Issue No. 890

Slot Machine

EasyJet Profits on Growth at Slot-Controlled Airports

Pushing Back: Inside the Issue

Last week ended with West Texas Intermediate oil prices roughly at the $80 mark, a reasonably comfortable level for airlines. If the reason for cheaper oil, of course, is a slowing global economy, then the gains could be erased on the revenue side. For now, though, most airlines say demand continues to flourish.

Scandinavia’s SAS for one — never mind the pilot strike it suffered this summer — says revenue growth is now outpacing cost growth. Even so, the bankrupt airline suffered a lousy August-to-October quarter (operating results were negative). In better shape is EasyJet, whose solid spring and summer profits stem from privileged positions at slot-controlled airports like London Gatwick and Lisbon, plus strong ancillary performance and a fast-growing package tour business. But to paraphrase what Senator Lloyd Bentsen once said to his debate foe Dan Quayle: EasyJet, you’re no Ryanair. Indeed, the latter produces much higher margins.

Hong Kong’s Cathay Pacific is still looking to get its margins back to black, as passenger demand finally starts to reawaken. In India, the Air India-Vistara merger is confirmed, with Singapore Airlines playing a major role. AirAsia and AirAsia X, meanwhile, are themselves looking to merge. Other pending mergers await regulatory clearance, including IAG-Air Europa, Korean Air-Asiana, JetBlue-Spirit, and Avianca-Viva Air.   

In other developments, United is opening new pilot bases to boost operational resiliency. Yet another airline is jumping into the New York-Paris market. Boeing hopes to finally secure approval for the -7 and -10 versions of its 737 Max product. Rolls-Royce, working with EasyJet, announced progress on hydrogen-powered engines.

Third quarter earnings season is now finished, but don’t look away. Several airlines — Delta and Southwest, for example — will host investor day events this month.

Airline Weekly Lounge Podcast

EasyJet is making good on its recovery plan. From expanding at slot-constrained airports like Lisbon and opening new seasonal bases in Greece, the airline is on its way back to the black. Plus, the Air India-Vistara merger. Listen to this week’s episode to find out. A full archive of the 'Lounge is here.

Weekly Skies

Air India and Vistara are to merge under a deal between Tata Sons and Singapore Airlines that also secures the latter’s foothold in the rapidly growing aviation market. The combination, which has been speculated about for months, will solidify Air India’s position as India’s second largest airline with, for now, 218 aircraft. The carrier would be second to only IndiGo in the domestic market, and the leader internationally. But, importantly for Air India’s business — and other airlines in the market — it would begin the rationalization of the highly fragmented Indian market.

“The enlarged [Air India] will … be able to achieve scale synergies, seamless connectivity on domestic and international routes, as well as optimization of its route network and resource utilization, enabling it to offer more choices and better connectivity for consumers, while creating a champion that can compete effectively internationally,” Singapore Airlines said of the deal in a Singapore Stock Exchange filing last week.

Singapore Airlines, which owns 49 percent of Vistara, will make a $250 million investment and receive a 25 percent stake in the expanded Air India as part of the deal.

Airlines in consolidated markets, like in the U.S., are consistently more profitable than peers in more fragmented markets. This financial performance can lead to more capacity growth, as well as passenger experience improvements. The pandemic has proven a catalyst for consolidation in markets from Latin America to Europe and South Korea.

Many have expected consolidation to come to India since the Tata Group took over Air India earlier this year. Tata already owned stakes in AirAsia India and Vistara, making both airlines prime targets for integration into the larger Air India franchise, which also includes Air India Express. Malaysia’s Capital A, which jointly owned AirAsia India with Tata, sold its stake in the budget airline to the Indian conglomerate at the beginning of November. And Singapore Airlines said in October that it was in talks with Tata over a potential Air India deal.

In addition, Tata has hired Singapore Airlines veteran Campbell Wilson to lead Air India. He was most recently CEO of the Singaporean carrier’s budget arm, Scoot, after more than two decades at Singapore Airlines itself.

The new Air India, including budget airlines AirAsia India and Air India Express (expected to be combined in 2023) and now Vistara, had a 23.5 percent share of Indian domestic passengers during the nine months ending in September, according to Indian civil aviation authority DGAC. They had a 23 percent share of international passengers in the second quarter. IndiGo, the country’s largest airline, had a 56 percent domestic and 15 percent international share during the respective periods.

IndiGo executives have, so far, brushed off any concerns over the resurgent Air India. “Whether it’s older airlines or newer airlines, they are all run by very professional veterans of the industry. So far we see no irrational behavior by anyone,” then CEO Ronojoy Dutta said in August. Dutta stepped down as CEO in September and was replaced by former KLM chief Pieter Elbers.

