The pandemic partnership of Azul and Latam Airlines broke up faster than almost anyone expected. Latam is pulling the plug on the codeshare and frequent flyer relationship on August 22 — less than a year after the pact launched — citing the resumption of organic growth in Brazil.
In a statement, Latam Brasil CEO Jerome Cadier said the codeshare “no longer made sense,” and added that passenger volumes fell short of expectations.
But that is only half of the story. Azul claimed the move was a reaction to its decision to engage financial advisors to pursue consolidation opportunities in Brazil. And Reuters has reported that Azul wants to purchase Latam’s Brazilian operation as part of the South American carrier’s U.S. Chapter 11 bankruptcy restructuring.
“Our plans are unchanged and I am confident that we are in the best position to pursue strategic alternatives at this point in time,” Azul CEO John Rodgerson said.
Brazil’s aviation market is an oligopoly dominated by Azul, Gol and Latam. In 2020, the airlines carried more than 99 percent of all domestic passenger traffic. Gol was the market leader with a 38 percent share, followed by Latam with a nearly 34 percent share and Azul with a nearly 28 percent share, according to data from Brazilian aviation regulator ANAC.
Any possible consolidation in Brazil would be among these three carriers. And, if as Rodgerson said Azul will be a “key part of any such activity,” there would only be two options: Azul-Gol or Azul-Latam. The latter alternative looks better on paper given Azul and Latam’s complementary Airbus A320-family fleets; Gol flies all Boeing 737s. Azul also operates ATR turboprops and Embraer E-Jets on thinner routes.
“Consolidation would go a long way in helping address the future [debt] obligation that has been created at Azul and Gol and significant cost pressure from the weaker [Brazilian real] relative to the [U.S. dollar],” wrote Raymond James Analyst Savanthi Syth.
Syth agreed with Azul’s assessment that Latam likely ended the codeshare in opposition to overtures by the leadership in Campinas to acquire the Santiago, Chile-based carrier’s Brazilian subsidiary. However, she added that, with Latam still working through the Chapter 11 reorganization process, the “final outcome is far from certain” and dependent on both the court and creditors.
In response to reports, a Latam spokesperson said the the group has “no intention of selling or breaking up” its operations, including those in Brazil. They added that Latam has not received a merger proposal from Azul, and said the decision to end the codeshare was unrelated.
Latam was formed in 2012 by the merger of Chile-based Lan Airlines and Tam Airlines in Brazil. The combo created a true pan-South American franchise with domestic operations across the continent, including in Argentina, Colombia and Peru.
However, Latam’s pan-South American aspirations ground to a halt with the coronavirus pandemic. The airline closed its Argentine operation and retrenched elsewhere. Executives have said it plans to grow in Colombia, where hometown carrier Avianca is also restructuring in the U.S. under Chapter 11 bankruptcy protection. Latam has also accelerated work on its proposed joint venture with shareholder Delta Air Lines as part of its reorganization.
Azul is a partner of United Airlines, which owns an 8 percent stake in the carrier. Prior to the crisis, Azul was evaluating a four-way joint venture with Avianca, Copa Airlines and United.
Rather than restructuring, Azul has moved ahead with a number of strategic initiatives during the crisis. It expanded its air cargo business, which Rodgerson said earlier in May would be the “the story of Azul over the next several years.” Executives forecasted an imminent travel inflection point in Brazil and target EBITDA of 4 billion reais ($756 million) — higher than in 2019 — next year.
“We’re happy [and] I think they’re happy with it,” said Abhi Shah, chief revenue officer of Azul, on the Latam codeshare earlier in May. “Our intent is to keep growing it as the airlines grow and recover the networks.” Not as happy as he thought it turns out.
IATA: Politics, Not Science, Informing South America Border Restrictions
Governments in Latin America need to “follow the science” and not let politics dictate border reopenings and travel restrictions, or else the region will lag behind the rest of the world in the recovery of both its airline industry and economic growth, Peter Cerda, IATA regional vice president of the Americas, said.
Despite the rising vaccination rates in the region, many South American countries have maintained restrictive rules both on domestic and international travel. Chile, for example, has vaccinated more than 50 percent of its population and has loosened rules for domestic travel but is still essentially shut for international visitors. Other countries in the region require PCR tests and quarantines for all passengers, regardless of their vaccine status. These are political decisions not based on sound science, Cerda said, imploring countries to relax the regulations for vaccinated travelers. Not doing so could imperil the region’s economic recovery, he added.
Part of the problem is that few countries in the region are able to handle digital travel credentials. Self-check in and biometric passport control remain rare in the region. This does not bode well for the adoption of such digital medical credentials, like the IATA Travel Pass.
