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American (AMR) Inspections: Gee, We Skipped Those Planes

AMR (AMR), parent of American Airlines, decided to skip inspections on certain of its airplanes due mostly to cost issues. The aircraft in question were suspected of being hit by lightening. American reasons that there has not been a crash caused by electric bolts in over 30 years. Tell that to the people who are on the next plane that crashes during an electrical storm.

According to The Wall Street Journal "American made the procedural changes and revised its maintenance manual in an effort to prevent planes from being pulled out of service."

AMR does have a hard choice. It can risk going into bankruptcy because it cannot cover all of its costs, including FAA mandated inspections, or it can risk killing its passengers. Tough call.

If the government is going to expect that airlines will follow the letter of the law, it will have to find some way to offset airline inspection costs with subsidies. Having an industry which is largely in Chapter 11 does not do the airlines or the government any good. With rising fuel prices, the next few quarters may be so bad that banks start looking at balance sheets at companies like AMR.

If airlines cannot afford safety procedures, the may just have to stiff their creditors.

Douglas A. McIntyre

Continental Unloading Copa Shares (CPA, CAL)

Copa Holdings, S.A. (NYSE: CPA) announced today that it has filed a registration statement for a proposed offering of 3,977,300 Class A non-voting shares of Copa Holdings by selling shareholder Continental Airlines, Inc. (NYSE: CAL).

Morgan Stanley will be the sole book-running manager, while UBS Investment Bank will be the joint lead manager of this offering.  The underwriters also have an over-allotment option to purchase up to an additional 397,700 shares from Continental Airlines.

Continental will hold about 1.3% of the outstanding Class A shares if the underwriters do not exercise the over-allotment option; and it will not own any more Class A shares if the underwriters exercise the full over-allotment option. 

Copa Holdings will not receive any proceeds from the offering.

You can join our open email distribution list to hear about other IPO's, secondary offerings, special financings, mergers, spin-offs, and other special situations.

Jon C. Ogg
May 12, 2008

Southwest Airlines Takes Down New $600 Million Loan (LUV)

Southwest Airlines Co. (NYSE: LUV) has disclosed in an SEC Fling that On May 6, 2008 the company entered into a term loan agreement with Citibank and seven European banks named as lenders to Southwest aggregating up to $600 million.

The consortium of banks have loaned the full $600.0 million to the air carrier on May 9.  These loans are all to be secured by first-lien mortgages of a total of 21 Boeing 737-700 aircraft that are owned by Southwest.

The loans mature on May 9, 2020 and are repayable quarterly in installments of principal and interest at a rate of LIBOR plus 0.95%.

After looking through the company's latest books as of March 31, 2008, the company had listed liquidity as $4.370 Billion in cash and equivalents, $350 million in receivables, and $180 million in long-term investments.  Its current debt was broken down as 5.781 Billion in  current liabilities, $2.079 Billion long-term debt, and $2.986 Billion in deferred long-term liability charges; and the total liabilities are $10.846 Billion.

You can join our open email distribution list to hear about other special financings, mergers, IPO's, spin-offs, secondary offerings, and other special situations.

Jon C. Ogg
May 12, 2008

Airlines Next Stop: Their Bankers' Offices (UAUA)(AMR)

With the huge amount of debt on airline balance sheets and rising fuel costs, the big carriers may have trouble meeting their debt service or loan covenants. United (UAUA) has over $7 billion in long-term debt. AMR (AMR) has over $9 billion.

According to the FT "United Airlines is considering asking its banks to revise the terms of its credit facility in an effort to gain much-needed financial flexibility to weather the airline industry’s sharp downturn."  Dollars to donuts every other US airline is doing the same thing.

This puts banks in a bad position, particularly with their own balance sheet problems. They can cut new deals with airlines, which might force them to write off the value of some of the loans, of they can force current terms to stay in place.

Current terms may be too onerous. Passenger revenue is likely to drop in a slow economy. There is no reason to think oil will drop below $100 this year. Banks who force the issue with airlines may be forcing Chapter 11 filings. In that case, lenders may only get $.50 on a dollar.

Airline financial woes are worse for the banks than they are for the carriers.

Douglas A. McIntyre

As Continental (CAL) Walks From United (UAUA) Link-Up, Airline Mergers Look Less Attractive

The board and management of Continental Airlines (CAL) have decided that staying single is the best way of life. After long merger talks with United (UAUA), Continental has elected to go it alone.

Continental may still enter a "code sharing" alliance with one or more airlines so that customers can have common ticking across more than one carrier.

The decision is based on the premise that airline mergers created nightmarish customer service problems which drive fliers to the competition. It is a sound position and calls into question the wisdom of Delta's (DAL) merger with Northwest (NWA).

While industry marriages may allow for the cutting of some routes and personnel, they can lead to labor relations headaches including strikes by employees who are trying to keep their jobs. The hook-ups also do nothing to solve the more pressing problem at all airlines--rising fuel costs.

Whether solo or linked, several of the large US carriers could go into Chapter 11 this year. A combination of $120 crude and a recession which is almost certain to curtail air travel put the airlines under pressure which their managements cannot relieve.

The airline industry is about to undergo another profound restructuring, whether it wants to or not.

Douglas A. McIntyre

AMR (AMR) Looks For Partner Before Trouble Worsens

AMR (AMR), parent of American Airlines, is in talks with US Air about a merger. Based on balance sheet and stock price performance AMR needs a partner more than most of the other large carriers.

According to Reuters "American Airlines has had early-stage merger talks with US Airways and is in advanced talks for an alliance with Continental Airlines."

Northwest (NWA) and Delta (DAL) have already begun the merger process.

With fuel prices high and moving higher, the major carriers are closer to Chapter 11 than they will admit. All lost large sums in the first quarter.

Douglas A. McIntyre

AirTran Raises Much Needed Cash (AAI)

AirTran Holdings Inc. (NYSE: AAI) has priced $65 million a 5 1/2% convertible Senior Notes due 2015.  The company is also given underwriters a 30 day overallotment option for $9.75 million additional in notes.  Morgan Stanley was the lead underwriter and Credit Suisse served as co-lead manager. The equivalent conversion price is $3.84 per share.

The airline has concurrently priced 22.3125 million shares of its common stock price of $3.20 per share.  Underwriters have been granted more than 3.3 million shares as an overallotment option.

AirTran has a market cap of $294 million and shares closed at $3.20.  While the company lost $35 million last quarter, it had over $360 million in cash and equivalents at the end of 2007.

As you can see by their wide trading range of $3.13 to $12,65, they are also not immune from high oil prices and a tightening economy.

You can join our open email distribution list to hear about other special financings, IPO's, spin-offs, secondary offerings, restructurings, and other special situations.

