June Quarter Earnings Recap

The Americas

• Pandemic? What pandemic? Southwest Airlines managed a fantastic result last quarter, highlighted by a 17 percent operating margin. That topped even its 16 percent operating margin in the second quarter of 2019. Its secret weapon? Enormously favorable fuel hedges, which brought its average fuel price per gallon down to just $3.36. Unhedged rival JetBlue Airways, by contrast, paid $4.24 per gallon. To be clear, second quarters are typically the best for Southwest, with June in particular, a super-peak month.

• Things weren’t quite so rosy north of the border. Air Canada suffered a C$129m ($100 million) operating loss excluding special items related to its cargo activity, equating to a negative 3 percent operating margin. One challenge was Canada’s strict Covid travel restrictions, which were in place for longer than in the U.S. When they finally were relaxed, demand sprang back suddenly and sharply, leaving airports struggling to handle operations. Toronto, in fact, topped many lists for airport delays, cancellations, and other frustrations. “In the second quarter of this year,” the company said in its earnings call, “we operated 84,643 flights and carried over 9.1 million customers. That is an increase of four times for flights operated and almost eight times the customers carried for the same time last year.” It added: “We’ve never seen demand increase at such a high rate in such a short period of time, particularly having been at a near standstill for almost two years.” Management said things are now improving. Separately, Air Canada’s weak margins also stemmed from greater China exposure than its U.S. peers. Mainland China and Hong Kong remain largely closed. There were bright spots though: Sixth freedom traffic (connecting passengers from one foreign country to another flying through Canada) was strong. Air Canada is excited about a new transborder joint venture with United and an evolving partnership with Emirates. It mentioned Europe and Australia as international markets coming back strong. Other highlights of the carrier’s spring include strong premium leisure demand, the development of cargo-only flights, a well-performing loyalty plan, and a strong desire to grow internationally.
  
• JetBlue‘s long standing cost problems reared their head in the second quarter. Despite record revenues and unit revenues, the airline posted a $113 million operating loss for the period. The majority of the loss was fuel-related as the airline is largely unhedged, but much came from a double-digit run up in labor and airport expenses. But the airline has (another) plan for that: Chief Financial Officer Ursula Hurley laid out a new structural cost savings program that aims to slash $250 million annually from 2024. “This new program focuses on cross-functional costs and is more about gaining operational and planning efficiencies,” she said. What was unmentioned are the cost pressures from its planned merger with Spirit. The airlines anticipate $600-700 million in revenue synergies once the two airlines are fully integrated, but before they get there JetBlue has to convert a budget airline with a completely different operating model and onboard product to its higher-cost model. That will almost certainly add cost pressures as JetBlue tries to get unit costs under control.

• Like Air Canada, Brazil’s Gol is also operating dedicated freighters, one of its many tactics designed to sustain it through the crisis. The low-cost carrier, however, said it won’t change its core business model, which involves flying Boeing 737s with a product catering to both leisure and corporate travellers. The company’s biggest move was striking a merger deal with Colombia’s Avianca, alongside two smaller South American carriers. Gol will retain its unique brand and management autonomy, however, in what’s perhaps best described as a lighter version of Europe’s multi-carrier International Airlines Group. High fuel prices, made worse by the strong U.S. dollar, is a major headache. But demand is strong and its Smiles loyalty plan is a critical asset. Gol said corporate demand has “plateaued” in recent weeks, suggesting this might be because companies are waiting to see the outcome of Brazil’s presidential election scheduled for October. Overall, the bad outweighed the good for Gol in the second quarter, leaving it with a negative 6 percent operating margin. The airline, once allied with Delta and now cooperating with American, has had some excellent years throughout its history. But it’s had some dreadful ones as well, especially during times of Brazilian economic distress.

• Panama’s Copa Airlines, long one of the airline industry’s most profitable airlines, appears back on track. Though its second quarter operating margin was a modest 6 percent, the company forecasts a monumental 16-18 percent for the third quarter. That’s a stronger quarter seasonally. In addition, as Chief Financial Officer Jose Montero explained, many of the tickets for third quarter travel were sold when fuel prices were at their peak, which in turn meant prices and yields were at their peak. Counterintuitively, he warned that margins could be worse than forecast if falling fuel prices lead to falling airfares. In any case, all signs point to an extraordinarily strong summer, supported by traffic feed from European partners who’ve by now restored most of their flights to Panama. Demand is strong “across the board,” though business demand is still just half what it was in 2019. In other developments, Copa is densifying its Boeing 737-800 seating, taking more Maxes, and “carefully” expanding its low-cost unit Wingo from Colombia. Copa, by the way, operated 97 percent of its second quarter 2019 capacity last quarter.

