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Rating Action:

Moody's downgrades debt ratings of AMR Corp. -- corporate family to Caa1; Outlook Negative

01 Aug 2008

Approximately $7.6 billion of Debt Securities affected

New York, August 01, 2008 -- Moody's Investors Service downgraded the Corporate Family and Probability of Default Ratings of AMR Corp. and its subsidiaries ("AMR") to Caa1 from B2, and lowered the ratings of its outstanding corporate debt instruments and certain equipment trust certificates ("ETC's") and Enhanced Equipment Trust Certificates ("EETC's") of American Airlines, Inc. The company's Speculative Grade Liquidity Rating of SGL-3 was affirmed. The rating outlook is negative.

The rating actions reflect Moody's view of increased credit risk as large operating losses combined with particularly sizeable calls on cash for debt maturities and other requirements could erode the company's financial strength over the coming year. Despite some recent moderation in fuel costs and the benefit of capacity reductions and other management initiatives, Moody's believes that AMR could experience further losses during the near term. With $5.1 billion of unrestricted cash and marketable securities, an undrawn $255 million revolving credit facility, and considerable amounts of unencumbered assets AMR has flexibility to address the current challenging business environment. Yet, continued losses combined with material debt maturities between now and 12/31/09, large scheduled aircraft deliveries (some portion of which could be financed externally) and the potential for a significant increase in cash holdbacks by credit card processors, AMR's liquidity could be considerably reduced over the coming year. The rating action reflects Moody's view that the likelihood of continuing losses and eroding balance sheet strength at AMR are suggestive of an elevated risk profile that is consistent with a Caa1 rating at this time.

As the largest U.S. airline, AMR possesses important competitive advantages including its strong brand recognition, a large domestic and international route network, well established hub markets, and good alliance partners, including its participation in the oneworld alliance. AMR was one of only two major U.S. carriers that did not resort to a bankruptcy restructuring during the 2000 -- 2004 industry downturn. While it did achieve significant cost reductions during that time period, it continues to have a higher level of indebtedness than many of its peers and its non-fuel costs are above those of many domestic airlines partly due to fleet age and the full consolidation of its regional airline subsidiary, American Eagle. With a large portion of its narrow body fleet composed of less fuel efficient MD80 aircraft, AMR's earnings are particularly susceptible to the current environment of elevated fuel costs.

Like many airlines, AMR has announced aggressive actions to reduce mainline domestic capacity by approximately 5.7% in 2008 compared to 2007. This capacity reduction will involve the idling of over 30 MD80 aircraft which should help to reduce operating costs. The capacity reductions, in conjunction with similar cuts by other airlines should contribute to improved ticket pricing. AMR is also taking other actions to reduce costs, enhance productivity and improve passenger yields, and the company maintains a fuel hedging program that provides some short term benefit from fuel costs. Yet with a weakening economic outlook, Moody's is not certain that these actions will be sufficient to stem cash losses.

With the potential for further losses, and meaningful calls on cash for debt maturities and other needs, AMR's sizeable cash balance could begin to erode over the coming year. The company faces meaningful debt maturities for the balance of 2008 and an additional $1.2 billion during 2009. Capital spending requirements for new aircraft deliveries alone will likely exceed $1 billion over this time period, and because of the significant improved fuel efficiency offered by modern aircraft Moody's anticipates that AMR will continue to purchase new aircraft. Aircraft financing markets remain reasonably strong and should allow AMR to finance at least some portion of these deliveries. Nonetheless, capital spending could pose a call on cash over the coming year. The company could also face cash calls associated with planned workforce reductions and seasonal working capital requirements as the air traffic liability reverses, and becomes a cash use during the seasonally weaker winter months. AMR's credit card processing banks require the company to comply with a matrix of financial metrics that includes minimum unrestricted cash and a fixed charge coverage ratio. Although there is no holdback currently imposed by AMR's credit card processing banks, the credit card processors could impose holdbacks as soon as late this year. The holdback could increase further during 2009, which would pose a significant additional call on cash.

The SGL-3 Speculative Grade Liquidity Rating considers that with $5.1 billion of unrestricted cash and an undrawn $255 million revolving credit facility, AMR has meaningful financial flexibility to address the current challenging industry conditions. However, the prospects for this liquidity to erode over the course of the coming year, limit the rating at the SGL-3 level. AMR also has a sizeable amount of unencumbered assets and continues to pursue initiatives to enhance its liquidity through additional financings, sale leaseback transactions and asset sales. Yet, Moody's notes that AMR, which in the first quarter of 2008 announced plans to divest its American Eagle regional airline subsidiary, has placed this effort on hold until market conditions stabilize.

