Issue No. 767
Start Your Engines
Pushing Back: Inside This Issue
It’s going to be a smaller airline industry. That much seems sure, for at least the next few years as carriers adjust to a world with less travel. Fewer planes. Fewer routes. Fewer airline workers. It’s not a pretty picture.
From Europe to North America to Latin America, airlines last week lined up to share grim details about their first-quarter trauma, which will only get worse in the current quarter. Virgin Atlantic is exiting London Gatwick. Two more airlines, Colombia’s Avianca and South Africa’s Comair, are bankrupt. What in the world will Emirates do with all of those A380s? Despair, despair, everywhere.
Fortunately, most big airlines have enough cash to wait the crisis out. But that’s only because they’ve borrowed gargantuan sums of money, often with government backing. Even the industry’s most muscular balance sheets pre-crisis are now larded with debt. So even if demand comes roaring back tomorrow, the industry will take years to recover its pre-crisis health.
Demand, unfortunately, won’t come roaring back tomorrow. Not with travel restrictions still in place, economies in shambles, unemployment lines growing, and the virus still killing thousands of people every day. Airlines, are however, planning a gradual restoration of flights this summer and into the fall.
Chinese carriers, providing a possible window on what carriers elsewhere might expect as the outbreak dissipates, are showing some modest signs of demand recovery. U.S. carriers say they’ve at least bottomed out a few weeks ago, with bookings tricking in at a slightly higher rate in May. Norwegian has a new lease on life after pointing a gun at the heads of creditors and shareholders. IAG is preparing to take drastic restructuring steps, just as it did with great effect after the global financial crisis. All airlines have at least some restructuring efforts underway, be it downsizing their aircraft order books or approaching unions for permanent concessions. Revenue from robust cargo demand, meanwhile, won’t put a meal on any airline’s table. But every little breadcrumb counts.
There’s a hint of life on international travel too. Australia and New Zealand, both largely Covid-free now, may create a “travel bubble” allowing flights between the two countries. The concept is under discussion elsewhere, including parts of Europe and East Asia.
This week, Singapore Airlines will be among the carriers reporting their first-quarter carnage. Let’s hope it provides an inkling of hopeful news as well.
"If history is any indicator, low cost, low-fare travel is where the recovery comes first."Spirit CEO Ted Christie
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January-March 2020 (3 Months)
- Air France/KLM: -$2b/-$1.5b*; -16%
- IAG: -$1.87b/-$618m*; -12%
- Air Canada: -$783m/-$293m*; -12%
- Alaska: -$232m/-$102m*; -9%
- JetBlue: -$268m/-$116m*; -8%
- Hawaiian: -$144m/-$34m*; -8%
- Spirit: -$28m/-$59m; -8%
- Gol: -$514m/$39m*; 7%
- Copa: $74m; 17%
- Icelandair: -$240m/-$73m*; -44%
- SkyWest: $30m/$69m*; 9%
October 2019-March 2020 (6 Months)
- Emirates: $235m; 6%
October-December 2019 (3 Months)
- Frontier: $56m; 10%
- Sun Country: $5m; 7%
Net result in USD/*Net result excluding special items/ Operating margin
- A troubled carrier in good times, Air France/KLM is an existentially challenged carrier in times like these. Or one would think. The first quarter of 2020 was indeed a nightmare for Europe’s second-largest airline group by revenues. Operating margin was a bloody negative 16%, with Air France’s figure alone negative 18%, and even the fitter KLM posting red ink equivalent to negative 13%. The group’s maintenance division lost a bit of money too. And Transavia, a highly seasonal airline in its slowest season, stained the walls red with a negative 34% showing.
Awful numbers for sure. But thanks to generous state aid, Air France/KLM’s solvency isn’t in question, at least for many months to come. It received about $8b in support from Paris, with more help expected from Amsterdam. It’s not a handout, however. It’s money that the airline has to borrow and eventually repay, unwinding years of work to de-lever the company’s balance sheet. Part of the state aid, furthermore, is a direct loan courtesy of the French taxpayer (the rest is a mere guarantee to banks that will involve taxpayers only if the airline fails to repay). Paris also attached some strings to the aid, including mandates to withdraw some domestic flying so that more people travel by rail, a form of transportation with a lower carbon footprint.
Many of Air France/KLM’s global peers, of course, will be similarly burdened with mountains of debt, much of it backed by governments. But few others have such a history of toxic labor relations, which could burst into evidence again as downsizing and cost cutting unfolds. It was finally making progress on the labor front last year, signing 37 new contracts filled with important reforms like more flexibility to expand Transavia France and (less important now) expand longhaul premium seating. The difficult tasks ahead, meanwhile, could further strain relations between the French and Dutch sides of the company.
Details on exactly how the airline plans to navigate this ugly new world will come this summer, following completion of a new business plan. It will include a greater role for low-cost Transavia, at Paris Orly and elsewhere. It might also feature an earlier phaseout of A380s, B747s, and A340s. As it happened, 2020 actually started out fairly well, with unit revenues up y/y through February. Shorthaul markets were particularly strong thanks to MAX and NEO delays that left Europe with a capacity shortfall. Then came March, when the company suffered a mammoth $622m operating lost. That should have been the strongest month of the quarter. This quarter, it expects to burn through roughly $440m a month. Strong cargo demand between Europe and China is a small but welcome bright spot. But overall Q2 capacity will be down some 95% (Transavia is completely grounded). Even in 2021, Air France/KLM expects to be flying 20% less than it was in 2019.
IAG Begins to Map Out Restructuring Plans
- IAG’s Q1 results weren’t quite as bad. It was after all a far more profitable airline group than Air France/KLM was before the crisis. But pre-crisis profitability is ancient history now, and IAG too is amassing great losses and bleeding cash. The owner of British Airways, Iberia, Vueling, Aer Lingus, and Level reported a negative 12% Q1 operating margin, with official net losses almost matching Air France/KLM’s in severity. That’s mostly after accounting for its bad fuel hedges.
Excluding such accounting items, net loss was $618m, compared to an $80m net profit ex items in last year’s Q1. Its Q1 operating margin last year was 3%, powered by an 8% figure at British Airways. Even with bad hedges, IAG enjoyed a 12% y/y drop in its fuel bill last quarter. But much of that was due to an 11% ASK capacity cut, reflecting the effective shutdown of European air travel in March. January and February weren’t bad, just “slightly lossmaking” for what’s a very offpeak time of the year. In fact, the first two months of 2020 were no worse in terms of loss margins than the first two months of 2019, despite the early onset of Covid-19 in China, a market served by BA and Iberia both.
Vueling, for its part, didn’t do all that worse y/y even including March, though don’t get too excited about that — its operating margin was negative 28% (it’s a super-seasonal airline). Aer Lingus, another seasonal airline, did even worse at negative 30% (yikes). Iberia’s heavy exposure to Latin America, which saw a late onset of the crisis, allowed it to escape Q1 with just a negative 8% margin. British Airways, however, the group’s biggest breadwinner pre-crisis, saw the biggest y/y margin declines post-crisis — its Q1 figure was negative 11%. For the group, revenues dropped 13% y/y while operating costs only fell 1%.
In one respect, IAG’s pre-crisis history remains highly relevant. It did after all begin 2020 with a strong balance sheet. Going farther back, to the early 2010s, it undertook difficult and far-reaching structural reforms much earlier and more effectively than its Big Three peers. CEO Willie Walsh, who postponed his retirement until the fall, wants to be early and forceful again in implementing the new set of reforms necessary to deal with the current collapse in demand. Demand, he says, won’t return to 2019 levels until 2023 at the earliest. Of course, he needs to present a gloomy outlook as he asks unions for mammoth concessions, including thousands of job cuts. He’s already approached BA unions, in deference to British labor laws.
But IAG stresses the need to restructure all of its airlines, not just BA. Might BA even close its base at London Gatwick? Sounds like a not-so-veiled threat to unions, receiving a message that Gatwick will go if concessions don’t come. Other questions include whether Level will survive, and whether IAG will follow through on its acquisition of Spain’s Air Europa — Walsh says the deal still makes strategic sense but at a lower price, as their contract allows in the event of a demand shock. For now, operating costs have dropped from $490m a week to $220m, with ASKs down about 90% this quarter.
Next quarter, it hopes the drop will be just 55% as countries lift lockdowns and ease travel restrictions. Its best guess for now is that Q4 ASKs will be down 30% y/y. IAG won’t have a cash shortage anytime soon, with billions on hand and capacity to raise more. It’s doing well with cargo. Governments are providing credit and wage support. The group will take 68 fewer planes this year and next, relative to its original fleet plan. It has lots of aircraft leases expiring in the years ahead, giving room to cut more capacity if needed. It prefers to fly latest-generation planes like B787s and A350s. Like the rest of the industry, it’s adopting new cleaning and other procedures to help curtail the virus. But it doesn’t expect a meaningful return to service until July at the earliest. Even then, management doesn’t think consumers will respond to low fares for a while.
Ultimately, people will travel for business again—Zoom calls won’t cut it. And even now, some corporate customers are telling IAG that they’re ready to fly again when safe. There will be lots of industry restructuring, Walsh thinks. And more mergers and liquidations. Others will downsize a lot, as Norwegian already is. The fate of BA’s longtime rival Virgin Atlantic, meanwhile, is a big question. IAG supports government aid to help ailing airlines, but not aid tailored to specific companies, Virgin or otherwise.
