Maybe it’s the Meredith Whitney effect, maybe it’s the stress of not knowing if you’ll still have a job in the morning, but analyst notes have taken on a certain sense of drama in recent months.
Take the latest forecasts from JP Morgan’s airline team, led by Jamie Baker; not only will the industry lose $7.2bn this year (an all-time record), but there will also be blood:
Recessions have consistently led to multiple Discounter failures, management turnover, and at least one Legacy bankruptcy.
Mr Baker and his team even invoked that other, dread ‘b’ word - bankruptcy:
Yes, we said “bankruptcy.” Current fuel prices pose an earnings challenge to the industry that actually exceeds the economic impact of 9/11 in our view.
Furthermore, a recession poses its own challenges. It is simply a statement of fact that every recession since deregulation has led to numerous Discounter failures (underway), Legacy management turnover (apparently just starting), and at least one Legacy bankruptcy (although merge-at-all-cost M&A attempts may bridge the gap to a rosier economic environment as merger optimism leads to necessary capital infusions).
At current fuel prices, we simply see little reason for this to be the downturn that breaks from past precedent.
And this time around, even capital raising efforts might not be enough to stave off a collapse:
Raising capital buys time, but not much else. Capital raising efforts are already underway and expected to pick up steam. But capital is finite. Once opportunities are exhausted, we believe managements will have accomplished little other than buying time. Time for fuel to recede, time to get serious about capacity cuts . . . or merely time to wait for others to die and greatly reducecapacity in the process.
US Airways, Northwest and United topped the investment bank’s list of airlines likely to file for Chapter 11 unless market conditions improved dramatically, followed by American, JetBlue, Continental and AirTran. Delta, Alaska and Southwest, they wrote, are the least likely to be calling their lawyers anytime soon.
But wait, it gets gloomier, and Baker et al get all bearish - literally:
If it sounds as if we are panicking, it is because few managements appear to be.
Industry liquidity is admittedly abundant right now, and there’s always the possibility that fuel prices plummet. When challenged, several managements now concede that business plans rest on little more than outrunning the bear – you know, if one is hiking with a buddy then neither has to be faster than a marauding bear, only faster than his or her companion. While ‘outwit, outplay, outlast’ may provide entertaining fodder for reality-TV types, it is customarily accompanied by value destructive behavior coming at the expense of stakeholders.
To paraphrase a line from Jurassic Park, current cash balances may be met with the usual “oohs” and ”ahhs,” but later comes the running . . . and the screaming. Or so we fear
