Issue No. 787

European Recovery Derailed

Pushing Back: Inside This Issue

Buckle up, everyone. It’s time for third-quarter earnings season, starting with Delta on Tuesday. The dominant theme across the industry, of course, will be the Covid crisis, and its ongoing decimation of travel demand. Seven months into the crisis — longer if you start from its origins in China — international demand is still largely a big zero. America’s domestic recovery leveled off at a fraction of normal. Internal demand within Europe is sadly trending similarly. The domestic skies are getting busy again in China, Vietnam, and a few other East Asian countries. Same for Russia, and to a lesser extent Brazil. Even where traffic is recovering, however, airlines aren’t earning nearly enough to arrest heavy losses. Not with sharply lower fares. And not without any contribution from international. 

Hardly surprisingly, then, that IATA’s doom-laden warnings are only getting doomier and gloomier. It’s now concerned with the industry’s expected cash drain this winter. Promising new treatments for Covid might help. So might Covid testing. Vaccines will surely help in time. But maybe not fast enough to save carriers with weaker balance sheets, especially as government aid programs expire.

EasyJet, despite a strong balance sheet and ample cash, wants more government help. So does Southwest, which absent an extension of federal payroll support, is asking unions for concessions. It’s separately adding new routes and destinations with the goal of generating more leisure and family-visit traffic. Back in Europe, things are getting interesting in Norway as Wizz Air adds domestic routes, Norwegian pleads for more survival aid, and a new startup prepares to enter. AirAsia X is in a last-ditch survival effort, as AirAsia itself retreats from Japan and reassesses things in India. India’s SpiceJet is going to London. And Japan Airlines is launching its new low-cost carrier Zip Air.

Happy Q3 earnings season everyone!   

Verbulence

“The crisis is deeper and longer than any of us could have imagined. And the initial support programs are running out. Today we must ring the alarm bell again.”

IATA Director General Alexandre de Juniac, calling on governments to provide more relief.

Earnings

April-June 2020 (3 Months)

  • Air Astana: -$40m ; -352%

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

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Correction/Clarification

On the earnings board atop last week’s issue, we incorrectly stated TAP Air Portugal’s loss figures for the first half of 2020. The figures we showed ($439m net, or $189m excluding special items) were actually for just the first quarter of the year. The correct first half figures, as accurately shown in the Weekly Skies section, were a $647m net loss, or $431m excluding items. Operating margin for the half was negative 66%.

Weekly Skies

  • Air Astana’s latest financial statements show a $40m net loss for the April-to-June quarter, with an operating margin at negative 352%. Not that the margin figure is all that meaningful, other than to highlight a situation of severely depressed revenues, against a stickier cost base that’s not dropping quite so fast. Q2 revenues in fact declined 94% y/y, while operating costs were down 71%. During last year’s Q2, the airline earned a positive 8% operating margin. It earned a 9% margin for all of 2019.

    Air Astana is the national airline of Kazakhstan, a country which like neighboring Russia has a highly oil-dependent economy. That served it well during the oil boom of the first half of the 2010s. But when the boom fizzled in the second half of the decade, times were tougher. Air Astana is 51% owned by its government. The rest is owned by British defense firm BAE Systems. Its hub Nur-Sultan, formerly called Astana, is by whatever name well-positioned for east-west travel connecting Europe with Asia. But Almaty is a bigger business market, and operations are split sub-optimally across the two cities.

    Last year, the carrier launched a wholly owned low-cost unit called Fly Arystan using A320s. When the pandemic hit, Air Astana grounded most of its fleet but maintained flights for oil service workers and repatriation charters. It operated some cargo flights too, continuing nearly 30% of Q2 revenues. Passenger capacity was down 88% y/y in the quarter; capacity in the second half of the year should be down more like 40%.

    Helpfully, Air Astana’s largest market by revenues pre-crisis was the Kazakh domestic market. Its other major markets include Russia, Europe, Asia, and the Middle East. Before the crisis, it started receiving A321 NEO LRs and E2 E195s, with an eye toward nearly doubling its fleet to 60 planes by 2026.
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Media

  • In a downbeat week for Southwest (see labor section), there was some upbeat commentary about business travel. Dave Harvey, charged with generating more corporate business for Southwest, says he’s seeing a “nice pickup” in the segment. Speaking with Business Travel News, Harvey was careful to make clear that leisure travel is still more prevalent than business travel. But companies are indeed starting to relax their employee travel policies. Government travel is leading the recovery, with health care, transportation, and logistic companies also getting back in the air. Southwest continues to invest in its corporate travel division despite the crisis.
  • Bloomberg News looks at some companies developing supersonic and even hypersonic planes for commercial use. Aerion, for one, partly owned by Boeing and soon to be based near Orlando, is working with GE Engines to build business jets that fly twice the speed of today’s typical commercial planes. “Our long-term vision is to allow people to travel between any two points on the planet within three hours,” says CEO Tom Vice.

    Virgin Galactic, Boom, and Spike are three other companies with similar ambitions. Big technological obstacles remain though, most importantly getting the planes to fly economically at acceptable noise and emission levels. What’s the timetable for reviving the second age of supersonic travel? Aerion says it will have a business jet ready to deliver in 2027.

    Last week, Colorado-based Boom unveiled its XB-1 prototype, which it hopes to start test flying next year. An actual passenger jet version is to follow in 2025, with first flights perhaps late this decade. Japan Airlines and the Virgin Group have committed to flying Boom’s aircraft when ready and available.
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Fleet

  • A boost for Boeing? Alaska Airlines, Reuters reports, might be on the verge of a new B737 MAX order. It has fewer than 40 on order currently, which isn’t enough to meet its longterm replacement needs. The airline still flies A320-series aircraft inherited from Virgin America. These include A321 NEOs, which Alaska likes.

