The COVID-19 pandemic has crushed air travel demand in 2020, putting profits far out of reach for U.S. airlines. Instead, airlines have turned their focus to minimizing cash burn so that they can live to fight another day.
This week, Alaska Air (NYSE:ALK), United Airlines (NASDAQ:UAL), and Hawaiian Holdings (NASDAQ:HA) all updated investors on their cash burn expectations for the third quarter. For the most part, the numbers are moving in the right direction. Let's take a look.
Alaska Air continues its outperformance
Last month, Alaska Air reported that it burned $175 million of cash in July. While this exceeded its June cash burn, it was somewhat better than management's initial projection for monthly cash burn of $200 million.
In August, the Alaska Airlines parent continued its recent streak of beating its guidance for cash burn. In its mid-August update, the company had estimated that cash burn would be less than $125 million for the month. Alaska's cash performance ended up being much better than that, as the airline burned through just $80 million. Improved ticket sales were the primary driver of lower cash burn, according to the company.
Alaska Air projects that it will burn approximately $150 million in September, with much of the sequential uptick relating to the timing of debt service payments. If that forecast is accurate, the company would burn $405 million for the quarter as a whole. That's hardly chump change, but the company is well prepared to handle that level of cash usage for a few quarters. As of Tuesday (Sept. 8), Alaska had $3.6 billion of cash and investments on its balance sheet.
United Airlines is meeting expectations
In the second quarter of 2020, United Airlines averaged cash burn of approximately $40 million per day. In July, management projected that average daily cash burn would moderate to $25 million in the third quarter, despite a demand slowdown experienced beginning in late June. About $6 million of that expected cash burn was attributable to scheduled debt principal payments and severance costs.
In an investor update on Wednesday, United said that it remains on track to reduce average daily cash burn to $25 million this quarter. It now expects passenger revenue to fall 85% year over year in Q3, compared to its previous estimate of an 83% decline. However, the full-service airline trimmed capacity more than originally planned (70% as opposed to 65%), driving cost savings to offset lower-than-expected revenue.
United also noted in its recent investor update that demand for short-haul leisure travel had improved over the past couple of weeks. If that uptick continues, United could potentially beat its cash burn guidance. Even if it doesn't, the airline can withstand this level of cash burn (equivalent to $2.3 billion a quarter) for a while. United reiterated in the update that it expects to end Q3 with more than $18 billion of liquidity.
Hawaiian Holdings reduces spending to offset weak demand
The pandemic has been particularly hard on Hawaiian Holdings. Hawaiian Airlines specializes in serving leisure travelers heading to Hawaii for vacation, but that market has dried up in 2020 due to mandatory 14-day quarantines for all people arriving in the state. A program to allow visitors to avoid the quarantine by getting tested before flying to Hawaii was supposed to go into effect on Aug. 1 but has been delayed to October at the earliest due to testing delays, as well as high case numbers in Hawaii and key tourism catchment areas like California.
As of late July, Hawaiian Holdings' management was targeting cash spending of $3.2 million per day for the third quarter and assumed that net sales would be zero. (During Q2, cash spending averaged $3.3 million per day and refunds outpaced new bookings.)
In an update on Wednesday, Hawaiian disclosed that incremental capacity cuts and voluntary leaves by employees allowed it to reduce third-quarter expenses more than originally planned. As a result, the company expects daily cash burn to average $3 million this quarter.
Hawaiian Holdings increased its cash position in the first two months of Q3, ending August with $997 million on hand. Still, with cash burn on track to exceed $250 million this quarter, the Hawaii-based leisure carrier has far less cushion than either Alaska or United. Secured loans available under the CARES Act should enable Hawaiian to shore up its balance sheet this fall. Nevertheless, the carrier is really counting on the Hawaii quarantine order being lifted -- and ultimately, a vaccine becoming available -- sooner rather than later.