Tuesday afternoon United airlines (NASDAQ: UAL) became the second airline to report its second quarter results, after Delta airlines (NYSE: DAL) announced a pre-tax loss of $ 7 billion last week ($ 3.9 billion excluding special items).
As expected, United Airlines also accumulated a substantial loss in the last quarter, as the COVID-19 pandemic crushed demand for air travel. However, it did a better job of mitigating the short-term gains and cash flow pressure of the pandemic than Delta. It’s a great achievement, as United faces a more difficult recovery path than perhaps any other airline, due to its strong exposure to long-distance international travel.
United drastically reduces bone costs to stop bleeding
United Airlines revenue fell 87.1% year-over-year last quarter to less than $ 1.5 billion. However, the airline also reduced operating expenses (excluding special items) by a surprising 53.7%, despite not being able to implement involuntary layoffs or licenses due to the terms of its CARES Act payroll support. Including the grant portion of United’s payroll support funds as compensation for payroll expenses, operating costs fell 69.9% year-over-year.
Savings come from virtually every line item. Fuel expense decreased 89.9% due to lower fuel prices and United’s dramatic schedule cuts. Distribution expenses fell 93%, maintenance costs decreased 73.9%, and even wages and benefits expenses decreased 29% year-over-year.
The net result was that United reported a pre-tax loss of $ 2 billion, much better than Delta, and an adjusted pre-tax loss of $ 3.2 billion (also notably better than Delta). Careful capacity management was the key to this successful loss mitigation. United reduced its passenger capacity by 87.8% year-over-year in the last quarter.
United Airlines recorded a lower loss in the second quarter than Delta Air Lines. Image source: United Airlines.
Regarding the burning of cash, Delta and United were more even. Delta reported that daily cash consumption averaged $ 43 million in the second quarter. United’s cash burn reached $ 40 million per day. Restrictive policies around refunds for canceled flights contributed to United’s slower cash burn.
The charge is a bright spot
In addition to cutting costs, United did a great job capitalizing on an increase in air freight rates last quarter. Airlines typically carry large amounts of cargo in the bellies of airplanes that operate international passenger flights. As countries closed their borders and implemented other travel restrictions, airlines drastically reduced their international schedules, also destroying cargo capacity and causing cargo rates to rise.
United Airlines was one of the first airlines to begin operating cargo-only flights with passenger planes during the pandemic. The first such flight departed on March 19. In mid-April, the airline performed more than 150 cargo flights per week, covering more than two dozen routes. In May, United began placing some cargo in the passenger cabin for these cargo-only flights, further increasing its cargo carrying capacity.
As a result, United Airlines cargo revenue increased 36.3% year-over-year to $ 402 million, contributing more than 27% of the airline’s total revenue in the last quarter. In particular, it achieved this performance even though its cargo volume decreased approximately 40% year-over-year. For comparison, Delta’s second-quarter cargo revenue plummeted 41.9% year-over-year to just $ 108 million.
On the right path in a difficult situation
United Airlines CEO Scott Kirby has been realistic since day one of the COVID-19 pandemic, while some of his peers in the airline industry have been overly optimistic. This attitude has served United well thus far, and will likely continue to benefit the airline.
For the third quarter, United Airlines expects to reduce capacity by 65% year-over-year, maintaining a cautious capacity plan in the face of unstable demand. However, with positive ticket sales, United expects daily cash burn to drop to an average of $ 25 million this quarter, with a further improvement in the fourth quarter. And thanks to its aggressive capital-raising actions, the company is on track to have $ 18 billion in liquidity by the end of the third quarter.
This represents a solid cushion of liquidity. It should be enough for United Airlines to cover cash burn and short-term debt maturities for the next 12-18 months while still having plenty of additional cash.
Since United expects revenue to reach 50% of 2019 levels at best before a vaccine becomes widely available, limiting cash burn and maximizing liquidity are extremely important. The next few quarters will be tough, but United Airlines is doing its best to ensure that it emerges from the COVID-19 pandemic strong enough to have a legitimate shot on its return.
