Delta Sees Strong Demand Through Seasonal Trough
Pushing Back: Inside the Issue
Third quarter earnings season is underway, with Delta as usual batting leadoff. For the second straight quarter, its earnings were strong, underscored by another double-digit operating margin. That’s thanks to record revenues, fueled by extraordinarily robust demand — for leisure travel, for premium products, for domestic and transatlantic travel, for cargo, for SkyMiles, and even, to some extent, for business travel. Now if only costs weren’t so high. Fuel costs are up, labor costs are up, maintenance costs are up, and, importantly, overall unit costs are up, swelled by suboptimal utilization of aircraft and other assets. Delta still flew 17 percent fewer seat miles last quarter than it did in the same quarter of 2019. These cost troubles explain why Delta’s 11 percent third quarter operating margin wasn’t as good as the 16 percent it earned three years earlier. It’s now telling investors to expect a margin of between 9-11 percent this quarter, compared to the 12 percent it managed in 2019.
More airlines will report this week, including Delta’s rivals American and United. But there’s more going on besides earnings. The red hot transatlantic market prompted United to add new routes, new cities, and even a new partner (Emirates) for its return to Dubai. An even closer United partner, Air Canada, is itself adding new flights to Europe. And still another United partner, Lufthansa, unveiled new premium seats. Or should we say “suites.”
The sweet taste of profits is back at airlines like EasyJet and Qantas, both of which treated investors with an upbeat assessment of current trading. Make no mistake, the global economy faces heightened risk from high inflation, rising interest rates, a strong U.S. dollar, energy scarcity, more frequent natural disasters, and geopolitical uncertainty. The silver lining? Employment remains high (for now). Travel demand, hit perhaps harder than anything else during the pandemic, is now holding up perhaps better than anything else as 2023 approaches. That’s definitely happy news for airlines.
A good time for a low-cost carrier to start new widebody flying? India’s IndiGo apparently thinks so, experimenting with a few Boeing 777s. Warning though: It’s a lot harder to make money with twin-aisle planes than it is with single-aisle planes. Just ask carriers like AirAsia, WestJet, Virgin Australia, and Gol.
Airline Weekly Lounge Podcast
Delta CEO Ed Bastian claimed this week, after his airline reported a robust third quarter profit and sees seemingly unsated demand, that travel is “countercyclical” to the economic winds. And he’s not alone, International Airlines Group and United Airlines have separately said they see no signs of travel demand waning. Edward Russell and Jay Shabat discuss Bastian’s prognosis, plus what’s up in Amsterdam. Listen to this week’s episode to find out. A full archive of the ‘Lounge is here.
Weekly Skies
People have more than two years of that pandemic cliche, “pent-up demand,” to get out of their system. That’s driving continued robust travel demand at Delta Air Lines, which sees no slowdown even as the economic outlook sours on both sides of the Atlantic.
“While we are mindful of macroeconomic headwinds, the travel industry is experiencing a countercyclical recovery,” Delta CEO Ed Bastian said during the carrier’s third quarter-earnings call last week, kicking off earnings season. “Global demand is continuing to ramp as consumers shift spend to experiences, businesses return to travel and international markets continue to reopen.”
Bastian added that, from Delta’s view, travel demand did not “come close to being quenched” during what was a busy, and often chaotic, summer.
Economic outlooks widely predict recessions in both the U.S. and Europe. Rating agency S&P Global forecasts a contraction beginning in Europe this fall, and in the U.S. in the first half of 2023. High inflation, the energy crisis, a strong U.S. dollar, and other factors are contributing to the weak economic outlooks.
But even as S&P and others have released their bearish outlooks, airlines and other travel industry companies have repeatedly said they were seeing little or no falloff in demand or bookings. Marriott International CEO Anthony Capuano said in September that the hotel company was “just not seeing the impact yet in the data,” referring to the economic uncertainty.
