American Airlines CEO Doug Parker stood steps from the U.S. Capitol just four months ago, calling on Congress to provide billions of dollars in additional aid. The funds would allow airlines to forgo involuntary furloughs — likely for good — in the middle of the coronavirus pandemic and an economic recession.
Fast forward from that September afternoon and Parker is singing a very different tune. With the recovery in air travel slowing, furloughs are on the table for American after the latest round of federal relief expires on March 31. And that’s not all, despite promises that the industry would not need additional aid, unions are in talks with the Biden administration about the possibility of yet another round of payroll support this spring.
“We had hoped that demand would be — would have picked up, maybe not so much by April, but into the summer. That hasn’t happened yet,” Parker told investors during American’s fourth-quarter earnings call last week. The carrier will “need to address” its staffing levels if demand does not pick up in the next two months.
The outlook from American and other carriers paints a grim picture for the winter months. Most expect no improvement in the first quarter from the fourth quarter with the slow roll out of vaccines and continuing high Covid-19 infection — and death — rates.
In his comments, Parker did not say how many staff could face furloughs in April (see State of the Unions section below). Discussions are ongoing with unions on the subject with more voluntary measures likely before any involuntary actions, he indicated.
American furloughed 19,000 employees — the most of any single U.S. carrier — on October 1 when employment protections under the first CARES Act expired. It recalled staff just before Christmas after Congress approved a $17 billion extension.
Testing Risk
The possibility of Covid-19 testing requirements for all U.S. domestic flights is top of mind in the industry. While potentially necessary to slow the spread of the virus, such a move would undoubtedly dampen the recovery just as airlines were getting optimistic about 2021.
“Domestic testing … seems like something that would both be difficult, and have us testing Americans on airplanes that we know is safe,” Parker said when asked about the possibility. He added he does not necessarily oppose such a move but that further discussions with the administration are needed.
The Covid testing requirements for international arrivals in the U.S. that began last week have depressed bookings, he said. An expanded mandate would likely have a similar affect on domestic travel.
The possibility of domestic Covid-19 testing rules was raised by the Centers for Disease Control and Prevention (CDC) January 26. The agency said it is “actively looking” at the option amid the Biden administration’s push to control the pandemic, which has taken the lives of more than 425,000 Americans in a year.
There is evidence to suggest testing requirements do slow the spread of Covid-19. Hawaii credits its rules for allowing it to reopen to visitors in October while keeping the number of infections under control.
However, Hawaii benefits from an ocean between itself and the continental U.S. The benefits of requiring a negative test for a domestic flight would be limited if travelers could freely drive, or take the bus or train, between states.
American notably avoided providing any guidance of a tipping point in the travel recovery. Other carriers, including Delta Air Lines and United Airlines, have said they expect a rapid travel recovery to occur seemingly suddenly later this year — anytime from spring through Labor Day — once Covid vaccines are widely available. However, these comments were made before the possibility of domestic testing rules.
Structural Efficiencies
“By the time we get to December, we have the ability to produce 2019 level capacity on about 110 fewer airplanes,” American Chief Revenue Officer Vasu Raja said.
Those numbers represent a dramatic operational savings for the airline. By management’s estimates, American has permanently reduced annual expenses by roughly $500 million during the crisis.
The savings are multifold. Part comes from the headcount cuts that include a one-third reduction in the carrier’s management ranks, plus the many voluntary departures in 2020. Another part is from the fleet renewal that occurred last year.
American retired some 136 jets, including all of its Airbus A330s, Boeing 757s and 767s, and Embraer E190s in 2020. They will eventually be replaced by new Airbus A321neos, Boeing 737 Maxes and 787s — 16 A321s, 11 737-8s and 19 787s are due this year. And, in many cases, these replacement aircraft have more seats than the ones they replace resulting in further efficiency gains.
“We believe the structural changes made in 2020 will allow us to make industry leading revenues,” said American President Robert Isom.
And The Numbers
American reported a $2.2 billion net loss during the final three months of 2020. Revenues fell 64 percent to $4 billion on a 38 percent drop in expenses to $6.5 billion. The airline’s daily cash burn stood at an average of $30 million a day during the period.
The airline does not expect a material improvement in the first quarter. Revenue is forecast to drop 60 to 65 percent compared to the same period in 2019, and it plans to reduce capacity by about 45 percent. Cash burn is expected to hold steady at roughly $30 million a day.
For the full year, American’s net loss was $8.9 billion. Revenues slid 62 percent to $17.3 billion and expenses 35 percent to $27.8 billion. The airline flew nearly 62 percent less passenger traffic after halving capacity in 2020.
