U.S. airlines face an increasingly challenging situation finding pilots for their regional affiliates. This shortage is affecting schedules and the recovery and, at least for American Airlines, costing millions of dollars to rectify.
In its fourth-quarter results, American reported $61 million in special charges related to “regional pilot retention.” This comes from the more than $180,000 in signing bonuses and financial incentives in place at its wholly owned subsidiaries Envoy, Piedmont Airlines, and PSA Airlines to attract and retain new crew members.
“The issue we have is the throughput of pilots and getting them into training,” said Robert Isom, president and incoming CEO of American, during the carrier’s fourth-quarter and full-year earnings call last week. He cited lower numbers of new pilots produced during the pandemic that, coupled with the early retirements during the crisis, has constrained hiring, particularly at U.S. regional airlines that the entree point for most crew members into the industry.
In addition to the added costs, American has suspended select regional routes this spring to mitigate the impact of the shortage. And American is not alone: Delta Air Lines has cut regional flying by up to a quarter in the first half, and United Airlines has parked more than 100 small jets and cancelled routes and destinations as a result.
Experts have warned that the pilot shortage in the U.S. could hamper the airline recovery this year. For American that means only recovering capacity to roughly 95 percent of 2019 levels this year, which is slightly lower than the forecast it provided in October.
Aside from pilots, American does not face any issues hiring, said Isom. The airline plans to hire 18,000 people across functions, including flight attendants, mechanics, pilots, and reservations agents, in 2022.
On a positive note, American CEO Doug Parker said that the airline — and the broader U.S. industry — has put the operational affects of both the Omicron variant and botched 5G wireless rollout behind it. But that is not before thousands of Omicron-related flight cancellations over the holidays and into January, and only after several global airlines cancelled select flights to the U.S. amid 5G concerns.
“It wasn’t our finest hour as a country to get us to that point,” Parker said Thursday. Government agencies, planemakers, and the telecom companies are now talking and sharing info, which will allow the safe full rollout of 5G technology, which allows for faster wireless speeds, he added.
American cancelled more than eight flights and delayed others as a result of the 5G rollout, according to a memo from operations chief David Seymour on Wednesday. The airline is awaiting U.S. Federal Aviation Administration authorization to operate Airbus A320 family aircraft and Bombardier and Embraer regional jets to airports near 5G transmitters during bad weather that require automated approaches. There are fears that the wireless technology could interfere with the altimeters on these aircraft.
While the 5G rollout debacle is a black eye for regulators, Omicron was outside of everyone’s control. The variant adversely impacted demand after the holidays, and particularly in January and February when American expects losses before a significant improvement in March.
The broader pandemic recovery remains on track, according to Isom. Omicron only affected the “timing” of the recovery to later in 2022 but not the fundamentals. Critically, domestic business travel continued to recovery in the fourth quarter to 70 percent of 2019 levels. However, Isom said the business travel mix remains changed — likely permanently — with American carrying more small- and medium-sized business (SME) travelers rather than managed corporate account travelers. Domestic and short-haul international leisure demand has nearly fully recovered. Only long-haul international demand remains down significantly from 2019 levels.
While American did not forecast a 2022 profit, Isom said the airline does anticipate returning to profitability later in the year.
One bright spot for 2022 is the arrival of its 13 delayed Boeing 787s. American anticipates deliveries of the jets to begin in mid-April — more than a year late in most cases — with four aircraft expected to be in place for the peak summer period, said Chief Financial Officer Derek Kerr. However, he noted that the April date was unchanged for several months and warned that any additional delays from Boeing could push it back.
American lost $931 million in the fourth quarter despite improving revenue trends. The airline brought in $9.4 billion in revenues during the period, which was down nearly 17 percent compared to 2019 but a nearly eight-point improvement from the decrease in the third quarter. Expenses were down just 3.6 percent year-over-two-years to $10.2 billion. Passenger traffic was down nearly 17 percent compared to 2019 on a 13 percent decrease in capacity.
