The airline industry has been battered and bruised by the COVID-19 pandemic, with travel volumes down substantially compared to last year. The airlines are all losing money right now, and with the industry not expected to make a full recovery until 2022 at the earliest carriers are preparing for the worst.
Despite the issues, to date there have been no layoffs thanks to a provision of the CARES Act stimulus plan that traded $25 billion in payroll support for a temporary prohibition on involuntary separations. But that layoff ban expired on Sept. 30, and job cuts are looming.
The airlines are hoping for a last-minute reprieve in the form of a second stimulus package, but as of this writing lawmakers have yet to come through. Absent some added payroll support that prevents layoffs, here's how three Motley Fool Contributors see Southwest Airlines (LUV 0.44%), United Airlines Holdings (UAL -1.61%), and Alaska Air Group (ALK -0.67%) proceeding in the months to come.
One more reason to LUV Southwest Airlines
John Rosevear (Southwest Airlines): Southwest has been an investor favorite for a long time, and there's an extra reason to like it right now: It probably won't need to do any layoffs -- or much of anything else -- when the restrictions expire. While Southwest did need to trim its ranks amid the COVID-19 pandemic, it already took care of business with generous employee buyouts earlier this year.
That's yet another credit to the company's strong management team. We often note that Southwest is the only major airline that has never gone through bankruptcy, thanks to careful financial management, but it's worth remembering that it's careful with its people, too.
Those things are interrelated, of course. Thanks in part to those buyouts, even if things don't improve, Southwest's cash hoard should be ample to keep it flying until at least mid-2022. And if things don't improve by then (or if they get worse in the meantime), the company still has about $12 billion in unencumbered assets that it can borrow against.
But business is likely to improve by then, especially for Southwest. The majority of its routs are domestic, which should see an uptick before international routes as leisure travelers take advantage of discounts -- and remember that Southwest can make money on low fares that its rivals can't profitably match.
Here's the takeaway: Southwest is still well positioned to emerge from the pandemic mess in fine shape, and it may well lead the industry's recovery. If you're looking to bet on an airline, this one's an easy choice.
At United, the news is better than it could have been
Lou Whiteman (United Airlines): For United employees, the news is grim. But it could have been worse.
United management has been perhaps the most blunt in the industry since the pandemic began, with then-CEO Oscar Munoz warning of potential furloughs back in March when the rest of the airlines were celebrating the passage of the CARES Act.
He was right. United intends to lay off about 13,000 workers in the first few days of October as the airline retrenches and prepares for an extended downturn.
But there will be no pilots among the furloughed thanks to a deal reached between management and union leaders that trades lower earnings and minimum flight hours in exchange for job security.
That's good news for United for a lot of reasons. For one, the airline has long been plagued by poor labor relations and desperately needed to get its most important work group on board now to avoid added turbulence. It also gives United considerable flexibility to quickly ramp up operations if demand improves faster than expected.
Rivals including American and Delta Air Lines have yet to work out similar deals with their pilots. Those companies could end up scrambling to bring workers back in house and get them up to date on training and certification requirements while United and Southwest soak up added demand by adding flights more quickly, a potential revenue boost for United at a time when airlines need all the cash coming through the door they can get.
That's not enough to make United a buy for me. There are safer airlines for investors right now. But it could be an important advantage down the line that helps ensure United survives this crisis.
Cheaper is safer -- if investors have the patience
Rich Smith (Alaska Air Group): The last time I recommended Alaska Air Group, the stock was trading at $36 a share. It's still only $36 and change today, so at least things haven't got any worse. I think I'll double down on that bet and recommend Alaska Air again.
When government restrictions expire in October and Alaska Air is permitted to begin laying off workers, I expect layoffs will in fact happen. After all, at last report, Alaska Air was looking to run only about 45% as many flights in the third quarter of 2020 as it flew in Q3 2019. With a load factor on those flights that could be as low as 40%, that means there won't be enough business to justify keeping everyone on the payroll, nor will there be enough revenue to pay everyone's salaries.
Additionally, cash burn at Alaska this month already looks like it will be about double August's $80 million burn rate. To prevent that burn rate going even higher, layoffs look like an inevitability.
That being said, at last report, Alaska had some $3.6 billion in cash available to it through the recession. Assuming monthly burn rates do not go higher than September's estimated $150 million -- either because Alaska keeps costs in check through layoffs, or because the government steps in and renews its subsidies -- Alaska should have the money it needs to stay in business for about two more years without raising additional capital.
I hope I'm not being overoptimistic here, but two years of disruption should be long enough for the travel industry to return to some version of normal. And if Alaska Air can resume earning, say, the $769 million annually that it earned in 2019 by 2022, then a share price less than six times those future earnings still looks pretty cheap to me.