Southwest’s Streak Ends With First Loss in Nearly Half a Century
Southwest Airlines posted its first annual loss since 1972 last year as the industry was wracked by the coronavirus pandemic crisis.
The $3.1 billion net loss was “no surprise” during the crisis year, the Dallas-based carrier’s chairman and CEO Gary Kelly told investors during the company’s earnings call last week. Southwest is ready to “weather this continuing storm,” he added.
And that storm only appears to be growing. Despite optimism surrounding Covid-19 vaccines, airlines face weak demand and a nearly lifeless business travel market — Southwest executives said corporate flyer numbers are down about 87 percent from 2019 — through at least the first three months of 2021. And potential new testing rules for domestic air travel could put even more of a damper on the recovery until vaccines are more widely available.
“I think it would be a mistake,” Southwest President Tom Nealon said in response to questions on the possible testing rules. Implementation would be “very costly” for the industry and could distract from the distribution of vaccines.
The Biden administration has made it a top priority to get the pandemic under control and reopen the economy. And testing, in the few examples available, has been proven to slow the spread of the virus while allowing travel to continue.
“I just think with the millions of customers who fly or ride buses or trains or whatever, it’s just unrealistic to expect that we can efficiently and effectively do testing on a large scale,” said Nealon.
Concerns about difficulties testing all air travelers are not limited to airlines. In a report, Raymond James analyst Savanthi Syth cited the existing supply of tests an “impediment” to a broad mandate. She added that such rules are more likely once vaccines are widely available — something she expects by the summer — with exemptions available for those who have received their jabs.
Growing Out of Crisis
In the meantime, Southwest is doing what it does best during downturns: growing. The carrier is bullish on the opportunities opened up by the crisis. It has added or unveiled 12 new destinations and counting for its route map since the pandemic began.
“This is the bread and butter [for] Southwest,” said Nealon. “The question of why now is very, very easy to answer. First, we have the aircraft, we have the people that do it. And second, we’re going after new revenue pools.”
The markets are broadly split into two categories: large airports in big cities that complement existing service — think O’Hare and Midway airports in Chicago — and small airports that add diversity to the carrier’s domestic map.
The former category includes Chicago O’Hare, Houston Bush Intercontinental and Miami. While Colorado Springs, Montrose and Steamboat Springs, Colo.; Fresno, Palm Springs and Santa Barbara, Calif.; Jackson, Miss.; Sarasota/Bradenton, Fla.; and Savannah, Ga., fall into the latter. Flights to all of the new destinations are due to begin by June.
And with schedules still thin amid coronavirus cuts, Southwest has planes available to embark on a broad expansion. It will further buoy its fleet with the re-introduction of the Boeing 737 Max on March 11. Initially, the jet will be isolated to just 10 routes for the first month before it is scheduled across the Southwest network from mid-April. The airline plans to fly 69 737-8s by year-end.
Southwest will be the fourth, and last, U.S. carrier to reintroduce the Max since the aircraft was re-certified in November. American returned the plane to the skies in December with United Airlines scheduled to follow February 11, and Alaska Airlines on March 1. Alaska took delivery of its first Max to replace its Airbus A320 jets earlier in January.
A Historic Loss
Southwest revenues plummeted 65 percent to $2 billion on a 37 percent drop in expenses to $3.2 billion in the fourth quarter. This left the airline with a $908 million net loss for period. Cash burn averaged $12 million a day.
The loss, and those in prior quarters, pushed the airline to the historic net loss for 2020 — its first in 48 years. For the full year, revenues dropped 60 percent to a little over $9 billion and expenses were down 34 percent to $12.9 billion. Passenger traffic fell 59 percent on a 34 percent capacity cut.
The outlook is not much better for the first quarter. Southwest expects cash burn to climb to about $17 million a day even as it slashes capacity by 35 percent compared to 2020.
Alaska Places Its Bets on Boeing
Incoming Alaska Airlines CEO Ben Minicucci will take the helm in March in perhaps one of the strangest years in the century-long history of commercial aviation. After a brutal 2020, the airline is looking at this year as one of transition with a recovery in the offing in 2023, provided enough people in the U.S. get vaccinated, that is.
“I think I’m optimistic with the Biden administration,” Minicucci told analysts during the company’s fourth-quarter and full-year 2020 earnings call on Tuesday. “[President Joseph Biden] just announced 1.5 million vaccines per day … it could mean we have 100 million people in the country vaccinated.”
