The New Case For Airline Bankruptcies: $9 Billion Annual Loss

The International Air Transport Association has doubled its estimates for global airline industry losses compared to its figure of three months ago. That presages another round of carrier bankruptcies similar to these in the early part of the decade.

Reuters reports that the IATA expects the red ink at the world’s airlines to hit $9 billion this year. The main culprit is the same as it was last year–rising fuel costs. That is now married to a sharp drop in traffic.

Most of the Chapter 11 filings during the 2008 affected small airlines, at least in America. That could change this year if oil continues to climb toward $100 and the plunge in ticket sales gets worse. AMR (AMR) and United (UAUA), which have relatively weak balance sheets, are the most likely candidates to have to file for Chapter 11. They might be saved by mergers with stronger US carriers, or, if the government would allow it, flag carriers from Asia or Europe.

M&A may not save carriers like United. The problems in the industry are systemic. The savings of combining two airlines, with all of the risks of labor problems and customer service disruptions, may not be attractive enough to an airline with a strong balance sheet. The sector’s problems are so severe that airlines may decide that the distraction of acquisitions poses too great a risk in an economic environment that could force hundreds of millions of dollars of losses on each of the large carriers.

Now that the government has set the precedent of helping banks and auto companies, it may be tempted to try to keep the American airline industry from a series of corporate failures. The largest firms in the sector still employ tens of thousands of employees each. The chance to keep another US industry from a series of catastrophes may be too great for the Administration to resist.

The US airline industry will be restructured, whether it is in court, through M&A, or due to government intervention.

Douglas A. McIntyre