Blue Skies Ahead for Airlines in Australia and New Zealand
Pushing Back: Inside the Issue
September 1 marks the beginning of spring in Australia and New Zealand, two airline markets, appropriately enough, now springing back to life. Demand for Qantas and Air New Zealand is in many respects just as strong if not stronger than it was pre-crisis, aside from some markets like China and Japan. Capacity, however, hasn’t returned to the same extent, pushing up yields and — less welcomingly — causing operational distress. Both airlines lost money in the first half of this calendar year. But both are optimistic about the months and years ahead.
Qantas, in particular, is betting big on ultra-longhaul. Its latest route announcement — Auckland-New York — strikes directly at Air New Zealand. Once the appropriate planes arrive, the Flying Kangaroo will head nonstop to New York, and to London, straight from eastern Australia. But that’s several years out.
In Europe, SAS doesn’t have the luxury of planning several years out. It’s busy trying to negotiate its way out of bankruptcy, eager to wrest itself free from surplus widebody aircraft. Nordic rival Norwegian, like SAS, unveiled quarterly losses. TAP Air Portugal more encouragingly, produced a solid second quarter operating profit. It won’t be pleased, however, to hear that EasyJet is expanding from Lisbon. Ryanair, meanwhile, is expanding from the UK. Wizz Air is expanding from the deserts of Saudi Arabia. And Frontier, the Denver-based LCC, is expanding from a different desert, namely the one in Phoenix.
AirAsia X hopes to rise like a Phoenix after restructuring its debt. Alas, it has a long way to fly, having spilled more red ink last quarter — spilling red ink is something it’s been doing throughout its tenuous existence. Back in the U.S., American hopes to gain a competitive advantage in regional markets, aided by a new contract with Air Wisconsin. The regional carrier ExpressJet had an Aha! moment, succumbing to financial reality. Lufthansa hopes to avoid a pilot strike. And the U.S. and China are at each other’s throats again, this time over air service. It’s one more reason to question China’s role in the future of global aviation. And that’s perhaps the single biggest question the industry faces.
Airline Weekly Lounge Podcast
Flying through London is getting a little better with the end of capacity caps at Gatwick Airport. But constraints remain in place at Heathrow until the end of October, and British Airways has already reduced schedules through the winter. And an always-eager Ryanair is ready with more seats to grab market share, Edward Russell and Jay Shabat discuss the situation. Plus, they review American’s new regional strategy. Listen to this week’s episode to find out. A full archive of the ‘Lounge is here.
American Airlines Chief Commercial Officer Vasu Raja made clear last week how the carrier plans to make its new industry-leading regional pilot pay rates and additional 50-seat regional jet flying work: higher passenger yields or, in other words, fares.
“The value we’re able to go and create, especially [with] the regional network, has less to do with the expense profile of a regional jet and really everything to do with the yield profile of being able to go and serve a ton of these really unique markets,” Raja said at a Raymond James investor conference on August 23.
By American’s own count, it offers travelers roughly 30 percent more unique connection pairs — for example, Knoxville to Tucson — across its U.S. network than its main competitors, Delta Air Lines and United Airlines. And, in any market where one company has limited competition, the airline is able to generate higher passenger yields, particularly in smaller destinations, than its competitors.
That is certainly what investors want to hear from American. In June, the airline agreed to historic pay increases for pilots at its three wholly-owned regional affiliates — Envoy, Piedmont Airlines, and PSA Airlines — that brought rates, at least for the next two years, in line with entry-level rates for pilots flying at American mainline. The move, according to American executives, was needed to address the pilot shortage faced by many U.S. regional airlines. But higher cockpit crew member pay also means higher expenses.
Compared to 2019, American forecasts a 12-14 percent jump in unit costs excluding fuel and special items, which includes pilot pay, in the third quarter. However, to Raja’s comments about higher yields, the airline anticipates a 20-24 percent increase in total unit revenues during the same period — an increase that would more than offset the higher costs.
Those higher yields will come in handy when American adds a new regional affiliate next year. On August 22, it unveiled a new agreement with Air Wisconsin to operate up to 60 Bombarder CRJ200s under the American Eagle brand. Air Wisconsin, which currently flies for United under a contract that expires in February, will ramp up flying with 40 CRJ200s from March through October. Another 20 aircraft could be added to the agreement if the regional airline meets “certain minimum block hour utilization thresholds.”