“I think we might start seeing people venturing out for spring break, so I think we’re going to be cautious … I think we’re going to be on our toes and react appropriately,” added Minicucci, who assumes his new role officially in March.
Alaska executives noted that December was weaker than expected as bookings dropped off in late November in response to spikes in Covid-19 cases around the country and as states re-imposed travel restrictions.
But whether enough people in the U.S. will be vaccinated by then remains an open question, and airlines have been cautious in their predictions. Public health officials have said that at the current rate of vaccinations could result in herd immunity by Thanksgiving, in late November. The Biden administration has committed to increasing that pace, as Minicucci noted, but logistical challenges remain daunting, and vaccination rates and eligibility vary by state.
Adding to Alaska’s uncertainty is that its route network skews heavily toward the West Coast, which has some of the most severe travel restrictions in the country. Alaska expects demand at its San Francisco hub to be only 68 percent of 2019 levels in the first quarter. Similarly, its business-heavy transcontinental routes to the East Coast are expected to be down 80 percent in the first quarter.
Leisure, Leisure, Leisure
But where Alaska sees hope in what it calls “fun and sun” routes, to Hawaii, Mexican beach resorts, and destinations in the West that center around outdoor recreation. “You’re going to see a lot of focus on the Pacific Northwest and the state of Alaska,” Minicucci said. “We’re moving our airplanes around to go where the stronger demand is,” added chief commercial officer Andrew Harrison.
Business demand, however, is weak, at only 15 percent of 2019 levels. Where the airline is seeing some business-travel demand is among commercial fisherman and oil-industry workers heading to Alaska. And, echoing Delta Air Lines and United Airlines, Alaska is seeing more business travel among small- and medium-sized enterprises.
Larger business, like its fellow Seattle-based companies Microsoft and Amazon, are not sending employees back on the road yet. “[Corporate] travel managers have to decide on their duty-of-care and how much friction they’re going to put on people to travel,” before there is a more robust recovery in that sector, Harrison said. Alaska expects business travel to rebound to half of 2019 levels by the end of the year.
The carrier is unblocking middle seats in its economy cabin, but to encourage business travelers back to flight, will continue blocking middle seats in its premium cabin through May 31.
Alaska also is pinning hopes on its recently approved partnership with American Airlines and its joining the Oneworld alliance later this year. Both these moves will help it expand its corporate sales by giving customers more options for international travel.
The Right Aircraft
In the meantime, Alaska is retiring the Airbus A320-family jets it inherited from its merger with Virgin America. The carrier recently announced a 68-aircraft order with Boeing for 737 Max aircraft, to be delivered between now and 2024. In addition, the carrier has options to buy another 52 more.
Pilots currently certified to fly the A320s will be trained to operate the new Boeing aircraft, but Alaska did not specify a timeline for when that training will be completed. The carrier has parked 40 of its A320s, but it will retain 10 of the larger A321s for the foreseeable future.
“This fleet order gives us the chance to get back to full pre-Covid capacity in 2022 if the demand is there, and the potential for growth beyond that,” chief financial officer Shane Tackett said. Capacity — the number of seats an airline flies — was down 59 percent year-over-year in the fourth quarter and is expected to be 70 percent of 2019 capacity this quarter.
Each 737-9 offers 28 more seats than the A320s being replaced and offer lower operating costs and greater fuel economy than the former Virgin America aircraft, he added.
The future may be hopeful, but the present is dire. Alaska Airlines hemorrhaged money in the fourth quarter of 2020 and for the full year. It lost $430 million in the last quarter and $1.3 billion for the year. Revenues were down 64 percent in the fourth quarter to $808 million, and down 59 percent for the full year, to $3.6 billion. Daily cash burn was $3.8 million in the fourth quarter, a number Alaska has managed to hold steady through much of the pandemic.
The reason it could keep its daily cash burn at about $4 million per day is that it took early and aggressive measures to cut costs, Tackett noted. More than 10,000 employees took some form of leave during the pandemic. More than 3,000 remain on leave. The carrier has taken a total of $533 million in payroll support from the federal government through the CARES Act last year and the extension in December. Alaska is availing itself of federal grants to support the airline industry, to the tune of $400 million this quarter. The company has until May to decide if it wants to take a loan — a separate CARES Act financial facility — from the federal government.
London Still Calling JetBlue
JetBlue Airways is pressing ahead with its planned London launch in the third quarter, despite uncertainty over the trajectory of the pandemic and whether travel restrictions between the U.S. and the UK will remain in force.
