US airlines facing ‘Thelma and Louise’ moment as government aid set to expire

Airline industry

US airlines facing ‘Thelma and Louise’ moment as government aid set to expire

 

Funding used to protect workers will expire on 30 September, and airlines have already announced huge layoffs

 

Edward Helmore

Sun 20 Sep 2020 10.00 BSTLast modified on Sun 20 Sep 2020 10.29 BST

https://www.theguardian.com/business/2020/sep/20/us-airlines-government-aid-set-to-expire

 

US airlines are facing what one leading analyst calls a “Thelma and Louise” moment as the industry approaches a government-funding deadline that could decide its future.

 

On 30 September a government aid packages used to protect workers expires, the airlines have already announced huge layoffs but what comes next could be even worse.

 

“I don’t think people get the Thelma and Louise analogy here. The car is up to speed, it’s headed toward the cliff and we know what happens next because you’ve seen the movie,” said industry analyst Robert Mann.

 

Along with leisure and retail, the airline industry has been one of the most direly affected by the Covid-19 pandemic. Passenger numbers are down 70% and the loss of business and frequent flyer travelers has pushed revenue down by as as much as 85%.

 

In March, airlines were offered two sources of money as part of the US government’s coronavirus stimulus package, the Cares Act. The act gave the industry $25bn in loans to cover general costs and $25bn to keep workers on payroll. The payroll cash is made up of grants that don’t need to be paid back but the loans come with strings attached.

 

Airlines will have to give the US government some equity stake in return for the loans. Some airlines, including American, Hawaiian Airlines and Spirit Airlines have agreed to take the cash. Others including Delta, United and Southwest, have yet to decide whether they will tap the loans.

 

 

The situation is dire. Over the summer, American and Southwest both posted quarterly losses, with American dropping more than 86% to $1.6bn from nearly $12bn a year earlier. Southwest’s sales fell to $1bn, a drop of 83% from $5.9bn last year. With passengers avoiding airline travel over the peak summer months, conditions have barely improved.

 

Delta has warned that it may furlough more than 1,900 pilots, American said in July it could cut up to 19,000 workers and United could furlough 36,000 workers or nearly 40% of its staff, if enough employees do not accept buyout packages.

 

“Travel since March has been subsidized and the activity that is out there is 70% down and at fares 30% lower than they used to be,” said Mann. “There are no business travelers out there because companies have told them they’re under a travel ban, and if you do then don’t come back in the office.”

 

International travel is down even more dramatically, with carriers operating a reported 2% to 4% of their normal number of flights.

 

As the deadline for accepting the loans approaches, and additional Congress still arguing over whether or not to extend payroll grants, airlines are facing a difficult proposition.

 

“There are two theories,” says Mann. “One is that the industry goes over a cliff in October and it tries to tread water until there is a widely-administered vaccine and business travel comes back.”

 

The second theory, Mann says, is that there will be some kind of last-minute reprieve and “governments decide to subsidize the industry until a vaccine is a reality. While that would be expensive, it would preserve a lot of employment and service, which will otherwise be immediately withdrawn starting in October.”

 

Under a deal agreed with the department of transport, airlines were obligated to maintain their routes but permitted to cut back services. The obligation to maintain routes will also be withdrawn at the end of the month when support is lifted.

 

“The service mandates that will expire will mean cuts in services to smaller communities and services by smaller regional airlines, which are often subsidiaries of the major airlines,” Mann said. “If you’re in a city that loses service that will have a major impact on your local economy. The only thing that will change that is the availability of a vaccine.”

 

Until now, the major carriers have been trying to avoid taking out government loans. Cash-cushioned Delta Air Lines and Southwest, with around $19bn in cash-on-hand, have both declined.

 

On Monday, Delta announced plans to raise $6.5bn in bonds and loans backed by its SkyMiles frequent flier program. That follows United, which used its MileagePlus program as collateral for a $5bn financing deal in June. Others may be forced to accept the government’s offer. American Airlines, which has raised $2bn privately, has said it will use its program to back a $4.75bn treasury loan.

 

Last week, Southwest CEO Gary Kelly told the Dallas Business Journal his guess is the industry will receive more financial support from the government.

 

“My guess is that there is a Cares Act II, and I think as long as it has enough room, my guess is that there will be support for the airlines again,” Kelly said.

 

The logic for it was simple, he continued: “The whole idea was to preserve the infrastructure and the jobs to get through this trough. And I think that that was a good idea. I think the only mistake was everyone underestimated how long that trough is going to take.”

 

But without the support of a Cares Act II, Mann says airlines will have to try to summon “confidence they can continue to burn cash for as long as it takes for demand – in revenue terms – to return”.

 

“If you’re Southwest with $19bn in cash, you can continue to burn $20m a day for three years. But what happens to competitors without that ability? What if we’re still talking about this in a year? We’re going to see some kind of industry restructuring, and given how concentrated the industry already is, it’s going to be problematic how that evolves.”

 

As the cliff-edge approaches, there remains the crucial question of when passengers will feel confident to travel by air again. New rules – from mask requirements to temperature screenings – have been broadly enacted. But while some airlines have been keeping middle seats open, others have been packing existing flights.

 

In March, entrepreneur Mark Cuban noted that how companies treat employees and customers during the pandemic will define their business.

 

“Not only is it a safety issue, it’s a business issue,” Cuban said. “How companies respond to that very question is going to define their brand for decades. If you rushed in and somebody got sick, you were that company. If you didn’t take care of your employees or stakeholders and put them first, you were that company,” he added.

 

Mann believes for the airlines facing an October crunch, that idea may be more critical now than it was even then. “Delta and Southwest have generally treated their customers well. They’ve kept the middle seats open, and tried to make it as comfortable and safe as they can. On the flipside, you’ve got airlines packing planes and who have no intention of providing any kind of distancing measures.”

 

For those carriers, Mann says, it comes down to a fundamental question of aviation safety. The industry would be a fraction of its current size if people didn’t think flying was safe. That has seldom been more true than in the time of Covid-19. “Perception,” Mann points out, “is reality”.