The Crisis Deepens

Airlines are grappling with a fast-moving pandemic, a crisis more widespread and that more directly affects the industry than even Sept. 11, 2001.

The Covid-19 virus crisis is now a full-blown pandemic affecting all corners of the earth, not to mention all airlines of the earth. In China, the worst might be over as the number of new cases reportedly decline. In Europe and North America however, fears of a prolonged war with the virus escalated sharply, causing closures of schools, workplaces, shopping centers, and other places of gathering. Events are unfolding fast.

• Early last week, U.S. airline executives spoke of dramatic demand declines and their sweeping responses (see Skift Airline Weekly’s review of the initial cuts on Skift.com). By the end of the week, the situation had grown far worse, prompting additional measures, and more importantly a realization that even with fortress balance sheets, enduring through the crisis will require government aid.
  
  A big blow to U.S. airlines came when President Trump imposed a 30-day suspension of all travel to the U.S. by non-U.S. citizens physically present within the Schengen Area of the European Union 14 days prior to their scheduled arrival. In 2019, IATA explains, airlines flew about 200k flights between the U.S. and Schengen area (or about 550 per day), carrying 46m passengers and generating about $21b in passenger revenues. The three biggest markets affected are between the U.S. and Germany, France, and Italy. The largest transatlantic market by far, connecting the U.S. and the U.K., was originally unaffected by the order though was later added. Same for Ireland.
  
  The U.S. Travel Association, providing additional data, said 850k visitors flew from Europe to the U.S. in March 2019, spending more than $3b in the country. (For the latest schedule updates from Delta and American, see Routes section). 

• Italy’s airline market is essentially closed. So is much of the transatlantic market. So still, is the Europe-China market. Naturally, European airlines, like their American counterparts, are mothballing large portions of their fleets and asking workers to stay home without pay. Importantly, there’s no widespread permanent layoffs taking places — not yet anyway.
  
  But in one example of the sweeping nature of the crisis, Lufthansa said Wednesday it would cancel 23,000 flights between March 29 and April 24. Then on Friday, it spoke of even deeper cuts, with tentative plans to operate just 30% of its original schedule. Over the course of last week, Lufthansa saw new bookings come in at just half the rate of last year. It also saw mass cancellations. This Thursday, the airline will have more to say when it announces Q4 earnings. In a preview, it said operating margin for all of 2019 was 6%. Unsurprisingly, it said 2020 results would be “significantly below” that.
  
  One final eye-popping fact about Lufthansa, courtesy of Credit Suisse: The 300-plus planes it plans to ground is more than the total aggregate fleet of all European airlines other than the continent’s five largest.

• There were plenty of other cuts from across Europe. One airline to highlight, though, is Norwegian. On Friday, CEO Jacob Schramm produced a video pleading for government help, saying the airline had just weeks to live. Norway’s government did in fact announce some tax relief for its airlines. But Norwegian needs a lot more than that, especially with access to additional loans now closed off.
  
  To give itself a fighting chance, the carrier will ground 40% of its B787s and cancel a quarter of its shorthaul flying through May. It’s also temporarily dismissing half its workforce. All routes to the U.S. from London Gatwick will operate normal, but the rest of its critical transatlantic franchise is all but frozen during America’s European passenger ban. Norway’s economy, keep in mind, faces not just the scourge of Covid-19 but also the brunt of the oil crash — the country is a major oil exporter.
  
  And here’s one more thing that could put Norwegian over the edge: The country (is there anything surprising anymore?) will close all of its airports Monday.

• Norwegian’s rival SAS went one step further on Sunday, saying it would all but shut down the airline temporarily, with international air travel “essentially non-existent.” LOT Polish did the same.

• Qantas CEO Alan Joyce, in a special address to investors early last week, announced a 25% cut to international capacity, and a 5% cut to domestic capacity. The equivalent of 38 aircraft will be grounded. Importantly, the cuts will last all the way through mid-September, reflecting Joyce’s guess that the crisis “has still some time to play out.” Asian and trans-Tasman markets, he said, have continuously worsened. Bookings on U.S. routes were fine through late February but have now “dropped away very quickly.”
  
