Issue No. 757

The Covid-19 Crisis

Pushing Back: Inside This Issue

The alarm bells are ringing across the global airline industry. A coronavirus crisis that first decimated China’s travel market is now spreading elsewhere. Not only are people across the globe becoming warier of getting on airplanes. International commerce is feeling the impact as well, causing stock markets to swoon. Airlines are on edge as they await the ultimate severity of the crisis. Will it subside? Or will it get worse?

In times of great demand shocks, airlines already weak before the crisis are especially vulnerable. In this category are carriers like Virgin Australia, AirAsia X, and players in the brutally competitive Thailand market. The latest SAS results don’t instill confidence. On the other hand, IAG stands out as an industry champion. Honorable mention, meanwhile, goes to Mexico’s Volaris for a spectacular fourth quarter.

In the U.S., United lost confidence in its most recent financial guidance. Lufthansa, easyJet, and others expressed waning confidence through capacity cuts and other measures. Japan’s ANA, however, had enough confidence to order more Dreamliners.

It should be another eventful week for airlines, this one hopefully more uplifting than last. 

Verbulence

"It’s at a time like this when we can prove to you that IAG has the ability to adapt, to withstand, to address anything that gets thrown at us."

IAG CEO Willie Walsh

Earnings

November 2019-January 2020

  • SAS: -$91m; -8%

October-December 2019 (3 months)

  • IAG: -$110m/$637m*; 12%
  • AirAsia: -$92m; 10%
  • AirAsia X: -$23m; -1%
  • Bangkok Airways: $16m; -12%
  • Nok Air: -$16m; -9%
  • Avianca: -$378m/$20m*; 9%
  • Volaris: $67m; 20%
  • VivaAerobus: $34m/$6m*; 8%

July-December 2019 (6 months)

  • Air New Zealand: $65m; 6%
  • Virgin Australia: -$61m/$10m*; 3%
  • Comair/Kulula: -$38m/-$4m*; 0%

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

Weekly Skies

  • Put aside the Covid-19 shock and Heathrow expansion drama for just a moment, to properly recognize the astoundingly strong performance that British Airways achieved last year. Its 14% operating margin even bested Delta by a few fractions.

    And during just the supposedly offpeak fourth quarter, in which BA faced residual demand effects from a Q3 pilot strike, operating margin reached an unearthly 16%, a figure topped by only a handful of much smaller low-cost carriers. This is not a fluke. BA posted similar numbers in each of the past three years, leveraging its supremely privileged airport slot portfolio in London, still the world’s largest airline market.

    Almost as profitable, meanwhile, is Aer Lingus, whose 2019 operating margin was 13%. Iberia, one of the great turnaround stories of the 2010s, wasn’t far behind with a 9% posting. Its low-cost compatriot Vueling did even better at 10%. Together with Level, a young longhaul LCC off to a rocky start, these strongly profitable airlines form IAG, whose empire stands to further expand with the addition of Spain’s Air Europa later this year, if regulators allow.

    As a whole IAG’s numbers reflect the excellence of its four main constituent airlines. Its operating margins for Q4 and all of 2019 were 12% and 13%, respectively, far better than what Air France/KLM produced, and likely far better than what Lufthansa produced (it hasn’t yet reported). IAG’s Q4 revenues grew 3% y/y on 2% more ASK capacity. Operating costs also rose 3%, with fuel costs up 8%.

    CEO Willie Walsh, in his last weeks at the helm before retiring, did say 2019 was a more challenging year than 2018, with higher fuel costs, for one, convincing the group to scale back capacity expansion on multiple occasions. IAG doesn’t have nearly as much cargo exposure as Air France/KLM or Lufthansa but nevertheless suffered as cargo revenues dropped 10% y/y last quarter.

    More importantly, BA felt the impact as United and Delta invested heavily in their London Heathrow premium offering. Iberia had to contend with a rough Latin American economic backdrop, while many of Vueling’s frustrations were operational in nature — it was unable to optimize aircraft utilization because of severe air traffic control shortcomings, most importantly in its home market Barcelona.

    Creating Level was a defensive move against growing longhaul LCCs like Norwegian, which have since pulled back. Early signs of success on Level’s Barcelona-Buenos Aires route encouraged expansion, but flying from Paris proved a disappointment, and Buenos Aires itself suffered an economic meltdown. A subsequent route to Chile suffered amid national protests. IAG did say Tokyo was a strong market, both at Narita and Haneda airports. It also singled out strength in India and in Saudi Arabia’s capital Riyadh.

    But the group ultimately lives and dies by the transatlantic market, with the North Atlantic alone generating about 30% of total ASK capacity. It’s certainly BA’s bread and butter. And it’s even more true of Aer Lingus, whose 2019 peak season was hurt by A321 LR delays. Iberia is dominant on the South Atlantic, though not as dominant as it would be if the Air Europa deal goes through.

    So now the coronavirus scare, which Walsh says is hurting not just Asian markets but shorthaul Europe as well. It’s redeploying longhaul capacity to healthier markets, including places where rivals have perished or are struggling, i.e. India and South Africa. In the meantime, Heathrow’s third runway saw another setback last week (see airports section).

    More encouragingly, Walsh says about half of IAG’s cost base now varies with aircraft production, which enables more flexibility during times of market distress. After the B737 MAX had already been grounded, IAG signed a tentative mega-deal with Boeing for up to 200 units. After receiving 45 new planes in total last year, many more are on the way, both widebody and narrow. They include B777-9s, B787-10s, A350-1000s, and A321 XLRs.

    Joint ventures with American, Finnair, Japan Airlines, Qatar Airways, and most recently China Southern are important value drivers. So, it believes, are its aggressive NDC distribution efforts. It welcomes the new American-Alaska and American-Qatar alliances.

    And Brexit? In the short-term, it might be drumming up more business for BA as lawyers, consultants, bankers, and politicians descend on London to address the new reality. All eyes are now on the virus impact. But IAG insists that the worse things get, the more airline failures there will be.

SAS Losses Swell to $91m

  • Wintertime is never fun for Scandinavia’s SAS. And that’s especially true during the carrier’s fiscal first quarter, encompassing the wintry months of November, December, and January. The period was even less fun than usual this time around as net losses swelled to $91m and operating margin worsened to negative 8% — it was negative 6% for the same three months a year earlier.

    It was the carrier’s worst fiscal Q1 in fact, since the winter of 2014/15. More importantly, it contributed to a disappointing year for SAS, despite a pretty good summer peak. For the 12 months that ended in January, which covers most of calendar year 2019, it earned an operating margin of just 2%, down from 5% a year earlier and 6% the year before that.

    The results are particularly frustrating in light of the rather strong demand conditions SAS currently enjoys, alongside unusually favorable supply conditions. For one, Europe faces a temporary aircraft shortage due to the MAX grounding and NEO delays. And even more helpfully for SAS, its closest rival Norwegian is slashing capacity. Looking at current calendar Q1 schedules (Cirium), seat capacity for airlines other than SAS is down 9% y/y in Stockholm, 2% in Copenhagen and 1% in Oslo.

    Then why did SAS have such a lousy 2019, and a lousy November-to-January quarter? Isn’t the favorable supply and demand balance helping? What about all the reforms SAS has undertaken in recent years: The creation of a lower-cost unit based in Ireland, the introduction of maximum density A320 NEOs, improvements to the Eurobonus loyalty plan, and so on? Unfortunately, the positive effects from these reforms face strong countervailing headwinds, including the negative revenue and cost implications of Scandinavian currency weakness.

    SAS also faces higher labor costs after a debilitating pilot strike last spring. Labor costs rose 7% y/y last quarter, despite a mere 1% increase in ASK capacity; another reason for this is a temporary bump in training costs as pilots transition to A320 NEOs and A350-900s (the first of which SAS began flying last month, to Chicago). Management, furthermore, acknowledged that demand from the Nordic region has weakened for several reasons, including the region’s currency depreciation and, yes, concerns about the environment, expressed in the flight-shaming movement.

