Issue No. 814

European Airlines' Uncertain Summer

While U.S. CEOs Chill the Champagne, Europe's Airlines Expect a Different Summer

Pushing Back: Inside the Issue

After the first week of U.S. airline industry earnings calls last month, one thing became clear: U.S. airline CEOs expect leisure demand to go through the roof as people cooped up from more than a year of lockdowns flock to beaches, national parks, theme parks, and to go visit Grandma. After a week of European airline earnings, however, another thing becomes clear: European CEOs are much more muted. The pace of vaccinations has been much slower across Europe (with some notable exceptions) than in the U.S. Moreover, several European countries maintain strict travel restrictions. Despite European Union officials saying the bloc could welcome vaccinated tourists this summer, there isn't a single standard for vaccine documentation and verification — and meanwhile the summer season starts in just a few weeks.

Elsewhere in this issue, lessors believe airlines will lease a larger portion of their fleets after the pandemic recedes. U.S. startup Avelo heads to the East Coast (after launching in California last month). Allegiant bats away threats posed by startups (including Avelo, headed by former Allegiant executive Andrew Levy). Norse Atlantic tries to head off complaints that plagued Norwegian by meeting with a key U.S. union. Air Canada calls on its country's government to ease restrictions. copa And we crunch the numbers on how green the six largest global airlines are.

Verbulence

"We would expect bookings to recover if governments are serious about reopening. People want to fly."

IAG CEO Luis Gallego

The Airline Weekly Lounge Podcast

New episodes drop every week and are available wherever you get your podcasts and on AirlineWeekly.com. In the latest podcast, Edward "Ned" Russell and Madhu Unnikrishnan talk about Ned's field trip to American's MRO in Tulsa, Okla., as well as what the summer might hold for European airlines. Listen to the episode.

Weekly Skies

Corporate restructurings seem to be in the air in Europe with International Airlines Group placing Aer Lingus on notice amid what executives call Europe’s most “stringent” travel restrictions. The London-based group is “considering the necessary steps we need to take” for Aer Lingus to “survive,” said IAG CEO Luis Gallego during the first-quarter earnings call last week. His implication was that further cost cuts — for example layoffs or fleet reductions — could be necessary at the Irish carrier if travel restrictions remain in place.

In the first quarter, Aer Lingus flew just 3 percent of the passenger traffic it carried during the same period in 2019. Passenger revenues plummeted a dramatic 97 percent to nearly €12 million ($15 million). The revenue drop was the worst among IAG’s four airlines, which also include British Airways, Iberia and Vueling. Gallego and other executives placed the blame squarely on Ireland’s stiff travel restrictions that, unlike in other European countries, have not been accompanied by coronavirus aid for airlines.

“We are encouraging the Irish government not to be cautious [in reopening] if they’re not going to give us any support,” said Aer Lingus CEO Lynne Embleton during the call.

Carriers from countries that have provided relief, while not necessarily doing well, have largely avoided major restructurings. Denmark, France, Germany, the Netherlands, Spain and Sweden have all provided state relief to airlines.

“We are anticipating a decent summer season from July onwards,” said IAG Chief Financial Officer Steve Gunning during the call. The group’s carriers could ramp passenger capacity to as much as 70-75 percent of 2019 levels in the third quarter, and 80-85 percent in the fourth quarter if demand warrants.

However, prior to July, IAG is taking a cautious approach to the travel environment. Gallego described bookings as “quite volatile,” especially outside of Spain where domestic travel has reopened to a degree. IAG only plans to fly roughly 25 percent of 2019 capacity in the second quarter.

The ball is in governments’ court. Country-level restrictions still bar most travel across Europe with Croatia, Greece and Iceland among the only countries that have done more than give lip service to reopening. The UK’s new green list of 12 countries Britons can visit was not as expansive as many had hoped, with the much talked about travel corridor to the U.S. not included. EU leaders have also said that the bloc could reopen to vaccinated travelers this summer, though they have yet to flesh out details of the plan.

“We would expect bookings to recover if governments are serious about reopening,” said Gallego. “People want to fly.”

IAG’s Spanish budget arm Vueling remains a bright spot in the group’s passenger operations. The airline will fly “almost 100 percent” of its 2019 capacity this summer. This is fueled by strong demand to Mediterranean beaches, as well as growth opportunities into Nordic markets opened by cuts at Norwegian Air.

The recovery in business travel is a question mark for IAG as it is for every other network carrier. The group expects a roughly 15 percent reduction in corporate sales from pre-crisis levels coming out of the pandemic, said Gunning. To mitigate this, IAG has cut its workforce and shrunk its fleet among other cost saving measures.

One big lever BA has already taken was the retirement of its Boeing 747s in 2020. Removing the jets pulled a large number of premium seats that were popular with corporate flyers from its inventory. The current fleet and flexible seating layouts — for example swapping some business class suites for premium economy seats — position BA well for a recovery with fewer roadwarriors, said Gunning.

On the competitive front, little has changed on the proposed acquisition of Air Europa that, when combined with Iberia, would better position IAG’s Madrid hub to compete with the likes of Frankfurt and Paris. Talks continue with both EU and Spanish authorities, said Gallego.

IAG posted a net loss of nearly $1.3 billion in the first quarter, including special items. Compared to 2020, revenues fell nearly 79 percent to $1.2 billion on a 68 percent drop in expenses to $2.5 billion. Cargo was the group’s sole bright spot with revenues up 42 percent to $426 million. Critically, liquidity needed to weather continued losses stood at $12.8 billion at the end of March.

Passenger traffic across IAG’s airlines was down 89 percent compared to 2019. Capacity was down 80 percent.

