Pushing Back: Inside This Issue
The airline recovery continues, but so does Covid’s spread. In the U.S., airport traffic remains on a steady upward trajectory, especially in states that reopened their economies and tourist attractions early. Those same early openers though, including the giant Florida and Texas markets, are now experiencing Covid outbreaks, threatening the recovery. China, much further along in controlling the diseases, discovered a new cluster of cases in Beijing last week. Far more widespread is a surge of new cases in South America (led by Brazil and Mexico) and the Indian subcontinent.
Europe, meanwhile, where the outbreak is mostly receding, hopes to salvage some of the peak summer tourist season by opening internal borders this month. But some countries like the U.K. are moving slower, effectively forbidding inbound tourism by imposing mandatory two-week quarantines on arriving passengers. A few other places worldwide are already welcoming international tourists with few or no restrictions, including Mexico’s beach resorts. But in general, international borders still remain closed for all but essential travel. That even includes the U.S.-Canadian border, and borders within East Asia where many countries have the virus under control. Still, across the world, airlines are restoring flights, some like American rather aggressively, and some like Cathay Pacific more conservatively.
In terms of the industry’s financial health, or absence thereof, IATA expects carriers to collectively lose $84b this year, followed by a $16b net loss next year. That’s of course subject to a lot of unknown variables, like the price of fuel and — perhaps most importantly — progress in developing and administering a Covid vaccine. It’s not inconceivable that some airlines, most notably U.S. airlines, might earn domestic profits next year, if the economy recovers, if travel demand recovers, if industry input costs stay depressed, if the virus is contained or defeated, and if carriers maintain current plans to greatly shrink capacity. Lots of “ifs.” But “if” is better than “no chance,” which defines the probability of any airline making money this year.
Healthy recovery next year will also depend on an upcoming battle with unions to extract contract concessions. It’s a battle shaping up at airlines across the world, amid universal downsizing. Already, tensions are flaring, as the example of British Airways shows. Its rival Virgin Atlantic, meanwhile, remains on bankruptcy watch, unable to secure meaningful government assistance. The same goes for LOT Polish and Azul in Brazil. Not Cathay Pacific though. Last week, it joined another group of European airlines (i.e. Austrian and TAP Portugal) in the club of carriers relieved of immediate liquidity stress by generous government saviors.
Verbulence
“One thing is certain: The travel industry is going to be profoundly transformed.”
Transat CEO Jean-Marc Eustache
Mondays With Skift Airline Weekly
On Monday, June 15, Chris Jones, McCarran International Airport chief marketing officer, discussed how the pandemic affected traffic to one of the largest leisure destinations in the country, and how things look now that Las Vegas is reopening. You can watch a recording of the event here.
Earnings
January-March (3 Months)
- Philippine Airlines: -$182m; -20%
*Net result in USD/*Net result excluding special items/ Operating margin
Weekly Skies
- Philippine Airlines is no stranger to ugly financial results. But not this ugly. Battered by Covid’s wrath, the airline reported a negative 20% operating margin for the turbulent first quarter. That’s a giant reversal from positive 6% in the same quarter last year, as revenues dropped 18% but operating costs increased 5%. These numbers were heavily skewed by big hedge losses, which drove fuel costs up by 39%.
As of today, PAL is operating a limited flight schedule covering most of its top international destinations, including overseas cities like Los Angeles, San Francisco, New York. Honolulu, Toronto, Vancouver, London, and Dubai. But most routes operate just once a week and in some cases will arrive in Cebu rather than Manila, when testing facilities at Manila airport are backed up. Passengers who land in Cebu will be tested for Covid there and forced into hotel quarantine until getting their test results (usually 24-to-48 hours). The point is, these are flights PAL is operating for emergency use only.
Looking ahead, the Philippine government hopes to open selected Covid-free islands (like Boracay) for tourism, at first marketed to domestic travelers. It then hopes to have these islands join various prospective bilateral or multilateral travel bubbles, with Australia and New Zealand, for example, or with fellow countries in the ASEAN region. South Korea, as it happens, is the single most important source of tourists for the Philippines. Manila might take longer to see air travel normalize.
A longer-term question for the capital is the fate of plans to develop a new airport — the current airport was grossly insufficient to handle pre-Covid levels of traffic. In the meantime, PAL itself is cutting costs in a bid to stay solvent. Selling a 10% stake to Japan’s All Nippon last year provided some new capital. PAL’s controlling shareholder has more recently injected new funds. It’s joined with rivals Cebu Pacific and AirAsia in asking for government relief but so far unsuccessfully.
Transat’s Summer Flight Plan Depends on Borders Reopening
- Canada’s Transat was headed for its best winter results since 2009. Profits were up sharply y/y during its November-to-January quarter. February too, was more profitable this year than last. But then along came Covid, decimating demand from late March and causing Air Transat to ground all of its flights on April 1. Revenues for its February-to-April quarter thus plummeted 36% y/y, though the company did still manage a positive 4% operating margin ex special items (it doesn’t break out results for just the airline unit). Flights have remained grounded.
But last week, the company announced a July 23 restart date, using mostly A321 LRs to reopen 28 routes. A few will be domestic, but as a primarily international airline, most will be to Europe. Some will be to U.S. and Caribbean sunshine destinations too, though peak season for these routes is winter, not summer. Where in Europe will it fly? Family-visit markets are a target, linking Montreal for example with several cities in France (Paris, Marseilles, Lyon, Bordeaux, Toulouse, and Nantes). Toronto will see a few reopened routes to the U.K. Also starting are flights to Portugal, Greece, and Italy, all welcoming international travelers already.
Transat’s summer flight plan, however, depends on Canada itself reopening its borders by July 23. But that’s not the only thing Transat is talking to Canada’s government about. Unlike the U.S. and most European governments, Ottawa hasn’t provided any meaningful airline-specific aid, just subsidies to help pay airline workers. Transat hopes it can at least get some financing help to fortify its staying power until Q4, when it hopes to close a takeover deal with Air Canada.
That deal, which still requires Canadian and European regulatory clearance, forbids Transat from borrowing more money before the deal is closed. Fortunately, its cash cushion is sufficient for now, thanks in part to various asset sales in recent years, and a decision to exit hotel development. Also helpful: Its refusal to issue any cash refunds, instead giving customers travel vouchers valid for the next two years (Ottawa has been helpful here, allowing such a policy). More than 85% of its workers are on temporary leave.
Ancient A310s have been permanently retired. It’s negotiating to return all of its B737s as well. Three more A321 LRs by contrast, are still due to arrive in the coming months. What does it expect this summer? Bookings are starting to exceed cancellations. That’s good. But there’s still a lot of uncertainty, encapsulated by four key questions: 1) when will customers be allowed to travel? 2) Will they want to travel? 3) Will they be able to afford to travel? And 4) will they be afraid of catching the virus if they travel?
Gradually, the company is reopening its travel agencies across Quebec and elsewhere in Canada, hoping to sell at least some tickets this summer, salvaging a bit of what’s typically its best season. But Transat thinks it will take several years before a return to 2019 traffic levels.