Issue No. 893

The German Exception

Why Germany Lags Europe's Air Traffic Recovery

Pushing Back: Inside the Issue

Southwest has long been viewed as the gold standard for airline customer service. But not this time. For the airline and millions of its passengers, 2022 ended in misery. Dallas-based Southwest canceled nearly 17,000 flights, part of an epic operational meltdown that might rank as the industry’s worst ever. It was surely the costliest ever, erasing an estimated $725-825 million (!) just during the fourth quarter. That includes lost revenue, customer reimbursements, and additional labor expenses. For context, Southwest, in 2019, earned about $3 billion in operating profits.

Bad weather was certainly a challenge in key Southwest markets like Chicago and Denver. But the carrier certainly wasn’t alone in facing Mother Nature’s wintry wrath. It was alone, however, in failing to manage the situation. A central problem was an inability to get planes and crews in the right places, with the magnitude of distress overwhelming its SkySolver crew scheduling system. Southwest, keep in mind, runs a unique point-to-point flight network that’s more complex to operate than the hub-and-spoke networks more typical of carriers its size (Southwest currently flies a fleet of 758 Boeing 737s, according to the latest Cirium fleet data). The uniqueness of its operation, incidentally, makes it harder to find ideal off-the-shelf solutions from software vendors (for years it built many key systems in-house, which presented its own challenges, including the ability to recruit and retain leading IT talent).   

To be clear, it’s highly unlikely that this incident — however large the short-term reputational and financial impact — results in long-term demand destruction. That’s just the nature of the product — people fly airlines not because they want to fly them, but because they need to get somewhere. And for countless journeys, Southwest will continue to be the most convenient option and (albeit to a lesser extent these days) most affordable option. Its meltdown might, however, trigger new federal regulations that could burden all airlines.

In the meantime, Southwest’s pilot union SWAPA is mercilessly castigating management as it clamors for a new contract. It points to alleged past failures to adequately invest in IT, evoking what Airline Weekly itself mentioned in a 2017 feature story: “Southwest’s information technology,” we wrote at the time, “was becoming woefully out of date.”

We’ll hear more from Southwest when it presents its fourth quarter earnings (earnings that will be badly tarnished) later this month. But not before — as usual — Delta tosses the ceremonial first pitch. It will open earnings season this Friday, which happens to be Friday the 13th. But don’t worry. Delta won’t present investors with anything quite so frightening as Southwest’s disruption costs. On the contrary, it most recently said to expect a roughly 8 percent operating margin for all of 2022.

Ryanair, for its part, now expects to report stronger-than-expected financial results for the calendar fourth quarter. It pointed to “strong pent-up travel demand over the holiday season for the first time in 3 years.” Michael O’Leary and company will report on January 30. The Brazilian LCC Gol — like Ryanair and Southwest a critical Boeing customer — reiterated its expectation of a 7 percent operating margin for 2022. It more speculatively told investors it would earn double that in 2023.

Expect a lot more airline action as the new year proceeds. China’s market is finally reopening. Germany’s market can’t seem to revive. Leisure markets are still buzzing with strong demand. And after a year of intense fuel price pressure, oil now trades in the rather comfortable $70-80 per barrel range.  

Airline Weekly Lounge Podcast

Southwest had a terrible, horrible, no good, very bad holiday season. The cancellation of 15,000-plus flights between Christmas and New Years will weigh on its fourth quarter results, but consumers' memories are short and the airline will survive. Plus, what European country does Eurocontrol's latest data show led the continent's air traffic recovery last year? Listen to this week’s episode to find out. A full archive of the 'Lounge is here.

Weekly Skies

Southwest Airlines faces a $725-825 million hit to its pre-tax income in the fourth quarter from its operational meltdown during the year-end holiday season.

The Dallas-based carrier disclosed the initial hit last week. In addition to the top line reduction, which will push its fourth quarter net result into the red, Southwest estimated it lost $400-425 million in revenue as a result of the event where it cancelled roughly 16,700 flights over the Christmas and New Year holidays.

The December quarter hit was higher than most Wall Street analysts estimated. Bank of America analyst Andrew Didora wrote last week that the disruptions could cost the airline between $600-700 million in lost revenue and higher costs in the fourth quarter. And Raymond James analyst Savanthi Syth put the lost revenue from the operational distress at an up to 9 point reduction in the quarter, or by as much as $515 million based on Southwest’s revenue outlook in December.

“Our desire is to go above and beyond,” Southwest CEO Bob Jordan said on December 30, regarding how the airline plans to make travelers whole. That would include, he added, refunding tickets and covering disrupted travelers’ rental cars, hotel rooms, meals, and tickets booked on other airlines.

