Air Arabia Crowned as World’s Most Profitable Airline

Pushing Back: Inside the Issue

Can you hear the alarm bells ringing? Spirit and Frontier, two ultra-low cost carriers, delivered shockingly bad news to investors last week. The third quarter has developed far worse than expected, with fuel costs spiking, operational disruptions still vexing, and demand trends cratering. 

Are the woes of Spirit and Frontier representative of broader industry trends? With respect to fuel costs, the answer is yes. Other U.S. airlines have issued similar warnings there. But most have denied any significant deterioration in demand. Southwest says bookings look healthy. Delta and United speak of tremendous international demand. Alaska seems pretty content as well. American is holding to its original revenue forecast for the quarter, while just slightly downgrading its forecast for unit revenue. 

JetBlue didn’t provide any new updates last week. But imagine what’s going through its head as it views the carnage unfolding at Spirit. For now anyway, JetBlue appears committed to its takeover plans, hoping to assuage regulator concerns with offers to divest more airport assets to rivals. 

Delta, which still expects a 13% operating margin this quarter (it was 11% in the same quarter last year), sparked some debate with changes to its loyalty plan. They’re designed in part to reduce crowding at airport lounges. Separately in the U.S., executives gathered at a Chamber of Commerce summit, where FAA frustrations came to a boil. 

Airlines around the world are also boiling about more Pratt & Whitney GTF engine delays. Mexico’s airlines, by contrast, are pleased to finally have clearance to expand their U.S. operations again. Lufthansa is expanding its U.S. footprint. Vietnam is expanding its fleet, adding some new Boeing narrowbodies. 

The final quarter of the year is just weeks away, meaning third-quarter earnings season will begin soon. As for second quarter earnings season, read on for highlights, as well as a ranking of the world’s airlines by operating profitability. 

Airline Weekly Lounge Podcast

Slower bookings and “heightened” discounting are hurting Frontier and Spirit this quarter. That means potentially deep losses for the ultra low-cost carriers. Edward Russell and Jay Shabat discuss what’s happening. Plus, the latest on the Pratt & Whitney geared turbofan engine situation.

Weekly Skies

Spirit and Frontier Cut Outlooks, Others Maintain

Spirit Airlines delivered an extremely bearish message to investors last week, warning of a steep operating loss in the quarter that ends this month. Frontier Airlines said something similar. But the story is mixed, with the likes of Delta Air Lines and Southwest Airlines maintaining much of their guidance.

The Florida-based carrier now expects a third-quarter operating margin to register somewhere between negative 15-16%, a figure that stunned even competitors. Speaking at a Morgan Stanley investor event this week, United Airlines executive Michael Leskinen, said “the magnitude of what we have seen from peers was as shocking to us as it was to all of you.” He was referring to Spirit and Frontier, the two largest ultra low-cost carriers in the U.S.

In August, Spirit expected an operating margin of roughly negative 7% in the third quarter. But fuel prices have increased sharply in recent weeks, while demand has softened. It now expects to pay an average of $3.06 per gallon for fuel this quarter, a 9% increase from the $2.80 forecast it assumed a month and a half ago. Total revenues for the quarter, meanwhile, will be about 4-5% less than previously forecast. 

“During the last few weeks,” Spirit wrote in a regulatory filing, “the company has seen heightened promotional activity with steep discounting for travel booked for the second half of the third quarter through the pre-Thanksgiving travel period.”

The alarmingly poor forecast follows a difficult first half for Spirit, once routinely among America’s most profitable airlines. In the first and second quarters, only Hawaiian Airlines performed worse in terms of operating margin. United’s Leskinen, in his Morgan Stanley address, described what he saw as “a complete inversion of the industry structure,” pointing to supply-side constraints that are hobbling ultra-low-cost carriers like Spirit, which have historically depended on rapid capacity and workforce growth to achieve unit cost advantages. 

“Air traffic control is going to be constrained. The OEMs [original equipment manufacturers building planes and engines] are going to be a constraint. Pilots are going to be a constraint,” Leskinen said.

