Issue No. 790

LUV in the Time of Covid

Pushing Back: Inside This Issue

As election day looms in America, the country’s airline gave more evidence of travelers willing and eager to fly but deterred by closed borders and quarantine policies. Hawaii is a good example: As the state substitutes quarantines with testing, airlines see bookings take off.

The same is largely true in Europe. When the U.K. removed Spain’s Canary Islands from the quarantine list, bookings took off. So said British Airways, whose parent company reported predictably heavy losses. Air France/KLM, on the other hand, posted unpredictably mild losses thanks to lots of longhaul family-visit markets, leisure travel within France, KLM’s busy Amsterdam hub, and a widebody fleet well-equipped for the cargo boom. Wage subsidies helped too, though government loans are at risk following pilot discord at KLM.

Three airlines from mainland China were notable for their post-Covid recoveries. Shanghai’s Juneyao and Spring, both controlled by the private sector, managed small operating profits last quarter by moving international capacity back into the increasingly busy domestic market. China Southern, meanwhile, benefitting from problems at Hainan Airlines, came close to joining them in the black. (Its net result was actually positive but lifted by one-off gains).    

Japan’s Big Two airlines, enjoying early stages of a domestic recovery, see newly launched LCCs equipped with Dreamliners as key to their eventual recoveries on foreign routes. In India, domestic leader IndiGo expects to emerge from the crisis stronger than before, with the help of more Airbus NEOs, more digitization, more cost cutting, and ultimately a return to bullish capacity growth. It’s still most bullish about international markets, though not yet convinced of the wisdom of widebodies.     


“We believe there will be incredible generational opportunities to purchase planes in the coming years.”  

Allegiant President John Redmond


July-September 2020 (3 Months)

  • Air France/KLM: -$1.9b/-$1.2b*; -41%
  • IAG: -$2b/-$1.4b*; -105%
  • All Nippon: -$750m/-$863m*; -72%
  • Japan Airlines: -$636m; -80%
  • Air China: -$87m/-$270m*; -10%
  • China Eastern: -$88m/-$331m*; -17%
  • China Southern: $135m/-$28m; -2%
  • Hainan Airlines: -$563m/-$581m; -47%
  • Juneyao Airlines: $28m/-$2m; 3%
  • Spring Airlines: $38m/-$4m; 2%
  • JetBlue: -$393m/-$477m*; -128%
  • Spirit: -$99m/-$215m*; -62%
  • Hawaiian: -$97m/-$173m*; -287%
  • Allegiant: -$29m/-$69m*; -39%
  • SkyWest: $34m/-$156m*; -25%
  • IndiGo: -$161m; -52%
  • Finnair: -$232m; -171%
  • Icelandair: $38m (includes unspecified one-off gains); -5%

*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, and Southwest CEO Gary Kelly. You can check out the latest list of confirmed speakers here. Registration is free for annual Airline Weekly subscribers.

Airline Weekly Lounge Live

A recording of this week's edition with special guest Brett Snyder of Cranky Flier is now live.

Weekly Skies

  • It was a major margin laggard in the pre-crisis era. What now, are Air France’s chances to exit the Covid era on stronger footing relative to its peers? Can KLM emerge from the darkness just as strong as it was pre-crisis? Sometimes, it takes a radical revolution to change the order of the universe. And maybe, just maybe, Covid’s upending of the status quo is Air France/KLM’s opportunity to address chronic deficiencies, most importantly uncompetitive French labor costs and loss-making French domestic flying.

    Needless to say, the current crisis is painful. The airline likely wouldn’t even be here now without a big bailout from both the French and Dutch governments. The money it received was all borrowed though — none of it provided as equity. That’s different from the bailouts carriers like Lufthansa and Singapore Airlines received, or U.S. carriers for that matter. So the Franco-Dutch giant suddenly has enormous debts, prompting management to actively look for ways to raise more equity (it was lucky its plans to buy a stake in Virgin Atlantic never happened). But at least it can rest easier knowing the bailout money will cover its needs until the recovery, right?

    Not really. While it doesn’t face an immediate liquidity crisis, CEO Ben Smith, according to Bloomberg, says the money will cover less than a year of its needs. And that’s a problem because the recovery isn’t happening. It looked like it would, based on encouraging shorthaul demand revival in June, July, and into August. But business traffic never did return in the fall, as it usual does. And worse, Europe began suffering a dangerous second wave of Covid-19 infections, leading to the closure of many borders within Europe. There’s now amplified chatter about the possible need for more state aid, reportedly straining longstanding tensions between Air France, KLM, and their respective governments. If all this sounds bleak, it is.

    But let’s now emphasize the positive. In Q3, Air France/KLM’s operating margin was negative 41%, which was much less severe than what IAG suffered (see item below). In fact, it was similar to what the U.S. LCC Allegiant reported last quarter (see its writeup below). This by no means suggests a new future reality. But for the time being, Air France/KLM is managing through the crisis better than most thanks to a few factors. One, it’s a big cargo player, and its B777-300ER-heavy fleet is exactly what you’d want for a cargo boom — A350-900s are good cargo planes too. The airline saw its cargo revenues grow 34% y/y to $786m, which was 27% of total group revenues.

    Secondly, Air France and KLM are both flying a lot more than either Lufthansa or IAG, while claiming all of its flights are cash positive (i.e. they’re able to at least cover direct operating costs). The cargo factor is one reason why it can get away with more flying than some. In addition, Air France has a pretty big domestic market that’s still generating some leisure demand. It more importantly has lots of busy family-visit routes to overseas French territories and former French colonies — think Guadeloupe, Reunion, Beirut, and much of its African network. What’s more, Amsterdam happens to be the busiest airport in all of Europe right now, thanks to its utility as a connecting hub. With so many nonstops gone, connections are becoming more necessary, and will be for years to come, KLM argues.

    Remarkably, KLM’s Q3 operating margin was just negative 20%, on par with what its partner China Eastern produced in the fast-recovering Chinese market. Air France’s margin was negative 54%, still relatively mild. Transavia, meanwhile, benefitting from the temporary jump in leisure demand this summer, held its loss margin to negative 5%.

    Groupwide, Air France/KLM cut capacity 58%, compared to IAG’s 79%. It is important to note that the carrier is still receiving wage subsidies that keep its labor costs artificially low. It would be flying less without these subsidies, though some other airlines are getting similar help. The crisis, in any case, gives Air France in particular a rare chance to enact needed labor reforms, on top of several important ones it was able to extract just before the crisis. That’s not a given though. On the Dutch side, KLM pilots just rejected a five-year wage cut. And that puts bailout money at risk — the aid is conditioned on securing cost cuts. Just as threatening is the state of Covid in Europe, with France for one locking down businesses again last week. It should make for a very distressing winter.

    Beyond that, KLM hopes to gradually restore its past margin strength while Air France accelerates major reforms enacted before the crisis. They include major fleet restructuring, the expansion of Transavia France, and addressing chronic French domestic losses. The terms of its bailout should actually help in this regard, forcing Air France to cut shorter routes that overlap with the country’s high-speed TGV rail network — the idea is to cut aviation’s contribution to climate change.
  • IAG didn’t disclose operating margins for each of its airline brands, as it usually does. But you can safely assume they’re all losing big money, especially because the U.K., Ireland, and Spain have some of Europe’s most severe travel restrictions. IAG as a whole lost $1.4b net excluding special items in what’s supposed to be the best quarter of the year for European airlines. Operating margin was negative 105% as roughly 80% of its normal flying was suspended. On two separate occasions now, IAG had to reverse plans to restore more capacity in hopes of seeing this summer’s demand momentum continue. Instead, demand peaked in July before leveling off and remaining subdued into November.

    It’s the travel restrictions, more so than consumer confidence, that’s holding back the recovery, IAG believes. As evidence, it cites data showing a sudden burst of bookings after the Canary Islands were taken off the U.K.’s quarantine list on Oct. 22. No wonder why it wants to see more restrictions removed, banking on Covid testing for passengers as a means to do so safely.

    In the meantime, British Airways, now under a new CEO, alone cut 9k jobs last quarter, with more gone this quarter. At Aer Lingus, job cuts are at about 800 and counting. Jobs at Iberia, Vueling, and Level are for now protected by Spanish government wage subsidies. Level however did close its Vienna, Paris, and Amsterdam bases, leaving only Barcelona. Vueling did cut a fifth of its management team. With Willie Walsh in retirement, IAG’s new chief Luis Gallego, a veteran cost slasher, doesn’t have any big government bailout money to work with. But he does have a fresh supply of cash from owners, led by top shareholder Qatar Airways. Yes, cargo was helpful, but IAG isn’t as big of a cargo player as Air France/KLM and certainty not Lufthansa.

    Losses accumulated, meanwhile at businesses like BA Holidays and Iberia maintenance. BA did strike a lucrative marketing partnership with Delta’s close friend American Express. Its own close friend in the U.S., of course, is American. Uncertainty runs high for BA, which is crucially dependent on transatlantic markets and now faces a leaner bankruptcy-cleansed Virgin Atlantic. BA isn’t yet sure what it will do as far as future flying from London Gatwick. For now, it’s moved most of its shorthaul flying to Heathrow. It extracted important labor concessions in terms of pay and work flexibility, building on its history of acting quickly and forcefully on cost cutting during times of deep distress.

