U.S. Airlines Largely Unfazed — For Now — by Oil Prices

Edward Russell

March 21st, 2022

U.S. airline industry executives largely brushed off concerns that rising oil prices will put a dampener on their still-nascent recovery from the Covid-19 pandemic, confident in the resilience of summer demand to absorb higher fares.

In the immediate aftermath of Russia’s invasion of Ukraine last month, oil surged to more than $130 per barrel, breaking through the $100 per barrel threshold for the first time since 2014. Speculation in the early days of the Russian campaign ran rife that the surge would continue and oil prices could reach $200 per barrel or more if Russian supply — 10 percent of the world’s daily consumption — were to go offline.

But in the weeks since the invasion began, oil has floated back closer to earth. On March 15, prices for both Brent crude and West Texas Intermediate were hovering under the $100 a barrel threshold, with some analysts forecasting even more slippage as the market adjusts to its new reality. The factors informing the lower prices are many. Some oil-producing countries, like the United Arab Emirates, have signaled they will increase production. A new Covid lockdown in China is reducing demand for oil in that country. Energy traders have been loath to buy Russian crude — now trading more than $25 lower than Brent — for fear of falling afoul of sanctions, and that oil is finding new markets elsewhere in the world. And Iran and Venezuela could see sanctions eased, bringing their considerable reserves back online.

Meanwhile, demand for summer travel in the U.S. is soaring, based on advance ticket sales. Some carriers, including Alaska Airlines and JetBlue Airways, intend to fly as much if not more than their 2019 capacity this summer in response to surging demand. U.S. airline executives speaking at Wall Street conference believe the strength of demand, especially after the Omicron variant receded, will give them the flexibility to pass on higher fuel costs to passengers. They warn, however, that the situation remains fluid: The war could cause further price spikes, or a new coronavirus variant could stifle travel.

But from what they are seeing now, executives believe the rise in fares will be minimal. One way fares could rise $15-20, Delta Air Lines President Glen Hauenstein said at a J.P. Morgan conference on March 15. Summer demand is expected to be “robust,” and Delta thinks it will need to raise fares less than 10 percent to recapture higher fuel costs, he added. “We are very, very confident in our ability to capture over 100 percent of the fuel price run up in the second quarter, and probably over the summer.”

This increase is in line with what United Airlines is predicting. Chief Commercial Officer Andrew Nocella believes fares will rise less than 10 percent this summer to cover the rising cost of fuel. Fares lag the spot prices for fuel by a few weeks for domestic travel and by a month of so for international travel. “So far, we’re not seeing any demand destruction [due to higher ticket prices,” Nocella said. “And demand is really high right now and we’re bullish about the future, especially the next six months.”

American Airlines CEO Doug Parker was even more direct. “We can make money at oil prices of $100 [per barrel] or higher,” he said. The carrier, like United and Delta, is moderating near-term capacity, but this has as much to do with delayed aircraft deliveries from Boeing and staffing problems as it does with fuel prices, he added.

Southwest Airlines Chief Financial Officer Tammy Romo and JetBlue CEO Robin Hayes also attributed lower first-half capacity to staffing issues, rather than fuel. Hayes added that the carrier’s fare increases due to fuel will be “a little lower than Delta’s,” but he added the carrier is “extremely bullish” about its ability to recapture fuel increases as fares in the short- to medium-term.

Unlike the other airlines, Southwest hedges much of its fuel needs, and when oil hits $100 per barrel, the Dallas-based airline could reap up to $0.53 per gallon of jet fuel in the second quarter, and its gains only go up from there, Romo said. For the full year, the gains would be in line with the second quarter, if oil prices remain elevated. The carrier is 37 percent hedged for next year, and 14 percent hedged for 2024. “We are in a great position this year,” she said.

Alaska also hedges, but only about half of its needs, which gives the carrier the flexibility to ride out volatility in the oil markets without affecting is capacity plans, Chief Financial Officer Shane Tackett said. “This has always been about buying ourselves a little time,” he said, referring to the carrier’s hedge program. “We are in a good position for the next three or four quarters.”

Alaska plans to increase its capacity this summer to 2019 levels and still expects to be a larger airline by the end of this year than it was at the end of 2019, despite the surge in fuel prices, Tackett added. But he warned: “If fuel prices stay high for the next year, our advantage falls away.”

Madhu Unnikrishnan

Gol Stands to Benefit From Higher Oil Prices

Gol is optimistic about 2022, betting that high commodity prices coupled with capacity discipline in Brazil will accelerate its financial recovery to at or above pre-pandemic levels.

