Airlines are burning a lot of cash — so what does that mean?
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Delta Air Lines reports third quarter earnings on Tuesday, with United reporting on Wednesday and American and Southwest reporting next week. There’s a phrase likely to be thrown around as the companies detail how they’re getting through the pandemic: “cash burn.”
A company’s cash burn rate measures how quickly it’s spending its financial reserves. The International Air Transport Association said airlines will burn through more than $77 billion during the second half of this year.
“Most companies, particularly airlines, just don’t have revenues coming in, but they can’t get rid of all of their costs at the moment,” said IATA chief economist Brian Pearce. “So they are running down their cash balances in the bank. They are burning cash.”
And they are burning cash at a rate of many millions of dollars per day. Last quarter, Delta reported a daily burn rate of $27 million.
But cash burn calculation is not standardized.
“I figured cash burn, it’s ‘OK, we had this much cash, now we have this much cash.’ But no, there are all kinds of little carve-outs and differences between the airlines,” said Brett Snyder, who runs the airline industry blog, Cranky Flier.
For instance, whether an airline includes principal payments or debt service payments in their cash burn will tell a different story to investors.
But no matter how the number is calculated, unrelenting cash burn means more debt. Former airline executive and industry analyst Robert Mann said an analogy might help explain it.
“You go to the rent-to-own place, buy a bunch of furniture and burn it,” he said. “You still have to pay for it, ultimately, but you burn it.”
Expenses don’t go away just because people aren’t flying.
But Jack Hersch, who follows distressed businesses for S&P Global Market Intelligence, said the airlines are in better shape than they’re letting on.
“They’ve got almost uniformly more than a year in some cases, more than two years of running room with cash as it currently stands on the balance sheet before they end up in trouble,” he said.
That’s because before the pandemic hit, the industry was making enough cash to burn.
COVID-19 Economy FAQs
What’s the outlook for vaccine supply?
Chief executives of America’s COVID-19 vaccine makers promised in congressional testimony to deliver the doses promised to the U.S. government by summer. The projections of confidence come after months of supply chain challenges and companies falling short of year-end projections for 2020. What changed? In part, drugmakers that normally compete are now actually helping one another. This has helped solve several supply chain issues, but not all of them.
How has the pandemic changed scientific research?
Over the past year, while some scientists turned their attention to COVID-19 and creating vaccines to fight it, most others had to pause their research — and re-imagine how to do it. Social distancing, limited lab capacity — “It’s less fun, I have to say. Like, for me the big part of the science is discussing the science with other people, getting excited about projects,” said Isabella Rauch, an immunologist at Oregon Health & Science University in Portland. Funding is also a big question for many.
What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?
Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”
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