POSTED: 4 JUNE 2008 - 11:30am HST

Airlines cash reserve waning

image above:Detail of "International Airlines" post at

by Harry R. Weber on 2 June 2008 in The Honolulu Advertiser

Look for seat capacity to Hawaii to be further substantially displaced over the next 12 to 18 months should oil/fuel prices continue at current industry unsustainable levels. If fuel prices remain where they are, the visitor industry in Hawaii will be dramatically transformed in the next year and a half.

Airlines are cutting U.S. flights, shedding employees, putting off plane orders and even talking about combinations.

But with cash bleeding fast, fuel prices high and credit tight, nothing they do may be able to stop several major airlines' return flight toward bankruptcy, and possibly liquidation.

Unlike when four of the six legacy carriers filed for bankruptcy protection between 2002 and 2005, airlines facing bankruptcy in this climate may find it tougher to reorganize because of tight credit markets and they have fewer unencumbered assets to use as collateral for loans.

'It may be Darwin's law of the fittest. If one of the carriers goes into bankruptcy and liquidated, it would take a lot of seats out of the market and other carriers would benefit,' Calyon Securities airline analyst Ray Neidl said.

With losses piling up for most of the major airlines, maintaining a strong cash position is important to avoid the same fate.

'Unlike 2002, 2003, 2004, when it was largely a revenue problem that drove them into distress, this is largely a fuel price problem,' said Fitch Ratings analyst Bill Warlick. 'You could argue that the risk associated with fuel price spikes is largely uncontrollable in contrast to the revenue problem post 9/11, which was addressed through a variety of measures such as cutting costs.'

Eliminating Debt
Several of the carriers used their first trip through bankruptcy protection to wipe away debt, resize their fleets and terminate employee pensions.

American Airlines, the nation's largest carrier, teetered on the verge of bankruptcy before winning employee concessions in 2003. Because of high pension and debt obligations, as well as the hefty price of fuel, the unit of Fort Worth, Texas-based AMR Corp. is again facing the possibility of a future cash crunch.

It had $4.5 billion in unrestricted cash at the end of March, but Neidl projects that AMR could have a negative cash balance by the end of 2009 if oil prices remain at the current level of roughly $130 a barrel. Covenants on some of American's debt require the airline to maintain at least $1.25 billion in unrestricted cash at the end of each quarter through at least the middle of next year.

At the current fuel price level, Chicago-based UAL Corp., parent of United Airlines, and Tempe, Ariz.-based US Airways Group Inc., both of which have had trips through Chapter 11, also face the potential for precarious cash positions by the end of next year.

The debt covenant issue wouldn't necessarily force a bankruptcy filing, as airlines could re-negotiate debt agreements with lenders or sell assets to pay off debt. Neidl believes airlines would take drastic actions before the end of 2009 if current fuel trends continue.

The airlines are furiously trying to remove domestic flights from the air to reduce costs. At least two have announced plans to cut U.S. capacity by double-digit percentages and trim thousands of jobs. Others, like discount carrier JetBlue Airways Corp., are putting off buying certain new planes.

The price of oil has doubled in the last year. But fare increases have fallen well short of keeping pace with the price of fuel. As their finances have been buffeted, stocks of most major airlines have plummeted by double-digit percentages over the last year...

Neidl said in a recent research note that mergers, which are supposed to make the industry more efficient, may not work in the current environment because there is a large cash outlay up front and high execution risk. He believes the current crisis, which he described as the biggest challenge the industry has ever faced, may serve to cool the merger frenzy.



POSTED: 1 JUNE 2008 - 7:30am HST

You Think Flying Is Bad Now...

image above: A Northwest Airlines jet being refueled in Phoenix in 2004 when oil was $35 a barrel

by Dean Foust and Justin Bachman on 28 May 2008 for Businessweek

To fully appreciate the impact that soaring oil prices have had on the nation's beleaguered airline industry, consider that U.S. carriers will likely spend $60 billion on jet fuel this year—nearly four times what they paid in 2000. Because of the spike in fuel costs, airlines now lose roughly $60 on every round-trip passenger, a slow bleed that puts the industry on pace to lose $7.2 billion this year, the largest yearly loss ever.

Not surprisingly, Wall Street has become so dour about the industry's prospects—can you say federal bailout?—that the combined market capitalization for the six major legacy carriers and Southwest Airlines has fallen to just over $17 billion. That's about what ExxonMobil (XOM) books in revenues every two weeks. "The U.S. airline industry, as it is constituted today, was not built for $125-per-barrel oil," Gerard Arpey, the chief executive of American Airlines parent AMR (AMR), told shareholders on May 21.

Consolidation Is Likely
While the industry is no stranger to losing money—or reorganizing under bankruptcy, for that matter—experts nonetheless believe that the current crisis has the potential to profoundly reshape the industry in coming years. That means not only far fewer carriers than at present, but forcing the survivors to rethink every facet of how they operate, from ticket pricing to the very way they fly. "The problem right now is that no one knows where the price of oil is going to fall down," says Darryl Jenkins, an aviation expert at Ohio State University. "Right now you're just in kind of the worst of all possible situations. Your planning becomes 'What do we do to lose the least amount of money?'"

