Issue No. 786

Will Spirit Recover Faster Than its Rivals?

Pushing Back: Inside This Issue

The fourth quarter is now underway, with the Covid crisis showing few signs of easing. There is, to be sure, some positive momentum in a few domestic markets. Russia is leading the way with y/y demand growth. China’s not quite there yet but on its way. Momentum is building in New Zealand, South Korea, and Vietnam. Even in these countries though, airlines are suffering mightily from the absence of international demand and a depressed fare environment at home.

Elsewhere, the bleakness is unmistakable. IATA once again downgraded its global demand forecast after traffic growth — however modest — stalled in mid-August, just as most carriers were entering their quiet autumn season. Several U.S. airlines began mass layoffs after failing to secure an extension of federal payroll support. In Europe, Greece’s Aegean spoke despairingly about a tough winter ahead as a second wave of Covid cases flare throughout the continent. Not even Aegean’s shorthaul leisure orientation provided much help.

The Covid scourge has even reached the White House, and just before a momentous election no less. Spain is the top hotspot in Europe. Infection rates in India, Russia, and South America remain troubling as well. Treatments are improving, but nowhere near enough to arrest the mass death and suffering taking place across the globe. It will likely be another six months at least before widespread vaccinations.

Is there anything airlines can do to facilitate more travel in the meantime? Increasingly, the industry is pinning its hopes on testing passengers for the virus prior to departure. The idea is gaining steam as testing technology improves. But there are, make no mistake, logistical and cost challenges to address.   


“At some point early on in the summer, there was some expectation that possibly late Q3 or Q4 would see a more substantial recovery. It’s now the case that because of the resurgence of the pandemic as of early August… people around our industry are now realizing that the winter is going to be very hard and [the] return to normality or relative normality will take a longer period of time than what had been initially anticipated.”

Aegean Chairman Eftichios Vassilakis


April-June 2020 (3 Months)

  • Aegean: -$82m/-$49m*; -129%

January-June 2020 (6 Months)

  • TAP Air Portugal: -$439/-$189m*; -27%

April 2019-March 2020 (12 Months)

  • Qatar Airways: -$1.9b; -12%

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

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Weekly Skies

  • Qatar Airways, one of the Big Three Gulf carriers, published its financial report covering the 12 months that ended in March. The Covid crisis, of course, was just beginning in March, so the figures disclosed reflect pre-pandemic realities. Even so, the state-owned airline showed another massive net loss of close to $2b, with a negative 12% operating margin (including “general and administrative” expenses which it for some reason classifies as non-operating).

    The red ink reflects a longstanding truth about Qatar Airways: That it’s more than just a for-profit enterprise. More importantly to Qatar’s rulers, it serves as an economic development tool, and a vehicle to enhance the country’s diplomatic clout abroad. It does so through the airline’s multi-billion-dollar purchases of aircraft and airline ownership stakes. It’s one of the few big customers for Boeing’s new B777-X product, for example, with 60 currently on order. It has another 23 B787-9s on order as well, not to mention some B777 freighters. From Airbus, it has 50 A321 NEOs on order, along with 27 A350-1000s.

    As for airline stakes, Qatar Airways owns 25% of IAG, 10% of Latam, 10% of Cathay Pacific, and 5% of China Southern. It furthermore provided billions in new capital during the Covid crisis to IAG, Latam, and Cathay. It tried to buy a piece of American several years ago as well, unsuccessfully amid disputes about alleged subsidies. That dispute with the U.S. Big Three, incidentally, was quieted after a White House meeting between Qatar Airways CEO Akbar al Baker and U.S. President Donald Trump (Qatar is among the countries allegedly providing finance to Trump family businesses). In any case, oneworld members Qatar Airways and American are now codesharing again and calling their relationship a “strategic partnership.” American, when the rapprochement was announced in May, even said it would explore launching nonstops to Doha.

    Closer to home, Qatar’s national airline is still blockaded from serving key Gulf markets like Saudi Arabia and the U.A.E., as well as Egypt. Just before the Covid crisis spread globally, the carrier’s 49% ownership of Air Italy went up in smoke as the carrier liquidated. In India, al Baker spoke frequently about a possible investment in IndiGo, and at times the launch of an all-new airline. To date, nothing of the sort has come to pass.

    The carrier’s main focus during the pandemic, aside from its support for foreign allies, includes an active cargo operation. During its financial year to March, cargo accounted for 19% of groupwide revenues. Passenger revenues generated just 73% of the total, with other businesses like aircraft chartering, ground handling, hotel management, and, catering contributing the rest. A full 4% of group revenues came from duty-free sales, which covers the company’s exclusive right to sell alcohol in Qatar. Qatar Airways never did suspend its passenger operations after the pandemic. In fact, it has flown relatively robust schedules, serving 30 destinations even at its lowest point. It’s now up to about 90. It has however, like other airlines, grounded its A380 fleet.

