Issue No. 761

Uncle Sam to the Rescue

Pushing Back: Inside This Issue

The counterattack is underway. Governments around the world are spending trillions of dollars to cushion their economies from the wrath of Covid-19. In the U.S., the rescue mission will cost a mammoth $2t, with $50b of that allocated for airlines rocked by a near-shutdown of the entire travel sector.

Will it be enough? That depends on how long the crisis lasts and when people start travelling again. Across the industry, some like Ryanair are optimistic — the experience in China suggests a three-month period before the virus is contained, it says. Others like Air New Zealand are more pessimistic, worrying the industry might never be the same. Some, meanwhile, are better positioned than others to endure a long road back to healthy travel demand. U.S. carriers have their government money and their intact borrowing capacity. Singapore Airlines just received massive financial support from its government. Qantas, with much less taxpayer support but a war chest of cash, is gutting its cost base while planes sit idle.

Public support for Europe’s airlines has thus far been uneven. U.K. carriers are begging London to do more. On the other hand, some of the most vigorous rescue efforts have involved desperate cases like Alitalia and Norwegian. China, which is subsidizing international flights and waiving various fees and charges, is the market everyone is watching. Covid containment efforts there appear to have worked well, leading to a gradual recovery of economic activity, including air service. This week, Chinese airlines will report their fourth-quarter financial results, perhaps shining more light on just how durable the recovery there is.

Verbulence

"These are uncertain times, and our challenge is to hold on to as much cash as we can so that if this goes beyond three months, that we are a winner on the back side of this."

Azul CEO John Rodgerson

Earnings

  • EVA Air: $32m; 5%
  • China Airlines: -$24m; 0%

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

Covid Crisis 2020

  • March 5 seems like eons ago in the war against Covid-19. The pandemic is far more pervasive now, and far more impactful to airlines. So last week (March 24), IATA updated its industry damage assessment. It now says airlines worldwide will see a 44% y/y drop in revenues, equivalent to $252b. In the earlier March 5 assessment, IATA said the worst-case scenario would be a revenue loss of $113b.

    What it couldn’t foresee then were the travel restrictions imposed by most countries, effectively shutting down international air travel. The new estimate assumes these restrictions persist for up to three more months, followed by a gradual economic recovery (not a V-shaped one) later in the year. Of the $252b in losses, about 35% will be incurred by airlines in the Asia-Pacific region. European airlines will account for another 30%, and North American airlines another 20%. Globally, traffic measured by RPKs will likely fall 38%.

    There’s really no way of overstating how bad this crisis is for airlines. IATA uses the term “apocalypse now.” And by now it means now, a crisis so urgent that governments need to act. Airlines, it says, need some $200b in liquidity support, noting how many carriers entered the crisis holding enough cash to cover just two months of expenses. Based on current losses and forward booking trends, they’ll run out of cash well before an eventual recovery arrives. IATA’s top priority is pressuring governments to provide more industry aid. One way it’s doing so is via op-eds and letters appearing in major newspapers across the world, from France’s La Tribune to the Jakarta Post
  • There is some glimmer of hope in China, where air travel bookings are now rising from severely depressed levels in February. IATA itself shows traffic trends now on the mend. Yields, it said, were down by about 30% y/y during the first two weeks of March, but this compares to a 50% drop in mid-February. Those figures include international journeys too — domestic yields look much better. CAE, a Canadian company that builds flight simulators, said it received two orders from Chinese carriers in the past week, a small sign of hope. AAR, one of the world’s largest maintenance providers to airlines, said it’s indeed seeing a pickup in business from China. Just two weeks ago, it won a multimillion dollar landing gear order from a Chinese airline. 
  • In one of the earliest examples of government support for the airline sector, Norway provided $275m in loan guarantees. About half of that will go to Norwegian, which already has access to some of that money. The embattled carrier is mostly now just flying domestically and between Nordic capitals. It dismissed 90% of its workforce. Of course, it might not have lived, period, had there been no crisis.  
  • There’s another European airline for which the crisis is proving a means of salvation. Alitalia, also the beneficiary of quick government action, will be re-nationalized. But not, apparently, without major changes. No official word yet, but Italian news reports say a new Alitalia will be created in May, operating a slimmed-down fleet of somewhere between 20 and 70 planes. It has about 110 today. The trickiest question is how to rightsize the workforce to appropriate levels. Government officials are discussing the matter (via teleconference) with unions. The airline wants to shed about 7,000 workers.
  • The big story for U.S. airlines last week was of course the giant federal aid package that passed last week (see feature story). In the meantime, American, United, and Alaska all borrowed more money last week, the equivalent of stuffing as much cash as possible under the mattress in case this crisis persists for many months. The fact that banks will lend them more money (on top of credit lines they agreed to pre-crisis) is a good sign. It means they still expect U.S. airlines to eventually be well enough to repay their loans in full, with interest. Lenders clearly still see value in collateral like planes and airport slots too. After 9/11 and during the global financial crisis, U.S. airlines had a much harder time securing new capital. Southwest CEO Gary Kelly filed a video message to employees last week, admitting that the airline is “losing big money” on every single flight right now. But like other U.S. carriers it’s refused to furlough any of its workers. Alaska, meanwhile, just cut its planned April flight schedule by 70% — demand is currently running 80% down from last year’s levels.
  • A4A, the chief U.S. airline lobby group, said that on March 28, traveler throughout at TSA airport checkpoints was down 91% y/y. Just 184k passengers passed through airport security nationwide. A4A separately said that on March 26, U.S. airlines had 1,297 planes out of service, representing 21% of their total fleet. As recently as Feb. 29, this figure was just 7%. Every U.S. airline, meanwhile, has seen their credit rating dropped — only Southwest still has an investment grade rating from S&P.       
  • Airline market conditions in Brazil, like everywhere else, are vastly different than they were on March 12, when Azul reported its Q4 earnings. At that time, the airline said the Brazilian domestic market was still more or less functioning well. Now, big cities like São Paulo and Rio de Janeiro have joined the global rush to close most businesses and urge people to stay at home. Azul thus felt it necessary, on March 24, to update investors on how things have changed. Through April 30 at least, the carrier will run just 70 flights a day to 25 cities, implying a 90% reduction from its planned schedule.

