America is
on the Move Apr/May 2021

While the crisis has extended further than many expected a year ago, it is expected that recovery will eventually come; and that such a recovery will develop first in domestic, short haul, leisure, and VFR oriented markets. The US market seems to be following that pattern.

The US industry as a whole saw passenger numbers in 2020 down by 60% year on year. Operating revenues at the nine largest US passenger airlines fell by 63%, expenses by 35% and total losses reached $45.4bn. But the US market is the largest and most mature aviation market. Its domestic market is huge, in normal times accounting for 75% of the 1bn annual passengers. It should be ripe for recovery as the pandemic crisis wanes.

Since the beginning of February, nearly a year on from the onset of the crisis, there have been increasing signs of recovery. The numbers of passengers passing through airport security check points have been steadily rising and, in March, overtook prior year levels for the first time (see chart). The current daily peak of around 1.5m is still 40% the below “normal” levels of 2019, but double that seen through most of 2020.

Secondly, there has been a resurgence of passenger demand since the end of January on domestic routes, and routes to Latin America. According to figures from A4A these two areas are currently performing at only 40% below pre-pandemic levels (see chart). Even more impressive is the performance of routes to Mexico (in normal times the second largest international market from the US after Canada with 3% of total passengers) which by the beginning of April had almost returned to pre-pandemic levels.

This performance was driven by pent-up demand for sun-seeking holiday destinations and in spite of advice from the Centers for Disease Control and Prevention (CDC) that “travelers should avoid all travel to Mexico... even fully vaccinated travelers could be at risk” and the requirement for unvaccinated passengers returning to the US to self-quarantine for at least seven days after arrival.

But the US has been forging ahead with its vaccination programme: at the time of writing 40% of the adult population had received at least one shot of the vaccine and 28% had been fully vaccinated. Indeed at the beginning of April, the CDC put out an advisory note encouraging those who had been fully vaccinated to travel.

Optimism surrounding demand recovery was echoed in the conference call commentary on the publication of Q1 2021 results.

The first quarter numbers themselves were pretty dire. American, Delta and United each reported net losses of $1.2-1.4bn on a GAAP basis on revenues down respectively by 66%, 67% and 55%. On an “adjusted” basis (essentially excluding benefits from the payroll support scheme) the losses for the quarter came in at $2.3-2.7bn each.

In contrast Southwest fared relatively well. With revenues only down by 50%, it was able to report an official profit of $119m — although it too had benefitted from government support in the quarter to the tune of $1.7bn, and on an “adjusted” basis showed a net loss of $1bn.

Each airline chief executive expressed sincere gratitude to the Federal government for the support that allowed them to avoid furloughs (and survive). So far the top four carriers have received $32bn in the first two Payroll Support Programs. The third, extending the programme again to the end of September is in the process of being agreed. The support comes at a price: 30% of the payroll is granted as a ten year term loan at a 1% cash interest for the first five years; the airline has to provide share warrants; it is required to maintain certain levels of service; and cannot make redundancies, provide cash returns to shareholders and is limited on management remuneration.

The three major network carriers and Southwest (who between them controlled 80% of the US industry) each mentioned that cash burn had moderated in the first three months: Delta and United had seen positive cash generation in March for the first time in a year, American would have been cash positive in the month had it used the same definition of the term as its peers, and Southwest was cash positive to the tune of $4m a day after including advance bookings and working capital changes.

United was the most blatant in its announcement using as a subtitle the phrase “rebounding traffic is driving clear path to profit”, while “with current domestic leisure bookings 85% recovered to 2019 levels” Delta’s CEO Ed Bastian stated that "if the recovery trends hold, we expect positive cash generation for the June quarter and see a path to return to profitability in the September quarter”, and is so encouraged that from the beginning of May Delta will resume selling the middle seat on its aircraft.

There is still a long way to go to reach equilibrium, and some major elements are missing from the equation. All four of the country’s largest airlines rely on business traffic, and business travel is noticeable by its absence. Southwest mentioned that corporate managed travel revenues in March were still 85% down from 2019 levels, highlighting that the lack of the late booking market inherent in business travel also plays havoc with the traditional yield management programmes. United’s CEO Scott Kirby pointed out that, normally, roughly one third of United’s business is domestic leisure and VFR, one third domestic business traffic and one third international long haul — and that the latter two segments were still more than 80% below pre-pandemic levels.

An unanswerable question is quite how much the events of the last year, and the explosion in the use of remote working and online video conferencing, will have removed the need for business travel. In its forecast at the start of the year the Global Business Travel Association (GBTA) predicted that global business travel spend, having possibly halved in 2020, would recover slowly over the next four years almost enough to reach the $1.4tn spent in 2019 (see chart). But it estimated that by 2024 business travel spending in the US would still be 25% below 2019 levels (and not even reach the nominal values of 20 years ago). Then in a recent survey the GBTA suggested that 60% of respondents expect to resume business travel in the third and fourth quarters of this year.

United’s Scott Kirby waxed sanguine on the subject saying: “when you start to see people in office buildings in downtown Manhattan and it’s hard to get a table at lunch, you’ll know the business travel is probably back”. But for the moment, according to Google’s community mobility reports, workplace activity in the US remains consistently at a level 25% below pre-pandemic levels as it has for the past six months.

The three major network carriers also rely heavily on long-haul international traffic (Southwest has a few medium-haul international routes — mainly to beach resorts in the Caribbean and Central America — and says it tends not to like the complications of selling into markets with different languages or strange currencies). Canada, normally the largest international market, is essentially closed, as is the Pacific, while the Atlantic is running with demand 90% below pre-pandemic levels.

Scott Kirby again: "International demand is going to be entirely contingent on when borders open. We took over 3,000 bookings yesterday for our new services that we launched to Greece, Iceland and Croatia, if the US-UK opens up, I think you’re going to have a hard time finding a hotel room in the UK because there’s going to be so many people wanting to go. But international borders aren’t going to all reopen immediately. And my guess is that happens sometime next year."

There is comfort to be had from the first signs of a resumption of demand. But the industry is likely to be a very different beast as it does recover. A direct consequence of the desperate search for liquidity in the last year has been a massive increase in debt. As the chart shows, total year end debt increased by 60% or nearly $60bn in 2020, while net interest payments doubled to $3.8bn.

The debt issuance has continued. In March, American raised a record $10bn through the debt and bond markets at a blended interest rate of 5.6% (half what it to pay this time a year ago). It was in part secured on the company’s AAdvantage frequent flyer programme, and in doing so was able to follow Delta and United in persuading investors that there is value in the FFP. (For an analysis of the merits of banking on the frequent flyer programmes see Aviation Strategy Jul/Aug 2020). It will use part of the proceeds to repay the small amount it had borrowed under the expensive CARES Act loan facility — it had only drawn $500m of the $7.9bn facility granted (and itself backed by the FFP as collateral).

In April, United raised another $9bn in debt and loans — having already put its MileagePlus programme into hock, the loans were backed by its slots, gates and route rights — in part to repay the $520m it had drawn under its $7.5bn CARES act facility.

In the results meetings each airline emphasised that it would be concentrating almost exclusively through the recovery in the next few years on deleveraging balance sheets. The five years preceding the pandemic was a period of high profitability for healthy airlines and good returns for shareholders. It could be that the next will be a lustrum for zombies.