Issue No. 831

A Crisis Like No Other

What Makes the Covid Crisis Different From Past Airline Crises?

Pushing Back: Inside the Issue

Crises have wracked the airline industry almost since its inception. Wars, diseases, economic recessions and depressions, jet fuel price spikes — the list is almost endless and illustrates an industry almost uniquely prone to exogenous shocks. The Covid-19 pandemic started as a crisis like no other, affecting airlines in every corner of the world. A "pancession," as we called it in an Airline Weekly issue. And almost two years in, the pandemic is proving its difference in a new way.

Unlike past exogenous shocks, the Covid pandemic will be easier for airlines to climb out of. First, the global economy has shaken off its initial shock and is back to growing. Second, airlines took the painful but necessary steps early in the crisis to reduce headcount and costs, and to rationalize their networks and fleets. Governments — not all, but many — stepped in with support. These factors leave airlines in a good position to meet demand as it starts to return. Boeing upped its 20-year aerospace forecast to $9 trillion this year from $8.5 trillion last year, and expects the recovery to begin accelerating pretty quickly from 2023. Lessors are similarly bullish about the industry's long-term growth.

That's the good news. The bad news, of course, is that the near-term looks less rosy, as business travel remains depressed and travel restrictions persist. The yearend holidays remain strong, though, and airline leaders now expect the first quarter of next year to mark a fuller recovery.

The Airline Weekly Lounge Podcast

This week in the Lounge, Edward Russell and Madhu Unnikrishnan chew over why Australia’s competition regulator denied Qantas and Japan Airlines a joint venture. Will Fly Play buck the odds and make low-cost longhaul work? And, with gratuitous references to unicorns, Sasquatches, white whales, and a menagerie other mythical animals, the team considers Boeing’s $9 trillion aerospace outlook. For a full archive of the podcast, go here. A new episode drops every week.

Weekly Skies

The new strategic partnership between American Airlines and Gol checks some important boxes for the two carriers. American gets much deeper access to South America’s largest domestic market — Brazil — something that Chief Financial Officer Derek Kerr has said is a priority for the company, while Gol gets a capital infusion that analysts say it needs to weather the balance of the Covid-19 crisis.

Under the deal unveiled last week, American and Gol will enter into a three-year exclusive codeshare — in other words American cannot partner with another Brazilian carrier, nor Gol with another U.S. one — and cooperate where allowed under antitrust rules. In addition, they will expand reciprocal loyalty benefits with details to come in 2022. And, importantly for Gol, American will invest $200 million in the Brazilian carrier in exchange for a 5.2 percent stake in the airline.

The new pact should surprise few in the industry. American is taking a page — really, a second page — out of Delta Air Lines’ playbook after the Atlanta-based airline wooed away long-time American partner Latam Airlines Group with a sizable equity investment in 2019. In response, American and Gol launched a basic codeshare covering Brazilian domestic routes in early 2020. And then in July, American took that first page from Delta with an equity investment in and partnership with Chilean discounter JetSmart that aims to give its millions of South American loyalty members domestic and regional flight options within the continent.

“The one thing we don’t do in South America is offer short haul and domestic connectivity in a lot of markets,” Kerr said at a Cowen & Co. investor conference earlier in September. “We’re looking to create partnerships that do that and enable us doing further the reach of our loyalty program there.”

In August, American Chief Revenue Officer Vasu Raja said that 65 percent of seats on the airline’s flights South American flights were sold locally rather than in the U.S. He added that many of those flyers are members of the AAdvantage loyalty program and, by adding partnerships like the one with JetSmart, American can create a “massive amount of customer value.”

The American-Gol pact also sets up a fierce competitive showdown among the three large U.S carriers in South America once travelers return. American will have local equity partners in Argentina, Brazil, Chile, and Peru with Gol and JetSmart; Delta in Brazil, Chile, Colombia, Ecuador, Paraguay, and Peru with Latam; and United Airlines in Brazil, Colombia, and Ecuador with Avianca and Azul. United also partners with Copa Airlines, which has an extensive into-South America network via its Panama City hub.

Based on 2019 numbers — and excluding shuttered Avianca Peru and Latam Airlines Argentina — American’s partners Gol and JetSmart had an almost 22 percent share of intra-South America capacity; Latam, a roughly 36 percent share; and Avianca and Azul, a 20 percent share, according to Cirium schedule data. However, these numbers have changed as a result of the crisis and Avianca and Latam’s Chapter 11 bankruptcy reorganization’s in the U.S. that have seen both carrier’s shed dozens of aircraft.

American has long been the largest carrier between the U.S. and South America. The airline carried 28 percent of the 15.1 million travelers who flew between the regions — and 28 percent of all U.S.-Brazil flyers — in 2019, Bureau of Transportation Statistics data via Cirium show. United carried nearly 12 percent and Delta just over 8 percent.

