J.P. Morgan analyst: unfriendly skies ahead for airlines

A leading investment analyst is quoted as warning that the world's airline industry is headed for some turbulent times, with the recent terrorist attacks complicating what was already a difficult economic situation. Reuters reported that Chris Avery of J.P. Morgan told an airline industry conference in Budapest on Monday that the extent of the malaise is still far from clear, declaring that "it is still too early to tell what is actually happening to airlines...We're going into a deep dip, which may also be overemphasized by data."

The news service said Avery told an International Air Transport Association that U.S. airlines are predicting a 30% to 50% revenue decline in the next six months - which will cause bigger losses than in 1991. The Morgan analyst also told the airline executives that it is just not possible to cut costs by that amount - and that some U.S. carriers will seek Chapter 11 U.S. bankruptcy protection. Providing aid to the industry will simply defer the issues it faces, Avery concluded.

ABN-AMRO analyst says airlines will remain troubled

ABN-AMRO airline analyst Ray Neidl said in a Monday morning research note that while the session could see a mild rally in airline stock prices because of the quick passage by Congress of a $15 billion emergency aid package and an easing of liquidity concerns - but warned that the beleaguered industry is by no means out of the woods yet. Quoted in the Houston Chronicle, Neidl cautioned that "we think the industry for the foreseeable future will see the probability of substantial losses until traffic returns, which may take some time. We believe it will take a full year to get travel patterns back to normal."

AMR CEO buys shares, gives up paycheck

The chairman of American Airlines, Donald J. Carty, said that he had bought 40,000 shares of stock in parent AMR Corp. (AMR) - which Carty also heads. He said the open-market purchases were intended to show his confidence in the future of American, despite the airline industry's recent problems. Carty, who earns $772,000 per year, plus bonuses, also indicated he will give up all compensation for the rest of the year. He said if other employees take pay cuts, the Dallas-based airline giant would put 20% of the savings into an educational fund for the children of American pilots and flight attendants who were killed when two AA planes were seized and used as flying bombs by terrorists on Sept. 11. Following the attacks, AMR's formerly investment-grade debt was downgraded to junk-bond status by the major ratings agencies, in line with a general downgrading of airline debt.

Continental Air to avert bankruptcy thanks to federal money

Continental Airlines Inc (CAL) (Ba2/BB-) said the $15 billion emergency bailout package passed by Congress on Friday and signed into law over the weekend by President Bush means the Houston-based carrier is no longer in danger of filing for bankruptcy protection. A spokesman said Continental - which last week announced plans for thousands of layoffs and a 20% service cutback - expects to get more than $300 million in cash from the federal bailout plan, which consists of $5 billion in cash for U.S. carriers, and another $10 billion in federal loan guarantees. Continental said that without the government aid it could have been forced to seek bankruptcy protection by late October.

Report U.S. aid may short-circuit airline mergers

While the $15 billion package of immediate cash aid and future loan guarantees eases immediate liquidity concerns for troubled airlines hurt by the recent terrorist attacks and should keep the weaker ones out of bankruptcy, it reportedly could have an unintended negative consequence down the road - essentially roadblocking use of a key strategy the better-off major carriers might have used to justify acquiring their smaller, weaker rivals. TheDeal.com said the bailout would close off the use of the "failing-firm" defense which giants like American Airlines (AMR) or United (UAL) might invoke to counter federal antitrust objections to a combination with a smaller carrier like USAir (U) or America West (AWA). The "failing-firm" defense sometimes persuades antitrust regulators to allow an otherwise anticompetitive merger if a company is in danger of bankruptcy and no other buyers step forward. It noted, however, that federal regulators would likely not object to mergers among the smaller and mid-size carriers themselves. "By rushing to rescue the ailing airline industry, Congress may have deprived the largest carriers of their best chance in years to get substantially bigger" by buying the gates and market shares of smaller carriers, the financial news website cautioned.

Ex-UAL boss says feds must monitor bailout

The former chief of United Airlines (UAL) says the federal government should not just blithely dole out bailout money to UAL and the other airlines and then step out of the picture. Gerald Greenwald, who ran UAL until 1999, told the Chicago Daily Herald that there is a danger that an administration so focused on keeping out of the private sector as the Republican Bush White House might in effect tell the industry "here's the money and the guarantees, now leave us out of it. Then if some airlines don't make it, a legitimate question would be: Why was money spent in a failed cause and not effective in turning these companies around?" he said. Greenwald - who along with Lee Iacocca also helped turn Chrysler Corp. around in the 1970s with the aid of a $1.5 billion federal loan guarantee - said "what we learned from Chrysler is it is healthy for the federal government to step in selectively." Besides providing oversight on the use of the bailout money, Greenwald said Washington ought to take added measures to restore the public's confidence in flying, including directing the use of added security personnel, armed guards and reinforced cockpit doors to deter would-be hijackers.

