On March 10, American Airlines chairman and CEO Doug Parker addressed financial analysts, investors and journalists regarding how his airline—the world’s biggest—and the US airline industry would manage through the coming COVID-19 pandemic, which was still days away from hitting North America in a serious way.
“The US airline industry will manage through this,” Parker confidently told the J.P. Morgan Industrials Conference. “We have every intention of operating a robust capacity in 2021. American is prepared to handle a shock like this.”
American had, as of March 10, cut its summer capacity by 10% and planned to “accelerate” the retirement of older aircraft, Parker said. He noted that “not one [airline] CEO asked for government relief” when meeting with the Trump administration the previous week in Washington. Federal relief would not be needed, he asserted.
There is “real demand” for air travel in the US, evidenced by a spike in bookings made when American had dropped fares in the last few days, Parker said. Since overseeing the merger of US Airways and American, Parker had been pushing for a longer-term view of the industry. Shocks will happen and US airlines are now able and prepared to push through them rather than seek a bailout or enter bankruptcy, Parker said. He emphasized that the US airline industry would emerge in a better condition than before the coronavirus outbreak because the industry would finally have proven that it has changed its financial fundamentals.
Parker’s optimism turned out to be short-lived and far from the grim reality of how COVID would devastate the air transport industry. Fast forward to July 1: American announced it would drop Los Angeles International Airport (LAX) as an international hub after years of building its operations there as a network cog where passengers could connect from the US west coast’s biggest market to key points in Latin America and Asia.
Rather than a “robust capacity” plan for 2021, American conceded its summer 2021 long-haul international capacity would be down 25% compared to 2019.
“COVID-19 has forced us to reevaluate our network,” American chief revenue officer Vasu Raja said. “American will have a significantly smaller international network in the year ahead.”
American dropped five routes from LAX to destinations in Asia and South America, including Beijing, Peking, Shanghai, Hong Kong, São Paulo and Buenos Aires.
American said Dallas-Fort Worth will be its “major transpacific hub” going forward and Miami will be the preeminent hub for flights to the Caribbean and Latin America.
American ended up receiving $5.8 billion in total payroll assistance under the US government’s CARES Act, consisting of a $4.1 billion grant and a $1.7 billion unsecured, low-interest term loan. The carrier applied for a separate $4.75 billion loan from an additional $25 billion pot of loans and loan guarantees made available under the CARES Act.
Meanwhile, Parker and American took heat for resuming booking domestic flights to capacity on July 1, despite mounting rates of coronavirus cases in many US states.
Cautious approach
Delta Air Lines took a different track. Speaking in late June on the Masters of Scale podcast, Delta CEO Ed Bastian asserted the industry would slowly crawl back from the worst of the pandemic-related demand drops and eventually emerge from the crisis. “Travel is picking up,” he said. “We bottomed out in mid-April with less than 5% of our normal traffic. [By the end of June] we’re starting to approach 15 to 20%.”
Delta, however, is capping load factors on all flights at 60%. “No matter what seat you are in on the plane, you will have the seat next to you open,” Bastian said. “As we approach the 60% load factor on planes, that’s our signal to add more flights. We’re adding 1,000 more flights a day to the schedule, doubling our domestic schedule.”
Bastian also emphasized the safety of flying, even though that message did not appear to have filtered through to Congress or top US medical advisers. A Senate bill was proposed in July that would prohibit airlines from selling middle seats.
“For people that are looking for adventure, who want to get away, who want to go visit family, or if there is business to be done, candidly I’ll tell you there is not a safer time to be on an airplane than right now,” Bastian said. “We have no known transmissions on Delta of the virus to anyone. None. Zero. Safety is in the DNA of this company. There is not a safer form of transportation in the world than the US airline industry. We have a culture that is prone to caution. We have a culture to be able to address this.”
Bastian said load factors will be capped at 60% for the foreseeable future even though it means flights will be money-losing.
