More Red Ink for Qatar

Madhu Unnikrishnan

October 4th, 2020

  • Qatar Airways, one of the Big Three Gulf carriers, published its financial report covering the 12 months that ended in March. The Covid crisis, of course, was just beginning in March, so the figures disclosed reflect pre-pandemic realities. Even so, the state-owned airline showed another massive net loss of close to $2b, with a negative 12% operating margin (including “general and administrative” expenses which it for some reason classifies as non-operating).

    The red ink reflects a longstanding truth about Qatar Airways: That it’s more than just a for-profit enterprise. More importantly to Qatar’s rulers, it serves as an economic development tool, and a vehicle to enhance the country’s diplomatic clout abroad. It does so through the airline’s multi-billion-dollar purchases of aircraft and airline ownership stakes. It’s one of the few big customers for Boeing’s new B777-X product, for example, with 60 currently on order. It has another 23 B787-9s on order as well, not to mention some B777 freighters. From Airbus, it has 50 A321 NEOs on order, along with 27 A350-1000s.

    As for airline stakes, Qatar Airways owns 25% of IAG, 10% of Latam, 10% of Cathay Pacific, and 5% of China Southern. It furthermore provided billions in new capital during the Covid crisis to IAG, Latam, and Cathay. It tried to buy a piece of American several years ago as well, unsuccessfully amid disputes about alleged subsidies. That dispute with the U.S. Big Three, incidentally, was quieted after a White House meeting between Qatar Airways CEO Akbar al Baker and U.S. President Donald Trump (Qatar is among the countries allegedly providing finance to Trump family businesses). In any case, oneworld members Qatar Airways and American are now codesharing again and calling their relationship a “strategic partnership.” American, when the rapprochement was announced in May, even said it would explore launching nonstops to Doha.

    Closer to home, Qatar’s national airline is still blockaded from serving key Gulf markets like Saudi Arabia and the U.A.E., as well as Egypt. Just before the Covid crisis spread globally, the carrier’s 49% ownership of Air Italy went up in smoke as the carrier liquidated. In India, al Baker spoke frequently about a possible investment in IndiGo, and at times the launch of an all-new airline. To date, nothing of the sort has come to pass.

    The carrier’s main focus during the pandemic, aside from its support for foreign allies, includes an active cargo operation. During its financial year to March, cargo accounted for 19% of groupwide revenues. Passenger revenues generated just 73% of the total, with other businesses like aircraft chartering, ground handling, hotel management, and, catering contributing the rest. A full 4% of group revenues came from duty-free sales, which covers the company’s exclusive right to sell alcohol in Qatar. Qatar Airways never did suspend its passenger operations after the pandemic. In fact, it has flown relatively robust schedules, serving 30 destinations even at its lowest point. It’s now up to about 90. It has however, like other airlines, grounded its A380 fleet.

    Unlike its rival Emirates, which for the record produces about double the amount of revenue, Qatar Airways does fly narrowbody planes, including A321 NEOs. It was also quicker than Emirates to order B787s and A350s, planes seemingly better sized for the new realities of the Covid era. Capacity growth was already slowing in 2019, with ASK growth in the year to March just 3% and groupwide revenue growth just 6%.

    Still, consistent with its longtime philosophy of maximizing the number of destinations it serves, it last year added eight new ones: Davao, Gaborone, Izmir, Langkawi, Lisbon, Mogadishu, Rabat, and Malta.  Prior to Covid, it was planning to add Almaty, Dubrovnik, Lyon, Nur-Sultan, Osaka, Santorini, Siem Reap, and Trabzon. The additions were part of a three-year transformation plan announced at the end of 2019, by which time Qatar had already concluded that the airline was losing too much money. The country’s wealth, after all, depends heavily on income from energy exports. And energy prices remain low after crashing in late 2014.  

And TAP Reports a Huge Loss

  • TAP Air Portugal, partly sold to JetBlue and Azul founder David Neeleman in 2015, was partly renationalized earlier this year amid the Covid crisis. The airline last week disclosed a gargantuan $650m net loss for the first half of 2020, or a still ghastly $431m excluding special items. Revenues were down 57% y/y, and a lot more than that excluding the healthy growth it enjoyed during January and February. Operating margin for the half was negative 66%.

