Canadian Winter Blues
Pushing Back: Inside the Issue
The majority of airlines have now reported for the second quarter, and four in particular stand out. Copa, Thai Airways, Philippine Airlines, and IndiGo all achieved operating margins exceeding 20%, thus leading the industry in profitability. Copa’s position at the top is no surprise given its track record. IndiGo’s success is hardly shocking, given the demise of rival Go First. Besides, India’s market is growing fast. But what’s up with Thai Airways and Philippine Airlines? It’s not even peak season in Southeast Asia. But it is a time of extreme passenger demand revival throughout East Asia, especially on longhaul routes and especially for premium seats.
Cathay Pacific is seeing this as well in Hong Kong, in its case benefitting from the dearth of nonstop flights between mainland China and the rest of the world. Tokyo and Seoul are reaping rewards from this state of affairs as well, though the U.S. and China did agree late last week to add some more flight frequencies.
Other airlines reporting last week include Turkish Airlines and Air Canada, two Star Alliance carriers with histories of seasonal weakness disorder. Both are taking steps to be less dependent on the spring and summer, with Turkish already starting to prove that’s a year-round superstar. Let’s see how Air Canada does when the temperature drops.
Global Business Travel Group dropped some interesting comments that might make a few industry players uncomfortable. The giant travel management company, linked to Delta’s best buddy American Express, said its bookings data indicate that “growth rates across the travel industry are beginning to normalize year-over-year, with the impact of the pandemic receding and pent-up demand for leisure travel showing some signs of leveling off.” More encouragingly for airlines though, it cited results from an internal survey showing that 84% of its top 100 customers expect to spend at least as much if not more on travel during this year’s second half than last. “The highest growth,” it added, “is expected across the industrial, communication services, financial services, and insurance services.”
Airlines, to be clear, with near complete unanimity, say overall travel demand remains healthy as far as the eye can see (which is roughly into the fall and perhaps a bit into early 2024). There are areas of cooling off for sure, like some shorthaul U.S. leisure markets. But cooling off from boiling hot. Not cold. Ask any airline what their chief worry has been these past few weeks and few, if any, would raise concerns about demand. Bringing much greater dread is a return of rapidly rising fuel prices. IATA’s jet fuel monitor for the week ending August 4 shows average prices still down 13% from last year but up 20% from last month. Yikes.
A few other developments last week: Air India hopes a brand new brand will help erase memories of age-old dysfunction. Abu Dhabi’s Etihad apparently has tickets to a Red Sox game — it’s headed to Boston. American is adjusting to life without JetBlue. And Cathay Pacific ordered more narrowbodies.
Airline Weekly Lounge Podcast
Edward Russell and Jay Shabat discuss the latest Airline Weekly profit rankings for the second quarter. Plus, the latest developments at Hong Kong’s Cathay Pacific. Listen to this week’s episode, and find a full archive of the Lounge here.
Weekly Skies
Turkish Airlines continued to expand with breathtaking alacrity in the second quarter. Capacity, measured in ASKs, increased another 14% year-over-year. In the Americas alone, it has added routes to Dallas-Fort Worth, Newark, Seattle, and Vancouver since 2021, according to Cirium Diio schedules. New service to Detroit begins in November. It has also added plenty of new routes to Europe, Africa, the Middle East, Central Asia, and East Asia too.
And don’t forget about Turkish’s plans to finally challenge the Gulf carriers on routes to Australia, initially by serving Sydney and Melbourne through Singapore. Nonstops will come later, when yet-to-be-ordered widebodies — either the Airbus A350 or Boeing 777-9 — arrive.
Normally, expansion this brisk would signal a severe risk of financial implosion. Not for Turkish. Despite year after year of aggressive growth, it continues to post extraordinary profits, buttressed by the advantageous geography of its Istanbul hub — a hub by the way that now has ample available airport capacity (this was a constraining factor for Turkish until the city’s new airport opened in late 2018). Last quarter, Turkish saw its operating margin match its capacity growth figure, i.e., 14%. This was much better than the roughly break even operating result it managed in the same quarter of 2019.
