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Which Airlines Will Disappear in 2009?


Yes, fuel prices are down, but so is passenger travel, so any new bankruptcies could prove fatal

The airline industry should be entering 2009 with a nice tailwind. Airlines spent most of the past year cutting routes, and employees and tacking on a welter of fees to counter record high fuel prices. Then they lucked out when the cost of jet fuel plunged by two-thirds as 2008 wound down. But operating expenses aren't the only thing that has dropped: Passenger traffic tumbled 10.6% in November, according to Boyd Group, an Evergreen (Colo.) consultant, prompting carriers to slash fares to fill empty seats.

Now, with both business and leisure travel in North America expected to fall as much as 15% this year, the industry may face another round of bankruptcies. Unlike the last spate of failures in the mid-2000s, not every airline may survive. In previous downturns, carriers often used Chapter 11 as a reset button that let them emerge from bankruptcy even stronger by shedding debt and other obligations, such as pensions. To play it safe, big carriers such as American Airlines and US Airways have raised fresh cash. But many airlines have hocked most of their assets, leaving them little to borrow against. "At this point, bankruptcy is liquidation," says Roger E. King, an airline analyst at institutional research firm CreditSights.

"Ill-Equipped for Financial Hardship"

For now, the International Air Transport Assn. expects North American carriers to eke out a $300 million profit in 2009 thanks to capacity cuts and the plunge in fuel costs. That would be a big turnaround from estimated losses of nearly $4 billion in 2008. But a sharp drop in passenger traffic could be enough to put some airlines under. In a Dec. 2 conference call with analysts, executives at General Electric's GE Capital, one of the world's largest lessors of aircraft, said its "base case" for 2009 calls for a 1% to 2% drop in global traffic, which could result in the liquidation of one major global carrier.

If traffic dips 3% worldwide—the IATA expects a 3.6% falloff—a second major airline could liquidate, the GE executives warned. Some airline officials say that scenario isn't farfetched. "You're going to see a massive amount of restructuring in the industry because it is ill-equipped for financial hardship," says Gary C. Kelly, CEO of Southwest Airlines. "The industry has very stretched balance sheets."

The majority of Asian and European carriers should have the wherewithal to weather the recession, except for some startup carriers in India and Italy's state-owned airline, Alitalia, which filed for bankruptcy protection last August. While North American carriers are well ahead of their overseas rivals in pruning capacity, their balance sheets are much weaker. The U.S. industry is still dragging around $95 billion in debt, as much as the rest of the world's carriers combined.

Turbulence for Discounters?

Industry experts say the biggest jolt could be felt by discount carriers like AirTran Airways and JetBlue Airways, which can't downsize as easily as big airlines can. Two majors that could feel the squeeze are US Airways and Air Canada, which lost $1.7 billion and $244 million, respectively, in the first nine months of 2008. The collapse of fuel prices could make them profitable in 2009, but Vaughn Cordle, CEO of AirlineForecasts, an Arlington (Va.) research firm, says they could be in the red again if traffic plummets.

US Airways' woes stem from its inability to integrate operations fully with those of America West Airlines, with which it merged in 2005. As a result, US Airways remains saddled with high costs. Cordle says its cost per average seat mile is still above 8? before fuel costs, vs. 6.8? for Delta Air Lines. And with much of its assets already pledged to creditors, the Tempe (Ariz.) carrier doesn't have much borrowing power left. US Airways says a $950 million refinancing in October helped boost its cash position by $370 million and notes that the new passenger fees are generating $400 million in high-margin revenues. Even if demand falls 10%, says US Airways President J. Scott Kirby, "this could be the most profitable year in the history of the industry."

Air Canada's wounds are somewhat self-inflicted. When the Montreal-based carrier reorganized under bankruptcy in 2004, it created a new parent, ACE Aviation Holdings, to oversee its operations. At the prodding of Cerberus Capital Management and other hedge funds that bought the stock during the bankruptcy, Air Canada spun off its maintenance unit, frequent-flier program, and a regional airline subsidiary to unlock the value of these assets.

While ACE shareholders have seen their stakes rise 265% since 2004, some analysts fear the moves have stripped too much from Air Canada. Now the carrier must come up with $481 million in pension funds in 2009 and can't draw on the cash flow of those spun-off operations. Small wonder Air Canada's A shares have tumbled 87% in the past year, to around $1.30. A spokesman notes that credit markets have been supportive: In December the carrier got $330 million in loans from GE Capital and two banks.

If Air Canada were to hit the skids, analysts believe a big European carrier would swoop in to buy at least some of its assets. In the U.S., however, foreign carriers are barred from taking majority ownership of an airline. That means U.S. carriers can only hope oil prices stay low—and passengers return.

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Chinese Consolidation

A bailout of the airline industry by Beijing could be a boon to Air China, reports the Centre for Asia Pacific Aviation. That's because the government's money would likely come with strings attached, notably requirements that carriers consolidate. The outcome, the research firm notes, "would only be to the carrier's benefit."

To read the full piece, go to http://bx.businessweek.com/airline-bankruptcy/reference

Foust is chief of BusinessWeek's Atlanta bureau. With Justin Bachman in New York

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