One challenge for Air India will be to maintain Vistara’s high service quality while combining the two airlines. The latter is viewed as offering better service than the former, which for decades struggled under state ownership.

In recent months, Air India has announced deals for additional aircraft and expanded international flight offerings. Earlier in November, the airline unveiled a new daily flight between Mumbai and New York JFK, and plans to resume flights between Delhi and Copenhagen, Milan, and Vienna in early 2023.

The Air India and Vistara merger is expected to close by March 2024 pending regulatory approval.

Edward Russell

Cathay Pacific’s Comeback

Though it only publishes financial results after the second and fourth quarters, Cathay Pacific held a call with investors on November 25, providing an update on current market conditions. Finally, Hong Kong’s airline market is showing signs of recovery, triggered by relaxation of quarantine rules on airline crews and foreign visitors earlier this fall.

Traffic connecting through the city, which held up relatively well during the crisis, is now growing as Cathay adds back flights and destinations. Hong Kong residents are starting to travel for leisure again, sparking a jump in demand to Bangkok, Singapore, and Seoul in early October. After October 11, when Japan removed quarantine restrictions on visitors, demand to cities like Tokyo quickly increased as well.

Mainland China, a crucial market for Cathay, is still producing outbound travel to Hong Kong and beyond. But inbound demand to the mainland is constrained by rules from Beijing prohibiting inbound international connections via Hong Kong. Flight capacity to the mainland, furthermore, is severely constrained — Cathay is still permitted to operate just one flight a week to Shanghai. At this time in 2019, according to Diio by Cirium, the airline plus Cathay Dragon, which was merged into Cathay proper during the pandemic, was running as many as 51 flights a day to the mainland.

With outbound Hong Kong leisure demand normalizing fastest, Cathay’s low-cost subsidiary HK Express is seeing a quick recovery — it expects to be back to pre-Covid capacity levels by March. Cathay’s mainline passenger operation, by contrast, was operating at just 21 percent of pre-Covid capacity in October (it was 4 percent in the first half of this year). The goal is to reach 70 percent by the end of 2023 and 100 percent a year later. As for cargo, a critical source of profits during the crisis, conditions remain strong, though not as super-strong as they were during the holiday shipping peak a year ago. Cathay is now operating about 60 percent of pre-crisis cargo capacity.

Overall, Cathay assured investors that its liquidity levels are healthy — no concerns about running low on cash, in other words. It did need a major government bailout to survive the pandemic, but that’s hardly unusual among major global airlines. It likewise assured investors that it has adequate staffing to rebuild its flight network. It hopes to start generating positive cash flow from its operations in the second half of 2023. Likely weighing on 2023 earnings, however, will be Cathay’s 18 percent ownership stake in Air China, which means 18 percent ownership of the latter’s heavy losses. Economic challenges will be formidable as well, with China’s economy not nearly the growth dynamo it once was. On the other hand, tumbling oil prices are a blessing of the highest order.

“I think overall,” said chief commercial officer Ronald Lam, “we are definitely seeing bright light at the end of the tunnel. Hong Kong is coming back, and Cathay Group is coming back.”

Jay Shabat

Singapore Airlines, Thai Airways to Partner

Singapore Airlines plans a partnership with its long-troubled neighbor Thai Airways, in a strategic move that comes just days after it revealed plans to take a 25 percent stake in an upsized Air India.

The two airlines, both members of the Star Alliance, plan an extensive codeshare agreement under the pact. The tactic improves the marketability of each other’s flights in global distribution systems. This will begin with flights connecting Singapore and Bangkok and, by the end of the first quarter of 2023, it will expand to select routes between Singapore and North America and South Africa. Routes to India, Europe, and Australasia will likely follow.

The cooperation is unlikely to end there. The carriers also pledged to explore “wide-ranging commercial collaboration,” mentioning areas like loyalty, customer experience, airport lounge access, and airport ground services. There was no mention, however, of exchanging any ownership stakes. Both airlines are controlled by their respective governments, though Singapore Airlines is partially publicly traded. Thai Airways had publicly traded shares as well until filing for bankruptcy during the pandemic. It does not foresee re-listing again until 2025 at the earliest.

Singapore Airlines has long sought partnerships and allies to hedge its heavy exposure to its namesake market. As longtime CEO Goh Choon Phong explained during a discussion of the company’s latest earnings in November: “The reason why we have looked at a multi-hub strategy is because Singapore is a really small market, with five to six million people. We do not have a hinterland of domestic network that many other big countries have, so there are growth limitations based on the Singapore market. We are mitigating some of that, through all kinds of partnerships.”

