By Judson Rollins
March 16, 2020, © Leeham News: Throughout Sunday afternoon and evening, reports – all unconfirmed – began to emerge in the US that as early as today, the Trump administration may announce a suspension of US passenger flights domestically for 2-4 weeks. The suspension, if confirmed, could begin this week. Investors are scrambling to understand how long US airlines can survive on their current cash balances.
LNA reviewed the balance sheets of carriers worldwide in anticipation of such dramatic events. In this article, we will show that US airlines have plenty of time for demand to recover – or the US government to step in with emergency loans or grants similar to those doled out by the Air Transportation Stabilization Board from 2001 to 2003.
Prior to the COVID-19 outbreak in America, the three carriers with the thinnest cash cushions were Delta, American, and United. This is likely because the three were trying to maximize capital efficiency in a bid to please investors. All three still have fewer than 90 days’ cash on hand (including credit lines), but each one has between $10bn and $20bn in unencumbered assets like aircraft and landing slots. Selling these or using them as loan collateral could extend each airline’s respective runway out to 150-280 days.
Investors have been particularly panicky over American Airlines, driving the company’s shares down more than 50% over the last month. A set of American bonds with 2025 maturity issued last month were not even tradeable at 70 cents on the dollar during trading last Monday, according to a CNBC report and bond price data reviewed by LNA. Fears over American’s balance sheet are the main concern as the company’s debt exceeds its assets. However, a company presentation at last week’s JPMorgan investor conference claimed American has $10bn in unpledged assets.
Smaller airlines like Hawaiian and Spirit have much better cash balances relative to their expenses. Except for JetBlue, each has 120-180 days of cash plus varying numbers of unpledged aircraft. Southwest, Hawaiian, and Allegiant did not provide disclosure of what their unencumbered assets might be worth.
LNA defines days’ cash remaining as total cash plus liquid investments plus available credit lines, divided by the last 12 months’ operating expenses minus depreciation and amortization (non-cash expenses), multiplied by 365 to get a day count. Obviously, any capacity reductions would significantly reduce ongoing operating expense. Fuel isn’t burned, maintenance expenses slow as aircraft are utilized less, sales expense falls in line with lost booking volume, and marketing expenses are slashed.
American, Delta, and United announced dramatic capacity cuts that will buy them additional time. Other carriers will undoubtedly follow. These reductions will materially extend the amount of time each airline can last without running out of cash.
Accordingly, the days’ cash estimates here are highly conservative. One should not make dramatic conclusions like “JetBlue has just three months to live.”
Frontier Airlines is not included here as it does not make its financial statements public. However, the Denver-based airline is owned by Bill Franke’s Indigo Partners, which almost certainly has the funds necessary to support the airline during a downturn.
The airlines can, and some already have, halted capital expenditures. With capacity cuts already happening, and more to come, new airplane deliveries are or will be deferred. Because Boeing’s 737 MAX program is already 12 months behind schedule due to the grounding, airlines and lessors aren’t obligated to take delivery of most of the 400+ airplanes already produced. The clock is ticking on the balance of these aircraft.
Boeing hopes to recertify the MAX mid-year. It planned to restart production in about April, before the virus crisis erupted. This plan is likely going to be halted, moving any deliveries of new production aircraft out as well.
Airlines across the globe likely won’t want any airplanes from Boeing – or Airbus or Embraer.
Potential options include cutting pre-delivery payments or cancelling orders and requesting refunds from Boeing, should it become necessary. Boeing obviously won’t be thrilled with this request given its own worsening cash position. (The Seattle Times reported Sunday that Boeing may cut widebody production in response to the virus crisis as international routes are shut down.)
Discretionary spending is already in abeyance.