Issue No. 910

Anadolujet to the Fore

Turkish Airlines’ Budget Subsidiary an Afterthought No More

Pushing Back: Inside the Issue

Ryanair is buying planes again. A lot of planes. The Irish LCC opted for Boeing’s largest narrowbodies on offer, its 737-10s. Ryanair ordered 150 of them, with options for another 150. Will it still have enough growth opportunities to fill all those new planes as they arrive well into the 2030s?

Ryanair is known for many things, including its habit of earning ridiculously high margins during the peak third quarter — last year its margin was 35 percent! But nobody does that in the first quarter, right? Wrong. Thai Airways, a basket case through most of the 2010s, stunned the airline world with a 31 percent margin. That’s peak season for Thailand’s giant tourist sector, which is clearly back with a vengeance. Bangkok Airways had a great quarter too.

Copa Airlines seems not to care what quarter it is — it apparently has a year-round money-printing machine in its basement. Emirates, reporting for its full fiscal year that ended in March, earned solid profits. But it’s not a growth airline anymore. Virgin Atlantic said it lost money on a pretax basis during the calendar year 2022, another stain on its unimpressive financial record. Air Canada’s first-quarter losses, by contrast, were comfortably small. Same for Turkey’s Pegasus.

Read on for more about Air France-KLM’s losses. But one important reminder before moving on: According to IATA, jet fuel prices are currently down about 50 percent from this time last year. And yes, demand is still rip-roaringly strong. Have a nice day.

Airline Weekly Lounge Podcast

Ryanair gave Boeing a boost, and let bygones be bygones, by ordering up to 300 new 737 Maxes. It’s the European discounter’s largest-ever order. Edward Russell and Jay Shabat discuss the deal. Plus, Air France-KLM and IAG’s first-quarter results. Listen to this week’s episode, and find a full archive of the Lounge here.

Weekly Skies

Air France-KLM wants a bigger piece of the standout Latin America region. To this end, it has its eye on acquiring a stake in TAP Air Portugal, which the Portuguese government plans to launch a sale of as soon as this summer.

“TAP has a very strong position geographically at the southernmost point in Europe towards South America, and they do have a very strong network to Brazil with 11 cities online nonstop out of Lisbon,” Air France-KLM CEO Ben Smith said during an earnings call earlier in May. “So it’s very interesting, and could be potentially eventually accretive to our bottom line performance.”

Air France-KLM, for now, is just eyeing a deal with TAP. if the parameters of the Portuguese government’s privatization meet the group’s requirements — for one, not diluting its target of a 7-8 percent operating margin from 2024 — it plans to “participate in that process,” Smith said.

The interest in Latin America is for good reason. In the first quarter, Air France-KLM saw South Atlantic yields jump nearly 33 percent compared to 2019 on just 4 percent less capacity. The Lufthansa Group saw group yields on Latin America routes jump nearly 43 percent over the same period. International Airlines Group, which did not publish a comparison to 2019, saw Latin America passenger unit revenues increase 33 percent compared to last year. At all three groups, Latin yield performance was the strongest across their global networks except for Asia, where capacity remained artificially constrained.

Industry capacity between Europe and Latin America was down just 2 percent compared to pre-pandemic during the first half of the year, according to Diio by Cirium schedules.

Air France-KLM is the largest of the European groups to Latin America with a 21 percent share of capacity during the first six months of the year, Diio data show. IAG comes in a close second with a 19 percent share, and the Lufthansa Group lags with just a 7 percent share. Iberia, however, is the single largest carrier ahead of Air France.

“We are missing a southern hub compared to our European competitors, especially for the growing — the [origin and destination] traffic in and out of Africa and Latin America,” Lufthansa Group CEO Carsten Spohr said earlier in May. This is one reason for the group’s planned investment in Italy’s ITA Airways, which it has until May 12 to finalize with the Italian government.

IAG renewed plans to buy Air Europa in February, with a new €400 million ($443 million) deal that it thinks can pass European Commission antitrust scrutiny. Executives have long argued that merging the airline with Iberia would create a “360-degree” hub in Madrid that could compete better with Air France’s Paris and Lufthansa’s Frankfurt hubs as they exist today.

“We are starting to talk with the European Commission and other authorities in the different jurisdictions in order to try to close the deal,” IAG CEO Luis Gallego said earlier in May. “As we said before, we expect that this process is going to take 18 months.”

If all of the deals were to go through — far from a certainty — Air France-KLM and TAP would have a 29 percent share of Europe-Latin America capacity, based on Diio data for the first six months of the year. IAG plus Air Europa a 28 percent share, and Lufthansa plus ITA a 9 percent share.