Conseco names Shea as president/COO; ex-prez Kilian stays on

Conseco Inc. (CNC) (B1/BB-) named William J. Shea as president and chief operating officer, and as a member of the Office of the CEO. He replaces Tom Kilian, who will remain with the Carmel, Ind.-based insurer as president of its recently formed Conseco Life and Retirement Services unit, which handles Conseco's annuity products. Kilian will also remain a part of the Office of the CEO said Conseco Chairman and CEO Gary Wendt.Shea most recently served as chairman of the board of Demoulas Supermarkets, Inc., a New England-based grocery chain.

Phar-Mor files for Chapter 11 protection

Phar-Mor Inc. (PMOR) (Caa1/nr) sought protection from the holders of its 11.72% junk bonds due 2002 and other creditors via a Chapter 11 filing late Monday with the U.S. Bankruptcy Court for the Northern District of Ohio. The Youngstown, Ohio-based drugstore chain operator, which operates 139 stores in 24 states, mostly in the Northeast and Midwest, plans to close 65 stores considered either underperforming or not located in its core markets, which are considered to be Ohio, Pennsylvania, Virginia and West Virginia. It has obtained $135 million in debtor-in-possession financing via a Fleet Retail Inc.-led syndicate. The company said it will wait for the formation of a creditors committee and then will begin negotiations on the restructuring, in hopes of emerging from Chapter 11 "over the next six to nine months."

Lucent wins Korea Telecom optical networking contract

Lucent Technologies Inc. said on Tuesday it has won a contract potentially worth up to $40 million over three years to supply optical networking systems to Korea Telecom, the largest telecommunications provider in South Korea.

Charter Communications denies merger talks with RCN

Charter Communications Inc. on Tuesday said that other than a previously announced transaction involving High Speed Access Corp., speculation about imminent merger and acquisition activity, including RCN Corp. is erroneous and unfounded. Kent Kalkwarf, Charter Executive Vice President and Chief Financial Officer, said, "There has been no dialogue with RCN, nor is any planned. The source of this speculation is unknown to us."

XM Satellite Radio launches first U.S. digital satellite radio service

XM Satellite Radio said Tuesday it has launched the first U.S. digital satellite radio service, which it dubs "Radio to the Power of X," featuring 100 coast-to-coast, digital channels of music and information. The company also accelerated its launch of service to the Southeast U.S. to mid-October and plans to be nationwide by November. XM had originally scheduled its commercial launch for Sept. 12 but postponed it following the tragic events in New York and Washington.

"Today, like the federal government, the Congress and the stock market, business needs to get back to business," said XM President and CEO Hugh Panero. XM formally launched service today in its two lead markets, Dallas/Fort Worth and San Diego, covering 8 million people. In three weeks, XM's rollout expands to the entire Southwest and to the entire Southeast regions of the U.S.. In November, XM plans to expand across the rest of the country. XM had originally planned to launch the Southeast in the final phase of its national rollout.

S&P cautious on homebuilders, but sees some positives

Standard & Poor's cautioned that demand for new single-family housing will be negatively impacted by the World Trade Center and Pentagon tragedies, due to weakened consumer confidence and the more uncertain economic and employment outlook. S&P said in a report that ratings for most conventional homebuilders are not expected to come under pressure in the near term, primarily due to strong, visible backlog levels and generally favorable liquidity positions. But it warned that manufactured-homebuilders, already under stress conditions even prior to the recent events, could see further rating downgrades in the near term, "as this segment's buyers may be disproportionately more vulnerable to expected layoffs, and these companies are already grappling with repossessions and a constrained financing environment." S&P further said that while the current ratings for the sector have already factored in its expectation for a modest contraction in demand, "the extent to which current production levels will fall is now less certain." On the upside, the ratings agency said that rated conventional builders-at least in the near term-"are in remarkably good shape to maneuver in a much gloomier housing market." And, "continued low mortgage rates and the attractiveness of new homes as hard assets might also serve to cushion the major players against a very severe drop in demand."

Report Primedia may sell top magazines

Primedia Inc. (PRM) (Ba3/BB-) is reportedly "scrambling for cash" after its $515 million EMAP USA purchase, and may be looking to sell its glossy, high-prestige New York and Chicago magazine titles. The media-oriented Inside.com website reports that while a Primedia initially declined to comment on what he called the "rumors and allegations," (later calling back to say a sale of the two titles "have never been discussed nor will they be," it quoted two investment bankers familiar with the negotiations as having been told that the New York-based media company was "already having conversations" with potential buyers about selling the magazines." PRM is looking to divest $250 million of assets. Inside.com speculated that regional magazine publishing powerhouse Emmis Communications - which owns Texas Monthly and Atlanta "is considered a logical suitor for both titles." Last year, Emmis nosed out Primedia in a battle to acquire Los Angeles magazine. Allen & Co is advising Primedia on any potential deals.

