The pandemic bankrupted Thai Airways but didn’t kill it. So good news, right: What doesn’t kill you makes you stronger? There’s not much evidence of that so far. Last quarter, the airline suffered a negative 6 percent operating margin, despite a 12 percent year-over-year drop in labor costs. The margin figure was more like negative 12 percent excluding subsidiaries outside the core airline.
On June 1, Thailand reopened borders and relaxed quarantine rules, hoping to resuscitate one of the world’s largest tourism markets. Think of Thailand like the Asian equivalent to Florida in the U.S. or Spain in Europe; a market whose beaches and cities attracted 40 million foreign visitors in 2019. Just 2.1 million visited during the first half of 2022, but the Thai tourism ministry expects that to reach between 18-30 million people next year. As you can see, the forecast range is wide due to lingering uncertainty, not least the status of Chinese tourists. They accounted for nearly 30 percent of all foreign visitors to Thailand pre-crisis. This doesn’t count the country’s 172 million domestic tourists, many of which travel to their destinations by air.
Thai Airways did well with cargo throughout the crisis, and cargo fundamentals remain strong. Recently, it’s positioned Bangkok as a hub for Asian and European travelers visiting resurgent tourist hotspots like Bali in Indonesia. It’s also generating some passenger business flying religious pilgrims to holy sites in Saudi Arabia. Thai Smile, a wholly-owned subsidiary, is instrumental to the company’s turnaround plan. Cutting labor costs was key. Also critical is fleet simplification. Thai ended the second quarter with 64 planes, 20 of them flying with Thai Smile. It has another 27 parked and 19 decommissioned for sale.
Separately, rival Bangkok Airways had a rough second quarter, underscored by its negative 17 percent operating margin. AirAsia’s Thai affiliate, meanwhile, which reports its results separately from the AirAsia Group, did even worse: a negative 93 percent operating margin, and that excludes unrealized losses on lease liabilities due to adverse foreign exchange trends. One common thread across Thailand’s airlines: They’re all hoping that India can emerge as a growing source of tourism, perhaps offsetting declines from China.
Strong Dollar Pushes Asiana to Loss
With a shaky balance sheet even before the pandemic, South Korea’s Asiana was immediately thrown into existential crisis by the Covid shock in March 2020. By November of that year, it had sold itself to arch-rival Korean Air, who hailed the deal as means to rightsize the country’s airline sector and make it more competitive globally. “In general,” Korean Air said at the time, “countries with a population less than 100 million have a single full-service carrier. However, Korea has two full-service carriers, which gives it a competitive disadvantage compared to countries like Germany, France, and Singapore with a single major airline.” The merger still isn’t final. Key competition regulators have yet to give their blessing, and Korean Air itself might be having second thoughts after seeing Asiana’s second quarter earnings. To be clear, operating results were excellent: A positive 10 percent margin. Asiana, like Korean Air, benefitted from Seoul Incheon’s status as a top global cargo hub, at a time of booming cargo markets.
The problem is Asiana’s heavy U.S. dollar obligations, at a time of soaring dollar strength. This includes dollar-denominated loans and aircraft leases, which are becoming increasingly burdensome. The accounting has to reflect this as well, which explains Asiana’s bloody $169 second quarter net loss despite the strong operating profits. If the merger does wind up happening, the enlarged Korean Air will be a stronger force in both the passenger and cargo market.
But Korean Air will also face new challenges, including the rise of startup Air Premia, which is already starting to take Boeing 787s in support of its plan to eventually attack intercontinental markets like to the U.S. On the shorthaul front, Jeju Air is a low-cost competitor, which incidentally reported a negative 44 percent operating margin for second quarter. The heavy loss is another indicator that shorthaul passenger travel within Asia is still far from normal.
Pegasus’ Seasonality Suggests Strong Third Quarter
Pegasus, a low-cost carrier in Turkey, earned a $43 million operating profit during the second quarter, which was good for a 7 percent operating margin. Nothing to be ashamed of there, yet its rival Turkish Airlines earned a margin almost double that. Of course, Turkish has a global cargo business that’s currently thriving.
