Can South African 2.0 Succeed?

Edward Russell

September 7th, 2021

A greatly shrunken South African Airways is prepping to restart flights later in September after an 18-month pandemic hiatus. The relaunch comes as the South African government nears a potential deal with a private consortium to come on as an equity partner in the long-ailing national carrier.

The airline will relaunch with just six routes — Johannesburg to Cape Town, as well as to Accra, Harare, Kinshasa, Lusaka and Maputo — on September 23, SAA Interim CEO Thomas Kgokolo told the South African parliament’s Committee on Public Enterprises on September 1. SAA suspended flights on March 27, 2020 when the first Covid-19 pandemic lockdowns began. The six routes represented nearly 15 percent of its capacity in 2019, according to Cirium schedule data.

During SAA’s suspension, the carrier worked through the South African equivalent of bankruptcy restructuring known as “business rescue.” In that process, the airline shed more than 3,500 staff and will relaunch with a workforce of fewer than 1,000 people. SAA reworked its aircraft agreements with lessors and will operate a limited fleet of Airbus A320 and A330 jets under power-by-the-hour agreements, in which the carrier pays only for the time aircraft fly. And SAA also received 10.5 billion rand ($729 million) in state aid that it used, among other things, to pay down debt, for employee severance packages, and to maintain liquidity during its suspension. It remains to be seen process also shed its history of political meddling and poor management.

“We are very excited about the restart,” said Kgokolo. In his presentation, he outlined how the aim of the restructuring was to build a “viable and sustainable national carrier” — something SAA has not been for many years. The relaunch gives the airline the opportunity to test the market and see what routes work with the six markets selected for their higher load factors and yields.

But SAA relaunches into a changed market. South Africans have faced three national lockdowns since the pandemic began that brought domestic air travel nearly to a halt in April and May 2020. Since then, data from the country’s largest airports operator — Airports Company South Africa, whose assets include the Cape Town and Johannesburg airports — shows passenger traffic only recovered to 46 percent of 2019 levels during the first seven months of the year. And that limited recovery occurred with SAA suspended.

And foreign carriers have looked elsewhere for domestic partners. In August, Emirates unveiled a new partnership with CemAir. And Qatar Airways executives have said they are looking for additional partners in Southern Africa. Both Emirates and Qatar offer multiple flights into South Africa.

In his presentation, Kgokolo acknowledged that more work on SAA’s long-term viability is needed. For one, its Mango subsidiary entered business rescue at the end of July despite flying a reduced schedule through the pandemic. Its restructuring is in its “early stages” with the first meetings between the business rescue practitioner and both staff and creditors held on August 18, he said. The budget carrier has received 100 million rand from the 10.5 billion rand allocated to SAA to pay staff and creditors with additional funds expected.

SAA leadership plans to rejig both its fleet and route map as part of building a sustainable airline long term, said Kgokolo. This will include a “fleet reconfiguration” that, although he did not say it specifically, could include the introduction of new aircraft types that better match post-pandemic travel demand. In addition, management is looking closely at the airline’s route map that has long focused on a hub-and-spoke operation centered on Johannesburg.

Part of that long-term plan is the introduction of a strategic partner at the behest of the government. The Takatso Consortium, which includes Johannesburg-based Global Airways — owner of South African budget startup Lift Airlines — and private equity firm Harith General Partners, has completed its due diligence of a potential acquisition of a 51 percent stake in the airline and found “no material issues,” as Kgokolo put it. He did not provide any additional details of the process that is being managed by South Africa’s Department of Public Enterprises.

Edward Russell

Aeroflot Touts Leading Global Domestic Traffic in Q2 Results

The recovery dynamism at Aeroflot continued in the second quarter. The Russian carrier and its subsidiaries, Pobeda and Rossiya, carried nearly 13 percent more domestic passenger traffic on a 17 percent increase in capacity during the period compared to two years ago. That put it ahead of the Chinese Big 3 and the major U.S. carriers in traffic recovery from the Covid-19 crisis, or as Deputy CEO for Commerce and Finance Andrey Chikhanchin put it: “We are a world champion in the global domestic recovery.” Much of that recovery was for travel to Russian regional airports and those with holiday appeal, including Kaliningrad, Murmansk and Sochi.

