Meltdown 101: Will airlines go bankrupt?

By David Koenig

DALLAS —

Auto companies and airlines are both getting hammered by the recession, but while two of the nation’s major carmakers went into bankruptcy court protection, the leading U.S. carriers are flying above the carnage — for now.

Make no mistake, the airlines are in big trouble, with air traffic in a free fall this year.

Many business travelers — the most profitable customers for an airline — have been grounded. Others have moved from the first-class cabin back to coach.

Leisure travelers have been worried about losing their jobs. To lure nervous vacationers, carriers have slashed summer fares, and experts report some of the cheapest travel prices in years.

All the major U.S. carriers except Southwest lost money last year. The leader of an international airline trade group said last week that worldwide the industry will lose $9 billion this year — nearly double the loss the organization predicted in March.

Still, no major U.S. airline is in bankruptcy court protection. Compare that with the auto industry, where General Motors Corp filed for Chapter 11 protection last month, following in the tire tracks of Chrysler, which sought court protection from creditors in April and was taken over by Italy’s Fiat Group SpA.

Why aren’t airlines in bankruptcy court protection?

“The answer is because they went through bankruptcy in the last downturn, and they’re still benefiting from that,” said Michael Derchin, an analyst for FTN Equity Capital Markets.

Delta Air Lines Inc, United parent UAL Corp and US Airways Group Inc used the bankruptcy-court process to reduce debt and cut labor costs earlier in this decade. They emerged leaner, with fewer liabilities — some dumped pension obligations on the federal government — and with less debt.

American Airlines parent AMR Corp and Continental Airlines Inc avoided Chapter 11 protection but still extracted major wage concessions from unions.

Those moves put the airlines in better shape to survive when the current recession hit last year. Meanwhile, GM and Chrysler were saddled with high costs, such as a contract provision under which the carmakers pay many union workers up to two years of wages even after their plants are idled.

What are the airlines doing to avoid Chapter 11?

Stocking cash. Southwest Airlines Co has raised nearly $1.4 billion since the third quarter of last year, pushing its unrestricted-cash kitty to $2.3 billion. It sold several jets and leased them back.

US Airways Group Inc, which many analysts say has a weaker balance sheet than other carriers, and JetBlue Airways Corp raised money in recent weeks by selling debt that can be converted to stock.

“Traditionally airlines didn’t hoard a lot of cash, they just kept enough for contingencies,” Derchin said. But after the 2001 terror attacks, and record-high fuel prices and a recession in the last two years, “these guys are paranoid — with good reason.”

Even the weaker carriers are likely to get through this year, said Bill Warlick, an analyst with Fitch Ratings, “but it’s going to be tight for a couple of the carriers.”

Warlick rates UAL, US Airways and AMR as the most troubled when measured by cash reserves as a percentage of annual revenue. He puts Continental and Delta next, with the low-cost carriers such as Southwest in better shape, partly because they’re not exposed to the weak international-travel market.

Hunter Keay, an analyst with Stifel Nicolaus & Co, warned that airlines can burn through cash quickly, especially if oil and jet fuel prices keep rising and credit markets remain closed off.

“Sure, the cash balances look OK now,” Keay said, “but they really need to generate good cash flow this summer to get through the back half of the year, which is looking very weak.”

Jet fuel is much cheaper than it was a year ago, so why are the airlines struggling?

Revenue has fallen because traffic is down, especially the treasured business travelers who used to fly first-class.

Continental Airlines Inc. CEO Larry Kellner said the decline in business travelers in the front cabin caused airlines to cut leisure fares to fill the empty seats. The result, he said, was that revenue per passenger came under pressure in both the front and back of the plane.

Southwest CEO Gary Kelly said his airline is selling fewer full-fare tickets and fewer short-haul flights — both signs of depressed demand among business travelers.

“I’m not expecting things to improve based on what we’re seeing right now,” he said Thursday.

How are airlines responding to the downturn in travel?

They’re shrinking. Delta and American announced this month that they’ll make even deeper capacity cuts — offering fewer flights or using smaller planes — once the peak summer vacation season is over. Continental hinted it will make a decision in about a month, and analysts say they expect United will too.

How can shrinking help an airline’s bottom line?

First, it saves money. When airlines ground planes, they don’t burn as much fuel and they don’t pay flight crews.

And when airlines cut capacity they hope to trade volume for higher prices. As the supply of airline seats shrinks, it tends to drive fares higher — at least in theory.

In the past year, U.S. airlines have eliminated hundreds of flights, but fares haven’t risen because traffic fell faster than capacity.

Keay, the airline analyst, said airlines need to cut even more flights before they regain pricing power. But he doubts the carriers are disciplined enough to carry through — they are tempted to add flights to gain market share.