The approach has not always met with success. Singapore Airlines infamously overpaid for a 49 percent stake in Virgin Atlantic not long before the September 11, 2001, attacks; the stake was eventually sold to Delta Air Lines. Investments in Australia and New Zealand, first with Ansett and later with Virgin Australia, ended badly — both carriers would end up in bankruptcy. A joint low-cost longhaul venture in Thailand, NokScoot, was another failure. Earlier attempts to buy a stake in Air India, as well as a plan to invest in China Eastern Airlines, would have resulted in heavy losses had they happened. Just prior to the pandemic, Singapore Airlines flirted with the possibility of buying a stake in the Korean low-cost carrier Jeju Air.

Singapore Airlines has joint ventures with Lufthansa, SAS, and Air New Zealand, and unveiled plans for one with Japan’s largest airline, All Nippon Airways, in early 2020.

The Singaporean carrier is clearly keen on cooperating with rivals. The latest announcement regarding Thai Airways follows earlier partnership announcements with Malaysia Airlines and Indonesia’s Garuda in Southeast Asia. Last fall, Singapore Airlines expanded its codeshare with United Airlines in the U.S., a market where the carrier is growing aggressively using new ultra-long-range planes. And just last month, it reaffirmed its collaboration with Virgin Australia, now restructured and under new ownership post-bankruptcy. Then came its recent plan to merge its affiliate Visatra with Air India.

Pressure was building at Singapore Airlines, long one of the industry’s profit champions before producing a steady string of mediocre profits during the 2010s. Prior to the 2008-09 global financial crisis, it was a “battleship in a sea of shipwrecks,” as Airline Weekly once called it. But Asia’s airlines would improve, and competition would intensify, from low-cost carriers, Gulf carriers, and others. The pandemic naturally proved difficult in the extreme, not least because of Singapore Airlines’ heavy dependence on intercontinental premium traffic, during a time when the only area of salvation was domestic leisure flying. A large and quickly administered injection of government support, however, forestalled the need for a bankruptcy restructuring of the sort undertaken by Thai Airways. Robust cargo revenues also helped Singapore navigate the Covid crisis.

Now that the crisis is largely past, Singapore Airlines is earning some of its best profit margins ever. During the July-to-September quarter, its 15 percent operating margin ranked highly among all airlines tracked by Airline Weekly (see By The Numbers). This was also fifth best among airlines that operate widebody planes. Cargo continues to be a key contributor in 2022. But more importantly, longhaul premium traffic is back, in some ways stronger than ever — longhaul yields are extremely high. In stark contrast to the heightened competition Singapore Airlines faced throughout the 2010s, competitive capacity is now in retreat.

An example of that: Thai Airways, including its Thai Smile budget operation. Its capacity, according to Diio by Cirium, is down a massive 48 percent this quarter, versus the fourth quarter of 2019. (Singapore Airlines capacity, including Scoot, are down just 17 percent). Thai Airways now needs to reinvent itself as a much smaller carrier. And cooperating with Singapore Airlines provides it a way to retain some of the market reach it has lost by exiting so many markets.

Thai Airways was itself a rock-solid profit generator once, with a decades-long streak of making money hauling tourists to Thailand’s cities and beaches. But low-cost competition from AirAsia, Lion Air, and VietJet made the 2010s a decade of financial misery for the flag carrier, culminating in its bankruptcy filing in 2020. It has since cut roughly half of its workforce while renegotiating aircraft leases and simplifying a notoriously complex fleet. Something seems to be working. Like Singapore Airlines, Thai did well last quarter, earning a 12 percent operating margin.

Jay Shabat

In Other News

  • AirAsia, now under the corporate umbrella known as Capital A, is finally starting to awaken from its pandemic nightmare. Travel and tourism within Southeast Asia, or ASEAN, most importantly, are reviving steadily following the lifting of international border restrictions in most of the airline’s key markets. China, though, remains largely closed. In the third quarter, it was operating just two-thirds of its pre-Covid domestic capacity, and just one-third of its international capacity. By November though, it was back to flying 125 planes, which should reach 140 by year end, and 205 by the second quarter of next year. Nearly all furloughed staff have been recalled. Still, Diio shows scheduled seats for AirAsia’s core Malaysian operation this month is still down 40 percent from the same month in 2019. Seats at Thai AirAsia are down 24 percent. Its Indonesian joint venture is down close to 50 percent. The Philippines joint venture is down 32 percent. AirAsia Japan closed during the pandemic while the group’s 16 percent ownership stake in AirAsia India has been sold to Air India. The group now plans to integrate AirAsia X, until now a separately traded company specializing in widebody longhaul flights, into AirAsia. Also within the group is a maintenance division that’s seeking more third-party customers. It has a logistics arm and mobile app business as well.

