Issue No. 818

Could the Pandemic End Air Transport Liberalization?

Governments are looking inward and becoming more protectionist in response to the pandemic

Pushing Back: Inside the Issue

Brian Pearce has been IATA's chief economist since 2004, and in that time he's seen his share of exogenous shocks to the industry: SARS, MERS, the global financial crisis, the historic spike in oil prices, and now Covid-19. The industry has weathered all of them, but the breadth and scale of this pandemic has left no almost no airline unscathed. And governments have responded, many stepping up with financial support for the industry. But what will happen after? Pearce notes in this week's Feature Story that more governments are turning inward and becoming increasingly protectionist. That doesn't bode well for an industry that by its definition is global. It especially doesn't bode well for future consolidation or liberalization. And just how profitable was the industry before the pandemic?

Elsewhere in this issue, even though Norse Atlantic reached an agreement with the largest U.S. flight attendants union, pilots unions remain skeptical. Fallout continues after the Belarus hijacking incident, with governments moving quickly to ban flights from that country and to bar their airlines from overflying Belarus. This raises concerns that air transport and safety are becoming politicized and that the tit-for-tat could escalate. Are U.S. ultra-low-cost carriers best positioned to emerge from the crisis? Opinions are split. Iberia is returning aircraft to its fleet and re-converting some "preighters" back to passenger aircraft — perhaps a sign that travel demand is returning.

Meanwhile, Covid-19 has shown its not done with us. While vaccination rates in Europe and North America climb and societies return to normal, infections elsewhere are rising. Countries that were standouts early in the pandemic — Uruguay, Vietnam, and Japan, for example — are grappling with new surges. Disturbing new variants continue to evolve. While U.S. airline CEOs are bullish about the potential return of business travel, it's becoming increasingly clear that globally, this will be a second lost year for the airline industry.

Verbulence

"I think the volumes of domestic [business] travel 12 months forward are actually going to be even higher than the domestic volume we saw in 2019 alone because there is such a demand.”

Delta CEO Ed Bastian on the surge in U.S. business travel could begin as soon as July.

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 debate whether European airlines face another lost summer, and why is there so much merger talk in Brazil? Listen to the episode.

Weekly Skies

Swiss Adds Summer Flights Despite Slow European Recovery

Europeans may be flocking to Mediterranean beaches for getaways delayed by the coronavirus pandemic, but — at least at Swiss International Air Lines — the rise in leisure bookings belies a broader travel recovery.

“We regretfully still see no signs of any broader structural recovery of the air transport sector,” said Tamur Goudarzi Pour, commercial chief at the Zurich-based carrier, in Swiss’ summer schedule unveiled last week. All in, the airline will fly 50-55 percent of its 2019 capacity during the peak summer months of July and August, a marked increase from less than 30 percent in May but still far below some its network peers in Australia, China and the U.S.

The issue facing Swiss is that of every airline without a large domestic market. The carrier has negligible domestic flying — less than one percent of its system capacity in 2019 — and overwhelmingly relied on business travel before the crisis. Together, this leaves Swiss at a significant disadvantage when it comes to a recovery that favors domestic leisure and visiting friends and relatives (VFR) travel.

Swiss is far from alone. IATA expects passenger traffic in Western Europe to recover slower than in other regions with large domestic markets, chief economist Brian Pearce said during a briefing on May 26. The lagging recovery, which is forecast to last into 2023, is in large part due to the region’s reliance on international travel — both within the EU bloc and from long-haul points.

“You’re likely to see a more cautious industry, as we come through this crisis and go into the recovery mode,” said IATA Director General Willie Walsh.

Cautious is an accurate description of Swiss’ approach to the recovery. In May, the carrier unveiled significant fleet and staff cuts that will see it emerge from the pandemic smaller than it was before. The airline plans to operate fewer frequencies on European routes and cut some long-haul destinations from its map.

The Lufthansa Group, which owns Swiss and four other carriers, could fly as much as 70 percent of pre-crisis capacity during the peak summer, executives said at the end of April. However, how much the group’s carriers fly will depend on the pace of countries reopening to visitors — something many both inside and outside the industry agree is progressing slower than hoped.

Swiss has seen a rise in summer bookings to destinations along the Mediterranean as well as to the United Arab Emirates and U.S., said Pour. However, volumes remain “well below” pre-crisis levels.