Edward Russell

Swiss Makes Cuts Amid Structural Change in Business Travel

Swiss is moving forward with significant cuts to its workforce and fleet as it prepares for an expected structural change to the the airline’s bread-and-butter business traffic.

The Lufthansa Group carrier unveiled plans to slash its staff by 1,700 full-time equivalent employees and shrink its fleet of 90 aircraft by 15 planes in response to these structural changes. The cuts will see Swiss operate fewer frequencies in Europe and likely end some intercontinental routes as it recovers from the Covid-19 crisis, though it plans to retain its dual Geneva and Zurich hubs.

“It has grown increasingly clear that our market is undergoing structural change, and that despite the actions which we were swift to take in response, a restructuring of our company now sadly seems unavoidable,” said Swiss CEO Dieter Vranckx in a statement.

The cuts come as European airlines prepare for some leisure travel recovery this summer. While it is as yet unclear how many countries in the bloc will reopen to travelers, carriers are gearing up to quickly add flights if Covid-19 restrictions are eased. Lufthansa Group CEO Carsten Spohr said the group’s five carriers could ramp up to as much as 70 percent of pre-crisis schedules if demand recovers.

However, the leisure-first recovery creates significant challenges for business-travel focused airlines like Swiss. Speaking at the Routes Reconnected conference in April, Vranckx described Swiss as a “business airline” prior to the crisis and said its focus was how to manage a slow, multi-year recovery in the corporate travel it relies on.

“How do we manage and take the most out of say the next two- to five-years?” he said, calling the period “critical.” “I don’t believe the people who say everything will be digital … I think the balance will be in the middle, but still there will be in the near future less business travel.”

Swiss’ latest forecast is that business travel will remain down at least 20 percent compared to before the crisis for the medium term. At the group level, Lufthansa expects overall business travel will recover to to only 90 percent of 2019 levels by 2025.

The reductions to Swiss’ workforce will save the carrier roughly 500 million Swiss francs ($551 million) annually, according to the carrier. However, to achieve the 20 percent reduction outlined it warns that up to 780 staff could be involuntarily let go.

The staffing reductions come a week after Lufthansa Group Chief Financial Officer Remco Steenbergen said the group had achieved needed personnel reductions of 16,000 full-time equivalents in businesses outside of Germany. Cuts of another roughly 10,000 equivalents were still needed within Germany, he added, indicating that they would likely occur at the group’s namesake Lufthansa operation.

In terms of fleet, Swiss will remove 10 of its 69 Airbus A320 family aircraft plus five widebodies, which are understood to be Airbus A340s. The Lufthansa Group aims to remove all of its A340s — the group had 43 of the four-engined aircraft at the end of December — over the next few years.

Swiss posted an earnings before interest and taxes loss of €211 million ($255 million) on a 71 percent year-over-year drop in revenues in the first quarter. Passenger traffic was down 87 percent on a 73 percent cut in capacity.

Edward Russell

Cargo Boosts Air Canada Amid Tough Canadian Travel Restrictions

Cargo was a lifeline for Air Canada during the pandemic as passenger operations were largely sidelined by Canada’s strict coronavirus restrictions, and it will continue to play an important role for the carrier as it climbs out of the crisis. The carrier has operated more than 7,500 cargo-only flights since last March, including more than 2,000 just in the first quarter of this year.

Air Canada is adding two dedicated Boeing 767 freighters acquired from ATSG to its fleet by the end of the year. In addition, the carrier converted five Boeing 777-300ERs and four Airbus A330-300s temporarily to freighters by removing seats from the passenger cabins. These nine converted aircraft are expected to stay in the fleet at least until the end of the year, Chief Commercial Officer Lucy Guillemette told analysts during Air Canada’s first-quarter 2021 earnings call last week. As passenger service returns, the carrier will benefit from increasing belly-hold freight capacity as well, she added.

In addition to international air freight, Air Canada is building an e-commerce logistics business, Guillemette said. The carrier is working with local retailers for domestic package shipments around Canada. This is part of the carrier’s strategy to “capture unique revenue opportunities,” she said.

Unique or not, Air Canada’s cargo strategy is working. The carrier earned CAD$281 million ($231 million) in cargo revenue in the first quarter, or CAD$132 million more than in the same period last year — an 89 percent increase. Cargo yields rose 130 percent, even though cargo traffic was down 18 percent from 2020. Air Canada reported the strongest freight demand on transpacific and transatlantic routes.

The passenger side was another story. Canada has among the strictest Covid-19 travel restrictions in the world, requiring all incoming passengers to provide a negative test result at departure, a test on arrival in Canada, and a mandatory quarantine. Inter-provincial restrictions also have limited domestic travel. Canada needs a “modified and more relevant approach to testing and quarantine,” CEO Michael Rousseau said during his first earnings call as CEO.

“The government must act, because air transport is a central pillar in the nation’s infrastructure,” Rousseau said, adding “a multicultural, trading country like Canada needs a healthy aviation sector.” Air Canada alone was responsible for 2 percent of Canada’s GDP before the pandemic and directly employed 40,000 people, he said. Canada has given no timeline for when restrictions may be relaxed. The government had come under criticism for an early slow vaccine roll out and is just emerging from a third wave of the disease.

Air Canada is keeping a keen eye on how passenger demand is accelerating in the U.S. and other countries that have vaccinated more of their population than Canada has. And what it sees is encouraging. The carrier believes Canadian demand will start to return in the second quarter and will accelerate in the third and fourth quarters. Already, Air Canada reports stronger than expected bookings for beach destinations in the fourth quarter. U.S. routes are expected to return quickly after Canada opens its southern border. European routes could start to recover in September. Travel to Asia is expected to recover last, with no timeline for when that may occur.