    Did AirAsia’s core airline operations make money in the third quarter? The company’s notorious convoluted accounting makes it difficult to tell. Groupwide operating margin, removing what appear to be special items, was positive 2 percent. The company remains distressed though, enough so to be under special watch by Malaysia’s stock market. As a so-called “Practice Note 17” company, it is required to submit a proposal describing how it plans to restructure and revive. Management claims that “a recession will actually be a positive for us in the low-cost aviation space as people trade down to shorter flights and cheaper flights.” Perhaps. More certain are the benefits it will enjoy from falling oil prices. ASEAN currencies, meanwhile, having lost a lot of value versus the U.S. dollar this year, have recently started to reverse course and appreciate — that’s good news for AirAsia and other airlines purchasing their fuel and aircraft in dollars. It says, by the way, that it faces no manpower shortages.
  • SAS is making progress on its restructuring program, SAS Forward. The airline has reached deals with 80-90 percent of its aircraft lessors amounting to 1 billion Swedish kroner ($95 million) in annual savings; SAS targets 1.8 billion Swedish kroner in aircraft and maintenance savings. Lessors were the creditor group that SAS highlighted as a sticking point in its cost savings efforts prior to filing for U.S. Chapter 11 bankruptcy in July. But while restructuring progress was made, its pre-tax loss for the fiscal year ending in October widened by 1.3 billion Swedish kroner to 7.8 billion Swedish kroner. Chief Financial Officer Erno Hilden described it as a “heavy” loss during an earnings call last week, citing both higher fuel prices — up 215 percent year-over-year — and a 2.9 billion Swedish kroner hit from the strong U.S. dollar. The pre-tax losses are expected to continue with a 4-5 billion Swedish kroner loss forecast for the 2023 fiscal year. Otherwise, the trend SAS sees is good: Revenues are rising quickly, as are yields. Unit costs are also up but, as CEO Anko Van der Werff said, the gap is closing between unit revenues and costs. And, as far as winter and the uncertain economic outlook go, SAS has yet to see any “signs of increasingly strained macroeconomic impacts on our booking levels,” Van der Werff said. SAS aims to exit Chapter 11 in the second half of 2023.  
  • As expected, Avianca and Viva Air have appealed the rejection to their proposed merger by Colombian regulators. The airlines are offering to divest a number of slots at Bogotá’s congested El Dorado airport, maintaining Viva’s brand and business model, cap fares on three routes where the airlines are the only operators, codeshare with Satena on certain regional routes, and maintain Viva’s interline agreements as concessions to Aerocivil. Viva CEO Felix Antelo spoke of the necessity of the merger for the airline’s future in an interview with Airline Weekly in October, and said “staying independent in aviation in the 2020s is not an option.”
  • Speaking of dealing with regulators, Allegiant Air and Viva Aerobus have requested that the U.S. Department of Transportation tentatively approve their proposed joint venture. While acknowledging that they cannot implement their U.S.-Mexico pact until the FAA upgrades Mexico’s safety rating to Category 1, the airlines told the DOT that tentative approval would allow them to move forward with, for example, needed backoffice investments to implement the pact. Allegiant, for example, must upgrade its reservations and other systems to support international flying. In addition, the airlines noted that antitrust approval from the Mexican regulator, COFECE, expires on April 11, 2023; though COFECE could extend that by six months. “Continued delay will cause harm to United States consumers,” Allegiant and Viva Aerobus argued. Allegiant promised to begin its own flights to Mexico in the second or third quarters of 2024 if the DOT tentatively approves the partnership by April.
  • Norwegian startup Flyr has a new CEO. Chief Financial Officer Brede Huser took over after former CEO Tonje Wikstrøm Frislid left the company at the end of November. Board chairman Erik Braathen said Huser’s had the “necessary execution power” needed to “strengthen Flyr’s financial situation.” The airline has struggled to gain traction in its home market in the face of a resurgent Norwegian Air, and even as partially state-owned SAS restructures under U.S. Chapter 11 bankruptcy protection.

Edward Russell & Jay Shabat

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Sky Money

  • Air Lease Corp. priced a $700 million senior unsecured issue with an interest rate of 5.85 percent last week. The medium-term notes are due in December 2027. ALC will use the proceeds for general corporate purposes, including purchasing aircraft and repaying debt. Bank of America Securities, J.P. Morgan Securities, SG Americas Securities, and Truist Securities are joint book-running managers of the transaction that is scheduled to close on December 5.
  • Delta and Spirit have separately amended the terms on some of their revolving credit facilities. Delta extended the maturity of its $1.325 billion facility from J.P. Morgan by two years to April 2025; the maturity on its $1.25 billion standby letter of credit facility remains unchanged in 2024. And Spirit increased the commitment under its facility from Citi by $190 million to $300 million. Both airlines also changed the base rate the facilities are priced over to the secured overnight financing rate, or SOFR, from Libor.
  • Norse Atlantic has raised roughly $30 million from a private placement of 120 million new shares. Proceeds from the deal will be used to maintain its required cash buffer after a regulator-mandated investment of $46 million in its UK subsidiary. And, following the success of the sale, the airline hopes to sell another 60 million shares at 2.5 Norwegian kroner ($0.25) each in a follow on private sale. Pareto Securities and SpareBank 1 Markets were managers of the transaction.

