Recapitalization efforts by several U.S. airline carriers may lead to a wave of bankruptcies, some airline industry followers say. The possible restructuring moves are "a sign of the difficult condition that the airline industry is in, notwithstanding the recent dramatic improvement in both the debt and the equity markets," notes Douglas Runte, analyst at Morgan Stanley, in a research piece late last month.
Delta Air Lines, Northwest Airlines and America Trans Air are attempting to restructure some of their near-term debt maturities. Speculation among analysts is that America West Airlines will have to announce a similar move shortly. Janice Monahan, an America West spokeswoman, did not respond by press time.
Some investors see the looming debt exchanges as reason enough to think about scaling back. Conseco Capital Management is considering selling the unsecured airline bonds in its $20 billion taxable bond portfolio, as well as some of the issues secured by aircraft that are older or not widely used. "These debt exchanges are a function of the fact that the capital markets are still not open to the airlines. The financial flexibility of all the airlines is increasingly limited," says analyst Edwin Ferrell. He declines to give more specifics about a trigger for any sale, or what issues the firm would unload.
Airlines' need to restructure balance sheets underscores the fact that near-term debt maturities and pension payments still loom large, according toSasha Kamper, analyst at Principal Global Investors. "Revenues are still down 20% versus where they were in 2001," she says. While Kamper says some airline paper is overpriced, she offers a slightly contrarian take, arguing that the recent sell-off has made certain well-secured issues attractive from a long term perspective. Unsecured airline debt, however "is not a good long-term investment," she says. Principal does not own any unsecured paper.
Adding to the airlines' woes are indications from investors that the debt exchanges will be a struggle to pull off. Delta already had to sweeten its first offer to trade a combined $800 million of '04 and '05 debt for a combination of longer-dated notes and, in the case of the '04 paper, a cash component.