Delta, for its part, continues to see strong demand both in the U.S. domestic market, and across the Atlantic for the fall, said President Glen Hauenstein. This is driven, in part, from high levels of leisure demand continuing after Labor Day when the segment normally slows down, and from improving corporate demand. Corporate bookings at Delta recovered to roughly 80 percent of 2019 levels at the end of September, and are expected to rise to the “low to mid-80s” during the fourth quarter.
And the airline continues to see more blended trips, or those that include both leisure and work components, and is adjusting its flight schedule accordingly. Even Hauenstein admitted to changing his travel patterns since the pandemic: “I went to Paris last week for meetings, and I spent the weekend for leisure. Before I probably would have just come back.”
“I can’t imagine as we get to spring and summer next year that we don’t see robust demand” for international travel, Hauenstein said. Delta plans to fly 8 percent more seats across the Atlantic in summer 2023 than it did this year.
That demand will likely keep airfares high through the winter. New data from the U.S. Bureau of Labor Statistics released Thursday show airfares were up 42.9 percent in September compared to last year.
“Industry supply is constrained by aircraft availability, regional pilot shortages, and hiring and training needs,” Bastian said on the coming period. Delta forecasts a “mid-teens” percentage increase in unit revenues compared to 2019.
The issues Bastian cited have slowed the airline industry’s recovery. This summer, U.S. carriers flew roughly 15 percent less than they had planned at the beginning of the year, according to trade group Airlines for America. Add to that high fuel prices and interest rates, and the cost of operating a single flight has gone up dramatically since 2019.
And regional capacity at Delta is not expected to fully recover from the U.S. pilot shortage until 2024 or 2025, Bastian said. However, the airline’s fleet of small Airbus A220s and Boeing 717s will allow it to make up some of that lost capacity in the interim, he added.
Delta’s system capacity will be down roughly 8-9 percent compared to three years ago in the December quarter. However, that represents an at least 9 point improvement from the 17 percent decline in the September quarter.
But the airline does not plan to keep capacity depressed for much longer. Delta aims to fully restore its network — if not capacity — by next summer. That recovery will come in two parts: international, particularly to Asia, more of which will come back this winter; and U.S. domestic, particularly at its core Atlanta, Detroit, Minneapolis-St. Paul, and Salt Lake City connecting hubs.
“We choked off what I would say is more of our traditional flow in very key markets where Delta has historically been the leading carrier, particularly in the Southeast,” Hauenstein said. “As we head into 2023, our task that we’ve assigned our team is to get those historical high-yield flow customers back on Delta.”
While Hauenstein did not name names, there is only one other carrier with a hub in the Southeast that competes for the same passengers: American Airlines. The Fort Worth, Texas-based carrier is the most recovered major U.S. airline in terms of capacity, and has found particular success in domestic flying and providing the most connectivity to small- and medium-sized U.S. cities — something that, at least in the Southeast, Delta excelled at pre-pandemic. American recently signed a new agreement with affiliate Air Wisconsin to further expand its regional feed in Chicago, which competes directly with Delta’s Detroit and Minneapolis hubs for passengers.
Roughly 75 percent of Delta’s planned capacity growth in 2023 will be focused on resuming flights at its four core hubs, Hauenstein said.
But recovering domestic connectivity is not Delta’s only challenge to American next year. It will also implement its long-planned joint venture with Chile’s Latam Airlines Group. U.S. authorities signed off on the pact in September, allowing the carriers to move forward with the partnership that allows them to coordinate commercial activities on flights between the U.S. and South America. The deal will make Delta and Latam together a much more formidable competitor to American, the dominant airline on U.S.-South America routes.
Asked about the timing of the Delta-Latam partnership, Bastian said meetings on implementation were “beginning literally as we speak.”
Delta reported a $695 million net profit in the third quarter. Revenues were up 11 percent compared to 2019 to nearly $14 billion. Key for the airline are its total unit revenue and unit costs excluding fuel performance, which were up 34 percent and 22.5 percent, respectively. Delta flew 18 percent less passenger traffic during the period.
Raymond James analyst Savanthi Syth described the results in a report as “mostly in line with expectations,” with few surprises. She noted that, while Delta management repeatedly cited 2023 plans, they did not provide specific guidance for next year.