Meeting those undisclosed thresholds will almost certainly be dependent on Air Wisconsin’s pilot staffing. While the airline does not disclose its cockpit crew staffing numbers, the carrier’s overall employment numbers have dropped significantly during the pandemic. With 1,157 employees at the end of June, Air Wisconsin has lost more than a third of its employees since the Covid crisis began, according to U.S. Bureau of Transportation Statistics data.
The addition of so many additional 50-seat regional jets at American comes as most U.S. airlines are focused on phasing out the aging and inefficient aircraft. A United spokesperson, when asked about the end of the Air Wisconsin agreement, pointed to the airline’s order for 270 new narrowbody aircraft last year and said the carrier plans to “fly more larger narrowbody aircraft within our domestic network” — and fewer small regional ones.
A spokesperson for American, when asked if the Air Wisconsin aircraft would replace any existing regional feed — currently flown by higher-cost Envoy, Piedmont, or PSA, for example — said the additional CRJ200s would “supplement,” and not replace, existing regional flying. The new aircraft will primarily be based at American’s Chicago O’Hare hub.
Still, in a world where fuel prices are likely to remain relatively high and other costs are only going up, it is difficult to see American maintaining a regional fleet of more than 150 50-seat jets for long. Envoy and Piedmont flew 107 Embraer ERJ-145s at the end of last year, according to American’s latest fleet plan. The Air Wisconsin deal could be a harbinger of further changes at American’s affiliates.
In the meantime, American will continue to push more U.S. domestic connectivity over its hubs — particularly Charlotte and Dallas-Fort Worth — relative to its competitors, Raja said. This, in his view, will support the airline’s aim to continue to grow unit revenues, or RASM.
“We have competitors who can fly to islands off the coast of Africa and, presumably, they do great at it,” he said in a nod to United’s seasonal service to Tenerife in the Canary Islands this summer. “It’s not a thing that American Airlines historically made money doing. But we have the biggest and best domestic short-haul network, and we’ll always preserve that.”
SAS, Air New Zealand, AirAsia X Earnings, and More
In Europe, SAS faces an uphill battle as a mid-sized, shorthaul-dominant legacy carrier that’s now in U.S. Chapter 11 bankruptcy. With financial support from the governments of Sweden, Denmark, and Norway — as well as the U.S.-based investment firm Apollo Global Management — SAS will likely survive. But it still has difficult negotiations to navigate, most importantly with its aircraft lessors. Management specifically wants to downsize its widebody fleet now that Asian markets have become less tenable, owing to the closure of Russia’s airspace and ongoing Covid restrictions in China and Japan. That’s forced it to reorient westward, adding service to Toronto for example.
SAS does have a new pilot agreement, following a 15-day pilot strike that contributed to a negative 13 percent operating margin for its unusual fiscal quarter that covers May, June and July. Those are supposed to be three of the strongest months of the year for European airlines, and demand was in fact exceedingly strong this year. But the strike proved too hard to overcome. In addition, SAS has no fuel hedges in place, leaving it with an extreme competitive disadvantage relative to Ryanair. Fortunately, Ryanair is not terribly large in the Nordic region, but others like the revived Norwegian Air, and newcomers like Flyr and Norse Atlantic, continue to exert pressure. Lufthansa’s Eurowings too is expanding in the region. SAS does have a loyalty plan with 7 million members that is a key asset. And bankruptcy can be a powerful means to achieve the competitive cost structure that SAS has always found elusive. Bankruptcy doesn’t help much with growing revenues though.
The SAS strike, which occurred in July, didn’t affect Norwegian’s latest results, which were for the traditional second quarter covering April, May, and June. The results, alas, weren’t good if you ignore a big one-off accounting gain. Underlying operating margin was negative 15 percent, suggesting that cutting costs in bankruptcy doesn’t solve all ones problems. Norwegian, remember, was a chronic under-performer throughout the 2010s, overzealously adding planes and quixotically attempting to bring low-fare competition to intercontinental routes, most importantly transatlantic markets. The longhaul flying — and the Boeing 787s that enabled it — are now gone. But Norwegian is ordering planes again, most recently another 50 Boeing 737 Maxes.
