Kevin O'Toole/LONDON
US AIRLINES continued their long haul back into profit during the first quarter, although news that Trans World Airlines is heading back into Chapter 11 bankruptcy protection sounds a warning note that the restructuring is not yet over.
TWA says that it has agreed to another short spell in Chapter 11 to help see through its latest financial restructuring. The airline says that the bankruptcy is a technicality, and should last for no more than around two months until the restructuring is complete.
The airline has been holding discussions with its aircraft lessors and bond and shareholders over a plan to exchange around $500 million in debt for new equity, and expects to have final agreement in place by the end of June. TWA will then enter Chapter 11 with its restructuring already agreed.
The aim of this "pre-packaged" bankruptcy is to pre-empt dissent once the plan is in place. Pressure for the move apparently came from the major bondholder groups.
TWA originally emerged from bankruptcy protection at the end of 1993, but has since failed to make profits, and struggled to reduce its $1.8 billion debt. Over the last year, a new management team has begun to prune international capacity and to cut costs and jobs, but benefits have been offset by a continuing plunge in yields.
Another lack-lustre set of results for the most recent quarter has raised concern that the latest bankruptcy filing could be more protracted than expected. Standard & Poor's credit rating agency warns that, if cash flow deteriorates or the bankruptcy process drags on, then the airline "...could face a liquidity shortfall and potentially have to liquidate".
While TWA continues to struggle, Continental Airways and USAir show early signs of re-emerging from the worst of their respective crises.
Continental is looking more focused, having now abandoned its expensive low-cost Lite experiment, and begun to regroup its domestic network around the core Houston and Newark hubs. The group's new strategic Go Forward Plan unveiled at the end of 1994 is largely in place.
Over the past two months, the group has secured a series of important deals covering the deferral of 43 Boeing deliveries, the winding down of operations at Denver, Colorado, and the renegotiation of costly aircraft leases and debt payments. Outstanding talks with lessees should be confirmed by the end of June, says the airline.
Continental's slimming down of operations has already begun to show through in rising passenger yields and falling seat costs, following the example of Northwest, which pulled off a dramatic turnaround in 1994 through a similar reworking of its network around core hubs. The airline also appears to be making great strides in improving its historically poor on-time performance.
Continental suggests that it could now end 1995 showing a small net profit, a prediction backed up by recent analyst estimates. Securities house SG Warburg predicts a modest $12 million net profit this year as it recovers from the low-fares wars.
USAir has also benefited from an easing of the low-cost competition, which has ravaged yields on its high-cost East Coast markets. Although USAir's first-quarter losses remained at $100 million, the carrier points to a strong month-on-month improvement during the period.
Low-cost champion Southwest is also showing scars from the intrusion of aggressive low-fare competition into its West Coast markets, including the United Shuttle. Chairman Herb Kelleher believes that "...the competition has stabilised and, in some cases, receded", highlighting the scrapping of Continental Lite.
He adds that yields have recovered "significantly" since the free fall in the last quarter of 1994, when they dipped below ¢7 per revenue passenger kilometre (RPK). Despite the airline's rapid expansion, Southwest's seat costs have also continued to decrease, keeping it ahead of new rivals.
Meanwhile, the big three carriers continue to hack away at costs. Delta is leading the way with some hefty cuts in seat costs en route to the ultimate goal of ¢4.66/RPK. Chairman Ron Allen says that the airline is "well-positioned" to achieve the next target, which is a unit cost of ¢5.34/RPK in the second quarter. SG Warburg forecasts that Delta could emerge as the most profitable of the major airlines as its cost base falls over the next two years.
Source: Flight International
