Coronavirus

Airlines And Restaurants Grapple With The Capacity And Cash Burn Challenges

The coronavirus has challenged any number of businesses on several levels – and among the most challenged verticals have been the restaurant and airline segments.

After all, those firms depend on bodies in seats – literally.

Stay-at-home orders and government mandates to shutter restaurants have blocked the most direct ways for dining establishments to get top-line torque and make money.

After all, it costs the same to fly an airplane whether the cabin is full or not. And though a flight with 20 passengers aboard is preferable to one with single-digit counts of passengers (and it costs money, too, to keep planes idle), fixed costs quickly mount and give way to cash burn.

Waiting for demand to recover is a dicey proposition, of course, because no one really knows just how and when (not if) demand will recover.

The pain of that wait was underscored this week as the airlines reach a deal to receive billions of dollars in aid from the government.

Under the terms of that agreement, the Treasury Department will give as much as $25 billion to the airline industry. In examples of how much at least some of the carriers are getting, Delta Airlines will receive $5.4 billion and American Airlines will receive $5.8 billion.

“This is an essential step, but just one of many that will get us through the next several months,” Delta Chief Executive Officer Ed Bastian said in a message to employees, as reported by Bloomberg. “The funding, along with self-help measures we have taken, will prevent furloughs and pay rate reductions through the end of September, despite the 95 percent drop we’ve seen in passenger traffic.”

To get a sense of how the situation is unfolding for the airline industry as whole, the trade group Airlines for America said last month that “this unforeseen pandemic has caused rapid and severe economic damage to the industry over an unprecedented amount of time. Carriers are burning through cash as cancellations far outpace new bookings for U.S. carriers, planes are only 20-30 percent full and new bookings are implying 70-80 percent declines in traffic even as airlines make dramatic cuts in capacity.”

The collective burn rate for the U.S. airline industry, the trade group said, is $10 billion per month. This implies – very roughly speaking – that if revenue were to decline completely, there’s two and half months of cash in the collective coffer. Airlines such as Delta have billions of cash on the balance sheet (Delta, specifically, had $2.8 billion at the end of the year), billions of dollars in receivables and tens of billions of dollars in property, plants and equipment (which can be mortgaged) – but they also carry billions of dollars in debt and other liabilities, so balancing cash burn with what comes due down the line can be a walk across the proverbial tightrope.

Selling equity stakes – entitling buyers (in this case, the government) to a slice of future earnings and dividends – is another strategy, but a finite one. This time around, the Treasury is getting warrants that equate to 3 percent of American Airlines’ common shares, if converted.

In the meantime, amid the capacity cuts and massive drops in trips actually taken, the Air Transport Association – which is global in scope – has said that the airline industry as a whole will lose $314 billion in ticket sales in 2020.

Restaurants Feel A Bite, Too

Capacity also proves to be both a boon and a bane for restaurants.

In a rough, back-of-the-envelope manner, a restaurant gets the bulk of its top line through a simple formula: How many guests can be seated, how many times during the day those seats are “turned” and what the average ticket per meal per guest might be. There are all sorts of ancillary revenue streams, of course, aided by digital options. Order ahead/pick up counts, of course, as do deliveries.

But here’s another rule: Closing off the locations eliminates those revenue streams. McDonald’s is a prime example, as the fast-food giant said last week that global same-store sales were off by 22 percent in March as locations had to be closed.

As noted by CNBC, fast-food operators have been better positioned to weather the pandemic’s impact (with those additional revenue streams in place). Fast-food restaurants have seen transactions slide 40 percent as of the last week of March; the same period saw full-service operators see transactions slide by 79 percent, according to data from the NPD Group.

The cash crunch for dine-in restaurants – particularly smaller ones – is illustrated in research conducted by PYMNTS, where “Main Street” SMBs were surveyed as recently as early April. Capacity, of course, is gone, amid lockdowns and government-mandated shutdowns. Those firms said that with government assistance, such as through the ongoing Paycheck Protection Program (PPP), they had 44 days of operating cash in the bank. Without such aid, they expected to run out of cash in 24 days.

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