    Iberia’s fortunes, meanwhile, depend on Latin American markets, where the competitive landscape could change dramatically in its favor if IAG completes its takeover of Air Europa. It makes no secret that it still wants the airline, but only at a dramatically reduced price. Air Europa is now in the process of getting rescued by Madrid, which could lead to IAG getting it for nothing but some assumption of debt. We’ll see.

    As the group as a whole contemplates recovery scenarios, one area of focus is the longhaul premium economy segment. This was already growing as a contributor to overall revenues and was particularly helpful in the financial crisis recovery a decade ago. It’s thus looking at options to add more premium economy seats to its widebodies, targeting both business travelers trading down from their lie-flat luxuries and wealthier leisure travelers trading up from the squalors and depredations of economy class (that was a bit harsh). It says, in fact, that just 13% of the group’s revenues come from corporate contracts. Premium-heavy B747s are gone at BA, part of a move that positions IAG to be smaller for at least another two years. This quarter, it won’t fly more than 30% of its normal capacity. And it won’t break even on operating cash flows by the end of this year after all.
  • All Nippon, Japan’s largest airline, got its operating margin down to negative 72% in calendar Q3 after domestic travel restrictions lifted and demand started to recover. Net loss margin excluding special items was negative 54%, lifted by income tax credits. Back on the operating line, revenues fell 69% y/y as costs fell 41%, all on 66% less ASK capacity. For ANA in normal times, the domestic market is similar in size to the international market in terms of passenger revenues. And while the Japanese domestic market isn’t recovering as fast as the Chinese domestic market, it is recovering rather steadily. ANA is now operating about half of its mainline-branded domestic capacity (compared to just 30% of international). But just as importantly, its low-cost Peach unit is operating more domestic capacity now than it was at this time last year. Last year, remember, ANA merged its two LCCs Peach and Vanilla Air.

    Now, surprisingly, it plans to create a third airline brand (or fourth if you count Skymark, which it partly owns). The new unit, launching in 2022, will target low and mid-yield travelers not addressed by ANA mainline or Peach.  It will use the group’s Air Japan platform and use two-class 300-plus seat B787s rather than Peach’s narrowbodies. Targeted markets include the ASEAN region and Australasia.

    ANA is separately taking a page from AirAsia’s playbook and attempting to leverage its customer database to build new revenue streams. A foundation of this new “ANA X” platform initiative will be its tour operator unit, with eyes on generating more e-commerce even in the non-travel space (selling real estate insurance for example). Back in the air, ANA is earning strong yields in the international cargo space. Domestic tourism is getting a boost from its own promotions and government stimulus policies. The government is also providing wage subsidies. Still missing though are the many foreign visitors that were coming to Japan before the crisis, often flying within the country during their stay. The Tokyo Summer Olympics, postponed due to Covid, were supposed to further advance this trend of foreign tourism, an important economic force countering the stagnating influence of a rapidly aging and shrinking population. Currently, most of ANA’s international flying is undertaken with cargo demand in mind. Peach, however, is just now restarting flights to Taiwan.

    When intercontinental demand returns, ANA will prioritize its most profitable routes from Tokyo Haneda airport. Tokyo Narita, which will remain important for sixth-freedom connecting traffic (i.e. North America to the ASEAN region) will be a secondary focus. Just prior to the crisis, remember, ANA was able to announce 12 new routes from Haneda thanks to slot expansion. Some were new to the network, like Moscow, Istanbul, Stockholm, Milan, and Shenzhen. Others were cities it was already serving from Narita, including five in the U.S. Also just before the crisis, ANA signed a joint venture agreement with Singapore Airlines (it has JVs with United and Lufthansa as well) and a more modest partnership with Virgin Australia (it separately owns sizable stakes in Philippine Airlines and Vietnam Airlines).

    Another big pre-crisis strategy was attacking the Hawaiian market using A380s. Finally, in a last pre-crisis hurrah for Boeing pre-crisis, ANA — in late February — ordered another 20 Dreamliners, some of them B787-10s (it has B777-9s on order too). A key focus now of course, is cutting costs. It’s furloughing foreign pilots, cutting management salaries, postponing aircraft deliveries, insourcing airport handling and maintenance work, leasing a larger portion of its fleet, transferring surplus employees to the Toyota motor company, downgauging domestically, and giving more responsibility to Peach and, ultimately, the new LCC it’s creating.

    Peach will look to do longer-haul routes with narrowbodies, including A321 LRs. It’s also expanding from Nagoya as a third base for leisure traffic alongside Tokyo Narita and Osaka Kansai — note that Nagoya-based AirAsia Japan just closed its doors. High-yield business demand, by contrast, won’t return to pre-crisis levels for years, ANA believes — perhaps not ever. So it needs to reorient itself toward capturing more leisure demand. That means not just expanding Peach, starting a new LCC, and slashing costs. It also means improving distribution, hence a new partnership with Google Flights. ANA and Peach will also start codesharing and cooperating in other areas.

    ANA, by the way, also owns 18% of a small Fukuoka-based carrier called Star Flyer. For the airline’s current fiscal year that ends in March, losses will unsurprisingly be heavy. Operating margin for the fiscal year, management estimates, will be negative 68%.
  • Japan Airlines, which routinely out-earned its bigger rival All Nippon throughout the 2010s, is losing that distinction in the pandemic era. In calendar Q3, for the second straight quarter, its operating margin was worse, registering at negative 80%. Though the distinction isn’t too meaningful, what is relevant is a temporary loss of one of JAL’s most important strategic advantages. Pre-crisis, it profited much more than ANA in Hawaii, which represented a double-digit percentage of JAL’s overall passenger revenue (13% in last year’s calendar Q3). Jealous, ANA tried to crash the party with an A380-led Hawaiian offensive, as discussed above.

    But JAL is fighting back, even after U.S. regulators quashed its attempt to joint venture with Hawaiian Airlines. JAL will soon send its new low-cost carrier Zip Air to the Aloha State, offering Dreamliner service tailored for leisure passengers, including premium leisure. Hawaii, indeed, will be an ongoing theater of war between JAL and ANA post-crisis. Their networks and business models overlap in many other ways too, including a U.S. mainland franchise buttressed by joint venture partners (American in JAL’s case, United in ANA’s case) and efforts to drive more sixth-freedom traffic between to the ASEAN region via Tokyo Narita. JAL was likewise adding more international flying from both Tokyo Haneda and Narita and cultivating partnerships in key markets outside the U.S. (i.e. with Lufthansa, Aeroflot, Vistara, China Eastern, and Malaysia Airlines).

    The near-term focus now, of course, is the domestic market, where JAL is shifting some widebodies and adding new A350-900s. Just as ANA has Peach at home and soon a new LCC for abroad, JAL has Jetstar at home, complementing its new international LCC Zip Air. Zip, by the way, will grow to six B787s and possibly more, flying from Narita. JAL, meanwhile, will retire older B777s, will seek to drive more revenues from sources other than air service, including its loyalty plan and related credit cards. It’s marketing to “workation” people combining work with vacation. It also notes that domestic demand among group tours, a big market in normal times, is starting to revive. 
  • With a near Covid-free population of more than 1b people, China is furthest along in getting its airline sector back to normal. It’s not quite there yet, not with international markets largely still closed, and with domestic carriers scrambling to win back passengers with low fares. The July-to-September period was, to be sure, another loss-making quarter for China’s airline industry. In the same summer quarter last year, the country’s six publicly traded carriers tracked by Airline Weekly earned an outstanding operating margin of 15%. This year was almost a mirror image: Negative 12%. But that’s far better than what most carriers elsewhere in the world are managing.

    And within that average are some carriers doing much better than others. Two in fact, earned operating profits last quarter. Juneyao Airlines, based in Shanghai and aligned with China Eastern, produced a 3% Q3 operating margin. Spring Airlines, also based in Shanghai but sporting a low-cost business model, generated a positive 2% operating margin. More on these carriers in a bit.

    First, look at Guangzhou-based China Southern, the clear standout among the country’s Big Three airlines. It was alone in reporting a net profit, amounting to $135m. But don’t pay too much attention to that. When stripping out one-off gains, it was really loss-making. Truly impressive though, was an operating margin of merely negative 2%, despite significant pre-pandemic international exposure (about 30% of its RPK traffic in 2019). China Southern had much milder loss margins than its peers during Q2 as well, aided by minimal exposure to the beleaguered Hong Kong market (an important revenue source for Air China and China Eastern). China Southern’s Q3 revenues fell 40% y/y on 33% less capacity, while operating costs fell 29%. Domestically, its ASKs were down only 6%.

    All Chinese airlines right now are getting helpful cost relief from cheap fuel and a strong Chinese yuan. Cargo is another bright spot. China Southern, for its part, is probably benefitting most from the troubles at Hainan Airlines, which has a large presence in China’s southeast, including Guangzhou. China Southern, sure enough, is and long has been the largest carrier serving Hainan island. In Beijing meanwhile, another big Hainan Airlines market, China Southern is building a hub at the new Daxing airport south of the capital. Its international ambitions there are on hold, temporarily reducing the importance of a new alliance with American. Other partners include British Airways, Emirates, and Qatar Airways, not to mention its control of domestic ally Xiamen Airlines.

