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United Airlines Has a Huge Warning for Airlines – The Motley Fool

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- Hirdetés -

Shares of most major U.S. airlines surged in the last half of May and the first week of June, as investors became optimistic about the potential for a V-shaped recovery in air travel demand. This belief wasn’t totally unfounded. The number of people passing through TSA checkpoints increased rapidly during May and June, after bottoming out in mid-April.

However, the strong rebound of the past few months isn’t going to continue. Earlier this week, United Airlines (NASDAQ:UAL) showed investors convincing evidence that the nascent recovery in air travel demand is already running out of steam.

- Hirdetés -

A United Airlines plane on a runway

Image source: United Airlines.

Passenger numbers improve

On many days in mid-April, fewer than 100,000 passengers passed through TSA checkpoints — down about 96% year over year. However, air travel activity ramped up steadily during May and June. On May 20, throughput at TSA checkpoints surpassed 10% of 2019 levels for the first time since late March. By June 14, throughput exceeded 20% of year-ago levels. And on July 2 (the Thursday before the Independence Day long weekend), the TSA screened 764,761 passengers, or 36.6% of the year-earlier figure.

Many airlines tried to capitalize on the improving demand trends by restoring numerous flights to their summer schedules that they had cut during April and May. As of a few weeks ago, discounters Spirit Airlines and Allegiant Travel both planned to operate more than 85% of their July 2019 capacity this month. The legacy carriers have been a little more cautious, as they rely more on business travel and long-haul international flights, but they have still significantly increased flight volumes since May.

There was always a risk that the air travel recovery would lose steam in the fall, when leisure travel demand tends to be seasonally weaker. However, demand appears to be fizzling out even earlier, as the trajectory of the COVID-19 pandemic has worsened considerably in recent weeks.

COVID-19 strikes back

During the first two weeks of June, about 22,000 new COVID-19 cases were reported in the U.S. on a typical day, according to The New York Times. For comparison, the U.S. has averaged more than 50,000 new cases per day over the past week. Additionally, the COVID-19 death rate is starting to increase again.

Unsurprisingly, the uptick in cases is denting air travel demand. TSA throughput has continued rising in recent days (albeit more slowly than last month), but United Airlines revealed on Tuesday that airline industry bookings leveled off in June and decreased significantly toward the end of the month.

A chart showing a drop-off in bookings for United Airlines in late June

Image source: United Airlines July 7 SEC filing.

The reversal in bookings momentum implies a slower recovery in air travel over the next few months than airline bulls had been hoping for. United Airlines said on Tuesday that it plans to operate just 35% of its August 2019 capacity next month. Less than a week earlier, it had been planning to increase capacity to 40% of 2019 levels in August.

Travel demand has been particularly hard-hit in states and cities that are imposing quarantine requirements for travelers coming from states with high COVID-19 case numbers. For example, New York, New Jersey, and Connecticut have announced a 14-day mandatory (though probably unenforceable) quarantine for people arriving from 19 states, including California, Florida, and Texas. United Airlines said that bookings at its Newark hub plummeted after the first such quarantine restrictions were announced on June 24.

Airlines must shrink dramatically

Since April, CARES Act grants have covered a significant portion of airlines’ payroll costs, insulating the companies from making tough decisions about staffing. However, the CARES Act funds — and related restrictions on layoffs and furloughs — will run out at the end of September.

The deceleration in booking activity at United Airlines in recent weeks signals that airlines can’t count on steady upward momentum in travel demand. Airlines — especially the full-service legacy carriers — will need to rightsize their workforces to prepare for an environment where demand could remain well below 2019 levels for a year or two (and possibly even longer).

For its part, United Airlines has sent Worker Adjustment and Retraining Notification (WARN) notices to 36,000 U.S.-based employees (about 45% of its domestic workforce), alerting them to potential layoffs and furloughs later this year. The airline says that it hopes to accomplish as many job cuts as possible through early retirements, buyouts, and other voluntary moves. Nevertheless, it’s clear that there will be a substantial number of job reductions, and many will be through involuntary layoffs or furloughs.

The lesson for other airlines is that demand improvements alone won’t stem their cash burn over the next few quarters. Cost cuts — including workforce reductions — will have to be their main tool for mitigating losses in the near term.

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