Leisure and visiting friends and relatives (VFR) traffic will lead the recovery, with the latter expected to fuel transatlantic demand. As with many other carriers, premium leisure travel will be a more important segment for Air Canada, especially as business travel remains in the doldrums.

Based on discussions with its corporate clients, Air Canada expects business travel to start picking up by September at the earliest. Domestic Canada business travel will be the first to restart, followed by transborder to the U.S., and transatlantic by the end of the year or the beginning of next year. Much of this timeline depends on companies bringing workers back to offices and international travel restrictions easing, Guillemette said.

Air Canada did not furlough pilots during the crisis and has ensured its pilots remained up-to-date. This gives the carrier the ability to add capacity rapidly when demand starts to return. Furloughed flight attendants can be brought back and returned to the flight line after a few days of training, Rousseau said. The carrier also can quickly bring its mothballed jets back into service. In the meantime, Air Canada’s load factors averaged just under 44 percent in the first quarter, so it can meet rising demand with the capacity it already flies.

Air Canada’s first-quarter capacity was down 82 percent from last year and 84 percent from 2019. Revenues fell 80 percent from 2020 to CAD$729 million ($600 million), resulting in a loss of CAD$1 billion. Daily cash burn in the quarter was CAD$14 million, lower than the previously forecast CAD$15-17 million. Second-quarter cash burn is expected to be CAD$15-17 million per day, and Second-quarter capacity is expected to be double last years, but 84 percent lower than in 2019.

In the quarter, Air Canada consolidated all its regional flying with Jazz. It also ended merger talks with Air Transat. Last month, the Canadian government extended a $5 billion package of loans and aid to Air Canada and is in talks with the country’s other carriers for similar funding.

Madhu Unnikrishnan

Copa: More South American Markets Will Connect as Pandemic Recedes

Copa Airlines expects to fly about 45 percent of its 2019 capacity in the second quarter as travel restrictions in many of its core South American markets remain in force. When the region starts to recover from the pandemic, Copa believes the air transport market will change in ways that redound to the benefit of its connecting-traffic model.

Fewer markets in South America will be able to sustain point-to-point service as the region starts its climb out of the Covid-19 pandemic, Copa CEO Pedro Heilbron told analysts during the company’s first-quarter 2021 earnings call last week. Routes that have been dropped may not come back. Instead, more traffic will funnel through a hub, like Copa’s Panama City hub, which Heilbron said is ideally located for the region’s flows.

Heilbron said that more than 70 percent of Copa’s city pairs have fewer than 20 daily passengers each way. It is his belief that even larger city pairs will not be able to sustain nonstop service for the near term. “We expect city pairs that had enough traffic for nonstop service – some additional city pairs – will need a hub,” he said.

In expectation of this additional traffic, Copa is bumping up its Tocumen hub to six connecting banks in June — what it was before the pandemic — from four now.

Heilbron warned that it is “very difficult to predict the future.” Some markets, like the U.S., Panama, and several countries in the Caribbean, have contained the virus or have inoculated a significant part of their populations. Others have not and are imposing new restrictions. Argentina, Chile, Venezuela, and Cuba are among the countries that had started to reopen, only to close down again as infections increased. And in others, like Colombia, the airline has had to reduce frequencies from several times a day to a handful of flights per week. “We know things will get better,” Heilbron said. “We don’t know when.”

In restoring its network, Copa is not targeting leisure and visiting friends and relatives (VFR) markets over business markets. Most of the routes it flies have always been a mix. But it has reduced frequencies on some of its more business-heavy routes, like Panama-Bogotá as business travel still staggers, Heilbron said. The carrier has the fleet flexibility to ramp capacity up or down as demand returns, he added.

Copa expects to end the year with 83 aircraft, including 16 Boeing 737-800s in storage. Current plans call for the airline to pull nine of those mothballed jets back into service by the end of the year. Copa took delivery of six Boeing 737 Max 9s in the first quarter. These aircraft had already been built but were awaiting delivery while the Max was grounded. It plans to take delivery of an additional two Maxes this year. The four remaining Embraer E190s will exit the fleet in the second quarter.

Copa reported a net loss of $111 million including special items on revenues of $186 million, down 72 percent from 2019 and 69 percent from last year. Given the uncertainty about the pandemic’s trajectory, management did not offer guidance on the rest of the year. However, first quarter capacity was 39 percent of the same period in 2019. Second quarter capacity will rise to 45 percent of 2019, and management expects each quarter to see about the same rate of capacity growth through the end of the year.

Madhu Unnikrishnan

Azul Boasts of Big Cargo Ambitions

Azul is one airline where the strength of air cargo demand is on display as it emerges from the crisis. The carrier saw cargo revenues jump 53 percent to 228 million reais ($43 million) in the first quarter compared to 2020. And executives expect full year revenues to double compared to 2019 as demand continues to rise unabated.

“We are very bullish about our cargo business,” said Azul CEO John Rodgerson during the carrier’s first-quarter results call last week. “It is certainly the story of Azul over the next several years.”

Azul is not alone in seeing a surge in cargo business. In March, the IATA recorded the highest level of cargo ton kilometers globally since it began tracking the metric in 1990. However, despite the global rise, Latin America saw a nearly 24 percent decrease in international air cargo volumes during the month.

The success of Azul Cargo rests on the back of the airline’s passenger strategy: Offering a broad hub-and-spoke domestic network serving more cities in Brazil than any other carrier, executives said. This gives its freight division a competitive time advantage in getting goods to more cities across the country. Its focus on the domestic market also partially insulates the company from any drop in international air freight.

