The Latest in the JetBlue-Spirit Saga

Edward Russell
June 13th, 2022 at 12:01 AM EDT

The future of Spirit Airlines continued to play out like a soap opera last week. JetBlue Airways improved its offer for the discounter on June 6 that prompted Spirit to delay a key vote a day later, and the week wrapped up with J.P. Morgan analyst Jamie Baker saying the likelihood of JetBlue-Spirit merger was improving.

“We believe some merger involving Spirit is a high probability outcome,” Baker wrote on June 9. “We also believe a merger outcome between Spirit and JetBlue is a growing probability and may overtake the likelihood of a Frontier deal.”

JetBlue’s improved offer to Spirit shareholders included an additional $1.50 per share for a total of $3.4 billion. The additional funds would be paid as a partial upfront payment of the $350 million break-up fee it is offering in the event U.S. regulators block the proposed deal. A merger with Frontier Airlines, which Spirit’s leadership and board supports, is worth the equivalent to $2.9 billion in cash and stock.

Following receipt of JetBlue’s revised offer, Spirit CEO Ted Christie spoke with Frontier Board Chairman Bill Franke regarding the Denver-based carrier’s offer, according to a filing with the U.S. Securities & Exchange Commission. Franke declined on behalf of the airline to revise Frontier’s offer for Spirit.

Spirit the next day postponed the shareholder vote on a merger with Frontier — a yes vote being in favor of the combination while a no vote would allow JetBlue to move forward with its hostile takeover — by nearly three weeks to June 30 from June 10. In a statement, Spirit said the move allowed it to “continue discussions with Spirit stockholders, Frontier and JetBlue” and was widely seen as a sign that it may be uncertain about the outcome of the vote.

The crux of the debate is over whether a JetBlue-Spirit combination could pass antitrust scrutiny from the U.S. Department of Justice. Spirit executives have repeatedly said that they do not believe it would unless JetBlue agrees to end its alliance with American Airlines in Boston and New York City, something JetBlue executives have repeatedly said it would not do. Instead, JetBlue has offered to divest all of Spirit’s assets in Boston and New York, as well as five gates at the Fort Lauderdale airport, to secure the backing of shareholders and, ultimately, regulatory approval.

There are also concerns about JetBlue absorbing the largest U.S. ultra low-cost carrier. JetBlue offers lower fares than the three U.S. network carriers — American, Delta Air Lines, and United Airlines — but higher fares than the likes of Frontier and Spirit. Executives at JetBlue argue that fares would not rise under its proposed merger, but many in the industry expect that they would if only to cover JetBlue’s higher cost structure than Spirit.

No matter which deal happens — Spirit and Frontier, or Spirit and JetBlue — the resulting airline will become the fifth largest in the U.S. And, regardless the outcome of the bidding war for Spirit, most industry analysts see Frontier as a winner: Either having acquired Spirit or by becoming the sole large ULCC in the U.S.

Edward Russell

Cathay’s Troubles Highlighted by Hong Kong Loan Extension

The Hong Kong government has given Cathay Pacific Airways another year to draw down a HK$7.8 billion ($1 billion) loan, in a sign that the carrier’s business remains tenuous even as other airlines in the region are planning to wean themselves off state aid.

The loan is part of the HK$39 billion in state aid the Hong Kong government extended to Cathay Pacific at the onset of the pandemic, in June 2020. The extension runs through June 9, 2023. The airline said it has not had to draw on the loan for the last 12 months but added the extension gives it “the flexibility to manage our liquidity position.” Cathay Pacific ended 2021 with HK$30 billion in liquidity.

The carrier said it is planning to increase capacity, which will have a “positive impact on the airline’s business.” Still, it expects to burn HK$500 million per month in the near term.

“The unprecedented impact of the pandemic has necessitated some very difficult decisions, namely our restructuring in 2020, but through this and our recapitalization, we have created a more efficient, more competitive and more focused business,” Cathay Pacific CEO Augustus Tang said in a statement. “We have already recommenced hiring as we plan for the anticipated recovery in Hong Kong and global aviation in the 18-24 month period ahead.”

Despite Tang’s optimism, the present is pretty grim for Hong Kong’s flag carrier. In its most recent traffic report, Cathay Pacific said April traffic was down 98.5 percent from three years earlier. Capacity in April was down 97.7 percent from 2019. Compared with last year, traffic in the first four months of 2021 was up 16 percent while capacity was down 60 percent. Even cargo traffic — a lifeline for the struggling carrier during the pandemic — was down 43 percent in the first four months compared with last year.

That the Hong Kong government is extending state aid is remarkable, as airlines around the world have begun repaying the government aid they received earlier in the pandemic. Support for U.S. carriers, for example, expired in September last year, and many European airlines have repaid or begun repaying government loans first extended in 2020, a report from the Organization for Economic Cooperation and Development shows.

