How Southwest Has Managed a Furlough-Free Pandemic
By: Dylan Hughes
Tags: Transportation, Travel, Business, Economics, Airlines

With international travel restrictions, mandated post-travel quarantines, and an emphasis on remote work, the airline industry has taken a huge blow from the COVID-19 pandemic. While air travel demand is slowly rising, it is still down 70% year-over-year (as of August).

The U.S. Global Jets ETF, an all-encompassing global airline fund, is 44.7% off its yearly highs in early February.

Because of the dramatically lighter traffic, airlines have had to make tough decisions in 2020 when it comes to their workforce.

The industry got support from the U.S. government in March — $25 billion, to be exact, which barred the airlines from furloughing employees until October 1.

With October 1 in the past and no further stimulus agreed upon in Congress, airlines have been forced to begin furloughs as the industry still hurts for business.

Once the CARES Act expiration date passed, American and United Airlines furloughed more than 32,000 people. Both companies have committed to recalling those workers if a new stimulus bill is agreed upon.

Alaska Air also furloughed over 500 people.

The two largest airlines by market cap, Southwest and Delta, are committed to no furloughs — for now.

All of these airlines have been able to cut furlough numbers down drastically through pay and schedule decreases, early retirement plans, and other financial maneuvers to cut payroll. With such a drastic change in cash flow, however, holding off furloughs with no further stimulus support may be impossible.

While Delta has left the door open for pilot furloughs, Southwest has remained committed to no furloughs whatsoever through 2021.

CEO Gary Kelly announced his plan to make this possible, which includes a reduction in executive salary (including his, which will be $0 through 2021) and financial concessions from the company’s union employees that represent more than 80% of Southwest’s workforce.

The company lost 28% of its workforce over the summer thanks to voluntary unpaid leave and early retirement that helped make this furlough plan possible.

While those voluntary exits and government stimulus certainly played the largest factor in Southwest being able to avoid furloughs, the company’s savvy stewardship gave the airline financial flexibility the other large airlines don’t have.

Two good ways to determine a company’s liquidity and overall strength is net debt and tangible book value. Net debt is used to determine how easily a company can pay off its debt, using its cash and cash equivalents and subtracting that from short- and long-term debt.

Entering the year, Southwest was in great standing with just $117 million in net debt. Other airlines such as United ($11.8 billion), Delta ($8.3 billion), and American ($24 billion) were in a much tighter spot.

Since the pandemic began in the spring, Southwest has added debt but also built up a stable of cash, allowing itself to now have zero net debt.

Tangible book value (also known as net tangible assets) is used to determine the value of a company’s tangible assets. This number is found by subtracting total liabilities, intangible assets, and goodwill from total assets.

Southwest has always outperformed the other airlines here due to its prudent handling of debt. Over the past four quarters, Southwest has had an average tangible book value of $8.5 billion. United comes in at $2.7 billion, Delta at -$5.1 billion, and American at -$7.6 billion.

The big difference-maker in the numbers between Southwest and American, for example, is in intangible assets. In the growing digital age, intangible assets are becoming more and more common.

Intangible assets can include intellectual property, trademarks, patents, trade secrets, and brand value (a.k.a. goodwill). Technology companies like Microsoft, Amazon, and Apple see a large portion of their worth in intangible assets.

In airlines, though, intangible assets should not make up a huge piece of the pie. In its last two quarters, which were both hit by the pandemic, Southwest has maintained a total of $970 million in intangible assets. Delta has been at $15.7 billion — with over half coming from goodwill.

Goodwill isn’t a bad thing. It essentially represents a premium paid for an asset above book value. For example, when buying a company, you are not only purchasing the company’s physical assets. You are also paying for brand recognition among other intangible things.

Just like any other asset, though, goodwill can depreciate. Brand value is worth a ton but it must be actively maintained. Reputation can be damaged and when goodwill goes down, it must be written down.

Writing down an intangible asset such as goodwill shows that the company overstated its value and may call for a negative reaction among investors.

A high amount of intangible assets may never come to hurt Delta, but the possibility is always there. With Southwest, however, that risk is close to zero with such a small number represented on the balance sheet.