  The airline is seeing weakness on domestic routes too, partly the result of vanishing international connecting passengers. If demand comes back more quickly than expected however, “we bring back the aircraft.” The one area of demand resilience, incidentally, is the Australian natural resource market. Much worse is leisure travel, which is why Jetstar’s capacity will drop 8%. Separately, Qantas is cutting executive and board pay. It’s asking Airbus to delay a deadline for deciding on A350 orders for ultra-ultra-longhaul flying. It’s looking to defer some payments for other aircraft. It’s for now grounding its entire A380 fleet, while emphasizing that these planes will come back—they perform well on routes like Singapore and London.
  
  Perth-London, interestingly, was seeing “very strong demand” through early last week as corporations shy away from scheduling employees though Asian hubs during the virus scare. With an investment grade balance sheet, Qantas will be among the last of the world’s airlines to run out of cash.
  
  Its rival Air New Zealand, also strong financially, announced new measures of its own to manage through the crisis. Virgin Australia, in a much weaker position, said it’s seeking government tax relief.  

• Korean Air, Reuters reported early last week, warned its employees that it might not survive the crisis. South Korea is one of the four countries hardest hit so far by the coronavirus (the others are China, Italy, and Iran). And remember that Korean Air was already struggling before the crisis, beset by the cargo downturn and sharp passenger declines on Japanese routes. It’s now operating around 20% of its normal capacity, having grounded all of its A380s.   

• Indian airlines aren’t protected from the Covid curse. IndiGo said the impact was modest in January and February, affecting mostly just its mainland China and Hong flights, as well some markets in the ASEAN region. In the first few days of March, however, the carrier saw a 15% to 20% y/y decline in daily bookings.
  
  Sure enough: “We expect our quarterly earnings to be materially impacted.” It also mentioned the difficulty of dealing with a sharply depreciating rupee. 

• Things are of course changing by the day, if not the hour. But entering the weekend, worldwide airline capacity was scheduled to drop 13% y/y in ASK/M terms this month, according to Cirium data.
  
  For April, the decline right now is 7%. Here are some March figures for selected markets: Hong Kong ASKs down 67%, South Korea down 48%, China down 43%, Italy down 33%, Thailand down 27%, Singapore down 23%, Japan down 14%, Germany down 14%, Turkey down 9%, U.K. down 6%, and the U.S. down 3%. A few markets like Brazil, India, Mexico, and Portugal are still up a bit.
  
  These numbers, keep in mind, will change a lot in the days and weeks ahead.

• Somehow, Hong Kong’s Cathay Pacific managed to earn a profit during the second half of 2019, despite ongoing cargo weakness and a severe demand shock caused by political unrest. It wasn’t a big profit; operating margin was less than 2%. But that’s a triumph under the circumstances. The key, it seems, was Cathay’s ability to remove costs, not quite to the extent that revenues were falling but pretty close. H2 revenues in fact declined 8% y/y, while operating costs fell 5%. Luck helped, for sure, in that Cathay’s fuel bill plummeted 16%. But labor costs also fell, by 3% despite 4% more capacity.
  
  The surprisingly healthy H2 results meant the company wound up with a 3% operating margin for all of 2019, which is exactly what it earned in 2018. Again, that’s quite an achievement given all the duress the Hong Kong market experienced last year. The trouble spots were many: cargo, mainland China routes, premium demand, etc. But there were some bright spots too. Connecting traffic, though low yield, filled seats. For that thank strong demand to Europe from leisure travelers in Australia and Taiwan, most notably. Australian routes also benefitted from capacity reductions by mainland carriers among others.
  
  Indian routes, often filled with sixth-freedom traffic to North America, benefited from the demise of Jet Airways. Japanese routes boomed during the Rugby World Cup, especially from the U.K. and South Africa.
  
  At the same time, rival Hong Kong Airlines struggled to stay alive, dismantling big chunks of its network in the process. Cathay’s 18% ownership stake in Air China, meanwhile, earned better returns last half. Now for a reality check. Yes, 2019 was better than feared — still not great but well short of disaster. Now, disaster is probably too soft a word. Cathay was an early victim of Covid-19’s demand decimation, forcing draconian capacity and job cuts, first to mainland China, as early as the last week of January. One of the mainland routes it served was Wuhan, the origin of the pandemic. By February, its worldwide flight schedule, including both Dragonair and HK Express, had shrunk by nearly one-third y/y, according to Cirium.
  
