Pushing Back: Inside the Issue
Not enough excitement in your life? Try following the airline business. Last week featured a frenzy of activity, from the start of JetBlue’s merger trial to Virgin Atlantic’s retreat from Austin… a signal of excessive post-pandemic expansion zeal? Air Canada, United, American, Icelandair, and others are nevertheless adding more transatlantic routes. Korean Air still wants to merge with Asiana. And many of the globe’s largest and most influential airlines reported their third quarter earnings.
It was in general a very good summer, more so for non-U.S. carriers who generally aren’t seeing as much labor cost inflation (yet), nor as much of a supply-demand imbalance on shorthaul leisure markets (i.e., Las Vegas and Florida). Lufthansa, though it fared well, is surely disappointed that its third-quarter operating margin was the worst among Europe’s Big Three. Heavier cargo exposure is one reason why. But more troublingly, the core Lufthansa-branded airline is lagging. Swiss as usual was ultra-profitable. What’s happening at Austrian, Brussels, and Eurowings is pretty encouraging too, though their test will be avoiding heavy offpeak losses. Next up on Lufthansa’s agenda: Securing approval for its investment in Italy’s ITA.
Turkish Airlines continues to stun the industry with both its growth and profitability. If you thought Bryan Adams was wistful for the Summer of ’69, imagine the song Turkish will one day write about the summer of ’23. The chorus: We earned a 25% operating margin. Believe it or not, so did Norwegian, whose post-bankruptcy revival is becoming more and more convincing. Perhaps its theme song should be Bonnie Tyler’s “Turn Around.”
Every now and then, America’s ultra-LCCs get a little bit nervous that the best of all the years have gone by. Allegiant, however, despite a lackluster summer, insists that it’s not like all those other ULCCs (looking at you Spirit and Frontier). It’s got a different scheduling approach, a different competitive landscape, a different reliance on growth … We are unique, the carrier argues. Allegiant, remember, did have a great second quarter.
How about JetBlue, which is more of a premium LCC? The extra legroom and free snacks didn’t help much in the third quarter — not with JetBlue’s exposure to Florida, to geared turbofan engine woes, to rising costs, to operational disorder, and to numerous other maladies. All of this, as Bryan Adams might say, cuts like a knife. So, does JetBlue need Spirit more than ever? Or is it having buyer’s remorse?
Nothing remorseful about Air Canada’s blowout summertime profits. Same for profits at IndiGo, whose operating margin also topped 20% despite the calendar third quarter being an offpeak period in India. IndiGo also suffers major geared turbofan engine headaches, with more than 40 of its A320neo-family jets currently out of service. That’s not curtailing its ultra-bullish growth, however, as it seeks to capitalize on India’s high-potential economy. Just as Air Canada made international flying a staple of its grand strategy, IndiGo has its eyes gazing firmly abroad (though just with narrowbodies for now).
Now more than ever since its big merger more than a decade ago, Latam finds itself in a strong position, one year now removed from its bankruptcy exit. Japan’s Big Two are performing well, in part by carrying traffic into and out of China via Tokyo. Chinese carriers themselves had a fantastic summer, especially the country’s smaller domestic-focused airlines. Shanghai’s Spring Airlines, an LCC, had the best third quarter of any airline in the world that’s reported so far: a 29% operating margin! How do you say “killer quarter” in Chinese?
How do you say not enough transparency? Qatar Airways said in a press release, without any financial statements, that it earned a 9% net margin in the October-to-March half. Low-cost longhaul specialist Norse Atlantic earned just a 5% operating margin for the peak summer. That’s not a terribly large stockpile of profits to get it through the cold and dark Nordic winter. On a sunnier note, the global travel distributor Sabre cited “reasons to be optimistic” about managed corporate travel activity, based on what it sees from bookings.
Still not excited? In Fort Worth, Texas, last week, the airline stars were big and bright, shining new light on industry trends and developments. In a single-day event hosted by Skift, C-suite executives from American, United, Southwest, Sun Country, Viva Aerobus, Norse Atlantic, JetBlue Travel Products, Dallas-Fort Worth Airport, Air Lease, Airbus Americas, and ATPCO all shared their thoughts. Other top execs came from Delta, Alaska, Boeing, IATA, and so on. Southwest, for one, made news by revealing its interest in serving DFW airport. Did you ever think you’d live to see the day?
