Issue No. 830

Hope for the Holidays

As the Delta Variant Depresses Demand, Airlines Pin Their Recovery Hopes on the Holidays

Pushing Back: Inside the Issue

It was a good summer for airlines in many parts of the world, all things being relative. Leisure demand came back as people who had been locked down for months rushed to take long-delayed summer vacations. And think back just over a month ago — airlines were confident that business travel would resume in September, as it usually did before the pandemic.

We know how that story went. The virus that causes Covid-19 had other plans, and its Delta variant laid many parts of the world low. Companies are delaying when they plan to reopen their offices. Conferences and trade shows are being cancelled or going virtual (although some persist). Airlines that were bullish on the fall now have pushed their forecasts for profits back to the new year. But they remain hopeful about the yearend holidays and say bookings so far remain resilient.

Leisure demand will lead the way out of the pandemic. That is conventional wisdom at this point. And airlines are making structural changes to accommodate that shift. Whether it's by prioritizing their budget subsidiaries, as Japan Airlines is doing, or by cementing pandemic-era leisure destinations to their route maps, like most U.S. carriers, airlines are taking the lesson to heart.

The Airline Weekly Lounge Podcast

This week in the Lounge, Edward Russell and Madhu Unnikrishnan discuss why Philippine Airlines Chapter 11 bankruptcy surprised no one. The two also discuss Porter Airlines' restart, and Ryanair’s latest fight with Boeing. Despite some deep reporting, Madhu was unable to discern whether Mr. Porter, the Canadian carrier’s raccoon spokescritter, got a refresh when Porter updated its aircraft cabins. For a full archive of the podcast, go here. A new episode drops every week.

Weekly Skies

There’s nothing like an unsolicited takeover bid to get airline management moving. Fresh off one such rejected offer, reportedly from Wizz Air, EasyJet has unveiled plans to capture more share from legacy competitors and become a “local airline” brand in many other destinations across Europe.

London-based EasyJet’s growth plan has three legs. One, leverage and expand its leading position at slot-constrained airports in Western Europe — for example at Amsterdam Schiphol, London Gatwick and Paris Charles de Gaulle — versus legacy competitors. Two, build depth in destinations in places like southern Italy, Portugal and Spain in order to become a “local airline” in the eyes of local officials and tourism authorities. And three, add new focus cities in markets where it has a smaller presence, including Belgium, Ireland and Norway.

This growth, funded in part with proceeds from the roughly £1.2 billion ($1.7 billion) rights issue that launched on September 9, will “protect and strengthen EasyJet’s long‐term positioning in the European aviation sector,” the airline said.

And protecting its competitive position is very much top of mind for EasyJet. European budget leaders Ryanair and Wizz have both outlined ambitious growth goals fueled by the hundreds of aircraft they have on order. They too see an opportunity in the pandemic retrenchment of the continent’s major airline groups — Air France-KLM, IAG and Lufthansa Group. In July, Michael O’Leary, CEO of Ryanair, went as far as to say his carrier is the “only airline” capable of fully taking advantage of recovery growth opportunities.

EasyJet’s main strength is its competitive positions at many of key Western European airports. In 2019, the airline was number one at Gatwick and Milan Malpensa in terms of departures, and number two at Charles de Gaulle and Schiphol, according to Cirium schedule data. Slot limits at these airports make Air France, Alitalia — soon to be Italia Trasporto Aereo (ITA) — British Airways and KLM greater competitors to EasyJet than budget carriers. But outside these and other key markets, EasyJet’s ability to grow is limited without more planes.

According to a July presentation, EasyJet forecasts a fleet of 331 aircraft by September 2024, which is down from 342 aircraft at the same time in 2020 but up from a pandemic low of 307 planes. Gauge growth — 186-seat Airbus A320neos replacing 156-seat A319s and 180-seat A320s — will allow the airline to add seats and capture more share in key markets through 2024. But adding new routes and focus cities becomes a matter of robbing Peter to pay Paul without additional aircraft.

Ryanair and Wizz do not face that problem. Both have robust orderbooks that will allow the former to grow to roughly 600 Boeing 737s and the latter to 246 A320 family jets by 2026. Ryanair had 451 aircraft and Wizz 141 at the end of June. EasyJet has 101 Airbus A320neos and A321neos on order, plus options and purchase rights for another 78 A320neo family jets.

