United Deep Dive: Earnings Call Underscores Airlines' Disciplined Survival Plan

No one knows when the economic depression will end. It's no surprise that many companies lost money in the first quarter and will have worse results during the second quarter. Instead, investors are trying to figure out who is able to recover fastest and win market share in a post-pandemic reopening.

That's why no one cares that United Airlines Holdings, Inc. UAL lost $1.7 billion in the first three months of the year. For the airline industry the metrics that count now are liquidity and cash burn. The slower a company can draw down its reserves while waiting for people to start flying again the more likely its chance of survival.

On Friday, United executives said they planned to bring negative cash flow to within $40 million to $45 million per day early this quarter. If business doesn't pick up in the fall, they will consider involuntary furloughs to reduce outflows to $20 million per day. American Airlines, by comparison, is burning through $70 million per day and won't get to $50 million per day until June. 

Here is a closer look at how United is managing the crisis:

Discretionary Spending: Slashing flight schedules, getting 20,000 workers to take temporary leave without pay, suspending purchasing and services from outside vendors, halting work on new projects – not to mention lower maintenance and fuel costs with fewer airplanes in the air – have helped reduce the amount of money being burned.

All told, United expects to save $5.5 billion in operating expenses this quarter compared to its budget, and reduce capital expenditures by more than 50%, or about $2.5 billion, Chief Financial Officer Gerald Laderman said on an analysts' call that United is or has:

• Postponing more than 200 infrastructure projects, including work on United Clubs at Chicago O'Hare; Newark, New Jersey; and Washington Dulles airports – $60 million. 
• Reduced spending on more than 300 technology-related projects – $300 million
• Simplifying onboard product offerings – $30 million.
• Less advertising – $60 million
• Eliminating vendor services or reducing hours performed – $45 million

Fleet Changes: United expects to take delivery of 16 Boeing 737 MAX this year if federal regulators certify the airplane as safe to fly again. It will pay for the aircraft from proceeds of a recent sale-leaseback with the Bank of China. Another 24 MAX aircraft are due in 2021. The 40 aircraft are less than half the number of MAX aircraft originally scheduled for delivery by the end of 2021.

United expects to receive eight more 787-9 twin-aisle airplanes from Boeing this year and eight 787-10s in 2021. Laderman said production on the aircraft was already underway before the coronavirus pandemic, so rescheduling delivery would be financially impractical. But, he stressed, the company won't use any cash to acquire assets. It will only take delivery of airplanes it can fully finance.

An additional 131 MAX aircraft are scheduled for delivery in 2022 and beyond. "We are discussing the timing of these deliveries with Boeing. However, one thing is certain: I do not anticipate taking any of those aircraft unless, and until, we need them," Laderman said.

Financing: As previously reported, United is receiving $5 billion in emergency federal aid to help pay workers through September 30. After that, the company will likely terminate employees to bring the size of the workforce in line with the limited amount of bookings and airplanes flying. United has also raised $1 billion through a stock offering and borrowed $2.75 billion. 

If the airline needs to secure more financing, it has more than $20 billion in assets available as collateral, including the $10 billion value of its mileage program, $8 billion in aircraft, spare engines, parts, simulators and equipment, and $2 billion in routes to busy airports where take-off and landing slots are doled out by formula and can be sold to competitors.

Rightsizing: Management is reimagining every piece of the company to prepare for a world with fewer travelers, including new ways to deliver service and become ultra-efficient.

President Scott Kirby said United is "going to engineer costs permanently out of the system" with the help of more technology applications. United doesn't plan to close any hubs at this point, but he didn't rule out the possibility. 

"There are no sacred cows… And we will make the hard decisions that are required to make sure United survives, is successful and has the most good jobs possible for our people," he said. It will be agonizing to release workers, Kirby added, but the company won't hesitate to do so if that's what it takes to survive.

United, whose stock is down 70% this year, will be conservative bringing back aircraft to service once travel restrictions ease "because there is certainly the possibility that there will be false starts, there's a second wave" of outbreak, Kirby said. "We're not going to jump in with both feet once we see the first green shoots. We're going to be cautious. And we're going to work really hard to get back to cash flow breakeven… as the first step."

After liquidity, reducing debt will take priority over reinvesting in growth or shareholder returns, he added.

Airline stocks were down sharply in pre-market action Monday after Warren Buffet over the weekend said Berkshire Hathaway has dumped the sector at a loss because the coronavirus crisis has fundamentally transformed it and chances for growth.