An excerpt from the PlaneBusiness Banter - 04/04/08
The Titanic Watch Gets Really Busy
Editor's Note: I was going to re-edit this, given the events of Friday night, but hey, after re-reading it, I figured it was better to leave things as they were.
This industry now finds itself in one sad state of affairs. And hey, listening to Lehman Brothers' analyst Gary Chase didn't help my mood much last week out in Phoenix as he made the statement that "With [the effect of] fuel, it's like this is three recessions at once," he said. "And then, we also have a recession."
Great.
Needless to say, between the time I first mapped out our revival of our "Titanic Watch" two weeks ago and this week, some of the airlines on the list couldn't wait. They just went ahead and hit the ocean floor with a sickening thud.
There's really no secret in trying to figure out what is important in this current environment. As we have written here before -- it's cash. But right behind cash is an airline's fuel burn, and/or the airline's aircraft ownership costs.
This point was made clear a few weeks ago when Merrill Lynch analyst Mike Linenberg put together his chart showing just which two airlines would still be profitable with oil at $110 a barrel. That odd couple? Southwest Airlines and Allegiant. Yes, Allegiant. The airline that flies those gas guzzling MD-80s.
Why? Because right now Southwest has the drop-dead fuel hedges and Allegiant has the low aircraft ownership costs. Or to put it another way, if you don't pay much for an airplane, you can run through a lot of fuel before you get up to the same ownership costs of a brand spanking new Boeing 737.
As Gary Chase also pointed out last week (and we talk more about in our column this week), if you have older aircraft, it's much easier to manipulate your capacity because you can park them. You can cut utilization. It's not like you're parking new expensive metal. So as the cost of fuel goes up you can pull back on capacity fairly easily.
But if you have a lot of nice new "fuel efficient" aircraft -- you have to keep flying the hell out of them to cover your costs of ownership. And well, that then causes you to burn more fuel, and here we go.
I thought about this when I read a long story in MarketWatch Friday in which the traditional argument was made that the airlines that have higher maintenance costs, older aircraft, and higher fuel costs were the ones that had potentially the biggest problem -- in a high fuel environment. But as Gary reminded me last week, the other side of that argument, obviously, is how much is the airline paying for the airplane?
So before another list member decides to leave us, it's time to unveil the PlaneBusiness Titantic Watch. Note: List members are not necessarily listed in the order in which they could find themselves having to ask for third party support, i.e., bankruptcy.
As was the case in the past, by placing an airline on this list, we are saying that financially, the airline has issues that put the continued operation of the airline at risk.
Mesa Air Group
Okay, I assure you I have my bifurcated hat on here.
Given the news this week that Delta Air Lines is going to cancel its contract for approximately 19% of Mesa's current fleet, and the fact that those aircraft are going to be hard to re-place; given that the airline seems intractable on its money-losing Hawaiian escapade; and given the airline's financial results during 2007--for these reasons alone Mesa merits inclusion on the list.
But there are other issues.
The biggest of which is the fact the airline has an approximately $37 million convertible note payment coming due in June. The airline now has a market cap of about the same amount. In the last earnings call, CEO Jonathan Ornstein talked about how the airline would probably 'go to the markets' in an attempt to raise more cash.
With the stock below $2 a share and no major regional contracts out there to replace what Delta is pulling out -- you have to believe that 'going to the markets' at this point in time is going to be a) very expensive and/or b) not possible.
