Air Transat Prefers Merger With Air Canada

Madhu Unnikrishnan

March 15th, 2021


Air Transat is seemingly unflummoxed by the possible collapse of its long-planned combo with Air Canada. Despite Canadian sign off on the the latter’s acquisition of Montreal-based Transat, the deal remains in limbo following the failure of European authorities to give the green light by February 15. But that’s not keeping Transat CEO Jean-Marc Eustache up at night.

“There is no need to worry about a plan B,” Eustache said during the airline’s fourth-quarter earnings call last week. “There’s a lot of work being done in the background.”

The Air Canada deal, which continues to “live on,” is Transat’s preferred forward path, said Eustache. A decision from the EU is expected before the end of the second quarter, or by June. However, if the deal collapses Transat will consider “all other options,” including a competing offer from Canadian businessman Pierre Karl Péladeau.

While Transat awaits a decision from Europe, the airline remains grounded. Operations were suspended in January and are not expected to resume until mid-June, when European summer travel begins to pick up. Fellow Canadian carrier Porter Airlines has also suspended all flights, though only through May, as a result of Covid-19 travel restrictions.

During the first quarter ending January 31, Transat reported an operating loss of C$98 million ($78.2 million) after revenues fell 94 percent year-over-year to C$41.9 million. The airline’s adjusted net loss was C$109 million.

Edward Russell

2021 Augurs Ill for Cathay Pacific

Cathay Pacific expects to operate about half its pre-pandemic capacity this year, with the bulk of the recovery expected to start in the second half of the year.

The year has not been off to a promising start. The Hong Kong-based airline had to slash its February capacity after the government imposed new travel restrictions at the end of last month. After February 20, when the restrictions went into effect, Cathay’s passenger capacity dropped to 60 percent of January levels, and cargo capacity fell to 25 percent of January.

Last year was grim for Cathay, which, unlike many of its rivals, has no domestic market. The carrier shuttered its Cathay Dragon unit and parked almost 100 aircraft. Cathay reduced its workforce by 8,500 employees. Another round of voluntary separations is expected in the first half of this year.

Cathay now expects to operate less than one-quarter of its pre-pandemic capacity in the first half of this year, with capacity steadily rising in the second half, to about 50 percent of pre-pandemic capacity by the end of the year. In the company’s full-year earnings report, management made clear that this forecast could change, because the pace of vaccination in its key markets and the threat of new travel restrictions could derail the airline’s recovery.

Cathay’s remaining Airbus A350-900s and A350-1000s, originally to be delivered this year and next year, will be deferred until 2023-2024. The carrier is in talks with Boeing to defer its order of 777-9s. Cathay Pacific took delivery of 10 aircraft last year, including one A321 Neo.

Cathay Pacific reported an HK$21.6 billion ($2.8 billion) loss last year, compared with a $218 million 2019 profit. Passenger revenues fell by 84 percent, and capacity for the year was down 79 percent. Cargo revenues rose by 16 percent to $3 billion, or about two times passenger revenues. During the year, the company stripped some economy seats out of its Boeing 777-300ERs fleet to complement its freighter fleet.

Madhu Unnikrishnan

Latam Starts Slow Climb

Latam‘s fourth-quarter 2020 capacity was about 38 percent of 2019 levels, but this was a vast improvement from April, when the carrier’s capacity plunged to 5 percent of the year prior’s. The carrier reported a quarterly operating loss of $502 million and $1.7 billion for the full year.

Latam, of course, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in May, with its Brazil subsidiary following suit in June. The carrier reported it ended the year with $1.7 billion in cahse, and has $1.3 billion left in debtor-in-possession financing available.

Latam’s planned joint venture with Delta Air Lines will continue and won regulatory approval last month in both the U.S. and Brazil. Chile is continuing its review of the deal, Latam said in its earnings statement.

Although capacity started to creep back up, the year was bad for the South American airline. Passenger revenues in the fourth quarter were 82 percent lower than in 2019. Costs were down almost 60 percent, mainly due to a 31 percent reduction in headcount. Latam ended the year with 300 aircraft in its fleet and did not detail its fleet plans.

Plunging passenger revenue was partially offset by cargo, revenues for which rose 27 percent, despite a decline in available capacity.

Madhu Unnikrishnan

$30 Billion AerCap-GECAS Merger Tilts Momentum Toward Leasing

AerCap’s $30 billion acquisition of General Electric’s aircraft-leasing arm, GECAS, is a bet by the Ireland-based lessor that cost-conscious airlines globally will be shifting more broadly to leasing aircraft rather than owning.

The deal will create a leasing behemoth, with more than 2,000 aircraft under management, 900 aircraft engines, and 300 helicopters. AerCap will acquire GECAS for $24 billion in cash, $1 billion in AerCap notes, and 111.5 million AerCap shares, giving GE a 46 percent stake in the combined company, which will continue to be known as AerCap. The company expects the combination will yield $7 billion in annual revenue.