    But other moves, including the early retirement of some A320s, hints that Alaska will ultimately return to an all-Boeing fleet. Remember that Boeing and Alaska are both domiciled in Seattle (Boeing is technically headquartered in Chicago but retains many of its facilities and workers back in Washington State).
  • Miami-based startup Global X, which aims to start a Canadian LCC called Jetlines, plans to receive 15 A320-family planes over the next six months. Ten will be passenger planes. Five will be freighters. The company says it’s paying pandemic-era lease rates that are less than half of what it would have paid in January and February, before the crisis started. Global X plans to operate a multitude of business models, including cargo flying, scheduled charter flying to Cuba and other sunshine spots, and ACMI charter flying, for sports teams and hotels, for example. (ACMI refers to an arrangement by which customers rent an Aircraft, with Crews, inclusive of Maintenance and Insurance). The Jetlines brand will come later, targeting scheduled service from Canada to sunshine destinations like Florida.

    Again emphasizing the attractiveness of the aircraft market to newcomers right now, Global X told investors: “I will tell you that every major leasing company in the world has come to see us here in our offices in Miami. And we have a virtual unlimited selection of aircraft that we can choose from.”
  • The coronavirus pandemic could result in a significantly smaller airline market for the next decade, Boeing’s annual Market Outlook says. Although the market will recover, Boeing says, it could take longer than previously predicted and could hamper economic growth for years to come.

    The forecast calculates the total value of the commercial and defense aerospace market for products from all manufacturers, not just Boeing. And although the airframer put a rosy spin on it, arguing the industry is “resilient” and has returned from other crises, the underlying numbers paint a grim picture.

    Boeing estimates the total value of the commercial and defense military markets to be about $8.5t over the next 10 years, down from last year’s forecast of $8.7t. That’s $200b less than it expected last year. Airlines around the world will require more than 18,000 aircraft over the next decade, but that’s 11% fewer than Boeing forecast last year. That translates into roughly 2k fewer aircraft — or 200 fewer per year — over the next 10 years.

    And about the recovery of travel, Boeing forecasts that it will take three years for commercial air travel to return to 2019 levels. Moreover, it will take five years for travel to return to the level it would have been if 2019 traffic trends had continued at the same pace. This is more optimistic than IATA’s forecast of 2024 for air travel to return to 2019 levels, but not by much.
  • Airbus says it will trim its worldwide workforce by 15k employees, as demand for aircraft has fallen off due to the Covid pandemic. Chief Operating Officer Michael Schoellhorn told German media that the 15k cuts are a “minimum” given current demand conditions. The airframer also said the autumn has been much worse than was expected earlier this year. The company has begun talks with its unions for workforce reductions.

    Separately, Airbus said it delivered 57 aircraft in September, compared with 71 aircraft in the same month last year. For the year, Airbus has delivered 341 aircraft, or 40% of what it delivered last year.
    And finally, Airbus delivered its 10,000th A320-family aircraft, an A321 NEO, to Middle East Airlines, which, coincidentally or not, took delivery of the company’s 5,000th A320-family aircraft in 2012.
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Landing Strip

  • Data from Airports Council International (ACI) paint a stark picture of how bad the pandemic has been for the airline and airport industries. Passenger traffic fell by 59% in the first half of 2020 compared with last year. International passenger traffic fell the most, by 65%, and cargo, despite the growth in the sector, fell by 12%. In 2019, by contrast, traffic grew 4% from 2018, capping a decade of annual increases in traffic. The three busiest airports in the world, according to ACI, were Atlanta, Beijing, and Los Angeles.
  • ACI, in another white paper, said aviation taxes are hampering the industry’s recovery from the pandemic. Airport operators pay $10b in taxes worldwide, and this translates into almost 8% of an airport’s costs. With ticket and other taxes thrown in, air transport pays $90b in taxes, ACI estimates. The group believes that reducing aviation taxes could result in more than 700m additional passengers, if traffic held at 2019 levels, or 5.2m more jobs.
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State of the Unions

  • Even by the standards of this administration and the 116th Congress, last week was a  wild week, one that whipsawed the airline industry and its workers between hope and despair. And the week ended with no further clarity on whether the federal government will step in with more aid to bolster ailing airlines.

    Airlines began furloughing more than 30k employees on Oct. 1, when the CARES Act payroll support program expired. But workers could be recalled if more funds were made available. The week started with House Speaker Nancy Pelosi (D-Calif.) and Treasury Secretary Steven Mnuchin negotiating on a coronavirus-relief bill that would have included more than $25b in airline aid. At the same time, bills in both houses of Congress to extend airline industry payroll support through March 2021 were gaining bipartisan support.

    But President Trump upset the apple cart early in the week after returning from the hospital, where he was being treated for Covid-19. With a single tweet, he ordered White House negotiators to halt talks on the HEROES Act, the more than $2t bill Pelosi and Mnuchin had been negotiating. Republican senators signaled that even if talks were to continue, there wasn’t enough support in the chamber for a large relief bill.

    The next day, Trump said he was open to a standalone airline aid bill. Pelosi and Mnuchin spoke at least twice on moving one of the bills pending in Congress. Senators Roger Wicker (R-Miss.) and Susan Collins (R-Maine) introduced a $28b bill to extend the payroll support program. A similar bill, championed by House Transportation and Infrastructure Chairman Peter DeFazio (D-Ore.), was gaining bipartisan support in the House.

    But as the Speaker negotiated with the administration, Republican Senators Mike Lee (Utah) and Pat Toomey (Pa.) questioned the need for more aid. Taxpayers already had spent $25b on airline payroll support, so why should Congress extend it, when restaurants and small businesses were not getting the same favor, they asked. “The excess capacity of the airline sector will not be resolved in the near future, and continuing to force the entire payroll obligation onto the taxpayers is not sustainable,” they said in a statement.

    Meanwhile, Trump signaled — again, on Twitter — that the administration now is open to a more comprehensive bill, one that can be signed into law before the Nov. 3 election. The administration, however, sent mixed signals, according to a top Pelosi aide. “The Speaker pointed out that, unfortunately, the White House Communications Director contradicted that assertion during their call,” Drew Hammill, Pelosi’s deputy chief of staff, said. “The Speaker trusts that the [Treasury] Secretary speaks for the president.”

