Quarantines Pose a Vexing Problem
- It’s arguably the airline industry’s most important issue right now: When and how will governments reopen their borders? It’s even important to mostly domestic carriers, given the internal border restrictions now prevailing within some countries like Canada and Australia. In the U.S. New York, New Jersey, and Connecticut, early epicenters for the pandemic, are now mandating 14-day quarantines for travelers arriving from states that meet certain criteria (nine state currently, including Florida which earlier imposed quarantines on New York-area travelers. The European Union, meanwhile, consisting of 27 sovereign countries, is opening internal borders to varying degrees and on varying timetables. The U.K., which recently exited the E.U., continues to maintain strict quarantines, albeit with some easing to come. Other countries have Covid testing requirements. Tourism, keep in mind, is vital to many European economies, and not just tourism from within the continent.
The E.U., for its part, is now debating which visitors to welcome from overseas, with the U.S. posing a vexing challenge. The U.S. is said to be on the list of countries the E.U. is considering banning. There’s no decision yet for allowing Americans to visit, but medically damned if you do, economically damned if you don’t. The U.S. has one of the worst Covid outbreaks anywhere in the world, and one that’s getting worse in much of the country, not better. In any event, it’s a huge topic of concern for IATA as it advocates on behalf of airlines. It’s arguing strenuously against quarantines.
- What’s at stake if Americans aren’t welcomed to Europe this summer? Not just dashed dreams of languid August afternoons on a Greek island beach. A ban could have dire repercussions for airlines on both sides of the ocean, many banking on at least some transatlantic leisure travel to resume this summer (think of how rough this would be for Virgin Atlantic). Although most carriers have scaled back their transatlantic routes, the first signs of a recovery were showing. The E.U.’s likely move was met with dismay in the U.S., with travel industry groups arguing against such draconian measures.
- Dubai is planning to reopen to business and leisure travelers on July 7. Visitors will have to comply with health and safety regulations, and Emirates has said it will adhere to strict public-health standards, including requiring masks. Egypt is another country planning to reopen its tourist sector to foreigners from selected countries. Singapore and Malaysia are establishing protocols for cross-border travel. And so on. But in another manifestation of Covid’s toughness to beat, cases are now reappearing in Australia, South Korea, and other champions of the resistance (not in Taiwan though, the most successful resistance fighter of all). Hawaii too, has had some new cases despite strict quarantine measures. It will proceed with relaxing those measures though, implementing a testing program on Aug. 1. Passengers that test negative for Covid-19 within three days of entering the Aloha state won’t have to quarantine anymore.
- Ladies and gentlemen, we have a winner. Virgin Australia is now in the hands of Bain Capital, a Boston-based firm. It beat out Cyrus, a rival U.S. investment firm associated with Richard Branson, and a late attempt by bondholders to convert their debt claims to an ownership stake. There’s still a lot unclear about Bain’s intentions, and with whom it will partner. One report suggested Branson might still be involved financially. Another said the Queensland state government will hold a stake in the revamped Virgin. What will the airline’s new business model be? How many jobs will disappear? The sale still requires creditor approval in a vote scheduled for August. Assuming all goes smoothly, it will have been a remarkably quick process from filing for court protection to finding a buyer.
- As its national rival attempts a revival, the flying kangaroo is cutting costs anew. Qantas, with a history of highly effective out-of-court restructurings, is attempting its biggest one yet, announcing a three-year $10b plan to survive in the radically-altered post-pandemic world. Some of the cost reductions will come just from merely flying less and using less fuel. Regrettably, at least 6k jobs will go permanently, separate from the 15k currently on furlough (many of which are associated with international flying, which likely won’t recover in any meaningful way before mid-2021).