For Gol, the partnership is about more than just expanded network access. American’s investment is forecast to boost its liquidity to roughly 5.2 billion reais ($988 million) by year-end, wrote Bradesco BBI Transportation Analyst Victor Mizusaki in a report Wednesday. He forecasts that the additional liquidity, which will come from the issue of 22.2 million new shares, is “enough to overcome the Covid-19 pandemic.”

This is good news for Gol that some analysts have warned could struggle in coming years under its debt load and capital commitments.

The Latin American airline industry is in the midst of a pandemic-induced shake up. In addition to American’s deals and the bankruptcies, reports indicate that Volaris shareholder Caoba Capital has purchased a 40 percent stake in Chile’s Sky Airline opening the door to a tie up between the successful Mexican discounter and struggling Chilean carrier. And in Brazil, Azul is actively pursuing an acquisition of Latam’s local subsidiary, Latam Airlines Brasil, through the group’s bankruptcy restructuring. In addition, Gol agreed to buy Brazilian regional carrier Map Transportes Aéreos for 28 million reais in June.

“I do believe this is a kind of trend created by the pandemic,” Gol CEO Paulo Kakinoff said at an investor event in June. “[Gol] is about to reinforce, re-emphasize its role in promoting regional consolidation.”

Edward Russell

Fly Play CEO Welcomes Comparison to Defunct Wow Air

Ask Icelandic startup Fly Play CEO Birgir Jónsson about comparisons between his carrier and defunct Wow Air and he’ll tell you he welcomes them. Wow, which shut down in March 2019, is remembered by many as the epitome of the overambitious budget carrier whose over-expansion led to its demise.

“I am not ashamed or offended if someone compares us to Wow. I think, in many ways, that’s a great compliment,” Jónsson told Airline Weekly. And the comparisons come in spades: Play was founded by a number of former Wow executives, including Jónsson himself, who was deputy CEO of Wow before its closure. Its business plan outlines the same volume business connecting budget-conscious travelers on both sides of the Atlantic Ocean over a Reykjavík hub. And its fleet consists of the same Airbus A320neo-family jets.

But that’s where Jónsson thinks Play is different. The carrier, which began flights in June, is taking the disciplined approach to the market that Wow did not. It plans to stick to A320neo and A321neo jets — none of Wow’s Airbus A330s — and focus on a flexible operation connecting major Eastern U.S. cities to Europe via Iceland, with the added benefit to Icelandic tourism to boot. And Play only targets a fleet of 15 aircraft by the end of 2025 — Wow’s peaked at 23 aircraft — with three A321neos already in its fleet and another six A320neo and A321neos under contract from lessors.

“To see the opportunity in the market and then try to find the aircraft and fulfill it, that’s the logical” way of doing business, said Jónsson. “[But] it’s so tempting to go get airplanes and then try to find opportunities, and that’s a fatal mistake in any business. You cannot just find the best deal on a great cooking machine and decide to found a restaurant.”

Play is one several startup airlines to launch during the Covid-19 crisis. Since December, Avelo Airlines and Breeze Airways have taken to the skies in the U.S., Flyr in Norway, Itapemirim Transportes Aéreos (ITA) in Brazil, and Lift Airlines in South Africa. And at least two more are in the works, Connect Airways in the U.S. and Norse Atlantic Airways in Norway. 

Crises historically are a good times to launch an airline. Downturns often leave incumbents struggling and unable to mount a strong defense against new competitors. In addition, the barriers to entry are lowered with cheap aircraft available — Play has acquired its fleet at lease rates up to nearly a quarter lower than before the crisis — laid-off staff looking for work, and airports eager to fill the gaps left by retrenching legacy carriers. One only has to look as far as JetBlue Airways and Wizz Air after 9/11, and Azul after the Great Recession to find examples of startups that succeeded in the recoveries of economic crises.

But just because crises create opportunity does not make starting an airline easy. Play only filled 41.7 percent of its seats in July and 46.4 percent in August, its first two full months of operations. These loads are far short of the target 72 percent first-year load factor that Play outlined in a presentation to would-be investors in June.

“We deem this year, up until next spring, as like a ‘warm-up’ phase,” Jónsson said when asked about Play’s first early performance. The airline is focused on a reliable operation and expanding sales on the major global distribution systems, as well as boosting loads on its initial group of routes during this phase. July and August took a hit from the latest wave of Covid-19, something that was not included in its June investor outlook, and Play is unlikely to fill 72 percent of seats this year, he said. On a positive note, many bookings were just postponed — not cancelled — giving him optimism for the fall outlook.

“We’re just on track to building ourselves up to the main event, which is the U.S. operation,” said Jónsson. Play aims to begin flights to the East Coast next spring with tickets going on sale by the end of the year pending receipt of a U.S. foreign air carrier certificate, which it applied for in August.

