By David Koenig -- AP Business Writer
DALLAS (AP) — Auto companies and airlines are both getting hammered by the recession, but while two of the nation's major carmakers went into bankruptcy court protection, the leading U.S. carriers are flying above the carnage — for now.
Make no mistake, the airlines are in big trouble, with air traffic in a free fall this year.
Many business travelers — the most profitable customers for an airline — have been grounded. Others have moved from the first-class cabin back to coach.
Leisure travelers have been worried about losing their jobs. To lure nervous vacationers, carriers have slashed summer fares, and experts report some of the cheapest travel prices in years.
All the major U.S. carriers except Southwest lost money last year. The leader of an international airline trade group said last week that worldwide the industry will lose $9 billion this year — nearly double the loss the organization predicted in March.
Still, no major U.S. airline is in bankruptcy court protection. Compare that with the auto industry, where General Motors Corp. filed for Chapter 11 protection last month, following in the tire tracks of Chrysler, which sought court protection from creditors in April and was taken over by Italy's Fiat Group SpA.
Q. Why aren't airlines in bankruptcy court protection?
A. "The answer is because they went through bankruptcy in the last downturn, and they're still benefiting from that," said Michael Derchin, an analyst for FTN Equity Capital Markets.
Delta Air Lines Inc., United parent UAL Corp. and US Airways Group Inc. used the bankruptcy-court process to reduce debt and cut labor costs earlier in this decade. They emerged leaner, with fewer liabilities — some dumped pension obligations on the federal government — and with less debt.
American Airlines parent AMR Corp. and Continental Airlines Inc. avoided Chapter 11 protection but still extracted major wage concessions from unions.
Those moves put the airlines in better shape to survive when the current recession hit last year. Meanwhile, GM and Chrysler were saddled with high costs, such as a contract provision under which the carmakers pay many union workers up to two years of wages even after their plants are idled.
By David Koenig -- AP Business Writer
Q. What are the airlines doing to avoid Chapter 11?
A. Stocking cash.
Southwest Airlines Co. has raised nearly $1.4 billion since the third quarter of last year, pushing its unrestricted-cash kitty to $2.3 billion. It sold several jets and leased them back.
US Airways Group Inc., which many analysts say has a weaker balance sheet than other carriers, and JetBlue Airways Corp. raised money in recent weeks by selling debt that can be converted to stock.
"Traditionally airlines didn't hoard a lot of cash, they just kept enough for contingencies," Derchin said. But after the 2001 terror attacks, and record-high fuel prices and a recession in the last two years, "these guys are paranoid — with good reason."
Even the weaker carriers are likely to get through this year, said Bill Warlick, an analyst with Fitch Ratings, "but it's going to be tight for a couple of the carriers."
Warlick rates UAL, US Airways and AMR as the most troubled when measured by cash reserves as a percentage of annual revenue. He puts Continental and Delta next, with the low-cost carriers such as Southwest in better shape, partly because they're not exposed to the weak international-travel market.
Hunter Keay, an analyst with Stifel Nicolaus & Co., warned that airlines can burn through cash quickly, especially if oil and jet fuel prices keep rising and credit markets remain closed off.
"Sure, the cash balances look OK now," Keay said, "but they really need to generate good cash flow this summer to get through the back half of the year, which is looking very weak."
Q. Jet fuel is much cheaper than it was a year ago, so why are the airlines struggling?
A. Revenue has fallen because traffic is down, especially the treasured business travelers who used to fly first-class.
Continental Airlines Inc. CEO Larry Kellner said the decline in business travelers in the front cabin caused airlines to cut leisure fares to fill the empty seats. The result, he said, was that revenue per passenger came under pressure in both the front and back of the plane.
Southwest CEO Gary Kelly said his airline is selling fewer full-fare tickets and fewer short-haul flights — both signs of depressed demand among business travelers.
"I'm not expecting things to improve based on what we're seeing right now," he said Thursday.
Q. How are airlines responding to the downturn in travel?
A. They're shrinking.
Delta and American announced this week that they'll make even deeper capacity cuts — offering fewer flights or using smaller planes — once the peak summer vacation season is over. Continental hinted it will make a decision in about a month, and analysts say they expect United will too.
Q. How can shrinking help an airline's bottom line?
A. First, it saves money. When airlines ground planes, they don't burn as much fuel and they don't pay flight crews.
And when airlines cut capacity they hope to trade volume for higher prices. As the supply of airline seats shrinks, it tends to drive fares higher — at least in theory.
In the past year, U.S. airlines have eliminated hundreds of flights, but fares haven't risen because traffic fell faster than capacity.
Keay, the airline analyst, said airlines need to cut even more flights before they regain pricing power. But he doubts the carriers are disciplined enough to carry through — they are tempted to add flights to gain market share.
Q. Will airlines cut more jobs?
A. Yes. Fewer flights means less need for pilots, flight attendants and mechanics. American said this week that it would cut at least 1,600 jobs because it will eliminate more flights beginning in late August.
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