- Nov 9, 2003
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World News & Analysis
US Airways, Delta Will Consider Chapter 11 If Their Transformation Plans Come Up Short
Aviation Week & Space Technology
05/17/2004, page 24
David Bond
Washington
US Airways (again) and Delta will consider Chapter 11 if their transformation/reassessment plans come up short
BANKRUPTCY'S SIREN SONG
At a time when optimists once believed the big U.S. network airlines would be edging back toward profitability, the carriers are making plain in this spring's Securities and Exchange Commission (SEC) filings that they still are wandering in the financial wilderness.
US Airways and Delta Air Lines explicitly raise the possibility that they will need to restructure under Chapter 11 bankruptcy protection--a second stint in court-supervised reorganization for the former and a first for the latter. Approaching a year and a half in Chapter 11, United Airlines still faces multiple uncertainties about when and exactly how it will get out.
Northwest Airlines and Continental Airlines, further back from bankruptcy's brink, continue to husband cash and seek cost reductions. American Airlines, which cut its costs substantially in 2003 after threatening an imminent Chapter 11 filing, is working on further improvements. The experience of American, US Airways and United suggests that the only way to win labor concessions is to enter Chapter 11 or get too close to it for comfort.
None of the carriers is making money. The first quarter of any year typically is an airline's worst, so red ink during the three months that ended Mar. 31 came as no surprise. But prospects for the second quarter, which usually is the best or second-best, aren't good. Fares remain under pressure, so it will take growth in load factors--even as carriers increase capacity--to boost unit revenue. And for most of the airlines, higher fuel costs will soak up much if not all of their other gains.
The Air Transport Assn. projects an industry-wide loss of $2-3 billion for 2004, which equals the association's rough estimate of how much more the carriers will pay for fuel this year than they did in 2003. And for years after aviation turns the corner, it will have to climb back down a $100 billion-plus mountain of debt, much of it run up to provide the cash it needed to survive since 2001.
Among the six network giants, US Airways faces danger from the most directions. Southwest Airlines' entry into US Airways' main hub, Philadelphia, promises a drawn-out loss of yields and market share on what have been some of its most profitable routes. A credit rating downgrade by Standard & Poor's leaves General Electric Capital Services free to drop its agreement to finance the carrier's purchase of regional jets (AW&ST May 10, p. 18). (Standard & Poor's, like Aviation Week & Space Technology, is a unit of The McGraw-Hill Companies.) A $250-million prepayment on the $1-billion loan by which it exited Chapter 11 in March 2003 won relaxed loan covenants from the Air Transportation Stabilization Board (ATSB), the federal agency that guaranteed 90% of the loan (AW&ST Mar. 22, p. 40), but that was a reprieve, not a pardon.
ALL THIS GAVE rise to a US Airways "transformation" strategy aimed at reducing its unit costs from the highest among the network airlines to the lowest, reaching levels of Southwest and other low-cost competitors. The airline plans to reduce fares and deemphasize hub operations, which would increase aircraft utilization and operating efficiency. It seeks further concessions from its employees, and it wants to begin the new wave of cost-cutting by summer. It's trying to negotiate more favorable costs at Pittsburgh, including a $500-million reduction in airport debt obligations, and it's threatening to pull down its hub operations and employment levels there if state and local officials don't come through.
"While the company's preference is to complete its transformation on a consensual basis," US Airways told the SEC May 7, "failure [to attain low costs] will force the company to reexamine its strategic options, including but not limited to asset sales or a judicial restructuring." The potential of selling assets, including the northeastern U.S. shuttle, has been in play since winter. One of the ATSB concessions in March allows US Airways to retain 25% of asset sales up to a limit of $125 million, provided that the sale closes by Feb. 28, 2005.
At Delta, a bankruptcy filing has been an unspoken possibility throughout lengthy, and so far unsuccessful, attempts to negotiate pay and efficiency concessions with the carrier's only unionized group, its pilots. Unfavorable developments in the first quarter led the carrier to face bankruptcy head-on. "If we cannot achieve a competitive cost structure, regain sustained profitability and access the capital markets on acceptable terms, we will need to pursue alternative courses of action intended to make us viable for the long term, including the possibility of seeking to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code," Delta said in a May 10 SEC filing.
