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.