Delta, United Poised For Revenue Boost in Q4

Edward Russell

October 10th, 2022

Full flights and busy airports are likely to continue in the U.S. through the end of the year, Wall Street analysts warn. Demand is forecast to remain robust as corporate travel continues to recover, and consumers shift spending back to services — like air travel — after a pandemic switch to goods.

Delta Air Lines and United Airlines could benefit the most from these trends in the fourth quarter, according to a recent report from Raymond James. This is not to say that revenues will weaken at other U.S. airlines, including American Airlines and Southwest Airlines, but more because Delta and United are more exposed to markets where the recovery has been slow but accelerated in recent months as more people return to offices and international markets reopen.

“It appears there is greater demand recovery among large corporates and in the northeast in particular, which along with gradual reopening of long-haul international markets likely places [United] and [Delta] in a relatively stronger position in terms of revenue recovery,” Raymond James analyst Savanthi Syth wrote.

New booking data from J.P. Morgan appears to confirm this view. In September, booked revenue for the fourth quarter was “comfortably ahead of 2019” at American and United, analyst Jamie Baker wrote October 6. He added that Delta is expected to see similar trends.

A third point, and one beneficial to airlines, is consumers’ continued shift back to spending more on services. Melius Research analyst Conor Cunningham wrote October 6 that roughly 66 percent of consumer spending was on services in August compared to roughly 69 percent before Covid. He expects the percentage to revert to the pre-crisis norm in the months ahead.

“This is an important theme as it speaks on steadily improving demand for travel given a shift in spending habits,” wrote Cunningham.

These points are all good news for U.S. airlines as they near a full recovery from the pandemic. Most are expected to report strong results in the third quarter when travel demand was strong but capacity constraints — from staffing issues to air traffic control limits and aircraft delivery delays — kept airfares high. In September, United raised its third quarter revenue forecast a point to up roughly 12 percent compared to 2019, and Southwest honed its guidance to up 9-11 percent. And JetBlue Airways raised its unit revenue forecast by as much as three points to up 22-24 percent year-over-three-years.

“We are seeing some really great leisure strength into the fall,” JetBlue President Joanna Geraghty said at the Skift Global Forum in September. She added that corporate demand, particularly to and from New York, was also on the rise.

U.S. carriers are widely expected to report profits, though not record profits, in the third quarter. This follows similarly strong financial performance in the second.

But inflationary and other macroeconomic pressures are weighing on U.S. airlines even with robust demand. Costs are rising at accelerated levels driven, in part, due to the run up in labor expenses needed to address staffing issues. High fuel prices are also an issue; though these have eased somewhat with the recent declines in the cost of Brent crude. After peaking at over $129 per barrel in June, Brent spot prices closed at $94.42 per gallon on October 6. It is unclear yet how the Organization of the Petroleum Exporting Countries’ decision this week to cut production rates will impact jet fuel prices.

Cowen & Co. analyst Helane Becker wrote on October 6 that she is watching closely how much airlines are recapturing higher expenses through higher airfares. Other items to watch include whether the number of leisure travelers buying up to premium seats and products is holding, and the pace of the corporate travel recovery since Labor Day in early September.

“We expect cautious optimism with a hefty dose of concern due to inflationary pressures on costs,” Becker wrote on her outlook for U.S. airlines’ third quarter calls.

Delta is the first to report third quarter results, coming this week on October 13.

Edward Russell

Startups Flyr, Norse Atlantic Face Long Winter

Flyr and Norse Atlantic Airways, two European startups that launched during the pandemic, are facing a colder winter than normal. While Europe has long been known for significant seasonal demand shifts between summer and winter, the addition of high energy costs, inflation, and resurgent competitors appears to be challenging these new airlines.

Flyr, a Norway-based startup that took off in June 2021, said last week that it would cut its winter schedule drastically. Instead of flying a planned 12 aircraft, the airline will operate just five or six and suspend flights to all but a few key markets — including Alicante, Barcelona, Paris, and Rome — of the 27 destinations it served in September. The cuts, plus involuntary staff furloughs, aim to reduce expenses by half this winter and minimize cash burn to 400 million Norwegian kroner ($38 million). On top of the macroeconomic issues, Flyr CEO Tonje Wikstrøm Frislid said competition with legacy carriers, an age old challenge for any startup, was also challenging.