The optimism is somewhat counterintuitive outside of Brazil. Despite quickly recovering travel demand, airlines in Europe and North America face surging fuel prices and future uncertainty owing to Russia’s invasion of Ukraine in February. However, in Brazil where commodities — including oil — are a large portion of the economy, high oil and other commodity prices have historically translated to strong corporate demand for the country’s airlines.

Gol already sees bookings in line with 2019 levels in March, April, and May, said Chief Financial Officer Richard Lark during the airline’s fourth-quarter earnings call on March 14. However, yields for those bookings are roughly 30 percent higher than three years ago, and predominantly from leisure travelers. This indicates to Gol, which historically has carried a greater percentage of business travelers than holidaygoers, that there is significant yield upside as road warriors return.

Corporate travel was at 65-70 percent of 2019 levels in the fourth quarter, and is forecast to recover to 80-85 percent by the second quarter, Lark said. And that corporate recovery has largely occurred without Brazil’s big commodity companies, including Petrobras and Vale, which suggests a significant business travel upside if commodity prices remain high.

The bullish outlook comes as airlines taper capacity plans in Brazil. In an update released March 14, Gol pulled down its 2022 capacity forecast by 5 percentage points to up 65-75 percent year-over-year on expectations of a 30 percent year-over-year increase in fuel expanses. The airline flew just 41 percent of its 2019 capacity last year; however, that number stood at 67 percent in the fourth quarter. Gol’s outlook includes resuming U.S. flights in May, including between Brasilia and both Miami and Orlando, and Fortaleza and Miami.

Speaking at a Raymond James investor conference on March 7, Azul Chief Financial Officer Alex Malfitani said the carrier was likely to cut second quarter capacity as a result of high fuel prices. He echoed Lark forecasting improving corporate demand in the country. Azul is the largest airline in Brazil.

“The name of the game now is capacity management,” said Gol CEO Paulo Kakinoff.

Gol remains focused on its other corporate initiatives this year. Top of mind is fleet: The airline plans to take delivery of 21 Boeing 737-8s in 2022, and end the year with 44 of the latest-generation aircraft. Of those deliveries, 12 are financed under a $600 million deal with Castlelake that includes 10 finance leases and two sale-and-leasebacks. Gol intends to return 20 737-700s and -800s to lessors as the new Maxes arrive, which resulted in a one-time 1.6 billion reais ($313 million) net charge in the fourth quarter.

The fleet update will drive an 8 percent reduction in unit costs — including fuel — from the shift to more fuel-efficient Maxes from older 737s, said Lark. In addition, the new aircraft will add some incremental capacity as they replace some smaller 737-700s.

Gol forecasts net revenues of 13.7 billion reais in 2022, or nearly the 13.9 billion reais it brought in in 2019. And an earnings before interest and taxes margin of 10 percent, or 5 points lower than in three years earlier.

In the fourth quarter, Gol lost 2.8 billion reais on 2.9 billion reais in revenues. Passenger unit revenues were up 17 percent and unit costs excluding fuel 68 percent jumped year-over-two-years. Passenger traffic was down nearly 33 percent compared to 2019.

Gol lost 7.2 billion reais on 7.4 billion reais in revenues in 2022.

Edward Russell

Arajet Plots Ambitious Central and North American Network

Startup Arajet has ambitious plans to knit the Caribbean together from its home base in the Dominican Republic, and eventually connect Central America and North America over Santo Domingo.

The hill ahead of it is steep. Airlines with similar ambitions have long struggled — like Antigua and Barbados-based Liat and Air Jamaica. Yet, the market is a prime opportunity for airlines: Few transportation options besides air travel exist between the islands. Tourism is a major economic driver for the region. And diaspora populations in North America and Europe are a perennial source of air traffic.

It is this latter market that Arajet founder and CEO Victor Pacheco. “We’ll predominately go into the diaspora market in North America,” he told Airline Weekly. “As we make sure they’re choosing Arajet, we’ll expand into the leisure and tourism markets.” More than two million people of Dominican descent live in the U.S. alone.

Pacheco founded the airline after a career in financial services. He is joined at the top by Mike Powell, the former chief financial officer of Wizz Air. Griffin Global Asset Management and Bain Capital are providing the financing for the new airline, but Pacheco did not elaborate on the amount of startup financing coming from the two firms.

