The Latest News by Region
- IATA, working with Airports Council International and others, continues its push to advance passenger Covid testing as a short-term way of safely reviving air travel. The industry is getting desperate, with the pandemic still preventing most international borders from reopening. Airlines, IATA says, burned through $51b in cash during the second quarter, meaning April, May, and June. Airlines have gradually restored capacity since April, and demand has ever so gradually improved. But not much.
Airlines will have burned through another $77b during the second half of 2020, covering July through December, IATA estimates. And the industry won’t turn cash positive until 2022. All else being equal, large numbers of airlines would have collapsed over the past six-plus months. But governments came through with $160b in aid, in the form of loans, equity, grants, subsidies, and tax breaks. Carriers got another $20b in relief from suppliers, IATA adds. Many relief programs are coming to an end however — airline wage subsidies in the U.S. for example — and IATA urges further support. IATA, by the way, is undertaking its own cost cutting, eliminating some 400 jobs, about half of them through involuntary means.
- It’s a rare time in which airlines are not paying all that much attention to oil prices. They’re not flying much these days, after all. Prices did jump last week, reacting to an oil worker strike in Norway and a hurricane that affected oil facilities in the Gulf of Mexico. At about $43 a barrel though (Brent crude), the price is still at a level that airlines would consider cheap. As always during an oil downturn, some wonder whether demand has reached its peak. Worldwide, that might not be the case. But it might be so in richer countries like the U.S., where there’s a push to move toward renewable energy. That push could gain momentum with a Democratic victory in next month’s national elections.
- EasyJet, in a trading update, said its calendar Q3 revenues were just $689m, a 73% fall from last year’s peak summer period. On the bright side though, it did carry more than 9m passengers, with a load factor of 76% flying 38% of its normal seat capacity. (Last summer, easyJet’s load factor was 93%). Cash burn was less severe than expected in the quarter. And the company has raised plenty of money through new debt and equity, absolving itself of near-term liquidity risk.
But like the rest of Europe’s airlines, easyJet lost whatever modest momentum it had during the summer. Demand peaked during August, the airline said, and then “tapered significantly” during September as infection rates spiked and governments responded with new travel restrictions and quarantine measures. As it happens, September marked the end of easyJet’s fiscal year, which will likely show net losses exceeding $1b — quite large no, for its first annual loss in company history? It will report the results for the October 2019 through September 2020 period on Nov. 17.
Looking to minimize cash burn this winter, easyJet will temporarily close its Venice and Naples bases in Italy, having already closed three U.K. bases permanently (London Stansted, London Southend, and Newcastle). On the other hand, it will open new summer-only bases in Malaga and Faro next year. It will fly just 25% of its normal capacity this quarter (October to December). But it’s ready and able to quickly restore flights as demand merits.
It was able to secure important labor concessions, including more seasonal staffing flexibility. Helpful as well are suspensions of airport slot usage rules, which matters a lot for a carrier with a large presence at slot-controlled London Gatwick; Gatwick is its largest base of operations. Concession talks with unions in Germany, Portugal and Switzerland continue. As for future demand, it’s early to gauge next summer, but so far, booking trends appear pretty normal.
- Japan has managed the Covid crisis well, with fewer than 2k confirmed deaths (the U.S. by contrast is approaching 220k deaths). But domestic air travel remains subdued. In August, Japan Airlines operated 68% of its normal domestic ASKs but only generated 29% of its normal RPK traffic. Like its rival All Nippon therefore, load factors are extremely low.
Neither JAL nor ANA have published September traffic figures yet. But JAL said last week that a recent decline in new Covid cases has domestic travel gradually improving now, enough so to warrant a little more bullishness for November as it implements its flight schedules for the month. Unfortunately for Japan’s airlines, a sizable portion of their domestic traffic growth in recent years has come from foreign tourists visiting the country. That segment was in fact supposed to grow further with the planned Olympic Games in Tokyo. There’s none of that demand now.
Tokyo is instead trying to stimulate more domestic tourism among Japanese citizens. But so much of pre-Covid domestic airline demand in Japan consisted of business travelers, often flying on widebody planes between cities like Tokyo and Osaka. Business travel, alas, remains depressed some eight months into the Covid crisis.
- Count AirAsia among the success stories of the pre-Covid airline industry. For nearly 20 years, it’s been one of Asia’s largest and most profitable LCCs, underpinned by a valuable relationship with Airbus. But underneath the surface, and beyond its success in Malaysia and Thailand, were many cracks in the empire, cracks now getting exposed by the crisis. AirAsia Japan, for one, never managed to grow beyond a handful of routes, held back by regulatory constraints. So last week, it’s independent board of directors threw in the towel, deciding to cease operations. In India, meanwhile, AirAsia’s joint venture with the Tata Group fell far short of its ambitions. So AirAsia appears to have lost interest. It’s reportedly negotiating to sell its stake to Tata, which separately owns part of Vistara and might buy Air India.
