Issue No. 792

Too Many Fish in the Sea

Pushing Back: Inside This Issue

In another unwelcome first for the airline industry, Emirates — the mighty airline of Dubai — suffered a half-year loss. Mercifully, it’s a pretty big cargo player, at a time when cargo is a major distinguishing factor between carriers with horrific losses, and carriers with losses somewhat more bearable. More worrisome to Emirates than its half-year red ink? Its future ability to fill giant planes. 

Norwegian’s problems are more existential — will it survive the winter? Air Canada hasn’t gotten much love from its government but still might. American and Southwest said the run-up to the presidential election, combined with the latest Covid spike, is slowing demand momentum for the final two months of 2020. That awful 2020.

Southwest is separately adding yet another new sunshine spot in Florida, as United returns to the transcon market from New York JFK. Hong Kong and Singapore have their travel bubble set to open, eliminating the need for traveler quarantines. On the other hand, travel restrictions are tightening again in Europe and the U.S. The U.K., for one, doesn’t want anyone to leave the country for non-essential reasons this month. More U.S. states including California are asking people to self-quarantine for two weeks if they arrive from another state.

Most major airlines have now reported their summertime financial results. But there’s still some earnings action left. Britain’s easyJet will show its numbers this week. So will Panama’s Copa. Also, executives from leading airlines and suppliers from around the world will present at an online forum this week jointly hosted by Skift and Dallas-Fort Worth airport.  In the meantime, news on the vaccine front is encouraging. And governments are slowly accepting passenger Covid testing as an alternative to quarantines. Nevertheless, meaningful demand recovery seems at best still months away.


“Despite all these challenges, now more than ever, we have absolutely no doubt that the airline industry will recover. The timing of recovery, I leave to your own crystal balls.”

Air Lease Corp. CEO John Plueger


July-September 2020 (3 Months)

  • Air Canada: -$515m/-$760m*; -129%
  • Norwegian: -$105m/-$292m*; -151%
  • Garuda: -$368m/-$431m*; -156%
  • SpiceJet: -$15m/-$49m*; -36%
  • Cebu Pacific: -$113m/-$145m*; -336%
  • Jeju Air: -$56m; -118%
  • Air Arabia: -$12m; -20%
  • Air Astana: -$22m/; -18%
  • Chorus/Jazz: $15m/-$25m*; -4%

April-September 2020 (6 Months)

  • Emirates: -$3.4b; -79%

*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’s a symbol of globalization, in a world with closed borders. That captures the uncomfortable predicament of Emirates, the Dubai-based giant entirely dependent on international traffic. Mercifully, it’s a big cargo player, which enabled it to muster some $3b in revenues during the six months from April through September (the figure excludes its Dnata subsidiary which produced another $644m). Normally, Emirates generates about $13b during its fiscal first half.

    As for losses, the airline’s net result for the half amounted to $3.4b. Operating margin, though it didn’t disclose this explicitly, appears to have been about negative 79% based on year-ago figures and this year’s 75% drop in y/y operating revenues, alongside a 52% fall in operating costs. Passenger ASK capacity was close to zero for eight full weeks after Dubai halted all scheduled flights to contain the Covid pandemic. A gradual resumption of passenger service began in late May, but ASKs for the entire half were down 91%.

    It’s a sobering time for Emirates, which hadn’t posted a half-year loss in 30 years. Throughout the 2010s, recall, it struggled to earn robust profit margins but nevertheless always remained in the black. As discussed in Airline Weekly’s Oct 25th feature story, its large fleet of giant A380s and B777s are a challenge as it now faces what could be several years of depressed air traffic. At the same time, future competitive threats loom from intercontinental-minded Indian carriers and LCCs equipped with longer-haul narrowbody aircraft. Emirates, remember, is not part of a major alliance, which makes those giant planes all that much harder to fill. A shift to smaller A350s and B787s should help over time.

    Currently, a weaker U.S. dollar means Emirates can earn more every time it sells in euros and yen and yuan, etc. It’s already taken steps to unbundle its product — even its premium product — to drive more ancillary sales. It plans a premium economy product. It has new interline arrangements with Airlink and FlySafair to help fill Johannesburg, Cape Town, and Durban flights. With help from a $2b capital injection by Dubai’s government, cash reserves remain strong. The airline cut its workforce by more than a third. Its loyalty plan, meanwhile, recently topped 27m members.

    Naturally, the future success of Emirates will depend on the future success of Dubai. Will the city still be a tourist magnet? Will it still be a central node in the global economy? Will it still be a premier aviation hub?
  • It began the decade with great hopes. Great excitement. Great potential. Air Canada was an impressive turnaround story in the 2010s, beginning the period in recovery from another near bankruptcy but ending it with a rock-solid balance sheet and good if not great profit margins. To take things to the next level, it started 2020 armed with a new loyalty plan, a new reservation system, new narrowbody planes, a 10% shareholding in its regional partner Chorus, maturing joint ventures (with United, Lufthansa, and Air China), and a deal to buy its rival Transat. In January, presenting at an AltaCorp investor event, executives insisted that Air Canada was better prepared than ever to withstand a future economic shock.

    And then one came, and it was bigger and worse than anyone could ever have imagined. Now, in a year of dashed hopes for all airlines, Air Canada finds itself more hobbled by the Covid crisis than most. Canada’s government did little to support its airline sector financially. And the country adopted some of the tightest travel restrictions anywhere, including a near-blanket ban on foreign nationals and a mandatory 14-day quarantine — with threats of jail time for noncompliance! — for anyone entering the country. What’s more, Canada’s Atlantic provinces sealed off their own internal borders to travelers from elsewhere in the country. Even so, Covid cases are sharply rising in Canada, dampening airline hopes for any imminent reopening of borders.

