Air France/KLM Expects 2021 Flying Down 20% From 2019

• A troubled carrier in good times, Air France/KLM is an existentially challenged carrier in times like these. Or one would think. The first quarter of 2020 was indeed a nightmare for Europe’s second-largest airline group by revenues. Operating margin was a bloody negative 16%, with Air France’s figure alone negative 18%, and even the fitter KLM posting red ink equivalent to negative 13%. The group’s maintenance division lost a bit of money too. And Transavia, a highly seasonal airline in its slowest season, stained the walls red with a negative 34% showing.
  
  Awful numbers for sure. But thanks to generous state aid, Air France/KLM’s solvency isn’t in question, at least for many months to come. It received about $8b in support from Paris, with more help expected from Amsterdam. It’s not a handout, however. It’s money that the airline has to borrow and eventually repay, unwinding years of work to de-lever the company’s balance sheet. Part of the state aid, furthermore, is a direct loan courtesy of the French taxpayer (the rest is a mere guarantee to banks that will involve taxpayers only if the airline fails to repay). Paris also attached some strings to the aid, including mandates to withdraw some domestic flying so that more people travel by rail, a form of transportation with a lower carbon footprint.
  
  Many of Air France/KLM’s global peers, of course, will be similarly burdened with mountains of debt, much of it backed by governments. But few others have such a history of toxic labor relations, which could burst into evidence again as downsizing and cost cutting unfolds. It was finally making progress on the labor front last year, signing 37 new contracts filled with important reforms like more flexibility to expand Transavia France and (less important now) expand longhaul premium seating. The difficult tasks ahead, meanwhile, could further strain relations between the French and Dutch sides of the company.
  
  Details on exactly how the airline plans to navigate this ugly new world will come this summer, following completion of a new business plan. It will include a greater role for low-cost Transavia, at Paris Orly and elsewhere. It might also feature an earlier phaseout of A380s, B747s, and A340s. As it happened, 2020 actually started out fairly well, with unit revenues up y/y through February. Shorthaul markets were particularly strong thanks to MAX and NEO delays that left Europe with a capacity shortfall. Then came March, when the company suffered a mammoth $622m operating lost. That should have been the strongest month of the quarter. This quarter, it expects to burn through roughly $440m a month. Strong cargo demand between Europe and China is a small but welcome bright spot. But overall Q2 capacity will be down some 95% (Transavia is completely grounded). Even in 2021, Air France/KLM expects to be flying 20% less than it was in 2019. 

IAG Begins to Map Out Restructuring Plans

• IAG’s Q1 results weren’t quite as bad. It was after all a far more profitable airline group than Air France/KLM was before the crisis. But pre-crisis profitability is ancient history now, and IAG too is amassing great losses and bleeding cash. The owner of British Airways, Iberia, Vueling, Aer Lingus, and Level reported a negative 12% Q1 operating margin, with official net losses almost matching Air France/KLM’s in severity. That’s mostly after accounting for its bad fuel hedges.
  
  Excluding such accounting items, net loss was $618m, compared to an $80m net profit ex items in last year’s Q1. Its Q1 operating margin last year was 3%, powered by an 8% figure at British Airways. Even with bad hedges, IAG enjoyed a 12% y/y drop in its fuel bill last quarter. But much of that was due to an 11% ASK capacity cut, reflecting the effective shutdown of European air travel in March. January and February weren’t bad, just “slightly lossmaking” for what’s a very offpeak time of the year. In fact, the first two months of 2020 were no worse in terms of loss margins than the first two months of 2019, despite the early onset of Covid-19 in China, a market served by BA and Iberia both.
  
  Vueling, for its part, didn’t do all that worse y/y even including March, though don’t get too excited about that — its operating margin was negative 28% (it’s a super-seasonal airline). Aer Lingus, another seasonal airline, did even worse at negative 30% (yikes). Iberia’s heavy exposure to Latin America, which saw a late onset of the crisis, allowed it to escape Q1 with just a negative 8% margin. British Airways, however, the group’s biggest breadwinner pre-crisis, saw the biggest y/y margin declines post-crisis — its Q1 figure was negative 11%. For the group, revenues dropped 13% y/y while operating costs only fell 1%.
  
