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US carriers seek cash options
By Anthony O'Connor
18 April 2008
As the soaring cost of jet fuel continues to take its toll on airlines in the US and the threat of recession is mounting, the challenge to raise funds against all unencumbered assets is becoming a top priority for all carriers, even those that, in recent years, have had sufficient cash reserves to fund aircraft acquisitions. Cost pressures have also brought the long-standing industry consolidation debate to the head of the table.
Southwest Airlines has not visited the aircraft finance markets much in recent years. Instead, the company has typically used cash reserves to fund its B-737-700 aircraft. However, the airline is now talking to European banks to raise as much as USD400 million to fund some of its 30 deliveries this year and perhaps even some of its 17 aircraft deliveries scheduled for 2009.
United Airlines, meanwhile, has no firm order deliveries planned until 2011, according to publicly disclosed data, but the airline is reflective of others in the US market that are looking to raise funds against any unencumbered assets and to refinance existing facilities as the threat of dwindling cash becomes a real issue for the US market this year.
"United has been calling everyone," says an aircraft finance banker in New York. "They were looking for a warehouse facility for a package of planes, but I guess there wasn't enough interest to do a deal like that. So, they are approaching banks again for a smaller number of aircraft. They will most likely do two- or three-aircraft deals."
With the last batch of Chapter 11 proceedings only recently completed and the next batch looming, the collective confidence level among those banks financing the US airline industry is questionable as investors wait for the next shoe to drop.
On 11 April, Frontier Airlines Holdings announced that following an unexpected attempt by its principal credit card processor to substantially increase retention of customer receipts, which threatened to severely affect Frontier's liquidity, the company filed voluntary petitions for re-organisation under Chapter 11 of the US Bankruptcy Code.
Although the carrier has announced that it will operate with a normal schedule, bankers say that the filings do little to attract banks and leasing companies to offer finance or lease packages to the airline. Frontier is in the market looking for A320-family finance offers.
Frontier's announcement comes in the wake of a number of airline shutdowns or bankruptcies in the United States. In December 2007, Maxjet ceased operating, followed by Bigsky in January. Then Aloha closed for business in March. And in early April, ATA and Skybus also shut down.
"If the US airlines were structured as they were 10 years ago, with the current cost of jet fuel they would be in big trouble right now," says Jeffrey Craine, managing director of Skyworks Capital in Greenwich, Connecticut.
It is testament to their abilities that the US carriers have been able to restructure operations and deal with the USD90-a-barrel average cost of jet fuel in 2007 and still collectively post an operating profit of USD7 billion up to the end of the third quarter of last year.