Issue No. 756

Gulf Growth 2.0

Pushing Back: Inside This Issue

It was New Year’s Day when reports first began surfacing of a mysterious SARS-like virus spreading in the Chinese city of Wuhan. Nearly two months later, public health officials are still struggling to contain the outbreak, deploying tactics that have largely frozen the entire Chinese economy. Air travel, unsurprisingly, is dramatically down, hitting not just Chinese or even just Asian airlines, but all carriers with heavy Asian exposure. Air France/KLM and Qantas both gave financial damage assessments that reach into the hundreds of millions of dollars. IATA sees the Covid-19 virus shock erasing nearly $30b from industry revenues this year. It also foresees a y/y decline in traffic, for the first time since the 2009 global recession.      

How much worse will the crisis get? The impact is now spreading to markets outside Asia, including Europe where Venice just cancelled its Carnival celebrations. Korea, like Italy, is also seeing a jump in Covid-19 cases. The odds are increasing, meanwhile, that the outbreak will take a meaningful toll on the global economy.  

In earnings news last week, Air France/KLM’s Q4 numbers dampened hopes of a quick rise in margins following new labor accords and many new turnaround initiatives. Air Canada’s figures, similarly, failed to erase doubts about the company’s ability to earn decent margins during winters. Qantas, reporting for the six months to December, again did well thanks to robust domestic profitability. Elsewhere, Gol did phenomenally well and SpiceJet did well relative to all the capacity it added. TAP Air Portugal’s losses, combined with management-government friction, could lead to the airline’s sale — Lufthansa and United are reportedly sniffing around. 

Verbulence

"I think the way the TWU has been behaving is outrageous and disgraceful. With the challenges that we have with the tourism industry in Australia today, with the bushfires and with coronavirus, for them to take this disruptive action is a complete disgrace."

Qantas CEO Alan Joyce, attacking unions for engaging in labor unrest 

Earnings

October-December 2019 (3 months)

Net result in USD; operating margin
*Net profit excluding special items (all operating figures exclude special items)

  • Air France/KLM: $173m; 1%
  • Air Canada: $117m/$136m*; 3%
  • Gol: $106m; 26%
  • SpiceJet: $10m; 1%

July-December 2019 (6 months)

  • Qantas: $305m; 10%
  • TAP Air Portugal: $16m; 7%

Weekly Skies

  • Air France/KLM’s latest business plan, presented to investors in November, is now in full swing. The goal: To earn profit margins that look more like its European rival IAG. From 2011 to 2014, the Franco-Dutch carrier amassed net losses excluding special items that exceeded $5b. Fortunes improved after the 2015 fuel bust, but never to the point where it was earning high returns. Operating margins floated within a lowly band of 3% to 6% from 2015 to 2018, the latter a year in which labor strikes erased nearly $400m from would-be profits.

    Alas, the mediocrity continued in 2019, when operating margin was just 4%. As usual, the problem was Air France, with a margin just over 1%, not KLM, whose margin was a more respectable 7%. The group’s low-cost unit Transavia managed a 7% figure as well, an encouraging result relative to Lufthansa’s troubles with Eurowings. Operating margin for the group’s maintenance business was 6%. Looking at just the fourth quarter of the year, groupwide results were very similar to what they were in the same quarter a year earlier. Operating margin was just 1%, with Air France itself negative 1%, KLM positive 4%, Transavia negative 8% (its business is highly seasonal), and maintenance positive 8%.

    Overall, Q4 revenues rose nearly 2% y/y while operating costs rose 1%. ASK capacity grew 2%. With the euro still rather weak, the airline wasn’t fully able to take advantage of falling fuel prices. But helped by new fuel-efficient widebodies, its total Q4 fuel bill increased just 4%.

    Labor costs rose 4% too, though the most important fact about the carrier’s labor force is that it’s no longer threatening to storm the Bastille. Air France secured labor deals with all major work groups, including pilots who agreed to scrap several archaic contract restrictions that led to grossly sub-optimal aircraft configurations and fleet deployments. As testament to Air France’s new era of good feelings, operations ran normal even during nationwide strikes to protest government efforts at pension reform.

    KLM secured new labor deals too, albeit rather expensive ones. The only major unsettled labor matter left for Air France/KLM, in fact, concerns its pilots at Hop, which operates domestically within France and on shorthaul routes from secondary French cities. In general, passenger supply and demand conditions were generally positive last quarter (unlike the cargo situation, which was awful).

    Air France, KLM, and both Transavia France and Transavia Netherlands, benefited from the capacity squeeze in Europe’s shorthaul market. Longhaul markets like Japan, Korea, and India did well. Latin markets like Brazil, Argentina, and Chile remained challenging but showed some improvement. Leisure demand was strong on routes to Caribbean and Indian Ocean resort destinations. Africa was “OK.”

    Unit revenues dropped in the important North America market, mostly as Air France defended its position in the giant New York/Newark-Paris market, which is now served by Norwegian, with French Bee and Corsair soon to enter. Norwegian will in fact link Paris Charles de Gaulle to nine U.S. cities this summer, including new routes like Chicago and Austin. On the other hand, transatlantic player XL Airways no longer exists. Nor does Aigle Azur, which flew to Brazil and China, but more importantly had a collection of lucrative Algerian routes from Paris Orly that now belongs mostly to Transavia.

    Even back at home in the French domestic market, unit revenues increased sharply thanks to another round of aggressive capacity cutting, designed to moderate what have long been heavy losses. It’s not easy to compete against subsidized high-speed rail service.

    The biggest weak spot last quarter was the greater China market, especially Hong Kong. Now of course, the greater China market barely exists, at least for the next few weeks as carriers suspend flights amid the Covid-19 crisis. Unit revenue trends systemwide were actualy looking good for Air France/KLM in the first few weeks of January. But Covid-19 is expected to reduce operating results by something like $170m to $220m for the months of February, March, and April. The number could of course be larger if the outbreak continues beyond the spring. There’s concern too that other airlines will start reallocating Asia capacity to North America, leading to overcapacity there. Another worry is that lost Chinese tourists to Europe might infect shorthaul route performance.

    That said, the airline also expects fuel costs for the entire year to drop by some $333m, which brightens the outlook. Air France/KLM still expects to lower non-fuel unit costs this year as well, even with CASK pressure from its big capacity cuts to China. It still plans to grow ASKs about 2% to 3%; Transavia itself will grow 4% to 6% as the French division expands its fleet in response to relaxed pilot scope restrictions. Management also says it’s better positioned than most to reallocate planes away from Asia given its geographically diversified network (It can put more planes into Africa, for example). China Eastern remains an important partner and even part owner of Air France/KLM.