    Looking back at the third quarter, the super-tight restrictions meant that Air Canada suffered even steeper traffic and revenue declines than its peers in the U.S. It suffered bigger Q3 loss margins too, with operating margin at negative 129%. Revenues were down 86% y/y, while operating costs dropped only 62%. Capacity, measured in ASKs, shrank 82%. The carrier did get some cargo relief. Its cargo revenues jumped 22% y/y and represented almost 30% of total revenues. Transatlantic routes, including those to India and the Middle East, saw a particularly large cargo jump. Air Canada is now looking to permanently make cargo a more important part of its business, building capabilities to handle e-commerce for example, and planning to convert some B767s to freighters pending pilot negotiations.

    Still, cargo’s helpful contribution  wasn’t enough to prevent 20k job cuts at Air Canada, this after adding 10k jobs during the previous five years. It’s also cutting routes, exiting several regional airports, accelerating retirement of 79 planes, deferring some B737 MAX and A220 deliveries, and even cancelling 10 MAX and 12 A220 orders. The cancellations represent 40% of all outstanding orders, which highlights just how radically forecasts for future business have changed. Air Canada will only fly about 25% of its capacity this quarter. But it does have flexibility to exercise options with Boeing and Airbus if demand recovers faster and quicker than expected. It can also look to the many used planes now available cheap and on short notice — it last year grabbed eight A321s made available when Iceland’s Wow Air went bust.

    Is there any good news besides cargo? Well, there’s some degree of domestic traffic recovery in transcon markets and routes within western Canada. Trends for Aeroplan and its associated credit cards are still positive. Rouge, the company’s low-cost unit, is now flying again. A trial to reduce quarantine time involving Covid tests is underway in Alberta province, which Toronto might adopt if successful. Finally, Ottawa seems ready to provide some airline industry financial support, prompting Air Canada to postpone some route cuts until it sees what’s on offer. MAXs should be back next quarter. And the Transat acquisition remains on track but at a much lower price (the deal still requires regulatory approval in Canada and the E.U.).

    Air Canada, meanwhile, is preparing to launch Doha flights next month, with the help of new partner Qatar Airways. India and China routes, when fully restored, should recover rather quickly given their large family-visit component. The airline is currently using all-business class A319s, typically used for sports charters, on leisure routes to places like Florida and highish-yield Caribbean destinations like Barbados. To encourage more travel, it’s offering free Covid health insurance and unlimited travel flight passes for a fixed fee. Transat’s A321 NEOs and leisure-oriented routes should help in rebuilding transatlantic business. Corporate demand, on the other hand, could take three to five years to recover, management thinks. It acknowledges some demand possibly lost forever to videoconferencing. And it admits that convenience will be sacrificed as it cuts flights and dismantles routes dependent on connecting feed — this too will deter some business travelers.

    The immediate focus, however, is on the upcoming Florida peak season, bookings for which tend to occur right about now. It’s not an enjoyable way for longtime CEO Calin Rovinescu to exit the stage. But retire he will in February, handing the controls to CFO Michael Rousseau.
  • Survival. That’s the number one goal for Norwegian at the moment, as cash reserves dwindle. Just after the Covid crisis began this spring, the Oslo-based LCC avoided extinction by radically restructuring its costs and financial obligations. It was able to do so without the help of a bankruptcy court, thanks to some government aid, coupled with the limited negotiating leverage of its creditors and suppliers — better they do a deal with Norwegian than watch it die. Aircraft lessors, for their part, winced at the thought having to find new homes for all those B737s and B787s in the middle of a worldwide industry crisis. AerCap and BOC, in fact, two major lessors, uncharacteristically agreed to replace the money Norwegian owed them with ownership stakes in the airline — AerCap and BOC are now its two largest shareholders.

    Norwegian did similar debt-for-equity swaps with lenders too. It cancelled its large Boeing order, consisting of five remaining B787s and 92 B737 MAXs. It secured major pay and work rule concessions from its labor unions. Combined with concessions secured from various suppliers, this brought the airline’s cost base to levels that seemed to give it a fighting chance of having a sustainable business when traffic starts to recover, presumably next summer.

    Unfortunately, it might not make it to next summer. During Q3, despite a period of modest demand recovery throughout Europe, Norwegian suffered close to $300m in net losses excluding special items, and a negative 151% operating margin. With only 25 planes in service at the end of the quarter, flying mostly domestic routes in Norway, revenues were down not, say 66% y/y like Ryanair, but 91%. ASK capacity was similarly down 94%. A 72% drop in operating costs was impressive but not enough. New travel restrictions this fall, plus the onset of the offpeak season, means that only six planes will operate this winter. So it begged for more government money. And the government last week said no.

    Why no? Because Oslo understands that Norway doesn’t really need Norwegian. Wizz Air is now offering some of the same domestic routes. A new startup airline with prominent backers should soon enter the scene. There’s SAS of course. And there’s Wideroe flying domestic routes. And besides, much of Norwegian’s flying is from bases outside the country, most importantly London where the airline’s longhaul services are concentrated.

    Thus, in its own words: “There is a significant risk that the company becomes insolvent and enters into bankruptcy.” To be clear, it’s not there yet, and management continues to seek more working capital from various stakeholders other than the state. It also continues to cut costs, announcing more layoffs last week.
  • Indonesia’s Garuda recorded a negative 156% operating margin in Q3, good news only when compared to its negative 368% hammering in Q2. The government-backed carrier, with debt troubles even before the crisis, saw Q3 revenues plummet 84% y/y on 65% less capacity. Operating costs declined 52%. To stay alive, Garuda is renegotiating contracts with lessors, bondholders, labor unions, and so on. It’s receiving government assistance. And commercially, it’s permanently closing unprofitable routes, offering novel products like inflight weddings, and making money where it can with charter flights and cargo.