Spirit will in fact grow capacity, measured in available seat miles (ASMs), by about 13% this quarter compared to last year. But that’s less than it was hoping to grow coming out of the pandemic. In fact, it slightly lowered its capacity growth outlook for the quarter, from 13.7% in early August to 13.4% currently. Importantly, Spirit’s capacity plans have been greatly disrupted by Pratt & Whitney’s much-discussed difficulties delivering engines for A320neo jets. During its second quarter earnings call in early August, Spirit CEO Ted Christie remarked: “Exposure to this issue is very unique and material for us and is having an impact on our margin.”

Spirit’s bleak outlook raises questions about whether other U.S. airlines are seeing similar pressures. Several have provided updates in recent days, in all cases acknowledging the challenge of higher fuel costs. Frontier, like Spirit, dramatically revised its earnings forecast downward, moving from an expected pre-tax margin of positive 4-7% to negative 4-7%. “In recent weeks, sales have been trending below historical seasonality patterns,” Frontier said in a statement. It also blamed hurricanes and other operational disruptions. 

Frontier CEO Barry Biffle said, “Airlines Reporting Corporation has kind of shown you that over the last couple of weeks, things have changed and sequentially gotten worse. You’ve gone from industry sales being up to flat, to now being down versus 2019, and that’s coming at a time that capacity is going up. And then the third leg of that stool is fuel. So you’ve got fuel, capacity, and demand all headed in the wrong direction.”

But the outlook from the ULCCs is not the industry view. “We’re just not seeing the weakness. Looking past August, we’re seeing very strong leisure demand and strong business demand,” Southwest CEO Bob Jordan said at the event.

Delta President Glen Hauenstein expressed surprise with the comments of its ULCC competitors, while maintaining a generally bullish outlook for demand. It expects third quarter revenues to come in in the top half of its guidance of up 11-14% year-over-year, and total unit revenues (TRASM) down 2-3% rather than down 2-4%. 

Alaska Airlines lowered its third-quarter earnings guidance as well but still expects a healthy profit. Others have pointed to some modest demand weakening. But in general, the strong demand and revenue outlook enjoyed across the industry this spring and summer appears to persist, according to Alaska, Southwest, United, and others. American Airlines, for the record, lowered its third-quarter operating margin guidance to 4-5%, from a midpoint of 9%. Its unit revenue guidance worsened modestly.

— Jay Shabat

FAA Extends New York Slot Waivers to 2024

The Federal Aviation Administration late Friday extended slot usage waivers for the three main New York airports through October 2024. The move followed mounting calls from airlines, including JetBlue Airways, that argued the agency’s slow action to mitigate the impact of the air traffic controller shortage was hurting travelers.

The waiver allows airlines to idle 10% of their slots and runway timings — one is needed for either a takeoff or landing — at New York’s JFK and LaGuardia airports, and Newark through October 27, 2024. That is a full year past the current expiration of the slot waivers, which went into effect in May.

The move comes days after JetBlue CEO Robin Hayes last week called on the FAA to take action now rather than wait and potentially cause more travel disruptions like those at New York-area airports this summer. He noted that the agency has known for sometime that it is short roughly 3,000 air traffic controllers nationally. An early extension of the slot waivers, he said, would allow airlines to best plan for fewer flights by scheduling larger aircraft to New York.

“The system can’t cope with the number of flights today,” Hayes said. “We’re selling flights we know we won’t be able to operate because of ATC challenges.”

The FAA in March waived usage rules for 10% of flights at JFK, LaGuardia, and Newark this summer. The rules require airlines use 80% of their slots at any given time or risk losing them. Despite the waiver, flight delays and cancellations soared at the airports. United Airlines was beset with issues at Newark that rippled across the country in the weeks before the July Fourth holiday and prompted it to make deeper flight cuts at the airport in August. And airlines faced 30 straight days of air traffic control or weather-related capacity restrictions at JFK in June and July.

“Because of [the air traffic controller shortage], the same weather that, in the past, we could have managed through, it now can cause hundreds of delays, or even hundreds of cancellations,” United CEO Scott Kirby said last week.

The FAA waiver this summer was welcome by airlines but came “quite late,” Hayes said. It was issued just four days before the airline industry began its official summer schedule season on March 26. And an extension through the end of October was only issued on August 9 — again, very late in the airline scheduling process.

Airlines publish and begin selling flights as much as a year in advance. However, those schedules are fluid until about 90 days, or three months, out. The FAA’s initial waiver in March came just 66 days before the beginning of Memorial Day weekend, the unofficial start of summer travel in the U.S.

