Publicly traded airlines produce a remarkable number of metrics detailing financial performance, but the coronavirus pandemic has spawned a new one: daily cash burn. It measures just what its name implies: how much cash an airline expends each day to remain in operation.
The need to measure and report daily cash burn rose out of necessity.
With massive and technically complex fixed costs, airlines cannot easily park their planes, ground their pilots, and then, when the time feels right, instantly and cost-effectively ramp operations back up to cruising altitude. Pilots need to stay sharp even if they aren't flying planes full of passengers, those planes need to be carefully stored and maintained while not used, and routes and market shares need to be protected.
As the pandemic crushed passenger counts in the second quarter of 2020, airlines — along with seemingly every U.S. corporate with the ability to do so — rushed to draw down credit lines, and/or establish new ones.
As for whether cash and available credit would sustain the airlines until passenger traffic would rise enough to generate sufficient cash from operations, this was a question pondered by analysts, lenders, investors and company management.
Hence the emergence of the daily cash burn metric.
Prior to the pandemic, airlines didn't compute and report this metric because … well, why would they? They were in the business of making money, and until the pandemic, that is generally what they had been doing.
Computing daily cash burn
Daily cash burn is particularly useful to lenders. Knowing how airline borrowers compute daily cash burn, and how many days a particular airline has until its liquidity position becomes critical, helps lenders assess a loan and determine whether it requires greater scrutiny.
For the record, five of the seven largest North American passenger carriers have loans on their balance sheets that are components of the S&P/LSTA Leveraged Loan Index (totaling nine separate credits), though together the loans make up a relatively slim 1.22% of the index.
A challenge facing lenders and investors who use daily cash burn is that, not only is the metric not under GAAP, it is not even standardized among airlines.
The eight largest North American carriers all explain how they derive daily cash burn. Southwest Airlines' definition is as descriptive as any: "loss before income taxes, non-GAAP, adjusted for depreciation and amortization expense; capital expenditures; and adjusted amortizing debt service payments." It would then divide the figure by the number of days in the period.
JetBlue's definition is perhaps more direct: "net cash revenues, less cash operating costs, capital expenditures, and debt payments," again divided by the number of days in the period.
A credit analyst might approach it from the opposite, but more familiar, direction, obtaining a similar result: EBITDA, minus cash interest and capital expenditures, per-day.
The following table compares the most recently reported daily cash burn figures of the eight largest publicly reporting North American passenger air carriers, both against their reported liquidity around the end of the second quarter of 2020, and against a hypothetical 2019 that mimics the pandemic's passenger declines while keeping that year's cost structure roughly in place.
Comparing the most recent daily cash burn to a hypothetical 2019 reveals how much cost-cutting each airline has done to survive. Comparing it to current liquidity produces an estimate of how long the carrier can survive before running out of money. The former is interesting, but the latter can be particularly interesting to lenders. (See the end of this story for detailed notes on methodology and discussion on each airline's specifics).
The course of the pandemic, and its impact on passenger counts, has so far proved to be highly unpredictable. While airlines generally reported improving daily cash burn figures through the course of the second quarter, some have alerted investors to expect daily cash burn to be worse in the third quarter, versus June levels.
Others hope for better performance toward the end of 2020. For instance, Delta's CFO, Paul Jacobson, said in the airline's second-quarter earnings release, "we remain committed to achieving break-even cash burn by the end of the year." Delta burned $27 million per day in June.
For 2020 overall, S&P Global Ratings believes that global air passenger traffic will decline by between 60% and 70%, versus 2019, but will improve to down 30%-40%, versus 2019, for 2021. With the return of passenger traffic, airline revenues should increase.
But as mentioned, getting planes and pilots back in the air to meet the projected rise in passenger counts is not going to be a trivial exercise for airline management. Though increased passenger travel should produce higher revenue, expense levels will also rise. Management's great challenge through the end of 2020 and into 2021 will be keeping expenses aligned with revenue so that daily cash burn declines, and eventually flips to cash generation.
Notes on methodology
Column explanations for the "Cash burn and liquidity" table
2Q20 Liquidity: The airline's reported liquidity at quarter-end, including cash, short-term investments, and available credit. Some airlines reported data beyond quarter-end, as detailed in the following section.
