Air Canada Leans Into Mandatory Testing to Restart Travel After ‘Grim’ 2020

Edward Russell

February 16th, 2021

Air Canada is lobbying hard for mandatory Covid-19 testing for air travelers to and in its home country after what it deems as onerous restrictions contributed to its steep loss in 2020.

The Montreal-based carrier has partnered with various organizations to prove that broad testing protocols can control the spread of the coronavirus. In addition, Air Canada has put its money where its mouth is and is finalizing an order for rapid tests from pharmaceutical firm Abbott to administer to customers and staff. And it has also partnered with pharmacy chains to offer travelers pre-departure testing before flights.

All these moves are in the hope of one thing: That the Canadian government will drop its strict Covid travel restrictions in favor of mandatory testing. Currently, the country requires all international travelers to show proof of a negative Covid test and quarantine for 14 days after arrival. It also has closed the border with the U.S. to all but essential travelers, and asked airlines to suspend all flights to the Caribbean and Latin America through April 30. In addition, several Canadian regions and provinces mandate two-week quarantines for domestic flyers.

“The silver bullet here is a very, very effective testing protocol that replaces the blanket restriction, that replaces the quarantine,” Air Canada CEO Calin Rovinescu said during the airline’s fourth-quarter and full-year earnings call last week. Testing, he added, is the “most immediate and practical way to protect communities, restart the economy … and restore travel.”

The airline hopes a testing regime can be in place by the end of April, when the suspension of Caribbean and Latin American flights lifts.

In the meantime, Air Canada is rolling back its capacity recovery plans amid the new restrictions. It only plans to fly roughly 15 percent of 2019 capacity in the first quarter, compared to nearly 23 percent in the final quarter of 2020. The airline is suspending service to 11 cities, including New York, Seattle, and Washington, D.C.

A lack of government aid has only exacerbated the effect of Covid restrictions. Some Canadian carriers, including Air Transat and Porter Airlines, to suspend flights altogether — with some wondering if at least the latter will ever resume flying — and strong criticism from airline leaders.

“We compete with the U.S. airlines, so we think that a similar program [to the CARES Act], maybe with some Canadian modifications, would best suit the airline industry up here in Canada,” Rovinescu said when asked what kind of Covid aid the airline would like from the government.

U.S. carriers received more than $65 billion in Covid-related relief. This includes $50 billion split between $25 billion in payroll support to keep staff employed and another $25 billion in direct loans for other purposes from the CARES Act that was passed last March. The payroll support aspect was extended with another $15 billion in December, and a third $14 billion extension appears a likely inclusion in President Biden’s proposed $1.9 trillion Covid relief package.

Discussions between airlines and the Canadian government began in November. However, they have only recently picked up speed to a point where Rovinescu said he is “more optimistic [of success] for the first time.”

Air Canada anticipates any financial relief from the government to come with strings attached. These are likely to include refunds for travelers and resuming flights to regional destinations that it has suspended since the pandemic hit.

The Canadian government has given Air Canada one piece of good news: it signed off on the airline’s acquisition of leisure carrier Air Transat on Thursday. Conditions include keeping the Transat brand and base in Quebec, supporting other airlines to take over former Transat routes to Europe, and committing to adding new destinations within five years of closing.

Rovinescu declined to comment on the approval, noting that discussions with European regulators and other parties are still ongoing. Air Canada has a February 15 deadline to close the deal.

The Air Canada-Air Transat deal would see a combo of the largest and third largest Canadian carriers. Competitors, notably WestJet, have opposed the merger citing a loss of competition.

“When Canadians look to explore the world and reunite with family and friends once again, they will face fewer choices and higher fares,” WestJet CEO Ed Sims said in a statement on the approval Thursday. The Calgary-based carrier is Canada’s second largest airline.

Air Canada posted a $913 million (C$1.12 billion) net loss in the final quarter of 2020. Revenues plummeted 81 percent to $651 million with passenger traffic down nearly 89 percent year-over-year. The airline’s daily losses, or cash burn, averaged $9.5 million.

For the full year, the airline’s net loss totaled $3.7 billion. Revenues fell 70 percent to $4.6 billion on a 45 percent drop in expenses to $7.6 billion. Passenger traffic was down 75 percent on a nearly 67 percent capacity cut.

