U.S. Airlines Take Oil Price Hikes in Stride
Pushing Back: Inside the Issue
A couple of decades ago, $100-per-barrel oil was a doomsday scenario for the airline industry. Today, American Airlines CEO Doug Parker is confident that the industry can make money with oil at or above that price. That’s a good thing, because that’s where oil has been since Russia invaded Ukraine. After surging in the immediate aftermath of the invasion, oil prices have fallen below the $100 threshold, although volatility remains.
U.S. airline executives at an industry conference last week weren’t too bothered about the price of oil, despite predictions to the contrary. Some, like Alaska Airlines and Southwest Airlines, are hedged, which buys them time before they have to make capacity and pricing decisions. But even the majority of airlines that aren’t hedged say they’ll be fine. In fact, most airlines think they only need to raise fares modestly to recoup the higher fuel bills. This is good news for airlines. And good news for travelers. Summer demand is still expected to be torrid.
But the usual caveats apply. The pandemic continues to rage, with infection rates in parts of Asia higher than they have ever been since Covid-19 unleashed itself on the world. The Ukraine war may still cause a surge in energy prices, which would dent the world’s economic recovery. Inflation is a worry. Supply chains face increasing disruption. The labor market, particularly for pilots and licensed maintenance technicians, is tight. And although most now think it won’t, the Ukraine war could escalate.
All or some of these things could happen or get worse. But for now, airline executives are still casting their eyes toward the summer, and they like what they see.
The Airline Weekly Lounge Podcast
Russia’s invasion of Ukraine initially sent oil markets into a spiral. Prices may have come back down to earth, but oil remains volatile. Yet, U.S. airline executives aren’t terribly concerned. More pressing is how to hire enough pilots to operate flights. Edward “Ned” Russell and Madhu Unnikrishnan report on what they learned at a recent industry conference and discuss which airlines plan to add or trim capacity this summer. To listen to the ‘Lounge archive, visit Airline Weekly online.
U.S. airline industry executives largely brushed off concerns that rising oil prices will put a dampener on their still-nascent recovery from the Covid-19 pandemic, confident in the resilience of summer demand to absorb higher fares.
In the immediate aftermath of Russia’s invasion of Ukraine last month, oil surged to more than $130 per barrel, breaking through the $100 per barrel threshold for the first time since 2014. Speculation in the early days of the Russian campaign ran rife that the surge would continue and oil prices could reach $200 per barrel or more if Russian supply — 10 percent of the world’s daily consumption — were to go offline.
But in the weeks since the invasion began, oil has floated back closer to earth. On March 15, prices for both Brent crude and West Texas Intermediate were hovering under the $100 a barrel threshold, with some analysts forecasting even more slippage as the market adjusts to its new reality. The factors informing the lower prices are many. Some oil-producing countries, like the United Arab Emirates, have signaled they will increase production. A new Covid lockdown in China is reducing demand for oil in that country. Energy traders have been loath to buy Russian crude — now trading more than $25 lower than Brent — for fear of falling afoul of sanctions, and that oil is finding new markets elsewhere in the world. And Iran and Venezuela could see sanctions eased, bringing their considerable reserves back online.
Meanwhile, demand for summer travel in the U.S. is soaring, based on advance ticket sales. Some carriers, including Alaska Airlines and JetBlue Airways, intend to fly as much if not more than their 2019 capacity this summer in response to surging demand. U.S. airline executives speaking at Wall Street conference believe the strength of demand, especially after the Omicron variant receded, will give them the flexibility to pass on higher fuel costs to passengers. They warn, however, that the situation remains fluid: The war could cause further price spikes, or a new coronavirus variant could stifle travel.
But from what they are seeing now, executives believe the rise in fares will be minimal. One way fares could rise $15-20, Delta Air Lines President Glen Hauenstein said at a J.P. Morgan conference on March 15. Summer demand is expected to be “robust,” and Delta thinks it will need to raise fares less than 10 percent to recapture higher fuel costs, he added. “We are very, very confident in our ability to capture over 100 percent of the fuel price run up in the second quarter, and probably over the summer.”
This increase is in line with what United Airlines is predicting. Chief Commercial Officer Andrew Nocella believes fares will rise less than 10 percent this summer to cover the rising cost of fuel. Fares lag the spot prices for fuel by a few weeks for domestic travel and by a month of so for international travel. “So far, we’re not seeing any demand destruction [due to higher ticket prices,” Nocella said. “And demand is really high right now and we’re bullish about the future, especially the next six months.”
