Issue No. 768

Covid's Paradox: The Losers are the Winners

Pushing Back: Inside This Issue

Airlines are just going to have to learn to live with the virus. Might there be a miracle vaccine before 2020 ends? Or a miracle cure? Not impossible. But also not the likeliest scenario. Some say the plague could linger as a public health crisis for years. Worryingly, even some countries that thought they had the pandemic under control, like South Korea, are now seeing a second wave of cases.

So airlines are pinning their scaled-back revival hopes on efforts to relieve traveler anxieties, on governments easing international travel restrictions, on better testing and tracing of the virus, and on segments of the population that are ready, willing, and able to travel despite the health risks and despite the crumbling world economy.

Four months since airlines began suspending flights to Wuhan, and two months since the pandemic caused much of the world to close its economies and borders, carriers are starting to add back flights again. They hope to salvage something from the peak summer season, in what some call the “Great Restart.” Italy, for one, an early victim of the virus, plans to reopen its borders to the rest of Europe next month. Europe’s Baltic states will create the world’s first post-crisis open travel zone, or “travel bubble.” Many Florida beaches are open again. Other places like the U.K. though, are taking a more cautious approach, imposing two-week quarantines on all air arrivals. Hawaii is sticking to its strict quarantine policy through the end of June at least.

For an intercontinental champion like Singapore Airlines, not having a domestic market could stall its recovery. But armed with a mountain of new capital, it’s sure it can survive through the crisis, and then thrive after it. Korea’s airlines are in a more precarious condition. Government cash transfusions will keep them alive. But when the time comes to finally leave the hospital, they’ll walk out in crutches.

In Brazil, where the virus is spreading rapidly, Azul sees no risk of running out of cash. In the U.S., meanwhile, Allegiant’s mouth is watering as it sees what’s happening to used aircraft prices. Ryanair sees opportunity in the aircraft market bust as well. Everyone agrees though: Demand for air travel won’t get back to 2019 levels anytime soon, and that means lots of unpleasant capacity cuts, cost cuts, pay cuts, and job cuts.


"In my own family, I have those who don’t want to come out… Others are ready to rumble looking to get back out and resume their lives. If one were to choose a 100-person sample, perhaps 40 to 50 would want to return to normal times, while the balance do not. We, as an airline, have to be able to cope with this level of uncertainty, be able to rightsize ourselves to service those 40 or 50 looking to rumble in the coming months and hopefully see the remaining 50 return later this year and in 2021."

Allegiant CEO Maurice Gallagher

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January-March (3 Months)

  • Singapore Airlines: -$522m/$24m*; -2%
  • Korean Air: -$581m/-$131m*; -2%
  • Asiana: -$461m/-$235m*; -18%
  • Jeju Air: -$83m; -28%
  • Azul: -$1.4b/-$57m*; 6%
  • Allegiant: -$33m/$33m*; 13%
  • Air Arabia: $19m; 7%
  • Chorus/Jazz: -$13m/$16m; 13%

October-December 2019 (3 Months)

  • El Al: -$59m; 0%

Net result in USD/*Net result excluding special items/ Operating margin

Weekly Skies

  • Already by Feb. 14, while reporting financial results for the final quarter of calendar year 2019, Singapore Airlines knew it had a virus problem. Covid-19 was already spreading through China. Singapore soon became the second country with recorded cases. But the airline didn’t yet know how catastrophic the problem would become. It was still celebrating a pretty strong finish to 2019, underpinned first and foremost by ongoing demand strength for its core offering: Premium intercontinental air travel.

    Before the virus became a grave concern, the biggest headaches for Singapore Airlines included wrong-way fuel hedges, a weak U.S. dollar, a slumping cargo market, low-cost competition within East Asia, and aircraft disruptions (i.e. Rolls-Royce engine issues and the B737 MAX grounding). Some of these worries seem quaint now, with the airline’s entire revenue base wiped out by a halt to virtually all international air travel. Hedge losses, for sure, remain a problem, and last quarter contributed to massive accounting losses. Even excluding the hedge adjustments, Singapore Airlines lost money from January through March, though its negative 2% operating margin excluding special items wasn’t terrible (it earned a positive 6% figure in the same period a year ago). It was by the way, the airline’s first fiscal year net loss (its fiscal year ends in March) ever, in nearly a half-century of flying.

    The current April-to-June quarter will be far worse, with much of its fleet grounded and meaningful revenues coming only from cargo transport. Cargo revenues last quarter only dropped 4% y/y, compared to a 27% freefall in passenger revenues. Total revenues were down 22%, while operating costs ex items fell just 15%. The company was effective in removing costs as its grounded planes in the second half of the quarter — labor costs notably declined 62%, reflecting pay cuts, reduced work hours, and other measures. Though much of the Singapore Airlines workforce is represented by unions, these unions tend to have much more limited negotiating power than airline unions elsewhere. The carrier’s calendar Q1 ASK capacity declined 14%.

    Currently, 96% of the group’s passenger capacity is grounded, and will remain so through the end of the quarter. This includes mainline, Silk Air and Scoot, the latter a low-cost operator. Like the rest of the industry, the group is now modifying passenger services with concepts like social distancing in mind. It’s talking to Airbus and Boeing about delaying aircraft deliveries. It’s addressing customer concerns by relaxing typical ticketing rules and extending the validity of loyalty status for its KrisFlyer members. It’s trying to use the downtime to provide skills training to staff. And it’s benefiting from extremely generous government support, including wage subsidies and rebates on Changi airport fees.

    Most importantly, as an airline controlled by a government investment arm, Singapore Airlines got state buy-in for a giant sale of new shares that should generate a massive $6b in funds when completed next month. The airline can also issue more than $4b in convertible bonds if needed. And it’s pursuing other sources of funding including potential aircraft sale-leaseback deals.

    Looking ahead to later this year, when travel restrictions should start to loosen, management has established a “restart task force” divided into teams handling 1) government and health matters, 2) passenger service, 3) crew and aircraft readiness, and 4) supply chain management. Executives acknowledge that uncertainty levels are great, about the virus, about the economy, and about government travel policies. As a carrier dependent on premium business travel, it worries about longterm adoption of videoconferencing and changes to corporate travel policies. Without any domestic routes, it could get a slow start on recovery.

    On the other hand, it will benefit as weaker, less-capitalized rivals shrink and disappear. Before the crisis, Gulf carriers were scaling back capacity and regional rivals Thai Airways and Malaysia Airlines were in deep financial trouble. Singapore Airlines itself sees all the new capital it’s raising as a means to buy time so that it can resume pursuit of longer-term strategic initiatives when the crisis abates. These include new partnerships, including a joint venture signed with Japan’s ANA on the eve of the crisis. It forged partnerships with Malaysia Airlines and Garuda too, complementing joint ventures with Lufthansa, SAS, and Air New Zealand. Another close partner, Virgin Australia, is now bankrupt, which will cost Singapore Airlines its substantial ownership stake in the carrier. Virgin isn’t going away, however, and might wind up retaining its alliance with Singapore under new ownership. Singapore also has joint ventures in India (Vistara) and Thailand (NokScoot).

    It still believes in longterm fleet replacement, retaining (if delaying) orders for B777-9s, B787-10s, A350-900s, B737 MAX 8s (for SilkAir), and A320 NEOs (for Scoot). Before the crisis, it was busy densifying A380s and preparing to phase out the Silk Air brand, outfitting its narrowbodies with lie-flat seats. Last year, it expanded its U.S. presence with ultra-longhaul A350s (North America still accounts for less than 10% of revenues, making it less important than even the carrier’s Indian subcontinent/Africa entity). It expanded to Europe and Australasia as well, these being its two most important markets outside of East Asia. But all that has to wait. For now, the best it can do is pursue some cargo and passenger charter opportunities. Encouragingly, several Pacific rim economies like Taiwan, Australia, and New Zealand—all important markets for Singapore Airlines — seem to have the virus under control.

    But Singapore itself offers a cautionary tale: On Friday alone, the city-state recorded almost 800 new Covid cases, part of a second-wave outbreak tied to foreign worker dormitories. That raises another worrisome point: Singapore’s economy is highly dependent on international trade and imported labor, both threatened by post-pandemic realities.

Long Road to Recovery for Korea’s Airlines

  • Last year’s cargo weakness was poison for Korean Air, which as recently as 2018 got 24% of its total revenues from hauling freight. South Korea is, after all, an export powerhouse. Like for Singapore Airlines though, bullish premium longhaul passenger demand was enough to keep Korean Air profitable at the operating level last year, if barely. Its 2019 operating margin was just 2%, and losses were heavy at the net level — for that blame the cost of servicing heavy debts. This was the unflattering if at least manageable situation going into the Covid crisis.