Emirates Announces 32nd Consecutive Profitable Year
- In Dubai, Emirates announced a 32nd straight fiscal year profits, the latest amounting to $456m for the 12 months that ended in March. The period of course included the onset of the Covid crisis in the final weeks of March, as well as a six-week runway closure at Dubai airport last spring. Only 63% of the net profit came from Emirates the airline; the rest came from its Dnata ground handling and catering unit. For just the winter half — October of last year through March of this year — the Emirates airline division earned a respectable 6% operating margin. Cheaper fuel was a big help. And demand conditions were generally strong before cratering in mid-February.
The airline did suffer cargo weakness long before the crisis started. And competition was intense. Another stress point was the strong dollar, which eroded the value of its revenue from markets throughout the world. Emirates has the most exposure to Europe, but its route network is well diversified geographically, an attribute it hopes will serve it well during the Covid recovery. It ended March with $7b in cash. And it’s the prized asset of Dubai’s government, which would never let it fail. Emirates last year confirmed orders for both 50 A350s and 30 B787s, putting it on a path toward downgauging its all-widebody fleet. But it will be years before A380s leave the fleet, which is a big problem. The planes are uneconomical even in times of robust demand, as the many airlines dumping them attests.
Emirates thinks it will be at least 18 months before some “semblance of normality” returns to the airline business. As a reminder, it was one of several Gulf carriers to expand voraciously after the global financial crisis of 2008-2009. But it then began shrinking in the latter half of the 2010s, a rough period for commodity export regions like the Middle East. Will globalization ever be what it was pre-crisis? That’s a question of great importance for Emirates.
Grim Financial News From North America
- Air Canada shed plenty of its own red ink during Q1, a period typically slow for the airline even in good times. In 2019, a year in which it earned a pretty good 9% operating margin, its figure during just the January-to-March period was 3%. The start of this year, however, is a whole new level of awfulness. Air Canada’s Q1, 2020 operating margin was negative 12% as revenues dropped 16% y/y on 10% less ASK capacity. Operating costs fell just 4%, driven by a 16% decline in fuel outlays.
Canada’s airlines share all the gloom of their U.S. neighbors, and then some. They also face the challenges of a weakening currency, an economy heavy on oil production, less generous state aid, and in Air Canada’s case greater exposure to Asian markets and international markets more generally. It was forced to end its mainland China service (three routes to Shanghai and two to Beijing) as early as Jan. 29, this after suffering weakness on its two Hong Kong routes throughout much of 2019. By April 21, all flights even to the U.S. were suspended, an unthinkable state of affairs given how tightly Canada’s economy is integrated with its southern neighbor. Systemwide capacity this quarter will likely be down as much as 90%. Next quarter’s decline should be about 75%.
You know things are bad when Air Canada of all airlines says the current pancession is much worse than any past crises it’s ever experienced. It went bankrupt after all, during the SARS epidemic of 2003. It nearly went bankrupt again during the global financial crisis. Can it avoid bankruptcy now? Fortunately, it began 2020 in much better financial health than it’s ever been, highlighted by its near-investment grade credit rating. It ended Q1 with nearly $5b (USD) in unrestricted cash, plus plenty of valuable assets it can still use as collateral for future borrowing. These include airplanes like B787s, its now-wholly-owned loyalty plan and Air Canada Vacations.
Just as important are the carrier’s cost cutting, its investment freeze, and other measures to reduce a daily cash burn of about $16m in March. More than half of its work force was furloughed, supported by government wage subsidies active through early June. January and February were in fact “solid” months before the wholescale demand collapse came in March. Despite the heavy emphasis on preserving cash, Air Canada is proceeding with plans to upgrade its reservation system and related software to the Amadeus suite of products. It’s proceeding as well with plans to revamp its Aeroplan loyalty program, though at a slower pace.
As of now anyway, it’s business as usual on a planned takeover of Transat, though executives refused to speak on the matter, referring to an upcoming ruling by competition authorities (perhaps it hopes for a rejection now, as an excuse to abandon the deal). It will still take A220s and B737 MAXs — Boeing provided compensation for the latter’s lengthy grounding. On the other hand, 79 older planes will retire, namely B767s, A319s, and E190s.
Rouge, Air Canada’s low-cost affiliate, will be most affected, shrinking in the near-term to a narrowbody-only fleet. The fleet reductions reflect expectations of revenue and capacity taking at least three years to again reach 2019 levels. Management is now working on a restart plan, which features a new set of practices it’s marketing as Air Canada Clean Care Plus, incorporating concepts like social distancing throughout the airport and onboard airplanes. Further cost cutting remains a priority, focused on five areas: labor costs, technology, real estate, maintenance, and its regional flying contract with Jazz. It will soon operate 150 all-cargo flights per week. It’s adopting a new shareholder rights plan, a measure typically designed to thwart takeovers though management denied this was the motivation.
Air Canada still hopes to win some government financial relief. It does see domestic demand returning soon, followed by transborder U.S. demand whenever travel restrictions are removed — many Canadians after all have second homes in places like Florida, Arizona, California, and Nevada (some are even quarantining there currently and will want to return north for the summer when possible). Intercontinental demand, a major building block of Air Canada’s rise to strength in recent years, will take longer to recover.
- In the U.S., Alaska Airlines reported a negative 9% Q1 operating margin, its first quarterly loss in more than a decade. ASM capacity declined just 1% y/y, but revenues dropped 13%, compared to a 2% decrease in operating costs. In mid-February, remember, just as the world was about to fall apart, Alaska was celebrating a renewed alliance with American, tied to its own accession to the oneworld alliance (planned for 2021). The idea was to help Alaska offer its customers more intercontinental service, improve its loyalty plan, attract more corporate fliers, enable greater traffic growth, enhance its credentials in the giant California market, and better compete with the mighty Delta in Seattle.
The arrangement remains relevant, but not right now. The only thing that matters right now, as the Bee Gees would say, is staying alive. The group (Alaska, not the Bee Gees) is currently burning about $260m a month, or about $9m a day. Management hopes to bring that to about $200m a month by June and reach cash breakeven by year end. What demand will look like by year end is anyone’s guess. Starting March 11, cancellations began surpassing gross new bookings for the first time in company history. That’s still the case today, two months later, though the largest wave of cancellations “appears to be behind us.” Passenger volumes are still down about 90% below normal levels this time of year. That said, some modest week-to-week bookings improvement is now evident.
But it doesn’t see demand coming back in any meaningful way until West Coast states begin removing their stay-at-home orders and businesses start to open again. Even if demand stayed at zero though, Alaska could sustain its current daily cash burn and still remain solvent for more than 11 months. If demand does inch up, and as daily cash burn eases with cost cutting, Alaska’s breathing room will further increase. It fortunately entered the crisis with an excellent balance sheet. And helpfully, Washington and California, its two largest state markets, were early to impose lockdowns, which has helped avert a New York-like catastrophe. Seattle, Alaska’s home city, experienced America’s first Covid-19 outbreak. And it could be among the first to get it under control as it resists the temptation to reopen prematurely. The city also happens to be home to still-thriving tech firms like Amazon and Microsoft (albeit troubled Boeing as well).
Alaska is of course getting financial support from the other Washington — nearly $1b in payroll support. In the meantime, it’s taking advantage of the demand lull to accelerate the retraining of A320-family pilots into B737 pilots. It’s taking a fresh look at fleet renewal plans while ridding itself of Virgin America’s old A319s. It was never as disrupted as Southwest, American, and United by the MAX grounding, simply because it wasn’t supposed to have that many last year. It’s now talking to Boeing about how many it will get, and when, in the future.
Alaska was one of the winners in the aftermath of the 9/11 and financial shocks. It built a thriving Hawaii franchise, expanded transcontinentally, rode the west-coast economic boom, bought its way to prominence in California via Virgin America, built a lucrative loyalty plan, and so on. One thing it didn’t do during the past few years was mimic its transcon rivals in outfitting planes with lie-flat seats. The decision proved hurtful for a time but could prove a blessing now that premium corporate demand appears destined for years of dormancy. That’s one reason for hope, anyway, following four months in which Alaska burned through nearly half a billion dollars in cash.
- JetBlue began its Q1 earnings call with a moment of silence for six employees who died of Covid-19. The carrier is based in New York, the epicenter of America’s Covid crisis, which also happens to be America’s largest city and largest metro-area economy. JetBlue’s Q1 red ink was characterized by a negative 8% operating margin, with revenues falling 15% y/y on 4% less ASM capacity. Operating costs dropped 4%. In recent years, JetBlue fortuitously prioritized balance sheet improvement, enabling it to enter the crisis with what it called the second-strongest balance sheet among U.S. airlines (after Southwest).
Last week, it raised more cash by selling some of its frequent flier miles to its credit card partner Barclays. It also cut its capital spending budget for 2022 by more than $1b after working with Airbus to downsize its fleet plans. As for daily cash burn, the daily outflow was as high as $18m in the second half of March. The number averaged $12m in April. May should be down to $10m. And a rate of between $7m and $9m is in sight. These figures by the way do not include cash proceeds from the federal CARES Act, used exclusively to pay workers through September.
After safety and health, minimizing cash burn is JetBlue’s top priority for now. But it’s beginning to look ahead about how it might position itself to succeed in the post-crisis environment. It’s still operating just 100 or so flights a day, compared to about 1,000 normally. More than 60% of employees have taken at least some sort of voluntary time off. Most of its customers right now are people travelling for essential needs, i.e. health care professionals on the front lines of the crisis. Load factors last month averaged between 10% and 15%. Revenues were down 95%. The good news is that bookings are improving and cancellations moderating, if just a bit. And JetBlue feels well-positioned for recovery given its predominantly leisure and family-visit base of customers. It wants the broader travel industry to work together to help stimulate a return to travel.
