Reality Begins To Sink In For Airline Investors And Employees After United Warns Of 36,000 Looming Layoffs

It’s neither sporting nor good manners to laugh at people who just lost a bunch of money, but for the many investors who saw their investments in United Airlines’ stock drop a third in value over the last 30 days, the question must be asked: “What were you thinking?”

And it’s downright cruel to mock folk who just found out that they almost certainly will lose their jobs in a few weeks hence. But for the 36,000 or so United employees who have received – or soon will receive – 60-day warnings that they likely will be laid off, a similar question must be asked: “Did you not understand how precarious your situations really are when the company began seeking volunteers to take small financial inducements to exit the company immediately?”

United’s disclosure Wednesday that a little over a third of the 90,000 employees it began the year with will be pushed out on or shortly after Oct. 1 should not have come to a surprise to anyone. It and its two closest rivals, Delta and American, are very sick puppies, deeply infected by the potentially deadly economic strain of Covid-19. All three have been connected for four months now to the financial equivalent of ventilators – massive amounts of new debt issued to raise the additional billions of dollars in cash that they need just to stay alive through year’s end. And as with human patients with acute cases of the actual Covid-19 virus, surviving and eventually getting off a ventilator alive is no sure thing.

Thus, buying their shares anytime since early March was either foolhardy or recklessly bold. And sniffing disgustedly at even modest financial inducements to retire early or quit was the equivalent of sticking one’s head in the sand.

And that applies equally to investors in and employees of Delta, American, and probably several other U.S. airlines, too.

The hollowing out of the U.S. airline industry’s employee ranks has been inevitable almost from the moment the coronavirus first showed up in the United States early this year. Demand for air travel nose dived in March before bottoming out in April at a little less than 5% of what it was one year earlier. Had the airline industry been a human patient, its doctors would have told the next-of-kin that “there’s nothing more we can do. It’s in God’s hands, now.”

The carriers didn’t collapse and die immediately, but only thanks to Congress and federal taxpayers. In April the former agreed to provide nearly $50 billion of the latter’s money to the carriers in the form of low-interest loans and grants. But some of that money came with strings attached.

 The carriers couldn’t get any of that grant money unless they agreed not to lay anyone off through Sept. 30, and only so long as they used the grant money to pay workers’ salaries through that same date.

Then in early June airlines began issuing carefully and hopefully worded news releases disclosing two things. First, they started talking about the billions of dollars in cash they were able to raise by issuing debt and new stock. And second, airline execs made quasi-optimistic public comments about their plans to begin adding back this summer and fall some of the flights and routes they’d suspended in response to the near-collapse of demand.

No one, however, should have had their hopes lifted by all that hot air. A simple check of the number of flights planned for this fall against the numbers operated last fall would have shown that most U.S. carriers – with the notable exception of Southwest – were still going to be mere shadows of their 2019 selves. And a 15-second Google search for the Transportation Security Administration’s daily totals of airport passenger screenings would have shown that the number of people flying in June continued to be staggeringly low at only around 20% to 25% of last June’s totals.

Indeed, the nightmare scenario ahead for airline employees and any investors who’d bought into the fantasy of a miraculously quick recovery of travel demand, was so obvious that even the industry’s normally outspoken union leaders spoke in tones of acceptance, not their usual defiance. And rather than blast the airline managers, with whom they routinely tangle bitterly over contracts, airline union leaders began in mid-June efforts to persuade Congress to provide another round of financial relief that could keep most or all employees on carriers’ payrolls through next March.

At the same time some investors aggressively began buying airline shares, betting on that miracle recovery. From May 15 through June 8, United’s share price rose 144%, from $19.92 to $48.69 a share. The stock fell dramatically to $33.32 over the next three days, but then settled down until Tuesday. That’s when United officials began telling employees that the resurgence in the number of reported Covid-19 cases in the nation was causing late summer bookings to drop precipitously once again.