American Airlines CEO Doug Parker was even more direct. “We can make money at oil prices of $100 [per barrel] or higher,” he said. The carrier, like United and Delta, is moderating near-term capacity, but this has as much to do with delayed aircraft deliveries from Boeing and staffing problems as it does with fuel prices, he added.
Southwest Airlines Chief Financial Officer Tammy Romo and JetBlue CEO Robin Hayes also attributed lower first-half capacity to staffing issues, rather than fuel. Hayes added that the carrier’s fare increases due to fuel will be “a little lower than Delta’s,” but he added the carrier is “extremely bullish” about its ability to recapture fuel increases as fares in the short- to medium-term.
Unlike the other airlines, Southwest hedges much of its fuel needs, and when oil hits $100 per barrel, the Dallas-based airline could reap up to $0.53 per gallon of jet fuel in the second quarter, and its gains only go up from there, Romo said. For the full year, the gains would be in line with the second quarter, if oil prices remain elevated. The carrier is 37 percent hedged for next year, and 14 percent hedged for 2024. “We are in a great position this year,” she said.
Alaska also hedges, but only about half of its needs, which gives the carrier the flexibility to ride out volatility in the oil markets without affecting is capacity plans, Chief Financial Officer Shane Tackett said. “This has always been about buying ourselves a little time,” he said, referring to the carrier’s hedge program. “We are in a good position for the next three or four quarters.”
Alaska plans to increase its capacity this summer to 2019 levels and still expects to be a larger airline by the end of this year than it was at the end of 2019, despite the surge in fuel prices, Tackett added. But he warned: “If fuel prices stay high for the next year, our advantage falls away.”
Gol Stands to Benefit From Higher Oil Prices
Gol is optimistic about 2022, betting that high commodity prices coupled with capacity discipline in Brazil will accelerate its financial recovery to at or above pre-pandemic levels.
The optimism is somewhat counterintuitive outside of Brazil. Despite quickly recovering travel demand, airlines in Europe and North America face surging fuel prices and future uncertainty owing to Russia’s invasion of Ukraine in February. However, in Brazil where commodities — including oil — are a large portion of the economy, high oil and other commodity prices have historically translated to strong corporate demand for the country’s airlines.
Gol already sees bookings in line with 2019 levels in March, April, and May, said Chief Financial Officer Richard Lark during the airline’s fourth-quarter earnings call on March 14. However, yields for those bookings are roughly 30 percent higher than three years ago, and predominantly from leisure travelers. This indicates to Gol, which historically has carried a greater percentage of business travelers than holidaygoers, that there is significant yield upside as road warriors return.
Corporate travel was at 65-70 percent of 2019 levels in the fourth quarter, and is forecast to recover to 80-85 percent by the second quarter, Lark said. And that corporate recovery has largely occurred without Brazil’s big commodity companies, including Petrobras and Vale, which suggests a significant business travel upside if commodity prices remain high.
The bullish outlook comes as airlines taper capacity plans in Brazil. In an update released March 14, Gol pulled down its 2022 capacity forecast by 5 percentage points to up 65-75 percent year-over-year on expectations of a 30 percent year-over-year increase in fuel expanses. The airline flew just 41 percent of its 2019 capacity last year; however, that number stood at 67 percent in the fourth quarter. Gol’s outlook includes resuming U.S. flights in May, including between Brasilia and both Miami and Orlando, and Fortaleza and Miami.
Speaking at a Raymond James investor conference on March 7, Azul Chief Financial Officer Alex Malfitani said the carrier was likely to cut second quarter capacity as a result of high fuel prices. He echoed Lark forecasting improving corporate demand in the country. Azul is the largest airline in Brazil.
“The name of the game now is capacity management,” said Gol CEO Paulo Kakinoff.
Gol remains focused on its other corporate initiatives this year. Top of mind is fleet: The airline plans to take delivery of 21 Boeing 737-8s in 2022, and end the year with 44 of the latest-generation aircraft. Of those deliveries, 12 are financed under a $600 million deal with Castlelake that includes 10 finance leases and two sale-and-leasebacks. Gol intends to return 20 737-700s and -800s to lessors as the new Maxes arrive, which resulted in a one-time 1.6 billion reais ($313 million) net charge in the fourth quarter.
The fleet update will drive an 8 percent reduction in unit costs — including fuel — from the shift to more fuel-efficient Maxes from older 737s, said Lark. In addition, the new aircraft will add some incremental capacity as they replace some smaller 737-700s.
