Issue No. 892

Delta's Promise

Can the Airline Meet Its Bullish Profit Targets?

Pushing Back: Inside the Issue

As 2022 nears its end, two giants of the U.S. airline industry are glowing with optimism. United expressed its bullishness with a giant Boeing aircraft order — more 787s and 737s. Delta, for its part, showcased its confidence at a company event for investors. Both airlines returned to double digit operating margins this summer, and foresee more good times ahead.

JetBlue did trigger some investor angst by reporting disappointment with close-in demand this month, made worse by unhelpful holiday calendar quirks this year. Alaska Airlines, though bullish overall, did flag a “modest softening in corporate travel bookings.” (Keep in mind that Alaska has outsized exposure to the cooling tech sector). Spirit, however, was uniformly positive, raising its fourth quarter operating margin forecast to roughly 3 percent thanks to “strong” demand trends and lower costs, including cheaper fuel. Spirit, by the way, said it thinks its JetBlue merger will close “no later than the first half of 2024.” No new financial guidance from Southwest. But it did finalize a new labor deal with its 8,000-plus customer service workers. United, incidentally, reached an agreement-in-principle on a new contract with its mechanics.  

In Europe, Lufthansa gave an upbeat update. The group raised its profit guidance for all of 2022 amid ongoing demand strength and falling fuel prices. Virgin Australia, in better health since emerging from bankruptcy, is heading for Tokyo in a move motivated by slot preservation. Air India appears poised to join United in ordering more Boeing planes. And Canada’s Transat — though it still has a delicate balance sheet — also has flights that are once again filled with high-paying tourists.

More airline action awaits in 2023. Happy holidays!

Airline Weekly Lounge Podcast

Delta and United unveiled ambitious plans last week. The latter ordered up to 300 new Boeing aircraft, 200 of them 787s. CEO Scott Kirby claims the deal will cement United's status as the so-called U.S. flag carrier. And the former aims to recover its pre-pandemic profit margins in just two years. Can Delta and United do it? Listen to this week’s episode to find out. A full archive of the 'Lounge is here.

Holiday Notice

This issue is the last of Airline Weekly for the year. Our next issue will be dated January 9, 2023. But we're not going away! Check the Airline Weekly website for daily news updates and our weekly podcast. To those of you celebrating, we wish you a very happy holiday season. And we wish everyone a very happy New Year. Here's to an exciting 2023!

Weekly Skies

Canadian leisure airline Transat, which had a pre-pandemic deal to merge with Air Canada, ultimately remained independent (European competition regulators didn’t like the idea). The pandemic itself was of course greatly damaging to its business. But conditions are much better now. “These last few months have shown something powerful,” said CEO Annick Guerard in a company earnings call last week. “People have a strong desire to travel. Spending on travel is a priority to consumers.”

Transat reported for its fiscal fourth quarter, which includes August, September, and October; the latter two months are generally offpeak for leisure travel. It was also a period that this year featured high fuel prices and cost pressure from a strong U.S. dollar. As a result, Transat recorded a negative 9 percent operating margin. But the airline is fairly bullish about the year ahead, forecasting a positive operating margin of 4-6 percent. Bookings are still strong. Fares are still high. And fuel prices have plummeted by a quarter from recent highs. “Transat’s financial situation, although far from ideal, has stabilized,” Guerard said.

Air Transat, the airline within the group, flew 86 percent of its 2019 capacity levels this summer, filling 82 percent of its seats. In the August-to-October quarter, that rose to 91 percent of pre-pandemic capacity with an 83 percent load factor. Transat is heavily dependent on the transatlantic market during summers, shifting to reliance on southern sunshine markets, like Florida and the Caribbean, during winters.

Strategically, the airline is focused on fleet renewal, enthusiastically acquiring long range versions of the Airbus A321neo, including the XLR variant due to arrive in a few years. Even the existing long-range A321LRs already in its fleet have the range to reach western Europe from eastern Canada. Transat currently flies 31 planes, specifically 12 A330s (-200s and -300s), 12 A321LRs, and seven A321ceos. Another strategic priority is partnering with other airlines. It now has codeshare arrangements with both WestJet and Porter Airlines.

Geographically, Air Transat is allocating much of its growth to eastern Canada, where it’s larger now than it was pre-Covid. Recent network moves will also enable significantly greater aircraft utilization. It also aims to use its assets more during offpeak seasons, working to mitigate the risk of flying empty seats. Transat is also seeking more ancillary revenues. On the cost side, meanwhile, labor contracts are mostly settled, having signed a new pilot contract in the second quarter. It more recently struck a new deal with mechanics.

