Issue No. 850

That Frontier Spirit

U.S. Airline Consolidation Marches on With Proposed ULCC Merger

Pushing Back: Inside The Issue

One of the most popular airline-industry parlor games (yes, we've heard there are such things) is which two airlines would be the next dominoes to fall in U.S. airline consolidation. It's been a long parlor game; the last merger was the Alaska Airlines-Virgin America deal in 2016. Speculation has run rife, but Frontier-Spirit long has been a popular guess. The deal, in many ways, makes a lot of sense: Both airlines come from the Indigo Group's ultra-low-cost carrier (ULCC) incubator and share the same DNA; and their route networks and fleets are complementary. The real guessing game now is whether the Biden administration's Justice Department will approve the deal. Although the consensus opinion is that any deal involving the Big Four — American, Delta, Southwest, and United — would be dead on arrival, opinions are mixed about how the Justice Department will view a ULCC merger. Executives from the two ULCCs tout strong leisure demand and their ability to lower fares as reasons the deal should proceed.

Regardless, the deal signals that the ULCC market in the U.S., which is underdeveloped compared with the markets in Latin America and Europe, is on the move. A combined Frontier-Spirit would be a force the Big Four will have to reckon with, even if it would control less than 10 percent of the market. But the new airline (name to be decided) will vault ahead of Alaska and JetBlue, not to mention smaller carriers like Sun Country, Allegiant, among others, and the new entrants, like Avelo and Breeze.

Meanwhile, Panama's Copa did what few carriers anywhere in the world did by reporting fourth-quarter profits. It now predicts a return to its pre-pandemic capacity by the middle of this year, fueled by strong leisure demand. Lessors report that airlines are clamoring for new aircraft. The freight boom continues with no end in sight. And Stockholm continues to attract new air service. We also noticed that Hungary's Wizz Air quietly applied for a permit to fly to the U.S., and pilots unions promptly objected. Stay tuned on that story.

And in what now is a weekly occurrence, another long-serving U.S. CEO is stepping down. Maurice Gallagher, who invested in and then transformed Allegiant Air into one of the world's most profitable airlines, is retiring after almost 20 years at the helm.

The Airline Weekly Lounge Podcast

Big news in the U.S. ultra-low-cost-carrier market this week, as Spirit and Frontier announced their plans to merge. Meanwhile, Allegiant’s long-serving CEO Maury Gallagher, who helmed one of the most profitable airlines in the world, announced his retirement. In this week's episode, Madhu Unnikrishnan and Edward “Ned” Russell. discuss the hurdles ahead for the merger, why Gallagher’s retirement is significant, as well as why India’s IndiGo is not concerned about a revitalized Air India. A full archive of the 'Lounge is available here.

Verbulence

"It seems crazy that a 300-hour [first officer] can land a Lufthansa A350 into JFK flying over Queens, and a U.S. pilot can't do the same thing."

Mesa Air Group CEO Jonathan Ornstein blasts U.S. 1,500-hour rule for pilots

Weekly Skies

Copa Airlines pulled off a profitable fourth quarter, despite the spread of the Omicron variant, operating 83 percent of its 2019 capacity as its core Latin America markets opened up for leisure travel. The carrier sees its quick rebound during 2021 — after spending much of 2020 grounded due to Panama’s strict restrictions — as validation of its business model that connects North and South America over its hub in Tocumen.

But Copa wasn’t immune to Omicron. Bookings dropped off in December and remained weak through the first week of February. Because of the uncertainty, Copa offered guidance only for the first quarter, when it expects capacity to be 88 percent of 2019 levels, and operating margins of between 3-6 percent, making it one of the few carriers in the world to forecast first-quarter profits. “What we’ve learned from this pandemic is that things change from one day to another,” CEO Pedro Heilbron said during the company’s fourth-quarter and full-year 2021 earnings call last week.

Bookings primarily are for leisure travel, Heilbron said, but even this has changed. Through the second quarter of last year, “vaccine tourists,” heading from South America to the U.S. for Covid-19 vaccines, were a significant source of demand. This has receded to become just general leisure. Business travel is coming back but not as quickly as leisure traffic and is about half of its pre-pandemic level. “In general, we do not see that people are hesitant about traveling abroad,” Heilbron said. “There’s still some pent-up demand or if it’s no longer pent-up, it’s the urge to get out and do things and go somewhere.”

Copa’s network is performing well across the board, now that most Central and South American markets have eased restrictions, Heilbron said. Routes to Mexico, the U.S., and Brazil held up the most over the course of the last two years, and remain strong, he said.

