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.
For the sake of posterity, here is a list of airline bankruptcy filings:
|UAL Corp.’s United Air Lines||12/9/02||$22,800,000,000|
|Delta Air Lines||9/14/05||$21,561,000,000|
|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|
|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|
|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|
|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|
|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|
|Mid Pacific Air Corp.||1/20/88||$17,050,000|
|Florida West Airlines, Inc.||10/11/94||$16,060,000|
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.