Airlines Report That Few Passengers Are Booking Away From the Aircraft
Pushing Back: Inside the Issue
After two fatal accidents, regulators around the world grounded the Boeing 737 Max for almost two years. When the FAA re-certified the aircraft, most Max operators allowed passengers to book away from the type. Media reports were awash with stories about people swearing they would never fly the aircraft. And now, half a year later? Are people afraid of the Max? Our reporting says no. In fact, most passengers don’t know they’re on a Max, and if they do, they don’t seem to care. And airlines love the aircraft. If that sounds familiar, it is. In the 1970s, passengers swore they would never board another DC-10, after a string of fatal accidents. Yet that aircraft, in various forms, continued flying into this decade. For more, turn to this week’s Feature Story.
Elsewhere in the issue, Latin American airlines are going on an aircraft-order binge and adding dozens of new routes. Cargo continues to be a lifeline for airlines around the world, including Cathay Pacific, Etihad, Turkish, and Korean, which actually reported its fifth consecutive quarterly profit thanks to freight. Embraer is pressing ahead with its turboprop. Despite the spread of the coronavirus Delta variant, airlines are starting to feel more optimistic and adding dots to their maps. But supply chain bottlenecks could become more widespread as the industry races to complete deferred maintenance and restores aircraft to their fleets.
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The Airline Weekly Lounge Podcast
Why are Latin American airline on an aircraft order binge? That’s the question the Airline Weekly team discuss in this week’s episode of ‘The Lounge. Will the supply chain woes Mesa is encountering affect other airlines as maintenance comes due? And what can the industry expect from the mammoth infrastructure bill passed by the U.S. Senate? Listen to this week’s episode to find out. Past episodes are archived here.
Airline Weekly is taking its annual summer hiatus. The next issue of Airline Weekly will be distributed on Tues., Sept. 7 (the day after the Labor Day holiday in the U.S.). We will continue to podcast and publish AW Daily updates every day during the weekly issue’s hiatus.
Avianca plans to emerge from the Covid-19 crisis as a slimmer but stronger competitor, with partner United Airlines by its side, under a new restructuring plan filed with a U.S. bankruptcy court.
The Bogotá-based carrier’s plan, which was submitted to the court on August 10, lacks any major additional changes at Avianca. Bogotá and San Salvador remain its primary hubs with secondary operations in Costa Rica and Ecuador; the airline’s Peruvian subsidiary was shut in 2020. Its fleet will shrink to as few as 109 aircraft — 98 passenger and 11 freight — when it exits bankruptcy before growing rapidly with 58 new leased jets arriving from 2021-23. And United and the Star Alliance remain key pillars of its international network strategy.
“Avianca expects to build on its core strengths, including its strong operational performance, increased capacity, brand recognition, its market leadership position in the vibrant Latin American airline market … its membership in Star Alliance, and the strength of its LifeMiles program, while becoming a more cost-efficient airline, in order to emerge from [Chapter 11] as an elite competitor for years to come,” the airline said in its reorganization plan.
The filing marks the beginning of the end of the three major Latin American carrier Covid-19 reorganizations. Avianca led the way with its Chapter 11 filing in May 2020, Latam Airlines Group followed later that month and Aeromexico in July. All three carriers — the largest in Latin America — were hit hard by the precipitous drop in air travel and the lack of government support to pay their bills. Their bankruptcy filings came as International Air Transport Association (IATA) then-Director General Alexandre de Juniac warned that half of global airlines could “die” — either collapse or merge with competitors — without government aid.
While half of global airlines have not disappeared, many were forced to take dramatic steps to stay alive from laying off tens-of-thousands of staff to slashing fleets. Most did this outside of official restructuring or administration processes though the Latin American carriers were joined by the likes of Norwegian Air and Virgin Australia in these official processes.
A key pillar of Avianca’s reorganization plan is its proposed joint venture with United. Prior to the crisis, this was planned as a three-way immunized tie-up between Avianca, Copa Airlines and United covering all flights between South America and the U.S. Brazil’s Azul, which United owns a minority stake in, was also considering joining the pact. While Avianca never disavowed the pact during its restructuring, the bankruptcy process opens the door shifting airline allegiances.
As part of its plan, Avianca extended its agreements with United by seven years to 2030, and the U.S. carrier has the option to take an equity stake in the Colombian airline.