Management clearly used that not-surprising or unexpected bit of news as a convenient excuse, and to further justify the decision to issue the formal warnings of layoffs ahead. But in reality, the layoffs warned of on Wednesday have by now been a part of United’s survival plan for two month. Nothing really has changed. Still, United’s shares dropped 7.5% to $32.55 Tuesday amid early reports of the layoff plans, and a modest 20 cents Wednesday.

And this is not just a United issue. American and Delta’s shares have followed a very similar trading pattern over the last couple of months as some investors decided to ignore what’s plainly ahead for the big U.S. carriers and bet on a recovery that wouldn’t have qualified as just a surprise but as a miracle. Now it’s clear no such miracle is going to happen — not for United, not for Delta and not for American or any of several other U.S. carriers. Among the U.S. mega-carriers, only Southwest might escape without having to lay off any workers (it too is offering financial incentives for some workers to depart the company). And because of its substantially stronger balance sheet and continued great financial flexibility, Southwest expects to restore nearly all of its pre-pandemic service by year’s end in a bold move to steal market share from the conventional Big Three carriers or, conversely, to spend them under the table trying to defend their turf against Southwest’s market encroachments.  

And let’s not even consider the fate of some the biggest and best-known foreign carriers. Their predicaments are made even worse than United’s, Delta’s and American’s by the fact that huge percentages of their operations are dedicated to international travel. Demand for international travel is down much worse than demand for U.S. domestic flying, thanks to consumers’ fear of Covid-19 and to many nations’ foreign travel bans and/or tough quarantine rules for those arriving from other nations. Nor is international travel demand likely to rebound as soon, or as thoroughly as demand for U.S. domestic air travel eventually is expected to recover.

Employees at American and Delta have been just as slow and reluctant to accept early-out offers as their counterparts at United. To be sure, thousands at all three carriers have volunteered to take their money and run now, before the layoffs can start on Oct. 1. But as many as 100,000 of them combined whose jobs, it now appears, will be eliminated have not accepted such offers — yet.

All three carriers are certain to continue offering incentives for employees to retire early or quit. And perhaps one reason United went public about its 60-day warnings about layoffs ahead several weeks before it was legally obligated to do so on July 30 (assuming a targeted layoff date of Oct. 1) is that maybe now, having received such warnings, many more employees will more seriously consider accepting buyout packages.

Employees also should consider that the dramatic Covid-19-driven drop in demand is not the only reason airlines are going to be laying off workers. United, Delta and, especially, American have become in recent years somewhat bloated. Tough union relationships and the cost of offering early-out inducements when the carriers were earning handsome profits largely explains why they had not previously sought to thin their ranks. But now that the industry is teetering on the brink and must reduce their payrolls quickly, they have the opportunity to eliminate some of that pre-existing bloat while also cutting jobs directly in response to the Covid-19 driven collapse in demand.

That means it’s possible, maybe even likely, that the number of employees at all three airlines will fall, in percentage terms, even more than their flight operations shrink.

All three expect to be offering around 60% as much service this fall as they did a year earlier, meaning they’ll be 40% smaller, give or take. So, if United does lay off 36,000 workers this fall, its payroll number would be down by almost exactly 40% vs. the fall of 2019. But it already has induced thousands – the total is not yet known – of workers to take financial settlements to exit the company. And, if the eventual total of lost jobs via layoffs and induced departures exceeds the 36,000 mentioned today by United, we could see that carrier’s employment tumble by as much as 50% by the time leaves begin changing colors.

At Delta a 40% cut of the payroll total via layoffs and inducements would leave only around 54,000 workers, down from 89,758 at the end of 2019. At American, widely criticized for being over-staffed even before Covid-19 arrived, a 40% reduction in the number of employees would mean the departure of more than 40,000 workers, leaving just 62,500 or so vs. the 104,200 it had on Jan. 1.

But if, as suspected, the headcount reductions at both of those carriers exceed in percentage terms the year-over-year flight schedule reductions, both could end up with only 50,000 or fewer employees.

Of course, none of this should have come as a surprise today to either investors or airline workers. That it did simply reveals that some investors weren’t paying close attention, and that perhaps some employees were whistling past the graveyard believing their number would never come up.

For them, the dire reality of their situation is now sinking in.