Is the European Discounter Losing Some of Its Wizardry?
Pushing Back: Inside the Issue
With earnings season in full swing, we now have a clear picture of airline trends in the U.S. The Big Three — American, Delta, and United — all performed admirably in the fourth quarter, boosted no doubt by exceptionally strong demand, especially on sunshine routes and to Europe. Southwest, on the contrary, amassed gargantuan losses from its operational disaster last month. Never before had an airline spilled that much red ink due to an operational event. Alaska Airlines earned a decent fourth quarter profit, but west coast economic woes are a worry. JetBlue’s margins were anemic, never mind its heavy exposure to booming markets like Florida and the Caribbean — clearly something’s not performing up to snuff. Its transcontinental routes? Its Boston business markets? Perhaps Spirit will cure what ails it.
Wizz Air’s got ailments of its own, most frustratingly an inability to get aircraft utilization back to pre-pandemic norms. Ryanair, which Wizz mimics, reports Monday. Lots of other airlines report in the coming weeks as well.
In other news last week, Boeing said production headaches linger, though demand for the 737 Max and 787 is strong. China continues to reopen. Ethiopian Airlines and Copa Airlines have new routes. Vienna Airport seems to have figured out why Austrian Airlines is doing so well. And, less happily for airlines, jet fuel prices are starting to creep up again.
Airline Weekly Lounge Podcast
It was a busy earnings week with American, Southwest, Alaska, and JetBlue all reporting. Edward Russell and Jay Shabat previewed what they were listening for ahead of the airline calls. Plus, EasyJet’s strong December quarter revenues suggest their network shift to southern Europe is working. Listen to this week’s episode to find out. A full archive of the Lounge is here.
Two months. That’s how long Southwest Airlines expects there to be an impact on bookings from its massive holiday meltdown that disrupted millions of travelers over Christmas and New Years.
The Dallas-based carrier forecasts a $300-350 million hit to revenues as a result of the meltdown in January and February, it disclosed in its fourth-quarter results last week. That is on top of the roughly $800 million hit it took in December. But, by March, executives are confident that the fallout — at least on its earnings statement — will be fully behind it.
“I think we’re going to be very pleased with the [financial performance in the month of March,” Southwest Chief Commercial Officer said during the airline’s earnings. “It feels like we’re, kind of, back on plan.”
That’s pretty remarkable considering the magnitude of the disruption that began on December 21 and continued through New Years Eve. Southwest canceled more than 16,700 flights or, put another way, nearly 40 percent of its schedule over that 11 day period. That, based on back of the notebook calculations using its average of 83 percent of seats filled during the fourth quarter, equals as many as 2.2 million affected travelers (the actual number may be lower because some travelers are connecting on two or more flights).
Put another way, the number of travelers impacted by Southwest’s meltdown was equal to the population of the Kansas City metro area.
“I’m not proud of what happened,” Southwest CEO Bob Jordan told investors. He apologized again for the meltdown and then, along with Chief Operations Officer Andrew Watterson, detailed all the steps the carrier has and is taking to ensure a comparable meltdown does not happen again at Southwest.
While severe winter storms were the initial catalyst for Southwest’s meltdown, it was its crew-assignment software — SkySolver provided by supplier GE Digital — that was unable to keep up with the situation that, when combined with everything going on, prompted the multi-day reset of the airline. Watterson said upgrades to allow the system to keep up with a dramatic spike in crew rescheduling events have already been made by GE, and are currently being tested.
“[The] software they sold to us and others performs well in normal times,” Watterson said of the GE system. “This is a use case that nobody defined for them. So, in their defense, the software worked fine.”
In addition, Southwest has taken a number of other steps to ensure a similar meltdown will not happen again. These include a new early warning system of any potential spike in the number of crew and aircraft that need to be rescheduled; new crew communications tools; more crew scheduling staff; and a full review of the airline’s cold-weather operational preparedness. In addition, Southwest has engaged advisors Oliver Wyman to do a full review of the meltdown and its causes; Watterson said they expect the report “soon.”
One area where Jordan and his team were on the defensive was on technology investment. In response to analysts’ questions over potential underinvestment, he said: “We invest a lot in technology … There’s been no lack of investment.” Jordan went on to describe the investments as a “journey,” where there is a constant need to make upgrades as the airline grows increasingly complex. Southwest will invest roughly $1.3 billion in technology this year, up from about $1 billion in 2022.
“At the end of the day, that kind of disruption cannot happen again,” Jordan said.
Southwest’s schedule recovery and growth — it will surpass 2019 flying levels this year — continues unabated in 2023. System capacity will increase roughly 10 percent year-over-year in the first quarter, and 16-17 percent for the full year. The full-year number is at least one point higher than the airline’s previous guidance owing to year-over-year comparisons to the holiday meltdown.
