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Airlines Cut Costs: Will it Offset Coronavirus-Led Low Demand?

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The deadly coronavirus has wreaked havoc on the airline industry and the damage is only aggravating with no sign of descendance any time soon. To take control of the situation as travel demand plummets, airlines are exercising stringent cost-controls so as to partly offset the adversity stemming from lost revenues.

Amid large-scale travel restrictions and passengers being wary of air travel, Delta Air Lines (DAL - Free Report) announced plans to reduce domestic capacity by 10-15% at the J.P. Morgan Industrials Conference held on Mar 10. Additionally, the airline will trim international capacity by 20-25%. With demand having taken a significant hit by government travel restrictions, Delta will cut capacity on the Pacific region by 65% while transatlantic capacity will be lowered by 15-20%. The carrier has also withdrawn its first-quarter 2020 and full-year guidance.

At the same conference, American Airlines (AAL - Free Report) also announced the withdrawal of its first-quarter and full-year outlook. With decreased demand, the airline cut back its international capacity for the peak summer season by 10%. This includes a 55% reduction in trans-Pacific capacity for the summers. On the domestic front, the carrier reduced capacity by 7.5%.

Earlier in the month, United Airlines (UAL - Free Report) slashed capacity on international schedule by 20% for April. The Zacks Rank #3 (Hold) company now anticipates to make similar reductions in May. If needed, the carrier plans to further cancel flights on a rolling 90-day basis until signs of recovery become evident. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Fuel Cost Savings May Offer Some Relief

With the massive hit to revenues, the decline in fuel prices since the beginning of this year may provide some cushion to airlines in coping with this deep crisis. American Airlines anticipates a $3-billion cost-saving from low fuel prices in the current year while Delta expects its savings on fuel expenses to total $2 billion.

Though substantial, fuel cost savings alone will not be enough to counterbalance the effect of the slump in demand on revenues. As a result, airlines are looking for ways to optimize savings and drive the bottom line. To this end, Delta is putting a halt to hiring and offering voluntary leave options to employees. The carrier is also grounding wide-body and narrow-body aircraft as well as contemplating early retirement of the older aircraft. Savings from all of these coupled with those from reduced capacity are expected to generate $1.8 billion in total savings for Delta during 2020. Additionally, the airline is deferring capital expenditures worth $500 million as well as suspending share repurchases.

United Airlines too has suspended share buybacks and is cutting down on capital expenditures and operating expenses to address the downturn. Further, the company’s CEO Oscar Munoz and its president Scott Kirby are giving up on their respective base pays at least through Jun 30, 2020. The carrier has withdrawn its first-quarter guidance. Reportedly, Southwest Airlines’ (LUV - Free Report) CEO Gary Kelly will also take a 10% pay cut due to the downfall in business.
 
In order to curb the impact of the virus-led low demand on the top line, American Airlines is limiting discretionary operating expenditures as well as reducing capital expenditures.

Airlines Warn of Significant Coronavirus Impact

United Airlines, seemingly experiencing the maximum pressure among U.S. airlines due to its greater international exposure, expects to incur a loss in the first quarter of 2020. Last month, the airline’s management stated that near-term demand for travel to China is almost wiped out while demand on other trans-Pacific routes plunged nearly 75%.

Moreover, Southwest recently witnessed a steep fall in demand coupled with an increase in trip cancellations. The carrier expects the drop in demand to persist in the remainder of March, given the rapid spread of the coronavirus. Consequently, first-quarter operating revenues are expected to decline between $200 and $300 million. Additionally, due to significant descent in bookings, Ryanair Holdings’ (RYAAY - Free Report) fourth-quarter fiscal 2020 (ending Mar 31, 2020) results are likely to be heavily impacted.

As uncertainty looms large on the extent and duration of the coronavirus, it is perhaps not far off for the industry to endure a situation similar to the Global Financial Crisis of 2008. The International Air Transport Association forecasts a global passenger revenue loss of up to $113-billion, which is nearly commensurate with what the airlines had faced during the financial crisis of 2008.

Final Word

Cost controls coupled with savings from low fuel prices may aid the bottom line of airline companies. However, it will not likely be enough to offset revenue declines from the tumbling demand, given how gravely the viral outbreak is already weighing on the industry. Market watchers are especially cautious about the industry’s outlook due to the ambiguity associated with the spread and duration of the health hazard.

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