Avianca and Gol Plan South American Airline Group

Edward Russell
May 16th, 2022 at 12:01 AM EDT

Two of South America’s largest airlines, Avianca and Gol, plan to combine to create a European-style aviation holding company to dominate air travel in Latin America.

The new group, Abra, would own Avianca, Gol, and Viva Air outright, as well as a minority share of Chile’s Sky Airline under the plan unveiled on May 11. Abra would rival Latam Airlines Group, currently Latin America’s largest, in the market but break with its competitor’s single-brand strategy by maintaining — for now — each airline subsidiary’s independent management and branding. The announcement comes less than two weeks after Avianca and Viva unveiled plans to merge under a common holding company.

“Abra will provide a platform for the operating airlines to further reduce costs, achieve greater economies of scale, continue to operate a state-of-the-art fleet of aircraft, and continue to expand their routes, services, product offerings, and loyalty programs,” group Chairman Roberto Kriete said during a briefing.

Across its four airlines, Abra operated 21 percent of the passenger capacity in Latin America during the year ending in May, according to Cirium schedules. Latam operated nearly 24 percent. Abra would have a leading position in the important Brazil, Colombia, and Peru markets.

Abra would operate a varied fleet of aircraft centered on Airbus models. Avianca, Sky, and Viva all primarily fly Airbus A320-family jets, while Gol is an all-Boeing 737 operator. Avianca also has Boeing 787s for long-haul routes.

Bradesco BBI analyst Victor Mizusaki said in a research note Wednesday that the proposed deal was positive for Gol, which is almost exclusively a domestic airline in Brazil. The combination could also create “significant synergy opportunities” across the four airlines.

European airlines have successfully consolidated under a holding company structure similar to Abra’s proposal. Air France-KLM, International Airlines Group, and the Lufthansa Group all own multiple individual airline brands but benefit from economies of scale and other synergies through their larger group structures. Previously in Latin America, both Avianca and Latam grew through acquisitions in which they unified operations under a single brand but maintained individual operating airlines in each country.

“Everybody is looking for additional synergies, [and] cooperations,” Gol CEO Paulo Kakinoff said in March. He added that, in his view, many synergies could be achieved without a “full merger.”

Kriete and Abra CEO Constantino de Oliveira Junior, who founded Gol in 2001, emphasized that the deal would create growth opportunities for all four airlines. This will include expansion into new markets for each airline, as well as new international long-haul and cargo opportunities.

One unanswered question was Abra’s partnership strategy. Avianca has close ties with United Airlines, and Gol with American Airlines. United owns a 16.4 percent stake in Avianca, and American a 5.2 percent stake in Gol. Neither Kriete nor Junior commented on the group’s alliance plans.

Financial details of the proposed combination and creation of Abra also were not disclosed.

Avianca CEO Adrian Neuhauser and Gol Chief Financial Offier Richard Lark will become co-presidents of Abra once the deal closes. They will continue their current positions at their respective airlines.

Abra plans to close purchases of Avianca, Gol, Sky, and Viva under the new group structure in the second half of the year. The deal is subject to certain regulatory approvals.

Edward Russell

Azul Moves Beyond the Pandemic

The pandemic is over for Azul. The Brazilian airline is one of the first in the world to herald the arrival of the new normal for travel, and one that looks very bright.

“We are seeing a new, and greater pattern of demand,” Azul CEO John Rodgerson said during the airline’s first-quarter earnings call on May 9. The era of the pandemic cliche, “pent-up demand,” is behind Azul, he added.

The airline’s numbers show that new level of demand. Revenues at 3.2 billion Brazilian reais ($625 million) in the first quarter were 26 percent higher than they were three years ago, and that was even with a hit from the Omicron variant in January and February. Passenger traffic was up 15 percent. And Azul turned a net profit of 2.7 billion Brazilian reais, though it posted an adjusted net loss of 808 million Brazilian reais including foreign exchange and unrealized derivative results.