Airline Weekly Lounge Podcast
American Airlines CEO Robert Isom joined Edward Russell on stage at the Skift Aviation Forum. Enjoy their wide-ranging discussion from the year-end holiday outlook to international growth and boosting loyalty revenues.
Weekly Skies
Lufthansa Argues Why Overcapacity is Not Coming to Europe
The Lufthansa Group reported a €1.5 billion ($1.6 billion) adjusted operating profit and 14.3% adjusted operating margin — both improvements over last year — during the third quarter. Unit revenues were up 2.7% year-over-year, and an impressive 21.2% compared to 2019. Unit costs excluding fuel fell nearly 1% compared to last summer.
But it’s one thing to turn a mega-profit during the summer, when travel demand to and within Europe peaks. It’s another to maintain profits during the slower winter.
“Our flights are well booked,” Group CEO Carsten Spohr said last week. He added that the booking outlook was “positive” for the fourth quarter; Lufthansa has little visibility of demand beyond 90 days.
But Spohr is unconcerned about next year. The airline industry’s supply-side bottlenecks, including new aircraft delays, engine issues, and air traffic control constraints, make “overcapacity very unlikely in the next years to come,” he said. For example, Boeing’s new 777X that Lufthansa has ordered was supposed to begin arriving in 2020; the planemaker now does not anticipate handing over the first plane before 2025.
Issues with Pratt & Whitney geared turbofan engines will also limit airline capacity next year. Lufthansa anticipates an average of 20 of its Airbus A320neo planes will be parked on any given day for engine inspections in 2024. Those groundings will not affect capacity growth for the group, Spohr said. Other airlines are not so lucky; fast-growing discounter Wizz Air has been forced to significantly dial back its expansion plans.
And in Europe, air traffic control staffing remains an issue in certain markets, including Germany. That limits the number of flights airlines can operate, especially during weather. In addition, the Dutch government is pushing to cut flights at Amsterdam’s Schiphol airport, further constraining airline capacity on the continent.
“Demand will still be greater than our capacity in the coming year and enabling us to enforce good prices,” Spohr said.
The group’s new subsidiary, Lufthansa City, is its latest effort to add seats at a lower cost on flights from Frankfurt and Munich. Spohr indicated as much Thursday when he cited a cap of 95 seats on planes operated by existing regional subsidiary Lufthansa Cityline among the reasons for creating City.
Take, for example, the Frankfurt-Ljubljana route that Lufthansa serves twice daily with Cityline Bombardier CRJ900s with 90 seats, according to Cirium Diio schedules. The group could replace those with a 138-seat City-operated Airbus A319 — a 53% increase in seats — and efficiently feed more passengers onto Lufthansa’s many longhaul flights.
Why not just use Lufthansa mainline to replace Cityline? Costs. Spohr said the group will save €1-2 million per aircraft per year with City compared to Lufthansa mainline.
Union negotiations on the new subsidiary have yet to begin.
On ITA Airways, which Lufthansa has agreed to take an initial 41% stake in before taking full control of the Italian carrier, talks are underway with European competition authorities to secure approval. Those talks include agreeing to airport slot or gate divestitures that the group would make in exchange for antitrust approval. For example, Lufthansa or ITA could be asked to give up slots at Milan’s sought-after Linate airport.
Questioned whether the group was asked to give up slots in Frankfurt and Munich — its main hubs — Spohr declined to comment citing the ongoing talks with European authorities.
Spohr also said it was “too early to comment” on whether Lufthansa would make a bid for TAP Air Portugal. He did acknowledge the group’s interest, though.
Lufthansa plans to fly roughly 95% of its 2019 capacity next year, Group Chief Financial Officer Remco Steenbergen said. That represents a double-digit increase from roughly 85% this year.
The growth will include new transatlantic destinations Minneapolis-St. Paul and Raleigh-Durham, and increased service to cities like Washington, D.C.
