Issue No. 885

Aloha Crunch

Is an Amazon Freighter Deal Enough to Lift Hawaiian?

Pushing Back: Inside the Issue

The airline earnings reports are flying in fast and furious. Europe’s Big Three all reported last week, revealing robust profits all around. Some things seem to never change, like IAG’s superior performance relative to Air France-KLM and Lufthansa. It's Air France, though, that’s improving margins most, aided by a 16 percent reduction in staffing since 2019. KLM, on the other hand, while still the more profitable airline, is headed in a downward direction, challenged by discomforting developments in Amsterdam.

In the U.S. Southwest’s earnings were rather discomforting, especially given the carrier's advantageous fuel hedges and roaring domestic demand. Southwest is just not Southwest when not sweating its assets, something it can’t do until shoring up staffing. JetBlue has cost problems too, while lifeless results at Spirit and Frontier caused investors to ask: Was United’s Scott Kirby right? Is the ultra-LCC business model ill-designed for post-pandemic realities, like supply-side constraints on growth? (Perhaps Kirby was being a bit hyperbolic in calling the model a “Ponzi scheme”).

Hawaiian’s decade-plus run of success is hardly a Ponzi scheme. But is it a relic of the past? Norwegian had a good summer, and might even have a good future — its past was tainted by overambition and reckless longhaul adventures. Latin America’s Volaris and Gol hardly dazzled with their third quarter margins, but both see better times ahead. Air Canada reached a double-digit third quarter operating margin. Many more airlines (get ready) will report this week.

Airline Weekly Lounge Podcast

Who would have thought three years ago that we'd be talking about the bright future for Norwegian Air? One restructuring and pandemic later, and the discounter is profitable and taking corporate travel share from competitor SAS. Plus, Hawaiian's continued struggles. Listen to this week’s episode to find out. A full archive of the 'Lounge is here.

Weekly Skies

The capacity discipline foisted on the airline industry by the confluence of a myriad of constraints is not expected to dissipate anytime soon. But that’s good financial news, Lufthansa Group CEO Carsten Spohr said last week.

Global supply chain bottlenecks have slowed the delivery of new aircraft — including of Lufthansa’s own new Boeing 787s — staffing remains a limit on growth, and high fuel costs and other fees act as barriers to entry to new competitors, Spohr said during the group’s third-quarter earnings call. This will keep what airlines can fly next year in check, even if there is travel demand for more flights.

“Global aviation will not return to the overcapacities witnessed in the pre-pandemic times anywhere soon,” he said. Though Spohr added that the discipline was “forced” on the industry, rather than the result of more rational management and planning.

But even a disciplined recovery involves some big moves, including bringing back Lufthansa’s Airbus A380s. Three aircraft will resume flying at its Munich hub next June, with the number likely to increase in response to demand, Spohr said. “You should book now because our passengers love it and want to fly it,” he added jokingly to investors.

The Lufthansa Group sees continued strong travel demand even with the economic storm clouds. Lufthansa anticipates a 22-23 percent increase in yields in the fourth quarter compared to 2019, while flying roughly 15 percent less capacity, Chief Financial Officer Remco Steenbergen said. Yields increase nearly 23 percent in the September quarter.

“We don’t see any end of the high yields looking through [the fourth quarter],” Spohr said. “And, to take that into [the first quarter], why would it end? There is some optimism there.”

Spohr’s comments came despite a gloomy economic outlook. The International Monetary Fund lowered its growth forecast for the eurozone earlier in October to just 3.1 percent this year, and 0.5 percent in 2023 — an 0.8 and 2 point reduction, respectively, from its January outlook. Germany, along with Italy, is forecast to slip into a recession next year. The organization highlighted a “cost-of-living crisis” that includes both high inflation and energy prices.

Many other airlines, including those in the U.S. and Latin America, share Spohr’s bullish demand outlook.

One emerging opportunity is blended leisure and business travel. Spohr said that when he joined Lufthansa in 1994 the “strongest” day of the week for the airline was Friday. “Now it’s Thursday and Saturday, [and] that says a lot,” he said. That, he added, “offers new opportunities” for the group.

Costs remain a concern. Lufthansa expects fuel costs to remain elevated through next year, Steenbergen said. As such, the group continues to work on other areas of cost savings, including its €3.5 billion ($3.5 billion) in structural cost cuts by 2024. Inflation, however, has shifted some of those savings to different parts of Lufthansa’s business than originally planned, including its sales and maintenance functions. Labor costs are also a question mark; the group has reached 10 new accords, including with its pilots at Austrian Airlines, Lufthansa, and Swiss Air, but others, including with Eurowings pilots, remain outstanding.

