in Asia. This impact is now underway; On 19 April 2017, Emirates commented that it has seen a “significant deterioration in the booking profiles on all the airline’s United States routes across all travel segments” and announced reductions in its flight schedules (source: Flightglobal). The number of flight frequencies to five U.S. airports (Fort Lauderdale, Orlando, Seattle, Boston and Los Angeles) has been cut by 45% with effective dates ranging from early May to early July.
Chart: Emirates cuts capacity on five U.S. routes
Based on our latest analysis of Emirates’ overall flight schedules between the Middle East and the United States, we note that the carrier has cut its passenger capacity (in terms of ASKs) by 6% in 2Q17 compared to 1Q17. This is resulting in a marked deceleration in Emirates’ capacity growth on its United States routes. In 1Q17, Emirates’ passenger capacity grew 13% y/y but based on its planned flight schedules going forward, Emirates’ capacity is expected to grow only 6% y/y in 2Q17 and its capacity growth is expected to moderate further to 3% y/y in 3Q17.
The other Middle Eastern and Turkish carriers have not announced their capacity cuts yet but we expect them to follow suit as travel demand weakens on their U.S. routes. Interestingly, based on our analysis of Qatar Airways’ current flight schedules, there is also a sharp slowdown in Qatar Airways’ planned capacity growth on its flights to the United States. In 1Q17, Qatar Airways expanded its passenger capacity aggressively by 29% y/y. In contrast, Qatar Airways’ planned capacity growth is expected to decelerate to only 9% y/y in 2Q17 and 3% y/y in 3Q17. Overall, we note that the total passenger capacity growth between the Middle East and the United States has slowed from 10% y/y in 1Q17 to 6% y/y in 2Q17 and 3Q17.
Brief summary of our earlier article: US, UK electronics ban on Middle-East flights could benefit airlines in Asia (24 March 2017)
We expect the biggest losers to be Emirates, Qatar Airways, Etihad and Turkish Airlines. Emirates, Qatar Airways and Etihad each have 15%-16% capacity exposure to the U.S. routes and similarly for Turkish Airlines. Turkish Airlines also has a 3% capacity exposure to the U.K. which will also be negatively impacted by the U.K.’s “large electronic devices” ban. We estimate that there are 7 million connecting passengers travelling to/from the Asia Pacific on routes that hub in the airports affected by the “large electronic devices” ban and some of this traffic is likely to divert to other Asia Pacific airlines instead.
As the Gulf carriers and Turkish Airlines have historically gained more market share on long-haul routes between Southeast Asia/South Asia and the United States and the United Kingdom, we expect the major Southeast Asian/South Asian long-haul carriers, in particular, Singapore Airlines, Thai Airways and Jet Airways, to be the bigger beneficiaries of this traffic diversion.
Based on our estimates, every 5%/4%/3% gain from this diverted traffic could potentially boost Singapore Airlines, Thai Airways, Jet Airways’ net profit by 2.1%, 1.5% and 1.3% respectively and 4.6%, 3.2% and 2.8% respectively if this ban leads to contagion, resulting in the Asia Pacific-U.K. passengers choosing to avoid Dubai, Doha and Abu Dhabi as well even though these air hubs are not included in the U.K.’s ban.
North Asian carriers that rank among the top 10 largest airlines on the Asia-U.S. routes in terms of market share, such as Cathay Pacific, EVA Airways and Korean Air, are likely to capture some of this traffic diversion as well.
One risk is that the Gulf and Turkish carriers are likely to redeploy the capacity removed from their U.S. routes on other international routes. This could potentially increase the yield pressure on routes where they compete with the Asian carriers.