    On the other hand, it recently left the SkyTeam alliance. American and Spring Airlines, by the way, own small stakes in China Southern. Note that Chinese carriers don’t provide much commentary on their Q3 results, but there’s one more factor that might be contributing to China Southern’s relative strength: It has the most grounded B737 MAXs of any Chinese carrier, which helpfully keeps capacity less than it otherwise would be.
  • Air China, long the best performer of China’s Big Three, faces challenges in its home market Beijing. The city’s air traffic was momentarily disrupted this summer due to a Covid outbreak. And commercially, Air China faces new competition in the capital from airlines building hubs at Daxing airport. In Q3, the carrier saw a 50% y/y drop in revenues but just a 33% decline in operating costs. As a result, operating margin was negative 10%. Compared with results last summer, that’s terrible. Compared with results carriers elsewhere in the world are showing, that’s encouraging.

    Air China, with heavy dependence on longhaul international routes, flew 43% less capacity last quarter, the steepest drop among the Big Three. But its domestic capacity was more or less in line with its Big Three rivals, down by just 5%. Air China owns large stakes in Shenzhen Airlines, Shandong Airlines, and Air Macao, as well as in Cathay Pacific, thus absorbing part of the latter’s heavy losses. It also agreed to help recapitalize Cathay.
  • China Eastern, as usual, was the worst-performing of the Big Three last quarter, with its negative 17% operating margin. Its revenues and operating costs shrank by similar percentages as Air China. Its ASK capacity was down a bit less, shrinking 36% y/y. Domestic ASKs were down only 3%. Based in the giant but competitive Shanghai market, China Eastern is aggressively discounting tickets to drum up more domestic tourism. Promotions include air-rail passes and unlimited flying for a set price through the end of the year.

    Pre-crisis, the airline was ambitiously advancing its international credentials, joining China Southern in building a Beijing Daxing hub. Its Shanghai Airlines affiliate began flying widebodies. It was developing partnerships with Delta, Air France, Qantas, and Japan Airlines. Back at home, meanwhile, it had big plans for its Beijing-based LCC China United, now flying from Daxing instead of the small airport Nanyuan. In Shanghai, its cross-ownership with Juneyao turned a rivalry into something more cooperative.

    Looking ahead, China’s return to solid economic growth adds momentum to the country’s airline recovery. The next key milestone is for international markets to reopen. There’s the upcoming Chinese New Year as well, in February, which will mark roughly a year since China was hit with the world’s first wave of Covid infections. But all that aside, China Eastern needs to address its pre-crisis habit of repeatedly underperforming its peers.
  • Well, at least it doesn’t underperform Hainan Airlines anymore. Once a superstar of Chinese aviation, Hainan impressed investors and travelers alike with a more efficient, productive, and consumer-friendly business model than its Big Three peers. It capitalized on a boom in tourism to its namesake island Hainan, sometimes called China’s Hawaii. At the same time, it ambitiously built a fleet of Dreamliners, sending them to points around the globe. It became an especially large player in the U.S. market, serving seven airports there.

    But the walls came tumbling down with the onset of the Covid pandemic. International markets closed. Expensive widebodies were left with little to do. And all the while, Hainan’s parent company HNA was buried in debt, the consequence of a reckless overseas buying spree. To be clear, Hainan Airlines was already in a state of decline before the pandemic, reaping the wreckage of over-expansion. In fact, 2016 was the last year in which it shined above its peers with double-digit margins. In 2019, its operating margin was just 2%.

    And this year? Well, last quarter, its operating margin was negative 47%, resembling figures from carriers in countries with far less mature recoveries. Its 56% y/y slashing of ASK capacity — with an even drastic 39% cut to domestic capacity — helps explain not only its 62% drop in y/y revenues but also part of why rivals like China Southern are improving their margins so significantly. Hainan’s operating costs, for the record, fell negative 39%.  
  • Back to Juneyao Airlines, its welcome 3% Q3 operating margin came as it cut ASK capacity 12% y/y, driven entirely by less international flying. Domestically, it actually increased ASKs 10%. Revenues, to be clear, are still severely depressed, declining 39%. And operating costs aren’t falling as much, down just 28%. But this was an airline with an 18% operating margin last summer, which meant it could still make money despite a drastic fall in fortunes. It’s the point that Spirit and Allegiant make in the U.S., by the way — that because they were so profitable pre-crisis, it won’t take much to simply cross the breakeven line.

    Juneyao itself is a full-service carrier catering to business fliers, who even in China, aren’t yet returning to the skies in full force. But the airline also owns an LCC called 9 Air based in Guangzhou, where its domestic seat counts for November are scheduled to increase 21% y/y, according to Cirium. That’s roughly in line with the overall domestic growth for the Juneyao-branded operation. Just before the crisis, Juneyao was beginning to dabble in intercontinental markets using newly arrived B787-9s.  
  • The LCC Spring Airlines, which earned a 22% operating margin in last year’s Q3, managed a positive 2% result last quarter. Spring ambitiously grew domestic ASKs 46% y/y, allowing it to win a greater share of the Chinese market. But that was only because it redirected planes back home after pursuing aggressive shorthaul international expansion. In fact, its overall ASKs actually shrank 4% last quarter. The airline recently received its first A321 NEO, part of a fleet that now tops 100 planes. It runs a joint venture airline in Japan, which cooperates with Japan Airlines. And its chairman Wang Yu told Reuters last month that some of its stronger domestic routes are seeing fares almost back to last year’s levels. He separately said Spring has no plans to add widebodies, a testament to business discipline sometimes lacking among China’s private-sector airlines. 
  • In some ways JetBlue has the right characteristics for the crisis recovery phase. It carries mostly leisure passengers, with a heavy component of family-visit traffic. It’s overrepresented in Florida and the Caribbean, two markets showing at least some signs of life. On the other hand, a large of portion of JetBlue’s passengers originate in the U.S. Northeast, specifically the New York and Boston areas, which have been among the strictest in terms of traveler quarantine requirements.

    These pros and cons netted out to a $477m net loss ex special items last quarter. Operating margin was worse than what most of its rivals produced, registering at negative 128%. Like everyone else, JetBlue cut capacity dramatically y/y — 58% — but saw revenues fall much more: 76%. Operating costs declined just 39%, aided by a 78% drop in fuel outlays but a more modest 17% dip in labor costs. During Q3, remember, the U.S. federal government covered most of the industry’s labor costs, which won’t be the case in Q4. Still, JetBlue hasn’t announced any mass layoffs.

    But it’s for sure working diligently to slim its cost structure, recognizing the diseconomies of scale it faces while shrinking. In its own words: “We are taking an aggressive approach to improving our cost structure, better aligning our fixed and variable cost base to temporary lower revenue and capacity.” This quarter, capacity should be down by 45% and revenues down by 65%. Management also mentioned the likelihood of airport and health care costs rising. On the other hand, newly arriving A321 NEOs and A220s, despite some delivery deferrals, will help reduce unit costs in the long run. Much of its other cost cutting, frankly, involves labor. As for revenue, the airline will get a boost from its decision to start selling middle seats again earlier this month. A policy of capping load factors at 70% will end December 1.

    More strategic is a new alliance with American, a move management says will help preserve jobs (unions typically don’t like such alliances because they worry they’ll reduce the incentive to grow organically). By partnering with American (assuming regulatory approval), JetBlue enhances the appeal of its loyalty plan. It boosts its utility in New York and Boston. It can offer connections to American’s intercontinental flights. And it can help fill the many seats expected to go empty while demand remains weak. JetBlue will not however, like Alaska, join the oneworld alliance. Nor will it join American’s joint venture with IAG. Not with its own plan — still intact but not yet detailed — of flying to London with A321 LRs next year.

    JetBlue, meanwhile, announced roughly 60 new routes since the crisis began, some linked to big expansions in Los Angeles and Newark. This will help its transcontinental franchise which is currently one of the better performing parts of its network. Same for Mint, its transcon premium product. Also doing relatively well are its many leisure and family-visit routes to Florida, the Caribbean, and Latin America. At present, 20 of JetBlue’s 35 international destinations are open to American travelers. In addition, states like Connecticut and Massachusetts are starting to relax their quarantine rules, permitting travelers to present negative Covid test results as an alternative. When New York state removed California from its quarantine list, by the way, demand correspondingly increased.

    JetBlue speaks about Covid testing with great hopes and expectations, fearing even a vaccine might not be a total solution. Demand will also improve when tourist attractions like Broadway in New York City reopen. It sees clear evidence of pent-up travel demand, with forward bookings showing steady improvement despite the latest surge in Covid cases throughout the country. As it monitors demand, the airline pins additional hopes for recovery on its travel products division, a recent upgrade to more advanced Sabre revenue management software, and the ongoing if delayed densification of its A320s.  
  • What’s the U.S. state that’s had the strictest quarantine rules throughout the crisis? The answer is Hawaii, which explains why Hawaiian flew just 13% of the ASM capacity it operated in last year’s third quarter (it might frankly also explain the state’s low infection rate). Revenues were down 90% y/y, operating costs were down only 41%, and operating margin came in at negative 287%. This was down from Q2’s even uglier negative 366% figure but still not representative of the same quarter-to-quarter progress seen at most other airlines. It’s simply a waiting game for Hawaii to open up, which is fortunately starting to happen.

