Comments on: Shaking the airline bankruptcy blues http://www.consumertraveler.com/today/shaking-the-airline-bankruptcy-blues/ The last honest travel site Sun, 12 Feb 2012 14:38:00 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Mike http://www.consumertraveler.com/today/shaking-the-airline-bankruptcy-blues/comment-page-1/#comment-4661 Mike Thu, 24 Jul 2008 15:08:31 +0000 http://www.tripso.com/?p=5079#comment-4661 Good points, Matthew. Also, the debt often comes with cash restrictions so that if cash falls below a certain level, the airline is in violation of debt covenants. and the credit holders can force the airline into bankruptcy. Good points, Matthew. Also, the debt often comes with cash restrictions so that if cash falls below a certain level, the airline is in violation of debt covenants. and the credit holders can force the airline into bankruptcy.

]]> By: Matthew B http://www.consumertraveler.com/today/shaking-the-airline-bankruptcy-blues/comment-page-1/#comment-4659 Matthew B Thu, 24 Jul 2008 14:33:53 +0000 http://www.tripso.com/?p=5079#comment-4659 If you look up these carriers' debt/equity ratios, you'll see why their cash flow is so weak. Most of them have debt/equity ratios in the range 2.5 - 4.2, which means for every $1 of shareholder funds, they have $2.50 - $4.20 in debt (not liabilities, debt). For a carrier the size of American Airlines (which has the highest debt/equity ratio) this means hundreds of millions of dollars a year in interest payments. Interest payments cannot be deferred or ignored (like dividend payments). In most of the recent bankruptcies, the shareholders have lost all their money and the bondholders have been given shares in lieu of repayment. I bet if you check the share registry and the bond registry of these airlines, you'll find the same names on each. Compare this situation to the most profitable airlines in the world like Lufthansa, Air France/KLM, British Airways and Qantas, all of whom have debt/equity ratios of around 1.0. Better yet look at Southwestern Airlines, with its 35 years of profitability, it has a debt/equity ratio of around 0.29. When you are not shelling out all your cash for interest payments, you can remain profitable even through oil crises. I personally think the capital structure of the airlines is the main reason why they skirt bankruptcy all the time, not oil prices. The share/bond holders like the capital structure the way it is because it enables them to cry poor mouth to the government, and manipulate the bankruptcy process so that they can dump their pension plan obligations to their employees and make structural changes that their labor unions would not otherwise agree to. I think it is time Congress overhauled the corporate bankruptcy law to stop these kinds of shenanigans. If you look up these carriers’ debt/equity ratios, you’ll see why their cash flow is so weak. Most of them have debt/equity ratios in the range 2.5 – 4.2, which means for every $1 of shareholder funds, they have $2.50 – $4.20 in debt (not liabilities, debt). For a carrier the size of American Airlines (which has the highest debt/equity ratio) this means hundreds of millions of dollars a year in interest payments. Interest payments cannot be deferred or ignored (like dividend payments). In most of the recent bankruptcies, the shareholders have lost all their money and the bondholders have been given shares in lieu of repayment. I bet if you check the share registry and the bond registry of these airlines, you’ll find the same names on each.

Compare this situation to the most profitable airlines in the world like Lufthansa, Air France/KLM, British Airways and Qantas, all of whom have debt/equity ratios of around 1.0. Better yet look at Southwestern Airlines, with its 35 years of profitability, it has a debt/equity ratio of around 0.29. When you are not shelling out all your cash for interest payments, you can remain profitable even through oil crises.

I personally think the capital structure of the airlines is the main reason why they skirt bankruptcy all the time, not oil prices. The share/bond holders like the capital structure the way it is because it enables them to cry poor mouth to the government, and manipulate the bankruptcy process so that they can dump their pension plan obligations to their employees and make structural changes that their labor unions would not otherwise agree to.

I think it is time Congress overhauled the corporate bankruptcy law to stop these kinds of shenanigans.

]]>