American Airlines CEO Doug Parker will retire on March 31, and be succeeded by his longtime deputy, President Robert Isom.
The move will end Parker’s nearly 20-year run at the helm of a U.S. airline, including America West and US Airways, and bookended by crises: 9/11 and the Covid-19 pandemic. Parker, along with then-deputy Scott Kirby — now CEO of United Airlines — orchestrated the merger of American and US Airways in 2013 that created what remains the world’s largest airline to this day.
The news comes a little surprise to those in the industry, as the airline has been working on Parker’s succession plan for years.
“While we still have work to do, the recovery from the pandemic is underway and now is the right time to make the transition,” said Parker in a letter to staff on Tuesday. He called being CEO of American the “best job in all of commercial aviation,” and praised Isom’s team building and operational prowess.
The CEO transition at American is the fourth major leadership change at a U.S. airline since the Covid-19 pandemic began. Kirby took over as CEO of United in May 2020, just two months after the virus all but shut down air travel. Alaska Airlines CEO Ben Minicucci stepped into the top spot when Brad Tilden retired at the end of March. And Southwest Airlines CEO Gary Kelly will pass the reins to Bob Jordan at the beginning of February.
Isom takes over an American still recovering from the Covid-19 pandemic. The airline is due to fly roughly 89 percent of its 2019 capacity in December, according to Cirium schedules, and its recovery next year will be limited by the same staffing challenges that hamstrung it this summer and autumn. And the latest challenge, the Omicron variant, has slowed near-term traveler demand though the industry remains bullish on 2022.
“It’s about making American the best airline in the business,” Isom said of his plans in an interview. This includes building on the route map and partnership changes that the airline has made during the crisis, including its controversial new alliance with JetBlue Airways. He added that American has cut $1.3 billion in costs from airline since 2019.
Asked of the Omicron variant, Isom said it does not change his or the airline’s plans. “Anything that restricts travel has a dampening impact. But it will just delay [the recovery] — people want to travel,” he said standing by previous comments about robust pent-up travel demand.
And while Parker is rightly credited with creating the American of today and changing the U.S. industry, he has also faced criticism during his tenure. Some say American is a more mediocre carrier in terms of quality than it was when he took over; for example the carrier controversially densified its Airbus A321s and Boeing 737s, and removed personal entertainment screens from its narrowbody fleet. And, despite initial support from labor unions for the merger, Parker has been at odds with many of the groups, including pilots, flight attendants, and mechanics, for much of his time as CEO.
The transition likely would have occurred a year ago if it was not for the pandemic, said Parker when asked in an interview. After the merger in December 2013, he intended to stay until the integration was complete, which he said occurred when American and the TWU-IAM Association labor group reached an accord covering more than 30,000 maintenance and other staff in January 2020.
On his future plans, Parker joked he remains “gainfully employed” — as he put it at the Skift Aviation Forum in November — for the next four-and-a-half months. After that, he said he has nothing to disclose beyond remaining chair of American’s board of directors.
The leadership transition is expected to bring about little change at American. Isom has worked as Parker’s deputy at the airline since 2016, but with Parker on and off since the mid-1990s. Isom either oversaw or was actively involved in many of the major programs at American during the past five years, including some of the changes that Parker is criticized for.
Cowen & Co. Analyst Helane Becker wrote that Isom’s operational background suggests he will focus on “focus on improving on-time performance and other aspects of the operations” — areas in need of improvement at American. Investors should expect few strategic changes, she added.
“It’s game on!” Kirby told Isom after congratulating him on his new role in a social media post.
Southwest Plots a Cautious 2022
Southwest Airlines, encouraged by growing leisure travel demand, expects to be profitable this quarter and through all of 2022, making the third quarter of 2021 the last loss-making quarter for the carrier.
So far, the threat of the Omicron variant has not discouraged Southwest’s passengers from booking holiday and first-quarter travel. But the variant’s effect on travel is not fully known, and may yet affect business-travel bookings, which tend to be closer to the day of travel, Chief Financial Officer Tammy Romo warned at the Dallas-based carrier’s investor day last week.
Southwest expects to fly about 8 percent less capacity in the fourth quarter than it did in 2019. By contrast, the carrier began this year flying roughly half of its 2019 capacity. The airline expects 2022 capacity to be in a range from down 2 percent to up 3 percent from 2019, Romo said. “2022 will continue to be a transition year,” she said, adding that when the effects of the pandemic on travel fully recede remains unclear. Southwest plans to expand capacity by the low single digits annually through 2026.
