Issue No. 845
Allegiant Bets on Boeing
Boeing Lands Allegiant After Two Big Airbus Defections
Pushing Back: Inside The Issue
In the first week of the new year, Allegiant decided to make some news. The long-time Airbus operator ordered 50 Boeing 737 Max-family aircraft, with options for 50 more. Allegiant downplayed the news by saying it has operated a mixed fleet in the past (remember its MD-80s?) but it's still big news. It's a much-needed shot in the arm for beleaguered Boeing and the Max program. And it's a testament to the strength of the Airbus A320 program, because Allegiant's decision was informed in part by the long wait times for A320 deliveries, given Airbus's backlog.
In other news, two U.S. federal agencies got into a spat over the rollout of 5G wireless networks, with the wireless companies agreeing to a two-week delay so that the FAA can determine just how much the technology will interfere with radio altimeters. The Omicron variant and terrible weather gave airlines just the kind of news coverage they didn't want over the holidays. Many carriers are trimming their January schedules. Meanwhile, United's partnership with the Landline bus company is off to a slow start, but both companies see promise in its future.
Next week, Delta kicks of the fourth-quarter and full-year earnings season. Just how much of a bite did Omicron take out of airlines' earnings? We'll soon find out.
The Airline Weekly Lounge Podcast
It should have been a great holiday season for the U.S. industry, with bookings approaching 2019 levels, but a combination of Omicron-related crew shortages and terrible weather forced airlines to cancel thousands of flights. Edward Russell and Madhu Unnikrishnan dig into what happened and discuss the FAA's spat with the Commerce Department over 5G networks. Listen to the episode.
The quick spike in Covid-19 cases linked to the Omicron variant got the better of many airlines’ operations over the holidays. According to FlightRadar24, airlines globally cancelled nearly 101,000 flights, or 8 percent of their schedules, from December 20 through January 2. While not as bad as some media portrayals made it out to be, a 92 percent completion rate is still far lower than the normal more-than 99.5 percent completion factor for the industry.
The cause of many of the flight cancellations were Covid-19 cases and the required quarantines for staff after they tested positive. U.S. airlines successfully lobbied the Centers for Disease Control and Prevention (CDC) to shorten its recommended quarantine period to five days from 10 on December 27, but that has not proven enough for the wave of Omicron cases. Both Alaska Airlines and JetBlue Airways have proactively trimmed schedules with the former cutting departures by 10 percent to “reset” its operations, and the latter cutting 1,300 flights through January 13 to achieve the same. Other U.S. carriers have yet to make similar moves, though both Spirit Airlines and United Airlines are offering pilots extra pay to fly during the month.
And the issues aren’t limited to the U.S. Canada’s Transat has cut its schedule by 30 percent through February 25, and Air Canada will suspend flights to at least 14 Caribbean destinations citing the pandemic “context” from January 24 through April 30.
MKM Partners analyst Conor Cunningham wrote that he expects the operational challenges from Omicron to continue into February. However, he also forecasts that 2022 will be the year that the industry puts the Covid-19 pandemic behind it, not because the virus goes away but because it becomes endemic and both airlines and the public adapt to life with it.
And continue they have. Globally, airlines racked up another nearly 43,000 flight cancellations from January 3-7, FlightRadar24 data show. And in the U.S., just over 15,281 flights were cancelled during the period, though severe weather was a contributing factor.
U.S. Wireless Companies Agree to Delay 5G Rollout
AT&T and Verizon have agreed to delay their 5G wireless network rollout by two weeks, defusing for now a interagency fight that pits the wireless and technology companies and their regulator against the Transportation Department (DOT) and the airline and aerospace industries and their unions.
The 5G networks were expected to go live on January 5, but Verizon and AT&T agreed to the delay in order to allow DOT to study the effect the technology could have on avionics. Transportation Secretary Pete Buttigieg, in a December 31 letter, asked for the delay so that the FAA could identify airports where interference could pose a problem and for the agency to issue new guidelines for airlines and pilots. Without the pause, the air transport system could be snarled by additional delays, on top of those caused by winter weather and the Omicron variant.
