Issue No. 813
American Tech Ops' Post-Pandemic Future
The MRO Switches From Storing Jets to Getting Them Ready for Flight
Pushing Back: Inside the Issue
Early in the pandemic, American's Tulsa, Okla., maintenance base spent a lot of its time readying aircraft for long-term storage. Now, it's doing precisely the opposite as the world's largest carrier starts to pull its aircraft out of mothballs. We take a look at that pivot in this week's Feature Story.
Since the pandemic began, more than 1,500 aircraft have been pulled out of service, with many of those permanently retired, Boeing's CEO David Calhoun said. This could be a golden opportunity for the airframers when airline industry growth resumes, as airlines seek to replace that lost lift with new jets. But the heads of both Boeing and Airbus think this could be years off. That's in stark contrast to U.S. airline CEOs, who think the summer will be busy as vacationers take long-delayed holidays (although business and international travel remain in the doldrums).
Airbus CEO Guillaume Faury thinks the recovery will not be "linear," to use his word. While the U.S. and domestic China get ready for a busy summer, Brazil is just starting to emerge from a devastating wave of the disease, and India has descended into a public-health catastrophe. The Australia-New Zealand travel bubble showed signs of strain when a few passengers inadvertently breached the sanitary cordon (but the bubble so far still remains intact), and some have begun to whisper that the Tokyo Olympics may not occur as Japan grapples with a slow vaccine roll out. Meanwhile, airlines and governments can't agree on a single standard for vaccine documentation. Faury's right. There's a long and twisting recovery ahead of us yet before those "green shoots" start to grow.
"Based on the experience of airlines in the United States and the United Kingdom, countries that are more advanced than Brazil in the rollout of vaccines, we expect the national program for immunization to positively impact the normalization of demand for air travel in Brazil."Gol CEO Paulo Kakinoff
A big question in the executive suites of the world’s airlines is: When and how will lucrative business travel return?
Estimates from both inside and outside the industry vary widely. From Bill Gates’ statements that more than half of business travel will disappear as a result of the coronavirus pandemic, to United Airlines CEO Scott Kirby’s seeming bullishness that corporate road warriors will come racing back to travel the minute they lose a sale over Zoom.
The Lufthansa Group is one airline group that is on the optimistic end of the spectrum. This is understandable, given that roughly 45 percent of its business is comprised of four passenger airlines — Austrian Airlines, Brussels Airlines, Lufthansa and Swiss — that rely heavily on business travel. Hence, it raised some eyebrows when group Chief Financial Officer Remco Steenbergen told financial analysts on Thursday that they anticipate “at least 90 percent” of corporate travelers returning by 2025.
“Small and medium [sized] companies who will need that positive experience of corporate travel to see their customers, to see their suppliers are making up a bigger share of our corporate customers,” Lufthansa Group CEO Carsten Spohr said in response to analyst questions on Steenbergen’s comments during a first quarter earnings call on Thursday. “That’s the part I’m quite optimistic for.”
The group expects a spike in pent-up business travel demand by year-end, followed by a steady improvement to the 90 percent of 2019 levels through the middle of the decade. However, like its competitors, Lufthansa anticipates leisure and visiting, friends and relatives — or VFR — traffic to recover faster than its corporate segment.
Lufthansa has taken a number of steps to adapt to fewer lucrative business travelers flying. It has retired many of its long-haul jets with large business and first class cabins — including the Airbus A340 and A380, as well as the Boeing 747-400 — and it maintains the flexibility to replace some business class seats with premium economy seats on its Airbus A350s.
But the larger focus at Lufthansa is to become a more efficient group. This means continued staffing reductions, particularly in Germany, above the 24,000 full-time equivalent employees already removed since the Covid-19 crisis began. These reductions have helped Lufthansa reduce fixed costs by 35 percent.
And on the fleet side, the group has retired 115 aircraft on its way to removing 150 jets by the beginning of 2023. Lufthansa forecasts it can operate roughly 90 percent of 2019 capacity with just 80 percent of the planes — around 650 aircraft — on better utilization and denser seating layouts.
“We at Lufthansa have never been faster in restructuring and rightsizing the business in bringing down costs, variable and fixed cost in modernizing our fleet and in digitalizing our company,” said Spohr.
Looking at this summer, Lufthansa sees the same pent-up leisure demand that other carriers do when governments ease Covid-19 travel restrictions. The group remains conservative for the second quarter, with plans to fly just 30-35 percent of 2019 capacity. However, it could ramp up capacity to as much as 70 percent of two years ago during the peak summer months of July and August if demand warrants, Spohr said. Full-year capacity is forecast at 40 percent of 2019.
In addition, the group is “encouraged” by the comments that the EU could reopen to vaccinated American travelers this summer, he added. The transatlantic market accounted for roughly half of Lufthansa’s pre-crisis long-haul capacity.
