Issue No. 766

Flight Path Unknown

Pushing Back: Inside This Issue

The carnage is now plain to see. Some of the largest airlines from the U.S., China, Japan, and Europe showed just how much money the wicked coronavirus is bleeding from their coffers. A few like Southwest and Japan Airlines escaped the ugly first quarter with negative operating margins in the single digits. Others had a much bloodier story to tell.

The horror show began in China first, robbing airlines of their normally lucrative Lunar New Year profits. Their only consolation, perhaps, is the notion of what starts first should end first. There is, in fact, evidence of modest demand recovery. But it’s domestic only, and a far cry from where things will need to be for carriers to make money again.

The most comforting aspect of the moment for U.S. airlines is the extended period of survival they’ve guaranteed themselves, by borrowing billions, slashing costs, selling assets, and successfully lobbying for government aid. Bookings are a bit better than their low point a few weeks ago. But everyone agrees: Full recovery will be measured in years, not weeks or months.    

They won’t get any arguments from Europe. There, Finnair’s heavy China exposure triggered early alarms. IAG didn’t wait for its earnings release to share gory Q1 figures. As its British Airways unit joins SAS and others in prepping unions for big job cuts, Lufthansa is fending off government attempts to drive a hard bargain — Berlin wants a big slice of the company in exchange for any aid. Norwegian, meanwhile, got bondholder buy-in, in advance of a fateful meeting of shareholders this week. If that’s all not enough to exhibit the gravity of the crisis, consider this: Ryanair — the always profitable Ryanair — warned of losses this spring and summer.

Will there be any summer travel, which so many economies, let alone airlines, depend on for sustenance? Add that to the many questions the world still faces as it fights the twin evils of pandemic and recession.


"The virus will be defeated. There will be recovery. We just don't know when. "

United President and soon-to-be CEO Scott Kirby

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January-March 2020 (3 months)

  • American: -$2.2b/-$1.1b*; -16%
  • United: -$1.7b/-$639m*; -11%
  • Southwest: -$94m/-$77m*; -3%
  • All Nippon: -$539m/-$579m*; -15%
  • Japan Airlines: -$210m/-$176m*; -7%
  • Air China: -$802m/-$945m*; -24%
  • China Eastern: -$599m/-$760m*; -31%
  • China Southern: -$859m/-$955m*; -24%
  • Hainan Airlines: -$947m/-$1b*; -77%
  • Juneyao/9Air: -$71m/-$81m*; -18%
  • Spring Airlines: -$33m/-$52m*; -17%
  • Finnair: -$158m; -16%
  • Cebu Pacific: -$23m/-$8m*; -4

October-December 2019 (3 months)

  • Hainan Airlines: $7m/-$86m*; -11%
  • Spring Airlines: $17m/-$81m*; -16%

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

Weekly Skies

  • When Delta reported Q1 results a week earlier, its negative 5% operating margin masked the true gravity of the current Covid crisis. American’s results, by contrast, made the carnage crystal clear. The Texas-based airline reported a gruesome negative 16% Q1 operating margin, excluding special items, accompanied by a $1.1b net loss. Revenues plummeted 20% y/y while operating costs dropped just 2%, all on 7% less ASM capacity. Cheap fuel was the only bright spot.

    Frustratingly, the pandemic came just as American was lifting itself up from a rough — by pre-crisis standards, anyway—2019. It earned significantly lower margins than its peers last year, hurt by labor unrest and absent B737 MAXs (a problem for United and Southwest as well). But there were hints of better times to come as American improved its lagging operational performance, grew its most profitable hubs (led by Dallas DFW and Charlotte), secured new Tokyo Haneda slots, and reversed momentum on the alliance front by forging a high-potential partnership with Alaska Airlines (which quieted talk about losing its ally Latam to Delta). American was building partnerships with Gol, Qantas, China Southern, and Qatar Airwaysas well, complementing joint ventures with IAG and Japan Airlines. It was adding bold new intercontinental routes to places like Christchurch, Casablanca, and Bangalore, the latter from Delta’s Seattle hub. Weakness in Latin America, a large part of American’s international network, was turning to strength amid capacity cuts and economic improvements. In February, it reached a contract deal with mechanics, ending a highly-disruptive dispute. Importantly, the airline had just finished a multi-year period of heavy aircraft spending, which heralded lower capex and greater free cash flow for the next few years.

    So much for that. American like its peers is now hemorrhaging cash, with outflows expected to total some $70m a day this quarter. More than 80% of its flights currently operate with load factors below 25%. More than 30k employees are on temporary leave or working fewer hours, and another nearly 5k have accepted voluntary retirement. American, to be sure, took on more debt than its peers, pre-crisis, electing to pay for the many new planes it ordered with low-interest loans rather than cash. It instead returned lots of its cash to shareholders via buybacks and dividends. The practice generated external criticism when the crisis hit, especially as it lobbied for government aid. American, of course, was hardly the only carrier buying back stock and paying dividends — this was a common practice around the world. Executives pointed to the roughly $4b in cash on hand at the start of the crisis, not to mention what was arguably the world’s most valuable fleet.

    This meant it was no less well positioned than anyone to raise a mountain of new cash from banks and from aircraft lessors (via sale-leaseback deals). Indeed, it raised $2b last quarter, and now stands to end Q2 with an enormous $11b worth of cash and other liquid assets. Nearly $11b is also the amount of money it can get from the federal CARES Act, including loans for which it’s applying — negotiations with Treasury officials are ongoing, focused on what collateral American needs to provide. In the meantime, the carrier is undertaking heavy cost-cutting moves now evident throughout the industry — lowering executive pay, reducing investment spend, reducing payroll through voluntary programs, consolidating airport facilities, and so on. Most importantly, American has sufficient funding to ride out an extended period of minimal revenues. And it has plenty of additional assets left to liquidate if needed, including airport slots and AAdvantage frequent flier miles.

    Management is under no illusions of a quick recovery. Demand will be suppressed for “quite some time,” said CEO Doug Parker. Until when, nobody knows. And that’s making it difficult to set future schedules given the long planning horizons for aircraft availability, pilot training, maintenance programs, and so on. In the face of this uncertainty, American — planning now for summer 2021 — will play it safe and err on the side of having not enough capacity to meet demand, rather than too much capacity. So it’s mass-retiring older aircraft models, namely all of its B767s, B757s, A330-300s, E190s, and selected regional jets. That means its 2021 fleet will have roughly 100 fewer planes than originally planned.

    As for this year, April and May capacity will be down about 80% versus plan, with June schedules currently down 70%. Just last week in fact, it removed more summertime international flying, essentially abandoning hope of any meaningful peak season demand. It also cut more from New York, the epicenter of America’s Covid pandemic. Dallas DFW, by contrast, will likely see relatively fewer cuts. Charlotte, for its part, might be poised for an earlier recovery given the relative health of its big banking sector (banking was the hardest hit sector last crisis; this time the big losers are travel and tourism). American’s large Latin America franchise was late to see demand collapse last quarter, but the region is now among the worst-positioned anywhere to withstand the macroeconomic implications of the pancession (witness Brazil’s collapsing currency).

    Yes, American is making a bit of money with cargo right now. It expects to cut that $70m daily cash burn to more like $50m by June. At some point hopefully soon, revenue inflow will surpass customer refund outflow. American by the way, is still planning to take B737 MAXs later this year. And it’s proceeding with work on standardizing narrowbody configurations with denser seating but upgraded amenities. It will not, executives emphasize, close any hubs.

Not Any Better at United

  •  United’s Q1 results were closer to American’s awful figures than they were to Delta’s more moderate losses. The Chicago-based carrier, with heavy exposure to Asia, recorded a negative 11% operating margin, its first Q1 operating loss since 2014 (after which it hired Oscar Munoz and then Scott Kirby). The last time things were anywhere close to this bad was in Q1 of 2009, when United’s operating margin was negative 10% (that was before it merged with Continental, whose Q1, 2009 margin was just negative 2%).

