MIAMI — Today, American Airlines (AA) and Southwest Airlines (WN) reported billion-dollar losses in their Q2 reports. We take a look at the numbers and future outlooks for the companies.
As Q2 results from various airlines are coming out today, AA’s and WN’s Q2 combined US$5.7bn loss gives us a clear picture of the financial state airlines are currently in.
American Airlines Q2 Losses and Current Liquidity
In terms of net loss, the number is at US$2.1bn or US$4.82 per share. Excluding net special items, Q2 net loss amounts to US$3.4bn or US$7.82 per share.
American Airlines also boosted available liquidity in Q2 by a net US$3.6bn. It achieved this through offerings of common stock, convertible bonds, and secured bonds.
Thus, the airline ended Q2 with approximately US$10.2bn of available liquidity. Additionally, it signed a term sheet with the U.S. Department of the Treasury for a US$4.75bn secured loan. The loan is set to close in Q3 2020.
Furthermore, AA announced two senior secured note transactions totaling US$1.2bn. The company’s Q2 pro forma liquidity balance including these transactions would be around US$16.2bn.
American Airlines Strategy to Save Cash
The airline estimates that it will reduce its 2020 total operating and capital expenditures by more than US$15bn. AA will achieve this reduction primarily through cost savings related to less flying. In addition, the company implemented the following cost actions:
- Retired four aircraft types, consisting of 20 Embraer 190, 34 Boeing 757, 17 Boeing 767, and nine Airbus A330-300, along with a number of older regional aircraft. In addition, the company placed its Airbus A330-200 and certain older Boeing 737 into a temporary storage program. In aggregate, these changes remove more than 150 aircraft from the fleet and bring forward the cost savings and efficiencies associated with operating fewer aircraft types.
- Introduced additional voluntary leave of absence and early-out programs to help right-size its frontline team. American anticipates having over 20,000 more team members on payroll than needed to operate its fall schedule. In total, more than 41,000 team members have opted for early retirement, a reduced work schedule, or partially paid leave.
- Consistent with the CARES Act, reduced its management and support staff team, including officers, by approximately 5,100 positions, or 30%.
- Announced changes to its international schedule for 2021. American expects its summer 2021 long-haul international capacity to be down 25% versus 2019 and also plans to exit 19 international routes from six hubs. These changes will allow the airline to reset its international network for future growth as demand returns.
- Reduced non-aircraft capital expense by US$700m in 2020 and another US$300m in 2021 through reductions in fleet modification work, the elimination of all new ground service equipment purchases, and pausing all noncritical facility investments and IT projects.
Southwest Airlines Q2 Losses and Current Liquidity
On its part, Southwest Airlines also reported today its Q2 2020 results, with a net loss of US$915m and US$1.63 net loss per diluted share. Excluding special items, the total amounts to a net loss of US$1.5bn and US$2.67 net loss per diluted share.
Additionally, Q2 operating revenues for WS were at US$1.0bn, down 82.9% year-over-year. The airline ended Q2 with its liquidity at US$15.5bn, well in excess of debt outstanding,
As of June 30, 2020, the Company had approximately US$14.5bn in cash and short-term investments, and a fully available revolving credit facility of US$1.0bn.
Since the Company’s previous update of cash and short-term investments of approximately US$13.9bn as of June 17, 2020, the Company received its third disbursement of PSP proceeds in the amount of US$652m.
The remaining US$326m of PSP proceeds is expected to be received by the end of this month.
The Company currently has unencumbered assets worth approximately US$12bn, including approximately US$10bn in aircraft. As of June 30, 2020, the Company was in a net cash position of US$4.9bn, and its adjusted debt to average invested capital (leverage) was 49%.
Southwest Q2 Revenue Results
Southwest Airlines’ Q2 2020 total operating revenues decreased 82.9% year-over-year, to US$1.0bn, as a result of continued negative impacts to passenger demand and bookings due to the pandemic.
Q2 2020 operating revenue per available seat mile (RASM, or unit revenues) was 5.63 cents, a decrease of 61.9 percent, driven by a load factor decrease of 55.0 points, and a passenger revenue yield decrease of 21.1 percent, all year-over-year.
Thus far in July 2020, bookings for all months have softened; trip cancelations have increased modestly, and the rate of sequential monthly improvement for July revenue trends has slowed.
Not surprisingly. WS’s July-August 2020 operating revenues are currently estimated to decrease, year-over-year, in the range of 70 to 75 percent; capacity is estimated to decrease approximately 30%, year-over-year; and load factor is estimated to be in the range of 40 to 45%.
Demand and Capacity Outlook for American Airlines
American Airlines says passenger demand and load factors have improved since bottoming out in April, but continue to be significantly below 2019 levels.
While May and June revenue trends were encouraging, demand has weakened somewhat during July as COVID-19 cases have increased and new travel restrictions have been put into place.
The company will continue to match its forward capacity with observed bookings trends and presently expects its Q3 system capacity to be down approximately 60% year over year.
Southwest Cost Performance and Future Outlook
Q2 2020 total operating expenses for WN decreased by 56.8%, year-over-year, to US$2.1bn. Total operating expenses per available seat mile (CASM, or unit costs) decreased 3.4 percent, compared with Q2 2019.
Q2 2020 economic fuel costs were US$1.33 per gallon and included US$24m, or US$.12 per gallon, in premium expense and no cash settlements from fuel derivative contracts, compared with US$2.13 per gallon in Q2 2019, which included US$28m, or US$.05 per gallon, in premium expense and US$.06 per gallon in favorable cash settlements from fuel derivative contracts.
Market fuel prices have increased since the end of Q1 2020, but are still favorable compared with last year, and resulted in an approximate US$153m reduction in Q2 2020 fuel and oil expense compared with original market fuel price projections in January 2020.
Finally, WN continued to operate fewer of its oldest, least fuel-efficient Boeing 737-700 aircraft as a result of capacity cuts due to the pandemic which, combined with lower load factors, resulted in a year-over-year improvement of 14.5% in ASMs per gallon (fuel efficiency) in second quarter 2020.
Comments from American Airlines CEO
“This was one of the most challenging quarters in American’s history,” said American Airlines Chairman and CEO Doug Parker.
“COVID-19 and the resulting shutdown of the U.S. economy have caused severe disruptions to global demand for air travel. In spite of these challenges, the American Airlines team has done a phenomenal job taking care of our customers and our fellow team members.”
“We have moved swiftly to improve our liquidity, conserve cash and ensure customers are safe when they travel,” Parker continued. “There is much uncertainty ahead, but we remain confident we will emerge from this crisis more agile and more efficient than ever before.”
When asked about AA’s results, Parker tweeted, “As horrible as this crisis is – the one opportunity it has given us is to take the largest airline in the world and shut it down and start it from scratch. That allows us only to add back what makes sense.”
Comments from Southwest Airlines CEO
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, “As our nation continues to battle the COVID-19 pandemic, demand for air travel remains weak, which was the driver of our second-quarter net loss of approximately $1.5 billion, excluding special items.”
“We were encouraged by improvements in May and June leisure passenger traffic trends, compared with March and April; 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. We will adjust our flight schedule aggressively and frequently in response to this volatile demand environment.”
“I am incredibly proud of our Employees for their superb planning and cost management, swift actions to bolster liquidity, quick adaptation of our route network, and outstanding Customer Service. Our top priority is the safety and health of our People and our Customers.”
Featured image: AA and WN on the tarmac. Photo: cibercuba.com