    Unlike its rival Emirates, which for the record produces about double the amount of revenue, Qatar Airways does fly narrowbody planes, including A321 NEOs. It was also quicker than Emirates to order B787s and A350s, planes seemingly better sized for the new realities of the Covid era. Capacity growth was already slowing in 2019, with ASK growth in the year to March just 3% and groupwide revenue growth just 6%.

    Still, consistent with its longtime philosophy of maximizing the number of destinations it serves, it last year added eight new ones: Davao, Gaborone, Izmir, Langkawi, Lisbon, Mogadishu, Rabat, and Malta.  Prior to Covid, it was planning to add Almaty, Dubrovnik, Lyon, Nur-Sultan, Osaka, Santorini, Siem Reap, and Trabzon. The additions were part of a three-year transformation plan announced at the end of 2019, by which time Qatar had already concluded that the airline was losing too much money. The country’s wealth, after all, depends heavily on income from energy exports. And energy prices remain low after crashing in late 2014.  

And TAP Reports a Huge Loss

  • TAP Air Portugal, partly sold to JetBlue and Azul founder David Neeleman in 2015, was partly renationalized earlier this year amid the Covid crisis. The airline last week disclosed a gargantuan $650m net loss for the first half of 2020, or a still ghastly $431m excluding special items. Revenues were down 57% y/y, and a lot more than that excluding the healthy growth it enjoyed during January and February. Operating margin for the half was negative 66%.

    TAP is now tapping government funds for mere survival but needs to present a viable restructuring plan by Dec. 10 to unlock the full amount it was promised. It’s highly dependent, remember, on overseas lusophone markets, Brazil most importantly. The U.S. is a key market as well, having added a number of routes there in recent years. TAP’s future health is therefore tied to a revival in transatlantic demand. The carrier has already arranged to reduce its near-term capital spending by $1b with the deferral of A320 and A330 NEOs. Airbus also gave TAP the right to switch A330 NEO orders to other models. Talks for concessions with aircraft lessors are still ongoing.

    In terms of capacity, ASKs were just 12% of normal in July, and just 24% of normal in August. Neeleman, by the way, no longer owns any shares in the airline but his partner in the 2015 takeover, Humberto Pedrosa, remains in possession of a 23% stake. Portugal’s government now owns 73%, with the balance held by TAP’s employees.
  • Aegean Airlines knows a thing or two about managing through hard times. Greece suffered extreme economic hardship in the 2010s, especially during the early years of the decade. From 2010 through 2012, Aegean sure enough lost money, though margins weren’t too bad. It rebounded with a strong 2013, the year it purchased hometown rival Olympic Air. Solid profits have persisted ever since. What was its secret? The key to Aegean’s success, aside from its disciplined management, is Greece’s strong and steady tourism sector, attracting visitors from all over Europe and beyond. In 2010, while Greece was receiving the first of multiple IMF/EU bailouts, the country’s airports handled nearly 38m travelers. By 2019, the figure had reached 64m. With y/y growth of 5% in January and 4% in February, it looked like 2020 would be another record-breaking year.

    You know what happened next: Covid-19, a crisis far worse than any the airline industry had ever faced. Aegean certainly isn’t escaping the pandemic’s ravages, losing $82m in the second quarter, or closer to $49m excluding special items linked to bad fuel hedges. Operating margin from April through June was negative 129% as ASK capacity declined 91%. There simply wasn’t much flying until travel restrictions eased a bit late in the quarter.

    The story of Aegean this crisis is the story of most European shorthaul airlines. When markets began reopening in June, initial demand was encouraging, enough so for some carriers to anticipate nearly full schedules by year end. By late July, however, bookings began to weaken as Covid cases flared, and as E.U. governments responded — in an uncoordinated way — with quarantine rules and other restrictions. By August, Aegean had reached about 50% of its normal capacity (and a little higher than that domestically), even with most of its non-E.U. markets still closed (markets in the Middle East and the former Soviet Union, for example).

    Tourism to Greece, in fact, fared a bit better than average across Europe, with people perceiving its islands and beaches to be safe. Demand from Germany, Austria, and Switzerland was strongest, relatively speaking. It was weaker from the U.K. and France, and weaker still from Italy, Spain, and eastern Europe. Gone completely were tourists originating in North America, Asia, and other overseas markets. Parts of Scandinavia were closed off due to travel restrictions as well. Now, instead of an ongoing recovery into autumn, as carriers hoped this spring, demand is extremely weak, with signs of a tough winter ahead. Then again, visibility on future demand is extremely low due to very late booking curves (people, in other words, are booking their flights very close to departure day).

    A graph of Covid cases in Greece shows a sharp rise between late July and late September. The trend is similar throughout much of Europe. Aegean, fortunately, had a strong enough balance sheet going into the crisis that it has sufficient cash on hand to sustain losses for a while. It’s close to finalizing terms on a government-backed loan to further secure its liquidity position. At the same time, Athens is financing some of its payroll. Aegean has not cancelled any of its NEO orders with Airbus. But it did push back some delivery dates. Even so, it remains one of the few European airlines still taking planes this year and next. It helpfully has some A321 CEO leases expiring in the near term, which provides flexibility to reduce capacity if need be. Alternatively, if it does renew leases as they expire, it will probably get a favorable price right now.

