Issue No. 803

A Tale of Two Airlines

Aeromexico and Volaris Offer a Study in Contrasts

Pushing Back: Inside This Issue

Mexico was in the news last week, after a minor political scandal over a U.S. senator's ill-timed vacation. But it was in the news for us for a different reason: Aeromexico and Volaris both reported their earnings, and the two carriers' fortunes couldn't be more different. We take a look in this week's Feature Story.

Elsewhere in this issue, Atlas rides the cargo wave to new highs. Airbus reported earnings that were better than rival Boeing's, but still grim. JetBlue's pilots object to the new alliance with American. And carriers around the world chased sun and leisure traffic with dozens of new routes.

Next week, the major lessors report their earnings. We'll be interested to see how the pandemic affected this segment of the industry.

The Airline Weekly Lounge Podcast

New episodes drop every Thursday and are available wherever you get your podcasts and on AirlineWeekly.com. In the latest podcast, Edward "Ned" Russell and Madhu Unnikrishnan explain why United is channelling "The Jetsons" and how Spirit expects to have its 2019 capacity back by this summer. Listen to the episode.

Verbulence

"Today, as we have entered 2021, it's clear that the crisis is not over, and that it will likely continue to be a reality throughout the year. "

Airbus CEO Guillaume Faury

Weekly Skies

Air France-KLM is optimistic about the strength of its dual Amsterdam and Paris hubs in the coronavirus pandemic recovery. CEO Benjamin Smith described Amsterdam Schiphol as the “best connecting” hub in Europe, and Paris — including Charles de Gaulle and Orly airports — as the continent’s largest origin-and-destination market, particularly for the leisure flyers leading the recovery, during the Paris-based group’s fourth-quarter earnings call last week.

“We are well-positioned as a group,” said Smith. In addition to the benefits of its pre-Covid route map, he cited fleet simplification and other efficiencies achieved during the crisis as tailwinds in the recovery.

Many expect large hubs to benefit in the recovery as airlines pull back to their core. At the same time, leisure flyers continue to return ahead of their business counterparts benefitting airlines with more service to destinations popular with vacationers.

However, Air France-KLM is not out of the woods despite Smith’s comments. The airline reported a net loss of nearly $8.6 billion (€7.08 billion) in 2020. This included a $1.2 billion net loss in the fourth quarter alone that is expected to deepen in the first quarter amid new travel restrictions in Europe.

In 2020, the airline’s revenues decreased 59 percent to $13.4 billion during the year. Cargo was the only bright spot with revenues jumping 22 percent to $2.7 billion. Group passenger traffic fell 69 percent on a nearly 43 percent reduction in capacity.

“The situation is still extremely uncertain,” group Chief Financial Officer Frédérick Gagey said during the presentation. In the first quarter, Air France-KLM plans to fly roughly 40 percent of the capacity it flew during the same period in 2019 — this represents a decrease from the nearly 46 percent it flew in the final quarter of 2020.

The airline is betting traffic will pick up by the summer as vaccination programs accelerate, said Gagey.

Air France-KLM maintains an outlook that it will return to 2019 capacity levels by 2024. This aligns with other recovery forecasts, including that of IATA.

The group has made significant strides on the cost cutting program it launched in late 2019. Air France-KLM is on track to trim annual expenses by $1.9 billion by the end of the year, with a further $483 million in savings forecast in 2022. In addition, it aims to cut full-time equivalent employees by 14,500 by the end of next year.

Fleet simplification is driving a significant amount of savings. The group removed all of its Airbus A340s and A380s, and passenger Boeing 747s from operation in 2020. However, one A340, nine A380s and two 747-400s remained on its books at the end of the year. The group also continues to fly four 747-400 freighters.

“Basically all the aircraft with four engines have now left the group fleet,” said Gagey. Air France-KLM’s remaining widebody fleet consists of Airbus A330s and A350s, and Boeing 777s and 787s.

And in addition to retiring four-engine jets, the group continues to move towards consolidating its Airbus widebodies at Air France and Boeing widebodies at KLM. The 13 A330s at KLM are slated for removal, though executives have not provided a timeline.

Relief talks with with the Dutch and French governments continue for Air France-KLM. The group hopes to convert some of the state aid that it received in the form of debt to equity to reduce the burden on its balance sheet, said Gagey. Other European competitors, including Lufthansa Group and SAS, received aid packages that included some combination of cash, debt and equity.

