Issue No. 791

Countervailing Cost Currents

Pushing Back: Inside This Issue

It was a week of waiting. Waiting for the results. What would they be?   

Finally, the world learned. They learned that Lufthansa, Singapore Airlines, and Turkish Airlines collectively suffered hundreds of millions of dollars of third-quarter losses. But a major theme for all three was the relief they got from cargo. Turkish almost broke even at the operating level thanks to cargo. Same for cargo-heavy China Airlines in Taiwan. Cargo-heavy Korean Air? It managed another crisis-time operating profit.    

Asia’s international passenger market remains largely dormant with borders still closed. Yet confidence is building with the scourge of Covid nearly eradicated from most of the region. With vaccinations already underway in China and nearing distribution elsewhere, Asian carriers can finally see light at the end of the tunnel. With more and more carriers pointing to travel restrictions as the key factor suppressing demand, their eventual lifting augurs well for a quick demand recovery. Will that translate to a quick profit recovery? That will partly depend on other factors like capacity, costs, and the degree to which corporations buy business class tickets again.

Europe’s airlines are hopeful that vaccines will come to the rescue just in time to save next summer’s peak season. With Covid under decent control during this past summer, carriers with shorthaul-dominant networks did relatively well. Ryanair even managed an operating profit. Covid has since spiraled out of control, however, and tighter travel restrictions once again have European airlines suffering this fall and bleak about the winter. England won’t even let its citizens travel abroad for leisure this month. But again, every time travel restrictions do disappear, the demand recovery is swift and sharp.

Covid cases are dropping, meanwhile, in South America, where it’s almost summer. That gives Gol confidence as it steadily rebuilds its schedule. The state of Sao Paulo plans mass inoculations soon using vaccines from China.

U.S. Covid cases, by contrast, are skyrocketing across the country. Reversing that trend will be job number one for the country’s new president.    


“This pandemic will not be over in a few months. We cannot simply wait this crisis out. It will burden our business, our industry for years to come.”

Lufthansa CEO Carsten Spohr


July-September 2020 (3 Months)

  • Lufthansa: -$2,3b/-1.6b*; -48%
  • Singapore Airlines: -$2.5b/-$891m*; -79%
  • Korean Air: -$325m; 1%
  • China Airlines: -$28m; -1%
  • Turkish Airlines: -$132m; -4%
  • Ryanair: -$262m/-$26m ;1%
  • Wizz Air: -$281m/-$102m*; -11%
  • Gol: -$314m/-$226n*; -78%
  • Latam: -$574m; -110%
  • Jazeera Airways: -$18m; -107%

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

Skift Aviation Forum November 19

Join us for the inaugural Skift Aviation Forum, held online in partnership with Dallas Ft. Worth International Airport. Guests include Air Lease Corp. Executive Chairman Steven Udvar-Hazy, American Airlines President Robert Isom, Southwest CEO Gary Kelly, and United Chief Commercial Officer Andrew Nocella. You can check out the latest list of confirmed speakers here. Registration is free for annual Airline Weekly subscribers.

Weekly Skies

  • It wasn’t enough to make awful turn good. But it was enough to make appalling turn just mere awful. Cargo, always serious business for Lufthansa given its export-fueled home economy, produced $200m in operating profits last quarter, good for a positive 29% operating margin. That’s hardly sufficient to offset red ink everywhere else in the empire — Lufthansa mainline losses, Swiss losses, Austrian losses, Brussels losses, maintenance losses, catering losses… But it did bring groupwide suffering down to an operating margin of negative 47%. Cargo muscle also meant that while all other airlines are seeing total revenues drop in excess of their passenger capacity, Lufthansa’s groupwide revenue fell 74% while passenger ASKs shrank 78%.

    It was a victory without celebration, because indeed, outside of cargo, the picture was bleak. Lufthansa mainline did far worse than either Air France or KLM in terms of Q3 operating margin (negative 150%). Results were not quite as rough at other subsidiary airlines. Swiss came in at negative 43%, for example. Eurowings, even with two decent months of shorthaul leisure revival in July and August, was at negative 61%. Airlines of course, are currently managing for cash not margins. And with that in mind, Lufthansa — and especially Swiss with its big-bellied B777-300ERs — are at times flying passenger planes with just cargo.

    Lufthansa thinks it can start generating cash from total operations once demand is sufficient enough to run about 50% of its normal passenger capacity. This quarter, it will only fly 25% maximum, which implies ongoing cash burn. Cash won’t run out, however, not after receiving billions in aid from the governments of Germany, Switzerland, Austria, and Belgium. Lufthansa has announced some of the deepest downsizing plans of any major airline. It aims to shed 150 planes and the equivalent of almost 30k jobs. It’s already said goodbye to about 14k, with union negotiations ongoing. Management secured short-term concessions from pilots and flight attendants but not yet ground workers, who for a time walked away from talks. CEO Carsten Spohr, speaking during the carrier’s earnings call, sounded clearly frustrated with certain labor leaders, arguing they’re not taking the crisis seriously enough. The broad offer: Accept pay cuts in exchange for preserving jobs. Separately, the company cut 20% of its management staff.

    In the end, Lufthansa knows it needs to become smaller, less complex, and more efficient. It’s also an airline, be sure to note, that depends heavily on longhaul premium corporate traffic. As an aside, Spohr pointed out that first class seats — as distinct from business class seats — are nowadays typically bought by wealthy Europeans on leisure trips. So that demand might recovery rather quickly. But Lufthansa really needs that corporate demand in business class to return, which it will in due course, Spohr believes. He cites corporate Europe’s big backlog of deferred travel. The airline is also working with United on reopening some transatlantic routes with Covid testing. It’s likewise working with United on preventing overcapacity across the Atlantic, something the two can legally do given their antitrust immunity. Lufthansa has similar arrangements with Air Canada, All Nippon, Air China, and Singapore Airlines.