  In one respect, IAG’s pre-crisis history remains highly relevant. It did after all begin 2020 with a strong balance sheet. Going farther back, to the early 2010s, it undertook difficult and far-reaching structural reforms much earlier and more effectively than its Big Three peers. CEO Willie Walsh, who postponed his retirement until the fall, wants to be early and forceful again in implementing the new set of reforms necessary to deal with the current collapse in demand. Demand, he says, won’t return to 2019 levels until 2023 at the earliest. Of course, he needs to present a gloomy outlook as he asks unions for mammoth concessions, including thousands of job cuts. He’s already approached BA unions, in deference to British labor laws.
  
  But IAG stresses the need to restructure all of its airlines, not just BA. Might BA even close its base at London Gatwick? Sounds like a not-so-veiled threat to unions, receiving a message that Gatwick will go if concessions don’t come. Other questions include whether Level will survive, and whether IAG will follow through on its acquisition of Spain’s Air Europa — Walsh says the deal still makes strategic sense but at a lower price, as their contract allows in the event of a demand shock. For now, operating costs have dropped from $490m a week to $220m, with ASKs down about 90% this quarter.
  
  Next quarter, it hopes the drop will be just 55% as countries lift lockdowns and ease travel restrictions. Its best guess for now is that Q4 ASKs will be down 30% y/y. IAG won’t have a cash shortage anytime soon, with billions on hand and capacity to raise more. It’s doing well with cargo. Governments are providing credit and wage support. The group will take 68 fewer planes this year and next, relative to its original fleet plan. It has lots of aircraft leases expiring in the years ahead, giving room to cut more capacity if needed. It prefers to fly latest-generation planes like B787s and A350s. Like the rest of the industry, it’s adopting new cleaning and other procedures to help curtail the virus. But it doesn’t expect a meaningful return to service until July at the earliest. Even then, management doesn’t think consumers will respond to low fares for a while.
  
  Ultimately, people will travel for business again—Zoom calls won’t cut it. And even now, some corporate customers are telling IAG that they’re ready to fly again when safe. There will be lots of industry restructuring, Walsh thinks. And more mergers and liquidations. Others will downsize a lot, as Norwegian already is. The fate of BA’s longtime rival Virgin Atlantic, meanwhile, is a big question. IAG supports government aid to help ailing airlines, but not aid tailored to specific companies, Virgin or otherwise.   

Emirates Announces 32nd Consecutive Profitable Year

• In Dubai, Emirates announced a 32^nd straight fiscal year profits, the latest amounting to $456m for the 12 months that ended in March. The period of course included the onset of the Covid crisis in the final weeks of March, as well as a six-week runway closure at Dubai airport last spring. Only 63% of the net profit came from Emirates the airline; the rest came from its Dnata ground handling and catering unit. For just the winter half — October of last year through March of this year — the Emirates airline division earned a respectable 6% operating margin. Cheaper fuel was a big help. And demand conditions were generally strong before cratering in mid-February.
  
  The airline did suffer cargo weakness long before the crisis started. And competition was intense. Another stress point was the strong dollar, which eroded the value of its revenue from markets throughout the world. Emirates has the most exposure to Europe, but its route network is well diversified geographically, an attribute it hopes will serve it well during the Covid recovery. It ended March with $7b in cash. And it’s the prized asset of Dubai’s government, which would never let it fail. Emirates last year confirmed orders for both 50 A350s and 30 B787s, putting it on a path toward downgauging its all-widebody fleet. But it will be years before A380s leave the fleet, which is a big problem. The planes are uneconomical even in times of robust demand, as the many airlines dumping them attests.
  
