Airlines Shouldn’t Rush to Stop Losing Money - The Wall Street Journal

paksijenong.blogspot.com

July 14, 2020 10:28 am ET

U.S. airlines’ financial results are abysmal. They should resist the temptation to improve them too quickly.

On Tuesday, Delta Air Lines —the first major U.S. carrier to report numbers—reported adjusted losses of $4.43 a share for the second quarter, when lockdowns were in full effect. This was below analysts’ already gloomy expectations of $4.16, breaking the company’s almost spotless recent record of beating consensus forecasts.

Its shares fell roughly 3% after the open, dragging down peers. Investors’ main worry is that the resurgence of coronavirus cases in the U.S. is now sabotaging airlines’ attempts to emerge from their worst crisis ever.

Delta Air Lines posted adjusted losses of $4.43 a share for the second quarter.
Photo: Charlie Riedel/Associated Press

Given the huge amount of uncertainty surrounding flight demand, though, investors should give less weight to how bad things are out there and more to the ability of full-service airlines to respond with conservative scheduling. In this respect, Delta is telling investors what they should want to hear. It will now add only 500 flights in August, compared with earlier plans to bring back as many as 1,000.

Airlines face a conundrum: The only way to replenish their coffers is to start selling tickets again, but putting too many seats on offer at a time of tepid demand and social-distancing needs—Delta said Tuesday that it will run its planes only up to 60% full—means selling them with little prospect of profit. If a new wave of Covid-19 cases leads to another drop in traveler numbers, the losses from being overextended could be devastating.

This problem applies to legacy airlines in particular. While budget carriers such as Southwest Airlines and Spirit Airlines can set up and dismantle specific point-to-point routes on the basis of their profitability, hub-and-spoke operators such as Delta need their whole network to break even.

So far, U.S. airlines appear to have been a bit too optimistic with their reported schedules. Passenger numbers are still more than 70% below the same period of last year, according to airport screening data reported by the Transportation Security Administration. Online tracking by UBS suggests that Americans are currently snatching up airfares at steep discounts, with prices shoring up only in September bookings.

The sales push is being led by American Airlines. As of this week, its scheduled capacity is only about 40% below where it was on Jan. 20, figures by travel-data firm OAG show, compared with 57% for Delta and 63% for United Airlines.

One reason is structural. American has less exposure to the trans-Atlantic market, which remains closed, and reigns over two of the largest domestic hubs, Dallas Fort Worth and Charlotte. Reactivating its network mechanically implies more domestic flights. But it might also have to do with its weaker financial position, which makes the company desperate to revive sales.

On this subject, Delta’s latest figures show very positive progress. Average daily cash burn is now about $27 million, compared with $100 million in March, and operating expenses were cut by 53% year over year in the second quarter. Together with state aid, the savings should give the company the buffer it needs to continue taking a prudent approach to capacity.

Will airlines be able to avoid a price war? Early data already suggest that investors shouldn’t be too hopeful. As far as possible, though, they should reward airlines that put their cash to its best current use: doing nothing.