Airlines fight to exit ‘intensive care’

A white United Airlines plane in storage on tarmac.

Despite signs of modest improvement in passenger traffic and the lifting of many coronavirus restrictions, airlines aren’t relaxing efforts to shore up balance sheets and restructure in hopes of remaining solvent until demand returns in a meaningful way years from now.

Since Friday, several U.S. and international airlines have announced they are receiving more government assistance to stay afloat, implementing reorganization plans and laying off workers. Still, some airline executives are preparing scenarios for surviving, and thriving, beyond the next 12 months.

Southwest Airlines (NYSE: LUV) on Monday said in a regulatory filing that it received the second tranche of funding, worth $652 million, from the U.S. government’s emergency assistance program for airlines aimed at protecting jobs through September. The U.S. Treasury Department has disbursed $2.3 billion of the $3.2 billion committed by the government, about two-thirds of which is in direct grants and the rest in the form of low-interest loans. The remaining installments are scheduled for June and July. Southwest has 60,000 employees, many of whom have taken unpaid temporary leave while the airline operates at about 40% of its normal schedule. 

Public focus is on the $25 billion in workforce assistance to passenger airlines, but cargo airlines were also promised $4 billion.

On Thursday, Air Transport Services Group (NASDAQ: ATSG), a provider of outsourced charter transport, said it had reached agreement with the Treasury Department for non- repayable grants totaling $67 million for subsidiary Omni Air International and an additional $8 million for Air Transport International, which provides dedicated airlift for customers such as Amazon and DHL. The money will be paid in installments through September. In exchange, the company cannot implement involuntary furloughs or reduce employee pay and benefits, and will limit executive compensation through March 24, 2022. 

The U.S. government was motivated to support one of its largest carriers after the Defense Department’s order in March to restrict movement of all military and civilian personnel, and troop deployments, around the world, Susquehanna Financial Group airline analyst Christopher Stathoulopoulos said in a research note. 

Omni operates 15 passenger aircraft and is a major supplier of passenger airlift for the Defense Department, which is ATSG’s largest customer.  Contract work for the U.S. military by Omni, ATI and sister cargo carrier ABX Air was the biggest source of ATSG’s 63% growth in revenue last year, Chief Financial Officer Quint Turner told investors in early May, when the company reported a $134 million quarterly profit.

Continuation of military travel restrictions could put additional pressure on adjusted operating profits for ATSG and Atlas Air Worldwide, which has not applied for payroll support from the government. The different approaches may be explained by the fact that only a quarter of Atlas’ revenue comes from the Defense Department compared to about one-third for ATSG.

Domestic passenger airlines have made clear that they will have to significantly downsize their workforces after the government assistance ends because they expect to be operating fewer aircraft for several years until large numbers of people feel safe flying again, or can afford to do so after the pandemic. Their financial health is important to shippers too because they are a convenient way to ship cargo in normal times.

On Friday, United Airlines (NASDAQ: UAL) said it was eliminating 13 officer positions as part of a reorganization that began earlier in the week. Effective June 15, United will consolidate several departments and functions, with a single vice president for financial planning, corporate real estate moving to new Chief Customer Officer Toby Enqvist’s shop, environmental affairs moving under government affairs, and domestic and international line stations reporting to a single person. In total, eight officers, including Jim DeYoung, vice president of network operations, will leave the company by Oct. 1 and five positions will not be refilled.

Earlier in May, the airline said it would carve out 30% of its mid-level management and administrative staff. The next round of management and administrative changes will be announced before the end of June, and the entire reorganization process will be completed by August, United said in a memo to employees.

Meanwhile, Delta Airlines (NYSE: DAL) and its pilots union are in talks to avoid dismissals for 2,327 pilots who currently don’t have flying assignments after a reshuffling of pilots to different locations or airline types designed to align staffing levels with summer flying schedules. Reuters was first to report the pilot changes. The Delta Master Executive Council, part of the Air Line Pilots Association, said in a statement that it also is discussing potential early retirement for pilots who qualify, as well as voluntary leave programs. 

Future Vision

Travel demand has ticked up from the bottom six weeks ago, with Transportation Security Administration data for screened passengers show a decline of 90.4% in May from the year-ago traffic compared with 95.3% in April. Industry officials say leisure travel to beach and mountain destinations is luring travelers, while business and international travel continue to lag.

