IAG Dreams of Madrid Mega-Hub in Air Europa Deal

Madhu Unnikrishnan

March 1st, 2021 at 6:09 AM EST

International Airlines Group (IAG) sees European authorities signing off on its renegotiated deal to acquire Air Europa later this year, as the conglomerate positions the acquisition as necessary to create a competitive alternative to other large European hubs.

The combination of Air Europa and IAG-subsidiary Iberia would turn Madrid into a “360-degree hub,” as IAG CEO Luis Gallego described it, comparable to what KLM offers in Amsterdam and Lufthansa in Frankfurt. This is possible with the combination of the Air Europa and Iberia long-haul fleets, he added during the group’s fourth-quarter earnings call last week. And, although unmentioned on the call, the deal would give the group a large hub in the European Union following the completion of Brexit that puts British Airways’ London Heathrow base further outside of the Schengen area.

Based on 2019 schedules, Air Europa would boost Madrid departures for Iberia by nearly 50 percent to over 104,000 annually, according to Cirium data. The number increases to more than 123,000 departures when Iberia Express is included. KLM had nearly 127,000 departures from Amsterdam and Lufthansa over 154,000 from Frankfurt.

Consolidation is expected to boost IAG’s financial position after a record $8.4 billion net loss in 2020. Revenues fell 69.4 percent to $9.5 billion on a 33.5 percent decline in expenses to $18.5 billion. Of the group’s four main operating brands, Iberia performed the best, owing to its strength in the domestic Spanish market and non-passenger business lines. Vueling performed the worst, due to its many point-to-point routes in markets with severe restrictions and few other business lines, like cargo. Group passenger traffic fell 74.7 percent and capacity 66.5 percent.

In the fourth quarter, IAG revenues were down 79.1 percent to $1.6 billion and expenses were down 54.7 percent to $3.4 billion. The group’s net loss totaled $1.6 billion.

Looking forward into 2021, Gallego said the outlook remains “highly uncertain.” Capacity will be roughly 20 percent of 2019 levels in the first quarter and IAG has “very low expectations” for the normally busy Easter travel period. He did not provide capacity guidance for the rest of the year but cited expanding Covid-19 vaccination programs and the UK’s reopening plans as bright spots. For example, on the day UK Prime Minister Boris Johnson unveiled a four-stage reopening plan flight bookings surged 60 percent and holiday bookings 200 percent compared to the prior week.

However, Gallego warned that any travel recovery could be stifled if vaccination programs are not coupled with an easing of border and quarantine restrictions.

IAG is embracing are digital health passports to speed the restart of travel. The multiple apps in development aim to facilitate travelers ability to meet country-specific Covid travel requirements and create an easy-to-use verification process for airlines and local arrivals officials. The group is working with IATA’s Travel Pass, as well as trialling the VeriFly app.

“The future is vaccination, health pass and, in the meantime, we need testing regime to do the bridge,” said Gallego.

Edward Russell

Domestic Travel Restrictions Stymie Qantas

Australia’s geographically vast home market should have buoyed Qantas, which essentially grounded its international network, but the country’s domestic travel restrictions quashed any hope of a quick recovery. Still, the Flying Kangaroo has benefited from Virgin Australia’s travails, which have helped give it 70 percent of the Australian market.

But still, the first half the carrier’s financial year was grim, ending its financial first half with a A$1 billion loss ($800 million). Revenues were down A$7 billion from the prior year. Qantas is reducing its headcount by 8,500 employees, 60 percent of whom have already left the company. Business travel remains depressed, except for from the government and the resources industry, CEO Alan Joyce told investors last week.

Australia’s borders have been closed for the better part of a year, and during this time, Qantas has operated repatriation flights, except for a few trans-Tasman flights to New Zealand. Qantas is preparing for international borders to reopen, now expected in October. But the Airbus A380 fleet is likely not to be a part of the carrier’s international operations when flights resume. Domestic passenger capacity is expected to rise to 60 percent of pre-Covid levels in the next quarter.

In the meantime, cargo is keeping the carrier’s planes in the sky. Qantas Freight reported a record A$613 million in revenue, up from A$496 million in 2019. In addition to its Boeing 747Fs, the carrier has converted part of its Airbus A330 fleet to carry cargo, and is expecting to take delivery of A321 freighter conversions this year.

Madhu Unnikrishnan

Cargo, Including Penguins, Throws Air New Zealand a Lifeline

New Zealand has been one of the world’s success stories during this pandemic, praised for its stringent and effective public health measures and admired, enviously, for life returning almost to normal. And Air New Zealand has benefited, operating 76 percent of its pre-Covid domestic network.

But that’s about as good as the story gets for the carrier. The country’s borders are closed. Air New Zealand’s only international flights have been to repatriate Kiwis who want to return home — 60,000 since the pandemic began and continuing at a pace of roughly 1,000 per week.

Even domestic flights have been troubled. Before the pandemic, one-third of the company’s revenues came from its domestic network, and of that, 20 percent came from international tourists traveling around New Zealand. “No one could have accurately predicted how long and how severe Covid-19’s grip on the world would be,” CEO Greg Foran told investors last week.

