Issue No. 778

China's Uncertain Recovery

Pushing Back: Inside This Issue

U.S. airlines sounded common themes as they disclosed gargantuan second-quarter losses. Demand recovery was promising, until it wasn’t. Costs are down sharply, but more painful labor cuts are necessary. Corporate and international traffic volumes remain negligible. Carriers are dialing back planned capacity for the fall. There’s more than enough liquidity on hand to endure current rates of cash burn. Only with a Covid-19 vaccine, airlines seem to agree, will demand conditions start to normalize.

American is thinking strategically during the crisis, addressing its network deficiencies with domestic alliances. United is playing a more conservative game for the moment, operating fewer flights and in fact losing less money and burning less cash than its peers. Thanks to enthusiastic interest in voluntary job separation offers, Southwest said it won’t have to cut jobs or pay involuntarily, a minor miracle considering the circumstances. (Herb Kelleher would be proud). Alaska will team with American and join oneworld while navigating the crisis. Spirit insists its cost advantage will endure.

In Europe, Finnair recorded massive Q2 losses, just like everybody else. More importantly right now, it’s happily in the category of airlines without short-term liquidity concerns—not after a government-backed fundraising spree. Things in Europe get really interesting this week as Air France/KLM and IAG report results. So do the continent’s most successful low-cost carriers: Ryanair and Wizz Air.

They’ll be far from the only ones reporting Q2 earnings this week. Air Canada, Singapore Airlines, and ANA are some other heavy hitters scheduled to report.  

Verbulence

"It’s not only about raising new debt and it’s not only about raising new equity. We need to adjust our operations to new reality."

Finnair CEO Topi Manner

Mondays With Skift Airline Weekly

Brian Sumers, Skift senior aviation business editor, and Airline Weekly Editor Madhu Unnikrishnan discussed why the heads of four airlines would ask governments to ease transatlantic travel restrictions while the pandemic still rages. And why is there such an enduring love for the B747?

Earnings

April-June (3 Months)

  • American: -$2.1b/-$3.4b*; -256%
  • United: -$1.6b/-$2.6b*; -209%
  • Southwest: -$915m/-$1.5b*; -214%
  • Alaska: -$214m/-$439m; -139%
  • Spirit: -$144m/-$286m*; -247%
  • Finnair: -$191m; -254%

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

Weekly Skies

  • Don’t even think about the “B” word. Bankruptcy is not something American Airlines has to worry about in 2020. Not with a massive $16b in liquidity, more than enough to cover even a lengthy worst-case scenario of near-zero revenues. This figure includes nearly $5b it’s borrowing through a government-backed program, as well as another $1.2b it arranged to borrow via bond issuance just last week. Costs are down sharply. Some 150 planes were forever removed. And big job cuts are coming this fall.

    So no, American won’t be filing for bankruptcy, even as it loses monstrous sums of money. How monstrous? From April through June, its net loss adjusted for special items was almost $3.4b. More worryingly as it looks ahead to eventually coming out of this mess, balance sheet liabilities are growing enormously, to nearly $50b at the start of Q3. American, remember, entered the crisis with considerably more debt than its peers, mostly because it renewed its fleet more aggressively. It wasn’t just an inferior balance sheet though. American’s income statement was weaker too, its pre-crisis profit margins depressed by labor tensions, B737 MAX disruptions, and outsized exposure to difficult South American markets. Once the airline starts generating positive cash flow again, hopefully by the start of next year, debt repayment will be a top priority. That surely means less money allocated to product and service improvement, never mind shareholder rewards like dividends and stock buybacks (banned in any case as a condition of taking federal credit aid).

    But underinvestment will be a challenge for the whole U.S. airline sector — all carriers will be smaller, more indebted, and less able to invest their product. After a promising jump in domestic leisure demand in May and early June, with fuel prices extremely low, and with uncle Sam footing about three-quarters of its wage bill, American decided to restore capacity more aggressively than its peers. The fact that it’s a more domestic airline than either Delta or United helped. So did its large Florida footprint (it has a hub in Miami) and its domestic-heavy mid-continent hubs Dallas DFW and Charlotte. Management downplayed the long-term significance of this more aggressive capacity approach, calling it a mere summertime tactic that helped generate more revenues and cash, even if the extra flying was loss-making in a strict accounting sense. More meaningful is American’s long-term effort to address chronic weakness from New York, Boston, and along the west coast. These markets account for roughly a quarter of its total capacity, dragging down margins. In Dallas-Fort Worth and Charlotte, by contrast, American outperforms the industry on unit revenues and profit margins.

    What to do? American’s West Coast solution is a partnership with Alaska, announced just before the crisis. And its New York/Boston solution is a partnership with JetBlue, announced earlier this month. With Alaska as an ally, American will dismantle much of its intercontinental flying from Los Angeles and launch routes to Europe, China, and India from Seattle. With JetBlue as an ally, American will launch new service to Israel, Greece, and Brazil from New York JFK, while ending some 50-seat regional jet routes that waste precious JFK and LaGuardia airport slots. Philadelphia, though, will remain American’s leading transatlantic gateway, with excellent connectivity from most of the U.S.

    Also still crucial is a joint venture with British Airways and Iberia, as well as separate JVs with Japan Airlines and Qantas. Other key international partners include China Southern, which is building a major hub in Beijing, and Brazil’s Gol, which replaces former partner Latam. Other partners like Royal Air Maroc were to facilitate new routes like Casablanca, though that’s on hold for now. Also for now, international markets remain largely dormant, with recovery unlikely before mid-2021 at the earliest.

    Domestically, net bookings are now down 75% to 80% y/y, after a period in which the decline was more like 50%, and even less than that in certain sunshine markets. The momentum reversal, however, stems from worsening Covid spread in the Sunbelt and newly imposed quarantines by states like New York.

    As it looks beyond the crisis, to a point after which a vaccine helps normalize demand conditions, American will have the opportunity to renegotiate its credit card agreements with Citi and Barclays in 2022. In the past, airlines have been able to cash in on such opportunities. Will banks be so eager to pay for the privilege two years from now? The answer will partly depend on business travel habits, which some say will snap back and others say will change forever.

