Airlines in the United States and the Southwest have taken billions in new debt from private and government sources, burning $ 30 million to $ 70 million a day in order to navigate the depths of the COVID-19 pandemic when virtually no one is Fly.
Airlines had little choice, but what happens when the bills come due for all the new loans?
For the American based in Fort Worth, his debt amounts to about 40 billion dollars. Dallas-based Southwest is in the best position of any major airline, having incurred $ 7 billion in new debt since the start of the COVID-19 pandemic.
Airlines envision significantly lower profits for years to come, as a combination of health concerns and a worsening recession are expected to keep many travelers from jumping off planes until 2022 and beyond. And carriers will have to use more of those profits to pay off loans taken out due to the COVID-19 pandemic.
One analyst said American wouldn’t get by without much more government help or bankruptcy, an experience its executives know all too well. Another analyst downgraded the stock and set a target price of $ 1, showing little faith that it will have future value.
American is responsible for the paychecks of 130,000 employees through at least September, and Southwest has 60,000 workers nationwide. Both received government bailouts to keep workers on their payroll until then.
“The way forward is still very uncertain,” said Peter McNally, research analyst for investment firm Third Bridge. “I don’t know a lot of people who say things are going to bounce back for the airlines in September.”
Warren Buffett’s Berkshire Hathaway dropped its 10% stake in airlines in late April. Buffett called his investments a “mistake” and said he was worried about the increase in debt that airlines take on to survive.
“The world has changed for the airlines,” Buffett said at Berkshire Hathaway’s annual meeting on May 1.
Growing American Debt
Even before the COVID-19 pandemic became an international crisis, American had nearly $ 30 billion in debt dating back to before its bankruptcy in 2011 and its subsequent merger with US Airways.
American took on further debt by purchasing new fuel-efficient planes, such as the 737 Max still on the ground, and building its new headquarters and operations center in Fort Worth. It has also invested in airports across the country.
American has the lowest profit margin of any major airline and the most employees and aircraft.
But American’s revenue nearly doubled in 2019 to $ 45.8 billion from previous highs before the Great Recession and more passengers than ever were traveling. The company paid off $ 4.2 billion in debt in 2019 and refinanced other loans at lower rates.
The company started the year with around $ 7 billion in cash, enough to weather a downturn comparable to that experienced by the airline industry after the terrorist attacks of September 11, 2001.
Nothing could prepare airlines for a 95% drop in passenger numbers for months, followed by a prolonged decline in flights, McNally said. This plunge brought air travel to levels not seen since the 1950s.
“The plan at the moment is to overcome this,” McNally said.
Is airline bankruptcy imminent?
The American is paying a high price to fight his way through the pandemic financially. He spent $ 70 million a day in April and will still be using around $ 50 million a day by June.
For weeks, the airline paid more refunds than new bookings. Even though air travel is rebounding a bit this summer, analysts are unsure if American has the capacity to pull it off.
“My feeling is that Americans will not survive without government support beyond what they are currently receiving,” said Colin Scarola, analyst at CFRA Research. “Regardless of that, it will likely fail and go bankrupt. “
The last time American had a debt problem and filed for bankruptcy, it was saved by mergers. Scarola said mergers are less likely today because leverage is so high in the industry.
Duane Pfennigwerth, analyst at Evercore ISI, downgraded the US stock and set it a target price of $ 1, down about 90% from its current price and more than 97% from the price at which it was priced. was negotiated in February, before the pandemic. US stocks were trading around $ 10 on Friday.
By the end of 2020, American will likely have more net debt than annual income, Pfennigwerth said.
American Airlines CEO Doug Parker said the company was doing everything possible to weather the crisis. The company cut 2020 spending by around $ 12 billion, including all construction projects.
The company expects to have about $ 11 billion in cash by the end of June, including $ 5.8 billion in government grants and loans. He also asked for an additional $ 4.75 billion in government loans.
Most of those American-operated loans and lines of credit won’t mature for at least two years, Parker said. This should give Americans time to start making money again before all of these loans fall due.
“We have to get back to a point where we generate free cash flow in the future, and in doing so, we will be using it to pay down debt over time,” he said.
American also owns about $ 10 billion in “unencumbered assets,” goods such as airplanes and airport boarding contracts that have no loans. This does not include the value of its AAdvantage loyalty program.
After the US, Atlanta-based Delta Air Lines is the most indebted, with around $ 24 billion at the start of April. United has nearly $ 24 billion in debt. United has also taken more loans and offered actions to raise funds.
Opportunity for the southwest
Southwest has the lowest debt of any airline at around $ 6 billion at the end of March. The Dallas-based carrier has around $ 9.3 billion in cash and has been just as aggressive in asking banks for money as any other airline.
He burns about $ 30 million in cash a day with 60,000 employees. However, to stop this, it will be necessary to see the number of passengers increase or continue to reduce costs.
Southwest CEO Gary Kelly said the company has built up its cash reserves in case it needs it, but could end up using a lot of it to pay off creditors or the federal government for loans. $ 1 billion it contracted under the CARES law.
“Liquidity in this environment is asymmetric risk,” Kelly said on a call with investors in late April. “Not enough is a big problem. Too much, we will pay off the debt or buy the available assets opportunistically. “
Southwest also has the best opportunity to revert to previous flight levels, as most of its routes are domestic and the rest in North America. Transatlantic and transpacific flights are expected to return more slowly.
The airline also has more of its planes than any other carrier. Airlines often lease planes or have loans against them.
“It’s easier to park planes when you don’t pay for them,” Scarola said.
Southwest struck a deal on Friday to sell and lease 10 of its 737-800 and 10,737 Max 8 jets, which will give the company an immediate brew of $ 815 million.
Still, Southwest is aggressive in cutting costs. Kelly said the company is trying to avoid time off, but said it won’t make any promises. The company approached the unions to ask for cost-cutting ideas, a decision by union leaders interpreted as preparation for concessions over time.
Southwest has also continued to seek voluntary leave from employees and is working on early retirement programs to downsize. On 5,000 flight attendants and 821 pilots volunteered to take time off this month.
Over the past few days, Kelly has appeared on two national television news shows, primarily trying to convince passengers that it is safe to fly again and that Southwest is the better choice.
“There is more than one airline and there is competition,” Kelly told CNN Business this week. “It’s a position we’ve been in before. “