For the fourth quarter, Delta expects revenues 5-9 percent above 2019 levels, and an operating margin of 9-11 percent.
Delta’s Premium Home-to-Seat eVTOL Deal
Delta had a big news week. The lone holdout among major U.S. carriers is investing up to $200 million in Joby Aviation, a developer of electric vertical takeoff and landing (eVTOL) aircraft, to develop new last-mile connections in the Los Angeles and New York markets.
The deal could bring Delta into the urban air mobility market as soon as 2024, though that timeline is suspect given the certification uncertainty of eVTOLs. Joby, however, is the furthest along in certification of its aircraft among players in the sector that also includes Archer Aviation and Vertical Aerospace. The eVTOL segment is hot with airlines today in their dual push for low-carbon electric propulsion technology and to expand into travelers’ trips to and from airports. AirAsia, American, United Airlines, and others have ordered hundreds of the electric air taxis in the hopes of offering local journeys to and from airports.
Delta’s deal with Joby, however, is not just equity in exchange for a hundred-plus aircraft order. Instead, Joby has agreed to a five-year exclusivity agreement from commercial launch to provide Delta with a “premium” and “seamless” air taxi product — dubbed “Home to Seat” — in the U.S. and UK. Los Angeles and New York are initial markets with plans to expand beyond them.
“This is a groundbreaking opportunity for Delta to deliver a time-saving, uniquely premium home-to-airport solution for customers in key markets we’ve been investing and innovating in for many years,” Delta CEO Ed Bastian said. Bastian, as recently as August, held back endorsing the burgeoning eVTOL and other electric aircraft segment, saying the industry had “more questions” than answers.
Raymond James analyst Savanthi Syth in a report last week described the partnership as Joby managing “operations and branding” and Delta “operational and airport expertise.”
“Joby and Delta will work together to create a differentiated, premium experience for Delta customers featuring seamless booking, simplified transit, and greater time savings,” she wrote. “We expect this partnership is yet another lever in its premium revenue focus.”
Syth added that Delta’s investment in Joby, given its known rigorous investment standards and involvement with its partners, is likely to “garner additional investor interest” in the eVTOL segment.
Delta will initially invest $60 million in Joby, and potentially raise that to $200 million if certain “milestones” are achieved. The full investment would represent a roughly 2 percent ownership stake, and include a seat on Joby’s board, according to Raymond James. And, to the exclusivity agreement, that would apply to the premium service that Joby and Delta will develop, which will be separate from Joby’s standard airport air taxi business.
JetBlue Ventures also has an investment in Joby.
One big question that Delta, as well as other airline operators of eVTOLs, faces is how much demand exists for these premium services. Price points, while not yet set, are often compared to those charged by Blade in New York for helicopter flights between Manhattan and New York’s JFK airport; flights on Blade begin at $195 one way. In many markets, a $200 one-way fare is several multiples the cost of an airport train or bus, and significantly more than a taxi.
According to The Air Current, Delta expects roughly 1,000 passengers per airport to use the service when it reaches scale. Based on current schedules, that represents 5 percent of the roughly 20,000 seats Delta operates out of Los Angeles International Airport on a daily basis. A niche service yes, but a respectable number nonetheless.
In addition, certification of the actual electric air taxis is only one of the hurdles to carrying paying passengers. Another is how the U.S. Federal Aviation Administration will manage them in already congested airspace over major cities. Air traffic control staffing issues have been widely cited by airlines — including Delta — as contributing to flight delays and cancellations in Florida and the Northeast. In addition, eVTOLs could be blocked from serving the most sought-after destinations in cities if local residents object to the noise or activity.
In Other News
- American gave a preview of its third quarter financial results, which it will report this week (Thursday, October 20). Simply put, unit revenue trends in the quarter came in better than forecast, while the opposite was true for unit costs — they also (less happily) came in higher than expected. More specifically, American expects to report a 25 percent increase in total RASM, compared with 2019. In late July, the airline told investors that the increase would likely be 20-24 percent. Non-fuel CASM, however, which it said would be up 12-14 percent, actually came in closer to the higher end of that range. The average fuel price per gallon last quarter, meanwhile, was roughly $3.75, in line with previous guidance. American disclosed its third quarter profit margins as well, subject to final revisions. Operating margin excluding special items was approximately 7 percent. Pretax margin was 4.5 percent, a figure above its July estimate put in the range of 2-4 percent.
