Issue No. 760

'State of Emergency'

Pushing Back: Inside This Issue

It’s another week in the war against Covid-19, a once-in-a-century viral pandemic. Like everyone else on planet Earth, airlines are still in a phase of deeply uncomfortable uncertainty, especially about how long the war might last. A few weeks? A few months? A few quarters? More than a year?

There’s still uncertainty, too, about how governments will act to soften the economic pain. As the insurer of last resort against economic calamity, many are devising policies to replace lost income for workers and provide emergency cash to companies — airlines chief among them — that are suddenly sucked dry of their normal revenue stream. The private sector is in flames, and the government sector is the only one with the hoses.

As government lobbying becomes their number-one priority, airlines are internally focused on two key survival tactics: Cost cutting and cash grabbing. Just as we’re all adopting new terms like “social distancing” and “flattening the curve,” airlines have a new term of their own describing the essence of their cost cutting efforts: “variabalizing the cost base.” Lufthansa mentioned it. Qantas mentioned it. And so have many others.

What does it mean? Essentially, doing as much as possible to ensure that when flying is reduced by a certain percentage, costs are reduced to as close to that percentage as possible. Under the traditional principles of airline economics, that’s extremely difficult to achieve because much of an airline’s costs are fixed — they must be paid whether flights are operating or not. But in times as desperate as these, obligations (to workers, lenders, suppliers, airports, governments, etc.) are often suspended or renegotiated. Successfully variabalizing its cost base has Qantas for one, thinking it can ride the storm out, even if it lasts for another year. U.S. carriers say they need government aid to survive more than another few months. As of this writing, a relief package from Washington seemed imminent. Will it satisfy airline demands? 


"This company, this industry, and maybe soon, the global economy, is in a state of emergency."

Lufthansa CEO Carsten Spohr


October-December (3 months)

  • Lufthansa: $194m/$295m*; 3%
  • Aegean: $2m; 1%
  • VietJet: $35m; 10%

January-December 2019 (12 months)

  • airBaltic: -$9m; $2m; 6%

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

Webinar Replay and Q&A

You can watch a replay of the webinar, "Airlines and Covid-19," here.

We are going to provide an extended Q&A session, which will be longer and more in depth than previously planned. With that in mind, we’d love to hear your questions. Please submit them here until Monday, March 23 at 12 p.m. EDT, and we’ll make sure to prioritize them for our recording, which will be distributed on Tuesday, March 24.

Weekly Skies

  • A “state of emergency.” That’s how Germany’s Lufthansa described the current crisis that grips the world’s airline industry. During its discussion of financial results for 2019, the airline spent at least as much time talking about the dire circumstances it faces in 2020. Net bookings are now nearly zero, with operations all but grounded — all of the Lufthansa group airlines combined will (starting March 24) be flying just 5% of their original schedule. It has 700 planes sitting on the ground.

    Forgetting even about its pre-crisis flirtations with Alitalia, Lufthansa has rather heavy exposure to the Italian market, specifically the northern Italian market which now stands as ground zero for the Covid-19 virus pandemic. It even owns an Italian regional airline called Air Dolomiti.

    But the entire world right now is a dysfunctional market, so like every other airline in the world, Lufthansa is wholly focused on survival. That means doing everything it can to preserve and raise cash. Just as importantly, it means pleading for government support. It’s already received some, in the form of deferred taxes, relaxed airport slot regulations, and some relief (not enough according to airlines) on passenger compensation rules. In addition, Germany’s federal government expanded its “short-time work” wage subsidies, enabling Lufthansa to cut working hours for staff.

    The airline is talking directly to unions as well, insisting it needs more support from all stakeholders, not just governments. It did note that extracting fixed labor costs can be more difficult in Europe than in markets with less rigid labor laws and union politics. Roughly 60% of Lufthansa’s cost base is variable, meaning it fluctuates up and down depending on how many ASKs it flies. The biggest variable cost is fuel. But with its entire operation essentially grounded, it can also eliminate passenger service costs and airport fees.

    Any airline’s biggest fixed cost is labor, though the more accurate term is probably “semi-fixed,” in the sense that labor costs can be cut. How? The short-time work policy, for one. In addition, Lufthansa is reducing overtime hours, imposing unpaid work leave, freezing new-hires, and cancelling non-safety related staff training. At the same time, it’s stopped all marketing, deferred non-essential maintenance, cancelled all of its wet-lease contracts, suspended dividend payments, and drastically reduced its capital spending (which could affect aircraft orders).

    The group is comforted by the fact it owns 87% of its planes, and most are not yet mortgaged. That theoretically means it can use them as collateral to get new loans, assuming lenders still see value in aircraft. In any case, Lufthansa still has $1b in unused credit lines with banks, meaning it’s already preapproved to borrow that money. How long will the money last? Executives say they’re planning for three different scenarios, in which its planes are grounded for a) three months, b) six months, or c) 12 months.

    Oh, about fourth-quarter earnings, which was what Lufthansa’s presentation was supposed to be about. How did the company do in the final quarter before the world started fraying? Not great. Operating margin was just 3%, as usual a bit better than Air France/KLM’s 1% figure but grossly lower than IAG’s 12%. Under the new accounting rules Lufthansa is using, Q4 revenues increased 1% y/y on flat capacity, while operating costs were up fractionally. Though blissful in comparison to what’s happening this year, 2019 was no picnic for Europe’s largest airline group —  it earned just a 5% operating margin for the year.

