‘We believe the worst is behind us’: Travel boost helps Southwest, American Airlines envision end to financial pain of COVID-19

Southwest Airlines and American Airlines would have lost nearly $4 billion combined without the help of government payroll aid in the first quarter, but the carriers are envisioning a path back to profitability after a year of devastating losses from the COVID-19 pandemic.

Dallas-based Southwest turned in a $116 million profit in the first three months of 2021, the carrier’s best result since 2019, mostly thanks to $1.2 billion in payroll support as part of two government stimulus programs. Even though the company couldn’t make money on its own, daily losses are narrowing and Southwest could get back to making a daily operating profit by the middle of the year.

“While the pandemic is not over, we believe the worst is behind us, in terms of the severity of the negative impact on travel demand,” Southwest CEO Gary Kelly said in a statement.

Fort Worth, Texas-based American said it recorded an operating profit of about $4 million a day in March, excluding debt and severance payments. But American still lost $1.3 billion between January and March, a loss that would have been about $2.7 billion without government aid or the $163 million spent on early retirement costs.

“We’re still going through tough times in the business. We don’t like losing that much money,” CEO Doug Parker told CNBC Thursday morning.

Vaccine distribution and a gradually reopening economy are adding optimism to airlines that have become accustomed to multibillion-dollar losses since March 2019, when the COVID-19 pandemic upended global and domestic travel. Airlines started reporting an uptick in sales in mid-February and some are even reporting that summer ticket sales are near 2019 levels.

“We believe there is significant pent-up demand for leisure travel and are optimistic about summer 2021,” Southwest said Thursday. “In response, we are in the process of adding flights in June 2021, and we currently expect June available seat miles to be only slightly less than June 2019 pre-pandemic levels.”

There is still a long way to go until either airline is performing the way it did before COVID. International and business travel remain down and those segments are among the most profitable for airlines compared to price-sensitive leisure travelers.

The demand for summer sales shows that a lot of people want to fly, but getting back to the levels seen before the pandemic will be a greater challenge, said Jeff Windau, an analyst with Edward Jones.

“There is pent-up demand and as the vaccine gets rolled out, we think that’s going to be positive from the travel perspective,” Windau said. “Then we will start to see that business travel come back, maybe in the fall or next year.”

American reported $4 billion in revenue for the quarter, down 53% compared to the first quarter of 2020, which was also hurt by the developing COVID-19 crisis.

Southwest brought in $2.1 billion in revenue, which was also down 51.5% compared to a year ago.

The worst of the pandemic might be over financially for airlines, but losses are still likely to continue for a bit longer. A year ago, some analysts were predicting that at least one major airline would succumb to bankruptcy because of massive daily cash burn levels. Severe cost-cutting, massive borrowing and slowly improving travels helped avert that.

Southwest and American have added significantly to debt loads in the last year and that will require time to pay off. American now has about $41 billion in debt, even though it has about $20 billion in cash that it hoarded during the last year.

“We can certainly service the debt but it’s higher than we want,” Parker said on CNBC. “We entered 2020 looking to reduce our debt by $8 [billion] to $10 billion over the next five years. We’re still going to do that from here but now it’s higher than we wanted it to be.”

Bringing back employees and hiring more

American had about 6,000 fewer employees in February than it did the year before, the company’s smallest workforce since it merged with US Airways in 2015. It announced Thursday that another 1,600 employees had signed up for buyout packages that were offered earlier this year.

That could open the way for more hiring later this year.

American announced plans earlier this week to recall all of its previously furloughed pilots and begin hiring as many as 300 pilots at the end of this year and possibly 600 more next year. That’s to make up for about 1,000 pilots who retired during the pandemic.

The airline may start hiring for other jobs, too, especially ground workers, fleet workers and passenger service agents, said President Robert Isom.

“We’re gonna have needs throughout the network but it’s really just based on location needs more than anything else,” Isom said. “And it’s too soon to say anything about where we stand with our flight attendants. There will be a need there as well.”

Thousands of flight attendants are out on long-term leave they volunteered for last year. Parker said the company will likely need to start hiring again, but not until all of those workers have been brought back.

Southwest didn’t furlough any employees during the pandemic, thanks in part to government stimulus support. But more than 11,000 employees took voluntary leave and some opted to take long-term time away from work of up to 18 months.

But executives said the company isn’t ready just yet to commit to hiring new employees.

“To be straightforward about this, I think we’re all prepared for this to be messy,” Kelly said. “It’s not easy to predict and it’s not easy to execute and we won’t want to end up with excess staffing. It was really messy a year ago trying to downsize the airline.”

Kelly isn’t worried about turning the hiring spigot back on in the future.

“We’ve been a hiring machine for 50 years,” he said.