Issue No. 754

How Did the U.S. Industry Do Last Year?

Pushing Back: Inside This Issue

It is the best of times. It is the worst of times. Like a tale of two cities, there’s a tale of two airline industries right now, one watching with glee as oil prices plummet, the other watching in horror as a virus outbreak causes travel demand to plummet. At the epicenter of the scare are airlines in greater China, including Hong Kong, which can only hope that the outbreak is contained soon.

In the U.S. by contrast, airlines are enjoying near-blissful conditions, with demand strong, supply constrained, and yes, fuel prices tumbling. Spirit became the latest to post potent profits, though it does face some cost concerns. To be clear, all U.S. carriers face rising labor costs. Most are frustrated by fleet plan disruptions, the flip side of those supply constraints. In addition, incumbents have their eyes on Breeze, a promising new startup carrier. 

In Europe, Ryanair too has a love-hate relationship with the current aircraft shortage. It would clearly rather have its MAXs. But without them, Europe’s airline sector saw a tightening of supply and demand conditions, driving up fares. More capacity disappeared with the deaths of airlines like Thomas Cook. And sure enough, Ryanair’s profits increased.   

If only that were so for Korean Air. It faces terrible demand conditions in key markets like China and Japan. Cargo is no less a concern. At least Korean Air’s not Cathay Pacific, forced to temporarily close a major portion of its network. But at least Cathay’s not South African Airways, permanently closing much of its network and fighting for mere survival. At least South African isn’t in trouble with the law like AirAsia. 

American, robbed by Delta of its Latin alliance partner, can at least find comfort in a new relationship with Gol.

Verbulence

And if they had brains or..., they’d tell Branson to go and write the check himself instead of bailing it out.

Ryanair CEO Michael O’Leary, politely stating his objections to the provision of U.K. taxpayer money to Virgin-backed Flybe

Earnings

October-December 2019 (3 months)

  • Ryanair: $98m; 5%
  • Spirit: $81m/$85m*; 13%
  • Korean Air: $45m/-$125m*; 4%
  • Jin Air: -$37m; -33%
  • Finnair: $27m/$10m*; 4%
  • Icelandair: -$30m; -11%

*Net profit excluding special items (all operating figures exclude special items)

Weekly Skies

  • All along, it said not to worry. For seven straight quarters —almost two years — Ryanair’s operating margins were in steady y/y decline. Labor costs were rising sharply. Same for fuel costs, inflated by a weak euro and wrong-way hedges. Air traffic control delays were another headache. Brexit uncertainty and its impact on consumer sentiment led to “panic-pricing” by rivals. Savage fare wars in Germany and Austria caused unexpectedly big losses at Ryanair’s Lauda subsidiary.

    And the B737 MAX-200s Ryanair was eager to get never arrived, leading to pilot overstaffing, aborted growth plans, and higher costs for aircraft maintenance and depreciation. Last winter half (October through March), the airline suffered a highly unusual negative 12% operating margin. Even excluding Lauda’s losses, the figure would have been an ugly negative 6%. Fear not, however, because Ryanair continued to earn extremely high peak-season margins.

    And during last year’s calendar fourth quarter, its margins suddenly increased sharply as adverse trends reversed. Yes, just like Ryanair said they would. Q4 revenues soared 21% y/y despite just 6% more scheduled ASK capacity (Cirium). Operating costs, meanwhile, rose just 10%. Labor and fuel costs again rose by double digits, up 14% and 11%, respectively. Lauda is still losing more money than expected. But fares throughout Europe were no longer depressed. On the contrary, Ryanair’s average fares jumped 9%, alongside a huge 21% increase in ancillary revenues. Priority boarding and preferred seating were big sellers, boosted by a new digital sales platform that enables more personalized offers. Late-booking demand was notably strong around the Christmas and New Year holidays.

    Importantly, lots of industry capacity was lost due to the MAX grounding, NEO delays, and the disintegration of multiple airlines including Thomas Cook and Slovenia’s Adria. Ryanair was itself supposed to have more than 50 MAX-200s by now. Instead, it’s looking at a second straight summer with zero (see Fleet section below for more on Ryanair’s MAX situation). So growth will again be held back, following the reluctant closure of bases in Belfast, Hamburg, Las Palmas, Nuremberg, Stockholm Skavsta and Tenerife South. Lauda, on the other hand, with its Airbus CEO fleet, will continue to expand aggressively as it grows from 23 to 36 planes this summer, while enabling a fifth base in Zadar, Croatia. It wants more secondhand A320s if it can find them cheaply, though that’s becoming difficult given the MAX situation.

    In any case, Lauda intends to grow, with its eyes on establishing a base in Spain, Italy, eastern Europe or somewhere else outside of Germany and Austria. Vienna airport, as it happens, is running out of room for expansion, even as Lufthansa’s Eurowings retreats and IAG’s Level cuts back. As for its Düsseldorf and Stuttgart bases, Lauda won’t grow there until the market “settles down.” (Ryanair accuses Lufthansa of “below-cost selling.”)

    Lauda, of course, is just one of several Ryanair subsidiaries now, the others being Ryanair U.K., Malta Air, and Buzz in Poland. The company doesn’t pay much attention to their brands. But it finds this IAG-like multi-airline structure useful for lowering its tax liability (and the tax liability of its crews), improving operational flexibility, and providing its Dublin-based management with more career promotion and leadership experience opportunities. Ryanair continues to speak optimistically about its future. CEO Michael O’Leary expects more rivals to fail and consolidate. True to form, he angrily blasted away at Wizz Air’s claims of having lower costs, claiming its own CASK per passenger is 24% lower (and 44% lower than those at easyJet). Wizz Air, he said, is “clearly mathematically challenged.” O’Leary is still extremely bullish on the MAX and what the plane will ultimately do for its unit costs.

    On fuel costs, Ryanair is now 90% hedged through early 2021 after locking in recent declines in the oil market. On labor costs, the market for pilots has eased considerably without “the likes of Norwegian running around offering everybody stupid contracts, promises of long haul 787s and all the rest of it.” And the revenue environment? O’Leary said pandemics like the coronavirus actually boost demand as Europeans elect to holiday closer to home. But he declined to forecast what yields might be this quarter or this summer.

    Brexit is no longer an immediate concern with the U.K. now out of the European Union. But the two sides must still negotiate an air service agreement for flights beyond the end of this calendar year. Another long-term concern is the airline sector’s growing exposure to environmental taxes, regulation, and consumer activism. Ryanair is taking the problem seriously, hiring a new sustainability director and loudly touting its efforts to reduce carbon emissions. Another airline acquisition, by the way, would not “be the first thing on our list,” O’Leary said, while sounding open to the possibility.

Spirit Reports Favorable Trends

  • The fourth quarter brought some welcome developments to Spirit, America’s largest ultra-low-cost carrier. The airline’s 13% operating margin was second-best among all U.S. carriers, behind only Allegiant. This was better than expected — Spirit last month revised its RASM and CASM forecasts to reflect more favorable trends. In addition, the operational messiness it experienced during the summer largely dissipated as management restored more conservative levels of pilot reserves and aircraft utilization.

    On the other hand, Spirit’s 13% operating margin was a substantial drop from the 16% it earned in the same period a year earlier. Its margin decline, in fact, was steeper than that of even Southwest and Hawaiian, the two other U.S. carriers which suffered y/y margin deterioration.

    Spirit’s revenues increased 12% y/y on 17% more ASM capacity. More worryingly, operating costs jumped 16%, even with fuel prices down. Labor costs jumped 15%, depreciation costs were up 29% and maintenance costs rose 37%. It’s seeing airport cost inflation too. It’s building a new headquarters in Fort Lauderdale. And it’s spending money to become more customer friendly, in terms of service and operational reliability.

