Pushing Back: Inside This Issue
The once-in-a-lifetime Covid crisis already is reshaping the global airline business in profound ways. In London, the world’s largest air travel market, the upheaval has some major players in retreat, and others (like Wizz Air) sensing a once-in-a-lifetime opportunity. Never in its lifetime has India’s SpiceJet flown overseas. But it’s dabbling in the market now, plotting a new post-crisis strategy amid powerful forces of change like the potential privatization of Air India, the decline of Gulf carrier influence in Indian markets, the longhaul ambitions of Vistara, and the growing domestic dominance of IndiGo.
In the U.S., Frontier’s Q2 financial figures show it’s clearly benefitting from Denver’s relative strength in attracting leisure flyers. Sun Country, on the other hand, is more dependent on virus-stricken Florida, whose peak season by the way, is now just a few months away. Just a few days away, meanwhile, is the looming expiration of federal job subsidies for U.S. airlines, which continue to lobby for an extension.
In other U.S. news, Delta borrowed another massive sum of money, this time backed by its 100m member-strong loyalty program. Spirit detailed its path toward cash breakeven. Southwest, for its part, said it too is seeing a modest increase in leisure demand. Elsewhere, Cathay Pacific will soon unveil big changes to its business model. Thai Airways is undertaking big changes in bankruptcy. And in China, the Big Three are taking advantage of big changes in the competitive landscape, most importantly a big retreat by Hainan Airlines.
Verbulence
“We are not at the stage of recovery. We are still at the stage of survival.”
LOT Polish CEO Sebastian Mikosz
Earnings
April-June (3 Months)
- SpiceJet: -$79m; -119%
- Frontier: $17m/-$69m*; -41%
- Sun Country: -$6m; -95%
*Net result in USD/*Net result excluding special items/ Operating margin
Skift Global Forum
Delta CEO Ed Bastian, United CEO Scott Kirby, JetBlue President Joanna Geraghty, and American CIO Maya Leibman headline Skift Global Forum, held virtually this year. Join us Mon., Sept. 21-Weds., Sept. 23 to hear from them as well as more than 60 leaders from across the travel industry. Airline Weekly subscribers get a 25% discount on the registration with code SAW202025. Details and agenda are here.
Weekly Skies
- SpiceJet’s crisis management delayed it from reporting Q2 earnings until last week. But the numbers are now in, and the Delhi-based LCC showed a $79m net loss from April through June, along with a negative 119% operating margin. Revenues dropped 83% y/y on 90% fewer passenger ASKs, while operating costs — always stickier when contracting — fell 60%.
The reason revenues didn’t drop more drastically was SpiceJet’s fortuitous pre-crisis decision to develop a cargo business. It’s now India’s largest cargo carrier, with even widebody A340s and A330s in its fleet. It’s also converted some Q4 turboprops into freighters, as it runs much of its cargo operations from Ras al Khaimah in the UAE. It currently has 11 freighter aircraft in total.
SpiceJet does see some “early encouraging signs” of recovery in passenger demand. But India, unfortunately, is not one of the success stories with respect to Covid containment, joining the U.S. and Brazil among the worst-affected nations. Nevertheless, SpiceJet is filling about two-thirds of its domestic seats at the moment, following a government ban on most flying earlier in the crisis. The airline still looks forward to getting its 13 B737 MAXs back in the air, and to eventually receive the many others it has on order. The planes will replace less efficient earlier-generation B737s.
SpiceJet separately launched a new loyalty plan during the crisis, and received approval to serve both the U.K. and the U.S. Next month, it will wet lease widebodies from Oman Air to serve London Heathrow, having obtained the necessary slots. Back at home, it’s currently operating about half its regular schedule. India’s private-sector airlines didn’t get much direct financial assistance from their government. But they’re reportedly lobbying for an interest-free credit line to avoid the fate of Jet Airways, whose carcass by the way is still up for sale.
More consequential is Delhi’s ongoing attempt to sell Air India. As toxic as the carrier’s finances are, it could play a constructive role in the Tata group’s airline ambitions. The conglomerate, which actually founded Air India in the 1930s, could potentially use the carrier’s route rights and slots to boost the fortunes of Vistara, a joint venture between Tata and Singapore Airlines.
SpiceJet, in the meantime, will need to decide just how ambitious it wants to be in the intercontinental space. The same question looms for IndiGo, which readily acknowledges the longhaul opportunities presented by Gulf carrier retraction. SpiceJet’s other LCC rivals are AirAsia India and Go Air.
Frontier Benefits From Denver; Sun Country Bets on Cargo
- The Transportation Department’s Bureau of Transportation Statistics (BTS) published Q2 financial data for Frontier and Sun Country, two airlines owned by private equity firms. Frontier’s numbers didn’t look all that bad relatively speaking, even ignoring the $17m net profit it produced. That was thanks to unspecified non-operating revenues of about $86m. At the operating level, margin was negative 41%, the least bad figure of any U.S. airline last quarter. That’s not a huge surprise, given Frontier’s typical pattern of earning its highest margins during Q2.
It’s added lots of capacity into Florida for sure, and Florida is a market that peaks in Q1, not Q2. But Denver is still Frontier’s largest market by far, and currently one of the most resilient markets nationwide. Americans are visiting Colorado’s mountains. And with many nonstop flights cut, they’re increasingly traveling through hubs like Denver. Frontier, make no mistake, attracts a sizable amount of connecting traffic through Denver. The airline’s owner, Indigo Partners, seems financially secure amid the crisis, with all four of its airlines well positioned to serve the relatively resilient leisure and family-visit markets; Indigo’s other airlines are Wizz Air in Europe, Volaris in Mexico, and JetSmart in South America.
Frontier, for its part, continues to take additional NEO jets, receiving its 100th plane overall this summer. Early in the crisis, during the false dawn recovery in May, Frontier announced a throng of new Florida routes from various cities. It’s been quiet since but still among the most aggressive in terms of capacity. October schedules (Cirium) show seat counts down just 38% y/y. Only Allegiant, down a mere 6%, was lower.
- Sun Country, its seat counts down 45% y/y next month, posted a $6m Q2 net loss with a negative 95% operating margin. Despite diversifying its route network in recent years, Minneapolis-St. Paul remains the epicenter of Sun Country’s universe. More specifically, it lives and dies on Minneapolis-originating outbound demand to sunshine spots like Florida and Arizona in the winter. It was lucky to salvage most of this year’s Florida peak season before Covid hit. Indeed, it joined Allegiant as the only U.S. airlines to make money in Q1.
But next year’s Q1 peak is looking dicey, with mass vaccinations not likely until later in the year. Sun Country does however have a new cargo contract with Amazon which is likely performing well. It’s also big in charter flying, carrying sports teams for example.