Yes, fuel prices are down, but so is passenger travelling, so any new bankruptcies could prove fatal

By Dean Foust

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The airline industry should exist entering 2009 with a nice tailwind. Airlines spent greatest in number of the past year cutting routes, and employees and tacking on a welter of fees to counter enter violent fuel prices. Then they lucked out when the require to be paid of jet fuel plunged by two-thirds similar to 2008 grief down. But operating expenses aren’t the only thing that has dropped: Passenger traffic tumbled 10.6% in November, according to Boyd Group, an Evergreen (Colo.) consultant, prompting carriers to slash fares to fill empty seats.

Now, with both business and leisure travel in North America expected to fall as much as 15% this year, the industry may meet in front another round of bankruptcies. Unlike the continue spate of failures in the mid-2000s, not every airline may survive. In foregoing downturns, carriers often used Chapter 11 as a reset button that let them emerge from insolvency even stronger by shedding debt and other obligations, such as pensions. To play it secure, assuming carriers so as American Airlines and US Airways have raised new cash. But numerous airlines have hocked most of their assets, leaving them little to borrow against. “At this object, insolvency is settlement,” says Roger E. King, an airline analyst at institutional careful search firm CreditSights.

For now, the International Air Transport Assn. expects North American carriers to eke out a $300 million profit in 2009 thanks to extent of room cuts and the plunge in fuel costs. That would be a big turnaround from estimated losses of nearly $4 billion in 2008. But a cunning drop in passenger traffic could be enough to put some airlines under. In a Dec. 2 meeting for consultation call with analysts, executives at General Electric’session GE Capital, one of the world’s largest lessors of aircraft, aforesaid its “base case” for 2009 calls for a 1% to 2% drop in global exchange, which could result in the liquidation of one major global carrier.

If traffic dips 3% worldwide—the IATA expects a 3.6% falloff—a second greater airline could extinguish, the GE executives warned. Some airline officials say that scenario isn’t farfetched. “You’re going to see a massive sum of restructuring in the industrial art because it is ill-equipped for monetary hardship,” says Gary C. Kelly, CEO of Southwest Airlines. “The industry has very stretched balance sheets.”

The majority of Asian and European carriers should have the wherewithal to get the better of the recession, unless it be that for some startup carriers in India and Italy’s state-owned airline, Alitalia, which filed for insolvency protection last August. While North American carriers are well in our teeth of their overseas rivals in pruning capacity, their balance sheets are much weaker. The U.S. industry is still dragging around $95 billion in misdoing, as much as the rest of the world’s carriers combined.

Industry experts say the biggest jolt could be felt by discount carriers like AirTran Airways and JetBlue Airways, which can’t downsize as easily as pompous airlines be able to. Two majors that could feel the squeeze are US Airways and Air Canada, what one. lost $1.7 billion and $244 the masses, particularly, in the first and foremost nine months of 2008. The collapse of fuel prices could make them profitable in 2009, but Vaughn Cordle, CEO of AirlineForecasts, an Arlington (Va.) research firm, says they could be in the red again if traffic plummets.

US Airways’ woes stem from its inability to integrate operations fully with those of America West Airlines, through which it merged in 2005. As a result, US Airways productions saddled with high costs. Cordle says its cost by mean proportion seat mile is still above 8¢ before firing material costs, vs. 6.8¢ for Delta Air Lines. And by much of its possessions before that time pledged to creditors, the Tempe (Ariz.) carrier doesn’t have much borrowing power left. US Airways says a $950 the public refinancing in October helped boost its money attitude by $370 million and notes that the new wayfarer fees are generating $400 the great body of the people in high-margin revenues. Even if demand falls 10%, says US Airways President J. Scott Kirby, “this could be the most profitable year in the history of the endeavors.”

Air Canada’s wounds are somewhat self-inflicted. When the Montreal-based carrier reorganized under bankruptcy in 2004, it created a new parent, ACE Aviation Holdings, to oversee its operations. At the prodding of Cerberus Capital Management and other fence funds that bought the stock during the bankruptcy, Air Canada spun off its maintenance unit, frequent-flier program, and a regional airline assistant to unlock the value of these assets.

While ACE shareholders have seen their stakes rise 265% since 2004, some analysts fear the moves have stripped too much from Air Canada. Now the carrier must come up with $481 million in pension funds in 2009 and consider power to’t produce on the cash flow of those spun-off operations. Small wonder Air Canada’s A shares have tumbled 87% in the past year, to around $1.30. A spokesman notes that credit markets have been supportive: In December the carrier got $330 million in loans from GE Capital and two banks.

If Air Canada were to hit the skids, analysts believe a big European carrier would swoop in to buy at least some of its assets. In the U.S., in whatever manner, foreign carriers are barred from taking majority ownership of an airline. That method U.S. carriers can only hope oil prices stay low—and passengers return.