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If you think things couldn't get worse for the airlines, you might want to check in with Standard & Poor's -- or visit Arizona.

The rising price of crude oil, which recently spiked above $37 a barrel, combined with massive losses, crumbling travel demand and rapidly depreciating airplane assets, pushed credit rating agency Standard & Poor's to slash its rating on aircraft-backed debt issued by 11 U.S. airlines. For investors who haven't learned their lesson about the airline industry, where profitability has historically been a rare, fleeting happenstance, the debt reduction is another sign that the industry is on the brink of failure.

On Tuesday evening, well after Wall Street had closed for the day, credit analyst Philip Baggaley said the bankruptcies of

US Airways

and

UAL

(UAL) - Get United Airlines Holdings, Inc. Report

, parent of United Airlines, had undermined the asset value of planes used to back loans. In the credit rating agency's view, the fact that US Airways and UAL could dump scores of used aircraft into a market where there's absolutely no demand for aircraft has changed the risk/reward profile for all carriers' debt.

"The downgrades reflect further deterioration in aircraft values, and thus collateral coverage for many issues of aircraft-backed debt," said Baggaley, in a statement.

All told, the S&P downgraded dozens of enhanced equipment trust certificates, or EETCs, issued by

AMR

(AMR)

,

America West Airlines

(AWA)

,

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ATA Holdings

(ATAH)

,

Atlantic Coast Airlines

(ACAI)

,

Continental Airlines

(CAL) - Get Caleres, Inc. Report

,

Delta Air Lines

(DAL) - Get Delta Air Lines, Inc. Report

,

Northwest Airlines

(NWAC)

,

Southwest Airlines

(LUV) - Get Southwest Airlines Co. Report

, US Air and UAL. Even

Federal Express

(FDX) - Get FedEx Corporation Report

, which owns a number of planes in its shipping fleet, was not immune to getting cut.

While the specifics of each rating cut depend on the make, model and age of the aircraft, along with the overall health of the company, the rating cuts to the EETCs were generally one notch or two. This means that S&P thinks that you may not get your money back after investing in EETCs because the collateral backing the debt you own -- the airplanes themselves -- is worth less than it used to be.

Grounding Arizona

The heart of this phenomenon can be seen in the deserts of Arizona, where the main carriers have been parking the planes they're not using because there's no demand for travel. All told, 2,435 planes, or 5% of the world's total aircraft, had been parked as of Feb. 5, according to BACK Aviation Solutions, which tracks the industry.

Since 1997, the number of jets that have been put into storage in America has nearly tripled, jumping from 239 to 736 as of February 2003, according to BACK Aviation Solutions. As a result, the small world of aircraft finance has become a very scary place. With an oversupply of machines slowly building, offering a three-day sale like a local used car lot won't solve the problem. There are a limited number of corporations and people with the kind of scratch to snap up Boeing 747s, and they probably already have them parked too.

"The people who own those airplanes that are parked aren't buying from anywhere else," said David Swierenga, economist at the Air Transport Association. "And they don't see a need to buy more. Trying to sell them will be hard, because there are a lot of airplanes on the market. This is a simple supply-and-demand impact on price."

And on an aircraft balance sheet, the declining value of airplane assets will require carriers to take more noncash writedowns for goodwill. While the aircraft-backed debt reductions won't make it more costly for airlines to raise cash, the recent rating downgrades certainly don't make airline debt investing a very attractive proposition.

"Aircraft values don't have any direct impact on the airlines' ability to generate cash and pay their bills," said Baggaley. "The only scenario where I can see changes in the estimated value of planes could trigger financial problems is if writing off assets causes a covenant problem with a bank agreement. That said, the airlines have relatively few bank facilities where that kind of covenant is a problem."

Ultimately, as airlines take more noncash writedowns, their debt-to-capital ratios will increase and their balance sheets will weaken, making it even harder to raise cash. In a worst-case scenario, airplane assets could end up dropping even more over the next 12 months.

"Certainly, the collateral protection could deteriorate further

if there's a long and difficult war in the Middle East or a renewal of terrorism inside the U.S. or if American Airlines filed for bankruptcy," said Baggaley. "However, aircraft values, like the airline industry, are cyclical. Values come back, but this is the worst downturn ever. Eventually there will be a recovery."