Why The Three Major US Airlines Failed To Relive The Myth Of Continuous Profits In The First Quarter
As of June 13, the number of confirmed American Covid-19 cases has reached 2.09 million. Through a review of the development process of the pandemic, it can be clearly seen that in the first quarter, the impact of the aviation industry was mainly concentrated in March. At the end of January, the first patient was diagnosed in the United States. Passenger screening was started at major airports in the United States, and then three major U.S. airlines were grounded on Sino-U.S. routes. At the end of February, the U.S. Centers for Disease Control and Prevention stated that sooner or later the outbreak would occur in the United States. Started to realize the seriousness of the pandemic and began to adjust the annual development expectation; in March, the United States expected an explosion of newly confirmed cases throughout the country. In mid-March, it announced the restriction of passage between European countries, and the transatlantic routes were affected, which marked that the impact to the industry has escalated, until the US domestic market has gradually fallen, and the aviation industry has completely entered the dark night.
In the first quarter of 2020, the operating revenues of the three major US airlines decreased by 17%-19% year-on-year, and the operating losses amounted to US$410 million to US$2.5 billion.
At the same time as the revenue has dropped sharply, the airline company has a very high proportion of fixed costs to the total cost.
The difference in the amount of loss between the three major US airlines is also due to the difference in cost control capabilities.
Affected by the pandemic, the operating income of the three major US airlines fell by more than 15% year-on-year compared to the first quarter of 2019. American Airlines’ operating income in the first quarter was US$8.52 billion, down 19.4% year-on-year; US United Airlines’ operating income was US$7.98 billion, down 16.8% year-on-year; Delta Airlines’ operating income was US$8.59 billion, down 18% year-on-year.
the first quarter of 2019 vs. the first quarter of 2020 comparison of operating income of the three major US airines (Unit: USD million)
Among the operating income, both passenger and freight revenue declined to varying degrees. In terms of passenger revenue, the three major airlines fell closer, all from 9 billion to 7 billion. American Airlines, United Airlines, and Delta’s passenger revenue declined by 20%, 19%, and 18%, respectively; The decline in freight revenue is quite different. American Airlines and Delta have dropped from 220 million and 190 million levels to 150 million, with a decline of 33% and 21%, while United Airlines has only fallen from 290 million to 260 million. The range is 8%.
Comparison of the revenue composition of the three major US airlines in the first quarter of 2020 (unit: USD million)
Despite the decline in travel demand, various airlines have reduced capacity, but the passenger load factor still declined in the first quarter. The average load factor of American Airlines, United Airlines, and Delta Air Lines in the first quarter of this year were 72.7%, 70.9%, and 73.1% respectively. Compared with last year’s data (82.2%, 80.9%, and 82.7%), the decline rate was about 10%.
the first quarter of 2019 vs. the first quarter of 2020 comparison of load factor of the three major US airines
While revenues have fallen sharply, operating costs have not changed much over the same period. American Airlines’ operating costs have even increased, from US$10.21 billion in 2019 to US$11.06 billion, up 8%; United Airlines’ operating costs have dropped from US$9.09 billion in 2019 to US$8.95 billion, down 1.5% ; Delta Air Lines dropped from 9.45 billion US dollars to 9 billion US dollars, a decrease of 4.8%.
the first quarter of 2019 vs. the first quarter of 2020 comparison of operating income of the three major US airines (Unit: USD million)
From the perspective of cost composition, fixed costs account for a very high proportion. Among the three airlines, labour costs accounted for the largest proportion, accounting for about 30% of the total cost; followed by jet fuel and related taxes, accounting for about 10%-20% of the total cost, although Saudi Arabia launched in early March The “oil price war” caused the international oil price to “flash”, but the quarterly report has little effect on the cost of the season; in addition, most of the costs of aircraft maintenance, marketing channels, and aircraft leasing are also fixed cost expenditures. Even if the aircraft is parked in large numbers, there is still a lot of cost.
Percentage of cost items in operating cost of the three major US airines
The sudden drop in revenue and the difficulty in reducing costs simultaneously caused the three major US airlines to report operating losses in the first quarter of 2020. In the first quarter of 2019, American Airlines, United Airlines and Delta Airlines were all profitable, with operating profits of US$380 million, US$500 million and US$1.02 billion; In the first quarter of 2020, losses were US$2.55 billion, US$970 million, and US$410 million, respectively.
the first quarter of 2019 vs. the first quarter of 2020 comparison of operating profit/loss of the three major US airines (Unit: USD million)
At the same time, the net profit of the three companies also reported losses. Compared with the 2019 net profit of 190 million, 290 million and 730 million US dollars, in the first quarter of this year, American Airlines net losses of 2.24 billion US dollars, United Airlines 1.7 billion US dollars, Delta Air Lines 530 million US dollars.
the first quarter of 2019 vs. the first quarter of 2020 comparison of net profit/loss of the three major US airines (Unit: USD million)
In the “two trillion” economic stimulus bill signed by Trump, $58 billion will be used for emergency aid in the aviation industry, and the three major US airlines have received more than $5 billion in aid. Among them, American Airlines received US$5.8 billion in aid funds, including US$4.1 billion in grants and US$1.7 billion in low-interest loans; United Airlines received US$5 billion, including US$3.5 billion in grants and US$1.5 billion in 10-year loans. Delta Airlines received US$5.4 billion in bailout funds, of which US$3.8 billion was a grant and US$1.6 billion was a 10-year loan. The amount that had been received in the first quarter reached US$2.7 billion.