“It’s clear that this situation has to be corrected, corrected — modified,” said Gagey.

Edward Russell

Less Belly-Hold Capacity Redounds to Atlas’ Benefit

If there is any bright spot for the industry in this pandemic, cargo is it. Somebody has to carry all those goods homebound consumers are buying online. And Atlas Air Worldwide certainly was no exception, swinging from a loss of $293 million in 2019 to $360 million in profits last year.

Consumer confidence is ticking up in many large economies, even as the world’s macroeconomic outlook is cloudy. And unlike earlier in the pandemic, many consumers feel more comfortable spending money now rather than saving it. Atlas has capitalized on this boom, forecasting that it will operate more than 85,000 block hours in the first quarter. Beyond that, the company would not offer guidance, citing uncertain economic conditions for the balance of this year as the distribution of vaccines is patchy and new variants of the virus surge.

Atlas benefited from two additional trends last year. First, international passenger flights essentially ground to a halt, so shippers had less access to belly-hold capacity. Second, congestion at West Coast ports forced shippers to turn to air cargo carriers to get their goods to market. “Shippers are increasingly using airfreight to avoid bottlenecks in their supply chains, and that’s driving even further near-term demand,” Atlas CEO John Dietrich told analysts last week.

A third, unexpected, factor in Atlas’ favor is the continued strength of air freight in the first two months of this year, usually a down period for freight. Factories in China usually close during the Lunar New Year but have stayed open this year as the government has placed new restrictions on internal travel. This has accrued to the cargo company’s benefit, as it has softened some of the seasonality in the industry, a situation Dietrich called “unprecedented.”

Freight rates are likely to remain high this year, Cowen & Co. analyst Helane Becker said in a note to investors, but yields could fall from the highs fueled by panic-buying early in the pandemic.

Labor costs could rise. The company gave its pilots a pay raise last year and is negotiating a new collective bargaining agreement with its pilots. At issue is incorporating pilots from Southern Air, which Atlas acquired in 2016. Arbitration is expected to begin next month. This has upset its pilots union “This is an abdication of power and leadership,” said Robert Kirchner, head of the International Aviation Professionals. “Every stakeholder in this company should be concerned that this management team is wiping their hands of responsibility.”

Atlas ordered four Boeing 747-8 freighters recently, with delivery beginning this year and continuing into next year. The window for 747-400 passenger-to-cargo conversions is closing, as existing airframes are aging. Atlas is considering more -8s, Dietrich said.

Atlas reported full-year 2020 revenues of $3.2 billion, up from $2.7 billion in 2019. Amazon, for which Atlas operates freighters, increased its holding in the company to 9 percent.

Madhu Unnikrishnan

In Other News

  • A court in Europe ruled that state aid to airlines is legal during the Covid pandemic, quashing Ryanair’s challenge to government aid. Specifically, the court said French aid to Air France and Swedish aid to SAS are in the interests of the European Union by throwing those companies a lifeline during the pandemic. Ryanair has been vocal in its opposition to what it calls “illegal” state aid, arguing it is market-distorting. The Irish discounter adds that it plans to challenge the lower court’s ruling in the European Court of Justice.
  • Etihad and Bahrain’s Gulf Air have signed a “strategic commercial cooperation agreement” that would let the two carriers’ relationship deepen beyond the current codesharing, which started in 2019, to coordination on routes and schedules to 30 destinations from Abu Dhabi and Bahrain. The agreement also allows for reciprocal frequent-flier and premium benefits. The two companies may coordinate on MRO, cargo, and pilot and crew training. The agreement is subject to regulatory review in Bahrain and the UAE.
  • A long-running spat between Canada and Brazil in the World Trade Organization (WTO) is coming to the end, now that Brazil is withdrawing from the dispute. At issue was Brazil’s contention that Canada and the provincial government of Quebec supplied Bombardier with illegal aid for the development of the C-Series. The issue became complicated, Brazil said, when Airbus acquired the C-Series program (now the Airbus A220) and opened a production line in the U.S. Brazil said is withdrawing from the dispute because it does not believe the WTO is the best venue to settle the issue.
  •  Global Crossing struck a deal with Venezuelan carrier Estelar to restore service between Miami and Caracas and Maracaibo. Direct flights between the U.S. and Venezuela currently are prohibited, but Global Crossing said it expects the new administration and Congress will lift the ban soon. When it does, the two airlines plan to fly a daily Miami-Caracas flight and thrice-weekly Miami-Maracaibo with a Global Crossing Airbus A320.

