Within the travel industry's economic damage, airlines face substantial overcapacity. Two of the large US flag carriers will have to merge to avoid the bankruptcy of another American airline. United Airlines (UAUA), American (AMR) and US Air (LCC) are the weakest airlines. The stocks of all three are down more than 40% so far this year as concerns mount that passenger traffic declines will accelerate as the recession gets worse.
The sales loses are being partially offset by a drop in fuel prices and cuts in routes and airplanes, but the benefit of those reductions has already mostly occurred. When the economy or fuel prices are bad for a prolonged period, airlines turn to the two behaviors which have been their modes operandi in the past: mergers and bankruptcy.
If the revenue problems worsen, a stronger carrier such as Continental (CAL) is almost certain takeover one of its weakened peers. Not only are the numbers of passengers dropping, but as BusinessWeek pointed out two weeks ago, airlines are cutting ticket charges sharply because “there are relatively strong indications that bookings for the spring and summer — especially for business-class tickets — may be far softer than carriers had expected.”
In the fourth quarter of last year, United generated negative $989 million in operating cash flow and negative $1.1 billion of free cash flow, defined as operating cash flow less capital expenditures. The quarter that just ended will not be as good as Wall Street hoped. United cut a deal with its largest credit card processor for enough cash to maintain its business. The card company gets a security interest in some United aircraft in exchange. The deal extends until January of next year.
United needs a way out of all this trouble. since it has already been through a bankrupcty, a merger is now a more likely alternative.