London Gatwick under a cloud as carriers threaten to quit airport

Less than two weeks ago, Gatwick’s chief executive was talking about flights restarting by the end of this month as the UK’s second biggest airport plotted its recovery from the pandemic that has hit the aviation industry hard. 
Stewart Wingate said that, based on what he had seen as some countries eased the lockdown in Asia, he was hoping for “some meaningful volume coming through the airport by the end of May and start to ramp up volumes in June and then July.”
But the mood has darkened at the airport — located 30 miles south of London — in the past week. Virgin Atlantic, one of its longest-standing airline customers, said it was closing its operations just days after British Airways, Gatwick’s second biggest carrier, also threatened to walk away.

Between them the two airlines serve more than 70 routes, ranging from European cities and resorts to popular, long-haul holiday destinations, chiefly in the Caribbean and the US.
Such a dramatic loss of services raises the prospect of higher fares for consumers — 46m used the airport last year — pushing up the costs of holidays.
“One of the main reasons that UK air ticket prices are so keen is the intense competition in the industry and any reduction in competition will not work in the favour of the customer, impacting on both prices and choice,” said Luke Petherbridge, head of public affairs at ABTA, which represents UK travel agents. 

Iata, the global airline trade body, warned this week that air fares could rise by as much as 54 per cent compared to 2019, if airlines were told to introduce social distancing measures on aircraft.
Virgin Atlantic, the sixth-largest airline by capacity, will abandon the airport it has used as its headquarters for the past 35 years and move what are primarily leisure routes to its operations at London Heathrow.
But BA’s threat to leave would have a much bigger impact on Gatwick. The UK flag carrier accounts for 17 per cent of capacity, according to OAG data.

The coronavirus shutdown has hit airlines around the world hard, including Gatwick’s third biggest customer Norwegian Air Shuttle. The struggling carrier has warned it could stay grounded for 12 months and, after securing a rescue package this week, said it was preparing to restart as a smaller operation. 

Huw Merriman, chair of the transport select committee, on Tuesday told the BBC: “My hope is that Gatwick will survive but my goodness, it’s going to be tough for the aviation industry.”
Mr Wingate said he remained “very optimistic” about the long-term prospects and resilience of Gatwick, which is majority owned by Vinci, the French infrastructure group, but acknowledged the pandemic had hit the industry hard and that “severe economic knock-on effects are being felt in our local community”.
He also echoed his hopes from two weeks ago that operations, which are suspended bar a handful of daily flights, would resume by the end of May, adding: “We aim to make Gatwick even stronger than it was previously.”
Many in the industry believe the airport will have to re-examine its long-term strategic plans, and refocus itself on the low-cost airline sector.

Airlines will be risk averse, focusing on restoring their profitability. This means we will see degraded connectivity and potentially higher fares

Gatwick already has easyJet as the dominant carrier with Europe’s second biggest budget airline accounting for 40 per cent share of capacity. The low-cost airline has built up its dominant position over almost two decades and John Grant of OAG said in terms of the pecking order of London’s airports, Gatwick was in a good position.
“It certainly reaffirms that London Heathrow has that number one position,” he said, adding: “There is a ‘waterfall’ effect in the London market. Heathrow always has first place and then Gatwick and then Stansted or Luton.”
The upheaval caused by the pandemic is the latest blow to Gatwick in recent years. Four years ago, it lost its long-running battle for government approval for a second runway — a long-term strategic objective to allow it to rival Heathrow.
Since then it has also lost two of it biggest airline customers with the collapse of Monarch in 2017 and Thomas Cook last year. 

Vinci paid £2.9bn for its majority stake in Gatwick at the end of 2018. “One thing is for sure, Vinci never expected this for Gatwick when they paid a load of money,” said Mr Grant. 
Its previous owner, GIP, a US-based infrastructure investment fund, turned the airport’s financial performance around after buying it for £1.5bn in 2009. Passenger numbers have jumped by almost 44 per cent from 32m a decade ago.
Last month, Gatwick warned that a return to pre-crisis traffic levels could take up to four years. The number of flights were down 98 per cent last week compared to a year ago.
Olivier Jankovec, director-general, ACI Europe, the trade body for airports, noted that the impact of the pandemic will be felt throughout the sector “Airlines will be risk averse, focusing as much as possible on protecting their yields and restoring their profitability. This means we will see degraded air connectivity and potentially higher air fares,” he said. 
John Strickland, an aviation consultant, warned the outlook will be challenging for all airports and that any recovery will take time.
“I think the situation we’re in is temporary. Demand is going to come back but it’s still not going to come back to the level of using all the capacity that we’ve seen up to now at Heathrow and Gatwick,” he added.