Jordan and other executives emphasized that the operational chaos in December was no reason to put Southwest’s growth plan on hold. Travel demand is robust with the exception of January and February. And managed corporate travel, a key indicator of the economic recovery, is expected to hit 2019 levels by March; it was at 80 percent of three years ago in the fourth quarter.
And Southwest is ahead on its hiring plan. The airline saw a net headcount increase of 11,000 staff in 2022, which Jordan said was more than its target. It plans to add another net 7,000 staff this year. Pilot hiring, however, will step up with the airline seeking roughly 1,700 new cockpit crew members compared to 1,000 last year.
Almost all of the carrier’s growth this year will go into restoring the depth of its network. When the pandemic hit, the first thing to go were the multiple daily flights Southwest offered on key routes — for example, the Los Angeles-Phoenix route had eight daily flights where today it has five — those lost frequencies will come back this year. In addition, it plans significant growth in several key cities, including boosting Baltimore-Washington to more than 220 daily departures and Denver to more than 300 departures by July.
The growth in Denver comes after the airport opened a 16-gate extension of Southwest’s concourse for the airline last year. The Baltimore-Washington airport is also investing in new terminal facilities for Southwest.
Southwest’s capacity growth forecast “could be a cause for future concern given the severe operational issues previously experienced in their network over the holiday season and in the months prior,” Cowen & Co. analyst Helane Becker wrote on the carrier’s outlook last week.
While her comments came before Jordan and other executives commented on their plans, Becker raised a key concern among both investors and travelers about Southwest’s outlook. Namely, whether the airline is actually able to fly the full schedule it sells. This was something United Airlines CEO Scott Kirby highlighted in his takedown of the airline industry’s capacity forecasts earlier in January.
Jordan and his team were clear in their remarks: Southwest was staffed and ready to operate its full schedule over the holidays. It was only the weather, and the inability of its crew assignment system to keep up with the amount of changes, that led to the meltdown.
Ultimately, though, that is not for Southwest to decide. The U.S. Department of Transportation has launched an inquiry into the carrier’s scheduling practices, and whether it was selling more than it could reasonably operate over the holidays — meltdown aside.
“DOT is in the initial phase of a rigorous and comprehensive investigation into Southwest Airlines’ holiday debacle that stranded millions,” an agency spokesperson said. The “DOT is also probing whether Southwest executives engaged in unrealistic scheduling of flights which under federal law is considered an unfair and deceptive practice.”
Transportation Secretary Pete Buttigieg has been critical of Southwest’s handling of the meltdown, describing it as “unacceptable” in December. He has promised to use the full weight of the DOT to ensure the carrier refunds tickets and reimburses travelers for all eligible expenses. Legislators in both the House and Senate have also called for answers, and said they plan to hold hearings on the situation.
Any potential action or penalties against Southwest could extend the period where the airline feels the financial burden of its meltdown well beyond February.
Southwest lost $220 million in the fourth quarter after the roughly $800 million meltdown hit. Revenues increased 7.7 percent compared to 2019 to $6.2 billion but expenses ballooned nearly 30 percent to $6.6 billion. Revenue per available seat mile, a measure of how much the airline makes per mile it flies, increased 14.9 percent from three years earlier, while costs per available seat mile excluding fuel and special items jumped nearly 45 percent. Southwest flew 6 percent less capacity in the fourth quarter than it did in 2019.
And for the full year, Southwest posted a $539 million net profit. Revenues increased 6 percent compared to 2019 to $23.8 billion. Revenue per available seat mile was up 12.5 percent, and costs per available seat mile excluding fuel and special items by more than 22 percent.
Looking ahead, Southwest anticipates a 20-24 percent increase in revenues in the first quarter compared to last year. Unit costs excluding fuel and special items are forecast to increase 2-4 percent; the metric is forecast to drop 6-8 percent for all of 2023.
Updated to include Andrew Watterson’s comment on GE’s SkySolver crew assignment software.
American Focus on Utilization, Other Improvements
Despite a number of constraints in the aviation industry, American Airlines achieved a full year of profitability in 2022 for the first time since the pandemic hit. The carrier had total revenue of $49 billion, an increase of 7 percent over 2019, and a total net income of $803 million — all while flying 8.7 percent less capacity. And that is despite a $1.9 billion pretax loss in the first quarter.
The Fort Worth, Texas-based carrier also had the best fourth quarter in its history, with a total revenue of $13.2 billion, an increase of 16.6 percent from in 2019.
“Key to our success has been sizing our airline for the resources we have available and the operating conditions we expect to encounter. And we will continue to do that going forward,” American CEO Robert Isom said.
Now, post-holiday bookings are the strongest they have ever been, Isom said. Demand for domestic and shorthaul international flights are leading, while longhaul international demand is expected to increase this year.
