US airline executives’ attempts during their third-quarter earnings calls to shift the narrative from liquidity levels to visions of a cash-positive recovery had an air of wishful thinking.
Such visions have since become slightly more grounded in reality: Pfizer and Moderna in November announced efficacy rates above 90% for their respective Covid-19 vaccine candidates. Still, widespread distribution of vaccines is many months away. In the interim, carriers will continue to burn cash despite marginal increases in traffic to sun destinations. Liquidity levels will retain their prominence as the all-important metric for airlines until a recovery in demand is truly at hand.
End-of-year passenger throughput and capacity data show that significant increases in passenger revenue are not immediately forthcoming.
United Airlines noted that bookings had slowed down and its passenger cancellations accelerated during the week ending 18 November. The Chicago-based carrier attributed the recent negative bookings and cancellation trends to the rising rate of daily Covid-19 cases across the USA.
US airlines’ hopes for boosts in late bookings and passenger revenue during the Thanksgiving holiday weekend were dashed in late November. Rapid increases in new cases of Covid-19 across the country had led the US Centers for Disease Control and Prevention to recommend on 19 November that “the safest way to celebrate Thanksgiving is to celebrate at home with the people you live with”.
Media reports during the week of 23 November shared images of longer-than-usual lines of passengers checking in for travel at US airports and presumably ignoring the CDC’s recommendation, but Transportation Security Administration checkpoint numbers told a different story.
The number of daily travellers clearing TSA checkpoints during October was down 65% compared with year-ago data. This was a slight improvement from September, when travellers clearing TSA checkpoints were down 65-75%.
Year-on-year declines in TSA numbers during November hovered around 65% until the five days before the 26 November Thanksgiving holiday, when they improved to a 55-63% year-on-year decline – a slight positive trend.
The year-on-year percentage change in US airlines’ tracked flights began improving on 17 November even while the number of new Covid-19 cases per million population in the USA climbed steeply, data from the European Centre for Disease Prevention and Control (Covid-19 cases) and Cirium (tracked flights) shows. The number of tracked flights was down 44% on 17 November and by 28 November tracked flights were down 35%, compared with the 364th-day prior.
Capacity in November for all US carriers was down 45% year-on-year, Cirium schedules data shows. As of 23 November, capacity in December will be down 44%.
American Airlines cut capacity 51% year on year in November, and its December capacity will be down a similar proportion. Delta Air Lines will follow a 41% cut with one of 37%. For United Airlines, the reductions are 56% and 62%; for Southwest Airlines, 35% and 43%.
US MAJORS’ LIQUIDITY LEVELS
American did not provide during its 22 October third-quarter earnings call a timeframe for when it might reach cash breakeven, instead focusing on average load factor as a key indicator.
“The 65-70% [load factor] range is kind of where it’s going to take to get us back to breakeven,” said American’s finance chief Derek Kerr.
The airline had closed the third quarter with $13.6 billion in liquidity and, as of 22 October, expected to have $13 billion in liquidity at the end of the fourth quarter. A common stock offering of 38.5 million shares in November enabled American to subsequently increase its year-end liquidity forecast to more than $14.5 billion.
American now expects its daily cash-burn rate at the end of the fourth quarter to be at the high end of the $25-30 million range it estimated on 22 October, after a recent slowdown in demand and forward bookings. Consequently, the airline decreased its end-of-year liquidity expectations to $14 billion, including the undrawn portion of its $7.5 billion CARES Act loan.
Delta, meanwhile, ended the third quarter with $21.6 billion in liquidity and expects to close out the year with more than $16 billion. The Atlanta-based airline averaged $24 million per day in cash burn in the third quarter.
The SkyTeam carrier had predicted, during its 13 October third-quarter earnings call, a fourth-quarter average daily cash burn of $10-12 million, but on 3 December said it had increased the range to $12-14 million following a slowdown in travel demand.
“Like others in the industry, we’ve seen some slowing of demand and forward bookings as Covid cases have risen across the US,” chief executive Ed Bastian stated in a 3 December memo to Delta employees. “Revenues are slowly coming back, but we still expect to be at just 30% of our 2019 levels for the fourth quarter.”
Delta had previously aimed to reach cash breakeven by the end of the year but admitted during its 13 October earnings call that it had missed the target, and was instead on a trajectory to achieve breakeven during spring 2021. Bastian said on 3 December that the carrier was still “on track” to meet that estimation.
United ended the third quarter with $19.4 billion in liquidity and expects to end the year with either $16 billion in liquidity or close to $19 billion if the federal government, as expected, approves an additional $2.3 billion in funds under the CARES Act loan programme.
Daily cash burn averaged $21 million in the third quarter, and the Chicago-based carrier expects a range of $15-20 million in the fourth quarter.
Finance chief Gerry Laderman said during United‘s 15 October earnings call that cash burn was an imprecise measure of airlines’ relative health because different players had different ways of measuring it.
“It’s about liquidity, focusing on where we are at the end of the year on [liquidity and on] the balance sheet,” noted Laderman. “Those [are more] important than trying to figure out each of the [individual] components of cash flow in a quarter.”
Chief executive Scott Kirby made the case during United’s earnings call that his airline would break the pandemic-era cash-burn cycle ahead of its network competitors, although he did not offer a timeframe.
“Despite our larger business travel, coastal gateways and international exposure, on any apples-to-apples cash-burn basis, we believe United has had the lowest cash burn throughout the crisis so far among network peers, and we expect we’ll be the first network airline to return to positive cash flow when the demand environment recovers,” Kirby said.
Southwest ended the third quarter with $15.6 billion in liquidity. The carrier expects its third-quarter daily cash-burn rate of $16 million to decline to $11 million in the fourth quarter.
Chief executive Gary Kelly, too, is focused on reaching cash breakeven, although he states that for that to happen “operating revenues will need to recover to an estimated 60-70% of 2019 levels, which is roughly double our third-quarter 2020 levels”.
PAYROLL SUPPORT, PART II
A second version of the US CARES Act’s payroll support programme, which expired on 1 October, would help US carriers conserve liquidity while awaiting widescale vaccine distribution.
Election results in the USA so far have had no significant impact on federal Covid-19 relief legislation, which has remained stalled since early October when President Donald Trump ordered his administration representatives to cease negotiating with House Democrats.
A stimulus package would likely include a second version of the CARES Act’s payroll support programme (PSP) for US airlines.
President-elect Joe Biden’s legislative agenda is dependent on the outcome in Georgia of two runoff election contests on 5 January, which will determine which political party controls the US Senate. Republicans and Democrats alike will be focusing their efforts on the 5 January runoffs, leaving airlines and other industries to make their own way through the pandemic’s latest dark period.
This analysis was written by Steve Goldstein, part of Cirium’s North American reporting team