Issue No. 779

Phased Out: U.S. Airlines Look to the Past, Future

Pushing Back: Inside This Issue

Airlines are not happy with their governments. Air Canada complains of overzealous border restrictions. Asia’s airline association complains of inconsistent policies. Allegiant criticized Washington for inadequate testing and information. Ryanair is livid about government bailouts. Fair enough. But the true enemy is an extremely infectious virus which keeps on spreading. It’s creeping back into places where it was once well controlled. It’s spreading at alarming rates in some of the most populous countries, including India, the U.S., and Brazil. With some modest exceptions like the Chinese domestic market, there’s really no airline recovery to speak of. And there might not be for the rest of 2020.

Europe is seeing some shorthaul leisure recovery. But for global giants like Air France/KLM and IAG, that’s just a sideshow. The recovering Japanese domestic market is more significant to All Nippon. But Japan is backsliding in its fight to contain Covid. And forget about all that important premium traffic ANA typically carries to cities like New York and London and Sydney. Air Canada can’t do very much at all revenue-wise, with its borders sealed tight. Cargo helps a bit, but Asian carriers like Singapore Airlines are bigger cargo players, big enough to meaningfully alleviate losses. Back in Europe, the shorthaul leisure recovery, still choppy to be sure, will help Ryanair and Wizz Air prepare for what’s hopefully a more normal 2021. More U.S. airlines expressed their discouragement with current trends. Airlines in India, Brazil, and Mexico presented Q2 results as well, likewise in a cloud of great uncertainty.

More airlines report this week, including Europe’s largest airline, Lufthansa. 

Verbulence

"The Covid crisis will pass. Whether it’s in 6 months or 10 months or 12 months or 18 months, we don't know. But we will be one of the survivors, and we will be, by far and away, the most flexible lowest-cost survivor coming out of this."

Ryanair CEO Michael O'Leary

Mondays With Skift Airline Weekly

Airline Weekly got cranky. Brett "The Cranky Flier" Snyder joined host Madhu Unnikrishnan on a livestream to look back at the second quarter and talk through what might happen in the fall. Listen to the replay.

Earnings

April-June (3 Months)

  • Air France/KLM: -$2.9b/-$1.9b*; -131%
  • IAG: -$2.4b/-$1.6b*; -184%
  • All Nippon: -$1b; -131%
  • Air Canada: -$1.3b; -$251m
  • Singapore Airlines: -$802m/-$71m*; -67%
  • Ryanair: -$206m; -125%
  • Wizz Air: -$120m/-$63m*; -117%
  • JetBlue: -$320m/-$548m*; -332%
  • Hawaiian: -$107m/-$175m*; -366%
  • Allegiant: -$93m/-$95m*; -80%
  • IndiGo: -$377m; 344%
  • Gol: -$370m/-$235m*; -251%
  • Aeromexico: -$1.2b/-$323m*; -253%
  • Volaris: -$71m; -154%
  • Icelandair: -$91m/-$124m*;
  • SkyWest: -$26m/-$178m*; -45%

January-March (3 Months)

  • AirAsia X: -$132m/-$38m*; -11%
  • SpiceJet: -$111m; -30%

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

Weekly Skies

  • For many years now, Air France/KLM — the Air France part in particular — has underperformed its rivals IAG and Lufthansa, not to mention many of the world’s other global airline giants. Labor strife, high unit costs, heavy shorthaul losses, onerous taxation, sub-optimal aircraft configurations… these were some of the reasons for its chronic earnings ineptitude, despite what’s arguably the strongest global network in the business, buttressed by strong joint ventures.

    In 2019, Air France/KLM’s operating margin was a low 4%, and Air France’s alone less than half that. Lufthansa at least topped 5%, and IAG approached 13%. Naturally, there was danger in entering the mother of all industry shocks with such an unenviable history.

    Unsurprisingly, like Lufthansa, Air France/KLM needed government help to keep it from running out of cash before long. What it got was a massive $11.6b in public aid: $7.8b from Paris and $3.8b from Amsterdam. Unlike Lufthansa’s case, the French and Dutch governments did not demand an ownership stake; they each already have one, after all. But the money must be paid back, which implies a near-certain need for Air France/KLM to raise additional equity at some point.

    The aid also comes with emissions conditions. The governments, for example, demand measures to curb carbon and noise, like exiting some French domestic markets, reducing some Dutch night flying, and accelerating biofuel development. They also demand the carriers become more cost efficient, in Air France’s case freezing salary increases through 2022 and achieving unit costs comparable to Lufthansa and British Airways. KLM, already rather efficient, has to reduce controllable costs by 15%.

    Tough conditions? Yes, but also a golden opportunity to achieve a competitive cost structure, something Air France has always lacked. Major reforms, to be clear, began even before the crisis. Last year, the group signed no fewer than 40 new contracts with French unions, and another three with Dutch unions. The new agreements opened many new avenues of both unit revenue growth and unit cost reduction, including greater flexibility with respect to longhaul aircraft configurations. Cabin optimization remains an important strategic initiative longterm.

    More importantly right now, Air France, with the blessing of its pilots, can expand its LCC Transavia France. This means it can replace its less efficient Hop unit on most domestic routes, addressing a market that incurred a massive $222m loss last year. Hop will stick to handling just domestic flights to Paris De Gaulle, and operations from Lyon. In addition, Air France also aims to address low narrowbody utilization rates. KLM, with much better narrowbody utilization, will look to upgauge from Amsterdam, an airport with strict capacity limits before the crisis.

    Coping with the crisis, unfortunately, also involves heavy job cuts throughout the company. The goal is a 17% workforce reduction, with 7,500 positions gone in France, and up to 5,000 in the Netherlands. The hope is that all can be voluntary though early out packages. KLM will announce more reforms in October. Air France is still discussing further productivity improvements with its unions. Both carriers though, still intend to invest in new planes, partly for their environmental benefits, and also for their cost efficiency. Air France’s A380s and A340s are gone. So are KLM’s B747s. Transavia will expand by leasing more B737-800s. Air France will still get A220s and A350-900s. KLM will still get B787-9s, B787-10s, and eventually a replacement for its B737-NGs.

    Older planes were indeed one of Air France’s pre-crisis shortcomings. Another was its inability to dominate busy leisure and family-visit heavy routes to overseas French territories in the Caribbean. These take on a new importance with leisure and family-visit demand expected to recover before business traffic. Helpfully, 32 of its B777s can be quickly changed to a leisure-optimized configuration, with fewer premium seats. Just as helpfully, rivals like Aigle Azur and XL Airways are no longer around, while Norwegian and IAG’s Level have retreated from Paris.

    As for global business markets, Air France/KLM is still bullish longterm. In fact, even now, some of its corporate clients say they intend to fly in 2021. This summer, domestic French markets are leading the recovery. Other shorthaul markets like Algeria would probably be doing fine if not for travel restrictions. Groupwide capacity will be about 45% of 2019 levels this quarter, and 65% next quarter. Transavia is flying about half its capacity this summer. A full restoration of the group’s 2019 capacity levels probably won’t happen until 2024. But that’s just a guess. Visibility is extremely low, with customers booking extremely late.

    Financially, the airline downplayed the details of its Q2 loss margins, which for the record was negative 131% at the operating level. KLM as usual did better than Air France, but this time for the simple reason that it flew more cargo, the group’s only saving grace. The longterm financial goal remains: 7% to 8% annual operating margins, on average, by mid-decade. Positive operating cash flow, it thinks, is still possible by 2023.
  • In the pre-crisis world, IAG was the clear profit leader among Europe’s Big Three airlines, just like Delta was among America’s Big Three. With the world now in chaos, the Anglo-Spanish-Irish airline group has its collective brain weighing the necessary measures to stay on top. One reason for IAG’s outstanding performance during the 2010s was its success with consolidation. In 2011, British Airways CEO Willie Walsh formed the group while merging with Iberia, then a sickly and unreformed Spanish airline. BA itself had a swollen cost base, with labor costs too high to compete in many markets.

    To a far greater extent than its rivals Air France/KLM and Lufthansa, IAG addressed these dysfunctions, partly with brutal job cuts that triggered multiple strikes. But it took the medicine early, and in sufficient doses, enabling the outsized profit margins it would record in later years. The BA-Iberia merger itself, meanwhile, worked so well that Walsh bought rival British Midland in 2012, inheriting its precious London Heathrow slots. He then bought Barcelona-based Vueling the following year, giving IAG a profitable low-cost platform. In 2015, Walsh bought the airline he previously ran, Aer Lingus, which turned out to be the most profitable carrier in the group — attribute that to success on transatlantic routes. Not stopping there, IAG next purchased London airport slots made available when rival Monarch disappeared. Norwegian became a target in 2018, enticing because of its London Gatwick slots and attractive Boeing fleet. Walsh refused to overpay though, eventually walking away from a small investment in the Nordic LCC. 0

    But he wasn’t done. Last year, he proposed to spend $1.1b to buy Spain’s Air Europa, to eliminate Iberia’s top competitor on Latin America routes from Madrid. The deal was under regulatory review when Covid-19 became a thing, turning even IAG into a money-losing entity. Last quarter, it suffered a $1.6b net loss excluding special items, along with a dreadful negative 184% operating margin. None of its constituent airlines were spared, with BA, Iberia, Aer Lingus, and Vueling showing negative operating margins of 197%, 99%, 280%, and 137%, respectively. IAG’s other airline is Level, which was all but grounded during the quarter. The only thing providing at least some cushion was cargo, which accounted for a full half of IAG’s Q2 total revenues.

    Q3 is at least delivering some measure of recovery, particularly in the Spanish domestic market, where demand is back to about 50% of last year’s levels. That’s the strongest area of recovery so far. U.K. demand to Spanish resort destinations like the Canary and Balearic islands began showing signs of life early this summer, before a newly imposed U.K. quarantine on arrivals from Spain late last month. But U.K. bookings to other destinations like Greece are encouraging. In general, though, shorthaul booking growth overall has flattened in recent weeks as parts of Europe see an increase in Covid infections.

    In any case, IAG — unlike its U.S. counterparts — only gets a minimal portion of its revenues from shorthaul routes. It lives and dies by longhaul markets, especially to the Americas. And transatlantic travel remains highly restricted. BA still expects London-U.S. traffic, for example, to flourish over the longterm. But it will take a while. Recovery on Latin routes, IAG believes, will take even longer. For groupwide traffic levels to reach 2019 levels, it could take three or four years.