Asked where Play intends to fly in the U.S., Jónsson first declined to name destinations, citing competitive concerns. He then went on to say that “it’s always going to be a mixture of Baltimore, Washington, Boston, New York and Toronto.”

Jónsson added that the airline’s startup phase will likely last into 2023, well after U.S. flights are due to begin, at which point he sees its operation realizing the business plan laid out to investors in June.

In terms of competition, Play does not see itself as a major disruptor for the likes of British Airways or United. Jónsson envisions the airline as something of a nimble, but niche, player filling a gap in the market for a budget carrier connecting North America and Europe via Iceland. “We do not want to be big. We do not want to be a volume player,” he said.

And he’s correct in the fact that an airline with just 15 aircraft, all narrowbodies, flying sub-daily frequencies is unlikely to have a significant impact on the major transatlantic players. Icelandair, whose model Jónsson cited as an example for Play, will feel the most pressure. A spokesperson for Icelandair was not immediately available for comment on the new competition, and the carrier did not acknowledge the startup in its second quarter results statement.

“We have to be optimistic,” Jónsson said of Play’s outlook. And with nearly $82 million in unrestricted cash on hand, the airline has some runway ahead of it to weather the unpredictable recovery. 

Edward Russell

Sun Country Sticks to Minneapolis

Sun Country is hewing to its plans to grow from 31 aircraft now to 50 aircraft in the next couple of years as it plans ambitious growth. One thing it will not add is a new hub in addition to its home in Minneapolis, a Sun Country executive said.

“We will dedicate a significant part of our future growth in Minneapolis,” Chief Financial Officer Dave Davis said at the Morgan Stanley Laguna conference last week. Minneapolis is a two-carrier market, split between Sun Country and Delta, and is even more so now that other airlines pulled back on flights to the airport during the pandemic. Delta may be larger, but Sun Country’s leisure focus and seasonal routes give it a unique market niche. “Almost everything we’ve tried out of here works,” Davis said.

The carrier also benefits from strong name recognition and brand loyalty in the Twin Cities. Most of its flights originating in Minnesota are sold directly to consumers. But outside of the Twin Cities, Sun Country’s sales are mostly through GDS platforms, Davis said.

The carrier also plans more “opportunistic” growth outside of its hub, in markets like Dallas and Los Angeles, for example, Davis said. Sun Country expects growth to resume in the first quarter of 2021, when sun routes from the Upper Midwest peak. The booking curve remains short, although so far the holiday season has been unaffected. “We are really counting on the first quarter of ’21 to be a powerful quarter for us,” Davis said.

New entrants pose, like Breeze Airways and Avelo, pose little threat, with almost no overlap in their networks, Davis noted.

Meanwhile, Sun Country’s charter business is entering its peak season as college football ramps up and when basketball season begins. There has been some softness in the military charter business, as other airlines in the market have deployed widebodies usually used for international routes to their military charter business.

The cargo business Sun Country operates for Amazon is “steady as she goes,” Davis said. The carrier does not plan to add — yet — to the 12 Boeing 737-800s it flies for the e-commerce giant. “If Amazon wants to add 737-800s, we think we can get some of that [market], but we’re not counting on it,” Davis said. “We don’t control the growth.”

Sun Country has seen no problems in recruiting pilots, but below-the-wing employees have been tougher to find. Like other airlines, Sun Country is facing difficulty in recruiting and retaining entry-level and lower-wage workers. Part of the reason the carrier has not instituted a vaccine mandate for its employees is it fears a mandate could drive some workers away, Davis said. And then there’s the weather. “Being on the ramp in Minneapolis in January isn’t the most fun thing in the world,” he said.