Edward Russell

U.S. Suspends Belarus Air Services Agreement

The U.S. State Department has suspended the 2019 U.S.-Belarus bilateral air services agreement in the aftermath of that country hijacking a Ryanair flight last month to detain a dissident journalist, White House Press Secretary Jen Psaki said. But the speed with which governments have moved to sanction Belarus, although applauded by free-press and human-rights activists, has raised concerns about the politicization of air traffic control and air transport.

This could lead to a tit-for-tat that ultimately may compromise air safety, IATA said. “Two wrongs do not make a right,” IATA Director General Willie Walsh said. “Politics should never interfere with the safe operation of aircraft and politicians should never use aviation safety as a cover to pursue political or diplomatic agendas.”

Signs that the incident could devolve into escalating and reciprocal government actions — with airlines caught in the crossfire — are already emerging. In response to Western outrage, Russia briefly rejected European airlines’ flight plans that skirted Belarus en route to Moscow, but reversed that decision last week. Germany this week barred flights from Russia to land in Germany before allowing them to resume on Thursday. This was in response to a corresponding ban from Russia, which also was reversed.

The U.S. also moved quickly by suspending the bilateral air services agreement that had allowed unlimited flights between the U.S. and Belarus and points beyond by passenger and cargo carriers from either country. Both countries have the right to suspend the agreement if its terms or international laws are violated. “We take these measures, together with our partners and allies, to hold the regime accountable for its actions and to demonstrate our commitment to the aspirations of the people of Belarus,” Psaki told reporters. 

Although IATA condemned Belarus’ May 23 hijacking of a Ryanair flight in the strongest terms, the group warned that air safety should be kept out of geopolitics. “Banning European aircraft from using Belarusian airspace with a Safety Directive is also a politicization of aviation safety,” Walsh said. “This is a retrograde and disappointing development. EASA should rescind its prohibition and allow airlines to manage safety as they do each and every day — with their normal operational risk assessments.”

The European Union and the UK moved quickly after the May 23 incident to prohibit Belarusian carrier Belavia from flying through European airspace and landing in either jurisdiction. European airlines have been ordered not to overfly Belarus. The UK has formally suspended Belavia’s air operators certificate, and the EU is expected to do the same. The EU and the U.S. are expected to levy further sanctions on Belarus in the coming days.

Ryanair Flight 4978 was en route between Greece and Lithuania — both EU member states — on May 23 when Belarus President Alexander Lukashenko’s regime scrambled a MiG-29 fighter jet to escort the aircraft to Minsk on the false ruse that Belarus had intelligence that a bomb was on board the flight. Upon landing, authorities arrested dissident journalist Roman Protasevich and his companion. Protasevich lived in exile in Lithuania. The incident sparked a diplomatic row, with several European leaders decrying it as tantamount to state-sponsored hijacking of a commercial flight.

Russian President Vladimir Putin dismissed Western concerns, arguing the matter is an internal affair for Belarus. Russia’s carriers have increased the number of weekly flights to Belarus, and Putin’s regime has lent Belarus $500 million.

Madhu Unnikrishnan

IATA Urges Governments to Use Data to Guide Reopening

IATA Director General Willie Walsh implored leaders of the Group of Seven (G7) advanced economies, set to meet at a summit this month, to turn to data to determine when to reopen their countries. Measures such as quarantines and lockdowns have outlived their usefulness in containing the disease, he said.

The world — even among the G7 economies — remains sharply delineated by vaccine access and response to the disease. Australia and New Zealand, for example, have all but barred international travel and only recently established a travel corridor across the Tasman Sea. Canada still requires quarantines and expensive testing. Much of Asia is seeing infections spike, even among countries like Vietnam that were early success stories. While the pandemic is easing in Brazil, other South American countries are seeing fresh outbreaks. And meanwhile, the U.S. had an “almost normal Memorial Day,” and Europe could rebound this summer, Walsh said.

Scientists say it’s likely the world will have to live with the coronavirus for years, if not decades, to come, so it is increasingly important to use data tools to mitigate risk rather than trying to stamp out all incidences of the disease, Walsh told reporters during a press conference last week. Both Airbus and Boeing have developed data tools to calculate the risk of travel and have found that with rigorous testing and tracing, even travelers from “restricted” countries present a small risk of causing an outbreak. “It is clear to us that we can do better and in fact must do better,” he said. Universal restrictions on people are no longer necessary, he added.

