Leeham News and Analysis
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Leeham News and Analysis
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US carriers not at imminent risk of bankruptcy despite potential shutdown
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.
This airplane line-up at Chicago O’Hare Airport could be a thing of the past very soon. Source: Pinterest.
Every US carrier can survive at least three months – and longer with capacity, staff cuts
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 in better shape
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.
All figures in millions USD
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.
Capital expenditures already declining – options to get out of order commitments
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.
This is bigger than 9-11. Domestic loads are already dismal, AA BDL-PHL shows a A-319 with 128 seats as having 33 passengers.
United apparently gave guidance to employees over the weekend to expect not just the roughly 50% capacity cut, but that load factors on remaining flights might be 30-50%. So demand is something like 70-80% lower than a year ago. Brutal. At those loads, is a total US suspension better or worse for airlines? If they all have to comply, there’s no jockeying for market share.
To the final paragraph’s point, one can imagine that widebody deliveries and sales will be terrible for some time to come. Norwegian will almost certainly fail, and several other highly leveraged airlines around the world. Just this one bankruptcy would put thirty seven 787s into the parked & available aircraft, with an average age of about 3yrs.
I know its low in some locations, my wife is trying to get home and no spare seats where she is, but am willing to bet behind her you can pick your seat anywhere on the airplane.
9/11 was an emotional overreaction. It was the images and sudden loss of life in a small location, but the real impact on the economy was tiny.
In this case the cause is biological and that had to be handled first. Pouring money into it only works if people can spend on it. WWII comes to mind and that is more the organization end.
Its about test kits and containment or having it run through the community an picking up after our losses which will be major. 1-2% of the population will die if not contained. Nothing like it since the so called Spanish flu and the economy was vastly more basic back then.
Now the travel, hotels, sports etc is a big part of it and that has just gone stone quiet. Each of those has tens of thousands of employees. All who have bills to pay.
For this pandemic to equal the toll of the Spanish flu (by percentage of population) it would have to kill between 70-400 million depending on what estimate you believe of the Spanish flu. This pandemic has claimed 8,810 as of today with the flu already starting to wane in China. The two really shouldn’t be mentioned in the same sentence.
The swine flu alone killed an estimated 150,000–575,000 fatalities. According to WHO the typical seasonal flu outbreaks kill an estimated 290,000–650,000 a year.
Puts this in perspective I guess .
While it’s great that the world is taking this seriously it’s the precautions that are taking the economic toll rather than the disease itself which is I suppose is how it should be. The upside is that the precautions can be adjusted to the actual threat.
China and Singapore see people returning to offices, business slowly picking up. They are ~3-4 weeks ahead.
Yes. Its the hive mentality kicking in … all stay in with no one venturing out then gradually some come out and then its all out
Italy is a better barometer as its closer to the response of the US.
Rest of Europe as well but just starting to hit.
Duke:
Can’t disagree more or seen someone so wrong.
Nothing to do with Hive mentality. All to do with suddenly no air travel. You want to get stuck in a different country or city and watch the cash flow go ballistic?
Recommendation is to close things and no more than 10 people now. One infected person can contact 100s.
Recommend by the experts is that people do stay in. It reduces contact and spread.
Two family member had been planning on going over seas. Dang right it got cancelled.
Lot of dead people in Seattle because workers and groups were common to a bunch of critical care facilities and spread it to a group that was on the 30% mortality list.
Once you get it contained then you can star loosening things up and people can resume, China and South Korea are the only two, and USA and Europe are just doing the dive.
And that says noting of places like Iran we get nothign from but it was going wild last reports which means the whole Middle East is going to be hit big time.
No, the average person with the virus passes on to about 1.3 others , not 100s.
Even something like measles which is highly infectious….the health scare from 6 months ago that no one remembers now, would on average be around 13 people.
Who remembers the 60,000 US residents killed by the very bad flu season of 17/18 , just 2 years ago. Even a ‘normal’ flu season is 2000 dead per month in US.
There is no vaccine for Covid19 but there are some for pneumonia, one its major side effects that kills people. I paid around $200 for protection just last week. Just as I moved my savings out of stocks 5 weeks ago , being prepared is the antidote to a panic hive mentality.
You are throwing out stuff that is not relevant.
Not likely to change a closed mind per the unstable 737MAXers
As 20% of the cases go serious to one degree or another, hospitals as they have in Italy are overpowered.