None of the European Big Three have an immunized joint venture with a Latin American airline covering intercontinental flights. Air France has a close partnership with Gol but that focuses on the Brazilian domestic market. British Airways and Iberia have loyalty partnerships with Latam Airlines, which was formerly a member of the Oneworld alliance. And the Lufthansa Group has codeshares with Star Alliance members Avianca and Copa Airlines.

During the first quarter, Air France-KLM repaid the last of its French state aid. The move, as Smith put it, allows the group its “full strategic autonomy going forward” — for example, it would have been barred from bidding for TAP if the loan were still outstanding. And the emphasis on maintaining margin targets comes as it appears set to hit them earlier than forecast, as one investment analyst suggested earlier in May. Travel demand, particularly the lucrative premium leisure segment, continues to be torrid with summer set to be “particularly dynamic” for the group.

Air France-KLM posted a €306 million operating loss, equal to a negative 4.8 percent operating margin, and a €344 million net loss during the three months ending in March. Revenues of €6.3 billion were up 42 percent year-over-year, and up 5 percent from four years earlier. Group capacity was down 8 percent from 2019 levels.

Looking ahead, Air France-KLM plans to continue its capacity recovery to around 95 percent of 2019 levels for the rest of the year. It did not provide margin guidance but Chief Financial Officer Steven Zaat said it was “getting close” to hitting its full year 2024 margin targets.

Edward Russell

Strong Copa and Avianca First-Quarter Profits

Copa Airlines and Avianca both reported strong first-quarter operating profits, a sign of good times in Latin America’s airline market.

Profits at Panama-based Copa were once again extraordinary. Its operating margin for January, February, and March was a gargantuan 22 percent, second best of any airline in the world that’s reported so far for the first quarter. And to dispel any notion that the performance was just a seasonal quirk, Copa said its full-year operating margin would be somewhere between 22 and 24 percent. This wouldn’t be the first year that Copa’s operating margin topped 20 percent. But it hasn’t done so since 2013. Last year, as travel demand began to recover from its Covid hiatus, Copa’s figure was 15 percent.

During the airline’s first-quarter earnings call, executives spoke of “very, very robust demand,” largely across all geographies. They did say South America was not quite as strong as other areas, and that the recent weakening of the U.S. dollar is a headwind to revenues originating from the U.S. But overall, CEO Pedro Heilbron said, “U.S. point of sale remains pretty strong.” He also noted strength in premium demand, with more of its business class seats actually sold rather than redeemed as upgrades.  

Copa does expect unit revenues to soften in the second half of the year, in part because of rising competition from low-cost carriers, plus its own double-digit capacity growth. Importantly though, unit revenues are also expected to decline for a more welcome reason: cheaper fuel. As fuel costs come down, so typically do airfares.

When Copa was last earning 20 percent-plus margins in the early-to-mid 2010s, unusual market strength in Venezuela was partly responsible. That situation doesn’t exist today, but as Heilbron pointed out, the carrier’s unit costs have since declined significantly, aided by fleet simplification (all of its Embraer E-Jets are now gone). This year, it plans to receive another 12 Boeing 737-9s, further lowering its unit costs. Also important is the company’s new distribution strategy, such that two-thirds of its bookings are now received directly from the traveler rather than via a travel agent intermediary — it was just one-third before the pandemic. Copa also does more of its heavier aircraft maintenance in-house than it did a decade ago, saving it money.

In the meantime, it continues to expand, taking advantage of Panama’s geographic centrality within the Americas. Three new routes to Austin and Baltimore-Washington in the U.S., and Manta in coastal Ecuador launch this summer. Perhaps Copa will have more to announce when it holds an investor day event in New York City next month. The carrier is also adding new domestic flying in Colombia with Wingo, its low-cost unit. But Wingo remains small with just nine planes.

Copa and Wingo both count Avianca as a leading competitor. Unlike Copa, Avianca was driven into bankruptcy by the pandemic, emerging from the process with more of an LCC-like business model. While it’s not earning 20 percent margins, its operating margin for first quarter was a healthy 10 percent. The demise of domestic rivals Ultra Air and Viva Air certainly helped. Avianca is now merged with Brazil’s Gol under the new Abra Group, though each airline retains its own operation and identity. They’re also reporting financial results as two separate companies, at least for now.

Though competitors, Copa and Avianca are both Star Alliance members, and both planned to form a three-way joint venture with United Airlines before the pandemic. The agreement remains in place, but Copa reiterated its recent doubts that the pact will ever happen. As for Gol, it too had a great first quarter, at the operating level anyway. Its operating margin was an impressive 17 percent. It still faces a heavy debt burden, however, having never restructured in bankruptcy. Brazilian carriers, unlike Copa, have suffered greatly from the strong U.S. dollar. Avianca for its part has more exposure to dollar revenues than Gol, though less than Copa.

