Issue No. 857

Europe's Promising Summer

Will it Be a Hot Vaxxed Summer for European Airlines?

Pushing Back: Inside the Issue

European airline executives at last week's Airlines for Europe conference were remarkably bullish on summer demand. Bookings for summer travel are robust and trending higher. Airlines are planning scads of new routes, particularly to southern Europe to capitalize on booming leisure demand. Discounters are facing off to grab as much market share as possible.

This confidence is remarkable for a few reasons. First, lest we forget, the pandemic hasn't ended, nor has the threat of new variants. Europe is enduring its largest land war since the 1940s in Ukraine, raising questions about the durability of demand in the continent's East. And last, where oil prices will go is an open question. The price of crude remains volatile. Demand for diesel could cause prices for other distillates, including jet fuel, to spike. Maybe AerCap CEO Aengus Kelly is right, though, that the desire to travel after two years of lockdowns will overcome all of these short-term problems.

Meanwhile, the changes in C-suites continue. KLM and Pegasus named their first women CEOs, Marjan Rintel and Güliz Öztürk, respectively. SAS has a new finance chief in Erno Hilden. And after 50 years spent reinventing how the world moves goods and packages, FedEx founder and CEO Fred Smith ends an era and steps down from the company he dreamed up in 1973.

Verbulence

"The good guys are winning."

Volotea CEO Carlos Muñoz on European demand

The Airline Weekly Lounge Podcast

Delta Air Lines is making a play for more premium passengers in Los Angeles. Our reporter Brian Sumers took a field trip to LAX to talk to Delta leaders to see what the airline thinks sets it apart at the country’s second-largest market. Then, Brian and Madhu Unnikrishnan use the “garden center index” to gauge how far the travel recovery has come. Listen to the episode, and go here for the full archive of the Airline Weekly Lounge.

Weekly Skies

European airlines may face the dual challenges of the Covid-19 pandemic recovery and a war on their doorstep in Ukraine. But summer travel demand continues to look strong though another Covid surge, or geopolitical crisis, could knock it off course warned Ryanair Group CEO Michael O’Leary.

“The system is very fragile,” he said at the trade group Airlines for Europe (A4E) Aviation Summit in Brussels on March 31. “If there is further adverse news flows, that optimistic outlook will fall over.”

Ryanair ticket prices are softer for April and May travel compared to 2019 due to Russia’s invasion of Ukraine and a push to fill more of its flights, said O’Leary. He maintained expectations of mostly full flights and fares comparable to three years ago this summer.

The risk of another crisis, or Covid variant, is not stopping airlines from planning robust summer schedules. Europe’s largest airlines, including EasyJet, International Airlines Group (IAG), Lufthansa Group, and Ryanair, plan to fly at or near their pre-pandemic European capacity during the peak travel period. Long-haul flying, particularly to Asia, remains below 2019 levels for the global airlines.

Airlines are scheduled to fly just 1 percent less capacity in Europe in the third quarter, which includes the busiest summer months, compared to three years ago, according to Cirium data. However, schedules remain in flux more than a month or two out.

“If I were a potential customer, I’d book right after my speech right here,” Lufthansa Group CEO Carsten Spohr said. Easter bookings have already returned to 2019 levels, and Spohr expects summer to be the same.

Despite all the optimism, the Ukraine war is having some effect. EasyJet CEO Johan Lundgren said the fallout is worse the farther east one goes in Europe. Travel demand in Western Europe, where EasyJet operates the majority of its flights, remains strong. “We are not affected,” he said.

AirBaltic CEO Martin Gauss elaborated on a geographic differences in demand. Bookings for outbound travel from the Baltics remains strong but there is hesitancy, especially among corporate customers, to book travel to the region, he said.

And Spanish discounter Volotea, which does not fly farther east than the beach town of Varna, Bulgaria, has not felt a hit from the Ukraine war to its summer, said CEO Carlos Muñoz. “The good guys are winning,” he said, with pent-up travel demand the so-called “good guys,” and adverse macro forces, including variants and the Ukraine war, the opposing side.

