International Airlines Group is making a big bet on North America this summer, with plans to fly roughly the same transatlantic capacity as before the pandemic, executives said last week on the company’s fourth-quarter earnings call. But while IAG sees opportunity, its decision is partly a reflection of a new reality, in which one continent remains effectively closed to European airlines.
“The capacity that we are not flying to Asia, we are putting in the North Atlantic,” IAG CEO Luis Gallego told analysts. “And that’s the reason we are going to reach 100% of the capacity.”
As IAG rebuilds its transatlantic franchise, its network will look different than three summers ago, with Aer Lingus flying less capacity, Iberia flying to more destinations, and British Airways prioritizing more connecting service over London Heathrow.
Aer Lingus struggled more than IAG’s other network airlines during the pandemic, executives said, because it previously relied heavily on transatlantic traffic and lacks a domestic market. In addition, IAG CFO Stephen Gunning said, Ireland implemented stricter Covid protocols than other European nations. Aer Lingus reported a -92 percent operating margin last year with a load factor of 48 percent, according to figures released by IAG.
“It’s been a very tough time for Aer Lingus,” Gunning said. “They flew less capacity than our other operating companies during Q4 and still had the lowest load factor.”
Still, with the U.S. permitting European tourists, the Irish airline this summer will increase transatlantic capacity. IAG executives said Friday that Aer Lingus will operate about 90 percent of its former North Atlantic capacity this summer, though that includes fewer fights from Dublin and new ones from Manchester, U.K. to New York, Orlando and Barbados. The airline opened the new UK base late last year.
Meanwhile, British Airways should fly roughly the same amount of capacity this summer as in 2019. But connectivity will be different, as the airline moved some short-haul leisure capacity from London Gatwick to Heathrow, allowing easier connections from the U.S. to Venice and Naples. British Airways will return to “almost all” of its North American gateways this summer, executives said, with “more destinations than our competitors.”
“We have taken a lot of steps to try to rebuild the network and also to try to take the opportunities that others have let in the market,” Gallego said.
Executives said they are bullish on British Airways’ prospects, noting the airline produced impressive results in the fall, after the United States opened and before the Omicron variant began to spread. Its fourth-quarter operating margin was -15%, which, remarkably, made it the second-best performing IAG airline during the period.
“We really saw some momentum and progress in the business,” Gunning said. “We were ahead of our expectations, and it was really starting to motor as a business.”
Finally, executives called Iberia the group standout, noting it was the only one of the company’s four airlines to report positive operating margin in the fourth quarter, at 8 percent. This summer, executives said, Iberia is increasing its “presence” in North America, with new routes to Dallas and Washington, D.C. Concurrently, executives said Iberia will resume all but 5 percent of its Latin American capacity by the end of this year.
“All of the businesses, whether it’s MRO, whether it’s Iberia mainline or whether it’s Iberia Express, we’re profitable,” Gunning said.
While IAG is optimistic about the North Atlantic for Iberia and British Airways, executives underscored that they’re still not seeing highly profitable business travelers return in big numbers. They said they are hopeful business travel will return as more people return to the office.
“Premium business travel is clearly lagging behind for both airlines,” Gallego said. “For BA, they had a high of 30 percent of 2019 levels in November. And they have declined to 20 percent in January due to Omicron. For Iberia, it peaked at 60 percent in November and now is around 50 percent.”
Like most airline companies, IAG is partially offsetting the lack of business travelers with more leisure traffic. Executives noted that this summer, the company’s airlines may regain pricing power in the leisure segment as demand increases and fewer low-cost-carriers fight for the traffic. Just before the pandemic, many carriers made big profits from premium seats but struggled with economy class yields against airlines like Norwegian Air.
IAG is estimating economy and premium economy industry capacity across the North Atlantic will decrease by about 8 percent compared to 2019, while business and first class capacity will increase by 1 percent.
“Norwegian, they have left the market,” Gallego Martin said, “so we are going to have less non-premium seats in the market, and we are going to have an opportunity there.”
SAS Cuts Costs as it Faces Changed Nordic Airline Market
SAS plans to slash annual expenses by 7.5 billion Swedish kroner ($806 million) over the next five years under a plan dubbed “SAS Forward,” van der Werff said during the airlines results call for the quarter ending in January — the first of its 2022 fiscal year — on Monday. The plan includes 4 billion Swedish kroner in previously planned coronavirus-related cuts, plus an additional 3.5 billion in Swedish kroner that will come from across the company.
“We find ourselves in a changed market … We are really in need to look forward and chart a new course for that future,” he said.