If oil prices remain in the triple digits—above the $80-to-$90 break-even level for most airlines—it will accelerate the shakeout that is already occurring in the industry. While many carriers have in the past exploited bankruptcy as a competitive maneuver to cut costs, experts believe that any carrier that falls into Chapter 11 going forward will likely have to liquidate. That would probably include one or more of the major airlines. "I think the real risk this time is not Chapter 11, but [Chapter] 7—liquidation," says a senior executive of one major airline. "What happened to Pan Am? TWA? Eastern? I think there's a real risk here that some airlines just go away."

A court-overseen bankruptcy also could help smooth the industry's transformation if creditors decide the environment is too hostile and agree to sell off valuable assets. Historically, airlines have attracted sufficient funding to operate while restructuring, and new capital when they exit. It's not clear that current market conditions—high oil prices and credit-squeezed lenders—would support that playbook. Airlines with the financial muscle to step in—think Southwest (LUV)—would be interested. Southwest historically has avoided major acquisitions and considers them a steep risk but clearly recognizes potential opportunity in a bankrupt rival. "It just gives the acquiring carrier a tremendous amount of flexibility to impose change that would otherwise be very difficult," says Southwest CEO Gary Kelly, whose company has remained profitable because of long-term fuel contracts.

European Buyers
Analysts say liquidations could well leave an industry consisting of two dominant carriers, most likely the combined Delta (DAL)-Northwest (NWA) and perhaps a combined American (AMR)-Continental (CAL), along with a couple of discount players like Southwest. "I think the industry is going to look more like Europe—a couple of far-flung carriers and then a bunch of little guys," says Roger King, airline analyst for CreditSights, a New York-based institutional research firm.

Experts also believe that the oil crisis will eventually prompt Washington policymakers to drop their long-standing resistance to foreign ownership of U.S. carriers, leading to the first generation of truly global carriers. "The U.S. airlines badly need more capital to survive, and the only players with the resources to buy in are the [cash-rich] European carriers. Why would Congress object to that?" asks Robert Mann, an industry consultant in Port Washington, N.Y.

That could give British Airways (BAY.L) the opening for the acquisition of American it has long coveted, and a similar move by Lufthansa (LHAG.DE) on either United Airlines (UAUA) or JetBlue Airways (JBLU), in which it already owns a 19% stake. For all its aviation woes, the U.S. remains the largest, most lucrative travel market in the world. "Don't you think BA would fall over itself to buy American Airlines for $1.6 billion?" King says. "That's peanuts to them."

Creative Pricing
This consolidation will come with a cost: Experts believe that for the U.S. industry to shrink to a size that would allow the surviving carriers to earn a profit will require hefty fare hikes and a 20%-to-25% cut in capacity. That means fewer routes, fewer flights, and even more crowded planes. The biggest losers would be smaller cities like Cedar Rapids, Iowa, and Baton Rouge, La., that became accustomed to dozens of daily flights, usually on 50-seat jets that the majors use to feed traffic to their hubs. But oil priced near $130 has rendered those smaller jets uneconomical, meaning that carriers are likely to fly one much larger plane on marginal routes each day, but no more. "We might keep one flight just to keep Congress off our back," muses one industry executive.

Coast-to-coast flights will change, too. With roughly 30% of the weight of any transcontinental flight consisting of the fuel alone, meaning airlines are burning fuel just to carry fuel, carriers can be expected to replace many of those longer nonstops with one-stop flights, intended largely for refueling.

The era of cheap fares will end, too. Since deregulation in 1978, fares have fallen by more than 50% in real, inflation-adjusted terms. Prices will rise, and airlines will become even more creative in how they set fares. Some experts like Mann wonder if carriers won't begin charging passengers by weight, as air-freight companies do to transport goods. "There's a huge cost difference between flying a grown man and a 50-pound child," Mann notes. Industry executives say they can't see that happening any time soon—"too politically incorrect," as one notes. Adds Southwest's Kelly: "I just don't think it makes a lot of sense."

But the airlines will take other steps to wring more cash out of passengers, as American did last week in announcing plans to charge $15 to check a bag starting June 15. It will mean selling even more classes of service, and charging a premium for window, aisle, and exit-row seats as well as those at the front of the plane. Airlines will also create more levels of service off the plane as well, starting with a separate class of check-in, boarding, and baggage-claim service for travelers willing to pay more for the privilege of zipping in and out of airports quicker.

Technical Upgrades
The fee changes and higher fares are likely to cull millions of poor and middle-class travelers from the ranks of regular fliers, ending an era of $99 cross-country fares and bargain-basement weekend flights. It is also likely that Americans will see a far larger array of new travel products being sold at airline Web sites, such as aggressive hotel packages and travel insurance.

