Return flight to bankruptcy possible for struggling airlines

ATLANTA -- Airlines are cutting U.S. flights, shedding employees, putting off plane orders and even talking about combinations.

But with cash bleeding fast, fuel prices high and credit tight, nothing they do may be able to stop several major airlines' return flight toward bankruptcy, and possibly liquidation.

Unlike when four of the six legacy carriers filed for bankruptcy protection between 2002 and 2005, airlines facing bankruptcy in this climate may find it tougher to reorganize because of tight credit markets and because they have fewer unencumbered assets to use as collateral for loans.

"It may be Darwin's law of the fittest. If one of the carriers goes into bankruptcy and liquidated, it would take a lot of seats out of the market and other carriers would benefit," Calyon Securities airline analyst Ray Neidl said.

A handful of small carriers in recent months have filed for bankruptcy protection or gone out of business altogether.

With losses piling up for most of the major airlines, maintaining a strong cash position is important to avoid the same fate.

Spiraling fuel costs and limited means to trim other costs quickly makes that a tricky proposition.

"Unlike 2002, 2003, 2004, when it was largely a revenue problem that drove them into distress, this is largely a fuel price problem," said Fitch Ratings analyst Bill Warlick. "You could argue that the risk associated with fuel price spikes is largely uncontrollable in contrast to the revenue problem post 9/11, which was addressed through a variety of measures such as cutting costs."

Several of the carriers used their first trip through bankruptcy protection to wipe away debt, resize their fleets and terminate employee pensions.

"There are fewer opportunities to restructure now that the initial work is done," Warlick said.

American Airlines, the nation's largest carrier, teetered on the verge of bankruptcy before winning employee concessions in 2003. Because of high pension and debt obligations, as well as the hefty price of fuel, the unit of Fort Worth, Texas-based AMR Corp. is again facing the possibility of a future cash crunch.

It had $4.5 billion in unrestricted cash at the end of March, but Neidl projects that AMR could have a negative cash balance by the end of 2009 if oil prices remain at the current level of roughly $130 a barrel. Covenants on some of American's debt require the airline to maintain at least $1.25 billion in unrestricted cash at the end of each quarter through at least the middle of next year.

At the current fuel price level, Chicago-based UAL Corp., parent of United Airlines, and Tempe, Ariz.-based US Airways Group Inc., both of which have had trips through Chapter 11, also face the potential for precarious cash positions by the end of next year, according to Neidl's projections.

The CEOs of the two airlines have formally shelved their effort to create the world's largest airline, confirming the talks had been suspended in messages to their employees on Friday, a day after a meeting of United's Glenn Tilton and US Airways' Doug Parker.

Fitch Ratings said Thursday that US Airways would face a growing risk of violating one of its debt covenants if adverse fuel trends persist through the remainder of this year.

The debt covenant issue wouldn't necessarily force a bankruptcy filing, as airlines could re-negotiate debt agreements with lenders or sell assets to pay off debt. Neidl believes airlines would take drastic actions before the end of 2009 if current fuel trends continue.

Having few assets that aren't already being used as collateral on existing loans and the tight credit markets could make it difficult for US Airways, for instance, to raise financing to allow it to reorganize in bankruptcy if it had to file for the third time since 2002, Warlick said, adding that under those circumstances liquidation could result.

US Airways declined to make an executive available to discuss the airline's financial situation.

Atlanta-based Delta Air Lines Inc. and Eagan, Minn.-based Northwest Airlines Corp., which are seeking to combine, had a combined total of $5.8 billion in unrestricted cash at the end of March, but at current fuel prices Neidl projects that could dwindle significantly by the end of next year. Delta also has said it expects to incur $1 billion in one-time integration costs from its acquisition of Northwest. Both Delta and Northwest exited Chapter 11 bankruptcy protection just last year.

Neidl's cash projections include unrestricted cash and short-term investments, but exclude auction-rate securities.