The U.S. airline industry is losing money as the COVID-19 pandemic reduces travel demand by 95%.
Huge debt and operating cost of American Airlines makes it more vulnerable to the pandemic.
Southwest Airlines’ strong liquidity puts it in a better position than peers to fight COVID-19.
Amid the global lockdown, U.S. airlines grounded over 2,200 airplanes as they saw a 95% decline in travel demand, according to Reuters. One of the biggest problems with the pandemic is no one knows how long it will last.
By the time things normalize, most U.S. airlines could file for bankruptcy. Only the ones with a strong balance sheet and cash flows will survive.
America's largest airline carriers are struggling to stay afloat amid the COVID-19 pandemic. It seems like Southwest is in a better position to ride out the crisis than American Airlines. | Image: AP Photo/Rick Bowmer
The U.S. airline industry is losing money as the COVID-19 pandemic reduces travel demand by 95%.
Huge debt and operating cost of American Airlines makes it more vulnerable to the pandemic.
Southwest Airlines’ strong liquidity puts it in a better position than peers to fight COVID-19.
The U.S. airline industry will never be the same again after the COVID-19 pandemic. Amid the global lockdown, U.S. airlines grounded over 2,200 airplanes as they saw a 95% decline in travel demand, according to Reuters. One of the biggest problems with the pandemic is no one knows how long it will last. By the time things normalize, most U.S. airlines could file for bankruptcy. Only the ones with a strong balance sheet and cash flows will survive. The full-year 2019 earnings of the top four U.S. air carriers show that they have substantial operating costs, equating to 85-90% of their revenue. About 30-40% of these costs are allocated to salaries. That’s why jobs are usually the first to go whenever the airline industry faces a crisis.
American Airlines (NASDAQ: AAL), the world’s largest carrier, has $7 billion in liquidity. But in 2019, it also had massive debt ($30.5 billion) and negative free cash flow. Given that its quarterly operating cost is up to $10 billion, the company doesn’t have enough liquidity to survive more than a month without flying.
American Airlines is controlling cost by reducing its capacity by 60% in April and by 80% in May. It has also granted voluntary leaves and early retirement to a third of its employees. Apart from reducing cost, American has applied for $12 billion in government aid.
Among the top four U.S. airlines, American Airlines has the lowest operating margin at 6.7%. With revenues taking a considerable dip, American could post losses in the first half of 2020.
American Airlines suffered losses in the previous crisis as well. It filed for bankruptcy in 2011 and later exited insolvency by merging with U.S. Airways in 2013. History could repeat itself if the pandemic fallout doesn’t stabilize faster.
Can Southwest Airlines Fight The Pandemic?
Southwest Airlines (NYSE: LUV) is better prepared than American Airlines for the COVID-19 crisis.
Among the top four U.S. carriers, Southwest is the only one with a net cash balance of $2.2 billion. It has $4 billion in cash reserve and $2 billion in a revolving credit line. With a quarterly operating cost of $4.9 billion, Southwest is well-positioned to stay afloat for more than three months.
Operating at a margin of over 13% in 2019, Southwest Airlines hasnever reported a loss in 47 years. However, the pandemic could force Southwest Airlines to report its first loss in 2020 as revenue plunges. But once the pandemic is over, the company could return to profit faster than its peers.
Source : CCN
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