On the Eve of Post-Pandemic Recovery: How Airline CFOs Are Preparing for a Demand Rebound

Few industries were hit harder than aviation by the plunge in demand caused by the pandemic. Now, as businesses reopen and the economy heats up, airlines are finding the skies are becoming friendlier.

By mid-year, the U.S. economy is expected to grow at its fastest pace since 1983, thanks to record fiscal stimulus and mass vaccination. The Federal Reserve forecasts U.S. GDP will grow 6.5% in 2021, after contracting 3.5% in 2020.

Airlines' CFOs have a lot at stake in the recovery, and their preparations for the anticipated boom may offer lessons for finance executives in less pressured industries on how to better capitalize on strong economic growth. Spirit Airlines CFO Scott Haralson told CFO Dive that these CFOs are crafting turnaround strategies based on hard-won insights.

The challenges of COVID-19 "accelerated the learning curve in all industries, including ours," Haralson said, describing how the CFO's remit has expanded from financing and risk management to technology and human resources. "The way we manage things today is different."

Despite the brighter economic outlook, airline CFOs remain defensive, knowing that business and international travel are unlikely to rebound quickly.

They are refinancing debt, acquiring planes through leases rather than debt financing, and building up cash reserves. They are also scrutinizing weak links in their supply chains and tracking broader risks more deeply in scenario planning.

Airline CFOs are also turning from defense to offense. They are preparing for a surge in demand by adding flights, opening new routes, and in some cases even launching new low-cost carriers.

At the same time, they are dealing with the worst turbulence in industry history. According to the International Air Transport Association (IATA), U.S. domestic air travel in February was down 56.1% from the same month in 2019. IATA said global demand fell even more, plunging 74.7% in February compared to 2019.

IATA said total passenger numbers could rise to 2.4 billion this year, better than last year's 1.8 billion, but far below the record 4.5 billion in 2019. Global airlines could lose $47.7 billion in 2021, after losing $126.4 billion last year.

Markets that depend on international travel may not return to 2019 levels until 2024 or 2025, according to the Airports Council International.

U.S. airlines, though they received billions in federal grants and loans, were the only industry ordered by the government to essentially shut down, according to Cowen airline analyst Helane Becker. "No other industry was told, 'You can't do this,'" Becker said.

On April 13, 2020 — the pandemic low point for U.S. air travel — only 87,500 passengers flew in the U.S., compared to 2.2 million on the same day in 2019, according to Transportation Security Administration data.

The scramble for cash

Becker said airline CFOs responded similarly to how they did after the September 11, 2001 terrorist attacks, when U.S. airspace was temporarily closed, and during the early stages of the 2007-2008 financial crisis. "They all grabbed cash," selling stock and pledging assets.

While business and international travel may recover slowly, U.S. leisure travel has begun to rebound, benefiting regional and low-cost carriers, Becker said.

Low-cost carriers are seizing on signs of recovery, taking advantage of active stock markets and strong investor demand.

Frontier raised $570 million this month through an IPO, after Sun Country raised more than $250 million in an IPO in March.

Private-equity-backed low-cost carrier Avelo launched this year, flying from less-used airports to vacation destinations, avoiding major hubs. Another startup, Breeze, which uses a similar business model, plans to begin operations in 2021.

Large global airlines are also preparing for a surge in demand, despite the international travel slump and high costs of operating hubs.

American Airlines said this month it plans to fly close to its normal flight schedule this summer, the airlines' peak season. It has also added flights from the U.S. to Mexico and the Caribbean.

United Airlines announced plans in March to add more than 46 U.S. domestic routes this summer, and said this month it will begin recruiting pilot trainees.

Spirit, like its competitors, suffered a sharp downturn early last year. Haralson said the pandemic was particularly challenging for some suppliers, including those for crew training, forcing Spirit to strengthen its assessments.

"The way we look at their financial health is different than before the pandemic, and fortunately, our suppliers are all in pretty good shape," he said. "But it did raise some red flags."

By April 2020, Spirit was operating only about 5% of its pre-pandemic flight schedule, with daily cash burn exceeding $5 million, Haralson said in an April 2 interview.

"When you're a high fixed-cost business and you're not operating an airline or any assets, you're going to burn a lot of cash, no matter what industry you're in," he said. "Any plane flying in April or May was just burning fuel."

Cost cutting

Spirit cut $100 million in costs last year and added about $2 billion in liquidity through revolving credit, equity, convertible bonds, and debt sales secured by its loyalty program and intellectual property.

"You can't continue to burn cash at the rate the industry was without raising additional capital," Haralson said. "We were in pretty good financial shape."

Spirit also shifted from primarily debt-financing aircraft purchases to sale-leaseback deals, Haralson said. Despite the pandemic, its fleet has expanded about 20% since 2019. It is executing prior plans to take delivery of 16 Airbus jets in 2021 and 17 next year.

"We'll probably lease almost all of our aircraft for the next few years, which is a less capital-intensive way to finance," Haralson said. "We'll do that until we feel comfortable with our cash generation and forecasting capabilities."

Airlines will likely hold cash positions equal to 15% to 20% of revenue in the coming years, up from about 10% before the pandemic, Becker said. They may stand ready to quickly raise cash if there is another sharp downturn.

Spirit's cash flow has begun to recover as it operates more than 700 daily flights, compared to fewer than 50 at the worst of the pandemic, Haralson said.

"In a fixed-cost business like an airline, underutilization of assets is a real killer," he said.

"We need to get the airline running at full capacity as soon as possible," he said, adding that he expects Spirit to return to profitability this summer.

Domestic travel demand to warm destinations has picked up in recent weeks. "The customers we carry — low-cost, high-value leisure travelers — are ready to fly," Haralson said. "We think they may fly more than they did before the pandemic, so we want to be there to capture that opportunity."

Spirit plans to add flights in existing markets and open new routes. This year it has announced flights to several cities, including St. Louis, Pensacola, and Puerto Vallarta, Mexico.

The airline has also launched flights between cities it already serves, such as Baltimore and Houston. "The value of a point-to-point network like ours is that we can grow in a fairly efficient way by connecting the dots," Haralson said.

Spirit still needs 10 to 12 months to fully restore service, he said. It will continue hiring crew members (which resumed in February) and preparing idle or new planes for flight.

Spirit may consider refinancing some of its debt, Haralson said. With interest rates unusually low, "this could be our opportunity to clean up our balance sheet."

Overall improvements

The COVID-19 pandemic drove improvements across the airline industry, Haralson said.

"The pandemic, while it nearly made it impossible for airlines to prepare, made us think about things differently," he said. Airlines will be "more conservative on balance sheets" and maintain a focus on cleanliness, using "touchless" passenger interactions where possible.

Spirit's focus on company-wide risk is also sharper than before the pandemic, Haralson said. "If I had gone to the board before the pandemic and said, 'Hey, we should prepare for a global pandemic,' I probably would have been laughed out of the room."

Today, airlines are urging executives at all levels to identify risks more diligently, he said. "You can't always effectively mitigate all risks in an organization, but at least we've thought about them and identified where they might manifest," he said. Thinking ahead can lead to better, faster decisions.

Airlines need to incorporate multiple risks into scenario planning, including rising fuel costs, slower vaccination rates, the threat of a fourth wave of infections from COVID-19 variants, and the gradual recovery of business and international travel.

Yet amid signs of growing air travel demand, Haralson is optimistic. The pandemic was never an obstacle for Spirit, he said, but more of a speed bump. "We may have an opportunity to grow faster than we expected before the pandemic."