Jon C. Ogg
April 25, 2008

Despite US Air Carriers Issues, Boeing Guidance Mostly Strong (BA)

Boeing Co. (NYSE: BA) posted a 38% profit gain of $1.2 billion on a 4% revenue gain to $16 Billion in Q1-2008, and its numbers come to $1.62 EPS.  First Call had estimates of $1.35 EPS on $16.5 Billion.

Here is where this gets tricky, or at least where it is surprising.  The airplane giant has put 2008 EPS guidance as being reaffirmed at between $5.70 and $5.85 EPS (Fist Call is $5.93 EPS) and 2009 EPS expected to grow approximately 20% to between $6.80 and $7.00 EPS (First Call is $6.87 EPS). 

Despite some softness or not being above estimates, this is extremely strong considering the woes of the US airline industry as high oil prices are killing earnings.  Its contractual backlog of orders grew to a new record of $271 billion, and its total backlog is $346.1 Billion. 

What is amazing here is that the US airlines' woes are not yet bleeding over to Boeing.  International markets are strong, but from an outsider's view this one looks like even though it is under on guidance that the numbers are going to be hard to hit after all the 787 Dreamliner delays.  Either the new planes are going to help airlines bring on more passengers, or these airline woes will spill over into their upgrades.  Maybe those old $20 per ticket oil surcharges will go up to $100.

Boeing shares are up 2% at $80.39 pre-market on a relief rally, and the 52-week trading range is $71.59 to $107.83.

Jon C. Ogg
April 23, 2008

Is Southwest The Only Profitable Air Carrier? (LUV, CAL, AMR, DAL, NWA)

Southwest Airlines Co. (NYSE: LUV) may be one of the few remaining profitable airlines.  The company posted earnings this morning with a $34 million profit, or $0.05 EPS, and $0.06 EPS before one-time items.  Its revenues rose by 15% year over year to $2.53 Billion.  First Call had estimates of $0.01 EPS on $2.49 Billion in revenues.  Southwest did note that it would take possession of its 29 new planes for 2008 but is cutting 2009 deliveries in half to 14 and is putting off 2010 orders.  Bookings remained strong for May and June and it noted that unless the economy softens too much further, it expects per-passenger revenues to climb again in the coming quarter from last year.  Southwest saw its fuel prices rise by some 33%, and it is reviewing its flights to determine unprofitable flying.

Analysts that cover Southwest have a $0.20 EPS target for next quarter on $2.84 Billion in revenues, which seems a bit high in the current climate and in light of cancellations and charges that have already been seen.  But as of now, this may be the only profitable carrier and it has perhaps better brand loyalty than others.  Southwest shares are indicated up almost 1% pre-market.

Continental Airlines Inc. (NYSE: CAL) posted a loss of $80 million, or -$0.81 EPS, early this morning.  Outside of a gain on a small sale, it would have seen -$0.86 EPS, although this is actually slightly better than the -$0.93 EPS that First Call was expecting. Revenues rose by 17% year over year, but a fuel price surge of over 50% will bite into that in a hurry.  Continental is likely going to trim 5% of its capacity to focus on more profitable flying.  Analysts continue to expect a profit for Q2, although the fuel surge may create a need to bring those targets down.  As results were actually slightly above estimates, shares are up almost 2% pre-market.

Traders just are not reacting well to the Delta (NYSE: DAL) and Northwest (NYSE: NWA) merger, with Northwest shares down more than 10% since last Friday. Shares of Delta (DAL) are also down more than 10% since last Friday.  As one trader sent a quote this week to us: "Great, the combined giant can lose half the money and twice the baggage combined, and then hope they make it up on volume."

AMR Corp. (NYSE: AMR), American Airlines' parent, posted a loss of $328 million on Wednesday led by fuel prices.  That didn't even include the latest SNAFU for its massive flight cancellations.  It maintains that it can compete whether it pursues a merger of its own or not, although it is selling off 90% of its investment arm called American Beacon Advisors for some $480 million.

Jon C. Ogg
April 17, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

AMR (AMR) Posts $325 Million Loss, Can It Stay Independent?

AMR (NYSE: AMR) reported that it lost $325 million in the first quarter as fuel charges rose $665 million over the same period last year.

AMR also disclosed that it has reached a definitive agreement to sell American Beacon Advisors, Inc., its wholly owned asset-management subsidiary, to Lighthouse Holdings, Inc., which is owned by investment funds affiliated with Pharos Capital Group, LLC and TPG Capital, two leading private equity firms. AMR will receive total consideration of approximately $480 million.

AMR reported first quarter consolidated revenues of approximately $5.7 billion, an increase of 5.0 percent year over year. AMR ended the first quarter with $4.9 billion in cash and short-term investments, including a restricted balance of $426 million, compared to a balance of $5.9 billion in cash and short-term investments, including a restricted balance of $471 million, at the end of the first quarter of 2007. The year-over-year decrease in the Company's cash and short-term investment balance is primarily related to AMR's total debt payments of approximately $2.3 billion in 2007, including prepayment of approximately $1 billion.

AMR's Total Debt, which it defines as the aggregate of its long-term debt, capital lease obligations, the principal amount of airport facility tax-exempt bonds, and the present value of aircraft operating lease obligations, was $15.2 billion at the end of the first quarter of 2008, compared to $17.5 billion at the end of the first quarter of 2007. AMR's Net Debt, which it defines as Total Debt less unrestricted cash and short-term investments, was $10.7 billion at the end of the first quarter of 2008, compared to $12.2 billion at the end of the first quarter of 2007.

The financial data still begs the question of whether AMR can stay in business as an independent company? The company had interest expenses of $194 million in the first quarter. If fuel costs continue to rise and the recession cuts revenue, it will be hard.

Douglas A. McIntyre

Why Northwest Air (NWA) Is In Trouble

Investors should hope that airlines will do what they can to keep business. Northwest Airlines (NYSE: NWA) seems to want to do the opposite.

I tried to get a ticket for my son to fly from New York to Detroit. I went online, put in my credit card and was told that because my name is different from my son's, I had to call their "800" number. When I did, I was told their was a $15 fee to buy the ticket over the phone, even though it could not be down at nwa.com.

I told the reservation agent I would book on American NYSE: AMR). I did. No hassles. No extra charges.

No wonder NWA needs to merge with Delta (NYSE: DAL). They are trying to put themselves out of business.

Douglas A. McIntyre

New United/Continental Deal Could Kill Delta (DAL) Takeover

Who would have imagined that the Delta (NYSE: DAL) merger with Northwest (NYSE: NWA), which was announced yesterday, could be scuttled by a merger of Continental (NYSE: CAL) and United (NASDAQ: UAUA)?

