American Bullish on Business Recovery

Edward Russell
October 25th, 2021 at 12:01 AM EDT

American Airlines is bullish on the business travel recovery. The carrier expects revenue from the lucrative segment to fully recover by the end of 2022, joining the likes of Emirates in taking an overtly optimistic stance on the return of corporate flyers.

“We remain very bullish on the return of demand,” said American President Robert Isom during a third-quarter earnings call on October 21. Business travel revenues stood at about half of 2019 levels at the end of September after peaking close to 60 percent of levels seen two years ago in July before the Delta variant set back the recovery, he added.

Business travel has lagged leisure flyers in the Covid-19 recovery. While the latter segment has shown a willingness to fly during the pandemic, whether it was to escape to outdoors-oriented destinations in 2020 or make postponed trips to see family this year, the former has lagged. Most corporates face a duty of care burden that has made travel managers hesitant to send road warriors back out on the road while the risk of catching Covid-19 remained high.

“I hear over and over again that we’ve got to get back to the office, and once we’re back to the office travel will come,” said Isom citing comments at a meeting of American’s top 50 corporate customers earlier in October. Expectations are that many businesses will return staff to offices by January.

American stands alone among U.S. carriers anticipating a full business recovery next year. Both Delta Air Lines and United Airlines have forecast an inflection point early in the year coupled with returns-to-the-office but neither have gone as far as to say the segment will return to 2019 levels in 2022. Both do expect a full recovery over the medium- to long-term.

And the Covid-19 virus has proven again and again to be a wily adversary. Drops in case numbers have repeatedly ended in surges with the Delta variant driving a slowdown in demand in August and September. American was among the many carriers that walked back their third quarter outlooks in September with Isom citing at the time significant “uncertainty” in the market.

Driven in part by its business travel forecast and continued strong leisure demand, American plans to fly “very near” its 2019 capacity next year. Overall booking rates for November and December, as well as into 2022, are above 2019 levels, executives said.

American is walking a fine line on Covid-19 vaccines for staff. The carrier declined to mandate them until an executive order from President Joseph Biden required the shots for all government contractors, airlines included. But the debate has continued with its pilots union objecting to a mandate and, in comments Thursday, Isom said they “don’t expect anyone to leave” the airline.

But therein lies the rub: American does not expect all staff to get their jabs and that those who do not will seek exemptions and be accommodated, as Parker put it. However, he also acknowledged that not everyone who seeks an exemption will receive one. And what happens to those employees? “We fully expect them to get vaccinated,” he said talking around the unvaccinated and unexempted elephant in the room.

Given the controversy over Covid-19 vaccines and the public statements against the jabs by some American employees, there is a high likelihood of at least several hundred staff falling into the unvaccinated and unexempted category. The lack of a firm position from Parker and his team could embolden some staff to try and skirt the rule if they do not believe the penalties will be harsh.

United, which was the first U.S. airline to mandate the jabs, is moving to terminate more than 200 staff who have refused to get vaccinated and did not receive exemptions.

Asked about United CEO Scott Kirby’s warning on October 20 that airlines without vaccine mandates could face operational disruptions this winter, Parker said he does not anticipate any such issues. Accommodations for exempted employees will not be “cumbersome on the operation,” he said.

Parker declined to provide a percentage of American staff who are vaccinated. Delta executives said on October 13 that 90 percent of the carrier’s staff had received their inoculations and United’s workforce is more than 99.7 percent vaccinated.

American’s regional affiliates that operate American Eagle flights are not subject to the federal contractor vaccine mandate and have no corporate mandates, added Parker.

American reported a $641 million net loss excluding the benefit of federal Covid-19 aid during the third quarter. Both revenues and expenses decreased by roughly 25 percent to nearly $9 billion and $8.4 billion, respectively, versus 2019. As at its competitors, other key metrics were down as well: passenger traffic by 26 percent, capacity by 19.4 percent, and total unit revenues by 6.6 percent. Unit costs excluding fuel and special items increased 10.6 percent.

Looking forward, Parker was optimistic for the fourth quarter but said that weak business demand and rising oil prices will present challenges. American forecasts paying an average of $2.43-2.48 per gallon for fuel in the fourth quarter, which is an at least 17 percent increase from the third quarter. In addition, delivery delays to at least eight — and potentially 11 — Boeing 787-8 aircraft that were due in 2021 will drive up unit costs for the period.

