Philip Baggaley is managing director at S&P Global Ratings. The opinions expressed in this commentary are his own.

Covid-19 will impact the US airline industry even more than the terrorist attacks on September 11th. Planes have been grounded and the financial impacts of the pandemic will change the industry and air travel for the foreseeable future.

As a result of the pandemic, losses in the first half of 2020 have been unprecedented. For example, Delta Air Lines, the most profitable US airline in recent years, saw its revenues plunge 56% and its operating margin flip from a healthy 14% to negative 40%. And the current outlook for the third quarter is not much better. By contrast, after the terror attacks, Delta’s revenues dropped 25% in the second half of 2001 and its margin was negative 22%.

Airlines have also slashed costs more than previously thought possible in recent months, which has reduced losses — Delta (DAL) and United Airlines have each reported that they cut operating costs by more than 50% in the second quarter. Lower fuel prices have helped, but not much when there are fewer planes in the air. Voluntary employee retirements and furloughs are trimming labor costs, and many airlines are warning that more layoffs are coming when federal payroll aid ends September 30 — Delta, for example, just announced that it plans to furlough almost 2,000 pilots in October.

The federal $50 billion aid package for passenger airlines has served as a crucial lifeline. The combination of cash grants, unsecured loans and secured loans have boosted market confidence enough to attract billions more in new loans from investors. Several big airlines are reporting cash and borrowing capacity of more than double their normal levels. Delta claims, even if its cash outflow as of the end of June ($27 million a day) doesn’t diminish, it could last 19 months with its current cash and borrowing capacity.

Still, airlines will, at best, scrape by this year and emerge from the effects of the pandemic in 2021 or 2022 with more debt and reduced earnings capacity. S&P Global Ratings has lowered its ratings on all US airlines, and only one of them — Southwest Airlines — currently remains investment grade.

Possible bankruptcies

But what if this spring was only the first wave of the virus, with worse waves to come later this year?

While most airlines theoretically have cash to last into next year, they typically don’t wait until cash is exhausted before filing for bankruptcy. When American Airlines filed for Chapter 11 bankruptcy protection in 2011 after pilot contract talks broke down, the company had ample cash ($4.1 billion) but it saw no point in waiting; American wanted to be sure it would have sufficient resources to reorganize.

Might some weaker airlines choose a similar path if the recovery fizzles and widespread vaccination remains on the horizon? For US airlines historically, Chapter 11 has provided a way to renegotiate uncompetitive labor contracts, shift pension obligations to others, wipe out unsecured debt and trim secured debt.

With labor contracts, pensions and unsecured borrowing currently not too onerous and significant cost restructuring already underway for most airlines, the incentives to file may be less compelling. But if cash is running short and a recovery in air travel is uncertain, they may see no other option.

There won’t be many big mergers

Similarly, we do not foresee a wave of industry mergers, since combining airlines does not address the fundamental problem of weak demand and regulators might block mergers between large airlines on antitrust grounds. Still, selected combinations involving smaller airlines are possible and airline liquidations will leave the survivors with increased market share.

International and business travel won’t recover quickly

The outlook for airline passengers is also uncertain, at least in the short term. The threat of infection is compelling new restrictions and procedures at airports and on board. Unlike anti-terrorism security, these may be tightened and relaxed depending on the perceived threat. However, given what we’ve learned from how coronavirus spreads around the world, governments may be quicker to shut down air travel in response to any new outbreak.

Business travel has been hit particularly hard and will take years to recover. There is currently a lively discussion as to whether videoconferencing (and corporate cost cutting) will permanently replace a large share of corporate travel. The trips for marketing or relationship purposes should mostly recover, but the hurdle to justify other corporate travel, particularly internationally, will no doubt be higher.

We are more optimistic on leisure travel, especially domestically. Visiting family and escaping the confinement of quarantine remain compelling reasons to travel. And many of the younger generation have grown up viewing both domestic and international vacation trips as normal.

Covid-19 will destroy several years of growth and leave a smaller and poorer global travel industry, but air travel will eventually get back on the path toward an upward trend.

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