Will airlines cut more jobs?

Yes. Fewer flights means less need for pilots, flight attendants and mechanics. American said this week that it would cut at least 1,600 jobs because it will eliminate more flights beginning in late August.

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10 Comments

pointofview at 09:38 AM JST - 23rd June

Airline services have become worse. You have to pay for everything now while onboard and the unionized staff are rude. Also, the unions are demanding too much: More and more benefits when they are already better than most other industries and ridiculous pay hikes. All comes down to the bucks.
nisegaijin at 10:11 AM JST - 23rd June

If they become less regulated, some may survive. Too many costs are implemented because of government stupidity.

they should cut amounts of flights, then cut quality of service, cut compensation for delayed or cancel flights such as staying at hotels and meals, and so on.

I mean nothing is more pleasant for a passenger than to get on a half empty flight, but in reality those hurt airlines like hell. Airlines should be able to re-arrange flight schedules so they get more people on one flight. Regulations don't allow that, so they are loosing money.
timtak at 10:42 AM JST - 23rd June

Why is it that Japantoday keeps posting news about US airlines. From the heading I thought this would be about Japanese airlines. If you are going to write about a non-Japan related country then at least put that country name in the title.
sf2k at 11:22 AM JST - 23rd June

Actually airlines in Japan are not fueled from Japan but from Middle East imports. Japan isn't alone in this, and is the fate of all of us. Note that there is zero jet fuel replacement (in equivalent megajoules per gallon) so as oil becomes less available eventually they will just make airlines implode irrespective of their national origin. It's just a matter of time.

On a side note, given the amount of kerosene in use in Japan for general heating, there will also be a domestic competition for the making of jet oil fuels instead of kerosene or vice versa? I think people given a choice would want heating oil. As stocks go down this will be a challenge.

Dozens of airlines go under every year according to Wikipedia, so for a major carrier to go down won't be long now. Given the costs in Japan for imports that might make for a telling comparison.

Funny enough, it will be the airlines themselves who will beg to be taken over by the government, and in all but the USA that will probably happen.

Oil is dropping by 3-5% per year. (IEA Paris Nov '08) Eventually airlines have to cut down under the pressure at some point.

Before the next decade ends, (Not long now) it'll be trains for continental travel, then planes over water or back to ships. Japan and Europe are okay here, with genreal trains and shinkansen/TGV currently taking up far more percentages of personal travel than in North America since they are not taken over by the car.

Trains can also be electrified reducing the need for diesel oils. With oil dropping, any system electrified will be out of the demand/supply loop stabalizing services. Thus a drop will encourage more electrification.

I wonder though about Australia and New Zealand given their remote locations. Are thus more likely to have gov't controlled airlines as a matter of public need.

Anyway, it doesn't matter, once the airlines go, Peak Oil will be well underway and should be considered the canaries in the coal mine.

You have seen End of Suburbia documentary right? Go rent it or bittorrent it now. You'll be glad you did.
vajra at 11:25 AM JST - 23rd June

Nobody in US wants to travel due to crashes, fears of terrorism, and getting stuck on planes for hours .
Monoflow at 04:44 PM JST - 23rd June

What's the problem to resize the whole airline and travel industry?... A little step back to the basics should do it for mankind...
sydenham at 07:14 AM JST - 24th June

How can shrinking help an airline’s bottom line?

First, it saves money.

wow. the fact that this question needed to be asked shows the appalling state of today's business world.

you mean they can't just keep expanding forever in order to turn a profit? Lol!
Mittsu at 02:07 PM JST - 24th June

some should go bust so the survivors can make good money providing good services
rajakumar at 07:19 AM JST - 25th June

There is too many airlines,the good efficient ones must get bigger. The efficient ones, must buy up the shares of other struggling airlines.

Just like in any other business,same rules of buy up apply in airlines business.
Stereofreak at 01:47 AM JST - 4th July

Nisegaijin

"they should cut amounts of flights, then cut quality of service, cut compensation for delayed or cancel flights such as staying at hotels and meals, and so on."

I trust you either work for an airline or never have had your flight cancelled and do not shirk at the sight of masses of people sleeping in the airport, sometimes for days, unsure whether they'll be able to travel because of airline mismanagement.

If a customer pays for a ticket, he deserves to receive the service that he has paid for EXACTLY as he has bought it. If they airline cancels a flight at the last minute, OF COURSE they should be held responsible for the harm inflicted upon their customers. Why should they suffer because the airline is trying to save a few bucks? Regulation for this kind of thing is good, it protects consumers from airlines taking advantage of their customers.