American and Gol Make Moves on Brazil
The new strategic partnership between American Airlines and Gol checks some important boxes for the two carriers. American gets much deeper access to South America’s largest domestic market — Brazil — something that Chief Financial Officer Derek Kerr has said is a priority for the company, while Gol gets a capital infusion that analysts say it needs to weather the balance of the Covid-19 crisis.
Under the deal unveiled last week, American and Gol will enter into a three-year exclusive codeshare — in other words American cannot partner with another Brazilian carrier, nor Gol with another U.S. one — and cooperate where allowed under antitrust rules. In addition, they will expand reciprocal loyalty benefits with details to come in 2022. And, importantly for Gol, American will invest $200 million in the Brazilian carrier in exchange for a 5.2 percent stake in the airline.
The new pact should surprise few in the industry. American is taking a page — really, a second page — out of Delta Air Lines’ playbook after the Atlanta-based airline wooed away long-time American partner Latam Airlines Group with a sizable equity investment in 2019. In response, American and Gol launched a basic codeshare covering Brazilian domestic routes in early 2020. And then in July, American took that first page from Delta with an equity investment in and partnership with Chilean discounter JetSmart that aims to give its millions of South American loyalty members domestic and regional flight options within the continent.
“The one thing we don’t do in South America is offer short haul and domestic connectivity in a lot of markets,” Kerr said at a Cowen & Co. investor conference earlier in September. “We’re looking to create partnerships that do that and enable us doing further the reach of our loyalty program there.”
In August, American Chief Revenue Officer Vasu Raja said that 65 percent of seats on the airline’s flights South American flights were sold locally rather than in the U.S. He added that many of those flyers are members of the AAdvantage loyalty program and, by adding partnerships like the one with JetSmart, American can create a “massive amount of customer value.”
The American-Gol pact also sets up a fierce competitive showdown among the three large U.S carriers in South America once travelers return. American will have local equity partners in Argentina, Brazil, Chile, and Peru with Gol and JetSmart; Delta in Brazil, Chile, Colombia, Ecuador, Paraguay, and Peru with Latam; and United Airlines in Brazil, Colombia, and Ecuador with Avianca and Azul. United also partners with Copa Airlines, which has an extensive into-South America network via its Panama City hub.
Based on 2019 numbers — and excluding shuttered Avianca Peru and Latam Airlines Argentina — American’s partners Gol and JetSmart had an almost 22 percent share of intra-South America capacity; Latam, a roughly 36 percent share; and Avianca and Azul, a 20 percent share, according to Cirium schedule data. However, these numbers have changed as a result of the crisis and Avianca and Latam’s Chapter 11 bankruptcy reorganization’s in the U.S. that have seen both carrier’s shed dozens of aircraft.
American has long been the largest carrier between the U.S. and South America. The airline carried 28 percent of the 15.1 million travelers who flew between the regions — and 28 percent of all U.S.-Brazil flyers — in 2019, Bureau of Transportation Statistics data via Cirium show. United carried nearly 12 percent and Delta just over 8 percent.
For Gol, the partnership is about more than just expanded network access. American’s investment is forecast to boost its liquidity to roughly 5.2 billion reais ($988 million) by year-end, wrote Bradesco BBI Transportation Analyst Victor Mizusaki in a report Wednesday. He forecasts that the additional liquidity, which will come from the issue of 22.2 million new shares, is “enough to overcome the Covid-19 pandemic.”
This is good news for Gol that some analysts have warned could struggle in coming years under its debt load and capital commitments.
The Latin American airline industry is in the midst of a pandemic-induced shake up. In addition to American’s deals and the bankruptcies, reports indicate that Volaris shareholder Caoba Capital has purchased a 40 percent stake in Chile’s Sky Airline opening the door to a tie up between the successful Mexican discounter and struggling Chilean carrier. And in Brazil, Azul is actively pursuing an acquisition of Latam’s local subsidiary, Latam Airlines Brasil, through the group’s bankruptcy restructuring. In addition, Gol agreed to buy Brazilian regional carrier Map Transportes Aéreos for 28 million reais in June.
“I do believe this is a kind of trend created by the pandemic,” Gol CEO Paulo Kakinoff said at an investor event in June. “[Gol] is about to reinforce, re-emphasize its role in promoting regional consolidation.”
Fly Play CEO Welcomes Comparison to Defunct Wow Air
Ask Icelandic startup Fly Play CEO Birgir Jónsson about comparisons between his carrier and defunct Wow Air and he’ll tell you he welcomes them. Wow, which shut down in March 2019, is remembered by many as the epitome of the overambitious budget carrier whose over-expansion led to its demise.
“I am not ashamed or offended if someone compares us to Wow. I think, in many ways, that’s a great compliment,” Jónsson told Airline Weekly. And the comparisons come in spades: Play was founded by a number of former Wow executives, including Jónsson himself, who was deputy CEO of Wow before its closure. Its business plan outlines the same volume business connecting budget-conscious travelers on both sides of the Atlantic Ocean over a Reykjavík hub. And its fleet consists of the same Airbus A320neo-family jets.
