Grim Quarterly Results for American

• When Delta reported Q1 results a week earlier, its negative 5% operating margin masked the true gravity of the current Covid crisis. American’s results, by contrast, made the carnage crystal clear. The Texas-based airline reported a gruesome negative 16% Q1 operating margin, excluding special items, accompanied by a $1.1b net loss. Revenues plummeted 20% y/y while operating costs dropped just 2%, all on 7% less ASM capacity. Cheap fuel was the only bright spot.
  
  Frustratingly, the pandemic came just as American was lifting itself up from a rough — by pre-crisis standards, anyway—2019. It earned significantly lower margins than its peers last year, hurt by labor unrest and absent B737 MAXs (a problem for United and Southwest as well). But there were hints of better times to come as American improved its lagging operational performance, grew its most profitable hubs (led by Dallas DFW and Charlotte), secured new Tokyo Haneda slots, and reversed momentum on the alliance front by forging a high-potential partnership with Alaska Airlines (which quieted talk about losing its ally Latam to Delta). American was building partnerships with Gol, Qantas, China Southern, and Qatar Airways as well, complementing joint ventures with IAG and Japan Airlines. It was adding bold new intercontinental routes to places like Christchurch, Casablanca, and Bangalore, the latter from Delta’s Seattle hub. Weakness in Latin America, a large part of American’s international network, was turning to strength amid capacity cuts and economic improvements. In February, it reached a contract deal with mechanics, ending a highly-disruptive dispute. Importantly, the airline had just finished a multi-year period of heavy aircraft spending, which heralded lower capex and greater free cash flow for the next few years.
  
  So much for that. American like its peers is now hemorrhaging cash, with outflows expected to total some $70m a day this quarter. More than 80% of its flights currently operate with load factors below 25%. More than 30k employees are on temporary leave or working fewer hours, and another nearly 5k have accepted voluntary retirement. American, to be sure, took on more debt than its peers, pre-crisis, electing to pay for the many new planes it ordered with low-interest loans rather than cash. It instead returned lots of its cash to shareholders via buybacks and dividends. The practice generated external criticism when the crisis hit, especially as it lobbied for government aid. American, of course, was hardly the only carrier buying back stock and paying dividends — this was a common practice around the world. Executives pointed to the roughly $4b in cash on hand at the start of the crisis, not to mention what was arguably the world’s most valuable fleet.
  
  This meant it was no less well positioned than anyone to raise a mountain of new cash from banks and from aircraft lessors (via sale-leaseback deals). Indeed, it raised $2b last quarter, and now stands to end Q2 with an enormous $11b worth of cash and other liquid assets. Nearly $11b is also the amount of money it can get from the federal CARES Act, including loans for which it’s applying — negotiations with Treasury officials are ongoing, focused on what collateral American needs to provide. In the meantime, the carrier is undertaking heavy cost-cutting moves now evident throughout the industry — lowering executive pay, reducing investment spend, reducing payroll through voluntary programs, consolidating airport facilities, and so on. Most importantly, American has sufficient funding to ride out an extended period of minimal revenues. And it has plenty of additional assets left to liquidate if needed, including airport slots and AAdvantage frequent flier miles.
  
  Management is under no illusions of a quick recovery. Demand will be suppressed for “quite some time,” said CEO Doug Parker. Until when, nobody knows. And that’s making it difficult to set future schedules given the long planning horizons for aircraft availability, pilot training, maintenance programs, and so on. In the face of this uncertainty, American — planning now for summer 2021 — will play it safe and err on the side of having not enough capacity to meet demand, rather than too much capacity. So it’s mass-retiring older aircraft models, namely all of its B767s, B757s, A330-300s, E190s, and selected regional jets. That means its 2021 fleet will have roughly 100 fewer planes than originally planned.
  
  As for this year, April and May capacity will be down about 80% versus plan, with June schedules currently down 70%. Just last week in fact, it removed more summertime international flying, essentially abandoning hope of any meaningful peak season demand. It also cut more from New York, the epicenter of America’s Covid pandemic. Dallas DFW, by contrast, will likely see relatively fewer cuts. Charlotte, for its part, might be poised for an earlier recovery given the relative health of its big banking sector (banking was the hardest hit sector last crisis; this time the big losers are travel and tourism). American’s large Latin America franchise was late to see demand collapse last quarter, but the region is now among the worst-positioned anywhere to withstand the macroeconomic implications of the pancession (witness Brazil’s collapsing currency).
  
