Issue No. 824
Delta Kicks Off June Quarter Results
Delta Sees Cause for Optimism in the Second Half as it Opens the Second Quarter Results Season.
Pushing Back: Inside the Issue
We kick off June quarter earnings with Delta Air Lines, who had a rosy outlook for the recovery — at least in the U.S. The carrier turned a profit in June, and expects the black ink to continue to flow through the rest of the year, even as the lavish support of Uncle Sam expires in just over two short months. French Bee and Volaris expressed similarly optimistic outlooks, with the latter already larger than it was pre-pandemic and looking to capture as much marketshare as it can. But American Airlines reminded us that the crisis isn't over, and not by a long shot, in its updated guidance — second quarter numbers drop on July 22. And lessor Aircastle warned that the industry has not yet hit bottom, particularly in areas where vaccination rates are low like Southeast Asia.
Elsewhere in the issue, the recovery mood is definitely moving to the optimistic side of the coin. Aircraft deals are piling on with a transformational one from Porter Airlines and an aspirational one from United Airlines, while Delta is back to its old used plane tricks. Across the pond, Ryanair needs some 2,000 pilots for Summer 2022 as Boeing 737 Max 8-200 deliveries (finally) ramp up. And if that wasn't enough, airports in Austin and New York are moving forward with expansion plans.
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 Porter and United's aircraft deals, get stumped over the name of Porter’s raccoon spokescritter (it's Mr. Porter in case you didn't know) and debate the outlook for Wow Air-reboot Play Airlines. Listen to the episode.
“Is it the best time to start flights? Is it too soon by one month, or too late by one month. We don’t know, but we think it’s the end of the big crisis, and we think we will grow again.”French Bee President Marc Rochet
Saudia Arabia’s government made news earlier this month when it hinted at plans to build a global airline, based in the kingdom, to take on regional powerhouses Emirates, Qatar Airways, and Etihad. But will Saudi Arabia be able to dethrone Dubai and Doha as the world’s airline crossroads? The plan could be harder to execute than the country’s rulers might think, no matter how much money they throw at the problem, and it is likely fueled by regional tensions more than any economic imperative.
Details are scant, but Airline Weekly understands that Crown Prince Mohammed bin Salman, Saudi Arabia’s de facto ruler, intends for the new airline to be part of the $130 billion investment he’s spearheading to transform the kingdom into a global transportation and logistics hub. The investment is part of his multi-trillion dollar blueprint to wean Saudi Arabia off of oil and diversify its economy.
But this could be harder than Prince Mohammed thinks. Saudi Arabia historically struggled to win over both domestic and international tourists due to societal limitations, including a strict no-drinking policy and restrictions for women. Riyadh hadn’t welcomed international tourists for so long that its infrastructure remained underdeveloped. Even locals complained of a lack of venues.
Until last year, authorities forbid local restaurants and malls from playing music. Although officials eased some of these restrictions, much of that doesn’t apply to residents. Because the local culture doesn’t allow for much intermingling between the sexes, most Saudis enjoy the freedoms of being in unknown territories in cities such as Dubai, Cairo, London, or Paris. Moreover, Saudi Arabia continues to face global opprobrium for its alleged role in the 2018 murder of dissident journalist Jamal Khashoggi in Turkey.
There’s more to the new airline than just tourism, analysts say. Saudi Arabia just recently papered over its tensions with Qatar by ending a years long regional blockade, which required Qatar Airways to fly circuitous routes to avoid the airspace of the blockading countries. But fissures still remain, as Qatar did not accede to all of Saudia Arabia’s demands, among which was reining in its often critical news outlet, Al Jazeera.
But tensions more recently have flared with one of Saudi Arabia’s allies in the blockade, the United Arab Emirataes (UAE), home to both Dubai and Abu Dhabi and long a Saudi stalwart. OPEC+, which includes 10 countries led by Russia that are not formal members of the oil cartel, aimed to limit production to keep oil prices high as the world emerges from the worst of the Covid-19 pandemic. The UAE bucked the cartel by saying it wants to raise production and has further accused Saudi Arabia of bowing to Russia’s demands, Airline Weekly has learned.
It’s no secret that Prince Mohammed has long coveted the global business success and prestige Dubai has and aims to replicate it in Saudi Arabia. The country has broken ground on a new tech-focused city in the desert, Neom, with an aim of attracting massive foreign investment and to further diversify the economy. Now, the tensions with the UAE are fueling the drive for a new Saudi airline, one that would knock both the troublesome Qatar and Dubai off their perches.
It is understood that the new airline — yet unnamed and reported first in English by Reuters — would be a premium global superconnector, like Emirates, Qatar, and Etihad. The number of air routes from the kingdom would go up from about 100 now to 250. A difference from previous ambitions for Saudi Arabia’s airlines is that the new carrier would supplant Saudia, which would focus on religious traffic bringing pilgrims to the country’s holy sites, especially during the Hajj pilgrimage. Budget carriers Flynas and Flyadeal would then concentrate on low-cost domestic and regional travel and near-international routes. It remains unclear if any of the three existing airlines would feed traffic to the new airline.
