After a wave of mergers and a decade of steady economic growth, big U.S. airlines are in better financial shape than ever before to weather a major shock—provided it’s relatively short, as other downturns have been.
“We continue to believe near-term U.S. bankruptcies are unlikely, but our conviction is diminishing,” analyst Helane Becker at Cowen wrote after President Donald Trump banned most flights into the U.S. from Europe.
This is the moment United and its main rivals, Delta and American, have been preparing for—even if they didn’t want it to come. Starting in 2008, the six major traditional airlines, bruised and bloodied by bankruptcies and the worst recession in almost 70 years, merged their way down to three.
The idea was to get big enough and strong enough to thrive in the good times and survive the industry’s periodic downturns. The coronavirus will stress-test that theory. Airline CEOs are confident they’ll pass, even as they prepare for a slump as bad or worse than the one after the Sept. 11, 2001, terrorist attacks.
“Anytime before the last few years, this would have been a restructuring moment across most of the industry,” Scott Kirby, soon-to-be CEO of United Airlines, told a JPMorgan investor conference March 10, a day before Trump announced the European travel ban. “For something that we’re planning to be materially worse than the demand destruction that happened after 9/11, and we’re not talking restructuring, is a remarkable testament to where we and the whole industry are today.”
United, Delta and American are much better off than they were before the last major downturn, the 2008 recession. And they’re poised to emerge from this crisis with less damage, if it’s as short-lived as the post- 9/11 slump, which analysts say is most analogous to the current situation.
“If the coronavirus impact on airlines in 2020 turns out to be as severe as that downturn, we estimate (the big three airlines) might burn about $20 billion this year,” says Colin Scarola, an analyst at CFRA Research in Rockville, Md. “Considering they only have a collective $12 billion in cash on hand, they’d likely have to raise a total of $8 billion to make up the shortfall, and we don’t see that as a problem, considering each of them has over $10 billion in unencumbered assets to borrow against.”
That’s a sharp contrast with the impact of 9/11 on airlines. The ensuing travel slowdown triggered thousands of layoffs and billions in losses among U.S. carriers, which turned to the federal government for a $15 billion bailout.
“We have restructured our industry to handle an event such as this,” American CEO Doug Parker said at the JPMorgan conference, where he and other airline leaders said they’re not seeking federal aid. “Had something as significant as this coronavirus occurred anytime before 2013, we would have already seen multiple restructuring firms hired along with a frantic, concerted effort by our industry for government assistance.”
HOW STRONG ARE THEY?
At the end of 2008, United was just two years out of bankruptcy and had yet to merge with Houston-based Continental Airlines. United had $2 billion in cash and 62 unencumbered aircraft worth $570 million. It already had sold $625 million in loyalty-card program mileage to its credit card partner, JPMorgan Chase.
Today, United has $6 billion in cash, a $2 billion credit line and $20 billion in unencumbered assets, including more than 600 aircraft, gates, and takeoff and landing slots at various airports. That’s nearly three times the $3 billion a year it needs to run the airline, Kirby said.
United also has stopped repurchasing stock, instituted a hiring freeze and slowed its planned capital expenditures by $2 billion.
American, the second-largest carrier at O’Hare International Airport, has $7.3 billion in cash and available credit, as well as $10 billion in unencumbered assets.
Delta, long viewed as one of the industry’s strongest financial performers, has $5 billion in liquidity and $20 billion in unencumbered assets.
OIL IS KEY
Another big difference between now and 2008: Airlines aren’t limping into a downturn already drained of precious capital by runaway fuel costs.
United, Delta and American had piled up billions in losses in 2008, as fuel prices surged to $145 a barrel before the recession hit. Fuel charges, including hedging contracts, ate $3.4 billion of United’s cash.
Oil was $66 a barrel at the end of 2019 and $37 on March 10. American, which spent $9.4 billion on fuel last year, expects to spend $3 billion less this year if prices stay below $40 a barrel. “That’s simply the impact of price, not capacity cuts,” Parker said. Delta says it expects a $2 billion reduction in fuel costs.
But airlines aren’t content to muddle through a crisis. Delta says it’s already identified $1.8 billion in cost cuts, and “we are prepared to do more,” CEO Ed Bastian said.
Kirby said the company has been planning for how to cope with a 70 percent revenue decline—albeit temporarily—even though he’s not predicting it will be that bad. “We’re focused on getting through the near-term crisis,” he said. “If it’s as dire as we think it could be, there are some opportunities to emerge even stronger.”
He and others are betting, however, on a short recession and quick snapback in demand. Unlike the in recession of 2008, customers are staying away out of fear, not finances.
“The key is duration: Is this a two- to four-month problem where people are afraid to fly, or is this an 18-month problem?” says Becker, the Cowen analyst. “If this is short term, and people fly again over the summer, then they’ll be able to survive this. If it’s longer, and it changes the way people behave, then they’ll be faced with liquidity issues, and we expect bankruptcies.”