Edward Russell

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Routes and Networks

  • New Yorkers must be dying to get to Paris next summer. Long-haul, low-cost Norse Atlantic Airways is the latest to debut new flights between the cities with plans for a daily New York JFK-Paris Charles de Gaulle service on a Boeing 787 from March 26. The new route comes less than two weeks after JetBlue announced plans to begin its own JFK-Charles de Gaulle flights next summer. The two new routes come in an already busy market: Air France, American, Delta, French Bee, La Compagnie, and United, per Diio schedules.
  • EasyJet will add two new seasonal routes from Belfast and Manchester next summer. The discounter will connect the former to Rhodes, Greece, from June 3, and the latter to Murcia, Spain, from May 2; both routes will operate twice weekly. EasyJet will also base an additional Airbus A320neo in both Belfast and Manchester next summer, bringing the total number of aircraft at each base to eight and 21, respectively.
  • Route tidbits: Hawaiian Airlines will begin weekly flights between Honolulu and Rarotonga in the Cook Islands next May. It will be the first time any carrier has flown the route since Aloha Airlines did in 2003, and Hawaiian flew it itself until 1993, per Diio. Speaking of Rarotonga, Jetstar will launch twice-weekly flights to the island from Sydney with an Airbus A321LR from June 23. The discounter will compete with Air New Zealand on the route. And, Ryanair launched weekly seasonal winter service between Manchester and Turin on December 3.

Edward Russell

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State of the Unions

United will open new pilot bases in Florida and Nevada next spring, in a move that comes as contact negotiations with its pilots union, ALPA, continue after crews rejected an initial agreement in November.

The Chicago-based carrier plans to open a new crew base in Las Vegas with 204 pilots, and Orlando with 300 pilots next May — its first in nearly 20 years — United Managing Director of Flight Crew Resources Zach Shapiro told crews in a memo last week viewed by Airline Weekly. Pilots in both bases would exclusively operate the Boeing 737, of which United few 389 aircraft and had orders for another 353 at end-September. The Orlando domicile could also include the nearby Tampa airport in the future.

The bases, which could make life easier for United pilots living in the Las Vegas or Orlando areas, come amid contentious contract negotiations with ALPA. The current contract became amendable in 2019. A tentative agreement that the airline and union reached in June was overwhelmingly rejected by pilots last month with many demanding higher raises. And United pilots picketed at the airline’s hubs for the first time in nearly a decade in November.

Pilots at American have also picketed as talks between the carrier and its pilots union, the Allied Pilots Association, continue. And at Delta, its ALPA-represented pilots in November authorized a potential strike if the carrier and union cannot reach a deal.

The situation airlines face is complicated by complaints of overwork by some pilots during the pandemic recovery, as well as the shortage primarily affecting U.S. regional airlines. Both factors are driving pilots to push for higher wages and other quality of life improvements in their next contract. In June, pilots at certain American regional affiliates received raises that put their pay on par with that at some low-cost carriers, which has added fuel to demands for higher pay across the sector.

In his memo, Shapiro described the new bases as beneficial to pilots, travelers, and the airline through operational improvements. Florida and Nevada, he said, are home to the largest concentrations of United pilots outside of the airline’s existing bases. For example, roughly 1,100 pilots live in Florida. These crew members currently commute to work at airports where there are bases, like Los Angeles or Newark. Eliminating the need for these commutes with locally-based pilots, he said, would reduce delays and “drive operational integrity and recovery during off-schedule operations.”

“These circumstances create a natural opportunity to take flying that already exists today and crew it from such cities,” Shapiro said, in what he described as a “win-win-win” solution referring to pilots, customers, and the airline. And within a day of announcing the new bases internally, United was touting them to potential new hires through emails to those interested in its Aviate pilot training program.

Shapiro added that the new bases do not indicate plans for new United hubs. The airline will maintain current levels of flying, he added.

United will operate an average of 33 departures a day from Las Vegas, and 37 from Orlando in December, according to Diio by Cirium schedules. The airline will average 24 daily departures from Tampa.

