Just when the airline industry thought it had caught its breath from the Delta-variant surge, a new coronavirus variant is threatening to upend the recovery. Or is it? The consensus is it’s far too early to say.
A little over a month ago, when airlines reported their third-quarter results, leaders were almost jubilant, convinced that the worst of the pandemic was behind them and that the fourth quarter, and 2022 would be when the recovery took hold. Of course, every airline CEO noted both in their quarterly calls and in regulatory filings, that the trajectory of the disease was unpredictable and even the best-laid plans could be thrown off by new developments or the emergence of new variants.
When the Omicron variant emerged last week in Southern Africa, governments around the world quickly swung into action, partially to fend off the type of criticism they got last year for not reacting quickly enough to the Delta variant. Some, like the U.S. and several European countries, banned travel from several countries in the region. Others, like Israel, banned all foreign travel, and South Korea has said the new variant could delay the country’s planned reopening.
The World Health Organization (WHO) named the Omicron variant a “variant of concern,” but it and public health agencies around the world stress that much remains unknown about Omicron. Initial studies suggest it could be more transmissible than other variants, but public health agencies caution that the variant’s lethality and ability to evade vaccines are yet to be determined.
The travel bans, however, will buy governments time to evaluate the risks and may become an ongoing occurrence for airlines. Bookings are expected to dip in the first two weeks of December, as would-be travelers weigh whether to proceed with planned trips, but demand is expected to return by the year-end holidays. This is the view of EasyJet CEO Johan Lundgren during the airline’s 2021 fiscal year results last week: Near-term bookings had softened but the airline had yet to see any change in demand for trips in 2022.
Similarly, United Airlines CEO Scott Kirby said cancellations rose in the days after Omicron hit the news cycle, and that he expected demand to go down but not by as much as it did during the Delta-variant surge. However, the airline is likely to par back transatlantic capacity in January — a weak period in the best of times — amid Omicron concerns.
“In the past year, each new variant has brought a decline in bookings, but then an increase once the surge dissipates,” Cowen & Co. airline analyst Helane Becker said. “We expect the same pattern to emerge, although we don’t expect each successive dip to be shorter than the prior one as people begin to accept that we will have to learn to live with this indefinitely.”
That could be the key: If Covid-19 becomes endemic, as many public-health officials now say is possible, rolling travel restrictions, if not outright bans, and dips in travel demand in the wake of outbreaks could be just another facet of the airline business, one that they can plan and adjust for. A major difference between when the Delta and Omicron variants emerged, however, is the development and deployment of effective vaccines, which began at the end of last year. Now, just over half of the world’s population is vaccinated, although inequities remain, particularly in Africa, where some countries have vaccinated fewer than 10 percent of their populations.
U.S. carriers appear to have done so already. United, for example, is proceeding with planned route launches to Cape Town, South Africa, and Lagos, Nigeria, and has not altered its schedule to Johannesburg and other destinations in Africa. “Throughout the pandemic we’ve maintained service to places like Australia, Europe and South America and United remains committed to maintaining a safe and vital link for repatriation efforts as well as the transport of essential supplies like vaccines between Africa and the U.S.,” a spokesperson for the airline said.
Similarly, Delta Air Lines is not changing the schedule of its thrice-weekly Atlanta-Johannesberg flights, a spokesperson for the airline said. Both airlines are offering waivers for passengers who may be affected by the U.S. travel ban, or Israel’s travel restrictions, representatives for both airlines added. American Airlines said it is “closely monitoring the situation,” but has not altered its flight schedule.
The bigger worry for airlines is how the Omicron variant may affect business travel. Companies delayed reopening offices when the Delta variant began to surge. Several European and Asian countries mandated new lockdowns this month to ward off Delta-variant surges this month. It remains unclear how the Omicron variant will affect those or if rising caseloads will delay offices reopening even further, Raymond James analyst Savanthi Syth said.
“In the U.S., this could push back that business demand recovery again — it should still continue to improve slowly, but step function change from everyone being back in the office is likely delayed,” Syth added.
Allegiant and Viva Aerobus Plan Low-Cost Joint Venture
Allegiant Air and Viva Aerobus want to disrupt U.S.-Mexico travel with a broad joint venture that could see them add more than 250 new routes in the market.