    Executives say they’re acting swiftly to bolster the firm’s cash position, cutting management pay, conducting advanced sales of TodoAzul loyalty points, and negotiating payment deferrals with aircraft lessors and other vendors. It’s also talking to banks about securing more capital. And critically, it’s variablized its cost base through drastic cuts to what under normal times are fixed labor costs. To achieve this, it got more than 7,500 employees to accept unpaid leave of between one and six months — it’s pushing for that number to reach 9,000.

    By April 1, Azul believes, 50% of its workforce will be “off the books.” And the figure will go to 65% not long after. CEO John Rodgerson also wanted people to know that executives have surrendered all bonus pay despite Azul’s tremendously successful 2019. Normally, on average, Azul’s expenses would be roughly $176m a month at current dollar-real exchange rates (the real has depreciated sharply over the past year and still more in recent weeks).

    The weak currency, incidentally, along with high taxes, makes fuel inordinately more expensive in Brazil than elsewhere, which also means it saves more when its planes are grounded. Put another way, fuel typically accounts for a larger portion of a Brazilian carrier’s cost base, which means they typically have a more variable cost base. And in times like these when planes are not flying, the greater the portion of variable costs the better.

    Azul thinks the Covid crisis will last just two to three months, even envisioning a near-full restoration of schedules by July. If it’s a “six-month issue” however, governments will surely step in with aid, it believes. Azul is particularly crucial to the Brazilian economy, it also believes, because of all the Embraer planes it ordered, and all the small otherwise disconnected small cities it serves. Other stakeholders like lessors meanwhile, would likely assist Azul in the short-run, knowing the airline has a lot of growth planned in the long-run.

    The carrier’s E195 deal with the U.S. startup Breeze, by the way, is still in place. And so is its E195 deal with LOT Polish, though deliveries might be pushed back. Azul, remember, also holds convertible shares in TAP Air Portugal, which Rodgerson said would likely receive Portuguese government support — the country’s economy would be “destroyed” without TAP.
  • Singapore Airlines, no less wounded by the Covid crisis than its weaker peers, raised a massive $13b in new funds through both debt and equity, in other words both borrowing and issuing new shares. Who would buy shares in an airline right now, let alone an airline with only international routes? The answer in this case is Temasek, a government wealth fund that’s already the carrier’s largest shareholder. The new capital boost is thus government aid in a different form.

    Few governments care more about their aviation sector than Singapore — it contributes an estimated 12% of the island’s GDP. In fact, the government also provided U.S.-like wage support for Singapore Airlines, plus a reduction in landing fees at Changi airport. It might just be the most generous state support that any airline has gotten so far, which could also position it well when recovery comes. On the other hand, bad fuel hedges are complicating the carrier’s efforts to remove costs.
  • One airline actually is reporting relatively healthy load factors: Qatar Airways. The airline is maintaining an international network to more than 70 destinations, as of now, although that number could change as government travel restrictions around the world shift. Qatar Airways said it is adding capacity to this network, and has upgauged Frankfurt, London, and Paris flights to A380s. Load factors on some flights top 80%. The airline said most of this traffic is from people scrambling to get to their home countries, flying through its hub in Doha. Late last week, Qatar said it is adding 48,000 seats in April to its Australia network and is adding its first flights to Brisbane. To be clear though, bookings for future travel are a fraction of what they’d normally be.  
  • Australia’s Qantas further solidified its defenses against a lengthy virus war by securing $600m (U.S. dollars) in additional cash. How so? By borrowing it from a syndicate of banks. It will pay an interest rate of less than 3% over the ten-year life of the loan, with the low rate reflecting both cheap money conditions in international credit markets and the fact that Qantas is putting up seven B787-9s as collateral. The loan also contains no financial covenants (safeguards to protect lenders if the borrower’s financial conditions deteriorate).

    Qantas now has about $1.8b in cash on its balance sheet, with another $600m available through a preapproved credit line. In addition, it still has a lot of unmortgaged aircraft and other assets left to use as collateral if needed. And it doesn’t have major debt payments due until mid-2021. Though it is getting some government relief in the form of airport fee, fuel tax, and security tax rebates, Qantas seems fit enough to endure a long crisis without additional government aid.
  • The situation couldn’t be any more different at badly struggling Virgin Australia. It can forget about receiving financial support from its airline shareholders, i.e. Singapore Airlines and Etihad, which have their own problems to manage. And ratings agencies last week downgraded its credit. After the latest round of cuts, Virgin is now operating just 10% of its mainline domestic capacity. Tigerair is completely grounded. So are all international flights (though at least mid-June). One hundred twenty-five planes are on the ground. 80% of the workforce is on “stand down” (see labor section). All airport lounges are closed.

    Whereas Qantas appears optimistic that at some point, it can resume business as usual, Virgin’s CEO Paul Scurrah said more pessimistically: “I am mindful that how we operate today may look different when we get to the other side of this crisis.” One manifestation of this is a move to close its Tigerair pilot base in Melbourne and its pilot and flight attendant bases in New Zealand. Virgin, unlike Qantas and other muscular airlines, is thus using the crisis to permanently restructure its cost base. But might Virgin run out of cash? If it did, Canberra would likely step in with additional relief; it wouldn’t after all want Qantas to be the country’s only major airline.
  • Air New Zealand is closer to Qantas than its former partner Virgin Australia in terms of financial resiliency. But it still felt compelled to ask its government for a pool of $540m it could borrow as needed. The money will be available for 24 months, accessible if the airline’s cash balance drops below certain levels. The money won’t come cheap — ANZ will pay the government an annual interest rate of at least 7%. Officials also forced it to cancel a dividend it was planning to pay shareholders last week.