    The current pancession, of course, is far worse in totality than the 2008-09 financial shock. The demand shock today is near-total in its devastation of revenues and universal in its geographic scope. United last quarter, even with a solid January and February, saw revenues plummet 17% y/y on just 7% fewer ASMs. Costs fell as well, but by just 2%. The bright spot was fuel, for which outlays plummeted 15%. But labor costs rose 3%. Perhaps because of its ample presence in China, United was arguably quicker than others to recognize the gravity of the crisis, taking early steps to cut capacity. It wasn’t an issue yet on Jan. 21, the day United announced its Q4, 2019 earnings — the biggest concerns then were missing MAXs and some non-virus-related weakness in Germany, mainland China, and Hong Kong.

    Its first warning came on Feb. 24, when it suspended all China flying through late April. That day, as the virus was spreading to Italy, the carrier also suspended share buybacks. A few days later, it cancelled a planned investor day event, acknowledging that earlier financial projections were becoming obsolete. By early March, it was aggressively cutting capacity and sounding the alarm — before others — about how deep and long-lasting the demand shock might be. Don’t worry about United’s cash position. On March 9, it borrowed $2b from a group of banks, giving it $8b in liquidity. Subsequent borrowings, equity sales, sale-leaseback deals, and government aid put liquidity at almost $10b as of last week. So even as the airline burns through an expected $40m to $45m in cash per day this quarter, with negligible revenue potential, management expects $6b in liquidity by the end of Q3. Cost cutting continues, such that even if revenues stay at near-zero through the end of the year, daily cash burn could ease to about $20m in Q4. It’s certainly not predicting zero revenues for that long, but it’s prudently planning with the assumption that this might be the case.

    United is more vocal than others in warning employees that involuntary layoffs are a real possibility after Oct. 1. For now, more than 20,000 workers are on temporary leave. Others are working reduced hours. The airline meanwhile has suspended more than 200 airport projects and more than 300 IT projects. It does, however, still intend to take 16 B737 MAXs this year and another 24 next year. After that, it’s discussing deferrals with Boeing. Unfortunately many aspects of United’s pre-crisis strategy might now need revising. An expansion of its intercontinental premium offering appears unfit for a post-Covid world. Its planned joint venture with Avianca and Copa, both in dire straits now, might be in question. There’s little near-term hope now for new routes like San Francisco-Delhi, San Francisco-Melbourne, Chicago-Zurich, and Newark to Cape Town, Nice, and Palermo. On the other hand, United was lucky to strike a more favorable credit card deal with JPMorgan Chase on Feb 21, just before the world fell apart. The risk is that airline miles lose their value if people don’t travel as much in the future. But management downplays that scenario.

    Looking at the bright side, it sees opportunity to restructure many aspects of its business, perhaps achieving levels of productivity unrealistic when labor unions had much greater bargaining power. “Everything is on the table,” said Kirby, who takes the CEO reins from Munoz later this month. Encouragingly, net bookings (new ones minus cancellations) are no longer negative. And though it doesn’t see any signs of meaningful recovery of near-term demand yet, it is adding back some international flights as early as this month — Chicago-London, Newark-Amsterdam, and Washington-Frankfurt return on May 4. Internet searches for flights around spring break 2021 are interestingly up y/y, a sign of pent-up demand.

    That said, United doesn’t expect bookings to materialize until the virus is sufficiently contained. It also expects some “false starts” and won’t “jump in with both feet once we see the first green shoots.”

Southwest Predicts Return to Normal, but not When

  • If domestic travel recovers earlier than international, something widely expected, then Southwest is in a relatively good place. Some 95% of its business is within the U.S., and the other 5% is mostly U.S. travelers flying to nearby Mexico, Central America, and the Caribbean. The father of low-cost air travel, celebrated for its decades-long streak of success, has the added advantage of entering the current crisis in remarkably strong shape. Its balance sheet was investment grade, and in fact still is.

    As late as March 1, it held more than $1b in cash. It began this year with the smallest ratio of debt to total capital (just 24%) in company history. More than $10b of its $27b in assets were in the form of unencumbered B737s. What’s more, Southwest performed extremely well in January and February, with “solid” unit revenue growth and “better-than-expected” cost performance. Both months saw margins improve y/y. Only in late February did bookings begin to sour, before traffic eventually tumbled to near-zero in March. The net effect of these two drastically different trends in the quarter was a relatively modest net loss of $77m ex special items. Operating margin was negative 3%.

    Losing money in the offpeak first quarter isn’t entirely novel for Southwest. In Q1, 2012, with fuel prices up and its AirTran takeover in progress, it posted an $18m net loss excluding special items. But never has it experienced anything like the devastation it saw in March, which caused revenues for the entire quarter to plummet 18% y/y on a 7% decline in ASM capacity. Operating costs fell just 6%, and only that much because fuel costs fell 14%. The current April-to-June quarter, historically Southwest’s strongest of the year, will be much, much, much worse. Load factors continue to run in the single digits and bookings for travel through June remain “pretty anemic.” ASM capacity will be down something like 60% to 70% y/y for the quarter. Booking curves are taking a barbell shape, with some urgent-travel booked very close to departure and some leisure travel booked months in advance, by people hoping to take a vacation this summer.

    CEO Gary Kelly said his own family is determined to head for the beach in July. He also hinted that there were some markets booking better than others, suggesting New York (the epicenter of America’s virus crisis) as one that’s not yet showing signs of recovery. He adds that bookings are “decent” for July, the first month of Q3. But cancellations are possible. Also remember that in normal times, about one-third of Southwest’s customers are flying for business, and these travelers contribute a disproportionate about of the airline’s revenue and profits. This traffic could take longer to recover.

    Longer-term, Kelly is confident that business travel will return. Indeed, Southwest is still pushing ahead with plans to win more managed corporate business — it’s more aggressively selling through global distribution systems for example (the Amadeus and Travelport systems, anyway). “If you’re like me,” Kelly said, “I’m sick of these Zoom calls. I’m ready to go talk to people face-to-face.” He goes on to mention how the notorious 1918 flu pandemic was followed by the roaring 20s. And how it’s “just crazy” to think that New York City won’t ever be the same again, as some hysterically predict.

    Longterm optimism aside, Southwest is under no illusions about the short-term challenges. In a video to employees earlier this month, he warned that the airline might require dramatic downsizing, which as a last resort could involve pay and even job cuts. Like other airlines, it’s stockpiling cash by borrowing and through federal aid. It will take 59 fewer B737 MAXs from Boeing this year and next, relative to its original plan. Though three quarters of its costs are fixed, it managed to slice $100m from its non-fuel cost base last month. Cash outflows have been cut in half from pre-crisis levels. By May, more than 7k employees will be on voluntary leave. The company will soon introduce new early retirement and part-time schedule options. Helpfully, roughly 80% of its tickets sold are nonrefundable, so the majority of recent trip cancellations have resulted in issuance of travel credits rather than cash refunds.

    Southwest unfortunately has substantial fuel hedging contracts, which will cost it nearly $100m in premiums this year (and result in some one-off accounting losses). But its hedges are options that enable it to take full advantage of falling spot prices — it thus expects to pay just a paltry $1 per gallon for fuel this quarter, more or less. On the other hand, if Southwest is forced to shrink substantially, unit costs could suffer as economies of scale are reversed (think about the inefficiencies of underutilized airport gates, for example).

    Executive are currently examining three alternative recovery scenarios, ranging from an L-shaped pattern to a U-shaped pattern with significant pickup around Q4. A key moment will be the start of October, when federal payroll aid expires. At the very least, bookings have appeared to show gradual improvement after the first week of April, which looks to have been the low point. It might for a time intentionally limit the number of tickets it sells per flight to alleviate overcrowding, though it will notblock middle seats — some travelers have children or other family members they want next to them in the middle seat. Kelly doesn’t think people will stay six feet apart from each other forever, nor mask themselves for the rest of their lives. In summary, Southwest sees bookings slightly improving from extremely depressed levels. It has plenty of survival cash. It’s confident of an eventual return to normal. But it acknowledges that could take a while, potentially forcing major downsizing in the fall.    

Is China Past the Worst of the Pandemic?

