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American Airlines CEO Says The Coronavirus Crisis Is Worse Than 9/11: Is He Right?

By Lou Whiteman - Mar 19, 2020 at 3:41PM

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The airline industry is hit with its second existential crisis in two decades.

The CEO of American Airlines Holdings (AAL 7.09%) said Thursday that the COVID-19 pandemic's impact on airlines will be worse than the attacks of Sept. 11, 2001, urging lawmakers to move quickly to provide assistance for the U.S. airline industry.

Doug Parker, who as CEO of America West Airlines in 2001 had a firsthand look at the financial devastation caused by a terrorist attack using commercial airplanes, said that there is no indication when the dramatic plunge in travel demand due to the pandemic will end.

Parker, now CEO of American, spoke with CNBC while in Washington lobbying for an airline assistance package. He asked not to be directly quoted given the on-going discussions.

The airlines are seeking $50 billion in aid, including about $25 billion in immediate grants and a similar amount in loans. Parker said that the relief package would be enough to sustain current U.S. airline operations for about six months if business does not deteriorate further.

Is he right?

It's tough to make an apples-to-apples comparison of the two crises. Following the attacks of Sept. 11, U.S. airspace was completely shut down for two days. Civilian air traffic was allowed to resume on Sept. 13, but airlines reported dramatic reductions in demand for months to come.

There were 90.6 million seats available for sale on U.S. airlines in August 2001, according to the Bureau of Transportation Statistics, but that fell to 67.5 million for September. It took until July 2005 for the monthly level to hit pre-9/11 numbers.

A Boeing 777 tail at night.

An American Airlines Boeing 777 tail. Image source: American Airlines.

At least near-term, the current numbers appear to be far worse. In a letter to American employees obtained by Reuters, company president Robert Isom said the airline has seen "unprecedented declines in future bookings and customer demand" in recent days. The airline has cut 75% of international flying and 30% of domestic in April, parking about 450 planes.

"While these steps are unparalleled in our history, we expect demand to fall even more before it gets better," Isom wrote. "More network reductions are being worked in real-time as we see bookings decline."

In a letter to Washington leaders dated March 16, United Airlines Holdings (UAL 7.54%) CEO Oscar Munoz agreed that the financial impact for the airlines will be far worse than 9/11.

"March is typically our busiest month of the year. This year, in just the first two weeks of March, we have welcomed more than one million fewer customers on board our aircraft than the same period last year," Munoz said. "We're also currently projecting that revenue in March will be $1.5 billion lower than last March. The bad news is that it's getting worse. We expect both the number of customers and revenue to decline sharply in the days and weeks ahead."

Will it end the same?

In the weeks following the Sept. 11 attacks, the Treasury Department set up the Air Transportation Stabilization Board to dole out about $10 billion in federal loan guarantees designed to keep the airlines flying. It didn't do much to help. Only seven, mostly smallish, passenger and cargo airlines had loan applications approved, and the company that is today United Airlines Holdings (UAL 7.54%) was denied.

Of the recipients, only Parker's America West survived, going on to first buy US Airways out of bankruptcy and then merging with American and taking the name when that company came out of bankruptcy in late 2011.

In the ten years that followed the terrorist attacks, all major airlines except Southwest Airlines (LUV 4.98%) ended up in bankruptcy, and a series of mergers that followed saw Northwest Airlines, Continental, US Airways, America West, and AirTran disappear from the skies.

The survivors are much healthier now than they have been at any time since airlines were deregulated in the late 1970s, but no business can withstand the dramatic revenue declines airlines are now facing. Delta Air Lines (DAL 5.55%) said Wednesday it expects March revenue to decline by $2 billion year over year and said April is expected to fall even more.

AAL Chart

Airline stocks year-to-date data by YCharts

The major airlines all have significant unencumbered assets they can use as collateral for loans -- American on Thursday said it secured a fresh $1 billion loan, raising its total liquidity to about $8.4 billion -- but investors and creditors are mindful of the aftermath of 9/11, worrying that bankruptcies are inevitable. The airlines are pushing for a massive government package to reassure lenders and counterparties they will be able to remain flying and to keep sources of additional liquidity open and available.

All eyes turn to Washington

In 2017, Parker famously told investors that given the structural improvements to the airline industry in recent years, "I don't think we're ever going to lose money again." He likely regrets that quote now, but in his defense, the pandemic's impact on travel is far worse than what any recession has ever caused.

It's too soon to say for sure if the novel coronavirus will indeed do more damage to the U.S. airline industry than Sept 11. We won't know that until we know how long the pandemic rages, and how quickly travel demand returns once it has subsided. But at least for the smaller airlines, the odds of a major disruption are increasing by the day without some sort of government backstop.

In his letter, American president Isom told employees "we are in the fight of our lives, and we will win." The industry is fortunate it came into 2020 as healthy as it has ever been. We'll know in the weeks and months to come if it was healthy enough to withstand the COVID-19 pandemic.

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Stocks Mentioned

Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$31.20 (5.55%) $1.64
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$38.51 (7.54%) $2.70
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$13.90 (7.09%) $0.92
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$37.73 (4.98%) $1.79

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