For Pegasus, the name of the game is tourism, which recovered “faster than expected” this spring. Even better, the momentum continues into the summer. Keep in mind that August is a peak month for Europeans taking holiday to Turkey; that’s different from the U.S. where August (especially later in the month) tends to see waning leisure demand as schools reopen throughout much of the country. Winters are a different story — they’re typically quiet and often heavily loss-making for Turkish leisure routes.
With this in mind, Pegasus is one of the world’s most seasonal airlines, often posting extreme profits in the September quarter but ugly losses in the March quarter. As an example, it engineered a dazzling 40 percent operating margin in the third quarter of 2019, but that was after enduring a negative six percent margin in the first quater. Its full-year 2019 margin, according to Airline Weekly calculations, was 19 percent. So you can see, Pegasus went into the pandemic with strength. It’s now flying more available seat kilometers than it was pre-pandemic. And international passenger volumes in the second quarter, if not domestic volumes, were also above pre-crisis levels.
In business since 1990, Pegasus adopted its current low-cost business model in 2005. One feature of that model, unsurprisingly, is a heavy reliance on ancillary sales, which reached 25 percent of total revenues in the June quarter. More unique is the importance of connecting traffic, leveraging Istanbul’s position between Europe, the Middle East, and Central Asia. Pegasus doesn’t focus just on Istanbul though. Nonstops depart from multiple Turkish airports including beach resorts led by Antalya. Pegasus ended the second quarter with 95 Boeing and Airbus narrowbodies, and more A321neos on the way.
What about Turkey’s extremely weak currency? It’s not terribly problematic for Pegasus since a roughly equivalent portion of its revenues and costs (about a fifth each) are in lira. Its more relevant currency exposure is the euro-dollar exchange rate, with more of its revenue in the former and more of its costs in the latter. The current weakness of the euro versus the dollar, therefore, isn’t doing Pegasus any favors. The happier news is that its largest dollar-denominated cost — fuel — has steadily declined in price this quarter. Competitively, Pegasus has its eyes on Turkish Airlines, which is expanding its low-cost unit Anadolu Jet.
Other Second Quarter Highlights
- For perspective on Covid’s demand destruction: Sabre, a leading provider of commercial software to airlines, said in its latest earnings call that it estimates about 1.5 billion people will fly in 2022 than would have flown had the Covid pandemic not happened.
- AENA, the company that runs all of Spain’s major airports, made an important point during its earnings call: That labor cost pressures in Spain are “nothing near the labor cost pressures in the Northern European countries.” Also note that Cirium, which ranks airlines and airports according to their on-time performance each month, shows major Spanish airlines Iberia, Air Europa, and Vueling as Europe’s top three airlines for punctuality in July. Just as an example, Iberia’s on-time arrival rate was 81% last month, while KLM’s figure was just 66%.
- In Mexico, the country’s three publicly-traded airport companies gave updates on the current state of air travel. ASUR, which operates the Cancun airport among others, says Mexican airports haven’t seen the operational distress plaguing Europe and elsewhere, because there were never any mass layoffs. GAP highlighted the boom in Tijuana, thanks in part to many people using it as an alternative gateway to San Diego (a pedestrian bridge spans the border). OMA, meanwhile, whose busiest airport is Monterrey, described the phenomenon of “vaccine tourism,” in which Mexicans flew to Texas to get their Covid jabs this spring.
- Auckland Airport, in its fiscal year review, said traffic and airline capacity are recovering quickly. Still, passenger volumes remain well below pre-Covid levels. A key moment was the reopening of New Zealand’s border with Australia in April. Auckland is getting some prominent new flights, including Air New Zealand’s nonstops to New York JFK that starts in September, and an American Airlines nonstop to Dallas-Fort Worth in October. By December, based on current schedules, 23 airlines will be connecting Auckland with 37 destinations across the Middle East, Asia, the Americas, and the Pacific. The airport company did warn, however, that “rising operating costs for airlines and shortages in labor will slow the recovery in some markets.”