But Azul’s results have some caveats. The airline is almost entirely a domestic carrier in Brazil — 89 percent of its passenger capacity in the first quarter — in a recovery that has favored domestic-oriented airlines. Its home market never saw the same level of stiff domestic travel restrictions that some other markets have seen, like Australia and within the EU. And, the clogs in global supply chains and rapid rise in commodity prices since Russia’s February invasion of Ukraine in February have been a boon for Brazil’s commodity-led economy, including its airlines.

“Brazil is an enormous commodity economy, and many of these commodities have record prices,” the airline’s founder David Neeleman said. “Azul has a significant presence in all these commodity areas of Brazil, where producers are expanding rapidly to meet world demand.”

If there is an airline uniquely positioned to take advantage of the current global environment and fly ahead of the pack, it is Azul.

The airline’s strong revenue performance is largely due to Azul’s restored route map that extensively serves much of Brazil’s interior rather than focusing on the triangle of São Paulo, Rio de Janeiro, and Brasilia, Raymond James analyst Savanthi Syth wrote in a note to investors on May 9.

Azul will fly more than 30 percent of its passenger capacity outside of Brazil’s three largest cities in the second quarter, according to Cirium schedules. The number is just under 8 percent at Gol, and only 4 percent of Latam’s domestic Brazil capacity.

“The midwest of Brazil is Azul’s country,” Rodgerson said. Executives said that corporate travel in the oil and gas and agro-business sectors has fully recovered — areas that benefit Azul — while the government and finance travel recovery has lagged. Finance and government travel are concentrated in Brazil’s three largest cities.

Logistics and Azul’s other segments, including its vacations business and loyalty program, are also doing well. Cargo and other revenues more than tripled to 350 million Brazilian reais in the first quarter compared to three years ago. The airline continues to target a greatly expanded role in the country’s logistics segment.

Azul seems to be ready to take its newfound strength for a spin. The carrier’s partnership with United expires in June and the two have yet to reach an agreement on extending the pact. “They’ve been a great partner of ours, and we’re talking to them about the potential for an extension [but] kind of keeping it open,” said Rodgerson. United owns 8 percent of Azul, and they two have discussed a potential U.S.-Brazil joint venture for several years.

However, in terms of its attempted to take over Latam, Azul has stood down as its larger competitor works its way through the Chapter 11 reorganization process. Executives said the airline is “respecting” Latam’s process that, at this point, is focused on building creditor support for confirmation of its restructuring plan.

Unit costs excluding fuel at Azul were up nearly 18 percent over 2019 in the first quarter. However, executives pointed to data that show the metric as up just 1 percent over the period when excluding cargo expenses and the impact of foreign exchange. Average fuel expenses at Azul jumped 57 percent quarter-over-quarter to 4.25 reais per liter.

With the pandemic in the rearview mirror, Azul is bullish on its prospects. The airline forecasts earnings before interest, taxes, depreciation, and amortization (EBITDA) of roughly 4 billion Brazilian reais this year, which would be a 10 percent increase over 2019 and its best ever result. Passenger capacity will also be up 10 percent and unit revenues up as much as 20 percent. The forecast only improves in 2023 when EBITDA is expected to come in at roughly 5.5 billion Brazilian reais.

Edward Russell

Copa Confident in Standalone Strategy

Copa Airlines CEO Pedro Heilbron does not think the carrier needs to do anything differently following the announcement that Avianca and Gol plan to consolidate under a single holding company.

“I won’t talk about whether we have to react or not,” Heilbron said during Copa’s first-quarter earnings call on May 12. “If we choose to focus on our business model, I think we will be very successful doing it that way.”

His comments came the day after Avianca and Gol announced they would merge under the new UK-based Abra Group.

Heilbron acknowledged that the creation of Abra does create something of a “spider web” of partnerships among Latin American airlines. Copa and Avianca are both members of the Star Alliance, and prior to the pandemic committed to forming an immunized joint venture with United covering flights to the U.S. Copa has a separate codeshare agreement with Gol that has been in place since 2015.

