Atlantic
Resurgence Sep/Oct 2022

The transatlantic market, aviation’s largest and most mature long haul route, fell into hibernation during the pandemic. Statistics from the US DoT suggest that passenger numbers in 2020 were less than 20% of the total 83m carried in 2019; and in 2021 at 21.7m were still 75% below the pre-crisis level (and 30% below the numbers who flew on the route in 1990).

But for the period to April 2022 (the latest data available) passenger demand had recovered to 60% of 2019 levels, and airlines have increasingly responded to underlying pent-up demand by restoring capacity. The schedules suggest that seat capacity for the year as a whole will be 85% restored to pre-pandemic levels. (In this definition of the North Atlantic we look at services between North America — the USA, Canada and Bermuda — and Europe, Middle East and North Africa).

Supply on the route is highly concentrated, as the chart shows, dominated by three virtual airlines — the anti-trust immune metal neutral joint ventures of the three global branded alliances.

• oneworld, incorporating American and the IAG long haul operations at British Airways, Iberia and Aer Lingus;
• Star Alliance led by United, Lufthansa Group (including Swiss, Austrian and Brussels Airlines) and Air Canada; and
• the SkyTeam alliance of Delta, Air France-KLM, Virgin Atlantic, (and possibly Alitalia’s successor, ITA)

These three account for 70% of the current seat capacity on the route roughly equally shared. This share is two percentage points higher than in 2019.

Non-aligned carriers, mostly European Legacy carriers, provide 13% of the seats down a percentage point from three years ago.

The superconnectors (Emirates, Qatar, Etihad and THY) have increased their share of Atlantic capacity by four points to 13%, despite Etihad shrinking by 30% as it continues to rationalise. The four carriers' total capacity planned for this year is 25% higher than it was in 2019. The most notable increase (see graph) is from THY who has opened four new destinations (Dallas, Newark, Seattle and Vancouver) and Qatar with two new destinations of Seattle and San Francisco. Emirates also scheduled 4% more seats in 2022 than 2019 with new routes to Baltimore, Washington, Miami and San Francisco (but dropping Fort Lauderdale). Conveniently forgetting the very public arguments about “unfair competition” from the Gulf carriers of six years ago, American Airlines now has an extensive codeshare agreement with Qatar, and United with Emirates.

Low Cost tumbles

The big fall-out from the market over the pandemic has been among the low cost segment, which at its peak in 2018 accounted for 10% of the seats. In 2022 this share appears to be less than 4% with seat capacity down by 62% from 2019 levels. The main reason behind this decline was the failure of Norwegian’s long haul low cost model — at its height Norwegian flew 7.5% of all passengers between the USA and Europe. Financially challenged before the crisis hit, the pandemic brought the airline to its knees and after six months of restructuring under bankruptcy protection it re-emerged in May 2021, having jettisoned its fleet of 37 787s, as a purely short haul LCC.

There is a replacement startup — Norse Atlantic. Backed by Norwegian Air Shuttle’s former CEO Bjørn Kjos, and with an initial fleet of nine leased 787s (with plans for six more), Norse Atlantic started operations in June 2022 with flights from Oslo to New York JFK. It also decided to have a base in Berlin. Recognising that it needed to fly from London — the largest O&D market on the Atlantic — and complicated by Britain’s withdrawal from the EU, it set up a UK AoC. In October the US DoT granted operating authority to Norse Atlantic UK (with none of the objections that Norwegian had faced over flags of convenience) waiving ownership and control restrictions on the basis that the new operation was “not inimical to US interests”.

Another player in the low cost category that used to have a notable presence was Reykjavik based Wow Air. In 2018 it had a near 2% share of passengers between the US and Europe operating a narrowbody hub and spoke network through Iceland. It failed abruptly in March 2019. It has re-emerged as Play, founded by former Wow Air executives Arnar Már Magnússon and Sveinn Ingi Steinþórsson, which started operations in June 2021. It seems to be pursuing the same network strategy, and started transatlantic connections in April this year.

