Pushing Back: Inside the Issue
Where to begin? Boeing’s mounting woes? Another major airline bankruptcy? The latest in Q4 airline earnings?
It was a super-busy week in the airline universe. And frankly, most of the news was bad. Boeing is struggling to guarantee quality aircraft, so the FAA is forbidding expansion of its 737 production line. Gol can’t pay its bills, so it’s filed for bankruptcy. Southwest can’t get its earnings out of the basement. So, it’s reworking its network to reflect post-Covid demand trends.
In Europe, meanwhile, low-cost carriers can’t get a break. Fuel prices are down, but an otherwise healthy demand environment is marred by unrest in the Middle East. Wizz Air, a longtime profit champ now wallowing in losses, has the added frustration of a fleet plan upended by engine woes. For easyJet, the engines are fine. Wintertime losses seem manageable. Key Mideast markets like Egypt are recovering nicely. Package holiday sales are a hit. And demand for the upcoming spring and summer looks promising. Still, easyJet has yet to prove it can produce consistently strong full-year profits.
Elsewhere in Europe, competition regulators are evaluating both IAG’s planned takeover of Spain’s Air Europa and Lufthansa’s investment in Italy’s ITA. It’s also incidentally still reviewing Korean Air’s planned merger with local rival Asiana, which will impact the Europe-to-Asia market. As for Gol’s travails in South America, financial burdens proved too onerous to address without legal protection from creditors, hence a Chapter 11 bankruptcy filing in New York. Gol joins Latam, Aeromexico, and its own sister airline Avianca in turning to bankruptcy for financial salvation. Holders of bonds issued by Abra, the parent company of Gol and Avianca, agreed to provide Gol with $950m to operate while restructuring. As a reminder, Gol has generated solid operating profits in recent quarters, just not enough cash to pay its many bondholders, aircraft lessors, and other creditors.
Boeing is a major Gol creditor. But really, it wasn’t all bad news for the embattled U.S. plane manufacturer last week. Max 9s are headed back to service after a safety review, and Chinese airlines, after a long pause, are importing new Maxs again.
In U.S. earnings news, United fell short of Delta (again) in terms of operating margin, while American fell short (again) of United. Southwest and Alaska both fell short of American but for different reasons. Alaska gets a pass given the much higher fuel prices it was forced to pay on the west coast. Southwest, by contrast, is undergoing a major network transition that isn’t yet bearing fruit.
Be ready for more earnings this week. Ryanair’s discussion will be interesting, as always. Same for that of JetBlue, which will share its thoughts on life after Spirit. Boeing, too, will report its results.
Airline Weekly Lounge Podcast
As earnings season continues to gather momentum, this week we examine the fortunes of United Airlines and easyJet. In this specially extended episode, Gordon Smith and Jay Shabat discuss the major developments and identify the key trends at these two very different carriers. Listen to the episode here, and find a full archive of the Lounge here.