The creation of Abra will likely add “another twist” to Copa’s agreement to form a joint venture with Avianca and United, Heilbron said. “It’s hard for us to see right now what’s going to be the decision of [Abra] or the other partners. It’s up in the air right now but it’s still there.”

Copa’s hub-and-spoke model connecting North and South America via its Panama City hub continues to prove resilient. The airline posted a nearly $20 million net profit in the first quarter on revenues of $572 million, which was 15 percent below 2019 levels. Unit revenues were down 3 percent compared with 2019, and unit costs excluding fuel were down 1.5 percent. Passenger traffic was down 14 percent from 2019 on a 12 percent decline in capacity.

The demand environment is good and yields are improving, Copa Chief Financial Officer Jose Montero said. However, elevated fuel costs are weighing on results, and the airline anticipates a lower operating margin in the second quarter than in the first. Its March quarter operating margin was 7.8 percent, and it forecasts 3-5 percent for the June quarter. Montero said Copa is recapturing roughly half of the additional fuel expenses through higher fares, and that that percentage continues to improve.

Leisure and visiting friends and relatives, or VFR, traffic remains the main driver of demand driver, Heilbron said. Corporate travel recovered to roughly half of 2019 levels during the first quarter, and continues “ticking up in the second quarter,” he said.

Copa plans to fly 96 percent of its 2019 capacity in the second quarter, and 98 percent for the full year. Capacity in the second half of 2022 will be above 2019 levels.

Edward Russell

Mesa CEO Places Blame on Regulators for Pilot Shortage

A year ago, regional carrier Mesa Air Group was flush with profits, even as many of the mainline carriers staggered from the evaporation of demand during the pandemic. But while the major airlines are now optimistic about the the rest of the year, Mesa is offering no guidance on balance of 2022 after its profits turned to losses.

The reasons for the reversal are many, CEO Jonathan Ornstein said, but two stand out: The end of federal government support for the airlines during the pandemic, and Mesa’s inability to hire and retain enough pilots. “Clearly, this quarter was very disappointing,” he said.

Throughout 2021, optimism abounded at Mesa. The regional launched a new cargo partnership with DHL to operate Boeing 737Fs, and planned to expand to up to 10 aircraft. It delved into electric aircraft. And it even had its sights set abroad, establishing a European subsidiary, Gramercy. At the time, Ornstein struck a rare positive note in the industry: “While 2020 has been a challenging year for the industry, we were pleased to remain profitable and cash flow positive throughout the pandemic,” he said in early 2021.

But then the government turned off the spigot of cash from the CARES Act and subsequent Covid relief packages. Last year, Mesa reported a $12.1 million adjusted pre-tax profit, thanks in large part to $66 million in federal payroll support. In its most recent quarter, Mesa reported an adjusted loss of $13 million.

Government funding was finite, and Mesa could plan for its end on Sept. 30 last year. But it couldn’t plan for the pilot shortage. The challenge facing Mesa this year, and for the near future is pilot attrition. The carrier does not have enough pilots to produce the block hours its mainline partners originally wanted, Ornstein said.

“We are going to see quite a bit of pressure in block hours through the rest of the fiscal year, and we expect them to be roughly flat over the next two quarters,” Chief Financial Officer Torque Zubeck said. “As we look at the summer and fall, we will continue to work closely with our partners to maximize block hours with a goal to at least maintain current production.”

The problem, according to Ornstein, is that during the pandemic about 4,000 mainline pilots took early retirement or left the industry. As a result, major carriers are now poaching talent from the regionals earlier in a person’s career than they would have before the pandemic.

The second issue is that Mesa can’t train new pilots fast enough to get them out on the line to complete its planned schedule, Ornstein added. The company has bought new simulators and is hiring flight instructors, both from outside Mesa and promotions from within. “I think we ultimately will be successful there so that we can then get the training capacity to outstrip the attrition levels,” Ornstein said. “We just need to make sure that we execute on that front.”

