Issue No. 869

South American Reawakening

Latam and Gol Lead Charge to Post-Pandemic Normalization

Pushing Back: Inside the Issue

As America’s Independence Day holiday approached, airlines and their customers braced for more operational distress. Simply put, airlines, airports, and air traffic control towers throughout the U.S. are understaffed, owing to tight labor markets and earlier downsizing. The problem, however, goes beyond the U.S., frustrating airlines in many parts of the world as they try to capture a summertime travel surge after two years of extreme demand weakness. Demand is so strong, in fact, that not even sky-high fuel prices are getting in the way of what should be a solidly profitable third quarter for many carriers. The Orlando airport, for one, expects this year’s Independence Day holiday period to be no less busy than it was in 2019.

As airlines struggle to operate their schedules, the boardroom drama of the year continues to intensify. Spirit was all set to hold a shareholder vote June 30 on whether to accept a merger proposal from Frontier. But that vote was postponed, again, likely after insufficient support. The vote is now scheduled for July 8. JetBlue, of course, wants to buy Spirit as well, but, despite repeatedly sweetening its offer, has failed to convince Spirit management. The stakes are high — either combination would create America’s fifth-largest airline behind Southwest and ahead of Alaska. And scale, as consolidation has shown, brings big advantages.

In other news across the industry, Airbus bagged a big narrowbody order from China, the U.S. DOT gave tentative approval for a Delta-Latam joint venture, Gol is seeing business revive, Lufthansa is bringing back some A380s, and United’s pilots appear hesitant about a new contract agreement.

Lo and behold, the second quarter of 2022 is now history, capping off a busy first half that saw air travel finally start to normalize, at least in some geographies. But at the same time, inflation became a scourge in many nations, led by rising energy prices which left airlines paying a lot more for their fuel.

The Airline Weekly Lounge Podcast

For those who hoped we'd have a resolution to the Spirit Airlines merger saga this week, no dice. The carrier delayed, again, a key shareholder vote on whether to merge with Frontier. Edward Russell and Jay Shabat discuss the latest turns, and why JetBlue is so keen to acquire Spirit. Also, the outlook for July Fourth holiday weekend travel in the U.S. Listen to this week’s episode to find out. A full archive of the 'Lounge is here.

Weekly Skies

Delta Air Lines and Latam Airlines Group are on the cusp of regulatory signoff for a broad partnership that will give them a competitive edge — at least for now — on flights between the U.S. and South America.

The U.S. Department of Transportation found that the proposed immunized joint venture would provide “substantial” benefits in the market, and tentatively approved the pact with several conditions on June 23. Those conditions include a 10-year term, and requirements that both Delta and Latam interline with other non-aligned South American and U.S. airlines, respectively, if such a tie up is requested.

The airlines, in a joint statement, said they “applaud” the DOT’s decision, and added that the partnership will “vastly improve travel options and service for customers traveling between the two regions.” They plan to begin implementing the alliance once the regulator finalizes its decision that, given the required response and comment periods, could not occur before July 18.

Approval of the Delta-Latam joint venture is a big win for the airlines. Both have suffered major blows to their international partnership ambitions at the hands of regulators in recent years. Delta dropped its planned joint venture with WestJet in late 2020 after the DOT requested what the airlines saw as “arbitrary and capricious” conditions. And Latam ended its long-standing partnership with American Airlines in 2019 after a Chilean court blocked their planned joint venture.

Latam, which is operating under U.S. Chapter 11 bankruptcy protection, included the Delta joint venture as a key part of its restructuring plan. A bankruptcy judge approved that plan earlier in June, and Latam plans to exit Chapter 11 in the second half of the year.

The partnership will give Delta and Latam a competitive edge in the dynamic U.S.-South America market for the time being. The airlines together will operate 21 percent of the seats in the market this year based on current schedules, according to Cirium data. That is second only to American’s 32 percent share, but well ahead of the 11 percent share of the next largest airline, Avianca.

That edge is expected to face new challenges in the near future. Avianca and Gol are planning to combine under the new holding company, Abra — the airlines will maintain independent brands — later this year. Avianca and Copa Airlines continue to pursue a joint venture with United Airlines; a three-way pact would give the airlines a 21 percent share of U.S.-South America seats. And American, not to be left behind, is forging equity partnerships with Gol and Chile’s JetSmart.