Growing optimism for the summer does not mean Lufthansa is out of the woods. The group still expects cash burn of roughly €200 million ($242 million) per month in the second quarter after burning €242 million a month in the first. Asked when the group achieve breakeven cash flow, Steenbergen spoke of 2022 when the group is expected to fly more than half of its 2019 capacity.
In the first quarter, the Lufthansa Group’s net loss was €1.05 billion. Revenues were down 60 percent versus 2020 to €2.6 billion on a 51 percent drop in expenses to nearly €4 billion. Passenger traffic fell 84 percent and passenger capacity 74 percent.
One bright spot was the group’s budget arm, Eurowings. The carrier shrank its pre-tax loss by nearly 18 percent to €144 million year-over-year, whereas the loss at the group’s network brands jumped nearly 42 percent. Unlike its network peers, Eurowings benefits from a customer base almost entirely made up of the leisure travelers who are returning to the skies. The airline has ambitious plans to expand beyond its traditional German focus to become a “pan-European” low-cost carrier, as CEO Jens Bischof put it in March.
Lufthansa Cargo and Technik were two other bright spots during the quarter. Both business segments posted a jump in income before taxes to €314 million and €16 million, respectively.
JetBlue Looks At ‘Good’ Fall if Corporate Travel Returns
JetBlue Airways is hopefully eyeing a return of workers to offices and, more importantly, flying again on business trips beginning in September. A possible shift that could segue nicely from the forecast leisure recovery this summer to a business one this fall.
“We’re cautiously optimistic that — assuming there isn’t any increase in travel restrictions, that the vaccine continues to take a hold, [and] that case counts stabilize or come down — the fall has the potential to be good for JetBlue,” JetBlue President Joanna Geraghty said during the airline’s first quarter earnings call last week.
JetBlue is not alone. Most of the largest U.S. carriers see some level of business travel returning as summer switches to fall. While no one expects a full recovery — JetBlue executives were quick to note that any recovery would be off a “very low base” — Alaska Airlines thinks as much as half of its 2019 corporate travelers could be flying again by year end.
The latest forecast from trade group Airlines for America (A4A) has domestic air travel volumes recovering to 2019 levels by 2023. Globally, the recovery is expected to stretch into at least 2024.
“We’re in the midst of a leisure-first recovery,” said Scott Laurence, head of revenue and planning at JetBlue, during the call. “We’re built for leisure.”
No where is that truer than to the Caribbean and Latin America, which are mainstays of the airline’s map. Despite some headwinds from testing rules implemented by the U.S. earlier this year, demand to the region has recovered and — barring a change in the trajectory of the pandemic — capacity could exceed 2019 levels in July and August, said Laurence.
JetBlue anticipates system capacity of down roughly 15 percent compared to 2019 in the second quarter, executives said. At the same time, 10 of its 269 aircraft-strong fleet of Airbus and Embraer jets will remain in storage.
For just the Caribbean and Latin America, capacity is scheduled to increase as much as 1.7 percent compared to two years ago during the April-to-June period, according to Cirium schedules. The growth follows the additions of Georgetown, Guyana; Guatemala City; and Los Cabos, Mexico to its map since the beginning of the pandemic.
Of course, not all of JetBlue’s route experiments have worked. Markets where strict travel restrictions remain have underperformed others, adding that flights there have been duly parred back, said Geraghty.
“We are optimistic about the coming summer months,” she said echoing the general sentiment of U.S. airline executives.
JetBlue saw a “step up” in bookings in mid-February, with improvements continuing apace, said Geraghty. In addition, JetBlue is firmly in the camp of wanting to boost fares — raise yields in airline speak — this summer as more people book flights.
Executives shed no new light on the carrier’s long-planned London launch. All that CEO Robin Hayes would part with was that JetBlue remains on track to begin flights by the end of the summer. No mention of airports — though Heathrow appears likely — or even the potential U.S.-UK travel corridor.
The carrier does anticipate taking a key step towards London with the arrival of its first two Airbus A321LRs by June. The long-range jets — at least compared to JetBlue’s existing fleet — are purpose-bought for the water jump to the British Isles.
Similarly unmentioned during the call was the Department of Justice investigation into its new Northeast Alliance with American Airlines. Executives repeatedly touted “growth” and new “competition” in Boston and New York — two concerns raised by objectors to the alliance — when asked about the partnership during the call.
JetBlue posted a net loss before taxes of $347 million in the first quarter, or $247 million after a tax benefit. However, without federal payroll support relief the airline would was much deeper in the red with a $636 million loss. Revenues fell nearly 61 percent to $733 million on a nearly 43 percent drop in costs to $1.03 billion both compared to 2019.
Critically for its financial recovery, the carrier stopped burning cash and generated breakeven cash from operations in March. A trend seen at several other carriers, including Alaska and United.
JetBlue expects revenues to recover to down 30-35 percent compared to 2019 in the second quarter — an at least 26 point improvement from the first quarter — said Geraghty. She and other executives declined to say when the airline might return to profitability.
