Copa Forecasts Return to Pre-Pandemic Capacity by Midyear

Edward Russell

February 14th, 2022

Copa Airlines pulled off a profitable fourth quarter, despite the spread of the Omicron variant, operating 83 percent of its 2019 capacity as its core Latin America markets opened up for leisure travel. The carrier sees its quick rebound during 2021 — after spending much of 2020 grounded due to Panama’s strict restrictions — as validation of its business model that connects North and South America over its hub in Tocumen.

But Copa wasn’t immune to Omicron. Bookings dropped off in December and remained weak through the first week of February. Because of the uncertainty, Copa offered guidance only for the first quarter, when it expects capacity to be 88 percent of 2019 levels, and operating margins of between 3-6 percent, making it one of the few carriers in the world to forecast first-quarter profits. “What we’ve learned from this pandemic is that things change from one day to another,” CEO Pedro Heilbron said during the company’s fourth-quarter and full-year 2021 earnings call last week.

Bookings primarily are for leisure travel, Heilbron said, but even this has changed. Through the second quarter of last year, “vaccine tourists,” heading from South America to the U.S. for Covid-19 vaccines, were a significant source of demand. This has receded to become just general leisure. Business travel is coming back but not as quickly as leisure traffic and is about half of its pre-pandemic level. “In general, we do not see that people are hesitant about traveling abroad,” Heilbron said. “There’s still some pent-up demand or if it’s no longer pent-up, it’s the urge to get out and do things and go somewhere.”

Copa’s network is performing well across the board, now that most Central and South American markets have eased restrictions, Heilbron said. Routes to Mexico, the U.S., and Brazil held up the most over the course of the last two years, and remain strong, he said.

Although not formal guidance, Copa believes it will return to its pre-pandemic capacity by the middle of the year. It will take delivery of two Boeing 737-9s this quarter, and plans to add a total of eight this year. It will also retain three 737-700s that it had planned to sell, and it will reactivate 737-800s that were stored during the pandemic.

Copa is converting one of its 737-800s into a freighter in response to continuing strong cargo demand. Cargo revenues in the fourth quarter were 61 percent higher than they were before the pandemic. The carrier could add more -800 conversions if demand warrants. The first conversion will replace a Boeing 727 freighter Copa chartered during the pandemic when cargo demand spiked.

Copa ended the year in the black. The carrier reported an adjusted fourth-quarter net income of $84 million on revenues of $575 million, or down about 16 percent from 2019. For the full year, Copa reported a $2.7 million profit on $1.5 billion in revenues, or down 44 percent from 2019.

— Madhu Unnikrishnan

Sun Country Finds Pilot Shortage Silver Lining

Sun Country Airlines faces challenges hiring across its business amid the labor issues facing U.S. companies. But even as it struggles to find enough pilots and maintenance technicians to grow as fast as it wants, executives see a silver lining in the higher airfares that are likely from a slower airline recovery.

“I believe staffing challenges will result in downward pressure on capacity and therefore, be positive to fares,” Sun Country CEO Jude Bricker said during the carrier’s fourth-quarter and full-year results call last week.

Bricker has good reason to find a silver lining. The airline posted a 9 percent increase to $111.48 in its base fare per passenger during the fourth quarter compared to the three months prior. And year-over-year, fares were up 28 percent. Sun Country, which went public last March, did not publish average fare data for 2019.

The upward trend is a matter of supply and demand. While the Omicron variant hit demand for air travel in January and February, airlines — Sun Country included — remain confident in throngs of vacationers returning to the skies for spring break in March and April, and then again this summer. That return is all well and good for airlines but it means fares will rise if the industry cannot resume its pre-pandemic schedules in lockstep with demand. And after thousands of pilots retired during the pandemic, the timeline of the supply-side recovery is in question amid the growing staffing shortages.

American Airlines, Delta Air Lines, and United Airlines have already pared back their schedules this spring to mitigate any shortage of pilots at their regional affiliates. American has temporarily suspended or delayed the start of dozens of routes, while United has pulled out of several smaller cities and cancelled numerous regional routes. Delta has cut regional flying by up to a quarter but not exited any destinations in the first half of 2022, executives said in January.

For Sun Country, the lack of staff is limiting its ability to grow. Bricker said that in March the airline will fly the “maximum volume limited by staff,” though he did not indicate how much the airline would like to fly. Sun Country plans to fly 5-10 percent more capacity in the first quarter than it did three years earlier.

The carrier’s fleet growth plans remain unchanged amid its staffing issues. In January, Sun Country signed letters of intent for five used Boeing 737-800 aircraft due later this year. Those aircraft, along with two it acquired last year, put it on track to meet its target of adding eight passenger aircraft to its fleet in 2022, said Chief Financial Officer Dave Davis. Sun Country flew 36 passenger aircraft plus 12 737 freighters under a deal with Amazon at the end of December.

