Delta: Business Traffic to Return in Second Half
Delta Air Lines is mapping out a three-phase recovery plan for the return of corporate travelers, prompting executives to forecast the optimistic possibility of profits by summer.
A new survey of the Atlanta-based carrier’s largest corporate customers found that 40% plan to resume 2019 levels of business travel this year and another 11% in 2022, Delta CEO Ed Bastian said during the company’s fourth-quarter earnings.
Conversely, another 42% of large corporations were unsure when they would return to 2019 travel levels and 7% said they would never fully return.
“All indications is corporate travel is ready to start coming back and will come back pretty aggressively beginning the second half of this year,” Bastian said.
The return of big-spending corporate road warriors is critical for the airlines’ recovery and is key to the industry’s aims to stop burning cash and, at some point, begin generating profits again.
Not everyone is as optimistic about business travel. A December survey by Atmosphere Research only found 1% of corporate travel managers and buyers anticipating a full recovery in travel spending this year. Another 37% expect to be back by 2023, though that percentage has risen steadily during the last months of 2020.
“They’re not as concerned about the flight, they’re more concerned about the employees’ journey to and at the airport, and where they’re going,” Atmosphere co-founder and travel industry analyst Henry Harteveldt said. These concerns are outside the control of Delta and other airlines.
IATA and Airlines for America (A4A) do not expect a full travel recovery until at least 2024.
Wherever corporate sentiments lie does not change the fact that airlines face a tough winter. Travel demand remains at record lows, having fallen during the first weeks of January from a pandemic peak over the Christmas and New Year’s holidays. Data from A4A shows U.S. traffic numbers down 63% year-over-year during the week ending January 12.
Carriers have pulled back on flights since the beginning of the year. Delta plans to fly as much as 6% fewer seats in January and February than it did in November and December, airline President Glen Hauenstein said during the earnings presentation. And while Delta maintains broad flight connectivity over its “core” hubs — Atlanta, Detroit, Minneapolis/St. Paul and Salt Lake City — operations at its coastal hubs in Boston and New York remain a fraction of what they were prior to the pandemic.
Delta expects 2021 to play out over three distinct “phases,” as Hauenstein put it. The first as a continuation the “choppy” travel demand that dominated 2020 through the winter. An “inflection point” when customer confidence begins returning will mark the second phase sometime in the spring. And a dramatic pick up in travel — the pent-up demand airlines repeatedly say they see in the market — accompanying the broad availability of Covid-19 vaccines sometime during the summer.
“I think in the next 90 days we’re going to see the green shoots we need to see,” Hauenstein told Delta staff during an employee town hall last week.
This trifold outlook differs slightly from that held by many Wall Street analysts and other airlines. They talk of 2021 as a year of two halves: The first half marked by dampened demand through the winter and spring, and the latter a dramatic recovery accompanying the broad availability of vaccines sometime mid-year.
“We expect a disappointing [first half of 2021] before seeing a leap forward in demand” late in the third quarter or in the fourth quarter, wrote Cowen analyst Helane Becker in a report. She added that, while optimistic for the vaccination roll out and reopening of some international travel, she has “little hope” of a sizable recovery in business travel this year.
While the consensus is that 2021 will be defined by two distinct periods, some analysts align more with Delta on the tipping point occurring sometime in the spring.
Whenever that inflection does occur, flyers should not expect Delta to quickly return to its pre-pandemic schedules. The airline plans to steadily add seats back to its operation by both unblocking middle seats, which it has kept empty since at least April, and returning larger jets to its schedule. In other words, travelers are likely to see more planes like the Airbus A321 — a large narrow-body jet with seats for 191 passengers — flying at Delta before its pre-crisis flight frequencies return on busy routes.
For the many travelers who have enjoyed an empty middle seat, Delta has made no decision on when it will end the practice, Hauenstein said during the earnings call. Blocks are in place through March 30 and will only be lifted as customer confidence and travel demand returns.
Delta reported a $755 million net loss on nearly $4 billion in operating revenues in the final quarter of 2020. Critically, it halved its daily cash burn to an average of just $12. However, owing to the choppy outlook, Delta expects comparable cash burn numbers in the first quarter. Liquidity stood at $16.7 billion at the end of December.
The carrier expects revenues to be down 60-65% percent in the first quarter of 2021. It plans to fly roughly 65% of the capacity it flew a year ago.
For the full year, Delta posted a $12.4 billion net loss in 2020, a dramatic reversal from its $4.8 billion profit the year before. Revenues fell 64% to $17.1 billion and expenses 27% to $29.6 billion. The airline shrank by more than half, with capacity down 51%, and passenger traffic plummeted 69%.
“It’s a year for the record books for all the wrong reasons,” Bastian told staff of 2020 during the town hall Thursday.
Norwegian Ends Longhaul Dreams and Dreamliners
Just a few years ago, Norwegian Air was launching new subsidiaries in Ireland, the UK, and even Argentina as it planned to remake intercontinental travel. Today, the struggling airline admitted its wings have been clipped. It will now focus on its core market in the Nordic region and operate a handful of short-haul European flights and eliminate long-haul routes.
It also will return its fleet of Boeing 787s, central to its international expansion plans, to lessors. Irish media report 787s have been arriving at Shannon Airport for their eventual return. Norwegian grounded its 787 fleet in March last year, due to both issues with their Rolls-Royce engines and as demand for international travel began to evaporate because of the pandemic.