Gol forecasts net revenues of 13.7 billion reais in 2022, or nearly the 13.9 billion reais it brought in in 2019. And an earnings before interest and taxes margin of 10 percent, or 5 points lower than in three years earlier.
In the fourth quarter, Gol lost 2.8 billion reais on 2.9 billion reais in revenues. Passenger unit revenues were up 17 percent and unit costs excluding fuel 68 percent jumped year-over-two-years. Passenger traffic was down nearly 33 percent compared to 2019.
Gol lost 7.2 billion reais on 7.4 billion reais in revenues in 2022.
Arajet Plots Ambitious Central and North American Network
Startup Arajet has ambitious plans to knit the Caribbean together from its home base in the Dominican Republic, and eventually connect Central America and North America over Santo Domingo.
The hill ahead of it is steep. Airlines with similar ambitions have long struggled — like Antigua and Barbados-based Liat and Air Jamaica. Yet, the market is a prime opportunity for airlines: Few transportation options besides air travel exist between the islands. Tourism is a major economic driver for the region. And diaspora populations in North America and Europe are a perennial source of air traffic.
It is this latter market that Arajet founder and CEO Victor Pacheco. “We’ll predominately go into the diaspora market in North America,” he told Airline Weekly. “As we make sure they’re choosing Arajet, we’ll expand into the leisure and tourism markets.” More than two million people of Dominican descent live in the U.S. alone.
Pacheco founded the airline after a career in financial services. He is joined at the top by Mike Powell, the former chief financial officer of Wizz Air. Griffin Global Asset Management and Bain Capital are providing the financing for the new airline, but Pacheco did not elaborate on the amount of startup financing coming from the two firms.
But before it can execute on that strategy, Arajet needs regulatory clearance to fly. The carrier is in the process of getting its safety permits from the Dominican government, and once that’s secured, it can apply for a foreign air carrier permit from the U.S. Transportation Department. Pacheco believes Arajet will begin selling intra-Caribbean flights this spring, but he could not pinpoint a date for the carrier’s launch.
The intra-Caribbean market is the second prong of Arajet’s strategy. The market is poorly served — it can be easier to connect in Miami or even Europe when flying between islands in the Caribbean — but is plagued by high costs and fares. The carrier can’t lower the region’s high taxes and fees, Pacheco said, but it can lower fares. Airlines in the Caribbean typically have been full-service, catering more to tourists than residents. Arajet will offer a fully unbundled fare, reliant on ancillaries, in the vein of Volaris. Lower fares will stimulate demand, he said. “We are not looking to cannibalize existing carriers’ business,” he said. “We’re looking for new travelers.”
The third market Arajet is aiming for is connecting Central America, North America, and the Caribbean through its hub in Santo Domingo. This is a more crowded market, with carriers like Volaris in Mexico and Copa in Panama already offering low-fare connections between North and Central America. But Pacheco believes Santo Domingo offers a geographic advantage over hubs in Panama or Mexico. Flights via Santo Domingo could be as much as 20 percent shorter, which translates into less fuel burn and lower fares than competitors, he said.
Arajet placed an order for 20 Boeing 737-8-200, the 737 Max-family’s high-density aircraft also flown by Ryanair. These aircraft begin arriving in April 2024. Arajet also has options for 15 additional Maxes, but hasn’t determined which variant.
Until then, the carrier will turn to the spot leasing market for lift. It took delivery of its first 737-8 from Griffin last week. The second aircraft joins the fleet in April, on more in May, and two arrive in June. These first five aircraft will comprise Arajet’s fleet this year. It plans to turn to other lessors for six additional aircraft through next year. If it exercises all its options, Arajet will have a fleet of 46 aircraft later this decade, Pacheco said.
“It’s a pretty ambitious startup,” Pacheco admitted. “But we’ve seen the void in the market.”
Fly Jinnah Launches as Newest Private Carrier in Pakistan
Pakistan’s airspace is set to get crowded as Fly Jinnah, a proposed low-cost carrier, prepares to take wing this year. The airline is a joint venture between Air Arabia Group and Lakson Group, one of Pakistan’s leading and most diversified business conglomerates.
“Fly Jinnah will benefit from the experience of Air Arabia, which is its minority stakeholder,” an aviation expert from Pakistan said. “It will be essentially a low-cost airline, just like its partner.
“The airline will begin operating domestically with three leased [Airbus] A320 aircraft and will gradually expand to international routes after a year of successful domestic operations following the addition of aircraft,” the insider said.
Having received a regular public transport license for the operation of passenger and cargo services in July 2021 from the Pakistan Civil Aviation Authority, the start-up airline aims to secure its air operator’s certificate in June, after which it will soon commence domestic services.