Qantas also seeks savings from supplier contracts and fleet plan changes, including the deferral of some B787-9 and A321 NEO deliveries. All 12 of the carrier’s A380s will be grounded for the foreseeable future. Its remaining B747-400s will be grounded forever. The new plan will entail about $700m in up-front costs. But liquidity is in high supply, all the more so if it gets the $1.3b it’s seeking from a new stock offering. Qantas, make no mistake, is one of the best-positioned airlines in the post-pandemic world, especially so among carriers with large intercontinental networks. Those won’t be producing profits anytime soon, for anyone. But one of the kangaroo’s giant advantages is its lucrative domestic network, which was producing the lion’s share of its air transport profits even before the crisis. Add to this an even higher-margin loyalty program, whose points remain in strong demand even today. As CEO Alan Joyce explains, “almost two-thirds of our pre-crisis earnings came from the domestic market, which is likely to recover fastest, particularly as state borders prepare to open.”
Australia happens to be one of the leading success stories in terms of controlling the virus, some new cases in Victoria last week notwithstanding. And demand on routes catering to commodity firms is holding up relatively well, with Qantas operating about three quarters of its normal capacity to such markets. Overall, it’s only flying 15% of its normal domestic capacity right now, including Jetstar. But a year from now, that should rise to 70%. And two years from now, domestic flying will be fully restored. International flying, on the other hand, is projected to be half what it was even during its fiscal year ending in June 2022. Not until mid-September at the earliest will Australians be permitted to travel abroad. “It will take years before international flying returns to what it was,” the airline said.
Qantas, meanwhile, is talking to Canberra about extending the JobKeepers program that subsidizes furloughed workers. The government hasn’t provided much direct aid, aside from about $500m in relief to the airline industry at large, and another $140m or so to support regional routes. Other examples of aid include refunds and waivers for certain taxes and fees. As for its fiscal year to June 2020 (that ends this week), the airline expects to break even or perhaps earn a small profit excluding taxes and special items.
Looking ahead, the company isn’t providing any financial forecasts. But it sees the crisis as a good opportunity to restructure, and a catalyst to significant permanent structural changes for the whole industry. Just a few months ago, it was planning not big job cuts but big job growth, as it added new planes, developed a new joint venture with American, revamped its distribution strategy, and targeted ultra-longhaul nonstops from Australia’s east coast to London and New York.
- It’s another fundraising frenzy in the U.S., where airlines continue to buffer their balance sheets with more and more cash. It means billions in additional debt. It risks losing prized assets used as lending collateral. It causes a financial hit to existing shareholders. But scarred by past bankruptcies, carriers want to do everything possible to avoid another trip to the courts — even if that means overcompensating with too much cash. Better too much than not enough.
American certainly thinks so, as it announced another multi-billion-dollar financing drive last week, selling more stocks and bonds. The latest bonds the carrier is offering, to be clear, are considered “junk” by credit raters, even though collateralized by various slots, gates, and route rights. As a result, American will be forced to pay a high interest rate. It will use some of the new money to repay more expensive loans it took earlier in the year. But most will be used to solidify the company’s liquidity position.
In conjunction with the offerings, American told investors that Q2 revenues will be down about 90% y/y, but also that it’s extinguished nearly $14b from its operating and capital spending budget for 2020. These cuts, together with improving demand conditions, have helped thin daily cash burn to roughly $40m in June. It was forecasting a daily cash burn of $50m this month.
In somewhat of a gamble, American is ungrounding planes and restarting flights more aggressively than either United or Delta, encouraged by positive trends across the booking curve. And last week, it scrapped caps on the number of seats it will sell on each flight, even as its DFW and Miami hubs stand at the center of the latest viral outbreak. Net bookings are now positive for all seven of the advance purchase windows it monitors (i.e. from 1-to-6 days prior departure, from 7-to-13 days, etc., all the way up to 151-to-331 days prior).
American, remember, is also taking advantage of a federal CARES Act lending facility, pledging its ultra-lucrative loyalty plan as collateral. Rival United, meanwhile, as discussed in last week’s issue of Skift Airline Weekly, pledged its loyalty plan assets in another private-sector borrowing bonanza.