  • Entering 2020, Chinese airlines were already dealing with a slowing economy, slumping cargo revenues, unrest in Hong Kong, tensions with Taiwan, overcapacity in markets like Japan and Australia, the B737 MAX grounding, and currency weakness. But despite a loss-filled fourth quarter, all major carriers made money in 2019, aided by cheaper fuel. Then came Covid-19, which sprung from in Wuhan just as airlines were entering their busiest travel period: Chinese New Year. The outbreak began subsiding in March, but not enough to trigger a revival in air travel demand, and certainly not enough to avoid heavy Q1 losses.

    Air China, for one, typically the most profitable of China’s four global airlines, recorded a bloody negative 24% operating margin. The outbreak caused ASK capacity to drop 42% y/y, while revenues plummeted 47%. With much of its cost base fixed, operating costs fell just 28%. For most carriers around the world, Q1 is an offpeak season. But because of Chinese New Year, it’s typically one of the most profitable quarters for Chinese airlines. As for the current April-to-June quarter, some signs point to a modest demand revival, with factory re-openings triggering some business travel, and this past weekend’s Labor Day holiday triggering some leisure travel. Still, as IATA notes, flight schedules are nowhere near back to normal, and domestic load factors through much of April were in the 50% to 60% range.

    For all of 2019, Air China’s systemwide load factor was 81%. Cheap fuel is the one big silver lining this spring, all the more so because Chinese airlines are unhedged. More ominously though, China’s economy, which contracted for the first time in almost three decades last quarter, shows signs of only mild recovery. Nor is the virus a thing of the past; it’s largely gone from Wuhan but spreading now in Harbin, a northeastern city near Russia. In terms of Air China’s outlook, all it gave were some vacuous statements, i.e. its plan to “unswervingly adhere to the objective of focusing on high-quality development and establish a world-class airline.”

    Whatever. More substantively, the airline said it’s converting some passenger planes to cargo use, getting its various units to cooperate more closely (i.e. Shenzhen Airlines), and has both adequate levels of cash and capacity to raise more through bank loans and bonds. Helpfully, China’s government is helping airlines with tax exemptions and airport slot waivers. Air China, remember, is also exposed to Cathay Pacific’s heavy losses through a major ownership stake.
  • To be clear, China’s international market remains largely dormant, with visitors placed in quarantine and inbound flights to Beijing forced to stop in other Chinese cities first. That’s one of many setbacks for carriers including China Eastern, which was trying to build an international hub at Beijing’s new Daxing airport. Instead, it’s busy nursing huge Q1 losses, exemplified by a negative 31% operating margin. Revenues were roughly sliced in half y/y, on 44% less ASK capacity. Operating costs fell 28%.

    Building its new Daxing hub was just one of several strategic initiatives on China Eastern’s agenda as it entered 2020. It was also building alliances with Delta, Air France/KLM, Qantas, Japan Airlines, and its hometown rival Juneyao Airlines. It was planning to expand its LCC China United, even eyeing shorthaul international markets. Like its Big Three rivals, it was seeking ways to extract more revenues from a frequent flier plan with giant membership rolls. But now it’s just focused on rebuilding as demand starts to slowly revive.
  • China Southern was in largely the same boat last quarter, wallowing in a negative 24% operating margin, similar to what Air China suffered. Revenues and capacity declined more than 40% y/y while operating costs declined only 24%. China Southern too was hoping to focus on building its new Beijing Daxing hub this year. The project is proceeding but without the demand it expected to see, especially on the international front.

    Its Daxing ambitions also included partnerships with American, IAG and others, having recently exited the SkyTeam alliance. Like its peers, China Southern responded to the Covid shock by adjusting schedules, negotiating cost concessions with suppliers, suspending aircraft deliveries, freezing capital spending, identifying cargo opportunities, and prioritizing cash preservation. One helpful aspect of its network is not having much exposure to Hong Kong, which lies adjacent to its main hub in Guangzhou.   
  • Hainan Airlines, controlled not by the central government in Beijing but by the provincial government of Hainan, had yet to report its Q4, 2019 results. So last week, it reported both Q4, 2019 and Q1, 2020. For the latter, it suffered a negative 11% operating margin while cutting ASK capacity 10% (this still left it with a positive 2% operating margin for all of 2019). As the Q4 results for all major Chinese airlines showed, problems were festering even before the Covid crisis began. As for the just-completed January-to-March quarter, which featured the outbreak, operating margin was a devastating negative 77% (you read that right).

    Hainan Airlines began life just as China’s economy was taking off in the 1990s. It offered a more service-oriented product with lower unit costs and more professionalized management than Beijing’s Big Three. By the 2010s, it was earning excellent profit margins far exceeding those of its peers, while challenging Air China in particular in the busy Beijing and Shenzhen markets. But then it overreached. It established airline ventures throughout China, in cities like Chongqing, Tianjin, and Urumqi. It mass-ordered widebodies, such that by the start of 2020, its fleet featured 40 B787s, 38 A330s, and two A350s. Many of its intercontinental routes were wildly speculative, often from secondary Chinese cities to secondary foreign cities. It eventually secured rights to serve larger cities too, and by the end of 2019, its busiest non-Asian markets by seats, according to Cirium schedule data, were Boston, Brussels, Seattle, Los Angeles, London, Moscow, Melbourne, and Tel Aviv. It was even flying to places like Tijuana and Lisbon.

    More egregious still were the antics of its parent company HNA, which became world-famous for its recklessness, buying everything from stakes in Deutsche Bank and Hilton Hotels to pricey Manhattan real estate. It also bought stakes in lots of smallish airlines: Virgin Australia, Hong Kong Airlines, HK Express, Azul, Aigle Azur, Comair/Kulula, and TAP Air Portugal, not to mention the aircraft leasing firm Avolon, the catering companies Servair and Gategroup, Frankfurt Hahn airport, and the ground handler Swissport.

    To nobody’s surprise, the reckoning eventually came. Hainan Airlines saw its margins sharply decline, and HNA was forced to sell many of its equity holdings, including its HK Express stake to Cathay Pacific. Still tangled in massive debts, its destiny would have been bankruptcy if not for a government bailout.   
  • Shanghai’s Juneyao Airlines, with its LCC affiliate 9 Air, was hoping to see benefits from its new China Eastern partnership while developing its nascent intercontinental service. Instead, it experienced no less a bloody first quarter than most of its larger rivals. Its operating margin was negative 17%, with a familiar y/y revenue drop of roughly 40%, with operating costs dropping by roughly half that percentage. Juneyao still sees hope in flying B787s to Europe, as demonstrated by a new joint venture it struck with Finnair after the Covid crisis began.  
  • Spring Airlines, meanwhile, just like Hainan Airlines, reported both Q4, 2019, and Q1, 2020 results. Its Q4 operating margin was negative 16% (though it still reported positive 8% for all of 2019). Its Q1 operating margin was negative 17%. As you can see, Q4 was more or less just as bad as Q1. But remember, Q4 is typically offpeak while Q1 is supposed to be one of the most profitable times of the year.

    In any case, Spring could be well-positioned for an eventual recovery given its low-cost business model. It’s also refrained from any intercontinental flying, though it does have flights to Hong Kong, points throughout East Asia an even a joint venture in Japan.  

Red Ink in Japan…

  • Japan’s largest airline ANA was looking forward to an eventful 2020. The Tokyo Olympics were to start in July. New Haneda airport slots allowed for new routes this year to Istanbul, Milan, Moscow, Stockholm, and Shenzhen. New flights to Chennai, Perth, and Vladivostok were already aloft. Last year saw ANA embark on a major Hawaiian offensive involving A380s. The merging of its low-cost Peach and Vanilla Airaffiliates was complete.

    As recently as February 25, ANA was feeling confident enough to announce an order for 20 more B787s. That was shortly after forming a new codeshare relationship with Virgin Australia and — more significantly — a new joint venture with Singapore Airlines. Suffice it to say, 2020 hasn’t quite unfolded like ANA expected. Japanese airlines felt the Covid crisis early (at the end of January) through their exposure to China. The virus then spread to nearby countries including Japan, before becoming a global phenomenon. Domestic routes, which still generate more revenue for ANA than international, started seeing demand weaken in late February. By mid-March, everything everywhere had collapsed.