As with most airlines around the world, freight was a saving grace for Air New Zealand. The carrier said freight revenues grew by 91 percent in the first half of its financial year. Cargo kept the international network running, and allowed for more repatriation of New Zealanders. The carrier transported agricultural products — “and even live penguins,” Foran said — out of New Zealand and brought e-commerce goods and medical equipment into the country. (It was not immediately clear, however, where the penguins were traveling to, or how many chose to fly Air New Zealand over another carrier.)

Air New Zealand reported losses of NZ$185 million ($136 million) for its first half, down from a profit of NZ$198 million ($145 million) in the same period a year prior. Management predicts the carrier’s monthly cash burn for the next five months will be between NZ$45-$55 million ($33-$40 million). It expects losses to be “significant” and continue through this year.

Madhu Unnikrishnan

Winter Arrives in Scandinavia

Norwegian needs to raise NOK4 billion ($462 million) after it exits administration in order to have enough capital to operate for the balance of the year. Without that money, and if it can’t successfully exit administration, management thinks the company may have to either declare bankruptcy or liquidate.

This is a far, far different result than anyone expected a few years ago, when Norwegian’s operations straddled the world. The company is ending its long-haul operations and will go from 131 aircraft to 53, all narrowbodies, this year. As for now, it is operating just 15 aircraft. Management referred to this period as Norwegian’s “hibernation mode.”

Capacity in the fourth quarter was down 96 percent, and revenue traffic was down 97 percent. The company reported a -2,482 percent margin, and losses of almost $2 billion, Revenue fell 93 percent year-over year, but costs also fell 70 percent, as much of the carrier’s fleet was grounded and “most” of it staff was either furloughed or laid off.

Elsewhere in Scandinavia, Norwegian was much on the mind of SAS management. SAS didn’t mention Norwegian by name, but said the struggling carrier’s focus on shorthaul and Nordic markets will change the competitive landscape for SAS after the pandemic, provided Norwegian survives, that is. Management also was skeptical that Norway’s aviation market can support it, Norwegian, and the potential entry of Flyr.

SAS sees its passenger mix in the post-pandemic world as evolving. As with most carriers around the world, leisure has fueled what traffic SAS carried during the pandemic. CEO Rickard Gustafson expects this will continue even after travel resumes, that business travel will be flat and the company’s passenger will continue to skew toward leisure travelers.

Another story that is becoming increasingly common is that cargo kept much of SAS’ longhaul network operating during the pandemic. The carrier also has operated several cargo-charters to such destinations as São Paulo.

The present was grim for SAS. The company reported revenues were down in its most recent quarter by 76 percent year-over-year. Losses for the quarter were SEK2 billion ($243 million). Gustafson expects the carrier to return to about half its former capacity this year, provided the vaccinations pick up and the pandemic recedes.

Madhu Unnikrishnan

U.S. Green Lights Breeze

The U.S. Transportation Department (DOT) has tentatively approved Breeze Aviation to start operations later this year, and has opened a 14-day period for public comment.

In its show-cause order, DOT said Breeze met all its conditions for the operation of up to 22 aircraft this year. Breeze is expected to launch with three Embraer E190/E195s and has plans to add more Embraers throughout this year. By August, it expects to receive the first of 60 Airbus A220s it has ordered. The second delivery is expected in September, the third in November, and roughly one a month will follow from January 2022.

DOT noted that a lawsuit brought by Canada Jetlines has been “amicably settled.” The Canadian carrier had sued to stop Breeze from poaching Lukas Johnson, the former Allegiant executive who will serve as Breeze’s chief commercial officer. Rounding out the executive suite is another Allegiant alum, Trent Potter, who will be chief financial officer, and ATR and JetBlue (and Virgin America) veteran Thomas Edward Anderson as chief operating officer. And lest you’ve forgotten, Azul and JetBlue founder David Neeleman founded Breeze and will serve as CEO.

DOT said Breeze informed it that it expects to spend $57.5 million in pre-operating expenses, of which it has spent $30.6 million. The company will need access to $64.3 million in working capital, and has about $80.3 million in working capital, DOT found in ruling on the company’s financial fitness.

Madhu Unnikrishnan

In Other News

  • More regulatory approvals! Brazil’s regulators have given the nod to the proposed Delta Air Lines-Latam joint venture, making official the tentative approval granted in September, the carriers announced last week. With the deal, the airlines can codeshare, offer reciprocal earn-and-burn frequent flier benefits, and share terminals, lounges.
  • United CEO Scott Kirby and Delta CEO Ed Bastian were among the airline chief executives who participated in a White House meeting on aviation’s role in climate change last week. A United spokesman said the carriers “asked [the Biden administration] to support incentives for sustainable aviation fuel and carbon capture in the forthcoming economic stimulus proposal.”

Madhu Unnikrishnan

Madhu Unnikrishnan

March 1st, 2021 at 6:09 AM EST