  Yes, American is making a bit of money with cargo right now. It expects to cut that $70m daily cash burn to more like $50m by June. At some point hopefully soon, revenue inflow will surpass customer refund outflow. American by the way, is still planning to take B737 MAXs later this year. And it’s proceeding with work on standardizing narrowbody configurations with denser seating but upgraded amenities. It will not, executives emphasize, close any hubs.

Not Any Better at United

•  United’s Q1 results were closer to American’s awful figures than they were to Delta’s more moderate losses. The Chicago-based carrier, with heavy exposure to Asia, recorded a negative 11% operating margin, its first Q1 operating loss since 2014 (after which it hired Oscar Munoz and then Scott Kirby). The last time things were anywhere close to this bad was in Q1 of 2009, when United’s operating margin was negative 10% (that was before it merged with Continental, whose Q1, 2009 margin was just negative 2%).
  
  The current pancession, of course, is far worse in totality than the 2008-09 financial shock. The demand shock today is near-total in its devastation of revenues and universal in its geographic scope. United last quarter, even with a solid January and February, saw revenues plummet 17% y/y on just 7% fewer ASMs. Costs fell as well, but by just 2%. The bright spot was fuel, for which outlays plummeted 15%. But labor costs rose 3%. Perhaps because of its ample presence in China, United was arguably quicker than others to recognize the gravity of the crisis, taking early steps to cut capacity. It wasn’t an issue yet on Jan. 21, the day United announced its Q4, 2019 earnings — the biggest concerns then were missing MAXs and some non-virus-related weakness in Germany, mainland China, and Hong Kong.
  
  Its first warning came on Feb. 24, when it suspended all China flying through late April. That day, as the virus was spreading to Italy, the carrier also suspended share buybacks. A few days later, it cancelled a planned investor day event, acknowledging that earlier financial projections were becoming obsolete. By early March, it was aggressively cutting capacity and sounding the alarm — before others — about how deep and long-lasting the demand shock might be. Don’t worry about United’s cash position. On March 9, it borrowed $2b from a group of banks, giving it $8b in liquidity. Subsequent borrowings, equity sales, sale-leaseback deals, and government aid put liquidity at almost $10b as of last week. So even as the airline burns through an expected $40m to $45m in cash per day this quarter, with negligible revenue potential, management expects $6b in liquidity by the end of Q3. Cost cutting continues, such that even if revenues stay at near-zero through the end of the year, daily cash burn could ease to about $20m in Q4. It’s certainly not predicting zero revenues for that long, but it’s prudently planning with the assumption that this might be the case.
  
  United is more vocal than others in warning employees that involuntary layoffs are a real possibility after Oct. 1. For now, more than 20,000 workers are on temporary leave. Others are working reduced hours. The airline meanwhile has suspended more than 200 airport projects and more than 300 IT projects. It does, however, still intend to take 16 B737 MAXs this year and another 24 next year. After that, it’s discussing deferrals with Boeing. Unfortunately many aspects of United’s pre-crisis strategy might now need revising. An expansion of its intercontinental premium offering appears unfit for a post-Covid world. Its planned joint venture with Avianca and Copa, both in dire straits now, might be in question. There’s little near-term hope now for new routes like San Francisco-Delhi, San Francisco-Melbourne, Chicago-Zurich, and Newark to Cape Town, Nice, and Palermo. On the other hand, United was lucky to strike a more favorable credit card deal with JPMorgan Chase on Feb 21, just before the world fell apart. The risk is that airline miles lose their value if people don’t travel as much in the future. But management downplays that scenario.
  
  Looking at the bright side, it sees opportunity to restructure many aspects of its business, perhaps achieving levels of productivity unrealistic when labor unions had much greater bargaining power. “Everything is on the table,” said Kirby, who takes the CEO reins from Munoz later this month. Encouragingly, net bookings (new ones minus cancellations) are no longer negative. And though it doesn’t see any signs of meaningful recovery of near-term demand yet, it is adding back some international flights as early as this month — Chicago-London, Newark-Amsterdam, and Washington-Frankfurt return on May 4. Internet searches for flights around spring break 2021 are interestingly up y/y, a sign of pent-up demand.
  
