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Will one of the top four American Airlines close without notice?

Will one of the top four American Airlines close without notice?

Old Jun 24th, 2008, 12:53 PM
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Will one of the top four American Airlines close without notice?

I would like the experts to tell me how any of the huge American Based Air Carriers) could shut down. I just can not picture it happening.

The experts tell us that one or more of them may run out of money or credit and go out of business without notice. This is entirely possible but I doubt the US Government would allow a one day closing like what happened to ATA or Aloha Airlines. When those SMALL Airlines closed their doors there was some disruption but people were able to make it home with only some hassle.

If a huge Airline like American were to close their doors without notice it would strand hundreds of thousands of travelers for days because there would be a shortage of seats on other airlines due to reduced flights.

I know that Eastern Airlines, Pan American World Airways and
Braniff Airlines closed down suddenly but that was in a simpler time when less people were flying and there were more open seats to accommodate the passengers affected.

Could someone who knows the Airline industry and business tell me how any of the large Airlines flying in America could close down today? How would it happen? Tell us a story!
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Old Jun 24th, 2008, 01:14 PM
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I am not an expert in finance, but I don't think there's any chance of any of the big 4 shutting down today. A few months from now, maybe, but not today.

An airline can immediately shuts down for several reasons. One is that the management decides it's better to liquidate the company than bleed money. But this mostly applies to smaller airline that's either privately owned, or the management owns significant stocks. Which is not the case here with the Big Four. Shut down UA now, and Tilton is immediately out of a lucrative job. Why would he do it?

Another possibility is that creditors start repossessing assets when loans or leases default. All the major airlines are sitting on a pretty pile of cash right now, from the profitable 2006-7 seasons, as well as recent efforts to raise cash. None is defaulting on their loans, everybody's paying leases on the planes, etc. And the major airlines own significant portion of their fleet. Plus, it's not in the interest of the creditors to grab a large number of planes or other assets, when those aren't worth that much now.

Labor tensions can cause things to deteriorate and shut down an airline. But so far, things are still relatively calm at all the major airlines; compared to say the last years of Eastern. And we'll get a lot of warning.

Credit card companies may withhold payment and force a credit issue. That's what put Frontier into Ch 11. But that's a small airline with a relative shallow pocket; and F9 is still flying. All the major airlines also have extensive ties with some of the largest financial institutes in the US - AA with Citi, UA & CO with Chase, and DL with AE. All of those will give support to the airlines, unlike the situation with F9.

I don't see any reason why any of the largest airlines will shut down today without warning.
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Old Jun 24th, 2008, 01:46 PM
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I think the moves one is seeing in the daily papers - canning pilots, furloughing cabin staff, reducing frequencies and mothballing aircraft - represents airlines inoculating themselves in order to prevent any Chapter 7 events. Which is not to say that outfits like US might not go belly up. If anything would cause it I'd expect unpaid fuel bills (and not lease payments) would be their undoing.

However I believe that if one of the big 3 (counting NW/DL as one airline) threatened Chapter 7 you'd see moves by the federal government similar to those we saw after Sept. 11. There are some industries (transport or utilities to name two) that are so vital to national interest that a precipitous drop in capacity would probably evoke a "guaranteed loan" or similar response, possibly tied to a re-regulation quid pro quo, from the federal government.

If it works for Bear Stearns, why not for United or American?
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Old Jun 24th, 2008, 03:59 PM
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Nothing analytical here but I personally am feeling a bit gloomy about travel right now. Ticket prices are high, I am concerned about closures, airports and flying a bit of a humiliating experience these days. I know we've seen little inflation over the last decade so perhaps airfare a good bargain relative to inflation but it does seem to be creeping up lately. I look at ATL - SFO tickets, also looking at ATL to PVR - thinking of January trip with friend but I am nervous that tickets will skyrocket or closures will complicate things. We were thinking of going to Europe Summer 2009 but we are rethinking plans given costs all around.
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Old Jun 24th, 2008, 09:01 PM
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The latest rumblings I have seen from the analysts is that you won't see any failures until 2009, at the earliest. At that point, if oil prices do not drop, they are all pretty vulnerable to some sort of bankruptcy. From what I can tell, looking at the balance sheets, this seems about right.

Most of the "experts" seem to think that American is the most vulnerable to bankruptcy, but it isn't clear that they mean liquidation, rather than Chapter 11. And, if there was one carrier that I think could find some investors, it would be American. United is next on everybody's list, and they are probably more likely to actually liquidate. Continental and US Air are probably tied for next most likely - I would think that US Air would be a prime candidate for liquidation. Continental is perhaps a bit safer, as they have a respected management team, but they also suffer from being relatively small, and their fleet is relatively domestic-heavy, so they may not have too many valuable assets to leverage, other than the Newark (and, to a lesser extent, Houston) hub. Delta and Northwest look to be the safest, especially if the merger goes through.

I don't think we will see the government step in with too much money to bail any of them out, because I think there is broad industry consensus that they need one of the carriers to disappear. The fact of the matter is that there is plenty of capacity. And don't underestimate the impact of Southwest; they have gotten so big that it provides a lot of insurance to the system. On the international side, there is plenty of capacity - so much so, that I wonder if we might be talking in 10 years about slashing international routes because of too many planes and unprofitable fares.