Delta and Latam have promised at least nine new U.S.-South America routes once demand normalizes following the pandemic as part of their partnership. The former also committed to expanding its presence in Miami, which is Latam’s main U.S. gateway. And the airlines also committed to expanding service on nine more existing routes, whether that is additional flights or extending a seasonal route to year-round service.

While details of their planned expansion are limited, regulatory filings suggest Latam plans to add new flights to Delta’s hubs in Atlanta, Boston, Los Angeles, and New York, and Delta to Latam’s hubs in Bogotá, Lima, Santiago, and São Paulo. Atlanta would be a new destination for Latam.

The U.S. is the last country to sign off on Delta and Latam’s partnership. The carriers already have approval in Brazil, Chile, Colombia, Paraguay, Peru, and Uruguay.

Edward Russell

Gol’s Goals

Gol, during a June 24 investor call, gave an update on the state of its business, and a forecast of what to expect for the rest of 2022. Revenues during May (in local currency terms) exceeded those during May of 2019, an important sign of recovery from the pandemic. But costs are much higher too, not just because of what’s happened with fuel prices but also because of what’s happened to the Brazilian real. In May, one U.S. dollar was worth about 5 reais. In May of 2019, one U.S. dollar was worth only 4 reais (it was worth just 2 reais a decade ago). This weakening of the Brazilian currency makes much of what Gol pays for — including fuel and aircraft — more expensive. The good news, as Chief Financial Officer Richard Lark explained, is that Gol’s higher fuel bill has thus far been largely offset by fare increases, a testament to strong demand.

Note that Gol, like Southwest Airlines in the U.S., is a low-cost carrier that depends a lot on domestic business travel. Most of that is recovering nicely, though as Gol’s rival Azul pointed out in its first quarter earnings call, the finance and government sectors have been slower to rebound. Brazil’s large commodity sector corporations, by contrast, are flush with cash amid the boom in commodity prices.

Back to Gol’s business, a top priority is adding new Boeing 737 Maxes to replace prior-generation 737s, though the effort is complicated by Boeing’s production woes. Another priority is growing its Smiles loyalty program, a major lifeline for raising new capital during and before the pandemic. The origin of Smiles dates to Gol’s acquisition of Varig in the early 2000s, a deal that also gave it extremely valuable slots at key Brazilian airports, none more important than São Paulo Congonhas. That airport, incidentally, is slated for privatization and expansion. As Lark stated in last week’s presentation: “One of the key constraints on our ability to grow … in Brazil is airport infrastructure.” For now, Gol’s capacity is still well below pre-Covid levels. And, coupled with strengthening passenger demand and growth in cargo activity, this capacity discipline is driving unit revenue gains sufficient to counteract unit cost pressures. But holding back on capacity growth comes at a cost. The fact is, Gol’s aircraft assets are currently underutilized, which itself puts upward pressure on unit costs. “Until we get Gol back to 12 hours a day of aircraft utilization,” said Lark, “we’re not satisfied, and we’re not there yet. We’re still carrying inefficiency on the operating side.”

So when will Gol be back to pre-Covid levels of available seat kilometer (ASK) capacity? By the first quarter of next year, based on management’s current plan. At that point, it hopes to fully exploit what it claims is a 15 percent unit cost advantage versus its main rivals, namely Latam and Azul. Interestingly, Gol’s pending merger with Avianca, Sky Airline, and Viva Air — creating the so-called Abra — wasn’t discussed until later in the investor call (it almost seemed like an afterthought). Executives see the move as more of a long-term strategy, and one targeting revenue synergies (through initiatives like cross-selling and enhanced loyalty benefits) much more than cost synergies. Even after the merger is complete, Gol will retain its own brand and its own operation. The deal, by the way, already has approval from competition regulators and should close shortly. Also next month: Long-time CEO Paulo Kakinoff will retire, handing the reigns to his operations chief Celso Ferrer. Looking farther out to October, Brazil will hold its first presidential election since 2018. Currently leading in the polls is Luiz Inácio Lula da Silva, who was president during Gol’s formative years in the early 2000s.

Jay Shabat

Delta CEO Cites Air Traffic Control For Delays

Delta CEO Ed Bastian sees a “stressed” air traffic control organization as the leading cause of flight disruptions in the U.S. His comments come amid increasing calls for reliable airline operations ahead of what is forecast to be a busy July Fourth holiday weekend.

“I think [our partner] that’s most stressed right now is air traffic control,” Bastian told staff in a webinar June 29 viewed by Airline Weekly. Based on the Atlanta-based carrier’s internal data, air traffic control-related flight cancellations are up 195 percent this year compared to 2021 while weather events are up only 2 percent. Air traffic control in the U.S. is managed by the Federal Aviation Administration.

