Western aircraft lessors and financiers are accepting the fact that their aircraft in Russia are probably not coming out. That was the sentiment at the ISTAT Americas conference last week where the aviation finance community gathered amid the triple threats of Covid, Russia, and rapidly rising fuel prices.
“[It] looks to me like the door is slammed shut,” said Ascend by Cirium’s Head of Consultancy Rob Morris on getting the more than 430 Western-owned aircraft currently in Russia out of the country.
Since the EU imposed sanctions on Russia on February 25, lessors have succeeded in recovering some aircraft. But Russia moved quickly to protect its aviation assets, including allowing airlines to re-register foreign-registered planes in the country in a move that violates international law. Authorities in Bermuda, where many foreign-owned Russian aircraft are registered, removed all aircraft tied to Russia from its registry on March 12.
The Russian government has also recommended that carriers do not fly foreign-owned jets outside of the country to avoid the risk of repossession. And, on March 8, Aeroflot and its subsidiaries suspended flights to destinations outside the country.
Russian airlines operated 861 aircraft, of which 695 are Western-built — including 304 Airbus and 332 Boeing models — in February prior to the invasion of Ukraine, according to Cirium’s Fleet Analyzer. Foreign lessors owned 515 aircraft with AerCap, SMBC Aviation Capital, and Air Lease Corp. having the most exposure.
“You’ve got 500-plus aircraft at risk and maybe a dozen or two seized,” said Dean Gerber, executive vice president and general counsel of aircraft finance firm Valkyrie BTO Aviation. “The reality is those other aircraft are land-locked in Russia right now with significant unlikelihood that you’re going to get them out.”
The financial exposure of those aircraft for lessors and lenders is roughly $10 billion, said Airbus Head of Trading Francois Collet.
And lessors likely face losses even on the aircraft they have recovered. Without an aircraft’s records — most of which are kept on paper rather than electronically — an aircraft “has very little value,” said Clifford Chance Partner Emily Wicker. The lack of documentation poses real safety and airworthiness questions for an aircraft.
Some of the aircraft successfully seized include a Nordwind Boeing 777 in Mexico City, a Podeba Boeing 737-800, and an S7 Airlines Airbus A320neo, according to The Air Current. But like Gerber noted, its a mere fraction of the Western-owned fleet flown by Russian operators.
And lessors hoping to quickly collect insurance on aircraft held in Russia are likely to be disappointed. The process will likely take “years” and be litigated, said Aircastle Chief Legal Officer Christoper Beers.
The silver lining for lessors is that Russia is a relatively small market globally. For comparison, China Southern Airlines — China’s largest airline — operated 878 aircraft, or just 17 more than the entire in-service Russian fleet, at the end of December.
Still, the economic and industry implications of Russia’s invasion of Ukraine will spread far and wide. The closure of Russian airspace to most major global carriers has disrupted many long-haul flights to Asia. Finnair, which relied on overflying Russia for much of its long-haul network, will operate flights to Shanghai, Seoul, and Tokyo with at least three hours of additional flight time when they resume later in March. That additional flight time burns more fuel, requires additional aircraft, and — if the ban on overflights endures — puts Finnair’s very business connecting European and Asia in jeopardy. Other carriers, including Nippon Cargo Airlines and United Airlines, have suspended select flights.
Lufthansa Group CEO Carsten Spohr on March 3 identified one benefit from avoiding Russian airspace: No overflight fees. He did not specify how much it paid Russia, but said the savings could offset the added fuel expenses from longer flights.
But the broader fallout is already evident. Oil and other energy prices have skyrocketed since the invasion. Brent crude stood at over $114 per barrel on March 11, up 47 percent since the beginning of the year, according to Bloomberg and U.S. Energy Information Administration data.
“It will act as a serious brake on global GDP [gross domestic product] if we sustain oil prices at this level,” said Geoff van Klaveren, managing director of advisory at aviation advisor IBA Group. This could force airlines to cut capacity and raise fares to adapt, and — more broadly — slow the travel recovery from the Covid-19 pandemic, he added.
