Issue No. 758

The Corona Crunch

Pushing Back: Inside This Issue

It’s not just a problem for Chinese airlines anymore. Or just airlines in Asia. The Covid-19 virus outbreak is now obliterating demand for travel across the entire world. Suddenly, airlines even hearty and healthy just a week earlier find themselves burning through cash as planes to cities like Milan and Seoul run empty, and as ticket sales evaporate. For the already distressed, the virus could prove lethal, as it already has for one small U.K. carrier: Flybe.

There’s still a chance for the industry to surmount the crisis with just some first and maybe second quarter bruises, if the outbreak slows and life returns to normal by early summer. Perhaps it’s just airline demand delayed, not destroyed. China, it seems, shows some faint signs of a rebound. But right now, the world is a scene of cancelled business meetings, cancelled trips, panicked travelers, government travel warnings, disrupted economies, and tanking stock markets.

And events are moving fast — just as Skift Airline Weekly is preparing to publish, Air New Zealand is scrapping its financial guidance, Korean Air is expressing concerns about its survival, JetBlue is announcing emergency measures to preserve cash, and oil prices are taking another huge tumble. Financial markets open the week in disarray.   

Airlines like Turkish, Thai, and Aeroflot, all with significant exposure to China, gave their latest assessments of the damage the virus is inflicting. This week, Cathay Pacific reports financial results. And U.S. carriers will provide more commentary at a JPMorgan investor event in Atlanta. Assuming that is, it isn’t cancelled.


"The world is facing a huge challenge to prevent the spread of COVID-19 while enabling the global economy to continue functioning. Airlines are on the front line of that challenge and it’s essential that the regulatory community work with us to ensure airlines are able to operate in the most sustainable manner, both economically and environmentally, to alleviate the worst impacts of the crisis."

IATA Director General Alexandre de Juniac


  • October-December 2019 (3 months)
  • Turkish Airlines: $336m/$28m*; 4%
  • LATAM: $227m; 12%
  • Thai Airways: -$30m; -1%
  • Aeroflot: -$107m; -8%
  • Air Mauritius: $9m; 1%

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

Covid Crisis 2020

  • As late as Jan. 17, IATA expected worldwide airline profits to top $29b this year, with an operating margin close to 6%. The optimism extended even to Asian carriers, which IATA thought would benefit from easing trade tensions between the U.S. and China.

    It was becoming increasingly clear even then, however, that a major virus outbreak was rendering these forecasts obsolete. On Feb. 20, with the Covid-19 scare crippling the Chinese economy, IATA said the country’s airlines would see about $13b erased from their domestic revenues alone. With the virus at that point spreading to neighboring countries like Korea, and with Chinese tourists an important passenger base for many Asian airlines, IATA said the region’s airlines as a whole would see a $28b revenue loss. Global RPK traffic for 2020 would contract 8% y/y, not grow 5% as previously anticipated.

    But the virus kept spreading, well beyond Asia to places like Iran in the Middle East and Italy in Europe. Cases began appearing in the U.S. too. So last week, on March 5 to be exact, IATA revised its damage assessment once again. Now it says airlines worldwide will lose between $63b and $113b in revenues, depending on the ultimate severity of the outbreak. Airline share prices, at the time of IATA’s pronouncement, had plummeted 25% since the start of the Covid crisis — that’s a much steeper drop than witnessed during the SARS crisis of 2003.

    That worst-case scenario revenue loss of $113b, incidentally, equals almost one-fifth of the entire sector’s annual revenues. It’s also a level of loss comparable to what airlines suffered during the global financial crisis of 2008-2009. Cheaper fuel should save the industry money, but only something like $28b, IATA estimates. Add a few billion more for savings associated with measures like job and pay cuts.

    IATA is asking for further relief from governments, in the form of tax relief, lower airport charges, and relaxation of airport slot-usage rules.   
  • The good news is that airline operations and demand in China, where the virus originated, began showing signs of recovery last week. That doesn’t mean for sure that the worst is over for the country — infections could spike again. But it’s a welcome development for now. Just as importantly for airline demand, however, will be how fast China’s economy can return to normal, with implications for the global economy at large. Cathay Pacific reports financial results this week, perhaps providing more commentary on demand conditions in Hong Kong.

The View From the U.S.

  • The virus is now spreading in the U.S., driving businesses there to impose restrictions on employee travel. Some communities, notably around Seattle, are closing schools and cancelling public events. Beginning with JetBlue, U.S. airlines around the turn of the month began waiving change fees to reassure travelers.

    Last week, for the first time, evidence of severe demand destruction emerged, with Southwest reporting a “significant decline in customer demand” and an “increase in trip cancellations.” It sees this erasing between $200m and $300m in Q1 revenues. That’s a lot of money. Q1 unit revenues could fall as much as 2% y/y. It was expecting a RASM increase of roughly 4% to 6%.

    On the other hand, just since the start of the year, Southwest has saved something like $1b thanks to lower fuel prices. Mild winter weather and associated strength in operational reliability were other reasons the airline has a brighter unit cost outlook, though Q1 CASM should still be up 5% to 7%. Most of that rise is due to inefficiencies linked to its lost MAX capacity. 
  • In other U.S. news regarding the Covid crisis, United moved to cut its international schedule by 20% in April, with domestic and Canada schedules getting a 10% trim. JetBlue made some cuts as well. Spirit, speaking at a Raymond James investor conference, mentioned a clear decline in industry fares last week, though traffic volumes remain strong. It’s specifically seeing looser revenue management, in the sense that carriers are leaving cheaper fares open for bookings closer to departure. The Big Three, it noted, are bringing big planes from Asia to the U.S. domestic market.

    But Spirit downplayed concerns, calling attention to its low costs, its flexible fleet, its strong balance sheet, its many more route opportunities, its improving operational reliability, the 50% share of its revenues derived from ancillaries, the improvements it’s making to its vacation package offerings, and the revamped loyalty plan it’s launching soon.
  • Several U.S. airline CEOs joined with Airlines for America (A4A) officials to meet with President Donald Trump and Vice President Mike Pence at the White House. They discussed ways to help stop the spread of Covid-19, followed by administration pronouncements of possible short-term measures (i.e. tax relief) to help airlines through the crisis. A4A, which represents U.S. airlines in government affairs, separately established a webpage providing resources about the virus outbreak for air travelers, government agencies, Congress and the general public.
  • The U.S. Chamber of Commerce held its annual Aviation Summit in Washington last week, just as the Covid crisis swept through the industry. Alaska CEO Brad Tilden said January and February bookings were very strong, as were bookings even in the first few days of March. But with Alaska’s hometown Seattle market subject to the most U.S. cases of the coronavirus, bookings indeed began softening last week. Alaska issued an investor warning on Friday, saying Q1 RASM could fall by 5% y/y if bookings were to stop completely through the end of this month.

    American’s Doug Parker talked about having to cancel many international flights for lack of demand. As it happens, American, though it has the least exposure to Asia among the Big Three, also has the highest levels of debt. That’s a concern at times like these, when all airlines are burning through cash. That said, American did enter the crisis with lots of cash and lots of assets — all major U.S. airlines began the month with strong balance sheets.

    Indigo’s Bill Franke, owner of Frontier, said adequate cash levels were indeed the single most important weapon of survival during the crisis. 
  • Southwest’s Gary Kelly spoke at the Chamber event as well, commenting on the carrier’s latest investor update mentioned above. He said it’s still too early to have an accurate read on the ultimate financial impact of the Covid crisis, and that fare discounting doesn’t really work if people are scared to get on airplanes.