Adding planes and growing an airline requires capital. EasyJet had £2.9 billion in unrestricted cash at the end of June and, if proceeds from the rights issue come in as forecast, that number could jump by more than 41 percent to £4.1 billion. The airline also disclosed a new $400 million senior secured revolving credit facility.

Edward Russell

Latam Seeks More Time for Restructuring Plan

The market got a look at Latam Airlines Group‘s expectations for the next five-years in its latest request for more time from a U.S. bankruptcy court. And they’re not great: Revenues, margins and capacity are not forecast to recover until 2024 as the Latin American travel recovery lags the rest of the world. That’s at least six to 12 months later than most other markets.

Despite the pessimistic outlook, Latam feels it is sitting in a good place in terms of its Chapter 11 restructuring. The carrier has met many of it cost cutting targets and is working on the “final elements” of its fleet transformation, which includes annual cash savings of 40 percent compared to two years ago, according to a July creditor presentation it submitted to the court on September 9. And it has received and is reviewing “several” proposals for more than $5 billion in exit financing. As a result, Latam is seeking yet one-month extension to its exclusive period to file a reorganization plan with the court, pushing the deadline back to October 15.

In terms of the fleet plan, Latam plans to emerge from Chapter 11 with 286 aircraft, or 54 fewer than when it filed in May 2020. This includes reductions to its Airbus A319, A320 and Boeing 767 fleets. Latam is also removing all of its Airbus A350s in favor of a widebody fleet made up of Boeing 767s, 777s and 787s. By 2026, the carrier plans to operate 331 aircraft, including the addition of 28 new narrowbodies.

Latam’s five-year plan bets on traffic from partner Delta Air Lines to help speed its recovery. It anticipates a 12 percent bump in long-haul traffic from the U.S. from Delta that will mostly offset a forecast 15 percent structural reduction in long-haul business travel as a result of the Covid-19 pandemic. Latam expects domestic markets in Brazil and Chile to recover to pre-crisis traffic levels by mid-2022 followed by recoveries in Colombia, Ecuador and Peru. In August, the airline’s Brazilian capacity was already at 77 percent of 2019.

“We will emerge from this process as a highly competitive and sustainable group of airlines, with a very efficient cost structure,” Latam CEO Roberto Alvo said in a statement. He added that the group would maintain its “unparalleled network and connectivity” in “all the markets it serves” — a comment that could be read as a subtle jab at Azul who has made public overtures to acquire Latam’s domestic Brazilian business.

Separately, Latam’s joint venture with Atlanta-based Delta took an important step forward apart from the restructuring last week. The two airlines reached an out-of-court settlement with Chile’s competition court for approval of their strategic partnership. The Chilean National Economic Prosecutor’s Office — the authority with final say on approval in the country — said the agreement is “sufficient to mitigate the anticompetitive risks.” Chilean objections were a fatal stumbling block for Latam’s previous proposal to form a joint venture with American Airlines.

Edward Russell

JAL Raises $2.7 Billion for Budget Carrier-Focused Transformation Plan

Japan Airlines’ plan to return to profit by 2023 is getting a boost with a deal to raise up to ¥300 billion ($2.7 billion) in new capital to fund a transformation of its business.

That plan, called the Medium-Term Management Plan, sees the Tokyo-based carrier focus on growing its budget subsidiaries Jetstar Japan, Spring Airlines Japan and Zipair, while shrinking — or “optimizing” in corporate-speak — its full-service JAL brand. Capital will go to growing the discounters in each carrier’s target market: Jetstar in domestic Japan, Spring between Japan and China with an eye on inbound Chinese visitors, and Zipair on long-haul leisure travelers to Hawaii, Southeast Asia, and the Pacific Coast of North America. At the same time, JAL will see its fleet of large widebody aircraft shrink and a focus on resuming only “highly-profitable” routes with an eye towards its strategic partners American, British Airways, Finnair, Iberia and Malaysia Airlines.

Legacy carriers around the world face similar pressures as JAL. The leisure-first recovery has benefitted low-cost carriers and reinforced the strength of the model in the airline industry. Take Mexico for example, where budget carrier Volaris has used legacy carrier Aeromexico’s Chapter 11 bankruptcy restructuring in the U.S., and the demise of mid-market Interjet to accelerate its domestic growth plans and capture more share — a strategy that has proven successful thus far. Similar trends are underway in Europe and elsewhere around the world. This confirmation of the strength of the budget model has numerous legacy carriers looking for ways to grow beyond simply cutting costs. For example, British Airways is weighing whether to shift its entire London Gatwick operation to a new low-cost subsidiary.

