Tuesday, January 6, 2009

Falling air travel means bankrupt airlines

Plummeting jet fuel prices caused by the sharp decrease in the price of oil won't help the troubled airline industry. Passenger traffic was down 10.6% in November. We're also not talking about a nice (relatively) Chapter 11 bankruptcy that allows an airline to reorganize. Oh no, these are the Chapter 7s, liquidation.

Now, with both business and leisure travel in North America expected to fall as much as 15% this year, the industry may face another round of bankruptcies. Unlike the last spate of failures in the mid-2000s, not every airline may survive. In previous downturns, carriers often used Chapter 11 as a reset button that let them emerge from bankruptcy even stronger by shedding debt and other obligations, such as pensions. To play it safe, big carriers such as American Airlines and US Airways have raised fresh cash. But many airlines have hocked most of their assets, leaving them little to borrow against. "At this point, bankruptcy is liquidation," says Roger E. King, an airline analyst at institutional research firm CreditSights.
The 15% fall in North American passenger traffic squares with some numbers I found in a previous post (decrease to 240 million from 299 million passengers on American carries). That stories referenced from that post said ticket prices would rise. But this more recent article says that carriers are slashing fares to fill empty seats, but doesn't mention what's happening with capacity. Anecdotally, I haven't seen massive fare decreases.

The BusinessWeek article says Air Canada and US Airways are the two big airlines that are in danger of going under. From my reading, it seems that Air Canada's problems are due to the financial engineering of the hedge funds that bought it during its last bankruptcy.