    On Oct. 15th, the state implemented a pre-travel testing option enabling U.S. mainland travelers to avoid having to self-quarantine upon arriving to the islands. When the plan was announced in mid-September, bookings for Q4 improved to roughly 30% of normal levels, up from just 10% before the announcement. Now with the testing policy in place, the percentage is up to between 35% and 55%, with more strength late in the quarter. Hawaiian says it sees some booking momentum for Q1, 2021 as well. By next summer, it hopes to operate 15% to 25% of its steady-state U.S. mainland network, with readiness to flex up or down as appropriate. It didn’t operate any international routes last quarter, and only recently restored once-a-week Tokyo service for essential travel. The state of Hawaii said Japan will be included in the pre-flight testing regime soon, with other countries like Korea perhaps following. Hawaiian, though, doesn’t expect to restart Australia and New Zealand routes until 2021. Quarantines remain a depressant to inter-island travel.

    Despite such little flying and revenue generation — and even while much of its costs remain fixed — Hawaiian’s liquidity isn’t an issue. That’s thanks to aircraft sales and borrowing, including participation in Washington’s CARES Act loan program. The heavy borrowing does mean, however, that restoring its balance sheet to health will be a long and arduous journey. And until it does return to health, the airline’s ability to grow and invest will be constrained. Hawaiian will still replace A330s with B787-9s, but they won’t start coming now until late 2022 following a deferral arrangement with Boeing.

    Hawaiian separately cut its workforce by about a third, mostly through voluntary means. It’s still capping load factors at 70% to reassure travelers. It joined rivals in axing ticket change fees. A rare bright spot is cargo, with charter flying also providing some revenue. As a predominantly leisure carrier with many of its customers in flourishing tech centers like San Francisco and Seattle, its recovery should be relatively swift once travel restrictions are removed. Note, however, that booking curves tend to be pretty long for Hawaii trips, and many people right now are booking trips close to departure.

    When demand does return, it won’t automatically translate to smooth sailing for Hawaiian. At that point, 2019-style challenges reappear, namely competing with Southwest as it builds a Hawaiian franchise, along with other rivals hungry for all the leisure traffic they can muster, i.e. Alaska and the Big Three. Looking east, Hawaiian’s pre-crisis alliance plans with Japan Airlines were checked by DOT reproach. At the same time, All Nippon was hurtling A380s toward the island in hopes of capturing more market share. As mentioned earlier, JAL will soon send its new Zip Air affiliate to Honolulu.
  • Back on the U.S. East Coast, Florida-based Spirit believes it will lead the industry in returning to profits, highlighting its ultra-low cost base, its heavy reliance on leisure and family-visit travel, and the strong margins it was able to produce before the crisis. Just getting back to break even, it explains, won’t require anything near 2019 levels of demand and unit revenue. In fact, it can probably get there at current unit revenues but only when capacity is back to pre-crisis levels. It doesn’t have the demand yet to justify that, but it hopes the day is not too far off.

    Last quarter, its ASM capacity was still down by a third y/y, this after weaker-than-expected bookings this summer forced it to temper its restoration. Yields and unit revenues were still so low that revenues fell far more than capacity — they were down not one-third but almost two-thirds (60% to be precise). This month, capacity should be down almost 40%. But it’s currently planning for a drop of more like 20% for November and December. Like other U.S. airlines are reporting, demand is more resilient to the Covid spike this fall than it was to the spike in early summer. Attribute this to greater traveler confidence about safety, and the fact that more tourist attractions (Florida beaches for example) are now open. Note that nearly half of Spirit’s entire capacity touches the state of Florida.

    In addition, many of the Caribbean islands Spirit flies, along with points elsewhere in Latin America, are opening their borders to American tourists. These tend to be big family-visit markets as well. Looking ahead, Spirit is encouraged by bookings for Thanksgiving and is hopeful for the Florida peak season next quarter. Management doesn’t see the crisis creating any big paradigm shifts, instead expecting a return to the realities that made Spirit so successful in the past, i.e. low costs and high ancillary revenues are a path to high profits. It still plans to take 16 Airbus NEOs next year, following a big plane order it placed just before the crisis. It’s opportunistically entering markets like Orange County where local slots became available. It was able to avoid furloughs thanks to new cost-saving labor agreements. In January, it will introduce a new loyalty plan. Operational reliability, a problem last year, is much better now. Managing capacity on offpeak times and days will be key this winter. It decided against taking government loans after pledging its loyalty and brand assets to secure good terms from the private sector.

    It does see cost pressures from its temporary capacity cuts, as well as in areas like labor, airports, and aircraft leases. But most of its higher-cost rivals, it thinks, won’t be able to break even with the low fares likely to prevail while business traffic remains subdued. That will force them to cut more capacity, and by extension put further upward pressure on their unit costs. “Our model,” asserts CEO Ted Christie, “shines in tougher times.”   
  • Then and now, Allegiant has always taken a unique approach to airline economics. It counterintuitively found great success by flying its aircraft less, not more. Its approach to managing the Covid crisis, meanwhile, is counterintuitive again: fly more, not less. Its Q3 ASM capacity was down just 9% y/y, with flights down just 12%. That’s not because its demand was so much better than what other U.S. airlines saw. In fact, Allegiant’s Q3 passenger volumes plummeted 47%. It thus filled just half all of those seats it flew. But the flying was cash-positive enough to temper losses, leaving it with a negative 39% operating margin — not bad, all things considered. Revenues dropped 54% y/y and operating costs declined 23%.

    All of these figures, to be clear, exclude the wage subsidies it received from Washington. If you do include them, Allegiant actually broke even at the operating level last quarter, propelled by a positive 17% operating margin during September alone. Even without those subsidies though, September was cash break even for the airline. It’s odd to see September emerging as the best month of the crisis so far for Allegiant, because it’s historically its worst month of the year. But history is now irrelevant. The fact is, would-be travelers are feeling more confident and less deterred by Covid case spikes than they were this summer. Average daily gross bookings have increased from just over $2m during Q3 to more than $3m thus far in Q4. October is looking better than September, and the upcoming holidays look promising as well.

    Executives made clear that there’s still a long way to go before full recovery. But they use the term “best of the worst” to describe the carrier’s position. While it did need to borrow $300m to ensure sufficient liquidity, it did not have to issue any new equity like many other U.S. carriers. Nor did it take any government loans. In terms of operating costs, variables are down some 30%, which is more than three times its capacity drop. It did feel the need to undertake some involuntary job cuts, some affecting pilots. Its most exciting cost cutting prospect though, involves the severely depressed aircraft market. A320s, it says, can now be leased for what it previously paid for smaller A319s. Most of its rivals, meanwhile, have big aircraft order books locked in at pre-Covid prices. They also have much more debt to repay, which Allegiant believes will limit their ability to discount fares.

    On hold for now is the LCC’s Sunseeker real estate project in Florida — it’s hoping to attract partners willing to assume some of the investment. Most of the business model remains intact, however, including a heavy bet on sports marketing to improve its nationwide brand awareness. Allegiant Stadium in Las Vegas is now hosting NFL games. And the brand exposure could help explain an increase in the number of direct visits to its website, at the same time indirect visits (via search engines like Google, for example) are down. Allegiant says travelers want nonstop flights more than ever, which is what it offers. And it sees major growth opportunities as demand recovers.

    Looking at Allegiant’s October schedules via Cirium, seat capacity from some key markets like Orlando Sanford and Las Vegas are down by some 20% y/y. In other big markets, the decline is less severe (down 12% from St. Petersburg/Tampa, for example). And in some like the Florida Gulf Coast cities Punta Gorda, Sarasota, and Destin, the airline is flying more this year than last. Ditto for Nashville and to a less extreme extent, Cincinnati.
  • SkyWest, the U.S. regional giant, posted a negative 25% Q3 operating margin, excluding federal payroll support. Its net result excluding that support was negative too. As you can see, loss margins were milder than those of its partners, and of U.S. airlines more generally. But the crisis is challenging nonetheless, with SkyWest flying only about 60% of its normal capacity last quarter.

    It does however believe its two-class regional planes are well-placed to play an important role for its partners United, Delta, American, and Alaska as they rebuild their schedules. In fact, it just signed a new agreement with American to add 20 used CRJ-700s. It’s also acquiring another 21 CRJ-700s from an operator currently flying them in a 50-seat premium configuration for United (these are what some call the CRJ-550s). SkyWest’s most popular plane is the E175. Less popular are CRJ-200s, of which it admittedly has too many.

    Separately, it’s optimistic about its pro-rate business, in which it handles scheduling and pricing itself. It also sees opportunities in the pandemic-era trend of people moving away from big cities to smaller communities where regional air service is paramount. SkyWest, did by the way, avail itself of federal CARES Act loan money. A major focus now is ensuring it’s ready to fly the capacity its partners will need next spring and summer season, which effectively starts in March. It’s all a big question mark currently. But a general assumption is that SkyWest’s block hour capacity will be down by about 20% for the “foreseeable future.” It does have in its mind, however, a summer 2021 potentially characterized by “impressive demand, particularly with the smaller sized aircraft we have, and where we fly.”
  • In India, IndiGo is making the best of a bad situation. By ramping up domestic capacity, adding international charter flights, cutting costs, gaining market share, and chasing cargo revenues, the LCC managed to improve its calendar Q3 operating loss margin to negative 52%, versus negative 344% in the previous quarter. Revenues, aided by a 20% y/y surge in cargo sales, fell by 66% y/y, not much more than its 63% reduction in scheduled ASK capacity. Operating costs, aided by pay cuts, cheap fuel, and of course less flying, declined 52%.

