IATA Asks for Government Relief
- Among IATA’s latest asks of governments: Extend waivers on airport slot usage rules through the upcoming winter season. European airports, in particular, typically practice an 80-20 rule, by which airlines lose access to their takeoff and landing slots if they don’t use them at least 80% of the time. Officials suspended that rule for the summer half, which runs between late March and late October. This way, airlines don’t have to operate wasteful empty flights at a time of negligible demand just to preserve their slots. Will they grant a reprieve for the winter too, as IATA hopes? For more clarity on the extent of the current demand shock, IATA said that RPK traffic dropped about 20% after 9/11, about 12% after SARS, and 95% in April of this year. That’s why airlines need the help from governments they’re getting, though in some regions not enough.
The current crisis, meanwhile, is hitting all geographies, without any sanctuary. During the financial crisis a decade ago, remember, certain markets held up well, including leisure markets like Florida and Hawaii. Starting around 2010, oil markets were places carriers could seek refuge. The closest thing emerging as an early refuge this time around, it seems, is Florida again, and other U.S. domestic leisure markets like national park gateways (but not Hawaii this time, because it remains closed to visitors). Some leisure routes within Europe and within individual Asia-Pacific countries like China, Korea, Vietnam, Austrlaia, and New Zealand are offering some opportunities for relief as well, to carriers qualified to fly there.
- Emphasizing the great uncertainty pervading the airline industry, IATA points to a new survey that shows only 45% of travelers say they plan to fly in the next one to two months. An earlier survey showed 65% answered in the affirmative. It could be that early on, people thought the outbreak would be contained by now. In any case, 95% currently say they’ll travel sometime within a year after the pandemic ends, though half of this group will wait at least six months.
IATA separately points out that passengers are booking flights much later than usual. Normally, just 18% of bookings come in between zero and three days before departure. This May, the figure was 41%. It means airlines have no idea what to expect for the fall and winter holidays, devoid of any meaningful quantity of forward bookings. Few bookings also mean less cash coming in.
- IATA also talked a lot about Covid-19 testing last week. It doesn’t object to the idea, when applicable to travelers from high-risk countries and regions. But governments should assure that testing 1) delivers results promptly and accurately, 2) can be conducted at scale and cost-effectively, and 3) doesn’t create economic or logistical barriers to travel. The worst option, IATA says, is imposing 14-day quarantines on arriving passengers. Ideally, it adds, tests should be conducted at the departing airport, not the arriving airport.
- Turning its attention to Europe, IATA sounded a dismal note last week by warning that economic deterioration is expected to worsen as the full effects of the Covid pandemic play out. The group said GDP forecasts for the U.K., Spain, Germany, Italy, and France are worse for June than they were in April. Passenger traffic in those five countries also is expected to decline precipitously for the month, y/y. Collectively, European airlines are expected to lose $23b this year, and 6m aviation jobs could be at risk, IATA said. The association stressed the need for all European governments to act together to coordinate the restoration of air connectivity. And it once again called for more state aid for the region’s airlines.
- Finally, it’s time to pull the plug. Between 2011 and 2020, La Nacion reports, Latam’s Argentine unit amassed losses in the realm of $325m. During that same period, state-owned Aerolineas Argentinas received taxpayer subsidies amounting to $4.8b. Last year alone, the report goes on, Latam Argentina lost $133m. So Latam will close the unit, exiting all domestic routes and reassigning other units to fly Argentine international routes. The carrier stressed that domestic routes within Argentina account for less than 2% of groupwide capacity. And they simply became untenable amid Covid-related demand deterioration and a failure to convince unions to surrender concessions.
The market was always an uphill battle, with Aerolineas feasting on subsidies, frequent labor unrest, and at least as frequent economic distress. In 2019, LCCs like JetSmart, Flybondi, and even Norwegian began sprouting in Argentina. But all the while, the country experienced another currency crisis. The market shares some characteristics with Italy, also home to a wretched home carrier but filled with pockets of lucrative business traffic. Latam is betting it can still capture this traffic via its hubs in São Paulo, Santiago, and Lima.
Separately, at a shareholder meeting held online last week, bankrupt Latam said it expects to fly only about 9% of its normal ASKs this month, operating just in Brazil and Chile — operations in Peru, Colombia, Ecuador, and Argentina are still completely grounded. Overall flying should reach 18% of normal in July and 50% by December.
- Is Aeromexico next? The carrier said it too was considering a bankruptcy filing, which would put the airline in the same company as Latam, Avianca, and Ecuador’s TAME — Azul and Gol are not far from having to file themselves. Mexico’s largest airline faces many of the same headwinds as its regional rivals, likewise bereft of government support. A recent deal with its independent loyalty plan partner bought some time.
But to stay out of the courts, it will need concessions from unions, lenders, and other stakeholders. Failing that, Aeromexico would need to file, potentially wiping out Delta’s 49% ownership stake. Delta also stands to lose its stake in Latam, and perhaps Virgin Atlantic, if it too enters administration.
Don’t forget by the way, that Mexico’s Interjet is also facing severe financial difficulties and could go bankrupt as well.
- Air Canada’s CFO Michael Rousseau spoke at an online investor event organized by National Bank, making it clear that lack of government aid could hinder its ability to compete with global rivals as the recovery unfolds. U.S., European, and East Asian carriers, most notably, have received hundreds of billions of U.S. dollars in assistance. Air Canada was able to raise lots of money from the private sector, by issuing convertible debt for example. It continues to scout opportunities for additional funds, anticipating a recovery that could last for up to three years.