In Avianca’s earnings call, executives spoke about the Gol merger, the importance of cargo, the growth of its LifeMiles loyalty plan, the collapse of two domestic competitors, and the possibility of acquiring one of the two, namely Viva. A decision on whether to buy it, complicated by onerous regulatory conditions, was said to be imminent as of Friday morning. Avianca noted strength in North America, Europe, and Central America, adding that South America and the Caribbean were somewhat weaker. It also cited fare pressure from Mexico’s two discounters, namely Volaris and Viva Aerobus (no relation to Viva Air). In its quest to become a low-cost carrier not unlike its new partner Gol, Avianca is densifying seating on its planes (even its Boeing 787s), flying more non-hub point-to-point routes, and boosting aircraft utilization. It’s trying to achieve a cost position, it said, whereby it can be the “price setter.”

Earlier this month, Volaris and VivaAerobus reported first-quarter results, in both cases moderate operating losses. Both however, attributed this to seasonality and expect a robust full-year performance. South America’s largest airline, Latam, also reported this month, unveiling a nearly 11 percent March quarter operating margin.

The only major publicly traded Latin American airline that has yet to report first-quarter results is Azul of Brazil. It will do so this week.

Jay Shabat

First-Quarter Earnings Continue…

  • Emirates, 100 percent owned by the government of Dubai, doesn’t provide too much detail in its semiannual earnings releases. It did disclose that for the 12 months that ended in March, operating margin for the core airline (excluding its ground handling unit Dnata) was an impressive 13 percent. Gone are the days when Emirates would show up at an air show and order hundreds of widebody aircraft. It’s a slower growing airline these days, with capacity this quarter in fact lower today than it was in 2015, let alone 2019, according to Cirium’s Diio. It has opened some new routes, including one to Tel Aviv following a diplomatic accord. It’s also added a premium economy product. And it does still have a large future order book of new aircraft, including Boeing 777Xs, 787-9s, and Airbus A350-900s.
  • Air Canada posted a first quarter operating loss but, just barely, missed breakeven by just $13 million U.S. dollars. That’s a victory of sorts for the Montreal-based airline, whose network is highly seasonal. In 2019, the final full year before Covid, Air Canada earned a positive 3 percent operating margin in the first quarter before earning 9 percent, 17 percent, and 3 percent in the subsequent three quarters (that worked out to 9 percent for the full year). With summer bookings coming in strong, management is bullish on its full-year results. A top priority is trying to de-seasonalize earnings by adding capacity to winter-peaking markets like Australia, India, Thailand, and the Caribbean. Fortunately, demand is extremely strong in general right now, as many other airlines around the world have reported. Canada enacted much tighter travel restrictions than the U.S. during Covid, and Canadians are now releasing their pent-up travel urges. Air Canada Vacations, the company’s tour operator, is in fact producing “remarkable results.” Leisure travelers are filling business class seats too, while Air Canada’s loyalty plan, now fully under its own control, is thriving in partnership with JPMorgan Chase, the same bank that partners with Air Canada’s joint venture partner United (and with Southwest too). Air Canada and United are now sharing revenues on transborder routes as well as transatlantic routes. Lufthansa is another key partner. It’s even cooperating (to a more modest degree) with Emirates, which it once accused of collecting illegal subsidies. Air Canada is in the meantime expanding its cargo business, ordering more Airbus A321XLRs, and pursuing a new NDC-centric distribution strategy (NDC is an IATA-backed standard to advance direct bookings). Interestingly, management said the Japanese market has been doing well. No less interestingly, it called out the importance of Canada’s high rates of immigration as a big driver of family visit traffic. Indeed, Canada’s large communities of Indians, Chinese, Africans, and Middle Easterners, for example, have enabled Air Canada to launch many new routes to these regions during the past decade. It can also draw on “sixth freedom” traffic sourced from the U.S., carried via its hubs in Toronto, Montreal, and Vancouver. As for the supply side, CEO Michael Rousseau echoed the sentiments of his peers: “There is capacity that is limited from OEM’s ability to put new aircraft out in the marketplace.”
  • Something’s clearly going right in Thailand. Thai Airways, which drastically reduced its costs in bankruptcy, delivered an absolutely stunning 31 percent operating margin for first quarter. Its shorthaul oriented rival (and codeshare partner) Bangkok Airways didn’t do too shabby itself, with an operating margin of 22 percent. The March quarter is peak season for Thai tourism, which is clearly coming back with a vengeance. To be clear though, foreign visitor arrivals are still just 60 percent of what they were pre-pandemic. Interestingly, Russians are currently among the most numerous visitors.
