Issue No. 783

Mountain Market Muscle

Pushing Back: Inside This Issue

On Sept. 11, 2001, the French newspaper Le Monde, expressing solidarity with the American people, famously wrote “We’re all Americans now.” Last week, on the 19th anniversary of the 9/11 attacks on New York and Washington, U.S. airlines face a new and even graver assault on their industry, albeit one they’re in much better financial shape to endure. As they seek near-term recovery by chasing price-sensitive leisure and family-visit demand, even the Uniteds, Americans, and Deltas of the world are chanting: “We’re all low-cost carriers now.”

As all U.S. carriers adopt tactics pioneered by the likes of Southwest and Allegiant, demand is mercifully getting a bit better. Everyone’s cautious to be sure, after deflated hopes that followed earlier green shoots this spring. But U.S. domestic and even shorthaul international bookings are in fact showing signs of life again. Even so, the next six to nine months will in all likelihood be rough. It’s just a question of how rough, in the remaining period before vaccinations hopefully end the crisis once and for all.

Some U.S. carriers are nevertheless using this period of darkness to light new strategic fires. United surprisingly announced a bevy of new overseas routes launching in 2021, all targeted toward family-visit demand (with cargo also top of mind). JetBlue, perhaps the most strategically active U.S. airline during the crisis, itself announced another onslaught of new routes, several targeting at United’s Newark hub.

As U.S. shorthaul demand shows some upward momentum, Europe’s airlines by contrast, saw bookings slow as summer turned to fall. Quarantines are the key driver, imposed abruptly and inconsistently, airlines say. In recent weeks, the U.S. has seen Covid infections slow from extremely high levels, while Europe has seen cases rise from more moderate levels. Spain, the Florida of Europe in terms of tourist demand, is Europe’s leading hotspot. France and the U.K. are likewise seeing outbreaks.  

Throughout much of East Asia, the virus has been better contained. But that’s little consolation to Singapore Airlines, whose all-international network remains largely shuttered. Inevitably, the carrier last week announced major job cuts.


“The customers will be back very, very fast, especially in the VFR and leisure market… And we know by experience, going through all those crises, that as soon as the people feel comfortable, they will start to travel a lot.”

Transat Chairman and CEO Jean-Marie Eustache, referring to "visiting friends and relatives" travel.


April-June (3 Months)

  • Nok Air: -$25m; -66%

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

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Weekly Skies

  • Most reporting airlines have already issued their calendar Q2 statements. India’s SpiceJet will belatedly do so this week. Also this week, U.S. government data will show figures for Frontier and Sun Country. Greece’s Aegean will report at the end of this month.

    Last week, Thailand’s Nok Air, which filed for bankruptcy in late July, disclosed its Q2 financial statements, which showed a $25m net loss. Curiously, it simultaneously showed an $8m operating profit, but with “other income” accounting for half its total revenue. What’s that? In its latest annual report, it defines “other income” as mostly revenues from interest income, exchange rate profits, refunds of insurance and maintenance, and profits from the sale and lease back of aircraft. It’s stuff, in other words, that doesn’t reflect operations. Exclude it, and operating margin for the quarter was really negative 66%.

    Nok did generate some activity as its domestic flying was active. The airline consistently posted heavy loss margins in the years leading up to the crisis. It was initially backed by Thai Airways, which later lost interest, and which today holds just a 16% stake. That stake, of course, is in jeopardy of disappearing as Nok restructures in bankruptcy. Its priorities for restructuring are debt relief, most importantly, and finding a viable business model. It sees potential in expanding international flying when feasible. It will seek more distribution channels. It wants to deepen relationships with travel agencies both in and out of Thailand. NokScoot, a loss-making longhaul joint venture with Singapore Airlines, was dissolved. 
  • Canada’s Transat, which last week reported losses for its May-to-July quarter, barely even flew during the period. It relaunched flights on July 23rd after four months of inactivity. Canada’s government, to the great frustration of Air Transat and other Canadian carriers, has done stunningly little to help the travel sector, making it an outlier among rich-world countries. They worry this will create an uneven playing field with U.S. and European rivals, most of whom received lavish state support.

    In any case, Air Transat is back in the air, and getting a modest amount of demand on domestic routes, and family-visit routes to places like France and Portugal. With the winter now coming, bookings to Mexico and the Caribbean are showing some faint signs of life. But still, family-visit demand is stronger than leisure right now. Canada’s travel restrictions are extremely strict, with mandatory quarantines present even within the country among different provinces. Most people traveling internationally are people with dual nationalities or foreign residency permits.

    When will travel restrictions ease? Nobody knows, but Transat doesn’t expect a true revival in demand until they do. Two-thirds of the company’s staff are currently on temporary layoff (helped by government wage subsidies). Some 40% face permanent dismissal if things don’t change quickly. Travel policies are actually not the only area in which Ottawa holds great sway over Transat’s future. Competition regulators there are reviewing Air Canada’s proposed takeover deal. E.U. regulators are doing the same, and their decision must come before Dec. 27. After that Air Canada would be free to walk away.

    As it waits, Air Transat is doing its best to understand new demand patterns, noting for example that many of the people traveling right now are younger, booking late, and visiting family members or friends. Load factors are running in the 50% range, aboard six active A321 NEOs. The NEOs, importantly, will assume greater prominence in the airline’s fleet going forward. Transat isn’t quite sure when leisure demand will return to pre-crisis levels. But the segment doesn’t face the longterm structural demand changes that currently haunt the business segment. For that it’s thankful.

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  • Phoenix-based aviation consultant Hubert Horan, speaking with the Financial Times, delivers a darkly pessimistic outlook for airlines. After the dot-com crash in 2000, he notes, demand dropped 6%, which was enough to put three-quarters of the industry in bankruptcy. This time, the demand drop is more like 75%, with revenues down 85%. “This isn’t a case of a ship going through a bad storm. This is a case of a ship that has hit an iceberg.”

