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COVID-19 coronavirus: US airlines take steps to preserve liquidity

As the US moves from attempting to contain the COVID-19 coronavirus to the mitigation stage, the country’s airlines are following suit, attempting to fortify their respective war chests by cutting capacity, suspending share buy-backs, cutting capex and, in some cases, bolstering their liquidity. 

COVID-19 has now become the black swan event that is testing the long-held belief that the US airline industry is much stronger than it was in previous crises, including the Sep-2001 terror attacks, SARs and the 2008 financial crisis. 

Now is the time to lean on solid cash balances and be grateful for manageable leverage, and to that end, some US airlines are better positioned than others. 

Summary

  • US airlines are cutting capex and suspending share buy-backs, touting their unencumbered assets as they hunker down and try to weather the impact of the COVID-19 coronavirus
  • Capacity cuts at those operators continue to mount as demand continues to tumble.
  • United believes it is prudent to use worst-case scenarios as it navigates the COVID-19 crisis. 

As COVID-19 continues to intensify, airlines work to preserve liquidity 

The US industry is in a more favourable position to weather a scenario like the rapid spread of COVID-19 than it has been in the past.

Most of the largest US airlines have decent levels of cash in their coffers and manageable debt. Southwest and Alaska have the lowest leverage levels, and United has some of the highest liquidity levels. 

Annual debt, cash and leverage for select US airlines as of year-end 2019 

Airline  Total Debt  Cash and  short term investments USD
Total debt to EBITDA 
American USD33 billion 4 billion  4.04
Delta  USD17 billion 3 billion 1.21
Southwest  USD4 billion  4 billion  0.63
United    USD20 billion  5 billion 2.17
Alaska    USD3.2 billion    1.5 billion  0.97
JetBlue    USD3.1 billion    1.3 billion  1.74
Spirit    USD3.6 billion  1 billion  2.98 

Recently, United stated that it had raised an incremental USD2 billion in new liquidity from a group of banks as a secured loan, and company executives observed that the loan was secured by vintage aircraft.

As of the close of business on 9-Mar-2020, United had USD8 billion in liquidity, including USD6 billion on unrestricted cash and short term investments and a fully undrawn USD2 billion credit facility. United also has approximately USD20 billion in encumbered assets, including its loyalty programme. 

Additionally, United stated that it was adjusting its planned capital expenditures for 2020, and it now expects projected capital expenditures for the year of USD4.5 billion, versus a previous estimate of USD7 billion. The airline observed that its capital expenditures for 2020 were “front loaded”, and as a result, United has posted USD2 billion in capital expenditures year-to-date. 

After COVID-19’s spread to Italy in late Feb-2020, United suspended share buy-backs under its existing share repurchase programme. 

Delta is also suspending its share repurchase programme and is delaying USD500 million in capital expenditures.

During a recent investor presentation, Delta stated that it was prioritising free cash flow and a minimum of USD5 billion in liquidity for the full year 2020. The company also highlighted that it had unencumbered collateral of approximately USD20 billion, including USD12 billion in aircraft. 

US capacity cuts continue as bookings continue to plummet 

US airlines are also in the midst of cutting capacity – United and JetBlue were the first operators to cut capacity as the fallout from COVID-19 continues. Both those airlines are now poised for further cuts as demand for air travel continues to be pummelled. 

Initially, United stated that it was pulling down 20% of its international schedule and 10% of its domestic flights in Apr-2020. Now the airline has said that it anticipates cuts of 20% in May-2020, and is proactively planning to “evaluate and cancel flights on a rolling 90-day basis until it sees signs of a recovery in demand”.  

Delta CEO Ed Bastian stated that the airline had experienced a 25% to 30% fall in net bookings, and the company was prepared for that to get worse. 

Delta is cutting its system capacity by 15 points, with international cuts falling between 20% and 25%, and domestic decreases of 10% to 15%. The airline is parking some widebody and narrowbody aircraft and is also evaluating early retirements of older aircraft. 

American Airlines is cutting its international capacity for the US and Northern Hemisphere summer peak season by 10%, including a 55% drop in trans Pacific capacity. The airline plans to cut its domestic capacity in Apr-2020 by 7.5%. 

JetBlue has already outlined plans to cut its capacity by 5% from Mar-2020 through early May-2020, and is considering further cuts. The ULCC Spirit Airlines also plans to cut its capacity growth by 5% in Apr-2020. 

United believes it is better to plan for a worst case scenario as COVID-19 spreads 

To its credit, United appears to be the most open about the effects of the intensifying impact of the COVID-19 virus. 

United president and rising CEO Scott Kirby explained to investors that the airline’s gross bookings to Europe (gross bookings are new bookings before netting out cancellations) are down 50%, and US domestic gross bookings have fallen 25%. Domestic net bookings (new bookings minus cancellations) are down 70%. Unsurprisingly, net bookings to Asia are down 100% while gross bookings have fallen by 70%. 

United and other airlines have essentially suspended financial guidance for the year, given the uncertainty over the spread and duration of COVID-19

But United has decided to model more aggressive worst case scenarios than its competitors.

Mr Kirby stressed that United is not offering any specific forecast, but its current dire scenario-planning assumption is a revenue decline of 70% in Apr-2020 and May-2020, 60% in Jun-2020, 40% in Jul-2020 and Aug-2020, 30% in Sep-2020 and Oct-2020 and 20% in Nov-2020 and Dec-2020. 

Mr Kirby remarked that “I suspect that sounds shocking…and for what it is worth, we don’t actually think it will be that bad. But again, we’re biased to be too aggressive in taking action, as opposed to taking the risk and looking back at some point and wishing we’d been more aggressive sooner.” 

US demand will continue to fall as more COVID-19 cases emerge in the country

There are so many unknowns surrounding COVID-19 and the duration of the fallout of the virus on global business and travel. 

US airlines are taking varying steps to steel themselves against the continued negative effects of COVID-19, and no operator is daring to predict when the drop in demand will bottom out. 

For now, the general consensus is that diminishing demand will get worse before it gets better as more cases of COVID-19 emerge in the US

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