FedEx Maintains Margins as Belly Capacity Returns

Edward Russell

June 27th, 2022

Late last week, FedEx reported financial results for the quarter ending in May and, for the second straight fiscal year, saw operating margins register at 7 percent, after adjusting for one-off accounting items. For just the May quarter, operating margin was 9 percent, also flat with the same period a year ago. FedEx CEO Raj Subramaniam, recently appointed to fill the shoes of legendary founder Fred Smith, opened the earnings call by trumpeting the firm’s efforts to transport baby formula from Europe to the U.S. to help relieve a national shortage. It’s also active in flying humanitarian relief for Ukrainian refugees in eastern Europe.

Unlike its counterparts in the passenger business, FedEx stayed extremely busy during the pandemic, and strongly profitable as well. It benefitted as passenger planes were grounded, removing lots of competitive belly freight capacity from the market. That belly capacity is starting to return, however, just as storm clouds gather on the demand horizon. FedEx said it’s ready to react if there’s an economic downturn, the odds of which are increasing as countries deal with geopolitical shocks, lingering Covid challenges in Asia and inflationary price trends, most importantly for fuel. FedEx is less exposed to the current fuel shock than passenger airlines, thanks to its ability to pass on costs through surcharges. “I am confident we have the tools to get to continue getting inflation plus pricing,” said FedEx Chief Customer Officer Brie Carere.

Wage rates, which rose sharply during the pandemic amid shortages, are now starting to stabilize, the company said. But back on the demand side, consumers in the U.S. market have started to shift their spending away from goods as the pandemic receded, allocating more of their spending to services like leisure travel for example, or dining out at restaurants. That’s naturally meant fewer goods for FedEx and other logistics companies to move. Amazon, in fact, has admitted to over-expanding capacity. Separately, FedEx said in its earnings call that pilot hiring is not an issue.

In Europe, meanwhile, FedEx is consolidating and expanding flights at its Paris hub to boost network efficiency. Make no mistake: running a global logistics company with nearly 700 airplanes wasn’t easy during a pandemic. Difficulties remain with tight labor markets and supply chain bottlenecks. But never did it experience any annual financial losses. FedEx will have more to say this week, when it hosts an investor day event at its Memphis headquarters.

Jay Shabat

Qantas Trims Ahead of July Peak

The Covid-19 pandemic air travel recovery may have a hex on it. Flying is in disarray in Europe and the U.S. amid staffing shortages and industrial action, and Australia appears the next domino to fall with the country’s largest airline, Qantas Airways, warning about the months ahead.

Qantas will boost ground staff numbers by 15 percent in July compared to levels during the Easter peak in preparation for crowds, it said on June 24. In addition, the airline is offering non-management staff a one-time A$5,000 ($3,456) bonus after a two-year wage freeze. The one-time payments are forecast to cost Qantas A$87 million.

The moves could ameliorate any staff misgivings come as Australia braces for a busy July. The Brisbane, Melbourne and Sydney airports — the country’s three busiest — have both warned flyers of crowds, and advised them to travel with patience. The latter said on June 21 that it expects more passengers to pass through its terminals than in April during the Easter holidays. “We won’t sugar-coat the fact that the terminals will be busy during the school holidays, and there will be queues,” Sydney Airport CEO Geoff Culbert said.

Qantas, like its peers in Europe and the U.S., is also cutting flights in what it hopes will help ease airport crowds. The airline will reduce its domestic Australia capacity by another 5 points, for a total of 15 percent off plan, in July and August. Capacity will be reduced a further 15 percent in September, and then by 10 percent in October through March 2023. The airline says the cuts will also help it recoup high oil prices.

Qantas will fly 99 percent of its 2019 domestic capacity in the September quarter, 106 percent in the December quarter, and 110 percent in the March 2023 quarter. Its fiscal year ends in June.

The carrier’s international recovery remains unchanged. In fact, Qantas will add new thrice-weekly service between Perth and Johannesburg with an Airbus A330 on November 1. The new route will complement its existing nonstop between Sydney and Johannesburg, and takes advantage of changes in the market during the pandemic. South African Airways flew the Johannesburg-Perth route until 2020, according to Cirium schedules, but, after a difficult pandemic restructuring, has yet to resume any of its long-haul flying.

Virgin Australia, Qantas’ largest competitor, also retrenched during the pandemic. This included exiting long-haul international routes to Asia and the U.S.

Since Australia lifted travel restrictions last year, Qantas has added new international destinations, including Delhi and Rome. It has also moved forward with long-planned Project Sunrise nonstops between Sydney and both London and New York. Qantas plans to fly 70 percent of 2019 international capacity by September, and 90 percent by next June.

