- How bad is the Covid-19 demand shock so far? ICAO, an agency of the United Nations charged with supporting civil aviation, released some preliminary estimates of the damage. It believes airlines will have lost $4b to $5b in first quarter revenues they otherwise would have generated from mainland China routes.
This estimate doesn’t even include Hong Kong. ICAO says total losses from Covid-19 will exceed those incurred from the SARS shock in 2003. The Chinese economy was much smaller then, and flight cancellations weren’t nearly as widespread.
Currently, some 70 airlines have cancelled all of their international flights to and from mainland China. Foreign airline capacity to and from China is down about 80% y/y, with Chinese airlines themselves flying about 40% less capacity.
Before the crisis, ICAO adds, international capacity to China was due to rise 9% this quarter. Japan and Thailand will see the biggest hit to their tourism sectors as a result of lost Chinese visitors.
Newcomers to the U.S.
- As the U.S. airline sector stabilized after a series of mergers between 2008 and 2013, many wondered whether opportunities were ripe for a startup carrier. Those wonders intensified after the 2015 fuel bust, which led to extraordinarily high profit margins — 2015 remains the best year ever for U.S. airlines. If there’s so much money to be made, many asked, wouldn’t that attract newcomers?
Finally, they’re coming, two of them in fact. One is David Neeleman’s new airline Breeze, which hopes to launch with used E195s later this year, followed by A220s. Also still alive though, is a startup plan championed by Andrew Levy, a former Allegiant president and United CFO. The project, as discussed in the April 8, 2019 issue of Skift Airline Weekly, is moving ahead, Bloomberg reports.
The new airline has raised $125m and likewise hopes to launch before the end of this year. Levy tells Bloomberg that the airline will target flights from secondary airports to midsized and large airports, which sounds Allegiant-like. “The best way to compete in the airline industry is to not compete,” he said.
Other updates from the report include a plan to take delivery of the new airline’s first 189-seat B737-800 this summer. It will fly charter flights initially, using the platform of a small charter carrier called XTRA Airways that Levy purchased in 2018. He thus already has an FAA operating license and a team of operations and safety executives.
The logic of launching a new ultra-LCC is clear enough: Spirit and Allegiant make so much money with the model. But they both, along with Frontier, depend heavily on Florida and Las Vegas markets, which might not be able to support yet another low-cost carrier (or perhaps two more if Breeze goes there as well). Will XTRA, or whatever it’s ultimately called, look for opportunities outside of Florida and Vegas?
Wherever it goes, Levy pledges to launch with “more capital than we’ll ever need.” And he plans to grow at “a measured pace.” It’s certainly true that labor costs and airport costs are rising rapidly for incumbent U.S. airlines, suggesting an opportunity.
Qatar Pulls the Plug on Air Italy
- Well that didn’t work out so well. With investment savvy reminiscent of its Gulf rival Etihad, Qatar Airways bought 49% of a smallish Italian airline called Meridiana in 2017. With great fanfare and at great expense, the airline was rebranded as Air Italy and armed with new planes.
One of its missions was connecting its home island of Sardinia to other Italian cities. Another was challenging Alitalia on key transatlantic routes, sparking the ire of U.S. carriers irked about Gulf carrier subsidies. Air Italy flew to various points in Africa too, along with Bangkok, Mumbai, and Delhi.
To absolutely no one’s surprise, it failed to gain traction. So last week, Qatar announced it would shut the airline down. Given Qatar’s enormous tolerance for losses, the fact that it couldn’t stomach Air Italy’s performance suggests rivers of red ink.
Led Zeppelin might have been too cynical in singing all that lives is born to die. But that might be true of all Italian airlines, with Alitalia also facing the grim reaper. The bankrupt carrier might, though, get a boost from Air Italy’s demise.
- Add one more to the list of airline causalities. Turkey’s Atlas Global, flying a mix of scheduled and charter service, filed for bankruptcy and suspended operations. Atlas specialized in Middle Eastern markets like Saudi Arabia, Iraq, Iran, and Israel, flying A330s and A320-family planes. It blamed significantly higher costs associated with flying from Istanbul’s new airport. Atlas is survived by Turkish rivals Turkish Airlines, Sun Express, Pegasus, Onur Air, and Corendon Airlines.
TUI Benefits From Thomas Cook’s Absence
- The demise of Thomas Cook left Europe’s TUI in a great position to take advantage, though it hasn’t been able to because of the MAX crisis, at least not to the fullest extent. Unlike typical airlines, TUI is a tour operator that can’t just cancel flights. If it does, its hotel rooms will go unfilled. The problem is particularly acute in the peak summer when replacement capacity is hard to find.
And alas, TUI will have to go a second straight summer without its MAXs. That said, the disappearance of Thomas Cook is indeed driving booking strength. January, though a slow travel month, happens to be TUI’s busiest of the year for bookings. And this January was its strongest ever. Some of those bookings were for the next few months, others for the peak summer, which is still a bit too far off to assess in terms of demand strength.
Last quarter, incidentally, TUI estimates a loss of about $50m from not having its MAXs. Other headaches include weak European currencies and Brexit-related uncertainty about access to EU markets after this year. It’s also mindful of the need to keep costs low at its airlines.
Like most airlines, and especially European airlines, TUI now spends lots of time during its earnings calls addressing the topic of climate change. He argues that countries with lots of tourists take better care of the environment than countries that don’t.
He cites the example of Haiti and the Dominican Republic, sharing an island in the Caribbean. Each has a similar population, but Haiti has 560k annual tourists while the D.R. has 6.2m. And Haiti is the one experiencing severe deforestation. Working the land becomes necessary when few other jobs and food sources exist.
- Cathay Pacific’s latest traffic update is grim. Inbound passenger traffic to Hong Kong was down 40% y/y in January, which was in fact a slight improvement from declines seen in November and December. Outbound traffic, meanwhile, actually grew slightly vs. last January with the benefit of Chinese New Year falling earlier this year. Connecting traffic increased 7%, but at low yields.
Longhaul routes in particular, were showing signs of life in the first three weeks of the year. Alas, then came the Covid-19 virus scare in late January, which led to a “significant cancellation of bookings within a short period of time.”
Cathay is currently flying only about 60% of its current passenger schedule, though freighter schedules are operating normally.
- Israel’s El Al said the corona virus epidemic will cost it about $30m in lost business this quarter. But it also said most of that will be offset through cost reductions. The airline flies to three cities in East Asia: Beijing, Hong Kong, and Bangkok.
- You would think times would be good when your chief rival is in a state of shambles. But despite the bankruptcy of South African Airways (SAA), Comair warned of lower profits for the last half of 2019 (July to December). One reason: Costs associated with delayed MAXs. Another: A switch from SAA to Lufthansa for its maintenance (Lufthansa is more expensive). Comair, which runs a British Airways franchise and an LCC called Kulula, also said that SAA failed to meet its obligations to pay a recent legal settlement. ◄