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SHOCK-SENSITIVE. If implemented, the treaty would take effect as early as October, 2006, and increase the likelihood of an investment in a U.S. airline by a European partner. However, because the EU airline could still acquire no more than 25% of the U.S. airline, any such arrangement would presumably be mutually agreed upon. The benefit for the U.S. airline would be additional equity capital. While such an arrangement could help the affected U.S. airline, it isn't clear to what extent it would provide a more general solution to the difficulties facing the industry.
Although large U.S. legacy carriers are highly leveraged, their most pressing problem has been a cost disadvantage to low-cost carriers in the domestic market. Airlines have generally been able to attract capital in the form of secured debt and leases to finance aircraft or to continue operations in bankruptcy, which has enabled them to survive and slowed what otherwise might be a more rapid trend toward industry consolidation.
The airline industry has been beset by a seemingly endless series of external shocks and remains vulnerable to event risk. Terrorism is an ongoing concern, though its form may change from that of September 11, 2001. Shoulder-fired antiaircraft missiles, bombings at crowded airports, or other attacks could replace hijackings as the next threat. Although passengers have become more accustomed to some degree of risk, a successful attack within the U.S. would nonetheless hurt revenues and prompt additional expenditures for countermeasures.
FOR THE BIRDS. Potentially more damaging than terrorism would be a global outbreak of avian flu. A deadly and communicable respiratory disease of this sort could well prompt travel restrictions by businesses and governments -- a possibility raised in the Bush Administration's description of plans to prepare for and deal with such an outbreak -- and frighten away many other travelers. The relatively limited severe acute respiratory syndrome (SARS) outbreak in 2003 caused a brief but severe plunge in revenues for many Asian airlines, including a steep quarterly loss for the otherwise very profitable Hong Kong-based Cathay Pacific (not rated).
A global avian-flu pandemic would most likely have more severe and widespread effects and cause additional disruption through illness among flight crews and their families. Legacy carriers, which rely more heavily on international routes, would likely be affected first, but even domestic-focused low-cost carriers would be hurt eventually. Given the vulnerable financial condition of many large U.S. airlines, such a scenario could trigger Chapter 11 filings or even liquidation of already bankrupt carriers. The only hopeful factor is that previous flu pandemics, including the catastrophic 1918 Spanish flu, spread and then subsided fairly rapidly.
The U.S. airline industry remains under financial pressure, though recent declines in fuel prices and rising fares provide some reason for hope. S&P's Ratings Services doesn't see any of the remaining solvent airlines at near-term risk of default (all are rated B- or higher), but most of those companies are financially vulnerable and face the need to continue efforts to reduce costs and raise liquidity.