    Is Spirit losing its cost advantage? No, executives insist, because rivals are seeing their costs rise as well. Though it’s not a MAX customer, Spirit’s A320 NEOs are arriving late due to tariff disputes and issues at Airbus and Pratt & Whitney. But it relishes the NEO’s fuel efficiency and will now start deploying them on longer-haul routes where the benefits will be even more pronounced. The delivery delays, by the way, are not disrupting 2020 expansion plans too much, but Spirit fears they might cause it problems in 2021.

    The airline remains a champion of ancillary selling, earning $58 per passenger on average last quarter, up 2% y/y. It sees more growth in this area as it refines pricing, introduces new fare bundles, benefits from a revamped website, and uses software to yield greater insights into customer behavior. Spirit is also introducing onboard Wi-Fi and will soon unveil a new loyalty plan that should drive more credit card adoption. Demand and bookings remain strong, especially during peak periods. For offpeak periods, demand is there but pricing is more competitive. Inventory controls on discount fares, it said, are looser this year than last across the industry. That implies pressure on yields.

    But at the same time, Spirit’s yields should benefit as it enters fewer new markets. In 2019, it entered Austin, Burbank, Charlotte, Indianapolis, Nashville, Raleigh-Durham, and Sacramento. That list will likely be smaller this year. Not that it’s slowing growth overall — ASMs should increase another 17% to 19% this year. But much of that growth will involve frequency additions or connecting cities it already serves. It is however adding two cities in Colombia.

    In Orlando, its busiest airport after Fort Lauderdale, Spirit is benefitting from re-timed schedules on Latin/Caribbean routes. These were a drag during much of last year. The Dominican Republic is one Caribbean market that’s weak this winter. Puerto Rico shows some weakness too, perhaps related to a recent earthquake. Now that fuel prices are plummeting, would Spirit consider growing even faster?

    Not really: “We don’t swing our fleet planning and our growth profile based on the machinations of the fuel market,” CEO Ted Christie said. Besides, the large new batch of NEOs it just ordered won’t be arriving for several years. One other note on Spirit’s network: There’s less seasonal variance this year, with schedules not quite as peaked in the summer.

    How will margins develop this quarter? The company expects a pretax figure between 6.5% and 7.5%, down from close to 9% in Q1, 2019. Full-year 2020 margin pretax should be about 12%, compared to nearly 14% in 2019.  

Korean’s Dire Straits

  • For much of the first two decades of the 2000s, Korean Air built a thriving hub in Seoul by rendering it a convenient gateway into and out of China, for both passengers and cargo. Now that China’s economy is slowing, however, the model is showing cracks. More importantly last year, the U.S.-China trade war and a slowdown in global trade more generally badly damaged Korean’s Air’s cargo business, which accounted for 24% of revenues in 2018. Last year, that dropped below 21% as cargo revenues plummeted 15%.

    Unfortunately, the passenger business isn’t exactly thriving either, wounded not just by the slowing Chinese economy but also a heated political dispute between South Korea and Japan. Trouble in Hong Kong, a heavy debt burden, and Korea’s weakening currency relative to the U.S. dollar didn’t help. As a result, Korean’s Air full-year 2019 operating margin dropped to just 2%, from 5% in 2018, 8% in 2017, and 10% in 2016.

    See the trend? During just the fourth quarter, Korean Air’s operating margin did actually increase y/y, to 4% from 1%. For that thank a sharp 12% y/y decline in operating expenses, aided by cheaper fuel. Revenues dropped just 8%. Helpfully amid its woes in neighboring China and Japan, Korean Air gets roughly half of its passenger revenues from intercontinental flying, with about 30% from North America and the other 20% from Europe. These markets held firm, with the U.S. market in particular supported by Korean’s joint venture with Delta.

    Delta is now a part-owner of Korean Air, helping it develop more sixth-freedom U.S-Asia traffic, more U.S. point-of-sale traffic, more U.S.-based corporate business, and new routes like Boston and Minneapolis (the latter operated by Delta). The other key component of Korean’s Air traffic base is the ASEAN market, which seems to be doing well enough though certainly not short of tough competition. Korean opened new routes like Manila Clark and stimulated more leisure demand to destinations like Vietnam.

    Back on longhaul, it’s trying a new route to Budapest this summer, aimed at Korean tourists. It plans more frequencies to Boston, as well as to other cities like Los Angeles, Singapore, and Delhi. It will operate more charter flights for tourists. It’s expanding business class seating on shorthaul flights. And it will work to optimize aircraft utilization and deployment.

    Make no mistake though: Korean Air is a troubled airline, and not just because of temporary market disruptions. Its fleet, for one, is overly complex, probably the result of owning an aerospace manufacturing subsidiary that works closely with both Airbus and Boeing. Indeed, Korean has ordered just about every plane on their menu: A380s, B747-8s, B737 MAXs, A321 NEOs, A220s… the only notable exceptions so far are A350s, A330 NEOs, and B777-Xs. Last year it bought 30 more B787s, including the -10 version.

    Another problem is corporate governance, crystalized by the antics of the airline’s controlling Cho family. Remember the “nut rage” incident? Family members are now battling for management control, prompting current CEO Walter Cho to pledge asset sales and other reforms.

    The bottom line is that Korean Air is nowhere close to meeting the objectives of its Vision 2023 plan. And 2020 is off to a terrible start with the coronavirus scare emanating from China. 

And Jin’s Bad Fortune

  • Jin Air was launched as a low-cost subsidiary of Korean Air, before getting partly spun off through a public share offering. Those who invested aren’t happy right now, to say the least. Jin Air reported a devastating negative 32% operating margin for the fourth quarter, with revenues plummeting 20% y/y but operating costs dropping just 3%.

    A year earlier, Jin’s Q4 operating margin was bad, but only negative 11% bad. The company’s full-year 2019 figure was negative 5%, saved from an uglier fate only by a strong first quarter. Don’t blame cargo — Jin Air barely has any exposure. The main reason for its Q4 debacle was the geopolitical dust-up between South Korea and Japan, which obliterated demand for air traffic between the two neighboring countries.

    A year ago, Jin Air was getting more than one-fifth of its revenue from Japanese routes. Last quarter they were responsible for just 8%. The disruption forced Jin to move planes from Japan to China, the ASEAN region, and the Korean domestic market, leading to excess capacity in these markets. It did however cut ASK capacity overall by 10%.    

Finnair’s Declining Margins

  • Turning from Jin Air to Finnair, the Helsinki-based carrier’s annual operating margins for the past three years unfortunately read like a rocket launch countdown: 7% in 2017, 6% in 2018, 5% last year…. can the carrier reverse the slide? It plans to slow things down in 2020, following a year in which it grew ASK capacity a bullish 11%. That made it one of Europe’s fastest-growing airlines.

    Finnair grew 11% in just the fourth quarter of 2019 as well, with more new flights to Asia and a new route to Los Angeles. More importantly, results for Q4 improved y/y, empowered by strong results on intra-European shorthaul flying. Operating margin rose to 4%, giving it a fighting chance to post a modest profit for the offpeak winter half, always a challenge in the Nordic region. Q4 revenues rose 13% y/y, outpacing a 12% increase in operating costs.

    Frustratingly, the weak euro and hedge losses prevented Finnair from taking advantage of declines in the oil market. Its Q4 fuel bill increased 18%, never mind all the fuel-efficient A350s it now has. Labor cost inflation exceeded capacity growth too, rising 14%.

    Back on the revenue side, Finnair’s rosy results from the intra-European market has something to do with the market’s MAX-induced aircraft shortage. But even more helpful was Norwegian’s massive capacity cutting. Thomas Cook of course, disappeared, which contributed to good performance at Finnair’s tour operator division.

