The Airlines' Recent Death Defying Actions

Not long ago, daily media stories were predicting which major airline would be the first in line to fail. Las Vegas type odds were given to a list of inevitable airline bankruptcies.

There should be no argument the US airline industry is facing unprecedented challenges as they restructure their business models to survive with record high fuel costs and a questionable forward looking global economy.

In reviewing recent 2^nd quarter financial reports, it is obvious cash liquidity has become a very high priority for airline management going into the future.

Using various types of financing initiatives and asset sales, five of the eight largest US Airlines increased their unrestricted cash positions by significant amounts.

In consideration that Delta (DAL) and Northwest (NWA) will acquire approval for their merger by year end, only US Air (LCC) appears to have a potential cash liquidity problem in the near-term. (See table to right.)

In my opinion, the increased cash liquidity and upcoming capacity cuts combined with recent fare increases make predictions of airline failures very premature.

Disclosure: Author holds a long position in AMR

Comments

[CLH:]

Good post. I also own AMR (up 50%). Airlines will not disappear.

2008 Aug 07 07:06 AM

[wooga1:]

this article has some seriously flawed assumptions in it! a company's cash balance is not (by itself) a good indicator of their liquidity. if amr has $11 bil in debt and $5 bil in cash and lcc (us airways) has $3 bil in debt and $2.8 bil in cash who is in better shape??? you infer in your article that amr is in better shape in this scenario because they have more cash. sorry that's not the way it works in the real world of finance. of course, it is even more complicated than that (since lcc leases their planes while amr owns theirs, etc). don't have time to get into that. please be careful when throwing stones at cos like us airways- lots of bad info floating around re: their liquidity situation.

2008 Aug 07 09:58 AM

[SmartGuy:]

Absolutely agree with the POST above, AMR or AA is way worse than LCC or US Airways.

Read the disclosure above, this guy HOLDS MASSIVE AMOUNTS OF AMR!

Just check out their fundamentals in yahoo finance and u will see what I mean. Look at LCC charts, its way underpriced and the BEST VALUE OUT THERE FOR STOCKS.

LCC Strongest Buy

2008 Aug 07 04:59 PM

[SmartGuy:]

I agree with the above two posts!

Just read the headlines for LCC or AA, they are ranked the best on time performance/delays by DOT out of all the major US Carriers!!

Their debt to cash ratio, is wayy better than UAUA, or AA(AMR)!

Smart money wants u to think the others are better, when in reality this is the hidden GEM.

LCC (US Airways) Strong buy right now!!

2008 Aug 07 05:03 PM

[Robert Herbst:]

For some clarification-

Perhaps you are reading more into the short article and cash projections than what is written?

I am in no way -suggesting- any stock long or short. I frequently trade (not invest) in airline stocks. At the time I submitted this article I held a long position in AMR and disclosed this per the editor's disclosure requirement.

As for other applicable metrics for the airlines noted above. There are many. My website provides very detailed current and historical data far beyond what could be included in a short article here.

Specific to the comments above regarding Long-Term Debt/Capital leases the following is derived from the recent 2nd quarter (6/30/2008) SEC filings.

..... LT Debt .. (Debt ratio of Op Rev) .. ( Debt ratio of assets)
(in billions) (revenue is 4 x 2nd quarter)

AA ..... $6.926 ....... (31.6%) ....... (26.7%)
UAL .... $7.190 ....... (39.3%) ........ (33.7%)
DAL .... $8.338 ....... (47.9%) ........ (30.2%)
CAL..... $5.323 ....... (39.4%) ........ (38.5%)
NWA ... $6.849 ....... (50.9%) ........ (32.8%)
SWA ... $2.590 ....... (22.6%) ........ (11.1%)
USAir .. $3.205 ....... (32.6%) ........ (39.7%)
JBLU ... $2.936 ....... (85.4%) ........ (45.4%)

Please draw your own conclusions regarding debt/equity value as it relates to the projected cash positions.

Regards,

Bob Herbst
AirlineFinancials.com

2008 Aug 07 10:42 PM

[shure46:]

I just bought some LCC ( US Air ) at 7.96 , and while I am no number cruncher , I think that was a good price , especially if oil gets under 110 a barrell ....all the airlines would be better off ....I just wish i had loaded up a month or so ago at 3.00 !!!!!! The only thing that is worrisome is war , and oil right now ....this world is so volatile ......I am wondering if this Russian / Georgian conflict is going to hit the stock market .......I have a feeling Monday will be a down day , right out of the opening bell .....we will see .....actually Monday may be another opportunity to buy airlines cheaper if they dip ......

2008 Aug 10 12:16 PM

[Fish Gone Bad:]

Two days ago, JP Morgan recommended people overweigh their portfolios with airline stocks. Today LCC sells 19 million shares plus to Lehman. Is this the old pump-and-dump?

In July when LCC was at $2 and everyone considered it a dog-with-fleas, no one liked it. Today it is Lehman's little darling that everyone should own. A stock being talked up by a brokerage is really creepy.

Once oil is done going down, I am afraid there will be little reason to own this group of companies. Today oil closed at $115 and is headed down as of this comment. Today T. Boone Pickens puts oil's bottom as low as $110, but not $100.

Clark Jenkins
FishGoneBad.com

2008 Aug 14 09:26 PM