  As of Friday, with the pandemic spreading across the planet, its scheduled flight departures for March were down a once-unimaginable 64%. About three-quarters of staff are on unpaid leave, the South China Morning News reported in late February. So no miracles this half — Cathay made clear last week that it would suffer a “substantial loss” for the January-to-June period. Hong Kong is still seeing new cases of Covid-19, prompting a mandatory 2-week quarantine last week for all visitors from most of Europe.
  
  At this point across the global airline industry, no airline is safe from running out of money. But Cathay is at least in the position of having a government that would surely not let it die. It also entered the crisis relatively healthy, if not very profitable. So assume it will come out of the crisis, and when it does, it will be ready with a business plan that includes, among other things, new planes. Indeed, it plans to continue to take plane deliveries this year, from its orders of A321 NEOs, A350-900s, and A350-1000s. For now, B777-9s are currently scheduled to arrive next year. “Our plan to take delivery of 70 new and more fuel-efficient aircraft by 2024 remains unchanged,” the company said.
  
  Cathay’s acquisition of HK Express was completed in July. At that time, it expected the LCC to earn a small profit for the remainder of 2019. Instead, it lost $32m, even as it filled 92% of its seats. As for the bigger picture, Cathay says it’s ready to add back capacity “as soon as we are able to.”  

Azul Posts Strong Q4, Optimistic About Future

• For airlines just now reporting their Q4 results, the discussion is divided into two parts: 1) How they did in the quarter, before the world started falling apart; and 2) Their current predicament amid an industry crisis of epic proportions. In Azul’s case, the look backward was a celebration of phenomenal success. And the examination of current affairs was less awful that what most carriers are reporting.
  
  During Q4, Azul’s operating margin was a breathtaking 24%, topped only by its rival Gol’s 26%. Azul grew a lot faster though, expanding ASK capacity a monstrous 30% y/y. It’s another testament to how lucrative the Brazilian market became following the death of Avianca Brasil, which coincided with an uptick in corporate travel and lower fuel prices. For all of 2019, Azul’s operating margin was 17.5%, fifth-best of any airline that’s reported thus far (only Allegiant, Air Arabia, Gol, and Pegasus did better).
  
  Azul’s Q4 results, like Gol’s, would have been even better were it not for the expiration of payroll tax relief. This meant labor costs rose 42%. But fuel costs, even with all that new flying, and even with further real depreciation, increased just 8%. Total operating costs rose 22%, far less than the carrier’s 32% revenue gain. Azul has grown capacity almost 60% since 2016, largely by upgauging to larger planes including A320 NEOs. As things stood at the start of this year, the fleet consisted of 166 planes, including eight A330 CEOs, two A330 NEOs, 41 A320/21 NEOs, four E195-E2s, 70 E1-EJets, 39 ATRs, and two cargo-only B737s. The move from E1s to E2s is especially helpful, in terms of both ownership and operating costs.
  
  An accelerated E1 phaseout continues, facilitated by deals with LOT Polish and Breeze, the new U.S. startup created by Azul’s founder David Neeleman. In other developments, Azul obtained more São Paulo Congonhas slots by buying a regional carrier called Two Flex. The airline’s cargo and loyalty businesses are growing rapidly and appear to be strong profit generators. So now to the Covid crisis.
  
  Encouragingly, Azul said on Thursday, the day it reported earnings, that it’s hardly seeing any impact at all on domestic markets. That makes Brazil a rare market that’s apparently thus far spared from ravaging demand destruction. That said, international demand has dropped by 20% to 30%, which could be partly related to another sharp fall in the Brazilian real-dollar exchange rate. It’s not seeing any increase in no-shows however.
  
  Azul quickly cut international flying by about the same amount as its demand decline, with additional measures under consideration — it might postpone the launch of its planned New York JFK flights, for example. Management didn’t expressly say it had been negotiating a sale of its 47% stake in TAP Air Portugal. But that was implied as it talked about how any such matters were suspended for now (Lufthansa was a rumored buyer).
  
