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Who Will Survive the COVID-19 Crisis: Southwest or American Airlines?

Last Updated September 23, 2020 1:49 PM
Puja Tayal
Last Updated September 23, 2020 1:49 PM
  • The U.S. airline industry is losing money as the COVID-19 pandemic reduces travel demand by 95%.
  • Huge debt and operating cost of American Airlines makes it more vulnerable to the pandemic.
  • Southwest Airlines’ strong liquidity puts it in a better position than peers to fight COVID-19.

The U.S. airline industry will never be the same again after the COVID-19 pandemic.

Amid the global lockdown, U.S. airlines grounded over 2,200 airplanes as they saw a 95% decline in travel demand, according to Reuters . One of the biggest problems with the pandemic is no one knows how long it will last.

By the time things normalize, most U.S. airlines could file for bankruptcy. Only the ones with a strong balance sheet and cash flows will survive.

The full-year 2019 earnings of the top four U.S. air carriers show that they have substantial operating costs, equating to 85-90% of their revenue . About 30-40% of these costs  are allocated to salaries. That’s why jobs are usually the first to go whenever the airline industry faces a crisis.

US Airlines operating Expense Ratio for 2019
Source: Companies’ financials

To fight the COVID-19 pandemic, the U.S. Treasury is offering $50 billion aid to the airline industry, of which $25 billion is allocated to payroll grants . But it seems that the aid would not be sufficient to keep the airlines afloat.

Will American Airlines lose money once again?

American Airlines (NASDAQ: AAL), the world’s largest carrier, has $7 billion in liquidity. But in 2019, it also had massive debt ($30.5 billion) and negative free cash flow. Given that its quarterly operating cost is up to $10 billion, the company doesn’t have enough liquidity to survive more than a month without flying.

American Airlines is controlling cost by reducing its capacity  by 60% in April and by 80% in May. It has also granted voluntary leaves and early retirement to a third of its employees . Apart from reducing cost, American has applied for $12 billion in government aid .

Among the top four U.S. airlines, American Airlines has the lowest operating margin at 6.7%. With revenues taking a considerable dip, American could post losses in the first half of 2020.

American Airlines suffered losses in the previous crisis as well. It filed for bankruptcy in 2011  and later exited insolvency by merging with U.S. Airways in 2013. History could repeat itself if the pandemic fallout doesn’t stabilize faster.

Can Southwest Airlines fight the pandemic?

Southwest Airlines (NYSE: LUV) is better prepared than American Airlines for the COVID-19 crisis.

Among the top four U.S. carriers, Southwest is the only one with a net cash balance of $2.2 billion. It has $4 billion in cash reserve and $2 billion in a revolving credit line. With a quarterly operating cost of $4.9 billion, Southwest is well-positioned to stay afloat for more than three months.

Southwest Airlines plane idled amidst the covid pandemic
Source: Creative Commons/Flickr

Operating at a margin of over 13% in 2019, Southwest Airlines has never reported a loss in 47 years. However, the pandemic could force Southwest Airlines to report its first loss in 2020 as revenue plunges. But once the pandemic is over, the company could return to profit faster than its peers.

Enter at your own risk

The free fall of airline stocks even encouraged Warren Buffet to lower his stake in Delta and Southwest. It’s difficult to say which airlines will survive the pandemic and which will file for bankruptcy. So, now is probably not the best time to buy airline stocks even though they are dirt cheap.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investment advice from CCN.com.