“We have to get ahead of this,” Hayes said.

The FAA is not entirely at fault for the situation. Its every-five-year reauthorization bill, which includes more funding for air traffic control staffing, is stalled in Congress. And the agency has been without a confirmed administrator since March 2022 when Steve Dickson left the post. President Biden nominated former deputy administrator and United executive Michael Whitaker for the job earlier in September after his first nominee, Denver airport head Phil Washington, withdrew in March.

Kirby, Hayes, and other industry leaders have called on the Senate to move quickly to confirm Whitaker to the FAA administrator job.

— Edward Russell

In Other News

• Representative Garret Graves (R-La.), chairman of the aviation subcommittee in the House, said last week that Congress is working on a continuing resolution to keep the U.S. Federal Aviation Administration funded past September 30. A broad reauthorization bill that the House passed early in the summer remains stalled in the Senate. Graves called for the passage of the House bill that does not include controversial issues like raising the airline pilot retirement age or adding new longer-distance flights at Washington’s Reagan National airport.
• The JetBlue chapter of the Air Line Pilots Association (ALPA) voted to back the airline’s proposed $3.8 billion merger with Spirit Airlines last week. They join the Association for Flight Attendants-CWA (AFA) in supporting the combination. Of note, ALPA’s chapter at Spirit has not endorsed the deal that has been challenged by federal antitrust regulators. A trial in the Department of Justice’s case against the merger is scheduled for October.
• TAP Air Portugal in October will seek proposals to finance three Airbus A320neos due next year. The airline said it prefers a Japanese operating lease with call option, or JOLCO, structure that allows it to finance the full capital costs of the planes and own the plane at the end of the term. TAP will consider other financing structures as well but, it told investors, that long-term it wants to reduce the percentage of its fleet that’s leased to around 50% from 70% today. TAP will mandate a financier in January. 
• The U.S. Federal Aviation Administration upgraded Mexico’s aviation safety rating to Category 1 last week. The move was long awaited by Mexican airlines that were barred from adding new transborder flights or partnering with U.S. airlines while the country had a Category 2 rating. Aeromexico, Viva Aerobus, and Volaris are all expected to resume U.S. growth in the fourth quarter.
• The European Parliament passed the EU’s final sustainable aviation fuel, or SAF, mandates last week. By 2025, 2% of all aviation fuel in the bloc must be low-emission SAF, that increases to 6% by 2030 and continues to step up to 70% by the middle of the century. In addition, synthetic fuels must make up 1.2% of SAF usage from 2030 and 35% by 2050. The mandates have been debated for several years but represent one of the first SAF requirements globally. Airlines, however, also want incentives — like those provided in the U.S. under the inflation reduction law — from European governments.
• The parent company of Canada’s Air Transat reported earnings for the period covering May, June, and July, all peak months for transatlantic travel. Demand was strong — strong enough, in fact, for the company to deliver its first quarterly net profit since before the pandemic. Air Transat continues to see “favorable market conditions” but “keeping an eye on certain factors that could impact our activities such as the higher price of fuel, unforeseen delays in aircraft deliveries and the continuing supply chain challenges.” CEO Annick Guerard added: “Pent-up demand is still unsatisfied and it will be for a couple of years. And with the supply-demand on balance, we think that yield could stay up for some years now from now.”

— Edward Russell and Jay Shabat

Fleet

Pratt GTF Engine Issues to Ground 600-650 Planes

The quality issues affecting Pratt & Whitney geared turbofan engines on Airbus A320neo-family aircraft will ground 600 to 650 aircraft globally next year, the latest setback to the airline industry’s recovery and growth from the pandemic. 

Executives at RTX, which owns P&W, said last week that an average of 350 A320neo-family planes will be grounded as geared turbofan engine inspections and repairs occur. The number is expected to peak at 600-650 aircraft in the first half of 2024, or about half of the global fleet of the 1,360 geared turbofan-equipped A320neos, Cirium fleet data shows.

To put it in perspective, the largest airline in the world, American, only has 925 mainline planes.

“We don’t like the situation but think it’s the right thing to do,” Airbus CEO Guillaume Faury said at the U.S. Chamber of Commerce Global Aerospace Summit in Washington, D.C., last week. He added that there will be “a lot of consequences on the [airline] industry.”