    Since the crisis began, managing to stay alive has been a challenge. Pulling out all the stops, Korean Air has lobbied for state aid, sold non-core assets, and last week announced a share sale that should raise about $800m. Who wants to buy stock in a hobbled carrier like Korean Air right now? For one, it’s top shareholder Hanjin Group, which agreed to buy about $250m worth. Add to that another $1b or so in government assistance. The airline also has 70% of its workforce on six-month leave, big executive pay cuts in place, and most of its fleet grounded.

    During Q1, as the Covid pandemic spread quickly from China to Korea, Korean Air’s passenger revenues tumbled by one-third y/y. An industry shortage of freighter capacity amid all the global aircraft groundings triggered a yield spike that lifted the carrier’s cargo revenues 1%. But the net effect was still a 23% fall in total revenues, which was far greater than the 15% drop in the carrier’s operating costs. Passenger ASK capacity, like total revenues, fell 23%. The end result: More heavy net losses and this time operating losses too, though operating margin was a not-so-awful negative 2%.

    Before the world fell apart, Korean Air was banking on a close partnership with Delta to lift its margins and move on from corporate scandals (remember the Nut Rage lady?) Delta in fact bought a 10% ownership stake. Korean Air also ordered more Dreamliners last year, expanded shorthaul business class cabins, axed first class cabins on a portion of its longhaul fleet, added new China flights, and beat back a hostile takeover attempt led by (her again) the Nut Rage lady.

    On January 23 of this year, however, it gave the first sign that things would go terribly wrong. That day, the carrier announced it would stop flying to Wuhan, site of a mysterious new viral epidemic. South Korea has since won praise for managing the pandemic, with rigorous testing and contact tracing. But Covid-19 is a tough enemy, surging back with a wave of new Korean victims last week. That could stall what Korean Air hopes will be a gradual lifting of international travel restrictions next month. Keep in mind that about 30% of Korean Air’s pre-crisis passenger revenues came from North American routes, and another 20% from European routes.

    If this sort of intercontinental travel indeed takes years to recover, as some predict, it could be a long road to revival for Korean Air, even putting aside shortcomings like the presence in its fleet of 22 A380s and B747s.  
  • Already by March, Asiana’s passenger volumes were down by nearly 100% y/y (95% to be exact). Earlier in the first quarter, the carrier faced demand headwinds on its Japanese routes, the consequence of a political dispute. A weaker Korean won was likewise troubling.

    But the real pain started with the viral outbreak, which was most responsible for a brutal negative 18% Q1 operating margin. Asiana’s total revenues plummeted 22% y/y, never mind that cargo revenues increased 15%. Cargo in fact accounted for 35% of all revenues in the quarter. But a 34% freefall in passenger revenues was simply overwhelming. Operating costs only declined 8%, with fuel outlays down 15% and labor costs down 5%. Other numbers further highlight the Q1 distress: A 32% drop in RPK traffic despite just 19% less ASK capacity. Load factors dropped from 84% to 71%. Passenger revenues on Japanese routes declined 58%. On ASEAN routes — that’s Asiana’s largest market — revenues fell 35%.

    The company’s already heavy debts, meanwhile, spiked even higher, erasing recent efforts to get its balance sheet under control. Asiana also operates two separate low-cost carriers. One is Air Busan, which posted a gruesome negative 41% Q1 operating margin. Air Seoul wasn’t all that much better at negative 27%. Asiana has long posted inferior margins to those of its bigger rival Korean Air. That was even true in 2015, when Korea was tested by a viral outbreak called MERS, badly hurting airline peak season revenues that year.

    Asiana was on a path to reform, however, cutting routes, cutting costs, adding A350s and A321 NEOs, and most importantly attracting the Hyundai conglomerate as a new investor. Its investment, though, was stalled by the crisis, and now remains uncertain. Keeping Asiana alive for now: Government aid.
  • Results were even worse for the normally-profitable shorthaul LCC Jeju Air. With heavy exposure to disrupted shorthaul markets, most importantly China and Japan, Jeju suffered a negative 28% operating margin. Revenues dropped 42% y/y, compared to a mere 16% drop in operating costs. ASK capacity decreased 26% even as five new planes were added, implying low rates of utilization. In last year’s Q1, the carrier produced a positive 11% operating margin. But that was before Korea-Japan tensions flared, before overcapacity on Korea-China routes, and before, most importantly, anyone had heard of Covid-19.

    To help matters, Jeju turned to consolidation. At first, its parent company was interested in investing in Asiana. When that thankfully didn’t happen, Jeju purchased a large stake in LCC rival Eastar. That deal, though, is also in question following the onset of the Covid crisis. Jeju, meanwhile, might have wished it never placed a large B737 MAX order. On a brighter note, The Economist reports that flight capacity on the busy Seoul-Jeju route was almost fully back to pre-crisis levels this month, responding to a “swift” bounceback in domestic tourism. Last week’s second wave of infections though, puts some doubt into the resiliency of the domestic recovery.

Azul Sees Demand (Slowly) Recover

  • Having entered 2020 as one of the world’s most profitable airlines, Azul was expecting another strong year. The Brazilian economic outlook was brightening. The Brazilian airline sector was flourishing following the collapse of Avianca Brasil, leaving just three main competitors (Azul, Latam, and Gol). Azul was aggressively growing and upgauging its fleet, expanding its cargo flying, planning new longhaul routes like Campinas-New York JFK, expanding its domestic network through the purchase of a regional carrier called TwoFlex, developing joint ventures with United and TAP Air Portugal, building its loyalty program, and offloading older E-Jets to LOT Polish and Breeze, the latter a new U.S. startup launched by Azul’s founder David Neeleman, also of JetBlue fame.

    As late as March 12, Azul was still optimistic, insisting domestic demand was still holding firm. In the second half of March, however, Azul was forced to cut about half of its normal capacity. In the final days of the month, its network was down to just a few routes. Ultimately, results for Q1 were still positive at the operating level — operating margin was 6%, consistent with the positive results seen at other Latin American carriers (i.e. Gol, Volaris, Copa).

    But when things go wrong in the world economy, Brazil seems to always suffer disproportionally, tanking its currency and wreaking havoc on the net results of its corporations. Azul’s Q1 net loss — no kidding — was $1.4b due to heaps of accounting adjustments for forex movements and wrong-way hedges. Even normalized without the messy accounting through, the weak real’s hurtful impact on debt servicing meant net results were in the red, to the tune of $57m. What’s most important, however, is cash, and Azul thinks it has enough (or could raise enough) to stay in business through the end of 2021.

    Demand is in fact already starting to creep back, bottoming in mid-April. Oil and gas companies, surprisingly, are flying a bit more than expected. On the other hand, Brazilian finance companies are not. In a broader sense, business traffic is still largely dormant, and probably will be until São Paulo lifts its lockdown, currently in effect through May. Brazil, as it happens, has been hit hard by Covid outbreaks in recent weeks.

    Even so, Azul is gradually adding back flights, flying only when cash revenues exceed cash costs (now’s not the time to worry about noncash costs like depreciation or indirect costs like management overhead). People are booking late, which means it can make last minute decisions on whether to operate or cancel. It also has flexible crew contracts that allow for close-in schedule adjustments. Management sees demand recovering to about 40% of pre-crisis levels by December.

    In the meantime, it’s talking to Brazil’s public development bank about credit support. It suspended all E2 E-Jet deliveries until 2024. It’s talking to Airbus about altering delivery schedules. It hints at a desire to adopt more favorable labor contracts. Those contracts to sell older E-Jets to Breeze and LOT Polish, it says, are still valid. Cargo is a big bright spot, with lots of potential to grow in tandem with Brazilian ecommerce. An estimated 60% of Azul’s costs are variable, almost 80% of its staff have accepted unpaid leave, and 90% of its aircraft are leased rather than owned. Its wholly owned loyalty plan, with 12m members, can sell miles for cash if needed. Ownership and credit exposure risk to TAP Air Portugal is mitigated by the government support TAP will likely get, not to mention the airline’s loyalty program which serves as collateral for Azul’s loans.

    As it looks to rebuild the domestic network in conjunction with demand recovery, Azul insists it has one big advantage over rivals: Its diverse fleet consisting of everything from nine-seat Cessna Caravans to 200-plus-seat A321 NEOs. Widebody A330s for international use might take longer to recover relevance. But the point is, whatever happens with demand on a given route, Azul will have an appropriately-sized aircraft to serve it.       

El Al Enters Crisis Troubled

  • Israel’s El Al finally reported its Q4, 2019 results, which showed a negative 4% operating margin. This marked a modest y/y improvement as revenue growth of 5% outpaced a 3% increase in operating costs. Cheaper fuel helped. So did the fuel efficiency and other advantages of newly arriving Dreamliners. The airline also improved revenue generation from its loyalty plan, ended its low-fare “Up” experiment, and took advantage of robust inbound tourism and demand from a thriving domestic tech sector.

