Iberia CEO: Now is Time to Invest and Expand
Iberia is leading the recovery at International Airlines Group (IAG). The carrier continues to outperform its group peers in terms of the financial recovery, but CEO Javier Sánchez-Prieto does not see that as a signal to rest on his laurels as the industry emerges from the Covid-19.
“It’s a turning point for us post-pandemic. It’s time to invest, it’s time to take some risk,” he told Airline Weekly in Washington, D.C., on June 2. Sánchez-Prieto arrived the day before on Iberia’s inaugural flight to Washington Dulles, a destination that the airline had planned to launch in May 2020 but was forced to postpone due to the pandemic.
A big part of that investment is expanding Iberia’s map. In addition to Washington, the airline is adding flights to Dallas-Fort Worth, Heraklion, Greece, and Nador, Morocco, this year, according to Cirium schedules. The new U.S. routes benefit from Iberia’s joint venture with American Airlines. U.S. capacity will be up 14 percent compared to 2019 this year. But the long-term focus for Iberia remains transforming Madrid into a “360-degree” hub — or one with connections in all directions, and not just between Europe and the Americas — Sánchez-Prieto said.
An expanded Madrid hub has long been a dream for Iberia and IAG. It was the rationale for the group’s bid for competitor Air Europa in 2019, which was dropped last December after regulatory pushback. IAG renewed its bid in March with a convertible loan deal with Globalia that it could convert to a 20 percent stake in Air Europa. That initial stake would be the basis for a full takeover of the airline within 18 months.
“The big opportunity is to develop Asia,” Sánchez-Prieto said. This aim, while not new for Iberia, was postponed by the pandemic and remains a long-term aim as border restrictions in many Asian countries remain.
Iberia hopes to resume flights to Tokyo in early 2023, Sánchez-Prieto said. He did not provide a timeline for a return to Shanghai, the airline’s only other East Asian destination prior to the crisis. Iberia suspended flights to both Shanghai and Tokyo in March 2020, Cirium schedule data show.
Another area where the carrier is investing is fleet. At the beginning of 2022, Iberia had 31 aircraft commitments with deliveries stretching through only 2024, and nearly half of those planes — 15 Airbus A320neos and A350-900s — are expected this year. The continued renewal of Iberia’s 100-aircraft strong fleet could include some of the up to 150 Boeing 737 Maxes that IAG ordered in May. “I think [the Max order] is very good for the group. We are analyzing now where to better place those planes,” Sánchez-Prieto said. IAG plans to announce airline placements for the aircraft by the fourth quarter.
Iberia, like many of its European peers, looks forward to a strong summer. System capacity will be at roughly 88 percent of 2019 levels with leisure and visiting friends and relatives (VFR) demand fully recovered, Sánchez-Prieto said. Corporate demand is down roughly 30 percent but continues to come back although differently than before, he added. He cited, by way of example, more combined business-and-leisure trips — or what some like to call “bleisure” travel. It aims to return to 2019 capacity levels by the end of the year.
IAG, including Iberia, anticipates quarterly profits from the June quarter onwards. Sánchez-Prieto confirmed this view.
The airline faces none of the staffing-related operational issues that some of its European competitors are dealing with, owing to the Spanish government’s support during the pandemic, he said. Airline, airport, and air traffic control staffing have prompted warnings and disrupted operations at other European airlines. Some have even been forced to cut capacity, including Iberia’s sibling British Airways that has slashed schedules by 10 percent at London Heathrow through October.
“We are part of a network, and we are experiencing more and more problems in German airports or [in] Amsterdam,” Sánchez-Prieto said. “We don’t see those problems in the Spanish airports, or in Madrid … [But] we are not operating in an isolated environment.”
Asked if he had any concerns over a potential Eurozone recession later this year, Sánchez-Prieto said Iberia was keeping a “close eye” on the economic situation. However, many people have extra savings from during the pandemic and, despite the war in Ukraine and high energy prices, are still eager to travel. “I hope that all those external elements will come to a more moderate place in the following months,” he said but added that Iberia has not provided fourth quarter guidance due to the uncertainty.
While Sánchez-Prieto did not say that the pandemic was behind Iberia, he did say it was time to “turn the page” from the crisis. The airline is different today than in 2020. For example, it is more agile and technologically adept than when Covid-19 hit, and that’s a good thing in Sánchez-Prieto’s view.