The domestic recovery was led in a big way by Aeroflot’s budget subsidiary Pobeda. Passenger numbers at the low-cost carrier were up 40 percent in the first half of 2021 compared to 2019. This growth was in part driven by the opening of a new Moscow Sheremetyevo base with 17 routes and 10 Boeing 737 aircraft earlier in 2021. What’s more, Pobeda turned a 2.5 billion rubles ($341 million) net profit in the second quarter. Neither Aeroflot nor Rossiya, the group’s regional and mid-market airline, saw passenger numbers grow in the first half compared to two years ago.

Overall, the group posted a 2.6 billion-ruble loss in the second quarter. This was a dramatic 98 percent improvement over the same period a year ago. Group revenues were down 31 percent year-over-two-years to 120 billion rubles during the June quarter. The biggest hit — as at every global carrier — came from the loss of international traffic that was down 77 percent year-over-two-years.

For the third quarter, Aeroflot executives expect capacity and yields to recover further from their second quarter levels. However, they did not provide details of the anticipated recovery.

The group took delivery of 13 aircraft — five Airbus A320neos, two Airbus A321neos, five Airbus A350s, and one Boeing 777 — and retired 11 aircraft — nine A320s and two Airbus A330s — during the first half of 2021. It plans to take delivery of one A320neo, one A321neo, two A350s, two 777s and 15 Sukhoi Superjet SSJ100s, while retiring two A319s, seven A320s and three A330s in the second half.

Edward Russell

SAS Takes Wait-and-See Approach for Post-Pandemic Passenger Mix

As with most other carriers worldwide, SAS saw leisure demand rise rapidly during the summer quarter, with passenger traffic increasing 144 percent from the previous quarter. But the autumn, typically when corporate demand starts to fill the void left after summer vacationers return to school and work, is looking less rosy.

“There are question marks about the recovery speed,” new CEO Anko van der Werff said in his first earnings call after taking the helm six weeks ago. “The signals are mixed.” September through the end of November usually are strong business-travel months for the Scandinavian carrier, but van der Werff warned that booking windows remain shorter than before the pandemic, offering no clarity for how the fall will play out. It also remains unclear whether the mix of passengers — leisure and business — will be permanently different than before.

One factor clouding the prognosis is when offices will reopen in Scandinavia and throughout Europe. Businesses in Denmark have recalled workers to their offices, but Sweden and Norway lag, van der Werff said. “No one has given us a straight answer.”

And of course, travel restrictions are changing by the day as Europe reacts to the Delta variant. The European Union last week recommended that its member states re-impose restrictions on unvaccinated U.S. travelers. Van der Werff said the carrier is seeing some business demand return, but it is not yet matching leisure demand. “We are not out of the woods yet,” he said.

To illustrate the confusion of travel restrictions, van der Werff noted that he still has not visited the airline’s operations in Norway, because his U.S. vaccination documents are not recognized in that country. “This shows what the industry is up against,” he said.

But some signs are encouraging. Capacity is up 148 percent from the previous year. Load factors of 52 percent were 23 percent better than the previous quarter. Unit revenues declined 22 percent year-over-year, mainly due to the network, which has been primariliy domestic during the pandemic. Van der Werff said although the carrier is adding back flights to North America, its Asia network remains sluggish due to continued travel restrictions.

SAS has changed its orderbook as well in response to the pandemic. The carrier’s Airbus A350s now will arrive in 2024. But it continues with its plan to phase out its Boeing 737 fleet, with five exiting the fleet in the most recent quarter. The 737s are expected to leave the fleet by early next year. SAS is taking delivery of two Airbus A321LRs this year, 13 A320neos this year with 12 more to follow next year. In 2024, the carrier will take delivery of six more A320neos as well as two A350s, and four more A320neos will arrive in 2025, Chief Financial Officer Magnus Ornberg said.

