Covid Crisis 2020: The Latest

IATA: Rebound Not Likely Till 2021

• IATA, on March 31, gave another update to its description of what the Covid-19 pandemic is doing to the world’s airlines. This time, it emphasized the industry’s cash crisis, following its previous week’s assessment that airlines will see their 2020 revenues cut by an estimated $252b. That’s about the entire GDP of Finland.
  
  In the current April-to-June quarter that began last week, airlines face a $39b net loss, IATA forecasts. And they’ll burn through more than $60b of their cash reserves. Q2 RPK traffic will drop by something like 70% y/y. As one of the chief lobby groups for the world’s airlines, IATA’s top task right now is convincing governments to provide financial support to airlines.
  
  One specific battle it’s fighting is whether airlines should be obligated to provide cash refunds to customers canceling their bookings. Airlines themselves, desperate to preserve cash, want to issue vouchers for future travel instead. IATA says the liability for these refunds amounts to some $35b this quarter alone. It mentioned Canada, Colombia, and the Netherlands as countries that helpfully relaxed regulations to allow airlines to issue vouchers rather than cash refunds.
  
  The big message here is that airlines are at risk of running out of cash before the industry recovers. And when might that be? IATA does in fact see a strong rebound coming. But not until 2021.  

• Looking back on February, IATA reported eye-popping traffic declines. During the month, global air traffic fell by more than 14% y/y, the largest drop since the Sept. 11, 2001 terrorist attacks. In Asia, which was hit by the pandemic first, IATA recorded traffic declines of more than 41%. Demand collapsed first in China — domestic traffic there was down 84% in February! — and then throughout the region as the pandemic spread.  Other regions in February saw smaller declines in traffic or even grew. Even intra-European traffic grew by 1% y/y.
  
  The picture for freight was equally grim and also reflected the regional spread of the virus. Total FTKs fell by just over 1% in February but by 18% in Asia-Pacific alone, as factories in China shut down and belly-hold capacity fell with passenger capacity. “This is aviation’s darkest hour and it is difficult to see a sunrise ahead unless governments do more to support the industry through this unprecedented global crisis,” IATA Director General Alexandre de Juniac said.

The Importance of Contact Tracing

• Airlines are taking some criticism for repeated efforts to beat back attempts by public health officials to mandate the collection of contact information for all passengers. Carriers said it would be costly, logistically complex, and a violation of privacy. But it would have been extremely useful to track down anyone potentially exposed to a passenger with Covid-19.
  
  The ideal way to fight a burgeoning pandemic is to find where the virus is before it spreads widely. Testing helps with that. And so does contact tracing, which airlines could have helped with. The grim reality is, air travel is a pathogen’s ideal form of spreading far and wide. That’s true much more so now than during the SARS scare nearly 20 years ago (SARS wound up luckily disappearing on its own).
  
  By 2020, there were vastly more cites connected. For example, in 2004, Wuhan, where Covid-19 originated, had zero longhaul international flights. At the start of this year, it had nonstop links to San Francisco, New York, Sydney, London., Paris, Rome, Istanbul, Dubai, and Moscow, according to Diio Mi schedule data. 

Will Airlines Take CARES Act Funds?

• Just how bad will economies get? In the U.S., figures published last week show an extreme shock to labor markets. Hardest hit so far is the leisure and hospitality sector, led by restaurants and bars. But the carnage is widespread, with even the health care sector shedding 43,000 jobs, mostly related to services performed outside of hospitals (i.e. dental offices).
  
  The two big exceptions were the federal government and food retailers, where jobs increased. Air transportation actually saw a slight gain in employment from February to March as well. But this masks the tens and thousands of airline workers that have accepted voluntary unpaid leave. They’ll be spared forced layoffs or pay cuts for at least another six months thanks to federal grant money…

• …Assuming that is, all airlines take the money, which comes with some strings attached. Following passage of the federal CARES Act, which provides $50b for passenger airlines, Treasury department officials tasked with administering the aid got to work defining the process and filling in details. The act gives a lot of discretion to Treasury, which hinted it might even require an ownership stake in exchange for the $25b in money allocated for payroll grants.
  
  Early on, it appeared ownership would be a quid pro quo only for the other $25b — the money allocated for loans or loan guarantees. Most major U.S. airlines late last week said they applied for their share of grant money, which requires them to refrain from involuntary furloughs, pay cuts, stock buybacks, dividends, or exiting any of the cities they currently serve (a concession to rural state politicians who saw their communities suffer disproportionately in prior crises). In addition, top executives must accept pay limits.
  