    And the government also has rights to convert its debt to equity, which would lead to a greater ownership stake—it already owns 52% of the airline, having once controlled 100%. That said, the airline’s current management team retains full decision-making power — the government won’t get involved in commercial or operational decisions. It will in fact pay the carrier for public service flying, like maintaining critical air cargo links and repatriating kiwis stuck abroad.
Expand Section

Feature Story

U.S. airlines get the federal help they asked for. Will it be enough?

Last time, it was the banks. This time, it’s the airlines.

Last week, America’s government assumed the role of an insurance company during times of catastrophe, enacting a $2t aid package to soften the impact of Covid-19. There’s money for households. There’s money for hospitals. There’s money for state and local governments. There’s money for small businesses. There’s a pool of money for large businesses, including Boeing. But one industry was singled out for specific relief: The commercial airline industry, deemed critical to the nation’s economy.

Airlines basically got what they asked for. The U.S. Treasury will make $25b available for loans or loan guarantees. And it will separately grant another $25b — no need to pay this back — to cover employee wages, salaries, and benefits. Less consequential is a suspension of airline excise taxes for the remainder of 2020, estimated to be worth about $4b. The so-called CARES Act legislation also provides a separate set of funds to protect workers at cargo airlines ($4b) and industry contractors like maintenance and repair shops ($3b). Airports, meanwhile, will get another $10b. Airlines, recall, were not included in the $787b stimulus act of 2009. Only airports were. Airlines did, however, receive both $5b in direct federal aid, and another $10b in available loan guarantees, after the terrorist attacks of Sept. 11, 2001.     

Regarding last week’s provision for $25b in worker aid grants, the amount each specific carrier gets will equal the amount of labor costs it reported to the DOT for the six months that ended in September 2019. That implies enough money for each carrier to cover their labor costs through September of this year. Any carrier that takes its share of this $25b employee grant money — and all eligible certainly will — won’t be able to enact any involuntary furloughs through the end of September. And no pay cuts, no benefit cuts.

No problem, airlines say. They’re happy to accept those conditions while the economy slogs through a likely near-freeze for the next six months. The total aid package, however, including the $25b in loans and loan guarantees, comes with a wider set of conditions. Burned by the politically explosive bank rescues of 2008 and 2009, Washington this time will prohibit airlines from buying back their stock or paying dividends. They can’t use aid money for executive compensation. The bill imposes a two-year pay freeze on executive salaries in excess of $425k. There are limits placed on bonus and severance payouts too.

On the other hand, more onerous proposals from the House of Representatives failed to make the final bill, including measures to restrict maintenance offshoring, require airlines to reserve one seat on their boards for unions, force them to provide ample health insurance, mandate they perform an annual financial stress test, impose restrictions on pricing and ancillary fees, and insist that all of their domestic flying be carbon neutral by 2025.

For carriers taking the loans or loan guarantees, the no-stock buybacks or dividends rule will be valid until the loan is fully repaid (loans will be repayable over a maximum five years). 

Stock buybacks and dividends have indeed become a hot-button political issue. American, under the heaviest criticism, spent more than $13b on such shareholder goodies since completing its merger with US Airways six years ago. Last year alone, it spent about $1b on dividends and buybacks, money that critics say it should have reserved for a rainy day, or at least invested in its business and its workers. In American’s defense, it did spend more than $30b on new airplanes and other capital investments, despite a slow-growing U.S. economy. It spent billions more on new labor contracts; an American B787 captain with 12 years of experience currently earns an hourly pay rate of $342, according to Airline Pilot Central. Far from entering the crisis with a cash crunch, it currently has more than $8b in liquidity, plus a more valuable fleet than any of its peers. Enough to withstand a near-complete shutdown of global aviation? No. But not because of any buybacks or dividends it paid. Not a single airline anywhere in the world has adequate liquidity to long withstand the current crisis of all crises.   

But all right, no stock buybacks. What might concern airlines more is the discretion the bill gives to the U.S. Treasury Department. For one, it can block a loan recipient from exiting certain routes deemed essential to small and remote communities. But that’s of little importance. Much more substantively, the Treasury can, in exchange for any loans or loan guarantees, impose any taxpayer protection terms the department’s secretary (currently Steven Mnuchin) “deems appropriate.” That gives Uncle Sam the right to take ownership stakes in the airlines it helps, just as he did after 9/11. And just as he did, in fact, with many banks and auto companies after the financial crash of 2008-09. On balance, taxpayers wound up profiting from most of these arrangements, including one in which the government took ownership rights in America West, then headed by a young executive named Doug Parker. Today he’s running American.  

The 2020 loan requirements differ from those in 2001 in a big way, however. After 9/11, the government provided support only to airlines that proved they had a viable business plan, which typically required deep cost cutting and harsh labor concessions. This time, U.S. airlines entered the crisis in a much healthier state, with Washington looking to preserve the current upcycle state of labor costs. 

Now the question is: Which airlines will apply for the credit assistance? Most might not need to, given another big difference between now and the post-9/11 aftermath. Today, private-sector banks are still readily lending to U.S. airlines. In recent weeks, most carriers have arranged new borrowing, incidentally from many of the same banks that received bailouts in the financial crisis (Citigroup, Goldman Sachs, etc.). It’s nice to know the money is available if needed. But given the lack of immediate need for cash, plus the strings attached (i.e. the ownership rights), big airlines like Delta, United, and American might refrain for now. Southwest said last week that taking the credit aid was a mere “option.” Smaller carriers might be in a position to forego loan money as well. Spirit, its financial accounting issues aside (see stock page), had more than $1b of cash and cash equivalents on hand as of late February. Keep in mind that just a small portion of the post-9/11 money set aside for airline credit assistance was ever used. To repeat though, all U.S. carriers will take the $25b in employee support money. 

What happens after six months? That depends on whether the Covid crisis is over yet, and how fast the economy recovers. Concerned that recovery might take longer, United last week warned employees that it might yet need to cut jobs after the federal job support funds run out in September. “We expect demand to remain suppressed for months after that,” it said in a letter, “possibly into next year.”

