US Airlines Running A Little Low On Cash
US airlines, struggling to spur demand amid economic recession, face a potential liquidity crisis if revenues keep falling while credit markets remain tight.
Despite their best efforts, several of the top US airlines currently have less cash on hand than some experts think is comfortable.
If revenue does not increase this year, carriers may breach the minimum liquidity covenants enforced by their creditors, who then may accelerate the loan and force a default.
"If revenue doesn't stabilize and capital markets remain constrained, then I think it's certainly possible that we'll see increased risk of a covenant breach for a couple of carriers moving into 2010," said Fitch Ratings analyst Bill Warlick.
The airlines that face the greatest risk of covenant breach are US Airways, American Airlines and United Airlines, he said.
"This scenario would likely unfold only if revenue trends continue to worsen through the summer with no evidence of a US macro recovery appearing by late in the year," Warlick said.
The US airline industry, lurching for years from one crisis to the next, now finds itself grappling with depleted demand as the recession bites into business and leisure travel.
Airlines rapidly downsized late last year and again in 2009 to offset weaker demand. But the struggle to right-size the business continues, and revenue is weaker. Meanwhile, credit markets remain tight as the economic crisis grinds on.
"If you don't have enough to cover your fixed costs, you're just bleeding cash," said Morningstar analyst Basili Alukos.
"Airlines have always had high operating and financial leverage," he said. "And in a downturn, those can be recipes for disaster."
CAUSE FOR CONCERN
Some experts determine the health of an airline's liquidity position based on its unrestricted cash in a quarter as a percentage of the revenue it earned over the last year. Warlick said anything less than 20 percent should be cause for concern to airline managers.
Based on this calculation, US Airways had the weakest first-quarter unrestricted liquidity position at 11.9 percent of its revenue for a year, followed by AMR at 12.2 percent, UAL at 12.7 percent and Continental at 18.1 percent.
Southwest Airlines had the strongest cash position at 19.4 percent. The merger of Delta Air Lines with Northwest Airlines last year muddies the formula, making it difficult to rate the airline's liquidity position.
US Airways Chief Financial Officer Derek Kerr cautioned against using unrestricted cash to compare airline liquidity because carriers have different liquidity requirements from their creditors.
He said US Airways has more cash restricted than its rivals because of a requirement by its credit card processor. He said it is more appropriate to use total cash balances because airlines without this requirement also set aside money that may not be labeled restricted on a balance sheet.
"We have a higher restricted balance than other people really due to the credit card holdback, and others just don't have it," Kerr said.
Experts said that despite the relatively weak liquidity positions at major airlines, none is running an immediate risk of a bankruptcy.
"For most of the carriers, the liquidity is ample and should be sufficient to carry them through the downturn," said Standard & Poors' equity analyst Jim Corridore.
"Certainly all the carriers are looking to add to cash because it's prudent," he said.
