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PART THREE OF THREE – READ PART ONE: TRAFFIC AND PART TWO: AIRCRAFT ABS

Q2 financial performance of US airlines

Given that major airlines will issue their Q3 results around the end of October, we are currently focusing on 2024 Q2 results to take a brief look at the financial performance of airlines in the United States.

The majority of the selected US-based airlines experienced moderate revenue increases during the second quarter of 2024, with year-on-year growth ranging from 2.0% to 6.9%.

However, overall revenue growth momentum slowed compared to the same quarter last year due to softening yields and the slowing of passenger traffic growth from its recent Covid recovery to a longer-term mature market trend.

JetBlue and Spirit Airlines in particular experienced revenue declines, blaming the intensified competition on domestic routes from market “overcapacity” and high sensitivity to passenger yields in their low-cost carrier (LCC) markets. Both airlines outlined a plan to cut underperforming routes, focus more on core leisure markets and enhance ancillary revenues.

When it comes to profitability, six of the seven selected US airlines reported positive EBIT with only Spirit reporting losses.

However, EBIT margins for most airlines narrowed compared to 2023 as most faced higher operating costs, driven primarily by increased labour costs due to new post-Covid contracts for pilots and cabin crew, as well as increased maintenance and fuel expenses associated with increased capacity and expanded fleet size.

Leverage (Net Debt / TTM EBITDAR)
	American	United	Delta	Southwest	Spirit	JetBlue	Alaska
23Q2	3.7x	2.4x	2.7x	-1.3x	25.3x	3.1x	1.6x
24Q2	6.1x	2.1x	2.2x	-0.6x	717.7x	-33.2x	1.3x

Several airlines continued their efforts to strengthen their balance sheets, achieving a year-on-year decline in gross debt by consistently paying down their obligations. However, JetBlue and Spirit saw an increase in gross debt. Leverage ratio measured by net debt/ Trailing Twelve Month (TTM) EBITDAR declined for most airlines while Spirit’s leverage ratio soared due to an increase in net debt position.

On the other hand, Southwest reported a net cash position of $893 million as of June 2024 with substantial liquidity on hand, resulting in a negative leverage ratio.

The negative leverage ratio position for JetBlue is, however, due to its deteriorated operating results in the first quarter of 2024, which led to a negative TTM EBITDAR. It is critical for carriers to enhance or maintain liquidity positions to rebuild their balance sheet and continue funding near-term aircraft deliveries.

It is worth mentioning that Spirit’s financial health deteriorated substantially among the selected US airlines. According to Cirium Fleets Analyzer, Spirit is the largest US carrier operating an Airbus A320neo fleet equipped with PW1100G engines (116 out of 217 total aircraft), and the carrier grounded 20 aircraft per month on average during 2024. Although the carrier will receive $150 million to $200 million in credits as compensation from Pratt & Whitney for the full year 2024, this has largely disrupted the carrier’s operation since the onset of the GTF powder coating issue. While the airline failed to return to profitability and generate stable operating cash flow, its liquidity significantly diminished as a result of mounting debt obligations, extensive lease payments and pre-delivery payments. Additionally, the termination of the Spirit-JetBlue merger worsened the situation and left Spirit careening towards an unavoidable liquidity shortfall. As of June 2024, Spirit’s debt maturity schedule showed $1.3 billion in debt principal obligations (40.2% of total long-term debt outstanding) due by the end of 2025. According to a report by the Wall Street Journal on 3 October 2024, Spirit was in talks with its bondholders over the terms of a potential Chapter 11 filing. On the same day, Spirit’s stock price plunged by approximately 40%.

Near term outlook and countermeasure

In 2024, US airlines are encountering increasing challenges in both revenue generation and cost management. Cash flows are under significant pressure due to tight profit margins, rising capital expenditure, heightening labour cost and potential spikes in fuel prices. Consequently, US airlines highlighted the near-term plan on the following aspects to weather the industrial headwinds:

• Adjusting capacity to align with demand expectations: For example, American has scaled down its planned capacity growth, with a 3.5% increase for the second half of 2024. Delta also anticipates a decelerating capacity growth for the same period.
• Rationalising route networks to improve yields: LCCs such as JetBlue and Spirit are eliminating less profitable routes and prioritising those with higher demand and yields. Additionally, American and Delta are expanding their transatlantic routes in summer 2025 to tap into the potential of this market segment.
• Implementing effective cost-cutting initiatives: US airlines are focusing on reducing labour costs and fuel expenses to restore profit margins. While employee contract renegotiation is unlikely in the near future, airlines may right-size overhead and non-crew positions to reduce discretionary spending. Additionally, airlines may also need to develop fuel hedging strategies to mitigate the higher volatility in fuel prices amid the Middle East conflicts.
• Strengthening balance sheet and deleveraging to enhance financial resilience: Carriers remain committed to paying down debt obligations and refinancing existing high interest debt structures. Take the big three airlines for example: American Airlines reduced its total debt by $1.8 billion during the first half of 2024 and highlighted its goal to reduce total debt by $15 billion by the end of 2025. Delta repaid $2.1 billion in debt in the first half of 2024, targeting a return to investment-grade ratings. United Airlines reported $6.2 billion in debt repayment in its six-month cash flow statement to reduce the airline’s interest burden in the years ahead.