Azul Cargo controls roughly one-third of domestic air freight revenues in Brazil today, according to the airline. This is up from a 22 percent share in 2019. Competitors include passenger carriers Gol and Latam Airlines, as well as dedicated operators Latam Cargo and Sideral Linhas Aéreas.

“Our target is to fish in that 45 billion reais ocean,” said Azul Chief Revenue Officer Abhi Manoj Shah during the call. The airline aims to expand by capturing a larger share of the roughly 45 billion reais worth of domestic logistics business for good like electronics and clothing. Air freight only amounts roughly 3 billion reais, or less than 7 percent, of that market today.

Brazil is still in the midst of a crippling second wave of Covid-19 infections. While daily deaths have decreased in recent weeks — the total number passed 400,000 people at the end of April — the toll remains one of the highest in the world. Some experts warn that the worst is yet to come for the country.

World Health Organization data shows the number of new infections in Brazil tapering slightly since peaking during the week of March 22. For the week of April 26, the latest with full data, new infections were down nearly 21 percent from the peak to roughly 422,000. The drop is far more gradual than it was in the U.S. after that country’s third wave subsided in January.

But those warnings seem at odds with the mood at Azul. Rodgerson said the number of Brazilians with at least one shot of a Covid-19 vaccine has hit a quarter of the eligible population. This was the point in the U.S. when domestic airlines began to see an inflection in new bookings, which for them occurred around March.

“There’s strong reason to believe the [Brazil] domestic market will experience a similar inflection point within the next two- to four-weeks,” he said.

This forecast inflection appears to be already playing out in Azul’s bookings. The airline has seen a “continuous improvement” in demand over the past four weeks, with bookings rising 40 percent — though no benchmark was given — in just the past two weeks, said Shah. He cited the relaxation of coronavirus restrictions in all 27 of Brazil’s states for the improvements.

Even business travel, key to most airline revenues, is back to 35-40 percent of pre-crisis levels at Azul, added Shah.

Of course Brazilians have proven more willing to fly despite a continued risk of Covid-19. This is what occurred during the last few months of 2020 when the country’s airlines recovered to near 2019 capacity levels even as the number of new infections remained above 100,000 a week. The question is whether Brazil can keep its vaccination campaign moving fast enough to stay ahead of variants as well as the southern winter, when colds and flus flourish.

In the first quarter, Azul posted a net loss of 2.65 billion reais, or 1.12 billion reais when adjusted to exclude foreign exchange and other charges. Revenues decreased nearly 35 percent year-over-year to 1.8 billion reais and expenses by more than 22 percent to 2.04 billion reais. Passenger traffic was down more than 27 percent on a 23 percent drop in capacity. However, capacity was up 9 percent compared to the first quarter of 2019.

Edward Russell

Latam Pulls Back Amid Renewed South American Travel Restrictions

Latam saw its nascent recovery hit some turbulence in the first quarter. Rising Covid-19 infections across South America and renewed travel restrictions saw it roll passenger capacity back from 41 percent of 2019 levels to a forecast of just 25 percent in April. The carrier remains agile — as it put it — in adjusting its operations in response to the “unprecedented” environment.

As part of its U.S. Chapter 11 bankruptcy restructuring, Latam reached a deal with Boeing to cut its commitments by five aircraft — four 787s and one 777F — in April. The airline retains two firm orders for 787-9s both due in December. The agreement is subject to court approval. Latam also announced plans to retire its remaining Airbus A350s during the first quarter.

In the first quarter, Latam posted a net loss of $431 million. Revenues decreased 61 percent year-over-year to $913 million on a 44 percent drop in expenses to $1.27 billion. Passenger traffic fell 69 percent on a nearly 62 percent decline in capacity. Liquidity stood at $2.6 billion, including $1.3 billion available under its debtor-in-possession facility, at the end of March.

Separately, last week Latam pledged to go carbon neutral by 2050. Calling the initiative “a necessary destination,” group CEO Roberto Alvo outlined plans to cut emissions in the airline’s domestic operations in half by 2030, and to eliminate landfill waste by 2027. The airline will invest roughly $100 million in green initiatives over the next decade, including eliminating disposable plastics from all flights by 2023, he said. The announcement fits with the broader industry shift towards reducing emissions though Latam, which continues to fly under Chapter 11 bankruptcy protection, failed to unveil any truly innovative or unique solutions to the challenge.

Edward Russell

Allegiant Sits in U.S. Leisure Recovery Sweet Spot

Three months ago, Allegiant Air CEO Maurice Gallagher looked at the year ahead and said “We believe it’s time to step on the gas.” That time has clearly come. The carrier announced its first quarter 2021 earnings results last week, and Gallagher’s retort is now: “We’re stepping on the gas.”

Allegiant operates an all-domestic U.S., leisure-focused route network, one it believes is uniquely positioned to take advantage of the current moment, when the most lucrative markets airlines have to chase is vacationers, not business travelers. Although Allegiant did fly some business travelers before the pandemic, they were not its focus, and its network of relatively infrequent flights to leisure hotspots like its home market of Las Vegas or Orlando is not optimized for business travelers.

“We are fortunate to be a domestic leisure carrier,” Gallagher told analysts. “Leisure is king right now.” Las Vegas is beginning to rebound, as are all vacation markets in Florida. Allegiant’s cities in the Mountain West that serve as access points to national parks like Yellowstone also have performed well, a trend Gallagher expects will continue through the summer.

The booking curve is growing, signaling rising consumer confidence. Bookings for the latter half of the summer are about where they were during the same period in 2019, before the pandemic.