    For now, the name of the game is burning as little cash as possible, until vaccines come to the rescue, probably sometime in the next six-to-nine months. Things could be tough this fall, when airlines like American typically depend on business traffic for nearly half of their revenue. Executives say they’re biased toward flying less rather than more this fall. Q3 capacity, at the moment, is expected to be down about 60% y/y. American, by the way, is still selling middle seats unlike rivals Delta, Southwest, Alaska, and JetBlue.
  • United is still selling middle seats as well but flew considerably less capacity than American last quarter. Even so, its domestic load factor was just 36%, compared to American’s 44%. It’s also more of an international airline than American, though this presented some valuable overseas cargo opportunities. The distinctions don’t matter much when comparing losses of such grand magnitude, but for what it’s worth, United’s Q2 operating margin (negative 209%) was the least awful among America’s Big Three. Delta, keep in mind, paid significantly more for fuel when factoring in losses from its oil refinery: $2.16 a gallon, compared to United’s price of just $1.18 (American paid $1.13).

    What matters most at this stage of the recovery is cash burn, and on this score United outperformed. Daily burn (adjusted for one-off items like government payroll support) amounted to $40m on average last quarter, compared to $43m for Delta and $55m for American. United began cutting capacity early on in the crisis, while at the same time acting less aggressively in terms of permanently retiring aircraft. It’s no less cash rich than its peers right now, following round after round of bank borrowing, bond issuance, stock selling, and aircraft sale-leaseback deals. One creative bond offering, in fact, was tied to its United Mileage Plus loyalty plan. This quarter, cash burn should drop to $25m a day on average, before hopefully turning positive by year end.

    Like others, United saw a promising domestic recovery began to wane in late June, with more fluctuations expected before a vaccine solution arrives, by late 2021 in United’s worst-case scenario. It won’t be able to avoid mass layoffs this fall, even with more than 6k employees accepting voluntary severance. Because of the recent stalled recovery, it’s now paring back some planned autumn capacity. It recognizes the highly unpredictable nature of current trends but seems confident that pre-vaccine, demand will plateau after reaching about 50% of normal levels. Certain types of business travel — in-house company sales events, for example — simply won’t return while Covid is still a major health risk.

    In the meantime, the airline is adapting its network to chase family-visit traffic in particular. Leisure travel could regain some momentum if Covid infection rates slow. Said CEO Scott Kirby: “The country has learned some lessons about things like wearing masks.” Denver is arguably its best-positioned hub at the moment, given its heavy leisure component, its limited international offerings, and its mid-continent geography. Intercontinentally, United is taking advantage of partner hubs abroad to serve customers with urgent travel needs around the globe. When intercontinental demand does ultimately normalize, it will likely do so first from big coastal gateways where United is strong, like Newark and San Francisco. Signing a more favorable credit card deal with JPMorgan Chase just before the crisis was a stroke of good timing.

    Less well-timed was a 2019 decision to outfit planes with more premium seats. Lots of B737 MAXs are still due to come, eventually. Will corporate travelers return? Yes, eventually — Kirby described a likely re-appreciation for flying the first time an executive loses a big sale because he or she elected to do a Zoom call instead of a face-to-face meeting. The carrier thinks an increase in working from home might even drive more air travel demand as people still periodically visit their offices from remote locations. For now, though, with corporate travelers grounded, United will proceed with re-sizing the airline appropriately, while retaining as much flexibility as possible to react to what could be a quick post-vaccine recovery. One key task right now is further variablizing the airline’s cost structure. Slowly but surely, management is getting better about forecasting demand under crisis-like conditions. It’s certainly not interested in chasing traffic just to win market share. 
  • Even with barely any international flying, Southwest burned through $23m a day in Q2, as it did something it almost never does: Lose money. Net even the mighty Southwest could escape the ravages of Covid’s demand destruction, leaving it with a $1.5b net loss ex items. Revenues dropped 83% y/y, while operating costs (ignoring federal payroll support) only fell by 36%. Southwest was the most aggressive U.S. airline in terms of capacity, with ASMs down only 55% from last year’s levels. Load factor was just 31%, in part because it blocked middle seats, something it will continue to do through at least September. In situations where demand for flights exceeded its seats available for sale, it simply added flights, which 80% of the time covered their costs.

    Cheap fuel made that easier to achieve, even while paying a bit more than the industry average ($1.33 per gallon) given fuel hedge premiums. Even with oil prices up somewhat from their springtime lows, Southwest sees hundreds of millions of dollars in fuel savings this year (of course it’s flying a lot less). It’s separately cutting costs in just about every other area, including labor. But thanks to good take-up of early retirement and other generous separation and extended leave packages, Southwest was proudly able to say that not a single employee will be involuntarily furloughed, for the remainder of this year anyway. Nor will anyone have to swallow a pay cut. Beyond this year, management won’t make any promises. But demand will hopefully be back in recovery mode by then.

    It’s looking more likely that breakeven cash flow won’t happen until Q1 of next year. But liquidity is certainly not a problem, with billions raised, and billions more available if necessary, thanks to investment grade credit ratings and lots of valuable assets to use as collateral. It would rather avoid taking a government loan, given the ownership warrants it would have to surrender, and the prohibitions on dividends and stock buybacks its shareholders would have to accept.

    Back on the critical topic of cash flows, Southwest will have burned about $18m a day in July, which is up from $16m in June. The reason for the backsliding, as others have documented well, is the abrupt reversal in demand momentum that began in mid-June, with the Sunbelt spike in Covid cases, along with corresponding quarantines and business closures. Demand to Florida and Southwest’s home state of Texas slowed “very dramatically.” Trip cancellations are now increasing “modestly.” July bookings for all subsequent months have softened. Demand is now “much softer than we anticipated.” In response, the LCC is reevaluating August and September schedules, with an eye on beating its current Q3 daily cash burn forecast of about $23m. The fall, remember, is typically an offpeak period.

    And springtime hopes of some early bounce back in business travel now appear misplaced. August, according to company forecasts, will see a 20% reduction in y/y ASM capacity, but a 70% to 80% drop in revenues. Load factor for the month will likely be just 30% to 40%. Getting through the next half-year or so will be a “game of tactics and iterations,” said CEO Gary Kelly. “We’re prepared for a prolonged war against this pandemic.” Cost cutting will be essential, and even with promised severance payouts to departing staff, labor costs are expected to decline by $400m by Q4. With 17k people electing to leave the company though, its ability to respond to a sudden resurgence in demand will be somewhat limited. Kelly also expressed some concern about having cut investment spending to the bone.

