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Cash crunch resurfaces for airlines
[size=+1]High jet fuel prices eating away cushions at many carriers
[/size]
[size=-1]11:14 PM CST on Tuesday, March 8, 2005 [/size]
[size=-1]By ERIC TORBENSON / The Dallas Morning News [/size]
Cash is once again becoming a critical issue for major airlines in the face of stubbornly high fuel prices, middling revenue and weak balance sheets.
Oil prices tipped $55 a barrel this week – almost 20 percent more than airlines had expected – pushing jet fuel prices to $1.40 a gallon, compared with less than $1 a year ago.
Airline industry analysts have begun watching cash balances for signs of erosion that might cause the biggest carriers to violate loan terms or face a liquidity crisis.
"At this stage in the economic cycle, airlines should be doing well enough to repair their balance sheets and they're not doing that," said Vaughn Cordle, the chief analyst for AirlineForecasts and an airline pilot. "It really doesn't bode well."
While struggling carriers such as US Airways Inc. and Independence Air Inc. have restructured their finances in recent months, many feel they've only delayed their fates.
Bankrupt US Airways burned through 26 percent of its unrestricted cash just in January – historically most airlines' weakest financial month for cash flow – and faces more hurdles despite getting an investment from Air Wisconsin. US Airways this week cut many of its fares along with United Airlines Inc., also in bankruptcy protection.
"They're doing it to raise cash," said airline consultant Robert W. Mann in Port Washington, N.Y. "They need it right now."
Moves to preserve or raise cash aren't relegated to the bankrupt carriers. Continental Airlines Inc. faced a cash crunch last month before it reached tentative agreements for $500 million in annual labor concessions.
At Delta Air Lines Inc., discussions are under way to sell off one or both of its wholly owned regional subsidiaries, according to comments this week from an executive at SkyWest Airlines Inc., a likely bidder.
"I don't think Delta is up against the wall at this point, but the extra liquidity sure would help," said Ray Neidl, analyst for Calyon Securities in New York.
Trouble ahead
None of the major carriers appears likely to fail or seek bankruptcy protection in coming months as they enjoy the annual surge of ticket revenue from spring and summer travel bookings, analysts said.
Locally, Fort Worth-based American Airlines Inc. says it's comfortable with its cash levels for now, but will probably need to borrow in the future. Dallas-based Southwest Airlines Co. has the industry's strongest balance sheet and a war chest of cash.
But with futures markets pointing toward crude oil staying at or above $50 a barrel, the fall could prove too much for many carriers.
Mr. Cordle predicts reckoning for US Airways, Independence Air, America West Airlines Inc. and possibly Delta by year-end.
By 2006, high fuel costs will have eaten away cash cushions at American and Northwest Airlines Inc., he said.
If oil prices spike to $60 a barrel, few carriers beyond Southwest have the balance sheet strength to take that kind of hit over several months, Mr. Cordle said.
Each dollar increase in a barrel of oil costs the top 13 carriers a combined $300 million. Based on $45 oil, the industry was already on track to lose more than $5 billion, he added.
"The key is really what's going to happen with jet fuel," said airline economist David Swierenga of AeroEcon outside of Washington, D.C. "But it's hard to think about oil prices coming down when they're going up – it's like a psychological barrier."
Strapped for cash, traditional carriers are either going to have to cut more money-losing flights as they've done in the past year or face more difficult confrontations with labor groups for concessions, the consultants said.
"I've got to think this gets much worse before it gets better," said Mr. Mann.
Needing help
With $2.9 billion of that unrestricted cash to ride out the current storm, American says it's not in danger but will need help from Wall Street to make ends meet.
"We feel comfortable with our current level of cash, and unencumbered assets," said spokesman Tim Wagner. "However, with fuel at record high levels, continued downward pressure on fares, and significant debt maturities over the next several years, we believe we will need access to additional funding in order to maintain sufficient liquidity."
American refinanced an $834 million line of credit in December by agreeing to keep at least $1.5 billion in unrestricted cash on hand through September and $1.25 billion on hand after that.
To reduce its cash needs, American has deferred aircraft orders and whittled its capital expenses for coming years. American parent AMR Corp. has a few more planes to mortgage and could always sell its wholly owned regional carrier, American Eagle Airlines, to raise more cash.
The company's more than $20 billion in debt continues to weigh on its finances, and American is expected to lose upwards of $400 million in the current quarter. Despite that, it's in better shape than others.
"It's the old saw that you just have to outrun the other campers, not the bear," said Mr. Mann.