For most airlines, rapid growth is dangerous because it results in a surfeit of empty seats, or additional passengers paying rock-bottom fares. This has not been the case for Turkish, which continues to fill its additional seats at profitable yields. It can do so thanks to the power of the Istanbul hub, which last quarter enabled Turkish to grow international transfer passengers by 22% year-over-year, to 23% above pre-Covid levels.
“In the past, before the pandemic, in like 2017, ‘18, the share of transit passengers among international passengers was about 55%. And in the first half of this year, we observed it at 57%,” Chief Financial Officer Murat Seker said.
Make no mistake, there aren’t a lot of people that need to fly from Detroit to Istanbul. But there are plenty of people that need to fly from Detroit to somewhere in the world where Turkish flies — auto executives traveling to plants in Asia, Detroit’s large Arab-American population traveling to visit family in the Middle East, tourists visiting eastern Europe, and so on. That’s just an example of how one route can successfully plug into its network (if Delta tried Detroit-Istanbul, it’d have little chance to compete).
Turkish did have its struggles during the pandemic, just like everyone else across the industry. But it was among the least affected of any large airline, quickly getting back to its expansionary and profitable self. One thing that buffered the pandemic-era shock was its large cargo business, which is now coming down to earth — cargo revenues dropped 44% year-over-year and now account for just 13% of company revenues, down from 27% last year. Its cargo yields, however, remain “substantially higher” than they were in 2019 (like 35% higher). And Turkish Cargo commands unit revenues that are 10% above the global average, according to management.
Even with the steep drop in cargo revenues, total revenues rose 14% last quarter thanks to a 31% jump in passenger sales. One reason was Asia’s reopening. Another was extremely strong performance on routes to the Americas, boosted by greater demand for premium travel. Africa, where Turkish holds a strategic advantage given its network coverage, “performed relatively well.” Executives did not mention Russia during the call but the market is surely a lucrative one currently, as many Russians that previously transited or vacationed in Europe are now doing so in Turkey. Europe did well in part thanks to booming inbound tourism to Turkey, a trend that will magnify in the current summer quarter. Europe’s congested airspace, however, caused operational problems. And low-cost carriers like Wizz Air are expanding into the Middle East, which is depressing yields. In the Middle East, competition and capacity are growing as well, and the key Israeli market saw demand decline due to nationwide political protests. In addition, an earlier start to the school season in the Middle East has shortened the summer tourism season this year.
In general, though, travel demand across Turkish’s network remains strong, a trend still evident in forward bookings. Importantly, the airline is also seeing seasonal swings in demand moderate as its network diversifies with expansion.
Cheaper fuel naturally lifted Turkish’s second-quarter earnings. But fuel prices have since risen. Non-fuel costs, including labor, ground handling, catering, air traffic control, and maintenance, have increased as well, in some cases sharply. Capacity growth, however, is helping to spread the extra costs out over more revenue-producing seats.
Turkey’s domestic market, plagued by a weak currency, remains smaller than it was pre-pandemic. But it’s just not that significant to Turkish’s overall business. Only 12% of its sales originate in Turkey, and the Turkish lira accounts for a mere 8% of its revenue. On the other hand, 29% of its costs are in lira, which is good news when the currency weakens.
A planned order for 600 new planes, including some 400 narrowbodies and 200 widebodies, is still pending. In the meantime, Turkish is filling its capacity needs with leased aircraft, including some that are wet-leased (meaning it’s also renting the crews to fly the planes, something frowned upon by many airline pilot unions). “Going forward, our intention is to grow the capacity in terms of ASKs by about 7% to 10% year-on-year over the next five years.” It expects to finish 2023 with 435 planes, up from 394 at the start of the year. It plans to reach 500 in 2025 and 600 by 2028.
As if this weren’t enough to keep Turkish busy, it’s also planning to announce — sometime in the coming weeks — a new brand identity for its low-cost carrier Anadolujet. Separately, Turkish just announced a new joint venture with Thai Airways and hopes to add joint venture partners in East Asia and the Americas. It’s not, however, interested in a European joint venture (years ago it was rumored to be discussing a tie-up with Star Alliance partner Lufthansa).
