Continental joins US Airways, United and Delta in Financial Trouble

[bUU]

Fifth-ranked Continental Airlines said in a regulatory filing today that it needs $500 million in wage and benefit reductions by Feb. 28 or it will face a liquidity crisis.

[jezzdogg]

What happens if I have a Virgin Atlantic ticket to London, but it is actually a code share on a Continential flight/ Does Virgin Atlantic put me on another flight that day if Contenential goes belly-up. This flight is not until September of 05 and it is a one-way to London to take the transatlantic cruise back, fare was 203.

[bUU]

If the ticket is issued by Virgin, and they have another partner who has space to accommodate you, then you should be okay. Worst case, they'll refund your money.

 

The bad situation would be if you have a ticket issued by a bankrupt airline.

[mcboo]

Bicker,

I think with yesterdays ruling in favor of UsAirways alll the legacy carriers are going to give it a try.

What do you think?

mcboo

[hdawson]

Wasn't UAL's new contract with pilots rejected by their judge?

[Globaliser]

Fifth-ranked Continental Airlines said in a regulatory filing today that it needs $500 million in wage and benefit reductions by Feb. 28 or it will face a liquidity crisis.

I think it's worth reading the text of this filing to get the flavour of what is being said. Although it's bad for CO that it has to be said, it doesn't seem to me to be in the same sort of league of crisis as DL, let alone US or UA.

 

It should also be remembered that this was an after-thought filing, which may suggest that there is some debate about whether it needed to go into an SEC filing at all. Ironically, I'd put some money on the proposition that if this had gone into CO's main filing a couple of days previously, most analysts and journalists would never have picked it up in the same way.

Item 8.01. Other Events.

 

In connection with employee presentations regarding our previously announced plan to reduce our annual wage and benefit costs by $500 million, we are supplementing the risk factors in our public filings by adding the following additional risk factor, which summarizes certain information contained in such presentations.

 

Failure to achieve $500 million in annual wage and benefit cost reductions by February 28, 2005 could ultimately result in the Company having inadequate liquidity to meet its obligations.

 

The Company believes that it must obtain the previously announced $500 million reduction in annual wage and benefit costs in order to avoid ultimately having inadequate liquidity to meet its obligations under current market conditions. The Company's plan is to obtain these reductions by February 28, 2005. Currently, our estimated wages, salaries and benefits cost per available seat mile, measured on a stage length adjusted basis ("labor CASM"), would be the second highest among major domestic airlines, after taking into account labor cost savings announced by many of our competitors and proposed by carriers in bankruptcy. Even after the $500 million reduction in annual wage and benefit costs, we estimate that our labor CASM would continue to be higher than many of our competitors.

 

Absent the $500 million reduction in annual wage and benefit costs, we expect to lose hundreds of millions of dollars in 2005 under current market conditions. In addition, we have approximately $984 million in debt and pension payments due in 2005, approximately $500 million more than in 2004. Without the reduction in wage and benefits costs and a reasonable prospect of future profitability, we believe that our ability to raise additional money through financings would be uncertain. Moreover, unless we are able to timely achieve the reductions, we believe that we will not receive approval from our board of directors to take delivery of the additional aircraft that we recently announced.

 

If we do not obtain the $500 million in annual reductions, we may be forced, like many of our struggling competitors, to reduce our fleet, furlough more employees, and obtain larger wage and benefit reductions, and may potentially lose customers and revenue.

(Emphasis original.)

[bUU]

Yeah, no question that Continental isn't in the kind of bad shape that US Airways, United and Delta are in. However, it is interesting that they're even broadcasting this as far as they are. It does mesh very well with what mcboo said -- that other legacy airlines are all going to be posturing to be sure that can either force their unions to take deep pay-cuts, or pave the way for themselves to enjoy the same gifts that the legal system bestowed on US Airways this week.

[quesang]

Continental now has flights to San Jaun from Ottawa (2 legs, not 3 as before) for 2/3 the price I paid for my US air tickets. These flights did not exist 2 months ago when I booked (or maybe they were jusy too expensive and I didn't pay any attention to them). All the airlines you had to do 3 legs.

