Latam-Delta Joint Venture Gets Green Light
Delta Air Lines and Latam Airlines Group are on the cusp of regulatory signoff for a broad partnership that will give them a competitive edge — at least for now — on flights between the U.S. and South America.
The U.S. Department of Transportation found that the proposed immunized joint venture would provide “substantial” benefits in the market, and tentatively approved the pact with several conditions on June 23. Those conditions include a 10-year term, and requirements that both Delta and Latam interline with other non-aligned South American and U.S. airlines, respectively, if such a tie up is requested.
The airlines, in a joint statement, said they “applaud” the DOT’s decision, and added that the partnership will “vastly improve travel options and service for customers traveling between the two regions.” They plan to begin implementing the alliance once the regulator finalizes its decision that, given the required response and comment periods, could not occur before July 18.
Approval of the Delta-Latam joint venture is a big win for the airlines. Both have suffered major blows to their international partnership ambitions at the hands of regulators in recent years. Delta dropped its planned joint venture with WestJet in late 2020 after the DOT requested what the airlines saw as “arbitrary and capricious” conditions. And Latam ended its long-standing partnership with American Airlines in 2019 after a Chilean court blocked their planned joint venture.
Latam, which is operating under U.S. Chapter 11 bankruptcy protection, included the Delta joint venture as a key part of its restructuring plan. A bankruptcy judge approved that plan earlier in June, and Latam plans to exit Chapter 11 in the second half of the year.
The partnership will give Delta and Latam a competitive edge in the dynamic U.S.-South America market for the time being. The airlines together will operate 21 percent of the seats in the market this year based on current schedules, according to Cirium data. That is second only to American’s 32 percent share, but well ahead of the 11 percent share of the next largest airline, Avianca.
That edge is expected to face new challenges in the near future. Avianca and Gol are planning to combine under the new holding company, Abra — the airlines will maintain independent brands — later this year. Avianca and Copa Airlines continue to pursue a joint venture with United Airlines; a three-way pact would give the airlines a 21 percent share of U.S.-South America seats. And American, not to be left behind, is forging equity partnerships with Gol and Chile’s JetSmart.
Delta and Latam have promised at least nine new U.S.-South America routes once demand normalizes following the pandemic as part of their partnership. The former also committed to expanding its presence in Miami, which is Latam’s main U.S. gateway. And the airlines also committed to expanding service on nine more existing routes, whether that is additional flights or extending a seasonal route to year-round service.
While details of their planned expansion are limited, regulatory filings suggest Latam plans to add new flights to Delta’s hubs in Atlanta, Boston, Los Angeles, and New York, and Delta to Latam’s hubs in Bogotá, Lima, Santiago, and São Paulo. Atlanta would be a new destination for Latam.
The U.S. is the last country to sign off on Delta and Latam’s partnership. The carriers already have approval in Brazil, Chile, Colombia, Paraguay, Peru, and Uruguay.
Gol, during a June 24 investor call, gave an update on the state of its business, and a forecast of what to expect for the rest of 2022. Revenues during May (in local currency terms) exceeded those during May of 2019, an important sign of recovery from the pandemic. But costs are much higher too, not just because of what’s happened with fuel prices but also because of what’s happened to the Brazilian real. In May, one U.S. dollar was worth about 5 reais. In May of 2019, one U.S. dollar was worth only 4 reais (it was worth just 2 reais a decade ago). This weakening of the Brazilian currency makes much of what Gol pays for — including fuel and aircraft — more expensive. The good news, as Chief Financial Officer Richard Lark explained, is that Gol’s higher fuel bill has thus far been largely offset by fare increases, a testament to strong demand.
Note that Gol, like Southwest Airlines in the U.S., is a low-cost carrier that depends a lot on domestic business travel. Most of that is recovering nicely, though as Gol’s rival Azul pointed out in its first quarter earnings call, the finance and government sectors have been slower to rebound. Brazil’s large commodity sector corporations, by contrast, are flush with cash amid the boom in commodity prices.