Does JetBlue still want to fly to London? Yes, but probably later than its original 2021 plan (regulators are still scrutinizing the competitive effects of the American-British Airways joint venture, with implications for potential new entrants like JetBlue). It’s still excited about incoming A220s. Other aspects of its pre-crisis strategy, however, like a new partnership with Norwegian, no longer have much relevance. In any case, JetBlue like the rest of the industry will emerge from the Covid crisis with much higher levels of debt and lower levels of demand. How much lower? Executives insist that nobody knows. Said CFO Steve Priest: “Anyone who says they know how this is going to play out is lying.”
- Here’s the good news for Hawaiian Airlines: Its home state, in the middle of the Pacific Ocean, is about as close to Covid-free as any place in the country. But there’s insufficient Covid testing capacity (the cardinal shortcoming in America’s response to the crisis) and a 14-day quarantine for all visitors, essentially closing the state’s vital tourism sector. Hawaii is just now starting to ease restrictions on economic activity within the state, which could result in some inter-island travel before long. But the airline itself warns against relaxing restrictions “too soon and too fast,” worried about having to reimpose curbs and cause longterm damage to consumer confidence. Only when the quarantine is removed however, will visitors from the mainland U.S. start coming again. And only when international travel restrictions are removed will people start coming from Japan and elsewhere.
Hawaiian, remember, generates most of its revenue from outside of Hawaii, including places like the U.S. West Coast whose big tech firms are holding up rather well through the crisis. Looking back now at Q1, Hawaiian reported a negative 8% operating margin, not too bad given the circumstances. Unusually, its ASM capacity was still higher this Q1 than last, rising 3%. With cheaper fuel, operating costs nevertheless declined 1%. But revenues plummeted 15%. Like all major U.S. airlines, Hawaiian should be O.K. for a while in terms of adequate survival cash. For that thank its healthy pre-crisis balance sheet, its collection of valuable assets including A321 NEOs, help from Uncle Sam, available bank credit, and success so far in removing costs.
On the other hand, Hawaiian is currently burning through some $3m in cash per day, excluding federal payroll funding, capex, and refund payments. Speaking of which, it refunded more than $40m to customers in March and about that same amount in April. For Q3, booked load factor is in the mid-20% range; normally at this time, more like 35% of Q2 seats are already booked. Final loads could show much greater y/y declines because cancellations are more likely this year. Hawaiian, to be sure, had a good 2019, earning an 11% operating margin. This was however one of the lowest figures among U.S. airlines, and a far cry from the 19% it earned in 2017, for example, when it was the second-most profitable airline in the world after Ryanair.
Southwest’s Hawaiian arrival was a major challenge last year. This April, it signed a new flight attendant contract negotiated when market conditions were still favorable. As for the joint venture it wanted to form with Japan Airlines, the DOT again (in March) rejected their bid for antitrust immunity. Hawaiian doesn’t expect a lot of capacity to leave Hawaii as demand recovers. Muscular rivals like the Big Three and Southwest after all, will probably push more of their capacity to domestic leisure markets. Nor is this like 2008, when Hawaiian had a close rival — Aloha Airlines — file for bankruptcy and disappear.
In any case, Hawaiian is applying for $364m in federal loan money and has about half of its workforce on some sort of voluntary leave or work reduction. Having flirted with upping its B787 order before the crisis, it’s now thinking of pushing back delivery of its first arrivals. Much of its existing fleet is rather new, so it won’t be prematurely retiring anything other than a lone B717. It could take down utilization if necessary though.
- With lots of shorthaul leisure and family-visit traffic, Spirit could be well positioned for the eventual upturn, whenever it comes. But for now it’s wallowing in losses like everyone else, registering a negative 8% Q1 operating margin. It in fact saw the most severe y/y margin deterioration of any U.S. airline as revenues plummeted 10% but operating costs increased 8%. Fuel costs were down 7% on 2% less ASM capacity. But Spirit’s labor costs ballooned by 18%. As recently as Q4, Spirit had grown ASMs 17%, which required an expansion of its workforce. But it couldn’t just remove the costs of that expansion overnight as it abruptly grounded planes in March.
As a Florida-based airline with heavy reliance on the state’s tourism sector, Spirit is eyeing the day when theme parks like Disneyworld reopen. It also flies to many Caribbean and Latin markets currently closed due to travel restrictions. Until things reopen, the ultra-LCC is evaluating whether to take a government loan. It implemented a new shareholder plan to block any potential takeover attempts. It’s talking to Airbus about restructuring its ordering book, having unluckily placed a big NEO order just last year. It sees aircraft deliveries from now through 2021 falling about 20% from its original plan. Daily cash burn is about $4m a day. Even with federal rules requiring airline aid recipients to maintain service to most of its U.S. cities, Spirit’s is only operating at 5% of its planned capacity right now. For the summer, it aims to err on the side of offering too little capacity, willing to forego any demand that might return faster than expected. It just wants to focus on getting as much cost out of its system as possible.
Ultimately, though, it intends to bring back service to all of the destinations it previously served, including those beyond U.S. borders. It mentioned the potential ability to grow from airports that were previously capacity constrained. Overall growth will surely be subdued in the next year or two however, and that will put pressure on Spirit’s unit costs, a critical metric for an LCC. But executives don’t foresee the big structural change in traveler behavior that other airlines have discussed.
Yes, “it will take some time for people to regain their confidence and to get comfortable traveling generally.” But CEO Ted Christie adds: “We don’t think it represents a change in the way the business will work down the road.” Looking at bookings right now, volumes, loads, and fares are up slightly from their low points last month. Florida’s early lockdown relaxation is providing some momentum. Spirit, however, does not carry any cargo, even in the bellies of its passenger flights.
- Spirit’s like-minded rival Frontier, also an ultra-LCC, had a pretty good 2019, in case anyone still finds that relevant. Data released by the Transportation Department’s Bureau of Transportation Statistics (BTS) last week showed a 12% operating margin for the year, including a 10% operating margin for just the fourth quarter. It marked a big Q4 turnaround as revenues rose 18% y/y but operating costs, helped by cheaper fuel, stayed flat.
The story was similar for Sun Country, another privately held LCC whose Q4 financials appeared in last week’s BTS release. They showed a 7% Q4 operating margin, and a 12% operating margin for all of 2019. An improvement no less impressive than Frontier’s was evident, as Q4 revenues rose 17% while operating costs increased just 4%.
Again, these are Q4 numbers, not Q1 numbers. BTS won’t publish those for Frontier and Sun Country until June.
- Brazil, now experiencing a surge in new Covid cases, was late to lockdown. Its airlines, therefore, didn’t start dramatically grounding planes until the second half of March. It was March 24, in fact, when Gol implemented its current skeletal domestic-only schedule with just basic connections covering state capitals and Brasilia from São Paulo Guarulhos. So most of Q1, which is peak season in Brazil, and which features the Carnival holiday, behaved rather normally.
And normal is good for Gol, if by normal one means the incredibly benign supply and demand condition that existed for Brazilian carriers in the wake of Avianca Brasil’s collapse. Gol’s 19% operating margin last year was third best worldwide after Allegiant and Air Arabia, both much smaller LCCs. No surprise then, that even with the crisis tainting the final weeks of March, Gol’s Q1 operating margin this year was a solid 7% (revenues down 2% y/y, operating costs up 10%). That’s excluding one-off gains from sale-leaseback deals and Boeing MAX compensation (include all special items and operating margin was a stratospheric 33%).
Foreign exchange was again a devil though, causing a heavy official net loss. Indeed, the Brazilian real has sharply lost value versus the dollar during the crisis, which has decimated Brazil’s crucial commodity export sector. The crisis-prone economy, which was showing signs of recovery earlier this year, now stands to suffer an even deeper contraction than the one it endured when commodity prices last collapsed in late 2014. The silver lining for Gol is that it has lots of experience managing through economic shocks, and it enters this crisis in relatively durable shape. It thinks it has sufficient cash to last it through the end of this year even if demand stays where it is. A lot of payments to suppliers and other stakeholders are currently deferred or in some cases waived. The airline received compensation from Boeing for the MAX grounding, while separately cancelling 34 of its MAX orders. Last quarter, ASK capacity dropped 4%. This quarter, ASKs will be down about 80%, or 75% domestically. Revenues should be down more like 70%. Cash burn should drop from roughly $50m a day at the start of April to about $20m by the end of June.
More cash will likely become available through Brazil’s government development bank, though perhaps on costly terms (unlike the cheap loans U.S. airlines have access to). Even right now, load factors are in the 80% range, on greatly reduced capacity of course. Demand, to be clear, remains very weak. A sizeable part of its passenger base is government officials and big commodity companies like Petrobras and Vale. The flights it is flying right now are cash positive. And this month, it will gradually add back service to markets like Iguazu Falls, Navegantes, and the downtown airports of São Paolo and Rio (Congonhas and Santos Dumont). Management doesn’t think international markets will start opening until Q4.