Airbus Executive Vice President of Aircraft Leasing, Trading, and Financing Paul Meijers said at ISTAT that he now expects global air passenger traffic to recover by late 2024 or early 2025, or a year later than he forecast before the invasion.
“This crisis will be much more constrained [than Covid] but with a long tail,” said Beers.
Transat Completes Metamorphosis to National Carrier
Canada’s Transat has completed its rapid transformation from a travel company to a national airline, but is emerging from the pandemic to a rapidly changing Canadian airline market.
The Montreal-based carrier’s fleet renewal is complete. It is now solely an Airbus operator having eliminated its Boeing 737s and 757s to rely solely on A321s and A330s. It operates 29 aircraft today, down from 48 split among four different types just a year ago.
Transat will take delivery of two A321neos this year after having taken seven of the 10 it has on order. The balance are due by 2024. When deliveries are complete, Transat will operate 36 aircraft: 12 A330s, 17 A321neos, and seven A321s.
Transat is working the new aircraft hard, CEO Annick Guerard said last week. The carrier plans to operate 90 percent of its 2019 capacity this summer, but with eight fewer aircraft than it had then. Average fleet utilization will be 13 percent higher than it was in 2019, she said.
Much of this is possible thanks to the A321neo, whose operating economics are a match for Transat’s planned summer transatlantic schedule and its newly launched transcontinental flights to Western Canada. Moreover, given the aircraft’s efficiency, Transat currently is not worried about fuel-price volatility caused by Russia’s invasion of Ukraine. “This aircraft has never been more relevant or competitive.,” Guerard said.
But if fuel prices continue to rise, the carrier will raise fares, although no determination has yet been made. Transat has not hedged its fuel needs this year but will consider hedging if the current volatility continues.
Bookings for the summer are almost at the same pace now as they were in 2019, continuing the trend Transat first noticed late last year as Canada eased its travel restrictions. Bookings were strong in November and the first half of December, before turning negative in January and February due to the Omicron variant’s spread. The variant resulted in Transat cancelling 30 percent of its capacity in January and February. But Guerard said the trajectory has resumed, and in recent weeks outpaced 2019. “It is clear that our customers are impatient to travel and to make up all the time when we were forced to stay at home,” she said.
But as the carrier emerges from the pandemic, it’s finding its home market radically transformed. Transat itself — through its metamorphosis from a travel and charter company to a national airline — arguably kicked off this trend last year by announcing the divestiture of its hotels business. It has launched new transcontinental routes to California and Western Canada, and launched a codeshare with WestJet.
And just this week, the carrier announced a codeshare with Porter Airlines — itself planning to become a national carrier — on routes from Halifax and Toronto. This will increase feed into Transat’s transatlantic and transborder networks this summer, Guerard said.
Meanwhile, WestJet’s planned acquisition, announced earlier this month, of leisure carrier Sunwing has raised concerns in Montreal, Guerard said. “We expect a thorough examination of the important competition this raises. We do not see this as good news for customers,” she said, adding that the merger will result in “concentration” in Western Canada.
The merger, however, has so far not affected Transat’s codeshare relationship with WestJet, although Guerard said the carrier is reviewing potential effects. “We will see what’s going to happen in the upcoming months.”
Despite the pent-up demand Transat’s management reported, the booking curve remains very short. At this point in 2019, passengers were booking transatlantic travel for July-September. Now, Transat’s bookings are strong for May-June but have not matched 2019 for after June. “We have had to adapt over the last two years,” Guerard said.
The carrier is working to increase its brand awareness in its new markets. Now, about 30 percent of tickets on its California routes originate in the U.S. By comparison, 45 percent of bookings on its transatlantic flights originate in France and the UK.
Canada’s travel restrictions could hamper international demand. Consumers may not be aware that the country has reopened, or they may be scared off by testing requirements. Transat is putting pressure on the government to lift the antigen testing requirement for re-entry, Guerard said. The company has noticed demand for sun routes in particular is depressed by consumers’ fears of being trapped abroad for testing positive.
