Issue No. 865
Summertime, and the Fares Are Easy
High Demand + Less Capacity = Higher Revenues. Or so Airlines Hope
Pushing Back: Inside the Issue
Delta Air Lines became the latest in a long list of U.S. carriers to cut summer capacity. Now, almost all the U.S. majors and mid-tier airlines have cited some combination of staffing, air traffic control issues, weather, and aircraft availability for the schedule cuts, which are aimed to ensure operational reliability. But there is a big silver lining. With demand expected to be through the roof this summer after two years of the pandemic, airlines stand to reap significant revenues. Fares will be higher, but so will yields, even on domestic leisure routes.
Half a world away, IndiGo is optimistic about India's airline market and also reports that summer demand is strong. But IndiGo has a slightly different problem ahead of it. The carrier so far has been passing higher fuel costs on to passengers, but CEO Ronojoy Dutta predicts the market will reach a point soon where higher costs will dampen demand. He said the Indian airline industry is engaging in a "balancing act" now, one that carriers around the world could soon find themselves in if fuel costs continue to rise. Meanwhile, JetBlue was among the first U.S. airlines to hint that it could start its own balancing act this autumn, if inflation and oil prices keep growing and tip the U.S. into recession. But for now, on the cusp of summer, the fares are easy.
The Airline Weekly Lounge Podcast
Just how bullish is IndiGo CEO Ronojoy Dutta on India’s airline market? Very, very bullish. But Edward “Ned” Russell and Madhu Unnikrishnan note in this week's episode that others have predicted that India’s aviation market is about to take off (Kingfisher? Jet Airways?). So what makes Dutta so confident? Listen to this week’s episode to find out. A full archive of the 'Lounge is here.
IndiGo is navigating between dual headwinds, unfavorable foreign exchange and sharply rising fuel costs, and is reaching a limit of how much of these higher costs it can pass on to passengers. But despite these negative forces, the Indian carrier is optimistic about the trajectory of the country’s aviation market in the medium- to long-term.
Fuel costs rose precipitously in the quarter that ended in March. In that month alone, fuel rose 15 percent from February. The pain continued even after the quarter’s end. April’s fuel tab was 11 percent higher than March’s, and May’s is 6 percent higher than April’s. India imports almost all of its energy and its economy took a hit after Russia’s invasion of Ukraine forced global oil prices higher.
Unfavorable foreign exchange added 6 billion rupees ($77 million) to IndiGo’s quarterly losses, CEO Ronojoy Dutta told investors on May 25. The rupee reached an all-time low against the dollar earlier this month. The dollar has gained in strength since the beginning of the year, and India is beset with rising energy costs and domestic inflation. “It’s a tug of war,” Dutta said of foreign exchange and fuel cost pressures.
Dutta noted that inflation is eating into demand, as passengers put off trips due to higher costs of essential goods. Internally, the carrier is dealing with employee demands for higher pay to combat rising prices, he said. Pilots are set to get an 8 percent pay raise, and are expected to get an additional 6.5 percent pay raise later this year.
“It’s a balancing act,” Dutta said. The carrier has been raising fares, but it is leery of raising fares beyond what the market can bear and squashing demand. But IndiGo is focused on profits, Dutta said, so fares have risen. Some demand has fallen off, but yields are holding steady as more corporate travelers return to flights.
And corporate travelers have returned. In March, corporate travel was at about 64 percent of pre-pandemic levels, but by April and continuing so far into May, corporate traffic has exceeded pre-pandemic levels, Dutta said.
Leisure traffic is holding strong. Dutta credited IndiGo’s network for its success. Compared with its competitors, IndiGo offers more schedule depth and connections, allowing it to recover faster from irregular operations. This gives travelers more confidence, he said. And while its competitors focus on traffic between India’s major metropolitan centers — New Delhi, Bombay, Calcutta, Chennai, and Bangalore — IndiGo has built on its strength in these markets as well as opening new stations beyond the metropolitan centers.
