How the Big Four commercial airlines are positioned to exit the pandemic in 2021

Chris Fuhrmeister
Nov 25, 2020, 5:00am EST

The end of 2020 is a mere five weeks away, and certainly, no one running or employed by a commercial airline has any desire to linger in a year that has brought the novel coronavirus pandemic and an industry reckoning.

Recent positive developments on the vaccine front offer a light at the end of the tunnel in 2021. Next year, airlines may be able to exit survival mode and move into a post-pandemic recovery phase. While a number of regional carriers already have folded because of the pandemic, and more yet may not see the other side, none of the Big Four appear to be at risk of going under. Still, there will be winners and losers coming out of the most challenging aviation business climate on record.

Delta is in position to have the strongest brand name.

Atlanta-based Delta Air Lines Inc. (NYSE: DAL) has been clear about the image it's trying to project to customers amid the pandemic. Delta wants to be known as the safest, most trustworthy carrier — the one that puts customers first and foremost. It's made a big deal out of blocking middle seats to reduce capacity on flights, and it's the only airline that's committed to blocking middle seats through March 2021.

Like other airlines, Delta requires customers to wear masks on board its planes, and those who refuse receive bans from future Delta flights. CEO Ed Bastianroutinely sends company-wide memos — which are often released to the public — announcing how many people have been added to Delta's no-fly list. The airline has banned "nearly 550" customers as of Nov. 12, according to Bastian.

A recent J.D. Power report on travelers' sentiment at airports revealed a favorable view of heightened safety measures. Of the more than 85,000 respondents who were surveyed between Sept. 20 and Oct. 22, 48% said requiring travelers and airport staff is the most important safety measure that can be enacted to boost their confidence in air travel. Because the survey was in regard to airport — not airline — policies, there was no mention of middle seats. However, Bastian has said Delta's own surveys show its middle-seat policy "has gone to the number one reason why customers are choosing Delta."

"I think that's going to pay off, ultimately," Bob Mann, airline industry analyst with New York-based consulting firm R.W. Mann & Company, told Atlanta Business Chronicle. "I think people will remember that. I think the flip side will also be true, that they will think slightly differently about companies that chose not to [prioritize safety measures]."

Southwest is reaching new markets.

As long as there is a lag in business travel — which, depending on who is asked, could last anywhere from a year or two to a decade or more — budget-friendly airlines that do more leisure business will see revenues bounce back closer to normal levels. Of the Big Four, Dallas-based Southwest Airlines Co. (NYSE: LUV) is in the best position to grow its business.

With the number of daily flights were decimated amid the pandemic, Southwest found opportunities to add service at airports where gates were not previously available, including Chicago's O'Hare International Airport.

"It's a slot-controlled airport," Mann said. "It has limited facilities, and they would have had a tough time finding gates, other terminal facilities and commercially acceptable takeoff and landing opportunities absent the fact that traffic is down 70% and the amount of flight activity is down 50%. Nature abhors a vacuum, so what better time to find an entry point into markets like that?"




In addition to O'Hare, Southwest has announced new service to popular leisure destinations including Miami International Airport, Palm Springs International Airport, Montrose (Colo.) Regional Airport (Telluride and Crested Butte) and Yampa Valley (Colo.) Regional Airport (Steamboat Springs), Colorado Springs Municipal Airport and Savannah/Hilton Head International Airport.

"We are leveraging additional airports in cornerstone cities where our customer-base is large, along with adding easier access to popular leisure-oriented destinations from across our domestic-focused network," said Southwest CEO Gary C. Kelly, announcing the airline's third-quarter earnings on Oct. 22.

Delta has managed to avoid employee furloughs through at least summer 2021. While furloughs are still on the table for some Southwest employees, any cuts will be minimal compared to the numbers at United Airlines and American Airlines. With their workforces largely intact, Delta and Southwest will be able to quickly ramp up operations without training new hires as travel demand returns.

"Once you lay people off, it's a very, very difficult proposition to get people back," Mann said.

American has work to do.

Chicago-based United Airlines Inc. (Nasdaq: UAL) announced furloughs of roughly 13,000 employees, but this group does not include pilots, who would lose certifications if they were not regularly flying. As a result, United will be closer to Delta and Southwest in terms of its ability to quickly respond to increasing demand. Its average daily cash burn during the third quarter ($25 million) also was greater than Delta's ($24 million) and Southwest's ($16 million), but in the same ballpark.

United may not be as strong as Delta and Southwest exiting the pandemic, but it should not be far behind.

Fort Worth, Texas-based American Airlines Inc. (Nasdaq: AAL) is faced with a bigger challenge. American's third-quarter average daily cash burn ($44 million) was much higher than its Big Four competitors. It announced roughly 19,000 furloughs, and that includes about 1,600 pilots. American also ended the quarter with less liquidity ($13.6 billion) and greater long-term debt ($30 billion) than its competitors. The carrier was already struggling with debt prior to the pandemic. American may be forced to rethink how it does business in the aftermath.

"I think they will be the most stressed and have the biggest decisions to make about that," Mann said. "I think the guys that would have huge upside on recovery are Southwest and Delta, primarily, and then probably United in a next group. American will have the toughest time simply because of the way they entered and then, as a result, the amount of debt they've had to take on just to make it through.

"What will make it difficult for American is to generate the sort of cash flow, the sort of margins that will be required to retire that new debt."

 

I agree.

It isn’t just the “new debt” for AA, it’s also the old debt. They simply aren’t going to be able to generate the cash to pay off bonds coming due in the next few years while the aircraft they used as collateral has become much less valuable due to the drop in used airliner (and even new MAX prices whose original buyers have gone under). Chances were they would have had to simply sell new bonds to pay off the old ones anyway, but now that the collateral is less valuable, they’ll be paying much higher interest. The last bonds AA sold were requiring a yield of about 12%, while the ones they will be refinancing went for 2.5 to 3.5%.

Business is going to have to recover quickly or the debt service costs are going to eat them alive.