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1、12 March 2019GlobalMACQUARIEEQUITIESTickerPriceMar 11TargetRatingUS Airlines (USS)AAL32.0552.00OPALGT128.23149.00NALK55.4267.00OPDAL51.1261.00OPHA25.6429.00NJBLU16.5118.00NLUV51.6157.00NSAVE53.0779.00OPUAL82.38109.00OPCanadian Airlines (C$)AC33.3645.00OPWJA20.5819.00NEuepean Airlines ( unless noted)
2、AF10.6911.25NLHA22.4720.40NEZJ11.6215.00OPIAG5.385.10UPRY4C11.909.95UPChinese Airlines (HK$)753.HK7.9210.30OP670.HK4.795.80OP1055.HK6.057.40OPStocks CoveredSource: Bloomberg, Macquarie Research, March 2019InsideAncillary growth boosts earnings resiliency 2US Airlines6Canadian Airlines11European Airl
3、ines14Chinese Airlines21Valuation Comps22Appendix23AnalystsMacquarie Capital Markets Canada Ltd.Konark Gupta +1 416 848 3539 Daniela Campo +1 416 848 3502 Macquarie Capital (USA) Inc.Susan Donofrio +1 212 231 6535Aubrey Tianello +1 212 231 1201Macquarie Capital (Europe) LimitedPete Vanns +44 20 3037
4、 2938 :Macquarie Capital LimitedEric Zong +852 3922 4749 Heidi Leung +852 3922 3783 Global AirlinesAncillary growth boosts earnings resiliencyKey pointsWe take a deep dive into high-margin ancillary fees, which have been growing and account for 11% of industry revenues. Investor interest in ancillar
5、y fees is high given limited disclosures from the airlines. Our Top Picks are Spirit, Air Canada, easyJet and Air China based on ancillary opportunities and fundamental outlook.Ancillary Revenues Continue to Grow and account for 11% of BusinessWe estimate global airline ancillary revenues have grown
6、 at 20% CAGR over the past decade to reach almost US$93bn in 2018, far outpacing the industrys total revenue growth of 4%. This equates to over US$21 per passenger and 11% of total airline revenues. The key drivers of this growth have been rising air travel, unbundling of fares, increasing LCC penet
7、ration, and growing ancillary offerings by airlines. We have seen similar trends for most of the 19 airlines across North America, Europe and China we have discussed in this report. In our estimation, these 19 airlines generate US$38bn in ancillary revenues (US$20/pax and 11 % of total airline reven
8、ues).Boosting EPS Resiliency and Providing a Natural Hedge Against FuelAirlines have consistently generated profits since 2010, which is a contrast to the prior decade and not just a coincidence. It is quite interesting that airlines were profitable even when jet fuel was above US$1 OO/bbl earlier t
9、his decade. This is a direct result of airlines, increasing focus on ancillary fees, which carry significantly higher margins vs typical airline margins, boosting the much needed resiliency in net earnings. Further, ancillary fees now equate to over 50% of the fuel bill vs 10% a decade ago, providin
10、g a greater natural hedge against the largest airline cost item. Thus, we think airlines with higher ancillaries deserve a multiple expansion for greater earnings resiliency.Potential for Further Growth as Opportunities are NumerousIndustry-wide we expect baggage fees to be the key driver of ancilla
11、ry fees in 2019 but we also see loyalty programs, credit cards, corporate travel, and pre-boarding or in-flight offerings as other areas of growth over time. Passenger traffic is expected to double in the next two decades, growing at 3.5% CAGR. More airlines could add new ancillary offerings while m
12、any airlines will likely continue to evolve their offerings and increase the fees. This would suggest the ancillary revenue growth could remain high, perhaps in the high single-digit range if not double-digit over the next decades.Top Picks and Regional TrendsBased on our in-depth analysis in this r
13、eport as well as our fundamental outlook, we like Spirit Airlines, Air Canada, easyJet and Air China as our top picks in our global airlines coverage. US airlines lead the industry on ancillary revenues in terms of $ per passenger and percentage of total revenues with Spirit topping the charts. Simi
14、larly, Air Canada and easyJet are amongst the top ancillary earners with strong growth trends. While we expect continued growth in ancillary revenues for our covered airlines in North America and Europe, we believe Chinese carriers could have stronger growth potential in the long term given they hav
15、e been slower in adopting the ancillary model, similar to the airlines in Asia, Africa, Middle East and Latin America.Please refer to page 27 for important disclosures and analyst certification, or on our website .Upside potentialSpirit has done a remarkable job on the ancillary revenue side, increa
16、sing its non-ticket revenue per passenger flight segment 5.2% in 4Q18 to $56.70 and guiding to $56-$57 for FY19 (vs $55.23 in FY18). This accounts for almost half of the total revenue per passenger flight segment, pushing Spirit to the top of the industry.We had been anticipating 5% non-ticket growt
