More Value Destruction from Airlines – AMR Files Bankruptcy

No, this won’t be a simple re-hash of yesterdays news.

It was reported that American Airlines has filed for Chapter 11 bankruptcy protection.

And…the investment community is shocked to it’s core.

Because airlines have been the most wonderful stewards of shareholder capital over their operating history.

Wait…er….maybe not.

For the sake of posterity, here is a list of airline bankruptcy filings:

COMPANY START ASSETS
UAL Corp.’s United Air Lines 12/9/02 $22,800,000,000
Delta Air Lines 9/14/05 $21,561,000,000
Northwest Airlines 9/14/05 $14,352,000,000
US Airways, Inc. 9/12/04 $8,600,458,000
US Airways, Inc. 8/11/02 $8,025,000,000
Continental Airlines Holdings 12/3/90 $7,656,140,000
Eastern Air Lines, Inc. 3/9/89 $4,037,000,000
Trans World Airlines, Inc. 1/31/92 $2,864,530,000
Trans World Airlines, Inc. 6/30/95 $2,495,210,000
Pan Am Corp. 1/8/91 $2,440,830,000
Trans World Airlines, Inc. 1/10/01 $2,137,180,000
America West Airlines 6/27/91 $1,165,260,000
Resorts International 11/12/89 $1,034,580,000
Frontier 4/11/08 ————-
Aloha 3/20/08 ————-
ATA 4/3/08 ————-
Skybus 4/7/08 ————-
Kitty Hawk, Inc. 5/1/00 ————-
Evergreen International Aviation 9/20/93 $761,040,000
Resorts Int’l, Inc. 3/21/94 $575,790,000
Aloha 1/3/05 ————-
Midway Airlines, Inc. 3/25/91 $468,470,000
FLYi Inc’s Independence Air 11/7/05 $378,500,000
Tower Air, Inc. 2/29/00 $350,760,000
Midway Airlines Corp. 8/13/01 $349,000,000
Fine Air Services Corp. 9/27/00 $303,030,000
Braniff, Inc. 9/28/89 $237,550,000
Krystal Company, Inc. (The) 12/15/95 $130,790,000
Western Pacific Airlines, Inc. 10/5/97 $119,690,000
Aloha Airgroup, Inc. 12/30/04 $100,000,000
Hawaiian Airlines 3/21/03 $100,000,000
HAL, Inc. 9/21/93 $105,740,000
Metro Airlines, Inc. 4/1/91 $99,480,000
Rocky Mt. Helicopters 10/13/93 $95,040,000
Crescent Airways Corp. 2/3/95 $40,630,000
Vanguard Airlines, Inc. 7/30/02 $39,724,302
Kiwi International Air Lines 9/30/96 $36,070,000
International Total Services 9/13/01 $31,500,000
Flight International Group, Inc. 2/4/94 $28,950,000
StatesWest Airlines, Inc. 12/15/92 $28,490,000
Conquest Industries, Inc. 1/23/96 $27,440,000
Royale Airlines, Inc. 9/9/87 $27,000,000
Pan Am Corp. 2/26/98 $26,550,000
Presidential Airways 10/26/89 $25,440,000
CCAIR, Inc. 7/5/90 $25,420,000
Mid Pacific Air Corp. 1/20/88 $17,050,000
WorldCorp, Inc. 2/12/99 $16,830,000
Florida West Airlines, Inc. 10/11/94 $16,060,000

*Data courtesy of FoxBusinessNews via bankruptcydata.com

There are even a few repeat offenders in this esteemed list – and I would wager some repeat equity and debt holder offenders as well.

Failure is part of capitalism. No big deal. But when you destroy this much value again and again, something is terribly awry.

So, what’s the recipe for failure?

1. Hyper Debt

Probably the biggest culprit. Airline industry debt/equity ratio right now is 122.2. This type of capital structure doesn’t give much room for error. Fuel prices go up too much? You’re a goner. Trouble with union contracts? Goner. In fact, there aren’t many businesses where you can have this much debt and hope for a good long term outcome. Interest rates rise when you have to roll over a few billion in debt? Goner. The list goes on and on.

2. Hyper Capacity

It’s been discussed by industry CEO’s, Wall Street analysts and academics. The US airline industry has too much capacity. Too many airlines, too many routes, too many plane seats. This problem is only very slowly being worked out.

3. Hyper Organized

The continuing prevalence of labor unions at all levels in most of the airline industry causes serious structural problems. This is not a political commentary on unions, merely stating fact. Companies forced into long term collective bargaining agreements and post-retirement benefits cannot easily make changes to their business to adjust to market conditions. As if the heavy debt burden were not enough, they have to deal with rigid cost structures. Take a glance at the NLRB/Boeing case in South Carolina right now if you want to catch a glimpse.

4. Hyper Capital Intensity

Any business that requires huge, ongoing capital investment and rapid obsolescence of capital is bound for commodity hell. There are certain industries, like farming, textiles and airlines, where the improvements in cost and efficiency of capital investments are not reaped by the companies but passed along entirely to consumers. To add a new, fuel sipping Dreamliner jet can cut operating costs by a great deal, but then you have to put the older (but workable) jet out to pasture or keep it in fleet, add more capacity and watch your prices get smashed down continually on Travelocity.com.

This is not meant to be a defense of the capital destruction of the airline industry at all.

These are more self-inflicted than anything else. Bad mergers and poor investments in new routes all factor in.

Some creative investment bank should invent a synthetic CDS index or sector short ETF on airlines. At least debt/equity holders could more easily hedge the insanity.

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