Issue No. 802

Wall Street Hopes There's No Country Like Sun Country

Tiny Sun Country Files to Go Public — During Aviation's Worst-Ever Crisis

Pushing Back: Inside This Issue

The last U.S. mainline carrier to go public was Virgin America in 2014, which, it is safe to say, was a different era. The airline industry then was riding high and would soon start posting record profits. We all know what happened to end that party, resulting in the global suffering of a massive pandemic and the airline industry's worst-ever crisis. So why is Sun Country choosing now for its initial public offering? It's always been different, and there are some compelling arguments for Sun Country to go for it. We dive into the issue in this week's Feature Story.

Elsewhere in this issue, earnings, earnings, and more earnings — and they're all pretty grim. Air Canada is grappling with its home country's ever-stricter public-health measures. Once-and-future wunderkind Copa is continuing its fleet restructuring, even as it bleeds red ink. Spirit, on the other hand, thinks its leisure-focused network stands it in good stead, and Mesa actually made money (thanks to help from Uncle Sam).

Meanwhile, airlines the world over are scrambling to chase whatever traffic may exist by retooling their route networks. Singapore bets on the Boeing 777X. And United plots a more carbon-limited future with electric air taxis.

Verbulence

"No negative comments. No passengers refusing to fly the airplane. It's been like just any other aircraft in our fleet."

Copa CEO Pedro Heilbron when asked if passengers hesitate to fly the airline's Boeing 737 Max aircraft.

Airline Weekly Lounge

The podcast is back! New episodes drop every Thursday and are available here or wherever you get your podcasts. In the most recent episode, Airline Weekly reporters Edward Russell and Madhu Unnikrishnan discuss the week in earnings and why so many airlines are adding new routes like it's going out of fashion.

Weekly Skies

Air Canada is lobbying hard for mandatory Covid-19 testing for air travelers to and in its home country after what it deems as onerous restrictions contributed to its steep loss in 2020.

The Montreal-based carrier has partnered with various organizations to prove that broad testing protocols can control the spread of the coronavirus. In addition, Air Canada has put its money where its mouth is and is finalizing an order for rapid tests from pharmaceutical firm Abbott to administer to customers and staff. And it has also partnered with pharmacy chains to offer travelers pre-departure testing before flights.

All these moves are in the hope of one thing: That the Canadian government will drop its strict Covid travel restrictions in favor of mandatory testing. Currently, the country requires all international travelers to show proof of a negative Covid test and quarantine for 14 days after arrival. It also has closed the border with the U.S. to all but essential travelers, and asked airlines to suspend all flights to the Caribbean and Latin America through April 30. In addition, several Canadian regions and provinces mandate two-week quarantines for domestic flyers.

“The silver bullet here is a very, very effective testing protocol that replaces the blanket restriction, that replaces the quarantine,” Air Canada CEO Calin Rovinescu said during the airline’s fourth-quarter and full-year earnings call last week. Testing, he added, is the “most immediate and practical way to protect communities, restart the economy … and restore travel.”

The airline hopes a testing regime can be in place by the end of April, when the suspension of Caribbean and Latin American flights lifts.

In the meantime, Air Canada is rolling back its capacity recovery plans amid the new restrictions. It only plans to fly roughly 15 percent of 2019 capacity in the first quarter, compared to nearly 23 percent in the final quarter of 2020. The airline is suspending service to 11 cities, including New York, Seattle, and Washington, D.C.

A lack of government aid has only exacerbated the effect of Covid restrictions. Some Canadian carriers, including Air Transat and Porter Airlines, to suspend flights altogether — with some wondering if at least the latter will ever resume flying — and strong criticism from airline leaders.

“We compete with the U.S. airlines, so we think that a similar program [to the CARES Act], maybe with some Canadian modifications, would best suit the airline industry up here in Canada,” Rovinescu said when asked what kind of Covid aid the airline would like from the government.

U.S. carriers received more than $65 billion in Covid-related relief. This includes $50 billion split between $25 billion in payroll support to keep staff employed and another $25 billion in direct loans for other purposes from the CARES Act that was passed last March. The payroll support aspect was extended with another $15 billion in December, and a third $14 billion extension appears a likely inclusion in President Biden’s proposed $1.9 trillion Covid relief package.

