Issue No. 826
Europe's Tepid Summer
The Summer Isn't All That European Airlines Hope For
Pushing Back: Inside the Issue
Second-quarter and first-half earnings for European airlines have proved to be a mixed bag. While their U.S. counterparts pop open champagne and say the worst of the crisis is over, European airline CEOs are more measured. Some markets, like Spain, are coming back quickly, fueled by leisure travel and helped by the country's relatively faster reopening, while others remain moribund. CEOs express very cautious optimism about the second half of the year but admit that the real recovery may not start until early next year. And here's yet another sobering statistic: IAG reported that business travel across its system is 5-10 percent of pre-pandemic levels. So no champagne, yet.
Meanwhile, airframers are optimistic that airlines will replace retired fleet types with next-generation aircraft. Airbus, in particular, is looking good. Boeing is emerging from more than two years of crises, starting with the 737 Max grounding, and although it still has some issues with its 787 and 777X programs, it thinks the most of its worst days are past. Interestingly, both airframers said they are planning new freighters: Airbus green lighted the A350 freighter variant, while Boeing said it could start work on a 777X freighter. Elsewhere in the issue, smaller U.S. airlines reported their earnings, and AerCap kicked off the lessors' reports. Next week, Lufthansa reports, as do several other lessors.
“A few years ago, O’Leary couldn’t even spare the word Wizz. I’m glad he’s spending half of his presentation on us though.”Wizz Air CEO József Váradi
A year-and-a-half into the crisis, the airline industry still has little clarity on the structural changes expected from the Covid-19 pandemic. But Air France-KLM has found one: A permanent reduction in domestic French flying.
“We’re never going to go back — we’re not going to go back to the [pre-crisis] levels,” Air France-KLM Chief Financial Officer Steven Zaat said on domestic France capacity during the group’s second-quarter earnings call last week. At this point, the airline forecasts a recovery to 85 percent of 2019 capacity during the peak summer month of July before tapering to just 28 percent in September. He did not provide guidance beyond the third quarter, but said the group maintains its full recovery target of 2024.
But the structural reduction in France is emblematic of what many anticipate will happen in domestic markets — and hopefully some multi-national markets within the EU bloc — in the coming years. As a condition of its aid to Air France-KLM, the French government prohibited flights on routes where competing train service takes less than two-and-a-half hours. The rule was subsequently codified and applied to all airlines in a broad climate bill that the French legislature passed in July. This limit forced Air France to suspend flights on three route from Paris Orly — to Bordeaux, Lyon and Nantes — though it can continue flights that serve connecting travelers from Paris Charles de Gaulle. There is talk of other countries in Europe following France’s lead, including Germany and Spain.
Zaat did not say whether the climate legislation drove the group’s view of a structural reduction in domestic capacity. However, with demand recovering quickly from the Covid-19 pandemic when markets reopen, the new rules are the only other major change affecting French domestic flying.
Air France is also moving to streamline its “Train + Air” partnership with French rail operator SNCF. The airline is piloting a new “fully digitalized service” that could simplifying the check-in and travel process, including eliminating the need to stop at a train station for a ticket. Air France and SNCF offer air-rail connections via Charles de Gaulle Airport to 18 destinations in France.
Outside of domestic France, Air France-KLM is optimistic for the broader travel recovery in the coming months. The group has ramped up capacity to 60 percent of 2019 in July from less than 50 percent in May. It plans to fly 60-70 percent of what it flew two years ago in the third quarter. However, travel restrictions — and the unknown timeline for when they will ease — remain the biggest factor slowing the recovery.
“There’s a big travel appetite,” said Zaat. “Where if people can travel, they will travel.”
Asked when Air France-KLM anticipates the U.S. to reopen to European visitors, CEO Ben Smith admitted that the company has no idea, despite being “hopeful” that this will occur by October. American travelers can visit many countries in Europe with either proof of vaccination or a negative Covid-19 test, but the U.S. has yet to remove restrictions on European visitors, which continues to limit demand and resulted in a very one-sided flow of traffic.
However, if the U.S. reopens by the end of 2021, Smith expects group capacity could recover to more than 75 percent of 2019 levels next year.
As at Ryanair and other European carriers, Air France-KLM continued to face significant Covid-19 headwinds in the second quarter. It posted a €1.5 billion ($1.8 billion) net loss for the period, which was on par with the first quarter despite improving trends. A €938 million one-time pension charge contributed to the second-quarter loss. Revenues decreased 61 percent to €2.8 billion year-over-two-years, but increased 27 percent from the first quarter.
Looking ahead, the group forecasts positive EBITDA in the third quarter — its first since the crisis began. Air France-KLM posted a €248 million EBITDA loss during the June quarter. In addition, it continues to make progress on its broader restructuring program, including achieving an 11,000 full-time equivalent (FTE) reduction in staffing by June and expectation of a 14,000 FTE reduction by the end of 2022.
IAG Sees Hope in Spain as Iberia, Vueling Roar Back
Bookings for UK travel from the U.S. almost doubled in a single afternoon, on July 28, when the UK waived quarantine requirements for U.S. visitors who are fully vaccinated or could present a negative Covid-19 test. The spike surprised even IAG executives, who took it as an augury for the demand they could see when travel restrictions ease more widely.
In fact, IAG only has to look internally to see how demand for European vacations recovers once travel restrictions lift. Spain eased many of its barriers in May, and sales from the U.S. have boomed. Domestic demand in Spain is almost back to pre-crisis levels, and both Iberia and Vueling were the most successful airlines in the IAG group in the first half of the year. Iberia Express reported an operating profit, IAG CEO Luis Gallego said, although the discount unit’s figures are counted in Iberia’s overall results.
Both Iberia and Vueling retooled their networks to capture more Spanish domestic demand. Both have dropped some longhaul routes to Latin America and are redeploying aircraft on leisure routes in the Iberian Peninsula and the Balearic Islands, Gallego said. During the second quarter, Iberia operated 44 percent of its pre-crisis capacity, while Vueling operated 72 percent. Vueling’s domestic Spanish capacity is actually larger than it was in 2019, he added.
The tale at IAG’s other airlines was decidedly less positive, however. British Airways had seen an uptick in demand for visiting friends and relatives (VFR) flights to India and Pakistan earlier this year, but that demand dwindled after those countries were added to the UK’s “red” list in the wake of severe Covid-19 outbreaks. The carrier’s network has been restructured to capture more transatlantic traffic to Europe connecting through London, versus British Airways’ traditional focus on point-to-point longhaul flights.
During much of the first half, British Airways operated passenger flights to the U.S. and mainly cargo-only flights across the rest of its longhaul network. With the UK reopening to U.S. visitors, however, the carrier is adding dozens of frequencies to its transatlantic network, raising London-New York to thrice daily and Los Angeles to 10 flights per week, for example.
Aer Lingus trailed the rest of the group, thanks to Ireland’s travel restrictions, among the strictest in Europe. Load factors on the carrier’s flights have averaged at about 20 percent. The carrier has opened a new base in Manchester for transatlantic flights and has joined the group’s transatlantic joint venture with American Airlines.
IAG still has hopes for Level. The carrier has been operating cargo charters from Barcelona and eventually will return to low-cost longhaul flying, using Vueling as feed, when demand returns, Gallego said.
IAG Cargo was the star of the group in the first half of the year. The unit reported record traffic in the first half, and revenues are 49 percent higher than in 2019. Cargo operations, additionally, allow the group to keep crews current and raises utilization of aircraft, Gallego noted. Cargo traffic likely will fall through the balance of the year and into next year as “preighters” are pushed back into passenger service as travel demand rises.