  That said, United doesn’t expect bookings to materialize until the virus is sufficiently contained. It also expects some “false starts” and won’t “jump in with both feet once we see the first green shoots.”

Southwest Predicts Return to Normal, but not When

• If domestic travel recovers earlier than international, something widely expected, then Southwest is in a relatively good place. Some 95% of its business is within the U.S., and the other 5% is mostly U.S. travelers flying to nearby Mexico, Central America, and the Caribbean. The father of low-cost air travel, celebrated for its decades-long streak of success, has the added advantage of entering the current crisis in remarkably strong shape. Its balance sheet was investment grade, and in fact still is.
  
  As late as March 1, it held more than $1b in cash. It began this year with the smallest ratio of debt to total capital (just 24%) in company history. More than $10b of its $27b in assets were in the form of unencumbered B737s. What’s more, Southwest performed extremely well in January and February, with “solid” unit revenue growth and “better-than-expected” cost performance. Both months saw margins improve y/y. Only in late February did bookings begin to sour, before traffic eventually tumbled to near-zero in March. The net effect of these two drastically different trends in the quarter was a relatively modest net loss of $77m ex special items. Operating margin was negative 3%.
  
  Losing money in the offpeak first quarter isn’t entirely novel for Southwest. In Q1, 2012, with fuel prices up and its AirTran takeover in progress, it posted an $18m net loss excluding special items. But never has it experienced anything like the devastation it saw in March, which caused revenues for the entire quarter to plummet 18% y/y on a 7% decline in ASM capacity. Operating costs fell just 6%, and only that much because fuel costs fell 14%. The current April-to-June quarter, historically Southwest’s strongest of the year, will be much, much, much worse. Load factors continue to run in the single digits and bookings for travel through June remain “pretty anemic.” ASM capacity will be down something like 60% to 70% y/y for the quarter. Booking curves are taking a barbell shape, with some urgent-travel booked very close to departure and some leisure travel booked months in advance, by people hoping to take a vacation this summer.
  
  CEO Gary Kelly said his own family is determined to head for the beach in July. He also hinted that there were some markets booking better than others, suggesting New York (the epicenter of America’s virus crisis) as one that’s not yet showing signs of recovery. He adds that bookings are “decent” for July, the first month of Q3. But cancellations are possible. Also remember that in normal times, about one-third of Southwest’s customers are flying for business, and these travelers contribute a disproportionate about of the airline’s revenue and profits. This traffic could take longer to recover.
  
  Longer-term, Kelly is confident that business travel will return. Indeed, Southwest is still pushing ahead with plans to win more managed corporate business — it’s more aggressively selling through global distribution systems for example (the Amadeus and Travelport systems, anyway). “If you’re like me,” Kelly said, “I’m sick of these Zoom calls. I’m ready to go talk to people face-to-face.” He goes on to mention how the notorious 1918 flu pandemic was followed by the roaring 20s. And how it’s “just crazy” to think that New York City won’t ever be the same again, as some hysterically predict.
  
  Longterm optimism aside, Southwest is under no illusions about the short-term challenges. In a video to employees earlier this month, he warned that the airline might require dramatic downsizing, which as a last resort could involve pay and even job cuts. Like other airlines, it’s stockpiling cash by borrowing and through federal aid. It will take 59 fewer B737 MAXs from Boeing this year and next, relative to its original plan. Though three quarters of its costs are fixed, it managed to slice $100m from its non-fuel cost base last month. Cash outflows have been cut in half from pre-crisis levels. By May, more than 7k employees will be on voluntary leave. The company will soon introduce new early retirement and part-time schedule options. Helpfully, roughly 80% of its tickets sold are nonrefundable, so the majority of recent trip cancellations have resulted in issuance of travel credits rather than cash refunds.
  
  Southwest unfortunately has substantial fuel hedging contracts, which will cost it nearly $100m in premiums this year (and result in some one-off accounting losses). But its hedges are options that enable it to take full advantage of falling spot prices — it thus expects to pay just a paltry $1 per gallon for fuel this quarter, more or less. On the other hand, if Southwest is forced to shrink substantially, unit costs could suffer as economies of scale are reversed (think about the inefficiencies of underutilized airport gates, for example).
  
