Issue No. 788

Virus-Era Volaris

Pushing Back: Inside This Issue

For United CEO Scott Kirby, channeling Winston Churchill, it’s 1942. The war underway is still a long way from over. Battles still are being lost. But positive momentum is building. And a vision for post-war revival is starting to take shape.

United, like Delta, lost gobs of money during the third quarter. But both carriers are witnessing steady if slow demand improvement as Americans grow more comfortable flying during the pandemic. This is true even as infection rates spike again. Airlines hope that industry-wide testing for Covid will further ease the public’s anxieties, allowing for additional demand momentum before vaccines open the door to a more comprehensive recovery. That will be the industry’s 1945.

The virus won’t unconditionally surrender. But if all goes well with vaccine development and distribution, it will stop posing a threat to mass air travel sometime in the second half of 2021. Thereafter, United expects a favorable competitive landscape abroad as wounded foreign rivals slash capacity. Undeterred by short-term cash concerns thanks to widely available capital throughout the crisis, United, Delta, and other U.S. airlines can now start shifting their focus to post-crisis strategizing. United itself is resuming investment in new premium cabins. Delta remains committed to its Latam joint venture. Southwest is adding new routes. Allegiant might acquire new planes.   

On the other side of the world, most of China’s major airlines reached an important milestone, carrying more domestic traffic this September than they did last September. But hold the celebrations. With ticket yields extremely weak and international traffic nearly nonexistent, carriers continue to lose large sums of money.

In other news, Virgin Australia will get a new CEO who’s controversial with some unions. The CEOs of Air Canada and British Airways are leaving — one voluntarily and the other, well, not so voluntarily. Air Canada is proceeding with its Transat takeover but paying a lot less. Malaysia Airlines wants to pay its suppliers and creditors a lot less, threatening dissolution if they don’t. No dissolution at Ryanair, just more capacity cutting amid boiling quarantine frustrations.

This week, the earnings show goes on, headlined by U.S. giants American and Southwest. Expect a market update from Qantas as well.


“The light at the end of the tunnel is now visible.”

United CEO Scott Kirby


July-September 2020 (3 Months)

  • Delta: -$5.4b/-$2.1b*; -89%
  • United: -$1.8b/-$2.4b*; -108%

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

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Weekly Skies

  • There’s no pretending that Delta’s third quarter was anything but cataclysmic. From July to September, typically the best quarter of the year for U.S. airlines, Delta spilled $5.4b in red ink. All right, so this was only $2.1b when stripping out special items. But a $2b-plus net loss is woeful enough. Operating margin excluding items was negative 89% as revenues dropped 79% y/y on 63% fewer seat miles flown. Operating costs, a good chunk of them fixed regardless of what happens to capacity or revenue, declined only 52%.

    When the Covid crisis began in March, airlines didn’t expect things to be this bad seven months later. It’s why they lobbied for federal aid to get them through Oct. 1 — conditions would surely be better if not great by then, they supposed. In some ways, to be sure, they are better. Through the first 14 days of October, TSA checkpoint traffic at U.S. airports was down 65% y/y, not 95% like they were through the first two weeks of April.

    Delta, now flying more than 1m people a week, has had zero documented cases of Covid transmission aboard any of its aircraft. Anecdotal evidence suggests more and more Americans recognize this, losing their fear of flying (as often happens pretty quickly after accidents, crashes, acts of terror, etc.). More would surely be taking to the skies right now were it not for quarantine rules, not just imposed by other countries but also by individual states like New York and New Jersey — fly to Florida from LaGuardia or Newark, for example, and you must self-quarantine for two weeks upon return.

    Still, as Delta’s president Glen Hauenstein put it, “we’re closer to the end of the pandemic than we are to the beginning.” The airline, he adds, has seen “steady progression in demand” since July. That’s helped to reduce average daily cash burn to $18m in September. Delta produced just a tenth of its normal revenues in Q2. That rose to a fifth in Q3. And the expectation is to reach about a third in Q4. Here again: evidence of meaningful if modest progress. The critical corporate segment — think companies like Coca-Cola globetrotting around the world in business class — remains deeply depressed — corporate revenues were just 15% of their normal levels last quarter. But they’re trending up across all industries, and some 90% of the carrier’s major corporate accounts have at least some of their employees flying again.

    Geographically, coastal business centers like New York, Boston, and Seattle, with their large components of corporate travel and international travel — and in some cases their home state’s quarantine rules — are seeing the biggest y/y traffic declines. On the other hand, mid-continent hubs like Atlanta, Salt Lake City, and Minneapolis are more important than ever for funneling traffic around the country at a time when many nonstop routings are disappearing. Ditto by the way, for international hubs where its joint venture partners reside, i.e. Paris, Amsterdam, London, and Seoul. Domestic leisure markets like Florida and other beach destinations, and Salt Lake City and other mountain destinations, are out-punching their weight in terms of nonstop demand. Internationally, Caribbean and Mexican beach destinations are likewise showing signs of life (Mexico has no quarantine restrictions for visiting Americans; see feature story below).

    Delta, keep in mind, is still blocking middle seats and capping load factors, unlike its rivals American and United. When it decides to lift these self-imposed restrictions sometime in the first half of next year, revenues will get a sudden boost. Already boosting revenues — or least softening their decline — are non-ticket sources like cargo and SkyMiles. Americans are still eagerly spending money on their Delta-branded American Express cards, anticipating a return to travel soon enough. Card spending on Delta tickets specifically, sure enough, is rising as well.

