In a quarter in which airlines surprised the markets and the markets surprised the airlines, one fact remained as unsurprising as it was unpleasant: US carriers are losing money and show no signs of being able to stem the red ink
The US majors pulled off a few second-quarter surprises, in some cases losing less money than anticipated and in many cases taking major steps to preserve their liquidity. And the third quarter began with fuel prices actually falling.
The biggest surprise was that without special items, Delta Air Lines reported a $137 million profit, despite a more than $1 billion increase in the cost of fuel compared with a year earlier. A year ago, Delta had a $274 million profit excluding special items. But the carrier lost $1 billion in the second quarter, after recording $1.2 billion in special charges for write-downs, severance pay and closing of airport facilities.
But there the not-so-bad bottom-line news ends and the big losses, big cuts news begins. US Airways, which lost $567 million in the third quarter, including non-cash charges, also said it was cutting back again on its flights. It said it would reduce flights by 4% this year, up 1% from its previous announcement, and by 6% in 2009, up 2%. Most of the US Airways cuts are coming domestically. US Airways, which earned $283 million in the 2007 quarter, said it would cut international flights by 1% to 3%.
United Airlines said it suffered a net loss of $2.73 billion, compared with a profit of $274 million in the second quarter a year ago. United has taken the capacity cutting further than others, moving to take planes out of international service - normally the most lucrative type of route. It plans to cut its capacity by 11% in the fourth quarter, including a 16% cut in domestic flying, and a 7% reduction in international flights. For the full year, United's capacity is expected to drop 7.5% to 8.5% compared with 2007. United's chief operating officer, John Tague, said it had a "developing overcapacity in the international marketplace".
The decline in overseas flights is potentially troubling for the majors, but with the price of jet fuel nearly double that of 2007, "the economics of many routes just don't make sense," Tague said during a conference call.
But the important news was that the majors, while continuing cutting, had increased their cash positions as they prepare for a bleak winter. Fitch Ratings analyst Bill Warlick says "unsustainable cash flow trends and eroding liquidity positions" are his main concern. He says that airlines have to take steps now because the chances of using Chapter 11 reorganisation successfully "have now been undermined further by the tightness of global credit markets and lender unwillingness to commit more capital."
At Continental Airlines, for instance, a public offering of 11 million shares of common stock raised $162 million, while the carrier sold its remaining equity stake in Panama's Copa for $149 million. In June, it altered its bankcard agreement with Chase Bank, receiving $413 million. It also closed deals to borrow some $208 million. It ended the second quarter with approximately $3.4 billion in unrestricted cash and short-term investments.
RAISING CAPITAL
At American Airlines, the treasury had $5.5 billion in cash at the end of the second quarter. Chief executive Gerard Arpey says: "We've raised $720 million in financing since the first quarter."
United parent UAL continues to have liquidity and is able to raise capital. In addition to $2.9 billion in unrestricted cash at the end of the June quarter, it has about $3 billion in unencumbered assets - mostly aircraft - it can mortgage. It also bought a number of airliners that it had leased, and more importantly, pre-sold some $600 million in frequent-flyer miles to Chase, while also lowering the holdback the bank makes on United's Mileage plus Affinity Credit card. The holdback drops from $375 million to $25 million, giving United cash and above all, says Roger King of CreditSights, increasing United's credibility with the investment community.
The call-in or holdback from the card issuer is what pushed Denver's Frontier Airlines into bankruptcy in April, when its credit-card issuer increased its holdback to almost 100%.
United also expects the transaction to increase its cash flow by about $200 million over the next two years. "We got what we needed out of that contract," says Brace. "We got a higher price per mile. That was important to us, and the liquidity."
The coronation of the new king, cash, will continue despite the drop in jet fuel prices. The carriers must fall back on cash despite the fuel trend and they are now hoping that the new trinity of falling fuel, falling capacity and a rising economy will combine to keep them alive.
By early August, fuel had tumbled nearly 20%, nowhere near enough to make a real bottom-line difference. Most US carriers based their 2008 business plans on $87 barrel oil, using an Energy Department estimate. But the price of crude oil, which traded below $120 a barrel, would need to fall at least another $20, which is a big drop from the record high of $147.27 per barrel on 11 July.
Capacity cuts will help a lot. According to Innovata schedule data, US domestic capacity will drop by 8.8% in September, compared with the same month a year ago. This is the steepest annual drop since 2001. International capacity is also suffering as some carriers turn year-round service into seasonal flying.
But hotel bookings in the US, says Sabre, are dramatically down on 2007 August levels by as much 500,000, out of a total of about 600,000. Airline, hotel and rental car executives say they see the beginning of a serious demand downturn. So the trinity may still be lacking one major element - better economic fortunes - as winter comes.
Source: Airline Business