    But its most important partnership is the recently fused-joint venture iT has with Delta and Virgin Atlantic on North America routes. It plans to keep its close ties to Gol too, never mind Delta’s decision to abandon Gol for Latam. In the meantime, Air France/KLM continues to implement its impressively large number of reforms outlined in November. They include major fleet changes, i.e. the phaseout of A380s and the introduction of A220-300s. It’s studying A320 replacement and would love Airbus to build a larger A220-500. Air France is taking more A350-900s. KLM is taking more B787-9s and -10s as it phases out B747s.

    Air France is adding business class seats on domestic flights for connecting passengers. It’s adding more flat-bed seats on longhaul flights and optimizing overall seating configurations.

    That and a whole host of other reforms (see Skift Airline Weekly’s Nov. 11, 2019 issue). Air France/KLM doesn’t reject the idea of buying other airlines. But it seems keener on taking advantage of the consolidation that others do the dirty work of achieving. Of course, consolidation in Europe is developing not just through takeovers (i.e. IAG buying Air Europa, previously a prospective Air France/KLM JV partner) but at least as importantly through airline failures. And no, Air France/KLM is not interested in Alitalia.

    What’s the ultimate goal? Maybe IAG-like margins are a bridge too far, for now. Instead, management eyes a steady-state groupwide operating margin of between 7% to 8% by 2024. 
  • Air France/KLM can look to Qantas for inspiration. Early last decade, the Australian carrier was itself earning Air France-like margins while embroiled in nasty labor disputes. Then came 2015, when a series of tough reforms began to pay dividends.

    That year, its operating margin jumped to 11%, trailing off only modestly during the subsequent four years. Last year, Qantas posted an operating margin just above 8%, earning more than $1b in operating profits. That’s despite some slowing demand trends from Australian businesses and households during the year. Weakness in the important Hong Kong market was another notable setback.

    Qantas reports financial results just twice a year, and last week presented figures for the last six months of calendar year 2019 (July to December). That tends to be its stronger half, as it was again this time with operating margin nearly hitting the double-digit 10% mark. There was a tiny bit of y/y deterioration as revenues rose a little less than 3% while operating costs were up a little more than 3%. ASK capacity for the half was flat.

    Qantas earns its highest margins in the Australian domestic market, where it competes with the struggling Virgin Australia. Last half, mainline domestic operating margin was 14%. Jetstar, which also makes a lot of money domestically, earned 10%, with some additional profit contributions from Jetstar Japan (a joint venture with Japan Airlines). The Qantas loyalty plan was as usual extremely profitable, adding about a point or two to groupwide margins.

    Mainline international flying, by contrast, tends to earn just modest margins — only 3% last half. This marked some y/y improvement though as many foreign competitors shrink their Australian presence. Demand was mixed at home, with Jetstar experiencing some leisure softness and most industrial sectors flying less. The important resource sector, however, showed strength. The overall trend did improve some as the half progressed, particularly in the domestic market.

    On the other hand, Jetstar suffered from labor unrest last month, Hong Kong was still weak, and Australian airport costs rose, a particular frustration for the airline. Unfortunately, mid-January of this year marked an inflection point, when Covid-19 fears began reversing the modest demand recovery evident toward the end of 2019. Australia’s big wildfires might have caused additional softness. Some segments are still holding up, notably demand from the resource sector.

    But business and leisure are otherwise softening, and not just to China. Japan is hurting too. So are shorthaul routes. The only exception seems to be U.S. and U.K. routes, which seem resilient for now. Overall, Qantas expects the Covid-19 scare to erase about $70m to $100m from calendar first-half operating profits. There are of course the offsetting cost declines from cheaper fuel. In addition, the domestic leisure market could strengthen if Australians decide to holiday closer to home. Inbound foreign tourists by the way, account for just 8% of the traffic flying Qantas and Jetstar domestically. For tourists from Asia alone, that figure is just 2%.

    In any case, Qantas is reacting cautiously by cutting more capacity (see Routes section). Strategically, one of the Flying Kangaroo’s most important projects is the joint venture it’s building with American. That’s supporting a number of new U.S.-Australasia routes by both carriers. There are no current plans for Alaska to join their JV, but it’s an important partner for Qantas, nonetheless, especially following the new Alaska-American partnership and Alaska’s oneworld intentions.

    Another big strategic effort — “Project Sunrise” — is flying A350-1000s on ultra-ultra-longhaul routes to London and New York from Australia’s east coast. It won’t finalize plane orders, however, unless pilots agree to pay and work-rule terms management considers acceptable. Going around the pilot union, Qantas is preparing to next month ask pilots to vote directly on an offer.

    Qantas still has joint ventures with Emirates and China Eastern. It still counts Singapore as an important gateway to Europe and other parts of Asia. B787 Perth-London flights seem to be a success. A380s are getting new configurations with more premium seats. Jetstar gets A321 LRs next year, followed by XLRs a few years later. Qantas, meanwhile, still finds A220s or perhaps E2-EJets a good fit. It’s also evaluating B737 MAXs and additional NEO XLRs. It liked the Boeing NMA idea too.
  • How important is the MAX to Air Canada? With 24 of them on hand at the time of their grounding, they accounted for roughly one-quarter of the airline’s entirely narrowbody fleet (not counting E190s). The lost capacity has meant higher unit costs, operational complexities, fewer connecting passengers, and disruptions to profitable markets like Hawaii.

    The carrier did wind up flying about 97% of its planned 2019 capacity anyway, by retaining planes it was planning to retire, grabbing planes from Rouge and Jazz, extending leases, and even wet-leasing jets from other airlines including Air Transat (something U.S. airlines aren’t doing because of pilot contract restrictions). Because it doesn’t have prior-generation B737s, Air Canada has nothing for its MAX pilots to fly while they wait for the ungrounding.

    As with most MAX-affected airlines though, Air Canada got a Q4 bump in unit revenues from the loss of so much market capacity — rival WestJet is a big MAX operator suffering lost capacity too. This RASM bump was especially evident on U.S. transborder routes, which also saw healthy gains in premium demand. Transcon routes, meanwhile, did “very well” for Air Canada last quarter.

