The unsecured debt of several airlines was boosted by upbeat forecasts for the performance of carriers' equity this year. Bear Stearns issued a report estimating margins will improve in the airline sector, despite a rise in fuel prices. The positive outlook boosted Delta Air Lines and Northwest Airlines' unsecured bonds, which will convert into equity when they emerge from bankruptcy. Northwest's unsecured bonds surged 13 points to 48, while Delta's unsecured notes were up five points to 29. The upbeat equity forecast also fueled bids in American Airlines bonds; its 9% '12 notes were up two points to 99.
In its report, Bear Stearns estimates margins would improve this year because of continued economic expansion in the sector and capacity cutbacks, such as those at Delta and Northwest, which it says may benefit the industry. "Our sense now is that capacity will remain relatively tight moving into 2007 and our economists have not backed off their economic growth projections," says the report. Spokespeople at Delta and Northwest did not return calls seeking comment.
Roger King, an airline analyst at CreditSights, said worldwide demand for aircraft travel is growing faster than capacity is growing, which is helping to boost the financial outlook for the sector. Some airlines that grounded parts of their fleet following the decline in air travel after Sept. 11, have started using those planes again. King added that the increase in the price of fuel and the possibility of geo-political events are two risks that could dampen the upbeat forecast for the industry's performance.