Issue No. 772

Bad Math for Cath

Pushing Back: Inside This Issue

The airline recovery continues, but so does Covid’s spread. In the U.S., airport traffic remains on a steady upward trajectory, especially in states that reopened their economies and tourist attractions early. Those same early openers though, including the giant Florida and Texas markets, are now experiencing Covid outbreaks, threatening the recovery. China, much further along in controlling the diseases, discovered a new cluster of cases in Beijing last week. Far more widespread is a surge of new cases in South America (led by Brazil and Mexico) and the Indian subcontinent.  

Europe, meanwhile, where the outbreak is mostly receding, hopes to salvage some of the peak summer tourist season by opening internal borders this month. But some countries like the U.K. are moving slower, effectively forbidding inbound tourism by imposing mandatory two-week quarantines on arriving passengers. A few other places worldwide are already welcoming international tourists with few or no restrictions, including Mexico’s beach resorts. But in general, international borders still remain closed for all but essential travel. That even includes the U.S.-Canadian border, and borders within East Asia where many countries have the virus under control. Still, across the world, airlines are restoring flights, some like American rather aggressively, and some like Cathay Pacific more conservatively.

In terms of the industry’s financial health, or absence thereof, IATA expects carriers to collectively lose $84b this year, followed by a $16b net loss next year. That’s of course subject to a lot of unknown variables, like the price of fuel and — perhaps most importantly — progress in developing and administering a Covid vaccine. It’s not inconceivable that some airlines, most notably U.S. airlines, might earn domestic profits next year, if the economy recovers, if travel demand recovers, if industry input costs stay depressed, if the virus is contained or defeated, and if carriers maintain current plans to greatly shrink capacity. Lots of “ifs.” But “if” is better than “no chance,” which defines the probability of any airline making money this year.  

Healthy recovery next year will also depend on an upcoming battle with unions to extract contract concessions. It’s a battle shaping up at airlines across the world, amid universal downsizing. Already, tensions are flaring, as the example of British Airways shows. Its rival Virgin Atlantic, meanwhile, remains on bankruptcy watch, unable to secure meaningful government assistance. The same goes for LOT Polish and Azul in Brazil. Not Cathay Pacific though. Last week, it joined another group of European airlines (i.e. Austrian and TAP Portugal) in the club of carriers relieved of immediate liquidity stress by generous government saviors.


"One thing is certain: The travel industry is going to be profoundly transformed."

Transat CEO Jean-Marc Eustache

Mondays With Skift Airline Weekly

On Monday, June 15, Chris Jones, McCarran International Airport chief marketing officer, discussed how the pandemic affected traffic to one of the largest leisure destinations in the country, and how things look now that Las Vegas is reopening. You can watch a recording of the event here.


January-March (3 Months)

  • Philippine Airlines: -$182m; -20%

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

Weekly Skies

  • Philippine Airlines is no stranger to ugly financial results. But not this ugly. Battered by Covid’s wrath, the airline reported a negative 20% operating margin for the turbulent first quarter. That’s a giant reversal from positive 6% in the same quarter last year, as revenues dropped 18% but operating costs increased 5%. These numbers were heavily skewed by big hedge losses, which drove fuel costs up by 39%.

    As of today, PAL is operating a limited flight schedule covering most of its top international destinations, including overseas cities like Los Angeles, San Francisco, New York. Honolulu, Toronto, Vancouver, London, and Dubai. But most routes operate just once a week and in some cases will arrive in Cebu rather than Manila, when testing facilities at Manila airport are backed up. Passengers who land in Cebu will be tested for Covid there and forced into hotel quarantine until getting their test results (usually 24-to-48 hours). The point is, these are flights PAL is operating for emergency use only.

    Looking ahead, the Philippine government hopes to open selected Covid-free islands (like Boracay) for tourism, at first marketed to domestic travelers. It then hopes to have these islands join various prospective bilateral or multilateral travel bubbles, with Australia and New Zealand, for example, or with fellow countries in the ASEAN region. South Korea, as it happens, is the single most important source of tourists for the Philippines. Manila might take longer to see air travel normalize.

    A longer-term question for the capital is the fate of plans to develop a new airport — the current airport was grossly insufficient to handle pre-Covid levels of traffic. In the meantime, PAL itself is cutting costs in a bid to stay solvent. Selling a 10% stake to Japan’s All Nippon last year provided some new capital. PAL’s controlling shareholder has more recently injected new funds. It’s joined with rivals Cebu Pacific and AirAsia in asking for government relief but so far unsuccessfully.

Transat’s Summer Flight Plan Depends on Borders Reopening

  • Canada’s Transat was headed for its best winter results since 2009. Profits were up sharply y/y during its November-to-January quarter. February too, was more profitable this year than last. But then along came Covid, decimating demand from late March and causing Air Transat to ground all of its flights on April 1. Revenues for its February-to-April quarter thus plummeted 36% y/y, though the company did still manage a positive 4% operating margin ex special items (it doesn’t break out results for just the airline unit). Flights have remained grounded.

    But last week, the company announced a July 23 restart date, using mostly A321 LRs to reopen 28 routes. A few will be domestic, but as a primarily international airline, most will be to Europe. Some will be to U.S. and Caribbean sunshine destinations too, though peak season for these routes is winter, not summer. Where in Europe will it fly? Family-visit markets are a target, linking Montreal for example with several cities in France (Paris, Marseilles, Lyon, Bordeaux, Toulouse, and Nantes). Toronto will see a few reopened routes to the U.K. Also starting are flights to Portugal, Greece, and Italy, all welcoming international travelers already.