Back to Gol’s business, a top priority is adding new Boeing 737 Maxes to replace prior-generation 737s, though the effort is complicated by Boeing’s production woes. Another priority is growing its Smiles loyalty program, a major lifeline for raising new capital during and before the pandemic. The origin of Smiles dates to Gol’s acquisition of Varig in the early 2000s, a deal that also gave it extremely valuable slots at key Brazilian airports, none more important than São Paulo Congonhas. That airport, incidentally, is slated for privatization and expansion. As Lark stated in last week’s presentation: “One of the key constraints on our ability to grow … in Brazil is airport infrastructure.” For now, Gol’s capacity is still well below pre-Covid levels. And, coupled with strengthening passenger demand and growth in cargo activity, this capacity discipline is driving unit revenue gains sufficient to counteract unit cost pressures. But holding back on capacity growth comes at a cost. The fact is, Gol’s aircraft assets are currently underutilized, which itself puts upward pressure on unit costs. “Until we get Gol back to 12 hours a day of aircraft utilization,” said Lark, “we’re not satisfied, and we’re not there yet. We’re still carrying inefficiency on the operating side.”
So when will Gol be back to pre-Covid levels of available seat kilometer (ASK) capacity? By the first quarter of next year, based on management’s current plan. At that point, it hopes to fully exploit what it claims is a 15 percent unit cost advantage versus its main rivals, namely Latam and Azul. Interestingly, Gol’s pending merger with Avianca, Sky Airline, and Viva Air — creating the so-called Abra — wasn’t discussed until later in the investor call (it almost seemed like an afterthought). Executives see the move as more of a long-term strategy, and one targeting revenue synergies (through initiatives like cross-selling and enhanced loyalty benefits) much more than cost synergies. Even after the merger is complete, Gol will retain its own brand and its own operation. The deal, by the way, already has approval from competition regulators and should close shortly. Also next month: Long-time CEO Paulo Kakinoff will retire, handing the reigns to his operations chief Celso Ferrer. Looking farther out to October, Brazil will hold its first presidential election since 2018. Currently leading in the polls is Luiz Inácio Lula da Silva, who was president during Gol’s formative years in the early 2000s.
Delta CEO Cites Air Traffic Control For Delays
Delta CEO Ed Bastian sees a “stressed” air traffic control organization as the leading cause of flight disruptions in the U.S. His comments come amid increasing calls for reliable airline operations ahead of what is forecast to be a busy July Fourth holiday weekend.
“I think [our partner] that’s most stressed right now is air traffic control,” Bastian told staff in a webinar June 29 viewed by Airline Weekly. Based on the Atlanta-based carrier’s internal data, air traffic control-related flight cancellations are up 195 percent this year compared to 2021 while weather events are up only 2 percent. Air traffic control in the U.S. is managed by the Federal Aviation Administration.
“This is about a partnership and the government needs to step up,” Bastian continued. “It should get better, but this is going to be a constraint that’s going to stay with us for some time.”
Flight disruptions in the U.S. have gotten so rampant that even members of Congress are calling for answers. “So far this year, one out of every five flights in the United States were delayed, while airlines are cancelling flights four times as often on high-travel weekends than they did in 2019 … That is simply unacceptable,” Senator Bernie Sanders (D-Vt.) wrote in a letter to U.S. Transportation Secretary Pete Buttigieg on June 28.
Bastian’s comments came a day after Secretary Buttigieg denied that air traffic control staffing was the driving issue behind the current spate of flight disruptions.
“The majority of cancellations, and the majority of delays has nothing to do with air traffic control staffing,” Buttigieg said on NBC Nightly News on June 28. He called out, among other things, the early retirement packages that airlines offered staff during the pandemic that reduced headcount despite more than $54 billion in federal coronavirus relief.
FAA officials held a call with airlines and industry representatives on June 30 where the agency reportedly said that it is maximizing air traffic controller overtime over the July Fourth holiday weekend, as well as considering alternative routings in order to minimize disruptions.
During the town hall, Bastian acknowledged that Delta may have been too “generous” in the voluntary early retirement and other packages it offered staff in 2020. Every airline offered similar packages to reduce headcount in the early days of the pandemic even as federal aid protected jobs from involuntary furloughs and layoffs. Without that relief, many believe the issues the industry faces today would be much worse.
Despite pointing the finger at air traffic control, Bastian acknowledged that Delta’s own staffing was a drag on its operations. He reiterated that the airline is “fully staffed” for the summer, however, after the departures of many senior staff early in the pandemic, many new hires require training or lack experience handling irregular operations. Staffing issues forced Delta at the end of May to cancel roughly 2 percent of its schedule in July through the end of August.
