Issue No. 871
Back To Black
Delta Unveils Solid Profits for the Spring Quarter
Pushing Back: Inside the Issue
Second quarter earnings season is underway, ushered in with solid performance from Delta. The Atlanta-based giant earned a double-digit operating margin for the spring quarter, a welcome lift from its loss-splattered results during two years of pandemic misery. Delta is not quite making money like it was in 2019. Fuel costs are much higher now, and capacity much lower now, the latter causing low asset utilization and, by extension, inflated non-fuel unit costs. Also weighing on Delta’s results was the severe operational distress plaguing much of the airline industry. The difficulties of restaffing after a pandemic-era contraction is one reason, but Delta and its peers blame air traffic control issues as well.
But make no mistake: the demand and revenue side of Delta’s business is firing on all cylinders. The yearning for air travel is back in a big way, especially among leisure fliers but increasingly among business fliers as well. Delta, keep in mind, has excellent insights on consumer spending trends thanks to its close relationship with American Express. And, from everything it sees, consumers are still eagerly buying airline tickets, inflation and other economic pressures notwithstanding. Incidentally, in its own earnings call J.P. Morgan Chase cited strong consumer spending as well; travel and dining jumped 34 percent year-over-year. The big Wall Street bank would know: It has lucrative credit card contracts with Southwest and United.
Back at Delta, management said bookings continue to build strongly, even into the quieter fall season. In the meantime, it's negotiating a new contract with pilots and contemplating the addition of more narrowbody jets. It’s surely watching developments at Spirit as well. Still no resolution on who — JetBlue or Frontier — will buy it with a key shareholder vote delayed, again, this time to July 27.
What will airlines buy at this week’s Farnborough Air Show? Oddly enough, despite two years of sharply depressed demand, the aircraft market is currently rather tight, especially for Airbus and Boeing narrowbodies. Even widebodies, though, are tough to get these days owing to Boeing’s production woes and supply chain bottlenecks more generally.
As air travel issues ease somewhat in the U.S., Europe’s travails remain at crisis levels. Entering the weekend, SAS pilots were still on strike. Transavia flight attendants caused cancellations and delays. And London Heathrow and Frankfurt airports cut capacity through the rest of the summer. “We are asking our airline partners to stop selling summer tickets to limit the impact on passengers,” Heathrow said. Emirates, for one, isn’t pleased.
Will investors be pleased with second quarter financial results? A parade of airlines will report this week, including Delta’s rivals American and United. Also on deck are several carriers from Mexico, plus Alaska and Finnair.
— Jay Shabat
The Airline Weekly Lounge Podcast
What's travel like in the U.S. now? Busy and, in some cases, like a T.J. Maxx, The Wall Street Journal's new travel columnist Dawn Gilbertson told Edward Russell of her 11 flight, six airline "stress test" of the system over the July Fourth holiday weekend. We also chat with her about her role and her view on covering airlines and the travel industry. Listen to this week’s episode to find out. A full archive of the 'Lounge is here.
Delta Air Lines opened second quarter airline earnings season on a positive note, unveiling a 12 percent operating margin excluding special items, driven by a strong recovery in domestic passenger demand —especially premium demand. That’s a big step up from the heavy losses Delta and the rest of the airline industry experienced in 2020 and 2021. But that 12 percent figure doesn’t quite represent a total comeback from 2019 — Delta’s second quarter operating margin that year topped 17 percent.
Passenger demand, to be sure, has never been stronger, at least excluding demand to Asia, normally an important market for Delta. The airline is getting a lot more money to fly one passenger one mile today than it was pre-pandemic — total unit revenues (TRASM) rose nearly 21 percent in the second quarter compared to 2019. Unfortunately, the cost of flying one passenger one mile increased more, even excluding fuel; non-fuel unit costs (CASM) rose more like 22 percent. Average fuel prices, meanwhile, were roughly 85 percent higher. Delta’s non-fuel CASM, more encouragingly, will improve as the airline restores capacity, including the widebody flying to Asia its cut sharply. During the June quarter, its total capacity was still down 18 percent versus the same quarter in 2019. Delta plans to hold capacity at the 80-85 percent of 2019 level through the end of the year.
