Airlines lose billions as demand ‘stalled,’ CEOs warn recovery hinges on a vaccine
Revenue tumbled at both Texas-based carriers during the second quarter as the virus spread around the U.S, dropping more than 86% in the quarter at American to $1.6 billion from close to $12 billion a year earlier. Southwest’s sales fell nearly 83% to a little over a $1 billion from $5.9 billion last year.
The CEOs of both airlines don’t expect a full recovery in demand until there’s a vaccine or treatment for Covid-19.
The spike in infection rates coupled with travel restrictions abroad and in states like New York are dashing airlines’ hopes for a speedy recovery in demand, prompting them to trim flights as they race to stanch their cash burn.
“We’ll have to work harder now and adjust August and September capacity,” to keep lowering cash burn, Southwest’s CEO Gary Kelly. “We were on a path to break even by the end of the year. That is still my goal. But first quarter may be more realistic.”
Southwest estimated its third-quarter capacity will decrease between 20% and 30% over last year.
“We’ll let demand serve as a guidepost for our future capacity levels,” said American Airlines CFO Derek Kerr. “We will continue to be relentless in identifying additional ways to improve our cash burn rate going forward.”
He said the airline would likely cut more capacity in August and September.
Southwest swung to a net loss of $915 million in the second quarter and American posted a net loss of $2.1 billion. American said it lowered its cash burn rate from $100 million a day in April to $30 million a day in June after it cut flights and idled planes and thousands of employees took voluntary time off. Southwest’s cash burn fell to $16 million a day in June from $30 million a day in April.
Reducing head count
Southwest Airlines said it’s preserving its record of never furloughing workers in its nearly five decades of flying, at least for now. That’s thanks to close to 17,000 employees who have taken partially paid voluntary time off or buyouts.
The airline does “not intend to pursue furloughs and layoffs, or pay and benefits cuts” until the end of the year, adding: “we will continue to plan for multiple weak scenarios and maintain our preparedness.”
Airlines are prohibited from laying off or furloughing workers through Sept. 30 under the terms of a $25 billion federal aid package designed to protect jobs.
American Airlines last week warned 25,000 employees that their jobs could be at risk, urging them to apply for voluntary separation packages and early retirement.
“Undoubtedly, the most difficult part of the pandemic is the impact it has had on our team members,” CEO Doug Parker and the airline’s president, Robert Isom, said in an employee note. “We are hopeful the enhanced voluntary programs that are open now will help reduce or eliminate furloughs.”
Shoring up liquidity
Airlines have been spending the second quarter shoring up liquidity through debt and equity sales, to better weather the crisis. U.S. airlines have reached agreements with the Treasury Department for portions of $25 billion set aside in federal loans.
Southwest’s CEO, Kelly, said the company hasn’t decided whether to tap that funding, partly because of temporary bans on stock buybacks and dividends.
“The terms of the government loan are pretty onerous, including a significant file of warrants,” he said. “I think we would much rather avoid those. And I think what’s near and dear to shareholders’ hearts is it puts restrictions on dividends, which I object to, and share repurchases.”
Kelly said that while the company isn’t paying dividends or buying back shares now, it could want to do so in the future.
“And if our competitors have [the federal loans], absolutely, I think it puts them at a disadvantage,” he said.
American shares on Thursday gained 3.6% to end at $11.77, while Southwest’s fell 1.5% to $32.79.
Correction: American Airlines posted a second-quarter net loss of $2.1 billion. An earlier version misstated the figure.