    The carrier remains bullish on the B737 MAX, still the most efficient plane it’s ever flown. The plane could return to service by late December, though an early 2021 ungrounding wouldn’t surprise anyone. Southwest is still talking with Boeing about future delivery schedules. Would Southwest consider a second fleet type, like the A220? It’s not anything Kelly is thinking about currently.

    One thing that does remain a focus, as it was pre-crisis, is winning more managed corporate demand when the segment revives. To that end, it will offer its flights through the Travelport and Amadeus distribution platforms used by corporate travel agencies and company travel managers. The airline could not, however, reach a deal with the largest U.S. flight distributor Sabre — the two will terminate their existing relationship, however limited. (Recall that Southwest rebuffed its hometown neighbor Sabre for Amadeus when choosing a new reservation system last decade).

    On a final note, the world’s largest low-cost carrier says customer feedback has never been better, aided by its own efforts to make travelers feel safe, and thanks to much less crowded planes, airports, and airspace.
  • Of the six U.S. airlines that have thus far reported Q2 results, Alaska’s were least dreadful. To be clear, it reported a negative 139% operating margin. No putting lipstick on that. But an 82% y/y drop in revenues was less than what some rivals suffered. It cut a lot — ASMs were down 75%. But its hometown Seattle, with its leisure appeal and strong pandemic-era companies like Amazon and Microsoft, wasn’t a bad place to be. Operating costs, meanwhile, declined 48%.

    The big news for Alaska last week was its formal invitation to join the oneworld alliance, ideally before the end of this year. Its regional affiliate Horizon and even its regional partner SkyWest will join too, as affiliate members. Alaska itself will be the alliance’s 14th member, adding 34 unique destinations. Members British Airways, Cathay Pacific, and Japan Airlines all fly to Seattle, not to mention Los Angeles and San Francisco where Alaska also has a major presence. It’s most important partner, however, is American, which will rely on Alaska’s help to launch new London, Shanghai, and Bangalore service from Seattle, as mentioned in American’s earnings review above.

    Make no mistake: Seattle and the greater Pacific Northwest, including Portland, will be the chief focus of Alaska’s network strategy. The state of Alaska will always have an important place too. So will Hawaii, a market that was getting very competitive pre-crisis as Southwest began service. The giant California market by contrast, is no longer an expansion target, having realized that it’s simply too competitive. It’s still a vital market for the airline to be sure. But lots of the new routes it added from San Francisco after buying Virgin America were rolled back in the past year or so. It did announce 12 new routes from Los Angeles this month, but mostly to either its Pacific Northwest strongholds, or in a bid to generate leisure demand to Florida.

    Like other U.S. airlines, Alaska is greatly disappointed that the virus got so out of control in the Sunbelt, crushing what was becoming a robust rebound in domestic leisure travel. For a while, the carrier saw leisure demand back to about 50% of normal levels. Now, despair is building as many schools across the country delay their reopening, making it harder for parents to engage in normal business activities like travel. Companies also have duty-of-care obligations to protect the health of their workers. Hawaii, meanwhile, keeps extending its two-week quarantine rule for all visitors.

    Alaska fortunately entered the crisis with an extremely strong balance sheet. And it joined the rest of the industry in piling mountains of cash to ensure liquidity far into the future. It did say, like others, that demand needs to improve before cash flow turns positive. A true recovery to pre-crisis levels could take about two years, management believes. It’s a smaller management team to be sure, after already-enacted job cuts. Front-line jobs could be next on the cutting board, after Oct. 1. As things stand now, October capacity will be down 35% y/y. And even by next summer, capacity will likely still be down by something like 20%. Hence the likely need for job cuts.

    Alaska sees Americans falling into one of three buckets: those who will travel, those who might travel, and those who won’t travel. A vaccine or effective Covid treatments of course could change the way many people feel. Ideally, Alaska can start generating cash again in 2021, so it doesn’t have to burn through all the cash it borrowed. It can instead use the cash to repay those borrowings, and ultimately return to profitability and growth. Will oneworld membership and its new American partnership help in that regard? CEO Brad Tilden did remind Wall Street that “you’ve seen us make some of our boldest bets when things are down.” 
  • Spirit was another carrier heartened by the springtime pickup in demand, prompting it to restore more summer capacity. The move largely worked in June (for which load factor was 79%), and even as late as the July 4 holiday weekend, which the airline described as relatively strong. The second quarter ended in June though, and much of the period was sullied by Covid’s early devastation of demand. Operating margin, at negative 247%, was high compared to others that reported. One reason for that was Spirit’s workforce expansion designed to accommodate what was supposed to be another year of zealous growth. Instead, Q2 ASM capacity sank 83% but total labor costs barely budged.

    Another thing Spirit did just before the crisis was order lots of new Airbus planes. Little did it know the market for new aircraft would soon collapse. It’s arranged with Airbus to take just 12 new planes this year rather than 16, and 16 next year rather than 25. It does have 25 A319s that it fully owns, and thus economically sensible to ground if demand doesn’t pick up. A lot will depend on Florida, the epicenter of both the springtime demand revival and the subsequent summertime Covid spike. About half of Spirit’s network touches Florida, which also happens to be its home state (it’s based near Fort Lauderdale). Myrtle Beach is another major Spirit market that initially surged before a sharp slowdown.

    The misleading demand signals, in fact, caused Spirit to reduce capacity just 18% in July, a plan too bullish in retrospect. Learning the lesson, ASMs will be down 35% in August, and 45% in September. Then again, with conditions so volatile, maybe that will prove to bearish. The winter holidays (Thanksgiving and Christmas) will be an important period to watch.  What June showed in any case, was that when leisure demand to places like Florida does come back, Spirit is well positioned to benefit. It insists its cost advantage is “here to stay,” even if forced to reduce aircraft utilization. Rivals, after all, will be reducing their utilization too. And besides, most of Spirit’s cost advantage is derived from other attributes like high seating density, efficient fuel burn, and low overheads.