The city-state is grappling with a fifth wave of Covid, with hospitalizations and test positivity rates among the highest of any period during the pandemic. And Hong Kong continues to impose mandatory 7-day quarantines for permanent residents and 14-day quarantines on foreign nationals, regardless of vaccination status. This is as countries like Malaysia, Singapore, South Korea, and Thailand have relaxed their restrictions on inbound travelers, and as Japan prepares to do so. Hong Kong’s restrictions, however, are in line with those of mainland China, which has locked down several major cities in recent weeks in an attempt to contain Covid-19. The continued quarantine requirements imperil Hong Kong’s position as a global connecting hub, IATA has warned.

At the outset of the pandemic, analysts said airlines with small or no domestic markets — airlines like Copa, Emirates, KLM, and Singapore Airlines, to name a few — would struggle, while those based in countries with large domestic markets would benefit. In broad strokes, this was true for most the period from April 2020 to now. Airlines in Brazil, Canada, Mexico, and the U.S. began to bounce back as restrictions eased. Airlines in China and Russia also succeeded earlier in the pandemic, until the most recent Omicron subvariant wave ran into China’s strict “zero Covid” policy and Russian airlines began to feel the effects of Western sanctions over the the country’s invasion of Ukraine.

But as travel began to open up, even airlines based in smaller countries began to rebound. Copa, after spending much of 2020 grounded, returned to profitability by leveraging its Panama City hub to connect North and South America. Emirates has continued to report losses and availed itself of an additional $954 million in state aid last year, but its traffic improved by almost 200 percent in the fiscal year that ended in March from the year prior. The Dubai-based airline also is hiring to replace employees that left during the pandemic.

And KLM CEO Pieter Elbers recently told Airline Weekly the pandemic underscored the importance of a strong hub to maintain global connectivity when the number of flights plummeted. “There were certain specific city pairs where the only connection was through Amsterdam — for many city pairs we were the only airline, the only window to the world,” he said.

— Madhu Unnikrishnan

Wizz Air Sets Sights on Middle East Expansion

Wizz Air‘s summer is shaping up to be one for the record books. The Hungarian discounter now expects fares to be 160 percent of 2019 levels, resulting in stronger yields, on 140 percent more capacity than three years ago.

The capacity increase is due to Wizz having more aircraft than it did when the pandemic began, and due to upgauging to higher capacity Airbus A321s. The carrier ended its fiscal year on March 31 with 153 aircraft. It took delivery of 25 A321neos during the fiscal year and now has 47 of the type. Wizz returned nine A320ceos in the period. CEO Jozsef Varadi is a big fan of the A321. “It’s like operating 60 seats for free,” he said, referring to the fact the type’s operating costs are similar to the A320 but with a much larger gauge.

In terms of employees, Wizz now is a larger airline than it was in 2019. Before the pandemic, the carrier had 5,000 employees, a number which dropped to 4,000 during the depths of the pandemic. It has been hiring aggressively and ended the fiscal year with 6,000 employees. Varadi said the carrier is “fully stocked” with pilots and flight crews, but it has seen some operational challenges due to shortages of airport employees in some stations.

The carrier has rationalized its network, dropping some routes, like Oslo and Dortmund, Germany, which Varadi said were “opportunistic” during the depths of the pandemic. “I don’t think that Dortmund and Oslo give much of a lesson for the future because those were kind of extraordinary measures in extraordinary times, reacting to the Covid situation,” he said. Instead, the airline is focusing on its strengths in Central and Eastern Europe, and its expanding presence in Italy, which Varadi said were more “long-term” plays.

Wizz also is expanding its airline portfolio. The carrier is starting a new airline in Malta in October. Its Abu Dhabi subsidiary, which launched in January 2021, is exceeding expectations, especially now that the emirate has rolled back most of its Covid-19 protocols, Varadi said. Wizz has signed a memorandum of understanding with the government of Saudi Arabia to launch a subsidiary in that country. Details are scant, but Varadi said the new carrier stems from the Saudi government’s plans to diversify the country’s economy away from dependence on petroleum.

After Russia’s invasion of Ukraine in February, Wizz redeployed its capacity operating to Russia, Ukraine, and Moldova, and has opened 32 new routes outside that region, Varadi said. The carrier offered more than 100,000 free tickets to Ukrainians to escape the war. Wizz still has four aircraft in Ukraine, but all of its employees in that country have been evacuated and placed in jobs elsewhere in Wizz’s network, he said.

The Ukraine war has driven fuel prices higher, however. The carrier began to see the effects of the war in its fuel bill toward the end of its fiscal year, with fuel prices 17 percent higher than in the previous fiscal year. Wizz has put hedges in place to stabilize its fuel prices through August, Varadi said.