Absolutely critical to Norwegian’s new business model is flexing flight schedules up and down by season, something its fixed cost structure made it hard to do pre-bankruptcy. Now it has more flexible labor and engine contracts that enable more summer flying without having to carry the same labor and maintenance costs during the off-peak winter. “We have approximately 25 percent fewer seats for sale in the winter than what we have today … I think this is the first time we have done that,” CEO Geir Karlsen said in an earnings call last week.
By next summer, Norwegian will ramp back up to about 85 planes, all narrowbodies. Norwegian, by the way, is cooperating with Norway’s Wideroe and the new transatlantic player Norse Atlantic. And remember, July financials were likely strong due to the SAS strike — we’ll know more about that when the carrier reports third quarter results this fall. Separately, the Norwegian startup Flyr reported second quarter results, showing heavy losses (operating margin was negative 82 percent).
Consider TAP Air Portugal a winner this spring, based on its positive 6 percent operating margin in the second quarter. It did lose money at the net level, however, which reflects heavy interest payments on debt — it paid $122 million in interest during the first half of 2022, though Portugal’s government will convert some future debt into equity. Prior to the pandemic, TAP was partially privatized and under the ownership of a group that included JetBlue, Azul, and Breeze founder David Neeleman.
CEO Christine Ourmières-Widener says TAP is recovering more rapidly than other European carriers, thanks in part to the popularity of Portugal as a spot for holidays, expatriate living, and remote working. Being one of the closest European cities to North America also helps. As always, TAP depends a lot on South America, specifically Brazil. Portuguese-speaking markets in Africa, including oil-rich Angola, are key as well. Unsurprisingly, strong cargo demand played a role in achieving second quarter operating profits. The carrier also saved $83 million from fuel hedges, though the weak euro added $46 million in additional fuel costs. TAP exited its long-troubled Brazilian maintenance business. It is restructuring its ground handling unit. More Airbus A320neo family aircraft are on the way, including some long-range A321LR variants which can reach deeper into the Americas and Africa. A top priority is negotiating new labor deals. And a top concern is the airport situation in Lisbon, which hasn’t been able to support previous expansion plans. In one sense though, capacity shortages are helpful: They keep LCCs from expanding as much as they otherwise might. A final note: By the end of this year, TAP will have received $2.7 billion in state aid.
Air New Zealand had a rough calendar first half, posting an operating margin of negative 21 percent. Like Qantas though, the airline has performed much better in recent months as demand returns. Since the relaxation of travel restrictions and border reopenings (New Zealand’s borders reopened in March), “customer demand for travel has been stronger than it has been for over two years,” the company said. The airline performed well in the years leading up to the pandemic, dominating its domestic market and using 787s to reach more overseas markets. It’s now reintroducing Boeing 777s that were stored during the pandemic, and hopes to benefit as foreign carriers fly less to New Zealand because of aircraft shortages. As management likes to say, the early days of the pandemic were about surviving, now the task is reviving, and the future goal is too once again be thriving. Right now, interestingly, it says North America is the strongest of its international markets. Nonstop flights to New York from Auckland start in September, with Qantas joining Air New Zealand on the route next year.
AirAsia X, which underwent a major debt restructuring to survive the pandemic, disclosed another heavy net loss for the calendar second quarter of 2022. The amount was $152 million, far exceeding the mere $25 million worth of revenue it generated. And most of that was from cargo. AirAsia X began life in 2007, hoping to replicate the success of its sister airline AirAsia but on longhaul routes with widebody planes. It was a failure from the get-go, repeatedly losing money, revamping its route network, and revising its business plan. But it clung to life, aided by support from stakeholders including the AirAsia Group (now Capital A). Another critical creditor is Airbus, which counted AirAsia X as one of its largest A330neo customers. During its latest restructuring, the carrier canceled 78 A330neo orders, along with orders for another 30 A321neos. Now that travel demand is starting to revive, flights to Delhi and Seoul have restarted. Early next year, it plans to restore service to markets including Australia, Japan, New Zealand, Saudi Arabia, the United Arab Emirates, UK, and Turkey. It’s specifically prioritizing routes with significant cargo demand to help supplement passenger revenues.
ExpressJet to Liquidate in Bankruptcy
The end of the road has come for U.S. regional ExpressJet Airlines. The carrier, which has been flying under the Aha! brand since last October, ceased operations and filed for Chapter 11 bankruptcy in a Delaware court on August 23. The aim of the filing, unlike most Chapter 11 filings, is to liquidate the regional airline that has flown both as an affiliate for major carriers — primarily Continental Airlines and United — and independently since 1986.