“We are optimistic that 2022 has the potential to be a strong recovery year,” said Geraghty when asked about JetBlue’s financial rebound. She gave the hint that, even with a leisure rebound this summer and return of suits this fall, profitability could still be a year or more off for the airline.
Hawaiian Forecasts Strong Mainland Demand as International, Interisland Remain Depressed
Hawaiian Airlines is starting to see “more rays of sunshine than dark clouds,” CEO Peter Ingram said, as travel restrictions in its home state ease and tourists from the mainland flock to the islands for long-delayed vacations.
But the first quarter was, as with many airlines, a tale of two halves. January was weaker than expected, as Covid surged around the mainland U.S. after the yearend holidays. February bookings were better than January’s. And travel really took off in March — so much so that Hawaiian made almost half its quarterly revenue in the final month of the first quarter. Bookings for the second half are matching 2019 levels, so far. “It feels like we are out of the ditch and back onto the highway,” Ingram said during the company’s first-quarter 2021 earnings call.
Hawaiian is almost uniquely suited for the domestic U.S. airline recovery. Leisure travel is fueling the recovery, and Hawaiian’s bread-and-butter is ferrying passengers from the mainland, primarily, to their holidays in Hawaii. The carrier’s aircraft with lie-flat premium seats are positioned to take advantage of the growth of premium-leisure travel as the pandemic subsides. Business traffic is a very small part of Hawaiian’s passenger mix. “If there was any doubt that there was pent-up demand for leisure travel after a year of lockdowns, that doubt has been dispelled,” Ingram said.
For much of the pandemic, the state of Hawaii clamped down on entry to the islands, but now allows entry with proof of vaccination or a negative Covid test. The first wave of Hawaii-bound tourists arrived last fall, when the quarantine requirement eased. After a dip during the outbreaks on the mainland, demand from North America is surging again.
Ingram hopes this demand is a harbinger for things to come. The other two components of Hawaiian’s network are falling short. Interisland traffic remains depressed, because each island requires visitors to show proof of a negative test or to quarantine upon arrival. The testing requirement is too expensive to justify for a short hop to a neighboring island. Hawaii is planning to allow fully vaccinated residents to travel freely throughout the state, but there is no firm date for when that policy goes into effect.
Hawaiian’s international network is a fraction of its pre-pandemic size — 12 percent of 2019, to be precise. The international network’s recovery remains “the wild card” in Hawaiian’s return to pre-pandemic revenues, Ingram said. Now, the carrier operates a few flights to Japan and Korea, mainly to carry cargo. Tokyo-area operations have been consolidated at Narita, with no date for a return to Haneda planned.
Japan’s testing requirements have put a damper on tourism to Hawaii, Ingram said. Tourists must be tested three times: Once on arrival in Hawaii, once before departure, and once upon arrival in Japan, and could face quarantines in Japan. This adds significant cost and inconvenience to a Hawaii vacation. It remains unclear when this will ease, given the slow pace of vaccinations in Japan and fresh Covid outbreaks in that country.
While its international network is largely idled, Hawaiian is redeploying its Airbus A330 fleet to mainland routes. The carrier added three new routes during the first quarter: Honolulu-Orlando, Fla., and Ontario, Calif.; and Maui-Long Beach, Calif. A new flight to Austin, Texas, started this month. By June, with the addition of Maui-Phoenix, Hawaiian’s mainland network will be larger than it was before the pandemic.
Despite the optimism about North America, however, Hawaiian needs its international and interisland networks to recover. Those routes generated about half of the carrier’s pre-pandemic revenues and without their recovery, the airline will not return to revenue growth.
Hawaiian reported a first-quarter net loss of $61 million. Revenues fell 72 percent from the first quarter of 2019 to $182 million, on capacity that was 49 percent lower than that year’s. Daily cash burn for the quarter was $1 million. Hawaiian expects second-quarter revenue to be down between 45-50 percent from 2019. Second-quarter capacity is expected to be down 30-33 percent from 2019.
Chinese Carrier Losses Rack Up in Choppy Quarter
The big three Chinese carriers racked up 15.1 billion yuan ($2.3 billion) in losses during the first quarter when targeted domestic travel restrictions hit the travel recovery. The country’s largest carrier Beijing-based Air China saw its net loss rise 23 percent year-over-year to 16.9 billion yuan in the period. Revenues decreased 15.5 percent to 14.6 billion yuan while expenses decreased 3 percent to 23.1 billion yuan. Air China has the most exposure to international markets, which remain mostly closed off due to Chinese border restrictions.
Shanghai-based China Eastern Airlines net loss shrank by 2 percent 4.1 billion yuan during the first quarter compared to 2020. Revenues decreased 13 percent to 13.4 billion yuan on a nearly 4 percent drop in expenses to 17.8 billion yuan. The carrier cited domestic travel restrictions that had an “adverse” impact on its results for the quarter.
Guangzhou-based China Southern Airlines net loss narrowed by 32 percent year-over-year to 4.1 billion yuan in the quarter. Revenues increased less than 1 percent to 21.3 billion yuan while expenses fell 6.5 percent to 27 billion yuan. The carrier anticipates further negative financial affects from Covid-19 travel restrictions in the second quarter.
