Top executives at Alaska Airlines and Southwest said Tuesday the carriers are weighing cuts to their flight schedules in the next few months because of the precipitous drop in air traffic demand from concern about the novel coronavirus.
Southwest chief executive Gary Kelly said “the velocity and severity of the decline is breathtaking.”
Alaska president Ben Minicucci said that while the Seattle-based airline typically carries about 4 million passengers a month, since Feb. 24 it has seen 265,000 fewer bookings for March departures than a year ago, and 270,000 more cancellations for the month.
Both executives said they are looking to cut all nonessential spending and freeze hiring.
They also suggested that if the travel slump is prolonged, once Boeing’s 737 MAX is ungrounded their airlines may postpone planned deliveries of those aircraft.
In a video message to Southwest employees Tuesday, Kelly told them in sobering terms that if the impact continues for an extended period, as a last resort the airline might have to ground airplanes and furlough some employees.
“We are faced with a serious problem not seen since 9/11. And it may be worse,” Kelly said. “We’re seriously considering reductions to our scheduled flying in the short term and we will continue to monitor demand for necessary reductions thereafter.”
Southwest had already estimated last week that first quarter revenues could be down $200 million to $300 million compared to previous projections.
Minicucci, speaking at a JP Morgan conference, laid out the immediate hit to Alaska:
“We’ve recently seen a material reduction in bookings along with a spike in cancellations,” he said. “March and April travel have been the most materially impacted, but later periods have declined as well.”
Minicucci said that in reaction, Alaska will try to cancel flights expected to operate at a loss and transfer passengers to other unfilled flights that still get them to their destination.
For May, Alaska plans to reduce certain red eye flying and to accelerate the exit of markets that were slated for exit later in the year. This totals approximately 3% in capacity.
“While we have not made any material capacity changes to date, we’re preparing to make changes if the situation warrants it,” he said, adding that the airline will “react accordingly as this thing evolves.”
Minicucci said another option to preserve cash is to reduce capital spending on either new aircraft or advance payments for aircraft on order.
It’s a sharp reversal from Alaska’s thinking as recently as last month, when it laid out in internal messages to employees its long-term growth plans, including buying 200 aircraft over 10 years and “hiring thousands more employees.” It has projected taking 10 new Boeing 737 MAX 9s by the end of this year, assuming that plane is cleared to fly again.
But if the coronavirus impact on travel continues past the summer, Minicucci’s remarks suggest, the airline may pare back those deliveries. He said the company is reviewing such capital spending to preserve cash near term.
Kelly, speaking to employees, was more specific about the MAX planes. Southwest in January had projected it would take 51 MAXs by year-end.
He said that while Southwest is expecting to take delivery of its first MAXs in the late summer or early fall — assuming the Federal Aviation Administration ungrounds jet in June or July as Boeing expects — “It is too early to say what we will do if the demand isn’t there to grow.”
“We will consider all options and maintain maximum flexibility,” Kelly said.
Any further delay to deliveries of the narrowbody 737 MAX due to the coronavirus impact will be a blow to Boeing. Because overseas air travel has been hit even harder than domestic flights, industry analysts already project a damaging decline in deliveries of the bigger widebody jets used on international routes.
In a note to investors Tuesday, Rob Stallard of Vertical Research Partners cut his Boeing widebody jet delivery projection through 2022, forecasting that 747 production would end, that 767 and 777 production would each come down by 10 planes this year, and that the 787 rate would be cut from from 10 jets per month to 8 per month.
Domestic flying, though sharply down, is in better shape than international flying.
U.S. airlines have been highly profitable for the past few years, and both the Alaska and Southwest executives offered reassurance that their respective companies are in good financial shape with the cash resources to pull through a downturn.
Yet they also conveyed the uncertainty over how drastic the cuts will need to be.
“We need to aggressively attack the problem,” Kelly told employees. “We will do everything we know to do to keep Southwest profitable, financially healthy and jobs secure.”
“I can’t promise you we won’t have to ground airplanes and furlough employees. Heaven forbid that,” he added. “I can promise you it will be the last thing we do, not the first.”
Kelly said he’s taking a 10% cut to his salary as he asked the employees to hold fast and help work through the challenges ahead. “We are all in this together,” he told them.
