Is the Continent’s Hot Vaxxed, Ready-to-Travel Summer Melting Away?
Note From the Editor
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Pushing Back: Inside the Issue
Cancelled flights, lost bags, and industrial action are all becoming the European travel story of the summer. Staffing, whether it’s at airports, air traffic control organizations, or airlines, is the main cause for operational woes that are hitting some of the continent’s busiest airports, from Amsterdam to Frankfurt and London. Add to that potential strikes and the situation only gets worse. But, as yet, airlines have yet to see any material financial fallout and, instead, seem to be benefitting from pent-up demand and high fares. We’ll see how long that lasts.
And the situation isn’t limited to Europe. In Australia, the country’s three busiest airports and its largest airline, Qantas, are warning of crowds during peak travel periods in July. The carrier is offering staff bonuses under the auspices of their hard work during the pandemic, but also just as it needs them most. Qantas has also trimmed schedules due to high fuel and to minimize potential disruptions.
And in the U.S., the pilot shortage continues to wreak havoc with American Airlines exiting four small communities — two of which lose their last connections to the global airline network. And SkyWest Airlines has a novel solution to expanding pilot supply and maintaining air service: start a new airline. No where you are: it’s going to be an interesting summer.
The Airline Weekly Lounge Podcast
Are profits on approach for airlines in 2023? Edward “Ned” Russell and Jay Shabat discuss IATA’s updated outlook, and Director General Willie Walsh’s comments at the annual general meeting in Doha. Also, SkyWest Airlines has a novel approach to expanding the pool of pilots. Listen to this week’s episode to find out. A full archive of the ‘Lounge is here.
Weekly Skies
Late last week, FedEx reported financial results for the quarter ending in May and, for the second straight fiscal year, saw operating margins register at 7 percent, after adjusting for one-off accounting items. For just the May quarter, operating margin was 9 percent, also flat with the same period a year ago. FedEx CEO Raj Subramaniam, recently appointed to fill the shoes of legendary founder Fred Smith, opened the earnings call by trumpeting the firm’s efforts to transport baby formula from Europe to the U.S. to help relieve a national shortage. It’s also active in flying humanitarian relief for Ukrainian refugees in eastern Europe.
Unlike its counterparts in the passenger business, FedEx stayed extremely busy during the pandemic, and strongly profitable as well. It benefitted as passenger planes were grounded, removing lots of competitive belly freight capacity from the market. That belly capacity is starting to return, however, just as storm clouds gather on the demand horizon. FedEx said it’s ready to react if there’s an economic downturn, the odds of which are increasing as countries deal with geopolitical shocks, lingering Covid challenges in Asia and inflationary price trends, most importantly for fuel. FedEx is less exposed to the current fuel shock than passenger airlines, thanks to its ability to pass on costs through surcharges. “I am confident we have the tools to get to continue getting inflation plus pricing,” said FedEx Chief Customer Officer Brie Carere.
Wage rates, which rose sharply during the pandemic amid shortages, are now starting to stabilize, the company said. But back on the demand side, consumers in the U.S. market have started to shift their spending away from goods as the pandemic receded, allocating more of their spending to services like leisure travel for example, or dining out at restaurants. That’s naturally meant fewer goods for FedEx and other logistics companies to move. Amazon, in fact, has admitted to over-expanding capacity. Separately, FedEx said in its earnings call that pilot hiring is not an issue.
In Europe, meanwhile, FedEx is consolidating and expanding flights at its Paris hub to boost network efficiency. Make no mistake: running a global logistics company with nearly 700 airplanes wasn’t easy during a pandemic. Difficulties remain with tight labor markets and supply chain bottlenecks. But never did it experience any annual financial losses. FedEx will have more to say this week, when it hosts an investor day event at its Memphis headquarters.
Qantas Trims Ahead of July Peak
The Covid-19 pandemic air travel recovery may have a hex on it. Flying is in disarray in Europe and the U.S. amid staffing shortages and industrial action, and Australia appears the next domino to fall with the country’s largest airline, Qantas Airways, warning about the months ahead.