Even with the financial uptick, American is still working against multiple post-pandemic issues — including a workforce shortage, supplier constraints, and higher expenses — that will affect its growth and operations this year.
The biggest cost for American right now is underutilized aircraft, Isom said. That is being addressed in part by modernizing and simplifying fleet, but there are other opportunities that can offset those costs, like airport rent, landing fees, and maintenance.
“The fleet’s meant to be flown. Those are the areas I would probably look to most as being opportunities for us to see much greater efficiency,” said Devon May, chief financial officer for American.
American is also experiencing elevated upfront costs as it goes through a big hiring spree to replace retiring pilots and other workers. The company is considering those multiple factors as it plans for the year.
“What is different from times past is we have been very conscious in [first quarter] about how we use the airline’s resources — it’s people, it’s planes, it’s facilities, everything — largely so that we can have as much of that capacity for the summer peak as possible,” said Vasu Raja, chief commercial officer for American.
Still, American is making progress on other fronts, especially in paying down its more than $32 billion in long-term debt and finance leases. The airline aims to repay $15 billion of that by the end of 2025. The company has reduced its total debt by $8.2 billion since 2021, and expects to pay down another $3.3 billion this year.
American anticipates 23 aircraft deliveries this year, 12 of which are financed. However, the delivery number fewer than the airline had been planning.
Despite Boeing’s contractual commitment to deliver 27 Boeing 737 Max aircraft in 2023, the airframer has informed American that it will deliver 17 this year, said Derek Kerr, president of American Eagle. “This change in timing will shift planned [capital expenditure] out of 2023 and into future years,” he added.
In August, American started receiving Boeing 787-8 planes for the first time in 15 months. It took delivery of five aircraft in the fourth quarter, and four more are expected during the first half of 2023. Deliveries of Boeing 787-9s are to begin in the fourth quarter.
“What we have now is aircraft manufacturers that are just starting to get their feet back under them,” Isom said. “We continue to work with both Airbus and Boeing to make sure that we encourage them in an appropriate fashion to deliver on time. And I know that they’re working hard to make sure that they can meet our needs.”
American shed 50 longhaul aircraft during the pandemic, including its Boeing 757 or 767 fleets, Isom said. The company has also simplified its mainline operation to four fleet types, and has increased seating capacity in its existing planes.
It’s part of the airline’s ongoing work to simplify and modernize the fleet, which executives said will ultimately lead to higher aircraft utilization that will offset investment costs.
“What that enables us to do is in the fleet that’s left, we can much more dynamically alter schedules to follow where the demand is,” Raja said. “We can produce schedules that … are a lot more operable and, frankly, a lot more efficient. We’ve seen the benefits of that in our recent revenue performance, and we anticipate the benefits of that in the year ahead.”
The airline has also been working on investments in technology to track crew location and maintenance requirements, as well as tech that can help the company more efficiently manage big events like winter storms. Crew scheduling technology has come into focus after the major meltdown at Southwest over the holidays was blamed on its scheduling system being unable to keep up with cascading cancellations and changes.
American has hired 40,000 people over the last two years. That includes hundreds of pilots, with plans to hire 2,000 this year to replace a large number of retiring pilots. There were nearly 900 retirements last year, and 2023 will likely have around the same.
“We’re going through the greatest training cycle of pilots that we’ve ever experienced,” Isom said. “So we’re stretching our training resources like we’ve never before. But fortunately, we planned for this.”
On American’s historic pay increase for pilots at its wholly-owned affiliates, Envoy, Piedmont Airlines, and PSA Airlines, Isom said the move had “stabilized” its pilot workforce at the three airlines. “I think that is the biggest thing that any company can do, and has done, to actually get the pump primed and people flowing back in,” he said. “And we’re seeing that. We’ve stabilized the pilot ranks in our regionals, and we see potential growth as we come through the end of the year.”
American was criticized earlier in January for doubling the cost of regional pilots for the industry, while not solving the pilot shortage. Isom’s comments suggest that, while maybe not creating an excess of pilots, the raises had stabilized the workforce. He did not comment on the new economics of regional flying.
Alaska Margins Take Fourth Quarter Hit
Alaska Airlines, one of the most profitable airlines in the U.S. throughout the 2010s, reported just a 5.5 percent operating margin for the fourth quarter — less than half what it generated (11.3 percent) during the same period three years earlier.
The Seattle-based airline looked like it was regaining its pre-pandemic levels of profitability during the summer quarter, July-to-September, when it led all U.S. airlines with an operating margin that topped 15 percent. Summers are typically its strongest period of the year. The fourth quarter, however, presented new challenges.