“This is about a partnership and the government needs to step up,” Bastian continued. “It should get better, but this is going to be a constraint that’s going to stay with us for some time.”

Flight disruptions in the U.S. have gotten so rampant that even members of Congress are calling for answers. “So far this year, one out of every five flights in the United States were delayed, while airlines are cancelling flights four times as often on high-travel weekends than they did in 2019 … That is simply unacceptable,” Senator Bernie Sanders (D-Vt.) wrote in a letter to U.S. Transportation Secretary Pete Buttigieg on June 28.

Bastian’s comments came a day after Secretary Buttigieg denied that air traffic control staffing was the driving issue behind the current spate of flight disruptions.

“The majority of cancellations, and the majority of delays has nothing to do with air traffic control staffing,” Buttigieg said on NBC Nightly News on June 28. He called out, among other things, the early retirement packages that airlines offered staff during the pandemic that reduced headcount despite more than $54 billion in federal coronavirus relief.

FAA officials held a call with airlines and industry representatives on June 30 where the agency reportedly said that it is maximizing air traffic controller overtime over the July Fourth holiday weekend, as well as considering alternative routings in order to minimize disruptions.

During the town hall, Bastian acknowledged that Delta may have been too “generous” in the voluntary early retirement and other packages it offered staff in 2020. Every airline offered similar packages to reduce headcount in the early days of the pandemic even as federal aid protected jobs from involuntary furloughs and layoffs. Without that relief, many believe the issues the industry faces today would be much worse.

Despite pointing the finger at air traffic control, Bastian acknowledged that Delta’s own staffing was a drag on its operations. He reiterated that the airline is “fully staffed” for the summer, however, after the departures of many senior staff early in the pandemic, many new hires require training or lack experience handling irregular operations. Staffing issues forced Delta at the end of May to cancel roughly 2 percent of its schedule in July through the end of August.

Trade group Airlines for America (A4A) CEO Nicholas Calio wrote Secretary Buttigieg on June 24 asking for a meeting to “discuss how we can work together to better understand FAA’s controller staffing plan for the upcoming July Fourth weekend and summer travel season.” Other agencies, including the Transportation Security Administration (TSA), had shared their staffing plans for the holiday with airlines, he said, and asked for other measures to mitigate flight disruptions. Air traffic control centers in Jacksonville, Fla., and New York face some of the worst staffing issues, Calio said.

Prior to Calio’s letter, most of the flight disruptions were blamed on staffing issues at airlines. Alaska AirlinesAmerican, Delta, JetBlue AirwaysSouthwestUnited, and many regional carriers — in short the vast majority of the U.S. industry — have cited staffing shortages or training backlogs in their schedule reductions in recent months. The industry as a whole has reduced summer schedules by roughly 15 percent from plans at the beginning of the year to account for staffing limits, said Calio.

“We have to have a little more patience, a little more understanding,” Bastian told staff, about getting through the coming weeks. He expressed confidence in Delta’s ability to operate reliably over the July Fourth holiday.

Bastian also expressed optimism that the current staffing situation — both with air traffic controllers and at Delta — will ease. However, that could take until the end of the year, or early 2023, he added. Delta plans to will hold its capacity at a little over 80 percent of 2019 levels until the operational situation improves, he added.

Edward Russell

Air Canada and Swiss Cancel Summer Flights

Air Canada and Swiss International Air Lines are the latest to fall victim to the global wave of aviation industry disruptions this summer. In a letter to frequent flyers on June 29, CEO Michael Rousseau said: “Air Canada’s operations too, have been disrupted by the industry’s complex and unavoidable challenges.” He went on to offer his “sincere apologies.”

The Montreal-based carrier is cancelling an average of 154 flights per day, or 15 percent of its schedule, during both July and August. The reductions will only occur on domestic Canada and U.S. routes primarily from its Montreal and Toronto hubs. And Air Canada will suspend four routes in the process: Montreal to Baltimore-Washington, Kelowna, and Pittsburgh — both U.S. routes only resumed in June after a pandemic hiatus — and Toronto to Fort McMurray.

Zurich-based Swiss is cancelling roughly 2 percent of its schedule from August through October, the airline said June 28. That amounts to around 676 flights over the three-month period. “With the overall conditions still growing even more challenging, and in order to pay due and proactive regard to our responsibilities to our passengers, Swiss will be making this contribution to easing the present pressures on the system,” Swiss CEO Dieter Vranckx said.