Although not formal guidance, Copa believes it will return to its pre-pandemic capacity by the middle of the year. It will take delivery of two Boeing 737-9s this quarter, and plans to add a total of eight this year. It will also retain three 737-700s that it had planned to sell, and it will reactivate 737-800s that were stored during the pandemic.

Copa is converting one of its 737-800s into a freighter in response to continuing strong cargo demand. Cargo revenues in the fourth quarter were 61 percent higher than they were before the pandemic. The carrier could add more -800 conversions if demand warrants. The first conversion will replace a Boeing 727 freighter Copa chartered during the pandemic when cargo demand spiked.

Copa ended the year in the black. The carrier reported an adjusted fourth-quarter net income of $84 million on revenues of $575 million, or down about 16 percent from 2019. For the full year, Copa reported a $2.7 million profit on $1.5 billion in revenues, or down 44 percent from 2019.

— Madhu Unnikrishnan

Sun Country Finds Pilot Shortage Silver Lining

Sun Country Airlines faces challenges hiring across its business amid the labor issues facing U.S. companies. But even as it struggles to find enough pilots and maintenance technicians to grow as fast as it wants, executives see a silver lining in the higher airfares that are likely from a slower airline recovery.

“I believe staffing challenges will result in downward pressure on capacity and therefore, be positive to fares,” Sun Country CEO Jude Bricker said during the carrier’s fourth-quarter and full-year results call last week.

Bricker has good reason to find a silver lining. The airline posted a 9 percent increase to $111.48 in its base fare per passenger during the fourth quarter compared to the three months prior. And year-over-year, fares were up 28 percent. Sun Country, which went public last March, did not publish average fare data for 2019.

The upward trend is a matter of supply and demand. While the Omicron variant hit demand for air travel in January and February, airlines — Sun Country included — remain confident in throngs of vacationers returning to the skies for spring break in March and April, and then again this summer. That return is all well and good for airlines but it means fares will rise if the industry cannot resume its pre-pandemic schedules in lockstep with demand. And after thousands of pilots retired during the pandemic, the timeline of the supply-side recovery is in question amid the growing staffing shortages.

American Airlines, Delta Air Lines, and United Airlines have already pared back their schedules this spring to mitigate any shortage of pilots at their regional affiliates. American has temporarily suspended or delayed the start of dozens of routes, while United has pulled out of several smaller cities and cancelled numerous regional routes. Delta has cut regional flying by up to a quarter but not exited any destinations in the first half of 2022, executives said in January.

For Sun Country, the lack of staff is limiting its ability to grow. Bricker said that in March the airline will fly the “maximum volume limited by staff,” though he did not indicate how much the airline would like to fly. Sun Country plans to fly 5-10 percent more capacity in the first quarter than it did three years earlier.

The carrier’s fleet growth plans remain unchanged amid its staffing issues. In January, Sun Country signed letters of intent for five used Boeing 737-800 aircraft due later this year. Those aircraft, along with two it acquired last year, put it on track to meet its target of adding eight passenger aircraft to its fleet in 2022, said Chief Financial Officer Dave Davis. Sun Country flew 36 passenger aircraft plus 12 737 freighters under a deal with Amazon at the end of December.

Sun Country reached a new deal with its pilots union that executives think will make it even more attractive to new hires. The contract includes better pay and benefits, as well as improved work rules for pilots, and new flexibility for the airline to move crew members around its system where they are needed. Davis described the deal as “highly competitive with our low-cost peers.” He added that, since the agreement was signed in December, pilot applications jumped 160 percent compared to the months just prior to the deal.

The question for many Wall Street analysts is how the new pilots deal will impact overall costs. Sun Country forecasts that unit costs excluding fuel, but including the new labor agreement, will be lower in 2022 than they were in 2019. He attributed the drop to the airline’s planned growth, renegotiating aircraft leases, and technology improvements.

Sun Country’s ability to lower unit costs is big in an industry where cost pressures are increasingly a concern for management teams. Most airlines forecast significant increases in 2022 compared to 2019 with labor cost pressure a big reason for the increase, while flying less also factors in. Many analysts have pressured management teams to get costs in check as carriers are expected to transition out of the crisis this year.

Bricker was unconcerned about the proposed merger (see Feature) between Frontier Airlines and Spirit Airlines unveiled Monday. He pointed to the fact that neither carrier has a significant presence in Sun Country’s home Minnesota market — Cirium schedule data shows Frontier and Spirit sixth in Minneapolis-St. Paul with a 3.2 percent share of seats in February — and added that he does not see a merger as changing that positioning.

“I think it’s a net positive,” he said of the deal. “I don’t think it changes the dynamic much here in Minneapolis.”

