American Mainline Takes a Pilot Shortage Hit

Madhu Unnikrishnan

April 25th, 2022

There are two main issues limiting American Airlines schedule this summer: staffing and fleet. The mainline carrier will fly several points less capacity than it would like due to these concerns despite robust demand that executives say will flip it to the black in the second quarter.

While the Fort Worth, Texas-based carrier has acknowledged a negative impact from the well-documented U.S. pilot shortage since last fall, the situation has apparently worsened. No longer is it only limited to American’s regional operations but it is also constraining its mainline schedule.

The airline has exceeded its pilot hiring target with 600 hires to date in 2022, American CEO Robert Isom said during a first-quarter earnings call on April 21. However, a bottleneck getting those crew members trained and certified means the carrier will fly less than it wants through the end of the year.

“We have the supply coming in, [but] the school house is really running at full speed here,” American Chief Operating Officer David Seymour said.

American is the only one of the U.S. Big 3 — itself plus Delta Air Lines and United Airlines — to acknowledge pilot staffing issues at its mainline operation. Smaller carriers, including Alaska Airlines and JetBlue Airways, as well as the regional airlines that fly for the Big 3, have acknowledged a shortage and trimmed flights this summer as a result.

“We’re ready for the summer, and we have sized the airline for the resources we have available,” Isom said when asked about staffing issues, including of pilots. American has reduced its full-year capacity outlook to down 6-8 percent compared to 2019, from a January forecast of down roughly 5 percent.

American regional operation, American Eagle, has taken the biggest hit from the pilot situation. Departures will be down roughly 20 percent year-over-three-years in the second quarter compared to a 5 percent decline for the airline’s mainline operation.

The other big limiter of American’s schedule are aircraft delivery delays at Boeing. The airline has not received a new Boeing 787 since April 2021, when the planemaker halted deliveries due to Federal Aviation Administration quality concerns. American received only one of 19 787s it expected in 2021 and, now, Chief Financial Officer Derek Kerr said it will only receive seven this year with the balance arriving in 2023 and 2024. The delivery delays forced American to cut some international flying this summer, and end service to Hong Kong.

The airline ordered 30 more Boeing 737-8s in February to help make up for the shortfall in widebody aircraft. However, those Maxes will not begin arriving until 2023.

American’s recovery outlook is downright bullish despite the constraints. The carrier forecasts its first quarterly profit since the pandemic began in the second quarter. It also expects total revenues to increase 6-8 percent compared to the same period in 2019.

Leisure travelers continue to drive that recovery thought corporate flyers, who have largely sat out the recovery until now, are coming back in force. Over the course of the first quarter, domestic corporate revenues increased to 85 percent of 2019 levels in March from half of three years ago in January. American anticipates business travel revenues will recover to 90 percent of pre-pandemic levels in the second quarter.

“The gap between 90 and 100 [percent] is really due to long-haul international demand and certain pockets of domestic demand. But we’re continuing to see demand come in,” Raja said when asked about the business recovery.

Long-haul international demand had recovered to 60 percent of 2019 levels in March, Isom said. However, overall international passenger capacity will fully recover in the second quarter driven by the addition of flights to nearby destinations, including the Caribbean and Mexico. System capacity is forecast at down 6-8 percent year-over-three-years in the quarter.

Executives did not express significant concerns about a new Covid wave, nor of any fallout from the war in Ukraine or other geopolitical events. In terms of the higher fuel expenses from more than $100 per barrel oil, Kerr said American is confident that it can pass on the added costs to travelers through higher ticket prices.

American, like Delta, saw an inflection point in demand occur in March. After losses in January and February executives attributed to the Omicron surge, the airline turned a profit in March on “surging demand brought on by reduced infection rates, relaxed restrictions and tremendous pent-up demand,” as Isom put it.

American posted a net loss of $1.6 billion in the first quarter. Revenues were $8.9 billion, down just 16 percent from 2019. Unit costs excluding fuel and special items — a metric that measures an airlines’ costs — was up 13 percent year-over-three-years. Average fuel prices, however, jumped 18 percent to $2.80 per gallon in the first quarter from the fourth quarter.

The airline flew 19 percent less passenger traffic on nearly 11 percent less capacity in the first quarter compared to 2019.

In the second quarter, American forecasts a 3-5 percent pre-tax margin. Unit costs excluding fuel will remain elevated with an 8-10 percent year-over-year increase. And fuel expenses are forecast to jump at least another 28 percent compared with the first quarter.

Edward Russell

United to Return P&W-Powered 777s to Service

United will see a massive capacity boost this year when its 52 sidelined Boeing 777s return to service.