Like other airlines around the world, Turkish speaks about “lack of sufficient aircraft availability, manufacturing problems in the OEM supply chain, engine durability issues, and congested European aerospace,” all acting as “constraints in the robust demand environment.” Executives added, “We expect the industry’s supply-demand imbalance to persist at least until the end of the year.”
In summary, Turkish proclaims itself “among the few global carriers to successfully adapt itself to the new normal and exceed 2019’s capacity level by almost 25% in the first half of the year.” In fact, it’s even raised its profit guidance, expecting strong demand to more than compensate for cost inflation.
Hong Kong’s Cathay Emphasizes Rebuilding
Hong Kong’s Cathay Pacific emphasized the theme of rebuilding in its latest earnings presentation. Reporting for the first six months of 2023, the airline disclosed a solid 12% operating margin. Like most of East Asia’s airlines, Cathay is enjoying strong pent-up demand, alongside an industry capacity situation that remains constrained. Indeed, as one of its own executives stated, “demand outstrips supply.”
Hong Kong’s airline market was among the last worldwide to start recovering from the Covid crisis. It was also a market plagued by social unrest before the pandemic. Cathay survived in 2020 and 2021 thanks to generous government aid, complementing a surge in cargo profits. By the second half of 2022, it was back to making money again as passenger demand recovered and cargo demand cooled but remained healthy. That’s the situation today as Cathay continues to rebuild its fleet and flight schedules.
Perhaps the most interesting comment from its earnings call last week pertained to business traffic. It’s a “nice surprise,” executives said, to see corporate travel “rebounding quite quickly.” It cited lots of pent-up travel demand among companies, just as there is pent-up demand among leisure travelers. That’s especially true of companies looking to access mainland China, where international airline capacity abroad remains a shadow of what it was pre-pandemic (especially to and from North America). Hong Kong has thus assumed elevated importance as a hub for accessing the mainland, i.e., from the U.S. and Europe. And sure enough, Cathay is capturing elevated passenger yields as a result. It expects “sixth-freedom” demand (travelers connecting between two countries via a hub in a third country) to increase as it adds back new destinations.
Cathay, remember, also owns HK Express, a low-cost carrier now re-fleeting with Airbus A321neos. On its mainline operation, it will soon introduce its new “Aria” class cabins on Boeing 777s. Sometime around 2025, it hopes to start getting the next-generation 777Xs it’s ordered.
Questions linger about Hong Kong’s future role in the global economy after losing some of its autonomy to Beijing. But if its airline market does begin to grow again, its airport has a new runway to handle it. Cathay does foresee plentiful growth, supported by the potential of the Greater Bay area economy that includes the mainland cities of Guangzhou and Shenzhen. Cathay and Air China are close partners with equity ties, further tethering the former’s future to industry developments on the mainland.
Copa Soars with Strong Second-Quarter Operating Margin
Healthy travel demand and lower jet fuel costs lifted Panama-based Copa Airlines results in the second quarter. The carrier reported a second-quarter operating margin of 24%, the highest of any airline worldwide that Airline Weekly tracks.
“We’ve delivered solid second-quarter results and continue to see a healthy demand environment in the region. We continue growing and strengthening our network, the most complete and convenient hub for intra-Latin America travel,” Copa CEO Pedro Heilbron said last week.
The Star Alliance member exhibited a 16.7% revenue increase to $809 million, resulting in a second-quarter net profit of $17.5 million. Shares in Copa Holdings, the airline’s parent company, also highlight its dramatic post-pandemic recovery, surging by 31% since the year’s start.
Last week, the airline attributed steady leisure demand as key to its performance.
“Leisure is behaving in a way that you can see in our results. Demand is strong, and yield is healthy, so we’re fine with how traffic has developed,” Heilbron said.
Leisure travel drives 40% of travel demand at Copa, visiting friends and family results in another 30%, and the remainder is from business and corporate sectors. The airline also noted that leisure travelers are not from any particular region and are a combination of their three biggest markets — South America, North America, and the Caribbean.
“There’s a little bit of everything into the mix of our leisure travelers, which I think is very, very good in terms of the sources that we have for demand,” Heilbron said.
The drop in jet fuel prices also played a large part in the company’s results. The airline shared that jet fuel fell 35.9% per gallon, resulting in an overall unit cost, or CASM, decrease of 17% compared to the same period last year.