Requiring vaccines is not the solution, either, given the uneven distribution of the shots worldwide. “We cannot forget people who have not been vaccinated cannot be vaccinated or do not have access to vaccines,” Walsh said. “We cannot deny their freedom.” Instead, effective screenings can be a stopgap measure to keep infections from spreading.

However, the cost of testing, especially with the gold-standard PCR test, remains a barrier. Countries that mandate universal testing should pick up the tab for PCR tests, Walsh said. In most cases now, travelers pick up the bill, which can easily outrun airfare. Airlines are unable to pass on the costs. With cheaper, if less accurate, antigen tests, consumers can bear the cost, IATA said. “We have to question why the costs [for PCR tests] are as. high as they are and why governments are charging for those tests,” Walsh said.

Madhu Unnikrishnan

Views Split Over Whether U.S. Discounters Will Gain Share in the Recovery

U.S. budget carriers accelerated years worth of market share growth into a single pandemic year. Their collective share of passengers jumped several percentage points in 2020 as the returning leisure travelers fit nicely with their strategy of taking vacationers directly to popular holiday destinations.

The segment, which includes Allegiant Air, Frontier Airlines, Spirit Airlines, and Sun Country Airlines, has been one of the fastest growing and most profitable in the U.S. for years. And even though they — along with the rest of the industry — contracted dramatically when Covid-19 hit, discounters did not face the larger structural fall off in business and international travel that hamstrung their network competitors. This set up led raised the prospect of the ULCC set emerging from the crisis as a larger force in the U.S. market than before.

“There’s a lot of growth potential for [ultra low-cost carriers] coming out of this pandemic,” Allegiant Senior Vice President of Revenue and Planning Drew Wells told Airline Weekly in a recent interview.

The ULCC segment notched 2.5 points of share growth in 2020 when they carried 11.2 percent of all domestic travelers, U.S. Bureau of Transportation Statistics data via Cirium show. And in the first two months of 2021, they flew just over 13 percent of all travelers in the U.S.

Allegiant already has recovered to its 2019 capacity levels and plans to be roughly 20 percent larger at the end of December than it was two years earlier. This growth will see Allegiant add six new airports — including Jackson Hole, Wyo., Key WestPhoenix Sky Harbor and Spokane, Wash. — and dozens of new routes to its map this year.

Frontier plans to resume 2019 capacity levels this summer and grow from there. Spirit plans to recover 2019 capacity by year-end before growing by roughly 30 percent year-over-year in 2022. While Sun Country plans a slower capacity recovery in order to boost fares and hire new crews, the airline benefits from a dedicated-freighter business with Amazon that it launched in 2020.

But not everyone is sold on the conclusion that discounters will permanently gain share in the Covid-19 recovery.

“Downturns typically beget opportunity for the efficient and nimble,” wrote J.P. Morgan Analyst Jamie Baker in a report last week. “This turned out not to be the case, once the government stepped in with unprecedented generosity and loyalty programs rode to the liquidity rescue. What made this cycle different was that [network carriers] didn’t abandon the field and turn over meaningful share.”

Benefitting from the government largesse that will cover most labor expenses through September, carriers including American Airlines and United Airlines have made some interesting moves to capture new travelers. American has expanded dramatically in Austin and added a number of seasonal routes to Orlando, while United added a slew of seasonal point-to-point routes to Florida this past winter and plans another 26 non-hub routes to beach destinations this summer.

None of this worries Wells at Allegiant. Nor does the entrance of startups Avelo Airlines and Breeze Airways into the U.S. market. “The space is always going to be competitive,” he said. Asked about the varying strategies of Avelo and Breeze, he added that there is “room for some healthy differences of opinion.”

Local Bases

A few planes in a city here, a few in a city there. That has long been the strategy of discount juggernauts like Ryanair and Wizz Air in Europe. The former had 79 operational bases at the end of 2020, and the latter added 18 bases to its network during the year ending in March. These dispersed bases give discounters a greater presence — and chance to capture share — in local markets rather than just flying in.

