Boeing CEO Expects Airline Bankruptcy – What Did He Really Mean About Coronavirus Impacts?

It’s generally not good business practice to eagerly expect your customers to go out of business.

When Boeing CEO David Calhoun was asked by NBC News if “there might be a major U.S. carrier that just has to go out of business,” he responded quickly and strongly, “Yes, most likely.”

Calhoun did not give good evidence why in the advance clip from the May 12 Today show. He did not name any particular airline.

As the leader of one of the world’s only two major aircraft manufacturers, Calhoun should have shared Boeing’s global insights for how the U.S. could have a faster and safer recovery.

China Eastern, the second-largest Chinese airline, expects to have 70-80% of domestic capacity back in June. China had the first major outbreak and recovery.

Also on an upward track against COVID-19 is South Korea. It has excelled on testing – as recognized by Maryland, which bought half a million coronavirus testing kits from South Korea. They arrived on a Korean Air Boeing aircraft.

Europe’s largest airline, all-Boeing operator Ryanair, expects a summer recovery with around half of capacity back. British Airways owner IAG also expected a 50% recovery, at least before the U.K. government announced an arrival quarantine.

Yet Calhoun predicted that for the U.S. in September, “Traffic levels will not be back to 100%. They won’t even be back to 25%.”

Calhoun’s prognosis increased but still lagged global peers. “Maybe by the end of the year we approach 50%,” he said. Air France-KLM expects to have 60% of capacity back by the end of the year while IAG estimates 70%.

The new Boeing CEO is more open than predecessor Dennis Muilenburg, but Calhoun has overstepped before and later dialled back his comments, notably in a New York Times interview.

In this instance, his comments quickly softened to: “There will definitely be adjustments that have to be made on the part of the airlines.” Few would disagree – but that does not mean airlines go out of business.

U.S. airlines facing financial difficulty typically enter Chapter 11 bankruptcy restructuring – sometimes twice – but that allows them to keep flying. Chapter 7 bankruptcy is for liquidation.

Calhoun expected “something will happen when September comes around” – another agreeable comment.

U.S. airlines cannot furlough staff through September 30, a condition imposed as part of the billion dollar payroll assistance they received from the government’s CARES Act.

In the years before coronavirus, the U.S. airline industry transformed and became the most profitable in the world. That could be an argument for further assistance in a second CARES Act to bridge the downturn.

Underlying demand will return but airlines will want to quickly pay down debt, possibly by restricting capacity and pushing up fares.

If there is structural change, the major U.S. airlines have valuable airport gate and slot portfolios. Those will not go unused. But there may be government reluctance to allow further consolidation at the the top of the industry.

A major U.S. airline has not gone “out of business” since the early 1990s with Eastern and Pan Am, although this may depend on the definition of “major.” But Pan Am was carved out, helping create what are today’s European routes at Delta and Asian network at United.