On its list of longer-term concerns is the 10 minutes or so of extra aircraft turn time that new cleaning procedures entails. Gol has bad fuel hedges too. It was forced to cancel its scheme to take control of its Smiles loyalty plan. On the other hand, it claims to have the lowest unit costs of any carrier in Latin America, which will serve it well in times of economic distress. When the crisis does pass, it will have a new partnership with American in place, and a new maintenance division to develop. Gol sees “many months” of recovery ahead. But it’s confident the crisis will eventually pass.
- Like Gol, not to mention Volaris farther north in Mexico, Panama’s Copa felt the onset of the Covid crisis later than carriers elsewhere (the outbreak started in China, then spread to other parts of East Asia, then to Italy and other parts of Europe, then to the U.S., and only after that to Latin America). Copa in fact suspended all flying just 10 days before the first quarter ended. So like Gol and Volaris, it managed to make money in Q1, which also happens to be a peak period for much of Latin America.
To be clear, Copa didn’t just make money in Q1. It made a lot of money. How much? $100m in operating profits, which translated to a 17% operating margin, exactly what it earned in last year’s Q1. Sure, revenues dropped sharply without those last 10 days of flying — they fell 11% y/y. But operating costs fell 11% as well, on 14% fewer ASMs. Fuel costs dropped by one-fifth. It’s probably safe to say that no other airline will come even close to matching its Q1 profit margins.
Q1, however, was Copa’s last hurrah for a while. It won’t escape the ravages of the current quarter. Uncomfortably, it’s a mostly international airline at a time when borders are closed. Key markets in South America face enormous economic upheaval as their currencies plummet. Avianca, which filed for bankruptcy last week, was supposed to be a partner in a promising joint venture with United. It’s not getting (nor does it want) any aid from Panama’s government. Brazil and Mexico, two important markets for Copa, have kept their economies relatively open during the crisis, but are now seeing Covid cases spike; this might also make them late to recover.
Nevertheless, Copa is confident it can weather the storm with its strong balance sheet, newly-raised cash, and cost cutting. More than 800 of its workers have opted for retirement or voluntary separation packages. More than 700 have taken voluntary six- or twelve-month unpaid leave. More than 90% of management and administrative workers have taken voluntary 50% pay cuts. Copa hopes to get flying again on June 1, sporting a fleet of just B737-800s and B737 MAX 9s — no more B737-700s or E190s, the latter designated for exit even before the crisis. It does have Wingo, a low-cost carrier in Colombia, as a potential growth platform in the new environment. It has eyes on developments at Avianca, a close rival as well as future partner. MAX problems, a big headache in 2019, are less of a concern in 2020, though it still wants the planes. It also wants compensation from Boeing, talks for which are ongoing. Some of Copa’s MAX 9s by the way, have lie-flat seats for longhaul routes like Buenos Aires and San Francisco; there’s no plan to do away with this product.
Under its worst-case scenario, which assumes zero revenues, the airline thinks it will burn around $85m in cash per month. If it can sell some seats as it gradually returns to service, monthly cash flow should ease to around $70m for the remainder of 2020. Unit cost pressure will no doubt be a factor as it shrinks. But it also sees the demand shock shrinking the number of city-pairs up and down the Americas that can support nonstops, creating greater need for a connecting hub like Panama.
- Troubled Icelandair, which lost money in 2018 and 2019, certainly won’t make money in 2020. The question is, can it survive 2020? The answer is probably yes, assuming it secures more concessions from stakeholders including unions, which could earn it government credit support. The company is also converting some debt to equity, selling new shares, divesting assets, and integrating its Air Iceland regional unit. Boeing compensation for its MAX woes is helpful. So is strong demand at its cargo unit. January and February, as it turns out, saw improved y/y results. But it always loses money in the winter, aside from the $181m hit it took from the Covid demand shock last quarter.
In the end, Icelandair was left with a devasting negative 44% Q1 operating margin, with revenues down 16% y/y, operating costs down just 2%, and ASK capacity down 21%. Fuel costs only fell 1% but labor costs dropped 17%. The airline remains hopeful that Iceland will again be a tourist magnet, and again a busy connecting point between Europe and North America. Besides, other Nordic rivals including Norwegian and even SAS are greatly downsizing, which follows last year’s collapse of Iceland’s other hometown airline, Wow Air.
Icelandair, by the way, also owns a 36% stake in Cape Verde Airlines, which unsurprisingly incurred Q1 results that were “below expectations.” The African carrier is itself now seeking new long-term funding.
- The U.S. regional giant SkyWest isn’t exposed to the same revenue risk as most airlines — its partners take most of the initial hit when demand implodes. So it managed to emerge from Q1 with a positive 9% operating margin, not far off its 13% figure for the same quarter last year. But now that the Big Three and Alaska are flying just minimal schedules, SkyWest too is flying much less. In April, it operated fewer than 900 daily departures, compared to the 2,500 it planned to fly
It’s now working with partners on accommodating their downsizing plans. In some cases, jets with 2020 contract expirations won’t get renewed, including 55 CRJ-200s currently flown for Delta. Also gone will be seven CRJ-200s flying under pro-rate terms with American (under this arrangement, SkyWest itself assumes pricing and scheduling risk). Pro-rate flying accounted for just 14% of SkyWest’s Q1 partner flying revenues.
The company participated in CARES Act relief, both collecting payroll support aid and applying for a loan. While some of its regional rivals like Mesa avoided having to give Washington ownership warrants in exchange for its aid, SkyWest was too big to qualify for this exemption. One reminder: SkyWest deliberately shrank itself last year by selling its long-troubled ExpressJet subsidiary to a new entity co-created by United.
Global Airline Scoreboard: Q4 2019
- Brazilian carriers end the pre-Covid era on a big high
Global Airline Scoreboard: Q4 2019
|By Revenues (in m)||By Net Profit (in $m)||By Operating Margin||By Net Margin|
|Air France/KLM||$7,353||American||$502||Air Arabia||17%||Allegiant||13%|
|Southwest||$5,729||All Nippon||$269||Spirit||13%||Cebu Pacific||11%|
|China Southern||$5,349||Singapore Airlines||$239||Cebu Pacific||13%||Delta||10%|
|All Nippon||$4,827||Japan Airlines||$230||Delta||12%||IAG||9%|
|Air Canada||$3,407||Air France/KLM||$173||Southwest||12%||Frontier||8%|
|Turkish Airlines||$3,281||Gol||$106||Japan Airlines||11%||LATAM||8%|
|Hainan Airlines||$2,260||IndiGo||$70||VietJet||10%||Japan Airlines||7%|
|EVA Air||$1,560||Air Arabia||$54||Avianca||9%||Air Mauritius||6%|
|Thai Airways||$1,542||Cebu Pacific||$46||VivaAerobus||8%||IndiGo||5%|
|China Airlines||$1,382||Aeromexico||$37||All Nippon||8%||American||4%|
|Garuda||$1,032||VietJet||$35||Sun Country||7%||Wizz Air||4%|
|Asiana||$1,025||EVA Air||$32||Pegasus||6%||Sun Country||3%|
|SAS (Nov-Jan)||$1,022||Turkish Airlines||$28||Wizz Air||5%||Lufthansa||3%|
|Spirit||$970||Avianca||$20||EVA Air||5%||Air France/KLM||2%|
|Gol||$923||Bangkok Air||$16||Korean Air||4%||EVA Air||2%|
|AirAsia||$765||VivaAerobus||$6||Air Canada||3%||Air Canada||1%|
|Hawaiian||$708||Sun Country||$5||Air France/KLM||1%||Pegasus||1%|
|Wizz Air||$708||Pegasus||$4||Air Mauritius||1%||Turkish Airlines||1%|
|Juneyao||$532||Jeju Air||($15)||Air China||0%||Thai Airways||-2%|
|SpiceJet||$512||Nok Air||($16)||China Airlines||0%||Hainan Airlines||-4%|
|Volaris||$507||AirAsia X||($23)||Thai Airways||-1%||Air China||-4%|
|Allegiant||$461||China Airlines||($24)||AirAsia X||-1%||Aeroflot||-4%|
|Spring Airlines||$460||Icelandair||($30)||China Southern||-6%||Korean Air||-5%|
|Pegasus||$433||Jin Air||($54)||SAS (Nov-Jan)||-8%||Jeju Air||-6%|
|Cebu Pacific||$415||Juneyao||($56)||Juneyao||-9%||China Southern||-7%|
|Icelandair||$319||Spring Airlines||($81)||Garuda||-9%||AirAsia X||-8%|
|Air Arabia||$313||Hainan Airlines||($86)||Nok Air||-9%||SAS (Nov-Jan)||-9%|
|Aegean||$308||SAS (Nov-Jan)||($91)||Hainan Airlines||-11%||Icelandair||-9%|
|Jeju Air||$261||Garuda||($98)||China Eastern||-12%||Juneyao||-10%|
|Bangkok Air||$200||Aeroflot||($107)||Bangkok Air||-12%||China Eastern||-12%|
|Sun Country||$164||Air China||($197)||Norwegian||-13%||Nok Air||-14%|
|Jin Air||$155||Norwegian||($206)||Jeju Air||-15%||Spring Airlines||-18%|
|Air Mauritius||$155||Asiana||($286)||Spring Airlines||-16%||Norwegian||-21%|
|Nok Air||$113||China Southern||($379)||Asiana||-16%||Asiana||-28%|
|Jazeera||$70||China Eastern||($465)||Jin Air||-33%||Jin Air||-35%|
- U.S. airlines spent another week hunting for cash, in most cases successfully. Southwest sold 20 B737s in a sale-leaseback arrangement, specifically 10 MAX 8s and 10 -800s. It expects to receive gross proceeds of more than $800m. Spirit sold both common shares and debt convertible to shares.
