The Serial Airline Founder Tells Airline Weekly Why He Launched Breeze
Pushing Back: Inside the Issue
It’s a new Breeze blowing into the U.S. market. (We couldn’t resist the bad joke.) But in all seriousness, Breeze founder David Neeleman tells us this week why he’s launching his fifth airline and how he thinks it will serve a niche other airlines have abandoned. How will it be different from Allegiant or the other new airline that launched recently, Andrew Levy’s Avelo? Check the Feature Story to read what Neeleman thinks in his own words.
In other news, Ryanair is furious at Boeing for delivery delays of its high-density 737 Max 8 200s. We submit the quote below as evidence for how angry the Irish budget carrier is. Ryanair now has no confidence that it will have its new “Gamechangers,” as it calls the Max, before the summer, just as the European leisure market starts to heat up. Elsewhere, JetBlue announces routes to Heathrow and Gatwick, a lot of interesting things are happening at Newark, and cargo pushes Korean Air into its fourth consecutive profitable quarter. Yes, you read that right.
Verbulence
“But as the management team in Seattle continues to mismanage the process, I think there’s a real risk now that we may not see any of these aircraft in advance of summer 2021.”
Ryanair CEO Michael O’Leary on Boeing’s delayed deliveries of the carrier’s 737 Max aircraft
The Airline Weekly Lounge Podcast
New episodes drop every week and are available wherever you get your podcasts and on AirlineWeekly.com. In the latest podcast, Edward “Ned” Russell and Madhu Unnikrishnan discuss Breeze’s planned launch and where it intends to fly. We also talk about why Ryanair is so upset with Boeing. Can Ryanair make “Boeing 737 Gamechanger” stick, or should it quit trying to make “fetch” happen? Listen to episode.
Weekly Skies
Ryanair blasted Boeing for delaying the delivery of the first of 210 737 Max 8 200 aircraft, despite regulators certifying the high-density version of the jet in early April. The European low-cost-carrier now says it has no confidence that Boeing will deliver any of the aircraft in time for the expected surge in summer demand.
“We are quite upset with Boeing that eight weeks later we’re still waiting for the first delivery,” Ryanair Group CEO Michael O’Leary said during the company’s fiscal-year 2021 earnings call. “We’re being told by [Boeing] will be in late May, but I’m not sure we necessarily believe that.” Both the FAA and the European Union Aviation Safety Agency approved the aircraft for commercial service in early April.
Ryanair had hoped to have 40 of the new aircraft in its fleet in time for summer. “The management in Seattle have continuously missed promised deadlines for the first delivery,” O’Leary said. “But as the management team in Seattle continues to mismanage the process, I think there’s a real risk now that we may not see any of these aircraft in advance of summer 2021.” Instead, Ryanair hopes to have 60 of the -8 200s in its fleet by next summer, when it expects demand to be closer to 2019 levels.
Ryanair said it will resume talks with Boeing for the 737-10 after delivery issues with the -8 200 have been resolved, but the carrier says it could add the -10 to its fleet later this decade. Boeing has assured Ryanair that if it does, it will be “at the front of the queue,” O’Leary said. The carrier’s remaining Airbus A320s, operated by Lauda Air, will exit the fleet by the end of the decade.
Unlike his counterparts in the U.S., who believe this summer will see a surge in leisure demand, O’Leary thinks European demand will not return until the end of the summer, stretching into the autumn. The booking curve is lengthening, however, but still remains historically short. Ryanair reported about 500,000 bookings in the first week of April, rising to 1.5 million in the first week of May. This growth is probably unsustainable, O’Leary acknowledged, but signals increasing confidence in Europe as vaccination programs reach a larger percentage of the population.
As Europe begins to emerge from Covid, the airline market that awaits it will be significantly different. Several carriers — Flybe, Level, and Norwegian, for example — have either shut down or scaled back significantly. Even the legacy carriers that benefited from state aid, like Lufthansa, Alitalia, TAP Air Portugal, and Air France-KLM, have retired large parts of their fleets and slashed short-haul flying. This is capacity that will not easily come back to the market, O’Leary said, predicting that the Europe’s airline industry will be 70-80 percent of the size it was before Covid for several years.