The full cost of all of that — the refunds, rental cars, flights, hotels, plus all the expenses incurred in Southwest’s own business, like repositioning crews and planes — will play out over several quarters. Southwest is expected to offer additional details on its 2022 earnings call on January 26.

In addition to promising to reimburse any added expenses travelers incurred during the disruption, Southwest has also offered those affected vouchers and points to get them to return. For example, every traveler has been offered 25,000 Rapid Rewards points, which the airline said is equal to at least $300.

“We are going to be putting Southwest Airlines under a microscope in terms of their delivering these kinds of reimbursements and refunds to passengers,” U.S. Secretary of Transportation Pete Buttigieg said on the Today show on December 30.

Buttigieg, in a video posted on December 29, also said that where Southwest does not refund and reimburse travelers where it is obligated to, the Department of Transportation would “penalize Southwest, as we would any airline, to the tune of potentially tens-of-thousands of dollars per violation.”

DOT penalties are rarely material for large airlines. In 2022, the agency assessed over $8 million in total penalties, which it touted in November as “the largest amount ever issued in a single year.” Southwest, for perspective, made $6.2 billion in revenue in the third quarter of 2022 alone.

And, finally, there is the lingering fallout among consumers from the meltdown. Many are likely to harbor some ill-will towards Southwest for some time to come. Syth at Raymond James expects a hit a roughly 2 point unit revenue hit to Southwest in the first quarter as travelers book elsewhere, and that the situation will moderate in the second quarter.

Southwest “will recover,” wrote Marty St. George, the commercial chief at Latam Airlines Group and a former long-time JetBlue Airways executive that worked at the airline during its own operational disaster in 2007, tweeted on December 28. “It will mean a lot of work, a lot of IT, and a lot of soul searching but [Southwest] will recover.”

Edward Russell

Southwest’s Meltdown a Technology Warning for Airlines

The primary reason for the operational meltdown at Southwest of the holidays was its outdated optimization technology, which the airline has outgrown over the past couple of decades. Company executives have admitted to prioritizing other things over investing in technology for operations, despite warnings from staff and some close calls previously. Paired with a staff shortage, the issue became too much for Southwest’s system to handle.

“This one clearly pushed it over the cliff,” said Robert Mann, airline industry veteran and president of aviation consultancy R.W. Mann & Co. “While they’re working this problem out, they’ve got to be absolutely certain that this never happens again.”

But whether this can happen again is a legitimate question for the entire airline industry. Being behind technologically is a common criticism experts make of the aviation industry.

Southwest’s disaster over the holidays should serve as a reminder for other carriers to take stock of their operations to ensure nothing like this happens again, and when it comes to looking where to cut costs, leave the technology alone.

Now the question is what Southwest will do next. There is always a backlog of updates that need to happen in the airline industry, but they get pushed aside in a system where safety and regulatory issues are paramount. It appears that was the case for Southwest — to the extreme. 

Unions said they had been warning Southwest of tech inadequacies for years and that the problem could have been avoided if the company would have invested in its own operations. Southwest had invested in some new technology, mostly customer-facing applications like self-service capabilities, as outlined in a public filing in early 2022. The filing also said the company had deferred a “significant number of technology projects” during the pandemic, though it did finish the “long-awaited milestone” of establishing a single system for all aircraft maintenance and record-keeping.

Jordan told employees in a memo obtained by CNN that the airline has a lack of tools, and there has been talk internally about the need to modernize further. 

The main piece of failing tech was the airline optimization software called SkySolver, which is supposed to assign crew to flights using a complicated mathematical system. Southwest has grown beyond the capabilities of that old technology, which it began using when it was much smaller. On top of that, the airline flight crew has no front-end technology to input its whereabouts into that system, meaning the crew has to call a crew scheduler on the phone to share that information.  

The shortcomings of that system and its inability to catch up with the problem snowballed into the mass cancellation, which was needed to allow the system to reset. 

“As good as these companies are, as good as their brand halos seem to be, they all have warts that maybe people don’t see every day, but boy, they become pretty clear when you have a problem that involves them,” Mann said.

Hand-in-hand with the tech issues, Southwest had a lack of workers that led to the CEO declaring a company state of operational emergency in Denver just before Christmas. The airline has relied on employee overtime to staff operations. And the union representing ground workers at Southwest said many of the employees had worked up to 18-hour days during the holiday season, and some experienced frostbite. 

The company sent a memo to its Denver ramp agents on December 21 threatening their jobs if they did not comply with the operational emergency rules.