  Azul is now cutting even its domestic capacity, just in case. It’s also implementing a hiring freeze and preparing an unpaid leave program if needed. The point is, it’s ready to do more: “I have no intention of flying empty airplanes and definitely not flying when demand is low,” said chief revenue officer Abhi Shah. “We’re going to be okay,” added CEO John Rodgerson, who mentioned that he personally bought shares in the airline that morning.
  
  Management also said it’s hopeful that Brazil will be spared the worst given its warm climate and “vast experience in dealing with tropical diseases such as Dengue and Zika.” Brazil, it added, has one of the youngest and healthiest populations in the world. Its best guess is that the crisis will last for four months.
  
  Separately in Brazil, Gol late last week suspended its planned takeover attempt of Smiles, its loyalty plan.

Pegasus Results Strong, But Pandemic the Big Unknown

• The Turkish LCC Pegasus, which recorded extremely strong summertime results thanks to strong inbound tourist demand, followed that with a solid offpeak fourth quarter. Its operating margin for the period was 6%, up sharply from negative 4% in the same quarter a year earlier. Revenues rose 24% y/y while operating costs rose just 11%, all on 13% more ASK capacity. As was a common theme throughout the industry in late 2019, lower fuel prices were a big tailwind, in the case of Pegasus rising just 5%.
  
  On the revenue side, ancillaries per passenger jumped 19% and now account for roughly one-fifth of the airline’s total revenues. In euro terms, unit revenues rose 11% while unit costs declined 5% — even unit costs ex fuel dropped 2%. It was, simply put, a fantastic year overall for Pegasus. Its 19% operating margin for all of 2019, in fact, was fourth-best in the world among carriers reporting so far, as mentioned above in Azul’s review. Key to the strong performance was shrinking its domestic footprint and expanding internationally, which for Pegasus means mostly Europe, central Asia, and the Middle East. In 2019, it added Baku, Basra, Venice, Riyadh, Manchester, Eindhoven, Casablanca, and Ras al-Khaimah.
  
  Also helping were newly arriving A320 NEOs; it now has more than 30. Late in the year, it started taking A321 NEOs as well. It didn’t hurt that chief rival Turkish Airlines was held back by lost MAX capacity. But what about Turkey’s flimsy currency? It’s not really a big problem for Pegasus, which gets roughly as much revenue in euros and dollars as it does in lira. Its cost base is pretty close to matching its revenues too, alleviating forex risk.
  
  Pegasus separately sold a 39% stake in Air Manas of Kyrgyzstan. Things were looking good in early 2020 when local rival AtlasJet collapsed. What now, with the world in an economic freeze? Pegasus didn’t provide any information on current trends. But obviously, things are getting rough.   

Transat Says Air Canada Deal Still On

• Canada’s Transat doesn’t break out earnings for its airline. But the company as a whole, reporting for the months of November, December, and January, managed to go from an operating loss a year ago, to operating profits this time. A double-digit gain in travelers to its Caribbean and Florida sunshine destinations was a big factor. So was cheaper fuel and the arrival of A321 NEOs, including some LR versions capable of reaching Europe.
  
  Looking back at the full year however, “our results for the year 2019 did not live up to our hopes.” The disappointment stemmed from factors like tough competition, higher fuel prices during much of the year, a weak Canadian dollar, the collapse of its partner Thomas Cook, and costs related to modernizing its fleet. It was in these difficult circumstances that Transat agreed to sell itself to Air Canada.
  
  Is that transaction now in jeopardy with the industry’s revenue base in flames? No, insists Transat. It should close this quarter, pending approval from European and Canadian competition regulators. Next week (March 23), Canada’s competition bureau will make a recommendation, which Transat anticipates might be hostile to the merger. But it advised investors to pay more attention to the final ruling by Transport Canada, which it thinks should be favorable. That ruling needs to happen before May 2.
  
  Air Transat hasn’t made any major schedule adjustments yet in response to the Covid crisis (as of the weekend), aside from suspending flights to Italy. But bookings have indeed dropped sharply since the last week of February, and by roughly 50% y/y in the days leading up to its earnings call on Thursday. It says some people are pushing back their vacations to July and August but it’s still taking bookings. Interestingly, it’s working with Google to understand what travel searches Canadians are conducting right now — younger travelers, it says, are more likely to be shopping and booking near-term trips.
  