American expects revenues at roughly 80 percent of 2019 levels on capacity at 87-89 percent of two years ago in the fourth quarter.

Edward Russell

United’s Regional Carriers Not Subject to Vaccine Requirements

United CEO Scott Kirby may not want the carrier’s successful Covid-19 vaccine mandate to be a competitive advantage. But when it comes to promoting his airline over others he says to travelers, “caveat emptor” — or “let the buyer beware” — when it comes to booking flights.

“Customers can book with confidence on United … but if you’re booking on an airline that doesn’t have a vaccine requirement, they’ve got government rules they have to follow and caveat emptor,” he said during a third-quarter earnings call on October 20. Kirby outlined the possibility for large-scale operational meltdowns if unvaccinated staff who are required to submit to regular Covid-19 tests test negative and cannot work.

In citing potential operational disruptions, Kirby was indirectly pointing the finger at Southwest Airlines. The Dallas-based carrier has said it will allow unvaccinated staff to continue working if they seek an exemption and submit to regular testing. Southwest was also subject to a major staffing-related operational meltdown that cancelled nearly 2,000 flights over the Indigenous People’s Day weekend holiday in the U.S. earlier in September.

But the comments also set up something of a contradiction for United. While Kirby warned travelers to beware what airline they book flights with, the carrier has not asked nor is requiring its regional affiliates who operate United Express flights to implement the same Covid-19 requirements, said United President Brett Hart during the call. These affiliates, including Mesa Airlines, Republic Airways and SkyWest Airlines, operate the majority of United’s domestic flights — 59 percent in October according to Cirium schedules — and do so with little discernible difference from their partner except for the planes they fly.

“We have and are strongly encouraging them and pushing them to do it,” said Kirby. “We think it’s the right thing for them to do.”

A SkyWest spokesperson said the airline “strongly encourages” staff to get vaccinated, and added that the airline has incentives in place for this. She did not say what percentage of SkyWest staff have their jabs.

Spokespeople for Mesa and Republic did not respond to inquiries.

United was the first U.S. carrier to implement a broad Covid-19 vaccine mandate in August. As a result, roughly 99.7 percent of its staff — excluding those who have received exemptions — are vaccinated and it is moving to lay off those who have refused to get their jab.

United joined competitor Delta in citing the emergence of a new travel category in recent months: premium leisure. These are leisure travelers who are willing to pay a bit more — or redeem extra points — to sit in a premium economy or business class seat.

Andrew Nocella, chief commercial officer at United, said on the call that this trend has helped make the airline’s Premium Plus premium-economy cabin the “best performing” financially in its Atlantic segment this year. Long-term, United expects premium leisure travelers to drive a 2-3 point improvement in overall leisure travel yields.

But United has not gone as far as Delta in committing to reconfiguring its long-haul aircraft to capture more of these travelers. The airline will wait to see how business travel comes back before making any interior modification decisions, said Nocella. Despite this, United is moving forward with the paused installation of Premium Plus seats on its 14 Boeing 767-300ERs without the product, and plans to install the cabin on the 50 Airbus A321XLRs it has on order with deliveries from 2024.

United is downright bullish on the international travel recovery. For 2022, the carrier already forecasts 10 percent international capacity growth compared to 2019 while domestic capacity will be flat year-over-three-years. This is quite the switch from the years immediately preceding the pandemic when United was on a domestic growth kick focused on its mid-continent hubs in Chicago, Denver and Houston.

But the outlook is not uniform across regions. The airline is piling on across the North Atlantic where the news that the U.S. would drop country-specific travel restrictions in favor of a vaccine requirement for all arriving flyers from November 8 prompted a surge in bookings. Earlier in October, United unveiled five new destinations — Amman, Jordan; Bergen, Norway; Azores, Portugal; and Palma de Mallorca and Tenerife, Spain — amid an eight-route transatlantic expansion for next summer. The Pacific, however, is forecast to recover 12-18 months later with 2022 capacity expected to still be down significantly versus three years earlier.

“Our bookings across the Atlantic are now approaching 2019 levels. We expect a very strong bounce back next year, in particular, starting in the spring and summer,” said Nocella. He added that United has “one more significant international network announcement” for 2022 to come later in October.

As part of its 2022 forecast, United expects the 52 Boeing 777-200s with Pratt & Whitney engines that have been grounded since an engine failure in February to return to service in the first half. The airline has begun modifications to these jets ahead of a U.S. FAA directive with the hope of speeding their return.