Spohr was frank on negotiations with pilots at Eurowings, who have held three one-day strikes so far in October: “Additional costs result in less routes being profitable, result in less aircraft being needed unless you can lower the cost somehow else. That’s why five aircraft have been taken out.” He added that cost increases could “endanger the business model” of the group’s budget airline.

The Lufthansa Group expects fourth quarter unit costs excluding fuel and foreign exchange to increase at a rate lower than the 9.5 percent year-over-three-years rise in the September quarter.

In the third quarter, the group reported an operating profit of €1.1 billion, and a net profit of €809 million. Revenues came in at €10.1 billion, a 93 percent year-over-year increase and down just 1 percent from 2019. Passenger traffic and capacity were both down roughly 22 percent year-over-three-years.

Austrian was the group’s strongest margin performer in the third quarter. It posted a 16 percent operating margin and €110 million operating profit during the period. Steenbergen, who described the quarterly profit as a “record” for the airline, said the success was the result of yield growth outpacing costs at Austrian, and its “extremely good” brand and service position in the market compared to low-cost competition.

Looking ahead, the Lufthansa Group plans to fly roughly roughly 80 percent of its 2019 capacity in the fourth quarter, and maintains its guidance of roughly 75 percent for the full year. Executives reiterated their September guidance of a full year operating profit of more than €1 billion; more than double the expectation in July. The airline did not provide detailed financial guidance for the fourth quarter.

Edward Russell

Summer Transatlantic Demand Lifts IAG

International Airlines Group pleased investors last week with strong summertime profits that show no signs of fading this fall, even as macroeconomic and cost headwinds intensify. The carrier echoed many of the broad trends currently defining the airline industry, including strong travel demand and extremely strong pricing but also rising costs.

IAG produced a 16.5 percent operating margin for the peak summer quarter, down from 19.5 percent in the same quarter of 2019. Prior to the pandemic, the group had become one of the world’s most profitable airlines, a status it hopes to recapture now that the crisis has waned. That 16.5 percent figure was indeed among the best of all airlines reporting so far, and better than what Air France-KLM and the Lufthansa Group reported.

Key to full-year European airline success, however, is not merely making big profits in the summer but also avoiding big losses in the winter. Encouragingly for IAG, it’s guiding investors to expect a $400 million operating profit in the current October-to-December quarter, which would bring full-year profit to roughly $1.1 billion. For all of 2019, IAG’s operating profit was $3.7 billion — this year’s results will include the drag from earlier months, prior to the strong rebound in demand this summer.

In the fourth quarter, only Aer Lingus will be back to pre-Covid capacity levels. Other IAG airlines, namely British Airways, Iberia, Level, and Vueling, will still be flying less capacity. British Airways’ capacity will reach just 80 percent of 2019 levels, held down by London Heathrow’s capacity limitations and exposure to shuttered East Asian markets. British Airways is, however, restarting two key Asian routes — Hong Kong and Tokyo — with executives saying that the Hong Kong route is booking well.

Largely because of its Heathrow constraints and Asian exposure, British Airways was the worst performing of IAG’s four big airline brands in the third quarter, with an operating margin of 12 percent. Vueling, a highly seasonal airline that typically runs up its margins in the summer, came in at 25 percent. Aer Lingus, which is also highly seasonal, was 25 percent and Iberia 15 percent.

For IAG collectively, financial performance is heavily influenced by developments across the transatlantic. Rivals Air France-KLM and Lufthansa are major market players too but not nearly as dependent on it as IAG. That dependence is a plus right now, with both North Atlantic and South Atlantic markets extremely strong from a demand and revenue perspective. That’s even true from European points of sale, IAG executives said, despite what currency movements would suggest. Strength was evident for premium and non-premium segments. Management also affirmed what many other airlines have been saying this earnings season: That people are increasingly combining their business and leisure trips, a phenomenon facilitated by remote working and flexible office hours.

Supporting IAG’s results was strength in several key business units, most notably loyalty — including money earned from mileage sales to credit card partners — and BA Holidays. Cargo, though still producing much higher revenues than in 2019, accounted for just 5 percent of company revenues. The pandemic-era cargo bonanza, in any case, seems to be coming to an end. “Demand is beginning to soften and world trade has begun to lose momentum in the second half of 2022,” IAG CEO Luis Gallego said during the company’s third-quarter earnings call.