    Like other airlines, IndiGo’s focus right now is generating cash, not accounting margins (which take non-cash and indirect costs into account). Still, the margin improvement highlights real market improvement, particularly as the government progressively lifts its cap on how much capacity carriers are allowed to operate. The current cap domestically is 60%, with the likelihood of soon moving to 80%. IndiGo, despite weak load factors down some 20 points y/y, will quickly restore capacity to the maximum amount allowed; the fact is, the more it flies, the more its cash burn declines. “Once we are back at 100% capacity,” it adds, “we will have lower unit costs, a stronger product, a more efficient fleet, and a robust network.”

    Note that some local government flying restrictions remain in places like Mumbai, Chennai, and Kolkata, which limited IndiGo to just under 50% of normal domestic capacity in September. Internationally, it’s flying about 20% of normal, mostly with charters to countries with which India has “bubble agreements.” It now has one with Bangladesh, with Nepal potentially next.

    Looking ahead, IndiGo remains highly interested in expanding internationally, specifically with all the new A320 and A321 NEOs it’s set to receive. It’s still taking its deliveries more or less on schedule, as it simultaneously removes prior-generation CEOs as soon as their leases expire. The fleet count won’t grow next year as a result of these aggressive CEO removals. But the airline remains committed to longterm growth as it retains confidence in India’s longterm aviation potential. It’s already approaching 300 planes by the way (almost all leased), including a fleet of ATR turboprops and about 25 A321 NEOs already on property.

    But will it ever fly widebodies? Three years ago, it entertained the possibility of buying Air India, eyeing the creaky state carrier’s B777s and B787s, not to mention its international route rights and airport slots. That’s no longer a consideration. But it’s constantly evaluating the economics of organically adding widebodies, stating pre-crisis that they simply wouldn’t be profitable. Now, with airplane prices way down and fuel very cheap, the economics look better but still not compelling enough. Note that rival Vistara is now flying B787s intercontinentally, with SpiceJet dipping its toe into longhaul markets with wet-leased A330-NEOs. IndiGo is also watching Jet Airways, the defunct Mumbai-based carrier that’s trying to revive under new ownership.

    As for IndiGo’s narrowbodies, it’s lucky: The NEOs it has are holding their values better than other planes. It’s also able to still do some sale-leaseback deals with its ATRs. To further enhance liquidity and ensure sufficient cash, it’s currently evaluating different borrowing options. Encouragingly, its September cash position was better than management expected as the carrier added back more capacity. To be clear, business and corporate traffic account for about half of IndiGo’s revenues during normal times. And that’s far from returning to pre-crisis levels. It does see some early signs of recovery, however, in small business demand.

    It’s separately seeing a revival in some directional traffic flows, including non-metro to metro (in other words, secondary cities to big cities like Mumbai and Delhi). Its industry leading domestic market share now stands at 58%, up from 48% at the start of 2020. It’s marketing itself as the “lean clean flying machine” to restore traveler confidence. And it’s trying to digitize as much as it can, including all customer touch points—“no more paperwork, no queues or phone calls… let’s digitize everything.”
  • Finnair’s Q3 results included a $232m net loss and a negative 172% operating margin, which would have been worse if not for strong cargo revenues. They dropped just 40% y/y compared to a 92% decrease in passenger revenues. Flights to China were strongly cash positive thanks to cargo most importantly but also a 70% passenger load factor. The problem is, Finnair is currently authorized to operate just two weekly flights to China, one to Shanghai and the other to Nanjing. It’s hoping China’s government opens more access soon.

    Closer to home, there’s another area of light in the sea of darkness: Domestic tour packages to Finland’s Lapland region. Even in the winter, the airline notes, Lapland has sunshine (if not warmth). On Finnair’s European routes, meanwhile, demand is minimal due to Finland’s stringent travel rules — it has perhaps the toughest restrictions anywhere in Europe. When restrictions did relax briefly this summer, demand was quick to respond. Now, however, Finnair expects a bleak winter season, when demand is typically slow even in good times. It plans to operate just 15% of ASKs this winter.

    Early next year, it will review summer schedules with hopes there’s justification for a more robust schedule. Helpfully, Finnair’s most critical market is northeast Asia, where anti-Covid measures have proved effective, not the U.S., where the virus remains out of control. A key priority while it waits out the winter freeze is cost cutting, with eyes on slicing about $160m from its cost structure by 2022, relative to its 2019 level. It’s already cut more than 1k job permanently. And flexible furlough laws in Finland make it easy to quickly remove costs and quickly bring people back when needed. Maintenance and IT are two other areas ripe for savings.

    Finnair is separately postponing plans to order new narrowbodies, though the time for that will eventually come. To stay relevant with consumers while most of its plan sit idle, the carrier is selling Finnair-branded inflight food in supermarkets. It expects cargo to benefit from the upcoming Christmas rush. And while fearing near-term industry overcapacity as demand recovers, it expects tight capacity in the long run as airlines freeze investment in new planes.
  • Icelandair’s Q3 income statement, believe it or not, shows an operating profit of nearly $4m. But that’s only because it counted MAX-related compensation it received from Boeing as revenue. Just looking at core revenue, operating margin looks to be more like negative 5%, which removes $36m classified as “other” revenue. Negative 5% is still extremely good considering the circumstances, reflecting a 16% y/y surge in cargo revenues despite a 19% decline in freight capacity. During the summer quarter, Icelandair operated a mere 9% of its normal capacity, scaling up a bit when Europe relaxed travel restrictions just before the quarter but retrenching again after Iceland itself imposed new restrictions.

    After that, the airline was operating just 10 flights a week, compared with the nearly 300 a week it flew last summer. Keep in mind that most airlines right now are willingly running flights that lose money on an operating basis, so long as their revenues cover direct cash costs. This can have the effect of worsening loss margins for carriers that fly a lot, and flattering the margins of those that don’t, i.e. Icelandair this summer.

    In any case, what’s important now is how well-positioned airlines are to benefit from the recovery when it happens. Icelandair likes its chances following a cathartic restructuring that resulted in new longterm labor contracts with far better (from the company’s perspective) pay and productivity terms. The carrier also renegotiated all of its suppler contracts, including aircraft lease agreements, and managed to raise new equity and secure government-backed loans. As a highly seasonal airline, the timing of the demand recovery will matter a lot. Will testing, vaccines, and/or other factors allow for healthy levels of travel between North America and Europe by the spring?

    Icelandair has already published its summer 2021 schedule, with capacity down 25% to 30% from summer 2019. B737 MAXs, management thinks, will be back in service sometime next quarter.  

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  • The Washington Post looks at Denver-based Frontier Airlines, which was flying high in 2019. It placed an order for new XLR Airbus jets. It grabbed slots at key airports like Newark. It announced a new Miami crew base and a new Orlando training center. This year, alas, it expects to fly 20m fewer passengers. Like other airlines, Frontier was seeing virtually no bookings early on the crisis. In May, 40% of its planes were idle. It’s now operating an average of 258 daily flights to 93 cities, though capacity is still down about 40% y/y. The airline’s CEO Barry Biffle feels confident about the future, enough so to continue taking aircraft this year. Thanks to sufficient numbers of voluntary staff departures, he hasn’t had to lay anyone off.

    In a separate discussion at an online event hosted by Routes, Biffle reiterated his optimism: “We believe we entered this crisis in the best position in the U.S. We have the lowest cost and one of the best balance sheets. And that has paid off very well. We also have a very low cash-burn rate, and we’ve taken measures to further reduce that.” He also highlights all the debt his rivals now have, which will likely widen their cost gap with Frontier. In fact, he expects a strongly profitable summer 2021, once a large number of Americans are inoculated to Covid via vaccine.
  • Sun Country also spoke at the Routes event, claiming it earned a profit in Q3. Yes, a profit. The secret sauce was its new cargo contract with Amazon. But CEO Jude Bricker said the carrier’s leisure passenger business was also holding up well, aided by the flexibility to move planes around on short notice. He named Tampa and Ft. Myers, both on Florida’s Gulf Coast, as two markets doing relatively well from Sun Country’s Minneapolis base.

    The Amazon cargo arrangement, by the way, was signed in December and activated in May. In October, it represented a third of Sun Country’s total business. Said Bricker: “That means a third of our businesses is actually really, really strong, and it’s a side of the business we didn’t even have a year ago.” He said the carrier’s charter business is recovering too as sports teams start traveling again. Sun Country is now considering interline deals with other carriers.
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  • Airbus noted that although traffic had begun to recover slightly, new viral outbreaks and ever-changing travel restrictions have resulted in airlines paring back. The inability to forecast the future is one reason why the airframer, which first withdrew its full-year financial guidance in March, still won’t offer any for the balance of the year or the first quarter of next year.

    Airbus delivered 341 aircraft in the first nine months of the year, or 40% fewer than the same period last year. These include 282 A320-family aircraft. In September, it delivered 57 aircraft. Airbus is keeping a wary eye on Brexit and fears the disruption from Britain leaving the E.U. with no exit deal. Airbus manufactures wings and other components at facilities in the U.K. “The outlook for global air traffic recovery has deteriorated, indicating that the crisis is far from over,” CEO Guillaume Faury said during the company’s nine-month earnings presentation.

