London Air Travel’s Monday Briefing – 4 May 2020

Welcome to London Air Travel’s weekly briefing on air travel around the world, as published every Monday at 06:00 BST.

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British Airways, London Gatwick
British Airways, London Gatwick

Welcome to London Air Travel’s Monday Briefing for the week beginning Monday 4 May 2020.

The “Future Size and Shape” of British Airways

After the events of 11 September 2001, BA was faced with financial losses, a heavily indebted balance sheet and the rising threat of low cost airlines. Then CEO Rod Eddington assembled a group of senior managers to plan the “future size and shape” of the airline.

Nothing was off the table. BA looked at exiting short-haul altogether and effectively reverting to a BOAC long-haul only model. It also considered closing down at London Gatwick.

What followed set the course of the airline for the rest of the decade.

Many unprofitable routes were cut. Short-haul routes were downgraded from Boeing 757 and 767 to Airbus A320 series aircraft. A long process of removing legacy complexity began.

Whilst BA pulled back from withdrawing from Gatwick altogether, it abandoned a plan to operate Gatwick as a second London hub. Many routes were transferred to Heathrow. The airport was “de-hubbed” with a focus on point-to-point leisure traffic and a vastly reduced and simplified fleet.

A similar exercise is now underway at BA. Though, this time it is being led by its “brand agnostic” parent company IAG.

BA CEO Alex Cruz stunned staff last week by announcing a consultation which may lead to up to 12,000 of the airline’s 40,000 odd employees being made redundant. The airline is also seeking substantial changes to working practices, including the merger of its three Heathrow cabin crew fleets.

BA and State Support

In an e-mail to staff Alex Cruz said “There  is no Government bailout standing by for BA”.

Much will focus in the coming weeks on what is meant by this.

BA has already taken advantage of the UK government’s payroll support scheme for 22,626 furloughed employees.

Iberia and Vueling have secured loans from a consortium of banks for €750 million and €260 million respectively, guaranteed by the Spanish government. These come with relatively limited conditions.

No redundancies have yet been announced at Iberia or Vueling. Aer Lingus is consulting with unions on job cuts of up to 900 of its 4,500 employees.

Questioned are being asked by BA’s employees, trade unions and some politicians why it hasn’t obtained a loan under the UK’s Covid Corporate Financing Facility to mitigate the need for redundancies as easyJet and Wizz Air have done. Some are even calling for the separation of BA from IAG.

IAG will dismiss much of this as “noise” – there were similar sentiments at Iberia when IAG forced through a painful restructuring in 2012.

There is an unquestionably an element of “never waste a crisis” to this. After leaving BA for IAG Willie Walsh has never hidden the fact that his restructuring of the airline was work in progress. BA accepting a state-backed loan would also make it easier for Virgin Atlantic to demand one to preserve competition at Heathrow.

A situation IAG is likely to be at pains to avoid is for governments to grant loans either secured against, or in exchange for, shares in IAG airlines. This Swiss government is to do the former for SWISS. Lufthansa is in negotiations with the German government for a federal bailout of around €10 billion. A government stake of around 20% and a seat on its supervisory board are likely pre-conditions. Fundamental to the model of IAG is it having full control of its airlines and being able to make “rational” investment decisions. Having to assuage individual government shareholders would fatally undermine this model.

IAG is due to give an update to investors and analysts this coming Thursday morning. Whilst IAG always declines to give a running commentary whilst negotiations with trade unions are underway, it should at least give an update on planned capacity for the coming months.

Will BA Leave Gatwick?

Back to BA at Gatwick, will it leave the airport?

Probably not. One consequence of BA’s retreat 20 years ago was that it gave easyJet free rein to go from next to nothing to occupying half of the slots at the airport. Iberia, LEVEL and Vueling do not have anywhere near the brand recognition in the UK to replace BA at Gatwick.

That said, BA did however look at transferring all long-haul flights from Gatwick to London Heathrow a while ago, but could not reach an agreement with the airport on landing fees. With its own slots to fill at Heathrow and potentially lucrative slots from departing airlines to snap up, BA may look at this again.

Norwegian Secures Partial Support For Restructuring

Norwegian has secured support from its bondholders for a debt for equity swap.

This is just one step towards qualifying for further state support of up to NOK2.7 billion.

At the time of writing Norwegian has not confirmed whether its aircraft lessors have agreed to a reduction in Norwegian’s lease obligations of at least $500m in exchange for equity. More than half of Norwegian’s fleet is leased from no less than 24 different lessors.

The two measures will effectively wipe out the interests of existing shareholders in the airline.

Norwegian is due to hold an Extraordinary General Meeting today in preparation for another equity raise to qualify for secure state support.

Late post publication updates:

[Reserved for updates throughout the day]

Norwegian has secured support of a number of aircraft lessors to convert $750m of debt in to equity. It has also successfully passed resolutions at an EGM to convert bond and lease debt into equity. It will now issue NOK400 million of new shares to qualify for state support of NOK2.7 billion.

Norwegian is also seeking to convert NOK1,715 million of overdue payables into equity.

Air Canada expects third quarter capacity to be reduced by 75% compared to 2019. It is also accelerating the retirement of Boeing 767, Airbus A319 and Embraer 190 aircraft, with the latter leaving its fleet immediately. As part of its CleanCare+ initiative, Air Canada is also introducing mandatory infrared temperature checks at airports and will block all adjacent seats in economy until 30 June 2020 at the earliest.

British Airways continues to add cargo-only flights to its network. It will operate daily cargo-only flight to Nairobi from 6 May 2020 and a twice weekly Boeing 787 cargo service to Moscow Domodedovo airport from 16 May 2020.

KLM plans to resume daily flights from Amsterdam to Barcelona, Budapest, Helsinki, Madrid, Milan, Prague, Rome and Warsaw from this week. Flights will be operated with Embraer aircraft. KLM aims to operate 15% of its usual capacity in May. Face masks will be compulsory during boarding and onboard aircraft from 11 May until 31 August 2020 at the earliest.

Singapore Airlines is to continue to operate 13 return flights a month between London Heathrow and Singapore Changi airport until the end of June at the earliest. Overall, network capacity will be reduced by 96%.

Virgin Atlantic now has an interline agreement with Air Botswana which operates, inter alia, between Gaborone and Virgin destinations Cape Town and Johannesburg.

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