The pandemic has reordered the European airline market, Varadi noted. “We have been competing against Ryanair forever,” he said when asked if the Irish discounter posed a competitive threat. “We like competing against Ryanair.” Carriers like Wizz and Ryanair will benefit and grow in the post-pandemic European market as legacy airlines retrench and struggle to regain market share, he said.

Despite the optimism, Wizz Air lost money in the last fiscal year. The carrier reported a €643 million ($676 million) loss in the year that ended in March, or 12 percent more than it lost in the previous fiscal year. Of that, €465 million was from operations, which Varadi attributed to the costs of ramping up capacity, and the balance was from unfavorable foreign exchange. The carrier reported that 56 percent of its revenues came from ancillary sales. Wizz reported total revenues of €1.7 billion, up from €739 million the year prior.

Madhu Unnikrishnan

South Africa’s Comair Liquidates

South Africa is getting a dramatic post-pandemic makeover with the closure of Comair, the country’s second-biggest airline.

Lawyers for the airline, which had suspended flights on May 31, moved to liquidate the company on June 9. They cited an inability to secure funding to keep Comair flying and the fallout from Covid-19 travel restrictions for the move. Comair operated both a British Airways franchise in South Africa, and the discount brand Kulula.

“This development is really unfortunate especially at the time when we are making progress in terms of the recovery,” South Africa’s Minister of Tourism Lindiwe Sisulu said in a statement. “This essentially results in a limited distribution network where there is limited capacity for both domestic and international travelers.”

Comair flew almost 32 percent of seats, including both its British Airways and Kulula operations, in South Africa in May, according to Cirium schedule data. Safair operated 42 percent of seats, Airlink 16 percent, and state-owned South African Airways and its partner Cemair 7 percent.

According to Sisulu, Comair had a 40 percent share of domestic air travelers in South Africa. The country is the continent’s largest airline market.

In any market, the immediate loss of a third of airline seats is a blow. Seldom do competitors have the ability to quickly replace the lost capacity, which can result in higher airfares. The situation is exacerbated in South Africa where the market is still recovering from the pandemic, and South African Airways remains smaller than it was, due to its own financial struggles.

“Any reduction in services is bad for Africa interconnectivity and is a core element of the transport infrastructure,” Aviado Partners Managing Director Shakeel Adam said. Comair’s closure “provides the opportunity for [South African Airways] to make a go in the face of reduced competition. It is critical that the connectivity infrastructure is rebuilt.”

However, South African Airways ability to capture the market left by Comair’s exit will be limited as long as the government maintains a strong role at the carrier, and if the carrier fails to restructure based on global airline norms, Adam added.

The Airports Company South Africa, which operates nine airports in the country including the three busiest, Cape Town, Durban, and Johannesburg, handled 2.6 million passengers in April, company data show. That was the highest number since February 2020, and showed a near steady improvement since last August. However, April traffic was still 28 percent below 2019 levels.

“The removal of [Comair’s] capacity will undoubtedly be missed, especially at times of peak demand,” Airlink CEO Rodger Foster said in an email. “The surviving domestic airlines will undoubtedly see the opportunity to increase capacity to address the gap. Without sounding insensitive, Airlink is investigating ways in which it may be able to share in the supply of the capacity shortfall.”

Foster added that Comair’s closure was a “sad day in the history of South African aviation,” and that it highlights “the incredible difficulties confronting airlines” in Southern Africa.

Airlink, which flew as an affiliate of South African Airways until just before the pandemic, has grown out of the pandemic. The airline’s capacity increased at a compound quarterly rate of almost 37 percent from the second quarter of 2020 through the third quarter of 2022, Cirium data show. Some of that increase is attributable to the resumption of aircraft parked early in the pandemic, and the shift of flying from its former franchise operation to its own branded operation.

And Airlink has signed new international partnerships with Emirates — the largest foreign carrier flying to South Africa — and United in the past year. The latter is growing rapidly to South Africa to fill the gap left by South African Airways’ exit from U.S. routes.

South African Airways interim CEO John Lamola said on June 2, two days after Comair suspended flights, that the airline would add capacity between Cape Town, Durban, and Johannesburg. The state-owned airline is limited in what it can do following significant reductions in its fleet and workforce during the pandemic.

Edward Russell

Transat Wet Leases Aircraft Due to Airbus Delays

Transat’s ambitious plans for the summer are running into Airbus’ manufacturing travails, forcing the Canadian carrier to wet-lease aircraft to fulfill its summer schedule.

Transat had expected to take delivery of two Airbus A321LR’s this summer, but deliveries are delayed due to supply-chain constraints at the European airframer, Transat CEO Annick Guerard said on the company’s April quarter earnings results last week. She declined to specify where the additional wet-leased aircraft will come from or how many, but said they will be sufficient to operate the carrier’s summer schedule.