    Domestic performance was likewise strong, aided by leisure demand for connections to Lapland in the north. North American RASK trends were surprisingly robust, with Chicago singled out for distinction. Management also mentioned a bump in government traffic while Finland presided as EU Council president during the last half of 2019 (the rotating six-month position is now held by Croatia).

    But we’ve come too far without mentioning the centerpiece of Finnair’s business model: Asia. In fact, somewhere between one-fifth and one-quarter of Finnair’s shorthaul passengers are connecting to or from Asia, so when it’s not performing well, the entire network suffers. Well, it did perform rather well last quarter. Yes, Hong Kong was weak, though not quite as weak as feared. Yes, mainland China routes saw additional capacity, including Juneyao’s new Shanghai-Helsinki route. And yes, Finnair’s heavy exposure to Asian export economies implies a significant cargo operation, for which Q4 revenues shrank 5%.

    But Finnair’s single largest foreign market anywhere in the world is Japan, which performed well. A trans-Siberian joint venture with IAG and Japan Airlines helped. So did a weaker euro-yen exchange rate, which stimulated inbound European tourism from Japan. Other Asian markets like Korea, Thailand, Singapore, and India, the airline said, are behaving in the “usual fashion,” even now in the throes of the coronavirus scare.

    About that scare, Finnair is not terribly worried. Demand for its China flights is typically weak this time of year anyway, so cancelling them through the end of this month won’t result in any lost profits. So even factoring in refunds to customers, management feels the financial impact will be “relatively limited,” even if the cancellations extend through the entire first quarter. If the problem persists into the peak spring and summer seasons, of course, that would create more problems. One option it mentioned, if necessary, is reallocating some capacity to markets that could support it, like London.

    As it waits for the virus scare to pass, Finnair is embarking on a new business plan covering the next five years. It envisions a more modest expansion of about 3% to 5% a year in ASK terms. Other highlights include a plan to renew its narrowbody fleet, the introduction of a longhaul premium economy class, and the development of a fourth schedule bank at Helsinki airport. It appears keen on wanting a fleet with a greater ratio of narrowbodies relative to widebodies. It separately outsources regional flying to its partner Norra. It continues to expand in Japan with a new Sapporo service and upcoming flights to Tokyo Haneda.

    And after next month, the airline’s pilot contract comes up for renewal. Keep in mind that Finnair remains a government-controlled company. Its current ownership share is 56% and going anywhere below 50% would require an act of parliament. For now, that’s not terribly relevant.

    But it could be if another carrier like IAG ever decides to pursue an acquisition bid. Finnair itself would likely welcome any such interest, understanding all too well its vulnerability as a smallish airline dependent on connecting traffic to Asia. Aeroflot, interestingly, is increasingly chasing the same traffic. LOT Polish has its eyes on the market as well. 

Icelandair Reconsiders

  • On the far eastern end of the Nordic region, Icelandair chases not Europe-Asia traffic but Europe-North America traffic. But that market for the airline — transatlantic travelers connecting via Reykjavik — contracted by 21% y/y last quarter. Local passengers starting or ending their journeys in Iceland helpfully increased by double digits.

    But it wasn’t enough to prevent Icelandair from reporting a negative 11% Q4 operating margin, or negative 13% for just the mainline airline operation itself (i.e. excluding Air Iceland and the company’s hotel, aircraft leasing, and tour operator businesses). That sure beats the negative 23% figure it suffered in the same quarter a year earlier. Revenues rose 7% while operating costs fell 3%.

    Its full year margin figure (negative 3%) also marked a y/y improvement, though only a small one. Put Icelandair in the category of airlines deeply affected by the MAX grounding. Last quarter, it forced a 9% y/y reduction in ASK capacity. More importantly, the disruption has erased as estimated $100m in operating profits.

    That’s almost as much as it earned during each of 2015 and 2016, the last two years in which Icelandair earned strong margins. It’s been a rough going since, especially while Norwegian, Primera, and Iceland’s own Wow Air were recklessly expanding across the Atlantic. The latter two are gone now, in Wow Air’s case after failing to secure a merger with Icelandair. Norwegian is greatly shrinking. But the market remains competitive.

    The MAX was supposed to be accounting for about 27% of Icelandair’s total capacity by now. Partial compensation from Boeing, included in the airline’s passenger revenue, mitigates the impact only somewhat. Fortunately, fuel prices are pretty low, easing the pain from having to rely on its aging B757s much longer than anticipated. This year, Icelandair plans to cut ASKs another 8%, recognizing that it likely won’t get its MAXs flying again before autumn at the earliest.

    In the meantime, it’s focused on improving operations, optimizing crew utilization, reaping the benefits of a new revenue management system, developing a new bank of flights at Reykjavik airport, and building on big improvements in on-time performance last quarter. It’s even opening a new route to Barcelona, having closed some loss-making U.S. routes (i.e. San Francisco and Kansas City). Intriguingly, it also bought a 36% stake in Cape Verde Airlines, a carrier endowed with a hub well positioned for future U.S.-Africa demand.

    In 2020, Icelandair hopes for a return to profitability, eyeing a 3% to 5% operating margin. It warns however, that forecasting is increasingly difficult with travelers booking closer to departure. One more uncertainty is another restive Icelandic volcano that could erupt and disrupt air travel. Longer term, the airline is evaluating whether to stick with the MAX or turn to the NEO.   

IATA: 2020 Off to a Grim Start

  • Global airline passenger traffic (measured in RPKs) grew last year, but much more slowly than in the previous year, IATA data show. RPKs grew in 2019 by 4% over 2018, a much slower pace than 2018’s 7% growth and the first time since the financial crisis that RPKs have not risen by an average of 5.5% annually.

    Most regions of the world saw traffic rise by about 4% last year, except for the Middle East, where traffic grew by a more anemic 2%. Some highlights from IATA’s data are that airlines in China reported traffic rising by 8%, the slowest pace since the financial crisis. India’s airlines reported RPK growth of only 5%, down from the double-digit growth that characterized the industry since 2008, mainly due to the demise of Jet Airways and the slowing Indian economy.

    In most regions, slower economic growth, falling business confidence, and geopolitical tensions caused demand to fall.

    This year is off to a grim start, with the coronavirus outbreak in China crippling that country’s air travel and dampening demand for travel to East Asia in general.◄

Q4 2019 Earnings Scoreboard: U.S. Airlines

Q4 Winners (by operating margin, all figures exclude special items)

  • Allegiant: 20%
  • Spirit: 13%
  • Delta: 12%

Q4 Losers (by operating margin, all figures exclude special items)

  • American: 8%
  • United: 9%
  • Hawaiian: 9%

Q4 Earnings Scoreboard: U.S. Airlines

RevenuesOp Profit (Exluding Special Items)Net ProfitNet Profit (Excluding Special Items)Op Margin (Excluding Special Items)Pretax MarginNet Margin (Excluding special items)ASM/Ks
Delta$11.437b$1.420b$1.099b$1.096b12.4%12.2%9.6%5%
American$11.313b$876m$414m$502m7.7%6.0%4.4%3%
United$10.888b$991m$641m$676m9.1%8.2%6.2%3%
Southwest$5.729b$665m$514m$514m11.6%11.6%9.0%-1%
Alaska $2.228b$252m$181m$181m11.3%10.9%8.12%4%
JetBlue$2.031b$228m$161m$162m11.2%10.9%8.0%6%
Spirit$970m$130m$81m$85m13.4%11.5%8.8%17%
Hawaiian$708m$66m$50m$46m9.3%8.9%6.48%4%
Allegiant$461m$93m$61m$61m20.1%17.1%13.1%9%
TOTAL$45.765b$4.720b$3.201b$3.322b10.3%9.5%7.3%4%

Source: Cirium

  • Delta scooping up business as its three largest rivals deal with MAX headaches; Atlanta the jewel in its crown
  • American hobbled by labor frustrations in addition to its MAX woes; helped though by better Latin conditions
  • United affected by China exposure and weakness in Germany but otherwise enjoying robust demand conditions
  • Southwest most affected by the MAX affair but just about everything else is going right
  • Alaska recovering from period of uncharacteristcally banal margins; addressed trasncon troubles
  • JetBlue always seems to lag other LCCs on margins; Latin/Carib. markets under competitive pressure
  • Spirit showing some uncomfortable non-fuel cost creep even; margins falling but still high
  • Hawaiian unsurprisingly affected by Southwest’s offensive; Japan still strong despite ANA’s A380 offensive
  • Allegiant proving that it can be every bit as profitable with A319s and A320s as it was with MD-80s
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Sky Money

SkyMoney  

  • A gentle Breeze? Or a powerful gust of wind? U.S. airlines will soon enough see the true competitive impact of a new airline created by David Neeleman, the man behind airlines like Morris Air, JetBlue, WestJet, and Azul. He’s also in the driver’s seat at TAP Air Portugal. And he briefly served as heir apparent to the legendary Herb Kelleher at Southwest.

