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Airline Bailout Falls Short
A few months ago, the government approved a massive bailout deal to help U.S. airlines cope with the pandemic. However, billions in dollars in federal aid might not be enough.
The bailout deal's primary purpose was to prevent massive layoffs in the airline sector. Although, several U.S. airlines might have to cut jobs anyway. Air travel is improving, but it's still down significantly from pre-pandemic levels. Worst of all, there are no signs that it will improve anytime soon.
American Airlines and Southwest Airlines released quarterly earnings reports on Thursday. It included operating data for the worst months of the pandemic restrictions. Traffic volume has improved significantly from its April low-point. However, according to Southwest's CEO Greg Kelly, a full recovery is still a long way off. “We expect air travel demand to remain depressed until a vaccine or therapeutics are available to combat the infection and spread of Covid-19,” Mr. Kelly said in a Thursday-morning conference call.
Uncertainty for the Future
🚨🚨🚨Trump's airline bailout request would impose "limits on increases in executive compensation" until repayment of the loans
This falls short of more strict bailout conditions pushed by @ewarren @AOC @FlyingWithSara & other Dems
Sets up big clash….https://t.co/9jqBismPdl
— Jeff Stein (@JStein_WaPo) March 18, 2020
American Airlines also has a bleak outlook on the future. Management said it expects third-quarter system capacity to decline 60% from a year ago in response to reduced demand. The company burned through $2.07 billion in the second quarter as it struggled to cope with the pandemic slowdown. In comparison, American earned $662 million over the same three-month period last year.
Both companies said demand improved in May and June. However, Southwest said overall bookings weakened in July, and cancellations also increased. Southwest is the nation's largest domestic carrier, so rising case counts in some states could've caused the regression in demand. Both companies' share prices suffered declines on the news.
Congress approved a $25 billion bailout for airlines as part of its $2.2 trillion stimulus package passed in March. However, it looks like the stimulus will fall short. The bailout deal included a condition that forbids fund recipients from laying off their workers. However, the stipulation expires at the end of September, and several airlines are already preparing to institute massive personnel cuts after the provision expires.
Some airlines have already taken creative approaches to cut personnel costs without violating the bailout requirements. American implored its employees to accept early retirement voluntarily, reduced work schedules, and partially paid leave. All and all, more than 41,000 employees took the deals. More than 25% of Southwest's workforce has also volunteered for extended time off and separation programs.
The Bailout Deal
The first bailout deal banked on a rapid recovery in the airline sector, but that forecast is starting to look like a pipe dream. Several airline executives believe that travel depression could last years, and the hard truth is that these companies are too large to survive at these levels. Southwest burned through $18 million per day in July, and it cost American $55 million per day to fund operations in the second quarter.
This level of cash burn isn't sustainable, so something has to give. If demand doesn't pick up soon, airlines will have to trim their expenses and personnel at the top of the list. Airline unions and politicians have been very resistant to this idea, but the prevailing economic forces seem to indicate layoffs are unavoidable.
Airlines workers are lobbying Congress for an additional $32 billion in bailout funds, but government money can't sustain the airlines forever. Southwest says it will have to layoff workers unless passenger volume triples by the end of the year. That seems unlikely given the current economic environment, and government aid can't overcome free market forces.
This week's unemployment report revealed the number of new jobless claims increased for the first time in several weeks, indicating a possible backslide in the U.S. job market. No one wants to add laid-off airline workers to the mix, so D.C. wants to help the airlines solve their problems. However, another bailout deal might only serve to postpone the inevitable if passenger volumes don't recover soon.
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