JAL is not immune to these pressures and, as it acknowledged in May, its transformation plan aims to “address the changing market trends.”

To do this, JAL needs capital. The new financing is split between up to ¥200 billion in subordinated term loans split into two tranches, and up to ¥100 billion in hybrid bonds. Both loan tranches are set to price by the end of November, with maturities in 25 years. The carrier has not set a closing date for the bonds but the maturity will be 37 years.

The airline will funnel proceeds from the financing directly into its transformation plan. The top priority is to pay for the delivery of eight new Airbus A350s due by March 2024, which is the end of JAL’s 2023 fiscal year. The carrier already flies 10 A350-900s domestically and plans to introduce the A350-1000 on European and U.S. routes — where it will replace Boeing 777s — in 2023. JAL plans to retire 24 777s leaving it with just 13 aircraft by March 2024. The airline had outstanding orders for eight A350-900s and 13 -1000s at the end of August, according to Airbus orders and deliveries data.

Other uses for the new capital include investment in a new revenue management system, repaying debt, and to boost working capital.

JAL forecasts that leisure demand, both domestic and international, will recover by March 2024. Business travel, however, is expected to take longer to return. Despite the slower corporate travel recovery, the airline anticipates returning to pre-crisis earnings before income and taxes levels of roughly ¥170 billion by its 2023 fiscal year.

The carrier lost ¥57.9 million on revenues of ¥133 million during the three months ending in June. JAL ended the quarter with ¥408 billion in unrestricted cash and cash equivalents. Passenger traffic during the quarter was only 17 percent of two-years earlier, and capacity stood at 44 percent of 2019 levels.

Edward Russell

Philippine Airlines Aims for Speedy Pre-Packaged Bankruptcy

Philippine Airlines (PAL) hopes to get out of Chapter 11 quickly with a plan ready to go when a U.S. bankruptcy judge heard its case last week. The pre-packaged plan follows months — years really — of talks with creditors to avoid the lengthy process other carriers have faced.

The Manila-based carrier has agreements in place with nearly all of its creditors, in addition to the agreed upon plan for its exit, it said in bankruptcy court filings. This will allow for, in the words of PAL Chief Financial Officer Nilo Thaddeus Rodriguez, a “swift and efficient reorganization” that could wrap within 180 days court documents show.

Such a timeline would be speedy for an airline PAL’s size. For comparison, larger Aeromexico, Avianca and Latam all continue to operate under Chapter 11 protection more than a year after their own respective filings. Only Avianca has a path to exiting bankruptcy at this time after filing a reorganization plan with the court in August, though Latam believes it is close to a plan (see above).

PAL’s bankruptcy comes as a surprise to few. The airline has undergone several out-of-court reorganizations that managed to improved revenues but not necessarily profitability. Prior to the pandemic in early 2020, executives told staff that the carrier needed to “find a way to profitability, reduce its debt, and achieve a higher level of competitiveness,” in order to “survive.”

Those comments came after almost a decade of budget competition eating its lunch. The domestic share of PAL, and its subsidiary PAL Express, shrank by 12.5 points to 29 percent from 2012 to 2019 — a period when overall domestic traffic grew nearly 44 percent to 29.5 million flyers — according to data from the Philippines’ Civil Aeronautics Board. Over the same period, market leader Cebu Pacific’s share shrank two points to 44 percent while Philippines AirAsia’s share grew by eight points to 18 percent.

At the end of August, PAL had just $28.6 million in unrestricted cash on hand, court documents show. That is paltry for an airline its size with 95 aircraft at the end of June, and a workforce of more than 3,000 after already cutting its staff by 32 percent. In a filing, adviser Seabury called the level “dangerously low,” and said PAL should have “not less” than $300 million in unrestricted cash at any given time.

PAL’s restructuring plan calls for returning 21 excess aircraft — a fleet reduction of nearly a quarter — and cutting $2.1 billion in aircraft-related and other obligations from its balance sheet. In addition, it has lined up $505 million in debtor-in-possession financing from shareholder Buona Sorte Holdings. And the airline has term sheets for another $150 million in exit financing.

On the fleet front, PAL is seeking to reject 19 leased aircraft. This includes two Airbus A320s, three Airbus A321s, six Airbus A330-300s, three Airbus A350-900s — half of its A350 fleet — two Boeing 777-300ERs and one de Havilland Dash 8-400. The airline and lessors have agreed to transition the balance of its leased fleet — 66 aircraft — to power-by-the-hour agreements to further reduce expenses.