Madhu Unnikrishnan

In Other News

  • Australian authorities stopped Qantas and Japan Airlines‘ planned Australia-Japan joint venture last week. The Australian Competition & Consumer Commission denied their application after finding the tie up not in the public’s interest. The pact would have allowed Qantas and JAL to cooperate on flights in the market, something they argued would allow them to add more flights that would benefit consumers. However, with only one other competitor in the market — All Nippon Airways — following Virgin Australia‘s long-haul exit meant Qantas and JAL would overwhelmingly dominate the market. “Airlines have been severely impacted by the pandemic and this has been a very difficult period for them. But preserving competition between airlines is the key to the long-term recovery of the aviation and tourism sectors,” the ACCC said in a statement.
  • A short hop away from Japan, Korea’s Air Premia has chosen Amadeus’ Navitaire as its reservations system. The selection of the New Skies system comes as Air Premia begins to plan its expansion into near-international Asia routes and to the U.S. Air Premia got its air operators certificate last month.
  • Avianca‘s Chapter 11 reorganization plan had its first day in U.S. bankruptcy court last week. Counsel for the airline told the court that “constructive and cooperative” talks were on-going with creditors over the plan, which the judge approved for a vote with a final confirmation hearing scheduled for October 26. One outstanding point is the Avianca’s order for 88 Airbus A320neo family aircraft that it placed in 2015; the airline and Airbus continue to discuss terms but, according to Avianca’s counsel, the carrier can walk away from the deal without affecting its reorganization plan. In the meantime, Avianca continues to slowly recover from the depth of the Covid-19 crisis. Bookings have returned to roughly half of 2019 levels, and the airline plans to fly roughly 60 percent of its pre-crisis capacity this winter.
  • Staying in Latin America, more deals appear to be afoot in the region. Investment firm Caoba Capital has made a $70 million investment, equal to a 40 percent stake, in Chile’s Sky Airline, according to local reports. While a major investment to boost capital is not unusual in these pandemic days, what stands out is the fact that Caoba also has a stake Volaris, and its Managing Partner Rodrigo Salcedo sits on the board of directors at Avianca. A source told Chilean daily El Mercurio that the firm would work towards synergies between its airline investments as part of the Sky deal. Of course, another big Volaris investor Indigo Partners might have something to say about that with Indigo a major shareholder in Sky competitor JetSmart.
  • Three airlines are reshuffling their leadership decks. WestJet said Chief Financial Officer Harry Taylor will step up as interim-CEO later this year to replace Ed Sims, who announced his retirement in June. The Canadian carrier will continue its worldwide search for a permanent CEO. Jennifer Blue, who now serves as vice president of finance, will fill Taylor’s CFO role during his time at the top.

    Meanwhile, Lufthansa Group named Steffan Harbarth, now one of two managing directors at Lufthansa Cityline, to the top job of Air Dolomiti. Current Air Dolomiti CEO Jörg Eberhart is going to corporate headquarters as head of strategy for the Lufthansa Group. Harbarth takes the helm on January 1.

    And one airline announced a departure. Southwest Airlines President Tom Nealon left his role last week, although he will stay on in some capacity as a “strategic adviser.” Rumors that Nealon might leave Southwest began almost as soon Robert Jordan was named as CEO Gary Kelly’s successor in June. Southwest promoted current Chief Operating Officer Michael Van de Ven to president on Nealon’s departure.

Edward Russell & Madhu Unnikrishnan

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Landing Strip

  • The dreams of a new terminal west of Sepulveda Boulevard are finally coming true at Los Angeles International Airport. Operator Los Angeles World Airports is set to add Terminal 9, located across the boulevard from the airport’s terminal horseshoe, at an October 7 meeting, according to an informational presentation on the larger Airfield and Terminal Modernization Project. Other aspects of the more than $6 billion works include Concourse 0, a western expansion of Terminal 1, as well as runway and roadway improvements. The airport wants to wrap all of the work ahead of the 2028 Olympics in Los Angeles.

    In terms of the terminals, Concourse 0 would be a net addition of nine new narrowbody gates to Terminal 1. Terminal 9 would include 12 new wide-body gates. Both projects would reduce the use of buses for arriving and departing passengers. One detail unmentioned is what airlines will use the new facilities. Many expect Southwest Airlines, which uses the majority of Terminal 1, to use Concourse 0, while United Airlines is pushing hard for Terminal 9 for itself and its Star Alliance partners. Work on the concourse could begin in 2022 and wrap in 2026, and on the terminal in 2023 and end in 2027.

    But not all is not good at LAX, even as the board weighs the latest expansion plan, one of its signature projects — an automated people mover connecting the terminals and Los Angeles Metro system — is delayed. Work is 157 days behind schedule and now expected to open in early 2024, LAWA Chief Financial Officer Tatiana Starostina said in a bond presentation last week. The people mover was previously scheduled to open in 2023.
  • Work on Southwest Airlines planned maintenance hangar at Baltimore/Washington International Airport could begin in October. Following final approval from the Maryland Board of Public Works last week, the airline is cleared to build the $135 million facility that will be able to house up to three Boeing 737s. The airline will invest roughly $90 million with the state covering the balance. The new hangar, plus one under construction in Denver, will complement Southwest’s existing facilities at six airports around the U.S., including Atlanta, Dallas Love Field and Houston Hobby.
  • Oklahoma City’s Will Rogers World Airport opened a new concourse, complete with four gates, as well as a new security checkpoint last week. The facilities are the latest piece of a $90 million multi-phase expansion of the airport that began in 2019.

Edward Russell

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Routes and Networks

The Lufthansa Group’s budget arm Eurowings is making a play for the Swedish market as the competitive landscape continues to shift in Europe. The move realizes the German group’s long-held aim to capture a larger share of the Scandinavian market but comes as other carriers also see opportunities in the region as Norwegian Air and SAS continue to struggle.

