New York: The 11 September 2001 attacks in the US resulted in the crash landing of US airline industry, which had already been suffering from weak demand, low ticket prices and mounting debts, says Standard & Poor's (S&P) ratings services. But the European and Asian airlines were not affected in a major way.

According to an S&P study, dramatic falloffs in passenger revenue - linked to a soft economy and security concerns - hurt nearly every airline, and the effects spread to US airports. Some respite came in the form of federal support, but the problems were so deep that by August 2002 one major airline - US Airways - had filed for bankruptcy and another - United Air Lines - had threatened to do so soon.

US airports, however, managed to absorb the revenue shocks by raising the rates for parking and other concessionaires. Some, especially on the West Coast, were able to cut back on capital projects, or at least slow them down. Bouncing back sooner than expected, the airports' credit ratings did not suffer nearly as much as US airlines did.

Internationally, the attacks immediately slowed down air traffic particularly for flights to and from the US. Canadian airlines, although hurt severely following 9/11, have rebounded better during 2002, with Air Canada reaching profitability by the second quarter. Federal government aid, although more limited than that in the US, has provided war and terrorism liability insurance coverage.

Higher payable insurance premiums on repurchased coverage increased Canadian airline and airport cost bases. On the other hand European airlines tended to weather the short-term downturn well, with UK airports faring even better.

The Asia-Pacific region fared relatively better than the US. Despite very tough international markets and a fall in passenger numbers, very few ratings were downgraded. The collapse of Australia's second-largest airline, the Ansett group, two days after 9/11 had a dramatic effect on the fortunes of its owner, its key competitor, and - to a lesser extent - the nation's airports.

Already suffering, weakening further
The fourth quarter of 2000 saw the start of down turn for US airline and then accelerated in the second quarter of 2001 due to a weak economy, which led to a slowdown in passenger traffic. ''Most of the large airlines were losing money prior to September 11,'' credit analyst Philip Baggaley remarks. ''The attacks made things dramatically worse.''

Two days after the attacks, S&P placed all of its US airline ratings on CreditWatch with negative implications, concerned with the impact on passenger demand. A week later, S&P downgraded its ratings on AirTran Holdings, Alaska Air Group, AMR Corporation, Amtran, Atlantic Coast Airlines Holdings, Continental Airlines, Delta Air Lines, UAL Corporation, and US Airways Group.

The rating agency also lowered its ratings on equipment trust certificates, reflecting weaker aircraft values and downgraded airlines' senior unsecured debt, based on a rising proportion of secured debt and leases, relative to airlines' total assets. Airlines started receiving $5 billion in federal cash grants in September, and some continue to receive federal loan guarantees under a $10-billion programme.

Many commercial aerospace companies also were placed on CreditWatch with negative implications in September, anticipating lower aircraft orders and deliveries (indeed, most US airlines grounded about 20 per cent of their capacity after 9/11, though they have since restored about half of that amount).

Airplane manufacturers, including Boeing and Bombardier; suppliers of aircraft systems, components, and materials such as Fairchild Corporation, Goodrich Corporation, Hexcel Corporation, and Rockwell Collins; and vendors providing aviation support services like AAR Corporation and Sequa Corporation were adversely affected to various degrees. The larger, more diverse aerospace companies' credit strength was supported, however, by improved prospects in their defence operations, limiting somewhat financial damage from the weak commercial aerospace environment.

Boeing, for example, won a $9.7-billion contract in August 2002 to build transport planes for the Air Force, and is close to another substantial contract to build tanker aircraft for aerial refuelling.

S&P also reviewed aircraft leasing companies and financial institutions that extend loans secured by aircraft. International Lease Finance Corporation (ILFC), one of the world's largest providers of aircraft operating leases - part of American Insurance Group (AIG) - faced higher rental delinquencies and defaults among its airline customers and depressed rates on new aircraft leases over the next several years. AIG invested some more money in ILFC.