In its filings, ExpressJet blamed nearly everything but the kitchen sink for its liquidation. The airline, which once flew the largest fleet of Embraer ERJ-145s in the world, was unable to scale its ERJ operations due to a tight used aircraft market to its target fleet of eight aircraft. Weak revenues as a result of the Covid-19 pandemic and its variants. And high fuel prices plus elevated inflation in the U.S. What ExpressJet did not mention was its questionable business model: an all-50-seat regional jet airline with a hub in Reno serving smaller western markets.
ExpressJet’s last months of operations were a bloodbath for the carrier. It reported an operating loss of $17.7 million on $5.5 million in revenues during the first seven months of the year. That translates to a whopping negative 322 percent operating margin. ExpressJet also has $24.1 million in outstanding debt.
Competitors are already circling for what is arguably ExpressJet’s best asset: pilots. Envoy and Piedmont have publicly opened their doors to the airline’s furloughed pilots as the industry deals with a pilot shortage. ExpressJet includes a furlough list of roughly 1,300 pilots in its list of assets for sale; however, it said that only 71 employees were laid off when it stopped flying last week.
With no plans to return to the skies, ExpressJet joins Compass Airlines and Trans States Airlines among U.S. carriers that fell victim to the Covid-19 crisis.
In Other News
- Southwest Airlines will redeem the $1.23 billion outstanding under its 4.75 percent notes due 2023 by the end of August. The carrier will repay the principal plus a make-whole premium with cash. The debt being repaid represents nearly 14 percent of the $8.88 billion in long-term debt net current maturities that Southwest had at the end of June, when the airline had $13.2 billion in cash and cash equivalents.
- Virgin Australia has signed leases for four more Boeing 737-8s due in the second half of 2023. The aircraft will be used for growth, and bring the airline’s total leases for Max aircraft to eight 737-8s. Virgin Australia expects its first 737-8 from a separate deal unveiled in May, in the first quarter. The airline also has firm orders for 25 737-10s.
- Two big pilot pay increases at U.S. regionals last week. Mesa Airlines, which flies for American and United, agreed to a letter of agreement that will see its cockpit crew members become the best paid in the segment. Captains start at $150 an hour, and first officers at $100 an hour; for perspective, the latter is higher than at mainline carriers Alaska Airlines, Frontier Airlines, JetBlue Airways, and Spirit Airlines to name a few. And United affiliate CommutAir approved a letter of agreement that will see captains start at $100 an hour, and first officers at $72 an hour. Both the new Mesa and CommutAir accords appear to be in direct response to the deals Envoy, Piedmont, and PSA pilots ratified in June that set a new high bar for regional pilot pay in an effort to alleviate the pilot shortage and training backlog. The economics of U.S. regional flying are likely forever changed.
- In people moves, the chief financial officer of European budget juggernaut Wizz Air is departing for “pursue opportunities outside of the company.” Jourik Hooghe, who has managed the finances at the Hungarian discounter since February 2020, will leave at the end of December. His replacement, Ian Malin, will begin on October 1. KLM named Maarten Stienen its new chief operating officer effective September 1. Stienen replaces René de Groot who stepped down from the role at the Dutch carrier in July. And Finnair has appointed Kristian Pullola to replace Mika Stirkkinen as chief financial officer effective October 1. Pullola joins the airline from Nokia where she was also chief financial officer.
Routes and Networks
Ryanair is adding more than a million additional seats to its UK schedule this winter. A move it trumpeted as a relief to travelers in the wake of capacity cuts by other airlines, most importantly British Airways.
The additional seats, Ryanair said in a statement on August 23, are a “response to BA’s announcement that it will cancel eight percent of its winter schedule (over 10,000 flights) due to staff shortages and capacity cuts at ‘Hopeless Heathrow.’” Heathrow informed airlines on August 15 that it would extend capacity caps first introduced in June through October 29. Ryanair does not fly from Heathrow, instead primarily serving London’s Stansted airport with small operations at Gatwick and Luton.
Ryanair’s new flights also benefit areas of the UK outside of London, including airports in Birmingham, Edinburgh, and Manchester. In total, the Irish discounter serves 20 UK airports, more than any other airline including British Airways. Other major competitors in the UK shorthaul market include EasyJet, Jet2, and Wizz Air.
