What happened
Airline shares were under pressure on Tuesday, with United Airlines Holdings (UAL 0.84%) falling 5.1% at its low. It was news from another carrier, American Airlines Group (AAL -1.38%), that was weighing on investors. But with COVID-19 hanging over the entire industry, one carrier's news tends to ripple to other stocks.
So what
The airlines have been hit hard by the pandemic, but the industry traded a moratorium on layoffs for $25 billion in government payroll support earlier this year and have so far avoided massive downsizing. That deal expires on Sept. 30, and we are getting a clear picture of how dramatic the cuts might be once it does.
Image source: United Airlines.
American said Tuesday it expects to cut 40,000 of its 140,000 jobs, including upwards of 19,000 involuntary furloughs, in early October once the payroll support ends. A day earlier Delta Air Lines (DAL 0.52%) said it will need to furlough up to 1,941 pilots to accurately adjust to falling demand.
Southwest Airlines (LUV -0.42%) is still weighing the need for job cuts after getting offers from more than 25% of its workforce to take buyouts or extended leaves of absence. Which leaves United among the so-called "big four" U.S. airlines when it comes to cuts. Expect a high number: United said in late July it could furlough as many as 36,000 workers if demand does not return.
The talk of massive job cuts is weighing on airlines today. Criticism of the initial bailout could also make it harder for the industry to secure a second round of assistance that would allow them to avoid layoffs for at least the next six months.
Now what
It's easy to take potshots at the initial government plan as putting off the inevitable. But lawmakers knew that going in. The government received warrants in return for the funds and some of the money came in the form of loans. But the calculus from the beginning was to try to avoid an additional 100,000 job losses at a time when the unemployment system was under pressure, and to hope that by the time Sept. 30 came around travel would have recovered and layoffs could be avoided.
That hasn't happened, and it appears likely it will be 2022 at the earliest before domestic travel rebounds to pre-pandemic levels. If so, at some point these companies are going to need to get smaller.
The talk of layoffs is devastating potential news for families, has real political ramifications, and shouldn't be dismissed. But for investors, it is not something that should prompt a sell-off. As discussed last month, the airlines are flying at less than half of their pre-COVID capacity and simply need to bring down payrolls if they are going to survive.
In the coming months the airlines will either get additional payroll support, or will dramatically reduce the size of their operations. I can't predict which will happen, but would advise investors to remain calm either way.