    Nevertheless, El Al remained a troubled airline, recording its second straight year of net losses. It only barely eked out a positive operating margin for the full year. So it entered 2020’s Covid crisis already on weak footing. Part of its weakness is structural: Lack of alliance partners, Israel’s largely-closed borders with immediate neighbors, limited economies of scale, and low fleet utilization (due to the grounding of flights each week during the Jewish Sabbath). It also faces intense competition following a decade of open skies agreements with the European Union and elsewhere.

    Some of El Al’s toughest rivals include Aeroflot, Turkish Airlines, and European LCCs like Wizz Air and easyJet. The new B787s allowed for more longhaul routes, like Tokyo and Chicago. Or so it hoped — the Covid crisis forced it to postpone these two launches. Another postponed route was Dusseldorf. The good news, in a modest sense, is that El Al was always a sizeable cargo airline whose freighter capacity is serving it well at the moment.

    Israel, meanwhile, is seeing Covid infection rates drop as it looks to reopen its tourist sector next month. Talks are underway with Greece and Cyprus about creating one of the so-called “travel bubbles” up for discussion elsewhere.

    But El Al itself is battered financially, begging for government aid, specifically loan guarantees. The airline no longer has any state ownership. But it remains an important tool of the state, when coming to the aid of threatened Jewish communities abroad, for example.

Allegiant Expresses Optimism

  • March is the pinnacle of peak season for Florida, which explains why it’s typically the strongest month of the year for Allegiant. Not this atypical year, of course. But even with March disrupted by the coronavirus, the world’s most profitable airline by operating margin last year (see chart below) managed to earn a profit excluding special items last quarter. It was the only U.S. airline with a Q1 profit excluding items, aside from the regional carrier SkyWest.

    Nor was it a small profit — Allegiant’s Q1 operating margin ex items was 13%. To be clear, this was a big drop from its 20% figure in the same quarter a year ago. But even this was a less severe y/y drop than any other U.S. carrier. Revenues fell 9% while operating costs fell 2%, all on 4% more ASM capacity.  Both fuel and labor costs declined, by 11% and 5%, respectively. March revenues alone, for the record, dropped 40% from last year’s levels. Allegiant is uniquely structured to ground planes in periods of low demand without blowing up its unit costs. Low demand, for sure, is not the same thing as no demand, which is close to the state of U.S. air travel at the moment.

    But Allegiant seems well placed for an eventual recovery with its near-100% reliance on price-sensitive domestic leisure travel. Most of its customers, furthermore, live in regions of the U.S. less affected by the Covid crisis thus far, where the “sentiment is very different” than in big metro areas like New York, Dallas, Atlanta, or Los Angeles. Allegiant is actively surveying its customers, who are “telling us they overwhelmingly believe things are getting better.”

    Most think it will take more than six months for things to get back to normal, but nearly two-thirds plan to travel by air before the end of this year. About half, meanwhile, say they’ll stay in a hotel or vacation rental property. Another third plan to visit friends or relatives and the remainder will travel to their second home. Surveys also show a majority who report unchanged or improved personal finances, which could reflect a preponderance of retirees unaffected by the job market collapse.

    CEO Maury Gallagher compares consumer sentiment to the mix of opinions within his own family: Some people who won’t leave their homes and others who are ready to get moving again. Like the airline industry at large, Allegiant wants to size itself to accommodate the latter portion, which will hopefully grow over time, even if not to 100% for several years. As optimism builds, Allegiant is sure enough seeing a jump in recent flight searches on its website, and more importantly a modest “uptick” in bookings. That’s particularly true for flights to Florida’s west coast and panhandle (i.e. Tampa/St. Petersburg, Punta Gorda, Sarasota, and Destin), where beaches have reopened.

    On the other hand, Allegiant’s two busiest markets — Orlando and Las Vegas — are largely still dormant with theme parks and casinos still closed. The new Las Vegas Raiders stadium for which Allegiant bought naming rights is supposed to open in late August (every game for the entire season is already sold out, according to the Athletic). The company, remember, was also building a new hotel resort in Punta Gorda, work on which is suspended for now.

    That’s one measure management took to preserve liquidity. It’s also due to get $172m in federal CARES Act money to cover payroll. A less discussed benefit of the CARES Act is tax relief that will net Allegiant $100m in refunds this quarter and at least as much next year. It can access another $276m in CARES Act lending help if needed. More than a quarter of the airline’s workers have accepted voluntary leave or pay reductions. Its fleet will shrink by about 25 planes. It has no meaningful aircraft purchase commitments beyond this year. Current cash burn is down to about $2m a day.

    Feeling a more imminent sense of recovery than perhaps some of its peers, Allegiant is keeping all of its 18 crew bases intact. And it’s keeping a sizeable portion of its flights on sale, ready to go if bookings merit, or ready to cancel shortly before departure if not. For example, it has about 75% of its flights available for sale in May, compared to only about 30% for most U.S. carriers. That said, it actually operated just 13% of its planned departures in April. Other near-term tactics include measures to promote onboard health and efforts to get road trippers to book hotels on its website.

    Management acknowledges that it would eventually have to close some smaller bases if demand remains suppressed for a long time. It hints at a desire to experiment with new labor compensation models. But there’s one thing in particular that makes Allegiant think it might ultimately benefit from the crisis. The fact is, a critical part of the carrier’s success is its opportunistic buying and selling of aircraft. And now, the crisis has radically altered the aircraft market, not to mention the market for aircraft parts and maintenance.

    It can’t help but salivate at Avianca’s 45 CFM-powered A320s, some likely available at distressed prices as the Colombian carrier restructures in bankruptcy. Many more such opportunities abound, as they did with MD-80s in the immediate post-9/11 era. In the carrier’s 2007 annual report, it noted how “ownership cost of the used MD-80s sought by us are more than 80% lower than comparably sized new Airbus A320 and Boeing 737 aircraft.”

    As Gallagher likes to say as he purchases planes on the cheap: “We [are] a noncapital-intensive business competing in a capital-intensive industry.”

The Butchery Begins

U.S. Airline Scoreboard: Q1 2020

RevenuesNet resultOperating MarginNet MarginRev Y/YExpenses Y/YRev/Exp differenceASM/KsFuel Y/YLaborAverage FuelPretax Margin
1Delta$8.592b($326m)-5%-4%-17%-5%(13 pts)-6%-18%5%$1.82 -4.9%
2American$8.515b($1.129b)-16%-13%-20%-2%(17 pts)-7%-17%2%$1.83 -17.0%
3United$7.979b($639m)-11%-8%-17%-2%(15 pts)-7%-15%3%$1.90 -13.0%
4Southwest$4.234b($77m)-3%-2%-18%-6%(11 pts)-7%-14%-6%$1.90 -3.4%
5Alaska $1.636b($102m)-9%-6%-13%-2%(10 pts)-1%-12%5%$1.93 -8.9%
6JetBlue$1.588b($116m)-8%-7%-15%-4%(12 pts)-4%-16%5%$1.86 -9.6%
7Spirit$771m($59m)-8%-8%-10%8%(18 pts)-2%-7%18%$1.81 -9.7%
8Hawaiian$559m($34m)-8%-6%-15%-1%(14 pts)3%-10%8%$1.83 -8.0%
9Allegiant$409m$33m13%8%-9%-2%(8 pts)4%-11%-5%$1.87 10.3%
TOTAL$34.283b($2.448b)-9%-7%-17%-3%(14 pts)-6%-16%2%$1.86 -10.0%

*All figures exclude special items

And in Other Earnings News

  • U.S. regional airline Mesa reported $2m in net income for calendar Q1 but warned that this coming quarter could be ugly. The regional carrier reported that it is down to operating 194 flights per day now, down from 650 per day before the pandemic. It is delaying the delivery of 20 E175s and will continue to operate CRJ-700s for United until it takes the Embraers. Mesa took $93m in payroll protection funds provided through the CARES Act. Because it did not take more than $100m, Mesa is not required to offer the government stock warrants.

    Mesa shares labor costs with the mainline carriers for which it operates, so it said it could offer a cost reduction to its mainline partners. Mesa still is in talks with the U.S. Treasury about taking a loan through the CARES Act.

    CEO Jonathan Ornstein expects incremental improvement in traffic through the year, and said the company expects to be operating at 50% capacity by year end. Although jobs are protected until Sept. 30, Ornstein said the company is accepting voluntary leaves of absence and is in talks with its unionized workgroups for wage concessions to avoid furloughs and layoffs.
  • Chorus, the Canadian regional airline flying as Jazz for Air Canada, earned a comfortable 13% operating margin in Q1. This quarter will be rougher, with more than 70 of its planes parked and roughly 65% of its workforce inactive. Air Canada Express capacity is down 90% y/y for April and May.