In sum, Transat — while working to improve its less-than-ideal cash position — approaches 2023 with strong demand and high prices for its airline tickets and travel packages. Even better, fuel prices are down. But what if there’s a recession? “As always,” Chief Financial Officer Patrick Bui said, “we remain vigilant on the economic situation and potential impact on demand. At the current time, we do not see a negative impact on our booking trend.”

Jay Shabat

In Other News

  • The Lufthansa Group continues to see strong demand, with average passenger yields still “well above pre-crisis level.” The group’s large cargo and maintenance units, meanwhile, expect their best financial results ever this year. The final quarter of 2022 has thus far “exceeded expectations” in terms of company earnings. And passenger bookings for the months ahead show ongoing strength. For all of 2022, Lufthansa now expects an operating profit excluding special items of around $1.5 billion. It previously told investors to expect a profit of more than $1 billion, so, clearly, it has overdelivered. Management will publish results on March 3. Separately, Swiss, a wholly-owned Lufthansa subsidiary, opted for five Airbus A350-900s. They’ll eventually replace the carrier’s aging A340-300s, which have four engines rather than two. The A350s are not actually a new order, but will instead come from a Lufthansa commitment for 25 aircraft placed in 2019. In yet another Lufthansa development, meanwhile, the carrier’s Munich hub will restore flights to more cities, including Mexico City and Osaka Kansai. Flights will recommence next summer.
  • In people moves, American Airlines and Etihad Airways both have new chief financial officers. American will promote Devon May, currently senior vice-president of finance investor relations, to CFO effective January 1. May replaces Derek Kerr who is stepping back from the role that he’s held successively at America West, US Airways, and most recently American since 2002. Kerr will remain as vice chairman of American, and president of American Eagle. Halfway around the world, Etihad has named Raffael Quintas its new CFO. Quintas joined the airline from Latin American e-commerce firm Infracommerce, and has previously held finance roles at both Azul and TAP Air Portugal.
  • And both Southwest and United received some good labor news last week. Roughly 8,300 customer service staff represented by the International Association of Machinists and Aerospace Workers (IAM) at Dallas-based Southwest ratified a new five-year accord. The contract gives them 16-25 percent pay raises and other quality of life improvements. And at United, the airline reached an agreement in principal with the Teamsters covering its more than 8,000 technicians and related employees. The union must now finalize the terms into a tentative agreement, and then technicians will vote on the contract.
  • Cathay Pacific, as it seeks to rebuild its business following the Covid crisis, has restored first class service on some flights. The product first returned on selected Hong Kong flights to London Heathrow earlier this month. Flights to Paris and Tokyo are next in line. General Manager Customer Experience and Design Vivian Lo said in a statement: “We are extremely excited to be bringing back our first class service after an extended absence as the world’s appetite for travel comes roaring back.” Cathay also offers a separate business class service, as well as premium economy.

Jay Shabat & Edward Russell

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United Chief Financial Officer Gerry Laderman once said that an airline could buy a plane tailored to a few routes in its network but, if that is the case, it should not buy said plane. The better bet was to purchase an aircraft that serves the broadest number of routes efficiently, and to buy a lot of them.

That is exactly what Chicago-based United opted to do last week for its widebody fleet. The carrier unveiled a deal for up to 200 Boeing 787s — 100 firm aircraft plus 100 options of either the -8, -9, or -10 variants — that will make the plane the backbone of its longhaul fleet for decades to come. The first 100 aircraft will replace the 54 aging Boeing 767s in United’s fleet, plus some older Boeing 777s, by 2030 with the rest slated for expansion. All of the new aircraft are due to arrive by 2032.

The order is valued at more than $29 billion, based on Boeing’s list price for a new 787-9. However, airlines rarely pay full price for aircraft. Moody’s Investors Service analyst Jonathan Root estimates the order, plus one for 100 more 737 Maxes, to be worth roughly $16 billion.

United’s large 787 replacement order comes despite the aircraft being widely acknowledged as a significantly more capable plane — it can carry more passengers and fly further, for example — than the 767. These additional capabilities, which are part of the purchase price of the aircraft, go unused if it is flown on routes where they are not needed.

