General Lee
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Airline industry flies into liquidity turbulence
Economic headwinds buffet a vulnerable industry, may drain cash reserves
By Christopher Hinton, MarketWatch
Last update: 5:46 p.m. EDT April 4, 2008
NEW YORK (MarketWatch) - As if soaring fuel costs, plunging share prices and heightened safety concerns weren't enough, the U.S. airline industry this week was also roiled by two new bankruptcies, the latest evidence the sector is flying into an increasingly nasty storm.
The bankruptcies, by Aloha Airlines and ATA, were largely the result of high costs and cutthroat competition, a dynamic playing out across the rest of the industry. The demise of the two airlines carries an ominous message for the so-called legacy carriers like United, American and Delta, which have so far withstood the current round of financial buffeting.
"For the rest of the industry, it just highlights the pain that all the carriers are going through right now," said Jim Corridore, an airline analyst with credit rating agency Standard & Poor's. "This is a death by a thousand cuts," he said.
Most of the industry's current problems are not new. For years, a poisonous combination of high costs, overcapacity, ageing fleets and public dissatisfaction has beset U.S. airlines. Now, a financial market meltdown and a weakening economy are chewing into the industry's financial resources and forcing carriers into uncharted territory as they struggle to survive.
$100 oil
At the heart of the matter is the cost of fuel. The price of a barrel of oil is stuck above $100, more than three times what it was five years ago, when oil was trading at around $30 a barrel. Back then, jet fuel prices at American Airlines were about 88 cents a gallon, now American said it's paying $2.64 a gallon.
Over at Delta Air Lines (DALdelta air lines inc del com new
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DAL) , executives said they expect to spend an additional $2 billion this year for fuel.
Indeed, each $1 a barrel increase in the price of oil decreases earnings for the 11 largest carriers by about $200 million, according to data provided by Calyon Securities, a research firm.
Carriers have been trying to keep ahead of the higher costs by raising airfares and adding fuel surcharges, but the new revenue hasn't kept pace and many airlines are starting to dip into their cash reserves. Calyon expects the big network carriers to tap more than a quarter of their collective $19 billion in cash before the end of 2009.
"The network carriers, and most of the low-cost carriers, will survive the weak economic environment and high fuel prices over the next two years," Calyon analyst Ray Neidl said. "However, if high fuel prices and a lackluster economy persist through 2009, cash reserves at many airlines might become a concern."
At the top of the list is American Airlines, where cash reserves as a percentage of estimated revenue are expected to fall to 9.4% in 2009 from 13.3% this year. Close on its tail are Continental (CALContinental Airlines Inc
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CAL) and United Airlines, with cash as a percent of estimated revenue declining 2.8 points and 1.4 points, respectively.
Among the low-cost carriers, Calyon said Frontier Airlines (FRNTfrontier airlines holdings i com
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FRNT) and AirTran Holdings (AAIairtran hldgs inc com
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AAI) subsidiary AirTran Airways could see their cash fall below 10% this year. Some analysts expect Frontier to run out of cash by as early as the end of this year.
If these airlines do find themselves strapped for cash, it will force them to sell assets, park older planes, cut back on their workforce, and reduce the breadth of their business. Further out, it could lead to a complete shut down of operations, as with Aloha and ATA, and some analysts speculate things won't get better for the industry until at least two of the major carriers go under as well.
That's why so many analysts love Southwest Airlines (LUVSouthwest Airlines Co.
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LUV) . The Dallas-based carrier has positive cash flow and is well hedged for higher fuel prices, so it merely has to wait out its weaker rivals to snatch up additional market share.
Also well positioned for the coming recession are Delta and Northwest (NWAnorthwest airls corp com
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NWA) airlines, having just come out of bankruptcy last spring, according to Calyon.
Shakeout coming?
Major carriers have been preparing for a shakeout. United is removing 15 to 20 of its older, less fuel-efficient aircraft from service and is delaying the purchase of new aircraft; AMR has been trying to sell its American Eagle business; and just this week, Northwest Airlines said it would park more of its older aircraft, raise its fuel surcharge for international flights and begin charging $25 for a second checked bag. See related story.
"Over the past several months, the price of oil has risen dramatically to all time highs and there is no reasonable basis to conclude that oil prices will materially decline anytime soon," said Northwest Chief Executive Doug Steenland. "These increased costs are significant and call for a strong response from us."
Dwindling cash reserves will eventually bring credit downgrades, making it harder and more costly for airlines to buy the newer, more fuel efficient aircraft that would bring down their fuel and maintenance costs. Already the major carriers have poor credit ratings.
In fact, one of the rationales behind a Delta-Northwest merger, which the two airlines have been discussing recently, is that the surviving carrier would have stronger balance sheet that could raise its credit rating. That would give the merged airline access to more capital for expansion at less cost and give it the flexibility to park more of its older, more expensive aircraft to reduce capacity and firm up airfares.
Northwest, whose fleet's average age is 20 years, has one of the oldest fleets in the industry and spends almost 7% of its operating revenue on maintenance, materials and repairs.
(the rest of the article deals with mx issues as of late)
Christopher Hinton is a reporter for MarketWatch based in New York.
That highlighted part is important. We need to know what the plans would be with those DC9s before we ever merged, and if we have to use arbitration it would be nice for the arbitrator to know that the DC9s could go away. Otherwise, let's just have 2 seperate contracts, and our pilots will stay with our planes, etc. Sounds fair to me. If their planes are going away, our pilots should not be affected.