Corporate travel demand remains significantly below pre-pandemic levels. Volumes continue to hover around 60% of 2019 levels; revenues are higher thanks to strong yields. Steenbergen said Lufthansa expects corporate travel volumes to recover to roughly 65% of four years ago this winter, and to roughly 70% next year.
However, given the supply constraints, Lufthansa does not expect any “substantial deterioration in unit revenues going forward.”
The group forecasts an at least 8% adjusted operating margin in 2024.
A Fantastic Summer for Air Canada
Unlike its U.S. peers, all of which are posting lower margins today than in 2019, Air Canada saw its third-quarter operating margin excluding items jump to 22%. That’s rarified territory only few airlines will ever reach, albeit representative of just summertime strength — the true test is how Canadian markets fare when the snow starts falling. A year ago, Air Canada’s third-quarter operating margin was just 12%. Four years ago, it was just 17%. Something, clearly, is going right for Air Canada.
Most importantly, demand is red hot, with pent-up travel cravings still fresh — Canada was later to remove Covid travel restrictions than the U.S. As its partner United described, intercontinental demand is especially strong, as is premium demand. But more broadly, “this strength was across all markets for both leisure and business customers.” Newly-launched intercontinental routes like Vancouver-Dubai and Vancouver-Singapore look promising. Air Canada Vacations delivered a “solid contribution.” Aeroplan membership continues to grow as the program delivers significant profits. Boeing 787-10s are on the way starting in 2025. Ditto for Airbus A321XLRs. More A220s are coming too, promising better economics on domestic and U.S. transborder routes. Air Canada, meanwhile, sees “a lot more recovery left on the Pacific,” which includes the still-depressed Chinese market.
To be sure, labor costs are one reason for Air Canada’s better relative performance versus U.S. peers. United, for example, saw its third-quarter labor costs spike 38% year-over-year, even as headcount increased just 12%. Air Canada’s third-quarter labor costs, by contrast, rose 17% on a 13% increase in headcount. But labor inflation is coming, not least with pilots now negotiating for a new contract (their previous one expired in September).
“As we look beyond 2023, we do anticipate some continuing cost pressures from an evolving regulatory environment, updated airport rates and charges, as well as the potential impact of a pilot agreement renewal.”
ANA and JAL See Strong Summer Demand
All Nippon (ANA) and its somewhat smaller rival Japan Airlines (JAL) reported third-quarter operating margins of 16% and 13%, respectively. JAL, remember, was consistently the more profitable of the two during the 2010s, benefitting from its bankruptcy restructuring early in the decade. ANA, however, is emerging as the stronger airline in the 2020s so far.
Both airlines enjoyed strong demand last quarter. ANA is “seeing an upturn in consumer spending, as corporate earnings and [the] employment environment continue to improve.” It said international and domestic routes both performed well thanks to strong leisure demand. JAL is seeing this as well, driven by strong inbound arrivals (aided by a weak Japanese yen) and the use of Tokyo as a connecting point between North America and China (many North American-China nonstops have disappeared since the pandemic). Outbound Japanese demand, slower to recover in part due to a weak yen, has started to improve, prompting more flights to the key market of Hawaii, for example. ANA says demand is strong for Peach, its low-cost airline, especially during peak holiday periods.
In the quarters ahead, ANA group-wide sees business traffic recovering to about 70% of its pre-Covid volumes, having previously anticipated the figure to be more like 80%. But leisure traffic is running ahead of 2019 levels and ahead of previous forecasts. ANA also sees Chinese travelers gradually returning. Unfortunately, it’s regrettably scaling back some of its plans to take advantage of recovering markets like China, due to exposure to the Pratt & Whitney engine issue. ANA meanwhile is proceeding with plans to launch a new airline called Air Japan, targeting budget travelers on longer routes. Other highlights include introducing 787-10s on domestic markets and adding a third A380 to Hawaii.
