Lufthansa Eyes Smaller Companies For Business Travel Recovery

Edward Russell

May 3rd, 2021

A big question in the executive suites of the world’s airlines is: When and how will lucrative business travel return?

Estimates from both inside and outside the industry vary widely. From Bill Gates’ statements that more than half of business travel will disappear as a result of the coronavirus pandemic, to United Airlines CEO Scott Kirby’s seeming bullishness that corporate road warriors will come racing back to travel the minute they lose a sale over Zoom.

The Lufthansa Group is one airline group that is on the optimistic end of the spectrum. This is understandable, given that roughly 45 percent of its business is comprised of four passenger airlines — Austrian Airlines, Brussels Airlines, Lufthansa and Swiss — that rely heavily on business travel. Hence, it raised some eyebrows when group Chief Financial Officer Remco Steenbergen told financial analysts on Thursday that they anticipate “at least 90 percent” of corporate travelers returning by 2025.

“Small and medium [sized] companies who will need that positive experience of corporate travel to see their customers, to see their suppliers are making up a bigger share of our corporate customers,” Lufthansa Group CEO Carsten Spohr said in response to analyst questions on Steenbergen’s comments during a first quarter earnings call on Thursday. “That’s the part I’m quite optimistic for.”

The group expects a spike in pent-up business travel demand by year-end, followed by a steady improvement to the 90 percent of 2019 levels through the middle of the decade. However, like its competitors, Lufthansa anticipates leisure and visiting, friends and relatives — or VFR — traffic to recover faster than its corporate segment.

Lufthansa has taken a number of steps to adapt to fewer lucrative business travelers flying. It has retired many of its long-haul jets with large business and first class cabins — including the Airbus A340 and A380, as well as the Boeing 747-400 — and it maintains the flexibility to replace some business class seats with premium economy seats on its Airbus A350s.

But the larger focus at Lufthansa is to become a more efficient group. This means continued staffing reductions, particularly in Germany, above the 24,000 full-time equivalent employees already removed since the Covid-19 crisis began. These reductions have helped Lufthansa reduce fixed costs by 35 percent.

And on the fleet side, the group has retired 115 aircraft on its way to removing 150 jets by the beginning of 2023. Lufthansa forecasts it can operate roughly 90 percent of 2019 capacity with just 80 percent of the planes — around 650 aircraft — on better utilization and denser seating layouts.

“We at Lufthansa have never been faster in restructuring and rightsizing the business in bringing down costs, variable and fixed cost in modernizing our fleet and in digitalizing our company,” said Spohr.

Looking at this summer, Lufthansa sees the same pent-up leisure demand that other carriers do when governments ease Covid-19 travel restrictions. The group remains conservative for the second quarter, with plans to fly just 30-35 percent of 2019 capacity. However, it could ramp up capacity to as much as 70 percent of two years ago during the peak summer months of July and August if demand warrants, Spohr said. Full-year capacity is forecast at 40 percent of 2019.

In addition, the group is “encouraged” by the comments that the EU could reopen to vaccinated American travelers this summer, he added. The transatlantic market accounted for roughly half of Lufthansa’s pre-crisis long-haul capacity.

Growing optimism for the summer does not mean Lufthansa is out of the woods. The group still expects cash burn of roughly €200 million ($242 million) per month in the second quarter after burning €242 million a month in the first. Asked when the group achieve breakeven cash flow, Steenbergen spoke of 2022 when the group is expected to fly more than half of its 2019 capacity.

In the first quarter, the Lufthansa Group’s net loss was €1.05 billion. Revenues were down 60 percent versus 2020 to €2.6 billion on a 51 percent drop in expenses to nearly €4 billion. Passenger traffic fell 84 percent and passenger capacity 74 percent.

One bright spot was the group’s budget arm, Eurowings. The carrier shrank its pre-tax loss by nearly 18 percent to €144 million year-over-year, whereas the loss at the group’s network brands jumped nearly 42 percent. Unlike its network peers, Eurowings benefits from a customer base almost entirely made up of the leisure travelers who are returning to the skies. The airline has ambitious plans to expand beyond its traditional German focus to become a “pan-European” low-cost carrier, as CEO Jens Bischof put it in March.