India’s economy is recovering from a downturn during the pandemic. And long-term growth prospects remain strong. This is resulting in a “structural shift” away from rail travel to air travel that is only at its beginning phase, Dutta said. “People travel more, and people who could afford it are spending more on travel, vacations, and to go visit,” he said. “And people before who couldn’t afford it now can afford it, and because income levels have gone up.”
Dutta dismissed growing competition, from the newly privatized Air India, revived Jet Airways, and startup Akasa. His concern is that the latter two, in particular, could behave “irrationally” and drive fares down, forcing IndiGo to match. But he noted that IndiGo gets a larger percentage of higher-yielding fares booked 15 days before travel than its competitors.
Speaking of the booking curve, IndiGo said the curve is lengthening out and is now approaching pre-pandemic norms for travel.
The carrier is looking beyond India for future growth. International travel is more profitable and offers higher yields, but the challenge is that India is “surrounded by hubs,” Dutta said, referring to mega-hubs in Dubai, Doha, Singapore, and elsewhere in the region. Its fares to Dubai, for example, are higher than Emirates’, but Dutta said the pricing makes sense, given that Emirates prices its fares from India with an eye to connecting beyond Dubai, while IndiGo travelers tend to end or begin their journeys in that city. Point-to-point service will be the focus of IndiGo’s international expansion, he added.
The carrier plans to fly 13-17 percent more capacity for the balance of this year than it did before the pandemic. Capacity will be 2.5 times more than last year, during the worst of the pandemic. Its fleet size will remain roughly flat at 275 aircraft, but the increased capacity will come from upgauging with Airbus A321neos, Dutta said. The carrier plans to beef up its cargo operation with four Airbus A321ceo conversions.
IndiGo reported March quarter revenues of 82 billion rupees, 29 percent higher than the previous year. Losses came to 16.8 billion rupees, or 10.8 billion rupees without losses due to foreign exchange. Unit costs excluding fuel were up more than 12 percent due to unfavorable foreign exchange.
Delta Latest to Cut Summer Flying
Delta Air Lines will trim its schedule, beginning over the busy Memorial Day holiday weekend and into August, as it faces numerous operational challenges from air traffic control to sick staff.
The Atlanta-based carrier told employees in a memo on May 25 that it would “thin” schedules over the Memorial Day weekend — the unofficial start of summer in the U.S. — and through June to give staff “more buffer” to deal with operational challenges outside of Delta’s control. Reductions would be expanded to roughly 100 daily departures, or less than 2 percent of its full schedule, in the U.S. and near Latin America from July 1 through August 7.
“The various factors currently impacting our operation – weather and air traffic control, vendor staffing, increased Covid case rates contributing to higher-than-planned unscheduled absences in some work groups – are resulting in an operation that isn’t consistently up to the standards Delta has set for the industry in recent years,” Delta Chief Customer Experience Officer Allison Ausband said in a statement.
Pilot staffing, which is challenging many U.S. airlines, does not appear an issue at Delta. The airline trained 510 pilots in March and another 540 in April — both records — Ausband and Delta Chief of Operations John Laughter told staff in the memo.
Delta is the latest major U.S. airlines to cut flights during the busy summer travel season. Alaska Airlines and JetBlue Airways both pulled down schedules into the summer after staffing and air traffic control-related disruptions in April. And other carriers, including American Airlines and Southwest Airlines, have guided lower-than-hoped-for capacity for the second and third quarters citing staffing constraints.
Several other carriers, including JetBlue, Southwest, and Spirit Airlines, have also cited air traffic control as an issue affecting their operations. Earlier in May, the Federal Aviation Administration met with airlines and other aviation groups to reduce delays on flights to, from, and over Florida following staffing issues at Jacksonville Air Route Traffic Control Center. However, many airlines — including Delta — expect air traffic control-related delays and cancellations to continue this summer. Those were on display May 27 when the FAA limited the number of flights in, out, and through Florida airspace due to “weather and staffing” at the Jacksonville center.
The schedule reductions come despite seemingly inelastic demand for travel. Cowen & Co. analyst Helane Becker wrote on May 27 that travel demand is already above 2019 levels despite roughly 10 percent less capacity, which is translating to fares that are up roughly 34 percent year-over-year this summer. Strong demand allows U.S. airlines to pass on high fuel costs to travelers. Her comments came a day after both JetBlue and Southwest reported stronger-than-expected demand in the second quarter.