The inability to process digital travel credentials will prove a constraint as domestic travel recovers, IATA warns. It now takes an average of 1.5 hours to process a passenger through the airport in the region, due to social-distancing and other Covid restrictions. Airports now are processing about 30 percent of the passengers they did before Covid. If traffic rises to 75 percent of pre-Covid levels, it could take as long as 5.5 hours to process a passenger; if traffic matches pre-Covid level, this amount of time rises to 8 hours. But Cerda noted that countries in the region have chronically underinvested in air infrastructure.
Yet, given traffic in the region, there is a way to go before airport dwell times become a major concern. Demand, in aggregate, is down 82 percent from 2019. The split between international and domestic traffic is stark. International traffic is down 88 percent versus 2019, while domestic traffic in the region is down just 32 percent. Border restrictions are one factor explaining the split. The other is that citizens of Brazil — the region’s most populous country — are barred from entering most countries due to Brazil’s recent Covid surge. Cargo demand is up 4 percent from 2019, but freight ton kilometers have dropped by 21 percent, mainly due to less belly-hold traffic in passenger flights. IATA now forecasts that domestic demand will be about 52 percent of 2019 by the end of this year, rising to 88 percent next year. By 2023, domestic demand will surpass 2019 levels. International demand, however, will not return to 2019 levels until 2024.
A challenge in the region is, as it has been throughout the pandemic, the lack of coordination among governments and the resulting patchwork of restrictions, making it impossible for airlines to plan. Mexico, for example, has remained almost completely restriction-free throughout the pandemic, and as a result its domestic traffic has already begun to exceed 2019 levels. On the other hand, Argentina shut its airspace for months. Now, Argentina’s civil aviation regulator is requiring airlines to file their schedules every two weeks and is requiring 2 hours between international arrivals in Buenos Aires. IATA urges the government to allow airlines to file schedules two months in advance, which would give the industry more time to plan routes and frequencies, and to decrease the interval between international flights, Cerda said.
Consolidation could be a lifeline for struggling South American carriers, Cerda said. Governments have ponied up very little state aid for airlines, resulting in the de facto liquidation of several, including Interjet. The region’s three largest airlines — Aeromexico, Latam, and Avianca — are operating under Chapter 11 bankruptcy protection in the U.S. Although Latam and Azul walked away from their codeshare partnership on news that Azul is considering acquiring Latam’s Brazilian operation, the trend after the pandemic recedes will be toward more consolidation, he said.
U.S. Leisure Recovery Shifts Into Higher Gear
The U.S. air travel recovery looks to be shifting into upper gears in June. Nearly every carrier reports that leisure demand has recovered, with leisure yields at least comparable to 2019 levels at American Airlines, Delta, Southwest Airlines and United — as representative a sample one can get given their combined roughly 80 percent share of the U.S. market.
“We’ve been really, really pleased with the pace of demand recovery,” said Delta President Glen Hauenstein at a Wolfe Research conference last week. While the Atlanta-based carrier was one of the few yet to release an investor update, he said revenues would be down roughly 50 percent compared to 2019 in the second quarter. Delta guided a 50-55 percent drop in second quarter revenues in April. One positive trend: Premium revenues have recovered about 10 points faster than economy revenues, Hauenstein added.
American similarly did not release an update, but Chief Financial Officer Derek Kerr and Chief Revenue Officer Vasu Raja cited positive trends at the Wolfe conference. They added that business travel, led by small- and medium-sized enterprises, is back to 30 percent of 2019 levels. They even see the possibility of a surge in corporate travel above 2019 levels towards the end of the year and into 2022 as businesses get pent-up demand out of their system.
Southwest sees booking trends normalizing — or returning to pre-pandemic patterns — in June and July, it said in an update earlier in May. The Dallas-based carrier maintained its financial outlook for the second quarter but noted that business travel is only back to roughly 20 percent of 2019 levels.
With the aforementioned yield improvements, United’s total unit revenue (TRASM) forecast improved to down 12 percent compared to 2019 in the second quarter from down 20 percent. The Chicago-based carrier anticipates positive EBITDA in June, and for the full third quarter. Its EBITDA margin forecast has improved to negative 11 percent from negative 20 percent in the second quarter.
Citing improved bookings, Alaska Airlines’ cash-flow outlook improved by $100 million to $550-650 million for the second quarter in its own update last week. The Seattle-based carrier forecasts a breakeven pre-tax margin for the period, and a positive margin in the third quarter. Business demand, however, remains roughly 25 percent of 2019 levels. Alaska executives forecast business travel recovering to half of pre-crisis levels by year-end.
Hawaiian Airlines revenue outlook has improved for the second quarter. The Honolulu-based carrier forecasts a year-over-two-years revenue drop of 42-46 percent rather than a 45-50 percent drop. Its adjusted EBITDAR loss forecast has improved to $10-40 million, instead of $20-70 million.