    There are other positives: extremely low fuel prices, for one, record-high customer satisfaction scores, new airport facilities (i.e. in Salt Lake City), lower construction costs for new facilities, a streamlined fleet, and early signs of efficiency gains from efforts to remove costs. Delta is 20% smaller than it was at the start of 2020, in terms of capacity and workforce. But it happily won’t have to furlough any non-pilot employees, almost all of whom are not part of a union (non-pilot labor costs have dropped by more than 40% since the start of the crisis). Unionized pilots, on the other hand, do face furloughs on Nov. 1, but negotiations are underway to potentially avoid that.

    As Delta looks ahead, it sees at least two more years of abnormally low revenues. The return of corporate demand might take a bit longer, but return it will, CEO Ed Bastian insists. “Every crisis that I’ve been part of… [people said] technology was going to replace the need for travel. And every single time, business travel has come back stronger than anyone anticipated.” Don’t forget that Delta is still in the process of building a new joint venture with Latam, not to mention WestJet, pending DOT consent. Another big opportunity is in maintenance, with valuable rights to service next-generation Rolls-Royce and Pratt & Whitney engines.

    With a gargantuan $22b of liquidity, Delta has all the cash it needs to outlast the crisis and eventually start repaying all its new debt when cash flow once again turns positive (it hopes to get there by spring). Restoring its investment grade credit rating is a top priority. So is taking out older planes, with nearly 30% of the entire fleet expected to leave by 2025. That’s some 400 airplanes — B777s, B767s, B717s, CRJ-200s… all on the way out. Delta revised its Airbus order book as well, slowing deliveries of A350s and A330 NEOs to save more than $5b through 2022 (it also has A321 NEOs and A220s on order).

    The next near-term milestone is the upcoming Thanksgiving and Christmas holidays, which are currently generating some “good booking momentum.” It’s adding more capacity on peak travel weeks, while trimming during slower weeks around Halloween and the presidential election. Delta remember, followed United’s lead in permanently eliminating domestic change fees for all but its basic economy tickets. Internationally, it hopes Covid testing can become an important catalyst of demand revival.
  • United’s Q3 operating loss margin was a bit worse than Delta’s: Negative 108%. Net loss excluding items was $2.4b. The Chicago-based airline, however, thinks it’s best positioned among the Big Three to recover, claiming the lowest current cash burn and predicting it will be the first to turn cash flow positive. Its Q3 revenue trends were a bit better than Delta’s, with revenue falling a similar amount y/y (78% compared to 79%) but on less capacity (ASMs were down 70% compared to Delta’s 63% drop). United is getting help from having the largest cargo business of any U.S. airline, operating more than 3k cargo-only flights last quarter and doubling its cargo revenues to more than $400m. It used its valuable Mileage Plus loyalty plan, meanwhile, as collateral for novel financing arrangements that raised almost $7b in cash — Delta and Spirit followed with loyalty plan-backed private sector borrowing of their own.

    United, unlike Delta and Spirit, also opted for government financing made available through the Federal CARES Act. So like all U.S. airlines, liquidity is not a concern for United. Nor, anymore, is mere survival. Instead, the focus is on positioning the airline to best take advantage of the coming recovery, whenever it comes. As CEO Scott Kirby has said repeatedly, demand won’t return to more than half of what it was pre-crisis until mass vaccination. But like Delta, United is indeed seeing modest demand improvement this fall, thanks to growing confidence and comfort about the safety of flying. It hopes to further bolster that confidence with on-site and pre-departure Covid testing for passengers, ensuring no one aboard is infected. A trial is underway on San Francisco-Hawaii routes, with hopes for widespread industry adoption across the world by spring.

    One reason United expects a more robust recovery relative to its peers: Its outsized presence in global business centers like New York, Chicago, San Francisco, and Houston. They’re disproportionately hurt by the crisis but by extension, disproportionately poised to benefit when companies resume their travel and international markets reopen. For now, United’s Denver hub is a diamond in the rough, both for its tourist appeal and its geographic location as a connecting hub for many itineraries no longer available nonstop. Of course, Denver is hyper-competitive with Southwest and Frontier also boasting big operations. Southwest, come the mention it, just said it will start flying from United’s O’Hare and Bush hubs in Chicago and Houston, respectively (see Routes section below).

    United, while naturally shrinking, is itself adding new markets, and not just Florida routes. Internationally, it’s launching five exotic new routes to Africa and India, some late enough in 2021 to perhaps coincide with a vaccine rollout. United calls one of the new markets, San Francisco-Bangalore, among the most anticipated new route launches ever. Just last week, it announced another round of new sunshine routes to beach spots in Mexico and Central America (see Routes section below). Overall for this month, total capacity is about 40% of normal levels, this after scaling back capacity restoration during mid-summer amid what was then a stalled demand recovery. Q1 will likely be at similar levels to Q4. Remember: Ramping up capacity is key to depressing non-fuel unit costs but doesn’t make sense until demand can support it.