“We know there is extreme demand to fly a very full schedule, but we continue to adjust our network and other aspects of our operation to balance customer demand for Delta with the realities of our operating environment,” Ausband and Laughter said.
Delta planned to fly 84 percent of its 2019 capacity this summer prior to the latest cuts.
Spirit’s Board Blasts JetBlue’s ‘Cynical’ Offer
In some of its most forceful comments yet, Spirit Airlines rejected JetBlue Airways‘ unsolicited merger offer, making clear that it believes the best outcome for shareholders is the already planned merger with Frontier Airlines.
JetBlue’s offer is “illusory” and unlikely to survive regulatory scrutiny, Spirit CEO Ted Christie said in a call with analysts after the markets closed on May 23. “At the heart of the board’s decision is the fact that JetBlue’s offer is not reasonably capable of being consummated,” Christie said. “JetBlue’s regulatory case is weak and defies common sense.”
Spirit’s board has now spurned JetBlue’s merger attempts twice, urging shareholders instead to vote for Frontier‘s $2.9 billion offer. Shareholders are expected to vote on Frontier’s bid on June 10.
The crux of Spirit’s objection is that JetBlue is embroiled in a lawsuit brought by the Justice Department (DOJ) over the airline’s northeast alliance with American Airlines. “It’s inconceivable to us that an acquisition of Spirit by JetBlue gets approved unless they abandon the [northeast alliance], the anticompetitive alliance with American Airlines,” Christie said.
Christie said Spirit has asked JetBlue if it would abandon the pact with American to ensure its merger with Spirit is more easily approved. But JetBlue refused, he said. “JetBlue has demonstrated that preserving this alliance with American and not its acquisition of Spirit is its first prize,” he said. “If they think approval is so likely, why refuse to do whatever it takes to get the deal done?”
Even if JetBlue offered relief by divesting slots and reducing flights on the East Coast, it wouldn’t be enough, said Andrew Finch, an anti-trust lawyer Spirit has retained. “In our opinion, if JetBlue wins or settles the [northeast alliance] litigation, the DOJ will be even more determined to stop an acquisition of Spirit as JetBlue will have just completed a de facto merger in the Northeast with American Airlines, which is the largest airline in the world,” Finch said. “On the other hand, if JetBlue loses the [northeast alliance] litigation, JetBlue would likely appeal in the last ditch effort to save the anticompetitive alliance that it has implied is more important to it than an acquisition of Spirit, and that could take well over a year to resolve.”
Christie stressed that JetBlue is a “high-fare” airline and that a merger with Spirit would eliminate low-fare competition, particularly in the Northeast and in Florida. A merger with Frontier, on the other hand, would create a national ultra-low-cost carrier, similar to those, like Ryanair and Wizz Air, in Europe.
But not everyone is convinced that the Frontier deal is more of a win for Spirit’s shareholders. Although it’s true that a Frontier merger would create a large low-fare airline, JetBlue tends to have a bigger presence in the airports it flies to and brings down average fares in those markets, Raymond James analyst Savanthi Syth argued in a note to investors. “We view both mergers to be pro-consumer, either by introducing more low fares or by resulting in a stronger ‘disrupter’ to legacy airlines,” she wrote.
Syth added that a Frontier-Spirit merger probably will be easier to execute and will take less time to complete than a JetBlue-Spirit merger, however. But either would be a good deal for shareholders, especially if Frontier sweetens its offer.
Christie reserved his harshest comments for what he sees as JetBlue’s motive in making an offer for the airline. JetBlue, fearful of ultra-low-cost competition, wants to derail the Frontier merger, Christie said, calling it a “cynical” motive. A Frontier-Spirit merger could result in the country’s fifth-largest airline, after American, Delta Air Lines, United Airlines, and Southwest Airlines, and would make JetBlue less relevant, he said.