As for JAL, it’s expanding its longhaul LCC Zip Air and its domestic LCC Spring Air Japan (it also owns a third of the LCC Jetstar Japan). JAL is now expecting its fiscal year that ends in March to be more profitable than anticipated, thanks to stronger-than-expected international revenues and lower-than-expected fuel costs. Still, for both ANA and JAL, the weak yen presents cost concerns, to go along with other concerns like the loss of Russian airspace access. In JAL’s case, Hawaii was a big part of its success during the 2010s but, as Hawaiian Airlines has made clear, that market isn’t performing like it once was.
Turkish Profits and Growth Continue
Turkish Airlines continues to wow the global airline industry, not just with its growth but with its profits. During the peak summer quarter (July-to-September), the company posted a breathtaking 25% operating margin, well ahead of even IAG’s spectacular 20% figure. No less breathtaking are all the new longhaul routes it’s still adding, supported by all the connecting traffic cultivated through its Istanbul hub. Detroit and Osaka are two upcoming routes, fittingly given the extreme strength Turkish currently sees for both transatlantic and Asian routes.
“We want to add like nine, 10 new destinations in the Americas, another 10 to 15 destinations in the Far East,” said an executive. That’s to speak nothing of new Australia flights launching next year.
Inbound tourist demand to Turkey was red hot this summer. What it calls “ethnic markets” (Turkish families living abroad in Germany, the UK, etc.) were strong. Business class demand was strong. And so on. Turkish, interestingly, finds itself with a portfolio of subsidiaries gaining value in their own right, creating opportunities for potential divestitures or partial public share offerings. These include its cargo, maintenance, and Anadolujet units. Regarding Anadolujet, expect a new brand unveiling soon. In the meantime, Turkish is becoming very eager to develop new airline partnerships. It’s now working with Thai Airways, IndiGo, and China Eastern, for example. And it seeks partners in the Far East and the Americas. “We have a strong appetite to grow our engagements with other airlines … such collaborative efforts are very valuable.”
For now, forward bookings still look good despite the airline’s exposure to the Middle East and the recent unrest there. This is affecting some connecting flows though, from markets like Tel Aviv, Amman, and Beirut. Management says it’s working to offset the impact by generating more sales from India (a market where its access is restricted) and eastern Europe. Russia, meanwhile, has been a lucrative market since the start of the Ukraine war, when many western European hubs stopped handling Russian traffic. Africa has been a tougher market this year due to foreign exchange, visa, and competitive issues.
Turkish does have exposure to the Pratt engine problems, which could force it to ground as many as 40 planes next year. “However, we have been trying to fill that gap up with operating leases … So, the net impact of this grounding will be quite limited in terms of new capacity put in the markets.” Turkish plans to grow capacity, measured in available seat kilometers, almost 20% year-over-year this quarter, and in the high single digits in 2024.
On the cost front, upcoming negotiations with labor unions will surely be inflationary. But on fuel, the airline says it has a lot of pricing power to pass any additional costs onto passengers. Will Turkish place the giant aircraft order everyone’s been talking about? It’s still interested in buying new planes for its longterm needs, but “none of the OEMs are in a position to help us fill in the aircraft needs for the short terms [so] we decided to move more aggressively with the leasing companies.”
Routes and Networks
Virgin, KLM, JetBlue, and Spirit Cut Routes
We’ve written much about all the new routes airlines are planning for next year but now the cuts are beginning to come in. The most significant so far is Virgin Atlantic’s decision to exit Austin, the booming Texas city it only added to its map in 2022. The airline, which is partially owned by Delta, cited soft corporate demand “specifically the tech sector.” Virgin Atlantic will operate its last flight to Austin on January 7. And KLM is ending service to Liberia, Costa Rica, that was to resume in December due to operational limits at the Liberia airport.
In the U.S., JetBlue continues to cut its map following the end of the Northeast Alliance with American. The carrier will end service to Burlington, Vt. — a destination it has served from New York JFK since 2000 — in January; it’s among seven route exits early next year. New York LaGuardia flights to Charleston, S.C., Denver, and Nashville will end in January and March as JetBlue returns slots leased from American under the alliance. And, due to what a spokesperson said are reductions under the New York-area air traffic control slot waiver, JetBlue will end flights from JFK to Washington National (plus Burlington), Newark to Miami, and Boston to Rochester in January.