    America’s Big Four airlines lost $13b net last quarter, he explains, and suffered a $15b cash drain. Horan feels there’s just no way for carriers to cut costs fast enough to restore breakeven, especially with corporate travel and intercontinental travel both obliterated. Much of the demand destruction, furthermore, is likely to be permanent. Videoconferencing has advanced, globalization won’t be like it was, fares will likely rise, and travelers will reassess the necessity of enduring air travel’s hassles. Demand, in summary, won’t ever come back in full, nor sufficiently over the next few years to avoid more bankruptcies.
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  • Air New Zealand is grounding its fleet of seven B777-300s and eight B777-200s until September 2021, the carrier said. Recovery from the Covid pandemic is taking longer than expected, and it remains uncertain when longhaul traffic will return to pre-pandemic levels. The aircraft will be stored in the deserts of California and New Mexico. As international routes are restored, Air New Zealand will operate them with B787s.
  • Airbus has recorded 303 orders this year, after cancellations are factored in. The airframer delivered just 39 aircraft in August: two A350s; two A330s; and 35 A320-family aircraft. The company had one order for an A320 NEO in August. Airbus said its backlog is around 7,500 aircraft of all types.
  • At a Deutsche Bank aircraft finance and leasing conference last week, Air Lease Corp. (ALC) rattled off the reasons why it’s well-positioned to endure the crisis. Many of its airline customers are what it calls “systemically important,” in other words too economically vital to their countries to fail (not unlike governments judged many of their banks too systemically important to fail during the global financial crisis).

    Not on ALC’s customer list, by contrast, are bankrupt or near-bankrupt airlines like Latam, Norwegian, Thai Airways, and Avianca, etc. Though heavy on widebodies designed for currently suppressed intercontinental flying, the models ALC offers (B787s, for example) are still in demand. It thinks the troubled A330 NEO is still a good longterm bet given all the A330 CEOs that will need replacing. It’s less keen on B777-9s, noting its high price and limited customer base. On the narrowbody side, ALC is very bullish on A220s.

    Overall, lessors are benefitting as airlines with distressed balance sheets increasingly turn to leasing for their needs. Those needs, importantly, often involve the latest-generation planes as they mass retire older models.
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Landing Strip

  • Amid all this grim pandemic-related news, there is a bright spot. Western Sydney International Airport is close to awarding the contract to build a new terminal. The airport is expected to open in 2026, and aims to be the airport for “decades and generations to come,” CEO Simon Hickey said.

    Also in the project are connections to highways and the Sydney Metro and rail links. The airport will open with an expected 10m passenger capacity, scalable to grow to handle 82m annual passengers by the 2060s. 
  • Vancouver Airport is cancelling a long-term infrastructure and capital improvement program in order to focus on more immediate projects, the airport authority said. The Covid pandemic has forced it to be more fiscally responsible and to address current needs. The project was conceived when the airport saw double-digit annual traffic growth, which has ground down significantly as the pandemic has progressed. Now, the airport will allocate resources to the “restart of aviation,” including health screenings, data infrastructure, and cargo facilities.
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  • American Airlines’ decision to eliminate ticket-change fees for domestic and near-international flights was aimed to adapt to the changing demographics of its passengers. Although the airline announced its new policy the same week as United and Delta, Chief Customer Officer Alison Taylor said the move had been long in the planning.

    “Both our demographics and why people travel are why we’re pivoting now,” Taylor said in an interview with Airline Weekly. “Our travelers now are quite a bit younger and are not experienced road warriors, so we wanted to react to that.”

    As the pandemic has ground on in the U.S., American’s passengers have skewed younger. Before the pandemic, travelers under the age of 30 comprised 10% of American’s passengers. Now, they account for more than 30%, Taylor said. These passengers are primarily leisure travelers or can now work remotely and are opting to work from beach destinations in Florida, the Caribbean, and Hawaii, Taylor said.

    These younger travelers are more likely to purchase basic economy fares than other leisure travelers, but change fees still apply to those fares. The elimination of change fees is an incentive to upsell basic economy passengers to higher fares.

    In addition, business travel on American’s network is down 95% from last year, so the carrier is pivoting to focus on leisure destinations and travelers, Chief Revenue Officer Vasu Raja said at a conference this week (see Covid crisis section below). Even though most companies have grounded their employees, those same people still are flying for leisure. They expect the same perks and convenience they had as business travelers on their leisure trips, which also informed American’s decision to eliminate change fees, Raja added.

    Separately, unlike some of its competitors, American is not blocking middle seats. The carrier believes effective social distancing is not possible on an aircraft. Instead, American is working with scientists from Vanderbilt University on cleaning protocols and on a campaign to educate passengers on the steps the carrier is taking to make travel safe, Taylor said.

Online Bookings Expected to Capture More of Indian Travel Market, Yatra Says

  • Indian OTA Yatra said air travel is starting to recover, after almost completely collapsing earlier this year. Bookings are about 25% of what they were before the pandemic, but the company expects that to rise to around 40% by the end of the year. Before the pandemic struck, Yatra estimates that 60% of corporate travel bookings were offline. The company expects the move toward online corporate travel management to accelerate as the industry recovers from the pandemic.
  • The Canada Jetlines/Global Crossing saga continues. The latest development is that Global Crossing has spun off Canada Jetlines to a subsidiary called Canada Jetlines Vacations. Global Crossing will provide aircraft and crew for Canada Jetlines to offer charter flights to vacation destinations in Florida and the Caribbean.
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State of the Unions

  • Singapore Airlines, hobbled by the near disappearance of international and business travel, bowed to reality and said it would eliminate 4,300 jobs. Of these 2,400 will be lay offs and furloughs, with the balance accounted for through attrition, retirements, and a hiring freeze for open positions.

    Singapore expects to operate less than 50% of its pre-pandemic network for this year and next and said it doesn’t forecast a return to pre-pandemic traffic until 2024, tracking with the International Air Transport Association’s forecast. “Given that the road to recovery will be long and fraught with uncertainty, we have to unfortunately implement involuntary staff reduction measures,” Singapore CEO Goh Choon Phong said in a statement.

    These are the first layoffs or furloughs Singapore has announced since the pandemic began. The carrier entered the crisis in a relatively strong position financially. After the pandemic began to affect air travel, the airline took early and aggressive action. It raised billions in cash and credit, and has been proactive in parking aircraft and pulling capacity out of its network. In addition, Singapore’s government allocated $13b in aid for the airline, among the most lavish government aid packages to any airline in the world.