From March, Eurowings will offer nonstop service from Stockholm’s Arlanda airport and 20 European destinations, including sun runs to Alicante, Faro and Nice, as well as more traditional destinations Berlin, Birmingham and Copenhagen. The airline will initially base 150 crew members and five Airbus A320s at Arlanda.

“We have done our homework and responded quickly to new customer needs and requests,” said Eurowings CEO Jens Bischof last week. “We are convinced we will soon also attract many Swedish vacationers and business travelers with our cutting-edge services.”

The Lufthansa Group has long had its eye on the Scandinavian market. For years, those overtures took the form of a possible acquisition of SAS and, according to reports in 2016, its integration into Eurowings. Nothing came of those plans with SAS remaining an independent carrier and fellow Star Alliance member.

The crisis, however, has driven a dramatic change in Nordic air service. Norwegian has retrenched to less than half its pre-crisis size with a focus on just its home market. And SAS has removed 30 aircraft from its fleet and accelerated the retirement of its 24 remaining Boeing 737s in favor of A320neo-family jets. These cuts at the region’s two largest carriers — plus pandemic travel restrictions — have driven a dramatic decline in available seats on flights to, from and in Swede. Schedules show them down 51 percent in September compared with 2019, and nearly 60 percent for the full year, according to Cirium data. For comparison, European seat capacity is only down 35 percent in September and nearly 48 percent for the year.

Ryanair also sees opportunities in Scandinavia. Europe’s largest carrier will open a new base at Stockholm Arlanda with initially two 737s in October. The move comes almost two years after Ryanair closed a base at Stockholm’s Skavsta’s airport due to the grounding, and resulting delivery delays, of the 737 Max. In July, CEO Michael O’Leary said the pandemic has created the largest growth opportunity in his career for the airline with Sweden one such opportunity where “both SAS and Norwegian are in chaos.”

And a day after Eurowings’ announcement, Ryanair unveiled plans for new domestic service between Stockholm and Skellefteå on the Gulf of Bothnia. Flights will begin in December.

EasyJet, which rebuffed a takeover offer from fellow discounter Wizz Air earlier in September, also has named Sweden — and Scandinavia more broadly — as a place where it plans to invest in a “network of key cities,” including opening new bases.

Eurowings, like every carrier in Europe, has its work cut out for it. But the airline is ahead of other Lufthansa Group airlines in restructuring and, as a result, is recovering quickly. In August, group CEO Carsten Spohr said Eurowings is already hiring staff again and is likely to recover to — and expand beyond — its pre-crisis fleet ahead of other group airlines.

“Eurowings has a pan-European ambition,” Bischof said in March. Stockholm is Eurowing’s second base towards this goal since the crisis began; the first is one in Prague that opens in October.

Edward Russell

Route Briefs

  • West Palm Beach is Avelo Airlines‘ fifth destination from its new New Haven, Connecticut, base. The carrier will connect the cities from December, a month after it first lands at the coastal Connecticut airport.
  • British Airways is hinting that it expects strong leisure travel demand next summer. The airline will connect two destinations in the Azores — Ponta Delgada and Terceira — to its London Heathrow hub seasonally from July through September 2022. Both Azorean island destinations are served by Ryanair from London Stansted, Cirium schedules show.
  • Budget carriers aren’t the only ones with eyes on Stockholm. Finnair is expanding its new longhaul base at Arlanda with new nonstops to Los Angeles from November, and New York JFK from December. The routes complement previously announced routes between Stockholm and Bangkok, Miami and Phuket that begin this fall. The additions fill what Finnair sees as a gap in the Swedish market following cuts at Norwegian and SAS.
  • Latam Airlines Group, citing efficiencies gained through its U.S. Chapter 11 restructuring, is doubling down on Brazil amid overtures from Azul to acquire its Brazilian subsidiary. In the first quarter of 2022, Latam will add seven new domestic points to its map: São Paulo Guarulhos to Bauru, Cascavel, Caxias do Sul, Juiz de Fora and Presidente Prudente; Brasilia to Sinop; and Recife to Fernando de Noronha. The airline plans to serve 56 airports in Brazil by end-March, or 30 percent more than two years earlier. And if that was not enough, Latam could add up to another 10 new destinations plus 30 more new routes in 2022.