Despite the positive momentum, Transat lost money in the first quarter of its fiscal year that ended January 31. The carrier reported an adjusted loss of C$37 million ($29 million), compared with a loss of $54 million last year. Revenues were up sharply, to C$202 million, compared with C$42 million last year. The carrier recalled almost 700 furloughed employees in the quarter, to reach more than 2,700 workers, but Guerard warned that even when the recovery is complete, Transat expects to have far fewer employees than it did before the pandemic.
Connect Eyes Possible April Launch
U.S. startup Connect Airways could begin revenue passenger flights as soon as the end of April, said John Thomas, CEO of parent company Waltzing Matilda Aviation, at ISTAT Americas last week. The timeline — at least five months later than the late-2021 launch previously envision — follows the decision by the Air Line Pilot Association (ALPA) to drop its opposition to Connect’s application for a commercial air carrier permit.
Connect will initially fly between Toronto’s Billy Bishop Airport and both Chicago O’Hare and Philadelphia with two De Havilland Dash 8-400 turboprops. It will initially offer travelers interline connections to American Airlines, though Thomas said an expanded commercial agreement is planned but cannot be realized until Connect has final sign off from the U.S. Department of Transportation. He previously told Airline Weekly that the airline will focus on connecting U.S. travelers to Billy Bishop, which is adjacent to central Toronto.
Proving runs for the U.S. Federal Aviation Administration could begin as soon as the week of March 14 pending a DOT decision on Connect’s permit, said Thomas.
If successful, Connect would be the third U.S. startup since the Covid-19 pandemic began. Avelo Airlines led by former Allegiant Air and United executive Andrew Levy began flying last April, and Breeze Airways founded by serial airline entrepreneur David Neeleman took off a month later in May.
Ukraine War Roils Air Cargo
Air cargo’s long bull run during the pandemic took a bit of a hit in January and could face even greater challenges from now, IATA reports. Although cargo traffic continued to grow in January, it rose by under 3 percent year-over-year that month, compared with almost 10 percent in December. January was tough because the Omicron variant affected cargo carriers’ and airlines’ crew scheduling and operations, but the industry started to recover by the middle of February.
However, the outbreak of war in Eastern Europe poses an even greater threat. The closure of Russian airspace to airlines from most of Europe and North America is causing headaches as cargo flights are rerouted to the south and west. The longer flight times, coupled with surging fuel prices — up 27 percent so far since the start of the year — is making many cargo routes economically unviable, at least at current rates.
Most analysts believe the situation could right itself as cargo contracts come up for negotiation. But whether companies still will have the financial wherewithal to stomach higher cargo rates, already seen on the spot markets, remains to be seen. Moreover, the differential between maritime and air cargo rates, which fell to historic lows during the pandemic thanks to surface transport’s many snarls, could rise again, making shipping by air less attractive than it has been.
With that said, the war’s impact on maritime shipping is becoming clearer. Lufthansa CEO Carsten Spohr recently said ships around Europe were stuck at anchor as Russian and Ukrainian sailors left their posts. A week since Spohr’s remarks, the situation is more dire than he noted. Shipments bound for Russia re being delayed to determine if the contents of containers flout sanctions, leaving ships and containers out of place. In other words, the situation is expected to get worse.
AirBridge Cargo, operated by Volga-Dneper, has been banned from operating in the U.S. and the EU. The company is offering spare capacity on its Boeing 747Fs but sanctions could complicate payments. Similarly, Aeroflot Cargo is essentially grounded. The two companies combined provide more than 10 percent of the world’s air cargo volume.
The Ukraine war and the ensuing retaliatory sanctions could augur more trouble to come. IATA reported that some of its indicators of business confidence are falling for the first time since August 2020, and exports have followed suit.
In Other News
- Cathay Pacific Airways Chairman Patrick Healy has “absolute confidence” in the future of Hong Kong as a major airline hub, and the continuance of the airline as a going entity. His comments come as the Hong Kong government, under the direction of Beijing, maintains strict Covid-19 restrictions that have effectively closed the city to most visitors and barred most transit passengers — the lifeblood of Cathay’s hub — from Hong Kong airport. The airline will fly just 2 percent of its pre-Covid passenger schedule, and about a third of its cargo capacity until restrictions ease, said Healy.