    Today, Covid cases are spiking again nationwide, but death rates are down, treatments are improving, and, as mentioned, people are becoming more relaxed about air travel regardless. Naturally, desire to travel is bursting at the seams for many Americans stuck at home for the past half-year. Companies too, United believes, will be eager to hit the road again when offices reopen, and sales reps inevitably realize that selling via video just doesn’t replicate the effectiveness of selling in person.

    Until then, Kirby and his team are slashing costs, which unfortunately means furloughing 13k employees. Not pilots though. United and ALPA reach a no-furlough deal that also includes additional limits on the airline’s ability to outsource regional flying. For other work groups, there’s still some glimmer of hope that Congress might extend payroll relief that expired on Oct. 1. If not, a new Democratic regime in Washington, if elected, would likely pass something in early 2021. A key priority with respect to labor costs, as well as costs in other areas, is moving them from fixed to variable as much as possible. Delta’s high percentage of variable costs, incidentally — enabled in part by a flexible mostly non-union workforce — was a key driver of its pre-crisis margin success.

    As for fleet, United is not, unlike Delta and American, mass retiring older airplanes. Instead, it’s keeping idled planes around for use if needed when demand returns. It also emphasizes a recent shift from focusing exclusively on preserving cash to a restoration of some investment spending, including the resumption of retrofitting widebodies with its latest Polaris product. It also intends to reenter New York JFK airport in deference to the needs of key corporate customers in markets like California. It led the way in abolishing change fees while relaxing standby policies. Its cargo team is preparing to help ship vaccines when ready.

    Kirby makes no secret of his expectation that the next year or so will be tough. We’re only at the end of the beginning, not the beginning of the end, he asserts, channeling his inner Winston Churchill. But — it’s an important but — the other side of the crisis will see a radically altered competitive landscape, especially on overseas routes where battered rivals are mass retiring giant jumbos like A380s and B747s. 
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  • As China’s domestic airline industry recovers, the LCC Spring Airlines is not just restoring capacity. It’s growing capacity. A lot. As Shanghai Daily reveals, Spring is now one of the world’s fastest growing airlines, with ASK capacity this month up more than 50% y/y, according to Cirium schedule data. Load factors are running above 85%. More than 60 new routes grace its national route map. During an eight-day holiday earlier this month, domestic passenger volumes reached 80% of last year’s level, and with longer-stage routes actually seeing a y/y increase.

    The carrier by the way, just received its first A321 NEO. Spring was to be clear, an airline that was rapidly growing its shorthaul international franchise pre-crisis. So it’s hurting on the front.
  • Bloomberg News looks at the often-overlooked trend of travel demand dipping just before big national elections. In case you haven’t heard, there’s a big one happening right now in the U.S., to determine control of Washington’s executive and legislative branches. The story features a ski tourism company that consistently sees bookings drop every four years, just before presidential elections.

    Another travel consultancy specializing in trips to Mexico saw a particularly steep drop in group bookings just before the 2016 election. Airlines elsewhere, including Brazil, Australia, and Europe, have noted a similar pre-election phenomenon. And data show the slump tends to last through the early days of the next administration’s tenure. This year, the end of an extremely tense election could give further momentum to a strong travel rebound when virus dangers ease.   
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  • Allegiant, speaking last week at the Boyd Group’s International Aviation Forecast Summit in Cincinnati, is seeing more strength in demand recently, Bloomberg reported. The LCC, which has barely cut any capacity throughout the pandemic, is also getting inundated with calls from airlines and aircraft lessors about taking additional planes.

    On a separate note, Allegiant’s CFO Greg Anderson told the Las Vegas Journal-Review that he’s seeing some unusual travel patterns during the crisis, including a jump in outbound demand from Las Vegas residents flying to outdoor leisure spots like Montana and Idaho. Normally, traffic flows the other way, from smallish cities to Las Vegas. In the meantime, Allegiant’s nationwide brand recognition is increasing — it’s the sponsor of the fancy new Las Vegas Raiders football stadium.  
  • As China’s travel sector recovers (domestically anyway), one question with growing relevance is what level of success can the country’s state-owned aircraft manufacturer achieve? Air Lease Corp.’s Steven Udvar-Hazy, speaking with Aviation Week, notes a few important points. One is that the company, called Comac, has a narrowbody product called the C919 which might very well be built to Western standards, earning certification by regulators around the world. Russia’s Sukhoi managed to get that far with its SSJ product. But what Sukhoi was unable to do is establish maintenance support capabilities throughout the world, something only Boeing, Airbus, Embraer, and Bombardier have managed. That makes it unlikely that C919s will be a product Comac is able to export.

    Nevertheless, the domestic Chinese market is giant, and its major airlines controlled by the government. Udvar-Hazy sees airlines like Air China, China Eastern, and China Southern indeed flying meaningful numbers of C919s in the not-too-distant future. But even assuming high production capability, the numbers will still be just a modest percentage of their overall narrowbody needs. China, in other words, will still need lots of B737s and A320s (many delivered via leasing firms like ALC) for years to come. That’s probably the best-case scenario for Comac.

    There’s also an increasingly likely worst-case scenario, in which the U.S. and/or France ban CFM from exporting its engines to China. The C919 uses essentially the same CFM engines as the A320 NEO. CFM, remember, is a joint venture between the engine divisions of America’s GE and France’s Safran.
  • What a difference a year makes. Boeing’s third-quarter commercial aircraft deliveries plummeted by more than half and by two-thirds for the year to date, as airlines defer aircraft and rework their order books to reflect a collapse in air travel demand.

