But a combination of factors could help most, maybe even all, of the USA's big airlines dodge the bankruptcy filings and liquidations so widely predicted only a few weeks ago.
Over the last five months airlines have laid in deep capacity cuts, boosted fare prices by unprecedented amounts, and begun generating lots of new revenue by charging fees for services that used to be included with the ticket price.
They've also refinanced debt, sold assets, and issued new stock to build up extra cash in hopes of surviving long enough for one or more of their competitors to fail — an event that presumably would greatly improve the surviving carriers' health overnight. Airlines, however, may not have to wait for one of their number to fail in order to get healthy financially.
And though most carriers still can't turn a profit at existing jet fuel prices, they're getting close to the break-even point. Another $10 to $15 drop in the price per barrel, which some oil experts now say is possible, will have most of them back in the black. Analysts at both Morgan Stanley and JPMorgan Chase even are suggesting that the haggard industry could be profitable in 2009.
JPMorgan analysts Jamie Baker and Mark Streeter told investors in an Aug. 12 report that the "industry today is a significantly different one than that which gave us pause last March." The carriers' recent capacity cuts, decisions to ground old, fuel-inefficient planes and to boost revenue via higher fares, and the imposition of new and larger fees are likely to be long-lasting changes, Baker and Streeter wrote.
Millions of travelers remain steadfastly loyal to their airlines, King says, don't seem to be fazed much by rapidly rising fares, and will continue flying almost no matter what. That means airlines will continue to have large, predictable streams of revenue that will be highly valued by lenders and creditors, even when revenue doesn't cover operating costs. (doesn't make sense to me, but hey lenders have shown a lot of foresight the past half decade... what's that? Oh. Nevermind) Those lenders and creditors would rather keep airlines flying and generating cash than repossess collateralized assets such as airplanes that would be idled for months, or even permanently, by a repossession. (the parallels to the housing market are striking - but this would explain why lenders are constantly changing the terms of their convenants with the homebuilders when I assumed at least 2 major names would be bankrupt by now)
Lower fuel prices and the carriers' recent dramatic operational and financial maneuverings have helped ease the crisis, but it has not entirely passed. Delta and US Airways are moving close to what Neidl calls the bankruptcy/liquidation danger zone based on their cash and short-term investments at the end of June as a percentage of their revenue over the previous 12 months. The danger zone, he says, is a ratio of 10% or less. Delta's cash-to-revenue ratio on June 30 was 16.1%, while U.S. Airways' was 17.4%.
