Moody's Investors Service placed the debt ratings of US Airways Group and its subsidiaries under review for possible upgrade, and the ratings of UAL Corporation and its subsidiaries under review for possible downgrade following today's announcement that UAL has agreed to acquire US Airways in a cash transaction valued at $4.3 billion ($11.6 billion including assumed debt and operating lease obligations). The rating actions consider the potential benefits for US Airways debtholders, if US Airways becomes part of the larger UAL group, including revenue and cost synergies in its domestic east coast network, access to the greater Star Alliance for international traffic, and potential implicit or explicit support for existing US Airways obligations. In reviewing UAL Corporation's ratings for potential downgrade, Moody's noted the potential enhancements to United's route system and the opportunities for revenue and cost synergies. However, the rating agency also considered the significant increase in financial leverage that will result from the transaction and the considerable challenges facing management in integrating the two systems.MOODY'S REVIEWS DEBT RATINGS OF US AIRWAYS GROUP FOR POSSIBLE UPGRADE (SENIOR AT B3), AND RATINGS OF UAL CORP. FOR POSSIBLE DOWNGRADE (SENIOR AT Baa3) FOLLOWING PROPOSED MERGER ANNOUNCEMENT; COMMENTS ON IMPLICATIONS FOR HUB AIRPORT RATINGS
In its reviews, Moody's will focus on the form that the proposed transaction will take and the regulatory hurdles that must be overcome before the transaction can be consummated. The review will also consider the capital structure of the combined entities, including the increased debt burden at UAL resulting from the funding of the acquisition, as well as the treatment of existing US Airways obligations within the new group. The review will also assess the opportunities for revenue and cost synergies from the merger, the outlook for financial returns and cash flow generation by the new group, and the resulting impact on future debt protection measurements. It is anticipated that debt protection measures in the combined entity could initially be less favorable than those currently seen at United, but should improve over time as the benefits of integration are achieved.
Moody's said that the acquisition is subject to approval by US Airways shareholders as well as the appropriate regulatory authorities. In this regard, United plans to divest significant assets to maintain and enhance airline competition on routes into and out of Washington DC. The merged company will have a route structure substantially larger than either of United or US Airways alone and should have opportunity to achieve considerable revenue synergies. On the east coast, primarily north-south routes of US Airways are highly complimentary to United's strength in east-west traffic and its Pacific, and Latin American routes. US Airways is not a member of a major alliance and the opportunity to join the Star Alliance could provide benefits both to US Airways route profitability and to that of the alliance as a whole. It is unclear what the level of cost synergies will be at the combined entity. Some savings may come from redundant facilities and reduced overheads, but because the companies' route structures are highly complimentary, the magnitude of cost synergies may be more limited. Moreover, the integration of personnel, fleet and systems could be a costly and extended process. Labor relations will be a key issue in a successful merger, as both companies have experienced difficulties in this area, and United remains in negotiations with labor as to future contracts.
Moody's considers this action to be a continuation of the actual and virtual consolidation of the airline industry that has been accomplished through mergers and alliances over the past decade. The rating agency will assess the broader implications of this transaction, including the potential for competing bids, further consolidation among other carriers, and overall higher levels of event risk and uncertainty in the industry during the near term.
The ratings under review for possible upgrade are:
US Airways, Inc.: Issuer rating, B3; senior unsecured ratings, B3; pass through certificates, Ba3; All enhanced equipment trust certificate transactions, ratings ranging from A2 to Ba2; Bank Credit Facility, B1; Shelf registration for senior unsecured debt, (P)B3, for senior secured debt, (P)Ba3, and for senior subordinated debt, (P)Caa1; IRBs, B3.
Piedmont Aviation: Pass through certificates, Ba3, IRBs, B3.
US Airways Group, Inc.: Senior Implied Rating, B2; Preferred stock "ca"; shelf registration for senior unsecured debt, (P)Caa2; for subordinated debt, (P)Caa3; for preferred stock, (P)"ca."
The ratings under review for possible downgrade are:
UAL Corporation: Shelf registration for senior unsecured debt (P)Ba1; subordinated debt, Ba3; and preferred stock, "ba3"
United Air Lines, Inc.: Issuer rating, Baa3; Senior unsecured ratings, Baa3; Bank Credit Facility, Baa3; Equipment Trust Certificates, Baa1; Shelf registration for senior secured debt, (P)Baa1; and senior subordinated debt, (P)Ba2; All enhanced equipment trust certificate transactions, ratings ranging from Aa2 to A1; Jets Equipment Trusts series 1994 and 1995, ratings ranging from A1 to Baa2
UAL Corporation Capital Trust I: preferred stock, "ba3"
Implications for Airport Ratings:
Despite the complimentary route structures, a combined UAL/US Airways calls into question the future scope of operations of the new airline at their major hub airports, particularly US Airway's hubs in Charlotte, Pittsburgh and Philadelphia. While United has identified a number of new domestic and international flights to be operated from each of these airports, it is likely that there will be realignment of competing services between key markets. Consequently, in Moody's opinion, the proximity of the airports in Charlotte (rated A3), Washington Dulles (rated A1), Allegheny County-Pittsburgh (rated Baa1) and Philadelphia (rated A3) could lead to changes in traffic patterns which either enhance or diminish the roles of these facilities over the near term. Moody's will continue to monitor the developments with respect to the proposed transaction and revise our rating outlooks on these airports as warranted.
US Airways Group, Inc., with 1999 revenues of $8.6 billion, is a major US carrier headquartered in Arlington, Virginia. UAL Corporation, headquartered in Elk Grove Village, Illinois had 1999 revenues of $18 billion and is the parent of United Airlines, Inc. the largest air carrier in the world.
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