In other words, Ornstein said he is confident that Mesa can work through these problems this year, a year he said would be another one of transition. But he reserved his most scathing comments for the root cause of the pilot problem: Congress.

The 1,500-hour rule Congress mandated in the wake of the Colgan Air accident in 2009 is holding the industry back. Echoing his comments from the last quarterly call, Ornstein said it beggars belief that U.S. pilots are required to have 1,500 hours of experience before helming a commercial aircraft, while foreign pilots with far fewer hours of experience can fly a plane into the U.S. “I have probably the strongest feelings in the industry about it,” he said.

“This is all being generated by a rule that is totally unnecessary that’s actually creating more velocity … more turnover,” Ornstein said. “That lack of stability in terms of the workforce has to have much, in my opinion, more serious effects than whether or not a person who spent 1,500 hours flying circles around the Pacific Ocean.”

But he doubted Congress would relax that rule. Republic Airways in April applied for an exemption to the rule, but regulators granting it is thought to be a long shot.

Ornstein also called on regulators to raise the mandatory pilot retirement age to 67, from 65 now, among other measures, like bringing in more pilots from abroad. “There’s a lot of talk about pilots being able to be imported, qualified pilots from around the world,” he said.

Another challenge facing Mesa is its cargo business. In 2020 when it launched its 737F operation for DHL, Mesa had expected to grow to 10 or more aircraft in short order. It added its third 737F last month. “I think it’s fair to say that we did anticipate being larger than three aircraft by now,” Ornstein said. Cargo operators tend to be more conservative in their growth plans, he added.

But Mesa does anticipate the segment to grow. It is sticking with an exclusive cargo partnership with DHL with no plans to branch out. The cargo operation also serves as pilot recruiting tool, offering new aviators a career path to mainline aircraft that other regional airlines can’t replicate. Executives offered no timeline on when the cargo fleet would expand.

The carrier is positive on its European subsidiary. It expects European certification later this year. “In Europe, there is no scope [clause] in Europe, and there are pilots available,” Ornstein said. “And I think that the American model of capacity purchase would do very well there.”

Mesa reported fiscal second-quarter operating revenues of $112 million, up from $97 million the previous year. Total operating expenses doubled to $167 million as capacity rose from last year. Maintenance expenses, which challenged Mesa last year, declined in the quarter.

Madhu Unnikrishnan

In Other News

  • Latam Airlines Group narrowed its net loss by $50 million to $380 million in the first quarter compared to a year earlier. Revenues rose to $1.96 billion but were down 22 percent year-over-three-years. Cargo stood out with revenue up 65 percent compared to 2019 to $431 million. Passenger unit revenues were flat year-over-three-years while unit costs excluding fuel increased 15.6 percent. Latam flew 68 percent of its 2019 capacity in the first quarter with its domestic entities leading the recovery; for example, Brazil capacity came in just over pre-pandemic levels.

    Latam may be nearing the end of its U.S. Chapter 11 reorganization with a confirmation hearing scheduled for May 17 and 18. A majority of creditors, 65 percent overall but representing 82 percent of the airline’s outstanding obligations, voted in favor of the plan on May 6. And in April, the airline sought a further increase to its debtor-in-possession financing package by $500 million to $3.7 billion; it had drawn $2.75 billion from the credit facilities as of April 8. Latam hopes to exit its restructuring in the second half of the year.
  • Norwegian Air is focused on solving the problem of winter, CEO Geir Karlsen said after lackluster first-quarter results. “Everyone can make money during the summer. It’s all about the winter,” he said during a call on May 13. The discounter has power-by-the-hour aircraft lease agreements in place, and crew deals that will allow it to flex capacity down by as much as 25 percent this winter from its summer peak. But Karlsen is not happy with just these efforts, saying he thinks the airline is “very close to finding a [long-term] solution.”

