Latin America’s Airline Recovery Still Hard to Predict, Will Vary by Country
Pushing Back: Inside This Issue
The airline industry in Latin America and the Caribbean is in a tough spot. Some of its largest players are in the bankruptcy process, and some have stopped flying altogether, and the ones that remain are finding the region’s patchwork quilt of travel restrictions tough to plan around. Some countries, like Mexico, are completely open. Others, like Chile, are shutting down again. And meanwhile, the coronavirus has shown it’s not close to done, with a worrisome new surge of infections and deaths in Brazil. We take a look at the region in this week’s Feature Story.
Elsewhere in this issue, Norse Atlantic’s CEO is confident the U.S. will grant a foreign air carrier permit, despite noises from some of those who fought Norwegian Air International’s entry into the U.S. It’s a wholly different airline, Bjørn Tore Larsen said. Former United and Allegiant executive Andrew Levy’s new airline starts flights at the end of the month. A Canadian airline plans to be like Porter, while Porter is grounded. And Frontier added a lot of routes.
Verbulence
“If you have the lowest costs in the industry, you have an advantage over every other airline competing for the same passengers.”
Norse Atlantic CEO Bjørn Tore Larsen
The Airline Weekly Lounge Podcast
New episodes drop every Thursday and are available on our site or wherever you get your podcasts. In the latest episode, Editor Madhu Unnikrishnan and Brian Sumers, Skift editor at large, debate whether the U.S. really is on the cusp of a summer travel boom for airlines, or whether people will continue spending their discretionary income on plants (and other things).
Weekly Skies
Norse Atlantic Airways CEO Bjørn Tore Larsen brushed off comparisons to Norwegian Air and is confident the U.S. will approve the new airline in time for its planned transatlantic launch later this year or in the first quarter of next year.
“We have nothing to do with [Norwegian Air’s] NAI,” Larsen said. “We don’t see any reason why our application should be rejected.”
But the comparisons are striking, if not wholly accurate. Norse Atlantic plans to offer low-cost flights between Europe and the U.S., on a fleet of former Norwegian Air Boeing 787s it leased from AerCap. The new airline launches just as Norwegian Air, in bankruptcy, pulled back from long-haul flights to focus on flights in the Nordics and the rest of Europe.
These similarities were enough to re-open some of the wounds left by the bruising fight to approve Norwegian Air International (NAI), Norwegian Air’s Irish subsidiary, a few years ago. Unions and competing carriers on both sides of the Atlantic claimed then that Norwegian Air based NAI in Ireland to avoid Norway’s stricter labor laws. It took years for the U.S. Transportation Department to approve NAI’s foreign air carrier permit, an unusual delay for a European airline.
And many of those same objectors are back. One of the principals, Rep. Peter DeFazio (D-Ore.), chairman of the House of Representatives Transportation and Infrastructure Committee, recently told Transportation Secretary Pete Buttigieg it was “imperative” that the agency deny Norse Atlantic’s application. Joe DePete, head of the Air Line Pilots Association, called Norse Atlantic a “Frankenstein’s Monster … putting a bunch of dead parts together.”
These objections are unfair, Larsen said. “We have observed the comments and believe they are based on a misunderstanding,” he said. “We are a Norwegian company, flagged in Norway, using Norwegian, European, and American crews.”
This difference is critical to understanding why Larsen is more confident of Norse Atlantic’s prospects with regulators. NAI sourced crews from Europe, the U.S., and, most controversially, Asia, which its detractors said violated the U.S.-EU open skies agreement’s labor protections. “We will provide a lot of good jobs in Europe and the U.S.,” Larsen said. “And if our crews want a union, we will agree.”
Before it can apply for a U.S. foreign air carrier permit, the airline must have a Norwegian air operators certificate (AOC). Larsen expects Norway to award an AOC in the next five to six months.
Norse Atlantic has other challenges besides a protracted fight in Congress and the DOT. The company is picking up the low-cost long-haul mantle just as Norwegian, the last real player in that sector, jettisoned it. The model has never made money for airlines, and not just Norwegian Air, but Icelandair have abandoned it, and Wow Air went belly up trying to make it work. “They never made money, they never had a chance to make money, but they were doing a lot of damage along the way, and they’re gone,” United CEO Scott Kirby recently said of the three European low-cost, long-haul airlines.
But Larsen noted that Norse Atlantic is fully funded by several of the largest banks in Scandinavia. The company has raised $153 million (NOK1.3 billion) from more than 350 investors, including former Norwegian Air executives Bjørn Kjos and Bjørn Tise (although Larsen points out they are just investors). It debuted on the Oslo Bourse this week. “We are fully funded and have the flexibility to start when [operations] when demand returns,” he said.