    Typically, Garuda gets about 6% of its total revenue from cargo. Last quarter it was 28%. The company is more generally “reviewing the whole business to prepare for a new era after Covid-19.” Helpfully, Garuda is a domestic-heavy airline with a large domestic market (Indonesia has 270m people, more than any other country except China, India, and the U.S.). Garuda currently has a domestic market share of about 35%, though this was 43% last year (its chief competitor is Lion Air). Also helpfully, Garuda has a 68-plane low-cost unit called Citilink, whose Q3 ASK capacity was down just 41%. Citilink was starting to fly A330 NEOs just before the crisis began, to pursue longhaul expansion that’s now suspended.

    One important market that will determine the timing and degree of Garuda’s recovery is religious pilgrimage traffic to Saudi Arabia. Another is the busy Singapore route.
  • In India, the LCC SpiceJet escaped from the harrowing July-to-September period with a negative 36% operating margin. That’s one of the least bad results among carriers worldwide, and better than its rival IndiGo’s negative 52% figure for the same quarter. SpiceJet was also rare in seeing its total operating revenues for calendar Q3 (down 63% y/y) decline less than its passenger capacity (down 71%). That’s usually a sign of ample cargo revenues and, sure enough, SpiceJet fortuitously began building its cargo capabilities before the crisis, so much so that its cargo revenues expanded nearly 200% y/y last quarter. It now flies 17 cargo-only planes including three widebodies to serve Europe, Africa, and central Asia. Cargo thus accounted for about a fifth of revenues last quarter, earning a segment margin of positive 9%. Cargo, keep in mind, was never much of big business for India’s airlines because India isn’t a major exporter.

    There’s actually another key component to SpiceJet’s relative success in keeping loss margins subdued. Large numbers of Indian citizens live and work abroad, meaning lots of repatriation assignments for carriers like SpiceJet. This business was so brisk, in fact, that the LCC began wet-leasing A330 NEOs to handle missions to places like London and Toronto. SpiceJet got creative too, launching seaplane service within Gujarat province, for tourists wishing to visit the Statue of Unity.

    Ultimately, however, for profits to return, SpiceJet’s core passenger business needs to revive. There was some revival last quarter as lockdowns eased. But Indian carriers are still not allowed to operate more than 60% of their pre-crisis capacity and are still subject to fare caps. As a major B737 MAX customer, SpiceJet did receive compensation from Boeing, which helped the LCC’s otherwise weak balance sheet. It looks forward to flying the plane again next quarter, alongside its Q400 turboprops deployed on regional routes. Fuel is cheap, which not only helps airlines but also India’s entire oil-poor economy. Non-fuel cost cutting achievements during the past few months, management believes, will have a longterm positive impact.

    As an LCC with a premium economy product, it might also be well positioned to win price-sensitive business travelers when they start to return. Hence the sentiment that the “worst is behind us.”
  • Cebu Pacific carries some cargo too, but not enough to avert a disastrous negative 336% operating margin last quarter. With tight border controls and extreme travel restrictions throughout the ASEAN region, Cebu’s Q3 revenues plummeted 89% y/y, but operating costs declined just 52%. Unlike most carriers around the world, which managed to restore a meaningful amount of capacity in Q3 relative to Q2, Cebu’s Q3 ASKs were still down 94%. Passenger counts were down 96%. Some domestic flying helps a little. But even here, domestic quarantine rules kept demand to a minimum. Of all major East Asian markets, Cebu noted, the Philippines has the most restrictive domestic travel rules.

    This month, the airline was due to receive a second all-freighter ATR turboprop, which will be welcome. Cargo yields last quarter rose 95%, and cargo revenues accounted for two-thirds of Cebu’s Q3 total (it was 8% of revenues a year ago). The government did provide some modest airline relief, include airport fee waivers. Earlier this quarter, tourist spots like Boracay started reopening. But Cebu expects the recovery to be long. Even as late as 2025, it anticipates flying 17% fewer ASKs than it did in 2019. Even so, it believes it can lower unit costs even more, thanks in part to newly arriving A321 NEOs. It has A330 NEOs on order as well.  
  • In the world that once was, before the days of Covid-19, the LCC Jeju Air would torment its bigger and higher-cost rivals. But it’s currently Korean Air, with its massive cargo business, that’s the envy of the industry. Jeju Air’s predominantly passenger business, all involving shorthaul routes, suffered a negative 118% Q3 operating margin, spoiling what’s typically a peak period. An 84% y/y collapse in revenues reveals the depths of the demand destruction it faces, even as domestic traffic to its namesake island Jeju recovers some. In fact, Jeju’s airport, during October, saw passenger volumes down just 24% y/y, compared to 58% for all Korean airports.

    But volumes don’t tell the whole story. Yields are down sharply as Korean airlines including Jeju move planes from international to domestic markets, leading to overcapacity. In normal times, Jeju has an outsized presence in Japan, a market hurt by political tensions last year. A Korea-Japan travel bubble, if one is established, would be a major boost. In December, by the way, Jeju nearly bought 51% of its LCC rival Eastar. But it’s since backed out of the deal. 
  • With “strong cost control measures,” the UAE’s Air Arabia held Q3 net losses to just $12m, with operating margin registering at a relatively mild negative 20%. Charter flying, cargo, and a portfolio of non-airline businesses also helped. Still, revenues declined 80% y/y, with the resumption of scheduled flying limited and gradual. Air Arabia did, in July, launch a new joint venture airline in Abu Dhabi with Etihad, starting with service to Alexandria in Egypt. Competition will be stiff, however, as Wizz Air starts its own Abu Dhabi joint venture. FlyDubai, meanwhile, is just down the road. Air Arabia Abu Dhabi currently serves eight cities, the latest being Nepal’s mountaintop capital Kathmandu.