    How about its labor costs? Will it furlough workers? Spirit hasn’t yet made a decision.
  • Europe was different than the U.S., in that most airlines largely stopped flying early in the crisis, and in many cases didn’t really start again until July. This was the case for Finnair, which only few 3% of its normal capacity during the second quarter. In ASK terms, capacity was down 97% y/y; no U.S. airline declined more than United’s 88%. Finnair’s losses were no less severe, embodied in its negative 254% operating margin. Cargo was a bright spot, especially during May and especially on routes to Asia. This held the decline in Q2 revenues to 91%, even while barely flying passengers at all.

    Operating costs dropped a lot too, by 67%. Companies in Finland can temporarily idle workers without pay, which is exactly what Finnair did. Just as importantly, it was able to raise ample new funds via debt and equity, with the backing of Finland’s government. Helsinki thus remains the airline’s controlling shareholder. The new capital puts Finnair in a resilient position as it awaits recovery. With European countries gradually if inconsistently opening their borders, Finnair will operate about 25% of its flights this month, and 75% by September. This reactivation of flying though, will increase cash burn in the near term.

    Europe isn’t Covid free. But its spread is much better contained than in the U.S. Demand is thus returning quickly, at least to shorthaul leisure markets free of onerous travel restrictions. Finnair is also gradually restoring service to East Asia, the backbone of its network. Flights there are supported by cargo, as well as European expats returning home for the summer, and Asian residents of Europe (especially from China) going back to visit family. Overall July load factor should be about 60%. Bookings are coming in later than usual amid all the uncertainty. Finnair, meanwhile, is still working through its backlog of processing cash refunds.

    Management is now undertaking the difficult task of convincing unions to surrender permanent pay and productivity concessions. The carrier still needs to order new narrowbody jets and luckily didn’t buy too soon, before Covid crashed the market. Longterm, Finnair still aims to earn annual operating margins of 8%. By its own admission though, achieving that will now take longer than originally hoped.  
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Fleet

  • There will be even fewer opportunities to fly in a commercial B747, now that KLM is retiring its fleet of Delft Blue jumbos. The carrier announced earlier this year that its B747-400s would exit the fleet in March, instead of next year as originally planned. But it pulled its B747 Combi aircraft out of retirement to provide more cargo lift during the Covid pandemic. The aircraft flew between the Netherlands and China, primarily transporting medical equipment.

    As the pandemic begins to ease in Europe, however, the Dutch government says it no longer requires the emergency air cargo capacity. KLM will thus return its Combis—which carry passengers but have more cargo space than a typical B747—to the desert. It will however continue operating three all-cargo B747 freighters.
  • A long-running aerospace dispute at the World Trade Organization (WTO) may finally be coming to an end, to the chagrin of trade lawyers in the Europe and the U.S. For the past 16 years, Boeing and Airbus have been engaged in a legal fight, alleging each had benefited from illegal subsidies from their governments. These subsidies allegedly included launch aid for several new aircraft, including the A350.

    The governments of France and Spain agreed to change the terms of repayable launch aid to Airbus for the A350 program, thus obviating the need for U.S. tariffs. With this change, Airbus said it is now fully in compliance with WTO rulings. U.S. tariffs on European goods are harming the economies of both the E.U. and the U.S. and is making the bad Covid economy worse, Airbus said. 
  • It’s a drastic reversal. For years leading up the Covid crisis, airlines complained of an aircraft parts shortage. Delta, in response, even launched its own used parts subsidiary. It was becoming a meaningful cost problem for carriers. Now, as the consultancy Oliver Wyman explains, a surplus beckons as the industry retires more than 2,500 planes—a typical year sees only about 1,100 retirements. Expected deliveries of new aircraft, meanwhile, will likely drop 55% y/y in 2020, the company estimates. Airbus and Boeing, it adds, will likely be over-producing relative to demand “through 2022 at least.”
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Landing Strip

  • Grupo Aeroportuario del Sureste (ASUR), which runs several airports in Mexico, Colombia, and Puerto Rico, has been buffeted not only by the Covid pandemic but by the bankruptcies of three airlines that operate from its facilities: Latam, Aeromexico, and Avianca. But ASUR noted that although the quarter was grim, the company has “ample liquidity,” helped by funds from the Mexican government, and will be able to spool up when demand starts to recover. ASUR opened several terminals at its Cancun airport in order to accommodate social distancing. This is one measure that the group is using to deal with the pandemic.
  • ASUR’s Colombian airports saw the largest collapse in revenues, given the country’s stricter travel ban. Colombian airports contributed only 5% of revenue in the quarter, while Mexico’s contributed 34%. The group’s San Juan, Puerto Rico airport was responsible for more than 60% of the entire group’s Q2 revenue. Speaking of Puerto Rico, the bank Popular said San Juan arrivals were down 67% y/y in June. Hotel occupancy, a good gauge of tourism, was just 4% in April, 23% by mid-June, and 78% for the July 4th weekend. More than 90% of hotel occupants, the bank said, were local tourists. With newly-imposed travel restrictions though, “we are already seeing this positive trend reverse.” Puerto Rican residents by the way, are in fact eligible for Federal Cares Act benefits, including generous supplemental unemployment checks set to expire this month.
  • Grupo Aeroportuario del Centro Norte (OMA), which manages 13 airports in Mexico, reported that passenger traffic at its airports began to recover in June. The Mexican government’s program to ease travel regionally benefited the group, but traffic still was down 73% in the first 20 days of July, compared with 2019. For the whole quarter, traffic was down 90%, y/y. Traffic recovery will be led by visiting friends and relatives (VFR) travel, OMA said. The group already has noticed an uptick in VFR travel. Business travel, as elsewhere, is expected to lag.
  • Separately, OMA reported progress on the Santa Lucia airport outside Mexico City. The government is redeveloping the former military base as a new commercial airport to relieve congested Mexico City, after the country abandoned a project for a greenfield airport last year. Santa Lucia, Mexico City, and Toluca will operate as a system of three airports, OMA said.
  • Grupo Aeroportuario del Pacifico (GAP), which operates 12 airports in Mexico and two in Jamaica, said traffic was down 86% in the quarter. But LCC Volaris is the largest tenant in many of its airports, and GAP said traffic is increasing on the LCC’s visiting friends and relatives-focused network. The data from July are encouraging, GAP executives said on the company’s earnings call. Traffic for the first half of July was down only 60% y/y, which although grim is an improvement. In the meantime, GAP is focused on keeping costs down, even while beefing up cleaning and safety protocols.