This presents Ryanair with huge growth opportunities, O’Leary said. The carrier is taking delivery of 210 Boeing 737 Max aircraft over the next several years and will have a fleet of 600 aircraft by fiscal year 2026. It is one of the few airlines in Europe that is continuing to grow. Because so many airports saw revenues collapse as other airlines retrenched, Ryanair has the chance to enter new markets at lower costs than it would have had before the pandemic. The carrier opened eight new bases, including Stockhold Arlanda and Zagreb, during the last fiscal year. O’Leary said it has extended agreements at several of its existing airports, including Charleroi and Stansted, through the end of the decade.
The carrier expects to fly between 80-120 million passengers this fiscal year. Now, it projects to reach the low end of that range by next March, but if the pace of vaccinations picks up in Europe and travelers are increasingly willing to fly, it could hit 120 million. Much also depends on the trajectory of the disease and if vaccines can keep any new virus variants at bay. With its larger fleet, Ryanair expects to fly 200 million passengers annually by fiscal 2026.
As Europe inoculates more of its population, O’Leary said he hopes governments will drop testing requirements and quarantines. “We see no reason for testing, whether its antigen or PCR,” he said. ”It adds nothing.” Vaccine passports are a good idea, but he has no faith that governments will “get their acts together” in time to create a standard that can be used during the summer peak. Instead, in the near term, Ryanair is allowing passengers to upload proof of testing and vaccines into the airline’s app and hopes that is enough to satisfy regulators.
Covid taught Ryanair the necessity of being flexible with fuel hedges. The carrier incurred significant losses from being 80-90 percent hedged at pre-Covid fuel prices. It enters the new fiscal year 50 percent hedged at $55 per barrel, Chief Financial Officer Neil Sorahan said.
If traffic patterns hold, Ryanair expects to breakeven this fiscal year or to report a “small” loss, Sorahan said. The last fiscal year was “the most challenging in Ryanair’s 35-year history,” O’Leary said, adding that the carrier’s €815 million ($990 million) loss was “traumatic.” By comparison, Ryanair reported a €1 billion profit in the previous fiscal year. Revenues for fiscal 2021 were 81 percent lower than fiscal 2020, to €1.6 billion. Ryanair ended the fiscal year with €3.2 billion in cash.
European Court Rules Against State Aid for TAP Air Portugal, KLM
The General Court of the European Union ruled that state aid from Portugal and the Netherlands to TAP Air Portugal and KLM violated EU rules governing aid to companies. Last year, Portugal ponied up as much as €1.2 billion ($1.5 billion) for TAP, while the Netherlands provided as much as €3.4 billion to KLM.
In the KLM case, the court questioned why the Netherlands needed to provide aid to KLM when France already had given Air France €7 billion. The court said it was not immediately clear if KLM would benefit from the largesse given to Air France.
Both complaints were brought by Ryanair, which has vocally opposed European state aid to airlines during the pandemic. The aid rewards inefficiency and distorts the competitive landscape, the carrier said. “During the Covid-19 pandemic over €30bn in discriminatory state subsidies has been gifted to EU flag carriers,” Ryanair said in a statement praising the court’s decision. “Unless halted by the EU Courts in line with today’s rulings, this State aid spree will distort the market for decades to come.”
Ryanair has 20 cases pending on the matter with the court.
Despite the ruling, the court said it would not enforce the annulment of the aid to KLM and TAP until after the European Commission has considered the matter. To claw the money back now would harm air connectivity and the economies of both the Netherlands and Portugal, the court said.
Qantas, Virgin Australia Expand on Strong Domestic Rebound
Australia’s domestic travel market is rebounding quickly after a successful national effort to keep Covid-19 in check with strict border controls and even domestic travel restrictions to contain the spread of the virus.
