The price of default 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 early last week.
By last Wednesday, however, spreads had tightened to 260bps again, driven by the release of data showing December passenger numbers were better than expected.
Suppliers to air 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 that there's been more trading," said one London-based credit-default swap trader.
Tassos Philippakos, an analyst at Moody's Investors Service, says, "Moody's believes that the downcycle in the civil aerospace market will last through the year." In addition, the weak dollar hurts Rolls-Royce and makes it more expensive to buy default protection because most of the company's sales are dollar-denominated while it has European- and U.K.-based operations and costs.
Myriam Durond, a Moody's analyst who covers British Airways, says the outlook for the carrier is negative because of uncertainties over passenger volumes and weak near-term operating performance. A recent Moody's reported stated that a terrorist attack could have an impact on global travel and cause the rating agency to lower the airline's credit rating.