Swine flu latest threat to airline industry

Airlines have weathered high oil prices, collapsing financial markets, a recession, slumps in business travel and cargo trade.

And now comes the swine-flu health scare.

Airline stocks took a beating yesterday, down 13 to 17 percent, on investor worry that consumers already staying home because of the economy will have another reason not to travel.

Major carriers with connections to Mexico said they have waived change fees for travel to and from Mexico, allowing passengers to delay flights or buy tickets to a different destination.

At Philadelphia International Airport, only US Airways and USA3000, an affiliate of Apple Vacations, fly to Mexico. Cancun is the only Mexico destination out of Philadelphia.

US Airways has three daily flights to Cancun. USA3000 has four flights a week to Cancun.

"We believe airlines are at risk of suffering reduced traffic because of government-imposed quarantines and travelers' fears," said Standard & Poor's credit analyst Philip Baggaley.

European Union health officials urged citizens to postpone nonessential travel to Mexico and the United States.

Separately, UBS downgraded American Airlines, Continental Airlines, US Airways Group, and United Airlines to "neutral" from "buy," saying the near-term revenue picture looks worse than expected.

All major U.S. airlines reported first-quarter losses. Fare sales are widespread, and international travel has declined, UBS analyst Kevin Crissey said in a note to clients.

"The current revenue environment is bad enough to make future bankruptcies a possibility even with a modest economic recovery factored in," Crissey said.

Just when some airline executives had been seeing tentative early signs of improvement in travel, the flu scare could stall a recovery.

Airlines said their operations were normal and they have not canceled any flights to Mexico. Airlines said some passengers were canceling plans to travel to Mexico. None of the carriers would say how many.

"Our customers are calling and some have made changes to their itineraries," US Airways spokeswoman Valerie Wunder said. "They can change their itinerary up to seven days before or after their original travel date. Or they can apply the full value of their unused ticket to an alternate destination."

Concern over the swine-flu outbreak is reminiscent of the SARS epidemic in 2003 that started in Hong Kong and disrupted travel to and from Asia.

Avondale Partners L.L.C. analyst Bob McAdoo said in a note to clients that swine flu was unlikely to impact the airlines as SARS did.

"SARS was a much bigger issue for U.S. airlines," because there were many more flights and routes to China and Asia from the United States and Canada, McAdoo wrote. "Mexico is not a very large piece of the U.S. airline business."

Merrill Lynch & Co. analyst Michael Linenberg said airlines with large international operations, especially to Mexico, have "the most downside risk" if swine flu becomes a pandemic.

Continental Airlines has the most flights to Mexico among U.S. carriers. Still, its Latin American operations accounted for 14 percent of total 2008 revenues, "with flying to Mexico only part of that," S&P's Baggaley said.

Linenberg said because the swine-flu outbreak is recent, "it is difficult to assess the potential earnings hit. We think the industry is well-prepared to fly through the most challenging global economic backdrop since World War II."

US Airways shares closed down 84 cents, or 17.4 percent, to $4.