Low-cost carriers pose Avianca’s greatest competitive threat at home. While it was restructuring, Viva Air Colombia has expanded in their shared home market, and Mexican discounters VivaAerobus and Volaris both unveiled plans to expand to the market. And Volaris plans to open a new El Salvadoran subsidiary by the end of the year. This expansion has “driven significant and lasting downward pressure on fares” and changes in traveler preferences, Avianca said in its plan.
In response, Avianca plans to increase the seating density on its Airbus A320-family jets by roughly 24 percent, according to the plan. That would translate to as many as 186 seats on the airline’s A320s based on its 150-seat dual-class configuration prior to the crisis. Both Viva Aerobus and Volaris configure their A320neos with up to 186 seats.
Unlike Aeromexico and Latam, Avianca did not cancel any of its outstanding aircraft commitments with Airbus and Boeing during its restructuring. The airline maintains firm orders for 88 A320neo-family jets due from 2025-29, and two 787-9s due in 2024. Avianca has terminated leases on 12 aircraft and could reject another 47 — including its 11 ATR 72s — by the time it exits Chapter 11. In addition, it could reject another 10 A320neos due in 2023 that it leased from BOC Aviation in early 2020.
Avianca made drastic improvements to its balance sheet through bankruptcy. The carrier cut roughly $3 billion from the $5.2 billion in outstanding debt that it had at the beginning of the crisis. In addition, it has lined up $1.6 billion in bankruptcy exit financing to boost its working capital for the recovery.
But those cuts do not come lightly on unsecured creditors. Many subordinated and inter-company claims would receive nothing on the dollar under Avianca’s restructuring plan. Most secured creditors would be fully recompensed, either through cash payments or equity conversions.
The bankruptcy court will hold a hearing on Avianca’s restructuring plan on September 14. Comments or objections to the plan are due by September 7.
Azul Focuses on Yield Recovery Into 2022
Things kept going Azul‘s way in the June quarter. Its new cargo — we mean, “logistics” — business continued its double-digit growth and passengers kept returning to the skies as Brazil’s vaccination rate kept climbing to near 40 percent of the population on track having all adults inoculated by end-September. That translated to “strong revenue performance,” as Raymond James Analyst Savanthi Syth put it, and a net profit including foreign exchange gains during the quarter.
“Everyone has seen the boom in demand in the U.S. travel as the economy opened up, and we are now seeing the same phenomenon in Brazil,” Azul Chairman David Neeleman said during the airline’s second-quarter earnings call last week. The carrier is already flying more capacity than it did in 2019 and is on track to be up by double digits — roughly 10 percent — by September. But Azul is more focused on yield recovery than further growth, with executives saying it will hold back on adding additional flights as demand catches up.
Demand may not be far behind, though. The second quarter is traditionally the slowest for South American carriers as it covers winter in the Southern Hemisphere. The fourth and first quarters are historically the busiest for the region’s airlines. This year, that peak season is likely to coincide with the return of at least domestic Brazil business travelers. Roughly 60 percent of Azul’s corporate revenue has recovered and it expects 75-80 percent to be back by year-end, said Chief Revenue Officer Abhi Shah.
Looking ahead, Azul plans to hold its fleet count flat in 2022 as it focuses on achieving EBITDA of more than 4 billion reais ($764 million) — or higher than the 3.6 billion reais in 2019. Capacity plans could change depending on the pace of the travel recovery, added Shah.
Azul’s interest in acquiring Latam‘s Brazilian unit remains unrequited. “We believe strongly that consolidation is healthy for the market,” CEO John Rodgerson said, adding that the airline is “still looking” at the deal. Latam has exclusivity to file a reorganization plan with a U.S. bankruptcy court until September 15.
In the second quarter, Azul posted a 1.07 billion reais net profit including a 2.2 billion reais foreign exchange gain. Without the FX benefit, it lost 1.2 billion reais. Revenues 35 percent to 1.7 billion reais versus 2019, while cargo revenues jumped 137 percent to 272 million reais. Passenger traffic was down 32 percent on a capacity cut of 25 percent compared to two years ago.
Turkish Airlines Sees No Signs of Cargo Demand Diminishing
Turkish Airlines returned to operating profits in the first half of this year, primarily driven by the strength of cargo demand. In fact, cargo revenues almost trebled between the first half of last year and this.