  Emirates thinks it will be at least 18 months before some “semblance of normality” returns to the airline business. As a reminder, it was one of several Gulf carriers to expand voraciously after the global financial crisis of 2008-2009. But it then began shrinking in the latter half of the 2010s, a rough period for commodity export regions like the Middle East. Will globalization ever be what it was pre-crisis? That’s a question of great importance for Emirates.

Grim Financial News From North America

• Air Canada shed plenty of its own red ink during Q1, a period typically slow for the airline even in good times. In 2019, a year in which it earned a pretty good 9% operating margin, its figure during just the January-to-March period was 3%. The start of this year, however, is a whole new level of awfulness. Air Canada’s Q1, 2020 operating margin was negative 12% as revenues dropped 16% y/y on 10% less ASK capacity. Operating costs fell just 4%, driven by a 16% decline in fuel outlays.
  
  Canada’s airlines share all the gloom of their U.S. neighbors, and then some. They also face the challenges of a weakening currency, an economy heavy on oil production, less generous state aid, and in Air Canada’s case greater exposure to Asian markets and international markets more generally. It was forced to end its mainland China service (three routes to Shanghai and two to Beijing) as early as Jan. 29, this after suffering weakness on its two Hong Kong routes throughout much of 2019. By April 21, all flights even to the U.S. were suspended, an unthinkable state of affairs given how tightly Canada’s economy is integrated with its southern neighbor. Systemwide capacity this quarter will likely be down as much as 90%. Next quarter’s decline should be about 75%.
  
  You know things are bad when Air Canada of all airlines says the current pancession is much worse than any past crises it’s ever experienced. It went bankrupt after all, during the SARS epidemic of 2003. It nearly went bankrupt again during the global financial crisis. Can it avoid bankruptcy now? Fortunately, it began 2020 in much better financial health than it’s ever been, highlighted by its near-investment grade credit rating. It ended Q1 with nearly $5b (USD) in unrestricted cash, plus plenty of valuable assets it can still use as collateral for future borrowing. These include airplanes like B787s, its now-wholly-owned loyalty plan and Air Canada Vacations.
  
  Just as important are the carrier’s cost cutting, its investment freeze, and other measures to reduce a daily cash burn of about $16m in March. More than half of its work force was furloughed, supported by government wage subsidies active through early June. January and February were in fact “solid” months before the wholescale demand collapse came in March. Despite the heavy emphasis on preserving cash, Air Canada is proceeding with plans to upgrade its reservation system and related software to the Amadeus suite of products. It’s proceeding as well with plans to revamp its Aeroplan loyalty program, though at a slower pace.
  
  As of now anyway, it’s business as usual on a planned takeover of Transat, though executives refused to speak on the matter, referring to an upcoming ruling by competition authorities (perhaps it hopes for a rejection now, as an excuse to abandon the deal). It will still take A220s and B737 MAXs — Boeing provided compensation for the latter’s lengthy grounding. On the other hand, 79 older planes will retire, namely B767s, A319s, and E190s.
  
  Rouge, Air Canada’s low-cost affiliate, will be most affected, shrinking in the near-term to a narrowbody-only fleet. The fleet reductions reflect expectations of revenue and capacity taking at least three years to again reach 2019 levels. Management is now working on a restart plan, which features a new set of practices it’s marketing as Air Canada Clean Care Plus, incorporating concepts like social distancing throughout the airport and onboard airplanes. Further cost cutting remains a priority, focused on five areas: labor costs, technology, real estate, maintenance, and its regional flying contract with Jazz. It will soon operate 150 all-cargo flights per week. It’s adopting a new shareholder rights plan, a measure typically designed to thwart takeovers though management denied this was the motivation.
  
  Air Canada still hopes to win some government financial relief. It does see domestic demand returning soon, followed by transborder U.S. demand whenever travel restrictions are removed — many Canadians after all have second homes in places like Florida, Arizona, California, and Nevada (some are even quarantining there currently and will want to return north for the summer when possible). Intercontinental demand, a major building block of Air Canada’s rise to strength in recent years, will take longer to recover.  