    Late in the week, Pelosi changed course and said further aid to airlines would only come through a larger coronavirus-relief bill. “I have been very open to having a standalone bill for the airlines or part of a bigger bill,” Pelosi told reporters. “But there is no standalone bill without a bigger bill.”

    The White House has said it will work through the weekend and into next week to negotiate a bill. However, Trump called Pelosi a “nut job” on Friday during an interview with radio host Rush Limbaugh.

    But Senate Majority Leader Mitch McConnell (R-Ky.) quickly poured cold water onto those efforts by saying the Senate was unlikely to pass a bill before the election, dashing hopes that any deal reached could be enacted. Remember, the Senate is focused on confirming a Supreme Court justice for the seat vacated by Ruth Bader Ginsburg last month. Also, the Senate is effectively in recess until Oct. 19 as several Republican senators are in quarantine after contracting the coronavirus (thought to have occurred at an event to nominate Amy Coney Barrett to the Supreme Court).

    In the meantime, the more time that passes without additional aid, the less likely it is for the 30,000 furloughed airline workers to be recalled. Even Southwest, which famously has never furloughed an employee since its founding, warned that layoffs could begin next year “as a last resort.” CEO Gary Kelly is asking unions to begin talks on concessions to take effect next year. And airlines, freed from CARES Act’s mandates to retain service to all cities, have begun cutting routes.

    “We remain hopeful that either the President or Congress will act swiftly to save these jobs,” an Airlines for America spokesman told Airline Weekly. “We need action NOW.”
  • With no payroll support extension from Capitol Hill, Southwest CEO Gary Kelly began the uncomfortable process of asking unions for pay concessions. The unions, to put it mildly, weren’t thrilled. SWAPA, which represents pilots, said management has for years ignored its ideas to improve productivity. It also complained that the company wasn’t providing it access to crucial financial data. TWU, Southwest’s largest union (representing flight attendants and ramp workers) said Southwest could save more than $100m annually just by insourcing overnight aircraft cleaning.

    Both unions pointed to the airline’s strong cash position, its declining rates of cash burn, and its better position relative to rivals. Kelly says the company is losing “staggering sums of money.” SWAPA says Southwest “has a revenue problem, not a cost problem.” If it tries to furlough pilots, “we will fight to prevent them.”
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Distribution

  • Datalex, an Irish software company specializing in airline distribution solutions, cited four emerging trends at its annual shareholders meeting. One is that sales through digital direct channels (like an airline’s own web and mobile sites) are recovering at a faster rate than through third-party channels. Secondly, airlines increasingly want “offer control,” which means the ability to merchandise, price, bundle, and showcase their products as they sit fit, through whatever channel (this is what IATA’s NDC standards seek to achieve). Third, Dalatlex points to a trend toward more IT outsourcing as carriers cut internal investment budgets. Finally, there’s growing adoption of plug-and-play software solutions that are fast to implement and often less costly than many legacy tools.
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Routes and Networks

  • Wizz Air smells blood in Norway. Early next month, the ultra-LCC will launch its first domestic routes within the country, focusing on three big ones from Oslo’s main airport: Bergen, Trondheim, and Tromso, each with multiple daily frequencies. That’s nothing if not a clear warning shot at Norwegian, which remains cash insecure despite a deep restructuring.

    Norway has long been an important market for Wizz. It started flying there in 2008. And it today serves nine Norwegian airports, linking them to points in Poland most importantly. Norwegian too, is a player in the Norway-Poland market, catering primarily to migrant workers and their families. It even based planes in Warsaw many years ago.
  • Norwegian might have more to worry about than just Wizz Air. A new startup airline led by aviation veteran Erik Braathen, together with a team of former Norwegian executives, plans to launch in 2021 with either A320 CEOs or B737-800s. Those planes can certainly be had at a great price right now. Less certain is how long it will take for demand to recover, and what the domestic Norwegian capacity landscape will look like with Norwegian trying to survive and Wizz now in the picture.

    SAS and Wideroe are the market’s other big players. You can see the logic though: Secure assets and employees at extremely depressed rates right now, to enable a launch just as vaccines arrive, as demand presumably revives, and as Norwegian — perhaps — goes away or further downsizes. Braathen, by the way, is himself a former Norwegian board member whose family was involved in several airlines over the years, including BRA in Sweden, an early casualty of the Covid pandemic.

    According to Norway’s E4, the new startup wants the same sort of government aid that other airlines are receiving. With proper funding, it hopes to launch in Q2 of next year, just before the summer peak. The Norwegian domestic market is rather large relative to its population, partly because it’s a wealthy country (buttressed by oil riches), and partly because of long distances and rough terrain between major cities.
  • Norwegian, in the meantime, might close its shorthaul London Gatwick base. That would make easyJet happy, and perhaps free slots that Wizz Air and others can appropriate. On the long list of unimaginable developments this year, several airlines are abandoning their London positions. Virgin Atlantic, remember, is leaving Gatwick. Norwegian, however, will retain its longhaul base at Gatwick. How could it not, given the need to find homes for a large fleet of Dreamliners? There’s only so many B787s one can fly from Scandinavia.
  • Southwest provided more detail on the new Miami and Palm Springs service it announced earlier this year. Starting next month, it will fly four routes year-round from Miami: to Tampa, Baltimore BWI, Houston Hobby, and Chicago Midway, all major Southwest strongholds. It will connect Palm Springs nonstop year-round to Oakland, Phoenix, and Denver, three big Southwest markets in their own right. Though Southwest doesn’t operate a traditional hub-and-spoke network, its big stations like Chicago and Denver most definitely handle a lot of connecting traffic.
  • Southwest also announced another new destination, to operate just during winters. In December, it will fly to Telluride from Denver, an intra-Colorado ski route that mirrors its new Denver-Steamboat Springs route, also for skiers. Telluride gets nonstops from Dallas Love as well, though just on weekends. Southwest has historically been conservative with respect to adding new cities, preferring to focus on connecting existing nodes in its network, and adding frequencies on routes. Its philosophy might be changing, however, as it looks for any way possible to add more leisure and family-visit traffic.
  • Oddly enough, Qatar Airways never flew to San Francisco. But that will change in December, when the California city gets A350-900 nonstops from Doha. San Fran becomes the carrier’s fifth new worldwide destination announced since the start of the Covid crisis, the others being Toronto, Accra, Brisbane, and Cebu. Qatar has been pretty aggressive about rebuilding its network as well, and about maintaining service to places it served pre-crisis. By the end of 2020, it currently expects to have 124 destinations back online, including 42 in the Asia-Pacific region, 38 in Europe, 21 in Africa, 13 in the Middle East, and 10 (including San Francisco and Toronto) in the Americas.  
  • “Namaste London.” So reads the advertisements for SpiceJet’s newest route, connecting the U.K.’s capital to India’s capital of Delhi, as well as Mumbai. It will use a wet-leased A330-900 NEO. Jet Airways no longer exists, but the U.K.-India route is also contested by British Airways, Virgin Atlantic, Air India, and Vistara. SpiceJet’s distinguishing feature is its low costs, though cost efficiencies are more difficult to exploit on longhaul routes than they are on shorthaul routes.

