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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
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
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.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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