But the 787 offers something to United that no other available new widebody aircraft does: Scale. The carrier already operates 64 787s, the second largest number of twin-aisle planes in its fleet after its 96 777s.

“You should go to the best aircraft of the aircraft you’re operating a significant fleet size of, because in that situation the cost of complexity does outweigh the benefit of having the absolute perfect aircraft for that specific mission,” Laderman said in a 2018 interview when he was treasurer of United.

Laderman reiterated that view last week, saying the economics of adding a new aircraft type to United’s fleet, for example, the Airbus A350, did not “make sense.”

United maintains an existing order for 45 A350s. However, Laderman said that deliveries have been delayed — again — to 2030 at the earliest.

United’s aircraft deal comes at an optimistic time for the industry. After the shock of the pandemic and a bumpy recovery, airlines are bullish about 2023. Why? Many point to a level of travel spending that is still below historic norms as a percentage of overall economic activity. This gave Delta CEO Ed Bastian the confidence in October to proclaim that travel was “countercyclical” to a potential U.S. recession. Other airline executives have made similar comments though none went as far as calling the industry countercyclical.

Wall Street analysts generally support this outlook, at least over the near- to medium-term. Many expect the industry’s financial performance to improve in 2023 on the back of strong demand and capacity constraints. And United, at least among U.S. carriers, is expected to benefit significantly from its larger exposure to international markets than American or Delta; longhaul international travel, particularly to Asia, is expected to rebound dramatically next year.

“United has the greatest exposure to the ongoing recovery in higher-margin international travel among U.S. airlines,” Cowen & Co. analyst Helane Becker wrote in a December 1 report. The airline stands to benefit from this exposure, she added.

United executives have leaned into this view and claimed that the airline is the new “flag carrier” for the U.S. CEO Scott Kirby reiterated this last week and said the decision to keep all of its widebody planes during the pandemic rather than retiring some “set [United] apart” from its competitors.

“Today marks another step, a really big step, in solidifying United’s position as the flag carrier of the U.S.,” Kirby said of the 787 order.

Boeing effectively forced United’s decision when it cancelled the much talked about New Mid-Market Airplane in 2020. The aircraft would have sat between the 787 and the 737 Max with the ability to fly roughly 200-300 passengers around 4,000 miles — in other words, perfect for water jumps between the U.S. East Coast and Europe. The planemaker reinforced this decision in November when CEO David Calhoun said Boeing would not “contemplate” a new airplane for some years and then target an introduction sometime in the middle of the 2030s.

This has left carriers, like Delta and United, with no other option than to buy what is already available on the market, namely, Airbus A330neos or A350s, or 787s. Delta has gone the former route with orders for the A330-900 and A350. American, like United today, selected the 787 for its 767 replacement needs in 2018. And the Airbus A321XLR has already won the race to replace longer range Boeing 757s with orders from airlines around the world, including from IAGQantas, and United.

And even as United’s 787 order finalizes its mid-sized fleet for decades to come, Boeing has made the twin-aisle aircraft even more capable. In an interview with The Air Current, United Chief Commercial Officer Andrew Nocella confirmed that the airframer has increased the maximum takeoff weight of the 787-10 — the largest in the 787 family — to 572,000lbs from 560,000lbs. That increase allows the plane to fly nonstop fully loaded, for example, between Chicago and Tokyo.

In addition to the 787s, United committed to another 100 737 Maxes, including a new order for 56 aircraft and the conversion of 44 options. The latter bucket will arrive from 2024-26, and the former in 2027-28. Laderman said the airline has not decided whether the additional Maxes will be used for replacement or growth.

United had 353 737 Maxes on order at the end of September.

Edward Russell

Comac’s C919 is Big Business for Western Suppliers

The Commercial Aircraft Corporation of China, or Comac, delivered its first C919 on December 9, following more than a decade of development. The plane, now in the fleet of Shanghai-based China Eastern, will enter revenue service early next year.

China Eastern’s C919 will seat 164 passengers, a big increase from Comac’s smaller ARJ21, which China Eastern also flies. That plane seats just 88 passengers. The C919 is a more ambitious product, aiming to ultimately compete with the Boeing 737 and the Airbus A320, the industry’s two most widely sold jets. According to Cirium’s Fleets Analyzer, Comac currently has orders for 602 C919s, the majority from China-based leasing companies. No airline from outside of China has yet to place a direct order to buy the plane. 

