Businesses and analysts routinely model how they would do in the event of a disaster, testing stress to see how they would react to formulate a plan – just in case.
In the United Airlines (UAL) earnings conference call on Thursday, the company showed how some of these models can be defective.
Describing the company’s losses – an adjusted pre-tax loss of $ 2.6 billion to an annual loss of $ 9.9 billion – CFO Gerald Laderman pointed out that things were worse than they imagined. The stock fell about 7% with the earnings announcement.
“Before COVID, we modeled our worst-case scenarios based on the financial impact of 9/11, followed by a recession,” Laderman said in the conference call. “It turns out that we weren’t even close.”
Scott J. Kirby, the CEO, said in the call that one of the airline’s significant achievements was “being the first airline to recognize the potential gravity of COVID-19”, but was in a difficult situation when trying to minimize the cash burn when passengers stopped flying.
Although there is a light at the end of the tunnel, Kirby said the pandemic has changed airlines forever.
“As we recover from this crisis, we stop using the term ‘get back to normal’ because it creates an environment where it is very easy to get back to doing what we did before,” he said. “Instead, we want to focus on a return to the new approach that applies to a wide variety of goals. When this is over, our employees, customers, the general public and shareholders will see a new United Airlines. “
One of them will be how the company manages risk. People who study risk and the so-called black swans, a term coined by the polymath Nicholas Nassim Taleb that refers to rare events that have an extraordinary impact, see that predicting events of enormous impact is almost impossible. Instead, these risk specialists prefer generalized robustness to shock, withstanding a wide variety of events without the need to anticipate them. (Many people predicted, waited and warned about these scenarios, including Bill Gates, so many people argue that this was a risk factor that companies should be prepared for.)
“Going forward, we will focus on being ready for the sustained destruction of global air travel demand, as we are seeing today,” said Laderman.
As the company bleed reserves and revenue, “managing liquidity and cash flow has become much more important than any other financial metric,” said Laderman, and that these difficult lessons have led to some new conclusions for future crises.
Maintaining a strong balance sheet will be critical when the company returns to profitability, said Laderman, and maintaining speed and flexibility through liquidity and debt relief will be the priority. The process will take years, however: the company does not expect the first quarter of 2021 to be much better than the fourth quarter of 2020. Most airlines are going through equally difficult times, as tiny demand has led to fleets of planes on the ground and the need to cut expenses. (Norwegian even stopped its long-distance service.)
“This crisis has provided us with a series of valuable lessons on the balance sheet and capital allocation,” said Laderman. “We hope to set a minimum liquidity target higher than before the crisis.”
The full autopsy of the companies’ responses will not be ready for long, but the events of 2020 and 2021 will provide data to outline new plans and models, such as which assets are available to struggling companies as collateral, said Laderman. But the next crisis may take an entirely different form from the coronavirus pandemic and any preparations will not actually be tested until they are tested.
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Ethan Wolff-Mann is a writer for Yahoo Finance with a focus on consumer issues, personal finance, retail, airlines and more. Follow him on Twitter @ewolffmann.
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