    Other positive developments include strong connecting flows though the airline’s Montreal hub and good performance in longhaul markets that peak counter-seasonally, i.e. India and the Middle East. Management happens to see India as a promising growth market. New routes to São Paulo, Auckland, and Quito, all counter-seasonal as well, have delivered “positive results with a favorable outlook.” And importantly, the transatlantic market to Europe “continues to be a very robust part of our network,” with more opportunities to grow.

    So how did Air Canada fare financially last quarter? Not so great. Its 3% operating margin signals more work is needed to boost offpeak winter-half results. Q4 revenues rose 5% y/y but operating costs rose 6%, all on 3% more ASM capacity.

    Air Canada unfortunately has a pretty large exposure to greater China, with the mainland accounting for about 6% of total ASMs and Hong Kong another 3%. In response to Covid-19, it’s moving planes from Asia to Europe. Cargo was another area of weakness, with revenues dropping 14%. Add that to its MAX woes, the China shock, some weakness in western Canada, some aggressive transatlantic pricing, and some labor inflation, all of which should again drive down y/y margins in Q1, despite the health of many areas of its business.

    Air Canada is also experiencing some momentary hiccups with the introduction of its new Amadeus reservation system, a giant undertaking. As it happens, agents are getting a trial by fire on the new system as large numbers of customers on China routes need to be re-accommodated or refunded. Ultimately, the new system should drive higher revenues. So should a new loyalty plan coming soon.

    Most dramatically, Air Canada is awaiting regulatory clearance to buy its rival Transat — the airline expects to hear something around May. In the meantime, Air Canada continues to build on long-standing strategies like cultivating international connecting traffic and expanding Rouge. A220s are now arriving. A330 interiors are getting a makeover. Rouge will need new planes before long. New routes include Montreal-Toulouse, Montreal-São Paulo, Montreal-Bogota, Toronto-Vienna, Toronto-Brussels, Toronto-Quito, and Vancouver Auckland.

    For all of 2019, by the way, Air Canada’s operating margin was 9%. Compared to U.S. rivals, only American did worse. Indeed, there’s more work to be done, even after coming so far from where it once was, i.e. bankruptcy.
  • Stunning. That’s the only way to describe how Gol is faring in the wake of last year’s collapse of Avianca Brasil. The LCC reported a mesmerizing 26% Q4 operating margin excluding special items, its highest figure since 2004, when it was just three years old. Q4 happens to be peak season in Brazil.

    But even across all of 2019, Gol performed exceedingly well, posting a 19% operating margin. It wasn’t just Avianca Brasil’s disappearance that drove up margins. Falling fuel costs, aided by lower fuel taxes, were also a big factor. In Q4, Gol’s fuel bill dropped 11% y/y despite 6% more ASK capacity, and despite further currency depreciation. The Brazilian real hovered around all-time lows versus the U.S. dollar.

    No less important was a sharp recovery in corporate travel demand, which Gol is well-placed to capture even as a low-cost carrier. Why? Because of its privileged slot position at key airports — its market share is particularly strong in Rio de Janeiro. Gol also has products and services catering to corporate fliers, and a large loyalty plan called Smiles (more on that in a moment).

    As a result of the corporate demand resurgence, Gol’s Q4 unit revenues jumped by double digits. Total revenues spiked 19%, even as operating costs (adjusted for non-recurring items) declined 8%. Other than fuel, Gol’s most important cost declines came in the areas of airport fees and maintenance, the latter mostly because of prior year costs associated with redelivering B737-NGs to lessors. It didn’t redeliver as many this time, given the need to replace lost capacity from its seven grounded B737 MAX 8s. Gol also by the way faced the temporary loss of some NG capacity due to unplanned safety inspections.

    In general though, Gol is managing its fleet and capacity well, content with growing modestly even with Avianca gone. It contrasts this with competitors Azul and Latam, which Gol seems to think are growing too aggressively. Executives in fact don’t appear too perturbed about their MAX issues, perhaps because it’s much easier to find replacement capacity when yourpeak season is most of the world’s offpeak season. The airline did say that leisure demand has been much slower to recover than business demand.

    But it nevertheless expects another outstanding year in 2020, expecting operating margin to again hit 19%. It sees something similar for 2020 as well. ASK growth this year will be roughly 7% to 9%.

    Is Gol upset about getting dumped by Delta? Not at all. It says a new partnership with American will be even stronger, given American’s hub in Miami. Gol will have about twice as many American seats to sell (via codeshare) than it had with Delta. It’s at the same time retaining ties to Air France/KLM, while also adding new partners like Colombia’s Avianca, with which it will codeshare.

    As for Smiles, Gol regrets an earlier decision to sell a big stake. So it’s trying to buy it back, with its latest proposal subject to a vote next month by the loyalty company’s minority shareholders.

    Other pursuits include the launch of a new maintenance unit, partnerships with small carriers to build a better regional network, opening new international flights (i.e. São Paulo-Lima), growing its profitable cargo unit, and adding capacity to areas of the country with higher economic growth, like the northeast. MAXs, meanwhile, remain a critical piece of Gol’s longterm business strategy. It has 129 more still to come, including 30 MAX 10s.
  • TAP Air Portugal, though not publicly traded, disclosed a 7% operating margin for the second half of 2019, offsetting heavy losses in the first half of the year. In the end, TAP eked out a small 2% operating margin for the entire year, but losses were deep ($119m) at the net level. The net result, to be clear, was burdened by ongoing losses at the company’s Brazilian maintenance unit.

    When investors led by JetBlue and Azul founder David Neeleman bought effective control from Portugal’s government in 2015, TAP was an airline with decent profits but a weak balance sheet. The new owners injected lots of money to buy lots of new Airbus planes, including A330 NEOs and A321 LRs. They also revamped the carrier’s brand, added routes to the U.S. and Africa, optimized cabin configurations, implemented LCC-like pricing, and raised ancillary revenues.

    Unfortunately, while 2015 saw a big drop in fuel prices, it also marked a big downturn for TAP’s two most important overseas markets: Lusophone Africa and Brazil. A few years later, Portugal became one of the world’s fastest growing markets due to an influx of tourists. But that story also featured a big expansion by LCCs like Ryanair.

    Today, TAP is in constant confrontation with Portugal’s government, which feels misled by promises of profitability. Most recently, politicians are irate over executive bonuses despite last year’s net loss. Azul asks for a little more appreciation for the 900 new workers it hired last year, and the billions of dollars it’s investing in Portugal.