  • Virgin Atlantic clawed back most of its pre-pandemic revenue levels last year, generating $3.6 billion in sales. It also managed a 2 percent operating margin for 2022, similar to what it earned in 2019. It did suffer a pretax loss of $254 million excluding special items, however, scarred by cost inflation, a weak British pound, and what it called operational “failings” by London Heathrow airport. Virgin was never much of a money maker, relying heavily on transatlantic flying to the U.S. Fortunately, the transatlantic market is currently firing on all cylinders, and Virgin is working closely with its joint venture partners Delta and Air France-KLM to get back to net profitability. But it doesn’t expect that to happen until 2024. In 2021 and 2022, it lost a combined $1.7 billion, forcing it to undergo a bankruptcy restructuring. Virgin joined the SkyTeam Alliance in March.
  • TAP Air Portugal, which is the focus of a potential investment by Air France-KLM and others, posted a $17 million operating loss, and negative 2 percent operating margin in the first quarter. That’s a significant improvement from its negative 12.6 percent margin a year ago. Nearly every other metric showed improvement: unit revenue (RASK) was up 23 percent year-over-year, and unit costs (CASK) excluding fuel increased just 1 percent. Compared to 2019, RASK was up 24 percent on a 9 percent increase in capacity, while CASK excluding fuel was down 7 percent.
  • Forward bookings at Norwegian Air are pacing above 2019 levels with average fares in the peak June-to-August period 25 percent above pre-pandemic levels. All these indicators lead the discounter to suggest a “record” travel summer ahead. Sound familiar? Still, Norwegian continues to benefit from its pandemic restructuring and the struggles of its main competitor, SAS. Norwegian captured more corporate share in its home market, Norway, in the first quarter, and said its downward capacity fluctuation helped it limit losses during the notoriously weak winter quarter. Norwegian posted an $83 million operating loss, and negative 23 percent operating margin in the first quarter. That’s not great, but the margin result is about half as bad as it was last year — so, progress? Norwegian says it maintains plans to operate 81 aircraft this summer despite Boeing delivery delays.
  • TUI, the European tourism giant, told investors that bookings for the upcoming summer are “very strong,” echoing a theme. TUI has airline units based in various European countries, most importantly the UK, Germany, and Netherlands. During a quarterly earnings presentation last week, executives reacted favorably to the news of Ryanair’s big 737-10 order, viewing the deal as affirmation that Boeing will in fact build and deliver the variant. But the executives made clear their unhappiness with Boeing’s production delays (“They are not performing as they should perform”). But “with this [Ryanair] order,” said CEO Sebastian Ebel, “I think we can now expect that they will deliver the -10, which is extremely important for us to be competitive to the Neo of Airbus, which is mainly used by competitors.” He also hinted that TUI got a good deal from Boeing, ordering its Maxes several years ago when market conditions were looser. Ebel is less enamored with the constrained hotel supply situation across Europe, noting that “today, to get a flight seat to Greece is easier. It’s also not easy, but it’s easier than to get a bed.” A separate concern is the strong U.S. dollar relative to the euro — “the dollar, yes, has lost strength against the euro, but it’s still not where it had been.” This is having a dampening effect on outbound intercontinental demand from Europe. Longhaul airfares have risen a lot as well. Interestingly on the topic of serving Turkey, Ebel said TUI prefers to buy capacity from SunExpress than fly its own planes, because of the “stupid” EU passenger rights rules that give Turkish carriers a large cost advantage. “It makes a lot of sense to buy from SunExpress … It’s a great airline, a huge cost advantage, and they are happy to have us as a lead customer.”
  • Turkey’s Pegasus Airlines, which had a spectacular fourth quarter, came down to earth in the seasonally weak first quarter. Its operating margin was negative 1 percent, which is just fine for an airline that routinely runs extremely high margins in the summer. Pegasus surely has close eyes on what Turkish Airlines has planned for Anadolujet (see Feature).
  • Air Arabia, whose main base is in Sharjah just a stone’s throw from Dubai, performed strikingly well in the first quarter, earning a 21 percent operating margin. The LCC has affiliates spread across the Middle East and North Africa, including a venture based in Abu Dhabi. It has seven bases to be exact, its newest two located in Armenia and Pakistan. It began 2023 with 68 planes but currently has 120 on order, all Airbus narrowbodies. Besides its airlines, Air Arabia also owns a collection of hotels, IT firms, ground handlers, tour operators, maintenance providers, aviation training schools, and so on.
  • AirBaltic posted a $12.4 million net loss in the first quarter on $114 million in revenues. The loss was two-thirds smaller than what the airline reported a year ago, while revenues jumped 75 percent. Revenues were up 39 percent compared to 2019. AirBaltic aims to return to profitability later this year ahead of a planned IPO in 2024.

