The biggest airlines in the nation recently reported their first quarter earnings and, as expected, the novel coronavirus (COVID-19) has taken its toll on this sector that was hitherto enjoying record growth and prosperity. All of the carriers have seen dramatic drop-offs in passenger numbers and a barrage of cancelled bookings that have played havoc with their bottom lines and forced them to ground aircraft and shutter their lounges. While the Federal Government’s coronavirus response bill (CARES ACT) prohibits airlines from initiating any employee furloughs or layoffs through September 30, staff reductions may in all likelihood occur once that date has passed. Let’s take a detailed look at how the pandemic has affected the biggest domestic carriers in the most recent quarter.
#AmericanAir, most recently the nation’s largest airline, recorded the greatest amount of red ink of the first quarter earnings season. The Fort Worth, Texas-based carrier lost $2.24 billion, a greater than expected loss, as total operating revenue dropped 20% to $8.52 billion. It also announced the suspension of its dividend and stock buyback programs after receiving nearly $11 billion in government assistance under the CARES Act. The airline reported an adjusted first quarter loss of $2.36 per share, compared with a modest 41 cents per share profit last year. It was American’s first quarterly loss since emerging from bankruptcy protection in 2013. “Never before has our airline, or our industry, faced such a difficult challenge,” American’s CEO Doug Parker claimed. The airline reported that it will burn at least $70 million in cash per day over the early months of the second quarter but said that figure would fall to $50 million per day by the end of June. They have parked 450 aircraft, nearly half of their fleet.
The carrier ended the first quarter with $6.8 billion in liquidity.Total liquidity for American should increase to about $11 billion by the close of the current quarter as assistance from the Federal Government is realized. To compensate for reduced travel demand, American has slashed the number of scheduled flights by about 80% in both April and May and by 70% in June. The airline expects to reduce 2020 operating and capital expenditures by more than $12 billion which will be realized in part by reducing capacity as well as the accelerated retirement of 5 aircraft types. These include 20 Embraer 190s, 19 Bombardier CRJ-200s, 34 B757s, 17 B767s and 9 A330-300s. This will help to simplify their operations and result in cost savings and efficiencies associated with operating fewer aircraft types and about 100 fewer airplanes. In addition, nearly 39,000 American employees have taken early retirement, a reduced work schedule or a partially-paid leave. Parker added “We have moved quickly and aggressively to reduce our costs and bolster our liquidity We are particularly grateful for the $5.8 billion in financial assistance American will receive through the Payroll Support Program.”
#Delta Airlines, formerly the country’s most profitable, reported a loss of $534 million in the first quarter, its first quarterly loss in more than 5 years. They also pointed out that’s likely to appear small in comparison with the second quarter of the year when the pandemic’s impact is more fully felt. The Atlanta-based carrier saw revenues plunge 18% in the first 3 months of the year to $8.6 billion. Delta CEO Ed Bastion announced that second-quarter revenue is expected to drop 90% from the same period of 2019 and predicted an extended recovery and a smaller airline going forward. “We don’t know when it 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,” he explained in a staff memo. “I estimate the recovery period could take 2 to 3 years. I hope it’s sooner, but we need to be realistic in our planing.”
Their top financial priority remains preserving cash and enhancing their liquidity. Delta’s raised $5.4 billion in capital since early March, including securing a $3 billion secured term loan and closing $1.2 billion in aircraft sale leases. They have reduced planned capital expenditures by more than $3 billion, including working with aircraft manufacturers to optimize the timing of future aircraft deliveries and extended payment terms with airports, vendors and lessors. The carrier also announced the early June retirement of its MD-88 and MD-90 aircraft in an effort to further reduce capacity systemwide. As expected, Delta’s also suspended shareholder returns, including the company’s stock repurchase program and future dividend payments (a requirement under the CARES Act). They expect to receive about $5.4 billion in government payroll aid, including $3.8 billion in grants and a $1.6 billion unsecured 10-year loan. The airline also said it will offer $1.5 billion of secured notes due in 2025 and that it has lined up a separate $1.5 billion term loan. Its new debt will be backed by airport slots, gates and routes, including those at New York’s #LGAairport and #JFKairportt, #Regan_Airport in Washington and London’s #HeathrowAirport, among others.
