United Airlines (NASDAQ: UAL) expects to receive $5 billion in payroll subsidies to preserve jobs through the end of September, but the emergency aid won’t be enough for the company to survive without more drastic measures, officials say.
The workforce protection grant is merely a Band-Aid, CEO Oscar Munoz and President Scott Kirby told employees last week. They warned mass layoffs are likely after Oct. 1 because labor only represents about 30% of total costs and travel demand is expected to be suppressed into 2021.
“The challenging economic outlook means we have some tough decisions ahead as we plan for our airline, and our overall workforce, to be smaller than it is today, starting as early as Oct. 1,” they said.
The Chicago-based carrier on Monday said it suffered a pretax loss of $2.1 billion in the first quarter, including a $50 million write-down of its China routes because of the suspension of flying due to the coronavirus outbreak. Revenue fell 17% to $8 billion.
In a regulatory filing, United said it has $6.3 billion in liquid assets after recently borrowing $2.75 billion. It also has applied for $4.5 billion in loans from the U.S. Treasury Department under the government’s economic rescue plan for the airline industry.
The financial situation will only get worse. Fewer than 200,000 people flew United during the first two weeks of April compared to more than 6 million during the same period in 2019, a 97% drop. “And we expect to fly fewer people during the entire month of May than we did on a single day in May 2019,” the executives said.
Management continues to cut fixed costs, investments, supplier contracts and executive pay in an effort to bring operating size in line with income.
Toward that end, the fourth-largest airline in the world by revenue and passenger miles traveled has agreed to sell 22 aircraft on order from Boeing to Bank of China Aviation for an undisclosed amount and then lease them back, spokeswoman Rachael Rivas confirmed Monday. The deal is for six 787-9 Dreamliners and 16 737 MAX-9 aircraft.
Over the weekend, United began shrinking its schedule for May to about 10% of the planned capacity. Similar reductions are likely for June, officials said.
The reductions mean less pay for front-line workers. Airlines accepting government grants to help weather the crisis must maintain 90% of their employees at their minimum salary, wages and benefits for six months, but with so many flights eliminated most will only earn the minimum number of hours guaranteed in their contracts.
Munoz and Kirby said more than 20,000 employees have already signed up for voluntary unpaid leave, but that more emphasis will be placed on voluntary leave and separation programs in the coming weeks because the company needs payroll flexibility.
The United leaders gave credence to forecasts that airlines will not rebound quickly from their downsized status because the global economic recovery will be slow and uneven.
“We believe that the health concerns about COVID-19 are likely to linger which means even when social distancing measures are relaxed, and businesses and schools start to reopen, life won’t necessarily return to normal. For example, not all states and cities are expected to re-open at the same time. Some international travel restrictions will remain in place. Meeting planners and tour operators will do their best to accommodate people looking to avoid large crowds,” they said in the message, underscoring why fewer employees will be needed.
Cowen airline analyst Helane Becker said in a client note that airline revenues in the second quarter could plunge 90% as stay-at-home orders are likely to extend into the summer for many Americans. A potential second wave of coronavirus in the fall would further slow airlines’ recovery.
“Air travel is at levels not seen since the 1950s, and while people may want to travel to visit friends and relatives, the country is apparently being reopened in a phased approach, meaning flying between regions may be difficult in the short term. We believe we will not see a meaningful return in air travel until 2Q21,” she said. Robust domestic travel isn’t likely for three years and international travel will take up to five years to get back to precoronavirus levels, she predicted.
In another attempt to pare costs, United has asked the Department of Transportation for an exemption from the requirement that carriers receiving financial aid maintain “reasonable” levels of service where practicable. United continues to comply with the legislation and maintain connectivity among nearly all domestic destinations despite redesigning its network to be down 90%.
But in a petition, United said it shouldn’t have to serve cities for which there is effectively no commercial demand because of the pandemic. The airline proposed terminating service to 12 cities, temporarily suspending service to six locations in the Caribbean and elsewhere, and halting four seasonal routes for leisure travel.
“Flying empty, or nearly empty airplanes, to points that do not offer enough business to make them rational, much less commercially viable, is a waste of precious resources,” it said.
United added that all carriers should share the burden of service continuity. Smaller, low-cost carriers shouldn’t get preferential treatment just because they have a point-to-point business model and not a hub-and-spoke one like the major carriers.
Last week, the DOT rejected 10 of 12 of exemptions sought by JetBlue (NASDAQ: JBLU) and only granted Spirit Airlines (NYSE: SAVE) exemptions to three cities it had not yet served. Both airlines were granted exemptions to airports in Puerto Rico because the government there is restricting flights to contain the coronavirus outbreak.