Issue No. 765

Another Virgin Lost

Pushing Back: Inside This Issue

Let’s start with a bit of good news for a change. Jet2.com, a British LCC, says people are now booking holidays for late summer and beyond. Air Arabia and Etihad are moving forward with a new low-cost venture. Ditto for Japan Airlines. More major carriers, including Air France/KLM, now have government support that buys them at least a few more months if not quarters of survival, even absent any revenue. Several low-cost carriers expressed tempered optimism about leisure and family-visit traffic recovering — partially, anyway — by yearend. One of those low-cost carriers, Mexico’s Volaris, even reported a first quarter operating profit.

These are some faint examples of green shoots amid what unfortunately remains a horrifically bad situation overall. Delta, reporting its first Q1 operating loss in almost a decade, has an enormous war chest of cash now, yes. But to build it, the airline had to borrow billions of dollars, mortgage much of its asset base, and surrender a potential ownership stake to its government. It wouldn’t be surprised if the industry took three years to fully recover. 

So it will be a smaller global airline industry in the foreseeable future, as Aeromexico, Lufthansa, United, and others have joined Delta in suggesting. Virgin Australia will surely be smaller, if it survives at all after filing for bankruptcy last week. Air Mauritius filed for bankruptcy too. The fate of South African Airways, already in bankruptcy before the crisis, hinges on labor concessions. Norwegian’s fate could be determined at a shareholder meeting next week.  

This week, more earnings, or lack thereof, from most major U.S. carriers. They’ll talk more about matters of survival, but maybe too shed a few more glimmers of hope.

Verbulence

"We're prepared at Delta…We've got the liquidity. We've got the balance sheet strength. We've got the resiliency of our people, and our brand. We'll get through this. It may take several years to get through it, but we will get through it.

Delta CEO Ed Bastian

Earnings

January-March (3 months)

  • Delta: -$534m/ /-$326m*; -5%
  • Aeromexico: -$126m; -13%  
  • Volaris: -$75m/$17m*; 4%

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

Webinar

Watch a recording of Skift Airline Weekly staff discussing this issue and taking questions from readers.

Weekly Skies

  • Pessimism, but not despair. That describes the short- to medium-term sentiment at Delta, arguably the strongest airline in the world before entering what’s become the industry’s greatest crisis ever. As with all passenger airlines during the current Covid-19 pandemic, its entire revenue base has all but vanished in a matter of weeks, with traffic volumes at a mere 5% of normal levels. As things stand today, more than 400 of Delta’s airplanes are idled (soon to be 650), 37,000 of its workers are on voluntary leave without pay, and every single day, the airline is burning through something like $100m of cash.

    That said, Delta’s pre-crisis virtues — its investment grade balance sheet, for example — were hardly for naught. It began the year with nearly $3b in cash, an armada of valuable planes, a rather variable cost base, pre-arranged credit lines, and ample credibility with lenders. And so, it was able to raise more than $5b in additional cash during the first quarter of 2020, thus ending the period with nearly $6b in cash, despite the $2.1b it spent buying stakes in Latam and Korean Air, and despite distributing $1.6b worth of profit-sharing checks in February (based on the nearly $5b net profit it earned in 2019).

    How did it raise so much new money? Mostly by borrowing and by selling aircraft (in sale-leaseback arrangements with lessors). It separately borrowed $3b from existing lines of bank credit. Just last week, it borrowed yet another $3b, secured by a pool of assets including New York, Washington, and London airport slots. Not stopping there in its dash for cash, Delta secured $5.4b in federal aid ($1.6b of that repayable) designated to pay workers. It can also apply for another $4.6b in federal loans (it has several months to decide).

    No less important to Delta’s cash management are its efforts to slash costs. Already entering the crisis, a sizeable chunk of its labor costs was variable, including the profit share payments it certainly won’t be issuing this year. The large number of workers taking voluntary leave (varying from one to 12 months) will help preserve cash. So will moves like cutting executive pay, closing airport lounges, deferring aircraft deliveries, and suspending dividends, stock buybacks, and airport projects. Delta was in fact able to variableize 60% of its cost base. As a result, management thinks it can slice its $100m rate of daily cash burn in half, to $50b a day by the end of June, even assuming revenues remain close to zero. It also expects to have roughly $10b in cash by the end of Q2, $4b more than it had at the end of Q1. And yes, it could still raise more cash if necessary, through advance sales of SkyMiles to its partner American Express, for example.

    Looking back at Q1, Delta recorded its first operating loss for the period since 2011. Back then, it paid $2.89 per gallon for fuel. Last quarter, it paid just $1.82 per gallon, and that was before the oil market started utterly collapsing this month. Versus the same quarter last year, Delta’s fuel bill dropped 18%, which was one reason it managed to escape the period with just a modestly bad negative 5% operating margin. January and even February were in fact still strong, notwithstanding some early signs of distress in Asia, and later Europe. It wasn’t until the second week of March that the Covid pandemic froze the domestic U.S. economy. The empty planes through most of March, however, were enough to sink revenues by 17% y/y. There wasn’t much difference between premium and non-premium — both saw roughly similar declines. Cargo was just as bad. Geographically, Latin America, which started feeling the pandemic later, was least bad. Asia, where the pandemic started, was worst.

    As for operating costs, they fell just 5%, with the cheaper fuel offset by a 5% increase in labor costs. In Q1 of 2019, Delta’s operating margin was positive 10%. Will things be better this quarter? No, they’ll be a lot worse, with net sales expected to be negative as customers demand refunds for tickets they bought on flights no longer scheduled. Customers who opted for future travel credits, meanwhile, represent future obligations well into 2021. Relaxed ticketing rules and courtesy extensions of SkyMiles benefits will further weigh on future revenues. Cash flows from operations will likely be negative for the remainder of 2020.

    When will salvation come? It could be three years before a sustainable recovery, said Delta’s CEO Ed Bastian. Which means the industry, including Delta, will almost surely need to shrink. Downsizing won’t be the only unpleasant aspects of the next few months and perhaps quarters. Delta, remember, owns large ownership stakes in not just Latam and Korean Air but also Air France/KLM, Aeromexico (see below) and Virgin Atlantic, all bloodied by the crisis. Bastian in fact, speaking on CNBC, suggested Virgin might require a bankruptcy-like restructuring. Also in question are joint ventures with the now-bankrupt Virgin Australia (see feature story), and a prospective joint venture with Canada’s WestJet. Thank goodness it didn’t buy a stake in Alitalia. Delta’s oil refinery is expected to lose money next quarter. New airport and aircraft cleaning procedures will add operating costs, never mind the massive opportunity costs associated with the idea of permanently blocking middle seats to promote social distancing.

    Even if domestic demand does start to creep back later this year, Delta’s international network, and especially its longhaul international network, could take much longer to recover. As the time horizon lengthens, however, Delta’s outlook becomes more optimistic. For all the current gloom, certain aspects of the crisis present new opportunities to build an even stronger airline. Delta can implement new productivity measures, find new areas of costs to remove, and accelerate its fleet transition, for example. MD-88s, scheduled to leave by December, will now leave by July. A decision on MD-90s will come soon. B767s, B757s, and smaller regional jets could be headed for the exits as well. With Airbus no less distressed than its customers, Delta doesn’t plan to spend any money on new planes this year and might defer additional orders. Planes in general will almost surely be cheaper as it emerges from the crisis. So will aircraft parts, not to mention labor, software, and especially fuel.