“We move forward with renewed confidence, as today’s actions enable us to continue serving our customers and the Philippine economy long into the future,” said PAL President and Chief Operating Officer Gilbert F. Santa Maria in a statement.

Edward Russell

U.S. Airlines Hope for Holiday Boost After Delta Variant Bite

The U.S. airline industry has pivoted en masse away from what has proven to be an overly rosy outlook for the recovery this fall. Hopes for a return of business travelers were dashed by delayed office returns that, coupled with the seasonal slowdown in leisure travel, has carriers looking ahead to the end-of-year holidays for a boost.

Airlines heaped blame for the slowdown on the Covid-19 Delta variant. Rising case counts took down August and September numbers, with all but Delta Air Lines forecasting continued weakness until the November and December holidays. Most carriers now forecast a loss in the third quarter — a difficult reality to be faced with after optimistic profit outlooks in July.

“I don’t think the variant changes much of anything,” Delta CEO Ed Bastian said of the recovery at the a Cowen investor conference last week. “The variant is forcing us all to realize this is a serious disease virus that we have to deal with. And we’re dealing with it probably on an even faster pace in terms of getting people vaccinated, the mandates that are coming out.”

Bastian added that he expects the variant has only delayed the recovery in business travel by roughly 90 days, or into the fourth quarter. Corporate demand stands at around 40 percent of 2019 levels, unchanged from July. Delta previously forecast an inflection point after Labor Day.

United Airlines Chief Commercial Officer Andrew Nocella reiterated Delta’s outlook on an at least 90-day delay in the return of business travelers. Speaking at the conference, he said the inflection point was delayed by at best three months and at worst to early in the new year.

But fewer business travelers mean airlines are again pulling back schedules. Delta, Southwest Airlines and United Airlines all revised down their capacity plans for the second half of 2022, while American expects third quarter numbers to come in at the low end of its previous guidance, or at roughly 80 percent of 2019 levels. Even discounter Frontier Airlines that reaped an outsize benefit from the leisure-first recovery has cut its schedule for the third quarter after being the first to raise alarms over the Delta variant.

The decidedly poor outlooks have carriers looking for something of a holiday gift — if not a miracle — this November and December. Executives speaking at the conference were nearly unanimous in saying early leisure bookings for the Thanksgiving, Christmas and New Years holidays are at or above pre-crisis levels.

“Even with [the] uncertainty … our book-to-business for the holidays continues to be very strong,” said American Chief Financial Officer Derek Kerr.

Robust pent-up demand, to use the popular pandemic turn of phrase, does not translate to profits for airlines. United was forced to recant its previously bullish profit forecast for the second and third quarters to losses as a result of the Delta variant slowdown. Frontier, Hawaiian Airlines, JetBlue Airways and Southwest will also post September quarter losses after either forecasting breakeven results or declining to guide altogether in July. And Alaska and Delta appear on track to report profits, albeit at lower levels than previously hoped.

Missing from these guides was the imminent expiration of the last tranche of federal payroll support on September 30. The three tranches of funds have covered the majority of airlines’ labor costs — in most cases their single largest expense line — since the pandemic began in March 2020. No executive, nor Cowen Airline Analyst Helane Becker, mentioned the potential fallout of this expiration in their comments last week.

But the labor situation today is starkly different to what it was a year ago when the first CARES Act was set to expire, let alone when the program began. American, Southwest and Spirit Airlines have all had operational difficulties as a result of staffing shortfalls this summer. The situation was so bad that both American and Southwest were forced to pare back schedules into the fall and winter.

These issues hiring mostly entry-level employees, as well as what has by and large been a robust return of travelers, has few worried of any furloughs or layoffs when payroll support protections expire. What it does mean is that there will increased pressure on airline management to either boost revenue or find cost savings elsewhere to return their bottom lines to the black.

Edward Russell

United’s Recovery Forecast Delayed by 3-4 Months Due to Delta Variant Surge

United had an excellent July, and the carrier expected August traffic to exceed July’s and for business traffic to return in September. Neither of those things have happened. The Chicago-based carrier now expects its forecasts to be delayed by three to four months.

“We some some significant glimmers of hope in July and where we were going to be in August,” Chief Commercial Officer Andrew Nocella said at the Cowen & Co. Global Transportation Conference last week. “The crystal ball has been a little foggy, to say the least.”

In an investor updated filed to the Securities and Exchange Commission, the carrier revised its third-quarter capacity guidance down slightly to be at least 28 percent off 2019.

