Gol Takes Lead in Brazilian Consolidation

Edward Russell

June 14th, 2021

Gol is taking the first step in the expected wave of Brazilian airline consolidation, unveiling a 28 million reais ($5.6 million) deal for regional carrier Map Transportes Aéreos last week. The acquisition would strengthen Gol’s presence at slot-constrained São Paulo Congonhas airport, as well as expand its network into smaller cities in both the southern and Amazon regions of Brazil.

The Gol-Map deal comes as most in the airline industry are focused on the possibility of an AzulLatam Airlines Brasil merger.

“We believe the acquisition of Map is the only viable opportunity for rational consolidation in the Brazilian aviation market at present,” Gol CEO Paulo Kakinoff said in a statement. “Going forward, we will continue to focus on our organic growth strategy, stimulating demand to expand our network.”

Gol is the largest domestic carrier in Brazil with a more than 38 percent share of passenger traffic in 2020, according to Brazilian aviation regulator ANAC. Latam Brasil is the second largest with a nearly 34 percent share and Azul third with a nearly 28 percent share. Map has a less than 0.5 percent share of the Brazilian market.

Map operates seven ATR turboprops on regional routes from Congonhas and Manaus. Gol plans to replace those 70-seat ATRs with Boeing 737s — initially -700s that seat 138 passengers — that would provide more capacity to underserved regional destinations.

Expanding regional air service has been a focus of the Brazilian government for years. Prior to the country’s last economic recession, officials were working on a package of incentives to encourage the country’s airlines to expand regional flying. Then — as today — Gol and Latam both operate domestic fleets made up entirely of Airbus or Boeing jets, while Azul is the only national carrier with a regional fleet of ATRs and Embraer E-Jets.

Gol’s acquisition of Map is subject to approvals by both ANAC and Brazil’s antitrust regulator CADE.

Edward Russell

Azul-Latam Brasil Tie-Up ‘Very Likely’: Analyst

Continuing with the Brazilian consolidation buzz, a recent report from investment bank Bradesco BBI called an Azul and Latam Brasil tie up “very likely” with a deal possible in the next 90 days. The combination would give Azul an up to 63 percent share of the Brazilian domestic market and would likely receive approval from CADE with limited slot divestitures at Rio de Janeiro’s Santos Dumont and São Paulo’s Congonhas airports.

Analyst Victor Mizusaki outlined a process that could see Azul make a pitch for Latam Airlines Group‘s Brazilian unit through its U.S. Chapter 11 bankruptcy restructuring. At least two Latam creditors, Oaktree Capital Management and Knighthead Capital Management, have exposure to Azul that could influence them in support of a deal.

Latam Brasil is worth about $1.1 billion plus roughly $1.9 billion in debt, according to Mizusaki. He estimated that an Azul-Latam Brasil merger would result in roughly 10 billion reais ($1.98 billion) in financial synergies.

Mizusaki’s 90-day timeline could already be out the window. It was based on Latam submitting a reorganization plan to the court by June 30 and creditors voting on it by August 23. Several days after the report, the airline sought to extend the reorganization plan deadline to September 15 and the voting deadline to November 8.

Latam remains publicly opposed to selling its Brazilian unit. “We are not considering in any way, shape or form, any sale of any of our assets at this point in time,” group CEO Roberto Alvo told Bloomberg earlier in June.

But this would not be the first time an interested party has used the Chapter 11 bankruptcy protection process to push consolidation. All one needs to do is rewind to 2013 and then-US Airways CEO Doug Parker’s very public courtship of an initially unwilling American Airlines. Opposition gradually gave way to talks and a merger deal was concluded on Valentine’s Day in 2014.

Edward Russell

Transat Leaves Hotels Behind to Focus on Airline Business

Canada’s Transat is abandoning its vertically integrated travel company model to refocus on its core airline business, with plans to retool its network to ferry passengers from all over Canada to transborder and other international destinations through its hubs in Eastern Canada. The move is a strategic shift for the company, which only a few years ago touted the value in its vertical model.

The pandemic forced the change and gave the company time to reevaluate what its core business should be. On May 20, the company discontinued its hotel division and will not invest further in the sector. Tours will remain an important revenue stream — but not an area of focus — as the company prioritizes its airline operations. “We are not to our full potential as an an airline because we were focusing on being a tour operator, a travel agency, and on hotels,” said CEO Annick Guerard, who took the helm of the company from Jean-Marc Eustache on May 27. “Now we need to refocus and to be much better as an airline company.”