    There’s a reason why there’s no longhaul version of Southwest or Ryanair. If SpiceJet does ultimately succeed flying longhaul, it will need to build some measure of scale in terms of its fleet and network. That said, wet-leasing (renting planes along with their crews) might temporarily be good business given high cargo yields. SpiceJet hasn’t said whether it plans to order its own widebody fleet.
  • Zip Air, a new low-cost carrier launched by Japan Airlines, will belatedly operate its first passenger flight — from Tokyo Narita to Seoul Incheon — on Oct. 16. It’s actually already flying the route, having launched last month. But only with cargo. Tokyo-Bangkok will come next, though no start date has yet been announced. JAL ultimately wants Zip to fly longhaul routes with its fleet of B787s, offering just two classes of service: Economy and what might be called premium economy. The U.S. market, including Hawaii, is a likely longterm target.
  • A Middle Eastern aviation détente moved another step forward with the relaxation of overflying rights between Jordan and Israel. For El Al, amid an avalanche of bad news related to the Covid crisis, international aeropolitics have been a shining area of good news. The airline suddenly has significant new revenue opportunities stemming from agreements with Dubai, Abu Dhabi, Bahrain, and now Jordan. It has authority to use Saudi airspace for its Gulf flights as well.  
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Covid Crisis 2020

  • IATA, working with Airports Council International and others, continues its push to advance passenger Covid testing as a short-term way of safely reviving air travel. The industry is getting desperate, with the pandemic still preventing most international borders from reopening. Airlines, IATA says, burned through $51b in cash during the second quarter, meaning April, May, and June. Airlines have gradually restored capacity since April, and demand has ever so gradually improved. But not much.

    Airlines will have burned through another $77b during the second half of 2020, covering July through December, IATA estimates. And the industry won’t turn cash positive until 2022. All else being equal, large numbers of airlines would have collapsed over the past six-plus months. But governments came through with $160b in aid, in the form of loans, equity, grants, subsidies, and tax breaks. Carriers got another $20b in relief from suppliers, IATA adds. Many relief programs are coming to an end however — airline wage subsidies in the U.S. for example — and IATA urges further support. IATA, by the way, is undertaking its own cost cutting, eliminating some 400 jobs, about half of them through involuntary means.  
  • It’s a rare time in which airlines are not paying all that much attention to oil prices. They’re not flying much these days, after all. Prices did jump last week, reacting to an oil worker strike in Norway and a hurricane that affected oil facilities in the Gulf of Mexico. At about $43 a barrel though (Brent crude), the price is still at a level that airlines would consider cheap. As always during an oil downturn, some wonder whether demand has reached its peak. Worldwide, that might not be the case. But it might be so in richer countries like the U.S., where there’s a push to move toward renewable energy. That push could gain momentum with a Democratic victory in next month’s national elections.

Europe

  • EasyJet, in a trading update, said its calendar Q3 revenues were just $689m, a 73% fall from last year’s peak summer period. On the bright side though, it did carry more than 9m passengers, with a load factor of 76% flying 38% of its normal seat capacity. (Last summer, easyJet’s load factor was 93%). Cash burn was less severe than expected in the quarter. And the company has raised plenty of money through new debt and equity, absolving itself of near-term liquidity risk.

    But like the rest of Europe’s airlines, easyJet lost whatever modest momentum it had during the summer. Demand peaked during August, the airline said, and then “tapered significantly” during September as infection rates spiked and governments responded with new travel restrictions and quarantine measures. As it happens, September marked the end of easyJet’s fiscal year, which will likely show net losses exceeding $1b — quite large no, for its first annual loss in company history? It will report the results for the October 2019 through September 2020 period on Nov. 17.

    Looking to minimize cash burn this winter, easyJet will temporarily close its Venice and Naples bases in Italy, having already closed three U.K. bases permanently (London Stansted, London Southend, and Newcastle). On the other hand, it will open new summer-only bases in Malaga and Faro next year. It will fly just 25% of its normal capacity this quarter (October to December). But it’s ready and able to quickly restore flights as demand merits.

    It was able to secure important labor concessions, including more seasonal staffing flexibility. Helpful as well are suspensions of airport slot usage rules, which matters a lot for a carrier with a large presence at slot-controlled London Gatwick; Gatwick is its largest base of operations. Concession talks with unions in Germany, Portugal and Switzerland continue. As for future demand, it’s early to gauge next summer, but so far, booking trends appear pretty normal.

Northeast Asia

  • Japan has managed the Covid crisis well, with fewer than 2k confirmed deaths (the U.S. by contrast is approaching 220k deaths). But domestic air travel remains subdued. In August, Japan Airlines operated 68% of its normal domestic ASKs but only generated 29% of its normal RPK traffic. Like its rival All Nippon therefore, load factors are extremely low.