- Air Canada too, is raising more money — roughly $900m in fact — through the issuance of bond-like instruments. Having entered the crisis with a credit rating just shy of investment grade, Air Canada managed to raise more than $4b in new financing since the crisis began. That should leave it with close to $7b in liquidity at the end of this month, to close the second quarter.
At the airline’s annual shareholders meeting last week, CEO Calin Rovinescu expressed frustration, not to so much with Ottawa’s lack of financial aid for airlines, but with its stringent travel restrictions. Canada has done a good job controlling the spread of Covid-19, especially since mid-May. But it’s still not letting in foreigners (or even returning citizens) without mandatory two-week quarantines. Restrictions on movements across provinces exist as well. Rovinescu wants Ottawa to look to Europe for leadership on opening borders, as Italy, say, has done with countries having low infection rates.
Looking beyond the current crisis, Air Canada has lots to be excited about, including its new reservation system, its revamped loyalty plan, and its new A220s. It’s still bullish on B737 MAXs as well. But a revival of international travel is critical.
- Back below the border, Alaska Airlines is no less keen a fundraiser. It issued nearly $1b worth of bonds secured by a pool of B737-NGs and E175s. And it applied for $1.1b in federal government loans, as provided by the CARES Act. The Seattle-based airline began last week with $2.7b in liquidity but felt the need for more, unclear about what shape the recovery will take. Covid’s extensive spread through the Sun Belt surely adds to the uncertainty, though Alaska still holds hope that demand will continue to improve. If it does, it will add back flying.
As of now, it expects July ASM capacity to be down 60% y/y, with August down 50%. Load factor this month should be 50% to 55%, up from 40% in May and 15% in April. Total revenue this month, however, will still be down about 80%. Alaska initially parked 169 planes when the crisis hit. This includes 12 A320s that will never come back. When demand merits, it can bring back about five planes per week, with limited maintenance preparation. As for MAXs, Alaska currently expects three to enter service this year, and another 15 next year. By the end of 2020, Alaska will still have 49 A320s and 10 A321 NEOs inherited from Virgin America. Overall, it will start 2021 with 322 planes, growing to 329 by the start of 2022.
Next topic: Cash burn. For Alaska, the figure for June will be an estimated $150m, equivalent to a modest $5m daily. It did note the rising price of fuel and debt, however, relative to last month. Monthly cash burn, it said, should be down to zero by year end — that’s the goal anyway. Will it require autumn job cuts? For now, 6k workers on voluntary leave.
- After a scare, Lufthansa ultimately secured shareholder approval for the devil’s bargain it was forced to make with Germany’s government. It gets a huge financial lifeline, but at the cost of surrendering as much as a quarter of its equity to Berlin. It also leaves Lufthansa with a heap of debt. And to placate competition regulators, it will need to surrender some Frankfurt and Munich airport slots. It was enough to make the company’s top shareholder, a billionaire named Heinz Hermann Thiele, to consider voting against the deal. In the end, he voted yes.
Lufthansa is hardly out of the woods. It now needs heavy concessions from labor unions. It has already secured concessions from flight attendants. They’ll work fewer hours, for less pay and cuts to their pensions. But the pact saves jobs by adopting leave programs and other voluntary measures. Lufthansa also secured labor concessions at its Brussels Airlines unit, which is separately negotiating aid from Belgium’s government. The group has already received support from the Austrian and Swiss governments, on top of what Germany is providing.
In other developments, Lufthansa is closing the German arm of its Sun Express joint venture with Turkish Airlines, which flew seven A330s (they’ll transfer to Lufthansa mainline) and 11 B737s (they’ll go to Sun Express in Turkey). Ryanair by the way, is suing to stop Lufthansa’s bailout plan.
