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Rating Action:

Moody's affirms Southwest Airlines' Baa1 senior unsecured ratings, changes rating outlook to stable

22 Apr 2021

New York, April 22, 2021 -- Moody's Investors Service ("Moody's") affirmed its Baa1 senior unsecured debt rating for Southwest Airlines Co. ("Southwest") and the A2 rating on the company's Series 2007-1 enhanced equipment trust certificates ("EETC"), Class A. Moody's also upgraded the rating on the company's Class B tranche of the Series 2007-1 EETC to Baa1 from Baa2. The ratings outlook was changed to stable from negative.

"Stabilizing the ratings outlook reflects Moody's view that the worst of the coronavirus pandemic is in the rear view mirror for Southwest Airlines," said Moody's Lead Analyst, Jonathan Root. "Southwest has a history of strengthening its market position after economic shocks, and we expect much of the same as the coronavirus' impacts on the US domestic carriers wane into 2022," continued Root. Southwest has the broadest and densest geographic network in the US domestic market. It maintained service across its domestic network during the depths of the pandemic and has or will commence service to 17 new destinations by the end of 2021.

In stabilizing the outlook, Moody's expects Southwest to sustain its excellent liquidity, maintaining more cash and marketable securities than funded debt into 2024. The company's stated minimum liquidity is $10 billion. Moody's also expects improving cash generation, with the company achieving breakeven or better operating cash flow in 2021, setting the stage for positive free cash flow in 2022.

RATINGS RATIONALE

The Baa1 senior unsecured rating reflects Southwest's leading position serving mainly the US domestic market; its historically conservative capital structure, with debt-to-EBITDA of 0.9x heading into 2020; and Moody's expectation that the company will maintain very strong liquidity. The Baa1 rating also reflects Moody's expectation that the company's financial performance and credit metrics will sequentially strengthen through 2022, with metrics in 2023 solidly representative of the Baa1 rating. Moody's belief that Southwest will prioritize debt retirement and that returns to shareholders will remain dormant through 2022 also support the Baa1 rating. Moody's continues to project that demand and revenues will approach 2019 levels by the end of 2023, and that sharper cost management and efficiencies created while managing the operations through the pandemic will support a meaningful recovery in profit margins by then.

The upgrade of the Class B EETC reflects the improved equity cushion as amortization has increased in the past 18 months as the final scheduled payment date in August 2022 approaches.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded after annual revenues and profit margins approach pre-pandemic levels. Revenue and operating margin were $22.4 billion and 13% in 2019. Debt-to-EBITDA of below 2x, annual free cash flow above $1.5 billion and sequential reduction of the debt incurred in 2020 could also support a ratings upgrade. With Moody's expectation of a sustained recovery of US domestic air travel demand through 2022, the potential for a downgrade is more limited during this period. The ratings could be downgraded if the aggregate of cash, short-term investments and revolver availability is sustained below $8 billion or if the Spring 2021 recovery in passenger demand stalls, sustaining negative daily cash flow. Negative free cash flow for 2022 or the restart of dividends and or share repurchases that delay the retirement of funded debt could also lead to a ratings downgrade. Lack of progress through 2022 in moving Debt-to-EBITDA towards below 3x, funds from operations + interest-to-interest towards 8x, and/or retained cash flow-to-debt towards 25% could also pressure the rating.

Changes in EETC ratings can result from any combination of changes in the underlying credit quality or ratings of the company, Moody's opinion of the importance of the aircraft collateral to the company's operations, and/or its estimates of current and projected aircraft market values, which will affect estimates of loan-to-value.

The methodologies used in these ratings were Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811, and Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125852 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

The following rating actions were taken:

Affirmations:

..Issuer: Southwest Airlines Co.

....Senior Secured Equipment Trust Class A, Affirmed A2

....Senior Unsecured Conv./Exch. Bond/Debenture, Affirmed Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Love Field Airport Modernization Corporation

....Senior Secured Revenue Bonds, Affirmed Baa1

Upgrades:

..Issuer: Southwest Airlines Co.

....Senior Secured Equipment Trust Class B, Upgraded to Baa1 from Baa2

Outlook Actions:

..Issuer: Southwest Airlines Co.

....Outlook, Changed To Stable From Negative

Southwest Airlines Co., (NYSE: LUV) based in Dallas, Texas, is a leading low-fare airline in the United States. Southwest operated more than 4,000 flights daily during peak periods, serving 103 destinations across the United States and ten additional countries before the coronavirus. Southwest remained the nation's largest carrier in terms of originating domestic passengers boarded in 2019. Revenue was $9 billion in 2020, down from $22.4 billion in 2019.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jonathan Root, CFA
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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