5 Questions for Philip Baggaley

— -- This story was originally published on July 6, 2008.

Philip Baggaley, a managing director in Standard & Poor's Corporate and Government Services analysis group, has followed airlines and aircraft leasing companies for 23 years and manages the S&P's transportation, aerospace and defense rating team. A frequent speaker at conferences on air and rail transportation, Baggaley also has testified before Congress and congressionally created study groups. He has, he says, "serious concerns about the future of the airline industry if current oil prices persist."

Q: Some analysts and executives say U.S. airlines are headed for a financial "catastrophe" because of high oil prices. Do you agree?

A: The current unprecedented oil prices, if they persist, are likely to cause a financial crisis for U.S. airlines that could rival that following the Sept. 11, 2001, attacks. Although airlines have raised fares many times this year, the resulting added revenue offsets only about half of the higher fuel costs. We expect most airlines to report heavy losses and negative cash flow in 2008 and probably in 2009.

Q: Which carriers are in the most danger of a bankruptcy filing or liquidation, and why?

A: We have speculative grade ratings on all of the large U.S. airlines, with the notable exception of Southwest (which is rated investment grade), indicating a material risk of bankruptcy. We believe that these airlines have adequate cash and bank lines of credit to meet obligations in 2008, but if fuel prices remain at current levels and the economy remains weak, some could face loan covenant defaults and even bankruptcy in 2009.

Q: Would airline consolidation be a good or a bad thing for airlines, airline investors and travelers?

A: Airline mergers are very difficult, often resulting in problems combining employee groups and computer systems, which results in poorer service. Over the long term, some mergers … could strengthen their competitive position and improve earnings. However, the benefits will take time to appear.

Q: U.S. airlines have seen financial crises before. What's different now?

A: A typical airline industry downturn is caused by airlines overexpanding and then flying fewer passengers and having to charge lower fares during a recession. In the current situation, airlines have been cautious about adding new planes but face a huge increase in costs.

Q: Is air travel in danger of becoming unaffordable or inaccessible for many Americans?

A: There is no doubt that some business and vacation travelers will decide not to fly because of higher fares and the general hassle of the air transportation system. Still, even with higher fares, the price of air travel has increased much less over the long term than prices of many other products and services.