Comac, owned by China’s national government, is on the forefront of Beijing’s efforts to create a world-class aerospace industry. That would reduce the country’s heavy dependence on Airbus, Boeing, and other western manufacturers. The C919 itself, however, is for now powered by western-built engines, specifically the Leap-1C built by CFM International, a joint venture between America’s GE Aerospace and France’s Safran. Honeywell, based in the U.S., is another key C919 supplier. Escalating trade and national security tensions have led the U.S. and other western countries to rethink their willingness to supply advanced aerospace technology to China, threatening to delay the C919’s development. Comac has largely dismissed the impact of export controls so far. In the meantime, another state-owned Chinese company is now attempting to produce engines for the C919.

The new plane, to be sure, is less technologically advanced than either the latest A320neo or 737 Max. Those planes, furthermore, are part of aircraft families featuring versions of different sizes — that’s an important selling point too many airlines. Airbus and Boeing also have a global network of service and support facilities built up over decades, ensuring any maintenance issues can be addressed wherever in the world one of their planes might be. It will take many years before Comac can offer a similar range of differently sized variants for its C919, and a comparable worldwide scope of service. To succeed commercially without an over reliance on government subsidies, the manufacturer must also become more proficient producing and assembling at scale to lower costs. If it does hope to eventually sell the C919 overseas, it will need to obtain airworthiness certification from regulators in different countries.

Early in the C919’s development, Europe’s Ryanair expressed interest in the plane, even signing a loose agreement with Comac to help with the plane’s design. But the move was viewed by many at the time as a mere negotiating tactic to secure better prices from Boeing, to whom Ryanair is a vital customer.

The C919 appears poised to fly mostly with Chinese airlines in the near term, and unlikely — for now — to win any major orders from outside China or perhaps its close allies. China’s market is large though, ranking second in the world by seat capacity behind the U.S. But even dominating the captive Chinese domestic market is a long way off. In July, China’s three largest airlines — Air China, China Eastern, and China Southern — jointly ordered 292 A320neo family aircraft from Airbus.

In the meantime, China’s unique approach to managing the Covid pandemic has left its airline sector with heavy losses. During this year’s third quarter, a peak travel period in normal times, China’s Big Three airlines combined for nearly $4 billion in net losses, after losing nearly $7 billion the quarter before. In 2019, they earned a collective third quarter profit of $1.4 billion.

The stakes are high not just for China’s economy but also for many important aerospace players in the U.S. and Europe. While Airbus and Boeing are hardly eager to see a new competitor, suppliers like CFM and Honeywell are generating billions of dollars in revenue from their contracts with Comac. Even Massachusetts-based Raytheon, whose Pratt & Whitney unit does not supply engines for the C919, nevertheless hopes to win more business from Comac in the future. “The Chinese commercial aerospace market is the fastest-growing in the world,” Raytheon’s CEO Greg Hayes said last year. “We have to play there. We have thousands of employees. They are key parts of our commercial supply chain. And so, we’re going to continue to engage with Comac.”  

In July, Hayes reiterated his emphasis on China’s importance. “Obviously, the Chinese have a desire to have indigenous aircraft. That’s the C919, maybe the C929 at some point. But the fact is… we will continue to work with our partners there.” The C929 is a widebody plane in early stages of development at Comac, this time working not primarily with western suppliers but rather Russia’s United Aircraft Corporation.

Jay Shabat

Fleet Briefs

  • Air New Zealand is partnering with four zero-emission aircraft developers to source the eventual replacement of its De Havilland Dash 8-300 turboprop fleet. The airline will work with all-electric aircraft developers Beta and Eviation, hydrogen fuel cell developer Cranfield Aerospace, and hybrid-electric developer VoltAero on a demonstrator plane that can fly in 2026. That demonstrator, the airline, hopes can lead to the zero-emission aircraft replacement of its Dash 8s in the future. Air New Zealand operates 23 Dash 8-300s.
  • Supersonic aircraft developer, Boom Aero, unveiled plans for a new engine to power its Overture aircraft. The engine, named Symphony, will be the joint project of three firms: Florida Turbine Technologies on design, GE Additive providing additive technology design consulting, and StandardAero for maintenance. The news comes after leading suppliers GE Aviation, Honeywell, Rolls-Royce, and Safran Aircraft Engines all said they did not plan to work with Boom on the Overture. Boom’s timeline still remains suspect: The planemaker said last week that it still intends to begin production of the first Overture in 2024, roll it out in 2026, and deliver it to launch customer United in 2029. The timeline assumes quick approvals by the Federal Aviation Administration, European Union Aviation Safety Agency, and other aviation regulators not known for their speed. In addition, Boom’s claims that the Overture, when approved, will be both economic and capable of producing zero emissions by using sustainable aviation fuels are also questionable given the large amounts of fuel needed for supersonic flight.