    But all of this wasn’t enough. Singapore is in a particularly bad spot to take advantage of any recovery in the airline industry. It has no domestic market at all. Airlines that are beginning to recover benefit from large domestic markets, like those in the U.S., Russia, China, Australia, and Brazil, to cite a few examples. Even airlines based in small European countries have a relative advantage, given that they can operate within the European Union. Singapore is hamstrung by the patchwork of international travel restrictions throughout Asia and the world. In addition, the mainline carrier staked much of its success on premium business travelers, a market that has all but evaporated. The carrier explained its reductions like this: “In order to remain viable in this uncertain landscape, the group’s airlines will operate a smaller fleet for a reduced network compared to their pre-Covid operations in the coming years.”

    Singapore is beginning negotiations with its unions on the job cuts, the carrier said. The 2,400 layoffs and furloughs will be both in Singapore and at its stations around the world. “This is not a reflection of the strengths and capabilities of those who will be affected, but the result of an unprecedented global crisis that has engulfed the airline industry,” Goh said.

United, Pilots Union Reach Agreement to Save Jobs

  • United and its pilots union have reached a deal that could save up to 3k pilot jobs, CNBC reported. Terms of the deal were not disclosed, nor the length that the stay from furloughs would last. The carrier had said it would need to furlough up to 16k employees — including just under 3k pilots — when the CARES Act stimulus expires on Oct. 1.
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Routes and Networks

  • In 2020, network planning is mostly a game of addition by subtraction. With demand so sparse, airlines are cutting routes more than they’re launching new ones. But it’s starting to reach the point of the year when carriers need to plan for next year’s spring and summer seasons, when demand could look a lot different. That’s especially true for intercontinental routes, a big focus for United.

    Last week, the Chicago-based giant unveiled a major overseas offensive reminiscent of headier days. Assuming cross-border travel restrictions will have eased by next spring and pressured to find useful applications for an expensive armada of widebodies, United will launch new service to Lagos, Accra, and Johannesburg in Africa, the first two from Washington Dulles and the Jo’burg route from Newark. It was only just before the crisis that the airline launched its first and only African route: Newark-Cape Town. Not stopping there, it will link Chicago with Delhi — that one starts this December — and San Francisco with Bangalore (next summer).

    Last week, incidentally, United began a new Chicago-Tel Aviv flight designed for now with cargo in mind. The new African and Indian routes, by contrast, are undertaken with family-visit traffic in mind. Even when travel restrictions do get lifted, and even after vaccinations begin, nobody expects corporate travel to make a quick comeback. So airlines need to redirect as much capacity as prudently possible to leisure and family visit-heavy markets. It’s true in the U.S. domestic market. It’s true in the international market. Remember too that family-visit-heavy markets like India and Africa tend to generate low yields, but that’s O.K. if fuel prices are low, and other operating costs are dropping dramatically as they are now.

    Is Dulles-Accra the new Chicago-Heathrow? Not quite. But it might be the right kind of market for the times. All five of United’s new Africa and India routes by the way, will operate with B787s, planes with excellent economics. Some of the routes will run daily. Others (Lagos and Accra) just thrice weekly.

    A final note about Lagos: One of America’s largest communities of Nigerian immigrants (many of them energy industry professionals) is in Houston, a major United hub. Their other option to visit home is flying via Delta’s Atlanta hub; Sure enough, Delta too is eyeing near-term opportunity in Africa, quickly bringing back its own Lagos, Accra, and Johannesburg routes, not to mention Dakar. American does not fly to Africa, though a delayed Casablanca route from Philadelphia might see the light of day some time in 2021.
  • United is playing some longhaul domestic offense as well. Clearly expecting an imminent flourishing of suppressed demand to Hawaii, it’s adding nonstops from Newark to Maui and Chicago to Kona. Those come next summer, by which time quarantine restrictions will hopefully have gone, and mass vaccinations will perhaps have started.

    The nice thing about the Hawaiian market, from United’s perspective, is that it’s filled with the sort of leisure demand expected to revive next year, but free of the armies of low-cost carriers blanketing the Florida and Arizona markets. True, Southwest flies to Hawaii now. But not from Newark or Chicago — those are widebody-only markets.

Meanwhile, JetBlue Also Goes Big on Leisure

  • JetBlue is another U.S. airline playing offense in an era of retrenchment. Yes, it’s cutting overall. But this winter, starting in November and December, the LCC will launch 24 new markets, on top of the 30 new domestic markets it announced earlier in the crisis. Of the latest 24, more than half are international, covering beach destinations in Mexico, Jamaica, Aruba, the Dominican Republic, the Turks and Caicos Islands, Costa Rica, St. Maarten, and the Bahamas.

    Here again is an airline throwing more capacity at leisure markets. Just as interesting is from where JetBlue will fly to these sunshine spots. Seven of the new routes are from Newark, building on an earlier offensive to challenge United at its New York-area fortress hub. Southwest, remember, recently abandoned Newark. On the opposite side of the country, JetBlue is advancing a Los Angeles LAX offensive started earlier in the crisis. LAX gets seven of the 24 new routes, including new transcon links to Charleston, Palm Beach, Raleigh-Durham, and Richmond. The expansion also includes the airline’s first ever international flights from LAX, to Cancun and Costa Rica.

    Back east, Raleigh-Durham, one of America’s fastest-growing airline markets pre-crisis, will get new nonstops to San Juan, Fort Myers, and Montego Bay. Fort Lauderdale gets new longhaul routes to Palm Springs in California and Bozeman in Montana. Richmond, finally, gets new service to Tampa and Las Vegas. Leisure, leisure, everywhere. JetBlue remember, also has a new crisis-era alliance forged with American.

Bamboo Eyes Intercontinental Routes

  • Vietnam’s domestic market has held up well during the crisis — with respect to traffic volumes if not yields. On the international front however, it’s been no different than elsewhere: a near-complete cessation of all scheduled flying. That should change in 2021, when Bamboo Airways for one, aims to launch nonstops to Australia. It revealed the intention while undertaking charters to the country last week.

    Bamboo is a young startup that, unlike its rival VietJet, ventured to buy widebody planes, namely B787-9s. That makes it a challenger to Vietnam Airlines, whose business is in shambles due to the crisis. Note that Vietnam’s air links to points beyond East Asia are very limited. The Gulf carriers connect it with the Middle East. Routes to France, Russia, and the Czech Republic harken back to old historical relationships. There’s London, Frankfurt, Istanbul, a bit of Scandinavia, a bit of India… not much else though. North America is too far for most aircraft, though Vietnam Airlines has longterm plans to serve California.

