Debt wobbles a concern for highly leveraged airlines: CAPA

New Delhi, Aug 16 (UNI) The decline in the debt markets' appetite for risk and the current level of volatility in the global debt markets means that gone are the days of cheap finance for airlines worldwide, says Sydney-based consulting firm Centre for Asia Pacific Aviation (CAPA).

The US sub-prime mortgage problems have dented investors' appetite for providing debt financing. ''So much so that central banks have been pumping billions of dollars into global financial systems in the past week to avert a credit crunch.'' This is flowing into credit spreads for many industries, including the highly leveraged and volatile airline sector, said the CAPA. Even now at the best of times, the global airline industry is paying more for its debt as investors demand a higher yield premium over safer (government) borrowings.

The situation could be exacerbated as the massive influx of recent aircraft orders start to deliver, the CAPA said. Asia Pacific airlines alone have some 650 aircraft scheduled for delivery over the next 18 months -- more than one per day -- and all will need to be funded either through debt, equity (a less attractive option if market volatility continues and private equity exits in the scene) or from spare cash sitting in airline balance sheets.

The International Air Transport Association (IATA) recently stated that airline balance sheets remain fragile and the industry remains vulnerable to the kind of shocks that hit demand and costs over the past six years.

Returns on capital are considerably higher than in the depths of 2001 but, according to the industry body, remain below the levels achieved in the late-1990s and are still several percentage points away from matching the average seven to eight per cent cost of capital.

The industry sweet spot could quickly be replaced with something a lot less palatable if the global debt woes worsen, it said.

UNI