U.K. Airports Ask for Government Support

  • The U.K.’s airports are losing $188m per day, and are on track to lose $5b this year, an industry group said. The Airport Operators Association (AOA) said traffic at U.K. airports has fallen by as much as “99%,” and is imploring the government to step in with financial assistance. AOA is asking for relief from some taxes and duties, extending payroll support, and suspending the Air Passenger Duty (long on the wish list for airports and airlines operating in the U.K.) until the pandemic eases.

    “Airports have done everything in their power to weather the storm and have done so without the specific government support afforded to other sectors,” AOA CEO Karen Dee said. “That our airports lost close to [$2.5b] during the lockdown should serve as a wakeup call to government and lead them to finally grasp the severity of the challenge and threat that the pandemic has posed and continues to pose to the sector.”
  • Airports are taking advantage of less-busy times to improve facilities. Although many projects have been pushed back by the pandemic’s effects on airport revenues, some, particularly those that were far along in construction or for which funds have been committed, are continuing. One such project is Pittsburgh International Airport’s microgrid power program. Work began on the project, which is expected to be complete by next summer. When done, the microgrid will generate 20 megawatts of power from natural gas found on site and 3 megawatts from solar. The airport’s current power demand is 14 megawatts per day.
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State of the Unions

  • Southwest, as mentioned in the Weekly Skies section above, is not resorting to job cuts yet. CEO Gary Kelly said the carrier has drawn up plans for layoffs and furloughs, but it should not have to resort to them at least through the end of this year. The carrier offered employees voluntary separation and leaves-of-absence packages earlier this month, and almost 17k employees — 27% of the workforce — took them. About 4,400 opted to leave the company, and more than 12k opted for leaves of a year or more. This will allow Southwest to avoid the first layoffs in its history, Kelly said. The employees on leave can be recalled quickly, allowing Southwest to spool up rapidly if demand returns. But Kelly said the carrier’s forecasts predict demand will remain depressed through this year. With one-quarter fewer employees, Southwest will have 25% less capacity this year.
  • More than 2,000 easyJet pilots participated in a vote of no confidence in management, BALPA said. The symbolic vote is a protest against the carrier’s plans to close bases in London Stansted, Newcastle, and elsewhere, costing more than 700 pilot jobs, which BALPA said was “unrealistic.” Such a unified rebuke of management is unprecedented in easyJet’s history, BALPA said.
  • After blasting British Airways for a plan to “fire and rehire” pilots, the BALPA pilots union instead now is proposing pilots vote on a new package of measures to preserve as many pilot jobs as possible. Although it is likely almost 300 pilots will be laid off, BALPA said its proposals could keep that number from rising. The proposal includes voluntary reductions in hours and separation; creating a pool of 300 pilots on furlough that can easily be rehired if demand returns; pay cuts of up to 20%.
  • Alaska Airlines said it is sending WARN Act notices to employees on Aug. 1. The carrier said 30% of its employees have taken voluntary leaves-of-absence, but it may need to reduce headcount further. How many furloughs or layoffs needed depends on how many more employees take voluntary separation, the carrier said. In addition, it is reducing its corporate workforce by 15%, or 300 positions, on Oct. 1. Separately, the Air Line Pilots Association said it and Alaska have reached a deal to avoid pilot furloughs and layoffs that includes leaves of absence and early retirement.
  • Demand is not returning at previously forecast levels in India, leading IndiGo to announce that it will reduce headcount by 10%, or 2,400 employees. The carrier will not lay off any of its 3,000 pilots, local media report. IndiGo had hoped to stave off mass layoffs through pay cuts and other concessions, but CEO Ronojoy Dutta said traffic has not returned to the levels IndiGo predicted at the start of the pandemic. These are the first large-scale layoffs in IndiGo’s history.
  • Air France got its main pilot union (SNPL) to accept changes that pave the way for Transavia, the group’s low-cost unit, to assume responsibility for most domestic flying. Overall domestic flying will shrink about 40%, in line with government rules tied to rescue aid—Paris wants to reduce domestic flying for environmental reasons. The airline can’t be all that unhappy, given the many years of heavy losses it’s incurred flying within France.

     Transavia, by the way, can now fly from Paris De Gaulle airport, not just Orly, thanks to the new pilot deal. In exchange, management agreed to refrain from launching any new subsidiaries like Joon, or for that matter to acquire any such airlines. There are also stipulations like the obligation to add four Transavia planes for every three mainline planes removed, the idea being to create more pilot jobs.

    Sometime before the end of this month, Air France/KLM will unveil a new post-pandemic business plan, designed to address competitive disadvantages that were hard to overcome during normal times. Sometimes, a crisis presents opportunities to do things previously impossible, i.e. achieve certain labor reforms.
  • Icelandair and the Icelandic Cabin Crew Association “managed to resume discussions and have signed a new collective-bargaining agreement.” It’s valid through September 2025 and features similar terms to an interim agreement signed in June. The company said it meets the objectives of increasing productivity and flexibility while ensuring competitive pay for flight attendants. “Due to this progress, Icelandair’s pilots will not take over responsibility for onboard safety.” The most recent cabin crew layoffs will be withdrawn.
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Routes and Networks

  • Unable to convince unionized pilots in Germany to swallow heavy pay cuts, Ryanair threatened to close several bases in the country this fall. Leading the list of vulnerable candidates is Hahn airport near (or not so near) Frankfurt. Weeze airport marketed as Düsseldorf, along with Berlin Tegel, are others possibly on the chopping block. According to the VC pilot union, Ryanair is seeking acceptance of flexible short-time work and remuneration only for flight hours flown (at “drastically reduced” daily and hourly rates), all this while increasing productivity.

    The LCC already has cost saving agreements with pilots in the U.K. and Ireland. In Austria too, pilots have agreed to cuts, but not before the airline threatened to close its Vienna base.