Most Wall St. observers believed that the unions were the largest barrier to the Delta deal. The pilots have not given the marriage their imprimatur. The captains may be able to hurt the merger by threatening a strike which could shut down the new carrier. Regulatory questions could be the other roadblock, but, as Reuters, points out "While the U.S. Justice Department is expected to work carefully, the agency's track record on consolidation favors approval."

If the airlines can solve their labor issues, the merger, meant to offset the rise in fuel prices and fall in passenger revenue, is likely to happen.

All of that looked good until word began to get out yesterday that United and Continental do not think they can go it alone in the face of the Delta merger. It would put them at too much of a disadvantage as they maintain overlapping routes and duplicate costs for employees, planes, and maintenance. So, the boards of both companies are well along in the process of approving their own business combination.

The move by all four airlines to create two would be the straw that breaks the back of regulatory rubber stamping. Activist groups and members of Congress are likely to oppose the deal, perhaps appropriately, because having only four large airlines in the US, including AMR (NYSE: AMR) and US Air (NYSE: LLC), instead of six, might well hurt consumer choice and cause much higher ticket prices.

The mergers of four airlines would almost certainly lead to many cities having only one major carrier, a move that almost always spikes up ticket prices. It would also cause tremendous lay-offs at a time when unemployment will be up anyway. The Justice Department would have to look long and hard at those factors and that significantly hurts that chances of either merger going though.

Unless, of course, all four airlines want to get together and form just one carrier.

Douglas A. McIntyre

Delta (DAL) Merger With Northwest (NWA) Could Come In Days

The on-again, off-again merger between Northwest (NYSE: NWA) merger with Delta (NYSE: DAL) appears ready to go through. The deal could be hurt by the fact that the pilots have not signed up for the marriage.

According to The Wall Street Journal "They could go ahead without the support of Delta's 6,000 pilots. Delta and its pilots remained in talks over the weekend on a new post-merger contract that would cover that group only, leaving negotiations with Northwest's 5,000 pilots for a later day."

It sounds like the chances for a culmination are less than positive. The pilot's union could strike either airline and other workers might well go out in sympathy wanting to make it clear that management does not have a free hand in the future of the carriers.

A prolonged strike could do tremendous damage to a new carrier, driving all of the financial benefits out of the merger.

So much for executives and boards running companies.

Douglas A. McIntyre

American (AMR) Flights Back To 100%, What Was Cost?

AMR (NYSE: AMR), parent of American Airlines, will return to 100% service tomorrow after FAA-mandated inspections of it MD-80 fleet forced the cancellations of over 3,000 flights.

AMR management has said that the incident will cost the carrier tens of millions of dollars.  An analyst with Standard & Poor's estimated it could easily top $30 million," according to the AP.

The figure begs the question of how much the debacle will cost AMR. Customers may demand expense reimbursement for hotel stays and other costs which were incurred due to scrubbed flights. There may even be some class action suits for damages fliers will claim were caused by their lack of ability to travel.

Last year, AMR made only $945 million in operating income on $22.9 billion in revenue. The company had debt service of $894 million. It is likely that the rising cost of fuel and falling domestic traffic could take American to a loss in each of the next few quarters, and the expenses of the cancellations will make that worse.

At some point the carrier will have trouble meeting interest payments.

Douglas A. McIntyre

As Frontier (FRNT) Goes Down, AMR (AMR) Can't Stay Afloat

Frontier (NASDAQ: FRNT) filed for Chapter 11 joining ATA and Aloha Air. According to MarketWatch "The airline said the decision was taken after its principal credit-card processor unexpectedly said it would start withholding "significant proceeds" received from the sale of its tickets." But, like the others, it was the victim of high fuel prices and shrinking passenger prospects.

The news also came that Delta's (NYSE: DAL) pilots had elected to approve a new contract which will allows their company to merge with Northwest (NYSE: NWA). Whether the combination will come soon enough to save the carriers is a matter of conjecture. The marriage announcement is said to be less than a week away.

One airline which is not likely to make it through the current turbulence is AMR (NYSE: AMR), parent of American Airlines. The company's CEO said yesterday that current flight cancellations due to FAA inspections would cost the firm tens of millions of dollars. It is not money AMR can spare.

In most industries staying out of Chapter 11 is a badge of honor. The sole exception to that is the airline business where bankruptcy is embedded in the culture like ticks are on the hide of a deer.

AMR is one of the few large US airlines which stayed out of a significant financial mess over the last decade. In the most perverse sort of way, a Chapter 11 filing four or five years ago might have spared AMR from its current perilous state.

One advantage that carriers like Northwest have in the present difficult economic environment is that they used their trips through the Chapter 11 process to tear away debt as well as employees which they deemed to be redundant. By several accounts, NWA has saved over $2 billion a year because it went through bankruptcy.

All of the large US airlines are at risk now. Fuel costs are up sharply and passenger revenue and revenue miles are likely to fall as the economy keeps people off commercial carriers The very rich can continue to operate their own fleets of private jets.

The present financial trouble does not strike each large US airline equally. Largely because of an advantage of Chapter 11, NWA has $6 billion in debt to its $3 billion in cash. At AMR, long-term debt totals $15.6 billion compared to its $4.6 billion in cash. Last year, AMR's EBITDA was only about two times it interest expenses. By paying all of its bills over the years, AMR has been placed at a great disadvantage.

AMR had very modest operating income of $965 million last year compared to its $22.9 billion in revenue. The market has figured out the problem. While shares in other national carriers are off about 50% in the last six months, AMR is off 60%. That is a significant negative premium, a vote saying AMR is in a different bucket than its competitors are.

Several carriers reported falling traffic for March. At AMR, domestic traffic fell 5.9% for the month.

At some point soon, the dropping revenue effect and rising expenses cross where interest payments matter.

Those lines are crossing now at AMR and it puts the company at great peril.

Douglas A. McIntyre

As Hong Kong Airline Fails, Large US Carriers Face Trouble

Oasis Airlines in Hong Kong is shutting down. According to MarketWatch "Oasis Chief Executive Stephen Miller told a news conference all flights were being canceled immediately."

Oasis gets to join a growing list of airlines which have vanished into thin air. Large US carrier ATA is one of these, and Alitalia says it is almost out of money.

So far, the market's reaction to the risk to large US carriers has been muted. The stocks of AMR (AMR), Delta (DAL), United (UAUA), and Northwest (NWA) may be at 52-week lows, but they have found, at least for now, a bottom.

In most industries staying out of Chapter 11 is a badge of honor. The sole exception to that is the airline business where bankruptcy is embedded in the culture like ticks are on the hide of a deer.

One of the few large US airlines which stayed out of a significant financial mess over the last decade is AMR. In the most perverse sort of way, a Chapter 11 filing four or five years ago might have spared AMR from its current perilous state.