“Looking particularly at that memo to the Denver staff, I think that’s illustrative of a serious cultural failure,” Mann said. During a time when the entire industry is facing a worker shortage, he believes that approach was counteractive. 

“This should have been done the way many other carriers did it, particularly after last summer. A lot of them decided to use a carrot, not a stick. They would be able to offer incentives for peak demand,” Mann said. “They don’t actually pay very much on those incentives, but at the end of the day, they get people to volunteer for work on their vacation days. The result is you take the stress level right out of the airline, and you get better results.”

An immediate solution to keep a backlog from occurring would be to put a front end on the optimization system so employees don’t have to use the phone to update their whereabouts. Long term, the company would need to either build or contract an optimization system that it can grow into over its next phase of development, not one that it will outgrow again. 

It would likely take months to implement such a system. 

“We’ve already taken immediate actions to mitigate the risk of this ever happening again, and the review work will inform additional actions and investment as well,” CEO Jordan said on January 5. “We’ve asked our unions to participate in this review effort as well.”

Southwest will also need a plan to have more staff on hand. In response to a question about employee attraction and retention, an airline spokesperson said: “We’re proud to be an employer of choice and hired more than 17,000 new employees in 2022 with more hiring planned in 2023.”

The Department of Transportation, as well as Democrats in both the House and Senate, have already they will investigate Southwest’s holiday meltdown.

Justin Dawes

In Other News

  • Ryanair, citing “stronger than expected peak” holiday demand, now expects a roughly €200 million ($212 million) net profit in the December quarter. With the adjustment, the discounter forecasts a profit of €1.33-1.43 billion in the fiscal year ending in March, an at least €125 million increase. Ryanair group CEO Michael O’Leary had previously spoken cautiously on the outlook due to the concerns of an unexpected Covid surge, similar to what the industry saw over the 2022 year-end holiday season.
  • Gol has outlined its first guidance for the 2023 calendar year. The Brazilian carrier expects revenues to increase 32 percent year-over-year, and an operating margin of roughly 14 percent. Unit costs excluding fuel are forecast to decrease by nearly 3 percent on 20-25 percent more capacity. And average fuel expenses are forecast to decrease by roughly 9 percent to 5.3 Brazilian reais ($0.97) per liter. Gol plans to fly roughly 120 aircraft during the year — up from 102 at the end of 2022 — including ending 2023 with 53 new Boeing 737 Maxes.
  • Hawaiian Airlines added two additional Boeing 787s to its existing order, bringing the total to 12. Hawaiian is acquiring the -9 version of the Dreamliner. The airline, however, won’t start taking deliveries until the final quarter of this year. It was supposed to get its first plane last quarter. The deferral likely reflects Hawaiian’s preference to give some more time for Asian markets to recover.
  • The new $2.7 billion Terminal A at Newark Liberty International Airport will open its doors to travelers on January 12. Air Canada, American Airlines, JetBlue, and United Airlines will initially operate from the terminal with Delta Air Lines joining them later this year. The old Terminal A, which opened in 1973, will be demolished. The opening of the facility was planned for December 8, however, it was delayed over concerns of possible teething issues affecting operations during the peak year-end holiday travel season.
  • In people moves, Etihad Airways has named Arik De, who joined the airline from TAP Air Portugal in April 2022, as its new chief revenue officer. De is the first revenue chief at Etihad.

Edward Russell

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Routes and Networks

The Chinese government lifted Covid-era travel restrictions on January 8. While international travel demand to the country is expected to surge, airline schedules will take some time to recover, including in the big U.S.-China market.

Air China, American, Delta, Hainan Airlines, and United have all expressed interest — both officially and behind closed doors — in resuming some of their pre-pandemic schedules between the U.S. and China, Airline Weekly understands and U.S. regulatory filings show. However, flight limits imposed on both sides of the Pacific during the crisis remain in place and bar a quick resumption of nonstop air service between the countries.

“The old bilateral is being completely ignored,” one senior airline official said who was not allowed to speak publicly on the matter.

Prior to the pandemic, U.S. airlines were allowed nearly 23 daily flights to and from China, and Chinese carriers nearly 26 daily passenger flights under a bilateral agreement reached in 2007. The limits were primarily on flights to and from Beijing, Guangzhou, and Shanghai — China’s three largest cities — while flights to so-called zone three destinations in China, like Chengdu and Xi’an, were unlimited.

In 2019, United was the largest airline in the market with up to 10 daily nonstop flights, followed by China Eastern Airlines, Air China, Hainan, and Delta, according to Diio by Cirium schedules.