    The result in financial terms was a horrid negative 15% Q1 operating margin as revenues sank 20% y/y on 4% less ASK capacity. Operating costs, even with an 11% decline in fuel outlays and a 19% decline in labor expenses, fell only 6%. ANA has additional financial exposure, via ownership stakes, to Philippine Airlines and Vietnam Airlines. It also faced some pre-crisis difficulties with Rolls-Royce Dreamliner engines, and with distress in the Hong Kong and Korea markets. But in general conditions were healthy for most of 2019, with Japanese companies spending plentifully on business travel, and overseas tourists zealously visiting Japan.

    On the other hand, costs were momentarily elevated on the eve of the crisis as ANA increased staffing to prepare for its new Haneda slots and the Olympic games. International demand was also starting to weaken late last year. ANA is now undertaking thankless tasks like operating minimal capacity, offering voluntary leave to staff, cutting capex, scrounging for bank loans, deferring aircraft deliveries, bringing some outsourced maintenance in-house, and lobbying Tokyo — via the Scheduled Airlines Association of Japan — for emergency loans and tax relief.

    Management sees leisure demand returning first, with help from low fare stimulation. When the time does come to switch from defense back to offense, ANA will revert to strategic priorities like deepening its alliances in the ASEAN region, building on joint ventures with United and Lufthansa, upgrading premium amenities, fostering more sixth-freedom traffic through Tokyo, making productive use of its customer data, and renewing its narrowbody fleet with both NEOs (already arriving) and MAXs. The Tokyo Olympics, by the way, are now scheduled for next summer. Will the pandemic be over by then?  
  • As Japan Airlines awaits its government’s decision on financial assistance, it can take some comfort in its relatively modest negative 7% operating margin last quarter. Revenues (down 21% y/y) fell no less drastically than what ANA experienced. And operating costs (down 8%) likewise fell no less significantly (ASKs dropped 7%). But JAL is descending from a higher place, having flourished for a decade following its cathartic bankruptcy restructuring in 2010. In any case, it’s now back to square one, this time seeking to overcome not its own shortcomings and ineptitude but a vicious external crisis. To get a sense of the magnitude, consider JAL’s 28% y/y decline in international unit revenues last quarter.

    Like ANA, JAL now generates more money on domestic routes, where its load factor last quarter was just 58%. With the company’s cash balance declining almost 40% in the quarter, dividends were naturally suspended. As things stand now, JAL is running just 5% of its normal international capacity, and just 30% of its domestic ASKs. How did things stand before the crisis? Much like ANA, JAL was feeling strains in Korea and Hong Kong and starting to see weakness in international markets, not to mention cargo markets. It was adding A350s and B787s. It was actively pursuing partnerships, including a new joint venture with Malaysia Airlines. American, IAG, Finnair, and China Easternare other key partners.

    But U.S. regulators nixed JAL’s plan to form a joint venture with Hawaiian. Recall that Hawaii was one of JAL’s all-star markets for many years. It’s more recently downsized there, however, amid ANA’s A380 offensive. Before long, it will likely serve the market with a new low-cost B787 unit called Zip Air, which was planning to launch with flights to Bangkok next month. That’s postponed, but Zip still plans to take flight in 2020, complementing JAL’s other LCC Jetstar Japan, which is part-owned by Qantas and uses narrowbodies. JAL, like ANA, has new Haneda slots to use. Having never ordered any MAXs or NEOs, it now stands to get some at deeply discounted prices when it feels comfortable enough to place an order.

    Right now, though, JAL is focused on preserving cash. Encouragingly, Japan has experienced many fewer Covid-related deaths than most major economies. And the Japanese yen has actually strengthened versus the U.S. dollar since the crisis began. Longer term, JAL’s President Yuji Akasaka said he strongly believes business demand in particular will eventually return, citing the necessity of face-to-face communication.  

…And Elsewhere

  • Finnair is another airline that hadn’t yet bought any NEOs or MAXs but was planning to before the crisis came. It too stands to get much better pricing when the time comes — perhaps later this year or next year — to place an order. Though inherently vulnerable given its limited size and dependence on Europe-Asia connecting traffic, Finnair entered the crisis with strong liquidity, highlighted by a cash-to-sales ratio of 31%. The average across European airlines, it said, is just 17%. And only Ryanairand Wizz Air have higher figures than Finnair. “Just a couple of months back,” said CEO Topi Manner, “we were accused of being too conservative in terms of cash.”

    That’s not to say Finnair had a pleasant first quarter. On the contrary, its operating margin was a dismal negative 16% as revenues dropped 16% y/y and operating costs fell just 5%, all on 9% less ASK capacity. Cargo revenue dropped by almost one-fifth. It didn’t even get to enjoy the fuel price collapse as hedges and a weak euro spoiled the fun. When Finnair first suspended flights to China in February, it downplayed the impact, noting how China flights typically lose money in the late winter months anyway. Only later did it realize the global impact of Covid-19. Demand overall was strong early in the quarter, especially in shorthaul European markets where supply was simultaneously constrained due to missing MAXs and delayed NEOs. In addition, several European airlines including Thomas Cook had just disappeared. Combined with earlier failures like Air Berlin, Finnair was getting good traction in markets like the U.K. and Germany, using its well positioned Helsinki hub and new A350s to provide convenient connections to and from Asia.

    Outbound Japanese travelers are another critical component of Finnair’s traffic base. The question now is whether East Asia, because it experienced the crisis earlier, will exit the crisis earlier. Finnair isn’t seeing a pickup in China or elsewhere yet, as expected given the international travel restrictions now in place. But it still sees Europe-Asia as a longterm growth market. It is seeing a modicum of shorthaul bookings but downplayed their significance. Management thinks 2020 will be a lost year but 2021 potentially profitable.

    “Normalized” profits, it said, won’t come until 2023. That will be aided by an expected increase in bankruptcies among rivals, and capacity cuts by all airlines. Norwegian’s 2019 cuts, remember, were already giving Finnair a boost. It expects to start flying in earnest again around July, starting with domestic service, then intra-Nordic regional, then Europe as a whole, then intercontinental. The latter will depend on when travel restrictions are lifted, but it does expect to be operating some longhaul routes this summer.

    For now, Finnair has most of its staff on temporarily furlough with government assistance. Politicians were quick to provide the airline with loan guarantees. It’s in advanced talks on aircraft sale-leaseback deals. And it just announced a new stock offering. So put Finnair in the category of airlines capable of surviving for a while with near-zero revenues. When the time comes to restore flying, or alternatively ground planes for longer, it says it can react pretty quickly thanks in part to flexible Finnish labor laws. It does expect to be a considerably smaller airline for a while. It will likely burn between $3m and $4m of cash per day this quarter. And soon, it will announce an updated business strategy, including new measures to make passengers feel safer and more comfortable flying.
  • Cebu Pacific of the Philippines, sporting a low-cost business model since 2005, managed to escape the grim first quarter with just a negative 4% operating margin. But the extreme gravity of the Covid crisis becomes clear when considering that during last year’s Q1, Cebu’s margin was positive 18%. Indeed, it’s often among the world’s most profitable airlines, competing against the chronically troubled Philippine Airlines and AirAsia’s typically-unprofitable Philippine joint venture.

    Cebu’s Q1 revenues dropped by one-fifth, while operating costs fell just 4%, even as fuel costs fell 17%. A strong peso was another bright spot on the cost side. But it was small consolation amid a pandemic that forced Cebu to suspend all flying on March 19. Before that, it faced exposure to the virus in China, and then Korea, both important markets. Even on day one of the quarter, its important Hong Kong routes were suffering from political unrest. The carrier still filled 81% of its Q1 seats, which was only a few points down from its Q1, 2019 load factor. It boasts of a strong liquidity position and solid relationships with suppliers.