    Outside of the UAE, Air Arabia also operates from Morocco and Egypt. Indian subcontinent migrant worker traffic to and from the Arabian Peninsula is a critical market, and one that needs to recover for Air Arabia to revive its pre-crisis success. Russia, Turkey and Iran are important markets too. For its Moroccan venture, family-visit traffic to Europe is key. More recently, Air Arabia has stretched its Sharjah network to more distant cities like Kuala Lumpur and Vienna, courtesy of the five long-range A321 NEOs it now flies; a sixth will arrive next year. It hasn’t yet announced any flying to Israel, despite newly available rights. Will Air Arabia receive additional government aid? Media reports suggest it’s asking.
  • Air Astana, the national airline of Kazakhstan, reported a Q3 operating margin of negative 18%. The carrier, partly owned by a British defense firm, saw revenues and operating costs decline 68% and 54% y/y, respectively. Late last month, Air Astana announced its winter season schedule, which includes cuts to some key markets like Turkey and Germany but also some new charter flying to resort destinations like Sharm el Sheikh in Egypt. The Maldives is another. In the meantime, it continues to operate domestic routes alongside its new low-cost unit Air Arystan.

    Warning of the “financial and social consequences,” Air Astana urged governments to quickly adopt passenger testing protocols to get people flying again. “Travel, tourism and leisure industries are collectively a massive generator of global economic activity and jobs. It is vital that these industries are able to restart in a meaningful way at a point early in 2021,” the company said in a statement.

    In an interview with Business Traveler magazine last month, CEO Peter Foster said point-to-point leisure trips are emerging as a staple of the Covid era. Beach spots in Vietnam and Thailand are now of interest to the airline. Foster said flights to Dubai and Antalya in Turkey are currently pretty full with leisure travelers.
  • Back in Canada, the regional airline Chorus earned a positive 18% operating margin last quarter. But that includes the wage subsidies it received from Canada’s government (Air Canada flagged its wage subsidies as a special item). Add back $33m in subsidy income to its wage expense, and operating margin for Chorus would have been negative 4%.

    Chorus has several business lines. Its core business flying as Air Canada Express is today just a quarter what it was a year ago in terms of capacity. It expects to run about 20% to 30% of normal capacity this winter, before improved testing regimes, relaxed travel restrictions, and ultimately vaccines allow traffic to return to something resembling normal. Chorus is also a major lessor of regional aircraft, including the increasingly popular A220. And while it does have exposure to some bankrupt carriers — Aeromexico and Virgin Australia fly its planes, for example — it believes the regional airline sector will be most resilient during the recovery.

    Chorus separately provides some maintenance, charter, air ambulance, and cargo services. During its earnings call, the company declined to comment on a recent non-binding bid to acquire the company.   
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  • “People will get back on the plane as soon as they can.” So believes Air France/KLM CEO Ben Smith, who spoke last week with Les Echos. “There was never the slightest doubt in my mind about the ability of air transport to bounce back.” He even thinks family-visit traffic could be stronger after the crisis than before. And as markets like Greece and Portugal briefly demonstrated this summer, leisure demand will recover quickly, albeit subdued somewhat by the economic recession’s impact on family incomes. Business travel will take longer to revive. But “videoconferencing will never replace direct contact and human encounters with a client or an employee. All leaders know this. And this is even more true when the language and cultures are different.”

    In the meantime, the crisis is accelerating implementation of the new business plan Air France/KLM introduced in November. A380s, B747s, and A340s left earlier than expected. Staff numbers are down. With the help of Transavia and its new operating flexibility, French domestic routes are on their way to becoming a source of positive contribution rather than a constant financial drag. Smith thinks Transavia is stronger than its low-cost counterparts within IAG and Lufthansa, given its valuable Paris Orly slots and synergies with Air France/KLM’s Flying Blue loyalty plan. He also highlights the fact that Air France/KLM carries less business traffic than either of its two key rivals, a plus right now.

    But he acknowledges the need for Air France and KLM to cooperate more closely on strategic matters. In the short-term both will be able to survive with capital provided by their respective governments. But in the medium-term, Smith warns, the group will likely need more capital to survive. The airline is currently in discussions with Paris and Amsterdam about that.
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  • Four major leasing companies — AerCap, Air Lease, Aircastle, and Fly — held their Q3 earnings calls last week. And all four sounded optimistic, particularly beyond this winter. They cited developments like Pfizer’s extremely positive vaccine results, the near-complete recovery of domestic demand in Russia and China, declining requests for lease payment deferrals, the onset of passenger Covid testing to obviate the need for quarantines, clear signs of pent-up demand, the debut of new travel bubbles, the readiness of governments to support their airlines, and the sheer importance of travel and tourism to the world economy. Vietnam, Korea, New Zealand, Brazil, and Mexico are other markets with robust domestic recoveries. And even in the U.S., most indications point to stronger bookings for the upcoming Thanksgiving and Christmas holidays. The vast majority of the world’s airlines, AerCap says, will be able to navigate the crisis, and the industry will return to normal.

    In the meantime, airlines are accelerating their adoption of the most efficient planes, most importantly newer generation narrowbodies which Aircastle says will be the backbone of the recovery. Said Aercap’s CEO Aengus Kelly: “Once they are allowed to fly, millions of people will quickly get back on board an airplane.”
  • Air Lease did caution however, that this winter could see additional airline insolvencies. It’s also “monitoring the trade environment and political landscape” for risks like the new 15% tariff the E.U. started imposing last week on all Boeing aircraft. Widebody demand remains under pressure, as it was even before the crisis. For now, when it comes to travel demand, “country-to-country travel barriers due to quarantine restrictions and requirements remain the single biggest obstacle.” Such restrictions even make it tough at times to deliver planes to customers.