“Failure to reach a solution by January 5 will force the U.S. aviation sector to take steps to protect the safety of the traveling public, particularly during periods of low visibility or inclement weather,” Buttigieg wrote. “These steps will result in widespread and unacceptable disruption as airplanes divert to other cities or flights are canceled, causing ripple effects throughout the U.S. air transportation system.”
“At Secretary Buttigieg’s request, we have voluntarily agreed to one additional two-week delay of our deployment of C-Band 5G services,” an AT&T spokesperson said in a statement. “We know aviation safety and 5G can co-exist and we are confident further collaboration and technical assessment will allay any issues.”
“We’ve agreed to a two-week delay which promises the certainty of bringing this nation our game-changing 5G network in January, delivered over America’s best and most reliable wireless network,” added Verizon spokesman Richard Young.
“It’s clear that this irresponsible rollout of 5G wasn’t ready for takeoff, and that’s why U.S. Transportation Secretary Buttigieg, ALPA and others frontline aviation workers and stakeholders had called for a delay in implementation,” Air Line Pilots Association (ALPA) President Joe DePete said. “We are hopeful that this delay will enable the wireless industry and the broader aviation community to work together on effective solutions that will ensure that every passenger and cargo flight arrives safely without severe disruptions to aviation operations.”
Buttigieg’s letter elicited a furious response from Brendan Carr, commissioner on the Federal Communications Commission (FCC). “This is a highly irregular request and one that deviates from the clear, statutory process specified by Congress for regulating the provision of wireless service,” Carr wrote to Buttigieg. “Your request for delay is not backed up by the science, engineering, or law.”
The FCC, which regulates the wireless industry, approved the 5G networks last year, and the agency agreed to delay the deployment by one month from December 5, 2021 to January 5. “The DOT and aviation stakeholders had a lengthy and fair opportunity to participate in the relevant regulatory process. And they did. The FCC then adjudicated and resolved all of the issues consistent with the process established by Congress,” Carr wote.
The DOT and aviation groups requested the delay out of concerns that the C-Band frequency used by the 5G networks could interfere with aircraft radio altimeters. The FAA late last year issued an airworthiness directive warning of potential interference and said it could recommend “further mitigation” measures, which could include restricting low-visibility landings at certain airports.
But the FCC and the wireless companies argue that the FAA and the aviation industry had plenty of time to address these issues. “Inexplicably, the FAA and the aviation industry apparently did nothing following the February 2020 order or even after the C-Band auction closed in January 2021. In fact, it was not until November 2, 2021 that the FAA even issued a notice to begin collecting data about altimeters from the aviation industry,” AT&T CEO John Stankey and Verizon CEO Hans Vestberg wrote in a sharply worded January 2 letter to Buttigieg.
“Now, on the evening of New Year’s Eve, just five days before the C-Band spectrum will be deployed, we received your letter asking us to take still more voluntary steps — to the detriment of our millions of consumer, business and government customers — to once again assist the aviation industry and the FAA after failing to resolve issues in that costly 30-day delay period, which we never considered to be an initial one.”
The issue has united a broad coalition of aviation industry groups, including Airlines for America, the Aerospace Industries Association, the Aircraft Owners and Pilots Association, Airports Council International – North America, IATA, and several U.S. airline unions, including ALPA and the Association of Flight Attendants.
The coalition, as well as the DOT, argue that other countries that have deployed 5G networks have used lower-power transmitters and have restricted the networks around busy airports. They have identified several airports, which include all of the New York-area and Los Angeles-area airports and most of the busiest airports in the U.S., where the planned 5G networks could interfere with radio altimeters.
The two-week delay affords FAA time to address potential interference issues at these airports. “During this time, the FAA will review information relating to the size of the buffer zone around critical airports and will seek to reduce the size when safely able based on data from aviation manufacturers,” Buttigieg said in his letter.
“We appreciate the leadership of Transportation Secretary Buttigieg, Federal Aviation Administration (FAA) Administrator Dickson and National Economic Council (NEC) Director Deese in reaching the agreement with AT&T and Verizon to delay their planned 5G C-band deployment around certain airports for two weeks and to commit to the proposed mitigations,” Airlines for America President Nicholas Calio said.
