U.S. Airlines’ Mad Dash for Cash

Posted by: Justin Bachman on October 01

The scramble for liquidity, which most U.S. airlines embarked upon earlier this year, has gone into overdrive. There’s the global credit freeze, which went from chilly to Arctic-blast-frigid in the span of a few weeks, and the nearly universal prediction that recession is likely to maul the U.S. and much of Europe.

On Oct. 1, United Airlines’ parent UAL Corp. (UAUA) said it had added another $275 million to its cash position though a new aircraft financing deal and by selling assets. That comes atop $1.2 billion in funds the company secured last month from JP Morgan Chase by selling frequent flier miles and reworking the amount of money its credit card-processor retains on ticket sales. United, like some of its rivals, has been caught on the losing end of some fuel hedges as crude oil prices have tumbled nearly $50 per barrel since mid-July. (Crude settled at $98.53 per barrel on Wednesday.) For the third quarter, United had $472 million in unrealized losses from fuel contracts it had taken based on higher crude prices, and estimated two weeks ago that it would post a $225 million fuel hedging loss for the quarter.

Beyond the short-term imperatives to pay employees and to buy jet fuel – the two largest, nearly all-cash outlays for an airline – the effort to boost coffers ahead of the winter reflects the apprehension that business could shrivel quickly.

Throughout 2008, despite the pinch of higher fares, new fuel surcharges and pesky checked-bag fees, demand has proved resilient. And now, with summer gone and airlines parking planes to help goose fares higher, airplane cabins are hardly ghost towns. Yet the fear is real that further violent contractions out of the credit crunch, and economic malaise, could very swiftly send travel demand plunging. A survey released Wednesday found that most people expect to feel some personal financial pain from all this turmoil. “I wouldn’t be surprised, if you’re a legacy airline, that you’re seeing some falloff on international bookings … particularly on the premium end,” says Arne Haak, the chief financial officer of budget carrier AirTran Holdings (AAI).

If the economic climate deteriorates even further, and airlines see demand wane substantially, they could also face a potential hit from the companies that process credit-card transactions for ticket sales. The processors often retain a portion of a fare until the passenger has completed the trip. The “holdback” varies by airline based on the processor’s assessment of the carrier’s financial condition. (Frontier Airlines filed for bankruptcy protection in April after its processor, First Data, got worried and increased the amount of money it retained from sales.) Last week, American tapped a $255 million credit line to boost its unrestricted cash reserves as a way to avoid losing additional income flows from a credit-card processor. Delta crowed recently that it suffers no held funds from its card sales, and cash-rich Southwest probably also is free and clear on this subject. But if the industry experiences a severe downturn, processors could turn nervous and retain a larger portion of such monies.

United is hardly alone in the cash hunt. In August, Delta (DAL) tapped the entire $1 billion from its revolving credit line as it prepares to integrate Northwest Airlines (NWA) next year. On Sept. 18, the largest airline, American parent AMR Corp., (AMR) raised $294 million by selling 27.1 million shares, a month after US Airways (LCC) sold 19 million shares for $179 million in proceeds. Northwest is selling 14 jets, and AirTran has deals for 11 of its jets, and says it will entertain additional offers if the price is right.

AirTran has raised $474 million this year through a combination of activities: it has sold 11 jets, it netted $137 million by selling debt and equity, and in July the Orlando-based carrier arranged a new $150 million credit facility. The company also deferred 22 planes it was scheduled to receive from Boeing this year and next. “There’s a lot of risk out there, there’s a lot of uncertainty,” Haak says. “And our capital structure back in April wasn’t ready for a lot of uncertainty.” The question now, as airlines finish amassing rainy-day funds, is whether they’ll have enough to see them through.