“With a little bit of luck in terms of the macro, we can combine this robust recovery of the summer throughout the year and continue with the growth of the company,” he said. “We have a plan.”
U.S. Airlines Raise Revenue Forecasts
Alaska Airlines, American, Delta Air Lines, and Hawaiian Airlines all provided fresh outlooks last week that indicate a red-hot summer ahead. Each carrier raised their revenue and unit revenue guidance for the second quarter with overall revenue up as much as 14 percent over 2019 with capacity still down as much as 18 percent. “The demand has been phenomenal,” Delta CEO Ed Bastian said.
Alaska raised its revenue outlook by at least four points to up 12-14 percent from 2019 on 7-9 percent less capacity in the June quarter. However, fuel expenses are also up with the airline forecasting an average price of $3.65-3.68 per gallon, or at least 11 percent higher than its expectation in April. Alaska’s unit cost (CASM) excluding fuel guide remained unchanged.
American expects revenues 11-13 percent higher than in 2019 on 7-8 percent less capacity in the second quarter. Total unit revenues, or TRASM, will be up 20-22 percent, or at least four points better than forecast in April. CASM excluding fuel and special items will rise 10-11 percent, and it will pay an average fuel price of $3.92-3.97 per gallon.
Part of American’s strong financial outlook stems from the pilot shortage. While American mainline actually has more pilots than it did in 2019, its regional affiliates do not, CEO Robert Isom said last week. As a result, more than 100 small regional jets are parked, and the airline will not “fly a full regional schedule” this summer.
Delta anticipates a full revenue recovery to roughly $12.5 billion despite flying as much as 18 percent less capacity in the second quarter than it did in 2019. As Bastian said, the airline is seeing very strong demand across segments, including leisure and corporate travelers. Delta’s CASM excluding fuel guidance widened by at least three points to up 20-22 percent compared with 2019, and average fuel prices are forecast at $3.60-3.70 per gallon.
And Hawaiian, which is waiting on Japan to ease travel restrictions for demand to return in its largest international market, is also more optimistic on the second quarter. Revenues will be down 4.5-7.5 percent from 2019, a half-point improvement since April, on 11.5-13.5 percent less capacity in the June quarter. And, unlike its peers, Hawaiian’s CASM excluding fuel guide improved by up to one point to up 15.5-17.5 percent. Average fuel expenses are forecast at $3.76 per gallon.
SAS CEO Threatens Administration
SAS CEO Anko Van der Werff threatened last week to take the airline through a court-led restructuring process after little progress was made on the strategic plan it unveiled earlier this year.
“If people are still aiming for or expecting that there will be a magical solution to the challenges that we’re faced with, I think they are wrong,” he said during the airline’s April-quarter earnings call on May 31. He added that if SAS is unable to “find the right outcome for us to be competitive” then “we may be forced to go in court.”
By that, van der Werff referred to the European equivalent of bankruptcy restructuring.
Van der Werff repeatedly cited aircraft lessors when asked about the lack of progress on SAS Forward. The airline is seeking to negotiate both more attractive lease terms and alter the composition of its fleet, particularly of widebody aircraft, he said. SAS wants to shrink and simplify its fleet of twin-aisle planes, which today includes 14 Airbus A330 and A350s, in recognition of continued travel restrictions to Asia and the likely long-term closure of Russian airspace. The airline also wants to accelerate the renewal of its narrowbody fleet, which includes completing the replacement of its 12 remaining Boeing 737s with new Airbus A320neo-family aircraft.
SAS Forward is a 7.5 billion Swedish kroner ($768 million), five-year savings program that, according to van der Werff, is needed to make the airline “competitive.” The plan breaks down into five areas: 2.3 billion Swedish kroner from operations and planning, 1.8 billion Swedish kroner from fleet, 1.2 billion Swedish kroner from airports, 1.1 billion Swedish kroner from administration and distribution, and 1.1 billion Swedish kroner from other areas.
SAS Chief Financial Officer Erno Hilden said the airline had made “limited progress” on the entire program.
SAS, which struggled financially even before the pandemic, faces stiff competition in its home markets. Its largest competitor, Norwegian Air, emerged from its own court-led restructuring a smaller, nimbler airline that is rapidly building back its medium- and short-haul network in the Nordic countries and to Europe. Startups Flyr and Norse Atlantic Airways are challenging SAS in Norway. And competitors Eurowings, Finnair, and Ryanair used the crisis to expand their presence in Stockholm, a stronghold for SAS. “We have to be fully competitive in order to stay relevant,” van der Werff said.