Both Qantas Airways and Virgin Australia are resuming flights and adding new routes to capture the domestic rebound, which the former said is buoyed by Australians shifting planned international trips to ones within their country. In the fourth quarter of Qantas’ 2021 fiscal year — or April to June — the airline and its subsidiary Jetstar Airways will fly 95 percent of 2019 capacity, the Sydney-based group said last week. It plans to grow domestic capacity by 7-20 percent from 2019 levels during its 2022 fiscal year.
Virgin Australia, which shrank through a voluntary administration restructuring in 2020, plans to fly roughly 72 percent of its 2019 capacity during the April-June period, Cirium schedule data show. This is due to ramp up through October as the airline brings back more of its parked Boeing 737-800s.
Australia’s domestic recovery mirrors those in other countries. In March, passenger traffic in China had nearly recovered to pre-crisis levels, and in the U.S. it was roughly halfway back, according to the latest data from the International Air Transport Association. The Chinese and American domestic air travel markets are leading the global recovery.
Both Qantas and Virgin Australia are positioning with more flights to capture returning domestic travelers. These offensive moves come as they grapple for market share between themselves, and against new competition from Rex Airlines — a regional carrier that launched mainline service with 737s in April — on some key routes, including Melbourne-Sydney.
Qantas and Jetstar plan to reactivate all of its domestic aircraft by the end of June to support their expanded schedule, they said.
Virgin is focused on resuming some of its pre-crisis services, including boosting frequencies on the busy domestic triangle — covering routes between Australia’s three largest cities Brisbane, Melbourne and Sydney — by 30 percent by October as it brings back jets, it said last week.
And the Australian domestic recovery is not all leisure travelers. Qantas said roughly 75 percent of pre-crisis business flyers are already back. This is good news for its bottom line which depends lucrative corporate roadwarriors who often pay more for last-minute tickets.
Many expect Qantas to win new domestic market share as travelers come back. Virgin removed a significant share of its fleet, including all of its ATR turboprops and its entire Tigerair Australia operation, during its restructuring. And even with the entrance of Rex onto key routes, Qantas remains the go-to airline for many Australians.
“Qantas looks positioned to capitalize on the relatively soft competitive landscape and gain market share,” wrote J.P. Morgan Analyst Richard Jones in a report on Tuesday. He forecasts that the carrier will gain about 10 points of domestic share to control roughly 70 percent of the market post-Covid.
All of the good recovery news out of Australia does not come without a caveat. The country’s borders remain almost entirely closed except for a travel-bubble with New Zealand. Neither Qantas nor Virgin plan to resume most international flights until December, which is when the country anticipates completing the roll-out of Covid-19 vaccines. Nearly 66 percent of capacity at Qantas was international in 2019, Cirium shows. Virgin axed its long-haul services as part of its restructuring but plans to resume some short-haul international routes when borders reopen.
“We have a long way still to go in this recovery, but it does feel like we’re slowly starting to turn the corner,” Qantas Group CEO Alan Joyce said. The group forecasts an A$2 billion ($1.6 billion) loss during the fiscal year ending in June. However, it is well on track to shaving expenses by A$1 billion by 2023 with A$600 million in cost cuts achieved this year. Savings include reducing Qantas’ workforce by roughly 8,500 staff.
In contrast, Virgin CEO Jayne Hrdlicka gave a more upbeat comment on the recovery: “Growing confidence in the community … means the time is right for us to bring back jobs and put more aircraft in the skies. We are so pleased to have turned a corner from the worst of the pandemic.”
United Expands Long-Haul Routes as China, Elsewhere Slow to Recover
A United Airlines jet flew to Ghana for the first time in almost a decade on May 14. In a few weeks, the airline will operate its first-ever flight to Johannesburg and, in July, the carrier will launch its first-ever flight to Croatia earlier than planned.
The summer ramp in flights across the Atlantic is on, coronavirus pandemic or not. It comes as international travel to nearby destinations, like Cancun and Caribbean beaches, already is back strong. But that is only one side of the coin: Much of United’s pre-crisis long-haul network — especially to Asia — is a shadow of what it was. To China, where United was the largest U.S. carrier, its capacity is down more than 99 percent with only a few restricted flights via Seoul operating.