You have to minimize exposure any time there are the spread mechanism and hospital is in spades. Deplete your hospital personnel and you have no functioning system and they have to be triage (fancy way the doc if there is one decides to save 3 vs letting one person die) maybe no doc and more die.
That is why Italy is hurt so badly, they could not contain to manageable levels. That is why the US is on the cusp.
After the peak passed, great. 3 -5 million dead in the US with our population. EU I believe is about the same numbers and then you have the non EU and Russia portions.
The panic buying is a separate issue but the need to slow C-19 down so it can be manged is critical.
If not you have Italy or worse even Iran and then it hits Africa and India. What 20+ million dead?
And you can wind up with hot spot back in China or South Korea as it gets re-imported.
Returning under duress? To whom do they sell? Have they established an acceptable level of collateral damage to the virus? As a nation we have no idea what acceptable risk looks like. We live in a world where even a picture of the wolf at the door is too much.
The economic damage caused by the over reaction to the pandemic will likely kill more people than the virus itself ever could. Politicians have gone insane fearful of the demented ranting of a crazy partisan media. Hygiene is called for, staying home if there is even a hint of a cold is called for. Only old men who smoked are dying. They will be missed but the damage caused is going devastate more lives. We should get back to work and just accept fatalities.
Risk cannot be directly ascertained and sans guesswork until the tests are available to refine the numbers of carriers. Bring forth the supposedly existing test kits and make them available and input the results. This should have been in place years ago. Epidemics and pandemics happen
More like 8 weeks. China restricted movement on January 13. And China went immediately to a hard shut down with extensive testing which has still not started in the US. We’ll be lucky to be in recovery mode in three months.
I haven’t seen any reports about a possible suspension of US domestic passenger flights anywhere but here.
@Rick, it’s been written about in a number of places. Air Current, Airfinance Journal, reputable reporters on Twitter.
Administration has mentioned it twice now, crossed fingers my wife gets home and another brother and his wife.
Neither in a high impact zone (as of now) so looks safe to travel.
Seattle Times story on Alaska CEO Brad Tilden:
Tilden also tried to tamp down a widespread rumor that the government may shut down air travel completely, either nationally or in certain regions.
“We have been in regular contact with the White House, the DOT and others, and we are told that domestic travel restrictions are unlikely for the time being,” he wrote. “We are in touch regularly with government leaders and are working to keep the national transportation system intact.”
Still, he ended by noting that the airline will likely have to take additional action in the days and weeks ahead.
“Things are evolving and we will of course keep you posted,” Tilden told employees.
https://www.seattletimes.com/business/boeing-aerospace/alaska-air-cuts-flights-and-ceo-cuts-own-pay-to-zero-as-coronavirus-crisis-hits-airlines-bookings/
Maybe companies should be obliged to first get at least 75% of share buybacks/dividend payments made in the last 5 years from the capital market, before receiving Gov help.
But a short term unemployment support could help workers get through mass lay-offs.
It’s not just their jobs they’ll lose, it’s also their health insurance. Just what the USA needs when a pandemic hits: hundreds of thousands of newly-uninsured sick folks.
🙁
this ^^^^ 1000%
the people most likely to be laid off by this (service, retail and non-union manufacturing workers) are all going to lose what little health insurance they have, and any ability to pay if they already didn’t have.
at least in europe they have universal health care so they aren’t going to get saddled with $250k for emergency health care when their benefits got cancelled.
I suspect that after this pandemic that resistance against some kind of universal healthcare is going to be on the retreat. I can see why the US doesn’t have it however the lack of universal healthcare has the potential of leaving holes that will accelerate the transmission of the virus in a large number of individuals that can not access healthcare who will pass it on to those who can. One of the issues preventing it has been foreigners using the system from a porous border may be coming under control. No having entitlements to paid sick leave will tend to compel those that are shedding virus’s to work. Things are going to change in everything after this.
Absolutely. A nation of unemployed and uninsured- the former worker bees now on top of the previously “3 jobs to feed the family moms and dads” crowd.
Multi billionaire and tax avioder Dickie Branson and massively profitable Delta need to cough up at least a few billion before coming to the UK government for help. The man has no shame, having sued the national holy cow, the NHS and is now the first out with the begging bowl.
