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American Airlines Sees Situation Getting Worse, Not Better

By Rich Smith - Mar 27, 2020 at 5:15PM

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Flight cancellations in May will be steeper than in April.

In response to diminished demand for air travel in the age of coronavirus, on March 10, American Airlines (AAL -0.81%) announced that it will reduce domestic capacity (i.e. the number of seats it has available for reservation, and by extension, the number of flights it will operate) by 7.5%. International flights would get cut 10% "for the summer peak" flying season.  

Just four days later, demand had slipped further. American announced a 20% reduction in domestic capacity for April and a 30% reduction for May -- alongside a 75% reduction in international flights for the period running from March 16 to May 6.  

Collage of an airplane, coronaviruses, and a world map

Image source: Getty Images.

Fast forward two more weeks, and today American announced its latest cuts.  

American now expects domestic capacity to decline between 60% and 70% in April, and between 70% and 80% in May.

International capacity will be down between 80% and 90% in both periods.

Given the collapse in demand for air travel, the fact that American is cutting flights is not really surprising. What is a bit surprising -- and disconcerting -- is that the company is cutting more flights farther out (in May, relative to April), rather than the reverse. The implication appears to be that, in American's estimation at least, this situation will get worse, not better, as time progresses.

The good news, however, is that the U.S. Senate has finally passed its long-awaited Coronavirus Aid, Relief, and Economic Security Act, or "CARES Act," offering $25 billion in loans and loan guarantees to the airline industry as a whole, and a further $25 billion to pay employee salaries and benefits.

If declines in air travel are accelerating like American anticipates, they're going to need it.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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