"Higher Airport Costs New Problem For Struggling Airlines"

Wednesday, April 2, 2003

Higher Airport Costs New Problem For Struggling Airlines
Airline Financial News


Airports across the country will be buffeted by the Iraqi war as air travel
decreases and airlines are pressed to pay higher fees at the worst possible
time. While airports continue to take action to reduce expenses, a decline
in revenue from reduced flights means fixed costs will have to be passed on
to airlines when they can least afford it. 

This is the conclusion of a March 26 analysis by Fitch Ratings. Fitch
believes that the airport industry in general maintains strong credit
fundamentals -- including the essential role of air travel in the national
economy, limited competition for passengers within local markets, flexible
capital programs and the cost-recovery provisions of most "use and
lease"agreements. But Fitch sounds a cautionary note as well. Due to current
economic conditions, individual airports may experience deterioration in
their operating and financial condition and therefore their credit ratings. 

"Second- and third-tier connecting hubs appear to be at greatest risk in the
current environment," said Peter Stettler, director of Fitch Ratings. "Their
reliance on the transfer traffic from a particular airline makes them
vulnerable to potential scheduling changes as airlines react to a rapidly
shifting marketplace."

Connecting hubs with a favorable geographic location, low operating costs
and strong yields stand a greater likelihood of retaining passengers in the
current environment. 

The onset of hostilities in the Persian Gulf significantly increases the
financial risks facing U.S. airports, according to Fitch. It believes there
will be further erosion in the already depressed air travel market, the
potential for additional Chapter 11 bankruptcy filings by U.S. airlines and
an increased probability of the liquidation of at least one major domestic
air carrier. This would further restrict the revenue-generating capacity of
the nation's airports.

The past 18 months mark one of the most challenging periods U.S. airports
have encountered. The prolonged decline in passenger volume stemming from
the weakened U.S. economy and the aftermath of Sept. 11 has significantly
affected non-aviation related revenue sources at airports. Furthermore,
increased security requirements have challenged airports to adapt to more
stringent operating conditions imposed by regulatory agencies. 

Fitch noted that the Air Transport Association projects that passenger
volume will decline by some 8 percent over the short term due to the current
Iraqi war, based on actual travel patterns during the initial stages of the
1991 Gulf War. In response, the major airlines have already announced
service reductions on international routes and minor changes in domestic
service. The airlines may need to consider additional adjustments in
domestic service if the war drags on and passenger demand wanes to a greater
extent than expected. This additional damper on travel volume only
exacerbates the financial challenges facing airport managers, which now
confront the prospect of additional budget reductions and further
adjustments to their capital programs. 

A prolonged war may result in an even greater decline in passenger levels,
raising the possibility of additional bankruptcies among U.S. airlines. "The
war-related reduction in demand is putting additional pressure on the non-
bankrupt carriers -- particularly American Airlines [AMR] -- to quickly
reach agreements with labor unions as part of an effort to bring operating
costs in line with a diminished revenue base," said William Warlick, senior
director at Fitch. "Without rapid progress toward labor cost restructuring,
American is facing a near-term liquidity crisis and a probable Chapter 11
filing." While most airlines continue to operate their regular schedules
during the initial stages of Chapter 11 proceedings, the financial risks to
airports increase as the airline undertakes a reorganization that could
involve considerable schedule and other operational changes. 

Of particular concern to the airport industry is the increased probability
of one or more of the major domestic carriers filing for Chapter 7
liquidation. Fitch noted that United Airlines [UAL] raised the specter of
such a possibility in a recent bankruptcy court filing as part of its
continuing Chapter 11 proceedings.


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