• In the U.S., Alaska Airlines reported a negative 9% Q1 operating margin, its first quarterly loss in more than a decade. ASM capacity declined just 1% y/y, but revenues dropped 13%, compared to a 2% decrease in operating costs. In mid-February, remember, just as the world was about to fall apart, Alaska was celebrating a renewed alliance with American, tied to its own accession to the oneworld alliance (planned for 2021). The idea was to help Alaska offer its customers more intercontinental service, improve its loyalty plan, attract more corporate fliers, enable greater traffic growth, enhance its credentials in the giant California market, and better compete with the mighty Delta in Seattle.
  
  The arrangement remains relevant, but not right now. The only thing that matters right now, as the Bee Gees would say, is staying alive. The group (Alaska, not the Bee Gees) is currently burning about $260m a month, or about $9m a day. Management hopes to bring that to about $200m a month by June and reach cash breakeven by year end. What demand will look like by year end is anyone’s guess. Starting March 11, cancellations began surpassing gross new bookings for the first time in company history. That’s still the case today, two months later, though the largest wave of cancellations “appears to be behind us.” Passenger volumes are still down about 90% below normal levels this time of year. That said, some modest week-to-week bookings improvement is now evident.
  
  But it doesn’t see demand coming back in any meaningful way until West Coast states begin removing their stay-at-home orders and businesses start to open again. Even if demand stayed at zero though, Alaska could sustain its current daily cash burn and still remain solvent for more than 11 months. If demand does inch up, and as daily cash burn eases with cost cutting, Alaska’s breathing room will further increase. It fortunately entered the crisis with an excellent balance sheet. And helpfully, Washington and California, its two largest state markets, were early to impose lockdowns, which has helped avert a New York-like catastrophe. Seattle, Alaska’s home city, experienced America’s first Covid-19 outbreak. And it could be among the first to get it under control as it resists the temptation to reopen prematurely. The city also happens to be home to still-thriving tech firms like Amazon and Microsoft (albeit troubled Boeing as well).
  
  Alaska is of course getting financial support from the other Washington — nearly $1b in payroll support. In the meantime, it’s taking advantage of the demand lull to accelerate the retraining of A320-family pilots into B737 pilots. It’s taking a fresh look at fleet renewal plans while ridding itself of Virgin America’s old A319s. It was never as disrupted as Southwest, American, and United by the MAX grounding, simply because it wasn’t supposed to have that many last year. It’s now talking to Boeing about how many it will get, and when, in the future.
  
  Alaska was one of the winners in the aftermath of the 9/11 and financial shocks. It built a thriving Hawaii franchise, expanded transcontinentally, rode the west-coast economic boom, bought its way to prominence in California via Virgin America, built a lucrative loyalty plan, and so on. One thing it didn’t do during the past few years was mimic its transcon rivals in outfitting planes with lie-flat seats. The decision proved hurtful for a time but could prove a blessing now that premium corporate demand appears destined for years of dormancy. That’s one reason for hope, anyway, following four months in which Alaska burned through nearly half a billion dollars in cash.

• JetBlue began its Q1 earnings call with a moment of silence for six employees who died of Covid-19. The carrier is based in New York, the epicenter of America’s Covid crisis, which also happens to be America’s largest city and largest metro-area economy. JetBlue’s Q1 red ink was characterized by a negative 8% operating margin, with revenues falling 15% y/y on 4% less ASM capacity. Operating costs dropped 4%. In recent years, JetBlue fortuitously prioritized balance sheet improvement, enabling it to enter the crisis with what it called the second-strongest balance sheet among U.S. airlines (after Southwest).
  
  Last week, it raised more cash by selling some of its frequent flier miles to its credit card partner Barclays. It also cut its capital spending budget for 2022 by more than $1b after working with Airbus to downsize its fleet plans. As for daily cash burn, the daily outflow was as high as $18m in the second half of March. The number averaged $12m in April. May should be down to $10m. And a rate of between $7m and $9m is in sight. These figures by the way do not include cash proceeds from the federal CARES Act, used exclusively to pay workers through September.
  
