United Airlines plans for worst, hopes for best
United Airlines’ President Scott Kirby on Friday laid out a stark future for the airline industry, saying the carrier is preparing for a scenario in which there is no passenger revenue into next year and it will have to dismiss thousands of workers if travel doesn’t rebound from the coronavirus crisis.
In a matter of weeks, the pandemic has vaporized an industry that was seeing record growth, turning airports into ghost towns and airplanes nearly empty. United appears to be the most pessimistic of all the domestic carriers about the prospects for recovery.
Bookings are down by essentially 100% and “if demand remains significantly diminished on October 1 we simply won’t be able to endure this crisis as a company without implementing some of the more difficult and painful actions. These include decisions on involuntary furloughs, the reduction in hours as well as other actions that will have an immediate impact on our people and their livelihoods,” Kirby said in a call with analysts to discuss the company’s first quarter earnings.
“We’re planning for the environment to possibly continue at essentially zero net passenger revenue for the rest of the year and into 2021,” he warned. “We aren’t projecting that, and certainly hope it’s better than that, but we are planning for the possibility.”
The unvarnished assessment echoes that of many analysts who anticipate mass industry layoffs come the fall because passenger traffic will be very light and the companies will have a glut of labor for several years.
Chicago-based United (NASDAQ: UAL) reported after market close on April 30 that it lost $1.7 billion, or $6.86 per diluted share, in the first quarter and $2.1 billion on a pre-tax basis.
The airline’s revenue declined 16.8% in the first quarter to $8 billion, with cargo revenue down 7.7% to $264 million.
United and its competitors have been able to avoid involuntary furloughs and pay cuts to date because tens of thousands of employees have volunteered for temporary unpaid leave programs while the rest have seen large reductions in the number of available work hours. Also helping is $25 billion in emergency federal aid for workforce protection on the condition airlines keep payrolls and benefits unchanged through September.
In April the U.S. government agreed to give United $5 billion in assistance, divided between a $3.5 billion grant and a $1.5 billion 10-year loan. As part of the deal, United will issue warrants to purchase about 4.6 million shares of stock to the government. United received the first installment of $2.5 billion and has applied for a $4.5 billion five-year loan from the U.S. Department of the Treasury as well.
But Kirby, who will take over the company at the end of the month when CEO Oscar Munoz retires, stressed that the coronavirus rescue money is only a temporary, and partial, solution. The grant portion covers a little more than one-half the airline’s $6.5 billion in salary and benefit expenses over its six-month duration.
United is trying to lessen the impact on workers as much as possible, Kirby stressed, such as by eliminating contracted work at airports and using its own personnel for previously outsourced tasks.
Decisions to terminate employees will not be taken lightly, but “our overriding goal is focused on the long-term. We have to ensure that United is here to rebound once the virus is contained and demand is recovered. We simply cannot, and will not, risk the long-term future of United and the jobs the airline supports just because the short-term decisions are really hard,” he stated.
Kate Gebo, executive vice president for human resources and labor relations, informed workers in an internal memo Friday that there would not be any incentive or profit-sharing payments this year. The programs require the company to make a profit in order to make a payout.
“This is difficult news to deliver because we know that so many of you are persevering through tough circumstances – personally and professionally – and working particularly hard to help United through this crisis,” she wrote.
United was quick to suspend flight schedules and implement cost-containment measures when the coronavirus outbreak spread beyond China in February and will operate at about 10% of its normal schedule through at least June, officials said.
In addition to eliminating capacity, United was aggressive early in the pandemic to chop all non-employee expenses to the bone. And the budget for terminal and IT projects is being reduced by $2.5 billion in 2020.
Those steps, and reduced operational expenses such as fuel, have helped lower United’s cash burn to about $50 million per day compared to twice that amount in March, Kirby said. The airline will soon lower that daily outflow to about $40 million to $45 million even with paltry revenue levels.
Kirby said United expects to get the burn rate below $40 million per day in the third quarter and end the period with $6 billion in liquid assets. If business doesn’t pick up, officials said they have a plan to get to a $20 million cash burn that would involve significant headcount reductions.
Since March, the carrier has raised $4 billion through three term loans, new lease financing of 22 aircraft and an equity offering. It currently has $9.6 billion in liquid assets and has the option of taking the federal loan, if approved, to maintain that cushion.
Officials said it was too early to make decisions on retiring more aircraft, but Cowen airline analyst Helane Becker estimates the airline has more than 300 candidates that are more than 20 years old. American Airlines and Delta Air Lines, by comparison, are moving more planes to early retirement.
One of the few remaining sources of revenue is cargo as United, like most airlines, transforms passenger jets into mini-freighters to help shippers restore supply chains broken by the shutdown of passenger networks and provide urgent airlift for medical supplies needed to fight COVID-19.
Since March 19, United Cargo has operated more than 800 cargo-only flights worldwide, moving more than 28 million pounds of food and supplies around the world.
An optimistic sign of pent-up demand, Kirby said, is that searches for 2021 spring break travel on United’s website are higher this year than at the same time last year. “But we don’t expect those to turn into bookings or travel until the virus is sufficiently contained and the rhythms of daily life become routine again.”
United stock was down 10% in early afternoon trading.