AerCap and GE say the deal is expected to close in the fourth quarter of this year, after regulatory review both in 20 countries. Both companies are “confident” the deal will not raise antitrust concerns, AerCap CEO Aengus Kelly told investors last week in a call detailing the deal. It is worth noting, however, that AerCap and GECAS currently are the largest and second-largest lessors.

Globally, airlines are moving toward leasing, rather than owning, their fleets, both AerCap and rival Air Lease Corp. recently said. This trend only will accelerate as airlines emerge from the Covid downturn. Buying aircraft will be a harder argument to make to their boards, as airlines will be focused on paying down debt and any obligations they have to governments that offered loans as part of state aid “and not to send money to the OEMs,” Kelly said earlier this month during the company’s fourth-quarter and full-year 2020 earnings call.

A second trend that AerCap thinks the deal positions it to capitalize on is airlines’ expanding their fleets of advanced narrowbody aircraft, like the Airbus A320 Neo family and the Boeing 737 Max. A majority of GECAS’ fleet now is comprised of narrowbody aircraft. By 2024, the company expects two-thirds of its fleet to be comprised of narrowbodies, weighted toward “next generation” aircraft, like the 737 Max and the A320 Neo family. By that year, AerCap expects to have 75 percent of its fleet made up of next generation aircraft.

In its earnings call, AerCap said future demand for advanced narrowbodies will only grow, although the company remains committed to widebodies, particularly advanced aircraft like the Boeing 787 and the Airbus A350. “AerCap leased 200 widebodies in the last two years, or one every 10 days,” Kelly said on the call on the merger. “No other company has that capability.”

With 2,000 aircraft under management, AerCap will be a formidable force for the two airframers, Boeing and Airbus, to contend with and likely will gain a larger say in the design of future aircraft programs.

GE has been steadily divesting assets as the conglomerate seeks to focus on its core businesses, one of which is its aircraft engine unit. The deal with AerCap gives the Irish lessor 900 aircraft engines, mostly CFM 56 and CFM Leap engines used on narrowbodies like the Max and the Neo. But AerCap will not get preferential deals on maintenance, nor will the company be locked into selecting GE engines on future aircraft purchases, Kelly said.

AerCap also will acquire GECAS’ helicopter leasing portfolio, although it will comprise less than 10 percent of the combined company’s aircraft assets. The oil and gas industry is the primary customer for helicopters, and demand is rising now that oil prices have rebounded, Kelly said.

AerCap’s last significant acquisition was in 2013, when it bought ILFC from AIG for $28.1 billion.

Madhu Unnikrishnan

Airlines, Airports Benefit From New $1. 9 Trillion U.S. Coronavirus Relief Package

Airlines cancelled furlough notices to thousands of employees after President Joseph Biden signed a $1.9 trillion fiscal stimulus bill into law, ending a tortured route through Congress, which ultimately passed the bill on a party-line vote.

The law provides $14 billion to extend the Payroll Support Program through the end of September. As with last year’s CARES Act and the supplemental fiscal stimulus airlines received in December, carriers that take payroll support must promise not to furlough or involuntarily lay off employees through the period covered by the stimulus. Stock buybacks and dividend payments also are prohibited. Airlines got $25 billion in payroll support through the CARES Act and an additional $15 billion in December.

United Airlines and American Airlines were among the carriers that had issued notices to tens of thousands of employees that layoffs and furloughs were coming at the end of this month, when the December stimulus was expected to expire. “You can tear them up!” American CEO Doug Parker and President Robert Isom said in a letter to employees.

The federal government, like governments around the world, has lavished aid on the airline sector since the pandemic began. One key difference, however, between U.S. aid to the sector and that from other governments is that much of the federal aid is targeted at employees. In several European and Asian countries, furloughed airline employees are supported through existing unemployment programs or pandemic-related wage support that isn’t targeted at one sector.

Most U.S. airlines have said they expect to be much smaller this year and possibly next year. The federal aid is necessary, they argue, to keep staff current and certified and to avoid a brain drain, which would leave the unable to react when travel begins to rebound. “Preserving critical infrastructure will help our economy recover more quickly as the pandemic subsides,” Allied Pilots Association President Eric Ferguson said to make that pont.

Unions lobbied hard for federal support. “Our program reined in the worst corporate behavior by preventing layoffs, capping executive compensation for two years after relief ends, and banning stock buybacks and dividends for a year after the relief ends,” Association of Flight Attendants President Sara Nelson said in a statement. “Speaking with a united voice, we enacted the PSP and have now successfully extended it twice.”

The law also extends $8 billion in airport aid. This adds to the $10 billion airports got through the CARES Act and the $2 billion in the round in December. Airports could lose as much as $40 billion by next year if the pandemic continues, ACI-NA President Kevin Burke said.

Madhu Unnikrishnan

Madhu Unnikrishnan

March 15th, 2021