- Thai Airways, which filed for bankruptcy-like protection on May 26, is no longer government controlled. But it still has a long road ahead as it tries to restructure, to the satisfaction of the many creditors it stiffed. The carrier blamed not just Covid-19 for its inability to repay debts, but also intense competition and a lack of management flexibility under state ownership. Looking ahead, Thai will prepare a reorganization plan between August and December, after the bankruptcy court gives it a green light. The airline has the right to nominate its own “rehabilitation planners,” which creditors can accept or reject — a rejection would allow them to nominate their own planning team. By the middle of 2021, if all goes to script, creditors will vote on whether to accept whatever new business plan is devised.
What will that plan entail? Some key early steps will involve renegotiating debts, cutting chronically unprofitable flights, dropping unproductive planes, optimizing auxiliary business units (i.e. cargo, maintenance, and ground handling), and improving functions like revenue management, distribution, ancillary selling, and technology. The toughest task of all could be the job and pay cuts clearly necessary if Thai is to ever become viable.
- Thailand’s competitive landscape will surely change, in some ways helpful to Thai Airways. Last week, Singapore Airlines and Nok Air said they’ll close their NokScoot joint venture, which flew a handful of older B777s from Bangkok’s Don Muang airport, an LCC haven. The problem is, NokScoot never made any money, and its two owners don’t see any realistic path to ever doing so. Singapore offered to sell its 49% stake to Nok for a nominal fee. But Nok had no interest. Though it flew widebodies, NokScoot mostly flew to Japan and greater China, markets both reachable from Thailand with narrowbodies.
- An online New York Stock Exchange event gave Gol an opportunity to again reassure investors about its financial capacity to weather the Covid crisis, and its strategic advantages that should position it for success when markets stabilize. The carrier is speaking to the market quite often, trying to allay fears as Latin American airline bankruptcies proliferate.
Gol says it’s the region’s lowest-cost operation. More than 70% of its tickets, during normal times, cost less than $90. It offers excellent connectivity throughout Brazil, a market still with lots of longterm growth potential. The country’s population is becoming older and wealthier. It has a highly defensible market position with economies of scale, a portfolio of valuable airport slots, and a popular loyalty program. A key advantage is having a controlling shareholder — the Constantino family — committed to keeping Gol solvent. Business passengers account for about half of Gol’s revenues, including those from the 700-plus corporate contracts it has. Around one-fifth of its corporate customers are large multinationals, in sectors like banking, energy, and construction.
Currently however, most of its passengers are travelling for emergency needs, i.e. doctors dealing with the pandemic. It’s now starting to see a return of some family-visit traffic as well. It’s also seeing Smiles loyalty plan members accounting for a greater share of its total passengers. Even with Brazil experiencing one of the worst Covid outbreaks, Gol has seen week-to-week booking increases of about 20% in the past month or so. It expects to report a load factor of about 70% for June and 80% for July (on significantly reduced capacity of course, with ASKs down 85% this month).
Management insists it has at least 12 months of cash on hand. It’s negotiated helpful concessions with employees, suppliers, aircraft lessors and banks. Rival bankruptcies, it says, will be helpful in ultimately creating a healthier industry. It sees no meaningful changes in the way Latam, now bankrupt, is competing. What about the new costs associated with cleaning and sanitizing airplanes and airports? It’s not negligible, Gol says, but it’s much less onerous than factors like fuel prices and exchange rates.
By the end of this year, capacity should be back to about 70% of normal levels. A major theme throughout Latin America is the absence of government support for airlines. Brazilian carriers, however, are negotiating for credit support from the country’s development bank. It’s not something Gol will rely on, or even necessarily take. But it would be nice to have as an option if needed. A deal between airlines and the government could come this week.
Separately, Brasilia might buy about $20m worth of tickets from airlines for future use, providing additional capital.
- The Indian online travel agency MakeMyTrip, backed by China’s Trip.com, isn’t selling many trips these days. Only earlier this month did India start relaxing restrictions on domestic flights, with international flights still grounded. Delhi says, however, that it will consider some degree of international opening in July, perhaps involving travel bubbles with countries where the virus is well contained. Then again, India itself is suffering severe outbreaks. MakeMyTrip does see the potential for more airline consolidation as the crisis takes its toll.