However, a recent spike in fuel prices is expected to impact Copa’s full-year forecast. The company’s maintained its operating margin forecast of 22-24%, yet executives said it may come in on the “lower side” of the estimate.
The continued financial success and positive outlook of Copa allows them to invest in their fleet. In the second quarter alone, the airline welcomed the addition of two Boeing 737-9s. Looking ahead, the airline anticipates the arrival of an additional five aircraft before the close of 2023, with even more slated for 2024.
“We’re going to receive 14 aircraft next year, and we see the demand to have opportunities for all of those airplanes to fly at our current daily utilization,” said Heilbron.
Azul Completes Financial Restructuring
In Brazil, Azul reached a major milestone with the completion its out-of-court financial restructuring. Like all of South America’s major airlines, lack of government aid during the pandemic, combined with unforgiving fuel and foreign exchange trends, Azul was forced to renegotiate contracts with aircraft and engine makers, aircraft lessors, lenders, and other stakeholders. With this complete, investors can focus more on the airline’s profitable operations, which yielded a 14% operating margin in the offpeak second quarter.
There’s a lot going right for Azul’s business, separate from its financial obligations. Demand and yields are strong domestically, with corporate booking volumes having recently reached 100% of 2019 levels. “This is the first time I can confidently say that we’ve actually recovered 100% of corporate volume,” CEO John Rodgerson said last week. International demand has revived as well, with strength to Europe most notably, but also to the U.S. New international routes include Paris and Curacao, and “both of these are off to a very strong start.”
Back home, Azul is benefiting from a benign competitive arena, with just three major airlines in Brazil (the others are Latam and Gol). Azul runs a unique network in any case, flying without any nonstop competition on more than 80% of its routes. Newly-obtained slots at Sao Paulo’s downtown Congonhas airport hold great value. So do Azul’s loyalty, cargo, and tour package business. And the single “most-profitable thing we do,” according to Rodgerson, is replacing older Embraer E-Jet-E1s with newer E2s. That translates to more seats and lower fuel burn.
American Could Invest in New U.S. Carrier Connect
New regional carrier Connect Airlines has a memorandum of understanding with a major U.S. airline for a commercial partnership that, upon Connect closing its next round of fundraising, could turn into a significant equity investment.
The name of the “major U.S. airline” was not disclosed in a letter sent by the legal counsel for charter operator Waltzing Matilda Aviation, which owns Connect, to the Department of Transportation on August 4. But prior filings with the regulator for the airline’s certification have named American as Connect’s commercial partner once it begins revenue flights between Toronto’s downtown-adjacent Billy Bishop Airport and American’s Chicago and Philadelphia hubs.
Waltzing Matilda CEO John Thomas declined to name the potential major U.S. airline investor, and noted that “it is not necessarily as previously filed as that was noted simply as an interline agreement.”
An American spokesperson did not respond to an inquiry on the potential investment. The airline is the only major U.S. carrier without a partner on Canadian routes; Delta codeshares with WestJet, and United has a joint venture with Air Canada.
Connect cannot finalize a commercial agreement with American — or any other major U.S. airline for that matter — until it is fully certified to begin operations. That process is partially complete with the DOT having certified it to operate interstate scheduled air transportation in July 2022; Connect is still awaiting its air operators certificate from the U.S. Federal Aviation Administration. It had hoped to begin revenue flights as early as 2021.
That delay with FAA certification has forced Connect to seek an extension to its startup deadline with the DOT to December 31 from October 5.
Connect has raised at least $2.6 million in capital from investors, including Par Capital that has investments in travel companies ranging Expedia to SkyWest Airlines and Southwest, and Atlas Air Chairman — and former CEO — William Flynn. The airline plans to raise another $40 million in Series B funding with the help of Raymond James during its first year of operations; the airline partner would invest in Connect as part of the Series B fundraising.
Connect is one of a number of startup airlines that is trying to take to U.S. skies since the pandemic. Avelo, led by former Allegiant Air and United executive Andrew Levy, and Breeze, the latest airline from JetBlue founder David Neeleman, began flights in 2021 and have steadily expanded ever since. Others, like a reboot of ExpressJet Airlines as Aha!, have been less successful and shut down shortly after their launch.