- Corporate Travel Management, or CTM, said its revenue from booking business travel for customers is growing but hardly back to pre-crisis levels. It says three key obstacles are hobbling a full recovery in corporate travel: One is the industry’s supply constraints. Another is that many of CTM’s clients are not themselves recovered from the crisis. And the third factor is China, which remains closed. CTM added that the reopening of the transpacific market in June has not resulted in much upside yet, “because our clients are on vacation.” An uptick is thus expected when holiday and vacation season ends in the coming weeks and months. Separately, CTM surveyed its clients in May, finding that 80 percent expected to do the same amount or more travel in fiscal year 2023 (ending June 2023) than they did in fiscal year 2019.
- Singapore-based lessor BOC Aviation cited three broad themes for the first half of 2022: One, demand recovery; two, supply-side bottlenecks; and, three, “the ever-changing role of governments impacting our industry.” More specifically regarding the demand, the two key exceptions to the recovery are China and Japan. (China alone recorded 74 million international passenger journeys in 2019; In 2021, that number was less than 1.5 million). Elsewhere, revenues are in many cases sufficiently strong to offset rising costs for fuel, wages, and interest. A few other notes from BOC’s earnings call: The company, in April, ordered 80 Airbus A320neos. It’s once again receiving Boeing 787s. It took a financial hit on aircraft stranded in Russia (it still hopes to get them back). And it thinks widebody aircraft values have at worst, “bottomed out.”
In Other News
- International Airlines Group (finally) owns a piece of Spain’s Air Europa. Last week, the group converted a €100 million ($102 million) convertible loan to Air Europa parent Globalia into a 20 percent equity stake in the airline. The move comes nine months after IAG dropped its initial bid to take over Air Europa after regulatory pushback; the group took a different approach in March with the convertible loan to Globalia and plans to acquire all of Air Europa within 18 months. IAG wants the Spanish airline to expand its Madrid hub into one that can compete with the likes of KLM‘s Amsterdam hub or Lufthansa‘s Frankfurt hub.
- Speaking of IAG, the group got some bad news from the operator of London Heathrow airport last week when it notified airlines that capacity caps implemented this summer will remain in place until the end of the current schedule, or October 29. IAG-owned British Airways is the largest carrier at Heathrow, though it has already reduced its schedules at the airport by more than 10 percent from plans through the end of October.
- Apollo Global Management has agreed to provide $700 million in debtor-in-possession (DIP) financing to bankrupt SAS. The debt is subject to approval by a U.S. bankruptcy court, which the airline expects by mid-September. Private equity firm Apollo also provided DIP financing to Aeromexico and Latam Airlines Group in their separate Chapter 11 restructurings.
- There was labor movement at both KLM and Norse Atlantic Airways last week. The former and its pilots union, the Dutch Airline Pilots Association, reached an agreement in principal on a new contract. The one-year accord includes two 2 percent pay increases — one October 1 and one March 1, 2023 — as well as productivity and flexibility improvements for KLM if it is ratified. And at Norse, its flight attendants officially joined the Association of Flight Attendants-CWA. The startup and union reached a pre-hire agreement in 2021 that will now go to members for ratification.
- Emirates and Aegean Airlines launched a new codeshare last week. The partnership covers eight domestic Greek routes from Athens operated by Aegean, plus Emirates’ Athens-Dubai route. The airlines will expand the codeshare in September to cover eight more Athens-EU routes, as well as Emirates’ Athens-Newark and Milan Malpensa-New York JFK routes.
- Canadian startup Jetlines finally has its operating certificate from Transport Canada. The receipt on August 19 comes not a day too soon as the leisure carrier already delayed its launch by two weeks to August 29. Jetlines will begin flights between Toronto Pearson and both Moncton and Winnipeg with Airbus A320 family aircraft.