Of course, if businesses, schools, public services, and other pillars of the economy remain closed in the fall, Uncle Sam could return with another round of industry support.  

Expand Section

Weekly Skies

  • Taiwan’s population has been spared the worst of the Covid-19 pandemic, thanks to effective public policy. But the island can’t escape the pathogen’s economic devastation. Nor, for that matter, can its airlines.
    Taiwan is an export-oriented economy dependent on world demand for items like televisions and semiconductors. The country, and more specifically its largest company Foxconn, is critical to Apple’s supply chain.

    It’s thus no surprise that even though Taiwan itself is winning its local battle with the Covid curse, its largest airline, EVA Air, suffered a 37% y/y decline in passenger volumes during February. Its rival China Airlines(CAL) saw a 41% y/y drop. And passenger revenue declines were of a similar magnitude, though cargo revenues were up for the month. Both are major cargo carriers, and as such experienced difficulties throughout 2019 as the U.S.-China tariff war depressed international trade.

     There were other challenges in 2019 as well, including upheaval in the critical Hong Kong market, political tensions that limited cross-Strait travel to and from mainland China, extreme LCC competition throughout East Asia, new ultra-longhaul U.S.-ASEAN nonstops that robbed Taipei of connecting traffic, and the launch late in the year of an ambitious new challenger called StarLux.

    EVA, less exposed than CAL to the toxic cargo market, still managed to produce a decent 5% operating margin for the year. That’s after a similar 5% showing in Q4 alone, when revenues rose 5% y/y on 7% more ASK capacity.  Operating costs rose just 3%.  China Airlines earned just a 2% operating margin in 2019 and failed to even break even in the final quarter. Passenger ASKs increased just 2% y/y in the quarter, but revenues declined 5%. Operating costs dropped only 3%. While EVA gets roughly 20% of its sales from cargo, the percentage for CAL is closer to 30%.

    The two differ in some other respects: EVA uses B787s while CAL uses A350s. EVA is far more dependent on the North American market, which accounts for about half of its total ASKs. CAL has substantially more exposure to Australasia and Japan. CAL also has a low-cost carrier called Tigerair Taiwan.

    But their similarities are more pronounced than their differences. Both are nearly equal in size by total revenues (EVA is a bit bigger). Both have subsidiary airlines (CAL’s Mandarin Air and EVA’s UNI Air) to serve the mainland cross-Strait market. And both carry lots of lower-yielding sixth-freedom connecting traffic via their Taipei hubs. Just prior to the current Covid crisis, CAL announced new service to Chiang Mai in Thailand and Cebu in the Philippines. It also planned to start receiving its first of 25 A321 NEOs next year.
Expand Section

Sky Money

  • Will the IAG takeover of Air Europa be called off? As of now, there are no signs of any changes. How about Air Canada’s takeover of Transat? Canada’s competition bureau had some negative things to say last week, warning of higher prices and less choice for travelers. Transat though, recently told stakeholders not to pay too much heed to the bureau’s opinion, and to instead watch for Transport Canada’s upcoming ruling — that one will be binding.

    Far more uncertain, meanwhile, is LOT Polish’s planned takeover of Condor. Germany’s Spiegel reports that Poland’s government is essentially asking its German counterpart to provide financial assurances that protect LOT’s investment. That’s a steep demand, and one perhaps designed with the intention of getting LOT out of the deal.

    Condor, in the interim, is seeking more survival aid from Germany’s government, on top of what it already received after its parent company Thomas Cook collapsed last year.
  • Looking back on 2019, IATA said premium-class fliers, though just 5% of all international travelers, generated 31% of the industry’s total international revenues. That percentage was up slightly y/y. The premium air travel market was particularly strong in the transatlantic market connecting North America and Europe. In Asia, however, it weakened last year. The numbers this year of course, will tell a completely different story.

The Perils of Holding Cash

  • As airlines begin to receive dollops of government aid, critics are asking whether carriers should have stockpiled more cash when times were good. There were in fact quite a few airlines, particularly those in the U.S., that were indeed generating lots of cash from their day-to-day businesses.

    The problem is, holding cash comes with high opportunity costs. It earns no returns just sitting on a balance sheet. Is it not better to use the money for productive investments? Or if investment opportunities are scarce, is it not fair to return the cash to its rightfully owners, i.e. the company’s shareholders? Workers surely deserve part of it too, but airlines need to avoid locking in a labor cost disadvantage that allows rivals to undercut them on price — do that and the cash will dry up faster than a supersonic flight.

    Companies with excessive cash piles can also become ripe takeover targets, luring investors spotting opportunity to boost the firm’s capital efficiency. On the other hand, cash is indeed the best form of insurance against industry shocks. Or most shocks anyway — no amount of cash could have been enough to withstand the near-shutdown of broad swaths of the economy.

    To be sure, though, the ample cash, credit lines, and financeable assets that U.S. airlines possessed as they entered the crisis are hugely advantageous. As the tough times ensue, the more cash you have, the longer you can survive without revenues. Money can’t buy you love. But cash can buy you time.       

Cargo is Doing All Right

  • There are in fact a few thriving areas of the jolted world economy. And we’re not just talking about companies producing toilet paper and hand sanitizer. Parts of the heath care sector, including pharmaceutical companies, are buzzing with activity. Many federal government workers are busier than ever. Companies that facilitate at-home working (i.e. Zoom) and provide at-home entertainment (i.e. Netflix) are booming. Supermarkets are packed with shoppers unable to patronize restaurants.  Then there’s air cargo.

    Though adversely affected by the crisis for sure, all-cargo carriers like FedEx are keeping busy supporting medical relief efforts and a large increase in e-commerce as people confined to their homes order goods online. It’s also seeing a rebound in China, saying its flights there have been full in recent weeks (FedEx operates a hub in Guangzhou). As passenger carriers ground huge parts of their fleet, of course, that’s less available belly capacity for shippers. In the transatlantic market, for example, 60% of all airfreight typically rides in the bellies of passenger planes.