According to data from Diio by Cirium, Ryanair’s UK schedule for December is now about 4 percent larger than it was in the same month of 2019, based on total number of seats scheduled. The carrier is offering many new winter routes that did not exist before the pandemic. London Stansted to Vienna and Stockholm, for example.
Operational woes at London’s airports have gained much attention this summer, leading to long queues, and many flight cancellations and delays. In July, Heathrow airport introduced “temporary capacity limits to improve passenger journeys over the summer getaway.” These limit the facility to 100,000 departing passengers per day. That compares to a daily average of about 125,000 passengers in July 2019, airport data show. During the pandemic, that daily average dipped to around 14,000 passengers in July 2020, and 24,000 passengers in July 2021. According to Heathrow, the caps are having their intended effect, leading to “fewer last-minute cancellations, better punctuality, and shorter waits for bags.” It noted that several other European airports, including Amsterdam Schiphol, Frankfurt, and Gatwick have also put in place “equivalent capacity limits.”
Gatwick, however, said Monday that its capacity edict would sunset at the end of August as the airport “returns back to usual business operations.” The end of restrictions at Gatwick is likely benefit EasyJet, which as the airport’s largest carrier is scheduled to fly more than half of the seats at Gatwick in the second half of the year, Diio by Cirium data show.
European airport traffic typically spikes in July and August, the two busiest months of the year for leisure travel, before dropping in the fall. Most European airlines depend on summertime profits to offset wintertime losses. That pattern even holds true for Ryanair, one of the most profitable airlines in the world. In 2019, for example, it collectively lost roughly $150 million at the operating level during from October through March. But it earned $1.4 billion in profits between April and September. Airlines were thus frustrated that airports could not accommodate all the demand they had this summer, a crucial time for amassing as much profit as possible to cover off-peak losses.
- EasyJet is putting its new Lisbon slots to good use with 12 new routes. The discounter will connect the Portuguese capital nonstop to Barcelona, Bilbao, Fuerteventura, Grand Canary, Marseille, Marrakech, Milan Bergamo, and Toulouse from late October; and Birmingham, Rennes, Tenerife South, and Valencia from November, per Diio by Cirium schedules. EasyJet will also resume flights between Lisbon and Zurich in October, which were suspended in September 2020. TAP Air Portugal was required to divest the 18 Lisbon slots to EasyJet as part of a European Commission condition to the state pandemic aid the airline received. With the slots, EasyJet will inch ahead of Ryanair as Lisbon’s second largest airline by December with just over a 12 percent share of seats.
- Competing European discounter Wizz Air is also expanding, but eastward. The airline will link Dammam, Jeddah, and Riyadh in Saudi Arabia to 11 cities in Europe. Wizz will connect Budapest and Larnaca to all three cities; Bucharest, Milan Malpensa, Rome Fiumicino, Venice, and Vienna to Jeddah and Riyadh; Catania, Naples, and Sofia to Riyadh; and Tirana to Dammam. The routes launch between December and April 2023, with the expansion following a memorandum of understanding that Wizz signed with the Saudi government in May.
- Frontier Airlines continues its growth this winter with 10 new domestic routes from Phoenix Sky Harbor. The discounter will connect Phoenix nonstop to Baltimore-Washington, Fort Lauderdale, Orange County, Philadelphia, and Portland, Ore., from November; and Indianapolis, Kansas City, Minneapolis-St. Paul, Nashville, and Seattle-Tacoma from January 2023. Frontier will compete with American Airlines and Southwest Airlines — plus other carriers — on eight of the 10 routes, with American its sole competitor to Philadelphia and Southwest to Baltimore, per Diio. With Frontier’s capacity already above 2019 levels, the airline’s CEO Barry Biffle has said it plans to grow by double-digits annually through the end of the decade.
- JetBlue Airways has challenged American‘s application for two daily Havana frequencies available to U.S. carriers. As challenges go, it’s small: JetBlue wants just one weekly frequency on Saturdays — leaving American 13 weekly frequencies — to offer two Fort Lauderdale-Havana flights on that day, according to the airline’s Department of Transportation application last week. JetBlue has three flights between Fort Lauderdale-Havana flights the rest of the week, while American operates six daily Miami-Havana flights. The two daily Havana frequencies have been available since 2020 but not awarded due to the Covid-19 pandemic.