This is the new world airlines face: How and where to best fly limited assets (aircraft) amid a dizzying array of international travel restrictions with unexpected world events, like the fighting in Israel and the Gaza Strip, thrown into the mix. International capacity to and from the U.S. will be down almost 58 percent in June compared to 2019 whereas domestic capacity will be down just 12 percent, according to Cirium schedules.
All in, the International Air Transport Association does not expect international air travel to fully recover to 2019 levels until around 2024. And even longer for growth rates to catch up with pre-crisis levels.
“This is an exciting job that’s ever changing,” United’s Vice President of International Network Planning and Alliances Patrick Quayle told Airline Weekly ahead of the inaugural departure to Accra at Washington Dulles International Airport.
Accra is an example of a broader pivot at United to where long-haul travelers want — and can — go as international travel creeps back. With business travel still anemic, leisure and visiting friends and relatives (VFR) flyers are driving network planning decisions. And this is putting otherwise underutilized widebody jets — many of which are flying on domestic routes — to work to new destinations.
With Covid-19 border rules dictating the travel plans of many holidaygoers, countries that are open to vaccinated Americans are seeing something of a travel boomlet. Bookings are so strong for new flights to Croatia, Iceland and Greece that United is already upping capacity. Its planned Newark-Dubrovnik route will begin more than a week early on July 1 and operate four-times weekly instead of three; and it’s switching Newark-Athens to a larger Boeing 777-200 from a 767-300ER in July.
And, if Portugal and Spain reopen to vaccinated travelers, United will resume flights to Barcelona, Lisbon and Madrid in July. Service to both countries has been suspended since March 2020.
“It’s about offering more breadth,” is how Quayle described the airline’s approach to long-haul planning through the recovery. United will eventually return to its full complement of business destinations like Frankfurt, London and Shanghai, but — with the exception of London — frequencies may be lower than before the crisis. These adjustments will allow to to continue some of the new destinations that it is adding in the recovery.
In other words, Accra is not a pandemic play for cash. The Ghanaian capital is part of that longer-term pivot by United to capture a broader swath of international travel that also includes new service to Bangalore, Johannesburg and Lagos.
This shift speaks to the structural changes occurring in long-haul flying. A lot of system capacity that flew prior to Covid-19 is not coming back, including superjumbo Airbus A380s at Air France and Lufthansa, and budget disruptor Norwegian Air. Korean Air is in the process of acquiring competitor Asiana eliminating one competitor across the Pacific, and Virgin Australia shed its long-haul operation during a pandemic restructuring.
And closer to home for United, American Airlines Chief Revenue Officer Vasu Raja said recently that the carrier’s long-haul operation will be more profitable — read smaller — and “way different” after the crisis than it was before. The carrier has cut “strategic” destinations, including places like Croatia and Iceland, and will focus on what it deems core, which is understood to include key partner hubs and business markets like London, Madrid and Paris.
“We think international is where it’s at,” said Quayle when asked about United’s bet on international travel in the recovery. The airline, unlike American, Delta Air Lines and other competitors, has not retired a single widebody jet, instead preferring to keep them stored and ready for when they are needed in the recovery.
Asked about the possibility of the EU reopening to vaccinated Americans this summer and whether United would be ready, Quayle said: “We have the planes, we have the pilots and we have the flight personnel who can ramp up and get these aircraft in the air and going.”
No word, though, on when more flights to China or many destinations in Asia will resume. Though Quayle thinks the region will be the “last to recover.”
In the meantime, United is not taking its eyes off its domestic market. Leisure travel is forecast to surge this summer, with Cowen & Co. forecasting more than 10 million travelers for over the Memorial Day weekend holiday — the symbolic start of summer in the U.S. While that averages out to about 1.67 million travelers daily over six days, peak days could see numbers top 2 million a day for the first time since March 2020. Eyes are on whether the Transportation Security Administration and airport vendors are ready.
United plans to fly 67 percent of its 2019 domestic schedule in June, and 80 percent the next month. In July, additions include the return of several flight banks at its Chicago O’Hare and Washington Dulles hubs — the former goes to nine from seven banks, and the latter to three from two.