In Other News
- Philippine Airlines (PAL) has emerged from U.S. Chapter 11 bankruptcy protection, after its creditors — including all its lessors — approved its restructuring plan, which got the greenlight form a U.S. bankruptcy court last month. The carrier unveiled an ambitious recovery plan, which highlights its position as the country’s only domestic full-service carrier and one that, even with pandemic route reductions, serves the most international destinations. PAL also pointed to its new cargo business as a strength when freight has bolstered many airlines, particularly in Asia.
But recall that PAL’s troubles far pre-date the pandemic. It consistently lost money during much of the last decade and has struggled since it was privatized in the 1990s, and it last exited bankruptcy in 2007. Meanwhile, homegrown rivals, like Cebu Pacific, have been eating its lunch. With its restructuring, PAL promises to be leaner and meaner, and expects to be profitable by next year.
- Thai Airways sold its remaining stake in budget airline Nok Air in December. The carrier, which is implementing a rehabilitation plan under the supervision of Thailand’s Central Bankruptcy Court, disclosed the sale and that it had received “full payment from the buyer,” in a restructuring update covering the three month period ending December 14. In addition, Thai Airways amended terms on leases for 12 aircraft during the period. Talks with lessors on leases covering another 45 aircraft continue.
- Korea’s antitrust regulator said it would “accelerate” its review of the proposed Korean Air-Asiana merger, local media are reporting. The antitrust regulator recently sent Korean Air a report outlining conditions the carrier must meet before the government approves the acquisition. Korean has said it is reviewing the report’s recommendations.
- United continues to cut regional routes amid pilot staffing constraints at its regional partners. The carrier will suspend service to Destin-Fort Walton Beach, Fla., in March, and has dropped plans to resume flights to Halifax, Nova Scotia, in April, according to Cirium schedules. In addition, United will suspend flights between Newark and Northwest Arkansas from February through September. In November, United CEO Scott Kirby said the airline had parked 100 regional aircraft due to a pilot shortage, and it has since exited at least eight smaller destinations and suspended 14 routes to its Washington Dulles hub.
- Gol is one step closer to acquiring Brazilian regional carrier MAP Transportes Aéreos under a deal that will expand its presence at São Paulo’s congested Congonhas Airport. Brazil’s national competition regulator CADE signed off on the acquisition on January 3; approval from the country’s National Civil Aviation Agency (ANAC) is still pending.
- At long last, Norse Atlantic got its wings, or its permission to fly. Norway granted the start up an air operators certificate at the end of the year. With its new AOC in hand, the carrier says it is “on track” to start flights between Norway and the U.S. in the spring. The U.S. Transportation Department has yet to issue a foreign air carrier permit and exemption to serve the U.S., but that process couldn’t start until Norse got its AOC.
Allegiant Air has made a big strategic shift: Instead of the all-Airbus narrowbody fleet that it only achieved in 2018, the discounter has unveiled a commitment for up to 100 Boeing 737 Maxes with plans to operate a mixed fleet going forward.
The deal includes 50 firm orders plus options for 50 more, and includes 30 737-7s and 20 737-8200s. Allegiant will take delivery of its first 10 Maxes beginning next year, 24 in 2024, and 16 in 2025. And, while it plans to retain its fleet of Airbus A320 family narrowbodies, the airline will look to retire some of its older A320s and A319s beginning in 2023.
Allegiant, in fact, will continue primarily to be an Airbus operator, CEO Maurice Gallagher told analysts during a call to discuss the strategic shift. But the Boeings will allow it to grow more quickly. The A320 would have been the logical choice, but given Airbus’s backlog on the type, deliveries couldn’t be guaranteed until later in the decade.
The timing drove the Las Vegas-based carrier’s decision. It evaluated the Max, A320, and the A220 when making its fleet decision. The A220 offered some fleet commonality, but Allegiant determined it didn’t offer enough flexibility for the carrier’s network plans. Gallagher pointed out that the new Maxes will be fitted with CFM LEAP-1B engines, which are similar enough to the engines on the carrier’s A320 fleet to offer maintenance benefits. The deal also includes six spare engines, and all the Max engines will be covered by power-by-the-hour maintenance agreements.
“The infusion of up to 100 direct-from-the-manufacturer 737s will bring numerous benefits for the future — including flexibility for capacity growth and aircraft retirements, significant environmental benefits, and modern configuration and cabin features our customers will appreciate,” said Gallagher. He described the order as “opportunistic.”
