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Fitch: High Fuel Prices Cast Cloud Over Aircraft Values in U.S. Aircraft ABS

Posted on: Monday, 14 July 2008, 12:00 CDT

Record jet fuel prices and waning demand for air travel, particularly in North America and Western European markets, have placed increased pressure on many airlines, elevating the risk of default on leases and placing significant strain on values for certain aircraft types, according to Fitch Ratings.

These stresses will result in declining asset performance in certain U.S. aircraft securitizations, leading Fitch to revise its asset performance outlook for aircraft securitizations to declining. Fitch has also revised its Rating Outlook for the sector to Negative, with downgrades expected to outpace upgrades over the next 12 months.

'Most at risk for negative rating action will be transactions with concentrations of older, less fuel efficient aircraft types and exposure to troubled US carriers,' said John Bella, Managing Director, Fitch Ratings. 'While Fitch expects the number of negative rating actions to increase, the magnitude of rating movements should be dampened by the higher stresses Fitch has applied following the previous value declines observed after Sept. 11, 2001.'

These stresses are described in Fitch's August 2007 report, 'Global Criteria for Commercial Aircraft Operating Lease Securitizations'. Declines in airline profitability have resulted in plans for major capacity reductions, potential for fleet liquidations in concert with bankruptcy filings and, as a result, more grounded aircraft. These grounded aircraft, coupled with the record number of deliveries scheduled for the next several years could create a considerable shift in the supply and demand balance for commercial aircraft. As the available supply of un-utilized aircraft increases, lease rates and values for certain aircraft types will deteriorate. In addition, operating lease securitizations also risk increased frequency of default on existing leases made to lower tier operators.

While there are evident risks facing aircraft operating lease securitization on the horizon, Fitch believes that negative rating actions will be limited in the near term as Fitch's rating criteria assumes cyclical downturns occur every five years during the term of a securitization. For more recent transactions Fitch's stresses assume deterioration akin to what was seen in 2002-2003, the most significant slump in aviation history. In addition, the long term nature of most securitized lease portfolios helps to protect them from short term cash flow deterioration.

While crude oil prices have been elevated, the issue has been compounded for airlines as jet fuel 'crack spreads', essentially the cost to refine crude oil to jet fuel, have also skyrocketed in the past several months. All told, the price for a gallon of jet fuel, the airlines' largest operating cost has risen over 50% YTD. This pressure on airline profitability has been most acutely felt by US-based airlines which are further hindered by a weak US dollar. Recent bankruptcy and liquidation announcements of multiple smaller US carriers, including ATA and Skybus, evidence this pressure. The pull-back in air traffic is likely to further impact values and lease rates, particularly for older, less fuel efficient aircraft types. This concern is compounded by the record number of newer technology replacement aircraft expected to be delivered over the next several years.

Fitch will continue to review the aircraft lease securitizations it rates on a monthly basis to determine if these emerging trends are impacting performance to a degree commensurate with a Rating Watch or rating downgrade.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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