American companies in problems?

I was coming back from the pub last night, when I found an interesting article in the Business section of the Basler Zeitung lying in the tram. It quite interested me, so I’ve translated it (roughly) and enclose a copy here, to see what you think. I certainly never knew it was This bad for American Airlines … 😮

The US-Air Industry on the brink of ruin.

The chances that, after U.S. Airways and United Airlines, the biggest US Airline, and Swiss Code-sharing partner, American Airlines will declare a ‘Chapter 11’ bankruptcy are big. There’s even a possibility of ‘Chapter 7’.

By Luzian Caspar, Washington

Since the New York Times‘ report on Tuesday that American Airlines is in discussions with Citigroup and other banks about an emergency credit, standard practice in cases on bankruptcy, the shares of the US’ largest airline has plummeted by a further 25%. At $1.65, they’re already almost practically worthless – a clear indication of a possible bankruptcy. The Boss of the Flight Attendants’ Union has already warned his members that a Bankruptcy is ‘close’.
The members of another Union are due to protest against a possible declaration of bankruptcy in New York and other cities today (Thursday). American is the World’s biggest Airline. Wall Street Experts already say that American is bound to declare bankruptcy if a war is declared against Iraq.
American would be particularly vulnerable to a war as it’s reliant more than most on overseas routes. Last Year, American make a loss of $3.2 billion, and had about $2.7 billion in petty cash at the end of the year – enough to last a couple of months. But a war would throw a spanner in the calculations. In the last Gulf war, the Incomes of the US majors dropped by 8%, but this time, higher drops are expected. When the Federal government upgraded to an ‘Orange’ State of alert in February, the foreign ticket sales in the US dropped by some 20%. And each increase of 10% in Kerosene price costs the US Air Industry $2 billion a year.

Airlines demand Federal aid
American isn’t the only airline whose share price plummeted on Tuesday. Delta’s dropped by 22%, Northwest’s by 14%, and Continental’s by 15%. The average drop in price of the main US Airlines’ shares has been a third since the start of the year. The American Air Transport Association announced on Tuesday that a war with Iraq could cost US Airlines a further 70’000 jobs. Since 11th September 2001, the Airlines have already cut 100’000 jobs. In 2001, there was a collective loss of $8 Billion, last year it was $10 billion.
The US air industry is in a ‘real fight for survival’, the Association announced on Tuesday. Should there be a war, the Industry would desperately need further Governmental aid and tax breaks. After 9/11, the Federal Government awarded the airlines an immediate $5 billion of aid, and promised to underwrite the airlines up to the tune of $10 billion. These handouts helped the US airlines gain a competitive advantage over South American, and other competitors. A 3 month war, the most likely duration, would cost the Industry around $4 billion, according to the Association.

Even without a war massive losses
But even without a war, the Industry stands to lose $7 Billion this year. If there were a war, further bankruptcies would be probable, and possibly even liquidations. ‘Chapter 11’ Bankruptcy protection allows American companies to continue trading with protection against their creditors, but ‘Chapter 7’ would mean liquidation.
There’s already Speculation on Wall Street that United Airlines, the World’s second biggest Airline, may be forced to declare a Chapter 7 bankruptcy. United has been in Chapter 11 since December. On Tuesday, they applied to the Government to extend their reorganisation plan by a further 6 months.
If American were to declare bankruptcy, Delta would be the only one of the three majors not to be protected from its creditors. But Delta isn’t in a great position, either. The only established Airline still making money is Southwest, but even they recently issued a warning they could report a loss in their next set of figures. Experts reckon the only way to save the Industry, a radical consolidation. There are simply to many Airlines.

Use of Chapter seven
Chapter 11 may be an ideal way to decrease salaries; American want to save some $4 billion in further wage cuts. In the Bankruptcy process it’s easier to force wage cuts, or, as the U.S. Airways Pilots recently discovered, cut Pensions. But a total cleaning of the slate can only happen with a liquidation. Hence, presumably, the current speculation about Chapter 7. If some Airlines were to disappear, it may be possible to once again make money out of the US Airline Industry. In the end stages of the crisis, the only possible solution may be an Oligopoly.

Source: Basler Zeitung, Thursday 13th March 2003, page 15. “US-Luftverkersbranche am Rand des Ruins“