“We expected cargo revenues to normalize in the second quarter of this year,” Chief Financial Officer Murat Seker told analysts during the company’s first-half earnings call last week. “The normalization has not been realized yet, and it’s not going to happen any time soon.”
In fact, he believes air freight will continue to boom, thanks to ongoing maritime freight issues and seemingly bottomless demand for e-commerce. The strength of cargo kept Turkish’s second-quarter revenue slide to only 33 percent off of 2019, he said. Cargo also is directly responsible for Turkish’s first-half operating profit of $73 million, he said. “By the looks of the current state of recovery, the divergence between high cargo unit revenues and low passenger units revenues will remain significant during the third quarter,” he said.
Turkish currently operates a fleet of 26 dedicated freighters as well as 10 widebody preighters. Belly-hold cargo is coming back online as the airline adds more passenger flights. The freighter fleet is at full utilization, and Turkish streamlined scheduling in the first half of this year to get more hours out of its freighters. Seker said the carrier could add more preighters in the third quarter as demand dictates.
The passenger network is poised for a comeback as well. In the first half of the year, demand grew in pace with vaccination rates in countries Turkish serves. Capacity to North America rose from 2019, and to Europe started to rise as the summer approached. Systemwide, Turkish reported operating 70 percent of its 2019 capacity in June and expects to operate 80 percent of its systemwide capacity in the third quarter. Last year, Turkish flew mainly evacuation and humanitarian flights in the first half, making comparisons to 2020 less useful.
Other parts of Turkish’s far-flung network are not doing as well, however, due to ongoing Covid-19 restrictions. Flights to East and Southeast Asia remain the most constrained. Turkish reports strong visiting friends and relatives (VFR) flows from Europe, the Middle East, and North America for South Asia, although the carrier pared back flights to India during the recent Covid-19 surge in that country. Routes to Central Asia and parts of the former Soviet Union were a mixed bag, due to differing quarantine and lockdown regimes throughout the region.
Still, Turkish expects the recovery to gain traction as vaccines roll out. The carrier has so far reported no major cancellations due to the Delta variant of the coronavirus. The booking curve is lengthening out, primarily for longhaul flights but also in Turkish’s domestic network.
The domestic network has rebounded quickly, both from VFR and inbound demand from Europe, Seker said. Andaloujet, the carrier’s mainly domestic budget arm, saw capacity rise 129 percent in the first half and is on track to exceed pre-pandemic levels.
Turkish is not altering its orderbooks with Boeing and Airbus and still has 145 aircraft on order, 95 of which are firm. The carrier expects to add 25 more aircraft to its fleet this year, bringing it to 371 aircraft by year’s end.
Turkish reported first-half revenue of $4 billion, down from $6 billion in the first half of 2019. Passenger revenues fell by more than half from 2019, to $2 billion, while cargo revenues spiked 121 percent to $1.8 billion.
Cargo Yields Jump at Cathay Pacific
Cargo threw a lifeline to another airline, but one far more in need of it than Turkish. Hong Kong’s Cathay Pacific reported another quarter of staggering losses, offset only partially by booming cargo revenues.
The carrier was beset by a host of problems, the most damaging being Hong Kong’s strict quarantine rules. Early in the first half of this year, Hong Kong imposed quarantines on flight crews, requiring Cathay Pacific to rejigger its roster to require crews to serve for 21 days, followed by 14 days of isolation in an approved hotel. Despite these restrictions, the carrier continued to fly.
But it wasn’t flying that much. First-half passenger capacity was down 85 percent from 2020, and the carrier’s planes were only about 18 percent full, compared with 67 percent load factors in the first half of last year. For the fourth quarter, Chairman Patrick Healy said he “hopes” Cathay Pacific can fly 30 percent of its pre-pandemic capacity. About 40 percent of the carrier’s aircraft remain mothballed outside Hong Kong.
With no domestic market at all, Cathay Pacific remains hamstrung by the near-total collapse of international travel. Passenger demand across its networks was uneven. North America showed surprising resilience, at least comparatively. Travel to Oceania all but stopped, with both Australia and New Zealand effectively closed. Europe showed “pockets” of strength, Healy said, depending on each country’s rules. Demand for UK flights was weak earlier this year as that country dealt with a surge of Covid-19. Demand to Mainland China picked up as the half progressed. The group’s budget arm, HK Express fared particularly poorly, reporting revenues down almost HK$1 billion ($123 million).
