The role of airports is greatly underestimated, as the airline industry goes forward after a pandemic that caused devasting effects.…
U.S. Airline Furloughs: Where We Stand
When SARS-CoV-2, the novel Coronavirus strain that causes COVID-19, first reached the U.S., nobody really knew how the disease, which at the time had not yet been granted pandemic status by the World Health Organization, would impact life in this country. Yet as the disease spread throughout the country throughout late winter and spring, life came to a screeching halt.
Few industries were hit as hard as the travel and leisure sectors. Restaurants have shut down, hotels and amusement parks have been left virtually empty and airlines have seen passenger counts drop to record lows.
The coronavirus pandemic has caused a crisis in the aviation industry unlike any other in history. There have been struggles before, but nothing to match 2020. Pan American World Airways, commonly known as Pan Am and once among the world’s most recognizable and popular airlines, went bankrupt during the 1973 oil crisis, and a number of airlines, like United Airlines, Delta Air Lines, US Airways, Northwest Airlines and more, went bankrupt or folded into other airlines after the September 11 terrorist attacks. After the onset of the 2008 financial crisis, many airline employees were furloughed as airlines cut costs and cut down on hiring.
But none of these crises were as monumental, ongoing or uncertain as the current one. The number of passengers that the Transportation Security Administration (TSA) screened through its checkpoints bottomed out at a mere 3.6% of 2019 passenger counts on April 16, and it has since increased steadily to no more than 30% of last year’s counts with no increase in sight. Importantly, this figure represents 30% of all passengers from last year. Airline passenger counts compared to 2019 are much lower since TSA’s figures are spread across different carriers.
“9/11 was a shock, but it was a single-day thing. If 9/11 had dissolved into an all-out war we were fighting every day, people might have been more hesitant to fly,” Gary Krasnov, Vice President of Airline Strategy at RAA Financial Advisors, a firm helping pilots manage their finances and plan for retirement, told AirlineGeeks.
So, we thought we would take a moment to step back and look through where different U.S. airlines are in the midst of this unprecedented crisis.
To set the stage, let’s first take a look at airline finances. Delta Air Lines was the first U.S. legacy carrier to announce its earnings for the second quarter of 2020, which was the first full quarter impacted by passenger dropoff. The airline reported a $7 billion loss on only $1.5 billion in revenue, a 91% drop in revenue year-over-year for the airline. Soon after, United Airlines announced a net $1.6 billion loss on roughly the same amount of revenue that Delta had. American Airlines soon after announced a $2.1 billion net loss on a slightly-higher $1.6 billion in revenue, and Southwest Airlines announced a $915 million loss.
Low-cost-carrier Spirit Airlines recorded a $144 million loss during the second quarter, and Allegiant Airlines reported a $93 million loss. JetBlue revealed its revenue had dropped 90% to $215 million.
Airlines have also been burning massive amounts of cash every day. By the end of June, Delta was losing $27 million per day. United announced it’s losing $40 million a day, American is burning $30 million and Southwest is losing around $16 million a day.
Where Are We Now?
Airlines were quick to receive bailouts from the U.S. government to mitigate these losses. Airlines who received those bailouts, which were part of the CARES Act, were barred from involuntarily laying off workers through the end of September.
Many airlines have offered their staff voluntary leave or early retirement packages. In mid-June, United Airlines sweetened its flight attendant buyout package to mitigate involuntary layoffs in October. At the time, the carrier needed a total of 3,000 of its 25,000 cabin crew to accept the buyout, which comes in addition to medical, retirement and travel benefits, United offered a $1,500 health credit for each year an employee worked at the airline up to $45,000.
Low-cost airlines Frontier and Spirit have been the latest to announce furloughs. Frontier Airlines sent letters to 35% of flight attendants and pilots who are at risk of being furloughed; the airline believes that unpaid furloughs will last at least six months and may be permanent. Spirit will furlough 20% to 30% of its workforce, affecting up to 2,650 pilots and flight attendants.