    And to the south, Latam is looking to return to Buenos Aires’ Aeroparque airport and Mendoza in Argentina. The airline is seeking authority to serve Aeroparque from Lima, Santiago and São Paulo Guraulhos, and Mendoza from Santiago and São Paulo beginning in October. Latam ceased operations at the close-in Buenos Aires airport when it shut its Latam Airlines Argentina subsidiary in 2020; Mendoza flights were suspended due to the Covid-19 pandemic the same year.
  • Austin is ground zero for one of the hottest competitive fights in the U.S. today. The airport’s largest carrier, Southwest Airlines, is adding fuel to the fire with six new routes between the Texas capital and Amarillo, Charleston, Columbus, Midland/Odessa, Puerto Vallarta, and Ontario from March 2022. The additions follow a similar build up by American Airlines, as well as smaller expansions by other carriers. Outside of Austin, Southwest will add two more new routes: Albuquerque to Burbank from January, and Denver to Cozumel from March.
  • WestJet‘s budget arm Swoop is doubling down on sun runs this winter. Beginning in November and December, the carrier will connect Edmonton and Los Cabos; Toronto and both Kingston and Los Cabos; and Winnipeg and Orlando Sanford. The routes follow the easing of re-entry restrictions for Canadians traveling internationally.
  • Speaking of European leisure travel, Transavia France will connect Paris Orly to Cabo Verde this winter. The Air France-KLM budget arm will fly the route from December through March, and compete with Cabo Verde Airlines.
  • U.S. airlines with sought-after international air service rights can breathe a sigh of relief and wait a little bit longer before they need to resume flights. The Department of Transportation has extended a startup and dormancy waiver to March 26, 2022, from October 30. Without a waiver, carriers’ holding these rights must operate them within 90 days of the deadline or risk losing them. Flights to China, Cuba and Tokyo’s Haneda Airport are all covered by the waiver.

    Separately, the DOT will award 16 peak afternoon and evening “runway timings” — in other words slot pairs — at Newark Liberty International Airport to a single low-cost carrier. The move follows a successful lawsuit by Spirit Airlines to release the slots that were previously held by Southwest. The DOT did not provide a timeline for the release though they are likely to award the slots in time for the Summer 2022 travel season.

Edward Russell

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Sky Money

  • Lufthansa Group has launched a €2.1 billion ($2.5 billion) capital increase. Proceeds will repay the €1.5 billion Silent Participation I from the German government’s Covid-19 stabilization package and boost liquidity. In addition, citing indications of a “sustained demand recovery” and strong cargo revenues, the group said it intends to repay the remaining €1 billion Silent Participation II by year-end — fully repaying the German government’s stabilization measures. With the launch, Lufthansa said it anticipates an operating profit in the third quarter after strong demand in July and August. In addition, the group outlined plans to take delivery of roughly 30 aircraft annually going forward with half leased to lower upfront capital expenses.
  • Air New Zealand is losing up to NZ$80 million ($57 million) a month from the combined impact of national travel restrictions in New Zealand and the suspension of the trans-Tasman travel bubble with Australia. The losses include any benefit from New Zealand’s wage subsidy program. To offset the losses, Air New Zealand has or plans to draw NZ$465 million from its NZ$1.5 billion Crown standby loan facility. The airline has not provided forward capacity or financial guidance.
  • After more than a year of work, Gol has wrapped up its short-term debt restructuring program. The airline has extended the maturity of its reais 1.2 billion ($227 million) short-term notes due in 2024 by more than three years, or until 2027. In a statement, Gol CEO Richard Lark claimed that the airline has achieved “largest balance sheet deleveraging among its peers” with the transaction. Competitor Azul has also pursued out-of-court options to restructure its debt and commitments, while Latam Airlines Group has used the U.S. Chapter 11 bankruptcy process to cut its liabilities.
  • Not all the news was bad for Qantas last week when regulators killed its planned joint venture with JAL. Investor sentiment in the carrier proved strong with its A$500 million ($365 million) unsecured bond issue coming in six-times oversubscribed. The debt carries a 3.15 percent coupon. Proceeds will be used to refinance Qantas’ A$300 million unsecured issue that carried a 7.75 percent coupon, and boost liquidity.

Edward Russell

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State of the Unions

American Airlines regional carrier Piedmont could have a strike on its hands, if its flight attendants vote to authorize a labor action next month. Piedmont’s flight attendants are expected to vote on whether to authorize a strike next month after contract talks collapsed.

The Association of Flight Attendants (AFA), which represents the regional’s cabin crews, said mediated talks stalled after three years of negotiations, and frustrations are mounting. Management’s offer did not raise pay enough and, when coupled with increased health care costs, actually could result in lower wages.

“We kept the planes flying throughout the Covid-19 pandemic and saved Piedmont and the entire American Airlines Group through the Payroll Support Program, which helped American with billions of dollars in labor costs,” said Keturah Johnson, AFA Piedmont president. “The thanks we get is management demanding concessions.”

“We are actively engaged in contract conversations with the AFA to ensure that our team members feel supported and valued and look forward to getting back to negotiations later this month,” a spokesperson for Piedmont said.

If the parties do not return to the negotiating table, the National Mediation Board could call for a 30-day cooling off period before a strike. “This must stop,” Johnson added. “Piedmont flight attendants cannot afford to work at Piedmont.”