Uneasy airlines anticipate $60-a-barrel oil
Jittery airline executives, having already raised fares and cut flights, are now looking ahead to the possibility of $60-a-barrel oil.
Stuart Klaskin of KKC Aviation Consulting says his airline clients are running financial simulations to anticipate the effects. "You've got to assume the worst case," he says.
Prices have been rising all year. Last week, crude oil prices increased to within 50 cents of October's $55.67-a-barrel record. Oil closed Friday at $53.78.
Recent decisions by large airlines to raise fares by up to $20 round trip won't cover the added costs in fuel prices, says consultant David Swierenga of Vienna, Va.
He estimates that continuation of jet-fuel costs at current levels will add $600 million to airlines' operating costs for the January-March quarter, 11% higher than what had been budgeted. Despite an expected increase in passengers, Swierenga now looks for the industry to lose as much as $2.5 billion this year, driving cumulative losses since 2000 to $33 billion.
The surge in oil prices is already having an impact.
A week ago, US Airways, which is operating in bankruptcy protection, quit flying three routes it had just launched from Fort Lauderdale — to San Juan, Puerto Rico, Panama City and San Salvador. US Airways cited fuel costs and weak bookings.
Discount carrier America West has stopped flying three transcontinental routes it launched in fall 2003. "With fuel prices at this level, it didn't make sense to stay in those markets," said spokeswoman Elise Eberwein, who also cited competition from other airlines.
Most big airlines are defenseless against increases in fuel prices because they lack the cash or financial credibility to hedge prices, or to lock in a future price by contract. Neither US Airways nor Delta Air Lines has fuel hedges this year. American has 15% of its fuel hedged this quarter. United, which also is in bankruptcy protection, is 30% hedged this quarter.
Among major airlines, only discount leader Southwest is well protected, with 85% of its fuel this year hedged at $26 a barrel.
The price volatility is worrisome for United, which has been in Chapter 11 for two years and hopes to exit this fall. But with fuel prices rising for reasons beyond the control of any airline, writing an accurate business plan is daunting. United's business plan assumes oil prices in the $40-to-$49-a-barrel range.
Paul Stebbins, CEO of Miami-based fuel marketer World Fuel Services, says airline executives are "anxious and fearful." Jet-fuel prices, he says, are much more likely to rise sharply than to fall sharply.
[size=+1]High jet fuel prices eating away cushions at many carriers
[/size]
[size=-1]11:14 PM CST on Tuesday, March 8, 2005 [/size]
[size=-1]By ERIC TORBENSON / The Dallas Morning News [/size]
Cash is once again becoming a critical issue for major airlines in the face of stubbornly high fuel prices, middling revenue and weak balance sheets.
Oil prices tipped $55 a barrel this week – almost 20 percent more than airlines had expected – pushing jet fuel prices to $1.40 a gallon, compared with less than $1 a year ago.
Airline industry analysts have begun watching cash balances for signs of erosion that might cause the biggest carriers to violate loan terms or face a liquidity crisis.
"At this stage in the economic cycle, airlines should be doing well enough to repair their balance sheets and they're not doing that," said Vaughn Cordle, the chief analyst for AirlineForecasts and an airline pilot. "It really doesn't bode well."
While struggling carriers such as US Airways Inc. and Independence Air Inc. have restructured their finances in recent months, many feel they've only delayed their fates.
Bankrupt US Airways burned through 26 percent of its unrestricted cash just in January – historically most airlines' weakest financial month for cash flow – and faces more hurdles despite getting an investment from Air Wisconsin. US Airways this week cut many of its fares along with United Airlines Inc., also in bankruptcy protection.
"They're doing it to raise cash," said airline consultant Robert W. Mann in Port Washington, N.Y. "They need it right now."
Moves to preserve or raise cash aren't relegated to the bankrupt carriers. Continental Airlines Inc. faced a cash crunch last month before it reached tentative agreements for $500 million in annual labor concessions.
At Delta Air Lines Inc., discussions are under way to sell off one or both of its wholly owned regional subsidiaries, according to comments this week from an executive at SkyWest Airlines Inc., a likely bidder.
"I don't think Delta is up against the wall at this point, but the extra liquidity sure would help," said Ray Neidl, analyst for Calyon Securities in New York.
Trouble ahead
None of the major carriers appears likely to fail or seek bankruptcy protection in coming months as they enjoy the annual surge of ticket revenue from spring and summer travel bookings, analysts said.
Locally, Fort Worth-based American Airlines Inc. says it's comfortable with its cash levels for now, but will probably need to borrow in the future. Dallas-based Southwest Airlines Co. has the industry's strongest balance sheet and a war chest of cash.