Air Canada has used the pandemic to restructure its fleet. During 2020, it retired 63 jets — including all of its Boeing 767-300ERs and Embraer E190s — and accelerated plans to remove its 16 remaining Airbus A319s over the next few years. The airline is focused on emerging from the crisis with a narrow-body fleet built around the Airbus A220 and Boeing 737 Max, of which the latter returned to service on February 1.

“Air Canada is ready for the recovery and well positioned to compete in the post-Covid environment,” Air Canada commercial chief Lucie Guillemette said optimistically. However, she could not provide a timeline for that recovery.

Rovinescu will not oversee Air Canada’s recovery. He departs the airline after 12 years at its helm on February 15 when he passes the CEO reins to current chief financial officer Michael Rousseau.

Edward Russell

Icelandair Sees Opportunity in Pandemic-Driven Industry Reset

Icelandair is betting that its model of providing affordable flights across the Atlantic with stopovers at its namesake island will benefit from the industry reset during the coronavirus pandemic.

The Reykjavik-based carrier said “changes in the competitive landscape” across the North Atlantic will likely rationalize capacity in the market, during a fourth quarter earnings presentation on February 9. While Icelandair did not name these changes, they undoubtedly include low-fare disruptor Norwegian Air‘s decision to exit long-haul transatlantic flying in January. Discount Icelandic competitor Wow Air closed its doors in March 2019, a year before the Covid-19 crisis.

But whatever benefit Icelandair reaps from rationalization over the North Atlantic, it will not come quickly. The airline does not anticipate recovering to 2019 capacity levels until 2024 — three years hence. In the meantime, the airline continues to gradually retire its Boeing 757s — it had 23 at end of 2020 — and replace them with new Boeing 737-8s and -9s. Icelandair plans to resume Max flights with the six in its fleet this spring; take delivery of another three in the second quarter; and three more during the fourth quarter and first quarter of 2022.

While optimistic on its future market positioning, Icelandair’s balance sheet bled red with a $376 million net loss in 2020. Revenues fell 71 percent to $434 million on a 62 percent drop in expenses to $520 million. Passenger numbers dropped 83 percent on an 81 percent capacity cut. Strikingly, Icelandair noted that it carried more flyers in the first two months of 2020 than it did during the remainder of the year.

In the fourth quarter, Icelandair revenues were down 81 percent to $60.2 million and expenses dropped nearly 70 percent to $93.5 million. Its net loss totaled $83.3 million for the period.

Edward Russell

Copa Airlines in Grip of Latin America’s Super Strict Travel Rules

Panama’s Copa Airlines was essentially grounded for almost five months last year. Flights resumed in the fourth quarter, as Panama eased its travel restrictions, but the resurgent virus and fear of new variants has quashed demand since December.

Copa’s December capacity was 27 percent of the airline’s December 2019 capacity, and first-quarter capacity so far has been about 40 percent of 2019. But February and March, historically a weak period, could see demand taper off even further as the new Covid-19 outbreaks cause countries Copa serves to clamp down on travel, CEO Pedro Heilbron told analysts during the company’s fourth-quarter and full-year 2020 earnings call on Feb. 11.

The latter point has made Copa’s and other Latin American carriers’ recovery more difficult. Travel restrictions and quarantine requirements change frequently, with little warning, making forward planning a headache. Heilbron said Copa is hopeful that wider acceptance of testing will help ease some of these restrictions. Copa is down to a handful of weekly flights to Argentina, twice weekly flights to Havana. Flights to Venezuela were grounded for almost a month, Heilbron said.

Panama now requires a negative PCR or antigen Covid test taken within 48 hours of departure. Importantly for Copa, which primarily connects passengers through its hub in Panama City, the country does not impose the requirement on connecting travelers. Uruguay, by contrast, only permits entry to nationals and permanent residents who booked travel before the latest round of restrictions.

“It will be a long and twisting road to recovery,” Heilbron said. The carrier is not offering guidance for the remainder of the year, but it says it will reach cash breakeven by the time it achieves 70 percent of pre-Covid capacity, and it will report pre-pandemic unit costs when it reaches 80 percent of pre-pandemic capacity.