Discussions between airlines and the Canadian government began in November. However, they have only recently picked up speed to a point where Rovinescu said he is “more optimistic [of success] for the first time.”

Air Canada anticipates any financial relief from the government to come with strings attached. These are likely to include refunds for travelers and resuming flights to regional destinations that it has suspended since the pandemic hit.

The Canadian government has given Air Canada one piece of good news: it signed off on the airline’s acquisition of leisure carrier Air Transat on Thursday. Conditions include keeping the Transat brand and base in Quebec, supporting other airlines to take over former Transat routes to Europe, and committing to adding new destinations within five years of closing.

Rovinescu declined to comment on the approval, noting that discussions with European regulators and other parties are still ongoing. Air Canada has a February 15 deadline to close the deal.

The Air Canada-Air Transat deal would see a combo of the largest and third largest Canadian carriers. Competitors, notably WestJet, have opposed the merger citing a loss of competition.

“When Canadians look to explore the world and reunite with family and friends once again, they will face fewer choices and higher fares,” WestJet CEO Ed Sims said in a statement on the approval Thursday. The Calgary-based carrier is Canada’s second largest airline.

Air Canada posted a $913 million (C$1.12 billion) net loss in the final quarter of 2020. Revenues plummeted 81 percent to $651 million with passenger traffic down nearly 89 percent year-over-year. The airline’s daily losses, or cash burn, averaged $9.5 million.

For the full year, the airline’s net loss totaled $3.7 billion. Revenues fell 70 percent to $4.6 billion on a 45 percent drop in expenses to $7.6 billion. Passenger traffic was down 75 percent on a nearly 67 percent capacity cut.

Air Canada has used the pandemic to restructure its fleet. During 2020, it retired 63 jets — including all of its Boeing 767-300ERs and Embraer E190s — and accelerated plans to remove its 16 remaining Airbus A319s over the next few years. The airline is focused on emerging from the crisis with a narrow-body fleet built around the Airbus A220 and Boeing 737 Max, of which the latter returned to service on February 1.

“Air Canada is ready for the recovery and well positioned to compete in the post-Covid environment,” Air Canada commercial chief Lucie Guillemette said optimistically. However, she could not provide a timeline for that recovery.

Rovinescu will not oversee Air Canada’s recovery. He departs the airline after 12 years at its helm on February 15 when he passes the CEO reins to current chief financial officer Michael Rousseau.

Edward Russell

Icelandair Sees Opportunity in Pandemic-Driven Industry Reset

Icelandair is betting that its model of providing affordable flights across the Atlantic with stopovers at its namesake island will benefit from the industry reset during the coronavirus pandemic.

The Reykjavik-based carrier said “changes in the competitive landscape” across the North Atlantic will likely rationalize capacity in the market, during a fourth quarter earnings presentation on February 9. While Icelandair did not name these changes, they undoubtedly include low-fare disruptor Norwegian Air‘s decision to exit long-haul transatlantic flying in January. Discount Icelandic competitor Wow Air closed its doors in March 2019, a year before the Covid-19 crisis.

But whatever benefit Icelandair reaps from rationalization over the North Atlantic, it will not come quickly. The airline does not anticipate recovering to 2019 capacity levels until 2024 — three years hence. In the meantime, the airline continues to gradually retire its Boeing 757s — it had 23 at end of 2020 — and replace them with new Boeing 737-8s and -9s. Icelandair plans to resume Max flights with the six in its fleet this spring; take delivery of another three in the second quarter; and three more during the fourth quarter and first quarter of 2022.

While optimistic on its future market positioning, Icelandair’s balance sheet bled red with a $376 million net loss in 2020. Revenues fell 71 percent to $434 million on a 62 percent drop in expenses to $520 million. Passenger numbers dropped 83 percent on an 81 percent capacity cut. Strikingly, Icelandair noted that it carried more flyers in the first two months of 2020 than it did during the remainder of the year.

In the fourth quarter, Icelandair revenues were down 81 percent to $60.2 million and expenses dropped nearly 70 percent to $93.5 million. Its net loss totaled $83.3 million for the period.

