Is the Glass Half Empty or Half Full?

Pushing Back: Inside This Issue

Aside from a few stragglers like Hainan Airlines, Philippine Airlines, and El Al, fourth-quarter earnings season is now finished. Those were simpler times, featuring familiar names near the top of industry profit rankings: Delta, IAG, Copa, etc. Brazilian airlines, interestingly, enjoyed extraordinarily strong fourth quarters, with Gol topping all airlines worldwide with a 26% Q4 operating margin. For all of 2019, Gol was the industry’s third most profitable airline, behind only Allegiant and Air Arabia.

Soon, earnings season for Q1, 2020 will begin, in a radically altered industry landscape. Gone are quaint questions like how carriers will manage without their B737 MAXs. The questions today are of far greater gravity, like how many weeks of cash are left in the till. 

Fortunately, governments are providing enough aid to prevent a pandemic of airline bankruptcies. Uncertainties remain though, about what governments want in return. An ownership stake in the airlines they help? Airline stocks did jump last week, albeit from severely depressed levels, a sign that the pandemic — Covid-19 — may be perhaps starting to recede. Governments are now starting to consider ways to responsibly reopen economies. The re-opening could come gradually, though, and air travel could be one of the last commercial activities to revive given the ease with which microbes can spread throughout densely packed airplane cabins.   

There’s a case for optimism, as we outline in this issue and discussed in a webinar last week. There’s a pessimistic case too, however, and it’s one to which airlines are increasingly subscribing. Lufthansa is purging its fleet of older planes, approaching unions about concessions, and more broadly preparing to downsize, anticipating a long road to recovery. Air France, still waiting for government aid, is no less pessimistic.

For an airline like Norwegian, there might be no recovery. A drastic last-ditch survival plan could devastate shareholders and creditors alike, in the name of transforming into a much smaller airline. Rival easyJet, meanwhile, comforted investors by raising new cash and cutting aircraft commitments. Wizz Air says it could survive for many months on minimal revenues. Helpfully for such LCCs, shorthaul, price-sensitive demand might be first to recover. Carriers specializing in longhaul premium demand, by contrast, could be in for a longer journey back to health.  

Verbulence

"We will over the next weeks engage in dialogue with the bond holders, lessors and other creditors, with the intent of converting substantial debt to equity. This will create a platform which will enable Norwegian to return to the skies as an even better and stronger company to the benefit of the traveling public, our dedicated colleagues and current shareholders."

Norwegian CEO Jacob Schram

Earnings

October-December (3 months)

• Juneyao: -$35m/-$56m*; -9%

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