America’s Airlines Start to Recover… A Little Bit

• Long before anyone heard of Covid-19, Ryanair was facing uncharacteristically severe earnings pressure. To be clear, its 13% operating margin last year was nothing to be embarrassed about. But far from repeating its 2018 distinction as world’s most profitable airline, it didn’t even make the top 10 in 2019.
  
  Much of its woe came during the first half of the calendar year, when German and Austrian markets faced heavy overcapacity, when Ryanair’s labor and fuel costs were spiking, and when Brexit concerns were depressing U.K. demand. Schedule planning in the context of the B737 MAX grounding would become another headache later in the year. Recall that during the January-to-March period of 2019, Ryanair’s operating margin was an awful negative 17%, with about four points of that attributable to heavy losses at Lauda Air in Austria.
  
  Surely that would be a low point. Ryanair after all was still Europe’s low-cost leader, with airport, ground handling, maintenance, and aircraft ownership costs nobody else could match. What it couldn’t foresee is the greatest industry demand shock of all time. Or, for that matter, an epic collapse in oil prices that would render its aggressive fuel hedging strategy an expensive mistake. Alas, in this year’s calendar Q1, Ryanair posted net losses exceeding $650m, or $265m excluding unrealized hedge losses and other special items. As bad as that negative 17% operating margin was last year, the figure was negative 21% this year. Revenues declined 6% y/y on 1% less ASK capacity (Cirium). Operating costs declined just 3%, with fuel costs alone down 7%.
  
  The immediate pre-crisis period, covering the 2019/20 winter season, showed strong y/y earnings improvement, fueled by rising ancillary sales and a stronger European fare environment thanks to aircraft shortages and rival bankruptcies. Ryanair was also making progress with its new strategy of allocating flying across multiple subsidiaries, including Vienna-based Lauda but also Buzz in Poland and Malta Air.
  
  Today, all but a handful of the group’s planes are grounded and will remain so until early July. That would mark a nearly four-month grounding, compared to the handful of days it was grounded after the 9/11 attacks of 2001. Assuming Europe proceeds with plans to remove travel restrictions and reopen tourist resorts, Ryanair expects to have about 40% of its normal capacity running in July, and then roughly 60% in August.
  
  But even while optimistic that people will fly, it’s under no illusions about making any money this peak season. For calendar Q2, it sees losses exceeding $220m. And then “hopefully, a little bit less” in Q3. Survival won’t be in question. Ryanair entered the crisis with a fortress balance sheet loaded with valuable assets — it owns about 90% of its aircraft, all B737-800s (minus Lauda’s 26 A320s). It currently has some $4.5b in cash. Weekly cash burn is now about $66m, down from $220m in March. Of that $66m, meanwhile, $50m is outflow linked to bad fuel hedges. That figure will decrease as hedges settle and burn off in the coming months. But cash outflow from refunds will increase by a roughly offsetting amount.
  
  By the summer though, the airline should have some cash generation from bookings. And even if it doesn’t, executives say they can continue on for “a year or two” without liquidity trouble. It also, keep in mind, is accessing $730m in low-rate emergency U.K. government lending. As for its costs, 50% pay cuts are already in place. And management is playing hardball with unions for longterm concessions. More base closures are likely, following last week’s decision to close Lauda’s chief base in Vienna because unions refused to accede to company demands. It’s planning to cut a minimum 3,000 jobs company-wide. But if unions don’t grant 20% pay cuts, that figure will be higher. Nobody said Ryanair achieved its success by being nice.
  
  It’s negotiating with Boeing too, for MAX compensation, for fewer deliveries over the next 24 months, and for some larger MAX 10s if the price is right (the airline hopes to finally get its first of up to 210 MAXs this winter). Airbus, meanwhile, hasn’t provided any attractive offers as of yet. Ryanair does expect to receive attractive offers from airports big and small across Europe as traffic begins to recover. It sees several years of subdued oil prices. Labor costs will be a lot lower after enacting pay cuts. Rivals like Norwegian will be a lot smaller. Others like easyJet are deferring large numbers of aircraft deliveries.
  
  In recent weeks, bookings and flight searches are up, albeit off a very small base. Families in northern Europe, it says, are looking to take two-week holidays to places like Italy, Spain, and Portugal, whose beach resorts have low Covid infection rates. Italy will open to tourism in June, without any quarantines for arriving passengers. In the U.K. and Ireland, by contrast, arriving passengers will be required to self-isolate for two full weeks, a policy Ryanair’s CEO Michael O’Leary called absurd and unenforceable.
  
  Quarantines will eventually get lifted though. Longer lasting will be the impact of government aid, which Ryanair says will distort competition and depress fares. O’Leary points to the $14b Lufthansa stands to receive, the $11b Air France/KLM is getting, the nearly $4b allocated to Alitalia, the $2b for TUI, and so on. Also frustrating: Discriminatory aid like the airline tax refunds France is granting to Air France only. Ryanair is suing to stop some of these aid packages. But it recognizes that fares will be low until at least 2022, with taxpayer funds indirectly subsidizing travelers.
  
  The good news is that low fares, combined with attractive hotel pricing, will stimulate demand. So Ryanair expects to fill something like half its seats this summer, and then hopefully more like three-quarters in the winter. Longterm, the LCC sees enormous opportunity as the price of key cost items plummet (i.e. fuel, planes, labor, airport fees, etc.). And yes, it’s still extremely bullish on the B737 MAX.