Madhu Unnikrishnan

Expand Section

Routes and Networks

Even as competitive concerns swirl and unions balk, American Airlines and JetBlue Airways are wasting no time launching their new quasi-joint venture. The carriers unveiled 30 new routes from Boston and New York on Thursday with start dates between June and September.

American will connect Boston and Asheville, Jackson Hole, Traverse City and Wilmington, N.C., seasonally from June 5, and Columbus year-round from August 17. New York JFK will gain new flights to Bogotá, Cali, Medellin in Colombia, and Santiago, Chile, from May 6; and to Orange County from June 2. And from New York LaGuardia it will seasonal service to Key West, Myrtle Beach, Pensacola, Rapid City and Savannah in early June, and year-round service to Kansas City on September 8.

JetBlue is living up to its ambitious growth plans at LaGuardia and Newark. It plans three new routes between LaGuardia and Charleston, S.C., Denver and Martha’s Vineyard. At Newark, it will take United Airlines head on with 11 new routes to Antigua, Aguadilla, Cartagena, Martha’s Vineyard, Nantucket, Port-au-Prince, Puerto Plata, Seattle-Tacoma, St. Lucia, and St. Thomas. All of the new services begin July 1 with the Martha’s Vineyard, Nantucket and Seattle flights operating seasonally.

In addition to the routes, American and JetBlue will implement coordinated schedules between the New York and Boston, Los Angeles and South Florida, and between Boston and both South Florida and Washington, D.C., in April.

Both airlines say this is just the first round of alliance changes. Coordinated schedules are planned for flights between Boston and both Los Angeles and Chicago; and New York and Atlanta, Chicago, Dallas/Fort Worth, Raleigh-Durham and San Francisco by this summer.

Edward Russell

Routes Briefs

  • Allegiant Air was not joking when its CEO said it was “step on the gas.” The discounter will add two more new routes in June: St. Petersburg-Clearwater, Fla., to Portsmouth, N.H., from June 2, and Pittsburgh to Key West from June 3. In addition, Allegiant will extend planned temporary service between Punta Gorda, Fla., and Rapid City, S.D., to regular status with flights from June 2.
  • Airlines continue to look to the Great Outdoors for new routes this summer. Separate from its northeast additions, American will launch new service to Eureka-Arcata, Calif., and Idaho Falls, Idaho, and add new routes to Bozeman and Missoula, Mont., and Grand Junction, Colo., in June. The carrier will connect Dallas/Fort Worth and Idaho Falls; Phoenix and Bozeman, Eureka and Idaho Falls; and Los Angeles and Missoula on June 3. Two days later, it will connect Los Angeles and Grand Junction. Eureka and Idaho Falls are a throwback for American, which served both cities in the early 1990s.
  • One if by land, two if by sea, six if by air? United Airlines is the latest to pile into the red hot Boston-London market. The Star Alliance carrier plans daily service between New England city and Heathrow airport with a Boeing 767-300ER later in 2021. The news comes as JetBlue moves towards launching its inaugural transatlantic foray to London from Boston and New York by fall. British Airways and Virgin Atlantic fly the route, and American and Delta Air Lines are due to resume flights by May.
  • Fresh off its voluntary administration restructuring, Virgin Australia plans two new domestic routes for the Easter holidays. The carrier will connect Adelaide and Sunshine Coast four-times weekly, and Melbourne and Byron Bay six-times weekly from March 29 to April 25.
  • Canada’s new travel restrictions are hitting air service hard. Following on Air Canada‘s heels, the country’s second largest carrier WestJet will suspend flights to St. John’s, London, Ont., Lloydminster and Medicine Hat from March 9 to June 24.

    Edward Russell
Expand Section

Fleet

Aircraft deliveries will be flat this year, Airbus said, forecasting that the recovery in commercial air transport won’t return to 2019 levels until some time between 2023-2025. The airframer reported a $1.3 billion loss last year.

Deliveries in 2020 were down by almost 300 aircraft from 2019, coming in at 566 deliveries for the year. Single-aisle aircraft dominated. Airbus delivered 446 A320-family aircraft and 38 A220s. By contrast, it delivered 19 A330s, 59 A350s, and four A380s. “We are basically seeing a shift away from widebodies,” Chief Financial Officer Dominik Asam told analysts during the company’s earnings call last week.