SAS faces new and more nimble competitors that range from Finnair in Stockholm to startup Flyr in Norway, and the restructured Norwegian Air. In addition, the legacy carrier forecasts a permanent change in the mix of business and leisure travelers aboard its planes, with the former group shrinking by 5-10 percentage points and the latter making up 75-80 percent of its passengers going forward.
Lower-cost competitors and more leisure travelers — who tend to spend less — mean SAS needs to “fundamentally” change its cost structure, van der Werff put it last week. The airline has long struggled with high costs. This is understood to be, at least in part, the rationale behind hiring van der Werff as CEO last June. He joined the Scandinavian airline from Avianca, where he kicked off what was ultimately a successful restructuring and cost-cutting program. The process at the Colombian carrier wrapped up in December when it exited the U.S. Chapter 11 bankruptcy process.
And SAS is not alone. Around the world airlines have slashed fixed costs during the pandemic both in and out of court. In addition to Avianca, Philippine Airlines restructured under Chapter 11 in the U.S., and Aeromexico and Latam Airlines Group are still going through the process; and Virgin Australia went through voluntary administration. These efforts came as carriers sought to save themselves from becoming casualties of the Covid-19 crisis.
Analysts were skeptical of SAS’ Forward plan. Jacob Pedersen, an analyst at Sydbank, described it as “ranging from ambitious to maybe not that ambitious” citing the five-year timeframe. And others repeatedly questioned van der Werff and other executives about labor’s support for the program.
“This plan is designed, so that people understand that this really is the best alternative, and that the alternative price would be worse,” van der Werff said in response to questions on the labor reaction to his plan. SAS faced what was deemed an illegal strike by baggage handlers in Copenhagen earlier in February, and labor relations remain tense.
While labor savings were a big part of SAS’ initial cost cutting program, executives emphasized non-labor focused cuts as part of the additional 3.5 billion Swedish kroner in savings. These include additional fleet streamlining and increased aircraft utilization; broad adoption of new technologies; and the restructuring of its network into three separate operating units — SAS mainline, SAS Connect, and SAS Link — that will all operate under a unified SAS brand.
On the fleet side, SAS will continue with the transformation already underway. This includes taking delivery of 20 aircraft this year including new Airbus A320neo family jets, and six used Embraer E195s for its new Link subsidiary, while also retiring Boeing 737s and older A320 family aircraft. SAS Chief Financial Officer Magnus Örnberg noted that the group estimates it needs fewer widebodies and suggested that it could remove some of the 14 Airbus A330s or A350s that it flew at the end of January.
Fleet changes will coincide with network adjustments. SAS will fly to more destinations in southern Europe this summer than it ever has before, said van der Werff. It will open a new base in Bergen for SAS Link this year, and plans for additional new bases across Scandinavia that will “strengthen our relevance in Scandinavia.” Long-haul flying to Asia may be cut as the airline adjusts its network.
SAS served Beijing, Hong Kong, Shanghai, and Tokyo in Asia prior to the pandemic, according to Cirium schedules.
More immediately, SAS is optimistic for the upcoming summer travel season. The airline expects a “very healthy summer,” said van der Werff, though he noted that they remain “very cautious” amid the unpredictability of the Covid-19 virus. Omicron hit the airlines first quarter hard, which he described as a “tale of two cities,” indicating there were two very different halves to the three-month period.
SAS lost 2.4 billion Swedish kroner during the quarter ending in January. Revenues were 5.5 billion Swedish kroner; more than double a year ago but down 43 percent compared to the quarter ending January 2020. Expenses were down 23 percent year-over-two-years to 6.9 billion Swedish kroner.
Azul to Continue Focusing on Domestic Demand
Azul pulled off a rare feat in the fourth quarter of last year. It was one of the only airlines in the world to report more revenue in the quarter than it did in the fourth quarter of 2019.
The carrier reported revenues of 3.7 billion reais ($718 million), compared with 2019 revenues of 3.3 billion reais, which was a record for the airline then. “If you could remember back in the fourth quarter of 2019, that actually was our best revenue quarter ever until now, so the base was high and we are proud to be one of the few airlines worldwide to surpass pre-pandemic revenues in 2021,” Chairman David Neeleman said last week.
The Omicron affected Azul during what is its peak summer season. The carrier reported higher-than-usual sick calls in January, but executives noted Brazil’s high vaccination rate resulted in only one employee being hospitalized during the surge.
