Here’s why airlines probably aren’t using this moment to spruce up their planes
Imagine that you were about to begin work on a major home renovation to build your dream kitchen. Now let's say the economy has gone south and you're digging into your savings just to keep the lights on and pay the mortgage. Would you go forward with that kitchen?
That is the dilemma faced by airlines as they confront what to do with the various capital projects — many benefiting travelers — that they had planned or underway when the novel coronavirus pandemic hit.
Delta Air Lines chief financial officer Paul Jacobson reiterated to investors on Wednesday that the carrier had suspended all capital investments, like buying new planes or installing news seats on a jet. And Delta is not alone, American Airlines, JetBlue Airways, United Airlines and others have all stopped most non-essential spending amid what is seen as the worst crisis the industry has ever seen.
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Airlines hit the collective pause button on new investments in March, when they began hemorrhaging millions of dollars a day as travelers suddenly stopped flying amid the spread of COVID-19. At one point, more tickets were being cancelled than either flown or booked.
Delta, the only U.S. carrier to release their full first quarter numbers so far, was losing around $100 million a day in March — in other words pulling, it was $100 million out of its "savings account" daily. But through the suspension of new investments and other cost cuts it expects the bleeding to slow to just $50 million a day by June, said Jacobson.
"Delta's update on cash burn was better than expected," wrote Savanthi Syth, an analyst at Raymond James, in a report Thursday. Better, that is, considering how bad things have gotten.
This is survival for the airlines, and most improvement projects can wait.
Related: Delta sees a more 'premium' future in coronavirus recovery
There is an argument to be made that this is a good time to speed up investments. With traffic numbers near zero, why not work on updating the many planes that are parked? One could argue why not take advantage of that aircraft downtime to complete projects, especially when the ability to remove an aircraft from service for work is one of the main reasons such projects can take years.
The issue now is these investments cost money. Amid the current crisis, the airlines do not have a single spare cent today.
Based on aircraft lessor numbers, the cost of reconfiguring the cabin of a wide-body jet can range from $5 million to more than $10 million — depending on what needs to be done. Put another way, that's up to a fifth of Delta's entire daily cash burn target in June.
Another issue is airlines do not know what planes they will fly when the recovery is underway. For example, at the end of March, reports said American planned to retire 76 of its oldest Boeing 737-800s — a model that it has 304 of in its fleet. The carrier was in the middle of reconfiguring the jets with 12 more seats as part of a project dubbed "Project Oasis."
American spokeswoman Andrea Koos told TPG that reconfiguration work on the 737s continues, though she did not say of the same is true for the Airbus A321s.
Related: American adds more than 100 jets to those retiring due to the coronavirus
A week later, American's vice president of network planning Brian Znotins told TPG that while it may make sense to retire some of the airline's oldest 737s before they go in for heavy maintenance work, no decision had yet been made.
"One thing I've learned through this crisis, trying to forecast the pace and severity of the way things will be, no one can do that," he said. "We need to be very flexible coming out of this."
Until American — or any carrier — commits to further cabin or similar passenger-facing upgrades, it needs to know that it will need those improvements post-coronavirus.
Related: US airlines could retire older aircraft, focus on newer models due to coronavirus downturn
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Airports are a somewhat different story. As public or quasi-public entities and are not wedded to the same profit-and-loss expectations that airlines operate under. Downturns are traditionally good times to invest in infrastructure, and airports are no different with far fewer people expected to pass through their corridors for the next several years.
"We see a much smaller industry capacity footprint on the other side of this," wrote Evercore analyst Duane Pfennigwerth on April 15. He expects capacity at mainline carriers American, Delta and United to be down roughly 30% next year compared to 2019.
From Denver (DEN) to Washington Reagan National (DCA) airports, the slowdown in traffic is allowing them to do heavy work on capital projects for more hours of the day. Previously, work was constrained to off-peak hours when the disruption to passengers was minimal. Neither has said whether the extended work hours is enough for projects to open early.
Delta does plan to use what it thinks will be a three-year recovery to "advance the timelines" of some of its airport projects, said CEO Ed Bastian on Wednesday. Accelerating some project could reduce costs, especially at congested airports like Los Angeles (LAX) and New York LaGuardia (LGA) where the airline is managing major construction projects.