Airlines across the board have offered early retirement packages to older employees in hopes that doing so would protect younger employees at the start of their careers, many of whom may not otherwise have the seniority to avoid mass furloughs.
These buyouts have certainly helped airlines and employees. Southwest Airlines announced last week that it will not furlough or lay off any workers on Oct.1 in large part because so many employees accepted early retirements or temporary buyouts.
“We have no intention of seeking furloughs, layoffs, pay rate cuts or benefits cuts through at least the end of the year. We have never had any of these in our 49-year history,” company CEO Gary Kelly said in a letter to employees at the time. “I can’t guarantee it will never happen, especially during these dark pandemic times. I can promise you it will be the last thing we do to keep Southwest financially healthy and viable.”
But many other airlines are preparing for the worst. United Airlines has warned that it may need to furlough or lay off as many as 36,000 employees, which represents about 45% of its U.S. workforce, in October. As many as 15,000 flight attendants, 11,000 customer service and gate agents and 2,000 pilots, in addition to almost 10,000 other employees, would be affected. Meanwhile, Delta sent furlough notices to many employees. American is preparing for up to 25,000 furloughs, including nearly 10,000 flight attendants, 4,500 fleet service employees, 3,200 maintenance workers and 2,500 pilots.
An Uncertain Future
The number of employees that actually get furloughed will partially depend on how many employees take voluntary buyouts as can be seen with Southwest. But these assessments paint a grim picture of where airlines are sitting at the moment.
While airlines had hoped for a substantial recovery by now, many leaders have recognized that they will be nowhere near 2019 passenger numbers by the time CARES Act money will run out in October.
“Given the combined effects of the pandemic and associated financial impact on the global economy, we continue to believe that it will be more than two years before we see a sustainable recovery,” said Delta CEO Ed Bastian on the airline’s earnings call in July.
Southwest CEO Gary Kelly echoed that sentiment.
“We were encouraged by improvements in May and June leisure passenger traffic trends, compared with March and April,” Kelly said in a statement after announcing Southwest’s revenue. “However, the improving trends in revenue and bookings have recently stalled in July with the rise in COVID-19 cases. We expect air travel demand to remain depressed until a vaccine or therapeutics are available to combat the infection and spread of COVID-19.”
Similarly, United Airlines is looking to October as its month for reckoning if it is unable to secure further funding.
“While we’re seeing some glimmers of hope in the number of customers traveling, we know that we are still a very long way from returning to where demand was at the end of 2019,” United told Reuters. “That means a quick recovery is not likely so we need to continue to focus on cost-cutting as we plan to be a significantly smaller airline in October.”
Smaller regional airlines have been hit just as hard as legacy airlines. Compass Airlines and Trans States Airlines both ended contracts with major carriers early, forcing them to close operations earlier than expected.
While Compass and Trans States had already planned on closing by year’s end, ExpressJet, who was just recently beaten out for a United Express contract by CommutAir, wasn’t. United Express was ExpressJet’s only customer — it has long since ended contracts with Delta Connect and American Eagle — and could very well face its demise if it cannot find a way to sustain its own independent operation, or at least find another contract. With 101 aircraft in its fleet and 33 more on order, ExpressJet could be the largest casualty of the coronavirus crisis to date.
The sentiment that there will not be a substantial recovery until a coronavirus vaccine is developed is a common sentiment around the airline industry. United Airlines CEO Scott Kirby has said he does not expect passenger counts to rise above 50% of 2019 levels until a vaccine is widely available, which could not come for a year or more. For the time being, it seems that passenger counts, and therefore revenues, will be substantially depressed. And if they stay that way for a long time, the U.S. aviation industry as we know it could change forever.
“Airlines have bought time, but it’s not enough. If the world is in the same place 12 months from now, if airlines keep running at 30%, they can’t. Bankruptcy for the majors is 6 months to 12 months away,” said Krasnov. “Could we [see bankruptcies or mergers]? Yes. I think it’s all a timing issue that depends on if there’s a vaccine soon enough and how viable it is. Airlines can’t stay in their current position forever.”