Van der Werff waved off concerns about a reconstituted Norwegian Air focusing more intently on the Nordics. His focus is on SAS, he reiterated. “We have to become profitable.”

SAS reported a loss of SEK1.4 billion ($1.4 billion) in its fiscal third quarter, on revenues of SEK4 billion. Although passenger revenue declined 62 percent from the year prior, cargo revenue grew by SEK134 million.

Madhu Unnikrishnan

A Much Smaller Norwegian Air Lives to Fly Another Day

Norwegian Air ended the first half of this year a leaner airline — much leaner, as it ended its longhaul ambitions and reduced its workforce by 6,000 employees. Almost one-quarter of the airline’s remaining 3,000 employees remain furloughed, though CEO Geir Karlsen believes they will be recalled by the end of October.

Norwegian Air endured quite a bit of tumult during the first half of this year, prompting questions of its very survival. In January, the carrier announced it would scuttle its longhaul routes, ending almost a decade of rampant expansion to North America, Asia, and Argentina. It shed its fleet of Boeing 787s (many of which are now being acquired by startup Norse Atlantic, which aims to take Norwegian’s longhaul mantle). After ousting founder Bjorn Kjos last year, the carrier’s board in June also booted CEO Jacob Schram, who led the airline’s through its bankruptcy proceedings, naming Karlsen, who had been chief financial officer, to the top job. And in May, Norwegian exited restructuring.

It’s a much smaller carrier than it was. The airline now has a fleet of 51 Boeing 737-800s, many of which remain parked. It started the year with 10 in operation, which rose to 40 by the end of August. Karlsen expects to have the entire fleet back in service by the end of this year. During the half and while in bankruptcy, Norwegian negotiated “power-by-the-hour” deals with its lessors, giving the airline more flexibility in how it utilizes aircraft. This will allow it to scale back during the winter slump without incurring aircraft ownership costs. But these deals also will allow Norwegian to scale up capacity quickly and at lower cost as demand returns. Lessors have agreed to power-by-the-hour deals through the end of the first quarter of next year. By then, Karlsen said, Norwegian should be well on the road to recovery and will not need the flexibility.

The carrier is making a break with its past practice and will be more aggressive in managing capacity during the winter slump, Karlsen said. “We are losing way too much money in the low season,” he said. “We will park aircraft during the winter,” he said, adding, “We are not good enough compared with the best in class,” in efficiently managing utilization during the low season.

Norwegian also plans to add more capacity next year through fleet growth. Karlsen expects the carrier to add between 10-20 aircraft by the end of next year, although he did not define a precise number nor did he identify what kind of aircraft the carrier may seek. The carrier is in active discussions with lessors for new lift, and Karlsen noted the leasing market is “heating up.” Norwegian does not currently have any aircraft on order, after having cancelled as many as 185 orders during its restructuring. It is in contentious negotiations with Boeing for financial compensation due to the Max grounding and the cancellation of Norwegian’s remaining orders. Norwegian had 18 Maxes in its fleet before the March 2019 grounding.

But, despite the tumult, Norwegian predicts the rest of the year and the first half of 2022 will be a period of recovery. The booking curve is lengthening, but remains shorter than it was before the pandemic. Demand started to recover in June and strengthened through August. September bookings are “still not enough, but it’s very good,” Karlsen said. Fares also are rising. “We are seeing very good signs,” Karlsen said. “They are still not good enough, but definitely moving in the right direction.” Credit card holdbacks remain problematic, but Karlsen expects this situation to return to normal by early next year.

Norwegian ended the first half of the year with NOK7.5 billion ($863 million) in cash, with the bulk of its debt “taken out” during the restructuring process, Karlsen said. “We have created a company with the right fleet, the right balance sheet, and the right debt.” One item of value the carrier highlighted is its slots at London Gatwick, which it hopes to keep and expects to rise in value as the pandemic recedes, Karlsen said.

Norwegian reported a pre-tax profit of NOK1.5 billion, compared with a NOK4.8 billion pre-tax loss in the first half of last year. Capacity was down by 94 percent compared with last year, as the carrier ceased longhaul flying. Revenues at the much smaller Norwegian were NOK591 million, down 92 percent from last year’s NOK7.1 billion. Unit revenues, however, were up by 22 percent, Karlsen said.