JetBlue has alleged that Spirit’s board did not engage with it in good faith. This, Christie said, is “total fiction,” and that Spirit has spent considerable time with JetBlue’s board on the offer. “To be clear, over a 4-week period, we spent hundreds of hours and hundreds of thousands of dollars assessing the regulatory risk of an acquisition of Spirit by JetBlue, including assessing the validity and merits of JetBlue’s own analysis,” he said.
JetBlue did not respond to a request for comment on this story, but last week it defended its offer and blasted Spirit’s board. JetBlue contends that Spirit’s board is compromised by the airline’s previous ownership by Indigo Partners, Frontier’s majority stakeholder, an allegation Spirit dismisses.
“The Spirit board, driven by serious conflicts of interest, continues to ignore the best interests of its shareholders by distorting the facts to distract from their flawed process and protect their inferior deal with Frontier,” JetBlue said. “We are confident that as we continue to share the facts directly with Spirit shareholders, they will be even more perplexed than they already are about why the conflicted Spirit board has refused to negotiate with us in good faith.”
In Other News
- Startup Flyr posted a 211 million Norwegian kroner ($22 million) net loss in the first quarter citing a hit by the Omicron variant. Revenues came in at 82 million Norwegian kroner, while passenger unit revenues were 0.3 Norwegian kroner and unit costs (CASK) excluding fuel were 0.86 Norwegian kroner. Despite the challenges, CEO Tonje Wikstrøm Frislid said “early [summer] bookings indicate a significant upturn in activity going forward.” The airline is focused on reducing CASK excluding fuel to 0.41 Norwegian kroner in the second half of the year, and below 0.4 Norwegian kroner in 2023. Flyr plans to do this with an expanded fleet of 12 Boeing 737s by the end of this year — it had eight at end-March — and 16-20 737s by the end of 2023. Pending aircraft deliveries will be new 737-8 models.
- Play Airlines also posted a net loss, of $11.2 million, after taking an Omicron-related hit in the first quarter. Revenues were $9.6 million with unit revenues of 4 cents and CASK excluding fuel of 7.9 cents. Lowering CASK is a focus of the Icelandic startup, said CEO Birgir Jónsson last week. The aims to do this by improving both operations and connectivity, among other efforts, into the summer. And Play is demonstrating some capacity discipline not common with startup budget airlines; the carrier has suspended plans to add Orlando to its map in September citing high fuel expenses since Russia’s invasion of Ukraine in February. “There’s no benefit for anyone to go ahead with a project that is completely unprofitable,” Jónsson said. Play has swapped the planned addition of an Airbus A321LR with an A320neo following the Orlando decision.
- Qantas Airways is pulling back on capacity plans this summer as fuel prices remain high. The airline has cut domestic capacity by 4 points to 103 percent of 2019 levels in July and August. The move comes despite continued “strong demand” across its domestic business. Plans for international capacity, which is still recovering from a near total suspension during the pandemic, are unchanged. Qantas will fly just under half of 2019 capacity in the June quarter, and roughly 70 percent of three years ago in the September quarter.
- Southwest Airlines is updating its second-quarter revenue guidance to 12-15 percent over 2019 from previous guidance of 8-12 percent higher than three years ago. Demand will be strong this summer, but the Dallas-based airline, like many of its peers, will operate fewer flights. Seven percent less capacity than in 2019, it now says. Yields will more than offset higher fuel prices, which now are expected to be between $3.30-$3.40 per gallon versus prior guidance of $3.05-$3.15 per gallon. Unit costs excluding fuel are now expected to be up 14-18 percent over 2019, compared with prior guidance of unchanged from that year.
- It’s shaping up to be a good summer for JetBlue Airways, at least in terms of revenue. The New York-based airline now expects to second-quarter revenues to be at least 16 percent higher than in 2019, updating its prior guidance of between 11-16 percent higher than 2019. JetBlue predicts June unit revenues to be 20 percent higher than in 2019. The carrier expects to be profitable from June and continue being profitable through the rest of the year, CEO Robin Hayes told investors at a conference last week. But it is hedging it optimism with warning that inflation, higher oil prices, and a possible recession could affect revenues in the fall. JetBlue previously said it would fly 10 percent less capacity for the rest of the year.