Separately, the U.S. Justice Department rested its case on October 14 in its suit against American and JetBlue‘s Northeast Alliance. The regulator claims that the partnership reduces competition and could cost consumers as much as $700 million annually. American and JetBlue defend their pact as offering consumers more choice. The trial continues in Boston. - American‘s close ally International Airlines Group said market trends were “better than expected” in the July-to-September quarter, attributing the strength to robust passenger revenues. Its operating profit for the three months was something in the neighborhood of $1.2 billion. Forward bookings, meanwhile, show “no indication of weakness.” IAG will report its third quarter results on October 28.
- Qantas, which only reports financial results twice a year, last week provided an interim update. The Australian airline said its pretax profit for the calendar second half of 2022, excluding special items, will likely register between $770-830 million. That’s in U.S. dollars, which have appreciated sharply against the Australian dollar this year; one U.S. dollar was worth roughly 1.4 Australian dollars at the start of the year compared to roughly 1.6 Australian dollars now. The bullish guidance comes as strong demand “accelerates recovery” from the Covid crisis. And that’s enabling the company to reduce debt and restore wages. Domestically, revenues from both leisure and business travel now exceed pre-crisis levels. Yields are strong internationally too, but they’ll likely fall as Qantas and others restore capacity. Qantas Loyalty, long a critical profit contributor, should post record earnings. Operational performance is improving too, aided by a policy of keeping more spare planes available for use. Qantas did caution, however, that the “broader operating environment remains complex,” citing high fuel prices, inflation, and higher interest rates.
- EasyJet also gave a bullish trading update, telling investors to expect a roughly 21 percent operating margin for the July-to-September quarter. That’s the final quarter in the airline’s fiscal year, results of which it will report in late November. It’s also the quarter that coincides with the European summer travel peak, typically the most profitable time of the year for European LCCs. If its quarterly estimate is correct, EasyJet will have broken even at the operating level for its full fiscal year, which ends in September. Aside from the demand recovery throughout Europe, EasyJet said it benefitted from changes to its route network and strong ancillary revenue growth. EasyJet Holidays, which sells tour packages, also grew rapidly. Capacity in the September quarter was 88 percent of what it flew in 2019. Forward bookings continue to look good, and favorable hedges provide some protection against high fuel prices and the strong dollar.
- Will Air India merge with Vistara? There’s increasing talk that this will indeed happen, now that both are owned by the Tata Group. But Tata only owns 51 percent of Vistara, triggering questions about the future role of Singapore Airlines, which owns the other 49 percent. Singapore has a keen interest in the high-potential Indian market and might wind up with a stake in a combined Air India-Vistara.
- It’s never a bad idea to copy Ryanair. Lufthansa’s Eurowings, just like Ryanair, secured an air operator’s certificate in Malta. Why Malta? Does Eurowings want to expand there? No, the move has nothing to do with network strategy. It’s all about labor strategy, taking advantage of Malta’s “economic and regulatory framework.”
- Pilots at U.S. regional Republic Airways ratified a new five-year accord with the airline. While the deal offers quality of life and other improvements to cockpit crew members, the pay increase is the biggest change: Captains get an up to 54 percent increase to at least $140 an hour, and first officers an up to 94 percent increase to at least $90 an hour. The increases make Republic’s pay comparable to that offered at American subsidiaries Envoy, Piedmont Airlines, and PSA Airlines; the three American Eagle carriers set off the current round of regional pilot pay hikes when they announced their deals in June.