    Air Lease is bearish on Boeing’s new mid-market narrowbody concept as well. Even pre-crisis, there were doubts it could produce such a plane at a competitive price. Now, the lessor says, Boeing “needs to get its own house in order” before any new product launches. So probably no new plane types this decade, it believes.  
  • Air Lease, optimistic overall, did give a full-throated cheer for the A220-300, interest for which is growing. Airbus in fact told Bloomberg last week that it’s bullish on selling more A220s, notwithstanding some Air Canada cancellations.  Southwest, remember, is a potential candidate as it looks to replace similarly sized B737-700s. Back at Air Lease, B737 MAX requests are gaining traction too as the plane nears service reentry.

    In addition, Air Lease mentioned a call it received from a North American airline looking for some spare planes it could rent just for the upcoming holiday season. AerCap, by the way, said it was able to find new homes for two of Norwegian’s B787s. Fly sees a good future for not just B787s and A350s but A330s as well, simply because of all the A380s, B747s, and other large widebodies now permanently retired. Fly also downplayed concerns about AirAsia, one of its top customers.    
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  • Amadeus, in its latest earnings call, mentioned Turkish Airlines as a prime candidate for a passenger service system (PSS) upgrade. “Turkish is a very close customer to us,” said CEO Luis Maroto. “We provide them with different functionalities. And we hope one day to convince them to really get the PSS… They have an internal system that they’ve been running for years, and we would like to convince them.”

    Amadeus, which also owns the LCC-oriented Navitaire PSS, competes with Sabre in the space. Look around at all major full-service global airlines and most have either the Amadeus Altea product or SabreSonic. There are big exceptions though, and not just Turkish. Delta for one uses its own system, which it also provides to partners Virgin Atlantic and Aeromexico. United almost adopted Altea a decade ago but ultimately stuck with Continental’s old HP system. 
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Routes and Networks

  • There was a reason United stopped flying from New York JFK five years ago. The few flights it had there lost money. The markets it did serve, furthermore, were ably served across the river from Newark, a major United hub. But that was before Scott Kirby was in charge. Upon joining United, he quickly criticized the decision, pointing to critical corporate customers based in cities like Los Angeles that want a JFK option. Delta and American could approach a company like Disney and say: Give us your business because we can take you nonstop to JFK, United can’t.

    Unfortunately, for Kirby, United couldn’t just slip back in, not given the airport’s slot constraints. But with so much service cut during the Covid crisis, it can in fact reenter, and will in fact reenter. Starting in February, United will once again offer premium-heavy B767 JFK service to Los Angeles LAX and San Francisco SFO. Those are the two highest revenue routes in the U.S., filled in normal times with big-money business traffic. But they’re extremely competitive — United will be up against not just Delta and American but Alaska and JetBlue as well, the latter with its Mint product.

    JetBlue, incidentally, recently began flying to L.A. and S.F. from United’s Newark hub, dialing the competitive transcon thermostat even higher.  
  • Another new dot on Southwest’s route map: It will soon fly to Sarasota, located between Ft. Myers and Tampa on Florida’s Gulf Coast. It’s area that was booming before the pandemic, and one that’s experiencing some of the least drastic y/y traffic declines anywhere in the country. Southwest, meanwhile, began new service to Miami last week, another manifestation of its sun and snow network strategy. Other new airport additions recently announced include Chicago O’Hare, Houston
  • The British LCC Jet2 hopes to one day look back at this crisis as an inflection point. Like all airlines, it’s flying dramatically less this year than it was last year. But it’s also one of those LCCs, like Ryanair and Wizz Air, that’s playing a lot of offense. Last week, it unveiled plans to open a crew base in Bristol, which will be its tenth base overall, all of them in the U.K. Next summer, Jet2 will have 33 destinations on offer from Bristol, four of them new: Izmir in Turkey; Kalamata and Lesvos in Greece; and Costa de Almeria in Spain. Bristol’s largest airline, in case you’re wondering, is easyJet.
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Covid Crisis 2020

North America

  •  Southwest, in a mid-quarter investor update, rattled investors with a warning about November and December. It reports “a deceleration in improving revenue trends” for the two months, partly attributed to the recent presidential election. (It’s not uncommon for airline bookings to slow a bit during election seasons). What’s less clear is how much the recent slowdown relates to the latest sharp rise in Covid cases across the U.S. The carrier didn’t speak specifically about the holiday periods within November and December, just the two months taken as a whole.
  • American, at an investor event hosted by Baird, emphasized its strong liquidity, network flexibility, and fleet renewal as key strengths as it navigates the Covid crisis. The airline hasn’t cut quite as much capacity as its rivals Delta and United, and thus wound up flying one out of every three U.S. domestic passengers last quarter. A bigger market share of course doesn’t mean much. More substantively, American will emerge from the crisis with a much leaner and more efficient cost base, following the mass retirement of older planes and the fleet simplification emanating from that decision. As traffic returns, it will likely need to recall some of the 19k workers it furloughed.

    But more permanent are the savings from a 20% reduction in management staff. American entered the crisis still a bit overstaffed in the management ranks, having never quite fully captured synergies made possible by its 2013 merger with US Airways. The expected return of B737 MAXs next month will create additional unit cost tailwinds. Same for incoming A321 NEOs. As for strategies to boost revenues, American will look to leverage its muscle at Dallas DFW and Charlotte, its two most profitable hubs. It admitted again that New York and Los Angeles are relative laggards in terms of performance, but new partnerships with JetBlue and Alaska should help — the JetBlue cooperation should begin in the “coming months.” American also mentioned new international partnerships with Qatar Airways and Gol.

