No one would deny that US airlines had a very tough 2020 due to the coronavirus’ impact on air travel. The country’s three legacy airlines, Delta Air Lines, United Airlines, and now American Airlines – with a just reported record loss of $8.9 billion – were hit very hard by COVID-19’s effects, including a near-disappearance of air travelers for a time. And now, for the first time since 1972, Southwest Airlines (LUV), the country’s largest point-to-point or non-hub airline, has reported losing money. Times are tough indeed when the historically always profitable LUV posts a loss for the year.
No Escape for LUV
Southwest Airlines has always managed to turn a profit, including in the face of the 9/11 terror attacks, when many a US airline was hard-hit by their effect on travel. The air carrier also gambled smartly during the steep rise in crude oil prices in the mid-2000s, which saw the cost of jet fuel reach highs previously never seen, by locking in lower fuel prices through a process known as hedging. Unfortunately, there was no escaping the global impact of the coronavirus, and LUV found itself flying through the same turbulent economic air as United, Delta, and American.
American Hit Hard
American Airlines (AA) reported a net loss of $2.2 billion for the fourth quarter of 2020. With revenues declining by 64%, to $4.03 billion compared to $11.3 billion a year earlier, it’s easy to see how COVID-19 put the squeeze on AA. If there’s any bright spot in the air carrier’s dismal 2020, it’s that quarterly sales exceeded analysts’ expectations of $3.88 billion for the quarter. As well, the airline’s CEO, Doug Parker, reported that American’s fundamentals were good, with over $14 billion in total available liquidity. AA expects first-quarter 2021 capacity to be down about 45% compared to pre-pandemic 2019, though, along with revenues to be off by 60% to 65% compared to the same months in 2019.
New Travel Restrictions
As if all the above wasn’t enough to negatively affect airline revenues, new COVID-19 travel restrictions were recently put in place by the US government in an effort to combat the pandemic. Such restrictions hurt air travel, of course, but are felt necessary by authorities in the fight to gain the upper hand on the coronavirus. Unfortunately, those restrictions particularly impact international travel – which is a lucrative market for US airlines – and include extension of an existing entry ban on most non-US citizens recently in Europe, the UK, and Brazil as well as a new ban on South Africa. US health authorities are also considering requiring a negative COVID-19 test before travel on a domestic flight, a move sure to further dampen already weak domestic travel demand.
Southwest’s Cash Burn
For its part, Southwest Airlines expects to burn through about $17 million a day in the first quarter of 2021, which will be up from $12 million daily in the last quarter of 2020. Softness in demand combined with rising fuel prices are the culprits, and LUV has said that it needs for revenues to double from current levels to reach the breakeven point. The airline is famous for its cost-consciousness as well as its customer-friendly attitude, of course. But no amount of cost-cutting or great customer service will likely be enough to quickly return any airline, including Southwest, to profitability in the early months of 2021 as all of them continue to deal with COVID-19’s severe economic disruptions.
Kelly Hoggan, Founder and CEO of H4 Solutions, previously served as assistant administrator for operations at the Transportation Security Administration. In that role, he was responsible for aircraft and checkpoint security operations at the nation's 450-plus commercial airports.