Issue No. 899

Champion of the Americas

Copa Is Back to Its Exceptional Pre-Pandemic Profits

Pushing Back: Inside the Issue

Any doubts about Air India’s ambition to become a leading global airline? Not after the massive order for Airbus and Boeing planes it announced last week. In the earnings space, Air Canada still can’t seem to figure out how to make money in the winter. Norwegian, another wintertime struggler, is nevertheless showing signs of promise as it seeks to prey on SAS’s misfortunes. Finnair has many misfortunes of its own but likewise showed signs of progress last quarter. And, Copa … Wow. Enough said.

More earnings this week, including a look at why Air France posted higher margins than KLM, the latter being Air France-KLM's historically stronger performer. Also, perhaps some news on the unfolding Viva Air saga in Latin America? Will one of its many suitors execute a takeover? There could be some news as well from regulators on pending merger deals, including JetBlue’s plan to buy Spirit and Korean Air’s plan to buy Asiana.

Weekly Skies

JetBlue Airways has one big bargaining chip that it can offer the U.S. Department of Justice in exchange for approval of its proposed merger with Spirit Airlines: Its alliance with American Airlines.

The alliance card, which until now JetBlue executives have said is off the table, may need to be played following reports that the DOJ is preparing to sue to block the $3.8 billion JetBlue-Spirit merger. Because, frankly, it’s a good trump card to sway the firmly anti-consolidation, pro-competition regulator in favor of the deal that JetBlue executives view as critical to the airline’s future.

“I think that is more potent,” said Dr. Bijan Vasigh, a professor at Embry-Riddle Aeronautical University’s David B. O’Maley College of Business, referring to the alliance as a more potent competition concern than the proposed merger.

“American and JetBlue are dominating the northeast U.S.,” he added.

The DOJ, American, and JetBlue are awaiting a judge’s decision in the regulator’s lawsuit to break up the alliance, which was controversially approved in the waning days of the Trump administration. Many expect a ruling in favor of the airlines, and against the government.

All of this back and forth is over a relatively small portion of the U.S. market. JetBlue and Spirit combined carried just over 8 percent of all domestic passengers during the year ending in November, the latest Bureau of Transportation Statistics via Cirium show. The next smallest carrier, United Airlines, had a nearly 16 percent share, and the Big Four — American, Delta Air Lines, Southwest Airlines, and United — had a combined 79 percent share.

“This isn’t Pepsi and Coke merging,” JetBlue President and Chief Operating Officer Joanna Geraghty told Reuters earlier in February.

A JetBlue spokesperson last week said they “continue to work through the regulatory process to demonstrate how this merger will increase competition in the airline industry.”

The DOJ, which did not comment on the reports, is likely more targeted in its review than the national airline market. The northeast and Florida are where a combined JetBlue-Spirit would have the greatest concentration, and the former is the center of JetBlue’s alliance with American. Together, American and JetBlue had a 51 percent share of U.S. domestic passengers in Boston, and 35 percent at the three main New York airports combined during the year ending in November, according to BTS data. JetBlue and Spirit together had a 46 percent share of travelers in Fort Lauderdale.

To assuage any concentration concerns, JetBlue has offered to give up all of Spirit’s assets in Boston and New York, as well as five gates at the Fort Lauderdale airport. Spirit uses two gates in Boston for up to 16 daily departures, according to Diio by Cirium schedules. It has 16 slot pairs at New York’s LaGuardia airport, and operates up to 24 daily departures from Newark Liberty airport.

Asset divestitures are the DOJ’s tried-and-true method of blunting airline mergers. When American and US Airways combined in 2013, the regulator filed suit to block the deal that August before reaching a deal in November where the airlines gave up slots and gates at airports across the U.S. A similar agreement was reached for the merger of United and Continental Airlines in 2010.

Gates, slots, and runway timings in Boston and New York could be a big boost from other budget airlines. Frontier Airlines, the next largest U.S. ultra low-cost carrier after Spirit — and one-time merger partner — operates up to just two daily flights from Boston and three from LaGuardia; it does not serve Newark, Diio shows. Allegiant Air and Sun Country Airlines are each even smaller in Boston and New York. And budget startups Avelo Airlines and Breeze Airways do not serve either market directly today.

American and JetBlue have expanded in New York under their alliance. The carriers’ combined seat capacity at LaGuardia is up 24 percent in the first quarter compared to four years ago before their partnership and the Covid-19 pandemic, Diio data show. Their combined seats are also up 20 percent at New York’s JFK airport, and 12 percent at Newark.

However, in Boston, American and JetBlue have shrunk with combined seats down nearly 12 percent over the same four-year period, according to Diio. One potential reason for that decline is the lack of slot use-it-or-lost-it rules at Boston’s Logan airport versus the New York-area airports that means flights are coming back in line with travel demand. Or, in a more pessimistic view, it could be because American and JetBlue want to depress capacity in order to raise fares.