One was a bad winter storm around the holidays, which erased about $45 million in revenue. In addition, Alaska signed a new pilot contract in October, granting wage increases of up to 23 percent; senior captains will earning $330 per hour after two years. Importantly, the pricey new contract also contains provisions that ensure Alaska’s pilot pay stays competitive with other U.S. airlines — namely American, Delta Air Lines, JetBlue, Southwest, and United — as they sign their own new contracts. Combined with other new labor agreements, Alaska’s new pilot pact contributed to an 11 percent year-over-year increase in labor costs last quarter.
In addition, Alaska faces headwinds currently plaguing all U.S. airlines, including higher fuel costs and difficulties achieving pre-pandemic levels of productivity. “Productivity is not where it used to be in this post-pandemic era,” Alaska CEO Ben Minicucci said during the company’s fourth-quarter earnings call last week.
Another concern is Alaska’s exposure to the troubled technology sector. Many of the airline’s customers are tech workers employed by giants like Amazon and Microsoft, both headquartered in Seattle. And make no mistake, Alaska’s success in the 2010s was at least partly fueled by fast-growing tech firms both traveling frequently and — more generally — contributing to strong U.S. West Coast economic and income growth.
Alaska executives acknowledged that tech spending on travel is depressed but said this is unrelated to the recent spree of tech worker layoffs. Tech companies haven’t been traveling much since the start of the pandemic. “Even though you have these headlines of layoffs,” Chief Financial Officer Shane Tackett said, “it doesn’t really mean that there’s like, another downward step in terms of their travel. And I do think that at historically low travel volumes, they may never go back to where they were pre-pandemic. [But] I think they’re going to be above where they are today. I’m very confident about that.”
Tackett also stressed that tech customers typically pay lower fares than other corporate travelers, presumably because Alaska has to discount heavily to win their business.
Tech’s suppressed travel budgets, even throughout the industry recovery in 2022, is one reason why California’s airline markets have been slower to revive than those in other areas of the country. Alaska executives said roughly a third of its revenues are linked to the Golden State, where it became a much larger player after buying Virgin America in 2016. Ever since, the market has proved challenging, owing to heavy competition, not least from Southwest.
In Seattle, by contrast, Alaska holds the market’s commanding heights, even with Delta operating a competing hub. Management didn’t address specific markets, but intra-California and transcontinental routes to California are likely struggling right now. Beach markets like Hawaii and Mexico, also important to Alaska, are likely performing better. Keep in mind that during the spring and summer, big corporate markets like Los Angels, San Francisco, and Seattle become big tourist markets as well.
Regarding business travel more generally, the executives said bookings have been “highly choppy” this month. But “March and forward is very solid.” Overall, “demand remains strong and passenger booking patterns are keeping pace with scheduled capacity.” For the current January-to-March quarter, Alaska plans to grow available seat miles (ASMs) 11-14 percent year-over-year, pending labor and aircraft availability. It expects revenues to jump roughly 30 percent, relative to last year’s depressed levels; travel demand did not start reviving in earnest until second quarter. Unit costs will be down 2 percent year-over-year at best. But Alaska does expect to lose money this quarter, forecasting a pretax margin of between negative 1-4 percent. Conditions will improve during subsequent quarters, however, and pretax margins should reach 9-12 percent for all of 2023. In 2019, Alaska’s pretax margin was 12 percent. In 2018 it was 9 percent.
Last March, Alaska outlined its longterm strategy, highlighting areas of importance like its improved credit card deal with Bank of America, its plan to retire all the Airbus planes it inherited from Virgin America, and its growing engagement with American and other fellow Oneworld alliance members. Looking ahead, approximately two-thirds of the airline’s capacity growth will be focused in the Pacific Northwest (besides Seattle, Portland is also a key market), and the other third in California. In October, Alaska placed another larger order for Boeing 737 Maxes, exercising options to purchase another 52 units for delivery from 2024-2027. By 2030, Alaska could operate more than 250 Maxes.
For this year, though, Tackett said, the focus will be on “improving utilization, productivity and delivering on more of our commercial road map as we attempt to lead the industry again in financial performance in 2023.”
JetBlue Sees Big Loyalty Boost
JetBlue reported $2.4 billion worth of revenue during the fourth quarter of 2022, its highest ever in a fourth quarter, which the New York-based carrier attributed in part to significant growth in its TrueBlue loyalty program.
President and chief operating officer Joanna Geraghty said during JetBlue’s fourth-quarter earnings call last week that TrueBlue recorded a 50 percent year-over-year increase in program enrollment in 2022, representing the most successful year in its history. Geraghty added that TrueBlue also registered a 40 percent year-over-year increase in co-branded credit card signups.
The loyalty program “continues to not only exceed our expectations, but also hit new records,” said CEO Robin Hayes.