  Unlike the post-9/11 federal airline aid, which pressured carriers to lower their bloated labor costs, this grant forbids them from altering their collective bargaining agreements. It also discourages them from declaring bankruptcy.

• The loan money, meanwhile, carries a separate set of conditions including one that says carriers don’t qualify if they can raise funds elsewhere. As most have shown, they can, from large banks. Other loan conditions: Applicants need to show they’ll use the money for good cause, i.e. not going out and buying A380s equipped with showers. Carriers must put up sufficient collateral, i.e. aircraft. The loan must be repaid in five years, maximum. No stock buybacks. No dividends. No cutting more than a tenth of one’s workforce. Top executives must accept pay caps. And airlines must continue to serve all the cities they’re currently serving, especially rural ones.
  
  As you can see, some of the grant and loan conditions overlap. But fortunately for airlines, they don’t include some of the more onerous conditions found in an earlier House proposal. These would have imposed tough environmental, labor, and consumer protection provisions.   

• But again, it’s not clear if the Treasury will exercise its prerogative to take equity stakes in exchange for grants and/or loans. Flight attendant unions, for their part, urged treasury Secretary Steven Mnuchin not to do so. The AFA, APFA, and TWU jointly expressed worry that $25b in six-month payroll grants could be worth as much as 40% of the industry’s equity.
  
  That’s a “poison pill,” they said, that could wind up discouraging their employers from taking the money. That could in turn lead to layoffs.

• So yes, the U.S. industry’s fate hangs on decisions in Washington. And not just with respect to loan and grant money. Last week, the DOT ruled that airlines must fully refund — in cash, not vouchers — airfares bought by passengers whose flights have been cancelled or significantly changed.
  
  No, the DOT said, “the obligation of airlines to provide refunds… does not cease when the flight disruptions are outside of the carrier’s control.”

• Back on the topic of aid money, will U.S. regional carriers get any? Their lobby group, the Regional Airlines Association (RAA), wants the Treasury to ensure that if major airline payroll claims exceed the allocated $25b, a remedy is in place to ensure smaller airlines receive sufficient funds to support their own workforce.
  
  RAA also says many of its members frequently have corporate charters that prohibit issuing warrants or equity. Regional carriers like SkyWest and Republic operate a large portion of all the shorthaul flying sold by the U.S. Big Three and Alaska.  

The U.S., by Carrier

• For an airline like Delta, how frustrating it must be to see all of its hard work blow up overnight, in a crisis far beyond its control. The carrier, whose rise from rags to riches is chronicled in the book Glory Lost and Found, said last week it was burning through $60m in cash each and every day.
  
  And it thinks things will get worse before they get better. Q2 revenues, it fears, will be down a stunning 90% y/y. Government funds will help for sure — Delta last week applied for the payroll grants. But at this rate of cash burn, that money would only last until June. Even Warren Buffett has seen enough — his Berkshire Hathaway sold off a big chunk of its large stake in Delta last week.
  
  The airline badly needs more of its workers to volunteer for unpaid leave. In the meantime, it’s taking its social responsibilities to heart, offering free flights for medical workers, repatriating Americans stuck abroad, and providing cargo services for medical supplies.
  
  One reason why more and more industry figures see this crisis lasting a long time is the many future obligations they’re now incurring. Delta last week, for example, said people booked on flights cancelled this month or next due to the Covid crisis can use their flight credits anytime in the next two years. New tickets booked last month, this month, or next month can be changed fee-free anytime over the next year.

• United said its March revenues dropped by more than $100m a day compared to the same month a year ago. Its load factors this month are forecasted to be in the teens at best. And even as late as Q4, it sees a y/y revenue decline of 30%. That’s the number it’s using to plan its Q4 schedules anyway.  

• American saw the steepest stock price decline of any major airline worldwide last week, reflecting investor sentiment that the roughly $12b it’s eligible to get in federal aid might not be enough. Its latest international schedule cuts (see Routes section) suggest any hope of a summer recovery is grossly overoptimistic. It too is practically begging employees to accept unpaid leave or early retirement.   

• If there was one U.S. airline with a pre-crisis balance sheet stronger than even Delta’s, it was Southwest. But it too is in “intensive care,” CEO Gary Kelly told Bloomberg News. With the cost cuts it’s already made, Southwest thinks it can ride the crisis out for another six months, helped by the federal payroll grants. If the recovery happens in the fall: “We’ll come out of six months kind of bruised a little bit, but I don’t think we’ll be flat on our backs where we can’t get up,” Kelly said. But “if the loads continue where they are today for 12 months, that’s just impossible. There’s no way we can do that. We would run out of cash.”
  