    Transat’s summer flight plan, however, depends on Canada itself reopening its borders by July 23. But that’s not the only thing Transat is talking to Canada’s government about. Unlike the U.S. and most European governments, Ottawa hasn’t provided any meaningful airline-specific aid, just subsidies to help pay airline workers. Transat hopes it can at least get some financing help to fortify its staying power until Q4, when it hopes to close a takeover deal with Air Canada.

    That deal, which still requires Canadian and European regulatory clearance, forbids Transat from borrowing more money before the deal is closed. Fortunately, its cash cushion is sufficient for now, thanks in part to various asset sales in recent years, and a decision to exit hotel development. Also helpful: Its refusal to issue any cash refunds, instead giving customers travel vouchers valid for the next two years (Ottawa has been helpful here, allowing such a policy). More than 85% of its workers are on temporary leave.

    Ancient A310s have been permanently retired. It’s negotiating to return all of its B737s as well. Three more A321 LRs by contrast, are still due to arrive in the coming months. What does it expect this summer? Bookings are starting to exceed cancellations. That’s good. But there’s still a lot of uncertainty, encapsulated by four key questions: 1) when will customers be allowed to travel? 2) Will they want to travel? 3) Will they be able to afford to travel? And 4) will they be afraid of catching the virus if they travel?

    Gradually, the company is reopening its travel agencies across Quebec and elsewhere in Canada, hoping to sell at least some tickets this summer, salvaging a bit of what’s typically its best season. But Transat thinks it will take several years before a return to 2019 traffic levels.     
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State of the Unions

  • Labor relations continue to flare at British Airways, as several of its unions are refusing to negotiate with management on wage concessions. This follows weeks of contentious talks that caught the attention of members of parliament (see the June 8 issue of Skift Airline Weekly).

    The Unite union says the airline is using the Covid pandemic as cover to make long-desired wage and staffing cuts. Employees, including pilots, are objecting to what they term a “fire-and-rehire” strategy to force employees to take lower pay and inferior benefits. BALPA, which represents the airline’s pilots, is urging lawmakers to ban the approach, calling it an “appalling industrial relations practice.”

    Recall that IAG acted faster and more thoroughly than its peers in reworking labor contracts after the global financial crisis. Strikes at British Airways and Iberia were numerous in the early 2010s. But thereafter, IAG’s profits skyrocketed and its labor tensions eased.
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Landing Strip

New York’s LaGuardia Airport, often the butt of jokes and derided for its outdated facilities, got a much-needed facelift. Gov. Andrew Cuomo last week unveiled a refurbished Terminal B arrival and departure hall, an 850,000 square foot facility that is part of the airport’s ongoing $8b capital improvement program. United, Air Canada, American and Southwest operate from the terminal. Recall that Delta opened a new LaGuardia concourse in October. Another new departures and arrival hall will open in 2022.

Delta is the airport’s busiest carrier, based on seats scheduled last year (Cirium). American is number two, followed by Southwest, United, JetBlue, and Spirt.

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  • Indian booking platform Yatra says it is seeing a slow return of air travel in the country, although capacity remains between 15% to 20% of pre-pandemic levels. Much like in the rest of the world, leisure bookings are leading the way. Yatra does not expect corporate demand for domestic travel to return to pre-pandemic levels until the middle of next year. Corporate demand for international travel is expected to take longer, and Yatra said it cannot predict when it may recover. Much depends on countries lifting travel restrictions, the company’s CEO said.
  • United will now require passengers to complete a health self-assessment at check-in. The “Ready to Fly” checklist will be required of all passengers checking in at the airport, online, or via the carrier’s mobile app. It includes asking passengers if they have had Covid-19 symptoms or have been diagnosed with the disease. The carrier also is requiring passengers to wear face coverings inflight, and the checklist will ask if they are willing to accept that rule.
  • Delta is creating a Global Cleanliness division as part of its Customer Experience group to oversee its cleaning protocols. The new group will develop new cleaning methods and will work to ensure that aircraft and passenger touchpoints remain sanitized. The move shows that Delta is taking cleanliness as seriously as it does on-time performance and other customer-experience issues, the airline said. The new division will be led by Mike Madeiros, who previously was vice president of airport operations.
  • Singapore Airlines is the latest to announce the steps it’s taking to ensure aircraft and passenger touchpoint sanitation. The carrier is fogging aircraft before every flight with disinfectant and wiping down seats, armrests, tray tables, and IFE screens. The carrier also is studying UV-light disinfection as an option for aircraft before flight. Food and beverage service onboard remains limited, and lounge buffets have been removed. All passengers are given a sanitation amenity kit, which includes hand sanitizer, anti-bacterial wipes, and a surgical mask, before boarding. Cabin crew are required to wear masks and gloves and to don eye goggles during meal service.

Meanwhile, Gogo and Delta Rethink Relationship

  • Gogo and Delta have changed the terms of their inflight connectivity deal. The carrier is shortening its contracts with the provider, bringing forward the expiration dates to between Nov. 1 and June 2022. The original agreement was to run through 2027. The move is part of Delta’s push to provide free inflight Wi-Fi, Bloomberg reports. Delta says the new agreements give it flexibility to “reimagine” its inflight connectivity offerings.
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Covid Crisis 2020

  • IATA now thinks the global airline industry will lose a massive $84b net this year, and another $16b in 2021. Operating margin this year will be something like negative 23%, and next year negative 4%. The last year in which airlines collectively lost money was 2009, when the red ink was only $5b. The year prior (2008), net losses amounted to $26b. Next year’s recovery should see revenues rise 42% from their extremely depressed 2020 levels, IATA forecasts. But that will still leave it 29% below 2019’s level. Remarkably, cargo will account for a full quarter of entire industry revenues, double its typical share.