    The airline previously downplayed any significant impact from flight shaming. It’s true that Scandinavia’s economies aren’t growing much, with Norway in particular suffering from the downturn in oil markets (that’s a big reason why in turn, its currency is so weak). Even so, unit revenues rose last quarter, and key longhaul routes to the U.S. seem to be doing well.

    Asia, of course, is now in crisis, though SAS says it will lose just $21m in revenue from the suspension of Beijing and Shanghai flights during January and February. If still not able to fly to greater China during the peak spring and summer, of course, the impact will be greater. For now, overall forward bookings look positive, though the situation for airlines around the world is changing by the day. SAS affirmed its expectations of an operating margin this fiscal year of between 3% and 5%, including another y/y decline in margins for the current February-to-April quarter.

    Obviously, things could be worse if the Covid crisis worsens. Either way, SAS is determined to undertake yet another big reform involving the sensitive area of labor costs. As first disclosed last year, it’s looking to create a separate division to fly a sub-fleet of small narrowbodies it wants to buy, using crews with less generous work contracts. That triggered early outrage among some workers, though SAS did secure an agreement with Danish unions. The company’s message: We’re not trying to offshore these jobs; they’ll in fact be based in Scandinavia.

    What planes, specifically, does it want? The candidates are A220s and E2-Ejets, to replace A319s and B737-700s, though executives expressed some unease with GTF engine issues both planes are experiencing.

    That aside, SAS is separately launching new service to Tokyo Haneda, winning major corporate and tour operator deals, putting a big emphasis on punctuality, and planning to grow ASKs about 5% this year, mostly driven by aircraft upgauging.

    SAS insists that despite a string of poor financial results, its cash balance remains healthy. But that doesn’t negate its longterm concerns about all the aircraft European carriers have on order, never mind its short-term concerns about the coronavirus.

Air New Zealand Woes Mount

  • Well before the current virus crisis, challenges were mounting for Air New Zealand. Demand began softening early last year. The New Zealand dollar lost value against its U.S. counterpart. Hong Kong became a problem market. Cargo markets weakened. Overcapacity burdened trans-Tasman markets. Rolls-Royce engine problems on B787s caused significant operational disruption. Airport and air navigation fees were on the rise. This prompted the airline to take mitigating actions, like trimming capacity and stimulating domestic leisure traffic with a new set of fares.

    The efforts helped, as did robust corporate demand on domestic routes and Pacific Island leisure routes (excluding Samoa during the island’s measles outbreak). New routes like Chicago, Seoul, and Taipei performed well. Demand to Japan got a boost during the Rugby World Cup. Even South American flights, despite ongoing economic challenges, were “steady” during peak periods. A321 NEOs helped a lot on trans-Tasman routes to Australia.

    Nevertheless, Air New Zealand saw its calendar H2 operating margin slip to 6%, a level of earnings with which new CEO Greg Foran is not satisfied. Margin was 6% for the entire calendar year 2019 as well. H2 revenues rose 3% y/y, roughly in line with ASK capacity growth. But operating costs increased 8%, even with fuel and labor under control. Depreciation was one of the big inflation drivers.

    Now comes the Covid-19 demand shock, which the carrier thinks could erase about $20m to $50m from earnings this year. Forward bookings are weakening, especially on shorthaul domestic leisure and Tasman routes, in addition to Asian routes. North America routes, however, are seeing some new demand from Europe-bound travelers preferring to connect through cities like Los Angeles, San Francisco, Vancouver, Houston, or Chicago rather than an Asian hub. Pacific Island routes are holding up well for now too.

    Management is reacting by temporally suspending flights to China and Korea, cutting more shorthaul capacity, and moving B787s from Asia to Honolulu and Bali. That’s as it continues to cut costs, add A320/21 NEOs, take B787s with more premium seats, increase capacity to markets like Chicago, and prepare for its first B787-10s in 2023.  

Virgin Australia Cuts Capacity, Again

  • Struggling Virgin Australia reported a lowly 3% operating margin for the six months to December. But that wasn’t enough to prevent a slightly negative operating figure for the entirety of calendar year 2019.

    Virgin’s struggles are particularly stark in light of how well Qantas is doing domestically, where Virgin produces most of its capacity. The LCC does have a money-losing, sub-scale international business, which incurred a negative 7% operating last half. An ill-timed jump into the Hong Kong market certainly didn’t help. Even domestically though, its operating margin was a mediocre 5% (Qantas mainline during the same six months earned 14%).

    Virgin also owns the ultra-LCC Tigerair, which eked out a 1% operating margin in the half. The group, fortunately, was cushioned by its highly profitable Velocity loyalty program, of which Virgin once again has full ownership control. Groupwide, calendar H2 revenues rose 2% y/y while operating costs rose 4%, all on 1% less ASK capacity.

    Now about a year on the job, CEO Paul Scurrah is cutting capacity again, by about 3% in the fiscal year that ends in June. He’s already deferred B737-MAX deliveries, upsized to some MAX-10 orders, and announced 750 job cuts. Virgin is quickening removal of seven A320s from Tiger’s fleet, on top of two removals announced in November. It’s transferring two mainline international B737s to Tiger, thus giving it a single Boeing fleet type. Virgin is also removing F100s, ending its Hong Kong routes, trying a new route to Tokyo Haneda from Brisbane, closing Tiger’s Brisbane base, closing five of Tiger’s domestic routes, and undertaking a widebody fleet review.

    Sure enough, it sees demand weakening across the network, especially on leisure routes and Tiger’s routes. The Covid-19 crisis, it estimates, will erase $35m to $50m from earnings this half.

    Virgin, remember, experienced a messy divorce with Air New Zealand and more recently lost business due to brushfires in Australia. Scurrah says he’s only in the “early stages” of transitioning to a lower cost base. But patience is surely running thin for the carrier’s shareholders, including Singapore Airlines, Etihad, two Chinese conglomerates and Richard Branson’s Virgin Group. Delta, though not a shareholder, is a joint venture partner. 

AirAsia Improves; AirAsia X Drops Into Red

  • The accounting was messy as usual. But under the haze stood a strongly improved Q4 operating result for AirAsia. After heavy losses in the final quarter of 2018, the carrier’s Malaysian, Indonesian, and Philippine units this year combined for a Q4 operating margin of about 10%. Thank strong double-digit revenue growth, strong ancillary growth in particular, a 1% y/y decline in fuel costs, changes to its pricing strategy, profits at its fast-growing Teleport cargo business, distress at rival ASEAN carriers, and progress lowering non-fuel unit costs as more NEOs arrived — AirAsia in fact started flying its first A321 NEO in November.

    The group reports results for AirAsia Thailand separately; it too improved performance y/y but didn’t quite break even at the operating level. Problems in the Thai market include a strong local currency that hurts inbound tourism, and rather heavy exposure to the badly distressed Hong Kong and Macao markets.

    AirAsia India improved Q4 operating margin to negative 6%. AirAsia Japan, with just three routes, incurred a $10m net loss (it gave no other details about Japan). Across the entire group, AirAsia grew ASK capacity 8% last quarter. But the bulk of its expansion came in Indonesia, the Philippines, and India. Growth was just 1% in Malaysia, its biggest market. And Thailand, it second biggest, saw a 1% ASK contraction.

    This year got off to an unwelcome start as AirAsia was cited as an alleged perpetrator in a corruption case against Airbus. The airline vigorously denies the allegations. A more acute worry now, of course, is the Covid crisis, which is hitting the ASEAN region hard. With lots of routes to China, the carrier expects its Malaysian capacity to decline by 10% y/y this quarter, while its Thai capacity will drop 23%.

    Management at the same time complains about irrational pricing by competitors. But it retains confidence in a long-term vision to build auxiliary businesses — most importantly financial services, cargo, and online travel retailing — making use of the airline’s copious amounts of data. It says its digital strategy is “gaining momentum” with moves like teaming with a company called Kiwi to sell other airline flights on its Airasia.com platform.

