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Companies and analysts regularly model their disaster behavior, stress testing to see how they would react to formulate a plan – just in case.
During United Airlines (UAL) earnings call on Thursday, the company showed just how flawed some of these models can be.
Describing the company’s losses – an adjusted pre-tax loss of $ 2.6 billion to a full-year loss of $ 9.9 billion – CFO Gerald Laderman pointed out that things were worse than they ever were. ‘had imagined. The stock fell around 7% when the results were announced.
“Before COVID, we modeled our worst-case scenarios based on the financial impact of September 11, followed by a recession,” Laderman said on the call. “It turns out we weren’t even close.”
Scott J. Kirby, CEO, said on the call that one of the airline’s significant accomplishments was “to be the first airline to recognize the potential severity of COVID-19,” but it was in a difficult situation as she tried to minimize the consumption of money. when the passengers have stopped flying.
Although there is a light at the end of the tunnel, Kirby said the pandemic has changed airlines forever.
“As we recover from this crisis we have stopped using the term ‘back to normal’ because it creates an environment in which it is just too easy to start doing what we were doing before”, a- he declared. “Instead, we want to focus on a return-to-novelty approach that applies to a wide variety of goals. When this is complete, our employees, customers, the general public and our shareholders will see a new United Airlines. “
One of these will be the way the business manages risk. People who study risk and the so-called black swans, a term coined by polymath Nicholas Nassim Taleb that refers to rare events that have disproportionate impact, see that it is almost impossible to predict extremely powerful events. Instead, these risk experts prefer widespread robustness to shocks, resisting a wide variety of events without the need to predict. (A lot of people predicted, predicted, and warned about these scenarios, including Bill Gates, so a lot of people say this was a risk factor companies should have been prepared for.)
“Going forward, we will focus on preparing for a lasting destruction of global demand for air travel, as we are seeing today,” Laderman said.
As the company mopped up reservations and revenue, “managing liquidity and cash flow became much more important than any other financial measure,” Laderman said, and these difficult lessons led to new lessons to be learned. for future crises.
Consolidating a strong balance sheet will be paramount as the company returns to profitability, Laderman said, and maintaining speed and flexibility through liquidity and debt reduction will be the priority. . The process will take years, however: the company does not expect the first quarter of 2021 to be much better than the fourth quarter of 2020. Most airlines are going through an equally difficult time, as tiny demand has led to aircraft fleets on the ground and the need to reduce expenses. (Norwegian has even stopped its long-haul service.)
“This crisis has given us a number of valuable lessons about balance sheet and capital allocation,” Laderman said. “We plan to set a higher minimum liquidity target than before the crisis.”
The full autopsy of business responses won’t be ready for a long time, but the events of 2020 and 2021 will provide data from which to draw new plans and models, such as assets available to troubled businesses as collateral, stressed. Laderman. . But the next crisis could take a drastically different form than the coronavirus pandemic and no preparation will really be tested until it is tested.
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Ethan Wolff-Mann is a writer at Yahoo Finance who focuses on consumer issues, personal finance, retail, airlines and more. Follow him on twitter @ewolffmann.
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