Figuring Out How Much Cash the Airlines are Really Burning

Mergers/Finance

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.

AirlineReported Q2 Daily Cash BurnAdjusted 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
via Raymond James research – updated 8/3 with Allegiant and JetBlue

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.

AirlineAdjusted Daily Q2 Cash Burn as % of 2019 Daily Revenue
Alaska23%
Allegiant48%
American47%
Delta40%
JetBlue43%
Southwest28%
Spirit53%
United34%
via Raymond James research – updated 8/3 with Allegiant and JetBlue

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.

AirlineMonths of Cash on Hand
Alaska19.1
American10.8
Delta15.1
Southwest23.2
Spirit11.7
United19.1
via Raymond James research

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.

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32 comments on “Figuring Out How Much Cash the Airlines are Really Burning

  1. Brett,

    Thanks for sharing this information. Without digging into the weeds of this analysis (as with most things involving finance, the exact assumptions, time periods, demominators, etc etc REALLY matter, and can greatly skew the story one way or another), this is quite fascinating and insightful. I could see one of my old business school professors assigning something like this as a term project, and I’m sure there will be some great case studies to come out of how airlines have reacted to the current crisis, from not only a financial / cash flow side but also from an operations, employee engagement / HR side, etc etc.

    I’d be really interested to see how the smaller airlines, (particularly the ULCCs like JetBlue, Frontier, Allegiant, Sun Country, etc) stack up in a similar analysis, and I ask that you keep updating this information in new posts every month or two as Raymond James updates its analysis. Might also make for an interesting podcast interview if you can get one of Raymond James’ analysts on the line to discuss their take on the industry beyond just soundbites that get reported in the news.

    The finance side of things may be a little dry/boring for some avgeeks, but right now cash flow is king the key to survival for the airlines.

      1. Last I checked JetBlue was not a ULCC. Nor was it a true LCC either, more of a LCC with a bit of full-service. Speaking of which, interesting that an airline about the same size as Alaska was not included in this analysis, while Spirit, with very little in common with the rest of the airlines on the list, was included.

  2. Your assertion that Spirit just “tried to fly through” the pandemic is not correct, their Q2 ASMs were down 83.2% (only 2% difference from JetBlue & Delta, and much less capacity than Alaska, Allegiant, Southwest, and American)

    It’s actually the opposite, they lost a ton of money not flying in April/May (down 75% & 95% respectively) but once their schedule picked up in June they posted a load factor of 79.1% for the month, in addition:
    “If you exclude an early principal payment of nearly $50 million related to our aircraft deferral agreement and extension of our pre-delivery deposit facility, on an average daily cash basis, we were break-even for the month of June”

    They didn’t drastically add flights until this month, which isn’t included in Q2 numbers
    https://s24.q4cdn.com/507316502/files/doc_financials/2020/q2/Earnings-Release-2Q2020.-07.22.2020-FINAL-IR.pdf

    1. NK had one good month where it flew very little and got a bunch of advanced bookings for Q3 where it planned a lot more flights. As soon as it actually had to fly and the demand plateaued, it’s cash burn rate is way up. They are project $100 million per month cash burn for all of Q3. Things are going really bad there.

      1. Way up? You have no idea what their current cash burn rate is…..

        They are saying $3-$4M for Q3, that’s half of Q2 burn on conservative estimates

        1. They just said a week ago it’s $3 to $4 million a day and they’ve been telling their employees $100 million a month the past couple of days. That’s why they are warning 20 to 30% furloughs. They have also said in May that $4 million a day is their cost in a zero net booking environment. That is a lot.

  3. The cash burn numbers in your article aren’t even close to comparable because they don’t normalize for the amount of refunds which each airline is giving – which differs widely by airline. Delta’s CEO said they know that at least one of their competitors (undoubtedly UAL) is being very stingy with refunds (you even wrote about it) while DAL has been refunding much more. AAL has been giving refunds more freely than most other airlines as well.

    Analysts have repeatedly been focusing on air traffic liability in their questions to airline execs and are trying to back their way into how much refunding is going on – but airlines do not have to report refund activity so it is a murky guess.

    And the whole notion that cash burn is the most important statistic is also not really accurate.

    None of the airlines other than AAL in your tables has less than one year of cash left – and all of those statistics are based on cash burn projections given by each airline.

    There are and will be many moving parts.

    All airlines have more than enough cash to make it through the winter given their own actions – layoffs which are certainly coming Oct 1, reduced schedules, CAPEX reduction etc.

    If there is anywhere close to a vaccine so that next summer returns to some sort of normal, the day of reckoning is likely pushed back into the fall of 2021 or after. If there is no vaccine and all of life doesn’t return to normal by early 2021, there are much bigger issues for modern life as we know it.