Heathrow trials passenger temperature checks

Heathrow airport has launched a trial to check the temperature of passengers as part of plans to start increasing flights after the end of the lockdown.
John Holland-Kaye, chief executive, told MPs on the transport select committee that the checks were being carried out at departure gates.
The UK government has opted not to introduce checks on travellers at airports, in contrast with many other countries. Heathrow has called on Downing Street to take the lead in establishing a new set of international standards to enable a return of travellers in safe conditions.
“If we are told that the only solution until we can get a vaccine in 12 to 18 months’ time is to socially distance in an airport, then tens of thousands of jobs will be cut,” said Mr Holland-Kaye. “We cannot afford to wait that long to get flying again.”
Tim Alderslade, the chief executive of the lobby group Airlines UK, also told MPs the government would need to do more to support the sector in a time of crisis.
He said airlines would likely need an extension of the government furlough scheme until at least September or October, and relief on rules that require airlines to use 80 per cent of their slots or risk losing them to be extended until the end of the year.
“The key question for us is does [the government] see aviation in the way that it should do,” he said. “I remain to be convinced.”

US Treasury plumps for longer-term debt to fund $3tn stimulus

The US Treasury says it plans to significantly increase the proportion of borrowing through longer-term debt, as it set out details of how it will fund the government’s $3tn-plus stimulus of the coronavirus-ravaged economy.
On Wednesday the department, which has already indicated it will revive a 20-year bond it last issued three decades ago, said that it would boost the size of three, 10 and 30-year bond auctions to record amounts.
The outline comes just days after the Treasury said that it would need to borrow $3tn before the end of June, a historic sum that is more than triple the previous record seen in 2008 and far beyond the $1.28tn the department borrowed for the entirety of the 2019 fiscal year.

Congress has passed four large spending packages since the virus outbreak including bailout funding for corporations and cheques for American taxpayers to see them through the lockdowns.
“In light of the substantial increase in borrowing needs, Treasury plans to increase its long-term issuance as a prudent means of managing its maturity profile and limiting potential future issuance volatility,” the agency said in a statement.

Given that the Treasury has a captive buyer, it makes sense to issue as much as [it] can

Market participants have long braced for the borrowing surge, given the enormous support provided by Congress to ease the economic burden brought on by Covid-19, but some were surprised by the magnitude by which the Treasury is ramping up issuance of long-dated debt.
“There is a lot more duration coming to market than the market was anticipating,” said Gennadiy Goldberg, senior US rates strategist at TD Securities, noting that long-dated Treasury yields rose following the department’s announcement, indicating a fall in price. 
The yield on the benchmark 10-year Treasury note climbed 0.07 percentage points to 0.73 per cent, while the yield on the 30-year bond jumped 0.09 percentage points to 1.4 per cent.

The department — led by Treasury secretary Steven Mnuchin — largely relies on the market for bills, which mature in one year or less, to meet its funding needs. It has already raised $1.5tn in the second quarter, according to Thomas Simons, a money market economist at Jefferies, with an expected $1.4tn to come.
Wednesday’s announcement indicated this would be supplemented with a record $96bn of debt maturing in three, 10 and 30 years. Taken together with increased auctions for two, three and five-year notes as well as other instruments, the Treasury said it amounted to an additional $154bn of issuance over the next three months. 
The Treasury department also laid out in detail its plans to issue a 20-year note for the first time in three decades, including $20bn in a first sale slated for May 20. It had previously disclosed that auctions would be held in the third week of the month when Treasury inflation-protected securities, or Tips, are also sold.
The agency last issued a 20-year note in 1986, pulling it from its arsenal of funding instruments due to insufficient demand.

On top of the $3tn in the current quarter, the Treasury said it expected to borrow a further $677bn in the three months to September. Having already borrowed $477bn in the first quarter of the year, it would bring the total amount to more than $4tn for the full fiscal year. 
Investors said they do not expect yields to rise much higher from here, however, given that the Federal Reserve has committed to purchase an unlimited quantity of Treasuries. The US central bank is now buying government debt at a pace of $8bn a day, down from a peak of $75bn at the height of a financial market liquidity crunch in March but still a dramatic expansion of its balance sheet.
Subadra Rajappa, head of US rates strategy at Société Générale, said she expected the Fed would adjust the pace of its buying should there be a “meaningful sell-off” in US government debt.
“Given that the Treasury has a captive buyer, it makes sense to issue as much as [it] can,” she said.