First-quarter 2002 results showed that most airlines managed to maintain adequate cash balances because of federal cash grants, secured borrowing, and cutbacks in capital expenditures. ''Most large airlines were reporting diminishing losses and still had adequate liquidity,'' Baggaley says. ''They were doing poorly, but the trend was moving upwards at that time.''

The Air Transport Association, representing all major US airlines except Southwest Airlines, reported in May that its members' revenues per available seat mile in April 2002 were a disappointing 9.9 per cent below 2001 levels.

The principal cause of the weak revenue was pricing in the domestic market - yield, the standard measure of pricing, in April was 11.9 per cent below last year's levels. The use of corporate jets and video conferencing, security hassles at airports, and the steady spread of low-fare airlines were dampening the strength of the recovery and posing a long -term challenge for traditional hub-and-spoke airlines.

In addition the continued long term risks related to airport security, rising low fare competition, increased use of discounted tickets by business travellers and limited flexibility to reduce labour costs affected airlines finances.

''The pace and strength of the revenue recovery for large US airlines had weakened, prolonging losses and further eroding their weakened balance sheets,'' Baggaley adds. ''A lack of consumer confidence actually had little to do with the airlines' financial woes during 2002, and it has held up surprisingly well to date, though recent economic weakness and declines in the stock market may change that.'' Increased inconvenience and costs imposed by security measures added a further disincentive to air travel, especially on short flights.

August brings bad news for 3 major US airlines
Eleven months after the 9/11 attacks, US Airways became the first major carrier to file for Chapter 11 bankruptcy protection since the early 1990s.

The nation's seventh-largest airline said it was unable to renegotiate agreements with certain vendors, aircraft-leasers, and financiers. The carrier also said it expected continue operating and hoped to move out of bankruptcy in early 2003.

Shortly after the bankruptcy announcement, United Airlines announced that if it did not receive labour union concessions, it too would file for bankruptcy protection. Facing heavy operating losses due to the depressed airline industry revenue environment, the company is seeking a $1.8 billion federal loan guarantee; however, the Air Transportation Stabilisation Board states it would not grant the guarantee without first seeing significant cost cuts at the airline.

In August, AMR's American Airlines announced a reorganisation plan that included laying off 7,000 employees (7 per cent of its workforce), reducing its capacity, accelerating the retirement of some of its planes, and an overhaul of its hub network operations; these moves would save about $1.1 billion a year.

Other large airlines are likely to announce capacity reductions and cost-cutting initiatives, as well, though an eventual return to profitability also will require a recovery in passenger traffic and healthier pricing.

US airports absorb credit pressure
Before 9/11, US airports were suffering the ripple effect of the airlines' declining enplaned passenger numbers. After the attacks, airports in different parts of the country suffered to varying degrees - more on the East and West Coasts, where airports have a more international component; are undergoing expensive capital improvements; and can be replaced by train and automobile transportation.

It was clear that the business environment for airports had been altered and that the focus for airport sponsors over the next year would be security and operational issues, as well as regaining their financial footing.

The airports' ability to raise rates makes up for decreased activity, Todd Whitestone, credit analyst explains. ''An airline has mainly one way to generate revenues: by people buying tickets,'' he adds. ''An airport can get more concessions, it benefits from greater rental car activity, and it can raise revenues by charging the airlines or the travelling public higher rates. That's why the ratings are generally in the 'A' category, whereas airlines are largely speculative grade.''

''In terms of damaging the airports financially, I thought 9/11 after-effects would be more severe than they turned out to be,'' he remarks. ''Fifty-five out of the 88 US airports rated returned to their original rating and previous outlook, within nine months. Also, a healthy number only had their outlook changed, and retained their rating.''

Canadian airlines, airports suffer and recover
On 13 September 2001, S&P placed its ratings on Air Canada on CreditWatch with negative implications, and later that month lowered its ratings. During the same time, rating actions on Canadian airport authorities mirrored the actions affecting all North American airport and airport-related special facility ratings. The slowdown in air traffic last year was the first significant one Canada had faced since the federal government created them in the mid-1990s.

