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Delta Air Lines passenger planes are seen parked due to flight reductions made to slow the spread of coronavirus disease (COVID-19), at Birmingham-Shuttlesworth International Airport in Birmingham, Alabama, March 25, 2020.
Elijah Nouvelage | Reuters
Delta and United have reported their first quarterly losses in more than five years. Their competitors are also expected to release dismal results in the coming weeks. The next few months look even more painful for the sector as the coronavirus pandemic saps air travel demand during what is normally the most lucrative time of year.
Air travel has dropped by more than 95% as the Covid-19 pandemic spread around the U.S. Now, states hard-hit by the pandemic like New York are extending stay-at-home advisories for the next several weeks and canceling events through June in New York City, a sign that business isn’t even close to returning to normal yet. Bleak economic data and a rising unemployment rate are raising doubts about when travelers will return.
“People are fearing for their homes, not their holidays,” said Rob Morris, global head of consultancy at Ascend by Cirium, a UK based aviation consulting firm.
It’s not just would-be vacationers who are staying home. Also absent are high-spending corporate travelers, a crucial customer base for network carriers, as companies suspend business trips because of the virus.
Years to recover
Delta’s CEO Ed Bastian on Wednesday said revenue in the current quarter looks 90% lower than expected and that it could take two or three years for business to recover.
“We don’t know when [the recovery] will happen, but we do know that Delta will be a smaller airline for some time, and we should be prepared for a choppy, sluggish recovery even after the virus is contained,” Bastian said in a staff note.
The airline lost $534 million in the first quarter, its first loss in just over five years. United Airlines earlier this week disclosed a $2.1 billion pretax loss in the quarter ended March 31 because of coronavirus. The Chicago-based carrier hasn’t yet set a date to report full quarterly earnings yet.
American Airlines CEO Doug Parker last week told CNBC that the company’s revenues are down 90% from a year ago, but that it appears to be as bad as it’s going to get. “The real question is how long you stay at the bottom and when do we begin to recover. I don’t think I know that better than anybody else,” he said. The sentiment was echoed on Tuesday by JetBlue Airways CEO Robin Hayes.
Even after the disease is contained, close to half of travelers will wait a month or two before flying, while 28% said they would wait six months or so, according to the results of a new survey of potential travelers in 11 countries by the International Air Transport Association, a trade group that represents most of the world’s airlines. Just 14% said they would not wait at all to fly, down from the 22% who said they’d travel immediately in IATA’s February survey.
The pandemic has upended airline executives’ plans for further growth in passenger demand. When the coronavirus began to spread overseas early this year, U.S. airlines had just posted their 10th consecutive year of profits and had staffed up to the highest levels in 17 years. Last year, they couldn’t get new planes fast enough and now they’re parking hundreds of planes, particularly older jets, as demand dries up.
Faced with a dearth of passengers, airlines like American, Delta and United have started flying cargo-only flights.
Job cuts?
U.S. airlines cheered when Congress last month dedicated $50 billion in aid for the ailing sector. That included $25 billion in a mix of grants and loans that are solely dedicated to paying their roughly 750,000 workers and require airlines not to furlough or cut their pay rates — though hours have been reduced — through Sept. 30.
But that might not be enough to avoid job cuts if demand remains low.
The government aid “is helpful in the near-term because we can protect our employees in the U.S. from involuntary furloughs and pay rate cuts through the end of September,” United CEO Oscar Munoz and president, Scott Kirby, who takes the reins next month, told employees on April 15. “But the challenging economic outlook means we have some tough decisions ahead as we plan for our airline, and our overall workforce, to be smaller than it is today, starting as early as October 1.”
Voluntary unpaid leave
Around one-third of Delta’s roughly 90,000 employees have already volunteered for unpaid leave. Airlines continue to ask staff to consider unpaid or partially paid time off in a bid to cut down on costs.
“We will do as many things through voluntary means as we can to get our costs in line over time, over the next 12 months, with our demand profile,” Bastian said on a media call Wednesday, when asked whether involuntary furloughs or layoffs will be unavoidable. “If it turns that we’re unable to do that and the demand is much slower in materializing than we expect at the present time we may be forced to make those decisions.”
Delta is also considering offering employees early retirements, Bastian said.
Cowen & Co. airline analyst Helane Becker this month forecast job losses of between 95,000 to 105,000 in the U.S. airline industry, mostly at American, Delta and United “as the other carriers look to wait out the downturn in demand.”
Any costs left to cut?
Airline executives have made deep cuts to their networks, in some cases cutting some 95% of flights to certain airports to better align with almost nonexistent demand. Carriers have also implemented hiring freezes, cut executive pay and deferred capital expenditure projects.
Thousands of airline employees have already volunteered for unpaid leave and airlines are keeping those options open. Airlines continue to ask staff to consider unpaid or partially paid time off, leaves that can last as long as 12 months.
U.S. airlines as of April 15 had idled more than 2,700 planes, more than 44% of their fleet, according to Airlines for America, a trade group that represents the largest U.S. carriers. Some airlines are discussing delivery schedules with aircraft manufacturers which could mean deferrals of new planes. Airlines pay the bulk of an aircraft’s price when they take delivery. That’s bad news for airplane manufacturers like Boeing and Airbus.
Delta said it expects to halve its daily cash burn rate to $50 million by the end of the second quarter. Measures include parking more than 650 planes, closing airport lounges and reduced workweeks around the airline, which is the least unionized of the four largest U.S. carriers.
Shoring up cash
Airlines have spent recent weeks drawing down on lines of credit and raising additional funding to help them weather the crisis. Delta, for example, said it raised $5.4 billion since the end of March, including a $3 billion term loan and $1.2 billion from aircraft sale leasebacks. It also drew down $3 billion of an existing credit facility and cut planned capital expenditures by the same amount.
Late Wednesday, Delta said it plans to raise even more cash beyond government aid. It plans to offer $1.5 billion of secured notes due in 2025 and it also lined up a separate $1.5 billion term loan.
Investors will be asking airline executives in the coming weeks what else is left in their arsenals to get through the crisis, particularly if demand remains weak. Some options include selling frequent-flyer miles to banks in advance, or selling and leasing back planes, a move United announced this week.
United on Tuesday turned to the equity markets for additional cash, announcing plans for a sale of 39.25 million shares, worth more than $1 billion.
Health questions
Executives have so far said it will be a long, perhaps years-long, slog to pre-Covid-19 levels, when planes were flying nearly full. That lengthy recovery is because of the combination of a health crisis and what economists expect to be a deep recession. Already, the job gains since the Great Recession have already been wiped out.
They are also likely to receive questions about what will have to change to get travelers comfortable with flying. Several executives have noted that passengers won’t return until they feel like getting on board a plane will be safe and that they don’t have to worry about getting sick. Temperature checks at airports are a good step, Bill Franke, a longtime airline investor whose private equity firm Indigo Partners owns budget carrier Frontier Airlines and several others.
“There will be an effort to convince the customer that it’s safe to travel,” he told CNBC last week. “There should be some process where everybody who gets on an airplane knows that every other passenger doesn’t have a fever.”