Cargo demand, however, was robust. Cargo capacity fell by 32 percent compared to last year, thanks to the almost-complete lack of conventional belly-hold capacity. Yet, yields were up 24 percent, and cargo load factors average 81 percent in the first half. Cargo revenues reached HK$12 billion in the first half, flat from last year despite the significant difference in capacity.
Cargo demand came from the Americas and Europe, fueled by e-commerce and demand for goods such as clothing. Demand also was strong to Northeast Asia and to Mainland China, particularly around the time of the Lunar New Year.
Overall, the group reported a loss of HK$7.6 billion in the first half, compared with HK$9.9 billion in losses last year. Passenger revenues amounted to HK$748 million, or 93 percent down from last year.
Mesa Air’s Operational Woes Due to Supply Chain Bottlenecks
Regional carrier Mesa Air Group struggled to meet the summer surge in travel demand in the U.S., thanks to supply-chain shortages and maintenance delays, affecting the flights it operated for American Airlines.
The maintenance bottleneck was the primary cause of Mesa’s operational woes during the summer, leaving it with fewer spare aircraft in its fleet and ill prepared to handle disruptions caused by summer weather, CEO Jonathan Ornstein said during the company’s most recent quarterly call on August 9. Unlike other airlines that are facing staffing problems, Mesa has enough flight attendants on its roster and more than 250 pilots in its training pipeline.
“I mean our flight attendant numbers have been really good, [and] our pilot situation, especially on the American side is healthy, so the weather impact to us, yes, it causes all those related issues on crews timing out and all of that issue,” Chief Operating Officer Bradford Rich said. “Our primary issue has been that when we have the weather-related operational interruption, the inability to reset the system with adequate spare ratio has really been the core of our problem.”
Mesa, like most airlines in the U.S., deferred maintenance during the early days of the pandemic to save cash. But that bill has now come due, and aircraft — particularly the fleet of CRJ900s that it operates for American, which are getting cabin refurbishments — are undergoing heavy-maintenance C-checks that take twice as long as they did before the pandemic. The regional carrier said in anticipation of this, it lined up additional maintenance providers. But the crux of the problem is those providers have been unable to source enough spare parts.
Airlines are not alone in facing supply-chain woes. Ford and General Motors have had to shut down factories for lack of auto parts and semiconductors. Much of this is due to a global maritime freight slowdown. Ports in the U.S. are backed up, shipping companies are having difficulty sourcing containers, and ports in China and other parts of Asia have been subject to rolling closures due to Covid-19 outbreaks.
Mesa expects these supply-chain constraints to last through the third quarter of 2022.
Despite these issues, Mesa had a good quarter and expects the strength to continue through the third quarter, despite the spread of the Delta variant of the coronavirus. It plans to operate 88 percent of its pre-pandemic capacity for United in the September quarter, and more than 100 percent of its pre-pandemic capacity for American.
The carrier also made news right after the end of the quarter with its investment in Heart Aviation to provide up to 100 electric 19-seat regional jets, expected to join the fleet in 2026. This followed its investment, also with United, earlier this year for Archer Aviation‘s eVTOL aircraft. Ornstein touted the Heart deal’s potential to reconnect smaller cities — like Mesa’s former headquarters in Farmington, N.M. — to the national air transportation system. “We’ll also be able to fly once again to the dozens of cities that we have previously flown to that currently have little or no service,” he said. “We do think that there is a big future in electric and other forms of decarbonization.”
Mesa’s cargo operation with DHL also is ramping up. The regional is in the process of adding a third Boeing 737-400 freighter to its fleet, but says that aircraft is “limited.” For future cargo growth, Mesa likely will add 737-800 freighters, Ornstein said. But he tempered the optimism he expressed earlier in the pandemic, when Mesa said it could add as many as 10 freighters in the next year. Now, Ornstein believes the passenger side of the business provides more potential, while cargo will continue growing “incrementally.”
The regional’s expansion into Europe through its partnership with Gramercy Associates continues. Mesa is a minority partner in the joint venture, due to European Union restrictions, but it will provide technical and operational advice to Gramercy, Ornstein said. The new business is expected to get off the ground next year and likely will start with an existing Mesa aircraft that has been reconfigured to meet European regulations.
