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.
Paul,
I liked your article and would comment straight off that what you say was very thought prevoking. I would agree with many of your comments, especially that the cash 'store-up' has helped many airlines, however I can't yet see that business has picked up sufficiently to say that there won't be casualties yet. Many airlines were astute enough to hoard cash and raise finance prior to the downturn, but repayments and refinan cings will test CF going forward on an increasing scale; along with that there is a very sluggish second hand market, so no financial respite from a quick few sales or SLBs.
What I think this industry needs is a serious debate as to why people should invest in an industry that on the face of things just loses money. I know that many people around the edges of the airlines make money and a select few airlines themselves make money, so how do we convince your average investor (equity, mezz or secured debt) that the returns are available for them? Controversially I could say that air travel has become too cheap and the quickest way to recovery would be to see all prices rise. The LCCs would point to the fact that this isn't necessary and the unions on legacy carriers would argue that that probably does need to happen to avoid job losses. The fact remains that this industry has never quite made the complete leap from State operated to free market, so some of the best and worst of both situations remain.
We can't expect the ECAs to prop the finance market up; the banks are retreating; the lessors are only taking some slack - so in all we need to get a concerted message across to all hestitant investors that this industry does have a real financial future - we just need to work on the script.