Dallas — The four largest U.S. airlines — American, Delta, United and Southwest — have taken on billions in new debt from private and government sources, burning through $30 million to $70 million a day in order to get through the depths of the COVID-19 pandemic when virtually no one is flying.
Airlines had few choices, but what happens when the bills come due for all the new borrowing?
For Fort Worth-based American, its debt load totals around $40 billion. Dallas-based Southwest is in the best position of all the major airlines, taking out $7 billion in new debt since the COVID-19 pandemic began.
Airlines are looking at significantly lower profits for years to come as a combination of health concerns and a deepening recession is predicted to keep many travelers off airplanes until 2022 and beyond. And carriers will have to use more of that profit to pay off loans taken due to the COVID-19 pandemic.
One analyst said American won't get through without significantly more help from the government or bankruptcy, an experience its leaders are all too familiar with. Another analyst downgraded the stock and put a $1 target price, showing little faith that it will have future value.
American is responsible for the paychecks of 130,000 employees through at least September and Southwest has 60,000 workers nationwide. Both received government bailouts to keep workers on their payrolls until then.
"The path forward is still really uncertain," said Peter McNally, a research analyst for investment firm Third Bridge. "I don't know too many people who say things are going to bounce back for airlines in September."
Warren Buffett’s Berkshire Hathaway dumped its 10% share in airlines at the end of April. Buffett called his investments “a mistake” and said he was worried about the increased debt airlines are taking on to survive.
"The world has changed for airlines," Buffett said at Berkshire Hathaway's annual meeting on May 1.
Growing debt at American
Even before the COVID-19 pandemic became an international crisis, American was carrying nearly $30 billion in debt dating back to before its 2011 bankruptcy and subsequent merger with U.S. Airways.
American piled on more debt by buying new, fuel-efficient airplanes, such as the still-grounded 737 Max, and building its new Fort Worth headquarters and operations center. It also invested in airports across the country.
American has the lowest profit margins of any of the major airlines, the most employees and planes.
But American's revenue nearly doubled in 2019 to $45.8 billion compared to previous highs before the Great Recession and more passengers than ever were flying. The company paid down $4.2 billion in debt in 2019 and refinanced other loans to lower rates.
The company entered the year with about $6 billion in cash on hand, enough to get it through a downturn comparable to the one the airline industry saw after the terrorist attacks of Sept. 11, 2001.
Nothing could prepare airlines for a 95% drop in passengers for months followed by a prolonged decrease in flying, McNally said. That plunge took air travel back to levels not seen since the 1950s.
"The plan right now is to get through this," McNally said.
Is an airline bankruptcy imminent?
American is paying a high price to fight its way through the pandemic financially. It burned through $70 million a day in April and will still be using about $50 million a day by June.
For weeks, the airline was paying more in refunds than it was getting in new bookings. Even if air travel does bounce back some this summer, analysts are unsure if American has the ability to make it through.
"My feeling is that American won't survive without government support beyond what they are currently being given," said Colin Scarola, an analyst with CFRA Research. "Regardless of that, it will probably fail and go into bankruptcy."
The last time American went through a debt problem and filed bankruptcy it was rescued through mergers. Scarola said mergers are less likely today because debt loads are so high across the industry.
Duane Pfennigwerth, an analyst with Evercore ISI, downgraded American's stock and put a $1 target price on it, down about 90% from its current price and more than 97% from the price that it was trading at in February, before the pandemic. American shares were trading at around $10 on Friday.
By the end of 2020, American will likely have more net debt than annual revenue, Pfennigwerth said.
American Airlines CEO Doug Parker said the company is doing everything it can to get through the crisis. The company cut 2020 expenditures by about $12 billion, including all building projects.
The company expects to have about $11 billion in cash on hand by the end of June, including $5.8 billion in government grants and loans. It's also applied for another $4.75 billion in government loans.
Most of those loans and credit lines tapped by American won't come due for at least two years, Parker said. That should buy American time to start making money again before all those loans come due.
"We need to get back to a point where we're generating free cash flow in the future, and as we do that, we'll be using that to pay down the debt over time," he said.
American also has about $10 billion in "unencumbered assets," property such as airplanes and airport gate contracts that does not have a loan against it.
After American, Atlanta-based Delta Air Lines has the most debt, with about $24 billion at the beginning of April. Chicago-based United has almost $24 billion in debt. United, too, has been taking out more loans and offering stock to raise cash.
Opportunity for Southwest
Southwest has the least debt of any airline with about $6 billion at the end of March. The Dallas-based carrier has about $9.3 billion in cash and has been just as aggressive in asking banks for money as any other airline.
It’s burning through about $30 million of cash a day with 60,000 employees. Still, to stop that, it will need to see passenger levels rise or continue to cut costs.
Southwest CEO Gary Kelly said the company has been building its cash stockpile in case it needs it but might end up using a lot of it to pay back creditors or the federal government for the $1 billion in loans it took as part of the CARES Act.
"Cash in this environment is an asymmetrical risk," Kelly said in a call with investors in late April. "Not enough, that is a huge problem. Too much, we'll pay down debt or we'll buy available assets opportunistically."
Southwest also has the best opportunity to return to previous flying levels since most of its routes are domestic and the rest are within North America. Transatlantic and transpacific flying are expected to return more slowly.
The airline also owns more of its planes outright than any other carrier. Airlines often lease planes or have loans against them.
"It's easier to park planes when you aren't paying for them," Scarola said.
Southwest did strike a deal on Friday to sell and lease back 10 of its 737-800 and 10 737 Max 8 jets, which will give the company an immediate $815 million cash infusion.
Still, Southwest is being aggressive to cut costs. Kelly said the company is trying to avoid furloughs but said he won't make any promises. The company has approached unions asking for cost-cutting ideas, a move labor leaders interpreted as preparation for concessions down the road.
Southwest has also continued to ask for voluntary leave from employees and is working on early retirement programs to get smaller. About 5,000 flight attendants and 821 pilots volunteered to take time off this month.
In the last few days, Kelly has appeared on two national television news shows, mostly trying to convince passengers it's safe to fly again and that Southwest is the better choice.
"There's more than one airline and there's a competition," Kelly told CNN Business this week. "This is a position we have been in before."
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