While Swiss is just the latest in a growing list of European airlines, including British Airways, KLM, and Lufthansa, to cut flights, Air Canada is the first to do so in Canada. WestJet, the country’s second largest airline, said on June 30 that it was not cancelling additional flights as it had “proactively reduced capacity” this summer in order to provide travelers with a “stable operation.” The airline will fly nearly 23 percent fewer flights during the three-month June-to-August period this year than it did in 2019, Cirium schedule data show.

Porter Airlines, which operates from a main base at Toronto’s Billy Bishop airport, plans to operate its “summer flight schedule as planned,” a spokesperson said. Passenger numbers at the airline are “comparable” to 2019 levels, they added.

And Transat, which recently completed a transformation to a leisure airline from an integrated travel company, “does not anticipate any cancellations at the moment,” a spokesperson said.

While Rousseau did not say it in his letter, the general view in the industry is that operations will improve this fall after the summer peak eases. That can be seen in most airlines’ decision to only cut schedules through August.

Edward Russell

State of the U.S. Recovery

For the seven days through June 27, TSA passenger counts at U.S. airports were up 16 percent from the comparable period last year, and up more than 300 percent from the same period in 2020. More interesting is a pre-pandemic comparison (in other words, versus 2019), for which traffic is still down 10 percent. This includes slower-to-recover intercontinental traffic, including traffic to Asia which remains deeply depressed. TSA figures don’t show domestic traffic alone, but according to published schedules in Cirium, domestic U.S. seat capacity for the month of July will be down 6 percent versus 2019. Within that figure is heavy variation by airport — July’s domestic seats from Chicago O’Hare and Los Angeles, for example, will be down by more like 20 percent, while Miami’s capacity will be up an eye-popping 40 percent. Others with more seats scheduled now versus before Covid include Las Vegas, Orlando, Charlotte, Austin, Nashville, Washington Reagan, New York JFK, and New York LaGuardia.

Jay Shabat

In Other News

  • Southwest, in a June 21 update, said its fuel hedges for this year alone are valued at roughly $1.2 billion. That presents a major competitive advantage at a time when most other U.S. airlines refrain from hedging. During the early years of the 2000s, leading up to the 2008-09 financial crisis, Southwest’s fuel hedges allowed it to undercut its rivals on pricing while protecting it from the fuel inflation that bankrupted multiple U.S. carriers. On the other hand, when fuel prices suddenly crashed in mid-2014, Southwest’s aggressive hedging left it paying more for fuel than others. For now, though, it’s extremely happy to have those derivative contracts in place. For the record, Southwest paid just $2.30 per gallon on average for fuel during the first quarter of 2022. All other U.S. carriers, subject to spot fuel prices, paid from $2.60-3.20 per gallon. (Note that Alaska also has favorable fuel hedges which it said in early June would save it 45 cents per gallon).
  • A quick note from the Financial Times: U.S corporate spending on private jets for personal use by CEOs and chairpersons, it reports, reached a 10-year high in 2021. The pandemic was a big reason why. Facebook’s parent company Meta alone spent $1.6 million on private jets for CEO Mark Zuckerberg, the FT writes. For context, the social media giant earned a $39 billion net profit in 2021, on $118 billion in revenues.
  • KLM has repaid the final €277 million ($288 million) outstanding under the loans provided by the government of the Netherlands in 2020. Incoming CEO Marjan Rintel said she would “build upon this to achieve even better financial health for KLM in the future.” Despite strong travel demand, KLM has born the brunt of operational issues at Amsterdam’s Schiphol airport that have forced it to cap ticket sales and reduce capacity through at least August 28. KLM’s budget subsidiary Transavia has also been forced to cut flights at Schiphol by about 20 percent.
  • And in Norway, the government has joined its Danish counterparts in backing struggling SAS‘ restructuring plan. Norway supports the conversion of its existing loans to the airline to equity under the framework put forward under SAS Forward, but will not contribute any additional capital, the government said on June 28. SAS now has the backing of two of its three main stakeholders; the Swedish government has, as yet, declined to support the plan.