Cathay lost HK$5.5 billion ($703 million) in 2021. Revenues, at HK$45.6 billion, were down 3 percent year-over-year and 57 percent compared to 2019. Cargo was the airline’s only bright spot and, with the restrictions, not that bright coming in down 11 percent year-over-year at HK$10 billion. Passenger traffic was just 3 percent of 2019 on capacity of just 8 percent of two years earlier. Cargo traffic came in at 46 percent of 2019 levels.
Cathay ended 2021 with 193 aircraft, of which 37 percent are parked outside of Hong Kong. And, despite being all but grounded, the airline expects 11 aircraft deliveries in 2022, including eight Airbus A321neos and three Airbus A350-1000s. Cathay returned five aircraft to lessors as they came off lease in January and February.
- Latam Airlines Group‘s loss more than doubled to nearly $2.8 billion in the fourth quarter from a year earlier. The jump was due to the “valuation allowance of deferred tax assets” and restructuring expenses, according to the airline that is operating under U.S. Chapter 11 bankruptcy protection. Revenues were down 30.5 percent to $2 billion and expenses 23.7 percent to $1.9 billion year-over-two-years during the December quarter. However, Latam’s capacity recovery continued with the airline flying 63.5 percent of its 2019 capacity mostly in its domestic markets in South America. For the full year, the airline lost $4.6 billion on revenues of $5.1 billion.
Latam did not provide guidance for 2022. However, in a separate note to the U.S. Securities and Exchange Commission, it requested an additional $300 million from its $3.2 billion in committed debtor-in-possession (DIP) funding. The request was due to the “extension of the health and travel restrictions” by various countries, according to the filing. Latam had $1.25 billion available under its DIP facilities at the end of December.
- ANA’s stable has a new horse! The Japanese group is launching. a new airline, AirJapan, which is expected to begin operating in the second half of fiscal 2023. The new carrier will fly Boeing 787s on medium-haul international routes, ANA said. The group has not disclosed initial routes or cabin configurations, but said AirJapan will be neither a low-cost-carrier nor a full-service airline, but ANA suggested that the fares and cabin products will be unbundled.
- And then there were three. Air France-KLM and Delta Air Lines, and private equity firm Indigo Partners have separately expressed interest in stakes in ITA Airways, according to reports out of Italy. While specifics are unknown, Delta CEO Ed Bastian said in October that they were interested in a strategic partnership with the Italian carrier and in regular “conversations.” And Indigo-owned Wizz Air has keen interest in expanding in Italy, which CEO József Váradi has described as an “investible” market. A partnership of the Lufthansa Group and shipping giant MSC Global previously expressed interest in investing in ITA.
- United Chief Financial Officer Gerry Laderman said at ISTAT that the combination of Covid, the war in Ukraine, and the dramatic run up in fuel was without precedent for the airline industry. The mix could have serious implications for the summer recovery if high fuel prices stick around, he added, though at that time the airline had not seen any change in demand. Historically, United has been able to pass along 60 percent of a fuel price rise to travelers through higher fares. It generally takes three to four months to do so, however.
- Elected U.S. officials are beginning to raise concerns about the proposed merger of Frontier Airlines and Spirit Airlines. A group of eight progressive legislators in Washington, D.C., led by Senator Elizabeth Warren (D-Mass.) and Representative Mondaire Jones (D-N.Y.) last week sent a letter to the heads of the justice and transportation departments raising competitive concerns about the proposed combination. They asked for increased scrutiny of the deal claiming that it could result in higher airfares, worse customer service, and collusion in the industry.
And in Colorado, Frontier’s home state, Attorney General Phil Weiser sent his own letter to Transportation Secretary Pete Buttigieg asking him to consider additional consumer protections as the agency evaluates the deal. He cited Frontier’s history of poor customer service for his request.
- Southwest Airlines wants to build seven new gates at Houston’s Hobby Airport to support its future growth there. The project, which is estimated to cost $250 million, would expand the airport’s West Concourse that first opened in 2015 to support Southwest’s international expansion. The airline would have preferential use of six gates, while the seventh would be a common-use gate controlled by the airport. Southwest and the airport operator, the Houston Airport System, plan to further define the project and seek final city approval by year-end.