In the airline industry, failure isn’t an option, it’s a necessity

Somewhere in Washington, there’s probably a bucket with some airlines’ names on it.

Somewhere in Washington, there’s probably a bucket with some airlines’ names on it.

After all, taxpayers have bailed out banks, insurance companies, automakers, Wall Street and mortgage lenders. Can America’s foremost frequent failers be far behind?

The second quarter is supposed to be the highlight of the airlines’ year, the period when planes are stuffed with leisure travelers and travel demand is at its peak. This year, though, the recession, the swine flu scare and rising fuel prices have hammered results.

Houston-based Continental Airlines, for example, posted a $213 million loss last week as revenue plunged 23 percent. The airline also said it planned to shed 1,700 jobs.

And that’s what passes for good news, because Continental remains in better financial shape than many of its rivals. American, United and US Airways may need additional cash to keep flying beyond the end of the summer, JPMorgan analyst Jamie Baker wrote recently.

โ€œEven a seemingly miraculous surge in demand wouldn’t negate the necessity for significant incremental capital,โ€ he said.

Where will the additional capital come from? Bond investors are showing little interest in pouring more money into the carriers. Rates for credit-default swaps โ€” which shield investors from losses if the airlines are unable to repay their debt โ€” have been rising steadily for the parent companies of American and United, Bloomberg News reported. Rising swap rates are a sign that bond investors are increasingly wary the two carriers will default.

Last week, Moody’s Investors Service cut the debt ratings for industry stalwart Southwest Airlines to the lowest grade above junk. Meanwhile, Standard & Poor’s placed the ratings for American and United, which already are below the junk threshold, on its watch list with negative implications, citing concerns about liquidity and declining revenue.

Typically, at this stage in the airlines’ cycle of despair, the weaker carriers flock back to bankruptcy court like the swallows returning to Capistrano.

This time, though, things are different. Most of the industry has been through bankruptcy in the past few years. Most of the major airlines’ costs are within about a penny per mile for each available seat, and another trip through bankruptcy probably won’t reduce them significantly as it has in the past.

โ€œIt isn’t clear what Chapter 11 offers,โ€ Baker wrote.

So if the courts can’t help, might we actually see one or two of these perpetually troubled airlines go out of business?

Don’t count on it. It’s unlikely that lawmakers and the administration, facing stubborn unemployment numbers, are going to allow tens of thousands of airline workers โ€” many of whom are unionized โ€” to lose their jobs. Expect, at the least, government-backed loan guarantees to help carriers shore up their balance sheets with fresh capital.

Meanwhile, Wall Street โ€” lured by the siren song of investment banking fees โ€” likely will once again call for mergers of the damned, extolling the benefits of, say, a combined United-US Airways, even though about two dozen airline mergers during the past three decades has yet to produce a single success.

None of this will solve the airlines’ problems, merely perpetuate them. The airline industry has long cheated the consequences of competition.

If Washington really wanted to help, it would do nothing. It would turn a deaf ear to the pleas of the beleaguered carriers, allowing the chance that maybe, just maybe, one or two of them will actually stop flying and enable the surviving airlines a shot at sustained profitability when the recession’s over.

It’s time to stop the insanity. In the airline industry, failure isn’t an option, it’s a necessity.

About the author

Avatar of Linda Hohnholz

Linda Hohnholz

Editor in chief for eTurboNews based in the eTN HQ.

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