    However, a strike by SAS pilots on July 4 cancelled 175 flights, or 52 percent of the airlines’ schedule, per FlightAware. “A strike at this point is devastating for SAS and puts the company’s future together with the jobs of thousands of colleagues at stake,” CEO Anko van der Werff. The airline seeks to continue mediated talks with its pilots unions.
  • Thai Airways is seeking a modification to its restructuring plan that could see it exit administration in 2024. Under the proposal submitted to a Thai bankruptcy court on July 1, the airline proposes to boost equity by 80 billion Thai baht ($2.2 billion) through a series of transactions. They include, first, a new 25 billion Thai baht six-year term loan and revolving credit facility; second, a full conversion of the Thai government’s loans to the airline to equity, while other financial creditors would receive equity for 24.5 percent of their debt and cash for the balance that would reduce the carrier’s debt by nearly 38 billion Thai baht; and, third, a private placement of new shares to employees that could raise up to 25 billion Thai baht. Thai Airways also reported a continued improvement in demand, with September quarter bookings showing “continual growth.”
  • South Africa’s Airlink continues to add partners as the country’s airline market resets. Qatar Airways is its latest codeshare partner, joining the likes of Emirates and United that it signed with last year. Airlink is South Africa’s second largest airline after the demise of Comair in June. Airlink and Qatar plan to begin codesharing on July 6.
  • Waltzing Matilda Aviation is poised to get a key approval for its new carrier Connect Airlines. The U.S. Department of Transportation tentatively granted it an air carrier certificate on June 24 with any comments or objections due by July 8. Massachusetts-based Connect still needs Federal Aviation Administration sign-off before it can begin flights but, as Waltzing Matilda CEO John Thomas said, DOT approval is necessary to complete the FAA process. The airline plans to fly De Havilland Dash 8-400s primarily from Toronto’s Billy Bishop Airport. Initial destinations include Baltimore-Washington, Boston, Chicago O’Hare, New York JFK, and Philadelphia with a crew base in the latter city. A partnership with American is planned.

Edward Russell & Jay Shabat

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China’s Big 3 airlines, Air China, China Eastern, and China Southern, have committed to 292 new Airbus A320neo family aircraft, further solidifying the European planemaker’s lead in Asia’s largest market.

Beijing-based Air China, and its Shenzhen Airlines subsidiary, ordered 96 A320neo family aircraft, in one of the three deals unveiled on July 2 in China. Shanghai-based China Eastern ordered 100 A320neo family planes. And Guangzhou-based China Southern 96 A320neo family jets. Deliveries begin in 2023 for Air China, and a year later for its competitors, and run though 2027 for all three airlines.

The deals are a big win for Airbus, which has been picking up marketshare from Boeing since the 737 Max grounding in 2019. The market was roughly split between models from both airframers prior to the grounding, and a U.S.-Sino trade dispute that began during the Trump administration that continues to this day. Since these dual issues, Airbus — despite facing its own challenges — has moved to ramp up production of A320neo narrowbody jets and capture share while its competitor is down.

“There is … very much a move that Airbus believes it is capturing a dominant share,” Air Lease Corp. CEO John Pleuger told The Air Current on the Chinese market in 2021. “This is the time. This is the time to go for it. And that’s actually a very natural market decision to take.”

Airbus could produce 65 A320neo family aircraft a month by next summer, and 75 a month in 2025. The main issue that could hold the airframer back is its supply chain, which leasing companies and airlines have said is already showing signs of stress and resulting in delayed deliveries of new aircraft. Airbus has a final assembly line in Tianjin that serves the Chinese market.

Boeing, for its part, continues to await the restart of 737 Max flights in China. The country has officially moved to lift the grounding order that was put in place in March 2019, but revenue passenger flights have yet to begin. Boeing has numerous Maxes bound for Chinese airlines that are in storage.

“These new orders demonstrate the strong confidence in Airbus from our customers,” Airbus Chief Commercial Officer and Head of International Christian Scherer said in a statement. “It is also a solid endorsement from our airline customers in China of the performance, quality, fuel efficiency and sustainability of the world’s leading family of single aisle aircraft.”

Air China, China Eastern, and China Southern all say the new aircraft will be used for a mix of growth and fleet replacement. China Eastern said it plans to replace roughly 68 older A320 jets with its order for 96 new planes.

The three orders are worth more than $37 billion at list prices.

Edward Russell

Lufthansa Brings Back A380s

Next year, Lufthansa will bring back the Airbus A380, which it “permanently decommissioned” during the pandemic. The move comes amid resurgent travel demand.