But even airline executives admit that this is all chump change compared with what they could save if they could lower the costs of operating their current fleets of fuel-guzzling jets. In a different environment, that would mean eventually phasing out the traditional cigar-shaped planes the industry flies with a more efficient mode of transport. Engineers working on Boeing's (BA) X-48 Blended Wing Project designed a jet that uses nearly 25% less fuel—think of a Stealth Bomber-shaped plane that resembles one giant wing—but the design limitations (no easy exit, nor windows for passengers to look out) mean that the planes are likely destined for military use.

Airline executives think they can wring out comparable savings by prodding Congress to fund the long-stalled modernization of the FAA's air traffic control system, which still relies on 1950s-era radar to route planes. Replacing it with a GPS-based system would cost the government and industry a collective $47 billion to implement, but executives say it could save the industry billions in fuel costs each year. If pilots could fly point-to-point, that could cut the circuitous, 585-mile path they currently must follow between Boston and Washington D.C. by as much as one-third, for instance.

A Lovely Bunch of Coconuts
But developing a GPS-based system could take a decade or more, and in the meantime airline executives are exploring ways to reduce their reliance on jet fuel, a kerosene-based oil that currently costs roughly $4.09 a gallon, up 98% in the past year. But developing an alternative hasn't been easy: Jet fuels have to pack enough oomph to power jet engines and at the same time be dense enough not to freeze in the air at -40C—a temperature that turns most biofuels into solids. But progress is coming. The Pentagon, which buys more aviation kerosene than any other group, has successfully tested a jet fuel made from liquefied coal. Airbus, meanwhile, is leading a consortium on a project to replace a third of jet fuel with advanced biofuels extracted from algae and plant oils. The efforts will help lower fuel costs and reduce dependence on crude oil.

This past February, Virgin Group CEO Richard Branson christened the first-ever commercial flight powered by biofuels. In its test flight, Virgin flew a Boeing 747 running on a blend of oils from coconut and Brazilian babassu trees, produced by Seattle-based Imperium Renewables. "Two years ago, we thought this was pie in the sky," says Billy Glover, managing director of environmental strategy for Boeing's commercial division. "But things have evolved very rapidly. Our guess is that in five years we could have commercial biojet fuels on the market."

Projected cost: Around $2 per gallon, or a third less than current prices for aviation kerosene. Coupled with higher fares, biofuels would be cheap enough for airlines to turn a profit. These days, that'd be enough to make many an airline executive go out and collect the coconuts.



POSTED: 19 MAY 2008 - 7:30pm HST

Say Goddbye to Air Travel

image above: Sunset for commercial jets - and the suburbs they fly over

by Richard Heinberg on 14 May 2008 in

The airline industry has no future. The same is true for airfreight. No air carrier has a viable plan to make a profit with oil at current prices—much less in years to come as the petroleum available to world markets dwindles rapidly.

That’s not to say that jetliners will disappear overnight, but rather that the cheap flights we’ve seen in the past will soon be fading memories. In a few years jet service will be available only to the wealthy, or to the government and military.

Sir Richard Branson of Virgin Atlantic says he wants to use biofuels to power his fleet of 747’s and Airbuses. There are still some bugs to be worked out in terms of basic chemistry, but it might be possible in principle—if only we could make enough biodiesel or ethanol without further driving up food prices and wrecking the soil. Even then it would be very costly fuel.

Are there other options for powered flight?

Hydrogen could be burned in jet engines, but doing so would require a complete redesign of our commercial aircraft fleet, and H2 would be expensive to make—unless the growing trend toward more costly electricity (as we phase out depleting, polluting coal and increasingly scarce natural gas) can somehow be reversed.

Last year I was invited to give the keynote address at the world’s first Electric Aircraft Symposium. NASA and Boeing sent representatives, but all told there were only about 20 in attendance. The planes being discussed were ultralight two-seaters: that’s the limit of current or foreseeable battery technology. These might come in handy in a future where they are the only option for emergency air travel (blimps need depleting helium or explosive hydrogen). But forget about 300-seat planes running on solar or wind power, ferrying middle-class vacationers to Bali or Venice.

There are good reasons to cut down on air travel voluntarily: flying not only swells our personal carbon emissions but spews CO2 and other pollutants into the stratosphere, where they do the most damage. However, the worsening scarcity of the stuff we use for making jet fuel takes the discussion out of the realm of optional moral action and into that of economic necessity and personal adaptation.

I fly to educate both general audiences and policy makers about fossil fuel depletion; in fact, I’m writing this article aboard a plane en route from Boston to San Francisco. I wince at my carbon footprint, but console myself with the hope that my message helps thousands of others to change their consumption patterns. This inner conflict is about to be resolved: the decline of affordable air travel is forcing me to rethink my work. I’m already starting to do much more by video teleconference, much less by jet.

Those who live far from family will be more than inconvenienced, as will the hundreds of thousands who work for the airline industry directly or indirectly, or the millions who depend on tourism or airfreight for an income. These folks will have few options: teleconferencing can accomplish only so much.

Our species’ historically brief fling with flight has been fun, educational, and enriching on many levels to those fortunate enough to benefit from it. Saying goodbye will be difficult. But maybe as we do we can say hello to greater involvement in our local communities.

see also:
Island Breath: End of Air Travel 5/1/08
Island Breath: Aloha to Aloha Air