US Airways, United deemed likeliest to fail

By Lynne Marek
Bloomberg News Service

A United Airlines customer service assistant talks with a passenger at Chicago's O'Hare airport. Many analysts say the airline is one of two most likely to seek bankruptcy protection. Bloomberg News Service

US Airways and UAL's recent losses and debt burdens, combined with high costs, make the two companies more likely to need to seek bankruptcy protection than rivals, analysts said. America West Airlines also is vulnerable, using new loans backed by the U.S. government to buy more time after burning through as much as $500,000 a day in the first quarter.

US Airways has said it may file for bankruptcy protection should it fail to win a federal loan guarantee and United, the world's second-largest airline, said it may seek a guarantee.

The two airlines reflect the industry's financial straits since the Sept. 11 attacks deepened a decline in air travel, spurring carriers to slice fares in an effort to boost traffic.

"What you've got is a situation where almost all the airlines are continuing to bleed cash, except Southwest" Airlines Co., said Dan Kasper, an airline economist for LECG LLC, a consultant for U.S. carriers and government agencies.

Southwest, the biggest low-fare carrier, is the only major U.S. airline that didn't cut flights and workers after the attacks. American Trans Air parent Amtran Inc. and Southwest were the only two major U.S. airlines to have a first-quarter profit, mainly because of lower costs.

UAL shares rose 32 cents to $12.07 and have dropped 61 percent since the day before the attacks. US Airways gained 9 cents to $3.28, and has fallen 72 percent from Sept. 10, while America West fell 3 cents to $3.17 and has declined 63 percent since the hijackings. Southwest Airlines fell 28 cents to $16.74 and is 2.2 percent lower than on Sept. 10.

One investor regarded the depressed stock prices as an opportunity.

Soros Fund Management, led by billionaire investor George Soros, became the sixth-largest, non-employee investor in UAL in the first quarter, according to filings with the U.S. Securities and Exchange Commission. The fund, which owned 1.82 million UAL shares at the end of March, declined to comment.

"The market treats United as terminally ill, we view United as a patient in remission," said JP Morgan Securities analyst Jamie Baker, who initiated coverage of UAL with a "buy" rating. "We see United pulling through."

UAL's industry-leading $2.9 billion in cash and more than $3 billion in assets to back new financing could sustain United for at least two years even with more losses, Baker said.

Still, both United and US Airways, the seventh-largest U.S. carrier, say their survival depends on getting concessions from employees to reduce expenses. The airlines have the highest unit costs among major U.S. carriers, with United's at 11.4 cents for every seat flown a mile and US Airways' at 12.9 cents. American's unit costs are 11.3 cents.

"The potential of bankruptcy should be a threat to all the (United) unions," said Nick Redfield, an analyst and money manager with Banc One Investment Advisors, which held about 223,000 UAL shares as of the end of March. "If the pilots can look beyond the cockpit, they should be able to see you're burning cash every day."

UAL's prospects are worse than the AMR's because United has new labor contracts that may raise costs and because management is in flux with Chairman and Chief Executive Officer Jack Creighton leaving later this year, some analysts said.

UAL has more debt and lease payments due in the next year, $1.9 billion, than any other U.S. carrier. The airline has the highest overall net debt, $19.7 billion, including aircraft lease obligations, according to Deutsche Bank Securities.

America West, which has net debt of $2.49 billion, has about $28.5 million due in the next 12 months. The carrier was aided by a $380 million U.S. loan guarantee that helped raise capital and build its cash and short-term investment position to a record $421 million at the end of the first quarter.

US Airways has the worst net debt-to-capital ratio among the nation's airlines, with $1.40 of net debt for every $1 of the current value of investment by shareholders and lenders as of Dec. 31, Deutsche Bank said. The carrier's first-quarter net loss was $269 million.

Northwest's $1.03 in net debt to every $1 in capital was the second worst among major U.S. carriers, followed by Continental Airlines Inc.'s 93 cents and Amtran's 92 cents, according to Deutsche Bank.

While the Northwest ratio is worse than that at other carriers, its losses are shrinking faster than some competitors and its $2.5 billion in cash on hand was second highest in the industry at the end of the first quarter.

"All of them have a set of issues and a set of problems that are going to be very difficult to overcome in the current pricing environment and given the current competition," said George Ireland, a Ring Partners manager.