AMR, LUV, CAL Shy Away From Guarantees

AMR, LUV, CAL Shy Away From Guarantees

American Airlines [AMR], Southwest Airlines [LUV] and Continental Airlines [CAL] believe they will not have to tap into a $10 billion government loan guarantee program set up shortly after Sept. 11, according to ABN AMRO analyst Raymond Neidl. However, after visiting the three carriers on Dec. 6 and 7, he said they may apply for the loan guarantees before the June 28, 2002, deadline to keep their options open.

Meanwhile, it appears that Delta Air Lines [DAL] has not completely rejected the idea of applying for loan guarantees. On the other hand, the head of US Airways [U], Stephen Wolf, said on Dec. 11 the carrier does not plan to apply for loan guarantees, a declaration that surprised many observers who view US Airways as a prime candidate to file for Chapter 11 bankruptcy protection.

Neidl also said American, Southwest and Continental believe many analysts may be a bit over-optimistic about the timeframe for the industry to fully recover. According to Neidl, security is the key to regaining consumer confidence, and having the government assume responsibilities of security should help the industry. But he noted that the carriers expect, at least initially, that there will be delays and problems as the security system is revamped.

Continental believes its cash position is enough to get it through the current economic environment. If additional cash is needed, Neidl said Continental could sell Express, its owned regional feeder carrier. However, he added that in this environment it would probably be at a discount until Continental proves it is a survivor, since all Express business comes from Continental. Neidl also said Continental still wants the Express initial public offering to occur but is waiting for the industry and stock markets to stabilize.

Since Sept. 11, Continental has made strides in reducing costs, but the revenue side of the equation still remains the main concern, according to Neidl. So far, he said, Continental’s traffic at all points has returned at a rate that is better than originally forecast. But yield still remains a problem even though the company believes it is running at a yield premium to the industry.

Overall, Neidl said the carrier is pleasantly surprised with load factors, traffic and RASM trends and has set a goal of reaching breakeven by the end of March. But this estimate, Neidl said, is probably on the “aggressive side,” and the industry is likely in for a slower recovery. Because Continental recently increased its liquidity position through a recent stock offering, ABN AMRO raised its long-term rating to Add from Hold, although it still expects a short-term market adjustment for the airline sector as it heads into the slower winter season, unless oil prices continue to decline. >TK

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