    It’s also up in arms about the sorry state of Lisbon’s airport, whose severe congestion creates big cost and operational headaches, never mind the network opportunities TAP must forego because of expansion limitations. The airline now says it will stop growing for the next two years because of Lisbon airport constraints. Its CEO actually called it the “worst airport in the world.” Vinci, the French company that runs Portugal’s airports, is developing a low-cost facility for Lisbon at Montijo airport. TAP, alas, insists it will never fly there.

    An unrelated setback this month relates to Venezuela, where TAP had to temporarily suspend service because of a political dispute. A new joint venture with Azul is better news.

    The biggest question though is whether Neeleman wants to stick around, or alternatively sell his stake to another airline. Lufthansa wouldn’t mind some more Latin exposure; it’s now talking with United about a possible TAP takeover, reports Portugal’s Jornal de Negocios.
  • India’s SpiceJet somehow managed to grow its ASK capacity a massive 59% y/y last quarter, even with its MAXs out of service. The key was taking on a bunch of B737-NGs idled after Jet Airways stopped flying.

    All of SpiceJet’s Indian rivals, as it happens, only fly Airbus narrowbodies, so were uninterested in Jet’s planes. Impressively, the LCC’s calendar Q4 operating margin was stable y/y despite all that growth, staying above break even at 1%. For the entirety of 2019 though, SpiceJet’s operating margin was negative 1%, more reflective of management’s short-term emphasis on expansion over profits.

    The airline is now a solid second behind IndiGo in terms of domestic Indian market share. Revenues and operating costs both rose about 46% y/y last quarter, with fuel costs alone rising just 39%. Fuel prices are down sharply again this quarter, which should greatly boost the Indian economy — the country is one of the world’s biggest oil importers.

    By the IMF’s count, India in fact just surpassed France and the U.K. to become the world’s fifth-largest economy (only the U.S., China, Japan and Germany are bigger). On the other hand, as President Trump visits this week, he’ll see an India whose economic growth has slowed in recent years. Airline demand, measured by RPKs, increased just 5% last year, depressed by Jet’s collapse.

    SpiceJet’s voracious growth might lift the market in 2020. It’s even now wet-leasing some A320s from a Bulgarian company. It did receive some compensation from Boeing for its MAX troubles. Will it buy widebodies? Nothing new to report on that front. It does however plan a new airline in the UAE (see feature story). It’s also cooperating with Emirates and Gulf Air. Overall, SpiceJet has added more than 40 planes to its fleet since Jet’s death in April. It now has 121 planes, including five it uses for cargo operations.

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Sky Money

  • IATA’s economics team in Geneva produced estimates of how much revenue Asia’s airlines will lose as a result of the raging Covid-19 crisis. Its best guess for all of 2020 is about $28b, most of it incurred by Chinese carriers. For perspective, Air China by itself generates about $20b in annual revenue. Another way to view the damage: It would be like losing an entire IAG’s worth of annual revenue.

    Of that $28b, almost half will be lost from the Chinese domestic market alone. Before the crisis, IATA expected Asia’s airlines to enjoy a 5% y/y increase in RPK traffic this year. Now it expects a 13% decrease, based on forecasts modeled on the SARS shock of 2003. For the entire global industry, IATA currently sees a $29b loss in revenues and a 5% y/y decline in RPK traffic.

    Lower fuel prices of course, could help protect earnings. Looking more closely at China, IATA shows passenger volumes for Jan. 30 — seven days after the start of the New Year holiday — down 40% from the comparable seven-days-after data in 2019. February numbers look worse, with traffic down more like 60% y/y between Feb. 16 and Feb. 22. Citing not just SARS but also Avian flu and MERS, IATA said the damage from previous disease outbreaks typically peaked after one-to-three months, recovering to pre-outbreak levels in about six-to-seven months.

How Much Longer Does Hainan Have?

  • One of the earliest and largest airline casualties of the Covid-19 crisis could be Hainan Airlines. It was already swamped in debt and challenged by slowing traffic growth before the outbreak. Now reports from Bloomberg and others say it might be on the verge of a municipal government takeover. Hainan’s municipal government is in fact already a shareholder. 

    Other reports suggest its assets — including a large fleet of Dreamliners — could be sold to Air China, China Eastern, and China Southern. Hainan’s sister airline Hong Kong Airlines, which faced a near-death experience late last year, is now laying off workers in another desperate attempt to stay alive.

    In January, Hainan Airlines slashed its ASK capacity 21% y/y, with domestic ASKs alone down 25%. RPK demand dropped even more steeply, plummeting 30% overall and 35% domestically. February numbers will likely look even worse.

    One reminder: Hainan Airlines was a major Boeing customer, and a symbol of the problem Boeing faces in a world without Chinese plane buyers. This evaporation in Chinese demand, which started with the U.S.-China trade war, compounds the loss in recent years of giant widebody orders from Gulf carriers. 

United Strikes New Deal With JPMorgan Chase

  • When it comes to airline-credit card relationships, they don’t come any more lucrative than the one between Delta and American Express. American’s relationships with Citi, Barclays, and MasterCard are pretty darn lucrative too.

    But United? It hasn’t been shy about expressing disappointment with the terms of its deal with JPMorgan Chase. So the two have been discussing some revisions, which culminated in a new agreement last week. As disclosed in a regulatory filing, the two companies will modify terms of their contract while extending it to 2029.

    Along with a related agreement involving Visa, United expects to get an additional $400m out of the changes this year alone. This includes the impact of the new commercial terms, as well as anticipated growth in credit card adoption and the airline’s participation in Chase’s Ultimate Rewards program.

    The airline said it has seen seven consecutive quarters of double-digit y/y growth in its credit card portfolio. On a separate note, United increased checked bag fees last week, matching an earlier move by JetBlue.
  • Speaking of JetBlue, the LCCs’ CFO Steve Priest spoke at a Barclays investor event in Miami, reassuring attendees that the airline has not seen any impact at all so far from the Covid-19 virus scare. Bookings, he said, remain solid throughout the network. Even better, fuel prices are down sharply, though he pointed out that sustained reductions in fuel prices tend to eventually result in lower average fares throughout the industry.

    Margin trends have indeed improved from Q4 to the current quarter, aided by some network rearranging. It shifted some intra-West Coast capacity, for one, to higher-margin transcon routes. A big trouble-spot late last year was the Caribbean and Latin America, hurt by industry capacity hikes. Trends seem to have improved, however.

