MIAMI– Curiosity has been set in on the U.S aviation industry as Boeing CEO Dave Calhoun predicts that a major airline bankruptcy will take place this year.

In an interview on the TODAY show on NBC, he stated that he didn’t “want to get too predictive on that subject” but it was “most likely” that this was going to be the case.

Upsetting The Big Three

Boeing was quick to confirm that he wasn’t talking about any one carrier, but the damage had already been done with airlines such as American Airlines’ CEO Doug Parker calling Calhoun earlier this week expressing “surpriser and disappointment”, according to the Wall Street Journal.

“We’ve had long-standing personal relationships with the airlines and they’re highly valued customers,” a Boeing spokesman said. “We will all get through this current pandemic and be stronger in the end.”

In the interview itself, Calhoun stated that it could take around three years before the industry gets back to 2019 demand levels, which has been a consistent message amongst some airlines globally.

Willie Walsh of IAG had stated the same, aiming for 2023-24 to be a suitable year to come back to 100% operational capacity, admitting to the UK Transport Committee that he doesn’t expect operations to reach normal levels until said time.

Norwegian Air (DY) have also announced the same, aiming for that year but also reducing the number of aircraft in its fleet too.

In the U.S, demand for air travel is down more than 90% year-on-year, with Boeing expecting demand to get back to around 50% by the end of the year.

Comments Hurting Stocks

Due to Calhoun’s comments, shares at Boeing and also those of the major airlines are down on that expectation, falling about 60% year to date.

If the CEO’s comments speak any truth, then it will cause shares in airlines to fall much further.

It does ultimately beg the question of which airline Calhoun is hinting at.

Big Intervention from the U.S. Government

The U.S Government is currently in the process of handing bailouts over to a list of airlines. It is understood the following are receiving such bailouts:

  • American Airlines
  • Southwest Airlines
  • Alaska Airlines
  • Allegiant
  • Frontier
  • Hawaiian
  • JetBlue
  • United
  • SkyWest Airlines

May 1 saw such carriers and the Treasury Department agree a US$25b package for payroll assistance, which represents half of the US$50b bailout package for the airline industry as a whole.

American Airlines is understood to receive around US$5.8b in such assistance under the CARES Act, with Southwest Airlines receiving US$3.2b and Delta receiving US$5.4b also.

This package will, therefore, avoid layoffs in the sector until October as well as the Treasury taking stakes in airlines too.

VICTORVILLE, CA – MARCH 24: Delta Air Lines jets are parked in growing numbers at Southern California Logistics Airport (SCLA) on March 24, 2020 in Victorville, California. As the coronavirus pandemic grows, exponentially increasing travel restrictions and the numbers of people in quarantine, airlines around the world are scrambling to find places to park a majority of their fleet as they wait to see how the situation will play out. (Photo by David McNew/Getty Images)

Loans and Not Grants?

Criticisms have been given to the Treasury Secretary Steve Mnuchin due to the department previously suggesting that carriers would be required to pay back up to 30% of the grants, which would instead make them loans.

This point, in turn, could be what Boeing CEO Calhoun is going on about. If the U.S Government deems them as loans, it could put pressure on the industry’s financial structure, as it would not have the revenues to justify paying it back for at least three years.

At the moment, it is understood that the government will take a one-percent stake in Delta at close to $25 per share over the next five years. This could be seen as a collateral move to ensure the U.S. Government is controlling the carrier’s spending, even if the stake is significantly minuscule.

The Chair of the U.S. House Committee on Transportation and Infrastructure, Rep. Peter DeFazio stated that whilst this was good for preserving jobs, it was a deal that was far from perfect.

“Even though this process was neither easy nor perfect, it is critically important that in the end there are agreements in place that put workers and families first by keeping hundreds of thousands of airline employees— from flight crews to baggage handlers— on the payroll during this extremely tumultuous period for the U.S. economy”.

“I strongly believe what Congress laid out in this provision of the CARES Act—to put workers first—should be the model for any industry-specific relief going forward” he added.

The Big Question of Who?

Overall, with a lot of the major players in the domestic and international U.S. market taking bailouts from the government, the question of who will go under first remains the purely speculative point.

Nevertheless, it is quite clear that what Calhoun is saying can be very dangerous to the industry and can cause investor fallout.

This was definitely seen when conglomerate billionaire Warren Buffett announced earlier this month that he would be selling all of his associated shares in the industry, amounting to a US$4b sell-off.

As layoffs are not likely until October, it will be interesting to see not only what the numbers will be if the government does not expand its assistance but also what restructuring might be done going forward.