    If lucky, East Asia will recover from the crisis first, as easing virus infection rates suggest. At that point, it can resume progress on re-fleeting, which involves A321 NEOs to enable growth from congested Manila, ATRs to enable growth from smaller airports with short runways, and A330 NEOs, not so much for longhaul but for its busiest shorthaul markets. Cebu by the way, is a rare LCC with a big cargo business, even launching dedicated freighter flights last fall. Cargo revenues, however, did decline 20% in Q1.
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  • On CBS current-affairs news program “Face the Nation,” Southwest CEO Gary Kelly insisted that flying is no less safe than other routine activities, describing measures the airline is taking to make that even more true than ever. Is cheap travel over forever for Americans? To that question, he warned against extrapolating from the current moment, which is a low point. May will be better than April. June, though still bad, should be better than May. Bookings are in for later in the summer, though cancellations are possible.

    Kelly thanked Washington for coming through with quick and ample financial assistance, helping Southwest raise money from the private markets. It will decide later if it wants to take any more direct government loans, to supplement the federal money it’s getting for employee costs. 
  • How is Sun Country coping with the Covid crisis? CEO Jude Bricker tells Skift that he’s starting to see some signs of life. On a late-April flight from Minneapolis to Phoenix, he said, more than 100 people were aboard, many transporting golf bags. He’s seeing similar patterns emerge on flights to Florida and California. This is not, he emphasizes, an indicator of imminent recovery. Load factors were less than 30% last month. It’s still flying just 15% of its planned schedule. And forward bookings are hardly robust. But the airline is starting to see some interest in summer bookings for July and August — June demand remains sparse.

    In a separate interview with the Minneapolis-St. Paul Business Journal, Bricker describes what he sees as a “modest heartbeat” after hitting a floor in mid-April. For about a month starting in mid-March (which happens to be peak season for Sun Country’s sunbelt-heavy network), bookings were largely negative, in other words, refunds were exceeding cash from new bookings. Federal aid is helping. So is extremely cheap fuel. So are exemptions it won from the DOT allowing it to drop some cities from its network. As a result, most of its flying is now cash-flow positive, if still loss-making when properly allocating all associated costs (including indirect costs like management overhead and depreciation). Sun Country, specifically, received $60m in federal grants to help cover labor costs through September.

    An important bright spot is the cargo deal Sun Country signed with Amazon, which takes effect May 7. Another potential bright spot is the airline’s charter business, assuming college sports resume play in the fall — it provides air travel to many of America’s collegiate sports teams. Like other airlines, Sun Country is cleaning airplanes more thoroughly, giving employees masks and gloves, and increasing onboard spacing by leaving middle seats open. But Bricker thinks blocking middle seats is unsustainable in the sense that people won’t pay 30% more to travel. Helpfully, the carrier had no outstanding aircraft orders going into the crisis. When demand returns, it will be in a good position to hunt for used aircraft bargains.
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Covid Crisis 2020

What to Expect From Norwegian’s Shareholder Meeting

  • This week is Norwegian’s fateful shareholder meeting, at which owners will vote on whether to accept a major dilution of their holdings. Shareholders aren’t the only ones that Norwegian needs to convince, however. It also needs to convince aircraft lessors and bondholders to forget about most of the money the airline owes them, accepting stock in a restructured Norwegian instead.

    Well, bondholders for one struck a deal with the company, after initially rejecting the debt-to-equity plan in a vote last week. The alternative is bankruptcy, in which creditors would have control but could wind up worse off. At least under the current plan, Norwegian would boost its equity base and qualify for government loan guarantees, giving it a fighting chance to survive as a smaller, less ambitious carrier.

    What exactly does this prospective “New Norwegian” look like? Management provided some details in a presentation to creditors last week. Interestingly, the revived airline wouldn’t start flying until next spring — all planes, with the exception of eight B737s flying domestically, will be grounded through the end of next winter, unless international travel restrictions ease earlier than expected. Even after next spring, operations will only ramp up gradually, with normalized level of service not expected before 2022. There’s flexibility, however, to ramp up sooner if demand merits. New Norwegian is looking at roughly 110 to 120 planes at full strength, compared with  about 170, pre-crisis.

    Will it still fly longhaul B787s? Yes, and they’ll account for about half of total ASK capacity by 2022. Still longhaul flying will be 40% less than its original 2020 plan. The carrier will focus on its most profitable routes, with a strong position in the Nordic region, ongoing service to New York JFK and Los Angeles, a base of operations at London Gatwick, less flying in the offpeak winter, and an eye toward connecting large demand flows. Ancillary revenues will become more important. Ground handling will be more efficient. And its cost base will of course be lower following the many concessions it’s getting from various stakeholders, including unions. Speaking of labor, plans call for higher crew utilization and increased use of seasonal staffing. Ultimately, it sees unit costs below those of easyJet, and not that much higher than those of Ryanair and Wizz Air.  

Air France/KLM Works Out New Plan

  • Norwegian’s battle for survival is just one of many dramatic storylines unfolding throughout Europe. On the other side of the Atlantic, U.S. carriers quickly received government aid, if nothing else buying them months of time.

    The process has been more difficult and drawn out for Europe’s Big Three. Air France/KLM largely has what it needs for now, securing big government-backed loans from Paris, and more help likely forthcoming from Amsterdam. The Franco-Dutch carrier, the least profitable among Europe’s Big Three before the crisis, is now working on a new business plan that incorporates environmental goals linked to its French rescue package — it must exit some domestic routes, for example, so that people must travel by rail.

    Air France/KLM, according to articles in Les Echos and Le Dimanche last week, also aims to simply its regional Hop subsidiary, make use of Transavia’s low costs to exploit post-crisis shorthaul opportunities, hold talks with Groupe ADP about the timing and cost of building a fourth terminal at Paris De Gaulle airport, and consider a faster phaseout of A380s and A340s.

    Air France still plans on taking A350s this year and remains excited about A220s. The group as a whole doesn’t see traffic fully recovering for another two years at least, though the timing will depend on matters like when the key U.S. market will reopen.   

IAG: Recovery in ‘Years’

  • IAG, meanwhile, gave a preview of its Q1 results. They’re not, to put it mildly, pleasant.

    The parent company of British Airways, Iberia, Vueling, Air Lingus, and Level expects to report a negative 12% Q1 operating margin ex special items for the offpeak period, and a net result burdened by heavy losses from forex and fuel hedges. Revenues declined an estimated 13% y/y. Results, the group said, were similar to last year’s levels for January and February, despite suspending China routes at the end of January. Vueling, which typically loses lots of money in Q1 anyway, didn’t see much change in overall margins even including March. British Airways on the other hand, was responsible for most of IAG’s y/y earnings deterioration. BA is now talking to unions about cutting as many as 12k jobs, permanently. Some 23k of its workers are already on temporary furlough with government wage support.

    That aside, BA hasn’t received any government grants or credit support, but then again neither has its archrival Virgin Atlantic, which could go bankrupt as a result. Iberia and Vueling, on the other hand, are getting credit support from Spain’s government, which is aghast at what’s happening to the country’s vital tourism sector. IAG is operating just 6% of its normal capacity this month and expects similar levels of flying next month.

    “Recovery to the level of passenger demand in 2019,” IAG said in statement, “is expected to take several years.” The group formally reports Q1 results on May 7.  

Lufthansa Calls for More Aid

  • And then there’s Lufthansa, which can’t seem to get the support it wants from Germany’s federal government. The hang-up seems to be the state’s desire to take a major ownership stake in the airline — perhaps as high as 25% — in exchange for any aid. Austria’s government could wind up with a stake as well. The Swiss government has already provided Swiss and Edelweiss with credit support. The Belgian government might do the same for Brussels Airlines.

    An alternative for Lufthansa is bankruptcy. In a pre-published speech he’ll give at the airline’s annual shareholder meeting in cyberspace this week, CEO Carsten Spohr said the company stood on solid financial foundations when the crisis hit. But with some 700 planes grounded and a million euros an hour draining from cash reserves, the alternatives are indeed either government support or bankruptcy. Whatever happens, Lufthansa expects to be a considerably smaller airline post-crisis. It will, however, have greater opportunities to lower costs. Said Spohr: “We plan to reduce unit costs at all of our companies by twice as much as originally planned: by 2%-to–4% per year instead of the previous 1%-to-2%.”