“Obviously, you can’t make profits at 60% load factors,” he said. “We know that. No airline is making money in this environment because the demand is so low. Our goal is to bring demand back, to bring confidence back. I’d rather maximize confidence and bring more flying back at a lower load factor than trying to maximize load factors. So that’s our strategy. Fortunately, we’ve got the financial capability to weather the storm.”
Southwest Airlines is also taking a cautious approach to the pandemic. The Dallas-based carrier by the end of April had received a total of $2.28 billion in payments via the CARES Act. That is 70% of the total expected payroll support the airline will ultimately receive from the US government. Nearly half of Southwest’s fleet of Boeing 737 aircraft is either in short- or long-term storage.
Southwest CEO Gary Kelly has said he will not cut the size of the airline in terms of fleet or employees before Sept. 30, but acknowledges there may be “no choice but to downsize the airline” after Sept. 30, when US government aid expires.
Southwest vowed to maintain service to all domestic cities in its network, including five destinations in Hawaii, but significantly cut capacity as it plans for passenger traffic demand to be reduced for the long term because of the pandemic.
Southwest ended the 2020 first quarter with 742 aircraft in its fleet, all 737NGs or 737 MAXs, but has moved 106 737NG aircraft into a long-term storage program. That adds to the 34 737 MAX aircraft that were already in long-term storage because of the type’s worldwide grounding, meaning the carrier has a total of 140 aircraft in long-term storage.
Additionally, Southwest has another 250 737NGs in short-term parking programs that rotate in and out of active flying.
“The benefits of the short-term parking program is that the aircraft do remain part of the active fleet and it’s more cost-effective in terms of storage costs than the long-term storage program,” COO Mike Van de Ven said.
Kelly, like Bastian, has emphasized that Southwest will have social distancing procedures in place on aircraft. Though it does not assign seats, it will not book full flights and will assume all middle seats will be kept empty. Kelly told CNBC he did not foresee air traffic demand coming back anytime soon.
“I think a lot of things are going to have to happen for the country to come back to life, much less air travel,” he told CNBC. “If people are going to travel, they’re going to need to have something to do when they get there.”
ULCC rebound
There does appear to be one segment of the market where demand has come back more quickly: the ultra-LCC sector. Florida-based ULCC Spirit Airlines ramped up to operating 550 daily flights in July, an aggressive restoration of more than 80% of last year’s scheduled capacity.
Spirit’s July schedule saw it resume the bulk of canceled routes at a host of key airports across the country, including Baltimore-Washington International, Dallas-Fort Worth, Las Vegas, Los Angeles, Orlando and Philadelphia.
The rapid restoration of service marked a swift reversal following Spirit’s decision to slash capacity by nearly 90% in May, reducing its total schedule to just 50 flights per day.
“[Spirit executives] describe it as looking for ‘green shoots,’ paired with simply taking domestic leisure travelers where they want to go this summer,” a Spirit spokesperson explained.
Along with ULCC Allegiant Air—which will also operate upwards of four-fifths of last year’s capacity in July—Spirit led the pack of US carriers in terms of restoring domestic flying in July. That compares to 65%-75% for Southwest, 50%-70% for Frontier Airlines, 50%-60% for JetBlue Airways, 55% for American, 38% for Delta and 30% for United Airlines.
United was striking a relatively optimistic tone at the 2020 halfway point. It will add close to 25,000 flights in August, as it cautiously restores capacity in response to steadily increasing domestic travel demand. The growth will see Chicago-based United operate 48% of last year’s domestic capacity and 25% of international capacity in August, amounting to a tripling of its schedule from June.
The additions include more than 600 daily flights to more than 200 US airports, including 350 daily flights spread across United’s hubs. Daily flights out of Newark will double from July, while the carrier’s midcontinental hubs in Chicago, Denver and Houston will also see substantial growth.