- It’s no fun being last among peers. But alas, American Airlines remained in its familiar place, trailing well behind Delta and United in the battle for profit preeminence. American’s 5% operating margin last quarter (ex special items) lagged Delta’s 10% and United’s 8%. The figure was, however, better than what Southwest and Alaska managed (both earned just 3%). In one sense, American’s ranking makes sense. At a time when intercontinental flying is enjoying record demand strength, United and Delta are benefitting most, with their large transpacific and transatlantic networks. American, though it does fly more to Latin America, is a domestic-heavy airline—two-thirds of its Q4 ASM capacity was flown within the U.S. Of course, Southwest and Alaska don’t fly intercontinentally at all, helping to explain their relative weakness. But there’s more to American’s story. It also underperformed domestically, where passenger unit revenues dropped 6% y/y despite just 4% more ASM capacity—the domestic trends for United and Delta were much better. Some of this might relate to the one-time benefit American received last winter from Southwest’s epic operational meltdown (the two overlap heavily in Dallas-Fort Worth). But it’s perhaps also true that American’s heavy Florida exposure hurt, especially via its Charlotte hub where it arguably expanded too aggressively—its Charlotte seat capacity to and from Florida is up 20% y/y this quarter, and 36% from five years ago (Cirium Diio). Is American’s controversial new distribution strategy also contributing to its margin weakness? Management insists the experiment is going well, moving more of its customers to direct booking channels where it can more effectively market its full-suite of products and services. “In 2023 our revenue was 15% higher than 2019, while our selling expenses were 10% lower,” it said. Others though, including Delta and Air France-KLM, have suggested that American’s strategy is costing it business. In any case, American’s other challenges include reworking its northeastern strategy (following the judicial breakup of its JetBlue alliance) and grappling with the bankruptcy of its Brazilian partner Gol. On the other hand, it’s enjoying the transatlantic boom (alongside partners British Airways and Iberia) and insists that demand overall looks excellent for the upcoming spring and summer. It insists yields will inflect positively this quarter, even in Florida. Its operations are running smoothly. It uses CFM engines, not GTFs, on its A321neos. It doesn’t fly Boeing 737 Max 9s and doesn’t have any -10s on order. It does, however, rely heavily on Boeing for Max 8s and 787s, which aren’t spared the impact of Boeing’s production woes. Sure enough, American’s CEO Robert Isom joined a growing list of airline executives now publicly reprimanding the manufacturer. “Boeing needs to get [its] act together.” In the meantime, American is seeing record revenue from its loyalty program, very strong premium demand, and lots of upside to come as it restores idled regional jets flying across its domestic network. “The thing that we are maybe most enthusiastic about is the continued improved utilization of our wholly-owned regional jets… much of how domestic turns to positive RASM is directly correlated to us bringing regional jets back.” In addition, American is “very encouraged by the trends we’re seeing in business travel.” So, it’s hardly all bad news. But investors are looking for a path to stronger margins, a path American will describe at an investor day event it’s scheduled for March.
- “We are not satisfied with our current financial performance.” With this simple statement, Southwest’s CEO Bob Jordan hinted at the hellish year that just passed—hellish by its own esteemed standards anyway. It did make money last year, with an operating margin ex items of 3%. But this was down from 5% in 2022 and 13% from 2019—definitely not Southwest-like profitability. Early in 2023, remember, Southwest was still nursing the damage to its reputation caused by a massive holiday-season operational meltdown. Operations got much better as the year progressed. And demand in fact remained strong, and still looks strong today. But the airline’s vast domestic network was simply ill-configured for post-pandemic demand trends, for example, less short-haul business traffic in markets like California. It’s now working to update its network, which management hopes will contribute to roughly $1.5b in incremental pretax profits. This figure also factors in the maturity of newly-introduced markets and productivity initiatives designed to mitigate rising cost inflation, especially in the area of labor; last week pilots approved a new five-year contract featuring hefty pay gains (see State of the Unions). Unfortunately for Southwest, Boeing’s problems have disrupted plans to lower unit costs through fleet modernization. The Max 7, a plane pretty much designed just for Southwest, hasn’t yet been certified and likely won’t be this spring, as expected until the Alaska incident. But again, the revenue situation is good. “Demand looks very strong in January and February.” Same for Easter. Business demand looks encouraging too. Fuel hedges are a plus. The airline’s Rapid Rewards loyalty program is a lucrative asset. No major airline in the world has a better credit rating. Like several other U.S. carriers this spring, Southwest too will hold an investor day event to discuss its plans in greater detail. One big question everyone’s asking: Will it add premium seats? Premium demand can be very cyclical, it warns. But if needed, it will act. Separately, Southwest cited several markets that are currently performing well, including Phoenix, Orlando, and Las Vegas, all big leisure destinations. Hawaii did better than expected last quarter. And California, while slow to revive post-Covid, is improving. On a final note, Southwest joined the ultra-LCC bash-fest (its ringleader is Scott Kirby), suggesting that “products on the lower end of the segment… there may not be as much demand for those types of products today as what there once was.”