And Elsewhere in Europe

  • SAS isn’t waiting to see when and how much demand recovers. It’s permanently cutting jobs, now. Icelandair is doing the same, following Norwegian’s lead. In SAS’s case, 5k jobs will go, split across Norway, Sweden, and Denmark. The airline sees only limited demand this summer. But it can quickly ramp things up and even reverse job cuts if demand does bounce back earlier. It says it needs to act now on jobs, because of labor contracts that require about six months lead time before enacting cuts. 
  • Ryanair thought it was vaccinated against annual losses. So it hedged a large portion of its expected fuel needs, all but locking in strong margins even if fuel wound up dropping a lot. What it didn’t count on in was a monumental collapse in fuel prices, and more importantly a monumental collapse in demand, even for its low fares. It’s not even consuming fuel right now, with all but a token portion of its fleet grounded.

    Ryanair in fact doesn’t expect to do any meaningful flying before July. And even then, it will take time for demand to return. Traveler confidence, it said, will be impacted by new public health restrictions, such as temperature checks at airports. So it expects to post a net loss of something around $380m for calendar Q1, based on its fiscal year to March net profit forecast of about $1b. Losses in calendar Q1 are not unusual for Ryanair — it lost $227m in Q1, 2019.

    What’s highly unusual — even more so than a friendly smile on Michael O’Leary’s face — will be the losses Ryanair expects for Q2 and Q3, its spring and summer peaks. It said last week it would lose about $111m this quarter. O’Leary was late in realizing the gravity of the crisis. Now, he doesn’t expect demand and pricing to return to 2019 levels until summer, 2022 at the earliest. In the meantime, Ryanair is reviewing its growth plans, talking to Boeing about delaying MAX deliveries, talking to lessors about renegotiating Lauda’s A320 contracts, talking to unions about job and pay cuts, closing bases, and lobbying hard against “state aid doping” by Europe’s legacy airlines.

    Rather than provide direct support, it argues, why not cut taxes and airport fees which would benefit all airlines. Ryanair itself will not request state aid.   
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Sky Money

  • Warren Buffet, perhaps America’s most famous investor, regretted ever lending money to US Airways, with a stock conversion option, in 1989 (though his Berkshire Hathaway did ultimately profit from the investment). Those bad memories notwithstanding, by 2016 he was convinced the industry had changed for the better following multiple mergers.  So — ignoring his own earlier warnings that the sector was labor intensive, capital intensive, and largely commoditized — he bought major stakes in the four largest U.S. airlines: American, Delta, United, and Southwest.

    But last week, he sold his entire airline portfolio, saying the “world has changed” for the industry following the Covid pandemic. It’s another signal of pessimism about the industry’s prospects in a post-Covid world.     
  • Lord have mercy. Even Copa, a profit machine through good times and bad, worries about running out of cash. As recently as last quarter, its operating margin was something close to 17%, it said last week. But revenues declined 11% y/y, and it was forced to suspend all flying on May 22. As recently as March 13, it made dividend payments to shareholders. Now it’s scrambling to raise cash through borrowing and other means.

    As a carrier with no meaningful domestic market, Copa could take longer than others to see demand recover. The earliest it expects to fly at all again is June 1. And forward bookings are indeed weak, while refunds remain a cash drain. It might have to write down the value of its fleet as well, which will hurt its balance sheet. It said in a statement: “Assuming that our operating capacity would be at 0% and proceeds from the sale of tickets would also be $0 between the months of April and December of 2020, we currently estimate that our average monthly cash burn for the period would be approximately $85m.

    It’s now talking to Boeing and other suppliers about renegotiating contracts. Aside from Panama, Copa’s most important markets are Colombia, Brazil, the U.S., Costa Rica, and Argentina.  
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  • Airbus is slashing its production rate by one-third as it grapples with the collapse in demand due to the pandemic. The airframer plans to produce 40 A320-family aircraft per month; two A330s, and six A350s. Yet, the first quarter wasn’t as bad as it might have been. The company booked 356 orders for new aircraft: 248 A320s, 42 A220s and 21 A350s. Backlogs stand at almost 7,700 aircraft.

    But dark clouds are gathering. Airbus is focused on conserving cash, CEO Guillaume Faury said during the company’s Q1 earnings call. Although it is seeing a very slow recovery in orders from China, it also has booked 66 cancellations in the quarter and expects more in the coming quarters. The supply chain is straining, “basically everywhere,” Faury said. Some of Airbus’ suppliers are in a much “weaker position” than Airbus, which could affect the airframer later this year.

    Airbus predicts the narrowbody market will start to recover more quickly; widebody orders will not return to 2019 levels until the 2023-2025 timeframe, he said. This could work in Airbus’ favor, as its product mix is more heavily skewed toward narrowbodies than Boeing’s. And speaking of Boeing, Faury said the dust-up between Boeing and Embraer was expected “collateral damage” of the Covid crisis. Airbus reported first-quarter revenues of $12b, with a net loss of $534m. The company had to store 60 aircraft due to deliveries being fewer than expected in the quarter. Deliveries are expected to fall in the second quarter, Faury said.
  • Boeing plans to reduce its workforce by 10%, or about 16k workers, as the company reels from the Covid pandemic. CEO David Calhoun expects it will take three years for demand to recover to 2019 levels, and another two years after that for the company’s commercial aircraft division to start growing again.

    Boeing is cutting its widebody production rate, already soft before the pandemic, to three per month for the B777 family and 10 per month for the B787 family. (B787 production already was slated to fall from 14 per month to 12 per month later this year.) But in a sign of the parlous market conditions the company is seeing, Calhoun noted that development plans for the NMA are on ice for now. Like with Airbus, which shares many of the same suppliers, Boeing is shoring up its supply chain but sees this as an area of concern this year. In another sign of the way things are going,

    Boeing touted its defense arm’s successes in the quarter. Boeing reported Q1 revenues of $17b. Commercial Airplanes accounted for $6.2b, and the division reported a  negative 33% operating margin in the quarter, due the twin blows of the B737 MAX grounding and the Covid pandemic. MAX production is expected to continue this year, although at a lower rate than had been planned. Boeing is pressing ahead with the B777X test program and expects the first delivery of the type next year.
  • Embraer said it will pursue all legal remedies against Boeing for terminating the two companies’ joint venture. The Brazilian airframer said it believes Boeing “wrongfully” terminated the $4.2b agreement and is in violation of their contract. But Embraer CEO Francisco Gomes Neto said the company is open to a joint venture with another airframer, such as Mitsubishi.

    Regional jets will resurge as airlines alter their fleets to reflect the changed realities of post-Covid demand, he said. Domestic and shorthaul demand is expected to recover first. The company has stored a number of aircraft awaiting delivery and predicts this year will be difficult. However, Gomes Neto believes the recovery for shorthaul and demand for Embraer jets could recover starting next year.
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State of the Unions

  • After an earlier move to cut 1,700 pilot jobs, Canada’s WestJet said it reached agreement with the ALPA union to save about 1,000 of those positions. This applies to WestJet mainline, WestJet Encore, and Swoop, the group’s ultra-LCC. The union ultimately concluded that contract concessions were better than job losses. Management in turn, concluded that more flexible and less costly contracts will help during what’s expected to be a muted demand recovery.   
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Landing Strip

  • London Gatwick, a pillar of the world’s largest airline market, expressed confidence in the longterm future of U.K. aviation. But it’s not a pretty picture in the short-term, with one important tenant going belly-up just before the crisis (Thomas Cook) and two others on the verge of going under now (Virgin Atlantic and Norwegian). There was even a BBC report last week that British Airways might abandon its Gatwick base.

    A more mundane problem right now is just managing its air traffic control tower staffing while the Covid virus rages. It hopes for at least some traffic rebound this summer, starting in June. But it’s cutting 500 jobs in anticipation of a smaller airline industry for the next few years. Its best guess now for 2021 is passenger volumes of about 40m. It handled close to 50m in 2019, with Barcelona, Dublin, Malaga, and Amsterdam its busiest routes.