United, by contrast, withdrew a plan to sell $2.2b in “junk” bonds after failing to attract enough investors. The problem, it seems, was the collateral: a pool of 360 older jets. Holly Hegeman, founder of PlaneBusiness Banter, noted in a Tweet that United’s bond bust follows a recent stock sale that raised only $1b. “There’s not a lot of furniture left to burn,” she wrote. Mileage Plus assets, she added, will likely be used for collateral in the loan United will get from Washington via the CARES Act.
- AerCap, an aircraft leasing giant, did its best to temper the widespread gloom pervading the world’s airline industry. For lessors with modern machines and a global presence anyway, there’s no reason to panic. For one, AerCap will have fewer competitors as smaller and weaker rivals likely disappear. AerCap itself will adjust to the industry’s smaller footprint over the next few years by defering orders, like the 60-plus B737 MAXs Boeing agreed to deliver several years beyond the original schedule. Industry-wide, supply and demand will balance as Boeing and Airbus cut production rates by as much as 50% for some models — it helps on the supply side to have just two big players.
In addition, airlines are exiting older-technology aircraft, having announced the retirement or possible intent to retire approximately 700 aircraft, 240 of these large widebodies like A380s, B747s, A340s, and B767s. By AerCap’s count, just 12% of the roughly 21k full-sized passenger jets flying pre-crisis were latest-generation models, implying lots of future replacement needs in the coming decade. AerCap right now doesn’t have a single new aircraft placement slot available until 2022, and its average existing lease doesn’t expire until 2027.
True, some of these leases will default, and some customers are currently behind on their monthly payments. But in the post-crisis world, with airlines taking on so much new debt, they’ll ultimately lease more planes not less (leasing is typically a more viable option for carriers with poor balance sheets). The company also said that even in April, the low point for the aircraft market, it received more than $200m in cash lease payments from customers. Many of these were carriers in China, where industry recovery is already underway. There are hints of recovery in Europe too (see Covid Crisis 2020 section).
Bottom line, according to the world’s largest aircraft lessor: “The vast bulk of the world’s airlines and aircraft will be in operation after this crisis ends.”
- AerCap’s rival Air Lease Corp. (ALC) was similarly cool-headed about its prospects. Airlines are vital to the global economy, it said, a point made clear by the $100b in state support they’ve received to date. This figure could double, ALC thinks, by the end of the year. As it happens, three-quarters of its airline customers have some form of government ownership or are designated flag carriers.
To facilitate customers in distress, ALC has offered partial rent deferrals for a two- to three-month period, with payback usually due within a year at most. Three of its customers — Alitalia, Air Mauritius, and South African Airways — are now bankrupt. Others will likely follow, or partake in consolidation, notably within Europe. But specific examples of distress notwithstanding, discussions and negotiations for new aircraft leases have not stopped, notably for the 2022 to 2024 time frame.
Airlines still want younger planes even with cheap fuel, recognizing their environmental, maintenance, and operational benefits. In fact, the most challenging aspect of arranging future lease placements right now is the uncertainty about when Airbus and Boeing can deliver their planes. Like AerCap in its Q1 earnings call, ALC spoke of recovery trends in China and elsewhere during its own call (see Covid Crisis section).
Punctuating its confidence, ALC repeated an old mantra: “We have always said that in good times, airlines need our aircraft. And in bad times, airlines need our balance sheet.”
- United raised objections (and some eyebrows) from its unions and some lawmakers for its proposal to reduce some employees’ hours to part-time in order to cut labor costs. None other than American CEO Doug Parker (formerly United President Scott Kirby’s boss, remember) questioned whether United was falling afoul of CARES Act requirements to maintain staffing levels until Sept. 30.
United quickly backtracked and said that although it believed its request was within the scope of the CARES Act, it will allow some employees to reduce their hours while maintaining their full-time status (which makes a difference in benefits and for scheduling, and other reasons). In a separate memo to employees, United said it will be informing non-union employees within the next few months if their jobs will be preserved after Oct. 1. The company also now is asking employees to consider a “voluntary separation.”
- Iberia is planning to offer free Covid antibody testing to all employees, the carrier said in a statement. The first phase of testing will cover pilots, cabin crew, and 2,500 airport employees. The carrier expects to test its entire workforce of 17,000 by the end of the year.
The antibody tests, run in partnership with Quironsalud, will be conducted in Iberia facilities as well as at the healthcare provider’s labs. Iberia said it is studying whether to add thermal imaging equipment to gauge employees’ temperatures.
These measures follow the carrier’s stepped-up cabin cleaning and education programs, the carrier said.
- Even as most U.S. airlines begin requiring passengers to wear masks onboard aircraft, the largest U.S. pilot union is alleging that airlines are not taking enough steps to ensure the safety of pilots and cabin crew. The Air Line Pilots Association (ALPA) issued a report citing pilot concerns about workplace safety at 17 different airlines. ALPA says almost 300 pilots it represents have tested positive for COVID-19.
Although airlines have taken steps to more thoroughly disinfect aircraft between flights, the results have been patchy, ALPA says. Procedures and requirements differ among airlines. ALPA is calling on Congress to mandate that airlines comply with guidelines on transmission from the Federal Aviation Administration and Centers for Disease Control and Prevention.
Specifically, ALPA is calling on Congress to require the following measures:
- Require the use of facial masks for all airline passengers and crewmembers
- Ensure airlines provide pilots with personal protective equipment while on the flight deck
- Clarify that airline pilots, as essential workers, should have access to priority COVID-19 testing
- Airports Council International, the umbrella organization for the world’s airports, forecasts that its members will see 4.6b fewer passengers this year due to the Covid pandemic. This translates to $96b less in revenue. Airports are expected to see $40b less in revenue in the second quarter alone. The group is asking governments to offer tax relief and financial support for airports in order to protect jobs and to ensure that airports are functional when demand starts to return.
- While airports the world over retrench and shut down large parts of their facilities, Australia’s Brisbane Airport instead offered a very rare piece of good news. It just completed a new runway, the end of an eight-year project. The runway is expected to undergo testing and certification before opening on July 12. Brisbane’s new runway, alas, coincides with the bankruptcy of its hometown airline Virgin Australia.
- Fraport, which aside from Frankfurt operates airports in Peru, Greece, and Brazil among other places, said it could be two years before traffic begins to recover. The first quarter saw an 18% decline in revenue, but part of the quarter, remember, was before the pandemic spread worldwide. Frankfurt itself has seen 96% of the destinations it has flights to impose travel bans or restrictions. The airport remains open and is handling more cargo, as are airports Fraport operates throughout the world.
The company has scaled back its capital improvement programs and has furloughed or reduced hours for much of its staff worldwide. Although Fraport has not asked for state aid, it has had talks with the German government for compensation for keeping its airports open — Frankfurt still has about 200 aircraft movements per day. The quarter was “not comparable to what we ever have seen before,” said Mathias Zeischang, Fraport chief financial officer.
- That was quick. Frontier last Monday announced it would charge passengers $39 to block the middle seat in their aisles in an effort to increase social distancing onboard. It didn’t go well. The Denver-based ULCC faced immediate blowback on social media. The outrage caught the attention of lawmakers on Capitol Hill, who expressed disgust to every camera in sight, not to mention on social media.
By midweek, the carrier had retreated, and CEO Barry Biffle sent a letter to lawmakers to explain the move was well-intentioned, and to say that the company was not trying to profit off a pandemic, as many had alleged.
- Delta is stepping up efforts to allay passenger concerns while improving public health. The carrier already has blocked middle seats on all its flights since April. Now, it is limiting the sale of some window and aisle seats on certain aircraft. Overall, premium cabins will be limited to 50% occupancy, and economy to 60%. The move applies to all mainline and regional aircraft.
Delta now requires all passengers to wear face masks onboard. Boarding will be from front to back to limit crowding in gate hold areas and jet bridges. Aircraft now are being sanitized between all flights, and Delta last week said it will extend electrostatic sanitization to all its airport areas.
- Every airline in the world is restructuring. They’re slashing costs, changing their fleet plans, negotiating with stakeholders… but few are announcing any changes to their networks; that will come later for most airlines, after they start flying again in earnest. Virgin Atlantic is an exception. As it looks to avert bankruptcy, the U.K. longhaul carrier said it would close its London Gatwick base to focus on London Heathrow and Manchester. All Gatwick flying will disappear for the foreseeable future, though it plans to retain its slots there in hopes of eventually returning when demand merits.
Virgin is also saying goodbye to its seven B747-400s and four A330-200s (the latter by early 2022), having just retired its final A340s in March. It will instead rely only on its B787-9s, A350-1000s, and A330-300s. In conjunction with its Gatwick exit and fleet downsizing, Virgin will cut more than 3,000 jobs.
- It flies from eastern Europe, a region with relatively few deaths from Covid-19. It flies lots of family-visit traffic, a segment slated for early recovery. It was one of the world’s most profitable airlines before the crisis, with lots of cash currently. So count Wizz Air as a rare industry bull.
And watch with intrigue as it proceeds with a new joint venture in Abu Dhabi. Last week, it announced the venture’s first five routes from the UAE’s capital: Budapest, Bucharest, Cluj-Napoca, Katowice, and Sofia. These are routes it might have flown anyway using eastern European crews. But don’t look so unexcited. Before long, Wizz wants to send its new Gulf carrier to points on the Indian subcontinent, the Middle East, and Africa. The exact launch timing of the newly-announced routes will depend on when travel restrictions are lifted. But the goal is definitely sometime this year.
