U.S. Airlines Fly Into Credit Squeeze

Plunge in Travel Demand Could Result in Bankruptcy Filings by Winter if Conditions Don't Improve By SUSAN CAREY and MIKE ESTERL The recession, plunging travel demand and a tough lending environment are battering U.S. airlines, raising the prospect of a liquidity squeeze that could lead to bankruptcy filings by winter if conditions don't improve. The five largest hub-and-spoke carriers are expected to report second-quarter losses, starting with AMR Corp.'s American Airlines on Wednesday and followed by Delta Air Lines Inc., UAL Corp.'s United Airlines, Continental Airlines Inc. and US Airways Group Inc. next week. Darkening Landscape The second quarter normally brings strong traffic and profitability, but this wasn't a typical spring. The few bright spots in a darkening industry landscape are the modest second-quarter profits expected from discount carriers Southwest Airlines Co., JetBlue Airways Corp. and AirTran Holdings Inc., and from Alaska Air Group Inc. Those four will also report earnings next week. "Just as the airline industry was not built for $130 [per barrel] oil, neither was it built for an environment of negative global economic growth and nonfunctioning capital markets," Gerard Arpey, AMR's chief executive, said last month at an investor conference. The recession continues to discourage high-yield business traffic, forcing carriers to discount heavily to fill planes with leisure travelers. May passenger revenue was down 26% on 9.5% fewer passengers paying nearly 18% less per ticket than a year earlier, according to the Air Transport Association trade group. Continental and US Airways reported that their unit revenue -- the amount taken in for each seat flown one mile -- fell 20% in June compared with the year-ago month. Meanwhile, American's June traffic declined 8% and United's 10%. In a research note last week, Morgan Stanley estimated revenue at U.S. airlines will drop 18% for all of 2009. Burning Cash Pinched capital lending remains a problem for airlines trying to maintain or build cash balances as they're burning cash. Only Southwest has an investment-grade credit rating, and Moody's Investors Service has negative outlooks on eight of the nine biggest U.S. airlines. Reflecting pessimism about autumn bookings, Southwest last week launched one of its biggest fare sales ever, offering one-way tickets for as little as $30 starting in September, when demand historically tails off. "A recovery doesn't appear to be on the way yet," said Laura Wright, Southwest's chief financial officer, in an interview. Fuel prices, which a year ago shattered records, are now at about $60 a barrel, $10 below the June 2008 average. But carriers' savings on one of their top expenses aren't enough to offset the plunge in demand, even though airlines have slashed the number of seats they're offering. "The sheer collapse in unit revenue is pretty much unprecedented," said Bill Warlick, an airline bond analyst for Fitch Ratings. Mr. Warlick recently cut the corporate credit ratings of Delta and United, pushing them deeper into speculative territory. While Delta has a relatively strong $5.3 billion in unrestricted cash, the company faces scheduled debt maturities of roughly the same amount before the end of 2011. Delta's ability to maintain its liquidity at current levels depends on improved credit-market openness and industry stabilization in 2010, Mr. Warlick said. United, with about $2.5 billion in cash, must meet more than $650 million of debt and lease payments later this year and more than $1 billion in 2010. With this "unsustainable" capital structure, United may have trouble raising a large amount of fresh capital in the near term, Mr. Warlick said. United declined to comment. Some carriers may have no choice but to seek protection from creditors this winter, when cash flow typically dries up. United, American and US Airways are the most vulnerable among large carriers, according to credit-rating agencies and Wall Street investment houses. While he doesn't rule out one or more carriers filing as soon as this fall, Philip Baggaley, a debt analyst for Standard & Poor's Corp., says that "the more likely scenario is that they will manage to scrape by again." He adds, though, that "there's not a lot of room for error." US Airways has been through Chapter 11 twice since the 2001 terrorist attacks, and United and Delta, as well as Delta's recent acquisition, Northwest Airlines, have been through it once. Some analysts wonder what good further restructurings would do. "We might lose one along the way," said Bill Swelbar, a researcher at the Massachusetts Institute of Technology's International Center for Air Transportation. "It's hard to restructure zero demand." Write to Susan Carey at susan.carey@wsj.com and Mike Esterl at mike.esterl@wsj.com