  Similar to other airlines, Air Transat is waiving change fees, offering staff reduced work schedules, and taking measures to protect its cash. Not having any debt helps. If need be, the airline can ground older A330s or ask lessors for payment deferments. A310s are already gone. B737s will be too. Might it delay A321 NEO deliveries? No, they’re already late, management said, and can use these planes to downgauge and save money.
  
  Other aspects of its business plan remain intact, including efforts to increase ancillary revenues, improve revenue management, generate more connecting  traffic, pursue more partnerships like the one it has with easyJet, and increase direct sales. This plan of course, could change if and when Air Canada takes the reigns. The latter plans to retain the Air Transat brand.
  
  Bottom line: Last year was tough for Transat. This year started out well. But the rest of 2020 will be extremely tough given the Covid crisis. Seeking to calm nerves, Transat pointed to its long experiencing dealing with major demand shocks, including 9/11, SARS (which hit Canada hard), and the global financial crisis.

Jet2.com Remains Upbeat

• Jet2.com gave a relatively upbeat update on Wednesday. First of all, it said earnings excluding special items for its fiscal year that ends this month will be “significantly ahead of current market expectations.” Then it said summer 2020 bookings were well ahead of expectations as of late February, though of course weaker in recent weeks. Some customers booked for July and August might be waiting to see how the virus outbreak transpires before cancelling their trips.

Correction/Clarification: In last week’s issue, we wrote that JPMorgan was planning a conference last week in Atlanta. It was actually scheduled for New York, though later changed and held virtually.

• It wasn’t just airlines participating in last week’s JPMorgan conference. The aircraft leasing giant AerCap presented its thoughts on the current crisis, expressing confidence that the industry will bounce back. Speaking about China, it said the number of flights in the country was 14,631 on Jan. 23.
  
  By Jan. 23, with Chinese New Year approaching, the number was up to 15,885. As the coronavirus spread, however, carriers operated a mere 4,062 flights on Feb. 20. That was the low point. The numbers are encouragingly rising now, with March 5 seeing a total of 8,080. Fares are surely way down.
  
  But “the key point here is that people are getting back into aircraft,” said CEO Aengus Kelly. AerCap does have Chinese customers, some of which it’s granting payment deferrals. But as of last week, airlines around the world were still actively buying, selling, and leasing planes.
  
  On a separate topic, Kelly anticipates more widebody production cuts at both Airbus and Boeing.

• Singapore-based BOC Aviation, in an earnings call last week, also expressed confidence that the current crisis will pass. Last week, it agreed to lease 22 B787-8s to American, delivering this year and next. BOC’s largest customer, for the record, is Qatar Airways.
  
  It sees opportunities to help distressed customers with liquidity by buying their planes and leasing them back. In addition, it’s willing to grant certain customers rent deferrals of up to three months, typically with interest payable on overdue amounts.
  
  Last year, it had planes with Avianca Brasil and Jet Airways but encountered little trouble placing them elsewhere. Though the B737 MAX trouble seems like yesterday’s news, BOC noted that it only took delivery of one unit before the grounding, of the 28 it was supposed to get. It had five A320-family NEO planes delayed.
  
  As for China, home to BOC’s top shareholder, Bank of China, executives say they’re starting to see light at the end of the tunnel, mentioning the same about Macau. May, it said, is normally a slow month for Asian traffic. But it sees a likely revival in June.

Air Canada Cuts Order Book

• Air Canada, which first started ordering B737 MAXs in 2013, cut its remaining order book by 11 units. That still leaves the carrier with 26 more firm orders, on top of the 24 it’s already taken. It has additional options and purchase rights too. Throughout the extended grounding of the plane, Boeing has retained nearly all of its orders — airlines badly wanted all the MAXs they bought. The Covid crisis might make some reconsider.

• The long-simmering negotiations between Qantas and its pilot union has taken a new turn, due to the Covid-19 pandemic. Pilots were due to vote on a new deal, which the union had previously said was not satisfactory. The wrinkle is that the Australian carrier has said it will delay its A350 order due to the coronavirus outbreak.
  