    One last note about Aegean is that it typically makes most of its money during the peak summer travel season. It’s thus critical for demand to reach something approaching normal by next summer, to avoid two years of financial trauma. Like other carriers, Aegean is hopeful that pre-departure Covid testing for passengers can help facilitate a revival. Widespread vaccinations, of course, would help even more, and might perhaps come in time to rescue next year’s peak.

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  • United Chief Commercial Officer Andrew Nocella spoke with Business Travel News, reiterating the airline’s belief that air travel demand won’t return to normal until an effective vaccine is widely distributed. Unlike many of its rivals, United has not mass-retired large parts of its fleet. It wants to be ready with enough capacity when demand does return, and it’s impossible to predict right now how strong the comeback will eventually be. Companies, Nocella said — especially small businesses — are already starting to relax their employee travel policies. And business travel will gain momentum as governments open borders and as employees return to offices. It’s not unreasonable to expect a full return to pre-crisis levels of business travel in the next few years, boosted by more at-home workers living far from their offices and commuting in by air periodically.

    United continues to respond to corporate requests for new routes, including the upcoming launch of San Francisco-Bangalore, a top ask among Bay Area tech companies. The carrier also led a movement to abolish ticket change fees.

    Nocella said separately that he’s closely watching the development of new rapid-response Covid tests, like the ones it’s now trialing on San Francisco-Hawaii routes. Currently, the availability of such tests is limited. But as the airline industry at large is hoping, they could prove helpful in reviving airline demand as availability, reliability, and cost effectiveness improves.
  • Delta CEO Ed Bastian, speaking to CNN last week, said his airline is working on testing options as well. He adds that there might come a day fairly soon when a negative Covid test result, or documentation of vaccination, is a prerequisite to boarding a Delta flight, particularly on international routes. That would not only provide a sense of security for passengers but also allow them to avoid quarantines, which Bastian says is the biggest deterrent to recovery in travel to Europe, for example, or in markets like New York.
  • You don’t hear much about Lion Air. Once upon a time, the Indonesian carrier made waves with giant aircraft orders. It was unfortunately the subject of multiple safety-related incidents, including one of the two B737 MAX crashes. But it’s not a publicly traded company and doesn’t communicate much with media. Bloomberg, though, reports that its founders have plans to launch another new airline.

    It’s not clear whether the new entity would be part of Lion Air (like Batik Air, which they previously launched) or altogether separate. What is clear is the intention to take advantage of future opportunities presented by the Covid crisis, using a new airline with a clean balance sheet and perhaps a lower cost structure. Lion Air, including Batik Air, is already Indonesia’s largest airline, ahead of state-owned Garuda which faces possible bankruptcy.
  • In a new podcast produced by Etihad, CEO Tony Douglas talks about some of his early priorities in the Covid crisis, including preparations to restart flights after they were grounded, the need to maintain the airline’s grounded planes, expanding  cargo activities, and crafting a vision of how the industry might look after the crisis. Etihad has since executed major upgrades to its website, app, and loyalty program.

    Douglas echoes the industry’s enthusiasm for pre-departure Covid testing as a way to safely facilitate more international travel. He raises the idea of “wellness visas” for travelers, not unlike the wellness certifications used for shipping animals across borders (he acknowledges the awkwardness of comparing humans to animals, but you get the point).

    On a separate note, Douglas all but pronounced the obituary for its A380s. He welcomes the opportunity to perhaps start flights to Israel. And he downplayed recurrent rumors about an Etihad-Emirates merger.  
  • Israel’s Globes examines the current ownership of El Al, the country’s flag-bearing airline. Recently, 27-year old Eli Rozenberg became controlling shareholder, buying a 47% stake for a little over $100m. But some, including El Al’s board of directors, question whether it’s Rozenberg’s father who’s really in control, which would be a problem because he’s not an Israeli citizen. Like most countries, Israel bars foreign nationals from controlling local airlines.

    El Al is facing a severe financial crisis amid the Covid shock. But it’s also presented with some new opportunities on the Arabian Peninsula, including rights to fly over Saudi airspace and serve the U.A.E. and Bahrain.
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  • FAA Administrator Steve Dickson (a former Delta pilot) took a B737 MAX for a test flight last week and said although he thought the aircraft had come a long way, more needs to be done before it can be re-certified. Dickson completed two landings during the course of the two-hour test flight and told reporters, “I like what I see.” Dickson cautioned, however, that the FAA and international regulators still are reviewing all the data and the fixes to flight-control software in order to re-certify the aircraft, which has been grounded for 18 months, after two fatal accidents. The B737 MAX could be re-certified by the end of the year.