The carrier plans to return the Pratt & Whitney-powered 777-200s to its active fleet gradually throughout the year, as soon as the FAA signs off on approved fixes to the engines. The fleet was grounded in February 2021 after an uncontained engine failure over Denver. United said it is pleased with the progress it has made with the engine-maker and airframer on the proposed fixes.

The 777s are central to United’s upgauging strategy, CEO Scott Kirby told investors on April 21. Through these aircraft, and with additional 787s and new Airbus A321neos, United aims to increase its gauge by 30 percent by 2026, he said. Upgauging will drive CASM-ex down.

The timing of United’s upgauging is fortuitous. The carrier forecasts torrid demand in the second quarter, with gains seen in all parts of its network, except for Asia-Pacific. Even there, however, management was encouraged by the uptick in demand for flights to Australia and South Korea as soon as those countries lifted their travel restrictions. Domestic leisure forward bookings are robust, and near Latin America is performing well. And the carrier is anticipating “record” transatlantic demand, Chief Commercial Officer Andrew Nocella said.

United is virtually licking its chops in anticipation of summer. The airline expects unit revenues to be 17 percent higher in the second quarter than in 2019. The recovery has already begun: Unit revenues in March were 9 percent than three years ago, Nocella said.

Even with the pilot shortage, United does not anticipate any dearth of aviators. The carrier plans to hire 200 pilots per month this year. But the shortage will be felt most acutely by smaller and mid-size airlines. “The pilot shortage is real,” Kirby said. “Most airlines will not be able to realize their capacity plans because there simply aren’t enough pilots, at least not for the next five years.”

Not that United is immune. Its regional affiliates are struggling to hire pilots. This is limiting United’s ability to broaden its network to many small and mid-sized cities.

At the outset of the pandemic, United, with its reliance on business travel and huge network in Asia, was uniquely battered among the major airlines. But it retooled its network to increase flights to domestic leisure destinations, particularly in Florida. Now, with Asia reopening and business travel returning, United believes it is uniquely positioned to take advantage of the recovery.

To illustrate this, Nocella noted that business travel was 30 percent lower than in 2019 during the first quarter, but in March was only 20 percent lower. The airline sees “considerable upside” in business travel as offices reopen, particularly in San Francisco, where United has a hub. Tech companies have lagged other industries in returning to business travel, but Nocella sees signs that even United’s tech corporate accounts are putting workers back on the road. “We are bullish on business,” he said.

Kirby was even more positive. “There has been a structural change in travel,” he said. “Once people get back to traveling, you realize how much you missed it. It’s not just pent-up demand … We are social creatures and we need to be with others,” he said.

“I happen to believe we will surpass [2019] on a permanent structural basis,” he added. “But that’s just one guy’s opinion.”

Despite all the optimism, United spilled more red ink in the first quarter. The carrier reported a $1.4 billion adjusted net loss on $7.6 billion in operating revenue, down 21 percent from 2019. This generated a pre-tax margin of negative 23.2 percent. There were some bright spots. Cargo, for example, generated $627 million in revenue, up 119 percent from 2019. United believes cargo yields will remain strong in the near term and that it will have enough belly-hold capacity to meet demand, even as it scales back cargo-only flights.

In the second quarter, United anticipates operating margins of 10 percent. The airline expects to be profitable for the full year.

“We are in the first inning of the recovery,” Kirby said. “That’s why just barring something bad happening in the world, in 2023 getting to 2019 margin levels seems pretty easy.”

Madhu Unnikrishnan

Big Jump in Tech Bookings at Alaska Airlines

Tech companies are making a big return to business travel, with Alaska Airlines and others reporting a significant uptick in corporate bookings in recent weeks.

“There’s just been this material, as in a 50-point change, in booking levels for some of these big [tech] guys in the last few weeks,” Alaska Chief Commercial Officer Andrew Harrison said during the airline’s first-quarter earnings call on April 21. He did not name names but given Alaska’s headquarters in Seattle and hub in San Francisco, these companies likely include industry heavyweights like Amazon, Facebook, and Microsoft.

The return of these corporate flyers is very good news for the industry. The business travel recovery as a whole has lagged behind leisure flyers, who have come back in droves since the summer of 2020. But although holidaygoers and those visiting friends and relatives have helped fill aircraft, they have done so at lower fares than are typically paid by road warriors. This has made the return of corporate travel one of the biggest watched items for airlines, and the return the big tech firms a significant hurdle for carriers like Alaska and United, which rely heavily on demand in the major tech hubs.

Roughly 70 percent of 2019 corporate demand has returned, Alaska CEO Ben Minicucci said. This compares with the already fully recovered leisure segment at the airline. And Harrison said the return of business travelers helped drive yield improvements in the first quarter, when they rose to up 9 percent in March compared with three years earlier from an average of up 3.5 percent across the entire three-month period.