Qantas will boost ground staff numbers by 15 percent in July compared to levels during the Easter peak in preparation for crowds, it said on June 24. In addition, the airline is offering non-management staff a one-time A$5,000 ($3,456) bonus after a two-year wage freeze. The one-time payments are forecast to cost Qantas A$87 million.
The moves could ameliorate any staff misgivings come as Australia braces for a busy July. The Brisbane, Melbourne and Sydney airports — the country’s three busiest — have both warned flyers of crowds, and advised them to travel with patience. The latter said on June 21 that it expects more passengers to pass through its terminals than in April during the Easter holidays. “We won’t sugar-coat the fact that the terminals will be busy during the school holidays, and there will be queues,” Sydney Airport CEO Geoff Culbert said.
Qantas, like its peers in Europe and the U.S., is also cutting flights in what it hopes will help ease airport crowds. The airline will reduce its domestic Australia capacity by another 5 points, for a total of 15 percent off plan, in July and August. Capacity will be reduced a further 15 percent in September, and then by 10 percent in October through March 2023. The airline says the cuts will also help it recoup high oil prices.
Qantas will fly 99 percent of its 2019 domestic capacity in the September quarter, 106 percent in the December quarter, and 110 percent in the March 2023 quarter. Its fiscal year ends in June.
The carrier’s international recovery remains unchanged. In fact, Qantas will add new thrice-weekly service between Perth and Johannesburg with an Airbus A330 on November 1. The new route will complement its existing nonstop between Sydney and Johannesburg, and takes advantage of changes in the market during the pandemic. South African Airways flew the Johannesburg-Perth route until 2020, according to Cirium schedules, but, after a difficult pandemic restructuring, has yet to resume any of its long-haul flying.
Virgin Australia, Qantas’ largest competitor, also retrenched during the pandemic. This included exiting long-haul international routes to Asia and the U.S.
Since Australia lifted travel restrictions last year, Qantas has added new international destinations, including Delhi and Rome. It has also moved forward with long-planned Project Sunrise nonstops between Sydney and both London and New York. Qantas plans to fly 70 percent of 2019 international capacity by September, and 90 percent by next June.
Separately, Gareth Evans, CEO of Qantas Group subsidiary Jetstar Airways, will leave the airline at the end of December. Evans has been CEO of Jetstar since 2017, and with the group for 23 years. Qantas has not named a replacement.
Qantas maintained its outlook of a loss in the fiscal year ending June 30, and a profit for the coming year that ends in June 2023.
SkyWest to Launch Part 135 Airline to Access Pilots
They say necessity is the mother of invention, and many U.S. regional airlines are desperate for an inventive solution to their pilot woes. Some are pitching a potential — but unlikely — increase in the mandatory pilot retirement age. Others are calling for paying regional crews the same as their mainline counterparts. SkyWest Airlines has another bold answer: start a new airline.
The Utah-based carrier applied for certification of its new SkyWest Charter subsidiary to the U.S. Department of Transportation on June 17 in an application released publicly on June 21. The new airline would allow them to serve smaller cities, by connecting “underserved cities” across the country with frequent flights “to the national transportation system,” according to the application.
Many cities that fit this description are threatened with losing air service amid a national pilot shortage — SkyWest Airlines is exiting 29 small markets — and the resulting run up in wages as airlines compete to attract available talent.
SkyWest Charter’s answer to the pilot situation is the DOT’s “Part 135” public air charter certification that allows an airline to hire pilots with as few as 250 hours, rather than the 1,500 required for pilots at scheduled carriers like SkyWest Airlines or American Airlines. This expands the pool of eligible pilots. SkyWest Charter can do this by flying a fleet of Bombardier CRJ200 aircraft with just 30 seats — the maximum allowed under 135 rules — instead of the standard 50 seats.
“There are some good opportunities with 135 operators to help utilize [the CRJ200] and backfill some of the things that we’ve been doing,” SkyWest Airlines CEO Chip Childs said in April. He hinted at the time that the carrier could use some of its idled CRJ200s to fly under 135 certification in order to maintain air service to small communities.
The DOT’s 135 certification has been a popular way for airlines to fly under the 1,500 hour rule. Rapidly growing regional airline Southern Airways Express operates under the classification, and in May its CEO Stan Little said that it may be “the only airline in the country that has more pilots than” it needs. Other airlines, including Countour Airlines and private-like carrier JSX, also use the certification standard.
