Moody's Investors Service downgraded the senior unsecured rating of United Airlines, Inc. (United) to Ba1 from Baa3 and left the rating under review for possible further downgrade. All other ratings of United and its parent, UAL Corporation, were downgraded as indicated below and remain on review for possible further downgrade. The rating review continues based on UAL Corp's proposed debt financed acquisition of US Airways Group and the additional financial stress that such a transaction (pending US Department of Justice approval) would entail. The ratings action was prompted by Moody's expectation of weak operating cash flow in the near term, the negative impact that the continued weak operating performance is likely to have on debt protection measurements, and the longer term impact of a high cost structure resulting from recent wage agreements. Acknowledged in the ratings is the company's strong route structure, brand name and global alliance, and the improvement in the system performance measures since the operational difficulties experienced in the third quarter of 2000. MOODY'S DOWNGRADES UNITED AIRLINES INC. SENIOR UNSECURED RATING TO Ba1 FROM Baa3
Ratings affected include:
United Air Lines, Inc.: Issuer rating and senior unsecured rating to Ba1 from Baa3; Bank Credit Facility to Ba1 from Baa3; Equipment Trust Certificates to Baa2 from Baa1;
Enhanced Equipment Trust Certificates:
Series 2000-1, Class A to Aa3 from Aa2, and Class B to A2 from A1
Series 2000-2, Class A to Aa3 from Aa2, Class B to A2 from A1 and Class C to A3 from A2
Shelf registration for senior secured debt, to (P) Baa2 from (P)Baa1; and senior subordinated debt confirmed at (P)Ba2;
Jets Equipment Trusts
Series 1994-A, Class A to A3 from A2, Class B to Baa2 from Baa1 and the junior class to Baa3 from Baa2
Series 1995-A, Class A to A2 from A1, Class B to Baa1 from A3, Class C to Baa2 from Baa1 and the junior class to Baa3 from Baa2
Series 1995-B, Class A to A2 from A1, Class B to Baa1 from A3, Class C to Baa2 from Baa1 and the junior class to Baa3 from Baa1
IRB's to Ba1
UAL Corporation: Shelf registration for senior unsecured debt to (P) Ba2 from (P)Ba1; subordinated debt to B1 from Ba3; and preferred stock, to "b1" from "ba3"
UAL Corporation Capital Trust I: preferred stock, to " b1" from "ba3"
United has experienced three quarters of financial losses which has produced a substantial deterioration in debt protective measures. The most recent earnings weakness is the result of increased costs combined with a decline in higher-yielding business travel, an important factor in United's overall profitability.
United's most recent wage settlements will substantially increase operating costs (labor up 22% year over year for the first quarter of 2001 on a decline in ASM's of 1%). United's earnings have already be effected by the agreed wage increases and the company has found it difficult, in the current economic environment, to pass on this increase in operating costs in the form of higher fares. Over time, it is probable that all major US airlines will see increased labor costs. However, as the first airline affected, United is at a competitive cost disadvantage leading to lower profitability.
Supporting the rating are United's increasingly competitive operating statistics, its strong route structure both in the US and around the world and the company's strong brand name. United experienced a period of operating difficulties in the third quarter of 2000 as a consequence or pilot negotiations, but has operationally recovered. The company continues to have, directly and through its powerful Star Alliance structure, one of the broadest and most extensive route structures in the world. United benefits from the combination of a strong presence in both the Atlantic and Pacific as well as the size and breadth of its presence in the US.
Moody's continuation of its review of United's ratings is based on a combination of concerns over continued weak operating performance and the company's intention to acquire US Airways in a cash transaction valued at $11.6 billion including assumed debt and operating lease obligations including a $4.3 billion cash component. The financial leverage of the combined entity and the cost and operational dislocations associated with the proposed merger are anticipated to be significant. Some of the financial impact of the initially announced structure could be reduced if United's agreement with AMR Corp, parent of American Airlines, Inc., to purchase certain of US Airways assets is implemented. Nevertheless, the acquisition as currently structured will leave United with a significantly weakened financial profile.
The delay in obtaining regulatory approval leads Moody's to conclude that approval of the merger will not be obtained under its current terms. The ultimate costs and benefits to United are highly dependent on the eventual merger terms but the integration of a major portion of US Airways primarily north-south east coast route structure with United's strong international and domestic east-west presence, could have substantial long term benefits for the combined entity. Moody's will review the financial and organizational aspects of the merger, if approved, for its impact, almost certainly to be negative in the intermediate term, and adjust the ratings of the company's debt accordingly.
UAL Corporation, headquartered in Elk Grove Village, Illinois is the parent of United Airlines, Inc. the second largest air carrier in the world.
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