    In the short-term though, there’s no hiding the pain AirAsia will experience from the Covid shock. Along with cutting capacity, it’s aggressively discounting fares to fill planes, hoping to recoup some revenue with ancillary sales. The group is imposing a hiring freeze and renegotiating supplier contracts. 
  • AirAsia’s sister airline AirAsia X did not have a good Q4, meaning it enters the Covid crisis already in distress. Q4 is a peak period for the airline, but that didn’t stop operating margin from dropping into the red, from positive 2% a year ago to negative 1%. Reveues rose 4% y/y but operating costs increased 7%, well in excess of a 1% ASK capacity increase.

    Fuel costs helpfully declined 7%. But other areas of its cost base swelled, most importantly maintenance. The weak Malaysian ringgit also contributed to cost inflation. The airline, furthermore, experienced heavy Q4 losses at its Thai and Indonesian longhaul affiliates.

    In fact, all three AirAsia X operations — Malaysia, Thailand, and Indonesia — posted full-year 2019 operating losses, with margins of negative 3%, negative 8%, and negative 48%, respectively. AirAsia X and its longhaul LCC model has consistently lost money or at best earned small margins over the course of its 13-year lifespan. It’s now flying more shorthaul routes like Kuala Lumpur-Singapore, while moving into narrowbody A321 NEOs for routes less than six hours.

    For the longer routes it still plans to serve, the big bet is on A330 NEOs, the first of which recently began flying from Thailand to Australia. With the Covid crisis however, the airline is deferring A330 NEO deliveries. In the face of major demand loss on routes to China, Korea, Japan, and Australia, AirAsia X is also cutting fares and suspending three unprofitable routes: Tianjin, Lanzhou, and Jaipur. Ancillary revenues, which are typically less price sensitive, helpfully account for about a quarter of the carrier’s revenues.

    But there’s no escaping the fact that 30% of AirAsia X’s revenues come from China, a market experiencing a 9/11-like demand shock. If that weren’t enough, the carrier also complains of overcapacity in the Japanese market, “irrational competition,” and an increase in Malaysian passenger taxes. This month by the way, it’s already pre-cancelled more than 600 flights.  

Red Ink at Bangkok Airways, Nok

  • Thailand’s economy is heavily dependent on Chinese tourism, which even in 2019 experienced periods of declines, notably in the year’s first half. Ultimately, arrivals from China to Thailand grew 4% for the year, which wasn’t enough to save Bangkok Airways from incurring a negative 2% operating margin over the full 12 months.

    It was a year also challenged by a strong local currency, which made visits to Thailand expensive for many travelers. Europe, an important tourist source market, sent fewer travelers in 2019. The Thai economy, meanwhile, grew less than 2% for the year, decelerating due to export weakness in the context of U.S.-led trade wars. Overall, tourist arrivals did rise 6% in 2019, with a boost from fast-growing markets like India and Russia.

    But however buoyant the traffic demand, airlines in the country faced what Bangkok Airways described as “highly intense competition.” The self-described “boutique airline,” which also runs airports and sells services like ground handling and catering, has just a 10% share of the Thai domestic market measured by passengers carried. It competes with Thai AirAsia, Thai Airways, Thai’s sister airline Thai Smile, Nok Air, Thai Lion Air, and Thai VietJet.

    No wonder why in just the fourth quarter of 2019, its operating margin dropped to negative 12%, from negative 9% in 2018’s Q4. Bangkok Airways cut ASK capacity 2% y/y (and 6% domestically). But revenues fell 5%, exceeding a 2% decline in operating costs. Not even cheaper fuel could help much.

    As recently as 2016, Bangkok Airways was a highly profitable airline, earning a 14% operating margin that year. It did so with a unique business model, in which roughly half of its airline revenue comes from flying tourists to the airport it owns and runs in Samui, a beach resort. Its busiest market is Bangkok’s main airport though (Suvarnabhumi), where it connects inbound visitors from across the world to other cities in Thailand and neighboring countries (most importantly Cambodia, Myanmar, Vietnam, and Laos).

    About 6% of its sales come from within China. Almost 30% comes from Europe and the Middle East. Naturally, with so much of its business derived from foreign points of sale, Bangkok Airways is big on marketing abroad and codesharing with other airlines — its latest codeshare partner is Turkish Airlines, and it’s even working with Thai Airways. Last year, it signed on to install the Amadeus Altea passenger service system.

    But last week, management was focused on crisis management, announcing plans to trim capacity, cut executive pay, and impose unpaid time off. 
  • Bangkok’s rival Nok Air, which flies from Bangkok’s low-cost airport (Don Muang), suffered is sixth consecutive year of red ink in 2019. More importantly, it was the LCC’s fifth consecutive year of downright horrible losses, this time in the form of a negative 13% operating margin. Well, at least it was better than the year prior’s negative 17% drubbing.

    That’s about the nicest thing one can say about an airline that somehow manages to survive by shrinking its fleet and cutting costs. Its Q4 operating margin was negative 9%. And operating margin for its longhaul joint venture with Singapore Airlines, called NokScoot, was negative 19% for Q4 and something similar for the full year. Nok Air increased Q4 ASK capacity 4% y/y, leading to a 2% revenue gain, concurrent with a 6% drop in operating costs. Hence a y/y margin improvement.

    Nok has experienced near-death experiences before, most recently just before the global financial crisis when oil prices reached stratospheric levels. Before that — just months after launching in fact — it faced the 2004 tsunami that devasted Thailand. Will it survive the Covid-19 crisis?

    Nok Air was originally a creation of Thai Airways, which retains a minority ownership stake. 

Avianca Strengthens After Financial Restructuring

  • In the second quarter of last year, Colombia’s Avianca began a major financial restructuring to save itself from a possible bankruptcy filing. That effort is now complete, having fortified its balance sheet with, among other things, new capital from United.

    The job now turns to lifting profit margins, which haven’t been terrible in recent years, but nor have they been great. Typically, Avianca earns annual operating margins between 6% to 7%, though the figure slipped to just 4% in 2019, highlighting the urgency to reform. The final quarter of 2019, coinciding with strong seasonal demand, saw the airline earn a near-9% operating margin, up a bit from the same quarter a year ago.

    Revenues declined slightly less than 11% y/y, while costs declined slightly more than 11%. Those declines reflect a retrenchment in which Q4 ASK capacity shrank 7%. Avianca most definitely enjoyed the fruits of cheaper fuel, with outlays falling 10%. To ensure longterm margin gains, however, management is banking on initiatives like new branded fares and the densification of A320s from 150 seats to 174.

    Those are two elements of the Avianca 2021 turnaround plan, whose highest-potential project is a joint venture with United and Copa. Work has stalled while Avianca undertook its financial reprofiling. But the three carriers will soon apply to the U.S. DOT for antitrust immunity. In the meantime, Avianca is forming looser codesharing partnerships with Gol, Azul, and TAP Air Portugal.

    Even as it axed 25 unprofitable routes and greatly downscaled its Lima operations, growth in Bogota continued. It’s expanding its Bogota links to Brazil, for example, part of a plan to create a more robust connecting hub. Currently, about 35% of Avianca’s Bogota passengers are connecting. It thinks that number could go as high as 50%.

    Another key tenet of Avianca’s reforms: Growing its profitable LifeMiles loyalty plan. It recently launched a new Express-branded unit as well for domestic turboprop flying. It’s still taking A320 NEOs though fewer than it originally ordered. E190s are leaving. Brand building is important too, especially given raw memories of an ultra-long pilot strike in 2017.

    The Avianca brand also incurred some reputational damage when Avianca Brasil, though a separate company from Avianca, fell apart. The same thing happened with Avianca Argentina.

    This quarter, the company expects operating margin to be between 2% to 3%, which should put it on track to earn 6% to 8% for the full year. It’s surely mindful of the Covid-19 outbreak but sees no demand destruction yet — it doesn’t fly to Asia or even Italy. It does see some overcapacity on European routes, however, along with lingering cargo weakness.

Volaris, VivaAerobus Report Strong Quarters

  • To the north in Mexico, Volaris triumphantly pronounced one of the all-time great quarters in airline history. In fact, of all the airlines that have so far disclosed Q4 operating margins, Volaris showed the second highest figure, trailing only the supernatural 26% that Gol achieved.