SkyWest to Resume Hiring to Prepare for Busy Summer
U.S. regional carrier SkyWest will resume hiring pilots in the second quarter as it gets ready for what it expects to be a hot summer for the airline industry as leisure travelers flock to the airways for their summer vacations.
SkyWest did not specify how many employees it plans to hire, but the carrier already has begun hiring flight attendants and maintenance technicians. The regional took more than $200 million in the first two rounds of federal payroll support and expects a further $250 million from the third round in the next two months. These funds required SkyWest — and any carrier that took the funding — to pledge not to involuntarily furlough or reduce pay for any employees. SkyWest’s plans to hire signal that it thinks demand will grow torridly this summer. SkyWest has not furloughed any employees, although it did offer voluntary leaves of absence during the worst of the pandemic, a spokeswoman confirmed.
Before the pandemic, a looming pilot shortage concerned regional carriers, as a significant number of mainline pilots were expected to retire in the coming years. Changes to pilot-training requirements in the wake of the 2009 Colgan Air accident also put pressure on regional hiring plans. Because of these concerns, SkyWest had already set up a robust pilot-hiring pipeline before the pandemic, working with more than 300 flight-training schools and universities, CEO Chip Childs told analysts during the company’s first-quarter 2021 earnings call. Competition for pilots is expected to be fierce, as mainline airlines begin hiring again and new entrants, like Avelo and Breeze, step up their recruitment. But Childs is not concerned, saying he was “astonished” by the number of prospective pilots who have expressed interest in working for SkyWest.
SkyWest is sitting pretty for the recovery. It fills in the smaller spokes on its mainline partners’ route maps, and its network is primarily domestic. The pandemic has sparked a boom in people moving to smaller cities and rural areas, fueling demand for the regional’s flights.
This is also driving expenses. SkyWest reported higher maintenance costs in the quarter as it prepares for the peak season. First-quarter maintenance costs were $204 million, up from $160 million in the first quarter of last year. This includes bringing 25 CRJ 700s out of long-term storage to return to the American Airlines fleet. “Things like maintenance are going to continue to run hot as we bring new airplanes back into service again as we prepare for what’s shaping up to be a pretty busy summer,” Chief Financial Officer Robert Simmons said.
By number of aircraft, SkyWest is one of the largest airlines in the world, with 468 airplanes in its fleet at the end of the first quarter. In addition to these, SkyWest leases two CRJ 200s, 34 CRJ 700s, and five CRJ 900s to other carriers.
SkyWest ended the first quarter with a profit of $36 million on revenues of $535 million, down 27 percent from 2020. The company expects to be fully back to 2019 levels of flying by the end of the fourth quarter, provided the Covid-19 pandemic trends in the U.S. continue to hold.
In Other News
- Ottawa continues to pony up relief for airlines with Transat A.T. the latest to secure funds. The Montreal-based carrier will receive up to CAD$700 million ($570 million) in aid from Canada’s Large Employer Emergency Financing Facility, the same mechanism through which Air Canada secured CAD$5.9 billion in relief. Transat has agreed to refund all tickets for travel after February 20, 2020, and maintain its workforce at April 28 levels in exchange for the capital. Despite the aid, Transat operations remain suspended due to government travel restrictions with the carrier hoping to restart flights in mid-June.
- It’s something of musical chairs in the C-suites at Avianca and SAS. Anko Van der Werff has resigned as CEO of Avianca Holdings just two years into his tenure and will become the new CEO of SAS by July 15. Replacing him at the Colombian carrier is Adrian Neuhauser, who has been the airline’s president since November. Neuhauser joined Avianca as chief financial officer in 2019.
“With global air travel resuming as COVID vaccines are rolled out and significant progress having been made in our corporate restructuring, we are at logical juncture to transition to a new leader who will guide Avianca into its next chapter,” said Van der Werff in a statement. Avianca continues to operate under U.S. Chapter 11 bankruptcy protection.
SAS CEO Rickard Gustafson, who unveiled plans to retire in January, will step down in May. At that time, chief commercial officer Karl Sandlund will take over as acting president and CEO until Van der Werff officially joins the airline.
- Norwegian Air posted a pre-tax net loss of $145 million (NOK 1.2 billion) during the first quarter. The budget carrier, which officially shed much of its fleet including its entire long-haul operation at the beginning of the year, saw revenues plummet 96 percent year-over-year to $31 million. Expenses fell 80 percent to nearly $167 million. But the airline was also a ghost of its former self in the quarter: passenger traffic was down 99 percent on a 98 percent drop in capacity. Norwegian plans to complete official restructuring processes in Ireland and Norway by June.