The airline has already commenced recruitment drives for cabin crew in Karachi, Islamabad, and Lahore.
Fly Jinnah will be Pakistan’s fourth private airline after Serene Air, Air Blue and Air Sial. The latest entrant – Air Sial, debuted in late 2020 and is currently operating domestically with plans to fly to the Middle East at a later date.
However, except for Air Blue, none of the other airlines are in good shape because of the pandemic and the raging competition, the expert said. The entry of Serene Air in 2017 saw Shaheen Air, Pakistan’s second-largest airline, fold after almost 24 years of operation.
“While the state-owned Pakistan International Airlines, along with Shaheen Air and Air Blue (launched in 2004), had been making a lot of money on domestic routes, the entry of Serene Air in 2017 proved to be a disaster for all,” the expert said. “Fly Jinnah will intensify the already stiff competition, which will benefit the consumers, but may prove to be detrimental to incumbent players and may even drive out a couple of them before the entry of Q-Airlines.”
Q-Airlines, the second carrier waiting in the wings, is a proposed charter that has just received a regular public transport license. The airline is expected to take at least one year to acquire its air operator’s certificate. It will then be the fifth private carrier to enter the market, probably around 2023.
“As excessive capacity floated on domestic routes at one point, India’s domestic growth touched a staggering 20 percent, but at the cost of investors. The industry lost about $10 billion in a decade by selling below cost. Mergers and bankruptcies were the logical outcomes for these airlines. A similar situation could be expected here in Pakistan,” warned the aviation expert while drawing parallels with the neighboring Indian market.
Passengers ferried by Pakistan’s domestically-owned airlines stood at 7.4 million in 2019, while in 2020 the number was 3.7 million. This number had peaked in 2016, before the entry of Serene Air, when the airlines had carried a maximum of 9.63 million passengers.
Aviation has often served as a catalyst for economic growth. Countries in Asia and the subcontinent are looking at the sector to support domestic and international connectivity while creating jobs.
“Fly Jinnah will not only serve Pakistan’s aviation industry, but will also aim to contribute to the country’s infrastructure, tourism, business travel, and the creation of new jobs,” the airline’s chairman, Iqbal Ali Lakhani, had been quoted as saying in a press statement. “The airline will be a catalyst to the country’s economic growth.”
In Other News
- If at first you don’t succeed, try, try again? International Airlines Group has agreed to loan Globalia €100 million ($111 million) for a seven-year term. However, the debt is convertible to an up to 20 percent stake in Air Europa, which Globalia owns and IAG dropped plans to acquire in December following competition concerns raised by European regulators. The deal appears a backdoor approach for IAG to build a stake in — and maybe eventually acquire — Air Europa, which CEO Luis Gallego said remains important to “the development and competitiveness of Madrid’s hub.” IAG has the right to match any third-party offer for Air Europa for three years, per the agreement.
- The holiday season was good for FedEx. The cargo carrier reported its best peak season in its history. But Omicron quickly rained on FedEx’s party. The company suffered from staff shortages — as much as 15 percent of its workforce was out any given time during the surge — and staffing challenges at its customers’ operations. These resulted in a $350 million hit to the company’s earnings in its most recent quarter.
Still, FedEx reported net income of $1.1 billion in the most recent fiscal quarter, on $23.6 billion in revenues, or $2 billion more than in 2021. The company continues to benefit from the drop in passenger flights to Asia, which means there’s less belly-hold capacity to compete with, Chief Marketing Officer Brie Carere said. But macroeconomic factors, including the war in Ukraine, the pandemic, labor shortages and supply-chain disruptions, and rising inflation and energy prices, concern FedEx in the near- to medium-term.
- Aeromexico exited U.S. Chapter 11 restructuring on March 18. Marking the occasion, CEO Andres Conesa said the airline will “continue to streamline our company to become even more sustainable, resilient, and competitive, but we will also significantly expand our network and fleet.” Aeromexico cut roughly $1.1 billion in debt and achieved roughly $605 million in annual cost savings through its restructuring. During the process, it signed agreements for 41 new Boeing 737 Max aircraft as well as additional Boeing 787s.
- New Zealand is beginning to reopen to visitors after a two-year coronavirus slumber. The country will reopen to vaccinated Australian travelers on April 12, and to visitors from other countries, including the UK and U.S., on May 1. The news has at least Qantas and its subsidiary Jetstar Airways adding flights: the duo will jump to 30 daily flights from two to Auckland and Christchurch beginning April 13. The airlines plan to add more frequencies in May and June, including a return to Queenstown and Wellington.