First, the new airline’s potential strengths. Prince Mohammed’s plan to transform the economy includes making Saudi Arabia, which has struggled to attract foreign visitors, a tourist destination. The country has reformed its visa regime to allow more visitors and, in 2019, began issuing tourist visas for the first time, instead of just business and religious pilgrimage visas. The Covid-19 pandemic has put those efforts on ice, however. A new global airline would play into that new market and funnel tourists to the kingdom. The country itself is large for the region, with a population of about 35 million people, which provides it with significant pool of passengers, especially when compared with neighboring countries, like the UAE, with a population of about 10 million, and Qatar, with just 3 million.
So build it and they will fly? Not so fast. Although Saudi Arabia is pouring billions into the airports in Riyadh and Jeddah, it will take more than just airports to create a hub. Emirates, Qatar, and to a lesser degree Etihad, have spent decades building their brands, networks, and products, Craig Jenks, founder of consultancy Airline/Aircraft Projects, points out. Those three airlines have a corner on flows to Africa and much of Asia. Nearby, Turkish Airlines has built a vast network that, in addition to Asia, Africa, and Europe, handles East-West passenger flows to many former Soviet republics. Not far away, Ethiopian is building a lucrative franchise in Africa-China traffic flows.
And just throwing money at an airline is not the answer: Etihad tried to buy its way into the big league and has since had to retreat. At an industry conference a few years ago, Qatar Airways CEO Akbar al-Baker famously told the CEO of Oman Air that it was “too late” for the sultanate to build a superconnecting airline. Fabulously wealthy Saudi Arabia is no Oman. But al-Baker’s point remains salient: The field is crowded, and any new entrant would be decades behind the competition.
Although it is not yet free-wheeling Dubai, the prince has relaxed some of Saudi Arabia’s more stringent social rules and brought the morals police to heel. But has it been enough to attract inbound travel or a talent pool needed to run a global airline? This remains an open question. The three big Gulf carriers rely on foreign employees at almost every level, from flight attendants to the C-suite. But living in cosmopolitan Doha or Dubai (or close to, in Etihad’s case) has always been an easy sell for foreign talent. Would conservative Riyadh attract the same talent?
If it is built, will passengers fly it? Saudi Arabia, for all its recent liberalization, remains deeply conservative. Will premium globe-trotting passengers fly an airline that doesn’t serve wine with meals or that may require a dress code? Saudia, after all, does not serve alcohol and does enforce a dress code. By contrast, alcohol is readily available on other airlines in the region, and female passengers are not required to cover their arms, nor male passengers barred for wearing shorts. Lingering horror over the Khashoggi murder won’t help in attracting flyers.
If price is right, the network is convenient and far-reaching, and the passenger experience is top-notch, people will fly it … eventually. And therein lies the rub. Emirates, Qatar, Etihad, Turkish and Ethiopian, to name a few regional examples, not to mention Singapore Airlines, Lufthansa, Air France and a host of other intercontinental airlines will not sit still while the new Saudi airline ramps up. In other words, creating a premium superconnector airline from whole cloth may be a more intractable problem than Saudi Arabia’s billions can solve.
Delta Confident in Autumn Recovery as Business Travelers Return
Domestic travelers are returning to the skies at a pace that even a seasoned executive like Delta Air Lines CEO Ed Bastian said was surprising, so much so that the airline, which lost money in the second quarter, expects to return to profits in the second half of the year.
The pace of the domestic recovery is a welcome change but one that required Delta to step up its hiring. “It’s taken us a little bit of time to catch our breath,” Bastian said. The carrier expects to hire about 4,000 people from now to the end of this year, many of whom are replacing employees who took voluntary separation or early retirement during the depths of the pandemic last year.
Unlike some of its competitors, Delta has not been plagued by debilitating pilot and cabin crew shortages. But its reservations and ticketing operations staffing has come up short, with reports of six-hour wait times on customer-service cals. Part of this Bastian attributed to passengers having more questions about traveling during the pandemic and changing travel plans, thanks to more flexible ticket-changing policies. Part, though, lies with staffing, and Delta says half of the 4,000 people it plans to hire will be in customer service.
In the short term, the airline has tapped retirees to step in and help with the call volume, which has outstripped anything seen in 2019, and is stepping up its training programs to ensure it is staffed up to handle the number of calls. Delta expects wait times to return to normal by September as employees are fully trained and in place, Bastian said.
The strength of the domestic leisure travel recovery this summer is remarkable. Delta reports that demand is back to 90 percent of summer 2019. The carrier returned to profits for the first time since the pandemic began in June and expects to be “more sustainably profitable” in the second half, Bastian said. Delta’s hubs on the two coasts — Boston, New York, Seattle, and Los Angeles — as business travel collapsed and due to stricter Covid-19 restrictions in those regions. That has begun to reverse, auguring well for the second half, the carrier said.
The picture is different for Delta’s international network. Demand also is strong to short-haul Latin American markets, and has even exceeded 2019 levels for Mexican leisure destinations. Long-haul markets in Latin America still are behind as countries in South America grapple with new outbreaks of the disease and vaccination roll outs remain slow.
International demand is growing across the Atlantic, with load factors returning to historical norms in the 80 percent range. Europeans still are barred from visiting the U.S., so the bulk of the traffic across the Atlantic originates in the U.S. Because of this, the carrier has shifted its network to focus on European leisure destinations popular with U.S. tourists; Delta this month launched its first New York-Dubrovnik, Croatia flights, for example. Bastian expects transatlantic travel to grow even more rapidly when the U.S. government lifts restrictions on inbound European travel, but he offered no timeline for when that might occur.