    Karlsen’s winter comments come as Norwegian Air focuses on getting unit costs (CASK) excluding fuel below 0.4 Norwegian kroners ($0.04). CASK excluding fuel was a high 0.55 Norwegian kroners in the first quarter, owing to last minute schedule reductions and weak demand during the Omicron surge, but near 0.4 in April. Getting costs permanently below the that threshold is “where we need to be in order to be competitive,” said Karlsen. Norwegian Air lost 1 billion Norwegian kroner on revenues of 1.9 billion Norwegian kroner in the first quarter. The airline is capturing roughly half of the recent increase in oil prices through fares, said Karlsen. Unit revenues were up 3 percent year-over-year to 0.48 Norwegian kroner during the quarter. The airline plans to fly 70 Boeing 737s this summer and, with its recent lease of 15 737-8s, 85 aircraft in summer 2023.
  • Acknowledging the strength of the travel recovery, Lufthansa Group CEO Carsten Spohr said at its Annual General Meeting on May 10 that the group may recover to pre-pandemic capacity levels “earlier than planned.” The group previously forecast a full capacity recovery by the middle of the decade, or around 2025. In addition, Spohr said the group was on the “verge” of repaying the 420 million Swiss francs ($423 million) in outstanding aid from the Swiss government. Lufthansa repaid the German government last year, but still has loans outstanding from the Austrian and Belgian governments.
  • IAG said it hopes regulators approve its 20 percent stake in Globalia, which owns and operates Air Europa. The objective, CEO Luis Gallego said, is to take control of the Spanish carrier and build out Madrid as a hub. European competition authorities squashed the deal last year, saying IAG did not offer enough relief to satisfy anti-competitive concerns. “We want to have the flexibility to put the remedies on the table that can allow to do these deals,” Gallego said.
  • EasyJet and Italian leisure carrier Neos are partnering with new connections over Milan’s Malpensa Airport. Neos, and its owner Italian tour provider Alpitour Group, will sell single-ticket itineraries combining Neos flights to New York JFK and Santo Domingo, and EasyJet’s flights to Catania, Naples, and Palermo in Italy from June 16. The tie up is described as a move to “enhance connections” between southern Italy and international destinations. It also comes as airlines, including EasyJet, ITA Airways, Ryanair, and Wizz Air, jockey for dominance of the Italian market.
  • Qatar Airways and Virgin Australia have unveiled a new strategic partnership. The codeshare will give Qatar flyers access to 35 Virgin Australia destinations, and travelers on the latter access to Qatar’s worldwide network. Connections will be via Qatar’s Australian gateways, including Brisbane, Melbourne, and Sydney. Notably, the pact comes despite Qatar’s membership in the Oneworld alliance that includes Virgin Australia competitor — and Australia’s largest airline — Qantas Airways.
  • The Star Alliance will add an “intermodal” partner to its roster of airlines, although CEO Jeffrey Goh offered scant details, offering only that it will be in a European market and most probably with a railroad. “I will take your money if you wanted to bet on the railways,” he said in a press conference last week. Separately, the alliance is offering an industry first: A co-branded, alliance-level credit card by the third quarter of this year. The card will launch in an unspecified market with an unspecified bank, and will allow members to earn loyalty points to use on Star Alliance member airlines.
  • Tata Sons tapped Campbell Williams, who currently leads Singapore Airlines’ Scoot subsidiary, as the next Air India chief executive. Williams’ appointment is subject to Indian government approval, however. Earlier this year, former Turkish Airlines Chairman Ilker Ayci withdrew from the Air India job after several powerful ministers objected, allegedly due to his ties to Turkish President Recep Tayyip Erdogan.
  • Spirit Airlines is recommending its shareholders vote for the merger with Frontier Airlines at a shareholders meeting scheduled for June 10.

Edward Russell & Madhu Unnikrishnan

Edward Russell
May 16th, 2022 at 12:01 AM EDT

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