But that’s where Jónsson thinks Play is different. The carrier, which began flights in June, is taking the disciplined approach to the market that Wow did not. It plans to stick to A320neo and A321neo jets — none of Wow’s Airbus A330s — and focus on a flexible operation connecting major Eastern U.S. cities to Europe via Iceland, with the added benefit to Icelandic tourism to boot. And Play only targets a fleet of 15 aircraft by the end of 2025 — Wow’s peaked at 23 aircraft — with three A321neos already in its fleet and another six A320neo and A321neos under contract from lessors.
“To see the opportunity in the market and then try to find the aircraft and fulfill it, that’s the logical” way of doing business, said Jónsson. “[But] it’s so tempting to go get airplanes and then try to find opportunities, and that’s a fatal mistake in any business. You cannot just find the best deal on a great cooking machine and decide to found a restaurant.”
Play is one several startup airlines to launch during the Covid-19 crisis. Since December, Avelo Airlines and Breeze Airways have taken to the skies in the U.S., Flyr in Norway, Itapemirim Transportes Aéreos (ITA) in Brazil, and Lift Airlines in South Africa. And at least two more are in the works, Connect Airways in the U.S. and Norse Atlantic Airways in Norway.
Crises historically are a good times to launch an airline. Downturns often leave incumbents struggling and unable to mount a strong defense against new competitors. In addition, the barriers to entry are lowered with cheap aircraft available — Play has acquired its fleet at lease rates up to nearly a quarter lower than before the crisis — laid-off staff looking for work, and airports eager to fill the gaps left by retrenching legacy carriers. One only has to look as far as JetBlue Airways and Wizz Air after 9/11, and Azul after the Great Recession to find examples of startups that succeeded in the recoveries of economic crises.
But just because crises create opportunity does not make starting an airline easy. Play only filled 41.7 percent of its seats in July and 46.4 percent in August, its first two full months of operations. These loads are far short of the target 72 percent first-year load factor that Play outlined in a presentation to would-be investors in June.
“We deem this year, up until next spring, as like a ‘warm-up’ phase,” Jónsson said when asked about Play’s first early performance. The airline is focused on a reliable operation and expanding sales on the major global distribution systems, as well as boosting loads on its initial group of routes during this phase. July and August took a hit from the latest wave of Covid-19, something that was not included in its June investor outlook, and Play is unlikely to fill 72 percent of seats this year, he said. On a positive note, many bookings were just postponed — not cancelled — giving him optimism for the fall outlook.
“We’re just on track to building ourselves up to the main event, which is the U.S. operation,” said Jónsson. Play aims to begin flights to the East Coast next spring with tickets going on sale by the end of the year pending receipt of a U.S. foreign air carrier certificate, which it applied for in August.
Asked where Play intends to fly in the U.S., Jónsson first declined to name destinations, citing competitive concerns. He then went on to say that “it’s always going to be a mixture of Baltimore, Washington, Boston, New York and Toronto.”
Jónsson added that the airline’s startup phase will likely last into 2023, well after U.S. flights are due to begin, at which point he sees its operation realizing the business plan laid out to investors in June.
In terms of competition, Play does not see itself as a major disruptor for the likes of British Airways or United. Jónsson envisions the airline as something of a nimble, but niche, player filling a gap in the market for a budget carrier connecting North America and Europe via Iceland. “We do not want to be big. We do not want to be a volume player,” he said.
And he’s correct in the fact that an airline with just 15 aircraft, all narrowbodies, flying sub-daily frequencies is unlikely to have a significant impact on the major transatlantic players. Icelandair, whose model Jónsson cited as an example for Play, will feel the most pressure. A spokesperson for Icelandair was not immediately available for comment on the new competition, and the carrier did not acknowledge the startup in its second quarter results statement.
“We have to be optimistic,” Jónsson said of Play’s outlook. And with nearly $82 million in unrestricted cash on hand, the airline has some runway ahead of it to weather the unpredictable recovery.
Sun Country Sticks to Minneapolis
Sun Country is hewing to its plans to grow from 31 aircraft now to 50 aircraft in the next couple of years as it plans ambitious growth. One thing it will not add is a new hub in addition to its home in Minneapolis, a Sun Country executive said.
“We will dedicate a significant part of our future growth in Minneapolis,” Chief Financial Officer Dave Davis said at the Morgan Stanley Laguna conference last week. Minneapolis is a two-carrier market, split between Sun Country and Delta, and is even more so now that other airlines pulled back on flights to the airport during the pandemic. Delta may be larger, but Sun Country’s leisure focus and seasonal routes give it a unique market niche. “Almost everything we’ve tried out of here works,” Davis said.