    Obviously, jet fuel prices are a big unknown, with the power to greatly influence industry results. IATA for now is assuming a per-barrel price next year of $52, which is similar to 2016’s average, and the lowest average annual price since 2004. That’s helpful. So is the $123b in government aid airlines have received this year, though a good $70b of that will need to be reimbursed. Less helpful is the $120b in new debt carriers have amassed since the crisis began.

    Oh, in case you’re wondering: The global airline industry’s best year ever, by IATA’s count, was 2015, when operating margin nearly hit 9%. It was similar in 2016 as well, another year defined by cheap fuel. As IATA always reminds though, profits aren’t distributed evenly across the world, with U.S. carriers responsible for a large chunk in recent years.
  • Intra-E.U. travel can begin again on Monday as the European Commission lifts restrictions. The bloc is calling on its member states to ease rules in the Schengen area and to roll back quarantine requirements. The E.U. said its member states have coordinated a layered risk-based approach to screen travelers and to ensure public health, spearheaded by EASA and the European Centers for Disease Control. This is the approach IATA has called for worldwide, and the group lauded the E.U.’s move.

    IATA and ACI-Europe note that European airports and airlines have taken measures to ensure public health at every step of the journey. Less-restricted travel outside the E.U. is expected to begin on July 1. 
  • This has not played out across the Atlantic, however. The U.S. and Canada are expected to extend their border closure until late July. The restrictions were earlier expected to end on June 21. Canada has reported a slowing in its Covid pandemic, but hotspots in Toronto and Montreal remain, and the U.S. has suffered close to 115,000 deaths from the disease. The border is closed for nonessential travel, but trade continues. Employees may cross the land border to get to work. Separately, Canada has required temperature screenings for all air passengers.
  • Ishka, an aviation consultancy, compiled a “watch list” of airlines it deems financial vulnerable. The current list shows 10: Virgin Atlantic, Lion Air, El Al, Interjet, Aeromexico, Air Europa, AirAsia X, SpiceJet, Go Air, and Sriwijaya. Fourteen airlines are already in bankruptcy: Latam, Avianca, South African Airways, SA Express, Thai Airways, Virgin Australia, Air Mauritius, Comair/Kulula, TAME, and a collection of smaller carriers (CityJet, LGW, Ravn Air, Bek Air, and Miami Air).

North America

  • Whoever thought Delta, of all airlines, would be in danger of breaching its loan covenants? More specifically, the carrier doesn’t think it can meet certain metrics measuring its ability to cover fixed costs, including debt repayments. A violation, it thinks, could occur early next year. So it’s now talking to banks about relaxing the covenants.

    Last week, it returned to the bond market for yet another dose of new capital, having raised more than $10b in new financing since the current Covid crisis began in March. The funds have primarily come via bond issuance, bank borrowing, aircraft sale-leasebacks, and government payroll assistance. If needed, the company still has another $6b to $7b worth of mostly aircraft to use as collateral for additional money. It can avail itself of a government loan too. Bankruptcy is thus not a concern.

    More of a concern is Delta’s international partnership strategy. Allies like Latam and Virgin Australia are already in bankruptcy. Virgin Atlantic could be next. Aeromexico is fighting to stay liquid. Air France/KLM and Korean Air needed giant government bailouts. Delta paid nearly $2b for a 20% stake in Latam last year, a stake that could soon be worth nothing. It separately has legacy loan guarantee commitments to an old partner, Latam’s rival Gol.

    In any event, the recovery back home is mercifully underway, if at a very early stage. Delta said last week that recent improvements in booking trends, as a well as a stabilization in refund requests, has it on track to lower its average daily cash burn to about $40m by the end of this month. It was closer to $100m at the start of the quarter. Revenues for Q2 though, will be down 90% y/y on 85% less ASM capacity.

    In interviews with ABC News and the Mike Milken podcast, CEO Ed Bastian emphasized the many measures Delta is taking to ensure that flying is safe. It’s been more aggressive than others in fact, about blocking middle seats and capping load factors. In the first week of June, Delta was flying roughly 45k to 50k passengers a day. And the numbers are trending up. In his interviews, Bastian separately spoke about Delta’s three key priorities of 1) protecting the health of its workers and customers, 2) protecting its cash, and 3) protecting its future. He also said airfares will likely remain low for a while. Airport renewal projects in cities like Los Angeles and New York continue, with work in fact accelerating now that passenger volumes are so low.

    Another topic of high priority for Bastian is advancing Delta’s efforts to promote racial equality. The airline’s home city Atlanta, as it happens, played a crucial role in America’s civil rights movement, producing many of its top leaders. (Martin Luther King Jr. himself was born there). Delta too had a role in the movement, providing crucial air links for activists as they campaigned throughout the south.   
  • American, holding its annual shareholders meeting, said it’s carried 127k passengers per day so far in June, up from 87k per day in May, and just 32k per day in April. The demand recovery, in other words, continues, but with a long road still ahead. In terms of load factors, American has filled 58% of its seats so far in June, up from May’s 45% figure, and April’s figure of just 15%. Just counting domestic flights, American’s June-to-date load factor is at 62%. The relatively welcome numbers are enabling lower rates of cash burn than originally feared. They’re also prompting the airline to restore about 40% of its July schedule, or 55% excluding international.

