The coronavirus took another bite out of the US airline industry early Tuesday, as several airlines, including two of the nation’s largest, announced deep cuts in their international and domestic schedules.
American, the world’s largest airline, said it would cut its international capacity by 10% this summer compared to the current schedule, as well as a 7.5% drop in domestic flights in April.
Delta Air Lines said it will cut its international flights between 20% to 25% and trim domestic flights by 10% to 15%.
“We are prepared to do more as the situation evolves,” said CEO Ed Bastian.
Delta said it would make additional moves aimed at saving $3 billion, including a suspension of share repurchases, a deferral of contribution to the company’s pension plans, a cut in capital spending and a deferral of maintenance spending on aircraft it expects to park. It also said it would institute a hiring freeze and set up a way for employees to sign up for unpaid leave. And Delta said it no longer stood by its previous earnings outlook for 2020.
“Should the environment get worse, we can go deeper,” said Bastian, speaking at an investor conference sponsored by JPMorgan.
Discount carrier Spirit Airlines also announced it would cut capacity by 5% in April, and it could possibly make deeper cuts in May.
“I think it is safe to say there will be capacity reductions in May, with the 5% reduction in April just being the first move,” said Spirit CEO Ted Christie.
Spirit will still have 9% more capacity in April than it did a year ago. But it had previously expected to grow capacity by 14% before this slowdown.
Comparisons to 9/11
The spread of the coronavirus and guidance from US health officials has caused many major companies to limit employee travel and also led to the cancellation of major public events, such as South by Southwest. Bastian said he did not anticipate trying to encourage passenger bookings through steep fare cuts.
“This is clearly not an economic event. It’s a fear event, more akin to what we saw after 9/11 than in 2009,” Bastian said, referring to the fall in travel during the Great Recession.
In the last two weeks, the US airline industry is seeing a bigger drop in demand than following 9/11, said JetBlue CEO Robin Hayes.
Southwest Airlines CEO Gary Kelly announced in an email to employees Monday that he would take a 10% paycut, a spokesperson for the airline confirmed. And Southwest is “seriously considering reductions to our scheduled flying in the short term,” according to the spokesperson. But it has yet to announce details of the schedule cut.
Airlines expect to bounce back
The only good news for airlines from the crisis has been a sharp drop in the cost of jet fuel, the second largest expense at most airlines. American said it will save $3 billion in cost savings this year compared to its earlier guidance, due to the lower fuel prices. That doesn’t include savings from reduced fuel consumption due to canceled flights. Delta said it expects to save $2 billion on fuel.
Despite the loss of passengers and the drop in fares, the airline industry should be able to withstand the crisis, according to several executives speaking at the JPMorgan conference.
“Fact is our industry is exponentially more resilient today than it’s been in the past,” said American CEO Doug Parker. “Our earnings base is well higher than any time before 2013, and our balance sheet have dramatically more liquidity.”
A crisis like this would have resulted in requests for an airline industry bailout in the past, Parker said. He pointed out there was no request for a bailout when airline CEOs met with President Trump and other governmental officials at the White House last week.
“This current crisis is a test of the ability of our restructured industry to withstand the types of shocks that we’ve never been able to withstand before,” he added. “I know that American Airlines is positioned to pass that test, and I suspect the rest of the industry is as well.”
The cuts follow similar reductions in capacity announced last week at United Airlines and JetBlue Airways, which also announced plans to have employees take voluntary leaves of absences.
“We’ve been very aggressive at going out with voluntary time off,” said JetBlue’s Hayes. “I’m optimistic that we can, even with future capacity cuts, achieve this through voluntary means. That is our preference and our goal.
Shares of American rose 2% in early trading on the news while Delta shares slipped 2% and Spirit shares fell 3%. Other airline stocks were also mixed.
By Chris Isidore, CNN Business