Lufthansa cited the “steep rise in customer demand and the delayed delivery of ordered aircraft” for its decision to reactivate up to eight A380s remaining in its fleet, the airline said June 27. It parked its 14 A380s in 2020 amid the precipitous decline in air travel, and has since sold six. The remaining superjumbo jets, which seat 509 passengers, will return to revenue service in summer 2023.

In May, Lufthansa Group CEO Carsten Spohr described travel demand as “enormous.” At the time, the airline planned to fly all that it could this summer within the constraints of “delayed aircraft [and] operational bottlenecks.” It also raised its full-year capacity guidance by 5 points to 75 percent of 2019 levels. Lufthansa has since cancelled more than 3,000 flights in both July and August due to airport and other staffing issues in Germany.

Spohr spoke repeatedly last year about “modernizing” Lufthansa. This included retiring nearly all of the airline’s four-engine aircraft, including the A380s, as well as Airbus A340s and Boeing 747-400s. Only Lufthansa’s 747-8s were to remain. The group pivoted to acquiring more new, efficient, twin-engine Airbus A350s and Boeing 787s, both ordering additional aircraft and acquiring new models from lessors.

Since then, however, both Airbus and Boeing have faced supply chain issues that have delayed new deliveries. Boeing is especially challenged having not delivered a new 787 since mid-2021, and it delayed the entry-into-service of its new Boeing 777X until 2025 — nearly five years late. Lufthansa has orders for 27 777-9s. These issues have forced airlines around the world to find alternative aircraft to fly their schedules, including extending aircraft leases and bringing planes back from storage.

Lufthansa’s decision to bring back the A380s suggests that the delays it faces from both Airbus and Boeing, coupled with strong travel demand, outweighed its desire to quickly modernize its fleet.

But the return of the A380 is unique. Even before the pandemic, demand for the large passenger jet was waning. Many airlines saw it as too much airplane for the market, which increasingly favored smaller, more nimble models. Airbus announced in early 2019 that it would end production of the jet two years later with the final model delivered to Emirates in December 2021. The pandemic, which hastened many airlines’ shift to those more nimble aircraft, sped the exit or at least long-term storage of many A380s, including at Air France, British Airways, Lufthansa, Qantas Airways, Qatar Airways, and Singapore Airlines.

British Airways and Singapore Airlines were the first to resume A380 flights in November, followed by Qatar in December, and Qantas in January, according to Cirium schedules. But even with Lufthansa joining this global cohort, the future of the A380 looks dim the longer it is out of production and as its numbers dwindle.

Lufthansa has not said when or where it will fly the A380 when the aircraft returns next summer. It previously flew it primarily from its Frankfurt hub, but also from Munich, to destinations including Hong Kong, Los Angeles, New York JFK, and Shanghai Pudong, Cirium schedules show.

Edward Russell

Fleet Briefs

  • More than two years after the pandemic began, nearly a fifth of the world’s commercial aircraft fleet remains parked, according to Visual Approach Analytics. But the percentage is far less for narrowbody aircraft: closer to just 7 percent.
  • Azerbaijan’s Silk Way West Airlines has joined the growing list of airlines with commitments for Airbus’ new A350 freighter. The cargo carrier signed a purchase agreement for two A350Fs last week, bringing the airframer’s total commitments for the aircraft to 31.
  • IAG has firmed 14 Airbus A320neo options. The aircraft, from a 2013 deal, will be split between 11 A320neos and three A321neos that arrive in 2024 and 2025. The option exercise comes a month after IAG firmed a 2019 memorandum of understanding with Boeing for 50 737 Maxes plus another 100 options.
  • Aer Lingus and Icelandair have both signed new leases for narrowbodies. The former will take two Airbus A320neos from CDB Aviation in July. The planes will replace older A320ceos in its fleet, and were originally built for Russia’s Smartavia but never delivered due to Western sanctions following the country’s invasion of Ukraine. Icelandair, for its part, has leased two Boeing 737-8s from BOC Aviation that are due in the fall of 2023. The aircraft will increase its Max fleet to 20 aircraft.
  • China’s airlines aren’t the only ones in Asia looking at new aircraft. In the past week, Bloomberg has reported several pending fleet deals in Asia: for one, Japan Airlines is in talks with Airbus and Boeing over an order for up to 50 narrowbodies, likely A320neo or 737 Max family jets, to replace its existing 737 fleet. (JAL was rare among large airlines in that it never ordered any Maxes or Neos prior to the pandemic). In India, Air India was polling pilots on a potential order for around 20 A350 aircraft, while rebooted Jet Airways is close to a deal for up to 50 A320neo and A220 jets; both deals could be a loss for Boeing, which currently provides Air India with its widebodies and Jet with its narrowbodies.
  • The leasing world is about to get a major new player. Saudi Arabia, as part of its efforts to diversify away from oil dependence, will allocate a massive $100 billion to aviation investments from now through 2030, led by the launch of a new aircraft leasing company called AviLease. It will be led by former top executives from the Carlyle Group, GECAS, ORIX Aviation, and Aergo Capital. With that sort of money and that sort of management pedigree, expect AviLease to be a major player in the aircraft market before long.

