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Rating Action:

Moody's affirms ratings of AMR; Caa1 CFR, outlook negative

19 Sep 2011

New York, September 19, 2011 -- Moody's Investors Service affirmed its ratings of AMR Corporation ("AMR"): Caa1 corporate family, Caa1 probability of default, B1 and B2 senior secured, Caa2 senior unsecured and all of its ratings assigned to the company's Equipment Trust Certificates ("ETCs") and all but one of its Enhanced Equipment Trust Certificates ("EETCs"). Moody's changed the Speculative Grade Liquidity ("SGL") rating to SGL-3 from SGL-2 and the rating of the A-1 tranche of the company's 2001-1 EETC to Caa1 from B2. The outlook is negative.

RATINGS RATIONALE

The change in outlook to negative reflects Moody's expectations that AMR will continue to demonstrate weak operating metrics over the medium term as debt maturities and needed investment in fleet modernization meaningfully exceed the operating cash flow that we anticipate the company will generate, resulting in an erosion of the company's liquidity profile. The outlook change also considers the pressure that the company's loss-making operations exert on credit metrics and the uncertainty of AMR's ability to timely achieve a cost structure that leads to sustained positive free cash flow and de-levering of the capital structure.

The downgrade of the Speculative Grade Liquidity rating anticipates that AMR will be hard pressed to achieve positive free cash flow generation over at least the next 12 months. The continuing high cost of jet fuel and potentially tepid growth in travel demand in upcoming quarters will constrain pressure on free cash flow generation, which was at a $1.1 billion deficit in the last 12 months to June 30, 2011. AMR's disadvantaged cost structure keeps it from achieving margins and operating cash flow at levels that are competitive with its U.S. airline peers. With few remaining unencumbered assets after completing the routes and slots financing in March 2011, we believe that AMR will increasingly rely on its unrestricted cash balance, $5.2 billion at June 30, 2011, to help meet a portion of the $3.1 billion of debt due through year-end 2012. Accordingly, we believe that the company's cash balance could settle below $4.0 billion before the end of 2012.

The Caa1 Corporate Family rating reflects the company's weak credit metrics profile and continuing negative free cash flow generation. Debt to EBITDA and EBIT to Interest approached ten times and 0.5 times, respectively, at June 30, 2011. Uncompetitive labor costs and the relative inefficiency of the fleet burden AMR with an inferior profit margin profile. Needed replacement of the fleet will sustain adjusted debt at high levels beyond the medium term. The long time needed to transform the fleet is likely to prevent marked improvement in operating earnings; keeping leverage elevated. The prospects for attaining a competitive labor cost structure also remain uncertain as does a sustained retreat of the price of jet fuel. The combination of these factors is likely to prevent AMR from strengthening credit metrics to levels indicative of a higher rating level. The Caa1 rating also considers that AMR should be able to fund deliveries of new aircraft as it has arranged financing for an overwhelming majority of the order-book, including sale leaseback transactions.

The downgrade of the rating on the A-tranche of the 2001-1 EETC reflects our estimate of a loan-to-value well in excess of 100% as the result of the recent change in this transaction's collateral. Fourteen aircraft, either Boeing B737-800s or B777-200ERs left the collateral pool of this EETC Series upon the maturity of the A-2 tranche earlier this year. Thirty-two late 1990's vintage McDonnell Douglas MD-80's, an aircraft which is becoming less desirable as fuel prices remain high, support the remaining tranches of this EETC. Liquidity facilities support each tranche, causing Moody's to affirm the Caa2 and Caa3 ratings on the B and C tranches, respectively, leaving these ratings equivalent to, or higher than our ratings on the company's various ETC's which do not benefit from liquidity facilities.

The ratings could be downgraded should AMR be unable to strengthen credit metrics from the June 30, 2011 levels. The inability to maintain unrestricted cash above $3.0 billion could also pressure the rating. Moody's anticipates that the pace of improvement in the metrics profile will be slow because it does not expect AMR to achieve significant cost reductions that would dramatically improve its profitability in upcoming quarters. Additionally, the cost of jet fuel is likely to remain elevated above $2.50 per gallon, preventing the company from experiencing some relief on this expense line item. Potential weaker demand could also challenge the industry, and AMR, to grow yields in upcoming quarters. Debt to EBITDA that remains above 8.0 times, EBIT to Interest sustained below 0.5 times or an EBITDA margin of less than 10.0% could result in a downgrade as could the per gallon cost of jet fuel being sustained above $3.50.

Demonstrated improvement in credit metrics relative to the levels at June 30, 2011 would be required for Moody's to consider returning the outlook to stable. Moody's would look for sustained positive free cash flow generation in excess of two percent of debt, Debt to EBITDA of less than 8.0 times and EBIT to Interest greater than 0.8 times.

The principal methodology used in rating AMR Corporation was the Enhanced Equipment Trust And Equipment Trust Certificates Industry Methodology published in December 2010 and Global Passenger Airlines Industry Methodology published in March 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Jonathan Root
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's affirms ratings of AMR; Caa1 CFR, outlook negative
No Related Data.
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