- Delta Air Lines and Qatar Airways have finalized plans for to take stakes of 20 percent and 10 percent, respectively, in Latam Airlines Group when the Chilean carrier exits its U.S. Chapter 11 restructuring. Latam confirmed Delta and Qatar’s stakes in filings with the U.S. Securities & Exchange Commission last week. All three airlines await a judge’s decision on confirming Latam’s restructuring plan.
- The Missoula Airport will open a new four-gate terminal on June 8. The $67 million facility is the first of a two-phase project that will see the airport’s terminal complex completely rebuilt with a new nearly 205,700 square-foot building with eight gates.
- Canada Jetlines is now one step closer to flying its planned leisure network. The carrier said the Canadian Transportation Authority has determined the carrier meets ownership and financial requirements to start operating. Canada Jetlines plans to start operating a fleet of Airbus A320s on routes in Canada, and to the U.S. and the Caribbean this summer.
- Air New Zealand issued A$550 million ($389 million) in medium-term notes on May 26. The fixed-rate debt is split into an A$300 million 4-year tranche and an A$250 million 7-year tranche. Proceeds will be used to redeem NZ$400 million ($258 million) in redeemable shares from the New Zealand government. The medium-term notes are the last piece of the NZ$2.2 billion recapitalization package that Air New Zealand launched in April. The deal was the airline’s first in the Australian debt capital markets. ANZ Bank, Citigroup, Commonwealth Bank of Australia, and MUFG Securities acted as joint lead managers on the transaction.
- As part of a share repurchase plan announced last week, IAG will buy two tranches of its own shares for €0.10 each ($0.11), the company said. The first tranche is of 1.85 million shares, and the second is for 1.4 million shares. The shares will partially go toward employee share-based incentive programs.
- Air France-KLM intends to raise €2.3 billion ($2.5 billion) by issuing 1.9 billion shares in the company, priced at €1.17 per share. The French and Dutch governments, two of the company’s largest shareholders, said they would participate in the rights issue in order to keep their stakes unchanged. Each current shareholder in the company will receive one right in the issue, tradable for three new shares.
Routes and Networks
- American Airlines is adjusting its international service plans for the winter. The carrier will return to Auckland with a daily nonstop from Dallas-Fort Worth from October 29 through March 25. American suspended Auckland flights, at the time from Los Angeles, in March 2020, per Cirium schedules. The airline will also add four new routes from New York: JFK to Bermuda and Monterrey, Mexico, and LaGuardia to Little Rock, Ark. and Tulsa, Okla. all from November 3.
On the other side of the ledger, American has dropped plans for a nonstop between Dallas-Fort Worth and Tel Aviv, and cancelled three routes from November 3: Dallas-Forth Worth to Lima, and New York JFK to Cali and Medellin, Colombia. In addition, American has again postponed plans for Seattle-Bangalore flights, this time until summer 2023, citing the closure of Russian airspace. The changes appear unconnected to the 13 787s the airline is owed by Boeing. American Chief Revenue Officer Vasu Raja said last week that it was a “great question” when they might begin arriving.
And on the ground, American has added a third destination for its new Landline bus service. Buses will connect the Philadelphia airport to Lancaster, Pa. — a new destination on its map — from August 16. The addition comes a little over two months after the partnership launches on June 3.
- Long-haul low-cost startup Norse Atlantic Airways is officially entering the busy London-New York market. The discounter will connect London Gatwick and New York JFK with Boeing 787s from August 12. Sound familiar? Norwegian Air‘s defunct long-haul operation flew the route, as well as Norse’s three long-haul routes from its Oslo base, for much of the last decade before ending flights at the beginning of the pandemic, according to Cirium schedules. Norse CEO Bjørn Tore Larsen has repeatedly rejected comparisons to Norwegian Air, claiming Norse is completely different.
State of the Unions
- Alaska Airlines pilots voted 99 percent in favor of a strike if their union, the Air Line Pilots Association (ALPA), and the airline fails to reach a new contract. To clarify, a strike is not imminent. The U.S. National Mediation Board must first rule that additional mediation was unsuccessful and recommend arbitration then, if either party declines arbitration, the two sides must enter a 30-day cooling off period before a strike could be called.