- ANA expects a narrower fiscal-year loss, despite lower revenues, the company said in a stock market filing. ANA now expects to lose ¥465 billion ($4.3 billion), better than the ¥510 billion it had previously forecast. Revenues are expected to fall 2 percent to ¥725 billion, down from the previous forecast of ¥740 billion. By comparison, ANA reported revenues of ¥1.9 trillion for fiscal year 2019.
- The crisis has slowed — but not shrunk — Viva Air‘s ambitions to expand its brand across South American. The Colombian LCC still plans to establish new operating subsidiaries in the continent’s countries, including Brazil, CEO Felix Antelo said at the virtual Routes Reconnected conference last week. “I love Brazil, but it’s not an easy market,” he said, adding that they are unlikely to launch a new operation in Brazil — or elsewhere in South America — before the second half of 2022 as they are still focused on recovering from the crisis.
- Gol‘s first-quarter 2021 earnings call was a stark reminder that the pandemic hasn’t run its course just yet. Brazil is finally past a devastating second Covid-19 wave, and travel is only now starting to inch back up. The carrier reported its first-quarter capacity was down more than 40 percent from the fourth quarter. Entering Brazil’s off-peak second quarter, Gol expects further capacity reductions. By June, however, the Brazilian budget carrier will operate 410 daily flights, about what it operated at the end of last year. It expects to fly about 60 percent of its 2019 passengers by the end of June, CEO Paulo Kakinoff said during the company’s first-quarter earnings call.
The carrier reported an operating loss of 522 million reais ($97 million) on revenues that were half of those in the same period in 2020. The airline is acquiring its Smiles loyalty program, a deal announced during the quarter. Kakinoff is confident in Brazil’s recovery, however. If the country’s vaccination program follows the trend in the U.S., demand will start to return more meaningfully by the second half, when Brazil expects to vaccinate most of its residents.
- We’re all shopping more online. Even with countries reopening, retail probably will have undergone a structural shift toward more e-commerce, a pandemic trend that will likely persist. And with U.S. stimulus money coursing through the economy, retail benefits. That’s the message from UPS, which reported record earnings and profits in the most recent quarter. It forecasts the U.S. economy to grow by 6.2 percent this year, with retail sales growing 12 percent and electronics sales up 13 percent. Business-to-consumer volumes are up dramatically, and business-to-business volumes are returning to growth.
The company reported consolidated first-quarter revenues of $23 billion, up 27 percent from last year. Profits rose 158 percent to $2.8 billion.
Boeing Expects Industry to Recovery by 2023 at the Earliest
Echoing many of his peers at airlines, Boeing CEO David Calhoun thinks this year will be an “inflection point” for the manufacturer, as it seeks to iron out its production issues and return to growth and profits.
With the rising vaccination rate in some countries, Boeing expects air travel to resurge, with domestic markets leading the way. International travel will remain depressed for the foreseeable future, especially if countries retain travel restrictions. The company expects the airline industry to return to its 2019 size by 2023-2024, but growth beyond 2019’s levels probably won’t resume for “some years” after that, Calhoun said. “The next six months will be challenging for airlines,” he said, adding “The recovery is gaining traction but has been uneven.”
Even before the Covid-19 pandemic hobbled its customers, Boeing, the single largest source of U.S. exports, struggled with the grounding of its most popular aircraft, the Boeing 737 Max, which was idled for almost two years after two fatal accidents in Indonesia and Ethiopia. Boeing resumed delivery of the type late last year after regulators cleared it to fly and has delivered more than 80 since then. It still has 100 Maxes waiting to go to customers. Some of those aircraft will have to be re-marketed and reconfigured after their original buyers balked, Calhoun said during the company’s first-quarter 2021 earnings call.
The company also is struggling with an electrical issue on the flight decks of some in-service Maxes that has grounded about 100 aircraft worldwide. The airframer is working with the FAA for a fix and expects that to come “soon,” Calhoun said, without specifying a timeline. Boeing estimates it will take a day or two to fix each aircraft after the remedy is approved. The issue slowed down deliveries and will show up in Boeing’s April delivery numbers, but Calhoun expects to work through its delays by yearend.
The airframer has 3,200 737s in its backlog and plans to raise production of the type to 31 per month next year, with production rates gradually increasing over the coming two years.
Although regulators in more than 150 countries approved the Max’s return to service, China still has not, but Boeing expects China to re-certify the Max in the second half of the year. The larger issue of strained U.S.-China relations is of critical importance to the airframer, as China may fuel up to one-quarter of the demand for aircraft over the next decade. Calhoun said the company has begun talks with the Biden administration to stress how crucial smooth relations between the economic behemoths are to aerospace.
During the quarter, production problems on the 787 delayed that aircraft’s deliveries, but Boeing said it has resolved the issue, and deliveries resumed in March, with nine of the type delivered so far. The remaining aircraft will be delivered by the end of the year, Calhoun said. Production rates for the 787 will hold at five aircraft per month.
Boeing expects the first delivery of its 777X to be in late 2023. It is in talks with its customers over the production delay for this aircraft and is working with regulators for certification. Emirates President Tim Clark recently said the airline planned to have “grown up discussions” with Boeing about the 777X delays. Boeing expects production rates for all types of the 777, including freighters, to stabilize at two aircraft per month.
