Red Ink Expected to Drench Airlines

With the nation's airlines set to report another round of heavy losses for the first quarter, some analysts believe 2005 could be the year when more long-suffering carriers finally descend into bankruptcy.

The high cost of jet fuel is weighing down finances at most big carriers, even as they've had some success in raising airfares. And low-fare airlines continue to grab market share from larger hub carriers, stressing their finances further.

"Crunch time is approaching," said airline analyst Jamie Baker of JPMorgan Securities in a report to investors Monday.

Baker predicts that Delta Air Lines, Continental Airlines and America West Airways will have to borrow hundreds of millions of dollars by the end of the year if they want to avoid joining United Airlines and US Airways in bankruptcy court.

Fort Worth-based American Airlines has a stronger financial foundation, with a $2.9 billion cash cushion to pay for losses. But gloomy industry conditions could force American to ask for more employee concessions in 2006, Baker said.

The earnings reports begin trickling in Thursday -- on what is likely to be a rare positive note - when Dallas-based Southwest Airlines posts its results. Analysts expect Southwest to report a profit of about 4 cents per share, or roughly $31 million.

Wall Street holds a dimmer view of AMR Corp., American's parent company. AMR is expected to lose about $300 million for the quarter when it reports results April 20. That would be a significant decline compared with the first quarter of 2004, when AMR lost $166 million.

Analysts are forecasting even poorer results at other carriers. Delta, for example, is projected to report losses of about $650 million for the quarter.

As a whole, analysts predict the large airlines will lose more than $2 billion for the period.

"The industry cannot continue to incur losses of this magnitude," Ray Neidl, an airline analyst with Calyon Securities in New York, said in an investment note. "This will probably be the last year before carriers are forced to undergo a major restructuring."

For years, airlines have been subsidizing their losses by borrowing money, often using their airplane fleets as collateral. But it remains to be seen how much longer they can fund those losses, Baker said.

"Airlines are far better at raising cash than earning it the old-fashioned way," he said. "But time is finite."

Delta needs to raise $500 million this year to remain out of bankruptcy, Baker said. Continental will require about $400 million, he said, and America West will need $100 million to stay afloat.

Despite its heavy losses, American can probably use its cash cushion to last through the end of the year, Baker said. But he believes that cushion will shrink in 2006 and possibly lead to more concessions a year from now.

In the meantime, however, the chief strategy of most airlines seems to be simply outlasting their competitors, said Neidl of Calyon. If a major airline finally folds, it should relieve some of the competition and boost revenues among the survivors.

Neidl likened the situation to a joke about two hikers who encounter a bear in the forest. As one runs away, his companion yells, "You can't outrun a bear!"

The hiker responds, "I don't have to, I just have to outrun you."

AMR stock (ticker: AMR) closed Monday at $11.49, up 30 cents, or about 3 percent. Stock in Southwest (ticker: LUV) closed at $14.35, down 11 cents.

Wall Street analysts expect another round of heavy losses when the large airlines start reporting earnings this week.

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