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Posted March 26, 2010 2:55 PM
By Paul Sheridan

Where have all the bad airlines gone?

At a customer meeting a few weeks ago I was asked what airlines were on my watch list this year. Apart from saying “everybody but nobody” I couldn’t think of a single name. As the industry enters another year of losses, how is it that we haven’t had more bankruptcies?

Two and a half years ago as oil prices were breaking a new record each day there was an incredible amount of talk and comment about the end of the industry as we knew it. The industry was doomed and oil would keep on going up even though the world economy was stalling. Fleets would be halved. Nobody would ever buy a 737 classic again. People were trying to imagine what a peak oil fleet would look like. It feels like another world and not just because it was all before the Lehman collapse.

 
The idea that oil prices would rise and rise, like decoupling and so many theories of the last boom, was the one big flaw in that argument but the rest of it was mostly true. Airlines could not survive $150 dollars a barrel oil for a sustained amount of time and the 737 classic is a hard aircraft to place. Even though oil prices went down the spike still softened up the airlines for the economic downturn that was on the way. How is it then that the industry is starting to call a bottom on the downturn and there has only been one major bankruptcy, and that was with an airline that was in difficulty before oil prices began to rise? Where is this downturn’s Swissair or United?
 
We all like to look down on airline management but for once it’s time to ask them to take a bow.  Airlines, through a combination of good planning and good luck, were actually ready for the downturn. Coming in to 2008 they had significantly more cash in the bank than they had coming in to 2001.  For example, Aer Lingus had over five times as much in 2008 and Lufthansa had three times as much. Put simply, airlines like Aer Lingus and TAP would have gone bankrupt if they had 2001 levels of cash. Airlines also managed their capacity well and here they had an element of luck. The rapid capacity reductions seen during the oil price panic ended up helping the airlines to position themselves for weaker demand before it really materialised. The reductions were implemented quickly and in an orderly fashion too.
 
That’s not to say that airlines have a bright future ahead of them (they don’t even have a bright future behind them anymore). No industry can sustain three years of heavy losses (indeed what other industry regularly sees three consecutive years of losses?). Like a boxer staggering into his final round where it will just take one well placed punch to knock him down, the airline industry is still vulnerable to a shock this year. Without a shock it seems that we might just get through this downturn without any major casualties, something to put in banner headlines in any submission to a credit committee.
 

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