The new Las Vegas and Orlando pilot bases come after a wave of base closures by airlines cutting costs during the pandemic. Hard-hit Cathay Pacific has scrapped its overseas crew bases and focused resources on Hong Kong. Delta closed its Cincinnati pilot base in 2021. And United closed its flight attendant bases in Frankfurt, Hong Kong, and Tokyo in 2020.

United currently has nine U.S. pilot bases, almost all located in hubs: Chicago, Cleveland, Denver, Guam, Houston, Los Angeles, Newark, San Francisco, and Washington, D.C.

Edward Russell

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Fleet

Delta quietly introduced the first of 33 used Boeing 737s formerly flown by Lion Air in November. The first, registered N951DX, of the fleet of 737-900ERs entered service between Atlanta and Panama City, Fla., on November 18, according to FlightRadar24. Delta plans to introduce another five by the end of December, and the rest of the planes monthly through October 2023.

But the 737s are entering service before they are fully refit to the Atlanta-based carrier’s specifications, Delta told flight attendants recently in a memo viewed by Airline Weekly. All of the aircraft will feature just 12 first class seats, compared to 20 in Delta’s standard layout, and a varying number of economy and extra-legroom economy comfort seats. And amenities like inflight wi-fi and entertainment are limited to just certain aircraft. Due to these product differences the 737s will only operate on 18 routes of 500 miles or less from the airline’s Atlanta hub for the time being.

Wi-fi and inflight entertainment will be fully operational on the aircraft by the spring, but reconfiguring the aircraft in Delta’s layout will not begin until 2024.

The 737-900ERs are “needed quickly to support our operation,” Delta told staff.

Why then is uber brand-conscious Delta introducing these planes before they meet its known exacting standards? Regional staffing are issues, plus delivery delays of new jets, are likely reasons as the airline moves to fully restore its pre-pandemic network by next summer. The pilot shortage in the U.S. has forced many regional airlines to temporarily park planes, particularly smaller 50-seat models, as they work to rebuild their cockpit crew ranks; this has forced many carriers to fly less than they otherwise would like.

“We don’t think it will be fully restored until probably 2024, 2025 at the earliest,” Delta President Glen Hauenstein said of regional capacity in October. He added that the airline’s fleet of small mainline narrowbodies, particularly the Airbus A220 and Boeing 717, would help Delta to fully restore its network by next summer even with fewer regional aircraft.

And while Delta did not mention pilots or regional capacity in its memos to staff, if its A220s and 717s are flying routes normally the domain of regional jets, like the Embraer E175, then it would need more Airbus A320s and 737s — the next size up in its fleet cascade — to fill in on markets where those smaller jets previously flew. And, given the delivery delays facing new Airbus aircraft that Delta has on order, the used 737-900ERs are the airline’s only viable alternative to quickly boost its fleet count.

“We make decisions about fleet induction and aircraft deployment based on a variety of factors but what’s most important is that we have flights when and where our customers want to travel,” a Delta spokesperson said. The introduction of the used 737-900ERs, they said, was “going well.”

Delta had 50 A220-300s and 137 A321neos on order from Airbus at the end of September, according to its latest fleet plan. Executives, while acknowledging that there are delays, has not said how many of the airline’s deliveries are late.

“Every plane last year and this year is delayed,” Air Lease Corp. Executive Chairman Steven Udvar-Hazy said in November. A321neos, for which Delta significant orders, are averaging six to seven months late, Hazy added.

Delta also has an order for 100 737-10s from Boeing. However, the delivery timeline is uncertain pending U.S. Federal Aviation Administration certification of the aircraft.

The airline first unveiled the deal for 29 former Lion Air 737-900ERs from lessor Castlelake, along with seven used Latam Airlines Airbus A350s, in 2021. Both deals were billed as part of its fleet renewal plan, and would help backfill some of the planes Delta retired during the pandemic but at much lower capital costs than new Airbus or Boeing models. it acquired four more used 737-900ERs in the second quarter.

Edward Russell

Fleet Briefs

  • Croatia Airlines has finalized an order for six Airbus A220-300s as part of its plan to streamline its fleet around the small narrowbody aircraft, which was first unveiled in October. The carrier will lease another nine A220s for a total commitment of 15 aircraft. Croatia Airlines operates 13 aircraft currently.

Edward Russell

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Feature Story

In the rabidly competitive airline industry, profits don’t come easy. Europe’s low-fare giant EasyJet, however, has found a way.

Last week, the orange-colored carrier reported financial results for its fiscal year that ended in September (it reports just twice a year, not quarterly). To summarize, EasyJet posted a big operating loss during the first half (October 2021 to March 2022). It then negated that with a near-identical profit from April-to-September. Its full-year operating result was thus more or less break even. But the spring and summer peak periods were pretty good, delivering a solid 12 percent operating margin. That was better than the margins recorded by International Airlines Group (11 percent), Air France-KLM (9 percent), and the Lufthansa Group (8 percent) during the same six-month period.     