    Separately, Boeing said it is consolidating its B787 production lines at its factory in North Charleston, South Carolina, ending the advanced twinjet’s assembly in Boeing’s historic Puget Sound home. The South Carolina facility came online in 2010 and is the only facility capable of building the larger B787-10. Smaller B787-family aircraft will continue to be built in Washington state until the overall type’s production rate goes down to the previously announced six aircraft per month next year, Boeing said.  Boeing’s Puget Sound factories will continue building B737, B747, B767, and B777 aircraft.
  • Qantas, with its mainline and Jetstar units, has long dominated the domestic Australian market. Poor Virgin Australia was driven into bankruptcy. Now, both airlines (Virgin is back with new owners) have another contender to face. The regional carrier REX, as it disclosed earlier this year, will jump into the busy Sydney-Melbourne-Brisbane triangle with mainline jets next year.

    In pursuit of that objective, REX last week signed leases for six B737-800s. They’ll start arriving in November and will all be on hand by the end of calendar Q1 of next year. The arrival schedule will allow for the debut of Sydney-Melbourne flights in March, with advanced ticket sales starting in December, pending final regulatory approvals. REX hopes to ultimately reach a fleet of 10 B737s for its mainline endeavor, though the exact number will depend on demand.
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State of the Unions

  • U.S. Senate Majority Leader Mitch McConnell (R-Ky.) has said the Senate will not vote on legislation until Oct. 19, after several Republican senators contracted the coronavirus and went into quarantine. President Donald Trump has been hospitalized with Covid-19, and other Senate Republicans who attended a White House event last week are being tested for the disease. These developments put further airline aid in jeopardy, at least until the full legislature returns.

    Airlines began furloughing tens of thousands of workers on Oct. 1 when payroll support through the CARES Act expired. The industry had held out hope that Congress would extend the program through March, but a legislative solution evaporated when the Senate canceled votes due to the latest coronavirus outbreak.

    The House last week narrowly passed the $2.2t HEROES Act, which had $25b in airline payroll support. The bill made further aid contingent on the same restrictions that were in the CARES Act: Airlines taking the aid would have to serve all their pre-pandemic destinations and could not furlough employees through March 2021, among other provisions. House Speaker Nancy Pelosi (D-Calif.) brought the bill to a vote late last week after talks with Treasury Secretary Steven Mnuchin failed to reach a compromise.

    Pelosi on Friday said she was open to standalone bill Transportation and Infrastructure Committee Chairman Peter DeFazio (D-Ore.) had introduced. Senators Roger Wicker (R-Miss.) and Susan Collins (R-Maine) had introduced a separate, $28b standalone bill in the Senate.

    But with the Senate not voting on any legislation until later this month, the HEROES Act and any airline-specific legislation have stalled for now.

    Spokesman for American and United told Airline Weekly that the furlough process had begun, but the carriers could reverse the furloughs if more aid became available. American is planning to furlough up to 19k employees, and United is furloughing more than 13k. Several regional carriers also are furloughing thousands of workers.
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Routes and Networks

  • Ryanair said it would close its Cork and Shannon bases in Ireland, blaming what it believes are overly strict travel regulations. The decision takes effect later this month, at the start of the winter schedule. But it seemed willing to reverse the move if Irish authorities reverse course and adopt E.U. guidelines on permitting unrestricted travel to areas of Europe with low infection rates. 
  • In 2015, United decided to stop flying from New York JFK. The airline is so large after all, at Newark. And besides, it was only offering JFK nonstops to three cities: Los Angeles, San Francisco, and Washington (Dulles). It had long ago abandoned international routes to London and Tokyo. Why bother with what was surely a money-losing presence?

    That’s not, however, how CEO Scott Kirby saw things when he subsequently arrived at United as its president. JFK might not be a money-maker in its own right, he argued. But not serving it cost it dearly among big corporate customers in California. This gave American and Delta an advantage with these customers, particularly in L.A., a highly competitive market. (Imagine telling a customer like Disney that sorry, it can’t provide flights to JFK). United never did return, even under Kirby’s watch, given the difficulties of re-obtaining slots and gates.

    Now, however, as CNBC reports, pandemic-era capacity cuts are freeing up slots. And indeed, the report says United plans to reenter the airport next year. JFK-based JetBlue, recall, had no compunction about entering United’s Newark transcon markets.
  • Brussels Airlines announced a restoration of several African routes, appealing to family-visit travelers. Africa is a relative aviation bright spot during the crisis, attracting even brand new longhaul routes like those United is adding from the U.S. Brussels Airlines, a unit of Lufthansa, is a major player in the Europe-Africa market, building on former colonial ties. The continent, by the way, has had a rather encouraging record in dealing with the Covid virus, perhaps aided by is experience with the Ebola pandemic, and by its youthful demographics.   
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Covid Crisis 2020

North America

  • David Neeleman’s new airline still intends to launch, just later than initially planned. It’s called Breeze, and it’s now targeting March for its first revenue flights. Where will it fly? Breeze is not yet ready to say, other than to disclose that its first routes will connect an unspecified Southeastern airport to points in the Northeast, with additional routes from an airport farther south to various points in the Northeast, the Southeast and the “Southern Plains” (which usually refers to Texas, Oklahoma, and Kansas).

