MOODY'S DOWNGRADES NORTHWEST AIRLINES SENIOR IMPLIED RATINGS TO B1 FROM Ba3
Moody's Investors Service downgraded the debt ratings of Northwest Airlines, Inc. ("Northwest"), senior implied to B1 from Ba3. The ratings outlook is negative, and reflects the significant risks facing all airlines in the current difficult environment. This rating action takes into account Northwest's cost structure, which is lower than many of its major competitors and has been on an improving trend for several quarters, as well as a strong liquidity position with higher cash balances than its peers. Northwest's cost actions enabled the company to record a slight profit during the 3rd quarter when most other carriers reported losses, and are expected to limit the severity of near-term losses stemming from significantly lower passenger volume. Nevertheless, the current ratings anticipate a marked recovery in cash flow from current depressed levels no later than the second half of 2002. The company has arranged financing for the delivery of future aircraft on order, which limits a significant call on cash. However, funding these deliveries will further increase Northwest's already high level of debt. Moody's notes that a significant portion of Northwest's assets are pledged to certain debt holders and the notching of unsecured debt ratings reflects the relative priority of claims in the company's capital structure.
The intermediate term outlook for Northwest's earnings and debt protective measures has deteriorated, and cash flow weakness over the last several months has eroded Northwest's financial profile. These concerns are balanced against the company's relatively stronger earnings profile than many of its major competitors, industry leading liquidity, and the benefits of cost cutting efforts that began in the second quarter of 2000. The rating action completes the review of Northwest's ratings that began after the terrorist attacks of September 11th.
Ratings affected are:
Northwest Airlines Corporation
Issuer Rating: to B3 from B2
Senior Implied Rating: to B1 from Ba3
Northwest Airlines, Inc.
Senior Unsecured to B2 from Ba3
Senior Unsecured Debt Shelf: to (P)B2 from (P)Ba3
Senior Subordinated Debt Shelf: to (P)B3 from (P)B2
Secured Revolving Credit Facility: Confirmed at Ba3 (reflecting granting of a security interest in certain assets during the fourth quarter of 2001)
NWA Trust #1
Enhanced Equipment Notes Ser. A to Ba1 from Baa3
Enhanced Equipment Notes Ser. B to Ba2 from Ba1
NWA Trust #2
Enhanced Equipment Notes, Class A to Baa2 from Baa1
Enhanced Equipment Notes, Class B to Baa3 from Baa2
Enhanced Equipment Notes, Class C to Ba2 from Ba3
Enhanced Equipment Notes, Class D to Ba3 from Ba2
Enhanced Equipment Trust Certificates, Series 1996-1, Class A to Baa2 from Baa1
Enhanced Equipment Trust Certificates, Series 1996-1, Class B to Ba1 from Baa3
Enhanced Equipment Trust Certificates, Series 1996-1, Class C to Ba2 from Ba1
Enhanced Equipment Trust Certificates, Series 1996-1, Class D to Ba3 from Ba2
Enhanced Equipment Trust Certificates, Series 1997-1, Class A to Baa3 from Baa2
Enhanced Equipment Trust Certificates, Series 1997-1, Class B to Ba2 from Ba1
Enhanced Equipment Trust Certificates, Series 1997-1, Class C to Ba3 from Ba2
Enhanced Equipment Trust Certificates, Series 1999-1, Class A to A3 from A2
Enhanced Equipment Trust Certificates, Series 1999-1, Class B to Baa2 from Baa1
Enhanced Equipment Trust Certificates, Series 1999-1, Class C to Ba2 from Ba1
Enhanced Equipment Trust Certificates, Series 1999-2, Class A to A3 from A2
Enhanced Equipment Trust Certificates, Series 1999-2, Class B to Baa2 from Baa1
Enhanced Equipment Trust Certificates, Series 1999-2, Class C to Ba2 from Ba1
Enhanced Equipment Trust Certificates, Series 1999-3, Class B to Ba2 from Ba1
Enhanced Equipment Trust Certificates, Series 1999-3, Class C to Ba3 from Ba2
Enhanced Equipment Trust Certificates, Series 2000-1, Class C to Ba2 from Ba1
Enhanced Equipment Trust Certificates, Series 2001-1, Class A to A3 from A2
Enhanced Equipment Trust Certificates, Series 2001-1, Class B to Baa2 from Baa1
Enhanced Equipment Trust Certificates, Series 2001-1, Class C toBa2 from Ba1
The following transactions are backed by monoline insurers and are confirmed at Aaa:
Enhanced Equipment Trust Certificates, Series 1997-1, Class G confirmed at Aaa
Enhanced Equipment Trust Certificates, Series 1999-3, Class G confirmed at Aaa
Enhanced Equipment Trust Certificates, Series 2000-1, Class G confirmed at Aaa
Northwest reported a third quarter net profit of $19 million after consideration of the $249 million recognized (pre-tax) from the Airline Stabilization Board as a grant. The agency noted the Northwest's cost structure on a relative basis is among the lowest in the industry. Its cost structure is not only lower than its major competitors, but has declined in recent quarters reflecting a series of programs begun during 2001. Northwest enjoys a competitive benefit from its ability to use regional jets. The flexibility of these aircraft can permit Northwest to operate profitably on lower density routes and/or maintain higher levels of frequency in major markets compared to competitors using larger aircraft.