    Separately, there’s talk that Ryanair might want to grab the slots at Frankfurt and Munich airports that Lufthansa is required to surrender as a condition of receiving so much government aid.
  • Unable to convince unionized pilots in Germany to swallow heavy pay cuts, Ryanair threatened to close several bases in the country this fall. Leading the list of vulnerable candidates is Hahn airport near (or not so near) Frankfurt. Weeze airport marketed as Düsseldorf, along with Berlin Tegel, are others possibly on the chopping block. According to the VC pilot union, Ryanair is seeking acceptance of flexible short-time work and remuneration only for flight hours flown (at “drastically reduced” daily and hourly rates), all this while increasing productivity.

    The LCC already has cost saving agreements with pilots in the U.K. and Ireland. In Austria too, pilots have agreed to cuts, but not before the airline threatened to close its Vienna base.

    Separately, there’s talk that Ryanair might want to grab the slots at Frankfurt and Munich airports that Lufthansa is required to surrender as a condition of receiving so much government aid.
  • In other Ryanair news, the carrier is slashing capacity between the U.K. and Ireland, blaming the latter’s “blanket 14-day quarantines on all arrivals.” The LCC is more bullish on markets like Malta, where it reports a surge in bookings for summer travel; Malta is one of Ryanair’s strongest routes, the carrier said. Overall, it claims that tens of thousands of Europeans have booked flights for summer following relaxation of travel restrictions in July.
  • TAP Air Portugal began flying to Boston from Ponta Delgado in the Azores, a group of islands in the Atlantic Ocean. Most Americans are not yet allowed to enter Europe for health reasons. But TAP hopes to attract some Portuguese Americans with dual citizenship. Many Portuguese Americans, the airline said, trace their lineage back to the Azores. The flights will run three times a week this summer, with one of TAP’s new A321 NEO LRs.
  • To generate a more substantive recovery in transatlantic travel, major carriers on both sides of the ocean are encouraging governments to allow people to travel back and forth between the U.S. and Europe if they present a negative Covid test. United, Lufthansa, American, and IAG all signed a letter advocating for the plan. Is testing the answer to reopening international airline markets? IATA, which represents most airlines, accepts its potential. But the testing must be widely available. It must be extremely accurate. It has to be mutually recognized by different governments. Results need to come back quickly. And they need to be securely transmitted to relevant health and security officials.
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Covid Crisis 2020

North America

  • Throughput at Transportation Security Administration (TSA) checkpoints last week was down slightly. While the overall trend is flat, there have been week-over-week declines in the last two weeks, the first such declines since April, the worst month of the pandemic. The w/w declines confirm what airlines have said: Bookings are falling in July as Covid rampages in more parts of the country and travel restrictions go back into place.
  •  U.S. carriers are strengthening mask requirements. Southwest CEO Gary Kelly said masks will be required of all passengers over the age of two, with no medical exemptions, during all stages of flight except when consuming food or beverages. United will require passengers to wear masks in all its terminals around the world — at more than 300 airports worldwide. Meanwhile, Delta has said it has banned more than 100 people from its flights for failure to comply with mask requirements. The passengers are prohibited from flying on Delta until the mask requirements are lifted. American said it also has banned passengers, but said the number was likely fewer than Delta’s. The Dallas-Ft. Worth-based carrier also said all passengers over the age of two will be required to wear masks.

Middle East

  • Emirates is taking a novel approach to reassuring passengers. If a passenger falls ill with Covid-19 during his or her travel on an Emirates flight, the carrier will cover medical expenses up to $173k. The carrier also will cover quarantine costs of up to $115 per day for 14 days. The reimbursement is open to all passengers, regardless of fare class. Travel must be completed before Oct. 31, and the reimbursement offer is good for 31 days from completion of the first flight segment of travel.
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Feature Story

In China, people are flying again. But airlines face risks beyond the current pandemic

As most of the world suffers a deep recession, China’s economy managed to grow last quarter, by 3% y/y. But make no mistake: Its airlines face challenges no less daunting than those of its rivals abroad.

The Covid crisis hit early for Chinese airlines. The disease emanated from Wuhan, incidentally the country’s only airport—among its 25 busiest—to record double-digit growth in passenger traffic last year, according to China’s civil aviation regulator. Wuhan’s passenger volumes rose 11% y/y, to 27m, making it China’s 14th busiest airport. That’s now a quaint and distant memory. Starting in January, the virus spread, quickly enough and widely enough to force a near-freeze of all air travel nationwide during the Lunar New Year period in late January. That happens to be one of the busiest and most lucrative times of the year for Chinese carriers, underpinning strong first quarter profits in normal times. During this year’s first quarter though, the cumulative net losses of China’s four largest airlines, excluding special items, amounted to $3.7b.  

Through May, demand (measured in revenue passenger kilometers, RPKs) is down 59% y/y for all Chinese airlines. That’s on 57% less capacity (measured in available seat kilometers, ASKs). Airport traffic, which includes foreign airlines as well domestic, recorded a similar 57% decline in passenger volumes during the first five months of 2020.

But are trends improving? Monthly traffic figures suggest the answer is yes, but only marginally. Air China, for its part, recorded a 3% y/y drop in RPKs during January. The decline was 81% in February, 74% in March, 79% in April, 69% in May, and 65% in June. During just the second quarter, its load factors have stabilized between 65% and 68%. The trend, however, looks somewhat better for just the domestic market. International flying remains largely dormant, with RPKs still down 97% as recently as last month. Domestically though, Air China’s monthly traffic declines from January to June were: 2%, 84%, 63%, 64%, 48%, and 41%. Domestic load factors were 76%, 50%, 61%, 67%, 69%, and 68%. What kind of fares and yields are Air China and its peers seeing? There’s a lot less transparency on that. But with China Eastern offering all-you-can-fly weekend passes, retail sales nationwide still down by double digits, and travel distributors like Trip.com expecting to report Q2 revenue declines of as much 77%, it’s safe to conclude that revenue weakness and financial losses remain the reality, even in China’s domestic market.

Air China did face exposure to a momentary mini-outbreak of Covid-19 in its home city Beijing last month. China Eastern’s trends look a bit better, with RPK traffic for June down not 48% but 41% (on 26% fewer ASKs). Its June domestic load factor was 67%, down from 83% last June. China Southern saw only a 33% drop in June domestic traffic (and a 69% load factor).

