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All The Bad News From Airlines This Week: 'Travel Demand Is Essentially Zero'

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All The Bad News From Airlines This Week: 'Travel Demand Is Essentially Zero'

As malls, restaurants and other beleaguered businesses hold out hope for economic revival, airlines continue to take a beating.

Industry shares tumbled Monday after Warren Buffett said he sold his stakes in American Airlines Group Inc (NASDAQ: AAL), Delta Air Lines, Inc. (NYSE: DAL), Southwest Airlines Co (NYSE: LUV) and United Airlines Holdings Inc (NASDAQ: UAL). Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) had been one of the largest investors in the airlines.

Additional industry news revealed pain points outside of the capital markets.

Airline Cost-Cutting Measures

United Airlines announced Tuesday that it would cut 3,400 management positions in October after federal aid stipulations expire, and it sent a memo warning of the “displacement” of about 30% of pilots. In the meantime, it urged employees to take a voluntary separation.

“Travel demand is essentially zero for the foreseeable future and, even with federal assistance that covers a portion of our payroll expense through Sept. 30, we anticipate spending billions of dollars more than we take in for the next several months, while continuing to employ 100% of our workforce,” United spokesman Frank Benenati said in an email. “That’s not sustainable for any company.”

Virgin Atlantic also announced Tuesday that it would cut 3,150 jobs, move its flight program from London Gatwick to Heathrow, and explore all public and private funding options to sustain operations.

Lufthansa asked Airbus and Boeing Co (NYSE: BA) to defer aircraft deliveries, and its Technik subsidiary announced that it modified its first Airbus A380 to transport cargo instead of passengers.

The status of other airlines are inferred from reports by AerCap Holdings N.V. (NYSE: AER), which said it already lost some Boeing 737 MAX leases and expects more cancellations throughout the year.

M&A

The apparent weakness of some airlines may seem like an opportunity for the strong, but Lufthansa CEO Carsten Spohr said Tuesday that his company had no plans to purchase suffering rivals.

“Our focus is on stabilising Lufthansa in its current form and not on acquiring other airlines,” Spohr said. “We are not planning a takeover at this time.”

He forecast a slowdown in industry consolidation due to government bailouts.

Related Link: Airline Stock Short Sellers Have Made A $4B Profit In 2020

Airline Bailouts

U.S. airlines have already accepted government aid contingent on employee retention through September; their international peers continue to negotiate aid from their home governments.

Lufthansa is talking with several governments about a 10-billion-euro ($10.8 billion) bailout, and management anticipates a near-term deal with Germany that would give the country a 25.1% stake and board representation, according to Reuters.

An additional deal with Belgium is in the works.

On Monday, the EU approved France’s $7.6-billion loan program for Air France, and Norwegian Air Shuttle’s shareholders approved a plan to swap debt for equity in order to access $290 million worth of federal guarantees.

Similar relief packages have drawn opposition. Ryanair Holdings plc (NASDAQ: RYAAY) asked EU judges Tuesday to cancel approval of Sweden’s $494 million in loan guarantees due to discriminatory distribution.

South Africa’s Comair filed for bankruptcy Tuesday and applied for share suspension at the Johannesburg Stock Exchange.

Flight Culture

On Tuesday, the International Air Transport Association advised that all passengers and flight staff wear face masks, but it stopped short of recommending socially distanced seating, according to Reuters.

In fact, it rejected early proposals discussed by Director General Alexandre de Juniac to leave middle seats unassigned. IATA chief economist Brian Pearce said most airlines would have been unprofitable in 2019 if their most-flown models roped off one-third of their seats.

Frontier Airlines determined to offer passengers an empty middle seat but decided to offset related losses by charging a $39 fee.

Photo by Bjoertvedt via Wikimedia

 

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