Listen to leaders at United Airlines speak and you’ll literally think the sky is falling. But listen to leaders at American Airlines and you’ll walk away feeling hopeful. And yet both live in the same reality. Who is delusional…or are both delusional?
United Airlines: Pessimism Reigns
United has taken a “glass half empty” approach to COVID-19. It was the first carrier to prepare for the worst, has consistently warned employees of job cuts, and has aggressively scaled back service.
For example, all the way back in March incoming CEO Scott Kirby warned of potential job cuts:
“This weekend, we began conversations with our union leadership about how to reduce our payroll expense in a way that minimizes what we know will be painful for all of us.”
The cutbacks began on March 5th, earlier and more aggressive than at American or Delta. But even United underestimated how bad things would get. On March 10th, Kirby predicted a “worst-case scenario” of a 40% drop in revenue in June 2020. As United plans a 90% reduction of its scheduled June flights versus last year, the situation turned out far worse.
Since then, United has forced non-union employees to take a mandatory cut in hours, grounded more aircraft, deferred new purchases and other capital expenses, denied refunds, and has all but guaranteed there will be painful job cuts as soon as CARES Act funding expires at the end of September.
American Airlines: Cautious Optimism Reigns
Meanwhile, American Airlines has taken a very different approach. While schedule reductions have been aggressive, the tone coming from AA’s leaders could not be more different.
While United simply says it is in a fight for its life, American Airlines President Robert Isom told employees on March 19th, “We are in the fight of our lives, and we will win.”
That optimistic sentiment becomes a rallying cry.
And listen to American CEO Doug Parker on CNBC:
Parker says the government aid will be “more than sufficient” to get through this crisis. He also stressed that job cuts will minimal, noting that “our team will be here when the flying public is ready to return.”
While Parker notes “we’ll have more team members than we have work for,” he still hopes to avoid job cuts.
“Hopefully we can manage through that without having to do furloughs.”
American Airlines simply does not have the survivalist mentality that United has. It has quickly processed refunds, not played games with them. It has also (with one exception) not dismantled the value of its loyalty program, unlike United.
So Who Is Right? (Or Are Both Wrong?)
Looking at the figures, American Airlines is more vulnerable than United Airlines. American Airlines is burning through $70 million per day and lost $2.2 billion during the first quarter. Meanwhile, United lost $1.7 billion and is burning through $50 million per day. Both expect that number to drop by the end of the quarter, though AA’s debt servicing limits this opportunity. To that point, American Airlines is also highly leveraged. AA values its unencumbered assets at over $10 billion, a move that some analysis question. United has unencumbered assets of $20 billion plus more cash in reserve.
By those figures, you might think AA is the one who should be in panic mode. But it’s not. Watch Parker above and you’ll hear him say “I don’t know” over and over. American is taking a “wait and see” approach while United is preparing for the worst.
While only time will tell which strategy is better, I cannot imagine American employees have any more security than United employees, even if Isom and Parker are not warning of job cuts at this time. The numbers are grim. American Airlines simply cannot continue the status quo unless demand dramatically picks up, and that does not seem likely at this point.
CONCLUSION
I like what I am hearing from American Airlines and I like the way they have handled the COVID-19. As View from the Wing notes, this is a tremendous opportunity to change the culture at American Airlines. But I cannot help but to feel employees and investors will feel even more betrayed if leaderships talks down job cuts and grim cutbacks only to implement with far less notice than United.
If you work for American Airlines or United, are you happy about how leadership has communicated with you? Please leave a comment below.
I think your cash burn rates are off… in the call United said it has cash burn closer to $50m at the moment, and is expecting $40-45m throughout the quarter. AA can’t move much on its cash burn because of massive debt service payments it has to make. United doesn’t have the same balance sheet problems as AA, but is not as favorably-positioned in this regard as WN or DL.
The market is not buying the rosy outlook from AA leadership. The longer the demand picture persists, the more the company needs to cut huge costs out of its operation, and that is going to be painful regardless of management’s tone.
I was going off the linked CNBC and NPR reports, but I clarified with United and you are correct. Thanks for the heads up!
Seriously?? “Untied is preparing for the worst…” UNTIED?? Childish, immature and just plain TACKY!!
Just a typo.
