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Rating Action:

MOODY'S LOWERS RATINGS OF ALASKA AIRLINES, INC. (SR. UNSECURED SHELF TO (P)Ba3); CONTINUES REVIEW FOR POSSIBLE DOWNGRADE

19 Sep 2001
MOODY'S LOWERS RATINGS OF ALASKA AIRLINES, INC. (SR. UNSECURED SHELF TO (P)Ba3); CONTINUES REVIEW FOR POSSIBLE DOWNGRADE

Approximately $300 Million of Debt Securities Affected.

New York, September 19, 2001 -- Moody's Investor's Service lowered the debt ratings of Alaska Airlines, Inc. ( Senior Unsecured Shelf to (P) Ba3 from (P) Baa3) and Alaska Airlines Group (Senior Unsecured Shelf to (P) B1 from (P) Ba2). The rating action reflects the increasing business and financial risks facing the company in the aftermath of last week's terrorist attacks in the United States. The ratings remain on review for further possible downgrade.

The downgrade reflects Moody's expectation that last week's events will result in severe operating and financial burdens for Alaska and the rest of the airline industry, despite the possibility of any initiative on the part of Congress to provide some form of relief to the sector. During the days immediately following the attack, the industry lost significant revenues that will not be recouped. Moreover, we expect that carriers will have to shoulder a much higher cost burden in connection with increased security measures. Moody's also anticipates that intermediate-term business and leisure travel will decline significantly. These factors will result in a material erosion in the operating environment for the industry, and will further depress its already strained cash generating characteristics and financial flexibility. Consequently, we believe that the ongoing credit quality of Alaska and other U.S. carriers will be weaker than in the past, despite any possible Federal assistance program for the industry. Although Moody's expects that some type of Federal assistance program will be enacted, its timing and magnitude remain uncertain.

Moody's review of Alaska's ratings will focus on: 1) the degree to which future developments will erode the industry's revenue outlook or raise its cost structure; 2) the ability of Alaska to protect its relative competitive position and restructure its operating model in the face of new industry fundamentals; 3) the cash flow, liquidity and financial flexibility of the company over the near term; and, 4) the size and scope of any Congressional assistance program.

In response to the eroding outlook for the industry, most carriers have announced plans to significantly reduce their employment levels and flight schedules. Moreover, it is likely that some carriers, in the absence of an effective government bail-out plan, could seek bankruptcy protection during the near term. Moody's expects that both of these developments would have a highly negative impact on the value of used aircraft, particularly older planes that are more expensive to operate. These developments will also erode the level of asset protection afforded to the holders of Enhanced Equipment Trust Certificates (EETC). Holders of senior EETC tranches would have a narrower level of protection against loss, and the holders of more junior tranches would be much more likely to experience significant losses as aircraft are liquidated. Consequently, Moody's ratings of EETCs and its evaluation of the expected loss exposure of various classes of certificate holders, will be affected by the outlook for the industry's operating fundamentals and by the potential erosion in the value of aircraft.

Alaska Airlines benefits from its strong position in its primary markets (Seattle and Alaska). In the Alaska market, a great deal of travel by air is less discretionary than it is in other parts of the US, and may well be less affected by current consumer concerns over air travel. More questionable are the high frequency routes that the company flies on North South routes on the West Coast of the US. Some of these routes, to Mexico for example, are will remain dependent on continued leisure demand. Scheduled flights may have to be reduced on some routes to major cities if demand does not return to previous levels. Horizon Air, the company's regional subsidiary, is not as well positioned as the company flies relatively short stage lengths, and consumers have the option to choose other forms of transportation. Alaska Airlines' liquidity position is strong as almost all of the company's future aircraft deliveries are supported by committed funding. However, as with the remainder of the industry, Alaska must quickly move to adjust its flying to the new levels of demand, and reduce its costs to a level which generates positive cash flow.

Ratings lowered and remaining under review for possible further downgrade are:

Alaska Airlines, Inc.:

Senior Unsecured Shelf from (P) Baa3 to Ba3

Senior Secured Shelf from (P) Baa1 to Ba1

Equipment Trust Certificates from Baa1 to Ba1

Alaska Air Group:

Senior Unsecured Shelf from (P) Ba2 to B1

Subordinated Shelf from (P) Ba3 to B3

Convertibles Subordinated Debentures from Ba3 to B3

Alaska Airlines and Alaska Air Group are headquartered in Seattle, Washington.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

New York
Richard Bittenbender
VP - Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

No Related Data.
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