- Canada, the UK, and France are among the countries that have eased their Covid-19 travel restrictions. The UK went furthest, dropping all pre- and post-arrival testing. France is allowing unvaccinated travelers from the U.S. to enter the country, provided they show proof of a negative PCR test. And Canada is dropping its pre-departure testing requirement for vaccinated travelers.
- Icelandic startup Play plans to implement a fuel surcharge to combat the run up in oil prices since Russia’s invasion of Ukraine in February. The budget carrier will use the surcharge and additional operational efficiencies to counter the additional roughly $10 million in annual fuel expenses it anticipates. Besides the additional expenses, Play CEO Birgir Jónsson said demand is strong in a statement on the airline’s 2021 results. “Our new destinations have been very well received and I believe that we are expanding our network and operation at precisely the right time as the demand in the market increases,” he said. Play lost $22.5 million on $16.4 million in revenues last year; revenue flights began in June.
- Citing the war in Ukraine and high energy prices, startup Norse Atlantic Airways has delayed its launch to June from earlier in the second quarter. The airline also delayed the start of ticket sales by a month to April. Norse will initially connect Oslo to three U.S. markets: Fort Lauderdale, New York — either JFK or Stewart airports — and Ontario, Calif. In addition, the carrier’s plan to begin transatlantic flights from London moved forward with the allocation of an undisclosed number of slots at Gatwick Airport.
- Air Canada plans to pay cash for its deliveries of Boeing 737-8 and 787-9 aircraft over the “near term” in order to de-lever its balance sheet, Chief Financial Officer Amos Kazzaz said at a J.P. Morgan conference last week. However, the airline is considering an enhanced equipment trust certificate (EETC) transaction for future 737 and 787 deliveries; the airline last tapped the market with $553 million private issue in September 2020. Airbus A220 deliveries will continue to be financed with Export Development Canada (EDC) debt, Kazzaz said. Air Canada has C$1.2 billion ($943 million) in capital expenditure commitments in 2022 when it is due to take delivery of six A220-300s, nine 737-8s, and one 787-9. The carrier will also add three used Boeing 767Fs to its freighter fleet.
- Norwegian startup Flyr has a new investor: The country’s TV 2. The private broadcaster will invest 10 million Norwegian kroner ($1.1 million) for a 2.7 percent stake in the airline. As part of the deal, Flyr will purchase marketing services at a discount from TV 2 for a nine-month period from April 1 through December 31.
Some of Russia’s private airlines appear open to returning their Western-owned aircraft to lessors despite a new law that allows them to seize the planes.
Russia’s state airlines, including the Aeroflot group’s eponymous carrier, Pobeda, and Rosiya, appear to be hanging on to their leased aircraft. Those three airlines hold more than 50 Western-owned planes, and have suspended all international flights to avoid potential aircraft seizure. But lessors are finding the country’s private carriers, including Nordwind and S7, more amenable to working with them in order to maintain access to European and U.S. aircraft after the war ends.
Privately owned Russian airlines “very much see the endgame beyond this current crisis or believe that there is life after this crisis, and they are doing everything possible knowing that they need our aircraft and other Western supplied aircraft on the leasing side,” Air Lease Corp. CEO John Plueger said at a J.P. Morgan conference on March 16. “So they’re doing I think an excellent job of trying to manage this balance to try and work with us as cooperatively as possible.”
ALC has 14 aircraft leased to S7, 11 to Nordwind, four at Ifly, and a handful at other private carriers, according to IBA data via J.P. Morgan. None of its 32 aircraft in Russia are flown by Aeroflot or its affiliates.
That’s good news for lessors that feared the industry may have to write off as much as $10 billion in aircraft assets. Cirium data show that 79 Western-owned aircraft have been recovered by lessors to date, leaving some 428 aircraft in either Russia or Belarus. Russian airlines leased 515 aircraft from foreign lessors on February 24 when Russia invaded Ukraine.
Nationalizing foreign-owned aircraft became a very real risk for lessors after Russian Federation President Vladimir Putin signed a law allowing the re-registration of foreign-registered aircraft in the country on March 14. Russia’s civil aviation regulator can issue new airworthiness certificates under the legislation. This permits Russian airlines to operate the aircraft on domestic routes even if their certification was rescinded by their country of registry — in most instances Bermuda — according to Russia’s TASS news service.
AerCap has the largest exposure among Western lessors with 142 aircraft placed at airlines in Russia, IBA data show. ALC is a distant second with 32 aircraft and Avolon third with 16 aircraft.