    His latest creation: Breeze Airways (illustration from Breeze below), with its headquarters in Salt Lake City. A lot about Breeze’s business model remains undisclosed and perhaps not yet decided. It won’t say, for example, which routes it plans to fly.

    But Neeleman spoke with Skift last week, providing some disclosure about the carrier’s plans. For one, it will use the 30 used, 125-seat E195s it’s getting from Azul for connecting underserved markets involving smallish cities, not unlike Allegiant. One of Breeze’s top executives in fact, is a former Allegiant exec Lukas Johnson.

    What it will do with 60 A220s that start arriving next spring is less clear. They’ll have far superior operating economics but also far higher ownership costs. The idea of targeting underserved city pairs seems to be a central theme for Breeze, which notes how other U.S. airlines are upgauging to larger planes and seeing their costs increase.

    These two trends favor flying on thicker routes with more demand. Breeze hopes to launch by the end of this year.
  • Hong Kong’s Cathay Pacific was hopeful that a nightmare 2019 would give way to a healthier 2020. Instead, the coronavirus outbreak in mainland China is turning a bad situation into outright panic. The airline last week felt it necessary to suspend roughly 90% of its mainland flying, with other parts of its network subject to “significant reductions” for the next two months.

    Overall, this will result in a massive if temporary capacity cut of about 30%, or perhaps closer to 50% according to a study of the carrier’s schedules by the South China Morning Post.

    Cathay was quick to assure that it has enough cash to ride out the storm but needs to take some drastic measures until the virus is contained. It’s modifying inflight service on mainland flights, for example, temporarily stopping all duty-free sales and distribution of hot towels, pillows, blankets, and magazines. Even more dramatically, it’s asking all workers to take three weeks of unpaid leave. 
  • As bad as things are for Cathay, they’re worse for Hong Kong Airlines. Hanging by a thread even before the year started, it’s now cutting 400 jobs and suspending service to eight cities through the end of March. Only four of the eight are in mainland China, the others being Male and three cities in Japan (Okayama, Yonago, and Kagoshima). Other routes like Beijing, Tokyo, Seoul, Bangkok, and Bali will see reduced frequencies. 
  • AirAsia expressed deep concerns that an anticorruption allegation will adversely impact its “brand, reputation, and goodwill.” Malaysian investigators are pursuing aspects of a case against Airbus involving AirAsia, and whether its founders accepted illegal payments to a sports team they owned in exchange for agreeing to buy planes.

    Airbus itself admitted to illegally trying to influence plane buyers, for which it’s paying a $4b penalty. CEO Tony Fernandes, mastermind of the AirAsia empire, will step down from his duties temporarily. He also faces corruption charges in India. AirAsia said it “vigorously rejects and denies any and all allegations of wrongdoing.”
  • Qatar Airways is betting big on Rwanda, an ambitious country trying to position itself as the Singapore of Africa. The Gulf carrier is already involved financially in the construction of a new airport for Kigali. It now says it’s negotiating a 49% ownership stake in state-owned RwandAir. In its most optimistic visions, RwandAir will one day replicate the success of Ethiopian Airlines. Or better yet, Singapore Airlines. It has a long way to go though.  
  • Indigo, the investment firm specializing in ultra-low-cost airlines, is cashing in its winnings at Wizz Air. The Arizona-based company sold the majority of its 21% stake. According to Reuters, it sold at least in part to ensure Wizz complies with foreign ownership laws; Indigo now has just a 3% stake left. It remains a major shareholder in Frontier, Volaris, and JetSmart.◄

Full-Year 2019 Earnings Scoreboard: U.S. Airlines

Full-year Winners (All figures exclude special items)

  • Allegiant: 20%
  • Delta: 14%
  • Spirit: 14%

Full-year losers (All figures exclude special items)

  • American: 8%
  • JetBlue: 10%
  • United: 11%

Full-Year Earnings Scoreboard: U.S. Airlines

RevenuesOp Profit (Excluding Special Items)Net ProfitNet Profit (Excluding Special Items)Op Margin (Excluding Special Items)Pretax MarginPretax Margin (Excluding special items)ASM/Ks
Delta$46.910b$6.535b$4.767b$4.773b13.9%6.3%10.2%5%
American$45.768b$3.706b$1.686b$2.179b8.1%13.2%4.8%1%
United$43.259b$4.547b$3.009b$4.071b10.51%9.4%9.4%4%
Southwest$22.428b$2.957b$2.300b$2.300b13.2%13.2%10.3%-2%
Alaska $8.781b$1.063b$769m$798m12.1%11.6%9.1%2%
JetBlue$8.094b$814m$569m$568m10.1%9.48%7.0%7%
Spirit$3.830b$519m$335m$349m13.54%11.9%9.1%14%
Hawaiian$2.832b$313m$224m$219m11.1%10.5%7.7%2%
Allegiant$1.841b$364m$232m$232m19.8%16.4%12.6%9%
TOTAL$183.784b$20.818b$13.891b$15.489b11.3%10.3%8.4%3%

Source: (Cirium)

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Media

Airlines in the Media

  • We’ll have to wait until May before seeing how Sun Country (and Frontier, for that matter) performed in the fourth quarter. That’s when the DOT’s transportation statistics division publishes results for the industry.

    But good news! Sun Country CEO Jude Bricker presented at last week’s Routes Americas conference in Indianapolis, providing an update on the airline’s current situation. Interestingly, Bricker expects to have industry-leading profit margins by the time its new relationship with Amazon is up and running. It plans to fly packages for the online retail giant, using 10 B737-800s that would otherwise be underutilized.

    The arrangement will be one of three distinct lines of business for Sun Country, the others being its vibrant charter flying and of course, its scheduled passenger business. Minneapolis-St. Paul remains the focus of the latter, with about 60% to 70% of its flying concentrated there. It’s opportunistically added leisure flights from other airports too, like Dallas DFW and Portland PDX.

    Since Bricker arrived, in fact, the airline has added more than 20 new markets while densifying seat configurations and lowering airfares. The target: Anyone who pays for their own tickets.  Minneapolis giant Delta can have the corporate market to itself. Sun Country claims a base of about 1m loyal customers and earns fare premiums over Spirit and Allegiant.

    It wants to broaden its support across the Midwestern U.S.; Wisconsin’s capital Madison is one market it’s chasing. It’s even interlining with regional bus companies. How about its new Hawaii service from Minneapolis operated via Los Angeles? That’s one of Sun Country’s best markets, Bricker said, with one of the keys to its success being the fact that flights only run during peak periods.