Larsen is betting that demand for international travel will “blossom” as soon as countries ease travel restrictions and more people get the vaccines. “There is an underlying desire to travel,” he said. “We expect Europe and North America to be ahead of other continents in controlling the pandemic.”
The company’s first routes are expected to be between Europe and destinations in the U.S., although Larsen said the route map “is not cast in stone.” Initial targets include Miami, New York, London, and Paris. The carrier has not secured slots at London Heathrow and thinks it most likely will operate from London Gatwick. Similarly, it does not have slots at New York John F. Kennedy International Airport, but has had a “warm welcome” from airports in the New York area, Larsen said. “JFK is high on our list.”
Long-haul traffic depends on feed from domestic markets to fill widebody aircraft. Norse Atlantic is in talks with several undisclosed airlines to provide connections. The carrier sees the continent of Europe as its catchment area and will operate flights from various European cities — not just in Scandinavia — to the U.S., Larsen said.
Norse Atlantic will start taking delivery of its nine Boeing 787s this year and into next year. The aircraft will be configured with about 60 premium-economy seats and 290 economy seats. Larsen expects the fleet to grow to between 15-20 aircraft, depending on demand.
Several new airlines are popping up to take advantage of low aircraft costs caused by airlines downsizing their fleets. In the U.S., David Neeleman’s Breeze is gearing up with a fleet of Embraer E190s. Avelo Airlines, a startup led by former United and Allegiant executive Andrew Levy, will start flying later this month (See below). In Canada, Connect plans to start service between Toronto and several cities in the U.S. All see a vacuum left by other airlines’ downsizing and by the industry consolidation that has left just a handful of very large airlines on both sides of the Atlantic.
“It is very unfortunate that these circumstances [the pandemic] led to these opportunities,” Larsen said. “We think it’s a great time to start a new airline and to contribute to economic growth.”
Avelo Could Have East Coast Operation By Year’s End, Levy Says
Andrew Levy sure sounds undaunted about the prospect of launching an airline in the teeth of the worst crisis for the industry in its century-long history. Is the former Allegiant and United executive crazy, or will time show the brilliance of his bold move?
Levy’s latest project, Avelo Airlines, will launch its first flights on April 28 from Southern California’s Burbank Hollywood International Airport. operating short-haul, leisure-focused routes to 11 cities west of the Rocky Mountains. The airline has raised $125 million in private-equity funding. Levy, who is the airline’s chief executive, did not disclose the investors.
“In the past, what you’ve seen is that times of crisis are the best times to start great businesses,” he said. “The timing for us was absolutely perfect.”
The pandemic presented unique opportunities for a startup airline, Levy said. Aircraft are available for millions of dollars less than they would have been before the pandemic. Fuel is relatively inexpensive. The pool of available talent has grown as airlines have shed both management and front-line employees through buyouts and voluntary separation packages. Companies that provide the backend systems that make an airline work, like information technology, have the capacity and are offering discounts. And slots at congested airports have become available, as the industry retrenches to meet current demand.
This last point is why Avelo chose Burbank for its first base, said Levy, a former Allegiant president and United chief financial officer who earned a reputation over the years for financial acumen and mastery of airline operations. The airport had spare capacity as the airlines that serve it scaled back their flights. “Our decision to fly from Burbank was driven by the pandemic,” Levy said, referring to the newly available slots and gate space at the airport. “It would have been extremely difficult to do so a year ago.”
Furthermore, Burbank is right in the sweet spot of the niche Levy hopes Avelo will fill. In the Los Angeles basin, Burbank is in the second-largest catchment area in the U.S. but doesn’t have the cut-throat competition that Los Angeles International has. And Burbank has a sizeable and desirable catchment area of its own, and a population Levy believes will welcome not having to drive to LAX.
But even more central to Avelo’s business model is Bubank’s position as a secondary airport in a major metropolitan market. Even with the pandemic, the major airports — think New York’s John F. Kennedy International and LaGuardia, Chicago O’Hare, or San Francisco International — remain congested and competitive. During Levy’s tenure, Allegiant wrote the playbook on operating to secondary airports. Levy hopes to replicate it with Avelo with a twist.
While Allegiant focused on connecting leisure travelers in smaller towns to vacation destinations, like Las Vegas, Avelo will fly from secondary airports in large metropolitan areas to underserved markets a short hop away. “Allegiant was much more tailored and went purely after leisure travelers,” Levy said.