Separately, Gareth Evans, CEO of Qantas Group subsidiary Jetstar Airways, will leave the airline at the end of December. Evans has been CEO of Jetstar since 2017, and with the group for 23 years. Qantas has not named a replacement.

Qantas maintained its outlook of a loss in the fiscal year ending June 30, and a profit for the coming year that ends in June 2023.

Edward Russell

SkyWest to Launch Part 135 Airline to Access Pilots

They say necessity is the mother of invention, and many U.S. regional airlines are desperate for an inventive solution to their pilot woes. Some are pitching a potential — but unlikely — increase in the mandatory pilot retirement age. Others are calling for paying regional crews the same as their mainline counterparts. SkyWest Airlines has another bold answer: start a new airline.

The Utah-based carrier applied for certification of its new SkyWest Charter subsidiary to the U.S. Department of Transportation on June 17 in an application released publicly on June 21. The new airline would allow them to serve smaller cities, by connecting “underserved cities” across the country with frequent flights “to the national transportation system,” according to the application.

Many cities that fit this description are threatened with losing air service amid a national pilot shortage — SkyWest Airlines is exiting 29 small markets — and the resulting run up in wages as airlines compete to attract available talent.

SkyWest Charter’s answer to the pilot situation is the DOT’s “Part 135” public air charter certification that allows an airline to hire pilots with as few as 250 hours, rather than the 1,500 required for pilots at scheduled carriers like SkyWest Airlines or American Airlines. This expands the pool of eligible pilots. SkyWest Charter can do this by flying a fleet of Bombardier CRJ200 aircraft with just 30 seats — the maximum allowed under 135 rules — instead of the standard 50 seats.

“There are some good opportunities with 135 operators to help utilize [the CRJ200] and backfill some of the things that we’ve been doing,” SkyWest Airlines CEO Chip Childs said in April. He hinted at the time that the carrier could use some of its idled CRJ200s to fly under 135 certification in order to maintain air service to small communities.

The DOT’s 135 certification has been a popular way for airlines to fly under the 1,500 hour rule. Rapidly growing regional airline Southern Airways Express operates under the classification, and in May its CEO Stan Little said that it may be “the only airline in the country that has more pilots than” it needs. Other airlines, including Countour Airlines and private-like carrier JSX, also use the certification standard.

Asked about the 1,500 hour rule that SkyWest Airlines is subject to in April, Childs said: “We’re actually not looking to modify any law, particularly with 1,500 hours is a component that’s out there. We think it’s a terrible way to train pilots, but we don’t think that the reality of what’s happening in D.C. is going to necessarily make a move in that area.”

Finding a way to ease the burden of the 1,500 hour rule is a focus for the regional airline industry. The segment’s trade group, the Regional Airlines Association, is working to boost the supply of pilots through flight schools and pushing the federal government for increased assistance to help defray the cost. Cape Air CEO Linda Markham has called for credits toward the hour requirements for accredited training programs. And Republic Airways has gone as far as to request an exemption from part of the 1,500 hour rule for trainees from its Lift Academy.

SkyWest Charter hopes to begin flights in October pending DOT sign off. The airline intends to launch with three or four aircraft and flights to four or five cities, and gradually ramp up to a fleet of 18 CRJ200s serving 25 cities by April 2023.

The airline’s list of potential destinations center around a main base in Denver, but also at Chicago O’Hare and Houston Intercontinental. From Denver, SkyWest Charter could serve: Devils Lake and Jamestown, N.D.; Dodge City, Hays, Liberal, and Salina, Kan.; Gillette, Laramie, Riverton, Rock Springs, and Sheridan, Wyo.; North Platte and Scottsbluff, Neb.; Prescott, Ariz.; Pueblo, Colo.; Sioux City, Iowa; and Vernal, Utah. Chicago could see flights to Decatur, Ill.; Fort Dodge and Mason City, Iowa; Hancock, Mich.; Johnstown, Pa.; and Paducah, Ky. Houston could connect to Hattiesburg/Laurel and Meridian, Miss. SkyWest Charter noted that flights to many of these destinations would be subject to the award of competitive DOT essential air service contracts.

SkyWest Airlines did not mention a partnership for SkyWest Charter with a major carrier, like United Airlines, in its application to the DOT. However, given the former’s close ties with Alaska Airlines, American, Delta Air Lines, and United, some form of partnership for the new airline is expected.

SkyWest Charter’s application received at least eight letters of support from small airports. All called the proposed airline an “innovative plan” to maintain scheduled flights to their communities.

