The pandemic-induced plunge in customer demand has hurt few industries more than airlines. Now, as businesses reopen and the economy heats up, airlines are finding the skies much friendlier.
By mid-year, the U.S. economy is expected to roar ahead at the fastest pace since 1983, spurred by record fiscal stimulus and widespread vaccination. Gross domestic product in 2021 will surge 6.5% after shrinking 3.5% last year, the Federal Reserve forecasts.
With airline CFOs having so much at stake in a recovery, their preparations for the expected boom may show financial executives in less-stressed industries how to make the most of stronger economic growth. The CFOs are building turnaround strategies based on hard-earned insights, Spirit Airlines CFO Scott Haralson told CFO Dive.
The challenges from the coronavirus “accelerated lessons for every industry, including ours,” Haralson said, describing changes in a range of CFO responsibilities, from financing and risk management to technology and human resources. “We manage things differently today.”
Despite a brighter economic outlook, airline CFOs are remaining on the defensive, aware that business and international travel are unlikely to snap back soon.
They are refinancing debt, leasing aircraft rather than making purchases through debt financing and increasing cash on hand. They’re also looking closely for weaknesses in supply chains and, as part of scenario planning, tracking a broader variety of risks at a deeper level.
Airline CFOs are also going on the offensive. They’re preparing for a surge in demand by increasing departures, opening new routes and, in some cases, launching new discount airlines.
They're also drawing up strategic plans while being slammed with some of the worst turbulence in industry history. U.S. domestic air travel declined 56.1% in February compared with the same month in 2019, according to the International Air Transport Association (IATA). Total global demand fell further, plunging 74.7% in February compared with the same month in 2019, IATA said.
The total number of passengers will likely rise to 2.4 billion this year, an improvement over the 1.8 billion who flew last year but well below the 4.5 billion record in 2019, the IATA said. Airlines worldwide will probably lose $47.7 billion in 2021 compared with $126.4 billion last year.
Markets relying on international travel probably won’t return to 2019 levels until 2024 or 2025, Airports Council International said.
U.S. airlines, while receiving billions of dollars in federal grants and loans, were the only industry ordered by the government to all but shut down, according to Helane Becker, airlines analyst at Cowen. “No other industry was told, 'you can’t do it,'" Becker said.
On April 13, 2020 — a pandemic low for U.S. air travel — only 87,500 passengers flew in the U.S. compared with 2.2 million on the same date in 2019, according to the Transportation Safety Agency.
Dash for cash
Airline CFOs responded as they had after the terrorist attacks on Sept. 11, 2001, when U.S. air space temporarily shut down, and at the start of the 2007-2008 financial crisis, Becker said. “They all grabbed cash,” selling shares and mortgaging assets.
While business and international travel will probably slowly climb back, leisure travel has started to rebound in the U.S., benefiting regional and low-cost airlines, Becker said.
Discount airlines are seizing on signs of recovery, taking advantage of vibrant stock markets and strong investor demand.
Frontier raised $570 million in an IPO this month, following the lead of Sun Country, which raised more than $250 million in an IPO in March.
Avelo, a discount airline backed by private equity, launched this year, flying from lesser-used airports to vacation destinations and avoiding big hubs. Breeze, another start-up with a similar business model, plans to begin service in 2021.
Large global airlines are also gearing up for a surge in demand, despite the slump in international travel and the high cost of operating hubs.
American this month said it plans to fly closer to its usual schedule for the summer, a peak period for airlines. It has also added flights from the U.S. to Mexico and the Caribbean.
United in March announced plans to fly to more than 46 additional U.S. routes this summer, and said this month it will begin enrolling students for pilot training.
Spirit, like its rivals, hit a sharp downdraft early last year. The pandemic proved especially challenging for some vendors, including for crew training, compelling Spirit to sharpen its evaluations, Haralson said.
“We are looking at their financial health differently than we did pre-COVID and luckily for us our vendors are all in a pretty good spot,” he said. “But it did raise some eyebrows.”