- Route tidbits: Delta Air Lines will launch new seasonal service between Boston and San Juan this winter. The carrier will offer a daily flight with a Boeing 737-900ER from December 17 through April 23, per Diio by Cirium. On the West Coast, Alaska Airlines will connect Paine Field north of Seattle to Anchorage daily with an Embraer E175 from November 30. Discount startup Play Airlines is doubling its Washington, D.C.-area presence with flights to Washington Dulles from Reykjavik beginning April 26; the route complements its existing service to Baltimore-Washington. Another startup, Avelo Airlines, will add three routes from Fort Myers this winter: twice-weekly to Kalamazoo and Lansing, Mich., begins November 11, and thrice-weekly to Raleigh-Durham a day later. And in Asia, Thai AirAsia will begin thrice-weekly service to its first Japanese destination, Fukuoka, from Bangkok’s Don Mueang airport on October 12.
After two-plus years of darkness, the sun is finally rising down under. Qantas, having lost roughly $5 billion during the Covid crisis, is once again flexing its muscles. While reporting its calendar first-half financial results on August 25, the carrier announced a new nonstop route connecting Auckland to New York JFK — a 16-hour journey — launching next June. It’s another sign of Qantas betting big on ultra-longhaul flying as it looks to recapture its pre-pandemic success.
That push began in 2018, with the debut of Perth-London Heathrow nonstops using Boeing 787-9s. By all accounts, the route was a big success, with executives boasting of strong premium demand and heavy connecting flows from eastern Australia. The success prompted the advent of “Project Sunrise,” the airline’s goal of offering nonstops to London — as well as New York — from Australia’s two largest markets, namely Sydney and Melbourne. To accomplish that, however, Qantas will need aircraft with super-long-range capabilities, beyond even the 9,000 miles required for London-Perth. Answering the call came Airbus and Rolls-Royce, which will provide the carrier with 12 enhanced A350-1000s, and allowing for the new London and New York flights to launch in 2025. Don’t be surprised to see other new ultra-longhaul nonstops in the years ahead, to Chicago or Seattle perhaps (Brisbane-Chicago flights were announced in 2019 but abandoned during Covid). Keep in mind: Any new route needs to have substantial premium demand, a prerequisite to ultra-longhaul profits.
Perth-London remains popular with fliers as demand jumped back to life this spring (Australia will soon enter its peak summer season). In response, Qantas began seasonal Perth nonstops to Rome in June, also with 787-9s. Another newly introduced Dreamliner route is Melbourne to Dallas-Fort Worth, home of its joint venture partner American Airlines. Back in Perth, meanwhile, Qantas will add two less distant cities — Johannesburg and Jakarta — in November. In further evidence of prioritizing international expansion as it looks ahead, Qantas is now offering flights to India, specifically between Melbourne and Delhi, and between Sydney and Bangalore.
The newly-announced Auckland-New York flights, to be sure, won’t be easy. Air New Zealand is jumping on the route as well, with its own 787-9 flights from September 17. For Qantas though, a modest loss on this route wouldn’t be the end of the world. The idea is to develop and grow demand for ultra-longhaul flying, from now until the Australia-New York nonstops launch in 2025. In the past, Qantas has served New York via Los Angeles with its own aircraft. It also works with American to move people between Australia and New York via Dallas-Fort Worth. Other commonly used hubs for that market include San Francisco, Vancouver, Tokyo, and Dubai.
Qantas is now looking at options to replace its Airbus A330s, while just last month adding its first Airbus A321LR at Jetstar Airways, the group’s unequivocally successful low-cost carrier — so successful, in fact, that its founding CEO Alan Joyce was promoted to run the entire Qantas Group in 2008; it’s a position he still holds today. A321XLRs, with even greater range, will start arriving by mid-decade, deployed at both Qantas mainline and Jetstar. Aging Boeing 717s, furthermore, will make way for Airbus A220s in Qantas colors. Assuming regulators allow (which they might not), Qantas will take control of the regional carrier Alliance Airlines, which brings with it a fleet of Embraer E190s to replace Fokker F100s and De Havilland Dash 8-300s.
