Airlines should shut down, park their aircraft, furlough all workers, and preserve cash for the day when air travel resumes.
It sounds draconian. But the industry now needs such radical measures, according to Helane Becker, a veteran airline analyst with Cowen & Co.
“The best thing for the industry would be to shut down entirely, furlough everyone nonessential, and wait for this to pass,” Becker said in an interview with Barron’s. “If demand comes back in the summer, they can start to ramp up, but it won’t come back to the way it was. The airlines aren’t going to need as many people anyway.”
Shutting down all passenger flights would conserve cash that airlines need for debt service, Becker says.
Other analysts are starting to model industry revenues going to zero as airlines continue to slash schedules and travelers cancel booked flights. “Zero revenue not so far from reality,” wrote Vertical Research Partners analyst Darryl Genovesi in a note published Thursday. “This is a dramatization, but isn’t far from the new reality as each capacity reduction far exceeds the one that preceded it.”
Assuming no passenger revenues for the rest of the year, he writes, airlines would have cash outflows of $40 billion. Some of that would be offset through reductions in capital expenditures, along with other cuts in fixed and operating costs. But U.S. airline stocks have lost $73 billion in market value since late February, he notes, implying that investors expect a near shutdown in travel to last for many months.
Airlines appear to be inching toward shutdowns anyway.
American Airlines Group
(ticker: AAL) plans to cancel 30% of flights in May and 23% in the second quarter, Becker says.
Delta Air Lines
(DAL) has canceled 65% of flights in May and 50% for the second quarter. United Airlines Holdings’ (UAL) schedule is down 50%.
(LUV) is shrinking capacity by 20% from mid-April through early June. Its planes were flying 67% full in mid-March and are trending down to 50%, according to the CAPA Centre for Aviation, an airline industry research group.
Airways (JBLU) said in a filing this week that a normal March day would produce $22 million in revenue, Becker wrote in a note published Thursday. “Yesterday they booked less than $4 million and processed $20 million in refunds,” she notes.
U.S. carriers are consuming cash at an accelerating rate. Airlines are burning through $10 billion in cash a month, according to Airlines for America, or A4A, the industry’s trade group. Planes are “only 20%-30% full,” A4A said in a blog post Wednesday, and new bookings imply 70% to 80% declines in air traffic, even as the industry cuts capacity.
Non-U.S. carriers may be in worse shape, partly because of widespread travel bans throughout Europe.
(LHA.Germany), which includes Swiss, Brussels, and Austrian airlines, says it plans to slash scheduled flights by 95% by April 19.
Holdings (RYA.UK), Europe’s largest low-cost carrier, said Wednesday it expects most of its flights to be grounded after March 24, except for a few connections between Britain and Ireland.
Lufthansa has asked the German government for aid to continue operating. Airlines globally will need a assistance fast to stay operational, according to CAPA. Without government intervention, “by the end of May 2020, most airlines in the world will be bankrupt,” CAPA said in a statement on Tuesday.
The U.S. industry has asked for a $50 billion aid package from Congress, including grants, loans, and relief on prior excise-tax payments. It has been deemed a bailout, and it’s already sparked controversy—due partly to the industry’s spending on share buybacks, executive pay, and measures to improve profitability, such as skimpier seating and rising fees for baggage, refunds, and ticket changes.
The industry’s trade group says airlines have pumped 73% of operating cash flow back into product and services since 2010, including new aircraft, ground equipment, and technologies. Airlines have also retired $91 billion in debt, according to A4A.
Becker argues that the industry wouldn’t use the money to bail out debt or equity holders, noting that airline executives have all announced voluntary pay cuts. “Every management team has cut pay from 20% to 100%,” she says. “They’re trying to keep as many people employed as possible, doing their best to maintain employment and salaries for all their employees.”
A shutdown of commercial passenger flights would certainly be painful economically. Airlines directly employ 750,000 people. But the industry overall—including airport workers, aerospace companies, suppliers and air services—supports 10 million jobs, according to A4A. That doesn’t include hotels, taxi companies, and related employment in the hospitality industry. Overall, aviation and related services contribute 5% to U.S. economic output.
How realistic is a total shutdown? It isn’t unprecedented—flights were grounded for a few weeks after the 9/11 terrorist attacks. But investors appear to be bracing for a longer period of disruption now.
Airline stocks appeared to stabilize Thursday, following heavy losses Wednesday. The NYSE Arca Airline Index was up 0.8%, though American continued to trade down, losing 9% in recent trading.
How low will the stocks go? Becker, who has covered the industry for decades, doesn’t think they will go to zero. But asked if there will be any equity value left, she replies, “I can’t answer that question. Every time we think we’ve found a floor, the shares go lower.”
Write to Daren Fonda at firstname.lastname@example.org