    In some ways, Frankfurt isn’t the best place to have a hub right now. For one, it’s not a leisure market. Secondly, Lufthansa doesn’t get on very well with the airport’s owner, Fraport. But it is a good place to connect passengers coming and going to all kinds of places across the world. That’s a key advantage, Spohr believes, because more passengers need to connect as nonstops disappear. “It is a mathematical certainty in our industry,” he says, “that less demand leads to more bundling over hubs.” As an example, he cites the Frankfurt-Venice route. After both Ryanair and Norwegian axed their Stockholm-Venice flights, Lufthansa’s Frankfurt-Venice flights suddenly saw an uptick in passengers connecting to and from Stockholm. On these flights currently, only connections from Berlin are more numerous.

    In other developments, Lufthansa is proceeding with plans to house low-cost longhaul flights in a new unit. It has no intention of selling assets including planes at fire sale prices. It expects to be one of the few cargo airlines in the world capable of transporting vaccines that require cooled temperatures. Summing up what the rest of the industry has come to conclude: Shorthaul will recover before longhaul, leisure will recover before business.

    On a final note, Lufthansa probably deserves some criticism for its fleet management over the years. It invested in many of the wrong types of widebody planes, from A340s to A380s to B747-8s. Is it making the same mistake with its B777-9 orders? Too early to say. But in fairness, decisions to buy B787s and A350s, and B777-300ERs for Swiss specifically, put the group on a path toward addressing its past mistakes.
  • Singapore Airlines likewise thanks its lucky stars for having a major cargo operation. Without a domestic passenger market in tiny Singapore, the airline reported a bloody negative 79% operating margin for the calendar third quarter. But think how bad this would have been without cargo, given a 99% y/y decline in passenger traffic. There was no momentary summer shorthaul bump like there was in Europe. Singapore’s cargo business, more specifically, saw revenues increase 28% y/y in the six months to September, contributing a large majority of the entire group’s total revenues, which were down 80% in the quarter. Operating costs were down 63% on 92% less passenger ASK capacity.

    Slowly, Singapore Airlines is restoring passenger service to various points across the globe, doing so when there’s enough cargo demand to cover the variable costs. This week, in fact, it’s restoring ultra-longhaul nonstops to New York, this time using JFK airport rather than Newark. Back within Asia, Singapore naturally looks upon neighboring countries like China, Japan, and Vietnam with some envy, given their large domestic markets. That said, safely reopening borders is one of the highest priorities for Singapore’s government, recognizing the economic importance of its airline industry. As it happens, much of the Asia-Pacific rim — China, Japan, Korea, Singapore, Thailand, Vietnam, Australia, New Zealand — is largely Covid free now (on Nov. 6, these eight countries had a combined total of about 1k new cases, compared to 133k in the U.S. and more than 300k across Europe and Russia).

    Asia’s success against the disease means countries there can feel safer trialing bilateral travel bubbles, replacing quarantines with Covid testing. Singapore and Hong Kong have put one in place, triggering immediate signs of strong demand. This will likely lead to more such arrangements. Singapore Airlines says it will be ready to bring back planes when warranted.

    In the meantime, with levels of cash burn still high, the airline is looking to replenish earlier government bailout money with new capital — it’s looking at the sale-leaseback market, the debt market, and the convertible stock market. It also agreed to defer some Airbus deliveries and hopes to soon conclude deferral talks with Boeing. Unfortunately for Singapore, it had to close its longhaul LCC joint venture, NokScoot. It lost its investment in Virgin Australia when the latter restructured in bankruptcy. Its Indian joint venture Vistara, on the other hand, is proceeding with intercontinental expansion. Just before the crisis, Singapore announced plans for a JV with Japan’s All Nippon, adding to JVs with Lufthansa and Air Zealand.

    Soon, Silk Air will start transitioning its B737s to mainline, part of a plan devised pre-crisis to extinguish the Silk brand. Scoot, the group’s LCC, is gradually reinstating routes like Melbourne. Management, meanwhile, is looking to develop other sources of revenue using its loyalty plan, corporate training potential, and logistics capabilities. The group did feel the need to cut thousands of jobs as the crisis dragged on longer than expected. But it’s now seeing some reasons for optimism as Asia nears full defeat of Covid, vaccines beckon, and borders reopen. Last month, Singapore Airlines began another three-year transformation plan to prepare it for new post-Covid realities.
  • For Korean Air, cargo wasn’t merely a shield against the slings and arrows of the crisis. It was a fortress. During Q3, its cargo revenues skyrocketed 59% y/y, accounting for two thirds of total company revenues. A year ago, cargo was 19% of revenues. With an export-based economy, a fleet of widebody planes, and thriving customers like Samsung, Apple, and Amazon, it’s no wonder why Korean Air’s fate is to be great at freight.

    And no wonder why it was able to again earn an operating profit, if just barely. Q3 operating margin was roughly half of 1%, though net results were firmly in the red due to heavy interest payments. In last year’s Q3, Korean earned just a 4% operating margin.  With passenger revenues down 87%, total revenues declined 53%. Operating costs fell 51% and passenger ASK capacity dropped 77%. Demand on the passenger side is starting to tick up a bit this fall, especially as international markets within Asia slowly reopen. Korean is earning some money flying charters for top corporate clients.

    Interestingly, a much larger portion of its crisis-time passenger business is coming from North America, likely due to student and family-visit traffic. Many major U.S. cities have large ethnic Korean communities, one of them being Atlanta, home of Korean Air’s close partner Delta. The two airlines are working together to appropriately plan capacity in the North America-East Asia market. Demand to Europe, conversely, was much less significant this summer — this market tends to be more leisure oriented. Domestic demand was more active, but demand to spots elsewhere in Asia were largely closed to tourists due to tight travel restrictions.

