The coronavirus took another bite out of the airline industry on Tuesday, as several airlines announced deep cuts to their international and domestic schedules.
American (AAL), the world’s largest airline, said it would cut its international capacity by 10% this summer compared to the current schedule, and eliminate 7.5% of its domestic flights in April.
Delta Air Lines (DAL) said it will slash its international flights between 20% to 25% and trim domestic flights by 10% to 15%.
“We are prepared to do more as the situation evolves,” said Delta CEO Ed Bastian. “Should the environment get worse, we can go deeper.”
Bastian spoke at an investor conference sponsored by JPMorgan along with five other airlines - American, United, JetBlue, Spirit and Alaska.
Discount carrier Spirit (SAVE) Airline also announced it would cut capacity by 5% in April, and it could possibly make deeper cuts in May.
“I think it is safe to say there will be capacity reductions in May, with the 5% reduction in April just being the first move,” said Spirit CEO Ted Christie.
Spirit will still have 9% more capacity in April than it did a year ago. But it had previously expected to grow capacity by 14% before this slowdown.
Executives at several of those carriers said they expect tougher times ahead.
United, the first airline to cut its domestic schedule last week, said that new bookings to Asia and Europe have essentially been wiped out by canceled reservations to those destinations. It has suffered a 70% drop in net bookings on domestic flights when taking canceled reservations into account.
“While those numbers are encouraging compared to international, we’re planning for the public concern about the virus to get worse before it gets better,” said Scott Kirby, United’s president, who will become CEO in May. “As testing expands in the [United States], many more cases are likely to turn up in many more communities around the country. As such, we’re planning for domestic bookings to deteriorate further in the weeks to come.”
Kirby said United is preparing for a “dire” scenario, in which revenue plummets 70% in April and May, 60% in June, 40% in July and August, 30% in September and October and 20% in November and December.
“We, of course, hope that it will be better, but we’re not willing to count on that,” he said.
Kirby said the current situation is far worse than the 40% drop in demand following the 9/11 terrorist attacks.
Delta said it would make additional moves to save about $3 billion, including a suspension of share repurchases, a deferral of contribution to the company’s pension plans, a cut in capital spending and a deferral of maintenance spending on aircraft it expects to park. It also said it would institute a hiring freeze and set up a way for employees to sign up for unpaid leave. And Delta and other airlines said they could no longer stand by its previous earnings outlook for 2020.
Airlines around the world are also cutting back. Norwegian Air canceled 3,000 flights that had been scheduled for mid-March to mid-June, reducing its capacity over the period by 15%. Qantas (QABSY) slashed almost a quarter of its flights over the next six months.
British Airways, Ryanair (RYAAY) and other carriers canceled flights to and from Italy after the government in Rome imposed a nationwide quarantine designed to prevent the spread of coronavirus. BA had already announced cancellations for some European and transatlantic flights for the second half of March.
Comparisons to 9/11
The spread of the coronavirus and guidance from US health officials has caused many major companies to limit employee travel and also led to the cancellation of major public events, such as South by Southwest. Delta’s Bastian said he did not anticipate trying to encourage passenger bookings through steep fare cuts.
“This is clearly not an economic event. It’s a fear event, more akin to what we saw after 9/11 than in 2009,” Bastian said, referring to the fall in travel during the Great Recession.
In the last two weeks, the US airline industry is seeing a bigger drop in demand than following 9/11, said JetBlue CEO Robin Hayes.
Southwest Airlines CEO Gary Kelly announced in an email to employees Monday that he would take a 10% paycut, a spokesperson for the airline confirmed. And Southwest is “seriously considering reductions to our scheduled flying in the short term,” according to the spokesperson. But it has yet to announce details of the schedule cut.
Airlines expect to bounce back
The only good news for airlines from the crisis has been a sharp drop in the cost of jet fuel, the second largest expense at most airlines. American said it will save $3 billion in cost savings this year compared to its earlier guidance, due to the lower fuel prices. That doesn’t include savings from reduced fuel consumption due to canceled flights. Delta said it expects to save $2 billion on fuel.
Despite the loss of passengers and the drop in fares, the airline industry should be able to withstand the crisis, according to several executives.
“Fact is our industry is exponentially more resilient today than it’s been in the past,” said American CEO Doug Parker. “Our earnings base is well higher than any time before 2013, and our balance sheet have dramatically more liquidity.”
A crisis like this would have resulted in requests for an airline industry bailout in the past, Parker said. He pointed out there was no request for a bailout when airline CEOs met with President Trump and other governmental officials at the White House last week.
“This current crisis is a test of the ability of our restructured industry to withstand the types of shocks that we’ve never been able to withstand before,” he added. “I know that American Airlines is positioned to pass that test, and I suspect the rest of the industry is as well.”
Virtually all the airlines have announced plans to have employees take voluntary leaves of absences. As yet, though, no one has announced involuntary layoffs or furloughs.
“We’ve been very aggressive at going out with voluntary time off,” said JetBlue’s Hayes. “I’m optimistic that we can, even with future capacity cuts, achieve this through voluntary means. That is our preference and our goal.
There were discussions in Washington once again on Tuesday about a federal bailout for the travel industry, including airlines. That helped to lift airline stocks, which have been particularly badly hit in the last two weeks. But none of the executives speaking Tuesday endorsed the idea of a bailout.
“We are not going to count on any kind of government intervention,” said United’s Kirby.