Sun Country lost $602,000 on nearly $173 million in revenues in the fourth quarter. Revenues were up up 60 percent year-over-year in the period. Total unit revenues (TRASM) were up 34 percent and unit costs (CASM) excluding fuel were down 2.2 percent. And the airline flew 72 percent more passenger traffic on 36 percent more capacity.

For the full year, Sun Country posted a $77 million profit including a $72 million benefit from federal coronavirus aid. Revenues increased 55 percent to $623 million compared to 2020. TRASM was up 7.9 percent on a 0.6 percent decrease in CASM excluding fuel.

The carrier forecasts revenues of $215-225 million in the first quarter, or a 9-14 percent increase over the same period in 2019.

Edward Russell

Norse Mimics Norwegian Air With UK-U.S. Plans

Norse Atlantic Airways CEO Bjørn Tore Larsen insists the airline is not Norwegian Air, but the startup is looking more and more like the now-defunct long-haul arm of that airline.

Norse is in the process of securing an air operators certificate (AOC) from UK authorities that would allow it to add flights in the “biggest transatlantic market,” or between the UK and the U.S., Larsen said at an International Aviation Club (IAC) event in Washington, D.C., on last week. Norwegian Air offered flights between the UK and U.S. from 2014 to 2019, including by its UK-based subsidiary Norwegian Air International, which attracted the ire of U.S. lawmakers and labor unions.

“We are not Norwegian [Air] … We are a lean and focused operator. We will do do one thing only: We will fly long-haul with one aircraft type. We are going to be taking home gold medal rather than trying to three, or four, or five at the same time, because then it’s going to be silver, or bronze, or worse,” said Larsen when asked how Norse will succeed when Norwegian Air did not.

While Norwegian Air did attempt to build a diversified low-cost airline group, Larsen’s arguments for why Norse is different and will succeed — a focus on low costs, a disciplined concentration on a single business, and likely very low aircraft lease rates — were very similar to those of former Norwegian Air CEO Bjørn Kjos. Up until he departed in 2019, Kjos repeatedly dismissed criticisms of Norwegian Air’s long-haul, low-cost business. The airline entered administration shortly after Kjos left and, in early 2021, officially shuttered its long-haul business.

Norse Atlantic, however, will pick up where Norwegian Air left off. With its EU AOC and U.S. permits in hand, Norse plans to begin flights between Oslo and the U.S. in the second quarter, Larsen said. He specifically declined to say whether that meant April, May, or June. Initial destinations will include Fort Lauderdale, New York — either JFK or Stewart airports — and Ontario, Calif. Tickets will go on sale at the end of March.

Norse will launch with three Boeing 787s — its first arrived in December — and grow slowly through the summer. Its fleet plan calls for three 787-8s with 291 seats, and 15 787-9s with 344 seats.

In terms of Norse’s planned UK flights, Larsen said he expects a local AOC “in a few months time.” The airline already has begun the application process with UK authorities, he added.

“We don’t want to run before demand comes back,” he said about the start of flights. He added that Norse will focus initially on operating just one airline — referring to its initial Norway-based operation — before it launches a second.

Norse has learned one thing from Norwegian Air: Secure political and union support early. While Norwegian Air’s U.S. expansion repeatedly faced pushback from both lawmakers and organized labor, Norse reached a deal with the Association of Flight Attendants-CWA last June — months before it even had an operating certificate — to avoid any such outcry. Larsen said Thursday that the airline has “good relationships” with both British and Norwegian pilot unions; though there was no mention of the Air Line Pilots Association (ALPA), the largest U.S. pilots union.

And Rep. Peter DeFazio (D-Ore.), the chairman of the House Transportation and Infrastructure Committee who was unconvinced about Norse last year, was in attendance at IAC event.

“Sir, I know you were skeptical of us,” Larsen said to DeFazio at the event. “Thank you very much for listening to us and giving us a chance.”