    More service linking the southeast to other parts of the country will follow. That first Southeastern airport base could be in any number of cities, from big hub spots like Atlanta or Charlotte to fast-growing Nashville or Raleigh-Durham. The far-south airport sounds like it could be somewhere in Florida. We’ll find out soon enough.

    As for aircraft, Breeze pushed its A220 deliveries back to August but will start with E190/95s until then. It also said it will launch with scheduled service, abandoning earlier plans to start with charter flying — it cited the disruption to college sports as a reason (college teams are major customers for charter air service). The new airline arrives on the scene amid great uncertainty but also potential opportunities as incumbent airlines cut cities and flights from their network. Breeze thinks lots of midsized U.S. cities will lose a lot of nonstop air service.

    A few other facts: Pilot training is already underway. Neeleman, who founded JetBlue and Azul, will own 36%. The startup assumes a fuel price of $1.70 per gallon. And heavy maintenance on its E-Jets will be outsourced to an Embraer facility in Nashville. Is that (Nashville) going to be the inaugural flight base?

Northeast Asia

  • In its Q2 earnings call on Sept. 24, China’s said domestic airline bookings showed positive y/y growth in August. To be clear, overall domestic passenger volumes during August were down roughly 20%. It could just be, moreover, that Trip is winning a greater share of total bookings. But it’s an encouraging sign, nonetheless. The company also said corporate travel was reviving, and high-end hotel bookings have risen by double-digits y/y in recent weeks. International travel to and from China remains minimal but even here, Trip is optimistic for the long run.

Russia/Former Soviet Union

  • It’s the strongest recovering airline market anywhere in the world. No, not China, but Russia. As IATA statistics released last week show, domestic airline demand in Russia (measured by RPKs) increased 4% y/y in August. That’s right, the Russian domestic market is busier now that it was before the virus. Domestic tourism is booming, IATA says, thanks in part to falling fares. Of course, falling fares are not good for airlines, and neither is the still-deeply-depressed state of international markets. Many Russians, it seems are simply shifting their travel from points abroad to points at home. The country, remember, recently became the first to conduct mass vaccinations against Covid, albeit without the standard safety protocols.


  • Air New Zealand held its annual shareholders meeting, virtually of course. The carrier reviewed its losses to date since the start of the pandemic, contributing to its first fiscal year loss in 18 years (for the 12 months that ended in June). It’s also the first fiscal year since 2005 in which ANZ won’t pay any dividends to its owners. The carrier’s controlling owner is New Zealand’s government, which remains a committed shareholder, providing emergency credit support — support that ANZ is now utilizing.

    It seems to be encouraged by recent domestic demand, even noting some revival in small business travel. It’s downright “thrilled” with booking trends from the past few weeks, aided by the removal of government restrictions on seat sales to maintain onboard social distancing. The removal came on Sept. 14, after which the airline sold 250k seats in 72 hours. That’s more than normal, and a sign of Kiwi eagerness to “scratch the travel itch.” Of course, ANZ’s international network remains shuttered, which also means fewer visiting foreigners flying around New Zealand on domestic flights. ANZ thus expects to be a smaller airline for the next few years, especially on the widebody side. Plans for ultra-ultra-longhaul New York nonstops from Auckland are obviously on hold.

    After the meeting, Australia and New Zealand announced the start of a travel bubble covering selected markets, but with quarantine rules waived only for New Zealanders visiting Australia, not the other way around. Back at ANZ, roughly 4k jobs were cut. And management is working on a “strategy refresh” that emphasizes domestic markets, loyalty plan improvements, digitalization, and carbon reduction. Changes to be sure, will be evolutionary not revolutionary. ANZ was after all a strongly profitable airline before the crisis.

Sub-Saharan Africa

  • South African Airways had little choice but to suspend all operations. It has no money, and more importantly no deal yet with its government on future funding. Is Ethiopian Airlines the white knight in shining arm, coming to the rescue. Not exactly. Ethiopian’s CEO Tewolde Gebremarian tells Bloomberg he’s only willing to provide operational support, meaning planes, pilots, and maintenance services. There’s no desire to help SAA repay its debts or finance severance pay for dismissed workers. “We don’t want to deal with the legacy issues.”
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Feature Story

Spirit says it will recover faster than others. Is it right?

It says it can return to profitability faster than other carriers? Is Spirit Airlines right?

The arguments are logical enough. Spirit highlights its low costs, low fares, and long record of strong profit margins. With an all A320-family fleet, it can react quickly to abrupt changes in demand. Its customers are predominately flying for leisure or to visit friends and relatives. It’s by contrast not exposed to the near-complete collapse in corporate travel and intercontinental travel. Nor is it overly dependent on big-city markets like New York, Washington, and other places facing disproportionate economic pain. The airline also says its passenger skew young, and younger travelers that have been more willing to fly in the Covid era.