Weak International Demand Hurts Taiwan’s Airlines

• The SARS epidemic of the early 2000s gave Taiwan a scare it wouldn’t forget. H1N1 later that decade reinforced its fears. As a result, it was about as prepared as a place could be for the Covid pandemic, detecting and addressing the problem early. Its preparation and diligence worked, with a mere seven recorded Covid deaths to date. If there’s one place in the world that’s defeated the virus, it’s Taiwan.
  
  But that’s small consolation for the island’s airlines. Though life is relatively normal on the streets of cities like Taipei and Kaohsiung, the economy is hardly immune to what’s happening abroad. China Airlines (CAL), for one, suffered a negative 9% operating margin during the turbulent first quarter, with revenues sinking 19% y/y. Operating costs fell just 10%, on 15% less ASK capacity. The fact is, Taiwan’s airlines get just a small portion of their revenue from domestic markets. And international markets began closing in late January, first on cross-Strait mainland routes during the busy Chinese New Year period. By March, CAL’s total ASK capacity was down 45%. By April it was down 96%.
  
  One of Taiwan’s strategies in containing the virus, after all, is keeping its borders closed. And they’ll likely stay closed until October, when the first foreign tourists are expected to return. On a brighter note, CAL is a major cargo carrier, with freight accounting for about 30% of total revenues during normal times. Now, it’s the locomotive for the whole company. Cargo revenues in April, in fact, more than doubled y/y, even as passenger revenues were near zero. The boom is likely to be temporary however, and the longterm outlook for cargo isn’t rosy. Not with trade wars and moves to repatriate supply chains.
  
  At the same time, Beijing is stepping up threats against Taiwan, which it regards as a breakaway province. That’s in the context of arguably the tensest-ever relations between China and the U.S. Dangerous times indeed.
  
  On the more mundane matter of airline opportunities, CAL could begin to see some on the passenger side, if Taiwan joins the prospective Australia-New Zealand travel bubble. The airline still owns a small LCC branded as Tigerair. Before the crisis, CAL was adding A350s and planned to start taking A321 NEOs next year. B777s were replacing B747s on the freighter side.

• CAL’s rival EVA Air, typically larger by revenues but not last quarter, is faring better during the crisis so far. Its Q1 operating margin was only negative 1%, continuing a trend of outperforming its hometown rival. A year ago, EVA earned an 8% Q1 margin compared to CAL’s 2%. For all of 2019, the difference was narrower but still significant: 5% to 2%. In this year’s Q1 however, EVA experienced a much steeper 32% y/y decline in revenues.
  
  One reason is that CAL saw a stronger and earlier pickup in cargo revenues, though by April (after Q1 was finished) EVA too was seeing a y/y doubling in revenues from freight. On the passenger side, EVA’s revenues rose 15% in January before declining 37% and 68% in February and March, respectively. Passenger ASK capacity for the quarter fell 10%. The airline was hoping 2020 would be a year of growth in markets like North America, for which it ordered B787-10s and even B777-9s. The Taiwanese market was becoming more competitive pre-crisis however, with the new-entrant Starlux in the mix, and with LCCs proliferating. 

Southeast Asia Demand Dries Up

• Philippine Airlines is one of the carriers just now getting around to reporting its fourth-quarter 2019 results. Not that they have much relevance in the radically altered world of 2020, but for what it’s worth, PAL earned a decent 6% operating margin. The quarter was notable for declining costs, with fuel outlays alone down 26% y/y. Total operating costs fell 17%, far outpacing a 6% drop in revenues. This is despite what Cirium schedule data shows to be a 16% increase in Q4 ASK capacity. New planes like A350-900s, A321 NEOs, and Q400s are helping PAL become a more efficient airline.
  
  But not that much more efficient. Its decent Q4 operating result notwithstanding, PAL entered 2020 a deeply troubled airline, with three straight years of net losses, and a mere 1% operating margin for all of 2019. Its 2019 net result, in fact, was its steepest in company history, prompting major turnaround efforts. Overstaffing is one problem. Heavy longterm debt and lease obligations are another. The new year started out with volcanic ash disruptions causing flight cancellations. That was just before Covid-19 began rearing its ugly head in China. Already by the end of January, PAL was cancelling flights to several markets in northeast Asia including Korea and Taiwan.
  
  Before the pandemic, PAL was planning to relaunch Los Angeles nonstops from Cebu, open Manila service to Perth, and reduce its headcount through voluntary employee buyouts. It had a strong ally in Japan’s ANA, a 10% shareholder. Even today, the Philippine peso remains pretty strong, as it was throughout 2019. It was hopeful that Manila would finally see some badly needed airport infrastructure investment.
  
  Right now though, it’s main focus is crisis management, and trying to avoid bankruptcy. A fifth of its revenue is domestic, where demand will likely revive first. Adding more domestic flying from Cebu, Davao and Manila Clark is still a goal. PAL hopes to soon start welcoming Chinese and Korean tourists again. The fate of Filipino migrant workers, critical to the economy, is more uncertain with globalization under threat. All of the country’s airlines (Cebu Pacific and AirAsia’s local affiliate are PAL’s two main rivals) are asking the government for aid. PAL itself reportedly received an emergency capital injection from the tycoon who owns it.  

• A “catastrophe” is how Bangkok Airlines describes the impact of Covid-19 on Thailand’s tourism industry, which accounts perhaps one-tenth of the country’s entire economy. During Q1, international tourist arrivals declined 38% y/y, and 54% from within East Asia. From China, Thailand’s number-one source of tourists in normal times, the y/y decline in arrivals last quarter was 60%. Adding to the pain and frustration was the fact that January through March is typically peak season for Thai tourism — last year, Bangkok Airways generated a 13% Q1 operating margin.
  