    Some of its rivals — abroad if not at home — are already downsizing and collapsing. Travelers, it says, will value quality, reliability, and safety more than ever, and Delta has sterling reputations for all three. Sure, Delta acknowledges, businesses will do a little more videoconferencing post-crisis. But it’s hardly a substitute for meeting face to face. Perhaps Delta’s private jet business, recently upsized with an investment in the firm Wheels Up, will win some new business as corporations avoid cramped commercial flying for health considerations. On a more mundane level, cash outflows from refunds are starting to stabilize. Cargo sales, meanwhile, are generating some revenue.

    If there’s any airline that’s going to survive the monstrous 2020 pancession, it’s Delta. It has the most important quality any airline can have right now: Staying power. Losses, for sure, will be ugly in Q2. They might be ugly in subsequent quarters as well. But with mountains of cash, bankruptcy is a distant prospect. Delta is now busy postulating various scenarios on future supply and demand conditions, and what new health procedures and practices might transpire in the post-coronavirus era. Whatever form the recovery takes, Delta wants to be ready when you are.

A Darker Picture at Aeromexico

  • Aeromexico, half-owned by Delta, also reported its Q1 financial results. They were much uglier than Delta’s, headlined by a $126m net loss and a negative 13% operating margin. Aeromexico is no stranger to losses in the offpeak first quarter — its Q1 operating margin last year was negative 2%. But it showed progress in the latter half of 2019, ending the year with a double-digit 10% margin in Q4. Among the favorable developments late last year: cheaper fuel and a stronger peso. Fuel, of course, remained cheap in the opening quarter of 2020. But the peso weakened, violently so in March as the Covid pandemic threw financial markets into disarray.

    A closer look at Aeromexico’s world on the eve of the crisis paints a darker picture than the sunny U.S. landscape to the north. Overcapacity was deflating shorthaul yields as three low-cost carriers grew and upsized their Airbus narrowbody fleets. Mexico’s economy was largely stagnant. Aeromexico felt compelled to withdraw from multiple U.S. routes because the six B737 MAXs it had were grounded (it was supposed to have received 14 by now). A new world-class airport for Mexico City, promising to relieve frustrating congestion, was abandoned mid-construction. With just a 51% stake in its loyalty plan, potential to fully benefit was limited.

    Now, it’s downright Armageddon as the virus pandemic and oil crash obliterate the most important drivers of Mexico’s economy, most notably inbound tourism, oil exports, remittances from Mexicans working in the U.S., and contributions to the supply chains of U.S. manufacturers. The impact of the Covid crisis on demand wasn’t fully felt until the final two weeks of the quarter. But still, Aeromexico’s load factor for the period dropped six full points. Revenues dropped 14% y/y, but operating costs declined only 5% (driven by a 20% fall in fuel costs). Capacity measured by ASKs shrank 9%. The declines were everywhere: domestic revenue fell 15%, international revenue fell 14%, ancillary revenue fell 21%, cargo revenue fell 7%, and so on.

    So what now? Aeromexico reacted to the crisis by quickly securing concessions from labor unions, aircraft lessors, lenders, and other stakeholders. Fixed labor costs, in fact, were halved, aided by a voluntary unpaid leave program lasting up to three months. Total fixed cash costs, which ran to about $110m per month pre-crisis, are now down to roughly $50m per month. To further relieve cash outflows, the carrier secured the right to delay payments for jet fuel and airport services. It’s working with Mexico’s government to get further liquidity assistance, while emphasizing that it’s not asking for a bailout or any subsidies. Though it does have wrong-way fuel hedges, they won’t cause any cash outflows. Unlike its LCC rivals, which lease a large portion of their fleets, Aeromexico owns many of its planes, meaning sale-leaseback deals are an option to raise cash. It would hate to sell its loyalty plan stake, but it theoretically could if necessary. It’s still talking to Boeing about additional MAX-related compensation.

    As Deutsche Bank analyst Michael Linenberg aptly put it during the carrier’s earnings call: “In the environment that we’re in, everything is open to renegotiation.” Aeromexico closed Q1 with $563m in cash, giving it confidence to state: “We are in a good position to withstand this contingency period.” Next month, it plans to operate at least 16 weekly widebody charters to China, mostly to transport medical equipment. That should be modestly cash positive. It’s operating about 20% of its normal schedule this month, mostly flying key domestic routes. It’s still filling about half of its domestic flights. And it’s trying to fly only routes where cash generation at least exceeds cash costs.

    Management thinks the recovery will be gradual, with traffic not returning to pre-crisis levels until well into 2021. But it does see things improving at least some this quarter. Most hopefully, Aeromexico thinks consolidation is inevitable. Interjet specifically, ailing badly even before the crisis, doesn’t seem long for this world. “So I think,” said CEO Andres Labastida, “the composition of the Mexican industry will be completely different once this crisis is over.”

Grounds for Optimism at Volaris

  • Aeromexico’s low-cost rival Volaris managed to make money in the first quarter of 2020. With only domestic and shorthaul international routes, it started seeing the full effect of the pancession only in the final two weeks of March, following two-and-a-half months of generally favorable conditions. The steep drop in demand first appeared on international routes, which for Volaris mostly means the U.S. and Central America. Only after that did a dramatic demand decline hit Mexico’s domestic markets. As executives noted, Mexico is about five to six weeks behind the U.S. and Europe in terms of Covid-19’s arrival. In addition, it was only in the final few weeks of the quarter that Mexico’s currency began its vertiginous depreciation.

    And so, planes were full most of the quarter—  85% full, in fact, which was almost two points higher than its load factor in last year’s first quarter. More importantly, Volaris earned a positive 4% Q1 operating margin, up from close to break even in the same quarter a year earlier. Its official net result was negative, but only due to one-off accounting items. Back at the operating level, revenues increased 9% y/y (on 7% more ASM capacity) while operating costs increased only 5% (helped by a 6% drop in fuel outlays). Volaris, remember, went from losses in 2018 to extraordinarily high profits by the end of 2019. Its Q4, 2019 operating margin, in fact, was 20%, fueled by a stable peso, strong ancillary performance, good demand conditions in its core family-visit market, success luring long-distance bus travelers, a new codeshare pact with Frontier, new NEO jets, and the deep distress of its rival Interjet. Perhaps most importantly, Mexico’s shorthaul overcapacity problem was tempered by Aeromexico’s missing MAXs.

    The point is, Volaris entered the crisis on a high note — if it hit a year earlier, the airline’s fate would be in far greater doubt. As it happens, Volaris today has a “robust liquidity position,” with about $450m in cash as of March 31. More than two-thirds of its balance sheet liabilities are to aircraft lessors, which have mostly agreed to defer payments so that Volaris can preserve cash while much of its fleet is grounded. It’s also deferring some new aircraft deliveries. Just as importantly, Volaris has flexible labor contracts in which a big portion of crew pay is tied to the number of hours people fly — with more than 60 planes grounded, labor costs thus automatically drop. Many workers are on partial-pay leave for up to three months. And the company lowered pay for most employees, ranging from 80% cuts for top executives to 20% cuts for lower-level workers.

    Volaris is optimistic for reasons beyond its abilities to manage cash flow. Management sees family-visit travelers, which typically account for half of its customer base, as the most resilient type of travelers. It’s a key reason, executives explain, why it reduced operations at a later stage than Aeromexico and other rivals. In fact, it expects load factors to decline only 10 to 15 points in Q3, when it hopes to be flying 40% to 50% of its normal capacity (it’s flying just 20% of the norm this month and 10% next month). Volaris carries almost no corporate or government traffic. Ancillaries represented nearly 40% of its Q1 revenues, having increased 9% on a per passenger basis during the period. Even during the crisis, it’s accelerating digital initiatives, including an upgrade to the latest edition of the Amadeus New Skies reservation system. It might get some government credit support to help with payroll.

