A Sea of Seats and Just 11 Flyers: Airlines’ Woes Dwarf U.S. Aid
A Sea of Seats and Just 11 Flyers: Airlines’ Woes Dwarf U.S. Aid
(Bloomberg) -- Miguel Diaz’s JetBlue Airways Corp. flight from New York to Orlando cost just $79 with a checked bag and was nearly empty. The 11 passengers each had a row of seats to themselves, spaced at least six feet apart to maintain high-altitude social distancing.
“The entire experience was luxurious,” the 30-year-old Queens librarian said.
He was one of 279,018 people who passed through security at a U.S. airport on Tuesday -- compared with 2.2 million on the same day a year ago. With the coronavirus pandemic shrinking the number of passengers, now down more than 90%, some U.S. airlines have announced plans to cut as many as eight out of 10 flights in coming months.
That’s got them and their employees anticipating a $61 billion aviation aid package in the $2 trillion economic rescue bill signed Friday by President Donald Trump. The bailout is designed to avert thousands of layoffs but it won’t solve the industry’s biggest problem: A lack of passengers.
Carriers have cut food and drink service with only canned or bottled water available on request in some cases. And with passenger cabins flying almost empty, airlines are turning to freight operations. American Airlines Group Inc. has started parcels-only flights for the first time in 36 years and Delta Air Lines Inc. has expanded charter freight operations.
Yet the potential for months-long disruptions far outweigh what the industry faced after the Sept. 11, 2001, terrorist attacks.
Carriers are losing money on almost every flight.
“You can’t cut a plane in half,” said Michael Ball, a professor at the University of Maryland’s Robert H. Smith School of Business who specialized in aviation issues. “You cut your level of service, but you have to maintain your basic routes and your network.”
The rescue plan allocates $50 billion to passenger airlines, half in loans and half in cash assistance earmarked exclusively for payroll, benefits, healthcare and other employee costs. Cargo haulers, airline contractors and airports will also be eligible for aid.
There are strings attached. Airlines may have to give the government options, preferred stock or other securities in exchange for support. The aid also prohibits stock buybacks and limits executive compensation among other restrictions tailored to avoid backlash over corporate largesse that followed previous government rescues of big companies in trouble.
“This is not an airline bailout. It is support to the airlines for national security reasons that the taxpayers will be compensated for,” Treasury Secretary Steven Mnuchin said Friday on Fox Business News. “We need to make sure when we reopen the economy we have domestic travel.”
The bill calls for Mnuchin to publish application procedures for the payroll aid within five days. And the first payroll grants to airlines must go out within 10 days.
The extraordinary assistance was necessary so the carriers could respond quickly after the virus and social distancing measures have run their course, American Airlines Chief Executive Officer Doug Parker told workers in a video message on Thursday.
“Our elected officials want us to continue to provide safe air travel through this crisis and they want us to be up and flying when demand for travel picks up again, and that’s what we’re going to do,” he said.
In exchange for the grants, airlines must maintain employment levels through September and are barred from cutting worker pay and benefits. However, many airline employees are paid hourly and will be working fewer shifts, so their checks are expected to shrink significantly.
Companies also are barred from paying dividends or buying back shares through September 2021, and must cap executive compensation and termination payouts for two years.
A provision of the legislation gives Transportation Secretary Elaine Chao authority to force airlines accepting aid to continue flying to destinations they served as of March 1, but it’s unclear how she may wield that power.
The language stops short of requiring airlines to continue their current schedules. It merely says they have to continue flying to airports they currently serve and doesn’t say how frequently. The bill also gives Chao wide latitude, saying she can do what she deems necessary.
“This is an important issue and the department supports the intent of maintaining a national network of air service to communities across the country,” the agency said in a statement. “We will have further guidance about how this will be accomplished in the days to come.”
In addition to the cash infusion and loans contained in the bailout legislation, the bill contains an additional $56 million to supplement flights into small, rural airports to “prevent, prepare for, and respond to coronavirus.”
“The government does not want us to shut down because we’re essential,” said Southwest Airlines Co. Chief Executive Officer Gary Kelly. “It may not be at the same number of travelers we had before, but you will certainly shut the country down if we don’t have a means to transport goods and people. So they want us to keep flying.”
Airlines already are rushing to slash other costs. Executives are taking pay cuts, freezing hiring and offering voluntary unpaid leave to employees -- more than 21,000 volunteered for such offers at Delta alone.
Above all, with so few passengers flying, carriers are dramatically reducing their flight schedules -- American Airlines is planning an 80% cut in flying for May, while Delta is trimming 70%. The two carriers are parking more than 1,000 aircraft. United Airlines Holdings Inc. will reduce flying 60% next month, with more cuts likely in May.
Such draconian cuts are “new ground,” said Ball, the University of Maryland professor. “This can’t be a real long-term situation or something’s got to give.”
The Federal Aviation Administration has taken steps to help, such as giving airlines a grace period for pilots and others to complete certain training and allowing carriers to stop flying into congested airports at which they would normally lose slots that went unused.
Total Shutdown?
Those tools may only go so far and the scant passenger demand means more extreme measures can’t be ruled out, according to Mike Boyd, president of aviation consultant Boyd Group International.
“The package will not provide the one thing that airlines need – business,” Boyd said in a report Thursday. “Airlines are flying empty airplanes -– load factors in the teens or lower -- and this relief program is only going to extend the amount of time before the industry has to ground itself. A total or nearly-total temporary shutdown is in the cards, regardless of what Congress wants.”
Airports should be preparing for a potential air service shutdown of unknown duration “that could manifest in a number of days,” he said.
The industry will likely hit its low point in the second quarter before possibly beginning to rebound in the third quarter, Cowen analyst Helane Becker said via email.
“If airline traffic starts to come back in mid to late June or July, we suspect the airlines will be okay. If it takes longer, then when September 30 comes along, they will start to make difficult decisions about furloughing employees until there is a need for them again,” she said.
Practical Considerations
In the meantime, airlines will have to wrestle with difficult choices.
“We certainly do not believe they can continue to fly 5% load factors indefinitely, nor should they, but remember, pilots need to maintain a certain minimum level of flying every month or they can’t fly until they re-qualify,” she said. “As a result, while a complete shutdown for a few weeks might be advisable, it is probably impractical.”
For people who continue to fly, they’ll likely have plenty of room to move about the cabin. Jaydene Benjamin, a 26-year-old South African who moved to New York as part of an au pair program, stepped off a Southwest flight to the Los Angeles suburb of Burbank on Thursday with just a handful of passengers on board.
“There were people who had masks on. I didn’t wear one. I’ve heard that you shouldn’t wear one unless you were already infected,” Benjamin said. “Everyone is stressing out over coronavirus, but I was worried because I’m unemployed and have no money. I don’t like being other people’s problem.”
She said she fled New York as a last resort to look for work and plans to self-quarantine for two weeks after the federal government recommended that step for everyone leaving the city earlier this week.
She said there was no unusual screening when she landed.
“There were police officers nearby who were announcing that anyone who sees someone who’s unwell should report it, but that was it,” she said.
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