Delta Kicks Off the September Quarter Earnings Season
Pushing Back: Inside the Issue
Delta opened the third-quarter earnings season with confidence. After posting its first quarterly profit sans government aid since early 2020, the airline is looking to a year-end holiday bump and then a pick up in business travel in the new year. But CEO Ed Bastian also pointed out a new emerging trend: premium leisure travel. An increasing number of holidaygoers are willing to pay extra for the premium seats — whether it’s premium economy or business class — made available by the dearth of corporate roadwarriors who normally buy up the inventory. Delta bets the trend will continue and is investing in adding more such seats to its planes.
But while Delta was guardedly optimistic, Southwest spent the week apologizing. The airline had what some called a “burnout” when it cancelled nearly 2,000 flights over the three-day Indigenous Peoples’ Day holiday weekend in the U.S. The issue was staffing, plain and simple, and not a rumored pilot sickout in response to Southwest’s federal Covid-19 vaccine mandate that was popularized on social media. Southwest is the latest to join the growing list of U.S. carriers, including American, Delta and Spirit, that have faced staffing-related operational snafus as they ramp up their schedules.
Elsewhere, United has gotten ahead of the FAA by beginning modifications to its Pratt & Whitney-powered Boeing 777s in the hope of returning the jets to revenue service when the regulator issues its air worthiness directive. Etihad, Qantas and Volaris all raised recovery funds, and deliveries picked up at Airbus and Boeing in the third quarter.
The Airline Weekly Lounge Podcast
This week in the Lounge, Madhu and Ned breakdown Delta’s third-quarter earnings, and take bets on whether premium leisure is the travel trend of the future that CEO Ed Bastian thinks it is. Also, Southwest burns out and United wants its Pratt & Whitney-powered 777s back for what could be a blockbuster Summer 2022 across the North Atlantic. Find out in this week’s episode. A new episode of the Lounge drops every week, and you can find the full archive here.
Weekly Skies
Delta Air Lines leadership believes the way people travel has undergone a “structural” change as more leisure passengers opt to fly in the front of the aircraft. The Atlanta-based carrier is now planning to fly more premium seats as it plots its recovery from the Covid-19 pandemic.
When the pandemic began and international travel demand collapsed, Delta began using its large widebody aircraft, designed for international routes and with flatbed seats in their premium cabins, on domestic routes. These aircraft were not designed to fly shorter routes and the costs of the domestic network went up. But an unexpected side benefit has been that passengers opted for and paid to travel in the premium cabins on those routes. This dynamic has continued even as Delta adds back overseas flying.
In fact, Delta reported that premium revenue recovered 10 percent more than its economy recovery on domestic and near-international routes to Latin America in the third quarter. The company expects this dynamic to continue as it adds back transatlantic and longhaul Latin America routes, and, when Asian countries lift their travel restrictions, on that network as well.
One reason for this could be access. Before the pandemic, leisure passengers who wanted to fly in the front of the aircraft may have been squeezed out by managed travel and corporate account travelers who had first crack at booking premium seats. The solution is to add more premium seats to its aircraft. Delta started the process of adding a third cabin — a distinct premium economy hard product — in 2019 and will accelerate that work in the months and year ahead. “More premium seats is the direction we want ahead,” CEO Ed Bastian said Wednesday during the company’s third-quarter earnings call. “It was a big epiphany for us.”
And Delta will have the opportunity to do so soon. The carrier announced it is adding two used Airbus A350s to its fleet in the fourth quarter, although it did not say where those aircraft were coming from. It has converted options for 55 A321neos to firm orders, with deliveries expected to start next year and run through 2027. And it plans to add 38 more used aircraft in the near future.
This is part of its fleet rationalization that began last year when Delta retired about 200 aircraft, including all its Boeing 777s and will focus its fleet strategy on upgauging. By next summer, it expects half of its narrowbody fleet will be upagauged from before the pandemic, and widebody aircraft will comprise 25 percent of the total fleet, up 15 percent from 2019. About 160-170 aircraft that were parked in the desert during the pandemic are expected to return to the fleet next year, Chief Financial Officer Dan Janki said.
These fleet changes will position Delta for the recovery, which it expects will begin in earnest next year. The third quarter started off well, but demand started to fall off in August and September as the Delta variant of the coronavirus (which Delta Air Lines refers to as simply “the variant”) caused outbreaks of Covid-19 throughout the U.S. The airline had expected business demand to return after Labor Day, but companies delayed reopening their offices. Given the trend in bookings and the airline’s polling of its corporate clients, President Glen Hauenstein called August and September a “temporary pause.”
