Airlines Now Carrying More Cash

AMR Corp. chief financial officer Thomas Horton was wrapping up a $2 billion debt offering on Sept. 11, 2001, when word came that four jets had been hijacked. Two were jets flown by AMR's American Airlines Inc.

"Obviously, when the events of that morning unfolded, that deal collapsed," Mr. Horton recalled. "The timing really couldn't have been worse for us. Had that deal been done as planned, we would have had considerably more financial flexibility in the years that ensued."

For airlines, one of the biggest business lessons from 9/11 is that they can never have too much cash.

A temporary grounding of all U.S. airlines just after the attacks and a long-term drop in traffic and revenue drained money from airline coffers, leaving many vulnerable, sometimes unable to pay their bills.

American, which later obtained a smaller financing package at less favorable terms, narrowly averted bankruptcy with a restructuring in 2003.

But US Airways Group Inc., Northwest Airlines Corp., Delta Air Lines Inc., UAL Corp. and its United Airlines Inc. unit and other carriers had to retreat to bankruptcy court.

Today, most airlines have more than doubled the amount of ready money -- cash and short-term investments -- they can call upon in an emergency, compared with what they considered sufficient in 2001.

"Everyone is trying to become more liquid," said Standard & Poor's airline credit analyst Betsy Snyder. "They went through a pretty tough time up until 2006. They want to make sure they have access to liquidity, just in case there's another downturn in the economy."

Higher and higher

Fort Worth-based AMR had less than $1.5 billion in the bank on June 30, 2001. By Sept. 30 of this year, the kitty had grown to more than $5.5 billion, including about $400 million in restricted cash.

Continental Airlines Inc. has gone from $1 billon to $2.7 billion in the same period. Delta, which is still in bankruptcy court proceedings, has increased its cash horde from $1.5 billion on June 30, 2001, to $2.8 billion at the end of this year's third quarter.

Even Southwest Airlines Co., a model for financial conservatism even before 9/11, has greatly increased its cash holdings, from $968 million on June 30, 2001, to $2.3 billion now.

Laura Wright, Southwest's chief financial officer, said the Dallas-based discounter was "by far the best prepared on 9/11."

"We had the highest cash balance in our history on that date, well in excess of $1 billion, and we also had a fully untapped line of credit, which is what the rest of the industry didn't have," she said.

In October 2001, Southwest borrowed another $600 million for just-in-case cash, which it has since repaid, Ms. Wright said.

"This industry has a lot of risks that we know are out of our control," said Ms. Wright, who was the carrier's treasurer in 2001. "The lesson learned is that you've got to have a reasonable amount of liquidity."

University of Portland business professor Richard Gritta said only Southwest and a few other airlines really had enough cash on hand before the Sept. 11 attacks shut down the industry.

"That two- or three-week period drained hundreds of millions of dollars out of carriers," Mr. Gritta said, "particularly ones like US Airways that were flying out of Reagan," the Washington airport that remained closed until Oct. 4, 2001.

Fitch Ratings airline analyst Bill Warlick said one rule of thumb is that airlines should have cash and other liquid investments equal to about 15 percent to 20 percent of their annual revenue.

Few airlines could meet that measure in mid-2001.

American's cash balance on June 30, 2001, depleted by its recent purchase of Trans World Airlines Inc., was only 7.3 percent of its revenue for the previous 12 months, and United was even lower at 6.8 percent. Delta was at 9.4 percent, and Continental was at 10 percent.

Even Southwest and Alaska Air Group Inc., both fiscal conservatives, were between 16 percent and 17 percent, much lower than their current reserve ratios.

Big difference

Contrast that to today. The lowest among large carriers are Delta and Northwest, whose Sept. 30 cash balances were about 17 percent of their revenue for the previous 12 months. Continental and United were holding 21 percent cash caches, with Southwest at 26 percent, US Airways at 27 percent and Alaska at 34 percent.

To increase their cash balances, airlines must choose between building up the cushion and using the money in other ways: paying down debt, increasing contributions to pension funds or investing in new airplanes or facilities.

"It's somewhat a judgment call," Mr. Horton said. "I think you'll see us maintain a substantial cash balance for some time to come. But you'll also see us working on repairing the balance sheet."

This year, AMR has paid down $1.2 billion in debt on schedule and bought back $128 million in debt ahead of maturity. The company has an outstanding offer to buy $338 million in debentures and term notes.

"Carriers are sitting on a lot of cash now, arguably too much right now," Mr. Warlick said. But the industry is vulnerable to "large shocks" that can lead to large losses quickly, he said.

"Bear in mind, things can change in a hurry when things go wrong in this industry," he said.

Ms. Snyder said for airlines post-9/11, it was "not easy at all" to raise money in a hurry. "That's the problem. If you're having financial problems, why would banks want to lend to you? You're a poor credit risk."

Share repurchases

Ms. Snyder said airlines -- heartened by big profits in the second half of the 1990s -- spent a lot of money that they could have hoarded.

"Remember back in the late 1990s, they said, 'We don't need this much cash, so we'll do share repurchases.' Had they not done those share repurchases, they probably would have been in better shape going into Sept. 11 and the period after that," she said.

AMR bought back $2.56 billion of its own stock from 1997 to 1999. Delta repurchased $1.82 billion in Delta shares from 1998 to 2000. UAL repurchased $1.05 billion of its shares from 1997 to 2000. Continental spent $1.2 billion from 1998 to 2001 to buy its stock.

"If they had held on to that cash or did smaller share repurchases, they might have been able to get through the downturn in better shape," Ms. Snyder said.

Mr. Horton drew a contrast between 2000 and 2006. Six years ago, AMR's debt load was about $13 billion, compared with more than $19 billion now. Jet fuel was less than 80 cents a gallon rather than more than $2. The company had a pension surplus, compared with today's deficit.

"As we sit here today, a lot of those things have changed, some within our control and a lot of them not," Mr. Horton said. "I think that's given rise to perhaps a more conservative stance with respect to how much cash we should keep on hand."

Mr. Gritta said the finances of many carriers still aren't healthy, just as the airlines need to rebuild their aging fleets with modern aircraft like the upcoming Boeing 787 Dreamliner.

"Given the state of the economy right now, they're OK," Mr. Gritta said. "If interest rates go up, if fuel prices blip back up, if the economy goes into recession, you're going to see some more problems. I think there's going to be one more major merger."

He sees evidence that airline executives "are getting smarter, finally. But you have to wait and see through another cycle to see if they have learned it."

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