The eight largest public North American airlines recently announced operating results for 2020's third quarter, indirectly revealing that each has secured more time to continue generating losses, and engineer turnarounds, before liquidity reaches a critical level.
The extra time was made apparent through a unique metric spawned by the COVID-19 pandemic, first detailed in September in "Deep Dive: Amid pandemic, airlines forge new survival metric – Daily Cash Burn."
The metric, which measures the cash an airline expends each day while in operation, has risen to prominence as equity investors, lenders, and even the flying public have sought to quantify how airlines were dealing with this year's stupendous decline in passenger traffic precipitated by the pandemic.
In the September Deep Dive, LCD noted that while the computation behind daily cash burn varies slightly from airline to airline, the results are sufficiently uniform to be useful, especially to lenders. With a bit of math, daily cash burn shows how many days an airline might have until its liquidity position becomes thin, helping lenders assess whether a loan may require greater scrutiny.
With this update, we reassess the eight airlines in the bright light of their third-quarter reports.
In the third quarter of 2020, the eight publicly traded airlines all reported daily cash burn rates that trended downward since the prior quarter. All but Air Canada also showed quarter-end balance sheets with greater liquidity than at the end of the previous three-month period. The upshot, even for Air Canada, is longer survival runways — sometimes more than a year longer.
On the flip side, the eight airlines also ended the quarter with higher interest burdens than in the second quarter, both in dollars and in the percentage of their daily cash burn, the negative result of debt taken on in the third quarter. But for all the airlines, the added debt costs were more than offset by improved operating efficiencies and the resultant lower daily cash burn rates.
For an explanation of column headings and commentary on each airline, see the "Notes on cash burn and liquidity table" section.
Twice since the pandemic's full force was first felt, in March, the virus appeared to be retreating, only to surprise with surges in new cases. In the U.S., by many measures this third wave is proving to be the most severe of the three.
But in spite of the pandemic's path, since the initial surge, U.S. GDP and retail sales have been rising, and unemployment has been declining, perhaps at least partially explaining why the eight largest North American airlines all showed quarter-to-quarter increases in revenue-passenger-miles, or RPMs, a key indicator of airline passenger-carrying volume. Airlines have recently been raising concerns about fourth-quarter passenger counts, however.
The LCD September Deep Dive noted S&P Global Ratings believed global air passenger traffic would decline by 60%-70% this year versus 2019, and would improve to down 30%-40%, versus 2019, for 2021. Ratings said it did not anticipate a return to 2019 levels until 2024.
At the time, S&P Global Ratings specifically noted that its ratings on airlines “are likely to remain under pressure until a vaccine or effective treatment is widely available.” With a COVID-19 vaccine now reportedly close, that pressure may soon begin abating.
Notes on "Cash burn and liquidity" table
The following explains the table's columns, followed by detail on the data used for each airline, obtained from airline public filings. Note that not all company data in this table is as of third-quarter-end; some are September-only, others are fourth-quarter projections. Similarly, in the September Deep Dive "Cash burn and liquidity" table, some data are June-only, others are company third-quarter projections. In all cases, the specific data used is identified under Airline-specific commentary.
Total liquidity: All liquidity identified by the airline in its third-quarter earnings press release or Form 10-Q, from sources including balance sheet cash, company revolvers and the CARES Act.
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 (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 U.S. Treasury website, “the continuation of payment of employee wages, salaries and benefits.” Also under CARES, certain airlines applied for capital from a secured loan program to be funded in 2020's third and fourth quarters. Air Canada received funds from the Canada Emergency Wage Subsidy (CEWS), a Canadian government program similar to the CARES Act's PSP.
Daily cash burn: Management's report of this metric, for the most-recent month, the most recent quarter, or a fourth-quarter projection.
Daily interest cost: Computed by dividing Q2'20 gross interest by Q3'20's 92 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: Computed by: [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.
Days remaining @ Sept: Days remaining data from the September LCD Deep Dive, for comparison purposes.
