The six largest U.S. airlines have built a $23.8 billion cash hoard to cut debt and build a cushion against future shocks, bucking a pattern in other industries of returning money to investors.
As the carriers dig out from two years of collective losses, stockholders must be content with the knowledge that the group led by United Continental Holdings Inc. may be better protected against fuel-price surges and recessions, according to analysts at Fitch Ratings and Standard & Poor’s.
“The cash-deployment priority for all U.S. airlines over the next year will be debt reduction,” said Fitch’s Bill Warlick in Chicago. “Shareholder-friendly initiatives, both share repurchases and dividends, will take a back seat to balance-sheet repair.”
Dividends are climbing this year in all 10 of the Standard & Poor’s 500 Index’s main industry groups, according to RBC Capital Markets, with cash as a percentage of assets at the highest since 1959. Southwest Airlines Co. is the only major carrier with a quarterly dividend, at 0.45 cent a share.
United Continental, Delta Air Lines Inc. and their peers are now chipping away at $50.2 billion in combined balance-sheet debt after being bruised by bankruptcies last decade, a 61 percent jump in jet fuel to a record in 2008 and a travel slump that forced the deepest cut in seats since World War II.
“The volatility of this business on the revenue side and the fuel side -- you’re always going to want to carry somewhat higher cash balances than perhaps in other industry,” United Continental Treasurer Gerry Laderman said at a Dec. 8 airline conference in New York.
The $23.8 billion amassed at United Continental, Delta, American Airlines parent AMR Corp., Southwest, US Airways Group Inc. and JetBlue Airways Corp. consists of cash and short-term investments through Sept. 30, according to data compiled by Bloomberg. The nine-month total was more than any full-year tally since at least 1999.
“Airlines have been building up and holding more cash and short-term investments than they did historically,” said Philip Baggaley, an S&P managing director in New York. “That’s been as a result of sad experience for many of them.”
Credit-default swaps protecting JetBlue debt for five years fell 16.1 basis points to 589.4, the lowest since Nov. 15, at 12 p.m. in New York, according to data provider CMA. Contracts on Delta slid 12.7 basis points to 580.2, CMA data show.
Credit-default swaps, which tend to decline as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Debt at the largest airlines almost tripled to $57.2 billion in 2008 from 1999. As credit markets thawed last year, carriers began generating cash with secured debt and equity offerings, and rising travel demand revived profits in 2010.
That rebound helped send the Bloomberg U.S. Airlines Index up almost threefold through Dec. 17 since the S&P 500’s bear- market low on March 9, 2009. The preceding years weren’t as kind to the carriers’ stockholders.
Bankruptcy filings wiped out the shares in four big airlines from 2002 through 2005, including Delta and United predecessor UAL Corp. In late 2005, three of the five largest U.S. carriers were in court protection.
“Reducing the risk of financial distress in a downturn probably maximizes returns over the long term,” Fitch’s Warlick said in an interview.
Buybacks and dividends haven’t been part of airlines’ cash consumption. Dallas-based Southwest probably will keep its dividend unchanged through at least 2013, and no other large carrier is projected to start such payments, based on data compiled by Bloomberg.
No airline in the group bought back shares in the past year, Bloomberg data show. By contrast, AT&T Inc.’s Dec. 17 dividend boost marked a 27th straight annual increase, and the largest U.S. phone company said it would repurchase as many as 300 million shares.
Airlines want enough reserves to keep operating amid disruptions such as the industrywide grounding that followed the terrorist attacks of Sept. 11, 2001, said Scott Topping, the treasurer of Dallas-based Southwest.
“There is probably some additional conservatism from not completely trusting the credit markets to always be open,” Topping said in an interview. “That has to be in the back of everyone’s mind sitting in the finance department and trying to manage cash. You just have to get the money when you can.”
Southwest will draw on its $3.4 billion in cash and short- term investments when it closes the $1.4 billion cash and stock purchase of AirTran Holdings Inc. in 2011.
Delta Chief Executive Officer Richard Anderson signaled that he also wants to prepare the Atlanta-based carrier for “future opportunities” as it works to cut debt by 33 percent to $10 billion by 2012 using free cash flow. Such moves reduce interest costs and free up airplanes so they can be pledged again as collateral to refinance other debt.
“We don’t know yet what those opportunities would be,” Anderson told investors on a Dec. 15 call, a day after Sky News reported that Delta was considering an approach to Virgin Atlantic Airways Ltd. He wouldn’t comment on Virgin.
Delta has $2.1 billion in debt maturing next year, part of $8 billion coming due among the big six carriers in 2011 and $6.8 billion in 2012, according to a report by Fitch’s Warlick.
AMR had $4.56 billion in cash and short-term investments on Sept. 30 and said Dec. 16 it would end the year with $4.8 billion. Delta had $3.86 billion; US Airways, $1.94 billion; and JetBlue, $945 million. Chicago-based United Continental said Dec. 8 it expects to end 2010 with as much as $8.7 billion, down from $9.1 billion at Sept. 30.
“The question is, is that the right amount of money?” United Continental’s Laderman said at the Dec. 8 conference. “Sort of like Goldilocks -- it could be too much, too little, just right. Probably not too little.”
United Continental has said it will spend about $1.2 billion to combine the operations of Continental Airlines and United Airlines, which closed their all-stock merger Oct. 1 and formed the world’s largest carrier.
“The industry is always just on the verge of the next crisis,” Vicki Bryan, a senior high-yield analyst at New York- based Gimme Credit LLC, said in an interview. “They are better prepared, and you usually don’t say ‘better prepared’ and ‘airlines’ in the same sentence.”
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