Major Airlines Improve Cash Positions

Major domestic 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 in the run-up to the closing of the third quarter, effective today, pulled a number of levers to build their liquidity positions. For the legacy airlines, the cash-raising efforts further suspended the already distant possibility of bankruptcies in the short term, analysts said, though revenue trends and sustained demand weakness present carriers with yet another challenging quarter.

UBS analyst Kevin Crissey in a Sept. 24 research note said, "The 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 major 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 in a call with financial analysts and media earlier this month. "I think it's fair to say that the same could be said for every airline. While you can never borrow your way to success, today's 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—those two firms "topping AMR's friends and family speed-dial list," according to JP Morgan aviation analyst Jamie Baker. Though Baker said the moves put to rest any concerns on American's cash position and any short-term bankruptcy scenarios, he said "longer-term AMR still could justify bankruptcy under certain circumstances."

Delta this week 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 ends 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, while United's parent company, UAL Corp., today became the latest legacy airline to announce plans to offer new common stock shares to help build its cash position.

Prior to those most recent legacy carrier cash grab in the final weeks of September, International Air Transport Association director general and CEO Giovanni Bisignani said, "Larger airlines have built up cash reserves of $15 billion in the past 10 months." Of that, he said, $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." Still, Bisignani said, "some airlines have not been able to build up their reserves. They've relied on banks, and banks are not lending," which means "we could see some more casualties in the coming months."

Domestic legacy carriers are not expected to be among those casualties, analysts said. Even before reinforcing cash positions, Crissey said, "We didn't previously expect any of the U.S. majors to file Chapter 11 soon and these capital raises provide more support for this view," Crissey said.

Still, Crissey noted that not all of the new liquidity "lowers the risk of bankruptcy in our models," since UBS had already assumed some of the recently announced 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 in our view."