The DOJ has used airline partnerships as a bargaining chip in merger negotiations in the past. In 2016, the regulator forced Alaska Airlines to all but end its codeshare with American in exchange for approval of the former’s merger with Virgin America. At the time, the DOJ described the settlement as creating the incentive for the combined Alaska-Virgin America to “vigorously compete” with American. (Alaska and American reformed their codeshare in 2020)

What’s different today is JetBlue’s pact with American is much deeper, and understood to be more lucrative, for the airline than the Alaska-American tie up was for Alaska seven years ago. While JetBlue executives have repeatedly declined to put numbers to the partnership, they have emphasized the airline’s growth in New York. Without American’s slots, JetBlue executives have rightly indicated that the airline could not add new flights at either JFK or LaGuardia airports.

“We’re very pleased with the performance of the [northeast alliance] and the acceleration that’s given, frankly, to our New York markets and their recovery,” Geraghty said in January.

Another option on the table for JetBlue and Spirit is something of a throwback to the former’s launch in 2000. The airlines could promise to grow in certain markets — for example, smaller cities that have lost air service due to the industry’s pilot shortage — as a condition of their merger. JetBlue made a similar pledge to Senator Chuck Schumer (D-N.Y.) to serve smaller cities in New York state, including Buffalo and Syracuse, in exchange for the slots it needed at JFK airport for its launch 23 years ago.

JetBlue is already promising growth if the merger is approved. Days after news of the DOJ’s likely challenge, the airline announced plans for new service to Tallahassee, Fla., from January 2024. Tallahassee, the capital of Florida, is a small city that has lost air service since the pandemic began, notably flights on United. In addition, JetBlue promised to add roughly 30 routes currently not served by itself or Spirit from Fort Lauderdale, including new service to Europe if the merger is approved.

And, earlier in February, JetBlue hinted at potential new service to Hawaii from Los Angeles following the merger.

Ultimately, it will be up the the DOJ to decide what would be enough to placate its monopoly concerns. Embry-Riddle’s Vasigh said that this measure changes from administration to administration, with President Biden having taken a very pro-competition position.

“The merger of JetBlue and Spirit does not create as much of a problem as previous mergers,” he said.

Edward Russell

Finnair Posts Modest Profit Amid Harsh Realities

For the world’s airline industry, the Covid pandemic was a like a meteor strike. For Finnair, it was like ten meteor strikes. Now, the beleaguered Helsinki-based carrier is at least back to earning modest profits.

Finnair produced encouraging results in the fourth quarter with an operating profit of €18 million ($19 million) during what’s an offpeak period. Its operating margin more specifically, was 3 percent, close to the 4 percent it managed in 2019. Recall, in the third quarter the airline produced just a 5 percent operating margin excluding items, which was far too low for the peak summer season; its third quarter 2019 operating margin was 12 percent, and even that was low for a European airline.

While hardly electrifying, the December quarter performance indicates solid progress in Finnair’s quest to reconcile with harsh new realities. Prior to the pandemic, much of its business depended on a unique advantage — the favorable geography of Helsinki for linking Europe with Asia. When Asian markets largely closed due to Covid, however, its central strategy lay in ruins. Only with government aid did the company survive (though this was hardly unique across the industry).

Then came another asteroid. Early last year, Finland’s neighbor Russia invaded Ukraine, triggering closure of Russian airspace to European airlines. That affected Finnair’s rather sizable business to Russia, where it at one point or another served Moscow, St. Petersburg, Yekaterinburg, Kazan, and Samara. And, more importantly, the airline lost access to Russian airspace, which significantly increased flying times between Helsinki and Asia. That implies burning more fuel, and higher costs more generally. Keep in mind that many of Finnair’s shorthaul flights to and from Helsinki are only economically viable with Asian connecting traffic, much of that now gone.

Management responded to the extreme Asian setbacks by hiring out surplus planes and crews to other airlines. It increased flying to the Middle East in cooperation with Oneworld alliance partner Qatar Airways. It grew its U.S. network as well, adding markets like Dallas-Fort Worth and Seattle while challenging competitor SAS with summertime Stockholm flights to New York and Los Angeles. Importantly, Asian routes got a critical boost from super-strong cargo demand during the pandemic. Ancillary sales improved, as did direct bookings and U.S. point-of-sale distribution. Naturally, Finnair cut costs with renewed vigor, resulting in more favorable union agreements. All told, the carrier removed about $200 million from its cost base during the pandemic, with efforts still ongoing.  

The airline was finally the beneficiary of a little luck last quarter. The euro reversed course and appreciated versus the U.S. dollar, depressing dollar-denominated costs. That includes fuel costs, the price of which dropped by roughly a fifth in the second half of 2022. All of this, meanwhile, as travel demand continued its strong recovery, especially on North American and intra-European routes. Even in Asia, demand is starting to recover following the end of Covid-related travel restrictions. Japan is Finnair’s most important Asian market; its borders reopened in October.