Volotea sees strong demand for the spring and summer, and will fly significantly more capacity this summer than it did three years ago, added Muñoz.

“If there is one particular area of strength, particularly for Easter, it’s the beaches of Europe — Portugal, Spain, the Balearics, and Greece,” said O’Leary. The latest indication that the leisure-first pandemic recovery that has favored outdoor-oriented destinations, like beach markets, continues.

Few airline executives, other than O’Leary, spoke of the risk of another surge hitting summer demand. Even with the BA.2 variant spreading, European governments are increasingly looking towards reopening rather than closing. Switzerland on March 30 decided to drop all Covid restrictions beginning April 1. Other countries around Europe are moving in the same direction, and the airline chiefs were united in pushing for fewer restrictions than more.

“We’re a more resilient company,” said Lundgren when asked if EasyJet was ready for whatever challenge may come next.

Edward Russell

EasyJet and Ryanair Make Progress on Expansion

Ryanair and EasyJet are targeting markets where competitors have made deep cuts to grow as Europe emerges from the Covid-19 pandemic.

Topping that list are destinations in southern Europe. Speaking at the Airlines for Europe Aviation Summit on March 31, Ryanair Group CEO Michael O’Leary named Italy where Alitalia was replaced by half-its-size ITA Airways last October, and Portugal where TAP Air Portugal has made dramatic cuts, as well as Spain and Sweden, where the Irish discounter is growing. And EasyJet CEO Johan Lundgren listed airports in Italy and Portugal, including Milan Linate and Porto, where the UK-based airline has acquired up slots.

“We have liberally spread [our new] aircraft across Europe,” said O’Leary citing the 65 Boeing 737-8200s that Ryanair plans to take in 2022.

Ryanair has long made it clear that it would grow out of the crisis. Last July, O’Leary said he had never seen as much of a growth opportunity as presented by the pandemic. He dismissed competition from EasyJet and Wizz Air, both of which also plan to grow in the recovery, pointing to the fact that Ryanair had more aircraft on order and simply could grow more.

Lundgren is more measured about EasyJet’s growth plans. Rather than focusing on aircraft deliveries — the airline will take eight Airbus A320neo family aircraft this year, and another seven in 2023 — he is focused on acquiring slots and growing at key airports, expanding EasyJet’s seasonal bases, and growth by shifting to larger aircraft. EasyJet raised £1.2 billion ($1.6 billion) in September to fund its expansion.

“We’ve got plenty of opportunities to grow,” said Lundgren. He added that the airline can grow without “entering into new markets with the risk and the time it takes for those markets to mature.”

And Wizz Air is splitting the difference. The airline is upgauging by replacing smaller A320s with new, larger A321neos that, as CEO József Váradi said in January, will lift its average seat count per flight to 250 in the coming years from 211 this summer. In addition, Wizz has a robust orderbook that parent Indigo Partners topped off in November when it ordered another 102 A321neo and A321XLR jets fro the discounter.

Portugal is one country where EasyJet and Ryanair are facing off. The country is a “trendy” destination, as TAP CEO Christine Ourmières-Widener described it at the summit, with visitor numbers rising dramatically in the years before the pandemic. However, the crisis has been tough on the country’s national carrier, and it will operate 15 percent fewer flights in the third quarter than it did three years ago, according to Cirium. Notably, European departures will be down nearly one-fifth when many of its network peers, including Iberia and KLM, will be back at 2019 levels.

Both EasyJet and Ryanair plan double-digit departure growth in Portugal in the September quarter compared to 2019, Cirium shows. And in Porto, a city where TAP’s cuts are particularly deep, EasyJet operate 49 percent more flights this summer, and Ryanair nearly 7 percent more. O’Leary said his carrier would be even larger in Portugal this summer were it not for what he has described as “slot squatting” by TAP in Lisbon.