  This year, unsurprisingly, was a much different story. Operating margin was just 4%, with revenues tumbling 21% on 12% less ASK capacity. Operating costs decreased 13%, with fuel costs alone also down 13%. The company is more than just an airline. Only 69% of its Q1 revenues in fact came from passenger air service. It also owns and operates three Thai airports, most importantly the one serving the beach resort Samui. And it sells ground handling, cargo handling, and catering services to other airlines serving Thailand. It did win some new customers for all these activities but still, revenues inevitably dropped across all of its business lines given the virtual shutdown of all flying in late March.
  
  As recently as 2016, Bangkok Air was a quiet superstar, earning double digit margins. During recent years though, extreme fare competition made shorthaul flying tough. Foreign LCCs like VietJet and Lion Air entered the market with local joint ventures. AirAsia’s Thai venture expanded. And Thai Airways and Nok Air remained important players as well. Bangkok Airways was always somewhat shielded with its more upscale full-service model, its large network of codeshare partners, the more than half of its passengers originating outside of Thailand, and a dominant position at the airports it owned.
  
  But by 2019, these advantages failed to avert a full-year operating loss (margin was negative 2%). Now it has to navigate its way out of the industry’s greatest crisis ever. Thai Airways, its top rival but also a codeshare partner, is now restructuring and sure to downsize in bankruptcy. Nok Air has problems just as grave. But even as capacity seems set to contract, demand revival will take time. Thai AirAsia for one, sees a U-shaped recovery in tourism from Asia, with tourism from Western markets like Europe and the U.S. taking longer.
  
  Unhelpfully, wildfires in Thailand’s north are complicating efforts to lure back visitors. Bangkok Airways though, isn’t abandoning longterm endeavors, including the new training center it’s building in Bangkok, or the aviation services business it’s developing in Utapao. One thing it hasn’t yet done is order any future replacements for its A320-family fleet. Most of these are smaller A319s, an out-of-favor aircraft type.

• In these dark times for public health and the economy, the airline industry was hit with another somber punch: A fatal accident. A Pakistan International Airlines A320, flying domestically from Lahore to Karachi, crashed upon landing, killing 97 people. Two survived.   

• Gonzalo Pérez Corral, general manager of JetSmart Argentina, spoke to Clarín about some of the airline’s local frustrations. One is the Argentine airport company’s plan to close El Palomar airport, a low-cost facility near Buenos Aires. Another is the regulatory red tape in getting approval for the LCC’s takeover of Norwegian Argentina late last year.
  
  As for the Covid crisis, JetSmart’s core operation in Chile continues to operate a small part of its schedule. But in Argentina, no airlines are allowed to even sell tickets until Sept. 1. Corral expands on these issues in a separate talk with Aviation News, noting that making money at Ezeiza airport in Buenos Aires would be difficult (Aeroparque airport is closed temporarily while upgrading runways for widebody use). In the meantime, he’s watching how Aerolineas Argentinas might change its network after integrating Austral.
  
  JetSmart, remember, is owned by U.S.-based Indigo Partners, which also owns Wizz Air, Frontier, and Volaris. In fact, the South American LCC planned to take 100 of the A320-family NEOs Indigo has ordered, over the coming decade. JetSmart’s CEO in Chile, Estuardo Ortiz, remains bullish long-term, and committed to Argentina. Corral added in the Aviation News interview: “We always assumed that when we started operating in Argentina, this is a country that has its complexities.”

• Air Lease Corp.’s John Pleuger told CNBC that he does see some industry green shoots, especially in Asia. In China and Korea specifically, domestic load factors are now between 60% and 65%, he said. He compares the airline industry to a patient that’s just undergone emergency surgery and is now in critical care recovery.
  
  More than 60% of the world’s passenger airline fleet remains grounded. And planes beyond 20-years old or so won’t likely ever come back. Airlines instead will move forward with the youngest and most fuel-efficient models, in part to comply with environmental obligations. Plueger points to the Air France bailout, in which the carrier is obligated to cut emissions through fleet renewal.

• Delta, reports The Points Guy, will still be able to fly all four of the ultra-longhaul routes it operates with B777-200LRs. The LRs are leaving, but A350s will be capable of the missions, specifically New York JFK-Mumbai, Los Angeles-Sydney, Atlanta-Shanghai, and Atlanta-Johannesburg. The latter will require some modifications to the Airbus plane. Delta, remember, will receive additional A350s as part of its 2019 deal to invest in Latam.

• The U.S. Travel Association reported grave jobs data for the travel sector. It estimates that the industry’s unemployment rate is (ugh) 51%. The unemployment rate for the U.S. as a whole is estimated to be 25%, though keep in mind that unusually generous unemployment insurance is softening the economic impact (some countries have distributed aid to workers via company transfers, which makes unemployment numbers look better; the U.S. in fact took this approach with the airline industry).
  
  In any case, this situation won’t resolve itself soon, the association warned. There is indeed pent-up demand for travel. But U.S. Travel thinks the need for social distancing, combined with traveler health fears, could make travel look different for the foreseeable future.
  
  Another alarming data point: Americans were expected to spend $4.2b on travel during the Memorial Day holiday weekend, down from $12.3b last year.