    But Chorus sees some green shoots as it works with Air Canada on mutually beneficial remedies. The company is also a major lessor of regional aircraft to airlines around the world, parts of which are starting to show signs of a travel revival. It’s seeing capacity ramp up in Asia and Europe, for example. And it’s encouraged by the prospect of airlines downsizing to smaller planes in the context of lower demand. In addition, domestic markets are restarting first, and carriers tend to use lots of regional planes domestically.

    Even KLM, without a domestic network, is restarting intra-European flights with Embraer jets. Another Chorus customer, Lion Air, is restarting regional flights within Indonesia. Virgin Australia, alas, is a customer too — Chorus is hopeful it will retain its ATR turboprops even under new ownership.
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  • Former American CEO Bob Crandall told Bloomberg that he expects a “substantially smaller” airline industry for a long time to come. This crisis, in other words, is more than just a cyclical downturn. The central problem is that many people will feel unsafe in a confined space like an aircraft cabin. And that won’t change until there’s a vaccine, a cure, or much more systematic testing to identify and quarantine people who have the virus.

    Crandall accepts the need for Washington to aid the airline industry in such times, serving as an insurer of last resort for an economically-vital industry. He accepts the notion of banning behaviors like stock buybacks. But he’s not in favor of government ownership. 
  • Romanians working in Italy. Mexicans working in the U.S. Indians working in Dubai. Filipinos working, well, everywhere. Migrant labor was a staple of the pre-Covid global economy, in industries as diverse as hospitality, construction, health care, and agriculture. Airlines, of course, benefit greatly from this cross-border flow of labor. But what now?

    The Bloomberg “Stephanomics” podcast asks this question, as millions of migrants return home amid the crisis. In Eastern Europe, countries like Poland are wondering whether the influx of returning workers, now available for infrastructure projects, for example, can neutralize the lost income from migrant worker remittances. About one-third of Singapore’s workforce is foreign born. In Dubai, the population could drop as much as 10% as expats, including skilled workers like engineers and teachers, return home. The Gulf region of course, is also losing oil sector jobs traditionally filled by migrants.

    “The export and import of labor,” notes Bloomberg’s Dan Moss, “is one of the biggest causalities of the Covid-induced downturn.” Add airlines to the collateral damage. What’s the longterm future of the globalized labor market? The best argument for eventual recovery is that the economies of worker-exporting countries and worker-importing countries are so heavily dependent on one another. 
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Sky Money

  • Boeing CEO David Calhoun, in an interview with NBC, caused a stir by suggesting a major U.S. airline would go out of business by the fall. “What did he just say?” was how the Wall Street Journal described the reaction among carriers like Delta, United, and American. He clearly misspoke, given the near-impossibility of any such thing happening. U.S. carriers have much of their payroll costs covered by federal funding through the summer, supplementing enormous piles of cash that would keep them going even if revenues stayed near zero for many months to come, which they likely won’t as an uptick in recent bookings suggests.
  • Europe’s tourism giant TUI was starting to enjoy life without its one-time chief rival Thomas Cook, which collapsed last fall. Instead, it’s just hoping to salvage something — anything at all — from this year’s summer peak. Summers, after all, are when TUI typically makes most of its money.

    With Thomas Cook gone and Europe’s airline capacity constrained by MAX and NEO issues, TUI enjoyed what it called its strongest January in company history. When Covid came, though, it was forced to rely on a German government bridge loan to avoid insolvency. Now it’s managing for cash, not profit, and would feel fine if just Greece and Spain’s Mallorca were to reopen and receive some visitors this summer.

    It’s seeing busy traffic on its website, if not yet strong bookings. Flights should be back in the air in late June or early July. About 35% of summer seats are booked, not too bad, if far from the 59% figure it should have around this time. TUI is optimistic about 2021 and beyond, saying “people still have a passion for holidays.”

    Separately, management is still in MAX compensation talks with Boeing. Longhaul markets served with B787s, it said, will take longer to recovery. And it rejects the idea of selling off its airline units, affirming their strategic importance while acknowledging their need to downsize.   

The Last Year of Normal

Global Airline Scoreboard: Full Year 2019

By Revenues ($m)  By Net Profit ($m)  By Operating Margin  By Net Margin  
Delta$46,910 Delta$4,773 Allegiant20%Air Arabia23%
American$45,768 United$4,071 Air Arabia20%Jazeera14%
United$43,259 IAG$2,663 Gol19%Wizz Air14%
Lufthansa $40,986 Southwest$2,300 Pegasus19%Pegasus13%
Air France/KLM$30,628 American$2,179 Azul17%Allegiant13%
IAG$28,678 Lufthansa $1,443 SkyWest17%Copa12%
Southwest$22,428 Ryanair$1,155 Wizz Air16%Ryanair12%
China Southern$22,366 Japan Airlines $948 Mesa16%Cebu Pacific11%
Air China$19,736 Alaska $798 Copa16%Azul11%
All Nippon$19,020 All Nippon$798 Cebu Pacific15%SkyWest11%
China Eastern$17,516 Air Canada$692 Chorus15%Southwest10%
Air Canada$14,512 Qantas $582 Jazeera14%Delta10%
Cathay Pacific $13,679 JetBlue$568 Delta14%Frontier10%
Japan Airlines $13,651 Singapore Airlines$562 Spirit14%United9%
Turkish Airlines$13,229 Air China$523 Ryanair13%IAG9%
Qantas $12,651 Turkish Airlines$480 Southwest13%Spirit9%
Singapore Airlines$12,360 Air France/KLM$448 IAG13%Alaska 9%
Korean Air $10,562 Wizz Air$442 Volaris13%Gol9%
Hainan Airlines$10,491 LATAM$367 Frontier12%Hawaiian8%
LATAM$10,431 Spirit$349 Sun Country12%VietJet8%
Aeroflot $9,828 Copa$336 Alaska 12%Chorus7%
Ryanair$9,588 SkyWest$321 Hawaiian11%JetBlue7%
Alaska $8,781 Azul$319 United11%Japan Airlines 7%
JetBlue$8,094 Gol$317 Japan Airlines 10%Mesa7%
Thai Airways$5,929 Air Arabia$296 JetBlue10%Sun Country7%
EVA Air $5,868 Pegasus$253 VietJet10%Aegean6%
China Airlines$5,451 Frontier$251 Aegean9%Air Canada5%
Asiana$5,113 IndiGo$239 Air Canada9%IndiGo5%
IndiGo$5,018 Allegiant$232 Air China9%American5%
Norwegian$4,948 Hawaiian$219 Spring Airlines8%Volaris5%
SAS (feb18-jan19)$4,938 Cathay Pacific $216 Qantas 8%Qantas 5%
Avianca $4,622 Aeroflot $210 American8%Singapore Airlines5%
Garuda$4,573 Cebu Pacific$183 Juneyao 7%All Nippon4%
Virgin Aust $4,077 EVA Air $157 VivaAerobus7%Air New Zealand 4%
Air New Zealand $3,863 Air New Zealand $144 LATAM7%Turkish Airlines4%
Spirit$3,831 VietJet$136 AirAsia 7%Lufthansa 4%
TAP Air Portugal $3,706 Aegean$87 Singapore Airlines7%LATAM4%
Aeromexico$3,575 Volaris$86 airBaltic 6%Juneyao 3%
Gol$3,515 Juneyao $82 All Nippon6%Spring Airlines3%
Finnair $3,484 Chorus$74 IndiGo6%EVA Air 3%
Wizz Air$3,059 Finnair $71 Air New Zealand 6%Air China3%
SkyWest$2,972 Spring Airlines$70 Lufthansa 5%VivaAerobus2%
AirAsia $2,909 Jazeera$50 EVA Air 5%Aeroflot 2%
Azul$2,898 Mesa$50 Finnair 5%Finnair 2%
Hawaiian$2,832 Sun Country$46 Turkish Airlines4%Cathay Pacific 2%
Copa$2,707 SAS (feb18-jan19)$34 China Southern4%Air France/KLM1%
Frontier$2,508 Garuda$25 Aeromexico4%Bangkok Air1%
Juneyao $2,427 VivaAerobus$14 Air France/KLM4%SpiceJet1%
Spring Airlines$2,145 SpiceJet$12 Avianca 4%SAS (feb18-jan19)1%
Pegasus$1,928 Bangkok Air$11 Garuda3%Garuda1%
Allegiant$1,841 airBaltic $2 Aeroflot 3%airBaltic 0%
Volaris$1,806 Air Mauritius ($2)Cathay Pacific 3%Air Mauritius 0%
VietJet$1,770 Comair/Kulula($6)China Eastern3%China Airlines0%
SpiceJet$1,699 China Airlines($22)Korean Air 2%China Southern-1%
Cebu Pacific$1,640 Jeju Air ($29)Hainan Airlines2%AirAsia X -1%
Icelandair$1,504 Icelandair($58)SAS (feb18-jan19)2%Comair/Kulula-1%
Aegean$1,463 Nok Air ($59)TAP Air Portugal 2%China Eastern-2%
Air Arabia$1,296 Jin Air($62)China Airlines2%Hainan Airlines-2%
Jeju Air $1,184 AirAsia ($71)Comair/Kulula0%Aeromexico-2%
AirAsia X $1,058 Aeromexico($73)Norwegian0%Korean Air -2%
Chorus$1,033 AirAsia X ($106)Virgin Aust 0%AirAsia -2%
Bangkok Air$832 Virgin Aust ($112)SpiceJet-1%Jeju Air -2%
Jin Air$784 TAP Air Portugal ($119)Bangkok Air-2%Avianca -3%
Mesa$729 Avianca ($125)Air Mauritius -2%Virgin Aust -3%
Sun Country$701 China Southern($143)Jeju Air -2%TAP Air Portugal -3%
VivaAerobus$669 Hainan Airlines($184)Icelandair-3%Icelandair-4%
Air Mauritius $574 Norwegian($227)AirAsia X -3%Norwegian-5%
airBaltic $572 Korean Air ($247)Thai Airways-4%Thai Airways-6%
Comair/Kulula$501 China Eastern($269)Jin Air-5%Jin Air-8%
Nok Air $410 Thai Airways($378)Asiana-6%Asiana-9%
Jazeera$346 Asiana($457)Nok Air -13%Nok Air -14%

