Security Fears Cause Aircraft Spreads To Widen
The price of protection on companies linked with air travel jumped last week after a British Airways flight to Washington was grounded because of fears it was being targeted by terrorists.
The price of protection on companies linked with air travel jumped last week after a British Airways flight to Washington was grounded because of fears it was being targeted by terrorists. Credit-default swap spreads on British Airways widened by around 15 basis points to 275bps. By Wednesday, however, spreads had tightened to 260bps again, driven by the release of data showing December passenger numbers were better than expected. Spreads on Lufthansa and SAS also widened.
Suppliers to the carriers were also hit. For example, five-year spreads on Rolls-Royce, an engine manufacturer, jumped 10 basis points last week to 56bps on Wednesday. "If anything, the name is more liquid now there's been more trading," said one London-based credit-default swap trader.
Tassos Philippakos, an analyst at Moody's Investors Service, said, "Moody's believes that the downcycle in the civil aerospace market will last through the year." In addition, the weak dollar has hurt Rolls-Royce because most of its sales are dollar denominated but it has European and U.K.-based operations and costs.
Myriam Durond, a Moody's analyst covering British Airways, said the outlook for the carrier is negative because of uncertainties over passenger volumes and a weak near-term operating performance. A recent Moody's reported said a terrorist attack could push the rating down.
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