Madhu Unnikrishnan

Cargojet Pilots Join ALPA

An overwhelming majority of Cargojet‘s 300 pilots voted to join the Air Line Pilots Association (ALPA). And immediately, the union raised an issue with management.

“Normally, we would start a new relationship with the management team by discussing how we can work together collaboratively to advance our mutual objectives going forward,” ALPA President Joe DePete said. “However, Cargojet management wasted no time in demonstrating their unwillingness to be a productive partner in the airline’s success and left us no choice but to fiercely defend the rights of ALPA’s newest pilot group.”

At issue is the fate of 23 probationary pilots, whom ALPA said were unfairly terminated even as the carrier continued hiring. The union last week filed a complaint with the Canada Industrial Relations Board alleging the action violated Canada’s Labour Code. The union also has asked the board to prevent Cargojet from disciplining ALPA members who supported the union’s action.

“Not only will we continue protecting the careers of pilots and their collective agreement, but we will also aggressively pursue the reinstatement of those 23 pilots,” said Tim Perry, president of ALPA Canada.

Madhu Unnikrishnan

Atlas Pilots Agree to New Contract

Atlas Air and its 2,500 pilots implemented a new joint collective bargaining agreement, the last significant milestone in the merger of the cargo carrier with Southern Air, which Atlas acquired in 2016.

Pilots, represented by the International Brotherhood of Teamsters, will get pay raises and other benefits starting next month. The new five-year agreement could raise pilot pay by between 28-53 percent, said Cowen & Co. analyst Helane Becker.

“Our company has long prepared for this investment in our pilots and has factored these new terms and conditions into customer contract negotiations,” Atlas CEO John Dietrich. “We continue to see strong demand for our aircraft and services as we expand and extend customer agreements.”

Madhu Unnikrishnan

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Boeing’s annual Commercial Market Outlook (CMO) paints a rosy picture for air transport’s 20-year growth prospects, pandemic notwithstanding. In fact, Boeing predicts now that after 2024, airline traffic will return to the level the company had forecast for that year before pandemic struck.

“We’ve lost about two years of growth,” Vice President of Commercial Marketing Darren Hulst told reporters on Monday in advance of the CMO’s release. “There’s no getting around it.” But after that choppiness subsides and the industry regains equilibrium, the return to growth will be fast. Unlike in other airline industry crises, the fundamentals underpinning the industry remain strong. Global economic growth already has resumed and will continue to expand. “The recovery accelerates pretty quickly next year and into 2023,” Hulst said.

Instead, the constraints on air travel are regulatory. Travel restrictions remain in place around the world, hampering the return of air travel. The deployment of vaccines against Covid-19 is uneven worldwide, leading to a patchwork of regulations that further complicates air travel.

The domestic air travel recovery is well underway. Regional air travel — intra-Europe, and intra-Asia, for example — is starting to resume and will be the next area of growth. In line with previous forecasts, Boeing expects longhaul international travel to return last, and forecasts a return to 2019 levels by the end of 2023 or the beginning of 2024. Passenger traffic is expected to grow by 4 percent per year. “This is fundamentally a growth market,” Hulst said.

Another trend fueling this growth projection is demographic. Increasing urbanization in emerging economies will stimulate travel, as people are likely to fly to return to their home regions. Rising incomes also will allow for more discretionary spending, and people will want to “explore the world,” Hulst said.

The CMO forecasts a $9 trillion aerospace market over the next 20 years, broken down into $3.2 trillion in commercial aircraft, $2.6 trillion in defense and space programs, and $3.2 trillion in the services market. The world’s airlines will need more than 43,000 new aircraft to fuel expected growth over the next 20 years, resulting in a doubling of the global in-service fleet from 25,000 aircraft today to about 50,000, Hulst said.

The market for new aircraft will be split almost evenly around the world, with Europe, North America, China, and Asia excluding China accounting for about 20 percent each. The rest of the world accounts for the remaining 20 percent. “I’ve never seen a more balance market,” Hulst noted.

Boeing expects single-aisle aircraft to lead the market. Of the 43,000 aircraft the world will need, 33,000 will be single-aisle jets, just under 8,000 will be widebodies, 2,400 will be regional jets, and about 1,000 will be dedicated freighters. In terms of single-aisle jets, airlines will focus even more on fleet and network flexibility, which could mean more market share for larger single-aisle aircraft, like the Boeing 737-10 or the A321, which can complete longer missions. The widebody market, meanwhile, will coalesce around smaller, longer-range aircraft, like the 787 or A350 families, Hulst said.

In the short term, however, the used aircraft market could heat up. Airlines have parked more 4,000-5,000 aircraft in response to the pandemic. About 1,500 are expected to be fully retired. The balance are being recalled as demand warrants and could start changing hands as airlines rationalize their fleets. Others could be slated for freighter conversions.

