Airlines
Now Is the Winter of Our Discontent - Bankruptcy,
Liquidation & Consolidation Explored; Ests Revised
Airline Equity
Jamie BakerAC
(1-212) 622-6713
jamie.baker@jpmorgan.com
Scott Tan, CFA
(1-212) 622-5541
scott.b.tan@jpmorgan.com
Airline/Aircraft Credit
Mark Streeter, CFAAC
(1-212) 834-5086
mark.streeter@jpmorgan.com
J.P. Morgan Securities Inc.
See page 46 for analyst certification and important disclosures.
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We are reissuing this note to
update Figure 4 on page 8.
The availability of capital will largely determine the industry’s size, shape, and
profitability next year, in our view. Oil & revenue warrant attention, but from here it is
largely a question of what the liquidity-challenged can accomplish. While a paucity of
capital may imply to some a potential liquidation and resulting return to prosperity for
survivors, Washington may interfere, up to and including endorsing consolidation
among weaker players. And don’t discount the ability of the larger network players
(AMR/UAUA particularly) to squeeze more liquidity juice from friends and family.
While it remains too early to aggressively engage the “buy the survivors” equity
strategy, capital and regulatory clarity in coming months suggest the potential for
outsize wintertime gains, in our view.
• We’ve Passed V1. While airlines remain beholden to GDP & fuel prices, we
believe the point of no return has already passed. Even a seemingly miraculous
surge in demand (i.e., flat yr/yr revenue in Q409 vs. current -20% environment)
wouldn’t negate the necessity for significant incremental capital at AMR, LCC &
UAUA. We believe sources of potential liquidity at AMR exceed those for UAUA,
while the same holds true for UAUA vs. LCC.
• It Isn’t Clear What Ch11 Offers, or Whether DIP Financing Can Be Found.
With the debatable exception of AMR, Ch11’s benefits have already been bestowed
upon LCC & UAUA (twice, in fact, for LCC). But liquidity for all three has already
declined below typical filing thresholds. In the absence of definable benefits, “hope,
and pray somebody goes first” may be the resulting strategy, particularly if sufficient
assets with which to secure DIP financing no longer exist.
• So Something Needs to Give. Should We Model for Liquidation? Not so fast.
Airlines may be bad at making money, but their track record for finding it stands in
sharp contrast. Investment banks, leasing companies, manufacturers, and the U.S.
government often meddle with market forces. It is precisely this fact that prevents
us from becoming more bullish on aggregate sector risk/reward.
• Consolidation and the Government. While we’d much prefer Washington to turn a
blind eye, capital to act prudently, and outright liquidation(s) to occur, we doubt
shareholders in surviving airlines will get that lucky. Assuming LCC or UAUA die
off, as we believe some do, is a mistake, in our opinion. Washington may ultimately
prove the lender of last resort and push for job-saving consolidation in return.
Unfortunately, this does less to reshape the industry than outright liquidation, though
it could still provide sufficient capacity relief and allow for profits under certain
assumptions (and in fact forms the basis of our 2010 forecast; read on). We continue
to find merit in a potential LCC-UAUA combination.
• JetBlue a Bright Spot. With demand rebounding post-H1N1 and consumers more
confident than they were last winter, JetBlue may prove a) the only airline to exceed
consensus this season and b) the airline subject to the fewest downward estimate
revisions. We suggest a strategy of owning JetBlue specifically into earnings.