The amount of government subsidies for the three major US airlines in the first quarter of 2020 (Unit: USD million)
Comparing the size of cash and cash equivalents and accounts receivable at the end of the first quarter of the three major airlines in the United States, Delta Air Lines topped $8 billion with the highest level of liquidity, while the other two also exceeded 5 billion. As of March 31, American Airlines had US$3.73 billion in cash and cash equivalents and 1.02 billion receivables; United Airlines had US$5.22 billion in cash and equivalents and US$790 million in accounts receivable; Delta Air Lines had 5.97 billion USD in cash and equivalents and USD 2.28 billion in accounts receivable, totalling USD 8.25 billion, with the strongest ability to resist risks.
At the end of the first quarter of 2020, the top threeUS fast-moving assets (Unit: US$million)
However, the loss in the first quarter was just the beginning. In the first quarter, the operating income of the three major US airlines declined by less than 20% year-on-year, and the loss reached US$400 million to US$2.5 billion. In the second quarter, the operating income of the three major US airlines is expected to fall by 90%.If costs cannot be controlled as quickly as possible, the loss in the second quarter will be astronomical.
The three major US airlines are facing the reality that the future market prospects are not optimistic, and have shifted their core tasks from “seeking development” to “seeking survival.”
In order to survive, the three major US airlines quickly took measures to save themselves, including: 1) spare no effort to improve the level of liquidity: active financing (even mortgage slots/traffic rights and other resources for financing), application for government assistance, postponement of payment/delivery of aircraft; 2) Reduce the level of fixed costs: retire the aircraft or lease the aircraft, adjust the fleet structure, and reduce staff.
Compared with the beginning of the year, the share prices of the three major airlines in the United States have fallen sharply: American Airlines, United Airlines and Delta Airlines shares fell 68%, 77% and 67% respectively. In the same period, the S&P 500 fell by only 11%. In many industries, the impact of the aviation industry on this pandemic is evident.
According to the Wall Street Journal, if demand remains at the May level and the airline does not allow employees to take unpaid leave, American airlines’ cash level can be maintained for 6 months without considering government loans and rescue measures. United and Delta can maintain 10 months and 11.3 months.
In 2019, American Airlines was impacted by the Boeing 737MAX grounding and the strike of the maintenance and repair union. The development was affected to a certain extent. The original plan to reorganize and accelerate development in 2020 is now impossible. Vasu Raja, senior vice president in charge of network strategy, said that although the company has no plans to close any hub operation this year, it will conduct a comprehensive evaluation of the operating network and hub next year. In the second quarter of 2020, despite reduced capacity (80% capacity reduction in April and May and 70% capacity reduction in June), American Airlines expects daily losses to reach $70 million.
For this reason, rapid measures to reduce costs will be the first priority for survival. At present, American Airlines is streamlining its fleet type, and plans to retire include E190, Boeing 757 and 767, and Airbus A330-300. By 2021, the total number of American Airlines aircraft will be 100 fewer than originally planned. Several other major airlines in the United States, including Delta, United, and Southwest, are taking similar measures to reduce the size of the market in response to shrinking market demand.
Because American Airlines received US$5.8 billion in aid from the federal government, American Airlines could not force redundancy until the end of September this year. American Airlines CEO Parker said that he hopes to negotiate with his employees to voluntarily leave, and if the results are not good, he will impose redundancy or unpaid leave after October. So far, American Airlines has about 39,000 employees (30% of the total number of employees) agreed to retire early or take unpaid leave.
In terms of increasing liquidity, American Airlines increased liquidity by $2 billion in the first quarter through aircraft leaseback and financing. The company said it still has more than $10 billion in assets available for mortgages, and plans to increase its liquidity to $11 billion at the end of the second quarter from $6.8 billion at the end of the first quarter.
United lost a net loss of $1.7 billion in the first quarter, ending United’s 10-year profit record. Even after deducting one-time items (including losses from investing in Columbia Airlines), the amount of losses still reached US$640 million . United said that compared with the same period last year, in the last two weeks of March, the average daily revenue decline amount reached 100 million US dollars. The company plans to cancel 90% of its capacity in May to cope with the sluggish market demand, which is expected to continue for several months.
For the second quarter, United Airlines expects a daily loss of US$40-45 million.