“We also believe Allegiant received a good price on the aircraft as it seems incredibly unlikely an airline deviates like this without price being a major factor,” MKM analyst Conor Cunnigham wrote in a note after the investor call. Allegiant did not divulge financial details of its deal with Boeing.
Allegiant expects the 100 new Maxes could open as many as 1,400 routes, mainly connecting existing destinations on its route map. The majority — 80 percent — do not have nonstop competition. To reduce complexity, Maxes will operate out of dedicated bases, mainly in the middle of the country, and fly out-and-back routes from those cities. Each base will have Max-specific maintenance staff to reduce complexity and costs further.
The order for so many new aircraft is in itself notable for Allegiant, which has long sourced its fleet on the used market. The airline only placed its first-ever order for new planes in 2016 — a deal for 12 A320s — and Airbus data show that it has acquired just 13 aircraft new from the airframer.
Gallagher pointed to the examples of Delta and Southwest, which also operate a mixed fleet of new and used aircraft, as validation for the carrier’s change in tack. No airline can buy as many used aircraft as Allegiant needs, he argued, both due to a lack of availability and the threat of higher maintenance costs. To illustrate this, Allegiant has on average 90 heavy maintenance visits per year, and this would scale up dramatically if the carrier were to satisfy its fleet needs only with used aircraft. The costs of complexity associated with a new fleet type will be partially offset by the reduction in maintenance costs, he said.
The deal is also a shot in the arm for Boeing. The Chicago-based planemaker lost marquee fleet renewal orders for some 300 aircraft from long-standing customers KLM and Qantas in December. Both airlines flipped to Airbus for their narrowbody fleet needs.
In a report released shortly before the Max deal was unveiled, Raymond James analyst Savanthi Syth said the then-unannounced order as “another added layer of uncertainty that could also cause near term headwinds” for Allegiant. Other headwinds include an open pilot contract, elevated flight cancellation numbers across its system, and likely cost overruns at its Sunseeker Resort project in Florida.
- Lessor Aviation Capital Group could take as many as 60 Airbus narrowbodies, per a new deal signed last week. The lessor has 40 A320neo-family aircraft on firm order and has signed a memorandum of understanding for up to 20 A220s. In announcing the deal, ACG stressed the environmental benefits of the Airbus narrowbodies. Details on the types of A320neo-family aircraft were not provided, but the lessor highlighted the A321XLR as a potential buy.
- There’s now a number on Qatar Airways’ spat with Airbus: $618 million. The carrier is seeking that amount in damages from the airframer for surface damage it alleges are apparent on many of its A350s. Airbus has denied the claims and says it will fight them in court.
- The cargo bonanza continues. Atlas Air is adding four new Boeing 777Fs to its fleet, in addition to the 14 of the type the cargo carrier currently operates. The new freighters will start arriving in November and continue through 2023. Atlas also is taking delivery of four 747-8Fs this year; the carrier already operates a fleet of 49 747Fs. Last year was a good year for Boeing’s freighters. It notched orders for 80 new freighters and 80 passenger conversions, the airframer said.
- Air Lease Corp. has priced a $750 million senior unsecured medium-term notes offering at 2.2 percent. The debt matures in January 2027. Proceeds will be used for general corporate purposes, including acquiring aircraft and repaying outstanding debt. Bank of America Securities, NatWest Markets Securities, Regions Securities, and Wells Fargo Securities were joint book-running managers.
- U.S. startup Avelo Airlines has raised an additional $42 million in Series B funding. The second round funding includes $30 million coming from an investment fund managed by Morgan Stanley Tactical Value, which makes the manager the largest investor in the carrier. Avelo Founder and CEO Andrew Levy said the additional capital will enable the “acceleration of Avelo’s growth trajectory in 2022 and beyond.” The airline has commitments to add nine Boeing 737s to its six-aircraft fleet in 2022, as well as double the size of its network to roughly 40 destinations. Avelo’s invested capital base now stands at roughly $167 million.
Clear, the airport screening and biometric identity company, said on January 4 it had bought Whyline, a seller of virtual queuing and appointment systems.
The companies didn’t disclose the value of the all-cash purchase.