    That’s considerably more than what Delta or United currently expect to fly next month, which could reflect American’s more domestic-oriented traffic base. Not only does it fly a greater portion of domestic ASMs than its peers. Its domestic flights are in many cases filled with fewer international connecting passengers. An American Charlotte-to-Florida flight, for example, will typically have fewer international connecting passengers than a Delta Atlanta-to-Florida flight.

    Current July schedules according to Cirium show American’s seat capacity from Charlotte down 36% y/y. Dallas DFW is down 39%. Its Chicago ORD, Miami, Philadelphia, Phoenix, and Washington DCA hubs by contrast, are all down close to 50%. Los Angeles LAX is down 67%. And Delta? Most of its hubs are down around 60% y/y next month, in terms of seats. The notable exception is Salt Lake City (a gateway to several national parks), which is down just 39%. United doesn’t have any of its hubs down by less than 65%.
  • Allegiant said its May load factor was 47%, as it continues to see “material demand improvement” from April lows. It’s now averaging more than $2m in gross bookings per day, helping to reduce Q2’s average daily cash burn to just $1.75m. It previously expected the figure to be $2.1m, based on $750k in daily gross bookings. Note that fuel prices, however, are up from their extreme April lows.

    Interestingly, Allegiant said it accounted for 8% of all Memorial Day weekend fliers in the U.S., compared to 2% for the same holiday weekend last year. In the first week of this month, meanwhile, it operated 70% of its normal schedule (it was 50% in May). Load factors are still hovering around the 50% mark. And they should rise now that Allegiant’s home city Las Vegas is open to visitors again.

    The risk of course, is a reversal in demand momentum linked to the new outbreaks of Covid-19 now spreading through parts of the U.S. south. Florida is seeing a surge in new cases, for example. Houston, a big market for United and Southwest, is becoming the new U.S. epicenter of the epidemic.
  • JetBlue president Joanna Geraghty, speaking at an online summit, said being headquartered in New York City, the early epicenter of America’s Covid crisis, made dealing with the crisis all the more difficult. Some employees were understandably fearful of going to work. For a time, it seemed possible that Washington would ground the entire industry. The airline, she said, was “rocked to its core.” But like its peers, JetBlue is steadily recovering, with plans to operate about half its typical summer schedule.

    Being a predominantly leisure airline helps, though it does carry a lot of business traffic too, notably in Boston, and between the east and west coasts in its Mint class. Northeast-Florida flights are relatively fuller right now, even with quarantines in place — passengers flying from the New York area to Florida are still expected to quarantine for 14 days upon arrival (this rule is scheduled to end July 7 but could be extended). The hardest-hit part of JetBlue’s network, as the carrier explained during its Q1 earnings call, are its shorthaul business markets, within the state of New York for example.

    This summer, Geraghty said, airlines are competing with road trips. But she thinks that will be less the case during winter, when northerners need to fly south to get their sun. In any case, the airline is planning for all scenarios.

    Does she expect food service to come back? Yes, eventually. When will JetBlue decide on plans to serve London next year? Hopefully in the coming months, encouraged by opportunities to get airport slots and gates that weren’t available pre-crisis. Will there be layoffs? JetBlue is doing everything it can to protect jobs, strongly urging employees to take time off. But the carrier will no doubt be significantly smaller. Are new cleaning protocols slowing aircraft turn times? Not right now, because load factors are so low. If planes get full again, it might indeed have to schedule longer turns, but that would be a good problem to have. Does Geraghty expects more mergers or imminent bankruptcies? Not in the U.S. Are A220s still on the way? Absolutely, and they’ll initially deploy mostly from Boston, replacing E190s.
  • U.S. air traffic volumes continued to jump last week. Data published by the TSA shows passenger throughput at its airport security checkpoints reached 502k on Thursday (6/11). On Thursday of the previous week, the number was just 392k. On the equivalent Thursday of last year, however, the number was almost 2.7m.


  • Lufthansa is getting more state aid following big assistance packages from Germany and Switzerland. Now it’s Austria’s turn, guaranteeing 90% of some $340m worth of private-sector bank loans to Austrian Airlines, a wholly owned Lufthansa subsidiary. These loans must be repaid with interest by 2026. Vienna will also give its airline $170m in direct equity capital. Lufthansa itself will inject another $170m. So all told, Austrian will have $680m in new financing to help it get back on its feet after the Covid shock. Just as importantly, the airline’s employees agreed to $340m worth of concessions in the form of lower pay. Another $170m of savings will come from renegotiated or terminated supplier contracts.

    The state aid does contain some conditions. One is that Lufthansa must maintain its Vienna hub, including its intercontinental links. In addition, Austrian must meet specific environmental goals, such as cutting its carbon emissions at least 30% by 2030, relative to 2005 levels. Like France with Air France, Austria is also pushing Austrian to shift some shorthaul traffic to the railways. The government is also changing its airline ticket tax policy to make shorthaul travel more expensive, which incidentally could help Austrian by disproportionately hurting LCCs.

    When Lufthansa originally purchased Austrian in 2008, in the middle of the global financial crisis, it thought it might replicate the exceptional success it had with Swiss, which it bought three years prior. It also coveted Austrian’s impressive network east and southeast of Vienna, to eastern Europe, the former Soviet Union, and the Middle East. At the time remember, Lufthansa was on a buying spree, grabbing control of Brussels Airlines as well, and a largely forgotten and since sold 19% stake in JetBlue.