While the network airlines have shrunk as their business-travel and international franchises remain idled, Allegiant is growing. Its available seat miles (ASMs) grew by 3 percent during the quarter compared with 2019, partially a function of having more aircraft. Allegiant took delivery of three used Airbus A320s in the quarter and plans to grow from 108 aircraft at the end of this year to 145 by the end of 2024. Although Allegiant executives are confident the airline could grow faster than this — which works out to about 10 percent annually through 2024 — they plan to stick to this more measured approach. “The race always goes to the tortoise,” Gallagher said.

Part of the reason Allegiant thinks it can grow profitably is that Gallagher believes the network carriers — American Airlines, Delta Air Lines, and United Airlines — will be hit with a double blow as the pandemic recedes. Their business and international networks will struggle for a few years, and they will have large amounts of debt to pay down. This presents opportunities for ultra-low-cost carriers, like Allegiant, Frontier Airlines, and Spirit Airlines.

New entrants like David Neeleman’s Breeze, slated to launch later this year, and Andrew Levy‘s Avelo, which started flying last month, are less of a concern. Andrew Levy was an Allegiant executive, which prompted Gallagher to remark, “We know each other, and he certainly knows how to do what we do.” But Neeleman’s Breeze, which will start flying with Embraer jets and eventually Airbus A220s, is not as much of a threat, because of the size of its aircraft and its plan to operate longer, thin routes. Allegiant, by contrast, flies larger A320s on shorter routes. “Those airlines don’t have a brand,” Allegiant President John Redmond said.

The time is right to buy older A320s, Gallagher said. As airlines around the world downsize their fleets, Allegiant is able to buy used A320s for about 30 percent less than they did before the pandemic. Similarly, spare parts — usually a cost center for airlines — are available at a 50 percent discount. The carrier is being “opportunistic” in its aircraft and parts procurement, he said.

Allegiant had slowed down work on its Sunseeker Florida resort, but hopes to restart the project by the end of the year, Redmond said.

“I’m extremely excited about our future,” Gallagher said. “We’re back.” But despite the optimism, the carrier eked out a bare profit of just under $7 million in the quarter, or 88 percent lower than 2019. This profit was due in large part to expenses being offset by $92 million in federal payroll support funds. Allegiant expects to take a further $98 million from the third round of federal payroll support in the second quarter. Revenues were down $279 million, up 13 percent from the fourth quarter of last year.

In the second quarter, Allegiant expects revenues to be down between 6-10 percent from 2019, and capacity to be up between 2-6 percent.

Madhu Unnikrishnan

Sun Country Touts Higher Fares For Slower Capacity Ramp

Fresh off its successful IPO in March, Sun Country Airlines CEO Jude Bricker expressed confidence in the leisure recovery even as the carrier remains behind others restoring pre-crisis capacity levels. The rate of bookings, as well as fare levels, for the past 45 days is comparable to what the airline saw during the same period in 2019, he said during Sun Country’s inaugural earnings call last week. Bricker is “encouraged” by this trend, which has pushed the airline’s booked load factors for the summer above 2019 levels, but noted that demand remains “unpredictable.”

A topic of interest for Wall Street analysts is Sun Country’s decision to fly less passenger capacity this summer than two years ago. The carrier plans to fly roughly 17-20 percent less capacity in the second quarter than it did in 2019, and has yet to provide third quarter guidance. Bricker defended this, saying Sun Country is commanding higher fares, in part because of the availability of a broader array of ancillary fees, than it did two years ago on the lower capacity. The carrier plans to fully restore its passenger capacity by year end.

This is not to say Sun Country will sit on its laurels. The airline is adding nine new destinations to its map, including Hartford, Orange County and Raleigh-Durham, to its map in May with routes that Bricker described as catering to visiting friends and relatives — or VFR — travelers. Both leisure and VFR travel is expected to recover to at or near 2019 levels this summer. The airline will expand its map again with an eye on upper Midwest leisure flyers this fall and winter.

In April, Sun Country reached deals to acquire three Boeing 737-800s. These will be used to expand its passenger operations, which also includes charter flying. The airline plans to add as many as five more jets to its fleet this year.

A boon for Sun Country was its timely diversification into the air freight market just before Covid-19 threw the airline industry into crisis. The carrier began flying 737 Freighters for e-commerce giant Amazon last spring under a deal unveiled in 2019, and has since grown that operation to 12 aircraft. Bricker said the business is performing well though, in response to questions, added that there are no immediate plans to expand it.

Sun Country posted a $12.4 million net profit with the support of federal payroll support funds in the first quarter. Without the PSP relief, the airline lost $4.9 million. Revenues decreased 29 percent year-over-year to $128 million with every business segment down except for cargo, which jumped from zero a year ago to nearly $22 million this year. Expenses decreased 38 percent to nearly $103 million.

Edward Russell

In Other News

  • The slower pace of vaccinations in Europe is weighing on Air France KLM. The Franco-Dutch group now thinks its second-quarter capacity will be only half of 2019’s, and third-quarter capacity is forecast to be between 55-65 percent of 2019’s capacity. Revenues in the first quarter were down 56 percent, to €1.9 billion ($2.3 billion), and traffic fell by 73 percent from a year ago. Losses came to €600 million, offset in part by further staff reductions and help from the company’s governments.

    Cargo was a bright spot for the group. Revenue ton kilometers were up by 13%, and freight revenue rose by 80 percent, year-over-year, to €839 million.

