Another Great Quarter for Turkish Airlines

Edward Russell

March 6th, 2023


Turkish Airlines began its fourth quarter earnings call with an expression of condolences for those affected by the recent earthquakes that killed more than 40,000 people. With respect to its financial results, it was once again a triumphant quarter for the fast-growing airline, which posted an impressive 14 percent operating margin for the three months ending in December. This compares to just 4 percent in 2019.

Turkish is emerging from the pandemic as a powerful force in global aviation, developing Istanbul’s new airport into an omni-directional mega-hub that is currently handling more flights than either London Heathrow, Paris Charles de Gaulle, Amsterdam Schiphol, or Frankfurt. The explanations for the airline’s recent successes are many. The main Istanbul airport, for one, has largely avoided the operational meltdowns experienced at other big European hubs. In addition, Turkish is handling much of the Russian traffic now cut off from western European hubs due to sanctions. Turkey is also welcoming more Russian tourists and emigres who might previously have looked westward. The beaches of Antalya, for example, are currently filled with Russian sunseekers. The World Cup, furthermore, boosted traffic on itineraries involving the Middle East.

In the meantime, Turkish is getting important contributions from its large and fast-growing cargo operation, though cargo demand has been cooling off. As for passenger demand, it remains extremely strong, with no detectable impact from the earthquakes. Management said bookings have become less concentrated during weekends and holidays, allowing for “better revenue management and more efficient use of our capacity.” Passenger yields overall are about 20 percent higher than they were in 2019, with demand especially strong on flights to the Americas. Even more impressively, non-fuel unit costs are down about 2 percent from four years prior.

There’s a lot else going on at Turkish, including the growth and eventual spin-off of its low-cost carrier Anadolujet, which will reach a fleet of 80 planes this year. Anadolujet will soon get a new reservation system. Turkish for its part will continue to add dots to its vast global network, with Detroit, Denver, Orlando, Santiago (Chile), Rio de Janeiro, and Sydney all on its radar. India is another market of great interest, and one where it is now cooperating with IndiGo. Executives said there’s no problem recruiting pilots. And they doesn’t even foresee any major issues with aircraft delivery delays. “For the capacity increase, the issues with the OEMs [original equipment manufacturers] are not going to be a significant bottleneck for our planning of 2023.” Looking beyond this year, Turkish will soon announce a new ten-year corporate strategy. In sum, Turkish asserts: “Our competitive cost structure and vast network [are] our two key pillars that are going to allow us to benefit from this higher and stronger demand environment.”

Jay Shabat

Lufthansa Group Lifted by Swiss, Cargo

Thank you, Swiss International Air Lines. Thank you, cargo. And thank you, maintenance. It’s these three businesses that propelled Europe’s Lufthansa Group to a $313 million net profit for the fourth quarter of 2022. Operating margin excluding special items was 6.5 percent, up from 3.5 percent in the same quarter of 2019.

Consistent with long-running trends, Lufthansa’s 6.5 percent margin figure was worse compared with that of International Airlines Group‘s 8 percent operating margin but better than Air France-KLM‘s 2 percent. The same relative positions held for all of 2022 as well, though the margin gap between the three airline groups was narrower: IAG 5.4 percent, Lufthansa 4.6 percent, and Air France-KLM 4.5 percent.

Returning to the fourth quarter numbers, the Lufthansa-branded airline earned a disappointing 3 percent operating margin, a bit worse than its performance in 2019. Swiss was once again a superstar, growing its margin from 8 percent pre-crisis to 15 percent last quarter — an amazing result for the offpeak fourth quarter. Austrian Airlines, which had an uncharacteristically great summer, fell back to earth, with a margin that was slightly below breakeven; it was slightly above breakeven three years earlier. Eurowings and Brussels Airlines continue to weigh on the group’s success, with margins of negative 14 and 11 percent, respectively. But cargo had another fantastic quarter with a 28 percent margin, and maintenance was solid as well at 7 percent. Like Swiss, the cargo and maintenance units improved their results relative to 2019, and in cargo’s case by a lot.

With 2023 now underway, Lufthansa is busy buying more aircraft and announcing new product upgrades. In recent days, it’s trumpeted more orders for 22 more Airbus A350s and Boeing 787s, plus a new longhaul inflight offering for the Lufthansa- and Swiss-branded airlines. By 2030, the group expects to have added 200 new aircraft, with 35 scheduled to arrive this year — pending production delays currently plaguing Boeing and Airbus. The newly arriving planes will lead to fleet simplification, lower unit costs, and lower carbon emissions.