The proposed pact would effectively “merge” their combined U.S.-Mexico networks — only Viva flies in the market today — and allow the two budget carriers to coordinate schedules, jointly distribute and sell flights, and share revenues among other commercial aspects for at least 15 years, according to details unveiled last week. In addition, Allegiant would buy a $50 million stake in Viva as part of the deal. The partnership requires both Mexican Federal Economic Competition Commission and U.S. Department of Transportation sign off.
“This is an opportunity that our two carriers together can be stronger on [U.S.-Mexico] international flying,” Allegiant Chief Financial Officer Greg Anderson said in an interview. He cited a strong “cultural alignment” between Allegiant and Viva among rationales for the partnership and investment.
The tie up would also realize Allegiant’s long-held desire to serve Mexico that dates to at least 2004. Most recently, the airline applied for and received authority to launch transborder flights in May 2019 but never began service.
The partnership, while not the first proposed between two budget carriers, is comparable to the broad joint ventures long used by major carriers like American and Delta in numerous international markets. Those pacts include one between Delta and Aeromexico covering the U.S.-Mexico market. In recent years, smaller U.S. carriers have increasingly objected to the tie ups as limiting their ability to enter new markets. For example, JetBlue Airways raised such objections to Delta’s proposed joint venture with WestJet in Canada.
But, when done well, joint ventures can pay off big for airlines. They expand a carrier’s reach into an international market — or markets — without having to make the physical investment in additional aircraft to access more markets. And, for customers, they can offer more travel options and expand the functionality of a loyalty relationship.
The question facing Allegiant and Viva is whether a joint venture, which comes with necessary added complexities, is worth it for two airlines focused on low costs. In addition to IT infrastructure investments, the partnerships include dedicated teams at each airline that coordinate on all aspects of the venture, and then go back to each carrier’s respective management teams for implementation.
“All of that means overlap, redundancy, complexity and inefficiency. Four words that ULCCs hate,” said Aviado Partners Managing Director Shakeel Adam. He questioned whether Allegiant and Viva even need an immunized joint venture to achieve the growth they outlined for the U.S.-Mexico market. For example in Asia, the independent AirAsia Group carriers — AirAsia in Malaysia, Thai AirAsia, etc — will often share the cost of adding a new destination by each launching service at the same time but they do this without a formal joint venture or similar commercial tie up between them.
Adam said he views the deal is a “pure equity investment” by Allegiant into Viva, and questioned whether the commercial partnership will ever come to pass.
Other budget carriers have pursued simpler interline or codeshare agreements to expand their networks internationally. For example, the codeshare between Frontier Airlines and Volaris is widely seen as a successful partnership that comes with none of the complexities of a joint venture.
Asked about added complexity, Anderson said that Allegiant does not anticipate any long-term cost pressure from the venture beyond some upfront IT investment expenses related to implementation. And on the investment, he said it “symbolizes” the airline’s commitment to the partnership. Allegiant will hold a “single-digits” stake in Viva once the deal closes, added Anderson.
Not everyone is as skeptical of the proposed alliance. Conor Cunningham, an airline equities analyst at MKM Partners who covers Allegiant, said the partnership “looks like a good thing for both parties.” He cited the success of the Frontier-Volaris codeshare as an example.
Allegiant and Viva see additional flying opportunities for up to 18 aircraft on top of current growth projections by 2027 under the venture. For the former, that could represent as much as $108 million in incremental annual earnings before interest, tax, depreciation, and amortization (EBITDA) based on its system target of $6 million in annual EBITDA per aircraft.
The airlines also see broad potential consumer benefits from the venture. Targeting U.S. leisure travelers, the carriers see an opportunity to stimulate the market, including potentially adding service on more than 250 U.S.-Mexico routes. This includes 76 unserved U.S. routes from Cancun, 81 from Los Cabos, and 82 from Puerto Vallarta, according to the airlines. In addition, Allegiant could add service to Mexico City, and Viva to several of Allegiant’s bases in Florida under the joint venture.
Anderson described any growth under the proposed alliance as on top of Allegiant’s own planned domestic U.S. growth. The airline has outlined plans to grow capacity in the low double digits year-over-year in 2022, but has not provided longer-term growth plans owing to the pandemic.
Viva serves nine destinations in the U.S. — a number that is capped by the current Federal Aviation Administration safety rating of Mexico — in December, according to Cirium schedules. Only four are also served by Allegiant: Cincinnati, Las Vegas, Los Angeles, and San Antonio.
And, in the carriers’ joint application to the DOT, Viva said that its “lack of brand recognition” in the U.S. has limited its ability to grow in the market, and has forced it to cancel numerous transborder routes it has attempted that target American travelers.