17、h in FY19, though some of the upside from its non-ticket initiatives were pulled into 4Q, as evidenced by the strong TRASM performance. Nevertheless, we remain confident that SAVE can continue to grow non-ticket via several levers, including enhanced merchandizing opportunities such as changes theyv
18、e made to their co-branded credit card with Bank of America, website product enhancements, and more phone app sale opportunities.United Continental HoldinasKey sources of ancillary revenueUnited generates ancillary revenue through both its mainline operations as well as through ancillary revenues fr
19、om its regional airline affiliates. Ancillary revenues arise from fees for items such as selective seating and seating upgrades, baggage fees, cancellation or change fees, as well as onboard services like food and drinks. Ancillary revenues also include sales generated through Uniteds MileagePlus lo
20、yalty program in which it partners third-party participants including domestic and international credit card issuers, retail merchants, hotels and car rental companies, and its co-branded credit card partners.Financial impactWe believe Ancillary revenue for FY2017 was $5.8bn, representing a 7.6% YoY
21、 decrease from $6.2bn in 2016. On a per passenger basis, ancillary revenue was to $38.83 in 2017 from $43.44 in 2016. For 2018, we expect mid-single digit ancillary revenue growth roughly in-line with the 6.8% growth in Other revenues and 6.9% growth in passengers flown in 2018. In our view, the out
22、size growth in regional traffic in 2018 (+10%) versus domestic mainline (+6%) may lead to more flat to down YoY change in ancillary revenues on a per passenger basis as the carrier continues to focus heavily on its hub re-banking efforts.Upside potentialWe expect higher baggage fees to be a key driv
23、er of ancillary growth in 2019. As with the majority of our coverage, United followed suit with higher checked bag fees, increasing the price of the first and second checked bag by $5 last year. For United, this took effect for tickets purchased beginning in September 2018. In 2017, baggage fees gen
24、erated $794m, making up 14% of UALs overall ancillary revenues.Canadian AirlinesThe two Canadian airlines we cover generate total ancillary revenue of C$2.5bn (US$1.9bn) including loyalty programs, in our estimation. This equates to C$32.65/pax (US$24.48) and accounts for 11% of their total airline
25、revenues. We estimate Air Canada generates higher ancillary revenue within the group at C$2.Obn (US$1.5bn) or C$39.83/pax (US$29.87) and has a higher portion of revenue coming from ancillary fees at 11 %. We note Air Canada discloses ancillary revenue excluding its loyalty program, while WestJet dis
26、closes ancillary revenue including its in-house loyalty program.Air CanadaKey sources of ancillary revenueAir Canada generates ancillary revenue through a la carte services, including baggage fees, ticket changes, seat selection, preferred seating fees and upgrades, as well as on-board offerings inc
27、luding food, beverages, duty-free shopping and Wi-Fi services.Financial impactBased on recent disclosures, we estimate that Air Canada is generating annualized ancillary revenue of C$1.15bn or C$22.64 per passenger, which accounts for 6.4% of its total operating revenue.We note this number does not
28、reflect any contribution from the Aeroplan loyalty program, which AC re-acquired in January of this year. Including loyalty program-related ancillaries, we estimate ACs ancillary revenue would be closer to $2.Obn or $39.83 per passenger.In 2018, Air Canada successfully grew ancillary revenue by 13%
29、y/y. This compares to passenger traffic growth of 5.8%.The growth was led by baggage fees, paid upgrades, seat selection and preferred seats. This represents growth of 8% on a per passenger basis which was achieved by combining enhanced branding and the unbundling of services with new fare categorie
30、s. For fiscal year 2017, Air Canada reported that ancillary revenue had exceeded C$1 bn for the first time.Air Canada has been successful at expanding ancillary revenue every quarter through a combination of enhanced branding and new fare categories featuring unbundled services and better merchandis
31、ing of ancillary options on their website. For example, in November and December of 2018, 53% of ACs domestic passengers chose to buy up their branded fare beyond basic, which is more than double the buy-up rate on other online channels such as Expedia at about 22%.Upside potentialWe calculate ACs a
32、ncillary revenue per passenger at C$22.64 (excl. Aeroplan) and C$39.83 (incl. Aeroplan) vs US$18.88 (excl. loyalty) and US$32.09 (incl. loyalty) for its key US comps. While we believe AC should continue narrowing the gap to its peers as it grows the Aeroplan loyalty program, there could be further h