    A lingering challenge is its inability to get planes from Airbus on time. It was supposed to receive 13 A321 NEOs in 2019. Instead it got just six. JetBlue has a grand total of 149 planes on order, including 53 standard A321 NEOs, 13 A321 LRs, another 13 A321 XLRs, and 70 A220s. These will be instrumental in JetBlue’s efforts to control unit costs.

    The first A220 should arrive later this year, with lots of versatility — they can even perform transcon missions. They’ll replace E190s, which currently account for about 10% of JetBlue’s capacity but 20% of its cost structure. Unit costs will also fall as the airline densifies A320s.

    In the meantime, ancillary revenues are growing significantly. Priest called JetBlue Travel Products a “great margin business.” The TrueBlue loyalty plan is driving revenue growth. And a new fare strategy includes a basic economy-like offering for the first time.

    Priest separately defended JetBlue’s appeal in Boston, downplaying the threat of competitive attacks by Delta and American.
  • Sun Express, a 30 year-old joint venture between Lufthansa and Turkish Airlines, generated a record $1.6b in revenue last year, a 10% increase from 2018. Skift Airline Weekly, in our Aug. 5, 2019 issue, spoke with the airline about its various activities, including the wet-leased planes and crews it provides to Anadolujet, the low-cost arm of Turkish Airlines.

    Most importantly, Sun Express carries tourists to Turkey, which accounts for about 70% of its schedule traffic. The rest is mostly family-visit traffic between Germany and Turkey. Capacity will be at record levels this summer, with tourist arrivals to Turkey expected to reach another all-time high.

    New routes this year include Bremen and Marseille to Antalya; Milan, Ercan, Budapest, Prague, and Skopje to Izmir; and Hamburg, Vienna and Brussels to Adana.
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Media

  • Looks like IndiGo won’t be flying widebodies after all. An Economic Times report states the carrier will instead fly to London and Tokyo with narrowbody A321 XLRs, even if that means waiting a few years before they’re delivered.

    IndiGo, aside from its earlier flirtations with buying Air India, was for a time considering twin-aisle A330s to facilitate its overseas ambitions. An unnamed company official told the Times that IndiGo will soon announce new service to Moscow, which can be reached from India with standard A321 NEOs.

    It would add more flights to Turkey too if it could — scant flight rights between India and Turkey are all used up. Africa and China are other markets on its radar. 
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Fleet

  • Green Africa doesn’t want to wait for its new A220-300s to arrive from the Airbus factory next year. So it’s leasing three of them, enabling the startup to launch before the end of this year. Green Africa will try to do something no other airline ever has: Establish a consistently profitable and reliable airline in Nigeria, Africa’s largest country by both population and GDP. Earlier this month, the carrier ordered 50 A220s, which followed a big order for B737 MAXs. 
  • What’s the “New Light Twin?” As The Air Current describes it, this was Boeing’s idea for a 200-to-240 widebody jet first floated around 2011. It went nowhere at the time but might get a second look as the manufacturer seeks a response to the popular Airbus A321 XLR. Boeing recently shelved plans for a 220-to-270-seat widebody dubbed the “NMA,” or New Mid-market Airplane. In the meantime, it’s contemplating an “FSA” or Future Small Airplane, which would seat between 160 and 220, replacing the B737-family.
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Landing Strip

  • The Metropolitan Washington Airports Authority said 2019 passenger traffic at Dulles (IAD) and Reagan National (DCA) grew by 3% to 49m passengers, compared with 2018. Much of the growth was fueled by IAD, which served 25m passengers last year, up 5% from 2018. United, Alitalia, Egyptair, TAP Air Portugal, and Cabo Verde Airlines launched new international routes from the airport last year.

    This year, IAD is expecting new international service from Swiss, Iberia, and LOT Polish Airlines. DCA, on the other hand, saw traffic growth rise 2% y/y to 24m. The MAX grounding has taken a bite out of the airport’s expected 2019 traffic growth, the airport authority said.
  • Auckland International Airport, which operates its eponymous facility and other airports in New Zealand, reported strong passenger traffic for 2019, but 2020 is clouded by the Covid-19 outbreak. Inbound tourism from China has all but dried up, and the airport authority doesn’t expect tourism to recover until May or June at the earliest.

    Before the outbreak, the company said traffic to and from China was up 5% y/y. Traffic remains strong from the U.S. and elsewhere in Asia, but particularly to Singapore, which the company attributes to the country’s investment in tourism. Queenstown Airport reported a massive 17% growth in traffic y/y, mainly due to international tourism.
  • The Covid-19 outbreak also is affecting traffic across the Tasman Sea at Sydney’s airport. The airport said traffic to China constituted only 8% of the airport’s total, but that is significantly more than during the SARS outbreak almost 20 years ago.

    Given that, the airport said it can’t provide guidance on 2020 traffic projections at this point. In 2019, traffic at the airport was flat, with domestic passengers declining by a percentage point, and international traffic rising by about the same.
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Routes and Networks

  • With demand conditions weakening amid the Covid-19 shock, Qantas is proactively removing capacity from across its network. Naturally, Asia is the focus of its cuts, with mainline international flying (in ASK terms) reduced by 16% until at least the end of May.

    Helpfully, Qantas offers just one mainline route to mainland China — Sydney-Shanghai — which currently isn’t operating. Flights to Hong Kong from Sydney, Melbourne, and Brisbane are still available but with fewer weekly frequencies. On Melbourne-Singapore, Qantas will replace A380s with smaller B787s. Jetstar will see its Asia capacity contract by 14%.

    The cuts aren’t just to Asia though. Qantas is also removing 5% of its trans-Tasman flying to New Zealand, affecting both mainline and Jetstar. Domestically, groupwide capacity will drop by 2%, with cancellations primarily affecting routes between state capitals and flights at offpeak times.

    Overall, the capacity getting removed equates to the grounding of 18 aircraft across Qantas and Jetstar until the end of May. The group emphasized however, that its U.S. and U.K. routes are unaffected.  
  • Even as it trims, Qantas, or more precisely Jetstar, or even more precisely Jetstar Asia, is adding an all-new route to its network in July. From its base in Singapore, the LCC will offer A320 service to Colombo, Sri Lanka. No other airline within the Qantas Group currently flies there. 