All three of China’s national airlines are benefitting from deeper cutting at Hainan Airlines, a carrier troubled even before the crisis. Its survival required significant government assistance, details of which are murky. But what’s unhidden is a big 54% contraction in June domestic traffic, on 44% less capacity. Load factor was 73%. Hainan might be shrinking dramatically, creating opportunities—or at least relieving pressure—for Air China, China Eastern, and China Southern. But the Big Three aren’t getting any help from the low-cost carrier Spring Airlines. It’s carrying more domestic traffic this year than last, as its 10% increase in June RPKs reveals. Counterintuitively, Spring increased its June domestic capacity 18%. But not without reason. Spring needed somewhere to redeploy narrowbody planes that were flying internationally, to markets like Japan, South Korea, and Thailand. It also had a sizeable presence in Hong Kong, Macao, and Taiwan. The only other mainland Chinese carrier reporting June traffic was Shanghai’s Juneyao Airlines. Its domestic traffic dropped 33% on 17% fewer ASKs.

It’s a lot of numbers to digest, but the larger tale they tell is one of ongoing overcapacity and still rather weak demand. As Reuters reported last week, and as Cirium FlightStats data show, July reveals further progress relative to June’s number, with domestic flight departures at about 80% of normal levels, and domestic traffic at about 70% of normal levels. July though, is a peak leisure travel month. And rising demand reflects heavy fare discounting.

As they look beyond the Covid crisis, into 2021 and thereafter, Chinese carriers will have new challenges to confront. One is a world in which China’s economic relationships with other countries could look very different. A big part of China’s four-decade rise to economic superpower involved importing raw materials and exporting manufactured goods. This model generated international air traffic to all parts of the world. But greatly rising geopolitical tensions could limit future travel demand. U.S.-China relations have rarely been worse. Relations with Canada, India, Japan, Australia, Vietnam, parts of Africa, and much of Europe are likewise tense. Controversies over Hong Kong, Taiwan, human rights, Huawei, intellectual property theft, territorial claims, and military investment have many foreign governments rethinking their economic ties with Beijing. Less at risk but not immune is tourist and student traffic, with outbound demand from China a major component of economic growth for nations like Thailand and Australia, and no less an important driver of demand for Chinese airlines.

Tensions with the U.S. have already led to trade wars damaging to airline cargo revenues. Beijing’s tightening grip on Hong Kong, meanwhile, threatens the city’s status a global financial and tourism center (Air China, remember, has a large ownership stake in crumbling Cathay Pacific). China, of course, hasn’t just imported raw materials like oil, coal, and copper over the course of its economic ascendancy. It also purchased hundreds of billions of dollars of Boeing and Airbus aircraft for its airlines. As tensions have escalated in recent years though, new orders have declined sharply. Even pre-crisis, Boeing cited a slowdown in widebody sales to China as a major setback. Western countries now worry about overdependence on China for crucial medical equipment. But China is equally vulnerable with its dependence on Western-built aircraft. It’s trying to build its own planes as substitutes. Progress on its C919 narrowbody most importantly, has been slow. And besides, the C919 relies on Western technology, like GE engines. The smaller ARJ-21 plane, for its part, recently joined the fleets of several domestic airlines, which didn’t have a choice in the matter. One day, Chinese-built aircraft might be every bit as good, if not better, than those produced in Seattle and Toulouse. But that could take a decade or more, before which Chinese carriers will be forced to fly more and more uncompetitive aircraft.

Geopolitical risk might ultimately prove less threatening to Chinese airlines than it now appears. But it at least merits a rethink of pre-crisis international expansion strategies. This time last year, China Eastern, China Southern, Hainan Airlines, Spring Airlines, Sichuan Airlines, Juneyao, and Shandong Airlines were all growing international seat capacity by double digits, according to Cirium schedule data. Juneyao, on the receiving end of B787-9s, told China Daily earlier this year that it still intends to launch service to Istanbul, Athens, Manchester, and Reykjavik when the Covid pandemic resides. China Eastern and China Southern were both building major hubs at Beijing’s newly opened Daxing airport, counting on support from foreign partners like Delta and American, respectively. These plans might in retrospect seem better fit for a world that no longer exists.   

Helpfully, Chinese carriers don’t have many new widebodies on order, especially with Hainan likely abandoning B787 and A350 orders. Hainan’s contraction, as mentioned, will itself be helpful to rivals as they navigate a post-pandemic market both at home and abroad. Lower fuel costs, a managed currency, reduced need for pricey foreign pilots, tax relief, and government efforts to stimulate domestic tourism will help. So will the cost advantage Chinese carriers will continue to hold versus many of their foreign peers. Remember too that China might be the only major economy in the world that grows this year. The activity might be more domestic than international, but the domestic market is big and getting bigger. The question is, can airlines adapt?