    Perhaps Bamboo has U.S. proclivities as well. The Vietnamese market was certainly growing rapidly pre-pandemic and poised to win more global manufacturing jobs. It’s already a major manufacturing center for companies like Korea’s Samsung, Japan’s Honda, and America’s Intel. 
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Covid Crisis 2020

  • The International Air Transport Association (IATA) says the airline industry could be ready to air ship billions of doses of Covid-19 vaccines, when they’re ready to be administered, but only if governments around the world coordinate now on transport policies.

    The logistical challenge of transporting billions of vaccines is enormous. First, the sheer capacity required. IATA estimates that 8k cargo-only B747s would be needed to carry enough doses for the world’s 7.6b people. It’s almost needless to say that there aren’t 8k B747 freighters (given that Boeing only built just under 1,600 B747s of all types in the 50 years since the aircraft launched).

    Most air freight is carried not by freighters but in the belly holds of passenger aircraft. Since the pandemic started, airlines have slashed international routes, resulting in a cargo capacity crunch just as cargo demand and profits started to rise. Many airlines, including United, American, Turkish, Emirates, and others, have operated special cargo-only flights since the pandemic began, converting passenger cabins to temporary cargo holds (and in fact, cargo led to rare profits in the industry in Korea and Taiwan). Global air freight capacity was down 31% in July, the latest month for which data are available, from 2019, IATA said.

    A second challenge is maintaining the “cold chain,” or keeping the vaccines cool from manufacture to delivery. It’s not a matter of life and death if the cold chain fails for a shipment of fresh fruit. It could be if a shipment of vaccines is exposed to high temperatures, during land transport to the airport, on the tarmac, or even at the delivery airport if the shipment is held up by customs. Early in the pandemic, reports that personal protective equipment was stalled on tarmacs raised outrage, even though most of the equipment survived. Vaccines would not survive days on the tarmac, the industry warns. Freight industry analysts have said the cold chain already is stretched and could further imperil the safe transport of vaccines.

    And speaking of safety, airlines transporting vaccines will be charged with the safety of what will arguably be the world’s most valuable commodity. Security at all points of the logistics chain needs to be strengthened and can’t be solely airlines’ responsibility, IATA said.

    The good news is that airlines have parked thousands of aircraft — including hundreds of large widebodies — that can be pressed into vaccine-transport duty. But it takes time to return aircraft parked in the desert to service. And it takes employees to return those aircraft to service and to fly them, just as airlines around the world are in the process of furloughing tens of thousands of workers.

    None of this is insurmountable, IATA argues. Governments need to act and coordinate on security, mandating cargo flights, and loosening some quarantine and travel restrictions to allow flight crews more flexibility to operate cargo flights. But the time to act is now, not when vaccines are ready for distribution. “If borders remain closed, travel curtailed, fleets grounded and employees furloughed, the capacity to deliver life-saving vaccines will be very much compromised,” said IATA Director General Alexandre de Juniac.  

North America

  • Demand is starting to get a little bit better in the U.S. That’s a key takeaway from a Cowen investor event held virtually last week, at which several major carriers presented. A sharp post-July 4th slump in domestic leisure bookings, it seems, has evolved into a steadier if not stellar pattern of demand toward the end of August and into early September. That’s mildly encouraging.

    But airlines aren’t so quick to get encouraged as they were the last time demand showed life (back in the May-June period). They remember how those green shoots ultimately failed to blossom. TSA figures closely watched by industry executives, show the number of people passing through U.S. airport security checkpoints during the first 10 days of September were down 65% from the comparable period a year ago. The declines were 71% in August and 74% in July. And keep in mind these figures include international travelers too — the declines would be less severe if just domestic were shown.

    We’re now by the way, a few weeks away from the start of Q4, and about a month away from the start of Q3 earnings season.
  • American was among the Cowen event presenters, and among the most bullish of U.S. airlines during the springtime green shoots. It’s since dialed back some of its earlier zeal to restore capacity, with ASMs down roughly 60% y/y this month, similar to its figures during July and August. With capacity down so much, and cost-cutting so imperative, American will cut 19k jobs on Oct. 1, barring any additional federal payroll support.

    It does consider itself relatively well-positioned given its outsized presence in the U.S. sun belt, where demand recovery has been a bit better — think of its hubs in Dallas-Fort Worth, Miami, and Phoenix, the latter two big leisure markets. American is funneling lots of whatever demand it can get through its two most important hubs — DFW and Charlotte — which have grown from being about 40% of the airline’s network pre-crisis to more like 60% now. Importantly, American is seeing a major shift in customer age demographics, from people over 40 to people under 40. Many of these younger passengers are not yet members of the airline’s loyalty plan. Many are flying on basic economy tickets. Not as many live in big coastal cities like New York, Boston, Washington, San Francisco, and Los Angeles. And just about everyone flying on American these days is doing so for leisure or family-visit purposes. “The customer is changing,” said Chief Revenue Officer Vasu Raja.

    And understanding those changes is key to winning the recovery, adapting routes, products, and loyalty plan features accordingly. The recovery will likely be slow, American acknowledges, with a meaningful revival of corporate demand not expected before deep vaccine penetration across the population. Speaking of vaccines, American says its cargo team will be ready and able to handle shipments, particularly from its hub in Philadelphia which has long catered to the region’s many pharmaceutical companies. As for carrying people, the airline like others has seen “a good clip” of bookings in recent weeks, a mildly promising sign for Q4. Phoenix has seen high load factors. Bookings in general have been more resilient at key hubs. It’s trying to capture new demand by nimbly responding with new leisure routes like Indianapolis to Cancun.

    In case you’re wondering, yes, American is still looking forward to replacing older narrowbodies with B737 MAXs. It has 24 on the ground, 18 already built but not yet delivered, and many more future deliveries — it does hope to defer some 2021 and 2022 deliveries, leveraging its role as one of Boeing’s most important worldwide customers.