Edward Russell

In Other News

  • In conjunction with Frontier and Spirit’s merger announcement (see Feature), the carriers dropped their respective fourth-quarter earnings releases last week. Frontier posted a $53 million loss in the fourth quarter on revenues of $609 million, which were down 7 percent year-over-two-years. While numbers are tracking in the right direction quarter-over-quarter and year-over-year, unit costs (CASM) excluding fuel were up 18 percent to 6.5 cents compared to 2019, and total unit revenues (TRASM) were down 10 percent to 7.78 cents over the same period. For the full year, Frontier posted a $117 million loss that benefitted from CARES Act pandemic relief on revenues of $2.06 billion. The airline flew 9 percent less passenger traffic on 4 percent more capacity in the fourth quarter compared to 2019. “We’re really optimistic for the spring … and we’re really excited about the summer,” Frontier CEO Barry Biffle said last week citing strong leisure demand.
  • Spirit reported a $61.6 million loss on $988 million in revenues during the final quarter of 2021. But unlike Frontier, revenues were 1.8 percent higher than they were during the same period in 2019, marking the first quarter since the crisis began that Spirit’s revenues exceeded pre-pandemic levels. The airline still has work to do on the cost side: CASM excluding fuel was up 14.5 percent year-over-two-years to 6.54 cents in the fourth quarter, and TRASM was down 6.9 percent. Spirit carrier 3 percent more passenger traffic on 9.5 percent more capacity during the period than it did in 2019. And for all of 2021, Spirit lost $473 million on $3.2 billion in revenues. Spirit CEO Ted Christie echoed Biffle’s view of strong leisure demand ahead this spring and summer.
  • The latest piece of Aeromexico‘s restructuring has fallen into place: Buying back Aimia’s stake in its Club Premier loyalty program. The airline will buy Aimia’s 48.9 percent stake for $405 million in a deal unveiled last week. Aeromexico will take full control of Club Premier, including sticky relationships with the lucrative corporate travelers that the carrier’s U.S. Chapter 11 reorganization plan relies on, when the transaction closes, which is expected by early August. As part of the sale, Aimia agreed to drop all of its claims in Aeromexico’s bankruptcy case.
  • Spain’s Volotea has some ambitious growth plans for 2022. The discounter will grow capacity by 39 percent year-over-three-years, which includes launch 40-45 new routes and opening two new bases. The new bases will be unveiled by the end of February, the airline said. Revenue growth will be a bit more subdued at a just 20 percent increase over 2019 to roughly €525 million ($599 million). Volotea founder and CEO Carlos Muñoz said the growth outlook was the result of “analyzing the pent-up demand in our markets, and after having been able to maintain an average seat occupancy of over 90 percent since June 2020.”
  • Finnair is (finally) joining the premium economy party. The Finnish carrier will install the cabin on all of its widebody jets, as well as new business class seats and an economy class refresh, as part of a €200 million ($228 million) investment in its onboard product. The first reconfigured Airbus A330s and A350s will enter service this spring, and Finnair targets an end-2023 completion to the retrofits.
  • The U.S. Transportation Department has fined Air China $300,000 for violating its tarmac delay rule. DOT’s investigation found that two 2018 flights remained on the tarmac at New York’s JFK for more than five hours without allowing passengers to disembark.
  • Alaska Airlines is making the San Francisco Bay Area central to reviving its California route network. The carrier is stepping up its marketing efforts in the region, taking over the sponsorship of the city’s Lunar New Year celebration from long-time backer Southwest. After scaling back marketing during the pandemic, Alaska Managing Director of Brand Marketing Natalie Bowman told Airline Weekly the Bay Area is “a huge focus area for us now.” The carrier recently named Neil Thwaites, formerly of British Airways, to lead its California strategy. Separately, Alaska is investing $8.5 million to revamp its lounges in Seattle and Portland, Ore.
  • The executive suites of All Nippon Airways and Allegiant Air will be changing in the next few months. ANA named Shinichi Inoue as its new president and CEO who will replace Yuji Hirako on April 1. Inoue, who has worked at the carrier since 1990, was most recently a senior vice president and before that led ANA’s budget subsidiary Peach. Hirako, who took the top spot at ANA in 2017, will become vice chairman of the ANA Holdings board.

    And across the Pacific Ocean, long-time Allegiant CEO Maurice Gallagher, Jr., step down on June 1. John Redmond, the discounter’s president, will become CEO. Gallagher, who has been CEO since 2003, will remain chairman of Allegiant’s board. Allegiant and ANA join the growing list of airlines undergoing a leadership transition during the pandemic, including Alaska, American, Southwest, and United.

Edward Russell & Madhu Unnikrishnan

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Sky Money

  • In the latest sign the international travel recovery is firmly underway, Icelandair has cancelled a $120 million credit facility from Íslandsbanki and Landsbanki that was backed by the Icelandic government. The two-year revolver was extended to the airline in September 2020 to help it navigate the Covid-19 crisis. Icelandair never drew on the facility though CEO Bogi Nils Bogason said its availability was a “key component” in the carrier’s financial restructuring.
  • Regional Silver Airways has closed a $50 million private placement of senior secured convertible notes that completes its recapitalization efforts. With the capital in hand, the Florida-based carrier has resumed deliveries of new ATR 42-600 aircraft — it had 11 at the end of 2021 — finalized the integration of Seaborne Airlines that it acquired in 2018, and is “poised to undergo rapid and dramatic expansion,” said CEO Steven Rossum. Jeffries arranged the financing, and the notes were purchased by funds and accounts managed by Brigade Capital Management.

