IATA Calls for Coordinated Response, and Cargo Faces Capacity Crunch
- IATA gave its review of air traffic trends for April, the “disaster” month in which aviation all but came to a standstill. Measured by revenue passenger kilometers (RPKs), worldwide traffic was down 94% on 87% less ASK capacity. Mercifully, airlines operated 30% more flights in May than April, though the number was still down 73% versus last May. The markets farthest along in recovery are China, Vietnam, and South Korea, where domestic flight activity is now within about three quarters of where it was this time last year. New Zealand is showing signs of life domestically as well.
IATA said separately that domestic fares throughout the industry were down 23% y/y in May, though keep in mind that fuel and other costs were much lower too. Signs of rising business confidence, talk of “travel bubbles,” and spikes in travel searches on Google are all encouraging. But IATA still worries that governments will ignore newly published guidelines on getting air travel restarted. China’s airlines, by the way, saw domestic traffic decline 67% y/y in April, little changed from March. Their February traffic was down 85%. Capacity in China, it seems, is recovering faster than traffic, which isn’t much helpful.
- IATA is calling on the world’s governments to coordinate and adopt ICAO’s recommendations on mitigating the spread of Covid-19. ICAO recently issued what it calls a layered approach to ensuring air travel is safer. It recommends social distancing; face masks or coverings; routine sanitation of all passenger areas in airports and aircraft; health screening, including body temperature and what it calls “visual observation;” contact tracing; health declaration forms; and testing, when an accurate rapid-response test is available. IATA can’t say it enough: Without a coordinated approach by governments worldwide, air travel will not return as quickly as it could.
- Here’s an interesting problem. Cargo demand dropped by the largest percentage IATA has ever recorded: 28% in April compared with the year prior. But because the Covid pandemic caused the cancellation of so many passenger flights, IATA reported a cargo capacity crunch. There simply wasn’t enough belly-hold cargo capacity to meet cargo demand. Available freight ton kilometers fell by 42% in April, y/y. Although many airlines the world over are temporarily converting passenger cabins and flying cargo-only flights, this has not been enough to meet demand, IATA says. “The result is damaging global supply chains with longer shipping times and higher costs,” IATA Director General Alexandre de Juniac said.
- In 2019, American had the most disruptive labor relations of the U.S. Big Three. It had the most disruptive fleet problems, owing to its large B737 MAX exposure (NEO delays didn’t help either). It had the most exposure to the difficult Latin American market. But it also had the highest reliance on the U.S. domestic market, which is suddenly a major plus in the radically altered world of 2020. Last year, according to Cirium schedule data, 66% of American’s ASM capacity was domestic, compared to 63% for Delta and 56% for United. (Measured by revenues, the percentages were 74% for American, 72% for Delta, and 62% for United). Not a huge difference with Delta, but perhaps enough to give American a slight edge as the industry tries to recover from the current crisis.
Last week. American gave a rather bullish assessment of its recovery, one certainly more bullish than its worst-case scenario laid out in April. During the last week of May, it was carrying an average of 110k customers per day, up from just 32k per day during April. As expected, the driver of the increase is domestic leisure traffic, especially to Florida and the mountain region covering Montana, Colorado, Utah and Wyoming, all home to popular national parks. American also mentioned Gulf Coast cities (the biggest non-Florida ones being Houston and New Orleans), and three specific southeastern leisure spots: Asheville, N.C.; Savannah, Georgia; and Charleston, S.C. In response, American will restore flights to these markets, especially from Dallas DFW and Charlotte, its two largest hubs.
Southeastern states like Florida and Georgia, by the way, have been quickest to reopen their economies. Next month, American will fly 55% of the domestic capacity it flew last July. It’s also reopening airport lounges and further tempting travelers by offering double AAdvantage miles and waiving any change fees for flights booked in June. Emphasizing its sunshine state credentials as theme parks like Disneyworld re-open, American said it will offer more Florida seats than any other airline next month.
As for international service, American restored a few Latin and European routes last week, with a few more coming back now through early August. Big South American routes to Brazil, Argentina, and Chile won’t return until the fall, and Asian routes perhaps not until 2021. American’s faster-than-expected domestic recovery, incidentally, sent U.S. airline stocks up again last week. Sharply up (see stock chart below). Stocks also got a lift from signs in the employment market and elsewhere that the U.S. economy is starting to recover from its late-March and April collapse.