The carrier is evaluating its fourth-quarter capacity plans now. Bookings have stabilized since Labor Day, and the “holiday story is largely intact,” Nocella said. United will, however, fly fewer flights in the trough between Thanksgiving and Christmas than it had originally planned, he added.

A fundamental problem is supply greatly outstrips demand, particularly during leaner months, Nocella said, adding that this is an industry-wide problem and not only for United. “We were on the right trajectory; however, the supply and demand issue is tough to overcome,” he said. Yields remain low as low-yielding leisure customers continue to fill aircraft. “The next quarter or so are going to be difficult.”

There are some bright spots, however. Leisure demand to European countries that reopened for tourism shows the strength of pent-up demand, he said, citing United’s recently launched flights to Greece and Croatia. United has added flights to African countries and to India, where visiting friends and relatives traffic has endured. The carrier expects next summer to reveal strong transatlantic demand. “We feel pretty bullish,” Nocella said.

Transpacific demand, however, lags and will continue to remain weak for the foreseeable future. Before the pandemic, United operated as many as 11 daily flights to China. Now, that’s down to a handful per week, mainly because of strict crew quarantine rules that require the carrier to stop flights in Korea for crew changes.

The carrier’s 52 Boeing 777s powered by Pratt & Whitney engines remain on the ground, after an engine containment incident earlier this year. United doesn’t now need the lift, but it could by next spring, if transatlantic demand forecasts hold. United still is conducting maintenance on those aircraft and has retained all the staff needed to operate them, so the grounding will continue to weigh on the airline’s CASM, Nocella said. Although United is working with Pratt, Boeing, and the FAA on a fix for the issue, Nocella did not offer a day for when the aircraft will return to service.

United will continue operating all-cargo flights on its widebodies, at least for now. The carrier had begun re-converting its preighters back to passenger operations, but Nocella said that has stopped. In fact, United just returned five passenger 777s to the cargo operation, he said. Cargo likely will remain an important revenue stream even after the pandemic, but “airplanes need to go where passengers want to go,” he said.

Madhu Unnikrishnan

Transat Hopes Revenue-Free Quarters Are Behind It

Transat CEO Annick Guerard hopes the worst of the pandemic is in the past. And while she’s optimistic about the beginnings of a recovery, she’s far from bullish. Last week’s results will “hopefully remain Transat’s last quarter with close to no revenue,” she told analysts on the company’s quarterly earnings call.

Transat is in the midst of a transformation, from package holiday operator to a national airline in Canada. The company exited the hotels business during the quarter and plans to sell its remaining assets and real estate later this fall. Package tours will remain a part of the business, but scheduled flights will take more prominence, as will flights across Canada.

The carrier also is transforming its fleet, getting rid of its remaining Airbus A310s and Boeing 737s, leaving it with just A321s and A330s. “As we expected, the A321neoLR proves to be exactly the versatile aircraft we need,” Guerard said. “It gives us operational flexibility and efficiency like we’ve never had before.”

The carrier also is working on new airline partnerships — this, after regulators shot down its planned merger with Air Canada — but Guerard declined to say which airlines but said news will be made public this fall, and that Transat will announce more than one partner. “We have strong assets to offer potential partners looking to increase their footprint between America and Europe and/or [southern destinations],” Guerard said. “And our approach is to start with simple bilateral agreements which will allow us to make quick wins while building a relationship of trust and this may lead this partnership to evolve into something more important and strategic.” 

The carrier slowly has been ramping operations back up. Leisure travel — Transat’s bread and butter —  started coming back this summer. The airline went from 10 weekly flights to 50 this month and expects to increase that to 70 next month. Domestic Canada routes recovered first, but Transat saw bookings to Paris and Faro, for example, start to return by later in the summer. Now that the U.S.-Canada air border has reopened, Transat is adding back transborder flights. Guerard said the carrier has restarted flights to about “90 percent” of its pre-pandemic destinations.

The booking curve remains short, Guerard noted, but that’s not a cause for worry. “We currently see good trends in the booking even if they tend to come in closer to departure dates than they used to,” she said.

Despite the rosy talk, the quarter was grim for Transat. The carrier lost CAD$98 million ($77 million) on just $13 million in revenue. But that’s not surprising. Transat’s latest quarter ended on July 31, but the carrier only resumed operations on July 30.

