It’s no secret that the airline industry has seen better days. But how bad is it this time?
Not as bad as the mainstream media would like us to believe, according to airline analyst Robert Herbst, who publishes the Web site Airlinefinancials.com. And not so good that we shouldn’t be cautious with future bookings, he adds.
In the above chart, you’ll see a few first-quarter numbers for the major airlines as they compare to pre-bankruptcy. None of the airlines are in serious danger of coming close to the dreaded red bar.
Here are first-quarter debt ratios compared to total operating revenue and assets, as a comparison to recent bankruptcies.
Herbert says the problem is simple. Fares are too low.
To me, after reviewing airline industry financials, it is obvious air fares are simply too low to support the on-going fixed and variable costs of one of this country’s most important business sectors. Safety, schedule reliability and customer service comes at a price. These should not be compromised for cheap fares.
How depressed are airfares?
Accepting there is an airline-to-airline variance, as little as a 5% (average) increase in fares would make a significant improvement to every airlines capital structure.
A ~10% increase would help the industry replace an aged and fuel inefficient fleet. This needed fleet replacement will be a challenge due to the weak financial condition of most airlines.
So what does this mean to you?
Based on my analysis, US Airways and United look to have the greatest challenges over the next year.
I would always suggest buying airline tickets using a credit card which provides a refund should that airline cease operations.
So to summarize: The situation is serious, but the industry isn’t exactly circling the drain. A small raise in fares would be enough to save even the weakest carriers.
And if not? Then expect US Airways and United to fly into Chapter 11 in the near future.