  Pilots interviewed by Reuters said there is a belief that Qantas could outsource the A350 flying when those aircraft come online if the pilots do not approve the proposed deal. The carrier suggested that pilots who do vote for the deal may be eligible to fly the A350s, but that those who do not may be replaced with a “new employment entity.”

El Al Faces Industrial Action

• El Al is facing the possibility of a strike at the end of the month. The Histadrut union notified the Israeli carrier last week that it would strike on March 27 unless certain pay and work conditions are renegotiated to account for the Covid-19 pandemic.
  
  The union says the airline is using the pandemic as an excuse to push through changes to work conditions that violate existing collective bargaining agreements. El Al had said this month that it might request wage and other concessions from employees in response to the pandemic.

• Both the European Union and the FAA have relaxed use-it-or-lose-it slot rules at restricted airports. The EU has suspended its requirement that airlines use 80% of their slots until June, a move IATA lauded but said was not long enough. Airlines had been operating “ghost flights” in Europe to keep their slots, which United President Scott Kirby scoffed at for the environmental impact.
  
  FAA relaxed its 80% usage rule until May 31. The FAA rule applies to New York Kennedy and Washington Reagan National. Four other airports — Chicago O’Hare, Newark, Los Angeles, and San Francisco— are subject to FAA schedule review, and airlines will get credit for flights cancelled because of the Covid pandemic.

Vienna, Zurich Hold Back on 2020 Guidance

• Vienna’s airport reported a 10% y/y increase in passenger traffic for the first two months of the year, before the Covid crisis crippled air travel demand. In its 2019 earnings call, the airport said that based on historical precedents to SARS and the 2008 financial crisis, it had every reason to expect that demand recovery would be fairly quick after the Covid-19 pandemic tapers off.
  
  However, the earnings call was before the Trump administration banned foreign travel from most European countries. The airport will update its 2020 outlook at the end of April. That said, Vienna saw a more than 7% increase in passenger traffic last year.

• Another Lufthansa Group hub, Zurich, reported its 2019 results as well. The airport lauded the Swiss government for cutting some airport fees, and the company won concessions to operate airports in Brazil and India. Management is not offering guidance on 2020, amid the virus outbreak. However, Lufthansa’s Swiss unit has dramatically cut flights to the U.S. in response to the Trump administration’s restrictions on air travel to the European Union.

• On Friday, American’s CEO and COO sent a letter to employees outlining another round of capacity cuts on top of those announced earlier in the week. Many of the new reductions involve continental Europe, in reaction to the Schengen Area passenger ban.
  
  London service, later added to the ban, will see cuts too, including a temporary end to Heathrow-Raleigh Durham links. It’s also cutting in South America, affecting Brazil, Argentina, and Chile. American, meanwhile, is speeding up retirement of B757s and B767s, planes that not only guzzle more fuel (that’s less important now that prices have crashed) but also require more maintenance.
  
  Note that most U.S. airlines including American are now allowing customers who booked tickets even prior to March 1, with travel plans through April 30, the flexibility to rebook without change fees. No refunds though, except for special categories of customers like foreign nationals who have recently visited the European Schengen Area, Iran or mainland China, and thus not currently permitted to enter the U.S.    

• Also on Friday, Delta’s Ed Bastian updated staff with the following message: “Demand for travel is declining at an accelerated pace daily, driving an unprecedented revenue impact. Cancellations are rising dramatically with net bookings now negative for travel over the next four weeks. To put that in perspective, we’re currently seeing more cancellations than new bookings over the next month. The speed of the demand fall-off is unlike anything we’ve seen — and we’ve seen a lot in our business. We are moving quickly to preserve cash and protect our company. And with revenues dropping, we must be focused on taking costs out of our business.”
  
  That pretty much captures the gravity of the situation; remember, this is the most profitable airline in the world talking. In the next few months, Delta is now looking at a 40% capacity cut, more than its ever cut before including after 9/11. It will park up to 300 planes. Wow.

• No airline is thinking about adding new flights right now. Well, there was Etihad, which announced a daily flight to Vienna launching in May with B787-9s. We’ll see if circumstances allow it to follow through with those plans.

• Ranked by scheduled seats
• *Air Italy and Ernest Airlines no longer in business