    With that bleak prospect in mind, IAG is looking to once again move more boldly and forcefully than its rivals on cost cutting. That means tens of thousands of job cuts, including as many as 9k jobs at BA alone, with the goal of reducing labor costs almost a quarter by 2022. Already, labor fights are brewing, made clear by Walsh’s criticism of the Unite union last week: “I think they’ve been completely out of touch with the reality of the situation.” Other airlines in the group will see big cuts as well. The group is also grounding planes, including BA’s premium-heavy B747s and Iberia’s A340s. It will reduce its new-plane deliveries by 68 units in the next two years. It’s adding extra cargo flights. While keeping Level’s Barcelona operations, the LCC will close bases in Amsterdam, Paris, and Vienna.

    BA just renewed its co-branded credit relationship with American Express, in a deal worth more than $900m to the airline. IAG’s Avios loyalty plan, importantly, is still contributing profits this year. There are lots of other initiatives, from outsourcing catering at Aer Lingus to cutting spend in areas like IT and marketing. And yes, IAG remains interested in consummating the Air Europa deal, but only at a much lower price.

    It’s also keen on its joint ventures with American, Finnair, Japan Airlines, Qatar Airways, and most recently China Southern. Walsh even encouraged American to do its new tie-up with JetBlue, which builds on long-held JetBlue ties to Aer Lingus. BA, for its part, works with American’s partner Alaska.

    IAG will once again need to cut costs and introduce reforms more aggressively than rivals, if for no other reason than its lack of government aid. While Lufthansa and Air France/KLM receive billions, IAG is mostly getting just temporary wage subsidies and some modest credit support. It even got a word of sympathy from Ryanair’s Michael O’Leary of all people. This does mean IAG is less restricted and can pursue takeovers and pay dividends unlike its bailed-out peers. But it also means it needs more capital from the private sector, which it’s getting through a sale of new shares, supported by its top shareholder Qatar Airways.

    Yes, it’s going to be a long, hard slog back to normality, even for an airline so strong pre-crisis. But IAG, as Walsh prepares to retire, does expect to breakeven on operating cash flows as early as Q4. It sees evidence that demand quickly bounces back when travel restrictions are lifted. Next year, ASK capacity will likely be down about 35%. Vueling could be well-placed to take advantage of an earlier shorthaul recovery. But the fortunes of BA, Aer Lingus, and Iberia will ultimately depend on demand across the Atlantic Ocean.
  • In Japan, All Nippon is lucky in one respect: It’s always been more of a domestic airline than an international airline. That should prove helpful with prospects for reopening international markets still highly uncertain. It didn’t help too much in calendar Q2 though, when ANA lost more than $1b, with an operating margin of negative 131%. Its revenues declined only 76% y/y despite an 80% drop in ASK capacity. That’s partly thanks to the gradual restart of domestic flights, as well charter flights, and a huge increase in cargo yields. But operating costs declined only 42%. Cargo actually generated almost one-third of ANA’s revenues in the quarter, compared to just 8% in normal times.

    Peach, the group’s LCC, is seeing a faster domestic traffic recovery, and in fact restored all of its pre-crisis routes. It even added two new domestic routes from Tokyo Narita. For mainline ANA too, demand started recovering in May. And this month, it plans to have about 70% of domestic capacity restored. It was of course, supposed to be very different.

    This was supposed to be Japan’s year to host the summer Olympics, which had to be postponed until next year. Instead of full planeloads of foreign visitors, ANA is instead adjusting to a new reality of much smaller global airline demand. It’s cutting pay, offering temporary leave, deferring aircraft deliveries, and postponing product upgrades.

    Big bank loans will protect it from a liquidity crisis. But it didn’t get too much government help beyond wage subsidies and some relief on airport costs and the like. Looking beyond the crisis, ANA will have Peach try to drum up more demand from areas outside of Tokyo and Osaka. Brisk mainline international growth, supported by partners like United, Lufthansa, Vietnam Airlines, and Philippine Airlines, remains a longterm goal. This is an airline heavy on premium business traffic, however, which likely won’t come back anytime soon.
  • Canada might have the most severe travel restrictions of any major country worldwide. And at the same time, it’s providing less financial support to its airlines than almost any other rich-world country. No wonder why Air Canada sounds frustrated with Ottawa, saying it’s rare among the world’s 20 largest airlines to have not received a big relief package. As for the travel restrictions, borders are pretty much closed to all foreigners, and even Canadian citizens must quarantine upon entering the country. What’s more, individual provinces within Canada have in some cases established their own border controls.

    Air Canada says it welcomed Ottawa’s early moves to refuse entry from high-risk countries. But it can’t understand why it won’t even relax restrictions for low-risk countries, especially in light of how important air service is to Canada’s highly internationalized economy.

    Fortunately, with a strong pre-crisis balance sheet and plenty of available sources of new capital, Air Canada will be just fine in terms of bankruptcy risk (it filed once in 2003 and came close to a second filing in 2009). The good news is that Air Canada has a decent-sized cargo market which flourished last quarter. Also, because of the onerous travel restrictions, rivals like WestJet, Air Transat, Porter, and TUI’s Sunwing barely operated at all, even domestically. Air Canada itself had to reduce Q2 passenger ASKs 92%, more than any U.S. airline except Hawaiian (see below). Thanks to cargo and special charters for purposes like repatriation, revenues fell a bit less, by 89%. Operating costs though, fell only 57%, leading to a negative 251% operating margin. Its total revenue by the way, even with cargo, was less than what Alaska Airlines generated last quarter.

    Like all other airlines nowadays, Canada’s largest airline is downsizing its fleet, its network, and its cost base. Some government wage help through December notwithstanding, it’s cutting 2k jobs, some voluntary, some not. It’s ending service to eight regional airports. It’s reviewing capacity with its regional partner Chorus. It’s retiring all B767s, A319s, and E190s, 79 planes in all. Q3 capacity will be down 80% y/y, with service to 91 destinations this summer — that’s roughly double May’s number but half last summer’s number.

    Are there any positive signs? Some. Unlike the rise and fall pattern of U.S. domestic bookings, Canadian domestic books have been better in the past three or four weeks than in the three or four preceding weeks. Management thinks the typical summer vacation period will be extended this year, and bookings to the Caribbean in particular is starting to see some activity. Domestically, transcontinental routes, and routes within western Canada, have been first to show green shoots.

    Canada, encouragingly, is among the countries on the E.U.’s low-risk list. Air Canada is focusing its European flying on leisure routes like Rome and Athens, and on Star Alliance hub markets like Frankfurt. New A220s are a good fit for many North American markets. The airline still plans to unveil a revamped loyalty plan in Q4, after buying back control of its plan last year. A newly installed reservation system offers additional revenue potential. Air Canada-branded credit card spending on items other than travel is back to 2019 levels.

    It sees airline partnerships as key to generating enough traffic during tough times, hence an interest in doing more interline deals. Japan, where ANA is a Star partner, is one market it’s eyeing for more cooperation. Rivals without domestic markets, meanwhile, like the Gulf carriers and Singapore Airlines, will face a difficult time in the post-Covid age, Air Canada says.

    Not that its own path back to profits will be easy. It expects to burn about $12m a day this quarter. Corporate travel could take even longer to rebound with companies like Google extending their work-from-home policies. The vital U.S. border, all the while, remains essentially closed. Al lright, but what about Air Canada’s deal to buy Transat, subject to regulatory review? It refuses to comment, but in light of IAG’s intent to the cut the purchase price of Air Europa, there’s surely a desire to renegotiate.
  • Air Canada is right. Singapore Airlines doesn’t have a domestic market. And it’s extremely dependent on premium intercontinental demand. As such, it seems terribly positioned for the next few years. But hang on. Singapore Airlines last quarter had one of the least bad results of any carrier worldwide. It lost just $471m net excluding items, with a negative 67% operating margin. Bad for sure, but any margin in the negative double digits seems downright heroic in these times.

    What’s the answer to the Singapore riddle? It’s cargo, which provided nearly 80% of calendar Q2 revenue, and which held the company’s total y/y revenue decline to 79%, even though it barely flew any passenger flights. Most of its other revenue in fact, came from its maintenance division. With a highly variable cost base, meanwhile, the group was able to reduce operating costs by 64%. Singapore has seven freighter jets carrying just cargo. And it now has more than 30 passenger planes carrying just cargo. Another 119 planes, sadly, are sitting idle at Changi airport, and still another 29 are idled in the Australian desert.

    Much of the carrier’s pre-crisis strategy is up in smoke, including its ownership positions in bankrupt Virgin Australia and the recently shuttered NokScoot in Thailand. A380s are a drag. Same, potentially, for the large B777-9s it ordered. It’s now looking to defer aircraft deliveries, while undertaking a broader review of its fleet and network.

    There’s no liquidity crisis for sure — Singapore was quick to provide its national airline a giant aid package. But that doesn’t ease anxiety about future demand, which is returning more slowly than expected. Some recent easing of travel restrictions will help in select markets. Travel is now permitted between Singapore and some Chinese cities, for example. There’s movement on relaxing restrictions with Malaysia and Europe. Singapore Airlines can now carry one-way connecting traffic via Changi — originating in East Asia, Europe, or Australasia — to any point in its network worldwide.

    Yet, capacity this quarter will still be just 7% of pre-crisis levels. By the end of the quarter, it expects to be serving just 24 cities, up from 14 today. Scoot, as a low-cost carrier with shorthaul planes, might fare better in the difficult period between now and vaccine salvation. Silk Air, a full-service narrowbody operator, will still get phased out and integrated with mainline, in line with pre-crisis plans. Armed with new B787s, Singapore’s Vistara joint venture in India seems well positioned to become India’s leading intercontinental airline, for when such a distinction is coveted.

    Just prior to the crisis, Singapore Airlines forged deeper commercial ties to Malaysia Airlines and All Nippon. It might yet retain a joint venture with the revamped Virgin Australia. It’s definitely true: Being so highly exposed to the intercontinental corporate segment promises trouble in the next one to three years. But on a brighter note, it’s also well-placed to take advantage of China’s first-mover economic rebound, and tourism demand to places like Vietnam, Thailand, and Australia, where Covid cases have been low.

    Getting any mileage out of that, however, still requires an easing of border restrictions, which can’t come too soon for Singapore’s flag carrier.
  • Back in Europe, Ryanair finds itself in the unfamiliar position of losing large sums of money. But simultaneously, it’s in the familiar position of being among the best capable of dealing with those losses. Believe it or not, the Irish airline is more or less breaking even on cash this summer, which is really the most meaningful metric to watch right now. Unlike carriers in the U.S., Ryanair essentially grounded its entire fleet for almost four months, from mid-March through June. That left it with calendar Q2 revenues of just $139m, mostly from tickets purchased but unused after 12 months. This represented a 95% y/y decrease in revenues. By not flying, costs fell sharply too. Its costs are highly variable. It cut pay in the quarter by 50%. But still, total operating costs dropped by only 85%, with depreciation its largest line item, followed by labor. Net loss amounted to $206m, while operating margin was negative 125%.

