Carriers' credit crunch By Dan Reed, USA TODAY FORT WORTH =97 As a group, the USA's largest airlines are worthless, and= that=20 unusual predicament could help push some of the largest still-solvent=20 carriers into bankruptcy-court protection sooner than most analysts now=20 expect. Collectively, the nation's nine major passenger carriers saw all=20 $15.7 billion of shareholder equity on their books at the end of 2001=20 vanish in 2002. They ended last year with a combined negative shareholder=20 equity of $2 billion =97 the amount by which liabilities exceeded their=20 assets. That figure would be even uglier if the $4.4 billion equity of=20 Southwest Airlines, the only profitable major carrier, were excluded.=20 Investors and Wall Street analysts normally pay little attention to=20 companies' shareholder equity. But coupled with soaring debt levels,=20 dwindling equity means that the airlines have little remaining ability to=20 borrow money to cover their continuing huge losses. Without access to more= =20 financing, and without big savings from labor and other cost cutting soon,= =20 they could be forced into bankruptcy reorganization to preserve cash. One=20 pilots union board member at American recently told members his "best=20 guess" was that without significant revenue and cost changes, AMR,=20 American's parent and the world's biggest airline company, would file a=20 Chapter 11 bankruptcy petition by "midsummer." Another union official=20 warned that a filing could come by May. Pessimism rising That's much sooner than most Wall Street analysts had been saying that AMR,= =20 or any other still-solvent carrier, could be forced to seek court=20 protection from creditors. But in the past two weeks, even a handful of=20 industry analysts have revised their views to allow for earlier filings, at= =20 least by AMR. That's without giving any consideration to a war, which could= =20 worsen the industry's financial situation much faster. Lenders track=20 companies' debt-to-equity ratios closely as an indicator of=20 creditworthiness. Having negative shareholder equity, which makes a=20 company's debt-to-equity ratio impossible to calculate, does not=20 automatically cause a financial crisis at an airline. Northwest was in=20 negative territory for most of the 1990s after a close brush with=20 bankruptcy reorganization in 1993 and is there again today. Yet it=20 generally is regarded as a likely survivor of the current distress. Still,= =20 when an airline's equity falls below zero, lenders see red flags. In some=20 cases, negative equity can trigger defaults on loan covenants. That=20 typically leads to higher borrowing costs and lenders' insistence that some= =20 cash be moved into restricted accounts to protect the lenders' interests.=20 Though restricted cash is reported on a company's balance sheet as cash, it= =20 can't be used to pay for day-to-day expenses such as payroll, rent,=20 utilities and, in the case of airlines, jet fuel. AMR is a good example. More than $700 million of the $2.7 billion in cash=20 it had at year's end is restricted, meaning AMR ended 2002 with only $2=20 billion of truly available cash. In turn, tougher lending requirements to=20 cure one default =97 or even the mere existence of a default on one loan=20 agreement =97 can sometimes trigger defaults on other loan deals. "If=20 somebody says having negative equity is not a big problem, they may be=20 right in the very short term," says consultant Jon Ash of Global Aviation=20 Associates in Washington, D.C. "But in the long term, it is. Your cost of=20 borrowing goes way up. And if you don't turn it around" and generate=20 profits, or, at the very least, positive cash flow to cover operating=20 financing cost, "pretty soon you'll go (into) Chapter 11." Deepening problems In reality, only three of the nine major airlines actually ended 2002 with= =20 negative equity: UAL and US Airways, both in Chapter 11, along with=20 still-solvent Northwest. Together, they had negative equity of $9.75=20 billion. But at least four others =97 AMR, Delta, Continental and America=20 West =97 are in danger of slipping into negative territory this year. Making= =20 up shortfalls in pension plans is another worry. Typically, that's done by= =20 recording a non-cash charge against equity. American took a $1.1 billion=20 charge of that nature in December to cover part of its $3 billion-plus=20 pension plan shortfall. Delta's charge against equity was $700 million last= =20 year. More charges are likely. Only Southwest and Alaska are likely to end= =20 2003 with positive equity. Phil Baggaley, airline debt analyst at Standard & Poor's, who has a "junk"= =20 credit rating on every major carrier except Southwest, cautions that=20 diminished shareholder equity is one indication of the severity of the=20 airlines' problems but not the only one. Others include cash flow, cash on hand, undrawn bank lines of credit and=20 assets that can be used as collateral. Unfortunately, most carriers' cash=20 flows are negative. Also, cash losses =97 running at about $20 million a day= =20 in the first quarter =97 are rapidly depleting cash reserves. Some airlines,= =20 such as Continental, have drawn down all their available credit while=20 others are having to pay big premiums for continued access to borrowed=20 money. Beyond that, most of their assets =97 mainly jets =97 have been= pledged=20 as collateral for other borrowing. For example, AMR said a year ago that it= =20 had $6 billion in unencumbered aircraft it could put up as collateral. Now,= =20 that figure is down to $2.9 billion. But of that, AMR can probably raise only about $700 million from newer jets= =20 that lenders would be interested in backing. The rest of its jets are older= =20 models that lenders would be wary of accepting as collateral. What=20 separates this downturn from others is that now airlines are losing the=20 ability to raise money from aircraft they own, says industry consultant Dan= =20 Kasper of LECG in Cambridge, Mass. "It's the end of the airplane financing= =20 bubble," he says. "It's a bubble that ran longer than even the dot-com= bubble." *************************************************** The owner of Roger's Trinbago Site/TnTisland.com Roj (Roger James) escape email mailto:ejames@xxxxxxxxx Trinbago site: www.tntisland.com Carib Brass Ctn site www.tntisland.com/caribbeanbrassconnection/ Steel Expressions www.mts.net/~ejames/se/ Site of the Week: http://www.tha.gov.tt/ TnT Webdirectory: http://search.co.tt *********************************************************