Edward Russell

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State of the Unions

Mesa Air Group CEO Jonathan Ornstein blasted U.S. requirements that pilots have 1,500 of flight experience before they can take the helm of a commercial aircraft and argued for lawmakers to reduce the number of hours last week. The regional blames the national pilot shortage for why it is planning to operate 5-10 percent fewer flights this year than previously planned.

“It seems crazy that a 300-hour [first officer] can land a Lufthansa A350 into JFK flying over Queens, and a U.S. pilot can’t do the same thing,” Ornstein said, referring to the number of hours European pilots must have to be certified. “No other country in the world has adopted this [rule], not a single one.”

Ornstein called on lawmakers to rethink the 1,500-rule, put in place in the wake of the Colgan Air crash in 2009. “There is not a shred of evidence that says that a 1,500-hour pilot is safer than a 300-hour pilot with intense training,” he said. ” I think it’s important that some of the politicians start to act and take this up, because if they don’t, they’re putting the industry in jeopardy.” Smaller cities already are losing air service as regionals and mainline carriers are trimming their schedules in response to the pilot shortage, he said, adding that more smaller communities will lose connections to the national air transport system unless the law is changed.  

American Airlines and United Airlines, both of which Mesa flies for, have trimmed schedules and routes to mitigate the shortage. Both carriers expect the fallout to carry on through this year and possibly into 2023.

Echoing SkyWest CEO Chip Childs, Ornstein said the regional industry did not factor in massive attrition at mainline carriers during the pandemic in their hiring plans. Starting in 2020, hundreds of mainline pilots took buyouts or early-retirement packages as airlines downsized in response to the pandemic. This, coupled with retirements due to age requirements, led to the mainline carriers scrambling for pilots by hiring them from the regionals, Mesa said.

And the Omicron variant didn’t help matters. At times in December and early January, almost a quarter of Mesa’s staff was out sick with the disease, hamstringing the regional’s ability to operate its schedule. In a normal December, only about 5 percent of Mesa’s staff report out sick. The operational impact cost Mesa almost $10 million in the quarter.

“While attrition impacted us this last quarter, please do not underestimate the impact of Covid,” Ornstein said. “When you’re dealing with 23 percent, 24 percent, 25 percent absence rates — I mean I don’t care what the attrition is — if you have no attrition, you would not be able to cover that on a day-to-day basis.” Mesa’s sick rate fell back to historic norms in the third week of January.

Mesa said its pilot-hiring pipeline is “full.” Unlike SkyWest, where captains are leaving for mainline carriers, Mesa is seeing more first officers quit. Training for first officers takes less time than for captains, giving Mesa confidence its pilot crunch will ease — but not go away entirely — next year. The company is hiring more instructors and booking more simulator time to train new hires.

Mesa has another card to play that its fellow regionals do not: Its cargo operation for DHL. Mesa is the only regional to offer mainline-jet experience on its Boeing 737-400Fs, Ornstein noted. This provides a career path for not only Mesa’s current pilots but makes the company a more attractive proposition for applicants, he said.

The cargo operation is growing. It will add its third 737-400F this month. Last year was the first full year for the cargo operation and Mesa’s proof of concept for the subsidiary, and Ornstein said the company has met DHL’s expectations. However, when the carrier launched its 737 operation in 2020, it believed it could have as many as 8-10 aircraft in its fleet in a year to 18 months. Ornstein declined to predict when Mesa may add more 737s but said only that Mesa is committed to expanding the fleet.

Besides attrition and Omicron, it was difficult quarter for the company. It incurred $59 million in maintenance costs in the quarter. The bulk of this was maintenance work deferred from the beginning of the pandemic, and the company predicts these costs will abate over the next quarter. The December quarter also was the first not to benefit from federal payroll support, which in the fiscal first quarter of 2020 totaled $11.3 million.

Mesa reported a net loss of $14.3 million in its fiscal first quarter that ended on December 31, 2021, compared with a $14 million profit in the same period a year prior. Revenues of $148 million were down $2.6 million from 2020.

“Obviously, this has been a very tough quarter for Mesa,” Ornstein said.

