Just in case anyone has been sidetracked this week with delusions of merger madness, Fitch’s latest comments on the airline industry should serve to bring all you poor souls back to earth.

Here is a short take on their latest full report on the airline industry. The complete report, Airline Credit Navigator,  can be accessed here.

The largest U.S. airlines enter 2008 with a more uncertain operating environment

threatening to undermine further credit quality recovery, according to Fitch Ratings.

Developments in the fourth quarter of 2007 – notably, spiking

jet fuel prices and growing concerns about U.S. macroeconomic

risk highlighted the industry’s extreme vulnerability to

rapidly changing operating conditions and external shocks. As a

result, Fitch views 2008 as a year of increasing financial

uncertainty for the industry, with all U.S. carriers focusing

more attention on disciplined capacity management, strict

non-fuel cost control and liquidity conservation.

‘Changes in cash flow profiles will be important to monitor

over the coming months in light of the deteriorating operating

outlook for the industry,’ said William Warlick, Senior

Director, Fitch Ratings.

The timing and direction of moves towards industry

consolidation will probably remain the issue of greatest

interest to creditors during 2008. Some merger-related

synergies are clearly achievable in most legacy carrier

combinations, particularly on the revenue side with post-merger

capacity rationalization supporting long-term passenger yield

growth. Still, execution risk related to industry merger and

acquisition activity remains high in light of organized labor’s

desire to capture a greater share of the financial upside in

any prospective merger transaction.

The openness of debt capital markets moving into 2008 will be a

critical factor in determining whether legacy carrier deals can

be financed efficiently without layering on substantially higher

debt service obligations after the mergers are closed.

The ‘Airline Credit Navigator’ is a periodic report by Fitch

Ratings designed to provide investors with a summary of key

airline industry credit and operating trends, recent industry

financial developments, liquidity, cash flow, fleet plans and

financing activity. The report focuses on eight of the largest

U.S. airlines, seven of which are currently rated by Fitch. Key

credit and operating trends for each of the eight airlines are

provided in the report.