May 26, 2008

As Some Airlines Move Toward Chapter 11, Fuel Suppliers Demand Cash (AMR)


The major US airlines can no longer get "net 30 days" as credit terms, or any terms at all. Fuel companies want cash. They do not want to end up holding the tank if a carrier defaults and its receiveables go into a pool as part of a bankruptcy.

According to The Times of London, "Sources within the airline industry indicate that credit is being denied to most of the leading American carriers and the practice is moving to Europe and Asia."

Such action by major suppliers is often a sign of concern that some airlines won't make it. Suppliers are usually a better barometer than outside analysts because they have to deal with the carriers day-to-day.

Wall St. has begin to talk about the failure of one or more airlines. Most trade near 52-week lows. AMR (AMR) has a market cap of only $1.6 billion as its stock has gone from a 52-week high of $29.32 to $6.32.

If other major suppliers ask airlines to pay upfront, the cash crisis in the industry may get worse.

Douglas A. McIntyre


This could be very bad...