Jay Shabat & Edward Russell

Earnings Scoreboard: First Quarter Leaders & Laggards

Jay Shabat

In Other News

  • Pilots at Southwest voted 99 percent in favor of a strike last week. The vote, held by the Southwest Airlines Pilots Association, authorizes crew members to go on strike as a final measure if contract talks fail. However, as at other airlines, the authorization is primarily viewed as a negotiating tactic for pilots that have been unable to reach a deal with Southwest management since their existing pact became amendable in November 2020. Pilots at American have also authorized a strike in their own contract talks with airline management.

Edward Russell

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Ryanair laid out its future growth plans last week with a mega deal for up to 300 Boeing 737-10s. The planes will allow the giant discounter to continue to grow seats in its core markets, as well as expand into new ones — particularly those to the east.

Michael O’Leary, Ryanair Group CEO, speaking on a rainy morning at Boeing’s headquarters near Washington’s Reagan National airport in Arlington, Va., ticked off Egypt, Israel, Jordan, and Morocco as countries adjacent to Europe where the group is or plans to grow. But none of the markets figure as highly in the discounter’s plans as Eastern Europe.

“The biggest prize we’re looking at is Ukraine,” O’Leary said. Ryanair aims to be the first airline back in the country once the war with Russia ends and Ukraine’s airspace is declared safe again by European authorities. And the airline hopes to base aircraft in Ukraine within 12 months of resuming flights, he added.

Ryanair is already hiring Ukrainian pilots and cabin crew to support its future operations in the country. The crew members are currently based in Bulgaria, Poland, and Romania.

The shift east for Dublin-based Ryanair is expected. Western European markets that are the airline’s bread and butter are “essentially fully penetrated,” Bernstein analyst Alex Irving wrote in a report earlier in May. That limits growth opportunities there for Ryanair, he added.

Historically, airline capacity in mature markets grows at roughly the rate of annual economic growth. And in the case of Western Europe, economic growth rates are likely to hover in the low single digits.

“There is structural growth on offer in Europe, in the east of the continent,” Irving wrote. He added that Ryanair could base roughly 100 new aircraft in Eastern Europe by the end of the decade. The airline is also likely to capacity to Northern Africa and the Middle East over the same period, Irving noted.

The timing of Irving’s forecast dovetails nicely with Ryanair’s new Maxes. The 737-10s will begin arriving in 2027 and continue through 2033 — just in time to support a push into Eastern Europe if Irving’s estimates hold up. Deliveries from the airline’s current order book, which stood at 126 737-8200s at the end of December, continue through its 2025 fiscal year that ends in March 2026.

Ryanair will use roughly half of the 737-10s it ordered, or 150 aircraft, to replace older 737 Next Generation models in its fleet, O’Leary said. That still allows for significant growth as the new planes will come equipped with 228 seats, or a fifth more than the 189 seats on its 737-800s. The balance of the order will be used for network expansion. The order is split between 150 firm and 150 options, though O’Leary said Ryanair intends to exercise the options in the future.

Ryanair aims to carry 300 million passengers annually by 2034. That represents a roughly 5 percent compound annual growth rate from the 169 million it flew during the fiscal year ending in March.

One place Ryanair will not be sending its new Maxes: North America.

“We have no interest in transatlantic … Longhaul, low-cost fundamentally doesn’t work,” O’Leary said. He cited the losses incurred by Norwegian Air before it closed its longhaul, low-cost business in 2021.

One cannot understate the significance of Ryanair’s order for Boeing. O’Leary has been an outspoken critic of the airframer on everything from delivery delays to the price of the 737-10. As recently as November, he described the airline’s relationship with Boeing as “challenged” due to the delays. All of that appears water under the bridge now.

“It’s a bit like a marriage,” O’Leary said. “We have occasional rows and occasional splits, and we come together and kiss and make up.”

Ryanair expects 49-50 of the 51 737-8200s that were due ahead of its summer schedule to arrive by July, O’Leary said. That will force it to pull some seats from its schedule in May and June but, he emphasized, the airline sees no “material impact” and will not cancel flights or routes.

But Boeing’s challenges are bigger than aircraft delivery delays. A “gnarly” defect, as Boeing CEO Dave Calhoun put it Tuesday, found in 737 Max parts supplied by Spirit Aerosystems will take several months to fix. And it still has not certified the 737-7 or -10, two planes it was originally scheduled to begin delivering years ago.