Fair enough! My apologies, Matthew! We all make them from time to time! Carry on!
Our leadership here at United, for the first time in ten years, has taken something from the Continental playbook… “Open and honest communication”. There are hard decisions to be made and I appreciate their frank, direct approach to prepare for the worst. I can’t comment for my AA peers but I’m hopeful we at UA will come out of this more nimble, creative and adaptable than we have ever been.
Agreed. It’s not what anyone wants to hear, but it is the reality. The sooner we all face it the better off we’ll be.
I agree with United approach And honesty. Hope is not a business plan.
We would all like to have things revert to pre-Covid days. United was on path to grow domestically and internationally. Kirby wants to grow. I think United is being more honest in its assessment. Plan for the worst and hope for the best.
“Come out of this more nimble” is subjective, especially if that means you getting furloughed. But I’m guessing you are not in that potential group, hence the comment.
I think AA is ‘whistling through the graveyard’ and the market agrees. Some of their bonds are trading at 20-cents on the dollar while United’s are at 60-cents. AA was in trouble before Covid 19 – ignoring reality isn’t going to help.
20-year UA employee here. You might describe UA’s messaging as pessimistic, but to many of us, it’s honest and realistic. Scott and Oscar have said many times “prepare for the worst and hope for the best”, and that really seems like the most prudent approach right now. Maybe outsiders don’t realize how truly dire it is right now? (Far worse than 9/11.) We’re carrying about 3% of our normal traffic these days. There’s no way that’s sustainable, even with the government assistance. Thus, I appreciate the realistic talk.
I work for UA, nonunion airquote ‘management’.
Obviously this sucks, a lot. There’s no sugarcoating that this pandemic is exacting a far-reaching toll on the industry, and the world at large.
Our executive leadership’s tone is grim, weary, and realistic. We currently live in a reality where we don’t bother discussing how much money comes in the door. It’s irrelevant. Our goal is just to shave down the money going out the door. Our multi-million-dollar-per-hour cash burn rate is the most relevant statistic, as resigned and painful as that may be.
Our present demand has fallen dramatically, our cancellations have increased, and our future bookings have also dropped.
The longer this goes one, the longer it’ll take to recover, and the worse it gets.
The numbers don’t lie. I appreciate how candid our leadership has been. Whether we want to admit it or not, whether they want to say it or not, we can all see hard times coming.
Being told to look forward to job cuts in the future, sucks. But I would rather be told months in advance to consider refreshing my resume, than to have the rug swept out from under me. I have time to look for new work, while my older coworkers are considering early retirement. Those who can move on, will. And that leaves more wiggle room for those of us who can’t. It’s minor, and in no way diminishes how awful this all is, but at least it lets us optimize in some small way how our airline shrinks.
In the videoconferences and other communications we’ve seen, our executive leadership has been… candid. They go off script a bit. They get frustrated. They talk to us like we’re people. I’d prefer that they tell us ‘I don’t know’ sometimes, rather than pretend they have answers that they clearly don’t.
American has certainly acted like the determining factor in setting policy is the Magic 8 Ball over the past few years while United has taken a strong anti-customer and anti-employee stance since Kirby showed up. Given the choice between the two approaches, I think American has the right of it this time. If they want to go back the the government for another pile of cash, it’s much easier if they show that they’ve tried to show good faith with the customers and staff. Things may turn around anyway and if so, domestic flying would see the fastest resurgence, benefitting American over United. If all else fails, American can always declare Chapter 11 yet again, saying that hey, they tried.
I used to work for the airlines, and even when they are making money, they bleed it just as quick. Hence your bag fees, change fees, etc. Why is nobody talking about just letting these airlines fail? Poor business models result in an inability to weather hard times. We as individuals are encouraged to keep 6 months of saving to weather things like job changes and the unknown. Why is the same model not adopted by big business? Because the government thinks they need their services. Let them fail. New airlines can learn from the mistakes of legacy airlines and create better models for success both financially and with their customer base.
@E perfectly summed it up – “Poor business models result in an inability to weather hard times”. I travel all the time, mostly US to Europe/ME in F or J. Agree 100% with @E…let the poorly managed airlines fail!