• A step forward for Icelandair: Members of the airline’s pilot union voted to approve a new collective bargaining agreement, which will run through September 2025. It contains concessions that will help Icelandair navigate the Covid crisis. The next year or so will be rough for airline workers, whose pay and benefits will shrink in line with industry downsizing.

• Copenhagen Airport told a distressingly familiar tale: A decent performance in January and February, followed by almost nothing from March to the present. The forecast is so grim that the airport is not offering any guidance for the rest of the year. Passenger traffic in the first quarter plunged 24% y/y, and revenues fell by 21%. Profits were down 37%. Grim indeed.
  
  The airport is cutting operating costs and culling planned capital expenditures for the year. It benefited from the Danish government’s Covid relief package, which covers one-third of the airport’s wage costs.  The airport was also able to raise cash from private-sector lenders.
  
  Copenhagen is not losing focus on its sustainability initiatives despite the Covid crisis, the airport told investors. It still aims to be carbon neutral and emissions-free by 2030.

• Vienna Airport told a similar tale. January and February were decent, and then traffic fell by 99%, CFO Gunther Ofner said. Strength in the first two months of the year offset the traffic declines from March. Vienna saw traffic drop 19% in the quarter, y/y, while revenue fell by 9%. The second quarter could be grim, the airport warned.
  
  Like Copenhagen, Vienna accessed lines of credit and loans and is deferring capital projects. The airport availed itself of a government program to defray wage costs (the “short work” program also used in Germany). But it declined to provide guidance for the rest of the year.
  
  Vienna sees light at the end of the tunnel, Chief Operating Officer Julian Jager said. Austria is easing some travel restrictions. Austrian Airlines is negotiating with its unions for wage concessions. Wizz Air remains strong. One area of concern is ongoing friction between Ryanair and Lauda’s unions, causing the airline to close its Vienna base (it will still serve the city from other bases).
  
  Despite the airport’s closure in recent weeks, Vienna has had significant cargo and medical flights. “Even a closed airport or partially closed airport is still a lifeline for a whole country,” Ofner said.

How Will Airport Design Adapt for Future Pandemics?

• According to Ty Osbaugh, aviation lead and principal for architecture firm Gensler, airports have a number of design tools at their disposal now to adapt to a global health crisis.
  
  Speaking during the “Mondays With Skift Airline Weekly” livestream, Osbaugh said location technology can be used now to limit crowding at gates, at security checkpoints, and even at ticketing and check-in. Health screenings could be moved to the parking facility, limiting the terminal building itself to ticketed and screened passengers. Retail could start to resemble Amazon, with shoppers purchasing items on their phones and picking them up at designated areas in the terminal.
  
  In the long-term, airports in the U.S. may have to rethink the way they’ve traditionally been designed, Osbaugh said. Most airports in the U.S. are two-level, while many airports in Europe and Asia are multi-level. Funneling passengers through multiple levels can help airports manage crowding and keep disembarking passengers separate from boarding passengers, much like is done now with international arrivals.

• Airports Council International-Europe (ACI-Europe) applauded the European Aviation Safety Agency’s (EASA) roadmap to containing Covid transmission in transportation, which calls for a multilayered approach to biosecurity. The roadmap recommends member state governments work together to coordinate health security, from mandating masks in the terminals and inflight to limiting terminal facilities to ticketed passengers and employees. The plan also calls for strict social distancing and touchless check-in and boarding.
  
  One thing the roadmap does not recommend: Immunity passports. Testing can be inconsistent, and science does not understand the nature of the virus, making immunity passports less effective than other measures, the EASA said.

• Corporacion America Airports reported a 98% decline in traffic in March. That alone would be a headline at any other time, but is distressingly familiar now. The company, which operates airports throughout South America and in Europe, said it has furloughed or laid off a significant portion of its staff, deferred debt payments and is focused on preserving cash. Many of the airports it operates are in countries, like Argentina, that have completely banned air travel (Argentina has prohibited ticket sales until Sept. 1.)
  
  But amid all the gloom, the company sees some signs of hope. European travel is starting to pick up, admittedly from almost nothing. Many European countries are taking steps to prepare for a safer summer holiday season. This somewhat offsets the news from South America, which is now one of the world’s Covid hotspots.

Airport Data

• Emirates with some fanfare last month trialed a rapid-response Covid test in Dubai for some flights to Tunisia. The test required a pinprick of blood and returned results in 10 minutes. But further analysis found the test to be only about 30% accurate, The National reports. Emirates has dropped the trial, and Dubai has said it will use a more accurate nasal-swab test, although these have not been widely deployed at the airport.

• United has rebranded its aircraft cleaning protocol “United CleanPlus.” The airline is working with the famed Cleveland Clinic to develop biosecurity measures to create standards for such practices as mandating facial coverings and developing touchless kiosks. United also has joined forces with cleaning-products company Clorox to develop disinfection protocols for aircraft and hold areas. United will make Clorox sanitation products available to passengers at its Chicago and Denver hubs.

• Blocking middle seats to increase social distancing was one of the first ways airlines, particularly in the U.S., hoped to allay passengers’ fears of Covid transmission. However, some airlines are quietly backing away from this practice as demand returns — it was never financially sustainable, IATA and industry analysts have said.
  
  But JetBlue said it will continue blocking middle seats through the July 4 holiday. That’s on its fleet of A320-family jets. On its E190s, aisle seats will be blocked. Passengers traveling together can opt to sit next to each other, however.
  