    The real number that matters is the ability to service debt ie the percentage of each airline’s revenue that will go to interest payments and REQUIRED principal repayments. AAL was already spending the highest based on that ratio even before the crisis and its numbers will soar. And those that are quick to argue that LUV is in great shape would do well to look at how much debt LUV has taken on as a percentage of what it previously had. Obviously everyone is padding their cash right now but WN (LUV) has taken on far more debt as a percentage of their previous levels than other airlines which will cost them proportionately more.

    Cash burn is at best a means of trying to handicap how long airlines can last but it is a number that is moving quickly, does not include many key components such as refund activity, and also is far less important than the ability to service debt in the future.

  4. Interesting analysis and as it was more-or-less stated, it is fluid. I don’t expect AA to be out of business in 10 months anymore than I expect Trump to stop tweeting. That being said, whenever we do come out of this Covid mess I’m guessing we are back to the lean times at airlines, like post 9/11 when perks were cut to the bone and we discovered what ancillary fees were. Can’t wait!

  5. The months cash on hand obviously leads to the next question and that is the ability to raise additional capital. Some airlines have the ability to raise additional capital at a reasonable price. Some may not be able to raise additional capital or must pay a steep price in order to do so.

  6. Spirit right now is definitely trying to fill-up planes on routes it’s still operating right now. For the first time since COVID started I found myself on Google Flights potentially looking into a trip from Chicago to San Diego to visit a family member who has terminal cancer. I was stunned to see that right now the price of the Spirit non-stop flight is a whopping $18, $36 round-trip, with maybe a weeks advance purchase required. There definitely trying to get people to book and bring in some ancillary revenue with every booking.

    My partner though only wants to fly Delta if we make the trip (which doesn’t fly this market non-stop) primarily because of all the media attention they’ve gotten for require masks, including their list of over 100 banned passengers, and keeping middle seats empty (which is important to us, since during normal times is a reason we fly Southwest whenever possible so she can use their Customer of Size policy and we always get a free empty middle seat). With Spirit offering flights for $18 each-way maybe I should try and purchase a bunch of seats and get a few rows to ourselves, although I think the seat fees would make this much more expensive to have empty seats all around us.

    1. The only way, and I mean the absolute only way, you could get me on a Spirit flight is if you can book the Big Front Seat. I’ve heard it’s worth the extra cash and that should give you sufficient social distancing. Love the idea of purchasing multiple seats, though.

    2. From what I’ve seen and heard, Allegiant is also doing its best to fill flights with fairly cheap fares. With more and more states implementing policies that require visitors from (and/or residents returning from) states with bad COVID numbers (read: most of the US, with the exception of New England, NY, and NJ), Allegiant is likely to feel the pain, especially on flights to FL.

      Massachusetts’ new travel/quarantine policy goes into effect tomorrow, and I know of people who have already had to cancel trips (business and pleasure) because of it.

    1. JetBlue reported this week. HA reported this week. ALGT report this week. That’s why they weren’t included.

      No conspiracy here.

          1. Bill – Oh I knew you were joking, but there were multiple responses so I just wanted to clear the air. Saw FC already did it for me.

  7. Whenever I see stories like these, I’m reminded of Mark Twain’s wry observation, “There are three kinds of lies – lies, damned lies, and statistics.” That doesn’t mean I don’t find the article interesting and informative. I do and it is. As you point out, these numbers represent a snapshot. There are are a lot of variable factors going forward. Some can be controlled. Most can’t. Obviously, the biggest wild card, that can’t be controlled or predicted, is how much and how quickly travel demand will return. Unlike those who are rooting for an airline or two to be liquidated, I’m hoping overall demand will return enough to get all carriers to at least break even cash flow soon.

    1. I don’t see anyone rooting for liquidation of any airline but perhaps you can help show us where that is happening.

      Each carrier quickly develop their own strategies and cash burn reflects it. Even professional analysts are, at best, trying to compare apples to apples when there is no data to fill in specific parts of the puzzle including refund activity which this discussion did not include.

      Some carriers went all-in with new capacity and are having to pull back. They wasted alot of money operating flights that simply did not work to generate more revenue and will actually increase their costs as they have to refund money (which is what the feds say airlines have to do regardless of airline policies) as well as increase handling costs.

      Also, none of this discussion includes debt payments which every airline has in the near term (within a year) as well as interest expense – whether anyone wants to include that in cash burn or not. Companies cannot just push back all debt payments any more than you or I can.

      There are a ton of moving parts and none of it really matters right now because there is no liquidity crisis for any US airline for six months or more. Playing with numbers that are not accurate now in hopes of handicapping how last a company can last is no more accurate than any of the zillions of predictions about covid-19 deaths. btw, Herman Cain just passed away from covid which should highlight that statistics really don’t matter to anyone that has lost family and it won’t matter to airline employees that lose their jobs or have their income dramatically cut.