The rating actions on AMR's EETCs consider the underlying Caa1 Corporate Family rating, the continuing availability of liquidity facilities to meet interest payments for 18 months in the event of a default by AMR, and the asset values of specific aircraft which comprise the collateral pool for the EETCs. The ratings on the senior certificates of the 2001-2 and 2003-1 EETCs reflect that they are supported by policies issued by monoline insurance companies. With respect to ETC transactions, Moody's notes that in many cases these instruments are secured by MD80 aircraft whose values have deteriorated considerably as this aircraft type is likely to become a smaller part of airline fleets due to its relative cost inefficiencies.

The negative outlook considers the potential for continued deterioration in AMR's key credit metrics, such as interest coverage and leverage, due primarily to high fuel costs and a weak domestic demand environment. Although load factors remain strong and Moody's believes AMR may have the ability to obtain premium revenues due to its strong brand, fare increases are unlikely to fully offset the impact of elevated fuel costs. AMR's plan to reduce capacity in the fall should allow the company to raise fares in the near term but unless fuel costs decline the company is likely to continue to sustain further losses.

AMR's rating could be lowered if the company is unable to reverse operating losses and restore cash flow and financial metrics, or if weak operating conditions or increased holdback requirements from credit card processors further constrain available liquidity.

AMR's rating outlook could be stabilized with sustained increases to revenues or reduced non-fuel costs, or a sustained decline in fuel costs that increases cash flow from operations and enables the company to satisfy maturing debt and capital spending requirements from existing cash reserves and cash from operations.

Downgrades:

..Issuer: AMR Corporation

....Probability of Default Rating, Downgraded to Caa1 from B2

....Corporate Family Rating, Downgraded to Caa1 from B2

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to Caa2 from Caa1

....Senior Unsecured Medium-Term Note Program, Downgraded to Caa2 from Caa1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2 from Caa1

....Senior Unsecured Public Income Notes, Downgraded to Caa2 from Caa1

....Senior Unsecured Shelf, Downgraded to (P)Caa2 from (P)Caa1

..Issuer: Alliance Airport Authority, Inc.

....Revenue Bonds, Downgraded to Caa2 from Caa1

..Issuer: American Airlines 1988-A Grantor Trust

....Senior Secured Equipment Trust, Downgraded to Caa1 from B2

..Issuer: American Airlines, Inc.

....Senior Secured Bank Credit Facility, Downgraded to B2 from Ba3

....Pass Through Certificates, Series 1999-1

..........Class A1 Certificates, Downgraded to Ba2 from Baa2

..........Class A2 Certificates, Downgraded to Ba2 from Baa2

..........Class B Certificates, Downgraded to B2 from Ba3

.....Pass Through Certificates, Series 2001-1

..........Class A1 Certificates, Downgraded to B1 from Ba1

..........Class A2 Certificates, Downgraded to B1 from Ba1

..........Class B Certificates, Downgraded to Caa1 from B1

..........Class C Certificates, Downgraded to Caa2 from B3

.....Pass Through Certificates, Series 2001-2

..........Class A1 Certificates, Downgraded to Ba1 from Baa2

..........Class A2 Certificates, Downgraded to Ba1 from Baa2

..........Class B Certificates, Downgraded to Ba3 from Baa3

.....Secured Global Notes, spare parts transaction

..........Class A Certificates, Downgraded to Ba3 from Ba1

.....Secured Notes, spare parts transaction

..........Class B Certificates, Downgraded to B3 from B1

.....Series 2005-1 Pass Through Certificates

..........Class G, Downgraded to Baa3 from Baa1

..........Class B, Downgraded to B1 from Ba2

....Senior Secured Equipment Trust, Downgraded to range of Caa2 to Caa1 from range of Caa1 to B1

....Senior Secured Shelf, Downgraded to (P)B2 from (P)Ba3

..Issuer: Chicago O'Hare International Airport, IL

....Revenue Bonds, Downgraded to Caa2 from Caa1

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 from Caa1

..Issuer: Dallas-Fort Worth Intl. Airp. Fac. Imp. Corp.