  After safety and health, minimizing cash burn is JetBlue’s top priority for now. But it’s beginning to look ahead about how it might position itself to succeed in the post-crisis environment. It’s still operating just 100 or so flights a day, compared to about 1,000 normally. More than 60% of employees have taken at least some sort of voluntary time off. Most of its customers right now are people travelling for essential needs, i.e. health care professionals on the front lines of the crisis. Load factors last month averaged between 10% and 15%. Revenues were down 95%. The good news is that bookings are improving and cancellations moderating, if just a bit. And JetBlue feels well-positioned for recovery given its predominantly leisure and family-visit base of customers. It wants the broader travel industry to work together to help stimulate a return to travel.
  
  Does JetBlue still want to fly to London? Yes, but probably later than its original 2021 plan (regulators are still scrutinizing the competitive effects of the American-British Airways joint venture, with implications for potential new entrants like JetBlue). It’s still excited about incoming A220s. Other aspects of its pre-crisis strategy, however, like a new partnership with Norwegian, no longer have much relevance. In any case, JetBlue like the rest of the industry will emerge from the Covid crisis with much higher levels of debt and lower levels of demand. How much lower? Executives insist that nobody knows. Said CFO Steve Priest: “Anyone who says they know how this is going to play out is lying.”

• Here’s the good news for Hawaiian Airlines: Its home state, in the middle of the Pacific Ocean, is about as close to Covid-free as any place in the country. But there’s insufficient Covid testing capacity (the cardinal shortcoming in America’s response to the crisis) and a 14-day quarantine for all visitors, essentially closing the state’s vital tourism sector. Hawaii is just now starting to ease restrictions on economic activity within the state, which could result in some inter-island travel before long. But the airline itself warns against relaxing restrictions “too soon and too fast,” worried about having to reimpose curbs and cause longterm damage to consumer confidence. Only when the quarantine is removed however, will visitors from the mainland U.S. start coming again. And only when international travel restrictions are removed will people start coming from Japan and elsewhere.
  
  Hawaiian, remember, generates most of its revenue from outside of Hawaii, including places like the U.S. West Coast whose big tech firms are holding up rather well through the crisis. Looking back now at Q1, Hawaiian reported a negative 8% operating margin, not too bad given the circumstances. Unusually, its ASM capacity was still higher this Q1 than last, rising 3%. With cheaper fuel, operating costs nevertheless declined 1%. But revenues plummeted 15%. Like all major U.S. airlines, Hawaiian should be O.K. for a while in terms of adequate survival cash. For that thank its healthy pre-crisis balance sheet, its collection of valuable assets including A321 NEOs, help from Uncle Sam, available bank credit, and success so far in removing costs.
  
  On the other hand, Hawaiian is currently burning through some $3m in cash per day, excluding federal payroll funding, capex, and refund payments. Speaking of which, it refunded more than $40m to customers in March and about that same amount in April. For Q3, booked load factor is in the mid-20% range; normally at this time, more like 35% of Q2 seats are already booked. Final loads could show much greater y/y declines because cancellations are more likely this year. Hawaiian, to be sure, had a good 2019, earning an 11% operating margin. This was however one of the lowest figures among U.S. airlines, and a far cry from the 19% it earned in 2017, for example, when it was the second-most profitable airline in the world after Ryanair.
  
  Southwest’s Hawaiian arrival was a major challenge last year. This April, it signed a new flight attendant contract negotiated when market conditions were still favorable. As for the joint venture it wanted to form with Japan Airlines, the DOT again (in March) rejected their bid for antitrust immunity. Hawaiian doesn’t expect a lot of capacity to leave Hawaii as demand recovers. Muscular rivals like the Big Three and Southwest after all, will probably push more of their capacity to domestic leisure markets. Nor is this like 2008, when Hawaiian had a close rival — Aloha Airlines — file for bankruptcy and disappear.
  