    None of these investments worked as intended. Austrian, for its part, earned a less than 1% operating margin last year, after managing between 3% and 4% between 2016 and 2018. Some of its poor performance throughout the 2010s stemmed from geopolitical shocks that hurt key markets in Russia, Ukraine, and the Middle East.
  • TAP Air Portugal got a bailout last week too, in the form of credit assistance worth up to $1.3b. Without an imminent cash injection, TAP would likely have headed for bankruptcy. E.U. regulators approved the intervention, but with conditions, given the fact that TAP was deemed financially troubled even before the crisis. The loan must be repaid within six months, or alternatively, TAP must submit a viable turnaround plan within six months.

    But many questions remain, not least the future influence of Azul’s David Neeleman and fellow investors, which purchased control of the airline from Portugal’s government in 2015. The government subsequently reclaimed financial control but let Neeleman and his team run the airline. Lisbon now wants management control too. The relations between the government and TAP’s private shareholders were strained even before the Covid crisis. Neeleman, in fact, was reportedly hoping to sell his stake to another airline, with Lufthansa a leading contender.

    Another key question going forward is how much TAP now needs to shrink, and whether it can extract sufficient employee concessions.
  • The E.U. also approved Finland’s latest $320m worth of aid for Finnair. Helsinki, which already controls the carrier, will provide the money via new shares it pledged to buy. Finnair is issuing what it hopes will be nearly $600m worth of new shares. And it won’t have to give up any airport slots  —the E.U. said that’s not necessary because Helsinki airport isn’t congested, and because Finnair does not “hold a significant market power on the relevant markets on which it operates.”

    Last month, regulators approved a state guarantee on $670m Finnair arranged to borrow from the private sector.  At its annual shareholders meeting last week, held virtually of course, CEO Topi Manner said Finnair was well on its way to earning sustainable profits before the crisis hit. He says the core of its business strategy won’t change, just perhaps its timing and scope. Asia remains key.
  • Air France will fly about 35% of its normal capacity in July, and 40% in August. But this summertime schedule will cover about 80% of its pre-crisis destinations. Ironically, it’s prioritizing domestic flying, a part of its network that’s historically lost huge amounts of money, and which the government wants it to cut for environmental reasons.

    But with domestic routes, Air France doesn’t have to worry about international travel restrictions. Keep in mind that when Air France says “domestic,” it’s including overseas French territories like Martinique, Guadeloupe, St. Martin, French Guyana, Tahiti, and Reunion. Looking at fleet deployment, the carrier will fly 106 of its 224 planes this summer.

Northeast Asia

  • Chinese carriers, on June 5, transported more than 1m passengers in a day for the first time since late January as the country’s airlines continue to recover from the crisis. On that day, according to China’s civil aviation regulator, its airlines operated 11,333 flights, also the most since the crisis began. Traffic is now running at about 62% of last year’s levels. The next phase in China’s recovery will be international flying, starting with the “green channels” officials are establishing with eight countries led by South Korea.
  • China Eastern sees opportunity in the crisis, specifically to take advantage of troubles at Hainan Airlines. The Shanghai-based giant is joining with equity partner Juneyao Airlines and the online travel retailer to create a new airline to serve the island of Hainan, a tourist haven. China Eastern, Juneyao, and Trip will control 51%, 15%, and 14%, respectively. Local government-owned companies will hold the rest.

    The new Sanya International Airlines hopes to take advantage of Beijing’s plan to turn Hainan into a major trading hub. To facilitate that goal, visa restrictions will ease, and taxes will drop. Sanya, incidentally, is building a new airport, expected to open late this year.


  • Air New Zealand CEO Greg Foran started his job in early February. Great timing. Now, instead of piloting a strong airline in stable times, he’s undertaking a massive emergency restructuring in the craziest time ever. To mark his 100th day on the job, Foran addressed employees with the message: “Survive, revive, and thrive.” That’s the game plan for getting through the next few months, and hopefully stabilizing the airline thereafter. By August 2022, he hopes, ANZ can achieve healthy profits again.

    To get there, however, the airline will have to shrink to just 70% its pre-crisis size. It will operate fewer widebody planes. And it will need to radically overhaul its cost base. That inevitably means more union concessions, which Foran makes clear are necessary. Currently, ANZ’s wage bill is down by a third, but its revenues are down by two-thirds. That won’t do. So more job cuts are certain but involuntary cuts are a last resort.

    Domestic demand is fortunately starting to recover, and demand revival to Australia and nearby Pacific islands should follow. In most cases though, according to Foran, New Zealand won’t open its borders until there’s a vaccine or effective treatment for Covid-19. So he’s not counting on any meaningful international flying until next year. On a more optimistic note, he said some of ANZ’s most important innovations developed in the wake of past shocks, namely the 9/11 terror attacks and the global financial crisis.

Latin America

  • Latam’s bankruptcy proceedings continue. A creditor committee is now in place, to represent everyone to whom the airline owes money.  Among the committee’s seven members are two aircraft lessors: AerCap and Aircastle. Another is Lufthansa’s maintenance arm. Also getting a seat is Latam’s Chilean pilot union.  
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Feature Story

Some airlines are well-positioned for the recovery. Not Cathay Pacific. 

