The future of the airline industry
From this week's Fortune magazine (www.cnnfn.com)
The Future for Airlines: Bust?
Will the entire industry go down?
FORTUNE
Wednesday, March 19, 2003
By Jeremy Kahn
Take a look at airline stocks, and things appear bad enough: Shares of many major carriers have fallen more than 70% this year. But if you look at what the bond market is saying, the entire industry is about to go down.
Bonds from Delta, Continental, and Northwest are trading for pennies on the dollar. American Airlines is reportedly scrambling to arrange bankruptcy financing, a sign it may soon join United and US Airways in Chapter 11. "The bond market is saying that all the major carriers are going bankrupt," says Larry Fink, CEO of money management firm BlackRock. "There's not one survivor."
The bond market has a reputation for predicting disaster. Long before stock market investors got wise, corporate bond gurus realized that heavy debt loads meant big trouble for telecom companies and energy-trading firms. There's good reason to believe the bond market is right about the airlines too.
Fear of terrorism, a weak economy, and soaring fuel costs have ravaged the industry. Since Sept. 11, U.S. carriers have lost $18 billion; they are on course to lose another $6.7 billion this year--even without an attack on Iraq. If there is a war, the Air Transport Association projects that airline losses could climb to $10.7 billion. In a March report the trade group even raised the specter of the "nationalization of the industry as a result of wholesale airline bankruptcies." Shareholders are still betting the airlines will scrape by, but the bond market's message is clear: Grab your parachute and bail.
Uh oh...