Northwest has cut back capacity, although not as aggressively as most competitors. With these capacity reductions in place, however, Moody's anticipates that Northwest's cost per available seat mile will not decline further in 2002 despite continuation of the company's efforts. Also, Moody's notes that Northwest, along with the rest of the industry, has benefited from relatively low fuel costs. No near term increase in fuel costs is expected, but the company has no hedging in place, and may not be not positioned to absorb fuel cost increases.
Cash balances of approximately $2.6 billion are high by Northwest's historic standards and, especially, in relation to the industry. The company has successfully reduced or extended most of the major near term calls on cash, particularly equipment purchases as the company has financing commitments for all of its future aircraft deliveries. The primary near term demand for cash is excise tax payments, currently deferred but due in January 2002. Northwest, unlike most of the US airline industry, continues to take delivery of most of the aircraft on order. This reflects an operating fleet that is somewhat older than the rest of the industry. The new aircraft are substantially less costly to operate and are anticipated to be net cash flow positive in most cases. The additional debt, however, will add to an already high leverage profile. Northwest has some degree of unencumbered assets on its balance sheet, but due to the nature of its fleet which includes many older models, significant secured financing opportunities may be limited in the current environment. Nevertheless, the company has the potential to seek further assistance in the form of government guaranteed loans under the airline stabilization program.
Airline Industry Framework and Ratings Outlook:
The ratings reflect the more difficult business environment facing Northwest and all airlines due to the weak economy and the specific effects on the airline industry following the September 11 terrorist attacks
The rating agency noted that the airline industry is fragile and now especially vulnerable to shock risk. The negative rating outlook considers the risk that any adverse development that might otherwise have been easily tolerated, could have more devastating implications for a carrier in the current environment. Weakness in industry's earnings was evident before September 11th, but was significantly exacerbated by the specific implications of the terrorist attacks. Most industry participants anticipate losses and significant cash flow deficits for the fourth quarter of 2001. The industry has taken specific actions to cut capacity, reduce costs, and conserve cash, but Moody's believes that losses are likely to continue well into 2002 for most, and that it could be some time before the airlines return to historic levels of financial performance.
Industry operating capacity is down about 20%. While the load factor is increasing and approaching the levels of late 2000, a portion of the increase has been achieved partly through these capacity reductions. The absolute number of passengers carried is lower. Moreover, much of even this traffic has been stimulated with fare sales and yields (revenue per passenger seat mile) remain depressed on a year over year basis. Business traffic, which provides higher yields, remains at levels well below those seen a year ago.
Looking forward, Moody's believes that there are three principal risks which will affect the industry's ability to rebuild its revenue base: 1) recovery of the US economy from current depressed levels, specifically improved employment levels which will stimulate higher yielding business travel, 2) rebuilding passenger confidence in the safety and efficiency of the domestic airline system, and 3) constraint on the part of all airlines in adding capacity back into the system. The US economy remains in recession and an upturn may not materialize until well into 2002. The airline industry traditionally lags developments in the broader economy, suggesting a more protracted period of weakness for airlines. Because approximately half of the reduction in airline capacity in the United States is as a result of lower utilization than permanent grounding of aircraft, Moody's is concerned that underutilized capacity can be easily and quickly reintroduced into the system at the first sign of strengthening demand. This could temper the financial benefit of any recovery in industry fundamentals. Finally, passenger sentiment remains highly sensitive to safe and efficient functioning of the airline system, and any adverse events could prompt a further reduction in load factors. Consequently, Moody's anticipates that Northwest's revenue, and the revenue of most major carriers, will be lower in 2002, and only begin to recover to pre 9/11 levels during 2003
Although an airline industry is a critical factor in a modern economy, the current financial profile of any airline is subject to further deterioration if the company is unable to address its cost structure, if market conditions do not recover in 2002 and if, for whatever reason, capacity remains at levels that continue to constrain increases in yields. A sustained recovery in cash flow will require a substantial increase in revenues.
Northwest Airlines, Inc. is headquartered in Minneapolis, MN.
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