Edward Russell

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Routes and Networks

Virgin Australia has emerged a much stronger airline from the Covid-19 pandemic than it was at the outset of the crisis. A court-led restructuring of Australia’s second largest carrier created a leaner and, executives hope, a much more profitable airline.

One of the biggest changes to the Brisbane-based airline was its decision to axe its longhaul network with the disposal of its fleet of Airbus A330 and Boeing 777 widebody aircraft. Instead, Virgin Australia would focus on domestic Australia and near-international flying opportunities — Bali and New Zealand, for example — with an all-Boeing 737 fleet. That shift has proved a dramatic success: CEO Jayne Hrdlicka said in October that the airline was back in the black and on track to a profit for the full year ending in June 2023. An initial public offering could come as soon as next year.

Hence at first glance, it is a bit of a head scratcher why Virgin Australia on Wednesday unveiled plans to resume flights to Japan, a longhaul market from Australia if there ever was one. The airline will connect Tokyo’s popular and close-in Haneda Airport to Cairns daily from June 28 with — you may have guessed it — a 737. That’s a long flight on a 737 by any stretch of the imagination, even the Max 8 that Virgin Australia plans to fly on the route.

At 3,627 miles, the Cairns-Tokyo route will be the sixth longest 737 Max flight in the world, according to Great Circle Mapper and Diio by Cirium schedules. The longest is Malindo Air’s nonstop between Kuala Lumpur and Melbourne, Australia, at 3,918 miles.

But budget airlines like Malindo are not Virgin Australia’s main competition. It competes for passengers with the likes of Qantas domestically or All Nippon Airways on flights to Japan, and both of those airlines fly larger, more comfortable widebody aircraft — Airbus A330s and Boeing 787s to be precise — on Australia-Japan routes. And Qantas’ budget arm, Jetstar Airways, already flies the Tokyo-Cairns route with a 787, Diio data show.

Why then fly a 737 to Tokyo? It’s the slots, silly. Virgin Australia has one highly sought-after slot pair at Haneda airport. Rules governing the use of those slots — typically an airline must use a slot every 90 days or lose it — have been waived during the pandemic, but those waivers are scheduled to sunset at the end of March. June 28 happens to be right about 90 days later. Reacquiring a lost slot pair at Haneda, which Qantas would certainly jump for, could take years if it happened at all.

Add to that the opportunity to take advantage of the expected surge in international travel to and from Asia as Covid restrictions disappear. Japan reopened its borders to all travelers in October, and Australia reopened earlier this year.

“It was just irresistible to use Far North Queensland as the opportunity to open up Australia to Haneda,” Hrdlicka told the Australian Financial Review. She cited strong tourism demand from Japanese visitors to visit northern Queensland, which includes the Great Barrier Reef, as well as connectivity to major Australian cities elsewhere in the airline’s network.

It would make sense for Virgin Australia to stick with its new Tokyo route just to keep the Haneda slots whether it is financially successful or not. One potential measure of the route’s success is if the airline adds more longhaul 737 Max routes in the future; both Bangkok and Hong Kong are within the range of the 737-8 from Cairns, for example.

And Virgin Australia may yet prove itself ahead of the curve. Last year, Qantas ordered at least 20 Airbus A321XLRs, the longest range variant of the popular A321neo family. The airline could use them for new long, thin routes from Australia to destinations in either Asia — like Cairns to Tokyo — or the Pacific islands when they begin arriving around the middle of the 2020s.