    Operations restarted on July 1, with about 40% of normal capacity levels for this month. Next month, that will rise to 60% of normal. Then 70% in September assuming Europe avoids a second wave of Covid infections. The risk of that is substantial though, based on a current spike including one in Spain that caused U.K. officials to abruptly halt flights to the nation. Ryanair mentioned Barcelona as one market where a Covid outbreak has affected demand this summer. It’s watching now to see if its British customers with tickets to Spain change their reservations to Portugal, Italy, Greece, or some other alternative holiday spot.

    Like other airlines, Ryanair is temporarily allowing ticket holders to change their itinerary for no additional fees. All of its tickets remain nonrefundable though, unless of course Ryanair itself cancels your flight, and last quarter it cancelled nearly all flights. The airline says it will have 90% of cash refund requests handled by the end of this month.

    Aside from a second virus wave, Ryanair worries about the lingering uncertainties tied to Brexit, including the still-unresolved issue of airline flying rights between the U.K. and E.U. after this year. At the same time, the carrier is frustrated at the uncoordinated and in its opinion ineffective border restrictions that still exist within Europe, with Ireland among the most restrictive. Looking ahead to the next few years, one of Ryanair’s biggest concerns involve all the state aid its rivals are receiving.

    In his always-colorful way of describing things, CEO Michael O’Leary called it “giving monkeys machine guns,” in other words, handing failing carriers ammunition to dump low fares. He names Lufthansa, Air France/KLM, Alitalia, TUI, TAP Air Portugal, Finnair, Condor, SAS, and Norwegian, ordered by the amounts they received. Ryanair insists the aid is illegal, distorting competition. In some cases, governments are also imposing new taxes that disproportionately hurt LCCs. On the other hand, the same carriers getting bailouts — along with other rivals like easyJet — are slashing capacity and cancelling aircraft orders. easyJet is in fact closing its base at London Stansted, Ryanair’s busiest airport.

    Retreats like this, some at airports where slots were previously hard to get, will make Europe’s airports keener than ever on offering Ryanair incentives to launch flights. That heralds lower airport costs in the future, to go along with other key drivers of future cost reduction. One is the B737 MAX, which Ryanair hopes to finally have by Christmas, which could have it flying about 40 for next summer. The plane, it believes, will result in a “seismic” reduction in unit costs, never mind that it’s also renegotiating the price of the planes with Boeing (separate from compensation for delivery delays that it expects to receive). The airline would also consider adding more A320-family jets at its Lauda Air unit if the price were attractive enough.

    Ryanair separately thinks fuel will stay rather cheap for the next few years. Lower traffic volumes across Europe should greatly reduce air traffic control delays that plagued the industry pre-crisis. Also contributing to future cost savings: The company’s use of subsidiaries in Poland (Buzz), Austria (Lauda Air), and Malta (Malta Air).

    Then there’s the aggressive pay cutting Ryanair is forcing crews to swallow, in exchange for preserving jobs. It has new pay deals with about three-quarters of its crews across Europe, including those based in the U.K. and Ireland. It’s having a tougher time getting to yes in Germany, where it’s threatening to close three bases this fall. It might close bases in Italy too. At Lauda Air in Austria, it used the threat of closing its Vienna base as a cudgel to secure support from reluctant unions. The deals do promise to restore pre-crisis pay rates in the future. But they also feature productivity improvements for the carrier, like the right to schedule crews for five days on and two days off, providing flexibility to ground planes on offpeak Tuesdays and Wednesdays if deemed appropriate on certain routes. And although it’s avoiding layoffs for now, it makes no promises about the future.

    Is Ryanair receiving state aid itself? It did avail itself of about $770m in U.K. government loans, which it aims to repay relatively quickly. It’s also benefitting from some government wage support programs in various countries. It sees no need to borrow any additional money or sell any additional shares. It is after all, as mentioned, a rare airline that’s not burning through cash this summer. Which isn’t the same thing as earning profits — Ryanair actually expects to lose more money in calendar Q3 than it did in calendar Q2. Keep in mind that it’s still operating subscale, with lowish load factors and yields. It expects to fill about 70% of its seats this month, which is better than the 60% it was expecting. It sees something similar for August.

    Bottom line: Ryanair is losing money like everyone else during the worst crisis to ever hit the global airline industry. But it’s managing just fine without a giant government bailout, and without excessive borrowing. If a successful vaccine arrives by the first half of 2021, Ryanair even sees the possibility of a good summer. Its balance sheet is strong. And its fares and costs are Europe’s lowest.

    For the record, Ryanair’s shares are widely distributed, but its two largest shareholders currently are banking giant HSBC and the Scottish investment firm Baillie Gifford, each with 6% stakes. Michael O’Leary owns 4% of the company.
  • Wizz Air is like Ryanair’s clone to the east, with a similar business model and just as successful. It too faces short-time pain from the coronavirus like everyone else, manifesting itself in a negative 117% operating margin for calendar Q2. Wizz like Ryanair entered the crisis with an investment-grade balance sheet, which it still retains. And it likewise has enough cash to operate well into 2021 even in a worst-case revenue situation. Last quarter, revenues declined 87% y/y on 88% less ASK capacity, while operating costs dropped 67%. They would have dropped more were it not for bad fuel hedges, a curse plaguing most European airlines.

    After flying just 3% of its capacity in April, Wizz flew about 70% in July, which compares to about 40% on average for other European airlines. Cash burn isn’t as severe as anticipated and might even hit zero this quarter — management emphasizes that a lot is still uncertain. It’s seeing some normalization of its booking curves, generating about half of forward revenues within three weeks of departure, compared to earlier in the crisis, when half of revenue was booked within seven days. The airline, owned by the U.S. investment firm Indigo Partners, is updating all commercial contracts with more favorable cost and payment terms. It’s “obsessed” with further variablizing its cost structure.

    But more than just scrambling to survive like most airlines this summer, Wizz Air is spending at least as much time making moves designed for longterm benefits. It’s not just playing defense, in other words, but an aggressive offense as well. For example, it’s launching a new joint venture airline in Abu Dhabi this fall, starting with two A321 NEOs.

    Speaking of the NEOs, it’s one of the plane’s biggest customers. And it’s a rare airline not delaying deliveries. It’s in fact getting some earlier than its pre-crisis plan, with Airbus no longer plagued by production delays. This will allow Wizz to have a bigger fleet by next year’s summer peak, when it hopes demand will be much stronger. The airline is also spending a lot of time rebuilding its network to meet the times, reallocating 22 of its planes for example, from areas of slow recovery (i.e. places with the strictest border closures like the U.K.) to relatively more buoyant markets.

    It’s opening eight new bases, including Milan Malpensa, Albania’s capital Tirana, and even Russia’s second city, St. Petersburg. It’s announced more than 200 new routes since the crisis, never mind that capacity is still down about 30% y/y overall. It seems to see all the state aid rivals are getting as more of a nuisance than a threat, especially since most recipients are simultaneously slashing capacity. Wizz itself expects to grow some 40% to 50% in the next three years and even contemplates ordering more planes before its current NEO order is done delivering. It’s about as bullish as an airline can sound these days.

    Said CEO Jozsef Varadi: “We have been waiting for this moment for 10 years.” He’s excited, in other words, about the enormous opportunities the crisis presents as rivals downsize or disappear, and as industry costs drop sharply. During the financial crisis a decade ago, Wizz he said didn’t yet have the scale, the balance sheet, and the aircraft capacity to really take advantage. Now it does. “This is the time that sorts winners and losers.”
  • Our number one focus is cash, cash, cash.” So said JetBlue’s CFO Steven Priest, echoing the new golden rule of airline economics in the Age of Covid. The New York-based airline, like its peers, has plenty of cash thanks to healthy capital markets, a strong pre-crisis balance sheet, and sustained appetite among leasing companies for buying modern narrowbody  jets. Specifically, JetBlue began Q2 with $1.8b in liquidity, burnt through $691m running the airline, spent another $67m on aircraft and other capital purchases, and still another $78m repaying old debt. But it also borrowed $1.3b from banks. It got $936m in federal payroll support. It sold $150m worth of TrueBlue miles to its credit card partner Barclays. It raised $118m through sale-leaseback deals. So it ended the quarter with $3.4b in liquidity, with plenty more available if needed through a variety of sources, including federal government loans.

    As for the currently less meaningful loss metric, JetBlue’s Q2 net result was $548m in the red. Operating margin was negative 332%, worst except Hawaiian among all U.S. carriers that have reported thus far. Revenues were down 90% y/y, on 85% fewer ASMs. Operating costs were down 50%. Somewhat like Wizz Air, JetBlue is playing network offense even while in cash preservation mode. It made a big splash with a major expansion plan for Los Angeles LAX, while closing its longtime Long Beach operation. It’s also creeping onto United’s turf at Newark, with new transcon flights for example. It grabbed two additional gates in Fort Lauderdale and eyes more connections through the airport, to and from the Caribbean/Latin region.

    A revived alliance with American in the northeast gives it more heft in selling international destinations via New York JFK and Boston. All the same, it still intends to fly its own A321LRs to London next year. But first it has to get through this year, with reducing cash burn its most immediate priority.

    Encouragingly, it thinks it can make it through the end of 2020 without many involuntary layoffs, thanks to a large number of workers willing to accept temporary or permanent leave. With pilots, it promised no layoffs through March 2021 in exchange for scope clause relief, including the right to partner with American. As Congress debates a next round of stimulus by the way, further relief for airline workers is under discussion — one idea is to extend payroll support for another six months. JetBlue isn’t counting on that. It’s instead busy cutting costs where it can, and variablizing its cost base; one way it’s doing that is by changing supplier contracts to tie its obligations to how profitable it is.

    As for cash burn, it dropped to $8m a day by the end of Q2, after hitting $18 a day in April. Unfortunately, with the recent Sunbelt Covid spike that derailed the nascent demand recovery, JetBlue is now seeing cash burn inch back up, with daily burn of between $7m and $9m forecasted for all of Q3. The fate of northeast-to Florida demand is clearly important to the airline, as is transcon demand and family-visit demand to Puerto Rico and the Dominican Republic. All three were showing signs of life before the Covid spike, unlike for example, shorthaul routes within the northeast. Bookings currently, it said, are “choppy.”

    Executives are planning for a variety of different scenarios, good and bad, with cash preservation its immediate focus, followed by rebuilding profit margins, and then working to restore its balance sheet to pre-crisis health. How long will that take? It’s as much a question for vaccine producers as it is for airlines. But JetBlue’s best guess is an L-shaped recovery for now.

