Airlines cut fares to get more passengers on planes and salvage the summer travel season, but now their job gets harder heading into the slower fall and winter months.
The nine largest U.S. carriers lost nearly $600 million in the second quarter of this year. Bigger losses are predicted in the third and fourth quarters, and some analysts have raised the possibility of another round of bankruptcies.
America's airlines have been in a defensive crouch for two years. They've cut flights and fired workers first to absorb rising fuel prices, then to ride out the recession. But revenue is down one-fifth or more from a year ago at the four largest carriers.
Because they've cut costs, sold new stock and borrowed money, the airlines have plenty of cash for now. But even in good years, airlines build cash during the busy summer travel period, which ends around Labor Day in early September, to get through the slower months.
Airlines need enough cash to pay employees, buy fuel and pay other bills, including payments on the money they've borrowed. If cash falls too low, they can be pushed into bankruptcy protection, as happened earlier this decade with Delta, United, Northwest and US Airways.
United, US Airways and American are often mentioned as the airlines in the most precarious financial positions. They rely on business travelers who pay hundreds of dollars per ticket to sit in first-class. Many of those people are grounded or flying in cheaper coach seats due to the recession. Meanwhile fuel costs, although lower than last year's record levels, have been rising. The spot price of jet fuel has jumped about 70 percent since March.
One leading analyst, JPMorgan's Jamie Baker, estimates that by the fourth quarter, American Airlines parent AMR Corp. will burn more than $11 million a day, while United Airlines' parent UAL Corp. will be going through $7 million a day.
As of June 30, AMR had about $2.8 billion in unrestricted cash and short-term investments, UAL had $2.6 billion, and US Airways had about $1.7 billion. If Baker is right about how much cash they'll burn this winter, all three will have a thinner cash cushion than did the carriers who filed for bankruptcy protection in 2004 and 2005.
United and US Airways were among several airlines that made bankruptcy protection filings from 2001 through 2005. They used bankruptcy to shed debt and lower labor and pension costs.
Standard & Poor's analyst Philip Baggaley says, however, that the two have little to gain by doing it again and would face "more risk that if they go into bankruptcy they might not come out." That's because they might not find the financing they would need in the current tight credit market.
In most airline bankruptcies, the carriers have kept flying and passengers hardly noticed any difference. In the worst case liquidation employees would lose their jobs, shareholders would lose their investments, and stranded travelers could be forced to ask their credit card company for ticket refunds.
More mergers are also a possibility. Delta and Northwest combined last year, three years after each went through bankruptcy court. The current US Airways is the product of a combination with America West. United and Continental talked but didn't reach a deal.
Consolidation or liquidations could reduce competition, at least temporarily, leading to fewer flights on the surviving carriers.
"Who gets hurt in consolidation? The customer," says Morningstar Inc. analyst Basili Alukos, "because prices go up. If anyone has benefited from the airlines' misery, it's been customers, because prices have fallen."
Some analysts think talk of further consolidation is premature. Airlines have a knack for borrowing more money and living to fly another day.
"Undertaking a merger takes time, money, management attention and labor cooperation," says S&P's Baggaley. "If you're fighting for survival, it's risky to add that to your plate."
The airlines say they can survive the slow season.
"We don't think any airline will have liquidity issues this winter," says US Airways Chief Financial Officer Derek Kerr.
There are factors working in the airlines' favor. Vacation travelers kept planes nearly full this summer. Fees for checked bags and other items are raising hundreds of millions of dollars.
Although it's been lumped in with United and US Airways, American parent AMR has some advantages. It has about $3.7 billion in assets to sell or mortgage. That includes planes, the American Eagle regional subsidiary and miles in its frequent-flier program.
But AMR also has $1.3 billion in debt maturities and what CFO Thomas Horton called "several hundred million dollars" in pension funding due next year.
US Airways has little left to sell or hock. CEO Doug Parker says his airline has more cash than other network carriers except Continental when restricted cash is included. "So it's hard to accept the view that we get into trouble before others," he says. But restricted cash comes with limits on how it's used.
UAL could be forced to set money aside if its cash kitty shrinks, under an agreement with a credit-card processor. CFO Kathryn Mikells says her company has modest debt payments, low capital spending and no defined-benefit pension obligations.
During the last big slump in air travel following the 2001 terror attacks, the airlines turned to Washington for help. So far the carriers say they don't need the kind of bailout money given to banks and auto makers.
Kerr, the US Airways CFO, doubts Congress would approve a bailout. "We're not counting on that, and we're not lobbying for it."