    The group faced weakness in mainland China, Hong Kong, and Brazil while enduring intense pricing battles in German and Austrian shorthaul markets. The export-heavy German economy was badly hurt by a combination of tariff wars and China’s slowing economy, thus damaging Lufthansa’s large cargo business. The airline struggled with labor tensions. It had to navigate through Brexit uncertainty, Airbus NEO delays, escalating public pressure to reduce carbon emissions, and parts of its own business that badly needed restructuring.

    These include Eurowings, which decided to abandon longhaul flying, and Austrian Airlines, whose home hub Vienna became a hornet’s nest of LCCs. Both units did show significant y/y improvements last quarter, but Eurowings still ended Q4 with a negative 7% operating margin. Austrian’s was just above break even. The core Lufthansa-branded business didn’t do all that much better, earning just a 3% Q4 margin. Cargo did fine (5%). Same for maintenance (7%). And Swissas usual was the all-star of the group (8%, and 11% for the full year). The Eurowings entity now includes Brussels Airlines, itself undertaking a much-needed restructuring. Brussels was hit by the bankruptcy of Thomas Cook’s Belgian unit, with which it had a close relationship.

    During the last quarter of the year, Lufthansa’s crucial North American franchise saw a rather sharp reduction in yields, which was almost as bad as the yield degradation it saw in Asia and Latin America. Already, last fall, the carrier began seeing weaker longhaul premium demand in general. There were some flight attendant strikes last quarter too.

    At some point in the future, people will be flying on airplanes again. And when that time comes, Lufthansa wants to focus more on the airline business, as opposed to its past strategy of acting as an aviation conglomerate. That’s not to say it wants to sell its giant maintenance business. But it’s already sold much of its catering business.

    Key pre-crisis highlights of Lufthansa’s airline strategy include growing its loyalty plan, enhancing digital capabilities, working with joint venture partners (United, Air Canada, Air China, and Singapore Airlines), and re-fleeting with A220s, A320 NEOs, A350s, B787s, and B777-9s. It planned to create a new German longhaul leisure unit as well, modeled after Edelweiss.

    Does Lufthansa think the current crisis will trigger more consolidation? Yes, if it lasts only a few weeks. But executives don’t think it will. More likely, the crisis will persist for six months or longer, and that “probably slows down consolidation.” Added CEO Carsten Spohr: “If this lasts a year, this will get so expensive that many airlines in the world, even with government support, probably couldn’t come out of this in a healthy way.”

Aegean: ‘We are a resilient company’

  • Reviewing 2019 financial results feels like a class on ancient history. But for the record, Aegean Airlines, based in country famed for its ancient history, had a good year. It managed a 9% operating margin, lifted by its first-ever profitable fourth quarter. That’s usually an offpeak period for Greek tourism. But this time, Aegean eked out a 1% operating margin. Revenues rose an impressive 12% y/y on just 7% ASK capacity. Even better, operating costs rose just 4%, with fuel outlays up 7% and labor costs up 5%.

    The airline didn’t grow its fleet last year. But it did try to “stretch” the summer peak by keeping elevated levels of capacity and utilization into the fall. Its success in this regard was a big victory, because Aegean’s business is highly seasonal — any money it can make in the shoulder seasons is a big plus. Athens is its most important base, with new service last year to Marrakech, Casablanca, Ibiza, Valencia, Sarajevo, Tunis, and Skopje. But it operates from eight bases in total, including many of the popular Greek islands.

    Late last year, Aegean began receiving its first A320 NEOs (it currently has four). It also made a bid for Croatia Airlines and struck a deal to buy a Romanian startup carrier. But it never, unlike more adventurous European rivals, bit the poison apple of intercontinental flying. Such conservatism has served it well, surviving multiple crises over the years, including the meltdown of the Greek economy in 2010. Through these sobering experiences, the airline built deep relationships with suppliers, which should serve it well as it navigates the current shock.

    “We are a resilient company that knows how to deal with crises,” said chairman Eftichios Vassilakis. He didn’t take questions about the current state of affairs, promising to hold another call in the next three or four weeks, when the picture is hopefully clearer. The company did say, however, that it was flying just about 20% of its schedule as of early last week. Roughly 72% of costs are variable, i.e. fuel and passenger services. But even if totally grounded, it would still have to pay about $40m a month in fixed costs, i.e. overheads, leases, and labor. Like every other airline on planet earth, it’s now looking for government aid to help mitigate the Covid-19 crisis.

VietJet Commands Local Market

  • VietJet, a fast-growing LCC, didn’t even exist yet during the global financial crisis of 2008-09. Today, barely eight years old, it’s an airline with roughly 80 planes and an order book for 200-plus more. More importantly, it’s consistently earned profits, ending 2019’s fourth quarter with a 10% operating margin. That marked strong y/y improvement at its core airline operations as revenues spiked 25% y/y. Operating costs rose just 13%. Close to 30% of its airline revenue comes from ancillaries.

    It commands a leading share in Vietnam’s domestic market. And it’s aggressively expanded its international footprint while (like Aegean) refraining from intercontinental adventurism — lots of NEO and MAX orders but no widebodies. Vietnam, to be sure, is a tough airline market, characterized by severe airport congestion and intense competition.

    Vietnam Airlines is VietJet’s chief rival, fielding both mainline service and a Jetstar-branded LCC jointly run with Qantas (Jetstar Pacific). Bamboo Airways is a new rival, with others poised to enter. On the other hand, AirAsia is repeatedly stymied in its attempts to launch a Vietnamese venture.

    Entering the weekend, Vietnam had close to 100 known Covid-19 cases but no deaths yet. The country, seeking to limit the pathogen’s spread, ordered a halt to all inbound international flights. VietJet is selling “Sky Covid Care” insurance to domestic passengers, covering the cost of their health care if infected with the virus (under any circumstances, not necessarily while flying).