Madhu Unnikrishnan

Labor Briefs

  • The entire spectrum of U.S. pilots unions has objected to Wizz Air‘s application for a U.S. foreign air carrier permit. The Hungarian carrier’s application for a foreign air carrier permit, filed late last month, has scant details on its plans, something the Southwest Airlines Pilots Association (SWAPA) noted in its objection. Wizz offered no hints on its plans other than it wants a U.S. foreign air carrier permit. The Air Line Pilots Association, the Independent Pilots Association, the Allied Pilots Association, and SWAPA pointed to what they say is Wizz’s “anti-union” practices in their objections, and argue the carrier’s labor policies could violate the U.S.-EU open skies agreement. ALPA, for one, argued Wizz’s labor practices cold compromise safety.
  • Canada’s PAL Airlines reached an agreement with the Teamsters union on new collective bargaining agreements for the airline’s customer service agents and ground, cargo, and commissary staff. These are the first union contracts for the turboprop operator, Teamsters Local 885 said in a statement.
  • Air Line Pilots Association President Joe DePete blasted the process by which the federal government allocates wireless frequencies in a letter to lawmakers. DePete said the process is “broken in relation to aviation safety.” This follows a Congressional hearing on the botched 5G network rollout, which last month threatened to bring the national aviation system to a standstill. DePete called on lawmakers to reform the system and to involve the FAA more closely in wireless spectrum decisions.

Madhu Unnikrishnan

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Fleet

Canadian discounter Swoop is so confident that leisure travelers will come back stronger this summer than they have to date during the pandemic that it has unveiled a deal to expand its fleet by 60 percent.

“We believe [strong] demand is signaling that Canadians are ready to reconnect with family and friends, and we anticipate a very strong summer,” said Bert van der Stege, head of commercial and finance at Swoop. And this is true even with the Omicron variant-driven slowdown in January and February, which he said is quickly giving way to a March and April rebound ahead of the peak summer period.

To meet demand, Swoop will add six Boeing 737-8s to its fleet by summer — a 60 percent increase to its fleet of 10 737-800s. The aircraft are leased and will be delivered directly from Boeing, and do not come from parent WestJet’s existing Max orderbook, said van der Stege. He declined to name the lessor. All of Swoop’s current fleet has come from WestJet.

WestJet had firm orders for 27 737 Maxes at the end of January, Boeing’s orders and deliveries data show.

Asked about the decision to add Maxes versus more used 737NGs, van der Stege said that among all the options available to them the latest generation 737 is “an excellent aircraft for ULCCs.” He added that thanks to Swoop’s position in the WestJet family, it was benefitted from data from its parent’s experience operating the jet in its decision making.

The airline’s growth comes amid the rapid expansion of ultra low-cost carriers in Canada. The increasingly crowded sector includes Flair Airlines, which launched in 2020, as well as startups Jetlines and Lynx Air, which both hope to begin flights this year. In 2021, Flair was the largest of the set with a 5 percent share of seats in the Canadian domestic market compared to Swoop’s 3 percent share, Cirium data show.

“We believe with our investment announced today … we are well positioned to retain the market leadership in the ULCC segment,” said van der Stege. He did not comment directly on any of Swoop’s competitors.

Swoop does not plan to add more aircraft beyond the six new Maxes to its fleet in 2022. It will end the year with 16 737s.

Edward Russell

Fleet Briefs

  • Avolon reversed its 2020 losses and reported a profit of $47 million on revenues of $2.1 billion. Revenues were lower than the $2.3 billion reported in 2020. The lessor delivered 49 aircraft in the year and added 14 new customers, bringing its total to 150 airlines and 592 aircraft in its portfolio. Avolon sold 24 aircraft in the year and is the launch customer for IAI’s Airbus A330-300 freighter conversion. “While challenges remain in the short-term, and recovery will be uneven across markets, we have passed an inflection point and we are in the re-build phase for our industry,” CEO Domhnal Slattery said.
  • Icelandic startup Play has signed a letter of intent for another new Airbus A321neo. The aircraft, which will join its fleet in April, will expand its planned summer 2022 fleet to seven aircraft: four A321neos and three Airbus A320neos. Play plans to begin transatlantic flights to Baltimore-Washington from its Reykjavík base in April with service to Boston beginning in May and New York’s Stewart Airport in June.
  • ANAC, Brazil’s civil aviation regulator, certified cargo modifications on Azul Embraer E195s used to transport freight. With the new permits, the aircraft are certified to carry 15 tons of freight in the cabin in fireproof and temperature controlled containers monitored by a thermal camera fire detection system. Before the approval, the E195s were certified to carry seven tons of cargo in the cabin. Azul is now the first airline to operate Embraer “Class F” freighters, the airline said.