    The Volaris figure? 20%, which brought its full-year 2019 figure to almost 13%. This is an airline, remember, that lost money in 2018 — its operating margin then was negative 3%. Last quarter’s cheaper fuel, in which outlays rose 3% y/y despite 15% more ASK capacity, only begins to tell the story of the carrier’s turnaround. Total operating costs rose only 9%, while revenues rose an extraordinary 23%. A stronger Mexican peso helped.

    The fact that Volaris faces no direct airline competition on 40% of its routes helped. The rapid growth in family-visit traffic, the airline’s core market, helped. Strong demand during the Thanksgiving and Christmas holidays helped. “Solid traffic demand” on cross border U.S. routes helped. Strong growth in ancillary revenues helped. Positive unit revenue trends for its Central American unit helped. The purchasing power it enjoys as part of the Indigo investment group helped. The distress its rival Interjet is experiencing helped.

    And importantly, Aeromexico’s MAX-related capacity contraction was a big help in taming an earlier supply glut. Volaris boasts of being the largest Mexican airline ever in terms of traffic carried. It also boasts of being the Western Hemisphere’s lowest-cost airline.

    Importantly, it owes much of its success to stealing market share from long-distance buses, with which it benchmarks its cost structure. It estimates about 6% to 8% of customers are first-time flyers, and around 25% first obtain bus quotes before purchasing a Volaris ticket. In that sense, it can grow capacity far in excess of Mexico’s lethargic GDP growth and still earn a 20% operating margin.

    In 2007, 24m passengers flew within Mexico. Last year that number was 53m. The international market, meanwhile, roughly doubled to 48m, stimulated by open skies agreements and aggressive LCC growth. Volaris, Interjet, and VivaAerobus all placed big NEO orders.
  • Speaking of VivaAerobus, it too benefited from Interjet’s woes and Aeromexico’s missing MAXs. But not as much as Volaris. Viva, which had a better 2018 than its ultra-LCC rival, disclosed an inferior 2019, with operating margin at just 7%. That includes an 8% showing in the final quarter of the year, in which operating costs and ASK capacity increased 24% y/y.

    Revenues came close to keeping up, rising 23%. The airline ended 2019 with an equal number (18) of A320 CEOs and NEOs. Ancillaries accounted for an impressive 45% of total revenues.

    It’s increasingly open to more commercial complexity, working with travel agencies, for example, and fostering connecting traffic. It’s also offering charter flights to markets like Havana and carrying cargo.

    This year, Viva gets its first 240-seat A321 NEO, implying more aggressive capacity growth. It just added five new Chicago O’Hare routes, along with some new flying to Orlando and San Antonio.

    Will Viva do an IPO this year? Its shares are still privately held, but the time might be right to lure investors while Aeromexico’s plans are hobbled by a fleet shortage. Then again, the Covid-19 crisis might keep investors away from all airlines.

Headwinds for South Africa’s Comair

  • Even as its main competitor struggles to restructure in bankruptcy, South Africa’s Comair faces what it describes as “strong headwinds.” The airline, which flies on behalf of British Airways while running a separate LCC called Kulula, suffered an unusual $4m net loss excluding special items for the final six months of calendar year 2019.

    Operating margin dipped just below breakeven, though its full-year margin was slightly in the black. Revenue growth in the half was just 3%.

    Comair has a long history of always making money, aided by profitable auxiliary businesses like training and airport lounges. But as CEO Wrenelle Stander explained to MoneyWeb, the airline was hard-hit by the MAX affair, both from an operational and financial perspective.

    Another big cost headwind stems from a switch to Lufthansa as its maintenance provider — it wasn’t happy with the reliability of South African Airways, its previous provider.  Stander estimates that South Africa’s airline market has about 30% more capacity than demand merits. She also laments the fact that SAA hasn’t paid Comair the court damages it owes from an antitrust case. But she thinks the airline can take advantage of SAA’s domestic capacity cuts once peak season arrives.

    Some of her other priorities include growing ancillary revenues, opening new regional routes, and increasing fleet utilization. 
Expand Section

Sky Money

  • It has the most Asian exposure of any U.S. airline. So naturally, United is feeling some effects from the current Covid-19 scare. It said last week that near-term demand for China routes is virtually zero, while near-term demand for routes to other East Asian destinations is down about 75% y/y. Its greater China flights — to Beijing, Shanghai, Chengdu, and Hong Kong — are currently not operating but normally represent about 5% of United’s total ASM capacity.

    Other transpacific markets account for another 10%. As a result of the near-complete evaporation of Asian demand, the airline last week rescinded the 2020 earnings-per-share guidance issued in January. It might yet achieve these targets, but not if the Covid crisis doesn’t recede by mid-May, and not if normal travel patterns to Asia don’t resume by mid-summer.

    Keep in mind that in the short term, suspending China routes during an offpeak period won’t cost United much money. In fact, it might save it from incurring losses. But it does have to find new missions for widebody planes, which could lead to overcapacity elsewhere.

    United emphasized that it’s still well-positioned to grow earnings next year and beyond, as promised. It also highlights some 2020 earnings tailwinds it hadn’t anticipated when issuing guidance in January. One is cheaper fuel. Another is its updated credit card deals with JPMorgan Chase and Visa. 

European Carriers Adapt to Covid-19 Demand Shocks

  • United’s partner Lufthansa is itself taking proactive measures to stay one step ahead of the industry’s biggest demand shock since the 2008-2009 global financial crisis. It’s reassessing all hiring, offering workers unpaid leave, considering part-time work options, reducing administrative projects, and cutting some management budgets.

    With many of its East Asian flights suspended for the next weeks, the capacity equivalent of 13 planes is currently grounded. Media reports continue to surface though, about Lufthansa’s interest in buying TAP Air Portugal, perhaps alongside United.

    As for Alitalia, it faces another huge blow from Covid-19’s impact on northern Italy, never mind the death of rival Air Italy. Government officials might need to act quickly — one option discussed is selling off just the airline operations separated from its maintenance or ground handling.

    Frankly, Lufthansa would likely benefit more from a dead Alitalia than a takeover of Alitalia.
  • With the virus effects on air travel worsening drastically by the day, Finnair revised earlier comments downplaying the potential impact on earnings.

    It now says Q1 margins will be lower y/y, Q2 margins significantly lower, and full-year margins significantly lower as well. It will look to slice about $45m to $55m from its cost base, possibly through temporarily layoffs as it rolls back capacity.

    Executives emphasized, however that they still believe in the longterm wisdom of Finnair’s Asia growth strategy.
  • It’s not just Asia though. The Italian Covid-19 cases are infecting European shorthaul markets, enough so for easyJet to warn investors about “significant softening of demand and load factors into and out of our Northern Italian bases.” The LCC noted some demand deterioration in other European markets as well. It’s consequently cutting some capacity and undertaking some cost reduction measures.

TransStates Focuses on Regional Flying

  • TransStates, a U.S. regional carrier, became a casualty of a tight pilot labor market and efforts by the Big Three to streamline their regional operations.

    The St. Louis-based company, unable to find “workable solutions” to its existential problems, will close its TransStates operation. But it will continue to operate two of its subsidiaries: Compass and GoJet, which fly larger regional jets. TransStates itself flies just 50-seat ERJ-145s for United, having recently ended a relationship with American.

    Without enough pilot captains, it said, meeting its contractual commitments would be impossible. 
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Landing Strip

  • A U.K. court has ended, for now, plans to build a third runway at Heathrow, ruling that the proposal did not take into account the government’s climate-change commitments. The court said the third runway plans, as they are now, would fall afoul of the Paris climate agreement.

    It remains uncertain what Prime Minister Boris Johnson’s government will do. Johnson, before he became prime minister, was a vocal opponent of the third runway, and it is thought he could use the ruling as a pretext to end the proposal. His government has said it will let industry lead the decision making on whether a third runway is necessary.

    The U.K. airline industry objected to the ruling. UK Airlines, the industry’s trade group, called the ruling “extremely disappointing,” and said “the economic prize is enormous if expansion is done right.” The group called on the government to appeal the decision.