But the need to become a competitive airline runs deeper than just fending off other airlines. SAS needs to raise at least 9.5 billion Swedish kroner in capital in order to maintain “sufficient liquidity,” Hilden said. And it needs improve cost structure in order to raise those funds — hence SAS Forward — which the airline intends to do by issuing new equity, he continued. SAS also hopes to convert 20 billion Swedish kroner in debt to equity.
But SAS may have another option to administration. Swedish financial daily Dagens Industri reported on June 1 that a group of foreign investors were evaluating a deal to take the airline private. The investors, however, would condition any deal on SAS achieving cost cuts.
The talk of both administration and a privatization prompted the Oslo Børs stock exchange to place SAS’ stock in the “recovery box” from June 3. The so-called box is for companies “subject to circumstances that make pricing of the securities particularly uncertain,” the stock exchange said.
SAS looks forward to a strong summer. Van der Werff said booking trends are “encouraging” with the airline expecting passenger numbers at roughly 80 percent of three years ago this summer even with most of its Asia network still suspended. SAS will fly more to southern Europe this summer than it ever has before, he said. The carrier has positioned itself to capture a larger share of these leisure travel flows with these additional flights, as well as a new base in Bergen, Norway, operated by its new subsidiary SAS Link.
The cautiously optimistic outlook is tempered by the same concerns that other European airlines have cited. Operations are challenged by staffing everywhere from airports to suppliers and air traffic control organizations. Fuel prices are elevated due to high oil prices. The war in Ukraine continues to add an element of geopolitical uncertainty. And then there is Covid-19, which may have a few new variants to show yet.
SAS revenues jumped 265 percent year-over-year to 7 billion Swedish kroner during the three months ending in April, the second quarter in its 2022 fiscal year. Revenues were down 31 percent compared to 2019. The airline reported a 763 million Swedish kroner operating loss and a 1.5 billion Swedish kroner net loss. Unit revenues were up 10 percent year-over-three-years and unit costs excluding fuel up 12 percent.
The airline did not provide future guidance, citing macroeconomic uncertainty.
State Ownership Holds African Aviation Back
In the 1980s, the share of the African airlines’ global market share was around 14 percent, but that has fallen in recent years, despite the continent’s size and population, to about 1.9 percent. Yet, IATA predicts Africa will be one of the fastest-growing aviation markets over the next 20 years.
The large number of state-owned airlines may be the biggest hurdle to overcome. According to E.K Waithaka, the Executive Secretary Kenya Association of Air Operators in Kenya, one of the reasons is that most African states look at their airlines as symbols of national prides and not tools of trade.
“Those that are looked as symbols of national pride will not collapse since the state will always bail them out whenever they are in a crisis. The good side is that the nation will have an airline and will maintain its pride but the con of this is that the tax payer will be forced to support a dead horse,” he said.
Just recently, the Kenyan government approved a 20 billion Kenyan shilling ($17 million) in its 2022-23 budget to bail out national carrier Kenya Airways. This will see the state carrier receive a total of 56.6 billion Kenyan shilling, making it the largest corporate bailout in Kenya.
“While state airlines are not necessarily meant for profit making in Africa, the trickle-down effect is that when tourism arrives there are jobs created and trade done. The downfall of it results in a devastating effect in a nation. This is what happened recently in Namibia when our national carrier went down,” Namibia Tourism Board CEO Digu Naobeb said.
Namibia is currently in the process of talks with foreign airlines to serve Namibia after the national carrier collapsed. The government has managed to get Ethiopian Airlines to fly three times a week in Namibia and has also secured Qatar Airways, which from June will fly three times a week. In addition, Namibia has secured fifth-freedom rights from Namibia to Victoria Falls. Digu added that the reason for the failure of the state airlines is that most receive the funding capital injection from the government.
“Most of these airlines do not own their fleet and only lease it, which is a huge cost on its own,” he said. “Secondly, being that they are owned by the government, most appointments are politically motivated and some of the people in senior management are not exposed to running an airline or haven’t worked in aviation industry and that filters in into the disaster affecting airlines.”
Currently, Ethiopian, Royal Air Maroc and EgyptAir are the most profitable airlines in the continent. To survive, some are forming alliances like the recent Kenya Airways and South African Airways. The two carriers signed a strategic partnership framework in South Africa, in a move which they believe will see the two carriers eventually form a Pan-African carrier.