- IATA’s latest weekly crisis update with journalists focused on the prospect for airfares in the post-Covid world. Some forces, it said, will push fares down, namely weak demand, cheap fuel, excess capacity, the relatively early return of service by LCCs, and the incentive for carriers to bring back planes as long as they cover cash outlays, never mind fully-allocate profitability. In addition, some 80% of all seats worldwide pre-crisis were on routes with more than one competitors, while 30% were on routs with at least five competitors (think busy markets like Hong Kong-Singapore or New York-Los Angeles).
On the other hand, airline unit costs will rise with lower aircraft utilization, higher airport and air navigation fees, new cleaning procedures (that slow aircraft turns), and new regulatory restrictions. The most feared of these among carriers is a mandate to block middle seats, which would mean a maximum load factor of 67% on an A320, for example. Well, only four airlines in the world, IATA claims, had breakeven load factors below the mid-60 percent level.
All other airlines in the world, in other words, would likely lose money if middle-class seats are blocked permanently, unless they raised fares to cover a more than 50% spike in unit costs. For some empirical evidence on fare trends, turn to China, where demand is returning but middle-seat blockage isn’t a relevant topic yet because loads are so low. Domestic airfares there, according to IATA data, are down about 40% from this time last year.
- IATA is calling for all airlines and governments to require passengers to wear face masks or other facial coverings until the pandemic abates. The association proposes a layered approach, which would include thermal temperature checks; changing boarding and alighting procedures to minimize contact between passengers and flight crews; limiting movement around the cabin during flight; simplifying inflight food and beverage service; and more frequent and deeper cabin cleaning.
One thing the group does not recommend, as mentioned above, is blocking middle seats. It notes that the space created by blocking the middle seat is less than the 2 metres that public-health officials recommend to slow transmission of Covid-19. And furthermore, IATA says, studies from China and other Asian countries struck earlier by the pandemic show no transmission of the disease inflight.
- Everyone is closely watching China’s airline sector, looking for signs of recovery now that the country has Covid-19 largely contained. Last week, the typically-busy May Day holiday encouragingly saw 115m domestic tourist trips, according to Trip.com, citing government statistics. This was still down a lot y/y, from 195m last year. And rental car reservations were actually up 10% y/y, a sign of preference for travelling by road instead of air.
The Economist noted that Spring Airlines, a predominantly domestic LCC, added or restored 47 routes last week. Cirium schedule data show domestic seats for departure this month are down just 16% y/y, compared to down 35% in April. AerCap, the lessor, points to a steady increase in both flights and load factors over the past two months, after a drop in departures from 15,885 on Jan 23 to just 4,602 on Feb 24.
AerCap said Chinese airlines are now operating about half the flights they had at this time last year, filling about half their seats and hoping for load factors as high as 65% for the summer. Last week, it added, the relaxation of Beijing’s quarantine led to a surge in online travel bookings. It’s also seeing the first agreements on cross-border travel now under discussion between China and South Korea, with ASEAN countries also in the mix.
- Air Lease Corp. (ALC) also spoke about China’s recovery. China Eastern and China Southern, two ALC customers, said they expect to resume between 75% and 85% of their normal domestic capacity by the end of June. It mentioned the China-South Korea Green Lane program allowing Korean business travelers to certain places in China after passing through health screening and certain quarantine procedures.
- In the ASEAN region, Singapore Airlines didn’t wait for this week’s earnings release to warn investors of big calendar Q1 losses, aggravated by bad hedging. Not having a domestic market, it added, could hamper its recovery. To address the current collapse in demand, Singapore Airlines mainline and SilkAir have extended their combined capacity cuts of approximately 96% until the end of June 2020. Scoot is expecting capacity cuts of approximately 98%. The group is also negotiating changes to its aircraft order book. It’s trying to maximize its cargo flying. It pointed out that it has no loans to partner Virgin Australia.
- Will Europe follow China’s lead? “In our discussions with European airline CEOs,” said AerCap’s CEO Aengus Kelly, “we are hearing the same things we heard from China two months ago, which is that they expect to see flight activity resume on a limited basis at some point in May. Right now they are at the same stage that China was at in late February.”
Europe’s airlines are indeed planning to add back flights in the coming months, albeit with high uncertainty about demand. July and August capacity should be down about 50% y/y continent-wide. Declines will shrink in later months, with Air France/KLM planning to have 70% of its normal capacity running by year end. “What is occurring in China today,” Kelly said, “is what European airlines expect to see in two-to-three months’ time.”
- It’s a go for the New Norwegian, after bondholders, aircraft lessors, and shareholders also accepted — reluctantly and grudgingly — a bankruptcy-like restructuring. It breathes new life into the long-troubled carrier by unlocking significant government aid and greatly reducing costs. See last week’s issue of Skift Airline Weekly for more on the New Norwegian’s business plan.
- At Lufthansa annual shareholders meeting last week, held virtually for obvious reasons, CEO Carsten Spohr called the current crisis the worst in the carrier’s history. That’s certainly no understatement. The German giant is fighting for survival, talking to unions about longterm concessions, talking to airports about more equitably bearing cost burdens, taking to aircraft manufacturers about delivery deferrals, and most importantly, talking to government officials about financial support. Berlin, however, is asking for a 25% ownership stake in the company, which Lufthansa adamantly opposes.
The airline was fully privatized in 1997 and needs to operate independent of politics if it’s to compete globally against European rivals, America’s Big Three, China’s Big Three, the Gulf region’s Big Three, and Turkish Airlines. Based on projections, Spohr thinks Lufthansa has 10,000 surplus workers. Downsizing is thus imperative, not just for Lufthansa mainline but all of the group’s airlines, including Swiss, Austrian, Brussels Airlines, and Eurowings.
- Count on Qantas to provide some glass-half-full commentary. “We’re optimistic,” CEO Alan Joyce told investors last week, “that domestic travel will start returning earlier than first thought.” Not that he’s expecting a return to pre-crisis levels of demand anytime soon. And he’s definitely not bullish on intercontinental demand, which could take years to recover. But domestic and even trans-Tasman travel restrictions might ease in the coming weeks, with Australia and New Zealand discussing plans for a “travel bubble” that might also include neighboring Pacific islands and maybe even East Asian markets largely free of the virus, like Taiwan.
Qantas raised another $360m last week, secured by three B787-9s. Borrowing more money if needed wouldn’t be a problem. Daily cash burn is easing as it cuts costs. It has no significant debt maturities before next June. Importantly, Qantas has a 13m-member strong loyalty plan that’s still producing profits — pre-crisis, members earned two-thirds of their miles on the ground, with banks, retail stores, petrol stations, etc. A full 85% of surveyed loyalty members, incidentally, said they’re planning to travel when conditions allow. Cargo is also doing well, with domestic e-commerce shipments enjoying Christmas-like levels of demand.
Qantas unsurprisingly did suspend Project Sunrise, its plans to order A350s for ultra-ultra-longhaul flying to Europe and the U.S. “The Qantas of 2021 and 2022,” Joyce said, “will not be the Qantas of 2019.” But even if current conditions persist through the end of 2021, it has plans to stay solvent.
- As Qantas looks ahead to brighter days, Virgin Australia’s bankruptcy administrators are mired in the dirty work of addressing contracts with the carrier’s 1,300-odd creditors, including unions, banks, and bondholders. There appears to be no shortage of interest in buying Virgin though. At least 20 parties have expressed interest. Administrators, as they oversee work on a new business plan, hope to complete a sale of the airline by the end of June.
- Colombia’s Avianca, which narrowly averted bankruptcy before the crisis, was unable to repeat the feat once the crisis started. It filed for Chapter 11 bankruptcy protection in a U.S. court last week, though assuring customers that it won’t be going out of business. It fully intends, in other words, to fly again when travel restrictions are lifted. Avianca also hopes to get government financial support.
- Aerolineas Argentinas said it’s merging with Austral, a fellow state-owned airline, in its case focusing on domestic routes. In announcing the move, the carrier said the combined entity would create a new maintenance unit and stronger cargo capabilities. It should produce some labor efficiencies as well. But Aerolineas isn’t under any illusions that such a merger will solve its problems. For any chance of that happening, it needs major labor reforms, which management will try to achieve by year end.
U.S. — Aviation Takes Center Stage in Senate
- Airlines for America (A4A) President Nicholas Calio in testimony before the U.S. Senate Committee on Commerce, Science, and Transportation defended the industry’s use of vouchers instead of cash refunds for travel cancelled due to the Covid pandemic. “Vouchers, future credit opportunities, and other incentives are being offered as a means to stem untenable cash drain in order to protect our employees’ livelihood,” Calio said, adding that cash refunds would quickly bankrupt airlines. For this comment, Calio took some heat from lawmakers, several of them saying airlines should be required to issue refunds. “You are screwing the very taxpayers whose money is going into your pockets,” said Sen. Richard Blumenthal from Connecticut.
- Calio also took some admittedly mild heat from Sen. Amy Klobuchar of Minnesota for Frontier’s proposed and then abandoned plan to charge $39 for a blocked middle seat. Calio noted that Frontier is not an A4A member and stressed that A4A members are not charging for blocked middle seats. He added that blocking middle seats is not a sustainable long-term fix for the industry. This contradicted testimony from Dr. Hilary Godwin, dean of the University of Washington’s School of Public Health, who said airlines should assign seats to accommodate social distancing. Godwin further added that at least in the near-term more flights than necessary should be operated to avoid densely packed cabins.