Allegiant and Viva anticipate that together they can control an 11 percent share of the U.S.-Mexico market — behind Delta-Aeromexico, American, and United, but ahead of all other budget carriers. Viva carried less than 2 percent of the 30.3 million transborder travelers in 2019, DOT data via Cirium show.
Allegiant and Viva target antitrust approval by July or August 2022, and full implementation of their partnership by the first quarter of 2023. However, in many cases DOT approval can take up to two years.
Creditors Balk at Aeromexico Restructuring Plan
Unsecured creditors in Aeromexico’s U.S. bankruptcy reorganization oppose a modified plan that, they claim, unfairly benefits Delta and other more senior creditors.
The unsecured creditors committee argue that the plan, which includes nearly $1.5 billion in new equity and debt and estimates an enterprise value of $5.4 billion, understates the value of Aeromexico, according to documents filed with the U.S. Bankruptcy Court for the Southern District of New York last week. By its estimates, the proposal undervalues the restructured carrier by roughly $1 billion.
“The committee believes that the plan does not reflect the fair market value of [Aeromexico] due to the debtors’ flawed exit financing process,” they said. In addition, the committee claims that “insiders” in the restructuring process — including Delta and Mexican institutional investors — had undue sway in the formulation of the plan that will give them payouts in excess of their claims while short-changing less senior creditors.
Aeromexico is not alone in struggling to find a mutually agreed upon restructuring plan. Latam Airlines Group, which is also operating under U.S. Chapter 11 protection, faces similar strife in its own reorganization. After successfully fending off a hostile takeover attempt by Brazil’s Azul, Latam faces objections to its restructuring plan from a number of Chilean creditors. They too claim that the plan under values their claims to the benefit of others, including Delta that also owns an equity stake in the Chilean airline group.
All of the strife comes the same week as Avianca, the first major Latin American carrier to file for Chapter 11 in 2020, emerged from its restructuring process. The Bogotá-based carrier’s exited bankruptcy on December 1 under a plan that was supported by 99 percent of its creditors. United, which like Delta at Aeromexico and Latam, held an equity stake in Avianca prior to the reorganization will receive a roughly 16.4 percent stake in the new airline.
Aeromexico released its amended restructuring plan on November 29. Calling it the “best available source of liquidity,” the plan includes $720 million in new equity and nearly $763 million in new debt, and would see Aeromexico emerge from Chapter 11 with roughly $1.1 billion less debt than when it filed in 2020. Private equity firm Apollo Global Management and Delta support the plan, with each receiving an at least 22 percent and 20 percent respective equity stake in the post-bankruptcy company. The plan also includes $450 million for unsecured creditor claims.
According to the airline, the plan has the support of many of its creditors, including Delta and Mexican institutional investors.
But the number of objections is rising. Banco Santander and Deva Capital Investment, which together have claims of $95 million, joined the unsecured creditor’s objections, and the Ad Hoc Group of OpCo Creditors objected separately earlier last week. According to the unsecured creditor committee, creditors with claims worth more than $750 million object to the plan.
Both the Ad Hoc Group and the unsecured creditors committee pointed to an alternative reorganization plan that was turned down by Aeromexico. That plan, called the “alternative proposal” by the committee, would provide a “significantly greater recovery” to unsecured creditors while “providing substantially identical or improved treatment” to backers of Aeromexico’s proposal. However, citing opposition by Apollo, Delta and others, both group’s are prepared to push forward with this alternative plan in a manner that excludes any equity stake for the private equity firm or airline.
“There simply is no alternative proposal for [Aeromexico] to consider at this point,” Aeromexico said in a response filed on December 5. The airline asked the court to reject the unsecured creditors claims and argued that they risk the consensus achieved in the plan “in the hopes that there could be an even better result, no matter how small the incremental improvement.”
The unsecured creditors based their undervalued claim on Aeromexico’s five-year financial forecast. They argue that the forecast, which assumes four years of recovery from Covid-19 and a permanent 20 percent reduction in business travel, is too conservative, and cite a faster-than-expected rebound this year with rapidly improving financial numbers over the summer. This, plus the share gains Aeromexico is likely to see in Mexico City from the closure of Interjet, boosts the value of the airline by roughly $1 billion.
A hearing on Aeromexico’s restructuring plan is scheduled for December 6.