In addition to the high fuel prices, the lagging Asian recovery and the suboptimal asset utilization, Delta wasn’t immune from the operational mayhem plaguing the airline sector as demand suddenly and forcefully revived this spring. But CEO Ed Bastian insisted things have improved thus far in July. Air traffic control staffing shortages are one reason for the many delays and cancellations. Delta also acknowledged difficulties with its own staffing — not so much attracting qualified people (few problems there) but in the time required to train them and have them gain experience. It’s a problem Bastian said temporary but likely to last through the end of the year.
June alone by the way, yielded a 17 percent operating margin for Delta, which augurs well for the peak summer periods of July and August. Indeed, the airline said bookings continue to be strong, even into the seasonally softer autumn period. Premium domestic demand and leisure demand led the recovery, but international and business demand is now building as well.
But what if there’s a recession, as some economists now fear? Bastian made the point that Delta is much better positioned to withstand a downturn than it was in 2009, the last time the economy contracted prior to Covid. Even then, Delta managed to stay profitable excluding fuel hedge losses. Today, the airline’s revenue base is much more diversified, with greater contributions from premium products, loyalty relationships, and cargo and auxiliary businesses like aircraft and engine maintenance.
Delta is excited about the upgraded facilities it has in airports like LaGuardia, Los Angeles, and Salt Lake City. It’s working to regain its investment grade credit rating. SkyTeam membership signups are at record levels. And its operating profit margin in the September quarter should be similar to those in the second quarter, 11-13 percent.
As a reminder, Delta spent much of the 2010s outperforming American Airlines and United Airlines, aided by its Atlanta operation, likely the most profitable airline hub in the world. Its billion-dollar relationship with American Express, mostly non-union workforce, transatlantic joint venture with Air France-KLM and Virgin Atlantic, productive in-house maintenance team, reputation for good service … these are just some of the reasons for Delta’s success since emerging from bankruptcy and merging with Northwest Airlines just before the 2008-09 financial crisis. Its next big move could involve a big narrowbody aircraft order, with reports suggesting interest in the Boeing 737-10 as well as more Airbus A220s.
In Other News
- The Lufthansa Group also sees profits in the June quarter. In a guidance update, it forecast adjusted earnings before interest and taxes (EBIT) of €350-400 million ($353-403 million) in the quarter, driven particularly by the performance of Lufthansa Cargo but also strong demand at its passenger airlines. But, despite that demand, Lufthansa’s passenger business — with the exception of Swiss — is forecast to lose money in the quarter. Revenues of roughly €8.5 billion are expected for the period.
- Bankrupt SAS is urging its striking pilots to resume mediation. As of July 14, the industrial action had caused 2,550 flight cancellations affecting more than 270,000 passengers. It was costing 100-130 Swedish krona ($9.5-12 million) per day. SAS and its pilots unions resumed talks on July 16 but failed to reach an agreement; they planned to meet again on July 18. If the strike winds up preventing SAS from accessing a debtor-in-possession loan, it might be forced to sell “valuable strategic assets under duress while also radically downsizing SAS’s operations and fleet.” Anko van der Werff, President & CEO, said: “The strike is putting the success of the chapter 11 process and, ultimately, the survival of the Company at stake.”
It’s certainly not a given that SAS survives its court restructuring. Besides labor cooperation, the fate of SAS could ultimately hinge on the appetite for further government support. With Norwegian Air, Flyr and Norse Atlantic all flying, perhaps the region can do without a SAS? A separate question is whether SAS could attract interest from another airline. It clearly has some attractive assets, most importantly the Nordic corporate travelers tied to the carrier’s EuroBonus loyalty program.
- And SAS wasn’t alone among European airlines in suffering labor unrest last week. Transavia, was also forced to cancel flights due to a strike by cabin crew. Separately, Transavia sibling KLM got some good news on July 14 in a new one-year accord with the unions representing its ground staff.
- Air France-KLM got some other good news last week. It finalized a €500 million ($503 million) perpetual bond from Apollo Global Management backed by a pool of Air France spare engines to repay part of the aid it received from the French government. The bond, which will be recorded as equity on Air France-KLM’s balance sheet, carries a 6 percent interest rate for the first three years with step ups thereafter. The group can redeem the bond anytime after year three. The transaction is expected to close later in July.