- One of the most common complaints among pilots as a cause of the shortage — or situation, depending on how you see it — in the U.S. is pay. Cockpit crew members at Cape Air got a 15-30 percent raise in April when they ratified a Compensation and Basing Letter of Agreement. The agreement also included quality-of-life improvements. Cape Air CEO Linda Markham said in April she was optimistic that the agreement would help ease the pilot staffing situation the airline faced.
- WestJet and its flight dispatchers union have reached a 10-year agreement, which was ratified by more than 90 percent of the work group represented by the Canadian Airline Dispatchers Association. The new deal goes into effect on June 1. “The Canadian economy continues to transition from the challenges we faced during the pandemic,” WestJet Chief Operating Officer Diederik Pen said. “We welcome the ratification of the agreement and look forward to further collaboration to advance the recovery of Canada’s travel and tourism industry.”
The drama between Airbus and Qatar Airways over the A350 will head to trial, a UK High Court judge ruled last week. The three-month trial is expected to begin next summer.
The judgement brings some clarity to the dispute, which stems from Qatar Airways alleging that its newly delivered A350s were inoperable due to paint peeling and airframe damage. Airbus acknowledged some damage to the paint but held firm that the damage did not extend to the airframe. Qatar’s civil aviation regulator ordered 21 of the carrier’s A350 to be grounded.
The row escalated earlier this year, when Qatar Airways sought $650 million in damages from Airbus over the issue and lost revenue from what it said were inoperable A350s, landing the dispute in the High Court. Airbus snapped back by cancelling Qatar Aiways’ separate order for 50 A321neos, “in accordance with our rights,” the airframer said then.
Airbus countersued over losses from Qatar Airways’ undelivered A350s. The airline had an additional 20 A350-1000s still on order at the end of April.
The judge denied Qatar Airways’ request to split the trial in two and set a date for a single trial next year. “Airbus is pleased with the court’s decision rejecting all requests for injunctions regarding the A350 as well as a rejection of the proposal made by Qatar Airways to split the trial into two separate parts, which would slow down the process,” an Airbus spokesman said.
“We entered into this process to secure an expedited trial and early disclosure from Airbus that will give us an insight into the true nature of surface degradation affecting the A350s,” Qatar Airways said in a statement. “We will finally be able assess the cause of the damage to our aircraft and the expedited trial will provide a swift resolution of this unprecedented dispute.”
But the judge also allowed Airbus to continue delivering the jets to Qatar Airways, and if the airline refuses, to re-market the A350s that would have gone to Qatar. Several carriers, including Air India, are said to be interested in the aircraft.
“Airbus is likewise pleased that this issue is now behind it and that the matter can now proceed with all due speed to focus on the main topic of the misrepresentation by Qatar Airways of safety and airworthiness of the A350 — which we will continue to defend, as well as the reputation of its operators and the rules governing aviation safety in the face of unjustified claims,” Airbus said.
The judge urged the two sides to consider a settlement. It remains unclear where Qatar Airways could source additional widebody lift, given backlogs and delivery issues at Boeing on the 777 and 787 programs.
“We continue to favor engagement and an amicable solution to resolve the dispute,” Airbus continued. “The continued litigation is not in the interests of either party.”
- Anticipating higher summer demand for European travel, Finnair will wet lease an Airbus A320 from Danish carrier DAT. The aircraft will be crewed by DAT employees, and is expected to operate on routes between Finland and Denmark and Portugal. Finnair said it turned to wet leasing in order to ensure schedule stability during the busy summer season.
- Ethiopian Airlines is adding to its freighter fleet with an order for five Boeing 777Fs. The aircraft will join the carrier’s existing fleet of nine 777Fs and three 737-800 freighter conversions. Earlier this year, Ethiopian announced an order for five 777-8Fs.
- Avianca signed a deal with CDB Aviation for two Airbus A330-300 freighter conversions and one A320neo passenger aircraft. CDB expects to deliver five A320neos to Avianca through the end of next year.