    And the company is seeing a bifurcated recovery. Airlines with large domestic markets and little international exposure are faring better than those, like “national carriers,” which have much of their exposure on overseas routes, he said. The company has 135 aircraft that are built but awaiting delivery. The majority of these do have customers, but the airframer is in negotiations to defer deliveries.

    Still, Faury admitted that it had “low double-digit” white tail aircraft that do not now have customers and must be re-marketed. Airbus is holding the production rate of its A320-family aircraft to 40 per month but this rate could rise in the second half of next year if demand begins to return.
  • Boeing, after grappling with the grounding of its best-selling aircraft, now faces a commercial aviation market that won’t recover for at least three years, CEO David Calhoun said Wednesday on the company’s third-quarter earnings call. This is slightly more optimistic than IATA’s forecast, which holds that the industry won’t return to 2019 traffic levels until 2024.

    But Boeing is encouraged by the recovery in China, where domestic traffic is approaching last year’s levels. Domestic passenger traffic in the U.S., however, is only 49% of last year’s levels, while international traffic is only 12%. Still, the company sees glimmers of hope in airlines re-fleeting to retire older, less efficient aircraft, Calhoun said. Boeing earlier this year said it would reduce staffing by 10% and has already reduced its workforce by almost 20k employees. The company has had two rounds of voluntary separation and one round of involuntary layoffs. It now expects another 7k employees to leave the company through a combination of voluntary separation and layoffs by the end of the year. Boeing’s total headcount is expected to be about 130k employees by year’s end.

    The company is adjusting to its diminished market by moderating its aircraft-production rates. The B737 family will return to its rate of 31 aircraft per month by 2022. Production of B787 aircraft is expected to fall from 10 per month now to six per month next year, and B777-family aircraft will go from five per month this year to two per month next year. The company also consolidated B787 production at its South Carolina facility. Boeing expects the B777X to enter service in 2022, pending regulatory review.

    It’s encouraged by the regulatory review of the grounded B737 MAX, Calhoun said. The FAA has said it could re-certify the aircraft by year’s end, and American is already scheduling the type for December flights. Boeing has 450 B737 MAXs in storage awaiting delivery to airlines. The company may have to put an unspecified number of those aircraft back on the market, due to order cancellations and deferrals, Calhoun said. The company has updated its flight-control software and is awaiting regulatory clearance. Calhoun admitted that the B737 MAX’s grounding has cost the company market share in the critical narrowbody segment. “When you don’t produce an aircraft for a year and the other guy [Airbus] does, you take a big hit with respect to [market] share,” he said. He further admitted that the A321 fills a niche that Boeing does not.

    The company will return to work on the NMA mid-market aircraft concept, but he did not specify a time. Boeing, for the record, delivered 28 commercial aircraft in the quarter, compared with 62 for the same period last year.   
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State of the Unions

  • Delta and the leadership of its pilot union reached a tentative deal that would prevent furloughs until Jan. 1, 2022. The carrier previously had said as many as 1,900 pilots could lose their jobs on Nov. 1. The deal, struck between management and the Air Line Pilots Association (ALPA), would reduce line-pilot compensation by 5% but also would allow for more favorable scheduling terms, ALPA said. The agreement now goes to the union’s Master Executive Council (MEC) before membership votes on it.

    Delta has agreed to push back the furlough date until Nov. 28 in order to give the union more time to weigh the deal and for membership to vote. “While this agreement is still subject to approval by the MEC, we are confident this can help Delta to be better positioned through the long and choppy Covid-19 pandemic recovery,” John Laughter, senior vice president of flight operations, said in a memo to pilots. “If the federal government extends the CARES Act payroll support program under the same terms, the deal would “pause,” resuming only after that new funding expired,” ALPA’s Delta MEC said in a statement.
  • House Speaker Nancy Pelosi (D-Calif.) and the White House have reached a stalemate on further coronavirus aid, and standalone bills for the airline industry have stalled in both the House and Senate. Both Pelosi and Treasury Secretary Steven Mnuchin have said negotiations could resume after the Nov. 3 election, but Senate Majority Leader Mitch McConnell (R-Ky.) has been noncommittal. When the CARES Act expired on Sept. 30, airlines began furloughing more than 30k employees.
  • Allegiant is furloughing up to 130 pilots on Nov. 1. Allegiant has reduced its management and support headcount by about 300 employees, through a combination of voluntary separation and leaves of absence but noted on its third-quarter earnings call that it did not reach an agreement with its pilot union on a voluntary program.
  • Hawaiian Airlines will continue operating some Ohana-liveried ATRs on routes subsidized by the federal government’s Essential Air Service program. Hawaiian had previously said it would shutter the inter-island turboprop service on Nov. 1, due to issues with pilot scope clauses. The mainline airline flew few hours while the state was quarantined, which meant that mainline pilots flew very few interisland hours with the airline’s B717s and A320s. This triggered the scope clause in the pilot contract on Ohana flights, which are operated by Empire Airlines as a regional feed. Hawaiian has said it could restore the Ohana operation if interisland demand starts to return.
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Landing Strip

  • Groupe ADP, which runs the two main airports serving Paris, now faces another severe wave of Covid infections in the French capital, leading to lockdowns on people and businesses. During the brief summer months when traffic within Europe showed signs of revival, Paris Orly was the favored airport because it’s close to the city. De Gaulle airport, by contrast, is farther away and more dependent on intercontinental connections. For the first 20 days of October, both airports saw flights down 60% y/y but passenger volumes down 76%. Those are disappointing declines following the early summer recovery. Things are changing fast but as of now, the winter ahead looks bleak for all European airlines and airports.
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Covid Crisis 2020

North America

  • Delta and WestJet received U.S. DOT approval to proceed with their planned joint venture. But it comes with caveats. WestJet’s lower-cost Swoop unit cannot be part of the agreement. The two carriers must surrender eight roundtrip slots at New York LaGuardia through a blind auction sale — new entrants or carriers with a limited LaGuardia presence will be eligible buyers. In addition, WestJet must be open to interlining with other U.S. airlines for at least the next five years. The competitive impact of the JV, meanwhile, will be subject to a DOT review every five years, though the carriers won’t have to reapply for extension. Together,

    Delta and WestJet have a 27% share of all U.S.-Canada transborder capacity. That’s still considerably less than Air Canada’s 45%, which would go to 57% with United. The two have a joint venture covering transatlantic itineraries but never developed one for the transborder market. Delta and WestJet began codesharing in 2011, with WestJet more recently dumping American as a partner.

    One oddity about the transborder market: U.S. LCCs are largely absent: Southwest doesn’t serve Canada. Neither does Spirit nor JetBlue nor Allegiant nor Sun Country. The exception is Frontier, with a lone Denver-Calgary route. Of course, U.S. LCCs do carry Canadians crossing the border to catch flights at airports like Buffalo, Plattsburgh, and Bellingham, just south of Toronto, Montreal, and Vancouver, respectively.  
  • In a letter to employees, Delta CEO Ed Bastian explained that because of its load factor caps and middle seat blocks, the airline actually had 30% less capacity for sale than its three largest rivals last quarter. Even so, it produced 3% more passenger revenue, a testament to Delta’s ability to extract yield premiums even during the crisis. Bastian added that rates of cash burn are less severe at Delta than at major global competitors, and that cash flows from flying should turn positive sometime next spring. He points out that Delta, United, American, and Southwest combined have raised almost $100b in new cash since the start of the pandemic. The letter includes a plea to vote in Tuesday’s election, evoking words of the late Georgia Congressman John Lewis: “Your vote is precious, almost sacred.”   
  • If vaccines are the ultimate salvation, airlines see testing as the next best thing to reviving normality in the age of Covid. United said last week it will trial free same-day Covid testing for passengers travelling on specific flights from Newark to London Heathrow between Nov. 16 and Dec. 11. Passengers can opt out of the testing by selecting a different flight. The point is, everyone aboard the targeted flights — and public health officials in the U.K. — can rest assured that everyone on board is Covid-free. That’s of course assuming 100% accuracy, which has been an issue with the sort of rapid-results test United is using. But the technology has improved.

    Governments aren’t yet fully convinced, which is why quarantines remain a primary if blunt and costly tool to avoid importing the virus from abroad. A little bit more about United’s trial: Passengers traveling on the targeted flights need to make a testing appointment, and have the test administered at least three hours before the flight. The testing site, run by Premise Health, is located near one of United’s lounges in Newark airport. Results are returned in roughly 30 minutes.
  • Amazon, one of America’s largest spenders on air travel, said during its earnings call that it’s saved nearly $1b on travel this year. How much did it lose by not being able to send employees to meet with potential clients? That, it didn’t say. 
  • After shrinking an annualized 31% in Q2, the U.S. economy rebounded to grow 33% in Q3. So concludes the Bureau of Economic Analysis, part of the U.S. Commerce Department, in an initial estimate of the country’s gross domestic product (GDP). Still, the economy remains about 4% smaller than it was this time last year. Certain parts of the economy remain strong, led by anything pertaining to houses and the things people do inside houses. That means residential real estate itself, technology that facilitates work from home, home entertainment products like video games and streaming video, supermarkets selling food consumed at home, furniture for the home, home exercise equipment, and so on.