Madhu Unnikrishnan

U.S. Airlines May Have Already Seen Worst of the Delta Variant

Several major U.S. airlines have reported worse-than-expected August performance amid the surge in Covid-19 cases caused by the Delta variant across the country. But the bite of the latest surge may prove short-lived as case numbers in early hotspots have already peaked and Americans try to cram in one last summer trip this September.

“While the Delta-variant has caused August to underperform expectations and the anticipated step function improvement in business travel likely to be delayed, encouragingly, the demand impact has not been as big as prior Covid waves,” wrote Raymond James Analyst Savanthi Syth in a report on August 29.

Citing restaurant data, Syth noted that where the surge has peaked consumers are “quickly returning to ‘normal,’” where normal is pre-surge levels.

And, in a report on August 26 citing similar Covid-19 case trends, Cowen Analyst Helane Becker said the trend “could drive a demand rebound as travelers look to squeeze in a vacation before the end of summer.”

A last-minute bump in September leisure travel could be one reason why American Airlines declined to revise its guidance for the rest of the year after missing revenue its forecast in August. Speaking on August 25, American Chief Revenue Officer Vasu Raja reiterated that the recovery is and will be “very choppy” but added that, despite the slowdown, “there will still be a recovery.”

This is not to say airlines will avoid a fall slowdown. Historically, capacity decreases after Labor Day as leisure demand drops with kids returning to school. Business travel typically picks up some of that slack but not enough to avoid schedule reductions; however, it is unclear when this will occur due to later-than-expected return to office plans at many large companies. In 2019, domestic capacity decreased 10 percent from August to September, according to Cirium schedule data.

This nexus of historic trends and the Delta variant all come at the same time. Barring Becker’s possible last minute leisure travel surge scenario, airlines were already pruning their schedules for the seasonal slowdown. Cirium data show capacity dropping 8.6 percent from August to September in published schedules this week, slightly more than the 8.2 percent drop in schedules last week.

Southwest Airlines cited operational challenges as the main driver in its decision to cut more than 5,000 flights from its schedule this fall. However, the cuts simply reduce the amount of capacity growth the carrier planned this fall with its schedule still back to 2019 levels, Syth wrote in a report on August 27. Southwest has added 18 new destinations to its map, and greatly expanded its Hawaii flying, in a drive to capture new travelers and expand its domestic share coming out of the crisis.

Frontier Airlines and Spirit Airlines have also revised down their growth plans for the fall due to the surge in Covid-19 cases. However, the latter was also battered by severe operational issues due to staffing issues in early August. The combined fallout of the variant and its operational distress put the kibosh on Spirit’s expectations of a third-quarter profit.

More U.S. carriers, including giants Delta Air Lines and United Airlines, are expected to provide updated fall guidance — including just how much the variant hit the broader industry — after Labor Day.

Edward Russell

Chinese Big 3 Lose $2.6 Billion in First Half

Air China, China Eastern and China Southern posted 17.1 billion yuan ($2.6 billion) in combined losses during the first half of 2021. While touted repeatedly as one of the first domestic markets to recover from the Covid-19 crisis, the “sporadic spread and local clusters” of the virus — as China Eastern put it — hit results at all three airlines.

Air China reported a nearly 7.7 billion yuan loss, the largest among the three carriers. Revenues fell 40.6 percent to nearly 40 billion yuan during the six month period compared to 2019. Traffic at the Beijing-based carrier was down 49 percent year-over-two-years, though domestic traffic decreased just 11 percent. System capacity was down 42 percent and domestic capacity 3 percent.

China Eastern lost 5.4 billion yuan, second highest of the three airlines. Revenues decreased 39 percent to 37.7 billion yuan in the first half versus 2019. System traffic at the Shanghai-based carrier was down 44 percent on a 35 percent drop in capacity, while domestic traffic was down 14 percent on flat capacity.

