On Tuesday afternoon, United Airlines (NASDAQ:UAL) became the second airline to report its second-quarter results, after Delta Air Lines (NYSE:DAL) announced a $7 billion pre-tax loss last week ($3.9 billion excluding special items).

As expected, United Airlines also racked up a substantial loss last quarter, as the COVID-19 pandemic crushed air travel demand. However, it did a better job of mitigating the short-term earnings and cash-flow pressure from the pandemic than Delta. That's a big accomplishment, as United faces a tougher road to recovery than perhaps any other airline, due to its heavy exposure to long-haul international travel.

United slashes costs to the bone to stem the bleeding

United Airlines' revenue plunged 87.1% year over year last quarter to less than $1.5 billion. However, the airline also reduced operating expenses (excluding special items) by a stunning 53.7%, despite not being able to implement involuntary layoffs or furloughs due to the terms of its CARES Act payroll support. Including the grant portion of United's payroll support funds as an offset to payroll expense, operating costs plunged 69.9% year over year.

The savings came from virtually every line item. Fuel expense decreased 89.9% due to lower fuel prices and United's dramatic schedule cuts. Distribution expenses fell by 93%, maintenance costs declined by 73.9%, and even wages and benefits expense decreased 29% year over year.

The net result was that United reported a $2 billion pre-tax loss -- far better than Delta -- and a $3.2 billion adjusted pre-tax loss (also noticeably better than Delta). Careful capacity management was the key to this successful loss mitigation. United reduced its passenger capacity 87.8% year over year last quarter.

A United Airlines plane sitting on a runway

United Airlines posted a smaller second-quarter loss than Delta Air Lines. Image source: United Airlines.

With respect to cash burn, Delta and United were more evenly matched. Delta reported that daily cash burn averaged $43 million in the second quarter. United's cash burn came to $40 million a day. Restrictive policies around refunds for canceled flights contributed to United's slower cash burn.

Cargo is a bright spot

Aside from cutting costs, United did a great job pivoting to capitalize on a surge in air cargo rates last quarter. Typically, airlines carry lots of cargo in the bellies of planes operating international passenger flights. As countries closed their borders and implemented other travel restrictions, airlines dramatically cut their international schedules, gutting cargo capacity as well -- and causing cargo rates to spike.

United Airlines was one of the first airlines to start operating cargo-only flights with passenger aircraft during the pandemic. The first such flight departed on March 19. By mid-April, the airline was running more than 150 cargo-only flights per week, spanning more than two dozen routes. In May, United began placing some cargo in the passenger cabin for these cargo-only flights, further increasing its cargo-hauling ability.

As a result, United Airlines' cargo revenue surged 36.3% year over year to $402 million, contributing over 27% of the airline's total revenue last quarter. Notably, it achieved this performance even though its cargo volume was down about 40% year over year. For comparison, Delta's Q2 cargo revenue plummeted 41.9% year over year to just $108 million.

On the right track in a tough situation

United Airlines CEO Scott Kirby has been a realist from day one of the COVID-19 pandemic, whereas some of his peers in the airline industry have been unduly optimistic. This attitude has served United well so far, and will likely continue to benefit the airline.

For the third quarter, United Airlines expects to reduce capacity 65% year over year, maintaining a cautious capacity plan in the face of shaky demand. Nevertheless, with ticket sales turning positive, United expects daily cash burn to recede to an average of $25 million this quarter, with further improvement in the fourth quarter. And thanks to its aggressive capital-raising actions, the company is on track to have $18 billion of liquidity at the end of Q3.

This represents a solid liquidity cushion. It should be sufficient for United Airlines to cover cash burn and near-term debt maturities over the next 12-18 months while still holding plenty of extra cash.

Given that United expects revenue to at best reach 50% of 2019 levels before a vaccine becomes widely available, limiting cash burn and maximizing liquidity are both extremely important. The next few quarters will be rough, but United Airlines is doing everything it can to ensure it emerges from the COVID-19 pandemic strong enough to have a legitimate shot at a comeback.