    But as CEO Enrique Beltranena stressed: “I’m not expecting the state to rescue this company.” He’s hopeful that some demand will recover by the start of the peak summer season in June, noting again that family-visit traffic should be first to return. He thinks ultra-LCCs will recover a lot faster than higher-cost carriers. Demand growth, he adds, could return by the second half of 2021. Already for this year’s Q4, net bookings are positive. To be clear though, the next few months will be dark and dangerous. It’s currently burning $35m to $40m in cash per month. More than a quarter of the limited passengers currently booking tickets aren’t showing up for their flights (which means they’re not buying onboard ancillaries). Net bookings will be negative at least through May. Customer service channels are “overwhelmed” as customers ask for refunds, rebookings, or future flight credits. Mexico’s economy, though buttressed by existing IMF support and ample central bank dollar reserves, could shrink by a tenth this year. As Beltranena put it: “There should be no doubt, just like for every other passenger air carrier in the world, the future environment for the industry and for Volaris is very uncertain.”

United, Lufthansa Preview Losses

  • Back in the U.S.,United gave a preview of its Q1 results, disclosing a $2.1b pretax loss for the period. Excluding special items, the loss will be closer to $1b. Delta’s Q1 pretax loss excluding special items, by comparison, was just $422m. United, like all airlines, is scrambling to stack as high a cash pile as it can, mostly by borrowing. But last week, it turned to the equity markets, announcing a new stock offer. Painful as it is to sell stock right now, with prices so depressed, it sure beats running out of cash and having to file for bankruptcy again, as it did after 9/11.

    Back on the debt side, United will apply for $4.5b in federal loan guarantees, on top of the $5b in payroll assistance it received; about 30% of that $5b must be repaid with below-market interest. It’s conducting sale-leaseback deals as well, in another example of burning the furniture to keep from freezing. A unique problem for United is its financial interest in Avianca and Azul, two South American airlines now in deep distress. Avianca, for its part, warns of its very survival. Already for Q1, United will incur a one-off charge of nearly $700m linked to loans it guaranteed to Avianca-related entities that probably won’t ever be repaid given the carrier’s state of distress.

    On a different note, United outlined some of the temporary steps it’s taking to promote traveler health and well-being. It’s spacing out customers while boarding, preventing customers from assigning seats next to another person, adding plexiglass dividers at customer service counters, disabling self-service touch-screen kiosks, streamlining onboard meal service, and removing seat-back magazines. United, furthermore, claims to be the first major U.S. airline to require its flight attendants to wear a face mask while on duty. It’s encouraging passengers to do the same. At some airports, it’s testing the idea of temperature checks for airport employees and flight attendants.
  • United’s close partner Lufthansa also gave a preview of its Q1 results, revealing a gruesome negative 19% operating margin, excluding special items. It lost money in last year’s Q1 too, but not nearly as much. In March alone, the German giant saw revenues plummet 47% y/y, leading to an 18% decline for the quarter as a whole. It also holds toxic fuel hedges. In addition, it faces multi-billion euros worth of liabilities related to money it owes suppliers, refunds it owes customers, and debt payments it owes lenders. As of last week, it held close to $5b in liquidity. But it spoke of significant cash declines expected in the coming weeks. Lufthansa, alas, “does not expect to be able to cover the resulting capital requirements with further borrowings on the market.” And so it’s desperately urging the governments of Germany, Switzerland, Austria, and Belgium to help.

    Austrian Airlines itself, a wholly-owned subsidiary, announced some business restructuring steps, in anticipation of demand falling 25% to 50% this year  — and not recovering more than 75% of pre-crisis demand before the end of 2021. Demand, it thinks, won’t fully recover until 2023 at the earliest. Austrian’s “plan for a new start” involves exiting all turboprops, all A319s, and three of its six B767s, the latter by 2022. By that time, it expects to have around 60 planes in total, down from 80 today. Nine of the 60 will be longhaul aircraft.

    The Lufthansa Group, remember, is heavily dependent on premium intercontinental flying, a segment that might take longest to recover. Its large maintenance and cargo units face tough times ahead as well, amid trade wars and fleet downsizing. When will Lufthansa officially report Q1 results? It was scheduled to go this week but postponed the release until the second half of May.

Hope From Holidaymakers

  • There’s more encouraging news to report from Jet2, a shorthaul LCC whose main business is selling holiday flights and tour packages to U.K. residents visiting places like Spain and Greece. In an earnings preview, its parent company Dart Group told investors to expect a tidy profit when it reports results for its fiscal year that ended last month. But much more importantly, it injected some hope for the industry by disclosing that customers are still making bookings for late summer (Jet2 plans to start flying again on June 17). The same is true for the upcoming winter. An “encouraging” number of passengers are electing to rebook flights rather than ask for refunds. Even better, summer 2021 bookings look “very promising.” Finally, a bit of good news from the airline sector.
  • Japan’s two largest airlines are scheduled to report this week. They’ll be publishing figures for their full fiscal years which ended in March, and thus included the just-completed January-to-March quarter. Both carriers, unsurprisingly, said revenues and operating profits came in well under earlier forecasts. In ANA’s case, fiscal year revenues were 6% below plan, while operating margin came in at 3%, not 7%. That implies a big calendar Q1 loss. For Japan Airlines, fiscal year operating margin was 7%, not the 9% it was expecting.   
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Media

  • Is IAG proceeding with its takeover of Air Europa? The deal is still moving forward, reports Spain’s Cinco Dias. But there’s a clause in the sale contract that triggers a price reduction in the event of serious deterioration of Air Europa’s assets, financial results, or business environment. If IAG walks away from the deal, Air Europa would be entitled to a $44m breakup fee. But that wouldn’t mean to the airline and its parent company Globalia right now. Probably better to go through with the sale, even if at a much cheaper price. The deal is currently under examination by EU competition authorities. 
  • Latam Brazil’s chief Jerome Cadier tells O Globo that demand in 2021 could be down by some 30% to 40% from pre-crisis levels. Latam is currently flying planes only in Chile and Brazil, to satisfy public obligations. It would prefer to stop flying altogether so it can preserve cash. Money from Delta’s investment last year certainly helps (Qatar Airways is also a shareholder). But Cadier says Latam needs government aid, a topic still under discussion. Demand, he warns, will be down “violently.”
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Sky Money

  • It was a crazy week in the oil market. Really crazy. The craziness, more specifically, occurred in the oil futures market, where the May contract price for West Texas Intermediate oil (WTI), dropped to negative $40. Huh? It basically meant that if you bought a contract to buy oil for delivery last week, you were getting a product nobody wants right now because: 1) demand is so low, and 2) there’s nowhere left to store it. With so much supply and so little demand, all the storage facilities around the world are full. So yeah, you’d have had to pay someone forty bucks a barrel to take it off your hands. To be clear, nobody’s paying airlines to fill up their jets. Practically speaking, gassing up at the pump still costs money, to cover refining costs, transport costs, taxes, etc.

    Even unrefined crude oil, after those May contracts expired, rose to positive territory, with June WTI futures prices closing the week at $17 a barrel. Brent crude prices for June (Brent is based on European North Sea oil) closed at $21. For both benchmarks, prices for subsequent months are even higher, which means the market expects prices to rise, to roughly around $30 by year end. Sorry airlines, you can’t buy hedges locking in negative fuel prices, or even prices at their current depressed levels.