- Alaska Airlines CEO Ben Minicucci felt he needed to say something. His company was just ridiculed on the comedy show SNL, threatening the carrier’s treasured brand reputation. Quiet criticism of Boeing was no longer enough. So, Minicucci went on national television to express his intolerance for what happened earlier this month on flight 1282, when a door plug broke off a 737 Max 9 mid-air. The incident will cost Alaska an estimated $150m, mostly lost revenue from the grounding of its Max 9s. Helpfully, the grounding comes during the slowest time of the year. And make no mistake: Alaska’s business overall looks healthy. Its 8% operating margin for 2023 bested even its partner American, despite the latter’s gains from the booming intercontinental market. For Q4 alone though, Alaska’s margin was just 3%, in part because, “for the past six months, competitive capacity was up high single digits.” That pressure is easing now as rivals retrench. Also note that Alaska paid significantly more for fuel than its rivals last quarter, due to higher prices on the west coast. Whereas Delta and Southwest paid just $3.00 per gallon, for example, Alaska paid $3.42. Put another way, Alaska’s underlying business is still strongly profitable. Unit costs are coming in better than expected. Its loyalty program generated $1.6b in cash last year. It’s now a oneworld member and using its own website as a platform to sell tickets on partner airlines. Seattle remains one of America’s all-star economies, even if the tech sector has been slow to get back in the air. Other sectors, by contrast, are showing a “slow and steady” recovery in corporate travel. Unlike Southwest, Alaska is well-positioned to take advantage of the current boom in premium demand. And more broadly, “the general fare environment is improving.” It adds: “Taken all together, absent the impact from the Max 9 grounding, we feel very good about the outlook for our core business in Q1 and beyond.” Of course, Alaska’s biggest strategic move is its plan to buy Hawaiian Airlines, which it claims will be less problematic with regulators. “We believe we have a stronger and differentiated case from JetBlue and Spirit.”
- UK-based low-cost carrier easyJet has provided a brief update on its calendar fourth quarter results, along with commentary on current trading. As usual, the LCC lost money from October through December, ending up with a negative 6.5% operating margin. This was better, though, than the negative 8.3% it recorded in the same quarter a year earlier. It would have been better still were it not for conflict in the Middle East, which had a broad if temporary impact on demand across the network. For the winter half (October-to-March), easyJet expects the impact to reach about $50m. However, “demand and bookings,” it said, “have recovered strongly from late November.” One clear bright spot in the carrier’s efforts to lift margins is its Holidays division, which packages flights with hotels and other travel products. That produced a $40m profit last quarter. In the meantime, management is working to improve productivity, limit operational disruptions, capitalize on strong leisure demand, employ advanced data science to grow ancillary revenues, and lower unit costs by introducing newer and larger Airbus narrowbodies (for the record, it uses CFM engines, not P&W GTFs).
- Before something called Covid wreaked havoc on the world, Wizz Air was routinely one of Europe’s most profitable airlines. Its reputation as a successful Ryanair clone was well-deserved. But things are very different in 2024. Wizz last week reported a negative 17% operating margin for the calendar fourth quarter of 2023, no better than what it suffered in the fourth quarter of 2022—but vastly worse than what it earned in the fourth quarter of 2019 (positive 5%). It ended with a full-year 2023 operating profit but just barely—its margin was a mere 2%. Why has Wizz hit the skids? The much-discussed Pratt & Whitney engine issue is one big reason. Wizz had 13 GTF-powered planes grounded at the start of 2024, with 35 grounded currently; the number will soon be 40. The airline does receive compensation from Pratt, offsetting the associated expenses, but the disruption is costly in other ways. Management claims many of its markets had more demand than it could handle last quarter, resulting in foregone revenue. Even so, the carrier’s seat capacity last quarter was up by 75% versus 2019, or 64% excluding its Abu Dhabi joint venture. As GTF-equipped planes return by next summer, it will become even larger. Separately, Wizz was hit hard by the Ukraine-Russia war in 2022, and again by the Israel-Hamas war in 2023. Several of its planes, by the way, are still stranded in Kyiv. A few other items of note about Wizz: London Luton, Rome Fiumicino, and Bucharest were its three busiest airports last quarter. It hopes to receive its first A321XLR as early as the end of this year. Selling Airbus neos to lessors and leasing them back, a key element of its past financial success, is tougher now as it simultaneously asks lessors for help in dealing with its GTF issues. CEO József Váradi insists that operations will normalize when the GTF engines are back in service, and when new markets mature. When that happens, he assures, robust profits will return.