    So what’s the situation with demand? “There’s been a little bit of a flattening as we’ve gotten into the election and certainly, the spike in Covid,” said President Robert Isom. “But still, the trend is upwards, and we expect that to continue.” Demand is currently strongest on routes to the U.S. Sun Belt and beach destinations in the Caribbean and Mexico. Covid testing trials in markets like Hawaii and Jamaica appear promising. Establishing a travel bridge between the U.S. and the U.K. is “incredibly important.”

    Managed corporate demand, meanwhile, which accounted for 16% of American’s total passenger revenues last year, is starting to show some movement, if not a lot. Government travel is one area of activity. Some industrial companies are starting to travel again too. Same for some smaller businesses without managed travel programs. In any case, the airline has little doubt that travel will return as soon as borders re-open and quarantines are a thing of the past. Of that 16% corporate piece of total revenues, by the way, the largest component is the finance and professional services sectors (i.e. bankers, lawyers, accountants, consultants, etc.).
  • JetBlue is the latest U.S. airline to end its practice of blocking middle seats and capping load factors. Early next month, it will lift its maximum load factor from 75% to 85%. And then in January, after the Christmas rush, it will once again have all of its seats available for sale. American and United were notable for selling all of their seats throughout the crisis. Others besides JetBlue — Delta and Southwest, for example — have moved in that direction more recently.
  • The presidential election is over. But control of Congress — the Senate specifically — is still up for grabs. It will all depend on the state of Georgia, both of whose Senate seats will be filled in a runoff election scheduled for Jan. 5. Well, guess what? The airline industry is a huge employer in the state, given Atlanta’s status as the busiest airport in the world. That has some political scientists suggesting that the current Congress might finally pass another round of airline aid, with both parties eager to impress Atlanta voters. Neither political party, conversely, wants to be seen as blocking aid to Georgia’s aviation-heavy economy. Keep an eye on Capitol Hill.  

Latin America

  • Latin America’s patchwork quilt of travel restrictions is hobbling the airline industry — and connectivity — as the region enters its peak summer season. IATA is calling for an end to quarantines and travel restrictions in favor of increased testing and tracing and the creation of travel bubbles between countries.

    “Now is not the time to invent the wheel,” IATA Regional Vice President Peter Cerda told reporters on a briefing call. “The wheel has already been invented.” Instead, governments should follow established protocols for dealing with a public-health emergency. Unlike in Europe, there is very little cooperation among the governments in Latin America, IATA says. This is preventing a comprehensive re-opening and does not provide clarity to airlines or passengers on where they can fly and under what restrictions they will have to operate.

    The region’s recovery has been uneven. Uruguay is the only country the European Union says is not high risk in the Americas. It has kept its coronavirus infections low, partially due to a strict quarantine. Brazil’s domestic market has recovered to about half of what it was pre-Covid. And in Mexico, airlines are operating about 80% of their pre-pandemic capacity.

    Meanwhile, several countries remain almost completely closed off. Chile is expected to resume international flights again at the end of this month but will limit them to Santiago’s airport. Argentina had suspended all flights until this fall but will now restrict international entry only to Argentine citizens and citizens of neighboring countries. The country imposed a 35% tax on air travel, which IATA says is further dampening already depressed demand. Colombia has eased restrictions, but limits on the number of flights are causing capacity issues in Bogota.

Sub-Saharan Africa

  • It’s not exactly a great time to launch a new airline. Yes, everything you need is extremely cheap and abundantly available right now. But demand, oh demand. In any case, a new South African carrier called Lift is all set to go next month, starting with Johannesburg-based flights to Cape Town and George. Lift’s founders do have lots of credibility — one was a former CEO of Comair who founded the LCC Kulula. It helps that South African Airways is a mess and Comair itself filed for bankruptcy.

    South Africa is an extremely tough airline market, however. International opportunities are limited, even to neighboring countries. And domestic markets are competitive, not terribly numerous, and challenged by high airport costs and frequent macroeconomic distress. Be that as it may, Lift will liftoff with three A320s operated by one of its backers called Global, a major provider of charter flying.
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Feature Story

The airline outlook in East Asia is improving. But fragmentation remains a worry. 

It’s beginning to feel different in East Asia. Not very different yet. But different.

Optimism is on the rise among airlines throughout the region, which covers roughly 2.3b people in Greater China, Japan, Korea, and the 10-country ASEAN region. Most of the area has Covid largely under control, with new case counts extremely low relative to other parts of the world. Economies are starting to revive too, highlighted by y/y third quarter GDP growth in mainland China, Taiwan, and Vietnam. South Korea is close to showing y/y growth as well. Domestic airline traffic, accordingly, is in some countries — notably China — exceeding pre-crisis volumes.

Singapore, most forcefully, is working overtime to reopen borders with other Covid-safe countries. On Nov. 6, it began welcoming visitors from mainland China. They’ll still have to take a PCR Covid test at Changi airport upon arrival, which might deter some travelers. But as long as the test results are negative, they won’t have to quarantine. And it’s that standard two-week quarantine that’s the most significant travel deterrent. Visitors from Australia, New Zealand, Vietnam, and Brunei also now qualify to enter Singapore without having to quarantine, as long as they submit to a Covid test. Singapore and Hong Kong will later this month debut a much-watched reciprocal “air travel bubble” arrangement that covers travelers in both directions — no quarantines, just a negative test result.

Travel bubbles involving other East Asian countries are sure to follow absent any new outbreaks. In the meantime, mass vaccinations are underway in China and will likely roll out elsewhere in the region sometime next year, upon completion of more rigorous safety trials. By all accounts, intent to travel is high. Throughout East Asia, airlines, like their peers elsewhere, are rightsizing cost and capacity to fit new post-pandemic realities. More common than elsewhere are Asian carriers with large cargo operations, in some cases booming enough currently to produce company-wide operating profits.