And Spirit, hit hard by declining yields and the Pratt & Whitney geared turbofan engine issues, will end service to Denver in January. Denver, despite being the third busiest airport in the U.S. and a fast growing market, is not a big Spirit market. The discounter only serves the Mile High City with four daily flights from Fort Lauderdale, Las Vegas, and Miami, per Cirium Diio.
Route Briefs
- Southwest hinted at the Skift Aviation Forum last week of future plans to serve Dallas-Fort Worth airport. CEO Bob Jordan said the airline was considering a “modest presence” at DFW after restrictions agreed to when the Wright Amendment was repealed expire in 2025. No word on what routes Southwest will fly but Chief Operating Officer Andrew Watterson indicated that they would be to existing destinations on the airline’s map — we’d bet those include Baltimore-Washington, Chicago Midway, Denver, and other large Southwest bases.
- Route tidbits: Air Canada will add Stockholm Arlanda to its map next summer with nonstops from both Montreal and Toronto from June through the end of October. It will operate Boeing 787s on both routes. Icelandair will add Pittsburgh to its transatlantic map with four weekly flights next summer from May through October. Uzbekistan Airways has added new twice weekly flights between Tashkent and Munich on an Airbus A320neo.
Landing Strip
Airlines are warily watching the situation at Amsterdam’s Schiphol Airport where a caretaker Dutch government is pushing through a dramatic cut in the number of flights. Airport officials are working hard to provide the industry with clarity on just what the cuts, which could still be reversed, mean as airlines plan their schedules for next summer.
“We’re trying to explain what’s going on, [and] provide perspective,” Schiphol Head of Aviation Partnerships Joery Strijtveen said at the Routes World conference in Istanbul in October.
And Strijtveen was in the right place to set the record straight. Routes is the annual gathering of airports and airline network planners where they meet to talk about, you guessed it, routes. This allowed airport officials to sit down with many of their airline partners and explain the situation behind the public statements and capacity declaration by Schiphol slot coordinator, Airport Coordination Netherlands (ACNL).
The number of aircraft movements at Schiphol is set to be capped at 280,645 next summer season, which runs from the end of March through the end of October for airlines, according to ACNL. That represents a nearly 8% cut from the summer of 2019, part of an effort by the Dutch government to reduce noise pollution in the neighborhoods around the airport. The aim is to reduce movements to 460,000 annually from 500,000 before the pandemic.
But an 8% reduction may just be the beginning. The Dutch government has said it eventually wants to cut movements by 12%, or to 440,000 annually.
Put another way, Schiphol would have fewer annual flights than the physically smaller London Heathrow. Heathrow, which has two runways to Schiphol’s six (only five are capable of handling large passenger aircraft), handled nearly 476,000 aircraft movements in 2019. The difference is that London is a much larger and more lucrative market for airlines than Amsterdam, which has made its name as one of the leading connecting hubs in Europe.
The most affected is KLM, which will operate 55% of flights at Schiphol this year, according to Cirium Diio schedule data. EasyJet is the second largest at the airport with an 8% share of flights followed by Transavia, the budget subsidiary of Air France-KLM, with a 7% share.
But the issue of flights at Schiphol is more than just a government priority. It is a political issue championed by the governing party, the center-right People’s Party for Freedom and Democracy which has been in power since 2010, as the Netherlands prepares for a general election on November 22. Pushing through the Schiphol reductions now, weeks before the election, could be read as part of the ruling party’s politicking for votes.
Airlines have already mounted legal challenges but a decision is not expected until sometime next year — months after the general election.
Hometown Opposition
KLM is vocally opposed to cutting flights. CEO Marjan Rintel has repeatedly called for a “balanced approach” to reduce noise that would focus on things like pushing airlines to fly newer, quieter planes, changing flight paths to avoid dense neighborhoods, and reducing night flights. Cutting the overall number of movements, she has said, should only be a last resort.
At Routes, Airports Council International (ACI) Europe Director General Olivier Jankovec said he was “extremely concerned” about the Dutch government’s planned flight reductions at Schiphol. He described it as “policy greenwashing” that would do more harm than good.
