Pushing Back: Inside This Issue
On Sept. 11, 2001, the French newspaper Le Monde, expressing solidarity with the American people, famously wrote “We’re all Americans now.” Last week, on the 19th anniversary of the 9/11 attacks on New York and Washington, U.S. airlines face a new and even graver assault on their industry, albeit one they’re in much better financial shape to endure. As they seek near-term recovery by chasing price-sensitive leisure and family-visit demand, even the Uniteds, Americans, and Deltas of the world are chanting: “We’re all low-cost carriers now.”
As all U.S. carriers adopt tactics pioneered by the likes of Southwest and Allegiant, demand is mercifully getting a bit better. Everyone’s cautious to be sure, after deflated hopes that followed earlier green shoots this spring. But U.S. domestic and even shorthaul international bookings are in fact showing signs of life again. Even so, the next six to nine months will in all likelihood be rough. It’s just a question of how rough, in the remaining period before vaccinations hopefully end the crisis once and for all.
Some U.S. carriers are nevertheless using this period of darkness to light new strategic fires. United surprisingly announced a bevy of new overseas routes launching in 2021, all targeted toward family-visit demand (with cargo also top of mind). JetBlue, perhaps the most strategically active U.S. airline during the crisis, itself announced another onslaught of new routes, several targeting at United’s Newark hub.
As U.S. shorthaul demand shows some upward momentum, Europe’s airlines by contrast, saw bookings slow as summer turned to fall. Quarantines are the key driver, imposed abruptly and inconsistently, airlines say. In recent weeks, the U.S. has seen Covid infections slow from extremely high levels, while Europe has seen cases rise from more moderate levels. Spain, the Florida of Europe in terms of tourist demand, is Europe’s leading hotspot. France and the U.K. are likewise seeing outbreaks.
Throughout much of East Asia, the virus has been better contained. But that’s little consolation to Singapore Airlines, whose all-international network remains largely shuttered. Inevitably, the carrier last week announced major job cuts.
“The customers will be back very, very fast, especially in the VFR and leisure market… And we know by experience, going through all those crises, that as soon as the people feel comfortable, they will start to travel a lot.”Transat Chairman and CEO Jean-Marie Eustache, referring to “visiting friends and relatives” travel.
April-June (3 Months)
- Nok Air: -$25m; -66%
*Net result in USD/*Net result excluding special items/ Operating margin
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- Most reporting airlines have already issued their calendar Q2 statements. India’s SpiceJet will belatedly do so this week. Also this week, U.S. government data will show figures for Frontier and Sun Country. Greece’s Aegean will report at the end of this month.
Last week, Thailand’s Nok Air, which filed for bankruptcy in late July, disclosed its Q2 financial statements, which showed a $25m net loss. Curiously, it simultaneously showed an $8m operating profit, but with “other income” accounting for half its total revenue. What’s that? In its latest annual report, it defines “other income” as mostly revenues from interest income, exchange rate profits, refunds of insurance and maintenance, and profits from the sale and lease back of aircraft. It’s stuff, in other words, that doesn’t reflect operations. Exclude it, and operating margin for the quarter was really negative 66%.
Nok did generate some activity as its domestic flying was active. The airline consistently posted heavy loss margins in the years leading up to the crisis. It was initially backed by Thai Airways, which later lost interest, and which today holds just a 16% stake. That stake, of course, is in jeopardy of disappearing as Nok restructures in bankruptcy. Its priorities for restructuring are debt relief, most importantly, and finding a viable business model. It sees potential in expanding international flying when feasible. It will seek more distribution channels. It wants to deepen relationships with travel agencies both in and out of Thailand. NokScoot, a loss-making longhaul joint venture with Singapore Airlines, was dissolved.
- Canada’s Transat, which last week reported losses for its May-to-July quarter, barely even flew during the period. It relaunched flights on July 23rd after four months of inactivity. Canada’s government, to the great frustration of Air Transat and other Canadian carriers, has done stunningly little to help the travel sector, making it an outlier among rich-world countries. They worry this will create an uneven playing field with U.S. and European rivals, most of whom received lavish state support.
In any case, Air Transat is back in the air, and getting a modest amount of demand on domestic routes, and family-visit routes to places like France and Portugal. With the winter now coming, bookings to Mexico and the Caribbean are showing some faint signs of life. But still, family-visit demand is stronger than leisure right now. Canada’s travel restrictions are extremely strict, with mandatory quarantines present even within the country among different provinces. Most people traveling internationally are people with dual nationalities or foreign residency permits.
When will travel restrictions ease? Nobody knows, but Transat doesn’t expect a true revival in demand until they do. Two-thirds of the company’s staff are currently on temporary layoff (helped by government wage subsidies). Some 40% face permanent dismissal if things don’t change quickly. Travel policies are actually not the only area in which Ottawa holds great sway over Transat’s future. Competition regulators there are reviewing Air Canada’s proposed takeover deal. E.U. regulators are doing the same, and their decision must come before Dec. 27. After that Air Canada would be free to walk away.
As it waits, Air Transat is doing its best to understand new demand patterns, noting for example that many of the people traveling right now are younger, booking late, and visiting family members or friends. Load factors are running in the 50% range, aboard six active A321 NEOs. The NEOs, importantly, will assume greater prominence in the airline’s fleet going forward. Transat isn’t quite sure when leisure demand will return to pre-crisis levels. But the segment doesn’t face the longterm structural demand changes that currently haunt the business segment. For that it’s thankful.