    Auto sales are bouncing back nicely after a Q2 shock. Many businesses that were locked down in Q2 reopened in Q3. Non-urgent medical procedures deferred in Q2 were undertaken in Q3. Though government stimulus checks and generous unemployment benefits stopped in Q3, the money was still getting spent. The finance sector is doing fine. The energy sector less so. State and local governments are hurting. But worst hit is the labor-intensive travel market, and the leisure and hospitality market more generally.

U.S. Airlines Earnings

U.S. Airlines: Q3 Financial Results

Revenue and profit figures in millions

RevenuesNet Net Excluding Special ItemsOperating Margin Excluding Special ItemsNet Margin Excluding Special ItemsRevenues Y/YExpenses Y/YDifferenceASM/KsFuel Y/YLaborAverage Fuel Price/GalPretax Margin
American$3,173-$2,399-$2,818-107%-89%-73%-40%-34%-59%-75%-16%$1.23 -114.6%
Delta$2,645-$5,379-$2,096-89%-79%-79%-52%-27%-63%-78%-32%$1.25 -97.9%
United$2,489-$1,841-$2,374-108%-95%-78%-48%-31%-70%-78%-27%$1.31 -121.1%
Southwest$1,793-$1,157-$1,173-88%-65%-68%-30%-38%-33%-64%-16%$1.23 -93.4%
Alaska $701-$431-$399-75%-57%-71%-37%-33%-55%-74%-18%$1.32 -58.5%
JetBlue$492-$393-$477-128%-97%-76%-39%-37%-58%-78%-17%$1.23 -140.2%
Spirit$402-$99-$215-62%-54%-60%-24%-35%-33%-63%2%$1.27 -68.9%
Allegiant$201-$29-$69-39%-34%-54%-23%-31%-9%-50%-11%$1.32 -32.0%
Hawaiian$76-$97-$173-287%-227%-90%-41%-49%-87%-88%-89%$1.24 -321.4%

Source: Company reports

Sub-Saharan Africa

  • South Africa’s fiscally strained government controversially authorized more than $600m in new funding for its national airline last week. It was hoping to find outside investors to do the dirty work but hopes dimmed when Ethiopian Airlines failed to bite. South African Airways (SAA), bankrupt before the Covid crisis ever began, plans to revive as a much smaller airline. Its fleet will go from 44 planes to six. Its staff will shrink by some 80%. The hope is that growth can be restored over time.

    In the meantime, rival Comair (a British Airways partner) secured the necessary financing and union agreements to itself exit bankruptcy. There’s now reports of another carrier, startup Lift Airlines, jockeying to enter the market. It’s backed by a former Comair CEO who founded the carrier’s LCC unit Kulula. SAA by the way, is still grounded but its own LCC unit Mango is flying again.
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Feature Story

Southwest speaks to Airline Weekly

Southwest Chief Commercial Officer Andrew Watterson spoke to Airline Weekly Editor Madhu Unnikrishnan last week about the carrier’s evolving network strategy and why outdoor adventures, as he put it, are fueling Southwest’s traffic now. (This interview has been edited and condensed for clarity.)

Airline Weekly: In the past, Southwest was really focused on connecting the dots that already existed on the map. Since then you’ve thrown a whole bunch of new dots on the map. What’s the thinking behind the “snow and sun” routes?

Andrew Watterson: That’s where customers are traveling right now, because business travel is down quite a bit. Leisure travel is holding up much better than perhaps many expected especially in post summer. And people have a desire to go into kind of more outdoors leisure versus indoor leisure, which in the winter means either snow or sun. Either in the mountains to go skiing or to go to the beach. So that’s when we see a lot of our additional capacity, in Q4 into Q1. For a long period of time, we’ve gone between depth and breadth. It’s not uncommon in downturns for us to use breadth as a way to cast a wider net for passengers to fill airplanes.

Airline Weekly:  Southwest is less exposed to international than a lot of your competitors, but you do serve some international routes, mainly to beach destinations. Are you seeing the same strength and demand for your international sun destinations as you are with Florida or the Gulf Coast or California?

Andrew Watterson: That is correct. We are seeing to the ones who are operating we’re seeing robust demand to the same as, Florida, and I also would add, in Hawaii, which is seeing robust demand that keeps getting pushed back by the quarantine. We don’t fly to all the same international [destinations] as before because each country has its own requirements for visitors. Some are essentially discouraging visitors, and some are changing [travel restrictions]. So we’re flying to the ones that have stable requirements.

Airline Weekly:  What was the thinking behind expanding to O’Hare and Bush Intercontinental?

Andrew Watterson: We embrace having multiple airports in a metro area, and it does quite well for us. In Chicago, we have a very good operation at Midway that we’re very pleased with. It’s very convenient to the downtown and the South Side. But for corporate campuses in the North Side, getting to Midway is more difficult, especially if they have to drive past O’Hare. And so, we had always contemplated that if O’Hare space were available, we would like to take advantage of it, so that we could complement Midway. We were able to get space there that we couldn’t have gotten two years ago.

The city has done a wonderful job with the terminal at Midway. At the end of the day, there’s only so much space that you can have for air operations in Midway, so you’re just constrained.

Hobby will always be our anchor in the Houston area, but just like in Chicago and in the West Coast, we find that having multiple airports is desirable, especially for those in the northern suburbs. So by having a presence in the north, we can complement Hobby.

Airline Weekly: Can you tell us sort of the latest on demand trends and how bookings are looking for the upcoming holiday season?

Andrew Watterson: We saw that kind of after lockdowns ended in patchwork fashion in May, we started seeing a very strong run up in leisure demand in May and June. The next virus upsurge around the Fourth of July really put a flatline on demand growth, but it didn’t go negative like it did in the spring. About mid-August, you started to see demand start to grow again. It wasn’t like a rocket ship like it was in  early summer. It was a more steady-as-she-goes, and we’ve seen that steady-as-she-goes demand increase from mid-August through now.

It’s true during Covid times that people still travel for holidays, even if demand for business is depressed, holidays still get people to travel. And that’s true whether it’s Columbus, a fourth of July, or Thanksgiving.

The booking curve has shifted throughout the pandemic. After the Fourth of July, booking got quite close in. That’s now lengthened, but you can quibble that it’s lengthened because it covers the holidays now. The booking curve is still skewed closer, but it’s not as bad as it was in July.

Airline Weekly: Southwest CEO Gary Kelly mentioned the possibility of codesharing in the future presumably to help advance your goal of capturing more corporate traffic. Would there be an international partnership, or are domestic codeshares a possibility?

Andrew Watterson:  Codeshares have been on our roadmap for a couple of years. It’s just never made the list of technology projects. We’ve allocated our tech resources over the years for things like ETOPs and going to Hawaii, for corporate GDS. He was affirming it’s still in our roadmap.

When it will happen  — we don’t have a timeline yet. It would be modest in nature. Our agreement with our pilots is such that if we do this, we’ve agreed that it would be a modest venture, not a big one.  Our pilots agreement allows for codesharing and interline, subject to a volume threshold that would basically prevent us from being too successful doing that before we have to use our own metal.

Going into GDS with full functionality, which we do for corporate sales, was a precursor to interlining and codesharing. The standard way to [interline and codeshare] is through GDSs. That’s a feature we now have [with the Amadeus reservations system], although its intention was for more corporate bookings.

Airline Weekly: Southwest position has made it abundantly clear that bags fly free. Do you plan to raise revenues through other ancillaries?

Andrew Watterson:  We have less ancillary from fees. We want to find ancillary products that people are happy to purchase not obliged to purchase. The ones we do offer have good customer adoption, and good customer satisfaction. We want you to happily give us your money, not begrudgingly give us your money.

Airline Weekly: I have to ask what could you possibly make people happy to spend money on?

Andrew Watterson: People are happy to buy upgraded boarding at the gate. The same with Early Bird. We sell you Wi-Fi on our aircraft. It’s $8. It’s not the fastest Wi-Fi in the world, but it’s solid Wi-Fi, and it’s only eight bucks. The [ancillaries] we have, people actually use.

Airline Weekly: And what about cargo? A lot of airlines have seen cargo take off as a big part of their revenues during this pandemic. Have you seen a similar trend?

Andrew Watterson: Our cargo revenues have held up quite well. We’re a domestic cargo business, and we feel like we have a flattering market share of domestic cargo for passenger airlines. The cargo market was out of balance — transoceanic. So really it was the lack of widebodies flying passenger service that made there not be enough of a supply of cargo for longhaul. Domestically, that didn’t really happen. You still have UPS, FedEx, and Amazon. And yes, it’s less domestic passenger, but the cargo market did not get out of balance domestically like it did in longhaul international.

Airline Weekly: Could you give a rough number on what percentage of Southwest traffic connects both in normal times and now?

Andrew Watterson: In normal times, about 25% of our customers are purchasing connecting itineraries. I don’t know what the number is at the moment, or I actually don’t know if we disclose that.

Airline Weekly: There has been a lot of chatter that Southwest is starting to look suspiciously like a hub-and-spoke carrier. Is this the way of the future or is it a temporary reaction to grab market share now where you can?