    Korean is of course a major business airline too, with lots of premium seats. That’s a drag right now, along with its overly complex fleet that includes unwanted jumbos like A380s and B747-8s. The carrier is now preparing to take advantage of any travel bubbles that might emerge, referring to arrangements in which people can travel between two countries again without having to quarantine. The quarantines for foreigners entering Korea, by the way, are much stricter than they are in the U.S. and Europe, involving mandatory confinement in government-run facilities.

    As for competition, Korean is watching developments at its weaker rival Asiana, which was unable to close a pre-crisis deal it had for new investment. Intriguingly, a Korea Times report raises the prospect of Asiana outsourcing its longhaul flying to Korean Air. Another discussed option is allowing the two rivals to merge, with Asiana turning itself into the combined group’s shorthaul low-cost carrier. If nothing else, these scenarios speak to the dire state of affairs at Asiana.

    Back in the cargo realm, things will get more interesting. The peak Christmas season is coming. Shipments of information technology, car parts, and e-commerce in general are booming. Capacity remains severely constrained with so many widebodies grounded. Medical equipment demand is surging again with Covid’s explosive growth in Europe and the U.S. And Korean Air will be a major player in transporting Covid vaccines around the world.
  • Cargo played a similar role at Taiwan’s China Airlines (CAL), which didn’t quite earn a Q3 operating margin but came close. Its margin was negative 1%, with cargo accounting for almost all of the company’s revenue. During Q2, remember, CAL did earn an operating profit, and a rather large one at that — its Q2 operating margin was positive 10%. The passenger business was still largely dormant in Q3, with ASKs down 90% y/y. Total revenues fell 38% and operating costs were down 35%.

    Taiwan is a prime example of a place that’s handled the public health crisis extraordinarily well, perhaps better than anywhere else. And while its economy took a hit from the measures it had to use — border closures for example — GDP is on the rise again. The economy grew by 3% y/y last quarter, boosted by strong demand for its electronics and information technology exports. Taiwan is also benefiting from the trend of multinational companies trying to diversify more of their business away from mainland China. The island, though, remains a key flashpoint in growing tensions between Washington and Beijing.

    Within Taiwan, domestic travel is active, but it’s a small part of CAL’s business, served with its Mandarin Airlines subsidiary. The company also owns a shorthaul international LCC called Tiger Airways Taiwan, which will get an injection of new capital from CAL, Flight Global reports. Tiger flies throughout East Asia but gets most of its revenue from Japan.

    Back in the buzzing cargo realm, demand did ease some last quarter, which helps explain CAL’s margin drop-off from Q2. But with the Christmas peak coming, Q4 should be strong. CAL operates an armada of 18 all-cargo B747-400s, with B777 freighters on the way. One cargo challenge, though, is the Taiwan’s dollar’s appreciation, which makes the island’s exports more expensive across the world. CAL’s rival EVA Air, by the way, hasn’t yet reported for Q3.
  • Cargo was likewise an especially potent weapon for Turkish Airlines, whose 60% revenue increase from the segment placed the company within a whisker of earning Q3 operating profits. In the end, its operating margin was just negative 3%, a figure most carriers would die for right now. For Turkish, aiming to be one of the world’s largest cargo airlines, having a geographically central hub like Istanbul helps. That’s proving less advantageous for connecting passengers at the moment, with much of the airline’s Q3 traffic on point-to-point shorthaul routes. But with uncertain prospects for Gulf carriers, and other hubs potentially losing more service, Istanbul with its new airport is well poised to reemerge as a crossroads of global aviation.

    For Turkish last quarter, even though passenger revenues declined 77% y/y on 69% less ASK capacity, total revenues dropped only 62% thanks to that aforementioned 60% increase in cargo revenues. Cargo, indeed, accounted for 44% of total group revenues. Turkey does have a fairly large domestic market, boosted by foreigners connecting to internal flights via Istanbul. That market had some life to it this summer, when tourists from Europe came in ample numbers. Turkey, like Mexico (but unlike Thailand), opened its borders to all visitors, hoping to alleviate its economically critical tourist sector. The carrier’s domestic capacity was in fact down just 34% in the quarter. Turkish has a large family-visit and migrant worker segment too, particularly relevant on routes to Germany. Anadolujet, the group’s low-cost carrier, began flying internationally to Western Europe just before the crisis and actually earned a small profit on its international routes this summer.

    Another good news story is Russia, whose sun-starved tourist are returning to Turkish beach resorts like Antalya. Turkey, importantly, was also on the U.K. safe list for most of the summer, so that Britons could travel there without having to quarantine on return. That’s unfortunately not the case now. The U.K. (or England anyway) is actually banning all non-essential travel for the month of November. Other European countries too, have tightened outbound travel restrictions to cope with the current Covid wave, heralding tough times for Turkish this winter.

    Winters, though, are always tough for Turkish, at least on the passenger side. One nice thing about having so much cargo to carry is that you can justify flying a fairly robust flight schedule, which keeps unit costs in check, crews and planes active, and assets ready for the upturn when it comes. Turkish like other airlines has deferred some aircraft deliveries and cut worker pay, in its case by 40%. It hasn’t yet resorted to mass layoffs though. When travel restrictions eventually ease, demand should return, and not just on shorthaul European routes. It notes how restrictions are a chief impediment to family-visit demand between North America and the key markets India, Israel, and Iran. It’s sixth-freedom markets like these in mind that prompted Turkish — before the crisis — to plan new service to Newark and Vancouver. Both incidentally, are large markets for India traffic.