And in Italy, both airlines have made strides that play to their strength. EasyJet will offer three times more departures from Milan’s close-in Linate airport in the third quarter than it was in 2019, and Ryanair flights from the country — where it has added numerous new bases, including in Turin and Venice — will be up 44 percent, Cirium shows. And, keeping to form, O’Leary brushed off Wizz’s expansion in the country and said the airline is “struggling” in the country.

Europe’s three big discounters plan to be larger in the third quarter than they were three years ago. EasyJet capacity is scheduled up nearly 7 percent, Ryanair up almost 16 percent, and Wizz up more than 42 percent, according to Cirium. However, schedules remain in flux more than one or two months out, and the airlines’ summer plans could change.

Edward Russell

Jet Airways Ready for Second Act

The wait for India’s Jet Airways to hit the runway might get a little longer. But the new promoters of the airline maintain the restart activities are “progressing well.”

While the Jalan-Kalrock Consortium, which won the right to restructure Jet Airways, makes a statement almost every quarter on resuming operations, the progress so far hasn’t been encouraging. However, Akasa, the other airline set to launch in India, has already announced it would be launching its first commercial flight in the month of June.

Jet Airways went bust in 2019 and was revived after its new promoters — a consortium of entrepreneur Murari Lal Jalan and serial entrepreneur Florian Fritsch-backed Kalrock Capital — infused cash into it. Jalan has repeatedly said the earliest the airline could resume commercial flights was 2022.

Dubbing the process of restarting an airline “a complex exercise that must be done meticulously, in coordination with the regulatory authorities,” the consortium in its statement this month said that the process is underway. “The timeline reflects the typical duration of an air operators certificate process. However, we fully expect to have the proving flight and air operator’s certificate well in advance of the filed timelines.”

The airline has said that it is working closely with India’s civil aviation ministry and the Directorate General of Civil Aviation on the approval process and timelines for proving flight, following which Jet Airways’ air operators certificate (AOC) will be revalidated. “The resumption of scheduled services will follow soon thereafter,” the airline said in a statement this month.

However, what’s interesting is that the consortium clarified last December that the revalidation process had been initiated in August 2021 and was on a fast track. Jet had an existing AOC valid until 2023, which was only suspended in 2019 due to the financial health of the company then.

The consortium at that point had said that the time required for getting its AOC revalidated would be substantially less difficult than obtaining a fresh AOC by a new company.

The delay, according to reports, was because the airline had earlier requested for a waiver of the certification process to get its AOC back. India’s Directorate General of Civil Aviation rejected the request. As a result, Jet will now have to operate proving flights with the aircraft with which they plan to restart services.

Reiterating its commitment towards the revival of Jet Airways, the consortium in a statement noted that it is working with multiple aircraft lessors as well as aircraft manufacturers to source aircraft that will be inducted into the Jet Airways fleet over the next three to five years.

The airline this month also announced two major appointments. Sanjiv Kapoor, Vistara’s former chief strategy and commercial officer, will be taking over as the CEO of Jet 2.0 from April, while Vipula Gunatilleka, who had served as the CEO of SriLankan Airlines till January 2022, took over as the chief financial officer this month.

When the airline does takeoff, it plans to start flights with six narrowbody aircraft and aims to have more than 50 aircraft in its fleet fleet in three years, and more than 100 in its five-year plan.

The consortium had also clarified that it is confident to get the initial slots required to begin operations in this summer.  