The UK has been hit hard by new variants of the coronavirus and is set to announce mandatory hotel-based quarantines for incoming passengers. But JetBlue, like most airlines, is betting that the pace of vaccine administration will pick up over the course of the year, releasing what its executives say is “pent-up demand” for leisure travel.
The New York-based airline has not disclosed where it will fly to in the greater London area. “We have paths to more than one London airport,” CEO Robin Hayes told analysts on the company’s fourth-quarter and full-year 2020 earnings call on Thursday. The carrier last year won slots at both Gatwick and Stansted — although not as many as it requested. It recently filed a complaint with the U.S. Transportation Department that it had been shut out of Heathrow.
Heathrow access, perennially a problem for airlines, has been complicated by the UK government’s slot waiver extension. Airlines are subject to a minimum-use requirement for slots at Heathrow, a requirement that has been waived due to the pandemic. This has choked off the secondary market for slots, so JetBlue couldn’t buy slots even if it wanted to.
Since it first announced plans to fly to London, JetBlue has said it would fly from Boston and New York’s John F. Kennedy International Airport. But Scott Laurence, head of revenue management and planning, suggested the airline could fly to the UK capital from South Florida. The airline could consider flying from its Fort Lauderdale focus city when it takes delivery of Airbus A321 XLRs, he said. In the meantime, JetBlue is pursuing a pair of slots awarded to an undisclosed carrier that are not being used, he said.
London is planned for the third quarter. The present is a different picture altogether. JetBlue’s fourth-quarter flown capacity was down 47 percent from 2019’s fourth quarter. After bookings started to recover in the autumn, the company saw demand plunge in December as Covid-19 cases spiked around the U.S. and state governments, particularly in the Northeast and California, urged residents not to travel. JetBlue expects first-quarter capacity to be 40 percent of 2019 levels.
But the airline expects demand will rise as vaccines take hold. JetBlue now is planning to end the year flying between 70-75 percent of 2019 capacity, with the expectation that the first quarter of 2022 will see capacity restored to 2019 levels.
The carrier said it has seen demand to its Latin American and Caribbean markets remain strong, driven by visiting friends and relatives (VFR) traffic. As international restrictions change, domestic demand has shifted to Florida, it said. JetBlue believes its leisure-heavy network will stand it in good stead when demand begins to return more meaningfully.
Key to its recovery plan is its recently approved partnership with American Airlines, dubbed the “Northeast Alliance.” This will give JetBlue greater reach in the Midwest and the Southeast, routes that often are served by one carrier from New York. The partnership also will give JetBlue more access to international flights via codeshare, something it is keen to sell to its corporate customers, Laurence said.
Also key to JetBlue’s future is its changing fleet mix. The airline last month took delivery of the first of eight Airbus A220s it plans to add this year. It plans to retire one Embraer E190 aircraft for each A220 it takes, Hayes said. In addition to the A220, JetBlue took delivery of two Airbus A321 NEOs in the fourth quarter and plans to add three more in the first quarter of this year. JetBlue plans to end the year with 282 aircraft in its fleet, up from 267 at the end of last year.
JetBlue reported fourth-quarter 2020 loss of $454 million, resulting in a negative 69 percent operating margin. Full-year losses were $1.7 billion, generating a negative 58 percent operating margin. Revenues fell by 67 percent in the fourth quarter to $661 million, and by 64 percent for the full year, to almost $3 billion. The carrier’s daily cash burn for the fourth quarter was $6.7 million, or at the lower end of a forecast $6-8 million range.
Testing Requirements Depress Hawaiian’s Interisland Business
Hawaiian Airlines is raising more than $1 billion, backed by its loyalty program and other assets, that will help retire the debt it owes the federal government through a CARES Act loan. This move is part of the way the carrier plans to put its financial house in order as it faces an uncertain year.
The carrier did not supply many details of the offering, but said the funds raised should allow it to exit the federal loan program.
The pandemic hit Hawaiian hard, with travel to Hawaii all but grounded due to the state’s strict travel restrictions. This began to lift in October, when Hawaii began permitting passengers who tested negative for Covid to visit the islands. Expansion of this testing program is key to Hawaiian’s near-term recovery, CEO Peter Ingram told analysts during the company’s fourth-quarter and full-year 2020 earnings call on Tuesday. Longer-term recovery is dependent on more of the population getting vaccinated and the lifting of travel restrictions, he said.
“In our view, pre-travel testing is step one, but vaccination holds a true key to restoring demand closer to historical levels,” Ingram said.
