If you’ve heard United’s name mentioned in the news lately, it’s probably related to their financial troubles. I’ve seen plenty of people predict bankruptcy for the airline in the not-so-distant future, but when you look at the airline’s Q2 results on the surface, they don’t look so bad. They made money (on paper) thanks to fuel hedging gains and they have more cash than Southwest, but nobody is predicting Southwest’s demise. So what’s the story?

There are some major differences between the two airlines that put United in a much more precarious state than Southwest, despite the current cash position. Let’s review, and I’m promise I won’t get too technical.

• Cash Balance – Nobody denies that demand sucks right now, so the key is making sure you have enough in reserve until things turn around. The best immediate measure of this is cash in the bank. United had unrestricted cash of $2.6 billion at the end of the quarter and Southwest had $2.2 billion. Both have raised a little more since the end of the quarter. So United looks to be in good shape, right? Not exactly.




• Unencumbered Assets – Cash is good, but another key figure is how much additional cash you can raise. A lot of that is based upon how many assets you have that you can use as collateral for a loan. Much like your house backs your mortgage in case you default, airlines put up planes and parts as collateral to get loans. United only has about $1.1 billion left in unencumbered assets – assets that haven’t already been pledged as collateral previously. And many of those remaining assets aren’t that desirable. They recently raised money at a 17% effective interest rate, partially because they put out some spare parts and those aren’t worth nearly as much to lenders as, say, a brand new 777.

  Southwest, on the other hand, has between $7 and $8 billion in unencumbered assets. They’ve always been more conservative when it comes to debt, so they have plenty of room to raise more if they need it. And they won’t be looking at a 17% effective interest rate.




• Debt Obligations – Cash is important, but we also need to see how much money is going to be flowing out of the company. Looking at long term debt, Southwest has only $105 million coming due in the next year while United has $846 million.

  We can also look at the current ratio which puts current assets over current liabilities. United’s is .67 while Southwest’s is 1.00. In other words, United’s current assets would only cover two-thirds of their debt obligations in the coming year whereas Southwest is just about at one for one.




• Operation Size – Just comparing cash levels isn’t really a fair comparison. For example, if little Frontier had $2 billion + in cash, they’d be in fantastic shape. Though Southwest is larger than United domestically, it is still smaller overall. Southwest’s Q2 revenues were $2.6 billion while United’s were $3.7 billion.

This doesn’t even address the issue of credit card covenants. If cash gets below a certain level, the credit card processors are allowed to hold back a certain amount of money as insurance in case the airline were to go under. United has renegotiated these deals (as have others), but they are still relatively close to their limit.

So as you can see, Southwest is truly in better shape than United when it comes to its ability to generate enough cash to meet obligations, regardless of where the current cash position stands today.

It’s time to play Ask Cranky once again. Today we have a question about one of the many add-ons that airlines and travel websites try to sell you these days . . . travel insurance.

Travel websites are always trying to sell me insurance when I fly. Should I bother?

Chris

That’s a good question and there’s not one right answer. There are some things that might make you want to buy the insurance, but more often than not, it’s not going to help you. There are usually a bunch of exceptions and conditions on insurance like this, so it’s not easy to know exactly what will be covered without reading the full booklet for your specific policy.

Let’s take a look at Expedia’s Domestic Flight Protection Plan, for instance. If you, a traveling companion, or an immediate family member gets sick or dies, they’ll take care of you. (Of course, if you’re the one that dies, you’ll hardly care.) You’re also insured if you have a personal tragedy, like your home is destroyed by an earthquake or you lose your job.

So what do you get? Well if it happens before your trip, you can get your money back. If it happens during your trip, they’ll get you home as long as the cost doesn’t go above the cost of your original ticket.

So what limitations are there? The insurance doesn’t cover any loss caused by or resulting from:

Sickness or disease except as provided for in the policy; war or any act of war whether declared or not; while serving as a member of the armed services; while or as a result of riding in any device for aerial navigation other than as provided for in the policy; being under the influence of drugs or intoxicants unless prescribed by a duly licensed Physician; participation in any felonious act or attempt thereat; elective surgery; elective, non-emergency dental treatment or surgery; elective abortion; normal pregnancy, unless hospitalized; mental or nervous disorders, unless hospitalized.

These limitations aren’t actually too bad, and that makes this one of the better policies out there. Others are much more restrictive, so you’ll always want to read the fine print before committing to anything. But do you really need this?

It’s really up to you. You can never predict a personal tragedy, so this is simply something to buy you peace of mind. I’d be surprised to see it be worthwhile on a $59 ticket since it can run $20 per person but on a big, long, expensive trip it can make some sense.

This is a very timely question, because I’m actually working on a new business under the Cranky name that will help provide peace of mind for travelers in situations other than these. Stay tuned and I’ll have more info out here soon.

There was an interesting survey that came out earlier this month showing that people hate the middle seat far more than I could ever imagine. While I usually like to blame the surveyor, I think this is a case of the respondents not telling the truth.

Let’s start with the responses that make sense. Eighty percent of travelers say they try to avoid the middle seat and only 1% say they prefer it. (Who the heck are those 1%?) But those numbers don’t sound too far off. It also says that 56% would rather be stuck in traffic or go on a blind date. Ok, not so bad. Then it runs into trouble.

Apparently 50% of people would take an aisle seat on the next flight over a middle seat on their current flight. And even more astounding, 20% said they would stay overnight if they could avoid a middle seat on their flight. A full 9% said they would outright refuse a middle seat. Are you freakin’ kidding me?!? I can certainly see a few random big and tall folks being willing to stay overnight, but not 20%. That’s insane.

In this case, the surveyor doesn’t really have a skin in the game. It was put out by 3M Privacy Filters. You know those things – they go over your computer screen so that someone sitting close to you can’t look over your shoulder and see what you’re doing. All they care about is that middle seats exist, because that’s when you really need them. They don’t care if you like them or not.

So I think the respondents here aren’t being truthful. This survey was administered online, and it’s really easy to say you’d wait for the next flight when you’re answering from the comfort of your home. You go find me someone with a middle seat boarding pass waiting to board a flight and then you’ll get dramatically different answers.

In fact, let’s throw a survey out here and see what you guys think. Airline employees shouldn’t answer this one. As a former nonrev pro, I know the correct answer for an airline employee is “I will take absolutely any seat you give me as long as it gets me closer to home.”

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By the way, possibly the most disturbing thing in this survey was that only 6% of people said the middle seat gets both armrests. I imagine this may generate the most discussion down below, but that is the correct answer. If you’re stuck in the middle, you get both armrests. It’s a small consolation, yes, but it’s the least you deserve. Just don’t go trying to raise that armrest . . . .