United Airlines: Least worst is best

When it comes to airline economics, being the least worst of the bunch is a plus. 

United Airlines (NASDAQ: UAL) executives on Wednesday took pride that the company’s record-setting second-quarter net loss was only $1.6 billion. They said the airline is outperforming big domestic competitors during the COVID crisis by better managing capacity and that stanching financial losses now is a harbinger for strong results when the economy improves. 

Last week, Delta Air Lines (NYSE: DAL) reported a $5.7 billion loss. American Airlines (NASDAQ: AAL) on Thursday showed a $2.7 billion net loss. Southwest Airlines (NYSE: LUV) had a net loss of $915 million, but is primarily a domestic airline while United has a large international network. United officials were confident the airline performed comparatively better and showed the lowest average daily cash burn among its closest network peers.

Profitability, not market share, has been the priority from the start.

“That’s important because minimizing the depth of the hole we dig in this crisis is critical to preparing United to thrive on the other side,” Scott Kirby said in his first conference call with analysts about the company’s earnings since taking over as CEO in May. “If we can produce leading financial results even with these larger headwinds right now, just imagine what we’ll do in a healthier operating environment.”

The Chicago-based company’s clear-eyed, realistic assessment about how much the pandemic would devastate demand enabled planners to quickly reduce available seats, dramatically cut operating costs, source $16 billion of capital, put resources toward cargo operations and slow the expenditure of cash reserves, officials stressed.

United also bested American and Delta on pretax loss — $2 billion to $$2.7 billion and $7 billion, respectively.

“We believe our careful management of capacity, pricing and cargo during the quarter is a primary driver of our good results relative to our network peers in terms of absolute losses and cash burn,” said Andrew Nocella, the firm’s chief commercial officer. And, he added, United is sticking to that disciplined approach.

The carrier was able to slow the bleeding despite its heavy dependence on corporate and international travel because it was willing to reduce overall capacity by 88%, he said.

The company expects 65% less consolidated system capacity versus the third quarter of 2019. It slightly adjusted down its August schedule as travel demand, which improved in June, stalls with the coronavirus sweeping across the Sun Belt and quarantines in New York and New Jersey. In the past two weeks, the number of passengers going through airport security has gone down for the first time since early May, according to the Transportation Security Administration.

Other airlines have been more anxious to put capacity back in the market to see if they can stimulate demand, which forced United to reluctantly match them until the market shifted, Cowen airline analyst Helane Becker said in a research note.

Domestic yield per seat in July and August will be worse than late June because of the reduction in bookings and increased flight availability, Nocella warned. 

Planes in the next few weeks are expected to be less than half full, a reduction from the 57% load factors the airline achieved last month. The lost efficiency is partly explained by United limiting the overall number of people on board and separating customers whenever possible to reduce chances for infection. United switched to a larger plane 66 times per day in May and June to space out customers. It predicts fewer than 15% of flights this month will operate with more than 70% of seats filled.

“We expect to have the most conservative deployment of third-quarter capacity of anyone,” Nocella said.

International and corporate markets

Industry executives and analysts say international travel will take longer to bounce back because of on-off travel restrictions and travelers’ fears of being stranded in a foreign country. Nocella asserted that United’s coastal gateway hubs in San Francisco, Los Angeles, Houston, Washington, D.C., and Newark, New Jersey, will enable international business to recover quicker than at other airlines.

Corporate travel, down 96% in June at United, has also been slower to return than leisure travel. Officials said the widespread closure of most offices could actually spur business travel for small group settings. Conferences won’t happen until the pandemic passes.

“We are social creatures. Video technology is proved as a reasonable temporary measure, but we do not expect it to replace meeting in person over the long term. In fact, we have a hypothesis that more work-from-home employees may drive increased business travel over the medium term as some people trade their commutes by cars for less frequent commuting by airplane from a remote location,” Nocella said.

In an interview on CNBC, Kirby suggested that as soon as a company loses a corporate account to a competitor that negotiated in person it will have no choice but to put people back on the road.

“So in the short term, we will make appropriate adjustments to our network to reflect less business traffic by putting a higher proportion of our capacity into the leisure and [family visitation] market,” Nocella said.

Officials projected travel revenue would gradually improve from about 17% of last year’s level to 50% and then plateau until a vaccine is widely distributed, which they don’t expect until late next year.

Headcount reductions

United has used its strong balance sheet to build a cash cushion through debt offerings, stock sales, and emergency grants and loans from the federal government. Capital included $6.8 billion from the novel use of its MileagePlus program as collateral. To preserve that liquidity, United has slashed operating expenses and capital expenditures by more than half, bringing its average daily cash burn down to $40 million. 

CFO Gary Laderman said United has an agreement with Boeing to push delivery of 737 MAX aircraft beyond 2022, which reduces the need for $700 million in pre-delivery deposits this year.

United has not yet permanently retired any aircraft because, Kirby said, executives want to get a better sense of how long COVID will constrain the economy before making a decision. A handful of old Boeing 757s likely will be the first to go if there isn’t enough demand.

His team expects cash burn to be $25 million per day this quarter (similar to Delta’s $27 million daily burn rate in June), and $15 million to $20 million in the fourth quarter, but said all the efforts aren’t enough to survive unless the workforce shrinks.

About 36,000 employees received notice earlier this month that their jobs could be eliminated by Oct. 1, when government assistance expires. More than 6,000 employees have taken voluntary separation packages and an additional 26,000 have volunteered for temporary unpaid leave. The shared goal of management and the unions is to reduce the workforce in a way that minimizes the toll on workers, Kirby said.

“We know that there’s going to be a recovery. And if we can keep people temporarily, maybe not on the payroll full time, but engaged, connected to the company, certified, trained and ready to bounce back, because the recovery is going to be quick [once a vaccine is available], that’s really important to us,” he said.

Kirby in May said he hoped to avoid involuntary furloughs so workers can be quickly recalled.

Click here for more FreightWaves stories by Eric Kulisch.

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