“The liquidity is at record levels,” said Philip Baggaley, chief credit analyst for the airline industry at Standard & Poor’s. “That’s good, and it’s one of the few strong points they have at this point.”
The lion’s share of the borrowing and cash, then, comes from from banks and Wall Street. Like a struggling family flooded with credit card offers, the airlines have a lot of people eager to give them cash.
The borrowing has added about $40 billion in long-term debt to the balance sheets of the nation’s airlines.
“I think the general feeling is they’re wounded but they’re going to make it,” said Baggaley. The low interest rate environment has helped the airlines, as investors and banks looking for yields have been willing to lend to the airlines, he added. All the carriers except Southwest have junk bond credit ratings.
They have also made deep cost cuts, even with government help that prevented them from making permanent, involuntary job cuts.
The airlines used buyouts and early retirement to cut about 16% of the staff they had at the start of 2021. In recent weeks, American and United sent out layoff notices to 27,000 employees between them, saying they could again be furloughed unless there is a third round of government assistance before April 1.
The cost cuts slashed the rate at which the airlines burned through cash by about half between the second quarter to the fourth quarter last year, even as air travel and revenues remained a fraction of what they were before the pandemic.
But even as they trimmed the pace of cash burn, the four airlines combined blew through $115 million a day over the course of the final nine months of 2020. And they expect to continue burning through cash, albeit at a slower pace, in the first half of 2021. Building a substantial cash reserve is the only sure way to get through this unprecedented financial crisis, airline executives say.
“Our industry still has a long path to recovery ahead,” said American CEO Doug Parker on recent conference call with investors. He said the accumulation of cash, combined with cost cutting, built up “gives us confidence that we are well positioned for the year ahead and the long term.”
“I’ve got 10 straight months of data saying that people are ready to travel in six months. It keeps saying the same thing,” American’s Parker said in an interview on CNBC recently. “What I do believe is that once people are comfortable, it will come back relatively quickly. There is huge pent-up demand to travel. We hear it everywhere we go. But no one is going to travel until there are things to do when you travel, and until the vaccine is distributed and the pandemic is largely eradicated.”
S&P’s Baggaley believes airlines “are past the worst of it,” he said. None of them have filed for bankruptcy, and he believes the odds are that they won’t.
“It’s a reasonable concern that they are going to emerge from this with a lot more debt,” he said.