United President Scott Kirby has taken Covid-19 seriously since the virus first started spreading across the globe. Will that foresight help lessen the blow?
As some U.S. airlines play politics, telling investors and travelers they have no plans to furlough employees, or close hubs, United Airlines executives are telling the unvarnished truth, saying they’re prepared to do whatever it takes to keep the company operating amid near zero demand for air travel.
“While we don’t have any plans to close hubs, when you say everything is on the table, we mean everything,” Scott Kirby, who becomes United’s CEO later this month, said on United’s first quarter earnings call on Friday. “There are no sacred cows.”
United has no choice, Kirby said. Roughly eight weeks ago, as some competitors were downplaying Covid-19s influence on travel, Kirby was the first U.S. airline executive to tell investors how bad the crisis might get, telling them United’s worst case modeling showed April revenue falling by about 70 percent. At the time, Kirby admitted that seemed impossible, but the result was much worse.
Revenue last month decreased by 95 percent.
“While we were more bearish than anyone, in hindsight, even our expectations weren’t nearly as bearish enough as to both the depth and duration of this crisis,” Kirby said.
Planning for the Worst
United’s team is unlikely to underestimate the crisis again. While other airlines have used first quarter earnings calls to play-up limited good news, Kirby said he continues to plan for the worst.
Now, Kirby is planning for zero net revenue, not just for the rest of this year, but into 2021. It’s not official forecast, he said, but it is a possibility.
“When we say, plan for the worst and hope for the best, we really mean it,” Kirby said.
United can survive in those conditions, only if it gets fanatical about cost cutting, Kirby told analysts. Considering United has slashed nearly every non-salary budget item, Kirby said there’s only one way to reduce United’s outlays enough to save the company – fewer employees.
There’s not immediately need for cuts, as United took federal assistance that requires it to keep paying workers through September 30. But after that — assuming the government doesn’t pump in more payroll protection money — United will need more drastic action, Kirby said.
“If demand remains significantly diminished on Oct. 1, we simply won’t be able to endure this crisis as a company without implementing some of the more difficult and painful actions,” Kirby said.
With fewer employees, United could survive into 2021 with its current liquidity plan, Kirby said. After worker cuts, it could go from burning about $40 to $45 million a day this quarter, to around $20 million a day by later this year.
“If we get to the fourth quarter and demand is zero, we will have to make short-term sacrifices,” he said. “We will do that, and we will get our cash burn down to $20 million per day, which obviously gives us an extremely long runway to make sure that we come out on the other side and emerge a great United Airlines together,”
What Will It Take For Improvement?
Some airlines seek to stimulate demand with fare sales and other promotions, but Kirby said United’s passengers are not likely to return, en masse, until they feel it’s safe to fly.
Like its competitors, United wants increase traveler confidence through new safety measures, including requiring masks, cleaning airplanes more thoroughly, and installing plexiglas dividers to separate customers and ground staff.
Still, that’s not going to get enough customers off the couch and onto aircraft, he said.
“The real issue for us about demand, however, is going to be that people feel safe and have some freedom to travel,” he said. “Disney World needs to be open. … And cafes and museums in Paris need to be open before people are going to go back. And conventions need to be open and running. It’s not just about airlines.”
United knows there’s pent-up demand for air travel, Kirby said. It even reported more people are searching United.com for 2021 spring break vacations than the airline might expect, this far in advance. But they’re not booking.
Even once they do book, there’s no guarantee the airline can resume normal operations. There could be a second wave of the virus, Kirby said, putting airlines back into the same position as in March, with customers clamoring for refunds and exchanges.
“We are going to be cautious about putting capacity back and beginning the recovery because there is certainly the possibility that there will be false starts,” he said. “We’re not going to jump in with both feet once we see the first green shoots.”
Earlier in this crisis, Kirby sometimes spoke about post-Covid opportunities, saying United could gather assets, such as gates and slots, abandoned by other airlines.
Someday, United may have that opportunity, but Kirby on Friday admitted he now has more short-term goals.
“We’ll look forward to the day where we can actually spend brainpower thinking about those opportunities,” he said. “But we’re a lot more focused on the near-term at the moment.”
United could abandon some assets, too. United has eight hubs, including a tiny one in Guam, and all may not be necessary if the airline emerges smaller. Kirby said decisions about hubs and routes likely will come after the airline decides how many employee to retain.
Airlines generally don’t like to talk about closing hubs before it is official, because they don’t want to anger local politicians. Airline hubs are economic engines for local economies, and lawmakers do not like to lose them.
First Quarter Results
United reported a net loss of $1.7 billion in the first quarter and a pre-tax loss of $2.1 billion.
As of April 29, it said its total liquidity was $9.6 billion, including $2 billion under its undrawn revolving credit facility.
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Photo credit: United Airlines jets on the ground in Cleveland. Jldohm / https://commons.wikimedia.org/wiki/Category:Aircraft_at_Cleveland_Hopkins_International_Airport#/media/File:United_B737_at_Cleveland_Airport.jpg