Edward Russell & Madhu Unnikrishnan

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Routes and Networks

  • SAS is stretching the legs of its new Airbus A321LRs by adding Toronto to its map. The Star Alliance carrier will open flights between Toronto Pearson and Copenhagen thrice weekly, and Stockholm four-times weekly with the 157-seat jet from June. SAS will set a start date for the new routes once it has secured the necessary regulatory approvals.
  • Aeromexico lands at Mexico City’s new secondary airport, Felipe Angeles International Airport, in April. The carrier will connect the airport, which is about 31 miles northeast of Mexico City International Airport, with Merida and Villahermosa daily from April. Aeromexico joins Viva Aerobus and Volaris at Felipe Angeles, which opens in March.
  • WestJet budget subsidiary Swoop is adding five new destinations and 11 routes to its map this summer. The airline will land in the Atlantic Canada cities of Deer Lake, Charlottetown, Moncton, St. Johns, and St. John in May and June. The airline will offer 10 new routes from the cities to Edmonton, Hamilton, Ontario, and Toronto Pearson, as well as between Halifax and Ottawa. The expansion is possible with the addition of six Boeing 737 Maxes (see Fleet) to Swoop’s fleet.
  • Romanian discounter Blue Air will add two routes to Greece this summer. The airline will connect its Bucharest base with Kefalonia and Levkada from June. Blue Air cites “strong demand” among leisure travelers for the additions.
  • Staying in Europe, Norwegian budget startup Flyr is adding another international dot to its map: Stockholm. The airline will launch four-times weekly service between its Oslo base and Stockholm Arlanda on April 7 with a Boeing 737-8. Service will expand to daily this summer.
  • And speaking of Greece, Sky Express has joined EasyJet‘s Worldwide by EasyJet booking engine that allows travelers to book connecting itineraries between the two carriers. The tie up covers Sky’s domestic flights in Greece to more than 20 destinations, which deepens EasyJet’s reach in a country popular with leisure travelers. Connections are possible over Athens and 10 other Greek airports.

Edward Russell

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Feature Story

The ultra-low-cost-carrier model in the U.S. got a big boost last week. Frontier Airlines and Spirit Airlines unveiled plans to merge in a deal that would create a U.S. budget juggernaut to be reckoned with.

The merger would create the fifth-largest carrier in the U.S. serving 145 destinations in 19 countries with 283 aircraft. Frontier shareholders, particularly its majority owner Indigo Partners, would own 51.5 percent of the resulting company despite Spirit being the larger airline. The merger has been approved by the boards of both carriers after talks began late last year, but is subject to the approval of a Biden administration increasingly wary of consolidation. The airlines hope to close the transaction in the second half of 2022.

The transaction is valued at $6.6 billion, including the $2.9 billion equity value of Spirit as well as net debt and operating lease liabilities. Spirit shareholders would receive 1.9126 shares of Frontier plus $2.13 in cash for each of their shares. And the airlines forecast $500 million in annual revenue synergies after $400 million in merger-related integration expenses.

Frontier operated 110 A320 family aircraft and Spirit 173 aircraft at the end of December, according to the carriers’ respective fleet plans. Frontier had firm orders for 58 A320neos and 176 A321neos, and Spirit for 31 A319neos, 63 A320neos, and 26 A321neos — a combined total of 354 aircraft — at the time, Airbus data show.

A Spirit-Frontier deal has long been seen as likely. Only the timing came as a surprise. The carriers come from the Indigo flock, which built Spirit into the airline it is before selling the company in 2013 when it acquired Frontier. Both fly complementary fleets of A320-family jets and aim to stimulate leisure travel with cheap, point-to-point flights.

Frontier and Spirit would jump ahead of Alaska Airlines and JetBlue Airways in the U.S. if the combination is approved. They would have a 6.5 percent share of U.S. passengers based on 2019 numbers, according to U.S. Bureau of Transportation Statistics (BTS) data. Their share grew to 8.3 percent of the market during the first 10 months of 2021, the latest BTS data show. The airline would remain behind American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines, which together control more than three-quarters of the U.S. market. It is the first major airline merger in the U.S. since the combination of Alaska and Virgin America in 2016.

“This transaction is centered around creating an aggressive ultra-low fare competitor to serve our guests … and increase competitive pressure, resulting in more consumer-friendly fares for the flying public,” said Spirit CEO Ted Christie.

The deal comes at a time when the ULCC model is ascendant. In January, Airlines for America (A4A) Chief Economist John Heimlich highlighted the sector’s market share gains to roughly 15 percent of U.S. air travelers in the first half of 2021 from just 11 percent in 2019. He called this a “significant shift” in the market and coming at the expense of the legacy and hybrid carriers in the market. Other U.S. ULCCs include Allegiant Air and Sun Country Airlines, as well as startup Avelo Airlines.

Both Frontier and Spirit have recovered faster from the coronavirus pandemic than many of their competitors owing to the strength of leisure traffic. The airlines’ combined passenger traffic numbers were down just 2 percent in the final quarter of 2021. And their combined capacity was up 7 percent year-over-two-years.