Long before anyone ever heard of Covid-19, Hong Kong’s Cathay Pacific was an airline in trouble. Surprised to hear that? Maybe because Cathay was never really close to running out of money. Its reputation for excellent service, even among the most discriminating corporate jetsetters, was never compromised. Hong Kong, meanwhile, has long been one of the world’s greatest airline markets, loaded with premium traffic, leisure traffic, cargo traffic, and sixth-freedom connecting traffic. And it was on the doorstep of mainland China and its four-decade-long economic miracle.

Even so, Cathay repeatedly failed to produce healthy profit margins throughout the 2010s. It began the decade promisingly, earning an 11% operating margin in 2010 itself, a strong bounceback year from the global financial crisis. But it would never again top 7%, and more typically averaged between just 3% and 4% (see chart below). Worse yet, when much of the world’s airline industry was enjoying robust demand and cheap fuel in 2016 and 2017, Cathay posted losses. It was during these times, in fact, that Airline Weekly often highlighted its even-worse results than India’s forever-troubled Jet Airways; Jet would eventually collapse. Air France/KLM was perhaps a more appropriate comparison, with its similar global stature and similar chronic dysfunctions. 

Like Air France/KLM, Cathay enjoyed some uplifting trends throughout the 2010s, including long periods of strong premium demand, particularly on intercontinental routes. During the first half of the decade, it consistently outperformed its longtime rival Singapore Airlines, which didn’t have nearly as much exposure to the lucrative North American market, and which struggled with heavier low-cost competition. Cathay by contrast, was protected from LCCs to a degree, a reality highlighted when Hong Kong’s government blocked an attempt by Qantas and China Eastern to launch a local Jetstar affiliate. That was in 2015, the last year in which Cathay would outperform Singapore Airlines. As the latter steadily improved its margins in the second half of the 2010s, Cathay encountered one major headwind after another.

For starters, it was unable to enjoy the cheap fuel bonanza of 2015 and 2016, because of extremely bad fuel hedging. Later, when tariff wars dented global trade, the airline’s heavy reliance on cargo revenues became a big problem. China’s economy began slowing, which depressed the value of Cathay’s 18% stake in Air China. For a time, the mainland’s HNA Group backed an aggressive expansion of Hong Kong Airlines, which entered some of Cathay’s most important longhaul routes, including Vancouver, Los Angeles, San Francisco, and Auckland. HNA was the power behind the throne at fast-expanding HK Express too. Between 2013 and 2017, the LCC roughly quadrupled its seat capacity, according to Cirium schedule data.

In the meantime, Cathay faced increasingly severe congestion and air traffic delays. Mainland rivals in neighboring Shenzhen and Guangzhou expanded their intercontinental offerings. A major cyberbreach of customer data generated bad publicity. Confrontations with the airline’s pilot union were all too frequent. Years of U.S. dollar strength thinned the revenue Cathay was generating in markets like Europe, Canada, Australia, India, and points within East Asia including mainland China.  

This only begins to convey the difficulties Cathay was facing. Traffic flows between Taiwan and mainland China, once Cathay’s single largest source of demand, first diminished as cross-Strait deregulation allowed a growing number of nonstops, and then diminished as the cross-Strait market contracted due to political tensions between Beijing and Taipei. Political tensions between Beijing and Hong Kong itself, however, hurt Cathay the most. The umbrella democracy movement protest of 2014 was a first major instance of demand disruption.

Protests that erupted last summer, though, proved far more disruptive. They also caused strife within the airline, leading to the ouster of CEO Rupert Hogg, appointed just two years prior to help return Cathay to profitability. A number of employees were dismissed for their political activism, after Beijing threatened to revoke the carrier’s mainland flying rights. Tensions in Hong Kong have only grown worse in 2020 and represent a key flash point (one of many now) between Beijing and Washington. Hong Kong’s status as a global center of finance, commerce, aviation, and tourism, all the while, is under threat. 

Cathay itself somehow managed to squeeze out a small profit last year despite the protests, which at one point even caused Hong Kong’s airport to close. The airline even earned a small operating profit in the second half of the year, when the unrest got really bad. Significantly cheaper fuel helped enormously. So did the cost-cutting Cathay was forced to do. One helpful move, started a few years earlier, was densifying B777s with 10 coach seats across rather than nine. Last fall, it began cutting capacity, reversing an overaggressive intercontinental expansion that in recent years saw new service to Seattle, Washington, Dublin, Brussels, and Cape Town.  

Escaping 2019 with a small profit was a victory of sorts, and a good omen for 2020. In its final monthly traffic report of 2019 (for December), management acknowledged huge declines in inbound and outbound passenger traffic. But with a hint of hope, it spoke of improving load factors on longhaul routes, a 15% y/y increase in sixth-freedom connecting traffic, strong peak season cargo demand, and “promising” advance passenger bookings for the Chinese New Year ahead. Little could it have imagined what actually would lie ahead.

Already in January, smack in the middle of Chinese New Year, the Covid-19 epidemic began its near-total demand destruction. February RPK traffic was down 54% y/y, and 87% on mainland China routes. March RPKs dropped 84% overall. For April and May, the decline was 99%. Even so, load factor last month was just 30%. Management is certainly under no pretense that it can pull another miracle and make money this year. In fact, it estimated its losses for just the first four months of 2020 at about $580m. According to Bloomberg News, more than $10m a day have been draining from its coffers. It entered last week wondering how long its cash would last.