JetBlue also projects another major boost from TrueBlue, having announced last month it would make major upgrades to the program for the first time in a decade. The company said it would expand its elite Mosaic programs and create a level of mileage accumulation named tiles enabling customers to obtain perks before reaching mosaic levels of flying.
TrueBlue was far from the only major area of growth for JetBlue in 2022. Geraghty credited a surge in passengers from its Northeast Alliance with American as a reason for its strong fourth quarter.
“We’re very pleased with performance of the [Northeast Alliance],” she said. “We’re seeing the [Northeast Alliance] very much on the correct trajectory.
While Geraghty declined to provide financial details about its relationship with American, she stated the company expects that its partnership to produce more revenue. Cowen & Co. analyst Helane Becker predicted last week that JetBlue will look to expand its partnership with American in 2023. The company more than tripled its number of daily flights from New York’s LaGuardia Airport in 2022 compared to before the pandemic.
JetBlue also expects to see capacity increase up to 8 percent year-over-year, both for the first quarter and the full year of 2023. The carrier’s capacity for the fourth quarter of 2022 increased by 2.4 percent from the same period in 2019.
However, Chief Financial Officer Ursula Hurley said JetBlue projects a net loss in the first quarter of 2023, adding that the company is grappling with higher labor costs and surging rentals and landing fees.
Meanwhile, Hayes also addressed JetBlue’s planned merger with Spirit Airlines. He said he expects the transaction to close by no later than the first half of 2024, stating it could happen sooner if the company is able to reach an agreement with the U.S. Department of Justice. The Justice Department also filed an antitrust suit against American and JetBlue in September 2021, arguing the two carrier’s alliance had reduced competition for consumers. A ruling from a judge, which potentially has major implications for the JetBlue-Spirit merger, could come soon.
“If we [reach an agreement], it’s possible that could happen sooner. But the timeline is down to the Department of Justice, and we certainly want to be respectful of that,” Hayes said, acknowledging the possibility of the Justice Department suing JetBlue if an agreement doesn’t place, which would delay the closing of the merger.
Regarding JetBlue’s fourth-quarter performance, Becker said results were mostly in line with expectations. The company recorded an adjusted net profit of $72 million for the period. The carrier also saw its RASM increase 16.1 percent compared to the same timeframe in 2019.
In Other News
- Italy’s Ministry of Finance and the Lufthansa Group entered exclusive negotiations last week over the latter’s proposed investment in ITA Airways, Italian daily Corriere Della Sera reported. The parties now have six weeks to reach a deal where Lufthansa would initially take a 40 percent stake in the Italian airline worth €250-300 million ($271-325 million), and could later take full control of ITA. If a deal is reached, it would still need approval from Italian and European competition authorities.
- TAP Air Portugal shrugged off reports of a profitable 2022 last week, issuing a statement to the market that results for the year had “yet to be determined.” It intends to release its numbers in March. TAP did, however, indicate that 2022 revenues were among the highest in its history.
- Struggling Norwegian startup Flyr is diversifying its business with new charter contracts. Last week, the discounter signed a contract work 90 million Norwegian kroner ($9.1 million) with an undisclosed customer to operate charter flights from May through October. The deal was its second charter contract of the year, following one earlier in January for flights during the summer season worth roughly 30 million Norwegian kroner. Flyr, citing weak demand, was forced to park or lease out more than half of its fleet this winter to reduce cash burn. The airline has struggled competing against a more nimble post-restructuring Norwegian Air, and legacy incumbent SAS.
- After nearly a year of capacity restrictions, and one very chaotic summer, Amsterdam’s Schiphol airport will sunset its cap on passengers at the end of the IATA winter season on March 26. This will allow airlines, notably KLM, to recover more of their pre-pandemic capacity at the airport; the recovery had been limited by the caps. The restrictions were put in place last spring when a shortage of airport staff, notably security personnel, resulted in long queues and lengthy waits at Schiphol to the point where it was considered a safety concern. However, airlines will still have to deal with a Dutch government decision to cap the number of aircraft movements at Schiphol at 440,000 a year from November in order to reduce noise and emissions.
- Vienna Airport, a publicly traded company, said it’s seeing a very strong traffic recovery, aided by fewer operational problems than experienced at rival hubs like Frankfurt and Zurich. LCCs, which account for about 30 percent of Vienna’s traffic, are helping to drive growth — Ryanair and Wizz Air are the market’s LCC leaders. Airport executives are also encouraged by developments at Austrian Airlines, and the Lufthansa Group more broadly — it’s responsible for about half of Vienna’s traffic. Recall that during the third quarter, Austrian was the most profitable airline in the group, an unusual occurrence. Its European and North American routes are especially strong. Vienna does face several problem markets, however. Asia is one, though that’s starting to revive. Ukraine and Russia traffic, more troublingly, is totally gone. And Germany is way behind 2019 traffic levels, with Switzerland similarly suffering. The airport attributed this to many fewer low-cost seats in these markets, leading to high ticket prices. So high, in fact, as to “delight” Austrian Airlines (now you know why its third quarter margins were so high). Vienna will soon restart work on expanding Terminal 3, with completion targeted in 2027. It sees no need, however, to start building a third runway anytime soon. For the record, Vienna welcomed 24 million passengers in 2022, up from 10 million in 2021 but still only about three quarters of the 32 million welcomed in 2019.
