U.S. Airlines Roll In Cash Despite Huge Losses

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The country’s four largest airlines – American (AAL), Delta (OF), United (UAL) and South West (LUV) — among them had $ 31.5 billion in cash on their balance sheets at the end of 2020. That’s $ 13 billion a year earlier, before the pandemic hit. “Liquidity” has become a favorite buzzword for airline executives discussing their financial situation. Including cash and untapped lines of credit, airlines have access to nearly $ 65 billion.

“Liquidity is at record levels,” said Philip Baggaley, chief airline credit analyst at Standard & Poor’s. “It’s good, and it’s one of the few strengths they have at this point.”

The lion’s share borrowing and liquidity therefore come from banks and Wall Street. Like a struggling family inundated with credit card offers, airlines have a lot of people eager to give them money.

Airlines sold bonds, borrowed money, mortgaged their planes, loyalty programs and other assets, and even sold additional stocks, a highly unusual move for an industry in this position.

The borrowing added about $ 40 billion in long-term debt to national airlines’ balance sheets.

“I think the general feeling is that they are injured but they are going to be okay,” Baggaley said. The low interest rate environment has helped airlines, as investors and yield-seeking banks have been willing to lend to airlines, he added. All carriers, except Southwest, have credit ratings for junk bonds.

They have also made significant cost reductions, even with the help of the government which has prevented them from carrying out permanent and involuntary job cuts.

Airlines have used buyouts and early retirement to cut staffing levels by about 16% at the start of 2021. In recent weeks, American and United have sent layoff notices to 27,000 between them. , saying they could be third round of government assistance again before April 1.

Many of those employees were laid off in October when the first round of federal payroll support ran out and were called back to work in December when Covid’s second relief program provided an additional $ 17 billion to the industry. Airline unions were back on Capitol Hill last week to call for another round of help to keep their members employed.

Cost cuts cut the rate at which airlines spent cash between the second quarter and the fourth quarter of last year by about half the rate, even though air travel and revenue have remained a fraction of what they were before the pandemic.

But even slowing the pace of cash consumption, the four airlines combined spent $ 115 million per day in the last nine months of 2020. Half of 2021. Building up a substantial cash reserve is the only sure way. to overcome this unprecedented financial crisis, according to airline executives.

“Our industry still has a long way to go towards recovery,” US CEO Doug Parker said on a recent conference call with investors. He said that the accumulation of cash, combined with the reduction in costs, “gives us the confidence that we are well positioned for the year ahead and for the long term.”

Apart from Southwest, which just posted its first annual loss since 1973, the country’s other major airlines have all had at least one bankruptcy in their history. The industry’s current strong cash position gives hope that they can avoid that fate this time around. But it depends on when the traffic returns, and even the airlines don’t know when it will.
Southwest Airlines reports first loss in 48 years

“I have 10 straight months of data showing that people are ready to travel in six months. It just keeps saying the same thing,” the American’s Parker recently said in an interview on CNBC. “What I do believe is that once people are comfortable they will come back pretty quickly. There is a huge pent-up demand for travel. We hear it everywhere we go. But no one will travel. as long as there are no things to do when you travel, and until the vaccine is distributed and the pandemic is largely eradicated. “

Baggaley of S&P believes the airlines “have surpassed the worst,” he said. None of them have filed for bankruptcy, and he thinks there’s a good chance they haven’t.

But he warns that unlike the string of retail bankruptcies early last year that took place weeks or months after the onset of the crisis, airline bankruptcies can historically occur years after a financial crisis. . Delta and Northwest did not file until 2005, years after September 11. American did not file until 2011, well after the Great Recession.

“It is reasonable to fear that they will end up with a lot more debt,” he said.

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