AirBaltic Eyes A220 Future

  • Latvia’s airBaltic, 80% owned by its government, posted its financial results for 2019. The net figure was negative $7m, though that included some one-off charges. At the operating level, the carrier’s margin was a decent 6%, up from 4% the year before. That’s especially satisfying given the aggressive capacity growth the airline pursued last year. It grew ASKs 22% y/y, adding nine new routes. Revenues increased 23%, while operating costs rose only 20%.

    Based in Riga, the capital of Latvia, airBaltic is well-positioned to connect much of western Europe to eastern Europe and the former Soviet Union. Riga is in some sense a mini-hub for the Nordic region. It flies from Estonia’s capital Tallinn too, as well as Lithuania’s capital Vilnius. It thus positions itself as the leading carrier for the entire Baltic region, though dividing its assets across multiple hubs limits economies of scale. (SAS knows all too well the dangers of having three hubs with limited scale).

    Last year, it benefitted from some favorable supply developments, including the reduction of some Baltic-area capacity by Ryanair and Norwegian. Estonia’sNordica ended scheduled operations from Tallinn. And declining fuel prices later in the year helped too.

    If there’s one thing that stands out about airBaltic’s business model, it’s the early bet it made on the A220, when it was still called the CSeries. It already has more than 20 in service, with more on the way. Before long, as it phases out B737s and Q400s, the whole fleet will be A220-300s. airBaltic gets some of its revenue from wet-leasing crews and planes to other airlines including Lufthansa. It codeshares with SAS and Air France/KLM among others.

    This year — before the crisis hit anyway — it was planning to add a slew of new routes from all three Baltic capitals. The first two months of 2020, it said, were strong. But now it’s asking for state support. All of its flights are suspended through mid-April.


AirlineY/Y change
Air Arabia10%
Wizz Air-28%
China Eastern-34%
Air China-36%
China Southern-36%
Singapore Airlines-38%
Cathay Pacific-40%
Turkish Airlines-44%
Japan Airlines-49%
Cebu Pacific-51%
Korean Air-54%
Brent Crude Oil-56%
Air France/KLM-56%
Air New Zealand-57%
BA/Iberia (IAG)-60%
Air Canada-61%
Kenya Airways-68%
Virgin Australia-71%
Thai Airways-75%
  • It’s the mother of all bear markets for airline stocks
  • Price change from one year ago
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Sky Money

  • The Covid-19 crisis will greatly reshape the world’s economy in ways no one yet knows. But it’s already moving financial markets in profound ways. Stock prices are way down. So are prices for commodities, including oil. Interest rates are falling again too. Even traditional safe-haven assets like U.S. government bonds and gold are seeing price declines as people everywhere sell, sell, sell for cash, cash, cash. On the other hand, the value of the U.S. dollar — already elevated pre-crisis — is surging to new highs.

    For most airlines outside of the U.S., that’s just as troubling as the oil price decline is comforting. In countries with heavy dependence on oil exports by the way, the depreciation has been enormous, chief among them Norway and Russia. Latin American currencies too, have experienced extreme declines since the start of the crisis. So has another familiar source of currency distress: Turkey.   
  • Labor markets, pretty strong in most major economies, pre-crisis, at least measured in unemployment terms, are now poised to shatter as companies lose much of their revenue. The Economist provides interesting data on the U.S. economy and its ability to withstand extended periods of frozen revenues.
    The country’s 500 largest non-bank firms, as captured by the S&P 500 index, had aggregate operating costs of $2.6t last year. And they held $1.7t in cash, which implies about seven months of cost coverage before running dry. Be careful though, The Economist warns. Some companies like Apple had six years of cost coverage. Some wouldn’t last a week.

    Where do U.S. airlines fit on this spectrum? See our coverage above but let’s here take a look at Southwest, known for its ironclad balance sheet. At the end of 2019, it held $4.1b in cash and other liquid assets. Its operating costs for the year were $19.5b. So that’s less than three months of coverage. Of course, this assumes zero revenues which is not quite the case for Southwest. It also ignores new sums of cash the airline is now raising, and other sources of cash it could tap if necessary. But you can see the gravity of the situation all the same. 
  • Another big area to watch going forward is sovereign, or government, debt. After the global financial crisis, many governments reacted by shifting debt from the private sector (both businesses and households) to their own balance sheets. By 2020, the U.S., Europe, China, and Japan, the world’s largest economies, all had giant levels of debt.

    Now they’re about to add a whole lot more as they rescue the economy from Covid-19. The U.S. is better positioned to borrow than most because the rest of the world wants its currency to hold as reserves. So even with $23t in debt, the U.S. can keep on borrowing at extremely low interest rates.

    For countries like Argentina or Greece, lending from abroad can dry up quickly. Japan actually has the highest debt of any country in the world, relative to its total economic production (GDP). But it borrows much of it from its own citizens, mitigating risk. Italy, which spends more public money on retirement pensions than education, has an enormous debt-to-GDP ratio too. And that won’t improve as it re-nationalizes Alitalia.
  • No matter how economically distressed a situation gets, there are always some winners. And not just companies that make toilet paper. Airlines, perhaps the biggest losers in the current crisis, have their eyes on companies that produce videoconferencing. With everyone working from home now, times for these firms are flush (pardon the pun).

    But will companies continue to rely more on videoconferencing after the crisis? After seemingly every downturn, people wonder the same thing: Will companies use video to save money on air travel? The answer is usually no, or at least not in any way that structurally reduces demand for air travel (some once thought email would spell the end of business travel). Videoconferencing technology keeps getting better though, and workers will have lots of time to get more comfortable with it while stuck at home in the coming weeks and months.  

