United Airlines (NYSE: $UAL) makes adjustments to meet a drop in demand exceeding 60% caused by government reaction to the COVID-19 pandemic.
In late July United, after reviewing the results rolled out their new strategy. This plan would manage reductions in personnel, help clients feel confident about flying again, and control the hemorrhage of cash.
Confidence in the industry
In July IATA, an influential worldwide airline industry trade association published the results of a confidential survey. Let’s look at some key takeaways from that survey. As everyone can imagine the industry expects reduced profitability over the next twelve months.
Many of the airline executives surveyed believe airfares will decline. Because of the reduced demand for travel, over 55% expect to reduce the number of employees they have.
Cargo demand is improving resulting in cargo yield improvement.
The yield is a bit deceiving because it does not account for capacity that is grounded. There is a small percentage of airlines that foresee profitability in the year ahead.
Not all the news is gloom and doom, unlike the prior survey in April, of the airlines in the surveyed half expect passenger demand to increase. We are seeing an improvement in cargo and many airlines believe passenger traffic will begin to return.
There are two key elements of passenger demand, government travel restrictions, domestic and international, the other is passenger confidence. Making passengers feel health safe in a Covid-19 world will take convincing.
IATA screening, recommendations
As we look at the potential for ways to make travel safe the basics are important. First modern jets are not the 707s of the past. Many new jets have a HEPA filter to clean recirculated air before you get it. Of course, in airports screening passengers for temps and symptoms both onboarding and deplaning.
Are temperature screenings full proof? Not perfect. People that are asymptomatic will be missed as they do not have a fever. Also, people taking medicines like acetaminophen, which will reduce their fever. That said, it picks up on those that are not well while trying to slip through. It also helps give passengers more confidence as well.
We all know about maintaining distancing three to six feet. When traveling by air the most troublesome times are security, check-in, and the departure gate area. Many of these challenges are being worked on.
The tough ones are boarding, deplaning, handling carry on, close crew interaction, bathrooms, and seat partners. Changes in boarding procedures and blocking some seats are underway. Cleaning is the next revised procedure.
Turnarounds are now extended to clean planes with alcohol to get rid of the virus on surfaces. This will clean the plane and give passengers more confidence. The flight crew will be confined to hotel rooms getting food through room service.
Potentially see Immunity Passports based on people that recovered from the virus and those that received a COVID vaccination.
Other methods under development are contact tracing. Phone apps will help tell authorities where you have been lately. Lastly, the vaccination, many companies are now researching and developing just as a solution. None of these are ready yet.
United’s plan for COVID 19 health Concern’s
At the end of July United posted United Airlines Took Industry-Leading Steps to Manage Historic Impact of Covid-19 in Q2. We have already discussed a summary of IATA recommendations. Let us look at some ways United went above and beyond IATA recommendations.
United’s Clean Plus, touch-free kiosks and maximizing airflow plans to fight COVID.
United’s clean Plus plan places health concerns as the main element of the customer experience from check-in to baggage claim. At the airport, United has placed more touch-free Kiosks.
As IATA recommends, all passengers and cabin crew will wear face coverings. As stated earlier, boarding and deplaning are times that controlling distancing is difficult.
One of United’s responses is to maximize airflow to get as much circulated air through their HEPA filters as possible during those periods.
All of their employees will be temperature screened as they arrive at the airport. They have developed a passenger screening program based on the advice of the Cleveland Clinic.
To limit flight crew contact United already has started placing some snack items, wipes, and hand sanitizer as you get on the plane. United goes a step further. On flights that are booked in advance 70% full, the passenger is contacted and allowed to change flights at no charge.
United has given back to communities as well. United donated well over 500,000 pounds of food to food banks. To homeless shelters, United donated many thousands of amenity kits, pillows, and self-care products.
United’s Financial Plan to fight off COVID-19
United needs cash to weather the COVID-19 storm. They raised 16.1 billion in debt and Cares Act Payroll Program. The debt was financed at 6.5% interest. However, some loans had interest rates at 5.25% plus LIBOR. It is not clear whether that is just the $3 billion term loan. LIBOR in July averaged 506% for overnight to 977% for twelve months. LIBOR is traded and changes frequently.
In addition, during the second quarter, United sold over 500,000 shares for $22 million.
Not all news is bad. With capacity down 69% in Q2 operating costs dropped by 54%. Also 6,000 employees took part in a voluntary quit program giving them pay through the end of November. There was also a sale, lease agreement that covers 16 of the troubled 737 max 9 and 6 of the 787-9 larger aircraft.
The anticipated savings of 2020 will be $3.7billion.
United’s cash burn or net profit less investing and financing activities is anticipated to drop to $25 million per day compared to Q2 of $40 million per day.
Yet how is the stock doing?
Frankly, it’s not doing do much. Mostly navigating in a sideways drift.
Warren Buffett sold out, while everyone else is holding their breath, betting that a biggie such as $UAL is too big to fail. At best, they might acquire a minor struggling airline in the inevitable industry consolidation.
There are three key takeaways from the airline industry trade association’s recent report:
- First, United’s plan meets and exceeds the IATA recommendations. It should be noted that the breakeven load factor usually exceeds roughly 70% capacity. To keep pace with concerns about COVID recommendations United will frequently fill less capacity. When they do break 70%, they will allow passengers to find other flights that are less full. This portion of the program seems to be intended to give confidence to current and prospective passengers.
- Second, United also realizes they must stop the cash hemorrhage. Their plan should reduce cash burn by 46.15%.
- Third, and last but not least, freight revenue is on the rise with a recent 36.3% increase.
Based on the above analysis, United seems to be doing a decent job handling the situation and could come out well on the other side.