    “The success of the first set of capital-strengthening measures completed in April, allows us to look forward to the summer season with greater confidence, hoping that the progress of the vaccination roll-out worldwide and the implementation of travel passes will allow borders to reopen and traffic to recover,” CEO Ben Smith said.
  • While IATA still does not expect a full travel recovery until around 2024, the domestic passenger traffic in select domestic markets are on track to recover this year. China has already recovered and the U.S. could in the second half, said IATA Chief Economist Brian Pearce last week. His comments followed data showing that global passenger traffic was down 67 percent in March compared to 2019; domestic was down just 32 percent whereas international was down nearly 88 percent.
  • Australian regulators have tentatively blocked a proposed joint venture between Qantas and Japan Airlines covering flights between Australia and New Zealand and Japan. The Australian Competition & Consumer Commission said the proposed tie up, even in light of the negative affect of the Covid-19 crisis on air travel, would severely harm both competition and consumers. JAL and Qantas — including the latter’s Jetstar Airways subsidiary — dominate the Australia-Japan market, with only All Nippon Airways competing on the Sydney-Tokyo route. Virgin Australia planned to begin flights to Tokyo last year but they were shelved during its voluntary administration restructuring.
  • Virgin Australia reported an A$3.1 billion ($2.4 billion) loss during the fiscal year ending in June 2020, new filings with Australian regulators show. The carrier, which was losing money before the coronavirus pandemic, entered voluntary administration in April 2020 and emerged a much smaller carrier last November. Virgin Australia restructured much of its debt, as well cut expenses, while in administration.
  • The news from Japan isn’t great. The country is grappling with fresh outbreaks of Covid-19, and calls to cancel the Summer Olympics, planned to begin in a few weeks, are growing louder. Things are no better at the country’s two largest carriers. ANA reported a fiscal-year loss of ¥405 billion ($3.7 billion) on revenues that were 63 percent down from the previous fiscal year. Passenger revenues were off 93 percent from FY2019. Traffic fell by 94 percent on capacity that was 79 percent down from the last fiscal year. This was mainly due to the collapse of international traffic; domestic traffic held up a bit better but was still down 71 percent. Cargo was the shining light. Revenues for international freight were ¥161 billion, up 56 percent from last year. ANA said it forecasts a return to profitability this fiscal year, which ends next March.

    JAL told a similar story. Total revenues were about one-third of last year’s, or ¥481 billion. Its international network ground to a halt, with traffic down 96 percent from the previous fiscal year, while international load factors were less than 15 percent. Domestic travel had begun to rebound last year, but Japan restricted travel again in January in response to a public-health emergency, forcing JAL to run a very limited domestic network, the carrier said. Cargo was up, although not as markedly as for ANA. Revenues were ¥129 billion, up 41 percent from last year. On May 7, JAL acquired Spring Japan, and the deal is expected to close in June. In a filing announcing the acquisition, JAL said it sought the LCC to “capture the first inbound traffic from China, which is expected to recover in the near future.”  
  • Another day, another eye-popping result from an air freight company. Atlas Air Worldwide reported first-quarter net income of $89.9 million, up from $23.4 million in 2020. The company benefited from two trends that have emerged during the pandemic. First, the explosive growth of e-commerce as people in lockdown shifted from shopping at stores to online. Second, maritime shipping remains constrained, and the recent Suez Canal blockage didn’t help that sector.

    Atlas saw such demand that it returned four Boeing 747-400Fs and one 777F to its fleet last year. The carrier has four 747-8Fs on order with delivery expected in the second quarter. Revenues rose by more than $200 million, to $861 million in the quarter. Atlas CEO Joseph Dietrich expects these trends to continue this year and that freight yields will remain high, although not likely as historically high as during the second half of last year. It now says second-quarter net income could be 30 percent higher than the first quarter’s, but given the uncertainty around the trajectory of the pandemic, Atlas is not offering guidance for the rest of the year.

    Atlas and its pilots have been embroiled in often-contentious negotiations for a new contract for five years. Arbitration hearings ended last month, and the two sides await the arbitrator’s decision, after submitting post-hearing briefs. Atlas management expects a decision in the second half. The pilots union has accused Atlas of “dragging its feet,” delaying the expected decision from June to August. “Delay, delay, delay are the only words Atlas managers know when it comes to getting a contract done with their largest and most important work group,” said Robert Kirchner, head of the cargo carrier’s pilots union.

Edward Russell & Madhu Unnikrishnan

Expand Section

Routes and Networks

New Haven, Conn., is best known as the home of Yale University and for its pizza. As soon as July, it will also boast the East Coast base of start-up carrier Avelo. The airline will base several Boeing 737-700s and invest $1.2 million at the airport, with flights due to begin in the third quarter.

The news is something of a route for the Tweed New Haven airport. Despite sitting at the end of New York City’s Connecticut suburbs, it has steadily lost air service over the years. Sole network carrier American Airlines suspended flights outright for a brief period in 2020 when CARES Act air service protections lapsed. Avelo will be the first carrier to operate mainline jets from New Haven, which is limited by its short 5,600-ft. runway, since United Airlines shifted its then service to regional affiliates in 1996, according to DOT data via Cirium. The airport committed to more than $100 million in upgrades, including a runway extension and new passenger terminal, as part of Avelo’s investment.

Avelo has not disclosed where it will fly from New Haven but its inaugural base in Burbank, Calif., suggests a mix of leisure and more urban destinations. For example, the airline’s first flights connect Burbank to Santa Rosa, Calif., in the heart of wine country, but it has since added flights to airports in the Phoenix and Salt Lake City areas. Avelo has its choice of major East Coast cities, like Washington, D.C., as well as Florida beach destinations for new service from New Haven.

The airline’s planned New Haven base is poses a challenge to Connecticut’s main commercial airport, Bradley International. Located about an hour north of New Haven in Hartford, Bradley boasts air service on every major U.S. carrier. JetBlue Airways has invested in Hartford during the crisis, including adding nonstops to Los Angeles and San Francisco.