    Interestingly, in the past week or so, it has seen bookings for its Vacations product reach similar levels as last year. Most of its traffic is family visit or leisure related, which everyone expects to recover more quickly than business traffic. A220s will soon arrive, alongside additional A321 NEOs. It’s pushed back some deliveries though and might accelerate retirements of older A320s and E190s. Caribbean countries are starting to relax border restrictions. Middle seats are still blocked though Labor Day at least. But the costs are modest, with less than 10% of flights actually booking to the maximum.

    In any case, the summer quarter won’t be pretty, with July-to-September capacity expected to be down 45% y/y, but revenue down 80%.   
  • Since the start of the crisis in mid-March, Hawaiian has flown the least of any U.S. airline, due to the strict 14-day quarantine its home state has required for all visitors. Late in Q2 (June 16), Hawaii lifted restrictions on inter-island travel, allowing Hawaiian to restart some shorthaul routes, which are running about 40% full. But the quarantine for outsiders remains. It was thus a very bloody second quarter, even by the standards of the crisis, with operating margin at negative 366%. More importantly, cash burn was about $4m a day, and should drop to $3m this quarter. Cash won’t break even, management said, until demand shows some measure of improvement.

    Like other U.S. airlines though, it’s been able to raise cash from capital markets, to obviate any near-term bankruptcy concerns. Hawaiian too, has seen the “velocity” of bookings slow in the past few weeks. And it sounds like involuntary job cuts are unavoidable. The airline is however working with unions to increase take-up of voluntary leave options. It’s separately taking to Boeing about pushing back B787 deliveries. It will take the government CARES Act loan on offer. It’s doing sale-leaseback deals. It’s gradually adding back U.S. West Coast routes, if not yet international routes to key markets like Japan.

    This quarter, it will likely operate just 15% of its originally planned ASM capacity. By next summer, it still expects capacity to be down 15% to 25% from 2019 levels. It’s currently capping load factors at 70% to ease traveler health concerns. It’s of course, removing as much cost from its business as possible, understanding that big capacity reductions create diseconomies of scale and unit cost inefficiencies.

    A hurricane created an added headache last week, avoiding a direct hit on Hawaii but forcing the airline to move its fleet to the West Coast to avoid damage. Hawaiian, to be sure, has confident in the longterm attractiveness of Hawaii as a premier tourist spot. But it also expressed concern about the longterm damage the Covid crisis is inflicting on Hawaii’s tourism-centric economy. Almost everything depends on it, including even the state’s agricultural sector, whose biggest customers are tourist hotels.
  • Allegiant calls itself the “best of the worst,” with a Q2 operating margin of negative 80%, a lot better (or should we say less worse) than all of its rivals. In fact, of all the airlines that reported so far, only Singapore Airlines and SkyWest did better. Allegiant cut its flying a lot less than most airlines, with ASMs down y/y by only half during the quarter. Revenues declined a lot more, by 73%, but this was still a milder drop than seen elsewhere. It’s also burning less cash (less than $1m daily last quarter). It has the most variable cost structure of any U.S. airline. And it hasn’t had to hurt investors with any new stock or convertible bond issuance. Instead, it fortified liquidity with measures like executing sale-leaseback deals and suspending work on its Sunseeker hotel project.

    Importantly, the LCC made money in June, when markets like Florida and Arizona were showing vibrancy. Disappointment followed though, as the Sunbelt Covid spike crushed the momentum. The much-anticipated reopening of Disneyworld in Orlando wound up providing hardly any demand boost. Las Vegas is now seeing a bit more action but not much. Hopes are now pinned on the winter holidays, meaning Thanksgiving in November and Christmas in December. And if not that, then heaven forbid if demand remains depressed into Florida’s peak season next spring — it’s not atypical for Allegiant to earn 20% to 25% of its entire year’s profits just in the super-peak month of March.

    Fall is typically the worst part of the year, and Allegiant will undertake its usual schedule reductions in Q3, relative to Q2. One dilemma it’s having is an inability to extract contract concessions from pilots, forcing it to consider layoffs. It already eliminated some non-union management and administration jobs. It’s making progress in talks with other unions. But the balance at play here is the need to cut pilot costs without sacrificing the ability to take advantage of sudden upturns in demand. As success in June showed, it doesn’t need demand to bounce much for it to make money. There’s certainly no doubt that costs will need to decline for the carrier to hit its goal of breaking even on cash flows by year end.

    Separately, Allegiant identified some new trends it’s seeing with respect to leisure travelers. Its own customers are typically price-sensitive and use their own money to purchase tickets. That’s different from a typical leisure traveler on say, United or Delta, who buys their seats with miles earned while traveling for businesses. Now that there is no business travel, where will these people turn? To airlines like Allegiant? Internal surveys say Allegiant customers are willing to travel and have stable incomes. The carrier also sees more people working remotely at a vacation rental property. And it sees a reverse travel pattern of people in leisure destinations like Orlando, Phoenix, and Los Angeles traveling outbound to nature destinations like Yellowstone National Park and the Smokey mountains.

    Make no mistake: Allegiant CEO Maury Gallagher isn’t happy with Washington’s handling of the Covid crisis, citing inadequate testing and information. When the crisis does end, the airline might have another headache: New startups like Breeze adopting Allegiant-like business practices.
  • A large jump in Covid cases in India has airlines like IndiGo wondering if the worst is yet to come. It’s hard to get too much worse than Q2, when India’s largest domestic airline spilled $377m in red ink. Operating margin was negative 344%. A 92% y/y reduction in revenues was consistent with a 91% y/y reduction in ASK capacity. Only on May 25 were Indian carriers allowed to restart domestic flights, and only just a quarter of their normal capacity.

    As for IndiGo’s operating costs, they dropped just 60%, because labor costs dropped just 18%. IndiGo sees no alternative to steep pay and job cuts. While taking new NEO deliveries, they’ll be offset by lease returns. For cash, it’s doing more sale-leaseback deals. Charter flights for repatriation and other purposes are providing a bit of relief. Same for cargo, where executives see potential even in the longterm. Passenger volumes are low, but yields are decent.  It hopes to ramp up to about 60% or 70% of normal capacity soon but that depends on government travel policies.

    Right now, travel restrictions exist even between various Indian states. The government is also capping fares. Unfortunately, July was a terrible month for infections and fatalities, with Mumbai seeing the worst of it (IndiGo is headquartered near Delhi). Sure enough, the carrier said last week that bookings started to weaken in late July after strengthening through most of the month. Seasonality, though, might be part of the explanation. In any case, the trend is highly volatile and unpredictable, meriting a very short-term planning horizon.

    Longterm, IndiGo’s optimism remains “undiminished.” With 274 planes, it already has scale. It might yet jump into the intercontinental market, with cheap fuel making the prospect more attractive. It also sees Gulf carriers in retreat, relying too much on connecting traffic.

    Said CEO Rono Dutta: “There are almost 20 different ways you could book from Delhi to London, through Oman Air and Saudi Air and God knows who else is there. So as this one-stop becomes less competitive to nonstop, I think that’s an advantage.” Dutta adds when asked about India’s national airline: “At this point, we’re not interested in Air India.

    At home, it sees lots of potential in train-to-airline substitution. The immediate concern is getting costs down, noting that low aircraft utilization is currently one of its biggest problems. Right now, Dutta said, IndiGo’s unit costs are “obnoxious.” 
  • Also in India, IndiGo’s fellow LCC SpiceJet reported results, but for the January-to-March quarter, not yet the April-to-June quarter. No wonder why it wasn’t in a rush. Net loss was $111m. Operating margin was negative 30%. India isn’t providing much fiscal support to its airlines, leaving carriers like SpiceJet — with less balance sheet strength than IndiGo — struggling to survive. B737 MAX delays are no longer its biggest problem.

    Entering the cargo market pre-crisis proved a godsend. Now it’s looking to fly widebody charters overseas, perhaps as a way to test the waters of more permanent intercontinental offerings.
  • On July 9, the Brazilian airline Gol told investors to expect an operating profit during the second quarter, excluding special items. As Q2 results published last week show, however, it took a very generous definition of special items, ignoring all the costs (notably depreciation and crews) associated with its 130 grounded planes.

    In reality, Gol was just as badly wounded by the Covid virus as the rest of the industry, incurring a stated operating margin of negative 251%. Its accounting net loss was $370m, though this included some widely recognized special items like forex losses.  Gol cut its Q2 ASK capacity 91% y/y, leading to an 89% decline in revenue. Operating costs declined 56%, even though fuel outlays dropped 86% and labor costs 71%. Gol indeed has a highly-variable cost structure and quickly secured new labor agreements to help it avoid the fate of its rival Latam, which filed for bankruptcy.

    It hopes to soon strike further cost-saving and liquidity-enhancing deals with its aircraft lessors — Gol leases 100% of its fleet. Ensuring adequate liquidity is no doubt a challenge, especially with many international investors shunning Brazilian companies, deterred by the country’s macroeconomic challenges. Weighing on the country’s airlines last quarter was a sharp depreciation of the Brazilian real, though this is less of a problem with fuel prices so low.

    Gol does qualify for a loan backed by Brazil’s development bank. But that could take a few months to finalize. In the meantime, it’s scrambling to preserve and raise cash, executing a forward sale of frequent flier miles, for example, and stopping pre-delivery payments to Boeing for its B737 MAXs on order. At the same time, restoring flights to capture recovering demand requires up-front cash — it’s a tricky balancing act. Demand did start coming back in late May, and bookings recently have shown growth of about 18% week on week.

    Management contrasted the impact of Covid-19 on different social classes in Brazil, with wealthier people — typically the only Brazilians who fly — less affected than the poor. Cities like São Paulo are reopening businesses, and Gol expects businesses to start flying again as early as next month, which coincides with the start of South America’s spring season. About half of Gol’s pre-crisis customers were flying for business, and half of those flying on corporate contracts. Right now, aside from small numbers traveling with health and infrastructure companies, most traffic is leisure or for family visits.

    This month, it’s adding service from Salvador to northeastern cities to capture more of this non-business demand. More of its passengers, furthermore, are currently connecting through one of Gol’s hubs. With the expected pickup in business travel, the LCC will next restore more capacity at São Paulo’s Congonhas airport. By the end of December, during the country’s summer peak, Gol hopes to have about 80% of its normal capacity flying again. It’s also watching as rivals Latam and Azul cut capacity, but also cooperate with each other.   
  • Aeromexico, which filed for bankruptcy on June 30, posted a massive $1.2b Q2 net loss, though the figure was more like $323m excluding special items. Revenues declined 85% y/y on 78% less ASK capacity. Operating costs declined 45%. Mexico’s largest airline has no doubt that it can emerge from its court-supervised restructuring, as a stronger airline with lower costs. It will retain close ties to Delta, with which it operates a transborder joint venture.