DELTA'S EQUIVALENT of US Airways' transformation initiative is what it terms a "strategic reassessment of our operating and business strategy," begun late last year. Originally targeted for completion by June, the analysis currently is slated to go before a "late-summer" meeting of Delta's board. It has been broadened to include a review of the appropriate goal of the carrier's current profit-improvement initiative. The original objective was a 15% drop in mainline unit costs excluding fuel prices, but "we now believe that we may need greater reductions . . . in order to achieve a competitive cost structure."
Because of its first-quarter experience with fare yields and fuel costs, Delta also has "lowered our expectations for cash flows from operations for 2004." As recently as March the airline believed it would be able to finance daily operations plus $300 million in non-fleet capital expenditures out of 2004 cash flows. Now it expects cash flow to fund "only a portion" of the $300 million. It will draw on currently available cash for the rest, and for $577 million in debt maturities during the last nine months of this year.
Delta's unrestricted cash and equivalents totaled $2.2 billion on Mar. 31, a substantial amount but down from Dec. 31, 2003, by more than any of the other network airlines (see table). The carrier estimates 2005 debt maturities at $1.2 billion. Its total debt, including capital leases, is about $12.6 billion.
United still has issues to resolve--notably retiree medical benefits and costs, aircraft leases and Denver airport bond payments--before it can it can file a reorganization plan. The overriding problem, however, is its application for a federal guarantee for $1.6 billion of the $2 billion in borrowing it plans as exit financing from Chapter 11. The airline turned in an updated application to the ATSB in December 2003, but it faces opposition from other airlines and the likelihood of a more skeptical reading of its proposals. The experience of US Airways--deep in the red despite what the ATSB considered conservative revenue and cost estimates--promises greater scrutiny for United.
CASH STILL IS KING
Unrestricted Cash and Short-Term Investments for Big Six U.S. Airlines
Mar. 31, 2004 Dec. 31, 2003
American $3.2 billion $2.6 billion
United 1.9 billion 1.7 billion
Delta* 2.2 billion 2.7 billion
Northwest 2.9 billion 2.8 billion
Continental 1.6 billion 1.6 billion
US Airways* 1.0 billion 1.3 billion
*Delta and US Airways, the airlines speculating that they will be forced into Chapter 11 bankruptcy protection, were the only ones among the Big Six that came out of the second quarter with less cash than they had at the beginning.
Source: Company Reports
Jim
US Airways, Delta Will Consider Chapter 11 If Their Transformation Plans Come Up Short
Aviation Week & Space Technology
05/17/2004, page 24
David Bond
Washington
US Airways (again) and Delta will consider Chapter 11 if their transformation/reassessment plans come up short
BANKRUPTCY'S SIREN SONG
At a time when optimists once believed the big U.S. network airlines would be edging back toward profitability, the carriers are making plain in this spring's Securities and Exchange Commission (SEC) filings that they still are wandering in the financial wilderness.
US Airways and Delta Air Lines explicitly raise the possibility that they will need to restructure under Chapter 11 bankruptcy protection--a second stint in court-supervised reorganization for the former and a first for the latter. Approaching a year and a half in Chapter 11, United Airlines still faces multiple uncertainties about when and exactly how it will get out.
Northwest Airlines and Continental Airlines, further back from bankruptcy's brink, continue to husband cash and seek cost reductions. American Airlines, which cut its costs substantially in 2003 after threatening an imminent Chapter 11 filing, is working on further improvements. The experience of American, US Airways and United suggests that the only way to win labor concessions is to enter Chapter 11 or get too close to it for comfort.
None of the carriers is making money. The first quarter of any year typically is an airline's worst, so red ink during the three months that ended Mar. 31 came as no surprise. But prospects for the second quarter, which usually is the best or second-best, aren't good. Fares remain under pressure, so it will take growth in load factors--even as carriers increase capacity--to boost unit revenue. And for most of the airlines, higher fuel costs will soak up much if not all of their other gains.
The Air Transport Assn. projects an industry-wide loss of $2-3 billion for 2004, which equals the association's rough estimate of how much more the carriers will pay for fuel this year than they did in 2003. And for years after aviation turns the corner, it will have to climb back down a $100 billion-plus mountain of debt, much of it run up to provide the cash it needed to survive since 2001.