Whyline, based in Argentina, brings to Clear technology that allows travelers to reserve a spot in line when they check in for their flight.
For example, passengers at the Seattle-Tacoma airport at three checkpoints can reduce their waits at airport security by using a mobile app to see the live wait times and entering their place in a “fast lane” queue remotely by pre-booking their appointment.
The software alerts passengers when it’s their appointed time to show up to the fast lane and pass through. Seattle’s Spot Saver program handled more than 187,000 reservations in summer 2021, the Port of Seattle said.
This “virtual queueing” tech could be used outside of airports, too, such as at attraction parks, in conference venues, and on cruise ships.
The deal is Clear’s first acquisition since going public last June. The initial public offering put $409 million on its balance sheet, facilitating future acquisitions.
Clear CEO Caryn Seidman-Becker said the deal would achieve three objectives: It will cement Clear’s lead as a vendor with airport reservation lanes in signed contracts and ongoing tests at airports in Los Angeles, Seattle, Newark, Charleston, S.C., Orlando, and Calgary.
The transaction will also help Clear expand beyond the U.S. and Canada, given that Whyline has partners in Argentina, Mexico, Brazil, and Peru.
Royal Jordanian Airlines has entered a commercial partnership with Dezerved, an invitation-only rewards platform, for its Royal Club loyalty program.
The carrier follows Swiss‘ Miles & More program, which earlier this year became the first airline frequent flyer program to partner with Dezerved, which was created by Swiss-based tech vendor Loylogic Group in 2021.
Royal Jordanian and Swiss are now encouraging members of their loyalty programs to sign up for the deals site that lets airline loyalty program elites buy luxury goods and services at a discount with a mix of miles redemptions and payments.
Loylogic’s other travel partners trying this twist on consumer database marketing include Etihad’s loyalty program and American Express Membership Rewards (in Switzerland only).
During the pandemic, airlines have somewhat struggled to revive travel without having loyal customers redeem miles for free flights — a practice that’s less lucrative than persuading travelers to redeem miles for non-flight rewards instead — or purchase flights with cash.
“Travel and luxury brands have a huge interest in building direct relationships with consumers, given the success of companies like Warby Parker with direct-to-consumer models,” said Dominic Hofer, CEO of Dezerved and Loylogic. “We give these brands a platform to acquire proven loyal customers. We call it a direct-to-loyal-consumer model.”
To be sure, it’s not new for Lufthansa and other carriers to do mileage redemption partnerships with retailers. For instance, last year Lufthansa used its WorldShop e-commerce site to offer batches of whiskey and rum made exclusively for its mileage members by the distiller Sansibar Sylt. And Qantas cut its pandemic losses with sales from its wine shop.
What’s different with Dezerved is that it provides luxury brands with a few ways to create a direct relationship with consumers, avoiding third-party acquisition channels.
The Dezerved platform isn’t a store itself, unlike duty-free shops such as Heinemann. Once a member makes a purchase, the platform hands off the customer to the brand to fulfill the order.
Other airlines have run similar experiments recently. American Airlines teamed up with wine club Vinesse to cross-promote to its database of customers selected wines for delivery by mail.
“While flying an additional passenger for free might only be a nominal cost for an airline, accounting requirements typically make flight-based redemptions costlier than the alternative of redemptions for non-flight rewards through retail partners,” Hofer said.
One reason why eyewear maker Warby Parker gained traction over the past decade of direct-to-consumer sales was how it marketed itself as a “challenger” brand, offering consumers something new in the market.
“We feel there’s a real opportunity to offer the classic brands in luxury while also informing members about challenger brands in specific categories that are up and coming,” Hofer said. “Dezerved could really add value then for consumers by helping to introduce fresh brands in the premium segment.”
It makes a lot of sense for airlines to use a bus to connect smaller communities to major airports. Buses can go places aircraft cannot, and when they do replace planes, they can do so more cost-effectively and with lower carbon emissions. That’s what the partnership between United Airlines and Landline, a luxury bus company that markets itself as a regional aircraft on wheels, launched last year aims to do.
