PIGS debt crisis pummels airline and airport share prices


Another week, another crisis for the airline industry. The problems confronting the heavily indebted ‘PIGS’ economies (Portugal, Ireland, Greece and Spain) has been simmering for months, weighing on the euro and economic outlook for the European economy. But the crisis went to a new level yesterday as Standard & Poor’s (S&P) assigned a junk rating to Greece’s sovereign debt and reduced Portugal’s rating by two levels.

S&P lowered its ratings on Greece from 'BBB+/A-2' to 'BB+/B' and assigned a negative outlook, reflecting “an assessment of the political, economic and budgetary challenges that the Greek government faces in its efforts to place Greece's public debt burden onto a sustained downward trajectory”. S&P added, “the negative outlook reflects the possibility of a further downgrade if the Greek government's ability to implement its fiscal and structural reform program materially weakens in our view, undermined by domestic political opposition at home or by even weaker economic conditions than we currently assume”.

S&P forecasts Greece's net general government debt-to-GDP ratio reaching 124% of GDP in 2010 and 131% of GDP in 2011 and expects real GDP to be nearly flat over 2009-2016, while the level of nominal GDP may not regain the 2008 level until 2017.

S&P also lowered its long-term ratings on Portugal from 'A+' to 'A-' and the short-term ratings from 'A-1' to 'A-2', reflecting “fiscal and economic structural weaknesses [which leave Portugal] in a comparably weak position to address the significant deterioration in its public finances and expected lacklustre economic growth prospects over the medium term". S&P added, “the negative outlook reflects our assessment of the risk of a further downgrade should fiscal consolidation fall short of expectations or should concerns over government liquidity mount”.

Aviation sell-off around the world

The action by S&P sparked a sell-off on financial markets around the world, led by banking stocks. Airlines, airports and aviation suppliers were also marked down heavily.

Spain’s Vueling and Iberia, Greece’s Aegean and Ireland’s Ryanair were worst affected in Europe, dropping 5.2%, 3.6%, 4.8% and 3.9%, respectively.

Europe selected airlines daily share price movements (% change): 27-Apr-2010

US shares sharply lower

The PIGS problems were felt across the Atlantic, with the Dow Jones Industrial Average sliding 213 points, or 1.9%, to 10,992 – its lowest close since 08-Apr-2010.

United Airlines’ stock slumped 8.3%, Brazil’s GOL dropped 6.9% and Alaska Air, American, Continental, Delta and TAM all fell 5-6%.

North & South America selected airlines daily share price movements (% change): 27-Apr-2010

Airports also hit

Airport shares, particularly in Europe, were also sold off heavily with Spain's Ferrovial and Abertis dropping 6.6% and 4.8%, respectively.

Selected airports daily share price movements (% change): 27-Apr-2010

Aviation suppliers fall

The impact was also felt by suppliers to the aviation industry, especially those based in Europe. Airbus parent EADS fell 3.8%, while Boeing dropped 2.5%.

Selected Aviation suppliers’ daily share price movements (% change): 27-Apr-2010

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