The COVID-19 pandemic has boosted demand for air travel, tens of thousands of people are already out of work, and an expectation – whatever that may look like – is expected to last for years. But while smaller suppliers crash and burn, the largest corporations operating and orchestrating the airline industry survive, thanks to their size and their access to a crucial resource: cash.
The big airlines were hit with historic losses, which she described extensively last month in her quarterly earnings figures. Collectively, the Big Three – United, Delta and Americans lost a whopping $ 10 billion in the second quarter of 2020. JetBlue lost $ 320 million, Southwest $ 915 million, and budget carriers Spirit and Alaska lost $ 144 million and $ 214 million, respectively.
They have already done a lot of the hard work, reducing their costs by resuming flights early and pausing most of their routes – but they are also pre-off and dismissal ahead of time despite government programs intended to keep these people in work. Of the many billions of dollars they took from the AIDS, Relief and Economic Security Act (CARES) Coronavirus, only a portion was dedicated to protecting firefighters. That money is running out, prompting the airlines to make sweeping cuts unless that part of the government program is extended.
The big airlines have raised money at the same time because there is just a lot of money available for it. On top of the money from the CARES Act, interest rates are at rock-bottom, making it easier – and cheaper – than ever before for large companies to borrow a lot of money. This allows these companies to paper about their lack of revenue with a little financial engineering.
Steve Priest, chief financial officer of JetBlue, said his company’s number one focus is cash ‘during a quarterly profit a few weeks ago. “Cash, cash, cash, cash, cash, as you would expect it to be in this environment.” JetBlue pledged $ 936 million in payment support under the CARES Act, but Priest said the company has borrowed a total of $ 3.7 billion since the start of the pandemic, $ 750 million of which the company received by using its slots at JFK, LaGuardia, and Washington Reagan airports as collateral.
The larger airlines have, without surprise, much more loan. United Airlines has raised $ 16.1 billion through a combination of debt offerings, share issues, and payments and loans from the CARES Act, with nearly $ 7 billion of that coming from using its mileage rewards program as collateral. American Airlines borrows $ 4.75 billion under the CARES Act, with $ 1.8 billion for paid assistance, and it uses its intellectual property as collateral for an additional $ 1.2 billion loan from Goldman Sachs. Delta borrowed most of the government’s CARES Act funding, $ 5.4 billion, but has recently borrowed a total of about $ 15 billion.
This money buys these companies time. Delta says its loans have 19 months of liquidity, even as it continues to spend $ 27 million a day (the average for June). And things are probably not getting any better soon. Delta CEO Ed Bastian told NBC last week that he does not expect customers to return to flights until there is a fax. “We have some medical confidence back in consumers,” he said. In a letter to employees, Southwest Airlines CEO Gary Kelly described his company as “in intensive care.”
Trade groups now expect global air travel not to return to pre-pandemic levels until 2024 at the earliest. Wall Street is only slightly more optimistic about the recovery of the sector. In a recent report, Goldman Sachs said it expects handball to reach levels in 2019 to take an extra year than previously predicted, meaning 2023 instead of 2022. Domestic travel is still expected to return first, although that will be delayed by holiday travelers and not the high-income flyer depend on many carriers.
But even with the extra runway, the airlines are seeing unusual furloughs and layoffs of workers, as only some of the CARES Act funding was specific to support for paid traffic. And some of them have already found ways to reduce principal rates without technically violating any of the terms they agree with the government. Some 40,000 Delta employees volunteered to take unpaid sheets in the short term, and more than 17,000 chose an early retirement option. Americans warned that it might have to leave 25,000 jobs by October. Southwest said it would not lay off or leave employees in October, although nearly 17,000 of Southwest employees have taken voluntary severance packages and extended the time of the company.
The pain is also rippling through the supply chain to companies that do not have multibillion-dollar mileage programs like airport slots to exchange as collateral as the kind of money and resources needed to chart complex financial deals that have billions of dollars in liquidity unlock. Instead, they are only left with more targeted savings options.
Internet provider Gogo applied for, but did not receive a $ 150 million loan and a $ 81 million subsidy from the government through the CARES Act, so the company laid off 600 workers in April and then eliminated another 143 full-time positions in July. It is now also trying to sell its commercial aviation department. Southwest Wi-Fi provider, Global Eagle, filed for bankruptcy. Engine manufacturer Rolls-Royce cut about 9,000 jobs. Suppliers alone have collectively cut about 50,000 jobs, according to one estimate. Even though. some smaller airlines such as Virgin Atlantic are being forced to restructure.
All in all, it’s a grim image. COVID-19 has devastated demand for air travel. Travel restrictions, both in the U.S. and abroad, as well as a resurgence of the virus in the American South and West, are experiencing the modest bounce-back in air travel seen at the beginning of the summer.
The big airlines are also suffering record losses, but – for now, at least – they are watching this carnage play out of the top fresh stacks of money.
