Let's Talk About the Industry
January 8, 2021
Last year, all of the “big four” airlines, including United, were challenged first by the impact of diminishing revenue and then the virtual collapse of travel demand as the pandemic took over the world. What started as a ban of flights from China, spread through Asia, and rocketed then across the United States & Europe. With the implosion of our International routes, cruise ships became stranded, school and business closures and lockdowns spread across the world, and finally the domestic airline market essentially collapsed as well.
You know this, you were there. We’ve lived through this together. We’ve had various levels of participation on United Town Hall calls and updates, and we’ve needed to learn and understand more about revenue, load factors and market share than perhaps many of us would have liked. While some of us may have a greater interest in what happens behind the scenes than others at our airline, one fact most of us understand that is a reality for us at United is that a large portion of our revenue is derived from International and business travel.
Many of the businesses we depend on for revenue as well as those who could, began meeting virtually, instead of in person, reduced travel out of necessity. We’ve all become part of the “Zoom generation” that has learned to adapt and socialize on-line. The business community, much of which already had a foothold in this “virtual” area, moved to all on-line business platforms and cancelled travel.
United Airlines needs those customers to resume flying in order to return to profitability. These are high-yield, loyal and frequent travelers. While we’ve seen some proliferation within leisure travel over the past few months, it is not the bread and butter our airline depends on for growth. Most industry experts predict under the best circumstances, the industry will be 30% smaller at the end of 2021, and a full recovery is not likely until somewhere around 2023-2024.
While by no means a certainty, this is something we should keep in mind. When we speak of uncertainty, we are acknowledging a number of unknowns:
- When will a vaccine(s) be widely available and distributed?
- What border closures and restrictions with other countries in Europe and Asia look like this year?
- How soon will our business travelers begin to fly again?
- How soon will the general public feel safe to get back out again into the world?
One consideration that is important is that the “bread and butter” customer we mentioned is less likely to be impacted financially as much a typical leisure traveler. The pandemic has hit some of us harder than others; those who can transfer their work to home may have had little to no disruption, where front-line workers, gig workers and those in the hospitality industry have been impacted significantly harder. This provides an opportunity for our traditional customers to be among the first to return once those making these decisions feel comfortable returning to traveling.
Has the pandemic forever changed the business world and the familiar travel we associate with it? That remains to be seen, but we know that the cost savings achieved through online meetings simply cannot replace the value intrinsic in a face to face interaction when it comes to building business relationships.
We know from experience that online Zoom® calls with family, while necessary now, just aren’t the same. We expect business travel to return, but as of now, we can’t predict when or how that will occur. What we can do today is look at the decisions made this past year by our industry and what decisions are being made now with our competitors and within the context of what that landscape looks like.
The emergency relief offered through the PSP brings back all our furloughed flying partners through the end of March. But realistically how much has the travel industry rebounded since the initial reduction in force was applied this past October?
Of significance, in October, we were looking at a very bleak holiday travel period, which is traditionally a big revenue generator followed almost immediately by first quarter flying, which is typically among the lowest demand period of the year.
What we see looking forward in April is the spring break vacation period, closely followed by summer travel. While spring break will, like everything else right now, look different, it is historically a time of increased travel; with the summer period being our busiest of the entire year. While management has said they don’t see significant improvement in our immediate future, we know from this past holiday season, that people are generally booking much closer to departure than in previous years. While soaring demand isn’t likely, given the recent introduction of the vaccines, it is quite possible things could improve this Spring and Summer.
Another difference is that our work force is several thousand Flight Attendants smaller than we were when these processes started prior to October. Through voluntary separation programs (VSP), international base closures, and attrition, we are already permanently smaller as a work group.
So, the outlook for the period from October into the Spring and Summer, is that we have reason for a potentially more optimistic view. The facts we’ve just reviewed, would normally indicate a need for more Flight Attendants than were projected in October. We also have vaccines being distributed which adds another layer of potential optimism for revenue. So, while the immediate outlook may not be outright bright, it is definitely much better than it was in October.
Let’s also look at our friends and competitors in the industry, beginning with American (AA). AA took measures similar to United in aggressively reducing their workforce through furloughs. While not as aggressive as United, their approach follows a similar plan. As we move into 2021, it’s worth noting that AA is not weathering the storm as well as the rest of us. AA took on over $10B in debt in 2019, and in a “good” year, AA generates little over $1B in profit. That would mean if recovery were to happen significantly and soon, it would take AA the next 10 years just to pay back the 2019 debt, without even considering the debt they already had before the pandemic started. While we in no way wish any of our industry friends ill, many industry experts are predicting the U.S. airline industry may not be able to sustain the “big 4” through 2021. It’s important to note, that United is similarly situated in terms of debt. While perhaps not in the most solid financial position either, we are in a better position than AA.
Talking briefly about Delta (DL), they successfully negotiated concessions from their Unionized pilot group. Their Flight Attendants do not have a Union, and operate under rules that management can change at their whim. To date, DL has not furloughed any Flight Attendants, but has imposed cuts on some ground and other workers. While it remains to be seen what they will do in 2021, so far, they have managed to reduce employee costs mostly through voluntary means. Their financial position is second only to Southwest (WN).
According to experts, WN started this crisis with the strongest balance sheet and most money in the bank. WN’s approach to the crisis has not been one of furloughs, which they considered throughout the 2020 year, but looked at much more as a last resort, than a first choice. WN management came to their Flight Attendants, pilots and other work groups with requests for concessions. Those requests were met with a respectful but firm decline to negotiate any Contractual changes, as a “fix” to a pandemic out of their control. Even without the extension of the PSP in October 2020, WN management found voluntary ways to make it work.
WN has weathered the storm well so far, and has gone so far as to pledge they will not furlough any employees at all (with or without a PSP) in 2021. Their management has committed to work with their Unions and workers to avoid furloughs and instead vigorously pursue discretionary and voluntary time off options that help them reduce immediate costs, while keeping everyone employed. Of note, WN has never furloughed an employee in their nearly 50 years of flying.
This may be a long history lesson about our industry and the 2020 pandemic, but understanding the choices we’ve made and that we will be required to face going forward is important for us in understanding how we are situated in comparison to our competitors when establishing common ground for discussions.
When we look at the landscape of our industry, we have one airline where it appears challenges will continue, another airline that has negotiated concessions with their pilots and can change work-rules at whim with their Flight Attendants to suit their purposes. Our airline has taken a aggressive action to institute dramatic cost cuts and management has signaled they are considering a path towards continuing this stringent approach if this is what is needed to be taken this Spring. Then we have the last airline, pledging no furloughs at all in 2021, and committing to manage overstaffing through voluntary programs.
It’s just a fact: the landscape, outlook and future are brighter in April than they were in October, and if another airline can manage no furloughs, surely, we are in a position to dramatically and meaningfully reduce, if not eliminate, the need for involuntary furloughs.