- Then there’s AirAsia X. When launched in 2007, it promised to replicate the wonders of the shorthaul LCC model on longhaul routes. All it ever did was lose money year after year, constantly exiting and entering markets. Despite its poor track record, AirAsia X placed the industry’s largest order for A330 NEOs, 78 of them to be exact, two of which have already arrived. It has 10 A350 orders on the books as well, and recently adopted a plan to fly narrowbodies (A321 NEOs). In 2019, it lost more than $100m, leaving it no shape to deal with what lie ahead in 2020.
Without any domestic markets, AirAsia X was forced to completely suspend all scheduled operations during the Covid crisis, with no current plans for a restart. It now faces “severe liquidity constraints,” leaving it unable to repay debts coming due. In its own words, the airline faces “potential liquidation.” But it’s not prepared to succumb to such a fate just yet. Last week, it unveiled a restructuring plan that asks for concessions from all key business partners. They include, among other things, payment deferrals and debt forgiveness. Customers with tickets for upcoming flights, including those who purchased unlimited travel passes, will receive credits for future travel.
AirAsia X will simultaneously craft a new business plan that it hopes will attract fresh equity to restart the airline and ultimately enable it to earn sustainable profits. It sees itself becoming a “low-cost medium-haul airline” with a fleet of up to 25 A330s. It will avoid investment in immature routes, downsize staff, and focus less on winning market share. Putting a bullish spin on its prospects, AirAsia X speaks of a more rational post-crisis pricing environment. And it thinks it will have a leg up on other airlines because many of its markets are in “green zones” which are likely to reopen first. The goal is to complete the restructuring plan over the next few months and put two planes back into service in 2021’s first quarter. It hopes to have its full network up and running again by the end of 2021.
- Singapore’s Transport Minister Ong Ye Kung updated Parliament on his plan to revive international air travel, a lynchpin of the local economy. Several important things have changed since the city-state had to impose an emergency lockdown between April and June. First, the virus is now largely under control, with no deaths since July. Second, testing is more widely available and effective. Third, Singapore’s contact tracing capabilities are much improved, so that authorities can quickly identify and contact people who’ve been exposed to someone infected. Finally, more countries are now willing to open their own borders.
Singapore already has what it calls “green lane” agreements with China, Japan, South Korea, Malaysia, and Brunei, allowing some limited business and government travel. But it hopes to negotiate broader “air travel bubbles,” or ATBs, applicable to all fliers, including tourists. Discussions with Hong Kong for one, should begin soon. Singapore says it’s prepared to lift border controls on travelers from countries with similarly low risk profiles. Changi airport already has a facility to test 10k passengers a day. And the government is encouraging more transit traffic through Changi. Minister Ong sees “a gradual climb from a deep abyss” as the country opens “carefully, safely, and steadily.”
- Citing the “harsh reality” of the Covid crisis, and “an urgent need to fast-track its transformation,” Cebu Pacific of the Philippines will look to raise $500m through the issuance of convertible securities. Half the sum will come from preferred shares convertible to common shares (this will be offered to existing shareholders), and the other half from debt convertible to common shares. These instruments allow investors to benefit from any turnaround in which the airline’s share price winds up rising. Cebu, strongly profitable before the crisis, is currently operating just 15% of its normal capacity.
- To whatever extent there’s an airline traffic recovery right now, it’s mostly happening within domestic markets of East Asia (China, Vietnam, Korea, etc.) or in Russia’s domestic market. But don’t overlook the meaningful recovery taking place in the Brazilian market. Like Russia, Brazil has had a terrible public health ordeal with Covid.
But as the latest data from Gol and Azul clearly show, there’s some unmistakable recovery momentum. Gol for its part said domestic ASK capacity was down 53% y/y in September, roughly in line with its drop in RPK traffic. Load factor for the month was a healthy 80%. A month earlier (August), domestic RPKs were down 67%. In July, they were down 77%. You can see the meaningful month-to-month improvement. To be clear, Gol’s international network remains 100% inactive. But it never was much of an international airline, anyway, flying 86% of its ASKs domestically last year.
- As for Azul, its September figures for the domestic market were similar: ASKs down 51% y/y, RPK traffic down 52%, and load factor at 82%. And likewise, the trend was solidly positive month-to-month. Azul said it flew 42% of its normal capacity in September and expects to reach 55% of normal this month. The airline, whose founder David Neeleman is launching Breeze Airways in the U.S., separately said it’s burning less cash per day than anticipated. That’s indeed thanks to a “faster than expected ramp-up in demand.”
Also helping is its success in negotiating concessions from various stakeholders. Azul says it has sufficient liquidity to last for more than 30 months — that’s more than two years — even without raising any new capital. Keep in mind also that the southern hemisphere is now approaching its busiest travel season of the year. Brazil, meanwhile, is largely a tripolistic market with Gol, Azul, and Latam, which means discounting doesn’t have to be as aggressive in luring back passengers. Latam and Azul, in fact, are now cooperating.