Outlook for US airlines remains cloudy despite further $15bn aid injection

Congress looks poised to extend another $15bn in aid to beleaguered US airlines — a reprieve for employees, but one that raises questions about the industry’s final destination.

Not for the first time, airlines had threatened to furlough tens of thousands of staff when conditions attached to earlier rounds of bailout funds expire at the end of this month. American and United alone had put 27,000 employees on notice that it might stop paying them on April 1.

While some aspects of President Joe Biden’s $1.9tn economic stimulus package have attracted political controversy, the extension of the airlines’ Payroll Support Program is not one of them. The new money — $14bn for airlines and $1bn for their contractors — will take the total earmarked for the industry to $63bn.

But the PSP, which bars airlines from furloughing employees or cutting pay, was created in March 2020 to see the airlines through a sharp liquidity crisis when it was assumed the coronavirus pandemic would last only months.

A year on, US passenger traffic remains at a third of 2019 levels and the International Air Transport Association forecasts a full recovery globally only in 2024. It is unclear when big US airlines will be able to support their current payrolls without subsidies.

“It seems like the system is a little bit on autopilot,” said consultant Matt Barton of Flightpath Economics. “The industry is obviously still completely upside down. Does another extension simply delay the inevitable? Does it just make it harder for the industry to adjust?”

When the programme’s initial deadline expired at the end of September, airlines furloughed tens of thousands of staff, only to recall most of them when Congress extended the scheme for the first time in December. The extension in the latest stimulus bill, which is being taken up by the Senate this week, creates a new day of reckoning for industry of October 1 2021.

Critical funding

Analysing airlines in the age of Covid has been a little like looking at dotcom start-ups: cash burn has been the key metric.

At American, the largest and most heavily indebted of the big carriers, for example, net operating cash flow swung from $3.8bn in 2019 to minus $6.5bn in 2020. Revenue fell 62 per cent to $17.3bn. With the PSP barring furloughs, its bill for salaries, wages and benefits was $10.9bn, only 13 per cent lower.

The company reported a cash cushion of $6.9bn at the end of December, though, after taking $6bn in PSP funding last year. It had also been able to raise $2.6bn in new equity and $6.2bn in debt, arguably in part because private investors saw the US government standing behind American.

Across the four big US carriers, PSP funding last year was equivalent to 43 cents of every dollar reported as cash and short-term investments at the end of December.

So far, the US Treasury has disbursed nearly $35bn of the $48bn Congress has allocated through the initial programme and its first extension, according to the Peter G Peterson Foundation. The US taxpayer is getting warrants — the right to buy shares in the airlines — in return for the funds, which could leave them owning between approximately 8 per cent and 20 per cent of the four main carriers. How much those stakes will be worth, if anything, depends on what happens next to air travel.

Bar chart of Total anticipated payroll support under original PSP and first extension, $bn showing Congress has allocated $48bn in airline bailout funds so far

Previous crises

Travellers have returned to the skies slowly after past crises. It took nearly three years for passenger traffic to recover to the level it reached in August 2001, the month before the September 11 attacks. It took six years after the 2008 financial crisis before US airlines carried more than 836m passengers, the 2007 peak.

The airline industry will recover, but it would take time, Barton said. In particular, the lucrative engine that is business travel will not return to previous levels until road warriors feel comfortable sitting “elbow to elbow with 150 of their closest friends”.

The new reality included substantially lower revenue and a reduced yet persistent cash burn, said Deutsche Bank. Its analysts predicted in a recent note that while several carriers could break even on a cash flow basis in 2021, “most are at least a year away from sustainable profitability”.

Kevin Williams, an economist at Yale University, said demand would take several years to return to 2019 levels, when more than 1bn people flew on US airlines. In the meantime, airlines are shrinking their fleets.

The government should consider aiding the transportation sector more broadly, as well as other struggling industries, and helping workers who lose jobs to find new work in fields where employment is growing, Williams said.

Column chart of Recovery took several years after previous drops. showing US airline traffic falls after external shocks

Bailout proponents

Air travel is necessary to link a geographically vast nation, making it an important element in a broader economic recovery, said Liesl Miller Orenic, a labour historian at Dominican University. Pilots, in particular, have training and flying standards they need to meet to maintain their legal certification to fly jetliners.

Government aid has positioned the US airline industry better than any other international market to capitalise when demand does return, Ed Bastian, Delta chief executive, said last month.

Doug Parker, American chief executive, said the company would fly less than anticipated this summer, and so “we are fully behind our union leaders’ efforts to fight for an extension [of the PSP]. Our nation’s leaders understand the vital role airline workers play in keeping the country moving.”

Sara Nelson, president of the Association of Flight Attendants, which has 50,000 members, said there was Congressional support for the programme “to continue until we can get the pandemic under control”.

The US airline industry employed more than 500,000 workers in 2019, and Orenic said the dollars they earn flow to other people in the economy.

“It’s like, ‘Why do we need to save auto?’,” she said, comparing the current situation in aviation to former President Barack Obama’s bailout of the car industry after the 2008 financial crisis. “Well, you’re saving the auto industry, but you’re also saving all of those secondary jobs.”

The PSP acted as a bridge given the pandemic’s initial shock and severity, said Barton of Flightpath Economics, “but it’s time to get real. It’s time to accommodate the fact that the reality is fundamentally different now.” If capacity continues to exceed demand, “then the question becomes, do you continue to support employees and airlines at this magnitude until 2023 or 2024?”

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