Additional Liquidity: Management's report or LCD calculation, based on company filings, of additional liquidity during the upcoming months. This does not include the value of airline-reported unencumbered assets that may in the future be borrowed against.
Total Liquidity: 2Q20 Liquidity + Additional Liquidity
CARES Liquidity: Computed by totaling all sources of CARES Act capital to the airline. Dividing that sum by Total Liquidity produces the percentage that CARES Act capital represents of the airline's Total Liquidity. CARES Act refers to the Coronavirus Aid, Relief and Economic Security Act signed into law in March 2020. The Act's Payroll Support Program, or PSP, provided airlines $25 billion, partially in direct grants and partially in exchange for 10-year unsecured promissory notes and common stock warrants, specifically for, according to the US Treasury website, "the continuation of payment of employee wages, salaries and benefits." Also under CARES, certain airlines have applied for secured loans to be funded in 3Q20. Air Canada received funds from the Canada Emergency Wage Subsidy, or CEWS, a Canadian government program similar to the CARES Act's PSP (see Air Canada under Airline-Specific Commentary).
Daily Cash Burn: Management's report of this metric, in some cases for the most-recent period, in other cases a projection.
Daily Interest Cost: Computed by dividing 2Q20 gross interest (before interest income) by 2Q20's 91 days. Dividing daily interest cost by Daily Cash Burn produces the percentage that interest represents of the airline’s total daily cash burn. Does not include aircraft lease costs.
Days Remaining: [Total Liquidity – 10% of 2019 Total Revenue] / [Daily Cash Burn]. Deducting 10% of 2019 Total Revenue serves as a proxy for minimum cash needs, as an airline cannot actually allow liquidity to decline to zero.
Hypothetical 2019 Cash Burn: LCD's estimate of an airline's 2019 daily cash burn if its flying last year had been curtailed to the same degree as in 2Q20, and if its cost structure had not been adjusted in reaction to the decline. Computed by:
2019 total operating expenses [starting point]
+ 2019 revenue x (1 – 2Q20 revenue % decline over 2Q19) [add 2019 revenue adjusted for 2Q20's decline]
+ depreciation, amortization and one-time charges [eliminate non-cash and one-time charges]
+ fuel x percent decline in Available Seat Miles (ASM) over 2019 [adjust fuel burn expense to the amount of flying in 2Q20].
+ maintenance x percent decline in 2Q20 ASM [adjust maintenance expense to the amount of flying in 2Q20]
+ rent/landing fees x 50 percent of the decline in 2Q20 ASM [adjust landing fees expense to the amount of flying in 2Q20]
– net cash interest, without adjusting for capitalized interest
– reported capital expenditures, without adjusting for new-aircraft-specific financings.
The result is divided by 365 to produce a daily figure.
Note: ASM is computed by multiplying, for every plane in an airline's fleet, the number of seats aboard each plane by the number of miles flown by that plane during a given period.
These comments, regarding the second table, are from each airline's press releases and public filings.
Delta Air Lines Inc.: Reported $27 million cash burn per day in June. Daily interest cost in 2Q20: $2.1 million (7.9% of daily cash burn; uses net interest cost provided in Form 10-Q). $15.7 billion liquidity at quarter-end. Signed a non-binding letter of intent for a $4.6 billion CARES Act secured loan, but Delta said on Sept. 14 that it "has indicated it does not intend to participate in this program" (because it is still available, LCD has included this amount under CARES Liquidity). CARES Liquidity: $5.4 billion loans/grants + $4.6 billion term sheet signed = $10 billion (49% of Total Liquidity).
Defines "cash burn" as "net cash from operating activities and net cash used in investing activities, adjusted for (i) net redemptions of short-term investments, (ii) strategic investments, (iii) net cash flows related to certain airport construction projects, (iv) proceeds from financing arrangements that are reported within investing activities, (v) CARES Act grant proceeds, and (vi) other charges that are not representative of our core operations."
American Airlines Group Inc.: Reported $30 million daily cash burn in June. 2Q20 daily interest cost: $2.8 million (9.3% of daily cash burn).Current liquidity of $10.2 billion. Additional post-quarter-end liquidity: two new senior note transactions totaling $1.2 billion, expected to close in 3Q20, plus a term sheet signed for a $4.75 billion CARES Act secured loan. CARES Liquidity: $5.8 billion loans/grants + $4.75 billion term sheet signed = $10.55 billion (65% of Total Liquidity).