    China is another market where Turkish badly wanted to expand pre-crisis, adding Xian late last year but otherwise stymied by restricted access. Currently, China will only allow inbound international flights with load factors 75% or less.

    Turkish will need longhaul business class demand to return eventually, especially to support routes with very long stage lengths. It says business class tickets are typically five times as expensive as economy tickets. Currently, they’re only about twice as expensive. Turkey, by the way, expects 90m airline passengers in 2021, up from an estimated 54m this year but still down from 158m in 2019. It sees 2022’s figure reaching 132m.  
  • Ryanair isn’t accustomed to losing money. But it’s all too familiar with besting its rivals, often by a lot. During the July-to-September quarter — one in which Ryanair routinely earns monstrously large operating margins (33% last year and 34% the year before that) — net losses excluding special items amounted to $26m, a pittance given the dire industry circumstances. Even better, its operating margin was positive. Just 1%, but a loud 1% amid the anguish of 2020. The airline flew just around half of its normal capacity during the quarter but managed to fill 72% of its seats. Revenues dropped a lot more than half — the y/y decline was 66%.

    But while yields are down, management insisted it wasn’t — nor isn’t this winter — offering a flood of extremely discounted fares. The reason, simply put, is that most people these days are booking close to departure, and many close-in buyers are price-insensitive. They’re traveling for urgent work reasons, for example, or on the health care front lines in the battle against Covid. Ultra-cheap fares are more for leisure travelers willing to book far in advance. It was hoping to fly more this winter but the resurgence in Covid cases throughout Europe, and the associated travel quarantines, make that unwarranted. So it will fly just 40% of its normal capacity this winter, subject to change. November bookings are weak. Christmas looks “reasonable” for now. And beyond that is anyone’s guess.

    Ryanair does sound hopeful, however, that next year’s peak summer season will see a sharp revival in leisure demand, assuming there’s widespread vaccinations by then. As IAG described a week earlier, Ryanair said U.K. demand to the Canary Islands increased far beyond expectations after they were removed from the quarantine list. And unlike some rivals, notably tour operators like TUI, Ryanair was quickly able to respond with more capacity.

    The demand, in other words, is undoubtedly there. The obstacle is the travel restrictions and lockdowns, which the airline bitterly criticizes. It calls them inconsistent, ineffective, “unimplementable,” and too broad in scope geographically. In his always colorful way, CEO Michael O’Leary exclaimed: “It’s easier to get out of North Korea at the moment than it is off the island of Ireland.” Pre-departure testing for the virus would be better, he argues.

    In any case, if salvation by vaccine does arrive in time for next summer, the airline would likely have its B737 MAXs finally in service. In fact, it hopes to have more than 30 flying by next summer. And it seems set to order more. Rivals, it says, are slashing capacity and aircraft orders so drastically that they’ll be far worse positioned to take advantage of the coming upswing. It cites Air France/KLM’s 20% capacity cut, Alitalia’s “massive” shorthaul retrenchment, easyJet’s abandonment of growth through 2025, IAG’s delivery deferrals, Lufthansa’s 150 aircraft retirements, and Norwegian’s decision to cancel its entire Boeing order.

    Ryanair’s MAXs will be key to future cost control efforts. But so will cheaper airport deals, labor concessions, the restructuring of its Lauda Air business, fewer air traffic control delays, and so on. In the meantime, Ryanair is closing some bases, including several in Ireland, and opening a new one at Paris Beauvais. O’Leary continues his verbal assault on state aid to rivals, while also worrying about the potential implications of a no-deal Brexit.

    One big question now concerns January and February, a slow travel month but the strongest months of the year for cash inflow, given all the spring bookings people usually make at that time. On a lighter note, the good-humored airline spent last week gently mocking President Trump — soon to be former President Trump — on social media (Ireland is particularly excited about President-elect Joe Biden, the descendent of Irish immigrants).
  • If someone told you last summer that this summer, both Ryanair and Wizz Air would post losses, you might have said something like: “What, is there going to be a devastating disease that nearly destroys the entire global airline industry?” Well, here we are. And instead of the disease receding, Covid’s menace is worsening, throughout Europe anyway.

    During the peak summer months of July and August though, Wizz joined Ryanair in seeing enough of a demand revival to post much better than industry average margins. Unlike Ryanair, Wizz didn’t earn an operating profit for the quarter. But its operating margin was an only mildly bad negative 11%. In August, the LCC was back to operating 80% of its year-ago capacity levels. And even after having to pare back in September due to seasonal weakness and new travel restrictions, total ASKs for all of calendar Q3 declined only 28% y/y. Revenues dropped 61% and operating costs fell 36%.

    Wizz says it has enough cash to stay in business for two years even if it didn’t operate a single flight. Cash burn if completely grounded would be about $80m a month. Of course, the situation is not quite that dire. But Europe’s second Covid wave, and the renewed travel restrictions it’s triggered, is of course a major demand suppressant. Wizz, in fact sees travel restrictions as the number-one factor influencing the pace of its recovery. Demand collapses overnight when new restrictions are imposed, management explains, and surges immediately after restrictions are lifted.

    But opportunities nevertheless abound. For one, Wizz is entering the Norwegian and Italian domestic markets. It’s opened 13 new bases since the start of the crisis, including one at London Gatwick where it badly wants more slots (frustratingly still unavailable while governments temporarily allow incumbent carriers to preserve the slots they have even if they’re not using them). Some other new Wizz bases include Oslo, Milan Malpensa, and St. Petersburg, Russia. It’s separately ready to launch its new Wizz Air Abu Dhabi joint venture as soon as travel restrictions there ease.

