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The coronavirus pandemic has changed everything for the airline business.
Traveler concerns shifted to things like mask requirements and cleaning procedures from whether their upgrade will clear. And executives in C-suites around the world turned to daily losses — or cash burn — as the financial metric to guide their decision making through the crisis.
“[At] businesses where survival was at stake, it [is] the most important metric,” is how United Airlines CEO Scott Kirby described cash burn in October. At the time the carrier anticipated a $15 to $20 million daily loss in the fourth quarter, a forecast it raised last Friday to $24 to $26 million a day due to a “continued deceleration in bookings.”
While every airline measures its daily loss slightly differently, cash burn is generally understood as operating revenues minus operating costs with the result divided by the number of days in a given period. Calculations sometimes include government relief, for example proceeds from the federal coronavirus aid package or CARES Act, but often exclude tax and debt payments.
Airlines have made great strides getting cash burn down since Covid-19 hit. From early losses over $100 million a day, nearly every U.S. carrier expects cash burn below $30 million excluding debt service in the fourth quarter. Most of these reductions are from hard-won cost savings, including parking thousands of planes, suspending non-essential investments and culling tens of thousands of people from their workforce.
But daily losses upwards of $30 million are not sustainable, even if they are a step change improvement from April. Earlier targets by some airlines of breakeven by year-end have slid into the new year. And trade group the International Air Transport Association (IATA) expects the industry to hit breakeven by the end of 2021.
Now, all eyes are trained on the when travelers return as the key to the airline industry’s revival. When, however, is the key question.
“Not a lot has changed since June in terms of travel demand,” Southwest Airlines CEO Gary Kelly said in a Wings Club webinar earlier in December. But even as he said this, he agreed that there is pent up demand for travel when it is widely considered safe to do so.
Most estimates put a full recovery three- or four-years hence even as some travel has come back. Passenger traffic at U.S. carriers was down roughly 70 percent compared to last year during the week ending December 8, according to the latest data from trade group Airlines for America (A4A). This is a roughly 10-point improvement from where things stood at the beginning of July.
The snail-paced recovery is largely the result of the wily nature of Covid-19. U.S. infections rose temporarily in July putting a damper on some summer travel plans and have surged anew since September. The Centers for Disease Control and Prevention has warned Americans against holiday get togethers amid the continuing spike in cases.
The coronavirus surge — and subsequent warnings against travel — have hit airlines’ cash burn targets for the final quarter of the year.
At the beginning of December, Delta Air Lines CEO Ed Bastian said the slowdown in demand added an average of roughly $2 million a day to the carrier’s fourth quarter cash burn. Its updated forecast anticipates $12 to 14 million in daily losses excluding debt payments during the period.
On Tuesday, Air Canada raised its forecast by C$2 million ($1.6 million) to C$14 to C$16 million in daily losses in the final quarter of the year. And both American Airlines and Southwest have increased their estimates to near $30 million and $10 to $11 million a day, respectfully, in recent weeks.
One bright spot for airlines is the progress on Covid-19 vaccines. The UK, U.S. and other countries have begun mass vaccination programs starting with essential healthcare workers and those most at risk. However, most airline executives do not anticipate a broad travel recovery until vaccines widely available — something few expect before summer.
Public health experts agree the pandemic will likely get worse before it gets better. And air travel will limp along until things do, which could mean months of daily losses ahead for most airlines.
But the industry is, by and large, ready for a slow recovery. Airlines have built up war chests of cash to weather the crisis. The major U.S. airlines have billions of dollars of cash on hand to cover their costs for as little as 17 months at American to as long as 37 months at Southwest, according to a report from Raymond James on December 13.
Airlines are feeling so buoyant about their balance sheets that some have resumed limited non-essential investments. For example, United restarted its program installing its luxe Polaris business class seats on select jets.
“We have enough liquidity to get through the crisis. We’ve done what it takes,” said Kirby in October.