- The oneworld alliance has opened its first fully-branded airport lounge. The new space at Seoul’s Incheon International Airport marks the start of an exciting 2024 for the group, as it prepares to celebrate its 25th birthday later this year. With further oneworld airport lounges in the pipeline, and Amsterdam touted as the next location, the Seoul facility provides valuable insight into the template the alliance will use elsewhere. There are swanky furnishings and breakout zones as well as artistic details which pay homage to Korean culture. Oneworld is collaborating with Swissport and the team behind its Aspire Airport Lounges to operate the Seoul site.
- The Federal Aviation Administration has said it will not grant any production expansion of the Boeing 737 Max until further notice. This follows the door plug incident on an Alaska Airlines Max 9 earlier in January. In a statement, FAA chief Mike Whitaker said: “This won’t be back to business as usual for Boeing. We will not agree to any request from Boeing for an expansion in production or approve additional production lines for the 737 MAX until we are satisfied that the quality control issues uncovered during this process are resolved.” There was better news however, for U.S. airlines that operate the Max 9. The FAA confirmed that affected carriers can begin the inspection process of their existing aircraft. Once these are complete, the jets can return to service. At the time of writing, United Airlines and Alaska are both expected to resume revenue flying with the Max 9 imminently.
- RTX, the parent company of Pratt & Whitney, gave an update on its troubled geared turbofan (GTF) engines during the company’s Q4 earnings call. The firm continues to address the powdered metal problem that’s caused severe disruption for many A320neo and A321neo customers, allegedly contributing to the bankruptcy of at least one (India’s GoFirst). “We continue to focus on executing on our GTF fleet management plan and are working relentlessly to mitigate further disruption to our customers.” It added, “we are engaging with our customers each and every day to try to figure out how best to support them.” The company estimated that about 10-to-12 of its customers are bearing an especially difficult burden. Will it compensate those affected? Yes, but “obviously, it won’t make up for all of the disruption that they’re having in their fleet and all of the things that they’ve got to do to accommodate for these removals. But again, doing the best we can to come up with a fair set of compensation structures to help out during these trying times.”
- Boeing has delivered a 737 Max to a Chinese airline for the first time since March 2019. On January 24, Reuters reported that a Max 8 was handed over to China Southern Airlines, marking an end to the freeze on 737 Max imports amid political tensions between Washington and Beijing. The OEM had previously raised its demand outlook for China — one of the fastest-growing aerospace markets — in September, citing economic growth and demand for domestic travel. China banned imports of the 737 Max after two crashes in 2018 and 2019 involving the Max 8. Local airlines only resumed flying the Max in January 2023, almost three years after the U.S. ended its grounding of the aircraft. Boeing declined to comment on the delivery.
- The fleet of the Air Astana Group has reached 50 aircraft. The milestone was met following the arrival of a new Airbus A321neo from the OEM’s Hamburg plant. The expansion is the latest phase in a radical growth plan at the Kazakh company. Air Astana management have previously said that their medium-term goal is to have 80 aircraft in the fleet by the end of 2028.
- Royal Jordanian Airlines has accepted two new Embraer E195-E2s. The delivery was the first from lessor Azorra and marks the type’s debut in the Middle East. The pair of jets forms part of a wider deal, announced in May 2023, for eight aircraft in total. This figure comprises six aircraft from the lessor’s existing backlog with the OEM, plus a further two E195-E2 firm orders directly with Embraer.
