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20 May 2005
MOODY'S CONFIRMS DEBT RATINGS OF AMERICA WEST AIRLINES, INC. (SENIOR IMPLIED AT B3) -- OUTLOOK CHANGED TO NEGATIVE; CONFIRMS EETC RATINGS OF U.S. AIRWAYS, INC., OUTLOOK CHANGED TO DEVELOPING
Approximately $1.8 billion of debt affected
New York, May 20, 2005 -- Moody's Investors Service confirmed the debt ratings of both America
West Airlines, Inc. ("America West") and the
Enhanced Equipment Trust Certificate ("EETC) ratings of US Airways,
Inc. ("US Airways"), and changed the ratings
outlook for America West to negative from stable, and the outlook
for US Airways to developing from negative
The actions are prompted by the announcement that US Airways Group,
Inc., parent company of US Airways, upon its emergence
from Chapter 11 protection under the U.S. Bankruptcy code,
intends to merge with America West Holdings Corporation, the parent
company of America West. Management of the merged company will
be consolidated at America West Holdings headquarters. While the
airline will be marketed under the US Airways brand, operations
of the two airlines will remain separate initially although they will
share scheduling and certain resources. The transaction is expected
to be financed with new stock, and to close during the fall of 2005
following regulatory review, bankruptcy court confirmation and creditor
and shareholder approvals.
Upon the emergence of US Airways from bankruptcy and the completion of
the merger, the combined companies are likely to face a continuing
difficult operating environment in the U.S. airline industry.
Although America West is a low cost carrier, it has recently sustained
operating losses due to the competitive fare environment and high fuel
costs negatively impacting all carriers. US Airways is currently
operating under bankruptcy court protection, and upon emergence
it is expected to have trimmed its operating costs substantially.
Nevertheless, the combination of the difficult task of the merger
itself and the expectation of a continued negative operating environment
is expected to create significant challenges in achieving the anticipated
$600 million in annual net operating synergies. It is noted
that under the proposed merger, both airlines will operate under
separate operating certificates for a transition period of two to three
years, keeping flight crew, maintenance and safety procedures
for each airline separate. While this will mitigate the integration
risks that have affected prior airline mergers, it will also limit
the rapidity with which anticipated synergies can be achieved.
In monitoring the merger process, Moody's will particularly
focus on the near-term operating strategies of the new company,
the management of the labor integration process, the route configuration,
and fleet plan. Moody's will also consider the prospects
for earnings and cash flow of the combined group in relation to their
ongoing debt load.
America West outlook
The outlook change to negative for America West reflects the uncertainties
surrounding the successful completion of the merger, and the longer-term
challenges in integrating the operations of the two airlines to produce
the targeted synergies. The difficult operating environment in
the passenger airline industry, including intense competition,
labor uncertainty and high fuel costs, adds to the complexity in
Acknowledged in the confirmation of America West's ratings are the short
to intermediate term benefits of the merger, including an extended
route network, the operational benefits of similar fleet types and
the liquidity expected to be available to the combined group at closing.
America West is predominantly a West Coast airline with hubs in Phoenix
and Las Vegas as well as selected routes to Mexican and Central American
tourist destinations. This network will compliment US Airways'
primarily East Coast and Caribbean routes.
US Airways outlook
The change to a developing outlook from negative for US Airways EETC ratings
considers that the risk for holders of these instruments could increase
or decrease depending on how the aircraft underlying the EETC's
will be treated as part of US Airway's emergence from Chapter 11
protection and merger with America West. Under section 1110 of
the U.S. Bankruptcy code, U.S. Airways
has the ability to affirm its obligations under the transactions if it
wishes to retain the aircraft or could reject its obligations and return
the aircraft to trustees for the EETC investors if it determines that
the aircraft will not be utilized in its fleet post emergence from Chapter
11. In the event that the aircraft are retained by the combined
group, the ratings could benefit from the stable lease streams provided
by the emerged carrier. However, if the aircraft are rejected,
and subject to sale the ratings would be adjusted to reflect any change
in valuation of the aircraft at that time.
US Airways has, to date, continued to use all of the aircraft
collateralizing its rated EETC's although the airline continues to have
the ability to reject its obligations during the bankruptcy process.
This uncertainty has increased as a result of the merger --
US Airways and America West have not announced their route plans and overall
fleet configuration, other than the intention to purchase A350's.
Both companies operate Airbus flight equipment, and the companies
have projected returning 25 aircraft, post-merger,
in addition to the 46 aircraft that US Airways had previously planned
A considerable number of steps remain to effect the merger. America
West and US Airways will have to reach definitive agreements, obtain
approvals for the merger from existing creditors including the Air Transportation
Stabilization Board (ATSB) from which both have secured loans.
U.S. Airways will have to finalize its business plan,
of which the merger will be an integral part, and submit it to the
bankruptcy court for approval. A number of regulatory approvals
will also need to be obtained.
America West and US Airways expect new equity investments of approximately
$350, as well as, approximately $675 million
of additional cash from debt refinancing, signing bonuses and loans
from credit card providers and the refunding of certain deposits.
The companies also anticipate receiving a $250 million loan from
Airbus, as the new company has agreed to be the launch customer
for the Airbus A350 with deliveries beginning in 2011. These financing
initiatives are beneficial to the combined group as they are expected
to provide a stable financing structure as well as needed initial liquidity.
However, the ultimate terms and conditions of the financing are
currently unknown and could have important implications for the relative
priority of claims of existing creditors of each airline.
The ratings confirmed with negative outlook are:
America West Airlines, Inc.: Senior Implied at B3,
Senior Unsecured at Caa2, Issuer Rating at Caa2, IRB's
at Caa2, and EETC ratings ranging from Ba1 to B3. The Aaa
rated tranches of EETC's that are guaranteed by monoline insurance
carriers are unaffected by the rating action.
The ratings confirmed with a developing outlook are:
U.S. Airways Inc.: EETC ratings ranging from
Ba2 to C. The Aaa rated tranches of EETC's that are guaranteed
by monoline insurance carriers are unaffected by the rating action.
U.S. Airways Group, Inc. and U.S.
Airways, Inc. are headquartered in Arlington, Virginia.
America West Airlines, Inc. and its parent, America
West Holdings, Inc. are headquartered in Tempe, Arizona.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Gregory D. Clifton
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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