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Sunday, 06/30/2002 7:03:01 AM

Sunday, June 30, 2002 7:03:01 AM

Post# of 193
Delta up, ratings cut to "further junk" status:
Airlines See Debt Ratings Downgraded by Standard and Poor's
Jump to first matched term
By Terry Maxon, The Dallas Morning News

Jun. 29--Standard and Poor's lowered the corporate debt ratings of the nation's five largest airlines Friday, pushing their ratings further into the "junk" range.

S&P analyst Philip Baggaley blamed "what can only be called a very disappointing revenue outlook and some longer-term concern that this raises about revenue trends and the financial situation of the airlines."

The U.S. airline industry lost an estimated $7.7 billion last year, despite more than $4 billion in federal grants to help them out after the Sept. 11 terrorist attacks briefly shut down the system. The five biggest carriers accounted for $7.1 billion of those 2001 losses.

S&P, which had cut the credit ratings on a number of carriers after the terrorists crashed several passenger planes, took the top five carriers down another notch.

Best of the bunch was No. 3 Delta Air Lines Inc., which dropped from BB+ to BB. American Airlines Inc. and parent AMR Corp. and Northwest Airlines Corp. fell from BB to BB-. Next was Continental Airlines Inc., which went from BB- to B+.

At the bottom was United Airlines Inc. and parent UAL Corp., which saw their ratings drop from B+ to B.

A lower credit rating can make it harder for a company to borrow money and usually means that they have to pay higher interest rates to obtain loans or to sell bonds.

In addition, many mutual funds or investment companies refuse to invest in companies below a certain credit level, particularly those that have fallen below the investment-grade level.

Carriers are having to load up on liabilities to keep enough liquidity, Mr. Baggaley said.

"As the airlines are looking at a slower and more difficult recovery, persistent losses and in some cases negative cash flow, they're inevitably having to add debt and leases to cope with it," he said.

"Fortunately, near term liquidity for most is not the concern," Mr. Baggaley said. "But in order to maintain that, they've had to take on more debt."

The airlines' debt as a percentage of annual revenues is already higher than it was in the early 1990s, when the industry suffered through a recession and a post-Gulf War falloff in passengers. When the industry starts making money again, it'll face a huge debt load that is now piling up.

Mr. Baggaley said that the longer-term problem for the five major hub-and-spoke carriers is the loss of customer -- to low-fare carriers, trains, corporate jets or such technologies as videoconferencing.

"The question is: Can the airlines resize themselves and can they resize their cost structure to deal with the adverse environment?" he said.

Traditionally, airlines recover as the economy gets better. Mr. Baggaley said an alarming factor this time is that the U.S. recession was very short.

"All of this is happening in the backdrop of a fairly healthy U.S. economy," he said.

Although average fares in recent months have lagged the 2001 figures, the gap has been narrowing. However, early 2001 had reflected the effects of a slowing economy, Mr. Baggaley said.

Average fares in 2002 are getting progressively worse compared with 2000, the last profitable year for the major airlines.

"It's clearly an unfavorable revenue situation," Mr. Baggaley said.

"Using no way as way -
Having no limitation as limitation"