For the full year, American lost nearly $2 billion including the benefit of $4 billion in special items particularly federal Covid-19 relief. Revenues were down almost 35 percent to $29.9 billion and expenses were down almost 28 percent to $30.9 billion compared to 2019.
American forecasts revenues at 78-80 percent of 2019 levels, and capacity at 90-92 percent in the first quarter.
The call Thursday marked Parker’s final earnings presentation. While only CEO of American since December 2013 after orchestrating its merger with US Airways, the call was his 107th consecutive results presentation after becoming chief financial officer of America West Airlines in June 1995. Parker steps down as CEO on March 31 though he will remain as non-executive chairman of the airline’s board.
“Our goal right now is to get back to profitability as soon as possible and deliver a reliable product,” said Isom, who will take over as CEO from Parker.
Omicron Crimps United’s Capacity Plans
United Airlines’ ambitious plans to fly 5 percent more capacity this year than in 2019 ran into an obstacle named Omicron. Due to the spread of the coronavirus variant, the airline now expects to fly less than it did in 2019, with most of the hit coming in the first quarter.
The carrier didn’t offer new capacity guidance, but affirmed that it is reversing its October forecast and will fly less than in 2019.
During the first quarter, United expects capacity to be down 16-18 percent from 2019, a reduction it did not see coming when it updated investors in October. The Omicron variant has hit United in two ways. First, passenger bookings began to drop in December and continued falling into January and February. Cancellations similarly spiked.
Second, the airline reported staff shortages during the holiday period, especially before the U.S. Centers for Disease Control and Protection (CDC) shortened its quarantine guidance from 10 days to five, a change actively sought by the airline industry. Despite this, CEO Scott Kirby noted that not one United employee has died during the Omicron surge — compared with roughly one employee death per week before vaccines became widely available — and none of its vaccinated employees have been hospitalized during this wave of the pandemic.
United, which has the strictest vaccine mandate in the U.S. airline industry, took flak last year for its policy requiring vaccines for all employees. But Kirby pointed out the policy’s success. “Our vaccine requirement has truly saved lives,” he said on the company’s fourth-quarter and full-year earnings call last week.
The company is confident the Omicron surge will soon be behind it. Bookings for March travel have stabilized, and demand for transatlantic travel during the summer are strong and are exceeding 2019 levels, Chief Commercial Officer Andrew Nocella said. The recovery of United’s East Asia and Southeast Asia network remains slow, due to travel restrictions in the region, but the carrier expects to rebuild its large presence in Japan and China eventually. More capacity is being added to Africa, India, and the Middle East to offset the slower recovery in Asia.
But, like many of their peers, United’s management believes Covid-19 is on its way to being and endemic disease, and the carrier is planning for that future. “We believe and certainly hope that as a company and society, we are moving into the endemic stage of Covid,” Kirby said. “But we’ll continue to manage as we have throughout the crisis and once again this quarter and be responsive to what actually happens instead of what we hope will happen.”
Customer behavior has changed during the pandemic: Leisure travelers are booking tickets closer to their travel dates, behavior which before the pandemic was more typical of business travelers. But Nocella is encouraged by the trends. In the first week of January, bookings were 48 percent lower than in 2019, as travelers cancelled flights due to the Omicron surge. By the second week, bookings were down 40 percent, and by the third, 25 percent. The carrier expects trends to revert to normal by the middle of next month. “March looks normal,” Nocella said. “There’s a hole in January that we can’t fill.”
One way that United will partially fill that hole is by bringing back 52 grounded Boeing 777s. Those aircraft have been grounded since early last year, when the Federal Aviation Administration (FAA) required further inspections on the Pratt & Whitney engines’ fan blades after a dramatic engine failure over Denver. (The majority of United’s 777 fleet is not powered by Pratt & Whitney engines and were not affected.) The grounded aircraft represented about 10 percent of United’s business, and are expected to start returning to the fleet in March, Nocella said.
