General Lee
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Analysis
Cash-Strapped Airlines: Who’s Next to Fall?
Ken Sweet
FOXBusiness
Aloha Airlines and ATA Airlines might just be the first of several airlines to go belly up.
All the major airlines are putting increasingly larger amounts of cash on their balance sheets in order to weather the economic downturn. But the fear among airline analysts is that these cash levels will last only so long, given oil sitting north of $100 a barrel. And the current credit crunch makes it more difficult for airlines to borrow to raise money when the cash coffers run empty.
“We found that all the airlines would survive 2008 but cash levels would be at alarming levels for the majority of the carriers if current trends continue through 2009,” said Ray Neidl, an airline analyst with Calyon Securities, in a note to investors.
The problem for these airlines, from small to big carriers, is the credit crunch and liquidity troubles that hit Wall Street investment banks like Bear Stearns (BSC: 10.41, -0.13, -1.23%) are now affecting them. Banks are hesitant to lend to all but the strongest borrowers, and the issues facing many air carriers make them a higher credit risk.
That means the carriers must raise fares and surcharges because they are unable to handle even a short term increase in fuel costs, industry experts said. The average amount of cash on an airline’s balance sheet to cover expenses has risen from a historical level of 12% to more than 30%.
“The amount of cash these airlines have on their balance is unprecedented,” said Bob Mann, an airline industry consultant. “These airlines cannot gamble with any loss at all. If they carry a loss on a route, they see that as money gone forever at the moment.”
How bad is it? Both Neidl and Mann said all of the airlines could file for bankruptcy if a major event akin to the Sept. 11 terrorist attack happens again.
In an industry with such massive fixed costs like airlines, the biggest variable cost for the industry is fuel. For every penny that the price of barrel oil gains, the whole industry loses approximately $19 million, according to Mann and other experts.
In order to cover the massive costs of $100-plus oil, and the lack of ability for the airlines to raise more cash, most airlines have turned to fuel and various other surcharges. The most recent example was announced Thursday, when Northwest Airlines (NWA: 9.65, -0.51, -5.01%) said it would add $115 to $155 one way to each international ticket.
The airlines just cannot handle these volatile costs anymore," Mann said. "It just gets worse for them as oil keeps rising because it's also affecting their customers as well. They have to decide if they want to heat their homes or go to
Cash-Strapped Airlines: Who’s Next to Fall?
Ken Sweet
FOXBusiness
Aloha Airlines and ATA Airlines might just be the first of several airlines to go belly up.
All the major airlines are putting increasingly larger amounts of cash on their balance sheets in order to weather the economic downturn. But the fear among airline analysts is that these cash levels will last only so long, given oil sitting north of $100 a barrel. And the current credit crunch makes it more difficult for airlines to borrow to raise money when the cash coffers run empty.
“We found that all the airlines would survive 2008 but cash levels would be at alarming levels for the majority of the carriers if current trends continue through 2009,” said Ray Neidl, an airline analyst with Calyon Securities, in a note to investors.
The problem for these airlines, from small to big carriers, is the credit crunch and liquidity troubles that hit Wall Street investment banks like Bear Stearns (BSC: 10.41, -0.13, -1.23%) are now affecting them. Banks are hesitant to lend to all but the strongest borrowers, and the issues facing many air carriers make them a higher credit risk.
That means the carriers must raise fares and surcharges because they are unable to handle even a short term increase in fuel costs, industry experts said. The average amount of cash on an airline’s balance sheet to cover expenses has risen from a historical level of 12% to more than 30%.
“The amount of cash these airlines have on their balance is unprecedented,” said Bob Mann, an airline industry consultant. “These airlines cannot gamble with any loss at all. If they carry a loss on a route, they see that as money gone forever at the moment.”
How bad is it? Both Neidl and Mann said all of the airlines could file for bankruptcy if a major event akin to the Sept. 11 terrorist attack happens again.
In an industry with such massive fixed costs like airlines, the biggest variable cost for the industry is fuel. For every penny that the price of barrel oil gains, the whole industry loses approximately $19 million, according to Mann and other experts.
In order to cover the massive costs of $100-plus oil, and the lack of ability for the airlines to raise more cash, most airlines have turned to fuel and various other surcharges. The most recent example was announced Thursday, when Northwest Airlines (NWA: 9.65, -0.51, -5.01%) said it would add $115 to $155 one way to each international ticket.
The airlines just cannot handle these volatile costs anymore," Mann said. "It just gets worse for them as oil keeps rising because it's also affecting their customers as well. They have to decide if they want to heat their homes or go to
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