Madhu Unnikrishnan

In Other News

  • European authorities have signed off Italy’s €1.35 billion ($1.2 billion) capital injection into new national carrier Italia Trasporto Aereo (ITA). EU Antitrust Chief Margrethe Vestager said the funds were “in line with terms that a private investor would have accepted.” At the same time, the European Commission ruled that €900 billion in aid to beleaguered Alitalia was illegal, forcing the carrier or the carrier’s estate to pay back the subsidies. ITA, which the commission said is not responsible for its predecessor’s debts, will takeoff on October 15 with Alitalia closing its doors the day before.
  • While everyone is focused on what airlines are mandating staff get Covid-19 vaccines, Qantas is ready to take mandates one step further and require jabs for all passengers on its international flights. The airline has yet to offer details of the policy, which CEO Alan Joyce unveiled in comments to the Trans – Tasman Business Circle last week, except that it will apply to all international flyers. Qantas plans to resume long-haul flights in December after suspending most operations when Australia closed its borders to most non-citizens in March 2020.
  • WestJet budget arm Swoop and its flight attendants union have reached a tentative agreement, which now goes before the 200 employees for a ratification vote. If ratified, CUPE, the union, will have agreements in place with all three WestJet operating units, covering more than 4,000 flight attendants.

Edward Russell & Madhu Unnikrishnan

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Fleet

  • Archer Aviation’s electric vertical takeoff and landing (eVTOL) aircraft took one small — but critical — step forward toward FAA certification last week. The regulator approved the “G-1 Issue Paper” for the company’s Maker aircraft, a step that formally lays out the necessary airworthiness and environmental requirements for final certification. Archer continues to tout a 2024 entry-into-service timeline, which most in the industry doubt will happen. For example, the FAA awarded the G-1 Issue Paper for the 737 Max in 2014 and signed off on the jet (the first time) in 2017 — in other words, the process took a seasoned planemaker Boeing certifying updates to an existing airframe three years. Archer must certify an entirely new aircraft and propulsion system before the Maker will carry its first passengers. United Airlines and affiliate Mesa Airlines have commitments for up to 200 Maker eVTOLs.
  • Singapore became the latest country to re-certify the Boeing 737 Max last week, coming nine months after the jet resumed revenue flights after a nearly two-year grounding. The move allows airlines to fly the Max to and from Singapore, as well as the country’s namesake carrier — Singapore Airlines — to resume flying the six 737-8s in its fleet. SIA has another 31 737-8s on order.
  • Delta Air Lines is not done in the used aircraft market after closing deals for 36 used Airbus A350s and Boeing 737-900ERs in July. “You’re going to continue to see us do some things where there’s opportunity,” said CEO Ed Bastian at a Cowen & Co. conference last week. Opportunities to acquire used aircraft at advantageous prices is likely to stick around for a “couple of years,” he added. Delta has also converted 55 Airbus A321neo options to firm orders since the beginning of the year.
  • Air Lease Corp. has placed 10 Airbus A321neos with Spirit Airlines as part of the U.S. discounter’s growth push. Spirit will take the 10 aircraft from 2023-24. In addition, ALC has committed to sale-and-leasebacks of five A320neos from Spirit’s orderbook due in 2022.
  • It was an end of an era for Frontier Airlines when the carrier retired its last Airbus A319 last week. The A319 was the carrier’s entrée into the A320 family when it added the type in 2001. Prior to that, Frontier was an all-Boeing 737 operator. The airline is replacing its A319s with newer and larger A320neos and A321neos.

Edward Russell

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Routes and Networks

Southwest Airlines added 18 new cities to its route map during the pandemic, mainly to leisure-focused markets to capture as much of the depressed traffic as there was in the crisis. But, as it gears up for next year, the carrier is planning to shift its focus from network expansion to network depth in anticipation of the full recovery, Bob Jordan, executive vice president for corporate affairs and incoming CEO said.

Southwest expects to take delivery of 114 aircraft next year and with another 30-35 older Boeing 737s set to retire. The 80 or so net new aircraft will go toward rebuilding the schedule depth the carrier pulled down during the pandemic, Jordan said. It takes about 92 aircraft to operate the 18 new cities Southwest added as well as its growing Hawaii schedule, so the carrier requires the balance to add schedule frequencies, he said. “We are take 114 deliveries next year because it will take that plus more to recover the network,” Jordan said at the Cowen & Co. Global Transportation Conference last week. “We don’t have the network structure we had before Covid.”

