Debt, excess capacity plague US airlines
WASHINGTON (Reuters) - The U.S. airline industry still has too many planes and too much debt to be profitable over the long term despite some recent improvement in revenue and fuel costs, fixed-income analysts said on Tuesday.
"We have too many airlines and too many hubs," said Roger King, analyst at independent research service CreditSights, speaking at the Reuters Aerospace and Defense Summit in Washington. "When you look at the industry, it's really one big overhead."
Despite multiple bankruptcies in the sector, debt has not been appreciably reduced as much of it is in the form of leases or secured debt, which cannot be erased in a bankruptcy without giving back aircraft to lenders, King said.
"The legacy carriers are basically pillars of debt with a little bit of equity optionality on top," King said.
U.S. airlines are expected to chalk up losses of up to $10 billion this year after straining under high fuel costs, large pension burdens and keen competition.
Some airlines were able to raise fares this year to recoup part of their fuel costs and more fare increases could come if capacity is reduced but it is not clear whether demand will hold up in the face of rising fares, King said.
Because so much damage was inflicted on airlines' balance sheets over the last four to five years, "it's going to take an extended period of recovery to really make a dent in the heavy debt loads," said William Warlick, senior director in corporate finance for Fitch Ratings.
Airlines will not have much opportunity to reduce debt next year other than meeting payments on maturing debt, said Warlick.
"From a credit standpoint, when we look at balance sheets and cash flow damage that's been done, we're really just at the start of recovery," he said.
An easing of fuel prices, improved revenues and hopes of reduced competition have improved sentiment of equity investors toward the sector, but Warlick said fixed-income analysts are still skeptical about the long-term outlook.
One solution to overcapacity would be more mergers, but there are several obstacles to overcome, both analysts agreed.
"Historically, politicians have been against them because some of their constituents would be out of a job ... more importantly, labor unions have a difficult time merging," said King.
Airlines also don't want to take on more debt to finance mergers and acquisitions, so private equity would have to be involved for more mergers to occur, said Warlick.
Traditional capital market debt investors probably should not be involved in aircraft financing at all, King said.
"That should be left to large leasing companies who have the ability to repossess planes," he said.
The entire structure of enhanced equipment trust certificates (EETCs), a type of bond secured by airline leases, is not working for holders of junior tranches, King said. Junior tranches are lower-quality classes that have the last claim on assets.
"It puts bondholders at a disadvantage because they don't have the ability to repossess planes efficiently, and airlines know that," he said.
EETC holders can repossess aircraft in a bankruptcy, but few have wanted to because there has been little demand for planes amid consolidation in the industry and cutbacks in flights.
King said he would not recommend buying any airline's junior EETC classes, though some "A" or senior classes may be worth owning depending on the collateral backing the debt.
Airlines used EETCs to build up their fleets when airline traffic was booming in the 1990s, but the value of aircraft nose-dived after the September 11, 2001, attacks.
(Additional reporting by Kyle Peterson and Christian Plumb)
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