Flights across the Pacific, however, are not faring as well, due to a rise in infections in many Asian countries and continuing stringent travel restrictions. Delta does not expect the Pacific network to recover until the end of next year or early 2023.
Business travel, at least in the U.S. and to Mexico, is recovering more quickly than expected. Delta recently surveyed its largest corporate clients on their travel plans. A little more than one-third said they expect to return to pre-Covid levels of travel by 2022. Another 21 percent expected their travel to return to those levels by 2023. Five percent of Delta’s corporate clients said they intend never to return to pre-Covid travel levels, and 38 percent said it is too soon to say when they intend to restore their travel budgets. The strongest business-travel segment remains small- and medium-sized enterprises, a trend that started last year.
Delta believes that business travel will rebound in earnest this autumn, after schools reopen and when companies recall workers to their offices. “The surge is coming,” Bastian said. “There is enormous pent-up energy and demand for [business] travel.”
Despite the confidence Delta’s management projected, the reality is the carrier lost $881 million in the second quarter, a stunning reversal from the $2 billion profit it reported in the second quarter of 2019. The carrier did report a profit in June, but that included more than $1.5 billion in government payroll support during the quarter.
Bastian acknowledged that the federal government’s support has helped buoy the company during the pandemic, but said he is confident the carrier will be profitable in the second half even after the payroll support program expires on Sept. 30. “One can debate the length of the federal support,” he said. “It was critical for keeping our industry afloat and keeping our employees employed and being in the position for a recovery.”
Another note of reality was that Delta’s second-quarter revenue of $6.3 billion was half of what the carrier earned in 2019. The airline flew 39 percent fewer seats in the second quarter than it did that year.
Volaris Looks South as Mexico Recovers
Volaris is grabbing growth opportunities at home and venturing further south in Latin America as travel rebounds from the Covid-19 pandemic.
The airline plans to add 25 Airbus A320neo family aircraft to its fleet by the end of 2022, when it anticipates flying 113 planes total, fueling elevated capacity growth that will surpass pre-crisis levels. These planes will allow Volaris to increase its share in the key Mexico City market; expand in other Mexican cities, particularly Guadalajara and Tijuana; and launch a new subsidiary in El Salvador.
“We’re one of the most profitable airlines worldwide with room to grow,” said CEO Enrique Beltranena during a quarterly earnings call last week. The airline reported a rare pandemic profit free of government aid of MXP 1.54 billion ($78 million) in the second quarter.
Domestic Mexican growth is Volaris’ top priority over the next year-and-a-half. The carrier has the unique opportunity to fill the gap left by Interjet, which suspended flights in December 2020 and few expect to resume operations, and cuts at Aeromexico that is restructuring under U.S. Chapter 11 bankruptcy protection. Volaris is actively adding flights in slot-constrained Mexico City where, as executive vice president Holger Blankenstein put it, they see the “biggest capacity gap compared to pre-Covid levels.”
Competitors also see an opening. Aeromexico is rapidly resuming flights and budget competitor Viva Aerobus is growing out of the crisis. In July, overall Mexican domestic capacity is down 2.6 percent compared to 2019 solely on the loss of Interjet, according to Cirium schedule data. However, capacity at Aeromexico is up 11 percent, Viva Aerobus nearly 30 percent and Volaris 18 percent.
Outside of Mexico, Volaris has its eyes set on Central and South America. The new El Salvadoran subsidiary will launch in either the late third quarter or early fourth quarter with flights to Mexico and the U.S., said Blankenstein. This will complement Volaris’s Costa Rica subsidiary that will receive a third aircraft — returning its fleet to its pre-crisis status — by the end of the year. And, new flights between Mexico City and Bogotá begin in October as the company’s first foray into South America. Additional service to Colombia from Central America is likely soon, added Blankenstein.
One market where Volaris is not growing is the U.S. This is the result of the Federal Aviation Administration’s decision to downgrade Mexico’s safety rating in May, which barred Mexican carriers from adding any new flights to the country. Volaris executives spoke little about the downgrade and focusing instead on domestic and Latin American opportunities, as well as adding new U.S. flights from Central America under its Costa Rican and El Salvadoran subsidiaries that circumvents the FAA limits on Mexican carriers.
Volaris’ rebound is impressive — but not surprising — given the lingering pandemic. By its own measure, only 16.4 percent of Mexicans are fully vaccinated. That’s better than the global average but middle of the pack in Latin America, and well below the 48 percent of Americans who are fully inoculated. And executives highlighted the spread of Covid-19 variants as a potential risk in the second half of the year that barred them from making many financial forecasts for the period.
But Mexico was the first country globally to recover to pre-pandemic travel levels in June, the latest Skift Recovery Index found. This rebound is driven largely by the lodging industry, which is likely fueled by a surge in pent-up demand from U.S. leisure travelers.
Volaris acknowledged this surge in leisure, as well as visiting friends and relative traffic, reporting that 90 percent of its seats to the U.S. were full in the second quarter.
“Good — great results, actually,” Deutsche Bank Analyst Michael Linenberg said of Volaris’ second quarter numbers in a rare moment of analyst praise.
The airline’s profit followed a 38 percent jump in revenues and a 15 percent rise in expenses in the June quarter compared to 2019. Its earnings before interest and taxes margin was 23 percent versus to just 7.9 percent two years ago. And, in a sign of things returning to something like normal, executives touted the nearly 22 percent increase in total unit revenues — or TRASM — instead of cash burn or other crisis metrics. Overall passenger traffic was up 13 percent and capacity up 14 percent versus 2019.
