Economy, high fuel costs bury small airlines

But cash keeps big carriers flying

Travelers at an empty ATA Airline's counter yesterday in Los Angeles discover the carrier has discontinued all operations. (Ric Francis/Associated Press)

A slowing economy and high fuel prices appear to have killed off tiny ATA Airlines, Aloha Airlines, and Champion Air. A big pile of cash will keep the big airlines from that same fate, for now.

It's not that the big carriers aren't buffeted by the same forces that shut down ATA yesterday and Aloha on Tuesday. Champion Air, a Minnesota-based charter airline, will stop flying by May 31.

But the nation's biggest airlines have hoarded some $19 billion in cash as of the end of 2007, according to a tally by Calyon Securities analyst Ray Neidl. Even if fuel stays at today's levels and revenue drops 2 percent, they would still have $14.7 billion in cash at the end of 2009, under Neidl's estimate.

That's less cash than the 10 percent of revenue they like to keep, but enough to hold off a crisis, analysts say. The only carrier in Neidl's analysis with less than 5 percent of revenue in cash at the end of 2009 would be Frontier Airlines, which would have just $4 million by then.

He believes the older hub-and-spoke airlines "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," he wrote in a note on Saturday.

"They are fairly well situated, but it's important to remember that a lot of their cash needs have changed now," said Moody's Investors Service analyst George Godlin. "Their fuel costs have gone up dramatically. And the cost of putting in place fuel-hedging contracts has also gone up exponentially."

Size-wise, the major carriers are in an entirely different league than the small airlines that failed this week. The largest one to fail, ATA, employed one-sixteenth as many people as US Airways Group. So the smaller airlines failed after losing key customers (ATA and Champion) or because of intense price competition in a single market (Aloha). The larger carriers are big enough to ride out that kind of turbulence.

Not that they aren't nervous. Yesterday, Northwest said it would stop hiring new pilots and fly 5 percent less than planned this fall because of high fuel prices. The carrier pointed out that its $3 billion in cash works out to 24 percent of its 2007 revenue. "We are proactively making those decisions now to maximize our liquidity position," president and chief executive Doug Steenland said in a statement.

Northwest also said it would remove an additional 15 to 20 planes from service this year, including about 10 DC-9s. Those aging aircraft are cheaper to park because they're paid for.

Aviation consultant Michael Boyd said larger airlines such as Northwest and United can weather high fuel prices better because more of their fleet is already paid for.

"From that perspective, what happened with ATA is not a harbinger of things to come in the rest of the industry," he said. "Most big carriers have parts of their fleet they can park very cheaply."