Groupwide, capacity was 22 percent of 2019 levels in the first half, but this is expected to rise to 45 percent in the third quarter. IAG can flex its capacity up to 75 percent of 2019 levels by the fourth quarter, if demand warrants, because it has kept crews current and has enough aircraft on hand. The group’s overall capacity is lower than it was in 2019, however, thanks to the retirements of several British Airways Boeing 747s, the entire fleet of Airbus A380s, and Iberia’s Airbus A340s, Gallego said.
Business demand, however, is a fraction of what it was 5-10 percent of 2019 levels, mainly fueled by continuing government travel. Where non-government business demand exists, it’s from small- and medium-sized businesses, not large corporations, Gallego said. Still, the group is encouraged by the return of business travel among its Spanish carriers and expressed confidence that demand will recover as restrictions ease.
IAG did not cancel any aircraft orders and took five aircraft in the first half and expects to take 10 aircraft in the second half. The group anticipates 20 aircraft deliveries next year.
IAG still is pressing ahead with the proposed acquisition of Spain’s Air Europa. The European Commission last month said it is extending its antitrust review of the deal through December, however. Gallego said the deal would position Madrid as a “hub that can compete with the strongest hubs in Europe,” and would allow the group to expand flights to Asia from Spain.
IAG lost €2 billion ($2.4 billion) in the first half, a narrower loss than the €4 billion reported last year. Revenues of €2.2 billion were down 58 percent from last year.
Ryanair Plans European Growth in Recovery
No one has ever called Ryanair or its colorful CEO Michael O’Leary bashful, and that’s proving to be true as European travelers slowly return to the sky. The discounter has big ambitions to grow and capture a larger share of the market, especially as many of the continent’s big names retrench.
“In my 30 years in this industry — post-9/11, post-Gulf War — there has never been a growth opportunity in front of Ryanair such as we have at the moment,” O’Leary said during the Dublin-based carrier’s fiscal year 2022 June quarter earnings call on July 26.
Those opportunities range from Italy, where the new national carrier Italia Trasporto Aereo (ITA) — created out of the best assets of Alitalia — will be at least a quarter smaller than its predecessor. To the Nordic countries, where Norwegian Air restructured as a drastically smaller airline and SAS has shrunk its fleet, and on to Portugal, where TAP Air Portugal plans a sizable reduction in its short-haul fleet. Ryanair estimates that these structural changes, plus expected reductions at Europe’s three big airline groups — Air France-KLM, IAG, and Lufthansa Group — could see the continent’s short-haul capacity reduced by as much as 20 percent through at least 2023. This outlook has the airline ready to roll the dice on massive growth that could see it grow by nearly 50 percent in just four years.
That growth is possible with Ryanair’s 210-aircraft strong orderbook for Boeing 737 Max 8-200s, the first three of which arrived in June. The airline plans to operate roughly 600 aircraft by 2026, up from 451 at the end of June.
“We are the only airline taking sufficient aircraft deliveries to take up those opportunities,” said O’Leary. And therein lies the rub: Ryanair’s management views the carrier as the only one in Europe able to fill that gaps left by competitors.
But whether Ryanair is the only airline capable of absorbing those opportunities is debatable. Wizz Air, another discount juggernaut with big growth ambitions, has outstanding orders for 242 Airbus A320neo family jets while EasyJet has another 108 orders for the A320neo family, according to Airbus’ orders and deliveries for June. The latter did shrink its by 10 percent to roughly 300 aircraft as a result of the Covid-19 pandemic but, like its competitors, plans to grow out of the crisis.
And among the legacy airline groups, Air France-KLM has orders for more than 100 Airbus and Embraer narrowbodies and a campaign for either A320neos or 737 Maxes; IAG has 53 Airbus jets on order and a letter of intent for 200 737 Maxes; and Lufthansa Group has orders for more than 100 Airbus narrowbodies.
In fact, the numbers show that Ryanair does not have the most outstanding aircraft orders — that crown goes to Wizz. However, the Hungarian carrier is starting from a much smaller base with just 137 aircraft at the end of March. And order numbers do not include planned retirements that will make actual fleet growth — especially at the big groups — lower than the headline number.
Ryanair must manage through the crisis before it can grow. Last week, O’Leary opened his remarks by saying that the pandemic continues to “wreak havoc” on the airline’s business. The travel recovery is months behind the U.S. with Ryanair capacity down nearly 73 percent in the June quarter compared to two years ago, according to Cirium schedules. And its average load factor was just 73 percent during the period rather than the mid-90 percent range that it saw before the crisis.
But, if Europe maintains the pace of its vaccination programs and there are no further unforeseen Covid-19 setbacks, O’Leary is optimistic about the coming months. He estimated that the airline will carry 10 million passengers in August — double the number in June but still a third less than two years ago. And Ryanair capacity could meet or exceed pre-crisis levels by Summer 2022.
Financially, Ryanair forecasts a small loss or breakeven results for its 2022 fiscal year that ends in March.
In the June quarter, the airline lost €273 million ($322 million). Revenues decreased nearly 84 percent to €371 million and expenses by nearly two-thirds to €675 million compared to the same period in 2019. Ryanair had €3.6 billion in cash and cash equivalents at the end of June.
Wizz Air Challenges Ryanair in Recovery Growth
Wizz Air CEO József Váradi was almost flattered by the amount of time Ryanair CEO Michael O’Leary spent on his airline’s recent earnings call to take down Wizz. In fact, O’Leary’s comments could be taken as a sign that Wizz’s strategy of challenging Europe’s largest carrier in the race to dominate the continent’s air travel recovery is working.
“A few years ago, O’Leary couldn’t even spare the word Wizz,” said Váradi during the Hungarian discounter’s June quarter earnings call on July 28. “I’m glad he’s spending half of his presentation on us [now] though.”
Ryanair and Wizz are on a collision course for European travelers. Both see significant opportunities to grow through the recovery in Europe; especially in markets where incumbent carriers have retrenched, restructured, or gone away entirely. And both have orderbooks for 200-plus aircraft that give them the means to realize this growth. The only question is whether there are enough would-be travelers for the two discounters to seize, not to mention the recovery growth plans of pretty much every other airline on the continent.
For now, Wizz has its eyes on Italy and the UK, and eventually Abu Dhabi. Váradi called both former countries “investible markets” — a term he’s used before — where the airline sees significant growth opportunities. Italy and the UK have also seen an industry restructuring, for example the imminent launch of Italia Trasporto Aereo (ITA) that will replace Alitalia at about half the former carrier’s size. And in the UK, Flybe shut down at the beginning of the pandemic while British Airways has retrenched. These structural changes have caught the attention of Wizz — and others — as they look to grow out of the crisis.
“You should certainly be expecting a lot more activities coming out of this airline when it comes to Italy,” said Váradi. This will include new bases, additional aircraft dedicated to the market and more routes. Wizz has opened or unveiled bases in Naples, Palermo and Rome Fiumicino since the beginning of the crisis.
Italy is also a strategic focus for Ryanair. The airline has expanded its presence in Rome, which O’Leary said was driven by Alitalia’s demise, and is opening new bases in Turin and Venice Treviso.
Based on current schedules — almost certainly subject to change — Ryanair will have a 31 percent share and Wizz nearly 11 percent of seats in the Italian domestic and European market in 2021, according to Cirium schedules. That represents 4 points of share growth for Ryanair and 7 points for Wizz compared to 2019. Much of the share gains came from cuts at Alitalia and EasyJet.
