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Fitch: U.S. airline industry remains fragile despite early indications of stabilization

Direct News Source

24-Sep-2009 Looking beyond the early indications of stabilization in the U.S. airline industry operating environment, the sector remains fragile and highly sensitive to changes in air travel demand and the price of jet fuel, according to Fitch Ratings' Fall 2009 Airline Credit Navigator released today.

Following a period of extreme revenue pressure driven by the collapse in premium air travel demand over the past year, U.S. airlines enter the fall with growing expectations that still-tentative signs of stabilization in revenue trends over the last several weeks may pave the way for modest improvement in credit fundamentals and reduced bankruptcy risks moving into 2010. Fitch believes modest improvements in industry profit margins, cash flow and liquidity are more likely over the next year.

"The strength of a global economic recovery and the pace of improvement in high-fare business travel demand will be the driving forces influencing airline credit quality through the winter," said Bill Warlick, Senior Director at Fitch. "Over the next economic cycle, sustained improvements in airline credit fundamentals will depend upon further progress toward industry consolidation, as this provides carriers with the best opportunity to generate pricing power."

Relative liquidity positions and capital market access remain the primary factors influencing Fitch's assessment of U.S. airline credit quality. While recognizing the sensitivity of industry cash flow to the timing of a prospective revenue recovery, it is important to note that all of the U.S. legacy carriers have seen their liquidity positions eroded materially as a result of almost two years of sustained operating pressure and constrained access to capital. Thus, even if revenues continue their gradual firming trend through the period of seasonally weak demand extending into the winter, some airlines will face the risk that uncomfortably low cash balances in early 2010 will again force them to seek out emergency sources of capital.

Fitch expects tight credit market conditions and an absence of owned and unencumbered assets to limit the ability of large carriers to reliably raise capital at a time when heavy cash obligations, including debt maturities, pension funding and aircraft capital commitments, will continue to pressure liquidity. In addition, higher borrowing costs, persistently high leverage and chronically weak cash flow highlight the largely unsustainable nature of U.S. airline capital structures.