*All figures exclude special items

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  • Ryanair’s Michael O’Leary, in the category of ultra-LCC CEOs relatively bullish on recovery, told a Financial Times virtual summit last week that he’s in “advanced discussions” with Boeing about B737 MAX pricing. The talks include negotiations about how much compensation Boeing will pay for the MAX’s lengthy grounding.

    O’Leary sees the MAX returning to service in August at the earliest. As for his relative optimism, he understands that market conditions will be difficult in the near term. But like Allegiant, Ryanair is wide-eyed as it sees what’s happening to aircraft prices. “I see nothing but opportunity coming out of this.”

Delta Retires B777s

  • Delta, with a goal of reducing cash burn to zero by year end (from $50m a day currently), made another big move to downsize: It will permanently retire its 18 B777s by the end of this year.

    Delta was never a big B777 enthusiast like its rivals United and American, in part because of pilot strife in the late 1990s, which caused it to pare back orders. Its first of just eight B777-200s came in 1999. It then began taking 10 long-range versions in 2008, facilitating an aggressive intercontinental expansion that took it to places like India, South Africa, and Australia.

    Still, it always flew B757s, B767s, and former Northwest A330s in much larger numbers. Later, it began taking A350-900s, which it claims burn 21% less fuel per seat than the aging B777-200s. The move also by the way, cements Delta’s status as a predominately Airbus customer, though it still does have lots of B767s, B757s, B737-NGs, and B717s. The mainline jets in its order book (A220s, A321 NEOs, A330 NEOs, A350s) are all Airbus.

    Separately, Delta said it would close its pilot base in Cincinnati, one of its most profitable hubs for a time in the pre-9/11 era (for more on Delta’s history in Queen City, read Glory Lost and Found: How Delta Climbed from Despair to Dominance in the Post-9/11 Era.)
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State of the Unions

  • Emirates, cutting 30k jobs? It’s a serious consideration, Bloomberg reported Sunday. It might also accelerate retirement of A380s, a plane that was ill-fit for the pre-crisis era, and even more ill-fit for the post-crisis era. The Gulf carrier, a symbol of globalization, could be one of the biggest victims of a de-globalization trend. It was already under pressure pre-crisis from its oversized planes, tough competition, and the impact of oil prices on Gulf economies.
  • The U.S. House of Representatives passed another round of pandemic-related legislation that includes several provisions the Air Line Pilots Association and other airline labor groups have asked for. These include mandating that all passengers and crew wear face coverings, coordinated aircraft cleaning and disinfection standards, and notification of employees if a Covid case is reported in their workplace.

    The bill, called the HEROES Act, has become a political football in Washington, as both parties tussle over funding. But ALPA warned that without these mandates, more airline crews will be infected with the virus. More than 300 pilots represented by the union have been diagnosed so far, the union said.
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Landing Strip

  • During its morose Q1 earnings call, Air France/KLM said it was talking to Groupe ADP, the company that runs Paris Charles de Gaulle airport, about delaying its roughly $10b new terminal. The T4 project is currently scheduled to open in 2028, with capacity to handle about 10m annual passengers at first, and as much as 40m by 2037. The airline argues it won’t need the extra capacity by then given the crisis, and that ADP should instead focus on more modest expansion of existing terminal facilities.

    It’s not only that Air France/KLM plans much slower growth in the next few years. In addition, several French airlines disappeared last year — i.e. XL Airways and Aigle Azur — and others like Corsair are now under intense pressure. Air France/KLM is talking to Amsterdam’s Schiphol airport too, about sharing the cost burdens brought on by the Covid crisis.
  • Airports Council International-Europe is joining with two transport unions, calling for the EU to relax some ground-handling rules at airports for the duration of the Covid pandemic.

    The groups asked the EU to extend ground-handling licenses set to expire this year for another three years and are also asking the EU to issue temporary licenses that will remain into effect for three years. These measures will help preserve jobs at European airports and will ensure that facilities have the requisite staff to handle traffic when it begins to recover.

    Separately, ACI-Europe and IATA are urging the European Commission to work with the entire aviation ecosystem to formulate a plan to reopen Europe for the summer holiday season. The groups are asking the EC to coordinate with all its member state governments to avoid a patchwork of health regulations and quarantine measures, and to leverage data from the European Centre for Disease Prevention and Control to regulate when travel restrictions can be lifted.
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  • Both Sabre and Amadeus, in their Q1 earnings calls, used the term “severe” to describe the impact of the Covid crisis. Neither company sees much meaningful improvement in travel demand yet. Both, like airlines, are in liquidity preservation mode. And both, while optimistic for the long run, are expecting a smaller travel industry for some time.

    The number of worldwide airline bookings made by travel agencies declined by almost 50% y/y last quarter. And according to Sabre, the last half of March saw net airline bookings through all GDSs worldwide decline by about 140% y/y, which includes cancellations. The drop has eased in recent weeks, but as of late April, net numbers were still negative (cancellations exceeding new bookings).

    Sabre also noted that historically, 70% of its bookings have come via travel management companies (TMCs) which handle corporate travel. The other 30% come via online travel agencies, which might recover faster given their base of leisure customers.

    Sabre, remember, is abandoning a planned takeover of Farelogix. It’s now in a tussle with Lufthansa, which said it will terminate its Sabre GDS agreement this summer. Sabre, meanwhile, has yet to reach a distribution agreement with Southwest.
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  • A group of Democratic U.S. senators introduced legislation to require airlines and travel agents to refund cancelled flights in cash, rather than with travel vouchers.

    The proposed legislation follows a Senate hearing last week during which Sen. Blumenthal of Connecticut, one of the sponsors of the legislation, pressed Airlines for America President Nicholas Calio on why airlines are not refunding tickets in cash. The bill, introduced by Blumenthal and fellow Connecticut Sen. Chris Murphy; Sens. Elizabeth Warren and Edward Markey of Massachusetts; and Kamala Harris of California, would make the payments retroactive to March 20 and would allow airlines to use CARES Act funds to do so.

    “Congress allocated billions of dollars to airlines to help them stay afloat during this pandemic, but the airlines continue to play games with their customers,” Murphy said.
  • United is among the U.S. airlines outlining its social-distancing and aircraft-cleaning efforts. The carrier notes its aircraft are flying with light passenger loads. But passengers booked on busy flights will have the option to rebook on a later, less crowded flight if they feel uncomfortable. United also is changing boarding procedures to limit crowding at jetbridges and gate-hold areas, and boarding fewer passengers at a time.

    The carrier also is giving every passenger hand sanitizing wipes upon boarding and is trialing touchless kiosks at several airports. United is touting these measures after a photo of a full United flight caused outrage after circulating on social media.

    Separately, the Chicago-based carrier named Brett Hart its new president, replacing Scott Kirby as Kirby becomes CEO. Hart served as interim CEO when Oscar Munoz went on medical leave in 2015.

Gogo Says Inflight Connectivity Sector Needs to Consolidate

  • Inflight connectivity provider Gogo said it will install its systems on “minimal” aircraft for the balance of the year. This is both a blessing and a curse for the company. On the one hand, installations had been on pace to be among the strongest in the company’s history; business in January and February boomed. On the other, the company can preserve cash with fewer installations by reducing inventory.