Nonstop flights between the U.S. and China were among the first to end in the early days of the Covid crisis in 2020. Today, both governments allow the other country’s airlines to operate only several nonstop flights a week — far below the multiple daily flights flown just four years ago.

The number of flights allowed, along with so many other matters, are caught up in the tensions between China and the U.S. Issues include the trade war that began under the Trump administration, and the delays by Chinese authorities allowing Boeing’s 737 Max to return to passenger service after it was grounded in 2019. The latest volley is the U.S.’s decision in late December to require a negative Covid test from all inbound travelers coming from China.

China also requires a negative PCR test for all inbound international travelers regardless of country of origin.

Air China and Hainan have both applied to U.S. authorities to begin ramping up their schedules in the coming weeks. The former is seeking approval from the Department of Transportation to resume daily flights between Beijing and both Los Angeles and New York JFK on January 17, and several weekly flights between the Chinese capital and both San Francisco and Washington, D.C., in March, a regulatory filing on January 4 shows. The latter wants to resume several weekly flights from Beijing to Boston and Seattle, as well as Shanghai to Boston, and Chongqing to New York JFK, in February.

However, sources indicate that the DOT is unlikely to grant these requests until the Chinese regulator, the Civil Aviation Administration of China, allows U.S. airlines to similarly ramp up their flight schedules.

American, Delta, and United have, for now, published schedules that would see them resume two, four, and up to 10 daily U.S.-China flights, respectively, at the end of March, Diio data show. These schedules are not firm and will change, Airline Weekly understands.

A United spokesperson confirmed that flights between the two countries remain restricted by both governments, and added that the airline is currently allowed only four weekly U.S.-China flights.

Other airlines, not hindered by Sino-American politics, are already adding flights. Cathay Pacific and Etihad Airways have unveiled expanded schedules to China in recent days. Hong Kong-based Cathay “will more than double its flights” to the mainland on January 14 to 61 weekly frequencies — or nearly nine daily flights — with plans to increase service to more than 100 weekly frequencies in February.

However, even with these increases, analysts at both OAG and Raymond James have warned that many international flights to China will take time to resume. OAG, in a January 3 report, said they expect more additions to second quarter schedules than first as “airlines and travelers work through the logistics of restarting” travel.

And Raymond James warned on January 4 that the negative Covid test requirement to enter China, coupled with the country’s existing visa rules, will likely “dampen” the initial leisure travel recovery. Leisure has been a mainstay of the pandemic air travel recovery around the world.

Edward Russell

Route Briefs

  • British Airways plans four new routes from London Gatwick with its BA Euroflyer subsidiary this year. The airline will connect Gatwick to Corfu and Mykonos in Greece, and Montpellier in France with summer season flights beginning from May 27 through June 10. BA Euroflyer will also connect Gatwick and Innsbruck, Austria, next winter from December 8, 2023. The airline will compete from Gatwick with EasyJet on all of the routes, and with Wizz Air to Mykonos, per Diio. In addition, British Airways serves Corfu, Myokonos, and Innsbruck from London Heathrow.
  • Icelandic discounter Play Airlines is adding four new European destinations to its map: Aarhus, Aalborg, and Billund in Denmark, and Dusseldorf in Germany. Flights on the routes will operate less than daily and begin from June 8-15. Play faces no competition on two of the routes — Reykjavik to Aarhus and Aalborg — and will compete with Eurowings to Dusseldorf, and Icelandair to Billund, per Diio. The additions won’t be Play’s last this summer; Airline Weekly understands that another North American destination — it’s already adding Washington Dulles in April — is in the offing.
  • And TAP Air Portugal will boost connections to Angola this summer with a new nonstop between Porto and Luanda from May. The twice-weekly flights will complement its existing nonstop on the Lisbon-Luanda route. TAP also plans to increase service between Porto and Newark, a hub for its Star Alliance partner United, to daily this summer. TAP will compete with TAAG Angola Airlines on the Porto-Luanda route, per Diio.

Edward Russell

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Feature Story

It’s 2023, and most of the least recovered airline markets are still found within East Asia. Hong Kong’s scheduled seat departures are 63 percent fewer this quarter than they were in the first quarter of 2019, according to Diio by Cirium. From Taiwan, seat capacity is down 42 percent. Thailand is down 32 percent, Malaysia 26 percent, Singapore 25 percent … and so on. But what about markets outside of Asia? Which has been slowest to recover?