But a consensus is building that the market’s fears may be overblown. Only 5 percent of AerCap’s portfolio is in Russia, Cowen & Co. analyst Helane Becker wrote in a recent note to investors. The loss of its Russian assets would result in a $2.5 billion write-down, she said, adding that the market’s reaction is “overdone.” And J.P. Morgan analyst Jamie Baker concurred, saying the costs to lessors will be “manageable.”
The bigger fight now for lessors is with insurers. While assets are insured against war risk and seizure, recouping that money can take years of litigation. The Russian law allowing the re-registration of aircraft flouts international laws, and this bolsters the lessors’ arguments with insurers. “This is going to play out for years,” Aircastle Chief Legal Officer Christopher Beers said at the ISTAT Americas conference earlier in March.
“I think it helps the insurance question because it demonstrates the intent to confiscate which is, I think, a critical aspect of our war risk insurance,” ALC Executive Chairman Steven Udvar-Hazy said at the J.P. Morgan event.
The crisis will redound to lessors’ benefit in one way: Increasing the supply of in-demand airplanes. Fears that the market would be saturated with repossessed aircraft were squashed by Russia’s move on the in-service fleet. Instead, lessors can re-market aircraft previously bound for Russian airlines to other carriers. ALC already is in talks with airlines to take Airbus A320neo and Boeing 737 Max-family aircraft that were slated for Russian operators.
“That was a major earthquake. That was an 8.0 earthquake,” Udvar-Hazy said of the pandemic. “This is like a 2.5 aftershock.”
- Spanish discounter Volotea has acquired six additional Airbus A320s to support its growth this year. The airline plans to fly 30-35 percent more capacity this year than it did in 2019, growth that includes the new routes it launched at Paris Orly late in 2021, and two planned new bases — including Lille — in France. Volotea did not disclose how it acquired the additional A320s.
Routes and Networks
- WestJet appears to be taking a page out of Air Canada‘s sixth-freedom hub strategy. The Calgary-based carrier announced new nonstops from Toronto to Chicago O’Hare, Dublin, Edinburgh, and Glasgow — the latter three routes will be flown with Boeing 737-8 aircraft — all beginning in May, in a release that touted “convenient options” between all of the cities and Toronto. The new routes are part of a broader summer schedule roll out that will see it flying near pre-pandemic capacity levels. Some other transatlantic highlights include resuming seasonal Toronto-Barcelona flights that flew during summer 2019, launching Calgary-London Heathrow flights on March 26, and debuting delayed Calgary-Rome flights on May 7.
- And the Canadian ULCC market continues to heat up with four new destinations for startup Lynx Air. The discounter will add Edmonton, Halifax, Hamilton, and St. John’s to its map in June and July. Lynx will serve Edmonton, Halifax, and St. John’s from Toronto Pearson; and Hamilton from Calgary and Halifax. The airline plans its first flight, between Calgary and Vancouver, on April 7.
- All-business class La Compagnie will add Milan to its map in April. The airline will operate five weekly flights between Newark and Milan Malpensa on 76-seat Airbus A321neo jets.
- Southwest Airlines is making some adjustments to its California network this June. The carrier will add new daily flights between Sacramento and Santa Barbara; San Diego and El Paso; and San Jose and Eugene, Ore., on June 5. However, the day before, Southwest will suspend flights between San Diego and Kahului, Kona, and Lihue that it has flown since June 2021 when it began a big push for the Hawaiian islands. A Southwest spokesperson said the suspension is only for the summer. Southwest competes with Alaska Airlines on the three San Diego-Hawaii routes, per Cirium schedules.
- And Spirit Airlines is also making moves out West. The discounter will add Albuquerque, Boise, and Reno — three communities that anecdotally have benefitted from the Covid exodus from high-cost metro areas — to its map in August. Spirit will begin flights from Las Vegas and Albuquerque on August 3, Boise on August 5, and Reno on August 10. The carrier will face stiff competition on all of the routes: Southwest and Allegiant Air fly to Albuquerque; Alaska Airlines, Allegiant, and Southwest to Boise; and Frontier Airlines — which Spirit seeks to merge with — Allegiant, and Southwest to Reno, per Cirium.
- Despite executives citing staffing “constraints” at its regional affiliates, Delta Air Lines will add three new routes from New York LaGuardia: daily Dayton, Oklahoma City, and Roanoke flights begin June 6. But it’s not all additions at Delta. The airline has indefinitely suspended plans to resume flights between Minneapolis-St. Paul and Knoxville and Lexington; and Seattle and Indianapolis and Milwaukee that were slated to return later in 2022, per Cirium. The Minneapolis routes were flown with regional aircraft, and the Seattle routes mainline jets.