    American is likewise happy with its decision to take a federal loan collateralized by its loyalty plan, highlighting the low interest rate it’s getting. With so much new borrowing, it will at some point probably look to raise more equity. When it does start to generate positive cash flow, repaying debt will be priority number one. Fortunately, its near-term repayment obligations are limited.

    What else is American up to? It’s of course developing new partnerships with JetBlue and Alaska, the latter (announced just before the crisis began) a precursor to intercontinental flying from Seattle. It’s upgrading cleaning protocols to reassure travelers. It’s retiring older aircraft types. And it’s eyeing more seamless connecting journeys with alliance partners like British Airways, Qantas, and Japan Airlines.
  • Delta, too, sees some encouraging signs in the booking patterns of recent weeks. It describes a “slight” increase in leisure travel, with more spontaneous trips booked on very short notice. With vaccines likely arriving and distributed in the next 6-12 months, Delta expects to see some degree of corporate travel revive perhaps as early as next spring. But as it warned: “Vaccines don’t end pandemics. Vaccinations do.” People in other words must be able and willing to get themselves inoculated.

    Importantly, demand for Delta SkyMiles earned by using Amex credit cards remains pretty strong. People it seems, still want to earn miles anticipating they’ll be able to travel before long; things might be different if the crisis were expected to last multiple years. All the while Delta is slashing costs, with a 50% reduction achieved in Q2 and something similar on track for Q3. Cash burn is down. Cash reserves are plentiful. Refund obligations are thinning.

    Separately, Delta says many of its employees who accepted voluntary exits from the company were able to do so in part thanks to record profit sharing payouts just on the eve of the crisis. It had no choice but to downsize as demand shrinks. As for its future size and network, it all depends on consumers. 
  • United was not among the Cowen presenters but did provide a brief investor update on some developing trends. During the last weeks, it said, domestic and shorthaul international bookings have shown “moderate improvement.” But it warns that the recovery “won’t follow a linear path.” This quarter, ASM capacity is down 70% y/y, a few points more than previous guidance. More importantly, Q3 passenger revenues will be down some 85%. As it’s said many times before, United doesn’t see demand exceeding 50% of normal levels until vaccines arrive.

    As discussed in the Routes section above, United is making some intriguing network moves as it chases leisure and family-visit traffic both at home and abroad. It was the leader, remember, of a movement to abolish ticket change fees late last month, matching a longtime Southwest policy. That’s perhaps not surprising. As former Spirit CEO Ben Baldanza noted in his “Airlines Confidential” podcast last week, United has heavy network overlap with Southwest, much more so than Delta or American.

    So now that it’s competing for the same leisure traffic base in cities like Chicago, Denver, and Houston, it couldn’t let Southwest have a more attractive policy. Don’t forget though that United’s change fees still exist for its cheapest basic economy tickets.  
  • Back at the Cowen show, Alaska Airlines was no different in welcoming more robust booking activity at the end of August and into September. It described demand through August itself as “stable but low.” What’s driving the modest pickup late in the month? Alaska says it doesn’t really know, other than to suspect heavy pent-up demand and responses to various fare sales. Of course, Seattle’s economy is outperforming thanks to companies like Amazon, Costco, and Microsoft, all benefitting from the pandemic. August was a bit better than expected in terms of cash burn.

    But to be clear, revenue for the month was still down 72% y/y, not much different than the declines in June and July, and not much different for that matter than what’s expected for September, never mind the recent booking bounce. Load factors this month are running between 40% and 45%. Q3 capacity in total y/y will be down 55%. Alaska is planning to take a government CARES Act loan just for the extra cash it will provide at below-market interest. It’s not, unlike American, interested in issuing new equity.

    Speaking of American, the new Alaska-American partnership should help in markets like Los Angeles, while enabling Alaska to offer a wide array of intercontinental destinations without having to buy and fly widebodies itself. Intercontinental demand, though momentarily depressed, is a priority for Alaska because of Seattle’s growing global economic importance. It doesn’t want to let Delta harvest all the overseas fruits. Alaska’s relationship with American, however, is still to some extent constrained by regulations imposed by competition officials after Alaska bought Virgin America in 2016.

    Two final notes: Alaska is closely watching the Hawaii market, where Covid infection rates have jumped. And layoffs are coming on Oct. 1, though it hasn’t yet said how many.
  • In its own description of the latest booking bump, Spirit said forward bookings show people are becoming increasingly comfortable with air travel. It noted some pockets of strength in the western half of the country, including Las Vegas which held up “O.K.” Denver was a relative bright spot too, though Spirit isn’t too big there. On the other hand was lingering weakness in Florida due to quarantines imposed by other states. As things stand now, Spirit said during its Cowen presentation, trends are more “encouraging than discouraging.”

    It’s starting to see more travel searches for farther out time periods. And no, it’s not alarmed by the Big Three’s move to match Southwest’s no change-fee policy. Spirit itself imposes itinerary change fees (waived temporarily during the crisis). But it thinks the Big Three will have to raise fares to offset their lost fee revenue, which will be a net plus for Spirit. On the capacity front, Spirit’s Q4 ASMs are expected to decline 34% y/y, keeping in mind that fewer flights are getting cancelled this year. Q3 saw a similar decline.

    Looking ahead, it sees more opportunity to grow in Latin America and the Caribbean. It’s addressing shortcomings that make its loyalty plan “underpunch its weight.” And it sees upside in the co-branded credit card it offers with Bank of America.     
  • The U.S. Senate briefly debated a bill on $500b more Covid aid, but the bill failed to pass. Lawmakers remain divided on how to proceed, and the Trump administration has sent mixed signals on how much aid it thinks is required. The House of Representatives passed a $3t bill in May that the Senate has not considered. It is worth noting that there was no additional aid for airlines or airports in the defeated Senate bill.

    In the meantime, airlines and unions are calling on the government to pass a “clean” extension of the CARES Act’s payroll support program through March next year. Without it, tens of thousands of airline employees are expected to be furloughed on Oct. 1.

    The U.S. Travel Association estimates that half of all travel-related jobs in the U.S. have vanished since the pandemic began. Before the pandemic, 10% of U.S. jobs were in the travel industry or related businesses.