  Would it prefer to just shut down entirely to preserve cash? No, because that would mean getting planes back in the air — when a recovery eventually comes — would take much longer. Planes and crews must stay active to maintain their flying readiness. Separately, a question relevant to Southwest is whether it might be best positioned for a recovery, if one starts with domestic and shorthaul travel. International and longhaul travel, it seems, will take longer to revive.   

• JetBlue on Friday said it’s currently selling just $1m a day in tickets and ancillary items. Last April, it was selling about $22m a day. Even worse, it’s now issuing $2m a day in cash refunds, and another $11m in travel credits. That sort of cash burn can only last for so long. JetBlue has more than 100 planes parked and 70% of its April schedule cancelled. In a warning sign to workers, the airline said it might not be able to preserve current rates of pay when back at full capacity.
  
  It also mentioned that the federal grant money is based on 2019 employment data, but JetBlue has grown its workforce since then. So “total pay is likely to go down for both salary and hourly crewmembers.” Keep in mind that the government’s requirement to maintain service to all cities will result in a lot of empty flights and wasted cash, which offsets some of the benefits of the grants. Bad policy? JetBlue seems to think so.

• Spirit, which earned a 14% operating margin last year, now sees its stock price down 81% y/y, more than any other U.S. carrier. That has management worried about a hostile takeover. In response, the carrier last week adopted a plan of “limited duration stockholder rights.” What’s that? A better term is “poison pill,” giving current stockholders

• Airlines Reporting Corp. (ARC), disclosing sales generated by U.S. travel agencies and processed through its settlement system, saw an 89% y/y decline in tickets issued for the seven days ending March 29. Revenue associated with tickets sold was down 92%. The average domestic roundtrip ticket sold for $298, down 11%. Note that these figures don’t include tickets purchased directly from airlines.

Updates From Europe

• IAG, the owner of airlines in Britain, Ireland, and Spain, says it hasn’t yet drawn down bank money from a revolving credit facility to which British Airways still has access. But the group did negotiate an extension of its availability until June of next year. IAG was one of the champions of the pre-crisis era, and as such holds lots of cash and financeable assets. Now, like other airlines, it’s grounding surplus aircraft, reducing and deferring capital spending, cutting non-essential and non-cyber related IT spend, freezing recruitment and discretionary spending, implementing voluntary leave options, temporarily suspending employment contracts, reducing working hours, and suspending dividend payments.
  
  On Thursday, it announced additional capacity cuts, leaving just 10% of its planned flying intact for April and May. The unions representing BA flight attendants and ground workers, meanwhile, agreed to accept 30k furloughs for the next two months, during which they’ll receive 80% of their base pay courtesy of government funding. BA pilots, agreed to four weeks of unpaid leave. It’s taking similar steps in Spain and hopes to do the same in Ireland pending adoption of similar government wage support policies.   

• easyJet on March 30 decided to ground its entire fleet, aside from planes operating rescue flights for stranded passengers, as requested by London. Like IAG, easyJet entered the crisis with a strong balance sheet. It’s now talking to lenders about further shoring up its liquidity. It also reached agreement with the Unite union to mass furlough flight attendants for two months. Using the same government wage support program as BA, easyJet will ensure its furloughed workers get 80% of their average pay.
  
  Will the airline scale back its large Airbus order? Founder Stelios Haji-Ioannou, still a major shareholder, is loudly clamoring that it does so.

• Ryanair, whose passenger volumes fell 48% y/y in March, nevertheless expects a hefty net profit exceeding $1b for its fiscal year that ended in March. That of course reflects strong conditions before the crisis, though it is at the lower range of its earlier forecasts. Ryanair is also suffering from loss-making fuel hedges. And its fleet will be largely grounded for all of this month and next. All staff are currently earning just half of their pay.

• Norwegianis working toward collecting the first tranche of government aid it received, which was conditioned on private sector lenders agreeing to lend some money as well. But will it get the second tranche? Private-sector buy-in is hardly guaranteed, and Norwegian CEO Jacob Schram is warning that the airline might yet collapse and hurt Norway’s economy. SAS, he said, has received much more generous aid money from not one but three separate Nordic governments.
  