Overall, Wizz plans to recover to 2019 capacity levels by August and then grow at an average annual rate of 20 percent over the next five years. The airline’s fleet of Airbus A320-family aircraft will more than double to 246 in March 2026 — the end of its 2026 fiscal year — from 141 at the end of June. And Váradi envisions Wizz growing to as many as 500 aircraft by the end of the decade.
“You buy aircraft when the time is right for buying aircraft, not when you think you need the aircraft,” he said when asked by analysts whether the 500-aircraft target would entail a new order. Wizz had firm commitments for 242 A320neo and A321neo jets in June, according to Airbus’ orders and deliveries data.
Wizz has accelerated 10 aircraft deliveries into next summer, and is working with Airbus to move up more deliveries in its orderbook, added Váradi.
One concern among analysts are Wizz’s recent operational issues. Asked about cancelled flights and wet-leased aircraft, Váradi put the blame squarely on the shoulders of third-party airport and ground handling contractors that were unable to handle the recent ramp up in flights. Operations have “stabilized” and the wet-leased aircraft will leave the Wizz fleet in the next several months, he said.
In the June quarter, Wizz posted a pre-tax loss of nearly €114 million ($135 million). Revenues decreased 71 percent to €199 million and expenses nearly 49 percent to €308 million compared to 2019. And in a sign that the European recovery still has a way to go, RASK dropped 30 percent on a CASK excluding fuel increase of 57 percent year-over-two-years.
At the same time, Wizz generated its first positive cash flow since the crisis began during the quarter.
Wizz provided few details into its outlook for the September quarter beyond the recovery in August capacity. Longer term, returning load factors and aircraft utilization rates to pre-crisis levels is a focus for the airline, and executives expect both unit revenues and costs to normalize as these metrics recover.
“We will be the first major European airline that will be fully recovered,” said Váradi referring to capacity.
EasyJet Takes it Slow
Europe’s second largest budget carrier EasyJet is taking a slower recovery path than its competitors Ryanair and Wizz Air. While the latter two are aggressively jockeying for share in markets where legacy competitors have retrenched — like Italy — EasyJet has doubled down on fortifying its EU bases, particularly Berlin, Faro, Malaga and Mallorca. Those four points, as well as Scandinavia, saw many of the carrier’s new routes in the second quarter. However, capacity was just 17 percent of 2019 levels with two-thirds focused on the EU and just a third on the UK — normally half of its capacity touches the UK — during the June quarter; Ryanair flew 27 percent and Wizz 41 percent year-over-two-years.
What’s more, Ryanair CEO Michael O’Leary’s forecast that only his airline can grow in the recovery appears true, at least when it comes to EasyJet. Despite a firm orderbook of 101 Airbus A320neos, EasyJet’s fleet plan does not forecast a return to its pre-crisis fleet count of 342 aircraft by the end September 2024, or the end of its 2024 fiscal year. The airline only forecasts 317 aircraft by end-September 2022, and 331 two years later.
Europe’s accelerating vaccination programs and reopening is buoying EasyJet. The carrier plans to operate 60 percent of 2019 capacity in the September quarter, and noted that all of its fleet and 95 percent of its crews are ready to fly. Comparatively, Ryanair estimated traffic at roughly two-thirds 2019 levels — capacity will likely be higher — and Wizz Air plans to fully recover its capacity by August.
In the June quarter, EasyJet posted a £318 million ($442 million) pre-tax loss. Revenues decreased 88 percent to £213 million compared to 2019. The airline burned £55 million in cash during the period.
Gol Starts to Rebound as Brazil’s Vaccination Rate Climbs
Brazilian discounter Gol is confident the country has turned the corner from the depths of the Covid-19 pandemic and expects business travel to return to its pre-pandemic levels by the first quarter of next year. In the meantime, the carrier plans to maintain the strategy of strict capacity discipline that saw it through most of the crisis.
Brazil was hit hard by a devastating wave of illness and death at the end of last year and the first quarter of this year — the airline industry’s peak period in the Southern Hemisphere. But since then, the viral transmission rate has fallen by 2 percent per day since the end of June, a rate that the country’s public health ministry believes will continue. The São Paulo region, which generates one-third of the country’s economic activity, is expected to lift all Covid-related restrictions in the third quarter.
Unlike in the U.S., there is no widespread opposition to the vaccine, and the country has a long history of mass inoculation, CEO Paulo Kakinoff noted. The country has stepped up its vaccination program, with the goal of fully vaccinating 90 percent of the population by the fourth quarter. Despite having started its vaccination program later than the U.S., Brazil is expected to have a larger percentage of its population vaccinated by October.
This bodes well for Gol’s business. The carrier already has seen demand bounce back from the nadir of the country’s most recent wave of Covid-19. Second-quarter capacity was up more than 300 percent from the same period in 2020, and traffic, measured in revenue passenger-kilometers, was up almost 350 percent. Gol flew to 126 markets in the second quarter, up from 28 last year, but down from the 159 markets it served in the first quarter, during the Southern Hemisphere’s peak season. By the end of the year, Gol plans to operate to all of its domestic stations.
By the end of the year, Gol will resume international flights within South America and to the Caribbean. The carrier also plans to re-start flights to the U.S., but Kakinoff noted the resumption of Gol’s international network will depend on travel restrictions and the state of the pandemic by the end of the year.
The carrier mixed up its network during the pandemic, mainly to shift focus from business markets to leisure and visiting friends and relatives (VFR) markets. It operated fewer point-to-point flights, favoring connections over its hubs, particularly on domestic North-South itineraries. This strategy is likely to continue as the carrier emerges from the worst of the crisis, Kakinoff said. “We are now even leaner than we were before.”
Brazil’s economy has also turned the corner, with gross domestic product expected to grow by almost 8 percent on an annualized basis in the second half. Brazil’s economy is not services- or manufacturing-driven, like those of the U.S. and Europe; rather, it’s a resources economy. As economic activity ramps up worldwide, demand for Brazil’s raw materials is expected to increase.
This will help buoy Gol’s business traffic. Before the pandemic, large corporations — primarily, agribusiness, mining, and petroleum companies — fueled Gol’s business travel market. Those companies are “not present” in Gol’s bookings now, Chief Financial Officer Richard Lark said. These companies, however, typically rely on in-person site visits, so Lark believes bookings will return as restrictions lift. Gol expects large corporate travel to pick up in the fourth quarter and be almost back to pre-pandemic levels in the first quarter of next year.
Regarding Gol’s partner American Airlines’ investment in Chile’s JetSmart, Kakinoff was positive. “This strengthens our position,” he said, adding that “we welcome the further investment by American Airlines in our region.”
Even before the pandemic, Gol had suffered an exogenous shock in the form of the Boeing 737 Max grounding, which sidelined an aircraft key to its expansion. Lark noted that it is only now that Gol’s fleet strategy is starting to return to where it had planned to be three years ago. The carrier now has 10 737 Max 8s in its fleet but could add as many as 20-30 over the next 18 months, Kakinoff said. At the end of the quarter, Gol had 127 aircraft in its fleet and expects to have 131 by the end of next year, factoring in retirements and lease returns. The carrier has orders for 73 -8s and 22 -10s.
“Things can always get worse, considering the external circumstances, but it’s reasonable to believe the future will be better,” Kakinoff said.
Gol reached cash burn breakeven by the end of June. The carrier reported second-quarter revenues of 1 billion reais ($197 million), a 187 percent increase from the same period in 2020. Cargo and loyalty contributed another 141 million reais to the carrier’s revenues. Gol reported an operating loss of 810 million reais.