State of the Unions
U.S. airline executives are in agreement that the industry faces a pilot shortage that will limit schedules this summer.
“What can you do about it?” JetBlue Airways CEO Robin Hayes said of the pilot shortage at a J.P. Morgan investor conference on March 15. “Well, obviously, focusing on automation and technology … but also creating career paths.”
JetBlue benefits from its gateway program, which offers interested applicants various paths from university programs to flight schools to becoming a pilot at the airline. Launched in 2016, Hayes said the four-year program has recently begun producing “significant numbers” of new pilots for the carrier.
But in his comment Hayes highlighted the issue airlines face addressing the pilot shortage today: JetBlue’s program takes four years to produce a new cockpit crewmember. Some other programs, including ATP Flight School, claim they can train a new pilot in as little as seven months if they work at it full time. No matter what timeline one uses, what the industry does today to address the problem will take some time before it filters through to actual flights and schedules.
Senior executives at both Republic Airways and SkyWest Airlines, the two largest U.S. regional airlines do not expect the situation to ease until sometime in 2023. Both have cut their schedules this year as a result. The latest of which was SkyWest’s notification to the Department of Transportation that it would end government-subsidized flights to 29 smaller cities due to a lack of pilots.
Regionals are feeling the brunt of the pain. As the farm club for major airlines, like American Airlines and United Airlines, the sector is seeing elevated attrition as their partners have ramped up hiring to replace the pilots who took early retirement or voluntary departure packages during the pandemic. Airlines were barred from involuntary layoffs or furloughs under the federal government’s payroll support program that expired last September.
“We are depleting the ranks faster than we can get new hires ramped back up,” outgoing American CEO Doug Parker said at the event.
Regulators certified 4,928 new commercial airline pilots in 2021, according to the Regional Airline Association. That is less than half of the 11,526 pilots that the group estimates U.S. airlines plan to hire this year. And Oliver Wyman has put the shortfall at as many as 12,000 pilots in 2023.
The shortage is translating to leaner-than-planned schedules at most major airlines. Alaska Airlines, American, Delta Air Lines, and United have all trimmed flying plans and, in United’s case, exited smaller markets as their affiliates have struggled with attrition.
Southwest Airlines, which does not have any regional partners, has reduced its capacity recovery through May owing to “challenges with available staffing,” Chief Financial Officer Tammy Romo said at the conference. Former CEO Gary Kelly identified pilots as one area where Southwest faced staffing challenges in January.
Alaska and United have gone one step further than JetBlue and opened their own flight schools. The former opened the Ascend Pilot Academy in Oregon earlier in March, and the latter the United Aviate Academy in Arizona in January. Both programs offer financial aid and scholarships to lessen the cost of becoming a pilot, and encourage more people to do so.
“There is an enormous pool of qualified candidates that will make excellent pilots that haven’t had the opportunity to go to flight school because it costs money,” United Chief Financial Officer Gerry Laderman said at the event. United and partner J.P. Morgan will partially the cover the cost of training but, even with that help, expenses total more than $70,000.
Many have blamed the U.S. shortage on the combination of the 1,500-hour rule, high training costs, and the low wages new pilots often receive at airlines. Carriers are working to address the latter through new labor contracts and hiring bonuses and retention incentives. Recently, pilots at United affiliate CommutAir ratified a contract with a 32 percent wage increase for first officers.
But whatever the reason, airline executives agree that the shortage is here and managing through it is the only path forward. Coupled with the recent surge in oil prices due to the war in Ukraine, capacity will be closely managed this summer despite strong travel demand. That will likely mean higher airfares for travelers and improved financial performance for airlines.
“We are very, very confident in our ability to capture over 100 percent of the fuel price run up,” Delta President Glen Hauenstein said at the conference. His confidence was, in part, supported by the broad capacity discipline — in part a result of the pilot shortage — the airline is seeing in the U.S. market even as travelers return. Delta plans to increase ticket prices by $15-20 one-way beginning in the second quarter.
- Flight attendants at Eastern Airlines are organizing for representation by the Association of Flight Attendants. The next step is for the federal National Mediation Board to authorize a union representation vote. Eastern employs 65 U.S. flight attendants and 35 based outside the U.S., who crew its scheduled flights between the U.S. and the Caribbean and South America.
