Burning Through Cash, Hindered by Labor Contracts, Terrorism and Now War, Can the Major Airlines Survive? Bear Stearns Research Finds Major Carriers Burn Up To $6.1 Million a Day

Business Wire, April 1, 2003

Business Editors

Topical News: War On Terrorism

NEW YORK--(BUSINESS WIRE)--April 1, 2003

Labor contracts, a drop off in business travel, high oil prices, terrorism and tightened security following 9/11 have cost the airline industry a whopping $21 billion in operating losses over the past two years. Several major airlines have filed for bankruptcy protection and a new report by Bear, Stearns & Co. Inc. suggests more airlines could fail if war with Iraq drags on and costs are not reined-in. "This is the most brutal down-turn the industry has ever seen" said airline analyst David Strine. "Only those carriers that can quickly cut costs and renegotiate labor contracts will survive because balance sheets are stretched to the breaking point. For those that succeed, the upside will be impressive when the business cycle turns."

According to the report, Liquidity and Labor: The Keys to Survival, the major airlines are hemorrhaging cash. Strine estimates the cash burn rate for the major airlines will likely range between $1.6 million to $6.1 million a day this year, with AMR and Continental Airlines burning through the most dangerous amounts of cash given their unrestricted cash on hand. Strine notes, however, that Delta Air Lines and Northwest Airlines have more comfortable cash positions.

Labor costs, which account for a big chunk of operating costs, have also debilitated the large carriers. At AMR, Strine expects labor costs to account for nearly 50% of the carrier's 2003 revenues. "There's a clear relationship between the high cost of labor and airlines with deep financial troubles," said Strine. "The most successful airlines will be those that come up new labor contracts and at the same time improve their cultures - a very tough task for management."

But not all airlines are created equal. Strine points out that unlike the old hub-and-spoke carriers, low-cost airlines have managed to thrive with a nimble business model that is likely to be imitated. "The low-cost airlines have found a formula that works. Not only do they have simple fleets and point to point operations, but they have positive corporate cultures and good labor relations." said Strine who added that liquidity is not a concern for low-cost carriers like JetBlue and Southwest Airlines. "The next year will be pivotal. What takes place will likely shape the industry for the next five to 10 years."

Of the major carriers, Strine recently initiated coverage of American Airlines (AMR) with an Underperform rating, Continental Airlines (CAL) at Peer Perform, and Delta Air Lines (DAL) and Northwest Airlines (NWAC) at Outperform. Strine also initiated coverage of low-cost carriers JetBlue (JBLU) with an Outperform rating and Southwest Airlines (LUV) at Peer Perform.

For a copy of the report, members of the press may call Monica Orbe at (212) 272-9294 or email morbe@bear.com.

Founded in 1923, The Bear Stearns Companies Inc. (NYSE: BSC) is the parent company of Bear, Stearns & Co. Inc., a leading investment banking and securities trading and brokerage firm serving governments, corporations, institutions and individuals worldwide. With approximately $32.0 billion in total capital, Bear Stearns serves governments, corporations, institutions and individual worldwide. The company's business includes corporate finance and mergers and acquisitions, institutional equities and fixed income sales, trading and research, private client services, derivatives, foreign exchange and futures sales and trading, asset management and custody services. Through Bear, Stearns Securities Corp., it offers financing, securities lending, clearing and technology solutions to hedge funds, broker-dealers and investment advisors. Headquartered in New York City, the company has approximately 10,500 employees worldwide. For additional information about Bear Stearns, please visit the firm's Web site at http://www.bearstearns.com.

For important information regarding the companies in this report, please contact your registered representative at 1-800-371-0978, or write to Uzi Rosha, Equity Research Compliance, Bear Stearns & Co. Inc., 383 Madison Avenue, New York, NY 10179.