Also featured during the call were mentions of some key IAG marketing initiatives, including the rollout of new premium seats at British Airways and Iberia, their move into American Airlines’ terminal at New York JFK airport later this year, and the expansion of British Airways joint venture with Qatar Airways. Management separately said forward bookings look good for both longhaul and shorthaul routes, except for Asia which is still lagging. Premium leisure travel looks as good as it ever did, and business travel is recovering. Some labor questions remain outstanding, one being whether British Airways’ pilots will vote to approve a new tentative contract agreement.

Jay Shabat

Air France-KLM Eyes TAP Investment

Portugal is beckoning to Air France-KLM. A potential investment in state-owned TAP Air Portugal would complement its deal for Italy’s ITA Airways in several of Europe’s fastest recovering markets.

“We’re very comfortable with the Iberian peninsula, and TAP could be [an] option for us to have a larger presence,” Air France-KLM CEO Ben Smith said during its third-quarter earnings call last week. The group will “definitely engage” with the Portuguese government on a “formal basis” when it is ready to sell down its full ownership in TAP, he added.

An Air France-KLM and TAP deal would just be the latest in what is becoming something of an airline consolidation spree in southern Europe. The group is already part of the preferred bidding consortium selected by the Italian government to take over ITA; private equity firm Certares leads the bid. And IAG is working on a new structure for its proposed takeover of Spain’s Air Europa with an aim to close the deal by the end of 2023.

All these potential airline deals come as Europe’s budget carriers, from EasyJet to Ryanair and Wizz Air, are rapidly expanding in many of the same markets. This is fueled, in part, by slot divestitures that legacy airlines like Air France-KLM and TAP agreed to as conditions of the state Covid relief they received during the crisis.

The interest in southern Europe is at least two fold. For one, it’s the age old argument for consolidation: Larger airlines typically benefit from better economies of scale, for example when buying new planes, and improved pricing power in the market. However, regulators often push back against deals for some of the very same reason airlines want them: Improved pricing power often means higher ticket prices for travelers. That said, larger — and one hopes stronger — airline groups can also grow more, which benefits travelers.

And second, southern Europe has several large markets that are among the fastest to recover in Europe. Spain is the European Union’s second largest after Germany, and Italy its fourth. Passenger traffic in Portugal and Spain recovered to 96 percent and 80 percent, respectively, of 2019 levels in the first half of 2022, Eurostat data show. Comparatively, Germany and France only recovered to 61 percent and 73 percent, respectively, of pre-pandemic numbers. Data for Italy was not available for the period.

On the ITA acquisition, Smith said the consortium’s exclusivity period to finalize a deal with the Italian government expires at the end of October. He did not say more about what could happen if the deadline passed, or if Lufthansa could make a renewed push for the airline.

Air France-KLM also sees growth opportunities within its own airline portfolio. The focus is on its budget arm Transavia, particularly in France, that is in the process of taking over the bulk of the group’s operations at Paris’ Orly airport. Smith said the shift is “almost complete,” and added that, when finished, would allow the group to grow profitably at the airport while staying in line with French laws that bar most flights on routes where a train makes the journey in two-and-a-half hours or less.

Asked how the growth of Transavia translates into future growth for the group, Smith said the group would shift its focus to adding new point-to-point routes in Europe from second tier cities in France once the Orly transition was complete. While he did not name names, these would likely include Lyon, Nice, and Toulouse. This growth would act as a sort of “consolidation” by allowing the group to capture a larger share in these markets, Smith said.

Secondary French markets have proven a successful strategy for competitors. Spanish discounter Volotea opened bases in Lille and Lourdes this year, and Lyon in 2021, bringing its total bases to eight in France.

Air France-KLM reported a $1 billion operating profit, and a $457 million net profit during the September quarter. Revenues increased 5 percent year-over-three-years to $8 billion after a roughly $224 million hit from the operational issues airlines faced across Europe this summer. Corporate revenues recovered to 76 percent of 2019 levels in the third quarter. And yields were up 24 percent compared to 2019 with passenger capacity being down nearly 15 percent.

Looking ahead, Air France-KLM plans to fly roughly 85 percent of its 2019 capacity in the fourth quarter. Full year capacity will be down roughly 20 percent from three years ago. The group forecasts a roughly $894 million operating profit for the year.

