Airlines could see a 'v-shaped' recovery: analyst

Third Bridge Global Sector Lead Peter McNally joins The Final Round to break down his thoughts on United Airlines’ quarterly earnings and his thoughts on the broader, struggling airline industry.

Video Transcript

SEANA SMITH: Welcome back to "The Final Round." United out with earnings earlier this hour, posting a wider than expected loss. Revenue dropping 78% from a year ago. And this is similar to what we heard from Delta yesterday. Delta posted a 76% drop in their year over year revenue.

So joining us now for a little bit more about this, we have Peter McNally. He's Third Bridge global sector lead. And Peter, great to have you on the show. Let's just start with United, I guess, and then we'll follow up with Delta. But United shares under pressure here, off just around 1%. Just broadly speaking, what did you think of these results?

PETER MCNALLY: Well, there are three concerns that our clients have at Third Bridge about United and airlines in general. Number one is when does business and international come back? Number two is cash burn and liquidity. And number three, how they're going to compete in the domestic market, which is where, really, all the flying going on, or most of the flying is going on these days.

So, you know, on the first part, going through these United numbers, domestic passenger revenues were down 81%. International is still down to 91%. And the key on this business and international thing is the most important part for profitability. And our experts have been telling us that they saw business travel down 5% to 10%, like completely gone, never coming back due to things like Zoom.

Whereas the Delta CEO yesterday said that they now think that 10% to 20% of business travel will be gone in the new normal. So and that's the part of the business that was half of Delta's business prior to this. So that, to us, was pretty significant.

It looks like United did well on the cash burn point of view. They came in on the number of $25 million per day. They have guided an improvement in the fourth quarter back in July to about 15 to 20 million. They need to continue on that trajectory. But, you know, Delta was-- you know, was talking about being cash break even by the spring. We'll have to see what United says about that trajectory for them.

SEANA SMITH: Yeah, Peter, I wanted to ask you about that because with Delta, it's interesting. I mean, that seems like an ambitious goal at this point. Because like you said, the business traveler might not ever return to the levels that we saw before the pandemic. And then, of course, international travel is also a huge question mark at this point.

PETER MCNALLY: Yeah. I mean, look, most of these airlines, pretty much all of them, are positioning themselves for a V-shaped recovery. Capital markets have been open. They've raised money. It's not just dependent on government bailouts. Nobody is in a liquidity crunch yet.

And there's hope that all this stuff is going to turn around pretty quickly once we get a vaccine. But we really need to open borders to really help these airlines. And United is sort of caught between a few different things here, and that they came into this not quite in a strong of a position as Delta. But probably, like, generally speaking, people thought it was better than American.

But they're facing more competition in the US. You know, Southwest is coming into their markets. American and JetBlue have a new agreement that remains to be seen how it will play out. So, time will tell.

AKIKO FUJITA: Peter, we've seen a number of airlines try to get a little more creative with their routes in the face of this significant downturn they've seen in business travel, trying to do more routes to some of these travel or leisure destinations.

And I'm curious how big of a revenue driver that you think that can be, just given that the cost of the ticket itself, first of all, isn't as much as a business class seat or a first class seat. I mean, is that sort of-- can that be sort of a Band-Aid while waiting for business travel to tick back up again?

PETER MCNALLY: I mean, really, it is the only game in town at this point. And they will compete for it. So the airlines are all kind of reorganizing themselves to serve this leisure customer. And it's been pretty significant, that what we've seen to date in terms of when people are traveling, and it really is tilted towards this leisure customer, who's going to pay less and fly--

SEANA SMITH: Peter, do we still have you?

PETER MCNALLY: Yeah, I'm still here.

SEANA SMITH: OK, sorry. Jen, you want to jump in with a question?

JEN ROGERS: Sure. Sorry, I thought I had frozen maybe. Hey, Peter, stimulus. Is it worth it? I mean, when you look at the numbers, $25 million cash burn. They're losing money day after day. You said the capital markets are open here. Would it be too early to do something now? Should we be waiting on this?

PETER MCNALLY: Well, you know, look, the cash burn is what it is. And, you know, these companies have been very good at managing costs historically. And they've really done a tremendous job. Today, even in the second quarter, United was burning $40 million a day.

Certainly, directionally, things are getting better, but as I said earlier, these airlines are avoiding the real restructuring that might need to take place if the kind of impairments to business and international travel, like, don't come back. I mean, this domestic market, it is encouraging, right?

I mean, there's no doubt that some people are flying here in this country. But really, until we get a vaccine and open borders, that's going to spell some trouble for airlines like United, American, and Delta that really rely on that international long haul business. So their cash burns are going to be higher, just based on the nature of their businesses and the fact that they haven't really gone for wholesale restructuring just yet in the hope that this would turn around pretty quickly.

SEANA SMITH: All right, Peter McNally of Third Bridge, great to get your perspective on this. Thanks so much for during the show today.

PETER MCNALLY: All right, good to be here.