    Southwest, meanwhile, is seeing businesses cancel events, another reason why it might defer some hiring and trim its flight schedule. About one-third of its customers, Kelly said, are business travelers flying on tickets paid for by their company. Southwest itself is absolutely not cutting back on employee travel. And Kelly said history suggests that health scares are usually “short-lived.”

    Even if not, the airline is well prepared with an iron-clad balance sheet, a low cost base, and a long history of never having lost money or laid off any workers. It also entered the crisis with a fleet shortage due to the MAX grounding, which means its fleet today is smaller than it was three years ago. Kelly is hopeful of getting its MAXs in the air again by mid-year, as he waits for the plane to undergo its first recertification flights, which will be a major milestone on its path back to service.

    How much will Southwest grow after it gets its MAXs back? That depends on demand, but prior to the current crisis, Southwest had huge opportunities to grow in lots of places, Kelly said. With capacity constrained however, it’s focusing growth for now from three key airports: Denver, Baltimore BWI, and Houston Hobby.

And in Europe

  • More airlines in Europe announced measures to deal with the crisis. Finnair, with its heavy Asia exposure, cancelled more flights to China, Japan, and Korea over the coming months. It also postponed the launch of new Busan, Korea service. Norwegian, which entered the crisis with an already-vulnerable balance sheet, withdrew 2020 financial guidance.

    Ryanair’s Michael O’Leary, speaking on Bloomberg Television, says the LCC can’t cancel too many flights in the short-term because of costs and liabilities associated with EU-261 consumer protection rules. But as Italy’s largest airline, Ryanair is indeed paring back schedules into the spring. It says bookings have dropped 25% to 30% on average in the seven days to March 3, with drops even steeper for Italian routes but much less in Ireland.

    O’Leary nevertheless still wants more MAX planes, including -10s if the price is right. He’d be happy to buy Airbus narrowbodies too. Ryanair needs replacement planes for the 2024-to-2028 period.
  • O’Leary also appeared on an all-star panel of European CEOs at an Airlines for Europe (A4E) conference in Brussels. He said Italy overreacted by cancelling schools and events and feels confident the crisis will pass by the summer, aided by fare discounting. He sees a roughly 10% y/y decline in traffic for the next two or three months. Naturally, Ryanair and other European airlines are watching the busy Easter period closely. The holiday falls on April 12 this year. 
  • Lufthansa’s Carsten Spohr said longhaul routes were a “major concern” as he watches events unfold, day by day. He’s hopeful it’s just a short-term demand crisis but worries also about what might happen if health officials have to quarantine an important airport facility like a maintenance hangar, for example. Lufthansa doesn’t want government handouts but could use some help in areas like tax relief.

    Spohr, in agreement with other CEOs, thinks the crisis will facilitate consolidation in Europe’s still-over-fragmented airline market. Late last week, Lufthansa said it might cut capacity as much as 50% if bookings don’t recover. It’s even considering a complete grounding of its 14 A380s, planes that have trouble making money even in good times. According to the Wall Street Journal, Spohr told employees that at one point last week, it was getting as many cancellations as it was new bookings.

    Disruption to China or even all of Asia was bad. But Lufthansa is getting hit extremely hard now that transatlantic demand is affected. The airline reports Q4 earnings on March 19.  
  • At the same A4E event, outgoing IAG CEO Willie Walsh echoed Spohr’s sentiments about consolidation, though IAG itself is focused just on its Air Europa acquisition for now — it previously looked at TAP Air Portugal and has moved on from its stated interest in Norwegian. He did say some distressed carriers might get some breathing room as fuel prices drop. Walsh mentioned that after 9/11, airlines continued to fly empty planes, whereas carriers now are more aggressively taking capacity out.

    Air France/KLM CEO Ben Smith noted his airline’s well-diversified route network will help it deal with the crisis, adding that he too expects a return to normal booking levels by the summer.

    Europe, by the way, saw its first airline casualty from the crisis last week as Flybe ran out of money (see Sky Money section).
  • Carriers elsewhere in the world were no less affected by the demand shock. Emirates announced one month of unpaid leave for workers. Key questions on everyone’s mind: How long will the virus spread? Will there be a V-shaped recovery? How badly will the global economy be affected? How many airlines will perish? Will businesses become more comfortable with videoconferencing as a substitute for air travel?
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Weekly Skies

  • Through the first nine months of 2019, Turkish Airlines displayed its usual seasonality: Terrible Q1 losses, followed by a decent spring and robust summertime profits. Yet all throughout, its results were sharply down versus prior-year levels. The reasons: Turkey’s troubled economy, a slower-growing world economy more generally, tough sixth-freedom price competition with Gulf carriers and Aeroflot, weaker demand on critical China-Europe routes (which it blamed on the U.S.-led trade war), big increases in labor costs, the significantly higher costs to serve Istanbul’s new airport, and a disrupted fleet plan due to the MAX grounding and NEO delays.

    Earlier in the year, earnings were depressed by the physical move to the new airport, during which Turkish reduced its flying to ensure a smooth transition. In Q4, however, the airline improved y/y margins, quite substantially as revenues rose 10% y/y but operating costs increased just 5%. A 1% drop in fuel costs helped. Unit revenue gains were evident throughout the network. North American routes got a boost from the strong U.S. dollar, which encouraged more Americans to fly abroad.

    The domestic Turkish market, weak all year, started to show signs of life, alongside capacity cuts. Though many come in Q3, Turkey’s giant tourism sector was strong throughout the year, reaching 45m arrivals, up 14% from 2018 — that’s one big upside of having a depressed currency. Middle Eastern routes saw big RASK gains.

    India was boosted by a new codeshare arrangement with IndiGo. During the quarter, Turkish expanded ASK capacity 7%, which contributed to 3% growth for the full year (operating margin for the full year was 4%, down from 9% the year before). It was the third straight year of growing 5% or less, following many years of double-digit expansion.

    In fact, Turkish operated fewer flights in 2019 than it did in 2018, partly due to 12 MAX 8s and 9s it was forced to ground, and roughly 12 more it would have received. It also received only 11 instead of 18 A321 NEOs. The airport move was another reason for last year’s slow growth. There was also some unplanned B777 and B737-NG maintenance. With B787s and A350s now arriving though, Turkish planned to grow between 8% and 10% this year.

    But those plans are now uncertain with the Covid crisis unfolding. Sure enough, executives said bookings for Asian flights dropped in February, followed by weakness in the Americas, for travel over the next two months. Turkish hasn’t grounded any planes yet but did suspend some service to China, Iran, Italy, South Korea, Iraq, and Saudi Arabia. These destinations account for about 10% of the airline’s revenue.

    Management doesn’t seem too worried yet, for a few reasons. One, the carrier’s network is so diverse that it can easily move planes to areas where bookings have stayed relatively steady, like Indonesia, Pakistan, Egypt, and parts of sub-Saharan Africa. It’s also encouraged by signs of demand recovery in China. In addition, demand was “very strong” in January, and February is usually its slowest month of the year anyway, so even a bad March will be manageable, without severe damage to Q1 results. There’s the benefit of much cheaper fuel prices too.

    That said, the company acknowledged that losses could mount if the crisis lasts long. It still nevertheless plans to open new routes like Newark in May and Vancouver in June. There are still more routes in Africa and central Asia it wants to add. Turkish is still growing its cargo business.

    After contracting while wholly exposed to Turkey’s domestic weakness, the airline’s LCC unit Anadolujet is now expanding internationally from Istanbul’s Gökçen airport, which will get a new runway soon. That’s true for the new Istanbul airport too, where costs are much higher, yes, but passenger services, expansion opportunities, operational reliability, and ease of flight connections are all much better.