Azul Drops Latam Takeover Plan
Azul has dropped plans to take over Latam and ended its ambitions to create another giant South American airline. The difference was — it appears — in the numbers. Azul’s non-binding proposal, which Latam acknowledged receiving on November 11, included $5 billion in equity financing plus $4 billion in merger synergies, whereas Latam’s plan includes nearly double the amount of new equity: $10.5 billion split between $9.7 billion in new convertible notes and an $800 million issue of new shares.
“Azul will continue to focus on its exclusive competitive advantages,” the Brazilian carrier said. It added that it will continue to “evaluate future partnerships and consolidation opportunities.”
The combo, had it occurred, would have been among the largest in South America. It would have greatly eclipsed Gol’s acquisition of Brazilian regional carrier Map Transportes Aéreos, and surpassed the potential merger of Avianca and Chile’s Sky Airline. It would not have been the first for Latam: The airline itself was created through the merger of Lan Airlines and Tam Airlines in 2012.
Latam filed its reorganization plan with the U.S. Bankruptcy Court for the Southern District of New York late on November 26. Backed by major shareholders, the Cueto family, Delta, and Qatar Airways, the proposal would see the airline exit its Chapter 11 restructuring with $2.67 billion in liquidity and roughly $7.26 billion in outstanding debt — a 35 percent reduction in its long-term obligations compared to when it filed for bankruptcy in May 2020. The Cuetos, Delta, and Qatar would all receive new equity in the restructured carrier through backstopping nearly $1.4 billion of the new convertible notes.
Roberto Alvo, CEO of Latam, in a statement called the plan a “critical milestone” in the airline’s restructuring.
Not everyone is happy with the plan. A group of Chilean creditors — including local pension funds — represented by BancoEstado claims the plan discriminates against them by offering a roughly 19 percent recovery on their claims. They argue that international bondholders are treated better under the plan. Reports indicate they could officially object to the plan.
Latam did not outline any major changes to its commercial strategy in the plan. The airline plans to maintain and grow its domestic entities in Brazil, Chile, Colombia, Ecuador, and Peru — it closed its Argentina subsidiary early in its restructuring — and its position as South America’s leading global carrier. In addition, Latam continues to push forward with its proposed joint venture with Delta covering flights between the U.S. and South America. Only U.S. authorities need to sign off on the pact that would allow the two airlines to coordinate on schedules and other commercial initiatives.
While Latam’s plan focuses on creditors and shareholders, the airline has achieved savings through Chapter 11. It cut labor costs by roughly 44 percent, with a headcount reduction of 14,300 employees to 28,700 staff. And Latam streamlined its fleet by returning 42 aircraft — including all of its Airbus A350s — while renegotiating commitments with both Airbus and Boeing. The airline has firm orders for 70 Airbus A320neo-family jets, and two Boeing 787-9s. Latam operated 302 aircraft at the end of September.
Latam plans to hold a shareholder meeting on the plan in late December with an initial U.S. court hearing tentatively scheduled for January 27, 2022. A confirmation hearing could occur in March and, if approved, the carrier would aim to exit bankruptcy protection by the end of June.
EasyJet Puts Growth Plan Into Gear
UK discounter EasyJet is doubling down on the growth strategy it outlined as part of its £1.2 billion ($1.6 billion) rights issue in September. The airline has had some success securing slots at several of Europe’s constrained hub airports, including Amsterdam Schiphol, Milan Linate, Lisbon, and its key London Gatwick base, CEO Johan Lundgren said last week. EasyJet plans to base at least 79 aircraft at Gatwick, where it has leased some slots for the “medium-term” from British Airways, next summer; it based just 63 aircraft there during Summer 2019. And the carrier continues to seek additional growth opportunities by acquiring slots at European hub airports, as well as grow its portfolio of seasonal bases, particularly in Southern Europe.
The added slots have EasyJet looking forward to next summer, when it plans to be at or near 2019 capacity levels. The airline continues to recover flying to roughly 65 percent of two years ago in the December quarter, and roughly 70 percent in the March quarter in preparation for a robust Summer 2022 schedule. And even the emergence of the Omicron variant has done little to dent this outlook with Lundgren saying that bookings have softened for near term travel, but remain unchanged for the holidays and 2022. “We always thought this was how the virus would evolve,” he said of the uncertainty around Covid-19.
