"S&P Warns of U.S. Airline Bankruptcies"

Thursday, February 24, 2005

S&P Warns of Airline Bankruptcies 
The Associated Press


The risk of multiple, simultaneous bankruptcies in the U.S. airline industry
is growing, according to credit ratings agency Standard & Poor's, and could
be triggered by renewed terrorism, a spike in fuel prices or pension
liabilities. 

Credit analyst Philip Baggaley Thursday warned that "the breadth of credit
deterioration" in the airline sector, despite the economic upturn in the
United States, indicates that credit profiles won't rebound as they did in
the 1990s after a similar downturn. 

The "very prolonged" - even indefinite - difficult airline environment in
the United States has weakened almost all U.S. carriers, he said, due to
high fuel prices, excess capacity and intense price competition in the
domestic market. 

What's more, the pension obligations of the legacy carriers - those
high-cost airlines that were deregulated in the 1970s and are now reeling
from more nimble, cutthroat competition - could create "a domino effect" of
bankruptcies as they seek to lighten the pension load and become more
competitive. 

The dire warnings from Baggaley didn't come as a surprise to the high-yield
market. 

"This is different than other economic situations," said Raymond Neidl,
airline and aerospace equity and bond analyst at Calyon Securities in New
York. 

The balance sheets of the legacy carriers "are a mess," he said, adding that
the government will likely have to change its antitrust stand to allow more
partnerships between the bigger players. 

The legacy carriers "don't dominate any longer," he said. 

And even the safest types of investments in this volatile industry - debt
backed by aircraft - could run into problems in a scenario of multiple
bankruptcies. In that event, holders of this type of debt - considered
super-safe because it is backed by real assets - could be less able to
enforce their claims to full repayment from bankrupt airlines, according to
S&P. 

As a result, S&P Thursday placed its ratings on equipment trust certificates
and enhanced equipment trust certificates of America West Airlines Inc., AMR
Corp.'s American Airlines Inc., Continental Airlines Inc. and Northwest
Airlines Inc. on CreditWatch with negative implications. 

A total of $13 billion of securities are affected, S&P said. 

In announcing its rating review, S&P also cited concerns about the continued
court wrangling between UAL Corp.'s United Air Lines Inc. unit and a group
of its creditors regarding their right - and the right of lessors - to
repossess aircraft in United's bankruptcy case, now more than two years old.


United is challenging the right of the Chapman Group of creditors, which
controls 175 of United's planes, to repossess 14 aircraft that have been
used as collateral to back debt, alleging they are colluding with a broader
group of aircraft creditors in violation of antitrust law. 

But under the U.S. Bankruptcy Code, secured creditors have the right to
repossess planes 60 days after the bankruptcy filing if they are not being
paid in full, a right that is not limited by any other provision of the
title or by any power of the court. 

United won a temporary restraining order barring the creditors from
repossessing the planes - prompting S&P last December to warn that $30
billion of airplane-backed bonds sector-wide could eventually be downgraded
depending upon the outcome of the court case.


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