Lufthansa Cargo and Technik were two other bright spots during the quarter. Both business segments posted a jump in income before taxes to €314 million and €16 million, respectively.

Edward Russell

JetBlue Looks At ‘Good’ Fall if Corporate Travel Returns

JetBlue Airways is hopefully eyeing a return of workers to offices and, more importantly, flying again on business trips beginning in September. A possible shift that could segue nicely from the forecast leisure recovery this summer to a business one this fall.

“We’re cautiously optimistic that — assuming there isn’t any increase in travel restrictions, that the vaccine continues to take a hold, [and] that case counts stabilize or come down — the fall has the potential to be good for JetBlue,” JetBlue President Joanna Geraghty said during the airline’s first quarter earnings call last week.

JetBlue is not alone. Most of the largest U.S. carriers see some level of business travel returning as summer switches to fall. While no one expects a full recovery — JetBlue executives were quick to note that any recovery would be off a “very low base” — Alaska Airlines thinks as much as half of its 2019 corporate travelers could be flying again by year end.

The latest forecast from trade group Airlines for America (A4A) has domestic air travel volumes recovering to 2019 levels by 2023. Globally, the recovery is expected to stretch into at least 2024.

“We’re in the midst of a leisure-first recovery,” said Scott Laurence, head of revenue and planning at JetBlue, during the call. “We’re built for leisure.”

No where is that truer than to the Caribbean and Latin America, which are mainstays of the airline’s map. Despite some headwinds from testing rules implemented by the U.S. earlier this year, demand to the region has recovered and — barring a change in the trajectory of the pandemic — capacity could exceed 2019 levels in July and August, said Laurence.

JetBlue anticipates system capacity of down roughly 15 percent compared to 2019 in the second quarter, executives said. At the same time, 10 of its 269 aircraft-strong fleet of Airbus and Embraer jets will remain in storage.

For just the Caribbean and Latin America, capacity is scheduled to increase as much as 1.7 percent compared to two years ago during the April-to-June period, according to Cirium schedules. The growth follows the additions of Georgetown, Guyana; Guatemala City; and Los Cabos, Mexico to its map since the beginning of the pandemic.

Of course, not all of JetBlue’s route experiments have worked. Markets where strict travel restrictions remain have underperformed others, adding that flights there have been duly parred back, said Geraghty.

“We are optimistic about the coming summer months,” she said echoing the general sentiment of U.S. airline executives.

JetBlue saw a “step up” in bookings in mid-February, with improvements continuing apace, said Geraghty. In addition, JetBlue is firmly in the camp of wanting to boost fares — raise yields in airline speak — this summer as more people book flights.

Executives shed no new light on the carrier’s long-planned London launch. All that CEO Robin Hayes would part with was that JetBlue remains on track to begin flights by the end of the summer. No mention of airports — though Heathrow appears likely — or even the potential U.S.-UK travel corridor.

The carrier does anticipate taking a key step towards London with the arrival of its first two Airbus A321LRs by June. The long-range jets — at least compared to JetBlue’s existing fleet — are purpose-bought for the water jump to the British Isles.

Similarly unmentioned during the call was the Department of Justice investigation into its new Northeast Alliance with American Airlines. Executives repeatedly touted “growth” and new “competition” in Boston and New York — two concerns raised by objectors to the alliance — when asked about the partnership during the call.

JetBlue posted a net loss before taxes of $347 million in the first quarter, or $247 million after a tax benefit. However, without federal payroll support relief the airline would was much deeper in the red with a $636 million loss. Revenues fell nearly 61 percent to $733 million on a nearly 43 percent drop in costs to $1.03 billion both compared to 2019.

Critically for its financial recovery, the carrier stopped burning cash and generated breakeven cash from operations in March. A trend seen at several other carriers, including Alaska and United.

JetBlue expects revenues to recover to down 30-35 percent compared to 2019 in the second quarter — an at least 26 point improvement from the first quarter — said Geraghty. She and other executives declined to say when the airline might return to profitability.