Edward Russell

WestJet Returns to Its Roots

Big changes are afoot at Canada’s second largest airline, WestJet. The airline has unveiled a restructuring plan that would see it return to its roots as a low-cost carrier, eschewing the more full-service competitor strategy it had pursued to challenge Air Canada. WestJet was scant on details of when this will occur but did say that all current premium products, including lie-flat seats on its Boeing 787s and a premium lounge at its Calgary hub, would remain and target both premium corporate and leisure travelers.

Costs are not the only roots WestJet will be returning too. The airline will also shift its network back to focusing on Western Canada and adjusting its fleet to match under the plan hatched by new CEO Alexis von Hoensbroech who took the top job in February. While WestJet did not detail the planned network changes, Hoensbroech did say that the carrier would “maintain a significant presence in the Eastern provinces, primarily through direct connections to our Western cities.” That could mean big changes at Toronto Pearson where 61 percent of WestJet’s average 79 daily departures in June were to destinations outside of Western Canada, per Cirium schedules. WestJet did not say whether its budget subsidiary Swoop would similarly shift its network to focus on Western Canada.

WestJet’s western shift opens the door for competitors, particularly Porter Airlines and Transat. The former is preparing for the arrival of its first of up to 80 Embraer E195-E2s this year that it plans to use on new routes to “sunny spots” from Toronto Pearson, as well as Halifax, Montreal, and Ottawa — all eastern Canadian airports where WestJet could retrench. And Transat has already completed its shift from vacation company to network airline focused on bases in Quebec, primarily Montreal. Air Canada, the country’s largest airline and the biggest in Montreal and Toronto, also stands to benefit.

As part of the changes, WestJet will adjust its fleet. The focus will be mainline narrowbodies, which currently means just the Boeing 737. WestJet plans a “substantial additional narrowbody order” in the near future as part of the plan. The carrier’s Boeing 787 fleet will be held at its current size, while its de Havilland Dash 8-400 fleet will be “right sized” to focus on Western Canada operations.

Swoop will remain “complementary” to WestJet, Hoensbroech said. The airline, as well as WestJet’s vacations business, would be boosted by its pending acquisition of Sunwing. The network changes will occur gradually through summer 2023.

Edward Russell

In Other News

  • IATA updated its 2022 forecast for the industry at its annual meeting in Doha last week. Global airlines are forecast to lose $9.7 billion on revenues of $782 billion, the latter of which represents 93 percent of 2019 numbers. The loss forecast is better than $11.6 billion in losses IATA last forecast in October. But not all is rosy: expenses are forecast at $796 million, or up 44 percent from last year driven by fuel and labor costs. In addition, the war in Ukraine, a weak global economic outlook, and continued uncertainty from Covid-19 all weigh on airlines. “It is a time for optimism, even if there are still challenges on costs, particularly fuel, and some lingering restrictions in a few key markets,” IATA Director General Willie Walsh said.
  • Frontier Airlines has countered JetBlue‘s $33.50-per-share, or $3.7 billion, offer for Spirit Airlines in the latest twist in the bidding war for the Florida-based discounter. Denver-based Frontier has upped its cash-and-stock offer to roughly $2.7 billion based on June 24 closing prices, and increased its reverse termination fee to $350 million from $250 million. In addition, Frontier now also has the backing of proxy advisory firm Institutional Shareholder Services that previously supported JetBlue’s takeover offer. Spirit shareholders are set to vote on Frontier’s offer on June 30.
  • The largest of Latin America’s three big pandemic-era airline bankruptcies is nearing a close. A U.S. bankruptcy judge approved Latam Airlines Group‘s Chapter 11 reorganization plan on June 18. Under the plan, a slimmed down Latam will exit its restructuring with $8 billion in new capital, including $5.4 billion in new debt. Pre-bankruptcy shareholders, specifically the Cueto family, Delta, and Qatar Airways all retain stakes in the post-Chapter 11 entity. Latam plans to exit bankruptcy in the second half of the year, following Aeromexico‘s exit in March and Avianca‘s exit in December.
  • Finnair is the second Oneworld member to take advantage of the alliance’s sustainable aviation fuel offtake agreement with Colorado-based developer Gevo. The Finnish carrier will take 35 million gallons of SAF, or 7 million annually, for five years beginning in 2027. Finnair plans to supply its flights departing Los Angeles with Gevo’s ethanol-based SAF derived from “inedible corn parts.” Japan Airlines has a separate agreement with Gevo for 26.5 million gallons of SAF over five years from 2027.
  • Thai AirAsia plans to sell up to 2 billion Thai baht ($57 million) in new bonds, according to a stock exchange disclosure. The two-year notes would carry an interest rate of 6.8 percent. Thai AirAsia plans to sell the notes from June 27-29, and close the transaction on June 30.

Edward Russell

Edward Russell

June 27th, 2022