Airlines’ ‘free fall’ brings talk of bankruptcies

With all three major U.S. airlines cutting flight capacity to the bone and the U.S. airline industry thrown in disarray, some on Wall Street are drawing comparisons with the post-Sept. 11, 2001 downfall and even predicting bankruptcies.

United Airlines Holdings Inc. UAL, -15.50% and American Airlines Group Inc. AAL, -2.94% have joined Delta Air Lines Inc. DAL, -7.19% in announcing slashed routes as global air travel grinds to a near-standstill to limit the spread of COVID-19.

“Airlines are in free fall,” Cowen analyst Helane Becker said in a note. Over the weekend, the U.S. government added the U.K. and Ireland to the ongoing temporary travel ban.

“We expect additional airline bankruptcies,” with low-cost Norwegian Air Shuttle ASA NWARF, -15.73% an “airline of interest,” she said.

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American said it will reduce international capacity by 75% from March 16 to May 6, although it said it would continue to operate short-haul international flying, which includes flights to Canada, Mexico, the Caribbean, Central America and certain markets in South America as scheduled. American already announced last week reductions in flights to Asia Pacific.

United said its revenue in March, historically its busiest month, will be $1.5 billion lower than last March. “The bad news is that it’s getting worse. We expect both the number of customers and revenue to decline sharply in the days and weeks ahead,” the company said.

United already implemented a hiring freeze and offered unpaid leave and cut its schedule. Over the weekend, it said it will cut executives’ salary by half and cut capacity by about half for April and May, expecting that the reductions will extend to summer travel.

“Even with those cuts, we’re expecting load factors to drop into the 20-30% range -— and that’s if things don’t get worse,” United said.

Delta Air Lines said Friday it will cut capacity by 40% in the next few months, the most in its history, and took other steps to preserve cash amid the crisis, such as cutting $2 billion in expenses, offering unpaid short-term leave to employees and entering a hiring freeze. In a memo to employees about the changes, Chief Executive Ed Bastian said that the “situation is fluid and likely to be getting worse.”

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Even before the latest from American and United, analysts at Goldman Sachs had estimated March unit revenue declines to have reached “levels similar to those observed following September 11, 2001.”

They lowered their price targets on airlines and cut forecasts on a note Friday, and more ominously downgraded American to the equivalent of hold from buy as their new price target implied less upside than other buy-rated stocks. It upgraded SkyWest Inc. SKYW, -13.18% to buy from neutral.

The analysts stopped short of foreseeing bankruptcies, however, based on the airlines’ liquidity.

In addition, “we are also currently forecasting a recovery in demand similar to what was seen following September 11, 2001. If the impact of COVID-19 extends further than the impact of September 11, 2001, we would need to revisit our liquidity analysis.”

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The industry has improved since the last demand shock, the 2008 recession, and “will weather this demand shock better than it has in the past,” the Goldman analysts said. Airlines today reap the benefits of consolidation, have stronger balance sheets, and have a higher percentage of non-fuel variable costs, they said.