China’s Airline Recovery Augurs a Tough Future

• Because they were first to experience the Covid crisis, Chinese airlines are in some respects leading indicators for the industry as it attempts to recover. Unfortunately, as Q2 financial results from China make clear, no airline there is anywhere close to making money again. Six mainland carriers regularly publish figures: Air China, China Eastern, China Southern, Hainan Airlines, Juneyao and Spring. And they combined to lose $2.8b last quarter, a less than celebration-worthy difference from $3.3b in Q1. Their collective Q2 operating margin was negative 40%, nine points worse than their Q1 figure of 31%.
  
  To be sure, substantial differences between the carriers exist. Hainan Airlines, for example, is in deep distress with extreme loss margins. China Southern did notably better than average. In terms of traffic trends, all six carriers have now reported their July figures, which still show heavy y/y declines. For the Big Three (Air China, China Eastern, and China Southern), domestic RPK traffic for the month was roughly down between 25% and 30% y/y, on ASK capacity declines of between 15% and 20%. That implies much lower load factors and by all accounts, much weaker yields. Air China, for one, said domestic yields for the first six months of 2020 (it didn’t provide figures by quarter or month) were down 17%. Again, these are domestic numbers only.
  
  International is far worse, with borders still largely closed. Like carriers elsewhere, cargo is currently a lucrative side business. But overall last quarter, airlines reported total y/y revenue declines of between 50% and 70%. One cautionary tale of the China experience is that even when people start traveling domestically again, this demand is nowhere near enough to fill even sharply reduced capacity. Internationally, China is slowly opening the door to more flights and more foreign passengers, though for now with just a few other nations like South Korea and Singapore. Restrictions in even these “green lane” markets remain stringent. Next year should be better, with China in the late stages of vaccine trials.
  
  A wildcard is China’s position in the global economy, which was changing even before the pandemic. Most importantly, its enormous trading relationship with the U.S. is fraying, and disputes with many other key countries (Australia, Europe, Japan, Canada, India, etc.) are intensifying. That said, China’s economy is already growing again y/y, as most of the world idles in deep recession. Back in the airline space, here are some Q2 highlights from individual carriers:
  
  •  Air China’s negative 34% Q2 operating margin was modest relative to the industry average, though awful of course relative to any other time in industry history. The carrier’s hometown Beijing experienced some outbreak-related disruptions to demand in the quarter. And while still the busiest mainland Chinese airport in terms of scheduled capacity, Beijing Capital (PEK) is losing flights and passengers to a new mega-airport built south of the city. Over time, the new airport will pose both challenges and opportunities for Air China — its more competition but also relief from space-constraints frustrating expansion and operational integrity. That’s a problem for another day, however. At the moment, Air China is hoping to mitigate losses with more cargo flying, cost cutting, and other initiatives now commonplace throughout the industry. Government relief, in the form of reduced fees and taxes, is certainly helping. One longterm uncertainly for Air China and other Chinese carriers concerns future aircraft sourcing. It currently has no Boeing aircraft on firm order over the next few years, just NEOs and a handful of additional A350-900s, plus some Chinese-produced jets it’s buying to fulfill political obligations. China’s main carriers have recently started introducing the Comac ARJ-21, a sub-100 seat regional plane. Cargo by the way, increased from 4% of Air China’s total revenue in last year’s first half, to 13% this year. Separately, the company agreed to participate in the recapitalization of its partner Cathay Pacific, a portion of whose losses appear on Air China’s income statement. Air China is incurring losses from its stake in Shandong Airlines as well. Partly-owned subsidiaries Shenzhen Airlines and Air Macao are surely losing money too.  
    
  • China Eastern, based in Shanghai, showed considerably weaker Q2 performance highlighted by a negative 60% operating margin. Tough competition in its home market Shanghai is a suspected reason. Another is the carrier’s investment in building a hub at Beijing’s new airport. Revenues for the quarter fell 66% y/y, on 62% less ASK capacity. Operating costs fell 46%. Before the crisis, China Eastern was building an impressive portfolio of international partnerships, with carriers like Delta, Air France/KLM, and Japan Airlines. At home, it took an ownership stake in hometown rival Juneyao Airlines. The domestic market of course, is where the action currently lies. And it’s here that China Eastern is marketing aggressive fare promotions, including unlimited journeys in economy-class through the end of the year, for a set price. It’s also offering air-rail packages to domestic tourists, while trumpeting the benefits of its loyalty plan. This summer, it even opened a new branch in Shenzhen. China Eastern, remember, owns an LCC called China United, now based at Beijing’s new airport. It was gearing up for expansion before the pandemic and will likely play an important role in the post-pandemic recovery.
    
