KLM’s CEO Is a Recovery Realist

Edward Russell

November 22nd, 2021 at 12:01 AM EST

On November 8, the first day that the U.S. reopened to vaccinated foreign travelers, KLM‘s aircraft across the North Atlantic were 97 percent full, a remarkable statistic in the best of times but even more striking now, during a global pandemic, when planes plying international routes are on average about 60 percent full.

“This is a testimonial and a proof of the willingness of people to travel,” KLM CEO Pieter Elbers said at the Skift Aviation Forum last week. “It’s a demonstration of people wanting to get back in the air.”

The North Atlantic was the most important market for KLM before the pandemic,. The airline lacks a domestic market, as the Netherlands is too geographically small to sustain a large internal airline industry, so KLM makes its money by connecting passengers through its hub in Amsterdam. “It is the backbone of our long-haul network,” Elbers said.

A growing part of this travel is premium leisure, or leisure passengers buying premium-class fares for vacation travel. KLM is “in a good spot” to capture some of this demand, as its business cabins are relatively small, compared with its competitors’. But it offers more premium economy options than some of its competitors. KLM already had begun adding a premium-economy fare class to its flights before the pandemic, and. this work is picking up steam now that the recovery is underway, Elbers said.

Prior to the U.S. reopening, KLM had begun restoring its routes to the U.S., and most of its pre-pandemic destinations are back in service. The carrier now is working on adding frequency to its flights, and cargo helped keep KLM’s flights to the U.S. in business. But Elbers noted the road ahead will be “bumpy.”

“The world is on its way to recovery,” he said, but the recovery is likely to be “stop and go.” Some parts of the world are re-imposing restrictions, testing requirements, and quarantines in response to fresh surges of Covid-19. Asia remains largely shuttered, although Elbers is encouraged by recent moves in Japan, Thailand, South Korea, and Singapore to reopen, even if partially. China’s recovery is still “far away,” but Elbers said, “I stay optimistic.”

Business travel’s return is an open question, although Elbers noted European companies are sending workers back out on the road as vaccination rates improve in the continent. Most of the travel to the U.S. so far has been leisure, but small- and medium-size enterprises have resumed business travel across the Atlantic, if modestly. “We need to wait a little on longhaul [business] traffic,” he said.

It’s not just the nature of travel that the Covid-19 pandemic has changed. The way airlines view their role in climate change also has changed. Elbers pointed to KLM’s years-long efforts to mitigate its carbon emissions, but said the trend toward more environmentally sustainable airlines has accelerated. KLM is stepping up the amount of sustainable aviation fuel (SAF) it buys but acknowledges it cannot go it alone. IATA recently adopted more stringent carbon-emissions goals, and Elbers believes that with the airlines acting in concert, the supply of SAFs, now minimal, will grow in response to demand.

But airlines aren’t alone in the fight. Manufacturers, governments, and airlines must work together to reduce air travel’s carbon footprint. Governments have a role in mandating more SAF production and in streamlining air traffic control to allow more efficient flight paths. Manufacturers should be more aggressive in developing new propulsion systems. And airlines should accelerate fleet transformation to retire less efficient aircraft types. “We need to address all the different levers to make progress,” he said.

KLM has done so in recent years, with the introduction of more efficient regional jets, the Embraer 195-E2 and new Boeing 787s for its long-haul fleet, while retiring older Boeing 747s. The carrier still is deciding on which next-generation aircraft will replace its fleet of aging Boeing 737s, although Elbers declined to tip his hand.

Electric aircraft, like the “air taxis” American Airlines, United Airlines, and Virgin Atlantic, among others, have ordered, will play a role in reducing airlines’ carbon footprints, but the technology as it is now is still at too early a stage to make a significant impact. “It’s a start,” Elbers said.

— Madhu Unnikrishnan

TAP’s Africa Expansion on Hold — For Now

Before the pandemic, TAP Air Portugal had plans to expand its African network beyond its strongholds in Lusophone Africa, but those plans have been put on hold, as the carrier grapples not just with the pandemic but with its financial restructuring, CEO Christine Ourmieres-Widener said.

“I think for 2022, we need to be still very cautious — why, because first, we are in restructuring and we are under state aid,” she said at the Skift Aviation Forum last week. “It would be for us difficult to move out of these countries without taking a significant risk in investing in new destinations.”

Instead, the carrier will focus on strengthening its network in Lusophone Africa and bringing it back up to 2019 levels. That part of the network, as well as Brazil, have particularly resilient during the pandemic, fueled by strong visiting friends and relatives (VFR) traffic. The split between VFR and business traffic has been about 60-40, but business traffic is rising in both Brazil and TAP’s Africa network, thanks to recent high commodity prices.

