Podcast: Transatlantic Market: A Record Summer Awaits?

Aviation Week editors discuss the highly lucrative market between Europe and North America, where demand for flights has returned stronger than ever.

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Rush transcript

David Casey:

Hello, everyone, and thank you for joining us for Window Seat, our Aviation Week Air Transport podcast. I'm Routes editor-in-chief, David Casey. So, welcome on board. On today's episode, we'll be discussing the highly lucrative transatlantic market, which has resumed with the same momentum seen before the pandemic. As reported in the cover story for the March issue of ATW Magazine, if airline schedules for July hold, more flights will cross the Atlantic than any month in the history of commercial aviation. All three US majors recently reported an increase in transatlantic revenues compared to 2019 with the robust demand picture supported by the strength of the US dollar.

European airlines have also benefited from the surging demand across the Atlantic, providing a welcome boost for those affected by the slower return of some Asian markets and the closure of Russian airspace. In addition, new players have entered the transatlantic space in recent years with JetBlue beginning service to London in 2021, and this week announcing Paris. North Atlantic is also filling the gap left by Norwegian. An Iceland startup, PLAY, is introducing further one-stop options via Reykjavik.

To do a bit of a deep dive into what's happening in the transatlantic market, I'm joined today by two colleagues on different sides of the pond. In the UK we have Air Transport World, Europe, and Africa Bureau Chief Victoria Moores, while in the US we have Senior Editor Aaron Karp. Victoria and Aaron, good to be with you and thank you for joining us on Window Seat.

As I mentioned there, there's likely to be a record number of flights across the Atlantic during the peak summer. I know in a recent story that you filed, Aaron, I think you did some research with airlines from America that have found out that airlines were slated to operate 4,353 flights per week by peak July, which will break the record of 4,238 which was set in July 2019. Since then we've had even more routes announced. JetBlue has just confirmed New York, Paris, as I said, and Norse is adding several markets from London Gatwick including Los Angeles and Washington. Can you just give us a little bit of an overview of what's going on in the transatlantic market in the minute, Aaron, and some of the levels of demand that we're seeing?

Aaron Karp:

Sure. I mean every airline you talk to operating across the transatlantic is reporting very robust demand. United Airlines is making the strongest push among US carriers across the Atlantic. They'll operate 29% more flights and 32% more seats across the Atlantic this July compared to July 2019. Matt Stevens, their managing director of their international network said that the strength is across the board, going to big markets and smaller markets, that they see no letup. Air Canada says there are plenty of reasons to be optimism. Network and Partnerships Director Mary-Jane Lorette said, "Demand remains high and is continuing to ramp up."

Delta Air Lines says their international revenue continues to be led by the transpacific. There's high leisure demand, leisure passengers throughout the recovery have been willing to pay premium fairs, and now there's a lot of signs that the business passenger are coming back themselves. Yields are just really high across the Atlantic. I mean it makes sense for airlines to put their capacity there. You mentioned the Russian overflight, that's one other factor here. European Airlines, it just isn't practical often for many of them to fly the eight routes they used to fly because they can't fly over Russia. So they're directing many of those aircraft across the Atlantic instead.

David Casey:

Thanks, Aaron. I think Finnair is the prime example of that. Obviously it lost its USP of flying the shorter northern route to Asia, so it's had to direct quite a lot of that capacity over to the US. In terms of the European perspective, I don't think that the European carriers have been quite as aggressive as some of the US ones that we've seen, particularly United and Delta. I was actually looking at capacity figures for European carriers and I think this July they're scheduled to operate about 1.4 million seats to and from North America, which is slightly down on 2019 levels.

I think there's an important point that you just mentioned then about yields. It was interesting to hear from Lufthansa Group CEO, Carsten Spohr, last week following the publication of the results and he was saying that the carrier wasn't going to rush to add more aircraft capacity despite the surging long-haul demand because yields are so high. He said, and I quote, "They're just too much fun." It seems that that balance of supply and demand has really swung in favor of the airlines. Victoria, you're nodding along to this. Have you got any thoughts on that?

