How is the CARES Act hurting airlines' futures?
The stringent rules accompanying the CARES act grants are potentially strangling airlines’ futures. Their ability to cut back on routes now could prove useful in the Fall but the denials from the DOT are painting a grim picture for both the current situation and future planning. Forcing airlines to maintain routes that are not currently supporting a traveling public puts into question the sustainability of the airline when the funding is exhausted. But not everyone is receiving the same treatment…
KEY POINTS:
- “It would be nice if the Department of Transportation made it easier for airlines to cut routes. But when crafting the CARES Act, Congress sought to ensure smaller communities would retain air service, so the DOT is in a tough position. It doesn’t want to flout the desires of Congress.”
- Delta, United, Spirit, Frontier, JetBlue, and more all requested waivers for specific routes ranging from just a few to well over a dozen major routes/cities.
- “On Monday, the department said it rejected most requests by United Airlines and Frontier Airlines to suspend some flights.”
- Not everyone is receiving similar treatment; “The latest guidance from the US Department of Transportation released this morning shows that the Agency is using different standards for the different sized airlines in forming its policy.”
- “Sun Country will be permitted to collect its government funding while largely suspending service”
- “The DOT also appears to be admitting a mistake in prior rulings. Or at least identifying inconsistencies. JetBlue, for example, requested exemptions at Portland, Houston, Dallas/Ft Worth, and Minneapolis/St Paul. All four of those are included in the DOT’s listing of large airports. All four were denied in the DOT’s ruling for the carrier. Similarly, Spirit Airlines requested exemptions at Charlotte, Minneapolis, New York City, Portland and San Francisco. Those requests were also all denied.”
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Will Airlines declare bankruptcy next?
Facing unprecedented flight cancellations, airlines are scrambling to preserve and raise cash. In a unique twist, the government funding came with rules about payroll support and inability to layoff employees but will it work as intended? Was there another way that we might look to embrace? Whispers of bankruptcy start to emerge as the public continues to plant both feet on the ground; would it be so bad? Have we overlooked a path that shows us the difference between bankruptcy and liquidation?
The past could be a vital prediction of the future. While never have we seen such a steep drop in travel the concept of a government bailout is not new. Traditionally the notion of chapter 11 has come to leave a bad taste in one’s mouth; fear and panic ensue. But trending from the past could be showing us an option that has not traditionally been supported but potentially save jobs and put a pause button on an uncertain future.
KEY POINTS:
- “Berk believes airlines should be allowed to go bankrupt. He argues that bailouts help equity investors like Vanguard and Blackrock (which both own large stakes in several airlines), but that Chapter 11 bankruptcy could keep airline workers employed while forcing the company to restructure debt. “People confuse bankruptcy with liquidation,” says Berk.”
- “A number of airlines have undergone bankruptcy proceedings and re-emerged, including Continental Airlines UAL which filed in 1983 and came out in 1986, then filed again in 1990 when oil prices skyrocketed following the Gulf War—the airline kept all 37,000 of its employees on the payroll. Both times, the airline continued to operate.”
- “When American Airlines filed for bankruptcy in 2011, it continued normal operations as well through its merger with U.S. Airways in 2013.”
- “Airlines would still operate in bankruptcy, but the question is: What will they look like after bankruptcy?” says Arnold Barnett, a finance professor at MIT Sloan.
- “I don’t think the kind of [bailout] we have here precludes bankruptcies at all,” he says. “It lasts through September. When autumn comes, then what?”
We can turn our attention to airlines that aren’t looking at traditional sources of cash preservation for potentially opened minded notions come the Fall.
- “Southwest swung to a $94-million net loss in the first quarter from a $387 million profit a year earlier, and warned that operating revenues would fall by 90-95% in both April and May, when it does not expect load factors to surpass 10%.”
- “However, it has no current plans to cancel orders, Chief Financial Officer Tammy Romo said on a conference call, noting that a more fuel-efficient fleet “is still relevant and meaningful” even given current low oil prices and demand.”
- “On Tuesday it announced an additional capital raise including a public stock offering of 55 million shares, worth around $1.6 billion at Monday’s closing price of $29.11, and $1 billion worth of convertible debt. Shares rose 1.6% to $29.57.”
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When will airlines see load factors increase?
Right now, consumers are worried about the health of their families, whether they can buy for their basic needs, and the loss of freedoms. Travel for leisure or business is currently secondary but that doesn’t mean trends aren’t starting to emerge. Understanding consumer spending prior to, during, and coming out of COVID will be crucial to answering WHEN… when will travel pick up? When will airlines see load factors increase? When will everyone feel safe?
“The COVID-19 pandemic is changing daily life for consumers around the world in ways that would have been unthinkable. By understanding where the most significant changes are and which ones will stick, companies can position themselves to adapt”
KEY POINTS:
- “Consumer-facing companies urgently need to anticipate what kind of consumer is emerging, so they can make it through the current crisis and build the capabilities that future relevance will require.”
- “Across the markets we’ve surveyed, some consumers are making deep cuts. Others are continuing to spend as normal but are changing how they live in other ways. For now, many are remarkably optimistic. Looking across all the Index data, we’ve identified four segments of behavior.”
- Save & Stockpile; Not so concerned about the pandemic, but worried about their families. Pessimistic about the long-term effects.
- Cut Deep; Hardest hit by the pandemic. Most pessimistic about the future. Spending less across all categories.
- Stay Calm, Carry On; Not changing their spending habits. Not directly impacted by the pandemic. Worried that others are stockpiling.
- Hibernate & Spend; Most concerned about the pandemic. But best positioned to deal with it. Optimistic for the future. Spending more across the board.
- ““Cut deep” segment. These consumers – who are mainly over 45 – have seen the most impact on their employment. Almost a quarter have had their jobs suspended, either temporarily or permanently. Seventy-eight percent of them are shopping less frequently, and 64% are only buying the essentials. In contrast to the Hibernate and spend segment, 33% of consumers here feel brands are now far less important to them.”
- “Looking beyond the immediate effects of the pandemic, few consumers expect to go back to their old behaviors any time soon. As with many of the shocks we encounter in life, people are in a mood to pause and reflect.”
“The big question is this: as the economy recovers from the aftermath of the pandemic, which behaviors – if any – will return to what they were like before, which will stabilize for a while, and which will have changed for good?”
- “Today, a third of consumers strongly agree with the suggestion that they will reappraise the things they value most and not take certain things for granted. And more than a quarter say they pay more attention to what they consume and what impact it has. Perhaps in our post-crisis world we will see consumers becoming more mindful about the consequences of their choices?”
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Additional Resources
How Does the Coronavirus Compare to 9/11?
How to Survive Disruptive Change
Are Furloughs Coming?
What Should Pilots Do In These Uncertain Times?