Big airlines are hoarding cash to survive the pandemic

The COVID-19 pandemic has cratered demand for air travel, tens of thousands of people are already out of work, and a recovery — whatever that may look like — is expected to take years. But while smaller suppliers are crashing and burning, the biggest corporations that operate and orchestrate the air travel industry are surviving, thanks to their size and their access to a crucial resource: cash.

The major airlines were hit with historic losses, which they detailed over the last month during their quarterly earnings calls. Collectively, the Big Three — United, Delta, and American — lost a staggering $10 billion during the second quarter of 2020. JetBlue lost $320 million, Southwest $915 million, and budget carriers Spirit and Alaska lost $144 million and $214 million, respectively.

They’ve done a lot of the hard work already, reducing their costs by retiring planes early and pausing most of their routes — but they are also prepping layoffs and furloughs despite government programs meant to keep those people employed. Of the many billions of dollars they took from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, only a portion was dedicated to protecting layoffs. That money is running out, leaving the airlines threatening widespread cuts unless that part of the government program is extended.

The major airlines are simultaneously hoarding cash because there is simply a lot of cash available to them. On top of the CARES Act money, interest rates are at rock-bottom, making it easier — and cheaper — than ever for big companies to borrow lots of money. This makes it possible for these companies to paper over their lack of revenue with a little financial engineering.

Steve Priest, the chief financial officer of JetBlue, said his company’s “number one focus is cash” during a quarterly earnings call a few weeks ago. “Cash, cash, cash, cash, cash, as you would expect it to be in this environment.” JetBlue took $936 million in payroll support from the CARES Act, but Priest said the company has borrowed a total of $3.7 billion since the start of the pandemic, $750 million of which the company got by using its slots at JFK, LaGuardia, and Washington Reagan airports as collateral.

The bigger airlines have, unsurprisingly, borrowed much more. United Airlines has raised $16.1 billion through a combination of debt offerings, stock issuances, and CARES Act payroll grants and loans, with nearly $7 billion of that coming from using its mileage rewards program as collateral. American Airlines is borrowing $4.75 billion under the CARES Act, with $1.8 billion slated for payroll help, and it’s using its intellectual property as collateral for an additional $1.2 billion loan from Goldman Sachs. Delta took the most CARES Act payroll funding from the government, $5.4 billion, but has recently borrowed around $15 billion in total.

This money buys these companies time. Delta says its borrowing has afforded it 19 months of liquidity, even if it keeps burning through $27 million per day (its average for June). And things probably aren’t getting much better anytime soon. Delta CEO Ed Bastian said on NBC last month that he doesn’t expect customers to return to flying until there is a vaccine. “We need some medical confidence back in consumers,” he said. In a letter to employees, Southwest Airlines CEO Gary Kelly described his company as “in intensive care.”

Trade groups now expect global air travel to not return to pre-pandemic levels until 2024 at the earliest. Wall Street is only a tiny bit more optimistic about the industry’s recovery. In a recent report, Goldman Sachs said it expects the rebound to 2019 levels to take an extra year than previously predicted, meaning 2023 instead of 2022. Domestic travel is still expected to come back first, though that will be led by leisure travelers and not the high-revenue business flyers many carriers depend on.

But even with the extra runway, the airlines are eyeing unprecedented employee furloughs and layoffs since only some of the CARES Act funding was specifically for payroll support. And some of them have already found ways to reduce headcount without technically violating any of the terms they agreed to with the government. Some 40,000 Delta employees volunteered to take short-term unpaid leaves, and more than 17,000 chose an early retirement option. American warned it may need to shed 25,000 jobs by October. Southwest said it would not lay off or furlough any employees in October, though nearly 17,000 of Southwest employees have taken voluntary separation packages and extended time off from the company.

The pain is also rippling down the supply chain to companies that do not have multibillion-dollar mileage programs or airport slots to leverage as collateral or the kind of money and resources needed to chart out complicated financial deals that unlock billions of dollars in liquidity. Instead, they’re left only with more straightforward cost-cutting options.

In-flight internet provider Gogo applied for but did not receive a $150 million loan and an $81 million grant from the government via the CARES Act, so the company furloughed 600 workers in April and then eliminated another 143 full-time positions in July. It’s also now trying to sell its commercial aviation division. Southwest’s in-flight Wi-Fi provider, Global Eagle, filed for bankruptcy. Engine manufacturer Rolls-Royce cut about 9,000 jobs. Suppliers alone have collectively cut about 50,000 jobs, according to one estimate. Even. some smaller airlines like Virgin Atlantic are being forced to restructure.

All in all, it’s a grim picture. COVID-19 has devastated demand for air travel. Travel restrictions, both in the US and abroad, as well as a resurgence of the virus in the American South and West, are hampering the modest bounce-back in air travel seen at the beginning of the summer.

The major airlines are suffering record losses, too, but — for now, at least — they’re watching this carnage play out from atop fresh piles of cash.