Edward Russell

Copa Airlines in Grip of Latin America’s Super Strict Travel Rules

Panama’s Copa Airlines was essentially grounded for almost five months last year. Flights resumed in the fourth quarter, as Panama eased its travel restrictions, but the resurgent virus and fear of new variants has quashed demand since December.

Copa’s December capacity was 27 percent of the airline’s December 2019 capacity, and first-quarter capacity so far has been about 40 percent of 2019. But February and March, historically a weak period, could see demand taper off even further as the new Covid-19 outbreaks cause countries Copa serves to clamp down on travel, CEO Pedro Heilbron told analysts during the company’s fourth-quarter and full-year 2020 earnings call on Feb. 11.

The latter point has made Copa’s and other Latin American carriers’ recovery more difficult. Travel restrictions and quarantine requirements change frequently, with little warning, making forward planning a headache. Heilbron said Copa is hopeful that wider acceptance of testing will help ease some of these restrictions. Copa is down to a handful of weekly flights to Argentina, twice weekly flights to Havana. Flights to Venezuela were grounded for almost a month, Heilbron said.

Panama now requires a negative PCR or antigen Covid test taken within 48 hours of departure. Importantly for Copa, which primarily connects passengers through its hub in Panama City, the country does not impose the requirement on connecting travelers. Uruguay, by contrast, only permits entry to nationals and permanent residents who booked travel before the latest round of restrictions.

“It will be a long and twisting road to recovery,” Heilbron said. The carrier is not offering guidance for the remainder of the year, but it says it will reach cash breakeven by the time it achieves 70 percent of pre-Covid capacity, and it will report pre-pandemic unit costs when it reaches 80 percent of pre-pandemic capacity.

Still, Copa is confident that it can weather this storm. The carrier raised $650 million in financing last year and has $1.3 billion in available liquidity. It has cut costs so that its monthly cash consumption is between $40-45 million. Its connecting hub at Tocumen also is a strength, Heilbron said, arguing that few Latin American cities will produce enough demand for point-to-point flights until the recovery is complete. And Copa is being flexible with capacity, able to adjust up or down quickly depending on demand, he said.

The carrier is adjusting its fleet as well, moving toward becoming an all-Boeing 737 operator. The remaining 14 Embraer E190s have been sold and will exit the fleet by June, Chief Financial Officer Jose Montero said. The carrier also retired 14 Boeing 737-700s. Seventeen of the carrier’s 737-800s are in storage for now but will return to the fleet as needed.

Copa took delivery of one Boeing 737 Max in December, and will add another eight 737-9s by the end of this year. Some of these were aircraft that Boeing had already manufactured but were not delivered due to the global Max grounding. It expects to take delivery of five of the type in 2022.

The company financed the first seven 737-9s with a $328 million loan guarantee from the U.S. Export-Import Bank (Ex-Im), finalized in December. Further Ex-Im financing is being negotiated for the remaining Boeing deliveries, Montero said.

Copa reported a fourth-quarter operating loss of $95 million, and a full-year operating loss of $461 million. Fourth-quarter revenues were down 77 percent from the prior year to $158 million, and for the full year were down 70 percent to $800 million.

Madhu Unnikrishnan

Spirit Joins Industry Chorus Opposing Domestic Covid Testing Mandate

Spirit Airlines is the latest carrier to weigh in against the prospect of a Covid-19 testing mandate for all U.S. domestic flights. Executives warn of a dramatic impact on travel demand plus high implementation costs, especially at a time when the country is still struggling to expand coronavirus testing capacity.

“We do not support the idea,” said Spirit CEO Ted Christie during a fourth-quarter earnings call last week. “We don’t think it addresses the issue … it would be logistically extremely difficult to do and expensive.”

In terms of an effect on travel, Spirit commercial chief Matt Klein said the airline has seen a “profound negative impact” on the number of flyers on flights from the Caribbean and Latin America since international testing rules began in January. This echoes similar comments from other airlines.