It’s not that everything is on the cusp of being normal again in Asia. There are several ASEAN countries like the Philippines that still have a pretty high prevalence of Covid. Outbreaks can happen anywhere, and suddenly. Japan’s airline market — even the domestic market — is corporate heavy, and corporate business will take longer to revive. Many Asian carriers depend on intercontinental traffic to places like Europe and North America, which likewise isn’t close to recovering. A total reopening of borders might not come any sooner in Asia than it does in other parts of the globe.

But the combination of Covid’s near defeat, examples of countries returning to economic growth, thriving domestic traffic, imminent vaccination, cheap fuel, pent-up demand, and corporate restructuring has airlines in East Asia — earlier than their peers — sensing a return to some semblance of normalcy. 

Of course, normal for some is not necessarily good. Normal for Malaysia Airlines is means losing money. And let’s not forget that even in China, where there’s more domestic fliers now than there were before Covid, airlines are still losing lots of money. Getting back to healthy levels of traffic is one thing. Earning sustainable profits is another.

Sustainable profits, alas, were spotty throughout East Asia even before the crisis. Most of the major Chinese carriers generally produced decent enough margins. Same for Japan’s Big Two. Here and there are low-cost carriers with strong profit records — AirAsia and Cebu Pacific come to mind. But far more common up and down the region are airlines earning at best mediocre earnings and at worst heavy losses.

What does a high incidence of underperforming airlines across a region usually signal? Overcapacity. Well, sure enough, East Asia has a lot of airlines that ordered a lot of planes over the past decade. So naturally, carriers — as they contemplate how business might improve post-pandemic — are at least weighing the prospect of consolidation. 

That’s not as easy in Asia as it is in the U.S., or to a lesser extent Europe. Most combinations would need to involve airlines from two different countries, introducing a host of political obstacles. Instead, the region is more likely to see consolidation through liquidation and downsizing.

China is one East Asian market where mergers and equity tie-ups have been a major part of the airline sector’s evolution. China Eastern-Shanghai Airlines, Air China-Shenzhen Airlines, China Southern-Xiamen Airlines, the recent cross-ownership arrangement between China Eastern and Juneyao Airlines, and so on. All eyes now, however, are on Hainan Airlines and its dramatic capacity contraction, a major boost to all other players in the market.

In Japan, AirAsia’s Japanese joint venture is gone, a victim of the Covid crisis. But it was tiny. More relevant are not disappearing airlines but new longer-haul widebody low-cost carriers: Zip Air launched by Japan Airlines and a yet-unbranded copycat in the works at All Nippon. New airlines raise the prospect of more, not less fragmentation in Hong Kong and Taiwan too. The prospective startup Greater Bay intends to compete with Cathay Pacific. Starlux, with grand intercontinental ambitions, is already competing with China Airlines and EVA.

South Korea, by contrast, could be the scene of major consolidation. Asiana, the country’s number-two airline, is dying. And reports suggest its salvation could come in the form of some sort of merger with Korean Air. In the LCC space, Jeju Air’s planned takeover of Eastar fell apart, leaving the latter’s fate uncertain.   

Will the ASEAN region consolidate? A spotlight is on Malaysia Airlines. Can it secure the necessary stakeholder concessions it needs to survive? It’s asking a lot. If the answer is no, Malaysia’s government appears ready to turn the carrier’s Firefly unit into something more substantial. But it would undoubtedly be a lot smaller than Malaysia Airlines.

Malaysia might also lose AirAsia X, itself in a desperate bid to survive through sweeping creditor and supplier concessions. In Thailand, NokScoot is already gone. More substantially, Thai Airways is in bankruptcy, heralding permanent downsizing. Its relative Nok Air is in bankruptcy as well. Vietnam, by contrast, could see more startups compete with Vietnam Airlines, VietJet, and Bamboo — that market appears headed for more fragmentation, not less. What happens to Garuda and Lion Air in Indonesia? Philippine Airlines?

Singapore Airlines, despite a decade of less-than-stellar margins, has the government support and staying power to reap the benefits of its collapsing and shrinking ASEAN rivals. Consolidation of a sort was on its mind pre-crisis, exhibited by a joint venture it formed with Malaysia Airlines. Japan Airlines, by the way, likewise had pre-crisis joint venture plans with Malaysia Airlines. Singapore and All Nippon were planning to join forces as well.

Will East Asia be as stricken with overcapacity after the crisis as it was before? Regional fragmentation makes that more likely. Consolidation, airlines hope, could make it less so.