Others like RwandAir have formed joint venture partnership with Qatar Airways. In the partnership, Qatar Airways has bought 49 percent share of RwandAir which increases its network from 24 to 160.
“In my view alliances are good but they come at a nasty cost. You might be contributing to somebody’s economy. Sometimes airlines have agreements and contracts that say that if you make a lot of money and you are a member of the alliance you have to pay a certain amount of money which will make one party suffer at the expense of the other,” Waithaka said.
Experts say that for Africa’s airline share to increase globally, countries should adapt to the already proven styles that other continents have such as having one common regulator in the entire continent. In 1988, African countries came together the Yamoussoukro Declaration of principles of air service liberation. In 2000, the decision was endorsed by heads of states, and it became fully binding in 2002. Additionally, the Single Africa Air Transport Market is an initiative led by the African Union through the African Civil Aviation Commission (AFCAC). But the lack of political will is still making this a slow process.
“The single African air transport market is the only thing that can help us to become more competent and productive,” Airlines Association of South Africa CEO Aaron Munetsi said. “We need to see which areas we can cooperate with each other and other areas where we can collaborate.”
For African state airlines to be successful, governments need to ensure that they run as a business and not as a symbol of pride, he added.
“Airlines are a business just like any other,” Munetsi said. “No airline goes down because they don’t have an aircraft or airport, but because they have run out of cash.”
In Other News
- Air China plans to take “control” of Shandong Aviation Group, the principal shareholder in Shandong Airlines. The Beijing-based carrier owns 49.4 percent of Shandong Aviation Group and 22.8 percent of Shandong Airlines, and did not disclose how much it plans to raise its stake in the former to take control, according to a Hong Kong Stock Exchange disclosure last week. A full acquisition of Shandong Airlines would give Air China control over the largest airline in several key markets, including Jinan and Qingdao, per Cirium.
- United Airlines is investing another $100 million in its Flight Training Center in Denver. The carrier will build a new four-story building to house 12 new flight simulators at the campus adjacent to the city’s former Stapleton Airport. Marc Champion, managing director of the center at United, said the expansion provides the airline “even more resources to recruit and train the next generation of aviators.” United plans to hire 10,000 pilots by the end of the decade even as the broader U.S. industry faces a shortage of new cockpit crew members.
And in an interesting loyalty play, United added private-like charter operator JSX to its MileagePlus loyalty program. Members can earn and redeem miles on JSX, which flies primarily between airports in northern and southern California, under the pact. JSX and United said in a statement that “more cooperation” was coming later this year.
- And in other United news, CEO Scott Kirby is encouraged by the U.S. economy’s recalibration to its pre-pandemic norms. Before the pandemic, services constituted 41 percent of the economy, a portion that plummeted to 29 percent during the pandemic, and is now back to 36 percent. But now, consumers are shifting away from buying goods — “most of us don’t need to buy another dishwasher,” Kirby said — and home improvement back to services, which is bad news for manufacturers but good news for service industries, like airlines. Separately, Kirby is not threatened by new entrants like Breeze and Avelo, which he said will struggle with the challenges of high fuel costs and the pilot shortage.
- Frontier Airlines, Spirit Airlines, and JetBlue Airways continue to wage war by press release on the merits of which merger offer Spirit should accept. Frontier amended its offer to include a $250 million reverse termination fee, a move unanimously accepted by the boards of both it and Spirit. JetBlue, meanwhile, urged Spirit shareholders to accept its bid and said Frontier’s amended offer is an “acknowledgement that the regulatory profiles and timelines of both deals are indeed similar.”
- Mexican discounter Volaris reported 15 percent higher traffic on 15 percent higher capacity in May compared with last year. The carrier said it is “gradually” passing through rising fuel costs. May traffic and capacity results came in lower than expected, probably attributable to fuel costs that were 108 percent higher than last year, Cowen & Co. analyst Helane Becker wrote in a note to investors.
- More operational challenges at KLM. The Dutch airline cancelled at least 50 flights a day over the Pentecost holiday weekend, June 4-6, to help alleviate congestion at Amsterdam’s Schiphol airport. The congestion has been attributed to airport staffing levels, particularly of security personnel, in what is proving a wide-spread problem for European airlines and airports this summer. British Airways has also cancelled flights at London Heathrow as a result of airport staffing issues.