  • China Southern’s negative 19% Q2 operating margin was best among reporting Chinese carriers, helped by limited exposure to the Hong Kong market. Its main hub in Guangzhou neighbors Hong Kong, so flights between the cities are few (operated only by Cathay Pacific). More importantly, the airline derived a full fifth of its revenues from cargo as yields and profits for shipments surged. China Southern, like China Eastern, hopes to turn Beijing’s new airport into a vibrant hub. Xiamen is another key market thanks to partner Xiamen Airlines. Recall that China Southern decided to leave the SkyTeam alliance last year, preferring to get close to oneworld carriers like American and British Airways, without quite actually joining oneworld. Another hot item on its agenda just before the crisis hit was the B737-MAX grounding — China Southern had more of these planes than any other Chinese airline.
    
  • As mentioned above, times are rough for Hainan Airlines, even by today’s Armageddon standards. Its negative 100% operating margin shines light on a company that overexpanded internationally with expensive B787s and A350s. It’s now shrinking more than any major Chinese airline, with Q2 revenues down 71% y/y on 76% less capacity. Beijing PEK remains its busiest airport. But the airline’s namesake island of Hainan is getting a lot of attention, amid airport expansion projects and government policies to create a free trade zone. Hainan is also a warm-weather tourist destination, which positions it well for the recovery.
       
  • China Eastern’s rival and partner Juneyao Airlines is losing lots of money too, but Q2 operating margin was a more manageable negative 27%. It also owns an LCC called 9 Air which competes with China Southern in Guangzhou most importantly. Juneyao’s LCC rival Spring Airlines, meanwhile, is the one Chinese carrier that’s actually growing its domestic business. In July, domestic RPK traffic was up a surprisingly bullish 25%. But before getting too excited, its overall RPK traffic declined 15% as planes were pulled from markets like Hong Kong, Japan, and the ASEAN region. Much of this capacity was dumped into the domestic market, which created a weak yield environment. In the end, Spring lost money too; its Q2 operating margin was negative 24%. In sum, the Chinese airline recovery is indeed at a more advanced stage than elsewhere, domestically anyway, with the country having entered the crisis earlier, and thanks to strenuous efforts to control the virus. It means most Chinese airlines are at least reporting double-digit loss margins rather than the triple-digit carnage prevalent elsewhere. But the losses are nevertheless heavy, and the road to full recovery still long and uncertain.

Qantas in Good Shape, Relatively

• All things considered, Australia’s Qantas is in good shape. Yes, it’s incurring massive losses during the Covid pandemic, causing a negative 11% operating margin for the first six months of calendar year 2020 (it only reports semiannually, not quarterly). And yes, unlike other relatively well positioned airlines like Ryanair or Allegiant, Qantas does derive a lot of its revenue from corporate business and intercontinental flying. Yet even in good times, the Kangaroo’s chief source of profits is the Australian domestic market, which is already experiencing some degree of recovery, albeit stunted recently by interstate travel barriers.
  
  The Covid outbreaks that triggered those barriers notwithstanding, Australia has largely prevented the spread of the virus. Unfortunately, countries don’t really get many economic points for their public health success, because a prerequisite of that success is closing down large portions of the economy including travel. On the other hand, Australia’s economy, while in recession, is getting a jolt from rising prices for commodities like iron ore, large supplies of which are exported to China. That in turn is pushing up the value of the Australian dollar, which in normal times can hurt Qantas by depressing inbound tourism. Currently, with inbound tourism dormant, the main effect of a strong Aussie dollar is lower U.S.-dollar denominated costs, for fuel and aircraft most notably.
  
  The half-year figures Qantas disclosed aren’t terribly useful given the drastic differences between the first two months of the year and the subsequent four months. But it did say revenues for calendar Q2 alone declined 82% y/y, while operating costs for the period declined an almost fully offsetting 75%. Canberra hasn’t provided any big airline bailouts of the kind seen in other markets like Germany, France, Singapore, Hong Kong, and the U.S. But it is providing some relief through lower taxes, lower airport fees, and wage subsidies. The government also paid the airline for operating repatriation and rescue flights, and to maintain minimum levels of air service on key routes.
  
  Qantas also got a taste of the cargo boom benefiting the airline industry during the pandemic, earning handsome profits facilitating the spike in e-commerce as homebound Australians order more goods online. Critically, the airline’s loyalty plan, involved in a range of businesses including insurance and financial services, is a major cash cow whose operating margin increased y/y in the half, to an impressive 42%. Just as importantly, commodity sector travel is performing well, as one might expect with iron ore prices rising. Much of this travel is done via charter flying, which Qantas provides.
  