  Executive are currently examining three alternative recovery scenarios, ranging from an L-shaped pattern to a U-shaped pattern with significant pickup around Q4. A key moment will be the start of October, when federal payroll aid expires. At the very least, bookings have appeared to show gradual improvement after the first week of April, which looks to have been the low point. It might for a time intentionally limit the number of tickets it sells per flight to alleviate overcrowding, though it will not block middle seats — some travelers have children or other family members they want next to them in the middle seat. Kelly doesn’t think people will stay six feet apart from each other forever, nor mask themselves for the rest of their lives. In summary, Southwest sees bookings slightly improving from extremely depressed levels. It has plenty of survival cash. It’s confident of an eventual return to normal. But it acknowledges that could take a while, potentially forcing major downsizing in the fall.    

Is China Past the Worst of the Pandemic?

• Entering 2020, Chinese airlines were already dealing with a slowing economy, slumping cargo revenues, unrest in Hong Kong, tensions with Taiwan, overcapacity in markets like Japan and Australia, the B737 MAX grounding, and currency weakness. But despite a loss-filled fourth quarter, all major carriers made money in 2019, aided by cheaper fuel. Then came Covid-19, which sprung from in Wuhan just as airlines were entering their busiest travel period: Chinese New Year. The outbreak began subsiding in March, but not enough to trigger a revival in air travel demand, and certainly not enough to avoid heavy Q1 losses.
  
  Air China, for one, typically the most profitable of China’s four global airlines, recorded a bloody negative 24% operating margin. The outbreak caused ASK capacity to drop 42% y/y, while revenues plummeted 47%. With much of its cost base fixed, operating costs fell just 28%. For most carriers around the world, Q1 is an offpeak season. But because of Chinese New Year, it’s typically one of the most profitable quarters for Chinese airlines. As for the current April-to-June quarter, some signs point to a modest demand revival, with factory re-openings triggering some business travel, and this past weekend’s Labor Day holiday triggering some leisure travel. Still, as IATA notes, flight schedules are nowhere near back to normal, and domestic load factors through much of April were in the 50% to 60% range.
  
  For all of 2019, Air China’s systemwide load factor was 81%. Cheap fuel is the one big silver lining this spring, all the more so because Chinese airlines are unhedged. More ominously though, China’s economy, which contracted for the first time in almost three decades last quarter, shows signs of only mild recovery. Nor is the virus a thing of the past; it’s largely gone from Wuhan but spreading now in Harbin, a northeastern city near Russia. In terms of Air China’s outlook, all it gave were some vacuous statements, i.e. its plan to “unswervingly adhere to the objective of focusing on high-quality development and establish a world-class airline.”
  
  Whatever. More substantively, the airline said it’s converting some passenger planes to cargo use, getting its various units to cooperate more closely (i.e. Shenzhen Airlines), and has both adequate levels of cash and capacity to raise more through bank loans and bonds. Helpfully, China’s government is helping airlines with tax exemptions and airport slot waivers. Air China, remember, is also exposed to Cathay Pacific’s heavy losses through a major ownership stake.

• To be clear, China’s international market remains largely dormant, with visitors placed in quarantine and inbound flights to Beijing forced to stop in other Chinese cities first. That’s one of many setbacks for carriers including China Eastern, which was trying to build an international hub at Beijing’s new Daxing airport. Instead, it’s busy nursing huge Q1 losses, exemplified by a negative 31% operating margin. Revenues were roughly sliced in half y/y, on 44% less ASK capacity. Operating costs fell 28%.
  
  Building its new Daxing hub was just one of several strategic initiatives on China Eastern’s agenda as it entered 2020. It was also building alliances with Delta, Air France/KLM, Qantas, Japan Airlines, and its hometown rival Juneyao Airlines. It was planning to expand its LCC China United, even eyeing shorthaul international markets. Like its Big Three rivals, it was seeking ways to extract more revenues from a frequent flier plan with giant membership rolls. But now it’s just focused on rebuilding as demand starts to slowly revive.

• China Southern was in largely the same boat last quarter, wallowing in a negative 24% operating margin, similar to what Air China suffered. Revenues and capacity declined more than 40% y/y while operating costs declined only 24%. China Southern too was hoping to focus on building its new Beijing Daxing hub this year. The project is proceeding but without the demand it expected to see, especially on the international front.
  
  Its Daxing ambitions also included partnerships with American, IAG and others, having recently exited the SkyTeam alliance. Like its peers, China Southern responded to the Covid shock by adjusting schedules, negotiating cost concessions with suppliers, suspending aircraft deliveries, freezing capital spending, identifying cargo opportunities, and prioritizing cash preservation. One helpful aspect of its network is not having much exposure to Hong Kong, which lies adjacent to its main hub in Guangzhou.   