Planes aside, Lufthansa says its top priorities are product, people, and profitability. Regarding the latter, it targets an operating margin of at least 8 percent by 2024, though it does expect to lose money in the current January-to-March quarter. Bookings remain strong, for travel both this quarter and even more so next quarter; Easter in early April is looking “extremely” strong. Only Asia is still far behind 2019 traffic levels, though management is starting to see improvement in key markets like Japan and is hopeful about a revival in China. Worldwide, leisure demand is driving the current strength, with many leisure passengers booking premium seats. Yields overall are running about 20 percent above 2019 levels, though costs are up sharply as well. Lufthansa expects unit costs to come down as it brings capacity back to near what it was in 2019.

Lufthansa’s home markets, led by Germany, Switzerland, and Austria, have been among the slowest worldwide to rebuild capacity back to pre-pandemic levels. But that’s in part because of big retreats by low-cost carriers. EasyJet’s second quarter seats from these three countries will be down 45 percent from four years earlier, according to Diio by Cirium. Ryanair will be up in Austria and Switzerland but down 18 percent in Germany. Naturally, such reductions have helped lift Lufthansa’s shorthaul yields.

Strategically, the group is looking to divest non-core assets. “One thing is clear,” Chief Financial Officer Remco Steenbergen said, “we aim to develop from an aviation group into an airline group.” That means selling its catering and payments businesses, as well as a stake in its maintenance business. “Interest is very high” with respect to maintenance. But CEO Carsten Spohr made clear the company would not sell its Miles & More loyalty plan.

More interesting than what Lufthansa is selling is what it’s buying. Italy’s ITA Airways remains a target, with Spohr again emphasizing the importance of the Italian market. Even now, Italy is generating strong premium demand through Lufthansa’s hubs. The risk of course is that ITA joins Brussels Airlines and Eurowings as a chronically unprofitable segment, dragging down groupwide earnings. That’s precisely what happened with ITA’s hapless predecessor Alitalia, which was a financial albatross for Air France-KLM during the years it owned a 25 percent stake. Lufthansa said it has a plan to make ITA profitable.

In more general terms, Spohr’s strategic vision is to become more international, reducing the group’s heavy reliance on west-central Europe, where labor costs are high and economies — especially Germany’s — are overexposed to trading with China and manufacturing internal combustion automobiles.

On the other hand, risks specific to the global airline business are in many ways easing, not worsening, Lufthansa believes. Spohr said he agrees with United CEO Scott Kirby that industry capacity will stay constrained for “many years” (Spohr’s words) even as demand steadily increases. Spohr points to labor shortages at airports and suppliers, aircraft delivery bottlenecks, and aircraft parts shortages. Lufthansa itself, meanwhile, intends to add capacity more conservatively than rivals, and that should help with both profits and operations.

Speaking of operations, the group does not foresee any major issues at its Brussels, Vienna, and Zurich hubs this summer. It sounds somewhat less confident about Frankfurt and Munich.

Jay Shabat

AirAsia Looks to China for Recovery

AirAsia parent company Capital A expects China’s reopening to international travelers in January to drive the recovery of its airlines this year. The group’s four airlines — Malaysia-based AirAsia, Indonesia AirAsia, Philippines AirAsia, and affiliate Thai AirAsia — plan to rapidly ramp up capacity to China from less than 1 percent of 2019 levels in December, according to Diio by Cirium schedules, to 90 percent by August, Capital A said in a fourth-quarter earnings presentation last week. And, barring any unexpected events or waning travel demand, they will fly 11 percent more capacity to China in November than they did four years earlier. The rapid return to China will support the group’s recovery to roughly 85 percent of 2019 capacity levels this year.

Capital A said its China capacity plans demonstrate its “confidence and commitment” to the market, with group CEO Tony Fernandes adding that China’s reopening would “further boost” the company’s recovery.

China ended its no-Covid policy, and dropped most border restrictions in January. Since then, airlines from around the world have moved to resume flights that were suspended during the pandemic. All Nippon Airways, Cathay Pacific, KLM, Singapore Airlines, and Swiss, to name a few, are all resuming flights in the next few months.