Edward Russell & Jay Shabat

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Routes and Networks

  • Delta Air Lines is expanding its Boston hub this winter with a new sun run. The SkyTeam Alliance carrier will begin daily Boston-Phoenix flights with a Boeing 737-900ER on December 17, per Cirium. Delta will compete with American Airlines and JetBlue Airways on the route.
  • United Airlines is making a rare addition to its operation in the Northern Mariana Islands. The Star Alliance carrier will connect Saipan to Tokyo Narita thrice-weekly with a 737-800 from September 2, per Cirium. Airline Weekly understands that the new route benefits from financial incentives provided by the Commonwealth of the Northern Mariana Islands government for new international air service. Delta, and its forerunner Northwest Airlines, connected Saipan and Tokyo continuously for years until the airline closed its Narita hub in 2018.
  • And in Europe, Ryanair is beefing up its winter schedule with five new routes from Birmingham. The discounter will connect the UK city with Billund, Denmark; Grenoble and Toulouse, France; Santander, Spain; and Stockholm Arlanda from October. The new routes will be supported with the addition of one Boeing 737, for a total of five, at Ryanair’s Birmingham base.

Edward Russell & Jay Shabat

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State of the Unions

  • United Airlinesnew accord with pilots may not be the slamdunk airline and union leaders hope it is. Following the news that American Airlines offered its pilots a nearly 17 percent raise in a proposal sent to the Allied Pilots Association (more below), the Air Line Pilots Association chapter at United suspended a roadshow where it was attempting to sell the tentative agreement to crew members. But it may be a convenient excuse for ALPA: even before the American news, Airline Weekly understood that there is significant dissension in the ranks over everything from pay to regional scope, reserve and quality of life issues. Some members view the headline pay increase of 14.5 percent, which includes a previously agreed-to 5 percent increase, over two years as “substandard.” In addition, an increase to the weight limit allowed for 50-seat regional jets is also raising ire among pilots who abhor any additional regional scope relief. Voting on the United accord concludes July 15.
  • American CEO Robert Isom took his pitch directly to the airline’s pilots in video shared on June 30. In that video, he promised to raise pay to rates comparable with United — the current leader in the U.S. — with a 16.9 percent raise over two years. The proposal also includes per diem, reserve, and other quality of life improvements, he said. Isom’s move is notable in that he bypassed the APA, which represents pilots at American, where negotiations are normally held behind closed doors.
  • UK-based pilots at Ryanair represented by the British Airline Pilots Association (BALPA) last week approved a contract that restores pre-Covid pay levels and provides wage increases through 2026, according to the airline. “This long-term agreement delivers stability, accelerated pay restoration, future pay increases and other benefit improvements for our UK pilots,” Ryanair People Director Darrell Hughes said.
  • Pilots at Mesa Airlines rejected a tentative agreement on June 29. Of those who voted, 68 percent were against the deal that would have raised starting rates for first officers flying regional jets to $48 an hour, according to ALPA. The rejection comes less than two weeks after ALPA and American-owned Envoy, Piedmont Airlines, and PSA Airlines agreed to significant wage increases to $90 an hour for starting first officers. “We believe this vote reflects the rapid market shift for airline pilots which will need to be addressed by management,” said Captain Chris Gill, chair of ALPA’s Mesa Master Executive Council.
  • Flight attendants at Eastern Airlines have voted to join the Association of Flight Attendants-CWA (AFA). According to the union, 94 percent of cabin crew members at the carrier voted in favor of membership in a vote that was certified by the U.S. National Mediation Board on June 27. Eastern flight attendants must elect their union leadership before contract talks can begin.