American Builds in Charlotte

  • It’s rare that an airline gets the opportunity to expand with new airport infrastructure at two of its best hubs. That’s exactly the case at American, which is now growing Charlotte alongside growth at Dallas DFW. The carrier now boasts of more than 700 daily flights from North Carolina’s largest city, thanks to newly built gates.

    Why exactly does Charlotte, with a metro area population not much larger than San Antonio, produce such strong profit margins for American? For one, American dominates the market with about 90% of all traffic. In addition, Charlotte has the same geographic advantages that make Atlanta the world’s most profitable hub, i.e. its positioning as a Florida gateway, a transcontinental gateway, a transatlantic gateway, a Latin American/Caribbean gateway, and more.

    There isn’t much meaningful competition from alternative airports. And Charlotte’s airport costs are advantageously low. American is working with the airport to keep those costs low, while at the same time ensuring adequate longterm capacity. That will require more substantial infrastructure spending, including perhaps a fourth runway.

    Last year, American added 10 new routes from Charlotte, four of these international: Munich, Santo Domingo, Grenada, and Georgetown in the Bahamas. The others were small-city domestic routes like Bangor, Erie, and New Haven. 

And Will Alaska Go Intercontinental?

  • Will American’s new close friend Alaska ever go intercontinental itself? The Seattle Times cites an internal company posting to pilots, which says the following: “Although doing our own widebody international flying is not part of our strategic plan today, this relationship doesn’t preclude us from exploring it in the long term.”

    The message also referred to the American alliance as “the first step toward international long-haul becoming a viable option for us.”

    Hmmmm. 
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Feature Story

This time, it’s the region’s LCC’s sporting grand ambitions. 

Some said it couldn’t last. It didn’t.

By around 2015, Gulf carrier hyper-expansion was on the wane. No more voracious plane buying. No more hyperactive network expansion. No more billions spent on infrastructure. One of the global airline industry’s most important storylines of the 2000s and early 2010s had reached its final chapter. 

But today, another important storyline is developing on that same sandy Persian Gulf peninsula. Low-cost carriers — much more so now than their extravagant globe-trotting peers—are gearing up for a giant expansion of their own. While the likes of Emirates and Qatar Airways remain important players in the global airline industry, they’re no longer the ones making the biggest waves. 

Instead, the waves are emanating from carriers like Air Arabia. Based at Sharjah’s airport just outside of Dubai, the LCC has fewer than 60 planes today. But at the Dubai Airshow in November, it gave Airbus an order for 120 aircraft, all from the A320 NEO family. More specifically, Air Arabia will take 73 A320 NEOs, 27 A321 NEOs, and 20 A321 XLRs. 

What will it do with all those planes? Many will of course fly from Sharjah. Others will find missions with Air Arabia’s Moroccan joint venture, based in Casablanca, or its Egyptian joint venture, based in Alexandria. The fact is, the wider Middle East and North Africa region remains littered with vulnerable state-owned legacy carriers and outdated regulatory barriers ripe for removal. These realities alone should ensure plentiful growth prospects. Of course, Air Arabia’s bases are within reach of other markets too, including the Indian subcontinent, Europe, sub-Saharan Africa, Russia, Turkey, and Central Asia.   

The XLR planes will only expand its geographic reach. Already, Air Arabia is using a handful of A321 LRs to reach cities like Kuala Lumpur in the Far East. The XLRs will have a widebody-like range of about eight-hours, suggesting new market opportunities as far afield as Johannesburg, Beijing, or Jakarta. It’s almost more useful to ask what markets will not be out of reach from the Middle East once XLRs arrive. It’s pretty much just markets in the Americas and Australasia. 

Widebodies, when you can fill them, will still have superior economics to narrowbodies on longhaul routes. They’re also better for serving premium travelers. For low-cost carriers like Air Arabia though, intent on sticking to a single fleet type catering to price-sensitive fliers, the advent of longer-range NEO narrowbodies presents an enticing opportunity for growth. 

As it happens, Gulf economies are no longer booming like they were when oil prices ran wild from 2000 to 2014, minus the relatively brief decline during the 2008-09 recession. That makes travelers in the region, including many business travelers, more likely to forego frills and fly a low-fare carrier. Unlike the region’s widebody-toting globetrotters moreover, the region’s LCCs have in general produced strong profit margins. Air Arabia’s operating margin last year was an incredible 20%. 

Gulf governments are taking notice. Abu Dhabi, just as oil prices were taking off at the turn of the millennium, disengaged from Bahrain’s Gulf Air, launching its own airline instead. In some ways, this new airline — Etihad — was the most aggressive Gulf carrier of all, not just ordering legions of planes from Airbus and Boeing but also buying large ownership stakes in airlines abroad. Unfortunately, from the very time of its founding in 2003, Etihad was too aggressive for its own good. Losses swelled to monumental levels — nearly $5b in red ink for just the fiscal years covering early 2017 to early 2019. Rival U.S. airlines, in their campaign against Gulf carrier subsidies, claimed Etihad received some $18b in state handouts from 2004 to 2014. 

And its overseas investment strategy? Let’s just say that getting involved with carriers like Alitalia, Air Berlin, and Jet Airways wasn’t the finest example of airline corporate strategy. 

Etihad survives in slimmed-down form today, and with greatly diminished ambitions. But Abu Dhabi, far from disavowing the aviation sector as a means for economic development, has a new plan that happens to involve Etihad. But more interestingly, it also involves, yes, Air Arabia. Next quarter, the two carriers hope to launch a joint venture airline called Air Arabia Abu Dhabi. As the branding suggests, it will adopt Air Arabia’s low-cost business model, using A320-family aircraft. This represents another big growth opportunity for Air Arabia, and another justification for its big November NEO order.

Abu Dhabi clearly wants to develop its tourism sector as an economic diversification tactic. Its reliance on oil exports feels increasingly uncomfortable in a world pressured to reduce its use of carbon-heavy, climate-changing fossil fuels. But its plan doesn’t just involve Air Arabia. It involves a low-cost carrier from outside the region. A very successful low-cost carrier from outside the region.