    Still, even if prices indeed jump to $30 when economies recover, that’s historically very cheap. Brent crude averaged more than $100 a barrel between 2011-2013, which incidentally stalled the post-financial crisis recovery for developed economies, while turbocharging it for oil exporting nations. In 2015, the year that U.S. airlines in particular enjoyed a bumper crop of profits, Brent averaged $52.
  • Cheap oil. Which economies benefit? Which economies suffer? The biggest beneficiaries are oil importers like the nations of northeast Asia, India, most of Europe, and most of the U.S. The losers are big exporters like Russia, Saudi Arabia (and many of its Middle Eastern neighbors), Norway, Canada, Venezuela, Nigeria, Angola, and Mexico.

    The U.S. is in fact a tricky case. Historically, high oil prices were like poison for its economy, and low oil prices a powerful stimulant. The shale revolution in places like Texas and North Dakota, however, has turned America into an oil production powerhouse, meaning a big chunk of today’s U.S. economy faces distress when oil prices are low. The Trump administration has recently made moves to try and increase oil prices, something unthinkable for the U.S. government prior to the shale boom. Washington might see a need to rescue failing oil firms as well. Many are in Texas, a politically crucial state still reliably Republican but rapidly trending toward Democrats, especially in the booming cities of Dallas, Fort Worth, Houston, and Austin.          

Another Form of Stimulus: Governments Consider Buying Tickets

  • There’s an interesting new idea emerging on how governments can help airlines make their way through this mess. Hong Kong, for one, pre-purchased $260m in airline tickets, for future use by government employees. It’s a future liability for carriers, of course, but it provides what they now need most: cash. The beneficiaries are Cathay Pacific and Hong Kong Airlines. On the other side of the world, President Trump said the U.S. might do something similar.

A Pivot to Cargo

  • As airlines watch in horror as passenger traffic all but evaporates, and as they ground hundreds of aircraft in response, more carriers are pivoting to cargo, not merely to keep revenue flowing but to address the critical need for medical and other supplies as the Covid pandemic rampages around the world. Americanrecently began operating its first cargo-only flights since the 1980s — and last week carried 115,000 lb of soybean seeds from Buenos Aires to Miami, a record, on a B777-300. Etihad has launched several cargo-only routes, and last week the Abu Dhabi-based carrier announced it is working with the Australian government to bring medical supplies to that country, transporting fresh produce back to the Middle East on the return leg.

    And now Lufthansa said it is converting four of its A350s to carry freight on the passenger deck. These aircraft will operate on cargo flights between Munich and Beijing and Shanghai to transport medical supplies to Germany. The carrier is converting six A330s based in Frankfurt for similar missions. These 10 aircraft are in addition to the 17 freighters Lufthansa Cargo already operates. The carrier said it has operated 94 cargo-only relief flights since the pandemic began. Separately, with one last Lima-Frankfurt flight, Lufthansa said it has concluded its repatriation program, bringing back 90,000 German and European citizens from countries around the world.
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Fleet

  • As Boeing wiped its tears in 2019, it couldn’t imagine that 2020 would be worse. A lot worse. The latest headache? B737 MAXs were reasonably close to getting back in the air before further delays arose last week. The Wall Street Journal reports that the jet isn’t likely to win FAA approval to fly again until August or later due to virus-related logistical issues. More worrying is that fact that customers, especially lessors, simply don’t want as many MAXs anymore.

    CDB Leasing of China became the latest to cancel a large number of orders, 29 to be exact, leaving 70. All 10 of the upsized MAX 10s it planned to buy, meanwhile, were converted to less expensive MAX 8s. It’s also deferring 20 of its orders by a year or two. Avolon and GECAS were two other lessors that mass cancelled MAXs in recent weeks. The airline Gol cancelled some orders as well. And Ryanair told Bloomberg it doesn’t want any until markets recover, likely next summer. As for the widebody market, it was weak last year and even weaker now. Boeing, alas, is considering another big B787 production cut, which implies reduced need for workers.

    Separately, the manufacturer walked away from its planned alliance with Brazil’s Embraer, which isn’t happy, to say the least. Boeing reports earnings this week.
  • In Europe, Airbus affirmed that development of its A321 XLR product is on track. Flight testing will start in 2022, followed by entry to service in 2023 (perhaps global airline demand will be fully recovered by then). The great appeal of the plane is its range, enabling carriers to fly some 5,000 miles, more than enough to handle most journeys between the U.S. east coast and Europe, for example. To date, 24 customers have ordered 450 XLRs. Among the buyers are several ultra-low-cost airlines like Frontier and Wizz Air.
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State of the Unions

  • The International Transport Workers Federation (ITF) is joining IATA in calling for more government aid for airlines. The groups urged governments around the world to step up the amount of state financial aid to airlines to protect jobs in the industry. Once the crisis has passed, the groups urge governments to adapt regulations and end travel restrictions, so the airline industry gets back in the air.

    “Bold decisions are required to invest in the future of airlines and protect the jobs and livelihoods of the transport workers who will lead the economic recovery when Covid-19 has been contained, ITF General Secretary Stephen Cotton said, noting that his union has joined the industry in making this call. “Workers and the industry have joined forces, we invite more governments to join us in a coordinated approach to keep the industry and its essential supply chains moving.” 

Southwest Considers the Unthinkable

  • Could Southwest do something unthinkable and furlough or lay off employees for the first time in its history? Possibly, CEO Gary Kelly said in a video message to employees. The carrier shored up its balance sheet with $3.7b in CARES Act funding as well as through the capital markets, but this will see it through to the end of September.

    What comes after that? “I don’t know,” Kelly said, “and that’s the only honest answer anyone can provide.” Although Kelly said the company has cut its costs significantly, he warned that if traffic doesn’t improve in the next several months and demand for air travel remains abysmally low, “We will have to prepare for a drastically smaller airline.”

    If it has to resort to a reduction in force, Southwest will first ask for voluntary retirements and furloughs before asking for wage concessions and turning to involuntary furloughs. Kelly said the first goal is to avoid involuntary furloughs; the second is avoiding wage concessions; and the third goal is avoiding cuts to benefits.
  • Media reports surfaced last week alleging Southwest had already begun negotiating with unions for wage concessions. This is not true, Kelly said. The company has held two confidential briefings with unions since the crisis began, and Kelly noted that “TWU and AMFA breached” the confidentiality agreements in talking to the media. But Kelly averred that during those meetings, the company did not request concessions, and any negotiations on concessions will be held in the future.

    “No decisions or requests have been made regarding concessions,” Kelly said. “That would be very premature, and that also be a last resort, meaning we would have exhausted all other efforts to help Southwest survive.” Kelly said any future decision on further cost-cutting measures would be made after July traffic has been assessed (for more on Kelly’s message, see Covid Crisis update below).

IndiGo Changes Concessions Plan

  • IndiGo is walking back its plans to cut employee pay after the Indian government objected. Instead, the carrier will cut executive and C-suite compensation. The airline had previously said it would cut pay for all employees, on a sliding scale based on job function, to compensate for collapsed demand due to a nationwide lockdown. But “in deference to the government’s wishes,” the carrier will continue to pay employees until the lockdown ends, while senior vice presidents and above will see their April salaries reduced.    
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Landing Strip

  • ACI-Europe joined a host of European aerospace and other companies to urge Europe to act more cohesively in response the Covid pandemic. The response thus far, the signatories say, has been led by member states and has resulted in a patchwork across the bloc. “Recovering from the crisis, only European solutions can work, putting the Single Market as the central instrument,” the letter said. “More than ever we need a strong Europe, where its governments, businesses and citizens show their solidarity.”