Freight will be an area of considerable growth, but the market is expected to stabilize soon. Now, airlines are busy adding freighters or operating preighters, in the absence of belly-hold capacity. But as international routes begin to recover in 2024, the demand for conventional large freighters, with strengthened floors and cargo doors, will subside. Cargo demand, however, is expected to continue growing, fueled by explosive demand for e-commerce. This will result in more growth in the freighter-conversion market. “Express [e-commerce] markets don’t need the same type of densities as longhaul freight,” Hulst said. “Lower densities will require more and smaller aircraft.”

Hulst said Boeing expects the conventional jet — gas turbine — engines to be dominant over the next 20 years as new technologies likely will not be mature enough to replace jets on the in-service fleet. Boeing is optimizing its new aircraft to run on sustainable aviation fuels by the end of the decade. “Sustainable aviation fuels have become a critical part of our sustainability goals,” Hulst said.

Madhu Unnikrishnan

Air Lease Corp. Bullish on Post-Pandemic Market for Lessors

Lessors should get out of the game of financially supporting airlines, now that the industry is over the initial shock of the pandemic. Instead, further support should come from governments, Air Lease Corp. Chief Financial Officer Gregory Willis said last week at a pair of financial conferences.

For the first year of the pandemic, ALC its peers offered deferments and other accommodations to airlines struggling with an almost complete collapse in demand. But now, 18 months in, airlines have taken the necessary steps to emerge from the crisis by cutting headcount and other costs and rationalizing their fleets, and many around the world benefited from government support. Given that, it is unlikely that ALC will offer further accommodations, Willis said, while noting that most of its customers are on a stable footing.

The exception is Vietnam Airlines, which ALC also noted in its last earnings call. The lessor has several “young” airplanes at the carrier, but Willis said it is confident the deferments will be resolved soon, as the airline has the support of its government.

Another thing ALC is confident of is the industry’s recovery. “The pandemic has proved that air travel is vital to the economy,” Willis said. Lessors stand to benefit from both from airlines adding new aircraft to support the growth in air travel expected when the pandemic recedes and from what Willis thinks will be a large replacement cycle, as airlines rid their fleets of older, less efficient aircraft. And airlines with balance sheets battered by the pandemic are more likely to lease aircraft than they were in the past. In fact, Boeing in its 20-year forecast expects about half of the global fleet will be leased.

Echoing Boeing, Willis pointed out that this crisis is unlike past airline industry crises. The global economy remains strong and is back to growth. Airlines reacted quickly by slashing routes, cutting costs, and parking aircraft. And governments stepped in with support soon after the crisis began. “But it will not be a straight line to recovery,” he said, pointing to the spread of the Delta variant.

Supply could be an issue, however. Airframers slashed production during the pandemic, which means 1,600 aircraft that were expected to be built were not, Willis said. Meanwhile, about 1,500 aircraft are expected to leave the fleet. Narrowbodies are likely to be the most constrained, but demand for widebodies could increase too. When traffic returns, airlines will resume operating widebodies on longhaul routes. A single-aisle aircraft used on longhaul routes can’t generate as much revenue as a widebody, Willis said.

Airbus has said it will raise production rates, especially for single-aisle aircraft, but Willis said the manufacturer could bump into issues with its suppliers to attain its planned rates. Meanwhile, Boeing is plagued with delivery delays for its 787 aircraft, a backlog of Maxes, and production problems on the 777-10 program. “It’s tough there,” Willis said of Boeing.

Madhu Unnikrishnan

  • Avianca has terminated a lease agreement with BOC Aviation for 10 new Airbus A320neos as part of the airline’s U.S. Chapter 11 bankruptcy reorganization. The deal dates to January 2020 — two months before the the Covid-19 pandemic shut down most air travel, and four months before Avianca entered Chapter 11. The A320neos were scheduled to begin arriving in 2023. To date, Avianca retains outstanding orders for 88 A320neos and two Boeing 787s, however, it continues discussions with Airbus and Boeing over the future of these commitments.
  • Less than four months after launching flights, David Neeleman’s latest venture Breeze Airways has ordered more aircraft. The airline upped its commitments for the Airbus A220 by 20 to 80, with the first A220-300 due on October 26. In August, Neeleman told Airline Weekly that it plans to introduce its first A220 by the beginning of April 2022 on flights two-plus hours in length. Breeze flies 13 used Embraer E-Jets currently.
  • Brazil has signed off on Latam Airlines Group‘s plan to base Boeing 787s in the country. The group’s local subsidiary Latam Airlines Brasil will add four 787-9s to its fleet by December with the aircraft debuting on its flights between São Paulo Guarulhos and Madrid that month. The 787s replace Airbus A350s that Latam removed as part of its U.S. Chapter 11 bankruptcy restructuring. At the end of the year, the group anticipates a fleet of 28 787s.

Edward Russell

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