French Bee Picks Up Where it Left Off With Network and Fleet Expansions
French Bee‘s plans to launch Newark-Paris Orly flights last year were put on ice when the world shut down due to the Covid-19 pandemic. But the French leisure carrier is making good on its expansion, with its first flight on the route returning to Orly on July 15.
“We think now that most of the crisis is behind us, because of vaccinations. the health recovery, and the restart of the economy,” French Bee President Marc Rochet told Airline Weekly. “Is it the best time [to start flights? Is it too soon by one month, or too late by one month,” Rochet wondered. “We don’t know, but we think it’s the end of the big crisis, and we think we will grow again.”
It may not be the right time, at least in one direction. The U.S. government still bars most European citizens from entering the country, while U.S. citizens are permitted to visit Europe. Because of this, loads on the outbound flight from Newark are three times what they are on the inbound flight from Paris. By the same token, French Bee suspended the San Francisco refueling stops on its Paris-Tahiti flights, because the U.S. prohibits transit passengers from Europe. That flight now stops in Vancouver, but Rochet said it will return to San Francisco “the minute President Biden signs” an order permitting Europeans to enter the U.S.
The carrier will start Newark service three times weekly on an Airbus A350 configured with 411 seats, 35 of which are premium economy. And this is the key differentiator between French Bee and its competitors. Air France operates three daily flights to New York, using both Boeing 787s and 777s, the latter of which are configured with 80 business-class seats. It will be years before Air France is filling that cabin with high-yielding business-class passengers, Rochet said, adding that French Bee does not actively seek business travelers in order to focus on its leisure and visiting friends and relatives (VFR) core market. “The market is totally different.”
Another way the market is different is the growing importance of cargo. Although the inaugural flight from Paris this week had few passengers, it carried more than 10 tons of cargo. “This was part of our decision to restart Newark,” Rochet said. “There is a surge in this market.”
Another way the market is different — and one that benefits French Bee in Rochet’s eyes — is that it’s less saturated now. Before the pandemic, 10 airlines served the New York-Paris route. Now, Norwegian Air, XL Airways, and Level have exited the market, and the legacy carriers are operating far fewer flights. “I think it’s a big opportunity for us,” Rochet said. “We have a niche for one or two years ahead of us,” he said, referring to the present lull which will last until the legacy carriers restore their pre-pandemic frequencies on the route. Air France, for example, operated eight daily flights on the route before the crisis.
Rochet is not concerned about the failure of other low-cost long-haul airlines, arguing that French Bee has a less complex fleet than Norwegian did, for example, and can offset the winter seasonality of the transatlantic with North-South routes to French Polynesia, Reunion Island, and the Caribbean through its sister carrier Air Caraibes. Reunion and Tahiti also see significant VFR traffic from Metropolitan France. “It is not a 100 percent perfect game, but we are being smart and flexible enough,” he said.
Although Rochet is confident that French Bee’s pricing and product offering make it competitive on the Newark-Paris route now, he is concerned that Air France could use some of the billions in state aid and loans it got during the pandemic to undercut other carriers’ pricing. “At the moment we cannot say state aid to Air France have been in a manner that could distort the market,” Rochet said. “If they use the money they got from the state to lower pricing, we will be very aggressive.”
But Rochet ruled out the Ryanair tactic of pursuing relief through the courts, noting that the Irish discounter has lost almost every case it has pursued. Ryanair’s tactics may have more to do with marketing and press than actual relief, he observed.
French Bee did not furlough or lay off any employees during the crisis, but instead got its unions to agree to 10 percent pay cuts in exchange for not reducing headcount. Employees also were eligible for wage support from France. Rochet credits this strategy for why the carrier can resume its pre-pandemic plans so quickly. “We are ready to start again.”
The carrier has also resumed its fleet growth. Before the crisis, French Bee had a fleet of three A350s. It took delivery of a fourth last year and paused the rest of its fleet expansion. But now, it has committed to take delivery of an A350-1000 this year and another in the middle of next year, bringing its total fleet to six of the type, where it had expected to be by now.
French Bee has an interline agreement with Alaska Airlines for itineraries through San Francisco, which now have been paused. But Rochet said it is looking for a similar partner on the East Coast for connections via Newark. On the French side, the carrier is facilitating self-connecting passengers, a practice much more common in Europe than in North America. Rochet noted passengers at Orly can also connect to 17 routes on the French high-speed rail system, the TGV.
In Other News
- It’s official: the new state-owned Italian carrier carrier Italia Transporto Aereo (ITA) will begin operations on October 15, according to Corriere Della Sera. Long ailing Alitalia will operate its final flight the day before. The new airline will operate 52 aircraft, including seven widebodies, with plans to grow its fleet to as many as 105 aircraft by end-2025. However, under a deal with the European Commission, ITA will be forced to divest some of Alitalia’s slots at Milan Linate, Rome Fiumicino and other European airports. And the carrier will face robust competition: both Ryanair and Wizz Air have doubled down on their Italian operations, adding bases and flights.
- Ryanair suffered another setback in its quest against European state aid to the continent’s airlines. The European Union General Court ruled that aid to Austrian for losses and cancellations during the Covid pandemic were compatible with the bloc’s rules on state aid. In June last year, Austria granted €150 million ($177 million) in loans and aid to the carrier. The court ruled that the amount Austrian received was deducted from the amount Lufthansa got from Germany, therefore making Austria’s aid in line with EU rules. The court further ruled that the aid did not discriminate against other carriers that operate in Austria.