The global commercial aircraft fleet is about three-quarters the size it was before the pandemic. Boeing sees opportunity in this, however. The company estimates that airlines have permanently retired more than 1,500 aircraft. When they return to growth, they will seek to replace that lift with newer, more fuel efficient jets. Boeing’s current backlog is for more than 4,000 aircraft, worth about $283 billion.
The Max grounding, the 787 production problems, and even the 777X delays cost Boeing about a year, during with Airbus grabbed more market share than it typically had, Boeing conceded. But Calhoun is confident the company will “hold our own” against Airbus as the air transport market recovers.
Demand for Boeing’s defense and space business remained strong, although Calhoun warned that governments around the world may shift some spending away from defense as they deal with the economic ravages of the Covid-19 pandemic. This unit reported revenues of $7.2 billion, up 19 percent from last year.
Boeing reported a $561 million net loss in the first quarter, its sixth consecutive quarterly loss, on revenues of $15.2 billion, down 10% from last year. Its Commercial Airplanes division reported revenues of $4.3 billion, compared with $6.2 billion last year — a 31 percent drop. The airframer delivered 77 aircraft in the quarter, up from 50 last year, when the Max was grounded.
Airbus Forecasts 2023 for Widebody Demand to Return
The pandemic is far from over, Airbus CEO Guillaume Faury warned, despite the exuberance coming from U.S. airline leaders. Some domestic markets may recover, but international travel will be a shadow of its former strength for the foreseeable future.
“The path to recovery … is not necessarily linear,” Faury said. Domestic China and domestic U.S. appear to be strong now and could have a good summer season, but domestic Europe lags, as vaccination rates remain slow in the EU. The public-health catastrophe unfolding in India now is a “reminder of the fragility of the recovery,” he said. This fragility, and the volatility of demand during the pandemic makes it difficult to plan in the near term.
But Airbus has positioned itself well, Faury said. Orders and deliveries of the airframer’s single-aisle aircraft are picking back up. Airbus reported 38 orders for single-aisle aircraft in the first quarter. It delivered 72 aircraft in March, including nine A220s and 105 A320-family aircraft (including 45 A321s). Production rates for the A320 will go up to 43 per month in the third quarter, rising to 45 per month in the fourth. A220 production rates went up from four per month to five. That aircraft program is not expected to be profitable for “several years,” and orders need to pick up in order for it to reach breakeven, Chief Financial Officer Dominik Asam said. Airbus said it cannot predict how production rates will change next year yet, as it is in talks with its suppliers on if they have the capacity to scale up. However, Faury added that the engine-supply issues for the A320 have been ironed out.
Widebody production will remain low for at least the next year or so. During the quarter, Airbus delivered 10 A350s and one A330neo. Airbus did offer guidance on production-rate changes for its widebody aircraft. Although Airbus believes narrowbody demand will start to improve as the year goes and into the future, widebody demand likely will not begin recovering until next year.
The pandemic highlighted the importance of air freight, especially as e-commerce grew sharply and maritime shipping was constrained. Faury admitted that Airbus has a “weak” freighter offering, and said it is “not healthy to have just one player in the market.” The airframer will be “aggressive” in developing and going after the freighter market and expects to use one of its widebody platforms for the aircraft. Faury declined to specify a timeline or which widebody would be used for freighter development, however.
The company said it will make aerostructure manufacturing “central” to its business and is opening new facilities in France and Germany. Airbus reported a profit of €500 million ($606 million) on revenues of €10.5 billion, which were flat from last year. Its commercial airplanes unit reported revenues of €7.2 billion, down 4 percent from last year. Net orders for the quarter were -61, or 39 gross orders and 100 cancellations. The airframer’s backlog is close to 7,000 aircraft.
Aercap: More Airlines Will Turn to Lessors
Aercap sees momentum moving its way as the airline industry begins to recover from the Covid-19 pandemic. The recovery isn’t imminent, the lessor warned, but it is seeing increasing confidence from its airline customers that demand will start to return over the next two years.
And when it does, Aercap stands to benefit. The company believes more airlines will opt to lease, rather than own, aircraft as they rehabilitate their battered balance sheets. Leasing frees up capital and is less risky for airlines, while allowing them to benefit from the newest technologies, Aercap CEO Aengus Kelly said during the company’s first-quarter earnings call. Aercap believes that more than half of the world’s fleet will be leased in the near future.
The company placed 60 aircraft in the quarter, including a record 28 widebodies. This lease rate is a clear sign that the recovery has begun, especially given that the company placed 97 aircraft in all of 2020. “It is evident there is a lot of demand,” Kelly said.
The company announced its $30 billion planned acquisition of GECAS during the quarter. The deal is expected to close by the fourth quarter, pending regulatory review in several countries.