    Separately, Turkish received Boeing compensation for its 2019-specific MAX losses. In the meantime, it’s watching the Europe-Middle East market as LCCs increasingly overfly Turkey with nonstops, i.e. Ryanair and Wizz Air adding flights to Israel, a major market for Turkish.

Latam Margin Essentially Flat

  • Latam, South Americas largest airline, failed to produce meaningful y/y margin improvement in the final quarter of 2019, despite extremely favorable conditions in the Brazilian domestic market. To be clear, results were good, highlighted by a 12% Q4 operating margin. But that’s peak season in the southern hemisphere. And the carrier’s 3% y/y revenue growth was no better than its 3% y/y increase in operating costs. It left Latam with an uninspiring 7% operating margin for all of 2019, no better than what it earned in 2018.

    The situation in Brazil really was excellent, as Gol’s phenomenal margins made clear a few weeks ago. Latam took advantage of Avianca Brasil’s demise by grabbing some of its planes and slots, growing domestic ASKs a bullish 18% last quarter. Unit revenues still jumped significantly, a big plus given that the Brazilian domestic market generates a full third of Latam’s total passenger revenues. The carrier also gets 39% of its revenue from tickets sold within Brazil, including tickets for international trips. Management called the Brazilian domestic market “healthy,” which is probably a big understatement.

    So why weren’t margins higher? One reason was lingering weakness in Argentina, which produced just 6% of sales, down from 10% in 2018 — the government there imposed a hefty new international travel tax. Another was a 10% decline in cargo revenues, influenced by the sale of a Mexican cargo unit but even excluding that, yields for carrying freight were down sharply.

    The key area of distress last quarter, however, was Chile, where Latam is headquartered. There, social unrest erased about $40m from earnings. As it happens, prices for copper, Chile’s most important export, have fallen by more than 10% since the onset of the Covid crisis. Sales from within Chile represent about 15% of total sales, compared to 10% from the U.S. Colombia is another important market, where plans to expand were curtailed as currency depreciation weighed on demand.

    The carrier doesn’t have any MAXs on order but did have three of its Rolls-Royce-powered B787s grounded during part of 2019. And Latam’s Q4 cost performance? If all one saw were its two biggest cost items, conditions would appear blissful — fuel costs sank 11% and labor costs sank 6%.

    But costs for other items spiked, including maintenance as it quickly added planes in reaction to the Avianca Brasil collapse, and passenger services as it invested in new inflight and airport amenities. Unit costs, meanwhile, weren’t helped by shorter average stage lengths and a 5% ASK cut to international flying. In fact, ASKs rose only 3% overall, even with the aggressive expansion within Brazil. In total, Latam, added 29 planes last year, and some sexy new longhaul routes in recent years, including Sydney, Boston, Tel Aviv, and Lisbon.

    But its most intriguing move, of course, was its surprise decision to elope with Delta, after court rulings obstructed its relationship with American. Delta paid big money to buy 20% of Latam’s shares, not to mention some of its A350s (Qatar Airways remains a major shareholder too). It will leave the oneworld alliance in May, while keeping codeshare relationships to all oneworld members, minus American.

    Less heralded but also important strategically was Latam’s repurchase of the Multiplus loyalty plan stake it didn’t own. It’s now outfitting narrowbodies with a new premium economy class, having earlier pursued a more ultra-LCC like strategy for A320s.

    South America’s largest airline has inevitably had to temper its ambitions in recent years, amid difficult economic circumstances in Latin America. Just since the beginning of 2019, it slashed its 2020-2022 fleet commitments by more than $1b. That includes the A350 sales to Delta and some narrowbody deferrals. For now, executives still expect this year’s operating margin to be between 7-8.5%.

    But it’s watching the Covid crisis carefully, noting that SARS never really affected Latin American airlines but H1N1 in 2009 did. Latam is already, though, having to cancel São Paulo flights to Milan. It’s also starting to see some softness in international demand as corporations advise their employees to stay home. So it’s freezing non-essential hiring and capital investments. ASK growth this year, as of now, should be between 3% to 5% as expansion in Brazil tapers off.   

Thailand’s Strengthening Currency Hits Thai

  • As Brazil’s currency drops to all-time lows versus the U.S. dollar, Thailand’s currency is (or at least was late last year) moving in the opposite direction, strengthening against many key currencies (dollars, euros, yen, yuan). For most airlines, a strong home currency helps. It means lower costs for dollar-priced inputs like fuel and planes. It means greater purchasing power abroad for local travelers.

    For Thailand’s airlines, though, greatly dependent on foreign tourists visiting from abroad, a booming baht hurts a lot. Thai Airways, which once coasted to never-ending profits despite its many shortcomings, saw those shortcomings tear it apart in the 2010s, a decade in which net losses topped $1.7b. This includes a $386m net loss in 2019, accompanied by a negative 4% operating margin. For Q4 alone, Thai managed to improve y/y results significantly, but still not enough to avoid a negative 1% operating margin. The revenue situation was awful, dropping 8% despite an ASK capacity reduction of less than 1%. Blame a slowing Thai economy, ravaged cargo demand, and “extreme fare competition” on shorthaul routes.

    As for tourism, arrivals reached nearly 40m last year, which was up 4% from 2018. Arrivals from China, which rebounded from a big slump in the first half of the year, stagnated in the final month of Q4. The big savior was an 18% decline in fuel outlays, which led to a 15% drop in total operating costs. Thai is now asking for government loans, clearly concerned about liquidity as the virus shock hits during the country’s peak tourist season. No country in the world is as exposed to the Chinese outbound traveler as Thailand. The government, which owns 51% of Thai Airways, is starting to use the word crisis to describe its predicament.

    Its Mantra turnaround plan, frankly, contains mostly platitudes about growing online sales and changing company culture. In response to the Covid crisis, it’s suspending some flights, relaxing ticket rules, and cutting executive pay. On a positive note, Thai Smile, a lower-cost subsidiary, broke even in 2019 after heavy losses the year before. The unit is now coordinating its strategy and operations more closely with mainline. Thai still owns 16% for Nok Air, an LCC it criticized for not having a “clear enough” business plan. Bangkok’s main airport, helpfully, will see its terminal facilities expand this year and a new runway added in 2022.

    In Utapao, Thai will open a new maintenance business. With respect to tourism, Thailand was seeing strong growth from India, pre-crisis. Government efforts to relax visa rules should help stimulate further demand from various countries. Thai, meanwhile, is selling old A340s, B747s, and B737-400s, part of a new plan to renew and simplify what’s long been a sub-optimal fleet (it surely didn’t need to buy A380s).

What Do You Call the Jewel in Aeroflot’s Crown?

  • As The Economist writes in its latest issue: “The reward for providing the world economy with the raw materials it needs to grow is perpetual vulnerability.” Russia, alas, was one of the countries the publication was talking about. With oil prices tumbling, the country’s export revenues are sinking, just as its national airline Aeroflot faces sinking demand from markets affected by the virus scare.

    Fortunately, the carrier produced strong summer results last year, as it usually does. And that was followed by an offpeak Q4 that was not nearly as bad as it was the year before. Q4 operating margin was officially negative 1%, but more like negative 8% after stripping out $154m in toll revenue from foreign carriers traversing Russia’s airspace. Revenues satisfyingly rose 6% y/y on 4% more ASK capacity. And despite a 20% jump in labor costs, overall operating costs increased just 2% thanks to a 9% drop in fuel outlays. For all of 2019, Aeroflot walked away with a 3% operating margin excluding overflight revenue.

