02 October 2009
01 October 2009
Around the time I read this list, the Financial Times posted a quick profile on the foreboding future for U.S. airlines. The FT name-checks both CAL and AMR, but singles out US Airways as the most vulnerable:
US airlines’ strategy can now be reduced to one word – survival. Overheads and staff costs have been pared to the bone. Every financing option has been sought and, for some airlines, exhausted. Money was first raised against the good aircraft, then the old aircraft and finally less dependable assets such as spare parts and rights to landing slots (as Delta did last week, as part of a fund raising). Vendors, from the aircraft manufacturers to maintenance companies and credit card partners, have been tapped for financing support. Finally, helped by buoyant share prices, Continental, American Airlines and US Airways have issued equity.Here are some charts of AMR and CAL:
But industry revenues per passenger are down about 20 per cent on last year, while domestic capacity is down by a 10th, notes Creditsights, and still shrinking. Oil at $65 a barrel is only just tolerable. At the very least, airlines need corporate travellers to return. But to address the problem of shrinking sales and high fixed costs, ticket prices must also rise. Unfortunately, business spending returns only slowly. It took years for prices to start rising after the downturn following September 11 2001.
So the breathing space bought by fresh funds, which in turn appears to have helped propel the latest market rally, is merely that. Up by two-thirds in three months, the sector is being treated as a long-odds bet on economic recovery, but long-term problems of debt and overcapacity remain. Substantial pension payments and debt refinancing must be met in the next two years and there is little slack left to absorb a rise in the oil price or a weak recovery.
For example, US Airways – the most domestically focused, and with perhaps the most marginal route network – has barely any fuel hedging in place now. Should the winter prove particularly harsh, liquidation or consolidation will be the only realistic options remaining. The latter will be good for the industry, if not for the forced mergees, but only slowly and after considerably more pain.
Of course, it seems that since the airlines were deregulated a few decades ago, they've been as adept at burning jet fuel as they are at immolating shareholder wealth. Why should the next twelve months be any different?
These charts aren't the most compelling shorts I've come across, but like nearly every other equity right now, both AMR and CAL look overextended.