  • As IAG CEO Willie Walsh steps aside to retire, the group said worryingly that bookings have leveled off since July, after a brief shorthaul pop earlier in the summer as governments eased intra-European travel restrictions. In April and May, IAG’s airlines saw bookings largely stopped. Since mid-August, longhaul bookings have seen a modest increase. But shorthaul bookings have “fallen slightly.”

    During Q3, IAG’s total ASK capacity will have dropped 78% y/y. That’s a somewhat sharper decline that it was planning for. But it still expects cash flows to break even during Q4.

    There’s a lot going on within the IAG empire, including a process to cut up to 13k jobs at British Airways. Already, headcount there is down by 8k workers, mostly through voluntary departures. Another big focus is Air Europa, which IAG, according to reports, still wants to buy but only at a drastically reduced price, and with financial aid from Spain.  
  • EasyJet is the latest European LCC to express frustration about abrupt and inconsistent government changes to quarantine measures. After the U.K. removed seven Greek islands from its quarantine exemption list, the airline responded by scaling back planned capacity for the current fall season. This quarter, easyJet now expects to operate less than 40% of its original pre-pandemic schedule.
  • Icelandair is busy pitching its sale of more shares. It already won a government-backed credit line to help it through the crisis. It also secured concession-heavy deals with unions, creditors, suppliers, and Boeing. It’s these measures to improve its financial standing, in fact, that the airline is emphasizing in its share sale pitch. It also hopes to entice potential investors with the prospect of less transatlantic competition. It offers the example of Copenhagen-Boston, a route that SAS and Norwegian entered in recent years. But now they’re gone, forcing traffic in that market to travel via a hub like Reykjavik.

    Icelandair, furthermore, stresses its systemic importance to Iceland’s economy. It highlights the $437m in net profits it earned between 2011 and 2019. It can do a lot of its transatlantic flying with narrowbodies, including the MAX 8s and 9s on order. Its new labor agreements provide flexibility to enter more North American routes. It has high-value slots at London Heathrow, London Gatwick, New York JFK, and Amsterdam. It has a currently-thriving cargo business, plus an aircraft leasing business. It has a new partnership with easyJet and is talking to additional airlines in North America and China. It raises the prospect of tapping future tourism demand to Greenland as new airports open. It adds that load factors this summer were about 70%, higher than those of either SAS or Finnair.

    Icelandair admits that demand won’t completely normalize before 2024. But it will start a conservative capacity ramp-up in Q2, 2021, with an eye on long-term average operating margins of 8% annually.
  • Volotea said its summer schedule of leisure routes performed well. The carrier flew almost 2m passengers in July and August and reported an average load factor of 90%. In response to Covid, the airline pivoted to flying mainly domestic flights in the countries it operates.
  • The European Commission (EC) has outlined a grading system for countries or regions managing the Covid pandemic. The four-tier, color-coded system would assign a “Green” grade for regions that have fewer than 25 infections per 100,000 people; “Orange” for 50 or fewer infections per 100k people; and Red” for regions with more than 50 infections per 100,000 people (“Grey” for regions with insufficient data).

    The EC recommends that member states not restrict travel from countries with an equal or better infection rate, and arrivals from “Red” or “Grey” countries should be tested upon arrival. These are recommendations, IATA notes, as the EC cannot enforce these new criteria. “We hope that this time, European states will listen, act in coordination, and use this methodology to open up borders to travelers beyond the EU,” IATA Regional Vice President for Europe Rafael Schvartzman said.


  • Russia’s transport ministry released traffic data for August, showing local carriers flew more than 9m passengers during the month. That was down 37% y/y, a significant improvement from the 53% drop they recorded in July. Importantly, these figures include international travel, which was down much more severely. So clearly, the domestic declines are down much less severely.

    S7, Russia’s second-largest airline, saw traffic increase 6% y/y in August, but that in part reflects the consolidation of its Globus leisure subsidiary. The trend at Aeroflot is clear: The group is shifting more capacity and responsibility to its LCC Pobeda. Amid a mainline August traffic decrease of 60%, and drop at Rossiya of 32%, Pobeda saw a 17% increase.

Latin America

  • Is there a correlation between Brazil’s more relaxed approach to lockdowns and its extremely high Covid death toll? Maybe. But for airlines, the less stringent restrictions on flying allowed airlines like Gol to restore capacity relatively quickly. In August, Gol reopened 51 daily flights from its two major hubs: São Paulo GRU and Rio de Janeiro GIG. That made it considerably busier in August than in July. It was able to generate revenues for the month exceeding $90m.

    Still, domestic ASK capacity for August was down 66% y/y. RPK traffic was down a similar amount, so that load factors held strong at 79%. That’s different than in most markets around the world, where traffic declines are significantly outpacing capacity declines, causing very low load factors.

    Separately, Gol said it still has sufficient liquidity to meet its debt obligations and finance its capacity ramp-up, with cash burn down to about $1.1m a day, not including a big debt repayment it made. By the end of this year, the airline hopes to be at 80% of its normal capacity.
  • In a significant executive appointment, Latam named Marty St. George its new chief commercial officer (CCO). He previously served as Norwegian’s interim CCO, and before that the CCO of JetBlue. He’s held positions at United and US Airways as well. Clearly, Latam was looking for someone with extensive knowledge of the U.S. market, which takes on greater importance as the airline develops a joint venture with Delta.

    In a separate Latam development, its U.S. bankruptcy court refused to approve a DIP financing proposal by Oaktree, Qatar Airways, and Latam’s founding families. Some of the airline’s creditors weren’t happy with the terms.
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Feature Story

Denver and Salt Lake City emerge as airline powerhouses

There’s nothing particularly flattering about their pandemic-era traffic trends. In July (the most recent month for which data are available) Denver and Salt Lake City airports saw y/y traffic declines of 61% and 65%, respectively. Cataclysmic by normal standards. By current crisis standards, however, the declines are somewhat below the national average. Beyond mere traffic trends, more importantly, is the emergence of the Rocky Mountain region as one of the crisis era’s relative winners.

Denver and Salt Lake City are indeed seeing among the mildest declines in traffic and capacity among all major U.S. hub airports. One reason is simple: To the extent that Americans are still taking vacations, a large percentage are avoiding big cities and crowded theme parks, visiting national parks and other outdoor scenic spaces instead. With a deadly infectious disease on the loose, what better place to escape than the mountains? July visits to Rocky Mountain National Park near Denver were down by a quarter from last year’s record-breaking figure. But that was mostly because the park limited entries (to promote social distancing). Salt Lake City happens to be the closest airline hub to Yellowstone National Park, where July visits were actually up 2% y/y. Many visits don’t involve air travel of course. But many do, especially from distant parts of the country, like the east coast. 

