EDITOR NOTE: When it comes to sector rotation investing, it’s a generally-held precept that you aim for battered sectors or industries that eventually will see a recovery in demand. As far as the airlines industry is concerned, investing in it now would make you both “too late” and “too early.” Late because you missed the March low, too early because several airlines are in need of a second stimulus to avoid bankruptcy.
October 1 and the days that follow are going to be rough in terms of tens of thousands of well-paid service jobs – that’s what airlines are threatening unless they get another $25-billion bailout. Airlines have been trying to shed employees by offering packages that induce employees to depart voluntarily because the $25-billion bailout package under the CARES Act banned “involuntary” furloughs or layoffs through the end of September.
The air passenger business is still down roughly 70% in the US, six months after the initial collapse of traffic began, according to TSA airport screenings of air travelers entering into security zones. And demand has hardly improved any since early July, and airlines continue to slash costs and cash-burn to survive:
“It was assumed that by Sept. 30, the virus would be under control and demand for air travel would have returned. That is obviously not the case,” American Airlines CEO Parker and President Robert Isom told employees in a grim message on Tuesday.
Under its buyout, early retirement, and long-term leave-of-absence programs, 23,500 employees had already voluntarily departed. But that wasn’t enough. So the executives told employees what the next step would be: 19,000 “involuntary” furloughs on October 1.
American, which started the year out with about 140,000 employees, expects to have fewer than 100,000 employees in October.
“The one possibility of avoiding these involuntary reductions on Oct. 1 is a clean extension” of the bailout package, they said. So if given another bailout, American, which received $5.8 billion under the first bailout package, will then not lay off those employees on October 1 – but instead on the date when the second bailout package would expire?
In the fourth quarter, American expects to fly only one-fourth of its usual international schedule and less than half of its usual domestic schedule. Last week, it announced that it would pull out of 15 smaller cities in October, “as a result of low demand and the expiration of the air service requirements associated with the Coronavirus Aid, Relief and Economic Security (CARES) Act. This is the first step as American continues to evaluate its network and plans for additional schedule changes in the coming weeks.”
Airlines are grappling with this collapse in demand and a recovery that is stuck in the mud. If they don’t succeed in slashing their cash burn, and if they can’t raise new money, either in the market or via bailouts, to fund that cash burn and pay existing creditors, they’re going to contemplate another wave of bankruptcy filings. They’ve already been through this and know how to do it.
On Monday it was Delta Airlines. In a memo to pilots, it said it would furlough 1,941 pilots in October unless it reaches a deal with the pilots’ union over a cut in pilots’ minimum guaranteed pay. Delta proposed a 15% cut. This comes after 1,806 pilots had already agreed to depart voluntarily with early retirements.
“We are six months into this pandemic, and only 25% of our revenues have been recovered,” John Laughter, senior vice president of flight operations, said in the memo. “Unfortunately, we see few catalysts over the next six months to meaningfully change this trajectory.”
Southwest Airlines has cut 36% of its flights from its October schedule, the Dallas Morning News reported on Monday, citing an analysis from Airline Data Inc.
Earlier in August, Alaska Airlines said that up to 4,200 of its employees would be furloughed or laid off starting in October.
On July 23, Southwest said that nearly 17,000, or 27% of its total workforce, had accepted packages to depart voluntarily, including 4,400 who separated completely, and 12,500 who agreed to take a leave-of-absence of a year or longer.
And on July 8, United Airlines announced that 36,000 employees in the US, or 45% of its US staff, could face “involuntary furloughs” on or after October 1, but that it was trying to get employees to accept an array of packages for voluntary separations.
It all comes down to this: With business still down about 70% from pre-Pandemic levels, six months into the Pandemic, with the recovery of air passenger travel stuck in the mud, airlines are fighting for survival. And they’re going to cut costs and reduce cash-burn in order to survive.
October 1 was an artificial point in time cemented into the CARES Act. It was hoped that by then, the crisis would have long blown over, and that the old normal would be back, but those hopes for October 1, according to airline executives, are not panning out.
Whatever their thinking was at the time of the bailout deal, the bailout money, most of it in form of grants, ended up funding, among other things, the buyout and early retirement packages that airlines have offered their employees to induce them to depart.
Barring new bailouts, the risk of bankruptcy hovers over the industry. If airlines get through this period without a bankruptcy filing, they will emerge on the other side with a lot more debt that will make them precarious structures for years to come.
Despite the huge rally in stocks since March 23, airlines stocks have not recovered anywhere near the levels of the Good Times. The WOLF STREET index of the seven largest US airlines – Alaska, American, Delta, JetBlue, Southwest, Spirit, and United – is still down 45% from the already beaten-down level at the end of the Good Times in mid-January 2020, and down more from prior years (market cap data via YCharts):
Originally posted on Wolf Street