Asked about the 1,500 hour rule that SkyWest Airlines is subject to in April, Childs said: “We’re actually not looking to modify any law, particularly with 1,500 hours is a component that’s out there. We think it’s a terrible way to train pilots, but we don’t think that the reality of what’s happening in D.C. is going to necessarily make a move in that area.”
Finding a way to ease the burden of the 1,500 hour rule is a focus for the regional airline industry. The segment’s trade group, the Regional Airlines Association, is working to boost the supply of pilots through flight schools and pushing the federal government for increased assistance to help defray the cost. Cape Air CEO Linda Markham has called for credits toward the hour requirements for accredited training programs. And Republic Airways has gone as far as to request an exemption from part of the 1,500 hour rule for trainees from its Lift Academy.
SkyWest Charter hopes to begin flights in October pending DOT sign off. The airline intends to launch with three or four aircraft and flights to four or five cities, and gradually ramp up to a fleet of 18 CRJ200s serving 25 cities by April 2023.
The airline’s list of potential destinations center around a main base in Denver, but also at Chicago O’Hare and Houston Intercontinental. From Denver, SkyWest Charter could serve: Devils Lake and Jamestown, N.D.; Dodge City, Hays, Liberal, and Salina, Kan.; Gillette, Laramie, Riverton, Rock Springs, and Sheridan, Wyo.; North Platte and Scottsbluff, Neb.; Prescott, Ariz.; Pueblo, Colo.; Sioux City, Iowa; and Vernal, Utah. Chicago could see flights to Decatur, Ill.; Fort Dodge and Mason City, Iowa; Hancock, Mich.; Johnstown, Pa.; and Paducah, Ky. Houston could connect to Hattiesburg/Laurel and Meridian, Miss. SkyWest Charter noted that flights to many of these destinations would be subject to the award of competitive DOT essential air service contracts.
SkyWest Airlines did not mention a partnership for SkyWest Charter with a major carrier, like United Airlines, in its application to the DOT. However, given the former’s close ties with Alaska Airlines, American, Delta Air Lines, and United, some form of partnership for the new airline is expected.
SkyWest Charter’s application received at least eight letters of support from small airports. All called the proposed airline an “innovative plan” to maintain scheduled flights to their communities.
WestJet Returns to Its Roots
Big changes are afoot at Canada’s second largest airline, WestJet. The airline has unveiled a restructuring plan that would see it return to its roots as a low-cost carrier, eschewing the more full-service competitor strategy it had pursued to challenge Air Canada. WestJet was scant on details of when this will occur but did say that all current premium products, including lie-flat seats on its Boeing 787s and a premium lounge at its Calgary hub, would remain and target both premium corporate and leisure travelers.
Costs are not the only roots WestJet will be returning too. The airline will also shift its network back to focusing on Western Canada and adjusting its fleet to match under the plan hatched by new CEO Alexis von Hoensbroech who took the top job in February. While WestJet did not detail the planned network changes, Hoensbroech did say that the carrier would “maintain a significant presence in the Eastern provinces, primarily through direct connections to our Western cities.” That could mean big changes at Toronto Pearson where 61 percent of WestJet’s average 79 daily departures in June were to destinations outside of Western Canada, per Cirium schedules. WestJet did not say whether its budget subsidiary Swoop would similarly shift its network to focus on Western Canada.
WestJet’s western shift opens the door for competitors, particularly Porter Airlines and Transat. The former is preparing for the arrival of its first of up to 80 Embraer E195-E2s this year that it plans to use on new routes to “sunny spots” from Toronto Pearson, as well as Halifax, Montreal, and Ottawa — all eastern Canadian airports where WestJet could retrench. And Transat has already completed its shift from vacation company to network airline focused on bases in Quebec, primarily Montreal. Air Canada, the country’s largest airline and the biggest in Montreal and Toronto, also stands to benefit.