• Hainan Airlines, controlled not by the central government in Beijing but by the provincial government of Hainan, had yet to report its Q4, 2019 results. So last week, it reported both Q4, 2019 and Q1, 2020. For the latter, it suffered a negative 11% operating margin while cutting ASK capacity 10% (this still left it with a positive 2% operating margin for all of 2019). As the Q4 results for all major Chinese airlines showed, problems were festering even before the Covid crisis began. As for the just-completed January-to-March quarter, which featured the outbreak, operating margin was a devastating negative 77% (you read that right).
  
  Hainan Airlines began life just as China’s economy was taking off in the 1990s. It offered a more service-oriented product with lower unit costs and more professionalized management than Beijing’s Big Three. By the 2010s, it was earning excellent profit margins far exceeding those of its peers, while challenging Air China in particular in the busy Beijing and Shenzhen markets. But then it overreached. It established airline ventures throughout China, in cities like Chongqing, Tianjin, and Urumqi. It mass-ordered widebodies, such that by the start of 2020, its fleet featured 40 B787s, 38 A330s, and two A350s. Many of its intercontinental routes were wildly speculative, often from secondary Chinese cities to secondary foreign cities. It eventually secured rights to serve larger cities too, and by the end of 2019, its busiest non-Asian markets by seats, according to Cirium schedule data, were Boston, Brussels, Seattle, Los Angeles, London, Moscow, Melbourne, and Tel Aviv. It was even flying to places like Tijuana and Lisbon.
  
  More egregious still were the antics of its parent company HNA, which became world-famous for its recklessness, buying everything from stakes in Deutsche Bank and Hilton Hotels to pricey Manhattan real estate. It also bought stakes in lots of smallish airlines: Virgin Australia, Hong Kong Airlines, HK Express, Azul, Aigle Azur, Comair/Kulula, and TAP Air Portugal, not to mention the aircraft leasing firm Avolon, the catering companies Servair and Gategroup, Frankfurt Hahn airport, and the ground handler Swissport.
  
  To nobody’s surprise, the reckoning eventually came. Hainan Airlines saw its margins sharply decline, and HNA was forced to sell many of its equity holdings, including its HK Express stake to Cathay Pacific. Still tangled in massive debts, its destiny would have been bankruptcy if not for a government bailout.   

• Shanghai’s Juneyao Airlines, with its LCC affiliate 9 Air, was hoping to see benefits from its new China Eastern partnership while developing its nascent intercontinental service. Instead, it experienced no less a bloody first quarter than most of its larger rivals. Its operating margin was negative 17%, with a familiar y/y revenue drop of roughly 40%, with operating costs dropping by roughly half that percentage. Juneyao still sees hope in flying B787s to Europe, as demonstrated by a new joint venture it struck with Finnair after the Covid crisis began.  

• Spring Airlines, meanwhile, just like Hainan Airlines, reported both Q4, 2019, and Q1, 2020 results. Its Q4 operating margin was negative 16% (though it still reported positive 8% for all of 2019). Its Q1 operating margin was negative 17%. As you can see, Q4 was more or less just as bad as Q1. But remember, Q4 is typically offpeak while Q1 is supposed to be one of the most profitable times of the year.
  
  In any case, Spring could be well-positioned for an eventual recovery given its low-cost business model. It’s also refrained from any intercontinental flying, though it does have flights to Hong Kong, points throughout East Asia an even a joint venture in Japan.  

Red Ink in Japan…

• Japan’s largest airline ANA was looking forward to an eventful 2020. The Tokyo Olympics were to start in July. New Haneda airport slots allowed for new routes this year to Istanbul, Milan, Moscow, Stockholm, and Shenzhen. New flights to Chennai, Perth, and Vladivostok were already aloft. Last year saw ANA embark on a major Hawaiian offensive involving A380s. The merging of its low-cost Peach and Vanilla Air affiliates was complete.
  
