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Covid-19 and the Airline Industry

As airlines implode, when can they be expected to recover?

As Covid-19 continues its rampage through America, its effects can be seen throughout the economy. One of the hardest hit sectors is the airline industry. With countries closing down borders and American states quarantining visitors from other states, the fear of Covid has caused airlines to suspend routes and ground planes. It is estimated that these actions will cost airlines at least $314 billion.

Since the beginning of March 2020, the airlines have reported bookings to be down by up to 85% at one point. Required flights were flown with two to three passengers only at times. In other words, aircraft were essentially empty when taking off.

To counter the loss of passenger bookings, airlines have cancelled hundreds of thousands of flights in the last four months. Furthermore, they have taken planes and sent them to aircraft bone yards for storage, awaiting a day when flight bookings begin to increase again and the excess planes can return to flight.

All airlines are expected to report major losses for the second quarter and throughout the rest of the year. Air travel will not recover to 2019 levels until at least 2024 by most estimates and it could be longer.

Let’s take a look at different sectors within the airline industry to see how there are faring.

 

Boeing

Aircraft manufacturers have taken huge hits. Boeing is reporting a second quarter loss of $2.4 billion after revenue fell by 25%. Of course, not all of Boeing’s loss is Covid related. Much involves the grounding of the 737 Max jet after two crashes in 2018.

Boeing has only received 59 new orders for the Max, but had 382 cancellations. Another 323 orders are speculative at this point and will likely fall through.

Regular 737 production rates have fallen from 3 planes to 2 planes per month. The 787 has dropped to 6 per month. The 747 ends total production in 2024.

The only thing keeping Boeing afloat at the moment is its defense and space contracts plus any stimulus funds. It is expected that Boeing will file bankruptcy at any time to allow time to restructure and stave off creditors.

 

General Electric

General Electric has experienced problems in their aviation jet engine sector. Revenue fell 24% for the last quarter from a $2 billion drop in orders from Boeing and Airbus. The good news is that cash burn was “only” $2.1 billion compared to projected burn of $4.5 billion. Sometime in 2021, GE expects positive cash flow again.

The aviation business was GE’s biggest and most profitable division in recent years. It profited from aerospace products, including being able to sell their best engine to Boeing for use in the 737 Max. With the Max grounded and with the Covid shutdown foring flight cancellations, GE has experienced a decrease of new equipment orders by 41%, and new services orders by 67%.

To reduce expenses in the aviation division, GE is laying off 25% of the work force. 13,000 employees will lose jobs in the aviation division.

Other equipment and suppliers to airlines are doing the same.

 

Airlines

JetBlue is representative of airlines that have been hard hit. Boston and New York are primary hubs for the JetBlue business model, which leans heavily towards entertainment and family travel. With Covid, demand in those areas has fallen very hard with up to 95% decreases in bookings at one point.

Year over Year, JetBlue’s revenue has fallen over 90% to just $215 million for the last quarter.  Including Care Act payroll benefits, operating expenses have been reduced by 66%. End result was a pre-tax loss of $754 million, indicating a heavy cash burn offset only by government benefit programs and financing.

But this is not enough to stop the burn. For the coming quarter, JetBlue expects a $250 million cash burn per month.

Meanwhile, Southwest Airlines said they were tempering expectations for air-travel recovery and as a result, had 17,000 employees accept early retirement or else extended leave. United expects to cut 40% of its work force, up to 36,000 jobs. American has shed 41,000 jobs.

Delta is reducing employees as well. More than 12,000 elected to leave when early retirements were allowed.

https://twitter.com/zerohedge/status/1288883774739095564

When the end of September arrives, PPP ends and the airlines are no longer required to hang onto employees covered under the $25 billion Corona aid. Hundreds of thousands of employees are likely to be furloughed or laid off permanently.

 

Air Travel Demand & Load Factors

Air travel is at its lowest demand in decades. People fear air travel because of the threat of Covid.  Close proximity to other passengers while breathing recycled air provides a perfect storm for infection spreading. Though the airlines are taking action now to try and stem infected people from flying, there is no guarantee that it will be successful every time.

Load factors are a way of understanding the profitability of an airline. Break even points on load factors is 70%.  In 2019, the average load factor for domestic flights was 85.1%. At the height of Covid in mid April, it had fallen to 9.4%. By the end of April, it had returned to 22.5%, but that was because of all the flight cancellations that had occurred, forcing people to fly on other flights. (Flight loads are no longer reported by the industry.)

As of June 3rd, the average number of passengers per plane had risen to 54. But this is not indicative of rising profitability due to the number of idled planes and airline fixed costs continuing unabated.

Only when the Thanksgiving holiday arrives will we have any true idea about how well people will consider a return to traveling by airline.

 

Damages so far

To understand where the airlines stand so far, we only need to look at a few numbers.

American lost $2.1 billion in the 2nd quarter on revenue decrease of 86% to $1.6 billion. Southwest lost $915 million on revenue loss of 83%, down to $1 billion at the same time. Expect this trend to continue as Covid and shutdowns continue.

The International Air Transport Association expects airlines to lose $314 billion in revenue for all of 2020, a 55% drop from 2019.

On Thursday, April 16th, 95,085 people passed through TSA checkpoints. This was down from 2.6 million on April 16, 2019.

Over 60% of the American aircraft fleet has been grounded and parked. Many will never return to flight resulting from age, high maintenance costs and age.

The initial CoronaVirus stimulus package allocated up to $50 billion for aviation relief. It has done little to stem the tide of aviation revenues losses and employee cuts. Far more relief will be needed to keep the industry somewhat liquid.

 

To Summarize

Airlines have always been a risky business model. Any economic downturn can cause airlines to fail. Iconic airlines as PanAm, TWA and Continental are representative of those airlines no longer around.

The Covid crisis and economic downturn has once again put the airline industry to the test. 23 airlines around the world have already failed. Many more are likely to do the same.

Passengers are afraid to travel by air. They are cancelling long distance air travel and for short hops, electing to drive instead. International travel has been pretty much banned as countries around the world fear importing Covid cases into their countries.

Airlines in America are facing unprecedented losses. Flight schedules have been cut way back. 50% of the fleet is idle. Hundreds of thousands of employees are laid off, with more to follow.

As the 4th Turning continues, the airline industry will be remade in ways we can only guess. But one thing that we can be sure of, it will resemble nothing like it did on January 1, 2020.

 

Thanks go out again to our El Jefe Mark and his merry band of Moderators for allowing me to participate here at SpartaReport, the most exciting blog on the Internet. And thank you dear readers for looking at my ramblings.

As always, remember…….

LIFE IS GOOD!  (As long as you eat the bear before he eats you.)

 
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Written by PatrickPu

Former Loan Officer and currently a Case Consultant and Expert Witness in Foreclosure and Lending Litigation cases. Avid follower of NCAA Football and Top 25 teams.

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