What we might see, however, would be a relaxing of foreign ownership restrictions. The EU is pushing heavily for this, and it would likely solve the liquidity problems overnight. AA, for example, would surely be purchased by BA, as they have been lusting after them for quite some time. Likewise, Delta/Northwest would likely get at least a substantial investment from Air France. Lufthansa would probably get into the act, though I don't know if they would buy JetBlue, Continental, or United.
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Old Jun 24th, 2008, 11:30 PM
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About the "broad industry consensus" referred to above: it makes sense that such a consensus exists. If you ask any a competitor in any industry if one of their competitors should die they will probably say yes. Get any three of four airlines CEOs in one room and ask them if they think the other, fourth, airline should die and you will probably get a unanimous vote.

I haven't studied the airline industry, but I just don't believe that there is an over capacity problem now. The problem is the cost of fuel.
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Old Jun 25th, 2008, 12:38 AM
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I haven't studied the airline industry, but I just don't believe that there is an over capacity problem now. The problem is the cost of fuel.

If it were solely about the cost of fuel, then the airlines would have made money in the past. They haven't. They have spent decades chasing market share and it has led to irrationally low fares. It has also led to overcapacity on routes that are overly price-sensitive. Las Vegas and Orlando are two such markets, where business has boomed on the back of cheap airfares. But that much capacity means that it is difficult to raise airfares to the break even level.

And I think you miss the point about the "broad industry consensus." The reason it is important is that there may not be much support from the industry for any sort of 9/11-style bailout program. And pleas from individual airlines will be much more likely to fall on deaf ears than if it is a unified industry front. There is, of course, the issue of whether consumers would prefer the status quo, but consumers are an incredibly ineffectual pressure group and would be unlikely to win the day. The interests of "consumers" are just too varied to allow for a focused lobbying effort - look at what happened to the passenger bill of rights.
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Old Jun 25th, 2008, 10:53 AM
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Won't surprise me - their service stinks! and their staff ruder than any. I doubt if they get paid because that seems to reflect in their service and attitude.
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Old Jun 25th, 2008, 11:23 AM
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HariS - Bring your hatred somewhere else. This thread isn't even about AA.
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Old Jun 25th, 2008, 12:30 PM
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How is AirTran doing? GF has a flight with them in two weeks.
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Old Jun 25th, 2008, 01:15 PM
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All the major airlines are sitting on a pretty pile of cash right now, from the profitable 2006-7 seasons

So it is a cyclical business, right? When the economy is doing well people fly and the airlines make money. When the economy is suffering the airlines lose money and they spend some of that previous profit to keep things going until business picks up again. But now they can't afford the fuel to do that, so they are cutting flights so that they bleed less slowly.

Consumers are a great lobbying group. If demand is there and the price is affordable then the airlines will supply the capacity.

It apparently is (or has been) pretty easy to get into the airline business and not too difficult to hang around when sick. If "industry" lobbies Congress to let XX airline die, then that may happen. But the supply will come back if demand is still there but that won't happen if cost of supplying makes the price too high.

Yes there is a lot of capacity, i.e. a large supply of seats now and competition is fierce. But that has been the status quo and it never resulted in less capacity before. Over the last few months I've noticed a new competitor in LAX T6: Virgin America.

Fuel prices have changed the equation.
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Old Jun 26th, 2008, 12:42 PM
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"If it works for Bear Stearns, why not for United or American? "

Because Bear Sterns was a financial institution with a lot of "emotion" attached to it. Nobody wants to see banks fail.

An airline failure. Just another day.
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Old Jun 27th, 2008, 04:43 AM
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I think our RIDICULOUS government or maybe the SENATE that wasted our money on hearings should take all the subsidy money they give the oil companies to the airlines! It is pretty apparent after 30 years that the oil companies have been researching the money right into their own pockets!!!!!
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Old Jun 27th, 2008, 06:39 AM
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I know it is popular to label the oil companies as greedy and rapacious, but their earnings aren't really that out of line. Exxon/Mobil's profit margin was around 10% for 2007. By contrast, 3M's was around 17% last year. GE, too, has a higher profit margin than Exxon/Mobil.

And all of that is beside the point. The legacy airlines are in the trouble they are in because they are poorly run. They have made exceedingly poor decisions for most of the past 20 years and are simply unprepared for the challenge of expensive oil. But I am pretty certain that, if it wasn't oil, some other "crisis" would have come along to hobble them anyways. I mean, 4 of the big 6 just exited bankruptcy that was brought on, not by oil prices, but by their complete inability to hold down labor costs. So, no need to blame the oil companies for this one.
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Old Jun 27th, 2008, 07:09 AM
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...but their earnings aren't really that out of line. Exxon/Mobil's profit margin was around 10% for 2007. By contrast, 3M's was around 17% last year. GE, too, has a higher profit margin than Exxon/Mobil.

True, but on rather different volumes.

2007 Profits of the five US oil companies included in the top 50 companies tracked by Fortune amounted to $80.4 billion, or 27% of all profits generated by the Fortune 50. It's not just Exxon, it's Chevron, Conoco/Philips, Valero and Marathon. And don't forget some of the foreign-based companies not tracked by Fortune, such as Shell and BP.

I basically agree with your point about mismanagement, although pointing the finger at labor in my mind is scapegoating a little. Incapable management, capital crunch, poor route architecture, aging fleets, labor costs - it all really boils down to outmoded business models and way too much clubbiness among the industry leaders. Using "first to the bottom" pricing strategies can't work well in the long term.

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