- Returning to operations, Icelandair found an innovative solution to European staffing challenges. It is flying ground staff on passenger flights to Amsterdam to help turn the plane at the Dutch airport, and then having them return on the flight back to Reykjavík, reported Icelandic television broadcaster Ruv. No word on how long the airline will need to fly in staff to Schiphol.
- And in the U.S., United CEO Scott Kirby last week gave his take on the market’s operational distress, appearing on the “In the Bubble” podcast. He pins much of the blame on inadequate air traffic controller staffing forcing delays and cancellations — much like Ed Bastian at Delta. “It’s like there’s a major thunderstorm across the United States every single day,” Kirby said. During the last four months, roughly 75 percent of United’s flight cancellations were due to FAA-mandated delay programs, he said, downplaying pilot availability. United is “overstaffed” with respect to pilots, having cut block hour capacity by about 14 percent from pre-pandemic levels, but pilot numbers by only 3-4 percent.
- But one airline’s cancellations are another’s financial boon. Wizz Air forecasts a “high-single digit” increase in RASM during the September quarter compared to 2019. This represents a nearly 20-point swing from the 10 percent year-over-three-years decrease in the June quarter. Load factors are on average more than 90 percent full this summer. “The fare environment remains strong, with industry capacity reducing and consumer demand over summer strong,” the Hungarian discounter said. However, Wizz is not entirely immune from Europe’s operational distress. The airline cut its summer capacity forecast by 5 points to up 35 percent year-over-three-years.
- Aeromexico closed the buyback of its Club Premier loyalty program from Aimia on July 15. The $537 million deal for Aimia’s 49.5 percent stake brings the program back in house to Aeromexico 12 years after it first sold the shareholdings. The deal was part of the carrier’s U.S. Chapter 11 restructuring plan.
- New partnerships abound on both sides of the Atlantic. Air Canada and Emirates unveiled what they call a “strategic partnership,” though details of the tie up suggest something more along the lines of a codeshare with some added reciprocal loyalty benefits. Call us old fashioned, but we think of a strategic partnership as something akin to an immunized joint venture or close to it. The new Air Canada-Emirates tie up begins later this year.
And in Europe, Norwegian and Widerøe signed an interline agreement that they plan to grow into something broader. Their new pact will eventually include “synergies relating to both other revenues and operational efficiencies” — what we would consider a strategic partnership. The partnership will connect Widerøe’s regional network in Norway with Norwegian’s European network, expanding travel options for travelers.
- In Australia, regional turned mainline airline Rex has agreed to buy National Jet Express from scheduled charter carrier Cobham Aviation. The deal includes eight De Havilland Dash 8-400s and six Embraer E190s that National Jet operates under “Fly-In Fly-Out” contract services in Western Australia and Southern Australia. Rex sees its new Fly-In Fly-Out business as complementing its existing charter and airline operations around the country, and plans to expand it to Queensland and the Northern Territories. Terms of the deal that requires regulatory approval were not disclosed.
New capacity caps at London Heathrow and Frankfurt airports are the latest blows to European air travel this summer. But the needed flight cancellations are small compared to what the industry has already undertaken, and may help drive some European airlines back to the black simply by offering more pricing power on tighter inventory.
Heathrow CEO John Holland-Kaye, in a letter to passengers on July 12, said the airport has asked airlines to stop selling seats and pull roughly 4,000 daily seats from their schedules through September 11 for a target daily count of 100,000 passengers. “Our objective is to protect flights for the vast majority of passengers at Heathrow this summer and to give confidence that everyone who does travel through the airport will have a safe and reliable journey,” he said.
And Frankfurt Airport operator Fraport, on July 15, notified airlines that it would cap aircraft movements at 88 per hour beginning the week of July 18. This follows a reduction to 96 movements from 106 that the airport made in June. The cuts are in responses to staffing issues that have limited capacity at the hub airport.
“Since the already increased capacities of the ground handling services in Frankfurt are still not sufficient due to a high sickness absence rate, even for the flight schedule that has already been reduced several times, the decision taken by Fraport today is right,” Lufthansa Airline CEO Jens Ritter said.
