2020 Was a Record Year for 'All the Wrong Reasons'
2020 was a ghastly year for airlines. After racking up the tidy sum of $119 billion in pre-tax profits during the decade ending in 2019, the U.S. big six — Alaska Airlines, American Airlines, Delta Air Lines, JetBlue Airways, Southwest Airlines and United Airlines — together managed $43.8 billion in pre-tax losses last year. That’s just a few billion less than the cumulative airline industry losses during all of the 1990s and 2000s. Yowza.
But everyone knew the losses would be steep. And the full picture, had the U.S. government not provided more than $67 billion in airline aid, would have been a lot worse. The industry said goodbye to four small regional carriers but could have been talking about large Chapter 11 bankruptcy restructurings had the federal government not stepped in.
“It’s a year for the record books for all the wrong reasons,” as Delta CEO Ed Bastian put it in a town hall to staff in January.
Focus on margin expansion was replaced with shrinking daily cash burn as losses mounted. Some carriers were burning a staggering $100 million a day or more in April when flights were at their emptiest and CARES Act funds had yet to trickle through. Airlines greatly reduced daily losses by year-end but even at best they were still losing at least $4 million a day.
Delta’s balance sheet bled red in 2020. The Atlanta-based carrier posted a pre-tax loss of $15.6 billion, the largest among the big six. Revenues fell 63 percent to $17.1 billion on a 27 percent drop in expenses to $29.6 billion. However, much of Delta’s steep loss can be attributed to its fleet restructuring expenses. The airline recorded an eye-popping $8.2 billion in one-time restructuring expenses that included charges related to the accelerated retirement of some 400 aircraft across its fleet.
In 2020, Delta said goodbye to all of its McDonnell Douglas MD-88s and MD-90s, and its Boeing 777s, as well as some of its Airbus A320s, and Boeing 737s and 767s. In addition, it accelerated the removal of its Boeing 717s and remaining 767s by 2025, and Bombardier CRJ200s by 2023.
No other U.S. airline made as many long-term changes to its fleet as Delta — something it bets will make it a leaner and more profitable competitor as the industry emerges from the crisis. The carrier removed or identified for removal 21.7 percent of its seats in 2019, according to a Raymond James analysis. For comparison, the next biggest fleet change was at American who only retired 9.6 percent of 2019 seats.
American’s $11.5 billion pre-tax loss in 2020 was second only to Delta. The Fort Worth, Texas-based carrier saw revenues slide 62 percent to $17.3 billion on a 35 percent drop in expenses to $27.8 billion. American also incurred one-time charges related to its aircraft retirements and early-out programs for staff; however, the cost of these initiatives paled to those at Delta. Aircraft impairment charges totaled $1.4 billion and employee out programs just $365 million during the year.
The airline said goodbye to its Airbus A330s, Boeing 757s and 767s, and Embraer E190s during the year. The latter three were accelerated retirements of planes already identified for removal prior to Covid-19. A notable departure was the 767-300ER, which American launched in the mid-1980s and debuted in 1988.
The pre-tax loss at United totaled $8.8 billion in 2020. Revenues at the Chicago-based carrier slid nearly 65 percent to $15.4 billion on a 44 percent drop in expenses to $21.7 billion. While American and Delta zigged on fleet, United zagged. It retired barely any jets — only 11 older 757s with Pratt & Whitney engine removed — in the name of being nimble when the recovery happens. Executives have repeatedly said the potential benefit of having planes ready for the recovery outweighs the marginal cost of storing them for the duration.
This is not to say United may not join the fleet restructuring — and one-time impairment expense — train once the recovery is firmly underway. If it retires planes, CEO Scott Kirby has said that its 117 757s and 767s will be the first to go.
“Even Southwest is not immune to Covid-19, and we recognized our first annual loss since 1972. [And] it was a big one,” Southwest CEO Gary Kelly told investors during the airline’s earnings call in January.
The most successful U.S. carrier in history ended a nearly half-century run of profits with a $4.26 billion pre-tax loss in 2020. Revenues at Dallas-based Southwest fell nearly 60 percent to just over $9 billion on a 34 percent drop in expenses to $12.9 billion. Like United, it too had few one-time expenses beyond those for employee early-out packages. Southwest’s aircraft retirements totaled just three-percent of its 2019 seats, or 34 737-700 jets.
Pre-tax losses at Alaska and JetBlue totaled $1.82 billion and $1.89 billion, respectively, in 2020. Seattle-based Alaska saw revenues slide 59 percent to $3.57 billion on a 31 percent decline in expenses to $5.32 billion. And New York-based JetBlue saw revenues drop nearly 64 percent to $2.96 billion on a 36 percent fall in expenses to $4.67 billion. In terms of fleet, Alaska removed 40 A320 family jets from its fleet and unveiled plans to replace its remaining 21 A320s — though not its 10 A321neos — with new 737 Max 9s by 2023. JetBlue made no permanent fleet changes beyond accepting its first Airbus A220 on New Year’s Eve.
In terms of passenger traffic, little changed among the big U.S. airlines. American led the pack as it did in 2019, followed by United, Delta, Southwest, Alaska and JetBlue. However, traffic fell a dramatic 65 percent in 2020 to a level unseen since 1985, data from Airlines for America (A4A) show. Industrywide 2020 traffic numbers will come in higher once low-cost carriers like Allegiant Air and Spirit Airlines, as well as privately held airlines like Frontier and Sun Country, are included.
The losses would have been far deeper and more severe without the government relief provided airlines in the CARES Act in March, and payroll support extension in December. “It’s very clear that Congress’ efforts to support the industry and its employees by providing vital funds to weather the downturn were essential,” Alaska CEO Brad Tilden told investors in January.
As the industry looks ahead to 2021, it sees a year of recovery and further losses, albeit significantly smaller than during the past year. None of the major players are expected to produce a profit this year, though some like Southwest may come close or even surprise us. More transformation is coming, least of which will occur on the fleet and map front.
And threats still loom. The new administration of President Joseph Biden is considering mandating a negative Covid-19 test for all U.S. domestic travelers, something that the industry says would imperil the nascent recovery and almost certainly require more financial relief from the government. And a slower-than-hoped vaccine roll out has everyone guessing when a critical mass of Americans will have their jab and be ready to fly.
“Managements are optimistic but uncertain about demand recovery,” wrote J.P. Morgan analyst Jamie Baker summing up the industry sentiment. But when travelers do come back, airlines are ready to emerge “with potentially-significant structural improvements in operating costs chiefly driven by aircraft and labor savings.”