The eight largest public North American airlines recently concluded one of the most difficult years in their histories. But given the airlines' liquidity and the rates at which they are burning cash, five of them may have shorter runways now than they did following the third quarter of 2020 before their liquidity reaches the danger zone.
As LCD reported in September 2020, while scrambling to cut costs and raise capital, publicly traded airlines began reporting a new metric: daily cash burn.
The metric revealed the cash airlines expended each day, giving lenders, investors and customers a sense of the quality of management’s efforts as they navigated through the pandemic. LCD merged cash burn with liquidity data to produce a rough estimate of how much time each airline might have before its available liquidity fell too low to operate effectively.
The eight airlines recently finished reporting 2020’s fourth quarter and full-year performance, including daily cash burn rates and liquidity. Some also projected liquidity or daily cash burn for 2021’s first quarter, and a few have subsequently updated their numbers. LCD collated and then compared the data to what had been reported in a December update to the original airline cash burn story:
For an explanation of column headings and commentary on each airline, see "Notes on cash burn and liquidity table," below.
At the December update, all eight publicly traded airlines demonstrated longer liquidity runways (measured in days) than they had three months prior. But the same cannot be said now. Compared with December, five of the eight showed shorter liquidity runways, with six reporting less liquidity and half of them running at higher cash burn rates.
Notably, the liquidity runway calculations were made using either fourth-quarter 2020 or first-quarter 2021 estimated or actual data, depending on what the airline provided. For North American airlines, the first quarter is always the weakest, while the fourth quarter is usually second-weakest, so perhaps when airlines report second-quarter numbers they will reveal improvements in available liquidity, cash burn, or liquidity runways.
The pandemic finally seems to be in retreat in the U.S. But that good news runs headlong into the reality of the recent performance of the S&P/LSTA Leverage Loan Index’s air transport sector.
It is a relatively small sector, comprising roughly 1.5% of the index. Its 10.8% compounded return from April 2020 through February 2021 was the lowest of 36 leveraged loan investing sectors that reported returns.
The sector’s weak relative performance reflects S&P Global Ratings’ continued concern about the next few years of global air traffic. In November 2020, Ratings dialed back its projections for air traffic’s recovery, compared to its August estimate.
In the November report Ratings said it believes global air traffic in 2020 was 65%-80% under 2019’s level, and 2021’s traffic will be 40%-60% under 2019, both significantly shallower recoveries than August 2019’s traffic estimates. Ratings’ August estimate of 2023 was kept intact, at 10%-15% behind 2019, as was the agency’s belief that global air traffic will finally return to pre-pandemic levels in 2024.
To survive through 2024, though, LCD’s application of liquidity and cash burn data suggests that the top-eight North American airlines will almost certainly need to reduce their cash burn rates.
Notes on cash burn and liquidity table
The following explains the table’s columns, followed by detail on each airline’s data. Data was obtained from airline public information, including Form 10-Ks, 8-Ks and press releases.
Total liquidity: All liquidity identified by the airline, provided for a recent month, at the end of the fourth quarter of 2020, or a Q1’21 projection (“Current”), as well as from LCD’s December airline cash burn update ("Dec"). The actual source is noted under the "Source of current data" column. Airline liquidity sources include balance sheet cash and short-term investments, company revolvers, and expected CARES Act (Coronavirus Aid, Relief and Economic Security Act) and PSP2 (Payroll Support Program 2) funds.
Daily cash burn (DCB): Management’s report of this metric for a recent month, the fourth quarter of 2020, or a Q1’21 projection (“Current”), and from LCD’s December update (“Dec”). The actual source is noted under the "Source of current data" column.
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 allow liquidity to decline to zero. Uses “Current” data and provides days remaining from the December update.
Change in days remaining: The difference between the days remaining computed with the “Current” data, and the days remaining from the December update.
Source of current data: The liquidity and DCB “Current” source: A Q4’20 is actual fourth quarter 2020; E Q1’21 is estimated first quarter 2021; A Jan ’21 is actual as of January 2021; A Feb ’21 is actual as of February 2021.
Delta Air Lines Inc.: Reported $18 million daily cash burn during September 2020. Reported $12 million cash burn per day in Q4’20. Projects Q1’21 daily cash burn of $10-$15 million (LCD assumes $12.5 million). Reported $21.6 billion liquidity at end of Q3’20. Reported $16.7 billion liquidity at year-end 2020. Projects $18-$19 billion liquidity at end of Q1’21 (LCD assumes $18.5 billion).
American Airlines Group Inc.: Projected $25-$30 million daily cash burn in Q4’20 (LCD assumed $27.5 million). Projects $30 million daily cash burn in Q1’21. Reported $13.6 billion liquidity at end of Q3’20, plus additional post-quarter-end liquidity of $2.0 billion under CARES Act loan program, plus $1.0 billion via sale of common stock. Reported $14.3 billion liquidity at year-end 2020. Projects $15.0 billion liquidity at end of Q1’21.
United Airlines Holdings Inc.: Projected $25-$30 million daily cash burn in Q4’20 (LCD assumed $27.5 million). Reported $33 million daily cash burn in Q4’20. Reported $19.4 billion liquidity at end of Q3’20, plus additional post-quarter-end liquidity of $2.3 billion under CARES Act loan program. Projects $19.7 billion liquidity at end of Q1’21. The company did not immediately respond to an LCD inquiry about whether the $19.7 billion includes potential proceeds of a 37 million share stock offering reported in an 8K on March 3.
Southwest Airlines Co.: Projected $10-$11 million average daily cash burn in Q4’20 (LCD assumed $10.5 million). Projects $15 million average daily cash burn in Q1’21. Reported $15.6 billion liquidity at end of Q3’20. Reported $13.7 billion cash plus $864 million from Payroll Support Program 2 at Feb. 12, 2021.
Air Canada: Projected C$12 million–C$14 million per day in Q4'20 (LCD assumed C$13 million). Projects C$15-C$17 million daily cash burn in Q1’21 (LCD assumes C$16 million). Reported C$8.19 billion liquidity at Q3’20. Reported C$8.01 billion liquidity at year-end 2020.
Alaska Air Group Inc.: Projected $125-$150 million cash burn in November 2020 (LCD assumed $4.5 million per day). Reported $137 million cash burn in January 2021 ($4.4 million per day). Reported $5.5 billion liquidity at Oct. 21. Reported $5.2 billion liquidity at Jan. 22, 2021.
JetBlue Airways Corp.: Projected $6–$8 million daily cash burn in Q4’20 (LCD assumed $7 million per day). Reported $6.7 million daily cash burn in Q4’20. Reported liquidity on Nov. 27 of $2.8 billion, plus assumed post-quarter-end liquidity from CARES Act loan program of $1.84 billion. Reported year-end liquidity of $3.1 billion, plus continued access to $1.84 billion in CARES funds plus access to $0.5 billion in PSP 2 funds from the U.S. Government.
Spirit Airlines Inc.: Projected approximately $2 million daily cash burn in Q4’20. Reported $1.8 million daily cash burn in Q4’20. Reported $2.06 billion unrestricted cash and short-term investments at Q3’20. Reported $1.9 billion unrestricted cash and short term investments in Q4'20, plus it reported expecting $184.5 million in additional liquidity from PSP 2.