Air France-KLM Chief Financial Officer Steven Zaat, when asked about 2023 capacity, said it would continue to recover towards 2019 levels but warned that the operational issues the industry faced this year would “probably not be totally over.”

Edward Russell

Q3 Round Up

After a spectacular spring quarter, typically its best of the year, Southwest Airlines came back to earth with a pedestrian third quarter operating margin of just 7 percent, a bit below what even American managed. This is doubly surprising because Southwest’s fuel hedges allowed it to pay just $3.39 per gallon last quarter, meaningfully cheaper than what others paid. In fact, Southwest saved $220 million from its hedges last quarter, with expectations of $1 billion in full-year savings. Demand is definitely not the problem. It was strong in the third quarter and remains strong in the fourth quarter. Southwest’s balance sheet strength is second to none. Less happily, non-fuel units are up 12 percent from their 2019 levels. Some of that pressure will ease as Southwest returns to more normal levels of productivity and efficiency, achievable when it fully restores its network (doing that requires more pilots). Other cost pressures will remain, specifically for labor and airports. “Given the level of first half capacity growth,” said Chief Financial Officer Tammy Romo, “in a pre-pandemic period, we would have expected CASM-ex [fuel] to be subtly down year over year. However, we expect to continue experiencing unprecedented cost headwinds due to higher-than-expected inflation.” Chief Commercial Officer Andrew Watterson, meanwhile, said: “I think we have a couple of years where demand and supply may not be as aligned as it was pre-pandemic, which I think will [mean] yield tailwinds for a while.” One big uncertainty for Southwest: Can Boeing deliver its Maxes on time, and when will the Federal Aviation Administration certify the -7 version?

JetBlue Airways underperformed its peers again, with just a 6 percent operating margin last quarter. Elevated unit costs remain a concern, as does an aviation ecosystem it calls “fragile.” That includes issues with air traffic control staffing, often having an outsized impact on core JetBlue markets like the congested northeast and Florida. Hurricanes in Florida and the Caribbean led to some disruptions and losses in the third quarter. Overall though, the carrier says its operations have greatly improved, and that its own staffing is now where it needs to be. It sees no sign of slowing demand. There’s certainly a lot going on strategically at JetBlue. Most dramatic is its takeover of Spirit Airlines, subject to regulatory approval. An alliance with American is being litigated by the Justice Department. JetBlue will soon announce more European flying to supplement London. JetBlue Products, a division that sells tour packages among other things, will earn $100 million in operating profits this year (it only earned $15 million in 2019). And management claims to be only in the “early innings of the multi-year evolution of our loyalty program.” (TrueBlue now generates 10 percent of company revenues, versus 7 percent pre-Covid). More Airbus A321neos will arrive configured with premium Mint cabins. Corporate business is returning. More than half of all customers are buying up to Blue and Blue Extra fares. Sounds promising. But JetBlue faces heavy cost headwinds, including a new pilot contract to negotiate, rising maintenance and airport costs, a fleet transition out of its Embraer E190s, and ultimately the integration of Spirit. It also faces delays getting new A220s and A321neos.

In the meantime, Spirit reported its third quarter results as well, earning a measly 1 percent operating margin. To be fair, the summer quarter isn’t a particularly good one for Florida, so underwhelming third quarter margins are perhaps forgivable. But during the same quarter in 2019, Spirit managed a nearly 14 percent operating margin. Florida’s air traffic control headaches were a drag, as were elevated employee attrition and an aircraft utilization rate of just 10.6 hours per day, down 15 percent from 2019. As every other airline says, demand remains strong. And Spirit’s utilization rates should normalize by mid-2023. 

In Brazil, Gol managed just a 1 percent third quarter operating margin, keeping in mind that the period is an offpeak season in South America. Still, the mere 1 percent figure underscores a difficult cost environment that’s offsetting a strong demand environment. Gol’s net result, by the way, was heavily in the red, weighed down by foreign exchange accounting. Helpfully, the Brazilian currency, though sharply weaker versus the dollar year-over-year, has more recently avoided the depreciation hitting most other world currencies. Gol is confident it can weather the challenges as more Boeing 737 Maxs arrive, develops new leisure routes to Miami and elsewhere, grows its Smiles loyalty program, pays more attention to cargo, tightens its cooperation with American, and joins forces in a corporate merger with Avianca.