And practically, the U.S. may not have enough tests for all of the people traveling today. J.P. Morgan analysts estimate that the country would need to boost testing capacity nationally by 30 to 40 percent just to meet current demand, according to a report Tuesday. The increase would be even more pronounced in places like Florida — a popular destination for pandemic-weary Americans — where testing capacity would need to double.

Opponents also point out that unless similar testing rules are implemented for buses and trains, many travelers may just switch modes or drive for their trips. Moves that would only drain airline coffers further while doing little to stymie the coronavirus.

“Now is the time to turn our efforts to the recovery,” Christie said during the presentation last week. The airline plans to resume flying the same amount it did in 2019 by mid-year, and begin growing again thereafter.

To accomplish this, the carrier is beginning to bring back the 27 Airbus A319s that it placed in storage last year. This process is expected to last into 2022 as the airline works through the maintenance backlog for the jets and staffs up to fly them.

Staffing is the key “limiter” — as Christie put it — to Spirit’s recovery. While the airline can return to 2019 flying levels with its existing workforce, it does not have the crews to fully fly all of its planes plus the ones it has taken delivery of since Covid hit a year ago. This means the airline anticipates higher costs — but not fares — and potentially more losses until it is able to fully return to its low-cost, low-fare model by around mid-2022.

The fact that Spirit, and other budget airlines, are hiring attests to the strength of their model in the current market. While many major carriers who rely on lucrative business travelers are staring down a multi-year recovery, discounters whose bread-and-butter are deal-oriented vacationers are bullish on their immediate prospects. Allegiant Air and Sun Country Airlines, two of Spirit’s budget peers, also plan to recover and grow in 2021.

“The pandemic doesn’t necessarily disrupt our story,” said Christie. “We still think there’s going to be leisure demand, and we’re going to capture our portion of that. We did not make permanent changes to our business plan.”

Spirit recored a net loss of $157 million in the fourth quarter of 2020. Revenues fell nearly 49 percent to $498 million on a 22 percent drop in expenses to $658 million. Daily cash burn averaged just $1.8 million during the period.

For the full year, the airline lost nearly $429 million, a dramatic reversal from its $335 million net profit in 2019. Revenues were down nearly 53 percent to $1.8 billion and expenses dropped 30 percent to $2.3 billion. Passenger traffic fell 45 percent on a nearly 34 percent drop in capacity.

Spirit flew 157 Airbus A320 family aircraft at the end of December, a 12-plane increase compared to 2019. However, the year-end number includes the 27 stored jets. It plans to take delivery of 16 new A320neos in 2021.

The carrier anticipates another net loss this year before returning to profitability in 2022.

Edward Russell

Federal Aid Helps Mesa Boost Profits Above Pre-Pandemic Level

U.S. regional carrier Mesa Air Group‘s profits rose in the quarter ending in December from a year ago, mainly due to federal stimulus funds. The company reported fiscal first-quarter profits of $14.1 million, compared with $10.8 million the prior year, thanks to $11.3 million in benefits from the CARES Act last year.

The CARES Act’s benefits offset a 26 percent reduction in revenues Mesa earned from flying for its mainline partners, Chief Financial Officer Michael Lotz told analysts during the company’s earnings call last week. Mesa availed itself of a $195 million loan through the CARES Act in its most recent quarter, and the company expects to receive a further $25 million by March through the second round of airline support Congress authorized in December.

Without the payroll support, Mesa would have had to seek concessions from its pilots, maintenance workers, and flight attendants, CEO Jonathan Ornstein said. The federal aid allowed Mesa to avoid concessionary contracts and furloughing employees, although pilots did agree to pay cuts, he said.

“We are starting to see some glimmers of hope,” Ornstein said. The company is adding five Bombardier CRJs to its contract with American Airlines, and will have 64 of the type this year. For United Airlines, Mesa is adding 16 new Embraer E175s and is removing one CRJ from that fleet for every E175 it adds. Mesa expects to have 80 E175s in its United fleet in the next six months.

Last year, Mesa took the unusual step, for a regional carrier, of adding two Boeing 737-400s based in Cincinnati to carry cargo for DHL. The company plans to increase this fleet to at least 10 aircraft and could add a new aircraft every other month, Ornstein said. Mesa could expand its cargo flying to other companies beyond DHL, although no firm plans are in the works. “The cargo opportunity is significant for us going forward,” he said.