Leisure and family-visit travelers, Spirit said last month, are showing signs of regaining confidence. Labor Day travel was relatively encouraging. People are booking flights a bit further in advance now. They’re searching for trips farther out as well. There’s clearly, in other words, a wellspring of pent-up demand. There’s money to spend on travel too. As Goldman Sachs chief economist Jan Hatzius said on Bloomberg last month: “The most amazing statistic of this entire period has been the fact that the second quarter saw the biggest decline ever in real GDP… but also the biggest increase ever in real household disposable income.” The reason for that? Government support measures like stimulus checks and generous unemployment benefits, combined with all the money households are saving in areas like dining out, commuting to work, and indeed, leisure travel.

As CEO Ted Christie explains, Spirit was producing operating margins — excluding non-cash costs like depreciation and amortization — of roughly 25% pre-crisis. Just getting back to breakeven on a cash basis, therefore, isn’t that high a hill to climb. It can theoretically do so (get to breakeven EBITDA, in other words) if unit revenues were 25% lower, assuming it flew a full schedule. Alternatively, it could reach cash breakeven flying 25% less than normal, but with unit revenues returning to where they were pre-crisis. The first scenario is the more realistic one, and more within Spirit’s control. In fact, it came very close to cash breakeven for the month of June, when demand was recovering nicely. This prompted it to move from a 79% y/y reduction in ASM capacity during June to a decline of less than 20% in July.

That, alas, proved too optimistic. As everyone now knows, June’s recovery momentum didn’t last long as sunbelt Covid cases spiked, not least in Spirit’s home state of Florida. But June’s cash figures nevertheless show that it doesn’t take much for the airline to reach the point where more dollars are coming in than going out. The current autumn period is of course an offpeak season. But the Thanksgiving and Christmas holidays should help. And while refraining from any forecasts given the high uncertainty of infection rates, vaccines, and so on, Spirit thinks it might be able to return to full capacity by next summer.  

In the year or so leading up to the crisis, Spirit battled some cost pressure in areas like labor and airport charges. But it was also America’s fastest growing airline, increasing ASMs 20% last year. This created economies of scale that helped offset some of the cost pressures — adding new workers at the bottom of the wage scale, for example, pushed down average labor costs. On the other hand, all that growth last year left it with additional capacity — and additional workers — that became superfluous once the crisis began. In 2019 alone, Spirit added Austin, Burbank, Charlotte, Indianapolis, Nashville, Raleigh-Durham, and Sacramento. It began this year with expansion announcements from cities like Austin, Baltimore, and New Orleans.

Along with its aggressive expansion, Spirit entered the crisis on a campaign to improve customer service. Last summer, overzealous flight and crew scheduling, combined with bad weather and runway work in Fort Lauderdale, led to disruptive operations and unhappy customers. This perpetuated a long-held reputation for being cheap but not particularly passenger friendly — almost Ryanair-like. To change this perception, Christie and his team built more resilient schedules, even at a cost to productivity. They went further by investing in more comfortable seats with more legroom, without sacrificing density. Spirit also announced the construction of a new operations center in Nashville, far from Florida’s hurricanes. In building a new headquarters though, it opted to remain in Fort Lauderdale, its home since moving from Detroit many years ago. Detroit remains home to the carrier’s only self-owned maintenance hangar, opened in 2017. 

By 2019, Spirit was trumpeting its customer-service improvements, emphasizing its new planes and service to primary airports, among other things. But what else was Spirit busy doing on the eve of the crisis? Always striving for more ancillary revenues of course. In 2019, Spirit passengers paid an average one-way fare of just $55. But they spent an average of $56 on bags, seat assignments, flight-change fees, loyalty plan membership, and other ancillary services. To get that figure even higher, the airline improved its website, mobile app, and data analytics. Another goal was improving its loyalty plan offerings and associated credit card products in conjunction with partner Bank of America. It aimed to enhance its vacation package offerings and better monetize its “Big Front Seat” product. Though late to the game with Wi-Fi, the service is now available on many flights, for a fee of course.

Spirit is surely right in emphasizing the pandemic-era advantages of its low costs, strong ancillary revenues, improving service, and leisure-oriented network. There’s a case to be made, however, that its assertions about being best positioned to recover are wrong.

Spirit, for starters, doesn’t carry any cargo. Then there’s its heavy Florida exposure. “We’re very much a Florida airline,” Christie recently said. Is that a good thing? Well, maybe too good. As every U.S. airline prioritizes capture of leisure demand, all (except Hawaiian) are sending more capacity to the Sunshine State. That could imply depressed unit revenues for a long time to come. In addition, the prospects for widespread Covid vaccinations in time for 2021’s Florida peak season (February and March) don’t look good. It might not be until springtime 2022, therefore, that the Florida market really delivers strong returns, and only then assuming no capacity glut. The same 2021 hyper-competitiveness and RASM pressures could characterize Spirit’s Caribbean leisure markets as well. Same for Las Vegas, where Spirit also has a large presence.