As part of its restructuring, Norwegian also said it will cut its 140-aircraft fleet to 50 Boeing 737 aircraft, with plans to expand that to 70 narrowbodies by 2022, the company told Norwegian regulators. The company also plans to raise as much as $600 million in new capital.
Norwegian has been in administration in Ireland since November. The company got an infusion of state aid from Norway last year, but the Norwegian government turned down its request for a second round of aid in November.
Low-cost international flights, particularly across the Atlantic, have been a tough problem for airlines to solve. In the last decade, several airlines have tried, and some explicitly copied Norwegian’s model. It didn’t end well. Iceland’s Wow Air similarly tried to break into the low-cost transatlantic market and failed, liquidating in 2019. And Icelandair, which also tried flying to secondary markets, struggled to make the model work. Norwegian had been the lone survivor, before the pandemic, but now even it is exiting the market.
In a statement, Norwegian said it has already begun shuttering what overseas operations remain. Norwegian laid off most of its staff last year, and the new business plan will require more layoffs, although the company has not specified how many. British media report that as many as 1,000 employees at Gatwick could be let go. “Our focus is to rebuild a strong, profitable Norwegian so that we can safeguard as many jobs as possible,” CEO Jacob Schram said in a statement.
Norwegian did not specify which routes it will serve in Europe, but said it will focus on the Nordic region and a “shorthaul” European network. “Our shorthaul network has always been the backbone of Norwegian and will form the basis of a future resilient business model,” Schram said.
Norwegian’s downsizing likely could free up slots in the London area, as the airline operated a significant longhaul and European operation from Gatwick. These slots will be a valuable commodity when the airline industry eventually recovers.
It remains unclear what the effect Norwegian’s news will have on the 787 market. Boeing has cut production of the type, and last year delivered only 53 Dreamliners, compared with 158 in 2019. Now, presumably, several dozen more 787s will be available from lessors.
Norwegian was struggling financially even before the pandemic, strapped from its ambitious expansion plans. And those plans were really ambitious. It had established Irish and UK subsidiaries for low-cost longhaul (at one point offering transatlantic fares as low as $69). The airline offered transatlantic flights to secondary cities, including Hartford, Conn. Although the flights were popular and provided transatlantic connectivity to cities that had never had it, the airline posted often staggering losses.
Along the way, Norwegian got into a multi-year fight with U.S. labor, which alleged the company was flouting Norwegian labor laws with its Irish subsidiary and violating the terms of the EU-U.S. open skies agreement (a fight it eventually won by getting Transportation Department permission to fly to the U.S.). It launched a subsidiary in Argentina to operate both domestic and longaul routes. That business struggled from its inception, and eventually Norwegian sold it to JetSmart at the end of 2019.
Elsewhere in the Skies
- Transat has confirmed that its shareholders approved Air Canada’s takeover offer. The company said it rejected a rival bid from MTRHP, run by a Quebec businessman, Pierre Karl Peladeau. The rival offer would have preserved a more robust competitor to Air Canada and given customers more choice, Peladeau argued to the government of Prime Minister Justin Trudeau. Although Transat supports the Air Canada takeover, the European Commission may rule that the merger is anticompetitive, which could strengthen Peladau’s bid.
- SAS CEO Rickard Gustafson is leaving the company after 10 years at the top. He is expected to step down “no later than” July. Gustafson said he is leaving the company to helm one of Sweden’s “largest industrial groups,” without elaborating further. The airline has been rocked hard by the Covid-19 pandemic, although its competitive landscape looks a little better with rival Norwegian on the ropes. SAS now begins the search for a new leader, Chairman Carsten Dilling said.
- The U.S. now is requiring all incoming international passengers to present a negative Covid-19 test taken within 72 hours of departure for the country. Airlines had lobbied for increasing testing as a way to ease travel bans for European, Brazilian, and British travelers. The testing requirement is expected to go into effect on January 26.
- Virgin Atlantic is hoping to raise as much as $230 million from a sale-and-leaseback deal with Griffin Global Asset Management. The funds raised from two Boeing 787s would go toward paying back a loan the troubled carrier took last year.
- Will Canada’s Porter Airlines ever come back? The airline, which made its name through its quirky marketing (and raccoon spokescreature), has extended its grounding till March 29, or more than one year after it first suspended operations in response to the Covid-19 pandemic. It laid off or furloughed almost all of its 1,500 employees when it shut down, and has delayed its restart several times. Porter plans so far are to operate its entire fleet of 29 Q400s when it resumes operations, a spokesman told Airline Weekly. A decision on which routes will return first has not been made, he added.
- NO MORE PEACOCKS! United joined the growing number of U.S. carriers that no longer allow emotional-support animals on board. (These are animals, not pets, whose owners claim keep them calm or serve other medical needs. These are not guide dogs for the blind. And yes, a peacock once was involved in this menagerie, as have miniature horses, all sorts of dogs and cats, and, if rumors are to be believed, a goose.) American, Alaska, and Delta already have banned the creatures from flights. The U.S. Transportation Department recently changed its guidance to require airlines to continue flying guide dogs but allowing them to deny emotional support animals.
— Madhu Unnikrishnan