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COVID19: US budget airlines and LCCs feel the heat

Like their larger counterparts, low cost and budget operators in the US are working to fortify their balance sheets, slashing capex and cutting their capacity as COVID-19 dries up demand for air travel in the short term. 

Alaska, Southwest, JetBlue and Spirit are cutting their capacity growth to varying degrees, and Alaska and Southwest are taking steps to borrow funds to withstand the crisis – the duration of which is anyone’s guess. 

As bookings continue to turn negative and cancellations continuing to spike, US operators are no doubt ratcheting up their messaging that a proposed financial aid packaging totalling more than USD50 billion needs to materialise sooner rather than later. 

Summary

  • Alaska Air Group and Southwest Airlines are working to fortify their balance sheets as the COVID-19 crisis intensifies, and signs are showing that it will only get worse before improving. 
  • JetBlue and Spirit are also taking measures to withstand the crisis, and at present, low fares are not a weapon to entice the general public to travel. 

Southwest slashes capacity, as it deals with ongoing fallout from the MAX 

As previously reported by CAPA, at the end of 2019 Southwest Airlines had cash and short term investments of USD4 billion, total debt of USD4 billion and its total debt to EBITDA was 0.63. 

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

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

Recently Southwest, which is one of the few North American Airlines with an investment grade credit rating, has issued USD500 million in unsecured debt and has fully drawn a USD1 billion unsecured revolving credit facility. Southwest has also brokered a 364-day USD1 billion loan agreement. 

With all those transactions in place, Southwest has stated that its current unrestricted cash balance is approximately USD6.2 billion. Additionally, the airline has explained that it has 524 unencumbered aircraft worth USD10 billion. Despite this its share price has slid over 30% in as many days.

The liquidity build-up is occurring as Southwest has experienced several days of negative bookings for Mar-2020 and Apr-2020, where trip cancellations outpaced new passenger bookings, the company recently explained. As of mid Mar-2020, the airline’s month to date load factor was 67%, and recent days were trending at 50%. 

Now Southwest is cutting capacity by 20% from mid Apr-2020 through early Jun-2020, which are necessary as its schedule remains subpar due to the continued grounding of the Boeing 737 MAX. 

Alaska take steps to strengthen its balance sheet and JetBlue slashes its capacity

Alaska, JetBlue and Spirit Airlines do not have the same exposure to corporate clients and their international operations are concentrated in the Americas.

But as Southwest’s booking trends show, domestic demand is continuing to plummet, and new guidelines issued by the administration of US President Donald Trump to avoid gatherings of more than 10 people and cut discretionary travel will continue to drive bookings and cancellation into negative territory. 

Among those three airlines, Alaska has the best ratio of total debt to EBITDA of 0.97, and it has been working to strengthen its balance sheet. The company recently stated that it was pursuing additional borrowing of USD500 million and suspending USD300 million of planned capex through the deferral of pre-delivery aircraft payments and other non-aircraft projects. As of mid Mar-2020, Alaska had USD1.9 billion in unrestricted cash and short term investments. Nonetheless its share price has fallen some 60% in the past month.

As of 16-Mar-2020, Alaska’s booked load factor for the month of Mar-2020 had fallen by 25 points, to 56%, and for Apr-2020 had dropped by 13 points, to 43%. 

Alaska is cutting its capacity by 10% in Apr-2020 and 15% in May-2020 as it experiences extremely soft new bookings and unprecedented levels of cancellations. The company is monitoring demand, and will reduce its capacity on a rolling 15-day basis as needed. 

JetBlue was one of the first airlines to respond to COVID-19, with a 5% reduction in capacity and CEO Robin Hayes stating he was taking a 20% pay cut. The airline has stated that it has an undrawn credit revolver of USD550 million, and 34% of its fleet is unencumbered. JetBlue has also stated that it is cutting non-aircraft capex, but has not supplied a specific amount for the reductions. JetBlue too has seen its share price fall around 60% for the month.

Now JetBlue is cutting capacity by 40% for Apr-2020 and May-2020, and expects deeper cuts in Jun-2020 and Jul-2020. The airline stressed that it is receiving less than USD4 million per day in bookings, but issuing USD20 million in credits per day in cancellations. 

JetBlue entered the COVID-19 crisis with USD1.2 billion in cash and has recently secured a USD1 billion credit line. But the airline warned that, "this is not free money. It's a band-aid solution that holds us over, and we have to pay it back with interest". 

Spirit's cost advantage could prove useful, when normality returns 

The ULCC Spirit Airlines is cutting capacity by 5% in Apr-2020 and is assessing reductions for May-2020. The airline has stated that since Feb-2020 it has undergone significant pressure on fares, but load factors were fairly stable, remarkably with a forecast load factor of 81.5% for Mar-2020. 

But even as Spirit’s unit costs excluding fuel are among the lowest in the US airlines industry, at USD5.58 cents in 2019 (on a stage length adjusted basis), at this point ultra low fares are likely doing little to stimulate demand in the US market until the COVID-19 crisis has abated. 

Similarly to other airlines, Spirit is stressing that it has more than USD700 million in unencumbered assets and no financial covenants on debt. But its share price has tumbled 75% in the month.

Spirit does have some advantage in having a cost base that allows for passenger stimulation when the demand situation returns to normal, but given the commentary from other airlines, Spirit’s loads have likely fallen during the last few days and cancellations have increased.

For now, Spirit and other airlines are navigating the same demand environment, which is essentially a rapid deterioration in travel demand until the COVID-19 coronavirus crisis has been resolved. 

US airlines need aid - sooner rather than later 

The airline industry is too fundamental to social and economic connectivity to let it fold. US airlines, through their lobbying group Airlines For America, A4A, have asked the government for more than USD50 billion in aid through grants, loans and tax relief to ensure that they have ample support to survive current and possibly future travel bans and the overall evaporation of demand. 

As the situation in the US is growing worse day by day, the voices of the airlines could continue grow louder. And even as the administration seems to support some measure of aid to airlines, the severe plummet in demand warrants action sooner rather than later. 

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