But before it can execute on that strategy, Arajet needs regulatory clearance to fly. The carrier is in the process of getting its safety permits from the Dominican government, and once that’s secured, it can apply for a foreign air carrier permit from the U.S. Transportation Department. Pacheco believes Arajet will begin selling intra-Caribbean flights this spring, but he could not pinpoint a date for the carrier’s launch.

The intra-Caribbean market is the second prong of Arajet’s strategy. The market is poorly served — it can be easier to connect in Miami or even Europe when flying between islands in the Caribbean — but is plagued by high costs and fares. The carrier can’t lower the region’s high taxes and fees, Pacheco said, but it can lower fares. Airlines in the Caribbean typically have been full-service, catering more to tourists than residents. Arajet will offer a fully unbundled fare, reliant on ancillaries, in the vein of Volaris. Lower fares will stimulate demand, he said. “We are not looking to cannibalize existing carriers’ business,” he said. “We’re looking for new travelers.”

The third market Arajet is aiming for is connecting Central America, North America, and the Caribbean through its hub in Santo Domingo. This is a more crowded market, with carriers like Volaris in Mexico and Copa in Panama already offering low-fare connections between North and Central America. But Pacheco believes Santo Domingo offers a geographic advantage over hubs in Panama or Mexico. Flights via Santo Domingo could be as much as 20 percent shorter, which translates into less fuel burn and lower fares than competitors, he said.

Arajet placed an order for 20 Boeing 737-8-200, the 737 Max-family’s high-density aircraft also flown by Ryanair. These aircraft begin arriving in April 2024. Arajet also has options for 15 additional Maxes, but hasn’t determined which variant.

Until then, the carrier will turn to the spot leasing market for lift. It took delivery of its first 737-8 from Griffin last week. The second aircraft joins the fleet in April, on more in May, and two arrive in June. These first five aircraft will comprise Arajet’s fleet this year. It plans to turn to other lessors for six additional aircraft through next year. If it exercises all its options, Arajet will have a fleet of 46 aircraft later this decade, Pacheco said.

“It’s a pretty ambitious startup,” Pacheco admitted. “But we’ve seen the void in the market.”

Madhu Unnikrishnan

Fly Jinnah Launches as Newest Private Carrier in Pakistan

Pakistan’s airspace is set to get crowded as Fly Jinnah, a proposed low-cost carrier, prepares to take wing this year. The airline is a joint venture between Air Arabia Group and Lakson Group, one of Pakistan’s leading and most diversified business conglomerates.

“Fly Jinnah will benefit from the experience of Air Arabia, which is its minority stakeholder,” an aviation expert from Pakistan said. “It will be essentially a low-cost airline, just like its partner.

“The airline will begin operating domestically with three leased [Airbus] A320 aircraft and will gradually expand to international routes after a year of successful domestic operations following the addition of aircraft,” the insider said.

Having received a regular public transport license for the operation of passenger and cargo services in July 2021 from the Pakistan Civil Aviation Authority, the start-up airline aims to secure its air operator’s certificate in June, after which it will soon commence domestic services.

The airline has already commenced recruitment drives for cabin crew in Karachi, Islamabad, and Lahore.

Fly Jinnah will be Pakistan’s fourth private airline after Serene Air, Air Blue and Air Sial. The latest entrant – Air Sial, debuted in late 2020 and is currently operating domestically with plans to fly to the Middle East at a later date.

However, except for Air Blue, none of the other airlines are in good shape because of the pandemic and the raging competition, the expert said. The entry of Serene Air in 2017 saw Shaheen Air, Pakistan’s second-largest airline, fold after almost 24 years of operation.

“While the state-owned Pakistan International Airlines, along with Shaheen Air and Air Blue (launched in 2004), had been making a lot of money on domestic routes, the entry of Serene Air in 2017 proved to be a disaster for all,” the expert said. “Fly Jinnah will intensify the already stiff competition, which will benefit the consumers, but may prove to be detrimental to incumbent players and may even drive out a couple of them before the entry of Q-Airlines.”

Q-Airlines, the second carrier waiting in the wings, is a proposed charter that has just received a regular public transport license. The airline is expected to take at least one year to acquire its air operator’s certificate. It will then be the fifth private carrier to enter the market, probably around 2023.

“As excessive capacity floated on domestic routes at one point, India’s domestic growth touched a staggering 20 percent, but at the cost of investors. The industry lost about $10 billion in a decade by selling below cost. Mergers and bankruptcies were the logical outcomes for these airlines. A similar situation could be expected here in Pakistan,” warned the aviation expert while drawing parallels with the neighboring Indian market.

