Criticism and surprise as government steps in to fund bankrupt Midway Airlines to relaunch smaller-scale operations

US airlines received a second round of cash from the government last week, representing about 35% of the total federal aid package earmarked to provide financial relief to the industry.

Airlines, mainly major carriers and those most at risk of immediate closure, received the first half of the $5 billion aid package in early October. The most recent round of funding, to the surprise of many, included Midway Airlines.

The bankrupt carrier, which ceased operating within hours of the 11 September attacks, nonetheless received $10.1 million in aid which it intends to use to re-launch operations on a smaller scale from its Raleigh-Durham base. With funding in hand, the airline then received permission from a bankruptcy court judge to lease a Boeing 737 from Boullioun Aviation. Chief executive Robert Ferguson says he plans to operate five 737s, and expects to begin hiring pilots soon in order to resume flying by the end of the year.

The aid to Midway has drawn criticism from some who note the funding was intended to compensate airlines for their losses following the attacks, during which Midway actually closed its doors and dismissed staff. But US Department of Transportation officials, after reviewing Midway's plan, granted the carrier slightly less than the $12 million for which it applied.

American Airlines received another $223 million to make a total of $583 million. The airline, which suffered losses as a direct result of the events of 11 September and the fatal A300 crash in New York last month, has registered a greater traffic loss than most. But for all its troubles American reports good liquidity, according to Standard & Poor's (S&P).

Late last month, the credit ratings agency reduced many of the major airlines' debt to junk status, reflecting the potentially higher risk to creditors of not getting their money back should a carrier become insolvent. American, Continental Airlines, Delta Air Lines and United Airlines were among carriers downgraded by S&P, along with foreign airlines such as British Airways.

Continental, whose operating results have shown the least decline among the hub-and-spoke carriers since the attacks, has less cash to hand than most US majors, as well as less financial flexibility than its counterparts. As the table shows, unencumbered assets on which it can raise funds are more restricted than any of its major rivals. Earlier this month it raised just over $150 million with a share issue to bolster its finances for what it described as "general corporate purposes".

Delta is the best positioned among the US majors, according to Phil Baggaley of S&P. Despite its losses, the carrier has a large cash reserve and an ample supply of aircraft to offer as collateral against future borrowing. The airline also has the advantage of employing a higher percentage of non-unionised labour than most of its major rivals.

United Airlines, which like American lost two aircraft in the attacks, retains the dubious distinction of suffering the largest losses both before the attacks as the recession began to bite and after. Its new leader, Jack Creighton, will continue to struggle with high costs and a labour situation which is uncertain at best, says Baggaley, even with $644 million in aid from the government.

Surpassing United in financial misery is America West Airlines, which S&P rates as the airline with least liquidity and one of the weakest competitive positions. The carrier was the first to apply for a federally guaranteed loan (at $400 million), followed by Vanguard, and faces the possibility of near-term bankruptcy unless the government assistance is available.

The third tranche of financing from the government is not expected to be available to the airlines until early next year.

Source: Flight International