China was a major Asian market as well, and one where Finnair hopes to add capacity this summer when Beijing flights are expected to resume. But the airline’s flights are currently disadvantaged versus those of Chinese rivals, which still have the right to fly through Russian airspace. That said, many European travelers will still opt for European carriers so they can avoid flying over Russia, in some cases mandated to do so by employer travel policies.  

Finnair executives warned that fuel prices are still “exceptionally high” despite their drop from last summer. The airline still expects to be smaller this year, in available seat kilometer (ASK) capacity terms, than it was in 2019. And, more importantly, it expects revenues to still be down from 2019. Cargo demand, executives said, remains solid. Passenger booking curves are normalizing. “Finnair estimates that the strong demand for travel will continue in the short-term,” the airline said in a statement. But it also warned that “continuing general economic uncertainty will weaken the visibility of travel demand development during 2023.”

By 2025, management’s goal is to achieve 5 percent annual operating margins — a modest goal, to be sure. Just to get there, Finnair will need to further cut costs, to offset higher inflation. This includes the higher costs associated with longer flight times to Asia.

Ultimately, selling itself to another airline might prove the only viable means for Finnair to achieve more financially sustainable margins. Its best annual margin even during the latter half of the 2010s, when Asian markets were broadly strong, was a mere 7 percent. Finland’s government, which controls the airline, would have to agree to any merger, assuming another airline group were interested — Air France-KLM, International Airlines Group, and the Lufthansa Group would be the most likely candidates. But how much would they pay for an airline frequently caught in a meteor shower?

Jay Shabat

Air Canada Sees Solid Travel Demand

Air Canada expects “solid” demand through 2023 as it comes off a small operating loss last year driven, in part, by operational challenges over the year-end holiday period.

The Montreal-based carrier reported an operating loss of $139 million (C$187 million) for 2022 last week, with executives citing increased fuel expenses and weather disruptions as part of the challenge to fly back to profitability. Revenues were 87 percent of 2019 levels at $12.3 billion for 2022. Ticket sales in the fourth quarter surpassed pre-pandemic levels by 2 percent that was, in part, thanks to its stronger than expected performance by its loyalty program, Aeroplan. 

The big year-end hit, however, was severe winter weather across North America that disrupted operations over the peak Christmas and New Year holiday travel period. This contributed to roughly $215 million in expenses related to hotels, meals or other forms of customer compensation for 2022.

“In Vancouver, four-foot icicles formed on aircraft and bridges, rendering the assets unusable,” Air Canada Chief Commercial Officer Craig Landry said. “In Calgary, the extreme cold exceeded safe conditions for deicing activities. And in Toronto, facilities such as airport baggage handling systems, started to freeze.”

The increase in fuel expenses, which jumped 42 percent compared to 2019 to $3.9 billion, were driven by increased flying and higher global spot prices for crude oil. The inflationary climate and unfavorable foreign exchange rates also contributed to the rising costs.

Compared to the fourth quarter in 2019, unit costs (CASM) excluding fuel increased roughly 15 percent in 2022. The company expects the metric to be 13-15 percent above 2019 levels for 2023, and is looking towards efficiency savings from investments in technology and artificial intelligence for optimized maintenance planning, revenue management and more self-service options at airports.

Transatlantic demand led Air Canada’s revenues in the fourth quarter, up 16 percent from 2019 and making up 27 percent of the airline’s entire take during the three months ending in December. Lucrative corporate travel demand in North America is holding at roughly 70 percent of 2019 levels, which airline executives largely attributed to a later-than-anticipated return in roadwarriors.

Air Canada is also benefitting from the ease of travel restrictions in Asia-Pacific, but has yet to recover to pre-pandemic capacity levels. The airline continues to rebuild its international network with a tailwind from strong advanced bookings.

The airline is also investing in the customer experience. This includes a multi-year plan to improve onboard dining, including in economy class, and upgrade its premium Maple Leaf lounges. Air Canada also continues its fleet renewal with new Airbus A220, Boeing 737 Max, and Boeing 787s due this year and next. It also has orders for 30 Airbus A321XLRs.

“We expect a solid demand environment throughout all of 2023,” said Michael Rousseau, president and CEO of Air Canada. “Our strong liquidity position, pricing power … [and] diligence regarding our cost structure and our ability to execute on the overall strategic direction provides us a foundation to effectively compete and be very successful.”

Sherry Sun

Norwegian Air Makes Loyalty Investments

Norwegian Air continues to rebound from the pandemic and its restructuring, with an eye on taking competitor SAS’s lucrative corporate travel market. In the fourth quarter, the Oslo-based carrier saw corporate travel revenues increase 52 percent from the quarter before, hitting 90 percent of 2019 levels, CEO Geir Karlsen said during the airline’s latest earnings call last week. This continued the trend it saw during the third quarter. In his view, the airline’s gains were the result of offering a better product and on-time performance than its competitors. Norwegian Air did not disclose the amount of revenue that came from corporate travelers in the fourth quarter; total revenues for the period were nearly 5 billion Norwegian kroner ($487 million).