    IAG chief Willie Walsh said the news “didn’t come as a surprise,” and he reiterated his appeal for the U.K. to stop planning for a third runway at the airport. He added that if Heathrow found a way to add a third runway, the costs shouldn’t be passed on to the airlines.

    “I didn’t believe they could do it either on environmental grounds or on cost grounds, and my view on that hasn’t changed,” Walsh said.
  • Separately, Heathrow reported its 2019 full-year results. The airport recorded its ninth consecutive year of passenger growth, reaching 81m passengers for the full year. This is up only 1% from 2018, but the airport said it is operating near its maximum permissible capacity.

    Other stats from Heathrow include that it handles 50% of all London passenger traffic, and 70% of the country’s longhaul flights. Heathrow is one of only four airports in the world with more than 100 longhaul flights.

    Additionally, Heathrow handles 30% of the U.K.’s non-EU cargo.

ADP Acquires Stake in GMR; Expands Reach Into India

  • French airport operator Groupe ADP acquired a 49% stake in Indian airport operator GMR Airports for €1.3b. The deal extends ADP’s reach into South Asia, Greece, and the Philippines.

    Of particular interest to ADP are GMR’s contracts to run Delhi and Hyderabad airports, which bring almost 100m additional passengers into the French company’s control. In making this deal, ADP bet on the continued growth of the Indian aviation market, which it forecasts to expand by about 7% per year.

    The deal is part of ADP’s plan to build a global airport-operating platform. Besides the core European business managed by ADP, and this deal in India, the French company has a strategic investment in TAV, which operates airports in Turkey, several former Soviet republics and the Middle East.

Strong Spanish Tourism Market Fuels Aena

  • Aena, which operates airports in Spain and Brazil along with London Luton, reported its 2019 traffic reached 293m passengers.

    Much of this was fueled by strong growth in Spain last year. Spanish airports under its control reported more than 4% annual growth to 275m passengers. Drilling down further, Madrid saw a 7% annual increase, and Barcelona El Prat grew by 5%.

    The company took control of its Brazilian assets in the second quarter of last year, but remains bullish on their growth, particularly in Recife.

    Aena said it is too soon to assess the effect the Covid-19 virus will have on traffic in its European airports. “We need a little time to estimate the economic impact,” CEO Maurici Lucena Betriu said.

ACI: Too Soon to Gauge Covid-19’s Effect on Passenger, Freight Traffic

  • Airports Council International said global passenger traffic stabilized at the end of last year, growing 5% y/y in December. North America and the Asia-Pacific region grew the strongest, while growth in Europe and the Middle East was more tempered. Africa also reported 6% y/y growth.

    Freight started to stanch the negative news by surging to 5% y/y growth in December worldwide, but for the full year, freight reported a 4% contraction.

    These positive freight and passenger figures, though, were reported before the Covid-19 outbreak began to affect travel.
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Distribution

  • During its Q4 earnings call, Sabre outlined a $150m investment plan to achieve several key goals, including a migration away from relying heavily on transaction-based GDS fees for revenues. It instead wants to charge airlines (and hotels) to help them create, showcase, customize, and sell new products and services, through any and all distribution channels including their own.

    The key to achieving this is mastering the art of predictive consumer behavior, the concept that propelled Amazon, most famously, to corporate superstardom. To that end, Sabre is investing heavily in data analytics, artificial intelligence, machine learning, and a new cloud computing partnership with Google, another company that arguably knows people better than they know themselves.

    Can Sabre achieve a similar understanding of the specific subset of people known as travelers? Airlines, of course are using some of these same tools and technologies to understand their own customers and predict their behavior. But doing so is more difficult when it’s someone else — i.e. Sabre’s GDS — that’s handling the transaction.

    Their answer: New Distribution Capability, or NDC, a way to interact with travel agencies and other third parties that allows for more dynamic, customized selling. Rather than resist NDC, Sabre instead bought one its chief developers and champions, a Miami-based company called Farelogix. The deal hasn’t yet closed though, due to antitrust concerns.

    Sabre separately purchased a company called Raddixx to provide passenger service system (PSS) technology to low-cost carriers, much like Amadeus bought Navitaire to achieve similar aims.

    Sabre, however, has what appears to be a thorny relationship with the world’s largest LCC. That’s of course Southwest, which first antagonized Sabre by installing Amadeus Altéa. Now the two can’t seem to strike a GDS arrangement, frustrating Southwest’s efforts to further penetrate the corporate market.

    Turning to Q4 trends, Sabre saw airline bookings through its GDS rise 1% y/y, with healthy 5% growth from North America outweighing declines elsewhere (i.e. in Asia due to loss of Jet Airways’ business). Q1, unfortunately, will look much worse due to the virus crisis (see feature story).

Amadeus Reports Double-Digit Declines in Bookings Last Week

  • Sabre’s Madrid-based rival Amadeus reported results too, likewise noting double-digit declines in GDS bookings last week. Passenger boardings through its widely used Altea and New Skies reservation systems, meanwhile, were down somewhere between 7% to 10% last month.

    But Amadeus also cited past episodes of health scares in which demand quickly bounced back. When SARS hit in 2003, for example, the first two quarters of that year saw a roughly 10% y/y decline in GDS bookings. But declines were minimal in the second half of the year, and in 2004, bookings were again on the rise, growing nearly 6%.

    Even before this year’s virus scare, last year’s Q4 witnessed a near-2% y/y drop in Amadeus GDS bookings, depressed by the loss of Jet Airways, the MAX grounding, labor strikes (i.e. at British Airways) and strident efforts by Europe’s legacy carriers to promote direct sales.

    Amadeus, to be sure, remains a critical software provider to the industry, investing like Sabre in NDC solutions and other software to help carriers showcase, upsell, and personalize their offerings. Recent highlights include Air Canada’s migration to Altea and new IT deals with Japan Airlines and Lufthansa.

    One reminder: The Big Three GDSs (Sabre, Amadeus, and Travelport) do not handle bookings for Chinese domestic traffic — that market is monopolized by Travelsky.

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Fleet

  • Boeing can use some good news this year. After all, its MAXs are still grounded. Its B777-Xs aren’t selling. It’s at a loss for ways to address the middle market segment that Airbus is winning with XLRs. Critical Chinese orders aren’t materializing. Gulf carrier mega-widebody ordering is a thing of the past. And, oh yeah, the airline sector seems headed for its worst demand crisis since the global financial meltdown more than 10 years ago.

    How satisfying to thus receive a nice new order from longtime customer ANA in Japan. Though an Airbus narrowbody buyer, ANA is a Boeing stalwart when it comes to widebodies, ordering another 15 Dreamliners last week, or perhaps as many as 20 with options. Eleven of the 15 firm orders are for the -10 version, the largest of the Dreamliner family which ANA sees useful for replacing B777s in the Japanese domestic market (it’s a rare domestic market where widebodies make sense given airport capacity constraints). The other orders are -9s. It’s acquiring another three -9s from a third party, which means ANA could soon have a fleet of more than 100 B787s.

    Already, the 71 it currently flies makes it the world’s largest B787 operator. Recall that it was the first airline ever to fly the aircraft back in 2011.

    The newly ordered units, however, will operate with GE engines rather than the Rolls-Royce equipment it’s used until now. ANA is among the B787 customers that have faced major operational distress due to Rolls-Royce engine issues.     
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State of the Unions

  • Pilots from across the SkyTeam alliance met last week in Atlanta to discuss labor conditions at the group’s airlines. Collectively, the group condemned what it called the “autocratic” approach to labor relations taken by Alitalia, China Airlines, and Aeromexico.

    The group also called on Aeromexico to end its two-tier pilot pay structure, the only such collective bargaining agreements in the alliance. The SkyTeam pilots lauded Korean Air’s merging of two pilot unions and Virgin Atlantic changing its crew-rest policies.

    One topic that concerned the pilots: Gauging how much influence Delta has on SkyTeam member airlines’ labor relations and collective bargaining agreements.

    “There is concern that deteriorating labor relations at Delta [are] spreading to other member airlines of SkyTeam” the pilots said in a statement.
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Marketing

  • How sweet. Two old enemies are burying the hatchet. American, which for years complained about Qatar Airways and its alleged subsidies, is now forming a close strategic partnership with the Gulf carrier. The two say they’ve “moved on from past issues.”