 

My first react was: maybe these can be my back-up ( they are non-refundable I'm sure - so I won't ne going that route)!:o

 

My second reaction was: maybe they know something I don't and they're already thinking about taking over US airways flights.

 

My third reaction after reading this thread: am I ever going to get to San Juan for this vacation!!

 

The price was really great!! Maybe I can get these flights last minute if US Air goes under.

[bUU]

I really wouldn't read so much into Continental's announcement. While Continental is threatening financial trouble, there is no reason to believe it'll map to any kind of likelihood of ceasing operations anytime soon. It just doesn't seem to be that kind of financial trouble, at least not at this time.

[Globaliser]

I agree with bicker. My suspicion (pure speculation) is that someone in legal or regulatory realised that this bit of necessary but largely meaningless blurb had been missed out of the original SEC filing (in which nobody would have noticed one out of many "risk factors") and this has only acheived the prominence it has because it appeared separately. I personally wonder whether there is actually any real problem at CO as opposed to one theoretical possibility that they were regulatorily obliged to mention. Many airlines are in this boat, and trying to achieve cost savings of this level, while being far from any real financial trouble.

[LoneStarJeffe]

I think it is a prudent response by Continental's management to the change in environment resulting from the USAIR judge's decision. As they look ahead, they clearly see an extended price war lowering profits.

 

Does that mean lower wages is the only way to achieve cost reduction? Keep in mind that fuel prices will likely be lower until summer. But Continental's management is taking the wise step of not waiting until it is a crisis and opening negotiations with it's workers. Fuel, leases, and wages are the primary costs of an airline. Right now, Continental's management is battening down the hatches to ride out a lengthy price war and is exploring how much it can count on it's employees to help.

 

I see no immediate danger but extended price wars will put all carriers into higher risk over time unless they take steps to mitigate.

[Globaliser]

Does that mean lower wages is the only way to achieve cost reduction? Keep in mind that fuel prices will likely be lower until summer. But Continental's management is taking the wise step of not waiting until it is a crisis and opening negotiations with it's workers. Fuel, leases, and wages are the primary costs of an airline. Right now, Continental's management is battening down the hatches to ride out a lengthy price war and is exploring how much it can count on it's employees to help.

Keeping a tight rein on costs is very important. But the legacy carriers have more structural problems than this. In particular, they have major problems on the revenue side.

 

In part, this is because of the over-capacity in the market, over-capacity which is exacerbated by the Chapter 11 system which artificially keeps alive some airlines which ought to have been dead months or even years ago.

 

But even without over-capacity, they have to ask themselves: What are we here for? What are we trying to do? At the moment, there is a paradox in the market in that the (usually) higher-priced "full-service" legacy carriers actually offer a service proposition which is no better than - and often worse than - that offered by the low fare carriers. It's no surprise that many people book away from the legacy carriers, when they charge higher fares but give less service. Bribing passengers with frequent flyer miles is obviously not going to do the trick, particularly as the market learns how useless those miles can be.

 

On the revenue side, the legacy carriers really have to try some better ways of charging more money but yet delivering better value for it. Other full service airlines in the rest of the world do well at it - there must be lessons to be learned.

[bUU]

I'm not so sure that would work in the United States: Many customers are manically price-driven, seemingly far more so than many other industrialized nations in the world.

[Globaliser]

I'm not so sure that would work in the United States: Many customers are manically price-driven, seemingly far more so than many other industrialized nations in the world.

It would be a pity if it were so - and if it were so, then that really is the end of the full service carrier in the US.

 

Thinking through one further level, though, what about international ops? What if there were no more full service US domestic carriers? Who would do the international ops, and what would be the service proposition on them?

 

The other thing I wonder about is whether the exclusively price-driven purchasing in the US is in part conditioned by the fact that the market now perceives there to be no service level difference between "full service" and low fare airlines?

[hdawson]

Globaliser. I haven't seen any difference in many years.