America’s airline industry, after having all the legacy carriers except American Airlines visit the bankruptcy courts, is predicted to be headed back to the bankruptcy trough if oil prices don’t keep dropping.
Fitch Ratings is predicting rising energy prices and weak cash flow may result in “multiple bankruptcies and liquidation” for U.S. airlines in 2009. Fitch said it expects all major U.S. air carriers will experience “rapid erosion” of cash levels after the U.S. Labor Day holiday following the summer travel season.
“The U.S. industry’s current structure is unsustainable in the current fuel environment,” William Warlick, a senior director at Fitch, said in the report.
“The sheer magnitude of increasing energy prices and resulting weak cash flows make further industry consolidation unworkable,” the report said. “Over the second half of 2008, more forced take-out of domestic capacity is likely as ongoing fuel cost pressures drain liquidity to distressed levels at all but the most cash-rich carriers.”
If only one agency or a couple of rouge analysts were making these predictions, they could be dismissed, however, the persistent bankruptcy predictions have been dodging the airline industry for the past several months. Back in May Tripso.com reported on a bankruptcy list betting on who would be the first to file. I started the bankruptcy approach with a column about United Airlines and how bankruptcy there could solve many of the other airline woes.
Only this week, the Wall Street Journal blog began a thread about which airlines will face a “cash pinch” in 2009. The WSJ blog mentioned a report by USB analyst, Kevin Crissey, discussing a “liquidity crisis.”
Such a “liquidity crisis” or “liquidity event” refers to the point at which a company’s ability to pay its bills and continue operations comes into question. Crissey’s analysis is a measure of carriers’ ability to weather the rough conditions that currently face the industry.
By these metrics, UBS says US Airways and Air Tran top the list of carriers most likely to face a cash pinch, putting the likelihood for either at 59%.
Adding fuel to the fire, United Airlines, Northwest Airlines and US Airways just announced massive losses and more downsizing. It seems that the management, even while vehemently denying that there is any cash crunch are cutting line workers and executives as quickly as possible.
These discussions at the highest levels of stock market analysts underscore the precarious predicament in which legacy carriers now find themselves when faced with (no-so-hard-to-predict) high fuel prices after decades of poor management and a semi-oligopolistic business environment.
In closing, here is the list of endangered airlines and the percent chance of a “liquidity crisis” presented by USB in the WSJ blog.
American Airlines 29%
Continental 14%
Delta 18%
Northwest 11%
United 20%
US Airways 59%
Air Tran 59%
Jet Blue 17%
Charlie Leocha is the President of Travelers United. He has been working in Washington, DC, for the past 14 years with Congress, the Department of Transportation, and industry stakeholders on travel issues. He was the first consumer representative to the Advisory Committee for Aviation Consumer Protections appointed by the Secretary of Transportation from 2012 through 2018.