RTX first unveiled the production quality issues in geared turbofan engines in July. At the time, it said roughly 1,200 engines needed to be inspected within 12 months. The company has since determined that the quality issues affect some 3,000 engines with an estimated 600-700 likely needing repair. Aircraft will be grounded during repairs, which involves removing engines from the wings, and will take through 2026. The majority of inspections and repairs will occur next year. Repairs will take more than half a year, or 250-300 days.

“This will have significant impact on us, and any other A320neo operator,” Lufthansa Group CEO Carsten Spohr said at the U.S. Chamber summit Tuesday.

Lufthansa expects roughly 20 of its A320neos will be grounded — up from just three aircraft in July — at any given time through next year, he said. The airline will backfill that lost capacity by extending the lives of older A320ceo aircraft, as well as wet-leasing narrowbody planes from other airlines.

“There are less aircraft available in total than we were expecting,” Spohr said. “We were expecting to grow that by about double digit, and maybe it’s a little less.”

Not every airline is able to maintain its capacity outlook save a percentage point or two. European discounter Wizz Air, which operates an all-Airbus narrowbody fleet, on Monday cut its capacity growth forecast by 10 percentage points for the six months ending next March.

Frontier Airlines, Hawaiian Airlines, JetBlue, IndiGo, and Spirit Airlines all previously said the geared turbofan engine inspections would affect them this year and next. They have not provided new guidance following RTX’s update.

Fitch Ratings on Tuesday described the situation as “material” for Spirit, which operated 80 A320neo-family aircraft at the end of June, in the September quarter. The rating agency expects the issues for Spirit to continue into 2024.

— Edward Russell

Fleet Briefs

• Boeing racked up more orders for its 737 Max family last week. Vietnam Airlines ordered 50 firm 737-8s, and lessor SMBC Aviation Capital another 25 737-8s. Neither outlined a delivery timeline, but Vietnam Airlines said the planes were part of its 2025-2030 fleet plan. The deal for SMBC brings its total commitments for the 737 Max family to 81 aircraft.
• CDB Aviation has placed three Airbus A321neos at KLM. The aircraft are scheduled for delivery from September through November 2024. KLM, and its Transavia budget subsidiary, have 41 A321neos on order with the first nine due in 2024. The leased aircraft are in addition to the airline’s own orderbook.
• Spirit AeroSystems, speaking at an investor event hosted by Jeffries, gave an update on production challenges. The Kansas-based airframe builder, a major supplier to Airbus and especially Boeing, said for one that labor issues persist. “We’ve got the gross numbers now in place, but we’re still seeing a fair amount of attrition, especially amongst newer employees,” according to CEO Tom Gentile. “And it’s also taking these new employees longer to get up to speed. We laid off 8,500 people in Wichita alone during the pandemic. A lot of those were older, more senior experienced workers who took voluntary retirement packages. And the new workers that are replacing them are taking a little bit longer to get up to speed.” Regarding the supply chain, Gentile said it’s “still stressed.” Some of its own suppliers, he explains, are facing financial pressures. Shortages of some raw materials are an issue as well. “It’s getting a little bit better, but it’s still a pinch point as we go up in rates … And so I would say right now, those are the two big issues that we’re focused on is labor and supply chain.” By rates, Spirit is referring to monthly aircraft production output; Boeing for its part is aiming to increase production of its 737s and 787s.

— Edward Russell & Jay Shabat

Routes and Networks

• The Lufthansa Group unveiled a big expansion to North America last week. Lufthansa will add Minneapolis-St. Paul and Raleigh-Durham to its network with nonstops from Frankfurt in June, and link Munich and Seattle-Tacoma next summer. Swiss Air will add Toronto and Washington Dulles to its map with flights from Zürich on Airbus A330s. The new routes, plus frequency additions elsewhere, will see group seats across the North Atlantic up 16% year-over-year, CEO Carsten Spohr said. Travel demand, he added, remains robust in what is Lufthansa’s most important longhaul market. Separately, Swiss will add service to Cluj-Napoca, Romania, and Košice, Slovakia, from Zurich next summer. Both routes will operate thrice weekly with Airbus A220s. 
• Is air service starting to return to smaller cities in the U.S. after the double whammy of Covid and the pilot shortage? Maybe. Delta will return to Santa Barbara, Calif., which it suspended in July 2020, with a daily flight from Atlanta and twice-daily flights from Salt Lake City on June 7. Delta will also add a new daily Atlanta-Fresno nonstop in June, and twice-daily Seattle-Dallas-Fort Worth flight in July. 
• Route tidbits: Singapore Airlines will add Brussels to its European map next year. The Star Alliance carrier will connect its namesake base to the Belgian and EU capital four-times weekly with an Airbus A350-900 from April 5. Taiwanese startup Starlux will add San Francisco to its map with thrice-weekly flights from Taipei beginning December 16. The airline already serves Los Angeles. Southwest will launch a new five-times weekly Washington Dulles-Phoenix nonstop on April 9.