- Lawmakers called for an industry-wide requirement for masks and gloves, which Calio said was unnecessary when member airlines already are requiring them, in many cases. Godwin noted that the market may not necessarily ensure public safety. And it could resort to “stunts” like Frontier’s.
- Aerospace Industries Association CEO Eric Fanning, and American Association of Airport Executives President Todd Hauptli, testified for the need for more federal support for the industry. Fanning noted that aerospace workers are highly specialized, and the industry could be permanently harmed if those workers are let go. Hauptli asked lawmakers to consider additional funding for airports to help offset the collapse in Passenger Facilities Charge revenue and for more support for the Essential Air Service program to ensure connections to rural areas. Calio said airlines are not asking for more direct funding and are using funds under the CARES Act as a “bridge” to an industry post-pandemic. But Blumenthal pushed back on Calio’s comment, arguing that airlines are “failing” at winning back passengers’ trust and credibility with current policies on refunds. “That’s taxpayer money,” Blumenthal said. “You are killing the goose that lays the golden egg.”
No kidding: Now’s as good a time as any to launch a new U.S. airline.
Who’s ready to start a new airline in the U.S.? No, seriously.
The history is pretty clear. There are few better ways to lose your money than launching a new airline. For that matter, investing in old airlines is a pretty lousy way to make money. Ask Warren Buffet.
Yes, the airline business requires lots of capital. It requires lots of labor. It’s subject to heavy government taxation and regulation. It’s prone to frequent demand shocks and fuel shocks. But however unforgiving its economic realities, the airline industry has in fact produced lots of startup success stories. And most have two things in common: 1) They’re shorthaul low-cost carriers and 2) they came of age in times of distress.
Malaysia’s Tony Fernandes purchased a largely-defunct carrier called AirAsia three days before the 9/11 attacks upended global air travel. Brazil’s Constantino family launched Gol a few months earlier. The mid-2000s was a particularly prolific period of LCC startups: Air Arabia (2003), Wizz Air (2004), Volaris (2005), SpiceJet (2005), Jeju Air (2005), Spring Airlines (2005), IndiGo (2006), and Azul (2008). Cebu Pacific and Pegasus adopted their low-cost business models in 2005. All of the above hailed from emerging economies in the process of deregulating their airline sectors. All preyed on the dysfunction, bloat, and ineptitude of their incumbent rivals (names like Malaysia Airlines, Varig, Egyptair, Tarom, Mexicana, Air India, and Philippine Airlines). Most impressively, all created successful business models during a fuel shock. In 2002, Brent oil prices averaged $22 a barrel. By 2008, the price was $97.
All sought inspiration from Ryanair and easyJet, which established themselves after Europe deregulated its airline market in the early 1990s. Ryanair and easyJet, in turn, sought inspiration from Southwest, which against all odds emerged from the pre-deregulation 1970s, a time of economic stagflation and multiple oil shocks. Southwest would go on to thrive when let loose to expand in the deregulated 1980s. Nothing would stop it in subsequent years, not fuel shocks, not terror attacks, not financial meltdowns, not competitive counterattacks. Southwest proved — as countless imitators could not — that low-fare air travel could thrive in the U.S.
David Neeleman would know. Briefly designated as the heir apparent to Southwest’s founder Herb Kelleher, he ultimately returned to his true calling: Starting new airlines. In 2000, he launched JetBlue, which found its success in the aftermath of 9/11, preying on Delta in particular. AirTran, based in Delta’s home city Atlanta, did the same. Four of America’s six largest airlines would file for bankruptcy after 9/11, finding it their only way to fix flaws that Southwest, JetBlue, and AirTran were mercilessly exploiting. Then along came Spirit, whose origins date to the early 1990s but which only became the ultra-low-cost carrier it is today in 2007, after Indigo Partners gained control. Spirit soon became one of the world’s most profitable airlines as higher-cost rivals struggled through the global financial crisis and a subsequent three-year period of $100 oil. Allegiant, which adopted its current business model in 2005, followed a similar trajectory, producing extremely high profit margins through all the ups and downs since then. In 2013, Indigo Partners bought Frontier and turned it into a Spirit-like ultra-LCC. Four years later, Sun Country, under new owners, grabbed some of Allegiant’s techniques — and its former president — to reverse years of losses. In 2019, Frontier and Sun Country both earned excellent 12% operating margins.
Which brings us to today. The U.S. airline industry is experiencing crisis on a scale that dwarves everything before it. There’s virtually no revenue. But is there opportunity?
Almost everything a new airline would need is now available at rock bottom prices. That means everything from office space to software, but most importantly airplanes and the fuel they need to fly. It’s a buyer’s market for labor too, including pilots, engineers, and top management talent. Carriers like Ryanair and AirAsia, make no mistake, owe much of their blockbuster success to aircraft bargains they grabbed as young airlines during dark times.
A new airline would need lots of capital too, and well, capital is likewise abundant and inexpensive. That’s a general statement about capital markets, of course, not about prospective airline startups specifically. But the point is, if the startup has credible founders and a compelling business model, there’s money to tap.
There’s also a sudden abundance of gates, slots, and terminal space at once-congested U.S. airports. Virgin America, which launched just before the global financial crisis and stumbled with a premium-oriented business model, repeatedly complained about lack of access to airports like Chicago O’Hare. Alaska Airlines, which purchased Virgin in 2016, did so in large part to access scarce Los Angeles and San Francisco gates. Spirit expanded at Los Angeles LAX more than it otherwise would, just to grab gates there while it had the chance. Space constraints at Newark and New York LaGuardia have long kept fares artificially high. Same for Washington’s Reagan National airport. Other cities like Boston and Seattle have at times struggled to accommodate newcomers. With airlines poised to slash their flying for perhaps the next two or three years, the airport space problem will be a problem no more.
The most important key to winning in a world of established competitors is not just low costs but relatively low costs. Well, look around. America’s biggest airlines are now amassing billions of dollars in new debt they’ll have to repay with interest. They’re now indirectly part-government owned via warrants held by Washington. They’re losing economies of scale as they downsize. They’ll likely soon shed tens of thousands of their most junior employees, leaving a workforce with high average seniority earning compensation toward the top end of the wage and benefit scale. All signed inflationary new labor contracts in the past few years, some like American just on the eve of the crisis. Spirit saw its labor costs spike 18% y/y last quarter. Will carriers try and unwind these deals as they downsize? Probably, but extracting concessions can take years of bargaining, especially when bankruptcy is not a serious threat. It could also mire the country’s airlines in a long period of labor strife, which often means bad service.
A new airline could start with inexpensive planes and a junior non-union workforce, taking advantage of digital technologies and advances in data science unavailable to startups in earlier eras. What sort of business model would be appropriate? Surely one that borrows from the ultra-LCCs that have consistently profited throughout the world, in many cases ranking among the industry’s highest-margin companies. Within this category are differing strategies. Some practice high asset utilization, some low. Some distribute only directly to consumers, others through third parties. Some use new planes, some use older planes. While all avoid very longhaul, some are shorter-haul than others. But there’s at least one universal truth about successful ultra-LCCs: They rely heavily on ancillary revenues.
Most configure planes with high-density seating too. And no, the idea now thrown around about blocking middle seats won’t stick for long (not with so many local economies dependent on low-fare travel, and so many Americans accustomed to cheap fares). Besides, the current pandemic by all accounts is a temporary crisis. Better and more widespread testing, better contact tracing, and new medical treatments might even have Americans flying in big numbers again toward the end of this year. Vaccines appear promising. For a startup planning a 2021 launch, it’ll be entering a market with enormous pent-up demand, a weak economy that favors low-fare travel (even among businesses), vacation spots clamoring for new air service, a preference for domestic over intercontinental travel, and incumbent rivals with business models built for different times. What’s more, U.S. airlines today are understandably planning for the worst, likely overshooting on their capacity reductions, relative to what demand will look like in the next year or two. One more thing to consider: Even if the IMF is right, and U.S. GDP contracts by 6% this year, well, that’s still a $19t economy with just 11 major airlines, all of which earned healthy profits in normal times. As things eventually renormalize, will there not be room for at least one more airline with low costs, good service, and desirable destinations?
Nobody says this will be easy. America’s incumbent airlines are well-funded, with scale and firepower to endure bloody fare wars for extended periods. Whatever capital a startup airline thinks it needs, the amount should probably be double that amount. It’s true too that costs at key airports are rising despite depressed market conditions, because of all the new infrastructure they need to finance (don’t ever let anyone tell you that America doesn’t invest in its airports — Delta alone has participated in $7b worth of airport projects since 2006 and entered the crisis involved in an another $12b). All the while, carriers will be incentivized to bring back planes to produce more revenue from their fixed cost base. That spells overcapacity and yield pressure. Cheap fuel, meanwhile, can make it easier for incumbents to price-match lower-cost rivals. All true. But think things were easy for Southwest, JetBlue, Allegiant, and so on when they got started?