Neeleman Outlines Customer-Service Ideas

  • On Feb 24, just before U.S. airlines understood the enormity of the crisis on their doorstep, David Neeleman delivered a speech to a technology sector conference in Utah. He spoke about his new airline Breeze, which will try to emulate the customer service practices of companies like Amazon, Lyft, and Airbnb.

    By that he means shielding customers from having to interact with people when booking their flights or managing anything else they might need. He plans to create a super app that can handle just about any request. He complimented Delta’s app, which has a lot of functionality. But Breeze will strive to do even better. In fact, Neeleman says it will be a “technology company that happens to fly airplanes.”

    Of course, everything is now thrown into doubt. But the intention was to fly two types of planes, each operating with distinct business models. Breeze’s 122-seat E195s would fly between cities with no competition — Neeleman mentioned smaller places in the midwest connecting to places in the south. Interestingly, he wants to combine air travel with real estate, imagining a person who buys a home in another city for the purpose of operating an Airbnb-type business, renting to vacationers. Breeze would presumably provide a platform for doing that and offer free flights to those who use the platform for buying, selling, and renting homes.

    And the other business model? That’s less exotic, involving A220s with a range of 4,000 miles. It’s currently looking at more than 150 airports. Neeleman hasn’t subsequently said how the current crisis will delay his U.S. planes. But he did appear on Fox Business last week, expressing optimism that the pandemic might not be as bad as feared, based on new scientific data he’s seen.   

TransStates Ends Flying

  • The end is coming sooner than expected for St. Louis-based TransStates, a U.S. regional carrier that planned on shutting down after helping United get through the peak summer season. Now that summer demand appears all but wiped out, the company will instead close on April 1. What’s more, TransStates is now closing its Minneapolis-based Compass unit too — it flies for Delta. Another regional affiliate, GoJet, continues to fly for United.  
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  • Brazil on March 19 approved the sale of Embraer’s commercial division to Boeing, a deal that it approved earlier this year. The sale had come under renewed scrutiny after prosecutors asked the country’s antitrust regulator to reevaluate its decision. But the sale faces new questions now, as the coronavirus pandemic shakes airlines and original equipment manufacturers (OEMs).

    Boeing itself is asking for a big federal bailout as it loses orders and incoming cash from deposits airlines usually make for their new planes. For now, Boeing’s giant widebody factories near Seattle and Charleston are still open, deemed an essential business by local authorities. Several of its workers have contracted the virus though, and pressure to close down is mounting.
  • Despite the pandemic sweeping the world and the focus on the number of airlines grounding fleets, aircraft deliveries still continue, although at a much lower rate. Air Lease Corp., in one small example, just placed an A320 NEO with Air Seychelles. It even announced a new lease deal last week, to transfer two A330-200s from Vietnam Airlines to Russia’s Nordwind. The leasing giant AerCap, meanwhile, placed two used B787-8s with the Portuguese wet-lease and charter carrier Euro Atlantic. Rival SMBC last week delivered a new A320 NEO to Russia’s S7.

And KLM Retires the B747

  • KLM moved up the retirement of its iconic Delft-blue B747-400s to March 26. The carrier originally had planned to retire the fleet with a final New York-Amsterdam revenue flight in January, but the coronavirus pandemic put an end to those plans. KLM was among the last airlines to operate the B747-400 Combi passenger/cargo aircraft.
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State of the Unions

Airline labor relations shift dramatically as the crisis takes hold

The labor-intensive airline industry is one of the world’s most unionized, and the gains unions make for their members are significant. But securing gains now? Not likely, as the coronavirus pandemic throws a wrench into the management-labor balance of power.

There is a critical third-party, however, now in the mix. Currently, unions across the world are engaged in pay, benefit, and work-rule negotiations not just with their airline employers. Also involved are governments, as they decide whether and how to save the airline sector from collapse. Unions, understanding the fragile state of the industry, are suddenly making their demands not so much on management but on politicians and policy makers.

BALPA, for example, which represents U.K. pilots, is urging the British government to include wage and job protections in any state aid the country may be considering. ALPA, which represents pilots in North America, in a letter to Congress urged lawmakers to build employee protections into its bailout package.

That said, ALPA nevertheless acknowledges what’s increasingly likely: wage concessions. In its letter, the union said, “We are already working directly with individual airline management teams to negotiate agreements to keep these companies economically viable.”

Airline unions around the world are in much the same position. And their just now receiving news of inevitable mass furloughs and layoffs. Qantas furloughed two-thirds of its staff, for example, and SAS, 90%. Delta, not yet taking that step, has offered employees voluntary leave. Same for United, though it also warned that it could lay off or furlough employees commensurate with its heavy schedule reduction — if that is, government aid is not forthcoming or sufficient. In that sense, both management and unions are on the same side, lobbying jointly for government help. In fact, the 10 largest U.S. carriers promised, in a letter to Congress, not to lay off workers if an almost-$60b bailout package that includes grants is approved.

Wage concessions and layoffs were near-universal in the aftermath of the Sept. 11, 2001 terrorist attacks, and again during the dark period through the Great Recession of 2008. During those shocks, however, some airlines were in better shape than others. Air France, for one, was relatively well-positioned to withstand the 9/11 shock thanks to limited transatlantic dependence and exposure to resilient markets like Africa’s energy-sector centers. Shortly after the Great Recession, when commodity markets and the Chinese economy quickly recovered, airlines in places like Brazil, the Arabian Peninsula, and China itself quickly regained their footing. In the current Covid-shock, there are now relative winners. The pain is universal.

