IATA: Industry Will Lose $84b This Year
- IATA now thinks the global airline industry will lose a massive $84b net this year, and another $16b in 2021. Operating margin this year will be something like negative 23%, and next year negative 4%. The last year in which airlines collectively lost money was 2009, when the red ink was only $5b. The year prior (2008), net losses amounted to $26b. Next year’s recovery should see revenues rise 42% from their extremely depressed 2020 levels, IATA forecasts. But that will still leave it 29% below 2019’s level. Remarkably, cargo will account for a full quarter of entire industry revenues, double its typical share.
Obviously, jet fuel prices are a big unknown, with the power to greatly influence industry results. IATA for now is assuming a per-barrel price next year of $52, which is similar to 2016’s average, and the lowest average annual price since 2004. That’s helpful. So is the $123b in government aid airlines have received this year, though a good $70b of that will need to be reimbursed. Less helpful is the $120b in new debt carriers have amassed since the crisis began.
Oh, in case you’re wondering: The global airline industry’s best year ever, by IATA’s count, was 2015, when operating margin nearly hit 9%. It was similar in 2016 as well, another year defined by cheap fuel. As IATA always reminds though, profits aren’t distributed evenly across the world, with U.S. carriers responsible for a large chunk in recent years.
- Intra-E.U. travel can begin again on Monday as the European Commission lifts restrictions. The bloc is calling on its member states to ease rules in the Schengen area and to roll back quarantine requirements. The E.U. said its member states have coordinated a layered risk-based approach to screen travelers and to ensure public health, spearheaded by EASA and the European Centers for Disease Control. This is the approach IATA has called for worldwide, and the group lauded the E.U.’s move.
IATA and ACI-Europe note that European airports and airlines have taken measures to ensure public health at every step of the journey. Less-restricted travel outside the E.U. is expected to begin on July 1.
- This has not played out across the Atlantic, however. The U.S. and Canada are expected to extend their border closure until late July. The restrictions were earlier expected to end on June 21. Canada has reported a slowing in its Covid pandemic, but hotspots in Toronto and Montreal remain, and the U.S. has suffered close to 115,000 deaths from the disease. The border is closed for nonessential travel, but trade continues. Employees may cross the land border to get to work. Separately, Canada has required temperature screenings for all air passengers.
- Ishka, an aviation consultancy, compiled a “watch list” of airlines it deems financial vulnerable. The current list shows 10: Virgin Atlantic, Lion Air, El Al, Interjet, Aeromexico, Air Europa, AirAsia X, SpiceJet, Go Air, and Sriwijaya. Fourteen airlines are already in bankruptcy: Latam, Avianca, South African Airways, SA Express, Thai Airways, Virgin Australia, Air Mauritius, Comair/Kulula, TAME, and a collection of smaller carriers (CityJet, LGW, Ravn Air, Bek Air, and Miami Air).
- Whoever thought Delta, of all airlines, would be in danger of breaching its loan covenants? More specifically, the carrier doesn’t think it can meet certain metrics measuring its ability to cover fixed costs, including debt repayments. A violation, it thinks, could occur early next year. So it’s now talking to banks about relaxing the covenants.
Last week, it returned to the bond market for yet another dose of new capital, having raised more than $10b in new financing since the current Covid crisis began in March. The funds have primarily come via bond issuance, bank borrowing, aircraft sale-leasebacks, and government payroll assistance. If needed, the company still has another $6b to $7b worth of mostly aircraft to use as collateral for additional money. It can avail itself of a government loan too. Bankruptcy is thus not a concern.
More of a concern is Delta’s international partnership strategy. Allies like Latam and Virgin Australia are already in bankruptcy. Virgin Atlantic could be next. Aeromexico is fighting to stay liquid. Air France/KLM and Korean Air needed giant government bailouts. Delta paid nearly $2b for a 20% stake in Latam last year, a stake that could soon be worth nothing. It separately has legacy loan guarantee commitments to an old partner, Latam’s rival Gol.
