Airlines Better Cash Stances

Several major U.S. airlines spent the final days of September building cash reserves as they braced for the seasonally weak fourth quarter. Through several separate deals, American Airlines, Delta Air Lines, United Airlines and US Airways pulled a number of levers to build their liquidity positions.

The cash-raising efforts further suspended the already distant possibility of bankruptcies, analysts said, though revenue trends and sustained demand weakness present yet another challenging quarter.

UBS analyst Kevin Crissey in a Sept. 24 research note said, "U.S. airlines have been busy capital-raising bees. Particularly active has been AMR," American Airlines' parent company. American expects to end the third quarter with $4.4 billion in cash, thanks in part to financing deals announced on Sept. 17 totaling $2.9 billion and $830 million in cash from the sale of common stock the following week.

"There's no denying that the crises of the past two years have taken a toll on our earnings as well as our balance sheet," CEO Gerard Arpey said last month. "It's fair to say that the same could be said for every airline. While you can never borrow your way to success, the financing announcements are very important and positive developments."

The carrier immediately gained nearly $1.3 billion in cash through a $1 billion advance mileage sale to Citi and a $280 million loan from GE Capital Aviation Services—the firms "topping AMR's friends and family speed-dial list," said JP Morgan aviation analyst Jamie Baker. Though Baker said the moves put to rest any concerns about short-term bankruptcy scenarios, "longer-term, AMR still could justify bankruptcy under certain circumstances."

Delta completed financing transactions that totaled $2.1 billion, "marking a significant step toward addressing the company's 2010 debt maturities and further strengthening its liquidity position," the company said in a statement. Delta said it ended the third quarter with $5.6 billion in unrestricted liquidity. Meanwhile, US Airways in the final days of September raised $137.3 million through a common stock offering, and United parent company UAL Corp. on Sept. 30 also offered new common stock shares.

Before late September's cash grab, International Air Transport Association director general and CEO Giovanni Bisignani said the larger airlines had built cash reserves of $15 billion in the past 10 months, of which $12 billion is in debt and $3 billion is in equity. He likened the increase in liquidity to a "war chest to fight the crisis," but added that "some airlines have not been able to build up their reserves. They've relied on banks, and banks are not lending. We could see some more casualties in the coming months."

U.S. legacy carriers likely won't be among those casualties."We didn't previously expect any of the U.S. majors to file Chapter 11 soon," UBS's Crissey said, "and these capital raises provide more support for this view." Still, he noted that not all of the new liquidity "lowers the risk of bankruptcy in our models," since UBS already had assumed some of the carriers' capital-raising efforts.

Crissey concluded, "The rally in the U.S. airline stocks and the appetite for airline secondary issuances has meant that more capital is available to the airlines than we modeled a quarter ago. Therefore, near-term bankruptcy risk has diminished."