    TAP is now tapping government funds for mere survival but needs to present a viable restructuring plan by Dec. 10 to unlock the full amount it was promised. It’s highly dependent, remember, on overseas lusophone markets, Brazil most importantly. The U.S. is a key market as well, having added a number of routes there in recent years. TAP’s future health is therefore tied to a revival in transatlantic demand. The carrier has already arranged to reduce its near-term capital spending by $1b with the deferral of A320 and A330 NEOs. Airbus also gave TAP the right to switch A330 NEO orders to other models. Talks for concessions with aircraft lessors are still ongoing.

    In terms of capacity, ASKs were just 12% of normal in July, and just 24% of normal in August. Neeleman, by the way, no longer owns any shares in the airline but his partner in the 2015 takeover, Humberto Pedrosa, remains in possession of a 23% stake. Portugal’s government now owns 73%, with the balance held by TAP’s employees.
  • Aegean Airlines knows a thing or two about managing through hard times. Greece suffered extreme economic hardship in the 2010s, especially during the early years of the decade. From 2010 through 2012, Aegean sure enough lost money, though margins weren’t too bad. It rebounded with a strong 2013, the year it purchased hometown rival Olympic Air. Solid profits have persisted ever since. What was its secret? The key to Aegean’s success, aside from its disciplined management, is Greece’s strong and steady tourism sector, attracting visitors from all over Europe and beyond. In 2010, while Greece was receiving the first of multiple IMF/EU bailouts, the country’s airports handled nearly 38m travelers. By 2019, the figure had reached 64m. With y/y growth of 5% in January and 4% in February, it looked like 2020 would be another record-breaking year.

    You know what happened next: Covid-19, a crisis far worse than any the airline industry had ever faced. Aegean certainly isn’t escaping the pandemic’s ravages, losing $82m in the second quarter, or closer to $49m excluding special items linked to bad fuel hedges. Operating margin from April through June was negative 129% as ASK capacity declined 91%. There simply wasn’t much flying until travel restrictions eased a bit late in the quarter.

    The story of Aegean this crisis is the story of most European shorthaul airlines. When markets began reopening in June, initial demand was encouraging, enough so for some carriers to anticipate nearly full schedules by year end. By late July, however, bookings began to weaken as Covid cases flared, and as E.U. governments responded — in an uncoordinated way — with quarantine rules and other restrictions. By August, Aegean had reached about 50% of its normal capacity (and a little higher than that domestically), even with most of its non-E.U. markets still closed (markets in the Middle East and the former Soviet Union, for example).

    Tourism to Greece, in fact, fared a bit better than average across Europe, with people perceiving its islands and beaches to be safe. Demand from Germany, Austria, and Switzerland was strongest, relatively speaking. It was weaker from the U.K. and France, and weaker still from Italy, Spain, and eastern Europe. Gone completely were tourists originating in North America, Asia, and other overseas markets. Parts of Scandinavia were closed off due to travel restrictions as well. Now, instead of an ongoing recovery into autumn, as carriers hoped this spring, demand is extremely weak, with signs of a tough winter ahead. Then again, visibility on future demand is extremely low due to very late booking curves (people, in other words, are booking their flights very close to departure day).

    A graph of Covid cases in Greece shows a sharp rise between late July and late September. The trend is similar throughout much of Europe. Aegean, fortunately, had a strong enough balance sheet going into the crisis that it has sufficient cash on hand to sustain losses for a while. It’s close to finalizing terms on a government-backed loan to further secure its liquidity position. At the same time, Athens is financing some of its payroll. Aegean has not cancelled any of its NEO orders with Airbus. But it did push back some delivery dates. Even so, it remains one of the few European airlines still taking planes this year and next. It helpfully has some A321 CEO leases expiring in the near term, which provides flexibility to reduce capacity if need be. Alternatively, if it does renew leases as they expire, it will probably get a favorable price right now.

    One last note about Aegean is that it typically makes most of its money during the peak summer travel season. It’s thus critical for demand to reach something approaching normal by next summer, to avoid two years of financial trauma. Like other carriers, Aegean is hopeful that pre-departure Covid testing for passengers can help facilitate a revival. Widespread vaccinations, of course, would help even more, and might perhaps come in time to rescue next year’s peak.

Madhu Unnikrishnan

October 4th, 2020