Passengers ferried by Pakistan’s domestically-owned airlines stood at 7.4 million in 2019, while in 2020 the number was 3.7 million. This number had peaked in 2016, before the entry of Serene Air, when the airlines had carried a maximum of 9.63 million passengers.

Aviation has often served as a catalyst for economic growth. Countries in Asia and the subcontinent are looking at the sector to support domestic and international connectivity while creating jobs.

“Fly Jinnah will not only serve Pakistan’s aviation industry, but will also aim to contribute to the country’s infrastructure, tourism, business travel, and the creation of new jobs,” the airline’s chairman, Iqbal Ali Lakhani, had been quoted as saying in a press statement. “The airline will be a catalyst to the country’s economic growth.”

Peden Doma Bhutia

In Other News

  • If at first you don’t succeed, try, try again? International Airlines Group has agreed to loan Globalia €100 million ($111 million) for a seven-year term. However, the debt is convertible to an up to 20 percent stake in Air Europa, which Globalia owns and IAG dropped plans to acquire in December following competition concerns raised by European regulators. The deal appears a backdoor approach for IAG to build a stake in — and maybe eventually acquire — Air Europa, which CEO Luis Gallego said remains important to “the development and competitiveness of Madrid’s hub.” IAG has the right to match any third-party offer for Air Europa for three years, per the agreement.
  • The holiday season was good for FedEx. The cargo carrier reported its best peak season in its history. But Omicron quickly rained on FedEx’s party. The company suffered from staff shortages — as much as 15 percent of its workforce was out any given time during the surge — and staffing challenges at its customers’ operations. These resulted in a $350 million hit to the company’s earnings in its most recent quarter.

    Still, FedEx reported net income of $1.1 billion in the most recent fiscal quarter, on $23.6 billion in revenues, or $2 billion more than in 2021. The company continues to benefit from the drop in passenger flights to Asia, which means there’s less belly-hold capacity to compete with, Chief Marketing Officer Brie Carere said. But macroeconomic factors, including the war in Ukraine, the pandemic, labor shortages and supply-chain disruptions, and rising inflation and energy prices, concern FedEx in the near- to medium-term.
  • Aeromexico exited U.S. Chapter 11 restructuring on March 18. Marking the occasion, CEO Andres Conesa said the airline will “continue to streamline our company to become even more sustainable, resilient, and competitive, but we will also significantly expand our network and fleet.” Aeromexico cut roughly $1.1 billion in debt and achieved roughly $605 million in annual cost savings through its restructuring. During the process, it signed agreements for 41 new Boeing 737 Max aircraft as well as additional Boeing 787s.
  • New Zealand is beginning to reopen to visitors after a two-year coronavirus slumber. The country will reopen to vaccinated Australian travelers on April 12, and to visitors from other countries, including the UK and U.S., on May 1. The news has at least Qantas and its subsidiary Jetstar Airways adding flights: the duo will jump to 30 daily flights from two to Auckland and Christchurch beginning April 13. The airlines plan to add more frequencies in May and June, including a return to Queenstown and Wellington.
  • Canada, the UK, and France are among the countries that have eased their Covid-19 travel restrictions. The UK went furthest, dropping all pre- and post-arrival testing. France is allowing unvaccinated travelers from the U.S. to enter the country, provided they show proof of a negative PCR test. And Canada is dropping its pre-departure testing requirement for vaccinated travelers.
  • Icelandic startup Play plans to implement a fuel surcharge to combat the run up in oil prices since Russia’s invasion of Ukraine in February. The budget carrier will use the surcharge and additional operational efficiencies to counter the additional roughly $10 million in annual fuel expenses it anticipates. Besides the additional expenses, Play CEO Birgir Jónsson said demand is strong in a statement on the airline’s 2021 results. “Our new destinations have been very well received and I believe that we are expanding our network and operation at precisely the right time as the demand in the market increases,” he said. Play lost $22.5 million on $16.4 million in revenues last year; revenue flights began in June.
  • Citing the war in Ukraine and high energy prices, startup Norse Atlantic Airways has delayed its launch to June from earlier in the second quarter. The airline also delayed the start of ticket sales by a month to April. Norse will initially connect Oslo to three U.S. markets: Fort Lauderdale, New York — either JFK or Stewart airports — and Ontario, Calif. In addition, the carrier’s plan to begin transatlantic flights from London moved forward with the allocation of an undisclosed number of slots at Gatwick Airport.

Edward Russell & Madhu Unnikrishnan

Edward Russell

March 21st, 2022