As part of the changes, WestJet will adjust its fleet. The focus will be mainline narrowbodies, which currently means just the Boeing 737. WestJet plans a “substantial additional narrowbody order” in the near future as part of the plan. The carrier’s Boeing 787 fleet will be held at its current size, while its de Havilland Dash 8-400 fleet will be “right sized” to focus on Western Canada operations.
Swoop will remain “complementary” to WestJet, Hoensbroech said. The airline, as well as WestJet’s vacations business, would be boosted by its pending acquisition of Sunwing. The network changes will occur gradually through summer 2023.
In Other News
- IATA updated its 2022 forecast for the industry at its annual meeting in Doha last week. Global airlines are forecast to lose $9.7 billion on revenues of $782 billion, the latter of which represents 93 percent of 2019 numbers. The loss forecast is better than $11.6 billion in losses IATA last forecast in October. But not all is rosy: expenses are forecast at $796 million, or up 44 percent from last year driven by fuel and labor costs. In addition, the war in Ukraine, a weak global economic outlook, and continued uncertainty from Covid-19 all weigh on airlines. “It is a time for optimism, even if there are still challenges on costs, particularly fuel, and some lingering restrictions in a few key markets,” IATA Director General Willie Walsh said.
- Frontier Airlines has countered JetBlue‘s $33.50-per-share, or $3.7 billion, offer for Spirit Airlines in the latest twist in the bidding war for the Florida-based discounter. Denver-based Frontier has upped its cash-and-stock offer to roughly $2.7 billion based on June 24 closing prices, and increased its reverse termination fee to $350 million from $250 million. In addition, Frontier now also has the backing of proxy advisory firm Institutional Shareholder Services that previously supported JetBlue’s takeover offer. Spirit shareholders are set to vote on Frontier’s offer on June 30.
- The largest of Latin America’s three big pandemic-era airline bankruptcies is nearing a close. A U.S. bankruptcy judge approved Latam Airlines Group‘s Chapter 11 reorganization plan on June 18. Under the plan, a slimmed down Latam will exit its restructuring with $8 billion in new capital, including $5.4 billion in new debt. Pre-bankruptcy shareholders, specifically the Cueto family, Delta, and Qatar Airways all retain stakes in the post-Chapter 11 entity. Latam plans to exit bankruptcy in the second half of the year, following Aeromexico‘s exit in March and Avianca‘s exit in December.
- Finnair is the second Oneworld member to take advantage of the alliance’s sustainable aviation fuel offtake agreement with Colorado-based developer Gevo. The Finnish carrier will take 35 million gallons of SAF, or 7 million annually, for five years beginning in 2027. Finnair plans to supply its flights departing Los Angeles with Gevo’s ethanol-based SAF derived from “inedible corn parts.” Japan Airlines has a separate agreement with Gevo for 26.5 million gallons of SAF over five years from 2027.
- Thai AirAsia plans to sell up to 2 billion Thai baht ($57 million) in new bonds, according to a stock exchange disclosure. The two-year notes would carry an interest rate of 6.8 percent. Thai AirAsia plans to sell the notes from June 27-29, and close the transaction on June 30.
State of the Unions
- Pilots at United Airlines are voting on a new labor accord approved by leaders at their union, the Air Line Pilots Association (ALPA). The two-year agreement includes an up-to 14.5 percent pay increase, eight-weeks paid maternity leave, and other quality of life improvements for crew members. It does not include any of the scope relief that would allow United to fly more large regional jets, like the Embraer E175, as CEO Scott Kirby had hoped it would prior to the pandemic. Pilots will vote on the contract through July 15.
- Alaska Airlines and the International Association of Machinists and Aerospace Workers (IAM) reached a four-year tentative accord for ramp, stores, clerical, office and passenger service staff at the Seattle-based carrier. The agreement would immediately raise base wages by 8.9-17.4 percent from August 10 if it is ratified, and at least another 2.5 percent annually in 2023, 2024, and 2025. Wages could increase more in the latter two years based on the results of a review of industry wages. IAM represents 5,300 ramp, stores, clerical, office and passenger service staff at Alaska.