  This is part of JetBlue’s “Safety From the Ground Up” program, which aims to reduce touchpoints throughout the air travel experience.

• Here’s a rare bit of bright news in the category of network expansion. Volotea announced it is adding 40 routes this summer, including dozens of city pairs involving France, Italy, Spain, and Greece. It’s more specifically launching 15 routes in France, eight in Italy, 15 in Spain, and two in Greece.
  
  “Now that flying protocols are becoming clearer, and that clients will regain the confidence in safe and healthy travel for this summer, we know most of our clients will want to travel more, especially in domestic markets,” said CEO Carlos Muñoz.
  
  Volotea’s Spanish founders were originally involved with Vueling. The carrier now flies B717s and A319s in secondary European markets often ignored by Europe’s LCCs flying large narrowbodies.  

• IATA released recommendations for the safe resumption of air travel, calling on governments to shoulder much of the responsibility for health screening and passenger biosecurity. Airlines should be responsible for the safe transportation of passengers, it says. But it’s imperative that the world’s governments coordinate their protocols and requirements to provide clarity to both airlines and passengers.
  
  What’s not acceptable is the kind of uncoordinated, unilateral approach to security measures that governments pursued after 9/11—IATA mentioned the inconsistent policies toward shoe removal and carry-on liquids. The group reiterated its opposition to inflight social distancing, which typically implies leaving middle seats empty. It’s no less stridently opposed to the 14-day quarantines countries like the U.K. are imposing.
  
  Testing passengers for the virus is something IATA supports when scalable, accurate, and fast. This would allow for a “sterile” travel environment that would reassure travelers. The problem is that testing isn’t yet scalable, accurate, or fast. The idea of “immunity passports” for people known not to be infected is another idea that IATA supports in theory but isn’t yet ready to implement.
  
  So other measures will be more important and more reassuring in the near term. They include limiting access to airports only to passengers and employees; contact tracing for passengers; temperature screening at checkpoints; and physical distancing throughout the airport. Airlines should space out boarding and require passengers to wear face coverings if physical distancing onboard is not possible. IATA further recommends that check-in be completed as early as possible before passengers arrive at the airport, and that bag drops be made contactless. Once again, IATA emphasizes, the key is that measures must be coordinated and standardized.

• How’s that global coordination and standardization going so far? It’s early days, but countries at the moment are pursuing a wide variety of divergent policies. Just within Europe, the U.K., Ireland, Spain, Poland, Belgium, and Malta are among nations requiring all international passengers arriving by air to self-isolate for 14 days.
  
  Some like France let you skip the quarantine if you bring a health certificate affirming you’re Covid free. On June 15, France will open its borders to Germany and Switzerland, one of several cases in which countries are moving gradually, easing restrictions with immediate neighbors first. At the E.U. level, the European Commission recommends restrictions on non-essential travel until June 15.

Europe

• Another week and still no rescue package for Lufthansa. The airline is in advanced talks with government officials, though, for close to $10b in support, one-third of which would come in the form of a loan. Why are the negotiations taking so long? Presumably because of Berlin’s desire to take up to 25% ownership of Lufthansa in exchange. It has no plans however, to exercise any voting rights, unless it’s to block a hostile takeover. It would though, have influence in the appointment of two board members. And Lufthansa would face limits on executive pay and a ban on paying dividends. Both sides hope to conclude a deal shortly.

• EasyJet’s management team claimed victory in a shareholder battle with founder Stelios Haji-Ioannou, whose family still owns one-third of the airline. He staged a vocal and often nasty campaign to get easyJet to shrink its fleet and cancel a large order with Airbus. But other shareholders didn’t share the opinion. With the Stelios rebellion defeated, CEO Johan Lundgren and his team can focus on a more important effort: The restart of flying operations. EasyJet is looking for a rather quick revival, betting it can relaunch a chunk of its network on June 15. Specifically, the relaunch will focus on domestic routes in the U.K. and France. As international travel restrictions are progressively lifted, other routes will follow. 

• Greece’s Aegean Airlines has experience dealing with economic catastrophes, if none quite as catastrophic as the current one. Its past brushes with demand shocks, including the Greek debt crisis of the early 2010s, instilled an ethos of conservative balance sheet management. And so, it has enough cash to weather a prolonged period of depressed revenues.
  
  This quarter, it expects to burn about $20m per month assuming near-zero revenues, with a big chunk of that attributable to settlements on toxic fuel hedges. Only in Q3 will its restart get underway in earnest, flying around 25% of its normal capacity in July, and at best around 50% by September. Anything above 50%, it says, won’t be feasible given the state of consumer fears about the virus. Helpfully, Greece has handled the crisis well from a health perspective, without many cases or fatalities to date. Aegean freely admits the obvious: That 2020 will be “very, very clearly the worst year in our history.”
  
  In a typical year, nearly all of its profits come during Q3, which corresponds with the summer peak. And a strong year depends on also making decent money during Q2. Frustratingly, it was having one of its best early first quarters ever, only to encounter Covid’s wrath in March, when load factor sank to just 57%.
  
  Looking ahead, the airline says everyone in the aviation ecosystem must learn to live with new realities, and to incur their share of sacrifice. One key stakeholder is Airbus, whose A320 NEOs Aegean still very much wants, but with some delays to future deliveries. The carrier isn’t undertaking its usual summer hiring spree, cancelling contracts for foreign pilots, for example. Indeed, its flexibility to scale up and down its workforce by season is critical to its success during good times, and critical to its survival right now.
  
