Frontier (NASDAQ: FRNT) filed for Chapter 11 joining ATA and Aloha Air. According to MarketWatch "The airline said the decision was taken after its principal credit-card processor unexpectedly said it would start withholding "significant proceeds" received from the sale of its tickets." But, like the others, it was the victim of high fuel prices and shrinking passenger prospects.

The news also came that Delta’s (NYSE: DAL) pilots had elected to approve a new contract which will allows their company to merge with Northwest (NYSE: NWA). Whether the combination will come soon enough to save the carriers is a matter of conjecture. The marriage announcement is said to be less than a week away.

One airline which is not likely to make it through the current turbulence is AMR (NYSE: AMR), parent of American Airlines. The company’s CEO said yesterday that current flight cancellations due to FAA inspections would cost the firm tens of millions of dollars. It is not money AMR can spare.

In most industries staying out of Chapter 11 is a badge of honor. The sole exception to that is the airline business where bankruptcy is embedded in the culture like ticks are on the hide of a deer.

AMR is one of the few large US airlines which stayed out of a significant financial mess over the last decade. In the most perverse sort of way, a Chapter 11 filing four or five years ago might have spared AMR from its current perilous state.

One advantage that carriers like Northwest have in the present difficult economic environment is that they used their trips through the Chapter 11 process to tear away debt as well as employees which they deemed to be redundant. By several accounts, NWA has saved over $2 billion a year because it went through bankruptcy.

All of the large US airlines are at risk now. Fuel costs are up sharply and passenger revenue and revenue miles are likely to fall as the economy keeps people off commercial carriers The very rich can continue to operate their own fleets of private jets.

The present financial trouble does not strike each large US airline equally. Largely because of an advantage of Chapter 11, NWA has $6 billion in debt to its $3 billion in cash. At AMR, long-term debt totals $15.6 billion compared to its $4.6 billion in cash. Last year, AMR’s EBITDA was only about two times it interest expenses. By paying all of its bills over the years, AMR has been placed at a great disadvantage.

AMR had very modest operating income of $965 million last year compared to its $22.9 billion in revenue. The market has figured out the problem. While shares in other national carriers are off about 50% in the last six months, AMR is off 60%. That is a significant negative premium, a vote saying AMR is in a different bucket than its competitors are.

Several carriers reported falling traffic for March. At AMR, domestic traffic fell 5.9% for the month.

At some point soon, the dropping revenue effect and rising expenses cross where interest payments matter.

Those lines are crossing now at AMR and it puts the company at great peril.

Douglas A. McIntyre

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