  Also doing well are some routes within states, i.e. Brisbane-Cairns within Queensland. That’s a route actually seeing demand up from pre-crisis levels. The same is true of Perth-Broome within Western Australia (Queensland and Western Australia happen to be centers of Australia’s commodity sector). Domestic leisure travel, furthermore, was showing signs of life before the new travel restrictions. In any case, Qantas seems sure of ample future “revenge” travel, the term some are using to describe an intent to make up for lost vacations and family visits.
  
  International travel though, won’t even start to recover until July at the earliest, executives believe. Revival, though, might start sooner for trans-Tasman markets between Australia and New Zealand. Scheduled international passenger revenue, by the way, was down nearly 100% last quarter.
  
  There’s another reason why Qantas is in relatively good shape: It hasn’t had to overly leverage itself to survive the crisis. To be clear, it did borrow $1.2b this year (secured by Dreamliners and NEOs). But it also raised almost as much equity, helping to maintain an investment grade credit rating from Moody’s. Its debt, furthermore, carries no covenants. No major repayments are due until June. And rivals in markets like the U.S. and Japan have taken on much heavier debt burdens. Qantas separately announced a three-year recovery plan in July, which included plans for 6k job cuts. The airline also deferred some B787-9 and A321 NEO deliveries. All six of its remaining B747s were retired. All 12 of its A380s were placed in longterm storage. Qantas is moving some A320s to Western Australia for more commodity sector flying. It’s converting some A321s to freighters.
  
  Jetstar is downsizing its loss-making Asian operations but did notably well pre-crisis on Australian and even New Zealand domestic routes, despite a $22m hit from labor unrest. Qantas is selling some parts of its empire, like its catering business and its stake in Vietnam’s Jetstar Pacific, now renamed Pacific Airlines. The group’s supremely profitable loyalty plan now has more than 13m members, not bad for a country with just 25m people. And with such a strong balance sheet, it swears against ever using its loyalty plan as collateral for new loans, something several U.S. carriers have done.
  
  Domestically, Qantas expects to gain market share, especially among corporations, as Virgin Australia undertakes its post-bankruptcy restructuring (Virgin by the way received final creditor approval last week for its takeover by Bain capital). It’s not terribly worried about plans by REX to enter the Sydney-Melbourne-Brisbane triangle market with narrowbodies. The Kangaroo itself operated about 20% of its normal domestic capacity last month, and nearly 100% with Jetstar within New Zealand. Intercontinentally, executives expect more capacity discipline by debt-soaked rivals when markets start to reopen. They’re still keen on eventually reviving plans to fly A350-1000 ultra-ultra longhaul to the U.S. and Europe. Among the 100-plus NEOs Qantas has on order are options for 36 XLRs with range to open many new markets.
  
  It still has joint ventures in place with Emirates, American, and China Eastern. But again, the intercontinental scene is important but not vital to the airline’s success. The domestic market remains its wellspring of profits. In fact, it still thinks it can achieve its 2024 targets of an 18% operating margin for domestic mainline, and a 22% operating margin for domestic Jetstar.
  
  Separately in Australia, REX said in its earnings release that it expects two years of difficult conditions, but that regional markets should recover first.   

Air New Zealand Benefits From Domestic Strength

• Air New Zealand, like Qantas, generated a big chunk of its pre-crisis profits from its domestic market, where it faces limited competition. Its domestic success, indeed, helps explains a nearly two-decade run of profits, not to mention an investment grade credit rating. Needless to say, however, that profit streak will come to an end in 2020, following a $347m net loss in the year’s first half. Operating margin for the six-month period was negative 20%. Like Qantas, ANZ uses a July-to-June fiscal year, and its loss for the 12 months to June 2020 was its first in 18 years. New Zealand’s success in containing the virus unfortunately came at the expense of air travel, with all but emergency travel suspended during a seven-week lockdown that began on March 23.
  
  In mid-May, however, domestic travel reopened, and kiwis responded enthusiastically. By mid-June, domestic bookings were actually up versus last year’s level, thanks in part to a substitution effect — kiwis that would normally travel abroad travelled within New Zealand instead. The winter school holiday in July added fuel to the demand, prompting the airline to restore about 70% of its normal domestic capacity. Keep in mind that pre-crisis, a substantial number of ANZ’s passengers on domestic routes were visitors from abroad flying around the country; that demand doesn’t exist right now. Management called out Christchurch and especially Queenstown, both popular tourist attractions, as particularly strong. By early August, even domestic business travel was starting to return, with corporate demand reaching about 65% of pre-crisis levels. Only about quarter of passengers used travel credits to book, and even those people often added money to purchase more expensive fares. Domestic load factors, meanwhile, were a hearty 80%.
  