After the U.S. reopened to vaccinated travelers on November 8, TAP saw demand for its U.S. routes surge, Ourmieres-Widener said. The carrier has restored 10 of the 11 North American destinations it served before the pandemic, she said.

Madhu Unnikrishnan

United Aims to Beat Margin-Leader Delta on Quality

“We will win customers on quality,” United CEO Scott Kirby said at the Skift Aviation Forum last week on how he plans to beat U.S. margin leader Delta Air Lines at its own game. And Kirby had plenty of examples to cite: The addition of premium-heavy “high-J” Boeing 767-300ERs that fly to Europe, the Bombardier CRJ-550 that met pilot contract rules while bringing a dual-class product to smaller cities, and a return of in-seat entertainment screens to its domestic mainline narrow-body fleet to name a few. And, while further out, United is investing in new spaces in Denver and Newark, and possibly in Washington, D.C.

These improvements coupled with United’s seven hubs located in many of the U.S.’s largest markets give the airline the “structural ability” to be the “leading margin airline,” said Kirby. This is a competitive shot over the bow of Delta that, prior to the Covid-19 pandemic, was the major carrier with the highest margin in the U.S. market. Delta generated an earnings before interest and taxes (EBIT) margin of 14 percent in 2019 compared to 10.6 percent at United and 8.5 percent at American, according to data from S&P Capital IQ.

In October, Delta Chief Financial Officer Dan Janki said the airline is focused on “prioritizing driving margins, profitability and restoring our balance sheet” in 2022. It will do this through the continuation of many of the programs it began before the Covid-19 pandemic: Replacing smaller regional jets with new larger, more efficient aircraft; Updating aircraft cabins with additional premium seats; and accelerating investments in its hub airports. Delta plans to release more details of its 2022 plans at an investor event in December.

“There’s room for both of us to do really well,” said Kirby on United’s competition with Delta. “[But] I think we will win. We’ve just got a better hand of cards.” By “cards,” Kirby referred to what he sees as United’s better located hubs.

Kirby’s embrace of quality is new for the long-time airline executive. At America West Airlines and US Airways he was known for an obsessive focus on keeping costs down and maximizing revenue. Similarly, at American, where he was president under CEO Doug Parker from 2013 until 2016, he backed the decision to remove in-seat TV screens from narrow-body aircraft.

“I always had a boss before,” he said when asked about his apparent change of heart. “I have definitely evolved, as I’ve seen how customer service and product matter. But as the hand has changed, it’s given me the chance to really focus on it.”

American now stands alone among the U.S. Big 3 airlines without — and no plans to add — seatback screens to its narrow-body jets. United unveiled plans to install them across its fleet, beginning with new Boeing 737 Max aircraft, in June. Delta never opted to remove such screens in the first place and offers them on nearly all of its mainline jets.

But ultimately numbers will determine success or failure for Kirby. Onboard product improvements are not cheap to install or operate — any added weight increases fuel burn. They must, eventually, be justified by higher fares, or passenger “yields” in airline parlance. The pandemic has given Kirby some breathing room on this as few — if anyone — in the industry are looking for profits or record margins from United for some years to come.

Investors will eventually want to see a return on these investments. And that may be shareholders returns or, just maybe, beating Delta in the margin game.

Edward Russell

Copa Posts Profit on Strong VFR, Leisure Demand

Copa Airlines’ recovery happened faster than expected, especially given the Panamanian carrier has virtually no domestic routes. Visiting friends and relatives (VFR) and leisure traffic are fueling its climb out from the pandemic.

The nature of its business has changed, however. CEO Pedro Heilbron observed that before the pandemic, VFR, leisure, and business travel each accounted for one-third of Copa’s traffic. Now, VFR and leisure account for about 40 percent each, and business travel comprises just 20 percent. This appears unlikely to change in the near term.

The carrier flew 70 percent of its pre-pandemic capacity in the third quarter and is planning to add more in the fourth quarter and the first quarter of next year. It has maintained six flight banks at its hub in Tocumen, which is unlikely to change, although Copa is operating fewer flights in each bank. “But of course, Covid has not gone away,” Heilbron said.

Competition in the region is heating up, however, as carriers scramble to tap into demand to vacation hotspots in South America. “There’s quite a bit of action…especially from new entrants, or not new entrants but new entrants to the region,” Helibron said.

Demand within Latin America also remains robust, despite inflation and foreign-exchange headwinds. Recently, Azul said its international travel demand had withered a bit due to both visa delays and unfavorable foreign exchange making tickets more expensive for Brazilians. Heilbron said Copa has noticed few such issues.

