Despite some positive revenue trends, the US majors continue to struggle with a cash crunch possibly coming as the year draws to a close

United Airlines' long, slow journey toward an exit from bankruptcy reorganisation has stumbled over high fuel costs. As it seeks still more labour concessions, the once grand network airline is setting an unfortunate but likely precedent to what other major legacy carriers face. However, United's situation is perhaps more dire than that of other major carriers, some analysts are warning.

A liquidity crunch looms as early as this winter season. At United, the 2005 fuel bill will be about $700 million higher than calculated. That wipes out some of the savings it agreed upon with unions early this year. Since filing for Chapter 11 bankruptcy protection in December 2002, United has wrested about $5 billion in annual cost cuts through wage and benefit reductions and operational changes. Now, however, it is seeking more than just pay cuts. The airline says that it no choice but to end pensions plans for its unions.

That demand is made more difficult by union resentment over a $366,393 bonus that United chief executive Glenn Tilton agreed to accept in March. Citing the payments to Tilton and other top United executives, its flight attendant and its machinist unions have threatened a strike. Association of Flight Attendants chief Greg Davidowitch says United has been "caught red-handed giving big raises to its salaried and management employees while claiming to cut their pay". The International Association of Machinists says: "We're trying to work with United to find a middle ground. But if pensions are terminated, we are prepared to strike."

It is uncertain if a strike would be legal against an airline in bankruptcy court protection, but the mere threat of a strike or possible work slowdown could have a noticeable effect as the peak summer travel season approaches. And as summer passes, UBS analyst Robert Ashcroft sees a liquidity crunch overtaking almost all major legacy carriers and overwhelming even a recent positive revenue trend. Ashcroft thinks the crisis will be this winter, although United and Delta Air Lines could see real problems as early as late summer.

Jamie Baker of JP Morgan says: "Liquidity crunch time is approaching." He sees a "near-critical urgency for carriers to shore up looming liquidity shortfalls", notably America West, Continental and Delta. Baker thinks that these airlines have ways to raise cash: Continental could sell its stake in Panama's Copa, while Delta could sell its Atlantic Southeast regional unit, a possibility that Delta chief executive Gerry Grinstein has raised repeatedly. Baker adds that America West could turn to GE for liquidity. The US corporation has already made itself the "must see" financier for troubled airlines.

Baker notes that the dire situation has resurrected reports such as some "early speculation about a possible linkage" between America West and US Airways. America West chief executive Doug Parker told reporters in February that the carrier plans to "look aggressively at all opportunities and attempt to be more opportunistic". He spoke shortly after Southwest won a bidding war for an ATA Airlines codeshare agreement.

Others see long-awaited consolidation approaching globally. United's Tilton has pressed strongly for lifting US limits on airline ownership by non-citizens. He said in an April speech that "we are witnessing the beginning of this movement" with European and possible Asian mergers.

Tilton added: "It is particularly ironic to me that my former company, ChevronTexaco, has already moved to further consolidation with the announcement of its intent to acquire Unocal, little more than three years after the ChevronTexaco merger."

But for now airline consolidation in the USA, much like lower oil prices, may prove to be an ironic desire rather than a reality.


Source: Airline Business