All right, so where would a new shorthaul U.S-based low-cost carrier fly? Florida for sure, a bottomless pit of leisure demand with a fast-growing outbound traveler base to boot. It’s already an LCC haven with Southwest, Spirit, Frontier, Allegiant, and JetBlue all prowling the sunshine state. But capacity overall will likely be subdued for a while. Besides, all five of these LCCs have thrived there simultaneously. The same is broadly true for other leisure hotspots like Las Vegas, Mexican beach resorts, and the Caribbean. Phoenix might have the most potential of all, with a fast-growing population, no shortage of sunshine for retiring Baby Boomers and second-home buyers, and a somewhat neglected American hub (neglected in the sense that it was one of the carrier’s slowest growing hubs in recent years).
Another target could be the Big Three’s other least profitable hubs, where they’ll likely do an outsized portion of their downsizing. American, for example, won’t cut much at Dallas DFW but might cut substantially at Los Angeles LAX. United just closed its LAX pilot base. The Western U.S. in general has demographic advantages — faster population and economic growth than the national average. The same is true of emerging tech-heavy non-hub economies with large pools of highly skilled workers — places like Austin and Raleigh-Durham. Giant metro areas like New York, Los Angeles, San Francisco, and Houston, accounting for a growing share of national GDP over the past decade, will likely remain the country’s largest airline markets, and massive generators of discretionary travel.
Prior to the current crisis, there were two notable entrepreneurs working on U.S. startup airlines. One was David Neeleman and the other was former Allegiant and United executive Andrew Levy. Will they proceed with their plans, perhaps altering them to take advantage of changed conditions? Neeleman’s Breeze Airlines already has E195s and soon A220s ready to go. Will other entrepreneurs follow?
Warren Buffet famously said that a capitalist should have shot down the Wright Brothers. Maybe Warren Buffet should capitalize a new U.S. airline.
Around the World: May 11, 2020
Some stocks traded on multiple exchanges; not intended for trading purposes.
|Airline Name||Change From Last Week||Change From Last Year||Comments|
|American||-5%||-70%||Joining with Hyatt hotels to provide thousands of NY health care professionals with free three-night vacations|
|Delta||-6%||-60%||Even as crisis rages, found time to sign “trans-American” joint venture pact with new partner Latam|
|United||-5%||-70%||Has a rather large financial exposure to Avianca, which declared bankruptcy last week|
|Southwest||-7%||-48%||Warren Buffett, at Berkshire annual meeting, compliments Big Four U.S. airline CEOs; says crisis is not their fault|
|Alaska||0%||-50%||Says federal payroll funds will cover about 70% of its orginally budgeted labor costs through Sept.|
|JetBlue||1%||-50%||Suspended work on its A320 cabin remodeling, which includes seating densificaiton|
|Hawaiian||0%||-52%||Notes that its many routes offering just one frequency a day makes it harder to reaccomodate pax when flights are cancelled|
|Spirit||-20%||-79%||Mentions that federal CARES Act includes several provisions of income and excise tax relief|
|Frontier||(not publicly traded)||Indigo Partners founder Willian Franke questions whether low fares can stim. travel while health/safety still a concern|
|Allegiant||2%||-47%||Ancillary revenue per passenger was $5.87 in 2004; in 2019 the figure was $56.68|
|SkyWest||8%||-51%||Bombardier to complete exit from commercial aerospace this summer; sale of CRJ program to Mitsubishi expected to close June 1|
|Air Canada||-12%||-52%||Will present at a virtual investor conference hosted by RBC on Thursday|
|WestJet||(not publicly traded)||CEO Ed Sims tells Postmedia that the airline might never again reach its pre-crisis size; wants gov’t credit support|
|Aeromexico||-5%||-52%||Rival Interjet somehow still alive; how long can it last?|
|Volaris||-7%||-40%||Airport group OMA reports 93% y/y drop in April traffic; company’s busiest airport is Monterrey|
|LATAM||-20%||-62%||Argentine gov’t merging Aerolineas Argentinas with domestic airline Austral; both wholly state owned|
|Gol||-11%||-56%||Has a $300m debt payment due in August; pertains to a loan that was guaranteed by former partner Delta|
|Azul||-22%||-64%||President John Rodgerson meets with Brazilian president Bolsanaro to discuss airline industry recovery support|
|Copa||2%||-55%||Estimates between one-third and one-half of its Panama markets are also served via Bogota|
|Avianca||-11%||-69%||This isn’t the first time it’s bankrupt; filed in 2003 as well|
|Emirates||(not publicly traded)||President Tim Clark, speaking to The National, says the A380 is “over;” not a good trend cosnidering how many of them it has|
|Qatar||(not publicly traded)||By end of June, aim is to serve 80 cities (including 33 in Asia, 23 in Europe, 20 Mideast/Africa, 4 in the Americas)|
|Etihad||(not publicly traded)||Announces one-way repatriation flights from a dozen cities to Abu Dhabi|
|Air Arabia||-9%||1%||According to IATA’s count, there are currently more than 16k commercial jets in storage|
|Turkish Airlines||-1%||-15%||Plans to restart flights in June; files flight plans for June, July, August|
|Kenya Airways||43%||-65%||Coronavirus shutdown in Nairobi sparks protests|
|South Africa Air.||(not publicly traded)||Idled Comair/Kulula, a typcially profitable airline, heading for “business rescue” proceeding, similar to bankruptcy|
|Ethiopian Airlines||(not publicly traded)||CEO tells Bloomberg it’s talking to Mauritius about helping to revive its bankrupt national airline|
|IndiGo||-7%||-40%||Could score coveted Heathrow slots due to pandemic pulldowns by other carriers|
|Air India||(not publicly traded)||Neighboring Pakistan Int’l Airlines signs distribution deal with Amadeus GDS|
|SpiceJet||-13%||-69%||Boeing now expecting to resume B737 MAX production this month|
|Lufthansa||-5%||-59%||Plans to start flights to 106 destinations in June|
|Air France/KLM||-9%||-52%||Will retire B747s earlier than expected|
|BA/Iberia (IAG)||-11%||-61%||Willie Walsh’s retirement package sparks outrage as BA workers furloughed|
|SAS||-4%||-50%||Notches a 27% load factor in April|
|Alitalia||(not publicly traded)||Italian government injects another €3b in troubled flag carrier|
|Finnair||-10%||-54%||Nordic rival Icelandair will hold May 22 shareholders meeting as it looks to raise $200m in new funding|
|Virgin Atlantic||(not publicly traded)||Tells pilot it needs job cuts to secure gov’t aid and external financing; calls cargo a critical lifeline (Reuters)|
|easyJet||-6%||-49%||Prime Minister Boris Johnson details “Stay Alert” guidelines to ease restrictions|
|Ryanair||-9%||-12%||Pax volumes fell 99.6% y/y in April; Lauda unit completely grounded|
|Norwegian||-12%||-88%||AerCap, the leasing giant, was among the companies that accepted the carrier’s debt-to-equity offer|
|Wizz Air||-4%||-19%||Announces some new routes from London Luton and Vienna this summer, pending relaxation of travel restrictions|
|Aegean||-24%||-46%||Latvian government provides airBaltic with $271m in new capital; increases its ownership stake to 91%|
|Aeroflot||-4%||-23%||Aircraft liveries celebrating anniversary of Russia’s victory over Germany in World War II|
|S7||(not publicly traded)||President Putin expected to hold meeting this week on airline aid|
|Japan Airlines||-5%||-50%||Hawaii, a big JAL market, welcomed a mere 216 visitors arriving from out of state by air on May 5 (HTA)|
|All Nippon||-4%||-41%||Follows JAL in relaxation dress code for female employees; f/as, ground staff no longer have to wear high heels|
|Korean Air||-3%||-41%||Will open dozens of int’l routes in June, including to Europe and the U.S.|
|Cathay Pacific||-1%||-27%||Looking at deeper cost cutting and downsizing; one idea is ending Cathay Dragon as a separate brand (SCMP)|
|Air China||-8%||-35%||China notches largest 1-day increase in Covid diagnoses since April 28|
|China Eastern||-3%||-31%||Gradual recovery in China means Chinese carriers have the most ASMs worldwide (TPG)|
|China Southern||-4%||-30%||Air Lease Corp. mentions two B787-9s ready for delivery but Chiense carrier can’t come to U.S. right now to get them|
|Singapore Airlines||-28%||-54%||AAPA: Asia-Pacific airline net profits fell 25% even in 2019, before the corona panic; depressed cargo demand a drag last year|
|Malaysia Airlines||(not publicly traded)||Garuda Indonesia gets $382m loan from state-owned bank (Jakarta Post)|
|AirAsia||-5%||-71%||Won’t be taking any new A320 NEOs this year; working with Fly Leasing on timing of sale-leaseback deals|
|Thai Airways||-18%||-51%||Unions say they’ll work with government to help save the airline (Bangkok Post)|
|VietJet||4%||4%||Vietnam getting high marks for its handling of the Covid crisis; hasn’t experienced anything like what happened in Wuhan, Milan, New York, etc.|
|Cebu Pacific||-8%||-45%||Has only 14% of seats sold for the next 5 months; had 28% sold for eqivalent time last year|
|Qantas||-6%||-39%||Still operating about three-quarters of its pre-crisis charter capacity for Australia’s natural resource companies|
|Virgin Australia||0%||-52%||Indigo Partner’s Franke, speaking to Reuters, declines to comment on rumored interest in bankrupt Virgin|
|Air New Zealand||-4%||-56%||Urging Kiwis to start flying domestically again when deemed safe, but warns: 2/3 of pre-crisis revenue came from int’l tourism|
|Brent Crude Oil||17%||-56%||Prices swing wildly, this time in upward direction as producers cut supply and economies relax lockdowns; Brent ends week at $31 a barrel|