Viewed another way, airlines like American, Delta, United, and Southwest, while their business routes lie fallow, will feel compelled to keep large portions of their fleets busy in places like Las Vegas, Florida and the Caribbean. Of course, they’re shedding a lot of planes and capacity as well, which could be a mitigating factor. But just saying: Florida may not be the El Dorado it seems.

Spirit also faces a new competitive landscape in which American, Delta, and United no longer levy change fees, making them more attractive to travelers. Spirit, which still does, retorts with a reminder that Southwest — whose network has the most overlap with Spirit’s — never did have change fees. And Spirit’s long fared just fine competing with Southwest. It’s also managed to live with widespread adoption of the sort of basic economy pricing that it pioneered. Prior to that, it adjusted to widespread adoption of its ancillary tactics, at least with respect to charging for checked bags. Imitation, Spirit would argue, is the best form of flattery. 

So maybe it’s right after all about its potential to recover. The airline did, however, suffer an unfortunate bout of bad timing. In January of this year, it finalized an order for 100 A320-family NEOs — A321s, A320s, and even A319s. The deal included options for 50 additional NEOs, and even conversion rights for A220s. Might it have negotiated a better price if only it waited a few months? Might it have opted for fewer orders had it known the demand devastation that lie ahead? Certainly, albeit with less financial muscle to undertake any big order right now. Spirit has agreed with Airbus to defer some deliveries. Note also that its profit margins would likely have been somewhat lower last year were it not for the MAX-related disruptions that its rivals Southwest, American, and United endured.

What else has Spirit done to mitigate the impact of the crisis? Raised lots of new capital, naturally, including a recent deal collateralized by its loyalty program assets. It decided, however, to forego a government loan. It still has $600m in unmortgaged assets to use as collateral for future borrowing if needed. Early on in the crisis, it implemented a shareholder plan to block any potential takeovers. This quarter and next, capacity will be down by about one-third y/y. Deals with its pilot and flight attendant unions will achieve cost savings while avoiding furloughs. The crisis is opening some network opportunities, in slot-controlled Orange County, Calif., for example, the closest airport to Disneyland. Spirit also is adding capacity in beach markets like San Juan and Cancun.

Even today, Spirit calls itself a growth airline, poised to widen its cost advantage during the crisis. If it can do that then yes, it really will be early in its return to profits.

Spirt by the Numbers

Spirit’s Top Routes in 2019

2019 Seats
1Fort Lauderdale FLL5,087,433
2Orlando MCO3,517,579
3Las Vegas LAS3,237,929
4Detroit DTW2,194,204
5Chicago ORD1,974,194
6Baltimore BWI1,880,692
7Dallas DFW1,727,599
8Atlanta ATL1,685,680
9Houston IAH1,524,742
10Los Angeles LAX1,510,258
11Tampa TPA1,234,325
12New Orelans MSY1,069,053
13Boston BOS904,188
14Newark EWR875,840
15Myrtle Beach MYR875,338