  Unfortunately, the country went back into lockdown last month after Auckland discovered some Covid cases. Neighboring Australia likewise encountered new cases, dulling momentum for a trans-Tasman travel bubble. If domestic demand quickly resumes its momentum, though, and if Tasman routes and perhaps some Pacific Island routes do reopen, ANZ says it could probably reach profitability. Longhaul, which won’t come back any time soon, represented about 40% of pre-crisis revenues but surely less in terms of profits. Making money with longhaul still dormant, though, assumes a heavy contribution from cargo, which it’s currently enjoying.
  
  The airline hasn’t had to use a government-backed loan until now. Wellington, as well as Auckland airport, also helped with lower taxes and fees. The government will remain the airline’s controlling shareholder. ANZ cut about 30% of its workforce. It deferred deliveries of A321 NEOs and ATRs but not B787s, the first of which will still come in 2023. Older B777-200s were deactivated, with no decision yet on whether they’ll ever come back. Chances are, they won’t, with management expecting a gradual recovery rather than something V-shaped.
  
  That said, ANZ will be ready to accommodate demand when it returns. In the meantime, it’s working on “exciting” developments in the areas of loyalty, digitization, and sustainability.

• May 26 was a sobering day for the airline industry. It was the day that Latam, one of the sector’s power players, filed for bankruptcy. Just weeks earlier, the prospect was unimaginable. Latam is South America’s largest airline, with a long record of solid profitability and a fleet of more than 300 planes. In 2019, it turned heads with a blockbuster move to ally with Delta, leaving American and the oneworld alliance. Also last year, its Brazilian operation earned unusually high profits after Avianca Brasil collapsed. Groupwide, Latam’s 2019 operating margin was 7%, nothing spectacular but hardly characteristic of an airline on the verge of bankruptcy.
  
  Other highlights of 2019 included the buyback of previously sold shares in its loyalty plan, the launch of 26 new routes, and a refresh of its inflight products. Latam did, however, undertake multiple bond sales last year, leaving it with more than $10b in financial debt and lease liabilities at the start of 2020. This proved untenable when the Covid crisis decimated revenues, leaving it little choice but to file for court protection from its creditors. In the months since, Latam has rejected more than 30 aircraft leases. It closed its Argentine affiliate. It cut its financial debt by nearly $1b. It reduced its headcount by more than 7k. It implemented steep pay cuts. It struck a codeshare and loyalty partnership with Brazilian rival Azul. And it arranged new financing from various sources including its 10% shareholder Qatar Airways, but not Delta, which now stands to lose the 20% stake it purchased last fall.  The financing remains subject to court approval though, with some creditors objecting.
  
  One difficulty of restructuring during a massive crisis is the simultaneous losses Latam continues to amass. In Q2, its net loss was $890m, accompanied by a negative 122% operating margin. The carrier operated a mere 6% of its ASK capacity last quarter, which even by July amounted to just 9%. South America, sadly, has one of the highest Covid death and infection rates anywhere in the world, prompting harsh crackdowns on air travel. Restrictions have been a bit more relaxed in Brazil, but even there, Latam Q2 domestic ASKs were down 90% y/y. The one saving grace is cargo, which accounted for 56% of Q2 revenues. On the other hand, Latin America’s major currencies depreciated sharply against the U.S. dollar early in the pandemic, though some have rebounded in recent months. Chile, for one, is benefitting from a rise in copper prices.
  
  Latam, meanwhile, should benefit from Avianca’s withdrawal from Peru and other competitor retreats. Then again, the crisis could open doors for LCCs like Jetsmart, backed by America’s Indigo Partners.

• Aeroflot declared a $497m Q2 net loss, or $541m stripping out revenues it pockets from foreign airline overflight fees. Operating margin excluding this revenue was negative 162%, with revenues down 87% y/y and operating costs down 62%. Russia was no different than most other countries in forbidding most air travel early in the crisis, before easing up domestic restrictions in June. Fortunately for Aeroflot, the Russian domestic market is large, though competition for the greatly diminished demand has intensified as all Russian carriers shift their planes home from abroad.
  
  There are in fact some bright spots for Aeroflot, beyond just the large domestic market it serves. Cargo, no surprise, was a winner last quarter, contributing a full 29% of group revenues. The group did receive roughly $1b in government credit guarantees, plus $110m in direct subsidies. It applied for some tax relief as well. Most encouraging though, is the performance of Pobeda, the group’s LCC. With its flights suspended in April and May, it naturally lost money in Q2 (operating margin was negative 145%). But remarkably, its traffic was up 2% y/y in July, on 3% less ASK capacity. Pobeda likely earned a small July profit, in fact, with 94% of its seats occupied.
  