“We are optimistic that 2022 has the potential to be a strong recovery year,” said Geraghty when asked about JetBlue’s financial rebound. She gave the hint that, even with a leisure rebound this summer and return of suits this fall, profitability could still be a year or more off for the airline.

Edward Russell

Hawaiian Forecasts Strong Mainland Demand as International, Interisland Remain Depressed

Hawaiian Airlines is starting to see “more rays of sunshine than dark clouds,” CEO Peter Ingram said, as travel restrictions in its home state ease and tourists from the mainland flock to the islands for long-delayed vacations.

But the first quarter was, as with many airlines, a tale of two halves. January was weaker than expected, as Covid surged around the mainland U.S. after the yearend holidays. February bookings were better than January’s. And travel really took off in March — so much so that Hawaiian made almost half its quarterly revenue in the final month of the first quarter. Bookings for the second half are matching 2019 levels, so far. “It feels like we are out of the ditch and back onto the highway,” Ingram said during the company’s first-quarter 2021 earnings call.

Hawaiian is almost uniquely suited for the domestic U.S. airline recovery. Leisure travel is fueling the recovery, and Hawaiian’s bread-and-butter is ferrying passengers from the mainland, primarily, to their holidays in Hawaii. The carrier’s aircraft with lie-flat premium seats are positioned to take advantage of the growth of premium-leisure travel as the pandemic subsides. Business traffic is a very small part of Hawaiian’s passenger mix. “If there was any doubt that there was pent-up demand for leisure travel after a year of lockdowns, that doubt has been dispelled,” Ingram said.

For much of the pandemic, the state of Hawaii clamped down on entry to the islands, but now allows entry with proof of vaccination or a negative Covid test. The first wave of Hawaii-bound tourists arrived last fall, when the quarantine requirement eased. After a dip during the outbreaks on the mainland, demand from North America is surging again.

Ingram hopes this demand is a harbinger for things to come. The other two components of Hawaiian’s network are falling short. Interisland traffic remains depressed, because each island requires visitors to show proof of a negative test or to quarantine upon arrival. The testing requirement is too expensive to justify for a short hop to a neighboring island. Hawaii is planning to allow fully vaccinated residents to travel freely throughout the state, but there is no firm date for when that policy goes into effect.

Hawaiian’s international network is a fraction of its pre-pandemic size — 12 percent of 2019, to be precise. The international network’s recovery remains “the wild card” in Hawaiian’s return to pre-pandemic revenues, Ingram said. Now, the carrier operates a few flights to Japan and Korea, mainly to carry cargo. Tokyo-area operations have been consolidated at Narita, with no date for a return to Haneda planned.

Japan’s testing requirements have put a damper on tourism to Hawaii, Ingram said. Tourists must be tested three times: Once on arrival in Hawaii, once before departure, and once upon arrival in Japan, and could face quarantines in Japan. This adds significant cost and inconvenience to a Hawaii vacation. It remains unclear when this will ease, given the slow pace of vaccinations in Japan and fresh Covid outbreaks in that country.

While its international network is largely idled, Hawaiian is redeploying its Airbus A330 fleet to mainland routes. The carrier added three new routes during the first quarter: Honolulu-Orlando, Fla., and Ontario, Calif.; and Maui-Long Beach, Calif. A new flight to Austin, Texas, started this month. By June, with the addition of Maui-Phoenix, Hawaiian’s mainland network will be larger than it was before the pandemic.

Despite the optimism about North America, however, Hawaiian needs its international and interisland networks to recover. Those routes generated about half of the carrier’s pre-pandemic revenues and without their recovery, the airline will not return to revenue growth.

Hawaiian reported a first-quarter net loss of $61 million. Revenues fell 72 percent from the first quarter of 2019 to $182 million, on capacity that was 49 percent lower than that year’s. Daily cash burn for the quarter was $1 million. Hawaiian expects second-quarter revenue to be down between 45-50 percent from 2019. Second-quarter capacity is expected to be down 30-33 percent from 2019.