Trade group Airlines for America (A4A) CEO Nicholas Calio wrote Secretary Buttigieg on June 24 asking for a meeting to “discuss how we can work together to better understand FAA’s controller staffing plan for the upcoming July Fourth weekend and summer travel season.” Other agencies, including the Transportation Security Administration (TSA), had shared their staffing plans for the holiday with airlines, he said, and asked for other measures to mitigate flight disruptions. Air traffic control centers in Jacksonville, Fla., and New York face some of the worst staffing issues, Calio said.
Prior to Calio’s letter, most of the flight disruptions were blamed on staffing issues at airlines. Alaska Airlines, American, Delta, JetBlue Airways, Southwest, United, and many regional carriers — in short the vast majority of the U.S. industry — have cited staffing shortages or training backlogs in their schedule reductions in recent months. The industry as a whole has reduced summer schedules by roughly 15 percent from plans at the beginning of the year to account for staffing limits, said Calio.
“We have to have a little more patience, a little more understanding,” Bastian told staff, about getting through the coming weeks. He expressed confidence in Delta’s ability to operate reliably over the July Fourth holiday.
Bastian also expressed optimism that the current staffing situation — both with air traffic controllers and at Delta — will ease. However, that could take until the end of the year, or early 2023, he added. Delta plans to will hold its capacity at a little over 80 percent of 2019 levels until the operational situation improves, he added.
Air Canada and Swiss Cancel Summer Flights
Air Canada and Swiss International Air Lines are the latest to fall victim to the global wave of aviation industry disruptions this summer. In a letter to frequent flyers on June 29, CEO Michael Rousseau said: “Air Canada’s operations too, have been disrupted by the industry’s complex and unavoidable challenges.” He went on to offer his “sincere apologies.”
The Montreal-based carrier is cancelling an average of 154 flights per day, or 15 percent of its schedule, during both July and August. The reductions will only occur on domestic Canada and U.S. routes primarily from its Montreal and Toronto hubs. And Air Canada will suspend four routes in the process: Montreal to Baltimore-Washington, Kelowna, and Pittsburgh — both U.S. routes only resumed in June after a pandemic hiatus — and Toronto to Fort McMurray.
Zurich-based Swiss is cancelling roughly 2 percent of its schedule from August through October, the airline said June 28. That amounts to around 676 flights over the three-month period. “With the overall conditions still growing even more challenging, and in order to pay due and proactive regard to our responsibilities to our passengers, Swiss will be making this contribution to easing the present pressures on the system,” Swiss CEO Dieter Vranckx said.
While Swiss is just the latest in a growing list of European airlines, including British Airways, KLM, and Lufthansa, to cut flights, Air Canada is the first to do so in Canada. WestJet, the country’s second largest airline, said on June 30 that it was not cancelling additional flights as it had “proactively reduced capacity” this summer in order to provide travelers with a “stable operation.” The airline will fly nearly 23 percent fewer flights during the three-month June-to-August period this year than it did in 2019, Cirium schedule data show.
Porter Airlines, which operates from a main base at Toronto’s Billy Bishop airport, plans to operate its “summer flight schedule as planned,” a spokesperson said. Passenger numbers at the airline are “comparable” to 2019 levels, they added.
And Transat, which recently completed a transformation to a leisure airline from an integrated travel company, “does not anticipate any cancellations at the moment,” a spokesperson said.
While Rousseau did not say it in his letter, the general view in the industry is that operations will improve this fall after the summer peak eases. That can be seen in most airlines’ decision to only cut schedules through August.
State of the U.S. Recovery
For the seven days through June 27, TSA passenger counts at U.S. airports were up 16 percent from the comparable period last year, and up more than 300 percent from the same period in 2020. More interesting is a pre-pandemic comparison (in other words, versus 2019), for which traffic is still down 10 percent. This includes slower-to-recover intercontinental traffic, including traffic to Asia which remains deeply depressed. TSA figures don’t show domestic traffic alone, but according to published schedules in Cirium, domestic U.S. seat capacity for the month of July will be down 6 percent versus 2019. Within that figure is heavy variation by airport — July’s domestic seats from Chicago O’Hare and Los Angeles, for example, will be down by more like 20 percent, while Miami’s capacity will be up an eye-popping 40 percent. Others with more seats scheduled now versus before Covid include Las Vegas, Orlando, Charlotte, Austin, Nashville, Washington Reagan, New York JFK, and New York LaGuardia.