    More generally, it feels advantaged by the fact that some 80% of its passengers are traveling to see family and friends. Its passenger base also skews young. And airports throughout the continent are eager to do longterm deals for more air service. No wonder why Wizz is a rare airline right now that’s not mass cancelling or deferring airplane orders. It continues to receive A321 NEOs, positioning it to thrive once demand does return. It only wishes governments would better coordinate their travel restrictions. 
  • IATA’s just-published traffic report for September shows a 55% y/y decline in RPK traffic in the Brazilian domestic market. By comparison, the domestic U.S. market is down 65%. Only in Mexico is airline demand recovering more swiftly in the Americas. So while not China- or Russia-like in its recovery, Brazil is reviving enough to put the LCC Gol on a steady path to stabilization.

    It’s not there yet financially, posting a negative 78% Q3 operating margin. The carrier’s ASK capacity was still down 70% y/y during the quarter. But flights are departing about 80% full, and revenues didn’t drop much more than capacity — they declined 74%. Operating costs are stickier, falling only 44%. That said, Gol made major strides in variabalizing two critical components of its cost base: Labor and fleet. With new labor and lessor agreements, it now can save more money when it doesn’t fly. It also means Gol can afford to extend leases on planes currently grounded or lightly utilized, so that they’re ready to go when demand returns. It highlights the similar flexibility it has with MAX deliveries on order with Boeing, which counts Gol as a vital customer.

    Such labor and fleet flexibility, it argues, is a distinctive competitive advantage. At the close of Q3, it had 71 prior-generation B737s actively flying, out of a total 129. MAXs should return soon. This quarter, in which Brazil enters its summer season, Gol should have about 92 planes back in the skies. Q4 revenues should be back to about 60% of last year’s levels, moving to a forecasted 66% in Q1. Forecasts are of course challenging during a pandemic but getting a bit easier thanks to a consistent and steady build in demand. Family-visit travel, in fact, is pretty much fully back to normal levels, management says. Leisure travel is recovering nicely too, with more to come based on ever growing numbers of trip searches on Gol’s website. In response, it’s adding more capacity to northeastern beach spots like Fortaleza while opening what it refers to as a hub in Salvador. More of its traffic is getting funneled through hubs as many nonstop routes remain closed.

    But there’s one big piece of Gol’s customer base that’s still missing: Corporate travelers, who in typical times account for 30% of all passengers but half of all revenues. Executives stress that they’ve reduced and variabalized costs enough to manage through the current situation in which 80% of all traffic is leisure and family visit. They even compare Gol to Volaris, the Mexican ultra-LCC faring better than most with a combination of ultra-low-costs and steadily recovering leisure and family visit demand.

    Gol does of course maintain some costs associated with being a corporate-friendly airline (airport lounges for example). But it also foresees a day, probably mid next year, when corporate fliers return but the fruits of crisis-era cost cutting remain. It estimates a 20%-to-25% unit-cost advantage versus rivals, which could grow. Next quarter, it hopes to start reopening international routes. It looks forward to reaping the rewards from its new partnership with American, which has a larger presence in Brazil than Gol’s old partner, Delta.

    There is of course Brazil’s troubled economy and depreciated currency to navigate. “We haven’t gotten a dime from the Brazilian government” as far as state aid. On the other hand, Covid cases, though many, aren’t rising in Brazil like they are in the U.S. and Europe. And Sao Paulo’s state government has plans to vaccinate all 46m of its residents by February.   
  • Gol’s larger rival Latam, as part of its bankruptcy obligations, published its income statement for the month of September. It showed a net loss of $259m, with a negative 175% operating margin. Pieced together with data from July and August, the figures also reveal a negative 110% operating margin for the entire third quarter. Latam is no longer holding conference calls to discuss its quarterly results. But it’s disclosed a number of key developments since its Chapter 11 filing in May.

    One is a new codeshare and loyalty partnership with Azul in Brazil, something unthinkable before the crisis, when the market was producing outsized profits thanks to the demise of Avianca Brasil. Latam is also developing a north-south joint venture with Delta. It’s closing down Latam Argentina, a longtime source of labor headaches and macroeconomic distress. It hired JetBlue’s former revenue chief Marty St. George. It secured DIP financing to ensure enough funds to operate while restructuring. And of course, it’s slashing costs by walking away from various contractual obligations, to aircraft lessors, unions, and so on.
  • Kuwait’s Jazeera Airways, normally a profitable low-cost carrier, recorded a negative 107% operating margin for the third quarter of the annus horribilis 2020. Revenues dropped 83% y/y. Operating costs dropped only 50%. Jazeera, remember, owns and operates a terminal at Kuwait’s airport, which for obvious reasons incurred losses last quarter. Anyone entering the country must present a negative PCR Covid test result within 96 hours of arrival and must quarantine for 14 days. Jazeera hopes proposals to relax the rules are adopted — they include reducing the quarantine time for visitors from low-risk countries.

    In the meantime, the LCC, having restarted a few scheduled flights in August, is running charters, carrying some cargo, facilitating some transit passengers (between London and the Indian subcontinent, for example), and opening some new routes to open tourist destinations like Trabzon in Turkey. It opened a new Muscat route last week. Next year, Jazeera still expects to receive four A320 NEOs.
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  • Bill Wong, a Shenzhen-based business tycoon with Hong Kong residency, maintains his interest in launching a new Hong Kong-based airline to compete with embattled Cathay Pacific. The South China Morning Post delves into his plans for Greater Bay Airlines, which hopes to launch next summer with three B737s. With Cathay shedding so many planes and workers, Greater Bay thinks it can quickly scale up to 30 planes by 2025. (And remember, scale matters when it comes to airline unit costs; see feature story below).