Crises are traditionally a good time to start an airline. Existing players tend to be in defensive mode, shedding staff, aircraft, and airport space in an effort to cut losses and keep flying. That creates opportunity for new entrants to start up cheaply, and gain access to otherwise hard-to-enter markets.
However, the federal aid U.S. airlines received during the Covid pandemic allowed them to retain much of their workforce and avoid many of the service cuts they otherwise would have made. This kept many barriers to entry in place for startups.
Connect does not seek to disrupt the competition in, say, New York or Los Angeles. Instead, it aims to better connect Toronto Billy Bishop to the U.S. airline network via a partnership with, as mentioned, American. Porter Airlines, the incumbent at Billy Bishop, serves four U.S. cities — Boston, Chicago Midway, Newark, and Washington Dulles — but lacks deep partnerships for travelers to connect beyond those gateways.
And Billy Bishop itself is unique. Situated on an island in Lake Ontario across from downtown Toronto, it is restricted to only turboprop aircraft, like the De Havilland Dash 8-Q400 that Porter flies and Connect plans to fly. No feeder airline for a major U.S. carrier operates turboprops.
“Our view is how do we give people in Toronto more than just a flight to Chicago — or some point in the U.S. — how do we make this a one-stop connection into a massive network,” Thomas said in 2021. It gives us “a much stronger value proposition to people in Toronto.”
And, once Connect launches, it is working with Universal Hydrogen to become one of the first commercial airlines to fly hydrogen fuel cell-powered aircraft. The carrier aims to be the first “emission-free” airline in North America.
In Other News
- El Al is having one of its best years ever. The Israeli carrier, celebrating the 20 year anniversary of its IPO, is benefitting from strong inbound tourism and family-visit demand, especially from North America. Operating margin was 14% in the second quarter, compared to just 3% in 2019 (and 2% in 2022). Last quarter’s revenues exceeded 2019 levels by 8%, despite capacity measured in ASKs still just 87% of what it was. This capacity figure includes Sun D’Or, the company’s leisure carrier flying mostly to Europe. The second quarter operating margin, by the way, was its best for the the period since its IPO. El Al’s current “Rising Above and Beyond” strategy has already featured 12 new destinations (India is a notable growth market) and a deeper partnership with Delta. The airline is now upgrading its Boeing 777 interiors, shopping for new narrowbodies, growing its 787 fleet, investing in brand improvements, and looking to generate more revenue from its loyalty plan. El Al expects to end this year with 46 planes. By the end of 2028, it aims to have 59.
- Though it cited a “very strong performance” in the second quarter with a firm 12% operating margin, Jazeera Airways isn’t problem free. The Kuwaiti LCC complained of “significant overcapacity” resulting from a government decision to open its airline market to more foreign competition. That’s specifically an issue for the Indian subcontinent market, responsible for about quarter of Jazeera’s traffic. Sure enough, peak summer yields have dropped, and to a level Jazeera sees as unsustainable. Some of this excess capacity, it insists, will be forced to withdraw this winter. In addition, the airline sees some “easing” of the post-Covid pent-up travel boom. On the other hand, religious pilgrimage traffic to Saudi Arabia, which it transports from and through Kuwait, enjoyed an “active” season this spring. Keep in mind that Jazeera is not just an airline. It also owns a highly profitable terminal at Kuwait’s main airport. It’s developing duty-free, training, and security service businesses as well. And it hopes to build another airport terminal in Kuwait. Back at the airline meanwhile, it’s growing more aggressively than it was pre-Covid, adding new planes and new destinations in markets like Egypt, Iran, Cyprus, and the Balkans. It’s also densifying its aircraft cabins and awaiting approval to launch a joint venture airline in Saudi Arabia.
- Lufthansa and its pilots union, Vereinigung Cockpit, have reached new labor accords that will provide the airline with “operational stability, reliability for customers, and a sound planning” through at least 2026. The agreements, including one covering pay that expires on December 31, 2026, and another covering terms of employment expiring a year later, include a roughly 18% pay hike and quality-of-life improvements for pilots. The deal has been accepted by union leadership, and now must go to a ratification vote of the more than 5,200 pilots at Lufthansa and its cargo division.