Transat has 10 A321LRs fleet now, and besides the two that have been delayed this year, expects a further five deliveries in 2023-2024. Guerard said.

Guerard is the second airline CEO in a week to comment on Airbus delays. Wizz Air CEO Jozsef Varadi noted last week that although the European discounter had sufficient lift for its schedule, “If you look at Airbus and Boeing, I mean there are strains in the system. They have issues with their own supply chains, and as a result, it is becoming increasingly difficult to get access to new aircraft for the next few years.”

Airbus is ramping up production of its A320-family aircraft to 65 aircraft per month next year, with plans to increase that to 75 aircraft per month by 2025. Although Airbus CEO Guillaume Faury is confident the airframer can meet its targets, analysts have been skeptical and pointed to suppliers that have struggled to hire enough staff in tight labor markets in the U.S. and Europe.

Aside from delivery delays, however, Transat is looking forward to a booming summer. The booking curve is shorter than it was before the pandemic, so forward bookings for summer travel were behind 2019 levels in March and April, but were ahead of 2019 in May, Guerard said. The carrier plans to operate 90 percent of its 2019 capacity during the July and August peak.

Transat’s restructuring as a national Canadian carrier continues. The airline added new flights to Los Angeles and San Francisco from Montreal, and this summer will add Amsterdam flights from Montreal and Quebec City in addition to flights from Toronto. It is focusing on connecting passengers from all over Canada, both on its own flights and through its codeshares with Porter Airlines and WestJet, to Europe over its hubs in Eastern Canada. Transat also is building its fifth-freedom connecting business between the U.S. and Europe, Guerard said. The carrier plans to operate 75 percent of its 2019 transatlantic capacity this summer.

One hurdle for its fifth-freedom business is staffing at Canadian airports, Guerard added. It has had delays at Toronto Pearson, which Guerard said have been resolved. However, due to Covid-19 protocols at Canadian airports, it takes “two to three times longer” to process each passenger, resulting in bottlenecks at passport control, she said.

Transat expects to start generating cash again in July and August. The carrier’s monthly cash burn is now C$3 million ($2.4 million), but that’s an improvement over the C$27 million monthly cash burn in the previous quarter, Chief Financial Officer Patrick Bui said. Transat expects to burn cash again in the autumn after positive cash flow during the summer peak, he said.

The carrier’s summer looks promising, but its fiscal second quarter was beset by the effects of the Omicron variant. January and February were weak, but bookings started to recover in March and have continued on an upward trajectory ever since. Sharply rising oil prices have eaten into its earnings, and the carrier is implementing fuel hedging this summer, although Bui declined to specify what percentage of Transat’s fuel needs will be hedged.

Due to the Omicron variant, Transat reported an operating loss of C$88 million in the quarter that ended on April 30, about the same as it reported last year. Revenues rose to C$358 million in the quarter from C$8 million last year. Given the uncertainty over fuel prices and the progress of the pandemic, Transat is not offering guidance for the rest of its fiscal year. But Guerard is optimistic. “We foresee a strong recovery and will continue to implement all the measures necessary to capitalize on it,” she said.

— Madhu Unnikrishnan

In Other News

  • Brazilian aviation regulator ANAC launched its seventh set of airport privatizations last week with São Paulo’s popular Congonhas the crown jewel of the three blocks of airports on offer. The regulator values the three blocks at 5.3 billion Brazilian reais ($1.1 billion) with the minimum investments from concessionaires of 938 million Brazilian reais. The concession term is 30 years for each block with the auctions set for August 18. The first, and likely most sought after, block includes 11 commercial airports, including Congonhas as well as Altamira, Campo Grande, and Santarem; the second the Belem and Macapa airports; and the third two general aviation airports in Rio de Janeiro and São Paulo. ANAC has been privatizing Brazil’s airports for more than a decade with the country’s busiest, including Brasilia, Rio de Janeiro Galeao, and São Paulo Guarulhos all managed by private concessionaires.
  • Is the long cargo boom ending? It may be premature to ring the death knell, but IATA reports that demand fell 11 percent year-over-year in April, while capacity fell 2 percent. The group attributes the contraction to the Ukraine war and China’s “zero Covid” policy, which affected exports. An ominous augury of things to come, however, is that new export orders have fallen in every region, signaling a global economic contraction.
  • Passenger demand shows no sign of abating, however. IATA reports that global passenger traffic rose 78 percent in April from last year. International demand soared 339 percent in the period, while domestic demand fell 1 percent, mainly due to travel restrictions in China and the effects of the Ukraine war on travel in that country and Russia. In a sign that the industry is moving beyond the pandemic, IATA is no longer comparing traffic to 2019.

Edward Russell & Madhu Unnikrishnan

Edward Russell
June 13th, 2022 at 12:01 AM EDT

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