Are the “Big Four” Carriers Too Big to Fail?

Larry Kudlow, White House Economic Advisor, shocked the public yesterday when he said that the planned bailout package is worth more than $2 trillion, which is the double the amount previously reported.

While that is obviously a mouth-watering figure, the worrying part is that even that much may not be enough to save some businesses, as it is now evident that the coronavirus will have a bigger economic shock than the 2008 financial crisis and 9/11.

“Take post 9-11, post-financial crisis – double it – and it’s still not there,” American Hotel Lodging Association CEO Chip Rogers said of the magnitude of financial hit on the hotel industry.

Hotels, as well as travel leisure businesses, are hit badly. It was reported yesterday that the hotel industry is requesting $150 billion to be allocated to them from the stimulus package.

“The bailout requests are mind-boggling. And it’s going to be a matter of who’s going to win and who’s going to lose,” said Dennis Kelleher, chief executive of advocacy group Better Markets.

Alongside the hotel industry, the airlines are arguably the most endangered sector in this crisis. Globally, shares of airlines have been smashed over the past weeks, which has led to some European countries considering the nationalization of airlines as the only way for them to survive.

Italy was forced to take full ownership of its troubled national carrier Alitalia to save it from collapse, while Germany is considering taking similar steps to save Lufthsana, the biggest European airline, from crashing. Almost 60 airlines worldwide signed a plea asking for Government support.

In the United States, the situation isn’t much different. The so-called Big Four – Delta Airlines (NYSE:DAL), Southwest Airlines (NYSE:LUV), American Airlines Group (NASDAQ:AAL) and United Airlines Holdings (NASDAQ:UAL) – is on the brink of collapse.

It is important to note that these airlines control more than 80% of the US market.

“We now face a legitimate liquidity crisis and questions about our ability to meet ongoing debt obligations. This crisis hit a previously robust, healthy industry at lightning speed, and the government response needs to be just as swift, in order to save it,” it is written in a letter from groups representing airlines, labor, general aviation, the travel industry, and manufacturers addressed to Treasury Secretary Steven Mnuchin and congressional leaders.

“Our concern is compounded by the fact that the crisis does not appear to have an end in sight.”

The US President Donald Trump also hinted that his administration will work hard to save the airlines industry.

“We don’t want airlines going out of business,” he said in a press briefing a few days ago, while Senate Minority Leader Charles Schumer added that “we know we have to keep them [airlines] going”.

This sentiment is also shared by many analysts, who believe that the US administration will never let big airlines fail. One of the key reasons for this is the fact that airlines employ nearly 750,000 people, while indirectly supporting more than 10 million jobs.

For them to save their jobs, the carriers are requesting nearly $60 billion in grants, loans and tax relief.

“The major airlines know that unlike a local restaurant, they will never be allowed, collectively, to fail completely. In practice, the public has subsidized the industry by providing de facto insurance against hard times in the form of bailouts or merger approvals. And now here we go again” said Tim Wu, professor at Columbia Law School.

Now let us take a closer look at how each one of these airlines is faring up in these troubled times.

Delta Airlines

Delta, the world’s largest carrier by revenue, assets value, and market capitalization, reported a fall in revenue for March by $2 billion due to a sharp drop in demand for air travel. CEO Ed Bastian expects that the revenue for the next three months – April to June – is expected to decrease by 80% to $10 billion.

It is also estimated that Delta needs $50 million a day to survive. The airline is working to cut costs on all fronts with around 10,000 of Delta staff volunteering to take leave.

Shares of Delta are currently trading 63% down since the beginning of the year. This week, the stock price traded below the $20 handle for the first time since 2013.

American Airlines

Compared to its competitors, American, the leading U, is going a step further to secure some revenue. The company announced that it will start utilizing its currently grounded passenger aircraft to move cargo between the United States and Europe.

This will be the first time since 1984 that American will deploy cargo-only aircrafts.

“Challenging times call for creative solutions, and a team of people across the airline has been working nonstop to arrange cargo-only flight options for our customers,” said Rick Elieson, President of Cargo and Vice President of International Operations at American.

Similarly to Delta, shares of American are down 64% since the beginning of the year, trading at levels last seen in 2012.

United Airlines

During the last few days, the management of United has joined its colleagues in sending warnings of massive layoffs if a “sufficient” financial support is not provided. The company warned it will start taking steps to reduce the payroll and reflect a 60% reduction in flying for April.

“As travel demand continues to plummet, even more cost-cutting measures will be required soon to keep our company afloat,” it is said in a United letter.

“To be specific, if Congress doesn’t act on sufficient government support by the end of March, our company will begin to take the necessary steps to reduce our payroll in line with the 60% schedule reduction we announced for April.”

The carrier is now considering reducing pay, or a combination of job and pay cuts.

Shares of United have suffered the most among the Big Four, losing more than 72% since the start of 2020.

Southwest Airlines

Southwest, the world’s largest low cost carrier, announced it has been forced to cancel around 170 out of 250 flights in and out of Chicago, its major flying hub.

“We’ve had to pull that back by canceling around 170 flights. We’re averaging four to six flights per hour. There are only so many flights they’re letting in and out of Chicago,” Southwest Airlines spokeswoman Brandy King said.

Southwest stock price is holding up really well compared to other constitutions of the Big Four, with losses of around 41% recorded so far.

The Texas-based carrier had a 16.9% market share in the US in 2019.

Summary

Major US companies are eagerly anticipating the stimulus package aimed at helping businesses survive the worst economic crisis in decades. The bailout plan is expected to be worth around $2 trillion, making it the most expensive economic rescue package in U.S. history.

Among other vulnerable sectors, the Big Four US carriers are struggling to cope with tens of thousands of cancelled flights. The industry has requested around $60 billion in grants, loans, and tax reliefs in response to the coronavirus crisis, but even that may not be enough to save the Big Four.