One advantage that carriers like Northwest have in the present difficult economic environment is that they used their trips through the Chapter 11 process to tear away debt as well as employees which they deemed to be redundant. By several accounts, NWA has saved over $2 billion a year because it went through bankruptcy.

All of the large US airlines are at risk now. Fuel costs are up sharply and passenger revenue and revenue miles are likely to fall as the economy keeps people off commercial carriers The very rich can continue to operate their own fleets of private jets.

The present financial trouble does not strike each large US airline equally. Largely because of an advantage of Chapter 11, NWA has $6 billion in debt to its $3 billion in cash. At AMR, long-term debt totals $15.6 billion compared to its $4.6 billion in cash. Last year, AMR's EBITDA was only about two times it interest expenses. By paying all of its bills over the years, AMR has been placed at a great disadvantage.

AMR had very modest operating income of $965 million last year compared to its $22.9 billion in revenue. The market has figured out the problem. While shares in other national carriers are off about 50% in the last six months, AMR is off 60%. That is a significant negative premium, a vote saying AMR is in a different bucket than its competitors are.

Several carriers reported falling traffic for March. At AMR, domestic traffic fell 5.9% for the month.

At some point soon, the dropping revenue effect and rising expenses cross where interest payments matter.

That will be soon at AMR and it puts the company at great peril.

Douglas A. McIntyre

Cheap Multiples For Legacy Airlines Flying To Bermuda Triangle (DAL, UAUA, AMR, NWA, CAL, LCC)

It's that magic time of the economic cycle, all over again.  Investors run screens galore for cheap stocks to hide money in during a consumer and credit recession.  One group keeps showing up cheap over and over.... THE LEGACY AIRLINE CARRIERS.

When you run the basic searches these all show up with P/E ratios of well under 10.0 and they all look dirt cheap on a price-to-book ratio on the surface.  Just one small problem.  Those P/E ratios are about to show up as major Negative numbers and "N/A" on screens.  In fact, they won't be making money for a while as a group.  If that isn't enough, those price-to-book ratios are about to go to rise rapidly as cash will pay for higher and higher costs while the economic fundamentals go against the carriers.  Many book values will go negative by the end of the year at this rate.

We already saw the problems at individual carriers, but it is actually at every single legacy carrier now.  We cross referenced where many such screens were run and here was what we came up with for the stocks, on a P/E, and price/book ratio on major financial websites:
                P/E and Price/Book (each)

Airline name (ticker)                        YAHOO!      REUTERS      AOL
Delta Air Lines (NYSE: DAL)          2.14/0.25    1.63/0.25    3.64/0.43   
UAL Corp. (NASDAQ: UAUA)          7.61/1.02    9.62/1.03    12.78/1.72
AMR Corporation (NYSE: AMR)      5.56/0.93    5.78/0.93    7.88/1.31
Northwest Airlines (NYSE: NWA)   0.91/0.30    1.64/0.30      - /   -
Continental Airline (NYSE: CAL)    4.91/1.30    5.14/1.30    5.32/1.40
US Airways Group (NYSE: LCC)    2.09/0.69    2.20/0.60    3.25/1.63

The reason all calculations are different is that so many different services have different dates of reference, different numbers for GAAP and non-GAAP EPS, different "book value calculations" and more.  But you get the idea.  These look super cheap when you run the two most basic screens out there.  Now when you run the FORWARD EPS targets from First Call, the picture becomes much different.  Below are the First Call estimates for the coming quarter and then for the coming fiscal year.  As the losses mount and that cash flies out the window, kiss those low book values goodbye:

Airline name (ticker)                QTR/FISCAL EPS ESTIMATES       
Delta Air Lines (NYSE: DAL)            -$0.37 & $0.01   
UAL Corp. (NASDAQ: UAUA)           -$2.75 & -$3.05
AMR Corporation (NYSE: AMR)       -$1.32 & -$3.36
Northwest Airlines (NYSE: NWA)    -$0.28 & $0.10
Continental Airline (NYSE: CAL)     -$0.85 & -$0.69
US Airways Group (NYSE: LCC)     -$1.80 & -$3.29

If the fiscal estimates seem not bad enough, don't worry because it just means that the analysts haven't gotten around to downgrading and cutting the estimates further for the outlying quarter.  Joe Public and Corporate Joe are trimming back on airline travel rapidly.  Simultaneously, the price of oil has jet fuel at astronomical levels. $70 oil was pressuring the airlines.  $80 oil was hurting the airlines.  $90 was a real pinch.  $100 and above, well that's just a killer.  Airlines are having to create new bilking mechanisms of charging for checked baggage, figuring ways to charge for bad food. squeezing more seats on to each plane with less and less room, phone reservation charges, and other "fees."  The only alternative is to raise face value and nominal prices across the board, but passengers just go to the next cheaper ad rates even if it is the same after all the "other fees."

Unfortunately, like it or not, the balance sheets of all the legacy air carriers are about to start looking uglier than 2,000 of bad road.  We've seen four smaller airlines implode over the last two weeks.  Those won't be the last.

Dare we ask what the systematic implications are when many of these these legacy carriers start canceling all of the new plane orders?  The Fed already gave a selective bailout to the financial sector.  The government gave major checks out to keep the airlines solvent after September 11, 2001.  After oil prices wreak havoc this year, it very well may be time to get for the legacy carriers to get a second bailout in a decade.

By the time these airlines can actually reach their would be super-mergers, it may just be too late.

Jon C. Ogg
April 8, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

In The Face Of A Failing Industry Northwest (NWA) And Delta (DAL) Restart Talks

The argument that airline mergers improve profits is debatable. Combinations doe not save on fuel costs. Unions often use the marriages as ways to get wage concessions. The last thing a new airline needs is a series of strikes. Customer service is usually hurt as two large carriers put together reservation systems and IT.

Chapter 11 does offer airlines that chance to renegotiate and eliminate debt. Courts can also face down unions by mandating lay-offs.

Delta (DAL) and Northwest (NWA) are going back to the negotiating table to try to craft a marriage, according to the FT. The pilots union, which torpedoed that last deal, will be left on the sidelines. The theory is that they will come along if they see the economy turn against the companies.

And, conditions are getting worse with a vengeance. Fuel prices are still rising. Oil moved toward $107 again today. Passenger traffic will fall as travelers feel the vice close on their pocketbooks due to a deepening recession. In the face of that, even a merger may do the two companies no good.

They can go into Chapter 11 as a combined company instead of separately.

Douglas A. McIntyre

An AMR (AMR) Bankruptcy: The Perversion Of The Airline Industry

In all industries staying out of Chapter 11 is a badge of honor. The sole exception to that is the airline business where bankruptcy is embedded in the culture like ticks are on the hide of a deer.

