Why there is so much focus and discussion on average daily cash burn at least from US carriers?
After cutting cost, right sizing the business and preserving/protecting liquidity, the next key issue is to reach a breakeven cash flow position as when that goal is achieved, airline management can start thinking about paying down debt.
In the case of Delta Airlines (DL), it had initially hoped to be there by the end 2020. But as the virus has had greater impact on their business than expected that goal has been shifted to spring 2021. However and among the top 3 US FSC, DL is best positioned in terms of daily cash burn and at par ULCC Southwest Airlines (WN) based on YE2020 projected figures.
Do airlines know exactly by when the recovery will happen or what it will look like? No. Recently we have observed capacity cut as a consequence of a slowdown in booking curves due to COVID infections that continue climbing and new travel restrictions and lockdowns.
Therefore and through cost savings resulting from reduced flying, capacity discipline and long-term structural changes (fleet, infrastructure, etc.) among others, airlines will be able to reduce their daily cash burn to a minimum while expecting neutral or breakeven position as soon as demand and revenue environments improve. But if they don’t improve, daily cash burn rate may increase at least in Q1 2021.
However, it seems that DL and WN have different views related to by when a neutral cash burn break-even may occur. On one side, DL expects to reach breakeven by spring which seems unlikely based on the many challenges ahead in the 1H of 2021. On the other hand, WN expects normal seasonal swings in its traffic with an expected seasonal drop-off in bookings later this Q1 due to the post-holiday slower time period. Therefore, it is expecting its cash burn to be higher than $11 million per day shown. More so, the airline have commented that in order to achieve cash burn breakeven, it estimates its operating revenues will need to recover to an estimated 65% of 2019 levels, which is roughly double its Q3 2020 level.
Finally, what is the winning formula to getting back to breakeven cash flow?. None other than strong financial strength, capacity control and lowest costs.
Source: Selected carriers 10Q reports and Consultant analysis . DL: Delta Airlines. WN: Southwest Airlines. E: Estimated