    Since the start of last winter, the carrier launched eight new international routes, encompassing a wide array of geographies that highlight the privileged positioning of its Moscow Sheremetyevo hub — Dublin, Bali, Colombo, and so on. The idea is to create more and more options for connecting passengers between markets like East Asia and Europe, North America and the Indian subcontinent, and North America and the Middle East. It now plans to open more longhaul routes with the arrival of A350-900s (it expects to have 11 by year end).

    The geographically large Russian domestic market is another pillar of Aeroflot’s business, and one with both growth potential and weak competitors. Rossiya, a subsidiary, essentially serves three missions: scheduled routes from its home base St. Petersburg, longhaul flights to complement mainline at Sheremetyevo, and charter flying from Moscow Vnukovo for sun-seeking Russian tourists. Aeroflot also owns a carrier called Aurora, focused on Russia’s Far East.

    But if there’s one aspect of Aeroflot’s business that’s most encouraging, it’s Pobeda. That’s the group’s low-cost carrier, which is fast-emerging as the jewel in Aeroflot’s crown. It earned a spectacular 19% operating margin last year, while growing ASK capacity 42%. It’s also a powerful antidote to the group’s wintertime duress, earning an offpeak Q4 margin of 13%.

    As for Aeroflot’s response to the Covid shock, it’s a rare airline that did not suspend service to China — it merely cut some frequencies. It says load factors have been pretty high on China flights, and the market happened to have been strong in January.

    On the other hand, foreign airlines are starting to put more capacity into Russia as they take planes out of Asia and Italy. In addition, the ruble, after strengthening late last year, has weakened since the onset of the crisis and the accompanying drop in oil prices.  

News From the Gulf

  • Happy days are here again for Abu Dhabi’s Etihad. The state-owned Gulf carrier, famed for collecting dysfunctional airlines, lowered its annual operating loss, excluding special items, to just $870m. A year earlier, its loss was nearly $1.3b. The year before that? $1.5b. Progress! Abu Dhabi’s government was hoping to replicate the success of Emirates in neighboring Dubai. But the Abu Dhabi airline market is much smaller, forcing Etihad to rely on mostly low-fare connecting traffic.

    To compensate for its traffic shortcomings, the carrier thought it wise to buy stakes in carriers like Jet Airways, Alitalia, Air Berlin, and Virgin Australia, thinking their passengers could feed its hub. Most promising were Jet’s Indian passengers, funneled through Abu Dhabi for journeys to places like North America. But the benefits were modest and the costs astronomical, via all the red ink these affiliate airlines would spill. Jet and Air Berlin wound up collapsing. Alitalia would have many times over if not for repeated government lifelines. Investments in Air Serbia and Air Seychelles weren’t exactly Warren Buffet-like moves either.

    By 2017, a new team of managers were given a mop and tasked with a cleanup. Capacity in ASK terms peaked in 2017, falling 9% from those levels last year. It exited high-profile routes like San Francisco, Dallas DFW, São Paulo, and Perth. And gone were the days of binge ordering giant widebodies. It ended 2019 with 101 planes, roughly 30% of them narrowbodies. A330s are now gone.

    Etihad said demand on its 10-city Indian network remains strong even following the loss of Jet Airways feeder traffic. It continues to run a large cargo business and recently increased passenger frequencies to London Heathrow, Riyadh, Delhi, Mumbai, and Moscow Domodedovo.

    Abu Dhabi’s government clearly recognizes that Etihad grew way beyond its capabilities. But rather than temper its aviation-sector ambitions, officials are now betting on the low-cost carrier segment to drive demand. It’s pairing Etihad with Sharjah’s Air Arabia, for the launch of a new LCC later this year. Wizz Air, too, will enter a joint venture with a separate government-owned entity.
  • The LCC FlyDubai, though it doesn’t publish financial statements, said it managed a $54m net profit last year on roughly $1.6b in revenues, which equates to a 3% net margin. That profit figure, however, includes an unspecified amount of B737-MAX compensation from Boeing. In 2018, FlyDubai said it incurred a negative 3% operating margin.

    There’s no mistaking the carrier’s intense frustration at losing access to its 14 MAXs, not to mention the many more it was supposed to get. It said the fundamentals of its business were strong last year, which jives with the excellent results its neighbor Air Arabia posted.

    Cheaper fuel, though perhaps a long-run curse for Gulf economies, is certainly a short-run blessing for its airlines. FlyDubai had to cancel nearly one-fifth of its entire schedule due to the MAX affair, even as it acquired some relief capacity from lessors like SmartWings of the Czech Republic. It managed to open a route to Krabi in Thailand via Yangon in Myanmar in December. But it’s spilling lots of demand to rivals.

    Speaking of rivals, they’ll grow in number as Air Arabia, Wizz Air, and SpiceJet launch new ventures in the region. FlyDubai’s advantage is its close ties to Emirates, also wholly owned by Dubai’s government. 

And Finally:

  • Entering this weekend, there were no reported cases of Covid-19 in Mauritius, whose economy depends on inbound tourism. But the country’s national airline was forced to suspend service to Shanghai and Hong Kong. And the near-universal slowdown in international travel, regardless of geography, bodes ill for a carrier already struggling to make money.

    In 2019, it suffered a negative 2% operating margin, notwithstanding a positive 1% figure in the final quarter of the year. The calendar fourth quarter was in fact filled with encouraging trends, including sharply lower fuel prices, favorable forex trends led by a strengthening euro, and a 3% y/y increase on revenues concurrent with a 7% decline in operating costs.

    It did speak of “ferocious” competition, however. And as the Covid crisis unfolds, whatever hopefulness transpired in Q4 is now largely irrelevant. Air Mauritius is working on a new business plan, which is less about radical new ideas than it is about ways to trim costs, perhaps by renegotiating contracts with workers and suppliers.
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Sky Money

  • Flybe became the first airline casualty of the Covid-19 public health emergency — the carrier ran out of funds and filed for bankruptcy on March 5. It entered the crisis on extremely shaky ground, unable to find a profitable business model even with the financial backing of Virgin Atlantic.

    Virgin and other shareholders hoped the U.K. government would step in with support, mindful of the small communities dependent on Flybe’s air service. But no such luck. Surely, Virgin considered putting more of its own money on the line, given Flybe’s strategic importance as a provider of shorthaul traffic feed to Virgin’s longhaul flights. But it ultimately decided against, leaving Flybe to perish.

    Other airlines like Scotland’s Loganair promptly stepped in to replace some lost flights.  
  • Is Flybe’s death just a prelude to additional airline casualties? In Europe alone, the coronavirus is a tank of gasoline spilling onto the already flaming ruins of Alitalia — Italy is now imposing China-like quarantines on large parts of the country. The country’s government is becoming more desperate to sell the zombie airline, offering to separate out some of its unsavory parts. But it’s hard to imagine anyone giving it even cursory consideration right now, especially with Italy being one of the four countries at the epicenter of the Covid crisis (the others are China, Korea, and Iran).