One of the few large US airlines which stayed out of a significant financial mess over the last decade is AMR (NYSE: AMR), the parent of American Airlines. In the most perverse sort of way, a Chapter 11 filing four or five years ago might have spared AMR from its current perilous state.

One advantage that Northwest (NYSE: NWA), Delta (NYSE: DAL), and United (NASDAQ: UAUA) have in the present difficult economic environment is that they used their trips through the Chapter 11 process to tear away debt as well as employees which they deemed to be redundant. By several accounts, NWA has saved over $2 billion a year because it went through bankruptcy.

All of the large US airlines are at great financial risk now. Ditto for many of their overseas brethren like Alitalia. Fuel costs are up sharply and passenger revenue and revenue miles are likely to fall as the economy keeps people off commercial carriers The very rich can continue to operate their own fleets of private jets.

The present financial trouble does not strike each large US airline equally. Largely because of an advantage of Chapter 11, NWA has $6 billion in debt to its $3 billion in cash. At AMR, long-term debt totals $15.6 billion compared to its $4.6 billion in cash. Last year, AMR's EBITDA was only about two times it interest expenses. By paying all of its bills, AMR has been placed at a great disadvantage.

AMR had very modest operating income of $965 million last year compared to its $22.9 billion in revenue. The market has figured out the problem. While shares in other national carriers are off about 50% in the last six months, AMR is off 60%. That is a significant negative premium, a vote saying AMR is in a different bucket than its competitors are.

Aloha Air, ATA, and SkyBus all went out of business in the last two weeks. Several carriers reported falling traffic for March. At AMR, domestic traffic fell 5.9% for the month.

At some point soon, the dropping revenue effect and rising expenses cross where interest payments matter.

That will be soon at AMR and it puts the company at great peril.

Douglas A. McIntyre

Skybus: Another Airline Closes (AMR)(NWA)(DAL)(UAUA

Skybus became the latest US airline to close its doors. Over the last week Aloha Airlines and ATA have also shut down. Northwest (NYSE: NWA) announced that it would raise passenger fares in the hope of offsetting rising fuel costs. The move is not likely to work because consumers and businesses will be slowing travel to help deal with the faltering economy. Higher ticket prices will not help that situation.

According to The Wall Street Journal "Skybus said it regretted the decision. "Skybus struggled to overcome the combination of rising jet-fuel costs and a slowing economic environment," the company said in a statement. "These two issues proved insurmountable for a new carrier."

Part of the reason behind the recent merger talks which have included Northwest and Delta (NYSE: DAL), and at one point may have included United (NASDAQ: UAUA), is to cut costs. It is not clear that such combinations actually improve the high expenses of fuel and labor. Some overlapping routes can be eliminated  Airline mergers always do cause customer service problems as two large airlines try to put together incompatible reservations systems and IT operations. Frustrated fliers often move to other carriers.

Of the large airlines, AMR (NYSE: AMR), parent of American, may be in the worst shape. It carries a high debt load and cannot afford to see its operating income fall.

Skybus is not the last airline Chapter 11 that investors will see this year.

Douglas A. McIntyre

Northwest (NWA) Raises Fares, But Will Anyone Pay Them?

The management at Northwest (NWA) knows when it is in a pickle. Fuel prices are moving up and passenger traffic is likely slowing as the recession keeps people off airplanes. The only way to make some of that up is through higher ticket prices. But, that won't work.

Northwest and other big carriers, most of them saddled with debt and troubled by crude hanging out at $100, have watched this week as Aloha Air and ATA have filed for bankruptcy and stopped operations.

According to The Wall Street Journal "The move is the latest by a major carrier to trim service and pile extra fees on customers as relentless growth in the cost of fuel threatens the industry's attempt to put a half-decade slump and a round of bankruptcies behind it."

The trouble is that, in a bad economy, getting people to pay more is a losing tactic. Potential passengers who have to pay more will fly less. This even applies to the business traveler. At some point his company, faced with a tough economy, holds him off as many customer trips as possible.

While the airlines are faced with problems, they are not insurmountable. With possible bankruptcies at larger carriers looking more likely in the second half, the airlines are going to have to go to their employees for help, In Chapter 11, lay-offs are not just likely, they are a certainty. Asking workers to come in fewer hours would cut costs significantly at companies which have tens of thousands of employees. It would also allow the carriers to aggressively cut the number of routes which they fly, taking out those they are not highly profitable.

It is also time for the airline companies to go see their lenders. Better now than when the bankruptcy papers are being walked into court. Chapter 11 filings often leave banks with cents on a dollar. Extending debt over a longer period at least offers some chance of being made whole.

Renegotiation with worker's unions and banks may be the only thing that saves airlines and it is not such a bad thing for employees and lenders, especially given the alternatives.

Douglas A. McIntyre

ATA Airlines: Another Bankruptcy

At Aloha Airlines the reason for Chapter 11 was high fuel costs and too much competition. Overnight ATA Airlines went into bankruptcy because it lost a key military contract. As the reasons add up, filing Chapter 11 is back for the industry.

Carriers like AMR (AMR) and Delta (DAL) are still near 52-week lows. High fuel costs and falling passenger bookings due to a recession could make those stock prices worse. Most airlines have too much debt and are heading toward a period of too little cash flow.

The airline industry is one were going into bankruptcy is almost a badge of honor. It is likely to happen to some large carriers this year..

Or, they could merge with the car companies.

Douglas A. McIntyre

Frontier Airlines (FRNT) Loses Lift

Shares of Frontier Airlines (FRNT) are off 12% today to $2.23. The shares have a 52-week high of $7.46.

Early this morning the The International Air Transport Association speaking about industry profits said  "This could easily turn into a net loss should the current economic environment deteriorate further," according to the AP. The price of jet fuel is now about $3.50, about double what it was a year ago.

JP Morgan recently cut airline credit ratings to "underweight". Frontier's traffic was strong in February but probably not strong enough to offset rising costs.

Last quarter, Frontier revenue rose from $261 million in the period a year ago to $322 million. But the company's operating loss widened to $26 million. Add in interest expense of $9 million.

If revenue begins to fall or fuel prices push up operating losses further Frontier has real problems.

Douglas A. McIntyre

Aloha Airlines: A Canary In The Coal Mine? (AMR)(NWA)(DAL)

Aloha Airlines went into Chapter 11 last week. That was not enough. Now the carrier says it is ending passenger service after 60 years of operation.

Aloha is small and flies in only one market, but the reasons for its demise still had to do with falling ticket prices forced down by competition and risking fuel prices.