• Hawaiian Airlines paid less than $4 per gallon for its fuel last quarter, which is low relative to most U.S. airlines. Still, it failed to restore profitability, ending the second quarter with a negative 4 percent operating margin. Americans are flying to Hawaii again in great numbers. And they’re paying high prices. But Japan, a critical origin market, has been much slower to revive. “Travel restrictions in Japan have prevented us from resuming a full pre-pandemic schedule,” executives said. “But these restrictions are incrementally easing. And next month, we are resuming service to Haneda, at the same time as we increase frequency from Narita and Osaka.” Hawaiian did say Australia, New Zealand, and Korea are trending well. So are Hawaiian’s premium seat sales and ancillary revenues. Key priorities ahead include negotiating a new pilot contract, preparing to welcome Boeing 787s, and improving aircraft utilization to lower unit costs.

• Frontier Airlines saw an opportunity in combining with Spirit Airlines. But alas, JetBlue was willing to pay more, and that ship has sailed. The Denver-based carrier appears unfazed, returning its focus to organic expansion. For that, it has a large outstanding order of Airbus narrowbodies. Last quarter, it earned a 3 percent operating margin.

• Throughout the 2010s, Allegiant Air routinely led all U.S. carriers in profit margin, deploying a unique business model linking smaller markets with large tourist destinations. Defying a cardinal tenet of airline economics, Allegiant deemphasizes the importance of asset utilization, gladly keeping planes on the ground unless demand merits. The Las Vegas-based discounter is certainly not immune to high fuel prices though. And in the second quarter, it paid a suffocating $4.32 per gallon, holding the company to a pedestrian 4 percent operating margin. Keep in mind though: the second quarter isn’t one of its better quarters seasonally. With lots of Florida and other sunshine markets, the first quarter tends to lead.

• SkyWest Airlines, the giant regional carrier, faces alarming pilot shortages, leaving it little choice but to plan a 5 percent capacity cut this year, relative to 2021. It did earn a solid 11 percent operating margin last quarter though, thanks to contracts with Alaska, American, Delta, and United in which these partners — not SkyWest itself — bear the cost of fuel. Management is currently in pay talks with pilots. In the meantime, the airline is adding more dual-class Embraer E175s and launching a charter operation. Seeking to allay investor fears about the pilot issue, executives said in their call: “There are three components in the environment today that gives us great confidence in SkyWest as an investment. First, there’s undoubtedly significant unmet demand for regional flying. Second, our strong pipeline and our ability to attract, train and retain captains is far greater than our competitors. And third, SkyWest asset value is unparalleled in the market.”

Europe

• The Lufthansa Group had a good June quarter. The airline reported a €340 million ($346 million) operating profit, and €259 million net profit in the quarter. Impressively, revenues were down just 12 percent from 2019 on passenger capacity that was down 26 percent. That’s not to say all was rosy for the group, which includes its namesake airline plus Austrian Airlines, Brussels Airlines, Eurowings, and Swiss; operationally it underperformed as did many of its peers owing to staffing and other issues plaguing European airlines. “When it comes to operations, I definitely would have liked international air traffic to be in a better position compared to what we are currently experiencing at airports,” group CEO Carsten Spohr said during its earnings call August 4. Operational disruptions have “stabilized,” according to Spohr, but he does not expect “normalization” until 2023. In addition, disruptions this year are expected to cost the group €450-500 million; or nearly equal to its more than €500 million EBIT profit forecast for 2022.
  
• Air France-KLM, aided by fuel hedge gains, earned a solid 6 percent Q2 operating margin. But get this: KLM alone earned a 9 percent margin, making it Europe’s most profitable airline this spring. The group’s maintenance and cargo division is performing well. So is passenger demand on many routes, including those in the important transatlantic market, where Air France-KLM works closely with Delta. Transavia, the group’s low-cost carrier, lost money during the quarter but expects to have a strong summer. KLM is benefitting from robust connecting traffic despite the operational woes of its home airport, Amsterdam Schiphol. With many nonstop flights around the world still absent post-crisis, more travelers need to connect, and Amsterdam is geographically and logistically a good place to do that.
  