E-commerce has grown rapidly during the pandemic, as consumers increasingly shop from home. Mesa is not alone in adding freighters. Sun Country, which is planning to go public this year, operates 12 Boeing 737s to carry freight for Amazon. But Mesa’s deal is unusual, as it is the only regional carrier to fly mainline narrowbody aircraft as freighters.

The regional airline industry’s consolidation could continue, leaving just three or four companies flying all the U.S. regional lift, and Mesa is well positioned to be one of those companies, Ornstein said. He noted that in 1989 there were 113 regional airlines in the U.S., and that has winnowed down to the current handful of companies.

Mesa reported revenues down 26 percent in the most recent quarter to $127.2 million, compared with a year ago, but this this was up 31 percent from the previous quarter as block hours increased.

Madhu Unnikrishnan

In Other News

  • Tour operator TUI is relying on the UK, its biggest market, to lead a bounceback this summer, and predicts growth for its Musement activities app, following a dismal 2021 first quarter.

    For the three months to Dec. 31, 2020, TUI’s fiscal first quarter, the group reported an underlying loss of $1.21 billion. In that quarter it received another loan, worth $2.18 billion. So far, its bailouts come to almost $6 billion.

    For the next quarter it estimates it will burn through $302 million to $363 million per month, and it has $2.5 billion in the bank to see it through until the summer.

    Recovery now rests largely on pent-up demand, and its CEO hopes the UK will continue what’s been a strong start to its vaccination rollout, with almost 11 million people already receiving their first jab.

    “Because we have more than half of our bookings from the UK, that is definitely very helpful,” said Fritz Joussen during an earnings call on Tuesday. “This year there’s a strong indication that summer bookings will happen.”
    Matthew Parsons
  • Azul pulled off something few, if any, airlines managed this year. It’s January traffic grew 13 percent from January 2019. Capacity, also, was up, by 18 percent. Brazil’s domestic recovery is fueling Azul’s growth. The carrier’s domestic RPKs were up 14% in January from 2019, and capacity rose 16 percent. International RPKs fell by 3 percent, however, and international capacity was down 4 percent.
    Madhu Unnikrishnan
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Routes and Networks

  • American Airlines is beginning to roll out its summer schedule, and it’s already sporting a leisure focus from the 2020 playbook. The Fort Worth, Texas-based carrier is adding new routes from four of its hubs to Caribbean and Mexican beaches, domestic outdoor-oriented destinations, and as far afield as Israel.

    Miami lands a new thrice-weekly nonstop to Tel Aviv on a Boeing 777-200 from June 4. A day later, American connects its South Florida hub with seasonal Saturday-only flights to both Little Rock and Portland, Maine, from June 5 through August 16. And on July 1, it will add new five-times weekly service to Paramaribo, Suriname.

    Up the coast, new seasonal service between Charlotte and Marsh Harbour, Bahamas, and Reno, Nev., begins June 3; and Samana, Dominican Republic, begins June 5. The Marsh Harbour and Samana flights operate through August, and the Reno flight through September.

