Airlines face $39 billion in Q2 losses, industry group warns

Air Canada planes at the airport gate on a rainy day.

Air Canada and Lufthansa announced workforce reductions on March 30 to further reduce costs amid a cash crunch that will result in airlines losing $39 billion in the second quarter because of  global coronavirus restrictions.

The International Air Transport Association (IATA) on Tuesday said the financial losses will be greatest in the next quarter when revenue is expected to fall 68% on a 71% drop in passenger demand. The trade group said member airlines are expected to burn through $61 billion in cash reserves.

IATA last week projected a full-year revenue decline of $252 billion for the industry.

A small bright spot is cargo service, without which revenue losses would be 3 points higher next quarter. All-cargo carriers are deploying all available aircraft now and passenger airlines are flipping airplanes that would be parked into dedicated cargo service to make up for the lost cargo capacity available in normal passenger operations.

The updated financial picture underscores the fragile future for airlines and the possibility that some could go under. Kroll Bond Rating Agency says it expects a significant increase in the number of airline bankruptcies this year from about 20 in 2019, when industry profits were strong.

Even though airlines are slashing operating and capital expenses and the price of jet fuel has fallen sharply, they still can’t stay in the black. The airline group said airlines would eliminate about 70% of their variable costs – largely in line with capacity reductions – and that their fixed and semi-fixed costs would be halved in the quarter. Yet bookings and related fees have dried up and airlines face a $35 billion second-quarter liability for cancellation of existing bookings. 

“Airlines cannot cut costs fast enough to stay ahead of the impact of this crisis” and need relief from governments, IATA Director General Alexandre de Juniac said in a statement. “Airlines need working capital to sustain their businesses through the extreme volatility. This is a vital time buffer so that the sector can continue to function. In turn, that will help preserve the sector’s ability to deliver the cargo shipments that are vital today and the long-term connectivity that travelers and economies will depend on in the recovery phase.” 

He applauded Brazil, Canada, Colombia and the Netherlands for allowing airlines to offer passengers travel vouchers instead of refunds.

Airlines are desperately trying to preserve their workforces, but some are succumbing to the financial pressure. 

Air Canada on Monday said that it will reduce capacity by 85% to 90% in the upcoming quarter, place 15,200 unionized workers on off-duty status and furlough about 1,300 managers. The workplace reductions are scheduled to take place April 3 and intended to be temporary. 

“To furlough such a large proportion of our employees is an extremely painful decision but one we are required to take given our dramatically smaller operations for the next while,” said CEO Calin Rovinescu in a statement. “It will help ensure that Air Canada can manage through this crisis that is affecting airlines everywhere.”

The downside of involuntary unpaid leave is a slow rebound once the pandemic subsides and people are free to travel.

“Unlike most other businesses, once we materially downsize it would take months to start up again. This is because our team members would require significant training time and aircraft would need to be gradually brought back into service,” American Airlines CEO Doug Parker said in a video message to employees last week. 

Reuters reported that the coronavirus situation has prompted American Airlines to accelerate retirement plans for many jets as part of its fleet modernization.

In addition to the retirement of 34 Boeing  757s and 17 Boeing 767s announced just two weeks ago, American now plans to also mothball 76 Boeing 737s it acquired between 1999 and 2001, nine Airbus A330-300s and 20 Embraer 190s, sources told the news agency.

U.S. airlines are benefiting from a government aid package that provides $29 billion in grants to pay workers through the end of September. Another $29 billion is in the form of loans and loan guarantees that come with conditions airlines may, or may not, be willing to accept. 

Canada has not protected airlines the same way, but Prime Minister Justin Trudeau announced on March 30 a national wage subsidy program will be unveiled within days, which Air Canada said could impact its cost-mitigation plans. Trudeau has also acknowledged that airlines and other industries will need additional help. 

Meanwhile, Deutsche Lufthansa AG said more than 27,000 cabin and ground workers have agreed through labor representatives to work shorter hours. In some cases, 100% of an employee’s hours could be canceled. The goal is to eliminate all redundant work. The airline said it will pay 90% of the net salary lost from short-time work, but can’t guarantee it will be able to continue compensation at that rate. 

Lufthansa management and board members are also taking pay cuts.