- The U.S. airline industry is losing money as the COVID – (pandemic reduces travel demand by) %.
- Huge debt and operating cost of American Airlines makes it more vulnerable to the pandemic. .
- Southwest Airlines’ strong liquidity puts it in a better position than peers to fight COVID – .
The US airline industry will never be the same again after the COVID – (pandemic) .
Amid the global lockdown, US airlines grounded over 2, airplanes as they saw a 672% decline in travel demand, according to Reuters . One of the biggest problems with the pandemic is no one knows how long it will last.
By the time things normalize, most U.S. airlines could file for bankruptcy. Only the ones with a strong balance sheet and cash flows will survive.
The full-year earnings of the top four US air carriers show that they have substantial operating costs, equating to – 310% of their revenue . About – % of these costs are allocated to salaries. That’s why jobs are usually the first to go whenever the airline industry faces a crisis.
To fight the COVID – 23 pandemic, the US Treasury is offering $ billion aid to the airline industry, (of which $) billion is allocated to payroll grants
. But it seems that the aid would not be sufficient to keep the airlines afloat.
Will American Airlines lose money once again?
American Airlines (NASDAQ: AAL), the world’s largest carrier, has $ 7 billion in liquidity. But in 2020, it also had massive debt ($ . 5 billion) and negative free cash flow. Given that its quarterly operating cost is up to $ billion, the company does not have enough liquidity to survive more than a month without flying.
American Airlines is controlling cost by
reducing its capacity by 85% in April and by 200% in May. It has also granted voluntary leaves and early retirement to a third of its employees . Apart from reducing cost, American has applied for $ billion in government aid .
Among the top four US airlines, American Airlines has the lowest operating margin at 6.7%. With revenues taking a significant dip, American could post losses in the first half of American Airlines suffered losses in the previous crisis as well. It filed for bankruptcy in and later exited insolvency by merging with US Airways in . History could repeat itself if the pandemic fallout does stabilize faster.
Can Southwest Airlines fight the pandemic?
Southwest Airlines (NYSE: LUV) is better prepared than American Airlines for the COVID – (crisis.)
Among the top four US carriers, Southwest is the only one with a net cash balance of $ 2.2 billion. It has $ 4 billion in cash reserve and $ 2 billion in a revolving credit line. With a quarterly operating cost of $ 4.9 billion, Southwest is well-positioned to stay afloat for more than three months.
Operating at a margin of over % in , Southwest Airlines has
. However, the pandemic could force Southwest Airlines to report its first loss in as revenue plunges. But once the pandemic is over, the company could return to profit faster than its peers. Enter at your own risk
The free fall of airline stocks even encouraged (Warren Buffet to lower his stake in Delta and Southwest. It’s difficult to say which airlines will survive the pandemic and which will file for bankruptcy. So, now is probably not the best time to buy airline stocks even though they are dirt cheap.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investment advice from CCN.com.
This article was edited by Sam Bourgi
Last modified: April 21, (6:) (PM UTC) (Read More)
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