    One benefit of the charter business is that fuel costs are paid for by the customer, removing a key risk. Bricker does however acknowledge the challenges of finding workers in a tight Minneapolis job market and managing the operational complexity of essentially running three different businesses while growing rapidly and frequently moving around planes to follow peak seasons. He separately mentioned Belize as a booming market right now. Demand to Punta Cana, on the other hand, is down 50%. ◄
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Fleet

  • During its calendar Q4 earnings call, Ryanair said it’s still interested in buying additional B737 MAXs from Boeing, on top of the 200-plus it’s already ordered. Indeed, it even made an offer to do so, eyeing the upsized -10 version that would carry 230 passengers.

    Providing some unsolicited advice, Ryanair said Boeing should begin rebuilding lost narrowbody market share by focusing on sales to its two biggest B737 customers: Itself and Southwest. But first, it adds, Boeing needs to get the plane back in service, then catch up on backlogged deliveries, then get the production back on track, then deliver “a reasonable quantum of aircraft” per month, and then “start finding new orders.”

    In the meantime, Ryanair naturally expects compensation for its MAX-related losses covering lost revenue and unrealized cost savings. What it wants, specifically, is a re-pricing of future deliveries. It also expects to be “at the head of the queue” when Boeing sorts out who’s first to get MAX deliveries once they start again.

    That said, Ryanair only has an appetite for a maximum eight deliveries per month, and no more than 50 by summer 2021. It happens to be one of the few airlines in the world with its own MAX simulators, two of them in fact, with a third coming in June. That should make things easy if all that pilots will need is an initial MAX simulator session, with recurrent training thereafter done on either MAX or NG simulators.

    What it badly does not want are regulations that mandate even recurrent training be done specifically on MAX simulators only. This would effectively leave Ryanair with two separate fleet types, and by extension higher costs and less operational flexibility.    
  • The climb-down at Etihad, once one of the world’s fastest-growing airlines, continues. The embattled Gulf carrier sold 16 B777-300ERs, which it will then lease back, and 22 A330s, which will leave its fleet. One of the buyers is the American investment firm KKR. The other is a lessor called Altavair.

    Etihad is in the third year of a “transformation” plan designed to cut massive losses. Abu Dhabi’s government, which started the airline in 2003, is now taking a different approach to stimulating its aviation sector.

    It’s fostering the birth of two new low-cost carriers, one of them an Etihad joint venture with Air Arabia. The other is a JV involving a government entity and Europe’s Wizz Air. ◄
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State of the Unions

  • When American and the TWU reached a tentative deal earlier this month for the airline’s mechanics, it put to rest (for the time being) one of the longest-running and most contentious of the carrier’s labor negotiations. Remember, relations between management and the union deteriorated to the point that American took the mechanics to court last year, alleging the workers were slow-walking maintenance on aircraft. American’s on-time results suffered, the carrier alleged.

    All that is in the past now with the new deal. Terms of the deal are generous. American’s mechanics get pay raises of between 13-25% over the five-year term of the agreement, with 5-16% raises immediately upon ratification. Changes also include more robust retirement, health, and vacation benefits. And the union got much of what it had demanded during negotiations on a key point: Retaining maintenance work in the U.S. The agreement requires American’s maintenance workers to do half of its aircraft overhaul hours. Domestic line maintenance must be done in-house at one of 26 stations, and international line maintenance outsourcing is limited to 11% for the first two years of the five-year deal, rising to 12% afterward. The deal also requires American to keep at least 2,600 aircraft overhaul mechanics, as well as several hundred more engine-overhaul and component-maintenance jobs, the union told Airline Weekly.

    The union further added that the combination of work required and minimum number of employees makes it an industry leading agreement, besting those at Delta, Southwest and United, each of which either do not have minimum headcount provisions or stipulations against outsourcing.

    One interesting piece of the deal: Profit sharing. CEO Doug Parker has been vocal in the past of his disdain for profit sharing as an element of employee compensation. Yet, profit sharing is a significant part of the deal.

    The agreement now goes before workers, and TWU expects ratification, barring “false narratives on social media that we will address and dispel once we educate members on the final tentative agreements.” 
  • United is opening a pilot-training school. The carrier is taking over the Westwind School of Aeronautics and renaming it the United Aviate Academy. The school will be part of the United Aviate program, a pilot-training pipeline the airline launched last year.

    United anticipates hiring 10,000 pilots by 2028, and the Aviate Academy will train 300 in its first year. A focus of the program is increasing the number of women and minority pilots and to reduce the financial barriers that prevent aspiring pilots from entering the profession.

    The Air Line Pilots Association is working with United on the Aviate program.◄
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Landing Strip

  • The Trump administration has barred New York state residents from applying for or renewing membership in the popular Global Entry expedited passport control as well as similar programs that ease return trips from Canada and Mexico.

    At issue is the Trump administration’s objection to a new state law that is aimed to protect undocumented immigrants by not sharing their immigration status with federal authorities as part of the application for a driver’s license. The move is part of the Trump administration’s stated antipathy to so-called “sanctuary” laws, which protect undocumented immigrants’ information from federal authorities.

    New York residents who are already enrolled in Global Entry can remain in the program. New York state has said it will sue the Trump administration, arguing the move violates the state’s sovereignty.

    The Trump administration has not signaled if it will extend the ban to other states that have sanctuary laws on the books, such as California, the nation’s most populous state.
  • Indianapolis Airport is celebrating the first anniversary of Delta’s nonstop Paris flight and says the route attracts an average of 1,000 weekly passengers. The airport says it will seek to increase the number of international routes from the city in 2020. In terms of domestic routes, Indianapolis has listened to its business community and is seeking more routes to the U.S. West Coast. ◄

America’s Highest Revenue Airports, Excluding Connecting Traffic

AirportRevenues Oct. ’18-Sept. ’19AirportPercentage Vs. 4 Years Earlier
1Los Angeles LAX$4.2bNashville BNA37%
2San Francisco SFO$3.1bAustin AUS31%
3Chicago ORD$3.1bNewark EWR27%
4Atlanta ATL$2.9bDallas DFW26%
5Denver DEN$2.7bSalt Lake SLC25%
6Boston BOS$2.5bMiami MIA22%
7Seattle SEA$2.5bPhoenix PHX20%
8Newark EWR$2.5bDenver DEN20%
9Dallas DFW$2.5bCharlotte CLT20%
10Las Vegas LAS$2.5bSeattle SEA18%
11Orlando MCO$2.4bPortland PDX18%
12New York JFK$2.3bSan Diego SAN17%
13Phoenix PHX$2.3bAtlanta ATL17%
14New York LGA$2.0bChicago ORD16%
15Washington DCA$1.7bFort Lauderdale FLL15%
16Minneapolis MSP$1.7bBaltimore BWI14%
17San Diego SAN$1.7bOrlando MCO14%
18Philadelphia PHL$1.7bTampa TPA13%
19Houston IAH$1.5bWashington DCA13%
20Detroit DTW$1.5bHonolulu HNL13%
21Fort Lauderdale FLL$1.5bBoston BOS12%
22Honolulu HNL$1.4bLos Angeles LAX12%
23Tampa TPA$1.3bPhiladelphia PHL11%
24Portland PDX$1.3bDetroit DTW10%
25Baltimore BWI$1.3bHouston IAH10%
26Miami MIA$1.3bLas Vegas LAS9%
27Salt Lake SLC$1.2bNew York JFK9%
28Charlotte CLT$1.2bSan Francisco SFO6%
29Austin AUS$1.1bMinneapolis MSP5%
30Nashville BNA$1.1bNew York LGA-2%

Source: U.S. DOT O&D Summary Report via Cirium

*Ranked by DOT estimates of total revenues for origin and destination domestic U.S. traffic only, 12 months thru Sept. 2019 (i.e. if someone flies from Nashville to L.A. via Dallas DFW, Nashville is the origin and LAX is the destination, DFW is disregarded)
*New York market is larger than L.A. but split across three major airports
**Revenue growth influenced by traffic growth as well as average fares

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Routes and Networks

  • Most of the world’s airlines have stopped or sharply curtailed their flights to mainland China in reaction to the coronavirus scare. But some are suspending service to Hong Kong too.

