Fitch Ratings on Thursday cut US Airways deeper into junk, citing the growing likelihood of a cash shortfall later this year or in early 2009 due to rising crude and jet fuel prices.
Fitch also said it revised its outlook on United Airlines to negative from stable, which means the likely direction for its rating over the next one or two years is down.
Both actions have been driven by deteriorating operating margins as US airlines struggle to cut costs after fuel prices have more than doubled since the start of 2007.
Fitch cut US Airways rating to "CCC," the eighth lowest junk rating, from "B-minus." The outlook is negative.
"Given the dramatic rise in energy prices and limits on the amount of additional domestic capacity that the airline can remove to respond to the fuel challenge, Fitch believes that the potential for a liquidity squeeze in late 2008 or early 2009 has increased significantly," the agency said.
The downgrade also reflects US Airways' limited flexibility in raising additional cash through asset sales or new financings, it added.
Rising crude oil and jet fuel prices will also put increasing pressure on United's profit margins and its ability to generate cash this year, potentially forcing the carrier to consider asset sales or new financing to shore up liquidity.
Fitch said each 10 cent increase in the average price of jet fuel increases US Airways' annual mainline operating costs by USD$120 million, and its cash position will erode by the first quarter unless fuel prices decline.
Fitch said US Airways had USD$2.1 billion of unrestricted cash and investments at the end of the first quarter. It also has a USD$1.6 billion secured term loan with a minimum liquidity covenant of USD$1.25 billion.
The rating agency said it could further downgrade US Airways in the coming months if a continuation of adverse fuel price trends and weak unit revenue growth increases the likelihood that the airline will breach its term loan liquidity covenant.
The chief executives of both carriers were expected to meet on Thursday to discuss progress in merger talks and address key issues, a source familiar with the matter said on Wednesday.