In the U.S., however, ULCCs have followed a more centralized strategy. For example, the largest carrier in the segment, Spirit, only has seven crew bases. The airline still offers multiple nonstop flights from cities around the country but those additions are separated from the need for locally based aircraft and crews.

Allegiant is adopting a more European approach as it grows. Many of the carrier’s main bases — for example, Punta Gorda, Fla. — lack the space to park additional aircraft overnight, said Wells. This creates a need for new bases in larger destinations elsewhere in the country to facilitate continued growth. The strategy also improves aircraft utilization, he added.

The airline is a long way from reaching the size of either Ryanair or Wizz Air. Allegiant had 19 operational bases in February with two set to open later this year: Des Moines on July 1 and Austin on November 18. Plans for a base in Concord, N.C., near Charlotte that were unveiled just before the crisis remain on hold.

“There will be more bases to come” for summer 2022, said Wells. When asked what Allegiant looks for in a base, he said it wants cities with “a lot of future;” or put another way growth opportunities beyond just flights to the airline’s existing strongholds. For example in Des Moines, Allegiant will add new routes to Austin, Houston Hobby, Portland, Ore., and San Diego when its base there opens in July.

New local bases are also good for staff morale, said Allegiant Senior Vice President of Flight Crew Operations Tracy Tulle. Crews like them because of their smaller size, often greater scheduling flexibility and more opportunities to upgrade for first officers.

“The smaller bases are kind of like family-oriented companies,” she said.

Breeze is taking a similarly dispersed approach to operational bases. It plans for four such domiciles by the end of July: Charleston, S.C., New Orleans, Norfolk, Va., and Tampa. More bases are expected as the airline expands with the addition of new Airbus A220s that begin arriving in October.

Regardless of strategy, ULCCs are growing in the U.S. — and at faster rates than their network peers. Covid-19 did reset the industry but, while it allowed the likes of Allegiant to speed ahead with planned growth, it also enabled dramatic cost and efficiency improvements at all carriers. Delta Air Lines has shaved millions of dollars in expenses out of its business through aircraft retirements and staffing reductions that will allow it to achieve higher margins in 2023 on revenues comparable to 2019.

“The fact that the U.S. government was as strong with its support of the industry through the CARES Act kept the industry intact,” said Delta CEO Ed Bastian at a Bernstein investor conference last week. “Change will happen. It’s just going to be delayed and I think that change [will be] the strong are going to get stronger.”

Edward Russell

In Other News

  • Alaska Airlines and Emirates will end their frequent-flier and codeshare agreement on July 31, the Seattle-based carrier informed passengers. Instead, Alaska, now a oneworld member, will funnel passengers onto the alliance’s airlines. For connections in the Middle East, Asia, and Africa, Alaska will rely on oneworld partner Qatar Airways.
  • Vietnam’s Bamboo Airways has applied for a foreign air carrier permit and exemption to operate to the U.S.. In its filing with the Transportation Department (DOT), Bamboo said it intends to fly between Ho Chi Minh City and Los Angeles and San Francisco, as well as to other points in the U.S. and Canada via Taipei, Osaka, and Nagoya. The carrier also is seeking an exemption to codeshare to 25 more destinations in the U.S., and said it has an undisclosed major U.S. partner for those flights. Bamboo plans to start service to the U.S. in the third quarter, pending regulatory approval.
  • France joins a growing number of European countries that are planning to reopen for vaccinated tourists to visit. Fully vaccinated passengers from the U.S. and the UK will be able to enter France from June 9 with proof of vaccination and proof of a negative test result. Non-vaccinated passengers will have to provide a negative test result as well as an official reason for visiting France. Fully vaccinated visitors from “green list” countries, which include Australia, New Zealand, and South Korea, can enter France without having to provide a negative test result. Visitors from “red list” countries where outbreaks remain worrisome will have to provide negative test results and quarantine, even if vaccinated, although the length of the quarantine will be shorter for vaccinated passengers.