“It has taken longer than expected to build loyalty among business travelers on domestic routes in Norway, where the incumbent carriers maintain large market shares,” he said.

At Norse, the airline will suspend its flights to Los Angeles from Berlin and Oslo for the winter; two routes that it previously planned to fly year round. The cuts amount to a 28 percent reduction to planned capacity for the November-through-March period, according to Diio by Cirium schedules.

“The winter season is historically more challenging for the industry and this year faces the additional burden of high fuel prices, increasing inflation in the markets that we operate and uncertainty in overall demand,” a Norse spokesperson said. “We have taken action to trim certain frequencies from Oslo and Berlin to the U.S…. The routes that we will continue to operate throughout the winter schedule are in strong demand.”

Flyr lost nearly $61 million and Norse $51 million in the first half of 2022, according to their latest available financial data. However, the latter only began flying in June.

The cuts come as many more established European airlines indicate surprisingly resilient travel demand despite the seasonal and economic pressures. Norwegian Air CEO Geir Karlsen said on October 6 that in September the airline, a direct competitor of Flyr, saw “particularly high demand for international destinations” and a full recovery in corporate travel. He added that, as expected, the airline saw lower demand in the winter but within its forecast. Norwegian Air previously said it would seasonally reduce winter capacity by up to 28 percent compared to the summer.

And Wizz Air CEO Josef Varadi said at a Eurocontrol event on October 4 that European air travel “demand [was] surpassing previous levels.” The discounter was the fifth largest airline in Europe in terms of seats from January through September, Diio data show.

Even SAS, in a guidance update on September 30, said it expects passenger numbers to continue to recover to 90 percent of pre-pandemic levels during the first half of its 2023 fiscal year, or the winter November-to-April 2023 period. The legacy carrier, which is restructuring in U.S. Chapter 11, also said leisure demand was robust while corporate demand was returning at a slower pace.

“We expect a stronger demand/fare environment, as leisure demand continues to be more resilient than previously expected, particularly related to peak holiday travel,” Raymond James analyst Savanthi Syth wrote on the European outlook last week. She noted that macroeconomic factors, including energy prices and inflation, could weigh on profitability even as travel demand remains robust.

Other European startups also appear to be in a better situation than Flyr and Norse. Play Airlines CEO Birgir Jónsson said on October 7 that winter ticket “sales over the past weeks have been strong,” even with the seasonal slowdown and economic uncertainty. The carrier is continuing with its fleet growth plans to support additional flying next summer, including new service to Washington Dulles. Play launched in June 2021.

Edward Russell

South Africa’s Airlink Acquires Stake in FlyNamibia

Southern Africa remains an aviation market in flux with South African regional Airlink inking a deal for FlyNamibia, and long struggling South African Airways defending itself against questions over its future.

Airlink will buy 40 percent of FlyNamibia, Namibia’s only operating scheduled domestic airline, under a deal unveiled at the end of September that aims to expand air service both within and to the Southern African country. The deal will bring the two carriers closer together with all FlyNamibia flights transitioning to using Airlink’s IATA code — 4Z — in an effort to boost sales and improve international connectivity, particularly with Airlink’s expansive list of global partners. The value of the deal was not disclosed.

In the past two years, Airlink has signed new codeshares with global giants Emirates, Qatar Airways, and United.

The expansion comes as questions mount over the future of South Africa’s flag carrier, SAA. On September 29, the carrier released a statement saying it was not at risk of losing key international route authorities despite many being dormant since it suspended operations early in the pandemic. The airline has only flown nine routes — six within its namesake country, and three regionally — since it resumed flights in September 2021. South African Airways will resume two more routes in November: Johannesburg to Victoria Falls, and Windhoek, Diio schedules show.

“SAA management assures that there is a variety of resources within the company and the global aviation industry that can be innovatively exploited for the future success of SAA. We assure our customers and all our stakeholders and partners that there are no plans, nor an intention to see South African Airways liquidated,” SAA Executive Chairman John Lamola said earlier in September in response to questions over the airlines’ long-term viability.