    Although the letter praised the European Commission for creating transit green lanes and for facilitating the movement of goods and people throughout the EU, more is needed. “We see that the response to the current crisis is not less Europe, but more Europe, and it starts with our common European market.” In addition to ACI-Europe, signatories include the heads of several large airports like Munich, aerospace companies, and manufacturers.
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Routes and Networks

  • Even in these darkest of times, Air Arabia and Etihad are moving ahead with plans for a new Abu Dhabi-based LCC. Air Arabia Abu Dhabi received its operating license last week, though it didn’t give a launch date. That will depend on when international markets open up again. In the aftermath of the last industry crisis of 2008-09, remember, the Arabian Peninsula was booming with the fruits of $100 oil for three straight years. It was during those years (2011 to 2013) that the Gulf’s Big Three — Emirates, Etihad, and Qatar Airways — executed some their most prolific aircraft ordering. The aftermath of the Covid crisis, by contrast, will likely feature low oil prices, which makes Abu Dhabi’s reorientation toward low-cost airline development appear well timed and appropriate. Wizz Air, too, with a government-backed partner, will start an Abu Dhabi-based LCC. Etihad, in turn, having already curtailed its ambitions, will focus on longhaul and business traffic, complementing Air Arabia Abu Dhabi much as Emirates complements FlyDubai. Their planned level of cooperation, though, hasn’t yet been disclosed.

As Does JAL With Zip

  • Much as Air Arabia and Etihad are full speed ahead with their new LCC, Japan Airlines is still proceeding with Zip Air, a Tokyo Narita-based LCC equipped with 290-seat B787s. To no one’s surprise, Zip’s inaugural flight, scheduled to Bangkok in May, is postponed. But as of now, it still plans to launch Seoul flights on July 1. Honolulu will follow sometime in the upcoming winter. Zip ultimately intends to fly U.S. mainland routes as well, hoping low-fare transpacific flights work better than low-fare transatlantic flights. Ask Norwegian about that.

Air New Zealand New York Route on Ice

  • Air New Zealand’s planned Auckland-New York route will not launch until late 2021 at the earliest, Chief Revenue Officer Cam Wallace confirmed on Twitter. The planned Auckland-Newark route was expected to launch in October. The postponement reflects the carrier’s view that longhaul travel demand will remain depressed for at least a year, if not longer.

    In a Twitter thread, Wallace also noted that the carrier is cancelling its Buenos Aires route, and that London-Los Angeles will not return. He said too that the carrier is focusing on its domestic network, where it will add frequencies where possible after assessing demand.
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Covid Crisis 2020

  • There’s still no airline industry consensus on when exactly people will start travelling again. But there is general agreement now that domestic demand will return earlier than international demand, particularly longhaul international demand. IATA shares that view, as its director general and chief economist made clear in their latest weekly update. If that’s true — that domestic demand will recover first — then airlines with big domestic markets are clearly better positioned to exit the crisis first. U.S. carriers come to mind, and low-cost, domestic-oriented ones in particular.

    Another emerging consensus is that price-sensitive leisure travel will return faster than higher-priced business travel. But that’s so far not the case in China. Chinese carriers, IATA points out, are starting to see a bit of business travel as people return to work. It’s seeing some family-visit travel too, but not much leisure travel yet. It adds that flight activity there is still just half what it normally is this time of year. Perhaps the upcoming May 1 Labor Day holiday will see an uptick in leisure demand — some Chinese carriers report Q1 earnings this week, though they typically don’t reveal much about travel trends.

    What are the world’s other large domestic markets, which could be poised for an earlier recovery? India is one. There’s Brazil, Japan, Russia, Indonesia, Mexico, Turkey, and Canada, to name some others. Then there’s Australia, where the pandemic appears to be under control, but where unlike in China, demand hasn’t started recovering yet (see feature story). IATA says 60% of all worldwide air travelers fly domestically, though that’s a much lower percentage in RPK or revenue terms.

    Returning to the question of when people will travel again, domestically or otherwise, IATA commissioned a survey across 11 countries that found 60% of recent travelers would be ready to travel by air within one to two months of the pandemic subsiding. The other 40% though, said they might wait six months or more. Almost 70% of those surveyed, meanwhile, said they might delay a return to travel until their personal financial situation improves.

    In addition to its crusade for industry support from governments, IATA is now busy planning for a post-pandemic world, urging public officials to devise uniform standards on matters such as aircraft cleaning protocols and lifting restrictions on international visitors. It’s currently conducting virtual summits by region to get everyone on the same page. IATA chief Alexandre de Juniac, by the way, said the idea of blocking middle seats would mean the end of cheap air travel forever. 
  • We knew it was bad. But this bad? The U.S. Travel Association concluded in a study that the travel industry accounts for one-third of all the jobs lost in the U.S. so far due to the current pancession. As of April 23, more than 26m people filed for unemployment in the U.S., with more expected this week. Travel spending has fallen by 85% since the first week of March. U.S. Travel found that 90% of travelers had some sort of trip planned prior to the pandemic, and 80% of those would-be travelers have either cancelled or postponed their trips. The organization is calling on the federal government to broaden the next stimulus to include entities such as destination marketing organizations.
  • Delta’s close partner American Express, in its earnings call last week, echoed the emerging consensus that domestic travel will likely recover before cross-border travel. U.S. consumers, said CEO Stephen Squeri, will have a lot of pent-up demand this summer, perhaps choosing to fly to the Caribbean islands if not domestically. That said, Squeri said he recently spoke with IAG CEO Willie Walsh, who said British Airways flights to and from China are currently running “relatively full.”

North America

  • When Southwest starts touching the topic of layoffs, you know things are bad. In his latest video message to employees, CEO Gary Kelly wanted to make it perfectly clear that the airline is “burning through cash at an alarming rate,” and that the $3.3b in federal aid it’s receiving won’t fully cover payroll costs through September. He simply can’t say when people will start travelling again, and when they do, what they’ll expect as far as health practices and other aspects of service. If things don’t improve by July, he warned ominously, Southwest will have little choice but to “prepare for a drastically smaller airline.” Gulp. That wouldn’t necessarily mean layoffs. And no, management hasn’t yet asked unions for concessions of any kind (see State of the Unions section). But Kelly hinted there might be a need to cut pay and benefits, including his own — he’ll work for nothing. If that’s still not enough to maintain adequate cash balances and maintain competitive costs (in a post-pandemic market likely awash in low fares), then yes, involuntary job cuts are not unthinkable. Kelly emphasized that he’s not predicting this dark and gloomy future. He clearly just wants staff to understand the gravity of the situation.  
  • Hawaiian Airlines said it will get $290m in federal payroll aid, $57m of which must be repaid. It was separately allocated $364m in federal loans secured by yet-to-be-determined assets. In exchange for the grant and credit assistance, Washington now holds warrants potentially convertible to a 7% ownership stake in Hawaiian. It would pay just around $12 per share, which is less than half what the stock was trading at in late February. Hawaiian’s two largest markets, generally speaking, are visitors from West Coast states like California, and visitors from Japan. It’s a leisure airline but also a longhaul airline.
  • JetBlue, a predominantly leisure airline notwithstanding a sizeable business following in Boston, collected $936m in payroll money from Washington last week, $251m of which is repayable. The New York-based airline separately borrowed $550m from its revolving credit line with Citigroup. Appearing on CNBC, CEO Robin Hayes said demand isn’t showing any signs of improvement yet, with minimal flight schedules in place through June. The airline hasn’t yet decided whether it will take loan money available under the federal CARES Act — it will apply to meet an April 30 deadline but can decide later if it wants to follow through. Hayes said he hopes countries will have common post-crisis standards and regulations on matters pertaining to public health (i.e. passenger health checks at airports). He adds that JetBlue will be well positioned if leisure travel returns before business.
  • The same is true for Spirit, which received $335m in payroll grants, $70m of which is repayable. It said it will apply for federal loans as well — it’s entitled to as much as $741m.
  • SkyWest, the U.S. regional carrier, will get $438m in payroll support, $101m repayable. Its rival Mesa gets $93m. Because its allocation is below the $100m mark, Mesa won’t have to repay anything, and won’t have to provide Washington with any equity warrants. 

