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Announcement:

Moody's changes All Nippon Airways' rating outlook to positive

 The document has been translated in other languages

Global Credit Research - 21 Dec 2010

JPY 30 billion of debt affected

Tokyo, December 21, 2010 -- Moody's Japan K.K. has changed to positive from stable its outlook for the Ba2 senior unsecured rating of All Nippon Airways Co., Ltd. (ANA).

The change in outlook reflects Moody's view that ANA's performance and financial leverage will improve because of an increase in demand and reductions in costs.

It also incorporates Moody's expectation that ANA's strengthened position in the domestic market -- which is less volatile than the international passenger service -- will continue, thereby supporting performance stability.

Moody's notes that the company in October raised its operating profit forecast for FYE3/2011 to JPY70 billion from its original JPY42 billion.

ANA's passenger numbers in 1H FYE3/2011 (April to September 2010) increased by 3.7% for domestic travel and by 19% for international travel from a year ago, given the general recovery in demand and a shift from Japan Airlines (JAL, unrated by Moody's), which is in bankruptcy but continues to fly.

Moody's further considers that expansions at the two airports serving Tokyo will boost operating revenues. Both are operating at full capacity with a limited number of landing slots.

So far, ANA cut costs by about JPY about 100 billion in FYE3/2010 and is aiming for another JPY 86 billion during FYE3/2011 on a consolidated basis.

In addition, its rating incorporates the Japanese market's limited degree of competition and protected nature based on the high tax revenues and duties which the government receives from Japanese airlines, including ANA.

Moody's notes that, relative to its international peers, ANA's profitability is low because of the extremely high duties -- such as the fuel tax and landing and navigation fees -- payable to the government.

And financial leverage is high due to its high level of capital expenditure for fleet reprogramming in view of the expansion of Tokyo's two major international airports in 2010.

But, Moody's believes that these investments may improve operating efficiency and profitability over the medium term, although they may also constrain financial flexibility. Moody's expects ANA's financial profile will strengthen gradually.

At the same time, the company will continue to face volatility in exchange rates, fuel prices, and customer demand. Over the longer term, the entry of low cost carriers and the expectation of a financially sounder JAL will present challenges.

Moody's Ba2 senior unsecured rating on ANA also reflects the company's stable relationships with its main creditor banks as well as its important economic and policy role. This situation results in the company's rating being two notches higher than it would otherwise be.

Accordingly, the senior unsecured rating of Ba2 considers the combined effect of 1) a two-notch uplift from the support system, which is one of the regional rating factors in Japan, as stated in the above paragraph, and 2) one-notch down due to the presence of a high level of secured debt.

For a rating upgrade, financial leverage needs to improve. Upward rating pressure could emerge if ANA's earnings and cash flow continue to improve as a result of further rationalization and cost cuts, and an increase in demand due to the airport expansions. The result is improved financial leverage, such that adjusted debt/capitalization is approaching 70% and adjusted debt/EBITDA is below 5.0x.

The rating could come under downward pressure if competition substantially increases, or if ANA's performance deteriorated. Failure to de-leverage as expected could also pressure the ratings. In such a situation, Moody's would look for EBITDA margin below 12% for 18-24 months, adjusted debt/capitalization around 80%, and Debt/EBITDA above 7.0x on a sustained basis.

Moody's last rating action on ANA was taken on November 18, 2009, when the rating was downgraded to Ba2 from Baa3.

The principal methodology used in rating ANA was Moody's "Global Passenger Airlines" published on September 30, 2010, and available on www.moodys.co.jp.

Headquartered in Tokyo, All Nippon Airways Co., Ltd., is Japan's second-largest airline by revenue, with domestic and international passenger and cargo and mail operations, and travel services. Its total revenue for FYE3/2010 was JPY 1.23 trillion.

Tokyo
Mina Sawamura
Asst Vice President - Analyst
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Shinsuke Tanimoto
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's changes All Nippon Airways' rating outlook to positive
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