Industry Research

Expect Less Airlines in the Sky

Posted on February 24, 2009 by LCT Staff - Also by this author - About the author

ATLANTA — Plunging airline stocks suggest investors worry a few carriers may wind up in bankruptcy, victims of the U.S. financial crisis. Analysts say there is no immediate danger of that for any major carriers, although it could be the fate of one or two by this time next year if credit markets stay tight or the economy weakens further.

Tempe, Arizona-based US Airways is considered the most vulnerable among legacy carriers, according to analysts. American Airlines, a unit of Fort Worth-based AMR, also faces some financial headwinds given its debt obligations and how much cash it is currently expected to end the year with heading into next winter, a typically slow season.

Seattle-based Alaska Air Group, Atlanta-based Delta Air Lines and Houston-based Continental Airlines are considered by analysts to be in stronger financial positions.

"We got some problems potentially in early 2010 if some airlines cannot raise additional cash," Calyon Securities airline analyst Ray Neidl said Monday in an interview.

US Airways said in regulatory filing Wednesday that its high level of fixed obligations limits its ability to fund general corporate requirements and to obtain additional financing. Its fixed obligations include debt, aircraft leases and financings and aircraft purchase commitments.

US Airways said its "existing indebtedness is secured by substantially all" of its assets. It also said the terms of a credit facility it has with Citicorp and other financing arrangements require the company to maintain consolidated unrestricted cash and cash equivalents of not less than $850 million.

Neidl currently projects US Airways will end 2009 with $1.4 billion in unrestricted cash and short-term investments.

US Airways spokesman Morgan Durrant said Monday that his carrier has proven its ability in the past to raise significant cash when others didn't think it could.

American's parent said in a Thursday regulatory filing that it should have sufficient liquidity to fund its operations for the near term, including repayment of debt and capital leases, capital expenditures and other contractual obligations — including those relating to the anticipated delivery of 76 Boeing 737-800 aircraft that American is now committed to acquire in 2009 through 2011.

But it also noted its significant upcoming debt maturities. In 2009, AMR will be required to make roughly $1.8 billion of principal payments on long-term debt and roughly $110 million in principal payments on capital leases, and the company expects to spend roughly $1.6 billion on capital expenditures, including the Boeing aircraft commitments.

"In addition, the global economic downturn, potential increases in the amount of required reserves under credit card processing agreements, and the obligation to post cash collateral to secure loss positions on fuel hedging contracts, also pose challenges to our liquidity," the company said.

AMR said its possible financing sources include debt secured by new aircraft deliveries and the sale of assets.

Company assets that could be sold or otherwise used as sources of financing include its frequent flier program miles, takeoff and landing slots, and some of the company's business units and subsidiaries, such as AMR Eagle.

AMR said it had at least $3.5 billion in unencumbered assets and other sources of liquidity as of Dec. 31. But, it cautioned that the availability and level of those financing sources cannot be assured given the company's financial results in recent years, its already substantial debt load and the difficult revenue environment American faces.

Neidl projects AMR will end 2009 with $2.6 billion in unrestricted cash and short-term investments.

American spokesman Andrew Backover said Monday he couldn't speculate on specific actions the airline might take in the future relative to liquidity.

When oil prices last July ballooned to $147 a barrel, there was talk of the threat of bankruptcy for a few airlines. But carriers made drastic cuts to capacity, sold aircraft and looked for new sources of revenue from fees on checked bags and other once-free amenities.

Seven months later, oil prices have dropped below $40 a barrel, but now airlines face another big problem: the economy. No one knows where the bottom is. Families aren't taking as many vacations. Businesses are cutting back on corporate travel. Some recent fare sales have even begun to stretch into June, near the beginning of the traditionally busy summer travel season.

And credit markets are tight or frozen, depending on who you ask.

"I think our concern is that the airlines are running out of assets to finance and they do have substantial debt maturities, so they could be under greater pressure next year if the economy doesn't begin to recover," said Standard & Poor's analyst Philip Baggaley.

Baggaley noted that for a long time, international routes held up better than domestic routes and that was one reason airlines like Delta were shifting airplanes from the domestic market to the international market.

"But over the past several months, international traffic has weakened sharply," Baggaley said.

Investors appear anxious.

Since the close on Jan. 2, AMR's stock price has fallen 60%, US Airways' and Delta's have fallen more than 50% and Continental's has fallen more than 40%.

Source: USA Today

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