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Rating Action:

MOODY'S CONFIRMS B3 SENIOR IMPLIED RATING OF AIRTRAN HOLDINGS, INC.; DOWNGRADES RATINGS OF CERTAIN DEBT

30 Apr 2003
MOODY'S CONFIRMS B3 SENIOR IMPLIED RATING OF AIRTRAN HOLDINGS, INC.; DOWNGRADES RATINGS OF CERTAIN DEBT

Approximately $600 Million of Debt Securities Affected.

New York, April 30, 2003 -- Moody's Investor's Service confirmed its B3 Senior Implied rating of AirTran Holdings, Inc. ("AirTran") and lowered the ratings of certain of the company's debt securities. The rating actions reflect the company's earnings and modestly positive cash flow before capital expenditures in an environment in which most airlines in the US are experiencing significant cash losses. While AirTran's results demonstrate relative operating strength versus its competitors, including continued reductions in unit operating costs, the absolute level of earnings and cash flow are well below historic levels. Moreover, scheduled aircraft deliveries will increase adjusted debt levels and exacerbate already high leverage. While balance sheet liquidity has improved, overall financial flexibility remains limited. The ratings of several classes of secured debt were downgraded to reflect increased uncertainty in realizable values in the underlying collateral. The Outlook is Stable.

Ratings affected are as follows:

AirTran Holdings, Inc.

Senior Implied Confirmed at B3

Long Term Issuer Rating to Caa2 from B3

Senior Unsecured Shelf to Caa2 from B3

AirTran Airways, Inc.

Senior Secured Notes: confirmed at B2

Enhanced Equipment Trust Certificate, Series 1999-1

Class A to Baa2 from Baa1

Class B to Ba1 from Baa3

Class C to B2 from B1

AirTran is among the few US airlines managing to generate positive earnings in recent quarters. The company has managed to reduce its already low cost base and to take advantage of growth opportunities in markets exited by US Airways among others. Costs per available seat mile have declined steadily both in absolute terms and on a fuel adjusted basis. The decline in costs has been partially a result of growth in capacity (28.5% year over year, Q1 '03) and partially a result of the replacement of the company's DC9's with more fuel and labor efficient B717's. Revenues on a unit basis have declined over the past two years leading to substantially reduced operating margins and cash flow. Passenger revenue per available seat mile has fallen to 8.64 cents in 2002 from 10.32 cents two years earlier. There is some increase in the first quarter of 2003 on a year over year basis but at 8.73 cents unit revenues remain well below historical highs. The company's operating margin was 4% in the seasonally weak first quarter of 2003, up from a loss in the first quarter of 2002 and just below the 4.3% level achieved for the full year 2002.

AirTran's earnings and positive cash flow from operations are a result of its continued attention to costs and well timed capacity and network expansion. In addition to its Atlanta base, the company has rapidly expanded its Baltimore Washington operations, replacing US Airways as the airport's second largest carrier (after Southwest). With a lower cost per seat mile than US Airway's, AirTran has achieved profitability even in the current low fare environment. Expansion in 2003 is expected to focus on three areas, frequencies to existing cities, long haul flying to Denver, Los Angeles and Las Vegas and on the company's contract for regional jet capacity with Air Wisconsin. Growth provides a larger base over which to spread fixed costs and to date has been well managed by the company. However, its continued high growth (another 20-25% anticipated in 2003) will, in Moody's opinion, continue to stretch management resources. The company will have to carefully balance the desire to control overhead costs with the need to provide adequate managerial oversight.

The rating reflects continued weak cash coverage ratios and high leverage. Retained cash flow to debt fell to less than 2% for the full year 2002 and although lease adjusted debt to total lease adjusted capital has declined in the past two years due primarily to the conversion of convertible debt to equity it remains greater than 95%. Lease adjusted debt and adjusted debt to capital ratios are both anticipated to weaken with the continued delivery of B717 aircraft and the possibility for the purchase of an additional aircraft type. Retirement of the company's remaining DC-9 fleet is expected to be completed by the end of 2003 with net fleet growth for the year anticipated to be 8 aircraft.

Although Moody's considers existing cash on hand ($168 million as of March 31, 2003 of which $113 million was unrestricted) to be adequate, AirTran's overall financial flexibility is limited. The company has no line of credit and all of its assets are pledged to existing creditors. All new aircraft deliveries have committed financing arranged and should not create any significant call on the company's cash flow or liquidity. Debt maturities in the next twelve months are limited and Moody's notes that the majority of the maturing debt is held by Boeing affiliates, the supplier of the company's B717 fleet.

Although the new aircraft are substantially more efficient than those replaced, the fleet does represent a longer term challenge to AirTran. The shift to one aircraft type provides substantial operating efficiencies but limits the company's ability to match equipment type to route demands. To better match demand to aircraft type, the company has out-sourced both its Atlanta to West Coast flying (too long a distance for the B717's, now flown under an ACMI contract) and its short haul feeder routes (low demand calls for an aircraft smaller than the B717, now flown on a fee per departure basis by Air Wisconsin under the name AirTran JetConnect). In addition, AirTran has begun a process of evaluating the benefits of adding an additional aircraft type to its fleet. Both Airbus and Boeing products are being considered. While adding operational flexibility is a benefit, the company will not only continue to add to its lease adjusted debt burden but will add complexity to its operations (scheduling, crew training and assignment, maintenance etc.). The transition to an additional aircraft type has proven to be expensive for both large and small airlines and could add to costs in the intermediate term.

The downgrade of the company's Series 1999-1 Enhanced Equipment Trust Certificates reflects a decline in value, in Moody's opinion, of the underlying aircraft collateral. The B717 has and is expected to continue to serve AirTran well but has not found wide usage among the world's airlines. Airlines generate clear cost benefits from flying limiting fleet types and it is unlikely that most airlines will consider adding a new aircraft type unless very substantial discounts in offered.

The stable outlook reflects the company's positive cash flow (before capital expenditures) in the current difficult financial environment for US airlines. The ratings anticipate continued tight cost controls and little improvement in yield and passenger demand. However, Moody's notes that the company's dependence on internally generated cash flow, leaves it vulnerable to negative external events including but not limited to an increase in price discounting in AirTran's primary markets, a fall in passenger demand and/or an increase in the cost of fuel. In the event the company's cash flow were to decline meaningfully, ratings could be adjusted downward.

The rating of debt at the holding company (shelf and Issue Rating) are notched down due to their distance from the operating company cash flow and asset protection and the company's pledge of all of its otherwise unencumbered assets to support secured debt at the operating company (B2).

AirTran Holdings, Inc. and its subsidiary, AirTran Airways, Inc. are headquartered in Orlando, Florida.

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

New York
Richard Bittenbender
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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