Europe

  • They didn’t act as swiftly as Washington. But European governments are now coming around to rescue their ailing airlines. Air France/KLM secured close to $8b in new funding from Paris, subject to European Union approval (which likely won’t be an issue). The money comes in the form of a loan, part of it directly from the French government and part via private-sector banks acting with the assurances of a 90% government guarantee. The Netherlands too, seems prepared to provide additional aid. Earlier, the company drew down more than a billion euros (roughly $1.1b) from an existing credit line. With its cash needs now covered for at least the next few months, even assuming zero revenues, Air France/KLM will next set about crafting a post-crisis transformation plan. When the contours of a recovery become clearer, moreover, the airline’s board will consider selling more stock, some of which might be purchased by the French government. Paris currently owns 14% of Air France/KLM’s shares. The Dutch government owns 14% as well. Other key shareholders include Delta and China Eastern, each with 9% stakes. The airline’s employees hold about 4% of the company. One possible avenue of escape from the crisis could be giving greater prominence to its LCC Transavia, which would presumably be better positioned for what’s expected to be an earlier shorthaul leisure recovery.
  • Will the U.K. come through for Virgin Atlantic like France came through for Air France/KLM? The airline, never very profitable even in the best of times, is in terrible shape. And while not as systemically important to the British economy as Air France is to France, its collapse would have a thunderous impact on British jobs and competition. Complicating the problem for government officials are the optics of using taxpayer money to rescue an airline jointly owned by a flashy billionaire (Richard Branson) and a foreign entity (Delta). Britain already allowed the collapse of Flybe, in which Virgin Atlantic had a stake. One of the most vocal opponents of a Virgin bailout is none other than Ryanair’s Michael O’Leary, who’s eager to see Europe’s weak airlines disappear (never mind that Virgin Atlantic only flies longhaul routes). As Delta itself suggested, Virgin’s best hope, barring a government bailout, might be a bankruptcy-type restructuring in which shareholders would likely lose everything, and creditors (anyone to whom Virgin owes money) would lose a lot. That’s what Virgin Australia is going through now (see Feature Story).
  • Norwegian is already at the stage of having to do something close to bankruptcy. The big day is May 4, when shareholders will vote on a radical restructuring plan that leaves them with a miniscule stake in a smaller revamped Norwegian. Creditors including aircraft lessors would get their own stake in the new Norwegian. By converting their debt to equity, the airline will gain access to government funding guarantees, providing some additional breathing room. In a separate step last week, the carrier put several of its staffing subsidiaries in bankruptcy, as a means to axe Danish and Swedish crew costs. Its prospects of surviving might get a boost, meanwhile, from a new bankruptcy law passed last week, which makes it easier for companies to walk away from contractual obligations but still continue flying. For Norwegian specifically, it means the debt-to-equity plan no longer requires three-quarters of all shareholders to approve (the threshold is lower now). All eyes are on next week’s big meeting.   
  • In Norwegian’s more swashbuckling days of yore, it launched an airline in Argentina to boost profits, the equivalent of drinking bleach and Lysol to kill a virus. It’s acting far more conservatively now, and had been for much of 2019, well before the crisis started. But at best, it now appears headed for a future as a much smaller airline, which would contribute to a less competitive European landscape. One airline that’s ready to take advantage of airline failures and downsizings is Ryanair, which isn’t just voicing opposition to supporting Virgin Atlantic. Michael O’Leary, on Sky News last week, compared Lufthansa to a “crack cocaine junkie” as it looks for more state aid. He separately thinks blocking middle seats is a ridiculous idea, and one that Ryanair wouldn’t adopt unless the government paid for the empty seats. If forced to fly with empty and unpaid-for middle seats, it might not fly at all. He sees traffic returning in late June or early July. In the meantime, he wants people to understand the enormity of its refund problem. In a normal month, he said, Ryanair processes about 10 thousand refunds. Now, with staffing reduced by a quarter due to the virus, it’s processing 10 million refunds. It’s going to take weeks if not months, he said, to get through the backlog.

East Asia

  • In Korea, a market where domestic demand is showing some green shoots, regulators approved a merger. It involves Jeju Air, an LCC, which is buying a 51% in its rival Eastar. Both were hit hard last year by tensions between Korea and Japan, which depressed tourism flows between the two nations. Jeju crafted the deal before the current crisis.

Sub-Saharan Africa

  • South African Airways is basically dead in its existing form. The airline only has enough cash to pay workers through April 30, and the government won’t give it anymore — it needs all the scarce funds it has to fight the coronavirus. As of this weekend, the airline seemed fated to go in one of two directions. Employees would either agree to severance packages, and SAA’s assets would be sold off. Or they’d opt to help establish a new airline, with what would surely be sharply reduced pay. The deadline for workers to decide is May 1.
  • Air Mauritius, based on its namesake islands in the Indian Ocean off Africa’s eastern coast, filed for bankruptcy. At the start of 2020, its board established a transformation committee “with a view to addressing the financial difficulties of the company, and to reviewing its business model for ensuring a sustainable future.” That highlights the difficulties it was facing pre-crisis. It said was making progress just before the industry collapse, at which point it saw a “complete erosion of the company’s revenue base.” It added: “Our mission is above all to save the company.”
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Feature Story

Absent government aid, Virgin Australia files for bankruptcy.

Virgin America, Virgin Express, Virgin Sun, Virgin Nigeria, Virgin Samoa, Little Red… all gone. Same for Virgin Connect, the would-be name for Flybe, the first airline victim of the current virus crisis. Flybe’s part owner Virgin Atlantic, the very first Virgin-branded airline, itself now stands on the precipice of bankruptcy. Virgin Australia, alas, is already there — it filed for “voluntary administration” last week.

The filing makes Australia’s second largest airline the first major airline worldwide to seek judicial protection from its creditors. To be clear, Virgin Australia continues to operate normally, which in these bleak times means running just a skeleton schedule of flights. It’s still carrying cargo, for example. It’s still offering charters for Australian natural resource companies, demand for which it says remains strong. It’s operating a few flights to Los Angeles and Hong Kong each week to help Australians return home. And it’s flying some domestic routes — with government subsidies — deemed essential by Canberra. But most of its fleet is currently idled.

Virgin was hoping it could avoid the bankruptcy court. But repeated pleas for government help went unanswered. Politicians, no doubt, were concerned about Virgin’s importance to the economy, its 10,000 employees, and its role as a counterweight to Qantas, which would otherwise monopolize much of the country’s airline market. But ultimately, it was too difficult to stomach a taxpayer rescue that would protect the equity of Virgin’s mostly foreign shareholders. Richard Branson’s U.K.-based Virgin Group owns 10% of the airline. Abu Dhabi’s Etihad owns 21%. Singapore Airlines owns 20%. China’s HNA Group owns another 20%. The parent company of China’s Qingdao Airlines owns 20% as well. 