The cuts for next summer are not — at least not yet — permanent. The Dutch government plans to implement them under an “experimental” regulation or scheme, which is a process by which it can implement a policy for a temporary period to measure its effectiveness. That experimental regulation, according to the government, follows about a decade of government policy, but no official legislation, to cap flights — and reduce noise — at Schiphol.
In other words, the Dutch government believes it is within its rights to cut flights at the airport. For one, the Ministry of Infrastructure and Water Management noted in a September report to the European Commission that the current cap of 500,000 annual aircraft movements was set in 2016 by a consultative body and not set in law.
Not everyone agrees with the government’s point of view or its use of an experimental regulation. KLM and other airlines have taken the government back to court in an attempt to block the flight reductions. An airline spokesperson said that they “believe that the experimental scheme should not be used in this way.”
The case is expected to go in front of the Dutch Supreme Court in December or January, with a decision in the first half of next year.
KLM and other airlines in April won their first suit against the cuts at Schiphol but then, in July, lost after the government successfully appealed the ruling.
JetBlue’s Claim
JetBlue, which only began flights to Schiphol this summer, is pushing the U.S. Department of Transportation to get involved. It has argued in multiple filings with the regulator since September that the Dutch government’s cuts in Amsterdam violate certain aspects of the U.S.-European Union open-skies agreement, and that the use of an experimental regulation is “illegal.” However, the airline acknowledged in June that it was beginning Schiphol flights with “non-historic” slots that gave it “no claim” on flight slots in future seasons.
The New York-based airline has gone so far as to call for the “suspension of all KLM services” to New York’s JFK airport. It cited the rules governing KLM’s immunized joint venture with Delta under the open-skies agreement as its rationale for the penalty. At a minimum, JetBlue wants the DOT to mandate that KLM transfer it at least two Schiphol slot pairs for flights next summer.
The U.S. has opened a new regulatory proceeding on the issue of Schiphol access. However, as pointed out in earlier filings by the government of the Netherlands and the European Commission, the U.S.-EU open-skies agreement only guarantees market access and not airport slots.
“In open skies, it’s every man for themselves,” said one industry player who has worked on numerous open skies agreements on acquiring airport slots.
One example frequently cited is Heathrow. The U.S.-EU open-skies agreement opened the airport to all U.S. airlines. Carriers that lacked access to Heathrow quickly added flights by acquiring slots on their own — and at great expense — on the secondary market. The Dutch government, however, does not allow secondary market sales of Schiphol slots.
The Better Tough Option
“If the [ministry] was not doing what they are doing now with this temporary arrangement, people living around the airport could go to court [and] we might end up with an even more stricter number than the 460,000, 440,000 [movements] that the government is saying,” Schiphol Airline Partnerships Manager Wilco Sweijen said at Routes. “There were even talks of under 400,000. That would hurt the industry even harder.”
Airlines with historical slot portfolios at Schiphol, in other words, a right to future slots at the airport, must reduce their schedules by 3-4%, he said. The slot coordinator, ACNL, is working with airlines to determine the best solution for them.
There are several ways airlines with historical Schiphol slots could make the necessary reductions. They could reduce weekly frequencies, for example suspending flights on Saturdays. Or they could shorten the period during which they fly, for example from April through September instead of March through October.
The “capacity declaration is what KLM will now base its planning on, as we believe it is important that our customers are not surprised by changes in our flight schedule,” a KLM spokesperson said.
Attendees at Routes indicated that KLM was not planning any significant longhaul expansion next summer, unlike many of its European peers.
Alternative Growth Opportunities
Fewer flights do not necessarily mean fewer seats. Air France-KLM has ordered 100 Airbus A320neos and A321neos for KLM and Transavia to replace older Boeing 737s. Many of these new planes will be larger than the ones they replace, which will allow for some growth even without additional flights. Similarly, KLM is in the process of renewing its shorthaul fleet of 100-seat Embraer E190s with 132-seat Embraer E195-E2s.
And EasyJet, when it unveiled plans to order another 147 A321neos earlier in October, said the planes with 235 seats would “provide EasyJet with the opportunity to continue to grow in slot-constrained airports.” The budget airline, the second largest at Schiphol, operates more than 99% of its flights at the airport today on Airbus A319 or A320 aircraft that have 156-186 seats, Cirium Diio data show.
