"Fitch: Oil Prices Negatively Affect U.S. Airport Industry"

Wednesday, November 3, 2004

Fitch: Oil Prices Negatively Affect U.S. Airport Industry 


NEW YORK--(BUSINESS WIRE)-- The surge in oil prices and, in turn, jet fuel
prices exacerbates the already difficult economic environment facing the
U.S. aviation industry including domestic airports, according to Fitch
Ratings. Oil prices have increased to roughly $50.00 per barrel today from
$30.00 a barrel in October 2003. Commensurately, jet fuel has increased
about 90% to roughly $1.65 in recent weeks from $0.86 a gallon in November
2003. 

Higher jet fuel costs are weakening most of the major U.S. air carriers, as
jet fuel is the second largest expense item behind labor costs-driving
between 15% and 18% of the annual operating costs. Unlike Southwest Airlines
(rated 'A', Stable Outlook by Fitch) , which has 80% of its anticipated 2005
jet fuel deliveries hedged at crude oil prices below $28 per barrel, none of
the largest U.S. legacy airlines have a meaningful fuel hedge position in
place for next year. Absent a significant market correction, crude oil
prices persisting well above the historical norms will undermine airline
operating results again in 2005. Higher jet fuel prices in 2004 have driven
over $5 billion in lost operating cash flow among U.S. airlines versus the
2003 baseline. 

High jet fuel prices could have the potential to negatively affect U.S.
airports in several ways. First, if airlines are able to pass higher jet
fuel prices along to the flying public, it may dampen demand for air service
and reduce non-airline revenues at airports such as parking, rental car
fees, concessions, and passenger facility charges (PFCs). Such a decline in
non-airline revenues could potentially reduce airport liquidity, decrease
debt service coverage, and increase charges passed onto tenant airlines,
thereby increasing the average cost per passenger level for airlines serving
a particular airport. 

'A higher average cost per passenger, coupled with increased fixed costs
related to high airport debt issuance, represent another financial challenge
in a three year-long turbulent period for U.S. airports', said Dan Champeau,
Managing Director, Fitch Ratings. 'Higher airport costs may decrease the
propensity of air carriers to serve a particular airport at historical
levels, all else being equal', Champeau added. 

Weaker financial performance at airline companies increase the chances of
additional bankruptcies such as have occurred over the past three years.
These bankruptcies and near-bankruptcies of airlines present challenges to
airports such as delayed collection of receivables, the possible rejection
of an airport's use and lease agreement during the bankruptcy process, and,
in some cases, declines in air service as financially weak carriers
rationalize or cut back their route networks. 

'To the extent high jet fuel prices further weaken the U.S. airline
industry, additional modest downward pressure on U.S. airports' ratings may
result,' Champeau added. 

Fitch will continue to monitor the affect of oil prices on the U.S. airport
industry and will publish credit specific rating action and general
commentary as warranted.


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