All shareholders now face the possibility of losing their entire investment, pending the outcome of Virgin’s court-supervised restructuring. The proceedings get underway this week with a meeting between Virgin’s newly appointed administrators — four turnaround specialists from the global advisory firm Deloitte — and major creditors. The creditors include banks, aircraft leasing firms, and employee unions, among others. For now, the Deloitte administrators say they’ll keep the carrier’s current management team, led by CEO Paul Scurrah. Scurrah became CEO just last year, charged with putting Virgin on more stable footing after years of poor financial performance.

It was this record of poor performance that made Virgin so vulnerable heading into the crisis. The airline actually enjoyed a prosperous beginning. Today, it’s a victim of crisis. But in 2001, it was a major beneficiary of a crisis. Shortly after its 2000 launch, Virgin Australia, then called Virgin Blue, watched with glee as rival Ansett Australia collapsed from the post-9/11 demand shock. Virgin thrived as an orthodox low-cost carrier during the early 2000s, competing against its much higher-cost rival Qantas. The low-fare leisure market in Australia is only so big though, and Virgin soon felt the need to expand its offerings in order to grow.

So it began offering premium amenities to chase business travelers. In 2009, it began flying widebodies to the U.S. Before long, the once B737-only operator was also flying B777s, A330s, E190s, and E170s. It would add Fokker jets and ATR turboprops when it acquired the Australian regional carrier Skywest in 2012. That same year, it acquired Tigerair Australia, giving it A320s as well. In the meantime, it created a virtual network abroad via partnerships and joint ventures with foreign airlines, most importantly its shareholders Singapore Airlines and Etihad. Delta would become a JV partner too. In addition, Virgin befriended Air New Zealand to share revenues in the key trans-Tasman market linking Australia with New Zealand. The two became so close that ANZ for a time became Virgin’s leading shareholder. 

But ANZ grew frustrated by the losses, and by its partner’s rising costs and ever-increasing complexity. In 2018, ANZ decided enough was enough. It wanted nothing more to do with Virgin, which suddenly found itself alone across the Tasman. All the while, Qantas was turning itself into one of the world’s most profitable global airlines. It boldly undertook deep labor reforms in the wake of the global financial crisis of 2008-09, at one point even grounding its entire fleet to force union concessions. It managed to pinch Virgin from both ends, winning the upper-end of the market while harassing its rival’s low-fare flank with Jetstar. Qantas today earns its highest margins in the Australian domestic market, where Virgin barely gets by. During calendar year 2019, Virgin earned a mainline domestic operating margin of just 2%. Qantas mainline earned 12%. Virgin’s Tiger unit, meanwhile, suffered a negative 6% margin. Internationally, Virgin’s margin last year was negative 8%.

Things only got worse as Australia’s long era of economic growth began petering out with the slowdown in China’s demand for the country’s natural resources, notably iron ore and coal. That caused troublesome Aussie dollar weakness. Virgin then encountered new trouble by entering Hong Kong, and forming a partnership with the fragile Hong Kong Airlines, just as the city was becoming paralyzed by street protests. An epidemic of wildfires across Austrlaia didn’t help, suppressing tourism throughout much of the country.

It’s in this context that Scurrah, well before the current crisis, began cutting jobs, reducing capacity, renegotiating contracts with suppliers, shrinking its B737 MAX order, rightsizing Tiger’s fleet, and repurchasing full control of its Velocity loyalty program, the one part of Virgin’s business that’s always generated strong profits. On the network front, Virgin announced a retreat from Hong Kong, redeploying planes to Tokyo Haneda instead, having secured new slots at the airport. Brisbane-Tokyo flights were supposed to have launched late last month. 

Virgin, you can see, was in no shape to withstand even a mild downturn, let alone the worst downturn in industry history. The question now is: Can it find new investors to provide the necessary capital to exit bankruptcy? Would anyone be interested?

In fact, many are interested. Reports abound of private equity firms and even Chinese airlines looking to participate in Virgin’s revival. Existing shareholder Etihad, too, is mentioned as a possible contributor of more capital. Most interesting among the rumored suitors is the U.S. private equity firm Indigo Partners, which was involved in the original Tiger Airways based in Singapore. More importantly and influentially, it was responsible for turning Spirit into an ultra-LCC success story. It today controls Wizz Air, Frontier, Mexico’s Volaris, and Chile’s JetSmart.

The abundant interest suggests Virgin Australia can survive its current trip through bankruptcy, which for many airlines can result in liquidation. Why is there so much interest? Would not the airline’s long ledger of red ink suggest otherwise?

Don’t underestimate the advantages of a court-supervised restructuring. Virgin will have the opportunity to wash clean many of its unfavorable contracts — with suppliers, with unions, with airports, and so on. That should leave it with a much lower cost base. It can rethink many of the strategies that got it into trouble. Does it want to continue operating Tigerair? Does it want to continue to chase premium corporate traffic? Does it want to continue flying a subscale fleet of aging B777-300ERs? Does it want to continue to operate a subscale intercontinental network dependent on multiple airline partners, each with their own agendas?

Virgin will likely have even greater wherewithal to renegotiate contracts and abandon contractual obligations than unusual, given the parlous state of industry affairs — counterparties have virtually no leverage right now to, for example, redeploy aircraft elsewhere. Suppliers need Virgin to survive. So do unions. So do Australia’s airports. So does its home city Brisbane, whose local government offered some rescue money pre-bankruptcy. So does Canberra, loath to let Qantas dominate the Aussie skies. The city of Melbourne offered money if Virgin agreed to move its headquarters there.

Virgin’s best bet might be a return to its past. Before it became a Blunder Down Under, remember, it thrived as something akin to an ultra-low-cost carrier. True, Qantas is a much tougher competitor today, armed with Jetstar and a much lower cost base. But Qantas will be its only meaningful competitor. As mentioned before, Virgin mainline did earn a profit domestically in calendar year 2019. With a significantly slimmer cost base, less complexity, and a better business model, then surely it would have done better. The Velocity loyalty plan by the way, remains a part of Virgin but separately incorporated, and not currently in bankruptcy. Its 10m members are another lure for prospective Virgin investors.

Calendar year 2019, of course, was a different time and place. Post-pancession, the world will surely look different? But the differences might favor a domestically-oriented, low-cost carrier. Longhaul international markets, after all, are expected to take much longer to recover.

And speaking of recovery, don’t look now but Australia is one of the few places, along with South Korea and Taiwan, getting praise for a successful response to the Covid pandemic. The country has had fewer than 100 Covid-19 deaths, and few new cases in recent days. New Zealand too, a market to which Virgin would likely maintain service post-crisis, is starting to open its economy amid low infection rates. Back in Australia, Virgin’s home state Queensland began relaxing some restrictions on economic activity last week. All of this suggests Australasia could be among the first airline markets to recover.

That’s hardly a sure thing, especially with winter now coming in the southern hemisphere. IATA, meanwhile, said last week it hasn’t seen any evidence of demand recovery yet. But sooner or later, Australians will be flying in great numbers again, and Virgin Australia — cleansed of its sins through bankruptcy — will likely be there to serve them.

