Airlines continue to rationalize networks amid collapse in travel

A large airplane seen through big glass window of airport terminal.

(Updated 4:30 P.M. EST with details on JetBlue)

American Airlines and British Airways announced Thursday they will cut passenger capacity deeper and further as the leading airline industry group published figures showing a steep drop in February traffic. 

The sobering reality for airlines, which are operating at skeleton levels to survive the near-total halt in travel due to the coronavirus pandemic, is that data on passenger demand in subsequent months will be many times worse. The elimination of so much passenger traffic is also a negative for cargo shippers, who rely on belly space on passenger aircraft to move goods and are having trouble finding alternative transport – even at huge premiums.

International Airlines Group, the multi-national holding company that includes British Airways, Iberia and Aerlingus, said it will cut the number of passenger seats in service by 90% in April and May, up from plans two weeks ago to downsize operations by 75%. 

American Airlines said it is sidelining more than 60% of its international capacity for the peak summer travel season, delaying the launch of several new routes and the launch of new winter seasonal service to New Zealand until 2021. The drawdown will result in an 80% reduction in Pacific capacity, a 65% reduction in Atlantic capacity and a 48% reduction in Latin American capacity.

Previously, American (NASDAQ: AAL) had reduced international capacity by 75% through early May and planned to cut domestic flying through May by up to 80%

This week Air Canada said it would reduce capacity by 85 to 90%, while Panamanian flag carrier Copa Airlines shut down until April 21 and Mexican low-cost airline Volaris is reducing April capacity by 80% from prior plans.

Meanwhile, British Airways announced Thursday that it reached an agreement with trade union Unite to suspend more than 30,000 cabin crew and ground-based workers in April and May at 80% of their base pay. The airline also reached agreement with its 4,000 pilots to take four weeks of unpaid leave over the same period. The deals were made possible by the U.K.’s job retention scheme, under which employers will be reimbursed for 80% of pay and benefits  given to workers on leave of absence.

Similar government support in Spain is helping more than 17,000 employees at Iberia.

Airline trade groups have warned that without rescue aid – direct grants, loans and loan guarantees, and tax relief – huge numbers of workers are at risk of losing their jobs. 

“This is aviation’s darkest hour and it is difficult to see a sunrise ahead unless governments do more to support the industry through this unprecedented global crisis,” International Air Transport Association (IATA) Director General Alexandre de Juniac said in a statement.

The U.S. government provided $29 billion in grants to temporarily subsidize airline payrolls and offered more aid through loans, while some governments are permitting airlines to issue travel vouchers instead of ticket refunds to customers. 

Qatar Airways and Virgin Atlantic have already indicated they will seek aid from their respective governments.

IATA reported April 2 that passenger demand fell 14.1% in February, reflecting the increase in border closures and the collapse in travel demand within China and to, from and within the Asia-Pacific region. International passenger traffic was down 10.1%, while Asia-Pacific volume fell 30.4%.  

The industry stands to miss out on $252 billion in projected revenue this year and lose $39 billion during the second quarter.

U.S. carrier JetBlue says it is bringing in $1 million per day compared to $22 million on a typical April day.

“We are spending far more on running the airline than we are making in revenue and, as a result, we are burning through over $10 million of our savings each day. Despite our position of financial strength, this is simply not sustainable. We are leaving no stone unturned, cutting pay for officers (VPs and above), introducing voluntary time off programs, reducing capacity, re-negotiating Business Partners agreements, and stopping or pausing 75% of our major infrastructure, technology and real estate projects,” the New York-based airline said Friday.

According to a survey, one in five Americans said they wouldn’t travel again until 2021 because of concerns over contracting COVID-19 or spreading it to friends and family. The poll of 1,250 people was conducted by travel company Upgraded Points. 

Airlines are trying to be as flexible as possible to attract future bookings, with Delta Air Lines announcing on April 3 that it will waive change fees for two years for tickets booked in the next two months and Lufthansa Group allowing all fares and ticket prices to be rebooked at the new, lower fare structure.

Airlines are rapidly right-sizing their networks to preserve cash, eliminating capital expenditures, canceling stock buybacks, seeking to defer aircraft lease payments, transitioning planes to cargo-only service, and borrowing billions of dollars. Some airlines have shut down completely and many only have 10% to 15% of their capacity in operation.

Experts say it could take two to five years for passenger traffic to reach 2019 levels. 

State-owned airlines and airlines with significant cash reserves such as Ryanair, easyJet, Singapore Airlines, IAG and Spirit Airlines have more of a cushion to survive the crisis, while 49 airlines are at extremely high risk of failure due to low cash reserves, weak past performance and unclear government support, according to the International Bureau of Aviation, an industry consultant.

As much as half of the world’s fleet is parked, estimates Helane Becker, lead airline analyst at the Cowen investment bank, and many will never resume service. 

For example, American Airlines previously announced plans to retire its Boeing 767 fleet and accelerate retirement of its 757s, but earlier this week it said it was also retiring 76 Boeing 737s and nine A330-300s, as well as 20 Embraer 190s.

JetBlue said it has parked more than 100 aircraft in the Arizona desert and airports around the country.

“We believe the airline industry will look very different when we get to the other side of this. There are at least 158 Airbus A380s, for example, that are parked, and most will never fly again,” she wrote in a note to investors. “The world’s airline fleet will be smaller, the world’s airlines will be smaller and the fleet will likely be younger and more fuel-efficient.”

Air Canada (TO: AC) is among the airlines expected to permanently park inefficient aircraft, Becker said.