Bye Bye--General Lee
Economic headwinds buffet a vulnerable industry, may drain cash reserves
By Christopher Hinton, MarketWatch
Last update: 5:46 p.m. EDT April 4, 2008
NEW YORK (MarketWatch) - As if soaring fuel costs, plunging share prices and heightened safety concerns weren't enough, the U.S. airline industry this week was also roiled by two new bankruptcies, the latest evidence the sector is flying into an increasingly nasty storm.
The bankruptcies, by Aloha Airlines and ATA, were largely the result of high costs and cutthroat competition, a dynamic playing out across the rest of the industry. The demise of the two airlines carries an ominous message for the so-called legacy carriers like United, American and Delta, which have so far withstood the current round of financial buffeting.
"For the rest of the industry, it just highlights the pain that all the carriers are going through right now," said Jim Corridore, an airline analyst with credit rating agency Standard & Poor's. "This is a death by a thousand cuts," he said.
Most of the industry's current problems are not new. For years, a poisonous combination of high costs, overcapacity, ageing fleets and public dissatisfaction has beset U.S. airlines. Now, a financial market meltdown and a weakening economy are chewing into the industry's financial resources and forcing carriers into uncharted territory as they struggle to survive.
$100 oil
At the heart of the matter is the cost of fuel. The price of a barrel of oil is stuck above $100, more than three times what it was five years ago, when oil was trading at around $30 a barrel. Back then, jet fuel prices at American Airlines were about 88 cents a gallon, now American said it's paying $2.64 a gallon.
Over at Delta Air Lines (DALdelta air lines inc del com new
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Delayed quote dataAdd to portfolio
Analyst
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Discuss
Financials
Sponsored by:
DAL) , executives said they expect to spend an additional $2 billion this year for fuel.
Indeed, each $1 a barrel increase in the price of oil decreases earnings for the 11 largest carriers by about $200 million, according to data provided by Calyon Securities, a research firm.
Carriers have been trying to keep ahead of the higher costs by raising airfares and adding fuel surcharges, but the new revenue hasn't kept pace and many airlines are starting to dip into their cash reserves. Calyon expects the big network carriers to tap more than a quarter of their collective $19 billion in cash before the end of 2009.
"The network carriers, and most of the low-cost carriers, will survive the weak economic environment and high fuel prices over the next two years," Calyon analyst Ray Neidl said. "However, if high fuel prices and a lackluster economy persist through 2009, cash reserves at many airlines might become a concern."
At the top of the list is American Airlines, where cash reserves as a percentage of estimated revenue are expected to fall to 9.4% in 2009 from 13.3% this year. Close on its tail are Continental (CALContinental Airlines Inc
News, chart, profile, more
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Analyst
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Financials
Sponsored by:
CAL) and United Airlines, with cash as a percent of estimated revenue declining 2.8 points and 1.4 points, respectively.
Among the low-cost carriers, Calyon said Frontier Airlines (FRNTfrontier airlines holdings i com
News, chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
FRNT) and AirTran Holdings (AAIairtran hldgs inc com
News, chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
AAI) subsidiary AirTran Airways could see their cash fall below 10% this year. Some analysts expect Frontier to run out of cash by as early as the end of this year.
If these airlines do find themselves strapped for cash, it will force them to sell assets, park older planes, cut back on their workforce, and reduce the breadth of their business. Further out, it could lead to a complete shut down of operations, as with Aloha and ATA, and some analysts speculate things won't get better for the industry until at least two of the major carriers go under as well.
That's why so many analysts love Southwest Airlines (LUVSouthwest Airlines Co.
News, chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
LUV) . The Dallas-based carrier has positive cash flow and is well hedged for higher fuel prices, so it merely has to wait out its weaker rivals to snatch up additional market share.
Also well positioned for the coming recession are Delta and Northwest (NWAnorthwest airls corp com
News, chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
NWA) airlines, having just come out of bankruptcy last spring, according to Calyon.
Shakeout coming?
Major carriers have been preparing for a shakeout. United is removing 15 to 20 of its older, less fuel-efficient aircraft from service and is delaying the purchase of new aircraft; AMR has been trying to sell its American Eagle business; and just this week, Northwest Airlines said it would park more of its older aircraft, raise its fuel surcharge for international flights and begin charging $25 for a second checked bag. See related story.
"Over the past several months, the price of oil has risen dramatically to all time highs and there is no reasonable basis to conclude that oil prices will materially decline anytime soon," said Northwest Chief Executive Doug Steenland. "These increased costs are significant and call for a strong response from us."
Dwindling cash reserves will eventually bring credit downgrades, making it harder and more costly for airlines to buy the newer, more fuel efficient aircraft that would bring down their fuel and maintenance costs. Already the major carriers have poor credit ratings.
In fact, one of the rationales behind a Delta-Northwest merger, which the two airlines have been discussing recently, is that the surviving carrier would have stronger balance sheet that could raise its credit rating. That would give the merged airline access to more capital for expansion at less cost and give it the flexibility to park more of its older, more expensive aircraft to reduce capacity and firm up airfares.
Northwest, whose fleet's average age is 20 years, has one of the oldest fleets in the industry and spends almost 7% of its operating revenue on maintenance, materials and repairs.
(the rest of the article deals with mx issues as of late)
Christopher Hinton is a reporter for MarketWatch based in New York.
That highlighted part is important. We need to know what the plans would be with those DC9s before we ever merged, and if we have to use arbitration it would be nice for the arbitrator to know that the DC9s could go away. Otherwise, let's just have 2 seperate contracts, and our pilots will stay with our planes, etc. Sounds fair to me. If their planes are going away, our pilots should not be affected.
Bye Bye--General Lee