In Other News
- Southwest, in a June 21 update, said its fuel hedges for this year alone are valued at roughly $1.2 billion. That presents a major competitive advantage at a time when most other U.S. airlines refrain from hedging. During the early years of the 2000s, leading up to the 2008-09 financial crisis, Southwest’s fuel hedges allowed it to undercut its rivals on pricing while protecting it from the fuel inflation that bankrupted multiple U.S. carriers. On the other hand, when fuel prices suddenly crashed in mid-2014, Southwest’s aggressive hedging left it paying more for fuel than others. For now, though, it’s extremely happy to have those derivative contracts in place. For the record, Southwest paid just $2.30 per gallon on average for fuel during the first quarter of 2022. All other U.S. carriers, subject to spot fuel prices, paid from $2.60-3.20 per gallon. (Note that Alaska also has favorable fuel hedges which it said in early June would save it 45 cents per gallon).
- A quick note from the Financial Times: U.S corporate spending on private jets for personal use by CEOs and chairpersons, it reports, reached a 10-year high in 2021. The pandemic was a big reason why. Facebook’s parent company Meta alone spent $1.6 million on private jets for CEO Mark Zuckerberg, the FT writes. For context, the social media giant earned a $39 billion net profit in 2021, on $118 billion in revenues.
- KLM has repaid the final €277 million ($288 million) outstanding under the loans provided by the government of the Netherlands in 2020. Incoming CEO Marjan Rintel said she would “build upon this to achieve even better financial health for KLM in the future.” Despite strong travel demand, KLM has born the brunt of operational issues at Amsterdam’s Schiphol airport that have forced it to cap ticket sales and reduce capacity through at least August 28. KLM’s budget subsidiary Transavia has also been forced to cut flights at Schiphol by about 20 percent.
- And in Norway, the government has joined its Danish counterparts in backing struggling SAS‘ restructuring plan. Norway supports the conversion of its existing loans to the airline to equity under the framework put forward under SAS Forward, but will not contribute any additional capital, the government said on June 28. SAS now has the backing of two of its three main stakeholders; the Swedish government has, as yet, declined to support the plan.
However, a strike by SAS pilots on July 4 cancelled 175 flights, or 52 percent of the airlines’ schedule, per FlightAware. “A strike at this point is devastating for SAS and puts the company’s future together with the jobs of thousands of colleagues at stake,” CEO Anko van der Werff. The airline seeks to continue mediated talks with its pilots unions.
- Thai Airways is seeking a modification to its restructuring plan that could see it exit administration in 2024. Under the proposal submitted to a Thai bankruptcy court on July 1, the airline proposes to boost equity by 80 billion Thai baht ($2.2 billion) through a series of transactions. They include, first, a new 25 billion Thai baht six-year term loan and revolving credit facility; second, a full conversion of the Thai government’s loans to the airline to equity, while other financial creditors would receive equity for 24.5 percent of their debt and cash for the balance that would reduce the carrier’s debt by nearly 38 billion Thai baht; and, third, a private placement of new shares to employees that could raise up to 25 billion Thai baht. Thai Airways also reported a continued improvement in demand, with September quarter bookings showing “continual growth.”
- South Africa’s Airlink continues to add partners as the country’s airline market resets. Qatar Airways is its latest codeshare partner, joining the likes of Emirates and United that it signed with last year. Airlink is South Africa’s second largest airline after the demise of Comair in June. Airlink and Qatar plan to begin codesharing on July 6.
- Waltzing Matilda Aviation is poised to get a key approval for its new carrier Connect Airlines. The U.S. Department of Transportation tentatively granted it an air carrier certificate on June 24 with any comments or objections due by July 8. Massachusetts-based Connect still needs Federal Aviation Administration sign-off before it can begin flights but, as Waltzing Matilda CEO John Thomas said, DOT approval is necessary to complete the FAA process. The airline plans to fly De Havilland Dash 8-400s primarily from Toronto’s Billy Bishop Airport. Initial destinations include Baltimore-Washington, Boston, Chicago O’Hare, New York JFK, and Philadelphia with a crew base in the latter city. A partnership with American is planned.