Airlines heading for a crash

Sunday night’s TV showing of The Aviator told the remarkable story of Howard Hughes, who as well as being an engineer, Academy Award winning film director, and a little nuts, was also one of the world’s richest men. It covers the early years of the airline industry, focusing on TWA‘s battle with Pan-Am (Hughes had to take on Pan-Am and the US government in attempt to end Pan-Am’s monopoly as an international carrier).

The film chronicles Hughes’ constant battle to prevent TWA from going bankrupt, and in the 60 years that have since passed, very little seems to have changed in the airline industry. The industry is a graveyard – Pan-Am went bust in 1991, while TWA entered bankruptcy in 1992, 1995 and finally in 2001 (after which it was taken over by American Airlines). Other high profile bankruptcies have been Swissair and Sabena (Belgium’s national carrier). Numerous airlines have filed for bankruptcy protection and re-emerged after restructuring (eg Delta Airlines, Northwest Airlines, United Airlines, Air Canada). See here for a comprehensive list of defunct airlines.

We’ve written on this blog before about how global defaults have remained remarkably low, partly because companies that would have gone bust in previous cycles managed to escape in the recent liquidity fuelled cycle (see article). But now that money is no longer being thrown at unprofitable companies, we’re starting to see the number of defaults pick up. The airline industry is unsurprisingly being hit particularly hard. In the last few weeks alone, four US airlines have filed for bankruptcy protection (budget carrier Frontier Airlines, Aloha Airlines, ATA and Skybus). Hong-Kong based airline Oasis also collapsed recently. Silvio Berlusconi is desperately trying to find a buyer for Alitalia, and Aeroflot are the current favourites (some match up that will be).

This chart (click to enlarge) shows the 5 year CDS on some of the world’s best known airlines. Lufthansa (which is BBB rated) and British Airways (BB rated) are holding up OK, but Continental Airlines, United Airlines and American Airlines are all trading at distressed levels. Record high oil prices, competition from low cost carriers, high operational leverage, environmental concerns/costs and of course the big threat of economic recession are likely to make matters a whole lot worse.

Warren Buffet had a point when he said that (as at 1992) “the money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero.”