- Alaska Airlines, largely quiet since the crisis began, broke its silence with a virtual appearance at an online conference hosted by the Swiss bank UBS. CFO Shane Tackett said load factors rose to 40% in May, from 15% in April, with signs of ongoing sustained demand recovery. Cancellation rates are down. Fewer customers are asking for refunds. And people are actively searching for winter vacations, signaling lots of pent-up demand. Alaska is selling its full schedule of flights for the Thanksgiving and Christmas holiday season, though like other airlines, with the intention of ultimately cutting a lot.
Looking back, capacity for both April and May was down close to 80% y/y. June will be down 70% to 75%, which isn’t much of a change (American, you can see, is restoring flights more aggressively). Alaska is pleased to rely more on leisure traffic than business traffic, which will play well in the recovery. But it also reminds industry watchers that many of its bookings during the next few months will be credit sales rather than cash sales, in other words, people redeeming credits they’ve accrued from having their March, April, and May flights cancelled.
In a normal period, Tackett said, customers hold about $50m to $70m worth of outstanding credit in their e-wallets. The amount right now is more like $500m to $600m (Alaska’s total revenue last quarter was $1.6b). It could take a year or so, Tackett estimates, before returning to normal levels of cash sales. Credit sales, to be clear, will count as revenue when passengers actually redeem their credits for tickets and fly. It’s just from a cash management perspective that they won’t be helpful. Having so many outstanding credits could affect pricing and revenue management. More importantly, prices will likely be depressed amid a glut of empty seats.
Of course, the single biggest downward driver of average fares is lack of close-in business demand, hurting even a leisure-heavy carrier like Alaska. Being in Seattle could help, as resilient companies like Amazon and Microsoft (if not Boeing) recover quickly. The state of Alaska itself is largely Covid-free and the type of outdoorsy wilderness destination that’s showing popularity amid the pandemic. Interestingly, Tackett seemed to downplay Alaska’s once-vaunted ambitions in California. And he said California-East Coast transcon flying is currently the most depressed part of its network.
The airline is still full-speed-ahead on its new partnership with American and its intention to join the oneworld alliance. It’s eager to shed A319s and A320s inherited from Virgin America but likes its A321 NEOs — they can be a very profitable part of Alaska’s future. That said, moving back to an all-B737 mainline fleet is an option too.
Alaska, meanwhile, is still pursuing additional liquidity, including $1.1b it’s negotiating to borrow from Uncle Sam. It’s hoping to never have to use the money it borrows and will try to repay it as fast as possible. It still thinks its operations can stop bleeding cash by the end of the year. It does emphasize, however, with employees and other stakeholders in mind, that the extra cash can’t justify complacency. Alaska will still need to thoroughly cut costs, in other words. The sentiment to avoid, Tackett explained, is: “Oh, I’ve got a safety net. I don’t have to make as many of the tough decisions.”
- At the same UBS event, JetBlue’s CFO Steve Priest joined the chorus of U.S. carriers reporting some positive traffic momentum. The airline’s northeast-to-Florida market is a notable bright spot (with two-thirds of bookings originating from the northern end). Another is the family-visit Puerto Rico market from northeastern cities and Florida. Differing a bit from Alaska’s comments, JetBlue sees relative strength in transcon markets too. “What is actually hurting more than anything else,” Priest said, “is the very short-haul-type business,” pointing to markets like Rochester and Syracuse to New York City. In these sorts of drivable markets, people are mostly choosing car over plane. Corporate demand is “quiet” too, but about 80% of JetBlue’s demand is family-visit or leisure oriented.
One positive sign is a slowly normalizing booking curve, after about six weeks of seeing only very close-in bookings or very far-out bookings (i.e. for Thanksgiving and Christmas travel). Southwest, Priest said, might have higher load factors right now because it’s not exposed to northeastern markets like New York, where most businesses are still closed. JetBlue’s number one financial priority is decreasing its cash burn, which now stands at about $10m daily, from $18m in late March. More than 60% of workers are on voluntary leave. Capital spending will drop by $1.3b between now and the end of 2022. Cutting labor and maintenance costs are key priorities.