    Wong is not new to aviation. He owns Shenzhen-based Donghai Airlines, which flies 23 B737-NGs and has 25 MAXs on order. He raises the possibility of hiring some laid off Cathay pilots and using them at Donghai before transferring them to Greater Bay. The new airline’s target will be mainland China routes, at least initially. Cathay, recall, is closing its Dragonair unit which specializes in mainland flights, though it still intends to serve them with Cathay-branded jets.

    Will Greater Bay be a low-cost carrier? Not really, Wong says, but something less expensive and premium than Cathay. The city has a third carrier, by the way, called Hong Kong Airlines backed by the mainland’s HNA Group. Clearly, Wong’s longterm bet is that Hong Kong will remain a major global aviation hub, and that Beijing will be successful in its efforts to integrate and develop the Greater Bay area of Shenzhen, Guangzhou, and Hong Kong. The latter’s airport will have a new runway soon, accommodating future growth.

    And Covid-19? Donghai claims to have recovered 98% of its pre-pandemic business, auguring well for Hong Kong’s airline market when vaccines arrive and travel restrictions removed.
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Landing Strip

  • Finally, Berlin’s new airport is open. We’re not kidding. After a decade of delays, Germany’s capital has a new gateway to the world. The two-terminal, two-runway facility is located at the same site as Berlin Schönefeld airport. It can handle 40m passengers a year, which is not much more than half of what Frankfurt airport actually handled in 2019.

    Sure enough, airlines like Ryanair complained pre-crisis that it wouldn’t be big enough. Berlin is somewhat of an odd airline market. It’s the capital of the world’s fourth-largest economy, with a large population. But it’s a much lower-income metro area than cities like Frankfurt, Munich and Dusseldorf. Low-cost carriers like its leisure appeal. But for Lufthansa, it’s a mere spoke city feeding into its Frankfurt and Munich hubs. 
  • Chicago O’Hare opened another new runway last week, the latest milestone in two-decade long expansion and modernization project. The giant project has now delivered four new runways, with the extension of another due for completion next year. Also next year, O’Hare will open a major new international terminal. The airport is a major hub for both United and American, supported by a population larger than all other U.S. cities except New York and Los Angeles. Southwest, whose largest airport is Chicago Midway, will start serving O’Hare soon as well. In total, O’Hare currently has eight active runways.
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Covid Crisis 2020

Latin America

  • The situation at Mexico’s Interjet appears to be going from bad to very bad. Very, very bad. In July, the embattled carrier managed to sell a 90% stake to new investors, netting it a crucial $150m in new capital. Whew. It could avoid bankruptcy. Or maybe not. The investors haven’t yet provided the money, worried that it would immediately be claimed by the government seeking to recoup unpaid taxes.

    In the meantime, funds are dwindling. Interjet was forced to cancel all of its flights during part of last week because it couldn’t afford to pay for the fuel. It also owes money to airports. It can’t pay workers on time. Even the government warned consumers to beware of booking flights on Interjet, mentioning that it might soon go bankrupt. It’s currently flying just a handful of Russian-built SSJ-100s, after having much of its leased Airbus fleet repossessed.

    Interjet, for its part, denies that it will file for bankruptcy, confident it will secure the $150m investment once it works things out with tax officials. And ultimately, it could raise more money through a public offering of its shares. Mexico’s government, remember, like others throughout Latin America, hasn’t provided any meaningful airline industry aid (air travel is considered more of a luxury in the region, and thus politically difficult to support with taxpayer money).

    If Interjet does disappear, Mexico’s airline industry would follow the template of Brazil, which became an effective triopoly after Avianca Brasil disappeared. Latam, Azul, and Gol immediately saw profits surge. This time, it’s Volaris, VivaAerobus, and Aeromexico poised to benefit.
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Feature Story

As airlines frantically seek savings, there’s good news and bad.

It’s a central tenet of airline economics: All else being equal, more capacity means lower unit costs. But cost control by expansion doesn’t work if all those extra seats fly empty.

As the 2020 Covid pandemic stretches into its ninth month — tenth for some Asian airlines — lots of seats are flying empty. And many more would, had the industry not grounded or retired one-fifth of all the planes flying at the start of 2020. The industry’s fleet count is more precisely down 21% from January, according to IATA. But that greatly understates the contraction. Planes that are still flying are flying less. Larger planes account for an outsized portion of those idled. So in ASK terms, which measures both seats and distance, industry capacity is down not 21% but 62%.

That’s a problem. It means airlines are producing less for every dollar they spend, since many of their spending obligations are fixed — they won’t drop just because you fly less. Fuel is an exception. It’s a cost that does vary by capacity. Some aspects of labor costs are variable too. Many costs associated with buying or leasing aircraft, however, are indeed fixed. Same for lots of overhead costs. Worldwide, IATA estimates that about 50% of the industry’s cost base is fixed or semi-fixed, at least in the short run.

As a reminder, the Covid crisis is a revenue crisis, not a cost crisis. In fact, industry costs are falling dramatically now that there’s an oversupply of everything from fuel to labor to aircraft. But conversely, the diseconomies of scale from shrinking are frustratingly inflationary.

Airlines are simply lucky that fuel is cheap. And if it stays cheap, the recovery will be a whole lot faster and easier when demand does start to revive. Forecasts about when carriers can return to profitability are heavily dependent on this factor. Recovery from the 2008-09 financial crisis, remember, was slowed significantly by three-and-a-half years of $100 oil from 2011 to mid-2014.

Labor costs, by contrast, are not a function of luck. Since the onset of the crisis, airlines have placed high priority on not just lowering their labor costs but making them more variable. Airline jobs are disappearing, increasingly so as government wage support policies expire. Employees that remain are swallowing pay and benefit cuts. At least as importantly, carriers are looking to offset their contraction-related unit cost penalties with changes to work rules — asking employees to work longer hours for the same pay, for example, or to accept seasonal work. Where possible, companies are offering voluntary leave options — agree to depart in exchange for some severance benefits, maybe health insurance for a time, or travel privileges.  

