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Rating Action:

MOODY'S DOWNGRADES RATINGS OF AIRTRAN'S ENHANCED EQUIPMENT TRUST CERTIFICATES; OUTLOOK TO STABLE FROM NEGATIVE

15 Feb 2006
MOODY'S DOWNGRADES RATINGS OF AIRTRAN'S ENHANCED EQUIPMENT TRUST CERTIFICATES; OUTLOOK TO STABLE FROM NEGATIVE

Approximately $130 Million of Debt Securities Affected

New York, February 15, 2006 -- Moody's Investors Service downgraded all ratings of the Series 1999-1 Enhanced Equipment Trust Certificates ("EETC's), which are supported by payments from AirTran Airways, Inc. ("AirTran"), and affirmed the Corporate Family Rating at B3 for the parent AirTran Holdings, Inc. Moody's also changed the outlook to stable from negative. These rating actions complete a review of AirTran's EETC ratings initiated January 18, 2005.

Ratings affected were as follows:

AirTran Airways EETC Series 1999-1 Class A: to Ba1 from Baa2; Class B: to B1 from Ba1; Class C: to B3 from B2

The downgrades of the EETC ratings reflect Moody's assessment that the secondary market value of the B717 aircraft which collateralize these EETC's has declined faster than the related debt has amortized. Deterioration in market value of the aircraft reduces collateral protection under a liquidation scenario and increases the risk to EETC debt holders, especially for the Class B and C certificates which are junior to the Class A tranche.

Although the B717 is expected to continue to serve AirTran well, ongoing valuation of B717 is uncertain because this aircraft type will no longer be produced and because there are few operators of the limited number of aircraft already produced. The Boeing Company ("Boeing") recently announced that the last B717 is in production, although we expect that Boeing will provide operational support for the aircraft consistent with their other models. Only nine airlines operate the 155 B717 aircraft, and AirTran's fleet represents over half of this amount. With so few B717 aircraft in service and a limited number of operators, it could be difficult to place these aircraft under a liquidation scenario, particularly a fleet the size of AirTran's, without offering discounts. However, a substantial number of the B717s in service are leased from Boeing, including the majority of AirTran's fleet. In recent airline bankruptcies, major lessors and owners of aircraft have attempted to manage the liquidation of aircraft to limit the negative impact on secondary market values. Boeing has no obligation nor has it indicated that it would undertake any actions to support B717 secondary market values in the event of a liquidation of a meaningful portion of the B717 fleet. However, Boeing's objectives may coincide with those of other debt holders.

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 AirTran defaults on its payment obligations under the equipment notes. Any future changes in the underlying credit quality of AirTran 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 stable outlook reflects Moody's expectations that AirTran will continue to generate positive earnings and cash flow from operations as a result of continued cost control and better revenue from higher enplanements and a slight improvement in yield. The airline's low-cost structure has allowed it to somewhat offset the high fuel prices, and remain profitable in the competitive environment of the airline industry. AirTran has established a competitive advantage by continuing to contain its non-fuel operating expenses, and Moody's anticipates the airline will continue to operate at one of the lowest non-fuel CASMs (cost per available seat mile) in the industry. Non-fuel CASM during 2005 was 6.25 cents, down 1.6% compared to 2004. However, total operating CASM was 9.33 cents due to escalating fuel prices, representing a 10.8% increase year over year. Some fuel hedging instruments are in place through 2007 that will help AirTran mitigate a portion of its fuel expenses. Fuel, however, will have a meaningful negative effect on the overall costs. The revenue environment is also expected to improve, as capacity comes out of the markets served by AirTran and overall fares are rising. For 2005, average yield per revenue passenger mile was up 4% over 2004, passenger revenue per available seat mile was 9.07 cents, up 8.1% year over year, and the load factor was 73.5%, an increase of 2.7 percentage points from 2004. Passenger revenue and enplanements for 2005 represented historical highs for AirTran.

The ratings also take into account that the company's already high financial leverage (using Moody's standard adjustments) will increase further as AirTran finances its aggressive growth strategy. During 2006, the company plans to take delivery of 18 B737's and 2 B717's increasing its total fleet to 125 aircraft (85 B717 and 20 B737s). AirTran has obtained either debt financing or operating lease arrangements for aircraft expected to be delivered through 2006. Additional B737s are expected to be delivered during 2007. To date, management has demonstrated ability to integrate the B737 into its fleet and continue to control costs. However, Moody's notes there the operational risks increase as the company continues to grow, including operating two separate fleet types, training for flight crew and maintenance, additional city pairs, and efforts to attract a different type of passenger than historically used AirTran service.

AirTran's record of maintaining adequate balance sheet liquidity is considered in support of the ratings. At December 31, 2005, unrestricted cash and short-term investments were approximately $371 million. It is Moody's expectation that the company will use a portion its balance sheet liquidity as it continues to expand its operations and then gradually begin to rebuild it

AirTran's rating could raised if growth in internally-generated cash flow (using Moody's standard adjustments) can be sustained to reduce the company's reliance on debt financing, and improve its key credit metrics such as EBIT to interest expense greater than 2x and retained cash flow to debt of greater than 10%. Downward pressure on the company's rating could occur if flat or declining operating cash flows increase the company's overall leverage and/or a substantial worsening to the operating environment were to occur. Moody's notes that the company continues to rely primarily on internally generated cash flow for liquidity, and negative external events affecting cash flow from operations could put downward pressure on the company's fundamental debt ratings.

AirTran Airways, Inc., and its parent, AirTran Holdings, 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
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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