To be clear, EasyJet is no Ryanair when it comes to profitability. Never has been. Probably never will be. Ryanair’s operating margin over that same April-to-September period? 25 percent. And unlike EasyJet, whose 12 percent figure marked a five-point deterioration from the same period in 2019, Ryanair earned higher margins this spring and summer than it did in 2019. O’Leary clearly has the better business model.

But that doesn’t bother Johan Lundgren, the CEO EasyJet since late 2017 and who previously worked at the tour operator TUI. Lundgren’s EasyJet has found a way to earn solid if unspectacular profits, largely by building a network that avoids excessive overlap with Ryanair. Instead, EasyJet competes more directly with higher cost carriers — including British Airways, Lufthansa, and Air France — and tour operators like TUI.

Take the London Gatwick to Palma route as an example. Last quarter, it was EasyJet’s second busiest by number of seats, according to Diio by Cirium. Its two main rivals on the route are British Airways and TUI. Wizz Air, once with Ryanair-like margins, has jumped in more recently. But unlike Ryanair, Wizz has failed to take advantage of the demand recovery, losing money in the combined spring and summer periods (more precisely, Wizz Air’s spring was lousy; its summer was pretty good). Remember too that Thomas Cook, once a major EasyJet rival, collapsed just before the Covid crisis. EasyJet’s busiest route today is Milan-Catania in Italy, where it has joined Ryanair and Wizz preying on the old Alitalia and its successor ITA Airways. Italy, in fact, is EasyJet’s third largest country market. The UK is number one. And second is France, where it makes a living causing headaches for Air France, not an airline known for low costs.   

Though it shuns London Heathrow and no longer serves Frankfurt, EasyJet isn’t shy about concentrating capacity in higher-cost airports. It’s especially fond of slot-controlled airports where competitive pressures are constrained, allowing for higher yields. The airline has spent years amassing large slot portfolios at London Gatwick, most importantly, but also Paris Charles de Gaulle and Orly. It recently won more slots in Lisbon, where it impressed officials with its promise to fly 235-seat Airbus 321neos, bringing more capacity than what Ryanair could with its 189-seat Boeing 737 Maxes, or Vueling could with its 180-seat A320s. EasyJet says its financial returns are highest flying from slot-controlled airports, including those serving leisure markets in Greece, a major area of expansion for the airline.

Switzerland, meanwhile, is another high-cost airline market where EasyJet happily competes, undercutting — in this case — Lufthansa Group’s subsidiary Swiss. Geneva, in fact, is EasyJet’s second busiest airport after Gatwick this quarter. As a major ski destination, Switzerland is also an important offpeak winter market. Summer beach markets in Portugal, Spain, Italy, and Greece, however, are where EasyJet shines, especially from slot-controlled (read higher-yield) origin markets like London and Milan. It’s big in secondary UK cities as well, and in UK domestic markets where Ryanair no longer competes and Flybe is a shadow of its former self. British Airways too, is flying many fewer domestic UK seats today than it was pre-pandemic. A current area of strength for EasyJet are longer-haul leisure flying to markets like Turkey and Egypt, where Brits and Europeans can still take advantage of favorable currency trends.  

There’s more to EasyJet’s success than its network. No less critical are ancillary revenues, which have grown sharply on a per-seat basis from even 2019. The airline has added more products and services to sell. It’s improved its pricing and distribution. Ancillaries now generate about 30 percent of total revenues, up from closer to 20 percent prior to 2020. A big change came last year, when the airline started charging for carry-on bags stored in overhead bins. Looking ahead, a partnership with Datalex, which helps airlines merchandise their ancillary products, aims to yield future benefits.      

At his previous job with TUI, Lundgren gained experience with tour packaging. He’s since adopted the model within EasyJet, launching a Holidays division in 2019. The thinking: Nearly 85 percent of the airline’s customers are flying for leisure, typically booking a hotel and other travel products alongside their flight. So why not utilize EasyJet’s website to sell those products itself, earning commissions from other travel companies? It’s a line of business that’s proved nicely profitable for British Airways, Virgin Atlantic, and the British low-cost carrier Jet2. Sure enough, it’s proving nicely profitable for EasyJet too. In its latest fiscal year, EasyJet Holidays earned a nearly $50 million operating profit on $450 million in revenues, good for a double-digit margin. Profits are on track to eventually hit $120 million. Management expects the number of passengers booking a holiday package with EasyJet to grow some 30 percent next year, with plans to expand the concept to more countries across Europe, beyond the UK. It also claims EasyJet Holidays runs significantly higher margins than the comparable businesses at British Airways, Jet2, and TUI, not to mention the online UK travel agency Loveholdiays. Regarding EasyJet Holidays, Lundgren told investors during the company’s earnings call: “It’s the fastest-growing, highest-margin, lowest-cost travel company in the UK with a model that is really based on very, very little risk.” In fact, the company even expects the Holiday division to make money this winter.

