The cost of protecting airline bonds from default soared and bond prices plunged as oil reached a record $135 a barrel, stoking concern...

Share story

The cost of protecting airline bonds from default soared and bond prices plunged as oil reached a record $135 a barrel, stoking concern that carriers will run out of cash as jet-fuel prices surge.

Credit-default swaps tied to the bonds of American Airlines, Continental Airlines, JetBlue Airways and United Airlines increased to records, signaling investors are growing more concerned that companies won’t be able to repay their debt. AMR bonds due in 2024 dropped below 77 cents on the dollar Thursday. Continental notes due in 2011 fell below 72 cents on the dollar.

A 94 percent increase in the price of jet fuel the past year may push some airlines into bankruptcy, Soleil Securities analyst James M. Higgins said.

“Oil’s going to have to fall back to $90 before anybody should be positive about things,” said Roger King, a debt analyst at New York-based CreditSights.

American Airlines on Wednesday said it will cut “thousands” of jobs to blunt higher fuel costs and slowing demand. It also will charge travelers $15 for one piece of checked luggage. United, Delta, Northwest and US Airways also said they were considering such a baggage fee.

“We now expect AMR to have trouble avoiding bankruptcy by sometime in 2009,” Higgins wrote in a note to clients. “UAL is too close to that possibility for our comfort,” and Continental is “close to our comfort threshold.”

Surging jet-fuel prices may help produce a record full-year loss for the largest U.S. airlines of $7.2 billion, JPMorgan Chase analyst Jamie Baker estimated this week. That estimate is 57 percent more than Baker’s previous projection for the industry’s 2008 deficit.

James May, president of the Air Transport Association (ATA), told reporters in Washington that major U.S. airlines face liquidation should capacity cuts and fare increases fail to cover rising fuel costs.

Eight carriers have gone bankrupt in 2008, three of them Chapter 7 liquidations, according to ATA’s Web site.

“The biggest problem is that we don’t know the size of the market that’s willing to pay to cover the full cost of airline service,” King said. “I’m not even sure the airlines know. They’re not raising fares very fast. And the longer they delay in really zapping up fares, the more cash is going out the back door paying for the fuel bills.”

Standard & Poor’s said Thursday it may cut the credit ratings of AMR, UAL, Continental, JetBlue and five other airlines because of “potential severe financial damage from unprecedented high jet-fuel prices.”

“The dramatic increase in jet-fuel prices has increased airline costs significantly over the past two months, and, if sustained, could threaten their liquidity and financial profiles,” S&P analyst Philip Baggaley said in a statement.