Calyon Securities said the U.S. airline industry was expected to lose more than $1 billion this year due to high fuel prices and likely fare cuts as a result of slackening demand, but added that liquidity for major airlines was sufficient for now.
"Even in a lackluster economy with oil prices remaining high at around $100 per barrel, most of the publicly-traded network and low-cost carriers in the U.S. have enough liquidity on hand to survive until there is an economic rebound and/or oil prices subside," analyst Ray Neidl wrote in a note to clients.
He estimated that all airlines would survive 2008, but cash levels would be at alarming levels for a majority of carriers if current trends continue through 2009.
Operating cash flow for airlines will remain positive for 2008, while free cash flow will be negative, Neidl said.
Delta Air Lines Inc (DAL.N), Northwest Airlines Corp NWA.N and Southwest Airlines Co (LUV.N) are best positioned to weather the storm, Neidl said, adding that Southwest has a large fuel-hedge position and low leverage.
The network carriers and most of the low-cost carriers will survive the weak economic environment and high fuel prices over the next two years "though with not much room to spare," the analyst said.
Two low-cost carriers, AirTran Holdings Inc AAI.N and Frontier Airlines Holdings Inc FRNT.O, are a cause for concern as their projected cash position will fall well below 10 percent of revenue by year-end, Neidl said.
Historically, airlines believed that keeping cash of at least 10 percent of annual revenue on hand was necessary to maintain adequate liquidity, but after 9-11, 20 percent of annual revenue became a more realistic target, Neidl noted.
Last week, the analyst had downgraded five U.S. airlines on recent oil price increases and had said that the price rise was not expected to significantly subside soon. He had cut his view on Frontier to "sell" on concerns over the firm's competitive position and potential losses.
Delta Air Lines shares were down more than 4 percent at $8.22 in early morning trade on the New York Stock Exchange, while Northwest Airlines shares were trading down nearly 2 percent at $8.61.
Southwest Airlines shares were down more than 1 percent at $12.18 and AirTran shares were almost flat at $6.49.
Frontier shares were down nearly a percent at $2.36 on Nasdaq.
(Reporting by Tenzin Pema in Bangalore; Editing by Himani Sarkar)