JetBlue Pares London Citing Restrictions
JetBlue Airways thought it had the best laid plans for its London launch later this month until the one thing it cannot control — the Covid-19 pandemic and resulting travel restrictions — threw a wrench in its debut transatlantic service.
“We’re disappointed on the continued restrictions on travel between the U.S. and UK,” said CEO Robin Hayes on JetBlue’s second quarter earnings call on July 27. As a result, the carrier will reduce its schedule between New York JFK and London Heathrow to several days a week from daily in September, and continue to evaluate the situation on a month-to-month basis thereafter. Hayes did not say whether New York-London Gatwick flights would begin as planned on September 29.
Following the UK’s announcement that it would reopen to most U.S. travelers on July 28, JetBlue maintained its September reductions citing the continued restrictions on Britons traveling west.
The travel industry has expressed growing frustration with the U.S.’s restrictions on European arrivals. Early last week, the U.S. Travel Association re-upped its recommendation that President Biden drop restrictions on inbound travelers from the EU and UK, and noted that the rules had not stopped Covid-19 variants from entering the U.S. American officials have not indicated when they will remove restrictions.
Aside from the London reductions, JetBlue is optimistic about the recovery and its prospects. Leisure and visiting friends and relatives travelers returned at a “robust” pace ahead of the airlines expectations in the second quarter, said Hayes. That buoyed revenues that were down 29 percent compared to 2019, at least one point better than the carrier’s guidance in April. Capacity was down 15 percent year-over-two-years in the period.
Leisure travelers are forecast to continue to make up the bulk of flyers through Labor Day after which business travelers are expected to begin returning in significant numbers, said JetBlue President Joanna Geraghty. And the airline has yet to see any negative impact from the rapid spread of the Covid-19 Delta variant, she added.
One big boost for JetBlue was the implementation of its controversial Northeast Alliance with American Airlines. Geraghty cited a “positive initial response” from customers, including corporate clients, to the pact though neither she nor other executives would put a specific number on the revenue benefit. However, the partnership was described as being in the “very initial stages” of implementation with the suggestion that many more benefits are yet to come.
But those benefits come with added costs, which piqued the interest of Wall Street analysts on the call. CASM excluding fuel and special items is forecast to continue rising at an elevated rate into 2022 — including 11-13 percent in the third quarter — in part because of expenses and fleet changes related to the implementation of the alliance.
“Most of the drivers of the higher cost outlook should lead to higher revenue, but this negatively impacts the pre-crisis narrative that JetBlue would be breaking away from its history of disappointing cost execution,” wrote Raymond James Analyst Savanthi Syth in a report. She noted that previously the airline forecast CASM-ex would fall below 2019 levels next year but not expects them to rise in the single digits.
The premise for American and JetBlue’s tie-up in Boston and New York is the idea that together the airlines are stronger against competitors like Delta Air Lines and United Airlines. American lost ground in the Northeast after its merger with US Airways in 2013, while JetBlue found its growth stymied by its lack of long-haul options for lucrative business travelers. The alliance was presented as a way to rectify both airlines’ weaknesses and create a stronger competitor through growth.
To date, American and JetBlue have unveiled 58 new routes from Boston and New York including the latter’s first-ever service to places like Asheville, N.C., and Kansas City. American plans or has added new flights to long-haul destinations like Athens and Tel Aviv from New York.
But that growth comes with a price. JetBlue will delay retiring the 30 Embraer E190s that it owns to operate all the new flights, Chief Financial Officer Ursula Hurley said. While she did not provide a timeline, previous expectations were that they jets would leave on a one-for-one basis as the carrier took delivery of new Airbus A220s. Now, it appears JetBlue will hold off retiring its E190s until 2023 when it begins returning its 30 leased aircraft to lessors with the entire fleet potentially gone by 2026.
JetBlue did not specify the cost of keeping the E190s longer than planned but Hurley acknowledged that it will result in additional maintenance expenses. The airline recorded a $202 million impairment charge related to its plans to retire the planes in 2020.
The airline’s rapid growth at Newark and New York LaGuardia is also driving up expenses. Both are among the most expensive airports — but also the most sought after — to operate at in the U.S. This includes higher landing fees and terminal rents that airlines pay per flight they operate. In other words, more JetBlue departures from LaGuardia will also mean more of these higher airport expenses.
Combined, JetBlue estimates 2-4 percentage points in added unit cost growth from the alliance next year. The airline did not provide growth guidance for 2022.
“This will allow us to capitalize on the meaningful growth opportunities from the [Northeast Alliance] in a capital light and flexible way,” said Hurley on the benefits that will follow the added costs.
JetBlue posted a pre-tax profit of $57 million including the benefit of $366 million in federal payroll relief during the second quarter. Without the government aid, the airline lost $309 million. Revenues decreased nearly 29 percent to $1.5 billion and expenses 27 percent to $1.35 billion including the benefit of special items compared to 2019. The airline reported positive cash flow during the quarter and a focus on returning to pre-crisis margin levels in the future.
For the third quarter, JetBlue forecasts revenues down 4-9 percent and capacity flat to down 3 percent compared to 2019. The airline expects the arrival of five new aircraft — four A220s and one Airbus A321LR needed for its new London flights — during the period.
The carrier, like its partner American, notably did not forecast a profit in the third quarter. Executives did not say when they expect JetBlue to return to the black absent the federal aid that expires September 30. Alaska Airlines, Delta, Southwest Airlines and United all expect profits excluding any relief funds in the second half of the year.
Routes to Mainland Fuel Hawaiian’s Results
Hawaiian Airlines is enjoying someting of a “hot vaxxed summer” as it seeks to fulfill an almost insatiable demand for vacations in its home state. The carrier now is flying more routes and passengers between the U.S. mainland and the archipelago than it did before he pandemic began, and the company expects this only to increase as the state eases some of the country’s strictest travel restrictions.
Its mainland expansion offsets the near-total collapse of its international network. Before the pandemic, Hawaiian’s route structure depended on three discrete networks: U.S. mainland-Hawaii; inter-island travel; and international flights from Asia and Australia and New Zealand to Hawaii. Hawaiian does not expect to resume its Australia and New Zealand flights this year. Its flights to Japan and South Korea remain idled, although CEO Peter Ingram said as vaccination rates progress in those two countries, demand could start to return by the fourth quarter. “There’s a voracious appetite to travel to Hawaii from Japan,” he told analysts during the company’s second-quarter earnings call last week. Although Hawaiian added back one flight to South Korea and restarted service to Tahiti, in all it operated just 11 percent of its pre-pandemic international routes this year.
Meanwhile, routes to the U.S. mainland have seen torrid growth, with traffic now exceeding pre-pandemic levels despite more competition on the routes. Because many U.S. carriers have added flights to Hawaii, there is now between 125-128 percent more capacity on routes to the U.S. mainland now than there was in the third quarter of 2019. Hawaiian added Honolulu-Austin and Maui-Phoenix flights in the quarter, in addition to the Orlando flights it announced earlier this year.
During the quarter, Hawaii relaxed its quarantine and testing requirements for vaccinated travelers to enter the state as well as relaxing some of its restrictions on inter-island travel. The state will drop all restrictions when 70 percent of the population is vaccinated. About 60 percent is fully vaccinated now, according to the state’s health department.
Ingram expects that when the state crosses that milestone, demand will increase. The booking curve is lengthening out to pre-pandemic levels in anticipation, and bookings for the year-end holiday period already appear strong, he said, adding, “It’s a real 180 from where we were early this year.”