The Terminal 2/3 Delta Sky Way in Los Angeles to the South Terminal Complex in Orlando are just a few of the multi-billion dollar expansion projects poised to open at airports across the U.S. in the coming months.
Pieces of more than $13 billion in investments in cities coast-to-coast will open as airports wrap up work that they began before and carried on during the pandemic. One of the largest imminent openings is the $2.8 billion South Terminal Complex at Orlando International Airport that will open for its first travelers this summer. Other coming openings include an expansion of Terminal 5 at Chicago O’Hare, the new Terminal A at Newark Liberty, and major pieces of Delta Air Lines-led projects at Los Angeles, or LAX, and New York LaGuardia.
The openings come after an uncertain time for airports during the pandemic. Passenger numbers collapsed in 2020 with Orlando, one of the country’s busiest airports, handling just 1,517 departing passengers on April 15 that year. But the recovery, at least for domestic travel, has been faster and more robust than most expected with many airports — especially in leisure-oriented markets — back to near bursting. Airports that continued works through the crisis, rather than postponing or cancelling them, are sitting pretty as U.S. domestic number approach 2019 levels.
And even airlines’ capacity discipline amid elevated fuel prices, and cuts to regional flying owing to the U.S. pilot shortage are expected to do little to slow the travel recovery.
“We see low risk to our base case that passenger traffic will increase throughout 2022 and reach 95 percent of 2019 levels by year-end,” wrote Earl Heffintrayer, a senior credit officer at Moody’s Investors Service, in a report on March 14. The risks he referred to are the fuel price spike and pilot shortage.
Airports, for their part, are pressing forward with openings and restarting paused projects with traveler numbers on track to soon surpass 2019. These works are seen as key to handle growing passenger numbers with both new and renovated facilities that meet contemporary traveler demands.
Chicago O’Hare is moving forward with its phased $8.5 billion terminal modernization plan that includes a new Global Terminal on the site of today’s Terminal 2, and new satellite concourses for American Airlines and United Airlines’ hubs. The first piece of the project, a $1.2 billion, 10-gate expansion of Terminal 5, is scheduled to open in the first half of the year. Delta will move to the gates from Terminal 2, and allowing work to begin on further phases of the project.
Renovations to Terminal 5, which include the expansion project, are due to open from 2021 through 2023, according to a Chicago Department of Aviation spokesperson.
Delta is ready to open of the new headhouse piece of its $2.3 billion Terminal 2/3 modernization at LAX on April 20. The facility is the centerpiece of the new “Delta Sky Way” at the airport, and includes expanded check in, security, and baggage claim facilities. Still to come aspects of the project are a new Terminal 3 concourse, and an updated Terminal 2 concourse.
“Despite the global uncertainty, Delta continues to push forward toward a bright future,” CEO Ed Bastian told staff in a memo on March 17. “In a couple of weeks I’ll be at LAX with our people to celebrate the opening of our world-class consolidated terminal.”
The Atlanta-based carrier will also open the new terminal headhouse and Concourse E pieces of its phased $4 billion reconstruction of Terminal C at LaGuardia this spring. The first piece of the modernization, Concourse G, opened in 2019, with two additional concourses — D and F — planned to open in phases through 2026.
And the Port Authority of New York and New Jersey, which operates JFK, LaGuardia, and Newark, is expected to open the $2.7 billion, 33-gate new Terminal A at Newark in the next few months. United will occupy at least 12 gates in the facility that, a year ago, targeted an opening this April. Air Canada, American, Delta, and JetBlue Airways will also operate from the facility.
Orlando’s South Terminal will add 15 gates and a new terminal complex when it opens this summer. JetBlue will move to the facility, while other airline assignments are pending. The new terminal is also connected to a station on the soon-to-open Brightline rail line to Miami. And, in recognizing the strong recovery — Orlando was the third-busiest in the U.S. in January and February — the airport has restarted work a $400 million, eight-gate expansion of the South Terminal that was deferred in May 2020. Work on the additional gates is scheduled to begin in the second half of the year.
These are just five of numerous expansion projects underway at airports big and small across the U.S. Missoula, Mont., one of the many small communities that saw a boom in travelers during the pandemic, will open a new terminal in May. While facing delays, Denver is prepping a number of concourse extensions to debut later this year, and recently the city council recently approved additional funds to complete a renovation of its terminal building.
- Halfway around the world, a new terminal opened at Samarkand International Airport in Uzbekistan on March 18. The $80 million facility has eight boarding gates and parking positions for a further 16 aircraft. Airport operator Air Marakanda hopes the new facility will help it attract new air service.