    Madhu Unnikrishnan
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Sky Money

  • Fresh off the collapse of its proposed merger with Air Canada, Transat is making corporate moves that could boost its tour business. The company has acquired the remaining 30 percent stake in TraficTours Canada and taken full control of the company. TraficTours provides on-the-ground transportation and tour options to travelers in certain markets. Transat said the acquisition will strengthen its presence in Mexico, the Dominican Republic and Jamaica.
  • SKY Leasing has closed its $663 million SLAM 2021-1 secured notes issue. The transaction is split between a $592 million series A tranche with a 2.434 percent interest rate, and a $70.7 million B tranche with a 3.422 percent rate. Proceeds from the transaction will allow the San Francisco-based lessor to acquire a portfolio of 16 Airbus and Boeing aircraft, including 10 A321neos.

Edward Russell

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State of the Unions

Norse Atlantic and the Association of Flight Attendants (AFA) recently reached a pre-hire agreement that sought to defuse concerns that the new carrier would undercut European and U.S. labor laws, but pilots unions remain skeptical about the airline and are pushing for legislation to bar it and airlines like it from operating in the U.S.

In its agreement with AFA, Norse Atlantic pledged that any U.S. flight attendants it hires — and it says it could hire up to 700 in the U.S. — would be allowed to organize and vote on union representation. This is expected to allay fears that the carrier would seek to hire less expensive workers in foreign countries, a charge levied against Norwegian Air that led to a yearslong effort to deny that airline’s Irish subsidiary from operating to the U.S. “We strongly believe building an airline with respect for the people who work for Norse is the best way to ensure success,” CEO Bjørn Tore Larsen said. “AFA has been an outspoken advocate for flight attendants and our airline will also benefit from working with this great union.”

“Norse management is taking a refreshing approach to labor relations and demonstrating that the success of a business starts with good jobs,” AFA President Sara Nelson said.

But pilots unions weren’t so sure. The Air Line Pilots Association (ALPA) said it will reserve judgement on Norse until the carrier proves it is not just a flag-of-convenience airline. “As we have for years, ALPA rejects any business model that plays one country’s regulatory and safety standards off another in order to evade labor rights, as these practices endanger safety and put U.S. jobs at risk,” ALPA said in a statement. “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.”

The Allied Pilots Association (APA) said it will continue to lobby for legislation that would bar airlines like Norse from flying to the U.S. Legislation to do so has been introduced in Congress but it is uncertain if it will be attached to the infrastructure bill the House is considering.

But APA is skeptical. “Norse could be a Trojan Horse that is fundamentally a flag-of-convenience airline,” APA spokesman Dennis Tajer said. “It’s the same old horse as Norwegian.” Tajer said the airline’s overtures are nothing more than window dressing. “Like a child covering up his face to hide, we still see you,” he said.

All this back-and-forth could be for naught if Norse does not get a Norwegian air operators certificate or a permit to operate in the U.S. “This agreement for flight attendant jobs gives us even more urgency to lock in all of the regulatory approvals to start operations as soon as possible,” Larsen said. Norse has an ambitious timeline to lock in its regulatory clearances and begin operating by the end of this year or early 2022.

And airline leaders are skeptical that the low-cost, long-haul model even can work. Wow Air and Norwegian are among the casualties, their business models teetering even before the pandemic struck. United CEO Scott Kirby last week, without referring to Norse by name, flatly said of low-cost, long-haul airlines, “their business models do not work.”

Madhu Unnikrishnan

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Routes and Networks

Wizz Air is using the crisis to expand the breadth of its network in a push that its CEO József Váradi sees as both strengthening its business and accelerating its recovery. During its 2021 fiscal year that ended in March, the Hungarian discounter opened or announced 18 new bases, including ones in Abu Dhabi, Cardiff and Milan, greatly expanding its footprint across Europe and the Middle East.

“It’s a much more diversified network than before,” said Váradi during Wizz’s fiscal year results call last week. “That gives us a significantly improved ability to manage headwinds from a situation like Covid.”

The expansion is straight out of budget carrier’s pandemic playbook. Around the world, these often smaller and more nimble airlines have used the suspensions and retrenchments of larger competitors to elbow into markets where they previously had a minimal or small presence. JetBlue Airways took advantage of this shift to open a new base in Los Angeles last year; Australian regional Rex Airlines added Boeing 737s and began flights on the country’s busiest routes following Virgin Australia‘s voluntary administration restructuring; and Ryanair has opened eight new bases across Europe.