Production rates for widebodies will hold steady this year. Narrowbody production, by contrast, will increase slightly. Airbus expects to raise production of A320-family jets from the current 40 aircraft per month to 43 in the third quarter and 45 by the end of the year, CEO Guillaume Faury said. A220 production will go from four aircraft per month now to five per month by the end of this quarter. Airbus expects the A220 program to reach breakeven by the middle of this decade.

In 2020, Airbus had 383 gross orders, 360 for narrowbodies and 23 for widebodies. The company had 115 cancellations for the year. “We need to watch this trend going forward,” Faury said of cancellations.

IATA predicts air travel will begin to rebound in the third quarter of this year, but Airbus is more conservative, forecasting a return to 2019 levels by between 2023-2025. Vaccinations will help restore consumer confidence, Faury said, but the emergence of new coronavirus variants could stifle the recovery. Domestic and regional travel will lead the recovery, with longhaul lagging, which tracks with Airbus’ order trends. “The path to recovery is not necessarily linear,” he said. “Therefore, we have to remain humble and demonstrate our resilience again.”

Airbus’ defense, space, and helicopter businesses did better than its commercial aviation business, although the airframer noted that governments have pulled back on some defense spending as economies around the world suffer. Airbus delivered nine A400M airlifters last year.

At the end of last year, Airbus’ backlog stood at 7,184 commercial aircraft, valued at $451 billion, slightly off its 2019 year-end backlog, Faury said.

Madhu Unnikrishnan

In Other Fleet News

  • De Havilland is pausing production of the Dash 8-400 at its Downsview plant until demand returns, the airframer said. The company delivered 11 Dash 8s last year and will keep the plant open as it works through its backlog, but it expects to close it in the second half of this year. About 500 workers will be affected, the company said.

    De Havilland inherited the Downsview plant, near Toronto, when Bombardier divested the Dash 8 program. De Havilland said it is looking for a new site to resume production of the type. In the meantime, it is developing aftermarket modifications for the in-service Dash 8 fleet, including new overhead bins and freighter-conversion support. The airframer said it plans to resume production. “We see a bright future for De Havilland Canada and the Dash 8,” said David Curtis, executive chairman of Longview Aviation Capital, De Havilland’s parent company.
  • The UAE became the latest country to clear the Boeing 737 Max for flight last week, when the country’s General Civil Aviation Authority (GCAA) outlined a series of steps operators must take before returning the type to service. Operators must submit their plans on returning the Max to service to the GCAA that must account for differences in the FAA’s and EASA’s safety mandates and to retrain pilots on the new flight systems. Flydubai has more than 200 737 Max aircraft on order and has idled its fleet of about 20 since the type’s worldwide grounding in 2019.
  • Air Lease Corp. is leasing two Airbus A320-200s to Uzbekistan’s Qanot Sharq Airlines. The two A320s will be the first aircraft in the start-up’s fleet and are expected to be delivered next month. Qanot Sharq said it plans to start operations from Uzbekistan to Istanbul, Ankara, Dubai, Jeddah, Medina, Moscow, St. Petersburg, and Almaty.
  • All good things come to an end. Although it’s not a commercial aircraft, the Learjet has been an aviation legend since Bill Lear flew the first jet in 1963, becoming the last word in jet-set opulence. (Frank Sinatra was among its fans.) Bombardier, which acquired Learjet in the 1990s, said last week that it would end production of the iconic jet this year. The Canadian airframer has divested its commercial aviation division (and its rail transportation division) and now is focusing on its other business jets.
  • As expected, the pandemic pushed Delta Air Lines to reset its deliveries over the next few years. The carrier delayed the arrival of its first of 100 Airbus A321neos by two years to 2022. In total, Delta has deferred the deliveries of 102 aircraft from 2020-2022 to 2023 or later. The airline retired 178 planes, including all of its Boeing 737-700s and 777s, and McDonnell Douglas MD-88s and MD-90s, in 2020.

Madhu Unnikrishnan and Edward Russell

Expand Section

Landing Strip

The Metropolitan Washington Airports Authority is one of many airport operators that took advantage of the slowdown in air travel during the coronavirus pandemic to accelerate capital projects. Now with the crisis entering its second year, MWAA is ready to open the first part of its $1 billion Project Journey terminal expansion at Ronald Reagan Washington National airport as much as three months early.