United’s growth next year fits the narrative leaders have outlined for several months. That is that market changes — from airlines closing their doors to consolidation and carriers retiring aircraft — have set up United to outperform its competitors across the Atlantic and the Pacific for years to come. Executives bet that the airline’s decision not to retire any aircraft coupled with its long-standing market leadership, particularly to Asia, will make United the de facto “U.S. flag carrier” in the recovery.

But, despite the bullishness, executives repeatedly said that growth plans could be dialed back if demand does not meet forecasts. This is necessary considering the ups and downs that the market has seen during the Covid-19 crisis. As recently as July, United executives forecasted a significant uptick in travel through the fall with business travelers returning, however, by early September the Delta variant had arrested that optimism and forced the airline to walk back its forecast.

United posted a $329 million net loss, excluding a $1.1 billion benefit in federal Covid-19 relief, in the third quarter. Revenues decreased 32 percent to $7.8 billion and expenses also 32 percent to $6.7 billion. And the airline remained off many of its 2019 metrics: passenger unit revenues were down 11.7 percent, traffic was down nearly 37 percent and capacity down 28 percent. Unit costs, excluding fuel and special items, however, were up nearly 15 percent.

The airline expects revenues of 70-75 percent of 2019 in the fourth quarter when it forecasts flying roughly 77 percent of its capacity two years ago. And demand is strong for November and beyond, including the year-end holidays, with bookings above 2019 levels, Nocella said.

Edward Russell

Southwest Slows Recovery Amid Challenges

Southwest is backing off plans for a quick recovery following a series of operational challenges that culminated in a meltdown that saw nearly 2,000 flights cancelled earlier this month.

The Dallas-based carrier has cut fourth-quarter capacity by 3 points to down roughly 8 percent versus 2019, and executives expect these reductions to continue well into 2022 as the airline focuses on operational integrity and staffing issues. The slowest to return will be markets historically strong with business travelers that saw their deep, multi-flight schedules pruned dramatically as Southwest pivoted to offering more leisure-oriented breadth over depth during the Covid-19 crisis. Headline capacity will return to 2019 levels next year but that depth — and possibly the return of lucrative corporate road warriors — that will take longer.

“2022 will be another transition year in the pandemic recovery,” said incoming Southwest CEO Bob Jordan during the airline’s third-quarter earnings call on October 21. “The restoration of the network is a top priority in ’22 and ’23, but it will take time and it will be largely dependent on the pace of recovery of business travel and our ability to staff.”

Business demand at Southwest was down roughly 73 percent compared with two years ago at the end of September, said Chief Commercial Officer Andrew Watterson. This was a drop from down roughly 60 percent in July and August, and where the carrier hopes to end the year at. For comparison, American and Delta both said business demand was at roughly half of 2019 levels — or nearly 20 points above Southwest — in September. And Alaska Airlines, American and United all plan to be back to or nearly to 2019 levels next year.

Southwest’s lagging business recovery is not entirely surprising — nor necessarily a point of concern. The airline has long been more reliant on leisure travelers than American, Delta and United, and during the crisis pivoted even more to this segment by adding cities like Palm Springs, Calif., and Steamboat Springs, Colo., to its map and greatly expanding capacity to Hawaii. And, as Watterson pointed out, many of the flights that road warriors want are not back yet and will take more than a year to restore. That timeline is dependent on staffing but also the availability of aircraft; Southwest shifted 92 aircraft to those new destinations and routes requiring it to take delivery of new planes to backfill the flights it cut.

The airline plans to take delivery of at least 72 737 Maxes in 2022, and has options for another 42 deliveries, said Chief Financial Officer Tammy Romo. Southwest has firm orders for 250 737-7s and 149 737-8s, after exercising 16 737-7 options during the third quarter.

Southwest’s operational reliability is another major hangup to its recovery. Executives spent much of the third-quarter call explaining and taking responsibility for the delays and cancellations that occurred through the summer and culminated in the meltdown earlier in October.

Gary Kelly, Southwest’s outgoing CEO — who cedes the reins to Jordan in February — said he thought that when the carrier recalled the roughly 15,000 employees who took voluntary leaves that they would come back immediately. That, however, was not the case and, coupled with a tight job market, left the airline understaffed and underprepared for the pressures of summer demand.