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Around the World

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

Around the World: July 27, 2020

Airline NameChange From Last WeekChange From Last YearComments
American-4%-64%Latest borrowing initiative collateralized by the rights to its brand and logo
Delta-4%-58%Nearly 20% of its workforce has agreed to retire early; will greatly help reduce involuntary furloughs
United-3%-65%May load factor was 38%, June was 58%, July expected to be about 45%
Southwest-7%-42%Fares and schedules already available thru Travelport GDS; Amadeus soon; still no pact to distribute thru Sabre
Alaska-5%-45%Not a forecast but thinks cash bookings can get to 40% to 60% of normal by December
JetBlue-5%-47%Largest U.S. airline never involved in a merger
Hawaiian-4%-51%Hurricane Hanna headed for Hawaii; another hurricane headed for Texas
Spirit-6%-61%Sees potential to grab some airport gates and other facilities in cities where availability was limited pre-crisis
Frontier(not publicly traded)Spirit, like United said earlier, notes that the average age of its travelers right now is younger; younger also implies lower average incomes
Allegiant0%-25%American Gaming Assoc. lists Las Vegas strip as nation’s top casino/gaming market, followed by Atlantic City, Chicago, Wash/Baltimore
SkyWest-7%-54%Washington’s fiscal stimulus equivalent to 15% of GDP, notes Blackstone; could go to 20% with new Congressional spending bill
Air Canada-3%-63%Air Transat restarts limited operations after long period of dormancy
WestJet(not publicly traded)Flair Airlines, an LCC, adding several new twice-weekly domestic routes
Aeromexico14%-68%Will meet lenders in early August to discuss mutually agreeable debt restructuring
Volaris8%-42%Plans to operate about 70% of its normal ASM capacity in August; will have flown just 11%, 37%, and 55% in May, June, July, respectively
LATAM14%-83%Creditors not happy with airline’s plan to raise DIP financing from Oaktree Capital (Reuters)
Gol-9%-51%O Globo reports on crowded Rio beaches despite restrictions
Azul-6%-60%LCC JetSmart given clearance to fly Buenos Aires routes inherited from Norwegian Argentina following takeover
Copa-6%-56%China, looking to buy friends and win business in Latin America, pledges $1b loan for region to buy its Covid vaccine
Avianca1%-86%Website oilprice.com profiles Colombia’s heavy bet on oil sector which paid off in early 2010s but costly right now
Emirates(not publicly traded)President Tim Clark, speaking with Business Insider, again denies any interest in merging with Etihad
Qatar(not publicly traded)CEO Akbar al Baker speaks with Aviation Week; says demand trends up and down “like a yo-yo”
Etihad(not publicly traded)Expands “Deal Fare” product to more markets; discounted fare product for people flying without checked baggage
Air Arabia-3%1%Middle East/Turkey hoping to attract more Russian tourists as borders reopen
Turkish Airlines-2%-7%Turkey, like the U.S., not among countries whose citizens are yet re-allowed to enter EU
Kenya Airways0%-10%TAAG, Angola’s national airline, expects to lose nearly $300m this year, according to local media reports
South Africa Air.(not publicly traded)Still a lot more questions than answers on what a reconstituted SAA will look like, and where it will get its capital
Ethiopian Airlines(not publicly traded)Air Madagascar on its own after Reunion-based Air Austral breaks off ownership ties; now fully gov’t owned
IndiGo-4%-40%Weighing a plan to raise more debt and equity, Moneycontrol reports
Air India(not publicly traded)Assuring employees that no one will be laid off despite heavy company losses
SpiceJet3%-65%Bombardier lawsuit alleges breach of contract for walking away from 20 Q400s it ordered (Hindu Business Line)
Lufthansa-6%-46%Boo! New Berlin airport finally scheduled to open on Halloween, Oct. 31; will have three terminals
Air France/KLM-4%-56%Anticipation building for its new post-crisis business plan; will include thousands of job cuts
BA/Iberia (IAG)-9%-55%Iberia starting to take A321 NEO LRs; will be used to connect Madrid with the Canary Islands this summer
SAS-4%-44%Not making some required interest payments amid standoff with bondholders over debt restructuring efforts
Alitalia(not publicly traded)Hasn’t yet presented its new post-bailout business plan, or what its fleet and network will look like
Finnair-11%-92%Rival Icelandair said it suffered Q2 operating loss between $100m and $110m on just $60m in revenues; will report this week
Virgin Atlantic(not publicly traded)Restarted flying last week; has an all-longhaul, all-international, all-widebody operation
easyJet-11%-45%Adding several new routes to Croatian coastal towns in time to capture some summer demand
Ryanair-3%5%Extends removal of all change fees for another month; now, bookings made in Sept. too can be changed without any fees
Norwegian-17%-94%Norway, Poland, and especially Greece among the European countries with the lowest rates of Covid infections
Wizz Air3%-8%Unlike most airlines, and IATA for that matter, Wizz doesn’t want governments to extend waivers on airport slot usage
Aegean-4%-53%Says Q2 cash burn was “considerably lower” than forecast; flying 40% of capacity this month; 50% next month
Aeroflot6%-18%Pobeda, its up and coming LCC, gets its 31st B737-800; many more coming; supposed to get MAXs too
S7(not publicly traded)Russia and Uzbekistan discussing the possibility of jointly launching a new LCC
Japan Airlines-4%-45%Says domestic demand has been increasing since gov’t relaxed travel rules on Jun 19; but new Covid wave has bookings for Aug. below forecast
All Nippon-5%-35%Boeing likely to delay B777-X production by up to a year, Reuters reports
Korean Air2%-33%Not happening: Jeju Air walks away from plan to invest in dying rival Eastar, which isn’t happy about it
Cathay Pacific-8%-51%Pushes back delivery dates for A321 NEOs and remaining A350s on order; negotiating to do the same for B777-9s
Air China-1%-40%Affiliate Shandong Airlines, based in Jinan, expects to report first half net loss between $164m and $200m
China Eastern0%-26%Stimulating demand with all-you-can fly passes valid for weekend travel through the end of 2020
China Southern0%-26%U.S.-China tensions going from bad to worse; Washington orders closure of Chinese consulate in Houston
Singapore Airlines-2%-63%Raises another $540m through loan securitized by A350-900s and B787-10s
Malaysia Airlines(not publicly traded)Reuters explains how ASEAN region was huge market for Boeing, Airbus, and lessors pre-crisis; looks like the party’s over
AirAsia-3%-75%Seeing “increasingly strong demand;” travel searches on AirAsia.com up sharply since travel restrictions eased
Thai Airways-14%-70%Ended 2019 with 103 planes, including motley mix of A380s, B747s, B777s, A350s, B787s, A330s, and A320s (just CEOs)
VietJet-5%-22%Vietnam says no new airlines will be permitted before 2022
Cebu Pacific0%-60%Philippine Airlines, ailing even before the crisis, announces new measures to control costs and conserve cash
Qantas1%-37%Sydney airport says domestic traffic “noticeably increased” in June, versus April and May; momentum stalled however, by new travel restrictions
Virgin Australia0%-48%Company’s bondholders still pushing to torpedo sale to Bain; believe they should receive larger portion of what they’re owed
Air New Zealand2%-52%CEO Greg Foran spoke at China Business Summit in Auckland last week; hopes int’l markets will reopen before too long
Brent Crude Oil1%-31%All major private-sector oil giants losing money as crisis takes toll on energy demand

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

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