Article: High debt to equity ratios at Majors

[satpak77]

http://www.dallasnews.com/sharedcontent/dws/bus/stories/060610dnbusairdebt.14531a0.html

............ University of Portland finance professor Rich Gritta, a longtime observer of airline finances, said that balance sheets have been in poor shape across the airline industry for decades. But their financial situation weakened even more in 2009, he said.



"When you look at the financial crisis, that impacted the airlines a lot because the economy went into the tank. And when the economy goes into the tank, the airlines suffer a lot, just like the auto companies," Gritta said.



"That's the danger of having that much debt. You don't know when the poop is going to hit the fan, so to speak. You need to be relatively conservatively financed, which most of them are not," he said.
Dallas-based Southwest 's ratio of long-term debt to capital is a healthy 36 percent, Gritta said, meaning that it has 36 cents of debt for every $1 of equity and long-term debt.



By comparison, Continental has a debt-to-capital ratio of 84 percent, and Delta is at 94 percent. Large competitors AMR, UAL and US Airways have liabilities greater than their assets, giving them negative equity. (AMR is parent of American Airlines Inc., and UAL is parent of United Airlines Inc.)
Even some of the smaller, healthier airlines such as AirTran Holdings Inc. (60 percent), Alaska Air Group Inc . (62 percent) and JetBlue Airways Corp. (62 percent) have higher debt-to-capital ratios than is desirable, he said.
"Based on sound financial principles and my research, Southwest is the only carrier that is rationally financed and always has been," Gritta said. "I think a carrier should have a ratio of between 20 to 40 percent at the absolute most."

...........Gritta said the airline industry unquestionably needs a chance to heal. "You're looking at a couple of companies that are financially strong," Gritta said, "and the rest of them are virtual dog meat if anything bad happens."

 

[LearLove]

if Prof Rich thinks he can do better then tell him to get his own damn airplanes.

 

[N1atEcon]

Oh great, now the anti SWA crowd will start in about "who cares about long term debt ratios. At least at my airline we dont have to fly 8 legs a day 6 days a week with all overnights in LBB."

 

[scoreboardII]

I was thinking gee, thanks for the obvious Professor.

 

[luckytohaveajob]

The professor would be correct BUT we are in America.

America's legal system is designed to reward the overly leveraged. Lending laws, lending practices, accounting laws and accounting practices, banking laws, bankruptcy laws, etc.

I am not saying the current American system of business is sane, right, or just but it is legally set up for the overly leveraged and unstable to succeed.

Two brother show an example of why.

The first brother buys and sells property rolling all his previous profits in larger assets with more risk but displays stable debt to equity ratios of a responsible borrower. Ultimately the market tanks and he is at risk in bankruptcy of losing everything.

The second brother did the opposite. The second brother leverages 100% of all his property buying and sells but instead of reinvesting the profits takes the profit and pays the taxes at the time. When the market bottom occurs he has pocketed the profits and transferred it to relatives. Then he filed chapter 11 and the judge forces the refinancing and sale of all the debt while not being able to touch the profits which were removed prior to the problems.

So the more responsible first brother is holding the bag and going to lose everything while the less responsible second brother is using the American system to his advantage and not going to lose anything but what he does not want.

Neither brother was ultimately responsible but both played the American system differently with different results. One will succeed and one will fail. And the sad part is the worst brother will be the winner in America.

 

[Max Powers]

The professor would be correct BUT we are in America.

America's legal system is designed to reward the overly leveraged. Lending laws, lending practices, accounting laws and accounting practices, banking laws, bankruptcy laws, etc.

I am not saying the current American system of business is sane, right, or just but it is legally set up for the overly leveraged and unstable to succeed.

Two brother show an example of why.

The first brother buys and sells property rolling all his previous profits in larger assets with more risk but displays stable debt to equity ratios of a responsible borrower. Ultimately the market tanks and he is at risk in bankruptcy of losing everything.

The second brother did the opposite. The second brother leverages 100% of all his property buying and sells but instead of reinvesting the profits takes the profit and pays the taxes at the time. When the market bottom occurs he has pocketed the profits and transferred it to relatives. Then he filed chapter 11 and the judge forces the refinancing and sale of all the debt while not being able to touch the profits which were removed prior to the problems.

So the more responsible first brother is holding the bag and going to lose everything while the less responsible second brother is using the American system to his advantage and not going to lose anything but what he does not want.

Neither brother was ultimately responsible but both played the American system differently with different results. One will succeed and one will fail. And the sad part is the worst brother will be the winner in America.

Not exactly right there Sherlock......The creditor's committee will see to it that they extract their pound of flesh; through higher lease rates increased level of assets for collateral etc....I could go on but in the end - Brother number one Wins......and he wins every day of the week and twice on Sunday. Just look at the history of businesses across this country.

 

[igneousy2]

The professor would be correct BUT we are in America.

America's legal system is designed to reward the overly leveraged. Lending laws, lending practices, accounting laws and accounting practices, banking laws, bankruptcy laws, etc.

I am not saying the current American system of business is sane, right, or just but it is legally set up for the overly leveraged and unstable to succeed.

Two brother show an example of why.

The first brother buys and sells property rolling all his previous profits in larger assets with more risk but displays stable debt to equity ratios of a responsible borrower. Ultimately the market tanks and he is at risk in bankruptcy of losing everything.

The second brother did the opposite. The second brother leverages 100% of all his property buying and sells but instead of reinvesting the profits takes the profit and pays the taxes at the time. When the market bottom occurs he has pocketed the profits and transferred it to relatives. Then he filed chapter 11 and the judge forces the refinancing and sale of all the debt while not being able to touch the profits which were removed prior to the problems.

So the more responsible first brother is holding the bag and going to lose everything while the less responsible second brother is using the American system to his advantage and not going to lose anything but what he does not want.

Neither brother was ultimately responsible but both played the American system differently with different results. One will succeed and one will fail. And the sad part is the worst brother will be the winner in America.

I don't disagree with your overall point, but...

Doesn't the fact that the 2nd brother is pulling out money at every step so his debt/equity ratio improves with every new property acquisition.

I think in real life the first brother wins in the modern United States. Stay leveraged and then if you get into trouble just wipe out your debts in bankruptcy court. In most states they let you keep your house and car even if you are bankrupt so you really are encouraged by law to roll the dice.

 

[igneousy2]

As far as Dr. Gritta...I am very impressed with his mastery of the obvious.

 

[relief tube]

Oh great, now the anti SWA crowd will start in about "who cares about long term debt ratios. At least at my airline we dont have to fly 8 legs a day 6 days a week with all overnights in LBB."

well you know, international perdiem and a Prague Hotel is a lot more expensive than a LBB La Quinta and enough money for some BBQ