Sure enough, the group’s intercontinental expansionism, along with its fleet renewal strategy, received heavy attention as executives presented the company’s latest financial results last week. Make no mistake, the first half of this calendar year was still sullied by losses, underscored by a negative seven percent operating margin. That’s a far cry from its stellar record of the late 2010s, when it consistently posted positive margins between eight and 11 percent. This was good enough to consistently rank among the world’s most profitable intercontinental carriers, alongside industry profit champs like Delta Air Lines, International Airlines Group, and Japan Airlines. It was also good enough to erase memories of the early 2010s, when it barely managed to earn a profit (the turning point was 2015). Still earlier memories of constantly looking upward at Singapore Airlines in the worldwide profit rankings likewise faded as Singapore encountered more competition and not less. Qantas, by contrast, even before the pandemic, saw Chinese airlines and others sharply cut capacity to Australia, while carriers like Hong Kong Airlines, AirAsia X, and homegrown Virgin Australia stumbled in the market.
Remember though: Qantas reports just semiannually, not quarterly. If it did disclose results for just the April-to-June quarter, they would have shown black ink, the company said, sparked by the robust reawakening in demand during the period. In fact, calendar second quarter leisure demand was 25 percent greater than levels seen pre-crisis, a sign if there ever was of unleashed pent-up demand. Even corporate traffic, especially among smaller companies, neared pre-pandemic levels. The only area still badly lagging is northeast Asia, specifically Japan (an important market for Jetstar) and China (where Qantas has a joint venture with China Eastern). Management is nevertheless bullish on international, encouraged by a shortage of longhaul aircraft that will constrain foreign competitors. The optimism also stems from its new routes, its new planes, its cost cutting, its growing volumes of premium customers, and surveys that show the “intent to travel over the next 12 months is 60 percent higher for international travel than it was pre-Covid.”
The group’s mainline international segment, the weakest performing segment in the years leading up to the crisis, pleasingly managed to break even during the calendar first half. But that’s only thanks to a bonanza of cargo profits, this being a familiar theme among longhaul carriers throughout the pandemic. Besides cargo, the other all-star performer in the group was the Qantas loyalty plan, a gold mine before the crisis, a gold mine during the crisis, and no less a gold mine now that the crisis is ending. The unit’s operating margin for the half was 19 percent. The Qantas-branded domestic flying, another key contributor of strong profits before 2020, suffered a negative seven percent operating margin but almost surely turned positive after April. Jetstar, burdened by heavy exposure to Asian international routes, generated the worst results: negative 36 percent. But Jetstar, too, is well positioned to thrive both at home and abroad, also thanks to restrained competition.
Just how strong is demand this winter? Five words by Alan Joyce pretty much tell the story: “A380s can’t return fast enough.” That said, the sudden revival after numerous false starts has taxed the ability of airlines, airports, air traffic controllers, ground handlers, and aircraft manufacturers to cope. Qantas, during its earnings call, outlined the many steps it’s taking to address a recent spate of cancellations, delays, and mishandled bags. “Our performance simply hasn’t been good enough,” said Joyce. “And for that, we have apologized.”
Beyond getting its operations in order (it’s clearly not alone in that challenge), Qantas will face some new uncertainties about the Australian economy. The days of China sending hordes of students and tourists while buying mountains of coal and other resources might have passed forever. Australia’s resource market nevertheless remains robust for now, boosting the airline’s profits in mining markets (Alliance is big in this area). Another uncertainty is the prospects for a restructured, post-bankruptcy Virgin Australia, not to mention the startup low-cost carrier Bonza (which hopes to launch as early as next month). Throughout the 2010s, Virgin was a delightfully inept rival, making one strategic misstep after another (ordering Boeing 777s, buying Tigerair, and trying to reposition as a premium carrier, just to name three).
Qantas will no doubt build upon its close ties to American, underpinning what it hopes will be greater exposure and greater profitability in North America. It runs a joint venture with Emirates as well. In South America, Qantas runs a Santiago, Chile, route no longer aided by Latam Airlines Group, which left the oneworld alliance to join forces with Delta. Japan’s market will likely come back. But what about Hong Kong, never mind Beijing and Shanghai?
In any case, Qantas enters the brave new world of post-pandemic flying with plenty of financial muscle — it boasts of being one of only six airlines worldwide to retain an investment grade credit rating throughout the pandemic. Fuel and forex hedges have helped. Later this decade, Sydney will open a new airport. And by then, Australians should have a lot more nonstop air links to choose from courtesy of Qantas. For Australia’s largest airline, sunrise has come.