Azul achieved its results by focusing on its domestic network. Domestic Brazil demand remained robust through most of the pandemic and started to climb as vaccination rates improved in the second half of last year. The carrier flew 24 percent more capacity in the fourth quarter of 2021 than in 2019. International capacity remains down about 60 percent from pre-pandemic levels. Rodgerson forecasts that international capacity will remain at this level through the year, especially if fuel prices remain high.
Leisure demand drove much of last year’s growth, but by the second half, business travel had recovered to 70 percent of pre-pandemic levels, Rodgerson said. Travel by small- and medium-sized business actually exceeded pre-Covid levels, he added.
Cargo also fueled Azul’s growth. The carrier began prioritizing logistics and package delivery during the pandemic, and the strategy has paid dividends. In the fourth quarter, cargo generated 1.1 billion reais in revenue, more than double the amount in 2019. The carrier has upped its converted Embraer freighter fleet to four aircraft.
The Ukraine war caused oil prices to surge past $100 per barrel, but Rodgerson believes that price is temporary. The carrier is prepared to handle fuel at $90 per barrel, helped by favorable foreign exchange rates for the Brazilian real.
Azul’s fourth-quarter revenues generated an operating income of 525 million reais, compared with an operating loss of 143 million reais in 2020.
Candidates Emerge For FAA Administrator
Steve Dickson is leaving behind a legacy focused heavily on safety as the departing FAA Administrator. Dickson announced his resignation last week, leaving the aviation industry buzzing about who would replace the former Delta pilot in perhaps one of the most critical regulatory positions on the globe.
“We operate the safest aerospace system in the world, we want to make sure that it stays that way,” Dickson said in a farewell video last Friday.
That pretty much summarizes the task ahead for Dickson’s replacement who will face unparalleled challenges coming out of the pandemic. So who should succeed Dickson and tackle the issues?
At least four names are being mentioned, according to aviation sources. The names include Deborah Hersman, the former chairman of the National Transportation Safety Board; Bradley Mims, deputy administrator of the FAA; Sully Sullenberger, the US Airways hero pilot who was confirmed in December to be the U.S. representative on the Council of the International Civil Aviation Organization board, the United Nations air safety body,.
And then there is John Boccieri, a United Airlines pilot and former U.S. Congressman from Ohio.
A Washington insider, who asked not to be named, said that Josh Earnest, a former spokesman for President Barack Obama and now United Airlines chief communications officer, is likely advocating with White House officials for an appointment that United approves. Earnest, who once dealt with aviation media, now is more focused on political relationships.
Dickson was a former Delta Air Lines pilot. Delta and United pilots are the two largest groups in the Air Line Pilots Association, the powerful pilots’ union.
Todd Insler, chairman of the United chapter of the Air Line Pilots Association, is an advocate for Boccieri.
“The position of administrator is complex,” Insler said. “It deals not only with piloting and the certification of pilots, commercial and other pilots, but also with manufacturers, government and thousands of FAA employees. It needs to be filled by someone who checks more than one box and who is a known quantity.”
Insler said Boccieri is not only a former U.S. Congressman, but is also a Cleveland-based United 737 first officer and a vice commander of the Pittsburgh Air Reserve base. “His resume shows he is qualified and competent,” Insler said. “We need someone who knows the ins and outs of government and the ins and outs of safety,” Insler said.
Industry officials say whoever takes the top FAA job, it will be imperative to carry on Dickson’s work.
“We can’t squander the momentum” that comes from Dickson’s work, said Dennis Tajer, spokesman for the Allied Pilots Association, which represents American Airlines pilots.
“This is about ensuring that aviation safety comes first and the commercial interests follow,” Tajer said. “The trend has been set and it must be bolstered. We’ve learned that too cozy a relationship with commercial interests can only lead to tragedy.”
Dickson’s two and a half years on the job may have been among the toughest ever for an FAA administrator. He battled Boeing. He battled Covid and disruptive passengers and anti-maskers. He battled cellphone giants AT&T and Verizon on the rollout of 5G cell phone service, perilously close to airports.
He may be winning all three battles, but it is clear that none have ended.
Two weeks before Dickson announced his planned departure, AT&T CEO John Stankey appeared on CNBC’s Squawk Box. Stankey said the Federal Communications Commission “told the FAA, we don’t consider your concerns to be valid and you should go back and do the things you need to do to address them.
“When we get to the spectrum transitions and we’ve displaced somebody who’s a current occupant and in part of the spectrum band, there’s always dynamics that go on,” he said.
Perhaps the final straw for Dickson was the concept that aviation safety and faster video game processing are equal tenants of the spectrum. In any case, he will be gone March 31.