  And it represents a major future growth platform for Aeroflot. The group’s 2028 business plan sees it carrying as many as 65m passengers annually. Aeroflot’s mainline operation is now handing Pobeda all of its B737s and many of its lower-yielding shorthaul routes, including international routes as they start to reopen. Eventually, Pobeda will start getting B737 MAXs. Another group airline called Aurora, focusing on service within Russia’s remote Far East, will likely be sold. Still another, Rossiya, will fulfill a variety of functions, like feeding mainline routes, opening new regional bases in secondary cities, handling public obligation routes, flying lower-yielding leisure routes, serving as St. Petersburg’s home airline, and operating domestic routes that don’t touch Moscow or St. Petersburg. It will also serve as a dumping ground of sorts for the group’s problematic Russian-built aircraft, specifically its SSJ-100s.
  
  Aeroflot mainline meanwhile, will focus on premium, business, and intercontinental routes, as well as sixth-freedom traffic via Moscow Sheremetyevo. These demand segments, however, could take several years to recover. So far though, international demand is off to a good start. In August, Aeroflot reopened routes to the U.K. and Turkey, both of which attracted strong bookings. It opened flights to Switzerland and Tanzania as well. But the real story is the domestic market, where traffic recovery is probably more robust than it is anywhere in the world, China included. Pobeda’s traffic growth and high load factors in July is one manifestation. Another is IATA’s July data showing Russian domestic traffic (measured by RPKs) down just 17% y/y, compared to China’s 28% domestic decline, America’s 73% domestic decline, and Australia’s 90% domestic decline.
  
  In the meantime, Aeroflot is talking to aircraft suppliers about deferring deliveries, managing its refund liabilities, and cutting costs in general. On a final note, Russia this summer became the first country to start vaccinating its population against Covid-19.

And Meanwhile, in Scandinavia…

• Its reporting periods are a bit goofy, but so be it. SAS, for the months of May, June, and July, reported a $252m net loss, along with a negative 58% operating margin. These are the first figures for any airline that include the month of July, and it’s a good sign that negative margins seem to be easing from the triple-digit levels that most carriers have reported for April to June. During its May-to-July quarter, SAS saw revenues down 81% y/y and operating costs down 67%. ASM capacity was down 86%. As of July, the airline had 53 planes back in the sky, serving 83 domestic destinations. Demand, it said, was somewhat ahead of expectations this summer, thanks to leisure travelers.
  
  But it’s hardly a bull market, especially with the offpeak winter months now approaching. Management hopes to have about 30% to 40% of last year’s capacity back in action by November. That’s highly subject to change, however, all the more so with Europe experiencing another infection spike. The uncoordinated easing and retightening of travel restrictions across Europe, meanwhile, is another frustration and another factor clouding visibility. SAS can rest a little easier knowing it has the governments of Sweden and Denmark in its corner, contributing to a major financial restructuring that also includes a planned conversion of debt to equity like Norwegian and others have done.
  
  To get its lenders, lessors, and other creditors to agree, SAS is warning — with good reason — that it would likely go bankrupt otherwise. The E.U. already granted approval for the state aid, and the airline hopes to conclude the restructuring by November. If successful, it will at least be armed with sufficient capital to ride through what’s universally expected to be a long recovery. In one sense, SAS is well positioned given its shorthaul-heavy network. In another, it’s disadvantaged by a heavy dependence on business traffic, especially during offpeak periods.
  
  As it restructures its debt and raises new capital, the airline is also renegotiating supplier contracts, cutting 5k jobs, and improving cost efficiency. It’s getting a nice boost right now from a suddenly strengthening Swedish krona, reversing the weak krona-dollar trend that created difficulties in 2019. Other recent steps to deal with the crisis include closing its Irish-based subsidiary’s base in Malaga, deferring some A350 and A320 NEO deliveries, and postponing plans to order small-gauge narrowbodies. When intercontinental travel eventual returns, Copenhagen will be the main longhaul hub for SAS, with Stockholm and Oslo operating only a few North American and Asian routes.
  
  Speaking of Asian routes, the carrier will soon restart some passenger flights with cargo in mind. More broadly, executives say they must be “prepared to face any competition” as Norwegian reconstitutes itself and LCCs like Wizz Air prowl for Nordic opportunities.

• As for Norwegian, it’s dramatic eleventh-hour restructuring plan is complete but not sufficient. The LCC warned that “we will need more help” to get through the winter, which is another way of saying it will need more money. It did get some financial support from its government in Oslo. But not much, at least compared to the support rivals like SAS and Lufthansa are getting. One form of help is subsidized domestic flying in Norway, which justified the relaunch of a few planes. But most planes were grounded last quarter, as the carrier incurred an ugly negative 370% operating margin. Scheduled ASK capacity was close to zero, causing revenues to decline 95% y/y. But the best Norwegian could do with operating costs was lower them 74%.
  
