MOODY'S ANNOUNCES RATINGS ACTIONS ON NORTH AMERICAN AIRLINES
New York, September 14, 2001 -- Moody's Investors Service downgraded the ratings of America West Airlines, Inc. (senior implied rating to Caa1) and US Airways, Inc. (Senior Implied Rating to Caa1) and confirmed the ratings for Southwest Airlines, Inc. (senior implied rating of A3) and Atlantic Coast Airlines Holdings, Inc. (senior implied rating of B1). The rating outlook for each of these airlines is Negative. In a related action Moody's placed the ratings of a number of other rated airlines on review for possible downgrade. The rating action was prompted by the anticipation of significant losses stemming from a disruption in air travel and airline operating efficiency and increased costs associated with enhanced security measures in the aftermath of recent terrorist activities. This stress on the industry is compounded by the industry's weak earnings and the current economic environment.
The ratings actions include:
US Airways, Inc.
Senior Implied Rating Caa1 from B3, the Outlook is Negative
All Equipment Trust Certificates B2 from B1
All IRB's Caa3 from Caa2
IRB's that are "wrapped" are not affected by this ratings action and remain Aaa
All "wrapped" classes of EETC debt are unaffected by the ratings action and remain Aaa.
All other EETC ratings were downgraded one rating notch except for the most junior
class of debt in each transaction that was downgraded two notches.
Ratings on US Airways EETC's (except for wrapped transactions) range from Baa1 to B2.
America West Airlines, Inc.
Senior Implied Rating Caa1 from B2, the Outlook is Negative
Secured Bank Line B3 from B1
All IRB's Caa2 from B3
All "wrapped" classes of EETC debt are unaffected
by the ratings action and remain Aaa.
All other EETC ratings were downgraded three ratings notches.
Ratings on America West EETC's
(except for wrapped transactions) range from Baa1 to B2.
Senior Implied Rating C from Caa3
1998-1 Class A confirmed at Baa3
Class B B1 from Ba3
Class C Caa1 from B2
Class D Ca from Caa2
2000-1 Class A confirmed at Baa3
Class B B1 from Ba3
Class C Caa2 from B1
Ratings placed under review for possible downgrade
Except for debt backed by external parties (wrapped IRB's and or EETC's for example), the ratings for all debt associated with the following airlines has been put under review for possible downgrade. The rating indicated is the senior implied or senior unsecured rating for the referenced entity.
Air Canada B1
Air Tran Holdings, Inc. B2
Alaska Air Group, Inc. Baa3
American Airlines Baa3
American Trans Air B2
Continental Airlines Ba2
Delta Airlines Baa3
Northwest Airlines Ba2
United Airlines Ba1
Southwest Airlines, Inc. A3, Outlook, Negative
Atlantic Coast Airlines B1, Outlook, Negative
The ratings of US Airways, Inc. and US Airways Group ("US Airways") were downgraded (senior implied rating, Caa1). The ratings action completes a review begun in August of 2001 prompted by continued weakness of earnings and cash flow and the decision of UAL Corporation not to pursue the purchase of US Airways. The downgrade reflects the managerial and operational challenges US Airways faces in the implementation of its restructuring plans, the company's continued weak earnings and cash flow, high adjusted balance sheet leverage and the prospect for further deterioration in passenger volumes and yields. Acknowledged in the ratings are the positive benefits that can be generated by the company's restructuring plan and the value of the company's route structure including access to several key capacity constrained airports.
US Airways has been financially weakened by losses experienced over the past two years. Although the company has more than $1billion in liquid funds, it has limited additional financial flexibility as the vast majority of the company's assets are pledged to existing debt holders. The ratio of lease adjusted debt to capital is in excess of 100% as the company's recent losses and negative cash flow (after capital expenditures) have lead to a negative book net worth and increased borrowings and asset rentals. In light of the expected reduction in demand for air travel in the near to intermediate term, Moody's anticipates that cash flow will continue to decline and further deterioration in debt protective measures is expected.
In US Airways' primary market, the US East Coast, the company has seen an increase in competition among mainline carriers and from low cost and start-up airlines including Southwest, AirTran, American Trans Air and JetBlue. In addition the company has seen increased competition from mainline carriers such as United and Delta. US Airways' response to this competitive threat has been hampered by limitations on its use of regional aircraft incorporated into its contract with its pilots. As a result, on many routes, US Airways has either not responded to competition or has been forced to respond with aircraft that are too large for the level of demand. This inefficient use of assets is one of the factors that has lead to losses.
The ratings reflect the potential difficulties facing the company as it seeks to implement its restructuring plan following the collapse of the proposed purchase of the company by UAL Corp. It is not expected that the restructuring will have a meaningful impact on near term earnings. Portions of the plan (such as the acquisition of regional jet aircraft) will take more than a year to fully implement and will strain limited internally generated cash flow. Successful implementation of a portion of the plan will require acceptance of changes in work rules and possibly in wages and salaries. For example, US Airways has begun discussions with employees of its MetroJet unit regarding reductions in costs. Mainline pilots will be required, when they are delivered, to fly up to 60 smaller regional jets rather than larger traditional mainline aircraft. Moody's believes that labor will seek to minimize the impact of any changes and that the ultimate resolution of these issues will be time consuming and could lead to operational disruptions.