- Loganair has retired its final Saab 340 after more than 24 years of service. The Glasgow-based operator, which has grown to become the UK’s largest regional airline, ensured the aircraft’s final scheduled trip was notable. The journey from Kirkwall to Inverness and onwards to Glasgow was given the special flight number of LM340, as a tribute to the venerable prop plane. Over the years, the carrier’s fleet of 18 Saab 340s has completed more than 430,000 flights – both passenger and cargo – and carried over eight million customers. The 340s are being replaced by new ATRs, which can carry up to 45% more passengers than the outgoing Swedish examples.
Routes and Networks
- AirJapan has announced its third destination. The carrier, which is a low-cost subsidiary of the ANA Group, will link Tokyo Narita with Singapore from April 26. The new route is made possible by the delivery of the airline’s second aircraft, which is due in April. Around the same time, services on AirJapan’s existing two destinations (Narita-Bangkok and Narita-Seoul) will be bolstered to a daily frequency. The carrier uses Boeing 787-8 Dreamliners.
- Ryanair is ramping up its footprint in Albania. There are six new routes from Tirana this coming summer, comprising 22 destinations in total. Among the new additions are Birmingham, Budapest and Vienna. This Irish LCC forecasts that it will carry three million passengers through the Balkan nation this year. Speaking in Tirana, Ryanair CEO Michael O’Leary hinted that the airline was considering the city’s airport as a possible base.
- Air France is coming to Arizona. From May 23, the flag carrier will operate three days a week on Tuesdays, Thursdays, and Saturdays using Boeing 787-9 Dreamliners. The service leaves Paris Charles de Gaulle at 10:10am and arrives in Phoenix at 12:10pm. The return departs the city’s Sky Harbor International Airport at 2:10pm and touches back down in the French capital at 9:15am the following morning. Although this marks the first scheduled nonstop service between Arizona and France, the U.S. airport already has other European routes. British Airways and American Airlines each have a year-round daily flight linking Phoenix with London Heathrow, using Airbus A350s and Boeing 777s. German leisure carrier Condor is also in the market, albeit only seasonally, with flights to Frankfurt. It will use its new flagship Airbus A330neo for the upcoming summer period.
- Air Arabia is growing its European network. From June 28, the low-cost carrier will fly from its Sharjah hub in the UAE to Athens, Greece. The service will operate four-times weekly and be operated by Airbus A320s. The Mediterranean country joins an impressive list of European destinations already served by the LCC including Austria, Italy, France and Spain.
State of the Unions
- Flight attendants at Breeze have filed the paperwork to unionize with the Association of Flight Attendants. Among the alleged issues at the start-up carrier are concerns about pay, a lack of hotel accommodations when away from bases, a changing set of workplace rules, and “disrespectful treatment from management.” Breeze pilots voted to join the Air Line Pilots Association in August 2022, and are currently negotiating a contract with management. After filing the paperwork, the next step for the flight attendants is to hold an election under the National Mediation Board, which is covered under the Railway Labor Act. In order for the National Mediation Board to hold an election, a majority of flight attendants in a bargaining unit must express support for unionizing. Breeze did not immediately respond to a request for comment.
- Flight crews represented by the Southwest Airlines Pilots Association (SWAPA), have approved a new collective bargaining agreement. The five-year deal covers almost 11,000 pilots. According to the Texas-based LCC, since October 2022, nine union-represented workgroups have ratified new agreements: Appearance Technicians Customer Service Agents, Customer Representatives, and Source of Support Representatives Dispatchers Facilities Maintenance Technicians Flight Instructors Material Specialists Mechanics and Related Employees Meteorologists Pilots. The airline said it remains in negotiations with two union-represented workgroups.
United doesn’t need any more silver medals. But it won another last quarter.
United, alas, failed again to overtake Delta in the profit chase. Among the U.S. Big Three, Delta took gold with a 10% operating margin, ex special items. United’s figure was 8%. This gap, recall, was narrower in Q3, which covers the summer period, when United tends to perform better given the seasonal tendencies of its network—Delta has more winter-peaking sunshine routes. The more important point though, is that both airlines are performing well, albeit producing Q4 margins that were not quite as good as they were in 2022, or for that matter 2019—labor cost inflation is a major reason why.
