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 BusinessWeek makes the doom and gloom case for airlines, breathlessly naming US Airways Group Inc., AirTran Holdings Inc., JetBlue Airways Corp. and Air Canada as candidates for liquidation in 2009. Maybe so. Despite the magazine's proclamations, there is ample reason for investors and passengers alike not to run from those carriers just yet.
The magazine's case is a simple one, and on the surface tough to argue with: If global traffic dips by just percentage points in 2009 as the result of the recession, airlines will eventually run into cash flow troubles. With much of the fat cut from rounds of bankruptcies and restructurings and many airlines already levered up, it is fair to argue that Chapter 11 would be of little use, and a liquidation would be more likely.
But understand that doomsday scenario is still a good way's off. While these factors could surely stand in the way of the industry reaping strong profits thanks to declining oil prices, it still feels early to start looking for bodies. The piece mentions AirTran and JetBlue in only one sentence, arguing that because these discounters are smaller they can not downsize as easily as big airlines can. True, but those airlines also have relatively low costs and proved last year when gas prices were spiking they had the ability to sell parts of their young fleet and future delivery slots to raise cash and slow expansion. While a prolonged downturn could prompt either airline to seek a partner, a bankruptcy filing or liquidation seems far away. Oddly, the piece does not mention Frontier Airlines, a discounter who is in Chapter 11 protection and could find it tough to emerge if the credit crunch makes exit financing hard to come by. US Air, meanwhile, is slammed for its lingering inability to fully integrate its 2005 merger with America West, with the airline's pilot groups still fighting over seniority. The integration fight is a headache and a black eye, and the airline, the smallest of the legacy carriers, could be at a competitive disadvantage if traffic does fall off a cliff for an extended amount of time. But there are a lot of "ifs" there. And meanwhile US Airways' December load factor, an industry measure of how many seats are filled, came in better than rivals. The company also has significant cash in the bank. Company president Scott Kirby rebuts BusinessWeek by saying that even if demand falls 10% in 2009, the restructuring efforts completed by airlines could make this "the most profitable year in the history of the industry." Finally Air Canada is pinged because it must come up with nearly $500 million in pension contributions in 2009. The company has faced criticism because it has spun out many assets including its maintenance unit, regional affiliates and frequent flier program, moves the magazine feels could make it tough for the airline to quickly come up with new cash. Interestingly, BusinessWeek sees an out for Air Canada at least. "If Air Canada were to hit the skids," the magazine says, "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." Alas, however, Canadian law also limits foreign ownership, but to a more generous 49% stake -- almost twice the U.S. limit. And JetBlue, it should be remembered, sold a minority stake to Deustche Lufthansa AG last year to raise cash. So while U.S. carriers surely will hope that oil prices stay low and passengers return, it seems airlines north and south have options before falling into liquidation. - Lou Whiteman See BusinessWeek piece See report on US Airways See Dealwatch: Airlines Categories Deal Video
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