The carrier, however, is unlikely to add more cities to its U.S. mainland map, although itmay add additional frequencies to existing cities. Hawaiian expects its international network to start recovering by the end of the year, and therefore will need to return its widebody aircraft to those routes. “We need to balance the desire to chase more revenue now versus future network needs,” Ingram said.
One new trend Hawaiian has noticed since travel to the archipelago picked up is increased demand for premium seats. Vacationers seem more willing to pay for a seat in the front of the aircraft than they were before the pandemic. This trend shows no sign of abating, either, Ingram said.
The third leg of Hawaiian’s network, inter-island flying, also is recovering now that the state has eased quarantine requirements. Hawaiian is operating 75 percent of its pre-pandemic inter-island network in June. Hawaiian expects to operate about 77 percent of its pre-pandemic inter-island capacity in the third quarter.
The carrier remains committed to its Boeing 717 aircraft for inter-island routes and is not jumping on the electric air taxi bandwagon as other airlines — United and American, for example — have. Although the inter-island network is within the range of the proposed eVTOL aircraft, Ingram said the prototypes, which seat between four and six passengers, are too small to be viable for Hawaiian. “It may be a generation or two before we get there,” he said, adding that it most likely will be by the “mid-2030s” before there is feasible electric 717 replacement.
Hawaiian also remains committed to its Boeing 787-9 order and has no plans to cancel the 10 it has on firm order, despite having deferred its first deliveries until next year. Ingram dismissed the idea that the carrier would fall back on its existing fleet of Airbus A330s for international expansion. “The Boeing 787 … is destined to be the flagship of our fleet,” he said. “We are still very excited to get it.”
Hawaiian also is planning to resume hiring, especially for ground and airport positions. It is training pilots and cabin crew in anticipation of the resumption of international demand. If those routes don’t recover by the end of the year, Hawaiian may have a labor surplus, but it has no plans to trim its roster further.
Despite the optimism, Hawaiian continued losing money. In the second quarter, the carrier reported an adjusted loss of $74 million on revenues of $411 million, down 42 percent from the same quarter in 2019. This generated an operating margin of -23 percent. The carrier operated 30 percent fewer available seat-miles than it did in the same period in 2019. Hawaiian benefited from $204 million in federal payroll support and loans in the quarter.
For the third quarter, Hawaiian projects capacity to be down between 20-23 percent, and revenues to be down 28-33 percent compared with the the third quarter of 2019.
Spirit Faces Utilization, Other Challenges in Margin Recovery
For all the strength of the leisure travel recovery, Spirit Airlines is taking longer than many expected to get back to fighting form. The Florida-based discounter posted better than forecast performance in the second quarter when revenues came in down 15 percent on a capacity drop of 5 percent compared to 2019. “Flights are full and airports are very busy,” Chief Commercial Officer Matt Klein said during a June quarter earnings call last week.
But Spirit’s second-quarter performance and expectation of profits in the second half were not enough to deter analyst questions on the airline’s 2023 margin recovery forecast. Its adjusted margin, which excludes the benefit of federal aid and other special charges, was just 7.2 percent in the June quarter, a full 14.6 points lower than where it stood two years ago. CEO Ted Christie said several factors influence the slower-than-expected margin recovery. One is aircraft utilization at roughly 3 hours lower than before the crisis is forecast to take well into 2022 to normalize. The other is simply demand that, while returning strong in the U.S., does remain down compared to two years ago and at lower yields.
In terms of the recovery, Spirit sees strong bookings into September, said Chief Financial Officer Scott Haralson. Demand normally declines after Labor Day when leisure travelers typically stay home as kids go back to school and, to this point, the airline does not see anything to suggest a more severe decline than usual.
Spirit continues to eagerly take advantage of growth opportunities. The airline added five new destinations — Louisville, Milwaukee, Puerto Vallarta, Pensacola and St. Louis — in the second quarter, and has unveiled two more — Manchester, N.H., and Miami — from October. These additions will fuel roughly 10 percent year-over-two-years capacity growth in the third quarter, and roughly 23 percent in the fourth.
The carrier added five Airbus A320neos in the June quarter, and plans to take delivery of another nine before 2021 is out. And, in addition to the 24 A320neo deliveries scheduled for 2022, Spirit has a RFP out to lessors for additional aircraft from 2022-24.
In the second quarter, Spirit posted a $288 million net loss including a $115 million benefit from federal payroll support. The loss was driven by $332 million in one-time charges related to the repayment of its 4.75 percent convertible notes due 2025 and 8 percent senior secured notes.
Allegiant Soars on Strength of Leisure Demand
Allegiant had a very good quarter, and it forecasts it will continue on a growth trajectory in the second half. The carrier is expanding, with an additional order for 10 Airbus A320s from Air Lease Corp. announced last week, which will bring its fleet total to 160 by end of 2024, up from 112 projected for the end of this year.
It’s also re-starting work on its Sunseeker resort in Florida, after a pause of 18 months due to the pandemic. The company plans to finance the resort in part through a $350 million loan that it will finalize in the coming weeks, management said. Rooms will be sold on the carrier’s website.
The 10 jets from Air Lease Corp. are expected to start entering the fleet this year, with the final deliveries occurring next year. Allegiant expects to have 127 aircraft in its fleet by the end of 2022, CEO Maurice Gallagher said. Since the beginning of the year, Allegiant has acquired 21 aircraft, often at prices 30 percent lower than they would have been before the pandemic.
All these aircraft mean growth. The carrier’s second-quarter capacity was up 4.5 percent from 2019. It expects to grow by 10 percent annually for the next two years. Allegiant is adding capacity back to several medium-sized markets it eliminated during the pandemic. Management is not especially concerned with all the leisure capacity the legacy airlines have added during the pandemic, noting that more than 70 percent of its routes do not have much competition.
June was a banner month, as a larger Allegiant faced soaring leisure demand. In fact, June generated a record-setting amount of revenue, Gallagher said. Allegiant forecasts 18 percent capacity growth from 2019 in the second half. “We continue to lead the industry out of this Covid black hole,” Gallagher said. “I have cautious optimism for the remainder of this year and 2022.”
Capacity is expected to fall somewhat in September, but that is usual for the leisure-focused airline as the peak summer demand retreats. The carrier faced some operational difficulties in June as its partners — ground handling and maintenance, for example — struggled to find enough workers to match demand. The carrier expects this to shake out as the peak summer season ends and the economy returns to a more normal, post-pandemic footing.
Another difficulty came from the shortage of fuel in the Upper Midwest and the West. About 20 markets Allegiant serves did not have fuel, requiring the carrier to tanker fuel to operate flights from those stations. This, too, is starting to shake out as fuel production comes back online, and fuel suppliers increase surface fuel shipments.
Besides Sunseeker, the carrier is diversifying. Allegiant will launch a new loyalty program next year. It previously announced partnerships with concert and live-event providers Ticketmaster and Live Nation. “This partnership will ultimately unlock another layer of leisure offerings, further enhancing a one-stop shop for our customer,” Gallagher said.
Allegiant reported second-quarter revenues of $472 million, up from $133 million last year, and approaching the $492 million it reported in 2019. The company swung to a $95 million profit from a $93 million loss last year and higher than the $71 million it reported in 2019. Despite the added capacity, Allegiant carried 11 percent fewer passengers in the quarter than it did in 2019. “These results suggest we are close if not back to ‘normal’, where we were in the early days of 2020,” Gallagher said.