- Long-haul, low-cost startup Norse Atlantic Airways is confident that its winter schedule cuts, and a decision to sublease four of its 13 Boeing 787s to other carriers, is enough to carry it through the low-demand winter period. The airline expects load factors and yields to rise under its revised schedule, which includes the suspension of Los Angeles-Berlin and -Oslo flights, it told investors last week. Norse’s capacity cuts, and power-by-the-hour lease agreements, will allow it to “lower cash burn over the winter period,” CEO Bjorn Tore Larsen said. Demand on routes that are operating is “strong,” he said. Norse plans additional transatlantic routes from London Gatwick in the summer 2023 schedule it plans to unveil in early November.
Sky Money
- Latam Airlines Group priced $2.25 billion in bankruptcy exit financing from a group of lenders last week. The debt includes $450 million in five-year senior secured notes and $700 million in seven-year notes both at a fixed rate of 13.375 percent, and a $1.1 billion five-year term loan B at a variable rate of either 850 basis points over an alternate base rate (ABR), or 950 basis points over the adjusted secured overnight financing rate (SOFR). Latam CEO Roberto Alvo said the airline now intends to exit its U.S. Chapter 11 restructuring on November 3 with roughly $2.2 billion in liquidity and 35 percent less debt than it had when it filed in May 2020.
- Here’s some rare good news about Aerolineas Argentinas: The national government’s 2023 budget shows subsidies to the airline will decline by $102 million from this year’s total. Sounds like things are improving! The bad news: That still amounts to $412 million. The history of Aerolineas reads like a financial horror show, with frequent stomach-churning subplots featuring labor strife, dismal service, and examples of mismanagement (remember when a previous owner ordered Airbus A380s?). Generating traffic isn’t the problem. The carrier expects to move 11 million people this year, and 13 million next year. That’s in line with the volumes it was handling just before Covid. One tailwind for Aerolineas is the departure of Latam from the Argentine market. But the headwinds are well-known, severe, and chronic — uncompetitive wages, overstaffing, political interference, steep currency depreciation, recurrent financial calamities, and so on. The traffic split across two Buenos Aires airports, furthermore, makes it difficult to develop a connecting hub at either one. In any case, Aerolineas is investing in new planes and eyeing an increase in tourism while working to capture business traffic from key industries led by the oil sector. It’s recently been opening new routes to Brazil.
- Aeromexico has launched a tender offer for its remaining shares on the Bolsa Mexicana stock exchange. The airline is offering cash for the 11.5 million shares outstanding on the stock exchange. Once the tender is complete on November 8, Aeromexico plans to delist from the Bolsa Mexicana.
- Gol closed an $80 million engine financing with Apollo PK AirFinance. The debt finances nine engines that will be delivered from CFM International by the end of the year. The five-year debt has an interest of roughly 7 percent, and covers the full capital costs — minus pre-delivery payments — of the engines.
- And Embraer is again tapping export credit financing to get its planes out the door. Last week the Brazilian airframer closed two deals: A $100 million deal with UK Export Finance for supplies Embraer makes in the country, and a roughly 670 million Brazilian reais ($126 million) transaction with Brazilian export credit agency BNDES for six E175 aircraft bound for SkyWest Airlines. Both BNDES and UK Export Credit did a limited number of deals for several years owing to a corruption investigation involving the former, and an investigation into the latter’s dealings with Airbus.
- Surf Air Mobility and turboprop lessor Jetstream Aviation Capital are deepening their relationship under a new financing deal and powerplant order. The lessor will provide up to $450 million in financing to support Surf Air Mobility’s growth, and has signed a letter of intent for up to 250 hybrid or electric powertrains from the company. Jetstream already is a “long-standing” partner of Southern Airways Express, which has agreed to merge with Surf Air Mobility as part of its SPAC public listing. Surf Air Mobility aims to offer the first certified hybrid-electric aircraft powertrain on the market with plans to introduce it commercially on Southern’s fleet of Cessna Caravan aircraft. The technology is designed to be retrofitted onto existing aircraft.
Fleet
- Latam will lease five Airbus A321XLR aircraft from Air Lease Corp. The aircraft are the Santiago, Chile-based carrier’s first firm order for the XLR; an order for 17 A321neos in July only included a commitment to take an undisclosed number of XLRs in the future. The XLR, which has a longer range than the standard A321neo, could help Latam launch new routes between South America and, for example, the U.S. where it is in the process of implementing a new immunized joint venture with Delta. The ALC aircraft will arrive from 2025-26. Latam had 69 A320 family aircraft on order at the end of June.