By April 2020 Spirit was operating at about 5% of its pre-pandemic departures, with a daily cash burn of more than $5 million, Haralson said in an April 2 interview.
“When you’re a high fixed-cost business and you’re not running the airline or any of the assets in whatever industry you’re in, you’re going to burn a lot of cash,” he said. “Any airplane flying back in April or May was just burning gas.”
Spirit reduced costs by $100 million last year and added about $2 billion in liquidity using revolving credit, equity, convertible debt and debt sales guaranteed by its loyalty program and intellectual property.
“You just can’t continue to burn money at the rate the industry has and not raise additional capital,” Haralson said. “We’re in a pretty good spot financially.”
Spirit also shifted from financing most aircraft purchases through debt to sale/leaseback transactions, he said. Despite the pandemic, it has expanded its fleet by about 20% since 2019. It is following through on prior plans and will take delivery of 16 Airbus jetliners in 2021, and 17 next year.
“Over the next few years, we’ll probably lease almost all of our aircraft, which is a less capital intensive way to finance such purchases," Haralson said. “We’ll do that until we feel good about our cash generation and our ability to predict it.”
Airlines, in coming years, will probably hold cash positions equal to 15% to 20% of revenue, an increase from a pre-pandemic level of about 10%, Becker said. They’ll probably remain ready to quickly raise cash in the event of another sharp downturn.
Spirit’s cash flow has begun to recover as it operates more than 700 daily departures, compared with less than 50 during the worst days of the pandemic, Haralson said.
“Having underutilized assets in a fixed-cost business like an airline is a real killer,” he said.
“We have to be able to get the airline running at full efficiency as quickly as possible,” he said, adding that he hopes Spirit begins making money again this summer.
Demand for domestic travel to warmer destinations has picked up in the past several weeks. “The people we carry — the low-cost, high-value leisure traveler — are ready to fly,” Haralson said. “We think they’ll be in a position to fly maybe even more than they did pre-COVID, so we want to make sure we’re there to capture that.”
Spirit plans to increase departures on current markets and open up new routes. Already this year it has announced the start of flights to several cities, including St. Louis, Pensacola and Puerto Vallarta, Mexico.
The airline is also starting flights between cities with existing services, such as Baltimore and Houston. “The value of a point-to-point network like ours is that we can grow in a fairly efficient manner just by connecting the dots,” Haralson said.
Spirit needs another 10 to 12 months to fully restore service, he said. It will continue hiring crew, which it resumed in February, and prepare idled or new aircraft for flight, he said.
Spirit may consider refinancing some debt, Haralson said. With interest rates unusually low, “this may be an opportunity for us to do some cleanup on the balance sheet.”
COVID-19 has prompted improvements across the airlines industry, Haralson said.
“The pandemic, while almost impossible for airlines to prepare for, has made us think about things a little differently,” he said. Airlines will “be a little more conservative with the balance sheet” and maintain attention to cleanliness, using “touchless” interactions with passengers when possible.
Spirit is also much more attuned to risks across the company than before the pandemic, he said. “If I went to my board pre-COVID and said, ‘Hey, we should do all this stuff in preparation for a global pandemic,' I probably would have been laughed out of the room.’”
Airlines today are urging executives at all levels to more diligently identify risks, he said. “You can’t always efficiently mitigate all of the risk in an organization, but at least we have thought about it and identified where they may manifest,” he said. Forethought can promote better, quicker decision-making.
Airlines need to weave several risks into their scenario planning, including rising fuel costs, any slowing in the pace of vaccinations, the threat of a fourth wave of infection from a COVID-19 variant and the gradual recovery in business and international travel.
Yet amid signs of greater demand for air travel, Haralson is optimistic. The pandemic was never a roadblock for Spirit, but more of a speed bump, he said. “There may be opportunities for us to grow a little faster than we thought pre-COVID.”