There are many metrics used to evaluate the health of an airline, but these days, cash burn is pretty much all that matters. Oh sure, you need to think about debt levels, liquidity, etc, but ultimately this is a game of staying alive as long as possible, and the less cash you burn, the better chance you have of surviving. The airlines all realize this, and the metric has taken center stage. The problem is that they’ve duped us all by calculating cash burn in different ways. Let’s see if we can clear that up.
You’ve probably heard a whole bunch of different cash burn numbers bandied about. Delta said it was down to $27 million a day by the end of June. American was at $30 million while United explained it would be down to $25 million in the third quarter. But those numbers are all looking at different things. I tried to untangle the mess, but I gave up.
Fortunately, Wall Street analysts can’t give up on that, so I am happy to present their work. Specifically, I’m looking at what the research team at Raymond James put together by combing through airline public filings and then adjusting and normalizing the numbers.
First, I’ll try to explain exactly why the numbers you’ve been hearing can’t be properly compared. Delta, for example, apparently excludes principal payments on debt while the others don’t. Others don’t include all aircraft financing. In the end, this is all money that should count, so it should all be included in the calculation.
Raymond James opted to calculate the numbers by only excluding grants (that’s CARES Act stuff which shouldn’t be counted as cash in when looking at ongoing company health) and financing (which comes in a big chunk and then has to go back eventually). Here it is for the second quarter of this year.
| Airline | Reported Q2 Daily Cash Burn | Adjusted Daily Q2 Cash Burn |
|---|---|---|
| Alaska | $5.4 million | $5 million |
| Allegiant | $1 million | $2 million |
| American | $55 million | $59 million |
| Delta | $43 million | $52 million |
| JetBlue | $10 million | $10 million |
| Southwest | $23 million | $17 million |
| Spirit | $5.8 million | $6 million |
| United | $40 million | $40 million |
This paints a different picture, doesn’t it? Looking at the Big Three, United really distances itself from the pack. This shouldn’t come as a surprise. After all, United was the first to react and understand the severity of the crisis. It moved very quickly and cut costs out fast, so it had a head start in reducing Q2 cash burn over the others. That doesn’t mean it will have an ongoing advantage, mind you, but it still speaks to the airline’s ability to be nimble in the early days.
Delta looks far less impressive than it did before once you include the debt payments. Meanwhile, American continues to trail the pack to the surprise of nobody. Meanwhile, Alaska and Spirit look great. But wait, that’s not right.
This analysis obviously doesn’t adjust cash burn to account for the size of the airline. Raymond James decided the best way to fix that problem was to show it as a percent of 2019 revenues. Here’s how that looks.
| Airline | Adjusted Daily Q2 Cash Burn as % of 2019 Daily Revenue |
|---|---|
| Alaska | 23% |
| Allegiant | 48% |
| American | 47% |
| Delta | 40% |
| JetBlue | 43% |
| Southwest | 28% |
| Spirit | 53% |
| United | 34% |
Looking at it this way, it puts emphasis on just how well Alaska is doing and, contrary to the first cut, just how poorly Spirit is doing. Alaska is interesting in that it has significant presence in some of the earliest COVID hotspots along the West Coast, so you’d expect it to be harder hit yet they are running the airline well up there.
Meanwhile, Spirit just tried to fly right through it and, well, it did not work out well. This would explain why we’ve seen Spirit slash flying lately. But there is more to it than that. Since we’re comparing 2020 cash burn to 2019 revenues, any airline that grows quickly, like Spirit, is going to be unfairly penalized. So it’s not quite as bad as it looks for Spirit here, but it’s also not good.
Of course, the ultimate question is… how long can these airlines survive without major improvement? Combining cash burn with liquidity gives you the number of months of cash on hand, and that will tell that story. But how do you calculate that? Raymond James settled for a worst case scenario that assumes no revenue improvement, no additional cash being raised, and no changes in employment. All the airlines can make it through the winter with that, but some can’t get much beyond that.
| Airline | Months of Cash on Hand |
|---|---|
| Alaska | 19.1 |
| American | 10.8 |
| Delta | 15.1 |
| Southwest | 23.2 |
| Spirit | 11.7 |
| United | 19.1 |
Of course, these numbers aren’t realistic anyway since things will absolutely change between now and then. But it still gives us a sense of how airlines are positioned. American and Spirit appear to be the most vulnerable while Alaska and Southwest are in the best shape. United… not so bad. Delta… not as good as you thought. The numbers may change, but that reality is likely to hold.
