Don't Bank on US Airways

Three weeks ago I didn't like US Airways (U) as a potential turnaround-stock pick for one reason: It was a potential bankruptcy candidate.

Since then, the details of the government's $10 billion guaranteed loan program have been released. This program may change this scenario. However, I'm using the word "details" very loosely. The bill is written ambiguously, and it's tough to tell just what strings will be attached to any money released and how soon that money will be made available.

However, many readers asked why I was picking on US Airways, because it had more than $1 billion in cash on hand as of Sept. 30 (a figure comparable to those of Southwest Airlines (LUV) and Continental Airlines (CAL), for instance).

Well, it's for two reasons. First, Continental and Southwest were producing strong earnings before September; their business plans were humming along. This wasn't the case at US Airways, whose management squandered valuable time, twiddling its thumbs awaiting the OK for a merger with UAL (UAL) that, as early as last fall, was clearly not going anywhere. US Airways didn't have a strong business plan or a record of strong earnings before Sept. 11.

More important, even though the airline had plenty of cash Sept. 30, it's burning through it at a much higher rate than most of its competitors, according to most analysts' estimates.

For example, Southwest said in its conference call last week that it was going through just over $1 million a day in cash. AMR's (AMR) American Airlines said this week that it was going through about $10 million to $15 million a day. Northwest Airlines (NWAC) said in its call Thursday that it was going through $6 million to $7 million a day.

And US Airways? Most analysts estimate the airline is going through $20 million or more a day.

Even though the cash amounts of US Airways, Southwest and Continental were comparable 25 days ago, US Airways is in much more dire shape, cash-wise, on a longer-term basis. And that's why I believe the airline is a candidate for bankruptcy.

Earnings Summary

• Northwest demonstrated an impressive ability to keep operating expenses under control over the past quarter. This, plus its large hoard of cash, makes Northwest a potential long-term winner.

• Alaska Air (ALK) did exceptionally well last quarter, much better than I (and most analysts) had anticipated.

• Southwest reported earnings right on target. The airline has also managed to keep a tight lid on expenses, but as CFO Gary Kelly said in the conference call, "No doubt they are going to go up."

• AMR posted the worst quarter in its history, and operating expenses were through the roof. In a Securities and Exchange Commission filing Thursday, the airline said a significant fourth-quarter loss could cause the company to violate one or two financial covenants governing $819 million in credit. Consequently, that would cause this amount to become due and payable in the first quarter of 2002. The airline says it's now working to modify the covenants.

  AMR's horrible results don't bode well for UAL or Delta Air Lines (DAL), both slated to report next Thursday.

UAL Board of Directors Disappoints

As you know by now, UAL's board of directors didn't announce a change at the top after its regularly scheduled meeting Wednesday. While I find this news very disappointing, investors did too: UAL shares fell 4% Thursday.

Playing Catch-Up

Please bear with me, because I'm still trying to dig my way out of the email pile. Last week's column on United Airlines brought in more than 200 emails, and I'm still answering them! Thanks for your notes and for your patience as I slowly make my way through them all.

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