Aviation Industry Updates: February 2, 2021

Spirit Changes Business Model | It's Just Basic Math

KEY POINTS:

• As the scope of the pandemic became clear last year, the 'aha' moment came to the executive team at Spirit Airlines when they realized they could no longer focus on maximizing unit revenue.

• Now, it had to focus on maximizing earnings before interest, taxes, depreciation and amortization (EBITDA), a very different challenge, given the industry's high fixed costs and the steep drop in travel it faced in 2020.

• "It took us a little bit of time to get there mentally, and to understand how the new math works," Scott Haralson, Spirit CFO since 2018 and an eight-year company veteran, told CFO Dive in an interview. "This shift from maximizing unit revenue to EBITDA changes the game."

• Instead of trying to maximize the airline's unit revenue — traditionally either by increasing the unit price or by increasing the aircraft's capacity utilization — the focus had to shift to protecting the balance sheet. That meant cutting costs and generating cash —

• "A lot of CFOs think they know their business and think it's very predictable, but once you drop almost 90% of operations, you find you didn't really know as much as you thought."

• In the short run, he said, "you're thinking, 'I have large fixed costs: airplanes and facilities I have to pay for, and people I have to keep. At some point, I'll have to reduce the workforce.'"

• That meant making some tough decisions, including structuring a capital raise that would dilute shareholders. However, not raising the money would have been worse.
  At the end of the second quarter, the company had unrestricted cash, cash equivalents, and short-term investments of $1.2 billion.

• Historically, best-in-class companies, across industries, take advantage of disruption, Haralson said. "We want to make sure we take advantage, and being financially healthy allows us to do that."

CFO Dive

Interested in hearing more about Spirit? CHECK OUT our recent podcast episode where Raven's Jason DuVernay sits down with Former Spirit CEO Ben Baldanza. We talk about winners and losers. Discuss bankruptcies and possible mergers. We learn what’s next from a true expert and industry insider who has served as a leader within multiple airlines.

Legacy's Prep For Next Round Of Cuts

KEY POINTS:

• In what’s becoming an almost routine ritual, airline CEOs in the United States are warning of further furloughs from April.

• Most of those employees went back onto the payroll when Washington ticked off on a second round of assistance in late 2020. But that’s set to expire on April 1, and CEOs now warn of further pain for their employees.

• Last week, United Airlines sent out Worker Adjustment and Retraining Notices (WARN letters) to around 14,000 employees. This letter indicated they face possible furloughs in April.

• “Customer demand has not changed much since we recalled those employees. When the recalls began, United said most recalled employees would return to their previous status as a result of the fall furloughs around April 1. As such, recalled employees in states where WARN may be triggered are receiving notice about this today,” Simple Flying reported a United Airlines spokesperson saying last week.

• Now American Airlines is forewarning of further possible furloughs. American’s CEO, Doug Parker, got asked about furloughs during an earning’s call last week.

• “To state the obvious, April 1 is approaching and demand hasn’t got much better. So we’re definitely going to need to address this,” said Mr Parker. “We’re already talking to our unions about what we’re going to do.”

• To date, competitor airlines Delta Air Lines and Southwest Airlines have avoided involuntary furloughs. But neither airline rule them out in the future.

Simple Flying

US Airlines Commit Public Relations Suicide

KEY POINTS:

• US airlines have come out quite strongly against testing mandates for domestic travel.

• Though nothing has become concrete yet, and neither the White House nor the Centers for Disease Control (CDC) have released a plan to require passengers to undergo testing for travel, airlines are already expressing their displeasure.

• “I’m not aware that the CDC has reached out to us. By extension, I’m not aware that they’ve reached out to the Airlines for America. But yes, I think it would be a mistake. It’s very costly. As Tammy was pointing out in an earlier interview to administer the test, we don’t have adequate testing capacity for the country in the first place. Where our emphasis needs to be is on the two vaccines that are available and getting them rolled out and getting the country vaccinated, and I would hate for us to take our eye off of that ball.” Southwest Airlines CEO Gary Kelly

• “On the domestic front, it’s hard to see practically something like that working at that scale. Air travel is just one mode of travel. You obviously have rail, road transportation, people need to travel, they’ll figure out a way to get there. They’ll figure out a way to see Mom, Dad and frankly putting this burden on air travel is, we think, far too cumbersome. I also have concerns around just the testing capacity in the United States, I think, teasing out a little bit about what you’re saying about Puerto Rico. In many parts of the country, testing slots are scarce and it takes, frankly, many days and some cases actually get results back.” JetBlue’s COO, Joanna Geraghty

• American Airlines similarly came out against the idea of domestic testing. CEO Doug Parker stated he believed there were logistical difficulties in figuring out how to conduct wide-scale domestic testing. Mr. Parker also stated there were no conversations with American about instituting testing.

• Mr. Parker answered why airlines support international testing; “We support international testing because that’s about getting more people to be comfortable flying across borders, and we have worked with regularity on the administration to make that happen.”

• The other reason is that airlines know international demand is low. Even to sun destinations in the Caribbean and Central America, carriers are not seeing the same numbers they saw last year. A lot of people want to fly domestic.

• Friction in the travel process, whether a requirement to get a visa or a mandate to get a test, leads passengers to consider other, easier options. People who want to go on vacation are still going to find a way to go on vacation. That, however, will likely be via a mode of transportation that does not require a runway.

• Even though there have been some statements that agencies are actively looking into it, it is highly unlikely that any testing protocol will go into effect before consultation with industry groups.

Simple Flying

Wheels Up Goes On Rampage

• Private jet company Wheels Up is merging with a special purpose acquisition company to go public.

• The deal values Wheels Up at more than $2 billion, which is more than twice its valuation in 2019.

• In merging with Aspirational, Wheels Up gains a partner in luxury marketing and expansion overseas, especially in the fast-growing Asian markets.

• The deal, expected to close in the second quarter, will make Wheels Up the first publicly traded standalone private jet company and vaults the seven-year-old start-up past many of the industry’s longtime leaders in the race to become the Uber or AirBnb of private aviation.

• Commercial airline traffic is down about 65% to 70% from its pre-pandemic levels while private jet bookings are at or near their pre-pandemic highs.

• Delta Air Lines, which has an equity stake in Wheels Up from the merger of Delta Private Jets with Wheels Up last year, will also remain a shareholder when the deal is completed.

• The question for Wheels Up is whether it can produce earnings growth for Wall Street shareholders while also growing market share in an industry with a history of slim profit margins and excess capacity.

CNBC

Weekly TSA Numbers

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