Right now all efforts are directed to fight the COVID-19 Pandemic.
It will be difficult, and that will take time.
The sooner there is an effective vaccine, the faster this fight will end.
Worldwide, some essential air routes should be kept in place, to ensure basic connectivity for medical reasons, and also to keep essential infrastructures working properly.
Doctors, nurses, lab staff, aid personnel, medical aid, engineers, WHO workers… need a way to move fast to where they are needed.
So, yes, I think, basic air traffic connection should be available.
Airlines can keep passengers seated six feet apart, and wearing masks.
I believe that when the hard contagion curve is over, the Aviation will re-emerge stronger, and with clearer goals.
One day COVID-19 will end, and then the Aviation Industry will be back on track.
Its good there were no a380 in US airlines. Operating them is a cash drain. I wont be surprised if some of tbe a380 grounded wont fly again.
Qantas has grounded all its widebodies, A380, A330, B787 B747….
US airlines grounded their 757 and 767’s first. Its just that a whole fleet type grounding saves the most money in one go, rather than some of this and some of that.
Likely US carriers have moved up the chain to all 777s by now and just keep 787s going for the few long haul routes
Tom:
American has grounded its entire wide body fleet.
A380 has nothign to do with it.
Whether it flies again on other routes depends on traffic.
The same is true of 777-300s, A350. A330 etc.
Next up with the begging bowl – airports.Massively geared up after being passed around the banks and wealth funds.
Not just Boeing, US airlines have also engaged in massive share buy-back programs.
So that’s what the airlines did. “The biggest U.S. airlines spent 96% of free cash flow last decade on buying back their own shares.”
https://www.bloomberg.com/opinion/articles/2020-03-17/the-good-times-for-airlines-are-over
The crazy part is some business havent had the cash flow to spend on buy backs so they borrowed it with interest rates so low .
Lenders have made it worse by looking for risker investments like commercial paper etc with relatively low interest rates, they will lose all their investment. Leasing planes maybe one of the riskier investments if airlines can park a plane and walk away.
Thats the most telling point made, is that buy-backs are good for shareholders and hence a rational response by CEO’s. Its just that:
“Not everything that you want, that is in the best interest of society, will necessarily be what rational executives pursuing long-term shareholder value will do.”
Make risky bets, then take the money off the table and bet again.
you mean “short term shareholder value” share buybacks are basically throwing money down a toilet.
Boeing is a two time loser now over the ‘good for shareholders only’ approach of Muilenberg and his predecessors.
The rushed certification of the 737 Max has cost them dearly now and the coffers are empty and their credit rating is downgraded when the really really need more credit just to survive. Even with the Max crisis, their credit was good as all those parked planes had customers names on them and Boeing was playing hard ball on airliner compensation. Now no airline wants these planes in service this year and only a few will want them next year.
The airlines are now in the driving seat over when they want parked planes delivered and Boeing has crawl on their knees to get them off its hands
this entire problem and serious issue has been a shock to most americans…we have come to live in complacency with everything being ok,plentiful supplies and food,freedom to come and go as we please,and suddenly,there is this thing called corona virus…is not like the yearly flu or even a cold, and we just were not prepared..the airlines have had serious ups and downs since the 1970’s,but none were to this extent..the furlough notices went out,some flights were cancelled,and then within a few months,passenger loads picked up,employees were recalled and thing started to roll again..this is worse than a strike situation with shutdowns..this is not just one airline,but several..
As a Dutchie in semi-lock down let me add my 2cts. The virus if unchecked will infect 50% or more of a population (see what happened at some cruise ships). That is 160 Mio in the US. Death rate 1% if you are organised well (Korea), 3% if you react late (China), and worse if you react too late (Italy, with fully overwhelmed health care). WWII is a walk in the park compared to this. You can limit things very well like in Hong Kong, Macau, Taiwan, China, Korea by lock down or stringent social distancing measures. The problem is though, that China who beat the virus by putting their full might against it (show me a country that sents 40k health care workers to one province and builds in 2 weeks an additional hospital capacity similar to the Netherlands) now just have 80.000 of their 1.4 billion contracted the virus and may have immunity. If you do not kill the virus at global level, China is at extreme risk to get it back via imports. So they must control and limit incoming traffic and keep up a policy of tracking cases and social distancing. Killing it at global level is doing at global level the kind of quarantine that China did (or in due time, with a vaccine). But frankly, and I am sorry to say, I cannot see this happening in the US. 30 million uninsured or so. 50% (?) of the population living from paycheck to paycheck. Maybe 14 days of paid sick leave and then you are on your own. Many US citizens will have no option but to work on, and can’t afford social distancing or working from home. Where this will end only time will tell. As long as the virus rages, internationally and probably nationally some level of travel restrictions and social distancing will be in place. This is not something of 1 month. Where this ends I haven’t thought through entirely, but it will be a different world.