It is no coincidence that carriers like AMR (NYSE:AMR), Delta (NYSE:DAL), and Northwest (NWA) are near their 52-week lows. Someone, somewhere thinks that one or more of these airlines won't make it, at least in its current incarnation. And, that would probably not be a bad bet.

One of the reasons, perhaps the sole reason, that Northwest (NWA) wants to merge with Delta (DAL) is because of perceived cost savings, Whether those are real or not doesn't seem to matter. There is a desperation to the push to combine airlines which is a sign that management does not see any other way out of the current toxic environment.

But, mergers may not save anyone. The industry may have to go through a Chapter 11 filing or two. It happens to airlines about once a decade. Why should this time be any different?

Douglas A. McIntyre

Northwest (NWA) To Push Deal, Cause Pilot Strike

Northwest (NWA) could not get pilots in line for a merger with Delta (DAL), so it is going to try to move forward without them. It can get ready for a pilot's strike that could cost hundreds of millions of dollars in revenue.

Northwest and Delta have been talking merger for several months. The pilots at the airlines have not been able to agree on seniority of a combined pool of fly-boys and this has held up the deal. Northwest wants none of that. According to The Wall Street Journal, NWA's "jumpstarted deal wouldn't include terms of a combined pilot labor agreement and the salary enhancements previously foreseen."

A married-up company can watch a pilot's strike take it down the drain.

The benefits of merging airlines is hardly clear anyway. Fuel costs will stay high, so there is little benefit there. Combining customer service means putting together computer reservations systems, Glitches in this process almost always anger customers and probably drive them to other carriers. Cutting employees like mechanics who are parts of unions causes the remaining workers to push for higher compensation.

Competing airlines usually try to use the mess created to pick up unhappy passengers.

Man the picket lines. The merger is probably going through.

Douglas A. McIntyre

GE (GE) May Buy Fifty Boeing (BA) 737s

GE (NYSE: GE) is considering buying up to fifity Boeing (NYSE: BA) 737 jets to lease to airlines.

According to Bloomberg "The order may be valued at as much as $3.53 billion, based on a list price of $70.5 million for a next-generation 737-800 model."

GE probably gets a volume discount.

Douglas A. McIntyre

AMR (AMR) Heads Toward Airline Dead Pool

AMR (NYSE: AMR) hit the market with two pieces of bad news after the close. The parent of American Airlines announced that it fuel costs would rise well above projections made by the company two months ago. AMR's new forecast projects the firm will have a 2008 fuel bill of $9.29 billion -- more than $1 billion above what it was expecting earlier in the year -- assuming prices don't rise even further than planned, according to an SEC filing.

AMR was also hit with a downgrade from S&P. According to MarketWatch, the ratings agency changed the company's "long-term ratings of B/Negative/B-3 and its subsidiary American Airlines Inc. to negative from positive. S&P also lowered AMR's short-term rating to B-3 from B-2."

AMR's shares, which traded at $40 at the beginning of 2007 now change hands at $9.62 and dropped further after hours.

Douglas A. McIntyre

As Aloha Airgroup Files Chapter 11, The Market Frets About AMR (AMR)

Aloha Airgroup has filed for Chapter 11 citing high fuel prices and falling fares. With oil at $100 and both competition and a poor economy warring with ticket prices, the question is "who is next?" According to The Wall Street Journal "Despite shedding costs and its underfunded pension plans in its previous trip through bankruptcy, closely held Aloha has continued to struggle financially."

Other US carriers are trading as if they are heading toward bankruptcy if the cost of fuel does not abate. AMR (NYSE: AMR), parent of American Airlines, has watched it stock fall to $9 from over $37 in early 2007. UBS downgraded AMR late last week to "sell" from "neutral", as if the current price point was not already terribly low.

While the stocks in Northwest (NYSE: NWA), Delta (NYSE: DAL), and United (NYSE: UAUA) are off between 45% and almost 60%, AMR is now down 75% over the last year. Its shares now trade at .1x revenue

In 2007, AMR had interest expense of $337 million against operating profits of $965, so its ability to cover debt service is in trouble if its revenue falls by more than a few percentage points or fuel prices drive up expenses. The firm has long-term debt of over $9.4 billion and pension obligations of $3.6 billion.

AMR is at a tipping point and it does not control its own destiny.

Douglas A. McIntyre

The Wheels Come Off In The Airline Industry (DAL)(UAUA)

Forget about mergers. The US airline industry just has to stay afloat. Rising fuel costs and a recession that will keep people off airplanes like a SARS epidemic have hit the industry mercilessly in the last two months.

Delta (DAL) has already offered buy-outs to 30,000 of its workers. According to The Wall Street Journal the head of United (UAUA) told employees "This industry has serious challenges ahead. Continued uncertainty about the overall U.S. economy, with the price of fuel at historically high levels, has put significant pressure on all U.S. carriers." He is a master of understatement.

One analysts from JP Morgan expects US airline losses to be between $4 billion and $9 billion this year. With weak balance sheets, some carriers are not in any position to absorb the drop in cash flow which that will cause.

If demand for tickets falls to where it was in 2001, the year of the last big industry slowdown, the bankruptcy courts will have to put on an extra shift. That grim period caused four carriers to file for Chapter 11. There is not reason to believe that it cannot happen again.

Douglas A. McIntyre

Pilots Wreck Delta (DAL) Merger With NWA (NWA), Again

The fight over pilot seniority at Delta (DAL) and NWA (NWA) has threatened to kill a merger again. A strike by pilots would do substantial damage to the finances of a new company.

Maybe pilots are doing shareholders a favor. Merging airlines does not save on the rising price of fuel. Unions tend to use the deals as leverage to get better pay, or strike. Consumer service department mergers usually take months and drive consumers insane.

The merger may not matter at all. Jet fuel prices are so high and passenger traffic is expected to drop so low that all the major carriers are going to have to cut what costs they can to the bone. That will mean that routes will be eliminated and janitors who may not be in a union will loses their jobs. Senior management will get big bonuses, as usual.

Mergers aren't an answer. Right now, there is not one of any kind. If the recession is deep and oil stays high, there will be another wave of Chapter 11 filings and it will not matter which companies merged and which did not.

Douglas A. McIntyre

Cutting Maintenance Doesn't Help Southwest Shareholders (LUV)

Southwest Air (NYSE: LUV) responded today to preliminary findings of its internal investigation over safety allegations.  It looks like the allegations over safety and inspection incidents had some meat to them.  The airline is taking action and vowed to make any changes to assure full compliance with FAA Airworthiness Directives, as well as all of its own maintenance policies and procedures.