“For a long time, we had nothing to do. And then all of a sudden, wham, we had to pick up the pace … and it’s just been messy,” said Kelly. He added that he “pushed a little too hard” in terms of third quarter flying.

U.S. Department of Transportation data show just how these disruptions were for Southwest. After posting 81 percent or better on-time flight arrivals for the first five months of 2021, the metric fell to just 62.4 percent in June and 67.9 percent in July, the DOT’s latest data show.

For the third quarter, only 71.7 percent of Southwest flights arrived on time, said Operations Chief Michael Van de Ven. The airline aims to recover to 80 percent or better on-time arrivals in the fourth quarter.

All of these issues have cost Southwest. Where it once was forecasting profits through the end of the year, it now sees losses. The Delta variant that hit travel demand in August and September cost it roughly $300 million in the third quarter, and is forecast to cost another $100 million in the fourth quarter. In addition, the Indigenous Peoples’ Day weekend meltdown hit revenues by roughly another $75 million. These headwinds come as Southwest faces cost pressures, including staffing, airports and fuel.

In the fourth quarter, Southwest expects revenues to decrease 15-25 percent compared to 2019. Fuel expenses are forecast to increase at least 10 percent to an average of $2.25-2.30 per gallon over the same period. And Romo said the airline anticipates at least 4-5 percentage points of unit cost increases above inflation.

Southwest posted a net loss of $135 million excluding special items, which include federal Covid-19 relief, in the third quarter. With said items, the airline had a net profit of $446 million. Revenues decreased 17 percent to $4.7 billion and expenses 18 percent to $3.9 billion year-over-two-years. Passenger traffic was down 5 percent on a 1.6 percent cut in capacity compared to 2019. However, passenger unit revenues — an indicator of airfares — were down a notable 31 percent during the period.

Edward Russell

Qantas Sees ‘Phenomenal’ Demand For Australia’s Vaccine-Led Reopening

After standing down almost all of its entire international network for more than a year, Qantas Airways is coming back with a vengeance. The carrier is accelerating the return of its Airbus A380s and will resume flights to seven long-haul destinations weeks — and in some cases more than a month — earlier than planned on the back of the success of Australia’s Covid-19 vaccination program.

“Australia is en route to be one of the most vaccinated countries in the world,” Australian Prime Minister Scott Morrison last week. “And that means planes get back in the sky.”

Morrison spoke at a joint event with Qantas during which the airline rolled out its latest schedule expansion. The Oneworld alliance carrier will add Delhi to its map, and resume flights to Bangkok, Fiji, Johannesburg, Phuket, and Singapore weeks early. And, in response to strong demand for its Sydney-Los Angeles flights that resume November 1, Qantas will return its A380s to the route three months early in April, and the airline is in talks with Boeing about taking delivery of three stored 787-9s from April as well.

“Demand has been massive,” said Qantas CEO Alan Joyce, who spoke at the event with Morrison, of the airline’s London and Los Angeles flights that both resume at the beginning of November. “In a few hours, a large number of those flights sold out.”

Joyce added that Qantas has seen a “phenomenal reaction” from travelers to the federal and state border reopenings in Australia.

Australia and its states have tied their reopenings to Covid-19 vaccination rates. The federal government expects to meet its 80 percent threshold for the national border by the time Qantas resumes London and Los Angeles flights on November 1. As of October 22, almost 72 percent of Australians over the age of 16 were fully inoculated, and 86 percent had received at least one jab, data from the Australian Department of Health show. And, critical to Qantas’ Sydney hub, 83 percent of New South Wales residents over 16 years old were vaccinated as of October 19. Victoria will also open its borders on November 1, with other states expected to follow soon after.

The successful vaccination program, tied with clear guidelines from the Australian government, is making the country a model for reopening. Although quarantine-free travel is initially limited to citizens, permanent residents and immediately family who are fully inoculated against Covid-19, demand is robust, and Joyce said he expects the reopening to expand to foreign visitors soon. Speaking on October 20, United Airlines CEO Scott Kirby spoke positively of the country’s reopening and said it would likely lead the travel recovery in the Asia-Pacific region. United was the second-largest carrier between Australia and the U.S. behind Qantas in 2019, Cirium schedules show.

IATA Director General Willie Walsh has repeatedly backed risk-based measures, including both vaccination status and testing, for reopening. Speaking in Boston earlier in October, he said Australia’s reopening — and the demand seen by airlines — is an example of the success of measures in restarting travel.