  In one manner of thinking, the Covid crisis might wind up a blessing for Norwegian? How so? Because it was headed for bankruptcy before the crisis, with a broken business model that didn’t seem fixable. Only because of ravaged worldwide demand were creditors, unions, and other business partners willing to submit to the drastic concessions that provide a chance to start things over. Consider aircraft lessors, which would have easily found new homes for Norwegian’s B787s and B737s pre-crisis; now their options are limited. Besides eradicate large swaths of its debt, Norwegian reworked labor contracts, bankrupted some of its subsidiaries, terminated flight crew outsourcing contracts, insourced maintenance previously done by Boeing, simplified its organization structure, sold some unwanted planes, and downsized its administrative staff. Most dramatically, it’s terminating what’s left of its giant B787 and B737 MAX order, suing Boeing in the process (after failure to reach terms on MAX compensation).
  
  No less important than cutting costs is defining its future. The focus, management says, will be the Nordic market, offering a low-fare, “high-quality” airline. Ancillaries will assume a higher importance, comparing its fleet to a “chain of retail kiosks.” It aims to have a stronger loyalty program and more robust e-commerce platforms. The goal is to achieve profitability year round, a challenge for many European carriers. All this sounds consistent with a successful shorthaul network.
  
  But what about longhaul? Well, Norwegian’s 37 Dreamliners won’t just go away. It hopes to sell perhaps 15 or so. But that still leaves it with a sizeable longhaul fleet. Executives say a good number of longhaul routes earned profits pre-crisis, which gives it a foundation to build upon. For now, though, all of its Dreamliners are grounded, and the nearer-term focus is getting more B737-800s back in the air. Its best guess is by this winter, it will have about 20 to 30 planes flying; it’s flying 25 right now.
  
  Next summer will be better hopefully but not back to full fleet strength. The domestic Norwegian market right now is performing relatively well. Leisure bookings to markets like Spain are fluctuating with travel restrictions and Covid outbreaks.

Trouble in the AirAsia Empire

• For AirAsia to produce profits, all it really needs is volume — lots of tourists visiting ASEAN hotspots like Bangkok, combined with lots of ASEAN locals flying around the region on cheap fares. Now, for the first time in the airline’s two-decade history, the traffic isn’t there, suppressed by the Covid pandemic. So it too posted heavy Q2 losses, amounting to some $270m across its multiple joint venture airlines and other businesses. With a paltry $35m in revenues but more than half a billion dollars in operating losses, margins were exceedingly bloody even by Covid standards, reaching into the negative quadruple digits. This was true for five of AirAsia’s six airlines, namely those in Malaysia, Thailand, Indonesia, the Philippines, and Japan. Only at AirAsia India was there slightly more activity, holding operating margin to negative 377%.
  
  Groupwide, cargo generated 42% of total revenues, aided by the development of a logistics unit. It’s also involved in other businesses, from major attempts in the areas of financial services and online travel sales, to more secondary efforts like selling fast food. Pre-pandemic, it sold an aircraft leasing subsidiary for more than $1b, fortifying its balance sheet and incidentally taking on a new 10% stake in Fly Leasing. It took a similar divestment approach with its training and maintenance businesses, plotting instead a pivot to an asset-light “digital lifestyle company.” The idea is to leverage all the customer data AirAsia has on its tens of millions of passengers. Looking to Silicon Valley and local tech firms like Singapore’s Grab and China’s Meituan for inspiration, AirAsia wants to create a “super-app” for the region, providing a wide range of services beyond air travel.
  
  It’s still air travel, however, on which the company depends, and which needs to revive for AirAsia to remain solvent. Like so many other airlines these days, it’s currently engaged in the unglamorous task of negotiating payment relief and cost concessions with creditors and suppliers. It cut about 30% of its workforce, restructured fuel hedging contracts, and deferred Airbus deliveries. It’s now weighing whether to raise additional debt or equity. AirAsia does helpfully have some domestic routes already back in service. In Malaysia last month, it was flying roughly 45% of normal domestic capacity. It hopes to be back to full capacity within Thailand by next quarter. It just restarted service between Kuala Lumpur and Singapore.
  
  Management says it can ride out the remainder of the crisis surviving on a meager diet of domestic traffic. Competitor pricing, it says, has been rational. Demand, it adds, has been pretty strong. There’s been some talk of airline consolidation in Thailand. And constant chatter about a Malaysia Airlines-AirAsia merger persists. But what AirAsia needs most right now is for international travel restrictions to ease, and for all those tourists to return.

