With eye on rebound, United looks for alternative to furloughs

White jets with blue tails at airport terminal

Domestic airlines this week announced plans to permanently eliminate large numbers of management and administrative jobs as a prelude to even larger reductions in frontline forces. But United Airlines (NASDAQ: UAL) CEO Scott Kirby dismissed furloughs as an a primary option, saying they are a temporary solution that undermines the ability to capitalize on growth opportunities when coronavirus fears subside and travel takes off again.

No one knows when strong demand will return, so United’s priority is to create an extremely flexible cost structure centered on labor that allows the company to make money at any level of traffic, Kirby told investors Thursday. 

The company is negotiating with unions to adjust contracts to a new world in which passenger business could take years to recover to 2019 levels.

“The reality is our contracts were not designed for a world where demand might be down 50% or 70%. They were designed for a recession where demand is down 5% and you furlough 5% of the people,” the new CEO said in a virtual presentation to the Bernstein conference. 

“If you furlough tens of thousands of people, the bounce back is almost impossible. You lose the experience, you lose the people, all the training that has to occur,” he said. “And so finding a solution where we don’t furlough is really about the bounce back. It’s not as much about getting through the crisis as it is about bouncing back.”

From the beginning, United stood out in not sugarcoating the severity of the coronavirus travel restrictions on airline finances and jobs. The company slashed passenger operations, as well as discretionary and capital expenditures, to the bone; borrowed heavily from capital markets to increase liquidity; and encouraged tens of thousands of employees to take voluntary, unpaid leave for various lengths of time. 

United, which lost $1.7 billion in the first quarter, also warned early on that government coronavirus relief to protect industry jobs through September was a temporary salve and that mass layoffs were inevitable as airlines restructured into smaller entities. The Chicago-based carrier is receiving $5 billion in U.S. assistance. Two-thirds of the amount is in direct grants, but the money covers slightly more than half of the airline’s $6.5 billion in salary and benefit expenses over a six-month period.

In mid-May, United began offering voluntary separation agreements in an effort to reduce management and administrative headcount by more than 30%. The deals include some continuation of pay, access to medical benefits and travel privileges. Midlevel employees are also being forced to take 20 unpaid days off and use up 50% of vacation by the end of September.

On Thursday, American Airlines announced a similar 30% reduction in middle-management and support staff, as well as benefits.

And in an internal memo shared with the media on Wednesday, Delta Air Lines CEO Ed Bastian said the company will soon begin offering eligible employees an enhanced early retirement package and a voluntary separation for most employees. Delta is also discussing with labor representatives a similar early retirement plan for pilots, details of which could be released next week.

“The only thing we can be sure of today is that the more people choose to depart voluntarily, the greater our chances for avoiding furloughs this fall,” he said.

Prosperity Over Survival

Kirby said an improvement in labor relations under Oscar Munoz, who retired as CEO earlier this month, and the company’s openness about the slow market recovery from the pandemic make it easier to achieve union concessions.

“We’ve been upfront and realistic with our people. That transparency goes a long way,” he said. “People may not like the message, but, by and large, they appreciate the … honesty. And that sets the groundwork for actually getting deals done. If you’re saying everything is rainbows and sunshine and then you come in one day and say, ‘Oh, but now we need to furlough 30% of the people,’ that’s a really, really hard conversation.”

United’s goal is a temporary workforce accommodation that will enable the company to prosper again.

“Being able to jump on the recovery and not only defend the existing markets we have, but to take advantage of the fact that not everyone is going to be able to bounce back quickly” will be an advantage, Kirby said. “We know what we can do under the existing contracts to survive. The negotiations with the unions are not about the survival, they are absolutely about the bounce back.”

Some industry observers say some U.S. airlines will be forced into bankruptcy, but Kirby, who was United’s president for four years, ruled that out as a viable option.

“It would be the absolute last thing we could do. I can’t imagine why people think that’s a good business strategy. … It’s worse for shareholders, for creditors, for employees. It’s worse for every constituent that we have and that is not even remotely in the plans at United Airlines,” he said. 

American Airlines (NASDAQ: AAL) CEO Doug Parker a day earlier said bankruptcy is not an option even though the carrier came into the crisis with a large debt burden.

In the past two weeks South American carriers Avianca and LATAM Airlines have moved to restructure under U.S. bankruptcy laws. Smaller airlines have also gone into receivership or shut down, and others warn they could too without bailouts from national governments.

United stands to lose money after lending Avianca money to facilitate a joint venture.

Once the immediate crisis is past, the third-largest airline by passenger volume will focus on repairing its balance sheet. United’s goal is to bring its cash burn down to $20 million by the fourth quarter and be cash flow-breakeven soon after. Spare cash will go toward paying down debt rather than capital expenditures.

Kirby said the airline will spend nothing for new aircraft for the next two or three years, with general capital expenditures annually ranging between $500 million and $1 billion, down from about $4.7 billion total in 2019. Instead of retiring some planes at 15 years of age and selling off the parts, United will take the less risky approach of holding onto aircraft until they are 20 or 25 years old even if they are less efficient to operate.

“I think it’s going to be awhile before we’re taking new deliveries” or leasing aircraft, the CEO said, adding that he’s going to wait out the market before deciding on whether to retire any aircraft types from the fleet.

A bright spot for many passenger airlines, including United, is the surge in cargo business. United has completed more than 2,000 cargo-only flights transporting more than 30 million kilos of cargo since March 19, United Cargo President Jan Krems said in a message to customers. This week the carrier is planning 280 dedicated cargo flights to 21 destinations.