United Airline's tentative agreement with its pilots union last week is yet another example of the legacy airline carriers' facility at securing creative financing solutions in order to dodge the fatal bullet. However, there are reports that secondary activity in the sector - which by many accounts had been robust heading into the New Year - has suffered, as disappointing earnings and high oil prices signal a

prolonged agony.

"There had been a significant run-up in activity in trading on the subordinate tranches of pooled lease ABS deals between October and December," said one banker. "But there has been a weakening in the market since then."

The drop-off in secondary volume can be largely attributed to investors' concerns over escalating fuel prices and Delta Air Lines Inc.'s recent fare overhaul, which will slash fares by as much as 50% nationwide. "Everybody is concerned with what that [fare decrease] will do to revenues," the source said.

Delta posted quarterly and annual earnings results late last week, and the numbers did little to quell those fears. The airline reported a $5.2 billion net loss for the year, and a $41.07 loss per share, compared to a net loss of $773 million and a loss per share of $6.40 for the full year 2003. This kind of corporate environment does not bode well for the secondary bid, the banker said.

However, down the Street, a trader at another shop reported an up-tick in secondary volume on pooled lease transactions in recent weeks. "We are seeing more [secondary] activity now than we were at the end of December," said the source, adding that spreads in the sector continue to tighten.

Meanwhile, the new issue forecast in the sector is looking up. "There will be some new issuance in 2005 from repeat issuers," the trader said.

The last pooled lease securitization in the U.S. was the $815 million Castle 2003-2 offering via Lehman Brothers in December 2003. The offering still carries its original rating of triple A from both Moody's Investors Service and Standard & Poor's.

While recent headlines have not been reassuring, passenger traffic has been steadily increasing throughout the year, sources said. As of November 2004, one common measure of demand in the airline industry - revenue passenger miles - was just 1.6% shy of the high watermark set in 2000, according to statistics from the Air Transport Association. That figure is relative to a negative 10.6% difference in November of the preceding year. However, airline traffic is not the primary problem for legacy carriers, industry observers noted. "The problem is not passenger demand, it's revenue. That top line has looked very weak, and it doesn't appear to be getting any healthier now," a source said.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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