Peden Doma Bhatia

In Other News

  • The New Zealand government has extended its Maintaining International Air Connectivity (MIAC) subsidy program with Air New Zealand another year to March 2023. The airline will operate around 60 flights per week to key destinations, including certain cities in Australia, Hong Kong, Los Angeles, and Vancouver, under the program. Air New Zealand anticipates roughly NZ$180 million ($124 million) in related cargo revenues from MIAC. The carrier will begin ramping up its long-haul passenger flights with the easing of New Zealand’s border restrictions on May 2, including new nonstop flights to New York from September.
  • In U.S. government news, the U.S Transportation Department named Billy Nolen acting FAA administrator. Previously association administrator for aviation safety, Nolen took the role when Administrator Steve Dickson left at the end of March. FAA still is looking for a permanent replacement. Nolen previously served in safety leadership at both WestJet and Air Canada.
  • Fred Smith is stepping down as CEO of the little company he founded in 1973, FedEx. The former U.S. Marine Corps and Vietnam veteran famously came up with the idea for FedEx as an undergraduate at Yale University (and apocryphally was told it would never succeed). In the process, Smith created an industry, disrupted the way the world works, and has overseen the company’s expansion to a $92 billion enterprise. Current FedEx President Raj Subramaniam will take the top job when Smith leaves on June 1.
  • KLM named Marjan Rintel as its new CEO, the first woman to lead the company. Rintel currently leads the Netherlands’ passenger rail operator. She takes over from Pieter Elbers, who is stepping down on July 1.
  • And in Turkey, Pegasus Airlines also named its first female CEO, Güliz Öztürk. The carrier is promoting her from commercial chief on May 1, when current CEO Mehmet Nane moves on to become vice chairman of Pegasus’ board of directors. Öztürk has worked at Pegasus since 2005 when she joined from Turkish Airlines.
  • In other people moves, Erno Hilden becomes chief financial officer of SAS in April. Previously, he was CFO of Finnair and an executive overseeing privatization at Saudia.
  • Southwest Airlines and its 6,000 customer service employees reached a tentative agreement on a new contract, the IAM said. The union is finalizing the terms of the deal before it goes to members for a ratificaiton vote.

Edward Russell & Madhu Unnikrishnan

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Sky Money

  • Air New Zealand is embarking on a major balance sheet improvement effort just as it’s about to resume carrying international travelers. The airline has launched a NZ$2.2 billion ($1.5 billion) recapitalization program split between a NZ$1.2 billion rights offer to existing shareholders, NZ$600 million in redeemable shares issued to the New Zealand government, known as the Crown, and a NZ$400 million unsecured credit line from the Crown. Shares will be offered under the rights offer at NZ$0.53 per share with the Crown committed to buying NZ$602 million in order to maintain its 51 percent ownership stake in Air New Zealand. Proceeds from the transactions will be used to repay the NZ$850 million loan from the Crown and to boost the airline’s liquidity. Air New Zealand plans to leave the credit line undrawn.

    The recapitalization comes as Air New Zealand is seeing “encouraging” signs of recovery, as it described bookings since its namesake country said it would reopen borders to vaccinated travelers on May 1. As a result, the airline now anticipates a loss of less than NZ$800 million — rather than more than NZ$800 million as it previously guided — during its 2022 fiscal year that ends June 30.

    Despite the improvement, Air New Zealand forecasts one of the slowest capacity recoveries in the industry. It plans to fly just 90 percent of fiscal year 2019 capacity by its 2025 fiscal year, whereas most other airlines anticipate a full recovery by 2024. In addition, capacity will be more heavily weighted in the domestic market than in international ones.
  • Sun Country Airlines closed a $188 million enhanced equipment trust certificate (EETC) transaction on March 31. The notes are split between a $143 million A tranche with a 4.84 percent coupon due in 2031, and a $45 million subordinate B tranche with a 5.75 percent coupon due in 2029. The deal is backed by 13 Boeing 737-800s either in Sun Country’s fleet or about to join it.

Edward Russell

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Fleet

AerCap is pursuing every possible way to reclaim the $3.5 billion in assets it has in Russia but says that country’s seizure of foreign-owned aircraft is a “black swan event” that won’t prevent the lessor from leasing aircraft in other emerging or politically unstable markets.

AerCap has repossessed 22 aircraft and three engines from Russian airlines since the West imposed sanctions on Russia for invading Ukraine. That leaves 135 aircraft 14 engines remaining in Russia, or 5 percent of the combined AerCap-GECAS fleet by value. “It’s a setback, but a manageable one,” AerCap CEO Aengus Kelly told investors on March 30.