Still, the airline started the year with capacity at only a quarter of 2019. Now, it’s up to 75 percent. Delta expects to fly 80 percent of its pre-pandemic capacity in the fourth quarter of this year. Business demand is expected to be fully restored by the end of next year.
The story varies by region, however. Domestic network revenues were 72 percent of the third quarter of 2019, but this was an 17 point improvement when compared with the second quarter of this year. Latin America routes generated 84 percent of their pre-pandemic revenues. Transatlantic revenues were 35 percent of 2019, but this surged 20 percent from the last quarter after the Biden administration announced plans to reopen the U.S. to vaccinated Europeans. The Pacific network remains a “laggard,” Bastian said, due to continued travel restrictions in Asia. But with vaccination rates approaching 80 percent in the key markets of Japan and South Korean, he said he is hopeful the Pacific network will revive in the near future.
Costs rose by 12 percent to almost $8 billion, due to increased capacity and maintenance costs associated with bringing back parked aircraft. Delta is seeing lower labor costs, however. About 20,000 workers retired or left the airline during the pandemic. Their replacements are new hires, resulting in a “juniority” benefit to the airline, Bastian said, while stressing that Delta has not changed its pay scale. During the quarter, Delta benefited from $1.3 billion in federal payroll support, which expired on September 30. The carrier plans to hire pilots, flight attendants, and maintenance technicians in the next year, but it has not determined how many new employees it needs.
Delta eked out a $216 million pre-tax profit — its first since the pandemic began in March 2020 — in the third quarter, on revenues of $9 billion. Revenues now are two-thirds of the same period in 2019, Hauenstein said. The carrier was profitable despite 60 percent of its pre-pandemic business travelers not traveling during the quarter. The company expects revenues to approach 80 percent of pre-pandemic revenues by the end of the year. But it expects to report a modest loss in the fourth quarter, due to rising fuel costs.
Although he is confident the recovery now is enduring, Bastian struck a note of caution about the pandemic. “We know we are not out of the woods yet,” he said.
Philippine Airlines Unveils Restructuring Plan
Bankrupt Philippine Airlines will end service to New York and Toronto as part of a rejigging of its route map under a restructuring plan it filed with a U.S. bankruptcy court last week.
Citing “structural issues impacting profitability,” the Manila-based carrier will end its ultra long-haul service to New York and Toronto and focus instead on flights to Los Angeles, San Francisco and Vancouver on the West Coast of North America. PAL outlined plans to expand its codeshare with American Airlines at its remaining U.S. gateways to maintain connectivity.
PAL will also end service to Manila’s Clark Airport, which is popular with low-cost carriers, and focus on strengthening its hub at Manila International Airport. In addition, it will also cut unprofitable routes in Asia.
But the airline does not only plan for cuts. After initially trimming its network, PAL plans to grow at its “profitable” Manila hub with additional regional Asia service, particularly to China. This growth will be done largely with narrowbodies, which it deems “lower risk” than widebodies in its plan. In addition, it hopes to pressure competitors in Manila, including by potentially squatting on slots by flying them with lower-capacity turboprops.
“The [restructuring] plan will bring PAL into sustained profitability,” the airline said in the filing. If approved by the court, PAL forecasts a $220 million operating profit next year and a $364 million in 2023.
PAL filed for Chapter 11 bankruptcy protection on September 4. The surprised few as the carrier had struggled for years, and the bled through cash during the Covid-19 crisis. At the time of the filing, PAL had just $28.6 million in unrestricted cash on hand — far less than the at least $300 million advisers said an airline its size needed to keep flying. However, the filing came with the support of its creditors who had already agreed to a restructuring plan framework. PAL said at the time that it hoped to emerge from bankruptcy within six months.
Under the plan, PAL will remove 21 “surplus aircraft” from its fleet leaving it with just 77 planes when it exits bankruptcy. Among the aircraft being removed are three Airbus A350s that, depending on the source, could be its entire remaining fleet of the jet. PAL primarily used the A350 on flights to London, New York and Toronto prior to the pandemic with the latter two now being cancelled.
The airline has not placed any new aircraft orders or signed new leases in the month since it filed for Chapter 11.
The network and other cuts acknowledge a harsh truth for PAL: the airline has lost much of its home market to more nimble low-cost competitors. Domestically in the Philippines, PAL and its subsidiary PAL Express saw their combined marketshare shrink 12.5 points from 2012-2019 even as the market grew 44 percent to 29.5 million flyers, according to data from the Philippines’ Civil Aeronautics Board. During this period, Cebu Pacific solidified its position as the country’s dominant carrier.
PAL has lined up $505 million in debtor-in-possession financing that will convert to equity upon its exit from bankruptcy. And it is seeking another $150 million in exit financing.