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Around the World

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

Around the World: November 16, 2020

Airline NameChange From Last WeekChange From Last YearComments
American7%-58%As good news on vaccines sends airline stocks up, American takes advantage by selling more shares
Delta16%-36%Still working toward offering free inflight Wi-Fi once technology allows for stable, high-speed access
United12%-58%Adding more Thanksgiving period flights to accommodate uptick in later-than-normal bookings
Southwest10%-24%Bloomberg reports it’s in “advanced talks” to take over some MAX orders abandoned by others; would surely get good price
Alaska17%-37%CEO Brad Tilden retiring after Q1, 2021; President Ben Minicucci named as his successor
JetBlue15%-28%Seeing “signs of strong demand in certain markets;” adding more New York capacity to routes with leisure/family visit demand
Hawaiian34%-39%Tells customers it can use their miles to purchase the pre-travel Covid-19 tests they need to enter Hawaii
Spirit12%-48%Expects average daily cash burn this quarter to be about $2m; was $2.3m last quarter
Frontier(not publicly traded)CEO Barry Biffle, speaking at Aviation Festival Americas event, denies any interest in flying XLRs to Europe (Simple Flying)
Allegiant12%-9%Latest monthly data is in: Oct. pax volumes down 30% y/y on just 6% less ASM capacity
SkyWest15%-43%66% of American’s regional jets are flown by wholly owned regional subsidiaries; more like 45% for United and Delta
Air Canada23%-61%Can still only operate just two flights a week to China; would like to do more
WestJet(not publicly traded)Porter Airlines still grounded; Toronto Bishop-based carrier has no plans to fly until Feb. at the earliest
Aeromexico18%-66%Unions pushing back on what they call ultra-low-cost airline-type concessions
Volaris6%-7%Mexico approaching 100k Covid deaths; government taking lax approach to public health measures
LATAM4%-87%More than half of all the capacity it flew in October was in the domestic Brazilian market
Gol11%-43%Brazilian currency still a lot weaker versus U.S. dollar now than it was pre-crisis; many other world currencies have gained value
Azul12%-42%Aircastle, a lessor, says 18 of the 25 Embraer E2 jets it ordered have been placed with customers; latest is KLM
Copa41%-33%Plans to resume flights to Venezuela later this month (Reuters)
Avianca-1%-93%Says it has enough other parties providing DIP credit that it doesn’t need Colombia’s government to participate
Emirates(not publicly traded)Fuel accounted for just 11% of operating costs in its fiscal first half that ended in Sept.; was 32% in same period a year earlier
Qatar(not publicly traded)Introduces new fare families, six of them in total; designed to offer more flexibility, clarity
Etihad(not publicly traded)Announces big corporate restructuring; will become “midsized, full-service” carrier focused on widebodies
Air Arabia5%-19%New Abu Dhabi venture currently flying eight routes
Turkish Airlines18%-16%By year’s end, it expects to be operating about 40% to 45% of normal capacity
Kenya Airways0%29%Escalating military conflict within neighboring Ethiopia adds to country’s virus woes
South Africa Air.(not publicly traded)South Africa opens borders to all foreign tourists with negative Covid test
Ethiopian Airlines(not publicly traded)Reportedly still interested in helping to manage South African Airways, without investing money in it
IndiGo14%10%Singapore Airlines says Vistara filling about 65% of its seats; fleet up to 43 planes
Air India(not publicly traded)Air India Express, its usually profitable low-cost unit, appoints new chief
SpiceJet8%-49%Appoints new finance chief with experience working for Mumbai’s airport
Lufthansa22%-48%Finally, a deal with ground workers represented by the Verdi union; includes wage cuts in exchange for job protections
Air France/KLM27%-63%CEO Ben Smith tells Les Echos that Transavia’s fleet needs are covered for next two years; will need MAXs or NEOs beyond that
BA/Iberia (IAG)40%-74%Iberia trying to encourage shorthaul biz travel with out-and-back schedules, so fliers can return home the same day
SAS59%-93%Demise of Norwegian, if it happens, could open new opportunities in Norway
Alitalia(not publicly traded)New board of directors met for first time last week; business plan to be presented next month
Finnair45%-91%Helsinki airport welcomed 22m pax last year; 11m were Finnish nationals and the other 11m foreigners
Virgin Atlantic(not publicly traded)Expects to be flying about 25% of last year’s capacity by the end of this year (Reuters)
easyJet38%-43%Spain tightens Covid testing requirements for travelers from high-risk countries
Ryanair13%9%Eddie Wilson, perhaps Michael O’Leary’s future successor, speaking at aviation forum hosted by Skift and DFW airport this week
Norwegian-22%-99%Converted a total of $886m in lease liabilities to equity
Wizz Air19%12%Introducing new carbon offsetting option for pax willing to pay; money goes to environmental project
Aegean50%-50%Croatia Airlines getting a much-needed capital injection from its government
Aeroflot12%-37%Lots of media speculation about who will succeed Vitaly Savelyev as CEO; Savelyev to become Russia’s transport minister
S7(not publicly traded)Configuring two A319s with premium-heavy configuration for routes with high corporate/gov’t demand, i.e. Moscow-Simferopol
Japan Airlines0%-45%Now charging fees for reserving extra-legroom seats (i.e. in exit rows) on all international flights
All Nippon7%-35%Next year will mark a decade since ANA first debuted the B787
Korean Air15%-11%Reports about possible tie-up with Asiana becoming more numerous
Cathay Pacific12%-37%Hong Kong and Singapore set Nov. 22 as start date for new travel bubble; pax in either direction can avoid quarantines with Covid test
Air China13%-17%Bloomberg reports on reluctance to take more Airbus deliveries despite domestic traffic recovery
China Eastern4%-6%Boeing still bullish on future China airplane growth
China Southern4%-10%Partner American joins rivals United and Delta in restarting China flights; now back doing Dallas DFW-Shanghai
Singapore Airlines10%-59%Besides Singapore’s new travel bubble with Hong Kong, it unilaterally welcomes visitors from 5 countries (incl. China) sans quarantine
Malaysia Airlines(not publicly traded)Difficult negotiations with creditors, lessors continue; outcome could determine whether it survives
AirAsia19%-65%To help airlines, Thailand enacts jet fuel excise tax cut from November through late April
Thai Airways5%-59%Trying to sell off a chunk of its older planes including B747 fleet
VietJet7%-21%Bamboo Airways gets clearance from Washington to operate charter flights to the U.S.
Cebu Pacific7%-54%Indonesia’s Garuda says by December, it will have negotiated about $13m a month in savings from aircraft leasing
Qantas12%-25%Regional carrier REX, jumping into mainline routes, tells CAPA it could fly 30 to 40 mainline planes by end of 2022 (Reuters)
Virgin Australia0%-43%Bain takeover deal now complete; court gives final stamp of approval
Air New Zealand9%-43%New CEO building his management team; hires new finance chief
Brent Crude Oil9%-32%Next OPEC meeting scheduled for Nov. 30; cartel pessimistic about near-term oil demand

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

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