The Chicago Tribune has joined the chorus of articles examining United Airlines’ financial situation and not liking what it sees. I’m fairly certain that most of these pieces stem from a June deal United made to pay 17% on $175 million in debt it issued (that’s a high rate of interest, for those of you keeping track at home). The other major concern is that American Express will begin to require cash payments from the carrier if United’s cash reserves fall below $2.4 billion (Chase has a penalty that kicks in at $2.5 billion beginning in 2010) – the airline actually fell below that level in May.
In addition, United doesn’t own much that it can sell off to generate cash quickly, should demand not recover in the next 6-12 months. If you can’t sell your assets, how do you quickly generate cash? By slashing prices. Which is exactly what we saw last week with Southwest’s $30/60/90 sale, and what we’re seeing going into the fall and winter ($450 round trips to Moscow, anyone?). As FareCompare’s Rick Seaney recently wrote (Tweeted?) “Reality Check! Nov to May airfare prices in a free fall, airlines have popped their chutes, just don’t know if their is a hole in the canopy.” I’m not sure anyone knows more about airfare than him – if he’s saying airfares continue to reach new lows, we’re in historic territory.
But how low can you drop fares – at some point you’re not even covering the high fixed costs of running the airline. And the old days of using business class to make up for low coach fares are over for now. Sure, airlines have cut back significantly on capacity and that could help if business turns around. But it may not – at least not for the next 9-12 months. And if that happens, it’s desperation time, especially for United.
I can’t believe I’m saying this, but I think the only way out is a merger with Continental. It makes me sick just thinking about that. But the reality is that most industries have 2 major competitors, with a 3rd much smaller competitor, then extremely high fragmentation from there (Coke/Pepsi/Dr Pepper; McDonald’s/Burger King/Wendy’s). Sure, there are exceptions. But we don’t need AA, UA, Continental, Delta, US Airways, and Southwest (and JetBlue and Alaska?) as national carriers. A UA/CO matchup would help consolidate some of the competition. It’s not crazy that Delta could suck up US Airways once their NW merger is completed (assuming they’re able to ride out the next year’s downturn), and a JetBlue/Alaska matchup isn’t insane either. Which, in this pretend scenario, would leave AA, CO, Delta and Southwest as major national carriers, with Alaska Blue as Dr. Pepper in this scenario. It’s not crazy, and it would help to drive fares up (no one likes that – but no one likes airlines closing down either. And driving from New York to LA is a loooooong trip).
Like many others, I had pooh-poohed consolidation as a way out of trouble, and on some level I still do. It’s not a cure-all. But these are times like we’ve never seen, and airlines need to use this opportunity to right-size the market. 4 major carriers sounds about right to me. Sorry, United.