United Airlines says it will have enough liquidity to not just survive the “difficult” 12-15 months ahead but to be the first among its network peers to return to positive cash flow when an effective Covid-19 vaccine becomes widely available.
United ended the third quarter with $19.4 billion in liquidity, surpassing its goal of ending the quarter with $18 billion.
Health experts have told United that a successful vaccine will likely become widely available sometime toward the end of 2021.
The Chicago-based airline has taken strides toward easing customers’ concerns about contracting Covid-19 on airplanes, but admits that these efforts, even if successful, will not have a meaningful impact on travel demand. United does not expect demand to rise above 50% of normal levels until there is a widely available vaccine.
United on 15 October launched a Covid-19 pilot testing program for customers travelling from San Francisco to Hawaii. That same day, the carrier announced a study produced in partnership with the US Defense Department’s Advanced Research Projects Agency (DARPA) showing that it is extremely unlikely a passenger would be infected by the virus if aircraft run auxiliary power units during the boarding and deplaning processes to maintain typical in-flight optimal air flow.
Chief executive Scott Kirby deemed these two developments “the turning point” in the coronavirus crisis during United’s third-quarter earnings call on 15 October.
“We were the first to call how severe this [crisis] would be, and maybe we’re among the first to call the ultimate recovery,” Kirby says.
Back on 1 May, during United’s first-quarter earnings call, Kirby said that if demand remained significantly diminished when US CARES Act payroll support programme conditions expired on 1 October, United would not be able to “endure this crisis” without implementing “painful actions” such as involuntary furloughs.
“We have to ensure that United is here to rebound once the virus is contained and demand is recovered,” Kirby said on 1 May. “We simply cannot and will not risk the long-term future of United and the jobs the airline supports just because the short-term decisions are really hard.”
United’s capacity in the third quarter was down 70% compared with that period in 2019, and it expects to end 2020 with capacity down 55% year-over-year. United projects capacity in the first quarter of 2021 will be consistent with December’s levels.
Given these capacity statistics, the airline followed through on its “realistic”, hard-nosed assessment of last spring. United this month involuntarily furloughed 13,000 employees. In addition, during the third quarter more than 40,000 employees participated in early separation, voluntary unpaid leave or reduced work schedule programmes.
Workforce reductions and the recently secured $5.2 billion CARES Act loan will help United maintain the liquidity it needs to survive the next 12-15 months. That loan is likely to go up to $7.5 billion, subject to government approval.
In late July, the airline had $15.2 billion in liquidity. It now expects to end the year with either $16 billion in liquidity, or close to $19 billion if the federal government, as expected, approves the additional $2.3 billion under the CARES Act loan programme.
United’s finance chief Gerry Laderman says liquidity is the best measure of an airline’s financial health during the pandemic, since different airlines have different ways of measuring daily cash burn. As for the formerly all-important metrics of revenue per available seat mile (RASM) and cost per available seat mile excluding fuel (CASM ex-fuel), those will have to wait until the post-vaccine era to regain their stature, he suggests.
“It’s about liquidity, focusing on where we are at the end of the year on [liquidity and on] the balance sheet,” Laderman says. “Those [are more] important than trying to figure out each of the [individual] components of cash flow in a quarter.”
United had an average daily cash burn of $21 million in the third quarter, plus $4 million in debt and severance payments. The carrier expects average daily cash burn in the fourth quarter will be $15-20 million, plus $10 million of severance and debt principal payments.
The airline expects total revenue in the fourth quarter will be down 67% year-on-year, with passenger revenue expected to be down by 72%.
A LOOK BACK AT THE THIRD QUARTER
United in the quarter ending in September had a net loss of $1.8 billion, compared with a net income of $1 billion in the third quarter of 2019.
The carrier had an operating loss of $1.6 billion and a pre-tax loss of $2.3 billion in the third quarter. Passenger revenue was down 84% year-on-year.
United has 487 aircraft in service, 335 in storage and 269 on order, Cirium fleets data shows. It has 170 Boeing 737 Max jets, four Boeing 787s, 50 Airbus A321neos and 45 A350-900s on order.
“We don’t expect to retire any of our mainline aircraft in the near future,” Laderman says.
GLIMPSING THE RECOVERY
Kirby acknowledges that United is more exposed than its network peers to downturns in business and international travel but says that on an “apples to apples” basis, it has had the lowest cash burn throughout the crisis.
“Our focus can and has now shifted squarely to what the recovery will look like,” he says. “We were hoping we’d be wrong about the severity of the crisis, but our fact-based, objective approach equipped us to be more realistic and nimble in our response to the crisis.”
The airline will continue taking a “conservative” approach in the quarters to come, which it believes will position it to win the recovery and return to positive cash flow.
“Demand for our coastal hubs for the fourth quarter is still expected to be weak,” says chief commercial officer Andrew Nocella. “Incremental capacity we do add back in the fourth quarter is expected to be tilted toward our Houston and Denver hubs.”
Nocella notes that first-quarter 2021 results might show an “incremental” improvement driven by warm-weather flying. Anything beyond “incremental” will likely have to wait until 2022.