• AirAsia X doesn’t have any domestic traffic to ease its pain. All it has is a business model that was broken long before the pandemic, and thinning hopes of surviving until after the pandemic. Aside from cargo flights and some charters, the longhaul LCC is in hibernation mode, with no plans to restart until it can find routes able to make money. As mentioned, that was a challenge pre-crisis as well, a reality that didn’t stop it from placing a giant A330 NEO order. Its negative 354% operating margin last quarter by itself doesn’t say much about its prospects. They’ll be shaped, instead, by ongoing talks with creditors and other stakeholders.
  
  If it does manage to survive, AirAsia X hopes to benefit from its sister company’s digital business strategy, as well as the cost cuts it’s now enacting. As for route cuts, exits from Ahmedabad, Tokyo Narita, Osaka Kansai, and Gold Coast are permanent.

• Elsewhere in the ASEAN region, long-ailing Philippine Airlines stumbled into the Covid crisis, emerging from Q2 with $227m worth of bruises. That was its net loss for the period, joined by a negative 186% operating margin. Revenues and operating costs declined 89% and 67% y/y, respectively. Only in June, the final month of the quarter, did PAL resume some flights after shutting down. But severe restrictions remain.

• The LCC VietJet said it earned a $2m net profit on $473m in revenues for the first half of 2020. But let’s look at just its airline operations (it files two separate accounts, one including auxiliary businesses). For Q2 alone, the airline accounts show a $48m net loss and a negative 59% operating margin. That’s not bad relatively speaking, aided by Vietnam’s excellent job of containing the coronavirus. In 2019, roughly one-quarter of VietJet’s seats, and about half of its ASKs, were flown on international routes.
  
  That business is temporarily dead. But domestically, thanks to the effective public health efforts, the country was quick to reopen its airline market. VietJet in fact restored 100% of its domestic flights in June, operating some 300 daily flights. It even launched eight new domestic routes. Overall capacity was still down about 30% due to the loss of international service. By July, Vietnam’s domestic airline capacity, industrywide, was actually up y/y, and quite substantially, according to IATA, which noted the trend in a presentation last week.
  
  But then came bad news: The country discovered a few Covid cases and immediately imposed new travel restrictions. Flight operations were sharply curtailed. VietJet said it stocked up on fuel when prices were cheap this spring. It chased the cargo boom with more capacity. It developed new fare products to encourage domestic tourism. And it insourced some ground handling.

• Bangkok Airways reported a $94m net loss and a negative 248% operating margin for Q2. Revenues dropped 86% y/y, compared to a 98% reduction in ASK capacity. Most of its revenue came from cargo, with even the group’s other aviation businesses like catering, ground handling, and airports suffering from the absence of flights and passengers. Thailand, despite a heavy economic dependence on foreign tourism, strictly closed its borders early in the pandemic and hasn’t relaxed the policy since. Foreign tourist arrivals were literally down 100% last quarter.
  
  The country did start allowing some domestic flights in June, which is keeping Bangkok Airways a bit more active. By December, it hopes to operate a few international flights from the airport it owns in Samui, a beach destination. These include Hong Kong and Singapore. To save money and adjust to longterm changes in demand, the airline is shedding planes as their leases expire. To cut labor costs, it reduced pay, offered leave packages, and repatriated overseas staff. It’s now seeking additional lines of credit, with Thailand’s government set to help.
  
  Looking beyond the crisis, Bangkok Airways intends to have an important role in the development of Utapao airport, a major national infrastructure focus with support from Tokyo’s Narita airport. The facility is located near Pattaya but envisioned as a third airport for the greater Bangkok region; it’s a two-to-three-hour drive from the capital but will have a high-speed rail link.

El Al Begins Flights to UAE

• The big story for Israel’s El Al this summer: Its first-ever flights to the United Arab Emirates. This follows an Israeli-UAE agreement to establish formal diplomatic relations, opening the door to economic ties and, indeed, nonstop flights between the two nations. For starters, El Al flew a ceremonial passenger flight between Tel Aviv and Abu Dhabi, with cargo flights to Dubai (via Belgium) to follow. Of no less geopolitical significance, El Al is permitted to fly over Saudi Arabia, saving hours of flight time. In time, El Al will likely offer passenger service to both Abu Dhabi and Dubai, with Etihad, Emirates, and perhaps the region’s LCCs reciprocally offering flights to Tel Aviv.
  
  The prospect of a dynamic new market is welcome news for El Al, whose business is greatly challenged by not being able to serve most points in its home region. That makes it a longhaul-heavy airline which isn’t something you want to be in the post-Covid world. You do, however, want to be an active cargo player, which El Al is. Sure enough, cargo did heroic alleviation work last quarter, holding operating margin to a less-than-apocalyptic negative 27%. Cargo revenues, in fact, increased by more than $100m y/y, keeping the drop in total revenues to 72%. El Al came close to matching that with a 66% decline in operating costs as scheduled passenger operations were completely halted. They remain so today. Unfortunately, an operating margin that was merely less atrocious than average hasn’t saved El Al from “severe liquidity stress.” Belatedly, it managed to secure vital government support, in the form of backing for a $150m share sale and partial guarantees for $250m in new borrowing.
  
