Companies and analysts regularly model how they would fare if a disaster occurred, and stress tests to see how they would react to formulate a plan – just in case.
In the United Airlines (UAL) earnings call on Thursday, the company showed how flawed some of these models can be.
The financial report by Gerald Laderman, which outlines the company’s losses – an adjusted loss of $ 2.6 billion before an annual loss of $ 9.9 billion – points out that things are worse than they thought. The share fell by about 7% with the announcement of earnings.
“Before COVID, we modeled the worst-case scenarios based on the financial impact of 9/11, followed by a recession,” Laderman said. “It turns out we weren’t even close.”
CEO Scott J. Kirby said on the call that one of the airline’s most important achievements was ‘the first airline to realize the potential seriousness of COVID-19’, but it was in a difficult place because it tried to reduce cash burning. when passengers stopped flying.
Although there is a light at the end of the tunnel, Kirby said the pandemic changed airlines forever.
“While recovering from this crisis, we have stopped using the term ‘return to normal’ because it creates an environment where it is just too easy to go back to what we did before,” he said. ‘Instead, we want to focus on a return to a new approach that applies to a wide range of objectives. When it’s over, our employees, customers, the general public and shareholders will see a new United Airlines. ”
One will be how the company manages risk. People studying risks and so-called black swans, a term coined by the multiple Nicholas Nassim Taleb, which refers to rare events that have a major impact, see almost impossible predictions. Instead, these risk experts prefer general roughness over shock, while using a wide range of events without predicting it. (Many people have predicted, anticipated and warned these scenarios, including Bill Gates, so many people argue that it was a risk factor that companies should have been prepared for.)
“From now on, we will focus on being ready for a sustained destruction of the global aviation demand as we see it today,” Laderman said.
While the company has reduced bookings and revenue, ‘liquidity and cash flow management has become far more important than any other financial measure’, Laderman said, adding that these difficult lessons have led to some new tasks for future crises.
Laderman said the balance of a strong balance will be of the utmost importance because the company will be profitable again, and maintaining speed and flexibility through liquidity and debt reduction will be a priority. However, the process will take years: the company does not expect Q1 2021 to be much better than Q4 2020. Most airlines are in a similarly difficult time, as demand has led to a small number of levels of grounded aircraft and that the expenses had to be cut. (Norwegian even stopped its long-distance service.)
“This crisis has given us a number of valuable lessons about balance and capital allocation,” Laderman said. “We expect to set a higher minimum liquidity target than before the crisis.”
Laderman pointed out that the full autopsy of the company’s responses will far from be ready, but the events of 2020 and 2021 offer new plans and models, such as what assets are available to struggling companies. . But the next crisis may take a completely different form than the coronavirus pandemic, and any preparations will be tested before it is tested.
–
Ethan Wolff-Mann is a Yahoo Finance author focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.
For tutorials and information on investing and trading stocks, go to Cashay
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, en reddit.