Declaring that “hope is not a strategy,” the incoming CEO of United Airlines said today he’s planning for consumer demand for travel to remain at “net zero” through the end of this year into 2021.
United President Scott Kirby, who at the end of May will replace the retiring Oscar Munoz as CEO, said “it is naïve to believe that we, or anyone can predict” how soon demand for air travel will begin to pick up again. Therefore, while hoping for a recovery to begin in the shorter term, the Chicago-based carrier is planning for a much worse case scenario. “We are expecting to continue to see zero net demand for the rest of this year, and perhaps into 2021. We’re not predicting that. But we are planning for that.”
United Airlines CEO Oscar Munoz (L) and President Scott Kirby. Retiring United Airlines CEO Oscar … [+]
Kirby, Munoz and other United executives spoke with analysts via conference call this morning ostensibly to discus their airline’s staggering $1.7 billion quarterly loss, announced late Thursday afternoon. After one-time accounting adjustments the loss totaled $639 million. Those ugly numbers were roughly 40% less ugly than most analysts had expected, and better than even worse performance numbers revealed Thursday by larger rival American Airlines. But United executives made it clear that profit and loss totals and the ordinary financial and operational metrics normally discussed in quarterly earnings reports and conference calls are of minimal value during a crisis triggered by the COVID-19 pandemic and widespread shutdowns of commerce in response.
The only two relevant metrics worth discussing now: the rate at which the airline is burning through cash and the speed at which it can reduce costs, they said.
On April 1 United’s daily cash burn rate was around $50 million. Now the expectation is that in May and June the daily cash burn will be down to between $40 million and $45 million a day.
But that’s come at a very high human cost. United has cut its daily flight schedule by a staggering 90%. So far that’s been only partially compensated for by an unprecedented and painful reduction in workforce. Currently more than 20,000 of the 96,000 workers with which the airline began the year either have taken voluntary unpaid furloughs, are working reduced hours, or have accepted offers to retire early. And, unless there’s a big recovery of demand that’s visible by Oct. 1, the airline is all-but certain to lay off tens of thousands of its remaining workers.
Currently neither United nor other U.S. airlines that received billions in grants and low interest-loans from the federal government can issue layoffs. The CARES Act money can only be spent to cover workers’ compensation. But that restriction expires Sept. 30, and it does not now appear likely that either Congress or the Trump administration will create a second bailout program for airlines.
Thus, big layoffs are likely at United and its competitors as soon as Oct. 1. And demand doesn’t begin to show significant signs of recovery by then, those layoffs could be particularly large.
“By October we know that we’re going to get our cash burn, in a worse case scenario, down to around $20 million a day, assuming a net zero revenue environment,” Kirby said. “I sincerely hope we don’t have to do that. Doing that will be extremely painful for our people. But we won’t hesitate to do it if that’s what is required to ensure United survival and that there’ll actually be good jobs for our people to come back to when the recovery does begin.”
By “net zero” demand and “net zero revenue environment,” Kirby means that United currently isn’t selling enough new tickets to offset the number of sold tickets that it is having to refund, either in the form of vouchers or cash, to booked passengers whose future flights have been canceled or who now no longer wish to travel because of the fear of disease. That means the carrier is, at best, taking in just enough new revenue to offset the money it’s having to give back to people canceling their trips.
United officials didn’t say what their current load factor – percentage of filled seats – is, but other carriers have reported load factors currently in the 5% to 7% range. Airlines had been running load factors above 80% in the last few years. And had been need to fill more than 70% just to break even on their daily flight operations. Thus, United and its competitors now have a long, long way to go in terms of generating enough demand to once again simply cover their operating costs, let alone earn profits.
That’s why reducing costs and daily cash burn rates, and preserving as much liquidity as possible are so important for airlines right now.
Currently United has about $9.6 billion in availability liquidity. That includes about $2 million available to it via a revolving line of bank credit that it has not yet drawn. Additional debt transactions expected to close this month, and a second disbursement of government grant funds that’s expected soon should leave the airline with a similar amount of liquidity by the end of the second quarter after covering the daily cash burn. Thereafter United will be largely dependent on its ability to generate cash from ticket sales and from additional debt financings it can arrange.
The airline currently has about $8 billion worth of airplanes that it could put as collateral for such loans, plus $2 billion in other assets – mostly real estate and important foreign route rights and landing rights at for airports and a couple of congested U.S. airports, than can be sold or used for collateral. Not included among those assets is the estimated $25 billion-plus that its Mileage Plus frequent flier program is estimated to be worth should the airline need to raise additional debt, largely because if things get so bad that United would need to pledge its Mileage Plus program as collateral for a loan its balance sheet would be so overloaded with debt that it likely would be unable to meet its debt obligations without going through bankruptcy.
Part of Kirby’s concern – and it’s shared industry wide – about the recovering of demand is beyond the industry’s control. Airlines, he says, are excellent at minimizing safety risks, thus minimizing the new health risks through aggressive new cleaning procedures is something that “airlines will get right,” he said.
“The real challenge is to convince people that they have a reason to travel. Disney World needs to be open… . Conventions need to be happening… . Businesses need to be sending people out… . We’re going to need a broader confidence across the whole range in order to get society traveling again,” Kirby said.
“Six weeks ago we felt threatened when we saw someone walking down the street with a mask on. No we feel threatened when there’s one person who’s not wearing a mask.,” Kirby added, addressing the challenge of changing frightened consumers’ new, much more cautious attitudes toward engaging in public situations.
Kirby also warned of possible false starts to a recovery, and the potential for a second wave of the COVID-19 cases emerging later this year. That’s why, he said, United won’t jump to increase service upon seeing “the first green chutes” of potential recovery.
“There will be a recovery,” he said. “We just don’t know when.”
