Fitch Ratings forecasts better 2011 for U.S. airlines

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Dec. 10--As long as fares and revenue keep rising, U.S. airlines should make progress in repairing their balance sheets, Fitch Ratings said Thursday.

As a result, their credit ratings should improve next year, the debt rating service said.

"The critical driver of credit quality improvement in 2011 will be the continuation of positive trends in passenger yields and unit revenue linked to the steady recovery of high-fare business travel demand," Fitch said in its 2011 outlook.

Fitch's outlook comes a day after major carriers, speaking at a New York City investment conference, voiced cautious optimism for the coming year.

Analysts Bill Warlick and Stephen Brown expect most U.S. airlines to see better ratings next year, "reflecting a modest strengthening of industry operating fundamentals and steady progress toward debt reduction and balance sheet deleveraging."

That assumes that the airlines use their cash to pay off debt, Fitch said, calling that step "essential if the ratings momentum witnessed in 2010 is to continue for another year."

But Fitch cited anything that sharply reduces air traffic demand or causes energy prices to soar could sidetrack the outlook.

"The outlook for industry credit quality improvement could change quickly if a significant air travel demand shock, potentially tied to terrorism or a rapid deterioration of global economic growth prospects, drives negative unit revenue comparisons for U.S. carriers in 2011," the report said.

"In addition, a sharp rise in crude oil prices above $110 per barrel [leading to sustained jet fuel prices above $3 per gallon] could quickly erode airline operating margins and FCF [free cash flow] generation."

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