American Airlines could begin flights from the new 14-gate concourse as early as April 20, MWAA President and CEO Jack Potter said last week. “It’s a major customer service milestone that we’re reaching, and we’re reaching it in record time — much earlier than expected.”

Airports in Los Angeles and Salt Lake City have also used the crisis to accelerate work on terminal projects. The latter has shaved as much as two years off the timeline for the expansion of two new concourses that opened with its new terminal in September. But not all airport works are benefitting from the crisis. Plans for a new Terminal F at Dallas/Fort Worth have been put on hold pending a recovery in air travel.

Located at the northern end of the Washington National terminal complex, the new concourse will serve American Eagle flights. It is designed to handle Embraer E175-sized regional jets. The facility replaces the ground-level Gate 35X that was widely disliked by travelers.

In January, American President Robert Isom said the airline would replace all of its 50-seat regional jet operations at National with larger, dual-class aircraft by July. This coincided with the then opening timeline for the new concourse.

The Covid crisis, while allowing MWAA to accelerate concourse work, has also hit Washington National and American’s hub hard. The airport saw passenger numbers plummet 67 percent to just 7.2 million during the first 11 months of 2020, airport data show. And American slashed its hub to as few as 21 daily departures in May from as many as 249 a day prior to the pandemic, according to Cirium schedules.

MWAA does not expect passenger numbers to recover at National, or its larger sibling Washington Dulles, until Covid-19 vaccines are broadly available and administered — both in the U.S. and abroad — Potter said.

Work on the rest of Project Journey — two new security checkpoints that will allow the main hall in Terminal B/C at National to move inside security — continues with an opening expected in 2021. The checkpoints are more than a year behind their original 2020 opening target.

In addition to the early concourse opening, MWAA Chief Revenue Officer Jerome Davis said during the board meeting that the operator has signed a deal with American Express for a new Centurion lounge at Washington National. The facility is due to open by the end of 2022 after all Project Journey work is complete.

Edward Russell

Airport Briefs

  • What a year for what was once the world’s busiest international airport. Dubai International Airport (DXB) reported it handled 26 million passengers in 2020, down 70 percent from 2019. Traffic in the first quarter of last year was down only 20 percent compared with 2019, to 18 million passengers.

    DXB essentially shut down in April, handling only repatriation and cargo flights, and it reopened in June. From then on, flights started trickling back, with DXB ending the year with 75 percent of its pre-pandemic airlines serving 61 percent of the airport’s former routes. India and the UK were the top destinations. Cargo came into focus during the pandemic, and DXB said it invested heavily in its cargo and warehousing facilities and has become a regional hub for Covid vaccine transport.
  • The FAA has adjusted rules around the use of airport funds for transit connections. Airports can now use passenger facility charges (PFCs) — fees charged to each traveler using a facility — to fund transit infrastructure that does not necessarily end at the airport. Previous rules barred the use of funds for projects that served more than just airport customers. For example, PFCs could pay for a dedicated people mover from a nearby train station to the terminal but not a rail line with a terminal stop on its way to somewhere else. The new rules allow funds to be used for any transit facilities built on airport property in the latter scenario.
  • Las Vegas sure seems to like its senators. Clark County, home to the city, has approved a proposal to rename McCarran airport — named after former Sen. Patrick McCarran (D-Nev.) who died in office in 1954 — after former Sen. Harry Reid (D-Nev.). The facility would be known as Harry Reid International Airport if the FAA signs off on the change.
  • Grupo Aeroportuario del Pacifico (GAP) has unveiled roughly $504 million in upgrades for the Guadalajara airport. The investment includes renovations to the existing terminal that dates to 1966, as well as a second runway and a new terminal building. Upgrades to the existing facility are due to open by 2023.

    Edward Russell and Madhu Unnikrishnan
Expand Section

State of the Unions

  • Pilots at JetBlue Airways are unhappy with the carrier’s new alliance with American Airlines. Cockpit crews rejected a tentative agreement that included scope relief for the new partnership by a narrow 53.7 percent margin against. Leaders at the JetBlue chapter of the Air Line Pilots Association (ALPA) called on the carrier for more job protections and advancement opportunities for pilots.