  In exchange for government support — note that El Al is controlled by the private sector — officials insisted the airline drastically reduce labor costs. The result? 2k job losses and deep wage cuts, providing an estimated $260m in annual savings over the next five years. This assumes the carrier will operate at about 75% of normal capacity in the years ahead. For now, most workers are on unpaid leave, with scheduled operations grounded through at least the end of this month. Other efforts to manage through the crisis include renegotiating supplier contracts, selling assets like some cargo facilities, naturally expanding its cargo activities, and performing repatriation flights to points as diverse as Australia and Colombia.
  
  Interestingly, there’s been interest by multiple investors looking to buy control of the airline, but no deals have yet been reached. Though troubled even before the crisis, El Al does have a new fleet of Dreamliners, among other strengths. But it also has a history of labor unrest, no alliance affiliation, and poor aircraft utilization due to flying stoppages during each week’s Jewish Sabbath.

• Kenya Airways, deeply troubled before the crisis, reported a $135m net loss from January through June, a six-month period in which operating margin came to negative 28%. The net loss almost equaled the amount it lost for all of 2019, though operating margin last year was a mild negative 1%. The airline is still 7% owned by Air France/KLM (the government owns 50% and a consortium of banks owns 38%). But a process to fully renationalize it began even before the Covid crisis. Its pre-crisis problems were many, not least heavy levels of debt, labor strife, and tough competition from Gulf carriers, Turkish Airlines, and neighboring rivals Ethiopian and more recently RwandAir.
  
  Its dependence on inbound tourism and trade with China means things are particularly tough at the moment. After suspending operations in March, Kenya Airways was permitted to restart domestic flights on July 15, and international flights on August 1. It’s now flying to multiple destinations within Africa, as well as Dubai, Guangzhou, and three cities in Europe. Next month, it aims to reopen New York JFK and Bangkok. At one point, the carrier hoped to merge itself with Nairobi airport, creating a national aviation conglomerate. But parliament nixed the idea. Instead, it’s developing its own maintenance and training units, as well as a low-cost carrier called JamboJet. Importantly, it’s a sizeable cargo player, providing a cushion during the current crisis.
  
  A broad restructuring program, of the kind all airlines worldwide are undertaking, will conclude at the end of this month. Future recovery efforts will focus on improving ancillary revenues, working with SkyTeam members and other partners, refining its pricing and unfortunately cutting jobs. Last year, it opened new routes to Rome and Geneva and installed premium economy seats on B787s. Some B777s, meanwhile, were leased out to Turkish Airlines. Kenya Airways thinks traffic won’t recover to 2019 levels for another three to four years. A lot will depend on when tourists start visiting Kenya again — 2m came last year.
  
  CEO Alan Kilavuka, speaking with Business Daily late last month, said he hopes to reset the airline’s cost base to position it for future growth when feasible. Pilots in particular aren’t happy, but Kilavuka said its 414 pilots account for just 10% of total staff but 45% of total labor costs. He added that domestic routes have done reasonably well since reopening, as have routes to Juba, London, and Guangzhou, the latter thanks to Chinese workers returning home from Africa. Kenya by the way, hasn’t provided its airline with meaningful financial relief during the crisis, at least not yet.
  
  What Kenya Airways really wants though, is a level playing field. According to chairman Michael Joseph, in an interview with The Star last month, Ethiopian’s pilots earn half the wages as their Kenyan counterparts, while enjoying subsidized fuel. This helps explain why Ethiopian today has 120 planes, and Kenya Airways just 38.

• Latvia’s airBaltic, perhaps best known industry-wide for its zealous adoption of A220s, said its net loss for the first six months of 2020 came to $206m. Revenues were just $92m. In July, Latvia’s government decided to rescue the airline with a $280m capital injection, with the blessing from European Union regulators. This gave the state a 96% ownership state, up from 80%. And it gave the airline a green light to develop a revised business plan. It calls for resuming operations when possible with a fleet of 22 A220-300s. By the end of 2023, it hopes to have 50 in service, with options to take another 30.
  
  Before the pandemic, airBaltic was adding routes from all three Baltic countries: Latvia, Lithuania, and Estonia. The region has close ties to Scandinavia as well as Russia. This summer, by the way, airBaltic signed a new codeshare agreement with Icelandair, providing a means to sell itineraries to North America when the crisis subsides.

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• Cargo was the only means of relief in an otherwise catastrophically bad year.