In the U.S., according to Airlines for America (A4A), scheduled passenger airlines employed 460k full-time equivalent workers on the eve of the crisis in March. The number in August was 49k fewer. But that’s with federal wage subsidies still active. A4A foresees employment dropping another 41k by December. American alone, after subsidies ended last month, furloughed 19k of its workers. Others have avoided furloughs only after getting unions to accept various cost-saving measures. Airlines, all the while, have indirectly cut jobs by reducing outsourced work, for everything from maintenance to management consulting.

The labor carnage is everywhere. Almost 4k job cuts at Air New Zealand. More than 4k at Singapore Airlines. Almost 9k at Cathay Pacific. Air France/KLM, a company notorious for strikes, has already axed its workforce by 10%, with more cuts coming. In KLM’s case, the Dutch government nearly refused financial aid when the carrier looked like it couldn’t secure sufficient labor concessions due to pilot resistance (they’ve since relented). When it’s not the government in the industry’s corner, it’s sometimes the bankruptcy courts. Other times, the crisis is providing so much negotiating leverage that airlines are able to extract massive concessions from suppliers with only the mere threat of bankruptcy.       

As they prioritize labor cost cutting, airlines are no less critically hammering down their fleet costs. That typically means renegotiating lease agreements, frequently with terms that variabalize a portion of the airline’s obligations (through so called “power by the hour” agreements linked to utilization). Carriers are cancelling and deferring plane orders to reduce their near-term capital spending. They’re retiring old less-efficient planes previously kept around only because pre-crisis flights were so full and demand so robust. Some airlines are telling banks and bondholders that they simply can’t repay all the money they borrowed pre-crisis, most of it for acquiring planes. Often, lenders are agreeing to some form of relief.  

But despite the many examples of debt relief, airline industry debt is going up, not down. Because it’s not merely the debt they assumed pre-crisis that’s a problem. A bigger problem is all the new debt they’re amassing just to stay alive during the crisis. Fortunately, credit is widely available and interest rates rather low. And there are other avenues still open for obtaining emergency funds, including the aircraft sale-leaseback market. Airlines have sold a lot of shares too, and in some cases received government grants, no strings attached.

The cost picture for airlines, in summary, is mixed. In their favor are once-in-a-generation tailwinds like ultra-cheap fuel, plummeting aircraft prices, and unprecedented leverage to renegotiate contracts with all key stakeholders — labor unions, aircraft lessors, suppliers, lenders, and so on. In the meantime, airlines will emerge from the crisis with much newer and leaner fleets, having removed older planes that previously had a high opportunity cost of retiring. But blowing with force in the other direction are huge new debt cost burdens and those diseconomies of scale from shrinking so sharply.

Airlines worry too that airport costs might rise as operators struggle to cover their own costs in a world with so much less traffic. New aircraft cleaning procedures carry a cost, in part measured by increased aircraft turn times. When considering their variable costs, carriers will see not just their fuel costs rise with greater ASK production but also costs associated with selling more tickets and servicing more passengers, i.e. GDS fees and catering expenses. Decisions to reconfigure planes with more or fewer seats would have unit cost implications as well. The industry hopes to satisfy environmental pressures with its own initiatives to cut carbon emissions, i.e. fleet renewal, but heavier taxation on air travel is a salient risk.

Just how effectively can airlines take advantage of the cost tailwinds? Just how damaged will their cost structures be by the cost headwinds? The net effect of these countervailing currents will help shape the winners and losers of the upcoming Covid recovery. Whenever it happens.  