— Edward Russell

Landing Strip

Washington Dulles Fastest Growing U.S. Gateway

Travelers riding the mobile lounge between the main terminal and one of Washington Dulles airport’s concourses this summer got a who’s who of global airlines. A growing number of them have opted to add Washington, D.C.,’s main international gateway to their maps.

Swiss Air is the latest to announce new flights to Dulles from its Zürich hub beginning next March. The airline joins Iberia, Kuwait Airways, Norse Atlantic Airways, Play Airlines, and WestJet among new additions at Dulles since the pandemic hit in early 2020.

The airport will see 2,328 more international flights this year than it did in 2019, according to Cirium Diio schedules. That’s the most of any U.S. airport, with Austin and New York JFK runners up. Dulles falls to second after Dallas-Fort Worth when looking at international airline seats; however, most of the latter’s growth is driven by one carrier — American — whereas Dulles benefitted from flights on five new airlines. (Swiss will be Dulles’ sixth new addition).

“Travel demand is back,” said Paul Bobson, vice president of airline business development at Dulles operator the Metropolitan Washington Airports Authority (MWAA), in June. “And there is high demand to visit the capital city, and the greater national capital region.”

Bobson joked that maybe people are visiting the region to see the panda’s Smithsonian’s National Zoo.

Dulles added four new airlines between April and June alone: ITA Airways from Rome Fiumicino — ITA is the successor to former Italian carrier Alitalia that did serve Washington in 2019 — Norse from London Gatwick, Play from Reykjavík, and WestJet from Calgary. Calgary and Gatwick were entirely new routes from Washington; though United, after WestJet announced its plans, also added a new Calgary nonstop this summer.

The international additions have offset the loss of domestic traffic at Dulles. From January through May, international passenger numbers were up 7% from 2019 levels to 3.2 million, MWAA data show. Domestic numbers were down 3% to 6 million. Overall traffic was flat at 9.2 million.

The international boom at Dulles has not come without drawbacks. Waits to clear customs have gotten longer at peak times to the degree that MWAA’s board of directors has raised questions at recent board meetings. And international arrivals-capable gates are in scarce supply at peak times as well.

The additions at Dulles come amid boom times over the North Atlantic. Carriers, from Air France-KLM to American and the Lufthansa Group, have all reported historically strong demand for transatlantic flights. Part of that is believed to be pent-up demand from the pandemic as travel restrictions between Europe and the U.S. only fully eased last year. But part of why these flights were so lucrative for airlines was that there was less capacity in the market this summer than four years ago.

But to date, Dulles is undoubtedly an international flight winner from the pandemic. So much so, pandemic startup Play selected the airport as its fourth U.S. destination despite already serving Baltimore-Washington airport, which is about the same distance northeast of downtown D.C. as Dulles is west of the city. Not even New York gained a second gateway from the airline.

In addition to the new Swiss route, Lufthansa will upgauge some of its Munich-Dulles flights to a superjumbo Airbus A380 from an Airbus A340-600 next summer, Spohr said.

— Edward Russell

Feature Story

Air Arabia Tops the Latest Airline Weekly Profit Ranking

Put it in the books. Second quarter airline earnings season is now finished. And overall, it was a period worth celebrating. Based on an Airline Weekly analysis of 68 passenger-focused airlines that disclosed their financial results for the April-to-June quarter, all but seven earned an operating profit. Collectively, these 68 carriers delivered a 12.5% operating margin — that’s impressive for the global airline industry — on roughly $161 billion in total revenues.