In Mexico, Volaris joined Aeromexico in reporting a third quarter profit. But its operating margin was just 5 percent, compared to Aeromexico’s 9 percent. Both carriers, counterintuitively, are benefitting financially from the downgrade of Mexico’s aviation safety rating by the FAA — this curtails Mexican airline expansion to U.S. markets, lifting average fares. Mexico City’s stricter airport slot controls have the same effect, though this benefits Aeromexico more. And Volaris, to be sure, is eager to expand its U.S. flying, hoping the FAA upgrades Mexico’s rating next year. Separately, Volaris insists it faces no staff shortages (including pilots). Bookings, it said, remain “solid,” and markets remain “quite rational and stable,” especially now that Interjet is gone and Aeromexico is focused on the premium market. That said, a new threat could emerge as Mexico moves to open its domestic airline market to foreign competitors. For Volaris, non-ticket revenue accounted for 41 percent of third quarter revenues, never mind new regulations limiting bag fee charges. Nearly half its routes face no nonstop airline competition — just busses. Key to lowering unit costs will be newly arriving Airbus A320neos. Volaris will have more to say when it hosts an investor day event in December.

Back in Europe, recently restructured Norwegian Air had a good third quarter. It posted a 15 percent operating margin on revenues of 7.1 billion Norwegian kroner ($689 million). Unit revenues increased 61 percent and unit costs excluding fuel decreased 25 percent year-over-year; and, compared to 2019, the former was up 85 percent and the latter 39 percent. What’s more, the struggles of Norwegian Air’s main legacy competitor, SAS, appear to be benefitting it. CEO Geir Karlsen said the airline was taking more corporate share in Scandinavia, with business revenues already above 2019 levels (admittedly off a low base). As good as the third quarter was, Norwegian Air still faces a cold winter ahead. Inflation and foreign exchange pressures are a concern even though the airline sees no slowdown in demand through at least December, Karlsen said. The airline has already cut capacity per plan by a quarter from its summer schedule, and more cuts could come in the first quarter if demand weakens. And Karlsen warned of “overcapacity” in Norwegian Air’s home market citing startup Flyr. Flyr has already slashed its schedule by more than half and involuntarily furloughed employees in order to survive the winter. For 2023, Norwegian Air plans to fly roughly 27 percent more capacity than it will this year.

Jay Shabat & Edward Russell

In Other News

  • Canada’s Competition Bureau last week threw cold water on WestJet‘s proposed purchase of leisure and holidays competitor Sunwing Airlines. The regulator found that the deal could “result in increased prices, less choice and decreases in service for Canadians,” and identified 31 routes where competition would decrease. WestJet, meanwhile, thanked the regulator and noted that the report was only “advisory and non-binding.” Canada’s Minister of Transport, Omar Alghabra, will issue a final decision on the deal.
  • Thai AirAsia flew 42 percent of its 2019 system capacity in the third quarter, the airline said last week. That represents a remarkable recovery for the discounter — the Thailand-based arm of Capital A’s AirAsia franchise — which flew less than 2 percent of its pre-pandemic capacity last year. Domestic, as with pretty much every airline around the world, was ahead of international at 62 percent of three years earlier compared to 43 percent, respectively. The airline has focused its international recovery efforts on Southeast Asia and South Asia, it said.
  • Australia’s Rex Airlines said its Boeing 737 passenger operations turned its first profit in September. The carrier, which launched in February after a series of Covid shutdowns, said revenues were up 137 percent in September compared to June. Rex maintains its forecast of a profitable 2023 fiscal year, which ends next June. The airline is also sourcing two additional 737-800s to complement the seven it flies. Rex’s 737 operations complement its turboprop regional business that spans much of Australia, and the new “fly-in-fly-out” charter business it acquired with National Jet Express at the end of September. 