United will return 90 aircraft to service to facilitate the increased flying, including an unspecified number of 50-seat Bombardier CRJ550s, which include 10 seats in first class.
Much of the increase is destined for mountain and natural park destinations like Aspen, Colorado, and Jackson Hole, Wyoming.
“We’re adding in flights to places we know customers want to travel to, like outdoor recreation destinations where social distancing is easier, but doing so in a way that’s flexible and allows us to adjust should that demand change,” United VP-domestic network planning Ankit Gupta said.
United will continue operating to European cities despite the European Union and UK’s bans on incoming arrivals of US citizens and is planning to operate the routes as repatriation flights pending removal of the restrictions.
United is also set to resume a host of routes across the Pacific in August, with new 5X-weekly service between Chicago and Tokyo Haneda.
While a substantial increase from its existing flying levels, the additions for United are still less than those of its network airline rivals. American, for example, is targeting as much as 65% of last year’s domestic capacity for July, compared to United’s 48% by August. Delta will operate between 55% and 60% of last year’s domestic schedule by August, CEO Bastian has said.
United had the largest Chinese presence among all US carriers prior to the pandemic, operating five daily flights between Shanghai and its hubs. All operations to the country were halted in February amid the escalating coronavirus outbreak there.
The airline will also reinstate flights to other Asian destinations in July, including services to Tokyo Haneda and Singapore.
United has the most exposure among US carriers to the Asia-Pacific region, where it deployed 15% of system capacity and derived 11% of revenue in 2019, according to an analysis from Credit Suisse analyst Jose Caiado. By comparison, Delta deployed 10% of capacity and generated 6% of revenue in the region, while American scheduled 6% of capacity and earned just 3% of revenue there.
More broadly, United generated 37% of its total revenue last year from international flying, compared to 28% for Delta and 26% for American. That figure likely understates the carrier’s dependence on long-haul flying, however, as a large portion of its domestic volumes are used to feed into its international services.
As a result, United is adding back flights into its summer schedule at a more conservative pace than its competitors. In July, the carrier plans to operate just 25% of system capacity from a year ago, compared to 40% for American and 30% for Delta.
Unlike its US competitors, Air Canada has not received any government financial assistance and has described its situation as being in a state of hibernation. Still, CEO Calin Rovinescu told ATW that a “reasonable amount of business” could be operated by this year’s third quarter.
“Our expectation for the third quarter is to do 25% of what we did last year” in terms of carrying passengers, he said. “But that assumes we would have access to markets.” Demand for air travel is meaningless if hard travel restrictions remain in place in Canada, he cautioned.
As things stand, the Canadian government has advised citizens “to avoid all travel.” The blanket restrictions on travel mean even visits to friends and family are off limits.
“We are burning through C$22 million [$16.4 million] a day even after some serious mitigation” because expensive assets are sitting idle, Rovinescu said.
Air Canada has laid off 20,000 employees. “Restarting the aviation industry is not like reopening a pizzeria,” he said, explaining the carrier cannot just push a button and start up passenger flying again. According to Rovinescu, Air Canada entered the pandemic period with a strong balance sheet and ultimately will survive. “But it is a minimum of three years to get back to 2019 levels” of traffic and revenue, he said. “This is not a V-shaped recovery in the aviation world. … Yes, our expectation is we will be around for a long time to come.”
Rovinescu said he is “somewhat envious” of other major global carriers that have received government subsidies. But he noted that “some of these loans have strings attached. … Some of these strings attached are not something we’d want.”
While Air Canada’s passenger business is moribund, the airline has converted three Airbus A330-300s and four Boeing 777-300ERs into all-cargo aircraft by removing passenger seats and is also utilizing Boeing 787s for cargo flights.
“This has been one of the very bright lights in a sea of bad news,” Rovinescu said. “The cargo operation has been phenomenal. We’ve now operated more than 1,500 cargo-only flights since March.”
– Ben Goldstein contributed to this report
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