Southwest spent much of pandemic adding new routes and cities to its network. The carrier has added 70 new routes from existing bases since June 2020, of which 58 were the only nonstop flights in the market. In addition, Southwest added 18 new cities to its map, accomplishing years worth of network growth in 18 months.
Most of the new cities Southwest added are leisure destinations — like Bozeman, Mont., and Santa Barbara, Calif., and beach destinations in Florida — to capitalize on leisure demand trends, Chief Commercial Officer Andrew Watterson said. But some, like Chicago O’Hare, Houston Bush Intercontinental, and Miami, were new airports in existing Southwest markets to appeal to business travelers.
The carrier does not plan to continue this route-expansion spree next year, and instead will focus on adding depth — frequencies — to existing markets. Southwest redeployed more than 120 aircraft to support its new routes and cities, reducing schedule depth by 22 percent from 2019 while demand remained depressed. This gave the carrier little wiggle room in the event of irregular operations. Southwest cancelled thousands of flights in October when storms in Florida caused cascading delays and cancellations throughout its system. “More schedule breadth means we have little recovery options to recover from extended delays,” President Mike Van de Ven said. “We were overscheduled.”
Stung by the October meltdown, Southwest is taking a measured approach to adding schedule depth. The carrier won’t add new flights unless it is fully staffed for the operation. Southwest is in the process of hiring 5,000 new employees this year, and expects to add 8,000 next year to support its expanded network and additional aircraft. But the airline is competing for that talent in a historically tight labor market with the likes of Amazon. “We are being cautious,” Romo said. “It will take us a while to staff up.”
In October, Southwest exercised options for 14 Boeing 737 Maxes, all -7s, for delivery in 2023. The carrier expects to add 264 -7s and 149 -8s between now and 2027 and has combined options for 238 more aircraft during that period. Aircraft capital expenditures are forecast at between $1-2.5 billion annually through 2026. Southwest plans to retire between 30-35 737-700s per year over that period.
Spending on aircraft, inflation, and increased wages are factors in driving up Southwest’s costs. Unit costs excluding fuel will rise 8 percent over 2019 levels next year. Fuel is a factor, too. Romo noted that although fuel prices are falling now after rising precipitously this year, prices remain volatile.
Managed travel is an increasing part of Southwest’s business, with the number of contracts doubling since 2018, Watterson said. Although it still lags American, Delta Air Lines, and United in the managed travel sector, the gap with those carriers is narrowing. In 2022, Southwest will “renew its focus” on managed travel and sales through the three GDS platforms where it has a presence: Sabre, Amadeus, and Travelport, he said.
But leisure remains a core focus. The carrier hopes to segment its leisure fares through a new fare class, set to debut in the middle of 2022. Watterson did not divulge many details, except to say the new fare class will be between Southwest’s “Anytime” and basic “Wanna Get Away” fares and will offer “enhancements” over the basic fare class. “This closes the gap between our existing fare products,” Watterson said.
Qantas Bullish on Pent-Up Long-Haul Demand
Qantas forecasts robust international traffic through 2023 amid strong demand for the long-haul flights it resumed flying in November.
The Sydney-based carrier expects at least two years of pent-up demand as it ramps up its long-haul flying, Qantas CEO Alan Joyce said at the CAPA Australia Pacific Aviation Summit last week. That demand is selling out many of the flights that it has resumed or set dates to resume. These include London, Los Angeles, and Singapore in November; Honolulu and Vancouver in December; and Bangkok, Johannesburg, and Tokyo in January, according to Cirium schedules. The airline also is seeing strong demand for its new service to Delhi that began on December 6.
The anticipation of a two-year surge in international travel follows a nearly comparable amount of time when Australia’s borders were essentially closed to keep out Covid-19. However, once the country passed an 80 percent national vaccination rate — the rate stood at 88 percent on December 6 — it has eased border restrictions and allowed international flights to resume. This has been a boon to Qantas, which saw international bookings surpass domestic bookings for roughly four weeks when the reopening was first announced.