#SouthwestAir, as late as February, was the fourth-largest airline in the world behind American, Delta and United. Its now become the world’s biggest, a title no carrier wants to lay claim to now as airlines rush to cancel flights and park aircraft during this crisis. On Tuesday they posted their first quarterly loss since 2011 and said there would be “no material improvement in air travel trends” this spring as demand has taken a nosedive. Southwest had a loss of $94 million in the quarter ended March 31 (after a $20 million tax benefit) on revenue of $4.23 billion. That’s an 18% decline in sales for the Dallas-based carrier compared with the same period in 2019 and slightly weaker than analysts estimated. Its adjusted per-share loss came in at 15 cents though, somewhat ahead of expectations. Southwest is shrinking to better align with poor demand and is planning to cut capacity by as much as 70% in May. The airline has parked about 350 of its 742 aircraft.
Like its competitors, Southwest is trying to slash costs and reduce its daily cash outlay which it estimates will average somewhere between $30 million and $35 million per day in the second quarter. The airline announced a public stock offering of 3.5 million shares, valued at approximately $1.6 billion based on Monday’s closing price and said it would issue $1 billion in additional debt in an effort to shore up its finances. The airline also expects its operating revenue in May to fall as much as 95% from a year earlier. Southwest should be receiving about $3.3 billion in government aid in 4 installments from April through July. Some $2.3 billion is in direct grants and the balance is a loan. In exchange, the airline will give the Treasury Department warrants allowing the government to buy up to 2.6 million shares of company stock. On a brighter note, the carrier received an initial $428 million cash payment from Boeing as compensation for its grounded 737 Max jets. This is just over half of the $828 million that Southwest estimates it lost in operating profit in 2019 with the grounding of the aircraft type.
With results not as bad as expected, #United Airlines released first quarter 2020 earnings yesterday showing a net loss of $1.7 billion, a diluted loss per share of $6.86 and a pre-tax loss of $2.1 billion. Their reported first quarter adjusted net loss was $639 million, adjusted diluted loss per share was $2.57 and adjusted pre-tax loss was $1 billion. This was the first quarterly decline for the airline in 6 years. The company made this announcement while reviewing their “leading efforts to manage through the most disruptive global crisis in the history of aviation.” United’s offered voluntary unpaid leaves of absence for their US-based employees with more than 20,000 workers now participating. They’ve also reduced planned capital expenditures by approximately $2.5 billion, bringing that number down to less than $4.5 billion. The airline has slashed spending on vendors and outside contractors and plans to only take delivery of aircraft that have financing in place. Leadership changes will go forward as planned this month after their annual meeting on May 20 with CEO Oscar Munoz becoming Executive Chairman and President Scott Kirby taking over the reins as company CEO.
As United entered the second quarter, they reduced their daily cash burn down to $40 to $45 million on average per day with essentially zero net passenger revenue. They started the current month with approximately $9.6 billion in available liquidity. The company raised $1 billion by selling 39.25 million new shares at $26.50 apiece with an option for underwriters to buy an extra 10%. They could tap about $20 billion in assets as collateral for additional debt financing if necessary. The airline expected to get about $5 billion in government aid, of which $3.5 billion will be a direct grant and $1.5 billion will be a low-interest loan. The cash will be used to pay for the salaries and benefits of tens of thousands of United employees. The company is expected to issue warrants to the Federal Government to purchase about 4.6 million shares of common stock. The CARES Act helped the carrier avoid involuntary furloughs and pay cuts for employees, but only temporarily and only partially. The grant portion of the legislation covered only $3.5 billion of their $6.5 billion in eligible salary and benefit costs. If things don’t improve, United won’t be the only airline to further reduce expenses via salary cuts and a reduction in force after the September 30 deadline passes.
In other news, #AlaskaAir, American, Delta, #FlyFrontier, #JetBlue and United now, or will soon, require all passengers to wear a face covering during flight with several carriers also mandating masks during boarding and deplaning. In what may be a harbinger of things to come, the Port Authority of New York and New Jersey announced this week that terminal access will be restricted at the 3 major New York City Airports. Only ticketed passengers, airport employees and others who need to enter the airports for business will be granted access. The measure will be enforced at LaGuardia, Kennedy and Newark Airports. I predict we'll see additional protective and/or restrictive policies adopted as this pandemic will change the way we fly just as surely as the tragic events of 9/11 did nearly 19 years ago.
Until next time…stay safe.
Dramatic demonstrations of the impact of the virus and, if the restrictions suggested come into force, soon air travel will become much less enjoyable and therefore avoided, making any recovery a lonnnng runway ahead!