The carrier also benefits from strong name recognition and brand loyalty in the Twin Cities. Most of its flights originating in Minnesota are sold directly to consumers. But outside of the Twin Cities, Sun Country’s sales are mostly through GDS platforms, Davis said.
The carrier also plans more “opportunistic” growth outside of its hub, in markets like Dallas and Los Angeles, for example, Davis said. Sun Country expects growth to resume in the first quarter of 2021, when sun routes from the Upper Midwest peak. The booking curve remains short, although so far the holiday season has been unaffected. “We are really counting on the first quarter of ’21 to be a powerful quarter for us,” Davis said.
New entrants pose, like Breeze Airways and Avelo, pose little threat, with almost no overlap in their networks, Davis noted.
Meanwhile, Sun Country’s charter business is entering its peak season as college football ramps up and when basketball season begins. There has been some softness in the military charter business, as other airlines in the market have deployed widebodies usually used for international routes to their military charter business.
The cargo business Sun Country operates for Amazon is “steady as she goes,” Davis said. The carrier does not plan to add — yet — to the 12 Boeing 737-800s it flies for the e-commerce giant. “If Amazon wants to add 737-800s, we think we can get some of that [market], but we’re not counting on it,” Davis said. “We don’t control the growth.”
Sun Country has seen no problems in recruiting pilots, but below-the-wing employees have been tougher to find. Like other airlines, Sun Country is facing difficulty in recruiting and retaining entry-level and lower-wage workers. Part of the reason the carrier has not instituted a vaccine mandate for its employees is it fears a mandate could drive some workers away, Davis said. And then there’s the weather. “Being on the ramp in Minneapolis in January isn’t the most fun thing in the world,” he said.
In Other News
- Australian authorities stopped Qantas and Japan Airlines‘ planned Australia-Japan joint venture last week. The Australian Competition & Consumer Commission denied their application after finding the tie up not in the public’s interest. The pact would have allowed Qantas and JAL to cooperate on flights in the market, something they argued would allow them to add more flights that would benefit consumers. However, with only one other competitor in the market — All Nippon Airways — following Virgin Australia‘s long-haul exit meant Qantas and JAL would overwhelmingly dominate the market. “Airlines have been severely impacted by the pandemic and this has been a very difficult period for them. But preserving competition between airlines is the key to the long-term recovery of the aviation and tourism sectors,” the ACCC said in a statement.
- A short hop away from Japan, Korea’s Air Premia has chosen Amadeus’ Navitaire as its reservations system. The selection of the New Skies system comes as Air Premia begins to plan its expansion into near-international Asia routes and to the U.S. Air Premia got its air operators certificate last month.
- Avianca‘s Chapter 11 reorganization plan had its first day in U.S. bankruptcy court last week. Counsel for the airline told the court that “constructive and cooperative” talks were on-going with creditors over the plan, which the judge approved for a vote with a final confirmation hearing scheduled for October 26. One outstanding point is the Avianca’s order for 88 Airbus A320neo family aircraft that it placed in 2015; the airline and Airbus continue to discuss terms but, according to Avianca’s counsel, the carrier can walk away from the deal without affecting its reorganization plan. In the meantime, Avianca continues to slowly recover from the depth of the Covid-19 crisis. Bookings have returned to roughly half of 2019 levels, and the airline plans to fly roughly 60 percent of its pre-crisis capacity this winter.
- Staying in Latin America, more deals appear to be afoot in the region. Investment firm Caoba Capital has made a $70 million investment, equal to a 40 percent stake, in Chile’s Sky Airline, according to local reports. While a major investment to boost capital is not unusual in these pandemic days, what stands out is the fact that Caoba also has a stake Volaris, and its Managing Partner Rodrigo Salcedo sits on the board of directors at Avianca. A source told Chilean daily El Mercurio that the firm would work towards synergies between its airline investments as part of the Sky deal. Of course, another big Volaris investor Indigo Partners might have something to say about that with Indigo a major shareholder in Sky competitor JetSmart.
- Three airlines are reshuffling their leadership decks. WestJet said Chief Financial Officer Harry Taylor will step up as interim-CEO later this year to replace Ed Sims, who announced his retirement in June. The Canadian carrier will continue its worldwide search for a permanent CEO. Jennifer Blue, who now serves as vice president of finance, will fill Taylor’s CFO role during his time at the top.
Meanwhile, Lufthansa Group named Steffan Harbarth, now one of two managing directors at Lufthansa Cityline, to the top job of Air Dolomiti. Current Air Dolomiti CEO Jörg Eberhart is going to corporate headquarters as head of strategy for the Lufthansa Group. Harbarth takes the helm on January 1.
And one airline announced a departure. Southwest Airlines President Tom Nealon left his role last week, although he will stay on in some capacity as a “strategic adviser.” Rumors that Nealon might leave Southwest began almost as soon Robert Jordan was named as CEO Gary Kelly’s successor in June. Southwest promoted current Chief Operating Officer Michael Van de Ven to president on Nealon’s departure.