Possible Credit Downgrades?
05-26-2008 | 10:05 AM
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Possible Credit Downgrades?
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9 Airlines Face Threat of a Credit Downgrade
By MICHELINE MAYNARD
Published: May 23, 2008
In the latest sign that the outlook for the airline industry is darkening, Standard & Poor’s Ratings Services on Thursday placed nine big airlines on CreditWatch with negative implications, meaning that it was likely to cut their debt ratings.
A senior credit analyst with S.& P., Philip A. Baggaley, said the action was taken because of “potential severe financial damage” that could result from record fuel prices. In total, 10 airlines, including all the major carriers, are now under the CreditWatch negative designation.
The price of jet fuel has risen 82.5 percent in the last year and 10 percent in the last month, making it the single biggest expense for the airlines. If the price does not moderate, Mr. Baggaley said one or more of the major airlines might need to seek bankruptcy protection by 2009.
“All of them have a decent amount of cash,” he said, “but with the scale of losses that may occur, they could burn through that very quickly.”
S.& P.’s action affected American, Continental, Delta, Southwest, United and US Airways among the biggest carriers, and AirTran, Alaska and JetBlue among the smaller ones. Northwest was put on CreditWatch negative after it announced plans in April to merge with Delta.
Executives at the ratings agency plan to meet with officials at each airline and will act on debt ratings quickly.
Airlines have started a series of fare increases, fuel charges and new fees in the last few months. On Wednesday, American said it would charge some passengers $15 to check their first bag. None of the other airlines have yet followed suit.
However, Mr. Baggaley said the airlines risk alienating passengers more by the fees than if they simply raised ticket prices. This is only the third time that S.& P. has placed so many airlines on CreditWatch negative. The first was in 1992 during a series of price cuts that led to fare wars. The second was after the September 2001 attacks, when airlines grounded planes and laid off more than 100,000 employees.
Mr. Baggaley said he was concerned that if carriers filed for bankruptcy again, some could ultimately be forced to liquidate because they have already reorganized and have little more to trim.
“What is in some ways scarier about this situation is that most of the airlines have relatively few unencumbered assets,” Mr. Baggaley said. “If they go through their cash, there’s not much to fall back on. They’ve cut costs and restructured so if they go into Chapter 11, there’s a greater risk they might not come out.”
9 Airlines Face Threat of a Credit Downgrade
By MICHELINE MAYNARD
Published: May 23, 2008
In the latest sign that the outlook for the airline industry is darkening, Standard & Poor’s Ratings Services on Thursday placed nine big airlines on CreditWatch with negative implications, meaning that it was likely to cut their debt ratings.
A senior credit analyst with S.& P., Philip A. Baggaley, said the action was taken because of “potential severe financial damage” that could result from record fuel prices. In total, 10 airlines, including all the major carriers, are now under the CreditWatch negative designation.
The price of jet fuel has risen 82.5 percent in the last year and 10 percent in the last month, making it the single biggest expense for the airlines. If the price does not moderate, Mr. Baggaley said one or more of the major airlines might need to seek bankruptcy protection by 2009.
“All of them have a decent amount of cash,” he said, “but with the scale of losses that may occur, they could burn through that very quickly.”
S.& P.’s action affected American, Continental, Delta, Southwest, United and US Airways among the biggest carriers, and AirTran, Alaska and JetBlue among the smaller ones. Northwest was put on CreditWatch negative after it announced plans in April to merge with Delta.
Executives at the ratings agency plan to meet with officials at each airline and will act on debt ratings quickly.
Airlines have started a series of fare increases, fuel charges and new fees in the last few months. On Wednesday, American said it would charge some passengers $15 to check their first bag. None of the other airlines have yet followed suit.
However, Mr. Baggaley said the airlines risk alienating passengers more by the fees than if they simply raised ticket prices. This is only the third time that S.& P. has placed so many airlines on CreditWatch negative. The first was in 1992 during a series of price cuts that led to fare wars. The second was after the September 2001 attacks, when airlines grounded planes and laid off more than 100,000 employees.
Mr. Baggaley said he was concerned that if carriers filed for bankruptcy again, some could ultimately be forced to liquidate because they have already reorganized and have little more to trim.
“What is in some ways scarier about this situation is that most of the airlines have relatively few unencumbered assets,” Mr. Baggaley said. “If they go through their cash, there’s not much to fall back on. They’ve cut costs and restructured so if they go into Chapter 11, there’s a greater risk they might not come out.”
Last edited by ⌐ AV8OR WANNABE; 05-26-2008 at 10:10 AM.
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