While Karlsen did not name names, Norwegian Air only has one major competitor in its home market: SAS. The legacy carrier is restructuring through the Chapter 11 bankruptcy process in the U.S., and faced numerous disruptions in the second half of 2022, including a pilot strike. Budget competitor Flyr shut down in January, and regional airline Widerøe is a partner with which Karlsen said Norwegian Air is deepening its relationship.

“More and more of [big corporates] are now saying that more than 50 percent of their employees are now flying with Norwegian,” Karlsen said.

Norwegian Air plans to continue growing its share of corporate travelers by investing in its loyalty program, Norwegian Reward. The airline will unveil a new top tier in the coming weeks that targets very frequent flyers, or those who fly more than 32 times a year. This tier will include, as Karlsen put it, “all the benefits,” ranging from free bags and seat assignments to priority check in and boarding. But the plans do not stop there, the carrier is working to expand the loyalty program into something bigger than just an airline loyalty program with multiple partners in multiple consumer-facing industries.

“The ambition now is to create the best loyalty program in the Nordics, independent of industry,” Karlsen said. He added that the additional benefits and partners will “attract even more of the corporate travelers.”

Norwegian Reward currently has limited applicability outside of the airline, with partners limited to Avis rental cars,, and a few other Nordic parking and travel companies. SAS’ Eurobonus program, by contrast, benefits from the airline’s membership in Star Alliance that gives members access to flights around the world, as well as at least seven rental car and six hotel partners.

The “net effect should be highly positive,” Pareto Securities analyst Kenneth Sivertsen said of Norwegian Air’s loyalty investments.

Travel demand, both leisure and corporate, continues to be robust for Norwegian Air with strong early bookings for summer travel. Its strongest markets are Norway and Denmark, as well as flights to European beach markets, Karlsen said. Demand in Finland and Sweden is “more challenging,” he added. Norwegian Air faces competition not only from SAS, but also EurowingsFinnair, and Ryanair in these challenging markets.

Norwegian Air plans to fly 81 Boeing 737 aircraft during the summer peak. That’s down from plans to fly 85 aircraft because of delivery delays at Boeing, Karlsen said. The 81 number includes six former-Flyr 737-8s that Norwegian Air has leased from Air Lease Corp. The airline plans to operate 77 aircraft by the end of the year after returning some planes to lessors.

Looking forward, Norwegian Air plans to increase capacity by 24 percent year-over-year in 2023. Yields are forecast to increase compared to 2022 but Karlsen declined to be more specific on the growth. And unit costs (CASK) excluding fuel are expected to come down 5-10 percent compared to last year.

Norwegian Air reported a 39 million Norwegian kroner operating loss, and a negative 0.8 percent operating margin, in the fourth quarter. Total yields increase 14 percent year-over-year, while CASK excluding fuel decreased 5 percent.

For all of 2022, Norwegian Air reported a 1.5 billion Norwegian kroner operating profit. However, without the benefit of one-time items in the second quarter, the airline would have lost money last year.

Edward Russell

In Other News

  • European tourism conglomerate TUI sounds bullish about demand for summer travel. Bookings sagged a bit in December, it said during an earnings call last week, but picked up strongly in January and remain “very strong” so far in February. In fact, bookings are now “significantly … above pre-pandemic levels with higher prices.” That’s true, it added, for demand from both the UK and Germany, its two largest source markets. It mentioned strength from Switzerland, Austria, and Poland as well. Farther west, Amsterdam is improving after operational troubles at Schiphol airport last year. That’s interestingly helping TUI’s Belgian business too, because airlines — when Amsterdam was having problems — dumped their capacity into Brussels, depressing prices there. Separately, TUI remarked that many of its customers — namely seniors and retirees — are less impacted by consumer price inflation. However, it is seeing a shift from longhaul to shorter-haul holidays. Destinations like Egypt, Cape Verde, and the Canary Islands are especially strong right now. TUI also expects a busy summer for Greece and Turkey. TUI, by the way, acknowledged tough competition from Jet2, a UK rival that’s aggressively chased business left behind by the collapse of Thomas Cook in 2019. According to Cirium Fleets Analyzer, TUI’s airlines currently fly more than 100 planes, almost all of them Boeing 737s and 787s.
  • Icelandic budget carrier Play Airlines is optimistic as bookings for the year start on a high note, CEO Birgir Jónsson said during its quarterly earnings call last week. He called the strong demand a “confirmation” of its network strategy that connects Europe to North America via Iceland. Still, the airline remains in the red with a $44 million operating loss for all of 2022, and an $18 million loss in the fourth quarter. Its operating margin was negative 32 percent for the full year, and negative 46 percent in the December quarter. Jónsson cited the dramatic increase in fuel prices for at least part of the losses last year. He expects Play to turn an operating profit in 2023.
  • Never a dull moment in Colombia, it seems. After Viva Air filed for the local equivalent of bankruptcy earlier in February, Latam Airlines has expressed interest in the discounter, joining JetSmart, and putting Avianca on the defensive over its own proposed merger with Viva. “The ‘proposals’ of the competitors that have expressed their alleged interest in Viva are, by all accounts, unfeasible, late and seem more of a distraction in the face of the request for integration of Avianca and Viva,” Avianca said last week. The question now is: Will all of these expressions of interest turn into real offers for Viva, or will Colombian regulator Aerocivil quickly sign off on the Avianca deal in order to save the ailing carrier?
  • Apollo Global Management sold down its stake in Sun Country last week. The private equity firm sold up to 6 million shares, worth nearly $127 million based on the carrier’s closing share price on February 15, through a secondary public offering run by Barclays. Following the sale, Apollo will own 34.7 percent of Sun Country; down from just over 43 percent at the end of 2022. Sun Country purchased up to 750,000 of the shares through its existing share repurchase program.
  • Mexican regional carrier Aeromar closed its doors last week. While a tiny player in the market — it was scheduled to fly less than 1 percent of all domestic capacity in February, per Diio — it was the only airline in many of the markets it served. The airline cited its debt obligations, and inability to secure new investment, for its collapse. Aeromar plans to liquidate its assets, which include 10 ATR turboprops.