• IAG has its own airport woes at London Heathrow most importantly. But thanks to higher margins in Spain, the group managed an overall operating margin of 5 percent. Iberia led the way, followed by Vueling, Aer Lingus, and British Airways, with respective margins of 7, 6, 3, and 2 percent. That’s a change from pre-pandemic, when British Airways and Aer Lingus usually delivered IAG’s best margins. British Airways does have some currently-toxic Asian exposure, though not as much as either Lufthansa or Air France-KLM. Aer Lingus, meanwhile, suffered as Ireland was late to relax travel restrictions. In any case, demand overall, save northeast Asia, is strong. That’s especially true for premium leisure, shorthaul leisure, and British Airways Holidays. Interestingly, IAG, referring to corporate demand, said the most recovered sectors are small- and medium-sized businesses, oil, gas and mining, media, and banking. The least recovered sector is pharmaceuticals. “Forward bookings continue to be strong, especially in the leisure segment, while the business segment is making steady progress … we don’t see any signs of weakness in booking behavior although we are, for sure, looking at this very closely,” executives said.
  
• Ryanair‘s Michael O’Leary performed his usual act during the company’s second quarter earnings call, hurling insults, diatribes, slights, and slurs at pretty much everyone else in the industry. Specific targets this time included Wizz Air, EasyJet, Eurocontrol, the French government, labor unions, Heathrow airport, “the somewhat less-intelligent Irish,” and especially Boeing for not delivering Ryanair’s Maxes on time. Antics aside, O’Leary’s airline once again delivered for investors, producing a 8 percent operating margin. Fuel hedges helped enormously: It’s paying $62 per barrel for 60 percent of its fuel, and $71 for another 20 percent. Foreign exchange is well hedged too, protecting against aircraft purchase inflation caused by the weak euro. Most important was the sudden eruption of pent-up shorthaul demand stifled during the pandemic. Serving smaller, less congested airports was a plus. Ryanair says it’s fully staffed and flying more capacity now than before the pandemic. But it also warns that the recovery, though strong, is also “fragile.” O’Leary spoke of “once-in-a-lifetime” market share gains as rivals like Alitalia, SAS, TAP Air Portugal, and LOT Polish slash capacity. “We are also seeing significant passenger transfers from other airlines who are canceling flights at last minute.” Ryanair has been preying on Alitalia for years, which explains why Italy is today the airline’s largest single country market.
  
• O’Leary’s mocking aside, Wizz Air came closest to holding its own again Ryanair, using a similar business model to earn consistently high profit margins before the pandemic. Last quarter, though, was a disaster, as is clear from its negative 35 percent operating margin. A few lines from its earnings report largely explains the problem: “During the earlier phases of the Covid-19 crisis, key players in the airline industry, including Wizz Air, were severely impacted with significant financial hedge losses. As a result, during that time and as agreed with its Board of Directors, Wizz Air moved to a no hedge policy to avoid hedge losses in the future. In Europe, however, key competitors continued to hedge, albeit at lower coverage levels versus pre-pandemic.” There you go: It was unprotected from the ravages of the fuel spike and euro slump. It will now start hedging once again (just as fuel prices start to fall, ahem). Wizz also faced heavy disruption costs. It’s had some Ukraine exposure. And it’s invested in new markets like Abu Dhabi, where it runs a joint venture low-cost carrier. It says it might be interested in Saudi Arabia as the country opens its market to more tourists.
  
• EasyJet posted a £114 million ($138 million) pre-tax loss in the June quarter, with £36 million of that attributable to foreign exchange pressures. The discounter was hit hard by operational issues during the period and operated just 95 percent of its schedule; a significant drop when completion factors are normally better than 99 percent. However, it said the operational situation has improved with flight caps at Amsterdam Schiphol and London Gatwick. EasyJet did not break out fuel expenses for the quarter, but said it is 83 percent hedged for the September quarter. Speaking of the current quarter, EasyJet bookings are a point ahead of 2019 levels, and the airline plans to fly roughly 90 percent of its capacity three years ago.

• Icelandair managed a razor-thin second quarter operating profit, aided by recovering transatlantic demand and good performance in cargo and leasing. “However, external factors such as unrest in Eastern Europe, inflation, volatility in fuel prices, and potential new Covid waves are creating some uncertainty in our environment, especially for the last few months of the year,” it said.