Then there is always the option that airlines find new ways to serve Amsterdam. KLM CEO Rintel has highlighted the airline’s 2019 decision — the pandemic delayed implementation to 2022 — to replace one of its five daily Brussels flights with a train as a climate-friendly way to better use limited slots at Schiphol.
“We really need to promote going by train within 500 kilometers,” Rintel said last year.
However, the number of shorthaul routes under 500 kilometers (310 miles) that KLM could replace by time-competitive trains is limited. Only Brussels, Paris, and Dusseldorf are currently within a three-hour train journey from Amsterdam. Frankfurt and London are around a four-hour train ride from Amsterdam. However, most of these services require at least one transfer when traveling from Schiphol.
And then there is always the option of alternative airports. While this is not an alternative for KLM’s hub that depends on flight connectivity at Schiphol, it could be attractive to other airlines that serve Amsterdam as a spoke. The Rotterdam airport, for example, is only an hour’s drive or 40-minute train trip from central Amsterdam.
Fleet
- Korean Air has ordered another 20 of the popular Airbus A321neo. The commitment raises the airline’s firm orders for the plane to 42 plus eight already in its fleet. The A321neo operates on Korean Air’s short and medium-haul network to Southeast Asia, China, and Japan.
- Papua New Guniea’s Air Niugini has selected the Airbus A220 to renew its shorthaul fleet of Fokker narrowbodies. The airline ordered six A220-100s from the airframer, and plans to source another five A220s — three -300s and two -100s — from lessors. Air Niugini currently flies both F70s and F100s on shorthaul routes.
- And U.S. regional SkyWest Airlines ordered another 19 Embraer E175s for its operation with United. Deliveries begin in the fourth quarter and the planes will replace 19 older Bombardier CRJ700s that SkyWest flies for United. Airline Weekly understands that SkyWest will seek certification for the E175s to fly into the Aspen airport, which requires steep approaches and takeoffs due to nearby mountains. The regional airline estimates that it will fly 258 E-Jets when deliveries wrap in 2026.
Feature Story
Latam is Enjoying One of its Most Profitable Years Ever
It’s now been a full year since Latin America’s largest airline, Latam, exited bankruptcy. It deserves to celebrate.
From March 26, 2020, to November 3, 2022 — that’s almost three years — Latam was an unlikely guest of the U.S. court system, protected from creditors by America’s Chapter 11 bankruptcy laws. Known as one of the industry’s strongest airlines for decades, it had no other option after the Covid pandemic decimated its business virtually overnight. Without any significant aid from its host governments in South America, Latam used the court not just to stay alive but to also make itself stronger. Last week, the fruits of its court restructuring were on display, in the form of a 13% third quarter operating margin (excluding special items). During last year’s third quarter, while still in bankruptcy, Latam’s operating margin was just 2%.
More interestingly, Latam is performing better financially now than it was before the pandemic. That’s been the case for several quarters now, in which margins have exceeded those it registered in 2019. It’s now earned double-digit operating margins for three straight quarters, something it’s never before done since the merger of Chile’s LAN with Brazil’s TAM (announced in 2010 and competed in 2012).
You can see why it’s doing so well. During its court stay, Latam lowered its gross debt from roughly $10 billion to $7 billion, while slashing operating expenses by more than $1 billion. As a result, its non-fuel unit costs during the first half of 2023 were lower than they were in 2019, quite a contrast to what most airlines around the world have experienced. Its cost structure, furthermore, became less fixed and more variable (partly achieved through labor outsourcing). In addition, Latam attracted new financing. It closed its money-losing Argentine subsidiary while retaining operations in Brazil, Chile, Peru, Colombia, and Ecuador. It maintained investments in customer service, outfitting planes with wi-fi, for example, and opening new airport lounges. It shrank and simplified its fleet, flying just Airbus narrowbodies and Boeing widebodies (A350s are now gone). It reduced its headcount by about 12,000 people. And it retained equity and marketing ties to Qatar Airways and, most importantly, Delta.