The U.S. airline industry for its part was still highly fragmented during the Great Recession — most of the big mergers (Delta-Northwest aside) would come after the recession. At the time of 9/11, U.S. legacy carriers had just enjoyed a nice few years of plenty in the late 1990s but entered the 2000s with a grossly inflated cost base. 

Now it’s time for another sea change in labor relations. Much of the outcome will depend on how long the current pandemic lasts and what shape each airline is in on the other side of it. Keep in mind, labor unions can have great strategic significance. A classic example is how American’s unions side with US Airways management when the latter attempted a takeover. That support was instrumental in facilitating the merger of the two airlines. When US Airways tried buying Delta a few years earlier, it was unable to win support from Delta’s unions.

American and other U.S. carriers are again in open negotiations with their unions. Same for carriers elsewhere, including Qantas, Ryanair, and EVA Air, to name a few. These talks, and the collective bargaining agreements that result, will inevitably be shaped by the coronavirus pandemic and its effect on airlines. If history is a guide, unions will find their bargaining positions greatly weakened.

SEIU Pushes for Contract Employees’ Rights

  • As unions in the U.S. join with airlines to lobby for the terms of a federal bailout package, one constituency wants its voice heard. SEIU represents contract airport workers, a category which can include wheelchair assistants and janitors, to be included in the package. Contract workers are not directly employed by the airlines and the union said on a call with reporters that it is concerned they may not be included in the final financial support legislation.
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Feature Story

Remember when IATA, giving its worst-case scenario on March 5, said airlines could lose $113b in revenue from the Covid-19 pandemic? That now seems trivial compared to what they’ll actually lose. With things changing so fast, IATA didn’t issue a revised estimate. Understandably, its chief focus right now is lobbying for government aid, at a time when lobbying for government aid is the most important thing the industry can do to save itself.

It successfully convinced the E.U. to relax and then extend a moratorium on airport use-or-lose slot rules. Slot rule relaxation is now in place pretty much everywhere. It won some (limited) relief from E.U. passenger compensation rules, arguing that flight cancellations right now are “totally beyond the control of the airlines.”

But what the industry really needs to survive, according to IATA, are three sets of government measures to ensure adequate liquidity: direct aid, tax relief, and assurances carriers can borrow money, whether through loans or loan guarantees. Why should the government get involved? IATA answers with two key points: 1) airlines are directly and indirectly responsible for an estimated 70m jobs and 2) the world will need a functioning airline industry to help with economic recovery. But didn’t airlines earn $26b in profits last year? Yes, but just a relatively few (notably in the U.S.) accounted for much of that — the majority of airlines across the world were already struggling on the eve of the crisis.

Put aside the industry’s 30 largest airlines and what you’d see was an industry with heavy debt. Three quarters of all airlines entered the crisis with enough cash to cover just three months of expenses.

The U.S.

  • In the U.S., the White House and Congress have already agreed to a modest $8b worth of relief measures, including provisions like paid sick leave for workers. This followed the Federal Reserve’s move to cut interest rates. But now comes what will likely be a massive federal spending bill to relieve the economy. As of Sunday, the executive and legislative branches were trying to reach a deal on a package of measures that could exceed $1t.

    Airlines are all but assured to get some of that money. But how much, in what form, and under what conditions? A4A, which represents the industry, says it urgently needs $29b worth of worker payroll protection grants and another $29b in loans and loan guarantees. It wants tax relief too. The grants are more controversial, because taxpayers won’t get that money back. So the industry might get its $58b but all in the form of loans, likely collateralized with planes and other assets.

    Another policy option is for the federal government to take ownership stakes in the airlines, in exchange for grants. That’s what it did with companies like AIG, Citicorp, and General Motors during the 2008-09 recession. With the financial firms anyway, the bailouts wound up benefiting taxpayers a lot (they did lose money on the car companies). If Uncle Sam does take ownership positions in airlines, current airline shareholders — including many airline employees — would see the already diminished value of their stock further devalued.
  • What conditions will Washington impose? The corporate bailouts of 2008-09 were extremely controversial, and according to some political scientists even tied to the rise of Donald Trump and Bernie Sanders. In any case, some voices are arguing against federal aid for airlines, hurling litany of criticism at their past behavior — wasting their cash to reward investors with stock buybacks, nickel and diming customers with ancillary fees, shrinking legroom for passengers, charging a confusing array of fares, and paying princely bonus pay to top executives. Let’s just say that airlines have never been the most popular group of companies among the public. 
  • But wait a minute, say airlines like Delta. To accuse it of reckless balance sheet stewardship borders on the ridiculous. It has an investment grade credit rating, even after spending $20b over the past five years modernizing and upgrading its fleet, inflight amenities, airport facilities, technology, and customer service. Over the same period, it raised base pay by 30%, which doesn’t even include another $19b in profit sharing and pension contributions. No wonder why it made Fortune’s list of 100 best places to work.

    Immediately after understanding the gravity of the Covid crisis, Delta slashed executive pay and suspended all share buybacks and dividends. The point is, no airline in the world could have prepared for a shock of this magnitude. And without federal aid, no U.S. airline survives for long.
  • A4A adds that U.S. airlines retired $91b in debt and increased average compensation per worker 41% last decade. Now, planes are only 20% to 30% full and new bookings are implying 70% to 80% traffic declines. And this is getting worse each day. Currently, the collective cash burn rate for U.S. airlines is about $10b per month. In asking for their $29b in payroll grants, A4A promises no job cuts through August. And in asking for the other $29b in loans, it’s promising limits on executive compensation, stock buybacks, and dividends. 
  • Just how bad are things at Delta, for years the strongest airline in the world? It said Q2 revenues will likely be down by about $10b y/y, or 80%. Many of its employees are volunteering to take unpaid leave. The company just borrowed $5.6b to keep things going as it burns through $50m a day. At that pace, the $5.6b would buy it another 112 days. Cash burn should ease however, as it implements more cost cutting. “Cash preservation remains our top financial priority right now.”