Not that the carrier is doing much — or any — flying right now. When Canada closed its borders to Caribbean and Mexican destinations in January, Transat suspended all commercial flights. The carrier now expects to resume operations on July 30, provided Ottawa lifts border restrictions. When it does, Transat will offer fewer point-to-point flights and focus its network on its connecting passengers through its Montreal, Quebec City, and Toronto hubs. Instead of point-to-point flights, Transat will offer more frequencies on fewer routes. This new strategy will expose Transat to less seasonal variation and will increase aircraft utilization, Guerard said during the company’s fiscal second quarter earnings call Thursday.

Part of this shift in strategy was informed by the collapse of merger talks between Transat and Air Canada last month after regulators raised antitrust concerns. Instead, Transat is now in talks to pursue alliances and partnerships with other airlines, although Guerard declined to specify which carriers Transat is in discussions with.

The carrier is also in the midst of a fleet and fleet-strategy transformation. Transat is returning the last of its Boeing 737s and has retired its Airbus A310 fleet. It will have just two aircraft types from now: Airbus A330s and A321s. Crews will be able to operate either, reducing fleet and scheduling complexity. In addition, Transat will no longer lease aircraft during the winter for seasonal lift during what had been its peak season and will up the daily utilization rates for its existing aircraft — all part of its focus to reduce seasonality and increase frequency on key routes, Guerard said. “Overall, the average use of our aircraft was always below, compared with WestJet and Air Canada,” she said, adding: “We had too much seasonality and were not using our aircraft enough during the weekdays or even within each day.”

Transat is not straying too far from its roots, though. Guerard emphasized that the company will continue pursuing leisure travel. “We want to capture all the leisure traffic there is between Canada and the U.S., the Caribbean, and South America, while getting stronger in Europe,” she said. “The way for us to become even stronger is not to do as many routes but to do them in an efficient way.”

The carrier is optimistic that winter leisure travel will rebound. Guerard pointed out that during lockdown Canadians saved significant sums of money and thinks that they will use some of those savings for winter getaways. Still, Transat will not deploy as much capacity this winter as it did in 2019. “We never know what may happen,” Guerard said of the pandemic and future restrictions. “We are being prudent.”

During the quarter, Transat took a C$700 million ($579 million) emergency loan from the Canadian government. Of this, C$310 million will go toward refunds for passengers whose travel was cancelled during the pandemic and to whom Transat had offered travel credits. The remaining C$390 million will be used to fund Transat’s restart and to tide it over until revenue picks up.

Revenue in the quarter plummeted. The carrier reported C$8 million in revenue in the quarter, down from C$572 million last year, a quarter that also showed the pandemic’s effects. Transat’s quarterly net loss was C$103 million. Daily cash burn was C$1 million. The carrier expects to return to profitability by 2023, after gradually ramping up operations from July 30 through next year.

Madhu Unnikrishnan

American Optimistic About Business Travel Recovery

The name of the game is domestic leisure for U.S. carriers, but when lucrative business demand might return continues to be an open question. American CEO Doug Parker thinks demand will start to ramp up in September and the fourth quarter will be even better than the third. Parker based this prediction on what he’s heard from corporate clients.

But in the meantime, American will continue to focus on retooling its network to fly as many holidaygoers to as many destinations as it can. Long-haul international routes will be the last to come back and are dependent on governments around the world lifting travel restrictions, Parker told investors last week. Short-haul international, to vacation destinations in Mexico and the Caribbean, are doing “quite well.” The carrier this summer will operate 90 percent of its pre-pandemic domestic capacity and about 80 percent of its pre-pandemic capacity overall, he said.

American’s fleet resizing continues. The carrier earned about $300 million from the sale of the Boeing 767 and Embraer E190 it retired. The Boeing 757 fleet is taking a little longer to sell, as are the Airbus A330s, Chief Financial Officer Derek Kerr said.

Parker noted the recent controversy over voting-rights legislation that embroiled American. A Texas bill, now stalled in the legislature, would restrict voting rights by “some groups,” Parker said. After hearing from employees and Black CEOs from around the country, American took a stand against the law, earning the ire of Texas Republicans, who deny criticism that the bill would restrict access to the polls. “”We are not picking one side,” Parker said. “We want to try to pull people together.”

