Airlines and COVID-19: The Turbulence Ahead
Skip to content
Finance & Accounting Oct 30, 2020

Airlines and COVID-19: The Turbulence Ahead

With demand still down and debts mounting, the industry looks ahead.

pilots remove autopilot on plane

Michael Meier

Last week, two of the largest U.S. airlines released their quarterly earning reports. For the first nine months of the year, Delta Air Lines’ revenue was $10.2 billion, a decline of 68 percent from the same period in 2019, while United Airlines’ revenue was $9.4 billion, also a decline of exactly 68 percent. Delta and United have reported net losses of $11.6 billion and $5.2 billion, respectively. American Airlines, which is expected to report its third quarter financial results this week, is unlikely to have fared better.

The airline industry is in a crisis worse than anything we have seen before. Demand for air travel around the world collapsed in mid-March 2020, and while it slightly rebounded over the summer, domestic aircraft departures are still down by more than 50 percent. International travel has been hit harder still. And demand is expected to remain depressed for the foreseeable future.

The CARES Act provided the largest airlines almost $16.0 billion in grants and $6.5 billion in loans to keep them afloat, but it has not been enough. In order to survive in such an environment, airlines have rushed to banks and capital markets where they issued bonds and drew on their credit lines to raise money. Airlines have since borrowed and issued notes and bonds worth roughly $48 billion; they’ve resorted to secured borrowing—a practice traditionally used primarily by low-rated and distressed firms.

All this debt on airlines’ balance sheets has resulted in high leverage ratios. For example, Delta Air Lines’ leverage ratio (measured as the ratio of debt to total capital) has increased from 0.53 in June 2019 to 0.78 a year later. United Airlines’ leverage ratio has increased from 0.64 to 0.73, and Southwest saw its leverage ratio rise from 0.29 to 0.51.

This debt has taken its toll on industry credit ratings, which are currently at a very low point. S&P has downgraded the credit rating of every single airline in the U.S.: Delta and Alaska Air Group were downgraded from a BB+ to a BB, JetBlue and Spirit Airlines from a BB to B+, United from a BB- to B+, Hawaiian from BB- to CCC+, Allegiant Travel from B+ to B, and American Airlines from B to B-. These downgrades put most U.S. airlines deep in the “speculative grade” classification—a euphemism used by market participants to describe very risky firms with a high probability of default. The only airline that is currently rated higher is Southwest, which was downgraded from BBB+ to BBB, but is still above the threshold for being considered investment grade.

So far, in part thanks to the CARES spending, airlines have been mostly holding on to the cash they raised. By the end of June 2020, airlines were sitting on cash worth more than $56 billion—an increase of $35 billion from their cash holdings a year earlier. If this could continue, then their future might not seem so dire: after all, the cash on the assets side offsets the debt on the liabilities side.

“In order to recover, [airlines] will need to significantly restructure their costs and renegotiate their capital structures.”

— Efraim Benmelech

However, barring a second dramatic injection of government aid, airlines will need to spend this money. Industry estimates suggest that airlines have already burned through $51 billion in cash and are expected to keep burning through cash until 2022.

Some of the airlines’ costs can be eliminated or significantly reduced when they fly less. These variable costs include, for example, the amount they spend on fuel or food and drinks. Other costs are fixed: unless an airline terminates or successfully renegotiates a lease, it will continue to pay aircraft rental costs to lessors. But the lion’s share of airlines’ costs are somewhere in between variable and fixed: they are semifixed costs such as labor and maintenance expenses. Semifixed costs such as salaries do not fully adjust even to a dramatic decline in revenue such as the one caused by COVID-19. For example, in the first six months of 2020, salaries accounted for 56 percent of American Airlines’ revenue compared with only 28 percent a year earlier.

Will the U.S. airline industry survive COVID-19? With all that debt and government aid airlines are currently on life support. In order to recover, they will need to significantly restructure their costs and renegotiate their capital structures. In the aftermath of 9/11, there was a long and massive wave of airline bankruptcies. Legacy carriers such as United, Delta, Northwest, and U.S. Airways filed for Chapter-11 and emerged leaner and healthier. In doing so, they reneged on pension promises, cut wages, and laid off thousands of employees. Unfortunately, to survive COVID-19, airlines will likely need to do all of the above—and more. With so much debt on their balance sheets, the post-COVID-19 ride will be a very bumpy one.


This article originally appeared in Forbes.

Featured Faculty

Henry Bullock Professor of Finance & Real Estate; Director of the Guthrie Center for Real Estate Research; Director of the Crown Family Israel Center for Innovation

Most Popular This Week
  1. One Key to a Happy Marriage? A Joint Bank Account.
    Merging finances helps newlyweds align their financial goals and avoid scorekeeping.
    married couple standing at bank teller's window
  2. Take 5: Yikes! When Unintended Consequences Strike
    Good intentions don’t always mean good results. Here’s why humility, and a lot of monitoring, are so important when making big changes.
    People pass an e-cigarette billboard
  3. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  4. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  5. Entrepreneurship Through Acquisition Is Still Entrepreneurship
    ETA is one of the fastest-growing paths to entrepreneurship. Here's how to think about it.
    An entrepreneur strides toward a business for sale.
  6. Take 5: Research-Backed Tips for Scheduling Your Day
    Kellogg faculty offer ideas for working smarter and not harder.
    A to-do list with easy and hard tasks
  7. How to Manage a Disengaged Employee—and Get Them Excited about Work Again
    Don’t give up on checked-out team members. Try these strategies instead.
    CEO cheering on team with pom-poms
  8. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  9. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  10. The Appeal of Handmade in an Era of Automation
    This excerpt from the book “The Power of Human" explains why we continue to equate human effort with value.
    person, robot, and elephant make still life drawing.
  11. 2 Factors Will Determine How Much AI Transforms Our Economy
    They’ll also dictate how workers stand to fare.
    robot waiter serves couple in restaurant
  12. When Do Open Borders Make Economic Sense?
    A new study provides a window into the logic behind various immigration policies.
    How immigration affects the economy depends on taxation and worker skills.
  13. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  14. Sitting Near a High-Performer Can Make You Better at Your Job
    “Spillover” from certain coworkers can boost our productivity—or jeopardize our employment.
    The spillover effect in offices impacts workers in close physical proximity.
  15. How the Wormhole Decade (2000–2010) Changed the World
    Five implications no one can afford to ignore.
    The rise of the internet resulted in a global culture shift that changed the world.
  16. What’s at Stake in the Debt-Ceiling Standoff?
    Defaulting would be an unmitigated disaster, quickly felt by ordinary Americans.
    two groups of politicians negotiate while dangling upside down from the ceiling of a room
  17. What Happens to Worker Productivity after a Minimum Wage Increase?
    A pay raise boosts productivity for some—but the impact on the bottom line is more complicated.
    employees unload pallets from a truck using hand carts
  18. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  19. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  20. 3 Traits of Successful Market-Creating Entrepreneurs
    Creating a market isn’t for the faint of heart. But a dose of humility can go a long way.
    man standing on hilltop overlooking city
More in Finance & Accounting