“The airplane is performing beautifully, and we’re progressing,” Calhoun said on the certification process. U.S. Federal Aviation Administration certification of the 737-7, for which Southwest has hundreds on order, is expected this year and for the -10 in 2024, he added.

“I have nothing but confidence [in Boeing], particularly since you know we’re not the [first] delivery customer,” O’Leary said. Ryanair’s new Max order is worth $40 billion at list prices.

Edward Russell

Fleet Briefs

  • More issues for Pratt & Whitney’s geared turbofan (GTF) engines: KLM has pulled an undisclosed number of its Embraer E195-E2 aircraft from service and resulting in “minor adjustments to its summer timetable.” Data from FlightRadar24 shows that KLM has not flown five of its 15 E195-E2s since at least early April, and three of those not since December. Go Air in India, Hawaiian, Lufthansa, and Swiss are among other airlines reporting an adverse impact to their fleets from the GTF engine supply issues.
  • Philippine Airlines inked a memorandum of understanding with Airbus last week for nine A350-1000s. The planes, if finalized, would be used on the carrier’s routes to the Eastern U.S. and Canada, including New York and Toronto. Philippine Airlines operates two A350-900s.
  • South African Airways plans to lease six aircraft — five Airbus narrowbodies and one widebody — to begin relaunching its international route network later this year. The state-owned airline currently flies five A320s, one A330, and one A340. South African Airways was one of the hardest hit airlines during the crisis but, thanks to its state ownership, has been unable to recover like many of its peers. It suspended flights for 18 months in 2020 and 2021 but, unlike its competitors Airlink and Safair, has severely restricted in what flights it could resume. That’s has left a a gap for others to exploit, including the aforementioned domestic players as well as foreign airlines, including Delta and United, who have piled on new flights to South Africa over the past two years.
  • Air New Zealand is in talks to lease an eighth Boeing 777-300ER to support the rapid rebound in travel demand. CEO Greg Foran confirmed the discussions during a presentation last week. The news came the same week that the airline brought the last of its seven 777-300ERs back from desert storage in California. The airline has firm orders for eight 787s that will begin delivering late in 2024. Air New Zealand plans to fly roughly 91 percent of its pre-pandemic capacity during the IATA summer season through October.

Edward Russell

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Routes and Networks

  • Unsurprisingly, Delta‘s main competitor to Japan, United, objects to the its request for temporary gateway flexibility for two slot pairs at Tokyo’s Haneda airport. United, which has an immunized joint venture with All Nippon Airways, noted in a filing with the Department of Transportation that U.S.-Japan travel demand is recovering steadily, and the rate has already accelerated since the full easing of travel restrictions in Japan in April. Delta had claimed that demand was so significantly depressed that it needed to adjust the gateways on two of its seven Haneda slot pairs. And in the move we all expected, United said it is ready to fly the two slot pairs that Delta wants gateway flexibility for. American has backed Delta’s request, while Hawaiian Airlines has yet to submit a response.
  • AirBaltic is adding two new dots to its map this winter: Agadir, Morocco, and Alicante. The airline will serve Agadir from its Riga base beginning November 4, and Alicante beginning February 26, 2024. The new markets are part of an 11-route expansion by AirBaltic this winter, other additions include: Tallinn to Geneva, Tampere, and Tenerife; Tampere to Tenerife and Kittila, Finland; and Vilnius to Brussels, Dubai, Tenerife, and Turin.
  • Route tidbits: Delta will launch new daily service between Boston and Mexico City, a hub for its partner Aeromexico, with a Boeing 757-200 on December 21. Speaking of Delta, WestJet will launch new five-times weekly service between Winnipeg and Atlanta on September 6. Porter Airlines continues its Embraer E195-E2-fueled expansion with plans for a new daily nonstop between Ottawa and Vancouver from July 26. SAS will launch a new route between Stockholm Arlanda and Agadir, Morocco, with weekly flights from November 9. The route was last flown by both Air Arabia and Norwegian Air in 2019, per Diio.

Edward Russell

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Landing Strip

Reagan National Airport, adjacent to downtown Washington, D.C., is one of just two airports in the U.S. with a perimeter that limits how far airlines can fly. While several exemptions to that rule have been added since 2000, a new group backed by Delta wants to more than double the number of long-distance flights.