Victoria Moores:

Yeah, absolutely. It was that comment that you made about things happening perhaps more aggressively from the US side, because when I was thinking about this conversation topic, really short of the kind of changes that we're discussing and with using the narrow bodies for long-haul, a bit of a shake up in the market, particularly in Scandinavia. Really, it's a bit business as usual in terms of transatlantic from Europe. You kind of feel as though you've got those incumbents that have got their immunized joint ventures, that things just really are getting back to day-to-day business for the core airlines like IAG's carriers, like Lufthansa, Virgin Atlantic, which I think that we're going to talk about in a bit. But it doesn't feel as though much exciting is happening here beyond what's happening in the Nordics.

David Casey:

I think one of the interesting things that has happened though, which I suppose is in the Nordics as well, is the amount of low-cost capacity across the Atlantic. That has reduced since 2019. That's obviously largely due to Norwegian's exit from long-haul flying. I think they added large amounts of capacity over about a five-year period or so, till 2018, 2019. But since the pandemic, they've really retrenched just to focus on core European and domestic operations. But however, this has presented some startups, so there has been some movement in the transatlantic space. We are seeing Norse operating nonstops from London, Berlin, Oslo, and they're going to add Paris and Rome this summer. As we've said as well, there's PLAY who's doing a one-stop connecting strategy, which is modeled on that of defunct LCC, WOW. They're providing additional competition for Icelandair. Sticking with you Victoria, what is your take on some of these new entrants that have come into the transatlantic market in recent years? How can Norse and PLAY get a foothold when competition is so strong?

Victoria Moores:

Yeah, it's a really good point. I mean these are two clearly new businesses that have only launched around the time of the pandemic, post pandemic. Really the big thing to notice with Norse Atlantic and with PLAY is that they have single fleet strategies. We've got two very different businesses with those two examples. With PLAY, that's the Icelandic low-cost carrier, they're really focusing their strategy on the A320 NEO family, doing that sort of long-haul ops with a narrow-body aircraft. That's their model. Whereas Norse, basically they found some really good value 787's on the market. These were the 787's that came out of Norwegian when Norwegian decided to stop flying long haul transatlantic. They didn't really know what to do with them and they decided they would do long-haul low-cost with the 787, but they are just doing it with the 787. Unlike Norwegian, they don't have this mixed short-haul, long-haul fleet.

If we take for example, the model of the Icelandic low-cost carrier, PLAY, what existed in the market before them was WOW air, and WOW air, one of the things that they did was they diversified out into a A330 operations after they'd set up their short-haul network. Similarly, before then they had Iceland Express, which was the sort of long-haul low-cost carrier that was a predecessor to WOW. It was ultimately merged into WOW. Iceland Express got their short-haul network set up, then they brought in 757s. That's a big difference between them and these newer models, Iceland Express, WOW air, Norwegian all had a mixed fleet, whereas the likes of Norse Atlantic and PLAY are really focusing on their one fleet.

David Casey:

Thanks, Victoria. It does seem that Norse and PLAY have learnt from some of the mistakes that maybe Norwegian and WOW made when they were entering this space. I was talking to Norse's CEO, Bjørn Tore Larsen recently and he said there's basically nothing magic to their strategy. They're just going after large, thick O&D markets. They're simply putting capacity where that demand is.

Alongside Norse and PLAY, we may well see another transatlantic entrant within the next 12 months. There's a startup called Fly Atlantic, which is positioning itself as an ultra-low-cost carrier that wants to serve the U.S. and Canada from Belfast International. It hopes to launch in summer 2024 using either A321neos, or 737 MAXs, and has ambitions of operating about 18 aircraft by 2028. It's certainly a different angle to what we've seen before, although I do worry that the lower demand perhaps from Belfast compared to some of the other major European cities will make it tough going for Fly Atlantic. As well, operating narrowbodies means it won't have that cargo volume that some of the widebody operators can operate as well. What are your thoughts on this, Victoria?

Victoria Moores:

I think it's an interesting one and it's going to be one to watch this space as with any startup. But you're right, it's that idea of them operating from Belfast. When you consider that not that far away, you've got the Dublin hub that's got pre-clearance for the US. Really, what market do they have through Belfast? Are they going to be able to attract people to fly across there because a local market isn't necessarily going to be that strong. Also, even though you're in Belfast, if you buy a through ticket from say the UK, you're still going to have to pay APD. I think one of the things that they've been talking about is how you wouldn't need to pay APD because Northern Ireland is exempt, but the actual fact is that you would if you're flying through, and that's part of the model that they're trying to promote. So I'm curious about it.