Alaska’s new codeshare with American and membership in the Oneworld alliance have “opened up a lot of doors” for new corporate customers, Harrison said. However, he could not say how much this benefitted Alaska in the first quarter, and said he anticipated a clearer view by the September quarter.

But even as road warriors return, staffing constraints have put the brakes on Alaska’s recovery. The airline plans to fly 6-9 percent less passenger capacity than in 2019 during the second quarter, and revised down its full-year capacity outlook to flat to down 3 percent year-over-three-years from up 1-3 percent just a month ago. The main issue is pilot staffing and training that bubbled over into a higher number of flight cancellations at Alaska earlier in April.

“It’s a question of how we get the pilots through the schoolhouse, and out on the line,” Minicucci said. Alaska is meeting its target of hiring 600 mainline pilots and a “couple of hundred” for its regional subsidiary Horizon Air this year, he added.

Alaska is confident in the supply of new pilots, Minicucci said. The airline has roughly 500 trainees working through in its existing pipeline, which includes the recently opened Ascend Pilot Academy flight training school and other pathway programs. In addition, Alaska backs efforts by Airlines for America (A4A), the Regional Airline Association (RAA), and other trade groups to boost federal financial assistance for pilot training.

“Now, you have to take destiny into your own hands,” Minicucci said of airlines’ pilot supply efforts.

Alaska reported a net loss of $143 million in the first quarter. Revenues were down 10 percent to $1.7 billion on a nearly 2 percent increase in expenses to $1.9 billion compared to 2019. Executives attributed the increase primarily to $75 million in charges related to the early retirement of Alaska’s Airbus A320s and A321neos, as well as higher labor costs. Unit revenues increased less than 1 percent year-over-three-years on a 17 percent increase in unit costs excluding fuel. Alaska paid an average of $2.62 per gallon for fuel in the first quarter, up 16 percent from the fourth quarter.

Looking ahead, Alaska maintains its forecast of profits in the second quarter and for the full year. Total revenues are forecast to increase 5-8 percent compared to 2019 in the second quarter, though unit costs excluding fuel are expected to jump 16-19 percent year-over-three-years. Fuel expenses are forecast to rise at least 14 percent from the first quarter.

Edward Russell

Play Realizes Transatlantic Ambitions

After arriving on Play‘s first flight to the U.S., CEO Birgir Jónsson paused to relish the moment. The inaugural flight, to Baltimore-Washington from the startup airline’s Reykjavik hub, was the realization of its business strategy: To offer budget-focused hub-and-spoke network connecting both sides of the Altantic.

“We have always had our sights set on today,” he said the Baltimore airport gate area on April 20. “This is the day we connect the transatlantic over Iceland.”

The discounter, essentially a reboot of defunct Wow Air, has its work cut out for it. Its first U.S. flight was just over half full — 100-plus passengers on a 192-seat Airbus A321neo — and load factors still lag several points below the 72 percent target it set for 2021. The airline filled 66.9 percent of its seats in March, the latest data available. But with the Baltimore launch, which is soon to be followed by Boston in April, and New York Stewart in June, Play will start funneling planned-for feed into its previously Europe-centric network.

“In May or June we will fly as many passengers in one month like we did the whole of last year. We are seeing a healthy growth in utilization and load factor,” Jónsson said in an interview ahead of the launch flight. Play forecasts a profit in the second half of 2022.

Play is one of a new crop of long-haul, low-cost startups with their eyes on the transatlantic. Norse Atlantic Airways plans to begin flights between its Oslo base and three U.S. destinations by the end of June with former Norwegian Air Boeing 787s. Both Play and Norse follow in the footsteps of failed predecessors. Play embraces its likeness with Wow, while Norse distances itself from Norwegian Air’s former long-haul operation, which it increasingly mimics.

The startups enter a competitive marketplace where network carriers are piling on flights for the summer. Industry capacity between Europe and North America is scheduled to be down nearly 11 percent in the third quarter compared with 2019, according to Cirium schedule data. The decline is significantly less than the 38 percent to Asia and 23 percent to South America, but slightly more than the 9 percent to Africa.

But the odds are long for Play. No long-haul, low-cost carrier has ever succeeded flying the transatlantic. Norwegian Air and Wow Air both failed, as did their predecessors dating all the way back to Laker Airways‘ Skytrain in the late 1970s and early 1980s.

Covid, high oil prices and inflation, and the war in Ukraine are all added obstacles for Play. Concerns that Jónsson is relatively unconcerned about.

“If you’re going on holiday, you’re not going to abort your summer vacation if you have to pay $30 more for the airfare, especially if you’re going transatlantic,” he said. “In actual fact, the way consumers behave, it’s the price of a beer.”