The Capital Access Alliance, which has 24 members including Delta, says that removing or easing the perimeter would “make air travel more affordable and efficient” to and from Washington, D.C. On Wednesday, Representatives Hank Johnson (D-Ga.) and Burgess Owens (R-Utah) — both states with large Delta hubs — introduced legislation to create 56 new exemptions to National’s perimeter rule, or 28 new pairs. A pair is needed to operate a round-trip flight. Incumbent airlines, including Delta, would be eligible for 20 pairs, and non-incumbents, like Frontier Airlines, the remaining eight.

All flights from Washington National are limited by a 1,250-mile perimeter that falls just west of places like Dallas-Fort Worth and Minneapolis-St. Paul. There are 20 exemptions to the rule held by Alaska Airlines, American, Delta, Frontier, JetBlue, Southwest, and United that allow flights to destinations including Austin, Los Angeles, Phoenix, and San Juan.

New York LaGuardia is the only other airport in the U.S. with a similar distance limit on flights. Its perimeter is set at 1,500 miles with a carve-out for Denver and flights on Saturdays. The difference with Washington National is the local airport operator, the Port Authority of New York and New Jersey, manages the perimeter at LaGuardia, and not the federal government.

In both New York and Washington, D.C., the decades-old perimeters were implemented to push longer-distance flights to larger airports designed for such operations. The main long-distance and international gateways for New York are JFK and Newark airports. D.C.’s equivalents are Baltimore-Washington and Dulles airports.

The Delta-backed legislation is an opening salvo in what will likely be a heated fight over Washington National in the upcoming Federal Aviation Reauthorization bill. Washington-area representatives, including those from Maryland and Virginia, oppose new slot exemptions at the close-in airport. As do the airport operator, the Metropolitan Washington Airports Authority (MWAA), and United Airlines, which has a large hub at D.C.’s main international gateway, Dulles airport.

“This is a political landmine,” Cranky Flier author Brett Snyder wrote Tuesday. He noted that, with the FAA currently leader-less and an air traffic control staffing shortage limiting flights, there are “far bigger issues” for Congress to focus on than the perimeter at Washington National.

The key argument for both Capital Access and representatives Johnson and Owens appears to be airfares. In a statement Wednesday, Johnson said: “By limiting the number of flights in and out of National Airport, we are squeezing consumers … Travelers who want to visit the capital region face the most expensive domestic ticket prices compared to other major markets because of limited competition.”

Johnson’s statement, however, is not true, at least based on the latest U.S. Bureau of Transportation Statistics data on airfares. They show domestic average fares were $403.50 from Washington National in the fourth quarter. That is almost $10 more than the national average of $393.85 but lower than, for example, in the larger Los Angeles and Dallas-Fort Worth areas. And travelers in the Washington area have multiple alternative airports, including the region’s busiest Baltimore-Washington (BWI) where average fares were just $356.32 — or nearly $38 cheaper than nationally — in the December quarter.

Average airfares at both Johnson’s home airport of Atlanta and Owens’ home airport of Salt Lake City are notably higher than at Washington National. Atlanta stood at $408.76 and Salt Lake City at $439.50 in the fourth quarter.

Airfares aside, there is the issue of airport capacity at Washington National. MWAA recently completed a $1 billion upgrade to the airport, known as Project Journey, that included a new regional concourse and expanded the secure area in Terminal 2. The expansion was in response to a boom in passenger traffic in recent years to nearly 24 million travelers in 2019; traffic numbers had fully recovered to that level last year. The terminal complex, prior to the expansion, was designed for roughly 15 million annual passengers.

The addition of up to 28 new round-trip, long-distance flights could increase pressure on the facilities at Washington National. Due to their distance — at least more than 1,250 miles — they almost certainly would be flown with larger Airbus A320 or Boeing 737 family aircraft that can seat up to 200 passengers.

There are also legitimate concerns about the effect on United’s hub operations at Dulles. However, with the airport remaining the primary international gateway to the D.C.-region, the impact would likely be limited.

A 2021 report by the U.S. Government Accountability Office was inconclusive about the effect of removing the perimeter or adding new exemptions at Washington National. “It would be challenging to predict or quantify such effects,” the GAO found.

The last attempt to change the perimeter at Washington National in 2016 would have moved it to 1,425 miles from the current 1,250 miles. Backed by legislators from Texas, it would have allowed for nonstop flights to Austin and San Antonio. The attempt failed.

Edward Russell

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Feature Story

By now you’ve probably heard: Turkish Airlines is taking the airline world by storm. This year, it expects to move more than 85 million passengers, up from just 10 million 20 years ago. Today, among global airlines based outside the U.S., only Emirates is larger in terms of available seat kilometers. If all goes to plan, Turkish will be moving 170 million passengers ten years from now, with more than 800 planes flying to roughly 400 destinations across the world. Already, Istanbul’s main airport offers more flights than even London Heathrow. Twenty years ago, it offered fewer flights than Manchester.