    JetBlue has been pushing the case that the alliance represents growth for crews. The airline recently outlined plans to potentially triple flights at New York LaGuardia to 50-60 departures a day, as well as add up to 65 departures at New York JFK, 50 at Boston Logan and 45 at Newark Liberty. Federal authorities signed off on the American-JetBlue pact in January.

    Edward Russell
Expand Section

Feature Story

Aeromexico and Volaris Offer a Study in Contrasts.

Not that many years ago, Aeromexico was sitting pretty. Its main network competition, Mexicana, had gone bust, despite long-running and tortured attempts to revive it. It was the dominant carrier at Mexico City, a congested but coveted airport. It was enjoying the benefits of a rapidly growing middle class and economy in its home country, fueled in part by demand for commodities.

The Skyteam carrier got a vote of approval from Delta Air Lines, which bought an ownership stake in Aeromexico. The government broke ground on a new, bigger airport to replace Mexico City’s aging facility. Aeromexico expanded its network, adding flights to Seoul, Tokyo, and Shanghai, as well as more routes to Europe and the Americas.

And then a rough run began. First, the administration of President Andres Manuel Lopez Obrador stopped construction on the new airport and proposed redeveloping a military airfield for commercial use to augment, not replace, the slot-constrained Mexico City airport. The government also proposed using Toluca to relieve Mexico City, creating a three-airport plan for the region. This put paid to Aeromexico’s plans to recreate Copa Airlines’ vastly successful hub in Panama City.

Then came the worldwide grounding of the Boeing 737 Max, on which Aeromexico had staked much of its domestic and near-international capacity expansion. The carrier ended last year with six of the type, five of which resumed revenue service after the grounding lifted.

And finally, came the Covid-19 pandemic and its travel restrictions, an ensuing economic downturn, and a dramatic fall in oil prices. Although Mexico did not impose the stringent travel restrictions most other countries did and remained largely open, Aeromexico’s international network essentially ground to a halt. This was a march too far for the carrier, which last June sought bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. And as it faces 2021, it confronts a dramatically changed Mexican aviation market.

Aeromexico swung to a $2.1 billion loss last year, after posting a small profit in 2019. The carrier’s revenues were down almost 60 percent year-over-year, and traffic plunged by 61 percent for the year. Domestic demand is returning, and fourth-quarter capacity rose 40 percent from the third quarter, although capacity is still off almost 50 percent from the fourth quarter of 2019. The carrier ended the year with 106 aircraft at both the mainline and regional units, down from 125 at the end of 2019, after six 737-700s, nine 737-800s and nine Embraer E170s — its entire fleet of the small E-Jet — exited the fleet.

The carrier has begun restoring some routes within Mexico and elsewhere in North America. Its European and South American route networks remain more uncertain, as travel restrictions are eating into demand. Like airlines around the world, Aeromexico is chasing leisure traffic to beach destinations and visiting friends and relatives (VFR) passengers, in its case mainly to North America.  A concern for all Mexican carriers is new Covid testing requirements in the U.S.

The bankruptcy court approved $1 billion in debtor-in-possession financing for the beleaguered airline, and the carrier availed itself of the last tranche of that funding last week. Accessing the funds was touch-and-go for a while. It was dependent on the airline getting concessions from its unions, and its pilots and flight attendants balked. The unions agreed to negotiate new agreements earlier this year. “The funding of the final disbursement is a key milestone in Aeromexico’s ongoing, voluntary restructuring process that will provide us with sufficient liquidity to support our continued operations during this time and with the flexibility to continue our orderly restructuring process with the objective of emerging stronger,” CEO Andres Conesa said.

Mexican Airline Capacity 2020 vs. 2019

Airline2020 ASMs2019 ASMsPercent Change
Interjet2,170,880,7307,531,314,792-71.2%
Aeromexico6,124,083,4018,949,276,472-31.6%
Viva Aerobus7,549,363,7448,446,669,288-10.6%
Volaris15,357,765,15017,029,763,468-9.8%
Total*31,951,290,19942,990,665,573-25.7%

Source: Cirium

*Total includes regional airline capacity, not shown

Volaris Tells a Different Kind of Story

Meanwhile, it’s Volaris that’s now sitting pretty. The ultra-low-cost carrier ended the year with something few carriers around the world achieved: a positive operating margin in the fourth quarter, in its case 12 percent. Revenues in the fourth quarter were 83 percent of the same period in 2019, at $20 million, and for the full year, revenues were 64 percent of 2019 revenues. Perhaps most startling, fourth-quarter domestic capacity was 95 percent of 2019 levels, with international capacity at about 86 percent and domestic at 99 percent of 2019. Yes, 99 percent.