One thing it won’t do is “throw in a crazy amount of capacity just because we’ve seen a few green shoots.” The recent lift in traffic notwithstanding, revenues won’t get back to 2019 levels until 2022 at the earliest, Priest believes. But the crisis will present opportunities, just as the 2009 financial crisis opened doors for JetBlue in the Caribbean and Puerto Rico markets (where American downsized) and the transcon premium market.
- It’s down to two bidders for Virgin Australia. One is Bain Capital, working with former Jetstar CEO Jayne Hrdlicka and the other is Cyrus Capital, which has a long history of doing deals with Virgin Group founder Richard Branson — they teamed up to buy Flybe, for example, which later collapsed. Branson himself might contribute some money to keep some ownership in Virgin. A high-profile bidder now out of the running is Indigo Partners, owner of Wizz Air, Frontier, Volaris, and JetSmart.
At Qantas, meanwhile, management reports signs of heavy pent-up demand and big increases in customers booking flights and Google searching for trips. Normally, Qantas said, it plans capacity months in advance. But with so much uncertainty right now, it’s taking a more flexible approach. It added that flights can quickly ramp up in time for the July winter school holidays if border restrictions have eased by then.
- South Africa’s Comair, in bankruptcy, is unlikely to fly again before November. It’s not any government restriction on flying that’s holding it back. Instead, it’s a shortage of capital — an airline needs cash to restart operations. The carrier’s business rescue practitioners, equivalent to bankruptcy administrators, are currently negotiating with more than 30 potential sources of funding, with six of these “progressing.” Comair had a long history of money making, flying locally on behalf of British Airways, and for its own sake with the low-cost brand Kulula. Some of its most profitable activities included airport lounge rentals, aviation training, and other auxiliary businesses.
When it does return to the skies in November, assuming it gets the new capital it needs, it will do so with 14 fewer planes. That will take it from 27 planes to just 13 (or 16 counting three older B737-400s it will keep as spares). Employees are currently on unpaid leave, with layoffs pending. The entire rescue plan is expected to be finished by March 2021, at which point control of Comair will revert to its board of directors and executive team.
- Also highly relevant to Comair’s future, of course, is the outcome of negotiations to relaunch bankrupt South African Airways, which now seems more likely. Requests for more government rescue funds were rebuffed earlier this year. But politicians are reportedly having second thoughts. The carrier’s bankruptcy administrators plan to present a turnaround plan June 8.
- At a Bank of America conference for investors, the Brazilian LCC Gol stressed its staying power in the crisis, and the aspects of its business model that will help it recover in the nearish-term and thrive in the longterm. Number one, it says, is the airline’s predominantly domestic exposure with great slot access at the nation’s most important airports. It also cited its proven ability to tap underpenetrated markets within Brazil. Third is its popular Smiles loyalty program and other manifestations of a strong customer following. Fourth, Gol has a “a highly defensible, low-fare, point-to-point network.” Fifth is its track record in operational reliability, cost control, and liquidity management. Sixth, its singular fleet of versatile B737s, including the MAX. And finally, Gol points to its committed controlling shareholder, referring to the Constantino family, which originally founded the airline in 2001.
- Even in the best of times, Aerolineas Argentinas loses lots of money. But it usually avoids any difficult restructuring steps with the help of sustained government subsidies. During the current crisis, one of unprecedented severity, the airline is furloughing more than 7k workers for two months, though still paying three-quarters of their salaries. Unions, though, oppose the measure.
Aerolineas said its revenues are down 97% y/y, without much hope of reviving until September at the earliest. Only then will its government allow flights to restart, though the carrier is lobbying to operate some non-Buenos Aires domestic flights before then. Modestly helpful is the fact that June, July, and August are the offpeak winter months in Argentina. But some of the country’s mountainous areas in the Andes range depend heavily on winter ski tourism, near Bariloche and Mendoza for example.
Last month, Aerolineas was merged with state-owned Austral, a domestic-focused carrier. Now, according to Bloomberg, it could get at least $880m in government subsidies to cover its 2020 needs. It received $680m in subsidies last year. Its CEO, in an interview with Bloomberg, said it would be two years until demand would recover, and many years thereafter before the airline would make any money.
Aerolineas was privatized in 1990, sold to a Spanish tour operator after 9/11, and re-nationalized in 2008. It has made some important strides in recent years, in areas like fleet renewal. But its chances of becoming a strong airline were dashed by Argentina’s repeated financial disasters.