Madhu Unnikrishnan

In Other News

  • Ryanair notched another victory in its battle against European state aid for flag carriers. In this case, the European General Court ruled that Germany’s two loans to Condor exceeded the scope of compensating the airline for Covid-related cancellations. Germany extended two loans totaling €550 million ($670 million) in loans to the carrier early in the pandemic last year. The court annulled the aid and said they fell afoul of Europe’s competition laws, but the court also is suspending repayment until market conditions and the pandemic improve.

    “During the Covid-19 pandemic over €30 billion in discriminatory State subsidies has been gifted to EU flag carriers,” a Ryanair spokesperson said. “Unless halted by the EU Courts in line with today’s ruling, the effects of market distortion caused by this state aid will be felt for decades.”  The court previously had ruled in Ryanair’s favor and against state aid for KLM and TAP Air Portugal. The Irish discounter has several more cases pending before the court.
  • Hawaii is on the verge of lifting most of its travel restrictions. on June 15, the state will no longer require testing for inter-island travel, good news for Hawaiian Airlines, which reported a stark drop in intra-state travel due to the high cost of testing relative to the low cost of inter-island tickets, and to a lesser degree, Southwest, which also operates inter-island routes. When the state vaccinates 60 percent of its population, the state will relax most domestic restrictions; when it reaches 70 percent of residents vaccinated, all travel restrictions will be dropped.
  • The U.S. Transportation Department awarded Air Senegal a foreign air carrier permit and exemption to provide scheduled and charter service between the two countries, effective June 7. The carrier last month said it intends to start twice-weekly Dakar-New York-Washington flights on Sept. 2, using A330neos configured with 290 seats.
  • It was a busy week for foreign air carrier permits. Vistara got one step closer to flying to the U.S. when the DOT granted tentative approval for its foreign air carrier and exemption. The Indian carrier perviously said it plans to fly to the U.S. in the third quarter of this year. Barring objections to its application, it could make that deadline. Vistara, backed by Singapore Airlines and the Tata Group conglomerate, has not said where it intends to fly. The carrier currently operates two Boeing 787-9s on long-haul routes to London and Frankfurt.
  • After getting blowback, Air Canada said executive vice presidents and above will return their bonuses, and former CEO Calin Ravinescu will donate his 2020 bonus to the Air Canada Foundation. The carrier faced public condemnation for the bonuses for a year when it reduced its headcount by half and received a federal loan from Ottawa.
  • Aeromexico wants more time to finalize its U.S. Chapter 11 reorganization plan. The carrier has submitted a motion to the court to postpone the deadline to October 25 from June 25. If approved, creditors would have until December 22 to vote on the plan. The court is scheduled to hear the motion later in June.
  • The pandemic continues to be tough for Hong Kong’s carriers. HNA Group-owned Hong Kong Airlines is further cutting its operations with plans to fly just eight Airbus A330s on primarily cargo flights and ground its 12 Airbus A320s for at least a year from July, reported the South China Morning Post last week. In addition, the airline is considering redundancies for 30-40 percent of its staff. “Hong Kong Airlines is now in a critical survival mode … with the collapse of air travel and no recovery in sight,” the carrier’s chairman Hou Wei said in an internal memo.
  • United Airlines launched a new venture capital fund United Airlines Ventures last week. With initial capital of up to $200 million, the fund will focus on sustainability and innovation technologies for aviation. The fund is backing United’s speculative deals with Archer for electric vertical takeoff and landing — or eVTOL — aircraft and Boom Supersonic for 50 Overture aircraft.
  • Air cargo continues to be a bright spot for airlines during the pandemic. The latest IATA figures show that cargo demand in April was up 12 percent from 2019, and up 8 percent from March. The strongest growth came from North American carriers, which supplied almost 8 percent of that 12 percent rise. Belly-hold cargo remains relatively depressed on low international passenger capacity, but dedicated freighter capacity rose 26 percent. Signs point to the continued strength of air cargo. Global trade is up 4.2 percent. Maritime shipping rates remain high and constrained. And companies eager to restock as the world’s economy starts to recover, are showing a strong preference for the speed of air freight over maritime, IATA said.

    Madhu Unnikrishnan and Edward Russell

Edward Russell

June 14th, 2021