Edward Russell

Route Briefs

  • Canada’s Porter Airlines announced four new routes from the country’s capital Ottawa, all launching in March and operated with 78-seat De Havilland Dash 8-400 turboprops. Two of the four are domestic routes — to Quebec City and Thunder Bay — and the other two are cross-border — to Boston and Newark. As disclosed in an earlier announcement, Porter is also gearing up to link with Ottawa with Toronto Pearson, in this case with its new, larger Embraer E195-E2s jets. In addition, the airline said last week that Calgary and Edmonton will join its network in February with flights from Toronto Pearson on the E2s. Porter is attempting to evolve beyond just its longtime base at Toronto’s Billy Bishop airport, located next to the city’s CBD.
  • Route tidbits: Eurowings is expanding its Stockholm Arlanda base with new nonstops to Rome Fiumicino and Stuttgart from March 26. Discount giant Ryanair will expand its Cork, Ireland, base by 20 percent next summer with new nonstops to East Midlands, La Rochelle, Sevilla, and Venice Treviso. And not to be left out, Wizz Air is adding daily London Gatwick to Nice flights from March 26. Across the Atlantic, Spirit will add Charleston, S.C., to its map with daily nonstops to Fort Lauderdale, Newark, and Philadelphia from April 5. Down under, Jetstar will join its parent Qantas on the Brisbane-Auckland route from March 27. And Philippine Airlines will add Perth to its network with thrice-weekly flights from Manila beginning March 27.

Edward Russell & Jay Shabat

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Landing Strip

Los Angeles International Airport is moving forward with two long anticipated terminal expansions aimed at boosting capacity ahead of the 2028 Olympics at one of the busiest airports in the U.S. The nine-gate Concourse 0, an eastern extension of Terminal 1, and an up to 18-gate Terminal 9 east of the existing Terminal 8 and attached via a bridge across Sepulveda Boulevard are set to open by 2027. The projects are budgeted to cost a combined $6 billion.

New documents, presented to the board of LAX operator Los Angeles World Airports last week, show Southwest making big gains in terms of gates from the Concourse 0 project. However, United, which has long pushed for control of Terminal 9, went unmentioned in the latest description of the new facility.

Progress on the LAX expansions come as air travel has surged back from the pandemic. U.S. airlines have carried more travelers than they did in 2019 on several holiday weekends since Labor Day in September. However, average traffic numbers have hovered at around 95 percent of pre-pandemic levels for months, in part due to airlines flying fewer seats than they did three years ago. U.S. passenger numbers were down 9 percent compared to 2019 during the week ending December 4, the latest Airlines for America (A4A) data show. Airports, in response to the faster-than-forecast recovery, are either opening or moving forward with billions-of-dollars in capital projects.

At LAX, the airport was known before the pandemic as “gate tight” — or not having enough gates for existing airline schedules, let alone future expansion. That has driven numerous expansion projects over the past decade including the West Gates satellite that opened in 2021, and the plans for Concourse 0 and Terminal 9.

Southwest will have 22 gates across Concourse 0 and Terminal 1 at LAX when the former concourse opens, according to the LAWA presentation. The total number of gates is only possible if Southwest gets preferential use of all nine gates in Concourse 0. The new facility is scheduled to open in 2026.

An airline spokesperson said Southwest was “excited” to continue working with LAWA on the plans for Concourse 0.

Terminal 9, which could have 18 gates for narrowbody aircraft or 12 gates for widebody planes, is described as an “international common-use terminal,” by LAWA in the presentation. United CEO Scott Kirby has pushed for the facility to be the domain of United and its Star Alliance partners, which include All Nippon Airways and Lufthansa. The Terminal 9 description does not exclude United’s plans, nor does it confirm them as it does Southwest’s expansion into Concourse 0.

“We need more gates,” Kirby said of its LAX footprint in October 2021. “I think [Terminal 9 will] be great for us. [But] it’s taking a long time.”

The airport plans to seek funds from the Bipartisan Infrastructure Law for Terminal 9 but not Concourse 0, the presentation shows.

LAX passenger numbers recovered to nearly 83 percent of 2019 levels, or 89,198 travelers a day, in November, according to a separate presentation by LAWA CEO Justin Erbacci last week. The airport handled 54.6 million passengers during the 10 months ending in October, or 74 percent of numbers three years earlier, LAX data show.

LAWA expects passenger traffic to surpass 2019 levels during the fiscal year ending in June 2025, and then grow at a rate of roughly 1.7 percent annually thereafter, an August report by adviser WJ Advisors shows. Domestic traveler numbers are expected to recover a year earlier, which is sooner than previous forecasts.

A number of airport improvements that were begun before the pandemic have opened recently or are near opening at LAX. In October, the airport and Delta opened a new Terminal 3 concourse, which is part of a $2.3 billion upgrade to Terminals 2 and 3 at the airport led by Delta. And a new automated people mover linking all of the airport’s terminals with a new rental car center and train station of the Los Angeles Metro system is expected to open next year.