    Not all that much better positioned, meanwhile, is Norwegian. Its stock price fell another 35% last week amid concerns that it might need to raise new capital for the fourth time in the past two years, this time in a bear market. The Financial Times, quoting an ABG analyst, said Norwegian might also be close to breaking its financial covenants. These are agreements with lenders spelling trouble if cash, margins, or other metrics fall below certain levels.  
  • The demand shock hurting the airline industry will likely lead to some mergers as well as bankruptcies. In Korea, a tentative pre-crisis merger deal between the LCCs Jeju Air and EastarJet was finalized last week. More specifically, Jeju will take a 51% stake in its rival, after failing in a bid to invest in the much larger Asiana (itself distressed going into the crisis). The two LCCs will have a combined fleet of about 65 B737-800s and a handful of B737-900ERs, along with two grounded MAXs. 
  • Philippine Airlines told employees that it lost $208m net last year, calling it the biggest loss in the company’s history. And this for an airline that’s had lots of lousy years. “To survive, our flag carrier needs to find a way to profitability, reduce its debt, and achieve a higher level of competitiveness,” the carrier’s chief operating officer wrote in a letter. It now faces the Covid-19 demand shock, which could prove an existential crisis.
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Needless to say, the spreading Covid-19 outbreak was the dominant topic of discussion at the ISTAT Americas conference in Austin, Texas, last week. The more pessimistic attendees pointed to China’s massive demand destruction in February, severe traffic declines in markets like Korea and Italy, businesses cancelling events, individuals afraid to book new tickets, airlines grounding planes, and the fact that Covid cases and deaths already exceed those of SARS two decades ago. It also happens to be the time of year when many people book their summer travel.

But there were those who saw the glass half-full, too, like Air Lease Corp’s John Plueger. He noted the early signs of a return to normalcy in China, where grounded planes are starting to reenter service, often, he said, with high load factors. Demand is just delayed, the optimists say, not destroyed. A V-shaped recovery, if not inevitable, would be consistent with previous post-health emergency recoveries.

What else were people talking about at the ISTAT gathering?

  • The MAX, for sure. Rob Morris, head of Cirium’s consultancy Ascend, said airlines currently have 380 B737 MAXs on the ground, with another 420 or so others built but never delivered. Those nearly 800 planes are equivalent to about 3.6% of 2019’s total industry capacity. Even including planes that stuck around longer because of the MAX crisis and other supply disruptions (i.e. NEO delays), the total number of narrowbody aircraft increased by about just 150 units last year. In 2017 and 2018, the increase was between 600 and 800. Morris thus describes the twin black swans arriving concurrently: the MAX-driven supply shock and the Covid-driven demand shock.
  • When will the MAX return? There’s still no sure answer, but the general consensus for now is sometime in Q4. Some, however, think perhaps 2021 is a better bet. One big question airlines and lessors are talking to Boeing about is the future MAX delivery schedule? In what order will customers receive planes? Easing the pressure on Boeing is the fact that some carriers — think distressed Asian carriers like China Southern — are now probably happy to go toward the back of the line. Executives from United and Air Canada, though, speaking on a panel, insisted they still want their MAXs as soon as possible.  
  • The widebody slump: It was already the case before the Covid crisis. Widebodies just aren’t selling like they used to, and the demand that does exist tends to be for smaller mid-sized models. How is Boeing going to sell meaningfully more widebodies now, notwithstanding a welcome Dreamliner order from ANA in late February. How will Airbus sell more A350s and A330 NEOs this year? Can current production rates for B787s and A350s continue?  There was an interesting debate about the A330 NEO, with optimists arguing that there are so many A330 CEOs out there ripe for replacement. Pessimists, in turn, including Boeing of course, retorted with data about the large number of CEO operators that have already ordered B787s and A350s as replacements.
  • Sun Country CEO Jude Bricker, speaking at the ISTAT event, essentially said he’s looking forward to shopping for more B737-NGs as their values likely drop. The airline was flirting with Boeing about buying the MAX but never got close to a deal because of the high price. In any case, its fleet needs are covered through the fall of 2021. As for Sun Country’s current state of business, it’s somewhat protected from the demand shock because close to half of its revenues come from charter flying and cargo. Bricker (he was speaking early last week) said forward bookings were indeed starting to weaken, but passengers and crews were still showing up for flights. He’s more generally bullish on leisure travel in the long-run. He’s getting record numbers of pilot applications. And he doesn’t worry much about the two new startup airlines — Breeze and Houston Air — which will be launching under suddenly very difficult conditions.
  • War for the middle market: Boeing won’t build an NMA after all, it seems. That was its idea for a twin-aisle plane sized between its largest MAXs and smallest Dreamliners. The pressure is on because Airbus is running away with the market, via robust sales of its single-aisle A321 XLR. But as several commentators at the ISTAT event stressed, many A321 operators think the plane is too small for many of the missions their serving. Boeing is reportedly now focusing its efforts on a so-called FSA, or future small airplane. It would theoretically replace the B737 family but with larger variants. A question for Airbus is whether to offer a second engine type on A330 NEOs. China’s Comac continues to work on jets that would challenge Boeing and Airbus. But the U.S. is contemplating the wisdom of banning suppliers like GE from providing it technology. In the meantime, some new supersonic planes are under development, with Adam Pilarski of Avitas arguing that people would pay extra for speed and time saved, after decades of little progress in this area. 
  • Environmental responsibility and the challenge it poses: This was a huge topic of discussion at the event. Engine makers and others appear extremely pessimistic about revolutionary breakthroughs in electric propulsion. Some say there’s a much better chance of meaningfully reducing carbon emissions in other areas of the economy — converting to electric cars for example. The pressure on airlines and their suppliers to cut emissions is separately influencing fleet decisions, with older planes becoming less attractive even when fuel prices drop. The market is watching what happens to retiring B777-300ERs as they retire in large numbers soon. Will they find new homes? Boeing hopes airlines opt for new B777-Xs instead, or at least larger versions of its B787s. 
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State of the Unions

  • Australia’s Jetstar ended a simmering labor dispute with ground workers by reaching a new deal, which the union says members were “blackmailed” into taking. It provides 12% pay raises over four years and changes to scheduling and work hours.

    But the Transport Workers Union said its members were pushed into taking the new deal by the airline, which the union claims made raises from last year contingent on the new agreement. The airline, for its part, says the deal is fair and that the union was trying to strong-arm it into scheduling more full-time workers than it needed. Jetstar flights were grounded last month when ground crews walked off the job over the year-long contract dispute.

    Separately, talks with Jetstar’s pilots union continue.

Southwest, Pilots to Begin Talks

  • Southwest and the Southwest Airlines Pilots Association (SWAPA) began talks for a new contract, six months before the current pact becomes amendable. The last deal was signed in 2016 after contentious negotiations — at one point SWAPA called on CEO Gary Kelly to step down — and after 10 months of federal mediation.

    SWAPA said it has been consulting with its members and plans to present the airline with a “completely rewritten” collective bargaining agreement, which it says will modernize and simplify the current agreement. The union is seeking changes to scheduling and productivity, as well as improved disability, retiree, and healthcare benefits.

    SWAPA says its pilots are the “most productive” in the U.S. and face a greater workload than any other pilot group due to “numbers of takeoffs and landings alone.”
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Landing Strip

  • Finally, after years of delay, Berlin’s new Brandenburg airport will open. Lufthansa, Germany’s largest airline, said it will start transferring flights from Tegel airport on Oct. 31 (happy Halloween!), with Tegel operations stopping completely on Nov. 7.

    The city’s busiest airline, in fact, is easyJet, which purchased Air Berlin’s Berlin-based assets. Ryanair, with Lauda Air, is a major player too. Germany’s capital city, a smaller and lower-yielding airline market than Frankfurt and Munich, currently has two airports. Tegel will close this fall, while Schönefeld is located on the site of the new airport.