Gen Dynamics, rival extend Newport News bids

General Dynamics and rival Northrop Grumman Corp. Have extended their respective acquisition bids for Newport News Shipbuilding Inc. (NNS) (Ba1/BB+), with Northrop's bid now set to expire on Sept. 27 and General Dynamic's on Sept. 28. General Dynamics said that as of the prior expiration deadline of Sept. 21, Newport News holders had delivered 22.773 million of the new Port News, Va.-based naval shipbuilder's shares to General Dynamics, a giant defense contractor based in Falls Church, Va. Meanwhile, Los Angeles-based defense contractor Northrop said 2.495 million Newport News shares had been tendered under its rival bid by its prior Sept. 20 deadline.

Aladdin Gaming CEO leaves after closing warning

Richard Goeglein, chief executive officer and chairman of Aladdin Gaming Corp. (Caa3/CC), unexpectedly left his position - just a day after the company warned that its main property, the troubled Aladdin Resort & Casino in Las Vegas, might have to close. A spokesman announced Goeglein's departure late Friday, but declined to say whether the casino boss had quit or was fired. In a Securities and Exchange Commission filing Thursday, Aladdin Gaming - whose glossy new hotel on the famous Las Vegas Strip opened just 13 months ago - had said that it might have to close, further saying that its bankers would be willing to consider extending more credit only if the company first filed for Chapter 11. Already struggling with less-than-expected revenue and a crushing debt load, Aladdin was further impacted by the sudden problems hitting the whole gaming industry in the wake of the Sept. 11 terrorist attacks in New York and Washington, and announced that it would lay off 500 workers, or about one-sixth of its work force.

S&P cuts Exodus convertible debt to CC from CCC

Standard & Poor's on Tuesday lowered its ratings on Exodus Communications Inc. and removed them from watch where they had been placed with negative implications on June 21. At the same time S&P withdrew its B senior secured rating on the company's $600 million credit facility. The outlook is negative. The rating actions were based on Exodus' "deteriorating operating performance, vulnerable financial position and looming liquidity concerns. These concerns are exacerbated by significant management departures and continued weakness in demand for information technology spending. Management had previously lowered expectation of EBITDA and sales for the second half of 2001 and expects EBITDA for the year to be $80 million, down from its May 2001 guidance of $270 million."

Standard & Poor's said it believes that achieving even these lowered measures is likely to be challenging in a weakening economy.

It said: "Sales are likely to lag due to a decrease in the rate of new customer installations, an increase in the rate of cancellations, reductions of orders from existing customers, and concerns about Exodus' financial position. Exodus is highly leveraged with more than $3 billion of debt and sales of slightly more than $1 billion and has yet to achieve sustained operating profitability. Given its current performance, debt service requirements, and expected capital expenditures, the company is in a vulnerable financial position and will likely need additional financing to continue to operate. The availability of such financing is questionable. Exodus recorded about $450 million in cash at the end of June 2001, after repaying outstanding loans under its credit facility. S&P added that Exodus' inability to secure additional funding could lead to further lowering of the ratings."

The corporate credit and senior unsecured notes ratings were cut to CCC from B-, and the convertible notes to CC from CCC.

Moody's rates Fleming's upcoming sr sub notes B2, raises outlook

Moody's Investors Service assigned a B2 rating to Fleming Cos. Inc.'s planned $250 million offering of senior subordinated notes, confirmed the company's existing ratings and revised its outlook to positive from stable. The action affects $2 billion of debt.

Moody's said it raised the outlook as it considered that the Kmart integration has gone according to plan. With continued efficiency improvements from increased volume, Moody's said the rating could be upraded in the next four to six quarters. At the same time, leverage and fixed charge coverage have stabilized after a multi-year decline, and Moody's said cash flow increases leading to materially improved trends in debt protection measures could prompt an upgrade.

Moody's added that the new permanent capital from the note issue will provide a larger borrowing cushion for working capital needs as anticipated growth in the company's wholesale and retail segments requires greater capital investment.

Fitch affirms PacifiCare's BB+ rating, negative outlook

Fitch affirmed its BB+ senior debt rating on PacifiCare Health Systems, Inc. and kept the outlook as negative.

Fitch said the "considers the recent deterioration in PacifiCare's operating performance, modest levels of capitalization at the operating level, and high levels of debt refinance risk."

It added: "The company's profitability challenges can be attributed to a provider-driven movement away from capitated contracting and towards shared risk contracting, as well as to a continued poor operating environment in the Medicare + Choice marketplace."

Although Pacificare has a new corporate strategy, Fitch noted the senior management team has undergone "significant turnover" in the last year.

The rating agency called PacifiCare's $805 million of outstanding debt as appropriate for the rating category but said the structure is not. It noted full principal repayment is due in 2003, most in January.

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