United also is taking delivery of eight Boeing 787s this year, delayed from last year due to the FAA requiring Boeing to inspect their fuselages. And the carrier expects to take delivery of more than 50 Boeing 737 Max aircraft and plans to bring dozens of temporarily parked aircraft out of mothballs by the end of this year, later than originally planned.
The airline sees no difficulties in staffing those aircraft, despite the looming pilot shortage. United hired 1,200 pilots last year and expects to hire at a similar rate this year. In the next year or two, there could be fewer pilots coming from the regional carriers, but longer-term, United believes it can fulfill its pilot needs through its Aviate pilot-training program and through higher pay than offered at the regional airlines. “The big difference for us at the mainline is that at United, we create careers,” Kirby said. “They’re not just jobs.”
But the regional airline pilot shortage has had an effect. The carrier has had to end service to more than 20 cities due to its regional partners not being able to operate those flights. “We are facing the pilot shortage on our regional aircraft, not on our mainline aircraft,” Nocella said. “And we expect that pilot shortage to continue for a while, including for the rest of 2022; so we do expect, unfortunately, there will be a few more communities that we will have to remove from the network.”
Concerns over the deployment of 5G wireless networks have largely faded, now that Verizon and AT&T have agreed to a further delay of the rollout around several airports. Although some regional aircraft have had to divert this week, most flights are operating as planned. “I want to thank the White House, [Transportation] Secretary Pete Buttigieg, and the CEOs of AT&T and Verizon for finding and agreeing to an approach that mostly avoided what would have been severe disruption to passenger and cargo operations in this country,” Kirby said.
“While I wish it happened earlier, the good news is we now have everyone engaged, the FAA and DOT at the highest levels, the equipment aircraft manufacturers, airlines and the telecoms,” he added. “And I’m confident we’ll soon have a clear set of objective criteria that allow full rollout of 5G without significant impact to aviation.”
United reported a fourth-quarter net loss of $600 million, and a $2 billion net loss for the full year. Revenues in the fourth quarter were down 25 percent from the same period in 2019, to $8.2 billion. The carrier expects first-quarter 2022 revenue to be 20-25 percent lower than the same period in 2019.
An area of continuing strength for United, with its large Asia network and the ongoing logjams at ports and with surface transport, is cargo. Freight revenues were up 130 percent from 2019, to $727 million in the fourth quarter, a record for the airline. And for the full year, cargo revenues were up 100 percent from 2019, to $2.3 billion. “The supply chain disruptions, the backups at the ports, these things look likely to continue to some degree for the foreseeable future as we head into 2022,” Nocella said. “So we’re optimistic that cargo is going to have another great year.”
Latam and Aeromexico Face New Objections to Restructuring Plans
Aeromexico and Latam Airlines Group cannot catch a break in their separate, but fraught, U.S. Chapter 11 bankruptcy restructurings. Both airlines face allegations of using coercive tactics, namely offering creditors additional funds or the promise of future business, to garner support for their respective reorganization plans.
A group of Chilean bondholders represented by trustee Banco del Estado de Chile argued on January 20 that Latam offered “patently unreasonable” settlements totaling $2.8 billion to a creditor group known as the Evercore Group in exchange for their support of its plan. The support of the group would effectively nullify the votes of the Chilean bondholders and general unsecured creditors, according to the claim.
Members of the Evercore Group Sajama Investments, a partnership of Sixth Street Partners and Sculptor Capital Management, and SVP, including Poppintree Park LLC and Strategic Value Partners, both objected on January 20 to the Chilean bondholders claims. They called the allegations “theories” and “conjectures.”
The unsecured creditors committee in Aeromexico’s bankruptcy objected for a second time to the airline’s restructuring plan on January 18. The committee claimed that Aeromexico built support for its plan by offering creditors special benefits, the promise of future business, or the threat of a worse outcome if the plan was rejected. The committee alleges that these efforts contributed to nearly two-thirds of the 88 percent of votes in favor of the plan.