Sun Country reached a new deal with its pilots union that executives think will make it even more attractive to new hires. The contract includes better pay and benefits, as well as improved work rules for pilots, and new flexibility for the airline to move crew members around its system where they are needed. Davis described the deal as “highly competitive with our low-cost peers.” He added that, since the agreement was signed in December, pilot applications jumped 160 percent compared to the months just prior to the deal.

The question for many Wall Street analysts is how the new pilots deal will impact overall costs. Sun Country forecasts that unit costs excluding fuel, but including the new labor agreement, will be lower in 2022 than they were in 2019. He attributed the drop to the airline’s planned growth, renegotiating aircraft leases, and technology improvements.

Sun Country’s ability to lower unit costs is big in an industry where cost pressures are increasingly a concern for management teams. Most airlines forecast significant increases in 2022 compared to 2019 with labor cost pressure a big reason for the increase, while flying less also factors in. Many analysts have pressured management teams to get costs in check as carriers are expected to transition out of the crisis this year.

Bricker was unconcerned about the proposed merger (see Feature) between Frontier Airlines and Spirit Airlines unveiled Monday. He pointed to the fact that neither carrier has a significant presence in Sun Country’s home Minnesota market — Cirium schedule data shows Frontier and Spirit sixth in Minneapolis-St. Paul with a 3.2 percent share of seats in February — and added that he does not see a merger as changing that positioning.

“I think it’s a net positive,” he said of the deal. “I don’t think it changes the dynamic much here in Minneapolis.”

Sun Country lost $602,000 on nearly $173 million in revenues in the fourth quarter. Revenues were up up 60 percent year-over-year in the period. Total unit revenues (TRASM) were up 34 percent and unit costs (CASM) excluding fuel were down 2.2 percent. And the airline flew 72 percent more passenger traffic on 36 percent more capacity.

For the full year, Sun Country posted a $77 million profit including a $72 million benefit from federal coronavirus aid. Revenues increased 55 percent to $623 million compared to 2020. TRASM was up 7.9 percent on a 0.6 percent decrease in CASM excluding fuel.

The carrier forecasts revenues of $215-225 million in the first quarter, or a 9-14 percent increase over the same period in 2019.

Edward Russell

Norse Mimics Norwegian Air With UK-U.S. Plans

Norse Atlantic Airways CEO Bjørn Tore Larsen insists the airline is not Norwegian Air, but the startup is looking more and more like the now-defunct long-haul arm of that airline.

Norse is in the process of securing an air operators certificate (AOC) from UK authorities that would allow it to add flights in the “biggest transatlantic market,” or between the UK and the U.S., Larsen said at an International Aviation Club (IAC) event in Washington, D.C., on last week. Norwegian Air offered flights between the UK and U.S. from 2014 to 2019, including by its UK-based subsidiary Norwegian Air International, which attracted the ire of U.S. lawmakers and labor unions.

“We are not Norwegian [Air] … We are a lean and focused operator. We will do do one thing only: We will fly long-haul with one aircraft type. We are going to be taking home gold medal rather than trying to three, or four, or five at the same time, because then it’s going to be silver, or bronze, or worse,” said Larsen when asked how Norse will succeed when Norwegian Air did not.

While Norwegian Air did attempt to build a diversified low-cost airline group, Larsen’s arguments for why Norse is different and will succeed — a focus on low costs, a disciplined concentration on a single business, and likely very low aircraft lease rates — were very similar to those of former Norwegian Air CEO Bjørn Kjos. Up until he departed in 2019, Kjos repeatedly dismissed criticisms of Norwegian Air’s long-haul, low-cost business. The airline entered administration shortly after Kjos left and, in early 2021, officially shuttered its long-haul business.

Norse Atlantic, however, will pick up where Norwegian Air left off. With its EU AOC and U.S. permits in hand, Norse plans to begin flights between Oslo and the U.S. in the second quarter, Larsen said. He specifically declined to say whether that meant April, May, or June. Initial destinations will include Fort Lauderdale, New York — either JFK or Stewart airports — and Ontario, Calif. Tickets will go on sale at the end of March.

Norse will launch with three Boeing 787s — its first arrived in December — and grow slowly through the summer. Its fleet plan calls for three 787-8s with 291 seats, and 15 787-9s with 344 seats.

In terms of Norse’s planned UK flights, Larsen said he expects a local AOC “in a few months time.” The airline already has begun the application process with UK authorities, he added.

“We don’t want to run before demand comes back,” he said about the start of flights. He added that Norse will focus initially on operating just one airline — referring to its initial Norway-based operation — before it launches a second.

Norse has learned one thing from Norwegian Air: Secure political and union support early. While Norwegian Air’s U.S. expansion repeatedly faced pushback from both lawmakers and organized labor, Norse reached a deal with the Association of Flight Attendants-CWA last June — months before it even had an operating certificate — to avoid any such outcry. Larsen said Thursday that the airline has “good relationships” with both British and Norwegian pilot unions; though there was no mention of the Air Line Pilots Association (ALPA), the largest U.S. pilots union.

