Airlines are secretly preparing for something. What could it be?
The Great Preparation: Airlines seem to be taking actions to reduce overhead cost and their overall expenditure in preparation for something. We saw American Airlines earlier this year laying off over 800 employees. Notwithstanding its Department of Justice (DOJ) blocked merger with JetBlue Airways, we see Spirit Airlines doing what it can to reduce expenses as well. To make matters worse, just days ago, Southwest Airlines announced that it’s slowing pilot hiring and other expense-related activities as it is anticipating some slowdown in its operations in the future. The question we need to ask ourselves is: What are airlines preparing for? For some time now we’ve been predicting that the ensuing economic crisis that we are already in will impact the aviation industry significantly. These actions that have been announced by airlines are an indication that the airlines themselves understand what’s coming and are preparing themselves for the worst. What are some key takeaways here?
- The recent announcements by airlines to embark on cost-cutting measures as drastic and dramatic as they may seem, are only the tip of the iceberg.
- We expect more airlines to announce further cost-cutting measures as they prepare for the economic challenges ahead.
- Even though this might be an unpopular statement, airlines are right to be cutting costs as they head into a massive economic headwind.
Get Involved: Do you believe that cost-cutting measures such as layoffs and hiring freezes are the right thing for airlines to do at this time? Why or why not? Please share your thoughts in the comments below.
Recent cost-cutting measures for airlines are only the tip of the iceberg.
- Many of us might be hoping that many of the cost-cutting measures that we have seen by airlines are temporary and that this is the majority of such activities. Unfortunately, this might not be the case.
- We believe that what airlines have shared so far publicly is only a small fraction of actions that they are planning on taking given what is to come in the economy. Therefore, we can expect more cost-cutting measures that will affect jobs and output as the months go by.
- Notwithstanding the fraction of the cost-cutting measures that some airlines have already publicly announced, other airlines have not even begun, announcing any cost-cutting measures. However, rest assured, all airlines are planning cost-cutting measures.
On Aviation™ Note: What we are seeing for airlines regarding cost-cutting measures such as layoffs and cutbacks on expenditure is simply the tip of the iceberg, and we can expect a lot more to come.
As time goes by and the economic crisis deepens, we can expect more airlines to announce cost-cutting measures.
- As stated in the previous section, not only are the cost-cutting measures outlined by some airlines so far are only a fraction of those plans, and those still being planned, but not all airlines have publicly announced their present or future cost-cutting measures.
- A reason for the reluctance to publicly announce cost-cutting measures is that they tend to spook the jobs market and other parts of the economy. For this reason, airlines are very measured in how they announce these kinds of activities.
- One caveat to this, however, all things being equal, is that announcements of cost-cutting measures without a commensurate decrease in revenue mean higher evaluation for a company because it increases its cash flow and therefore increases its stock price. This means that investors generally look favorably on cost-cutting measures even though they may hurt the job market.
On Aviation™ Note: Cost-cutting measures may not be good for the job market, particularly if job cuts are a part of this measure. However, these measures sometimes bode well for investors.
Yes! As unpopular as this may sound, this is the right thing for airlines to do at this time.
- While this may be a very unpopular viewpoint, airlines should find ways to lower their cost as they head deeper into this economic challenge. The less burden an airline is with overhead costs and other expenses the better it is to ride out the economic crisis.
- Furthermore, an airline that can trim the “fat” from the business is much more nimble to deal with the adverse effect of the crisis, as well as not needing as much support – taxpayer money – or credit/debit to ride out the storm. This inevitably allows them to be a much stronger company on the other side of the crisis.
- Thus, while this may lead to layoffs and slowed hiring, this policy is best for having a viable airline industry, during and after the crisis. One that is not heavily reliant on government bailouts and debt, which makes things a whole lot worse.
On Aviation™ Note: The cost-cutting measures being taken by some airlines is the tough medicine to deal with the current economic crisis, and it must be taken if we wish to have a viable industry after the crisis is over.
Conclusion
There have been announcements by some airlines of cost-cutting measures. Particularly American Airlines, Southwest Airlines, and Spirit Airlines. These cost-cutting measures are particularly important as the airlines deal with the current economic crisis, and prepare for its worsening. These measures may be unpopular by the public and downright disliked by the jobs market. Yet, this is what is needed to ensure that we have viable airlines after this crisis is over. It matters not that investors benefit from these cost-cutting measures. What truly matters is the viability of airlines, and the overall industry after the storm has passed.
Thank you for reading this week’s On Aviation™ full article. Do you believe that cost-cutting measures such as layoffs and hiring freezes are the right thing for airlines to do at this time? Why or why not? Please share your thoughts in the comments below. Remember to check out our On Aviation™ Podcast and continue the conversation on our Twitter and Instagram.
Orlando – On Aviation™