S&P Ratings: The Swine Flu Impact on Airlines

The recent outbreak of swine flu, which is affecting Mexico City most severely, but has reached other areas around the globe, raises the risk, in the view of Standard & Poor's Ratings Services, that airlines could suffer a steep drop in international traffic, as occurred for some in 2003 following the emergence of severe acute respiratory syndrome (SARS). Fears about SARS triggered brief but substantial declines in passenger traffic and caused financial damage to certain Asian carriers, such as Hong Kong's Cathay Pacific Airways Ltd. (not rated), and had lesser but noticeable effects on some airlines in other regions.

"Though swine flu has not yet caused health problems on a similar scale, we believe airlines are at risk of suffering reduced traffic because of government-imposed quarantines and travelers' fears," says Standard & Poor's credit analyst Philip Baggaley.

Already, some governments are urging travelers to avoid certain countries with swine flu cases. According to media reports, the European Union's health commissioner urged Europeans to avoid unnecessary travel to Mexico and the U.S., where most of the cases have been so far.

Localized Disease, Global Impact

With Mexico currently at the center of the outbreak, airlines there (none of which we rate) are at greatest immediate risk. Among U.S. airlines, Continental Airlines (CAL) (S&P credit rating, B) has the greatest potential exposure, although it's not a large one, in our view: Its Latin American operations as a whole accounted for 14% of total revenues in 2008, with flying to Mexico only part of that. We see no rating impact on Continental at this time.

Although Mexico is currently the most affected nation, the disease could continue to spread, as it already has to the U.S., Canada, and countries on some other continents. Following the experience with SARS and subsequent fears related to avian flu, governments appear ready to act quickly against communicable disease outbreaks.

While this may be positive for containing disease, we believe it means that airlines could start to see lost traffic immediately, even when a communicable disease is fairly localized. For example, if travel between the U.S. and Europe falls off further, we believe a much wider range of airlines on both sides of the Atlantic would be affected, and to a greater extent.

Airlines worldwide are already facing significant declines in international travel, particularly since late 2008, because of weak global economic conditions. The Air Transport Assn., the U.S. airline trade group, reported that passenger traffic on international routes fell almost 13% in March 2009 (compared with March 2008 levels), and passenger revenues fell even more, by 22%, because first- and business-class traffic, with higher average fares, fell disproportionately.

Thus, even if the effect of swine flu on airlines remains much more limited than that of SARS (as it is currently), it comes at a time when their revenues and earnings are already under pressure. Standard & Poor's will continue to monitor the potential impact of swine flu on U.S. and other rated airlines.

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