    And at the center of American’s universe, Dallas/Fort Worth, gains nonstops to Merida, Mexico, St. Lucia, and St. Maarten. The same day, the airline launches new Los Angeles-Cancun service. All of the routes operate seasonally on Saturdays from June 5 through August 14.
  • Reeling from new Covid-19 travel restrictions from the Canadian government, Air Canada is suspending 17 routes and 11 destinations for an indefinite period beginning later in February. The carrier will temporarily end all flights to Bogota, Boston, Denver, Dublin, Fort Myers, New York LaGuardia, São Paulo Guarulhos, Seattle-Tacoma, Tel Aviv, Tokyo Narita and Washington Reagan National.
  • Fresh off its forecast of potentially double-digit growth this year compared to 2019, Allegiant Air has unveiled 25 new routes beginning this summer. The new nonstops include Appleton to Savannah; Austin to Bozeman and Northwest Arkansas; Bangor to Fort Lauderdale; Boston to Norfolk and Indianapolis; Bozeman to Oakland and San Diego; Cincinnati to Key West; Clarksburg, W. Va., to Chicago Midway and Destin-Fort Walton Beach; Concord, N.C., to Sarasota-Bradenton; Des Moines — a new base for the airline — Houston Hobby, Portland, Ore., and San Diego; Destin-Fort Walton Beach to Asheville and St. Cloud; Houston Hobby to Springfield/Branson and Lexington; Little Rock to St. Petersburg-Clearwater; Los Angeles to Omaha, Rapid City and Shreveport; Nashville to Albany, Boise, McAllen and Portsmouth; Portland, Ore., to Billing, Grand Rapids and Missoula; and San Diego to Kalispell, Pasco and Phoenix-Mesa. The new routes begin between May 7 and July 2.
  • California or bust? Delta Air Lines will add two routes from its Los Angeles hub in April. The Atlanta-based carrier will begin twice-daily flights to Houston Bush Intercontinental, and thrice-daily service to Oakland on April 12. Los Angeles-Houston is a new route for Delta, whereas it previously flew Los Angeles-Oakland until 2018.
  • Canadian flyers need not fear Air Canada’s suspensions, discounter Flair Airlines will add eight new destinations across the country between May and August. Flights to Halifax, Kitchener-Waterloo, Ottawa and Saint John begin May 1; Charlottetown and Thunder Bay in June; Victoria in July; and Abbotsford in August.
  • SAS is adding several Mediterranean routes this summer. The airline will connect Stockholm and Barcelona from March 26; and Copenhagen and Larnaca, and Oslo and Faro a day later. The routes will operate on a less than daily basis.
  • Aloha! United Airlines will add a new route to Hawaii, taking a stab at the Orange County-Honolulu market beginning in May. The carrier will offer a daily flight with a Boeing 737-700 on the route from May 6. Fun fact, Continental Airlines that merged with United in 2010 flew the route from 2010-2012.
  • European discounter Wizz Air will open its 41st base in Sarajevo in May. The Budapest-based airline will launch nine new routes from the capital of Bosnia and Herzegovina: Copenhagen and Dortmund flights begin May 20; Basel-Mulhouse, Brussels Charleroi, London Luton and Memmingen on May 21; Gothenburg and Paris Beauvais on May 22; and Eindhoven on May 23. Wizz will base one Airbus A320 in Sarajevo.

Edward Russell

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Fleet

United Airlines has a bold new plan to enter the urban mobility market offering so-called “last mile” rides between its hub airports and local destinations with new, low-emission electric vertical takeoff and landing — or eVTOL — aircraft.

The Chicago-based carrier has unveiled a partnership with air mobility company Archer to develop an eVTOL for these last mile missions. The proposed aircraft, which Archer plans to unveil later this year, would carry four passengers up to 60 miles at speeds up to 150 miles per hour. United and its regional affiliate Mesa Airlines have signed the equivalent of a memorandum of understanding to purchasing up to 200 of these electric planes in a deal valued at $1 billion with the aim to debut them as soon as 2024. The partnership includes an investment in Archer by both United and Mesa.

“Now is the time to embrace cleaner, more efficient modes of transportation,” said Scott Kirby, CEO of United, in a statement. “With the right technology, we can curb the impact aircraft have on the planet.”

The eVTOL partnership with Archer is just the latest green initiative from United. In December, the airline unveiled plans to go “100 percent green” by 2050 with an investment in carbon sequestration technology. This followed previous investments in biofuels that, according to Kirby, face challenges finding scalable feedstock supplies.

The idea of a battery-powered eVTOL services in urban areas raises many questions. Traditional gas-powered helicopters have repeatedly proven uneconomical providing quick connections from city centers to airports. EVTOL’s would provide carbon emissions benefits over their internal combustion engine-powered alternatives, however, it is unclear whether the economics of a four-passenger electric plane makes sense for a major airline. For comparison, New York Airways helicopters seated up to 25 passengers.

United’s move will pit it against the likes of Blade, a luxury ride-sharing helicopter service in New York, and Joby Aviation who has partnered with JetBlue Airways. Not to mention direct competition with personal automobiles and regional transit authorities, the latter of which are investing billions of dollars in new airport connections.