     CEO Oakleigh Thorne said Gogo has reduced costs and has furloughed 54% of its staff. It remains too early to determine how many of those furloughs will become permanent layoffs, he said. Gogo reported 91% fewer passenger sessions in March and April, but Thorne said sessions are picking up as airlines, particularly in Asia, add flights. Gogo’s commercial aviation segment reported $10m in profits in the first two months of the year, and an $11m loss in March.

    Thorne in a separate event said the inflight connectivity sector is ripe for consolidation. Customers want cheap, fast inflight connectivity with no gaps in coverage, he said. “And frankly, the only way to do that is by being a much, I think, bigger company than any of us in the industry are today,” Thorne said. The Covid pandemic may precipitate horizontal consolidation in the sector, he suggested.
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Routes and Networks

  • There’s some welcome news on the network front as carriers begin building back their schedules for the upcoming summer. Lufthansa, Eurowings, and Swiss will have 106 destinations in Germany and Europe opened again by the end of June, not to mention more than 20 intercontinental destinations. Emirates is reintroducing flights to cities like Paris, London, Frankfurt, Milan, and Sydney. Ryanair hopes to have 40% of normal flight schedule in tact on July 1, subject to government restrictions on intra-EU flights being lifted, and effective public health measures adopted by airports.   
  • Virgin Atlantic is looking ahead to summer 2021, assuming it survives until then. If so, it plans to offer flights to most of its pre-crisis U.S. cities, from London Heathrow. It plans a few U.S. routes from Manchester as well, along with Orlando service from Glasgow and Belfast. It’s even expanding on one route — Heathrow-Tel Aviv, which will see double daily service. Virgin sees a chance to capture more U.S.-Israel traffic via London as rivals pare back. According to the Wall Street Journal, the airline is pitching its potential to interested investors, looking to raise more than $900m. This could include government aid.
  • American is one of the many carriers pivoting to cargo-only flights as passenger traffic remains depressed, but unlike many of the other carriers doing so, American had not operated a cargo-only flight for decades before the pandemic struck. It will this month fly 140 weekly cargo flights to 15 cities in Asia, Europe, and the Caribbean. Airbus this month began offering a conversion kit to airlines seeking to temporarily use passenger aircraft for cargo-only flights.
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Covid Crisis 2020

  • IATA’s now-routine weekly update for journalists covered several key topics, including the group’s opposition to quarantine measures for arriving airline passengers — the U.K. announced a 14-day quarantine just last week. IATA is separately still fighting with the E.U. over ticket-refund rules, noting that under current regulations, airlines would have to return more than $10b for cancelled flights through the end of May. That’s money most carriers don’t have.

    Turning to its latest demand forecast, Chief Economist Brian Pearce said traffic measured by RPKs won’t return to 2019 levels until 2023, and not until 2024 for just international traffic. The RPK measurement takes distance into account, which means it’s a more pessimistic benchmark under the assumption that longer-haul flights will take more time to recover.

    But by any measure, airline demand revival is expected to lag global economic revival, a reversal of the typical pattern in which air traffic grows faster than GDP. Pearce did note that there’s still a lot longterm demand potential in high-population emerging markets like India, Nigeria, and Ethiopia.
  • An IATA poll, meanwhile, found that 58% of respondents plan to restrict travel to domestic destinations. But despite that, IATA said domestic traffic won’t match 2019 levels until 2022. This grim scenario could be further worsened if governments do not coordinate as travel demand begins to return.

    Quarantining arriving passengers, as mentioned, is a particular concern. A full 86% of travelers it polled said the prospect of a quarantine troubles them, and 69% said they would not travel if the destination required a quarantine. Instead, IATA is calling for a layered health-security approach, coordinated worldwide, that could include health screenings at airports, certificates of health, and contact tracing of populations to determine how the virus is spreading.


  • The Baltic region of Europe — Lithuania, Latvia, and Estonia — plan to implement the first post-Covid travel bubble. For veterans of the financial crisis, the word bubble will sound scary — remember the U.S. sunbelt housing bubble? But in this case, a bubble is a collection of countries creating what you might call an open travel zone. The Baltic region has escaped any major Covid outbreaks, so its three countries feel comfortable allowing cross-border movements without inordinate burdens like 14-day quarantines.

    Australia and New Zealand are negotiating the creation of their own travel bubble. Other Asian countries with the virus largely contained (i.e. Taiwan and Vietnam) could join them, or form bubbles of their own.
  • Other countries are planning a broader welcoming of foreign visitors, but with more stringent procedures to protect against importing the virus. Iceland, for example, is slowly opening up, at first from points within Europe. After June 15, tourists arriving from wherever must 1) quarantine for two weeks (few will choose that option), 2) get tested for the virus, or 3) show up with a valid health certificate. Visitors will also need to install a contact tracing app on their phones.

    According to the EU, travel, transport, accommodation, food, recreation, and culture contribute almost 10% of the bloc’s GDP. It said 267m Europeans (62% of the population) make at least one private leisure trip per year. And 78% of Europeans take a holiday in their home country or another EU country.

    The E.U., meanwhile, welcomed 563m visitors from outside the block. In a set of recommendations to member countries, the E.U. said those with similar overall risk profiles should start opening their borders to each other, while adopting measures like physical distancing, testing, and tracing.
  • The U.K., as mentioned, is introducing a 14-day quarantine for arriving airline passengers, a policy IAG says will delay the recommencement of flights. IAG CEO Willie Walsh, in testimony before a U.K. Parliament transport committee, came under heavy fire from lawmakers angry about British Airways job cut plans. He said BA has no choice but to cut costs, as it likely suffers disproportionately from its dependent on longhaul premium travel.

    Walsh separately called Virgin Atlantic a badly managed airline. And he suggested the U.S. supports its airline industry more because its military relies on civilian airliners for troop transports.

East Asia

  • Poor Cathay Pacific, which had a horrible 2019 on top of what’s now happening in 2020. In its latest update to investors, it said demand in RPK terms was down 99% y/y in April, even with mainland China starting to recover. Cargo demand dropped 37%, even with growth in shipments of medical supplies and other high-value products. Cathay flew to only 14 cities in April and wasn’t permitted to take connecting traffic. Are things getting better in May? Not really. “At this stage, we still see no immediate signs of improvement.”
  • It’s kind of general consensus now that leisure travel will recover before business travel. Maybe, but that’s not really been the case in China so far. There, business demand is showing signs of life as factories and other facilities reopen. But people aren’t taking flights for holiday purposes yet. It’s a reminder that conventional wisdom can sometimes be wrong. But it’s also possible that China’s airline recovery patterns will be unique.

Sub-Saharan Africa

  • South African Airways entered a form of bankruptcy in December, which indicates how weak it was even before the Covid crisis. After the crisis started, its government refused to give it any more funding, signaling to the carrier’s bankruptcy administrators that it was time to close down — what else could it do absent any more money? Foreign investors certainly weren’t interested.

    Some union scuffles and court rulings later, the country’s Treasury weighed in, suggesting it would create a new airline on the ashes of the old. That’s where things stood at a parliamentary committee held virtually last week, during which officials disclosed a $340m net loss for SAA in its most recent fiscal year that ran through March. In that same hearing, the bankruptcy administrators estimated it would cost some $500m to relaunch a new airline with about 25 planes, 15 of them widebodies.


  • Everybody it seems, has high hopes for bankrupt Virgin Australia. Why else would 19 suitors be angling to buy it, according to The Australian, quoting the carrier’s restructuring administrator? Those 19, based on the latest updates, have whittled down to eight, with more eliminations expected this week.

    One of the still-active bidders, Bloomberg reports, is IndiGo. No, not Indigo, the private equity backer of carriers like Wizz Air and Frontier. Well, that Indigo might be among the interested too. But IndiGo of India, or its parent company InterGlobe anyway, apparently sees potential in Virgin, perhaps as a dumping ground for the massive numbers of A320/21 NEOs the Indian firm has on order — no need for so many in India now.

    Another Virgin bidder is the state government of Queensland, fearful of the airline moving its headquarters out of Brisbane. Private equity-led consortiums, including one by Boston-based Bain Capital and another based in Canada, are also among the bidders. Final bids are due in mid-June, with a final decision expected in August (though a Sydney Morning Herald report says it might run out of cash before then).

    Why the enthusiasm? Have these bidders not heard about the viral pandemic decimating the world’s economy? The fact is, Virgin has some prized assets, including its high-margin Velocity loyalty plan. Virgin’s brand recognition is worth something too. Australia’s domestic airlines could be on a quick path to recovery thanks to the country’s largely virus-free population. Fuel is cheap. Bankruptcy affords a golden opportunity to build a competitive non-fuel cost base. Even in its inefficient pre-crisis state, Virgin managed to earn a small operating profit domestically last year. That doesn’t count Tigerair losses but hey, you can close Tiger easily now.