- Pilots at Alaska Air Group-subsidiary Horizon Air have approved an amended accord that includes wage increases designed to attract new crews. The regional airline has 800 pilots and flies de Havilland Dash 8-400s and Embraer E175s for Alaska. Horizon Air pilots are represented by the International Brotherhood of Teamsters.
- Ryanair plans to hire 2,000 new pilots over the next three years as it takes delivery of new Boeing 737 Max 8-200 aircraft. The Irish discounter was one of few airlines who expanded the ranks of its cockpit crew members during the crisis, ending 2020 with 5,584 pilots compared to 5,446 a year earlier, its annual financial statements show. Most airlines cut staffing numbers when Covid-19 travel restrictions all but shut down air travel. Ryanair does not indicate how many of the new crews will be growth versus replacing retirees. Training classes will begin this year.
- WestJet and its flight attendant union CUPE have a tentative agreement covering crews at regional subsidiary WestJet Encore. Few details have been released but a ratification vote is planned for August.
- Local authorities in Arlington Country, Va., are moving forward with a study of a new connection between the National Landing neighborhood where Amazon is building its so-called HQ2 and Ronald Reagan Washington National Airport. The pedestrian and bike connection — either a bridge, tunnel or combination of both — would not only bring the airport within walking distance of offices, hotels and residences, it would also connect the airport with the Washington, D.C., region’s regional rail network and potentially Amtrak in the future. However, travelers best not get too excited about the connection anytime soon: the study and environmental review are not scheduled to wrap until 2023 after which funding would need to be secured before construction begins.
- On Long Island near New York City, the town of Islip is evaluating expansion options for the Long Island MacArthur Airport. Three concepts are being considered: two on the north side of the field with an up to 30-gate terminal and direct connection to the Long Island Rail Road, and one on the south side with an up to 11-gate terminal and no transit connection. However, a ranking of the three concepts found that the two northern options meet the town’s aims to improve functionality, customer experience, operations and offer long-term flexibility to grow the airport, while the southern alternative meets few of them. Next steps include selecting a preferred alternative and conducting an environmental review, the latter of which would likely occur in 2022.
- The City of Austin had a surprise for Allegiant Air and Frontier Airlines last week. The airport will close the South Terminal that serves the budget carriers in order to build the planned Midfield Concourse B with at least 10 gates. Jacqueline Yaft, CEO of the city’s department of aviation, said in a memo to the city council that the closure and relocation of the two airlines to the airport’s main terminal will occur “within approximately the next two years.” Airlines have piled on with new flights to Austin during the pandemic, including a new base from Allegiant, dozens of new routes from American Airlines, and a renewed focus city commitment from Delta Air Lines to name a few.
- U.S. startup Avelo Airlines is uncorking more routes to Napa. The carrier will connect Santa Rosa, Calif., to Las Vegas from Sept. 16, adding both Sin City and the first route not touching Burbank to its map. Avelo recently trimmed its launch map and ended service to two of its initial 11 destinations: Bozeman, Mont., and Grand Junction, Colo. A New Haven, Conn., base is planned this fall.
- Nothing seems to stop discount juggernaut FlyDubai in its pandemic expansion. The airline added a little sound of music to its map with new flights to Salzburg from July 15, and will expand its presence in Egypt with Sohag service from July 25. With the additions, plus the resumption of Naples flights, FlyDubai is on track to fly 1.3 percent more capacity in the third quarter than it did in 2019, according to Cirium schedules.
- Down the road from Dubai, Air Arabia Abu Dhabi began new service between its namesake base and Baku, Azerbaijan last week. The service complements flights between Sharjah and Baku that resumed earlier in July.
Executives at lessor Aircastle took a decidedly less optimistic tone than their counterparts at many airlines about the pace of the industry’s recovery. “I’m not sure if anything has bottomed out at this point as we see the delta variant kind of raging in different places around the world,” CEO Michael Inglese told analysts during the company’s most recent earnings call last week.
Inglese had reasons for his more measured approach. Aircastle is working with several Southeast Asian airlines, including Garuda, Philippines Air, Lion Air, Thai Airways and AirAsia on possible lease deferrals and extensions if those airlines need to restructure. “Southeast Asia is still the part of the world and as it affects our industry and our business, where things are much moving forward at a much slower pace than anyone was hoping for 15 months ago or even 6 months ago,” he said. Countries in the region, like Thailand and Vietnam, were standouts for containing Covid-19 in the pandemic’s early days, but the slow rollout of vaccines has left those countries vulnerable to new infections.
In the quarter, Latam received bankruptcy court approval to extend leases on three Boeing 777-300ERs and 10 Airbus A320s. Aircastle’s view of Latin America is that the recovery will not come quickly. Argentina’s economy is troubled, as is Colombia’s. Restrictions remain in place throughout the region, and the pace of vaccination overall is slow.
Inglese believes the industry has fundamentally changed and is unlikely to return to the shape it was before the pandemic for years to come. Business travel demand fell 68 percent during this pandemic, compared with going down 11 percent after the Sept. 11 terrorist attacks and 7.5 percent during the Great Recession. Technologies like Zoom, traveler hesitancy, and smaller airline networks could have a larger effect on business travel than is commonly thought, he said.