United CEO Scott Kirby said last week he is looking beyond short-term survival and trying to manage the recovery by minimizing involuntary furloughs so the company can seize the moment to grab market share when demand rebounds. One option was recently modeled by Brussels Airlines pilots, who offered to work fewer hours to keep more on staff after the company last month said its restructuring would involve shedding 25% of its workforce.

And in a video message posted on Southwest Airlines’ community blog, Chairman and CEO Gary Kelly said the airline is trying to reimagine a long-term future after each department was instructed to develop 30-day, 60-day and 90-day plans for responding to the crisis and navigating through the recovery. 

“Since the company is in intensive care, so to speak, our immediate planning is focused on today,” but Southwest is developing flexible long-term scenarios to position the airline for whatever health and economic conditions exist at the time, he said.

“We’re preparing contingency plans if radical changes are required in order for us to survive,” Kelly said. Aircraft levels will vary depending on the scenario that materializes, adding that he hopes the 737 MAX will be cleared to return to service by the fourth quarter because “tis the most cost-effective plane in terms of fuel and maintenance” and provides a great customer experience.

“When traffic returns we’ll compete hard for customers, understanding it will be a brutal low-fare environment as there are far more airline seats right now and for some time than there are customers,” Kelly said. 

Southwest Airlines has a good chance of getting back on its feet because it is the largest U.S. domestic carrier. It also has a strong balance sheet with $12 billion in liquidity that could carry it well into 2021 with zero revenue,a loyal following, single-fleet type (Boeing 737) and a strong management team experienced at dealing with downturns, says Helane Becker, airline analyst at Cowen investment bank. The delay in receiving more MAX aircraft from Boeing has actually helped the company in the short term, she added in a note to clients.

International response

Deutsche Lufthansa AG (FRA: LA) on Monday also said it has agreed to a financial aid package from the German government and will reluctantly accept European Commission conditions to relinquish access rights at its hubs in Frankfurt and Munich. 

The company is urging shareholders to approve the deal at a June 25 general meeting even though they will take a haircut.

“It must be clearly stated, however, that Lufthansa is facing a very difficult road ahead,” Board Chairman Karl-Ludwig Kley said in a statement. 

“Stabilizing our Lufthansa is not an end in itself. Together with the German government, it must be our goal to defend our leading position in global aviation,” chief executive Carsten Spohr added. “We are grateful to all those involved in the stabilization process, including our customers, employees and shareholders for this perspective. We will not disappoint them and will now work hard to ensure the competitiveness and future viability of our airline group.”

Analysts expect international travel to take longer to bounce back than domestic travel. Lufthansa depends heavily on international business and the company is planning workforce reductions “in the most socially acceptable way possible,” Spohr said. 

Emirates, which operates a long-haul network out of Dubai, also said in a statement that it will let go an undisclosed number of employees because of the financial hardship caused by COVID-19. Fellow Gulf Arab carriers Etihad and Qatar Airways had previously announced layoffs.

Emirates cut salaries and wages after drastically reducing passenger operations in March in an effort to avoid job reductions, and Chairman and CEO Sheikh Ahmed bin Saeed Al Maktoum said then the United Arab Emirates would provide financial assistance. Emirates has seen a drop in cargo revenue because many of its wide-body passenger aircraft are grounded, but cargo business is still strong compared to passenger because of high demand for freighters and passenger jets used as auxiliary cargo planes.

Airlines are taking tentative steps to restore passenger service, as countries slowly reopen their economies. Italy opens its borders to regional and international travel on Wednesday, giving the tourism industry its first sign of optimism since the nation went into lockdown in early March.

United Airlines, for example, has increased its July schedule to 25% of normal, an improvement from May when the carrier operated at 10% of capacity. The schedule includes the increase of international service to Europe from Washington, D.C. and San Francisco, more service to Latin America and the restart of service to Tokyo-Haneda, Hong Kong, Singapore and Seoul. 

Last week, Austrian Airlines said it will resume some regularly scheduled flights on June 15 after shutting down operations for almost 90 days. Over a two-week period, it plans to bring back 5% of its regular capacity to service 37 European destinations on a limited basis, with more cities phased in over the following weeks. In the initial phase, Austrian will primarily deploy smaller aircraft such as the Embraer 195 and the Dash 8 turboprop.

(Click here for more FreightWaves articles by Eric Kulisch.)