Last May I wrote about my negative view towards the dysfunctional airline sector. The industry remains in a crux, facing intense price wars driven by discount airlines and high oil costs. I suggested in May that the risk investing in airline stocks was too high versus the potential.
Now, with fuel costs remaining high, the industry has little hope to rebound in the foreseeable future. This especially holds true for the major air carriers, but perhaps not so much for lower-cost rivals such as Southwest Airlines Inc. (NYSE/LUV) and JetBlue Airways Corp. (NASDAQ/JBLU).
The trend is negative for the airline sector as a whole, however, and I do not see that changing in a climate of high fuel costs and pricing pressures. The underlying structure of the major airlines offers little flexibility. And armed with massive debt loads, it has become difficult to manage debt payments.
And now there is news, albeit not surprising, that two of the country’s major airlines, Delta Air Lines Inc. (NYSE/DAL) and Northwest Airlines Corp. (NASDAQ/NWAC), may be on the verge of filing for Chapter 11 protection. Both airlines are struggling as far as liquidity goes, as well as in the ability to pay debt as it becomes due. Northwest failed to make a $42- million debt payment last weekend and may also ignore a $65- million pension contribution set for September 15.
Northwest failing to make a $42-million debt payment is serious business indeed. The company has about $2.14 billion in cash, but it also has a massive debt load of about $8.95 billion. Its book value is a negative $44.13 per share, so why anyone would want to buy the stock is beyond reason.
Trading at about $1.57 a share at last Tuesday’s close, Northwest is clearly a bet to avoid trouble. If Northwest files for Chapter 11, there is a high probability that existing shareholders would be left in the dark with nothing after the creditors get their share.
So, as I said last May and as I will reiterate now, the trend in the airline sector is negative, and it can only get worse if high oil prices continue. I like the discounters, but I would still be hesitant until the underlying fundamentals of the sector show improvement.