Change in days: The difference between the days remaining computed with the most recent airline data, and the "days remaining" figure provided in the September Deep Dive.
Delta Air Lines Inc.: Reported $24 million cash burn per day in Q3'20, and $18 million per day in September. Q3'20 daily interest cost: $3.2 million (17.6% of daily cash burn). Reported $21.6 billion liquidity at quarter-end. CARES liquidity: $5.6 billion loans/grants (26% of total liquidity).
American Airlines Group Inc.: Reported $44 million daily cash burn in Q3'20, and projects $25 million to $30 million daily cash burn in Q4'20 (LCD assumes $27.5 million). Q3'20 daily interest cost: $3.7 million (13.4% of daily cash burn). Reported $13.6 billion liquidity at quarter-end. Additional post-quarter-end liquidity: $2.0 billion under CARES Act loan program, plus expected $1.0 billion via sale of common stock. CARES liquidity: $6.0 billion loans/grants + $7.5 billion loan program = $13.5 billion (81% of total liquidity).
United Airlines Holdings Inc.: Reported $25 million daily cash burn in Q3'20 and in a recent 8-K projects $25million to $30 million daily cash burn in Q4'20 (LCD assumes $27.5 million). Q3'20 daily interest cost: $3.8 million (13.6% of daily cash burn). Reported $19.4 billion liquidity at quarter end. Additional post-quarter-end liquidity: $2.3 billion under CARES Act loan program. CARES liquidity: $5.1 billion loans/grants + $7.5 billion loan program = $12.6 billion (58% of total liquidity).
Southwest Airlines Co.: Reported $16 million average daily cash burn in Q3'20, $10 million per day in October, and in a recent 8-K projects $10 million to $11 million per day in Q4'20 (LCD assumes $10.5 million). Q3'20 daily interest cost: $1.2 million (11.5% of daily cash burn). Reported $15.6 billion liquidity at Sept. 30. Reported $12 billion in unencumbered assets (including approximately $10 billion in aircraft). CARES liquidity: $3.4 billion loans/grants (22% of total liquidity).
Air Canada: Reported C$9 million daily cash burn in Q3'20, and projects C$12 million to C$14 million per day in Q4'20 (LCD assumes C$13 million). Q3'20 daily interest cost: C$2.1 million (16.4% of daily cash burn). Reported C$8.19 billion liquidity at Sept. 30. Reported C$1.8 billion in unencumbered assets at Sept. 30. CEWS liquidity: C$391 million “net benefit” by Sept. 30 (4.8% of total liquidity; see CARES liquidity, above).
Alaska Air Group Inc.: Reported $4 million daily cash burn in Q3'20, and in a recent Form 8-K projects $125 million to $150 million cash burn in November (LCD assumes $4.5 million daily cash burn in Q4'20). Q3'20 daily interest cost: $370,000 (8.2% of daily cash burn). Reported $5.5 billion liquidity at Oct. 21, including post-quarter-end liquidity from CARES Act loan program. CARES liquidity: $1.1 billion loans/grants + $1.9 billion loan program = $3.0 billion (55% of total liquidity).
JetBlue Airways Corp.: Reported $6.1 million daily cash burn in Q3'20, and in a recent 8-K projects $6 million to $8 million per day in Q4'20 (LCD assumes $7 million per day). Q3'20 daily interest cost: $609,000 (8.7% of daily cash burn). Reported liquidity of $2.8 billion at Nov. 27, plus post-quarter-end liquidity from CARES Act loan program of $1.84 billion. Reported approximately $1.0 billion in unencumbered assets. CARES liquidity: $963 million loans/grants + $1.95 billion loan program = $2.9 billion (63% of total liquidity).
Spirit Airlines Inc.: Reported $2.3 million average daily cash burn in Q3'20, and projects approximately $2 million per day in Q4'20. Q3'20 daily interest cost: $363,000 (18.2% of daily cash burn). Reported $2.06 billion of unrestricted cash and short-term investments at Sept 30. CARES liquidity: $344 million loans/grants (17% of total liquidity).