....Revenue Bonds, Downgraded to Caa2 from Caa1

....Senior Secured Revenue Bonds, Downgraded to Caa2 from Caa1

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 from Caa1

..Issuer: Dallas-Fort Worth TX, Regional Airport

....Revenue Bonds, Downgraded to Caa2 from Caa1

..Issuer: New Jersey Economic Development Authority

....Revenue Bonds, Downgraded to Caa2 from Caa1

..Issuer: New York City Industrial Development Agcy, NY

....Revenue Bonds, Downgraded to Caa2 from Caa1

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 from Caa1

..Issuer: Puerto Rico Ind Med&Env Poll Ctl Fac Fin Auth

....Revenue Bonds, Downgraded to Caa2 from Caa1

..Issuer: Puerto Rico Ports Authority

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 from Caa1

..Issuer: Raleigh-Durham Airport Authority, NC

....Revenue Bonds, Downgraded to Caa2 from Caa1

..Issuer: Regional Airports Improvement Corporation, CA

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 from Caa1

..Issuer: Tulsa OK, Municipal Airport Trust (Ttees of)

....Revenue Bonds, Downgraded to Caa2 from Caa1

....Senior Secured Revenue Bonds, Downgraded to Caa2 from Caa1

....Senior Unsecured Revenue Bonds, Downgraded to Caa2 from Caa1

Other Changes:

..Issuer: AMR Corporation

....Senior Unsecured Conv./Exch. Bond/Debenture, to LGD5, 81% from LGD5, 83%

....Senior Unsecured Medium-Term Note Program, to LGD5, 81% from LGD5, 83%

....Senior Unsecured Regular Bond/Debenture, to LGD5, 81% from LGD5, 83%

.....Senior Unsecured Public Income Notes, to LGD5, 81% from LGD5, 83%

....Senior Unsecured Shelf, to LGD5, 81% from LGD5, 83%

..Issuer: Alliance Airport Authority, Inc.

....Revenue Bonds, to LGD5, 81% from LGD5, 83%

..Issuer: American Airlines, Inc.

....Senior Secured Bank Credit Facility, to LGD2, 27% from LGD3, 30%

..Issuer: Chicago O'Hare International Airport, IL

....Revenue Bonds, to LGD5, 81% from LGD5, 83%

....Senior Unsecured Revenue Bonds, to LGD5, 81% from a range of 83 - LGD5 to 82 - LGD5

..Issuer: Dallas-Fort Worth Intl. Airp. Fac. Imp. Corp.

....Revenue Bonds, to LGD5, 81% from LGD5, 83%

....Senior Secured Revenue Bonds, to LGD5, 81% from LGD5, 83%

....Senior Unsecured Revenue Bonds, to LGD5, 81% from LGD5, 83%

..Issuer: Dallas-Fort Worth TX, Regional Airport

....Revenue Bonds, to LGD5, 81% from LGD5, 83%

..Issuer: New Jersey Economic Development Authority

....Revenue Bonds, to LGD5, 81% from LGD5, 83%

..Issuer: New York City Industrial Development Agcy, NY

....Revenue Bonds, to LGD5, 81% from LGD5, 83%

....Senior Unsecured Revenue Bonds, to LGD5, 81% from LGD5, 83%

..Issuer: Puerto Rico Ind Med&Env Poll Ctl Fac Fin Auth

....Revenue Bonds, to LGD5, 81% from LGD5, 83%

..Issuer: Puerto Rico Ports Authority

....Senior Unsecured Revenue Bonds, to LGD5, 81% from LGD5, 83%

..Issuer: Raleigh-Durham Airport Authority, NC

....Revenue Bonds, to LGD5, 81% from LGD5, 83%

..Issuer: Regional Airports Improvement Corporation, CA

....Senior Unsecured Revenue Bonds, to LGD5, 81% from LGD5, 83%

..Issuer: Tulsa OK, Municipal Airport Trust (Ttees of)

....Revenue Bonds, to LGD5, 81% from LGD5, 83%

....Senior Secured Revenue Bonds, to LGD5, 81% from LGD5, 83%

....Senior Unsecured Revenue Bonds, to LGD5, 81% from LGD5, 83%

Outlook Actions:

..Issuer: AMR Corporation

....Outlook, Changed To Negative From Rating Under Review

..Issuer: American Airlines 1988-A Grantor Trust

....Outlook, Changed To Negative From Rating Under Review

..Issuer: American Airlines, Inc.

....Outlook, Changed To Negative From Rating Under Review

AMR Corp. and its principal subsidiary American Airlines, Inc. are based in Fort Worth, Texas.

New York
George Godlin
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades debt ratings of AMR Corp. -- corporate family to Caa1; Outlook Negative
No Related Data.
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