      CF’s capacity articles are unique and based on verifiable facts. They have been his best contribution to the aviation world since this crisis began.

      1. Tim,

        With all due respect, this isn’t the only airline blog I read. We’ve hashed this “liquidation” business out before, so there’s no reason to litigate it further.

        American’s definition of cash burn does include debt and interest payments. I remembered hearing that on the earnings call. Here’s an excerpt from American’s earnings call from Seeking Alpha (whose transcriptions leave something to be desired). In it, Derek Kerr said, “Well, there are several burn rate definitions out there. We define it as the sum of all net cash receipts less all cash disbursement ***that includes all debt payments and interest payments***. But it does exclude the effect of new financings and new aircraft purchases.

        I have a particular interest in American because I live in the Phoenix area, and have a number of friends who began their airline careers with America West (who, obviously, are now with American), so it’s a bit personal with me from that perspective. I don’t want to see my friends lose their jobs. Many of them have invested the vast majority of their working lives in the airline and are getting close to retirement.

        1. Ghost,
          You may be shocked to know that I do agree with Derek Carr. That IS the correct way that cash burn should be calculated.
          My point is that near term cash burn doesn’t include debt repayments six months to a year out – they simply are not required to provide financial projections that far out.
          AAL and other airlines are including the debt payments they have made in the present quarter and their financial declarations do include their required repayments by year – but not by quarter for future years.

          But you highlight exactly my point – that there are significant differences between the way cash burn is calculated and none of the lists above is a true apples to apples comparisons.

          1. correction Derek Kerr

            and, nobody is wishing ill-will on any one but decisions do have consequences, even for people who innocently thought they were giving their best to an organization where they were only one small voice.

            check out each airline’s debt repayment schedules for 2021 and you will see why these “cash burn forecasts” really don’t mean anything. There is a significant amount of the cash that has been hoarded that will have to go to debt repayment if this drags on into 2021 – which is likely. Operating cash burn – too many employees, too low load factors – can’t continue to be problems six months from now.

  8. BTW I was kidding about B6 being left out. It’s my old team. I get what and why you’re posting. I honestly didn’t think anyone would read or respond.Sent from my Verizon, Samsung Galaxy smartphone

  9. Thanks, CF

    It was very apparent that UA was more upfront when they announced their 2nd quarter daily cash burn average.
    They were the only airline that said they included debt repayments and interest expenses in their cash burn, while all others were silent on the matter. UA included the kitchen sink, while most did not.

    UA has also already gotten sale.leaseback transactions in place for all aircraft to be delivered in 2020 and thus have minimized cash burn and they no longer have any aircraft deliveries scheduled for 2021.

    DL, AA and especially Southwest have quite a few unfinanced new aircraft deliveries coming in 2020 and 2021.
    Although Alaska’s are extremely modest.

    However almost all carriers ran out and got 364 day loans in March and April as the pandemic started to gain momentum, and all have to pay the loans back in full in March and April of 2022. These balloon payments, if not refinanced for a longer term, may be significant problems for them in the future.

    UA’s and DL’s stand at $2.75B and $3.0B respectively, with even Jetblue at $1.0B. Southwest has done a good job changing the terms on $2.0B of theirs pushing out repayment until 2024 and later, And AA has done some of the same but at much lower amounts. But regardless, AA’s total debt now stands at $40B, or an interest payment alone of $2.0B per year if their average interest rate is only 5%. I suspect it is closer to 6.0 to 6.5% pushing it closer to $2.5B per year in interest. Now that will affect average daily cash burn.

    March and April 2021 could be very consequential months for some carriers if they don’t refinance their 364 day loans before then.

  10. It won’t take much effort to go back and compare how much each carrier has in unencumbered debt.

    Can JBLU be added to this analysis?

  11. All the worlds’ airlines are suffering from unprecedented declines in revenue. However, among airlines in the developed world, American Airlines are facing additional problems. The world is devolving into two categories of countries with regard to Covid-19. Those countries with Covid-19 and those without. New Zealand and Iceland have already reported no new cases of Covid-19. Australia, Taiwan, Hong Kong, Denmark, Greece and South Korea are well on their way in totally eradicating Covid-19. Countries that have or are very close to eradicating Covid-19 are now working on plans for a “travel bubble” where travel between those countries will not be restricted. As other countries also eradicate Covid-19, travel between them will be allowed without 14-day mandatory quarantines upon arrival. America will almost certainly be among the last developed countries to have no Covid-19 cases.

    1. Australia and Hong Kong bubbles have been leaking and shows the fragility of trying to isolate. Obviously the US is just a broken country.

  12. Now that Allegiant and JetBlue have reported Q2 results, Raymond James has updated the charts. I have added those airlines into the post tables.

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