atflyer:
Some very good points but you might want to think about WWII and where any given person was (or whole populations)
For some it was privation they managed through, others it was the end of existence. Really depends on how close you are to the pointy end of the spear.
Thats incorrect about ‘some cruise ships’ being 50% infected
This is from a published medical journal paper not your scare mongering
https://www.medrxiv.org/content/10.1101/2020.03.05.20031773v2.full.pdf
The Diamond Princess had an infection rate of around 15% ( 1 in 7 persons) and that was even with everyone kept on board in an ‘incubator situation’. Real world is very different.
Of those infected 40% or so showed no symptoms, only 7 died. The small numbers mean the ‘corrected’ death rate of those infected may be below 0.4%.
They have pretty good numbers as of the 3700 passengers and crew, around 3000 were tested.
By comparison in US, death from vehicle accidents is 3100 , not per year but PER MONTH
Hi Duke! Sure, you can of course use different assumptions. The 50% I used is common wisdom for reaching herd immunity. Let us say your 15% is more realistic. That is 52 Mio US citizens. A 0.5% death rate is really the lowest level you see – countries with the best healthcare systems that can freely accessed, and that become not saturated. That is 250k deaths, or several times the Vietnam war (even corrected for a higher population now). In much shorter time. China with its massive effort saw 3%. Italy higher. You then talk about 1 Million or more in the US. Reputable Imperial College London estimates 250k British death if it is not contained and the US has over 5 times the population. Countries will survive, like after the Spanish flue. Still a very minor part of the population is hit hard. But these are numbers that are in the same order of magnitude as US deaths in WWII. It is not comparable with deaths by traffic.
https://www.imperial.ac.uk/news/196234/covid19-imperial-researchers-model-likely-impact/
A cruise ship with everyone confined to their cabins is an isolation unit.
Of the 5 or 6 times I have had a really nasty fever, 2 were immediately following intercontinental flights.
That didnt happen , as they went from 1 or 2 cases to 17% of the 3700 on board or 630 people. Does that sound like isolation to you. 43% of those tested had no symptoms.
Thats why I gave the link to the real data , no peoples uninformed ‘guesstimates’ are helpful in a time like this. sorry guys save the ‘I think’ stuff for twitter
After this both air travel and work will need to be different forever. The costs can no longer be risked. Zero tolerance is the only way forward.
For Air travel: No one may fly while showing any symptoms of flu, cold, cough, running nose, congestion. Some kind of insurance surcharge will need to be built into the ticket to partially offset the costs of cancellations or the enforced quarantine if there is a failure to comply or manifestation of symtoms in flight. This can not be tolerated anymore. I know some folks will be asymptomatic while shedding virus but it still mitigates transmission and promotes the evolution of benign strains of the virus.
For workers likewise: any signs of cold, flu, cough, fever must mean the employee, worker or owner must return home. It will need additional sick leave entitlement or insurance that covers everybody, including such people as a casual waitress.
Certain nations tolerate with indifference the unhygienic raising and slaughter of animals of different species together and sale of the butchered meat mixed in with the meat of other animals. Apart from being cruel, for which we should not feel ashamed of condemning, the practice promotes viruses jumping species. All of those nations who fail to enforce compliance in ending this practices will need to have visa requirements added to slow traffic and ensure that travellers from that nation do not travel if they have symptoms or attended an agricultural market. These nations are also often indifferent to the cultural habit of public spitting.
The elephant in the room not many want to speak of- eating meat brought us here, as it did with SARS, swine flu, H5N1, 1918 pandemic, etc…
STOP PRESS – Boeing is stopping WTO proceedings, government aid and subsidies for airliner production are absolutely fine now.
Yeah these global pandemics and massive government ordered shutdowns happen every year… Not a disingenuous observation at all!