Edward Russell & Jay Shabat

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Air India has committed to at least 470 aircraft from Airbus and Boeing worth an estimated $34 billion as part of the Tata Group’s effort to remake the long-ailing Indian flag carrier into a global aviation leader. The airline will take 140 A320neos, 70 A321neos, 34 A350-1000s, and six A350-900s, plus “significant options,” from Airbus, Tata Chairman Natarajan Chandrasekaran said last week. The Airbus commitments are worth an estimated $19 billion based on Cirium’s full-life base values.

And from Boeing, Air India will take 190 737-8s and -10s, 20 787-9s, and 10 777-9s, plus another 70 737 and 787 options, the airframer said. The Boeing commitments, not including the options, are worth an estimated $15 billion, according to Cirium.

The dual aircraft orders are a big part of Tata’s aim to remake Air India. The company bought the long-ailing airline from the Indian government last year and has wasted no time in working to turn it around. Campbell Wilson was brought in from Singapore Airlines’ subsidiary Scoot to lead the carrier. And deals were reached in November with Malaysia’s Capital A to acquire its share of AirAsia India, and with Singapore Airlines for its stake in Vistara. AirAsia India is to be merged with Air India Express, and Vistara with Air India itself.

The blockbuster dual orders, which has parallels to American’s split order for 460 A320neos and 737 Maxes in 2011, will allow Air India to renew its fleet as well as grow. It could potentially even reclaim the unofficial crown as India’s national airline, which Emirates has long held by moving more Indian overseas travelers than any other airline.

“We are going through a massive transformation because we are committed to building a world-class airline known for safety, on-time performance, the best of Indian hospitality, and modern fleet,” Chandrasekaran said.

Of course, remaking Air India into a global leader will take more than just new aircraft. As Chandrasekaran pointed out, the airline needs to improve its operational performance and provide a customer experience that is on par with the likes of Emirates and Singapore Airlines. In short, Air India needs to become an airline people want to fly, not just need to fly.

“India is on the verge of an international air travel revolution,” Airbus CEO Guillaume Faury said. He added that it was time to turn India into an “international hub” for global aviation.

In addition to Air India’s turnaround and expected growth, the country’s largest airline, IndiGo, is expanding at a rapid clip. Its international ambitions are somewhat smaller, given its preference for an all-narrowbody fleet, with an aim to “connect China to Africa,” as former CEO Ronojoy Dutta put it in August. IndiGo has orders for 488 A320neo family aircraft, including for the long-range A321XLR, Airbus data show.

And demographically, India surpassed China as the world’s most populous country with 1.4 billion people at the end of 2022.

Deliveries of the first A350s are scheduled for late 2023, barring any delays from Airbus’ well known supply chain issues. The delivery timeline for the rest of the order was not disclosed.

Air India and Air India Express operate 131 aircraft, including the A320 and 737 families, as well as 777 and 787 models, Cirium Fleets Analyzer shows. AirAsia India operates another 28 A320s, and Vistara 53 A320, 737, and 787 family aircraft.

Edward Russell

Fleet Briefs

  • Alaska Airlines, Delta, and United outlined their fleet plans for the year, with all three facing Airbus and Boeing delays. Alaska anticipates delivery of 45 new planes, including its first three 737-8s, plus 34 737-9s and eight Embraer E175s for its Horizon Air subsidiary. The Seattle-based carrier will also remove its last 22 Airbus A320 and A321neos, and 11 De Havilland Dash 8-Q400s — the A320s and Q400s are already gone — and two 737-800s will be removed from operation for conversion to freighters. Alaska said potential Boeing delays were reflected in its delivery forecast.