To be clear, these restructuring efforts are not the only reason why Latam is performing so well financially this year. Demand, importantly, is “healthy,” especially on international routes, and even more so on intercontinental routes specifically. The Brazilian domestic market, which became a big source of profits after Avianca Brazil collapsed shortly before the pandemic, remains strong. Similarly in Colombia, several low-cost carriers collapsed, leaving Latam in a largely two-player battle with Avianca. Looking forward into 2024, demand remains positive, “with a solid booking curve.”
There are a few soft spots. Latam’s large cargo business, a blessing during the pandemic, is flying through a softer patch currently. Management, however, reminded investors that cargo is still stronger today than it was in 2019 (the business accounted for 11% of total revenues last quarter, down from 16% a year earlier). On the passenger side, Peru is a notable area of weakness due to political unrest. But the situation there has looked “better in the last two weeks.” Demand in Chile “has been wavering a little bit, but it’s also in a solid place.” Colombia’s traffic is down now that many stimulative fares have left the market, but that’s not a bad thing for profitability. For the record, Latam’s overall international capacity is still less than what it was in 2019.
Frankly, Latam’s results this year are better than even its own executives expected. In August, they revised the company’s full-year financial guidance, which previously forecasted an adjusted operating margin of between 6% and 8%. The expectation now is between 10% and 11%.
Latam does operate A320neo jets with Pratt & Whitney’s troubled geared turbofan engines. But required inspections of these engines, which have introduced severe operational disruptions for some airlines, shouldn’t be too much of a burden for Latam. The company, it said, expects “to be able to manage this without disrupting our capacity plans. Potential impacts may be mitigated by extending the use of several Ceo aircraft of the 319 and 320 family.” The airline, by the way, recently received its first A321neo, a plane that will further help it lower unit costs. In addition, it added some second-hand Boeing 787s previously operated by Norwegian. Overall, Latam’s fleet costs, thanks to advantageous deals it did in bankruptcy, should represent a significant competitive advantage during the next few years.
Another major competitive advantage: Its loyalty program, one of the world’s largest. Latam Pass currently has more than 42 million members. Regarding the Delta relationship, the two carriers received a green light last year to jointly plan capacity and fares. They’ve since introduced several new routes, including Latam-operated Sao Paulo-Los Angeles, Medellin-Miami, Orlando-Bogota, and Lima-Atlanta. Delta is operating new routes between Atlanta and Cartagena and between New York JFK and Rio de Janeiro. Delta currently owns a tenth of Latam’s shares (Qatar Airways also owns a tenth).
Latam, which served Tel Aviv from Sao Paulo until 2020, says it’s watching events in the Middle East for signs of any impacts on intercontinental demand (it hasn’t seen anything of significance yet). It’s of course closely watching political developments within South America as well, including the impact of the recent presidential election in Ecuador, where the drug trade has introduced alarming levels of violent crime. That’s even becoming increasingly true in Chile. Crime, both actual and feared, is a giant barrier to South America’s potential to attract tourists from other continents.
Looking at the current October-to-December quarter, Latam’s systemwide passenger capacity will be up 12% from the same period last year but still down 3% from 2019. Versus four years ago, Latam has grown its presence in Sao Paulo and especially Bogota but not in Lima and Santiago. Its capacity is down sharply in Rio de Janeiro and Brasilia. Capacity is up a lot to the U.S. but down a lot to Spain (its most important European market). The largest capacity reductions, unsurprisingly, have come from Argentina.
One upcoming question for Latam: When, if ever, will it become a publicly traded company again? “There is no certain time at this moment of a potential relisting,” Chief Financial Officer Ramiro Alfonsín Balza said during the company’s earnings call. But if it does decide to list through an IPO, it will surely have a good story to tell.
Latam CEO Roberto Alvo said the company is well positioned. “I think that Latam’s position today is really unique. Not only do we have, on an absolute basis, a very good capital structure, but also on a relative basis vis-a-vis the most important players that we compete with, we are in a privileged position. And this, in my view, allows us to take advantage of upside but also to be very close to opportunities that may arise in a downside scenario.” He added with confidence, “Latam is the owner of its own destiny.”