A very interesting new player in this segment is JetBlue. It took advantage of the Covid-19 crisis to gain access to slots at Heathrow and Gatwick during 2021 and start its long awaited transatlantic services operating A321LRneos featuring its MINT premium product. It has the advantage of being based In New York, the prime US gateway on the Atlantic with a strong network of routes domestically in the North East of the country to be able to feed routes out of both its home city and Boston. It has the experience of successfully (and profitably) disrupting the erstwhile cosy transcontinental markets between west and east coast (while halving fares on the routes). It is operating with efficient, new, and relatively small aircraft. And it may be able to afford to treat the Atlantic as an experiment.

Demand outstrips supply

The US major airlines were all fairly optimistic as they reported their third quarter results. The Atlantic is an important market for them: in normal times it could provide 18-20% of their total route operating profits.

American boasted that it had achieved the highest ever level of quarterly revenues in its corporate history. On the Atlantic, its passenger revenues were 19% higher than it recorded in the same period in 2019. While not specifically referring to the Atlantic, it did highlight that on its long haul international operations unit revenues were 25% higher than Q3 2019 with capacity down by 26%.

Delta also was proud of its record quarterly revenues, with overall capacity 83% restored to pre-pandemic levels. Overall international passenger revenues were 3% below 2019 levels, mainly because of performance on the Pacific (revenues down by half), but international unit revenue growth outpaced that on domestic routes for the first time since the pandemic.

On the Atlantic, passenger revenues were 12% up compared with Q3 2019 on capacity 11% lower. CEO Ed Bastian mentioned that the main strength of demand was to leisure destinations in Italy, Spain and Greece. The strength in demand can partially be attributed to the strength of the dollar (up on average by 10-15% against the Euro and Sterling) but, Intriguingly, Delta’s Glen Hauenstein said that “foreign yields are more than offsetting the foreign exchange impact”. What he possibly means is: such is a level of pent-up demand from Europe to the US that is overcoming the increased destination cost caused by currency movements.

Delta mentioned that from October it expected to be flying more on the Atlantic than it had three years ago, making it the first of their route areas to exceed 2019 capacity levels.

United in contrast had more than restored capacity on services to Europe, with a 14% increase in available seat miles in the quarter compared with 2019 and a 90% load factor. Unit revenues were also up by an astonishing 23% and total passenger revenues on the route 40% higher. Total Atlantic operating revenues were 50% higher.

On the other side of the pond the airlines tend not to report on a comparable geographic basis. In its quarterly results IAG specifically mentioned that long haul yields at British Airways, usually the strongest airline performer on the Atlantic but heavily dependent on premium traffic, were up by 24% in comparison with 2019 while North Atlantic capacity was only 13% down. And that was in spite of capacity limits imposed by London’s Heathrow airport because of their staffing shortages.

Air France-KLM actually increased capacity on the North Atlantic — up by 4% against pre-pandemic levels — and achieved a 25% boost to average yields. They too had significant disruption and capacity constraints at Amsterdam’s Schiphol airport.

Lufthansa Group, more dependent on transfer traffic through its main hubs in Frankfurt, Munich and Zürich still had capacity to the Americas 20% below 2019 levels but saw unit revenues up by 20%.

The increases in unit revenues are high, but even without the surge in oil prices this year, underlying unit cost comparisons with Q3 2019 are also high — for example United reported unit costs up 28% up on Q3 2019 and unit costs excluding fuel up 15%. There is some way to go before profitability can be restored.

The chart shows the historic development of US Airlines' operating margins by geographical route area (on a rolling twelve-month basis).

This understates the recovery in fortunes: for Q2 2022, the latest data available from the DoT, domestic margins may have touched 10%, while it looks as if the Atlantic produced its first (albeit small) profit since 2019.

What shows is that it is not just capacity and traffic that is returning to “normal” on the Atlantic. Fares are higher and profitability has returned.