18 July 2008

US Airlines Downgraded by Both Fitch and Moodys

I have just had a chance to read the Fitch Ratings report for the US Airlines. Perhaps I should have read it before I wrote my 500th Blog. It paints a sad picture. As I have previously reported on Moodys downgrade - I am going to concentrate on the Fitch Report issued on July 15th. BTW it is available for download from the Fitch ratings website:


Note you will have to register before you can reach it.

Essentially we are back at the post 9/11 state and all the efforts at restructuring over the past nearly 7 years have been for nothing - driven by the high price of oil.

For the airlines they track here is their outlook. Only one carrier rises to an A and only two have a stable outlook.

Company IDR Outlook
AMR Corp. B− Stable
Continental Airlines, Inc. B− Stable
Delta Air Lines, Inc. B Negative
JetBlue Airways Corp. B− Negative
Southwest Airlines Co. A− Negative
UAL Corp. B− Negative
US Airways Group, Inc. CCC Negative

However the kicker is the final paragraph of their outlook which I reprint here:

Looking ahead to 2009, Fitch believes that unsustainable cash flow trends and eroding
liquidity positions will significantly raise the probability of a major carrier liquidation. Recent ratings actions reflect heightened industry liquidity concerns, and follow-on downgrades are likely if fuel and revenue trends show no sign of improvement. Prospects for successful restructuring in Chapter 11, already limited by reorganizations completed earlier in the decade, have now been undermined further by the tightness of global credit markets and lenders’ unwillingness to commit more capital to an industry that remains fundamentally flawed both in terms of structure and long-term cash flow generation potential.

Of the list it is clear who they think are the most vulnerable. However for now they are sugar coating it by increasing the pool size of the vulnerable carriers. There is a dire warning on at least one carrier:
"Fitch believes that LCC in particular among the largest carriers faces the greatest risk of a cash crisis in the early part of 2009." LCC is the stock code for US Airways a misnomer if ever there was one.

It should be noted that Fitch is still using traditional metrics. I have argued before that this is actually part of the problem and that the airlines (and correspondingly their trackers and watchers) should be using a new set of metrics to illustrate the health and effectiveness of their model.

Of the carrier group they monitor - only Continental has engaged in shoring up its position over the last few months. Clearly Fitch is going to be compelled to issue a report as soon as possible after Labor Day when they can review the positions of the US airlines and see not just the summer performance but also what other actions the airlines have made to shore up their financial positions.

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