Madhu Unnikrishnan

Chinese Carrier Losses Rack Up in Choppy Quarter

The big three Chinese carriers racked up 15.1 billion yuan ($2.3 billion) in losses during the first quarter when targeted domestic travel restrictions hit the travel recovery. The country’s largest carrier Beijing-based Air China saw its net loss rise 23 percent year-over-year to 16.9 billion yuan in the period. Revenues decreased 15.5 percent to 14.6 billion yuan while expenses decreased 3 percent to 23.1 billion yuan. Air China has the most exposure to international markets, which remain mostly closed off due to Chinese border restrictions.

Shanghai-based China Eastern Airlines net loss shrank by 2 percent 4.1 billion yuan during the first quarter compared to 2020. Revenues decreased 13 percent to 13.4 billion yuan on a nearly 4 percent drop in expenses to 17.8 billion yuan. The carrier cited domestic travel restrictions that had an “adverse” impact on its results for the quarter.

Guangzhou-based China Southern Airlines net loss narrowed by 32 percent year-over-year to 4.1 billion yuan in the quarter. Revenues increased less than 1 percent to 21.3 billion yuan while expenses fell 6.5 percent to 27 billion yuan. The carrier anticipates further negative financial affects from Covid-19 travel restrictions in the second quarter.

Edward Russell

SkyWest to Resume Hiring to Prepare for Busy Summer

U.S. regional carrier SkyWest will resume hiring pilots in the second quarter as it gets ready for what it expects to be a hot summer for the airline industry as leisure travelers flock to the airways for their summer vacations.

SkyWest did not specify how many employees it plans to hire, but the carrier already has begun hiring flight attendants and maintenance technicians. The regional took more than $200 million in the first two rounds of federal payroll support and expects a further $250 million from the third round in the next two months. These funds required SkyWest — and any carrier that took the funding — to pledge not to involuntarily furlough or reduce pay for any employees. SkyWest’s plans to hire signal that it thinks demand will grow torridly this summer. SkyWest has not furloughed any employees, although it did offer voluntary leaves of absence during the worst of the pandemic, a spokeswoman confirmed.

Before the pandemic, a looming pilot shortage concerned regional carriers, as a significant number of mainline pilots were expected to retire in the coming years. Changes to pilot-training requirements in the wake of the 2009 Colgan Air accident also put pressure on regional hiring plans. Because of these concerns, SkyWest had already set up a robust pilot-hiring pipeline before the pandemic, working with more than 300 flight-training schools and universities, CEO Chip Childs told analysts during the company’s first-quarter 2021 earnings call. Competition for pilots is expected to be fierce, as mainline airlines begin hiring again and new entrants, like Avelo and Breeze, step up their recruitment. But Childs is not concerned, saying he was “astonished” by the number of prospective pilots who have expressed interest in working for SkyWest.

SkyWest is sitting pretty for the recovery. It fills in the smaller spokes on its mainline partners’ route maps, and its network is primarily domestic. The pandemic has sparked a boom in people moving to smaller cities and rural areas, fueling demand for the regional’s flights.

This is also driving expenses. SkyWest reported higher maintenance costs in the quarter as it prepares for the peak season. First-quarter maintenance costs were $204 million, up from $160 million in the first quarter of last year. This includes bringing 25 CRJ 700s out of long-term storage to return to the American Airlines fleet. “Things like maintenance are going to continue to run hot as we bring new airplanes back into service again as we prepare for what’s shaping up to be a pretty busy summer,” Chief Financial Officer Robert Simmons said.

By number of aircraft, SkyWest is one of the largest airlines in the world, with 468 airplanes in its fleet at the end of the first quarter. In addition to these, SkyWest leases two CRJ 200s, 34 CRJ 700s, and five CRJ 900s to other carriers.

SkyWest ended the first quarter with a profit of $36 million on revenues of $535 million, down 27 percent from 2020. The company expects to be fully back to 2019 levels of flying by the end of the fourth quarter, provided the Covid-19 pandemic trends in the U.S. continue to hold.

