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Airlines may be in for a stormy winter
[size=+1]Carriers could run low on cash and seek shelter in Chapter 11 [/size]
[size=-1]05:58 PM CDT on Saturday, August 28, 2004 [/size]
[size=-1]By ERIC TORBENSON / The Dallas Morning News [/size]
The airline industry's grim reaper could have a busy winter.
Nearly half the nation's seat capacity could be flown by carriers operating under Chapter 11 protection, if Delta Air Lines Inc. and US Airways Group join United Airlines in bankruptcy court.
Northwest Airlines Inc. is also restructuring and says it badly needs employee concessions to compete, though it hasn't threatened bankruptcy.
"There's a lot of change to come," said consultant Stuart Klaskin of Klaskin Kushner & Co. in Miami.
Profits have always been hard to come by for airlines, but these times are particularly hard because of the rising influence of discount carriers and skyrocketing fuel costs.
What's more, the airlines' traditional lean season is about to start. Every spring, airlines collect a swell of cash as travelers book trips for the summer. But after Labor Day, traffic drops sharply.
Carriers feel the effects of lower cash flow weeks before the unofficial end of summer.
And airlines that have worked diligently this year to bulk up reserves will see those levels start to dip because their ability to borrow is limited. Most have hocked their fleets, spare parts and even their headquarters buildings.
Cash has always been king for airlines, but that's more true than ever, analysts say. Even discounters such as ATA Airlines Inc., which overextended itself during an expansion, could end up on the auction block.
"For all the airlines, cash flow isn't what they had anticipated earlier this year," said Dan Kasper of LECG in Cambridge, Mass. "Fuel prices have been a tremendous squeeze on their finances."
Collectively, the largest carriers will spend $6 billion more for fuel this year than in 2003, according to the Air Transport Association.
"No one could have predicted this," Mr. Kasper said.
Misery has company
Not since Eastern Airlines and Pan Am World Airways failed more than a decade ago have so many carriers been in peril at the same time.
Delta told investors this month that it burned through $700 million in six months and expects to lose cash at the same rate for the year's second half.
At that pace, the nation's No. 3 carrier would see its reserves dip below the crucial $1.5 billion threshold by November, a level that analyst Ray Neidl of Blaylock & Partners figures would trigger a bankruptcy filing.
"They can't let it get below that or they're going to lose control and may have no choice but to file," he said.
Delta's board of directors is mulling an ambitious makeover plan from chief executive Gerald Grinstein, one that could shrink or even end Delta's hub operations at Dallas/Fort Worth International Airport. For the most part, the company has declined to discuss details of the plan.
US Airways has it even tougher in coming weeks. The airline faces the end of financing agreements on airplane leases and a huge pension payment that it has asked the Internal Revenue Service to defer.
The carrier, based in Arlington, Va., has set September deadlines to win $800 million in annual cost cuts, part of a broader effort to trim $1.5 billion from its yearly expenses. Talks with its pilots' union broke down last week; its mechanics' union refuses to discuss more cuts.
Airline officials say they need a new cost structure. US Airways' chairman has talked openly this month about the prospect of liquidation, a thought quickly rejected by the carrier's chief executive.
"People don't seem to realize that they could wake up one morning and see headlines in the paper that say 'It's all over' for US Airways," said Kevin P. Mitchell of the Business Travel Coalition, which represents corporate travelers. "It could really happen this time."
Many industry watchers, including Mr. Klaskin, expect US Airways to disappear next year.
"I can't see how they don't go back into bankruptcy," he said. "And I don't see how they're going to get any money to get back out."
US Airways' alliance partner, United, will have been in bankruptcy for two years this December and has no clear prospects for emerging, analysts say.
United's struggles are being watched throughout the industry because the carrier is expected to terminate its defined benefit pension plans as part of its reorganization. If that happens, taxpayers may have to pick up the bill.
A bankruptcy judge has given United's management a month to work out a plan with employees.
Ending the plans could also set off a domino effect among carriers with pension plans, including American Airlines Inc.
"Most wouldn't have any other choice but to follow United," said Mr. Kasper, the LECG consultant. "They can't run at that much of a cost disadvantage."
American coasting
Fort Worth-based American has already made painful cuts after teetering on the brink last year. But many industry experts believe the world's largest airline still faces more restructuring.