    Boeing delivered 28 commercial aircraft in the third quarter, mainly B787-family aircraft (13). Only low single digits of the other aircraft families were delivered: B737s (3); B747s (1); B767s (6); and B777s (5). For the year so far, Boeing delivered 98 commercial aircraft.

    Compare this with last year’s third-quarter delivery report. Boeing delivered 62 aircraft then: B737s (5); B747s (1); B767s (10); B777s (11). Once again, B787-family aircraft comprised the bulk of the delivery book, at 35. For the year through the third quarter, Boeing delivered 301 aircraft, including 118 B737-family aircraft and 113 B787-family planes.

    The 2019 numbers reveal a few things. One is that the B737 order book still was robust for part of the year, before the B737 MAX was grounded last March in the wake of two fatal accidents. The MAX still is grounded, but re-certification by the end of the year looks likely. Once the aircraft re-certified, Boeing will begin delivering the B737 MAXs it has already built but not delivered. Second, the demand for B787-family aircraft remained strong. And third, even before the airframer announced earlier this year it would end B747 production, the 2019 numbers revealed that few airlines were ordering the type.

    The 2020 numbers, however you slice them, are not great. Airlines are reshuffling their order books as they face years of depressed demand. They simply don’t need as many aircraft as they did. Just yesterday, on its third-quarter earnings call, Delta said it would trim as many as 400 aircraft from its fleet between now and 2025. Boeing itself revised its 10-year commercial market outlook downward, now saying the world’s airlines will need 11% fewer aircraft than it had forecast in its 2019 outlook. It’s not just Boeing. Airbus has said it will cut 15k jobs as demand falls for its aircraft.

    There’s been a lot going on at Boeing in the last few months. The company is ending the production of the B747. It’s consolidating B787 production in South Carolina, closing the line in Washington.

    It remains to be seen if Boeing’s grim delivery numbers will continue to slide downward. Some lessors and analysts believe orders will tick back up as airlines figure out their fleet needs. Most airlines are parking aircraft, but they may also replace older, less fuel-efficient aircraft with newer types. That process will shake out over the next few quarters.
  • Separately, European regulators reportedly cleared the B737 MAX for re-certification by the end of the year and have opened a public-comment period on the matter. The aircraft can’t return to the skies, however, until the FAA gives its nod, said to be imminent. American  has said it could return the B737 MAX to service by the end of this year.
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  • Business Travel News (BTN) published its latest ranking of the 100 largest U.S. corporate travel buyers, who collectively spent almost $12b on U.S.-originating trips last year. That was a record. At the top of the list was Deloitte, one of the world’s Big Four accounting firms, with a giant management and financial consultancy business attached. Its rivals EY, PWC, and KPMG were among the top 15 travel spenders as well, and all incidentally with New York City as their main corporate base. So naturally, these are vital customers for Delta, American, and (at Newark airport) United. Also on BTN’s top 15 are powerful West Coast tech companies like Amazon, which ranks number two behind Deloitte, and Google, Apple, Microsoft, and Facebook. IBM, McKinsey, and Accenture, with consultancy assignments across the world, are among the top 15. So are the aerospace giants Lockheed and Boeing. ExxonMobil, despite the oil sector’s troubles, lingers at number 14.

    Move a bit further past the top 15 and you’ll find the giants of U.S. banking and pharmaceutical production. Disney, GE, and the World Bank make the top 20 too. This year, of course, companies are spending a lot less on travel. The question for next year and beyond is how lasting travel budget cuts will be. To what extent will firms permanently replace some travel with video calls? Perhaps even more important to airlines: To what extent will companies cut travel to achieve environmental sustainability targets? There are to be sure lots of secular trends that should increase business travel over time, including population growth and improved aircraft technology that lowers the cost of flying and enables more nonstop routes.
  • American and Sabre, two companies with a long and complicated relationship, agreed to renew their existing distribution agreement. Sabre and its travel agency customers get access to all of Americans fares and flights. And the two will continue to work together on advancing IATA’s NDC concept for distributing content more effectively. American notably did not take a strongly confrontational approach in its negotiations with Sabre, as some carriers like Lufthansa and others have done, imposing surcharges, withholding certain fares, and so on. American itself has in the past taken an aggressive stance with GDSs.   
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Routes and Networks

  • Chicago and Houston are two of Southwest’s largest and most important markets. Chicago Midway, in fact, was its single busiest airport by seats last year, according to Cirium. Houston Hobby airport ranked number seven. But Southwest does not serve either city’s primary airport — O’Hare in Chicago and Bush in Houston. The world is changing though, and so is the airline’s network. Soon, O’Hare and Bush will indeed become part of Southwest’s route map, alongside Midway and Hobby. When? Sometime in the first half of next year. Which routes? Announcements on that will come later.

    Southwest did actually serve Houston Bush for many years, from the carrier’s earliest days in the early 1970s all the way to 2005. But just to Dallas Love, and serving just one route from an airport isn’t very productive in terms of asset and employee utilization, especially for Southwest given the way its labor contracts are structured. More generally, Southwest serves a strikingly small number of airports relative to its fleet size — 103 last year with close to 750 planes. JetBlue by contrast served 107 airports with roughly 250 planes.