But not every airline is happy. Emirates came out swinging against the Heathrow caps on July 14, saying its requested reductions were “entirely unreasonable and unacceptable, and we reject these demands.” The carrier blamed staffing issues at the airport firmly on the shoulders of Heathrow itself, and said its ground handling provider, subsidiary Dnata, was fully staffed. Emirates, for what it’s worth, is only scheduled to operate 2.5 percent of seats into the airport from July-September, per Cirium.
The very public display of outrage from Emirates got the airline and Heathrow to a deal, though. The next day, they said in a joint statement that Emirates had agreed to cap ticket sales through mid-August, and would “assist” the airport in ramping up its ground staffing.
Heathrow “reckoned 52 million passengers this year. They were saying 45 million in November. Already in [the second quarter], their numbers are wrong by about 30 percent,” British Airways CEO Sean Doyle said in May. “If you look at any scheduled forecast for Heathrow, you’re looking at passenger numbers, which will be north of 70 million.”
Doyle continued: “We were saying all along in November and December, the demand would recover. Despite Omicron, it’s continued to recover, and it’s unfortunate that the terminal capacity isn’t ready.”
In response to criticisms of Heathrow staffing levels, Holland-Kaye said the airport has the same number of security personnel as it did before the pandemic. However, shortages exist among ground handlers and check-in staff that, in a classic pass of the buck, are “contracted by airlines.”
British Airways, which before the pandemic flew nearly 47 percent of seats at Heathrow, has already made an effort to reduce schedules at the airport. The airline first cut its planned Heathrow schedules in May by 10 percent through October. And then, earlier in July, raised those cuts to 13 percent of planned schedules. If British Airways were forced to cut another 20 flights a day through September 11 when the capacity cap lifts, that would represent a further 1,220 flights.
Holland-Kaye indirectly acknowledged British Airways’ efforts: “Some airlines have taken significant action, but others have not, and we believe that further action is needed now to ensure passengers have a safe and reliable journey.”
He did not name names but, with Heathrow one of the most sought after airports in Europe to serve for airlines, few other carriers have made similar cuts. Unless British Airways cries uncle, other airlines — like Emirates — are likely to face the burden of Heathrow’s reductions.
Ritter at Lufthansa also pushed for other airlines to make cuts in Frankfurt. After citing Lufthansa’s cancellation of thousands-of-flights this summer, he said: “Other airlines flying to and from Frankfurt will now also contribute to an even reduction and stabilization with flight cancellations.”
In what could be good news for airlines, suspending the sale of seats or cancelling flights removes capacity from the system thus driving up fares for the remaining seats in the market. That’s what Wizz Air has seen (see Weekly Skies) as competitors have removed flights in Europe this summer.
Conversely, airlines will lose revenue as a result of the reductions. OAG estimated that the lost revenue at Heathrow alone could amount to as much as $550 million through September. However, there are also cost savings when flight schedules are reduced — for example, an airline doesn’t need to buy fuel for a parked plane — and the higher yields on the remaining flights could outweigh the lost revenue.
- Orlando International Airport will open its new $2.8 billion South Terminal complex on September 19. The facility has 15 gates that can serve either domestic or international flights, with 11 airlines — including British Airways, Emirates, Gol, and JetBlue Airways — moving to the terminal. Curiously, three airlines either led or launched by David Neeleman will operate from the South Terminal: Azul, Breeze Airways, and JetBlue.
- All Nippon Airways updated and finalized its commitment for 50 Boeing aircraft last week. As part of the finalization, ANA updated its order for 20 777-9s to 18 of the passenger jets and two 777-8Fs, the new cargo variant of the 777X. The airline cited “future growth in the cargo business” for the decision to add the freighters. ANA also firmed its order for 20 737-8s plus another 10 options. The Maxes will replace 737-800s in the airline’s fleet when they start arriving in 2025.
- When Virgin Atlantic emerged from the 2008-09 financial crisis, one of its biggest headaches was a fleet burdened with four-engined widebodies, specifically Airbus A340s and Boeing 747s. This time, as Virgin emerges from the Covid crisis, its fleet should be more of a positive than a negative. In September, it plans to start supplementing Airbus A350s and Boeing 787s with Airbus A330-900s, a plane that will replace A330-300s. Boston will be Virgin’s first A330neo market.