United stated that it currently has USD 9.6 billion in liquid assets (excluding government bailout funds) and is seeking USD 1 billion in financing in the capital market. At present, most of United’s own aircraft are used for mortgages. They also said that aircraft spare parts, airport time slots, frequent flyer programs, etc. can also be used for mortgage financing when appropriate.
Delta Air Lines
Delta originally expected that 2020 will continue the high profitability of the past decade and become the eleventh profitable year. However, the outbreak of the pandemic shattered Delta’s plan. Delta’s net loss for the first quarter of 2020 reached US$530 million, while the net profit for the same quarter last year reached US$730 million. Delta holds several overseas airline shares, and CEO Ed Bastian said Delta has no intention of selling these shares, but it also has no ability to provide financial support for these companies. At present, Delta’s daily loss is US$50 million. Bastian said he hopes to achieve a balance of payments by the end of the year.
In order to reduce costs, Delta moved quickly and took many positive measures, including negotiating delayed payments with airports, suppliers, and aircraft leasing companies, as well as delayed delivery of aircraft, adjustment of the fleet structure, and management salary cuts.
In the same situation as American Airlines, Delta Air Lines could not force redundancy by the end of September due to the assistance of the US federal government, but Delta managed to reach an unpaid leave agreement with 35,000 employees.
Another important cost reduction measure is the plan to withdraw the Boeing 777 aircraft from the fleet by the end of this year. Delta currently owns 18 Boeing 777 aircraft, and recently spent nearly 100 million US dollars to renovate the cabin interior, which was originally planned to be used for a few more years. As the longest range wide-body aircraft, the Boeing 777 fleet has made significant contributions to the transformation of Delta Air Lines into a global airline. Since the aircraft was put into service in 1999, it has helped Delta Air Lines to open ultra-long distance intercontinental routes from Atlanta to Johannesburg, South Africa and Los Angeles to Sydney. The early retirement of the Boeing 777 also implies that Delta Air Lines believes that the recovery of the long-range intercontinental market will be an extremely long process. Currently, many airline senior executives and industry analysts worldwide believe that long-haul flights will take at least a few years to resume. Delta said that when demand recovers, Delta will use A330 and A350-900 aircraft to carry out long-range flights, of which A350-900 aircraft consumes 21% less fuel than Boeing 777.
In addition to the accelerated retirement of the 777 aircraft, Delta is also accelerating the retirement of the elderly McDonnell Douglas MD-88 and MD-90 aircraft, which are expected to be fully retired in June. This also means that Delta will no longer need so many pilots. John Laughter, senior vice president of operations for Delta Air Lines, mentioned in an internal letter to Delta employees that in the fall, Delta will have about 7,000 pilots surplus. “This is a number that worries us very much. We want the number of pilots to match the number of our fleet,” he added. It is estimated that by the third quarter of 2021, Delta will have a surplus of 2500 to 3500 pilots. Therefore, it is expected that after October 2020, Delta will drastically reduce pilots.
While striving to reduce costs, Delta is also actively increasing its cash flow. Although it is already the airline with the best liquidity among the three major US airlines, Delta still dare not take it lightly. Delta’s liquidity at the end of the first quarter was US$6 billion, and it is expected to reach US$10 billion by the end of the second quarter.
Delta said it will use the time resources of major domestic airports and London Heathrow Airport, as well as the air rights of some international routes as collateral for financing. Since March, Delta has raised US$5.4 billion, including commercial loans and US$1.2 billion in aircraft sale and leaseback. In addition, the company also received US$2.7 billion of the US$5.4 billion in bailouts promised by the federal government. At the same time, the company is also eligible to apply for a US$4.6 billion mortgage loan. CEO Ed Bastian believes that the government’s bailouts are sufficient, and no additional funding is needed.
The three major US airlines in the post-pandemic era:
-Fleet size and personnel size will be reduced -Airline network will be significantly adjusted: shrink international airline network, strengthen domestic network
Similar to other markets, senior executives in the US aviation industry generally believe that the domestic aviation market will recover earlier than the international market.
American Airlines believes that demand in the international market will remain sluggish for a long time, and said to its pilots last week that the B330-200 fleet will be parked at least until 2022. CEO Doug Parker said, “In response to the long-term downturn in the market, American Airlines decided that its future strategy is not to expand, but to reduce its size.”
Delta Air Lines CEO Ed Bastian believes that it will take 2-3 years for the market to return to the level before the outbreak. In an internal letter to his employees, he said, “Delta must reduce its size to cope with the market downturn. Even if the pandemic is under control, we still need to be prepared for a period in which demand cannot be fully recovered. I hope the market will recover soon, but in When making plans, we must face reality.”
The realistic attitudes of the three major US airlines in anticipating market prospects, and the prompt action they take when reducing costs and increasing cash flow, all demonstrate good coping capabilities in the face of drastic market changes. The strategic adjustments that the three major US airlines may adopt in the future are worthy of competitors in other industries to think ahead and deploy their strategies in advance.
The original article is in Chinese, this version is translated by Albert K. Field