With a more than $1 trillion gap in their economic stimulus proposals and a truckload of distrust between the White House and Republican-controlled Senate and the Democrat-controlled House, layoffs affecting 30,000 to as many as 50,000 employees of U.S. airlines are scheduled to begin Thursday.
And as the next staggeringly sad chapter of U.S. airlines’ Covid-19 saga begins to unfold it’s becoming increasingly likely that at least one, and perhaps three or more will be forced into bankruptcy or, alternatively, into financially and strategically dubious mergers just to stay alive.
The new layoffs – assuming they aren’t forestalled by a last-minute stimulus agreement – come on top of the elimination of tens of thousands of airline industry jobs this summer. Though airlines, under the terms of the first economic stimulus package approved by Congress in March, were barred from laying workers off until today in exchange for $25 billion payroll protection grants and up to another $25 billion in government loans, they did use modest financial inducements and/or extended travel privileges to coax tens of thousands of employees to retire early, take various types of leaves, or to voluntarily depart. Ultimately the industry could well see more than 100,000 employees lose their jobs.
Now, without all those workers, and more importantly without millions of formerly regular travelers – especially high fare-paying business travelers who remain too afraid of Covid-19 to fly – the airlines will not be able to quickly spool up their operations should demand come roaring back at some point.
Additionally, airlines are facing tough decisions over several thousand commercial jets that have been sitting idle since spring or early summer as the carriers have continued make payments on the loans and leases they used to acquire those planes. If the planes can’t be used to generate revenue soon, airlines’ bloody balance sheets will dictate that they be written off as total losses, dumped unwanted on lessors’ doorsteps, or sold for scrap metal. Even then, airlines’ growing mountains of debt will likely remain too large for their meager revenue streams to fully cover all the cost associated with the planes they continue to operate, let alone those in storage.
“It might take five or six years to get back to normal” levels of passenger traffic and revenue like that the industry saw in 2019, says Hubert Horan, and independent transportation economist with about 40 years of industry experience. Horan was recently featured on a lengthy edition of Alphaville, a video-blog produced by the Financial Times. And the inherent danger for publicly owned companies in such a long slog back to “normal” business conditions, he says, is that “A public company can’t survive that kind of cash flow loss for even two years. And it might never get back to normal.”
Horan further noted that on top of $13 billion in combined second quarter losses on a GAAP (Generally Accepted Accounting Principles) basis, U.S. carriers blew through about $15 billion of their cash reserves in the same quarter. And they are likely to suffer similarly large GAAP and cash losses in the quarter ended Wednesday, and in the quarters ahead.
Horan pointed out that Southwest CEO Gary Kelly last month said publicly that business would have to double from the current, very low and disappointing levels of demand, just for his carrier to get back to break-even on a cash flow basis. Such an improvement, Kelly said at the time, is nowhere in sight.
To be sure, there are investors still buying airline shares and lenders besides the U.S. government still willing to loan at least some airlines money, implying that they disagree with Horan’s analysis. But if he’s right, it means that business historians one day in the future might peg this month of monster layoffs as a tipping point for U.S. airlines. While it is unfair, and an overstatement, to suggest that the industry has entered a death spiral, the layoffs and the subsequent changes they will likely force the industry to make may well lead to significant, even dramatic changes in the industry’s competitive structure and its economic formula. And those changes could be every bit as significant as the changes caused by the industry’s deregulation in December 1978.
Meanwhile, many foreign carriers are, in Horan’s view, facing even worse prospects because in all but a few cases their success is much more heavily dependent upon long-haul international travel. Such flying has been brought to a near-standstill by the imposition of travel bans, closed borders and draconian quarantine requirements around the globe. Big “flag” carriers like British Airways, Lufthansa, Air France and Australia’s Qantas all serve comparatively small domestic markets and depend heavily on international routes to earn profits. But they now effectively are cut off from those vitally important routes, and likely will continue to be cut off from them for months – maybe even a year or two.
And even after Covid-19 vaccines are approved, it could take quite a long time for doses to be administered to enough of the world’s 7.8 billion people to convince national health officials and political leaders around the world to lift those travel industry-choking restrictions.
There already have been a number of airline failures around the world. Most notably Virgin Australia, which went out of business, and Avianca and LATAM Group, the two biggest airline groups based in Latin America. Both entered bankruptcy and drastically reduced flight operations while they seek, so far unsuccessfully, new sources of capital. Groupo Aeromexico, also is offering very limited service while it works through its bankruptcy case, filed in the United States.
According to Rapid Ratings International, which tracks and analyzes the financial health of most of the world’s publicly owned companies, all three of those airlines had “Financial Heath Ratings” below 40 just prior to their bankruptcy filings. Now, the nation’s three biggest conventional airlines – American, Delta and United – all have FHRs below 40. That doesn’t mean that all three are destined to enter bankruptcy, but it does mean their chances of doing so are greatly heightened.
Much smaller JetBlue’s Financial Health Rating is not in the danger zone, but at 43, it’s in danger of falling into that range if it has to borrow more money or suffers, as expected, more large GAAP losses and continues to burn through its cash reserves.
Southwest, the nation’s largest carrier in passengers boarded but not in miles flown because it has very little international service, has an FHR of 72. That’s three times better than American’s FHR of 24. United, according to Rapid Ratings, has an FHR of 36; Delta’s FHR is 39.
American now has the largest debt burden of the three at around $45 billion after drawing $7.5 billion in loans this week from the Treasury Department and closing last week on another $1.2 billion loan from Goldman Sachs. And with the combination of dramatically reduced staffs and fleets, it’s increasingly doubtful that any of those three carriers will be able to generate enough revenue to be able to both make their debt payments and earn large enough returns to satisfy investors. And it likely will become increasingly difficult, if not impossible for them to attract new sources of liquidity they’ll likely to need to stay alive, or sources for additional loans they will need to begin growing again if or when travel demand picks up significantly.
As a result of all those pressures, there’s growing doubt about whether demand will recover fast enough, or fully enough to save heavily indebted carriers. And that’s serving to further pinch their already narrow financial escape path.
“For the first time, unlike any other (previous) cash crisis, a lot of the demand destruction is likely to be permanent,” Horan says, referring to businesses’ switch to using teleconferencing as perhaps a permanent replacement for at least some business activity for which they previously had to travel. He also suggested that many companies and individuals have learned from the travel limits imposed in response to Covid-19 that some of the travel they previously undertook really wasn’t worth the time and money they spent – or the hassles they experienced – doing it. Thus, many such travelers simply won’t travel as much in the future as they did prior to the pandemic, he suggested.