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Around the World

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

Around the World: November 9, 2020

Airline NameChange From Last WeekChange From Last YearComments
American2%-63%Deploying widebodies on shorthaul routes to the Caribbean, Central/South America (Cranky Flier)
Delta3%-46%CFO Paul Jacobson leaving to take same job at General Motors; will surely still fly Delta a lot given Detroit hub!
United2%-63%Ryanair notes that Boeing pushed production of its B737 MAX 10s back by two years
Southwest1%-31%High-stakes labor talks with unions continue; company wants pay cuts to avoid layoffs
Alaska1%-46%Mexican airport firm GAP cites revival of Southern Calif. tourism to Pacific Mexican beaches; says easy to return home in emergency
JetBlue3%-37%Dominica, a small Caribbean island, planning to build airport capable of handling widebody longhaul flights
Hawaiian0%-54%Japan, a critical source of tourism for Hawaii, now part of program that allows visitors to bypass quarantine with negative Covid test
Spirit1%-55%Ended Q3 with 155 planes, including one A320 NEO received during the period
Frontier(not publicly traded)Denver airport reestablished regular flights to Europe just last month with Lufthansa Munich link
Allegiant2%-18%Uncertain when construction on Florida Sunseeker resort will resume; also temporarily closed a nearby golf course it operates
SkyWest7%-51%By the end of 2021, it will be flying 90 CRJ-700s for American, including deal for 20 announced last month
Air Canada7%-67%Air Canada Rouge restarted operations last week; first flight was from Toronto to Cancun
WestJet(not publicly traded)Reduced quarantine trial now underway in Alberta province, home to Calgary
Aeromexico-1%-73%GAP airport company says its best performing airport last quarter (or least bad anyway) was Tijuana
Volaris12%-14%GAP says Tijuana’s strength due to heavy migrant/family-visit traffic; absorption of San Diego demand
LATAM-8%-87%New Brazilian codeshare with rival Azul now followed by another codeshare pact with Aeromexico
Gol12%-51%July ASK capacity was down 79% y/y; Aug down 71%, Sept 60%, Oct 43%; expects Q1, 2021 to be down 24%
Azul15%-51%Continues to receive A330-900 NEOs it rather wouldn’t have until crisis abates
Copa4%-52%Will publish its Q3 results on Nov. 18
Avianca-10%-93%CEO Anko van der Werff tells Routes the airline is fortunate to have access to Chapter 11 bankruptcy process; not available in Europe
Emirates(not publicly traded)FlyDubai to follow Etihad in launching service from the UAE (Dubai in its case) to Tel Aviv
Qatar(not publicly traded)Launches new carbon offset option for passengers; can opt in at time of booking
Etihad(not publicly traded)Wizz Air’s new Abu Dhabi venture says Israeli market from UAE “very interesting to us” (Routes)
Air Arabia-2%-27%Launched a new route from Sharjah to Uzbekistan’s capital Tashkent last week
Turkish Airlines8%-23%Current assumption, highly subject to change, is that 2021’s capacity will be 30% to 35% less than in 2019
Kenya Airways0%21%Restart of New York JFK route pushed back until the end of this month
South Africa Air.(not publicly traded)IATA expects African airlines to lose $2b net this year; estimated net loss last year was $300m
Ethiopian Airlines(not publicly traded)Cargo division highly active in distributing medical supplies/protective equipment in fight against Covid; ready to ship vaccines
IndiGo9%-5%CEO Rono Dutta, speaking with IATA Airlines magazine says “more consolidation is inevitable” in Asia
Air India(not publicly traded)IndiGo, reports Bloomberg, in talks with Pratt and CFM for giant NEO engine order; last year switched from Pratt to CFM
SpiceJet2%-56%Bloomberg notes how bankrupt Jet Airways oddly seeing big gains in stock price; revival prospects still murky
Lufthansa1%-57%Says 38% of its Frankfurt-Venice passengers are now connecting to or from somewhere else
Air France/KLM9%-70%KLM pilots yield on wage cut demands, sealing gov’t aid package; now talk of nationalizing AF/KL in exchange for equity
BA/Iberia (IAG)7%-81%U.K. lockdown includes ban on outbound tourism; Bloomberg notes jump in private jet activity just before it took effect
SAS-51%-95%In October, int’l flights within Europe saw an 88% y/y drop in RPK traffic; domestic traffic dipped 56%
Alitalia(not publicly traded)Wizz Air says Italian domestic market under pressure amid new internal travel restrictions
Finnair1%-94%Concludes agreement with Airbus to defer delivery (by about a year) of its final three A350-900s
Virgin Atlantic(not publicly traded)Adding new route to St. Vincent in the Caribbean; will launch in June from London Heathrow with A330-300s
easyJet5%-60%IATA calls quarantines a “blunt instrument” to fight Covid; calls again for globally aligned testing regime
Ryanair13%-5%Claims that every time it adds an aircraft, its unit cost gap with Wizz Air grows
Norwegian6%-98%Ryanair, not known for its manners, scoffs that it’s destined to be a “small and largely irrelevant Norwegian domestic airline”
Wizz Air15%-7%Calls itself (arguably without merit) the world’s first ever ultra-low-cost carrier; ever heard of Ryanair?
Aegean1%-67%Most of the 14 regional Greek airports run by Fraport saw y/y Sept. traffic declines between 40% and 50%
Aeroflot5%-44%IATA shows domestic RPK demand in Russia increased almost 3% y/y during Sept., on 7% more ASK capacity
S7(not publicly traded)Even amid Russia’s domestic recovery, St. Petersburg airport, run by Fraport, saw total passenger volumes down 29% y/y in Sept.
Japan Airlines1%-46%Latest move to improve liquidity: selling more shares; eyeing about $1.6b
All Nippon1%-39%New low-cost carrier plan seems to be a competitive response to JAL’s launch of Zip Air
Korean Air4%-23%Earlier this fall, it had to lend almost $1b to keep its U.S. hotel subsidiary from going bust
Cathay Pacific5%-46%Pilot and flight attendant unions still protesting big pay cuts and layoffs but negotiating leverage limited amid demand catastrophe
Air China3%-32%During Sept., according to IATA, domestic RPK demand in mainland China was down 3% y/y, on 2% more ASK capacity
China Eastern1%-15%China temporarily closes borders to foreign visitors from India, Russia, France, Nigeria, etc. as part of Covid precautions
China Southern3%-18%During Oct., Guangzhou airport saw a 15% y/y increase in domestic takeoffs; int’l was still down 73%
Singapore Airlines3%-62%Creating new unit to train other companies (across all industries) in customer service, operations, digitization, etc.
Malaysia Airlines(not publicly traded)Rival Malindo Air, partly owned by Indonesia’s Lion Air, joins many other airlines around the world in cutting jobs
AirAsia1%-71%AirAsia X asserts it “will not be intimidated” by Malaysia Airports’ objections to its restructuring plan
Thai Airways3%-64%Follows Qantas in offering scenic “flights to nowhere”; will offer views of important Buddhist sites
VietJet4%-26%Says its core airline business incurred a $40m net loss last quarter; calls that “better than expected”
Cebu Pacific3%-58%Gulf News reports that 50k Filipinos have left Dubai during the Covid pandemic
Qantas9%-31%Updates its agreement with Sabre, which will now showcase airline’s products and fares more dynamically
Virgin Australia0%-45%Qantas getting a lot of press attention for adopting more self-service customer service functions at airports, costing jobs
Air New Zealand3%-49%Running big domestic fare sales to sustain leisure booking momentum; recent school holiday period saw strong demand
Brent Crude Oil4%-37%Oil markets watching virus, U.S. election, economic data for clues about future demand

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

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