Still, Copa is confident that it can weather this storm. The carrier raised $650 million in financing last year and has $1.3 billion in available liquidity. It has cut costs so that its monthly cash consumption is between $40-45 million. Its connecting hub at Tocumen also is a strength, Heilbron said, arguing that few Latin American cities will produce enough demand for point-to-point flights until the recovery is complete. And Copa is being flexible with capacity, able to adjust up or down quickly depending on demand, he said.

The carrier is adjusting its fleet as well, moving toward becoming an all-Boeing 737 operator. The remaining 14 Embraer E190s have been sold and will exit the fleet by June, Chief Financial Officer Jose Montero said. The carrier also retired 14 Boeing 737-700s. Seventeen of the carrier’s 737-800s are in storage for now but will return to the fleet as needed.

Copa took delivery of one Boeing 737 Max in December, and will add another eight 737-9s by the end of this year. Some of these were aircraft that Boeing had already manufactured but were not delivered due to the global Max grounding. It expects to take delivery of five of the type in 2022.

The company financed the first seven 737-9s with a $328 million loan guarantee from the U.S. Export-Import Bank (Ex-Im), finalized in December. Further Ex-Im financing is being negotiated for the remaining Boeing deliveries, Montero said.

Copa reported a fourth-quarter operating loss of $95 million, and a full-year operating loss of $461 million. Fourth-quarter revenues were down 77 percent from the prior year to $158 million, and for the full year were down 70 percent to $800 million.

Madhu Unnikrishnan

Spirit Joins Industry Chorus Opposing Domestic Covid Testing Mandate

Spirit Airlines is the latest carrier to weigh in against the prospect of a Covid-19 testing mandate for all U.S. domestic flights. Executives warn of a dramatic impact on travel demand plus high implementation costs, especially at a time when the country is still struggling to expand coronavirus testing capacity.

“We do not support the idea,” said Spirit CEO Ted Christie during a fourth-quarter earnings call last week. “We don’t think it addresses the issue … it would be logistically extremely difficult to do and expensive.”

In terms of an effect on travel, Spirit commercial chief Matt Klein said the airline has seen a “profound negative impact” on the number of flyers on flights from the Caribbean and Latin America since international testing rules began in January. This echoes similar comments from other airlines.

And practically, the U.S. may not have enough tests for all of the people traveling today. J.P. Morgan analysts estimate that the country would need to boost testing capacity nationally by 30 to 40 percent just to meet current demand, according to a report Tuesday. The increase would be even more pronounced in places like Florida — a popular destination for pandemic-weary Americans — where testing capacity would need to double.

Opponents also point out that unless similar testing rules are implemented for buses and trains, many travelers may just switch modes or drive for their trips. Moves that would only drain airline coffers further while doing little to stymie the coronavirus.

“Now is the time to turn our efforts to the recovery,” Christie said during the presentation last week. The airline plans to resume flying the same amount it did in 2019 by mid-year, and begin growing again thereafter.

To accomplish this, the carrier is beginning to bring back the 27 Airbus A319s that it placed in storage last year. This process is expected to last into 2022 as the airline works through the maintenance backlog for the jets and staffs up to fly them.

Staffing is the key “limiter” — as Christie put it — to Spirit’s recovery. While the airline can return to 2019 flying levels with its existing workforce, it does not have the crews to fully fly all of its planes plus the ones it has taken delivery of since Covid hit a year ago. This means the airline anticipates higher costs — but not fares — and potentially more losses until it is able to fully return to its low-cost, low-fare model by around mid-2022.

The fact that Spirit, and other budget airlines, are hiring attests to the strength of their model in the current market. While many major carriers who rely on lucrative business travelers are staring down a multi-year recovery, discounters whose bread-and-butter are deal-oriented vacationers are bullish on their immediate prospects. Allegiant Air and Sun Country Airlines, two of Spirit’s budget peers, also plan to recover and grow in 2021.

“The pandemic doesn’t necessarily disrupt our story,” said Christie. “We still think there’s going to be leisure demand, and we’re going to capture our portion of that. We did not make permanent changes to our business plan.”

Spirit recored a net loss of $157 million in the fourth quarter of 2020. Revenues fell nearly 49 percent to $498 million on a 22 percent drop in expenses to $658 million. Daily cash burn averaged just $1.8 million during the period.

For the full year, the airline lost nearly $429 million, a dramatic reversal from its $335 million net profit in 2019. Revenues were down nearly 53 percent to $1.8 billion and expenses dropped 30 percent to $2.3 billion. Passenger traffic fell 45 percent on a nearly 34 percent drop in capacity.