The company will continue to try to recover its aircraft, but it also has admitted it may never do so. AerCap has filed insurance claims and will “pursue every legal remedy” to recover the $3.5 billion in assets leased to Russian carriers, Kelly said. Industry analysts have said this process, if successful, could take years. AerCap said it could report an impairment charge this quarter for that amount.

Sanctions require that Western aircraft leases be terminated by March 28. Lessors have thus far repossessed about 70 aircraft at airports outside Russia. Several Russian airlines, including Aeroflot and S7, have halted international flights to avoid seizure of their airplanes. Before the war, Russian airlines leased about 500 aircraft from lessors based in countries that have now sanctioned Russia. Of those, a little more than 400 are thought to remain in the country.

The aircraft that remain are operating illegally, Kelly said. Before the war, foreign-owned and foreign-built aircraft could not be registered in Russia. Russian Federation President Vladimir Putin changed the law to allow foreign aircraft to be reregistered as Russian, but international law prohibits an aircraft to be registered in two jurisdictions simultaneously. This makes flying them illegal.

An even bigger problem from the lessor’s perspective is maintenance. Boeing, Airbus, and other manufacturers are no longer providing parts and aftermarket support in Russia, raising questions about how aircraft will be maintained in the country. Just last week, Pobeda said it is grounding a number of aircraft to mine for parts to support the rest of its fleet. Aircraft used in this way are generally uninsurable and cannot be recovered.

“We continue to make efforts to repossess additional aircraft and engines from our former Russian airline customers, but it is unclear if we will be able to do so, or what the condition of these assets will be at the time of repossession,” AerCap said in a statement.

AerCap’s Russia problem isn’t deterring the lessor from going into other emerging or politically unstable markets, however. “This is a black swan event,” Kelly said. “Over the course of 50-60 years of aircraft leasing, we haven’t seen an event of this magnitude,” he said. “It’s a temporary aberration that I don’t believe will have an impact on other jurisdictions around the world in the long term.”

The lessor had a number of aircraft scheduled for delivery to Russian airlines this year, but these have been re-marketed to airlines outside of Russia. Before the war, AerCap had no delivery slots available this year, and had a “handful” that now have been filled, Kelly said.

Outside of Russia, things are looking good for AerCap. Demand has started to pick up in Thailand, Malaysia, Vietnam, and Indonesia — countries where air travel demand all but collapsed during the pandemic. Domestic demand in those countries is rising, now up to 80 percent of pre-pandemic levels, fueling the need for more narrowbody aircraft, Kelly said. Widebody aircraft demand continues to lag as international travel has lagged domestic travel, particularly in Asia. “We are confident of the recovery of air travel as Covid restrictions are unwound,” Kelly said.

This demand is strong enough to withstand higher ticket fares that result from rising fuel prices, Kelly said. Pent-up demand coupled with high household savings rates will more than offset higher fares. “The propensity to travel has not diminished,” Kelly said, adding, AerCap is “confident airlines can pass through higher fuel prices.”

Airlines managed prices north of $100 per barrel of oil between February 2011-September 2014, Kelly noted. “I have every confidence they will do so again this year,” he said.

The merger with GECAS closed on November 1 and AerCap already has realized benefits. GECAS brought with it several business lines that AerCap did not have before the acquisition, including engine leasing, helicopters, and cargo. The latter two, in particular, show promise, thanks to soaring demand for air cargo. Demand for helicopters will rise as more countries explore offshore oil in pursuit of energy independence, Kelly said. The engine leasing business also benefits from leasing only GE and CFM engines, which power all Boeing 737s and half of the Airbus A320-family fleet.