The carrier may add “one or two” new cities next year, but it is focused on adding frequencies, particularly in the new markets, Jordan said. He didn’t rule out expansion into near-international markets, however. Leisure travel patterns have changed, with more passengers opting for vacations in nearby markets in Mexico and the Caribbean rather than longhaul trips, a change he thinks is likely to endure.

But most of this focus will be next year. The Delta variant has thrown a spanner into Southwest’s plans for the fall. Southwest had forecast fourth-quarter capacity to be back to 2019 levels, but now expects it to be down 5 percent from that year, the company said in a filing with the Securities and Exchange Commission. “We are hopeful that it has bottomed out in terms of its impact,” Jordan said of the Delta variant.

Southwest did have a busy summer, particularly in July, when demand came “sailing back,” Jordan said. But that presented its own set of challenges, with Southwest’s on-time performance plunging into the 60 percent-range. The main driver of the operational difficulties was labor: namely, a labor shortage. Although Southwest did not furlough any employees, it allowed workers to take extended leaves of absence. The carrier underestimated how long it would take to train and re-certify recalled workers and could not do so fast enough to meet spiking summer demand.

The carrier will need to hire “thousands and thousands” of employees in the next couple of years to support its fleet expansion, but it faces significant challenges. The labor shortage, especially for entry-level positions, is a headwind, and is particularly acute in some Southwest markets like Denver. Southwest finds itself competing with companies such as Amazon for some positions. In addition, Southwest’s hiring teams have been largely sidelined during the pandemic and are just starting to ramp back up.

In response to the shortage, Southwest has increased pay for some entry-level positions and is offering incentives and promotions to attract and retain talent. “This is the first time where the constraint is staffing,” Jordan said. “We are pulling out all the stops.”

Madhu Unnikrishnan

Alaska Turns Focus to the Golden State

Alaska Airlines spent the early months of the recovery building back its Seattle operation, which now has more capacity than it did before the pandemic began, but now will “roll down the coast” to focus on its network in California, two senior executives at the airline said at the Cowen & Co. Global Transportation Conference last week.

Alaska inherited a robust California operation when it acquired Virgin America but has since scaled back some of that carrier’s routes. Now, the Seattle-based airline will return its attention to the Golden State but not necessarily by adding new dots to the map.

Instead, echoing Southwest , Chief Financial Officer Shane Tackett said Alaska will spend the near term focusing on building network depth in California — and across its network. “We’ll launch fewer new cities in the next two years,” he said. Schedule frequency, particularly to support business traffic when it returns, is what the carrier will highlight. Other routes that could see more frequencies are flights to cities in Idaho and Mountain West destinations that saw huge spikes in population growth as Californians fled cities during the pandemic, Nathaniel Pieper, senior vice president for fleet an alliances said.

But it remains anyone’s guess when business travel will return. The reorientation to leisure travel is likely to last at least in the near term. Alaska will continue to prioritize flights to Florida and Mexico to satisfy that demand, Tackett said.

Alaska announced that it would enter the alliance last year, just as the pandemic struck, hitting international travel to the West Coast particularly hard. Between then and its formal entry this March, the airline has been building relationships with other member airlines and working on the technology to integrate into the alliance, Pieper said. “When international travel comes back, we will be ready to go,” he said. “Not just in Seattle, but in Los Angeles and San Francisco as well.”

The rise of the Delta variant has crimped Alaska’s outlook for the fall. Business travel that was forecast to return in September has not materialized. October will be a “lean month,” Tackett said, as leisure travel will dry up with schools reopening and business travel hasn’t returned to fill the void. It’s too early to tell yet if bookings for the yearend holidays will hold up, although Tackett noted there have been no significant cancellations yet for Christmas and Thanksgiving travel.

Madhu Unnikrishnan

Porter Lives to Fly Another Day

Canada’s Porter Airlines woke from its pandemic slumber with ambitions to become a much larger airline than it was before the crisis hit. The carrier relaunched flights last week after ceasing operations in March 2020 as demand collapsed for its domestic and U.S. routes.

Porter resumed flights on three of its busiest pre-pandemic routes from Toronto’s Billy Bishop Airport: Montreal, Ottawa, and Thunder Bay. Flights to Halifax, Moncton, Quebec City, and St. John’s are expected to resume in the next 10 days. U.S. routes will return on September 17, to Boston, Chicago Midway, Newark, and Washington Dulles. Initially, Porter will operate fewer frequencies — it flew up to 18 flights a day between Toronto and Montreal before the pandemic, for example — but will add flights back as demand warrants.

