United Airlines is bracing for a worst-case scenario of no demand growth for the rest of the year, which will require "extremely painful" actions in terms of its employees in order to ensure the airline's survival, United president Scott Kirby said Friday during the carrier's earnings call.
United's first-quarter passenger revenue declined 19 percent year over year to $7.1 billion, and there are "no signs of meaningful recovery in near-term demand," said Kirby, who this month will succeed Oscar Munoz as CEO. As such, United is preparing for the possibility that net revenue stays near zero for the rest of this year and into 2021.
"We aren't projecting that and certainly hope it's better than that, but we are planning for the possibility," Kirby said.
United reported a net loss of $1.7 billion for the quarter, compared with a net income of $292 million in the first quarter of 2019. It was United's first quarterly loss since the first quarter of 2014.
Cost-cutting measures are pushing United's daily cash burn down from $50 million per day at the beginning of the current quarter to about $40 million per day, and United plans to push that below $40 million per day in the third quarter, Kirby said. Even with zero passenger revenue through that point and no additional financing, United will be able to keep its current liquidity position thanks to funding from the federal government's Covid-19 relief stimulus package.
Beyond the Sept. 30 end of the third quarter—at which point requirements to not furlough employees in exchange for the federal aid will expire—United has a "plan on the shelf" to reduce cash burn to $20 million per day if there is no demand recovery, Kirby said. Those cuts will have to come largely from United's payroll, he said.
"All non-employee expenses have been cut beyond to the bone," Kirby said. "It will be agony to make those decisions and incredibly painful for our people, but we have to make sure we have a strong future here at United."
For now, prevailing forecasts are that United will not have to take those drastic measures. Cowen analyst Helane Becker said in a research note that the "working assumption" is that demand will begin to recover after the second quarter after the lowest point in April and May.
"United telegraphed they expect June to be pretty bad as well as they hint towards a capacity decline of 90 percent again. Regardless, as the airlines head into July, August, September we expect demand to start to improve, leading to some revenues," according to Becker. "United's view appears to be they want a plan in place for all scenarios so they are not caught unprepared for any scenario."
Even if there are signs of recovery, United will be cautious in reinstating capacity, as there likely will be "false starts," Kirby said.
American Airlines on Thursday said it had no intention of closing any hubs as recovery begins, and Kirby said United also has no plans to do so. However, he was less adamant against that possibility in the future.
"When you say everything is on the table, everything is on the table," Kirby said. "There are no sacred cows."
Despite no signs of demand recovery on the horizon, Kirby said United is at least seeing evidence of pent-up demand once the rebound begins. Searches for spring break travel in 2021 are trending higher than they were at this point last year, though Kirby said he did not expect those to turn into bookings.
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