Wizz’s expansion came even as its capacity fell nearly 64 percent from 2020 to 2021. The airline posted a €576 million ($703 million) net loss during the fiscal year. Revenues fell 73 percent to €739 million and expenses 48 percent to €1.3 billion compared to its 2020 fiscal year. Passenger traffic was down nearly 75 percent year-over-year.

These pandemic losses have not dampened Wizz’s appetite for growth. The airline added 16 Airbus A321 Neo jets to its fleet during its 2021 fiscal year for a total of 137 aircraft at the end of March. The new bases allow the airline to put these new jets — and the 248 A320 Neo family aircraft it has on order — to work even as overall frequencies remain below pre-crisis levels.

Italy and the UK are two growth markets for Wizz. The airline is “going for Italy” that Váradi called an “investible market.” The airline opened or unveiled plans to base 17 aircraft in the country at Bari, Catania, Milan Malpensa, Palermo and Rome Fiumcino during the past year. And despite lower traffic volumes due to pandemic restrictions, Váradi said the market reaction to the new services has been “very positive.”

Wizz’s investment comes amid significant changes in the Italian market. Beleaguered flag carrier Alitalia is in the midst of a government-led restructuring that will see it relaunched as Italia Trasporto Aereo (ITA) sometime later this year. The new carrier is expected to be smaller and more nimble than Alitalia by taking the airline’s strongest assets and leaving its debts.

“Our Italian expansion has nothing to do with what will happen to Alitalia,” said Váradi when asked.

In the UK, Wizz continues to await a ruling on slots at London Gatwick where it plans to continue growing. The airline is also due to open a new base in Cardiff on June 17.

Not all of the carrier’s pandemic growth has been a success. A move into the Norwegian domestic market at the end of 2020 comes to an end later in June. Váradi described the closure of Wizz’s Oslo base and exit from domestic flying in the country as strictly a “financial decision” — implying that the opportunities in Italy are greater than those in Norway. Wizz will continue to serve points in Norway with flights to elsewhere in Europe.

Wizz did face a shrunken, but also financially strengthened, Norwegian Air that emerged from its restructuring at the end of May. In addition, Norwegian startup Flyr plans to launch domestic flights from Oslo at the end of June. Fly aims to serve eight destinations by the end of August.

Edward Russell

Route Briefs

  • Taking advantage of leisure travel recovery, Air Serbia will add two new beach routes in June and July. The carrier will connect Niš and Tivat, Montenegro, from June 15; and Kraljevo and Thessaloniki, Greece, from July 13. Both routes will operate through the summer.
  • Paine Field is back in full at Alaska Airlines. The carrier will resume its full complement of 18 daily flights by next spring and, in the meantime, add new seasonal winter service between the airport in Everett, Wash., and Tucson from November 19.
  • Orlando has landed another new route as leisure and VFR travelers continue to lead the recovery. Avianca will connect the home of Disney World with Cali, Colombia, with an Airbus A320 from July. The new route comes as the airline’s U.S. capacity remains down more than 43 percent in June compared to two years ago, Cirium schedules show. Orlando’s only nonstop to Cali, the route joins recently unveiled new international services from both KLM and Spirit Airlines.
  • Nearly a year after officially exiting its only South Florida gateway in Fort Lauderdale, Emirates is back with new service to Miami. The carrier will connect Dubai and Miami with a Boeing 777-300ER from July 22. Miami will be Emirates’ 12th U.S. destination and its first new point there since the crisis began.
  • FlyDubai is adding Egyptian beach destination Sharm El Sheikh to its map in July. The budget carrier will connect Dubai and Sharm El Sheikh — its second Egyptian destination — from June 15. FlyDubai has unveiled a rash of new leisure routes in recent months, including Mykonos and Santorini in Greece, and Bodrum and Trabzon in Turkey.
  • Norwegian startup Flyr has set a date for its first flight: June 30. The carrier will begin with service between Oslo and Tromsø with a Boeing 737-800. By the end of August, Fly plans to connect Oslo to eight cities: Alicante, Bergen, Bodø, Harstad/Narvik, Málaga, Nice, Tromsø and Trondheim. One catch, the carrier has yet to secure its air operators certificate, though at the end of May it said it expects the document “well before June 30.”
  • Latam Airlines is wasting no time in beefing up its network in Brazil following the end of its codeshare with Azul at the end of May. Latam will add one new destination — Comandatuba — and 10 new domestic routes from July 1 with an eye on flying 90 percent of its 2019 Brazilian capacity by year-end. The new routes are: Fortaleza to Belem, Manaus and Teresina; Rio de Janeiro Galeão to Maceio, Natal and Recife; and São Paulo Congonhas to Comandatuba, Fortaleza, Maceio, Natal and Recife.
  • UK regional carrier Loganair is adding a connection between Edinburgh and Cardiff — the capitals of Scotland and Wales, respectively — from August 2. The airline will fly 50-seat Embraer ERJ-145 jets on the route.
  • With leisure and VFR bookings up, Swiss is adding six routes to capture more of these travelers. The carrier will connect Geneva and Santorini, Greece, from June 19; Geneva and Ponta Delgada, Portugal, from June 25; and Geneva with Split, Croatia, plus Zurich with Billund, Denmark, and Tallinn, Estonia, from July 2 with all of the routes operating through the summer. Then in September, Swiss will add new flights between Geneva and Funchal, Portugal.

