Aviation Industry Updates: June 21, 2020

Will the Legacy Airlines Declare Bankruptcy? | Crazy Talk or Probable?

KEY POINTS:

• “The nature of the airline business causes enormous operating leverage. For a given flight almost all of the costs are fixed. Thus, a small decline in revenue causes a very large decline in operating profit.”

• “On top of enormous operating leverage, the capital intensity of the business, causes most legacy airlines to also use tremendous financial leverage. Financial leverage is the use of debt, or debt-like instruments such as financial leases, to acquire the assets required to operate the business.”

• “The combination of operating and financial leverage, usually means that a 15% decline in revenue is enough to send an airline into chapter 11 bankruptcy.”

• “Events such as Hurricane Katrina, the 9-11 terrorist attacks and recessions have typically caused reductions in revenue that pushed some legacy airlines into bankruptcy and wiped out the shareholders.”

• “A 15% decline in revenue has been fatal for many airlines. Covid-19 has reduced airline revenue by 80%. There has been some recovery in bookings. However, normally most reasonable estimates of legacy airline revenues for the next 12-month period, are such that would have caused at least one legacy airline bankruptcy, and brought the share prices of the others down to single-digit levels. That has not happened this time. Yet.”

• “Doug Parker, head of American Airlines is probably the one airline CEO who is likely to resist bankruptcy the most, even if he could personally benefit from it. Unfortunately for Mr. Parker and AAL shareholders, American Airlines is probably the weakest major US airline, as it already has negative book value and thus no equity. It will probably the first to be insolvent, although other airlines may file for bankruptcy first.”

• “Without massive infusions of cash from the government, there is no possibility that any of the legacy airlines could ever get to breakeven as long as Covid-19 is still a significant factor.”

• “Most of the legacy airlines have assets on their books whose value is now far overstated. Before Covid-19 slots and landing rights were very valuable assets. That was because airport capacity was constrained in many markets. Whether air travel is at 15% or previous levels, or at 50% previous levels, there is still substantial over-capacity at every airport. Not only do slots and landing rights have no market value now, but airport operators are going to be looking to the airlines to pay higher fees, to offset the airport’s vastly reduced revenues.”

• “Even a vaccine would not turn ALL’s book value positive, but it probably would boost all share prices including the legacy airlines. However, unless the legacy airlines are able to use such a rally to sell new shares to the public such a medical advance might be too late for the legacy airlines.”

Click here for the full article.

U.S. Travel Spending Not Expected to Recover to Pre-Covid Numbers Until 2024

“Total travel spending from both domestic and international travelers in the U.S. is forecast to plunge 45 percent by the end of 2020, and not expected to recover to pre-Covid numbers until into 2024, with international visitor spend maybe until 2025, according to new research from analytics firm Tourism Economics commissioned by the U.S. Travel Association.”

• “There is some hope that would-be U.S. outbound travelers who can’t go abroad this year will pivot to being domestic travelers, but these new numbers still predict a significant loss.”

• “The data is telling us that travel and tourism has been more severely damaged than any other U.S. industry by the economic fallout of the health crisis.”

• “Given that travel employed one in 10 Americans and was the No. 2 U.S. export before the pandemic, supporting this industry through to the recovery phase ought to be a national priority.”

Click here for the full article.

Corporate Aviation Continues to Surge on Health Fears, Lower Prices

KEY POINTS:

• “While commercial airlines are having a slow recovery, private-jet companies are seeing a surge in business from new customers.”

• “Commercial traffic is running about 15% to 17% of last year's totals, but private flights are running at up to 70% or more of normal, according to industry data and Private Jet Card Comparisons.”

• “The private-jet industry is seeing a rapid rebound from the coronavirus crisis, as new customers who had never flown private splurge to avoid the crowds and lines of commercial flying.”

• “New customer sign-ups with industry leader NetJets in May were more than double the typical May, according to Pat Gallagher, the company's president of sales, marketing and service.”

• “While business travel remains almost nonexistent, private-jet companies say personal travel by wealthy affluent fliers — many of them older — have more than taken up the slack. They say that while many families who could afford to fly private couldn't justify the costs, they are willing to spend the extra money for greater health safety.”

• “Prices for certain flights are now 30% to 50% cheaper than they were a year ago, bringing private-jet flights closer in line with first-class or business-class seats.”

• “Because commercial airlines have also suspended flights out of certain smaller airports, private jets have become more attractive to fliers who don't want to travel to larger airports.”

Click here for the full article.

Does JetBlue Have Enough Cash To Support Losses In 2020?

KEY POINTS:

• “JetBlue Airways stock has lost nearly 36% of its value since the beginning of the year.”

• “At $5 million of daily cash burn and gradual demand recovery possibly in Q3, the company has a strong liquidity position to cover fixed costs and repay its short-term debt obligations.”

• “Even in the pessimistic scenario, where demand recovery happens by October and the cash burn rate remains the same, the $3 billion of liquidity can address operating losses.”

• “However, if the demand does not recover by October, the daily cash burn rate would surge by $6 million just from employee costs. While the company can raise $1 billion in additional debt under the CARES Act, it would have to re-negotiate with all stakeholders to further reduce the cash outflow.”

Read on to see Forbes break down two possible scenarios for JetBlue.

Weekly TSA Numbers:

“There's a lot you can do far above and beyond being positive. There is no reason to be hopeless here, you can take control over how you adapt and react to highly unfair circumstances...Hopium, irrational or unwarranted optimism, is a dangerous and addictive drug. Friends don't let friends do Hopium...it's equally as dangerous as hopelessness but for different reasons.”

-James Onieal

Mega U.S. Business Travel Buyer Looks to Shrink Air Travel Post-Pandemic

Will EY’s decision ring true with the other Big Four accounting firms? Airlines depend on corporate travel and with billions of dollars to lose, the repercussions could be staggering.

KEY POINTS:

• “Ernst and Young LLP sees an opportunity to cut its carbon footprint measurably when pandemic travel restrictions end by not returning to the amount of air travel its accountants and consultants used to do.”

• “For EY, $1 billion worth of air travel amounts to 85% of the firm’s carbon footprint normally.”

• “We don’t think we need to be back to spending a billion dollars and creating the carbon footprint that we had. We think we can do our jobs with less of that.”

• “The pandemic offers companies like EY the chance to rethink how they conduct business and will accelerate efforts to meet long-term sustainability goals.”

Click here for the full article.

Additional Resources

Why Applying for Jobs Online Won't Work
How Does the Coronavirus Compare to 9/11?
How to Survive Disruptive Change
Are Furloughs Coming?
What Should Pilots Do In These Uncertain Times?