THE oft-recited bullish formula for airline stocks typically points out that many carriers are cutting costs by means like grounding planes and shedding unprofitable routes. With a little boost from the economy and a break from heavy fare wars, this lean approach should translate into quick profits.
Or so the argument goes.
Yet there is one nettlesome issue, apart from the unpredictability of the economy and airline pricing, that threatens to weigh on the industry's much-anticipated recovery: the debt carried off the airlines' balance sheets, covering leases for things like airplanes and buildings, a common practice in the industry. In some cases, this debt is more than twice the debt on their balance sheets.
That additional debt points up the daunting challenge many airlines face in regaining investment-grade status, which would help them drive down their stubbornly high costs.
"Earlier this year, the market seemed to think that any kind of earnings recovery would put the airlines on a path to much healthier financial condition," said Philip Baggaley, a transportation analyst at the Standard & Poor's Corporation. "But it is a much longer road back than they may realize."
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