Airline investor Bill Franke digs in for a slow industry recovery
Frontier Airlines planes stand at gates on the A Concourse at Denver International Airport in Denver.
David Zalubowski | AP
More government aid and health checks for travelers will be needed to get the airline industry through the coronavirus crisis, according to longtime discount-airline investor Bill Franke.
Air travel in the U.S. has plummeted by more than 95% from a year ago, federal data shows, whiplash for airlines that early this year boasted record passenger numbers and their highest employment levels in 17 years. The virus and measures aimed at slowing the disease’s spread have driven down demand for flights at the fastest clip ever.
“I have never seen anything like this in the industry or industry in general,” Franke said in an interview.
A quick turnaround is unlikely, said Franke, co-founder and managing partner of private equity firm Indigo Partners, which owns Frontier Airlines and is a major investor in three other budget carriers in Europe and Latin America. Revenue is depressed across those regions, he said.
Record job losses and economic weakness could further hurt travel demand in addition to lingering health concerns.
U.S. airlines, including Frontier, this week said that they plan to receive a portion of $25 billion in government aid — a mix of grants and loans — that require carriers not to furlough or cut the pay of their roughly 750,000 workers through Sept. 30. Frontier intends to also apply for a loan from a separate $25 billion pool of aid that Congress approved last month in the $2 trillion coronavirus relief package, the CARES Act.
Additional aid might be necessary, Franke said.
“We’re going to face as much as a year or two of recovery,” Franke said, adding that it’s “pretty clear that there’s going to have to be additional aid to the sector” without signs of a rebound this fall.
Airlines like Frontier have raced to cut costs, slashing service by more than 60% and parking hundreds of planes. They’ve also drawn down on credit facilities to shore up cash after flight cancellations outpaced new bookings. Franke said he’s preparing for the worst. He’s not canceling the hundreds of single-aisle Airbus planes he’s ordered for the discount airlines in his portfolio but he’s in discussions with Airbus about the timing of deliveries, which are slated to start next year.
Franke’s nearly three-decade career in airlines started when he was tapped to bring America West out of bankruptcy in the early 1990s. Franke told CNBC last year that he had become a “Mr. Fix It.” Known for aggressive cost-cutting, Franke was an early proponent of rock-bottom fares with few frills and fees for add-ons.
American Airlines CEO Doug Parker, who took the reins from Franke at America West in September 2001, told CNBC that the airline’s revenue for the past few weeks was down 90% year over year but it appears demand is hitting a bottom.
United Airlines CEO Oscar Munoz and President Scott Kirby, who takes over for Munoz next month and worked under Franke at America West, painted a bleak picture despite the government aid. They warned of job cuts this fall.
The $5 billion United expects to receive in government payroll aid is not enough to cover its full payroll expense, but the carrier will not furlough or cut the hourly pay rates of U.S. employees through Sept. 30, a condition of the aid, they said.
“But the challenging economic outlook means we have some tough decisions ahead as we plan for our airline, and our overall workforce, to be smaller than it is today, starting as early as October 1,” Munoz and Kirby said in a staff note.
The Chicago-based airline is planning to cut its capacity next month to just 10% of what it was planning for at the start of the year. In the first two weeks of April, United flew 200,000 people, a 97% drop compared with the same period in 2019. “And we expect to fly fewer people during the entire month of May than we did on a single day in May 2019,” the executives wrote.
Passenger health screenings
Franke said travelers will need to be convinced that airports and planes are safe before customers are comfortable with flying again once the virus is under control. Airlines have already taken measures to disinfect aircraft and have put social distancing policies in place, such as blocking middle seats.
Aside from a vaccine, which isn’t expected to be widely available until next year at the earliest, passenger health checks such as temperature screenings at airports are a good step, Franke said. Fevers are one of the symptoms of Covid-19 and a host of other infections.
“There will be an effort to convince the customer that it’s safe to travel,” he said. “There should be some process where everybody who gets on an airplane knows that every other passenger doesn’t have a fever.”
Franke said cost-cutting and other measures have prepared his airlines for the steep drop. The crisis will bring new investment opportunities because of the collapse in air travel as airlines around the world struggle, he said, but investing in another carrier for the sake of doing so is not enough.
Waves of airline bankruptcies have left four airlines in control of about three-quarters of the U.S. market, but mergers of two weak companies anywhere, could create more problems, Franke warned.
“You don’t want to combine two losers and create a bigger loser,” he said. “You have to be thoughtful about that.”