Airline bankruptcies who’s next?
NEW YORK Aloha Airlines, ATA, Skybus one week, three airlines out of business. Add in soon-to-be-defunct Champion Air and December casualty MAXjet Airways, and last week’s rapid-fire round of airline failures starts to look like an ominous trend.Considering the heavy toll high fuel prices are taking on the industry, it’s no surprise travelers, investors, airline employees and bankruptcy lawyers are wondering who might be next.”When you have not just one, not just two, but three airlines that go bankrupt, you have people really sitting up and saying ‘what’s going on?,'” said Vicki Corliss of InsureMyTrip.com, which has seen a jump in calls asking about coverage against going-out-of-business cancellations.Industry observers are reluctant to predict which airline, if any, could next leave passengers stranded. But they agree that any further failures this year are unlikely to involve names atop most frequent-flier lists.”The risk really is in some of the second-tier carriers that have less financial means than the major airlines,” said Kevin Mitchell, chairman of the Business Travel Coalition.One area of concern is regional airlines, which do most of their business feeding passengers in small markets to larger hubs on behalf of the bigger carriers. Their long-term contracts were always assumed to guarantee a certain level of business for years to come.But with larger airlines under pressure to rein in expenses, even the extent of those promises is now in doubt.”The major airlines are trying to cut costs as much as possible, and the regionals are one area where they can do that,” Standard & Poor’s airline analyst Jim Corridore said.Last week, Mesa Air Group Inc., which provides regional service for US Airways, United Airlines and Delta Air Lines, said Delta planned to cancel a major contract-flying agreement worth $20 million a month, amid a disagreement over the number of flights completed. Mesa contends Delta asked it to cut flights, then blamed it for a low flight completion rate in an effort to reduce capacity and increase profits.On Monday, Mesa filed a federal lawsuit to keep that deal intact. Delta spokesman Chris Kelly declined to comment about the lawsuit but said Delta would “vigorously defend” itself.Mesa is seen by some analysts as more vulnerable than other regional operators, such as Republic Airways Corp. and SkyWest Inc., because it is less diversified. It has also been dogged by a series of legal disputes involving subsidiary go!, an inter-island airline in Hawaii. In January, go! reported a $20 million operating loss in its first 16 months of operation.Mesa wouldn’t comment about whether it faced bankruptcy.Analysts have also sounded alarm bells about a handful of budget airlines, which they say could be at even greater immediate risk than regional providers.”I think there are other marginal carriers that could succumb,” Calyon Securities analyst Ray Neidl said.In a recent report, Neidl noted that most major carriers have amassed hefty stockpiles of cash that should help them weather what is expected to be a rocky year for the industry.But he cited concerns about low-cost carriers AirTran Holdings Inc. and Frontier Airlines Holdings Inc., saying their cash holdings are likely to fall well below 10 percent of expected revenue by the end of the year. Since the Sept. 11, 2001, attacks, a 20 percent cushion “became a more realistic target level for cash,” he wrote.”Most of the public companies can make it through the year, but if anyone’s at risk, it’s the low-cost carriers,” Neidl said.In an interview Tuesday, AirTran President and Chief Executive Bob Fornaro drew a sharp contrast between the Orlando, Fla.-based carrier and the airlines that went out of business last week. He said first-quarter revenue rose 6 to 7 percent, and that advance bookings through the third quarter are better than at the same time last year.”These were very, very weak airlines,” Fornaro said, adding the carrier was “absolutely not” expecting to file for bankruptcy. “We’re strong in the marketplace, we’re well positioned, and we have the lowest cost structure in the industry.”Frontier spokesman Joe Hodas said the Denver-based carrier has “no concerns about bankruptcy,” is operating as usual, and is working to bolster its cash position.Avondale Partners airline analyst Bob McAdoo, meanwhile, predicted in a research note Monday that upstart Virgin America which is privately held and therefore releases less operating information than publicly owned carriers could be the next casualty.McAdoo cited preliminary filings with the Department of Transportation that suggest the carrier is rapidly losing money, and flew planes that were considerably emptier than some of its competitors through the end of last year.”We caution that these estimates are based on limited (Transportation Department) filings and may be overly pessimistic,” he wrote. “However, given the ownership structure of Virgin America … we see parallels between Virgin and the three failed airlines.”Virgin America spokeswoman Abby Lunardini, reached as the carrier prepared to launch a new route between Los Angeles and Seattle, dismissed concerns about the company’s health and said the Burlingame, Calif.-based carrier’s occupancy levels had improved considerably in recent weeks.”Our business model is strong and we’re continuing to grow aggressively,” she said.AP business writers Chris Kahn in Phoenix and Sandy Shore in Denver contributed to this report.
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