The questions over SAA’s future surround the potential sale of a stake in the carrier to a private equity firm. Lamola described progress on the deal as “beset with delays” citing legal requirements put in place by the South African government, but that the airline aims to conclude it by March.

The moves come just over four months after South Africa’s second largest airline, Comair, closed its doors. In the second half of 2022, every remaining carrier in the country has gained share compared to the first half: market leader Safair 20 points for a dominant nearly 60 percent share, Airlink 4 points for 20 percent, and South African Airways 7 points for 15 percent, according to Diio. Overall, seat capacity in South Africa is down 12 percent in the second half of the year compared to the first half; and 38 percent compared to 2019.

The plight of South African Airways highlights the fact that the change in African aviation is not over. Airlink’s purchase of FlyNamibia is one such change. To be clear, FlyNamibia is a niche player in Africa providing mainly domestic flights in its namesake country; state-owned Air Namibia shut down in 2021. Airlink and FlyNamibia’s partnership is emblematic of the increasing cross-border airline cooperation — and consolidation — underway across the continent. This cooperation is largely seen as a way to maybe, finally realize the seemingly perennially unrealized airline potential in Africa.

In just the past month, African aviation leader Ethiopian Airlines was selected as the preferred bidder for a new Nigerian airline, Nigeria Air. And Air Arabia unveiled plans to launch a new subsidiary in Sudan named, aptly, Air Arabia Sudan. These deals, and Airlink’s own for FlyNamibia, come almost a year after SAA and Kenya Airways unveiled their own partnership — a deal that, as yet, hasn’t shown much progress.

But each deal faces its own challenges. Nigeria has bedeviled many other airlines, and entrepreneurs, prior to Ethiopian. There are armed conflicts in both Ethiopia and Sudan. And, as for SAA and Kenya Airways, there is no guarantee that joining two troubled airlines with years of state — and political — intervention is a recipe for success.

In terms of Airlink and FlyNamibia, the deal was described by executives of both airlines as supporting Namibia’s economic growth, and about more than just creating a larger airline. FlyNamibia Managing Director Andre Compion spoke of the larger carrier being better able to serve the country’s expanding resource industry, and returning tourists.

Edward Russell

In Other News

  • Airlines from most parts of the world continue to report strong traffic and load factor gains as travel demand recovers. Ryanair, for one, said load factors for September reached 94 percent, up 13 points from a year earlier. The carrier flew about 89,000 flights during the month, carrying about 16 million passengers. Singapore Airlines, Ryanair’s polar opposite in terms of service, said “customers are especially keen on destinations that have remained largely closed over the last few years.” That means, specifically, Hong Kong, Japan, South Korea, Taiwan, and mainland China, for which forward demand appears strong for the year-end holiday season. In Mexico, meanwhile, the LCC Volaris issued the following statement: “Load factor reached a monthly record for September as demand remained strong. Forward bookings are solid, and we expect to maintain a strong load factor for the remainder of the year.”
  • London Heathrow is not extending its capacity caps beyond October, according to the airport. While some restrictions remain in place, reports indicate that they will be removed as well except during the peak holiday travel periods. Either way, airlines benefit from a regime that has been in place for several months, which has allowed them to plan their schedules and avoid the sudden changes that occurred over the summer.
  • A big step in the massive terminal modernization project at Chicago O’Hare will take place on October 12. Delta will move to Terminal 5 from Terminal 2, an early step in the phased expansion project. While United and Alaska Airlines will initially take over Delta’s former gates, the move opens space for the eventual demolition of Terminal 2 and construction of a new “global” terminal and two new satellite concourses.
  • Pilots at the Lufthansa Group’s budget arm, Eurowings, struck on October 6. The airline cancelled roughly half of its just over 500 flights scheduled for the day. Pilots union Vereinigung Cockpit said talks over wage increases with the airline had “failed.” The strike came a month after pilots at Lufthansa, which are also represented by VC, also struck in a wage dispute.
  • The U.S. Bureau of Labor Statistics published its latest monthly jobs report, always closely watched by Wall Street, Washington, and Corporate America. It showed the addition of 2,800 new jobs in air transportation during September, compared to August. That was about 1 percent of the overall new jobs created throughout the U.S. economy last month.

Edward Russell & Jay Shabat

Edward Russell

October 10th, 2022