Following the restart of London and Los Angeles flights, Qantas will resume service to Singapore on November 23, Fiji on December 7, Johannesburg on January 5, Phuket on January 12, and Bangkok on January 14. Talks are on-going with Indonesian authorities over the resumption of flights to Bali, which is one of the most popular international destination for Australians. The latest dates follow previous announcements that Honolulu, New Zealand, Tokyo, and Vancouver flights would resume in mid-December.

In addition to Australia’s high vaccination rates, Qantas benefits from competitor Virgin Australia’s pullback from international flying. Virgin removed all of its widebody aircraft and indefinitely postponed the resumption of its long-haul network as part of its emergence from voluntary administration last year. The airline has unveiled no changes to that plan except to accelerate the growth of its Boeing 737 fleet to capture more domestic and near-international Australian travelers.

Qantas expects its first A380 to return to Australia from storage on December 25. Two aircraft will return to revenue service in April with five set to be flying by November 2022. The airline plans to have all 10 of its A380s back in service by early 2024.

The 787s that Qantas hopes to take delivery of early were previously scheduled for delivery during the airlines 2023 fiscal year that runs from July 2022 through June 2023. The jets represent the airline’s entire outstanding backlog of 787s.

Joyce did not comment on the status of Qantas’ narrowbody fleet replacement program. By the end of the year, the carrier will select some combination of more than 100 Airbus A220s, Airbus A320neos, Boeing 737 Maxes, and Embraer E-Jet-E2s to replace its 95 Boeing 717-200s and 737-800s over the next decade.

Edward Russell

Alaska Plans for ‘Choppy’ Recovery

Unlike some of its peers, Alaska is striking a note of caution on the trajectory of the recovery, predicting that it will be “choppy,” despite reporting its first quarterly profit since the pandemic began. Bookings for travel in the fourth quarter fell off in September and October and only now are beginning to show signs of strength.

“The consequences of the Delta variant have not yet dissipated,” Chief Commercial Officer Andrew Harrison told analysts during the company’s third-quarter earnings call on October 21. The airline expects the decline in bookings will cost it $200 million in the fourth quarter. Alaska reported Fourth of July and Labor Day travel almost approaching 2019 levels. But, starting toward the end of July and ramping up through August, Alaska saw demand take a precipitous drop in September and October.

Only now, in the last few weeks of October, has the Seattle-based carrier seen demand start to return. When the Delta variant began to spread, fourth-quarter bookings fell to half of 2019 levels. They’ve now recovered to 10 percent below 2019. “We hate that we aren’t getting the fourth quarter we reasonably expected to have thanks to the Delta variant,” added Chief Financial Officer Shane Tackett.

“The recovery will be choppy at times as we learn to live with Covid,” CEO Ben Minicucci said. Still, Alaska expects to return to its pre-Covid size by next summer and is poised to grow after that, if demand warrants. The carrier has firm orders for 93 Boeing 737-9s, including 63 due in 2022-23, and has options for a further 52 if needed. Some of these aircraft will be arriving to replace Alaska’s remaining 24 Airbus A320-family fleet, a legacy of its merger with Virgin America. These aircraft, after undergoing engine modifications and maintenance, will be returned to lessors in 2023.

To prepare for a choppy recovery, Alaska is focused on keeping costs low. Its headcount is now 16 percent lower than it was pre-pandemic, which aligns with its capacity reduction, and it expects to keep headcount “downish” even as demand starts to return, Tackett said. Fuel costs remain a worry, with Alaska now paying 25 percent more for fuel than it was at the start of the year.

The restoration of capacity has varied by region for the carrier. Its main Seattle hub is operating at pre-pandemic levels and is expected to exceed that soon. Portland is almost at 2019 levels. Alaska’s California network is at about 65 percent of its 2019 capacity, reflecting a sharper drop in demand there. Hawaii, which is 16 percent of Alaska’s capacity, was its weakest performing region, due to stricter travel restrictions that were implemented as the Delta variant began its spread, Harrison said.

Looking forward, Alaska plans to grow at its four main hubs: Los Angeles, Portland, San Francisco, and Seattle, with a renewed focus on leisure destinations from LAX. Its focus cities in Boise, San Diego, and San Jose will be important to the airline’s future growth. But management touted the primacy of the four main hubs and stressed the connectivity afforded by its new partnership with American and Alaska’s entry into the Oneworld alliance. In particular, Harrison singled out Qatar Airways’ flights from Seattle, Los Angeles, and San Francisco to Doha as providing strong growth opportunities for Alaska. American’s planned launch of flights to Shanghai and Bangalore from Seattle also will provide Alaska with more connectivity — and more opportunities for corporate sales, Harrison said.