Europe’s Wizz Air, fast earning a reputation for Ryanair-like profitability, will also come to Abu Dhabi. It will own 49% of a new NEO-flying, Wizz-branded LCC formed jointly with a government-backed entity. It plans to launch in the second half of this year. Neither Air Arabia nor Wizz Air have disclosed any routes they plan to fly. But Wizz said it’s initially targeting markets throughout eastern and western Europe, with the Indian subcontinent, Africa, and the Middle East itself on the long-run radar. Does Abu Dhabi need two low-cost carriers? It seems to be betting not just on increased tourism but also the prospects of becoming an alternative airport for Dubai as the main airport there nears full capacity. Dubai’s grand plans for World Central Airport, located roughly mid-way between Dubai and Abu Dhabi, are alas on hold. 

Dubai itself of course, launched FlyDubai a decade ago. It too has bold expansion plans, supported by a 225-plane mega-order placed in 2017. Unhappily, the planes it ordered were B737 MAXs, meaning multi-year delays to its growth plan. It’s perhaps another reason that Abu Dhabi, Air Arabia, and Wizz Air see now as a good time to get started with their new ventures.  

Abu Dhabi and Dubai aren’t alone in their LCC zeal. Ras Al Khaimah, also part of the UAE, once courted Air Arabia itself. That led to the carrier’s decision to base planes there in 2014, supporting service to about 10 destinations within the Middle East and to the Indian subcontinent. That’s been scaled back a lot however, and current schedules show Air Arabia nonstops from Ras Al Khaimah to just Egypt’s capital Cairo and three cities in Pakistan. Undeterred, the emirate has now found another LCC partner: India’s SpiceJet. In October, the airline announced plans to establish a new Ras al Khaimah-based airline sometime in 2020. Interestingly, it spoke of the project as a strategy to connect Europe with India via the UAE, something it can’t do (because of geography) from any Indian cities. This raises the important point that all the LCC activity transpiring in the Gulf right now has implications beyond just point-to-point traffic. LCCs there are competing for transfer traffic too.  

Saudi Arabia, another oil-rich Gulf state eager to welcome more tourists, saw its state-owned airline Saudia launch a low-cost unit called Flyadeal in 2017. It’s flying just domestically for now, but that’s likely to change when the first of as many as 50 A320 NEOs start arriving next year. Flyadeal competes with Flynas, another Saudi LCC with even more NEOs on order. How many? No less than 90. And of those 90, 10 will be XLRs. So yeah, add Flynas to the list of bullish Gulf LCCs. 

Oman, too, is getting in on the low-cost action with Salam Air, launched in 2017. And then there’s Kuwait, which allowed Jazeera Airways to challenge state-owned Kuwait Airways as early as 2004. But it was always extremely conservative when it came to growth. As late as 2017, it flew a mere seven A320s. But it added two more in 2018. Then four more in 2019. And this year, Jazeera plans to add another five, all A320 NEOs. 

If that doesn’t capture its sudden taste for ambition, then look at the new service it’s offering to London Gatwick. It’s the first example of a low-fare airline offering nonstops between London and the Gulf, taking advantage of Kuwait’s geography and the NEO’s range capabilities. Jazeera is simultaneously jumping headlong into the Indian subcontinent.   

According to Air Arabia, LCCs already accounted for 17% of all 2018 seat capacity in the Middle East, up from just 8% in 2009. That figure now appears set to jump even higher — perhaps significantly higher — as carriers like Air Arabia make blockbuster plane orders reminiscent (in volume terms anyway) of the Gulf Big Three ordering of an earlier era. Foreign LCCs like Wizz and Spice will provide additional fuel for the fire. For one set of Gulf carriers, the moment has passed. For another, the moment is just arriving.

Largest Airlines of the Middle East and North Africa

Airline12 Months Seats (through Feb.)Y/Y
1Emirates74,786,349-2%
2Saudia/Flyadeal50,462,4357%
3Qatar Airways48,808,9696%
4Etihad22,199,1900%
5Air Arabia15,591,2189%
6Egyptair12,907,8645%
7Oman Air12,855,615-2%
8FlyDubai12,351,152-19%
9Turkish Airlines11,251,4735%
10Royal Air Maroc10,754,4784%
11FlyNas9,780,5690%
12Air Algerie9,028,2222%
13Gulf Air8,668,7003%
14Air India/AI Express8,542,43414%
15AF/KLM/Transavia7,869,9966%
16Ryanair6,807,42029%
17El Al6,734,7174%
18Kuwait Airways6,687,3266%
19Lufthansa Group5,257,7880%
20IndiGo5,045,24034%
21Mahan Air4,970,748-24%
22Royal Jordanian4,861,2711%
23Tunisair4,530,677-6%
24Iran Air4,084,184-5%
25Middle East Airlines4,057,3123%
26Iran Aseman4,051,559-24%
27Pegasus3,660,82929%
28Iraqi Airways3,334,061-9%
29Pakistan Int’l3,332,36128%
30Jazeera Airways3,330,30017%

Source: Cirium

Ranked by seats scheduled for the 12 months through February

  • Big Three Gulf carriers no longer growing much, if at all
  • Turkish Airlines the biggest Middle Eastern player from outside the region
  • Ryanair not flying to markets like Israel, Jordan, and Lebanon from points throughout Europe
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Around the World