    Neither JAL nor ANA have published September traffic figures yet. But JAL said last week that a recent decline in new Covid cases has domestic travel gradually improving now, enough so to warrant a little more bullishness for November as it implements its flight schedules for the month. Unfortunately for Japan’s airlines, a sizable portion of their domestic traffic growth in recent years has come from foreign tourists visiting the country. That segment was in fact supposed to grow further with the planned Olympic Games in Tokyo. There’s none of that demand now.

    Tokyo is instead trying to stimulate more domestic tourism among Japanese citizens. But so much of pre-Covid domestic airline demand in Japan consisted of business travelers, often flying on widebody planes between cities like Tokyo and Osaka. Business travel, alas, remains depressed some eight months into the Covid crisis.

ASEAN

  • Count AirAsia among the success stories of the pre-Covid airline industry. For nearly 20 years, it’s been one of Asia’s largest and most profitable LCCs, underpinned by a valuable relationship with Airbus. But underneath the surface, and beyond its success in Malaysia and Thailand, were many cracks in the empire, cracks now getting exposed by the crisis. AirAsia Japan, for one, never managed to grow beyond a handful of routes, held back by regulatory constraints. So last week, it’s independent board of directors threw in the towel, deciding to cease operations. In India, meanwhile, AirAsia’s joint venture with the Tata Group fell far short of its ambitions. So AirAsia appears to have lost interest. It’s reportedly negotiating to sell its stake to Tata, which separately owns part of Vistara and might buy Air India.
  • Then there’s AirAsia X. When launched in 2007, it promised to replicate the wonders of the shorthaul LCC model on longhaul routes. All it ever did was lose money year after year, constantly exiting and entering markets. Despite its poor track record, AirAsia X placed the industry’s largest order for A330 NEOs, 78 of them to be exact, two of which have already arrived. It has 10 A350 orders on the books as well, and recently adopted a plan to fly narrowbodies (A321 NEOs). In 2019, it lost more than $100m, leaving it no shape to deal with what lie ahead in 2020.

    Without any domestic markets, AirAsia X was forced to completely suspend all scheduled operations during the Covid crisis, with no current plans for a restart. It now faces “severe liquidity constraints,” leaving it unable to repay debts coming due. In its own words, the airline faces “potential liquidation.” But it’s not prepared to succumb to such a fate just yet. Last week, it unveiled a restructuring plan that asks for concessions from all key business partners. They include, among other things, payment deferrals and debt forgiveness. Customers with tickets for upcoming flights, including those who purchased unlimited travel passes, will receive credits for future travel.

    AirAsia X will simultaneously craft a new business plan that it hopes will attract fresh equity to restart the airline and ultimately enable it to earn sustainable profits. It sees itself becoming a “low-cost medium-haul airline” with a fleet of up to 25 A330s. It will avoid investment in immature routes, downsize staff, and focus less on winning market share. Putting a bullish spin on its prospects, AirAsia X speaks of a more rational post-crisis pricing environment. And it thinks it will have a leg up on other airlines because many of its markets are in “green zones” which are likely to reopen first. The goal is to complete the restructuring plan over the next few months and put two planes back into service in 2021’s first quarter. It hopes to have its full network up and running again by the end of 2021.
  • Singapore’s Transport Minister Ong Ye Kung updated Parliament on his plan to revive international air travel, a lynchpin of the local economy. Several important things have changed since the city-state had to impose an emergency lockdown between April and June. First, the virus is now largely under control, with no deaths since July. Second, testing is more widely available and effective. Third, Singapore’s contact tracing capabilities are much improved, so that authorities can quickly identify and contact people who’ve been exposed to someone infected. Finally, more countries are now willing to open their own borders.

    Singapore already has what it calls “green lane” agreements with China, Japan, South Korea, Malaysia, and Brunei, allowing some limited business and government travel. But it hopes to negotiate broader “air travel bubbles,” or ATBs, applicable to all fliers, including tourists. Discussions with Hong Kong for one, should begin soon. Singapore says it’s prepared to lift border controls on travelers from countries with similarly low risk profiles. Changi airport already has a facility to test 10k passengers a day. And the government is encouraging more transit traffic through Changi. Minister Ong sees “a gradual climb from a deep abyss” as the country opens “carefully, safely, and steadily.” 
  • Citing the “harsh reality” of the Covid crisis, and “an urgent need to fast-track its transformation,” Cebu Pacific of the Philippines will look to raise $500m through the issuance of convertible securities. Half the sum will come from preferred shares convertible to common shares (this will be offered to existing shareholders), and the other half from debt convertible to common shares. These instruments allow investors to benefit from any turnaround in which the airline’s share price winds up rising. Cebu, strongly profitable before the crisis, is currently operating just 15% of its normal capacity.

Latin America

  • To whatever extent there’s an airline traffic recovery right now, it’s mostly happening within domestic markets of East Asia (China, Vietnam, Korea, etc.) or in Russia’s domestic market. But don’t overlook the meaningful recovery taking place in the Brazilian market. Like Russia, Brazil has had a terrible public health ordeal with Covid.

    But as the latest data from Gol and Azul clearly show, there’s some unmistakable recovery momentum. Gol for its part said domestic ASK capacity was down 53% y/y in September, roughly in line with its drop in RPK traffic. Load factor for the month was a healthy 80%. A month earlier (August), domestic RPKs were down 67%. In July, they were down 77%. You can see the meaningful month-to-month improvement. To be clear, Gol’s international network remains 100% inactive. But it never was much of an international airline, anyway, flying 86% of its ASKs domestically last year.
  • As for Azul, its September figures for the domestic market were similar: ASKs down 51% y/y, RPK traffic down 52%, and load factor at 82%. And likewise, the trend was solidly positive month-to-month. Azul said it flew 42% of its normal capacity in September and expects to reach 55% of normal this month. The airline, whose founder David Neeleman is launching Breeze Airways in the U.S., separately said it’s burning less cash per day than anticipated. That’s indeed thanks to a “faster than expected ramp-up in demand.”