Airlines that benefited from government support and have large domestic markets are best poised to take advantage of what air travel demand exists. Cross-border traffic is likely to be depressed for years to come, Inglese said. Low-cost carriers could be ascendent as economies recovery. To adapt, Aircastle has refocused its portfolio toward single-aisle aircraft. Demand for widebodies is expected to be low for years. The lessor’s portfolio was 54 percent widebodies in 2014, while now widebodies comprise just 18% of its aircraft.
In the quarter, Aircastle reported a $10 million loss on $166 million in revenue, and had 250 aircraft in its portfolio. The lessor placed two Embraer E195-E2s with KLM Cityhopper, the first of 15 the carrier has on order. It will deliver two more this year, with the balance coming next year and 2023. It placed one A320 with Frontier and expects to deliver three more this summer. The lessor issued $400 million in preferred shares during the quarter.
- American Airlines updated its second quarter financial guidance and singlehandedly reminded the market that the recovery has a ways to go yet. While the airline expects a small net profit in the second quarter, that profit is only possible thanks to Uncle Sam. Without the benefit of billions in federal payroll support, American anticipates a roughly $1.1 billion net loss in the quarter — what did we say, a long way to go. Despite the loss, the trend is positive: revenues are forecast down 37.5 percent compared to 2019, better than the initial down 40 percent guide. And unit costs excluding fuel and special items are only forecast to rise 11-12 percent compared to the previous guide of up 13-15 percent.
- Romanian budget carrier Blue Air reportedly plans to list on the London Stock exchange via a SPAC with Ridgecrest Ventures. Local news reports the airline hopes to raise as much as €250 million ($296 million) through the listing to fund its fleet expansion.
- Joining some of its peers, Delta Air Lines is beginning to repay some of the billions of dollars in debt that it raised during the dark days of the crisis. The carrier has launched a tender off for $1 billion in outstanding debt under its 7 percent Senior Secure Notes due 2025, 7.375 percent Notes due 2026, and 4.5 percent Senior Secured Notes due 2025 co-issued with SkyMiles. The tender would only repay a fraction of the outstanding principle, which totals $7.25 billion. In addition, Delta will only tender up to $800 million of the 7 percent 2025 notes. Offers are due by July 28.
- SAS has finalized a new Swedish kronor 3 billion ($346 million) credit line from the governments of Denmark and Sweden. Proceeds will be used to create liquidity buffer for the airline as it recovers from the Covid-19 pandemic.
As many warned that niche Canadian carrier Porter Airlines may have flown its last flight, the airline had something else up its sleeve. Last week, Porter unveiled an order for up to 80 Embraer E195-E2s and big ambitions for new nonstops across North America from eastern Canada’s largest cities — setting up what could be a fierce competitive battle for Canadian travelers.
The order is split between 30 firm E195-E2s with the first due in mid-2022, plus purchase rights for another 50 aircraft. The jets will fuel growth to destinations in western Canada, as well as the Caribbean, Mexico and what the airline termed “sunny spots” in the U.S., from Halifax, Montreal, Ottawa and Toronto Pearson. The latter Pearson service will complement Porter’s long-standing base at Toronto Billy Bishop Airport, where flights resume on September 8.
The move also marks the likely realization of Porter’s long-standing dream to fly jets. In 2013, the airline committed to up to 30 Bombardier CS100s — now the Airbus A220 — and unveiled ambitious plans to extend Billy Bishop’s nearly 4,000-ft. runway and modify the so-called tripartite agreement to accommodate the aircraft at the airport. That plan — and the aircraft order — died in 2015 when the Canadian federal government declined to review the tripartite agreement that barred jets at Billy Bishop.
“We believe that now is the right time to make this investment as the pandemic resets the aviation landscape,” Porter CEO Michael Deluce said in a statement. “Adding a diverse selection of popular business and leisure destinations to our network means that we are better positioned to serve the needs of many more passengers.”
That pandemic reset is occurring throughout the airline industry. Transat, which long focused on building a vertically integrated travel company, is ditching its hotel business in favor of building a leisure-focused hub-and-spoke network at its Montreal and Quebec City bases. Elsewhere, JetBlue Airways used the crisis to open bases at previously constrained hub airports Los Angeles and Newark; and the industry is seeing a raft of new startups, including Connect Airways that aims to challenge Porter at Billy Bishop and new Icelandic ultra low-cost carrier Play Airlines, a Wow Air reboot.
By Porter’s measure, the reset has resulted in permanent capacity cuts in Canada, as well as financial harm to some of the country’s largest carriers, Deluce told Airline Weekly in an interview. While he did not name names, Air Canada retired 79 aircraft and cancelled orders for both A220s and Boeing 737 Maxes as a result of the crisis. Deluce added that the pandemic also opened up aircraft delivery slots, and created opportunities to hire crews and expand into previously restricted airports.
“Out of crisis often comes opportunity,” he said.
Porter’s expansion will essentially create four network carriers in Canada, a country of nearly 38 million people that has long struggled to support two major airlines. The country’s largest airline, Air Canada, dominates all four cities identified by Porter for its new E2 bases and is rapidly resuming flights as the country’s external and internal travel restrictions ease. WestJet is a large competitor in Toronto and had ambitious growth plans when it was acquired by private equity firm Onex in 2019. And, as mentioned, Transat plans to pivot to a network model leveraging its strong brand presence in Quebec.
