Reconnaissance Flight Over a Troubled Sector

Let's talk about what's happened to the airline sector since the markets reopened on Monday, and the estimated cash-burn rates of the major airlines.

We saw the expected big selloff Monday, as most major industry players lost about 30% to 45% on the day. Southwest Airlines (LUV Quote) dropped the least -- 24%, and America West (AWA Quote) lost the most with a fall of 65%. The selloff started early, but leveled off fairly quickly.

Bargain hunters emerged Tuesday, and shares of several major airlines did quite well. Shares of American Airlines' parent AMR (AMR Quote), Delta Air Lines (DAL Quote) and America West all picked up about 10% on the day, while Continental (CAL Quote) sagged another 12%, on top of the 50% drop the airline suffered Monday.

Most major airline stocks were down a bit in trading Wednesday, and America West posted the largest drop of the group: down 9% to close at $3. However, Delta posted a 3% gain on the day. Volatility was the name of the game throughout the sector, though, as Mesa Airlines (MESA Quote), which bounced up Tuesday, dropped back 13% Wednesday to close at $5.80.

What's Going On?

First, why has Continental taken it on the chin so hard? I think the blame can be laid directly at the feet of its Chairman and CEO Gordon Bethune. As many of you know, he stepped up to the microphones and TV cameras Saturday and really got the "Congress needs to bail us out now" bandwagon in gear. Continental also said Monday that it wasn't going to make Enhanced Equipment Trust Certificate payments on a number of aircraft. (EETCs are basically bonds that airlines use to finance their aircraft.)

Yes, Continental was positioned for heavy growth before this economic turndown. Yes, it does have a lot of new, expensive aircraft underfoot. But it also had more than $1 billion in cash at the end of June. So I think other major airlines are on much shakier ground than Continental.

That brings us to the question of cash burn.

Determining the amount of cash an airline goes through in one day is, at the best of times, an inexact science. It's much tougher now. One analyst said this week that he hadn't published a cash-burn profile for the industry because he had little faith in such information.

Cash-Burn Comparisons

I agree -- to a point. It's still helpful to compare the airlines with one another. The numbers may be off a bit, depending on how they've been calculated, but the relationship, in terms of comparing relative strength among the individual airlines, is pretty much on target.

Brian Harris, analyst with Salomon Smith Barney, took a stab at the calculations Tuesday. Here are his estimates.

Airline Cash-Burn Rates As of June 30
	Cash Burn per Day in Millions	Cash and Short-Term Investments in Millions	Days to Deplete Cash
Southwest (LUV:NYSE)	$9	$969	142
Delta (DAL:NYSE)	31	2,553	85
United (UAL:NYSE)	40	2,747	63
American (AMR:NYSE)	39	1,752	53
Continental (CAL:NYSE)	19	1,008	39
Northwest (NWAC:Nasdaq)	22	1,296	96
US Airways (U:NYSE)	20	1,250	72
Alaska (AWK:NYSE)	4	371	103
America West (AWA:NYSE)	5	174	31
Source: Salomon Smith Barney

According to this data, the major airline with the most dire cash situation is America West. Southwest Airlines tops the list because of its relatively low cash-burn rate (those infamous low costs at work) and its billion in cash. Not surprising, then, how those two stocks fared Monday.

But let's take the situation a step further. What will any of this mean if all of the airlines declare bankruptcy?

The situation now seems to be pretty clear-cut. No bankruptcy filings are likely to be made ahead of the outcome of the hearings on Capitol Hill, which began Wednesday morning and will continue this week. As one airline manager noted in an email last night, "We don't want to see our shareholders take the hit. So we are going to wait and see what the government decides to do, in terms of financial relief."

It's simple. Either the shareholders or the taxpayers take the hit.

My gut feeling is that the government will give the airlines far less than the $24 billion for which they've asked. This, then, would likely set the stage for a number of airline bankruptcies.

If that happens, then those shares of airlines you own would become wallpaper, perhaps best suited for the spare bathroom.

One final thought. Shares in World Airways (WLDA Quote) closed at 98 cents Wednesday, up 63% from their Sept. 10 close. Why? The airline historically has been a large defense contractor.