Federal aid provides temporary lift as airlines face unprecedented dismantling

Big silver plane takes off from Los Angeles Airport

Airlines received a $58 billion lifeline in the economic relief package President Donald Trump signed into law Friday, but it doesn’t change the dire outlook for an industry that could be substantially smaller by the end of the year.

The money will temporarily help airlines pay their 750,000 workers and stem the financial bleeding caused by the plunge in air travel associated with the coronavirus pandemic. Industry officials and analysts say they expect a slow, gradual recovery in business that extends well beyond the government’s payroll support through Sept. 30.

“This federal assistance buys us time to adapt to this new environment and assess how long it will take for our economy to begin to recover,” United Airlines CEO Oscar Munoz and President Scott Kirby said in a letter to employees. “We expect demand to remain suppressed for months after [the virus stops spreading], possibly into next year.”

Even with more than 60% of its seat capacity eliminated for April, United [NASDAQ: UAL] expects load factors to fall into the teens or single digits, and even deeper cuts are being planned for May and June, the leaders said.

U.S. carriers are burning through cash reserves as cancellations far outpace new bookings. Planes are only 10% to 20% full, according to Airlines for America. 

Helene Becker, senior research analyst at Cowen investment bank, estimates airlines have lost five years worth of revenue — back to 2016 levels — and will have 100,000 fewer employees by the end of the year.

Airlines are evaluating the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act to determine how much they want to participate. There is $29 billion for direct payroll assistance for workers through the end of September. Airlines can tap the grants as long as they don’t implement involuntary furloughs or reduce pay and benefits (read more here for a detailed breakdown of the emergency aid for airlines). Another $29 billion is set aside for loans and loan guarantees that have strings attached, including the ability for the government to take equity stakes in companies that borrow money.

With both tranches of aid, cargo airlines are eligible for $4 billion.

American Airlines [NASDAQ: AAL], which announced plans to cut its domestic schedule 80% by May, said it is not sure yet if it will borrow from the government. “To be clear, American must apply for the loans and worker assistance grants, and there is still uncertainty as to exactly what the conditions will be. But we know the government values what we do as an essential service, and they are committed to helping us keep our team flying through — and eventually out of — this crisis, so we are optimistic that the terms will not be onerous,” CEO Doug Parker and President Robert Isom said in a letter to employees.

Most carriers are looking for other sources of capital — taking out term loans, drawing on lines of credit — or to adjust loan covenants. UPS [NYSE: UPS] for example, recently raised $3.5 billion.

In the meantime, airlines are cutting operating costs to the absolute minimum, suspending 80 to 90% of flight schedules, canceling capital expenditures, forswearing stock buybacks and dividends, and urging workers to take voluntary unpaid leave in a furious effort to preserve cash.

Delta Air Lines [NYSE: DAL] CEO Ed Bastian said in a corporatewide memo that 21,000 employees have signed up to take leave for various periods, according to CNBC.

Further rounds of federal economic relief aimed at preventing a depression are likely in the near future. If pass-through grants supporting airline payrolls aren’t extended airlines could layoff many workers after Sept. 30.

Air traffic won’t begin to noticeably improve until the fourth quarter and won’t reach 2019 levels until 2022 at the earliest, Becker predicted during a Friday webinar hosted by news site Airline Economics. Corporate travel will likely recover faster than leisure travel, though it may not return to precoronavirus levels until 2023 or 2024 as companies get comfortable with video and teleconferencing as a regular way of conducting business.

Consumer confidence will take a long time to rebound because of the level of unemployment and the deep financial impact on family balance sheets, Becker added.

“While we agree with the notion that there will be pent-up demand, we disagree that people will rush to get on planes. Many people who have jobs and are working from home are being told that they need to take some time off now, and this constitutes their annual leave. So much for those travelers this summer.

“Others are taking voluntary leave and won’t be getting paid, so they aren’t planning on traveling anytime soon. … No one wants to book a summer vacation, even a long weekend, until they know this house arrest/quarantine period will be over. As a result, we expect there will be a lot of late bookings as the year goes along,” she said.