— Ted Reed
In Other News
- In an apt description of the crisis, Qantas Airways CEO Alan Joyce described the six-months ending in December as something of a “rollercoaster,” during the airline’s results for six-months ending in December. From plans to fly more than 2019 levels of domestic capacity the airline pulled back dramatically in the face of state border restrictions for both the Delta and Omicron variants, the latter of which it continues to recover from. Despite the ups and downs, Qantas generated revenues of A$3.1 billion ($2.2 billion) during the first half of its 2022 fiscal year, an A$700 million improvement over the prior six months but still down 67 percent compared to 2019. The carrier lost A$1.4 billion during the period.
But Joyce sounded an optimistic note in his prepared remarks: bookings are “trending upwards,” and travelers are eager to return when border restrictions ease. Qantas saw its strongest week of international ticket sales in mid-February as restrictions eased further. “As Australia completes its shift to truly living with Covid, we can see things are stabilizing,” he said. The airline plans to fly 68 percent of pre-Covid domestic capacity in the March quarter, and 90-100 percent in the June quarter. International capacity will be 22 percent of pre-Covid levels in the March quarter, and 44 percent in the June quarter. And India, a market Qantas returned to after a near-decade long hiatus, has performed so well that it has become a “permanent fixture” on the airline’s map.
Qantas has cut A$700 million in fixed costs from its business to-date in the crisis, and is on track to achieve A$900 million in annual savings by June, the end of its fiscal year. The airline continues to target A$1 billion in structural savings by the end of the 2024 fiscal year. Qantas forecasts a loss for the year ending in June, including a roughly A$650 million negative hit from the Omicron variant.
- With nearly all long-haul passenger travel halted, Air New Zealand posted a NZ$272 million ($183 million) loss, or NZ$376 million after a tax benefit, during the six months ending in December. Revenues decreased 8.8 percent year-over-year to NZ$1.1 billion; they were hit, in part, by repeated Covid-related lockdowns in Auckland that stymied domestic travel — one of Air New Zealand’s few bright spots. The other bright spot was cargo; revenues increased 29 percent year-over-year to NZ$482 million, buoyed in part by the government’s Maintaining International Air Connectivity (MIAC) scheme. Cargo revenues made up 43 percent of the airline’s total for the period compared to pre-Covid times when international passengers made up two-thirds of the airline’s revenues, said CEO Greg Foran. Air New Zealand, like most other carriers, views the outlook as “uncertain” and provided little future guidance. The carrier anticipates a roughly NZ$800 million pre-tax loss for the 2022 fiscal year that ends in June.
- Singapore Airlines reported its first quarterly profit since the pandemic began, of S$85 million ($65 million), on revenues of S$2.3 billion in its most recent quarter. The carrier credits Singapore’s Vaccinated Travel Lanes and partial reopening for much of the increase in demand. Cargo generated S$607 million, up 82 percent from last year.
- Volaris, like Azul reported fourth-quarter revenues what were higher than in 2019. The Mexican discounter reported 14 billion pesos ($685 million) in revenues in the quarter, up 43 percent from two years ago. Capacity rose 27 percent, partially a function of the carrier’s larger fleet, which ended the year at 101 aircraft, compared with 82 at the end of 2019. Domestic demand remained strong last year, and Volaris continued its strategy of “bus-switching,” or attracting passengers from long-distance buses onto the carrier’s flights, Chief Commercial Officer Holger Blankenstein said last week.
Volaris saw bookings dip for “approximately three weeks” due to the Omicron variant’s surge, Blankenstein said, but booking recovered in early February, with leisure demand “gaining momentum” through the spring. Executives are bullish on “organic growth” and are not seeking partnerships or acquiring other airlines. Volaris’ plans to have half its revenue come from ancillary products could be a victim of high oil prices as price-sensitive passengers with less discretionary income cut back on extra spending, Blankenstein said.
Despite its strong revenues, Volaris reported a fourth-quarter loss of 200 million pesos, due to special charges. For the full year, the carrier reported revenues of 44 billion pesos, up 29 percent from 2019, generating a net income of 2.1 billion pesos.
- Korean regulators have given their conditional approval of Korean Air’s acquisition of Asiana. Korean Air announced its intention to acquire its smaller (and then-ailing) rival for north of $1 billion in 2020. The Korean government has demanded several remedies, including slot divestitures, in order to approve the deal.
- Turkish Airlines has named Ahmet Bolat as its new chairman. Bolat joined the airline in 2005 and has held a variety of leadership roles in government affairs, finance, and fleet planning, among others. He replaces Ilker Ayci, who stepped down last month and has since been named CEO of Air India.