Hope On The Horizon
Despite airlines’ current situation, there does seem to be a glimmer of hope on the, albeit distant, horizon. For starters, a majority of members of the U.S. House of Representatives last week published a letter supporting a bailout extension for airlines. Such a deal would provide airlines extra money to protect staff and would in turn require they do not involuntarily lay off employees through March 2021. That plan faces significant opposition in the U.S. Senate, but considering the House has already passed a second overarching relief bill, negotiations could keep additional airline support alive in the Senate.
There are also a number of vaccine trials in active tests around the world. Studies across the U.S., Europe and beyond have shown promise in early trials. Last week Massachusetts-based Moderna announced that it is entering Phase 3 of its vaccine trial, which will see the company distribute thousands of doses of the potential vaccine to sites across the country for testing. Trials generally take months to complete, but if this one goes well, there is a possibility that it could be approved and enter mass production by late 2020 or early 2021.
After a successful pilot study in the spring, Moderna said it planned to launch a major study in July and complete mass production by June 2021 at the latest. It is currently on track to fulfill that timeline, though the results of its current trial, barriers to approval and the time and resources needed to produce and distribute the vaccine on a massive scale are still unclear.
In addition, not every aspect of the U.S. aviation industry is suffering. The global cargo industry has boomed over the past six months. Cargo carriers are rushing to keep up with demand, and many passenger airlines have been able to stay afloat by shipping light medical equipment on passenger planes that would have otherwise sat empty on the ground.
Some prominent regional airlines, most notably SkyWest, have also posted profits so far this year. Though many of those are driven by contracts with larger airlines that guarantee certain income, airlines have also been able to make money by connecting relatives in smaller towns that are visiting each other amid the crisis.
Private aviation has also seen a boom. As passengers continued to visit relatives or travel to vacation homes, the private aviation market had all but recovered in the U.S. by early July.
Airlines have also expressed interest in retaining as many employees as possible throughout the coronavirus crisis. United’s Kirby has most explicitly expressed interest in retaining as much staff as possible.
“If we can keep [staff] kind of on the sidelines a little bit while we get through the crisis then when there is a recovery, and there will be a recovery … we can snap back quickly,” Kirby said in an interview with CNBC soon after taking over as United’s boss earlier this year. “If we furlough people, if we lay them off, the snapback is going to be really, really hard.”
Kirby said he wants to focus on adjusting pay and “using voluntary programs and, in particular, asking people to work fewer hours until we get through the crisis” instead of cutting jobs temporarily or permanently.
JetBlue has also taken steps to protect its staff. It announced in July that it will not furlough any pilots until at least May 1, 2021, a full seven months longer than any other airline has concretely committed to protecting employees.
Such goals won’t completely prevent furloughs if they are needed, Krasnov warns, but airlines also have to be mindful of the added costs of re-training any employees, especially skilled employees like pilots, that aren’t furloughed for long enough.
“There’s this great balance between not carrying so many extra employees that it hurts the future viability of the company and having enough staff that if the magical vaccine comes out tomorrow and demand returns you can turn it back on,” Krasnov said. “There’s a pretty big cost to furloughing a pilot because of training costs. There’s a balance of if you’re going to furlough pilots. You have to have people out long enough to save money. A pilot, for example, may need to be out over 8 months to save money.”
Many experts agree that it could take three to four years before the U.S. aviation industry recovers to what it was before the coronavirus hit. And many agree that, like after the September 11 attacks, the industry will never look the same again. Exactly how screening and travel patterns, especially among business travelers who may be able to work more remotely, will change is still unclear, but many anticipate that, with time, there will be a recovery.
And Krasnov was quick to mention that there will be plenty of opportunity for young pilots in the coming years since a large portion of pilots are reaching the Federal Aviation Administrated-mandated retirement age and will either take a buyout now or leave airlines in the coming years.
“For a lot of people who choose to fly airlines for a career, it’s a little bit in their blood and it’s something they have a passion for, and that drives them as much as the financial reward,” Krasnov said. “The world will recover, and a current number of pilots on the seniority list are aging so there will be an opportunity in the future. We need to be patient.”
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