“We are targeting a wider customer segment,” he said, adding, “We are not just going after the budget customers — Spirit, Frontier, and Sun Country do that really well. We are interested in building out connections that don’t exist by using convenient secondary airports.” The airline’s focus will include not just leisure travelers but self-booking business travelers in the communities it serves.
The initial batch of routes will fly to destinations that can easily be reached from Southern California and a primarily outdoor-leisure focused. These include Santa Rosa, Redding, and Eureka, Calif.; Medford, Bend, and Eugene, Ore.; Bozeman, Mont.; Mesa, Ariz.; Grand Junction, Colo.; Pasco, Wash.; and Ogden, Utah. The first flight will be to Santa Rosa on April 28, with the rest to follow through May 20.
But Levy is quick to point out that Avelo didn’t set out to capitalize on the trend toward travel to outdoor leisure destinations; that was just a happy byproduct of the cities the company targeted from Burbank. “These are underserved cities that historically have been viable,” he said. “These markets are ones that have worked well but will work even better due to the pandemic.”
Burbank may be the first base, but Avelo is aiming to establish similar bases around the country by the time it gets going. In other words, the airline doesn’t plan to focus only on the Western half of the country. The company chose Houston as its headquarters for its geographically central location. Levy predicts the airline could have an East Coast presence by the end of this year. At launch, Avelo is expected to have 200-250 employees, most based in Burbank.
The second major factor in Avelo’s founding was the last decade’s wave of airline mergers, which winnowed the industry down to four major players. Delta Air Lines, American Airlines, United Airlines, and Southwest Airlines control 80 percent of the U.S. market, with Alaska Airlines (itself the product of consolidation after it acquired Virgin America) and JetBlue comprising roughly another 10 percent, with the balance operated by niche airlines like Allegiant, Sun Country, Frontier, and Spirit.
Consolidation led to the three network carriers — Delta, United, and American — to focus on their hubs, while Southwest, which changed its focus from secondary airports to major metropolitan destinations, began acting more like a hub carrier by connecting passengers over its focus cities. This resulted in smaller cities losing air service and presented Avelo with an opportunity, Levy said. “The effects of consolidation and the results of it are hard to overstate,” he said. “It was a massive change.”
“Hub markets that are successful are ones in large metro areas, and geography plays a role,” Levy said. “Big cities can support these operations, but that creates an opportunity for us to create something different: People don’t want to drive from Bend, Ore., to Portland for a flight.”
Avelo is not alone in sensing an opportunity. JetBlue and Azul founder David Neeleman is gearing up his startup, Breeze Airways, with a fleet of Embraer E190s. And across the Atlantic, Norse Atlantic Airways saw a vacuum when Norwegian abandoned long-haul flights to launch its own low-cost, long-haul business with nine Boeing 787s (See above).
The major carriers are not likely to take the new competition lying down — eventually. Although now they are focused on survival and chasing whatever traffic they can find, that will change, Levy admits. “When our competitors are doing well, they will care more about new entrants,” he said. “But now is a wonderful time to get started.”
Avelo will start operations on April 28 with three Boeing 737-800s, one it owns and two leased from GECAS. The airline expects to have six aircraft by the third quarter and could have as many as 12-18 737-800s by 2022 if the company performs as expected, Levy said. The aircraft will be configured with 189 seats, and 60 of those seats will be longer-pitch and sold at a premium.
Fares will be unbundled, Levy said. The airline will charge for carry-on and checked bags as well as seat selection. Avelo will focus on out-and-back flights, avoiding the costs and complexities of connecting traffic and making network planning simpler, Levy said. Tickets will not be sold through GDS systems.
“What the future looks like is anyone’s guess,” Levy said, noting that the pandemic itself has not run its course yet. “But the opportunity was there, and what we’re doing resonates now, especially when people can’t wait to get out and move around.”
Passenger Recovery Uneven, but Cargo Remains Strong
A year ago, airline industry leaders were excited by “green shoots” of emerging demand for summer travel. After a relatively busy summer season, the Covid pandemic surged, showing it wasn’t done, and those green shoots withered. Now, with increasing vaccinations and rebounding economies worldwide, the industry is more cautiously optimistic that the shoots they see now will endure and grow.
The U.S. domestic airline market, in particular, is likely to recover by the middle of 2022, consultancy Oliver Wyman predicts, and the restart will be “less gradual” than originally forecast. As the federal government’s $1.9 trillion stimulus package trickles through the economy, more people will have the discretionary income to travel. And as travel restrictions fall around the country and attractions open, more leisure travelers will take to the skies, Oliver Wyman said.
Consumer confidence also is rising in the U.S. as the pace of vaccinations accelerates, the report said.