It need not worry about that anymore. In the latest industry example of a government bailout, Hong Kong, together with existing shareholders, agreed to provide Cathay with a massive $5b rescue. Roughly half comes in the form of preferred shares the government will buy. Along with warrants, this would give the government a 6% ownership stake, with two non-voting board seats. Cathay will raise another $1.5b by selling additional equity to its three largest shareholders, namely Swire Group (which currently owns 45% of the company), Air China (30%), and Qatar Airways (10%). Their new claims will equal 42%, 28% and 9%, respectively. Hong Kong will also provide Cathay with a $1b loan. Until now, the government has mostly provided just wage subsidies, mostly designed to protect workers. The city’s airport has chipped in with some financial relief as well.

The government’s preference shares can be repurchased by the airline at any time. But while outstanding, it would owe the government 3% annual dividend payments for the first three years, then 5% in year four, 7% in year five, and then 9% thereafter, in perpetuity. So it’s in Cathay’s interest to buy them back sooner than later — management said it would aim to do so in 3-5 years. The loan money, meanwhile, can be drawn anytime in the next 12 months as needed. The carrier also secured wage cuts and other concessions from workers. It intends to implement another round of executive pay cuts and another early-leave program for staff.

Strategically, though, it doesn’t know what to do, at least not yet. Management says it’s waiting to see how market conditions develop, holding off on presenting a new business plan for now. It hopes to have a better idea — and a new plan devised — by the fourth quarter. But there’s at least one thing already certain about the plan: It will result in Cathay becoming a much smaller airline.

Will there be a future for the B777-9s Cathay ordered? Or will, as a recent South China Morning Post report suggested, the B777s be swapped for smaller B787-10s? Last year, remember, Cathay purchased the LCC HK Express, which could be a useful vehicle for expansion in a recovery phase likely to feature more leisure traffic than business traffic. HK Express was already allocated half of the 32 A321 NEOs the company has on order. Cathay, some reports indicate, wants to do away with its Dragon brand, used primarily for mainland China routes. Will the group’s commercial ties to Air China deepen? Will it do anything more with Air New Zealand, another close partner?   

Helpfully, Hong Kong Airlines, which barely escaped last year alive, is in worse shape than even Cathay. Foreign rivals have their share of problems too. Hong Kong is now easing restrictions on travelers transiting through the city’s airport. Some tourist attractions are reopening. Importantly right now, Cathay’s cargo business is booming, albeit much smaller without the cargo hold capacity on its many grounded passenger planes. Cash flows, the carrier said last week, are starting to stabilize, despite a drain from more bad hedges. The city has fared well in its fight against Covid. Longer-term, the airport will get a third runway, and Cathay remains bullish about the future of the city as an aviation hub. Hong Kong after all, has overcome many challenges in the past, from Japan’s occupation during World War II to riots in the late 1960s and the British handover in 1997, which triggered an exodus of people and money to places like Canada, the U.K., Australia, and California.

The uncertainty, however, is heavy for all of the city’s businesses as Beijing gets more aggressive about challenging its autonomy. For Cathay, without any domestic routes to nurture a recovery, will fly just 4% of its normal capacity this month, and just 9% next month. Even that is subject to further relaxation of travel restrictions. Until at least Sept. 18, all non-Hong Kong residents arriving by air from any location other than mainland China, Macau, and Taiwan will be denied entry. Hong Kong residents and non-Hong Kongers arriving from mainland China, Macau, or Taiwan face a 14-day compulsory quarantine. Protests, meanwhile, continue. And so does Cathay Pacific’s agony.   

By the Numbers

Cathay Pacific vs. Singapore Airlines

Operating margins by year, excluding special items

Cathay (CX)Singapore (SQ)Winner
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Around the World