    In asking for their $29b in payroll grants, A4A promises no job cuts through August. And in asking for the other $29b in loans, it’s promising limits on executive compensation, stock buybacks, and dividends. 
  • American Airlines CEO Doug Parker spoke off the record with CNBC’s Phil LeBeau, making it clear that this is the worst crisis he’s ever seen, one far, far worse than 9/11. He said the aid airlines are asking for would stabilize the industry for about six months, assuming current demand conditions persist.

    United, meanwhile, warned Congress that if it doesn’t act by the end of March, “our company will begin to take the necessary steps to reduce our payroll.” American’s president Robert Isom, in a letter to employees on March 19, said the carrier is now operating just three longhaul international routes (DFW-Heathrow, DFW-Narita, and Miami-Heathrow). It has 450 planes on the ground.

    American had a rough year in 2019, with labor unrest, MAX headaches, and operational woes. But to be clear, it was solidly profitable and well-stoked with cash and valuable assets. It’s still trusted enough by banks to have last week secured $1b in new loans. Delta borrowed another $2.6b last week, separate from the pre-established credit line it’s now tapping. Southwest announced a new $1b loan.
  • JetBlue is “not going to sugar coat it.” In a March 18 letter to employees, it said it’s taking in less than $4m a day while issuing more than $20m of credits for cancelled bookings. On a typical day last March, it took in about $22m. Customer cancellation rates are ten times the norm. Among the many steps the airline is taking to survive including deferring four used A320s it was supposed to be getting. It secured a new line of borrowing too but warns that this is not “free money.” 
  • Hawaiian Airlines told employees that March revenue will be down at least 25% y/y. And April revenue will be more than 50% lower. April scheduled flying is a mere 60% of what they would be. Worker furloughs, it warned, were possible.  


  • Governments in Europe are responding to the airline crisis in various ways. The EU for example, will for now ignore its prohibitions on bailouts. That, for one, paves the way for Italy to renationalize Alitalia. Commercially speaking, the crisis is the best thing that ever happened to the Italian flag carrier, in the sense that it’s now getting rescued. Earlier this year, hope was dimming that it could stay alive for much longer. Believe it or not, the perpetually dysfunctional airline, whose bankruptcy administrators are trying to sell it, received eight offers of interest. One is from an Italian company called Almavia. Another is from South America’s acquisitive Synergy Group, known for its involvement with Avianca.

    In Europe’s northern Nordic region, meanwhile, Sweden, Norway, and Finland announced aid packages for airlines, providing some breathing room for SAS, Finnair, and even Norwegian.
  • IAG’s British Airways is cutting pilot pay in half, amid talk that the government might inject some money in exchange for an ownership stake. Could anyone even imagine the partial re-privatization of BA just a few short weeks ago?  

    Ryanair is cutting pay in half too, and told the Financial Times it wants 1) Governments to help make up lost wages and 2) ensure that any bailouts do not distort competition in the long run.

    Air France said on Monday it would ground its entire A380 and B747 fleet. It’s even desperate enough to touch that third rail: Asking unions for concessions, in this case on part-time work arrangements. Though struggling with anemic profitability before the crisis, Air France/KLM is among the healthier global airlines when it comes to cash balances, including the additional money it just borrowed through a pre-approved credit line. The group though, says it can only offset about half of the revenue it’s currently losing through the removal of variable costs. It now awaits prospective aid from the French and Dutch governments, which each already hold ownerships stakes.


  • Next week, China’s airlines will begin reporting their fourth quarter, 2019 results, perhaps also shedding some light on the tumultuous first quarter of 2020. How bad did things get during the Chinese New Year, when much of the country’s planes were grounded? To what extent have conditions improved?

    Major Chinese carriers did report February traffic numbers. Air China’s passenger volumes declined 83% y/y, filling just 51% of its seats. China Eastern’s traffic fell 87% and China Southern’s 85%. Hainan Airlines saw a 90% drop. The drop was 77% for Juneyao, which has ownership ties to China Eastern. A bit less dramatic was the 66% fall experienced at the LCC Spring Airlines. The declines for Chinese carriers were more or less similar for both domestic and international flying.   
  • Air China could wind up the new owner of deeply-distressed Hong Kong Airlines (HKA), according to the South China Morning Post. HKA is linked to the notorious HNA group, whose indebted flagship carrier Hainan Airlines was just bailed out by its municipal government. 
  •, formerly Ctrip, is China’s largest online travel agency. And last week, during an earnings call, it said about 90% to 95% of large manufacturers in China are now back to work in some capacity. For smaller businesses, the figure is closer to 70%. The company thinks that will soon translate to a recovery in domestic travel. “We expect to see strong recovery once the outbreak is behind us,” said a company executive. is prepared however, for extended weakness in international demand. During Chinese New Year, it added, the firm saw tens of millions of cancellations.
  • In Hong Kong, Cathay Pacific said passenger volumes plummeted more than 50% y/y in February, while ASK capacity shrank 29%. Barely more than half of its seats were filled. Just that month alone, the airline estimates to have lost about $260m, which is more than it made during all of 2019. Of course, things have gotten worse this month, albeit with some recent signs of life returning to semi-normal in Hong Kong. On the other hand, the city reported a jump in Covid-19 cases late last week.