- Struggling state-owned South African Airways is adding three Airbus A320s to its fleet. The aircraft will boost its fleet count to 10 planes by November, when the last A320 is due. SAA Executive Chairman John Lamola said the additional planes will be used to “add seat capacity” on the (few) routes it is flying today. In 2023, SAA plans to replace the three Airbus A319s and one A340-300 in its operating fleet.
- AerCap is growing its freighter fleet. The lessor ordered 15 A321 converted freighters with options for another 15 from converter Elbe Flugzeugwerke, which is partially owned by Airbus. Deliveries are scheduled from 2023-25. “The A321 freighter is the best-in-class and most fuel-efficient aircraft to replace the [Boeing] 757-200 freighter,” AerCap Cargo Head Rich Greener said.
- Lessors ALC and Avolon disclosed their third quarter activity last week. ALC delivered 14 aircraft, including eight from Airbus and six from Boeing, from its orderbook to customers. The lessor also sold one aircraft. And Avolon delivered four new aircraft, and transitioned another seven planes to new customers during the period. A highlight for Avolon was a 20 Airbus A330-900 lease deal with Malaysia Airlines.
Routes and Networks
United is confident enough in the outlook for 2023 to plan seven new transatlantic routes. The Star Alliance carrier will add three destinations to its map — Dubai, Malaga, Spain, and Stockholm — and four new routes to Barcelona, Berlin, Rome, and Shannon in its summer 2023 schedule. The seven new routes, plus additional frequencies in other markets, would see United fly 10-11 percent more transatlantic capacity next year than it did this year, and 30 percent more than it did in 2019.
But the expansive schedule comes amid economic recession concerns on both sides of the Atlantic. Rating agency S&P Global recently forecast a “shallow recession” in the U.S. during the first half of 2023, and the “risk of a full-blown recession” in the eurozone next year. S&P expects a moderate economic contraction in the latter beginning in the fourth quarter.
The uncertain outlook begs the question: Is there consumer appetite for these new flights?
United Vice President of Global Network Planning and Alliances Patrick Quayle is brushing off economic concerns. The airline has seen “incredibly strong demand” for transatlantic flights this summer and through September, he said. And that gives it the confidence in its 2023 schedule plans that, Quayle emphasized, it intends to fly.
In late March, United dropped plans to launch a new nonstop between Washington Dulles and Berlin this May. The airline cited resource constraints, and not the war in Ukraine, for the decision to drop the Berlin route. United has Berlin-Washington flights on its dance card again with plans for daily summer (2023) flights with a Boeing 767-400ER from May 25.
“My goal has been to skate to where the puck is going, and not to where it’s been,” Quayle said of his outlook for United’s 2023 schedule.
United’s rapid transatlantic growth is, in part, a response to where markets have reopened and travel demand has recovered. The airline did not retire any widebody aircraft during the pandemic unlike competitors American and Delta, which has given United an advantage in resuming and adding new international flights. Delivery delays of new Airbus and Boeing jets have compounded the situation for many airlines, but particularly those that retired aircraft in anticipation of new deliveries. Lufthansa will reactivate several of its Airbus A380s next summer to meet demand after delays to Boeing’s new 777X.
United’s traditionally large Asia-Pacific franchise remains hamstrung by Covid restrictions in the region. China has given no indication when it could ease restrictions under its zero-Covid policy. And Japan only dropped its Covid entry restrictions on October 11. Quayle said United will fly roughly the same amount of capacity across the Pacific next summer as it did in 2019; however, much of that will be additional flights to the South Pacific. The airline will add Brisbane to its map later this month, and additional frequencies to Sydney from December through February.
Across the Atlantic, United will connect Dubai from March, and Malaga and Stockholm from May to its Newark Liberty hub. The Dubai route was previously unveiled as part of its new partnership with Emirates. The four new routes connecting Barcelona and Shannon to Chicago O’Hare; Berlin to Washington; and Rome Fiumicino to San Francisco all launch in May.