In any event, the recovery back home is mercifully underway, if at a very early stage. Delta said last week that recent improvements in booking trends, as a well as a stabilization in refund requests, has it on track to lower its average daily cash burn to about $40m by the end of this month. It was closer to $100m at the start of the quarter. Revenues for Q2 though, will be down 90% y/y on 85% less ASM capacity.
In interviews with ABC News and the Mike Milken podcast, CEO Ed Bastian emphasized the many measures Delta is taking to ensure that flying is safe. It’s been more aggressive than others in fact, about blocking middle seats and capping load factors. In the first week of June, Delta was flying roughly 45k to 50k passengers a day. And the numbers are trending up. In his interviews, Bastian separately spoke about Delta’s three key priorities of 1) protecting the health of its workers and customers, 2) protecting its cash, and 3) protecting its future. He also said airfares will likely remain low for a while. Airport renewal projects in cities like Los Angeles and New York continue, with work in fact accelerating now that passenger volumes are so low.
Another topic of high priority for Bastian is advancing Delta’s efforts to promote racial equality. The airline’s home city Atlanta, as it happens, played a crucial role in America’s civil rights movement, producing many of its top leaders. (Martin Luther King Jr. himself was born there). Delta too had a role in the movement, providing crucial air links for activists as they campaigned throughout the south.
- American, holding its annual shareholders meeting, said it’s carried 127k passengers per day so far in June, up from 87k per day in May, and just 32k per day in April. The demand recovery, in other words, continues, but with a long road still ahead. In terms of load factors, American has filled 58% of its seats so far in June, up from May’s 45% figure, and April’s figure of just 15%. Just counting domestic flights, American’s June-to-date load factor is at 62%. The relatively welcome numbers are enabling lower rates of cash burn than originally feared. They’re also prompting the airline to restore about 40% of its July schedule, or 55% excluding international.
That’s considerably more than what Delta or United currently expect to fly next month, which could reflect American’s more domestic-oriented traffic base. Not only does it fly a greater portion of domestic ASMs than its peers. Its domestic flights are in many cases filled with fewer international connecting passengers. An American Charlotte-to-Florida flight, for example, will typically have fewer international connecting passengers than a Delta Atlanta-to-Florida flight.
Current July schedules according to Cirium show American’s seat capacity from Charlotte down 36% y/y. Dallas DFW is down 39%. Its Chicago ORD, Miami, Philadelphia, Phoenix, and Washington DCA hubs by contrast, are all down close to 50%. Los Angeles LAX is down 67%. And Delta? Most of its hubs are down around 60% y/y next month, in terms of seats. The notable exception is Salt Lake City (a gateway to several national parks), which is down just 39%. United doesn’t have any of its hubs down by less than 65%.
- Allegiant said its May load factor was 47%, as it continues to see “material demand improvement” from April lows. It’s now averaging more than $2m in gross bookings per day, helping to reduce Q2’s average daily cash burn to just $1.75m. It previously expected the figure to be $2.1m, based on $750k in daily gross bookings. Note that fuel prices, however, are up from their extreme April lows.
Interestingly, Allegiant said it accounted for 8% of all Memorial Day weekend fliers in the U.S., compared to 2% for the same holiday weekend last year. In the first week of this month, meanwhile, it operated 70% of its normal schedule (it was 50% in May). Load factors are still hovering around the 50% mark. And they should rise now that Allegiant’s home city Las Vegas is open to visitors again.
The risk of course, is a reversal in demand momentum linked to the new outbreaks of Covid-19 now spreading through parts of the U.S. south. Florida is seeing a surge in new cases, for example. Houston, a big market for United and Southwest, is becoming the new U.S. epicenter of the epidemic.
- JetBlue president Joanna Geraghty, speaking at an online summit, said being headquartered in New York City, the early epicenter of America’s Covid crisis, made dealing with the crisis all the more difficult. Some employees were understandably fearful of going to work. For a time, it seemed possible that Washington would ground the entire industry. The airline, she said, was “rocked to its core.” But like its peers, JetBlue is steadily recovering, with plans to operate about half its typical summer schedule.