Routes and Networks
- Dubuque, Iowa, Islip and Ithaca, N.Y., and Toledo, Ohio, all have the unfortunate distinction of being destinations American Airlines will exit on September 7. An airline spokesperson cited the pilot shortage for the decision, though the significantly higher operating costs under new pilot pay agreements at American’s wholly-owned subsidiaries Envoy, Piedmont Airlines, and PSA Airlines likely weighed as well. Islip and Ithaca will continue to be served by other network airlines. However, Dubuque and Toledo will lose their last remaining connections to the global airline network. Leisure carrier Allegiant Air continues to serve Toledo but does not provide broader connectivity.
- Copa Airlines will be the second foreign carrier to serve Mexico City’s new Felipe Angeles International Airport. The carrier plans thrice-weekly flights between Panama City and Felipe Angeles from September 26. Copa will join Venezuela’s Conviasa, as well as various Mexican airlines, at the airport. Copa’s new service will complement its five daily flights to Mexico City’s Benito Juarez airport.
- Leisure airline French Bee will land in South Florida this winter. The carrier will connect its Paris Orly base with Miami thrice weekly from December 15, and then four-times weekly from April 2023. French Bee President Marc Rochet cited strong demand in South Florida for flights to Paris as the motivation for the addition.
- Delta Air Lines is staying at Dallas Love Field airport following a settlement in its long-running dispute with Southwest Airlines over gates at the facility. Delta will no longer share a gate with the hometown carrier but instead lease one (for $200,000 a year through 2028) from Alaska Airlines. The settlement allows Delta to continue its multiple daily flights to Atlanta, and gives it the space to potentially add service in the future.
Fleet
EasyJet is putting criticisms that it does not have the aircraft to play a major role in the reshuffling of Europe’s aviation market to rest with a deal to expand its firm aircraft orderbook by more than half.
The UK-based discounter plans to exercise 58 options for Airbus A320neo family aircraft, and convert 18 A320neo orders to the larger A321neo, EasyJet told investors on June 21. Once the deal is finalized, the newly ordered planes would arrive between 2026 and 2029, and be equipped with CFM International engines. EasyJet had firm orders for 115 A320neo family jets at the end of March.
“The proposed purchase … [continues] the company’s fleet refresh, as the older A319s and A320s leave the airline and new A320 and A321neo aircraft enter, providing benefits to EasyJet through upgauging, cost efficiencies and sustainability enhancements,” EasyJet CEO Johan Lundgren said in a statement.
Available aircraft is proving one of the deciding factors in the recovery of European air travel. Ryanair’s brash CEO Michael O’Leary has repeatedly claimed that his carrier’s robust orderbook of more than 200 aircraft makes Ryanair the “only airline taking sufficient aircraft deliveries to take up those opportunities,” those opportunities being the gaps left by shrinking legacy carriers. Not to be left out, discount growth juggernaut Wizz Air ordered another 102 aircraft last November that boosted its orderbook to more than 300 aircraft. International Airlines Group (IAG), Alitalia successor ITA Airways, and KLM have also placed significant aircraft orders in recent months.
EasyJet’s planned order is its latest move to ward off competitors, and show it remains a force in European aviation. Following a reported takeover bid by Wizz Air, the airline raised £1.2 billion ($1.5 billion) in new capital last September and unveiled a three-pronged growth plan that included doubling down in its core markets, expanding the breadth of its route map, and building new focus cities across the continent.
Under that growth plan, EasyJet secured additional slots in Lisbon earlier in June that will allow it to base three additional aircraft in the Portuguese capital this winter. The carrier will become the second largest in Lisbon, after hometown TAP Air Portugal, with the additional flights. EasyJet has also acquired additional slots at London Gatwick, Milan Linate, and some Greek airports.
EasyJet plans to use most of its newly ordered aircraft to replace older models in its fleet. Whether or not it also increases the number of planes it flies, the new A320neo and A321neos seat on average 211 passengers compared to 171 passengers on the A319s and A320s they would replace. That upgauging alone will represent growth, as well as help improve fuel efficiency and lower operating costs.
EasyJet operated 322 A320-family aircraft at the end of March, according to its latest fleet plan.