United will also add a second daily flight on its routes between Los Angeles and London Heathrow — for 23 daily flights at the sought-after UK hub — and Washington and Paris.
For all of United’s European and Middle Eastern expansion, one market it added this year will not return in 2023: Bergen, Norway.
Route Briefs
- Air Canada will add Copenhagen and Toulouse to its map, and expand in Brussels next summer. Citing its Star Alliance connections, the carrier will link Montreal and Copenhagen (a SAS hub), and Toronto Pearson and Brussels (a Brussels Airlines hub) five-times weekly from June 1. Flights between Montreal and Toulouse, two Airbus manufacturing centers, begin the same day. In addition, Air Canada will resume flights after a pandemic hiatus between Pearson and Tokyo Haneda on May 1, and Vancouver and Osaka Kansai on June 1.
- IndiGo, which dominates India’s domestic airline market, announced a new international route to Istanbul. Flights from Mumbai will commence on New Year’s Day, supported by a codeshare agreement with Turkish Airlines. Most interestingly, IndiGo will fly the route using Boeing 777s, several of which it’s wet leasing; wet leasing involves renting planes as well as the crews to fly them. Until now, IndiGo has refrained from widebody flying, though it has flirted with the idea in the past. At one point in 2017, it even entertained buying Air India’s international business. Clearly, it senses opportunity as Air India and Vistara — both now backed by the Tata Group — face only foreign competition on key overseas routes. Mumbai-Istanbul, by the way, is a roughly 3,000-mile journey, similar to say, Boston-Dublin. That’s within reach of an A321LR narrowbody, let alone the XLR, both versions of the Airbus jet that IndiGo hopes to get later this decade. Stay tuned to see if IndiGo goes all in on widebodies and orders some of its own (likely 787s, A330s, or A350s). Conversely, it might conclude that using just XLRs as an international growth tool, however limited their range, is the wiser if less ambitious path. One lesson of airline industry history: it’s much easier to consistently make money with narrowbodies than it is with widebodies.
- Route tidbits: AirAsia (Malaysia) will connect Penang and Bali twice weekly from October 20. TAAG Angolan Airlines will launch a twice-weekly nonstop between Luanda and Madrid under a codeshare with Iberia on October 13. Wizz Air plans to launch the only budget nonstop between London and Amman, Jordan; the discounter will challenge British Airways and Royal Jordanian with new thrice-weekly flights between Luton and Amman from December 13.
Feature Story
Q&A With Frontier Airlines President and CEO Barry Biffle
Frontier CEO Barry Biffle is confident that the carrier’s cost advantage will drive its growth — and success — over the coming decade. This confidence comes after it lost a bidding war for budget competitor Spirit to JetBlue, and remains a fraction of the size of the U.S. big four.
At a recent event in Tampa marking the arrival of the Denver-based airline’s first Airbus A321neo, Airline Weekly correspondent Ted Reed spoke with Biffle on a range of topics from the Spirit deal to Frontier’s prospects and pilots. The interview has been edited and condensed for clarity.
Airline Weekly: Frontier’s attempted merger with Spirit didn’t work out. What does Frontier’s future look like if JetBlue and Spirit merge?
Barry Biffle: They are trying to merge with JetBlue and we’re on our own. This wasn’t the path we looked for in the beginning, but if this were to go through, 95 percent of the capacity in the United States will have costs 30 percent or higher than ours. So we feel like it’s kind of back to 1988, where if you were Southwest Airlines, that’s kind of what you enjoyed for the next 20 or 30 years. That would be the position we would be in.
If they merge, JetBlue has already said they’re going to take Spirit’s costs up to their costs. That’s going to price out a lot of consumers. And that pretty much makes us the sole nationwide ULCC [ultra-low-cost carrier]. My comparison to Southwest is that you haven’t had that extreme of a disparity between cost structures since the late ’80s with Southwest. That’s what helped fuel their growth over the last three or four decades. Because again 95 percent will have 30 percent to 80 percent higher costs than us.