The bankruptcy court is will hold a hearing on the restructuring plan on November 12.
Airlines Bring Back A380s as Longhaul Travelers Return
Singapore Airlines is the latest global carrier to return its Airbus A380s to regular service amid the pick up in long-haul international travel. With the superjumbo scheduled to return in November, SIA joins the likes of British Airways, Qantas Airways and Qatar Airways in bringing the plane back earlier than previously planned.
SIA will re-introduce the A380 on flights between Singapore and London Heathrow on November 18, the airline said Thursday. The move is in response to strong demand following the announcement that the UK would be included in Singapore’s vaccinated travel lane program, which allows travelers with their Covid-19 jabs and a negative test to enter Singapore without quarantining, from October 19. SIA’s A380s seat 471 passengers compared to 264 passengers on the Boeing 777-300ERs that the carrier will replace on its Singapore-London flights.
Airlines around the world are seeing strong demand for long-haul flights when governments ease Covid-19 entry restrictions. After the U.S. announced that it would allow vaccinated travelers in from November 8, several carriers reported triple-digit jumps in bookings, including an up to 600 percent increase at Virgin Atlantic. Those increases have prompted airlines to resume suspended flights, especially to leisure destinations, ahead of the year-end holidays. Reintroducing large aircraft like the A380 is another way to capture the “pent-up demand” so many industry executives have cited in their recovery outlooks.
The return of the A380 comes after many wrote off the plane early in the pandemic. Amid the precipitous drop in air travel last year, most airlines around the world put the aircraft — the largest passenger jet in regular service — in storage with the question of whether they would ever left unanswered. But in the just the past few weeks, the answer to that question has proven an unequivocal yes with a spate of service resumption announcements.
BA will bring back four of its 12 A380s on European flights in November to re-familiarize crews, before shifting the jets to flights to Dubai, Los Angeles and Miami in December. Qantas has pulled forward the return of five of its 12 A380s to next July with CEO Alan Joyce saying in August that the carrier expects demand to London and Los Angeles to warrant the extra capacity. And Qatar, a year after CEO Akbar Al Baker called the A380 the airline’s “biggest mistake,” plans to return several of its A380s as soon as November to cover for other aircraft that remain grounded.
“This aircraft could well come into its own,” said Emirates President Tim Clark on the outlook for the A380 earlier in October. He cited the aircraft’s low carbon emissions per passenger and ability to fly large numbers of travelers to slot-controlled airports like London Heathrow and Sydney for his view. Emirates is the largest operator of the A380 with 115 in its fleet.
But the A380s future is far from certain despite its return at more airlines. Air France and Lufthansa both retired their fleets of the jet citing a need for simplification and efficiency during the crisis. And Korean Air Chairman and CEO Walter Cho has cited rising costs as a result of fewer superjumbos in operation for its plan to retire the fleet within five years.
“Whenever it is not rational anymore, I will look into retiring it,” Cho said of the A380 earlier in October. Korean Air operates 10 A380s.
The number of A380 flights globally is slowly coming back. Airlines are scheduled to operate 1,605 flights in October and 2,237 in November, according to Cirium schedule data. However, those numbers are down 84 percent and 77 percent, respectively, compared to 2019.
And at the beginning of October, only 20 percent of the global fleet of the 245 A380s were in service, Cirium fleet data show.
Amazon’s Remote Work Policy Could Benefit Regional Airlines
Amazon’s decision to allow corporate employees to work from home may mean diminished business for its large airline partners, experts warn. But as with consultancy PwC’s own permanent move to remote work, it’s likely the tech giant’s corporate travel volumes will be redistributed more than reduced. And that’s good news for regional airlines.
A company of Amazon’s size can’t really implement an unwieldy blanket policy, so it’s giving teams the power to decide how many days will be needed.
“For our corporate roles, instead of specifying that people work a baseline of three days a week in the office, we’re going to leave this decision up to individual teams,” said CEO Andy Jassy last week.
But don’t expect a rush to Costa Rica just yet. “At this stage, we want most of our people close enough to their core team that they can easily travel to the office for a meeting within a day’s notice,” Jassy said.
Even a slight change in working patterns could impact the airlines in the region. Amazon is the largest employer in the state of Washington, with 80,000 employees. In a ranking of the biggest corporate travel programs in 2019, it spent $500 million on flights in the U.S., not that far behind Deloitte, which spent $583.1 million.
And let’s not forget it saved at least $1 billion in travel and related expenses during 2020, due to coronavirus putting the breaks on business travel. “This had a major impact on Seattle-Tacoma International Airport, hotels, and the two main airlines, Alaska Airlines and Delta,” said Mark O’Brien, managing partner of Avenue 5 Consulting.