    Ryanair, for its part, has lobbied to keep Tegel open, concerned about the new airport’s ability to handle future traffic growth.
  • Copenhagen Airport reported strong 2019 passenger traffic of more than 30m, but warned that storm clouds are gathering. Last year itself, the airport saw traffic disruptions from airline bankruptcies, capacity cuts, and labor strife at its largest carrier, SAS.

    And this year, the Covid-19 crisis and ensuing economic uncertainty, coupled with lingering effects of Brexit and trade wars, the outlook isn’t brighter. The airport will hold off on major investments, although it will continue planning, due in part to the flight-shaming movement’s roots in Scandinavia, to become a more sustainable facility.
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  • Virus fears are reaching even Latin America, about as distant as you can get from Wuhan. Despegar, a leading online travel retailer in the region, expressed concern in its latest earnings call about two second-order effects. One is what the outbreak is doing to Latin currencies, i.e. sending them to new lows. The other is all the capacity cutting carriers are now doing.

    Last quarter, before anyone ever heard of Covid-19, Latin America’s travel sector faced a litany of challenges, including social unrest in Chile and a new 30% tax on international travel from Argentina (never mind the deep recession there). Despegar did however see a bump in outbound travel from Argentina just before the tax took effect in December.  
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  • Airlines around the globe are responding in many ways to the current demand crisis: they’re cutting capacity, cutting budgets, grounding planes, deferring capex, postponing aircraft deliveries, freezing employment, suspending ticket restrictions, and so on.

    AirAsia X is doing a lot of that. But it also offered a novel deal for customers. The airline briefly sold all-you-can-fly passes good for an entire year, for just 499rmb, or roughly $120. The passes are for routes to China, Japan, Korea, Austrlaia, and India only, available only to Big loyalty plan members based in Malaysia. For those that grabbed them while still available, flights must be booked at least 14 days before departure (this discourages time-sensitive business passengers from using them). AirAsia X’s flights to Singapore, Bali, and Jeddah are excluded from the deal (as are all AirAsia flights).

    Trips must be point-to-point — no connections. Some peak days are embargoed. You won’t get any loyalty points for flying. And users must still pay government fees, airport charges, and of course any ancillaries they purchase. Restrictive? Yes. But still a great deal for travelers with lots of flexibility.

    “We want to restore travelers’ confidence amid the current sentiment towards flying,” the airline said. AirAsia itself, meanwhile, launched a major sale that included some “zero-fare” seats.
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Routes and Networks

  • Volotea is quietly operating under the radar, a European carrier focusing mostly on smaller cities that larger carriers ignore. Its latest move involves Spain, where it pledges to open two to four new bases next year.

    Why Spain? Because of an opportunity it saw in IAG’s planned takeover ofAir Europa. To assuage competition regulators — surely uneasy about the prospective power of Iberia and Vueling without Air Europa to keep them honest — IAG will divest some Spanish routes and airport slots to Volotea. The latter, headquartered in Barcelona, says it can become a vigorous competitor in the Spanish market, even on some longhaul itineraries given its codeshare partnership with TAP Air Portugal, whose Lisbon hub competes with Iberia’s Madrid hub.

    It’s not a publicly traded company, so Volotea’s financial record is undisclosed. But all signs point to success. It claims to have earned profits uninterruptedly since 2015. Its annual revenues top $550m. It expects to carry 9m passengers this year, with load factors exceeding 90% (it said so last week even amid the Covid crisis). And it’s opening three new bases in Lyon, Naples, and Hamburg this year.

    Vueling isn’t afraid to attack larger markets like Athens, or Madrid and Barcelona for that matter. It currently has 16 bases overall, including Bilbao and Asturias in Spain. Its aircraft of choice is the unloved A319, though it still has B717s as well. Will this new arrangement satisfy regulators scrutinizing the Air Europa takeover? IAG hopes so.

New Routes Aplenty in the U.S.

  • In a challenge to American and its powerful Charlotte hub, Allegiant will establish a base of operations at nearby Concord airport. The ultra-LCC will position two planes there this fall, becoming the carrier’s 21st aircraft base overall.

    Allegiant first began flying to Concord back in 2013, with a modest link to Orlando Sanford. Today, it offers five other Florida airports as well, along with New Orleans. Sometimes, basing aircraft at an airport has more to do with operational considerations than expansion intentions. But keep an eye out of new Allegiant Concord routes. American will have its eyes open.     
  • Spirit, which doesn’t fly from Concord, is adding new routes elsewhere.  New Orleans is a specific focus, getting two international routes that launch in June. One is Cancun (Mexico) and the other is to San Pedro Sula (Honduras).

    New Orleans will see more Spirit capacity to Orlando MCO as well. The Crescent City was once one of America’s most important economic centers thanks to its Mississippi River port. Its economic importance waned over the decades, as river commerce gradually gave way to rail commerce and later road and air commerce. Hurricane Katrina was a further blow in 2005, causing a big population exodus to nearby Houston. Nevertheless, New Orleans remains a big draw for tourists, a hub for the energy sector, and a city with a brand new airport terminal.  
  • Alaska Airlines is based in Seattle, site of the most U.S.-based Covid-19 cases. That aside, the airline announced new Seattle nonstops to Cincinnati starting in August using mainline B737s. This will give the airline nonstops to 93 airports from its home city. As it happens, Cincinnati, home to GE Engines, is an important place in the U.S. aerospace manufacturing ecosystem. Seattle, home to most of Boeing’s operations, is at the center of that ecosystem.    
  • Delta continues to add flying from Seattle as well. One of two new routes is to Dallas DFW, the epicenter of the American empire. The other is Columbus, once a hub for American’s ancestor America West. Both routes will operate with Delta’s new A220s.   
  • Air Canada has a new flight to booming California. The airline will connect its West Coast Vancouver hub to Orange County using A319s.
  • As of Sunday, March 8, worldwide airline seat capacity was scheduled to be down slightly (less than 1% y/y) for next month, Cirium data show. A week earlier, global seat capacity for April was schedule to rise slightly.

    Of the world’s 25 largest carriers by seats, United made the biggest cuts last week — its April capacity now shows a decline of 8%, compared to a 1% increase a week earlier. Lufthansa’s cuts were big too and poised to get larger if it follows through on its idea of temporarily grounding A380s. Air China, on the other hand, added back some capacity it previously removed, a sign of recovery.

April Capacity Trends Down

  • As of Sunday, March 8, worldwide airline seat capacity was scheduled to be down slightly (less than 1% y/y) for next month, Cirium data show. A week earlier, global seat capacity for April was schedule to rise slightly.

    Of the world’s 25 largest carriers by seats, United made the biggest cuts last week — its April capacity now shows a decline of 8%, compared to a 1% increase a week earlier. Lufthansa’s cuts were big too and poised to get larger if it follows through on its idea of temporarily grounding A380s. Air China, on the other hand, added back some capacity it previously removed, a sign of recovery.

Airlines with Heavy China/Hong Kong Exposure

AirlinePercentage China ASMs
Tiger Airways27%
Thai AirAsia26%
AirAsia X21%
AirAsia Malaysia16%
Ethiopian 13%
Cebu Pacific10%
Lion Air10%
Singapore Air.9%
Malaysia Airlines9%
Sri Lankan9%
Swiss 8%
Air Canada8%
Air New Zealand7%
China Airlines7%
Thai Airways6%
Virgin Atlantic6%
Vietnam Airlines6%
All Nippon6%
Korean Air6%
Air France5%
Japan Airlines5%

Source: Cirium

  • Selection of major airline brands with heavy China/Hong Kong exposure (treating carriers like Lufthansa and Swiss separately)
  • Ranked by percentage of 2019 ASM/Ks touching mainland China and Hong Kong
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Feature Story

As airline demand plummets, the aircraft market braces for impact.