In addition, the committee claimed that Aeromexico’s plan unfairly favors “insiders,” namely major shareholder Delta Air Lines and four Mexican shareholders — Eduardo Tricio Haro, Valentin Diez Morodo, Jorge Esteve Recolons, and Antonio Cosio Pando — that control the majority of the airline’s board. The plan would give Delta 20 percent of the airline’s post-bankruptcy shareholdings, and the Mexican shareholders at least 4.1 percent.
Aeromexico said on January 21 that it “continues working with all of its key stakeholders” to achieve confirmation of its reorganization plan.
The objections are the latest stumbling blocks in Aeromexico and Latam’s fraught restructuring processes. Unlike their competitor Avianca that exited Chapter 11 in December, the airlines have faced challenges building consensus for their plans among creditors. Aeromexico has faced multiple objections from its unsecured creditors, while Latam is subject to an unsolicited takeover offer from Azul that is backed by several of its large creditors.
Aeromexico settled the unsecured creditors’ initial objection, which centered on the post-restructuring valuation of the airline, by agreeing to a one-time cash termination payment upon confirmation.
Latam has as yet fended off Azul’s takeover proposal, which it called “skeletal and incomplete” in a court filing on January 16. However, its own unsecured creditors committee asked the Bankruptcy Court for the Southern District of New York in December to end Latam’s exclusivity period. If granted, Azul and its supporters could officially submit their takeover plan for consideration.
For its part, Latam said in its January 16 filing that requests to Azul for additional details and information related to its proposal were “entirely unanswered.”
Hearings for both the confirmation of Aeromexico’s plan, and on Latam’s disclosure statement — a precursor to a confirmation hearing — are scheduled for January 27. Aeromexico aims to exit bankruptcy in the first quarter, and Latam in the second half of 2022.
In Other News
- WestJet has extended its January schedule reductions through February as the Omicron variant continues to adversely effect its workforce. The carrier will reduce capacity by 20 percent through February 28. WestJet is also pushing for the Canadian government to eliminate “cumbersome travel rules” that it says stymie the travel recovery.
- Qantas has slashed March quarter domestic capacity by another 10 percent, after bringing it down to 70 percent of 2019 levels earlier in January. The latest cut was due to Western Australia’s decision to keep its borders closed indefinitely amid Australia’s Omicron surge. The reductions to Western Australia are in place through March 31.
- Jet fuel prices surged by 68 percent last year and are now at their highest levels since the end of 2018, IATA data show. This is putting significant pressure on airlines’ costs and is not expected to abate any time soon. But with that said, IATA reports that airlines narrowed their losses, to 2.6 percent of revenue in the third quarter, down from 13.6 percent in the second quarter of last year. One interesting tidbit: Premium revenues are lagging economy revenues, a reversal of a trend seen at the start of the pandemic, when premium fares were holding up better. IATA attributes the reversal to the fact that the gap between premium and economy fares is reverting back to near its pre-pandemic norm.
- Flight attendants at American regional carrier Piedmont reached a tentative four-year agreement with the carrier that will raise wages and enhance other benefits. The deal, which was negotiated with the National Mediation Board, now goes before union members for a vote. It ends contentious, years-long talks that ended in October with a strike authorization vote. “Solidarity works,” Sara Nelson, president of the Association of Flight Attendants, said. “Credible strike threats work.”
- Here’s one way to address the U.S. pilot shortage. Startup Avelo is raising pilot pay by 50 percent and first officer pay by 30 percent and is offering $20,000 signing bonuses to pilots who start before this summer, among other benefits. The carrier hopes to hire 120 pilots this year.
- Air Astana said it resumed operating its full schedule and network on January 18, after suspending much of its network for 10 days due to social unrest and political violence in Kazakhstan. Almaty Airport, which serves the country’s commercial capital, was closed until January 13, while Russian troops were deployed in Kazakhstan to help quell the uprising. The airport at Kazakhstan’s political capital, Nur-Sultan, remained open throughout the crisis, local media report.