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Fitch Airline Credit Navigator: Fuel Prices Draining U.S. Airline Industry Liquidity

Posted on: Tuesday, 15 July 2008, 15:00 CDT

Liquidity and credit quality are again at the forefront as the critical determinants of the U.S. airline industry's economic viability, according to Fitch Ratings.

The sheer magnitude of increasing energy prices and resulting weak cash flows make further industry consolidation unworkable. Indeed, the mechanism for industry capacity rationalization is now financial distress and carrier liquidation as opposed to merger and acquisition activity. Over the second half of 2008, more forced take-out of domestic capacity is likely as ongoing fuel cost pressures drain liquidity to distressed levels at all but the most cash-rich carriers.

Fitch expects that all of the U.S. legacy carriers will experience rapid erosion of cash levels in the post-Labor Day period. This erosion could threaten their survival if adverse fuel trends continue, and multiple bankruptcies and liquidations are increasingly likely looking ahead to 2009.

'The U.S. industry's current structure is unsustainable in the current fuel environment,' said William Warlick, Senior Director, Fitch Ratings.

As the airlines begin reporting uniformly weak Q2 results, fixed-income investors should pay close attention to the cash-raising options still available to the legacy carriers. Also key will be management's candor with respect to the viability of various liquidity-enhancing options.

Fitch Ratings' 'Airline Credit Navigator' is a periodic report designed to provide investors with a summary of key airline industry credit and operating trends, recent industry financial developments, liquidity, cash flow, fleet plans and financing activity. Key credit and operating trends for each of the major U.S. airlines are provided in the report. This edition seeks to provide investors insight into longer-term trends in the context of the upcoming earnings season.

The full report is available on the Fitch Ratings web site www.fitchratings.com.

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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