24/7 Wall St.

With the huge amount of debt on airline balance sheets and rising fuel costs, the big carriers may have trouble meeting their debt service or loan covenants. United (UAUA) has over $7 billion in long-term debt. AMR (AMR) has over $9 billion.

According to the FT "United Airlines is considering asking its banks to revise the terms of its credit facility in an effort to gain much-needed financial flexibility to weather the airline industry’s sharp downturn."  Dollars to donuts every other US airline is doing the same thing.

This puts banks in a bad position, particularly with their own balance sheet problems. They can cut new deals with airlines, which might force them to write off the value of some of the loans, of they can force current terms to stay in place.

Current terms may be too onerous. Passenger revenue is likely to drop in a slow economy. There is no reason to think oil will drop below $100 this year. Banks who force the issue with airlines may be forcing Chapter 11 filings. In that case, lenders may only get $.50 on a dollar.

Airline financial woes are worse for the banks than they are for the carriers.

Douglas A. McIntyre