    Unsurprisingly, carriers like American and Air Canada are now flying all-cargo flights in a bid to generate badly-needed revenue. It’s not a lot, but every little bit helps.   

Miami Air Files For Bankruptcy Protection

  • Miami Air, a charter airline, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. This means it can legally stop paying most of its bills, other than those for things it absolutely needs to keep flying, i.e. fuel.

    To whom does it owe the most money? It’s the U.S. defense department, which uses Miami Air planes and crews to move personnel. Some of the carrier’s other top creditors include KLM’s maintenance arm, Boeing, Delta, UPS, and the Wi-Fi provider Gogo.

    Miami Air, which operates six B737-800s, said it saw a rapid plunge in bookings, plus an increase in cancellations, in response to the Covid-19 pandemic. “At present and for the foreseeable future, Miami Air is only scheduled to fly certain flights for the United States military.” It just laid off half of its workers.

Q4 Operating Margins … So Far

AirlineQ4 Operating Margin Excluding Special Items
1Gol26.50%
2Azul24.10%
3Volaris20.20%
4Allegiant20.10%
5Air Arabia16.70%
6Copa15.70%
7Spirit13.40%
8Delta12.40%
9IAG12.30%
10LATAM12.20%
11Southwest11.60%
12Alaska 11.30%
13JetBlue11.20%
14Japan Airlines 10.90%
15AirAsia 10.30%
16Aeromexico10.10%
17VietJet10.10%
18Singapore Airlines10.00%
19Hawaiian9.30%
20United9.10%
21Avianca 8.60%
22VivaAerobus8.40%
23American7.70%
24All Nippon7.70%
25IndiGo7.70%
26Air New Zealand 6.00%
27Pegasus5.90%
28Wizz Air5.40%
29Ryanair4.80%
30EVA Air 4.50%
31Korean Air 4.20%
32Turkish Airlines4.20%
33Finnair 4.00%
34Lufthansa 3.50%
35Air Canada3.30%
36Air France/KLM1.50%
37Air Mauritius 0.80%
38SpiceJet0.60%
39Aegean0.50%
40China Airlines-0.30%
41Thai Airways-1.20%
42AirAsia X -1.30%
43Aeroflot-7.50%
44SAS (Nov-Jan) -7.80%
45Nok Air -9.20%
46Icelandair-11.50%
47Bangkok Air-12.10%
48Jazeera-13.40%
49Norwegian-13.40%
50Jeju Air -15.10%
51Asiana-15.70%
52Jin Air-33.20%
Expand Section

Media

  • Reuters looks at the challenge of finding parking spots for all the planes airlines are now grounding. According to Cirium data from March 27, nearly one-third of the entire global airline fleet is now idled — that’s more than 7,100 planes. Some airports are providing parking for free, using any space they can find: taxiways, maintenance hangars, and even runways. Swiss is renting space at a military airport near Zurich. Some are using desert parking lots in places like Victorville in California, Marana in Arizona, and Alice Springs in Australia’s outback.

    Remember that aircraft parking space was already an issue because of all the B737 MAXs currently unauthorized to fly. Idled planes still require regular maintenance check ups if airlines want them ready to quickly reenter service. Qantas, writes Reuters, is sending 30 engineers to Avolon airport, ensuring that the planes it’s parking there can return to action in 3-7 days after getting the call. Pilots, keep in mind, will need recurring training too during extended periods of inactivity.

Airline Leaders on the Crisis

  • Air New Zealand’s new CEO Greg Foran spoke with the New Zealand Herald, describing what it’s like to take over an airline just as the greatest industry crisis in history was unfolding. As a former top Walmart executive who once ran its China stores, Foran had spent lots of time in Wuhan and realized early that the coronavirus emanating from the city would be serious.

    But first it looked like just a China problem, then just an Asia problem, and only later a problem that affected the whole world. There was even a short period in February when ANZ’s U.S. flights were seeing a demand surge as travelers shifted away from Asia. Now however, ANZ is airline that’s seen its revenues drop from US$3.6b annually to just $300m in a matter of weeks. The carrier was forced to ask its top shareholder — New Zealand’s government — for an emergency pool of funds it can borrow if needed (see section on Covid crisis update).

    Foran’s longterm outlook isn’t as rosy as that of its rival Alan Joyce at Qantas. The ANZ chief does not assume the travel industry will bounce back quickly. In fact, he thinks the carrier might be back to just one–third of its pre-crisis size by Christmas, and three-quarters of its size in 18 months. He also worries that ANZ might emerge from the crisis with high debt, overstaffing, and stronger rivals capable of buying planes from failed carriers at rock-bottom prices.

    “Someone is going to get some incredible deals and going to set themselves up with new contracts and new ways of working, and ANZ will have to compete with that,” Foran said. With the airline still flying, by the way, he still needs to work at the office rather than working from home.  
  • Former American CEO Robert Crandall, who led the airline through the early days after deregulation, told Bloomberg News that the industry needs to be regarded as something akin to a public utility. The travel industry, he said, is probably the world’s largest employer. While not in favor of nationalizing airlines in times of distress, Crandall sees the need for some measure of support, with conditions like layoff protections attached. Weighing in on a controversial topic, he agrees with the charge that “share buybacks are a foolish thing to do.” In the airline industry after all, there’s always
Expand Section

Fleet

  • Airbus said although it is seeing some hesitation from customers, its own cash and liquidity positions remain strong, which will allow it to ride out the pandemic. To bolster that, the company tapped into a $4.5b credit facility. The company shut its facilities in Europe, but it has begun limited production in facilities in France and Spain. It is monitoring its supply chain, but so far has seen no disruption from its Chinese suppliers, despite the coronavirus pandemic first affecting that country. Airbus also said, in an update to investors, said it is seeing increasing interest in its A320 family, even from airlines that have not been Airbus customers.

    But of course, the company remains concerned about the financial positions of its airline customers and called on governments to support the airline industry.