  In any case, Hawaiian is applying for $364m in federal loan money and has about half of its workforce on some sort of voluntary leave or work reduction. Having flirted with upping its B787 order before the crisis, it’s now thinking of pushing back delivery of its first arrivals. Much of its existing fleet is rather new, so it won’t be prematurely retiring anything other than a lone B717. It could take down utilization if necessary though.  

• With lots of shorthaul leisure and family-visit traffic, Spirit could be well positioned for the eventual upturn, whenever it comes. But for now it’s wallowing in losses like everyone else, registering a negative 8% Q1 operating margin. It in fact saw the most severe y/y margin deterioration of any U.S. airline as revenues plummeted 10% but operating costs increased 8%. Fuel costs were down 7% on 2% less ASM capacity. But Spirit’s labor costs ballooned by 18%. As recently as Q4, Spirit had grown ASMs 17%, which required an expansion of its workforce. But it couldn’t just remove the costs of that expansion overnight as it abruptly grounded planes in March.
  
  As a Florida-based airline with heavy reliance on the state’s tourism sector, Spirit is eyeing the day when theme parks like Disneyworld reopen. It also flies to many Caribbean and Latin markets currently closed due to travel restrictions. Until things reopen, the ultra-LCC is evaluating whether to take a government loan. It implemented a new shareholder plan to block any potential takeover attempts. It’s talking to Airbus about restructuring its ordering book, having unluckily placed a big NEO order just last year. It sees aircraft deliveries from now through 2021 falling about 20% from its original plan. Daily cash burn is about $4m a day. Even with federal rules requiring airline aid recipients to maintain service to most of its U.S. cities, Spirit’s is only operating at 5% of its planned capacity right now. For the summer, it aims to err on the side of offering too little capacity, willing to forego any demand that might return faster than expected. It just wants to focus on getting as much cost out of its system as possible.
  
  Ultimately, though, it intends to bring back service to all of the destinations it previously served, including those beyond U.S. borders. It mentioned the potential ability to grow from airports that were previously capacity constrained. Overall growth will surely be subdued in the next year or two however, and that will put pressure on Spirit’s unit costs, a critical metric for an LCC. But executives don’t foresee the big structural change in traveler behavior that other airlines have discussed.
  
  Yes, “it will take some time for people to regain their confidence and to get comfortable traveling generally.” But CEO Ted Christie adds: “We don’t think it represents a change in the way the business will work down the road.” Looking at bookings right now, volumes, loads, and fares are up slightly from their low points last month. Florida’s early lockdown relaxation is providing some momentum. Spirit, however, does not carry any cargo, even in the bellies of its passenger flights.    

• Spirit’s like-minded rival Frontier, also an ultra-LCC, had a pretty good 2019, in case anyone still finds that relevant. Data released by the Transportation Department’s Bureau of Transportation Statistics (BTS) last week showed a 12% operating margin for the year, including a 10% operating margin for just the fourth quarter. It marked a big Q4 turnaround as revenues rose 18% y/y but operating costs, helped by cheaper fuel, stayed flat.
  
  The story was similar for Sun Country, another privately held LCC whose Q4 financials appeared in last week’s BTS release. They showed a 7% Q4 operating margin, and a 12% operating margin for all of 2019. An improvement no less impressive than Frontier’s was evident, as Q4 revenues rose 17% while operating costs increased just 4%.
  
  Again, these are Q4 numbers, not Q1 numbers. BTS won’t publish those for Frontier and Sun Country until June.  

And Elsewhere…

• Brazil, now experiencing a surge in new Covid cases, was late to lockdown. Its airlines, therefore, didn’t start dramatically grounding planes until the second half of March. It was March 24, in fact, when Gol implemented its current skeletal domestic-only schedule with just basic connections covering state capitals and Brasilia from São Paulo Guarulhos. So most of Q1, which is peak season in Brazil, and which features the Carnival holiday, behaved rather normally.
  