Being a predominantly leisure airline helps, though it does carry a lot of business traffic too, notably in Boston, and between the east and west coasts in its Mint class. Northeast-Florida flights are relatively fuller right now, even with quarantines in place — passengers flying from the New York area to Florida are still expected to quarantine for 14 days upon arrival (this rule is scheduled to end July 7 but could be extended). The hardest-hit part of JetBlue’s network, as the carrier explained during its Q1 earnings call, are its shorthaul business markets, within the state of New York for example.
This summer, Geraghty said, airlines are competing with road trips. But she thinks that will be less the case during winter, when northerners need to fly south to get their sun. In any case, the airline is planning for all scenarios.
Does she expect food service to come back? Yes, eventually. When will JetBlue decide on plans to serve London next year? Hopefully in the coming months, encouraged by opportunities to get airport slots and gates that weren’t available pre-crisis. Will there be layoffs? JetBlue is doing everything it can to protect jobs, strongly urging employees to take time off. But the carrier will no doubt be significantly smaller. Are new cleaning protocols slowing aircraft turn times? Not right now, because load factors are so low. If planes get full again, it might indeed have to schedule longer turns, but that would be a good problem to have. Does Geraghty expects more mergers or imminent bankruptcies? Not in the U.S. Are A220s still on the way? Absolutely, and they’ll initially deploy mostly from Boston, replacing E190s.
- U.S. air traffic volumes continued to jump last week. Data published by the TSA shows passenger throughput at its airport security checkpoints reached 502k on Thursday (6/11). On Thursday of the previous week, the number was just 392k. On the equivalent Thursday of last year, however, the number was almost 2.7m.
- Lufthansa is getting more state aid following big assistance packages from Germany and Switzerland. Now it’s Austria’s turn, guaranteeing 90% of some $340m worth of private-sector bank loans to Austrian Airlines, a wholly owned Lufthansa subsidiary. These loans must be repaid with interest by 2026. Vienna will also give its airline $170m in direct equity capital. Lufthansa itself will inject another $170m. So all told, Austrian will have $680m in new financing to help it get back on its feet after the Covid shock. Just as importantly, the airline’s employees agreed to $340m worth of concessions in the form of lower pay. Another $170m of savings will come from renegotiated or terminated supplier contracts.
The state aid does contain some conditions. One is that Lufthansa must maintain its Vienna hub, including its intercontinental links. In addition, Austrian must meet specific environmental goals, such as cutting its carbon emissions at least 30% by 2030, relative to 2005 levels. Like France with Air France, Austria is also pushing Austrian to shift some shorthaul traffic to the railways. The government is also changing its airline ticket tax policy to make shorthaul travel more expensive, which incidentally could help Austrian by disproportionately hurting LCCs.
When Lufthansa originally purchased Austrian in 2008, in the middle of the global financial crisis, it thought it might replicate the exceptional success it had with Swiss, which it bought three years prior. It also coveted Austrian’s impressive network east and southeast of Vienna, to eastern Europe, the former Soviet Union, and the Middle East. At the time remember, Lufthansa was on a buying spree, grabbing control of Brussels Airlines as well, and a largely forgotten and since sold 19% stake in JetBlue.
None of these investments worked as intended. Austrian, for its part, earned a less than 1% operating margin last year, after managing between 3% and 4% between 2016 and 2018. Some of its poor performance throughout the 2010s stemmed from geopolitical shocks that hurt key markets in Russia, Ukraine, and the Middle East.
- TAP Air Portugal got a bailout last week too, in the form of credit assistance worth up to $1.3b. Without an imminent cash injection, TAP would likely have headed for bankruptcy. E.U. regulators approved the intervention, but with conditions, given the fact that TAP was deemed financially troubled even before the crisis. The loan must be repaid within six months, or alternatively, TAP must submit a viable turnaround plan within six months.
But many questions remain, not least the future influence of Azul’s David Neeleman and fellow investors, which purchased control of the airline from Portugal’s government in 2015. The government subsequently reclaimed financial control but let Neeleman and his team run the airline. Lisbon now wants management control too. The relations between the government and TAP’s private shareholders were strained even before the Covid crisis. Neeleman, in fact, was reportedly hoping to sell his stake to another airline, with Lufthansa a leading contender.