United claims that the Archer eVTOLs would produce 47 percent fewer emissions than a personal vehicle driving from Hollywood to LAX. The airline did not provide a comparison to a traveler taking the bus or train to the airport.

And then there is the question of technology. As yet, Vancouver-based seaplane operator Harbour Air is the only carrier to test a fully battery-powered passenger aircraft. The airline has partnered with MagniX to develop an electric propulsion system for its DHC-2 de Havilland Beaver props. Other airlines, notably Hyannis, Mass.-based Cape Air, have partnered with various planemakers on developing an all-new electric aircraft.

Most greensheet electric aircraft programs remain years away. For example, the head of research at Italy’s Tecnam Fabio Russo recently told The Air Current that its electric variant of the P2012 Traveller — the P-VOLT — could enter service “well before … 2035.”

The U.S. FAA would have to approve and certify Archer’s eVTOL — including everything from its design to its engines and the flight control system — before it could enter service for United or any other operator.

“We believe the U.S. government should be encouraged by this move,” wrote Cowen analyst Helane Becker on United’s commitment to Archer in a report Wednesday. “We believe carbon emissions will be a major focus for airlines in the next two decades.”

Edward Russell

In Other Fleet News

Singapore Airlines is making big changes to its aircraft order book with the aim of deferring $4 billion in capital expenditure over the next five years.

The headline, though, is that Singapore Airlines is converting 14 Boeing 787-10 orders into orders for 11 Boeing 777-9 (or 777X). With the change, Singapore Airlines’s order book consists of: 35 Airbus A320-family aircraft; 15 A350-900s; 31 Boeing 737-8s; 20 787-family aircraft; and 31 777-9s.

Boeing’s 777X program has faced its share of headaches. The airframer recently said it was pushing the type’s entry-into-service date back to 2023. The Covid-19 pandemic has dampened demand for very large aircraft, and the type is facing increased regulatory scrutiny. Boeing is making changes to the airframe after discussions with regulators, CEO Dave Calhoun told analysts last month.

Singapore Airlines, however, grounded its Airbus A380 fleet during the pandemic., Late last year the airline said it would retire the remaining seven of the type in its fleet. This paves the way for a new aircraft to enter the fleet, filling the niche once filled by Singapore’s A380s and Boeing 747s.

  • Airbus booked no new orders in January, the airframer said. It delivered 21 aircraft to 15 customers: three A220s; 16 A320-family aircraft; one A330 Neo; and one A350. At the end of last month, Airbus’ backlog was for 7,163 aircraft, the airframer said.
  • Embraer delivered 28 commercial aircraft in the fourth quarter and 44 for the full-year 2020. The Brazilian airframer said Covid dramatically affected its operations last year (it has reduced its workforce significantly) but deliveries picked up in the fourth quarter. In 2020, Embraer delivered: 32 E175s; one E190; four E190-E2s; and seven E195-E2s.

Madhu Unnikrishnan

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Feature Story

It’s the odd airline that chooses now to go public. Tiny Sun Country fits the bill.

Why would an airline go public now, during a crisis that has left the industry staggering and forced most carriers to contemplate a smaller, much more limited near-term future? Why go public now in an environment so severe that even a stalwart like Southwest posted its first losses in almost 50 years?

Because Sun Country isn’t like other airlines. The Minneapolis-based low-cost carrier did something that most other airlines could not last year: It turned a profit. The carrier reported 2020 net profit of $4.1 million and an operating profit of $21.8 million in a year when even Allegiant reported a $184 million net loss. No U.S. carrier that has reported earnings for the past year can claim this achievement.

Sun Country, like other airlines, did have a little help from Uncle Sam. It took more than $62 million in federal aid through the CARES Act and the subsequent coronavirus fiscal aid package. But the carrier reported an operating margin of 7.4 percent for the first nine months of last year, which it achieved, in part, by cutting costs once the pandemic began.

Sun Country last week filed its intent to offer shares with the U.S. Securities and Exchange Commission (SEC) on February 8. The airline offered few details on its plans, with the number of shares and their price to be determined. Barclays, Morgan Stanley, and Deutsche Bank, together with Sun Country’s current owner, Apollo Global Management, are underwriting the offering.