    Also helping is its success in negotiating concessions from various stakeholders. Azul says it has sufficient liquidity to last for more than 30 months — that’s more than two years — even without raising any new capital. Keep in mind also that the southern hemisphere is now approaching its busiest travel season of the year. Brazil, meanwhile, is largely a tripolistic market with Gol, Azul, and Latam, which means discounting doesn’t have to be as aggressive in luring back passengers. Latam and Azul, in fact, are now cooperating.  
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Feature Story

After a brief summer of hope, Europe’s airlines are again feeling glum.

For a time, it was looking good. Europe’s airlines, in shorthaul markets anyway, enjoyed a brief burst of demand as markets reopened early this summer. Certain holiday hotspots like Greece distinguished themselves for effective Covid containment. Same for Germany, a large outbound travel market. Continent-wide, infection rates were down at the start of the summer holiday season. Bullish airlines like Wizz Air spoke of quickly returning to full capacity.

The optimism didn’t last long, flickering out just as it did in the U.S. market a few weeks prior. Hopes for unified European travel policies descended into constantly changing rules by individual countries. As Covid cases spiked, officials responded with 14-day quarantine requirements for returning travelers. In some cases, the quarantine rules applied for any and all cross-border travel. In others, the rules changed from day to day, week to week. By the start of October, most of Europe was experiencing a major new wave of infections, with Spain hit particular hard. Airlines were forced to scale back capacity.

According to Eurocontrol, the low point of the year was April 12, when flight movements within European airspace were down 90% y/y. Unlike the U.S., which tied fiscal aid to flight service commitments, Europe saw much of its airline industry completely grounded early on in the crisis. Most carriers began flying again in June, and by July 1, Eurocontrol’s daily data show flight volumes topping 10k for the first time. On July 17, they topped 15k. On Aug. 7, flight volumes reached 50% of last year’s level, prompting Eurocontrol to plan for the industry to reach 85% of year-prior levels by the end of 2020. With traffic flattening since mid-August, however, and with airlines reporting a sharp slowdown in bookings amid rising Covid cases and quarantines, Eurocontrol now sees traffic holding at 50% of last year’s levels through year end.

That’s the gloomy state of Europe’s airline industry as it enters the offpeak winter season. The shorthaul intra-European recovery has fizzled, and longhaul markets remain relevant to just a small pool of travelers with dual nationalities, urgent travel needs, or tolerance for quarantines. In the distance is potential salvation by vaccination, perhaps in the latter half of 2021. Closer in view, but more subject to uncertainty, is a potential boost from testing passengers for the virus before they fly. The idea: People would be able to fly confidently and safely knowing everyone aboard tested negative for Covid.

So still, some hope amid the despair. Yet even if the virus suddenly disappeared tomorrow, Europe’s airline landscape will have already changed in deep and lasting ways. Like global aviation at large, the European airline industry will be a lot smaller than its pre-pandemic projections, for years to come. Take Lufthansa. It now expects a reduction of 150 planes by 2023, relative to its original plans.

That’s just one aspect of Lufthansa’s dramatically altered state of reality. To merely survive the crisis, it needed a $10b government aid package, including state-guaranteed loans from Switzerland, Austria, and Belgium. Germany, though, was the biggest donor, taking a 20% ownership stake in exchange. Lufthansa agreed to refrain from paying dividends, refrain from buying back shares, limit executive compensation, and invest money to reduce its carbon emissions. It’s also temporarily prohibited from buying more than 10% of another airline. And to placate European Union regulators, it had to surrender some Frankfurt and Munich airport slots.

Lufthansa cushioned its Q2 losses with enormously high profit margins from its cargo division. On the other hand, its much larger passenger business faces greater-than-average challenges due to an outsized dependence on longhaul premium business. Its pre-crisis boastings about offering more premium seats than any other airline in the world no longer impress. What it does have besides cargo strength is a home market (Germany) that’s coping relatively well economically, aided by robust government fiscal relief. Germany, unhelpfully, isn’t nearly as large a tourist market as France, Spain, the U.K., or Italy. But its outbound tourism is rivaled in size by only the U.K.

Eurowings, its long record of losses notwithstanding, might take a greater role in attacking this outbound leisure market. Lufthansa, meanwhile, will also cut 22k jobs, wrest pay and productivity concessions from unions, consider strategic alternatives for its giant aircraft maintenance business, and restructure its longhaul leisure business. Will it reconfigure planes to have fewer premium seats? Will it de-emphasize Frankfurt in favor of Munich as Frankfurt raises fees? What will it do with its B777-9 order?  Right now, the questions are more numerous than the answers.

That’s true for Air France/KLM as well. Like Lufthansa, it received a giant dose of state aid that will need to be repaid (but which didn’t involve any equity transfers to the state — France and the Netherlands, after all, are already big shareholders). Like all European airlines, Air France/KLM is suffering mightily this fall amid terrible demand conditions. It will be smaller, financially weaker, and less capable of investment. Then again, that description applies to all European airlines. The question thus becomes who among the wreckage is least harmed? Or alternatively, who among the bloodied has the most potential to address pre-crisis shortcomings?

The answer might be Air France/KLM. Pre-crisis, it was busy implementing some of its deepest reforms ever, optimizing aircraft configurations, rightsizing its fleet, addressing chronic shorthaul losses, improving narrowbody utilization, and growing its low-cost Transavia unit in France. Most of these reforms required consent from labor unions, which in France anyway, have a notorious record of sabotaging the airline’s business when unhappy with management. Now, given the crisis, the airline has a rare opportunity to further cut labor costs without causing a social revolution worthy of a Victor Hugo novel. Indeed, its government backers are demanding it. The crisis, in other words, could present a chance to level the playing field with rivals that previously enjoyed entrenched cost and productivity advantages. Remember too, Paris is becoming a less competitive market with Aigle Azur, XL Airways, Norwegian, and IAG’s Level all dead or gone from the market. In Amsterdam, meanwhile, Air France/KLM can stop worrying for a while about Schiphol airport’s lack of capacity. Both the Netherlands and especially France are large tourist markets. Both have large diasporas living overseas in former colonies, a correlate to family visit travel.  