Asked about that competition, Deluce said that Porter only views Air Canada and WestJet — not Transat — as competitors. He added that the airline has done “very well” competing with the country’s two largest carriers in eastern Canada since its founding.
Citing the small size of the E2 and its range of nearly 3,000 miles, Porter’s plans for the jets include opening new nonstop routes currently only served via connections by other airlines. The E195-E2 seats 132 passengers in a standard all-economy layout, according to Embraer — significantly fewer than the 169 and 174 seats, respectively, on Air Canada and WestJet’s 737-8s. However, Air Canada is also pursuing the open-new-nonstops strategy with its growing fleet of A220-300s that seat 137 passengers.
Porter selected the E195-E2 over the A220 for its lower trip costs, said Deluce. He added that the jet, which uses the same Pratt & Whitney geared turbofan engines as its competitor, is “more environmentally friendly” in terms of both sound footprint and carbon emissions.
The airline also has substitution rights for the smaller E190-E2. The latter aircraft seats 106 passengers in a standard all-economy configuration.
The Porter order is also something of a coup for Embraer. The E2 has lost ground in the small mainline narrowbody segment to the A220, which Airbus acquired from Bombardier in July 2018. The Brazilian planemaker’s last major order for the type was for up to 35 aircraft from KLM in 2019 though the pandemic brought nearly all aircraft orders to a full stop. And Porter is Embraer’s first firm customer for the E2 in North America after losing campaigns to replace older E190s at both Air Canada and JetBlue to the A220.
Embraer first disclosed the E195-E2 order as for an undisclosed customer in its first quarter results in April.
Delta Goes Back to The Future With Used A350, 737 Deals
Delta Air Lines took a page out of its own playbook with dual deals for gently-used Airbus A350 and 737 aircraft as it looks to accelerate its recovery from the coronavirus pandemic.
The deal is a throwback to the Atlanta-based carrier’s active participation in the used aircraft market during the first half of the 2010s, when it bolstered its fleet with used Boeing 717s and MD-90s. A strategy actively pursued by then-CEO Richard Anderson, who managed to single-handedly reset used Boeing 777 values when he remarked that the airline could buy one for less than $10 million in late 2015. Since Ed Bastian took over as CEO in 2016, Delta has shifted to the more common practice of ordering new aircraft, including Airbus A220s, A321s, A330neos and A350s.
Hence, it is striking that, as competitors like Alaska Airlines and United Airlines eagerly nab empty production slots, Delta has opted for a dual approach acquiring both new and used planes to fuel its recovery. The airline will lease the seven used A350-900s from AerCap and purchase the 29 used 737-900ERs from Castlelake, it said on Tuesday. It did not disclose the former operators of the jets, however, The Air Current has reported that the A350s are from Latam Airlines Group and the 737s from Lion Air.
“These transactions accelerate our recovery plans,” said Bastian during Delta’s second quarter earnings call last week. He added that they aircraft fit with carrier’s existing fleet of 15 A350s — plus orders for another 20 — and 130 737-900ERs at the end of March.
That accelerated plan will see the airline recover to pre-pandemic capacity levels by next summer — a full year earlier than Bastian’s own forecasts early in the crisis. The new aircraft will partially replace the 18 777s, 77 MD-88s and MD-90s, and some of its A320, 737 and Boeing 767 fleets that it retired in 2020. All of the used aircraft are due to arrive by the first quarter of 2022 with most entering service after retrofit work by that summer.
Delta estimated that the additional aircraft give it the option to grow systemwide capacity by 7 percent by 2023 when compared to 2019, said Gary Chase, co-chief financial officer and senior vice president of business development and financial planning at Delta, last week. However, if the recovery stalled it could flex that growth down by accelerating retirements of 717s or 767s.
“Delta is taking the opportunity to grow their fleet through the acquisition of used (but nearly new) aircraft at a time when there is a significant surplus of availability in the market exerting negative pressure on used aircraft prices and lease rates,” said Rob Morris, global head of consultancy at Cirium, on the deals. Market lease rates for used A350s have fallen significantly since before the pandemic to between $580,000 and $700,000 a month, he said but added that Delta could be paying even less than that.
Delta undeniably got a deal for the aircraft. Based on its updated 2021 capital expenditure guidance, the combined costs of adding the A350s and 737s is just $700 million in incremental investment in 2021 and 2022. For comparison, the list price of a new A350 is roughly $320 million and a 737-900ER nearly $113 million — or some $5.5 billion for all 36 aircraft. The additional capital expenditures do not include the 25 incremental A321neos that the airline ordered in April.
United’s recent blockbuster orders for 270 Airbus and Boeing aircraft added $12.5 billion in new capital expenditures to its obligations — nearly 18 times what Delta added with its used aircraft deals.
In addition to the savings acquiring the aircraft, Delta anticipates further operational savings from a more streamlined fleet than compared to 2019, as well as benefits from larger gauge. For example, the 737-900ERs seat 180 passengers compared to up to 158 people on either the MD-88 or MD-90. And as any airline executive knows, adding seats per departure at a lower operating cost amounts to very margin accretive growth.
“They’re plug and play,” Bastian said of the aircraft. “We’ll continue to be able to grow the business accordingly.”
United, Mesa to Order Electric Regional Aircraft
United and regional carrier Mesa Air Group have been making waves with unconventional aircraft orders. The two carriers last week announced a potential 200-aircraft order with Gothenburg, Sweden-based Heart Aerospace for an electric 19-seat regional aircraft.