The easing of China’s restrictions is especially important for AirAsia. The country was the largest source of international visitors to Thailand, and in the top three for international visitors to Malaysia and the Philippines in 2019, each country’s data show. That makes China a critical market for the budget airline’s success. Flights to and from China made up nearly 17 percent of the four AirAsia airlines’ combined capacity in 2019, Diio data show.

As part of AirAsia’s recovery to China, it plans at least five new routes to the country this year. This includes service to Shenzhen on Indonesia AirAsia, and a new Kuala Lumpur-Guangzhou nonstop on AirAsia.

Even without China, Capital A posted strong results in the fourth quarter as the Asian travel recovery accelerated. Group revenues increased 77 percent from 2019 to 2.4 billion Malaysian ringgit ($537 million); airline revenues were down 34 percent from three years earlier to 2.1 billion Malaysian ringgit. The group posted an operating loss of 198 Malaysian ringgit. Airline unit revenues, measured in revenue per available seat kilometer, were up 134 percent compared to 2019, while unit costs excluding fuel were up 106 percent. Capacity across the group’s four airlines recovered to 57 percent of 2019 levels in the December quarter.

Capital A’s much vaunted AirAsia Super App for travel continued to make gains in the fourth quarter. Revenues increased 41 percent year-over-year to 138 million Malaysian ringgit, and the segment was earnings before interest, taxes, depreciation, and amortization (EBITDA) positive at 100,000 Malaysian ringgit. However, despite the public push, the Super App results reinforce the fact that airlines, not travel technology, remain Capital A’s core business — airline revenues were more than 15-times higher than Super App revenues.

The group’s plan to merge its Indonesia, Malaysia, Philippines, and Thailand units into a single holding company, AirAsia Aviation Group, is forecast for completion by March.

AirAsia’s airlines operated 126 of 205 total Airbus A320 and A330 aircraft at the end of December. The group aims to fly 150 aircraft by the end of March, and fully reactivate its fleet by the end of September. AirAsia has 362 A320neo family aircraft on order, and expects its first five A321neos in 2024.

AirAsia’s long-haul brand, AirAsia X, is a separate company and not included in Capital A’s results.

Edward Russell

Norse Atlantic Bets on London

Longhaul budget airline Norse Atlantic Airways is betting that a significant expansion of transatlantic flights from London will deliver it profits after posting a loss for its first year of operations. The Oslo-based carrier will launch six new routes from Gatwick to the U.S. — including new destinations Boston, San Francisco, and Washington Dulles — between May and September that, based on its expectations, will help drive a profit during the second half of the year. The new routes will be operated by Norse’s new UK-based subsidiary, Norse Atlantic UK.

“As we enter into our first full summer season in 2023 the initial substantial investments that were necessary to launch Norse Atlantic Airways operations, and subsequently establish our UK-based airline, will have created a strong and sustainable company, ready to swiftly seize on new opportunities and navigate through an unpredictable global economic environment,” Norse CEO Bjorn Tore Larsen said.

Airlines forecast a busy summer travel period across the North Atlantic. In January, United Chief Commercial Officer Andrew Nocella said they expect “record” revenues in the market this summer. And others, including Air France, Iberia, and JetBlue Airways, are adding new flights to take advantage of the demand. Industry capacity between the U.S. and Europe for the peak June-to-August period will be down roughly 3 percent compared to 2019, according to Diio by Cirium schedules.

Norse’s own forward bookings give it confidence in turning a profit during the six months that begin in July. In other words, if Norse can’t turn a profit on the transatlantic this summer, something is wrong.

Norse is solely focused on the transatlantic market. It operates a fleet of 15 Boeing 787s that, this summer, will serve seven U.S. destinations from Berlin, Oslo, London, Paris, and Rome. For flyers who need to travel beyond its gateways on both sides of the Atlantic, Norse has joint ticketing interline arrangements with EasyJet, Norwegian Air, and Spirit Airlines.

Speaking of Norwegian Air, Larsen has repeatedly said that Norse is not a reincarnation of Norwegian Air’s former loss-making long-haul, low-cost business that closed in 2021 as part of the airline’s restructuring. However, many of Norse’s routes were ones previously flown by Norwegian Air — including its latest London Gatwick expansion — and its 787s are former Norwegian Air aircraft.