Edward Russell

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Landing Strip

  • French airport operator Vinci, which owns terminals around the world, said passenger numbers “continued to accelerate in Q3” at almost all of its facilities. “Momentum was strong in Europe, South America, and the Caribbean,” it said, adding that traffic volumes returned to levels equal to or higher than 2019 at several airports in the Americas, Portugal, and Serbia. Asia remained weak, but the recovery should accelerate with Japan and other countries in the region relaxing travel restrictions. Osaka Kansai is one of its largest airports. Vinci also owns and/or operates London Gatwick, Santiago (Chile), and Lisbon, to name but three. It has 52 airports in total, and just announced a deal to buy 30 percent of Mexico’s OMA, whose busiest airport is Monterrey.
  • AENA, which operates most of Spain’s airports, as well as London Luton and some facilities in Brazil, spoke of its operational smoothness even amid industry turmoil. Traffic growth is surprising on the upside. “Believe me,” said an executive during the group’s third quarter earnings call, “we were not expecting this kind of performance to become a reality so quickly.” But they added: “Of course, no one knows what is behind or around the corner as a result of the macro conditions … The airlines themselves are, let’s say, watching out, monitoring this by the day.”
  • Mexican airport operator GAP highlighted the tremendous growth in Tijuana, fueled by usage of the pedestrian bridge crossing into California. It even says Tijuana is attracting travelers based in the Los Angeles metro area, and not just San Diego. Guadalajara, on the other hand, has been slower to recover from the pandemic due to its exposure to business traffic. GAP still hopes Guadalajara can develop into an airline hub that takes advantage of Mexico City’s capacity limitations. 

Jay Shabat

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Routes and Networks

  • Norwegian Air will open a new base in Riga, Lativa, with two Boeing 737s next year. While routes have not been announced, CEO Geir Karlsen said they will complement its existing flights to Norway. Norwegian serves Riga from Oslo and Trondheim currently, per Diio. The new base is described as a “test,” as Karlsen put it, of Norwegian’s ability to expand profitably outside of Scandinavia. A spokesperson for Riga’s hometown airline, AirBaltic, said they are “always glad” to see new flights to the city.
  • Ryanair continues to dribble out its winter additions with five more new routes. The discounter will connect Edinburgh to Grenoble, Santiago (Spain), and Verona; and Bournemouth to Lanzarote and Venice in its winter schedule that begins at the end of October. Edinburgh will also regain the nonstop to London Stansted that Ryanair suspended in 2020.
  • IndiGo is adding four new routes connecting secondary Indian cities in its winter schedule. The discounter will connect Ahmedabad and Jammu, and Bhubaneshwar and Ranchi four-times weekly from October 30; and Bhopal and Udaipur, and Indore and Chandigrah thrice weekly from November 1. IndiGo Chief Strategy and Revenue Officer Sanjay Kumar described the new routes as enhancing “connectivity and accessibility.” The airline’s only competition is Alliance Air on Bhubaneshwar-Ranchi, per Diio.
  • Route tidbits: Saudi discounter Flynas will add new four-times weekly service between Dammam and Mumbai on December 2. The route complements the thrice-weekly service between Riyadh and Mumbai that began October 20. United has pulled seasonal service between Los Angeles and Cozumel that was to operate from May through September from its schedules, per Diio. And WestJet has pulled two Halifax routes from future schedules: Orlando (ends May 7), and St. Johns (ends January 9), per Diio.

Edward Russell

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State of the Unions

  • American is near a tentative agreement with its pilots union, the Allied Pilots Association, that would include at least 12 percent raises, CNBC reported. First officers at the airline would start at around $110 an hour under the accord. The deal still needs approval of union management before it could go to pilots for a ratification vote.

    And, while much ink has been spilled over pilots, less has been said about the maintenance technician shortage. American, in a move to get ahead of the challenges, has a new career pathway program for graduates of the Aviation Institute of Maintenance’s Chicago campus. Under terms of a memorandum of understanding with the school, “top candidates” from the school will be guaranteed interviews with American. The partnership also includes limited financial assistance for “certification exams and toolboxes,” and reduced tuition for current American employees.
  • Southwest and the International Association of Machinists and Aerospace Workers (IAM) have reached a tentative accord covering roughly 8,300 customer service staff at the airline. The agreement, which follows one rejected by workers in April, includes a 16-25 percent pay increase, as well as other bonuses and quality of life improvements. IAM members at Southwest will vote on the accord in the coming weeks.
  • Swiss Air and its pilots union, Aeropers, reached the “cornerstones” of a new accord last week that could end more than two years of talks. While details were scant, the airline said it would include “improvements both in the planability of pilots’ social lives and on the salary front.” Aeropers members will need to approve the agreement once Swiss and the union finalize the terms. Swiss also reached an agreement with its ground staff union on 2023 pay rates.