Edward Russell

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Fleet

  • Lufthansa Cargo ordered its 14th Boeing 777F, bringing its total cargo fleet up to 15 aircraft by the end fo the year. The new freighter will join Lufthansa’s fleet before the end of the year, the German carrier said. “The corona crisis has impressively underlined how important these aircraft are for global supply,” said Dorothea von Boxberg, Lufthansa Cargo CEO.
  • Elsewhere in Europe, meanwhile, Iberia is responding to growing passenger demand by converting three Airbus A330s back to passenger operations. The airline had converted the aircraft into temporary freighters at the end of last year, Iberia Maintenance said, but will be restored to passenger configuration in the coming weeks in anticipation of rising passenger demand. The aircraft will be restored to the cabin layouts they had before the pandemic. In addition, Iberia Maintenance said it is pulling 29 Airbus A320-family jets out of mothballs to return to active service, 23 for Iberia and six for Iberia Express.
  • Aeromexico took delivery of the first Boeing 737 Max under its restructured orderbook last week. The 737-9 is one of eight aircraft the Mexican carrier will lease from Air Lease Corp., plus 20 Maxes directly from Boeing. A U.S. bankruptcy court approved the revised fleet plan at the end of April.
  • United made a bang in the fleet world by announcing an order for up to 50 of Boom Supersonic’s Overture aircraft. The deal, financial terms of which were not disclosed, consists of 15 firm orders and 35 options. United says it would deploy the supersonic aircraft on transatlantic and trans-Pacific routes. The aircraft is expected to operate at up to Mach 1.7, potentially cutting flight times between Newark and London to three-and-a-half hours, United said.

    The carrier expects the aircraft to be developed by 2025, take its first flight in 2026, and join United’s fleet by 2029, an ambitious timeline given that Boom’s propulsion unit has yet to be finalized. When asked, United CEO Scott Kirby did not disclose further details of the deal or of how big a bet the carrier is making on the Overture aircraft, but stressed it was part of United’s attempts to invest in innovative technologies, similar to its recent investment in Archer’s eVTOL aircraft.

Madhu Unnikrishnan and Edward Russell

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Feature Story

The aftermath of the Covid-19 pandemic could usher in a new era of airline industry growth and innovation, provided governments don’t stand in the way of the trend towards liberalization and consolidation that were gaining in strength before the industry ground to a halt.

Or at least that’s what Brian Pearce, IATA’s chief economist since 2004, thinks. He spoke to Airline Weekly recently on the cusp of his retirement from the airline group.

The airline industry is no stranger to exogenous shocks. In just the past 20 years, war, economic collapse, and more regional pandemics like SARS and MERS delivered blows to the industry. But the scale and breadth of Covid-19 was unprecedented, leaving no airline in the world unscathed. The conventional wisdom was that airlines were on an upswing, finally delivering value to shareholders and consistently boasting profits before the pandemic spread and stopped that growth in its tracks.