But with futures markets pointing toward crude oil staying at or above $50 a barrel, the fall could prove too much for many carriers.
Mr. Cordle predicts reckoning for US Airways, Independence Air, America West Airlines Inc. and possibly Delta by year-end.
By 2006, high fuel costs will have eaten away cash cushions at American and Northwest Airlines Inc., he said.
If oil prices spike to $60 a barrel, few carriers beyond Southwest have the balance sheet strength to take that kind of hit over several months, Mr. Cordle said.
Each dollar increase in a barrel of oil costs the top 13 carriers a combined $300 million. Based on $45 oil, the industry was already on track to lose more than $5 billion, he added.
"The key is really what's going to happen with jet fuel," said airline economist David Swierenga of AeroEcon outside of Washington, D.C. "But it's hard to think about oil prices coming down when they're going up – it's like a psychological barrier."
Strapped for cash, traditional carriers are either going to have to cut more money-losing flights as they've done in the past year or face more difficult confrontations with labor groups for concessions, the consultants said.
"I've got to think this gets much worse before it gets better," said Mr. Mann.
Needing help
With $2.9 billion of that unrestricted cash to ride out the current storm, American says it's not in danger but will need help from Wall Street to make ends meet.
"We feel comfortable with our current level of cash, and unencumbered assets," said spokesman Tim Wagner. "However, with fuel at record high levels, continued downward pressure on fares, and significant debt maturities over the next several years, we believe we will need access to additional funding in order to maintain sufficient liquidity."
American refinanced an $834 million line of credit in December by agreeing to keep at least $1.5 billion in unrestricted cash on hand through September and $1.25 billion on hand after that.
To reduce its cash needs, American has deferred aircraft orders and whittled its capital expenses for coming years. American parent AMR Corp. has a few more planes to mortgage and could always sell its wholly owned regional carrier, American Eagle Airlines, to raise more cash.
The company's more than $20 billion in debt continues to weigh on its finances, and American is expected to lose upwards of $400 million in the current quarter. Despite that, it's in better shape than others.
"It's the old saw that you just have to outrun the other campers, not the bear," said Mr. Mann.
Uneasy airlines anticipate $60-a-barrel oil
Jittery airline executives, having already raised fares and cut flights, are now looking ahead to the possibility of $60-a-barrel oil.
Stuart Klaskin of KKC Aviation Consulting says his airline clients are running financial simulations to anticipate the effects. "You've got to assume the worst case," he says.
Prices have been rising all year. Last week, crude oil prices increased to within 50 cents of October's $55.67-a-barrel record. Oil closed Friday at $53.78.
Recent decisions by large airlines to raise fares by up to $20 round trip won't cover the added costs in fuel prices, says consultant David Swierenga of Vienna, Va.
He estimates that continuation of jet-fuel costs at current levels will add $600 million to airlines' operating costs for the January-March quarter, 11% higher than what had been budgeted. Despite an expected increase in passengers, Swierenga now looks for the industry to lose as much as $2.5 billion this year, driving cumulative losses since 2000 to $33 billion.
The surge in oil prices is already having an impact.
A week ago, US Airways, which is operating in bankruptcy protection, quit flying three routes it had just launched from Fort Lauderdale — to San Juan, Puerto Rico, Panama City and San Salvador. US Airways cited fuel costs and weak bookings.
Discount carrier America West has stopped flying three transcontinental routes it launched in fall 2003. "With fuel prices at this level, it didn't make sense to stay in those markets," said spokeswoman Elise Eberwein, who also cited competition from other airlines.
Most big airlines are defenseless against increases in fuel prices because they lack the cash or financial credibility to hedge prices, or to lock in a future price by contract. Neither US Airways nor Delta Air Lines has fuel hedges this year. American has 15% of its fuel hedged this quarter. United, which also is in bankruptcy protection, is 30% hedged this quarter.
Among major airlines, only discount leader Southwest is well protected, with 85% of its fuel this year hedged at $26 a barrel.
The price volatility is worrisome for United, which has been in Chapter 11 for two years and hopes to exit this fall. But with fuel prices rising for reasons beyond the control of any airline, writing an accurate business plan is daunting. United's business plan assumes oil prices in the $40-to-$49-a-barrel range.
Paul Stebbins, CEO of Miami-based fuel marketer World Fuel Services, says airline executives are "anxious and fearful." Jet-fuel prices, he says, are much more likely to rise sharply than to fall sharply.
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