    American, in case you haven’t noticed, is getting more creative and aggressive with partnerships, evident from the deals it just did with Alaska and Gol. Royal Air Maroc is another new partner, befriended to support new nonstops to Casablanca.

    Will American now fly to Doha? Not now, no. But it mentioned the possibility in future years. The partnership with Qatar currently focuses on codesharing, enabling smooth transfers from the Gulf carrier’s U.S. flights to American’s flights, in cities like Boston, Dallas DFW, Chicago, Los Angeles, New York, and Miami. It’s also a way for American’s customers to easily book journeys to places beyond the Middle East.

    The two oneworld members had a modest codesharing relationship prior to 2017, before the Gulf carrier subsidy debate was at a boil. 
  • Reality or a public-relations stunt? Air New Zealand filed patents for what it’s calling the “Economy Skynest” cabin. This will feature sleep pods for economy class – a major benefit for an airline that operates ultra-longhaul flights from its base in a remote archipelago.

    The pods will come with sheets and pillows and will not supplant economy-class seating. Passengers will be able to go to their sleep pods when they want and probably will book snooze sessions, with the cabin crew refreshing the pods between passengers.

    The vision is more than a year away, though. Air New Zealand says it will decide on whether to outfit aircraft with the cabin after it launches its Auckland-New York flights next year.

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Routes and Networks

  • Jet Airways is gone. So its partners are picking up some of the demand it left behind. Virgin Atlantic is one such partner. In October, it will launch new nonstops from Manchester to Delhi, to go along with the Delhi and Mumbai service it offers from London Heathrow. Virgin is looking more and more like a growth airline these days, after years of very limited network expansion.

    The Heathrow-Mumbai service is new, having launched just last fall. Heathrow-Tel Aviv launched last fall too, not long after Heathrow-Las Vegas and Manchester-Los Angeles. Heathrow-São Paulo, Heathrow-Cape Town, and Gatwick-New York JFK launch this year.

    These new services coincide with the start of combined management of transatlantic routes with Delta and Air France/KLM. They also parallel the formation of new partnerships with WestJet and Gol, along with newly arriving A350-1000s, newly ordered A330 NEOs, and still-active plans to use newly acquired Flybe as a feeder operation (assuming that is, the regional carrier navigates its way out of ongoing financial trouble).

    Don’t forget that Thomas Cook’s U.K. operation, now dead, had its biggest base in Manchester, presenting big opportunities for Virgin.
  • But Virgin isn’t the only ex-Jet Airways partner planting more of its own flags in India. Air France has a new route too, in its case connecting Paris with Chennai, the country’s third largest airline market after Delhi and Mumbai. It’s using 279-seat B787-9s, joining the carrier’s existing flights to Delhi, Mumbai, and Bangalore.

    KLM flies to those same three cities as well. Air France/KLM happens to have the smallest Indian presence among Europe’s Big Three, a shortcoming it seems keen on addressing.

    Lufthansa and its subsidiaries have the largest. IAG is somewhere in between.   

Southwest Announces First Seasonal Route; Frontier and Spirit Add Dots

  • After all these decades, Southwest still flies to just 102 airports with its 741 planes. JetBlue for comparison’s sake, flies to just four fewer with 259 planes. Add one more to Southwest’s list when Cozumel opens next month, as previously announced.

    Add another still with the opening of its newest city, unveiled last week. What city? It’s Steamboat Springs, a Colorado mountain market popular with skiers. There’s no launch date yet, but the airline says flights will operate from its booming Denver stronghold before the end of the year. They’ll also operate only during winter ski season, which is unusual for Southwest. All of its existing routes operate year round.

    In the past five years, most of the LCC’s new routes have been to the Caribbean, Mexico, or Central America (i.e. Punta Cana, Puerto Vallarta, and Costa Rica’s capital San Jose). It most recent entered Hawaii with service to Honolulu, Maui, Kona Hilo, and Lihue. Other cities added in recent years include Cincinnati and Long Beach.

    It’s of course exited some underperforming cities too, including Branson, Flint, Dayton, Akron/Canton, Jackson, Key West, and most recently Newark. Just to be clear, even if the number of dots on Southwest’s route map doesn’t grow much over time, it’s always adding lots of new routes connecting existing dots.

    That’s a less a risky way of growing, especially when you already have a giant base of customers in most of the country’s largest metro area economies.
  • Frontier takes a more experimental approach to adding new cities and routes, often committing just a few flights per week. Its latest experiment involves Ontario in California’s Inland Empire east of Los Angeles. Flights will run to Las Vegas in competition with Southwest, and to Seattle in competition with Alaska.

    Two new routes are to Central America: San Salvador and Guatemala City. And two are transcon routes: to Newark and Miami. Frontier is separately launching Phoenix flights to Los Angeles and San Jose, both in California.

    It will be the fifth airline on the LAX route, along with Southwest and the Big Three.
  • Frontier’s larger rival Spirit launched another new Austin flight last week, this one to Cancun. Nashville and Newark are next on its Austin expansion list, tapping demand from a city that the Wall Street Journal last week said was America’s hottest job market. Apple is adding lots of jobs there.

    Nashville, where Amazon is adding jobs, was actually number two on the Journal’s list. Others in the top 10 were Denver, Seattle, San Francisco, Salt Lake City, Raleigh-Durham, Orlando, Dallas, and San Jose. The eleventh deserves a mention because it’s surprising: Cincinnati.

    The Journal also compiled a list for smaller metro areas, that one topped by Boulder (Colorado), Midland/Odessa (the epicenter of West Texas oil), Fayetteville (Walmart’s home city in Arkansas), and Sioux Falls (South Dakota).

Alitalia Ends Seoul and Santiago Routes

  • Are Alitalia’s days finally numbered? Never be too sure, given its many previous brushes with death. In the end, Italian taxpayers always seem to come through with a helping hand, if not voluntarily.

    But with travelers avoiding northern Italy due to the virus outbreak, conditions are surely turning from really bad to outright code-red panic. One move it’s taking to get some relief: Ending service to Seoul and Santiago, permanently.
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Feature Story

Airlines are experiencing their greatest demand shock in a decade.

Is the world falling apart? It feels that way for airlines.

Just a few short weeks ago, things were looking rather bright. As the new year began, prospects for travel demand appeared healthy in most parts of the world. Global economic growth, according to the IMF, was picking up. Fuel prices were subdued. For most airlines, the biggest concern was an aircraft supply shortage. Then came Covid-19.    

By mid-January, a mysterious new virus began spreading in Wuhan, home to China’s 16th busiest airport. In response, officials greatly restricted the movement of people, essentially freezing the economy. The outbreak, moreover, coincided with the Lunar New Year holiday, the busiest travel period of the year for Chinese airlines. Indeed, because of how busy New Year travel typically is, Q1 is usually the most profitable quarter of the year for Chinese carriers.

Not this year. The demand shock in China was sudden and devastating, no less so than the shock U.S. carriers experienced after the 9/11 attacks in 2001. Already in January, carriers began showing y/y declines in traffic. February figures aren’t yet published but make no mistake: They’ll show extreme declines. Domestic scheduled flight departures last month, according to Cirium data, were down nearly 50% from last year. The y/y drop this month currently stands at about 20%.

The declines are even more severe for China’s international market. This month’s scheduled departures to and from China are down close to 75%. Most of the world’s airlines with routes to China have temporarily suspended them, or at least greatly curtailed flight frequencies. These factors pose problems for carriers with heavy reliance on China demand — Korean Air, for example, or AirAsia. But others like Finnair and United, both with substantial China networks, initially delivered a reassuring message: The financial impact won’t be that meaningful, they and others said. They were already, after all, dealing with an unrelated Hong Kong demand shock present throughout much of 2019. Besides, it was offpeak season for Chinese international traffic, and other Asian markets like Japan were doing just fine. Well into February, the demand shock looked like it might be confined to just a Chinese airline problem.