It had accelerated the internal investigation last week after Southwest received details from the FAA's letter of civil penalty. The company has now noted concerns with some of its own findings over controls over procedures within maintenance airworthiness directives and regulatory compliance processes.  The immediate steps were as follows:

• Placed 3 employees on administrative leave and noted that those employees are cooperating with the investigation;
• Hired an outside consultant to help review its maintenance program controls, especially Airworthiness Directive compliance;
• Fully engaged with the FAA on its current audit of Southwest and committed to FAA leadership that it will investigate and address any deficiencies in its maintenance controls.

This mess is really hard to fathom, and it would be much harder to fathom this being a system-wide policy of cutting corners.  Even after that unfortunate event in Chicago, Southwest has the safest record of any major airline and that of any of the major discounters.  We have noted in the past how the airlines "isn't so much of a discount" any longer and we have noted how its fuel hedges were helping less and less compared to the past.  But it should also be noted that the airline has a cult-like core flier base that has brand loyalty that goes above and beyond most airlines.

This is one of those issues that just feels like more negative headlines will come out over controls and procedures are described horribly in a USA Today piece.  If employees are being suspended and this is ongoing, it probably isn't over yet on the headline front and any long-term investors should probably expect more "findings" to hit the tape.  It will have to eat some financial charges that may even go beyond the already-reported amounts and it may have some higher expenses coming as a result of whatever new procedures it puts in place. 

The airline can recover.  As long as the airline gets this back in order and has no incidents this will ultimately pass and the company shouldn't be too tarnished longer-term.  Unfortunately, its stock isn't doing well and it is at the very bottom of a multi-year trading range.  Cheating rarely pays off in the long-run.  At least Eliot Spitzer isn't able to get involved.

Jon C. Ogg
March 11, 2008

In The Shadow Of Bankruptcy, Airlines Focus On Mergers (NWA)(AMR)(DAL)

The airline industry has periods when more big carriers seem to be in Chapter 11 than not. Another such period may not be that far off. Right now, the news about the industry centers around combinations like the one being negotiated between Northwest (NWA) and Delta (DAL).

Putting airlines together is no guarantee that they will be more successful. A business combination does not push down oil costs. Unions often use the mergers as a way to leverage additional benefits for helping the marriage go through. This hidden cost of combinations is that customer service is almost always wrecked for a time as reservation computer systems and call centers are combined. In other words, revenue can actually fall as fliers flee to other carriers.

Airline mergers may go off the front pages and be replaced by another series of Chapter 11 filings. While earning at US carriers were modestly positive last year, at most companies operating income was offset by debt service. And, as fuel prices rise, that operating income is likely to fall. This is made worse by an economy where business and personal travel is likely to be down sharply. Refinancing debt in the current environment is also likely to be close to impossible. 

The stocks of a number of airlines are down 30% to 60% over the last year, with AMR (AMR) turning in the worst performance. AMR's price to sales is now .14x which puts it in a league with over-leveraged car companies and newspaper chains.

Airline mergers are about to get pushed off the front page. And, the news is about to get much more unpleasant.

Douglas A. McIntyre

Delta (DAL) And Northwest (NWA) Pilots Talk Again

Late word is that Delta (NYSE: DAL) and Northwest (NYSE: NWA) pilots have re-started talks about seniority in a combined airline. Failure of negotiations helped kill earlier merger talks between the airlines.

According to Bloomberg, "The sessions were the first between the airlines' work groups since negotiators failed to agree two weeks ago on how to combine the seniority rankings of 12,000 pilots."

The news may actually be bad for NWA and DAL shareholders. It is not clear that merging two airlines benefits shareholders. Fuel costs stay at present level. Labor costs often go up as groups including pilots look for ways to improve contracts with the new company.

Customer service virtually always deteriorates sending consumers to other airlines. Revenue erosion becomes a real possibility.

Douglas A. McIntyre

The Airlines Are Flown By Pilots (NWA)(DAL)

The captain of a commercial airline is in charge, no matter what. If things don't work out, the blame often falls to him. Airline pilots have taken that principle all the way to controlling the management of the airlines they work for.

Delta (DAL) and Northwest (NWA) watched their shares fall by 6% yesterday as the chances for a merger of the two companies fell. One of the major reasons is that the airlines' pilots cannot agree on seniority in a merged group of fly boys. A senior pilot at the merged company may not be as senior as he was at Northwest. He won't get to pick which flights he wants or the routes he wants to fly. The burden of the new system would simply be too much for him.

In the meantime, the management and boards of the two airlines had presented the merger as a fait accompli. The stocks rallied accordingly. The dreams of cost cutting due to firing redundant people and cutting redundant routes simply fell away.

Since the benefits of airline mergers are dubious because they disrupt customer service and do nothing to cut fuel prices, the captains may have done stockholders an unintended favor.

Douglas A. McIntyre

Boeing (BA) May Lose Japan Airlines Business

Japan Airlines management is so upset about delays in the Boeing (NYSE: BA) 787 that it may turn to Airbus for planes.

According to Reuters "JAL, which had planned to buy 55 787 planes, favoring their greater fuel-efficiency, was looking at purchasing Airbus planes as it wants to offset the cost of higher fuel prices quickly by using more mid-sized airliners."

It is not clear whether airlines, facing delayed deliver of the 787, can cancel their orders outright. If so, Boeing could see a substantial drop in its revenue.

Boeing stock has already been crushed. It trades at under $82, down from a 52-week high of $107.83.

Douglas A. McIntyre

Airline Pilots Go After Northwest (NWA) Merger With Delta (DAL)

The pilots fly the planes and it looks like they also set the course for big airline mergers as well. A combination of Northwest Airlines (NYSE: NWA) and Delta (NYSE: DAL) is being held up because the pilots cannot decide how to assign seniority in the event that a marriage goes through.

The news is an example of why the economics of airline mergers may not be what they seem. The pilots cannot block a merger, but the threat of a strike can certainly push a combined Northwest/Delta to make financial concessions. That, in turn, makes the whole deal a lot more expensive.

According to the AP, NWA pilots want younger Delta pilots put at the bottom of a seniority list. Even if this is resolved it still leaves open the question of mechanics and air crews. Any of these groups could cause labor unrest in the hope of better compensation.

Since a merger might destroy customer service and drive revenue down, the pilots may be doing the two airlines a favor.

Douglas A. McIntyre

The Idiocy Behind Airline Mergers (CAL)(NWA)(UAUA)(DAL)(AMR)

Depending on which rumor is true, Delta (NYSE: DAL) may merge with Northwest (NYSE: NWA), or United (NASDAQ: UAUA).

The math behind airline mergers doesn't add up, and the fact that the two most successful airlines in the US, American (NYSE: AMR) and Southwest (NYSE: LUV) are not merger happy is because they know the weakness of the math.