    The airline has already achieved important restructuring steps in the past few months, including an adjustment of its B737 MAX order. Its new owners can decide the merits of maintaining a sub-scale intercontinental network (one report said the current management team wants to replace B777s with B787s).

    Back at home, keep in mind that Australia’s domestic market is a duopoly, in which Qantas and its low-fare offshoot Jetstar produce extremely high margins. If only a revamped Virgin Australia could grab a modest slice of those excess profits…
  • A duopoly? Maybe not for long. Virgin Australia bidders beware: An Australian regional carrier called Regional Express, or REX, smells an opportunity. It says it’s been approached by multiple investors interested in financing a move into the scheduled domestic market. REX, indeed, finds the idea “particularly compelling,” and will decide on the matter within about two months. If it proceeds, the new flying would commence next March. For now, REX operates 60 Saab A340 turboprops while also engaged in ground activities like pilot training.

Latin America

  • Gol gave investors another update on its financial situation, hoping to reassure them. It called its cash position robust, with ten months of reserves and a means to raise more if needed. Government credit assistance is forthcoming. A deal with Boeing on MAX compensation and order book restructuring yielded Gol $114m in cash in April, and is worth about $430m in total, including future payments. Capacity plans are flexible. Its cost structure is low. Most customers are rebooking and taking vouchers rather than refunds. Cash burn is coming in less than expected. And Gol has no expected expenditures for new aircraft over the next 24 months.
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Feature Story

For the world’s weakest airlines, the current crisis brings a new lease on life.

“We’re sure glad 2019 is over. 2020 has been so much better.”

This is a quote said by absolutely nobody in the airline industry (passenger airlines, anyway). Nobody will disagree that the 2020 Covid-19 pandemic is the worst crisis the sector has ever faced. Nobody can make money when revenues are essentially zero. Nobody likes depression-like economic conditions.

True, but…

For the airline industry’s sickest patients — the uncompetitive, the undercapitalized, the strategically challenged — the ravages of 2020 are in some respects a blessing. For one, the crisis has opened a gusher of government financial support: Grants, credit support, tax relief, regulatory relaxation, and so on. If you’re Delta or IAG or Singapore Airlines, that’s aid you wished you never had to take, aid that will taint sterling balance sheets and dilute shareholders. If you’re Alitalia, though, that aid represents a new lease on life, aid that would never have come had there been no crisis.

Alitalia, remember, was searching for survival capital throughout 2019, from Delta, from easyJet, from Lufthansa, from private equity firms, from the Italian Treasury, from Italian conglomerates, and just about anyone else who’d listen. Alas, it got nowhere, and there was a real chance the money-bleeding airline would finally collapse. Until Covid-19 came along.

Alitalia now stands to be relaunched with a massive $3.3b in government subsidies. The carrier, which lost more than $500m last year, and another $240m in the first quarter of this year, will downsize but not much, aiming for a fleet of 92 planes, including 20 widebodies for intercontinental routes. The relaunch effort might also include changes to labor laws that disadvantage the foreign low-cost carriers that carry the majority of Italy’s air traffic. In fact, Ryanair, easyJet, Vueling, Volotea, Norwegian, and Romania’s Blue Air teamed up last week to form an Italian lobbying front to protect their interests.

It’s not just Alitalia. There’s Italian government money for other local airlines too, including Air Italy, which isn’t even alive anymore! (It ran out of money in February). In Germany, as Lufthansa reluctantly asks for a government bailout, Condor will get a second round of public aid and a chance to remain independent after LOT Polish walked away from a takeover deal. Latvia’s airBaltic, which lost $9m last year, enters the second half of this year with a big infusion of government funds. In Asia, grossly dysfunctional carriers like Thai Airways and Malaysia Airlines, on a path to oblivion in 2019, have a much greater chance of taxpayer recapitalization in 2020.

All of this makes one wonder whether the parade of airlines that died in 2019 — Thomas Cook, Jet Airways, Avianca Brasil, Aigle Azur, XL Airways, Adria Airways, and so on — might have bought themselves more time had they only survived to see the crisis. Flybe, which died shortly after the crisis began, was a unique case — the U.K. government was reluctant to spend taxpayer money on a company partly owned by billionaire Richard Branson. 

Branson’s Virgin Atlantic and Virgin Australia face a similar problem. The latter, unable to get government help, was forced to file for bankruptcy. The former, thus far denied state aid as well, might be forced to do the same. But importantly, both carriers — longtime money losers but several notches above the Alitalias of the world in terms of competence and efficiency — are attracting tremendous interest from private sector providers of capital.

A crowd of investors have lined up to buy Virgin Austrlaia out of bankruptcy. Almost as many are listening with great interest as Virgin Atlantic pitches a turnaround plan. As an Economist article notes, quoting a Perella Weinberg investment banker, this crisis is the opposite of the financial crisis a decade ago, in which capital markets were largely closed but non-financial businesses mostly intact. Today, there’s plenty of available capital for airlines desperately in need.  

The nearly 40-year old Virgin (Atlantic) and the one roughly half its age (Australia) are emblematic of a large category of airlines, airlines not quite on the verge of dying pre-crisis, but losing money, under-scaled, outcompeted, stuck with unfavorable contracts, or otherwise struggling to achieve sustainable success. Many of these carriers, including the two Virgins, are well liked by travelers, with strong brands. Both Virgins, incidentally, have close and valuable relationships with Delta. Both, in other words, were perfectly good airlines in many ways, but chronically unable to make money.  

The Covid crisis could change that. To be clear, this sort of global catastrophe is nobody’s wish. No matter what ultimately happens to airlines like the Virgins, their employees, suppliers, shareholders, creditors, airports, and local economies will have suffered greatly. As businesses, however, the crisis offers a rare chance to restructure in ways impossible under normal circumstances. Even absent a bankruptcy proceeding, distressed carriers can now radically reset their cost structures, their fleets, their workforces, and their business models more broadly. Input costs, from fuel to planes to labor, have rarely been cheaper. Airline negotiating leverage with suppliers, be they lessors or manufacturers or airports, has rarely been stronger.

Norwegian is Exhibit A for this sort of reset. Pre-crisis, it was already undertaking major reforms, enabling it to escape 2019 alive. Barely. But even its boldest steps left big questions about whether it could ever achieve success. Then the crisis came, and Norwegian was suddenly in a position to access government loan support, subject to extreme reforms. The result: Pain for all stakeholders, but also a “New Norwegian” with a business model much more likely to succeed than anything achievable pre-crisis. It’s now a less complex airline, with vastly lower costs and greater operating flexibility. Before, Norwegian was a broken airline in a world of robust demand. Now demand is much lower, but the airline is much leaner.

Even South African Airways, with a near-zero chance of ever earning sustainable profits pre-crisis, has at least a window of opportunity now to be resurrected with a more viable cost base and business model. Its rival Comair, itself in bankruptcy, can emerge more competitive. Same for others that have gone bankrupt in the current crisis, like Air Mauritius. Avianca, which narrowly avoided bankruptcy just before the crisis, couldn’t pull off the same trick a second time. But it’s confident of using the time in court to become a  

“better, more efficient airline.” Avianca’s 2003 trip through bankruptcy by the way, positioned it for many years of solid profits (it even earned an operating profit last year, if just small one).

All across the industry, airlines are reimagining themselves as potentially leaner and nimbler companies. Everyone understands that the revenue pool will be considerably smaller, perhaps for years to come. But they’re also enticed by the opportunities afforded by the crash in input costs and — for the sicklier carriers, pre-crisis — access to financing they surely would never have gotten.

Delta, a paragon of pre-crisis strength, said during its Q1 earnings call that the crisis is “an opportunity to accelerate strategies to streamline our company, simplify our fleet, and reduce our fixed cost base in ways not possible in the past.” It need not be too concerned about distortionary government aid though. U.S. federal aid is targeted to all airlines roughly equally, adjusted for size. Not so in Europe, where Ryanair is red with rage about long sickly flag carriers receiving tens of billions of dollars in state aid. It’s even suing to stop rescue efforts for rivals like SAS and Air France/KLM. Ryanair is the largest airline in Italy by passenger volumes, so you can only imagine how Michael O’Leary feels about the latest Alitalia bailout. Last week, he told Bloomberg that Lufthansa was “hoovering up state aid like the drunken uncle at the end of a wedding.”

Lufthansa, and Air France/KLM, for that matter, are examples of airlines that were troubled pre-crisis, earning margins well below those of rivals like IAG and Delta. But they weren’t extremely troubled. Both had a fighting chance at self-improvement pre-crisis, with a large number of promising reforms. The Covid shock is therefore much more setback than opportunity, but an opportunity nevertheless, to do as Delta mentioned and enact changes heretofore impossible. IAG has the chance to renegotiate its Air Europa takeover price. Perhaps Air Canada can do the same with its Transat transaction.

