The airline industry could shrink by half to survive, United Airlines chairman says

United Airlines executive chairman Oscar Munoz explains why the airline industry can expect to see lots of furloughs and payroll cuts up to 50% "for some time."

Posted: Sep 2, 2020 2:51 AM
Updated: Sep 2, 2020 2:51 AM

The US airline industry needs to shrink its labor costs by as much as 50% to survive -- and even then it's possible some carriers don't make it through the crisis, United Airlines Executive Chairman Oscar Munoz told CNN Business.

"The stark reality of what we're facing is dire," Munoz said in an exclusive interview.

Munoz, an icon in the airline industry who stepped down as United's CEO in May, estimates the collapse of air travel during the pandemic will force airlines to slash their payroll costs by a staggering 30% to 50%. That translates to tens of thousands of lost jobs.

"This industry has gone through hell and back on repeated occasions," said Munoz, who suffered a heart attack and had a heart transplant during his five-year stint as United's CEO. "This is, by far, orders of magnitude larger than anything we've ever seen."

Times are so tough for airlines that they're taking dramatic steps to lure customers. United announced Sunday it will permanently eliminate hated change fees on economy and premium cabin tickets for domestic flights. Delta and American followed suit Monday. The shift underscores the enormous leverage travelers now have over hurting airlines.

Thousands of workers take voluntary cuts

Airlines have signaled steep job cuts are on the way.

Last week, American Airlines said it will lay off or involuntarily furlough 19,000 workers as of October 1 unless Congress provides more aid.

In July, United Airlines warned that 36,000 employees, or nearly half of its frontline workforce, could be furloughed this fall.

"Hopefully things recover and we can bring everyone back," Munoz said, adding that this crisis is far worse than the downturn in the airline industry after 9/11.

Prior to the pandemic, the airline industry was booming — and spending more on its workforce. Wages and benefits for the nine publicly traded airlines in the United States stood at $50.9 billion in 2019, up nearly 6% from the year before.

Passenger airlines employed nearly 500,000 people in February before the pandemic erupted, according to the Bureau of Transportation Studies.

The CARES Act, which provided a $50 billion bailout designed to keep US airlines afloat, requires carriers to avoid making involuntary job cuts until October 1. But thousands of workers have already taken buyouts, early retirements or unpaid furloughs.

Munoz praised the thousands of workers who have accepted voluntary cuts so that colleagues who are "more in need" don't face financial hardship.

"That's just heroic stuff," he said.

Some US airlines may not survive

Munoz said that a potential 50% drop in industry-wide payroll costs doesn't necessarily translate to a loss of half of the jobs. That's because some jobs cost more than others. And Munoz mentioned that companies could adopt job-sharing programs where workers share a job — and a salary — for a period of time. That would reduce worker hours and pay, eliminating the need for layoffs.

Air travel in the United States, as shown by the CNN Business Recovery Tracker, has bounced off its worst levels. Travel came to a virtual standstill in April.

Yet TSA security lines processed just 808,000 travelers on August 30 -- down by 57% from the same day last year. That's a far cry from the V-shaped recovery that has emerged in housing, retail sales and other parts of the US economy.

During the second quarter, United Airlines burned through a stunning $40 million a day.

"We used to make a decent amount of money for an airline just a few months ago," Munoz said. "We tell our employees that we are going to be a smaller airline for some time and we hope to get back to the place where we were. But we think that's quite a bit a ways out."

Several major airlines based overseas have collapsed into bankruptcy, including Colombia's Avianca and Virgin Australia.

Asked whether all of the non-regional US airlines will survive as independent carriers, Munoz said the answer depends on how long the crisis lasts.

"You've seen some airlines, in essence, fold. I suspect you may see more the longer this thing goes on," Munoz said. "If this would stretch an inordinate amount of time, all of us would be affected to some degree."

He added that most major airlines have enough financial resources to withstand the crisis "certainly through next year."

The industry went through widespread bankruptcies and mergers in the two decades before the Covid-19 pandemic. Every major carrier other than Southwest made a trip through bankruptcy. The nine major carriers that existed on 9/11 have been consolidated into four major carriers, often through the bankruptcy reorganization process.

Business travel won't recover until there's a vaccine

The International Air Transportation Association (IATA) predicted in late July that global air travel won't recover from the pandemic until 2024, a year later than the body's previous projection.

One of the biggest challenges facing airlines is the implosion of business travel. Corporate conferences have been canceled. Investment bankers are doing deals virtually. And companies aren't rewarding star performers with travel junkets.

Although domestic leisure bookings have improved to about half their year-ago levels, corporate bookings remain down nearly 90%, according to Bank of America.

"Corporate demand remains soft," Bank of America analysts wrote in a note Monday, adding that bookings have "shown no improvement" since mid-June.

Munoz said business travel — a major moneymaker for the airline industry — likely won't recover until there is widespread access to a coronavirus vaccine.

"The vaccine is going to be probably the most determinant piece of the beginning of the end of this," Munoz said. "Confidence in the health aspect is going to bring back conferences, bring back corporate travel. It's going to bring back across-the-pond travel for lawyers and bankers and consultants."

That vast uncertainty makes it extremely challenging for airlines to plan for the future and make major decisions around how much money they need to survive and how much money to invest in innovation.

"It's tough to pinpoint anything because we don't know the basic determinant: When will things return to normal? When will a vaccine come?" Munoz said. "Until...that vaccine that comes in, uncertainty is going to rule the day."

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