Edward Russell

Airport Briefs

  • The Gold Coast Airport in Australia has opened a terminal expansion that added, among other things, six new gates to the facility. The project will allow the airport to accommodate expected traffic growth over the coming decade, and for the 2032 Olympics in nearby Brisbane. Gold Coast was the sixth busiest airport in Australia in 2019 when it handled 6.5 million passengers, according to Australian government data. The expansion is part of A$500 million ($334 million) in upgrade works at the airport.

Edward Russell

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Feature Story

It wasn’t exactly an investor day event — Delta Air Lines will hold one of those in June, offering a deep dive on different areas of its business. Last week, in a meeting with investors, the airline’s chief focus was to share and explain its upbeat financial outlook for 2023 and beyond.

Delta now forecasts an 11 percent operating margin for the current October-to-December quarter, within a whisker of the 12 percent it earned in the same quarter of 2019. Recall that in mid-October, Delta expected to earn a fourth quarter an operating margin of 9-11 percent — that was before a significant decline in fuel costs. For all of next year, it expects the metric to be 10-12 percent (full-year 2019 operating margin was 14 percent). Operating margin is then forecast to rise 13-15 percent in 2024, which would restore profitability to its impressive pre-Covid trend. Impressive indeed: Among all airlines worldwide with intercontinental networks, none had higher 2019 operating margins than Delta.

How did Delta become so profitable? CEO Ed Bastian gave investors a bit of a history lesson, saying the airline did not have a sustainable business model prior to 2010, coming out of the global financial crisis and fresh from its merger with Northwest Airlines. In the first decade of the 2000s, Delta filled only about 70 percent of its seats on average. Last quarter, its load factor was 87 percent. Along the way, the company went from chronically-loss-making in the early 2000s to consistent double-digit profit margins throughout the second half of the 2010s. The reasons for the turnaround were many, but Bastian summed things up nicely: “The main thing we did was we utilized the assets a heck of a lot better.” Industry restructuring certainly helped as well: “We no longer have that overhang of seat capacity that continues to suppress the pricing in this industry.” Here’s all you need to know: From 1991 to 2019, Delta showed, U.S. airline domestic seat capacity increased 30 percent. Over that same period, domestic revenues rose 219 percent! If only airlines in other regions of the world were so lucky.

Post-pandemic, U.S. industry capacity and pricing trends stand to become even more benign. Another big merger is pending (JetBlueSpirit). And supply-side constraints like pilot shortages, strained airport capacity, and reduced aircraft production will limit seat growth. Another deterrent to growth: airline industry costs are unequivocally ascending, the unpredictable vagaries of future fuel costs aside.

Higher non-fuel costs will certainly be a fact of life for Delta, made clear by its expensive new pilot contract (now awaiting ratification). Even after the airline restores normal productivity levels through greater utilization of existing assets, non-fuel costs are not going back to where they were pre-Covid. In 2023, Delta sees costs per available seat mile excluding fuel (CASM-ex) falling from this year’s levels but still lingering about 11 percent above 2019. Even in 2024, relative to 2019, CASM-ex will be up in the “high single digits.”

That can only mean one thing: Delta — to recapture its pre-Covid margin glory — will need its revenues to be up at least as sharply. Fortunately, white-hot demand since the spring has already lifted revenues above 2019 levels. Notwithstanding some negligible softness in December, demand continues to look great well into the first quarter of 2023. Delta, furthermore, sees more corporate travel returning as armies of consultants, attorneys, and accountants belatedly rediscover their normally hearty travel appetites. Executives furthermore point to the estimated $300 billion in “missing demand” lost during the pandemic but poised to return, and this time with people more mobile thanks to remote working. Next year, Delta expects revenues to be up 15-20 percent from 2022.

What if there’s a U.S. recession, as many economists predict? Bastian invokes the “this time is different” argument. “I don’t think that the pattern of 2019 for corporate travel is going to look like what we’re seeing into the future.” He cites the past approach of cutting corporate travel in bad times but “this is not a recession where you can do that. This is a recession [where] you have to grow your top line because they already have the cost out … that incremental reduction of travel spend is not going to matter relative to getting back out with your customers.” Delta President Glen Hauenstein added: “The differential between the … yield [for] leisure and business has converged over time. And so the trade-downs aren’t as pronounced as they were historically, which I think is a great shock absorber for us.”

