Valujet’s Survival Depends On Customer Loyalty Analysts Say Grounded Airline Has Enough Cash To Weather Current Crisis
ValuJet has enough cash to survive being grounded for at least a while, the question is whether it has enough customer loyalty, analysts said Thursday.
“The longer they’re grounded, the harder it will be to either get back in the air or attract traffic back,” said Raymond Neidl, an analyst with Furman Selz.
The airline had about $254 million in cash before the May 11 crash of Flight 592 in Florida, but it has had some hefty costs since.
ValuJet lost money when it halved its flights on May 19, then took another hit when it issued refunds to passengers after halting service late Monday. It also agreed to pay the Federal Aviation Administration $2 million to help defray the costs of the agency’s intense inspection.
“We have lost a lot of money over this period of time,” ValuJet President Lewis Jordan said this week, refusing to provide specifics.
ValuJet has admitted no wrongdoing, and does not expect the FAA to pursue any civil penalty against it “except for violations of regulations concerning hazardous materials.”
Jordan has said he hopes the airline can begin flying again within a month. Neidl estimates it will cost ValuJet $10 million for each month it is grounded.
“I think they can afford to be grounded for a long time,” Lehman Brothers’ analyst Brian Harris said.
ValuJet has little debt, and Jordan said this week that the airline was reviewing whether it could continue making payments on a $1 billion order to McDonnell Douglas while grounded.
ValuJet, which ordered 50 of the new DC-9s in October, was not scheduled to receive the first aircraft until the summer of 1999.
The Atlanta-based airline has laid off most of its 4,000 employees, and under the consent order that led to its shutdown, agreed that when it does resume service it will do so with no more than 15 airplanes. The carrier operated 51 planes at the time of the accident.
Standard & Poor’s, a major credit rating agency, placed ValuJet Inc. on credit watch with negative implications after the crash, and has since twice lowered its credit ratings. Moody’s also downgraded the airline. The airline’s debt is already at the “junk” level.
Although debt payments are minimal, S&P noted that the airline faces liability issues in the Everglades crash that killed 110 people, and must contend with shaken consumer confidence in the wake of reports of shoddy maintenance.
S&P dropped its corporate rating on ValuJet from B- to BB-, and its rating on ValuJet’s $150 million in senior notes due in 2001 to CCC+ from B+. The ratings remain on credit watch with negative implications.
Moody’s lowered the senior unsecured rating of ValuJet to B3 from B1 and said it may drop the rating further.
In trading Thursday on the Nasdaq Stock Market, ValuJet stock rose 25 cents a share to $7.50. On Monday, before the grounding, it was trading at $10 a share.