A breathtaking growth story, and a highly profitable one. But there’s an important subplot to this story, one that gets less attention. Have you heard of Anadolujet? Maybe not, if you’re based outside Turkey. But its pace of expansion is no less breathtaking than that of its parent. Anadolujet, a wholly-owned subsidiary of Turkish Airlines, is quietly becoming an influential airline in its own right, taking advantage of Turkey’s unique market strengths, most importantly its geography, its tourist appeal, its lowish labor costs, and its large diaspora.

Anadolujet is not new. Turkish launched it back in 2008, partly as a defensive weapon against Pegasus Airlines, which adopted a low-cost business model three years earlier. Anadolujet was itself positioned as an LCC, mostly tasked with serving Turkey’s capital Ankara, connecting it with cities throughout the country. The operation began life with just five airplanes. By the start of 2020, it was flying 31 planes, all Boeing 737-800s, half based in Ankara and half based at Istanbul’s secondary airport (Sabiha Gökçen) located on the Asian side of the city.

Along the way, Andolujet’s strategy fluctuated rather haphazardly, hinting at some indecision about what exactly its mission should be. It at times flew regional aircraft, including Embraer E-Jets and ATRs. Part of its fleet was (and still is) operated via wet-lease by Sun Express, an airline jointly owned by Turkish Airlines and Lufthansa (wet leasing means renting not just the planes but also the crews). Early on, Anadolujet began expanding into Europe, targeting Turkish migrant populations, not unlike Sun Express was already doing. It quickly reverted to being an all-domestic LCC, until again adopting an international strategy during the pandemic, mainly from Gökçen airport. Was Anadolujet just an afterthought for Turkish, a mere tool to handle secondary objectives — like satisfying Ankara’s air service needs and pressuring Pegasus — separate from its primary objective of conquering the skies from Istanbul International? Or would Anadolujet become more than just an afterthought?

Now the answer is crystal clear. In its latest 10-year business plan, Turkish reveals gargantuan growth plans for its low-cost unit. It aims to expand its seat capacity by an average of about 14 percent annually through 2033, ending with a fleet of some 200 planes. That’s more than Wizz Air has today. Anadolujet began this year with 64 planes flying 180 routes. Many of the 737 Maxes, or more likely Airbus A320-family neos, that Turkish has on order will likely end up with Anadolujet. Of the 55 new planes Turkish expects to receive this year, 30 will go to its LCC, all of them next-generation narrowbodies.

Perhaps most interestingly, Turkish now plans to let its low-cost offspring walk on its own. The idea is to give Anadolujet a unique operating certificate separate from the one Turkish uses. That will coincide with turning the airline into a separate company that it will then sell, at least partially; one option is a share offering to the public (IPO). “We expect to spin Anadolujet off by the beginning of 2024,” said Turkish Airlines Chief Financial Officer Murat Şeker, during the company’s first-quarter earnings call.

To spruce its appeal, Turkish will work to fortify Anadolujet’s LCC credentials, introducing a new passenger service system, for example, that will enable more robust ancillary selling and better revenue management. Another focus will be brand positioning, hoping to boost awareness for a carrier little known outside of Turkey. That was fine when Anadolujet stayed within its borders. But already in the first quarter of this year, 30 percent of its passengers flew on international itineraries. Most of these involved Europe or the Middle East, with connections between the two available via Istanbul Gökçen. London Stansted, Tel Aviv, Dusseldorf, and Jeddah are some of the carrier’s top markets. Central Asia, populated by ethnic Turks, is another important market. A new second runway at Gökçen creates further growth opportunities from Istanbul.

But it’s also flying internationally from Ankara as well. Same for the beach resort of Antalya, bringing sun-seeking tourists. Other top tourist spots like Bodrum and Dalaman likewise have nonstop Anadolujet flights to points abroad. All told, about half of the LCC’s capacity is now international. Five years from now, the goal is to increase the portion to nearly three-quarters. The overall plan in many ways mimics what Pegasus is doing. And why not mimic a rival airline that earned a 24 percent operating margin last year?

Naturally, like any self-respecting LCC, Anadolujet will look to cut its unit costs, in its case by at least 20 percent. The newer, more fuel-efficient aircraft it’s getting will help in this regard. The plan is to end this year with 86 planes.

Pay attention to Anadolujet’s new brand identity, to be unveiled “in the upcoming quarters.” Will it change its name? In any case, whatever it’s called, the low-cost arm of Turkish Airlines will have quite a growth story to tell potential investors; a growth story impressive even by the superlative standards of its globetrotting parent.  

Jay Shabat

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