Emirates, in a dangerous position as a premium, intercontinental, large-widebody airline in a region dependent on oil money, might be able to use the crisis to accelerate aircraft downgauging and other necessary changes. Allegiant, in the opposite position as a lean and flexible leisure-oriented carrier, is no less keen on seizing the moment to experiment with new labor models. Aerolineas Argentinas, in the category of Alitalia-like basket cases, already reacted by announcing a merger with its sister airline Austral. It’s now (good luck) attempting labor reforms with famously recalcitrant unions.

When the calendar turns to 2021, no airline anywhere will look back and say: Wow, 2020 was such a great year. But all will have identified some unique opportunities that arose during the year’s horrors. Some will have survived in 2020 only because of the crisis, in other words, the opportunities it created and the new sources of funding it opened. Still others will have used the crisis to turn what were dead-end business models into models with a much greater chance of success. In that way, a crisis can turn losers into winners.

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Around the World

Around the World: May 18, 2020

Airline NameChange From Last WeekChange From Last YearComments
American-11%-72%Will be among the airlines presenting at a Wolfe Research virtual investor conference this week
Delta-16%-65%First phase of Salt Lake City airport’s $4.3b redevelopment project still scheduled to open in mid-September
United-22%-76%Will have a key role in Avianca’s bankruptcy restructuring as one of the carrier’s top creditors
Southwest-12%-54%Dallas Morning News notes how Southwest has borrowed $7b since crisis began, thus more than doubling its debt
Alaska-15%-58%Seattle Paine Field shutting down all passenger air service through the end of July
JetBlue-9%-54%Tells shareholders it’s working “to determine what the size and shape of JetBlue will be in the future”
Hawaiian-14%-59%Eliminated approximately 57% of the costs it originally expected to incur in Q2
Spirit-24%-83%Was the fastest growing major U.S. carrier between 2017 and 2019, in terms of ASMs (A4A)
Frontier(not publicly traded) Visual Capitalist shows how videoconferencing firm Zoom now worth more on stock market than U.S. Big 4 and European Big 3 combined
Allegiant0%-48%Still intends to make nearly $300m of principal debt payments from now through the end of 2021
SkyWest-18%-59%Mesa planning to enter the cargo business, something it planned to do even pre-crisis
Air Canada-14%-62%Making moves to cut more than half its workforce, which means more than 20,000 lost jobs
WestJet(not publicly traded)New owner Onex reports heavy Q1 net losses
Aeromexico-21%-63%Getting financial help (via loan and forward mileage sales) from Aimia, which owns part of its Club Premier loyalty plan
Volaris-12%-46%Aeromexico-Aimia deal also extends relationship by 20 years, gives airline option to buy back Aimia’s stake
LATAM-11%-64%Among the many airlines announcing permanent layoffs; will have to compete with restructured Avianca
Gol-1%-52%Has roughly $100m invested in hedge portfolio of 17m barrels of oil covering May 2020 to December 2022
Azul-19%-68%Says most of the people flying on its planes right now are paying in cash, as opposed to redeeming vouchers
Copa-13%-59%Mentions the A321 XLR as a potential risk to its hub; will enable rivals to overfly Panama on some long-distance routes
Avianca-55%-85%Liquidating its Peruvian subsidiary, though it might still operate Lima hub (already slimmed down pre-crisis) with its Colombian unit
Emirates(not publicly traded)Dubai was supposed to host Expo world’s fair in October; will open next October instead
Qatar(not publicly traded)Tells South China Morning Post it would consider putting more money into Cathay Pacific if asked
Etihad(not publicly traded)Was offering pax service to only five North American cities pre-crisis: New York, Washington, Chicago, L.A., Toronto
Air Arabia-4%1%Was originally hoping to launch new Abu Dhabi LCC with Etihad this quarter; Q3 or Q4 more realistic
Turkish Airlines0%-13%Hopes to get all of its domestic destinations back online next month; int’l reboot will take longer
Kenya Airways58%-41%IATA urges Nigeria, Africa’s largest economy, to do more to support its airlines
South Africa Air.(not publicly traded)South Africa’s finance minister said it’s receiving lots of offers to buy various assets from the airline
Ethiopian Airlines(not publicly traded)Believes it can finalize a B737 MAX compensation deal with Boeing by the end of June (Reuters)
IndiGo6%-39%Parent company’s interest in Virgin Australia could facilitate India-Australia flights; market served only by Air India
Air India(not publicly traded)Believe or not, creditors of Jet Airways still trying to sell it; carrier suspended service last year
SpiceJet17%-65%Chairman Ajay Singh tells New Indian Express that nearly half its fare revenue gets taken in taxes and levies
Lufthansa-3%-59%Brussles Airlines cutting its network by about 30%; also looking for more flexible work contracts
Air France/KLM-7%-53%Labor talks with French unions get underway next month; company wants more flexibility to scale up and more importantly down
BA/Iberia (IAG)-11%-67%Denies any interest in buying Austrian Airlines from Lufthansa
SAS-2%-48%Icelandair reaches tentative pilot deal that includes productivity concessions; would run through fall, 2025 if ratified
Alitalia(not publicly traded)ENAV, Italy’s air navigation company, sees gradual traffic recovery starting this summer
Finnair-8%-56%Tourism ranks fourth among E.U. export categories, after chemicals, automotive products, and food
Virgin Atlantic(not publicly traded)Air France/KLM was on track to buy 31% of its shares until backing out late last year; thank goodness for the Franco/Dutch carrier’s sake
easyJet-6%-50%Founder and key shareholder Stelios still harassing management; offers reward to anyone with info that could sabotage carrier’s Airbus order
Ryanair-11%-20%Said it’s lowered non-frontline headcount by about 250 at its Dublin, Stansted, Madrid, and Wroclaw offices
Norwegian14%-86%Now majority owned by its aircraft lessors, an odd arrangement; AerCap for one a big shareholder
Wizz Air-3%-22%Poland, with Covid relatively well contained and migrant workers returning home, forecasted to fare least bad this year among top E.U. economies
Aegean8%-40%Greece, Cyprus, Portugal, and Croatia the E.U. countries with the highest percentage of GDP tied to tourism, according to European Commission
Aeroflot-3%-21%IATA discussing the future of inflight meals with various stakeholders; Pre-packaged food? No food at all?
S7(not publicly traded)Russia, India, Mexico, Brazil among the latest Covid hotspots; U.S., U.K., Italy lead in total deaths
Japan Airlines1%-50%Privatization of Hiroshima’s airport to proceed despite crisis, though pushed back until mid-2021
All Nippon6%-37%Mitsubishi suspends development work on long-delayed SpaceJet; was hoping to deliver first to ANA in mid-2020
Korean Air-5%-46%Korea’s Pulse News looks at small regional carrier Hi Fly, which is proceeding with plans to add more ATRs
Cathay Pacific-3%-28%Has history of tense relations with unionized pilots; rancor could rise again as management contemplates job cuts
Air China-6%-37%Domestic pax volumes for April were down 56% y/y; int’l volumes were still down nearly 100%; rivals show similar declines
China Eastern-3%-33%Bloomberg profiles Serbia’s Covid-era campaign to attract Chinese tourists
China Southern-2%-31%Plans to raise more than $2b with new bond issuance; will use money to fund new aircraft, among other purposes
Singapore Airlines-12%-59%Will permanently close its airport lounge in Adelaide, Australia; separately, B777-200s/300s, A330s likely on their way out
Malaysia Airlines(not publicly traded)Indonesia’s Garuda closing in on government rescue package, Bloomberg reports; would include debt restructuring
AirAsia-5%-71%Adjusted its airport procedures and tweaked its mobile app to ensure contactless travel; no more touching kiosk screens, for example
Thai Airways-20%-59%Gov’t still trying to decide how best to save its national airline; putting it through a bankruptcy process one possibility
VietJet-5%-3%Avation, a U.K. lessor, says VietJet filling 80% of its domestic flights, adding back service
Cebu Pacific-6%-49%Air Carriers Association of the Philippines (ACAP) still lobbying for more government aid
Qantas-1%-37%Australian regulators approve British Airways-Qatar Airways joint venture plans for Europe/U.K.-Australia routes
Virgin Australia0%-52%Just as Airline Weekly published, reports pointed to three leading bidders, one of them being Queensland’s gov’t
Air New Zealand-1%-55%Will reopen domestic airport lounges on May 25 but no longer offer buffet food service
Brent Crude Oil5%-55%With economies slowly reopening across the world, oil demand is starting to grow, and so in tandem are oil prices

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

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