Sun Country’s Aid-Free Pandemic Profit
Sun Country Airlines eked out a Covid-19 pandemic profit of $4.5 million in the second quarter. And that profit happened without the benefit of the U.S. government’s largesse, something that at least to this point remains rare. But the Minneapolis-based carrier had a lot going for it with a three-pronged business of passenger, charter and cargo businesses to boost its bottom line. Its year-old cargo business generated $22 million in revenues; more than the $20 million, or 12 percent, decline in total revenues to $149 million compared to 2019. Expenses fell 37 percent to $100 million, including the benefit of special items, year-over-two-years.
But Sun Country’s recovery outlook is increasingly bright. Since its strong public debut in March, the airline has taken IPO proceeds and used them to grow the airline. It added two used Boeing 737s in the second quarter, and a third in July. Speaking during Sun Country’s second-quarter earnings call last week, Chief Financial Officer Dave Davis said the airline has a “strong bead on many other” potential used aircraft deals, including several multi-plane fleets. Scheduled capacity was down 17 percent compared to 2019 in the second quarter.
The airline continues to focus on expanding in its Minneapolis-St. Paul base. It unveiled 11 new destinations during the second quarter, including Duluth, Minn., from December. Flights from the northern Minnesota city follow the successful introduction of connecting bus service via Landline in 2019, which Sun Country CEO Jude Bricker recently told Airline Weekly proved to be the “perfect entree” into the market that allowed the carrier to view travel patterns and add flights based on demand.
Looking forward, Sun Country forecasts total revenues of $170-175 million in the third quarter. That would be flat to the $171 million it earned during the same period two years ago. System capacity will be down 16-19 percent versus 2019.
In Other News
- Buffeted by the many border closures and travel restrictions around the world, Singapore Airlines posted a S$409 million ($302 million) loss during the June quarter. Revenues decreased 68 percent to S$1.3 billion and expenses 60 percent to S$1.6 billion compared to 2019. Group passenger traffic was just 5 percent of two years ago and capacity 29 percent. Singapore took delivery of three Airbus A350s and its budget subsidiary Scoot three Airbus A321neos in the June quarter that, with the return of three other aircraft, left the group end the period with 164 aircraft.
Despite the headwinds, Singapore is optimistic for vaccination campaigns that could lead to the easing of travel restrictions, particularly in the Asia-Pacific region. “The growing pace of mass vaccination exercises across many countries provides hope for further recovery in international air travel demand,” the airline said in a statement last week. It added that new Covid-19 variants remain a concern.
- Barely two months after the FAA downgraded Mexico’s safety rating to Category 2, the U.S. regulator has agreed to provide technical assistance to Mexico’s Agencia Federal de Aviación Civil to help return the rating to Category 1 status. FAA experts will begin traveling to Mexico to assist with the process in August. The Category 2 rating blocks Mexican carriers from adding flights to and codesharing with U.S. carriers with capacity capped at May levels. Both Aeromexico and Volaris have shifted their growth plans elsewhere due to the restrictions on adding flights north of the border.
- A U.S. bankruptcy court has granted a request by Latam Airlines Group to extend the exclusivity period for it to file a reorganization plan to September 15. The extension will give the carrier more time to work out deals with its creditors on its Chapter 11 exit, including a possible acquisition of its Brazilian subsidiary, Latam Airlines Brasil, by Azul.
- Transat resumed flights after a six-month suspension on July 30. It flew two routes: Montreal-Punta Cana and Montreal-Vancouver. The airline plans to operate up to 24 routes to 16 destinations this summer.
- SkyWest reported $657 million in second-quarter revenue, generating a $62 million profit, compared with a $26 million loss in the same period last year. Revenues were down $87 million — 12 percent — from the same period in 2019. SkyWest announced it is adding eight E175s for Alaska Airlines through next year and 2023, as well as 20 E175s for American Airlines. In addition, SkyWest is adding 11 CRJ700s to its American fleet over the next two years, which will bring its American fleet of the type to 101 aircraft.
- Air Canada has put the pieces together on a roughly $5.7 billion financing package. It includes a $2.8 billion private placement split between: $1.2 billion in senior secured notes due in 2026 with a 3.875 percent coupon, and C$2 billion ($1.6 billion) in senior secured notes due in 2029 with a 4.625% coupon. The second piece is a new $2.4 billion term loan facility including a C$2.3 billion term loan B due in 2028, and a $600 million revolving credit facility that matures in 2025.
Proceeds will refinance four separate credit facilities that total about $2 billion in outstanding debt, and be used for working capital and general corporate purposes. Facilities marked for repayment include the C$200 million outstanding under its 4.75 percent senior secured notes due 2023; C$840 million under its 9 percent second lien notes due 2024; $578 million under its term loan B facility; and replace a $600 million revolving credit facility.
- Delta Air Lines successfully tendered $847 million in outstanding debt through a cash offer. The carrier purchased $677 million of the $3.5 billion outstanding under its 7 percent senior secured notes due 2025, and $170 million of the $1.25 billion outstanding under its 7.375 percent notes due 2026. Total cost of the tender was $1 billion, including fees and premiums paid. Delta did not accept any offers for its 4.5 percent senior secured notes due 2025 that are backed by its SkyMiles frequent flyer program.
American Airlines, the largest U.S. carrier in South America, has been without a local partner in much of the region since Latam Airlines shocked the industry with its pivot to Delta Air Lines two years ago. Now, American has a plan to close much of that gap with a new partnership with Chile’s JetSmart Airlines in what appears to be a tradeoff in favor of growth opportunities despite vastly business models.
The pact, which is only a letter of intent at this point, is three pronged. One, American will buy a minority stake in JetSmart. Two, the U.S. carrier will extend frequent flyer earning and redemption benefits to its new partner. And three, the airlines will implement a broad codeshare on American flights to and from South America, and JetSmart flights within the continent. All aspect of the partnership are subject to approvals.
The tie up is not exactly a match made in heaven. American is a full-service, network airline whose aim is to connect travelers to points far and wide around the globe. Four-year-old JetSmart is an ultra low-cost carrier with bases in Argentina and Chile, and a fleet of just 18 Airbus A320 family jets (plus another 68 aircraft are on order).
For comparison, JetSmart was just 5 percent the size of just Latam’s intra-South American operations in terms of seats in 2019, according to Cirium schedule data.
What, then, is American thinking? Network.
Buried in the U.S. carrier’s statement, it revealed a commitment, along with JetSmart majority owner Indigo Partners, to provide additional capital for “potential future opportunities in the region.” Additional funding could accelerate the Chilean carriers ambitions to expand in and beyond its two existing markets into other countries in South America, for example Colombia and Peru. Adding domestic operations there would help American by closing the gap left by the end of its Latam partnership.
In addition, said funds would help JetSmart fulfill its ambitions. Speaking at a Routes conference in May, CEO Estuardo Ortiz said the airline saw significant growth opportunities, primarily from stimulating traffic with lower fares, both in Argentina and Chile as well as elsewhere in South America. He named Peru as one country ripe for growth in the recovery, including citing the fact that roughly a quarter of domestic capacity in 2019 has left the market for good.
“This proposed partnership would accelerate JetSmart’s path to becoming the leading South American low-cost carrier,” said Ortiz in a statement last week. This sentiment was echoed by American Chief Revenue Officer Vasu Raja who added that the pact enabled the carriers to “grow aggressively.”