Andrew Watterson: For decades, we have had connecting traffic. For one decade, we’ve actually scheduled flights for connections. We have a subset of our flights — less than 20% — that we actually schedule, thinking about connections. The rest of the connections are because we get big in a certain city, and once you’re big, connections naturally happen. As a result of that, 25% of our customers buy a connecting itinerary. We are not a hub-and-spoke carrier, but we are not dogmatically saying only point-to-point passengers are welcome. The connections are the icing on the cake. The cake is point-to-point.

In Covid times, there’s not enough demand to fill up an aircraft for point-to-point, even though our customers prefer it. As a result of that, we do see more connecting demand now than the normal times because demand isn’t sufficient to have the airplane only be point-to-point. So, it’s more of the changed nature of demand. But there’s been no change in strategy.

Airline Weekly: Other airlines have mentioned their mid-continent connecting hubs are doing relatively well aggregating a lot of traffic. Is that generally true of big mid-continent Southwest stations like Chicago and St. Louis?

Andrew Watterson: It’s more about the destination. Denver is doing very well for us. Phoenix is doing very well for us. And you have connections there, but you have a lot of people wanting to go there for the outdoor adventures. Colorado to their credit kept Covid cases under control, all throughout winter and all throughout summer. Because we had a good schedule there and because there’s lots of people going to Colorado, that provided connectivity just because there are a lot of flights. And so the combination of those two things made Denver and Phoenix do quite well.

Airline Weekly: Could you give us an update on Hawaii bookings now that the state’s opening up a little bit?

Andrew Watterson: All throughout the downturn, we would see the state of Hawaii would have a quarantine restriction that would expire on a certain date. And we would see substantial bookings on that date forward. Every time they would shift the quarantine back weeks, we see the booking shift to the end of the quarantine. That’s continued. Now that they have the testing program that allows you to avoid the quarantine, we see the bookings sticking quite nicely.

We decided to be a little bit conservative, and right now we have what we call our essential air service, twice a day from Honolulu to Oakland, that we’ve flown throughout the pandemic, just to provide transportation to and from the islands. We waited till Nov. 4 to start our full Hawaii schedule, just to let them get the wrinkles ironed out and to make sure there are no problems. Bookings look solid for those and forward. As long as it’s safe to go to Hawaii, for the people of Hawaii and if they allow visitors, we see substantial demand.

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Around the World

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

Around the World: November 2, 2020

Airline NameChange From Last WeekChange From Last YearComments
American-10%-62%Network strategy in a nutshell: more DFW/CLT; PHX/MIA leisure chase; east/west coast help from allies; PHL/ORD await int’l revival
Delta-10%-44%That was then: U.S. received a record 40m visitors from overseas in 2019 (NTTO)
United-11%-63%Latest TSA airport traffic counts show a y/y decline of 63% during final seven days of October
Southwest-8%-30%Provides more detail on its new Chicago ORD and Colorado Springs service; both get Denver, Dallas, Phoenix flights
Alaska-9%-45%Complains that Aeromexico terminated a codeshare agreement after joining forces with Delta; anticompetitive?
JetBlue-11%-38%Raised more than $4b in cash since crisis began in March; exploring option of pledging loyalty plan for more gov’t or private loans
Hawaiian-10%-52%First B787-9, though now delivering in Sept., 2022, probably won’t enter service until early 2023
Spirit-5%-53%Regional carrier Silver Airways entering Jacksonville with 2x weekly flights to Fort Lauderdale and Tampa
Frontier(not publicly traded) Phoenix, Los Angeles LAX, Fort Myers three notable markets where it’s flying more seats this fall than it was last fall
Allegiant-5%-19%Florida seeing more activity than most markets but trends most bullish in Gulf Coast cities more specifically
SkyWest-14%-51%E175 block hours down less than that for its CRJs
Air Canada-13%-69%Owns 10% of regional partner Chorus/Jazz, which last week received a takeover offer from unnamed source
WestJet(not publicly traded) Will this week open new WestJet “Elevation” lounge at its home airport Calgary
Aeromexico-5%-72%Mexico the largest international airline market from the U.S. now; Canada number two
Volaris-12%-20%Exploring different financial options for raising more funds
LATAM-2%-86%Chile votes to change constitution; was experiencing social unrest before the Covid crisis
Gol-20%-57%Argentina now says no more flights at El Palomar airport near Buenos Aires; Jetsmart to move to Ezeiza; Flybondi threatening to close
Azul-17%-57%In Argentina, Aerolineas Argentinas rebuilding int’l network as border controls ease
Copa-13%-52%Peru suffering South America’s worst Covid outbreak now, based on deaths per 100k people
Avianca-12%-92%Secures four-year labor deal with pilots; experienced long pilot strike, remember, in 2017
Emirates(not publicly traded) FlyDubai launched new route to Maldives last week; demand strong enough to justify more frequencies
Qatar(not publicly traded) Kuwait Airways becomes first recipient of -800 version of the A330-NEO; took delivery of two units last week; six more coming
Etihad(not publicly traded) Kuwaiti LCC Jazeera adds Oman’s capital Muscat to its network
Air Arabia-1%-19%Bahrain’s Gulf Air introduces new “boutique fares” to capture different market segments
Turkish Airlines-13%-23%Earthquake, currency woes, tensions with France all adding to Turkey’s Covid-era woes
Kenya Airways0%20%Expands interline agreement with Qatar Airways to cover more routes
South Africa Air.(not publicly traded) South African airports saw 81% y/y drop in traffic during Sept. (Airports Company South Africa)
Ethiopian Airlines(not publicly traded) Air Peace, a Nigerian carrier, looking to start flights to Johannesburg before year end (Daily Independent)
IndiGo-5%-10%Cargo revenues got stronger as calendar Q3 progressed; by Sept., they were up 27% y/y despite flying less capacity
Air India(not publicly traded) Rose among thorns: Air India Express, according to reports, had strong profits in fiscal year that ended just before crisis
SpiceJet-5%-57%Announces a bunch of new Bangladesh routes to take advantage of new air travel bubble
Lufthansa-12%-52%Of the major European airline hubs, Frankfurt perhaps least dependent on leisure traffic; that’s a disadvantage now
Air France/KLM-15%-74%First A220 expected to arrive next winter; should help improve shorthaul margins
BA/Iberia (IAG)-12%-82%Probably wouldn’t mind if Air Europa just failed but Spanish gov’t won’t allow that
SAS-27%-90%Recapitalization plan, backed by governments of Sweden and Denmark, now complete
Alitalia(not publicly traded) Hopes that currently robust cargo business will help it through the initial relaunch phase
Finnair-5%-94%Helsinki airport, which closed one of its 3 runways from April to Aug., will close it again this winter given dire traffic forecast
Virgin Atlantic(not publicly traded) U.K. government tells citizens to avoid all non-essential travel
easyJet-8%-59%Sold another nine A320-family planes to further build its cash reserves; calls sale-leaseback market “robust”
Ryanair-10%-2%Looking to capitalize on Canary Islands quarantine-free status by adding more flights from London; others doing the same
Norwegian-10%-99%Wizz Air’s big domestic Norwegian expansion a big challenge; another is what to do with all those B787s
Wizz Air-8%-16%Cranky Flier blog describes its rise to pre-crisis prominence, post-crisis ambitions
Aegean-7%-68%New sales campaign offers new discounts every Tuesday
Aeroflot-5%-47%CEO tells Rossiya 24 that many of its Russian rivals could wind up in bankruptcy due to crisis
S7(not publicly traded) Moscow SVO highlights Sochi, Anapa, Simferopol as busy routes right now; int’l recovery led by Istanbul, Antalya, London
Japan Airlines-11%-46%Int’l load factor was just 19% in Sept., with ASK capacity down 80%
All Nippon-5%-39%ANA branded domestic flights saw 68% y/y decrease in pax volumes in Sept.; Peach’s domestic decline was 48%
Korean Air-6%-20%South Korea joins China and Vietnam in showing a solid return to economic growth last quarter
Cathay Pacific-10%-48%Says majority of its pilots and flight attendants have accepted new contracts that include big concessions
Air China-8%-28%Latest central government economic plan continues to see aviation as a growth industry
China Eastern-8%-11%Original plans had it introducing 34 B737 MAXs this year, followed by 12 next year
China Southern-7%-17%Sichuan Airlines, based in Chengdu, takes another A321 NEO on lease from AerCap; now has 13
Singapore Airlines-5%-64%Maintenance arm dissolving a venture it has with Cebu Pacific of the Philippines
Malaysia Airlines(not publicly traded) Rival AirAsia X denies reports that it’s liquidating its Indonesian venture
AirAsia-3%-71%Thai unit operated 96% of normal domestic capacity in sept. filling 65% of seats; capacity will be up y/y for Q4
Thai Airways-4%-61%About 5k workers have accepted voluntary early retirement (Xinhua)
VietJet-4%-30%Typhoon disrupts air travel in parts of the ASEAN region, including Vietnam
Cebu Pacific-6%-58%AAPA, which represents Asia-Pacific airlines, warns of liquidations but encouraged by emerging travel bubbles
Qantas-8%-35%Takes delivery of the world’s first A321 freighter (converted from passenger configuration)
Virgin Australia0%-43%City of Melbourne emerges from strict 112-day lockdown
Air New Zealand-7%-50%Cutting more flight attendant jobs as int’l markets remain closed
Brent Crude Oil-10%-36%Venezuela now producing less than 400k barrels of oil per day; was close to 3m a few years ago

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

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