US airlines are making money despite huge losses

US airlines are making money despite huge losses

by
The country’s four largest airlines – American (AAL), Delta (DAL), United (UAL) and South-west (LUV) — between them they had $ 31.5 billion in cash on their balance sheets at the end of 2020. That’s more than $ 13 billion a year earlier, before the pandemic. “Liquidity” has become a favorite keyword for airline executives who discuss their financial condition. Including untapped cash and lines of credit, airlines have access to almost $ 65 billion.

“Liquidity is at record levels,” said Philip Baggaley, chief credit analyst for aviation at Standard & Poor’s. “This is a good thing and it is one of the few strengths they have at the moment.”

The lion’s share the loan and the money, then, comes from the banks and Wall Street. As a struggling family, inundated with credit card offers, airlines have many people eager to give them money.

Airlines sold bonds, borrowed money, it mortgaged its planes, frequent flyer programs and other assets, and even sold additional shares, a highly unusual move for an industry in this position.

The loan added about $ 40 billion in long-term debt to the balance sheets of the country’s airlines.

“I think the general feeling is that they are injured, but they will survive,” said Baggaley. The low interest rate environment has helped airlines, as investors and banks looking for returns are willing to lend to airlines, he added. All operators, except Southwest, have junk bond credit ratings.

They also made deep cost cuts, even with government help that prevented them from making involuntary and permanent job cuts.

The airlines used acquisitions and early retirement to cut about 16% of the staff they had in early 2021. In recent weeks, American and United have sent layoff notices to 27,000 employees among them, saying they could be dismissed again. , unless there was a third round of government assistance before April 1.

Many of these employees were laid off in October, when the first round of federal payroll support ended, and were called back to work in December, when Covid’s second aid package provided the industry with an additional $ 17 billion. Last week, airline unions returned to Capitol Hill asking for another round of help to keep their members employed.

Cost cuts cut airlines’ cash burn rate in half between the second quarter and the fourth quarter of last year, even with air travel and revenue remained a fraction of what they were before the pandemic.

But even while reducing the rate of cash burn, the four combined airlines have spent $ 115 million a day over the past nine months of 2020. And they hope to continue burning money, albeit at a slower pace, in the first half 2021. Building a substantial cash reserve is the only safe way to overcome this unprecedented financial crisis, airline executives say.

“Our industry still has a long road ahead of recovery,” said American CEO Doug Parker in a recent investor conference call. He said the accumulated cash accumulation, combined with cost cutting, “gives us confidence that we are well positioned for next year and for the long term”.

With the exception of Southwest, which has just recorded its first annual loss since 1973, every other major airline in the country has at least one bankruptcy in its history. The sector’s strong current cash position raises hope that they can avoid this fate this time. But it depends on when the traffic will return, and even airlines are not sure when it will happen.
Southwest Airlines reports first loss in 48 years

“I have 10 consecutive months of data saying people are ready to travel in six months. They keep saying the same thing,” Parker of American said in an interview with CNBC recently. “What I believe is that when people are comfortable, he will come back relatively quickly. There is a huge pent-up demand to travel. We hear that everywhere we go. But nobody is going to travel until there are things to do, when you travel and until the vaccine is distributed and the pandemic is largely eradicated. “

S & P’s Baggaley believes that airlines “are past the worst,” he said. None of them filed for bankruptcy and he believes they probably won’t.

But he warns that, unlike the series of retail bankruptcies at the beginning of last year, which occurred weeks or months after the crisis, historically airline failures can occur years after a financial crisis. Delta and Northwest did not file the lawsuit until 2005, years after 9/11. American did not file the lawsuit until 2011, well after the Great Recession.

“It is a reasonable concern that they will come out of this with a lot more debt,” he said.

.Source