Fleet Briefs
- Norwegian Air has finalized a commitment for up to 80 Boeing 737-8 aircraft. First unveiled in May, the deal includes 50 firm aircraft plus 30 options, with deliveries from 2025-28 that are timed to replace lease expirations on older 737s in the airline’s fleet. Norwegian and Boeing also settled all of their “outstanding legal disputes” as part of the deal.
Feature Story
Europe’s hot, vaxxed travel summer already appears in shambles. Staffing issues across aviation are prompting carriers to proactively cancel flights during busy July and August, flight caps are in place at three of the continent’s busiest airports and counting, and industrial actions are hitting — or may hit — some of the continent’s largest airlines.
“The upcoming summer will undoubtedly be a major operational challenge for the whole industry,” Lufthansa Group CEO Carsten Spohr warned in May. At the time, he said airports, air traffic control organizations, and even third-party caterers were “struggling with significant staff shortages.” Fast forward seven weeks, and Lufthansa and its budget subsidiary Eurowings are cancelling more than 3,100 flights in both July and August in order to mitigate the disruptions they are already seeing.
From June 1-23, more than 2 percent of all flights in Europe — not including those to points outside the region — were cancelled, according to Cirium data. That is not a wholly bad result but also not a great one either in an industry that strives for completion factors greater than 99 percent. KLM, Eurowings, and EasyJet cancelled the most flights: 9 percent, 7 percent, and 5 percent, respectively. Unsurprisingly, the airport with the most cancellations was KLM’s hub at Amsterdam Schiphol, followed by Hamburg and Brussels.
What gives? It’s the post-Covid hex that is plaguing the recovery across industries and countries as the world tries to come back from its pandemic stupor. While there is no one reason for the situation, generally staff who left their jobs for whatever reason during the crisis are now in high demand, which allows them to pick and choose where they want to work and for what wage. This has made airport jobs, particularly those in terminals without the travel benefits of airline employment, more challenging to fill due to what is a lengthy credentialing process in many countries. It has also put upward pressure on wages.
“You cannot scale up overnight,” Airports Council International (ACI) Europe spokesperson Virginia Lee said when asked about the situation at European airports. It can take up to six months to hire and credential an airport worker in many European countries. That, she pointed out, means airports needed to have hired for current demand in December and January — or in the middle of the Omicron surge when many countries were reimposing travel restrictions and airlines were cutting flights.
Airport staffing is widely cited by airlines for cancellations. In addition to Lufthansa’s reductions, British Airways in May cut its schedules at London Heathrow by 10 percent through October due to what it sees as understaffing by the airport’s operator. EasyJet has reduced its June quarter capacity by 3 points to 87 percent of 2019, and September quarter by about 10 points to roughly 90 percent. And lack of security and airport staff have been widely cited for the disarray at Schiphol that has hurt KLM.
The staffing situation has prompted Schiphol, as well as London’s Heathrow and Gatwick airports, to institute caps on the number of flights. Schiphol Group operations chief H. L. Bui said in a letter to the airport’s slot coordinator on June 17 that the caps through August 28 were “necessary to ensure a safe operational environment.”
Industrial actions are also taking a toll. Nationwide strikes in Belgium closed Brussels Airport on June 20, and Brussels Airlines has warned of further cancellations from June 23-25 due to actions by its own unions. Ryanair, Europe’s largest budget airline, cancelled several hundred flights due to industrial actions on June 23, 24, and 25. And British Airways, which has already reduced its schedules at Heathrow, faces potential actions by two unions representing work groups at Heathrow airport, including check in agents.
Despite the operational disarray, there has yet to be a material financial fallout for Europe’s airlines. Industry executives near universally forecast strong demand ahead of the summer season that, despite the negative operational headlines, has abated little. EasyJet, the last to update its financial guidance on June 20, said that despite the operational issues “booking momentum has continued with demand for travel this summer remaining strong.” The airline did not update its financial guidance other than to revise down its capacity targets for the June and September quarters.
Less capacity and high demand, of course, benefit airlines by driving up fares. The cuts implemented by many airlines are likely to do just this, which in turn will help them recoup historically high fuel costs. But the question is how long this situation can last before travelers, sick of operational issues, opt to stay home or economic forces outside of airlines’ control — whether it’s high energy prices or a recession — dominate the picture.