Another growth opportunity for Alaska, and a trend it noticed during the pandemic, is the strength of premium demand, despite the near-total absence of business traffic. The airline plans to capitalize on premium leisure demand as the recovery takes hold and to more aggressively market its premium cabin to business travelers. The challenge is balancing the number of seats available for sale versus those reserved for upgrades, Harrison said, and those plans will be ironed out in the next few months. Alaska is not, however, planning to add more premium seats to its aircraft to meet this demand.

Labor increasingly is an issue for Alaska. The carrier is struggling with hiring and retaining airport employees, particularly in Seattle, where the job market is especially tight, Tackett said. Trends are improving, though, and he expects hiring to become easier in the coming months.

But the main labor issue Alaska faces is its increasingly contentious negotiations with its pilots, represented by the Air Line Pilots Association (ALPA). The carrier asked the National Mediation Board (NMB) to mediate the contract talks, which have stretched on since April 2019. “We are confident we’ll get to a deal,” Minicucci said. Pointing to the aircraft Alaska plans to add, he said, “This will be a phenomenal place to spend their careers.” (See story in State of the Unions below.)

Despite the uncertainty, Alaska had a good quarter. The carrier reported third-quarter revenues of $1.9 billion, up 179 percent from last year, yielding a profit of $194 million and a 12 percent pre-tax margin. Costs rose 33 percent to $1.7 billion. The carrier flew 83 percent more capacity than it did last year, and traffic was up 204 percent from 2020. Alaska expects fourth-quarter capacity to be 13-16 percent below 2019 and said it expects a breakeven pre-tax margin in the quarter.

— Madhu Unnikrishnan

Volaris Says it Is in Better Shape Now Than Before the Pandemic

Although most airlines see hope in the fourth quarter and beyond, few can say they are in better shape now than they were before the Covid-19 pandemic ravaged the industry. But that’s precisely what Mexican ultra-low-cost carrier Volaris claims in its third-quarter results and its guidance for the near-term future.

“Volaris is in a stronger position than when the pandemic began,” CEO Enrique Beltranena said during the company’s third-quarter earnings call on Friday. The carrier is not looking to cut any routes or capacity but is focused on aggressive growth, he said.

And by most measures, this is no idle claim on Beltranena’s part. Volaris is one of the few carriers in the world that operated more capacity than it did in 2019, before the pandemic struck. The airline flew 21 percent more capacity in the third quarter compared with 2019, and it plans to fly between 26-29 percent more than 2019 in the fourth quarter. Volaris said it expects to grow ASMs by the mid-20 percent range next year.

Part of this is a function of fleet growth: More aircraft means more ASMs to operate. Volaris ended the quarter with 94 Airbus A320 family aircraft and plans to finish the year with 101. By the end of 2022, Volaris expects a fleet of 113 aircraft. Its fleet now is 40 percent A320neos, and this proportion will grow as it adds more planes; the airline is in the process of moving to an all-Neo fleet, Beltranena said.

Another explanation for Volaris’ strength is the resilience of the Mexican market, which largely stayed open and free of travel restrictions during the pandemic. Visiting friends and relatives (VFR) and leisure travel are Volaris’ core markets — it does not go after business traffic, which largely was idled during the pandemic. The carrier saw strong domestic Mexico VFR traffic in the third quarter and resilient inbound leisure demand to Mexican beach destinations. VFR traffic also grew between Central America and Mexico, thanks to the growing populations of people from that region in both Mexico and the U.S. Looking forward, Volaris plans to expand its networks to Colombia, Guatemala, El Salvador, and Costa Rica to tap that demand, Executive Vice President Holger Blankenstein said.

And within Mexico, Volaris is sitting pretty. Its mainline competitor, Aeromexico, is mired in U.S. Chapter 11 bankruptcy reorganization and has cut back routes. Although Volaris has seen its low-cost competition adding flights to Mexico City, Volaris has another card to play. It’s the only airline on more than 40 percent of its routes, especially from Tijuana and Guadalajara, with its main competition on those routes coming from long-distances buses.