Edward Russell

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Fleet

  • Boeing posted a $2.8 billion operating loss, or $3.3 billion net loss, on nearly $16 billion in revenues during the third quarter. The results were driven by “losses on our fixed-price defense development programs,” Boeing CEO Dave Calhoun said. The airframer’s commercial airplanes division posted a $643 million operating loss on a 40 percent year-over-year increase in revenues to $6.3 billion. Boeing delivered 112 aircraft in the September quarter, including nine 787s after resuming deliveries in August. It netted orders for 227 aircraft during the period.
  • And across the Atlantic, Airbus reported a €3.6 billion ($3.6 billion) operating profit during the first nine months of the year. The European planemaker’s commercial aircraft division brought in nearly €27 billion in revenues during the period, or 69 percent of the group total. Airbus netted 647 aircraft orders during the nine months, and delivered 437 aircraft. The planemaker plans to deliver 700 commercial aircraft this year.
  • We knew Alaska liked Boeing’s 737 Max, but just how much was evident last week when it firmed 52 options for the aircraft. The airline added 42 737-10s and 10 737-9s to its orderbook with deliveries from 2024-27 for total firm commitments of 146 aircraft, including the 35 Maxes Alaska already operates. Barring (likely) delivery delays from Boeing, the carrier plans to operate 78 737-8s and -9s by the end of next year, which will allow it to retire the Airbus A320 family aircraft it inherited from Virgin America. Alaska CEO Ben Minicucci described the latest Max deal, which includes purchase rights for another 105 Maxes, as securing “aircraft to optimize our growth through the next decade.”
  • Alaska wasn’t alone in doubling down on a new aircraft, Air Canada also firmed options for 15 Airbus A220-300s last week. The move brings the Montreal-based airline’s total firm commitments to 60 aircraft, including 31 already in its fleet. The order is the latest indication that the A220, with its smaller size and improved fuel efficiency, has proven its worth on the many long and thin routes in Air Canada’s network. Deliveries of the additional A220s will occur in 2026.
  • Fleet tidbits: IAG finalized its previously announced orders for 50 737 Maxes, plus 100 options, and 37 Airbus A32neos. And Airbus picked up a two-aircraft deal for A330-900s from Air Côte d’Ivoire last week. The aircraft will allow the currently all-narrowbody operator to launch long-haul routes.

Edward Russell

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Feature Story

Sweet memories of the Great Recession? Not exactly, but for Hawaiian Airlines, the global economic calamity of 2008 and 2009 didn’t leave many scars. Hawaii’s tourist sector felt the impact for sure—the number of visitors arriving by air dropped 10 percent in 2008 and another 4 percent in 2009, according to the state’s tourism authority. Nevertheless, Hawaiian Air earned solid profits in both years. It certainly didn’t hurt that the recession killed off two of its closest rivals: Aloha Airlines and ATA. But it’s also true that the Great Recession had a much bigger effect on business markets—leisure markets like Hawaii were relatively resilient.

Not this time. The Great Pancession of 2020, caused by a deadly viral outbreak, saw Hawaii’s tourism market essentially closed for the better part of two years. Airline visitor arrivals in 2020 shrank below 3 million, down from greater than 10 million the year before. Recovery would begin in 2021, but still, air arrivals reached only 7 million. The impact on Hawaiian Air? It suffered more than perhaps any other major U.S. airline. And even as 2022 brings a sharp revival in travel demand, it’s still faring worst among its peers.

Last week, Hawaiian reported an $8 million third quarter net loss, excluding special items (operating margin was slightly above breakeven). It’s the only U.S. airline to have reported a third quarter net loss thus far. In the same quarter of 2019, Hawaiian earned a lofty 15 percent operating margin, punctuating a remarkable run of success. Its golden year was 2017, when its 19 percent operating margin was the second best in the entire world, behind only Ryanair. As Airline Weekly wrote in January 2018: “As booms go, there’s no boom quite like the one in Hawaii.”

The boom in that case referred to a tourism market that grew consistently — if not rapidly — throughout the 2010s. At least as important as demand growth was a benign supply environment. Hawaii was hardly a growth market for the U.S. Big Three. Ultra-LCCs, while ruffling feathers on the U.S. mainland, ignored the state (aside from a brief and unsuccessful foray by Allegiant Air). So did the mighty Southwest until 2019. Back on the demand side, meanwhile, the tech boom flourishing along the U.S. West Coast created oodles of new money to spend on Hawaiian vacations. Hawaiian Air took advantage, investing in new planes, premium products, and improvements to its loyalty plan. Even today, it commands a yield premium versus other airlines on key routes to the mainland west coast. People, it seems, like to fly it.