    Gatwick still wants to bring an existing standby runway into routine use. And it still dreams of an all-new runway one day, likely beyond 2030 if ever. Gatwick’s busier neighbor
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Routes and Networks

  • In a rare example of an airline announcing new route expansion in these difficult times, Wizz Air says it’s opening a new base in Lviv, a Ukrainian city. It will base an A320 there in July, signaling expectations of a summer revival of at least some demand.

    With lots of migrant workers and family-visit traffic, Wizz could see an earlier recovery than other airlines. From Lviv by the way, Wizz will add flights to Billund in Denmark, Tallinn in Estonia, Lisbon in Portugal, Hamburg in Germany, and Szczecin in Poland. It’s separately adding Tallinn and Berlin service from Kharkiv.
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Feature Story

Airlines and airports are struggling to restore passenger confidence and answer public health concerns, but standardization remains the elusive goal.

Face masks. Blocked middle seats. Extensive aircraft cleaning and disinfection. Health screening before security. Flight attendants in protective gear. These are among the many ways in which airlines, airports, and governments around the world are grappling with a raging viral pandemic. Some are effective and can scale up when demand and traffic start to return. Some are not and may not last. Regardless, it is clear that the measures that either airlines choose to maintain or are mandated to implement will fundamentally change the air travel experience and the way airlines operate. And warning to airlines as they wait for progress on vaccinations, therapies, or herd immunity: The new measures could impose significant costs.

It is unclear when traffic will begin to return in anything like it was at the end of 2019. How sharp the recession is worldwide will determine much of the return, as this will determine companies’ and people’s wherewithal to travel again. Delta CEO Ed Bastian said it could be 2-3 years, a timeline with which Boeing concurred. Although the palest of green shoots are appearing in China and elsewhere, the consensus is that it will be years, not weeks or months, before air travel resumes its former growth trajectory. And before effective therapies emerge and even after, airlines will have to ensure the traveling public they are taking necessary steps to promote health and restore consumer confidence in taking to the skies.

And that last point is key. Poll after poll has shown passengers are fearful of being confined to the close quarters of an aircraft cabin and are wary of waiting in line at security checkpoints and of facing exposure throughout airports. Anything airports and airlines can do to instill confidence is worthy at this point in the pandemic, but it bears remembering that these measures must be feasible and effective in addressing public health.

The parallel is security in the immediate aftermath of the Sept. 11, 2001 terrorist attacks, and what evolved in response to attempted terrorist bombings of commercial aircraft in the first decade of this century. Some measures, such as reinforcing cockpit doors and beefing up airport access and security, worked and remain. Some, such as removing shoes at security checkpoints in the U.S. and banning liquids beyond 100 ml the world over — both of which were implemented in response to specific terrorist attempts — remain in place due to what has been called “security theatre.”

At least in the near term, face masks and gloves, which a growing number of airlines are requiring crew and passengers to wear, will become the norm. Strict social distancing in the airport, during boarding and inflight at the lavatories will become best practices. Inflight magazines are being removed and are unlikely to return (eliminating a cost center for airlines as a bonus). Aircraft disinfection and cleaning before every boarding, rather than just during line maintenance or overnight, could be here to stay as well, as could disinfecting check-in kiosks. Infrared thermometers, already a fixture at many airports worldwide, could screen every passenger going through passport control.

But what of some of the other tactics airlines and airports are trying? Emirates started field testing rapid-result Covid blood tests on some Dubai-Tunisia flights. Etihad has started testing health kiosks at its Abu Dhabi hub to gauge a passenger’s temperature, heart and respiratory rates. Yet, both raise serious health and privacy concerns. Experts say at best the health kiosks will identify passengers with current fevers, possibly not caused by Covid, and will not be able to screen asymptomatic carriers. The Emirates blood test raises privacy concerns if widely adopted worldwide. The possibility of “mission creep” is significant — how to prevent testing blood for diseases other than Covid. In the first decade of this century, the EU and the U.S. had a fierce row about passenger name record data, which the U.S. wanted the airlines to share, causing the EU to object out of privacy concerns. Data gleaned from a blood test is almost immeasurably more sensitive than PNR data, so if this solution is adopted more widely, governments and passengers will want reassurances that data will be safeguarded. And both tests, and others like them, burn something that is in short supply at airports: Time. The test Emirates is using delivers results in 10 minutes. Boarding a fully loaded A380 would become almost impossible.

Ty Osbaugh, who heads the aviation practice at architecture firm Gensler, recently told Skift Airline Weekly that the entire architecture of airports will have to be rethought to prepare for future pandemics. In the near term, he believes airports will move some functions, like health screenings and check-in, to parking garages. Passengers could be required to report to security and boarding at specific times, ensuring social distancing at checkpoints and in gate hold areas. Airports will have to limit crowded inter-terminal trams, and concessions will have to meter people entering food, beverage, and retail shops. Airlines have already begun disinfecting check-in kiosks (or eliminating them altogether) between each passenger, which requires more staff time and slows down throughput at check-in. Right now, this is not an issue, as few people are traveling, but as traffic ramps back up, even the seconds it takes to disinfect a kiosk will slow the process.

Similarly, airlines the world over are rightly touting their enhanced aircraft-cleaning procedures. These likely will remain after the pandemic begins to recede, experts say, not merely for the huge public-health benefits but also for public relations in allaying passengers’ fears. Yet, cleaning an aircraft between each boarding will add costs, yes, but these will be minor compared with the effect on airline operations. New disinfecting protocols could end the quick turn. Increased time at the gate will reduce the number of flights airlines can operate. This, in turn, could result in airlines reducing the number of connecting banks they operate at their larger hubs. “Yesterday’s gate availability might only accommodate some level of reduced service in the new world of longer ground times,” said industry analyst William Swelbar.

Another question hangs over social distancing on aircraft. A growing number of airlines are blocking middle seats, in an attempt to space out passengers. This is fine now, when traffic has collapsed by 90% in some areas and aircraft are operating at 20-50% load factors, but it is unsustainable in the long term. If this practice is mandated by governments, it will hurt all airlines, but ultra-low-cost carriers, which built their business models on dense cabins and cheap fares, could find it an impossible standard to meet. Ryanair CEO Michael O’Leary has already threatened that the carrier would not return to the skies if this practice becomes law.

Some in the industry have called for “health passports” to transport previously screened passengers in some semblance of normalcy. Chile recently said it would begin issuing certificates for people who have survived Covid, but reportedly is walking back the plan. Other proposals posited by industry insiders is for passengers to upload the result of health screenings before showing up at the airport or at booking, but this raises other issues, says Atmosphere Research founder Henry Harteveldt. Questions remain about how long before a flight is a health screening valid, who is authorized to conduct a health screening, and how to reconcile results from different tests used by each jurisdiction. And this last point further complicates plans such as those being tested by Emirates and Etihad, for example. If tests differ and there is no standardization, will passengers connecting through megahubs have to be re-screened? And will transiting passengers who test positive have to be quarantined, and where? And who bears the cost?

None of this is known yet nor has been worked out. The key going forward will be standardization of every aspect of the air travel experience, from what types of data are needed at booking, through check-in, security and screening, inflight and even arrival. IATA’s focus now has been on ensuring the airline industry’s survival by beseeching governments to step up with financial aid for airlines. But the group also has said governments must work with ICAO to standardize regulations and procedures.

“We are not expecting to re-start the same industry that we closed a few weeks ago,” IATA Director General Alexandre de Juniac said. “Airlines will still connect the world. And we will do that using a variety of business models. But the industry processes will need to adapt.” And in a key statement, he added, “another stream of activity will involve working with governments and health authorities to understand what measures will be needed.”

Traffic will start to return, however slowly. Businesses will begin sending their road warriors back out. Visiting friends and relatives (VFR) and leisure travel, most believe, will rebound even more quickly than business travel. Countries that took drastic measures, like Argentina, which shut down its airspace until September, will relax their strictures. Airlines and airports will need to maintain some measures to restore confidence and convince passengers that it is safe to fly, and they’ll need to balance these measures against what is financially and logistically feasible. But without a coordinated global approach to public health, none of these measures will be entirely successful in that aim, leaving airlines in a tenuous and uncertain position until a vaccine or therapy is found, or herd immunity is achieved.