Boeing Could Get Stimulus Funds, Still Working on MAX

  • The $2t U.S. federal aid package includes $17b in loans or loan guarantees for companies deemed “critical to maintaining national security.” That’s surely aimed squarely at Boeing, which was already facing big problems with its B737 MAX issues, a dearth of orders from China, and weak widebody sales before the crisis. The IAM union, one of Boeing’s largest, warned lawmakers that 500k aerospace jobs could be lost if the government didn’t offer aid to the aerospace industry.

    On a separate note about Boeing, work on recertifying the MAX continues unabated. Speaking on CNBC early last week, CEO David Calhoun said the firm has enough cash to hold out for a long downturn, but things could get tough after about eight months; it does after all have a large defense business that’s still doing well. But he pushed the government to provide the credit support to ensure that borrowing is an option if needed.

    The company is now in the midst of a 14-day shutdown of its Seattle-area factories. As for the MAX, it’s flying test and ferry flights every day. And the plane is “close to the finish line” with respect to certification. Boeing still expects the MAX to be reauthorized to enter service sometime in the middle of this year, which effectively means within the coming months.

AAR Could Benefit From Aircraft Retirements

  • Chicago-based AAR, one of the world’s leading providers of aircraft maintenance and parts, said in its latest earnings call that it’s still getting a lot of work from government customers (that seems to be the trick in the current downturn: Sell as much as possible to governments, which are spending more than ever). AAR also sees opportunity to expand business with cargo carriers.

    As for the passenger business, a world of carriers with weaker balance sheets could lead to greater reliance on cheaper used aircraft, which require more of the maintenance services that AAR provides. Low fuel prices push the industry toward older used planes as well.

    As the self-described largest aftermarket supplier of aircraft parts, it should also see a jump in parts availability as aircraft are retired early. That’s a big contrast with the pre-crisis state of affairs, in which “the demand for aftermarket material [had] far, far exceeded the supply.”

    Recall that after 9/11, airlines outsized a large portion of their labor force, and the largest area of that outsourcing involved mechanics. Companies like AAR wound up hiring many laid-off airline mechanics and grabbing some of their facilities. In one example, AAR wound up buying a big Indianapolis maintenance center that United abandoned while in bankruptcy.
Expand Section

State of the Unions

  • The TWU-IAM union alliance representing some 30,000 of American’s mechanics and other fleet workers voted yes — “overwhelmingly” — to new contracts. The airline first announced the deals in late January, putting a tentative end to extended periods of disruptive labor unrest. The ratification vote makes the truce official.

    Would American have done these deals had it known of the industry carnage that lie ahead? Surely not. In that sense, mechanics timed their agreement, with luck, perfectly. One thing to keep in mind is that the $25b in federal aid for worker support will be allocated based on 2019 labor costs. Now that American just raised pay for mechanics, the aid money won’t be able to fully cover this.

    U.S. airlines can’t impose layoffs or cut pay while taking the money. But they could — and are — urging workers to accept part-time work or unpaid leaves of absence. They might also start talking to unions about cutting jobs and pay beyond September, when the aid money expires.

Airlines Continue Furloughs, Layoffs

  • For most airline workers around the world right now, there’s not much work to do. Many are thus getting laid off — Norwegian dismissed 90% of its workforce. Some are converting to part-time work. Others will see their paychecks protected with government support.

    Qantas placed two-thirds of its 30,000 workers on “stand-down,” in which they’ll be able to collect their paid-leave benefits. For those that haven’t accrued much sick leave yet, they can claim four weeks of advanced leave they haven’t yet earned. Others will have the option to take leave at half pay. Qantas is even working with the retail chain Woolworths to create part-time work for idled staff. There will be some Qantas and Jetstar workers, however, that won’t get any pay while idled. How long will this last? At least until the end of May, the airline says. What it surely doesn’t want to do is permanently lay people off, particularly those that are “highly skilled employees who we’ll need when this crisis passes.”

    Like most airlines, Qantas is only overstaffed momentarily during the crisis, not structurally overstaffed as most U.S. airlines were when 9/11 hit. Put another way, some stronger airlines are not yet using this crisis, unlike many past crises, as a means to permanently restructure their labor costs.

U.S. Labor Lauds Federal Bailout

  • ALPA, the union representing many North American pilots, applauded provisions in the federal relief package that “limit furloughs, protect our contracts, and ensure that federal assistance is used to pay airline employees’ salaries and benefits, not executive compensation or corporate stock buybacks,” said ALPA’s president Joe DePete.

    “This is an unprecedented win for frontline aviation workers and a template all workers can build from,” said Sara Nelson, head of the Association of Flight Attendants. “The payroll grants we won in this bill will save hundreds of thousands of jobs and will keep working people connected to healthcare many will need during this pandemic.”

    Organized labor had rallied employees to press the unions’ requests with lawmakers, and ALPA said its members alone sent more than 130,000 letters to their Congressional representatives. American’s APA pilot union, by the way, separately noted that if the airline laid off pilots, they’d need five or more weeks to requalify in their respective aircraft, “greatly reducing the ability of American Airlines to resume normal service when the demand inevitably ramps back up.”  
  • And a final note about airline front-line workers. They can’t work from home. And as such, they face a greater risk of contracting (and spreading) Covid-19. Sadly, an American flight attendant died of the virus last week. That might be one more reason the government might decide to completely close the nation’s airspace to passenger travel.

    Airlines, losing money on every flight, might not mind. On the other hand, there are some people still engaged in essential air travel — doctors and nurses, for example, flying to support hospitals in hard-hit areas like New York City.
Expand Section

Landing Strip

  • First, airlines started suspending flights and grounding fleets. Now, airports, which had stayed open to service an ever-dwindling number of flights and which most governments had deemed critical infrastructure, are beginning to close. Cities served by more than one facility were the first to begin closing airports.