- Norwegian Air has signed a lucrative four-year deal with the Norwegian Armed Forces. Under terms of the agreement that begins in the first quarter, the airline could receive up to 1 billion Norwegian kroner ($98 million) a year for roughly 250,000 trips annually. Government contracts are typically lucrative business for airlines as it guarantees them revenue for certain flights, and losing them can result in the cancellation of certain routes.
Routes and Networks
- The U.S. and China have agreed to double the number of nonstop flights between them to 24 weekly for each country from October 29. That’s equal to just under four daily flights for Chinese airlines, and the same number for U.S. carriers. Air China and United have already unveiled plans for more flights: Air China an additional Beijing-Los Angeles frequency, and United will bump San Francisco-Shanghai to daily (from four-times weekly) and resume San Francisco-Beijing flights. American, China Eastern, China Southern, Delta, and Xiamen Airlines are also expected to add flights.
- American continues to make post-JetBlue alliance changes to its route map. The airline will resume flights between New York LaGuardia and Boston in October after ceding the route to then-partner JetBlue in January 2022. But what was once a busy hourly shuttle route for American will be a shadow of its former frequency: just four daily flights with Airbus A319 aircraft. Separately, American will end flights between New York JFK and Monterrey, Mexico, on December 20.
- Speaking of New York, the U.S. Federal Aviation Administration has extended its waiver of usage requirements for 10% of slots and runway timings as it faces a seemingly intractable air traffic controller shortage. The waiver will now end on October 28, or the end of the IATA summer scheduling season, instead of September 15. However, few believe the FAA has an immediate fix for air traffic control staffing and are calling for a similar usage waiver for next summer.
- Azores Airlines is making a play for the Porto market. The airline will launch new nonstops between the Portuguese city and Boston, New York JFK, and Toronto Pearson with Airbus A321neos next summer. The routes will be Azores’ first transatlantic nonstops from the Portuguese mainland. The airline only faces direct competition on Toronto route from Air Transat, per Cirium Diio schedules. However, TAP Air Portugal and United fly seasonally between Porto and Newark.
- Route tidbits: Etihad Airways has named Boston its fourth U.S. destination with four-times weekly flights from Abu Dhabi beginning March 31, 2024. The airline will connect with partner JetBlue over the new gateway. Air Transat plans new seasonal flights between both Montreal and Toronto and Lima this winter; the routes will operate with Airbus A321LR aircraft from December through April. Avelo is expanding in Wilmington, Del., with new twice-weekly nonstops to San Juan and Sarasota-Bradenton from November. Thai AirAsia will launch thrice-weekly flights between Bangkok Don Mueang and Ahmedabad on October 10.
Fleet
Thumb through an airline map from the 1970s or 1980s and something is immediately striking: The web of short routes feeding major hubs is deep. Stauning, Denmark? Terre Haute, Indiana? Both used to have commercial air service but do not today.
The disappearance of these regional routes is multifold. The economics of flying has become more expensive. Commercial aircraft keep getting larger, making smaller cities less attractive to serve. And people increasingly live in cities, making service to smaller dots less and less attractive as travel demand has moved elsewhere.
“There is a massive gap,” Electron Aerospace and Aviation Co-Founder and CEO Josef Mouris said. “You see the ranges that airlines do have gone up and up — the minimum distances that they fly. And you’re forced to fly with 180 people in a jet and, if you want to go from point A to B, sometimes you’re forced to go to point C and back again because all these services have been cut.”
The Netherlands-based Electron Aerospace is developing a clean-sheet electric plane with room for four passengers plus a pilot that it aims to have certified and carrying revenue passengers by 2027. Electron Aviation is the operator side of the business that will fly the plane in an on-demand service pattern between small airports. Mouris, a former pilot with defunct British regional airline Flybe, founded the company with Marc-Henry de Jong in 2020.