    But before it thinks about strategy, more immediate tasks include securing debtor-in-possession (DIP) financing and restructuring contracts with suppliers, lenders and unions. DIP loans are unique to the U.S. bankruptcy process, allowing new lenders to come in and provide capital, while moving to the front of the line when it comes to claims on the company’s assets, ahead of previous lenders.

    Aeromexico is already using its bankruptcy rights to return some unwanted aircraft to lessors. As a major B787 and B737 MAX customer, its most important supplier is Boeing. One tiny bright spot last quarter was a 36% y/y increase in cargo revenues. Much less helpful was a sharp y/y depreciation of Mexico’s currency against the U.S. dollar.

    In June, domestic load factor was 68%, down from 83% a year ago. Now that it’s in bankruptcy, Aeromexico did not hold its usual quarterly investor call.
  • Aeromexico’s ultra-low-cost rival Volaris finds itself in the relatively privileged position of carrying mostly shorthaul family-visit and leisure traffic. Like Wizz Air (and Frontier and Jetsmart), Volaris is owned by Indigo Partners, which three years ago placed a massive Airbus NEO order for all four carriers. Volaris still intends to take its share, eyeing to have NEOs account for 60% of its fleet by 2023, double the current ratio. That said, it did defer about 20 orders into the late 2020s.

    As strange as it sounds, if your operating margin was better than negative 200% last quarter, you were among the better performing airlines. And the figure for Volaris? Negative 154%. Revenues, ASM capacity, and operating costs declined by 82%, 77%, and 50%, respectively. This quarter, it expects to burn between $40m to $45m per month, which is less than $1m a day. Like others, it’s further variablizing its cost structure, in part by negotiating concessions with some 360 suppliers. It flew 60% of its June capacity and expects to ramp that up to 70% this month. To help generate extra cash, it’s selling tickets as far out as next fall. It sees domestic demand reaching 65% to 75% of last year’s levels by year end, in volume terms anyway (fares will remain depressed). Bookings look pretty good for the first half of 2021. More recently, bookings have softened but this was offset somewhat by lower no-show rates.

    Which markets are outperforming right now? Tijuana, which sits across the border with San Diego, is already back to last year’s levels of traffic, driven by family-visit demand. Guadalajara is a similar story. The second-best group of markets are beach places like Cancun, Los Cabos, and Puerto Vallarta, driven by domestic leisure demand. Volaris is allocating less capacity to transborder markets, given travel restrictions. But already by the end of this month, it plans to be operating most of its U.S. routes, albeit with significantly fewer frequencies per week. That’s consistent with a broader network approach right now of emphasizing breadth over depth; in other words maintaining most routes but with slimmer schedules.

    One longtime cornerstone of the Volaris business model is its aggressive courtship of long-distance bus travelers. And it wasn’t beneath management to warn that poor ventilation on busses could be hazardous to your health. About half of the carrier’s customers are visiting friends and family, many of whom would consider bus travel an alternative. Aeromexico’s bankruptcy of course presents opportunities for Volaris, not least the chance to grab scarce Mexico City slots, which it’s indeed doing. (As an aside, cancelling construction of Mexico City’s new mega-airport no longer looks so damaging for the country in retrospect). There’s also scope to benefit from Avianca’s bankruptcy, specifically in Central America.

    Volaris more generally sees the crisis as a “once in a lifetime opportunity” to improve the fundamentals of its business not least its already-low cost structure. It claims to have the strongest balance sheet among Mexico’s four biggest airlines (the others are Aeromexico, Interjet, and fellow ultra-LCC VivaAerobus). Its co-branded credit card is performing relatively well. Worker remittances from the U.S. to Mexico, which typically correlates with family-visit and migrant traffic, is near all-time highs. The airline has an upgraded website and reservation system. During Q2, it took 1.1m bookings for future travel.

    And no, video calls won’t replace air travel. To quote the carrier’s number-two executive, Holger Blankenstein: “A trip to the beach cannot be replaced by a conference call.”
  • Icelandair was a broken airline even before the Covid crisis. It did after all lose almost $60m last year. All right, so B737 MAX delays were a big reason for that. But anyway, there’s no argument about Icelandair’s broken balance sheet right now, after incurring a $124m net loss excluding special items last quarter. Only thanks to its sizable cargo business did total revenues only drop 85% y/y, despite a 97% cut in passenger ASK capacity.

    Like its Nordic rivals Norwegian and SAS, Icelandair is attempting to achieve a bankruptcy-like restructuring of its costs without actually resorting to bankruptcy. Also like Norwegian and SAS, it’s only hope of riding out the crisis is raising additional cash with government support. Indeed, Iceland’s government is guaranteeing a loan, on the condition that the airline undertakes a successful share sale next month. Investors who take the plunge will own an airline well-placed to take advantage of any future recovery in price-sensitive transatlantic travel.

    Icelandair will also have much cheaper and more flexible labor agreements after securing multi-year concessions from pilots, flight attendants, and mechanics. To complete its restructuring, it also needs concessions from lenders, aircraft lessors, credit card processors, fuel hedge counter-parties, and Boeing.
  • AirAsia X, like SpiceJet, belatedly reported results for the first quarter. The longhaul LCC, with a long record of losses, this time recorded a $38m net loss and a negative 11% operating margin. The airline said it was making money in January before the world started falling apart, starting with the Covid outbreak in China. It ultimately saw a 25% y/y reduction in passenger volumes. It suspended all operations on March 28. It’s already said that certain routes like Tianjin, Lanzhou, Jaipur, Ahmedabad, Gold Coast, Tokyo Narita and Okinawa won’t be coming back.

    For now, it’s mostly running cargo and charter flights. It’s hopeful of seeing some return of regular passenger traffic late this year. Malaysia’s borders remain mostly closed though at least until the end of this month. But the survival of AirAsia X is hardly guaranteed, with management warning of “severe liquidity constraints.” It’s doing what it can to reschedule payments to creditors and renegotiate contracts including bad fuel hedges.

    Its joint venture Thai AirAsia X, by the way, lost 427m last quarter.
  • SkyWest, the U.S. regional giant, posted a $26m Q2 net loss, but that would have been $178m without the CARES Act payroll support it received from Washington. While most of its revenue is contracted, rather than dependent on ticket sales, it nonetheless saw a 53% y/y drop in revenues as it flew 33% fewer block hours.

    So SkyWest too is burning through cash, though just about $500k per day on average currently. With a strong balance sheet going into the crisis, with access to federal loans if needed, and with $1b worth of unencumbered assets available to use as collateral, SkyWest is well-placed to ride out the storm and be ready for the upturn. When that will come is anyone’s guess, and management is reluctant to undertake major layoffs or base closures before having a better sense of what its partners — United, Delta, American, and Alaska — want it to fly next spring and summer peak. It stressed the flexibility it has in working with partners as they try to rightsize their fleets.

    Fortunately, E175s are proving a useful tool in that endeavor. In fact, E175 block hours should be down only around 10% this quarter. On the other hand, carriers like Delta are eagerly getting rid of 50-seat jets like CRJ-200s. As more E175s arrive, and as more CRJ-200s depart, dual-class aircraft (i.e. those with premium cabins) will soon represent 70% of its entire fleet.

    To cope with the near-term reduction in flying, some 4k of the airline’s workers have accepted voluntary time off or retirement. Naturally, SkyWest is watching labor negotiations at the Big Three to see if unions grant scope concessions to outsource more regional flying. It has the balance sheet strength to finance planes like the E175s, at a time when the big boys are sharply reducing capital expenditure. Says the airline’s CEO: “We’re in this for the long game.”  
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Media

  • “Bloomberg Prognosis,” a podcast about health care, stressed the importance of air cargo in the process of ending the Covid pandemic. Reporter Brendan Murray worries the global supply chain simply isn’t ready to handle the task of getting vaccines to billions of people around the world.

    As pharmaceutical companies scale up to produce their vaccines, air freight providers are actually scaling down, with airlines grounding so many jets. He cites an estimate that it will take one B777-sized plane to transport a million doses, which implies 1,000 B777s to carry a billion doses. If it turns out the people need two doses to be effective, that would mean 2,000 B777s. It’s the type of logistical challenge that requires global coordination, at a time when that’s in short supply.

    Effective vaccines will likely be ready before the end of this year. But it might be Q1 or Q2 of next year before widespread use. It could take even longer to reach remote areas of the planet. 
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Fleet

  • It’s been a rough 18 months or so for Boeing. First, regulators grounded the 737 MAX after two fatal accidents. And now Covid has brought its airline customers to the brink of ruin. The company’s revenues fell 25% in the second quarter from the same period last year, when the MAX was first grounded.

    Before the pandemic, economists fretted about the MAX grounding’s effect on U.S. GDP. Boeing was the single largest exporter in the U.S., and the company was responsible for 1% of GDP. Now, of course, Covid’s effect on the air transport industry is more of a worry than the MAX, and the company says it will have to reduce its workforce by 10%.

    Boeing expects regulators to re-certify the aircraft, currently undergoing certification flights, by the fourth quarter, a little later than the company had previously predicted. When the MAX is cleared, Boeing will start to deliver the 450 aircraft it has already produced and that are sitting on tarmacs to customers. It expects to deliver most of those aircraft within the first year after re-certification, and by 2022 Boeing expects to produce 31 MAX aircraft per month.

    As airlines grapple with the collapse in demand, they want fewer aircraft. So Boeing is reducing the production of its B787 from 10 per month to six per month, which is lower than the seven per month it had previously forecast. The 777X entry-into-service slipped from 2021 to 2022. And perhaps most upsetting to aviation geeks the world over, Boeing will end production of the 747 that year as well. Despite cancellations, Boeing Commercial Airplanes (BCA) has a backlog of 4,500 aircraft. But here’s a sobering metric: BCA delivered 20 aircraft in the quarter, compared with 90 in the second quarter of last year.

    The company also is planning to consolidate its B787 production lines down from two to one, but CEO Dave Calhoun did not specify if the remaining line will be in the Puget Sound area or in South Carolina.

    BCA and its deliveries to airlines dominate the headlines Boeing gets, and this has been especially true in the 18 months since the MAX grounding. But almost half of the company’s revenues come from its defense, space, and government sales divisions. Boeing executives have always pointed to this as a way to balance the company. In other words, defense revenues can offset declines in commercial aircraft sales during a downturn in the airline industry, and vice versa. Calhoun said the defense unit this quarter provided “critical stability.”