Around the World: February 24, 2020

Airline NameChange from last weekChange from last yearComments
American-4.70%-21.60%Borrows $500m through bond issuance to fund contributions to employee pension plans
Delta-1.70%12.30%Changes to management team includes appointment of first chief sustainability officer
United-1.90%-12.80%Deepens relationship with Vistara by adding codesharing; no love for Star Alliance member Air India
Southwest-2.50%5.40%Issues statement responding to DOT Inspector General report; explains steps it’s taken to improve safety
Alaska-1.00%4.90%American and Alaska first began cooperating four decades ago but never as closely as they will now
JetBlue-3.10%19.70%Says 85% of its traffic is point-to-point; only 15% of customers are connecting
Hawaiian-4.10%-14.80%Once again in 2019 (for the 16th straight year) number one for on-time performance among all U.S. airlines
Spirit-6.30%-31.60%Says no single foreign country represents greater than 4% of total passenger revenues
Frontier(not publicly traded)Its new service to Guatemala City starts in May; will cater to family visit and migrant worker market
Allegiant-1.60%15.70%Expects to end 2020 with 105 planes; will grow to 125 by end of 2022
SkyWest-3.90%-0.50%Rival GoJet wins contract to fly “CRJ-550s” for United; really CRJ-700s redone with more premium seats
Air Canada-8.70%27.30%Doesn’t have any fuel hedges in place for 2020; able to take full advantage (minus forex effect) of lower prices
WestJet(not publicly traded)Effective Feb. 12, checked bag fees will increase for Basic fares on routes to and from Europe
Aeromexico3.60%-35.80%Aeromar, a regional carrier flying ATR turboprops, plans to grow traffic 30% this year (Simple Flying)
Volaris0.90%54.50%Grounded planes raise further alarm about the financial health of rival Interjet
LATAM-2.00%-11.40%Brazil accounts for 51% of its ASK capacity; 26% touches Chile, 15% Peru
Gol-6.10%22.50%Claims a 20% to 25% unit cost advantage against its next closest rival (presumably referring to Azul)
Azul-6.10%46.80%Finalizes takeover of regional carrier TwoFlex; paid about $30m
Copa-2.50%20.10%Has some of its B737 MAX 9s configured with 166 seats (including lie-flats) and others with 174
Avianca1.00%14.00%Copa announces new Wingo route from Panama’s secondary airport to Peru’s capital Lima
Emirates(not publicly traded)Celebrates 30 years of service to Saudi Arabia’s capital Riyadh; first flew there with B727s in 1990
Qatar Airways(not publicly traded)Increases stake in IAG, owner of British Airways, Iberia, etc., from 21% to 25%
Etihad(not publicly traded)Fleet down to roughly 100 planes; single largest fleet type is the B787 (has 38, including eight -10s)
Air Arabia1.30%68.80%Best performing stock in the past year of any airline on this page; investors impressed with strong 2019 profits
Turkish Airlines-2.50%2.80%Sun Express, its 50-50 JV with Lufthansa, developing maintenance facility in Antalya; will seek to insource work
Kenya Airways-7.50%-70.20%Might launch Tel Aviv nonstops if it can fly over Sudan; warming Sudan-Israel ties make that a possibility
South Africa Air.(not publicly traded)Ambitious Nigerian startup Green Africa to use the Amadeus low-cost Navitaire reservation system
Ethiopian Airlines(not publicly traded)Air Senegal announces new service to London Stansted; starts in June, running 3x a week
IndiGo1.80%31.50%Economic Times reports that it’s taking with Qantas/Jetstar about a possible codeshare relationship
Air India(not publicly traded)Mainland and Hong Kong flights cancelled all the way out to the end of June
SpiceJet3.70%20.20%Cargo operations currently lose money; uses five B737-800s
Lufthansa-2.80%-36.60%Signs updated IT contract with Amadeus; will help advance its digitization goals
Air France/KLM-5.00%-22.40%KLM CEO tells Luchtvaartnieuws that San Diego could be carrier’s next market after Austin
BA/Iberia (IAG)-2.60%-3.40%BA has six new European routes from Heathrow this summer, to Greece, Italy, Kosovo, Montenegro, Turkey
SAS-3.20%-42.30%Will this week present financial results for its Nov.-Jan. quarter
Alitalia(not publicly traded)EU still looking into legality of that loan money it received from Italy’s government to keep it alive
Finnair-6.00%-29.90%Stock price dropping despite company assurances that virus won’t have big impact unless it lasts past spring
Virgin Atlantic(not publicly traded)Still working to keep Flybe alive; has enough cash only until the end of this month, writes the Irish Independent
easyJet0.70%16.30%Turkey ending visa fees for U.K. tourists; Jet2 notes how new policy will save £100 for family of four
Ryanair-1.90%27.00%CEO O’Leary under fire again for his big mouth, this time about allegedly calling for racial profiling
Norwegian-8.40%-34.10%CEO to Dagens Næringsliv: “I think we’ve ordered all the planes we should have for a long time to come.”
Wizz Air-1.80%38.30%Lufthansa will be happy to hear that it’s ending service to Frankfurt this summer; only flew a few routes
Aegean-1.10%7.20%Celebrated its 20th anniversary last year; began operations in 1999
Aeroflot-3.00%15.70%New codeshare with Japan Airlines takes effect late next month; will help support its new Osaka route
S7(not publicly traded)Belavia, the national airline of Belarus, talking about perhaps launching low-cost flights next year
Japan Airlines-3.20%-26.50%If worldwide traffic really does decline this year as IATA expects, it would be first y/y drop since 2009
All Nippon-4.40%-21.10%Scheduled 9,632 flights to mainland China in 2019, including Peach (Cirium); JAL (incl. Jetstar) just 5,315
Korean Air-8.20%-35.30%Mongolia’s MIAT buying market data product from Sabre; country eyeing 1m tourists this year
Cathay Pacific0.00%-22.80%Note the big y/y stock price declines for almost all Asian airlines
Air China0.90%-22.40%IATA estimates that Chinese airlines get about 79% of their revenue from domestic flights, 21% international
China Eastern3.70%-10.20%Prior to Covid crisis, IATA expected China to surpass the U.S. in total air traffic in 2024; that now in question
China Southern3.10%-19.70%World Bank says China accounted for 1% of global trade in 2000; 33% today (WSJ)
Singapore Airlines-0.60%-15.70%Management shakeup includes reinstatement of Campbell Wilson as CEO of Scoot; was LCC’s first CEO
Malaysia Airlines(not publicly traded)Lion Air founder tells Indonesia’s Tempo he’s eyeing more routes to Indian subcontinent as well as Istanbul
AirAsia-3.30%-62.90%AirAsia Philippines names Zamboanga its newest destination; flights will operate from Manila Clark
Thai Airways-8.60%-63.10%Stake in LCC Nok Air dropping again, from 16% to 13%; Nok raising new equity but Thai not participating
VietJet0.00%5.80%Ended 2019 with 22 A320s, 33 A321s, 14 A321 NEOs (one of the NEOs an ACF version with 240 seats)
Cebu Pacific1.70%-6.90%Working with Philippine government to help stimulate domestic tourism to alleviate virus-linked int’l downturn
Qantas1.20%13.00%Jetstar: 52 planes in Australia, 25 in Japan, 18 in Singapore, 18 in Vietnam, 11 (B787s) in int’l unit, 7 in N.Z.
Virgin Australia-3.70%-35.00%Next month will mark one year on the job for CEO Paul Scurrah
Air New Zealand-0.70%3.00%Announces July-to-December financial results this week; Virgin Australia goes this week as well
Brent Crude Oil1.30%-13.80%Though oil prices rose last week, opened with a big drop early Monday this week on worsening virus news

Some stocks traded on multiple exchanges; not intended for trading purposes

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