  If Norwegian goes away, he adds, Ryanair would swoop in and fly just the busiest routes, leaving smaller communities without air service. At some point, a bankruptcy restructuring might be Norwegian’s only viable option, allowing it to walk away from heavy obligations to Boeing and Airbus. Norwegian is now asking Oslo for about four times the amount of aid money it was given.

And in the Rest of the World

• Air Canada will at most fly just 15% of its normal capacity this quarter. It thus placed more than 15,000 unionized workers on “off-duty status.” Another 1,300 management staff were furloughed. It emphasized that the cuts are intended to be temporary. Like the U.S., Canada said it will provide government wage support and loan credits to airlines. Air Canada awaits the details.

• Mexico’s Interjet, barely hanging on before the crisis, might have finally run out of steam. According to the IBA Group consultancy, much of the carrier’s fleet was repossessed by lessors last week. The carrier is currently operating just five domestic routes from Mexico City. So it doesn’t need the planes it lost right now. But it doesn’t bode well for its chances come recovery time.

• Singapore, a city-state whose economy greatly depends on the airline sector, swiftly provided massive crisis aid to Singapore Airlines. But how about Dubai, with a similar dependence on its national airlines Emiratesand FlyDubai. Emirates itself did get a pledge of full support, via capital injections.
  
  But Dubai’s public coffers are dwindling as its two most important industries — oil and tourism — are both in a deep depression. Even pre-crisis, Emirates was already hitting a growth wall, unable to find profitable new markets. Its post-crisis future, clouded by even weaker growth prospects and the fiscal ills of its government, could involve deep downsizing. The long-discussed idea of merging Emirates with Etihad will perhaps revive as well.

• Qatar Airways needs government support too, its CEO told Reuters. The Gulf carrier is burning through so much cash right now that it could run out in a “very short period.” Staff though, are notbeing forced to take pay cuts. Qatar is at least a wealthy country. For oil-exporting countries not so lucky, from Nigeria to Russia to Iran, providing financial support will be tougher.
  
  U.S. dollar strength, meanwhile, is adding a further complication to developing countries trying to protect their economies from the ravages of Covid-19. A carrier like Ethiopian Airlines, keep in mind, is one of its country’s top earners of critical foreign currency to cover necessary imports. Not right now though.  

• AirAsiachief Tony Fernandes said on Bloomberg Television that times are of course tough, but that the eventual recovery will likely be characterized by people flying low-fare airlines to save money, and by people flying within their home region. In addition, some competition and capacity should “drop off.” AirAsia should have enough cash to take it through much of this year, he said. A government loan would help further.
  
  Might the government try again and merge AirAsia with Malaysia Airlines? Fernandes said all options are open but denied the proposition was currently under discussion. AirAsia is discussing changes to its giant aircraft order with Airbus, expecting traffic growth to remain subdued for a long time. The airline is also busy restructuring its loss-making fuel hedges.
  
  Troubled AirAsia X, Fernandes said, will benefit from its recent transition away from longhaul flying. The group as a whole should benefit from a big push into new digital businesses, which don’t burn a lot of cash like flying airplanes. Cargo is also doing well.

• Virgin Australia is still trying to figure out how it’s going to survive just for the next few weeks let alone months. It’s asking its government for $800m in financial support, saying also that Canberra could take an ownership stake.  

• Summarizing the efforts of governments so far, Ishka, a consultancy, counts about $73b in confirmed financial support to airlines so far. The U.S. leads the way with $58b of that $73b ($50b for passenger airlines and the rest for cargo carriers and others in the aviation supply chain). Singapore is providing more than $8b. Germany allocated $2b in credit support to TUI. Taiwan is giving $1.6b. What’s left will come from the Nordic countries, Australia, New Zealand, South Korea, and Hong Kong.
  
  Ishka is not counting aid packages it classified as not yet confirmed, such as Italy’s planned bailout of Alitalia. Nor is China’s unspecified industry support included. The U.K., meanwhile, with its giant airline market, hasn’t yet provided a big-bang relief package comparable to what the U.S. has done, efforts by carriers like Virgin Atlantic notwithstanding. Britain has however, relaxed interpretation of passenger rights rules, waived some Heathrow parking charges, announced wage support for furloughed airline workers, and modestly cut its air passenger duty. London does appear keen on giving airlines part of the $375b in credit support designated for large companies. It also wants to give airlines access to the Bank of England’s Covid Commercial Finance Facility for large companies. But carriers still await details.