    Delta plans to take delivery of 43 new aircraft this year, including nine Airbus A220-300s, 28 A321neos, and six A330-900s. However, it has told staff that it plans to introduce 93 aircraft to its fleet this year, including six used A350s and 32 used 737-900ERs; eight parked Boeing 717-200s will also return to service. Delta said some of its new deliveries will be delayed.

    And United, which is scheduled to take 149 new aircraft — 12 A321neos, 135 737 Maxes, and two 787s — expects 51 of them to be delayed to 2024 or later. That, along with other macroeconomic issues, has forced United to delay an undisclosed amount of its planned capacity growth this year.
  • Boeing Chief Financial Officer Brian West at a Cowen investor conference last week said boosting 737 and 787 production was a top priority. The goal is to reach 50 737s a month, up from 31 currently. For 787s, it aims to reach ten “over the course of the next two years.” Boeing, keep in mind, has lots of 737s and 787s built but undelivered due to maintenance fixes required to comply with regulatory directives. Getting all those planes delivered — many of them to Chinese airlines — should take “a couple of years.” In the meantime, Boeing awaits certification of its 737-7 and -10 variants. And it’s hoping to have its new 777X enter service in 2025. West suggested that order discussions with potential widebody customers are picking up, perhaps heralding more announcements in the months ahead. One possible venue for order announcements is the Paris Airshow in late June.
  • Air Lease Corp. again expressed frustration about production delays at Airbus and Boeing. “We had delays on some aircraft that were like two to three months, and we had delays on, for example, on A321neo that was nine months,” Executive Chairman Steven Udvar-Hazy said. “And we’ve had everything else in between. I can’t give you a mathematical average, but it’s certainly worse than three months, and it’s not getting any better.” Part of the problem, he explained, relates to the engine makers CFM International and Pratt & Whitney. A separate challenge for lessors is that borrowing costs (in other words, interest rates) are rising faster than lease rates. That said, demand to lease the latest generation jets continues to strengthen as travel demand soars coming out of the pandemic. Widebody momentum is building, and lease rates are getting a boost from shortages linked not just to production delays but also certification waits for models like the Boeing 737-7s and -10s, the Boeing 777X, and the Airbus A321XLR. In the meantime, ALC has steadily placed planes with airline customers around the world. It’s still doing business in China as well, though increasingly less so. “This year,” said Udvar-Hazy, “we only have 2 aircraft going into Mainland China — two A321neos out of about 70 to 80 new deliveries.”  
  • “The market environment looks indeed quite encouraging for 2023 despite ongoing supply chain constraints,” said Germany-based MTU, a major engine supplier to both Airbus and Boeing; MTU partners with companies like Pratt & Whitney and GE. MTU is especially involved in the A320neo-family engines. It’s now testing an upgraded “Advantage” version of those geared turbofan Neo engines, called the “GTF A.” MTU hopes they’ll enter service next year, offering airlines greater range and payload for their Airbus narrowbodies. MTU is also working on the development of the new GE9X engine for Boeing’s new 777X. Another area of investment: developing more environmentally sustainable aircraft engines — one idea it’s pursuing is a water-enhanced turbo fan concept based on the GTF and hybrid electric propulsion. Back in the present, MTU is encouraged by what it’s seeing from China’s airline market after the lifting of travel restrictions. Cargo traffic has slowed down “slightly,” returning to “normalized” levels after a pandemic surge. And regarding supply chain bottlenecks, the situation is “certainly improving” but still an issue. “The majority of the issues are coming with big structural parts,” citing U.S. suppliers that are struggling to hire staff after Covid departures. “They’re stepping up their personnel. They’re back in recruiting. But it takes some months, maybe even one year depending on the level of know-how to qualify and certify the employees. Industrial capacity, from my point of view, is available. Shortages are on labor, and this is to be continued and to be improved over the year of 2023,” MTU finance chief Peter Kameritsch said.