With $3.4 billion in unrestricted cash, American has the largest bankroll of any carrier. Chief financial officer James Beer prefers to measure cash as a percentage of total revenue, putting American near Continental Airlines Inc.'s cash hoard of about $1.73 billion.
"We're pretty comfortable about where things sit at the moment," Mr. Beer told analysts recently. The airline has some ideas on whittling its $22 billion in debt and aircraft lease obligations but won't say how it might use the cash.
American's concern is that while it showed a modest $6 million profit in the second quarter, it won't make nearly enough money in coming quarters to service its mountain of debt.
One debt analyst, Mark Streeter of J.P. Morgan Chase, even said in a report this month that American wasn't being "honest" with its employees about the need for more restructuring, a charge American flatly denies.
"We have the lowest costs of any of the network carriers, and we've met our pension obligations," said spokesman Tim Wagner. Chief executive and chairman Gerard Arpey has said repeatedly that further concession talks aren't planned.
Analysts give American good marks for getting the hard work done before Delta. But they aren't sure the fixes so far give American any long-term edge.
"Yes, they have some advantages right now," Mr. Kasper said. "But I don't think their changes guarantee their long-term survival."
Consumers may not care about the financial health of the airlines they fly on, and most of the industry tumult has been invisible to passengers. Some believe turmoil may help the quality of in-flight service.
"I had some of the best service ever on Eastern Airlines right before it went under," Mr. Kasper said. "A lot of that had to do with employees accepting there was a need to be at their best."
While it's clear that major carriers are in upheaval, it's hard to say whether the current troubles represent the latest in a series of restructurings – or perhaps the prelude to a more stable industry.
Even if oil prices were to recede dramatically, airline costs are still too high, Mr. Kasper said. "It doesn't change the fact that the house is still on fire – the fuel prices were just gasoline thrown on the fire," he said.
And the fate of US Airways, Delta and United may not settle the playing field.
"I think we're seeing the last of the pre-shocks," said Mr. Klaskin. "This is definitely a restructuring wave that moves us further downstream toward what the industry's really going to look like in the future. But if I were a betting person, I'd say this is still short of the perfect storm that's going to create lasting change that we really need."
[size=+1]Carriers could run low on cash and seek shelter in Chapter 11 [/size]
[size=-1]05:58 PM CDT on Saturday, August 28, 2004 [/size]
[size=-1]By ERIC TORBENSON / The Dallas Morning News [/size]
The airline industry's grim reaper could have a busy winter.
Nearly half the nation's seat capacity could be flown by carriers operating under Chapter 11 protection, if Delta Air Lines Inc. and US Airways Group join United Airlines in bankruptcy court.
Northwest Airlines Inc. is also restructuring and says it badly needs employee concessions to compete, though it hasn't threatened bankruptcy.
"There's a lot of change to come," said consultant Stuart Klaskin of Klaskin Kushner & Co. in Miami.
Profits have always been hard to come by for airlines, but these times are particularly hard because of the rising influence of discount carriers and skyrocketing fuel costs.
What's more, the airlines' traditional lean season is about to start. Every spring, airlines collect a swell of cash as travelers book trips for the summer. But after Labor Day, traffic drops sharply.
Carriers feel the effects of lower cash flow weeks before the unofficial end of summer.
And airlines that have worked diligently this year to bulk up reserves will see those levels start to dip because their ability to borrow is limited. Most have hocked their fleets, spare parts and even their headquarters buildings.
Cash has always been king for airlines, but that's more true than ever, analysts say. Even discounters such as ATA Airlines Inc., which overextended itself during an expansion, could end up on the auction block.
"For all the airlines, cash flow isn't what they had anticipated earlier this year," said Dan Kasper of LECG in Cambridge, Mass. "Fuel prices have been a tremendous squeeze on their finances."
Collectively, the largest carriers will spend $6 billion more for fuel this year than in 2003, according to the Air Transport Association.
"No one could have predicted this," Mr. Kasper said.
Misery has company
Not since Eastern Airlines and Pan Am World Airways failed more than a decade ago have so many carriers been in peril at the same time.
Delta told investors this month that it burned through $700 million in six months and expects to lose cash at the same rate for the year's second half.