The answer to this question — ignoring small markets with fewer than 2 million quarterly seats — happens to be what used to be the world’s fourth largest airline market. Germany, with roughly 24 million seats scheduled this quarter, is now the world’s eighth largest country market, a full 32 percent smaller than it was in early 2019. By contrast, the U.S. market (based on first quarter schedules) is 1 percent larger. India is 3 percent larger. The UK is only 10 percent smaller. Even Finland, whose airline market had heavy exposure to Russian airspace, is only 28 percent smaller. Nor is this a momentary first quarter fluke. Germany’s seat counts were down 27 percent last summer (third quarter 2022 versus 2019). And while the decline eases to 19 percent as things stand now for next quarter, that’s still a steeper decline than almost all major markets ex-Asia.

What’s wrong with Germany?

The most obvious explanation is the country’s heavy reliance on corporate fliers, and by contrast, its relatively low volume of inbound tourism. Globally, the post-pandemic air travel resurgence has been dominated by leisure traffic, boosting the fortunes of markets like Greece and Spain but doing much less for markets like Germany. Europe’s largest economy, rather than relying on tourism, relies instead on manufacturing, a sector hard hit by spiking energy costs linked to the Russia-Ukraine conflict. German manufacturers, including global auto giants like Volkswagen and Daimler, have simultaneously grappled with parts shortages (like semiconductors) and weakening demand from China, a critical export market. Business Travel News, which publishes an annual ranking of the top corporate travel spenders, features the German conglomerate Siemens as number 12 worldwide on its most recent list, just behind Apple. SAP, the software giant based near Frankfurt, ranks number 74. Recession-threatened companies like these are surely under pressure to cut their travel budgets.

Germany’s airline market, meanwhile, had considerable direct exposure to Russia. Aeroflot and its Pobeda subsidiary, for example, once operated more than 20 different routes to Germany. On the eve of Russia’s Ukraine invasion, Lufthansa flew to Moscow from both Frankfurt and Munich, and from Frankfurt to St. Petersburg as well. All of this is gone now, contributing to Germany’s post-Covid decline in seat capacity. The German-Ukraine airline market was itself rather sizeable, contested by both Ryanair and Wizz Air.

Speaking of low-cost carriers, Ryanair has abandoned many German markets, including Dusseldorf, Frankfurt, Munich, and Stuttgart. Even more dramatic is EasyJet’s near total loss of interest in Germany, with first quarter seat capacity barely 20 percent of what it was pre-crisis. Wizz Air, though its seats from German airports are up a lot from 2019, left the important Frankfurt market in 2020.

But it’s Lufthansa and its subsidiary airlines that account for the majority of Germany’s lost seats. To be clear, Lufthansa is performing well financially, reminding in its latest earnings call that just a quarter of its traffic originates in its home country. For Germany’s airports though, Lufthansa’s draconian capacity cutting is painful. Based on the latest data from the German Airports Association (Flughafenverband), passenger volumes for the month of November were down 28 percent nationwide, relative to November 2019. Frankfurt, thanks largely to recovering intercontinental markets like North America, suffered a November drop that was somewhat less extreme (down 19 percent). Munich fared worse (down 25 percent). Dusseldorf and Berlin were worse still (down 37 percent and 39 percent, respectively).

Airports with the most domestic exposure are suffering most. Incredibly, Germany’s domestic airline market is less than half the size of what it was pre-pandemic. Diio figures show that about 61,000 domestic flights were scheduled in first quarter 2019. This quarter, airlines plan to fly just 29,000. EasyJet is a big reason why, fleeing the German domestic market entirely (it was once a big player). This and other retreats leave Lufthansa Group as the only sizable player left in the market, and it too has slashed domestic capacity. The explanation here is straightforward: It’s about Germany’s decision, made before the Covid crisis, to sharply increase shorthaul aviation taxes. Other European countries have moved in this direction as well, eager to substitute air travel with rail travel to cut carbon emissions. To be clear though, Germany’s international flights — and even longhaul international flights — are likewise far off their pre-pandemic marks. The declines just aren’t quite as exaggerated as the domestic drop.   

There are, for sure, some airlines that have grown their footprints in Germany post-pandemic. Wizz Air, as mentioned, is one, expanding its presence in Hamburg and Memmingen, for example, more than offsetting the impact of its withdrawal from Frankfurt. Turkish Airlines, having grown its seat capacity to Germany by 20 percent from the first quarter of 2019, is now the country’s third busiest airline after Lufthansa and Ryanair. Also from Turkey, Pegasus Airlines has expanded to Germany. United, a close Lufthansa ally, has added new routes including Denver to both Frankfurt and Munich. Aegean, Vueling, and Qatar Airways are some other carriers larger in Germany now than they were four years ago.  

Four years from now, will Germany’s airline industry still be smaller than it was before Covid? The climb back will be steep.

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