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Rating Action:

MOODY'S ASSIGNED B2 RATING TO US AIRWAYS $1.1 BILLION CREDIT FACILITY, UPGRADED SELECTED US AIRWAYS ENHANCED EQUIPMENT TRUST CERTIFICATES, CHANGED OUTLOOK TO STABLE

31 Mar 2006
MOODY'S ASSIGNED B2 RATING TO US AIRWAYS $1.1 BILLION CREDIT FACILITY, UPGRADED SELECTED US AIRWAYS ENHANCED EQUIPMENT TRUST CERTIFICATES, CHANGED OUTLOOK TO STABLE

Approximately $3 billion of debt affected

New York, March 31, 2006 -- Moody's Investors Service assigned a B2 rating to the $1.1 billion secured credit facility ("Credit Facility") of US Airways Group, Inc. ("Parent"). Additionally, Moody's upgraded selected tranches of certain Enhanced Equipment Trust Certificates (EETC's) supported by payments from US Airways Inc.("US Airways"), affirmed the remaining tranches, and withdrew the rating on one US Airways EETC that was repaid. Ratings on EETCs supported by America West Airlines, Inc. were affirmed. Moody's also assigned a B3 corporate family rating at the Parent level and withdrew the corporate family rating previously assigned to America West Airlines, Inc. The outlook has been changed to stable.

The stable outlook reflects Moody's expectation of non-fuel cost savings in line with the company's plan of up to $250 million as the operations of US Airways and America West Airlines are integrated, modest revenue benefits from a somewhat stronger pricing environment, and improving liquidity. Nonetheless, Moody's notes that the company is in the early stages of the integration of the two airlines and meaningful challenges remain, especially on the labor front, before a low-cost operation is sustainable. The outlook also anticipates some merger-related revenue opportunities through better connections of U.S. cities served separately by the two airlines, an enhanced frequent flyer program, and expanding selected transatlantic and Latin America markets where passenger yields have been strong. The proposed Credit Facility eases the near term pressure on liquidity by extending the maturities on certain existing loans. Unrestricted cash balances at FYE 2005 of $1.58 billion are adequate for near term needs as the company raised approximately $1 billion of capital post-merger. Consequently, Moody's expects the company to fund all of its near term cash requirements (capital spending of $160 million and debt maturities of $200 million) through its operating cash flow or cash on hand.

Among the factors considered in the rating is the market position of the combined airlines. US Airways Group, Inc. is a predominately domestic carrier, which has achieved a lower overall cost through the US Airways bankruptcy. The extensive domestic network of the combined systems position the company to be successful in it business model as a low cost carrier. US Airways and America West Airlines continue to operate separately with separate airline operating certificates, although management plans to combine the operating authority and is working on a transition plan. The hurdles to fully integrate the airlines and deliver on the business plan were also considered among the rating factors. Labor continues to be a significant obstacle to fully achieving the low cost structure. Although the company has made strides in merging the work force, it is likely to be at least another year before the workforce can be fully integrated. As well, the company is working on developing a common platform for its systems, including reservations and the frequent flyer programs, which is expected to take some time still. Further, financial results are highly sensitive to jet fuel prices. The company has a very limited hedging program, and the prospects of passing on fuel costs to the consumer through higher fares may limit the leisure bookings attracted to low fares and which are important to the business plan. Moody's also notes that the ability to sustain a low cost structure also depends on an appropriate level of investment in the fleet. The company will take delivery of only three new aircraft in 2006. With a relatively older fleet compared to other carriers, the company's cost structure may be pressured upwards through higher maintenance as well as lower fuel efficiency, thereby weakening its relative competitiveness in markets with high penetration from other low-cost carriers.