With new working habits and more virtual meetings, we shouldn’t underestimate another ripple effect.
“Alaska Airlines may need to look at adding new routes to its network if some key locations are identified with higher concentrations of relocated HQ workers,” said Ryan Hohag, director, global air practice at Advito. “However, a more likely scenario is broad fragmented demand which Alaska could address by bolstering its partnership with American Airlines — enhanced benefits, more codeshare routes.”
One beneficiary could be regionals like SkyWest Airlines, which has predicted the post-pandemic economy will be tied to the small communities.
“Out in the west, there’s a massive exodus out of California,” said Chip Childs, CEO of SkyWest Inc., which operates small jets for Alaska, American Airlines, Delta and United Airlines.
“It’s going into all the small [and] mid-sized cities. And all of this new market scenario post-pandemic where people want to live and work is going to completely change the dynamics of what regionals can do going forward … Demand for regional aircraft is going to increase,” he added, speaking at the end of September.
Meanwhile, the extra flexibility could simply lead to more urban migration.
“My guess is [employees] may relocate from inner city locations to nearby suburbs or rural areas that are less expensive, but still near the office so a flight won’t be necessary,” said Lisa Lacey, managing consultant at Advito.
At the same time, some might decide to relocate from expensive San Fransisco, Los Angeles or San Diego living areas to Denver, Dallas or Phoenix where the cost of living is less, but they still have access to major airports, she added.
More announcements are likely to follow, and not just from technology firms but other industries too, leading to more regional alliances and a major corporate travel supply chain shake-up.
In Other News
- The U.S. set a date for its reopening to vaccinated travelers: November 8. Airlines are already eager the the expected surge in international flyers, especially from Europe where restrictions have limited travel for more than 18 months. British Airways CEO Sean Doyle called the date a “pivotal moment” in the travel recovery.
- Despite a Delta variant slowdown in September, American is forecasting “robust peak” period travel — in other words the Thanksgiving, Christmas and New Years holidays — in the fourth quarter. That has the carrier planning to fly more than 88 percent of its 2019 capacity during the period. In the September quarter that just wrapped, American’s revenues came in roughly a quarter below two years ago, and it forecasts a net loss of $620-674 million excluding special items, which include the last benefits of the federal payroll support program. Unit costs excluding fuel and special items were up 10-11 percent year-over-two-years, while fuel expenses have yet to register the run up in Brent crude prices with only a 2 percent increase versus 2019 to an average of roughly $2.08 per gallon.
- And across the Atlantic, EasyJet is similar optimistic for the December quarter, or the first quarter of its 2022 fiscal year. The British discounter plans to fly 70 percent of its December quarter 2019 capacity this year — a 12 point increase from the September quarter — and CEO Johan Lundgren said in an investor update last week that the “recovery is underway” with business travelers returning. The recovery on UK and European routes is the most robust, while travelers are returning more slowly to international routes outside of the EU. EasyJet forecasts a £1.14-1.18 billion ($1.5-1.6 billion) loss during its 2021 fiscal year that ended in September.
- The New Zealand government has extended its Maintaining International Air Connectivity (MIAC) scheme for Air New Zealand. The airline forecasts NZ$150-170 million ($104-118 million) in revenues from five-month extension through March 2022. The program supports Air New Zealand flying a regular schedule in order to maintain passenger and freight connectivity to select international destinations, including Hong Kong, Los Angeles, Shanghai and Vancouver.
- Domestic travel is recovering, but more people report planning an international trip next year, Expedia Group research shows. London, Rome, and Paris are the top destinations searched for on Expedia for next year, while Cancun topped the list this year. The booking window remains short, however, at about 60 days though searches for travel 180 days out are increasing. Fares remain low, with the average U.S. ticket costing $371, compared with $467 in 2019. The gap between premium fares and economy fares is narrowing, with premium fares now 288 percent higher than economy, compared with 430 percent higher in 2019, Expedia data show.
- Gol looked pretty bullish in a recent investor update. The Brazilian carrier said unit revenues were up 5 percent year-over-year and reported a 48 percent increase in daily sales from the second quarter of this year. Meanwhile, unit costs fell by 11 percent. The carrier is operating 84 percent of its routes and 66 percent of its fleet, or 76 aircraft. Gol plans to increase fourth-quarter capacity by 30 percent over the third quarter.
- Latam Airlines Group is seeking yet another extension to the deadline of its exclusive period to file a restructuring plan with a U.S. bankruptcy court. The airline wants just over another month to November 26.