Despite the similarities, Larsen has been adamant that Norse is different. The airline has power-by-the-hour lease agreements on most of its 787s that allow it to cost-effectively reduce flying during the winter; Norse pays far less for the aircraft if they are not flying under power-by-the-hour agreements. This is important because the market tends to be very seasonal. In addition, the airline’s sole-focus on long-haul, low-cost flying with a single aircraft type allows it to keep other expenses low as well.

If Norse can turn a profit this year, it would be notable among the startups that launched during the pandemic. Fellow Norwegian airline Flyr, which targeted European leisure travelers with a fleet of Boeing 737s, shut down in January. And Icelandic discounter Play Airlines only expects an operating profit if there are no further energy, labor, or macroeconomic shocks in 2023 as were seen this year.

Norse intends to operate 10 aircraft this summer, while five 787s are subleased to other carriers. The carrier plans to operate its full fleet of 15 787s in summer 2024.

The airline posted a $106 million operating loss on $101 million in revenues in the second half of 2022, its first as an operating airline. Norse cited startup challenges, as well as high fuel costs, for the loss. For the full year, the carrier lost $146 million. It had $70 million in cash at the end of December.

Edward Russell

In Other News

  • In the latest twist in the Viva Air saga, the discounter shut down on February 27. However, its claims that the closure was the direct result of Colombian regulator Aerocivil’s delays approving its proposed merger with Avianca, are being challenged. Multiple local media outlets, citing an Aerocivil document late last year, have reported that Viva had options other than a merger available to continue flying but chose the merger. Remember, when Avianca and Viva sought regulatory approval last August, the former already had economic control of the latter and, based on reports citing the Aerocivil document, also commercial control through indirect means. What happens next is anyone’s guess: Does Aerocivil approve the merger despite the alleged illegalities? Let Viva, Colombia’s third largest airline, collapse? Or, maybe, find a different buyer, like JetSmart or Latam Airlines, for its assets?
  • FlyDubai, owned by Dubai’s government, said it earned a $327 million net profit in 2022. Though not a publicly-traded company with financial reporting obligations, the airline typically provides headline figures about its annual performance. Last year’s profit came on about $2.5 billion in revenues and roughly 11 million passengers. “Our resilient financial stance enabled us to maintain positive cash flows and not require the government aid that was available to us during the pandemic,” the company said.
  • Privately-held AirBaltic reported a €32 million ($34 million) operating profit last year, on €500 million in revenues. The latter number fell just short of the Riga-based carrier’s record of €503 million in revenues in 2019. AirBaltic reported a €54 million net loss for the year. CEO Martin Gauss recently said the airline hopes to return to the black this year, and hold a long-planned initial public offering in 2024.
  • REX, a longtime player in Australia’s regional airline market, began challenging Qantas and Virgin Australia on mainline routes with narrowbodies during the pandemic. During the second half of 2022, it managed a US$4 million net profit excluding special items, claiming its domestic jet services returned to profitability in September. But regional operations suffered from what it said was “predatory behavior” by Qantas. REX isn’t happy about its giant rival entering small markets “that are too small to support two operators.”
  • Pilots at Delta Air Lines ratified a new contract last week. The accord includes up to 34 percent pay increases over four years, as well as other quality of life improvements, that the Air Line Pilots Association (ALPA) estimates are worth about $7 billion. For Delta, the agreement buys it peace with its pilots for a while but at a cost: The contract is estimated to drive a roughly 3 percentage point year-over-year increase in costs per available seat mile (CASM) excluding fuel this year. CASM excluding fuel at the airline is forecast to be up more than 20 percent this year compared to 2019. Pilots at American Airlines, Southwest Airlines, and United, all of which are in contract negotiations, are expected to push for similar terms to Delta’s new accord.
  • In people moves, the Lufthansa Group‘s board extended both CEO Carsten Spohr and Chief Financial Officer Remco Steenbergen’s contracts another five years, or until the end of 2028. And in Australia, Qantas‘ chief of both its domestic and international airline businesses, Andrew David, will retire in September. Cameron Wallace, a former Air New Zealand executive, will become the new CEO of Qantas International and Freight on July 1; the airline is in the process of recruiting a new CEO of its domestic airline.

Edward Russell & Jay Shabat

Edward Russell

March 6th, 2023