At that pace, the nation's No. 3 carrier would see its reserves dip below the crucial $1.5 billion threshold by November, a level that analyst Ray Neidl of Blaylock & Partners figures would trigger a bankruptcy filing.
"They can't let it get below that or they're going to lose control and may have no choice but to file," he said.
Delta's board of directors is mulling an ambitious makeover plan from chief executive Gerald Grinstein, one that could shrink or even end Delta's hub operations at Dallas/Fort Worth International Airport. For the most part, the company has declined to discuss details of the plan.
US Airways has it even tougher in coming weeks. The airline faces the end of financing agreements on airplane leases and a huge pension payment that it has asked the Internal Revenue Service to defer.
The carrier, based in Arlington, Va., has set September deadlines to win $800 million in annual cost cuts, part of a broader effort to trim $1.5 billion from its yearly expenses. Talks with its pilots' union broke down last week; its mechanics' union refuses to discuss more cuts.
Airline officials say they need a new cost structure. US Airways' chairman has talked openly this month about the prospect of liquidation, a thought quickly rejected by the carrier's chief executive.
"People don't seem to realize that they could wake up one morning and see headlines in the paper that say 'It's all over' for US Airways," said Kevin P. Mitchell of the Business Travel Coalition, which represents corporate travelers. "It could really happen this time."
Many industry watchers, including Mr. Klaskin, expect US Airways to disappear next year.
"I can't see how they don't go back into bankruptcy," he said. "And I don't see how they're going to get any money to get back out."
US Airways' alliance partner, United, will have been in bankruptcy for two years this December and has no clear prospects for emerging, analysts say.
United's struggles are being watched throughout the industry because the carrier is expected to terminate its defined benefit pension plans as part of its reorganization. If that happens, taxpayers may have to pick up the bill.
A bankruptcy judge has given United's management a month to work out a plan with employees.
Ending the plans could also set off a domino effect among carriers with pension plans, including American Airlines Inc.
"Most wouldn't have any other choice but to follow United," said Mr. Kasper, the LECG consultant. "They can't run at that much of a cost disadvantage."
American coasting
Fort Worth-based American has already made painful cuts after teetering on the brink last year. But many industry experts believe the world's largest airline still faces more restructuring.
With $3.4 billion in unrestricted cash, American has the largest bankroll of any carrier. Chief financial officer James Beer prefers to measure cash as a percentage of total revenue, putting American near Continental Airlines Inc.'s cash hoard of about $1.73 billion.
"We're pretty comfortable about where things sit at the moment," Mr. Beer told analysts recently. The airline has some ideas on whittling its $22 billion in debt and aircraft lease obligations but won't say how it might use the cash.
American's concern is that while it showed a modest $6 million profit in the second quarter, it won't make nearly enough money in coming quarters to service its mountain of debt.
One debt analyst, Mark Streeter of J.P. Morgan Chase, even said in a report this month that American wasn't being "honest" with its employees about the need for more restructuring, a charge American flatly denies.
"We have the lowest costs of any of the network carriers, and we've met our pension obligations," said spokesman Tim Wagner. Chief executive and chairman Gerard Arpey has said repeatedly that further concession talks aren't planned.
Analysts give American good marks for getting the hard work done before Delta. But they aren't sure the fixes so far give American any long-term edge.
"Yes, they have some advantages right now," Mr. Kasper said. "But I don't think their changes guarantee their long-term survival."
Consumers may not care about the financial health of the airlines they fly on, and most of the industry tumult has been invisible to passengers. Some believe turmoil may help the quality of in-flight service.
"I had some of the best service ever on Eastern Airlines right before it went under," Mr. Kasper said. "A lot of that had to do with employees accepting there was a need to be at their best."
While it's clear that major carriers are in upheaval, it's hard to say whether the current troubles represent the latest in a series of restructurings – or perhaps the prelude to a more stable industry.
Even if oil prices were to recede dramatically, airline costs are still too high, Mr. Kasper said. "It doesn't change the fact that the house is still on fire – the fuel prices were just gasoline thrown on the fire," he said.
And the fate of US Airways, Delta and United may not settle the playing field.
"I think we're seeing the last of the pre-shocks," said Mr. Klaskin. "This is definitely a restructuring wave that moves us further downstream toward what the industry's really going to look like in the future. But if I were a betting person, I'd say this is still short of the perfect storm that's going to create lasting change that we really need."