Sound familiar? That’s because the business has many similarities to the model being pitched by the developers of helicopter-like electric vertical takeoff and landing, or eVTOL, aircraft. Many of those planes will similarly carry up to four passengers plus a pilot to airports and destinations not currently connected to the global aviation system, and aim to do so much more cheaply than conventional aircraft. The difference, however, is eVTOLs target the urban air mobility market, or trips of less than roughly 100 miles — think Manhattan to JFK airport, or Palo Alto to downtown San Francisco.
Electron’s aircraft will be an electric conventional takeoff and landing plane, or what is known as an eCTOL, with a range of up to 750 kilometers, or a little under 500 miles. Asked why the company is developing something akin to an electric Cessna and not an eVTOL, which are currently darlings of Silicon Valley, Mouris said it was primarily about range.
eVTOLs “will get me from Southampton to London, or from Heathrow Airport to London city center, but it’s not going to get me from London to Amsterdam,” he said. “For that you need an eCTOL or, in fact, you need a clean sheet eCTOL.”
The opportunity in this market, known as regional air mobility, is not lost on the aviation industry. In a recent report, McKinsey estimated that the segment could be worth $75-115 billion and serve as many as 700 million travelers annually by 2035. Many of those potential fliers, particularly in the U.S., currently drive for trips under 500 miles.
Electron is not alone in seeing the opportunity in regional air mobility. Eviation and Heart Aerospace are both working on new, clean-sheet electric or hybrid-electric planes that would cater to this market. In addition, others like Surf Air Mobility are working on retrofitting existing aircraft with hybrid-electric propulsion systems that, in their view, would significantly reduce the costs of flying these regional routes and reopen air service to many smaller cities.
The main difference between Electron and these other companies, as Mouris sees it, is the Dutch company will offer on-demand air travel at the touch of an app similar to what people are used to with ride-hailing services. Think Blade Air Mobility but with electric planes developed in-house. Electron does have options from buyers as far afield as Australia and South Korea for 39 aircraft currently.
And while Mouris admitted that this would initially only be available to businesses and well-off travelers — prices will be equivalent to those of a business class airline ticket — he expects costs to come down as service scales up. He added that conventional air service is only going to get more expensive in the future as new taxes and emission charges are implemented.
“If true that a range of 500 miles can be achieved … the applications of the technology are many,” said William Swelbar, chief industry analyst at the Swelbar-Zhong Consultancy and a long-time researcher on regional air connectivity in the U.S. However, those “many” applications come with a lot of buts, not least “the workforce demands that cannot be met today,” he said referring to the captain shortage faced by many U.S. regionals. Costs will also be a challenge, Swelbar added.
Asked about the hurdles, particularly pilot staffing, Mouris cited training hour requirements that new pilots must meet. For example, in the U.S. a new air transport pilot certificate to fly for a major airline like American or Southwest requires 1,500 hours in the air. Most pilot trainees, however, graduate from flight schools with around 220-250 hours.
“You could actually get paid to get those hours, and then you could just walk into a big airline if you want to,” Mouris said. Pilots for charter or air taxi companies require fewer hours.
That’s similar to the model already used by Contour Airlines and Southern Airways Express, and, if approved by regulators, SkyWest Charter to staff their air-charter airline businesses.
Electric aircraft are widely viewed as cheaper to operate than their internal-combustion counterparts. For example, as with cars, electric engines have fewer moving parts and thus lower maintenance costs. However, as pointed out by Swelbar, production and operational scale will be needed before those savings can be fully realized.
Before Electron — or anyone else for that matter — can begin trying to restart the regional air mobility market with electric planes, those aircraft must be developed and certified by regulators. The Dutch company is in what Mouris described as the “preliminary design phase” of its twin-engine electric plane and focused on the engineering. He declined to name Electron’s suppliers — for example, of the propulsion system or the batteries. But he said the company was working with some “really strong players.”
Electron aims to begin test flights in 2025 and secure certification from the European Union Aviation Safety Agency (EASA) by the end of 2026. U.S. Federal Aviation Administration certification will come after its plane is approved in Europe, Mouris said.
