In late May, Southwest Airlines (NYSE: LUV) launched an aggressive schedule for the fall, which required the low-cost airline to operate as many flights in November and December as it did a year earlier. The plan even called for double-digit year-over-year growth in some of the company’s main markets.
At the time, this scheduling move seemed like a sign of growing confidence that people would return to travel on airlines in large numbers by the end of 2020, at least nationally. However, Southwest acknowledged in a letter to employees this week that a rapid return to normality seems increasingly unlikely. As a result, the airline will almost certainly be forced to implement the first involuntary layoffs and licenses in its history later this year.
Recovery in demand is slowing.
Air travel almost stopped in April. On several days in mid-April, the TSA reported that it tested fewer than 100,000 passengers, 96% less than the previous year. However, demand began to pick up in May and accelerated between Memorial Day and the July 4 holiday weekend.
In fact, passenger throughput at TSA checkpoints was still less than 10% of 2019 levels as recently as May 20. In contrast, during the first week of July, TSA passenger performance averaged 27.3% from the prior year’s levels. Obviously, that’s much less than a full recovery, but it represented a substantial sequential improvement over a month and a half.
Unfortunately, COVID-19 case counts are increasing rapidly in much of the US That has led many states to pause or reverse their plans for economic reopening. Additionally, several cities and states require 14-day quarantines for anyone arriving from COVID-19 hot spots. The list of hotspots in the three-state quarantine list for New York, New Jersey, and Connecticut has grown to encompass 22 states, representing more than half the population of the United States.
Image source: Southwest Airlines.
Not surprisingly, these measures are undermining recovery from the trip. On Monday, the TSA examined 697,985 passengers: 26.7% of the previous year’s figure. That represented only a modest improvement over the previous two weeks, when TSA performance had already reached 25.5% of 2019 levels. That sequential improvement seems especially small considering that Disney World reopened last weekend. .
Jobs on the go at Southwest
Until now, involuntary layoffs and leave of absence have been ruled out for airlines, due to the terms of the CARES Act payroll subsidy they accepted. However, those conditions expire at the end of September (along with subsidies), forcing airlines to take self-help initiatives to align staff with projected demand.
In a recent staff note, Southwest Airlines CEO Gary Kelly said demand would have to more than triple from current levels by the end of the year for the airline to avoid layoffs. Based on recent demand trends, it is extremely unlikely to happen. Kelly’s statement implies that if demand continues to recover slowly, Southwest will cancel many of the flights it had previously scheduled for November and December.
Southwest Airlines must notify employees 60 days in advance that they may be terminated or terminated. For the job cuts to go into effect in early October, when the CARES terms expire, these “WARNING” notices would have to come out in late July. As a result, the airline set a deadline Wednesday for employees to request voluntary purchases. Southwest has been encouraging employees to seriously consider taking purchases, to limit the number of involuntary layoffs and licenses.
Looming storm clouds
Last week, United airlines He told investors that industry ticket sales stagnated in mid-June and began to decline at the end of the month, after a strong recovery between late April and early June. That makes Southwest Airlines’ warning of excessive staffing just the latest evidence that the airline’s recovery is already stagnating.
This is bad news for Southwest employees, as the airline has no reasonable way to avoid a certain level of layoffs or licenses in October. However, Southwest Airlines itself is not in danger. In mid-June, the airline had a manageable debt load and nearly $ 14 billion of cash on hand – enough to cover nearly two years of burning cash at recent rates. He also had $ 12 billion in untaxed assets that he could borrow against, if necessary.
Conversely, more is at stake for airlines with weaker balances, such as United and American airlines. The longer it takes for demand to recover to a reasonable level, the greater the risk that they will be forced to raise capital on unfavorable terms or to exit the pandemic with unsustainable debt burdens.