Our ranking includes most major airlines across the globe, with some notable exceptions. A few big ones like Emirates, Cathay Pacific, Qantas, and Air New Zealand report only semiannually, not quarterly. Others like Virgin Atlantic, Aeromexico, WestJet, ITA, LOT Polish, Qatar Airways, Saudia, FlyDubai, and Etihad generally don’t publish quarterly financial statements, either because they’re privately- or government-held. In general, if it’s an airline that doesn’t report quarterly, they’re not on our list.

Of the 68 we did track last quarter, none earned a higher operating margin than Air Arabia. The Gulf-based LCC, headquartered in Sharjah near Dubai, managed an extraordinarily high 27% margin, fueled by many of the same tailwinds that lifted the entire global airline industry this year. These include a resurgence in travel demand as the Covid pandemic faded, a sharp decline in fuel prices following a big spike in 2022, cost cutting efforts undertaken during the pandemic, and aircraft production bottlenecks (and other supply-side obstacles) that restrained competitive capacity growth. In Air Arabia’s case, it also benefited from the Russia-Ukraine war, which diverted many Russian travelers and tourists away from Europe and to airports and beaches in the Middle East. Turkey’s airlines got a boost from this Russian diversion too — note how well Istanbul-based Pegasus Airlines performed. So did airlines in Thailand, a popular tourist spot for Russians.

Remarkably, Thai Airways took the prize for highest second-quarter operating margin of any non-low-cost carrier; or alternatively, any carrier that operates widebodies. The Russian bump explains just a small part of its remarkable turnaround, which owes more to its heavy restructuring while in bankruptcy. For many airlines across the world, 2023 has been a year of unit cost inflation — non-fuel cost inflation, anyway. But not for Thai, which grew capacity, measured in ASKs, 47% year-over-year during the quarter but saw non-fuel operating costs increase just 34%. The story was similar for neighboring Philippine Airlines, which also underwent a bankruptcy restructuring. Singapore Airlines, certainly not near bankruptcy, nevertheless achieved extraordinarily strong profits thanks to extraordinarily strong demand.

It was a good quarter for East Asian airlines more generally, with many markets in the region having only reopened in late 2022. China was an exception, having reopened early this year, and still subject to ongoing restraints on international travel (i.e., to North America and Europe, where only a small fraction of pre-pandemic flight capacity has returned). A few domestic-oriented Chinese airlines are now decently profitable. But Air China and China Eastern, both with extensive international networks, remain in the red.

Joining them in the lossmaking column are carriers like Hawaiian Airlines, which is still waiting for Japanese tourists to return (and experiencing costly operational frustrations), and Norse Atlantic, whose losses are not atypical for a startup airline still ramping up. AirAsia is a unique case given its complex accounting and many non-airline businesses — its core airline properties likely did earn a profit.

Back on the winning side were longtime profit champions like Panama’s Copa, Europe’s Ryanair, and America’s Allegiant. The muscular results at IndiGo underscore the rise of India’s fast-growing airline sector. Among truly global airlines, second quarter’s profit prize goes to Delta.

By all accounts, the third quarter will be another good one for most airlines, especially those plying well-traveled intercontinental markets like those connecting North America and Europe. On the other hand, fuel prices have reversed course again, prompting several carriers to warn investors that margins might not be quite as rosy as expected. The U.S. dollar has gained strength versus many currencies again, which can cause major cost headaches for non-U.S. airlines. Some markets like Florida and the Caribbean seem to be getting more price competitive. Supply-side barriers to expansion, however helpful in the aggregate, are still frustrating management teams across the industry (the latest Pratt &Whitney engine announcement appears especially disruptive). Regulatory headaches are top of mind as well for airlines like Korean Air, IAG, and JetBlue, all fighting resistance to planned acquisitions (of Asiana, Air Europa, and Spirit, respectively). Another uncertainty is whether business traffic volumes will ever return to pre-pandemic norms. Will leisure travelers continue to buy premium seats? Will Chinese outbound demand recover? What direction will the global economy take?

The questions and uncertainties are always many in the unforgiving global airline industry. But things were happily a little more forgiving in the second quarter of 2023. Will the good times last? We’ll know more soon enough—we’re now just a month or so away from the start of third quarter earnings season!

— Jay Shabat