When Bankruptcy (Again) May Make Sense for Some US Airlines


Right now, airlines in the US have a lot of liquidity thanks to private deals done with all kinds of collateral, and for some the Cares Act loan opportunity. How long this will last depends on the airline’s cash burn rate, and for the largest airlines this is still running at $10M-$20M per day. We’re in October, when normally businesses would be traveling but not many are this year. There are two big holiday travel periods left in 2020 and scientists are asking people not to travel at these times this year. So the next real opportunity for airlines to see increased demand and neutral to (gasp) positive cash flow is the Spring and Summer 2021. What if that doesn’t happen?

Airlines look at their bookings for future travel to get indications about how demand is changing. Beginning in late January and into April and May, airlines will get an increasingly clear realization of what the Summer 2021 travel demand will be. If this is meaningfully higher than Summer 2020, and vacation spots are open so that families can go and actually do something, airlines will breathe a sigh of relief and likely conclude that their liquidity positions will allow them to fly through 2021, by which time hopefully a vaccine is widely available and governmental quarantines and limits will be waning if not removed completely.

If this booking period shows another weak demand for Summer 2021 travel, however, some airlines will have to think of bankruptcy as a potential option. Anyone who has been through a bankruptcy knows that you don’t wait until cash is low to do this, but rather that you file with relatively strong cash to have the best chance to emerge quickly and successfully. It’s important to think about what “tools” bankruptcy gives an airline, and why this wasn’t a good option in Summer 2020 when Covid travel realities were first evident.

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Going into the Covid crisis, US airlines were structurally sound with many years of profitability and strong balance sheets. This position was largely the result of bankruptcies following 9/11, where retiree obligations were reduced and massive amounts of debt were restructured. Some hubs closed or shrunk during this time, as bankruptcy gave the ability for the airlines to free themselves from long term leases and later consolidations made those assets unnecessary. Going into the Covid crisis, it wasn’t obvious where bankruptcy would help since this is a demand-based, revenue driven crisis. There aren’t things you can do in bankruptcy to make customers comfortable to fly again or to make New York remove its quarantine when traveling in from other states.

But there are two things that can be better addressed in bankruptcy as we move forward with a potentially very long return to cash flow positive operations: fleet and labor. Of course airlines now are working with manufacturers, aircraft lessors, and financing institutions to defer payments and deliveries of equipment, and to better rationalize their fleets for their view of future demand. Some airlines have announced retirements of whole aircraft types, for example. Order books are being restructured now, to reduce new deliveries and financial obligations in the near term. This makes sense if Summer 2021 shows promise and by the end of 2021 the industry is clearly on a build back to something that looks normal. But if not, airlines will need to do more with their fleets and bankruptcy gives them some options that collegial negotiations may not deliver. On the labor side, no one expects contacts to be abrogated in bankruptcy, but there is no doubt that the filing itself and the uncertainty of emergence dials up the urgency for everyone to get realistic about what is needed. I was shocked, for example, when seeing Southwest CSWC CEO Gary Kelly on TV say that he was asking for a 10% temporary pay reduction to help them through this, and within hours the airline’s flight attendant union put out a statement saying that they had no plans to accept this reduction.

This isn’t a strategy for every airline but likely American would be the first to have to consider this given their debt largely related to fleet decisions. During the last round of airline bankruptcies, AA was the last airline to enter and many thought that they waited too long. They won’t make this mistake again, and United likely won’t allow AA to get the advantages they could realize and leave them in an uncompetitive position. So, there could be a small domino effect here as everyone thinks about how they will compete going forward. This is not a prediction that this will happen nor a recommendation that it does. It’s a pragmatic view that, early in 2021, airlines will be able to make a quantitative estimate of their cash flow for the full year and if it it isn’t significantly better than 2020, this strategy will have to be considered.

Forbes: Aerospace & Defense source|articles

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