Pan Am: Still Aloft

In the red since 1969, denied Government subsidy a year ago and seemingly on the brink of bankruptcy, Pan American World Airways last week served notice that forecasts of its demise have been premature. The airline reported a third-quarter profit of $42.1 million, v. a $500,000 loss during the same period of 1974. The turnaround is especially remarkable because it conies at a time when other airlines are in deep trouble: Eastern last week reported a huge third-quarter deficit (see following story), and TWA estimated it will lose $100 million during all of 1975.

Since it lost $55 million during the first half, Pan Am may wind up in the red for the full year too. But its startlingly bright third-quarter showing clearly improves its chances of borrowing needed capital. The airline recently arranged a two-month extension of its current $125 million credit agreement with 36 banks, and it is now asking them for a new commitment of about $100 million. The July-September upturn also means that Pan Am is no longer dependent for its survival on a proposed $300 million investment by Iran. Indeed, if currently stalled negotiations to get Iranian cash resume, the airline will have the leverage to bargain for better terms than those the Shah offered early this year.

To get into the black, Pan Am this year has slashed costs drastically. It has cut its jet kerosene fuel bills $30 million, largely by dropping unprofitable flights, and laid off more than 2,000 employees--or about 10% of its work force. Pan Am's third-quarter profit also reflects savings realized because of route swaps concluded with TWA and American Airlines earlier in the year. Those swaps eliminated head-to-head competition in flights to more than a dozen major overseas cities. In the fast-growing mid-Pacific market (California-Hawaii-Hong Kong), Pan Am has added flights and carried profitably heavy loads since last spring. As a result of the route exchanges and higher international fares, the percentage of seats that must be filled for Pan Am to break even on Pacific flights has been chopped by more than 20% since last year--a huge reduction that translates directly into increased earnings.

Pan Am has still not flown entirely clear of financial thunderclouds. The airline's break-even point--49.4% of seats filled on an average flight--is one of the lowest in the industry, but Chairman William Seawell acknowledges that rising labor and other costs mean it cannot be reduced much further. He is also concerned that because lenders are sweating out the fate of their New York City bonds and shaky real estate loans, obtaining a new loan commitment could be difficult. Says Seawell: "It's ironic, since we're finally showing some progress. But getting a new line of credit won't be easy because the climate for borrowing now isn't the best." Nonetheless, Seawell and most airline observers believe that Pan Am will indeed get a new line of credit.

Growing Markets. A far greater concern is what happens after that. To help raise capital, Pan Am has sold off more than $40 million worth of its least efficient jetliners since 1972, but it can hardly keep that up much longer. In fact, to compete in growing markets such as New York-Tokyo, the airline will soon have to add to its fleet new, longer-range jets like the Boeing 7475P, which can serve those markets nonstop. Yet it may have trouble obtaining massive long-term financing for any new equipment until, as Seawell puts it, "we return to a sustained level of profitability and get some meat on our bones." One way Pan Am might accomplish that is by merging with another carrier and acquiring domestic routes, but it has unsuccessfully explored mergers with TWA, Eastern and American. For the time being, at least, it seems clear that Pan Am will have to continue the battle for sustained profitability on its own.

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