For all of 2023, both airlines improved versus 2022 but slipped a bit versus 2019. As United repeatedly stressed, costs have jumped significantly in the past five years. But they’ve jumped for all U.S. airlines, including low-cost rivals which are having a more difficult time adjusting. At the same time, United says its revenue growth has closely tracked its cost growth, and the correlation has never been tighter—one reason, it says, is because carriers are now quicker to cut capacity when costs escalate.
To be sure, United’s current revenue strength—this is certainly true for Delta too—stems in large part from international routes. Transatlantic routes are perhaps enjoying their strongest year ever, supported by a strong U.S. dollar, a resilient U.S. economy, the unleashing of pent-up wanderlust post-pandemic, and a growing willingness for leisure travelers to pay for premium seats. It is leisure markets like Spain and Italy that are in fact leading the current boom, generating more demand than usual even in the off-peak winter. “Spain and Italy have become more year-round destinations than seasonal,” said United’s commercial chief Andrew Nocella.
Naturally, the airline has shifted some European capacity south, from markets like London Heathrow and Germany. Asia is likewise strong, also aided by a robust dollar, if hurt somewhat by weaker cargo trends. “We expect all of United’s new Asia capacity to produce strong margin results as we head into Q2 and Q3.” Latin America, including Caribbean sunshine routes, was by contrast “pressured by record industry capacity levels and heavy fare discounting.” And domestic markets? They too remain strong, with Q4 unit revenues down less than 1% y/y despite 7% more ASM capacity; domestic yields actually increased 1%. United is earning higher profit margins internationally, however, than it is domestically.
The airline is seeing signs of life—finally—in corporate demand. Business bookings to London Heathrow, for example, have jumped in recent weeks. “As we started January, in the new budget season for all of our big corporate clients, we did notice a significant step-up. It’s still well behind where it should be relative to GDP growth, [but] we’re seeing close-in yield gains… result from that. And I think that’s one of the reasons our domestic RASM outlook is as strong as it is.” United did feel a pinch from events in Israel, which forced it to suspend service there (it normally flies to Tel Aviv from Newark, Washington, Chicago, and San Francisco). On a more positive note, operations at Newark and San Francisco airports have become more manageable with FAA-imposed flight reductions. “We’re optimistic that the demand will catch up with supply in 2024 in these two United hubs that have lagged the recovery elsewhere.” (Since 2019, Denver has been United’s fastest growing hub by far).
The latest disruption operationally, of course, is the grounding of its 737 Max 9s, which account for about 8% of its scheduled Q1 capacity. The groundings will inflate non-fuel unit costs by an estimated three percentage points this quarter, which has United forecasting a loss for the period. For the record, United lost money during last year’s Q1 as well, keeping in mind that Q1 is its slowest and worst quarter of the year. Delta, for the record, expects a positive 5% operating margin for Q1.
Both carriers, by the way, have many Max 10s on order, with United now building a schedule plan that excludes the plane—it still lacks FAA certification and lags about five years behind its original delivery schedule. CEO Scott Kirby made his frustrations clear on national TV, while hinting to investors that it might replace aging 777s with A350s. (Both United and Delta, incidentally, also use Pratt’s troubled GTF engines for their A321neos).
Q1 frustrations aside, United has little doubt that it will earn a solid full-year profit in 2024, with many of 2023’s positive trends unchanged. There’s some concern from investors that its growth plans might be excessive, with its intention of upgauging to the largest narrowbody planes, i.e. the Max 10 (if it ever comes) and the A321neo. One way to read what was a big jump in Basic Economy sales last quarter is that it’s needing to discount more to fill all those extra domestic seats. In any case, United says it’s grabbing share from the ultra-LCCs, and that catering to all price points is essential. It will have a lot more to say in Chicago on May 1, when it hosts an investor day event. One thing it’s already teasing is some news on Mileage Plus, hoping to better communicate its true value to investors.
In sum, it was another good quarter for United. But oh, does it ever want that gold medal from Delta.