A relatively resilient tourist sector is one reason Salt Lake City currently has the lowest unemployment rate of any airline hub city: Just 5% in July, compared to almost 11% nationally. (New York’s unemployment rate is 16%). Denver is well below the national average too, at less than 8%. Tourism aside, Denver and Salt Lake are both cities with large technology sectors. And technology is an area of the pandemic-era economy that’s holding up well.

Demographically, Denver and Salt Lake are growth superstars. Between 2010 and 2019, the U.S. population grew by 6%, according to U.S. Census data. Denver’s population by contrast grew 16%. Salt Lake saw a 13% increase. Utah also happens to have the highest birthrate and youngest median age of any state. Two decades ago, when airlines were dealing with the 9/11 crisis, Salt Lake City was one of Delta’s weaker hubs, with many routes busy enough to support only regional jet flying. Thanks to years of above-average population and economic growth, the market can support much more demand today. 

Even before the pandemic, Denver in particular was a booming airline market. It welcomed 69m passengers last year, up 7% from 2018. Salt Lake City itself grew 5% to 27m. Neither city, importantly, has a whole lot of intercontinental traffic in normal times. They’re primarily domestic hubs, and that’s a good thing right now with international borders closed. Population centers within the mountain region, meanwhile, tend to be rather spread apart, making air travel often more practical than surface travel. Locals in Denver and Salt Lake are big per capita fliers — just driving from one to the other is an eight-hour affair. As for hub competition, Denver and Salt Lake are alone in the mountain region; contrast this with the midwestern region pre-consolidation, which had more hubs than the market could support. Even today there are three big ones (Chicago, Detroit, and Minneapolis). 

The mountain region certainty has its fair share of low-cost and ultra-low-cost air travel. Frontier is based in Denver. It was Southwest’s second largest market by seats after Chicago last year (according to Cirium data). Spirit and JetBlue are there. Allegiant and Sun Country dabble there. Southwest is large in Salt Lake City too, with JetBlue and Frontier sporting a smaller presence. Spirit and Allegiant are not yet in Salt Lake, partly due to facility shortages.  Breeze, the new airline backed by David Neeleman, will have its headquarters in Salt Lake City.

Denver, of course, is a United hub. Salt Lake City is a Delta hub. Well, both airlines, as they slash frequencies to cities around the country, are funneling more traffic through their midcontinent hubs. Want to fly United’s nonstop from San Francisco to Philadelphia? It’s gone. An alternative is flying via Denver. That Los Angeles-Columbus nonstop on Delta? Doesn’t exist anymore. Go via Salt Lake instead. Note also that neither hub is particularly big for corporate traffic, another segment of demand (like international) that’s deeply depressed.

Helpfully, Covid-19 infection rates were low throughout the summer, at least when compared to hotspots like Florida and Southern California. Texas, always a big source of mountain region visitors, was a major Covid hotspot this summer, surely encouraging some to flee for the mountains. The intense heat wave currently scorching the west is another incentive to head for higher altitudes. Looking ahead, Denver and Salt Lake are hoping for a relatively busy ski season, Covid permitting.   

When traffic does start to revive in earnest, Salt Lake City will be ready. This week, Delta will operate the first flight from the city’s brand-new airport, built on the site of the existing airport (and using the same runways). As it happens, the site is notable for its proximity to the city center, which is most definitely not the case at Denver. It can handle close to 40m passengers annually. Denver, for its part, has 39 new gates under construction, a 30% increase on its current capacity.  

Longer-term, both cities — Denver, especially, given its size — will strive to attract more international service. Its only European destinations pre-crisis were London, Frankfurt, Munich, Paris, and Reykjavik. Its only Asian destination was Tokyo. It offered nothing south of Panama City. Intercontinentally from Salt Lake City, it’s just London, Paris, and Amsterdam. KLM is alone among longhaul foreign airlines flying to Utah’s largest city. No British Airways. No Lufthansa. But the airport believes nonstops to Seoul could become a reality once markets recover, thanks to Delta’s partnership with Korean Air. More service to Central and South America is a target as well, and in many cases reachable with narrowbody planes.

Interestingly, one of Salt Lake City’s biggest travel buyers, with lots of international itineraries, is the Church of Jesus Christ of Latter-Day Saints, known for worldwide missionary work. Business Travel News (BTN), in fact, ranks it number 43 on its list of spenders on U.S. air travel. It spent an estimated $93m on airline tickets in 2018, BTN estimates, much of it naturally booked with Delta. Adobe, a Silicon Valley-based software giant, has a large presence in the Salt Lake region. Palantir, another notable Silicon Valley company, will soon move its headquarters to Denver. The mountain region in general has a large federal government presence. And it’s an area with many natural resource companies as well.

Add it all up, and you’ll see two airline markets absorbing the Covid shock better than most. Forward airline schedules are subject to major changes these days, even close in. But it’s hardly random that among America’s 50 busiest airports excluding those in Hawaii, Salt Lake City’s October seat counts are scheduled to drop the second least of any: down 21% y/y (Cirium). Only Fort Myers in Florida (down 13%) shows a smaller decline. Denver sits just three notches down from Salt Lake, with a 28% decrease. The next few months will be tough for all airports. But for a bit of bullishness in an era of bears, head for the mountains.