    The company proved that in the second quarter. Boeing’s defense business reported $7b in revenue and a 9% operating margin, compared with the $1.6b revenue and -169% operating margins at BCA. Ultimately, Calhoun thinks travel will resume and airlines will see demand bounce back. He predicts it will be three years before air travel returns to its pre-pandemic levels.
  • Airbus’s first-half 2020 results are a marked difference from its first-half 2019 results. Then, Airbus was flying high on the strength of its A320 family, the uptake of the A220, and the growing popularity of the A350. And the Boeing 737 MAX grounding was beginning to have a positive effect on the Airbus order book. In the first quarter of this year, Airbus notched 290 orders for its aircraft. In the second quarter, just eight. It delivered 196 aircraft in the first half of this year, versus 389 aircraft in the same period of 2019. The backlog remains strong, though, with more than 7,500 aircraft. But the company said it couldn’t deliver 145 aircraft in the first half of this year because of the Covid pandemic.

    Airbus is slowing its production lines and has said it will reduce its headcount by 15k employees. Although Airbus does have a defense unit, the company doesn’t rely on its defense sales to buoy it during a commercial aircraft downturn in the same way Boeing does. Revenues at its Helicopters and Defense and Space units were down -2% and -9% respectively, compared with -48% for its commercial aircraft unit.

    The chaos caused by the Covid pandemic shows no signs of letting up this year, CEO Guillaume Faury said. “We face a difficult situation with uncertainty ahead.”
  • The leasing giant AerCap presented its Q2 results, trying to allay investor fears about the current aircraft market debacle. Taking a glass-half-full perspective, it pointed to China’s recovery momentum, where domestic flights this summer are about 90% of the levels seen in January. Europe, where airlines operated just 2,100 flights on April 12, they operated 16,300 on July 24, according to AerCap. Big Asian holiday destinations like Thailand and Vietnam, though still largely closed to visitors, have low rates of Covid infections, positioning them well to reopen soon.

    The U.S., unfortunately, saw a promising recovery stall after June. But airlines there are managing through the crisis with financial help from Washington. Governments around the world, in fact, by IATA’s calculation, have provided more than $130b to help airlines navigate the crisis. In the meantime, carriers have announced 950 aircraft retirements, equivalent to 5% of global seats. These are older planes that stayed in service pre-crisis because the opportunity costs of grounding them was too high when demand was strong. Leasing companies like AerCap are also pleased to see Boeing and Airbus cut production of new planes. AerCap itself cancelled some of its B737 MAX orders.

    The company, meanwhile, continues to collect monthly cash rental payments from most customers. Payment deferral requests are slowing. Also, airlines don’t need to return to profitability before it makes sense to add planes again — they just need to be able to cover their cash costs of operating new jets. In tough situations like Norwegian’s out-of-court restructuring, AerCap agreed to take ownership in the airline.

    Finally, the firm is also watching the sale-leaseback market with interest as the terms grow more attractive. In addition, the aircraft leasing sector seems poised to consolidate after a bullish period characterized by multiple new entrants.
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Landing Strip

  • Groupe ADP said the quarter was its worst in more than 50 years, in terms of traffic declines. Traffic across the board fell 58% y/y and was down 63% in Paris. The group is focusing on preserving cash and cutting costs, although capital improvement projects that were underway and did not make financial sense to stop are continuing.

    Groupe ADP closed Orly at the start of the pandemic, between March 30 and June 26. The airport will operate with just two terminals for the remainder of the year. Executives say the slow recovery of shorthaul flights will benefit Orly in the near-term until international travel begins to rebound.

    In the quarter, ADP closed its acquisition of GMR, which operates airports in Delhi and Hyderabad in India, and Cebu in the Philippines. ADP also won the right to operate Kazakhstan’s Almaty airport.
  • Heathrow, with its concentration of longhaul and international flights, reported its traffic in the quarter was down 96%, and it predicts full-year traffic to be 60% lower than 2019, if travel begins to recover in the second half. Cargo volumes were down 30%, as fewer passenger flights operated at the airport. The airport cut its costs by 30% in the quarter and has cancelled many of its capital projects. It forecasts having enough cash on hand to operate through 2021 with no revenue.
  • Aena, which operates airports in Spain, Brazil, and the U.K., gamed out a scenario in which traffic does not return to pre-pandemic levels until 2027. Granted, the company said this is its most pessimistic scenario, and the probability of the recovery taking that long is “low.” But executives did stress that they cannot game out the rest of this year. Traffic patterns and how the recovery occurs remain unclear. Traffic at its Spanish airports is expected to decline by two-thirds, y/y. Aena thinks it will recover between 2024 (IATA’s prediction) and 2027.
  • Vinci, which operates 45 airports in Europe, the Americas, and Japan, added to the chorus: Traffic at all its airports came to a virtual standstill in the second quarter. Its European airports, however, are seeing modest signs of traffic recovery, and the company is optimistic this will continue, particularly in markets with high leisure and visiting friends and relatives traffic. Vinci calls 2021 the “year of rebound,” which is perhaps more optimistic than its peers. Its airports in France, Portugal, and Japan are doing better than expected, although traffic is off from 2019 levels by more than 60%.
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State of the Unions

  • Hawaiian Airlines sent a federally required notification to pilots that it could furlough or lay off more than 200 of its 850 pilots. Management and the union earlier this year struck a deal for voluntary separation, early retirement, and leaves of absence of up to two years to avoid resorting to layoffs or involuntary furloughs. But demand has not returned, and Hawaiian may need to turn to involuntary reductions in force.
  • In a video message to employees, Southwest CEO Gary Kelly said he is joining his peers in asking the federal government to extend the CARES Act payroll support program for six months. The current program ends on Sept. 30, and many airlines have warned that they will have to lay off or furlough tens of thousands of employees on Oct. 1 to match headcount with demand.

    Although Southwest has said the number of employees who have taken voluntary separation or leaves of absence so far will prevent it from having to resort to furloughs, the carrier has said it may have to if demand continues to crater. Airline unions have been calling for a payroll support extension for several weeks. Given the wrangling over the larger stimulus bill in Washington, unions and airlines are calling for a standalone bill to extend the program.
  • United’s head of flight operations warned that the carrier may have to furlough almost 4k pilots — one-third of its total pilot workforce — when the CARES Act payroll protection program expires on Sept. 30. “Bookings have stalled,” Senior Vice President of Flight Operations Bryan Quigley said in a memo to pilots. If demand doesn’t improve and if the CARES Act payroll protections aren’t extended, the furloughs will be necessary to match workforce to demand.

    The carrier left open the possibility for new agreements with pilots on wages, however.
  • Delta is considerably smaller this week. About 17k employees who took voluntary separation or leaves of absence packages left the company last week. But demand has been falling off in recent weeks. CEO Ed Bastian said the company is closer to its goal of not having to furlough more employees on Oct. 1, when the CARES Act payroll protections expire. But he left open the possibility if conditions do not improve.
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Routes and Networks

  • United is adding 25 cities back to its international network in September. The carrier will resume flights suspended by the pandemic to Asia, including India, Australia, the Middle East, and Latin America, as well as to the Caribbean and Mexico. All of its hubs will see some international service restored. United plans to operate 30% of its pre-pandemic international network and 40% of its domestic network this fall. September capacity will be up 4% over August, and overall United will operate 37% of its pre-pandemic network in September. 
  • Aeromexico is resuming service to Quito, Las Vegas, Denver, and San Francisco in August, and will increase frequencies to Miami, Paris, and São Paulo. In addition, the carrier will increase frequencies domestically at Cancun, Merida, Durango, Los Mochis, Chihuahua, and Culiacan. Its August schedule will have 20% more capacity scheduled than Aeromexico’s July schedule, the carrier said.  
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Covid Crisis 2020

  • IATA is becoming significantly more pessimistic about when the airline industry will recover. Now, the group thinks traffic will not return to pre-pandemic levels until 2024, a year later than it had previously said. Emerging economies and the U.S. are seeing uncontrolled spread of the virus. Other developed economies have controlled Covid-19 more effectively and are on track to recover more quickly, IATA said.

    IATA’S 2020 forecast now is that global enplanements will be down 55% in 2020, compared with 2019, and that’s a revision downward from the 46% decline IATA had predicted in April. Next year, IATA forecasts that passenger volumes will rise 62% year-over-year, but that’s from this year’s depressed base.

    Domestic travel is expected to fuel most traffic this year, and IATA says it does see pent-up demand for visiting friends and relatives travel. There is a “but,” however. IATA’s economists also see declining consumer confidence, with more than half of respondents to a survey saying they do not plan to travel this year. Business travel will remain depressed for the year as companies slash travel budgets and keep travel restrictions in place.

    Cargo traffic was 18% down y/y in June, but that’s better than the 21% y/y decline in May. There’s a clear capacity shortage for cargo, as belly-hold capacity is down 70% (due to fewer international passenger flights) but that’s somewhat offset by freighter capacity rising more than 30%.

    But air cargo is losing market share to rail and maritime cargo transport, a trend typical of economic downturns, IATA reported. Now that emergency transport of medical equipment has eased, companies are turning toward cheaper modes of freight transport.

East Asia

  • There’s yet another airline bankruptcy to report, this time in Thailand. Thai Airways remember, is already in bankruptcy. Last week, it was joined by its affiliate Nok Air, an LCC that Thai itself helped launch in the early 2000s. The carrier’s inability to withstand the Covid crisis is hardly surprising given its long run of pre-crisis losses. The idea here is to relieve its contractual burdens and clean up its cost structure and balance sheet. It has “no intention to terminate or liquidate its business.” Among the goals for Nok as it restructures: downsize its fleet, optimize its network, and become more efficient from a labor perspective.
  • Korean Air had previously announced it would scale back its first-class cabin. Now, citing declining demand, the carrier is phasing it out on most routes, One Mile at a Time first reported.  Korean will maintain first class on certain marquee routes, like New York and Los Angeles. The aircraft still will have first-class cabins. Korean simply isn’t selling tickets first-class tickets. One Mile at a Time reports it remains unclear what Korean will do with the first-class cabins on its aircraft.