Edward Russell

Route Briefs

  • While the European travel recovery may not come in time for summer, the Baltics continue to attract new routes. AirBaltic will add new routes between its Riga base and Kos, Greece; Pisa, Italy; and Valencia, Spain from July.
  • With all of the leisure route additions this summer, it’s easy forget there are others — like Columbus, Ga. American Airlines returns to the southern city after an eight-year hiatus with nonstops to Charlotte and Dallas/Fort Worth from August 17, according to Cirium schedules. The carrier will also add new flights between Charlotte and El Paso, and Dallas/Fort Worth and Syracuse on the same day.
  • Continuing the transatlantic push into countries open to vaccinated travelers, Delta Air Lines will add Croatia to its map in July. The carrier will connect New York JFK and Dubrovnik four-times weekly through the summer. Delta joins United Airlines flying to Croatia this summer.
  • FlyDubai wants to bring more Russians to the Persian Gulf. The budget carrier will add three new Russian destinations to its map: Moscow Zhukovski from May 12; Novosibirsk from May 28; and Perm from June 2. With the additions, FlyDubai will serve 11 destinations in Russia from its Dubai base this summer.
  • Southwest Airlines has beefed up its summer map with 25 new routes, including 15 seasonal connections. While most of the new nonstops operate only on weekends, six routes will fly daily: Austin to Chicago O’Hare; Orange County, Calif., to Boise, Reno and Spokane; and Sarasota-Bradenton to Denver and St. Louis. The new routes begin June 6, the same day that Southwest resumes suspended service to Costa Rica.

Edward Russell

Expand Section

Fleet

The future of the Boeing 737 program could hinge on when (and whether) Russia and China re-certify the 737 Max. Not only are the two countries’ airlines barred from operating the type, but foreign airlines can’t fly the Max to Russia and China, nor can they overfly either country, which is particularly a concern for airlines seeking to traverse Russia’s vast airspace en route from Europe to Central and East Asia.

“The recovery of the Boeing 737 program will not be complete until these countries certify can obtain clearances to operate the 737 Max in their country and for overflights,” Air Lease Corp. (ALC) Executive Chairman Steven Udvar-Hazy said during the company’s first-quarter 2021 earnings call last week. “ALC has several 737s on future delivery where our lessees require Russian and/or Chinese certification.”

The lessor expects both countries, but China in particular, to be large and lucrative markets for the Max.

The FAA re-certified the Max late last year, with Mexican, Brazilian, and European regulators following in short order through earlier this year. Although neither Russia nor China have offered a timeline for re-certification and the issue has been ensnared in wider geopolitical problems, re-certification is expected by the second half of this year.

Boeing hasn’t helped its own cause with the most recent grounding of more than 100 Max aircraft worldwide due to a flight-deck electrical issue. The company is working with regulators for a fix, which, when approved, is expected to be straightforward and require only a few days per aircraft. Although fewer than 10 of ALC’s leased aircraft were affected by the most recent grounding, Udvar-Hazy called it “very frustrating.”

Despite these concerns, ALC has seen renewed interest in the Max from airlines that had cancelled their lease agreements for the type when the Max was first grounded two years ago. “We’re working with Boeing and those airline customers to reactivate those specific deliveries under favorable pricing and delivery terms,” CEO John Plueger said.

But it was another aircraft that emerged as a pandemic star. The Airbus A321 family, including the Neo and the LR variants, is the right type for the moment, with airlines around the world deploying A321s on routes that would have been flown by smaller twin-aisle aircraft. “It’s an airplane that sits into the airline demand picture very well in terms of size, performance, operating costs,” Udvar-Hazy said.

ALC has seen lease rates for the A321 family tick up, but it also reports strong demand for Airbus A350s and Boeing 787s. ALC does not have any Boeing 777s in its orderbook, yet another signal that demand for large widebodies is slowing down.

The recovery will be regional, ALC said. North American airlines stand to reap a decent summer, even with international and business traffic still largely constrained. Europe’s summer prospects look a little more hazy, and new outbreaks in Latin America and Asia, particularly India, will prolong those regions’ recoveries.

Still, ALC said the rate of deferrals, lease rejections, and lease restructurings has slowed down since the start of the pandemic.

The company reported first-quarter revenues that were down 7 percent from 2020 to $475 million. Net income was $80 million, down 53 percent from last year.

ALC believes its young fleet, with a focus on smaller widebodies and narrowbodies, will stand it in good stead as airlines emerge from the crisis and seek to re-fleet with newer technology and more efficient aircraft. Like many of its peers, ALC believes lessors will account for roughly half of the world’s fleet in the near future, a proportion many lessors expect to grow.

Madhu Unnikrishnan

Fleet Briefs

  • With cargo continuing to outperform passengers in the recovery, Boeing is expanding its capacity to convert 737-800s to freighters. The airframer has partnered with Cooperativa Autogestionaria de Servicios Aeroindustriales (COOPESA) to add two additional conversion lines at COOPSEA’s facility in Alajuela, Costa Rica. With the new lines, Boeing will have facilities converting passenger 737s to 737-800BCFs in four locations: Guangzhou, Jinan and Shanghai in China, as well as Costa Rica.
  • United Airlines confirmed that an undisclosed number of its 180 firm Boeing 737 Max orders are for the 737-8. Previously, the carrier only disclosed commitments for the 737-9 and -10. Despite the recent electrical issues with select Max jets, at the end of March United planned to take delivery of 13 more Maxes this year and 40 in 2022.