David Casey:

Yeah, I think it's case of watch this space with that one. Aaron, we touched on it earlier about JetBlue, which is another new entrant to transatlantic flying. It’s by no means a startup, but it launched flights to London in 2021, add routes from Boston last year, and later this year it's launching its much-anticipated New York-Paris route using A321LRs. It will also add Boston-Paris later in the year as well. Now it also wants to add a third destination in Europe in the form of Amsterdam, doesn't it? But it is being prevented of doing so. What's the story behind that?

Aaron Karp:

Well, JetBlue has actually accused Schiphol, and particularly the slot coordinator there, of violating the U.S., EU Open Skies agreement and have filed a complaint with the US Department of Transportation asking them to intervene. JetBlue said it's made diligent attempts to gain slots for US to Amsterdam service, but it has been rejected. It says it has been told that it can only fly if it has joint operations as part of a revenue sharing transatlantic alliance that we see dominating much of the transatlantic market. JetBlue says this is a blatant discrimination against low-cost carriers and airlines that are not part of international immunized alliances. They say there are former air slots retired by the Dutch government that could be made available, and they just don't understand why they can't get into Amsterdam. I'm not sure how this fight is going to play out, but you can see it shows that JetBlue is really thinking about services across the Atlantic to multiple cities, not just their initial foray into London.

David Casey:

Yeah, I think it's really interesting what JetBlue has said there about the discrimination. There has been a bit of a precedent in the past with Norwegian, which managed to get slots from KLM in 2018 for a route from Amsterdam to New York. So it does feel like JetBlue has something of a case there. Sticking with Amsterdam, moving slightly away from the transatlantic focus for a minute, but it is in the news a lot at the moment. Now we saw the airport introduced passenger caps last year to help alleviate pressure due to staff shortages, and we're going to see some caps as well in April and May. But added to that, and for a separate reason, the Dutch government has announced that capacity will be reduced from 500,000 flights per year to 460,000 flights from November 2023. What's the latest with that, Victoria? Why are we having that 8% reduction?

Victoria Moores:

Yeah, this is basically an initiative by the Dutch government to try and reduce noise levels and to become more sustainable. But understandably, KLM, which is the hub carrier at Schiphol, we've got over 50% of the traffic there. They are not very happy about this potential to reduce down the amount of traffic that's able to come through the airport. Again, I think they're considering pulling it down even further to 440,000 movements from November '24. So the trend would be a reduction. Now what KLM has argued in the past is they've said that they're not going to be able to sustainably operate their network if they have that capacity cap. They've argued that perhaps up to 30 destinations could be at risk of closure. They're saying that the way that this cap was calculated was based on old fleet data like 2018 fleet data, and they're saying, "It's not taking account of our fleet renewal, our sustainability initiatives."

The most recent move that we've seen on this is that KLM, together with a series of other airlines that's EasyJet, TUI, Delta, and also Corendon Airlines are taking legal action against the Dutch government to challenge this decision. Also, IATA has weighed in on that as well. The cases that they're arguing is that the industry wasn't consulted, that this goes against basically noise rules and the Chicago Convention, and that's what they're going to be taking to court arguing for greater consultation and for this to be used as a last resort, not as a first resort.

David Casey:

Thanks, Victoria. There certainly seems to be a lot to unpick at Amsterdam at the minute. Going back to something that you were saying earlier and about the Netherland slot coordinator advising that JetBlue needs what it describes as “joint operations” with another carrier, either through revenue sharing or a joint venture in order to obtain slots. It feels that it does discriminate somewhat against low-cost carriers that do have a different business model aren't part of an immunized joint venture. In terms of those joint ventures, they now control about 83% of capacity between Europe and North America, and this is up about 77% pre-pandemic. It feels like they are taking a larger slice of the market and these partnerships have become even more important than they perhaps were pre-pandemic. Would that be a fair assessment?

Aaron Karp:

Yes, I mentioned that I spoke to Air Canada and they said that transatlantic partnerships are more important than ever. Of course, they're involved in the United, Air Canada, Lufthansa in specific immunized alliance that is connected to the Star Alliance. Air Canada says that a lot of their routes they're planning are to partner Star Alliance hubs, so then their passengers can connect to a broader network without them having to operate flights to all those destinations. For example, they're going to launch 787 flights between Montreal and Copenhagen this summer, and they said that there is an ample connectivity into Northern Europe using SAS, which is one of their partner airlines. It allows them to optimize traffic flows and take advantage of SAS's network.