North America

  • An entity called Global Crossing Airlines is now in control of JetLines Canada, an LCC working its way toward launching around Christmas. Last week, it discussed some of its plans, which includes flying A320s as charters for cruises, hotels, and casinos. It wants to fly cargo too, and scheduled passenger service to sunshine spots like Cuba from points in Canada. It even wants to base planes in Atlantic City, N.J., catering to casinos there. Not stopping there, it wants to form a tour operator using the JetLines brand. It’s also discussing a partnership with Nolinor, a Canadian travel company with its own flight ambitions. It won’t be easy competing with Air Canada/Rouge, WestJet/Swoop, Air Transat, and TUI’s Sunwing. On a more encouraging note, there’s never been a better time to buy or lease planes. 
  • The Transportation Department (DOT) granted more service-requirement exemptions. U.S. carriers that took federal funds through the CARES Act stimulus are required to maintain service to all their pre-pandemic destinations, but DOT grants exemptions based on a variety of criteria, including existing service by other carriers or service to nearby airports. DOT approved Hawaiian’s request to suspend service to Pago Pago, American Samoa, through Aug. 31. Separately, DOT approved Silver Airways’ request to reduce frequencies at Miami and Orlando from a minimum of three flights per week to once per week.
  • Lawmakers in the U.S. House of Representatives introduced legislation to require passengers and flight crews to wear masks or facial coverings on board aircraft and in airports. The bill would require the FAA to mandate masks and to enforce masking policies. It remains unclear what the bill’s chances are or whether the Republican-controlled Senate will act on a bill if the House passes it. Most U.S. carriers require facial coverings on board, and many airports do (although some merely recommend them). Enforcement of the rules falls on airline employees, and labor groups have been vocal in asking for the federal government to pass legislation on this matter.

Europe

  • Reports from Germany, including one from Borsen Zeitung, raise the prospect of a TUIfly-Condor joint venture. TUI has long sought a partner for its German shorthaul airline, at one point proposing a joint venture with Etihad, back when the Gulf carrier owned Air Berlin. Condor, for its part, thought it was saved from existential questions when LOT Polish agreed to buy it. Once the Covid crisis came, however, LOT backed out.
  • Europe’s Volotea, an airline with some resemblance to Allegiant in the U.S., secured a $167m loan from a group of banks. The loan is guaranteed by Spain’s government, which is providing similar assistance to other Spanish airlines. It’s a privately held company, so Volotea doesn’t report its quarterly financial results. But it claims to have earned profits in each of the past five years. It also claims to be better positioned than others to manage the Covid crisis, given the large portion of its cost base that’s variable rather than fixed. The newly borrowed funds will enable Volotea to continue the ungrounding of its planes — building back its schedule, in other words. In addition, it has a deal with IAG to take over some of its shorthaul routes, if and when IAG’s takeover of Air Europa is finalized and approved by regulators.
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Feature Story

After a rough Q2, U.S. airlines look back and ahead

No surprises. U.S. airlines, as expected, reported gargantuan second-quarter losses. Collectively, the country’s nine largest publicly traded airlines (excluding the regional carrier SkyWest) registered more than $11b in net losses, nearly wiping out the $14b in profits they earned all of last year. U.S. carriers were more active than many of their counterparts elsewhere, maintaining about 21% of their 2019-level ASM capacity. Still, their collective revenues plummeted 87% y/y, far in excess of the 67% cost decline they were able to manage. 

The crisis leaves carriers with extraordinarily low visibility. The traditional tools of forecasting, like forward booking curves and historical traffic, have become all but irrelevant. Already, they’ve been fooled once by a promising springtime demand spike that abruptly fizzled. The best they can do now is view things in phases, starting with a review of the early days of the crisis, when things were most dire and most uncertain. Subsequent ups and down led to where airlines stand today, typically their peak summer period. What to expect and look for in the fall? How about 2021 and beyond? Here’s a summary of the crisis in phases, past, present, and future:

PHASE 1: THE INITITAL SHOCK (MARCH and APRIL)

First came China, then a broader swath of East Asia, then Italy. As late as early March, it looked like the U.S. might avoid the scourge of Covid-19. On March 1, U.S. airport traffic, measured by the TSA, was down just 1% y/y. But already by March 10, volumes were down 24%. By the end of the month, the decline was 93%. Throughout the entire month of April, traffic was 96% lower. Airlines immediately responded with emergency measures to cut costs, cut capacity, and raise capital. Managing refund requests was a major task at hand. So was introducing new cleaning protocols to reassure travelers. With that same goal in mind, most carriers stopped selling middle seats. All waived most ticket restrictions, allowing fee-free itinerary changes, for example.

Executives swallowed pay cuts. Other workers were encouraged to take unpaid leave, as thousands wound up doing. Thanks to federal aid, however, carriers were not permitted to dismiss any workers involuntarily, at least through Oct. 1. Washington’s aid package also included loan support, which American, for one, would ultimately elect to use. There were conditions, including the need to pay back some of the payroll assistance and prohibitions on stock buybacks, dividends, executive bonuses, etc. Uncle Sam also obtained warrants in exchange for the aid, giving them an effective ownership stake in the nation’s airlines. Such conditions though, elicited few complaints from airlines.

The only comforting aspect of the industry’s greatest crisis ever: The plentiful availability of capital, in stark contrast to the financial crisis a decade earlier. Also different this time was the robustness of U.S. balance sheets going into the crisis. Bankruptcy was thus never a major concern for anyone save some tiny players like Alaska’s Ravn Air and the regional providers Compass and Trans States.

PHASE 2: A PROMISING RECOVERY (MAY and JUNE)

With plentiful cash, plummeting input costs, rightsized fleets, government assistance, and easing rates of infection, hospitalization, and mortality in Covid-plagued areas like New York, there was reason for optimism as U.S. carriers entered the late spring. They were still burning cash. They were still racking up huge losses. No two ways about that. But people, especially younger people feeling less vulnerable, began to fly again. On May 21, for the first time since March, airport traffic was down by less than 90% y/y. By the last week of June, the declines were more like 75%. Considering all the cost cuts, considering the extraordinarily low price of fuel, and considering all the removed capacity, it was a welcome sign of recovery. The numbers looked even better when removing international markets from the equation — nobody expected those to recover until much later.

The trends also looked better in certain parts of the country, led by Florida. Other sunshine markets like Phoenix were likewise seeing a spike in leisure travelers with raging pent-up demand. Also popular were rural areas and nature destinations like the Colorado mountains and national parks. With flights in short supply, the bigger hub airlines reworked their schedules to funnel much of this demand through their mid-continent hubs — think Dallas-Fort Worth, Denver, and of course Atlanta. Coastal gateways like New York, Washington, Los Angeles, San Francisco, and Seattle, by contrast, were laggards in the recovery given their outsized exposure to corporate and international business. Even so, New Yorkers and the like were starting to take to the air again — a beach trip in Florida, visiting grandma in Phoenix, renting a house in the Great Smoky Mountains, and so on.

A few airlines looked beyond the crisis and announced major strategic moves — American and JetBlue forming an alliance, JetBlue expanding in Los Angeles, etc. Cargo markets, meanwhile, were a nice cushion for those in the space, including United. Its loss margins were less severe than those of its rivals simply because of its cargo prowess.

PHASE 3: DISAPPOINTMENT (JULY and AUGUST)

June’s strength encouraged airlines to add back more capacity for the summer peak. But already in the second half of June, their hopes were crumbling. Much of the U.S. Sunbelt, including the big Florida, Texas, California, and Arizona markets, experienced a major Covid spike, discouraging travelers. At least as damaging to demand were new quarantine rules imposed by northern states like New York — all travelers returning from a high-infection state must isolate themselves for 14 days. Bookings promptly slowed, albeit not back to April lows. For all of July, average daily TSA airport passenger counts were down 74%, not that much better than June’s 81% average daily decline. If the booking momentum of late May and early June hadn’t dissipated, July’s traffic decline would have been significantly less severe.

With the virus still spreading rapidly, August isn’t looking any better. Alas, it became inevitable: Most airlines would have to undertake involuntary furloughs. Southwest notably said it would not have to do any such thing before the end of the year, thanks to healthy take-up of its generous leave programs. But others warned of tens of thousands of potential job losses after Oct. 1. In the meantime, carriers like Spirit and American, aggressively returning planes to service in order to capture what they thought would be growing summer demand, were forced to pull back.

PHASE 4: THE FALL AND EARLY WINTER (SEPTEMBER to DECEMBER)

If the peak summer proved so disappointing, what will the offpeak fall be like? It’s a time when most carriers depend on business traffic to fill seats — that’s not happening this year. Perhaps the pandemic will ease, and the traditional summer vacation period extended. But airlines have turned pessimistic, dialing back earlier capacity plans. A big question is the economy? As bad as Q2 was, it would have been a lot worse without massive federal stimulus spending. But a key unemployment benefit expired at the end of July, and airline-specific wage support will expire at the end of September.

Congress is debating what to do next, with a six-month extension of airline wage subsidies under consideration. Airline unions support that, and so do airlines themselves. Everyone is of course monitoring the progress of vaccine trials, which look promising. But it’s more of a question of when rather than if. Vaccinations could start before the end of this year, but how long before widespread adoption? That could be a mid-2021 development. Will there be any game-changing Covid therapies or treatments in the interim, allowing normal life to resume? Might the virus miraculously fade away, as SARS wound up doing? Only with progress in stemming or defeating the pandemic can economies truly reopen, quarantines removed, and global travel restrictions eased.

Don’t forget, there’s also a heated presidential election in November, which can affect economic outcomes and even travel patterns. Also on the list of items airlines are watching are school re-openings, or the absence thereof. This will absolutely affect the economy and travel. At some point, carriers will have to decide when to sell middle seats again and when to reapply revenue management controls like ticket restrictions. A key period will be the fall/winter holidays, i.e. Thanksgiving followed by Christmas. Most carriers still hope they can at least get their negative daily cash burn under control by Q4.

PHASE 5: HOPE FOR A MORE RESILIENT RECOVERY (2021)

For low-cost carriers in particular, the Florida peak season with its heights in February and March are crucial. If the virus is under control by then, via vaccines or otherwise, 2021 might get off to a decent start. They’ll then look to the summer peak, while monitoring the appetite among companies to travel again. Seeking intercontinental revival next year — or certainly early next year — might be a stretch. But some nearfield international markets like the Caribbean could play an important role in restoring order next spring.

Who knows about fuel prices, but input costs in general should remain low. So should capacity levels, with so many planes permanently retired. On the other hand, the U.S. will see at least one ambitious new entrant, born from the mind of JetBlue founder David Neeleman. His new airline, Breeze, aims to get started with used E-Jets later this year. By the end of 2021, it will have A220s as well. Another entrepreneur with strong credentials, former United CFO Andrew Levy, is also said to be eyeing a launch next year if not before.

Early 2021 should also see the return of the B737 MAX, a plane American, United, Alaska, and most of all Southwest, still eagerly want. 