    There’s a reason for this: Southwest’s network model focuses on high frequency schedules on routes catering to shorthaul business traffic — Midway to Hobby alone typically offers about six flights per day in each direction. Daily frequencies between Hobby and Love can be as high as 20. Obviously, that’s a problem when there’s not much business traffic. So in 2020, Southwest is behaving more like a typical leisure carrier, emphasizing network breadth (i.e. more destinations) over frequency depth. The fact is, there aren’t many places generating any traffic right now — what’s available tends to be in the largest cities like Chicago and Houston, or to leisure markets like Miami, Palm Springs, and ski resorts in Colorado.

    A final thought: experimenting with new markets is a whole lot less risky when fuel costs not much more than $1 a gallon.
  • As Southwest attacks its hubs, United is throwing more capacity to sunshine destinations south of the U.S. border. That means Mexico, Central America, and the Caribbean, places for the most part welcoming American tourists without any quarantine restrictions or testing requirements. The airline will in fact open a number of all-new routes, including Los Angeles to San Jose (Costa Rica), Liberia (Costa Rica), and San Pedro de Sula (Honduras). Denver gets new routes to San Jose and Belize. Washington Dulles gets new routes to Santo Domingo (Dominican Republic). San Francisco and Cleveland will see new international beach flying as well.  
  • Having already announced new routes to Pakistan, Virgin Atlantic is now adding routes to India. In December, it will connect Manchester with Mumbai. In January, Manchester gets service to Delhi. It’s yet another example of an airline chasing family-visit travel, a source of resilience in an otherwise devastated demand environment. Virgin said there’s some 500k people of Indian origin living across the north of England.
  • LCCs everywhere are simultaneously navigating the current crisis — a serious one for all airlines — and eyeing opportunities to grow and fill vacuums left by retreating legacy rivals. In Chile, Sky Airline is expanding its new affiliate in Peru, having just received clearance to serve Florida. It aims to link Lima with Miami and Fort Lauderdale, competing against Latam, American, JetBlue, and Spirit. Avianca, however, left the Peru-Florida market.   
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Covid Crisis 2020

North America

  • Air Canada still wants Transat. But it won’t pay nearly as much for it. In May of last year, Canada’s largest airline announced the takeover of its rival for 13 Canadian dollars per share. Months later, it raised its offer to 18. Now, it’s set to pay just five. Air Canada did, though, amend the terms of the agreement to allow Transat to borrow some money before the deal closes, to ensure it doesn’t exhaust its cash reserves while waiting for the takeover to finalize. The merger remains subject to Canadian and European regulatory approval. Though Air Canada doesn’t exactly have money lying around for acquisitions right now, the deal continues to make strategic sense. Most importantly, it will greatly reduce competitive pressures on transatlantic and southern sunshine routes from Canada.

    But it won’t be CEO Calin Rovinescu’s job to integrate Transat. Last week, he announced his retirement effective early next year. CFO Michael Rousseau will take his place. One of Rovinescu’s former lieutenants, Ben Smith, went on to run Air France/KLM.  
  • South of the Canadian border, the good news is coming in small bites. But good news indeed to see ticket sales from U.S. travel agencies top $1b in September, according to Airlines Reporting Corp. (ARC). It’s the first time that’s happened since March. September’s sales were actually $1.2b, up a robust 56% from $751m in August. Still, September’s figure was an 85% y/y decline. Keep in mind that September is traditionally a slow month for travel but a pretty strong one for bookings, as Americans plan their Thanksgiving and Christmas vacations. Some families are starting to think about late-winter/early-spring vacations as well, with Florida travel typically peaking in February and March.


  • With Willie Walsh presumably enjoying his retirement, his successor Luis Gallego is molding the IAG executive ranks in his own image. Gone now is British Airways CEO Alex Cruz (he’ll temporarily stay on as non-executive chairman). Taking his place will be current Aer Lingus CEO Sean Doyle, who spent much of his career in the BA management ranks.

    Gallego, who previously ran Iberia and secured the IAG helm that some thought would go to Cruz, also made a few other executive moves last week. Level’s CEO Francisco Candela will step into the new role of chief transformation officer. Aer Lingus will name Doyle’s replacement at a later date, but the role will be filled temporarily by the Irish carrier’s Chief Corporate Affairs Officer Donal Moriarty. Willie Walsh himself, remember, rose to the top positions at IAG and BA from Aer Lingus, where he started his career as a pilot.  
  • Ryanair is again scaling back winter capacity. Amid extreme frustration with Irish and European travel restrictions, the LCC will now fly just 40% of its typical winter capacity, not 60% as previously planned. It earlier announced the closure of its Cork and Shannon bases in Ireland. Now it says Toulouse, home of Airbus in France, will close too. Other bases will see significant capacity reductions including Vienna and unspecified cities in Germany, Belgium, Spain, and Portugal. Bookings for this month, Ryanair said, weakened slightly following an increase in travel restrictions across Europe. They weakened more substantially though, for November and December travel.

    The carrier’s goal is to run load factors of about 70%, which — even at today’s depressed fares — is sufficient to minimize cash burn and come close as possible to breaking even (cheap fuel helps). It wants to fly as much as sensibly possible to keep planes and crews active, to avoid mass layoffs. Base closures though, will lead to some job losses, as well as unpaid leave and job-sharing schemes.