  As recently as February 25, ANA was feeling confident enough to announce an order for 20 more B787s. That was shortly after forming a new codeshare relationship with Virgin Australia and — more significantly — a new joint venture with Singapore Airlines. Suffice it to say, 2020 hasn’t quite unfolded like ANA expected. Japanese airlines felt the Covid crisis early (at the end of January) through their exposure to China. The virus then spread to nearby countries including Japan, before becoming a global phenomenon. Domestic routes, which still generate more revenue for ANA than international, started seeing demand weaken in late February. By mid-March, everything everywhere had collapsed.
  
  The result in financial terms was a horrid negative 15% Q1 operating margin as revenues sank 20% y/y on 4% less ASK capacity. Operating costs, even with an 11% decline in fuel outlays and a 19% decline in labor expenses, fell only 6%. ANA has additional financial exposure, via ownership stakes, to Philippine Airlines and Vietnam Airlines. It also faced some pre-crisis difficulties with Rolls-Royce Dreamliner engines, and with distress in the Hong Kong and Korea markets. But in general conditions were healthy for most of 2019, with Japanese companies spending plentifully on business travel, and overseas tourists zealously visiting Japan.
  
  On the other hand, costs were momentarily elevated on the eve of the crisis as ANA increased staffing to prepare for its new Haneda slots and the Olympic games. International demand was also starting to weaken late last year. ANA is now undertaking thankless tasks like operating minimal capacity, offering voluntary leave to staff, cutting capex, scrounging for bank loans, deferring aircraft deliveries, bringing some outsourced maintenance in-house, and lobbying Tokyo — via the Scheduled Airlines Association of Japan — for emergency loans and tax relief.
  
  Management sees leisure demand returning first, with help from low fare stimulation. When the time does come to switch from defense back to offense, ANA will revert to strategic priorities like deepening its alliances in the ASEAN region, building on joint ventures with United and Lufthansa, upgrading premium amenities, fostering more sixth-freedom traffic through Tokyo, making productive use of its customer data, and renewing its narrowbody fleet with both NEOs (already arriving) and MAXs. The Tokyo Olympics, by the way, are now scheduled for next summer. Will the pandemic be over by then?  

• As Japan Airlines awaits its government’s decision on financial assistance, it can take some comfort in its relatively modest negative 7% operating margin last quarter. Revenues (down 21% y/y) fell no less drastically than what ANA experienced. And operating costs (down 8%) likewise fell no less significantly (ASKs dropped 7%). But JAL is descending from a higher place, having flourished for a decade following its cathartic bankruptcy restructuring in 2010. In any case, it’s now back to square one, this time seeking to overcome not its own shortcomings and ineptitude but a vicious external crisis. To get a sense of the magnitude, consider JAL’s 28% y/y decline in international unit revenues last quarter.
  
  Like ANA, JAL now generates more money on domestic routes, where its load factor last quarter was just 58%. With the company’s cash balance declining almost 40% in the quarter, dividends were naturally suspended. As things stand now, JAL is running just 5% of its normal international capacity, and just 30% of its domestic ASKs. How did things stand before the crisis? Much like ANA, JAL was feeling strains in Korea and Hong Kong and starting to see weakness in international markets, not to mention cargo markets. It was adding A350s and B787s. It was actively pursuing partnerships, including a new joint venture with Malaysia Airlines. American, IAG, Finnair, and China Eastern are other key partners.
  
  But U.S. regulators nixed JAL’s plan to form a joint venture with Hawaiian. Recall that Hawaii was one of JAL’s all-star markets for many years. It’s more recently downsized there, however, amid ANA’s A380 offensive. Before long, it will likely serve the market with a new low-cost B787 unit called Zip Air, which was planning to launch with flights to Bangkok next month. That’s postponed, but Zip still plans to take flight in 2020, complementing JAL’s other LCC Jetstar Japan, which is part-owned by Qantas and uses narrowbodies. JAL, like ANA, has new Haneda slots to use. Having never ordered any MAXs or NEOs, it now stands to get some at deeply discounted prices when it feels comfortable enough to place an order.
  
  Right now, though, JAL is focused on preserving cash. Encouragingly, Japan has experienced many fewer Covid-related deaths than most major economies. And the Japanese yen has actually strengthened versus the U.S. dollar since the crisis began. Longer term, JAL’s President Yuji Akasaka said he strongly believes business demand in particular will eventually return, citing the necessity of face-to-face communication.  