Source: Cirium

Ranked by Seats Scheduled

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Around the World

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

Around the World: October 5, 2020

Airline NameChange From Last WeekChange From Last YearComments
American6%-49%Among the many airlines experimenting with Covid testing for pax; first trial will be on Miami-Jamaica routes
Delta7%-40%Says again that recovery will be “long and choppy;” executive pay cuts extended
United5%-57%Chicago O’Hare still intending multi-billion-dollar terminal upgrade/expansion project but timing more uncertain given Covid
Southwest4%-26%Started 2020 with $4.1b in cash; ended Q1 with $5.5b; now has $15.8b
Alaska2%-40%S&P report shows Seattle, along with Phoenix and Charlotte, atop the rankings for y/y changes in home prices
JetBlue2%-27%David Neeleman’s new airline Breeze to use both in-house and outsourced maintenance
Hawaiian5%-47%One of seven U.S. airlines to take CARES Act loan (the other six are AA, United, Alaska, JetBlue, Frontier, SkyWest)
Spirit3%-50%Caribbean Airlines, from Trinidad & Tobago, implementing harsh new labor cuts
Frontier(not publicly traded)New promotion offering free flights to Orlando for anyone named Orlando (first or last name)
Allegiant-3%-18%Decided not to take government loan after securing attractive private sector funding; selling $150m in new bonds
SkyWest7%-42%Signs five-year loan deal with U.S. Treasury; can borrow up to $573m in CARES Act funds
Air Canada-1%-64%Close to ordering 25k rapid Covid testing kits from health care firm Abbott; based on nose swabs
WestJet(not publicly traded)Canadian airline unions leading campaign for government aid for embattled industry
Aeromexico8%-68%Some bondholders not happy with DIP loan terms proposed by Apollo (which by the way owns Sun Country in the U.S.)
Volaris5%-17%Tulum, south of Cancun along Mexico’s Caribbean coast, gets President AMLO’s endorsement for new airport
LATAM-2%-84%Disclosed a $142m operating loss for the month of August; July’s operating loss was $161m
Gol-3%-47%With one of the strictest aviation lockdowns worldwide, Argentina’s Aerolineas Argentinas expected to lose $700m this year
Azul-9%-51%Receives certification to convert an E195 into an all-freighter aircraft
Copa-11%-50%Panama to reopen borders and welcome international travelers on Oct. 12
Avianca-3%-87%Court injunction against Bogota’s participation in airline’s DIP financing remains in place; Avianca has enough funds lined up anyway
Emirates(not publicly traded)FAA certifies GE’s new engines built for B777-X; it’s the only engine option available to airlines ordering the plane
Qatar(not publicly traded)Doha airport handled 38m pax in the 12 months to March 2020, a 9% y/y increase
Etihad(not publicly traded)Tells Routes it’s likely to launch Abu Dhabi flights to Tel Aviv
Air Arabia2%-8%Wizz Air Abu Dhabi was supposed to launch Oct. 1; launch now set for November
Turkish Airlines2%-10%In talks with government about financial aid, Reuters reports
Kenya Airways0%57%Prospective Nigerian startup Green Africa, backed by some former American Airlines execs, receives new financing
South Africa Air.(not publicly traded)All operations temporarily suspended while it continues its search for more funding; might this grounding be permanent?
Ethiopian Airlines(not publicly traded)Strong cargo yields helping it through the crisis; Addis Ababa well-positioned as a logistics hub
IndiGo2%-30%Appoints former WestJet CEO Gregg Saretsky to its board of directors
Air India(not publicly traded)U.S. signs open skies agreement with Bangladesh
SpiceJet8%-59%India-UAE “bubble” agreement for air travel extended through the end of this month
Lufthansa-1%-51%Plans to restart some flights to India postponed after Delhi fails to give clearance
Air France/KLM-3%-69%KLM submits restructuring plan to Dutch gov’t; precondition of receiving big loan package; plan includes big cost cuts
BA/Iberia (IAG)-3%-80%BA to launch a London Heathrow-Bermuda nonstop in March; will use B777-200s
SAS-52%-75%Gets clearance from Swedish regulators to proceed with new stock and convertible bond sales
Alitalia(not publicly traded)ENAV, the publicly-traded air navigation provider, says traffic was down about 50% y/y in Aug., similar in Sept.
Finnair2%-94%Announces new initiative to improve its distribution within mainland China
Virgin Atlantic(not publicly traded)Extends marketing partnership deal with America’s National Football League (NFL)
easyJet1%-56%U.K. adds Turkey and Poland to quarantine list; anyone who travels there must self-isolate for 2 weeks upon return
Ryanair0%10%Continues to campaign stridently against government financial support to airlines; Spain’s aid for Air Europa a new target
Norwegian15%-97%Norway’s gov’t reportedly discussing the idea of buying a stake in Norwegian to help it stay aloft
Wizz Air4%-10%Announces two new routes connecting Romania with Birmingham in the U.K.
Aegean-11%-64%Original delivery schedule had it taking 26 NEOs between 2020 and 2022; number now down to 15, 5 of which have already arrived
Aeroflot-7%-32%Announces new share sale; Moscow to participate and maintain its 51% ownership stake
S7(not publicly traded)Ukraine International adding some tourist flights to Egypt
Japan Airlines-5%-39%Assoc. of Asia Pacific Airlines (AAPA) was supposed to hold executive meeting in Japan next month; event switched to virtual
All Nippon-10%-33%Big cutbacks to int’l schedule for November; will fly just 28 routes, not 75
Korean Air3%-18%LCC Jeju Air not yet decided on whether to seek government aid (Yonhap)
Cathay Pacific2%-47%Anticipation building for the turnaround plan now in development; could mean significantly smaller airline
Air China3%-27%Bloomberg, citing data from Alibaba’s travel arm Fliggy, says domestic air reservations now roughly flat y/y
China Eastern1%-5%Construction of new Qingdao airport now complete; the seaport city has lots of economic ties to South Korea
China Southern1%-13%Guangzhou airport undertaking another big expansion; will be able to handle 120m pax by 2030 (Routes)
Singapore Airlines2%-62%Planned to offer flights to nowhere for aviation enthusiasts but reconsidered after pushback from environmentalists
Malaysia Airlines(not publicly traded)Running out of cash, Reuters reports; having trouble paying lessors and other suppliers
AirAsia-3%-62%Says Langkawi one of its most popular destinations; adds service from Kuching
Thai Airways-1%-64%VietJet’s Thai affiliate now offering “deluxe” fares that include various amenities and perks
VietJet-1%-24%Rival Bamboo Airways now adding E195s to its fleet
Cebu Pacific6%-57%Launches new marketing campaign to boost local tourism
Qantas6%-35%Investment firm PAG Asia Capital providing the funds for REX’s dive into B737 flying
Virgin Australia0%-46%Sydney Morning Herald report says big pilot pay cuts coming; new owner Bain looking to further lower carrier’s cost base
Air New Zealand13%-47%Says (in reply to shareholder question) it would consider doing a loyalty status match offer
Brent Crude Oil-7%-32%Oil prices drop last week as worldwide Covid cases spike, heralding further hits to global economy

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

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