Routes and Networks
- Ethiopian Airlines, champion of Africa, announced its 21st European destination last week. Beginning in May, the carrier will fly nonstop from its Addis Ababa hub to Copenhagen with 315-seat Boeing 787-9s, running five times per week. The secret sauce to Ethiopian’s longtime success is its ability to conveniently and reliably get travelers into and out of virtually everywhere in Africa, in some cases with support from partner carriers in Togo (Asky Airlines), Malawi (Malawi Airlines), and Zambia (Zambia Airways). As for the new Copenhagen route, Ethiopian expects to supplement its passenger volumes with cargo from Denmark’s pharmaceutical industry. Fun fact: It’s not the first time in Copenhagen for Ethiopian. It served the market for a few years around the year 2000.
- Copa Airlines has unveiled its second Washington, D.C.-area gateway: Baltimore-Washington (BWI). The Panamanian carrier will offer four-times weekly service between BWI and Panama City from June 28. The new route complements Copa’s existing service to Washington Dulles, which it operates up to three times a day, per Diio. It is also BWI’s first nonstop to Latin America that doesn’t cater to American holidaygoers flying to the region’s beaches; Copa will offer connections via Panama City on to more than 55 destinations in Latin America. Separately, Copa will add new service to Manta, Ecuador, from Panama City in June as well.
- Longhaul low-cost startup Norse Atlantic Airways will open its latest transatlantic route on June 19: New York JFK to Rome Fiumicino daily with a Boeing 787. With the addition, it will serve New York from five European gateways, including Berlin, Oslo, London, and Paris. However, while capacity will be up this summer — Norse’s second summer since launching in June 2022 — it remains a fraction of the size of Norwegian Air, the carrier whose failed longhaul low-cost model Norse “isn’t” modeled on despite operating (literally) the same planes on many of the same routes. Norse capacity between the U.S. and Europe this summer will be a tenth the size of Norwegian Air’s four years ago, per Diio by Cirium.
- Wizz Air will return to Istanbul in March after a seven-year hiatus with as many new routes. The discounter will connect the Turkish city to Antalya, Bucharest, Budapest, Dalaman, Iasi, and both London Gatwick and Luton with flights beginning from March through June. Wizz will serve Istanbul’s main airport, rather than the Sabiha Gökçen airport that it flew to until 2016. In addition, Wizz will connect the Turkish beach destination of Antalya to Abu Dhabi, Budapest, and Debrecen from May and June.
- Delta will end its long-standing nonstop between Detroit and Nagoya on February 26. The airline told staff the cut was due to “low customer demand.” Delta inherited the route from Northwest Airlines when the two merged in 2009; Northwest had served Nagoya continuously since 1991, first from Guam and nonstop from Detroit beginning in 1998, U.S. Bureau of Transportation Statistics data via Diio show. Separately, Delta will shift its pandemic Detroit-Seoul-Shanghai routing to a nonstop between Detroit and Shanghai on March 3.
- Route tidbits: Air France is rebuilding its China franchise this summer: Paris Charles de Gaulle to both Beijing Capital and Shanghai Pudong go to daily — from once and thrice weekly, respectively — on July 1. Ryanair will add a twice-weekly nonstop between Belfast and Budapest from April through its summer schedule; no airlines currently operate the route, per Diio.
- For Boeing, America’s largest exporter, demand for its commercial planes — 737s and 787s, anyway — is robust. The problem is building them. The company says production is “stabilizing for the 737-Maxes, which it’s now turning out at a clip of 31 per month. It hopes to increase that number to about 50 by 2025 or 2026. China, importantly, recently approved the Max for reentry to service. The U.S., though, hasn’t yet certified two variants, specifically the 737-7 and the -10. Boeing also has more than 200 Maxes assembled but not yet delivered (many of these are for Chinese airlines; some are -7s and -10s). As for the 787, production rates are about two per month currently, with about 100 in inventory awaiting delivery. But airlines at least want more Maxes and 787s, highlighted most recently by United’s big order for both planes last month. Boeing says more big orders are coming, notably from outside the U.S.; Air India is one expected buyer. Unfortunately, demand for Boeing’s new 777 model remains weak. In addition, building planes on-time remains a challenge. “Our realities are still the same, a difficult, difficult supply chain,” CEO Dave Calhoun said. “And while average deliveries met our objectives, we continue to face a few too many stoppages in our lines … those stoppages, while they are coming down, are not where they need to be as we think about stable rates going forward.”