    United, for example, cancelled all flights through Feb. 20. Virgin Australia is pulling out of the Sydney-Hong Kong market altogether. It not long ago exited from Melbourne-Hong Kong. These were routes where it likely fared poorly even before Hong Kong’s triple whammy of troubles, i.e. the U.S.-China trade war, the anti-mainland street protests, and the coronavirus scare. 
  • As part of its bankruptcy-like restructuring process, South African Airways is drastically downsizing its network. Routes that will not be touched include Johannesburg to Frankfurt, London Heathrow, New York JFK, Perth, and Washington (the latter via Accra). Also staying put are routes to the African cities Blantyre, Dar es Salaam, Harare, Kinshasa, Lagos, Lilongwe, Lusaka, Maputo, Mauritius, Nairobi, Victoria Falls, Livingston, and Windhoek. But not so lucky are Abidjan (via Accra), Entebbe, Guangzhou, Hong Kong, Luanda, Munich, Ndola, and São Paulo. And domestically, only one route will remain: Johannesburg-Cape Town.

    That means all other domestic destinations, namely Durban, East London and Port Elizabeth, will cease on February 20. However, SAA’s low-cost Mango unit will continue to operate as normal. Along with this major network revamp, SAA’s administrators are renegotiating supplier contracts, reviewing organizational structures, exploring asset sales, searching for outside investors, and prepping unions for imminent job cuts.

    They plan to publish a final turnaround plan later this month, which creditors (i.e. banks that lent the airline money) will have a chance to approve or reject. South Africa’s government will also have a say, and right now officials are not too happy about the route cuts. That includes the country’s business-friendly president himself, Cyril Ramaphosa.
  • It’s now official. Turkish Airlines will fly to Vancouver, adding yet another distant dot on its expansive global route map. Istanbul’s new airport is at the center of that map, of course. And facilitating a new wave of intercontinental routes are incoming B787-9s. The new Canadian service will begin in June, though with just three flights per week — Canada is notoriously stingy when it comes to providing flight rights to overseas carriers, most notably Gulf carriers. 
  • Aeroflot surely has Turkish Airlines on its mind as a model for building a sixth-freedom airline hub. It’s not growing nearly as aggressively as Turkish was at a similar stage of development. But the Russian carrier is starting to fill obvious holes in its network. Last week it began selling tickets to Singapore, with flights launching in October. It will be one of the first deployments of the carrier’s new A350-900s. Separately, Aeroflot is moving its Tokyo flights from Narita airport to Haneda. That route uses B777-300ERs.  
  • Booming Denver, a city perched a mile high up in the Rocky Mountains, is expanding its airport. And that affords United the opportunity to lease another 24 gates. This will enable the airline to offer some 700 daily departures from Denver by 2025, up from about 500 today.

    Believe it or not, Denver generates more origin-and-destination passengers than any other U.S. airport except Los Angeles LAX. That means people starting or ending their journeys there, disregarding whether or where they connect. Why is it such a giant market? For one, there are no alternative airports, other than perhaps Colorado Springs to the south.

    More importantly, Denver is a long and often winding drive from most other nearby cities, making air travel imperative. It’s a major tourist draw. Its population and economy are growing rapidly. No wonder why it can support three airlines. Besides United, Southwest and Frontier are both big in Denver. 
  • U.S. low-cost carriers flying to upper South America are nothing new. Less common are South American LCCs flying to the U.S. The phenomenon is growing, though, as carriers like Sky get A320 and 21 NEOs.

    At the Routes Americas conference in Indianapolis last week, Sky said it plans Lima-Miami nonstops in June, competing against the big boys Latam, Avianca, and American. JetBlue and Spirit fly from Lima to Fort Lauderdale. Sky has other international routes on its agenda too, including Lima-Punta Cana and Lima-Cancun. When it ultimately gets A321 XLRs, a new world of opportunities will open.

    The planes, for instance, can reach New York, San Francisco, and Toronto from Lima, it says, not to mention Miami from Sky’s home city Santiago, Chile. 
  • Also at the Routes Americas event in Indiana, Mexico’s VivaAerobus said it plans to launch another 20 new routes this year, including some to the U.S. It launched 19 last year. More NEOs are arriving, including A321 versions with 240 seats, an amount typically associated with widebodies. Even so, it’s introducing a premium economy product. Viva will take its first four A321 NEOs this year.  ◄
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Marketing

  • As expected, American and Gol are teaming up. Both are recovering from the fateful decision of Latam and Delta to run off with each other. In doing so, Latam ditched American and Delta ditched Gol. American won’t take an ownership position in Gol, as Delta had.

    But the two will elevate a modest interline agreement into something deeper involving reciprocal codesharing and loyalty plan benefits. American also plans to add a second daily peak-season flight to Rio de Janeiro, where Gol has a leading presence (Latam is larger in São Paulo).

    At the same time, mindful of Delta’s recent moves to increase Miami flying, American will add Miami capacity to key markets like Boston, Houston, Orlando, Nashville, Raleigh-Durham, and Tampa. The new partners say they’ll offer more daily flights between the U.S. and South America than any other airline partnership.

    A third developing alliance in the U.S.-South America market is that involving United, Avianca, and Copa
  • American is making partnership moves across the Atlantic too. It’s joining with IAG and Finnair in asking DOT permission to allow Aer Lingus into their revenue-sharing transatlantic joint venture. They said the Irish carrier would still be free to continue its existing marketing partnerships with JetBlue, Alaska, and United.  
  • In other transatlantic joint venture news, Delta, Air France/KLM, and Virgin Atlantic implemented their combined alliance last week, covering nearly one-fifth of all passenger and cargo capacity in the market.

    The venture is managed by an executive committee of each airline’s CEO, plus a management committee of representatives from departments across the three airlines. The relationship between Air France/KLM and Virgin by the way, is unaffected by the former’s decision to forego taking a 31% ownership stake.

    Virgin Group remains the top shareholder in Virgin Atlantic with a 51% stake. Delta owns the rest.  
  • JetBlue has retooled its JetBlue Vacations travel bundle to include more perks. The program now features new partnerships with hotels in vacation destinations, among other on-the-ground benefits.

    In Aruba and Punta Cana, JetBlue Vacations customers can have access to a local travel expert who can facilitate tours and other activities. Inflight customers won’t have to pay change fees. They’ll get a free beverage. And they’ll have priority boarding.

    JetBlue Vacations is managed by JetBlue Travel Products, a subsidiary of the airline.
  • The B737 MAX grounding is affecting all of Boeing’s suppliers, but it’s also hurting airline suppliers, including inflight Wi-Fi provider Viasat. In its fourth-quarter earnings call, the company said the MAX grounding will have a $10m effect on its bottom line, up from previous guidance of $5-10m.

    Viasat sees the continuing pressure on its earnings to last into 2021, even if the MAX returns to service by the middle of this year, as Boeing recently said. In more positive news, Viasat said it has successfully moved into the Latin American market with its first flight with Azul.
  • Here’s a fun one. Lufthansa is selling off bits of its retired A340-600s. Interested customers can buy keyrings made from the aircraft’s exterior, wall bars made of the windows, and coffee tables created from the aircraft’s slats, among other items. The interior wasn’t neglected, either. Briefcases and backpacks were crafted from business-class blankets and headrests. The items are for sale on the carrier’s online shop and are part of Lufthansa’s Upcycling Collection.◄
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Feature Story

Highlights of the Q4 earnings season for U.S. airlines.