  And normal is good for Gol, if by normal one means the incredibly benign supply and demand condition that existed for Brazilian carriers in the wake of Avianca Brasil’s collapse. Gol’s 19% operating margin last year was third best worldwide after Allegiant and Air Arabia, both much smaller LCCs. No surprise then, that even with the crisis tainting the final weeks of March, Gol’s Q1 operating margin this year was a solid 7% (revenues down 2% y/y, operating costs up 10%). That’s excluding one-off gains from sale-leaseback deals and Boeing MAX compensation (include all special items and operating margin was a stratospheric 33%).
  
  Foreign exchange was again a devil though, causing a heavy official net loss. Indeed, the Brazilian real has sharply lost value versus the dollar during the crisis, which has decimated Brazil’s crucial commodity export sector. The crisis-prone economy, which was showing signs of recovery earlier this year, now stands to suffer an even deeper contraction than the one it endured when commodity prices last collapsed in late 2014. The silver lining for Gol is that it has lots of experience managing through economic shocks, and it enters this crisis in relatively durable shape. It thinks it has sufficient cash to last it through the end of this year even if demand stays where it is. A lot of payments to suppliers and other stakeholders are currently deferred or in some cases waived. The airline received compensation from Boeing for the MAX grounding, while separately cancelling 34 of its MAX orders. Last quarter, ASK capacity dropped 4%. This quarter, ASKs will be down about 80%, or 75% domestically. Revenues should be down more like 70%. Cash burn should drop from roughly $50m a day at the start of April to about $20m by the end of June.
  
  More cash will likely become available through Brazil’s government development bank, though perhaps on costly terms (unlike the cheap loans U.S. airlines have access to). Even right now, load factors are in the 80% range, on greatly reduced capacity of course. Demand, to be clear, remains very weak. A sizeable part of its passenger base is government officials and big commodity companies like Petrobras and Vale. The flights it is flying right now are cash positive. And this month, it will gradually add back service to markets like Iguazu Falls, Navegantes, and the downtown airports of São Paolo and Rio (Congonhas and Santos Dumont). Management doesn’t think international markets will start opening until Q4.
  
  On its list of longer-term concerns is the 10 minutes or so of extra aircraft turn time that new cleaning procedures entails. Gol has bad fuel hedges too. It was forced to cancel its scheme to take control of its Smiles loyalty plan. On the other hand, it claims to have the lowest unit costs of any carrier in Latin America, which will serve it well in times of economic distress. When the crisis does pass, it will have a new partnership with American in place, and a new maintenance division to develop. Gol sees “many months” of recovery ahead. But it’s confident the crisis will eventually pass.  

• Like Gol, not to mention Volaris farther north in Mexico, Panama’s Copa felt the onset of the Covid crisis later than carriers elsewhere (the outbreak started in China, then spread to other parts of East Asia, then to Italy and other parts of Europe, then to the U.S., and only after that to Latin America). Copa in fact suspended all flying just 10 days before the first quarter ended. So like Gol and Volaris, it managed to make money in Q1, which also happens to be a peak period for much of Latin America.
  
  To be clear, Copa didn’t just make money in Q1. It made a lot of money. How much? $100m in operating profits, which translated to a 17% operating margin, exactly what it earned in last year’s Q1. Sure, revenues dropped sharply without those last 10 days of flying — they fell 11% y/y. But operating costs fell 11% as well, on 14% fewer ASMs. Fuel costs dropped by one-fifth. It’s probably safe to say that no other airline will come even close to matching its Q1 profit margins.
  
  Q1, however, was Copa’s last hurrah for a while. It won’t escape the ravages of the current quarter. Uncomfortably, it’s a mostly international airline at a time when borders are closed. Key markets in South America face enormous economic upheaval as their currencies plummet. Avianca, which filed for bankruptcy last week, was supposed to be a partner in a promising joint venture with United. It’s not getting (nor does it want) any aid from Panama’s government. Brazil and Mexico, two important markets for Copa, have kept their economies relatively open during the crisis, but are now seeing Covid cases spike; this might also make them late to recover.
  