And on the fleet front, EasyJet has exercised purchase rights for 19 Airbus A320neo family jets for delivery from 2025-28, and boosted its firm orderbook to 118 aircraft. However, even with the additional orders, the airline’s fleet will remain well below its pre-pandemic peak of 342 aircraft through at least the fiscal year ending in September 2024 when it aims to fly 328 aircraft; EasyJet operated 308 planes at end-September. The recovery in capacity is possible by the replacement of 156-seat Airbus A319s with larger A320neo and A321neo aircraft that seat 186 and 235 passengers, respectively.
EasyJet outlined a financial target of achieving “mid-teen” earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR) over the “medium term.” Executives did not define what timeline medium term referred to but compared to target to the carrier’s 2019 EBITDAR margin of 15 percent. It also targets a “roadmap” to EasyJet Holidays contributing £100 million pre-tax profit to the group annually; the segment’s contribution in the 2021 fiscal year was “not significant.”
EasyJet narrowed its annual loss to £858 million during the fiscal year ending in September. Revenues decreased nearly 52 percent to £1.5 billion on a nearly 39 percent decrease in expenses to £2 billion year-over-year. The airline cites £512 million in cost savings in 2021 with “half” understood to be long-term structural improvements. Passenger traffic decreased 60 percent on a 46.5 percent decrease in capacity compared to its 2020 fiscal year.
In Other News
- First in, first out: Avianca exited its U.S. Chapter 11 bankruptcy restructuring on December 1, less than a month after a bankruptcy judge approved its restructuring plan. The Bogotá-based carrier was the first major Latin American airline bankruptcy of the Covid-19 pandemic when it filed on May 10, 2020. That first mover status extended to its exit as Aeromexico and Latam, both of which filed for protection later in 2020, continue to move through the process. Under Avianca’s plan, the airline will pivot towards a future with far fewer business travelers and one where it flies denser planes on more point-to-point routes from its geographies of strength, under a broad partnership with United. No word yet on a potential merger with Chilean discounter Sky Airline, however, Avianca CEO Adrian Neuhauser said in October that if such a deal were to occur, it would happen after the airline exited Chapter 11.
- SAS nearly halved its quarterly loss to 744 million Swedish kroner ($82 million) during the three-months ending in October compared to the prior period. The improvement came as the airline saw an upswing in both leisure and business travelers during the period that drove a nearly 45 percent quarter-over-quarter increase in revenues to almost 5.8 billion kroner; revenues jumped 90 percent year-over-year. In its 2021 fiscal year that ended in October, SAS lost 6.5 billion kroner on nearly 14 billion kroner in revenues.
SAS CEO Anko Van der Werff expects the travel recovery to continue even with the rise in Covid-19 cases in Europe — the airline is monitoring the new Omicron variant “closely” — he said last week. The carrier plans to launch its new operational subsidiaries SAS Connect and SAS Link from Copenhagen early in the new year, said Van der Werff. While operationally separate from SAS, both subsidiaries will be marketed and sold as SAS flights to eliminate traveler confusion. And asked about Finnair‘s longhaul expansion in Stockholm, Van der Werff showed little concern and said that he does not view it as a “structural” change for the airline but more a temporary pivot to utilize aircraft previously flying to Asian markets closed by the pandemic.
- Cargo continues its torrid growth streak, rising more than 9 percent in October versus the same month in 2019, IATA data show. Maritime freight remains lines remain snarled, resulting in supply chain disruptions, and the Purchasing Managers Index dropped to its all-time low — all factors that will continue fueling air cargo.
Meanwhile, passenger volumes are just under half of what they were in October 2019, IATA said. The emergence of the Omicron variant is likely to slow passenger traffic recovery.
- Ethiopian Airlines-backed Zambia Airways will launch with flights between Lusaka to Ndola on December 1. The new airline will also begin service between Ndola and Livingstone the same day, and add flights to Harare, Johannesburg, Mfuwe, and Solwezi in 2022. Zambia Airways will operate a de Havilland Dash 8-400 leased from Ethiopian. Zambia’s Industrial Development Corporation Limited holds 55 percent and Ethiopian 45 percent of the equity in the new airline.
- In people moves, one of the industry’s longest-running leaders, Cape Air CEO Dan Wolf, will hand the reins to his deputy President Linda Markham on January 1 after 32 years; Wolf founded the airline with a single Cessna flying the Boston-Provincetown route in 1989. Markham will be the only female airline CEO in the U.S., and one of a handful globally. And in Canada, WestJet named its Chief Financial Officer Harry Taylor Interim President and CEO to replace Ed Sims who retires at the end of the year. The airline continues to search for a permanent replacement for Sims.