    On Friday, Cathay said it would basically ground its entire passenger operation for all of April and May. The only exceptions are three flights a week to London, Los Angeles, Vancouver, Tokyo Narita, Taipei, Delhi, Bangkok, Jakarta, Manila, Ho Chi Minh City, Singapore, Sydney, Beijing, Shanghai PVG, and Kuala Lumpur. HK Express, the LCC Cathay purchased last summer, is completely idled. Cargo-only flights are operating normally, carrying critical medical supplies and pharmaceuticals, for example.   

Asia and Australasia

  • Garuda CEO Ifran Setiaputra, speaking on Bloomberg Television, said the biggest impact on the carrier’s revenues right now is from lost religious pilgrimage business to Saudi Arabia. In a normal year, half a million Indonesians travel to the holy sites of Mecca and Medina. Closing all China routes, naturally, took a big toll. Ditto for shutting down its busy Singapore routes. Mildly helpful is the fact that Garuda typically gets 80% of its revenues from the Indonesian domestic market, which remains open. Traffic is down for sure, by about 30% to 35%, Setiaputra said. But non-business traffic on weekends is holding up decently.

    Garuda is talking to banks about refinancing loans to give it some breathing space. Failing that, it might have to restructure the loans, perhaps in a bankruptcy proceeding. But Setiaputra isn’t worried. He’s confident the airline’s top shareholder — the Indonesian government — will provide any necessary support. At some point, when the world emerges from the Covid crisis, Garuda would like to expand in India, Australia, and Thailand.
  • It would be wrong to say Qantas chief Alas Joyce is optimistic right now. Like every other airline in the world, the flying kangaroo is burning through cash. But Joyce gave some uplifting words to investors last week (March 18), insisting Qantas has “plenty of cash to survive at least 6 months and a lot longer than that.”

    The airline is taking tough actions upfront and early to minimize cash burn, buying time. This includes a complete suspension of all scheduled international flights and the grounding of all A380s, B747s, and B787s. It now has 160 planes sitting on the ground doing nothing. It is flying some key domestic routes, including several that provide vital air links to small communities.

    Joyce doesn’t venture to guess how long the crisis will last — as long as 18 months, perhaps? But he says there’s more Qantas can do if necessary, like take out more domestic flying. And he’s confident there’s a lot of pent-up demand that will come to life once things normalize. “Travel demand will bounce back and when it does, we’ll be very well placed to take advantage of the opportunity.”

    Australia’s airlines are already getting some government help, which Joyce called “helpful.” Unpaid leave for the carrier’s staff, two-thirds of which are idled, is “inevitable.” Qantas, meanwhile, is doing what it can to variabalize its cost base (especially labor), defer its pre-delivery aircraft payments, and take advantage of low fuel prices through hedging contracts.


  • Ethiopian Airlines CEO Tewolde Gebremariam told The Reporter last week that the Covid-19 pandemic has cost his airline $190m in revenue during just the past two months. Ethiopian has heavy exposure to China, which was the first country to experience Covid’s curse.

    The airline is now operating at about 75% of its normal capacity (as of this weekend) and has more than 20 widebody planes grounded. But still, Gebremariam denies any plans for layoffs. And interestingly, he has not asked Ethiopia’s government, which owns the airline, for support. That makes it perhaps the only airline in the world right now not seeking state aid. It is however, getting some financial support from China’s government, in exchange for maintaining flights.
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Around the World

