Several dozen Delta Air Lines jets are parked at Kansas City International Airport in Kansas City, … [+]
Airlines all around the globe are staggering under the weight of the coronavirus pandemic. Beginning Wednesday we’ll begin learning just how badly they’re hurting.
The four largest U.S. carrier release their first-quarter results over the next seven days: Delta, Southwest, American and United. Together they carry more than two-thirds of all air travelers in this nation.
The flexibility and dexterity of the English language will be put to the test by efforts to describe just how ugly the carriers’ first-quarter losses will be. Then the linguistic challenge will get even tougher in July, when the airlines report results from what is guaranteed to be an even worse second quarter. That’s because the first quarter includes January, which though historically one the slowest months of the year, didn’t see much impact from the pandemic.
Load factors – the percentage of filled seats – tumbled dramatically through February, below carriers’ break even points around 75% and then below 50%. By late March, they hit the teens, when United said it was losing $100 million a week. Currently load factors for most U.S. airlines are hovering around 5% despite the fact that they are operating only 35% to 20% of their regular schedules.
Delta, which last year became the world’s largest airline in terms of revenues, is expected to lead off earnings season Wednesday with a loss of around 86 cents per share, or $550 million, on revenue of $9.36 billion. It could decide to add a bunch of accounting charges and write-downs to get lots of disclosure pain over with in one super-ugly announcement. A year ago in the first quarter it earned a profit of 96 cents per share, or $710 million, on revenue of nearly $10.5 billion in revenue.
Southwest, reporting Thursday, is expected to lose around a nickel per share in the first quarter, or approximately $25.4 million, vs. a profit of 70 cents per share, or $387 million a year ago. American on Friday is forecast to lose around $1.44 per share, or around $616 million, vs. the 52 cents per share it earned in 2019’s first quarter. United already has posted a preliminary $2.1 billion pretax loss for the first quarter, but that number could be revised when the company officially reports its quarterly performance on April 28.
The reason for all the red ink is obvious: the pandemic.
But the numbers behind the red ink are truly shocking, even for an industry with nearly a century of wild boom-to-bust cyclicality. Airlines For America (A4A), the big airlines’ trade group, said last week that the industry is facing the “worst cash crisis in the history of flight.” Recently airlines have been paying out more in ticket refunds than they’ve been taking in via new sales, even though they’ve been strongly encouraging customers to accept vouchers for future traveler rather than cash, which the carriers desperately are seeking to preserve. Booked revenue, as it is termed, has been running down by 103% vs. a year ago in the last couple of weeks.
A4A says the average number of passengers per domestic flight now is only about 10, even though carriers are canceling most trips, or even all but one of their scheduled trips per day on a majority of their routes. On the few international flights being operated the average number of passengers is around 24 – on planes typically designed to carry 250 to 400 passengers.
All four of the biggest U.S. carriers have been approved to receive big federal grants sized to be enough to meet roughly 70% of their payroll needs through Sept. 30. But that money can’t be spent on anything other than workers’ pay. Plus, under the terms of the agreement the airlines can’t lay off any workers until after Sept. 30. Still, the carriers are aggressively seeking volunteers for unpaid leaves and for early retirement. In many cases there having to add incentives to get more employees to accept such offers rather than wait to see if they might survive a future layoff.
Thus, it’s clear that all four big carriers likely will execute massive layoffs after the Sept. 30 deadline, barring the unlikely passage of a second multi-billion-dollar government support program specifically for them. Of course, there could be an unexpected surge in global air travel demand if restrictions on human travel are eased and bans on international travel are lifted in the relative short term, but just now that would seem a pipe dream.
In a memo to all United employees sent on April 15, United CEO Oscar Munoz and President Scott Kirby, who is scheduled to take over as CEO upon Munoz’ upcoming retirement, said, “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.”
Therefore, U.S. airlines, like those that survive in other nations, will emerge from this period significantly smaller in terms of number of employees and planes. All together about 750,000 people work in the U.S. airline industry, with around 350,000 of those at the four biggest carriers.
Already Wall Street analysts are seeking to top one another with predictions of how many planes will be retired and/or kept out of operations indefinitely. The latest predictions fall in the 800 to 1,000 plane range. But don’t be surprised if the total among those four tops the 1,000 mark, perhaps by a considerable margin. Southwest had about 750 planes in its fleet before the pandemic hit, United just over 800. Delta operated around 880 planes while American had more than 930. And that’s not counting the hundreds of regional jets that fly in their colors but which are owned by regional airlines operating under contract to the big carriers.
If demand initially comes back at less than 50% of what it was before the pandemic took hold, that would imply between 300 and 450 planes remaining idle per carrier, or between 1,200 and 1,800 grounded jets among those four only. (Currently more than 2,100 U.S. commercial aircraft are grounded as international travel bands remain in place and extreme shelter-in-place orders exist in more than 40 states.) A 75% bounce back of travel demand would imply keeping 600 to 900 planes out of the sky. Smaller U.S. carriers like Alaska Airlines, JetBlue, Spirit, Allegiant and Frontier also will be keeping some of their planes on the ground for an extended period, as will the regional carriers.
The numbers of grounded planes undoubtedly will vary some from the predictions, especially since international demand is likely to be slower to comeback. Southwest, which has very little international service, doesn’t fly the big widebody planes that Delta, American and United use on their long-haul international routes. So it likely will ground a smaller percentage of its fleet, made up entirely of different versions of the Boeing 737. But for Southwest any significant number of airplane groundings would trigger an historic event. Already management has approached leaders of all the unionized work groups there telling them that the airline that has never laid off a single worker in its 48 years of operations, will have to lay off thousands in the fall if the unions aren’t open to granting relief from the new, high-paying contracts negotiated in the last year or two.
The rate at which grounded planes will be returned to service, as well as the decisions on what size planes to bring back into operation first will be driven mostly by the pace of travel demand growth. The kind of demand growth – for domestic or international travel – also will play a role in the decision of which planes to bring back into service, and when.
Expect executives of all the airlines to discuss their thoughts on that during their upcoming quarterly “earnings” conference calls. But remember that their plans for returning aircraft to operations and for laying off and then bringing back staff are being written in pencil, not ink.
Early hopes in February for a deep, but short drop in demand, and for a strong recovery of air travel demand by fall or the fourth quarter now are giving away to expectations that demand will recover at a much slower rate. Indeed, it is likely that demand won’t return to its pre-pandemic levels until after a COVID-19 vaccine becomes widely available. And current hopes are that a vaccine might be approved for use sometime in early or mid-2021, with a months-long ramp up of manufacture and distribution of vaccines to follow.
As a result, more and more analysts now are revising their expectations, pushing a likely recovery into 2022. Analysts at Cowen & Co. have gone so far as to suggested that it won’t happen in full until sometime in 2025.
Nor is it certain that travel demand ever will come back to the record levels seen in the last few years (at least when adjusted for population growth). Some analysts and industry insiders fret that months of living under travel quarantines will teach consumers, and especially business leaders charged with keeping costs down as the economy recovers, how to get lots of business done from their desks, or even their homes, without having to go on the road.
Certainly, lots of business activities – conventions, sales calls, service calls and more – still will need to be conducted at a face-to-face level. But other reasons behind business travel – like executive visits to remote operations, large meetings involving lots of mid-level workers, and company training sessions – may be accomplished as well, or almost as well via today’s much-improved teleconferencing technology. Many companies may choose to continue to use those means as a way of saving money, especially if the economy remains sluggish coming out of the current lock downs.
