United, others gain on 'relief' airline cash
United Airlines and Continental Airlines Inc., reaping cash by selling frequent-flier miles to credit-card companies, may be easing investor concern that the industry lacks the reserves to weather losses lasting into 2009.
The Bloomberg U.S. Airlines Index jumped 29 percent in the past week even as seven of the eight largest carriers posted combined net losses of $6.2 billion. United parent UAL Corp. soared 69 percent on July 22 after reworking its credit-card agreement with JPMorgan Chase & Co.
"There was a certain level of relief associated with the cash that was raised, particularly at United," William Warlick, senior director of Fitch Ratings in Chicago, said yesterday in an interview. "It's confirmation cash on the balance sheet is the name of the game right now."
UAL's accord, including the sale of frequent-flier miles for $600 million, followed a credit-card deal last month by Continental and second-quarter moves by American Airlines parent AMR Corp. and Delta Air Lines Inc. to boost liquidity.
American, United, Delta and Continental -- the four biggest U.S. airlines, respectively -- all said they boosted cash last quarter. They're also part of industrywide cutbacks that include grounding at least 465 jets and eliminating 26,000 jobs.
The airlines index rose 5.5 percent yesterday, adding to a 16 percent increase the previous day that was the biggest in the benchmark's 9-year history. AMR has surged 64 percent since reporting a $1.45 billion net loss on July 16. UAL has more than doubled in that time, while Delta is up 46 percent and Continental has gained 61 percent. All had quarterly losses.
Cash Over Earnings
"As you get into these distressed situations like this industry is in, the amount of cash you have becomes more important than your earnings," said Roger King, a CreditSights Inc. debt analyst in New York.
AMR said it had $5.5 billion in cash and short-term investments as of June 30, while UAL had $2.7 billion, Delta had $3.3 billion and Continental had $3.4 billion. They may need it.
The industry's usual air-travel decline after Labor Day may be worsened this year by a slowing U.S. economy on top of continued high fuel prices, extending losses and possibly pushing some carriers near bankruptcy, Warlick said.
"Plans for the fall period have been laid out in terms of capacity reductions," said Bill Hochmuth, a fixed-income analyst at Thrivent Financial in Minneapolis, which manages funds holding shares in at least six big U.S. airlines. "The environment has been changing so rapidly over the last few months with such volatility we just don't know how well the plans are going to hold. Monitoring liquidity right now is a big deal."
Industrywide Outlook
Industrywide losses may reach $13 billion in 2008, the Air Transport Association trade group has estimated. Jet fuel has surged 71 percent in the past year to surpass labor as carriers' biggest expense.
Falling prices for oil, from which jet fuel is refined, also are creating a tailwind for airline stocks. Crude has dropped 7.5 percent in the past week to $124.48 a barrel in New York yesterday after closing at a record $145.29 on July 3.
UAL benefited in two ways from its credit-card agreement with JPMorgan Chase, as it freed up restricted cash under the new terms in addition to the sale of miles.
Continental said June 12 it would receive $235 million for the advance purchase of frequent-flier miles and $178 million for other marketing commitments with Chase Bank USA, a unit of JPMorgan Chase.
"I would expect there will be follow-on announcements," Fitch's Warlick said. "It's a `me-too' industry. With respect to financing transactions, if one big carrier does it, I would be surprised if we didn't see similar announcements from others."