A look at the world’s airlines, including end-of-week equity prices

Around the World: June 15, 2020

Airline NameChange From Last WeekChange From Last YearComments
American-10%-49%Hasn’t yet closed on CARES Act loan from Washington; expects to do so by end of this month, pledging its loyalty plan as collateral
Delta-11%-46%Project it’s undertaking to upgrade Los Angeles LAX facilities could be ready as early as the end of 2022; faster to work when there are no passengers
United-6%-54%U.S. airline stock momentum reverses course last week amid broader market slump; concerns mounting about Covid’s spread
Southwest-6%-32%Houston, experiencing a major Covid outbreak, one of Southwest’s largest markets
Alaska-10%-38%President Ben Minicucci tells Seattle Times airline is now up to handling about 24k pax a day; was 5k at low point in April; job cuts coming
JetBlue-11%-37%Still blocking middle seats on Airbus planes; blocking aisle seats on E-Jets; policy will continue at least through end of July
Hawaiian-16%-40%As of Sunday, Hawaii had 723 active Covid-19 cases; that’s still low but numbers growing
Spirit-17%-63%Qualifies for $741m in government credit help, if it wants to take it
Frontier(not publicly traded)All pax and crews subject to temperature screening; anyone with 100.4F degree fever or higher won’t be permitted to travel
Allegiant-9%-23%Paid roughly 91 cents a gallon for fuel last month, an unthinkably low number; paid $2.18 last year
SkyWest-19%-43%Its home state Utah, along with neighboring Colorado, saw biggest gains in personal income last year
Air Canada-4%-51%Operated its last B767 flight on Jun 2, from Montreal to Toronto; plane first entered Air Canada’s fleet in 1982
WestJet(not publicly traded)Quebec province harder hit by Covid than other provinces, including even Ontario which has more people
Aeromexico-10%-62%Mexico already completely reopen to international tourists
Volaris-16%-36%Last year, 45m international tourists came to Mexico, making it one of the largest tourist spots in the world
LATAM-8%-78%Chilean gov’t still debating aid for airlines; president of the country Sebastian Pinera used to own large stake in Latam
Gol-1%-40%Has a new collective bargaining agreement in place with main union representing pilots, flight attendants; valid for next 18 months
Azul5%-50%Will it be the next South American bankruptcy domino to fall? Working hard to avoid it
Copa-6%-44%Argentina revises policy on allowing airlines to restart flights; had been restricted until September
Avianca40%-86%Will Colombia’s government provide financial aid in exchange for an ownership stake? Could be a shareholder in the post-bankruptcy Avianca
Emirates(not publicly traded)IATA’s forecast shows airlines will lose an average of $37.54 for every passenger they fly this year
Qatar(not publicly traded)Flew 18% of the entire worldwide airline industry’s RPK traffic in April; kept its planes active with repatriation missions
Etihad(not publicly traded)Has now operated two flights to Israel carrying aid to Palestinian communities
Air Arabia2%9%Royal Air Maroc says it’s losing more than $5m a day as Covid tears into demand
Turkish Airlines0%1%Restarted international routes last week, focusing at first on Europe; longhaul routes coming back later this month
Kenya Airways23%-26%Segment on CNBC Africa last week discussed merits of fully nationalizing the airline
South Africa Air.(not publicly traded)Plan for revival again pushed back; now supposed to come this week
Ethiopian Airlines(not publicly traded)Ethiopian economy still expected to grow this year; subsistence farming largely unaffected by Covid; roughly 80% of Ethiopians are farmers
IndiGo-16%-40%Fleet at the end of Q1: 1 A321 NEO, 71 A320 NEOs, 130 A320 CEOs, 15 ATRs
Air India(not publicly traded)Pakistan’s national airline PIA, which suffered a crash last month, losing almost $40m a month
SpiceJet1%-64%Expanding its cargo network; now offering routes to Egypt and Kyrgyzstan
Lufthansa-4%-42%Raising the specter of enormous layoffs as it asks unions for concessions; says more than 20k jobs could disappear
Air France/KLM-13%-43%Reuters profile of Toulouse highlights its growing troubles as Airbus sees business evaporate
BA/Iberia (IAG)-16%-41%British Airways and other U.K. airlines livid about country’s quarantine policy; suing to have it overturned
SAS-19%-33%Swedish regional airline BRA, in bankruptcy, hopes to resume flying this fall
Alitalia(not publicly traded)Might wind up getting some of Air Italy’s assets; carrier stopped flying earlier this year
Finnair-77%-85%One condition of receiving gov’t aid: It’s not permitted to buy 10% or more of a competitor
Virgin Atlantic(not publicly traded)Has lawyers ready to go in case it needs to file for bankruptcy; still hoping to restructure out of court
easyJet-10%-13%Rival Jet2 pushes back restart date to July 15; seeing lots of “pent-up demand” but U.K. quarantine a concern
Ryanair-14%3%European Commission calls for all intra-E.U. travel restrictions to end this week (Jun 15); phase out restrictions on non E.U. countries on July 1
Norwegian-26%-90%Asking shareholder approval to issue more equity or convertible debt on short notice if needed; could need funds to finance restoration of flying
Wizz Air-10%-12%Polish media rife with discussions about LOT’s finances, union tensions, bankruptcy risk
Aegean-11%-51%Expects to be up to about 1k flights per week by mid-July; 1,600 by the end of August
Aeroflot-2%-11%Wants some of the A350s it’s supposed to get in the coming months to arrive closer to next summer’s peak season instead
S7(not publicly traded)Restoring a big portion of its domestic flying this summer and the upcoming winter
Japan Airlines-6%-37%Will operate 12 routes to nine cities in North America next month (excluding six routes to Hawaii/Guam)
All Nippon-4%-27%All Hawaii flights suspended indefinitely; routes flown with A380s
Korean Air-4%-38%Planned takeover of Asiana Airlines by Hyundai conglomerate still uncertain
Cathay Pacific-7%-24%Will hold a board meeting on Aug. 12 to announce its financial results for the first half of 2020; spoiler alert: they’ll be atrocious
Air China-6%-29%Guizhou-based China Express orders 100 Comac planes; unspecified mix of ARJ21s and C919s
China Eastern-4%-28%Says Sanya Int’l Airlines, its new venture in Hainan, will be a “boutique aviation brand”
China Southern-4%-27%Temporarily suspending Guangzhou flights to Bangladesh’s capital Dhaka over Covid concerns
Singapore Airlines-4%-54%State-backed issue of new stock bagged it $7b; has more fundraising firepower if needed
Malaysia Airlines(not publicly traded)Hoping for another cash injection by its lone shareholder, which is Malaysia’s government wealth fund
AirAsia12%-66%Reportedly might get investment from a Korean conglomerate; also looking for capital elsewhere
Thai Airways-3%-58%Full restructuring could take seven years, one of its key advisors says (Reuters)
VietJet-1%-7%Indonesia’s Garuda avoids default by getting creditors to agree to a loan restructure
Cebu Pacific7%-46%Hasn’t planned any international flying yet; waiting for more clarity on easing border restrictions
Qantas-3%-20%Chinese investment, a big boost to Australia’s economy, threatened by both Covid and diplomatic strains
Virgin Australia0%-49%Bankruptcy administrators still intend to have binding sale agreement in place by June 30
Air New Zealand-1%-40%IATA says any bilateral/multilateral travel bubbles must be just temporary; goal is to safely open the whole world to cross-border travel
Brent Crude Oil-8%-36%Wild fluctuations up and down continue; oil moving roughly in tandem with stocks

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

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