But the virus spread, and so did people’s fears. Cases in Hong Kong. Cases in Singapore. Japan. Korea. Iran. Then, farther afield. Italy, one of Europe’s largest air travel markets, experienced an outbreak of Covid-19 cases in the country’s north that began two weeks ago. Now it wasn’t just business conferences in places like Hong Kong and Singapore getting cancelled. The outbreak was cancelling major tourist events like the Venice Carnival. Another high-profile cancellation: The Mobile World Congress in Barcelona. Saudi Arabia closed its borders to visitors with religious pilgrimage visas. And so on.  

On Feb. 20, IATA gave some estimates on what it thought the outbreak’s impact would be on airline traffic and revenues. Airlines in China, it said, would see something like $13b erased from just their domestic revenues. For all Asian carriers, including those in China, the revenue loss would exceed $28b. Global traffic, measured in RPKs, would drop 8% this year, IATA said, revising a pre-Covid prediction of 5% growth. These IATA forecasts came before things got bad in Italy, though, where carriers are now reporting steep demand declines to Milan in particular.

And then… last week. For the first time, the Covid-19 outbreak started feeling like a truly global demand shock. The fear was clear as stock markets tumbled, spooked by a succession of corporate profit warnings and cancelled events. Airlines, on the front lines of the health crisis, saw dramatic stock price declines. It was the worst week for the U.S. stock market, in fact, since the global financial crisis more than a decade earlier, perhaps heralding another global downturn. On Wednesday, JetBlue flashed the first warning light among U.S. carriers without any Asia exposure, when it waived all change and cancellation fees for customers booking tickets through March 11, for travel through June 1.

Two days earlier, United suspended its financial guidance amid a near-complete collapse of its Asian demand. By Friday, United felt spooked enough to cancel an investor event it was planning to hold this week. Delta on Wednesday said it was reducing service to Seoul in addition to its suspension of China routes. It’s also waiving change fees for any booked travel to China, Korea, or Italy. Sabre said quarter-to-date GDS industry bookings are down y/y in the mid-teens.

Airlines and travel distributors, indeed, are sounding more and more pessimistic with each passing day. Finnair, which downplayed the impact on its finances on Feb. 7, during its Q4 earnings call, gave a much gloomier assessment last week. IAG, presenting its own Q4 results on Friday, noted a “very strong falloff in demand” to Italy just since last Monday and a broader weakness in business bookings as events are cancelled and companies impose more stringent travel policies. Lufthansa and easyJet were two other European airlines that reacted to deteriorating conditions last week, cutting shorthaul capacity and imposing moratoriums on non-critical hiring and investment.

As things stand now, airlines in most parts of the world will feel some degree of pain from the Covid-19 health emergency. The pain is still most acute among Chinese airlines, followed by non-Chinese airlines with heavy China exposure. Clearly, the toll is building for Europe’s shorthaul airlines. The virus is just now infecting U.S. air travel markets, it seems, and perhaps the whole U.S. economy.

Will the demand shock persist? For how long? Will it worsen? Airlines will be watching the world’s efforts to resist the outbreak’s spread, which seems — encouragingly — to be slowing in China itself. In a best-case scenario, the outbreak subsides quickly, perhaps with the help of a vaccine or antiviral drugs. For most airlines, prior virus scares with names like Ebola, Zika, H1N1, avian flu, and MERS were in some markets damaging but only briefly. SARS in 2003 had a greater impact but mostly in Asia, where China at the time had a much smaller and less globally-systemic economy. Coinciding with the current Covid crisis, meanwhile, is a development that airlines are relishing: Plummeting fuel prices.  

A worst-case scenario? Widespread infection across the world, leading to large numbers of fatalities, lost days of work due to illness, and the mass closure of offices, schools, shopping malls, and other places of gathering. One of the last places a person would want to be when trying to avoid infection is an enclosed tube crammed with other flyers. Even those willing to fly might not have reason to, if businesses are reeling, events cancelled, and tourist sites closed.

Already, the demand shock has been large enough to put at least one major airline in dire straits. Hainan Airlines, though it discloses very little, reportedly can’t survive on its own anymore and requires a takeover by the government of its namesake province. There’s even talk its planes and other assets might be sold off to China’s Big Three. Hainan is no minnow, with more than 200 planes, to speak nothing of the planes held by sister carriers like Hong Kong Airlines, plus a major leasing firm also owned by its parent company HNA. 

Will this be a first instance of post-Covid consolidation? China and Asia more generally, with its airlines already suffering cargo distress, overcapacity, over-fragmentation, and slowing economies, could use some airline mergers. The longer the shock lasts, the more pressure will grow on carriers already weak before the crisis. The current gravity of the shock in Asia, meanwhile, is prompting carriers to shift capacity to other regions, creating risk of overcapacity in the transatlantic market for example. That’s precisely what happened, incidentally, after the late 1990s Asian financial crisis. What happens in Asia doesn’t stay in Asia.  

The current shock could also have profound implications for aircraft markets. This will be the center of attention at this week’s ISTAT Americas conference in Austin, Texas, which was not cancelled. Lessors have already said they’re working closely with Chinese and other Asian customers, in some cases moving planes to markets with MAX- or NEO-related aircraft shortages.

Bottom line? Time is running out for the Covid crisis to pass without having caused a major crisis for the global airline industry as a whole. If it ends soon, and there’s a V-shaped demand recovery, 2020 might yet be a decent year for many airlines, minus those based in China, anyway. If planes are still empty by the peak summer, however, or if the virus subsides but comes back with a vengeance in the fall, 2020 could be the worst year for airlines since at least 2009. Might it get as bad as 2001? Might 2020 (gulp) be the worst year ever? It might not be long before it starts to feel that way.

Seat Capacity Trends at East Asia’s 50 Busiest Airports

AirlineJan. Y/YFeb. Y/YMarch Y/YApril Y/Y
1Danang DAD31%24%1%4%
2Cebu CEB27%16%17%13%
3Hanoi HAN17%17%0%-3%
4Ho Chi Minh City SGN14%8%-3%-3%
5Manila MNL13%9%5%6%
6Sanya SYX12%-49%-28%-23%
7Changsha CSX11%-46%-22%-24%
8Harbin HRB10%-38%-17%-11%
9Chengdu CTU9%-41%-11%-1%
10Tokyo NRT9%3%-6%-6%
11Osaka KIX8%-12%-23%-6%
12Shenyang SHE8%-44%-13%-4%
13Guangzhou CAN8%-44%-41%-19%
14Jeju CJU8%-1%4%-1%
15Shenzhen SZX8%-44%-22%-15%
16Zhengzhou CGO8%-49%-19%-14%
17Jinan TNA8%-50%-21%-21%
18Jakarta CGK8%6%7%16%
19Haikou HAK8%-49%-30%-21%
20Nanning NNG7%-44%-17%-7%
21Xian XIY7%-54%-22%-16%
22Kuala Lumpur KUL7%1%-4%2%
23Guiyang KWE7%-45%-13%-9%
24Nanjing NKG6%-48%-18%-14%
25Bali DPS6%2%2%9%
26Seoul ICN6%-5%-19%-2%
27Xiamen XMN6%-44%-26%-14%
28Qingdao TAO6%-48%-25%-5%
29Taipei TPE6%-14%-29%-11%
30Hangzhou HGH5%-48%-21%-16%
31Shanghai PVG5%-51%-52%-14%
32Chongqing CKG5%-43%-15%-11%
33Singapore SIN5%-6%-14%0%
34Kunming KMG5%-54%-24%-2%
35Surabaya SUB4%8%6%10%
36Seoul GMP3%0%5%1%
37Makassar UPG1%6%4%9%
38Phuket HKT1%-12%-21%-12%
39Shanghai SHA1%-49%-21%-8%
40Osaka ITM1%5%1%-2%
41Urumqi URC0%-52%-16%-5%
42Bangkok DMK0%0%-1%-2%
43Bangkok BKK0%-9%-18%-3%
44Tianjin TSN-2%-54%-21%-4%
45Tokyo HND-2%2%-1%8%
46Fukuoka FUK-3%1%-5%0%
47Sapporo CTS-4%-1%-4%-3%
48Beijing PEK-5%-53%-34%-11%
49Okinawa OKA-6%-3%-5%0%
50Hong Kong HKG-7%-37%-61%-14%
All East Asian airports6%-24%-16%-6%