I own a small (profitable) business for last 22 yrs (ironically supplying commercial airlines), yet I have had to ‘reinvent’ my business 5 times over to be successful/ let alone stay in business. If the US majors can’t figure out how to do the same…they should be left to fail, period.
Full disclosure – I am not flying US airlines to Europe & ME. Why? b/c their hard & soft product (J/F) cannot compete with competition such as LH, LX, TK, EK, SK etc. Simple as that…I am a customer, I have $$$ to spend, and I will spend it on the best product available. It’s called ‘Free Enterprise’…if not clear in what that entails pls look up definition of ‘Free Enterprise’, seriously, worth reading again.
The Big 3 in US (AA, UA, DL) ‘know’ that they own a ‘tri-opololy’, they ‘know’ that 90% of US does not have a choice…so they do nothing, they fail to innovate, they fail to provide excellent customer service…and on & on. But we (Americans) have no other choice, so we mostly accept it. Sad.
It’s not free enterprise when you chose to fly on state-owned airlines. How can US airlines compete with a nation owned airline that doesn’t care how much money they lose? Far from free enterprise. Now if you are anti-US then that is different…
While UA has been abysmally customer unfriendly lately, something that I think is going to come back and bite them in the a** eventually, I actually appreciate their candid approach. One, because I think they’re right. Anyone who thinks this is going to be a V or U-shaped recovery, especially in the travel industry, is simply deluding themselves at this point. But two, as someone else pointed out, if I worked in an industry where severe job cuts were inevitable, I’d much rather get the bad news out in the open now. As someone else mentioned, you tell me today that I’m probably going to be out of a job come October 1, I have nearly 4 months to figure something out, either by starting a job search or at least getting finances in order and saving away whatever I can to prepare for long-term joblessness. Contrast that to AA, where we all know the furlough notices are coming, but you’ll only have a couple of weeks notice, and then face competing with the 20 million others out of work.
As somebody who has primarily flown United (been moving most of my business to BA/One World and other Star carriers) and flown a bit of AA I have to say I was impressed by how AA was quick to give me my money back after Covid19 affected flights. When I hear all the shenanigans UA is pulling not to give people back their money when booking a flight and relabeling flights that are cancelled as not cancelled the damage UA is doing is greatly self-inflicted. I’m open to booking tickets for future flights but I have to know that the carrier is credible. Kirby thinks that by painting a bleak figure he is. That might seem like leadership but in actuality there are things he can do to bring an influx of business. Demonstrate to frequent flyers that miles have value, that if a flight is cancelled you aren’t forced to take a credit but will see the money back in your account in one week or less, walk-back some of the client unfriendly policies and people will book flights again even if it’s a fee weeks/months away. At this point I trust BA/AA much more than I trust Kirby’s United.
This is why you don’t listen to a travel blogger who knows nothing about finance. Airlines need about 25-30% LFs to get that cash burn to zero. Not to mention UA is significantly more revenue reliant on less resilient sources. Their international exposure is almost double that of AA and their loyalty program and credit card partnerships are materially weaker. Their domestic network is materially weaker. These two companies are not the same. UA is posturing to get more federal funding in an election year. UA also just failed to sell 2.25B in bonds. AA is maybe overly optimistic but they’re positioned sufficiently based on even a small recovery of demand (which we’re starting to see).
Your comment is so full of inaccuracies that it isn’t worth even responding. But you’re a good propagandist for AA. Going For Great…
I agree.
Ive read a few of your blogs for ads website, and a lot of your advise are useless and/or misleading; mostly driven to generate more advertising and complimentary upgrades for your own benefit. Kirby has always been a half glass empty kind of guy, and doesn’t understand the value of goodwill from employees and passengers. I find it hypocritical that you call the commenter a propagandist, when that is all you do with regards to your advertisers. lol
Sorry to burst your bubble, but I’ve never accepted a dime from United.
Hey Matthew, nice article, but you’re definitely comparing apples to oranges. UA does not have the domestic network/route structure that AA has. They also have a higher ratio of wide bodies to narrow bodies and therefore a higher focus on international flying than AA does. United’s exposure to Asia is tremendous. You also failed to include something that’s crucial: AA has 5000 retirements over the next 5 years whereas United has about 60% of that. AA will be just fine because they stopped hiring. Attrition will take care of most of the cuts other majors may have to do.