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Around the World

Around the World: April 27, 2020

Airline NameChange From Last WeekChange From Last YearComments
American-10.90%-69.70%Raising checked bag fees by $15 for selected fares (notably basic economy) and selected routes
Delta-7.70%-61.30%CFO Paul Jacobson postpones planned retirement to help company deal with Covid crisis
United-12.10%-71.00%Notes risk of credit card cash holdbacks as customers who booked tickets demand refunds
Southwest-6.00%-44.60%Received its first $1.6b in federal money on April 21; will get $3.3b overall, to be used exclusively for employee pay
Alaska-6.40%-53.90%The part of federal payroll aid that airlines are required to repay Washington will carry just a 1% interest rates for next five years
JetBlue-11.50%-56.30%One out of every six American workers now unemployed
Hawaiian-0.60%-59.60%City of Honolulu extends stay-at-home order through end of May; Hawaii though has one of the lowest Covid infection rates in U.S.
Spirit-9.00%-79.20%Crisis hit Florida midway through its peak season; fall (hurricane season) typically its slowest period of the year
Frontier(not publicly traded)Another example of the travel sector carnage: Rental car giant Hertz, based near Ft. Myers, Fla., cutting 10k jobs
Allegiant-7.20%-47.70%Offering coupons to past customers, telling them “use this offer when you’re ready”
SkyWest0.10%-56.80%Expedia chairman, appearing on CBS “Face the Nation,” calls idea of blocking middle seats on airplanes “absurd”
Air Canada0.50%-42.00%Another “who would’ve ever thought moment”: Air Canada suspending all U.S. flights through May 22
WestJet(not publicly traded)Carrying less than 5% of its normal traffic levels; making 3,000 more workers “inactive”
Aeromexico11.20%-61.80%Denies hiring financial restructuring advisors; calls the claim “completely false”
Volaris2.70%-42.00%Cites its lack of restrictive crew scheduling rules as an advantage; can operate only flights that break even on a cash basis
LATAM-6.40%-56.80%Brazilian development bank willing to provide loans convertible to shares but airlines don’t like the terms
Gol-11.10%-53.90%With proposed BNDES aid, government would be poised to own large ownership stakes in Brazil’s airlines, perhaps 20% (Exame)
Azul-13.60%-58.20%Brazilian gov’t considering allowing Latam, Gol, and Azul to temporarily coordinate flight schedules to reduce wasteful flying (Reuters)
Copa0.70%-37.00%Hoping to resume some passenger flights on May 1; will restart only about 10% of pre-crisis schedule in first phase of restoration
Avianca-18.60%-68.20%Currently in default on some of its debt and other obligations; delaying publication of 2019 annual report
Emirates(not publicly traded)Asking passengers to arrive at the airport at least three hours before their flights; must wear masks
Qatar(not publicly traded)Gas and oil are Qatar’s biggest exports. What’s its biggest import? Good guess: Aircraft (OEC)
Etihad(not publicly traded)Jordan’s capital Amman saw airport traffic decline by a fifth y/y in Q1, according to Groupe ADP
Air Arabia(not publicly traded)3.90%Saudi Arabia, trying to stem virus, currently has nationwide curfew between 3 p.m. and 7 a.m.
Turkish Airlines-2.40%-26.90%Istanbul’s new airport still planning to open a third runway on June 18
Kenya Airways-13.10%-81.30%IATA estimates Africa could see 3m aviation-related jobs wiped out by Covid crisis; pleads for government aid
South Africa Air.(not publicly traded)South Africa deferring payroll, income, and carbon taxes for all sectors, including airlines
Ethiopian Airlines(not publicly traded)Senegal to pump $128m into its airline and tourism sector, IATA notes
IndiGo-16.50%-39.40%Just a quarter of its shares are publicly traded; company founders including former United executive Rakesh Gangwal own the other 75%
Air India(not publicly traded)Unions asking government to force airline to rescind pay cuts
SpiceJet-12.30%-66.30%Bookings for Mumbai-Delhi flights closed until June 1
Lufthansa-12.80%-67.00%Berlin’s massively delayed new airport still on track to open Oct. 31; hopefully there will be some pax by then
Air France/KLM-6.10%-57.20%CEO won’t take 2020 bonus pay, based on 2019 performance; was controversial in time of crisis
BA/Iberia (IAG)-6.70%-59.30%Apparently dodged a bullet by negotiating price adjustment clause in Air Europa deal (see Media section)
SAS0.80%-55.30%Icelandair announces job cuts; more measures to be announced before the end of this month
Alitalia(not publicly traded)Government now saying new nationalized Alitalia will have around 90 planes, not far from today’s number; union, alliance matters still in question
Finnair-1.30%-48.30%Most European countries deferring charges for air traffic control
Virgin Atlantic(not publicly traded)As of May 21, Alitalia will no longer be part of Delta-Air France/KLM-Virgin Atlantic transatlantic joint venture
easyJet-10.30%-51.20%Irish regional airline CityJet enters a form of bankruptcy; same for Germany’s LGW, which wet-leased jets/crews to Eurowings
Ryanair-4.40%-16.40%Portugal’s national airline TAP still trying to convince its government to provide credit support
Norwegian6.80%-84.90%Calls its employees “red nose warriors;” crews in Norway, Italy, France not affected by last week’s bankruptcy filings
Wizz Air-3.00%-21.50%Qualifies for Bank of England’s loan support scheme because its stock is listed on London exchange
Aegean3.20%-38.80%French engine maker Safran weighing plan to build new facility in Greece
Aeroflot-0.80%-23.60%Domestic pax volumes dropped just 18% y/y in March, a relatively modest decline; int’l down 54%
S7(not publicly traded)Bloomberg headline last week: “Russians Told to Forget Foreign Travel This Year Over Virus”
Japan Airlines-8.20%-51.60%Sees load factors dropping by around 50 points y/y for the Golden Week holiday (April 29-May 6)
All Nippon-7.10%-41.40%Passport applications in Japan down almost 60% y/y during March (Jiji Press)
Korean Air-5.30%-43.10%Korea planning a “New Deal” stimulus to recover from Covid shock; echoes Franklin Roosevelt’s Depression-era plan for U.S.
Cathay Pacific-4.90%-33.20%Hong Kong Airlines marketing its fares, all of which have no change fees and unlimited changes now, as “Flexi Fares”
Air China3.20%-42.70%Hainan Airlines and Spring Airlines still haven’t published their Q4, 2019 financial results
China Eastern-3.10%-41.70%Ishka, a consultancy, notes high level of Chinese airline bond issuance last quarter
China Southern-2.30%-38.80%Labor Day holiday (May 1) typically a busy travel period for Chinese tourists
Singapore Airlines-3.00%-37.40%Only operating one U.S. route, Singapore-Los Angeles, this month and next; operating only on selected days
Malaysia Airlines(not publicly traded)Bloomberg BusinessWeek profiles Malaysia’s boom in medical glove exports
AirAsia-1.30%-69.20%New rule when Thai domestic flights launch on May 1: strictly no food or beverage onboard
Thai Airways-0.70%-45.30%Airports of Thailand, which runs the nation’s airports, temporarily reduces charges to assist airlines
VietJet-1.90%0.60%Restarted a few flights last week, operating some frequencies between Ho Chi Minh City and Hanoi
Cebu Pacific-8.10%-42.20%At the start of this year, Cebu was flying to 27 cities outside of the Philippines
Qantas-8.90%-40.70%Postponing planned calendar Q1 update originally scheduled for this month
Virgin Australia0.00%-53.50%Progressively increased its own trans-Tasman flying after the joint venture break with Air New Zealand
Air New Zealand-8.00%-56.20%Auckland airport said its staffing up 40% in past 18 months to execute development plan; now looking at job cuts
Brent Crude Oil-21.40%-66.40%Another crazy week in the oil markets; demand collapsing and supply still elevated

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

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