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Around the World

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

Around the World: September 14, 2020

Airline NameChange From Last WeekChange From Last YearComments
American-5%-57%Envoy, its wholly owned regional subsidiary, closing its New York JFK and LaGuardia bases (Reuters)
Delta0%-47%Will be among the companies presenting at a Morgan Stanley investor event on Thursday (Sept. 17)
United-6%-60%Has about $18b in total available liquidity following multiple rounds of fundraising
Southwest-1%-29%CEO Kelly tells Dallas Business Journal he expects more federal airline aid; said industry would have collapsed without earlier aid
Alaska-1%-39%Hopes to complete the IT work necessary to join oneworld in the latter part of Q1 2021
JetBlue2%-28%Some of its newly announced transcon routes have never been served by anyone before
Hawaiian1%-49%Like others, it’s keeping change fees for basic economy tickets, beyond temporary waiver period
Spirit-3%-55%Upgrading airport pax handling technology to improve efficiency, limit contact with agents
Frontier(not publicly traded)Last big route announcement was in May; has been quiet on the network front since
Allegiant0%-12%Joins the chorus of U.S. airlines reporting “modest” improvements in bookings last month and into this month
SkyWest-2%-43%Headquartered in St. George, Utah, about four hours south of Salt Lake City
Air Canada-5%-59%Air Transat moving from five fleet types last year to just two (A330s and A321s) by next year
WestJet(not publicly traded)Porter Airlines, still grounded, now expecting to resume service on Nov. 12
Aeromexico-9%-71%Tapped the first $100m of its $1b DIP loan from Apollo
Volaris-4%-16%Interjet sued by U.S.-based fuel supplier for not paying its bills
LATAM1%-80%LCC JetSmart seems to be targeting Peru, Colombia, and Brazil, in that order
Gol-1%-45%Began September with 60 planes back in service, of the 130 (all B737s) it has in total; will go to 74 planes this month
Azul8%-49%Encouragingly seeing “strong improvements in booked average fares and revenues”
Copa4%-45%Panama still a primary destination for people fleeing Venezuela’s distressed economy
Avianca1%-83%Bad news: $370m government loan in jeopardy as Colombian court temporarily orders injunction
Emirates(not publicly traded)Israir, an Israeli carrier that competes with El Al, applies for rights to serve Tel Aviv-Dubai market
Qatar(not publicly traded)Latest A350-900 delivery gives it 100 planes installed with high-speed Wi-Fi
Etihad(not publicly traded)Latest destinations to rejoin the network are Casablanca and Rabat in Morocco
Air Arabia-1%-6%Bahrain’s Gulf Air restarting flights to the important India market this week
Turkish Airlines4%-9%Domestic ASK capacity was down only 32% y/y last month; int’l down 70%
Kenya Airways0%53%Reports from Nigeria say Arik Air, one of the country’s leading airlines, looking to change its name to Nigerian Eagle
South Africa Air.(not publicly traded)Cash again becoming a problem as long-term solution to reviving airline remains in question
Ethiopian Airlines(not publicly traded)Signs new codeshare agreement with the Brazilian LCC Gol
IndiGo3%-25%Business Insider report highlights plentiful cash and declining competition as reason its stock hasn’t fallen all that much
Air India(not publicly traded)Sale to private sector, most likely Tata Group, still a decent possibility despite crisis
SpiceJet-4%-61%India on pace to surpass U.S. as country with the most Covid cases
Lufthansa-7%-43%Says it’s distributed more than $2b in ticket refunds this year, to more than 6m customers
Air France/KLM-3%-60%Breakthrough: signs what it’s calling an “innovative NDC distribution deal” with Amadeus, Europe’s largest GDS
BA/Iberia (IAG)-11%-57%TAP Air Portugal announces new routes for next summer; Tunisia new on its menu of destinations
SAS-2%-51%Iceland ‘s government approves 90% credit guarantee for Icelandair; carrier will next sell new shares
Alitalia(not publicly traded)One incentive for gov’t to buy it B787s: Italian aerospace companies are key suppliers to the airplane
Finnair5%-93%Says previous fall schedule can’t be implemented in full “due to low demand”
Virgin Atlantic(not publicly traded)Just took delivery of another A350-1000, its first A350 delivery since last fall (Simple Flying)
easyJet-10%-42%Latest partner is Icelandair; other “Worldwide by easyJet” partners include Emirates, Norwegian, Virgin Atlantic
Ryanair-1%19%Threatening to close secondary Irish bases if government doesn’t remove onerous quarantine rules
Norwegian-2%-97%As massive as its restructuring was, it’s not enough; needs to raise more capital this fall
Wizz Air-7%-2%Says it may delay launch of Abu Dhabi venture if gov’t there doesn’t relax travel restrictions (Bloomberg)
Aegean0%-55%Still hasn’t published Q2 financial results; won’t do so until Sept. 28
Aeroflot0%-23%Pobeda, its LCC, poised to emerge as one of the stars of the crisis; already taking on a bigger role in Russian market
S7(not publicly traded)In Kazakhstan, Air Astana deploying A321 NEO LRs to Frankfurt
Japan Airlines6%-35%Members of oneworld alliance, JAL among them, commit to net zero carbon emissions by 2050
All Nippon7%-25%Sounds like AirAsia keen on getting out of Japanese venture; never grew beyond a handful of routes
Korean Air-2%-23%Jin Air, its publicly traded low-cost affiliate, lost $48m net in Q2
Cathay Pacific0%-41%Looking to reduce payroll through involuntary layoffs rather than apply for more temporary gov’t wage support
Air China3%-24%Taiwan’s StarLux to launch widebody ops with A330-900s instead of A350-900s next year
China reporting that 9 Air’s load factor was near 90% last month (9 Air the LCC unit of Juneyao)
China Southern2%-11%Wuhan, origin of Covid-19, saw day last week in which domestic flight departures and pax volumes matched y/y ago levels
Singapore Airlines-2%-61%As late as July total pax traffic at Changi airport was down 99% y/y
Malaysia Airlines(not publicly traded)Says domestic demand starting to “show a positive trend;” offering new fixed rate fares to stimulate traffic
AirAsia-1%-63%Forms new media solutions group offering various marketing services to other companies
Thai Airways4%-66%Opens pop-up restaurant for those who just can’t live without inflight airline food
VietJet-2%-23%Lunar New Year, or Tet in Vietnam, falls in mid-February next year; important period of air travel
Cebu Pacific5%-60%Will increase weekly frequencies to Dubai; carrying mostly overseas Filipino workers
Qantas-2%-39%New Western Sydney airport proceeding with development; still targeting late 2026 opening
Virgin Australia0%-46%Tiger Airways is no more; new Virgin owner Bain decides to close it
Air New Zealand-1%-51%N.Z. mostly Covid-free but new cases appearing
Brent Crude Oil-5%-32%Prospect for oil prices tied to global economic recovery, which faces heavy headwinds

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

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