  If there’s one more ask from Aegean, it’s to governments and regulators across Europe: Please coordinate the industry’s upcoming restart. A jumble of varying standards and protocols won’t serve anyone well.

• Dart Group, which owns the LCC Jet2.com, took an important step toward ensuring sufficient cash reserves by selling additional shares. Add to this money the money it’s eligible for from the Bank of England’s Covid crisis lending support program. What’s more, the company’s lenders are supporting its survival efforts, by easing covenant terms for example. Jet2 is therefore in negligible risk of a liquidity crisis anytime soon.
  
  In fact, it’s joining other European carriers in gearing up for the great restart, in its case offering flights and holiday packages from June 17 onward. That could change if countries don’t relax their travel restrictions on time. In fact, just in case, Jet2 is modeling three separate “no fly” scenarios, in which flights won’t restart until Sept. 1, Jan. 1, or next April.
  
  But looking out to next summer, Jet2’s bookings — and the yields it’s getting for those bookings — are “encouraging.” Recall that pre-crisis, the airline was a quiet success story, taking advantage of dying British rivals like Monarch and later Thomas Cook. It now owns the latter’s former summer airport slots at London Stansted, Manchester, and Birmingham.

East Asia

• Attention readers: Another airline bankruptcy. This time it’s Thai Airways, 51% owned by Thailand’s finance ministry. The carrier last week said it would undertake an updated version of its latest turnaround plan under the auspices of the country’s central bankruptcy court. That should enable it to “emerge from the crisis situation… a stronger and more sustainable entity.”
  
  Thai joins Virgin Australia and Avianca as the most prominent bankruptcy victims of the Covid crisis. Once upon a time, Thai Airways was consistently profitable. In fact, it enjoyed a multi-decade streak of consecutive annual profits. But then came the 2010s, when Thailand became a hornet’s nest of low-cost carriers led by AirAsia’s local affiliate. Aside from momentary political unrest and natural disasters though, demand in volume terms was never in short supply. Last year, Thailand welcomed just shy of 40m international visitors.
  
  The tourists will eventually return, but Thai has deeper structural problems it needs to address, problems that arguably were always only fixable in bankruptcy. One of these problems is excessive widebody fleet complexity, in the form of A380s, B747s, older B777s, A350s, B787s, and A330s. Before the crisis, its turnaround efforts included plans for more European flying, defensive maneuvers in the important Japanese market, and longterm development of a new maintenance business. In bankruptcy though, it can take the more crucial steps of restructuring its balance sheet and escaping burdensome supplier contracts. The government intends to relinquish control by selling part of its stake. The carrier will also cut jobs and get a new management team.
  
  Whoever’s on that team won’t have an easy task; the airline has a history of union strife, corruption, cost bloat, political interference, and patronage. For now, Thai is flying mostly just repatriation charters and cargo flights. It doesn’t intend to restart international service until July 1 at the earliest. 

• Garuda, another ASEAN-based carrier under government control, has avoided the bankruptcy courts so far. But it’s restructuring all the same. In June, a $500m bond payment comes due, and there’s no way the Indonesian company can pay. It ended April with just $150m in highly restricted cash, and still has operating cash outflows of about $46m a week after cutting pay between 10% and 50%. April revenues, it said, were down 89% y/y. So it’s asking for a three-year extension on repayment, along with relaxed covenant restrictions. Already a group of investors representing 28% of those holding the bonds have accepted the offer. Others will vote on June 10.
  
  In the meantime, Garuda is still engaged in active discussions with its government on financial support. If it winds up getting a government loan, it will make sure to repay the bondholders first.

North America

• Air Canada told investors tuned into a Wolfe Research conference that it’s still awaiting more information about Ottawa’s plans to provide financial help to large companies. The airline needs help, if only because it competes with so many other airlines getting help. U.S. rivals, for example, will receive up to $50b in government support. Assuming some sort of assistance, Air Canada feels it’s well positioned to “power through” the current crisis, with adequate liquidity and lots of valuable assets. It still plans to proceed with projects like the new loyalty plan it’s developing. It’s happy to have negotiated a reduction in B737 MAX orders even before the pandemic.
  
  As for revving up its schedules, one thing management is waiting to see is when countries will open their borders again, and under what conditions. Air Canada is a more internationally dependent airline than American, Delta, and United to the south.

Indian Subcontinent

• Catching India’s airlines off guard, the country’s government said it will allow a phased-in resumption of domestic flights starting Monday (May 25). Initially, carriers will only be able to operate about one-third of their normal domestic schedule. Among the newly adopted rules: Passengers can only check-in for their flights online, not at the airport. They can only check one bag. They’ll be required to wear face masks. No inflight meal service is allowed, or even any eating onboard, period. Airlines will provide a list of all passengers to relevant government authorities. And they’ll only be able to charge within a restricted fare band.
  
  How significant is the latter constraint? At this point, airlines aren’t expecting to maximize revenues. They’ll be happy to generate whatever cash from fare sales they can get. Ultimately though, they’ll push hard for the right to price freely if the fare restrictions persist. As it happens, carriers were expecting to be grounded for longer, so they weren’t even selling tickets for flights leaving this week, until the government announcement last Thursday.
  
  India is among the countries currently dealing with a surge in Covid cases.