Jay Shabat & Edward Russell

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Routes and Networks

  • WestJet will add three new dots — Detroit, Minneapolis-St. Paul, and Washington Dulles — to its map amid a 10 route expansion this summer. The airline, which is shifting its network towards western Canada, will link Calgary to Detroit and Washington, and Edmonton to Minneapolis. WestJet will add another seven new routes: Calgary to Moncton; Edmonton to Charlottetown, London (Ontario), Moncton, and Seattle-Tacoma; and Vancouver to Atlanta and Nashville. All 10 new routes begin in May and June. WestJet cited its codeshare partnership with Delta for the new routes to Atlanta, Detroit, and Minneapolis — all Delta hubs. The airline did not say whether it still intends to renew its application with Delta for a U.S.-Canada joint venture. Delta flew the Edmonton-Minneapolis and -Seattle, and Vancouver-Atlanta routes prior to the pandemic, per Diio.
  • JetBlue wants to fly to Amsterdam. That’s crystal clear in a complaint it filed with the U.S. Department of Transportation last week alleging that the government of the Netherlands violated the U.S.-EU open-skies agreement in rejecting its multiple applications for slots at Schiphol airport. JetBlue had at least three applications for two Amsterdam slot pairs — one each for nonstops to Boston and New York JFK — rejected, even when the slots in question were unused by Aeroflot or bankrupt Flybe. JetBlue wants the DOT to either force the Netherlands to award it these unused slots, or make KLM divest them as a competition remedy for its transatlantic joint venture with Air France, Delta, and Virgin Atlantic.
  • Speaking of Europe, discounters Eurowings and Volotea have signed a new joint sales agreement that includes eight new routes this summer and fall. Volotea will launch new service between Bordeaux and Dusseldorf, Hamburg, and Stuttgart; Florence and Hamburg; Lyon and both Berlin and Hamburg; Nantes and Stuttgart; and Verona and Berlin in May and October. The agreement will allow Volotea to sell 100 routes operated by Eurowings, and Eurowings 40 routes operated by Volotea through their respective distribution channels. Both budget airlines touted the agreement as expanding connectivity for passengers.
  • Spirit is expanding in California and Puerto Rico, the latter coming two weeks after Frontier unveiled seven new routes to the island. Spirit will add San Jose, Calif., to its map on June 7 with a total of four daily flights to Dallas-Fort Worth (DFW), Las Vegas, and San Diego. And to Puerto Rico, the discounter will add five new routes from San Juan to Atlanta, Chicago O’Hare, DFW, and Detroit in May; and Hartford in June. Frontier also plans to fly between San Juan and Chicago, DFW, and Detroit. San Juan is also a base for Spirit’s proposed merger partner, JetBlue.
  • Heading into its third summer, Breeze is adding Portland, Maine, to its map as part of a 22 route expansion. The airline will link Portland to Charleston, S.C., Norfolk, Pittsburgh, and Tampa from May and June. The other 18 routes Breeze is adding, most of which will only operate through September, include: Providence to Fort Myers, Orlando, Sarasota-Bradenton, and Tampa; Los Angeles to Jacksonville, New Orleans, and Raleigh-Durham; and Pittsburgh to Jacksonville, Islip, and Raleigh-Durham. Cincinnati, Hartford, Richmond, and Syracuse also gain new nonstops.
  • Route tibdits: Paris Orly will be Azul‘s second European destination after Lisbon. Flights between São Paulo’s Viracopos airport and Paris begin April 26, and increase to daily on July 31. Copa named Austin its next U.S. destination last week, joining Baltimore-Washington among 2023 additions. The Star Alliance carrier will link the Texas capital with Panama City four-times weekly from July 6. El Al will add Fort Lauderdale to its map in September. The Israeli airline will connect the South Florida city to Tel Aviv through October, then resume the route as year-round service in spring 2024. El Al already serves nearby Miami. Norse Atlantic will link London Gatwick to Fort Lauderdale up to four-times weekly, and Orlando up to daily from May through its summer schedule; Norse already connects both Florida destinations to Oslo.

Edward Russell

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Feature Story

What’s the most profitable airline in the world right now? There’s now an easy answer to that question.

Panama’s Copa, even by its own lofty standards, dazzled the industry with a spectacular 25 percent operating margin for the October-to-December quarter. This far exceeded the impressive 16 percent figure it managed during the same period in 2019. Copa’s fourth quarter earnings extravaganza, ahem, brought its operating margin for all of last year to 15 percent, within a whisker of what it earned in 2019. And that’s after a slowish start to the year, in which both the first and second quarters yielded sub-10 percent margins.     

What’s fueling this spectacular success?

Many of the reasons are familiar. Copa has long reigned among the global airline industry’s most profitable airlines, thanks to advantages like the geography of its Panama City hub, competitive labor costs, the dearth of strong airline competitors across Latin America, and a prudent management team that has refrained from risky widebody flying and messy mergers. It now flies only Boeing 737s, after exiting the Embraer E190 in 2020. Copa ended 2022 with 97 737s, including 20 -9s.

It flew 102 planes before the pandemic so no, this isn’t exactly a growth story. Measured by available seat miles (ASMs), capacity has in fact grown by 6 percent since the start of the pandemic, thanks to longer average stage lengths. But ASMs are likewise up a mere 6 percent from five years ago. Again: Not a growth story. This year, however, Copa will put its foot back on the accelerator, with plans to grow ASMs 12-14 percent. Already announced route additions include Austin, Baltimore-Washington, and Manta in Ecuador. These will give it a network of 80 cities evenly distributed up and down the Americas. At least another two will be announced shortly, separate from the roughly ten it abandoned during the Covid crisis but might bring back (New Orleans, Tegucigalpa, and Recife, to name a few).