And Rep. Peter DeFazio (D-Ore.), the chairman of the House Transportation and Infrastructure Committee who was unconvinced about Norse last year, was in attendance at IAC event.

“Sir, I know you were skeptical of us,” Larsen said to DeFazio at the event. “Thank you very much for listening to us and giving us a chance.”

Edward Russell

In Other News

  • In conjunction with Frontier and Spirit’s merger announcement (see Feature), the carriers dropped their respective fourth-quarter earnings releases last week. Frontier posted a $53 million loss in the fourth quarter on revenues of $609 million, which were down 7 percent year-over-two-years. While numbers are tracking in the right direction quarter-over-quarter and year-over-year, unit costs (CASM) excluding fuel were up 18 percent to 6.5 cents compared to 2019, and total unit revenues (TRASM) were down 10 percent to 7.78 cents over the same period. For the full year, Frontier posted a $117 million loss that benefitted from CARES Act pandemic relief on revenues of $2.06 billion. The airline flew 9 percent less passenger traffic on 4 percent more capacity in the fourth quarter compared to 2019. “We’re really optimistic for the spring … and we’re really excited about the summer,” Frontier CEO Barry Biffle said last week citing strong leisure demand.
  • Spirit reported a $61.6 million loss on $988 million in revenues during the final quarter of 2021. But unlike Frontier, revenues were 1.8 percent higher than they were during the same period in 2019, marking the first quarter since the crisis began that Spirit’s revenues exceeded pre-pandemic levels. The airline still has work to do on the cost side: CASM excluding fuel was up 14.5 percent year-over-two-years to 6.54 cents in the fourth quarter, and TRASM was down 6.9 percent. Spirit carrier 3 percent more passenger traffic on 9.5 percent more capacity during the period than it did in 2019. And for all of 2021, Spirit lost $473 million on $3.2 billion in revenues. Spirit CEO Ted Christie echoed Biffle’s view of strong leisure demand ahead this spring and summer.
  • The latest piece of Aeromexico‘s restructuring has fallen into place: Buying back Aimia’s stake in its Club Premier loyalty program. The airline will buy Aimia’s 48.9 percent stake for $405 million in a deal unveiled last week. Aeromexico will take full control of Club Premier, including sticky relationships with the lucrative corporate travelers that the carrier’s U.S. Chapter 11 reorganization plan relies on, when the transaction closes, which is expected by early August. As part of the sale, Aimia agreed to drop all of its claims in Aeromexico’s bankruptcy case.
  • Spain’s Volotea has some ambitious growth plans for 2022. The discounter will grow capacity by 39 percent year-over-three-years, which includes launch 40-45 new routes and opening two new bases. The new bases will be unveiled by the end of February, the airline said. Revenue growth will be a bit more subdued at a just 20 percent increase over 2019 to roughly €525 million ($599 million). Volotea founder and CEO Carlos Muñoz said the growth outlook was the result of “analyzing the pent-up demand in our markets, and after having been able to maintain an average seat occupancy of over 90 percent since June 2020.”
  • Finnair is (finally) joining the premium economy party. The Finnish carrier will install the cabin on all of its widebody jets, as well as new business class seats and an economy class refresh, as part of a €200 million ($228 million) investment in its onboard product. The first reconfigured Airbus A330s and A350s will enter service this spring, and Finnair targets an end-2023 completion to the retrofits.
  • The U.S. Transportation Department has fined Air China $300,000 for violating its tarmac delay rule. DOT’s investigation found that two 2018 flights remained on the tarmac at New York’s JFK for more than five hours without allowing passengers to disembark.
  • Alaska Airlines is making the San Francisco Bay Area central to reviving its California route network. The carrier is stepping up its marketing efforts in the region, taking over the sponsorship of the city’s Lunar New Year celebration from long-time backer Southwest. After scaling back marketing during the pandemic, Alaska Managing Director of Brand Marketing Natalie Bowman told Airline Weekly the Bay Area is “a huge focus area for us now.” The carrier recently named Neil Thwaites, formerly of British Airways, to lead its California strategy. Separately, Alaska is investing $8.5 million to revamp its lounges in Seattle and Portland, Ore.
  • The executive suites of All Nippon Airways and Allegiant Air will be changing in the next few months. ANA named Shinichi Inoue as its new president and CEO who will replace Yuji Hirako on April 1. Inoue, who has worked at the carrier since 1990, was most recently a senior vice president and before that led ANA’s budget subsidiary Peach. Hirako, who took the top spot at ANA in 2017, will become vice chairman of the ANA Holdings board.

    And across the Pacific Ocean, long-time Allegiant CEO Maurice Gallagher, Jr., step down on June 1. John Redmond, the discounter’s president, will become CEO. Gallagher, who has been CEO since 2003, will remain chairman of Allegiant’s board. Allegiant and ANA join the growing list of airlines undergoing a leadership transition during the pandemic, including Alaska, American, Southwest, and United.

Edward Russell & Madhu Unnikrishnan

Edward Russell

February 14th, 2022