China Southern posted the best results of the lot with an only nearly 4 billion yuan loss during the first half. Revenues at the Guangzhou-based carrier decreased 29 percent to 51.6 billion yuan year-over-two-years. System traffic was down 39 percent on a 31 percent drop in capacity, while domestic traffic was down 12 percent on a 3 percent drop in capacity.

One highlight of the period for China Southern was the growth of its hub at Beijing Daxing airport, which opened in September 2019. By the end of June, the airline was operating more than 400 flights a day from the airport to 40 domestic destinations. It plans to open a second international hub at Daxing to complement its Guangzhou gateway once China eases border restrictions.

Edward Russell

In Other News

  • Long-ailing Philippine Airlines finally succumbed. The carrier filed for Chapter 11 bankruptcy protection in New York late last week, just as the U.S. began a three-day holiday weekend. Details will emerge, but PAL is expected to seek to reduce its fleet and its debt load. PAL downsized early in the pandemic, and reduced its fleet by more than 30%. But it wasn’t enough to stem its losses. The carrier said it expects to file for reorganization in its home country as well. PAL’s troubles aren’t new: The carrier has lost money consistently for several years.
  • Icelandic startup Fly Play unsurprisingly lost money during the first half of 2021, a period during which it only flew three days. The airline posted a $1.8 million net loss on revenues of $43,409. But it was an “excellent” start according to CEO Birgir Jónsson, one of the many former Wow Air executives leading Play. The airline boosted its cash reserves to $65 million today from $42 million at the end of June after its IPO in early July. And load factors inched up to more than 46 percent in August from nearly 42 percent in July — albeit still far short of achieving the 90 percent-plus load factors most ultra low-cost carriers need to succeed. Play has applied for a foreign air carrier permit to begin flights to the U.S. East Coast next spring, and signed leases for five Airbus A320neos plus one A321neo for delivery through end-2022. How could the airline not succeed copying the strategy of Wow Air that failed so spectacularly in 2019?
  • Following the European Union’s decision to remove the U.S. from its “safe” countries lists, KLM threw some shade at the Netherlands’ new mandatory 10-day quarantine for arrivees, even those with their jabs. After saying Covid-19 health and safety was “paramount,” it said restrictions need to be “effective and proportionate.” “Other EU member states, such as Italy, France and Belgium are not putting a triple lock on the door for travelers from the U.S.,” KLM said. As a result of the new restrictions, the airline has suspended plans to resume flights to Las Vegas, Miami and Orlando this winter.
  • Delta, the variant and not the airline, has taken a bite out of Alaska Airlines‘ third quarter. The carrier has lowered its revenue forecast by up to two percentage points to down 19-21 percent compared to 2019, and expects half the cash flow from operations — flat to $50 million — than it did six weeks ago. All of this is the result of a, to paraphrase, “moderate deterioration” of bookings since Covid-19 case counts rose due to the variant. The good news is that pre-tax margins — a proxy for pre-tax profitability — are still forecast as positive.
  • July traffic worldwide was down 53 percent from 2019, but that’s an improvement over July, when traffic was down 60 percent from 2019, IATA reports. The sharp divide between international and domestic travel continued, despite easing travel restrictions. In July, international traffic was down 74 percent compared with 2019, while domestic demand was down 16 percent. The most startling exception was Russia, where domestic traffic exceeded 2019 by 29 percent. Cargo, of course, is a starkly different story. Freight demand was 9 percent higher than the same month in 2019, even as capacity fell by 10 percent from the same month. Cargo is expected to remain a force, as business confidence indices are rising and the inventory-to-sales ratio remains low as the peak holiday retail season approaches, IATA said.
  • Vistara, the TATA Group-Singapore Airlines joint venture in India, won its final approval to operate to the U.S. from the Transportation Department. The order is effective immediately. Vistara previously had said it planned to start flights in September, but given travel restrictions in place in both the U.S. and India, it is unlikely to begin flights this month. Local news reports in India say the airline could launch its U.S. service in December.

Edward Russell & Madhu Unnikrishnan

Edward Russell

September 7th, 2021