A blessing in disguise? Throughout 2019, airlines struggled mightily with an aircraft shortage. Now, with worldwide traffic demand in freefall, not having all those additional aircraft might be a good thing.

The Covid-19 demand shock of 2020, which started in China and is now moving westward, was unsurprisingly the dominant theme of conversation at last week’s ISTAT Americas event in Austin, Texas. Builders, buyers, sellers, and lessors of aircraft wondered just how bad the traffic declines will get, just how long the crisis will last, and ultimately what the shock’s impact will be on the global aircraft market.  

Airlines, indeed, weren’t getting the airplane capacity they needed in 2019. There was the lengthy grounding of the B737 MAX, of course, which happened to have started while last year’s ISTAT event was in progress. Airbus, meanwhile, hasn’t been delivering its A321 NEOs anywhere close to on-time. Widebody plane shortages were much less of a problem, but some carriers did experience ongoing operational issues with B787s powered by Rolls-Royce engines. After peaking in 2017, total aircraft deliveries fell sharply in 2019, to their lowest number in seven years. 

The MAX affair, to be sure, was the chief reason for the decline. Rob Morris, who runs Cirium’s aviation consultancy Ascend, explained how industry ASK capacity growth might have been about 7% last year had MAXs flown and arrived without incident. Instead, as IATA figures show, capacity growth was just 3%. What’s more, a full 23% of all MAXs built but not yet delivered are intended for Chinese customers, which are least capable at the moment of absorbing new capacity. Carriers have of course replaced some lost MAX and NEO capacity by flying older aircraft for longer, insourcing wet-leased capacity, and so on. But aggregate seat supply is nevertheless lower than what it would have been, at a time when passenger demand is much lower than anyone anticipated.

The Covid-19 outbreak’s impact on aircraft markets is already evident. Bloomberg reports that Airbus might be forced to cut production of A330 NEOs, a product struggling to find buyers even before the virus crisis. Why? because the jet’s biggest buyer, AirAsia X, is deferring deliveries in reaction to a giant drop in traffic, particularly from China. Other airlines are likely talking to Boeing and Airbus about deferrals as well. Leasing firms say many of their airline customers want a temporary reprieve on paying their monthly rent. About 10% of the global aircraft fleet is currently grounded, including the nearly 20% of China’s fleet. That compares, by the way, to the 14% grounded in the aftermath of the 2001 9/11 attacks, according to Ascend.   

Not long after 9/11, oil prices began rising, from a low of $19 per barrel Brent at the close of 2001, to the upper $20s for most of 2002. Oil prices initially dropped and then rose sharply after the SARS virus crisis of 2003 as well. Ditto for the global economic recession, which saw a drop below $40 in December 2009, only to top $75 a year later. These episodes of quickly rebounding oil prices taught airlines that buying new aircraft was more often than not a smart bet, as their greater fuel efficiency meant big savings. Cheaper fuel, of course, is also a demand stimulant, as carriers gain the ability to cut fares and still make money.

Will fuel prices rise again? Airlines might be a little less sure this time around. Prices have remained rather subdued after crashing in late 2014. Last year. Brent averaged about $65 a barrel, more than 40% below the average from 2011 through 2014. Then, after an initial mini-spurt above $70 in the early days of 2020, the price came tumbling down in tandem with the Covid-19 outbreak. A barrel of Brent on Feb. 10 was priced at just $53. It plummeted another 9% last week, to $45 (with further steep declines as this week began). But even if oil demand, and jet fuel demand more specifically, recovers quickly and sharply, other pre-virus forces depressing the oil market will likely hold: A decline in global trade, for example, and global efforts to reduce carbon emissions. A strong U.S. dollar ,too, tends to correlate with low oil prices.

To be clear, airlines still want their MAXs, which provide not just fuel efficiency, however less important that’s becoming, but also certain range and passenger service benefits. The pressure to cut emissions, indeed, is another reason why airlines still want the latest-generation aircraft. It’s also true that early vintage prior-generation B737s and A320s are coming close to retirement age. That all said, the reality remains: Cheap fuel makes airlines generally less keen on buying new aircraft.

If the MAX grounding hadn’t happened, demand for new narrowbody aircraft might have already been in steep decline entering 2020. Traffic growth was already slowing across the industry, in response to slower economic growth in China and elsewhere. And 2019 saw a record number of airline failures, and with those failures, a record number of aircraft subject to bankruptcy proceedings. Jet Airways, Thomas Cook, Avianca Brasil, XL Airways… it was a long list. Now in focus are carriers that narrowly avoided death in 2019, but which suddenly face another falling guillotine; think Norwegian, Alitalia, Hong Kong Airlines, Philippine Airlines, and Mexico’s Interjet, for example.

East Asian carriers are particularly vulnerable, though the most vulnerable — airlines in China — enjoy some measure of government protection. Hainan Airlines, for one, would likely have succumbed to the virus crisis if not for a bailout by provincial authorities. Including related carriers and lessors under the umbrella of the HNA Group (Hong Kong Airlines included), hundreds of planes were at stake. Hainan is also a major B787 customer. Several big airplane buyers in Asia incidentally — think VietJet — are dealing with their first big demand shock ever, having not yet been around during SARS or the global financial crisis.

Keep in mind too that many of the world’s top narrowbody buyers are Asian and European low-cost carriers now on the front lines of the virus. VietJet is one. But AirAsia, Lion Air, and Norwegian are also feeling inordinate pain. This comes as some of the biggest widebody buyers were already in retreat before the current crisis. Gulf carriers aren’t mega-buying widebodies anymore. Chinese carriers weren’t buying Boeing’s B787s or B777s amid the country’s trade war with the U.S. The cargo advantages of planes like the B777, meanwhile, were losing their relevance as global trade slumped. Boeing is now questioning whether it can maintain current rates of Dreamliner production. Airbus surely has similar concerns about A350 production. B777-9s aren’t selling. Neither are A330 NEOs. The Big Three Gulf carriers, by the way, will retire hundreds of widebodies in just the next year or two. Will they find a secondary market?

It’s a scary time for aircraft builders and owners. On a comforting note, demand roared back after the SARS crisis in 2003, with 14% industry traffic growth in 2004. Providing a broader sense of reassurance are the many long periods of airline industry growth, followed by short periods of contraction. It’s a pattern that’s held for decades. Besides, environmental pressures almost necessitate rapid adoption of the latest aircraft technology, lifting Airbus and Boeing. On the other hand, there are lots of airlines that don’t want more planes right now, and not a small number of others that might not be around to fly the ones they already have.

The low oil prices, the slump in world trade, the strong dollar, and pre-virus overcapacity are other reasons even healthy airlines might go slow on fleet replacement, let alone growth. Yes, individual airlines want their MAXs and NEOs. But for the industry at large, an aircraft shortage might be just the right prescription for a bad virus.   