To put that in perspective, Australia’s domestic network came close to fully recovering earlier this year before a last set of lockdowns prior to hitting the 80% vaccinated threshold. And Qantas plans to fly 2019 capacity levels in January, and it expects to expand to 115 percent of three years earlier by April. Its group subsidiary Jetstar, plans to fly 120 percent of 2019 capacity in April. Internationally, however, Qantas may not fully recover capacity for several years owing to the slower re-openings of some East Asian markets, particularly China.
Qantas is not alone anticipating a surge in pent up international demand. Prior to the emergence of the Omicron variant, United executives have expected one of the airline’s best years ever on the transatlantic in summer 2022. And, in October, Emirates President Tim Clark forecast a full business travel recovery for his airline, which relies almost entirely on international traffic, in 2022.
Joyce did not comment on the Omicron variant and whether it could slow Qantas’ recovery.
“We want to get people flying again,” said Joyce of Qantas’ strategy in 2022. The airline will focus on flying its aircraft anywhere it can generate cash — not necessarily a profit — in order to get all of its planes back in the air, and staff working again. This will do two things: Generate cash to begin paying down its pandemic debt, and allow Qantas to capture a larger share of domestic marketshare from competitors.
Joyce, echoing earlier outlooks from financial analysts, said he anticipates Qantas and Jetstar will emerge from the Covid-19 crisis with roughly 70 percent market share of the Australian domestic market. That’s a 10 point jump from where it stood prior to the pandemic.
Qantas and Jetstar’s growth comes after the restructuring of Virgin Australia, and closure of Tigerair Australia in 2020. Asked about Rex Airlines and startup Bonza, Joyce said he believes the former competes more with Virgin for the middle-of-the-market rather than with Qantas, and he said Jetstar has a strong franchise to compete with the latter.
Qantas is on schedule to unveil a preferred supplier — Airbus, Boeing, or Embraer — for its more than 100 narrowbody aircraft campaign by the end of the year, said Joyce. Calling the process very “competitive,” he reiterated that the airline was likely to select some combination of the A220, A320neo, 737 Max, and E-Jet-E2 families to replace its 95 Boeing 717s and 737-800s.
The order is part of Qantas’ commitment to achieve net zero carbon emissions by the middle of the century. In addition to more efficient aircraft, the airline will unveil a significant offtake agreement for sustainable aviation fuel (SAF) before Christmas, and continue its carbon offset program, said Joyce.
“We have to be careful to not throw the baby out with the bath water. Aviation has huge economic benefits,” said Joyce when pushed on whether Qantas’ mid-century target is fast enough to address climate change. He noted that batteries lack the energy density necessary to power larger aircraft, and hydrogen-powered engines remain at least a decade away. However, if either of those technologies “came around,” Qantas would be interested in adopting them.
Azul Sees Business Travel Growth
There are two business travel recovery camps in Latin America: On one side is Avianca where CEO Adrian Neuhauser thinks business travel has been permanently halved, and has restructured the carrier to look more like a LCC; and on the other side is Azul where Chief Revenue Officer Abhi Shah who is confident that corporate travel in Brazil will come back, and come back higher than it was in 2019. “Is corporate going to be back to 100 percent? The answer is over 100 percent,” he said with an eye on 2022 and 2023 during the Brazilian carrier’s investor day last week.
Of course, as we’ve seen in country-after-country domestic markets are the first to come back from the crisis, and Azul’s business travel outlook is almost entirely focused on South America’s largest domestic market, Brazil. The country has one of the highest vaccination rates in the developing world at 64 percent fully inoculated against Covid-19, and more with just one of their two jabs. And then there is Azul that continues to successfully stimulate traffic by serving destinations few other airlines do via three strategically placed connecting hubs in Belo Horizonte, Campinas near São Paulo, and Recife. The airline, which is already flying more domestic capacity than it did in 2019, forecasts earnings before interest, taxes, depreciation, and amortization (EBITDA) of 4 billion reais ($720 million) in 2022; slightly higher than the 3.6 billion reais EBITDA it posted in 2019. The wild cards for 2022 are not Covid-19 or the Omicron variant but rather foreign exchange fluctuations, and the price of oil.
