The aviation industry is facing a mega challenge with the effects that shutdown restrictions are having on the global economy. Commercial aviation is taking a major hit as air travel has declined significantly as a result of the shutdown and stay-at-home orders that many states and governments have issued. Airlines like Delta, American, and United are burning through their cash reserves. Delta is losing $60 million per day and other airlines are losing millions just to stay open. Boeing has shut down its production facilities; however, it seems to be in better shape than the airlines at this point.
Although many public companies have been criticized for maintaining share buybacks, dividends, and adding debt to their balance sheets to finance mergers, the airlines’ balance sheets are not in that bad of a condition compared to other public firms. Delta and United had $2.882 billion and $2.762 billion on hand respectively at the end of the 4th quarter of 2019. Delta and United’s cash has allowed them to stay afloat for a while. Other companies do not have that much cash on hand to hold out while operations are impacted. American only had $280 million on hand at the end of their 2019 4th quarter. They represent what has happened to many companies in the decade of low-interest rates that has encouraged them to keep minimal cash on hand. Now, these firms need to take action to ensure that they can fully return to the skies. To do this they will need to conserve cash, find new areas of revenue, prepare for the return to normal operations, and make long-term changes to the way they operate.
To weather and exit the storm, airlines can take steps to conserve cash, find new areas of revenue, and help to prepare from the return to normal service. The main area that needs to be focused on at this time is to reduce and eliminate any losses. Cash burn has to be stopped as soon as possible to ensure that the company can continue on when the economy is opened back up. To stop the losses, airlines will have to cut capacity and reduce the number of team members. Those cuts will be very tough; however, they will have to be done to have a greater chance for the majority of people to return to work once the economic shutdown is over. Keeping operations active with no passengers can be dangerous to the future of these companies as they are losing resources that can be used to help the company start back up. To save even more cash, the firms will need to end all share buybacks and dividends, which many firms have already done. Large amounts of cash will need to be saved to ensure that these aviation companies can deviate around this storm and any future storm that they may face. When operations fully restart, they may also need cash for the ramp-up in operations. In the meantime, airlines could also locate other ways to generate revenue.
Above is a photo of a Delta Air Lines Airbus A320 with American and Delta airplanes in the background at Los Angeles International Airport. The photo is by InSapphoWeTrust on Flickr and Wikimedia Commons. The photo has been enhanced by the FlyRadius team.
Finding other revenue sources will be key to help the airlines get through this period while also backup options in the future. Cargo operations are one way that the airlines could use to get through this shutdown. Airlines like United and American have started to do this. The only downside to this is that there may not be significant amounts of revenue from cargo flying as the other cargo companies may be able to handle the cargo traffic. Airlines could try to supplement ground shipping by offering cargo flights at cost or near cost so that they can keep their planes flying. Another option to raise revenue could be to reduce the number of people flying on each plane by allowing having significant amounts of space between passengers. That could involve having an entire row for a single passenger. The airlines could them market this as a feature of their service. Delta has recently stated that they will not be using the middle seat on their aircraft. Airplanes are also flying with almost no passengers, so this is already occurring to some extent. Airlines, need to market this feature so that they can attract a few more customers. Also, airlines could focus on selling at cost to ensure that they at least pay for expenses that required to keep their business in operation. Airlines need people to be present for most of the services that they do and with the stay-at-home orders in the U.S., there is not much they can do to get people on their planes. That means they will have to use their aircraft in other ways to generate revenue or find other creative ways to generate additional revenue.
Planning for a return to operations is one of the key areas that airlines and companies can work on so that they can return to normal as soon as possible. A plan that covers the required resources to resume normal operations will need to be created. One difficult factor with flying is predicting when people will start flying again and which city pairs will be the ones that return to normal quickly. It will have to be seen if people will return to skies immediately after the economic shutdown ends. There could be an influx of travelers, so airlines will need to be prepared for a sharp increase in demand. Having a plan in place to quickly ramp up operations will allow firms to capitalize on a strong increase in demand.
Long-term changes to the way airlines and other companies manage their cash flows and balance sheets will need to be made to help future operations. One factor that has been pointed out in this crisis is that many firms do not have significant amounts of cash to weather out any potential downturns. Monetary policy may have played a major role in creating the environment of not wanting to hold cash. Holding cash in what seems to be an unproductive manner can actually be beneficial in times like these. Companies will have to now have a plan in place for something that has never occurred in American history.
The main factor that will solve all of these problems is to help bring an end to the current situation. If airlines and companies can work together to find a way to end this, they will be able to return to the skies quickly.