Mesa reported quarterly revenues of $5.8 million, up from $4.9 million last year, generating profits of $4.3 million, or $900,000 more than in 2020. The carrier ended the quarter with 167 aircraft in its fleet, and expects to grow by a net of one aircraft through the third quarter of next year.
In Other News
- Avianca posted a $342 million net loss in the second quarter, slightly worse than its $312 million loss during the prior quarter. Compared to 2019, revenues decreased 61 percent to $437 million and expenses 51 percent to $582 million. Avianca flew just a quarter of its second quarter 2019 capacity during the period, Cirium schedules show.
- Cargo helped stanch yet another mega-carrier’s losses. Etihad Airways reported first-half losses of $400 million, or about half of its losses last year. Cargo revenues soared 56 percent to $800 million, dwarfing passenger revenues of $300 million. Passenger volumes have grown 10 percent every month this year, but still are down about 70 percent from last year.
- And another! Korean Air reported its fifth straight quarterly profit, once again thanks to cargo. The carrier reported record cargo revenues of 1.5 trillion won ($1.3 billion), besting the previous record of 1.3 trillion won. Korean Air credits this to companies around the world restocking as the global economy shakes off its Covid-19 torpor, and the carrier predicts this strong demand will continue through the year as vaccinations take hold and countries emerge from the pandemic. Passenger demand is expected to remain anemic through the end of the year. In the quarter, Korean Air reported revenues of 2 trillion won, up 16 percent from last year, generating an operating profit of 197 billion won, a 31 percent increase from 2020.
- The Covid-19 crisis continued to pummel Latam in the second quarter. The airline posted a $358 million operating loss during the period, or a $770 million net loss including one-time restructuring expenses. Revenues fell 63 percent to $889 million and expenses 47 percent to $1.2 billion year-over-two-years. Latam flew just 31 percent of its capacity in 2019 ending the June quarter with 296 aircraft.
In terms of Latam’s U.S. Chapter 11 bankruptcy restructuring, the airline has received court approval to postpone the deadline for it to file a reorganization plan to September 15. Latam continues to work with creditors to secure bankruptcy exit financing. The carrier also made progress on its fleet with agreements to take 70 new Airbus A320neo family aircraft and two new Boeing 787s through 2028, while also cancelling commitments for two A350s, four 787s and one 777F.
- The almost inevitable happened. Low-cost longhaul startup Norse Atlantic Airways has pushed its launch back from this December, as originally planned, to sometime in the first or second quarter of next year. By then, the carrier said it will have all 15 of its Boeing 787s in place, and it will open ticket sales three months before the launch. One thing it doesn’t have yet is an air operators certificate, but the carrier said its management team now is in place, fulfilling Norway’s requirements for granting one. Norse Atlantic is applying for AOCs in Norway and the UK.
- New Zealand is keeping the drawbridge up until early next year. Prime Minister Jacinda Ardern said when the country reopens next year, only fully vaccinated travelers from “low-risk” countries will be allowed in. This puts an end to dreams of a trans-Tasman travel bubble with Australia, at least for this year.
- The UK has added the Belarusian air traffic control provider to its list of sanctions in response to the illegal diversion of a Ryanair flight in May. Belarusian President Alexander Lukashenko scrambled fighter jets to divert the flight, en route from Athens to Vilnius, to Minsk in order to arrest dissident journalist Roman Protasevich. The May 23 incident met with global (with the exception of Russia, which dismissed it as an “internal matter”) horror over state-sponsored air hijacking.
- Canada will require employees of the country’s airlines, shipping lines, and railroads to be vaccinated against Covid-19 by the end of October. This requirement will extend to “certain travelers,” including all passengers on airlines, interprovincial trains, and large sea vessels, like cruise ships, Transport Minister Omar Alghabra said in a statement announcing the new rules. Details are scant, however. Transport Canada said it will engage with transportation companies over the next few weeks to determine “how this requirement will be implemented,” how vaccination status will be verified, and whether testing still will be required.
Both WestJet and Air Canada said they welcomed the requirement for airline employees. Neither airline mentioned the requirements for passengers, however. According to the Canadian government, 71 percent of Canada’s population has been fully vaccinated.
- Also in Canada, WestJet‘s cabin crew union, CUPE, has ratified a five-year collective bargaining agreement, the first for the union and the carrier. The agreement spans August 1, 2021-July 31, 2026.