  Nevertheless, Copa is confident it can weather the storm with its strong balance sheet, newly-raised cash, and cost cutting. More than 800 of its workers have opted for retirement or voluntary separation packages. More than 700 have taken voluntary six- or twelve-month unpaid leave. More than 90% of management and administrative workers have taken voluntary 50% pay cuts. Copa hopes to get flying again on June 1, sporting a fleet of just B737-800s and B737 MAX 9s — no more B737-700s or E190s, the latter designated for exit even before the crisis. It does have Wingo, a low-cost carrier in Colombia, as a potential growth platform in the new environment. It has eyes on developments at Avianca, a close rival as well as future partner. MAX problems, a big headache in 2019, are less of a concern in 2020, though it still wants the planes. It also wants compensation from Boeing, talks for which are ongoing. Some of Copa’s MAX 9s by the way, have lie-flat seats for longhaul routes like Buenos Aires and San Francisco; there’s no plan to do away with this product.
  
  Under its worst-case scenario, which assumes zero revenues, the airline thinks it will burn around $85m in cash per month. If it can sell some seats as it gradually returns to service, monthly cash flow should ease to around $70m for the remainder of 2020. Unit cost pressure will no doubt be a factor as it shrinks. But it also sees the demand shock shrinking the number of city-pairs up and down the Americas that can support nonstops, creating greater need for a connecting hub like Panama. 

• Troubled Icelandair, which lost money in 2018 and 2019, certainly won’t make money in 2020. The question is, can it survive 2020? The answer is probably yes, assuming it secures more concessions from stakeholders including unions, which could earn it government credit support. The company is also converting some debt to equity, selling new shares, divesting assets, and integrating its Air Iceland regional unit. Boeing compensation for its MAX woes is helpful. So is strong demand at its cargo unit. January and February, as it turns out, saw improved y/y results. But it always loses money in the winter, aside from the $181m hit it took from the Covid demand shock last quarter.
  
  In the end, Icelandair was left with a devasting negative 44% Q1 operating margin, with revenues down 16% y/y, operating costs down just 2%, and ASK capacity down 21%. Fuel costs only fell 1% but labor costs dropped 17%. The airline remains hopeful that Iceland will again be a tourist magnet, and again a busy connecting point between Europe and North America. Besides, other Nordic rivals including Norwegian and even SAS are greatly downsizing, which follows last year’s collapse of Iceland’s other hometown airline,  Wow Air.
  
  Icelandair, by the way, also owns a 36% stake in Cape Verde Airlines, which unsurprisingly incurred Q1 results that were “below expectations.” The African carrier is itself now seeking new long-term funding.   

• The U.S. regional giant SkyWest isn’t exposed to the same revenue risk as most airlines — its partners take most of the initial hit when demand implodes. So it managed to emerge from Q1 with a positive 9% operating margin, not far off its 13% figure for the same quarter last year. But now that the Big Three and Alaska are flying just minimal schedules, SkyWest too is flying much less. In April, it operated fewer than 900 daily departures, compared to the 2,500 it planned to fly
  
  It’s now working with partners on accommodating their downsizing plans. In some cases, jets with 2020 contract expirations won’t get renewed, including 55 CRJ-200s currently flown for Delta. Also gone will be seven CRJ-200s flying under pro-rate terms with American (under this arrangement, SkyWest itself assumes pricing and scheduling risk). Pro-rate flying accounted for just 14% of SkyWest’s Q1 partner flying revenues.
  
  The company participated in CARES Act relief, both collecting payroll support aid and applying for a loan. While some of its regional rivals like Mesa avoided having to give Washington ownership warrants in exchange for its aid, SkyWest was too big to qualify for this exemption. One reminder: SkyWest deliberately shrank itself last year by selling its long-troubled ExpressJet subsidiary to a new entity co-created by United.

Global Airline Scoreboard: Q4 2019

• Brazilian carriers end the pre-Covid era on a big high