“These results reflect that Volaris is too different from any carrier in the continent and should be benchmarked and values alongside the best ultra-low-cost airlines in the world,” CEO Enrique Beltranena said last week.

How did Volaris pull this off? There are several factors. First, the carrier’s management likes to tout its relentless focus on costs. CASM-excluding fuel is back to pre-pandemic levels, at 4 cents at the end of the last quarter, an 18 percent improvement over the third quarter. Much of this is attributable to new maintenance and labor agreements. Fleet changes also reduced costs. Volaris returned an Airbus A319 and added three Airbus A320neos in the fourth quarter, ending the year with 86 aircraft (six A319s, 64 A320s, and 16 A321s). “The airline continues to have one of the lowest unit cost structures in the world,” Cowen & Co. analyst Helane Becker said in a note to investors. 

Perhaps a larger factor, though, is Volaris’ customer base and route network. Even before the pandemic, the airline was laser-focused on VFR and leisure traffic. VFR comprised 45 percent of its traffic pre-Covid, with leisure another 30 percent. The balance was business traffic, which the carrier did not actively court. And even then, most of Volaris’ business traffic was from small- and medium-sized businesses, not major corporations, Executive Vice President Holger Blankenstein told Airline Weekly last year.

And of course, what airline markets are recovering quickest worldwide? VFR, leisure, and travel by small- and medium-sized businesses. Even Delta is shifting its focus to chase that business-travel segment. So Volaris entered the pandemic better prepared than any airline in Mexico and was perhaps among the best-positioned in the world. Last week, Blankenstein said that 70 percent of Volaris’ traffic was VFR and leisure, with the balance made of business traffic from small- and medium-sized businesses, in 2020.

Ancillary revenues reached a record last year, comprising 48 percent of total operating revenues. The goal is to reach 50 percent this year. In 2020, Volaris changed its carry-on and checked-bag fees and added new ancillary products, including medical and travel insurance, both of which proved popular during the pandemic.

And market conditions redounded to its benefit. Troubled Interjet, which could not pay its fuel bill at the end of last year, is down to a handful of Sukhoi Superjets (also troubled) and has essentially stopped flying. Its survival remains uncertain. Aeromexico is retrenching, freeing up valuable slots at Mexico City. And Volaris plans to go on the offense. “We looked at where there were capacity gaps left by some of our struggling competitors,” Blankenstein said.

The company has launched several new VFR routes within Mexico and to the U.S. And it retains its focus on attracting passengers away from buses. There are about 3 billion bus journeys in Mexico each year, of which about 30 percent are on premium buses. This is where Volaris will focus its energies this year, Blankenstein added.

But all is not smooth sailing ahead. Viva Aerobus, itself wholly owned by a bus line, is nipping at its heels. Although Viva Aerobus had not released its earnings report by press time, the company’s most recent traffic report shows the carrier had a V-shaped recovery last year. Traffic dipped significantly when the pandemic began but, by November, Viva Aerobus was back to 100 percent of its 2019 capacity, the company said. And by December, it had exceeded its 2019 ASMs. The airline launched 28 new domestic and international VFR and leisure routes last year. Viva Aerobus is now half the size of Volaris and expanding.

Another headwind is the first quarter, historically a weak period for the country’s airlines. Neither Aeromexico nor Viva Aerobus offered guidance on the first quarter, but Volaris expects its first-quarter capacity will be about 20 percent lower than last year’s.

And of course the coronavirus itself is a headwind. Mexico’s airline industry has been almost unfettered during the crisis, but the capital has been badly afflicted. How vaccine distribution plays out remains to be seen. New testing requirements in the U.S. could be a dampener on demand for travel. New variants of the virus circulating in the U.S., and fresh outbreaks of the disease could affect crossborder traffic even more. Volaris noted the booking curve remains shorter than usual.

In other words, more unknowns, but Volaris’ Blankenstein is “cautiously optimistic” that the recovery will begin after Easter in April. And Aeromexico said it is confident of a year of transition in 2021. Whether that confidence is justified, of course, remains to be seen. Stay tuned.

Madhu Unnikrishnan

Expand Section