Australasia

• The Virgin Australia sweepstakes is heating up. The bankrupt airline is down to four key bidders: America’s Indigo Partners (the owner of Wizz Air, Frontier, Volaris, and JetSmart), America’s Bain Capital, Australia’s BGH Capital, and the Anglo-American Cyrus Capital. Bain is working with Jetstar’s former chief Jayne Hrdlicka. Cyrus, meanwhile, has a long history of doing deals alongside Richard Branson, suggesting the London-based Virgin Group might yet retain some ownership links to the revived airline.

Latin America

• There goes another. TAME of Ecuador, a smallish airline with ties to the country’s military, suspended flights and is headed for liquidation. Ecuador was hit hard and early by Covid-19, costing its economy dearly. In response, officials are shuttering state-owned companies like TAME to save money. According to one report, the carrier lost money in nine of the past 12 years. TAME joins a growing list of carriers sent into liquidation or bankruptcy by the crisis. Thai Airways, Avianca, and Virgin Australia are the most prominent. But others include Air Mauritius, Flybe, South Africa’s Comair, and a handful of smallish U.S. carriers like Trans States, Ravn Air, and Miami Air.

• Will Latam be next to file? South America’s largest airline missed at least one major debt payment last week, which rings alarms. Like many South American companies, Latam is controlled by a family. But it has many other shareholders as well, along with many creditors.  

U.S. carriers sees signs of life as summer approaches.

America’s economy is starting to reopen again — a little bit. And with this reopening, America’s airlines are starting to attract customers again — a little bit.

It was all pessimism during first-quarter earnings season. The nine scheduled U.S. airlines reporting results suffered more than $3b in combined operating losses, yielding a negative 9% operating margin. Not even during the painful financial bust a decade ago did U.S. airlines experiencing anything remotely that bad. Last year, they maintained their habit of earning solid profits during the offpeak January-to-March period, posting a positive 7% margin. Things were going well at the start of this year too, before the impact of the Covid pandemic weighed on demand in the second half of the quarter, and all but zeroed out demand in the last half of March. Those final dark weeks caused industry revenues for the entire quarter to shrink 17% y/y, on just 6% less ASM capacity. Operating costs declined only 3%, and only that much thanks to a 16% freefall in fuel costs.

The numbers will, to be sure, look worse for Q2. Far worse. April looked much like the end of March, with only minimal revenue generation from repatriation charters, cargo shipments, and a microscopic number of paying passengers. May will look a bit better. June should be somewhat better still. But again, expect monstrous Q2 losses.

And the fate of U.S. airlines beyond Q2? Happily, there’s reason for measured optimism. As several big carriers revealed at a virtual Wolfe Research investor event last week, their very worst case scenario is not what’s playing out. During its Q1 earnings call, United said it was planning for the possibility of revenues remaining near zero through the end of the year. At the same time, it was ominously warning of autumn job cuts. Even Southwest began prepping employees for the possibility of autumn job cuts. Others warned as well that the second half of 2020 could be just as bad as Q3. 

United’s message last week was more upbeat. It said cancellation rates are down. It’s seeing “moderate” demand improvement in domestic markets and even in some (unspecified) international markets. That gives it enough confidence to progress from 90% capacity reductions for this month and next month, to a less drastic 75% reduction for July. Scott Kirby, who assumed the role of United’s CEO last week, said on CNBC that the middle of April was rock bottom for business, with just 10k passengers a day, compared to about 500k normally. Last week though, volumes were up to about 35k a day. Traffic, he said, is increasing a bit faster than expected. United is also seeing lots of pent-up demand, manifested in online flight searches and discussions with corporate clients. Chief Commercial Officer Andrew Nocella, addressing the Wolfe conference, spoke of easing rates of cancellations and no-shows. He said North America demand is starting to “inflect” and look “a little bit positive.” That’s even true for some of Latin America too. International flights overall though, are still seeing just 20% load factors and in many cases only operating to capture cargo demand.

United’s executives in general sounded more hopeful than they did just a few weeks ago, even suggesting it might not need big layoffs after all if employees willingly reduce hours. Addressing the company’s annual shareholder meeting, Kirby stated: “We don’t yet see the light at the end of the tunnel, but it’s not quite as dark in here anymore.”

Southwest, in a regulatory filing last week, said load factor was just 8% in April. 8%! But now it’s seeing a “modest improvement” in passenger demand, bookings, and trip cancellations. Month-to-date through May 18, new bookings exceed cancellations. May load factors should be between 25% and 30%, considerably higher than the 5% to 10% it was expecting (without any material changes to its capacity assumptions, i.e. ASM reductions of 65%-ish). May revenues, too, will be down less than expected, albeit still close to 90%.  Looking to June, Southwest guesses loads will jump to between 35% and 45%. And revenues will be down between 80% and 85%, on between 45% and 55% fewer ASMs.  

Delta, speaking at the Wolfe event, echoed these tepid feelings of rising fortunes. Not getting too excited, it described recent booking trends as “a little bounce off the bottom.” But net bookings after cancellations have improved for sure, notably for leisure demand in June and July. The airline is even reintroducing some flights, if in part to facilitate a new policy of capping load factors at 60% to enhance onboard customer spacing. The demand it is seeing involves mostly leisure spots like beach destinations. It mentioned some positive trends out West as well, which could mean its Seattle, Salt Lake, or Los Angeles hubs. United in fact mentioned a spike in bookings to airports serving as gateways to national parks following their reopening. Allegiant and Sun Country mentioned southwest Florida beach destinations as relative bright spots.