United CEO Bets on Business Travel
When business travel returns in the U.S. is the subject of much debate and conflicting opinions. Southwest’ CEO Gary Kelly, citing recoveries after previous recessions, has said it could take between 5-10 years. Delta’s Ed Bastian forecasts as shorter timeline. And then there’s United’s Scott Kirby, much more bullish than the rest and confident the climb out has already begun.
Kirby thinks business demand will start to pick up in September, when schools reopen and people are more comfortable getting back out on the road. Business travel could soon exceed 2019 levels, although Kirby did not offer a timeline for when. “It’s just human nature” to want to meet in person, he said at the Wolfe Research Global Transportation and Industrials conference last week.
“We took business travel for granted; it was a hassle and a pain,” Kirby said. “People will want to travel again — they’ve missed it — and there’s pent-up demand for business travel.”
Even tech companies are showing signs of wanting to travel again, Kirby said. Tech companies in the San Francisco Bay area are recalling workers to their offices, even if only for part of a week or month. Kirby thinks this could result in the growth of a new kind of business travel: Workers who may have moved to remote locales — Kirby cited Idaho — will have to travel back to San Francisco a few times a month to work from the office. “We see possibility of some incremental growth,” through that, he said.
(In fact, Kirby himself said he planned to work from United’s Chicago headquarters one week per month, to be on the road for one week a month, and to work from home for the balance of the month.)
United was particularly vulnerable at the start of the pandemic, with its reliance on business travel, its large international network, its coastal hubs in areas where the disease first started to spread. But the carrier has made structural changes, including reducing its corporate and management headcount, that will be permanent, Kirby said.
The federal payroll support program was beneficial, but it could have stymied innovation in the industry, Kirby noted. Had there been on payroll support, the industry would have focused more on capacity discipline and reducing costs.
Looking forward, Kirby does not believe inflation will be a problem as the U.S. economy recovers from the pandemic recession. Consumer confidence is rising, with JP Morgan Chase reporting a 6 percent increase in credit card spending. United itself expects positive EBITDA next month (see story above).
Domestic leisure travel demand is beating all expectations from earlier this year. Domestic leisure yields are expected to exceed 2019 levels in the second quarter, United said in an investor update. International travel will remain constrained as long as border restrictions remain in place. But Kirby is confident that the recovery in international travel will be more apparent “in a year or two.”
Hawaiian Sees Domestic Demand Surge, While Inter-Island, International Networks Lag
It’s a tale of three networks for Hawaiian Airlines, which CEO Peter Ingram noted is in a “dramatically different place” than it was just a few short months ago. The carrier’s flights to the mainland U.S. are booming, but its once-robust international network remains moribund, as is its inter-island route map.
Hawaiian’s recovery only began last fall, when the state government eased the strict testing and quarantine requirements that had been in place since the start of the pandemic, Ingram said at the Wolfe Research Global Transportation and Industrials conference last week. The carrier has added several mainland routes, including to Austin, Texas and Orlando, that it hadn’t served before the pandemic. Those routes are likely to stay even as the pandemic recedes, Ingram said.
Domestic mainland capacity is “100 percent back,” and will likely exceed 2019 capacity, Ingram said. The carrier has redeployed its widebodies normally used on international routes to mainland flights, like the route to Orlando. Fares were lower but are starting to rise again as travelers, cooped up at home for a year and unable to take international vacations for the most part, have flocked to Hawaii.
The inter-island network is showing signs of life, after Hawaii on May 11 eased restrictions on travel between the state’s islands. Residents can now travel between the islands if they have proof of vaccination. Travel is recovering but is not as robust as the carrier’s mainland routes. “This is frustrating to us,” Ingram said.
When Hawaiian’s international network will restart in earnest remains a wild card, however. Vaccination rates in much of the world outside the U.S. remain low. Travel restrictions are onerous. Japan, which furnished 20 percent of Hawaii’s tourists before the pandemic, is seeing infections rise in some regions, and its vaccination rate remains extremely low. Yet, Ingram said he had every confidence that the international network will bounce back quickly once inoculations are more widespread, if the quick recovery of the mainland network is any guide.
Because the international network remains in the doldrums, Hawaiian is not pursuing its planned joint venture with Japan Airlines at the moment. The federal government denied the carriers’ application, and both had said they would try again. But now is not that moment, Ingram said. Instead, when traffic between the two countries starts to ramp up, Hawaiian will pursue further opportunities for codesharing and frequent-flier program coordination until a joint venture makes sense.
Ingram brushed off concerns that Southwest’s expansion in Hawaii will be much of a threat. Hawaiian is the hometown airline and understands the market and its idiosyncrasies better than any other carrier could, he said.