The paradise-like conditions of Hawaiian’s airline market didn’t just benefit Hawaiian Air. Japan Airlines, like Hawaiian, is a veteran of the bankruptcy courts, and likewise one that flourished after exiting. Hawaii is a big reason why, accounting for a double-digit percentage of JAL’s total international capacity. While Southwest was kicking itself for arriving late to the Hawaii party, JAL’s rival All Nippon Airways had similar regrets, hoping to compensate with a big Hawaii buildup involving Airbus A380s. JAL and Hawaiian Air reacted by planning a joint venture, ultimately rejected by U.S. regulators. All the while, Alaska turned Hawaii into a major strategic priority. United paid it more attention too by decade’s end, growing its Hawaii capacity by almost a fifth from the fourth quarter of 2017 through 2019, per Diio by Cirium. Canada’s airlines enjoyed Hawaiian success as well.

And then came Covid. Mercifully, the pandemic has receded, and tourists are flocking back in great numbers, consistent with the broader boom in leisure air travel across the world. In its third quarter earnings call last week, Hawaiian Air indeed said demand was strong last quarter, with no signs of softening. Why, then, did the airline still lose money? Yes, it faced familiar post-pandemic headaches ranging from high fuel prices to rising wages to suboptimal asset utilization; its third quarter capacity was still 7 percent less than what it was in 2019. But more specific to Hawaiian Air was its exposure to Japan, which only lifted its Covid-era travel restrictions this month. In 2019, nearly a fifth of Hawaiian Air’s capacity touched Japan. During the call, it used the words “Japan” or “Japanese” 24 times.   

The airline is confident that before long, Japan will follow in the footsteps of other markets and return to strength.

Or will it? One clear obstacle is the sharp depreciation of the Japanese yen, which makes vacations to Hawaii significantly more expensive. Hawaiian Air did single out Australia as a market that’s performing exceptionally well right now, despite adverse foreign exchange trends. But in general, international markets ex-Japan have never been big winners for the airline. At the same time, America’s west coast tech sector suddenly faces unusually tough times, threatening bread-and-butter tourist origin markets like San Francisco and Seattle. More disconcerting to Hawaiian Air are the extremely low fares Southwest is charging on inter-island routes within Hawaii — Hawaiian Air calls it “unusually aggressive pricing” that surely can’t cover the cost of its operations. In the background, meanwhile, are calls by local Hawaiians to admit fewer tourists, for environmental and quality-of-life reasons. Another concern is the future of Airbnb-like accommodations, which arguably worsen the state’s housing shortage — an accommodation shortage makes vacationing in Hawaii more expensive.

Faced with these new challenges, Hawaiian Air unexpectedly announced a headline-grabbing move this month. It’s partnering with Amazon, America’s second largest company by revenues (only Walmart is larger). Hawaiian will fly Airbus A330-300 freighters for Amazon’s cargo operation (at least ten of them), providing the crews and the maintenance. Amazon will provide the planes. Hawaiian will be paid based on block hours and departures flown, making it thus not “susceptible to the same economic and competitive forces that affect our passenger operations.” Amazon will be responsible for the fuel costs, greatly removing a key risk factor. “Other cost categories, including labor, maintenance, overhead, and procurement, will benefit from efficiencies gained through growth and scale, all of which provide the opportunity to generate significant revenue and strong cash flow for the next decade and we would hope beyond.” That’s from CEO Peter Ingram, speaking to investors after announcing the deal. Amazon, by the way, will get stock warrants (exercisable over the next nine years) that could see it owning 15 percent of Hawaiian’s shares.  

There’s more than just the Amazon deal. Hawaiian will soon take delivery of its first Boeing 787s — it announced an order for at least ten back in 2018. It’s also installing a new Amadeus passenger service system, having already installed a new revenue management system. The airline continues to invest in premium products, with Extra Comfort seats alone now contributing about $100 million in annual revenues. Cargo assumed a new level of importance to Hawaiian Air during the pandemic. And for all their current economic and environmental concerns, west coast markets like California remain flush with spending power — the state will soon surpass Germany in terms of economic activity. Japan, meanwhile, for all its challenges, remains the world’s third largest economy behind only the U.S. and China.  

Aside from Southwest’s expansion, there’s no current sign of other major airlines planning significant capacity growth to Hawaii, above what they offered in 2019. Then again, the pandemic didn’t rain death on Hawaiian Air’s chief competitors like the Great Recession did. How sweet the memories.    

Jay Shabat

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