But this isn’t the full picture, Pearce notes. “The five years before Covid were the best investors ever had,” he said. “But a closer examination of those five years of success shows that airlines in the U.S. and the a few others generated those profits.” Most other airlines continued to destroy shareholder value. Indeed, IATA’s 2020 forecast, issued at the end of 2019, forecast strong profits in North America and Europe, slightly weaker profits in Asia and the Middle East, and significant losses in Latin America and Africa. “The contribution of the top 30 [airlines] is absolutely disproportionate,” then-IATA Director General Alexandre de Juniac said in December 2019. “There are many airlines struggling to keep revenues ahead of costs.”

“Covid has delivered a massive demand shock to the industry, and the normal reaction would be the more inefficient players will go,” Pearce said. “This would lead to a stronger industry and would lead to some consolidation.” The industry outside the U.S. and the North Atlantic remains very fragmented, especially when compared to other industries, he added.

But governments have stood in the way of needed consolidation. “We are still governed by ownership and control rules from the 1940s, which limit foreign investment,” Pearce said. Airlines took on large amounts of debt during the pandemic and will need to raise equity, but their ability to raise that equity is limited to a pool of investors who won’t fall afoul of ownership and control rules. “That’s a real problem today,” Pearce said.

In fact, the Covid pandemic may have set the cause of liberalization back even further. Governments around the world poured money to prop up their airlines during the crisis. Taxpayers are likely to object if that investment is seen to accrue to foreign investors, or if a national carrier merges with a foreign airline. That backlash is something no airline leader or transport minister would want to endure.

A corollary to this is that Covid has made many governments more inward-looking. This trend began before the pandemic, with trade rows raging between China and the U.S,. and economies everywhere becoming more protectionist. Airlines, to succeed, depend on globalization and the willingness of people to travel, but in many parts of the world “globalism” became an epithet. “Globalization has stuttered a bit with trade wars,” Pearce said. “We have seen the political environment change: It has become more explicitly protectionist.” At least in the near term, governments will turn their focus toward national priorities to shore up economic growth. “This is not the environment that is conducive to the liberalization we saw in the U.S. and Europe or through open skies [agreements],” Pearce said.

In the more collared airline industry of the 1950s, fares were eight times more expensive in real terms than they were before the pandemic, a 90 percent drop in the cost of air travel, a reduction in fares made possible by liberalization in the U.S. in the 1980s and Europe in the 1990s. Technology, too, played a role, both on the aircraft — the jet engine — and in the airport. Innovation in business models — like the rise of the low-cost and ultra-low-cost carriers and the superconnectors — has further driven down fares. Liberalization has been good for both consumers and businesses, Pearce argued, and consolidation has led to stronger airlines.

So how does Pearce think the industry will climb out of this crisis? “Covid was a demand shock. Consumers can’t spend the money they ordinarily would have on travel. Savings rates are growing in many of the world’s largest economies. “We will see an almost complete rebound,” he said. “Covid will not stop people from traveling.”

Business travel could take longer to come back, Pearce predicts. Teleconferencing (the so-called “Zoom Effect”) could take out as much as 10-20 percent of all business travel. Business travel will grow again, but from a much lower base than before the pandemic. “The value of business travel hasn’t disappeared, because there is strong evidence that people will need to meet face-to-face,” he said. When that might be is unclear. Delta CEO Ed Bastian at an industry conference last week forecast a surge in U.S. domestic business travel beginning July 1 and then picking up dramatically after Labor Day in September, when children return to school. On the other hand, Southwest CEO Gary Kelly has said it could take anywhere between 5-10 years to return to 2019 levels. IATA itself believes the airline industry as a whole won’t match 2019 levels until 2023.

Another development that is likely to outlast the pandemic is the strength of cargo. Before the pandemic, cargo was an important, if secondary, revenue stream for airlines, comprising 10-15 percent of an airline’s bottom line. During the pandemic, several airlines, particularly in Asia, turned profits on the strength of cargo demand, and cargo on average has been about one-third of airline revenues. “Airlines are looking seriously at cargo in a way they haven’t before, and this will have lasting effects,” Pearce said. Cargo yields have been high during the crisis as supply, in the form of belly-hold space, has been constrained. That will change as airlines add more widebody international flights. Revenues next year won’t be as strong as a result. But still, the pandemic shone a light on an oft-ignored part of the business. “This year and last year were a trigger for cargo to be taken more seriously by airlines,” Pearce said.

Madhu Unnikrishnan

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