Perhaps, though the U.S. hasn’t experienced a typical recession since 2009; the 2020 recession was deep but very brief, immediately addressed with massive fiscal and monetary support for households and businesses (which first was directed to goods spending and now is directed at services like leisure travel). The two consecutive quarters of economic contraction in the first half of 2022, meanwhile, was probably not a true recession at all given how robust the job market was. The point is, airlines really don’t know what a typical recession would do to their business. Are there really shock absorbers now? Would fuel prices fall in tandem, offsetting any demand weakness?

In any case, Delta isn’t relying on sustained strength in travel demand alone. On the contrary, management detailed a long list of internal actions and strategies designed to lift revenues. A few, in particular, stand out.

One is Delta’s valuable partnerships, which the company expects to yield even greater benefits going forward. These include its symbiotic relationship with American Express, currently delivering something like $7 billion in value to the airline. That’s billion with a “b.” Its overseas airline joint ventures, meanwhile, while disrupted by bankruptcies and other Covid-era misfortunes, are now bubbling with potential. No joint venture is more powerful and lucrative than the one Delta has with Air France-KLM, with Virgin Atlantic also in the mix. In Asia, Korean Air’s pending merger with Asiana greatly enhances Delta’s position in Seoul. “Once you put them together,” said Hauenstein, “they will have, by far, the largest hub in Asia and one that we can connect to and really funnel most of our Asia traffic — that we’re not going to serve nonstop — over their hub.” Cooperation with Latam is just getting started, having received antitrust immunity earlier this year. Like Latam and Virgin Atlantic, Aeromexico was pushed into bankruptcy by the pandemic, damaging Delta’s large equity holding. But it’s coming back strong, competing with just two other domestic airlines (both LCCs) in a country with 130 million people.  

Delta also expects to produce higher margins in 2023 by growing in, well, higher-margin markets. Recently, it’s been allocating a large share of its growth to more competitive (read less profitable) coastal hubs, namely Boston, Los Angeles, New York, and Seattle. Now it plans to pivot and add seats to what you might call Bastian’s bastions, like Detroit, Minneapolis, and the Fort Knox of the airline industry: Atlanta. The bastion hubs were in fact losing some market share — even Atlanta losing some to Charlotte — as growth was directed elsewhere. Consider this year’s summer quarter, when scheduled seat capacity from Detroit, Minneapolis, and Atlanta were down 27, 22, and 16 percent, respectively, compared to three years ago, per Diio. Boston, by contrast, was up 17 percent, and New York’s LaGuardia and JFK combined down less than 10 percent. Note that some of the growth now directed to the bastion hubs involve the restoration of international capacity, including Asia flights from Detroit.

If Delta achieves its lofty profit goals, it will be in part thanks to a winning bet. Well before 2019, the airline placed its chips on premium traffic, allocating larger portions of its inflight real estate to products like Delta One (flat-bed seats), Premium Select (longhaul premium economy), and Comfort+ (extra legroom in economy). All have outperformed during the pandemic and continue to attract eager buyers. Speaking about Premium Select specifically, Hauenstein said “the returns on those? We’re getting fares that are generally double what we get for a regular coach product.” The push continues: As Delta receives new planes, they’re typically arriving with more premium seats than the planes they replace. Next year, it will offer roughly 15,000 more premium seats a day than it was in 2019. Before long, nearly one out of every three seats that Delta sells will be a premium seat. What’s more, Basic Economy seats — with no extra amenities — today account for a mere 5 percent of Delta’s seat bookings. In other words, even its economy class customers are willingly paying a premium, even if just to avoid being treated like a medieval serf when it comes to boarding priority, ticketing flexibility, seating preference, and loyalty plan benefits.

Bastian, Hauenstein, and Chief Financial Officer Dan Janki gave lots of other reasons for their optimism, ranging from fleet modernization to growth of non-ticket revenues. “We have a great story here to tell at Delta.”

A true story? Or a fairy tale? Stay tuned to find out.

Jay Shabat

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By the Numbers

Atlanta is still the world’s busiest airport by seats, followed by Dubai, in the first quarter of 2023. In terms of growth compared to 2019, note the Superstar ABCs : Austin, Bogotá, Cancun, and Cairo. On the other side of the ledger, big East Asian hubs are still far smaller than they were pre-pandemic.

Airports are ranked by, one, total scheduled seats; and, two, seat growth compared to the first quarter of 2019.

Top 100 Airports Ranked by Total Seats

Top 100 Airports Ranked by Growth, vs First Quarter 2019

Source: Diio by Cirium

Jay Shabat

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