And here, the carrier sees its prime advantage to raise its market share from 42 percent of the Mexican market. Long-haul bus traffic has been in decline since 2018 as the country’s emerging middle class — and young demographic — increasingly prefer to fly rather than travel by road, Blankenstein said. About 47 percent of the population reports never having flown, and a majority of these people said they would fly if fares are comparable to bus fare. “We think more bus passengers can be switched in the next few years,” Blankenstein said, noting that “Covid accelerated bus-to-air switching.”

The capacity growth Volaris reported varied in its regions. Domestic Mexico was 19 percent higher than the third quarter of 2019, while international was 17 percent higher. Central American capacity lagged the other two regions, thanks to more restrictive lockdowns in some of those countries. The quarter was a story of two halves. The first half, July and August, was robust as domestic Mexico and inbound leisure demand soared. This offset the decline in vaccine tourism to the U.S. as the shots were more widely available in Mexico.

The second half of the quarter, on the other hand, saw demand decline as the Delta variant began to spread. “The Delta variant caused a reduction of confidence among our customers,” Blankenstein said. But demand started to return in October, and fourth-quarter bookings so far are strong. The booking curve is shorter, so Volaris declined to project how demand will hold up in the first quarter of next year. Fares fell off in the latter part of the quarter but started to rebound in September, he added.

Beltranena dismissed the idea that Volaris would grow through a merger or acquisition. But Blankenstein noted that the carrier, armed now with air operators certificates from both Costa Rica and El Salvador, would expand in those countries. “Central America clearly is on our mind,” he said. Deep South America routes are not a priority, limited by the A320neo’s range, and Volaris was firm that it would not add a new aircraft type to its fleet.

The carrier also is studying the market around the new Santa Lucia Airport in the capital region. The airport has a large catchment area of its own, separate from merely overflow from Mexico City’s congested main airport. Incomes in the Santa Lucia region are lower than in Mexico City, but Beltranena said the carrier “could do business there.”

Volaris reported third-quarter revenues of 13 billion pesos ($644 million), up 35 percent from the same period in 2019. This generated a net income of 1.5 billion pesos, a 112 percent improvement over 2019, and a 12 percent margin. Costs rose 24 percent from 2019, due to increased capacity and expenses associated with adding new aircraft.

Madhu Unnikrishnan

In Other News

  • Azul continues to seek some form of consolidation with Latam Airlines Group‘s Brazilian subsidiary. While Latam has said it has no plans to divest its largest domestic entity, Raymond James Analyst Savanthi Syth noted in a report last week that a joint venture structure “could be on the table” for an Azul-Latam Brasil tie up. One step below an actual merger, a JV would likely be more palatable to Latam management, she said. Latam is seeking to extend the exclusive period to submit its reorganization plan to a U.S. bankruptcy court until November 26.
  • Aeromexico, which has been in the Chapter 11 bankruptcy protection since June 2020, reported a relatively good quarter. The good news is that it notched its first operating profit, $16 million, since the pandemic began. Revenues were up 32 percent from the second quarter, but down 28 percent from 2019. Capacity was up 25 percent from the second quarter, but down 27 percent from 2019. Unit revenues rose by 6 percent from the last quarter and were only off 1 percent from 2019. The carrier cut costs by 8 percent from last quarter but said its unit costs were up 4 percent from 2019.
  • Icelandair, despite having to deal with an escalating labor row (see State of the Unions section below), reported a $20 million third-quarter profit, even as the Delta variant sapped demand for travel. Revenues were $257 million in the quarter, up from $104 million last year. The carrier is anticipating a surge in demand after the U.S. reopens its borders to vaccinated passengers next month. “The opening of the U.S. borders means that we can finally start harnessing the full potential of our route network for the first time since March 2020,” CEO Bogi Nils Bogason said. “It is important that Icelandic authorities review the current border restrictions and ensure they are simple, efficient and in line with those of the countries around us.”
  • Lessor AerCap has priced $21 billion in new debt to finance its $30 billion acquisition of General Electric’s aircraft-leasing arm, GECAS. The transaction is split into eight tranches ranging in size from $1 billion to $4 billion with interest rates from 1.15 percent to 3.85 percent, as well as a $500 million floating rate tranche. The debt matures between 2023 and 2041. Citi and Goldman Sachs are joint global coordinators and joint book running managers.

Edward Russell & Madhu Unnikrishnan

Edward Russell
October 25th, 2021 at 12:01 AM EDT

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