- American Airlines has apparently firmed the first 50 of its conditional commitment for up to 350 Vertical Aerospace VX4 electric vertical takeoff and landing, or eVTOL, aircraft. Vertical said it has “secured a pre-delivery payment commitment” from the carrier for the aircraft despite the eVTOLs still being in development and lacking certification or a realistic in-service date. Vertical has previously said the VX4 will enter service in 2024; a timeline that few in the industry see as realistic for an entirely new technology. Vertical also has commitments from lessor Avolon for placement at AirAsia, Gol and Japan Airlines, and from Virgin Atlantic.
- Boeing delivered 121 commercial aircraft in the second quarter, including a robust 103 737 Maxes. Deliveries of its popular 787 remained suspended, however, pending Federal Aviation Administration sign off on quality concerns. During the first six months of 2022, Boeing delivered 216 commercial aircraft.
It’s not often that the U.S. government is willing to think outside of the box for a longstanding grant program that typically runs like clockwork. But it did for Sun Country Airlines in the case of Eau Claire, Wis., where new flights begin in December.
The program, the Department of Transportation’s Essential Air Service (EAS) initiative, provides subsidies to airlines to fly to smaller cities that otherwise would not have air service. Eau Claire has been part of the program since 2009, and served by SkyWest Airlines, which operated on behalf of United Airlines, since 2010. That connection fell victim to the pilot shortage facing U.S. airlines earlier this year when SkyWest notified the DOT that it did not have the crews needed to continue flights to the city and to 28 others.
“We never thought we’d get into the EAS, but Eau Claire was a unique situation,” Sun Country Chief Revenue Officer Grant Whitney said. The airline, a hybrid ultra-low-cost-carrier known for connecting the upper Midwest to leisure spots, was “recruited” — in the words of Eau Claire Airport Director Charity Zich — by the airport to put in a bid that strayed significantly from the standard EAS proposal.
The Minneapolis-based carrier is the first mainline airline to win an EAS grant for air service in the U.S. outside of Alaska in more than a decade, if ever. That win could open the door to more such bids, from Sun Country — Whitney said unhesitatingly that they are very interested in further bids — as well as other discounters, to support mainline flights to small cities. Whitney said Sun Country would be interested in future bids based on the performance of Eau Claire. And Allegiant Air, which already serves a number of EAS destinations, should be watching closely.
Sun Country will only offer four weekly flights to Eau Claire from December 1, according to the DOT order. Service will include two weekly flights to Sun Country’s Minneapolis-St. Paul hub, and two to a rotation of Fort Myers, Las Vegas, and Orlando throughout the year all on a 186-seat Boeing 737-800. The DOT will pay Sun Country $6.5 million annually for two years for the flights.
EAS rules dictate that an airline must provide two daily flights on an aircraft with 30-50 seat aircraft to destinations outside of Alaska. A waiver was required for Sun Country’s proposal — and granted by the DOT — as well as for the increasingly common proposals for more frequent flights on smaller aircraft, like those flown by Cape Air and Southern Airways Express. The regulator did not consider a competing Eau Claire proposal from Boutique Air because a waiver for its nine-seat planes was not sought.
To make Eau Claire work, Sun Country will operate its two Minneapolis flights with a focus on connectivity, said Whitney. Aircraft will fly to Eau Claire in the evening and return in the morning in order to maximize options for further travel. The Fort Myers, Las Vegas, and Orlando flights will operate with aircraft based in those cities.
“This proposal has tremendous traffic and revenue upside and a reasonable chance to see reduced subsidy need in future years,” Zich said in a May 24 letter backing Sun Country’s proposal to the DOT. She cited the airline’s success in entering other small, upper Midwest markets like Duluth, Minn., and Madison, Wis., and gradually expanding capacity over time.
Asked if Sun Country plans to grow in Eau Claire, Whitney was clear that he does not want to put the cart ahead of the horse. The airline has not loaded its schedule for the market yet, something it intends to do in the coming weeks, and has yet to see how the new flights will perform. “I’m expecting it to be successful,” he added.
The win also raises important questions about small city air service and the EAS program. Eau Claire is located just 93 miles from the Minneapolis-St. Paul airport, or about an hour-and-a-half drive, according to Google Maps. With airlines facing staffing constraints and its — and the Biden administration’s — focus on reducing carbon emissions, such short routes may be better served by ground-based transportation, like Landline’s buses-as-flights model. Landline already has a partnership with Sun Country to two cities in Minnesota.
