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American Airlines Group and other companies are queuing for more rescue funds under the Care Act, as the industry faces an increasingly precarious situation due to an increase in coronavirus cases.
Five major airlines signed a letter of intent with the United States Treasury to take loans under the Care Act, the Treasury said in a statement Thursday. American (ticker: AAL), Frontier Airlines, Hawaiian Holdings (HA), SkyWest (SKYW) and Spirit Airlines (SAVE) plan to obtain loans, according to the Treasury, which did not specify the amounts or terms. Treasury Secretary Steven Mnuchin said talks with other airlines continue, according to a statement.
American is the largest operator that has accumulated the most Treasury funds so far. Not surprisingly, the airline needs help.
The airline is in a race against time to stay operational (outside of Chapter 11 bankruptcy protection) as revenue falls and the company adds debt to its balance sheet. American is expected to lose $ 4.4 billion in cash flow from operations this year, as sales plummet to $ 20 billion from $ 45.7 billion in 2019. Total debt is expected to reach the $ 44.6 billion by the end of the year.
Assuming American lines up a new Treasury loan, the operator should have cash and liquidity of $ 15 billion, estimates Helane Becker, an analyst at Cowen. He said American should have cash to last 12.5 months, reducing its balance to zero, or 10.5 months to a minimum balance of $ 2 billion, assuming earnings remain very depressed.
But Americans won’t make cash flow anytime soon. The carrier is still burning cash on a daily basis. Analysts expect the operator to post a loss of $ 16.76 per share this year, narrowing to a loss of $ 1.82 per share in 2021.
Meanwhile, American plans to dramatically reduce its international operations in a bid to restore profitability. The airline said on Wednesday it plans to fly 25% fewer long-distance international flights in 2021 than in 2019. “American will have a significantly smaller international network in the coming year,” said Vasu Raja, director of revenue for American. in a sentence.
American also aims to increase revenue faster than other airlines, a strategy that is not without risks. The airline is adding more flights than its rivals such as United Airlines Holdings (UAL) and Delta Air Lines (DAL). And it has removed the policy of limiting seats on flights.
Starting in July, American said it would fill the planes to capacity, if possible, and that it would allow passengers to book free of charge if their flight is nearly full. The new policy of filling each seat sparked reprimands from health officials who testified before Congress this week.
In fact, the industry may be facing another critical test. Covid-19 cases are on the rise in the US, reaching record levels this week. If cases continue to rise throughout the summer, we can see a slowdown in domestic travel, the engine of the industry’s recovery so far.
Passenger performance at Transportation Security Administration checkpoints has increased sharply from lows in April. The number topped 600,000 in five of the past seven days, well above the April lows, when fewer than 100,000 people traveled per day. But demand has still fallen more than 75% from last year’s levels, which exceeded 2.5 million travelers per day at this time of year. The growth rate has slowed in recent weeks, indicating that demand may be stabilizing.
However, airlines are gradually adding long-haul flights for the summer travel season. American, Delta, Hawaiian and United plan to fly more than 60 international long-distance routes in July, compared to 40 in June and 14 in April, according to the Points Guy blog.
Whether those flights get crowded may depend on the burden of virus cases in the US, along with travel bans and quarantine measures for US residents. Travel bans on Americans were recently extended to destinations such as Canada and the block of countries of 27 members of the European Union, due to the failure of the United States to control the pandemic.
That’s not something airlines can control, of course, but it’s just one more hurdle for the industry on its path to profitability.
Write to Daren Fonda at [email protected]
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