Can Air France/KLM expand its cargo business? Can it capitalize on the restructurings of its close partners Delta and Virgin Atlantic? Will A220s prove the right aircraft for the times? IAG, of course, has questions of its own. It’s arguably in the opposite position of Air France/KLM: A structural winner in the “before” period, with the most to lose in the “after” period. So much of its fortunes, remember, are tied to the transatlantic market both north and south. The London market, meanwhile, is undergoing its own big changes, as discussed in Airline Weekly’s September 20th issue.

IAG’s host governments — the U.K., Spain, and Ireland — weren’t as generous as other European governments in doling out airline aid. But government help came via a different channel, in the form of more capital from Qatar’s state-owned airline — Qatar Airways maintains a 25% ownership stake. Does IAG still want to buy Spain’s Air Europa, giving it still more transatlantic exposure? Will Vueling be a vehicle to grab more price-sensitive tourist traffic? If the past foretells the future, then IAG’s impressive record of cutting costs in tough times augurs well. In past episodes of industry distress, British Airways and Iberia were more forceful than peers in enacting, quick, deep, and painful cuts, especially with respect to labor costs.

As Europe’s Big Three compete to cut and shrink most effectively, they’re more or less hostage to the frozen longhaul markets — until they thaw, there is no meaningful recovery. Not so for Europe’s Big Three LCCs, namely Ryanair, easyJet, and Wizz Air. Ryan and Wizz, in particular, with their ultra-low-costs and demonstrated ability to thrive during downturns, were feeling downright bullish early in the crisis. Wizz was especially active in adding new routes and bases. The LCCs too, however, have since relinquished their optimism, scaling back plans for schedule restoration amid the Covid resurgence. They complain bitterly not just about quarantine policies but also, in the case of Wizz, regulatory decisions to suspend airport slot rules, allowing legacy carriers to preserve their entrenched positions at key airports. EasyJet, which by contrast favors the slot rule waivers, is pleading for more government help.

The precise amount of government help each airline receives, along with conditions tied to that help, will no less shape the fortunes of Europe’s many other airlines. Oddly enough, weaker carriers were under greater risk of disappearing before the crisis, as the demise of carriers like Thomas Cook and XL Airways showed. Now, even the weakest are getting lifelines, such that death and disappearance are very much not a feature of the current crisis — only a few smallish niche players have succumbed to the Covid shock, i.e. Flybe and Sweden’s BRA.

Others like TAP Air Portugal, itself the subject of takeover mergers on the eve of the crisis, have a new lease on life with state support. Alitalia is perhaps the best example of a European carrier that would have gone away if not for its government’s renewed willingness — thanks to the crisis — to provide more taxpayer aid. Norwegian is another. Still other troubled carriers like Virgin Atlantic, denied state support, relied on the abundant supply of private sector capital chasing returns in a low interest rate world.

The crisis is thus paradoxically delaying the consolidation of Europe’s fragmented airline industry. It might even make it worse as new startups look to take advantage of low aircraft prices and oceans of unemployed aviation talent. Norwegian, for one, will have a new competitor (see Routes section). Other smallish players will have to navigate the bleak new landscape in their own ways. For many, hopes are pinned on very specific market segments, i.e. Europe-Asia for Finnair, outbound tourism from the U.K. for Jet2, and inbound tourism to Greece for Aegean. Others trying to find a way in this brave new world include LOT Polish, airBaltic, Condor, Volotea, and the tourism conglomerate TUI.

In the near term, everyone will be battling for the only small crumbs of the pie still available to eat, in other words, shorthaul leisure and family-visit traffic. When overseas markets ultimately reopen, Europe’s longhaul players will be watching their key foreign competitors: Turkish Airlines, the Gulf carriers, global carriers from North America and East Asia, etc. What reforms and restructurings will they have undertaken? Does the Emirates model, under pressure with all of those A380s even before the crisis, have relevance now? How about the future relevance of Istanbul’s position at the crossroads of so much intercontinental travel? Is Aeroflot a challenger to watch? How about LCCs as they add longhaul-capable narrowbodies, including A321 XLRs later this decade? 

What else will shape the post-crisis European airline industry? Aspects of public policy for sure, like environmental regulations, consumer protection rules, and taxation (which is extraordinarily high for airlines in places like the U.K.). Public sentiment about aviation’s role in causing climate change will matter too — don’t forget about the flight shaming phenomenon that got so much attention in 2019. Oh, and one more thing you shouldn’t forget about: Fuel prices. Demand recovery, and economic recovery more broadly, could come a lot faster if fuel prices remain low. Three straight years of $100-plus oil, remember, greatly stunted recovery from the global financial crisis a decade ago, though it did turbocharge the expansion of airlines from oil-rich regions like the Arabian Peninsula, not to mention Europe’s own oil champion Norway. The price of oil, no doubt, will again determine winners and losers of this catastrophe’s aftermath.  

For now, it’s an afterthought. What matters most as 2021 approaches: The virus. Can it be contained? Can borders reopen? Will testing work? When will vaccines come to the rescue?