Above all, Copa plans to be flexible until the pandemic has fully receded. Heilbron noted that the carrier added capacity last November in anticipation of strong year-end demand, which never materialized. This year is expected to be different, but he said the carrier reserves the ability to flex capacity down if needed.

Copa is in the midst of a re-fleeting. The last of its Embraer E190s exited the fleet in the quarter. It sold two Boeing 737-700s, and is transferring two more 737-800s to its Wingo unit in Colombia. Copa accelerated deliveries of 12 737-9s it has on order from Boeing with the aircraft now due to arrive from next year through 2025. Copa plans to take delivery of an additional two -9s by the end of the year and two more next year. Copa ended the quarter with 87 aircraft in its fleet and plans to end the year with 89 planes.

Copa reported a third-quarter adjusted operating profit of $49 million, down 63 percent from 2019. Revenues for the quarter were $445 million, down 37 percent from two years ago.  Copa expects to operate 83 percent of its 2019 capacity in the fourth quarter.

Madhu Unnikrishnan

In Other News

  • While Avianca may be on the verge of emerging from Chapter 11 bankruptcy restructuring in the U.S. — a judge approved its plan on November 2 — it widened its loss to $359 million in the third quarter, or $17 million more than the quarter before. Other metrics are moving in a more favorable direction: Revenues rose 194 percent year-over-year to $608 million while expenses increased only 119 percent to $796 million. Avianca operated 142 aircraft at the end of September; a net reduction of three from June following some juggling: eight Airbus A321s and A321neos were removed while five A320s and A320neos were added.
  • Bankrupt Philippine Airlines lost almost $28 million during the nearly two months from its U.S. Chapter 11 filing on September 3 through the end of October, a court filing shows. The carrier did greatly improve its cash position during the period: Cash and cash equivalents stood at $267 million on October 31 compared to a dire $29 million when it sought court protection. The boost was thanks to $505 million in debtor-in-possession financing that was approved at the beginning of October. A shrunken PAL aims to exit Chapter 11 quickly under a creditor-backed restructuring plan that was submitted last month.
  • Thai Airways lost 9.6 billion baht ($29 million) excluding special items during the first nine months of 2021. Including a 73.1 billion baht benefit from one-time items, including a 60.7 billion baht gain from restructuring its debt, the airline generated a 51.5 billion baht net profit for the period. Revenues totaled almost 15 billion baht, or down 66 percent compared to the first nine months of 2020. But, owing to Covid-19 travel restrictions, the Thai was a fraction of itself during the period: passenger traffic was down almost 94 percent year-over-year on an almost 71 percent cut in capacity. The airline, like the industry as a whole, points to rising vaccination rates and the reopening of borders for its continued recovery. Thai plans to fly 36 routes serving Asia, Australia, and Europe in the fourth quarter after suspending its entire international network during the crisis.
  • UK regional carrier Flybe is the latest Covid-19 casualty planning a reboot. The airline plans to resume flights from a base in Birmingham with a fleet of De Havilland Dash 8-400s in early 2022. A statement indicated that the airline will fly both domestic and international routes to the EU. If its restart succeeds, Flybe will join ExpressJet Airlines and RavnAlaska in the U.S. in coming back from a pandemic closure.
  • Jet2‘s losses in the half year that ended in September were 53 percent worse than the previous year, down to £170 million ($229 million). But the pandemic had not struck in the first part of last year’s first half results. In this year’s first half, the carrier endured lockdowns, quarantine requirements, and the UK’s “traffic light” system of restrictions, the company noted in its first-half results. In addition, Jet2 did not operate any scheduled flights between April 1-June 24. The booking curve was very short for most of the period, but is lengthening; the outlook for next summer looks promising, the carrier said. Traffic ticked up in October after the UK suspended its traffic light restrictions. In October, Jet2 placed firm orders for 51 Airbus A321neos, with options to go up to 75 of the type.
  • Lynx Air is the latest ultra low-cost startup to make a go of it in Canadian skies. The Calgary-based carrier plans to begin flying in 2022 with a fleet of Boeing 737 Max jets; Lynx has orders and lease agreements for 46 aircraft due over the next seven years, the airline said. The carrier will be led by Australian airline executive Merren McArthur, who has previously worked as CEO of Tigerair Australia, Virgin Australia Regional Airlines, and Virgin Australia Cargo. Lynx is privately held.

Edward Russell & Madhu Unnikrishnan

Edward Russell

November 22nd, 2021 at 12:01 AM EST