Among the six network giants, US Airways faces danger from the most directions. Southwest Airlines' entry into US Airways' main hub, Philadelphia, promises a drawn-out loss of yields and market share on what have been some of its most profitable routes. A credit rating downgrade by Standard & Poor's leaves General Electric Capital Services free to drop its agreement to finance the carrier's purchase of regional jets (AW&ST May 10, p. 18). (Standard & Poor's, like Aviation Week & Space Technology, is a unit of The McGraw-Hill Companies.) A $250-million prepayment on the $1-billion loan by which it exited Chapter 11 in March 2003 won relaxed loan covenants from the Air Transportation Stabilization Board (ATSB), the federal agency that guaranteed 90% of the loan (AW&ST Mar. 22, p. 40), but that was a reprieve, not a pardon.
ALL THIS GAVE rise to a US Airways "transformation" strategy aimed at reducing its unit costs from the highest among the network airlines to the lowest, reaching levels of Southwest and other low-cost competitors. The airline plans to reduce fares and deemphasize hub operations, which would increase aircraft utilization and operating efficiency. It seeks further concessions from its employees, and it wants to begin the new wave of cost-cutting by summer. It's trying to negotiate more favorable costs at Pittsburgh, including a $500-million reduction in airport debt obligations, and it's threatening to pull down its hub operations and employment levels there if state and local officials don't come through.
"While the company's preference is to complete its transformation on a consensual basis," US Airways told the SEC May 7, "failure [to attain low costs] will force the company to reexamine its strategic options, including but not limited to asset sales or a judicial restructuring." The potential of selling assets, including the northeastern U.S. shuttle, has been in play since winter. One of the ATSB concessions in March allows US Airways to retain 25% of asset sales up to a limit of $125 million, provided that the sale closes by Feb. 28, 2005.
At Delta, a bankruptcy filing has been an unspoken possibility throughout lengthy, and so far unsuccessful, attempts to negotiate pay and efficiency concessions with the carrier's only unionized group, its pilots. Unfavorable developments in the first quarter led the carrier to face bankruptcy head-on. "If we cannot achieve a competitive cost structure, regain sustained profitability and access the capital markets on acceptable terms, we will need to pursue alternative courses of action intended to make us viable for the long term, including the possibility of seeking to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code," Delta said in a May 10 SEC filing.
DELTA'S EQUIVALENT of US Airways' transformation initiative is what it terms a "strategic reassessment of our operating and business strategy," begun late last year. Originally targeted for completion by June, the analysis currently is slated to go before a "late-summer" meeting of Delta's board. It has been broadened to include a review of the appropriate goal of the carrier's current profit-improvement initiative. The original objective was a 15% drop in mainline unit costs excluding fuel prices, but "we now believe that we may need greater reductions . . . in order to achieve a competitive cost structure."
Because of its first-quarter experience with fare yields and fuel costs, Delta also has "lowered our expectations for cash flows from operations for 2004." As recently as March the airline believed it would be able to finance daily operations plus $300 million in non-fleet capital expenditures out of 2004 cash flows. Now it expects cash flow to fund "only a portion" of the $300 million. It will draw on currently available cash for the rest, and for $577 million in debt maturities during the last nine months of this year.
Delta's unrestricted cash and equivalents totaled $2.2 billion on Mar. 31, a substantial amount but down from Dec. 31, 2003, by more than any of the other network airlines (see table). The carrier estimates 2005 debt maturities at $1.2 billion. Its total debt, including capital leases, is about $12.6 billion.
United still has issues to resolve--notably retiree medical benefits and costs, aircraft leases and Denver airport bond payments--before it can it can file a reorganization plan. The overriding problem, however, is its application for a federal guarantee for $1.6 billion of the $2 billion in borrowing it plans as exit financing from Chapter 11. The airline turned in an updated application to the ATSB in December 2003, but it faces opposition from other airlines and the likelihood of a more skeptical reading of its proposals. The experience of US Airways--deep in the red despite what the ATSB considered conservative revenue and cost estimates--promises greater scrutiny for United.
CASH STILL IS KING
Unrestricted Cash and Short-Term Investments for Big Six U.S. Airlines
Mar. 31, 2004 Dec. 31, 2003
American $3.2 billion $2.6 billion
United 1.9 billion 1.7 billion
Delta* 2.2 billion 2.7 billion
Northwest 2.9 billion 2.8 billion
Continental 1.6 billion 1.6 billion
US Airways* 1.0 billion 1.3 billion
*Delta and US Airways, the airlines speculating that they will be forced into Chapter 11 bankruptcy protection, were the only ones among the Big Six that came out of the second quarter with less cash than they had at the beginning.
Source: Company Reports
Jim
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