The company is taking back several Airbus A350s from Latam as that airline rejected 22 leases while it restructures in bankruptcy protection. Aercap expects to be able to lease those aircraft out relatively quickly, although at a lower lease rate. On the flip side, Norse Atlantic is taking former Norwegian Boeing 787s, which will not need to be reconfigured. Several of the lessor’s customers are in bankruptcy protection, including Latam and Aeromexico. Kelly expects their exit from bankruptcy to move in step with the pace of vaccinations in their home markets.
The recovery has not been even, executives noted. In Asia, China domestic, Australia, New Zealand, Korea, Vietnam, and Russia have recovered their domestic markets, while Malaysia and the Philippines are down about 25 percent. India is suffering its worst outbreak of Covid-19 yet. In the Americas, the U.S. is surging ahead, while Canada and Brazil lag. Europe and Africa also are behind, as the pace of vaccinations in those regions is slower than expected.
Aercap reported net income of $228 million for the quarter on revenues of $1.1 billion, down 12 percent from 2020. The company ended the quarter with more than 1,300 aircraft in its portfolio and said it has no lease positions available in its orderbook until 2023.
- Aeromexico is restructuring its Boeing orderbook as part of its U.S. Chapter 11 restructuring. Last week, the court approved a deal put together with advisor SkyWorks Capital that shrinks its outstanding firm 737 Max commitments to 20 aircraft from 54. A separate deal with Air Lease Corp. adds another eight 737 Maxes and 787s to its fleet. The rejigged orderbook will be used to replace and expand Aeromexico’s fleet with all aircraft due by the end of 2022.
- Azerbaijan-based Silk Way West Airlines said it ordered five Boeing 777F freighters as part of the carrier’s fleet renewal program. Terms of the deal were not disclosed. The new freighters join Silk Way West’s fleet of five 747-8Fs and seven 747-400Fs.
- Avolon reported an $83 million net loss on revenues of $470 million in the quarter. By comparison, the lessor reported $141 million in profits on $644 million in revenue last year. During the quarter, Avolon placed eight aircraft with six airlines. It deferred 34 narrowbodies and 3 widebodies from its 2022-2023 orderbook to 2025 and after. Avolon ended the quarter with 578 aircraft and with orders for 262.
- Embraer narrowed its quarterly loss to $96 million from $104 million on the strength of increasing sales for its E190 E2s and improved performance at its business aviation and defense units. Revenues grew by 27 percent from last year. The Brazilian airframer delivered nine commercial aircraft in the first quarter.
Last week, Embraer scored an order for 30 E195 E2s from an undisclosed customer, which should be made public in a month or so, CEO Francisco Neto said during the company’s first-quarter 2021 earnings call. Embraer is delaying the E175 E2’s entry-into-service until 2024 due to scope-clause concerns in the U.S. Embraer said its 2022 production mix will still skew toward its older jets, with 60 percent of its output comprised of E175s and 40 percent of E2s.
- Aircastle has beefed up its $1 billion revolving credit facility. The lessor added two banks to the 10 backing the facility, and extended the maturity by three years to 2025. Aircastle can draw on the facility as needed.
- Tis the season for modifying revolvers. Air Lease Corp. has upsized its unsecured revolving credit facility by $200 million to $6.4 billion, and extended the maturity by two years to May 2025. Pricing remains 105bps over Libor with a 20bps facility fee. More than 50 lenders participate in the facility that is administered by J.P. Morgan.
- Spirit Airlines launched two fundraising deals with the goal to repay up to $515 million in debt last week. The first is a $440 convertible notes due in 2026 offering that priced at 1 percent, with the net proceeds totaling $428 million. Underwriters Barclays, Morgan Stanley, Citi and Deutsche Bank Securities have the option to purchase up to another $60 million for 30 days. Proceeds will be used to repurchase the $175 million outstanding on its 4.75 percent convertible senior notes due in 2025, and for general corporate purposes.
The second transaction is a common stock offering to holders of the 4.75% convertible senior notes due in 2025. Proceeds from that deal will be used to repurchase up to $340 million of Spirit’s 8% senior secured notes due in 2025, of which the airline had $850 million outstanding at the end of March.
- British Airways is the latest to jump on the Eastern Europe bandwagon amid a flurry of new summer flights. BA will connect its London Heathrow hub with Gdansk and Wroclaw in Poland; Riga, Latvia; and Cluj-Napoca, Romania, from July. Flights will operate through the summer. All four cities are new additions to BA’s map.
- Taking aim at the heart of AirBaltic, European discounter Ryanair will open a new base in Riga from October. The Irish carrier will launch 14 new routes to destinations in Denmark, France, Germany, Hungary, Italy, Norway, Poland, Spain, Sweden, Ukraine and the UK. Two summer routes to Frankfurt Hahn and Venice Treviso will be extended through the winter. Ryanair will initially base two Boeing 737s in Riga.
- Spirit Airlines is giving Kansas City denizens more options to Florida. The discounter will add new nonstops to Fort Myers and Tampa, as well as resuming flights to Fort Lauderdale, in June. The additions come as airlines prepare for what could be a strong U.S. domestic leisure travel season this summer.