Making money during winters certainly doesn’t come easy for European airlines. But EasyJet thinks it can at least reduce losses, in part with help from its Holidays division but also with changes to its labor contracts. A portion of its pilots, for example, have voluntarily moved to seasonal contracts, meaning EasyJet won’t incur their wage costs during the offpeak. At the same time, a portion of its planes now operate from seasonal bases — often in lower-cost markets in southern Europe — that don’t operate from November through February.

Controlling costs, of course, isn’t just a wintertime imperative. Even if more tolerant of higher-cost airports than Ryanair, EasyJet nevertheless depends on maintaining a significant cost advantage versus the British Airways, TUIs, and Air Frances of the world. Cost control is unfortunately becoming more difficult due to inflationary pressures. Wages are up. So are airport- and aircraft-related costs. Fuel is a wildcard, with recent declines in oil prices perhaps offering some relief. More reliably though, EasyJet will look to offset inflation by sustaining its much-improved operational performance and by growing capacity, thereby improving fleet and crew utilization. In addition, EasyJet’s fleet evolution will bring unit cost savings in the years ahead.

The airline currently operates about 320 planes, 94 of those being out-of-fashion Airbus A319s with prior-generation engines. The airline plans to replace 40 percent of these in just the coming three years, mostly with larger and lower-unit-cost A320neos. It has 168 Neos on firm order, including some A321s, renowned for their cost efficiency. These larger A321neos will fit well flying easy-to-fill, longer-haul leisure routes to the eastern Mediterranean, for example, from slot-controlled airports where capacity growth is otherwise difficult. More than 80 percent of EasyJet’s all Airbus narrowbody fleet, importantly, still flies with prior-generation engines (Ceos, in other words, not Neos). For the record, roughly 40 percent of its planes are leased. It owns the others, boosting a low-debt balance sheet judged investment grade by key ratings agencies.

Unlike Ryanair or Wizz, EasyJet remains smaller today than it was in 2019. Diio shows its fourth quarter seat capacity down 16 percent from three years prior. Much of that flying has come out of the German market, having exited not just Frankfurt but also Düsseldorf, Stuttgart, and other cities (it’s gone from Vienna too). It’s a lot smaller in Berlin now as well. Other places where it’s still large but much smaller than it was include London Luton, London Stansted, Amsterdam, Barcelona, and Venice. On the other hand, it’s grown aggressively in Greece, Portugal, Turkey, and North Africa (specifically Egypt, Tunisia, and Morocco).

Demand overall continues to be strong, albeit with some need to discount and promote during offpeak travel periods this winter. Early booking trends for Easter, always a busy time for EasyJet, appear positive. Business travel, accounting for an estimated 18 percent of EasyJet’s traffic, is picking up. Roughly three quarters of all bookings come from returning customers who’ve flown EasyJet in the past two years. Demand trends are likewise positive for the Holidays division, where people tend to book rather early.

What about the increasingly troubled UK and EU economies? “EasyJet does well in tough times,” said Lundgren in a statement announcing the company’s financial results.

And what about the heightened talk of looming European airline mergers? Wizz, after all, even tried to buy EasyJet last year. Lundgren is skeptical. “Even if you were to speculate on these things,” he said during the earnings call. “Who would take over whom? You’re looking at some of these debt positions, and it’s not like you’re thinking that some of them are in a great position to do transactions as you come through this.”

Mergers, Lundgren’s essentially saying, aren’t easy.

Jay Shabat

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By the Numbers

Airlines are ranked by operating margins for the July-to-September 2022 period, or calendar third quarter, excluding special accounting items.

  • Pegasus, a low-cost carrier in Turkey, was turbocharged by booming inbound tourism and access to Russian traffic now off limits to European Union carriers; Turkish Airlines benefitted from these developments as well.
  • Robust European tourism to markets like Greece propelled Ryanair and Aegean to outsized summertime profits; Wizz Air recovered from an awful second quarter.
  • Korean Air was still buoyed by cargo strength; Copa built back its pre-crisis margin muscle; and Alaska took the prize as the most profitable U.S. carrier.
  • China’s leading airlines were buried at the bottom with heavy losses amid country’s Covid Zero policy.
  • Who’s not included here? Mostly airlines that don’t report quarterly, including EasyJet and Emirates (which report only semiannually), and non-public carriers like Virgin Atlantic that don’t report at all.

Source: Airline Weekly analysis of company financial data

Jay Shabat

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