Madhu Unnikrishnan

In Other News

  • Ottawa continues to pony up relief for airlines with Transat A.T. the latest to secure funds. The Montreal-based carrier will receive up to CAD$700 million ($570 million) in aid from Canada’s Large Employer Emergency Financing Facility, the same mechanism through which Air Canada secured CAD$5.9 billion in relief. Transat has agreed to refund all tickets for travel after February 20, 2020, and maintain its workforce at April 28 levels in exchange for the capital. Despite the aid, Transat operations remain suspended due to government travel restrictions with the carrier hoping to restart flights in mid-June.
  • It’s something of musical chairs in the C-suites at Avianca and SAS. Anko Van der Werff has resigned as CEO of Avianca Holdings just two years into his tenure and will become the new CEO of SAS by July 15. Replacing him at the Colombian carrier is Adrian Neuhauser, who has been the airline’s president since November. Neuhauser joined Avianca as chief financial officer in 2019.

    “With global air travel resuming as COVID vaccines are rolled out and significant progress having been made in our corporate restructuring, we are at logical juncture to transition to a new leader who will guide Avianca into its next chapter,” said Van der Werff in a statement. Avianca continues to operate under U.S. Chapter 11 bankruptcy protection.

    SAS CEO Rickard Gustafson, who unveiled plans to retire in January, will step down in May. At that time, chief commercial officer Karl Sandlund will take over as acting president and CEO until Van der Werff officially joins the airline.
  • Norwegian Air posted a pre-tax net loss of $145 million (NOK 1.2 billion) during the first quarter. The budget carrier, which officially shed much of its fleet including its entire long-haul operation at the beginning of the year, saw revenues plummet 96 percent year-over-year to $31 million. Expenses fell 80 percent to nearly $167 million. But the airline was also a ghost of its former self in the quarter: passenger traffic was down 99 percent on a 98 percent drop in capacity. Norwegian plans to complete official restructuring processes in Ireland and Norway by June.
  • ANA expects a narrower fiscal-year loss, despite lower revenues, the company said in a stock market filing. ANA now expects to lose ¥465 billion ($4.3 billion), better than the ¥510 billion it had previously forecast. Revenues are expected to fall 2 percent to ¥725 billion, down from the previous forecast of ¥740 billion. By comparison, ANA reported revenues of ¥1.9 trillion for fiscal year 2019.
  • The crisis has slowed — but not shrunk — Viva Air‘s ambitions to expand its brand across South American. The Colombian LCC still plans to establish new operating subsidiaries in the continent’s countries, including Brazil, CEO Felix Antelo said at the virtual Routes Reconnected conference last week. “I love Brazil, but it’s not an easy market,” he said, adding that they are unlikely to launch a new operation in Brazil — or elsewhere in South America — before the second half of 2022 as they are still focused on recovering from the crisis.
  • Gol‘s first-quarter 2021 earnings call was a stark reminder that the pandemic hasn’t run its course just yet. Brazil is finally past a devastating second Covid-19 wave, and travel is only now starting to inch back up. The carrier reported its first-quarter capacity was down more than 40 percent from the fourth quarter. Entering Brazil’s off-peak second quarter, Gol expects further capacity reductions. By June, however, the Brazilian budget carrier will operate 410 daily flights, about what it operated at the end of last year. It expects to fly about 60 percent of its 2019 passengers by the end of June, CEO Paulo Kakinoff said during the company’s first-quarter earnings call.

    The carrier reported an operating loss of 522 million reais ($97 million) on revenues that were half of those in the same period in 2020. The airline is acquiring its Smiles loyalty program, a deal announced during the quarter. Kakinoff is confident in Brazil’s recovery, however. If the country’s vaccination program follows the trend in the U.S., demand will start to return more meaningfully by the second half, when Brazil expects to vaccinate most of its residents.
  • We’re all shopping more online. Even with countries reopening, retail probably will have undergone a structural shift toward more e-commerce, a pandemic trend that will likely persist. And with U.S. stimulus money coursing through the economy, retail benefits. That’s the message from UPS, which reported record earnings and profits in the most recent quarter. It forecasts the U.S. economy to grow by 6.2 percent this year, with retail sales growing 12 percent and electronics sales up 13 percent. Business-to-consumer volumes are up dramatically, and business-to-business volumes are returning to growth.

    The company reported consolidated first-quarter revenues of $23 billion, up 27 percent from last year. Profits rose 158 percent to $2.8 billion.

Edward Russell and Madhu Unnikrishnan

Edward Russell

May 3rd, 2021