Delta clearly worries though, about “false starts,” in which new Covid outbreaks break the sense of confidence and comfort that travelers are starting to feel. Even so, it’s still proceeding with key airport projects, and even accelerating some like its New York LaGuardia redevelopment, where a rare time of light traffic allows for demolition work that would in normal times be too disruptive to flight schedules. Delta doesn’t expect meaningful amounts of high-yield business traffic anytime in the foreseeable future, especially absent a vaccine. But five years from now, it says, “We’ll be looking much more like we did in 2019 than we look like in 2020.”

Other carriers are seeing better trends as well. JetBlue, while warning people not to “get carried away,” sees signs of activity, notably in the northeast-to-Florida market. Spirit expects May load factors to be in the 50% to 60% range, which is back to where they were in March; April’s figure was just 17%. American spoke too of “modest improvement” in demand, while noting that it’s a more domestic-heavy airline than United and Delta — this should serve it well if the current industry consensus is right and domestic demand recovers first. American’s load factor so far in May is 35%, up from 15% in April.    

Nobody will disagree that the current crisis is far worse than anything before it, measured by degree of demand destruction. But in some important ways, U.S. airlines are much better off now than they were after 9/11 and the global financial crisis. When 9/11 hit, most major carriers were out-of-shape financially with pricey labor contracts and legacy cost burdens. Many would soon go bankrupt. By the end of the decade, when the financial crisis hit, the industry was somewhat more consolidated — this was helpful — but also battered by extreme fuel volatility. Wrong-way fuel hedges alone nearly bankrupted several airlines. American did go bankrupt, in 2011.

None of America’s leading airlines is anywhere close to bankruptcy today, never mind what Boeing’s CEO might have uttered on camera. Financial markets are open, and all carriers — no exceptions — took advantage by amassing mountains of cash. Some investors, as the Financial Times reports, are betting that American might eventually succumb to its likewise mountainous sums of debt. But that’s a distant prospect, and one that assumes extreme revenue depression far out into 2021 and perhaps beyond. American has low-rate loans from Uncle Sam to extend its staying power. In addition, after many years of solid if not exactly industry-leading profits, it was able to invest heavily in a fleet of state-of-the-art planes, like MAXs and Dreamliners that the current sale-leaseback market shows are still highly desired.   

Another reason why this crisis might feel a bit less stressful than prior shocks: Extremely low fuel prices, and depressed prices for other major input costs. Many foreign rivals aren’t getting as much government aid. Carriers, meanwhile, are removing capacity and cutting costs more aggressively than they have in the past. And U.S. carriers are certainly not holding back with respect to aircraft retirements. Delta just said it would rid itself of all B777s, following a decision to retire MD-88s and MD-90s. American will say goodbye to not one, not two, not three, but four aircraft types (B767s, B757s, A330-300s, and E190s). 

American also mentioned how the A321 XLRs scheduled to arrive mid-decade could take a more prominent role in its international network, if demand to places like Europe and South America never quite fully returns to normal. In that same regard, United is contemplating the need to restructure its schedules to account for a world in which frequencies don’t matter as much, which they wouldn’t if businesses aren’t travelling as much. Fewer frequencies in turn, would encourage airlines to use larger aircraft, which have lower unit costs. Not that any airline thinks video Zooming will completely replace in-person meetings. But the responsible thing to do is plan for a wide variety of different recovery scenarios.

Airline planners, to be sure, are also considering how they’d change aircraft seating configurations if premium demand doesn’t recover for several years. Do the Big Three really need all those lie-flat seats? If everyone is forced to chase price-sensitive leisure traffic, will the Big Three need to reshape their labor agreements and operating models, to look more like their LCC rivals? The LCC Allegiant, incidentally, is taking the early lead in bouncing back from the crisis. Last week, NPR’s “Here & Now” transportation analyst Seth Kaplan shared flight data from Cirium showing that Allegiant is already operating more than half the flights it was at this time last year. The average across all U.S. airlines was closer to a quarter. Kaplan suggests Allegiant might be benefitting from better economic conditions and less stringent lockdowns in its heartland markets away from the country’s largest metros. Will other airlines seek refuge in such markets?          

Back in the finance department, all the new debt that airlines are incurring is a concern for sure. Pre-crisis, United said it would stress test its balance sheet for the direst of scenarios it could imagine, like a 9/11-type shock accompanied by high fuel prices. That led it to target at least $5b in liquidity. Now that it’s seen the Covid shock, said CFO Gerry Laderman, “I can tell you the minimum we’re going to be comfortable with is substantially more than $5b.”

That will have consequences. As airlines spend the next few years paying off debt and putting aside large piles of cash, there won’t be much left for investment, even if profits rebound. That means fewer new airplanes, fewer new product upgrades, slower adoption of new technologies and, perhaps, an industry with worsening customer service. All of this was true in the decade after 9/11. That era, by the way, was also characterized by heavy labor strife, something to fear as the industry downsizes.

Downsizing might be the best word to capture what’s happening to the U.S. airline industry post-Covid-19. Many questions remain, like will there be a second wave of outbreaks in the fall, and — most important of all — will there be a vaccine and if so, when? But the downsizing is already underway, with all the attendant risks of higher unit costs, labor strife, underinvestment, cash hoarding, and inferior service. No wonder why Warren Buffet cut and ran.

The flip side, however, is an industry with unique opportunities to restructure fleets, networks, labor contracts, supplier relationships, and operating procedures. None of this matters, of course, if people are too afraid to fly. But as U.S. airlines explained last week, people are indeed getting on airplanes, more than executives feared might be the case. So yes, as the country reopens, airlines are recovering. A little bit.