- Aside from Boeing, two critical aerospace suppliers reported their earnings last week. General Electric, once a sprawling conglomerate now concentrating mostly on jet engines, said it currently has an order backlog for nearly 10,000 of its LEAP engines, which power both the Boeing 737 Max and the Airbus A320neo, not to mention the Comac C919. Management said departures of aircraft equipped with GE or CFM engines are now close to 90 percent of 2019 levels, with expectations of reaching 2019 levels later this year (CFM is GE’s joint venture with France’s Safran). GE also expects strong growth this year for internal maintenance visits and external spare part sales. “We’re laser-focused on supporting our airframers, airlines, and lessors as they ramp post-pandemic.”
Also reporting last week: Raytheon, owner of GE’s rival Pratt & Whitney. It said global air traffic should fully recover to 2019 levels this year, with notable strength in the U.S. and Europe. “This is pretty consistent from what we’re all hearing from the airlines.” It said it’s “keeping a close eye on China, which historically has represented about 14 percent of global air traffic … Our working assumption today is that China’s lifting of Covid restrictions continues to be manageable, and its traffic levels will remain robust.” For Pratt, its GTF engine competes with GE’s LEAP, and GTF demand right now is “really, really strong.” Supply chain bottlenecks remain an issue, but “that’s starting to ease.” Raytheon also owns Collins Aerospace, which is experiencing a slower recovery from the Covid crisis. That’s because its aircraft interiors business (installing new premium cabins, for example) suffered as “airlines were conserving cash for these last couple of years.” It added: “We don’t expect a recovery in the interiors business literally over the next three years.” A final note worthy of mention: Raytheon said that “given the supply chain challenges we’re having on new production, you’re seeing airlines hold on to older assets longer [and] signing up for longer leases.”
- Air France-KLM has ordered four more Airbus A350Fs for its Martinair subsidiary. The deal follows one for four A350Fs for both its KLM Cargo and Martinair operations in December 2021. The new freighters will replace Boeing 747Fs.
- Icelandair has financed two Boeing 737-8s using an insurance-backed debt instrument with Itasca Re and NORD/LB. The total value of the deal is $67 million. Icelandair initially paid cash for the aircraft that were delivered in late 2022.
After a bloody first half of 2022, followed by an underwhelming summer, Europe’s Ryanair-wannabe, Wizz Air, reported heavy underlying losses for calendar fourth quarter. Its operating margin? Negative 17 percent.
The label “Ryanair wannabe” is not an insult. Wizz in fact has an extraordinary record of Ryanair-like profit margins, using a Ryanair-like business model. Prior to the pandemic, its summer margins were routinely among the highest worldwide, reaching 32.9 percent in 2019. Ryanair’s third quarter, 2019 operating margin? 32.9 percent. Identical.
But the two ultra-low cost carriers have since diverged, with Ryanair (which unveils its calendar fourth results on January 30) now thriving again thanks to resurgent leisure demand from markets like London to markets like Italy and Spain. Wizz is capturing some of that, to be sure. But it’s also struggled with significant exposure to Ukraine and Russia before the war, with those two countries alone accounting for roughly a tenth of Wizz’s total seats originally planned for 2022. Four months before Russia’s invasion, Wizz announced plans to double its capacity from Ukraine, responding to a new open-skies agreement with the European Union. Currently, the airline has no flights operating in either Ukraine or Russia. All of that capacity had to be redeployed, predictably leading to a drop in load factors. Wizz filled just 87 percent of its seats last quarter, compared to 93 percent in the same quarter of 2019. And keep in mind: High load factors are critical for Wizz because the more customers it has, the more ancillary revenue it can generate. Ancillaries account for half — yes, half — of the airline’s total revenues.
Wizz has been growing rapidly as well, complicating the effort to fill seats. Its available seat kilometers (ASKs) are up nearly 40 percent from 2019, having lifted its fleet count from roughly 120 to 170 planes. No wonder why it calls itself the fastest-growing airline in Europe. Its biggest growth market since the start of the pandemic has been Italy, where it’s feasted on the fruits of Alitalia’s ineptitude — Alitalia 2.0, or ITA, isn’t exactly a formidable foe either. Romania is now Wizz’s second busiest market by seats, followed by the UK (where it recently acquired more Gatwick airport slots) and Poland. It’s roughly doubled capacity to Spain, France, and Israel since the start of the pandemic. It’s putting lots of seats into Albania, too. On the other hand, its home country Hungary is a rare market where it has cut capacity. In the meantime, Wizz launched a new joint venture airline in Abu Dhabi, which it hopes will smooth out the seasonality of its earnings. Wizz Air Abu Dhabi now has eight aircraft.