    Last week, London City, a popular airport with business travelers heading to London’s financial center, announced it is suspending operations from March 25 through the end of April. Next, Paris Orly, France’s second-busiest airport and busiest domestic airport, said it will cease operations on March 31. Any flights scheduled for after April 1 — including those to overseas French departments, considered domestic flights, like French Polynesia — will be operated from Paris Charles de Gaulle.
  • Airports Council International-North America (ACI-NA), which lobbies for airports in the U.S. and Canada, lauded the federal government for including airports in its $2t stimulus package. The bill directs $10b to U.S. airports. ACI-NA had previously expected U.S. airports to face a shortfall of $3.8b this year. The expected shortfall now is estimated at $14b, due to the fall-off in demand and the collapse in airport revenues (from landing fees, parking, and concessions, among other revenue streams).

    ACI-NA President Kevin Burke said the $10b will help defray the shortfall and will help airports make bond payments, but more is needed. The formula for allocating the stimulus funds will be worked out with the FAA and the U.S. Transportation Department.

Meanwhile, ANA Proceeds With Haneda Improvements

  • In non-coronavirus news, ANA opened three new lounges at Tokyo Haneda on March 29. This is part of a larger project to update Terminal 2 and consolidate operations there. The carrier said it also is adding new self-service ticketing kiosks, and will operate some international flights from the terminal, allowing quicker connections from domestic Japan flights. None of this, however, will be relevant until the Covid crisis passes.

U.S. Delays Real ID and Other Airport News

  • The U.S. Department of Homeland Security (DHS) has delayed the introduction of the Real ID program, slated to go into effect on Oct. 1. DHS has pushed compliance with the program back by a year, to Oct. 1, 2021, due to the coronavirus pandemic. The travel industry greeted this news with relief.

    States already were finding it difficult to provide enough compliant identification cards to passengers, a task infinitely complicated by the pandemic. Applicants must go to a department of motor vehicles to update their licenses, and therefore would flout social-distancing rules many cities have instituted to slow the spread of Covid-19.

    The Real ID program will require enhanced driver’s licenses and more documentation in order to go through airport security. Millions of U.S. residents do not have compliant identification and would have had to bring a second form of identification — such as a passport — had the rule gone into effect this year. Industry groups have already warned, though, that a one-year extension may not be enough, given the enormous disruptions from Covid-19.
  • Airports Council International (ACI) published its January traffic data and notes that the coronavirus even then had a notable effect on passenger and cargo traffic. Global traffic grew by 2% for the month, down from 5% in 2019. Asia-Pacific traffic fell by 2%, and domestic traffic in the region that first reported the pandemic, fell by 4%. Cargo traffic, already weaker due to trade rows, fell more than 4% in the month, y/y. ACI expects freight traffic to collapse even further this year as supply chain disruption due to the pandemic continues.
  • The Bond Buyer podcast features an interview with Gerrard Bushell, executive chair of the New Terminal One development project at New York’s JFK airport. The $7b public-private partnership will expand handling capacity at the international terminal to about 24m passengers annually, from about 3m today — it’s actually handling closer to 7m today, hence the urgent need for expansion. The goal is to open 10-to-11 new widebody gates by January 2023, then another three in 2024 and nine more in 2025. All but one of the gates will be for widebodies.
Expand Section

Marketing

  • As the Covid crisis ensues, there are no airline route announcements. No new aircraft orders. No new marketing campaigns. None of the news that typically fills the pages of Skift Airline Weekly. There was a bit of news on the alliance front, however, from the U.S. government. The DOT, more specifically, delivered bad news to Japan Airlines and Hawaiian Airlines. It rejected their revised application for antitrust immunity, unconvinced by the changes they made since last getting rejected.

    The two airlines, to be clear, are still permitted to cooperate. But they won’t be able to form of a true joint venture involving pricing and scheduling coordination. Needless to say, it’s not the first thing on either carrier’s mind right now. But when the day comes that Japanese and American tourists are visiting Hawaii again, JAL and Hawaiian won’t be as formidable a force as they hoped. 
  • American and Philippine Airlines, looking past the current darkness, quietly formed a codesharing partnership. It will facilitate smoother travel to and from Manila for people in Atlanta, Denver, Houston, Las Vegas, Miami, New Orleans, Orlando, and Washington. The primary connecting point will be Los Angeles LAX.
Expand Section