Rousseau, in fact, is closely watching how United is using its loyalty plan as collateral to raise money. Another option is a Canadian government borrowing facility, but the interest rates are pretty high and the airline would have to surrender warrants convertible to shares. With a smallish domestic market, Air Canada is much more dependent on international travel than its U.S. peers. As such, it’s strongly urging Ottawa to open its borders to foreign visitors, who now must quarantine for 14-days upon entry. Even some provinces within Canada have restrictions on visitors from other parts of the country. Only if and when travel patterns return to some semblance of normal will Air Canada be able to start recalling its 20k workers currently on furlough.
Domestic bookings, to be clear, are increasing. And Rousseau hopes to see a bit of European leisure traffic this summer if travel restrictions ease. But note that all transatlantic flying going forward will be mainline, because the carrier’s low-cost unit Rouge retired all of its widebody B767s. Or then again, if Air Canada does wind up buying Transat, there will be no shortage of lowish-cost longhaul flying in the group.
In the meantime, A319s, and E190s are also gone. On the other hand, Air Canada remains bullish on the A220s arriving this year, and the B737 MAXs which might return to service this year as well.
Separately, the airline is working with its regional partners Jazz and Sky on areas to cut costs. An Aeroplan relaunch remains on track for later this year. A final thought from Rousseau: He himself hates virtual meetings and thinks he’s not the only one eager to get back to face-to-face meetings with clients.
- Delta, holding a virtual shareholders meeting, said company finances are stabilizing, though more money is still going out than coming in. The airline will add more flying this summer while doing so in a highly disciplined way, CEO Ed Bastian explained. Speaking separately on Bloomberg TV, Bastian pointed to Labor Day as a key point in time, because that’s the time of year when business travel typically restarts after the summer. Month-to-date load factor for June, he said, is running in the mid-40% range, and growing as the month progresses. Keep in mind though that Delta is still capping its load factors at 60%. It will decide later this year on when to ease the cap.
- You can never have too much cash. Or that’s the thinking right now, even when adding more cash means adding more debt. American, the most indebted U.S. carrier, is looking to borrow another $2b through the issuance of junk bonds, Bloomberg reports. By junk, it simply means that the securities carry an elevated risk of default. American, remember, used its frequent flier plan as collateral for a loan it’s getting from Washington. What collateral will it use for this latest $2b dash for cash?
- Southwest’s latest market assessment shows demand revival is happening faster than expected. A few weeks ago, it expected June revenues to be down 80-85% y/y, on 45-55% less capacity, with load factors between 35-45%. Now it sees June revenues falling only between 70-75%, on 40-50% less capacity, and with loads between 40-50%.
Looking ahead to July, Southwest sees revenues likely to decline 65-70%, on 2-35% less capacity, with loads between 45-55%. Keep in mind that it’s still blocking middle seats for customers not travelling with family members or other companions. The demand that’s returning, it said, is primarily leisure-oriented.
But uncertainty remains high, so management is planning for multiple scenarios. Running out of cash is most definitely not a concern, not after raising a mammoth $17b in new financing since the start of the year, including new borrowing, new stock issuance, government payroll aid, and aircraft sale-leaseback deals. It currently has liquidity of nearly $14b, which would last it roughly two years. It previously felt it had enough liquidity for 20 months, but that was based on revenue forecasts that proved too bearish. It’s now down to burning about $20m a day. It expects to pay roughly $1.30 a gallon for fuel this quarter, which is up from previous estimates following an increase in market prices. About 12 cents of that price is for hedge premiums.
- Throughput at Transportation Security Administration (TSA) checkpoints in the U.S. continued to climb, with average daily passengers now between 400k-500k. This is still 80% off last year’s levels, particularly for the summer, but far above the 87k recorded on April 14, the low point of the Covid-19 travel shock. With more airlines adding flights and more state governments easing restrictions, forecasts now say the U.S. could see 1m daily passengers by the end of the year. Of course, these forecasts could change if coronavirus infections increase and states go back into lockdowns.
- The U.S. Travel Association warned that spending on travel is expected to be 45% lower this year compared with last. Breaking that down, domestic U.S. travel spending is expected to fall 40%, and spending on international trips is expected to be 75% lower. Domestic trips on all modes of transportation are expected to be 30% down y/y, plunging to the lowest level since 1991. The industry needs further support, U.S. Travel says. The association is calling on Congress to extend federal support for employees to include destination marketing organizations, and to provide tax incentives to help the tourism industry restart safely. The group also is asking Congress to protect businesses from Covid-related lawsuits and to provide federal support for pandemic risk insurance.
- Europe’s leisure travel giant TUI restarted flying last week, commencing with two fully booked flights from Germany to Majorca. Faro in Portugal is its second tourist spot to reopen. In July, it will offer a variety of destinations in Spain, Greece, Cyprus, Italy, Croatia, Bulgaria, Portugal, Austria, Germany, and Switzerland, with more coming as travel restrictions ease. It’s mostly carrying tourists from Germany, Switzerland, the Netherlands, and Belgium for now, with flights from the U.K. and the Nordic region still suspended until later this summer. Summer holiday bookings are definitely picking up, notably from Germany and Belgium. Same for winter bookings, even from the U.K. Bookings for next summer look “promising.”
- The pressure to reopen borders is especially great for European countries dependent on inbound tourism, like Greece, Italy, and Portugal. No wonder why all three were among the first to welcome visitors from other parts of Europe. Spain, meanwhile, said it would open up, sans quarantine, even to the U.K., where infections rates remain relatively high. The U.K.-Spain market is one of the world’s biggest in terms of air traffic volumes.