But testing hasn’t been an unqualified boon for Hawaiin, Ingram noted. A substantial part of the carrier’s network is interisland, within Hawaii. The pre-departure test, which can cost more than $100, is a deterrent to most passengers, given the low fares charged for interisland travel. On top of that, travel restrictions vary among the islands. Kauai, for example, recently instituted stricter restrictions, choking off most travel to the island.
Bookings to Hawaii spiked after the government approved pre-departure testing. But with Covid cases spiking on the mainland in December, bookings started to drop. Hawaiian operated 34 percent of its North American schedule in the fourth quarter, rising to 50 percent in December, but has since seen travel decline. “Rising Covid cases on the mainland resulted in a dampening of demand,” said Brent Overbeek, head of revenue planning.
Hawaiian is planning for first-quarter capacity to be about half of 2019’s. Capacity is expected to rise as vaccines are administered and as travel restrictions are relaxed. The carrier expects summer capacity to be between 70-80 percent of 2019 levels.
Its network to the mainland also is expanding, with the addition of Austin, Texas, Orlando, Fla., and Ontario in Southern California. Flights between Long Beach, Calif. and Maui also are expected to begin in the first quarter. Austin and Orlando, in particular, give Hawaiian access to market without direct flights to Hawaii.
When travel resumes, Hawaiian believes it is uniquely positioned to recover quickly, given its leisure-travel oriented schedule.
Hawaiian’s international flying will continue to be sparse. The carrier expects to fly 12 percent of its 2019 international capacity in the first quarter, up from 5 percent in the fourth quarter. Flights to Japan have resumed, but operations to Haneda and Osaka are being scaled back in the first quarter as Covid cases mount in Japan. Service to Korea will ramp up as soon as Hawaiian finds an approved testing partner in that country. Hawaiian has been operating all-cargo flights to Korea during the pandemic, and in December started flying some passengers on those flights. Hawaiian does not plan to resume service to Australia and New Zealand until “at least” the third quarter, Ingram said.
Hawaiian, unlike Delta Air Lines, has no plans to accelerate the retirement of its Boeing 717 fleet. The aircraft type still is expected to leave the fleet somewhere in the middle of the decade, Ingram said. Nor did the reduced utilization during the pandemic lengthen the timeline for retirement, he added. Hawaiian in the fourth quarter reached a deal with Boeing to delay the delivery of its 787-9s. It still expects to take 10 of the type, with the first delivery expected in September 2022.
Hawaiian reported a fourth-quarter loss of $162 million, and losses for the full year 2020 were $510 million. Revenues plunged 79 percent in the fourth quarter to $150 million, and for the full year by 70 percent to $844 million. Cargo and charter revenues fell by only 3 percent, however, to $58 million.
Daily cash burn in the fourth quarter was $1.7 million, lower than the forecast $2.2 million, due to lower costs from operations and higher sales.
In Other News
- HNA Group, parent of Hainan Airlines and several other carriers in China and Hong Kong, is teetering on the edge. The conglomerate said several of its creditors have petitioned the courts for its bankruptcy.
It wasn’t so long ago that HNA Group sought to remake China’s aviation industry, and indeed the world’s. Hainan itself flew a fleet of Boeing 787s to far-flung destinations, including some that analysts at the time said didn’t have the catchment area to sustain nonstops to China. The company invested heavily in hotels around the world and acquired a stable of airlines, many of which have faltered in the years since.
The Chinese government starting in 2017-18 began to clip its wings as part of a more general strategy to curb private companies’ expansion. The Covid pandemic appears to have been a march too far for the once high-flying company.
- Just a couple of weeks after implementing one of the world’s strictest travel restrictions, Canadian Prime Minister Justin Trudeau announced that flights to Mexico and the Caribbean would be suspended until April 30.
In addition, incoming passengers will not only have to present proof of a negative pre-departure Covid test, but they must now take a PCR test upon arrival in Canada and quarantine for up to three days in an approved hotel while they await the test’s results. After getting a negative test result, passengers still will have to quarantine at home for the remainder of the 14-day period (while those with positive tests will have to quarantine in a government facility).
Flights to Mexico and the Caribbean will halt on January 31 for 90 days. Air Canada and WestJet said they are suspending flights to 15 and 14 destinations, respectively. Air Transat, on the other hand, said it is suspending all flights from January 29-April 30. “The government asked, and we agreed,” said WestJet CEO Ed Sims.
The National Airlines Council of Canada renewed its call for government aid for the industry.