PHASE 6: THE LONG RUN (2022 and BEYOND)

U.S. airlines might find it relatively easy to make money again once demand returns to something resembling normal. That’s because of consolidation, the low input costs, and pre-crisis mastery of effective business tactics like ancillary selling and partnering with other airlines. Once the profits start, they can then turn their attention to repaying all the debt they amassed to deal with the crisis. Washington will at some point exit its airline exposure.

No less important will be resuming investment in new products and services, on hold for now. There’s no guarantee corporate demand will make a full recovery in the age of videoconferencing. There’s no guarantee intercontinental demand will make a full recovery with trade links severing and globalization uncertain. Restoring employee morale after a period of jobs cuts will be another longterm project. If they really want to think longterm, carriers will have an eye on future aircraft technology, including a new generation of ultra-fast supersonic planes now under development. If only the recovery could be so fast.

U.S. AIRLINES EARNINGS SUMMARY: Q2 2020

  • American plays a bit more aggressive with summer capacity; developing coastal alliances with Alaska and JetBlue
  • United least bad among the Big Three thanks to cargo; like American, is not blocking middle seats
  • Delta hurt by losses at its oil refinery, which caused it to pay a lot more for fuel than anyone else
  • Southwest operated more of its regular schedule than others; helped by limited int’l exposure; will not do layoffs
  • Alaska teaming with American along the West Coast, joining the oneworld alliance
  • JetBlue teaming with American along the East Coast; making moves in Los Angeles, Newark
  • Spirit well-placed to enjoy the brief mini-recovery in Florida demand but unable to meaningfully reduce labor costs
  • Allegiant the only airline in the world thus far with Q2 op. margin better than negative 100%; variable cost base helps
  • Hawaiian operated the least capacity of any U.S. airline relative to normal; Hawaii essentially closed to visitors

A Quarter That Will Live in Infamy

RevenuesOperating Margin Excluding Special ItemsNet Margin Excluding Special ItemsRevenue Y/YExpenses Y/YDifferenceASMs Y/YLoad FactorFuel Y/YLabor Y/YAverage Fuel/GallonPretax Margin
American$1.622b-256%-207%-86%-46%(41 pts)-76%42%-88%-21%$1.13 -266%
United$1.475b-209%-177%-87%-54%(33 pts)-88%33%-90%-29%$1.18 -219%
Delta$1.176b-308%-239%-91%-53%(38 pts)-85%34%-84%-24%$2.16 -329%
Southwest$1.008b-214%-149%-83%-36%(47 pts)-55%31%-76%-17%$1.33 -222%
Alaska $421m-139%-104%-82%-48%(34 pts)-75%38%-87%-20%$1.20 -86%
JetBlue$215m-332%-255%-90%-50%(40 pts)-85%34%-94%-17%$0.96 -351%
Spirit$139m-247%-206%-86%-43%(43 pts)-83%49%-93%-1%$1.05 -261%
Allegiant$133m-80%-71%-73%-37%(36 pts)-50%51%-77%-17%$1.11 -90%
Hawaiian$60m-366%-291%-92%-42%(49 pts)-92%23%-93%-83%$1.26 -384%
TOTAL$6.248b-240%-189%-87%-67%(21 pts)-79%37%-88%-23%$1.26 -248%
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Around the World

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

Around the World: August 3, 2020

Airline NameChange From Last WeekChange From Last YearComments
American-2%-64%U.S. GDP suffered catastrophic 33% y/y decline last quarter; cushioned by 40% increase in federal non-defense spending
Delta-4%-59%Focused on building more connecting options thru its 4 mid-continent hubs (Atlanta, Detroit, Minneapolis, Salt Lake)
United-5%-66%Generated $402m in cargo revenue last quarter, compared to just $130m for American and $108m for Delta
Southwest-2%-40%CEO Gary Kelly tells workers he’s actively involved in lobbying for a CARES Act 2 to help workers for longer
Alaska-2%-46%Seattle Paine Field open again with limited service
JetBlue0%-46%More than halfway done with reconfiguring its A320 fleet; new layout includes more seats but also more amenities
Hawaiian-10%-54%Anticipates restarting flights to Japan and Korea before Australia and New Zealand
Spirit-4%-63%Warning workers of big layoffs to come; exact number depends on demand trends, take-up of voluntary leave
Frontier(not publicly traded)Takes delivery of its 100th plane (an A320 NEO); separately withdraws 2017 registration to do IPO
Allegiant-1%-25%Airports could wind up getting more federal aid under some Congressional stimulus proposals
SkyWest-7%-57%Former subsidiary ExpressJet getting dropped by United, which is giving its routes to rival Commutair (Reuters)
Air Canada-8%-67%Says the biggest impediment to demand revival right now is Canada’s quarantine policy
WestJet(not publicly traded)Air Canada’s CEO Rovinescu: “Canada needs to find a way a responsible way to coexist with Covid-19 until there is a vaccine”
Aeromexico-5%-68%Did not hold earnings call for Q2; bankrupt companies typcially don’t
Volaris2%-35%Noted in Q2 earnings call that 40% of its routes pre-crisis had no direct air competition; mostly competes against long-distance busses
LATAM12%-81%Different groups competing to provide DIP financing; could have implications on who winds up owning Latam post-bankruptcy
Gol-5%-56%Says Sao Paulo-Rio shuttle route accounts for about 10% of total revenue in normal times
Azul-1%-61%The Saudi Arabia of lithium? BBC looks at Bolivia’s vast supply of the resource, critical for electric car batteries
Copa-7%-59%Hoping to finally restart operations in Sept. if government allows, but initially eyeing just 3% of normal capacity (Reuters)
Avianca-13%-88%Warned employees that some contracts will not be renewed, due to Covid-related downsizing
Emirates(not publicly traded)Dubai expected to lose something like 10% of its entire population this year as expats return home (The Economist)
Qatar(not publicly traded)U.N. World Tourism Organization says 40% of all destinations worldwide have started relaxing travel restrictions
Etihad(not publicly traded)Began requiring passengers to submit negative Covid test results prior to travel.
Air Arabia3%3%Rival Royal Air Maroc looking to sell off a large chunk of its assets (ch-aviation)
Turkish Airlines-9%-14%Regular Turkey-Russia flights restarted this weekend; airlines hoping to capture a bit of the usual summer tourism demand
Kenya Airways0%10%Job cuts coming; union lobbying highest levels of government to provide relief
South Africa Air.(not publicly traded)Rival Comair/Kulula, also bankrupt, hasn’t yet filed a rehabilitation plan; deadline to do so extended
Ethiopian Airlines(not publicly traded)One of its B777 freighters damaged in Shanghai airport fire
IndiGo3%-37%Pre-Covid, business traffic accounted for about half its total
Air India(not publicly traded)International routes to and from India to stay closed through at least the end of this month
SpiceJet-7%-67%More reports that AirAsia negotiating a divestment (to partner Tata Group) of its stake in AirAsia India
Lufthansa-9%-48%Belgium finalizes aid package for Brussels Airlines; Lufthansa airlines also got aid from Germany, Switzerland, Austria
Air France/KLM-12%-63%Goal: Reduce CO2 emissions per RPK by 50% in 2030, relative to 2005
BA/Iberia (IAG)-17%-61%Aer Lingus filled just 9% of its seats last quarter; BA 28%, Vueling 45%, Iberia 49%
SAS1%-41%Rival Icelandair a 36% shareholder in troubled Cape Verde Airlines; makes some money by leasing it planes
Alitalia(not publicly traded)Italy’s GDP shrank 17% y/y in Q2; France and Spain contracted even more
Finnair-4%-92%Cargo accounted for more than 70% of its Q2 revenue
Virgin Atlantic(not publicly traded)Now has more than 200 staff dedicated to processing refunds; repeatedly apologizing for processing delays
easyJet-16%-49%German GDP shrank 12% y/y in Q2; during worst quarter of global financial crisis (Q2, 2009), GDP shrank 9%
Ryanair-3%9%Says it doesn’t have as large a spread between the pay of its most senior and junior crewmembers, compared to legacy carriers
Norwegian-10%-94%Ryanair’s pay cuts range from 20% for the highest-paid pilots to just 5% for the lowest-paid flight attendants
Wizz Air-7%-9%Recruitment efforts giving extra attention to developing more female pilots
Aegean-9%-57%Wizz says it doesn’t see labor as a major area of potential cost savings; crews already very efficient and productive
Aeroflot-6%-23%Reported Q2 results under Russian accounting standards but not yet under international standards; publishes both each quarter
S7(not publicly traded)Ukraine Int’l Airlines has lost $60m since Covid crisis began, according to local reports
Japan Airlines-10%-50%Japan imposing some new restrictions on restaurants and other businesses as Covid cases increase
All Nippon-8%-41%LCC Skymark, of which ANA is part owner, Secures new funding to manage thru crisis
Korean Air-5%-32%Hyundai Development, which had a pre-crisis deal to invest in Asiana, looks more and more like it will walk away
Cathay Pacific-6%-53%Trying to lower labor costs by offering buyout packages to its most senior pilots (SCMP)
Air China2%-38%Airports on Hainan Island, popular with tourists, seeing traffic levels start to surpass their 2019 totals
China Eastern0%-25%Opening new base in Xiamen, home of China Southern ally Xiamen Airlines; city opening new airport in 2023 (Routes)
China Southern-2%-27%Latest airline to offer big promotion to fill seats; selling all you can fly passes for about $500, valid for the rest of 2020
Singapore Airlines-6%-65%Can raise another $4.4b, if needed, through issuance of bonds convertible to stock
Malaysia Airlines(not publicly traded)Announces marketing partnership with China’s Trip.com; gives airline’s loyalty plan members more access to hotel inventory
AirAsia-10%-67%Singapore Airlines subsidiary Silk Air to “indefinitely” suspend service to the Thai beach resort Koh Samui
Thai Airways-3%-71%Airports of Thailand forecasts traffic levels returning to 2019 levels in Oct. 2022; best guess for arrival of vaccine is next July
VietJet-9%-29%Younger rival Bamboo Airways signs distribution deal with Amadeus; still plans to fly its B787s to Frankfurt and Prague
Cebu Pacific-2%-60%AAPA, which represents Asia-Pacific airlines, criticizes governments for “uncoordinated measures” on reopening borders
Qantas-11%-43%Australia’s competition regulator permitting Qantas and Virgin to continue their schedule coordination with REX on regional routes
Virgin Australia0%-48%Keeping its headquarters in Brisbane but moving to a different site within the city
Air New Zealand1%-51%Suspends ticket sales to Australia through the end of this month, responding to new Australian travel restrictions
Brent Crude Oil-1%-33%Weakening U.S. dollar pushing oil prices upward; investors concerned about U.S. economy, relations with China, upcoming election

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

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