By October 6, Porter expects to operate 60 percent of its pre-pandemic capacity, CEO Michael Deluce told Airline Weekly. This underscores the recovery of the Canadian market, he said. Shortly after Porter suspended operations in 2020, demand collapsed to 5 percent of normal and remained there for “long stretches,” but has since recovered, according to Canadian airport data, to roughly 45 percent of its pre-pandemic level. Canada restricted travel between provinces for much of the pandemic, and had among the strictest rules for international arrivals. But domestic travel has resumed, and the air border with the U.S. has reopened. “Based on Canadian market-wide data, we are optimistic,” Deluce said.

Bookings are coming in at within four weeks of travel, which was not atypical for Porter even before the pandemic.

The competitive dynamic at Billy Bishop has not changed, despite Air Canada resuming its flights from the close-in Toronto airport on the same day as Porter. New entrant Connect, backed by Boston-based Waltzing Matilda Aviation, has said it plans to fly from Billy Bishop to the U.S. with the same type of de Havilland Dash 8-400s that Porter operates, but it has not firmed up its network. Deluce noted that of the cities he’s seen Connect publicly consider, only Boston would be a significant overlap.

Porter entered the pandemic with 1,500 employees, furloughing 90 percent of its staff as it suspended flights. It now has 900, which Deluce said can support the carrier’s plans to operate 60 percent of its pre-pandemic capacity. As demand returns and its network is restored, Porter will recall workers, and Deluce is optimistic that Porter will avoid staffing shortages that have plagued other airlines.

But Porter could soon hire even more people. The carrier has ordered up to 80 Embraer E195-E2s for its fleet — its first jet aircraft — which breaks down as 30 firm orders and purchase rights for 50 more. The new jets will start arriving in the second half of next year and enter revenue service shortly thereafter. Porter could grow to as many as 6,000 employees to support that fleet, Deluce said. The carrier is hiring pilots and upgrading existing pilots to operate the jets, he added.

The Embraers will be based at four focus cities: Toronto Pearson, Halifax, Montreal, and Ottawa. Deluce declined to identify initial routes but said Porter plans to expand into Western Canada, Mexico, the Caribbean, and further into the U.S. Porter now operates 29 Dash 8-400s on routes in Eastern Canada and to the eastern U.S.

The Dash 8s received a cabin refresh, including new slimline seats, lavatories, overhead bins, and paint jobs. “The temporary suspension allowed us to complete an overhaul of the interiors,” Deluce said. “It’s difficult to complete when you’re operating [the aircraft] day in and day out.”

Early in the pandemic, Porter raised CAD$135 million ($107 million) from the Export Development Bank of Canada. In June, it got CAD$270.5 million in loans through a Canadian government loan program that Air Canada, Transat, and Sunwings also availed themselves of. As demand returns, Deluce said he thinks Porter’s drawdown of that facility “will be minimized.”

Madhu Unnikrishnan

Route Briefs

  • British Airways will offer two more options to get to Alpine pistes this winter. The carrier will connect London City and Southampton to Salzburg from December through the winter. It’s BA CityFlyer affiliate will operate Embraer E190s on both routes.
  • Colombia is emerging as a focal point of airline expansion in South America. Copa Airlines is adding a second new destination in the country, Cucuta, with flights from its Panama City hub beginning December 6. Copa joins Avianca, JetSmart, Viva Air Colombia and Volaris in adding new Colombian routes in the recovery. By December, seats to and from the country are scheduled to be up 4.4 percent compared to the same month in 2019 — though schedules more than one or two months out remain in flux — Cirium schedule data show.
  • The Ryanair growth juggernaut continues with five new routes from Birmingham this winter. The discounter will connect the British city with Bucharest, Lisbon, Milan Bergamo, Shannon and Turin from October. Ryanair will base four aircraft in Birmingham and fly 28 routes from the airport.
  • Rouge is in the air! Air Canada‘s budget arm resumed operations last week after a pandemic hiatus. “As we emerge from the pandemic, we anticipate increased demand for vacation travel and from customers flying to enjoy overdue visits with family and friends,” said Jon Turner, president of Rouge and Air Canada’s vice president of inflight services. “Air Canada’s leisure airline is ideally suited to serve this market.” Rouge’s initial routes Toronto to Las Vegas, Orlando, and Regina. Cancun and Tampa are expected to follow later this month. Rouge will introduce a refreshed cabin on its Airbus A321 fleet later this fall.

Edward Russell & Madhu Unnikrishnan

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