Chicago-based United Airlines released fourth-quarter earnings Wednesday posting a loss of $1.9 billion, contributing to a massive loss of $7.1 billion for the pandemic-stricken 2020. The year’s loss is exceeded only by the company’s loss in 2005 when the company made a $21 billion loss due to bankruptcy-related costs. Yet, United remains positive about the future.
The fourth-quarter loss amounted to $7 per share, higher than estimates of $6.62 loss per share according to FactSet. In the same quarter a year ago, the major airline earned $641 million. The full-year loss amounted to $27.57 per share, the largest loss in its vast history.
The Tragic Fall of Revenue
Revenues crashed 69% to $3.41 billion in the quarter as compared to the same period last year. It almost matched the expectations of $3.42 billion. The total revenue for the year tumbled 64.5% to $15.4 billion.
Revenue from international flights plunged 83% while it declined 72% from domestic flights. Around 56% of seats were booked on an average flight in the quarter after United Airlines decided to reduce thousands of flights owing to weak demand caused by the pandemic. The decline in flights must lead to fewer costs yet it failed to keep up with the drop in demand.
Passenger miles fell 70.9% in the quarter while the full-year passenger traffic staggered 69.1% even though the drop in traffic didn’t start until March 2020.
Cargo – A Silver Lining
Cargo performed unexpectedly well, generating 77% more revenue as compared to last year. Unfortunately, cargo forms a small part of the company’s total business.
In terms of costs, the company’s cash burn amounted to $33 million including the $10 million it spent per day in cash to cover principal payments on debt and severance for the quarter despite its slashed costs. By the end of 2020, United has $19.7 billion in available liquidity after taking over $26 billion in debt and equity in 2020.
United Airlines ended 2020 with 21,500 fewer employees on its payroll as compared to the beginning of the year. The 94-years old company had to furlough thousands of employees in October when the initial round of payroll aid expired. However, those workers were hired again when another $15 billion in payroll aid for airlines was given. It alerted the employees that the recall could be temporary owing to depressed travel demand.
United Airlines gave a positive outlook for the coming years saying that it expects to exceed the pre-pandemic Earnings Before Interest, Taxes, and Amortization (EBITA) of 9.94% if demand returns gradually in 2021 and 2022. Unfortunately, this target would be reached three years from now, in 2023.
Cost Reduction Plan
The Scott Kirby-led airline aims to achieve this goal through its cost reduction plan. It has identified $1.4 billion of annual savings over the last nine months that are expected to be permanent. Permanent structural cost reductions are expected to result in additional savings of $600 million, taking the total cost savings to $2 billion annually.
United will receive $2.6 billion in payroll aid through March and announced that it hopes to offer workers options like voluntary leaves to slip furloughs after that period.
It has also resumed maintenance and engine overhauls, something that was paused due to weak demand. The company pointed out that resuming such work was important to capitalize on the recovering demand that it expects to occur in the second half of this year.
Revenue & Capacity Utilization
United expects revenue for the first quarter of 2021 to decline between 65% and 70% as compared to the same period of 2020 when only one month, March, had to face the assault of the pandemic. Capacity for the first quarter will decrease at least 51% this year.
Rival Delta Airlines Expects More
Atlanta-based Delta posted a loss of $755 million last week for the quarter and $12.3 billion for the full year. United’s rival revealed higher expectations for the future, saying it will earn positive cashflow by the start of summer with profits coming in the third quarter and second half of 2021. Moreover, Delta estimates to restrain its cash burn to $12 million a day in the spring with no furloughs occurring.
United shares crashed as much as 6.2% to $42.38, the largest decline on the S&P 500 Index.
The newly sworn President Joe Biden plans to ban travelers from Europe and Brazil. As the coronavirus cases keep growing, the biggest hope for airlines is the Covid-19 vaccine that could lead to an increase in travel demand later in the year.