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Around the World

Around the World: May 4, 2020

Airline NameChange From Last WeekChange From Last YearComments
American3.2%-68.6%Mass retirement of aging planes includes 17 B767s, 34 B757s, 9 A330s, 20 E190s
Delta7.6%-57.8%Moving up retirement of both MD-88s and MD-90s; both will be gone by the end of June
United4.1%-69.7%Delta admits that “high level of debt will be a burden on our future growth”
Southwest-0.3%-45.8%Has 250 B737s in short-term storage; others in long-term storage will take at least 3 or 4 days to reenter service
Alaska7.5%-51.5%Sabre walking away from planned takeover of Farelogix; has implications for airline adoption of NDC distribution initiative
JetBlue13.5%-51.6%Starting this week, all passengers (except small children) required to wear face masks; other carriers adopting similar policy
Hawaiian13.4%-53.3%Hawaii’s unemployment rate still under 3% but this masks severe damage to tourism-heavy economy; rate will surely spike
Spirit8.4%-74.9%Florida Covid hospitalizations/deaths concentrated in Miami-Ft. Lauderdale area; much less in Orlando, Tampa, etc.
Frontier(not publicly traded)Tesla CEO Elon Musk, bashing U.S. infrastructure, said “our airports, in a lot of cases, are an embarrassment”
Allegiant6.1%-49.3%Sun Country tells MSP Business Journal it was on a path toward perhaps doing an IPO in 2021; that’s now off the table
SkyWest5.6%-54.7%Chicago Tribune looks at city’s modernization plan for O’Hare airport in context of demand shock
Air Canada5.8%-41.3%IATA singles out Canada as country that needs to act now on supporting its airlines
WestJet(not publicly traded)Reuters report points to reservations some Air Canada investors are having about its Transat takeover; want price renegotiated
Aeromexico17.4%-51.5%Another blow to rival Interjet: carrier suspended from IATA’s clearinghouse; inhibits its ability to sell via travel agencies
Volaris21.9%-31.2%Further relaxed ticketing policies and increased flexibility to make rebooking and obtaining credits or refunds easier
LATAM6.4%-53.0%Delta now has two of its nine board seats; Qatar Airways has one
Gol16.2%-45.6%Argentina effectively bans all air travel until Sept. 1; IATA urges it to reconsider
Azul24.4%-48.8%Points out that crisis isn’t just obliterating demand but also devaluing its assets and reducing availability of credit
Copa-15.1%-47.7%Sold up to $400m worth of bonds last week, convertible to stock; buys it more time while grounded
Avianca0.6%-65.8%All internal domestic travel within Colombia restricted until May 30
Emirates(not publicly traded)Was having trouble filling A380s at decent yields even before the crisis; the jumbos could be a drag on its recovery efforts
Qatar(not publicly traded)Deferring some salaries to save cash, according to a recent Bloomberg report
Etihad(not publicly traded)Etihad and Emirates jointly warn of mass bankruptcies without more gov’t aid; say demand won’t return to pre-crisis levels until 2023
Air Arabia6.5%14.0%Rival LCC Jazeera of Kuwait slashes jobs in bid to stay solvent during crisis
Turkish Airlines4.1%-25.3%Turkey hoping to open domestic tourism at the end of this month, with limitations on activities to protect safety
Kenya Airways-4.3%-81.1%Ailing LCC rival Fastjet now says it has enough cash to survive through at least the end of July
South Africa Air.(not publicly traded)Rival Comair/Kulula warns investors it doesn’t expect to operate again until Oct. or Nov.; wants to cancel MAX 8 orders
Ethiopian Airlines(not publicly traded)The Economist suggests Zambia, a major market for Ethiopian, might be facing biggest post-Covid debt crisis of any developing nation
IndiGo11.6%-34.4%India extending nationwide lockdown for another two weeks but with some exceptions in areas where virus isn’t prevalent
Air India(not publicly traded)Singapore Airlines says its Indian subsidiary Vistara “well-positioned” to recover from crisis; committed to supporting its fleet needs
SpiceJet5.3%-65.6%Not cutting any jobs for now but implementing temporary pay cuts to preserve cash
Lufthansa12.8%-62.1%Pilots offering some temporary wage concessions to help company preserve cash and avoid bankruptcy
Air France/KLM4.1%-54.9%Gov’t support tied to environmental goals; must cut shorter domestic routes and meet carbon emission cut mandates
BA/Iberia (IAG)-1.2%-60.8%Unions upset that Iberia and Vueling asked and received support from Spain, while BA is resorting to job cuts in the U.K.
SAS6.7%-47.6%Will be closely watching Norwegian’s shareholders meeting this week; SAS stands to benefit if its rival goes away
Alitalia(not publicly traded)Carrier will be reborn on June 1 with 92 planes, 20 of them longhaul; will be 100% state owned
Finnair-10.0%-51.1%All package tours sold through its in-house tourism unit have been cancelled through the end of June
Virgin Atlantic(not publicly traded)Still no resolution on saving the company; time running out
easyJet-0.9%-51.7%Germany allowing flights to accommodate 80k eastern European farm laborers to help harvest German crops this summer
Ryanair8.2%-12.9%Alleges more than $30b in “illegal” state aid to Lufthansa, Air France/KLM, Alitalia, SAS, and Norwegian
Norwegian-11.8%-85.8%Thinks gov’t-backed loan amount, if it’s able to qualify, would cover its liquidity needs through the end of this year; would get money on May 14
Wizz Air4.9%-18.6%Eastern Europe largely spared the worst of Covid-19; has affected western Europe much more so far
Aegean13.1%-30.2%Europe discussing ways to safely open its tourist markets this summer; July and August the two busiest months
Aeroflot2.9%-21.3%In Israel, an important Aeroflot market, El Al reportedly discussing merger with rival Israir
S7(not publicly traded)Russia now 7th most-affected country in terms of Covid infections, having surpassed China, Turkey, Iran last week (Moscow Times)
Japan Airlines4.9%-49.7%Ended Q1 with about 37m members in its Mileage Bank loyalty plan; All Nippon has a similar number in its plan
All Nippon-1.1%-41.6%Started upgrading longhaul first- and business-class product last year for the first time in a decade
Korean Air0.0%-40.3%Might sell some non-core assets as it scrambles to survive Covid crisis; one possibility is its loyalty plan
Cathay Pacific3.3%-30.4%Airbus working to modify A350s and A330s to make more room to handle cargo at expense of pax space
Air China2.2%-40.4%Shanghai’s two airports, Pudong and Hongqiao, together handled 122m pax last year
China Eastern6.1%-36.0%Transfer to Daxing airport now underway; when completed, two-thirds of its Beijing flights will use Daxing rather than Capital airport
China Southern5.5%-36.3%Even though Guangzhou is its busiest hub, it carried less than half of the airport’s total pax in 2019
Singapore Airlines1.2%-36.9%Says it has no loans outstanding to Virgin Australia; stands to lose its equity in the bankrupt company though
Malaysia Airlines(not publicly traded)AAPA: Asia-Pacific airlines saw int’l pax volume shrink 38% y/y in March; cargo traffic dropped 10% on weaker exports
AirAsia5.2%-70.1%Load factor for AirAsia Malaysia just 77% last quarter; was 87% in Q1 last year
Thai Airways5.8%-42.1%Filled just 54% of its seats in March (72% for entire first quarter)
VietJet0.3%-0.3%Trying to stimulate second-half travel with promotional fares available between August and December
Cebu Pacific1.7%-41.0%Rival AirAsia Philippines cut ASK capacity 13% y/y in Q1; RPKs dropped 19%
Qantas6.8%-36.5%Australia and N.Z. talking about creation of a “travel bubble” allowing flights between the two; both countries have virus under control
Virgin Australia0.0%-53.5%Sydney Morning Herald reports ULCC specialists Indigo Partners tried to buy stake in Virgin as early as 18 months ago
Air New Zealand6.6%-52.7%Took a momentary break from dealing with the crisis to celebrate its 80th birthday; first flight was to Sydney in 1940
Brent Crude Oil6.6%-63.4%Prices regain some ground on signs of optimism about vaccines, treatments, testing, and economic reopening

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

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