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Apr 13, 2005
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Airline Bonds Rally Most Since 1997 as Travel Demand Increases
2006-03-29 00:00 (New York)

By Walden Siew
March 29 (Bloomberg) -- Airline bonds are staging their
biggest rally in nine years as demand for travel rises and
carriers emerge from bankruptcy with less debt.
Bonds sold by airlines with junk ratings such as AMR
Corp.'s American Airlines and Continental Airlines Inc. yielded
an average 8.6 percent yesterday, the lowest since April 1999
and down from 9.72 percent at year-end, Merrill Lynch & Co. data
show. The securities returned 9 percent, the best since Merrill
began tracking the industry. The market for all high-yield,
high-risk bonds rose 3 percent so far this year.
Carriers are filling more seats than at any time since
World War II, fuel costs fell 23 percent in the past six months
and the amount of bonds available to investors is declining. The
extra yield, or spread, that junk-rated airline bonds offer
compared with U.S. government debt narrowed to 432 basis points,
the least since April 2001, Merrill data show. Since year-end
the spread declined 191 basis points.
``It's been an enormous recovery,'' said Eric Green, who
manages $3 billion at Penn Capital Management in Cherry Hill,
New Jersey, including $600 million in junk-rated bonds. Oil
prices ``aren't going up dramatically, the planes are full and
there's been consolidation in the industry.'' Green said he
holds bonds of Fort Worth, Texas-based American Airlines and
preferred shares from Houston-based Continental.

Yields Plunge

Merrill's index of air transportation bonds rated below
Baa3 by Moody's Investors Service and BBB- by Standard & Poor's
contains 18 securities with a market value of $3.3 billion,
compared with 48 bonds valued at $8.2 billion at the end of
Yields on airline bonds dropped from an average of 16.7
percent a year ago, even as Delta Air Lines Inc. and Northwest
Airlines Corp. filed for bankruptcy protection in September. UAL
Corp.'s United Airlines emerged from bankruptcy last month, and
US Airways Inc. exited Chapter 11 proceedings in September.
Miles flown by paying passengers at 16 U.S. airlines rose
3.9 percent in the first two months of 2006 compared with a year
ago, and 77.6 percent of seats were filled in 2005, the highest
since 1945, according to the Air Transport Association.
``The revenue picture has improved and this is a huge
change,'' said Philip Baggaley, an airline industry analyst at
S&P in New York. ``The big swing factor is the long-awaited
improvement in pricing,'' which accelerated as bankrupt carriers
grounded aircraft.

American Leads Returns

``It's almost certain losses will decline,'' Baggaley said
in an interview. ``American, Continental and possibly United
could show a small profit this year.''
American Airlines' 10.2 percent bonds maturing in 2020
returned 9 percent this month, leading returns, according to
Merrill. The bond traded at 84 cents on the dollar on March 24
to yield 12.67 percent, up from 77.25 cents and a yield of 13.91
percent in mid-January, according to Trace, the bond reporting
system of the NASD. American's unsecured debt is rated CCC by
S&P and Caa2 by Moody's.
The cost to insure $10 million of AMR's bonds against
default for five years narrowed to about 6 percentage points, or
about $600,000 a year, from 20.5 points in October, according to
Markit, a U.K. financial data company. Investors pay about half
that amount to protect against junk bond defaults, according to
the Dow Jones CDX.NA.HY index of credit default swaps.
Continental's 6.94 percent notes maturing in 2013 returned
4.7 percent. The debt trades at par, according to Trace. The
company's notes are rated Caa2 by Moody's.

Cutting Costs

Airlines spent the past year dropping unprofitable routes
and selling planes. Carriers such as Dallas-based Southwest
Airlines Co., the low-fare leader, raised fares. The companies
also reduced labor costs, historically their largest expense,
through bankruptcy or by negotiating concessions with unions.
Bonds sold by junk-rated carriers returned 9.27 percent in
the fourth quarter, trimming last year's loss to 10.19 percent,
Merrill data show. Airline bonds last had a positive year in
2003 when they gained 38.5 percent.
Six of 11 airlines in North America with credit ratings
have stable outlooks and three are negative, according to S&P.
Elk Grove, Illinois-based United doesn't have credit ratings
from Moody's and a B rating from S&P since it has no bonds after
emerging from bankruptcy.
Delta has $9.2 billion of bonds, and Northwest, in Eagan,
Minnesota, has $4.71 billion. Atlanta-based Delta's 9.75 percent
bonds due 2021 traded at about 27 cents to yield about 36
percent, compared with about 21 cents a month ago, yielding 47
percent, Trace data show.

$40 Billion Loss

U.S. airlines lost $40 billion over the past five years,
according to the Air Transport Association in Washington. The
Sept. 11 terrorist attacks and war with Iraq reduced demand.
Last year's hurricanes caused the Bloomberg New York Harbor 54-
Grade jet fuel spot price to rise to a record $2.49 a gallon.
``Things have been so bad, so whenever there's something
positive in the industry, a whole lot of bonds get sold,'' Roger
King, analyst at New York-based research firm CreditSights Inc.,
said in an interview.
Tempe, Arizona-based US Airways, the sixth-largest U.S.
carrier, emerged from bankruptcy through a merger with America
West Holdings Corp. The airline has about $3 billion in debt and
plans to reduce borrowing costs to return to profit this year,
Chief Financial Officer Derek Kerr said March 10.
Carriers used the rally to cut borrowing costs. American
Airlines, the world's largest carrier, reduced the interest rate
on $773 million of bank loans by 2 percentage points, according
to a March 27 regulatory filing.
Delta, the third-largest U.S. carrier, cut the interest on
$1.9 billion of loans arranged to help finance operations while
in bankruptcy by as much as 1.75 percentage points.

Qantas Sale

Qantas Airways Ltd., Australia's biggest airline, sold $400
million of 10-year notes, $50 million more than planned, at 133
basis points more than similar-maturity Treasuries. The notes
will be rated Baa1 by Moody's and BBB+ by S&P.
The Sydney-based carrier issued $450 million of 10-year
notes in June 2003 at 187.5 basis points more than Treasuries,
according to Bloomberg data. The debt last traded at about 94
cents to yield 6.138 percent, a spread of about 143 basis
points, according to Bloomberg data.
Investment-grade airline bonds are the second-best
performing debt market this month, gaining 0.5 percent, compared
with a loss of 0.9 percent for all investment-grade bonds,
Merrill data show.
Travel-related companies may follow airlines as the
industry benefits from increased travel and improved profits,
CreditSights' King said.

Sabre Saves

Sabre Holdings Corp., owner of the online
reservation service, sold $400 million of 10-year notes on March
8 at 167 basis points more than similar maturity Treasuries. The
spread was 63 basis points less than when Sabre last issued
similar debt in 2001.
``There's been a big drop in spread since the last time we
sold,'' Chief Financial Officer Jeffrey Jackson said in an
interview last week from the company's Southlake, Texas
headquarters. ``Part of that is the market generally, but the
company is viewed better in the credit markets.''