Defines "cash burn" as: "the sum of all net cash receipts less all cash disbursements, but excluding the effect of new financings and new aircraft purchases."
United Airlines Holdings Inc.: Reported $25 million daily cash burn projected in 3Q20. 2Q20 daily interest cost: $2.2 million (8.6% of daily cash burn). Reported $15.2 billion liquidity at July 20, and liquidity at the end of 3Q20 to be "over $18 billion." Filed for a $4.5 billion CARES Act secured loan. CARES Liquidity: $5 billion loans/grants + $4.5 billion term sheet signed = $9.5 billion (53% of Total Liquidity).
Defines "cash burn" as: "Net cash from operations, less investing and financing activities."
Southwest Airlines Co.: Reported $20 million projected daily cash burn in 3Q20. 2Q20 daily interest cost: $1.1 million (5.3% of daily cash burn). Reported $14.8 billion liquidity at Sept. 15. Reported $12 billion in unencumbered assets (including approximately $10 billion in aircraft). CARES Liquidity: $3.3 billion loans/grants (22% of Total Liquidity).
Defines "average core cash burn" per day as "loss before income taxes, non-GAAP, adjusted for depreciation and amortization expense; capital expenditures; and adjusted amortizing debt service payments," divided by the number of days in the period. Company 10-Q noted that using an "alternative cash burn approach" including adjusting for changes in working capital yields a daily cash burn of $14 million.
Air Canada: Reported it expects daily cash burn "between C$15 million and C$17 million per day" in 3Q20 (LCD assumes C$16 million per day). 2Q20 daily interest cost: C$1.6 million (10.2% of daily cash burn). Reported cash and short term investments at quarter-end of C$9.12 billion. Reported C$2.5 billion in unencumbered assets at June 30. CEWS Liquidity: C$180 million received and $115 million accrued through June 30 (see CARES Liquidity, above)
Defines "net cash burn" as "net cash flows from operating, financing, and investing activities, and excluded proceeds from new financings, a lump sum debt maturity made in March 2020 of $255 million and any future lump sum debt maturities where the Corporation has refinanced or replaced the amount."
Alaska Air Group Inc.: Reported August cash burn of approximately $80 million and September expected cash burn of approximately $150 million (LCD assumes an average of $4 million per day). 2Q20 daily interest cost: $187,000 (4.7% of daily cash burn). Reported $3.6 billion cash and short term investments as of Sept. 9. Signed a non-binding letter of intent for a $1.1 billion CARES Act secured loan. Reported "significant remaining borrowing capacity" including 33 aircraft, real estate and slot assets, and loyalty program. CARES Liquidity: $1.0 billion loans/grants + $1.1 billion term sheet signed = $2.1 billion (45% of Total Liquidity).
Defines "cash burn" as "all cash in excluding new loans or federal funds LESS all cash out for operating costs, capital and debt service."
JetBlue Airways Corp.: Reported it expects average daily cash burn in 3Q20 in "a range of $7 to $9 million" (LCD assumes $8 million per day). 2Q20 daily interest cost: $440,000 (5.5% of daily cash burn). Reported liquidity of $3.4 billion at end of 2Q. Signed a non-binding letter of intent for a $1.1 billion CARES Act secured loan. CARES Liquidity: $936 million loans/grants + $1.1 billion term sheet signed = $2.0 billion (45% of Total Liquidity).
Defines cash burn as "net cash revenues, less cash operating costs, capital expenditures, and debt payments."
Spirit Airlines Inc.: Reported it expects daily cash burn in 3Q20 "will come in at the lower end of the Company's guidance range given in late July of $3 to $4 million" in 3Q20 (LCD assumes $3.2 million per day). 2Q20 daily interest cost: $305,000 (9.5% of daily cash burn). Reported $1.234 billion unrestricted cash and short term investments at June 30. Applied for $741 million CARES Act secured loan. CARES Liquidity: $335 million loans/grants + $741 million applied for = $1.08 billion (54% of Total Liquidity).
Defines "estimated average daily cash burn" as "the sum of net operating cash outflows, debt service, fleet capex net of financings and pre-delivery deposit payments. It does not include the impact of any financings, capital raises, or the funds from the U.S. Department of Treasury’s payroll support program."