For Brazil, South America’s largest market, American already has a partnership with Gol. That pact was signed in February 2020, six months after Latam’s departure to Delta. Commenting Thursday on the new American-JetSmart deal, Gol CEO Paulo Kakinoff said the airline welcomes the new tie up and added that it could “strengthen our position” in the region suggesting a potential future Gol-JetSmart tie up. The Brazilian carrier is in the process of acquiring Map Transportes Aéreos to expand its share in its home market.
Bob Mann, an adviser at R.W. Mann & Company and former airline executive, said the JetSmart partnership fits with American’s focus on austerity across its domestic fleet. This includes recent cabin retrofits that added seats to its Airbus A321s and Boeing 737s, and choice to push bring-your-own-device inflight entertainment.
“Perhaps this is [Doug] Parker’s revived nod to the ‘fundamental change’ — a relentless push for lower costs via austerity and unbundling — that Bill Franke always talked about as being necessary to commercial airline practice,” said Mann. Parker is CEO of American, and Franke is the founder and managing partner of Indigo Partners. In addition, the men go way back: Parker was Franke’s deputy at America West Airlines in the late 1990s and succeeded him as CEO in 2001.
Still, one has to wonder what high-value corporate flyers will think when they face the option of transferring from an American business class seat to a cramped JetSmart economy seat, compared with the same option on Delta with Latam as its local partner. As they say, necessity creates strange opportunities.
- Air Canada will bolster its presence in Quebec City with two new sun runs flown by its Rouge subsidiary this winter. It will connect the capital of Quebec with Fort Lauderdale from November, and Orlando from December. The routes will be flown with Airbus A319s that Air Canada plans to retire as a result of the crisis but has yet to provide a removal timeline.
- In case you wondered if American Airlines had maxed out its potential Caribbean opportunities from its Miami gateway, the answer is it has not. The Oneworld Alliance carrier will add new service to both Anguilla and Dominica from Miami this December, according to Cirium schedules. Flights to both islands will operate twice weekly.
- U.S. startup Avelo Airlines is expanding its network from Burbank. The carrier will connect the Southern California airport to Provo, Utah, and Monterey, Calif., from September; and Fort Collins, Colo., and St. George, Utah, from October. The routes join new Santa Rosa-Las Vegas service launching this fall.
- It’s all sun and fun at Frontier Airlines this winter. The discounter unveiled 20 new routes and five new destinations — Antigua, Belize City, Liberia, New York Stewart and Providenciales — to its map beginning in October. Frontier will connect all five cities with Orlando amid a larger 17-route expansion at the popular Floridian resort town airport. In addition, it will connect its Denver base with Belize City from December; and New York Stewart with Miami and Tampa from November.
- Spirit Airlines will be among the first carriers flying to Palmerola International Airport, the new airport serving Tegucigalpa, Honduras. The discounter will begin with service from Fort Lauderdale, Miami and Houston Intercontinental to the facility — and to the Honduran capital — on November 17. Palmerola is operated by a consortium that includes Munich Airport International.
- With WestJet ready to make its Dutch debut on August 5, the airline is expanding its reach with KLM. The Canadian carrier will expand its codeshare with KLM on flights to 18 destinations across Europe, including Berlin, Lisbon, Milan and Vienna. The move comes despite the fact that KLM and WestJet will compete on the Amsterdam-Calgary route. KLM currently places its code on numerous WestJet-operated flights beyond the Albertan city.
Airbus will begin research and development work for a freighter variant of its A350 widebody, using the architecture of both the -900 and -1000s, the airframer said. The move aims to fill a hole the European airframer had in its lineup and to catch up with archrival Boeing’s strength in the freighter market.
E-commerce and package cargo already were trending upward before the pandemic, but global shutdowns led to a structural shift in consumer habits, fueling even stronger growth prospects for the sector as the world emerges from its Covid torpor. At the same time, maritime freight is constrained and backed up, reducing the cost difference between maritime and air cargo rates. Any air freighter already in service saw maximum utilization during the pandemic, and several airlines — like Air Canada, WestJet, Sun Country, and more — added the first freighters to their fleets in recent months, while others, like Korean Air, have stayed profitable through most of the crisis on the strength of cargo.
And while Boeing has the 747-8F, the 767F, the 777F and is working on a freighter variant of the 777XF, Airbus’ freighter offerings have been more limited. Air Lease Corp. Executive Chairman Steven Udvar-Hazy called out Airbus’ lack of freighters recently and urged Boeing to double down on this area of strength (see Boeing story below).
The new A350 freighter will offer a 20 percent fuel burn advantage over existing twin-engine freighters and 40 percent over four-engine freighters, Airbus CEO Guillaume Faury told investors last week. The new freighter will be built on existing A350 lines and is expected to enter into service in 2025.
Meanwhile, another difference from Boeing is the sense of optimism emanating from Toulouse last week. While the U.S. airframer lurches from crisis to crisis — even with the Max grounding behind it for the most part, it still is struggling with 787 fuselage issues and the delayed 777X program — Airbus is struggling with a good problem to have. The company is planning to raise its A320-family production rates from 43 per month to 45 per month by the end of the year. The rate is forecast to go up to 64 per month in 2023.
But even this rate will not draw down the near-6,000 aircraft backlog the company has for the type. Airbus estimates that at current production levels, it will take 15 years to build its existing backlog; at the 60-aircraft rate, it will take 10 years. It hopes to raise production rates to 75 aircraft per month by 2025, but is facing some pushback from its suppliers, Faury said. The company believes its suppliers will handle the 45 per month rate and is working with them to ensure it can reach the targeted 75 aircraft rate, Faury said, noting that suppliers pushed back to the current 43 per month rate last year.
Its other product lines also will see rate increases. The A220 and A350 are expected to go up from five aircraft per month to six next year. The A330 will hold steady at two aircraft per month. The company still has three A380s to deliver, Faury said.
Airbus delivered 297 aircraft in the first half of this year, which Faury noted was an unusually busy first half for the company but one that is explained by the relative paucity of deliveries last year, during the depths of the crisis. The company is on track to deliver 600 aircraft for the whole year. Airbus notched 165 gross orders in the first half, or 38 net orders, once cancellations are factored in.
Airbus reported first-half revenues of €24.7 billion ($29.4 billion), generating an operating profit of €2.7 billion. For the full year, Airbus is forecasting an operating profit of €4 billion.
Boeing Pins Future Success on China’s Max Re-certification
Boeing has China on its mind, as geopolitical gamesmanship between the world’s two largest economies, China and the U.S., could upset the airframer’s plans as it seeks to recover from the 737 Max grounding and position itself for its post-pandemic future.
Boeing aims to increase the Max production rate from the current 16 per month to 31 per month early next year, but this rate increase depends on China re-certifying the aircraft’s return to service. China’s aviation regulator, the CAAC, remains the biggest holdout in re-certifying the aircraft, which was grounded for almost two years in the wake of two fatal accidents traced back to a flawed flight-control system.
China’s delay is the main impediment to the production-rate increase occurring, CEO David Calhoun told analysts during the company’s second-quarter earnings call last week. The company’s suppliers are ready for the ramp up but also are prepared should Boeing need to trim its ambitions. “If we get to the end of the year … we do have to consider real actions with respect to what the future rate ramp looks like,” he said.
Chinese airlines now have about 100 Max aircraft on the ground awaiting re-certification. Calhoun believes the country will re-certify the type by the end of the year and in advance of the 2022 Beijing Winter Olympics, when the country’s airlines will need the capacity. But much about the timing of China’s re-certification remains in question and will depend on the state of U.S.-China relations for the balance of this year.