A merger of two airlines does nothing to save fuel costs. The price of planes does not get cut. Over time reservations and customer service personnel can be chopped down, but the consumer's experience is almost always undermined in the process. Putting two reservations systems together is widely acknowledged as being a nightmare. Cutting the costs of crew and pilots may also take a long time because of union resistance. As The New York Times points out  "Any cost reductions, for example, could easily be eaten up by higher wages required to win labor’s support for a deal."

Northwest, which bought Republic Airlines, went into Chapter 11 in 2005. Continental, which bought Texas Air, filed for bankruptcy in 1983. In 1991, after taking over People Express and several other airlines, Continental filed again.

Mergers distract airlines for serving the customer population, and there is no evidence that they save a dime.

Douglas A. McIntyre

Delta (DAL) And Northwest (NWA) Get Urge To Marry

Northwest (NYSE: NWA) and Delta (NYSE: DAL) are getting very close to announcing a merger. According to the FT "the airlines may clinch the landmark accord as early as mid-February, the people said, though they cautioned that negotiations may still stall or even collapse."

While merging airlines in periods of high fuel costs and a tight economy may make some sense, the savings are probably overrated. Customers service and other back office jobs can be cut, but knocking down flght crew expenses often leads to serious and disruptive labor disputes.

There is no solid evidence that the mess which always results from putting together two airlines drives customers away.But, poor reservations service and badly run ground operations don't bind the passergers to the carrier.

The merger may save some money but it almost always hurts customer affairs.

Douglas A. McIntyre

Fuel Hedges Aren't Helping Southwest Shares (LUV, AMR, CAL, AAI, JBLU)

Southwest Airlines Co. (NYSE: LUV) has not been doing well as a stock.  Over the last two years its stock has lost nearly one-third of its value.  Even over the last 5-year period, its stock has recently put in new lows.  In the past we noted how many of the issues in the sector were out of context relative to other airlines.  But in today's environment the situation looks like it has reversed.  If passengers think they are unhappy with major airlines now, wait until they get to deal with all the problems when two majors merge into one structure.

If you believe that oil is the largest wild card for airlines, you'll scratch your head when you consider that Southwest had the best fuel cost structure of any large airline operator out there.  The company decided to enter major counterparty fuel hedge transactions back when oil prices were so low that oil was cheaper than water.  That strategy worked as the uncertainty was making the entire sector look at risk of failure and when all of the others had to get a government handout.

If you look at the hedging strategy below you might determine that fuel hedging acts a de-leveraging mechanism that investors don't prefer.  If you compare the hedging structure from this year to last year, you will see some slight differences.  Here is the hedge structure noted in their annual report:

• 2008 over 70% at $51 per barrel;
• 2009 55% at $51 per barrel;
• 2010 30% at $63 per barrel;
• 2011 over 15% at $64 per barrel;
• 2012 over 15% at $63 per barrel.

If you will take note, this is slightly different than the fuel hedges we noted from the same period last year.  If you wanted to draw a parallel it would probably be assumed that as the fuel gets used and as the capacity rises slightly the cost basis ends up being higher because of the current oil/barrel prices.  Here were the prices noted in early 2007 for the forward years:

• 2007 was 95% hedged at $50/barrel;
• 2008 was 65% hedged at $49/barrel;
• 2009 was over 50% hedged at $51/barrel;
• 2010 was over 25% hedged at $63/barrel;
• 2011 was over is 15% hedged at $64/barrel;
• 2012 was 15% hedged at $63/barrel.

This is more than surprising when you consider the cost structure of the other airlines. Over the last 5-years Southwest as a stock has underperformed the major airlines that didn't file for credit protection.  It looks like Continental (NYSE: CAL) is up some 200% and AMR (NYSE: AMR) is up much more than that.  On the discount side, Airtran (NYSE: AAI) has outperformed as a stock, but JetBlue (NASDAQ: JBLU) lost its way and is down sharply. It is also the belief of Wall Street that as the top 5 or 6 airlines merge into perhaps the top 2 or 3, Southwest will remain an independent carrier in the mix.  We had noted how the discount airline wasn't such a discount to other carriers anymore, yet that may actually be a good thing in today's airline environment.

Can we determine that Wall Street is discounting the results two years out as the fuel hedges dwindle?  That is nonsense.  If you have watched housing or financial stocks over the last six months you will know that Wall Street has lost its ability to price in any forward events and that traders are only reacting to each new round of news headlines.  It's almost amazing how the airline with the best cost structure, the smartest in foreseeing fuel price escalation,  perhaps the best employee relations in the sector, the safest track record, and one of the best brand loyalties hasn't translated into a win for investors compared to other airlines.  It seems that no good deed goes unpunished.

Jon C. Ogg
February 5, 2008

Qantas Wants Money Back From Boeing (BA)

Late delivery of the Dreamliner is catching up with Boeing (BA). According to the FT "Qantas’s contractual arrangements with Boeing provided for the ability to claim damages in certain circumstances."

Geoff Dixon, Qantas chief executive said: “We will be discussing the issue of liquidated damages with Boeing in the coming weeks.”

Good luck collecting.

Douglas A. McIntyre

Airline Mergers Don't Work (DAL)(UAUA))(NWA)

Perhaps the people at Delta (DAL) did not get the memo. The reasons for airline mergers seem to be a bit soft. While there may be come savings in cutting ground crews and reservations people, customers often walk away from the mess of a merger. Service just becomes too poor.

“A merger almost inevitably is going to cause some service problems,” said Philip A. Baggaley, an analyst at Standard & Poor’s told The New York Times.

Mergers also do nothing to address high fuel costs, infrastructure, and aircraft maintenance expenses.

False economies may drive another round of carrier mergers, but they won't keep airlines out of bankruptcy court if fuel costs stay high and the economy is weak.

The reasons that airline boards are looking at big combinations is that hope springs eternal. A merger may bring some short-term savings and "buy time" for an upturn in the economy to lift all boats.

The big airlines have another alternative. Do the hard thing. Get with labor. Cut costs. Or have another wreck in which jobs are lost more randomly because they cannot be supported by revenue.

Douglas A. McIntyre

Suppliers Feel More Boeing 787 Delays (BA, SPR, BEAV, HON, COL, LMIA, TIE, PCP)

The Wall Street Journal has announced that there may be (actually it says "near announcing") some new delays out of Boeing (NYSE: BA) on its 787 Dreamiliner.  We first noted that the Boeing suppliers were likely to be under pressure back on OCTOBER 10, 2007 on word of the first real delays in the Dreamliner.

Here is a snapshot of some of the many suppliers for Boeing, with some price comparisons:

• Spirit Aerosystems (NYSE:SPR) is the ex-Boeing unit, which makes fuselage parts: stock price on October 10 after the first Boe