Frontier and Spirit’s proposed combination will come under the U.S. Justice Department’s (DOJ) microscope. The department, along with the Federal Trade Commission, has taken a firmer line against mergers in large industries since the Biden administration took office in 2021. Speaking in January, President Biden spoke out against monopolies in key industries and said “capitalism without competition is not capitalism, it’s exploitation.” A Spirit-Frontier merger, while creating a stronger budget airline, would also eliminate one competitor from the already highly-consolidated U.S. airline market.

“This is not about reducing competition and raising fares, this is about getting more low-fares to more people in more places,” Frontier CEO Barry Biffle said during an investor call last week. “We’re excited to tell our story to [regulators] and we think it will be well received.”

Frontier and Spirit executives repeatedly touted the merger’s consumer benefits during the call. They forecast $1 billion in annual consumer savings from the additional flight options and strong competitive position of the resulting airline in the marketplace. And Biffle said the merged carrier could serve more smaller cities with limited or no budget competition today, including Eugene, Ore., Ithaca, N.Y., and Worcester, Mass.

“Them merging is not going to increase their ability to pick up passengers,” said Shakeel Adam, managing director at airline advisors Aviado Partners, on the potential network expansion. By his measure, if the combined carrier could serve any of the three cities named, so could Frontier and Spirit today given the point-to-point nature of their networks.

Biffle acknowledged that the airlines will need DOJ approval for their merger. The regulator, in a recent signal of its pro-competition stance, challenged American and JetBlue’s Northeast Alliance in court in September.

Jonathan Kanter, who leads the antitrust division at Justice, has taken a firm stance against mergers that could reduce competition. In January, he said the department would “seek a simple injunction to block” any transaction it deemed would “lessen competition.”

While there was initial widespread skepticism over whether the DOJ would green light the Frontier-Spirit merger, Wall Street analysts view the deal as likely to get approval. Savanthi Syth, an analyst at Raymond James, initially wrote that the merger would likely raise “some objection” from antitrust officials but, later the same day, updated her view saying she did not expect any “deal-breaker” requirements from regulators.

“Justice is going to put them through the wringer,” said Kenneth Quinn, a partner at Clyde & Co. who specializes in regulatory and antitrust aviation legal matters, but added that they will be “hard pressed to challenge this transaction.” He cited Frontier and Spirit’s limited network overlap and their large operations at airports with few barriers to entry.

Multiple sources familiar with the regulatory approvals process expressed views that any acquisition involving the Big 4 — American, Delta, Southwest, or United — would be dead on arrival in Washington, D.C., but that the combination of two smaller airlines would likely make it through.

The merger agreement gives the parties until February 5, 2023, plus automatic extensions to February 5, 2024, to secure regulatory approval of the deal. If the deal collapses, Spirit must pay Frontier a $94 million cash termination fee.

William Franke, the chair of Frontier’s board and managing partner at Indigo, will lead a committee to determine the resulting airline’s leadership, as well as its name and where it will be headquartered. Speaking last week, Franke said the committee would undergo a “thoughtful [and] careful” analysis to determining these items, and unveil their decisions closer to the transaction’s close date.

“They’re both exceptionally good CEOs,” Franke said referring to Biffle and Christie. “It’s not an easy process but we’ll go through it.”

Executives of both airlines said that the merger would not result in any job losses. They promised 10,000 new “direct” jobs — or ones at the new carrier rather than a contractor — by 2026 if approved. And in separate letters to flight attendants and pilots at Frontier, executives said the carriers planned to maintain and expand all of their current crew bases.

Frontier employed 5,502 staff, and Spirit 10,433 people at the end of December, BTS data show. That represents an 11 percent year-over-two-years increase for the former, and a 16 percent increase for the latter.

Adam questioned the airlines’ promise to keep all current staff. One of the key synergies of any merger is the ability to reduce redundant staffing, for example management positions or front line airport staff, he said.

Labor costs are one concern raised about the deal. U.S. airlines already face a pilot shortage that is unlikely to let up this year and, with the significant growth planned, Frontier and Spirit are likely to face pressure to raise pay rates to attract new staff. First officers start at $58 an hour at both carriers, which is at least 31 percent less than at the Big 4, according to data from Cowen & Co. “Competing for the same pilot pool means wage rates are likely to increase,” wrote Cowen analyst Helane Becker on the merger.

Sara Nelson, president of the Association of Flight Attendants-CWA union that represents cabin crew members at both Frontier and Spirit, said last week that the union’s focus would be “on a review to determine whether we support this merger based on making sure it would benefit flight attendants.”

“Once you see what it does for both sides it becomes obvious: This is a very complementary transaction,” said Christie.

Edward Russell

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