Will These Airlines Face Bankruptcy in 2009?

Deepening economic strife is starting to erode financial viability in many industries. Foremost among them is the airline industry, according to Giovanni Bisignani, CEO of the International Air Transport Association. He indicated that 2009 was shaping up to be worse for airlines than the period immediately following the attack on the World Trade Center in 2001.

Most major airlines are reporting rapidly diminishing travellers, and have resorted to fare cuts and flight suspensions to counter the effect of the lost revenue, a situation that can only worsen the plight of the companies in the long term. The question is, which airlines are likely to fall first?

Air Canada [TSX:AC], Canada's national airline, has seen bankruptcy rumours swirling increasingly as it fights to remain viable, mostly due to a huge debt load and massive pension obligations. An analyst at Research Capital suggested that the firm needed to reduce its domestic routes by as much as 57 percent and global routes by 53 percent.

United Airlines, (NYSE:UAUA) which emerged from bankruptcy protection in February 2006, is looking increasingly questionable as well - especially as it negotiates with 16,000 flight attendants for improved contract conditions.

In its 2008 annual report, it said, "During 2008, UAL’s management and its Board of Directors were active in adjusting the Company’s operational plans in response to difficult industry conditions and the weakening global economy. Unprecedented increases in jet fuel prices during 2008 had a significant negative impact on our results of operations and were one of the leading factors that prompted the development of the Company’s operational plans, as described in Note 2, “Company Operational Plans,” in Combined Notes to Consolidated Financial Statements."

Meanwhile, Gary Kelly, CEO of Southwest Airlines (NYSE:LUV) took a 10 percent voluntary cut in pay, citing tough market conditions and the company's irst quarter results. The company reported a profit in 2008 depsite losses during the second half of the year. Q109 results saw a loss of US$91 million.

Most industry observers, however, think that low cost thrift airlines like Southwest will fare better in the continuing contracting economy than will the larger traditional carriers.

American Airlines (NYSE: AMR) Chief Executive Gerard Arpey suggested to listeners on a conference call last week that he thinks revenues have stabilized and his "gut feeling" was that conditions were improving, in stark contrast to reality.

All in all, the entire airline industry looks quite shaky, and we predict that there will be several major filings for Chapter 11 protection by the end of 2009.

Allegiant, a small airline focused on the leisure traveler, said Tuesday that its first-quarter earnings would come in higher than analysts had been forecasting.

The next morning, SkyWest, a regional carrier, said its first-quarter results would fall short of Wall Street’s expectations.

Disclosure: No positions

Comments

[widget:]

So, exactly what qualifications does one need to become part of this community. Mr. West's prognosis contains no analysis of each companies financial condition or business model going forward. He uses old '08 numbers as a basis for forward looking estimates, and never once considers costs in '09 versus a year ago.

Does anyone out there really think UAL's bankruptcy teeters on it's negotiations with the flight attendants?

2009 will be a tough year for airlines because of two things: revenue generation and liquidity. Good business models will survive and bad ones won't. Can I be an expert, now, too?

Apr 19 08:51 AM

[notsosmart:]

if you want to become a millionaire,start out as a billionaire & invest in airlines.(per the owner of virgin).

Apr 19 10:27 AM

[fromthefloor:]

all I ever hear is that airline labor rates are too high or their pensions have to go. Blame the employees. The airlines have been mismanaged for a long time, since deregulation. The bean counters have taken all the profits from the industry and left us with no future. Passengers are treated better at a fast food restaurant than on most of the airlines. The price of a plane ticket has not seen an adjustment for inflation in two decades. All these extra charges for bags and food are back door ways to adjust for not raising the ticket price is BS. You what cheap, take a bus. Most passengers dress for that today. Just keep paying CEO,CFO and all the other white collar criminals their bloated pay and bonuses and when they fail let's give them a golden parachute. Even in bankruptcy all the focus goes to attack labor. While management gets retention bonuses from the courts. It seems to me that maybe we should start looking at the people that are spending the airline's money and not the people that are keeping the airline flying.

Apr 19 11:44 AM

[TxPublisher:]

What a bunch of garbage! What do you pay this guy to write for you $7.00 an hour. His article said nothing and shed no light on anything. What a waste of space.

Apr 19 12:14 PM

[VincenzoUno:]

Since deregulation, the airlines have been unable to post profits due to excess capicity and excess top management pay. There should be a return to at least some government regulation. Fares, route structure, and capacity should be controlled. Wages for employees should be a living wage, not starvation wages as it is now for any junior staff.
Top executive pay should be capped based on performance. If the senior executives now in place don't agree with that I am sure there are plenty of new MBA's on the market who would love to make half or 40% of current top management salary.
There needs to be new blood at the top, less greed at the top, and more compassion for the workers and traveling public.

Apr 19 04:14 PM

[Robert Herbst:]

Some facts for the US airline industry-

In the 30 years since the 1978 US Airline Deregulation.

19 years had positive operating income.

16 years had net profits.

From 1995 - 2000 (6 years) there was $22.9 billion in net profits and nearly double that in operating income.

Since 1950, there have only been two time periods where the airline industry has experienced major losses (1990-1993 and 2001-2005)

Source: ATA

Robert Herbst
Airline Financials.com

Apr 19 10:58 PM