Spirit flew 157 Airbus A320 family aircraft at the end of December, a 12-plane increase compared to 2019. However, the year-end number includes the 27 stored jets. It plans to take delivery of 16 new A320neos in 2021.

The carrier anticipates another net loss this year before returning to profitability in 2022.

Edward Russell

Federal Aid Helps Mesa Boost Profits Above Pre-Pandemic Level

U.S. regional carrier Mesa Air Group‘s profits rose in the quarter ending in December from a year ago, mainly due to federal stimulus funds. The company reported fiscal first-quarter profits of $14.1 million, compared with $10.8 million the prior year, thanks to $11.3 million in benefits from the CARES Act last year.

The CARES Act’s benefits offset a 26 percent reduction in revenues Mesa earned from flying for its mainline partners, Chief Financial Officer Michael Lotz told analysts during the company’s earnings call last week. Mesa availed itself of a $195 million loan through the CARES Act in its most recent quarter, and the company expects to receive a further $25 million by March through the second round of airline support Congress authorized in December.

Without the payroll support, Mesa would have had to seek concessions from its pilots, maintenance workers, and flight attendants, CEO Jonathan Ornstein said. The federal aid allowed Mesa to avoid concessionary contracts and furloughing employees, although pilots did agree to pay cuts, he said.

“We are starting to see some glimmers of hope,” Ornstein said. The company is adding five Bombardier CRJs to its contract with American Airlines, and will have 64 of the type this year. For United Airlines, Mesa is adding 16 new Embraer E175s and is removing one CRJ from that fleet for every E175 it adds. Mesa expects to have 80 E175s in its United fleet in the next six months.

Last year, Mesa took the unusual step, for a regional carrier, of adding two Boeing 737-400s based in Cincinnati to carry cargo for DHL. The company plans to increase this fleet to at least 10 aircraft and could add a new aircraft every other month, Ornstein said. Mesa could expand its cargo flying to other companies beyond DHL, although no firm plans are in the works. “The cargo opportunity is significant for us going forward,” he said.

E-commerce has grown rapidly during the pandemic, as consumers increasingly shop from home. Mesa is not alone in adding freighters. Sun Country, which is planning to go public this year, operates 12 Boeing 737s to carry freight for Amazon. But Mesa’s deal is unusual, as it is the only regional carrier to fly mainline narrowbody aircraft as freighters.

The regional airline industry’s consolidation could continue, leaving just three or four companies flying all the U.S. regional lift, and Mesa is well positioned to be one of those companies, Ornstein said. He noted that in 1989 there were 113 regional airlines in the U.S., and that has winnowed down to the current handful of companies.

Mesa reported revenues down 26 percent in the most recent quarter to $127.2 million, compared with a year ago, but this this was up 31 percent from the previous quarter as block hours increased.

Madhu Unnikrishnan

In Other News

  • Tour operator TUI is relying on the UK, its biggest market, to lead a bounceback this summer, and predicts growth for its Musement activities app, following a dismal 2021 first quarter.

    For the three months to Dec. 31, 2020, TUI’s fiscal first quarter, the group reported an underlying loss of $1.21 billion. In that quarter it received another loan, worth $2.18 billion. So far, its bailouts come to almost $6 billion.

    For the next quarter it estimates it will burn through $302 million to $363 million per month, and it has $2.5 billion in the bank to see it through until the summer.

    Recovery now rests largely on pent-up demand, and its CEO hopes the UK will continue what’s been a strong start to its vaccination rollout, with almost 11 million people already receiving their first jab.

    “Because we have more than half of our bookings from the UK, that is definitely very helpful,” said Fritz Joussen during an earnings call on Tuesday. “This year there’s a strong indication that summer bookings will happen.”
    Matthew Parsons
  • Azul pulled off something few, if any, airlines managed this year. It’s January traffic grew 13 percent from January 2019. Capacity, also, was up, by 18 percent. Brazil’s domestic recovery is fueling Azul’s growth. The carrier’s domestic RPKs were up 14% in January from 2019, and capacity rose 16 percent. International RPKs fell by 3 percent, however, and international capacity was down 4 percent.
    Madhu Unnikrishnan

Edward Russell

February 16th, 2021