United Airlines (UA) this week sent out layoff warning notices to 36,000 of its employees, telling them they may be furloughed due to the ongoing collapse in air travel caused by the coronavirus. Though UA is the first U.S. airline to warn its employees they may face layoffs it will doubtlessly not be the last. The other three major carriers – American Airlines, Delta Air Lines, and Southwest Airlines – are all facing the same massive revenue losses as United. What can be done to prevent such airline employee furloughs in the fall, after the current tepid summer travel season ends, is an open question.
Alarming Cash Burn
Even in flush times, airlines burn through cash at a steep rate in an industry where the average profit at the seven largest U.S. airlines stood at about $20 per passenger in 2018 -- though it’s been declining since. Recent flush years had seen UA and its competitors earning an average profit margin of about 9%, but it’s worth nothing historical margins have been less than half that figure. United Airlines itself is currently burning through an alarming $40 million in cash daily. Such a loss is unsustainable for long in an industry where domestic air travel revenues are down about 78%, with international operations experiencing an even steeper slide at 87%.
COVID-19 Quarantine Rules
Many U.S. states have put stringent quarantine rules in place in an effort to combat COVID-19, with some strengthening those requirements even more as cases began rising again in June. United Airlines, which has a very large hub in Newark, New Jersey, noted that its operations there were being seriously negatively affected. Typically, the airline operates more than 400 daily flights from that city. However, domestic bookings out of Newark for UA are now down a massive 84% year-over-year compared with a 73% drop elsewhere in the airline’s network. Airlines built to fly with their planes completely full or nearly so can’t afford to do so for long with those same planes flying less than a quarter full on average.
Adding Flights to Cover Expenses
In its letter to employees, United noted that some of its competitors are adding many more flights to their schedules than the current weak recovery warrants. U.S. airlines typically add more flights during the busy summer travel season, which partly explains the increase. Another reason for currently doing so may be an artificial ‘jumpstart’ attempt by air carriers to more quickly recoup steep losses caused by the COVID-19 pandemic and the widespread shutdowns and quarantines which followed.
Risk from Adding Flights
The risk for airlines in adding more flights too soon is that supply may outstrip demand, putting downward pressure on ticket prices which in turns puts additional pressure on operating profits. In the face of steep declines in such profits airlines frequently begin looking at controlling expenses in one of their two major cost centers: labor in the form of wages and salaries (fuel is the other major cost for an airline). United Airlines now finds itself potentially facing just that situation.
Not a Formal Layoff Notice
Like its other major U.S. competitors, United Airlines benefited from a series of federal payroll grants and loans of up to $50 billion to the U.S. airline industry which has helped it so far avoid layoffs. Those grants, however, are due to end on September 30th, the expiration date set by Congress for the industry aid package it created under the 2020 CARES Act. The warning letter itself appears to have been required by a 1988 federal law requiring companies to provide their employees with at least 60 days notice of any mass layoffs being contemplated. United took care to note in its letter to employees that it wasn’t a formal notice of actual layoff, only an advisory their jobs could be affected by what it called an ‘involuntary furlough.’
United Not the Last
United Airlines won’t be the last U.S. carrier to send letters to its employees warning of potential layoffs in the near future. American Airlines has already said it may need to cut up to 20,000 jobs due to a similarly steep loss in operating profits. Canada’s major airline, Air Canada, has already announced that it intends to layoff up to 22,000 of its employees and is asking flight attendants to cut hours, take unpaid leave, or resign. Down in Atlanta, Delta Air Lines has previously spoken of widespread job cuts if demand doesn’t soon begin rising. That carrier had already announced cuts to its August flight schedule due to spikes in coronavirus cases around the world. So far, Southwest Airlines – which doesn’t operate large hubs but, rather, flies strictly from city to city -- has remained largely silent on any future employee job cuts, but it faces many of the same industry operating pressures as the others so one need not do the math to figure out its potential future.
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.
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