The butcher’s bill will be revealed by U.S. airlines Tuesday when Delta leads off the (now euphemistically named) third quarter “earnings” report season. And the only question is not whether, but by how much will the third quarter rank as the single worst in industry history?
Based on analysts’ current consensus estimates the Big Four U.S. carriers – Delta, American, United and Southwest – are expected to lose almost $8.5 billion combined in the quarter on a pre-tax operating basis. Throw in proportionately similar, albeit much smaller losses from the rest of America’s airlines, plus taxes, write-offs and other below-the line losses and the industry’s net third quarter loss should top even the $11 billion it lost on that basis in the second quarter of this year, the first fully impacted quarter of the Covid-19 era. And, were it not for the $25 billion in federal grants paid to airlines and certain other aviation related companies to help cover employee costs – money which is now mostly spent – third quarter losses this year would be even more enormous.
According to Zacks Investment Research, analysts’ consensus estimates call for:
- Delta, which reports Tuesday, to lose around $3.1 a share, or around $1.97 billion on a pre-tax, operating basis
- United, which reports on Wednesday, to lose $7.73 a share, or around $2.25 billion on the same basis
- American, which reports Oct. 22, to lose $5.6 a share, or around $2.85 billion on the same basis
- Southwest, which also reports on Oct. 22, to lose $2.44 a share, or around $1.37 billion on that basis. Its loss will be smaller than those of its three largest competitors because of its distinctly different business model that produces lower total revenues because it lacks first class service and positions itself as a low fare or discount carrier. Nevertheless, it’s just as devastating a loss in that it, coupled with a big second quarter and likely big fourth quarter loss, means Southwest will report is first annual net loss in 48 years. Southwest’s only annual loss came in its first full year in business.
But none of that should be a surprise to investors – or to anyone else – given the intense news coverage of U.S. airlines’ – and their global counterparts’ – struggles to stay alive since Covid-19’s economic assault began in earnest in February.
Just two weeks ago U.S. carriers, freed from restrictions against laying off non-management employees that came with their acceptance of that $25 billion in federal grants, laid off tens of thousands. United and American combined issued pink slips to 32,000 workers on Oct. 1. Combined, the industry has removed around 150,000 people from their payrolls since the virus began destroying travel demand in late February. On top of the recent layoffs they have used financial inducements in exchange for early retirements and resignations and to get some workers to accept long-term and indefinite voluntary – and unpaid – furloughs. They’ve also eliminated a number of contract and temporary jobs. Plus, they’ve dramatically reduced or eliminated the number of workers they use who actually were employees of third-party outsourcing companies.
By comparison with the third quarter of 2019, this year’s third quarter will represent more than a $15 billion reversal of fortune. Last year U.S. carriers had a combined third quarter net profit of $4.6 billion.
Besides the headline quarterly loss numbers, analysts and investors will be paying close attention to what airline executives say now about three critical future issues: their prospects for recovery of travel demand, especially among business travelers; the carriers’ daily cash-burn rates; and their liquidity outlook.
Analysts expect airline leaders during their upcoming quarterly visits with analysts, reporters and investors to further roll back their expectations for passenger traffic recovery in the fourth quarter. Coming out of the disastrous spring, when passenger traffic fell for a couple of weeks in the middle of April by as much as 95% from the same time in 2019, carriers expected demand to begin growing slowly but steadily in the summer vacation season. They then expected demand to grow steadily through the second half of the year, even after the end of the summer vacation season. Indeed, there was hope that by year’s end demand would up to somewhere between 75% and 85% of what it was last year.
But by late June it was began to be obvious that the summer demand recovery was not really going to happen. And since Labor Day demand has been significantly weaker than industry leaders had been planning on back in May.
Now carriers are scrambling to slash even more of their November capacity – which currently is already down between 45% and 55% from this time a year ago. And their hopes for a real capacity rebound have been pushed back into at least the last half of 2021.
“Broadly administered vaccinations and sticky regulatory impediments (like travel bans and mandatory quarantines for international travelers) likely don’t permit demand to rise above the -50% mark until the second half of next year, at the earliest,” said J.P. Morgan analyst Jamie Baker in a note last week to investors.
Cowen analyst Helane Becker, in a similar note said, “Demand recovery continues but the rate is slower than anticipated and we expect a much slower 2021 recovery as the airlines continue to limit capacity in the current environment.” She suggested 2021 combined revenue for the industry’s big four carriers will be down 44% from 2019.
Carriers significantly reduced their daily losses, or cash burn rates from the first to the second quarter. But hoped-for further reduction in those burn rates largely has not materialized. Carriers did most of the cost cutting they’re able to do in the late first quarter and in the second quarter. While some cost cutting opportunities are available, most of that would be a result of further capacity reductions. Carriers have been very reluctant, until the last week or so, to cut capacity even further, believing that would leave them with too few available seats on important routes when a true demand recovery wave begins. But that wave – which would bring with it a much-needed boost in operating revenue – now seems very unlikely to begin building until the middle of next year at the earliest.
As a result. J.P. Morgan’s Baker said there’s a “high probability” that airline managements will announce static or even higher fourth quarter cash burn rates at most carriers when they report their third quarter results. Specifically, he said he expects American Airlines to see its daily cash burn rate to rise to around $38 million a day, United’s to push above $35 million a day, Southwest’s to climb to around $24 million and day and Delta’s to grow to about $11 million a day.
Analysts largely agree that raising enough cash just to stay alive now won’t be as big a concern as it was during the late first and all of the second quarter because carriers have achieved that short-term goal. But, several carriers may elect to continue raising money either through loans they’ve already negotiated but have not fully drawn, through putting up more assets like portions of their frequent flier programs as collateral on more loans, or by floating new debt or even stock on the markets.
But, most analysts agree that with the possible exception of American, which with $45 billion of debt on its balance sheet is the most heavily indebted U.S. carrier and owner of the weakest balance sheet, no carrier is in danger of running low on liquidity before the end of 2021.