The beer in his analogy is equivalent to added fuel expenses that Play estimates it needs to recoup since oil prices spiked after Russia’s invasion of Ukraine in February. And even then, Jónsson said, the airline’s estimates were made in March when Brent crude prices were over $120 per barrel. Brent now hovers just over $105 per barrel.

For its U.S. launch, Play sees roughly 70 percent of bookings coming from American travelers. This balance is unusual for European carriers that tend to see higher points-of-sale in Europe than the U.S. Jónsson said the majority of these bookings are for travel onto Europe rather than to visit Iceland.

Stewart, Play’s New York-area gateway, is something of an out-of-the-box move given the airport’s nearly 70-mile distance — or a nearly hour-and-a-half drive — from Midtown Manhattan. Jónsson said the airline got “a lot of raised eyebrows” for the decision. Given Stewart’s large catchment of suburban New Yorkers and Play’s connections into Europe, he was confident in the market. This is in contrast to the failed point-to-point flights that Norwegian Air tried at Stewart from 2017-19.

Play already is looking at growth beyond the upcoming summer season. The airline has announced three cold weather destinations — Geneva, Liverpool, and Orlando — for travelers looking for escape during the winter months when east-west transatlantic demand is historically at its lowest.

As for Orlando, which is Florida’s busiest airport and a leisure destination in its own right, a new rail link to South Florida that is due to open by the end of the year or in early 2023 influenced Play’s air service decision. The airline is one of the first to publicly acknowledge the role that Brightline played. Brightline is the first intercity rail link in the U.S. that actually stops in an airport terminal.

“The big thing is by landing at [Orlando] you have the best connection to many points of interest in Florida through this train line,” said Jónsson, who added that Play considered multiple Florida destinations before selecting Orlando. Brightline will initially connect the airport to West Palm Beach, Fort Lauderdale, and Miami, but is planning an extension to Disney World and Tampa in the coming years.

Edward Russell

In Other News

  • It’s finally happened. The Oneworld alliance has suspended Russia’s S7 from the group. The carrier and Oneworld said the suspension was a mutual decision based on S7s inability to operate international routes, due to Western sanctions on Russia stemming from its invasion of Ukraine. Earlier, Oneworld had allowed members to decide whether to continue their partnerships with S7.
  • Japan Airlines has revised down its financial guidance for the fiscal year that ends in March. The carrier now forecasts revenues of ¥682 billion ($5.3 billion), compared with earlier guidance of ¥766 billion, an 11 percent decrease. The carrier attributes the Omicron variant and resulting lockdowns in Japan, as well as continuing weakness in international demand, for the revision.
  • Nordic Aviation Capital aims to emerge from U.S. Chapter 11 bankruptcy protection in May. The U.S. Bankruptcy Court for the Eastern District of Virginia has signed off on the company’s reorganization plan to reduce total debt by $4.1 billion. The lessor is funding its reorganization through $337 million in new equity financing and $200 million in revolving credit loans. Nordic has 350 aircraft in its portfolio.
  • So far, Western airframers and OEMs have not suffered for a lack of Russian titanium, and production ramp-ups planned by both Airbus and Boeing should proceed as planned. Russian titanium still is available, but due to sanctions, the country’s ability to do quality certifications has been curtailed, industry sources said. If the Ukraine war and its resulting sanctions grind on, a shortage of certified titanium could become acute.
  • One pandemic-era airline practice is ending. EASA, the EU’s aviation regulator, will bar cargo in the passenger cabins of aircraft from July 31. Thus ends European airlines’ use of “preighters” to bolster revenue while passenger traffic plummeted. “Following a review of the operational context for transport of cargo in passenger cabin, the agency has concluded that the logistical challenges that arose in 2020 as a result of the COVID-19 crisis no longer exist to the same extent,” EASA said.
  • Speaking of cargo, Gol’s plans to expand into the logistics and package-delivery space is gathering steam. The Brazilian carrier is joining up with Mercado Livre, an e-commerce and online auction company. The deal includes Gol operating a fleet of six Boeing 737-800 freighters with the option to add another six by 2025.
  • And more cargo. AviaAM Leasing has acquired another Boeing 737 to convert into a freighter. The lessor started acquiring 737s for passenger-to-freighter conversions last year and has completed work on three, with the latest becoming the fourth. The work will be carried out by Taikoo Aircraft Engineering Company in China.
  • And even more cargo! Air Canada has begun cargo operations in Halifax by basing a Boeing 767F there. The freighter is now flying Toronto-Halifax and will being flying cargo routes to Frankfurt, Cologne, Istanbul, and Madrid next month.

Madhu Unnikrishnan

Madhu Unnikrishnan

April 25th, 2022