It’s been years since an airline went public. The last major airline to go public was Virgin America in 2014, although regional carrier Mesa Airlines floated its shares in 2018. Since then, of course, the Covid-19 pandemic struck and brought the airline industry to its knees. The U.S. government has funneled $65 billion in aid to the industry since last March, with more possibly coming.

Given Sun Country’s profitability, and the continued frothiness of the stock market despite macroeconomic uncertainty, Apollo may think now is the right time. “Historically, private equity looks at a five-year investment cycle,” said Raymond James airline analyst Savanthi Syth. “If they can IPO now, that would give Apollo a pathway to exit over the next few years.’

But the pandemic hasn’t been unkind to all travel companies. AirBnB, the hospitality behemoth, raised almost $4 billion in its initial public offering in December, even as the pandemic sapped demand for travel. In its prospectus filed to the SEC, Sun Country said it is hoping to raise at least $100 million. “Airline stocks and investor sentiment in the sector is still somewhat challenged, but at least well off of the lows,” Syth adds.

That could be argument enough for Apollo, which acquired Sun Country in 2017. Apollo signaled its intention to float Sun Country more than year ago. At the time, CEO Jude Bricker said the company saw a window of opportunity to go public and “didn’t want to miss it.”

Apollo bought the carrier from its former owners, two Minneapolis-based brothers who made their fortunes through dairy and quartz-countertop businesses. They bought the bankrupt carrier in 2011 and brought Allegiant veteran Bricker on in 2017 to reimagine the airline.

And reimagine it he did. Sun Country went from a hybrid airline with a premium class to an airline built around the price-conscious leisure traveler, taking them from its Minneapolis base to leisure destinations in the U.S., Mexico, and the Caribbean.

Sun Country’s Leisure-Focused Network

(Source: Sun Country)

In addition to its traditional business flying almost entirely leisure travelers from the Upper Midwest to southern beaches, it launched cargo flights under a deal with e-commerce giant Amazon early last year. In what now appears a prescient diversification of its business, cargo revenues jumped from nothing to $17.5 million — a small but tidy sum — during the first nine months of 2020.

This helped offset the lost revenue from Sun Country’s other business lines and allowed it to continue hiring pilots at a time when most of the industry was asking for concessions or threatening furloughs. “The [Amazon deal] has generated consistent positive cash flows through the Covid-19-induced downturn,” the company noted in the filing with the SEC.

While Sun Country does not mention any agreement to expand flying for Amazon beyond the 12 Boeing 737 freighters it currently flies for the online giant, the airline does plan to grow in 2021. The carrier said it has “identified” three to five used 737-800s it could acquire for growth this year. The aircraft would complement the 31 737s — 30 -800s and one -700 — it currently flies.

“We believe the airline industry will rebound in the back half of 2021 and normalize in 2022,” Sun Country said in the prospectus. Much of these hopes are pinned on widespread distribution of Covid-19 vaccines and the ensuing return of travel demand.

But Sun Country acknowledged that its hopes for a rebound are not without risks. “We are depending upon a successful Covid-19 vaccine and significant uptake by the general public in order to normalize economic conditions, the airline industry, and our business operations, and to realize our planned financial and growth plans and business strategy,” Sun Country said in its SEC filing.

New quarantines or travel restrictions, the failure of vaccines to contain the disease, and the possible requirement to test domestic travelers for Covid-19 also could affect the company’s plans, the carrier added. Furthermore, Sun Country generates a significant amount of revenue from its charter operations, especially with sports teams. More cancellations of sporting events will hit its bottom line, the company said.

Sun Country also is particularly at risk if a recession lingers after the pandemic recedes. Its passengers are mainly price-conscious leisure travelers, who are more likely to put off or cancel trips if their discretionary income falls.

So yes, there are risks, but the carrier and its backers see ample opportunity for reward. Will Sun Country be the next AirBnb? Unlikely. But with its diversified business of scheduled and charter flights, strong leisure route network, and growing Amazon cargo operation, the question probably shouldn’t be “Why now?” but “Why not now?”

Madhu Unnikrishnan and Edward Russell

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