US truck sales a bright spot as GM ekes out a profit

General Motors’s quarterly profits may have tumbled nearly 90 per cent, but US truck sales strengthened and the automaker is keen to build more when US and Canadian plants reopen this month.
Sales at GM declined 6 per cent overall to $32.7bn in the first quarter, the company said on Wednesday, while sales in the US declined 7 per cent. Yet US sales for full-size pick-up trucks rose 27 per cent from the same period a year earlier.
Chief financial officer Dhivya Suryadevara said the company is selling more vehicles in states not located on the US coasts. The Detroit automaker is watching where dealers are selling vehicles, and which models, and that will guide how GM ramps up production when it reopens US and Canadian plants on May 18, initially with a single shift per day.

“As we come back online we will prioritise trucks . . . as well as geographies that are running light from an inventory standpoint,” she said. “From a dealer inventory and sales perspective, you cannot paint the entire country with the same brush.”
Imported brands are traditionally more popular in coastal states, which so far have been hit harder by the pandemic. Governors there also moved more quickly to impose stay-at-home orders.
“The states that shut down later are the ones where full-size pick-ups are more popular,” said Fitch Ratings analyst Stephen Brown. “Texas having closed down later, that probably benefited the Detroit Three,” he added, referring to GM, Ford and Chrysler.
GM’s net income in the first quarter fell 87 per cent to $294m, which nevertheless bested the billions in losses posted by its two rivals. It also beat Wall Street’s profit expectations. Analysts polled by FactSet expected an adjusted profit, which excludes certain items, of 40 cents per share, but the carmaker reported earnings of 62 cents.
The company said that the pandemic lowered its earnings before interest and taxes by $1.4bn, and chief executive Mary Barra said GM expects “an even greater impact in Q2 because of the production stoppage, a phased restart and what we believe will be lower market demand”.

Ms Suryadevara said in a scenario where global auto production is down between 60 and 70 per cent, GM will see a cash outflow between $7bn and $9bn in the second quarter.

GM shares rose nearly 5 per cent to over $22.
GM’s announcement that it would join Fiat Chrysler in restarting US and Canadian plants on May 18 means Ford is likely to follow suit, given that the carmakers all work with the United Auto Workers union.
UAW president Rory Gamble said on Tuesday: “The companies contractually make that decision, and we all knew this day would come.”

Top investor calls for dismissal of Wirecard chief Markus Braun

Deka Investment, a top-10 shareholder in Wirecard, has called for the dismissal of chief executive Markus Braun, raising the pressure on chairman Thomas Eichelmann after shares in the German payments group collapsed 38 per cent in a week. 
The sell-off, which has wiped more than €5bn from Wirecard’s stock market value, was triggered by the results of KPMG’s special audit into its accounting and business practices.
The Big Four accountancy firm said it could not verify that large parts of Wirecard’s reported revenue were real and disclosed it ran into obstacles during a six-month investigation. 

Ingo Speich, Deka’s head of sustainability and corporate governance, told the Financial Times that he called for Mr Braun’s removal in a personal conversation with Mr Eichelmann earlier this week. 
“The company owes [Mr Braun] a lot but we don’t think that he is the right person to stabilise Wirecard and overcome the current crisis,” said Mr Speich, adding that the chief executive was “primarily responsible for the massive loss in confidence”. 

Mr Braun has been talking down Wirecard’s issues for too long and failed to deliver necessary changes to its organisation and governance

The KPMG audit was commissioned by Wirecard’s supervisory board last October after the Financial Times reported about whistleblowers’ accusations of accounting fraud.
While KPMG said it found no evidence of fraud, it pointed out it could not verify the existence of certain sales and clients as it lacked the necessary data. It also raised questions over how Wirecard calculated its revenue and cash.
Deka, which holds a 1.4 per cent stake in the company, is the first long-only investor to explicitly call for the chief executive’s dismissal. Frankfurt-based Union Investment, which holds a 4 per cent stake, on Tuesday told the Financial Times that Wirecard “needs an organisational and personal renewal” and called for the appointment of “untainted, external managers to the executive board”.

Wirecard declined to comment on Deka’s demand.
In an interview with Handelsblatt, Mr Eichelmann last week said a discussion about managerial change “would currently not at all be in the company’s interest”, adding that, “I do not see a removal of Mr Braun at the moment.”
Ousting Mr Braun may be complicated by the fact that he is one of Wirecard’s largest shareholders, holding a stake of more than 7 per cent.
After the KPMG report was published, Mr Braun called it a “big step forward”, adding that there was “not any reason to have even the faintest doubts over account balances”.
Mr Speich said the KPMG report was, in fact, “a disaster” and “the final straw” for Deka, causing it to lose confidence in the CEO. “Mr Braun has been talking down Wirecard’s issues for too long and failed to deliver necessary changes to its organisation and governance,” he said.
Mr Speich called on the supervisory board to act quickly. “Otherwise, the risk is that the crisis spills over on its clients and damages the operating business.”
Deka’s call to replace Mr Braun was first reported by Wirtschaftswoche.