- Sun Country Airlines is keeping its promise to growth with the proceeds from its IPO in March. The Minneapolis-based discounter will add nine new airports, plus 18 new routes, to its map from August through February 2022. New destinations include: Duluth and Rochester, Minn.; Grand Cayman; Green Bay and Milwaukee, Wis.; Phoenix-Mesa; Punta Gorda and St. Pete-Clearwater, Fla.; and Providenciales, Turks and Caicos. One seeming winner is Duluth where Sun Country launched connecting bus service to its Minneapolis-St. Paul hub in 2019 with an aim of building the market to support future air service.
- Citing the continued travel recovery, Delta Air Lines plans to hire 75 pilots this summer. The move comes after the airline paused hiring, and sought voluntary outs from its cockpit crews, early in the coronavirus pandemic last year. Delta Operations Chief John Laughter described the move in a memo to staff as representing “growth and further recovery” for the carrier. Delta’s pilot workforce fell by just over 140 crewmembers to 12,940 people in 2020.
- The Biden administration is extending the federal mask mandate, set to expire on May 11, to Sept. 13. The mandate applies to all federal buildings and where the federal government has jurisdiction, including airports, and on all modes of transport, including aircraft. The Association of Flight attendants applauded the move. “Scientists have made clear that masks are the best way to stop the spread of COVID-19 when in enclosed spaces like the plane or the airport — regardless of vaccination,” union President Sara Nelson said. “Mask compliance is key to confidence in air travel as we climb towards recovery, which includes international travel.” The U.S. Travel Association added, “Extending the federal mask mandate for travel is the right move and has the travel industry’s full support.” The Transportation Security Administration reports that more than 2,000 passengers have been cited for mask violations on all modes of transportation since the federal mask mandate went into effect earlier this year.
One of the largest airline maintenance facilities in the world sits on the edge of the Ozark foothills in Tulsa, Okla. There, American Airlines can work on any of its more than 850 mainline jets in a sprawling 330-acre facility along the eastern edge of the Tulsa airport.
“The capabilities here aren’t anywhere else for us,” Ed Sangricco, the head of American’s Tulsa maintenance base, said during a recent interview in his office. The base has done everything from store Boeing 737 Maxes during the 20-month grounding of the type, to storing up to 100 jets during the worst of the coronavirus pandemic, and is now wrapping up work getting all of the carrier’s jets back in the air ahead of what is expected to be a banner summer for leisure travel.
But although Tulsa has played a critical role for American throughout the crisis, the base has faced its share of challenges. For one, a planned $550 million investment to upgrade the facility unveiled just before Covid-19 began grounding U.S. fleets is in question. While Sangricco repeated that the airline is “committed” to Tulsa, he also said only about $12.5 million of the planned investment has been allocated to date. Those funds are going towards important infrastructure upgrades, like replacing a central utility plant and “reskinning” several hangars, rather flashy new facilities.
American does not yet have a timeline for some of the headline aspects of the investment, including a new widebody hangar that could house two Boeing 787s at one time, said Sangricco.
Another challenge is workforce. Prior to the crisis, American employed more than 5,500 people at its Tulsa facility, including 600 who were hired in 2019 alone. However, today that number stands at roughly 5,200 people after attrition and voluntary departures. Roughly 400 jobs were preserved through the U.S. government’s three payroll support bills that cover most airline labor costs through September 30.
“As we spool the airline back up, the need for support continues to also move up,” said Sangricco. American is in the process of recalling staff who took voluntary leaves, and plans to hold a hiring event for roughly 109 positions that the carrier was unable to fill internally in May.
The path forward for Tulsa is very much tied at the hip to American. There are no plans to add external work, said Sangricco adding that the world’s largest airline generates plenty of maintenance jobs. Even American’s wholly-owned regional subsidiaries Envoy, Piedmont Airlines and PSA Airlines that together operate more than 330 aircraft go elsewhere for maintenance.
This strategy is in contrast to Delta Air Lines‘ TechOps division, which continues to expand its revenues by taking on external work. For example, it 2019 it became the preferred maintenance provider for Pratt & Whiney GTF engines on Airbus A320 Neo jets in North America. Despite the pandemic, “other” revenue at Delta that includes TechOps fell just 9 percent to $3.6 billion in 2020 whereas passenger revenues plummeted 70 percent to $12.9 billion.
Despite the lack of outside maintenance work, Sangricco is confident that the Tulsa base will stay busy. With fleet reactivations done, it’s back to routine maintenance for the entirety of the American fleet. That can range from overnight work to intensive D checks that occur only every five years or so. And he is eyeing cost-effective improvements to existing facilities — like removing scaffolding designed for now-retired Boeing 757s and 767s from hangars to make room for 787s — that further enhance the competitiveness of Tulsa.
“We’re all thinking outside the box,” he said. “We’re forced to think differently than just a year ago.”