Airlines’ ‘free fall’ brings talk of bankruptcies
By Mon, Mar 16, 2020
With all four major U.S. airlines cutting flight capacity to the bone and the U.S. airline industry thrown into disarray, some on Wall Street are drawing comparisons with the post-Sept. 11, 2001 downfall and even predicting bankruptcies.
United Airlines Holdings Inc. UAL, -14.82% and American Airlines Group Inc. AAL, +11.25% have joined Delta Air Lines Inc. DAL, -6.65% in announcing slashed routes as global air travel grinds to a near-standstill to limit the spread of COVID-19.
On Monday, Alaska Air Group Inc. ALK, -14.28% said it would reduce capacity in April by at least 10% and by 15% in May, in addition to seeking more borrowing and cutting capital expenditures and offering employees unpaid leave, among other measures.
The Wall Street Journal reported Monday that U.S. airlines are in talks with the government to obtain as much as $50 billion in financial assistance, citing two people briefed on the discussions.
“Airlines are in free fall,” Cowen analyst Helane Becker said in a note. Over the weekend, the U.S. government added the U.K. and Ireland to the ongoing temporary travel ban.
“We expect additional airline bankruptcies,” with low-cost Norwegian Air Shuttle ASA NWARF, -16.85% an “airline of interest,” she said.
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Top White House economist Larry Kudlow on Monday had opened up the possibility that the government could help airlines.
“We don’t see the airlines failing, but if they get into a cash crunch we’re going to try to help them,” Kudlow said, according to a White House press-pool report. He did not like the term “bailout,” saying it was more of a short-term liquidity issue.
He said the airlines had been in touch seeking aid, “lots of them,” and that “we’re in touch about their balance sheets and their cash flow.”
American said it will reduce international capacity by 75% from March 16 to May 6, although it said it would continue to operate short-haul international flying, which includes flights to Canada, Mexico, the Caribbean, Central America and certain markets in South America as scheduled. American already announced last week reductions in flights to Asia Pacific.
United said its revenue in March, historically its busiest month, will be $1.5 billion lower than last March. “The bad news is that it’s getting worse. We expect both the number of customers and revenue to decline sharply in the days and weeks ahead,” the company said.
United already implemented a hiring freeze and offered unpaid leave and cut its schedule. Over the weekend, it said it will cut executives’ salary by half and cut capacity by about half for April and May, expecting that the reductions will extend to summer travel.
“Even with those cuts, we’re expecting load factors to drop into the 20-30% range -— and that’s if things don’t get worse,” United said.
Delta Air Lines said Friday it will cut capacity by 40% in the next few months, the most in its history, and took other steps to preserve cash amid the crisis, such as cutting $2 billion in expenses, offering unpaid short-term leave to employees and entering a hiring freeze. In a memo to employees about the changes, Chief Executive Ed Bastian said that the “situation is fluid and likely to be getting worse.”
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Even before the latest from American and United, analysts at Goldman Sachs had estimated March unit revenue declines to have reached “levels similar to those observed following September 11, 2001.”
They lowered their price targets on airlines and cut forecasts on a note Friday, and more ominously downgraded American to the equivalent of hold from buy as their new price target implied less upside than other buy-rated stocks. It upgraded SkyWest Inc. SKYW, -16.24% to buy from neutral.
The analysts stopped short of foreseeing bankruptcies, however, based on the airlines’ liquidity.
In addition, “we are also currently forecasting a recovery in demand similar to what was seen following September 11, 2001. If the impact of COVID-19 extends further than the impact of September 11, 2001, we would need to revisit our liquidity analysis.”
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The industry has improved since the last demand shock, the 2008 recession, and “will weather this demand shock better than it has in the past,” the Goldman analysts said. Airlines today reap the benefits of consolidation, have stronger balance sheets, and have a higher percentage of non-fuel variable costs, they said.
European airlines also have taken similar capacity-cutting measures in face of the near-halt on air travel, and an aviation consultant in Australia has said the novel coronavirus pandemic could bankrupt most of the world’s airlines by the end of May unless they get help from governments and the industry.
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