For U.S. airlines, Q4 earnings season is now complete. And as is customary these days, all players produced solid profits. Collectively, Delta, American, United, Southwest, Alaska, JetBlue, Hawaiian, Spirit, and Allegiant reached a double-digit operating margin, topping 10% on nearly $46b in revenues. For all of 2019, they earned 11% on $184b. The year before: 10% on $175b. No other country has an airline industry so stable and profitable. 

What were the highlights of the final quarter of the final year of the decade? Here’s a review:

  • Perhaps most importantly for U.S. airlines, the domestic economy was strong, driving robust corporate and household spending on air travel. U.S. GDP grew a healthy 2.1% in Q4 and 2.3% for all of 2019. Though business spending was weak, consumer spending and especially government spending was up significantly. Both fiscal and monetary policy remain expansionary. 
  • Complementing strong demand conditions were tight supply conditions. Seat capacity, indeed, was depressed by the absence of grounded B737-MAXs, and to a lesser extent the late arrivals of A321 NEOs. To be clear, the carriers affected wish it weren’t so — disrupted fleet plans are driving up costs, complicating operations, and delaying strategic initiatives. But there’s no denying the significant lift to industry unit revenues from the loss of so much capacity.
  • Fuel prices dropped sharply. This was another big highlight of the fourth quarter: The industry’s fuel bill sank 8% y/y despite a 3% y/y increase in ASM capacity, not to mention the unrealized fuel efficiency that all those grounded MAXs and tardy NEOs were supposed to provide. Most carriers paid just a bit more than $2.00 per gallon, compared to a simple average of about $2.30 in the same quarter a year ago. This quarter by the way (January to March) looks even better. After an initial jump following escalation of U.S.-Iran tensions, Brent crude oil prices have plummeted, reacting to the virus-related demand shock in China. 
  • Labor costs, on the other hand, are not falling sharply. On the contrary, the sector’s Q4 wage and salary bill jumped 7% y/y. Some of that is profit sharing. But most is simply linked to higher pay rates and better benefits. There’s likely more labor inflation to come as the Big Three negotiate new pilot contracts now already past their amendment dates. Pilot contracts at Alaska, Southwest, and Sun Country will become amendable later this year. American will have to swallow the cost of its new mechanics contract, if ratified. Hawaiian can’t seem to get a contract done with flight attendants. And so on.
  • Airport costs are rising too. It’s not a huge part of an airline’s cost base, certainly not as meaningful as labor or fuel costs. But several carriers felt it important enough to mention in the Q4 earnings calls. U.S. airports are often cited as examples of America’s neglect when it comes to infrastructure investment. In reality, the country’s top 50 airports have budgeted about $35b in capital spending. Big projects include an all-new airport in Salt Lake City (right alongside the old airport), a revamp of New York LaGuardia airport, and big projects at Chicago O’Hare and Los Angeles LAX. Denver, Dallas DFW, Charlotte, and Washington Reagan are others expanding with additional gates. Delta alone is investing $12b of its own money over the next five years to upgrade its hub airports. 
  • Efficiencies from aircraft investments are delayed but not denied. U.S. airlines aren’t getting their planes on time — their narrowbody planes anyway. But the NEOs, E-Jets, and Dreamliners that are arriving do wonders for unit costs. Delta is keeping Airbus happy by taking A220s, A330 NEOs, A350-900s, and, later this year, A321 NEOs. These planes have revenue benefits too, providing greater range, more space for premium seating, and more comfortable interiors than the jets they’re replacing. At current count, five U.S. airlines have ordered standard-range NEOs, four have ordered MAXs, three have ordered B787s, and two have ordered A220s. United, American, and Frontier have ordered extra long-range (XLR) versions of the NEO. None, however, have ordered Boeing’s B777-X. Several are interested in Boeing’s NMA widebody concept. Sometimes, it’s not about buying new planes but what you do with your old planes. United is creatively refashioning aging CRJs and B767s with more premium seats.   
  • While domestic conditions were extremely strong, international market trends were more mixed. The big weak spot for U.S. carriers last quarter was Asia, but even that had areas of ups and downs. Japan was fine. But mainland China and Hong Kong were not. Same for cargo on Asian routes, a big contributor to overall cargo revenues. The story was more unambiguously uplifting in Latin America, where carriers saw big unit revenue gains from the key Mexican and Brazilian markets, mostly thanks to capacity cuts (Mexican markets were affected by Aeromexico’s MAX constraints). Across the Atlantic, where the U.S. Big Three earn most of their international revenue, yields and unit revenues declined y/y, hurt by adverse forex trends and some pockets of weakness, notably outbound corporate demand from Germany. But transatlantic conditions remain broadly benign. One would think that non-U.S. airlines are scrambling to add U.S. capacity to take advantage of the good economy. But foreign airline capacity to the U.S. was down in Q4, partly owing to the loss of carriers like Wow Air, Primera, Thomas Cook, and Avianca Brasil. At least as important was Aeromexico’s MAX disruption and downsizing by Norwegian, Avianca, Hong Kong Airlines, Icelandair, and Air China.
  • Encouragingly for the future, carriers continue to possess a large arsenal of revenue-enhancing weapons. The most important of these is their loyalty plans. Also ranking high are joint ventures, many still yet to transpire. There’s smarter segmentation and pricing. There’s microtargeted upselling and other forms of personalization enabled by data mining, machine learning, and IATA NDC principles. As already mentioned above, new planes and new airport facilities can drive revenue growth too. 
  • San Juan, Puerto Rico heads a list of hot markets. That might seem surprising given the island’s struggling economy and lingering effects from hurricane Maria. But sure enough, tourism is back, and San Juan’s scheduled seat capacity grew a stunning 23% y/y last quarter (Cirium), benefitting from Frontier’s decision to double its presence there. Sprit, Delta, American, Southwest, and Sun Country all added lots of seats too. So did some of the island’s biggest international carriers like Copa, Iberia, and Avianca. Among America’s 50 busiest airports, the growth leaders following San Juan were Nashville, Fort Myers, Dallas DFW, San Jose, Austin, and Denver. All are among the country’s fastest-growing areas economically.  
  • Eight of the Top 50 U.S. airports saw y/y seat capacity decline. Kansas City led the way with an 7% drop. Icelandair withdrew service. But more importantly, Southwest shifted capacity elsewhere during its MAX crunch. The other Q4 losers, most of them likewise Southwest-heavy, were Chicago Midway, Orange County SNA, New York JFK, Houston HOU, Los Angeles LAX, Miami, and San Francisco. 
  • Hawaii highlights of a group of battleground markets. It’s Hawaiian versus newcomer Southwest in the Aloha state, with Alaska and the Big Three also in the ring. At Newark, Southwest is not entering but leaving, opening the door to Frontier and other LCCs itching to rattle United. Delta is challenging American in Miami while American challenges Delta in Boston. The two are also going to war in South America. Delta is already challenging JetBlue in Boston and Alaska in Seattle. There’s the aforementioned Puerto Rico fracas. Various airlines are jockeying for supremacy in hot markets like Nashville and Austin. Booming Denver is a three-way battle involving United, Southwest, and Frontier. Sarasota and Asheville are two smaller airports with huge capacity increases. Tokyo could get bloody as the Big Three and Hawaiian expand at Haneda airport. JetBlue is preparing to challenge the Big Three joint ventures in the transatlantic market next year. We’ll soon find out where David Neeleman’s new airline Breeze will make its moves. 
  • Carriers increasingly acknowledging the environmental threat. It’s a more pronounced phenomenon in Europe, but pressure on airlines to address their carbon footprint is a reality in the U.S. now too. Not standing still, JetBlue for one announced a major initiative to fly carbon neutral on all domestic flights. Frontier is trumpeting its environmental credentials through its marketing, including one campaign that offered free flights to anyone with the last name “Green.” All U.S. carriers, though, are now speaking loudly and often about the topic.  
  • And looking ahead? The recent fuel price collapse should be a big booster this quarter. Demand still looks good, aside from isolated trouble in greater China. MAXs aren’t likely coming back until at least the fall. In 2016, carriers did report some demand slowdown around the presidential election, the next one of which occurs this November. The most disruptive event of 2020 could prove the entrance of Breeze, though it’s not poised to launch until late in the year. ◄
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Around the World