    “While we deeply regret these winter schedule cuts,” the airline said in statement, “they have been forced upon us by government mismanagement of EU air travel.”

Northeast Asia

  • China’s September traffic data is here and guess what? Most reporting carriers say their domestic traffic volumes were greater this year than last. International markets, don’t forget, are still largely closed. But within China’s borders, people are most certainly traveling again. To be clear, the country’s leading carriers are beefing up traffic by grabbing share from their downsizing rival Hainan Airlines, a very large carrier pre-crisis. Even so, total flights within China, says the country’s aviation regulator, were up y/y during September. Here’s a carrier by carrier look (all figures are domestic only):
  1. Air China: ASKs up 6%, RPKs up fractionally, load factor 69%;
  2. China Eastern: ASKs up 9%, RPKs up 4%, load factor 78%;
  3. China Southern: ASKs up 7%, RPKs up 2%, load factor 78%;
  4. Hainan Airlines: ASKs down 36%, RPKs down 40%, load factor 82%;
  5. Juneyao Airlines: ASKs up 15%, RPKs up 10%, load factor 84%;
  6. Spring Airlines: ASKs up 52%, RPKs up 47%, load factor 89%.

Sub-Saharan Africa

  • AFRAA, the association representing Africa’s airlines, published rankings of the continent’s airports based on the various taxes their passengers must pay. Regarding departure taxes on regional routes within Africa, for example, it shows Niger’s capital Niamey to be the most expensive, charging $163 per departure. The figure for Lagos is $70. Cairo is $67, Nairobi $50, Addis Ababa $31, and Johannesburg just $21. AFRAA shows rankings by various other taxes and charges as well, comparing them to airports in Europe and the Middle East — it says taxes and charges are twice as high in Africa. Illustrating its argument that African airport taxes are too high, AFRAA cites the Dakar to Casablanca route, where a passenger would pay $119 in taxes and fees on a $69 fare. Ouch.


  • Virgin Australia will get a new pilot. But not everyone onboard is happy. The airline’s new owner, Bain Capital, will replace CEO Paul Scurrah with Jayne Hrdlicka, who if nothing else will know her new enemy — she previously served Qantas as head of Jetstar. Virgin’s unions though, going by media descriptions, consider U.S.-born Hrdlicka a sinister cost cutter, based on her record of labor relations at Jetstar. The Transport Workers Union, for one, said Bain is reneging on a commitment it gave to rebuild Virgin as a full-service carrier with a full menu of international and regional routes, just as it had prior to bankruptcy. Referring to Bain, it spoke of “slippery private equity doing backroom deals.”

    Bain, for its part, says it won’t turn Virgin into a low-cost carrier. It will stay a hybrid carrier still intent on capturing premium corporate traffic. Unions are incidentally wrangling with Qantas too, over matters like outsourcing. Hrdlicka by the way, currently serves as a Hawaiian Airlines board member.
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Feature Story

Wounded rivals, no quarantines, low costs… Mexico’s largest LCC likes where it is.

It’s good to be lucky. It’s better to be good. It’s best to be both.

No one would call any airline lucky right now. But in Mexico, the ultra-LCC Volaris had the good fortune of seeing its biggest competitor (Aeromexico) go bankrupt as a result of the Covid shock. Volaris is certainly good at making money in normal times, earning a 13% operating margin last year, nearly double that of its fellow ultra-LCC VivaAerobus (Aeromexico’s 2019 margin was just 4%). Now, Volaris finds itself better positioned to benefit from the crisis than almost any other airline anywhere.

Like Brazil to its south and the U.S. to its north, Mexico ranks among the worst-hit nations for Covid deaths and infections. Like Brazil and unlike the U.S., its airline traffic is nevertheless showing ample signs of steady recovery. The trends from August to September are telling. Volaris saw its August domestic passenger volumes down 31% y/y, itself not bad relative to carriers in most other countries. In September, the decline eased to 25%. Aeromexico for the record saw a 52% drop in August improve to a 40% drop in September. Domestic traffic at Cancun’s airport fell 40% in August but only 22% in September.        

There’s even progress in international markets. Cancun, which depends on tourists from the U.S. and elsewhere abroad, reported a 66% international traffic decline last month, an improvement from 77% in August, and much better than the near 100% demand destruction seen in most international markets across the world. Mexico has been among the most relaxed countries anywhere in terms of border controls, welcoming tourists from even the U.S. throughout the pandemic, and without any quarantine requirements. Of course, Americans and others in some cases have to quarantine upon returning home. And governments, including the U.S. government, are warning citizens to avoid nonessential travel to Mexico. So sure, tourist volumes are way down. But they’re far from zero.

Volaris, for its part, flew 60% of its normal number of international passengers last month. Some were tourists. But most were presumably Mexican-Americans with dual citizenship, or migrant workers, some visiting family and friends back home. Thanks to increasing demand for air travel both domestically and internationally, Volaris expects to operate a full 85% of its normal ASM capacity this month. Domestically, ASMs were only down a mere 9% y/y in September. Next month schedules, according to Cirium, show ASMs actually up a bit y/y. One important thing to note though: The 83% load factor it clams for September is deceptive, based on booked rather than actual load factors. This doesn’t account for no-shows.