To meet its growth projections, Azul is in talks with Airbus and Embraer over accelerating some of the aircraft it has on order into 2023-24, said Chief Financial Officer Alex Malfitani. The airline’s current delivery schedule includes four A320neos in both 2022 and 2023, and six E195-E2s in 2022 and two in 2023. Azul would use any accelerated deliveries, or new orders, to move up the replacement of E190s — currently scheduled to leave the fleet by 2026 — in order to achieve cost savings targets, as well as for growth. CEO John Rodgerson said the airline is “very happy” with the E2s, which Azul began operating in 2019, and noted that fuel burn is “much better than they told us.”
Cargo remains an area of growth for Azul. While executives reiterated the huge potential to capture more of the 45 billion reais in freight that moves by ground in Brazil — air cargo only accounts for 3 billion reais currently — they are increasingly willing to put their money where their mouth is to tap the market. Azul will convert five E190s to “preighters” — passenger aircraft with the seats removed to carry packages — from January. These planes directly target e-commerce logistics where the smaller packages do not need the same dedicated freighters as pallet cargo. In addition, executives said Azul has the belly capacity on its aircraft to accommodate a tripling of small package cargo from current levels.
“I’m very confident that our plan is substantially better than what they have today,” Rodgerson said when asked about Azul’s aborted takeover bid of Latam Airlines Group. The airline dropped its bid after Chile-based Latam filed a standalone restructuring plan with a U.S. bankruptcy court in November, with Rodgerson saying Azul will respect the court process that favors Latam’s plan. However, he remained confident in the airline’s proposal and indicated it is not out of the running yet: “We’ll let it come to us. I think we need to have the creditors go ‘Holy shit, what happened?’”
Avianca Reimagines Itself Post-Bankruptcy
Newly restructured Avianca has a robust vision for growth for the next few years. The airline aims to launch as many as 200 new routes by 2023, grow its passenger fleet by a quarter to roughly 125 aircraft, and compete vigorously with rapidly expanding Latin American low-cost carriers.
But that vision requires Avianca to compete more effectively. To that, end the Bogotá-based carrier slashed expenses through its U.S. Chapter 11 restructuring — it exited on December 1 — and is adding roughly 17-20 percent more seats to its Airbus A320 family jets — A320s go to 176 seats from 150 — to achieve the magic revenue and cost mix that drives higher profits and margins.
Avianca CEO Adrian Neuhauser said last week that unit costs per kilometer excluding fuel will be, at 3.4 cents, 38 percent lower in 2023 than they were in 2019. To put that in perspective, that’s better than both Azul and Gol in the third quarter, which reported unit costs excluding fuel of 3.5 cents and 4.6 cents, respectively. But the question is how that compares to the new crop of LCCs that, according to Neuhauser, are expected to dominate Latin American aviation by the middle of the decade.
JetSmart, Viva Aerobus, Viva Air Colombia, and Volaris are all expanding in Avianca’s territory. Viva Air competes directly with Avianca in the Colombian domestic market, though during the pandemic it pivoted to more of a hub-and-spoke network centered on Medellin, which is a destination that has long been secondary to Bogotá for the legacy carrier. And JetSmart, Viva Aerobus, and Volaris are all — for now — encroaching by expanding their presence on regional routes into Colombia.
Avianca is alone in trying to redefine itself among the three big Latin American airline Covid-19 restructurings. Aeromexico‘s reorganization plan doubles down on its core strengths: Its dominance in Mexico City, and partnership with Delta and other SkyTeam Alliance members. And Latam, after shrinking and shedding its loss-making Argentina subsidiary through bankruptcy, will look a lot like it did before bankruptcy but with less debt.
The question facing Avianca is whether its new cost structure, plus the revenue benefits of its fleet densification, are enough to compete with LCCs. Some industry analysts have said that, even with its Chapter 11 cuts, Avianca still has more full-time equivalent employees per aircraft than budget carriers. Volaris, the only publicly listed Latin American LCC, reported unit costs per mile excluding fuel of 4.09 cents — while not directly comparable to Avianca’s number, the metric would be lower if stated in kilometers — in the third quarter. The Mexican discounter’s numbers include its subsidiaries in Costa Rica and El Salvador.
“In an industry where margins are as thin as they are, and your production unit is the flight … the more people you can put on it, the cheaper your unit costs are,” Neuhauser told Airline Weekly in October. His comments shed some light on his thinking on competition: By adding seats to planes on top of the cost cuts achieved through bankruptcy, Avianca has a strong competitive proposition.