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Around the World

Around the World: March 9, 2020

Airline NameChange From Last WeekChange From Last YearComments
American-16.2%-51.3%Investing $550m over seven years in its Tulsa maintenance base, its largest maintenance base overall
Delta-0.5%-7.7%Major U.S. carriers presenting at a JPMorgan conference this week; watch for updates on demand declines
United-15.4%-38.2%Says it’s been preparing for a crisis like this for 10 years now; balance sheet, liquidity built to withstand heavy winds
Southwest-1.0%-13.8%Will have no fewer than nine B737 MAX simulators by April; says it only hires captain-qualified pilots
Alaska-10.4%-19.0%Intra-California expansion: going double daily on San Diego-Monterey MRY E175 route
JetBlue-12.0%-15.5%Amtrak appoints new CEO to replace former Delta chief Richard Anderson, who finishes three-year term this year
Hawaiian-15.6%-32.7%Cancelling flights to Japan, a critical market; has no current network exposure to China
Spirit-20.8%-57.7%New $2.2b Orlando MCO airport terminal scheduled to open in 2021
Frontier(not publicly traded)Opening new crew bases at Newark and Miami airports; growing a lot from both places
Allegiant-10.2%-6.1%Austin cancels South by Southwest festival due to virus scare
SkyWest-10.1%-19.6%Rival TransStates, which is shutting down, also laying people off at its Compass unit
Air Canada-3.2%1.2%CEO Calin Rovinescu, at U.S. Chamber of Commerce event, says carrier paying pensions to nearly 40,000 retired workers
WestJet(not publicly traded)Hong Kong’s Cathay Pacific, triple slammed by trade war, street protests, and coronavirus, closing its Vancouver crew base
Aeromexico-3.0%-40.5%The big question: Can Interjet survive? Reportedly owes government lots of money
Volaris-12.0%5.4%Feb. RPM demand up a bullish 21% y/y on just 16% more ASMs; says domestic, U.S., central Amer. loads strong
LATAM-2.6%-27.9%Will complete project upgrading interiors of 170 planes this year
Gol-17.8%-20.3%In Argentina, Indigo-backed Jetsmart gets access to Buenos Aires Aeroparque via takeover of Norwegian
Azul-13.0%5.4%Bolivia’s airline (BOA) reportedly suffering heavy losses, ops woes; competes with private-sector airline Amazonas
Copa-6.4%-8.1%CEO appears on Spanish-language CNN to discuss coronavirus, MAX woes, airline’s strong punctuality record, etc.
Avianca-19.2%-24.5%Rival LCC Viva Air to jump on the Cartagena-Miami route that Avianca abandoned
Emirates(not publicly traded)Prominently advertising “zero change fees on all flights” policy on its website
Qatar Airways(not publicly traded)Gulf carriers among the few foreign airlines ex-East Asia still currently flying to China; others: Aeroflot, Turkish, Ethiopian, etc.
EtihadSays 2019 financial results exceeded its internal plan but still has more work to do
Air Arabia-11.4%32.8%Sharjah airport welcomed record 14m pax in 2019; undertaking $400m expansion
Turkish Airlines-5.2%-21.0%AnadoluJet plans to increase capacity 22% this year with its new int’l strategy; Covid-19 perhaps will lead to a rethink
Kenya Airways-5.9%-65.8%Takes $49m government loan for E190 engine maintenance
South Africa Air.(not publicly traded)Mango, its LCC, ending service to Jo’burg’s alternative Lanseria airport; flies there from Cape Town, Durban, Zanzibar
Ethiopian Airlines(not publicly traded)IATA says Ethiopian air traffic will grow from 7m in 2017 to 24m in 2037
IndiGo-9.5%-4.2%Doesn’t have a frequent flier plan but does have a co-branded credit card in which users can obtain loyalty points
Air India(not publicly traded)Government in process of answering questions from interested bidders
SpiceJet-24.1%-25.1%Only 30 Covid-19 cases (and zero deaths) reported in India as of March 6
Lufthansa-2.2%-48.7%Flew more than 145m passengers in 2019, including those flying Swiss, Austrian, Brussels, Eurowings
Air France/KLM-17.4%-47.1%Ryanair, speaking to De Telegraaf, says it wants to fly to Amsterdam’s Lelystad airport if and when it ever opens 
BA/Iberia (IAG)-8.6%-24.6%CEO Willie Walsh says IAG paid more than $1b in air passenger duty (APD) last year
SAS-6.3%-59.1%Said Covid-19 had “limited impact” in Feb. but forward demand weakening
Alitalia(not publicly traded)IATA notes 50% rate of no-shows for passengers booked on flights to Italy last week
Finnair-10.3%-47.9%Carried 15% fewer passengers on Asian flights, y/y; Asia load factors down six points
Virgin Atlantic(not publicly traded)Was supposed to launch Heathrow-Sao Paulo flight later this month; will start in October instead
easyJet-9.1%-19.6%Canary Islands says Covid crisis causing more damage to tourism than Thomas Cook collapse (Preferente)
Ryanair-7.4%-10.8%Launching special “rescue fares” for stranded Flybe customers
Norwegian-35.4%-80.8%Cut ASK capacity 22% y/y, leading to 15% increase in unit revenues; cuts are part of restructuring, not Covid response
Wizz Air1.1%8.3%Finalizes deal with Abu Dhabi for new LCCs; will launch this fall
Aegean-11.1%-30.3%Volotea, which has an Athens base, has its busiest base in Nantes (based on seats scheduled, per Cirium)
Aeroflot-8.5%-13.3%Still flying to Iran’s capital Tehran but just once a week; also still flying to China and Korea
S7(not publicly traded)Kazakhstan’s Air Astana receives 2nd A321 NEO LR (on lease from ALC); uses LRs for London, Paris, Moscow, Istanbul
Japan Airlines-5.8%-36.8%Japan hoping virus doesn’t force it to cancel this summer’s Olympics in Tokyo
All Nippon-0.9%-28.6%Summary of new Haneda opening: 50 new flights (25 for Japan’s carriers, 25 for foreign carriers); 12 of 25 for U.S. carriers
Korean Air6.7%-33.5%Seoul Incheon saw monstrous 41% y/y drop in pax volumes last month; Jeju airport volumes down 43%
Cathay Pacific-0.9%-24.9%Will present its 2019 financial results on Wed.; mgt could provide clues on whether demand now recovering
Air China-1.1%-26.4%Chinese carriers putting foreign pilots on indefinite unpaid leave during Covid crisis
China Eastern4.0%-22.2%HNA Group will not be taken over by national gov’t; an “authoritative source” tells Yicai Global
China Southern4.5%-29.5%Taiwan’s ambitious new airline Starlux, facing demand shock in its infancy, signs GDS deal with Sabre
Singapore Airlines-0.5%-19.0%Indonesia’s Garuda seeing demand and revenues plummet just as big debt payments come due (Bloomberg)
Malaysia Airlines(not publicly traded)Signs multi-year distribution agreement with Travelport, one of the Big Three GDSs
AirAsia5.0%-62.5%Penang airport, operating at capacity, moving ahead with expansion plans
Thai Airways20.5%-63.8%Cargo revenues fell a massive 24% y/y last quarter
VietJet-1.1%-0.4%Rival Bamboo Airways, taking a chance on longhaul, starting new flights to Munich in July using its B787-9s
Cebu Pacific-3.1%-12.4%After resuming Taiwan flights in mid-Feb after early Covid scare, Filipino carriers again cancelling flights amid renewed fears
Qantas-15.7%-17.8%Website provides anonymous info on 3 pax who tested positive for Covid-19; i.e. pax in row 5, on Sing.-Sydney, Feb. 27
Virgin Australia-17.1%-56.5%Former CEO John Borghetti appointed to board of Brisbane’s airport
Air New Zealand-9.3%-18.6%Says its latest inflight safety video, produced with NZ’s conservation department, viewed more than 27m times online
Brent Crude Oil-8.9%-31.4%Energy market in crisis; OPEC and Russia fail to reach agreement on supply cut; Saudi Arabia increases supply to hurt rivals

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

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