Following the 11 September terrorist attacks, Canada's federal government stepped in to provide indemnification to substitute for the lost war and terrorism coverage. The federal government advised the airports that they must repurchase C$50 million of coverage, and that the federal indemnity for exposure past the first $C50 million would remain in place until such time as an industry-wide solution was finalised.

The higher payable insurance premiums increased the airport's cost base. Canadian airports and airlines are now dealing with a federal Canadian Air Travellers Security Charge, implemented on 1 April 2002. This results in a C$12 surcharge on domestic trips, a C$12 surcharge for transborder traffic to the US, and a C$24 surcharge on all other international trips. Year -to-date overall domestic passenger volumes have been down compared to 2001, but are gradually improving, especially during the busy summer season.

The great escape
The 11 September events' effects on European airlines and airports varied from case to case, but were generally not as severe as those in the US.

Airlines that relied on cross-Atlantic traffic for a large portion of their business were hurt worse, while those with routes within Europe suffered less of a passenger decline. For most airports, traffic recovery has appeared to take longer than during the 1991 Gulf War. Traffic to the US remains severely affected, and also, intra-European traffic remains below 2001 levels before 9/11.

''For many airlines, 9/11 acted as a strong catalyst to convince employees and trade unions of long-needed restructuring measures,'' S&P credit analyst Virginie Casin remarks. ''A few airlines did not have sufficient financial flexibility to survive the market disruptions that followed the attacks however.''

Traffic to the US remains severely affected; approximately 15 per cent below 2001 levels. Most carriers reallocated some of their North Atlantic capacity to more attractive markets. Outside the low-cost and charter segments, softness in intra-European traffic (5 per cent below prior-year levels) reflects weak economic conditions, especially in Germany.

Overall, UK airports faired better on average, limiting their decline due to strong domestic traffic. Total traffic declines at the European airports in the first eight months of 2002 has been between 3 per cent and 10 per cent and in general traffic appears to be fundamentally weaker than before the attacks.

Increased activity by the low -cost carriers, however, limited the damage for European air traffic. In particular, low-cost carriers have had an important role in the still strong domestic traffic in the UK. ''In general, the airports were able to reduce their projected capex requirements over the next three years, which supported the financial cushion available to them,'' credit analyst Jan Willem Plantagie says.

''In addition, most airports had a relatively positive first three quarters in 2001, allowing them to absorb some of the financial impact.'' The airports' finances in many cases have also been supported by passing on additional security costs to passengers and general increases of landing and passenger fees.

A positive sign has also been that passengers continue to spend money at airports, thereby providing some higher -than-expected commercial revenues. This results from increased waiting times at airports due to security reasons and improved retail strategies at most airports. A further positive aspect is the strength of the holiday charter traffic. For most airports, this traffic is key as the summer months provide the peak in passenger traffic. At most airports the charter traffic has seen some declines of between 2 per cent to 5 per cent but lower than anticipated in early 2002.

Australian, New Zealand skies shaken by Ansett's collapse
The collapse of Air New Zealand's (Air NZ) subsidiary Ansett soon after 9/11 resulted in duopoly situation in the Australian domestic market.

The New Zealand government was forced to rescue Air NZ to prevent it from also collapsing. For Qantas Airways, Air NZ's key competitor, the elevation of its domestic market share to 85 per cent from 55 per cent overnight has been a key factor cushioning the airline from the events of 9/11 and weakness in its international markets.

''Indeed, as Qantas' international markets recover, the airline is poised to further cement it position as one of the world's strongest and most profitable airlines,'' says credit analyst Jeanette Ward.

Overall, the major Australian and New Zealand airports delivered yet another resilient earnings performance despite the impacts of 9/11 and the collapse of Ansett. The performance varied across the region's airports, but all the airports exceeded their traffic expectation.

An interim increase in aeronautical charges and higher car parking rates assisted the revenue performance of the Australian airports. ''The performance in fiscal 2002 clearly highlights the resilient nature of origin and destination airports and their ability to rebound quickly after exogenous shocks,'' concludes credit analyst Parvathy Iyer.