Source: Cirium

  • Airlines are constantly adjusting their capacity as the Covid-19 virus crisis unfolds, but here’s a snapshot of y/y changes, taken on Feb. 26.
  • Ranked by growth in January
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Around the World

Around the World: March 2, 2020

Airline NameChange From Last WeekChange From Last YearComments
American-31.7%-46.7%IATA requests temporary suspension of use-it-or-lose-it slot rules
Delta-20.3%-7.0%Announces start of loyalty plan reciprocity and more codesharing with Latam
United-21.3%-30.1%Opens new United Club lounge in the new New Orleans airport terminal
Southwest-18.3%-17.6%Andrew Watterson tells Skift Airline Weekly: Havana and Orlando 2 places where free bags a big advantage
Alaska-22.9%-18.2%Seattle’s Paine Field will this year celebrate one year since welcoming its first passenger
JetBlue-23.4%-5.5%Mexico’s ASUR, which runs San Juan airport, says only 17% of its passengers there are connecting
Hawaiian-22.5%-30.2%United and Hawaiian both holding investor day events this month
Spirit-30.8%-49.4%JetBlue was Fort Lauderdale’s largest airline last year with a 24% pax share; Spirit had a 23% share
Frontier(not publicly traded)Will soon fly to 17 cities from Phoenix, a big Southwest and American market
Allegiant-16.7%2.7%Stock price drops least among U.S. carriers; only U.S. carrier without any int’l routes
SkyWest-18.0%-15.8%ExpressJet, which SkyWest recently sold to new carrier backed by United, signs E145 deal with United
Air Canada-18.8%3.4%JV partner Lufthansa resuming Frankfurt-Calgary route this summer; will be its fifth Canadian city
WestJet(not publicly traded)Appoints former airport executive as new commercial chief for Swoop, its ultra-LCC unit
Aeromexico-14.0%-43.0%Mexican president AMLO suggests creation of a new airline to employ Mexicana’s old workers
Volaris-19.3%21.6%Costa Rica growth opportunities constrained by FAA Category 2 safety rating
LATAM-20.5%-28.4%Has already moved its New York JFK operations to Delta’s terminal already co-located in Miami
Gol-24.3%-4.0%Flew 10m passengers in the fourth quarter 2019
Azul-20.1%18.0%Newest international route is to Buenos Aires from Recife
Copa-22.5%-5.7%Venezuela producing more refugees than any other country in the world except Syria
Avianca-22.1%-14.5%Calls out 4 specific strengths: Bogota hub, LifeMiles loyalty plan, brand, alliance with United/Copa
Emirates(not publicly traded)Saudi Arabia currently not allowing foreign religious pilgrims (using Umrah visa) to enter country
Qatar Airways(not publicly traded)Opens new premium lounge at Singapore’s Changi airport
Etihad(not publicly traded)Algeria, uncomfortably dependent on energy exports, may ease visa rules to attract tourists, Skift reports
Air Arabia-10.8%47.7%Neighbor Emirates offering leave to staff to offset coronavirus demand shocks
Turkish Airlines-19.1%-16.9%Promoting upcoming launch of int’l Anadolujet flights with heavily discounted promo fares
Kenya Airways-1.8%-65.2%Gov’t giving it more cash to address another bout of financial distress (Bloomberg)
South Africa Air.(not publicly traded)Gov’t substantially increases funding for carrier as it attempts to restructure; will inject more than $1b
Ethiopian Airlines(not publicly traded)South Africa’s Comair/Kulula says no dividends until MAX is back flying again
IndiGo-11.3%15.5%Widespread rioting over citizenship law still plaguing New Delhi
Air India(not publicly traded)Reports surfacing of Indian energy company backed by billionaire possibly interested in buying Air India
SpiceJet-10.4%4.3%AirAsia India still in process of applying for fly internationally from its Indian bases
Lufthansa-20.9%-48.2%Formally ending cooperation with Condor as the latter joins LOT Polish
Air France/KLM-23.9%-36.4%Reports emerging of potential mass job cuts; talk of 1,500 job losses by 2022
BA/Iberia (IAG)-24.2%-21.2%Says 2018 the worst year ever for European air traffic control delays; 2019 the second-worst year ever
SAS-26.8%-57.1%Since adding an option for customers to opt for biofuel use, almost 10,000 travelers have done so
Alitalia(not publicly traded)EU investigation of government bridge loan now underway; could complicate efforts to save the company
Finnair-17.0%-41.6%Adding frequencies to Delhi and Los Angeles as it looks for markets to redeploy Asian capacity
Virgin Atlantic(not publicly traded)Increasing capacity to Barbados from Manchester this winter; also from London Heathrow to Havana
easyJet-27.0%-10.3%Adding two new summer routes to Greece from Bristol (to Preveza and Kos)
Ryanair-19.9%0.9%Its pilots have a five-days on, four-days off work schedule; fly from 82 bases across greater Europe
Norwegian-47.5%-67.4%Carried more pax from New York City last month than any other non-U.S. carrier; surpassed even Air Canada
Wizz Air-22.5%12.3%Cutting Italian capacity by about 60% this month; seeing lots of reservation cancellations on Italian routes
Aegean-25.4%-19.2%Eurozone GDP grew just 1.2% in 2019; lower than expected by the IMF, and lower than 2018 figure
Aeroflot-19.8%-4.3%Received its first of 22 A350-900s last week (316 seats); will fly to London, NY, Miami, Beijing, Dubai, etc.
S7(not publicly traded)Pax volumes grew a hearty 17% y/y in January; carrier now has 101 planes incl. jets incorporated from Globus
Japan Airlines-10.7%-34.1%Expands codesharing with Vistara, never mind closeness of Vistara backer Singapore Air. with JAL’s foe ANA
All Nippon-10.4%-29.6%Says B787-10s will be 25% more fuel efficient than the B777s they’ll replace on domestic routes
Korean Air-5.3%-39.4%South Korean airport pax volumes rose 5% to 158m in 2019; Jan. 2020 showed 2% growth; Feb will be bad
Cathay Pacific-4.6%-24.1%SCMP estimates about three-quarters of employees have taken unpaid leave during current demand crisis
Air China-8.5%-26.1%Chinese carriers slowly getting their planes back in the air; discounting heavily to get people flying again
China Eastern-9.6%-22.3%Marriott said revenue per room at its greater China hotels dropped 90% y/y in Feb.; rest of Asia down 25%
China Southern-8.6%-31.0%Another casualty of the virus crisis: Indonesia’s Lion Air postpones its planned public share offering
Singapore Airlines-6.7%-20.1%Jan. traffic statistics don’t yet show signs of demand shock; RPK traffic rose 8% y/y on 6% more ASKs
Malaysia Airlines(not publicly traded)AirAsia X said Malaysian outbound demand for air travel still pretty resilient for now; inbound worse
AirAsia-13.8%-63.9%AirAsia X also said Q4 holiday demand was actually pretty good; Q1 demand now plummeting
Thai Airways-21.7%-70.2%Thai Smile, a wholly owned subsidiary, welcomed as “connecting partner” to Star Alliance
VietJet-5.2%2.4%Expects to receive about 200 new Boeing and Airbus narrowbodies by 2025
Cebu Pacific-7.8%-12.5%Philippine peso up in value versus the U.S. dollar y/y; helps local airlines manage costs
Qantas-15.1%-3.5%Slipping hints that it might hire idled Chinese pilots to fly ultra-ultra-longhaul; would make labor tempers boil
Virgin Australia-19.2%-47.5%Complains that Australian airport costs have risen 2.5 times the rate of indexed consumer inflation
Air New Zealand-16.8%-8.1%Says it typically carries fewer Chinese package tourists on trans-Tasman routes than other airlines
Brent Crude Oil-10.7%-22.0%Oil market has its worst week since the 2008/09 financial crisis; a silver lining for hard-hit airlines

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