Around the World: February 10, 2020

Airline NameChange From Last WeekChange From Last YearComments
American5.70%-21.20%Has four flight attendant bases in Latin America: Bogota, Buenos Aires, Santiago, Lima
Delta3.90%14.80%Relaunched SkyMiles Amex cards with new benefits for households and businesses
United6.30%-9.90%84% of its roughly 95k workers are represented by unions; pilot contract became amendable on Feb. 1
Southwest4.10%-0.70%Profit sharing for 2019 amounts to $667m; each worker will get check worth more than six weeks of pay
Alaska-1.00%-2.00%Adding a new Boise route to its menu of offerings at Seattle Paine Field; United exiting Paine-SFO. route
JetBlue0.60%9.90%Began flying to Guadeloupe in the French Caribbean last week; operates 3x a week from New York JFK
Hawaiian1.60%-7.50%Finished 2019 with 17 A321 NEOs; ordered 18 in total
Spirit7.60%-28.10%Expects about two-thirds of ASM capacity growth this year to involve additional frequencies on existing routes
Frontier (not publicly traded)Ending its experiment serving Tyler, Tex., which it hopes could be an alterntive airport for Dallas
Allegiant-3.20%19.80%Expects to finish 2020 with 105 planes (all A320-family), 14 more than it had at the start of this year
SkyWest3.50%6.20%Three pillars of growth: Winning market share, develop leasing, helping partners grow with scope constraints
Air Canada2.50%45.00%Air Georgian, which operates some of Air Canada’s regional flights, files for bankruptcy
WestJet (not publicly traded)ULCC rival Flair offering all-you-can-fly travel passes for journeys starting now through May
Aeromexico-4.20%-44.00%Going year-round on Mexico City-Denver route in conjunction with Delta; previously seasonal
Volaris-2.60%65.20%January load factors jumped five points y/y; international loads up 8%, reaching 89%
LATAM9.80%-5.20%Cueto family owns 22%, Delta owns 20%, Qatar owns 10%, pension funds own 18%
Gol0.60%27.50%January capacity down slightly y/y in ASK terms but seat counts increased 5%
Azul-5.00%52.10%Currently one of the fastest-growing airlines in the world; January ASKs rose 27% y/y
Copa6.70%8.60%U.S. alleges Venezuelan airline Conviasa a vehicle for government corruption; imposes sanctions
Avianca2.00%7.90%LCC rival Viva Air flying from Cali again after two years of absence
Emirates (not publicly traded)SAS exec tells Cranky Flier that its new L.A.-Copenhagen route getting quite a few people connecting to Beirut
Qatar Airways (not publicly traded)Says it’s interested in increasing its 10% ownership stake in Latam
Etihad (not publicly traded)According to The Economist, 2.7m Pakistanis live in Saudi Arabia; represent a big market for Gulf carriers
Air Arabia-2.00%49.00%Not quite ready to announce initial routes for new Abu Dhabi joint venture with Etihad (Khaleej Times)
Turkish Airlines5.80%-1.60%Pegasus Airlines B737-800 accident at Istanbul SAW kills three passengers
Kenya Airways-7.20%-74.20%According to Google Trends, the travel destination with the biggest spike in searches last year was the Maldvies
South Africa (not publicly traded)Long struggling Air Namibia exiting the Windhoek route to neighboring Luanda
Ethiopian Airlines (not publicly traded)China one of its most important markets; flies to five cities there including Hong Kong
IndiGo3.10%17.20%Recently openend a call center in Guangzhou to provide service to Chinese customers
Air India (not publicly traded)Indian media reporting possibility of Tata buying Air India and merging Air India Express with AirAsia India
SpiceJet-2.10%16.90%Hires new chief commercial officer as it manages MAX crisis and takes advanatge of post-Jet opportunities
Pakistan International (not publicly traded)-9.20%-25.90%
Brent Crude Oil-3.80%-12.30%Prices fall again. Airlines not heavily exposed to China could see big Q1 windfall
Lufthansa6.70%-33.10%Northern Europe including Germany hit by major windstorm that badly disrupts air travel
Air France/KLM5.50%-13.40%TAP Air Portugal finalizes joint venture deal with sister airline Azul amid rumors that TAP could be sold
BA/Iberia (IAG)7.10%-6.90%Dublin airport hoping its new runway now under construction will be fully operationally by summer 2020
SAS0.60%-43.00%January yields down about a point y/y but unit revenues up about a point
Alitalia (not publicly traded)Things quiet for the moment but Lufthansa still lurking as a potential buyer
Finnair10.60%-20.40%Has at least seven union contracts to negotiate this year, including one covering Spain-based flight attendants
Virgin Atlantic (not publicly traded)New three-way JV with Delta and AF/KLM offers 341 peak-day departures across the Atlantic
easyJet8.40%17.90%Lufthansa’s Eurowings closing its Munich base as it restructures operations
Ryanair5.40%41.30%Leases just 6% of its fleet; makes sense to own because it buys at such attractive prices from Boeing
Norwegian3.90%-65.50%Deuces wild: Ordered 222 airplanes in 2012; has ordered 59 more since
Wizz Air0.70%37.90%Ryanair highlights big cuts at Romania’s Blue Air; fleet went from 22 planes to 14
Aegean2.00%9.80%Norwegian starting a new London Gatwick route to Aktion Airport serving Preveza and Lefkada
Aeroflot11.40%17.40%Pobeda, its low-cost unit, not the only one waiting for MAXs; so is Siberia-based rival Utair
S7 (not publicly traded)Will offer flights to Heraklion, Greece for tourists this summer
Japan Airlines2.30%-21.40%Signs two new codeshare agreements, one with MIAT Mongolian and another with Royal Brunei
All Nippon1.00%-13.50%Again? Yes, Mitsubishi’s SpaceJet delayed again; won’t deliver to ANA for at least another year
Korean Air13.70%-24.20%Singapore and South Korea have newly liberalized air service treaty; should lead to more competition
Cathay Pacific5.10%-14.10%Hong Kong temporarily relaxing use-it-or-lose-it slot rules for foreign airlines
Air China8.20%-9.00%Chinese airlines still operating most of their international schedules, including service to the U.S.
China Eastern-7.50%-6.50%Finnair says China its second-busiest foreign market after Japan
China Southern-8.20%-16.90%Chinese carriers helping effort against coronavirus with activity like transporting medical teams, supplies
Singapore Airlines0.40%-12.10%Adding a fifth daily frequency to Perth in western Australia beginning in June
Malaysia Airlines (not publicly traded)Busiest Malaysian airports outside of Kuala Lumpur: Kota Kinabalu, Penang, Kuching, Johor
AirAsia-8.40%-58.00%AirAsia X began year with 39 planes: 24 in Malaysia, 13 in Thailand, two in Indonesia
Thai Airways-2.60%-57.60%Still has plan to acquire 38 planes to refresh and simplify fleet
VietJet0.80%5.00%Carried nearly 25m pax in 2019, up 28% from 2018; ancillary revenues up 35%
Cebu Pacific6.00%-12.60%All mainland China flights cancelled through the end of March; Hong Kong and Macau flights scaled back
Qantas1.10%15.10%Jetstar domestic targeting an extremely-high 22% operating margin by 2024; mainline domestic 18%
Virgin Australia-3.40%-28.20%Retreat from Hong Kong route (see Routes section) a big setback in efforts to make money internationally
Air New Zealand-0.70%0.70%Grew ASK capacity less than 3% y/y in the last half of calendar year 2019

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

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