Edward Russell

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Feature Story

It won’t take no for an answer. JetBlue Airways wants Spirit Airlines badly, as its higher and higher offers make clear. But why? Here are ten reasons:

  1. Consolidation Works Wonders: When America West bought US Airways in 2005, it triggered a merger wave that would reshape the U.S. airline sector, improving the financial fortunes of all involved. Five subsequent deals — DeltaNorthwest (2008), UnitedContinental (2010), SouthwestAirTran (2010), AmericanUS Airways (2013), and AlaskaVirgin America (2016) — gave the industry a level of pricing power strong enough to withstand all but the most severe shocks. The mother of all shocks — the Covid-19 pandemic — would arrive in 2020. But now that its impact is receding, JetBlue is surely mindful of the long track record of airline mergers producing a lot of value. To be sure, several of those past mergers came with headaches including labor tensions and even some short-term financial distress. But no airline today — not Delta, United, American, Southwest, nor Alaska — regrets having done their deals. (note: Alaska outbid JetBlue to buy Virgin).
  2. Eliminates a Key Lower-Cost Rival: One reason why consolidation works so well is that it often removes a close competitor, resulting in immediate yield gains. JetBlue would never quite say this so directly, but it’s surely a key motivation.
  3. Florida: JetBlue has a high degree of dependence on the Florida market, which fortunately for its sake, performed about as well as a market could during the pandemic. On the other hand, others weren’t oblivious to this fact and, in some cases, responded with huge amounts of new Florida capacity. That’s especially true of the Orlando and southeast Florida markets, both critical to JetBlue. Buying Spirit thus alleviates some of that intensifying competitive pressure.
  4. The Caribbean: JetBlue trails only American in terms of its Caribbean clout, and Spirit brings a lot of its own heft in the region. Getting stronger in the Caribbean (and upper South America) also makes its loyalty plan and other travel products more attractive in places like New York and Florida.
  5. People, Planes and Property: Asked early on why it wants to buy Spirit, JetBlue gave this as a key reason. A tight narrowbody aircraft market, made worse by Airbus and Boeing production issues, will make it tough for JetBlue to realize its growth ambitions. Spirit’s order book of A320neo family jets should make that easier. JetBlue can certainly use more pilots, which Spirit will provide. And it would gain access to airport gates and other facilities in congested markets like Atlanta, Chicago, and Los Angeles.
  6. Economies of Clout: One of the biggest benefits of merging is the influence a larger airline achieves with key suppliers ranging from banks to manufacturers to software vendors. With Spirit under its control, JetBlue would become even more important to two companies in particular: Barclays, its credit card partner, and Airbus, its aircraft provider. As far as traditional economies of scale, like spreading fixed costs over a larger asset base, those will likely be scant for a JetBlue-Spirit combination, offset by having to de-densify aircraft layouts and standardize labor compensation.  
  7. Greater Leisure Exposure: JetBlue, though already a leisure-heavy airline, does have substantial business exposure in markets like Boston, and for products like Mint. With business traffic trends still uncertain, more leisure exposure in the years ahead looks increasingly attractive. Though business traffic can bring big bucks in flush times, leisure traffic tends to hold up better across business cycles. Even during the extremely severe 2008-09 recession, markets like Florida did rather well. More leisure offerings, meanwhile, will boost the earnings potential of JetBlue’s loyalty plan and Travel Products division.
  8. Ancillaries: Spirit is nothing if not a master of ancillary sales. It was also a leader in introducing bare-bones basic economy-type fares that the rest of the industry — JetBlue included — eventually adopted. JetBlue would surely eliminate some of Spirit’s ancillary products, especially those considered least customer friendly. But it’s just as likely to learn from the master, adopting some of its best practices.  
  9. More Muscle to Compete with the Big 4: JetBlue competes fiercely with four airlines much larger in size, namely American, Delta, Southwest, and United. And its pending northeast alliance with American doesn’t change that. The added scale that Spirit would bring entails the ability to offer more competitive schedules when going head-to-head with rivals in major markets. The bigger you are, furthermore, the more likely you can stomach losses in a particular market for an extended period. Each route, in other words, becomes a smaller percentage of your overall business. This also means JetBlue can afford to be more aggressive if, Allegiant or Breeze say, try to attack its core markets. Separately, more traffic flowing through JetBlue’s domestic and Latin/Caribbean networks means more potential feed for future transatlantic expansion.
  10. Defends Against Itself Getting Swallowed: Would Southwest ever attempt a hostile takeover of JetBlue? It’s surely something the heirs to Herb have at least entertained. In any case, by getting bigger, JetBlue would become a tougher takeover target.

Jay Shabat

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