Asia

• All Nippon Airways and Japan Airlines posted improved results in the June quarter. But in a sign of who is stronger, ANA turned a small ¥1.1 billion ($8.3 million) net profit while JAL posted a ¥19.5 billion net loss. Both cited the easing of travel restrictions in their home market, Japan, as well as in other Asian countries for improved revenue and passenger numbers. One interesting move both airlines have made: leveraging their Tokyo Narita hubs to capture connecting flows between North America and the countries in Asia that are opening, including Indonesia, the Philippines, Singapore, and Thailand. Recall, both ANA and JAL were shrinking Narita operations pre-pandemic in favor of Tokyo’s close-in Haneda airport. Both airlines expect continued revenue and traffic improvements through the summer, and forecast positive EBIT results for their fiscal years ending in March 2023.
  
• Singapore Airlines struggled to produce strong margins throughout the 2010s, leaving some to wonder if its glory days might be gone forever. Well, good news to start the post-pandemic period: The airline posted an impressive 14% operating margin in the three months to June. Fuel hedges delivered a comforting $150m gain. Cargo yields remained high. And passenger demand began returning in a big way, reflecting heavy pent-up demand. Singapore Airlines expects to be back to about two-thirds of pre-crisis capacity by early next year. It said it’s committed to its premium positioning. And bookings for the upcoming months look good.
  
• India’s largest airline, IndiGo, characterized the broad trends airlines saw in the June quarter: strong demand marred by high oil prices. The carrier posted a 10.6 billion rupee ($134 million) net loss on its highest ever revenue, yields, and unit revenue, as CEO Ronojoy Dutta put it during an earnings call on August 3. But the loss was largely paper; a weak rupee to the U.S. dollar, which exacerbated the run up in fuel expenses, was a big piece of IndiGo’s results. With the September quarter the historically weakest on the airline’s calendar, IndiGo is looking to the December quarter for a return to profitability. In the meantime, it is focused on filling planes and boosting yields, something Dutta believes is achievable even with new competitors, Akasa Air and a reboot of Jet Airways, entering the Indian market. And, when IndiGo has the planes, it is eager to expand with an eye on adding new service to Tel Aviv and Africa.

— Edward Russell & Jay Shabat

In Other News

• Global air traffic continued to tick back towards normality in June. The latest data from IATA shows passenger traffic numbers were nearly 71 percent of 2019 during the month, or a two point improvement from May. Both domestic and international traffic also showed gains, with the former rising to 81 percent of three years ago and the latter to 65 percent. On a year-over-year basis, every domestic market showed gains except China, where traffic numbers fell 45 percent owing to the government’s zero-Covid travel restrictions.
  
• A group led by private equity firm Apollo Global Management plans to take Atlas Air private in a $5.2 billion all-cash deal. The group will pay Atlas investors $102.50 per share, which represents a 6 percent premium over the closing price on August 3, the day before the deal was announced; the premium is significantly greater before initial reports of the deal ran on August 2. Apollo aims to secure approvals and close the deal by the first quarter of 2023.
  
• With travel to much of East Asia still limited, the U.S.’ two big trans-Pacific carriers Delta and United are sending their under-utilized planes to new dots elsewhere around the world. Atlanta-based Delta is the latest to unveil a number of additions: one new destination — Tahiti — and three new long-haul routes that begin this winter and next summer. The airline will connect Atlanta with Cape Town, a route authority the Department of Transportation granted it in July, from December 17, and Tel Aviv from May 2023; and Los Angeles with Tahiti from December 17. All three routes will operate thrice weekly.
  
• IAG-owned Iberia will be one of the first network carriers in Europe to recover its pre-pandemic capacity. The airline will be at 2019 levels of flying in its winter schedule that begins October 30. The mark will come as Iberia resumes flying to Caracas and Rio de Janeiro, its last two suspended destinations in South America, and adds frequencies in a number of European markets. Iberia and Aer Lingus are, for now, the only European network carriers flying pre-pandemic capacity levels in the fourth quarter, per Cirium.
  
• While not a big issue for the likes of Iberia, Amsterdam Schiphol has extended its capacity restrictions through the end of the IATA summer schedule, or through October 29. The caps keep in place limits that have been in place since June in order to mitigate passenger congestion due to staffing levels at the airport. Airlines, including hometown KLM, are expected to extend existing schedule reductions through October.
  
• Canadian startup Jetlines has pushed back its launch date by two weeks to August 29. The airline cited “receipt of final licensing approval” for the move as it finalizes its operating approvals with Transport Canada and the Canadian Transportation Association. Jetlines will initially offer nonstop flights between Toronto Pearson and both Moncton and Winnipeg with Airbus A320 family aircraft.

— Edward Russell