Business travel, however, will lag and is not expected to rebound more meaningfully until companies start bringing workers back to offices full time and trade shows resume. International travel, similarly, will remain constrained until worldwide vaccinations rise and travel restrictions are eased.
The International Monetary Fund expects global GDP to rise by 6 percent this year, up from the 5.5 percent it forecast earlier, and after contracting by 3.3 percent last year — the worst annual contraction since the Great Depression. This growth will moderate to 4.4 percent in 2022, still higher than historic norms.
This rapid economic growth is redounding to the benefit of air cargo. Air freight traffic rose by 9 percent in February over 2019’s pre-pandemic levels, the group reported. Air freight lanes from Asia, particularly to Africa, and from the Middle East to North America were heavily trafficked. IATA reports that freight traffic among Asia-Pacific carriers grew by 11 percent in February.
This growth is expected to continue as companies respond to increasing demand and restock inventory. Goods that ordinarily would have gone by sea are now going by air, as maritime shipping remains constrained and companies seek faster deliveries. The recent days-long blockage of the Suez Canal by a grounded container ship is likely to cause a spike in air freight demand in the next few months, IATA said.
The picture for global passenger traffic was murkier, IATA reported. February passenger traffic worldwide was down 75 percent from 2019 levels, off slightly from January, when traffic was down 72 percent from 2019. Bookings worldwide fell 30 percent between December and February.
A major factor in the decline was the fall in China domestic traffic, due to government restrictions on travel during the Lunar New Year in February. March demand in China is looking up, with flights matching pre-pandemic levels.
Domestic U.S., Australia, and India also showed signs of rebounding in March. U.S. airlines are confident, with airlines like Southwest and American among those recalling furloughed pilots to meet expected demand. International traffic is expected to take longer to recover as border restrictions remain in place.
The trajectory of the pandemic is a mitigating factor in the airline industry’s recovery, Oliver Wyman noted. New variants continue to pose challenges and could cause fresh outbreaks of the disease. Countries that have successful vaccination programs are racing against new coronavirus variants, and it remains to be seen if vaccines will outpace Covid’s progression. And several countries in Asia and Africa have not yet begun meaningful vaccine programs, which will hamper those countries’ recovery.
France’s Billion-Euro Bet on Air France-KLM
The latest financial rescue for Air France/KLM may strain the French and Dutch carriers’ partnership. Air France/KLM secured up to $4.7 billion in fresh funding from Paris. The package will boost Air France/KLM’s capital by close to $1.2 billion, enhancing its ability to service its debts. A related capital restructuring should help lower the Franco-Dutch company’s reported leverage.
KLM executives may raise their eyebrows at the French state increasing its stake up to 29.9 percent and becoming the group’s largest shareholder. The Dutch state’s stake may drop to 9.3 percent after all the financial maneuvers end. That fact may leave KLM’s management feeling like it’s in a back seat while less profitable Air France is in the pilot’s seat.
In 2019, the Netherlands’ government grabbed a 14 percent stake to gain rough parity with the French state’s ownership. But it didn’t take part in the latest capital boost. KLM’s relatively superior financial performance to Air France ironically meant that the Dutch state felt less pressure to help.
The Dutch government is continuing talks. For example, it might convert an approximately $1.19 billion direct loan from last June into “hybrid equity” to reduce Air France/KLM’s reported leverage. Such a move could help Air France/KLM raise additional money in a share issue analysts expect later this year. After the dust settles, China Eastern, which took a minor part in the capital rejig, should see its stake be a little shy of 10 percent, and Delta, which didn’t take part, should see its stake be at about 8.8 percent.
KLM executives can take heart from group CEO Benjamin Smith being wary of neglecting the strengths that the Dutch carrier brings to the group, regardless of shareholding changes. Smith recently called Amsterdam Schiphol the “best connecting” hub in Europe, and KLM’s hub there is just one of its many strengths.
In Other News
- China’s three largest airlines, Air China, China Southern, and China Eastern, released their 2020 results, reporting steep losses for the year. This was despite the country emerging relatively early from the worst of the Covid-19 crisis and despite the vast domestic market the carriers enjoy.
And China was different than anywhere else. While the International Monetary Fund estimates global GDP contracted by more than 3 percent last year, China’s bucked the trend and grew by more than 2 percent. All of these factors should have redounded to the benefit of the country’s airlines.
And they did, but with the the Chinese Big Three’s annual reports, a more complicated picture emerges. Collectively, the three airlines lost more than $5 billion last year. Air China reported a full-year loss of $2.2 billion; China Eastern, $2.1 billion; and China Southern, $1.8 billion. Revenues at all three were roughly half of 2019 levels.