Fleet Briefs
- Cathay Pacific is beefing up its narrowbody fleet with a letter of intent for 32 more Airbus A320neo-family aircraft. The planes, if finalized, will arrive by 2029 and be operated by Cathay and its budget subsidiary HK Express on routes to Mainland China and elsewhere in East Asia. CEO Ronald Lam said the planes would better allow Cathay to take advantage of the third runway at Hong Kong’s airport that opened last year. This is the second order for A320neo-family aircraft for Cathay after a deal for 32 in 2017; 13 of those aircraft have been delivered with 19 firm outstanding.
Feature Story
Springs and summers are wonderful in Canada. Now about those winters …
During the springtime quarter — covering April, May, and June — Air Canada delivered an excellent 15% operating margin. That matched American’s 15% and came close to Delta and United’s 17%. Air Canada’s U.S. peers, keep in mind, have vastly larger loyalty programs and generally lower airport costs. But you get the point: Canada’s largest airline had a splendid spring by anyone’s standard.
It’s surely having a great summer too, with passenger demand red-hot across pretty much all segments and geographies. But will the airline once again stumble when temperatures drop? Simply put, the U.S. Big Three have largely learned how to make good money all year round. Springs and summers are better, for sure. And it’s true that this year’s January-to-March quarter was pretty bad for the U.S. Big Three, just as it was for Air Canada. The previous quarter though — the fourth quarter of 2022—saw the U.S. Big Three earn double-digit operating margins, while Air Canada wallowed in an operating loss.
Give some leeway to Air Canada for getting a later start in the post-Covid recovery — Canadian borders were late to reopen. But the winter woe thesis still holds, based on pre-Covid data. In 2019, Air Canada’s operating margins for the four quarters of the year were 3%, 9%, 17%, and 3%, respectively. And in 2018? 0%, 5%, 16%, and 3%. See the extreme variance? Without belaboring the point with more figures, rest assured that Air Canada’s American peers had better winters those years.
Air Canada’s management team, now led by Michael Rousseau, recognizes the problem. In its second-quarter earnings call last week, it referenced how sixth-freedom traffic — in its case using Canadian hubs as gateways into and out of the U.S. — provides some revenue diversification that helps smooth seasonal peaks and valleys in its passenger business. In March, before retiring, then-Chief Financial Officer Amos Kazzaz told investors point blank, “We’re a very seasonal business.” In its first quarter call in May, network chief Mark Gallardo talked about efforts that began even before the pandemic, aimed at “de-seasonalizing the business.” He and his colleagues specifically mentioned growing in markets like Australia and India, which both have strong demand during Canadian winters. “Seasonal routes like Vancouver-Bangkok,” Gallardo said, “clearly demonstrate that our network diversification strategy is working. This also counterbalances traditional seasonal patterns.”
Serving the same purpose are southern sunshine routes like Florida and the Caribbean, which Air Canada partly services with its low-cost unit Rouge. A priority during the pandemic, incidentally, was restructuring Rouge, with the intention of “getting some of the seasonality out of that business.” One thing about offpeak salvation from Florida and the Caribbean though: They’re great in the first quarter but not so much in the fourth quarter, the first half of which overlaps with hurricane season.
Other revenue diversification efforts, doubling as de-seasonalization efforts, include adding dedicated cargo planes, growing its loyalty plan, utilizing Air Canada Vacations, and working with joint venture partners (most importantly United on cross-border routes, and Lufthansa and United together on transatlantic routes). Air Canada now partners with Emirates and FlyDubai as well, supporting its own nonstops to Dubai from both Toronto and Vancouver.
Next spring, Air Canada will launch nonstops to Singapore from Vancouver, a hub it hopes to position as a gateway between Asia and North America. Like Dubai, Singapore is not a summer-heavy leisure market like say, its transatlantic markets.
Will these initiatives be enough to make winters and falls more tolerable? One optimistic scenario is that post-pandemic demand patterns might be less seasonal, with more people flying for leisure or remote working purposes during the fall. Air Canada would love it if that were true on transatlantic routes, which generated 29% of its total passenger revenue in the first half of this year. For the record, this was 26% for the full year 2019. Management did say in last week’s earnings call that bookings look “solid” even as far out as early 2024. It even noted a “slight uptick” in managed corporate travel this fall, and more substantial gains for non-managed corporate. It denied any signs of booking weakness, international or domestic.
So far, so good. But it’s only August.