It’s a big bet that, with the regulatory uncertainty accompanying any new technology, may prove to be more public relations prowess than a realistic future strategy.
If the aircraft does pass regulatory muster, United expects to take 100 of Heart’s ES-19 electric turboprops, and Mesa another 100, and Heart says the two have options for another 100. Financial terms of the deal were not disclosed, but Heart said it has raised $35 million in Series A financing from Breakthrough Energy Investors, which includes United Airlines Ventures, Mesa, and a clutch of other investors. The two U.S. airlines say the ES-19 could come to market as soon as 2026. Earlier this year, Finnair signaled it could order as many as 20 ES-19s for short-haul domestic routes but did not specify a timeline for delivery.
Just weeks ago, United announced the largest aircraft order in its history, for 270 737 Max and A321neos. Along with Mesa, United earlier this year said it would order up to 200 Archer Aviation eVTOL “air taxis,” optimized for the last mile of passenger journeys. And United also shook things up in June with its order for up to 50 supersonic long-haul aircraft from Boom. Mesa, similarly, not only has joined forces with United on the Archer and Heart orders, but added its first mainline aircraft, in the form of Boeing 737 freighters it operates for DHL.
Unlike the A321s and 737 Max planes, but like the Boom and Archer aircraft, Heart’s ES-19 is based on new, untested technology. The FAA has not certified any aircraft powered by electric propulsion for commercial flight, making the 2026 entry-into-service target for the ES-19 highly ambitious. Heart’s aircraft will be powered by lithium-ion batteries, similar to those found in electric cars, the company says, but driving turboprops. The company demonstrated the feasibility of its concept with a 400 kW demonstrator, Heart says.
United expects all three new aircraft types to join its fleet by the end of the decade, even though all three feature new technologies uncertified by any regulatory agency, and Boom has not yet identified a propulsion unit for its aircraft. But the three aircraft have served to put United on the front pages of newspapers and on the nightly news, earning the airline positive press as it emerges from the depths of the Covid-19 pandemic.
The ES-19 is expected to have a range of 250 miles, which both United and Mesa say will re-connect smaller communities to the national air transport system. United cites the example of flights from its San Francisco hub to Modesto, Calif., a distance of just under 100 miles, as the type of route the ES-19 can serve.
Potential ES-19 Routes From United’s Main Hubs
For its part, Mesa notes that 19-seat aircraft served a vital role in connecting smaller cities to the air transport system, and as airlines phased out aircraft of that size, those cities lost their connectivity. Mesa cited the example of Farmington, N.M., where the company was founded, as now having no air service, after once having 30 daily departures to seven cities. (Farmington, however, is 289 miles from Denver but is within range of Albuquerque, which is not a hub for any U.S. carrier.) “Mesa has decades of experience in operating nineteen-seaters, so we do not need to reinvent the wheel,” Heart CEO Anders Forslund noted.
The Heart order is of a part of United CEO Scott Kirby’s pledge to reduce the airline’s greenhouse gas emissions by 2050 without relying on offsets, which the outspoken CEO has dismissed as ineffective. The order also is a part of Kirby’s plan to reinvent the carrier “nose-to-tail” for its post-Covid-19 future. “We have to build companies who have real potential to change how industries operate and, in our case, that means investing in companies like Heart Aerospace who are developing a viable electric airliner,” said Michael Leskinen, United’s vice president of corporate development and investor relations.
With its earlier order for 270 Boeing and Airbus narrowbodies, United said it planned to retire as many as 300 aircraft, including most of its 50-seat regional jets. The ES-19s, if certified and if they join the fleet, could replace many of those 50-seaters on smaller missions, while the carrier will upgauge to mainline jets on other 50-seater routes.
- Air France-KLM is in talks with Airbus and Boeing for up to 160 new narrowbody aircraft, according to Bloomberg. The order would be for its KLM and budget Transavia operations, both of which fly 737s currently. The group is considering both the A320neo and 737 Max families. In June, KLM CEO Pieter Elbers told Airline Weekly that the airline was in the process of relaunching its search for a new mid-sized narrowbody.
- Boeing delivered 79 aircraft in the second quarter, and 156 aircraft so far this year. Included in that total were 50 737-family aircraft, as the airframer works to run down its inventory of 737 Max aircraft that were delayed during the Max grounding. Boeing delivered 12 787s and will need to do further fuselage inspections of undelivered aircraft of the type as mandated by the FAA. Production rates for the 787 will be lower than five per month due to the inspections but Boeing expects to return to that rate later this year.
- And while Boeing has racked up new orders for the Max this year, particularly United‘s blockbuster deal for 200 jets, other customers continue to trim their commitments. FlyDubai cancelled 65 orders for the jet in June, Reuters reported. This leaves the discounter with commitments for roughly 94 Maxes, not including the 16 it already operates.
- Saudia-owned budget carrier Flyadeal has received its first of 30 Airbus A320neos. The plane will support growth at a time when Saudi Arabia is weighing throwing billions of dollars at building a new global airline and aimed at taking some of Emirates and Qatar Airways superconnector status in the region.
- Pratt & Whitney reported orders for 800 of its GTF engines, which power the A320neo-family, among other aircraft, since the beginning of the year. This total includes engines for 80 A320neo and A321neos from lessor AerCap.