33、eadroom from ancillary fees not collected by AC. AC expects future growth in Aeroplan membership base and new customer analytical initiatives to generate additional ancillary opportunities. Currently, Air Canadas checked baggage allowance is dependent on route and fare class with all international f
34、lights allowing for at least one free bag. Baggage fees for flights within Canada, the US, Mexico and the Caribbean depend on fare class and frequent flyer status, with some options offering free baggage allowance. In addition, Air Canada allows passengers to carry with them on board one standard ar
35、ticle and one personal article free of charge, regardless of the route. We believe there is room for AC to increase ancillary revenue from bag fees as many of its competitors charge for baggage regardless of the route. In addition, many airlines, including United, have started charging for carry-on
36、bags with basic economy tickets; this is a policy that Air Canada could also implement. Air Canada should also benefit significantly from the increased checked baggage fees (which kicked in on October 5th, 2018). The fee for the first checked bag increased to $30 from $25 and the second luggage to $
37、50 from $30.Air Canadas priority boarding privilege depends on the fare class purchased by a customer. Passengers with Business and Premium fares board first, with Economy fares boarding last. AC does not offer an optional fee for priority boarding. This could provide an opportunity for Air Canada t
38、o upsell to Economy customers who would like the ability to board early.Lastly, we believe there is an opportunity for AC to benefit from additional on-board fees related to entertainment. In-flight entertainment, for applicable flights, is currently offered free of charge. Some airlines have adopte
39、d a pay per view model, where passengers can choose an entertainment package based on what they would like to watch. For example, Hawaiian Air offers newly released Hollywood movies at US$7.99 per movie, or alternatively guests can choose an unlimited TV bundle which offers a variety of classic movi
40、es, TV shows, etc. all for the same price.WestJet AirlinesKey sources of ancillary revenueWestJet ancillary revenue strategy consists of three phases. The first phase includes traditional anc川ary products such as bag fees, change/cancel fees, pre-reserved seat fees, and the new differentiated pricin
41、g offerings for preferred seating. It also includes breakage revenue (unredeemed points) associated with the WestJet Rewards Program and any revenue generated from the WestJet RBC MasterCard program. These traditional products have increased ancillary contribution from 5% to 10% in the past five yea
42、rs, and during this time ancillary revenue per guest has increased by 112%. The second phase of ancillary fees are optimization fees which are actively managed ancillary products. For example, pre-reserved seat and upgrade fees are tactically increased in markets with strong demand and reduced in ma
43、rkets with weaker demands, thus increasing yields. The third phase, which is the next frontier for WestJet, is dynamic customization of ancillary offerings. This will allow WestJet to offer customized bundle offers for different markets and different traveller types. For example, a customized ancill
44、ary bundle for a business traveller could include priority security screening, priority boarding and in-flight Wi-Fi. These new customized bundles are expected to drive conversion and yield.Financial impactIn 2018, WJA generated C$467m (+6.2% y/y) in ancillary revenue or C$18.32 per passenger (+0.5%
45、), which accounts for 10% of its total operating revenue. The increase in 2018 was attributable to a higher volume of passengers, the addition of ancillary revenue generated by its new ULCC, Swoop, increasing bag fees, and a greater number of guests purchasing Premium upgrades and pre-reserved seati
46、ng. Ancillary revenue for FY2017 was C$440m, representing a 12.8% YoY increase from C$390m in 2016. The increase in anc川ary revenue was a result of a 7% increase in passengers during the year, increase in pre-reserved seating sales, increased change/cancel fees, and increased contribution from the W
47、estJet RBC MasterCard program.Upside potentialSimilar to Air Canada, WestJet will benefit from increased checked baggage fees, which were implemented during 4Q18. We expect Swoops ramp-up this year to provide a further tailwind for ancillary revenue per passenger. We currently forecast ancillary rev
48、enue per passenger at $19,18 for 2019, but we believe there could be potential upside risk given the US low-cost airlines generate US$26.86 per passenger. We think the upside risk in ancillary revenue could come from a number of initiatives, including dynamic pricing options, improved in-flight meals, and increased baggage fees. In addition, we believe WJAs new low cost airline, Swoop, as well as the frequent flyer program will help attract and retain more customers and increase ancillary revenue collection opport