Separately, Hawaiian said it is planning to hire as many as 400 employees as demand starts to surge. The carrier had recalled almost all of its furloughed employees, it said in a statement. Many of the positions being filled are new jobs to support routes the carrier recently opened.
Brazilian and Icelandic Startups Plan June Launch
It is said that in crisis lies opportunity. That is abundantly clear in aviation with new carriers either in the air or in the works around the world. Brazil and Iceland are home to two of the latest startups: Itapemirim Transportes Aéreos (ITA) and Play Airlines, respectively.
ITA plans to begin flights between Brasilia and São Paulo Guarulhos on June 29. The startup will expand to seven destinations by the end of July: Belo Horizonte Confins, Curitiba, Porto Alegre, Rio de Janeiro Galeao and Salvador. It plans to serve 35 airports in Brazil by July 2022.
ITA is owned by Brazilian transport conglomerate Grupo Itapemirim, whose main long-distance bus business operates more than 300 buses around the country. The group plans to “democratize” air travel in the country, though it does not specify whether it will pursue an ultra low-cost or more upscale model. ITA will fly Airbus A320 jets with 162 seats.
A little over 6,000 miles to the north, Play plans to begin passenger flights between Reykjavík and seven cities in Europe on June 24. Initial services include: Barcelona, Berlin, Copenhagen, London Stansted, Paris Charles de Gaulle and Tenerife. The carrier’s senior management is a who’s who of former Wow Air executives, including CEO Birgir Jónsson who was deputy CEO of Wow until 2015 and operations chief Arnar Magnússon who held the same role at Wow until the airline shut down in 2019.
Play plans an ultra low-cost model and will also fly A320 family jets. Tickets for both ITA and Play are on sale.
In Other News
- U.S. lawmakers joined the chorus of officials demanding the FAA take action against Belarus for forcing a Ryanair flight to land in Minsk. Last week, Belarusian authorities detained dissident journalist Roman Protasevich after scrambling a fighter jet to force a Ryanair flight en route from Greece to Lithuania to land, ostensibly because of a bomb on board. No bomb was found. The threat was a ruse to detain Protasevich. The move, described as a “state-sponsored hijacking” by several European officials skirted the bounds of international aviation law, ICAO said.
The European Union quickly banned Belavia and other Belarusian carriers from operating in EU airspace and barred European airlines from overflying Belarus. The overflight ban could be a nothing more than a minor inconvenience for Europe’s airlines, but it could be devastating to Belavia and the Belarusian economy, already hobbled by sanctions imposed after the country’s strongman President Alexander Lukashenko violently cracked down on protests against an election widely seen as rigged. Belarusian citizens seeking to travel to the EU will have to fly east before changing flights to fly west.
While the EU and the U.S. denounced Belarus’ action in the strongest diplomatic tones, Lukashenko remained defiant. Russia, Belarus’ patron, dismissed Western concerns and said the matter is an internal affair for Belarus. - SAS reported a net loss of 2.1 billion Swedish krona ($253 million) in its second quarter, which ended in April. While steep, the result was actually an improvement over its 3.3 billion krona loss in the second quarter of 2020. Revenues fell 63 percent to 1.9 billion krona on a 61 percent decrease in expenses to 2.8 billion krona. SAS had 4.4 billion krona in cash at the end of April.
In a report on the quarter, acting CEO Karl Sandlund said SAS continues to focus on reducing expenses and improving efficiencies. The airline expects competitive pressures to increase after the pandemic as budget carriers, including Ryanair and Vueling, expand to fill the gap left by retrenching Norwegian Air.
SAS shrank its fleet by nine aircraft — including Boeing 737s and Bombardier CRJs — from February through April. It flew 131 aircraft at the end of the period. - Norwegian Air has emerged from its restructuring a much smaller airline with much smaller ambitions. In an update to investors, the carrier said it has raised 6 billion kroner ($721 million) in capital. Norwegian has 51 aircraft in its fleet now, down from more than 150 before the pandemic, when its network stretched across the Atlantic. The carrier will now fly routes “in Norway and the Nordics or from Norway/the Nordics to continental Europe,” Norwegian said. Norwegian completed the restructuring processes in Ireland and Norway last week.
- Gol is feeling more optimistic about the second half of the year. In recent guidance, the Brazilian budget carrier said it expects load factors to top 80 percent in the second half and that it will operate 110 aircraft, versus 80 in the second quarter. Gol expects to operate 114 domestic routes in the second quarter, rising to 159 by the second half. CEO Paulo Kakinoff called the growth “organic,” responding to rising demand in Brazil. The country is expected to finish its vaccination program by the end of the year. Gol is emerging from a dark first quarter, when Brazil suffered a devastating second wave of Covid-19. Gol warned, however, that a “high degree of uncertainty remains.”
— Madhu Unnikrishnan and Edward Russell