Around the World

Around the World: March 30, 2020

Airline NameChange From Last WeekChange From Last YearComments
American35.3%-54.6%New seating policies allow for more social distancing aboard planes; blocking half of all middle seats
Delta38.4%-41.3%U.S. airlines calling their aid package “disaster relief,” not a bailout
United34.0%-58.2%Altimeter Capital, a hedge fund, buys more United shares; now owns 5% of the company (Barron’s)
Southwest13.9%-27.9%Will the U.S. order a complete shutdown of all flights to curb corona’s spread? Airlines probably wouldn’t mind
Alaska26.8%-45.9%Announced more measures last week to cut costs, including executive pay cuts
JetBlue36.4%-39.7%One of the harsh realities of today’s ravaged airline industry: traffic dropping much faster than airlines can cut capacity
Hawaiian28.0%-57.7%14-day quarantine for all arrivals to Hawaii now in effect
Spirit70.2%-71.4%Uh oh. Management discloses problems it found with its accounting; “internal controls over financial reporting were not effective”
Frontier(not publicly traded)Spirit says April and May capacity will be down between 45% and 75%, subject to change amid fluid situation
Allegiant32.1%-28.3%Currently has a higher S&P credit rating than American; agency had them at same level pre-crisis
SkyWest34.3%-49.1%On March 22, U.S. airlines filled just 25% of their seats; domestic load factor just 20%, int’l 41% (A4A)
Air Canada35.0%-47.9%Airlines around the world have raised more than $17b in bank loans during March, Bloomberg reports; U.S. carriers most active
WestJet(not publicly traded)Dismissed nearly 7,000 workers last week; about 90% of those came via voluntary means (i.e. early retirement)
Aeromexico-3.0%-53.9%For whatever it’s worth, A4A notes U.S. traffic to Mexico, though down about 50% y/y, is falling less dramatically than domestic U.S.
Volaris0.4%-48.5%March and April capacity reduced by about half of what original schedule was
LATAM8.4%-68.2%History lesson from 1989: LAN Chile sold 51% of its shares to Scandinavia’s SAS that year; SAS sold out in 1994
Gol72.9%-50.8%Stock had biggest jump of any airline in the world last week, probably reacting to last week’s welcome rise in Brazilian currency
Azul41.3%-47.7%Said again that cargo, which is doing relatively well in the crisis, is typically a very profitable business
Copa42.7%-43.8%Panama has reported 14 deaths from Covid-19 as of Sunday; 786 reported cases
Avianca40.3%-66.0%Colombia, on Mar 25, closed its domestic airspace to all passenger travel
Emirates(not publicly traded)Passenger fleet grounded but B777 freighters still active, transporting medical supplies, food, etc.
Qatar Airways(not publicly traded)Customers with elite status can now keep their status for another 12 months; previously was six months
Etihad(not publicly traded)All transit itineraries via Abu Dhabi currently forbidden; applies to sixth-freedom travel, the backbone of Etihad’s business
Air Arabia-3.5%3.7%Lebanon’s Air Liban (aka Middle East Airlines) tells Daily Star it’s losing $1m a day
Turkish Airlines11.0%-29.7%Currently the only Turkish carrier authorized to operate domestic flights
Kenya Airways-14.1%-72.1%Random note about Silicon Valley giant Google: Travel companies were some of its biggest ad spenders; not right now
South Africa Air.(not publicly traded)Bankruptcy restructuring deadline pushed pack until late May in light of virus crisis
Ethiopian Airlines(not publicly traded)The Economist surveys future of Africa, including its expected demographic boom in coming decades
IndiGo17.9%-28.6%Uplifting line it’s using on social media” “The sky will be blue again, #See you soon”
Air India(not publicly traded)Skift online discussion about travel sector asks whether Expedia might be bought; Amazon a rumored buyer
SpiceJet5.0%-62.9%India in 21-day citizen lockdown; borders closed between states
Lufthansa0.2%-53.1%European airlines upset about insufficient relaxation of EU261 pax rights; want to offer vouchers instead of full refunds
Air France/KLM6.8%-51.3%In first two weeks of March, Groupe ADP estimates 29% y/y traffic fall at its two major Paris airports
BA/Iberia (IAG)-2.1%-58.6%For travelers with tickets booked thru May 31, Aer Lingus offering voucher for full value of ticket plus another 10%
SAS-4.2%-55.7%Icelandair says 92% of its workers now on temporary part-time employment; 240 workers cut
Alitalia(not publicly traded)Alitalia aside, some Italian unions asking the government to relaunch (no kidding) Air Italy
Finnair-2.9%-54.4%Could be well-positioned for recovery if Asia emerges from crisis first; network highly dependent on Japan, Korea, greater China
Virgin Atlantic(not publicly traded)Virgin Group founder Richard Branson injecting $250m in cash but says gov’t aid still needed
easyJet-0.9%-46.8%IATA sees U.K. losing 114m airline passengers this year; compared to what it would likely have seen; Spain 94m fewer
Ryanair4.9%-21.6%Was an active practitioner of dividends and stock buybacks; these are payouts only strong airlines can give
Norwegian-10.6%-79.6%One silver lining of having so many industry planes grounded: emissions way down
Wizz Air0.2%-25.4%Like many airlines, it’s warning customers that its call centers are overloaded; says be prepared for long wait times
Aegean8.8%-47.0%Traffic at Athens airport was still up 3% y/y in February; domestic down but international up
Aeroflot3.8%-30.9%Passenger volumes declined slightly y/y in February; ASK capacity rose 4%
S7(not publicly traded)A rare airline announcing a new route last week: Moscow DME to Ulyanovsk with E170s ostensibly launching Apr. 17
Japan Airlines8.1%-44.9%Tokyo Olympics postponed after all; will try to reschedule next year
All Nippon-0.4%-25.3%Will seek loans and ask unions to permit flight attendant furloughs, Reuters reports
Korean Air24.3%-39.7%Incumbent management team, aligned with Delta, defeats shareholder rebellion led by member of controlling family
Cathay Pacific0.6%-40.7%Hong Kong grants carriers full 5-month waiver on parking/airbridge fees for idle pax aircraft; 40% 4-month cut to landing charges
Air China-4.3%-42.4%China closes borders to foreign citizens as it tries to stem rise in imported Covid-19 cases
China Eastern1.0%-33.3%Latest trade data show exports from Japan to China are down by roughly half y/y
China Southern0.4%-34.4%Travelsky, the state-owned monopoly GDS in China, cites risk that distribution market will open to foreign competitors
Singapore Airlines1.0%-36.6%AAPA says region’s airlines saw a 44% y/y drop in international traffic during Feb.; seat capacity was down only 21%
Malaysia Airlines(not publicly traded)But AAPA also said Feb. cargo demand held up “remarkably well;” aided by pharmaceutical and food shipments
AirAsia10.3%-72.2%Entire management team taking pay cuts of between 15% and 100% depending on level
Thai Airways3.9%-74.2%Still running most of its European flights for now but planning to stop them all on Wednesday (April 1)
VietJet-5.9%-17.3%Vietnamese regulations require that all passengers wear medical face masks
Cebu Pacific8.9%-47.0%Offering travel credits to anyone booked between April 15 (when it hopes to restart flights) and June 30
Qantas31.8%-43.8%Australia one of the only places in the world spared from ravages of the notorious 1918 flu pandemic
Virgin Australia30.9%-61.1%Angry about Qantas comments suggesting that Virgin is on verge of bankruptcy
Air New Zealand-9.1%-63.6%Work on Auckland’s second runway frozen amid Covid crisis; airport says it’s committed to the project longterm
Brent Crude Oil-3.6%-58.3%IATA’s jet fuel monitor shows average jet fuel prices down 63% y/y; Prices in Asia down 58%; down 67% in North America

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

Expand Section