Edward Russell

Expand Section

Sky Money

  • Fresh off a small first quarter profit thanks to Uncle Sam, Allegiant Air raised nearly $296 million by issuing 1.35 million shares of new stock last week. Shares priced at $219 each, or a $15 discount off the closing price of $234 a share on May 5. The discounter will use proceeds of the sale to fund growth and repay debt — similar to the plans laid out by Frontier Airlines and Sun Country Airlines for proceeds from their respective IPOs this spring.
  • Shareholders of the Lufthansa Group have approved a request to issue up to €5.5 billion ($6.6 billion) in new shares. Speaking at the group’s annual general meeting last week, CEO Carsten Spohr said the equity was necessary to “strengthen our balance sheet ratios again and return to our former financial stability.” Lufthansa has until 2026 to issue shares under the authorization.

    Separately, Lufthansa financed two Airbus A350-900 deliveries under a Japanese operating lease with call option (JOLCO) transaction in April. The structure allows airlines to finance the full capital costs of an aircraft, whereas other options typically require some investment from the operator. Advisor ABL Aviation arranged the transaction.
  • Singapore Airlines raised S$2 billion ($1.5 billion) in aircraft financing through four separate sale-and-leaseback transactions. The deals cover one Airbus A350-900 and Boeing 787-10 with Aergo Capital; four A350-900s with Altavair; one A350-900 and two 787-10s with EastMerchant/Crianza Aviation; and one A350-900 and one 787-10 with Muzinich and Co. The Aergo Capital tranche tapped the Islamic finance market with funds from the Dubai Islamic Bank. SIA’s latest financing round brings its total to S$15.4 billion since the crisis began more than a year ago.

Edward Russell

Expand Section

State of the Unions

Norse Atlantic Airways, the startup that plans to pick up the low-cost, long-haul mantle that Norwegian has retreated from, is taking an unusual step. The carrier is hoping to forestall the labor opposition that plagued Norwegian Air International‘s (NAI) entry into the U.S. and is meeting with labor ahead of its planned launch and even before it has hired most of its staff.

Norse Atlantic and the Association of Flight Attendants (AFA) have scheduled talks for later this month. The carrier is taking great pains to differentiate itself from NAI. “We are a brand new airline with no ties to existing or previous airlines,” CEO Bjørn Tore Larsen said in a statement. “While we have an opportunity to offer low-cost, long-haul service for customers with some of the aircraft made available following Norwegian’s exit from the market, Norse will approach labor relations differently from the start.”

Recall that several years ago, a coalition of unions, airlines, and federal lawmakers banded together to fight NAI’s  application for a U.S. foreign air carrier permit, alleging that Norwegian based a subsidiary in Ireland to avoid Norway’s stricter labor laws — a violation of the U.S.-EU open skies agreement. Although NAI ultimately got its permit, the kerfuffle left a bitter taste behind. And that’s why Larsen and Norse management have emphasized that the new airline has no relationship with Norwegian. “We are a Norwegian company, flagged in Norway, using Norwegian, European, and American crews,” Larsen told Airline Weekly last month.

Larsen also said Norse Atlantic planned to engage with labor in Europe and the U.S. to ensure that unions were on board before the carrier launched. So far, AFA is keeping an open mind. We believe Norse can provide good flight attendants jobs that respect labor rights in the U.S. and Europe as intended by the E.U.–U.S. open skies agreement,” AFA President Sara Nelson said. “We look forward to meeting later this month to attempt to codify these discussions with a legally binding contract.”

The carrier could have an uphill fight ahead of it. The Air Line Pilots Association (ALPA) said it is reserving judgement on the airline until it can ensure that it really isn’t taking a page out of Norwegian’s playbook. Union President Joe DePete, who recently called Norse Atlantic a “Frankenstein’s Monster” made up of “dead parts,” said he is “skeptical” of the new airline’s independence. “We will vigorously oppose Norse’s attempt to obtain Department of Transportation approval to operate into the United States if its ‘brand new’ airline is just another bait-and-switch flag-of-convenience scheme, and we are confident that this administration will vigorously enforce our trade agreements, defend collective bargaining rights, and protect American jobs,” DePete said.

Rep. Peter DeFazio (D-Ore.), the chairman of the House Transportation and Infrastructure Committee, also is unconvinced. He was among the most vocal opponents of NAI’s foreign air carrier permit. And he remains opposed to Norse Atlantic, urging Transportation Secretary Pete Buttigieg to deny the new carrier’s permit. “It is imperative that you correct the error of 2016 and deny this airline’s application,” he said in a hearing earlier this year.

Madhu Unnikrishnan

Expand Section

By the Numbers

The growing importance of environmental sustainability to airlines was made clear during this quarter’s earnings calls. All of the major airlines and lessors spent significant portions of their presentations highlighting their bona fides and outlining plans for the future. Although sustainability has long been an area of concern in the industry, the issue has come under increasing focus in the last couple of years. This may partially have been spurred by the flight-shaming movement before the pandemic, by memories of the bruising fights over the European Union’s emissions trading system a decade ago, and also by shifting public opinion, which has moved even more sharply toward the issue of climate change in recent years.

Skift Research’s new report “Sustainability in Travel 2021: Environmental Performance of the Six Largest Airlines” explores the issue and offers a scorecard on if the industry has met the moment. Below are some of the most compelling data from the report.

Madhu Unnikrishnan

The Six Largest Carriers’ Carbon Dioxide Emissions

Low-Cost Carriers Are the Most Efficient Per RPK

Asian Carriers Are the Most Efficient When Cargo Is Factored In

No Airline Achieved Consistent Reductions in Fuel Consumption

Expand Section