Further, leverage remains high for the rating category despite US Airways having discharged approximately $3.3 billion of debt through the Chapter 11 bankruptcy process. Consolidated pro forma debt to EBITDA was 15.2x for 2005 (on a pro forma basis for the full year for both America West Airlines and US Airways using Moody's standard adjustments), and EBIT to interest expense was 0.2x. As well, Moody's expects the company to be free cash flow breakeven at best for FY 2006, even with a modestly better operating environment as transition costs and high fuel could negatively affect the cost structure. Ratings could improve if the company reduces debt or improves operations to sustain debt to EBITDA below 7x with EBIT to interest expense approaching 1.5x (both using Moody's standard adjustments). Conversely, ratings could come under pressure if balance sheet cash or cash flows were to decline significantly from their expected levels.

US Airways Group has made notable progress since the September 2005 merger. Since then, the company has obtained single-carrier certification from the National Mediation Board (which permits the US Airways and America West Airlines spare parts processing and crew scheduling to be combined), and is implementing its transitional labor agreements at competitive wages. Aircraft leasing expense has been reduced from its historical level; 55 aircraft were returned to lessors in 2005 and an additional 20 aircraft are likely to be returned in 2006 as overlapping service is removed from the system. Unit revenues grew substantially in 2005 supported by stability in domestic yields and stronger demand in cities served by its Express regional provider, as well as increased leisure traffic. However, the company reported a significant net loss as a result of higher fuel prices and a $100 million restructuring charge for returned aircraft at America West Airlines.

All EETC's supported by payments from America West are affirmed. The Aaa ratings for certain of the US Airways EETC's that are based on the support of insurance policies issued by monoline insurance companies have also been affirmed.

The rating upgrades for the EETC's supported by US Airways reflects its successful reorganization and its September 2005 emergence from bankruptcy and improving secondary market values for the aircraft collateralizing the transactions. All of the aircraft collateralizing the transactions are manufactured by Airbus and include the A320 family (A319, A320, A321) and A330 aircraft. The A320's are in high demand at the moment.

All classes of the EETC's continue to be supported by liquidity facilities intended to pay up to 18 months of interest in the event US Airways or America West defaults on payment obligations under the equipment notes. Any future changes in the underlying credit quality of the company and its ratings, and/or meaningful changes in the value of the aircraft pledged as collateral, and/or changes in the status of the liquidity facilities or the credit quality of the liquidity provider could cause a change in the ratings of all classes of the EETC's.

The B2 rating for the Credit Facility, one notch above the corporate family rating, reflects the value of the collateral securing the loan, principally the unrestricted cash and cash equivalents, upstream guarantees from the main operating subsidiaries, its senior position relative to approximately $625 million in unsecured debt, and the frequency of appraisals for all collateral (annually at least). Debt outstanding will not change, as the Credit Facility will refinance existing debt (ATSB guaranteed loans, along with term loans from GE Capital and Airbus Financial Services) and will extend maturities with a new final maturity of 2011. Covenants include minimum EBITDAR to fixed charges of 0.86 to 1.0 through September 30, 2006, 0.9 to 1.0 through December 31, 2006 and 0.93 to 1.0 through March 31, 2007 as well as minimum unrestricted cash and cash equivalents of $750 million at all times.

Ratings assigned

US Airways Group, Inc. senior secured bank credit facility at B2, corporate family rating at B3

Rating withdrawn

America West Airlines, Inc. corporate family rating of B3

Rating upgraded for the EETC's supported by payments from US Airways

Series 1998-1 Class A: to Ba1 from Ba2

Class B: to Ba3 from Caa1

Class C: to B3 from C

Series 1999-1 Class A: to Ba1 from Ba2

Class B: to Ba3 from Caa1

Class C: to B3 from C

Series 2000-3 Class C: to B3 from C

Series 2001-1 Class C: to B3 from C

Ratings withdrawn:

Series 2000-1 Series G: Aaa withdrawn

US Airways Group, Inc. and its two operating subsidiaries, US Airways, Inc. and America West Airlines, Inc. are headquartered in Phoenix, Arizona.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Gregory D. Clifton
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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