Airline Industry’s Future is a Grim Picture

“Dire.”

This is how United Airlines Executive Chairman Oscar Munoz described “the stark reality” that the global airline industry is facing today.

In a recent interview with CNN, he described a tragic scenario.

He said the sector should shrink between 30% to 50% to survive, a crisis “by far larger than anything we’ve ever seen.”

Not even after the Sept. 11 terrorist attacks. It’s an unprecedented crisis.

As a result, airline stocks crashed this year. The stocks of the three biggest US airline companies notched big gains in August, about 20%; however year to date they have still piled up big losses. 

United stock dove 59% in the first eight months of 2020, American Airlines dropped 54%, and Delta was down 47%. Southwest, described by some analysts as the best positioned of the US carriers, lost 30%.

With air travel almost completely shut down in the second quarter, the Big Three lost $10 billion from April to June.

By then, they were burning about $40 million a day each.

The situation is a little better now, but there isn’t yet a reason to celebrate.

A Sharp Decline

Prior to the pandemic, the sector was booming. But for 2020, global passenger numbers are expected to decline by 55% compared to 2019, according to the International Air Transportation Association (IATA). 

Passenger numbers are expected to rise 62% in 2021, but still will be down almost 30% compared to 2019.

IATA predicts that global air travel won’t return to pre-pandemic levels until 2024.

Mega investor Warren Buffett also painted a bleak picture of the industry and said Berkshire Hathaway got rid of all of its holdings in the airline sector.

“I was wrong about that business,” Buffett said in early May, speaking at Berkshire Hathaway’s annual shareholder meeting, which was held virtually for the first time because of the coronavirus.

Berkshire’s portfolio included shares from Delta, Southwest, United Airlines, and American Airlines.

Layoffs Coming?

Labor unions and companies say that more than 75,000 employees are at risk after September 30, when the $25 billion federal aid package that prohibits companies from cutting jobs or pay rates will expire.

The industry, which employed nearly 500,000 in February, has urged Congress for another $25 billion relief fund, but lawmakers haven’t yet approved a second stimulus bill.

United announced that unless it gets more federal money it will cut more than 16,000 jobs next month. Already, thousands have left the company in the last few months, accepting buyouts and early retirement packages.

Without extra aid, American Airlines said it will also lay off or involuntarily furlough 19,000 workers.

Delta said it will need to furlough nearly 2,000 pilots in October. The announcement came after 17,000 – nearly 20 percent – of its workers have joined early retirements and voluntary departure programs.

One of the biggest hurdles for airlines is the collapse of business travel, more profitable than leisure travel bookings.

Millions of employees are working from home. In-person meetings were replaced by virtual ones. Conferences were canceled.

This situation will not change before we have a secure and effective COVID-19 vaccine available on a large scale, which probably will not happen this year.

Bankruptcy, Mergers on the Horizon

Until then, some experts say the crisis could push some airlines into bankruptcy, and we are likely to see a consolidation in the industry.

This has already started to happen overseas. 

Latin America’s two biggest airlines, Avianca and LATAM, filed for Chapter 11 bankruptcy in May after travel bans issued by many governments. Aeromexico did the same in June. 

Virgin Atlantic, the European carrier founded by British entrepreneur Richard Branson, filed for debt relief in the US last month.

In late August, in a drastic move to sell tickets, United announced it was permanently dumping scheduling change fees. The next day, rivals American and Delta also said they were adopting the new policy. 

It’s a huge move. Change fees represented last year $2.8 billion for the industry. (Southwest doesn’t charge for ticket changes.)

The bottom line, though, is that airlines need people to fly. Desperately.

Until that happens, it will be a long and arduous climb back to cruising altitudes for the air industry.

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