And some investments are moving forward, coronavirus or not. Southwest Airlines continues to work on the technology needed to sell its flights on large ticket distribution systems, the airline's president Thomas Nealon told the Global Business Travel Association (GBTA) earlier in April. The project will make Southwest flights available to more travelers than before — something that will benefit the airline after COVID-19 just as it would have before.
Related: Delta opens new concourse, bringing modern, airy feel to LaGuardia
Updated with comment from American Airlines on Project Oasis 737 retrofits.
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There’s a lot to love about the Amex Gold. It’s a fan favorite thanks to its fantastic bonus-earning rates at restaurants worldwide and at U.S. supermarkets. If you’re hitting the skies soon, you’ll also earn bonus Membership Rewards points on travel. Paired with up to $120 in Uber Cash annually (for U.S. Uber rides or Uber Eats orders, card must be added to Uber app and you can redeem with any Amex card), up to $120 in annual dining statement credits to be used with eligible partners, an up to $84 Dunkin’ credit each year at U.S. Dunkin Donuts and an up to $100 Resy credit annually, there’s no reason that foodies shouldn’t add the Amex Gold to their wallet. These benefits alone are worth more than $400, which offsets the $325 annual fee on the Amex Gold card. Enrollment is required for select benefits.Pros
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- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
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| 4X | Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year. |
| 4X | Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year. |
| 3X | Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com. |
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Why We Chose It
There’s a lot to love about the Amex Gold. It’s a fan favorite thanks to its fantastic bonus-earning rates at restaurants worldwide and at U.S. supermarkets. If you’re hitting the skies soon, you’ll also earn bonus Membership Rewards points on travel. Paired with up to $120 in Uber Cash annually (for U.S. Uber rides or Uber Eats orders, card must be added to Uber app and you can redeem with any Amex card), up to $120 in annual dining statement credits to be used with eligible partners, an up to $84 Dunkin’ credit each year at U.S. Dunkin Donuts and an up to $100 Resy credit annually, there’s no reason that foodies shouldn’t add the Amex Gold to their wallet. These benefits alone are worth more than $400, which offsets the $325 annual fee on the Amex Gold card. Enrollment is required for select benefits.Pros
- 4 points per dollar spent on dining at restaurants worldwide and U.S. supermarkets (on the first $50,000 in purchases per calendar year; then 1 point per dollar spent thereafter and $25,000 in purchases per calendar year; then 1 point per dollar spent thereafter, respectively)
- 3 points per dollar spent on flights booked directly with the airline or with amextravel.com
- Packed with credits foodies will enjoy
- Solid welcome bonus
Cons
- Not as useful for those living outside the U.S.
- Some may have trouble using Uber and other dining credits
- You may be eligible for as high as 100,000 Membership Rewards® Points after you spend $6,000 in eligible purchases on your new Card in your first 6 months of Card Membership. Welcome offers vary and you may not be eligible for an offer. Apply to know if you’re approved and find out your exact welcome offer amount – all with no credit score impact. If you’re approved and choose to accept the Card, your score may be impacted.
- Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
- Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com.
- Earn 1X Membership Rewards® point per dollar spent on all other eligible purchases.
- $120 Uber Cash on Gold: Add your Gold Card to your Uber account and get $10 in Uber Cash each month to use on orders and rides in the U.S. when you select an American Express Card for your transaction. That’s up to $120 Uber Cash annually. Plus, after using your Uber Cash, use your Card to earn 4X Membership Rewards® points for Uber Eats purchases made with restaurants or U.S. supermarkets. Point caps and terms apply.
- $84 Dunkin' Credit: With the $84 Dunkin' Credit, you can earn up to $7 in monthly statement credits after you enroll and pay with the American Express® Gold Card at U.S. Dunkin' locations. Enrollment is required to receive this benefit.
- $100 Resy Credit: Get up to $100 in statement credits each calendar year after you pay with the American Express® Gold Card to dine at U.S. Resy restaurants or make other eligible Resy purchases. That's up to $50 in statement credits semi-annually. Enrollment required.
- $120 Dining Credit: Satisfy your cravings, sweet or savory, with the $120 Dining Credit. Earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, and Five Guys. Enrollment required.
- Explore over 1,000 upscale hotels worldwide with The Hotel Collection and receive a $100 credit towards eligible charges* with every booking of two nights or more through AmexTravel.com. *Eligible charges vary by property.
- No Foreign Transaction Fees.
- Annual Fee is $325.
- Terms Apply.