One of the main issues with expanding the bus-as-flight model to EAS cities is how the Federal Aviation Administration funds airports. Formula dollars are allocated based on the number of “enplanements,” or the number of people that board flights at an airport. That metric does not include passengers who board a bus even if it is operated as a flight and sold exclusively as such. There has been no official move in recent years to change how enplanements are measured.
“We will certainly work with Landline to augment and bolster our service level,” Whitney said on its new Eau Claire service. In Sun Country’s application to the DOT, it said flights “could be supplemented” by Landline buses in the future but was clear to note that no EAS funds would be used for bus services.
- Hawaiian Airlines‘ pandemic foray to Central Florida is no more. The carrier will end flights to Orlando on Sept. 8, a year-and-a-half after service began. A Hawaiian spokesperson said the move was part of a broader network “realigning” to take advantage of the reopening of international markets. The airline relied heavily on traffic to and from Japan before the pandemic and, in recent earnings calls, has repeatedly emphasized plans to quickly ramp up capacity to the country as travel restrictions ease.
- It’s a win-some-lose-some in the American Airlines network this fall. The carrier will drop the nonstop between New York JFK and Bogotá it added in May 2021 as part of an international expansion at the airport under its controversial alliance with JetBlue Airways, but add new daily service between JFK and Mexico City with a Boeing 737-8. The Bogotá route ends November 2, with Mexico City flights beginning a day later, per Cirium.
In addition, on July 13 the DOT awarded American frequencies for four new Cuba routes. The regulator allocated it rights to begin daily or more flights between Miami and Santa Clara, Holguin, Matanzas-Varadero, Camaguey, and Santiago de Cuba in early November. American will operate the routes with a mix of Airbus A319 and 737-800 aircraft.
And domestically, American is adding new seasonal ski runs from Austin to Bozeman, Mont., and Vail, Colo.; and Miami to Jackson Hole, Wyo. Recall that Austin has been something of a pandemic winner both in terms of airline and broader population growth. American’s expansion follows Delta Air Lines‘ pre-pandemic labeling of Austin a “focus city,” and planning its own growth there. The three routes will operate from mid-December through early April, per Cirium.
- American wasn’t the only DOT winner last week. Delta and United Airlines were awarded three U.S.-South Africa frequencies each for new routes to Cape Town. Delta will connect Atlanta to the Western Cape with an Airbus A350-900, and United Washington Dulles to Cape Town with a Boeing 787-9. Both routes will operate thrice weekly thanks to South African authorities granting the U.S. two additional U.S.-South Africa weekly frequencies; previously only four were available. Win-win!
- Spirit Airlines has unveiled its latest new dot: San Antonio. The discounter will connect the Texas city to Las Vegas and Orlando with a daily flight each from November 17. In a statement, Spirit said it “sees big opportunity in Texas” to grow, and also plans to add capacity at its existing destinations in the state: Austin, Dallas-Fort Worth, and Houston Intercontinental.
- In Europe, EasyJet has unveiled three new winter routes. The discounter will connect Bristol and Rovaniemi, Finland; London Gatwick and Porto Santo, Portugal; and Manchester and Fuerteventura, Spain. All three routes will operate twice weekly and begin in November.
- Saudi Arabia last week said it would end airspace restrictions on Israeli airlines, and flights to and from Israel. The move benefits El Al, Akria, and Israir, though the former could see the biggest gain, particularly on its flights to India and Southeast Asia. El Al CEO Dina Ben Tal Ganancia said in June that she wants to expand the number of transit passengers on the airline, which is something expanded service to India and Southeast Asia, plus shorter flight routings, would support. Saudi’s airspace reopening does not include rights for Israeli airlines to serve the country.
- Indian airline Vistara is expanding options to Bangkok this summer. The airline will offer service between Mumbai and the Thai capital with five-weekly flights on an Airbus A320neo from August 5. Vistara already serves Bangkok from Delhi, and will face stiff competition on the Mumbai route: Air India, Go First, IndiGo, and Thai Airways all serve the market, per Cirium.