With airlines failing on a weekly basis because of near-record fuel costs, the question naturally arises: Who's next?

It's fairly straightforward to sort out which airlines are in better financial shape than others, say industry analysts. Denver-based discount carrier Frontier Airlines was already on some short lists of financially shaky carriers before it landed in bankruptcy Friday.

But as Frontier's sudden bankruptcy filing Friday shows, the wild card that can quickly send an airline to the brink is its often obscure relationship with its credit card processors.

Denver-based Frontier sought Chapter 11 protection after its credit card processor suddenly increased its so-called "holdback" — the amount of money that it holds in reserve when a customer buys a ticket using a credit card. The reserve protects the processor in case the airline folds and it has to repay the customer.

Airlines usually receive most of the cash from a ticket sale within a few days after such a purchase. That particularly helps to build airlines' cash reserves in the spring, when customers are buying tickets ahead of the summer vacation season.

However, with soaring fuel bills and a likely recession threatening to eat into many carriers' cash reserves, credit card processors have been holding back a bigger portion of some airlines's revenues from credit card sales.

"Given Frontier's sensitive liquidity position, we believe its processor was already withholding as much as 50% of sale proceeds until time of flight, and may have boosted that to 100% in recent weeks," J.P. Morgan analyst Jamie Baker said Friday in a report. "Accordingly, the cash cushion that otherwise would have been building as summer booking took place failed to materialize."

Most other discount and regional carriers' shares fell Friday in the wake of Frontier's bankruptcy filing. But AirTran Airways' stock tumbled almost 35 percent, to $4.13, as news reports indicated that rival Delta Air Lines may be getting close to a merger deal with Northwest Airlines.

Baker said he believes Columbus, Ohio-based discounter Skybus also was forced to file Chapter 11 and to shut down operations April 5 because its credit card processor raised its holdback requirement. Unlike Skybus, Frontier said it plans to continue flying while its reorganizes in bankruptcy court.

A similar cash squeeze sent Delta Air Lines skidding into bankruptcy in 2005. A steep spike in jet fuel prices worsened its already heavy losses and its credit card processors responded by bumping up holdback requirements. In the final days before its Chapter 11 filing, all of Delta's credit card processors were withholding most of the airline's revenues from credit card bookings, and its cash reserves quickly dropped from more than $1 billion to half as much.

These days, Delta is in less danger of a holdback squeeze than most carriers, Baker indicated. He said Delta, Alaska Airlines and discounter AirTran Airways, Delta's biggest rival at the Atlanta airport, don't appear to be subject to credit card holdbacks under their agreements with credit card processors.

US Airways is subject to holdbacks of "undetermined level," Baker said in his report, but with about $2 billion in cash reserves it doesn't appear to be in near-term danger. Continental "appears OK for now," said Baker, but it could be required to post about $190 million in extra collateral if its credit rating falls below certain limits. American, United and JetBlue airlines haven't disclosed their situation regarding holdbacks, "a policy they may be inclined to revisit," Baker wryly remarked.

While a jump in holdback reserves may be the final trigger for an airline's bankruptcy or failure, mounting losses and shrinking cash reserves often provide an earlier warning to an airline's financial distress. After all, Delta reported more than $10 billion in losses in the five years before it filed Chapter 11, and its usable cash reserves dropped from about $2.7 billion to $550 million.

"U.S. recessions have consistently proven fatal for under-capitalized airlines, with last week serving as the rule rather than the exception," Baker said last week after Skybus joined Aloha and ATA among the ranks of failures in the past month.

Delta said Thursday in a regulatory filing that it expects to report a loss for the first three months of the year. Analysts estimate it will report a loss of roughly $150 million during the first quarter. But the carrier appears to be in better shape than most of its rivals, with about $2.8 billion in usable cash reserves at the end of 2007, the latest figures available.

Recent cash flow projections by Ray Neidl, an analyst with Calyon Securities, indicated that Delta and discount carrier Southwest may be about the only airlines that manage to build their cash reserves this year if high fuel prices persist. Northwest's reserves will drop, but not alarmingly, he projected.

"Not surprisingly, the carriers best positioned to weather the storm are Delta ... and Northwest ... due to progress made during restructuring," Neidl said in a recent report. Both carriers have some of the lowest costs among big network carriers after shedding billions of dollars in annual expenses through job cuts and other moves. Discount carrier Southwest was also at the top of his list of survivors because of its low debt level and hedge contracts locking in much of its fuel bill at lower prices than rivals.

Most carriers should survive the next two years even if fuel prices stay at near-record levels, "though with not much room to spare," he said.

"I don't want to name names, but there are some smaller carriers" at risk, he said Friday. But Delta, AirTran and most other carriers are in "no immediate danger," he added.

Friday, a spokesman for AirTran said the company disagreed with Neidl's projections showing that its cash reserves will decline.

"Our projections show our cash balance growing in 2008," said AirTran spokesman Tad Hutcheson. "We have a very strong balance sheet and the lowest operating costs in the business."

After AirTran's stock fell Friday, Neidl issued a buy recommendation, saying the airline wasn't in danger of soon following Frontier into bankruptcy because it has a stronger cash cushion and more diverse route network.

Falling cash levels

Most airlines should survive the next two years if record fuel prices and a weak economy persist, but not with much of a safety margin, according to one industry analyst's recent cash flow projections. Delta Air Lines will be in better shape than most, according to the projection.

Source: Calyon Securities