Bankruptcies loom for airlines - report

Record fuel prices have slammed the industry, and bankruptcies may loom as a weak travel season begins after Labor Day.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Thousands of layoffs, hundreds of grounded planes and 21 price increases may not have been enough to save the embattled airline industry from the damaging effects of high fuel prices.

According to a report on the nation's top airlines released by Fitch Ratings Tuesday, record fuel costs and weak cash flow may lead to "multiple bankruptcies and liquidation" for major U.S. airlines in 2009.

"The industry's current structure is unsustainable in the current fuel environment," said William Warlick, a senior director at Fitch and author of the report.

Airlines have attempted to cut costs by reducing capacity, downsizing, and hiking fares and fees, but the moves may not be able to improve their cash flow.

"Schedule-cutting moves announced by all U.S. carriers over the past few months are not sufficient to counter the devastating impact of jet fuel prices," said the report.

Though many of the major carriers, such as United Airlines, Delta Air Lines and Northwest Airlines only emerged from bankruptcy protection not too long ago - as recently as June 2007 - the report says the current situation may prove to be even more severe than the industry's last financial crisis.

"The current situation ... is a potentially permanent cost shock that cannot be addressed entirely through capacity reduction and downsizing," said Warlick.

Other analysts agreed, saying the airlines' present dilemma cannot be compared to previous industry struggles.

"Jet fuel prices have changed the whole business model, so we don't have any history to draw on here," said Joe Schwieterman, a Transportation expert at DePaul University. "We don't know where it all leads."

Crash could come after Labor Day

So far, most of the recent bankruptcies in the industry have been limited to smaller carriers like Aloha Airlines, ATA and Skybus that lacked ample capital to cover losses from fuel costs.

But in the fall, when air travel typically grows lighter, Fitch says the larger airlines may begin to suffer the same fate.

"After Labor Day ... all the U.S. legacy carriers will see a rapid erosion of cash levels that could threaten their survival in 2009 if adverse fuel trends continue," Warlick wrote.

Furthermore, a sustained economic slump could drive even more passengers away, making revenue gains even more difficult to generate for airlines, according to the report.

"It seems implausible that air travel will substantially diminish after seven years of steady growth, but next year we could see a strong downward shock," Schwieterman said.

Fitch said the airlines that will have the most difficult time generating enough revenue to cover rising costs include United (UAUA, Fortune 500), Delta (DAL, Fortune 500), US Airways (LCC, Fortune 500), Southwest (LUV, Fortune 500), and JetBlue (JBLU).

American Airlines (AMR, Fortune 500) and Continental (CAL, Fortune 500) were listed as "stable."

Not all analysts are sure that bankruptcy is imminent, however.

"At some point, air travel will just have to be 20% more expensive," said Schwieterman. "It's not implausible to see the industry in the black."In the meantime, airlines continue to cut back.

Cutbacks continue

As part of an effort to trim 6,800 jobs, or 8% of its work force, American Airlines announced Tuesday it is cutting 200 pilot jobs to cope with higher costs for jet fuel.

"Any pilot reductions are regrettable, but the current economic environment is forcing us to make adjustments throughout the company," said the airline in a statement. "This proposal will help mitigate the unfortunate effects of a reduction in force."

Midwest Airlines (MEH), announced Monday it will cut 1,200 jobs, or 40% of staff, and it will ground 12 planes by this fall.

Last week, CEOs from 12 of the nation's top airlines sent an open letter to all airline customers, urging lawmakers to curb excessive speculation to scale back record fuel costs.

Airlines say record fuel prices are burdening their business and customers alike. Analysts expect the airlines will cut capacity by 9% in 2008 while continuing to hike fees and cut staff. To top of page

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