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Around the World

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

Around the World: October 12, 2020

Airline NameChange From Last WeekChange From Last YearComments
American2%-51%Appoints former Northwest CEO Doug Steenland to its board of directors
Delta3%-39%Breeze, based in Delta’s hub city Salt Lake, now has $100m in startup funding; will fly in U.S. east initially
United3%-57%Will restart key San Francisco-Shanghai route later this month, four times weekly with B777-300ERs
Southwest3%-26%Seats and fares now bookable in Amadeus GDS; already in Travelport’s GDSs but never did strike deal with Sabre
Alaska3%-40%Retiring 10 wholly-owned A320s earlier than planned; still deciding whether to move to an all-Boeing fleet
JetBlue8%-24%FAA extends waiver of slot usage rules for Washington Reagan, NY LGA, and NY JFK
Hawaiian2%-50%TSA airport traffic was down 67% y/y in September; decline was 70% in August
Spirit3%-49%Generated $64m in cash last year from subscriptions to its $9 Fare Club loyalty program
Frontier(not publicly traded)Offering $19 one-way base fares but only to members of its Discount Den Club
Allegiant4%-16%Sept. traffic report cites steady improvement in bookings; saw strength in “back half” of Q3
SkyWest0%-42%Mesa Air’s new B737-400 cargo operation with DHL now underway
Air Canada3%-63%New U.S. startup Global X, hoping to launch Jetlines in Canada, to start taking first planes (A320/21s) in Nov.
WestJet(not publicly traded)What to do with those big and expensive B787s? Flying some domestically between Toronto and Vancouver
Aeromexico-1%-68%Though RPK demand was down 71% y/y in Sept., domestic RPKs alone were down only 28% (on 25% fewer ASKs)
Volaris2%-18%Airlines cancel flights to Cancun and Cozumel as Hurricane Delta threatened coast
LATAM0%-85%Wants to use the crisis to get its Brazilian labor costs competitive with those at Gol and Azul (Reportur)
Gol10%-42%Tourism firm CVC cites nice recovery in domestic Brazilian travel; Argentina much worse
Azul4%-49%Aerolineas Argentinas reaches pilot agreement to facilitate merger with subsidiary Austral
Copa6%-46%Reopening some more service to Colombia as flight restrictions ease; travel restrictions though, remain stringent
Avianca1%-88%Bankruptcy court in New York grants it access to new DIP loan funds; United among the lenders
Emirates(not publicly traded)Wall Street Journal discusses how crisis is hitting Emirates, and by extension the entire travel-dependent Dubai economy
Qatar(not publicly traded)Says it’s carried 220k Americans home since the start of the crisis, via scheduled and charter flights
Etihad(not publicly traded)Offering Abu Dhabi-based customers free PCR Covid tests with each ticket booked; applies to all routes except China
Air Arabia-4%-17%Offering free Covid insurance for travelers from Sharjah and Abu Dhabi; covers all medical and quarantine costs
Turkish Airlines1%-8%Has thus far avoided mass layoffs but might need more gov’t support
Kenya Airways0%42%Intends to restart its high-profile New York JFK flights from Nairobi later this month
South Africa Air.(not publicly traded)Future of airline being shaped in the context of extremely difficult fiscal situation for South Africa’s government
Ethiopian Airlines(not publicly traded)No further updates for now on its interest in aiding South African Airways
IndiGo8%-24%Zurich airport wins contract to build and develop new airport for Delhi
Air India(not publicly traded)Pakistan’s gov’t looking to relieve its national airline (PIA) of huge debts
SpiceJet-1%-57%Jet Airways, still trying to find a buyer, denies reports of investment by team of London and UAE investors
Lufthansa13%-43%Introducing new “continuous pricing” system designed to better match supply and demand
Air France/KLM11%-68%2m of its Flying Blue loyalty members are based in the Netherlands and Belgium
BA/Iberia (IAG)13%-77%British Airways’ B747s retired for good last week; served the airline well for decades
SAS-5%-79%Operated about 60% of its domestic schedule in September but RPK demand dropped almost 60%
Alitalia(not publicly traded)Gov’t signs off on creating new Alitalia with the assets of the current Alitalia
Finnair2%-94%Cuts back on winter schedule; hoping for better when spring arrives; eyeing summer 2021 launch for new route to Busan
Virgin Atlantic(not publicly traded)London Heathrow airport argues case for third runway before U.K. Supreme Court; environmental groups trying to stop it
easyJet5%-54%Adjusting flight schedules with two-to-four-week lead time; changes typically occur much farther out
Ryanair10%11%Hurling verbal abuse at Irish tourism minister for not enacting reforms to travel restrictions
Norwegian-30%-98%Still largely grounded: Sept. ASK capacity down 93%, RPK traffic down 96%
Wizz Air3%-10%Does sale-leaseback deal on six more A321 NEOs with China Development Bank’s leasing unit
Aegean5%-62%Zurich airport reports a 77% y/y drop in pax volumes
Aeroflot-13%-40%After steadily strengthening in Q2, Russian ruble now trading around its lowest level versus U.S. dollar in years
S7(not publicly traded)Ukraine International Airlines expects to lose $60m this year, reports Ukrainian News Agency
Japan Airlines2%-38%Using some surplus workers to help develop its logistics business using unmanned drones
All Nippon-1%-34%Domestic load factor was just 30% in August; appears to have restored capacity too aggressively during summer peak
Korean Air5%-15%All first-class cabin service suspended, except on routes to New York JFK and Los Angeles LAX
Cathay Pacific1%-44%Still engaged in talks with unions about concessions; has stronger labor unions than its rival Singapore Airlines
Air China2%-22%IATA estimates airlines worldwide, during Q2, burned through $300k in cash per minute
China Eastern1%-3%Domestic tourism strong during Autumn festival holiday, though not as strong as last year
China Southern1%-10%Chinese airline domestic capacity up y/y during holiday week but loads down 10 points to 77%
Singapore Airlines2%-61%Changi airport serving fewer pax today than it was when it opened in 1981
Malaysia Airlines(not publicly traded)Latest from Reuters: Gov’t threatening to divert Malaysia Airlines funds to low-cost unit Firefly if restructuring talks fail
AirAsia-7%-64%Wants to shrink its fleet significantly by returning as many leased planes as possible; sees no new orders for years
Thai Airways0%-64%Thai Smile, a wholly owned subsidiary signs distribution deal with Sabre; will now sell through Sabre GDS
VietJet0%-24%Thai VietJet launches new domestic route linking Bangkok BKK with Ubon Ratchathani
Cebu Pacific-4%-59%Gov’t says it’s willing to provide financial help to airlines but only with private-sector participation
Qantas5%-32%Playing hardball with REX, retaliating with overlapping regional routes
Virgin Australia0%-46%Richard Branson wants to reinvest money with eyes on again holding 10% stake (Sydney Morning Herald)
Air New Zealand3%-46%Hires new chief customer and sales officer from within; incumbent CFO to leave company
Brent Crude Oil10%-26%Bloomberg story on oil hedging notes how airlines have all but abandoned the options market

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

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