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Preparing for the Aftermath: China’s Airlines Try to Exit Crisis, Alitalia is Nationalized, Qantas Plans 21-Hour Direct Flights

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Via Wolf Street

The situation is very fluid.

By MC01, a frequent commenter on WOLF STREET:

On April 2, the Civil Aviation Authority of China (CAAC) held a press conference in Beijing to update the press about the aftermath of the Covid-19 lockdown. Internal air traffic more than doubled since the depth of the crisis but still operates at only 42% of the capacity it had before the crisis.

The main drivers of this recovery have so far been migrant workers returning from their home provinces to their jobs in big economic powerhouses like Shanghai and Shenzhen. As final restrictions on internal movements will be lifted on April 8, air traffic will begin to pick up at a faster phase, as more aircraft are pulled from storage as demand increases.

International passenger flights are at the present limited to 134 per week, mostly originating from four countries (US, Japan, Thailand and Laos). On top of this, special charters may be authorized by CAAC, like the twice a week Air China flights to connect the little army of Chinese healthcare specialists sent to assist Italy.

Very intriguing is how internal cargo flights have increased 18% compared to pre-epidemic weekly averages. The CAAC has been at the forefront of incentivizing using idled passenger aircraft to carry freight. For example, China Southern is using some of its Airbus A330 on regular freight flights to Europe; and Qatar Airways operates daily “cargo hold only” flights between Shanghai and Abu Dhabi.

Ironically, Boeing is well placed to take advantage of this situation: In December 2019, it inked a deal with the Guangzhou Aircraft Maintenance Engineering Co (GAMECO) to convert the 737-800 to a freighter configuration. Boeing and GAMECO already have 130 firm orders for conversions; and as air freighter traffic booms and larger stocks of used aircraft become available, these numbers are sure to increase a lot.

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Chinese firms as a whole seem to be optimistic about a quick recovery of the travel industry worldwide: Alibaba, the hi-tech giant, has just announced investing an undisclosed sum in Israeli travel tech startup Hotelmize, while booking startup Klook opted to sink “under $10 million” into Huizhuche, a car rental platform whose original investors claimed was worth “hundreds of millions of dollars” back in 2016. Similar deals are being announced on a daily basis.

Is this merely a case of excessive optimism or are these companies astutely taking advantage of the fire sale that has just started? Only time will tell.

One company that is surely looking to the future with a lot of optimism is Alitalia. The Italian government took advantage of the general chaos caused by the Covid-19 epidemic to re-nationalize Alitalia, an operation that will cost taxpayers €600 million just to pull the perpetually money-losing airline from administration (a form of bankruptcy). On top of this, Alitalia has €1.2 billion in assorted liabilities to be dealt with and burned through cash at a frightening pace even before the crisis started.

Taxpayers will be elated to learn that while they are left in complete uncertainty about their own future and threatened with longer and more crippling lockdowns, the Italian government is diligently burning the midnight oil to come up with a “restructuring plan” for Alitalia.

Part of this plan is how to deal with one Alitalia’s chronic diseases, the extremely high cost of leases. Alitalia has a fleet of 113 aircraft, of which 72 are leased. This is by far the highest rate of leases among flag carriers worldwide and would be an anomaly even among low-cost and charter-focused carriers.

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Most of these aircraft had originally been bought by Alitalia outright, but were then sold to leasing companies such as AerCap and leased back in “sweetheart deals” to raise quick cash over the past decade. This precipitated a vicious circle as leasing costs spiraled out of control (they presently stand at €240 million a year) and deprived the airline of high-quality collateral to secure loans, thus sending lending coasts higher and higher.

Under the present tentative plan “up to 43” leased aircraft will be returned shortly to lessors to cut expenses, albeit the exact number is still shady.

And then there’s the biggest bone of contention: the workforce. Alitalia has long been notorious for having a very large and very expensive to maintain workforce. Of its 11,000 employees – a high number given the size of the company – about 6,800 are on furlough, receiving 80% of their wages. By contrast, the average furloughed Italian worker can cash unemployment benefits of up to €600 a month and in a few weeks may not have a job to return to.

In the past, cutting this workforce has proven to be extremely difficult and expensive due to the enormous severance packages demanded and invariably obtained by Alitalia unions for their members. But now Alitalia has been pushed into near-irrelevance on the domestic market by Ryanair and EasyJet. And with well-funded and well-organized competitors such as Lufthansa and Emirates serving international travelers, it’s likely Alitalia unions may have a hard time pushing their extravagant demands on taxpayers.

And finally some good news. Qantas, the flag carrier of Australia, inked a deal with their pilots to make Project Sunrise a reality. Project Sunrise is an ambitious plan by Qantas to directly connect Melbourne and Sydney with London, New York and Paris. The Australian flag carrier has been conducting test flights between these locations carrying teams of volunteers and a medical staff to monitor the effects on crews and passengers of the flights that may last up to 21 hours. With the pilot deal done, Project Sunrise regular flights are set to start in 2023.

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Qantas originally planned to order a number of Airbus A350 to carry out these flights, but with the collapse in air travel worldwide, the order has still not materialized, and may not materialize at all. The Project Sunrise test flights have been carried out using Boeing 787, so Qantas is weighing if perhaps using these aircraft may be an economically viable option. Good deals are made in bad times, or so the saying runs. By MC01, a frequent commenter, for WOLF STREET

All eyes are on China to see how air transport will change in the aftermath of the crisis. Read…  “Not All Airlines Will Go Bankrupt”: How Will Coronavirus Travel-Bans Impact Airbus, Suppliers, and Airlines?

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