Earlier this month, the airline announced a return to Istanbul (see Routes and Networks) after a seven-year absence. Most interestingly, it’s undertaking a major expansion linking Europe with Saudi Arabia. As it moves into so many immature markets though, the risk to yields and loads is amplified. Separately, it dealt with severe operational problems last year, which haven’t yet completely disappeared. Unlike Ryanair, which kept its staffing mostly intact during the Covid crisis, Wizz sharply reduced headcount, only to find itself understaffed when travel demand suddenly rebounded last spring. Airport and air traffic control staffing shortages didn’t help.
As a result of Wizz’s string of poor quarters, credit agencies no longer rate it investment grade. For now, though, it continues to benefit financially from perhaps its most consequential strategic decision ever — the decision to mass-order Airbus A321neos. That’s provided a pipeline of highly coveted planes that it’s been able to sell and leaseback at a tidy profit. But more than just a financial benefit, the planes benefit the business by operating with a widebody-like 239 seats in Wizz’s configuration, offering highly attractive unit costs. According to Cirium Fleets Analyzer, Wizz currently operates 76 A321neos, accounting for 45 percent of its fleet; it also flies earlier generation A320s and A321s, along with a handful of A320neos. Just as importantly, it has nearly 300 A321neos on order, at least 47 of which will be long-range XLR versions (executives mentioned 70 on its call). The A321XLRs start arriving about a year and a half from now.
The challenge with a 239-seat plane is finding enough routes where you can fill all those seats, even when charging very low fares. Executives say the recent dip in load factors is an aberration, and loads will rise as new markets mature. Future flight additions, they add, will mostly be on existing routes or connecting airports it already serves, “as opposed to adventuring in new markets, new airports, [and] new territories … we are de-risking that growth substantially.”
Wizz was asked during its earnings call about the structural nature of its Middle Eastern flying, which involves relatively long flights, implying fewer aircraft rotations per day. LCC economics, conversely, often dictate that a large number of short hops will produce more daily revenue than a handful of longer flights, since shorthaul yields tend to be higher. But Wizz’s CEO József Váradi challenged the premise that “Middle East rotations cannot produce the same level of profitability as more frequent rotations in Europe. That’s simply just not true.” Yields on Middle East routes, he said, are actually rather high despite the longish stage lengths, citing a “less competitive environment … giving us more room to maneuver on the yield side.” So, he added, “I don’t think that profitability is at structural jeopardy just because we are operating in the Middle East.” And besides, “we would be still operating multiple rotations during the day.” Váradi also stressed that people tend to make more onboard ancillary purchases on longer flights.
Ultimately, the most important reason for Wizz’s poor earnings of late stems from its depressed level of aircraft utilization. It’s currently “dramatically below our target minimum of 12.5 hours a day,” Váradi said. “We are putting fleet utilization in the forefront of the business, and utilization is the religion of the airline. Everything else is sort of subordinated to that.” Utilization, the company said, should return to pre-pandemic levels next winter. At the same time, Wizz is working to optimize its route network, eliminate unproductive flying patterns, reduce flight disruptions, and improve customer service (but rejected the idea of launching a loyalty plan). It’s also contemplating how to best use its incoming A321XLRs, mindful that longer-distance flying could require the costly overnighting of crews, something it’s heretofore avoided.
Helpfully, foreign exchange pressures (in other words, a strong U.S. dollar) have eased some. Fuel prices have come down some as well. Here again, Wizz differed from Ryanair in that it was largely unhedged against last year’s fuel and forex demons. It now has 45 percent of its fuel needs hedged this year. It purchased some currency hedges too.
Bookings for the critical Easter holiday (which falls in April this year) look good. Ditto for summer bookings. Growth plans are somewhat in flux as Airbus struggles to deliver planes on time. Nevertheless, Wizz plans to grow ASK capacity by another 30 percent in the next fiscal year, which begins in April. That in turn, should help drive more economies of scale and — the airline hopes — return the company to its pre-pandemic margin might. Wizz may have temporarily lost some of its wizardry. But it still has some powerful magic wands, most importantly those super-high density A321neos.
By the Numbers
Six U.S. airlines have now reported their fourth quarter results. Here’s how they rank.
- American, which is almost back to its 2019 levels of capacity, now leads the industry in total revenues. United and Delta are still about 9 percent smaller in terms of available seat miles.
- Delta earned the best operating margins last quarter but barely; United and American did almost as well while paying more for fuel. Note that United and American earned higher margins in the fourth quarter of last year than they did in 2019.
- Southwest‘s operational meltdown was responsible for a disastrous quarter.
- Still to report at Allegiant, Frontier, Hawaiian, Spirit, and Sun Country, as well as regionals Mesa and SkyWest.