Cargo Fuels Another Profitable Quarter for Korean Air
Korean Air did something almost no other airline did since the pandemic began: It turned a profit, again. This is the fourth consecutive quarterly profit Korean has reported since last year. And why? Cargo.
Cargo revenue doubled in the second quarter versus a year ago, to 1.35 trillion won ($1.2 billion). The carrier said it is fully utilizing its fleet of 23 freighters in addition to several passenger jets that have been pressed into freighter duty. Korean has no plans to re-convert those aircraft back to passenger aircraft any time soon.
Korean reported a 125 billion won ($110 million) operating profit in the second quarter, fueled almost entirely by its strength in freight.
Cargo yields remain high for three reasons, Korean said. First, despite growing demand for air freight, global capacity is down sharply thanks to far fewer international flights and therefore less belly-hold capacity. Second, trade is heating up as consumer confidence grows and companies restock inventory. And third, maritime shipping is constrained, and both shipping containers and port space remain at a premium.
Korean expects the good times for cargo to continue rolling in the second quarter, but these factors will change by the end of the year. As travel recovers and more airlines add international widebody flying back into their schedules, competition will increase as more freight capacity returns. Maritime shipping also will work through its current snags and reach equilibrium. In the near-term, Korean will go after the cargo business aggressively to reap rewards before freight trends turn unfavorable.
The passenger business was a different story, however. Revenues plunged 88 percent year over year. International demand remains anemic as travel restrictions, particularly in Asia, are still in force. Domestic demand is starting to rise, now that Korea has contained a third wave of Covid.
In Other News
- Less than two weeks after IAG CEO CEO Luis Gallego warned that “necessary steps” to “survive” would be needed at Aer Lingus if the Irish government did not back down on its travel restrictions, the group is taking said steps. The airline will permanently close its Shannon base and temporarily shutter its Cork base, according to TheJournal.ie. The moves will result in the redundancy of at least 45 ground staff in Shannon, while 81 cabin crew members are being offered severance packages or a transfer to Dublin. Aer Lingus will temporarily lay off 198 staff in Cork.
- Avianca released its first quarter results as it continues to restructure through the Chapter 11 Bankruptcy process in the U.S. The Colombian carrier posted a net loss of $312 million year-over-year during the period. Revenues fell nearly 61 percent to $371 million and expenses decreased 38 percent to $580 million. Avianca must submit a restructuring plan to the bankruptcy court by September 2, and plans to exit Chapter 11 this year. That plan will include roughly $500 million in annual savings, achieved through various measures including closing its Peruvian operating subsidiary and rejecting leases on at least 14 aircraft.
- You know transatlantic travel is coming back when airlines begin touting business class products again. JetBlue Airways will debut its Mint product to London in August, and all-business class French carrier La Compagnie plans its return in June. La Compagnie aims to resume New York-Paris flights that month, and New York-Nice flights in July pending an easing of travel restrictions. The news came just days before the EU agreed to reopen to vaccinated travelers and those from “safe” countries, though an exact date has yet to be set.
- Things are looking good for Volaris. The Mexican budget carrier is revising its second-quarter guidance upward from just a few weeks ago, thanks to growing demand for its leisure-focused flights both within Mexico and across the border to the U.S. Capacity is expected to be between 110-113 percent of 2019 second-quarter capacity, largely due its growing fleet size. It predicted its daily cash burn would be about $600,000, but now Volaris expects to generate between $800,000-$1 million per. Day. Total unit revenues are expected to be between 8-10 percent higher than in the second quarter of 2019. Volaris warns, though, that this could all change if the trajectory of the disease in Mexico or the U.S. changes.
- Latam is jumping on the cargo bandwagon in a big way. The carrier says it almost doubling its freighter fleet by 2023. Latam ordered four Boeing 767 freighter conversions earlier this year and exercised its options for four more. To these eight aircraft, Latam now is adding two more 767-300ER conversions. These 10 aircraft will bring its total freighter fleet up to 21 by the time deliveries are completed in 2023. The first of the new aircraft will be in Latam’s fleet by December.