Another key question going forward is how much TAP now needs to shrink, and whether it can extract sufficient employee concessions.
- The E.U. also approved Finland’s latest $320m worth of aid for Finnair. Helsinki, which already controls the carrier, will provide the money via new shares it pledged to buy. Finnair is issuing what it hopes will be nearly $600m worth of new shares. And it won’t have to give up any airport slots —the E.U. said that’s not necessary because Helsinki airport isn’t congested, and because Finnair does not “hold a significant market power on the relevant markets on which it operates.”
Last month, regulators approved a state guarantee on $670m Finnair arranged to borrow from the private sector. At its annual shareholders meeting last week, held virtually of course, CEO Topi Manner said Finnair was well on its way to earning sustainable profits before the crisis hit. He says the core of its business strategy won’t change, just perhaps its timing and scope. Asia remains key.
- Air France will fly about 35% of its normal capacity in July, and 40% in August. But this summertime schedule will cover about 80% of its pre-crisis destinations. Ironically, it’s prioritizing domestic flying, a part of its network that’s historically lost huge amounts of money, and which the government wants it to cut for environmental reasons.
But with domestic routes, Air France doesn’t have to worry about international travel restrictions. Keep in mind that when Air France says “domestic,” it’s including overseas French territories like Martinique, Guadeloupe, St. Martin, French Guyana, Tahiti, and Reunion. Looking at fleet deployment, the carrier will fly 106 of its 224 planes this summer.
- Chinese carriers, on June 5, transported more than 1m passengers in a day for the first time since late January as the country’s airlines continue to recover from the crisis. On that day, according to China’s civil aviation regulator, its airlines operated 11,333 flights, also the most since the crisis began. Traffic is now running at about 62% of last year’s levels. The next phase in China’s recovery will be international flying, starting with the “green channels” officials are establishing with eight countries led by South Korea.
- China Eastern sees opportunity in the crisis, specifically to take advantage of troubles at Hainan Airlines. The Shanghai-based giant is joining with equity partner Juneyao Airlines and the online travel retailer Trip.com to create a new airline to serve the island of Hainan, a tourist haven. China Eastern, Juneyao, and Trip will control 51%, 15%, and 14%, respectively. Local government-owned companies will hold the rest.
The new Sanya International Airlines hopes to take advantage of Beijing’s plan to turn Hainan into a major trading hub. To facilitate that goal, visa restrictions will ease, and taxes will drop. Sanya, incidentally, is building a new airport, expected to open late this year.
- Air New Zealand CEO Greg Foran started his job in early February. Great timing. Now, instead of piloting a strong airline in stable times, he’s undertaking a massive emergency restructuring in the craziest time ever. To mark his 100th day on the job, Foran addressed employees with the message: “Survive, revive, and thrive.” That’s the game plan for getting through the next few months, and hopefully stabilizing the airline thereafter. By August 2022, he hopes, ANZ can achieve healthy profits again.
To get there, however, the airline will have to shrink to just 70% its pre-crisis size. It will operate fewer widebody planes. And it will need to radically overhaul its cost base. That inevitably means more union concessions, which Foran makes clear are necessary. Currently, ANZ’s wage bill is down by a third, but its revenues are down by two-thirds. That won’t do. So more job cuts are certain but involuntary cuts are a last resort.
Domestic demand is fortunately starting to recover, and demand revival to Australia and nearby Pacific islands should follow. In most cases though, according to Foran, New Zealand won’t open its borders until there’s a vaccine or effective treatment for Covid-19. So he’s not counting on any meaningful international flying until next year. On a more optimistic note, he said some of ANZ’s most important innovations developed in the wake of past shocks, namely the 9/11 terror attacks and the global financial crisis.
- Latam’s bankruptcy proceedings continue. A creditor committee is now in place, to represent everyone to whom the airline owes money. Among the committee’s seven members are two aircraft lessors: AerCap and Aircastle. Another is Lufthansa’s maintenance arm. Also getting a seat is Latam’s Chilean pilot union.