Copa’s capacity may have increased only modestly since before the pandemic. But there’s something else that’s increased dramatically: Its fares. With exceptionally strong pricing power for an airline, Copa managed to lift its revenues 31 percent last quarter, relative to the same quarter of 2019. And again, that’s on just 6 percent more capacity. As it happened, many of the passengers flying Copa last quarter purchased their tickets during the summer, when fuel prices reached extreme highs, and when Copa was able to adjust fares upward accordingly. Then came the sharp drop in fuel prices during the fourth quarter, leaving the airline with shrinking costs to accompany its elevated fare revenue. All the stars, you might say, were aligned.

But there’s still more to the story behind Copa’s phenomenal fourth quarter profits. In addition to the strong revenues and easing fuel cost pressure (fuel costs remained much higher than they were in 2019 despite the year-end retreat), non-fuel costs declined sharply. Labor costs were down 9 percent from three years earlier. Aircraft depreciation and maintenance costs were down even more, thanks in part to fleet renewal and the divesture of those E190s. Stunningly, the airline’s December quarter unit costs, excluding fuel and adjusted for special items, were down 7 percent from three years earlier; this at a time when most airlines around the world are battling with severe unit cost inflation. Copa even managed to boost aircraft utilization by 5 percent, in sharp contrast with the industry norm. Not once during the airline’s fourth quarter earnings call did management mention anything about labor shortages or operational headaches.   

That said, Copa is not immune to the global aircraft shortage stemming from problems at the aircraft makers. It said 737 Max deliveries are 2-4 months behind schedule, slowing down its fleet modernization plans. It’s also seeing higher maintenance costs and longer shop visits as repair firms struggle with their own labor shortages and heavy backlogs. Copa, meanwhile, just signed a new pilot contract that will lift labor costs going forward. Pricing this quarter, furthermore, is not quite what it was last quarter, as fares dropped in tandem with declining fuel costs.

So don’t expect another 25 percent operating margin this quarter, though you never know given that the firs quarter has historically been Copa’s best-performing quarter. In any case, don’t shed any tears. The airline didn’t provide March quarter margin guidance but it did forecast a full-year 2023 operating margin somewhere between 17 and 19 percent. Or to put it another way: It expects another fantastically profitable year, one even more profitable than last year.   

Demand, management said, remains strong across all regions, notwithstanding some overcapacity in Colombia — its Colombian LCC Wingo will thus refrain from growth this year, other than some ASM expansion via improved aircraft utilization. Wingo currently flies nine 737-800s.

Back in Panama, Copa hopes to boost its appeal with a new lounge at its new airport terminal. It’s pursuing a new distribution strategy that makes use of IATA’s New Distribution Capabilities while imposing a “cost recovery” surcharge on legacy bookings via global distribution systems. It recently reactivated its Panama stopover program to encourage more tourism in its home city. Prior to the pandemic, it introduced lie-flat seats on longer-haul flights, basic economy fares, its own loyalty plan (it previously used United’s), and a more aggressive ancillary strategy. It even has one of its 737s dedicated just to cargo, though it underscored the fact that cargo is still just a tiny part of its business (about 3 percent of total revenues).  

Interestingly, management said leisure and family-visit passengers now account for about 75 percent of all traffic, versus more like 66 percent pre-pandemic. Put another way, it’s carrying less business traffic than in the past. Regarding competitive trends, it said it faces more ultra-LCC competition than before, which has both negative and positive implications. On the one hand, the ultra-LCCs can compete with a lower cost base. But on the other, their presence often leaves Copa as the only full-service option in many markets. It added that the Viva Air bankruptcy will have minimal impact. Viva is now the subject of takeover interest involving Avianca, JetSmart, and Latam.

Copa itself has avoided consolidation, aside from its purchase of Colombia’s AeroRepublica in the early 2000s. It certainly doesn’t need another merger given its financial track record and given how well it’s performing coming out of the Covid crisis. Said CEO Pedro Heilbron last week: “We’re confident as ever in our business model.”

Jay Shabat

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By the Numbers

  • Note the geographic diversity of Copa‘s network, the airline is not overly dependent on any one market or country;
  • Copa is taking full advantage of the boom in Cancun, one of the hottest airline markets in the world;
  • Keep in mind that a large portion of Copa’s traffic is connecting. For example, according to Diio estimates, the Panama-Miami route is filled with people originating from (ordered by total passenger estimates) Guayaquil, Lima, San Jose (Costa Rica), São Paulo, Asuncion, and so on;
  • And, other leading itineraries served by Copa include São Paulo-Orlando, as well as Santiago (Chile) and Buenos Aires to Caribbean beach spots like Cancun and Punta Cana. As for markets where passengers are flying nonstop, Panama City-Bogota is among Copa’s busiest.

Source: Diio by Cirium

Jay Shabat

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