And there is precedent for what Avianca hopes to accomplish. In the U.S., the Big 3 all lowered costs enough through separate bankruptcies to be competitive with LCCs and discount giant Southwest. However, American, Delta, and United had the added benefit of consolidation to improve their competitive positions, and they did not operate as a web of wholly owned country-specific local carriers united under one brand as Avianca does.
Avianca aims to debut its first reconfigured A320 in May, and complete the reconfiguration of nearly 100 aircraft by the end of 2022 — a short timeline by most measures. The airline also plans to take delivery of roughly 20 new A320neo family jets next year. In addition, Avianca will remove its remaining seven passenger Airbus A330s, and focus on an all-Boeing 787 widebody fleet; it flies 14 787s and has firm orders for another two aircraft.
Another key to Avianca’s post-bankruptcy strategy is differentiating itself from budget competitors. This includes offering more spacious premium-style seating on its refit narrowbodies, strengthening its LifeMiles loyalty program, offering travelers connections across the Star Alliance network, and — finally — completing its long-planned joint venture with Copa Airlines and United. On the latter point, Neuhauser reiterated that Avianca continues to work on the proposed three-way “metal neutral” partnership that would cover flights between Latin America and the U.S.
United will hold an at least 16.4 percent equity stake in the post-bankruptcy Avianca, according to court documents.
In December, Avianca will fly roughly 65 percent of its December 2019 capacity, according to Cirium schedules. This includes launching several new routes, including many point-to-point flights — something Neuhauser said Thursday will feature prominently in the airline’s growth over the next two years — from places like Cali to Mexico City, or Medellin to Quito. These new routes are designed to give travelers more convenient options to connecting over hubs in Bogotá and San Salvador, as well as increase aircraft utilization to further boost revenues.
In Other News
- Investment firm Lianing Fangda Group has taken control of HNA Group’s troubled airline business, local media are reporting. With the deal, effective on December 8 and brokered by the Chinese government, Fangda will acquire Hainan Airlines, Deer Jet, and Tianjin Airlines, among others. HNA started its restructuring process in January, after a debt-fueled acquisition spree in the last decade forced it into bankruptcy.
- The Tata Group is looking for a new leader for its recently acquired Air India, local media are reporting. On the shortlist are current Tata executive Nipun Aggarwal and Surf Air Mobility President Fred Reid, who previously led Virgin America and has worked as an executive at Delta and Lufthansa, among other roles. Reid neither confirmed nor denied that he is in talks with Air India. Media report that Reid could be named CEO, while Aggarwal could be chief financial officer. Either way, the move signals that Tata means business in reforming the beleaguered airline, which has languished under state ownership for decades. Tata founded the airline in 1932, and it was nationalized a few years after India gained independence from Great Britain in 1947.
- A U.S. bankruptcy court judge has signed off on Aeromexico‘s exit financing plan and set January 18, 2022, as the date for a confirmation hearing. The approval came after the airline reached a settlement with the unsecured creditors committee over objections to the airline’s valuation under the plan. If the plan is approved by creditors, and then U.S. Bankruptcy Court for the Southern District of New York Judge Shelley Chapman, Aeromexico could exit its Chapter 11 restructuring in the first quarter.
- The U.S. and Ecuador have signed an open skies agreement, which removes all restrictions on the number of flights or destinations carriers can serve in either country. The deal, which went into effect immediately after approval last week, is the 131st U.S. open skies agreement.
- Gol, like Azul, has a rosy outlook for 2022. The carrier expects domestic traffic in Brazil to exceed pre-pandemic levels and, as such, plans to grow its fleet above 2019 numbers with the delivery of 16 new Boeing 737 Maxes for a total of 44 aircraft by end-2022. The return of Brazilian business travelers accelerated at the end of the third quarter — led by the education, industrial equipment, and automotive sectors — and is forecast to continue to pick up next year, Gol Chief Financial Officer Richard Lark said last week. And the airline remains open to cross-border mergers and acquisitions, he added noting that the post-pandemic environment requires Latin American airlines look beyond national borders. Gol is in the process of acquiring Brazilian regional Map Transportes Aéreos. Gol forecasts net revenues of 14 billion reais ($2.5 billion) — a less than 1 percent increase over 2019 — a pre-tax margin of roughly 1 percent, and a more than 8 percent decrease in unit costs excluding fuel year-over-three-years in 2022.