Moody's also downgraded the ratings of America West Airlines, Inc. ('America West') and its parent America West Holdings, Inc. (senior implied rating, Caa1). The ratings action was prompted by increased concerns regarding earnings and cash flow in the current operating environment. Acknowledged in the ratings is the company's strong position in its Phoenix hub and the recovery it has made from the operational difficulties it experienced last year. The company has taken a series of steps to reduce its costs and overall demand on cash to meet the current operational challenge including reduction of costs and a reduction in planned capacity growth.
The ratings reflect the company's highly leveraged financial structure, weak cash flow and earnings and dependence on leisure travel. The company has experienced net losses for the past three quarters and is facing the seasonally weak fourth and first calendar quarters. Despite a return to normalized operations, the company has experienced a loss of business class passengers and has become increasingly dependent on the leisure market. Increased competition in two of the company's largest markets, Phoenix and Las Vegas, have driven down fares and profits.
The recent terrorist actions in the US will, in Moody's opinion, further dampen demand, particularly for discretionary travel, at a time of constrained cash flow for America West.
Ratings on review for Possible Downgrade
The ratings review was prompted by the anticipation of fundamental and negative changes in the operating earnings and cash flow within the airline industry. Moody's will review the liquidity and cash needs of each airline under review to determine its financial flexibility during what is anticipated to be a period of sharply reduced demand. Critical factors in Moody's review will include the impact on revenue of changes in passenger demand and fare levels, the ability to control costs and most importantly each company's liquidity profile and cash flow.
Moody's believes that both business and leisure travel will be curtailed for at least the rest of 2001 and probably into 2002. Full fare and premium business traffic has been dramatically reduced by the current economic correction and will almost certainly be further reduced in the near term. The industry has used fare reductions to keep load factors at reasonable levels, counting on leisure and fare conscious business travelers to keep aircraft full and revenues growing in the face of increasing costs. Moody's will monitor the revenue impact of changes in consumer behavior and the reaction of the industry (changes in fare levels particularly) to new levels of demand.
Control of costs and the impact of added security measures will be reviewed. It is anticipated that increased congestion at airports and unfamiliar security routines will add to general operational inefficiencies and increased costs. Direct costs will come from increased security and the potential for higher staffing levels generally. Moody's review will focus each company's plans to reduce or control its costs and the impact on cash flows of increased security costs and will monitor the extent to which these fall on the airlines or elsewhere.
Liquidity, cash flow and plans for conservation of cash will be reviewed at each airline. Access to existing lines of credit and alternate liquidity will be important considerations in Moody's review. The degree to which each airline has and can maintain financial flexibility during a potentially prolonged period of weak cash flow will be an important factor in ratings actions. Under consideration will be the timing of major payments, their impact on cash flow and the plans each company has put in place to deal with cash needs. In addition, Moody's will be monitoring the impact of falling demand on airlines' working capital. As demand declines, Air Traffic Liability (the ticket purchased and paid for but travel not undertaken) also declines and reduces an airline's typical negative working capital position creating a demand on cash..
Ratings confirmed with a negative outlook
Moody's confirmed the ratings of Southwest Airlines, Inc. and changed the ratings Outlook to Negative. Southwest Airlines, Inc. ('Southwest') is one of the strongest airlines in the US in terms of debt protective metrics. It will, in Moody's opinion, feel the negative impact of the current circumstances affecting the industry. As a result, the outlook was revised to Negative. However, the company has historically demonstrated substantial financial strength. It is one of the lowest cost providers, has the lowest leverage among major US airlines and has demonstrated its ability to remain profitable in the face of weakening economic circumstances. The company's on balance sheet liquidity and lines of credit are more than sufficient to meet near term financial needs even in the face of reduced cash flow. In addition, the company has a large fleet of unencumbered aircraft which provide an important element of financial flexibility.
Atlantic Coast Airlines Holdings, Inc. ('Atlantic Coast') rating and Negative Outlook was confirmed. Atlantic Coast is substantially, but not completely shielded from much of the current uncertainty facing the airline industry. The company provides, through its major operating subsidiaries, regional jet service for Delta and United Airlines. As a fee for service provider, the airline is not directly subject to changes in customer demand or fluctuations in fares. Atlantic Coast is paid to fly a route regardless of the number of passengers on each aircraft or the price each passenger has paid for their ticket.
Atlantic Coast is subject to the risk of a substantial reduction in the demand from Delta and United for regional flying and to the risk of payment from their two customers. Due to the benefit provided by regional feeder routes to mainline airlines, Moody's does not anticipate that there will be a dramatic reduction in flying for either company. However, the risk of a major reduction in demand from either or both of these mainline carriers warrants a Negative ratings Outlook.
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