United CEO Scott Kirby described the service as “going well,” and Landline co-founder and CEO David Sunde called its performance as “good” in separate comments in November. And in what Sunde described as a signal of some success, United added a fifth daily bus between the Denver airport and Fort Collins, Colo. — one of Landline’s two routes under the pact — in November. Landline has connected United’s Denver hub to the ski town of Breckenridge, as well as the nearby city of Fort Collins, since March and April, respectively.
But the offering is being marketed as more than just your average airport bus. Landline buses carry United flight numbers and depart the Denver airport from a gate on Concourse A alongside other United Express flights. Bags are transferred automatically — both to and from Breckenridge and Fort Collins — and travelers can check in for their entire trip at both Landline-managed destinations. In addition, travelers can earn frequent flyer miles and status points by riding the bus. The biggest pain point for travelers is buses arrive landside at the Denver airport where they have to proceed through security screening on their own.
Despite the tighter integration between Landline and United, neither Kirby nor Sunde described the partnership as a clear success. Both qualified their comments in ways that suggest the service is still maturing.
“In a world where we’re pilot constrained to fly 50-seaters, [and one] where we’re worried about carbon emissions when there’s a better option: I would love to see Landline successful because it could tick all those boxes,” Kirby said at the Skift Aviation Forum in November. He added that it was “too early to conclude it has worked or hasn’t worked” citing the on-going Covid-19 pandemic.
Both Landline and United declined to provide ridership numbers for the service, and airport passenger data does not include those who arrive and depart by bus — even one that leaves from an airside gate in Denver. However, booking data viewed by Airline Weekly for both Landline routes for the week of January 3 showed most buses booked with fewer than 10 passengers out of the 35 available seats. Several Breckenridge runs were completely empty, while the fullest bus was one to Fort Collins from Denver with 15 seats reserved. Neither company has said what level of bookings represents success, but it is widely agreed that buses need to fill far fewer seats than planes to break even financially.
One reason for the low booking numbers could be marketing. Ben Brooks, a New York-based frequent traveler with family in Fort Collins, said that he would likely use the Landline service but has repeatedly forgotten to book it when coordinating travel. He suggested that United could “nudge” more travelers to use the buses by suggesting it during the flight booking process, or offering it as an upsell afterwards.
Jason Licon, the airport director at Northern Colorado Regional Airport in Fort Collins, thinks local residents are “responding well” to the service. While he did not have numbers to provide, he said the positive response was “obvious from the amount of traffic we’re seeing.” Landline buses arrive and depart from the airport.
Northern Colorado airport is working with Landline and United to allow travelers to clear security in Fort Collins and arrive airside in Denver. Many believe that such a move would make the bus service even more attractive to travelers.
“We see it as a concourse extension for Denver, so to speak,” said Licon.
On a recent visit to Landline’s gate at the Denver airport, there was only a handful of people waiting for the next bus, which was scheduled to depart for Fort Collins in 30 minutes. Though, with other United flights departing from adjacent gates, it was not clear whether those waiting were bound for the northern Colorado city or other destinations.
Sunde, responding to the booking data for the week of January 3, said Landline would not have added a fifth Fort Collins trip if “it wasn’t working.” In addition, it recently retimed the Breckenridge bus to arrive in the evening and return to Denver in the morning. Sunde added that Landline expects a big demand bump once travelers are able to arrive at Gate A78 inside security at the Denver airport.
And an immediate success may not be needed right away for the Landline-United partnership. As Kirby said at the Skift forum, the service checks a lot of boxes that are important for him — expanding United’s map amid a regional pilot shortage that has temporarily grounded 100 aircraft, and helping reduce carbon emissions. And the model has proven successful elsewhere.
Landline and Sun Country Airlines debuted a similar offering at the latter’s Minneapolis-St. Paul International Airport hub in November 2019. Sun Country aimed to do the same thing as United: Expand its map to nearby smaller communities cost-effectively with buses. Landline initially connected Minneapolis-St. Paul to two destinations — Duluth and Mankato, Minn. — and service has since expanded to five more cities in Minnesota and Wisconsin. And the kicker? Sun Country complemented the existing Landline service with new jet flights connecting Duluth with the sun spots of Fort Myers and Phoenix this winter.
“I’m patient to see it through to the other side,” said Kirby of Landline. And a CEOs backing may be all it needs to continue, at least for now.