Is Not Cutting Flights As Deeply As Competitors A Brilliant Strategy Right Now? [Speculative]

Airlines are in a race to conserve cash. Forward bookings are drying up, and none have enough cash – or even assets – to continue their businesses for long without revenue.

American Airlines spent about $40 billion in 2019, so the $7 billion cash (though debt covenants restrict their use of the last $2 billion) doesn’t go very far. They say they have $10 billion in unencumbered assets, but those are almost certainly worth less in the current environment than the last time they were marked to market.

Assuming, as United does, that revenue initially drops 70% there’s not a lot of runway. That’s why airlines are running to the government for subsidies – management wants to protect their jobs and shareholders’ equity. (There’s not actually a systemic risk to the economy to be addressed, and certainly not at this point.)

The normal approach is to cut spending everywhere possible, from capital expenditures to labor. It’s harder to cut employee salaries but Delta is throttling down spend on contracting firms and consultants. It is parking up to 300 planes.

So far flight loads haven’t been as bad as you’d expect, overall think of planes as 60% full towards the end of last week. That’s probably higher than we’ll see going forward:

  • People were rushing to get home, not knowing what the U.S. government might do next. After all the President announced a ban on flights from Europe on live television (we discovered shortly thereafter this was not true).

  • Consultants were coming home from their travel week. Many consulting firms were still working last week, but will have employees home for awhile going forward.

  • It’s spring break.

  • Forward bookings are down, with airlines reporting as many cancellations as new bookings.

Nonetheless, airports remain open and while people are cutting down on international travel and businesses cutting down on all travel there still is travel. Would an airline that continues to operate more flights than competitors actually stand to come out ahead?

  • Many of an airline’s costs are fixed. They still own or lease their planes. As United President Scott Kirby explained two years ago to justify his expansion strategy labor costs are mostly fixed in the short run. Unless an airline furloughs employees they’ll be paying most of them.

  • Variable costs are actually down. Fuel prices are down to the low $30s per barrel. That’s a long way from $100 oil when airlines were struggling.

Will flying cover the marginal cost of a flight? Will an airline generate more revenue with planes in the air than on the ground? If everyone kept their schedule flying is almost certain to be a losing strategy. The thing to figure out now though is how much more flying than competitors is actually optimal, but betting wrong is a very risky strategy because there’s pretty much no margin for error.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Gary the CDC recommends no public gatherings of more than 50 people for 8 weeks.. can you please write and and explain your thinking on if you think they’ll really shut down domestic air travel. DHS said their not ruling it out and obviously airports have way more than 50 people.

    Could a shut down of airports possibly really be plausible?

  2. It happened during 9/11, so there is precedent, although civilian air travel was curtailed for only a short time. In this case, it would have to be for a prolonged period to be of any use (like what China did in Wuhan). Highly doubt our great leader would entertain this.

  3. Of course it’s plausible. A 737 normally has more than 50 seats and, as the virus can last for more than 3 days on a hard surface, planes, unless disinfected after every flight, would be the LAST place people should be.

    Unless you’re coming back home, there’s zero reason you should be flying right now. It’s as simple as that.

    However, that does open up the opportunity for planes for fly for cargo ONLY. Many routes are not profitably for PAX alone. Cargo makes up a massive amount of revenue.

  4. People will still have reasons to travel. For example: airlines have to move around flight crews, cabin crews and mechanics. Doctors, healthcare workers, government officials, WHO employees, there is quite a few groups who will need to travel.

    The best solution is to downgauge the aircraft and fly fewer flights. This is where the alliances come into play. For example: AA can hand off all TATL to BA. Delta can do the same with KLM. This will allow them to satisfy customers needs, while not having 100s of flights flying partially full.

  5. You gotta be crazy not to think that a number of employees will be furloughed. Another huge hit through the economy.

  6. @Will

    The CDC recommendations are just that, recommendations. They aren’t compulsory. In many ways, they’re no different than state department travel warnings.

    More broadly, to Gary’s question. I don’t think this is a matter of one carrier’s capacity relative to another’s. I think right now, the best thing a carrier can do is get its cuts over with ASAP, and publish a schedule that they will commit to flying to. Right now, if airlines just cut stuff willy nilly, people will not book because “if they cancel my flight, I’m screwed, and I don’t want to deal with that.” But if the airline will commit to their cut schedule, that at least gives the consumers some confidence.

    For that matter, UAL has done themselves *zero* favors in inspiring consumers to book future travel with them. They’ve changed their refund policy so much, that the smart consumer play is to just wait on future bookings. But UAL needs the cash *now*, so scaring off the customers is probably a disastrous policy in the long run.

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