…And Elsewhere

• Finnair is another airline that hadn’t yet bought any NEOs or MAXs but was planning to before the crisis came. It too stands to get much better pricing when the time comes — perhaps later this year or next year — to place an order. Though inherently vulnerable given its limited size and dependence on Europe-Asia connecting traffic, Finnair entered the crisis with strong liquidity, highlighted by a cash-to-sales ratio of 31%. The average across European airlines, it said, is just 17%. And only Ryanair and Wizz Air have higher figures than Finnair. “Just a couple of months back,” said CEO Topi Manner, “we were accused of being too conservative in terms of cash.”
  
  That’s not to say Finnair had a pleasant first quarter. On the contrary, its operating margin was a dismal negative 16% as revenues dropped 16% y/y and operating costs fell just 5%, all on 9% less ASK capacity. Cargo revenue dropped by almost one-fifth. It didn’t even get to enjoy the fuel price collapse as hedges and a weak euro spoiled the fun. When Finnair first suspended flights to China in February, it downplayed the impact, noting how China flights typically lose money in the late winter months anyway. Only later did it realize the global impact of Covid-19. Demand overall was strong early in the quarter, especially in shorthaul European markets where supply was simultaneously constrained due to missing MAXs and delayed NEOs. In addition, several European airlines including Thomas Cook had just disappeared. Combined with earlier failures like Air Berlin, Finnair was getting good traction in markets like the U.K. and Germany, using its well positioned Helsinki hub and new A350s to provide convenient connections to and from Asia.
  
  Outbound Japanese travelers are another critical component of Finnair’s traffic base. The question now is whether East Asia, because it experienced the crisis earlier, will exit the crisis earlier. Finnair isn’t seeing a pickup in China or elsewhere yet, as expected given the international travel restrictions now in place. But it still sees Europe-Asia as a longterm growth market. It is seeing a modicum of shorthaul bookings but downplayed their significance. Management thinks 2020 will be a lost year but 2021 potentially profitable.
  
  “Normalized” profits, it said, won’t come until 2023. That will be aided by an expected increase in bankruptcies among rivals, and capacity cuts by all airlines. Norwegian’s 2019 cuts, remember, were already giving Finnair a boost. It expects to start flying in earnest again around July, starting with domestic service, then intra-Nordic regional, then Europe as a whole, then intercontinental. The latter will depend on when travel restrictions are lifted, but it does expect to be operating some longhaul routes this summer.
  
  For now, Finnair has most of its staff on temporarily furlough with government assistance. Politicians were quick to provide the airline with loan guarantees. It’s in advanced talks on aircraft sale-leaseback deals. And it just announced a new stock offering. So put Finnair in the category of airlines capable of surviving for a while with near-zero revenues. When the time comes to restore flying, or alternatively ground planes for longer, it says it can react pretty quickly thanks in part to flexible Finnish labor laws. It does expect to be a considerably smaller airline for a while. It will likely burn between $3m and $4m of cash per day this quarter. And soon, it will announce an updated business strategy, including new measures to make passengers feel safer and more comfortable flying.

• Cebu Pacific of the Philippines, sporting a low-cost business model since 2005, managed to escape the grim first quarter with just a negative 4% operating margin. But the extreme gravity of the Covid crisis becomes clear when considering that during last year’s Q1, Cebu’s margin was positive 18%. Indeed, it’s often among the world’s most profitable airlines, competing against the chronically troubled Philippine Airlines and AirAsia’s typically-unprofitable Philippine joint venture.
  
  Cebu’s Q1 revenues dropped by one-fifth, while operating costs fell just 4%, even as fuel costs fell 17%. A strong peso was another bright spot on the cost side. But it was small consolation amid a pandemic that forced Cebu to suspend all flying on March 19. Before that, it faced exposure to the virus in China, and then Korea, both important markets. Even on day one of the quarter, its important Hong Kong routes were suffering from political unrest. The carrier still filled 81% of its Q1 seats, which was only a few points down from its Q1, 2019 load factor. It boasts of a strong liquidity position and solid relationships with suppliers.
  
  If lucky, East Asia will recover from the crisis first, as easing virus infection rates suggest. At that point, it can resume progress on re-fleeting, which involves A321 NEOs to enable growth from congested Manila, ATRs to enable growth from smaller airports with short runways, and A330 NEOs, not so much for longhaul but for its busiest shorthaul markets. Cebu by the way, is a rare LCC with a big cargo business, even launching dedicated freighter flights last fall. Cargo revenues, however, did decline 20% in Q1.