The timing of the CAAC’s decision also will weigh on Boeing’s workforce. The airframer currently has 140,000 employees, with no plans to reduce its headcount further, unless the CAAC withholds certification this year, Calhoun said.
Boeing is working through its backlog of built — but undelivered — Maxes. The company expects to deliver half of the 390 Max aircraft that were stored during the grounding this year, with the balance delivered next year. “We are turning a corner, and the recovery is gaining momentum,” Calhoun said.
The airframer’s next product could be a freighter version of the 777X. The company is confident of the passenger version’s certification and expects to begin delivering the type by the end of 2023. But strong cargo traffic and demand for freighters prompted the company to consider beginning work on a freighter variant. Calhoun noted that 72 percent of the world’s air cargo traffic now is carried on dedicated freighters, versus 48 percent before the pandemic. Cargo traffic is up 8 percent worldwide, despite the decline in belly-hold capacity as international passenger flights remain a fraction of their pre-pandemic level.
The move could solidify Boeing’s already-dominant position in the freighter market. Last month, Air Lease Corp. Executive Chairman Steven Udvar-Hazy recommended Boeing double down on freighters, noting that Airbus is playing “catch-up” in the sector and currently doesn’t have a freighter that can compete with the 777. Boeing should allocate engineering resources to freighter development, Udvar-Hazy said then.
Boeing is more likely to focus on a 777X freighter variant than a clean-sheet aircraft, Calhoun said. The issue is that propulsion suppliers still are developing the next generation of engines, and ones that are optimized for sustainable aviation fuels. Until then, Boeing’s engineering resources are better spent on a freighter, he said.
Calhoun brushed off concerns, recently reported by Bloomberg, that the company is losing the battle for engineering talent to Silicon Valley. Boeing has the talent it needs, and he is confident the company will attract young engineers through its internship and college-recruitment programs. “I like our chances,” he said. “It’s about the mission of the company, and [young engineers] like what we do.”
He also dismissed concerns that recent orders — like United‘s order for 200 Maxes and Southwest‘s order for 34 — are “opportunistic” and taking advantage of the company’s travails. United’s order was split between Boeing and Airbus, Calhoun said, with the bulk going to the U.S. airframer. “I like the way our product line competed,” he said. “I’m pleased with how it went.”
The United and Southwest orders, he said, spoke more of the strength of those airline’s recovery from the pandemic than any perceived weakness at Boeing. The orders were strategic, for the airlines’ future growth plans. “That’s about as fundamental as it gets,” he said.
Meanwhile, the 787 production rate has fallen to fewer than five per month as the airframer works with regulators on a fix for quality-control issues on the fuselage. Deliveries of the type have been suspended but could resume this year. The company expects to deliver half of its backlog of 100 already-built 787s this year, Calhoun said. But with international passenger traffic remaining depressed, “customers are not knocking down our doors to get their airplanes,” he said.
But the company is confident of the 787s enduring success. The program is near breakeven, Calhoun said. “No widebody airplane has been flown more aggressively during the pandemic as the 787,” he said. “It’s everywhere.” About 90 percent of the world’s 787 fleet has continued to fly during the crisis, he added.
During the Covid crisis, airlines around the world retired 1,500 aircraft. Calhoun believes most of those aircraft will not return to active service. Instead, airlines that are in the financial position to do so will focus on rejuvenating their fleets with more efficient aircraft. Airlines now are operating about 80 percent of the world’s pre-pandemic fleet. This positions Boeing well for its post-pandemic future, he said.
But when that future will arrive remains unclear. Boeing forecasts the recovery to occur in three phases. First, domestic travel will return, as is already happening in large markets like the U.S., the EU, China, and Russia, and is starting to happen in India, Brazil, and within Latin America. Next, regional markets, like intra-Asia, intra-Americas, and intra-Africa, will return. The longhaul international market likely will not return to growth until after 2024, Boeing predicts.
Boeing reported second-quarter revenues of $17 billion, a 44 percent increase from last year. The company reported a $567 million profit, its first in almost two years, driven mainly by the strength of its defense, space, and services businesses. Operating margins at its defense and services business approached 14 percent each. The company’s Commercial Airplanes unit, on the other hand, reported a -8 percent margin, although revenues rose almost 300 percent from last year — the depths of the Max crisis — to $6 billion.
At the end of the quarter, Boeing’s commercial backlog stood at 4,100 aircraft, about 3,300 of which are for 737-family aircraft.
AerCap Upbeat on Industry Recovery
What a difference a year makes. During AerCap’s second-quarter earnings call last year, to focus was on fleet retirements, which regions of the world were starting to recover, and which were stumbling, and what airlines might file for bankruptcy next. But on its most recent call, the leasing behemoth was decidedly more positive, pointing to recoveries well underway in several markets and to which airlines were stepping up their orders.
Notably, AerCap’s profits last year, during the uncertain early days of the crisis, and now are almost identical — $250 million. This shows the resilience of the leasing industry, especially for a company that can manage its portfolio. In fact, AerCap is so positive the recovery will hold, CEO Aengus Kelly said” The airline industry in witnessing an unprecedented and rapid recovery in air travel in the many of the world’s largest markets.”
Domestic capacity in China, a major market for the lessor, is at 105 percent of pre-crisis levels. The U.S. domestic market is rebounding quickly, and Europe is at about 70 percent of its 2019 levels. Kelly noted a strong correlation between vaccination rates and domestic travel’s return. “Our industry will not be the same until everyone has the opportunity to be vaccinated,” he said.
Kelly noted that China has been taking aircraft at a record pace, not just new aircraft but used and off-lease assets, to fuel the increase in domestic demand. Narrowbodies, especially, are in demand in the country, thanks, in part, to the ongoing Boeing 737 Max grounding there. “We are seeing now demand from the Chinese customers for aircraft off the order book, and we expect that to continue as our market continues to grow.”
The pandemic is raging in some parts of the world, however. Southeast Asia remains an area of concern. AerCap said less than 5 percent of its portfolio is with airlines in the region, however.
Last year, airlines were scrambling to retire fleet types, especially less-efficient aircraft. Those aircraft likely will not return to service. Echoing the airframers, Kelly believes airlines will now scramble to order next-generation aircraft, like the Airbus A320neo-family and the A350, and the Boeing 737 Max-family and the 787.
The $30 billion acquisition of GECAS is expected to close in the fourth quarter, now that both the U.S. and EU have given their tentative approvals. AerCap is waiting for a few other regulatory approvals before the deal can close, Kelly said.
With GECAS, AerCap will inherit a small helicopter-leasing portfolio. Asked if AerCap has any interest in investing in electric aircraft, either rotary or fixed wing, Kelly was dismissive. “At best, at the moment, it’s coffees and prescriptions that are being delivered on local drones,” he said, adding that it will be many years before large electric aircraft are approved for passenger transport. “Electric vehicles are coming,” he conceded. “I think that’s a given.”
AerCap reported $250 million in profits on $1.2 billion in second-quarter revenue, both relatively flat from the year before. The company reported new leases for 51 aircraft in the quarter, including 13 widebodies. Lease deferrals are falling and the industry is reaching an equilibrium, Kelly said.
- Airbus has flipped Condor Airlines from Boeing widebodies. The German carrier committed to 16 A330-900s to replace its equal number of 767-300ERs last week. Condor expects its first A330neo by Autumn 2022 with all 16 aircraft in its fleet within two years. The order is also a rare widebody commitment amid the still lagging long-haul travel recovery from the Covid-19 pandemic. Since the crisis began last year, most new orders have been for new generation narrowbodies, primarily the 737 Max.