Around the World: March 23, 2020

Airline NameChange From Last WeekChange From Last YearComments
American-27.5%-66.5%Operating cargo-only flights for the first time in nearly four decades (Bloomberg)
Delta-44.3%-57.2%Investment fund seeking control of Korean Air looking to buy Delta’s 15% stake
United-41.2%-69.3%State Department tells U.S. citizens: Don’t travel internationally right now
Southwest-22.6%-35.7%Lost amid the Covid crisis: Salt Lake City experienced major earthquake last week
Alaska-37.9%-57.3%Investor’s Business Daily profiles CEO Brad Tilden; started at airline in 1991, became chief in 2012
JetBlue-36.0%-56.2%U.S. continues to pursue trade war with top trading partners; tariffs hiked on Airbus imports last week
Hawaiian-38.8%-65.9%U.S. airports want bailout money too; Port Authority of NY/NJ wants $1.9b
Spirit-42.4%-83.5%Stock has dropped the most in the past year of any airline on this page
Frontier(not publicly traded)Cargo airlines like FedEx in relatively better shape as e-commerce benefits from more home shopping; also carrying medical supplies
Allegiant-39.3%-45.2%Suspending construction on Florida Sunseeker resort, among other draconian measures to preserve cash
SkyWest-26.2%-60.9%Silver Airways, which calls itself America’s leading independent regional airline, pleads for “critical and immediate financial aid”
Air Canada-51.1%-60.5%Toronto Bishop-based Porter Airlines shut down until at least June 1
WestJet(not publicly traded)Canada’s federal government even asking people to avoid travel to neighboring provinces
Aeromexico-6.4%-51.6%Mexico has only one reported Covid-19 death so far; all reported cases imported from outer countries (i.e. no local transmission yet)
Volaris-32.6%-50.7%Traffic measured by RPMs was still up 21% y/y in February; March will be a different story
LATAM-49.1%-72.8%Copper, Chile’s largest export, selling for prices last seen during the financial crisis a decade ago
Gol-34.8%-76.3%Latin America could be spared the worst of the pandemic if virus proves to be weaker in warm weather; that’s still unclear
Azul-44.2%-66.5%Founder David Neeleman, speaking on Fox News, sees hope in more advanced Covid-19 testing
Copa-47.3%-62.1%Completely shut down until April 21, in accordance with Panamanian government directive
Avianca-58.7%-76.5%Aside from giant Brazil, Ecuador currently the South American country with the most Covid-19 cases and deaths
Emirates(not publicly traded)Grounded all of its passenger flights this weekend; still running some cargo flights
Qatar Airways(not publicly traded)This year’s Farnborough Airshow in the U.K., scheduled for July, officially cancelled
Etihad(not publicly traded)UAE reports its first two Covid-19 fatalities this weekend; 153 total cases as of Sunday
Air Arabia-9.8%10.4%North Africa’s Tunisair, perennially in financial trouble, expects to lose $25m this month alone
Turkish Airlines-12.7%-43.9%Only international routes currently operating are to New York, Washington, Hong Kong, Moscow, Addis Ababa
Kenya Airways-3.6%-68.2%AFRAA, the lobby group for African airlines, urging governments to support carriers; wants cost relief, subsidies
South Africa Air.(not publicly traded)All international flights suspended through May; South Africa declares “state of disaster”
Ethiopian Airlines(not publicly traded)March 10 marked one year since its tragic B737 MAX crash
IndiGo-12.7%-38.8%Reports suggest LCC Go Air might be most financially troubled of India’s private-sector airlines
Air India(not publicly traded)One U.S. dollar now buys 75 Indian rupees; exchange rate was 1-to-70 a year ago
SpiceJet-19.3%-61.5%Filled 93% of its seats as late as last month; Indian airlines now suffering from crisis as well
Lufthansa-4.6%-55.2%Munich-based billionaire Hermann Thiele buys 5% stake in the company
Air France/KLM-3.9%-56.2%French and Dutch governments, both shareholders in the airline, trying to coordinate their bailout measures
BA/Iberia (IAG)-38.3%-59.8%CEO Willie Walsh postponing retirement amid crisis
SAS-0.2%-55.3%ACI Europe estimates 80% of European airport costs are fixed, in other words must be paid regardless of pax volumes
Alitalia(not publicly traded)Italian airports handled 193m passengers in 2019, up 4% y/y
Finnair4.6%-53.9%Cancelled annual shareholders meeting that was scheduled for last week
Virgin Atlantic(not publicly traded)Asking workers to take eight weeks of unpaid leave
easyJet-23.7%-50.6%Has more than $2b in cash, another $600m in undrawn credit; lots of valuable planes and airport slots
Ryanair-16.5%-25.1%Credit card holdbacks, already an issue for weak European airlines pre-crisis, could cause more trouble now
Norwegian32.5%-79.0%Norway offering it loan guarantees but details still unclear. Will it be enough?
Wizz Air-16.7%-28.1%U.K. airport operators strongly encouraging gov’t to suspend air passenger duty for at least six months
Aegean-19.8%-50.5%Charter flights generated 6% of its 2019 revenues
Aeroflot-13.0%-34.5%Subsidiary Rossiya sells all of its scheduled flights using Aeroflot’s “SU” IATA code
S7(not publicly traded)Russian gov’t warns of airline bankruptcy risk; on top of virus scare, weak ruble a major threat; UTair appears in most trouble
Japan Airlines2.3%-49.1%Moody’s, which assigns credit ratings to companies, says global airline capacity in 2020 could be down something like 35% y/y
All Nippon23.3%-25.6%Working with fellow Japanese firm Hitachi to automate schedule recovery process after irregular operations
Korean Air-26.0%-54.4%Heavy debt load makes it extremely vulnerable; was troubled even before the crisis
Cathay Pacific-15.0%-40.0%Hong Kong finance chief says economy in “deep water” (Bloomberg)
Air China-17.5%-35.7%Will host March 31 board meeting to finalize 2019 financial results; China Eastern will hold meeting the same day
China Eastern-9.7%-33.7%Started the month with 724 aircraft, 93 of them widebodies (B777, B787s, A350s, A330s)
China Southern-10.4%-36.3%Rival LCC 9 Air, owned by Juneyao, actually launched a few new routes from Guangzhou and Shenzhen last month
Singapore Airlines-16.4%-38.3%Singapore recorded first two Covid-19 deaths just this weekend; gov’t praised for its crisis handling
Malaysia Airlines(not publicly traded)AAPA, which represents Asian airlines, tells governments: “Asia is still reeling from the COVID-19 pandemic”
AirAsia-17.1%-75.6%Independent internal investigation clears CEO Tony Fernandes of wrongdoing in Airbus corruption; will resume CEO duties
Thai Airways-23.0%-74.8%Appoints new president to lead company during crisis; will take office this week
VietJet2.0%-14.0%Most foreigners currently banned from entering Vietnam; country still had no confirmed Covid-19 deaths as of Sat.
Cebu Pacific-16.9%-50.7%Philippine Airlines says it’s “severely affected” by Covid-19; will likely cancel more flights
Qantas-25.8%-57.4%Says many of its ticketed customers are happily accepting credit for future travel rather than full refunds
Virgin Australia-30.4%-71.1%One Australian dollar now worth a mere 58 U.S. cents; was worth about 71 cents this time last year
Air New Zealand-35.7%-57.0%Establishes $500m credit line with N.Z.’s government; can access money if its cash drops below certain levels
Brent Crude Oil-14.5%-55.6%If oil prices stay low as industry recovers, older less fuel-efficient aircraft could regain popularity

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

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