Cash (burn) is king for airlines in the Americas, as liquidity is challenged

Summary:

• US airlines are facing a jagged recovery in demand, and are working to cut their cash burn, as well as building liquidity. They are also bracing for the possibility of involuntary furloughs.
• Latin American airlines are navigating the pandemic with little government support, and three of the region's major airlines are restructuring under Chapter 11.
• Canada's airlines have been hampered by travel restrictions that have been in place since Mar-2020.

Bullish hopes quelled by new COVID-19 waves in the US

After a bump off bottomed-out demand in the US in May-2020, some US airlines became bullish about a recovery, with a couple of those operators aiming to resume close to a full schedule by YE2020.

But after COVID-19 cases jumped - from 1.8 million at the end of Jun-2020 to more than 5.8 million at the close of Aug-2020 - that uptick vaporised.

Now the nation's airlines are preparing for a jagged recovery, with United Airlines concluding that the recovery of air travel demand will level off at 50% of pre pandemic levels until a vaccine becomes widely available.

Delta, Alaska and Southwest Airlines have all stated that they are working to reach a break-even cash burn (which is defined differently by each airline) by the end of 2020.

But Southwest has recently acknowledged that a more realistic scenario is reaching break even in early 2021. Southwest expects average daily cash burn of USD20 million in 3Q2020, compared with a previous estimate of USD23 million.

Although cost-cutting has helped US airlines rapidly slash their cash burn since the onset of the COVID-19 crisis, demand will also play a role in those airlines reaching their aspirations for break-even cash flow. The uncertainty in demand patterns could create obstacles to operators reaching those targets.

Delta Air Lines improved its cash burn from USD100 million in Mar-2020 to USD27 million in Jun-2020. The airline cut its operating expenses by 50% in 2Q2020, and expects a similar drop in 3Q2020.

Revenues are needed as cost cuts deepen

The company's CEO Ed Bastian has acknowledged that "it's really going to be on the commercial side of the business, that's going to be much more important to getting us down to that breakeven level [daily cash burn] as demand hopefully…starts to pick up again as we look into the late summer and fall".

Southwest, which at one point stated that it could reach close to a full operating schedule by the end of 2020, has reassessed that aspiration in light of highly uncertain demand trends.

After watching net bookings fall by 10 to 15 points year-on-year during a portion of 2Q2020, the airline did cite some modest improvements in booking through late Aug-2020, and stated that booking trends were slightly improving in Sep-2020. "However yearover-year revenue declines remain significant, and passenger demand and booking trends remains inconsistent", the airline said.

Given how demand zigzagged during what was normally the US high season, and as the weaker shoulder season settles in, US airlines are working to ensure they have optimal levels of liquidity. Most of the country's operators have signed letters of intent to access up to USD25 billion in loans available to airline and other aviation suppliers under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Government loan offers were too onerous for Southwest

Southwest was one of the airlines that signed a letter of intent with the US government for a USD2.8 billion loan, but has opted not to access the funds.

Previously, Southwest CEO Gary Kelly has stated that the terms of government loans were onerous, including a "significant file of warrants…I think we would much rather avoid those. And I think what's near and dear to shareholders' hearts is it puts restrictions on dividends which I object to, and share repurchases. I object to that as well."

It is not clear if other airlines will opt out of government loans, but some US operators and unions are pushing for an extension of payroll support beyond the 30-Sep-2020 expiration date. Essentially, without an extension airlines will be forced to institute involuntary furloughs in order to size their operations properly in light of significantly lower demand.

There is debate over whether an extension is necessary, given that airlines have been warning they need to shrink in order to adapt to new demand realities. Unions are unsurprisingly pushing for more support; but at this point, US legislators have yet to reach an agreement on a second Coronavirus stimulus package.

The support that US airlines have received from the government is in stark contrast to Latin America

IATA has calculated that governments in Latin America have offered airlines just 1% of 2019 revenues, compared with 25% in North America and 15% in Europe.

The lack of government support has forced three of the region's powerhouse airline groups - Avianca, Aeromexico and LATAM Airlines Group - into Chapter 11.

Many of the countries in Latin America shut down domestic and international aviation in order to restrain the spread of COVID-19, but according to the Johns Hopkins Coronavirus resource centre, Peru, Mexico and Colombia had the sixth, seventh and eighth highest case counts worldwide as of late Aug-2020. Brazil remained the second largest, behind the US, with approximately 3.6 million cases. Peru has restarted domestic operations, and Colombia is opening some airports in Sep-2020.

Brazil is a global exception in growing despite a startling infection rate

Brazil, which never fully shut down its domestic aviation system, has remained a study in contrasts during the pandemic.

As cases have continued to climb, two of the country's largest airlines - GOL and Azul - have been bullish about demand moving off the bottom. GOL anticipates some return of business travel by the end of 2020.

During Aug-2020, Azul chief revenue officer Abhi Shah told analysts and investors that the airline had "seen average fares come up very nicely over the past three to four weeks. And the very good news is the volume of demand has held up as those average fares have come up".

Mr Shah has acknowledged that average fares are still down worldwide, "but they are coming up".

Canada's travel restrictions have been firmly in place since Mar2020, creating challenges for the country's airlines.

Canada's largest airline, Air Canada, has identified some signs of domestic recovery, particularly on transcontinental routes and in Western Canada, airline chief commercial officer Lucie Guillemette has said.

But she warned that a market rebound would be uneven, as the "maritimes continues to be impaired by interprovincial travel restrictions, while Ontario and Québec lagged behind the western provinces in terms of reopening our economy".

Air Canada CEO Calin Rovinescu concluded that Canada's federal and interprovincial restrictions, "which have been amongst the most severe in the world", resulted in the airline carrying less than 4% of the customers in 2Q2020 than it transported in 2Q2019.

In many ways, airlines in the Americas have been forced to accept that COVID-19 is a new reality, and a full rebound in demand will not occur until a vaccine is widely available.

Those airlines are now working to size their operations to that new reality, and the approaches airlines are adopting to that rightsizing are varying by region - with some Latin operators being forced to downsize through Chapter 11.