AerCap reported fourth-quarter revenues of $1.4 billion, up 40 percent from 2020, and full-year 2021 revenues of $5.2 billion, a 16 percent increase over 2020. Including charges and costs associated with the GECAS deal, net income for the quarter was $89 million and $1 billion for the full year. AerCap ended the year with 3,701 aircraft, helicopters, and engines in its owned fleet.

Madhu Unnikrishnan

Fleet Briefs

  • Gozen Holding, which operates Freebird Airlines in Turkey, has ordered 50 VX4 eVTOLs from Avolon. The deal includes options for 50 more, and all 100 will be a combination of leased and purchased aircraft. With this order, all 500 of Avolon’s Vertical Aerospace eVTOLs have been placed, the lessor said. Prior deals include placements with Gol, Air Greenland, AirAsia, and Japan Airlines.
  • And in other eVTOL news, FedEx Express will test autonomous cargo drones using Elroy Air’s Chaparral eVTOLs. The drones are capable of carrying a 300-500 pound payload about 300 miles. “When you’re not limited by challenging infrastructure, traffic, or airports, logistics can reach more people, faster than ever before,” Elroy Vice President of Business Development Kofi Asante said.
  • Delta Air Lines will configure 21 A321neos with 148 seats, including 16 Delta One lie-flat business class suites, according to a fleet guide shared with pilots on March 22 and viewed by Airline Weekly. In addition to the new suites, the aircraft will have 12 premium economy, 54 extra-legroom economy, and 66 economy seats. The guide did not include a timeline for when the premium configuration will enter service.
  • Italy’s ITA Airways is plowing ahead in its expansion with a new deal for 10 Airbus A320neos and two A330neos from lessor AerCap. Deliveries will begin next year and go through 2024.

Madhu Unnikrishnan & Edward Russell

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Routes and Networks

  • Volotea CEO Carlos Muñoz said the airline is “days away” from unveiling its second new base of the year, which he declined to name except that it will be in France. The first, in the French city of Lille, opened April 1 and is meeting expectations, he said at the Airlines for Europe (A4E) summit on March 31. Separately, the Spanish discounter will add new twice-weekly service between Palermo and Athens on June 10.
  • Air France, which also plans to fly at or near its pre-Covid European capacity this summer, is adding two new destinations to its map: Tirana, Albania, and Zakynthos, Greece. Both will be served seasonally twice-weekly from Paris Charles de Gaulle from July 9. Air France also plans four new summer routes from other cities in France: Marseille to Santorini and Tunis, and Nice to Heraklion and London Heathrow all beginning July 8 and 9.
  • And Finnair has set a date for its new bus-instead-of-a-plane “flights” Tampere and Turku in Finland. Buses will begin running on May 2 and will connect the Tampere and Turku airports, their respective city centers, and the Helsinki airport during the daytime. Finnair will continue to offer a morning and evening flight on between both cities and Helsinki for better connections.
  • Across the north Atlantic, Turkish Airlines has set a date for its planned Seattle service. The Star Alliance carrier will connect Istanbul and Seattle-Tacoma four-times weekly with a Boeing 787-9 from May 27, Cirium schedules show. Separately, Turkish notified investors that it intends to add Bergamo, Italy, and Tivat, Montenegro, to its map in the future “based on market conditions.”
  • Speaking of Seattle, Air Tahiti Nui will add the Emerald City to its map in October. The carrier will offer twice-weekly flights between its Tahiti base and Seattle-Tacoma with a 787-9. Alaska Airlines will codeshare with Air Tahiti Nui on the flights, a move that the latter’s Managing Director Mathieu Bechonnet said will help grow the market for Tahiti tourism in the Pacific Northwest and Western Canada.
  • Latam Airlines Group, taking advantage of the strong domestic recovery in Brazil, launched new 10-times weekly service between Belo Horizonte Confins and Curitiba on March 27. Latam cited a desire to connect Brazil’s major cities nonstop for the new route, however, it will compete directly with Azul that has a hub in Belo Horizonte and attempted a hostile takeover of Latam during the latter’s bankruptcy.

Edward Russell

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