Similarly, they're also flying into Brussels. I mean they're going to coordinate with Brussels Airlines, which is a Star Alliance member as part of the Lufthansa Group. I think that these alliances, the Air France-KLM, Virgin Atlantic Alliance, the American Airlines, BA, Finnair, Iberia Alliance, and the United, Air Canada, Lufthansa Alliance, they're going to dominate the market. JetBlue and carriers like it could get small slices, but I don't think anyone expects that this is going to be anything other than a market dominated by those three joint ventures.

David Casey:

In terms of some of those joint ventures, we've seen Virgin Atlantic's already got a strong partnership with Delta and Air France-KLM, but this month has also joined SkyTeam. I think March the second was its actual joining date. Victoria, are there any advantages for passengers of Virgin being part of this alliance now?

Victoria Moores:

Yeah, I think that the main advantages probably with loyalty initiatives and connectivity across the SkyTeam members network. Because if you think about it, Delta and Virgin have been in a joint venture since 2012, so this is already very well established as a transatlantic partnership with Delta. I would've thought that the key difference is going to be for the passenger experience in terms of lounge access, in terms of collecting loyalty points. But I don't know how much it's actually going to change or shift the schedules at all transatlantic. I don't know, perhaps I can turn that question back to you, David. What are you seeing in terms of any changes with the SkyTeam membership?

David Casey:

Yeah, I think it mainly just formalizes what's already operating. We saw Virgin launch in Austin and Tampa last year, but I don't think there's any new U.S. destinations that are going to be on the schedule this year. I think it'll basically just be continuation of that transatlantic joint venture, and as you said, the main benefits of the SkyTeam membership will be for passengers.

Moving on, I just wanted to finish on some of the other new transatlantic routes that have been launched this year. Aaron, you've already mentioned a few that have been launched by the joint ventures, but some of the ones that I found quite interesting are the long-haul narrowbodies, Aer Lingus is doing it and we're also seeing SAS as well. I know SAS is opening routes from Aalborg in Denmark and Gothenburg in Sweden to New York, so they're two secondary cities that you won't probably associate with transatlantic service. It is a bit of a departure from their usual network strategy which is historically centered on Copenhagen, Oslo, and Stockholm. But obviously the long range narrow bodies in the fleet gives it more flexibility in route planning, enabling to tap in demand from some thinner markets. Are we likely to see more of this, do you think, Aaron, particularly once airlines start taking deliveries of the XLR next year?

Aaron Karp:

Yes, absolutely. We were talking about JetBlue before, they've got XLRs on order and they've said that they want to fly it into Europe, and deeper into Europe. The XLR, just as a level setter, has a range of 4,700 nautical miles. That's 700 nautical miles more than the A321LR model that JetBlue is currently using for transatlantic flights, and is actually the longest range single-aisle aircraft built in decade. JetBlue is going to rely heavily on its premium Mint seats. They believe that most of the revenue from those seats, but other carriers have different ideas.

Wizz Air, for example, says that they're going to operate theirs in a low-cost carrier configuration with long-range flights from Abu Dhabi. They say, "Well, the passengers might be in tighter seats, but there will be more money in their pockets, so they'll be happier." Frontier Airlines, the U.S. ULCC, is taking delivery of the XLR. They have said that they will consider transatlantic flights from cities like Philadelphia. The XLR, some carriers believe is going to be a game changer because it allows you to fly narrow-body flights at distances that previously could never be contemplated with traditional 737s and A320s.

David Casey:

Thanks for that, Aaron. That's about all we have time for on this episode. But it certainly feels like the transatlantic market, which is obviously one of the most important international markets anyway, is really bouncing back stronger than ever. We're going to have more discussion on this, as well as a whole host of other topics that are affecting the industry in the Americas, at Routes Americas 2023, which is taking place in Chicago from the 21st to the 23rd of March. Look out for coverage from that event on aviationweek.com. You can find out more about how to attend on routesonline.com. Victoria, Aaron, thank you for joining me today and thanks also to our producer, Michael Johnson. Finally, thank you to you, our listeners. Make sure you don't miss us each week by subscribing to the Windows Seat Podcast on Apple Podcast, or wherever you listen. Until next week, this is David Casey disembarking from Window Seat.