We’ve announced that we will be back to sub six cents [cost per available seat mile excluding fuel] in 2023. [Post-merger] Spirit is going to be well into the 8-9 [cents] range. It will be 40 percent to 50 percent higher than us. The competitive dynamics for us is we basically have no natural competitor.
AW: Will the merger go through?
Biffle: I have to assume it goes through. I originally thought it wouldn’t go through, [but] I believe that JetBlue management and their board really think they have a deal or they wouldn’t risk $500 million in reverse termination fee. I assume they have to have confidence that they are going to get it through.
AW: How can you be a national airline with only 116 aircraft, and about 500 daily departures? And do you connect any passengers?
Biffle: We serve, within 90 minutes of driving, 90 percent of the U.S. population. We’re in over 100 cities. It’s all point to point. We have a small amount of connecting traffic. Those are by accident. We fly point to point. We make some connections but It’s less than 20 percent of our traffic. We connect some in Denver, some in Orlando, and some in Las Vegas. They’re all very similar, about 75 departures a day.
AW: Where will you be in five years?
Biffle: By the end of the decade, we will almost triple our size — not necessarily in fleet, but in passengers, because we’re also growing with bigger gauge planes. There are 158 more of these [A321neos] coming with 240 seats. We have 116 as of this second, counting this one and one more that is transferring title [from Airbus] today. We picked this one up a week and a half ago, I was there [in Hamburg].
They are all A320 family. We have a mix of A320 classics, A321 classics, A320neo and, now, the A321neo.
We’re going to be growing a lot. We look to where the fares are the highest, and where we can provide the most value in lowering fares for consumers.
AW: What’s different about the A321neo?
Biffle: It is the most efficient configuration that has ever been flown in the U.S., with 240 passengers in 41 rows. Pitch is 28 or 29 inches. When this starts flying later this week, it will be the greenest airplane to ever fly in the U.S. It gets 120 miles per gallon per seat. We have the A321 today, but it only has 230 seats. Now we will burn less fuel and have more seats, because of the new engines.
If you burn the least fuel per seat, that makes you the lowest greenhouse gas [producer] by a mile. Airlines today get 60 miles per gallon per seat. This gets 120.
AW: How do you compete for pilots?
Biffle: Today we enjoy having a competitive rate, but our pilots make as much money or more than any other airline in the U.S. because they upgrade to captain in under four years. Then, because we’re growing, their seniority is higher sooner, so they’re going to have weekends and holidays off ten years before anybody else. Also, we’re spending a significant amount of time making sure that our pilots get over six hours of flying per day on their lines. So, what we believe that’s going to do, is that it will enable our pilots to have the lowest days per month worked. They’ll have more days off. If we can pay them the best, have the best lifestyle because they’re relative seniority is higher, and they can have more bases as an option, we think we have the best package.
AW: What do you think about the Justice Department’s antitrust case against the northeast alliance between American and JetBlue?
Biffle: Everybody in the industry is watching. The government is alleging that it is anti-competitive. So we’re all trying to observe and see where this goes. When you look at it from our point of view, it’s very hard to justify — when any one of the big four that [together] control 80 percent of the market — when they get together with other people to control parts of the market, it’s kind of difficult. I think we could use more competition in this country and I can’t see how this helps it.
AW: What did you learn during your years at US Airways? (US Airways merged with American in 2013)
Biffle: I went through two bankruptcies at US Airways so I learned a lot. One of the things I learned, which was probably the most important: The best way to stop losing money is to stop doing things that lose money. We had city ticket offices. We had a hub we closed in Pittsburgh that we kept two clubs open in. The list goes on and on. We had a Noah’s ark of airplanes. We had two of everything. In the late nineties, in the back of the magazine, it took a whole page to show all the equipment types. And you take the headquarters. The headquarters should have been in Charlotte. But because they didn’t want to make a decision, we picked a third city [Arlington, Va.] that was the most expensive of all of them. That drove the labor rates up for your headquarters. The list goes on and on.
— Ted Reed
By the Numbers