Interestingly, during its latest round of fundraising, Volaris spoke of strengthening its capital position, yes, but also of its desire to “take advantage of potential growth opportunities.” It went on: “The company considers the SARS-CoV-2 (COVID-19) crisis an opportunity to ramp up more quickly and strengthen its competitive position for the benefit of Volaris’ customers and shareholders.”

What exactly are those opportunities? Like its European cousin Wizz Air — also owned by the U.S. investment firm Indigo Partners — Volaris sees its low costs, plentiful cash, reliance on ancillaries, abundance of migrant-worker traffic, and Airbus NEO orders as major advantages right now. Both ultra-LCCs were bullish early on, eyeing a quick restoration of capacity, aggressively opening new routes, and preparing to pounce as rivals — even the stronger ones — were forced to retrench. One difference though, is that Volaris has maintained its hearty pace of capacity restoration into the fall. Wizz by contrast, amid a flurry of new quarantine rules within Europe, has been forced to pull back. LCCs in the U.S., similarly, are stunted in their recovery efforts by quarantines, notably those in states like New York affecting travelers returning from Florida, Texas, Arizona, and so on. Even U.S. airlines, though — LCCs and non-LCCs alike — are adding flights to Mexican beach destinations this winter; note United’s announcement last week (see Routes section). 

Quarantine rules haven’t been much of an issue even within Mexico. At the same time, Volaris is bolstered not just by Aeromexico’s bankruptcy and concurrent downsizing, but also the parlous state of its rival Interjet. Only with an injection of new capital by private investors this summer has Interjet been able to survive this long. But it remains deeply troubled, a reality made clear by headlines about labor disputes, unpaid taxes, and flights cancelling because of unpaid fuel bills. Last week, it abruptly ended a short-lived alliance with Aeromar, a regional carrier. All Interjet has left is a handful of undependable Sukhoi SSJ-100s; all of its Airbus planes are out of service, many of them repossessed by lessors. Mexico’s airline sector will thus likely emerge from the crisis with just three competitors of any significant size: Aeromexico, Volaris, and Viva. That’s not a lot for a country with 125m people and long distances between major cities.

On the other side of the crisis therefore, Volaris should be well positioned. Mexico’s economy of course, is taking a deep hit from the virus. But that might move some businesses to fly low-cost carriers. More importantly, cross-border migrant and family-visit traffic typically correlates with worker remittance flows from the U.S., which are right now near all-time highs despite the tough economic times. Volaris, remember, also operates a unit in Central America, with bases in Costa Rica and El Salvador. Just last week, the company said it would restart Central American operations in late November. It will be one more milestone in the airline’s relatively brisk recovery.  

Management likes to say it’s playing offense, not just defense. Volaris recently launched five new routes from Mexico City’s main airport, where slot constraints are suddenly less problematic. It’s testing new ancillary products. It relaunched its website. And it’s “closely monitoring capacity reductions from competitors for possible opportunities.” That said, its total fleet count will remain at 87 planes for the next three years, a pause in growth that will surely pressure unit costs. But importantly, it won’t have the same 87 planes in 2023 as it does today — more will be A320- and A321 NEOs with superior economics. More specifically, about 60% of its fleet will be NEOs in 2023, almost double the current percentage.

This week, Volaris will provide additional insight on its recovery and positioning when reporting its Q3 financial results. They won’t be good. But they might be on a fast path toward getting better.

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Around the World

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

Around the World: October 19, 2020

Airline NameChange From Last WeekChange From Last YearComments
American-6%-56%Updates loyalty plan program with new benefits; elites can now enjoy their perks even when flying on basic econ ticket
Delta-4%-41%Cites banking/financial services, manufacturing, and transportation sectors as its most important sources of corporate demand
United-8%-62%Hawaii will be 9% of domestic ASMs this month, up from 4% last month; growing capacity in tandem with testing trial
Southwest0%-26%United, to gauge corporate prospects, says it’s monitoring metrics like skyscraper occupancy rates in Manhattan
Alaska2%-41%Official date for joining oneworld alliance: March 31
JetBlue-4%-28%Follows Southwest in adding new winter ski routes to Montrose in the Colorado Rockies
Hawaiian-3%-55%Ending its Ohana branded turboprop service connecting Hawaii’s islands
Spirit-6%-55%Sliver Airways, flying turboprops, to connect Charleston, SC, to multiple Florida cities
Frontier(not publicly traded)Sun Country IPO could happen as early as next year if travel rebounds, it tells Bloomberg
Allegiant5%-14%CFO tells Las Vegas Review-Journal that it pays roughly half what others pay for its aircraft
SkyWest-4%-46%Carried more than 43m pax for United, Delta, Alaska, and itself last year; number will obviously be smaller this year
Air Canada-4%-66%Porter Airlines, based at Toronto’s downtown Bishop airport, extends grounding; won’t get started now until Dec.
WestJet(not publicly traded)Major retreat from Atlantic Canada; exiting Moncton, Fredericton, Sydney, Charlottetown; also deep cuts to Halifax, St. John’s
Aeromexico8%-67%Will publish its Q3 financial results this week; Volaris will as well
Volaris3%-12%Says 1.2m of its customers were first-time fliers on its airline last year
LATAM-1%-85%IATA sees Latin American and African carriers as most vulnerable to cash depletion due to absence of gov’t aid
Gol0%-47%Looks like Argentina will allow flights from El Palomar airport near Buenos Aires after all; was threatening to close it
Azul1%-50%Now a member of ALTA, the association representing Latin and Caribbean airlines
Copa-3%-48%Panama began receiving international flights and visitors again on Oct. 12; has had among world’s strictest travel regs
Avianca-8%-89%Talks about being a 30% smaller company post Covid and post bankruptcy
Emirates(not publicly traded)Skywards program now at 27m members; celebrating 20 years since launching
Qatar(not publicly traded)Arabian Business looks at Royal Jordanian and its prospects to recover following CEO’s departure
Etihad(not publicly traded)Flew over Israeli airspace to get from Milan to Abu Dhabi, a first; now possible following Israel-UAE peace pact
Air Arabia2%-18%Sharjah airport pressing ahead with $408m expansion (Routes)
Turkish Airlines-2%-2%Aeroflot reports big y/y increase in demand to Turkey during Sept.; adds that forward bookings look good for Dubai, Male
Kenya Airways0%42%Nationalization plan still in progress; uncertain whether Nairobi airport will be nationalized as well
South Africa Air.(not publicly traded)AFRAA, which represents African airlines, says countries need to stop taxing air travel as a luxury good
Ethiopian Airlines(not publicly traded)Gov’t flirted with idea of partially privatizing the airline but won’t proceed right now
IndiGo-3%-23%Delhi airport operating with about half its usual domestic flight activity now
Air India(not publicly traded)Nationwide, India’s domestic air traffic down by roughly two-thirds y/y in September
SpiceJet-4%-60%Creditors of grounded Jet Airways approve investor consortium’s plan to revive the airline; will have long uphill climb
Lufthansa-6%-51%Airlines not satisfied with latest E.U. agreement to update travel regulations; individual countries can still impose quarantines
Air France/KLM-6%-71%A340s, with their superfluous four engines, now gone from the fleet; last plane wore colors of failed Joon unit
BA/Iberia (IAG)-7%-81%Aer Lingus summer 2021 schedule includes 12 routes to North America
SAS-21%-83%Gets its first of three A321 LRs on lease from ALC; will be used for transatlantic service
Alitalia(not publicly traded)Italy now on U.K.’s list of countries where travelers must quarantine upon return
Finnair-8%-95%IATA, A4E, ACI pounding the table on getting E.U. to harmonize travel rules/quarantine rules
Virgin Atlantic(not publicly traded)U.S. and U.K. still working toward establishing an air travel corridor between the two; hopes it can be ready for Christmas
easyJet-8%-63%As U.K.-E.U. divorce deal remains elusive, threat to flight rights between the two remains a risk
Ryanair-7%-3%Launches new podcast series; first episode features Eddie Wilson, CEO of Ryanair branded unit
Norwegian-12%-98%Sold two B787-9s to NEOS, an Italian charter/leisure airline
Wizz Air-2%-17%New route links Pristina in Kosovo to Karlsruhe/Baden Baden in Germany
Aegean-4%-62%Rival Greek airline Sky Express to add six new A320 NEOs
Aeroflot-3%-44%Seeing “elevated demand” for domestic Black Sea resort spots and domestic “culture destinations”
S7(not publicly traded)Recent ad campaign highlights this summer’s revival of domestic tourism
Japan Airlines-1%-41%Skift’s Matt Parsons looks at Zip Air’s potential appeal to business travelers; carrier will offer unbundled lie-flat product
All Nippon-1%-36%Various reports say it’s due to get nearly $4b worth of new loans to cushion its liquidity
Korean Air3%-18%Will extend policy of having 70% of its employees on unpaid leave through at least December (Korea Herald)
Cathay Pacific7%-41%Hong Kong strikes bilateral air travel bubble agreement with Singapore
Air China-1%-29%Rival Hainan Airlines giving Boeing big headaches; has lots of B787s on order that carrier no longer can afford
China Eastern-1%-10%Getting nearly $5b in new capital courtesy of several fellow state-owned companies
China Southern0%-14%American moving to new Beijing Daxing airport to team with China Southern; Delta also moved to Daxing (to team with China Eastern)
Singapore Airlines0%-62%Sept. traffic and capacity data published last week shows pax volumes still down 99% across all group airlines (mainline, Silk, Tiger)
Malaysia Airlines(not publicly traded)Looking to give its wholly owned Firefly unit a greater role; Reuters said it might even fly widebodies
AirAsia-2%-69%CEO Tony Fernandes tells Skift’s Dennis Schaal that website generates 70% of airline’s bookings
Thai Airways-1%-63%Mass protests against king leave Bangkok again in a state of unrest
VietJet1%-24%Vietnam’s aviation market reached 116m passengers in 2019, up 12% from 2018
Cebu Pacific1%-61%Clark airport north of Manila has new terminal ready to go; will formally open in January
Qantas-3%-37%Selling Qantas branded clothing, sightseeing flights… anything to generate some cash
Virgin Australia0%-46%Fun fact: New owner Bain Capital was founded by U.S. senator and former presidential candidate Mitt Romney
Air New Zealand-2%-47%Getting back to normal: With Covid eradicated from NZ, rugby matches attracting tens of thousands of maskless fans
Brent Crude Oil2%-27%Worldwide energy demand will increase 25% from now to 2045, OPEC forecasts

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

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