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23 Jul 2008
Moody's downgrades ratings of US Airways -- corporate family to Caa1; Outlook Negative
Approximately $2.1 billion of Debt Securities affected
New York, July 23, 2008 -- Moody's Investors Service downgraded the Corporate Family and Probability
of Default Ratings of US Airways Group, Inc. ("US Airways")
to Caa1 from B3 and lowered the ratings of its outstanding corporate debt
instruments and certain Enhanced Equipment Trust Certificates ("EETC").
Moody's lowered the Speculative Grade Liquidity Assessment to SGL-4
from SGL-3. The rating outlook is negative.
The rating actions were prompted by the expectation that US Airways'
financial performance will remain under pressure and that its liquidity
profile could deteriorate as a result of the difficult operating environment
facing the U.S. airline industry. Despite the recent
moderation in fuel costs, Moody's believes the environment
will continue to be characterized by sustained high fuel costs and a weakening
domestic economy that precludes adequate pass-thru of rising costs
in ticket prices. US Airways reported a net loss (excluding special
items) of $101 million for the second quarter of 2008, a
sharp decline from a profit of $261 million in 2007, primarily
due to the effects of higher fuel costs. Absent a significant improvement
in its ability to recover fuel costs in ticket pricing, US Airways
will continue to incur losses that will erode its financial profile.
Moody's also notes that US Airway's non-fuel costs
are higher than those of a number of other domestic airlines partly due
to fleet age and the full consolidation of a regional airline subsidiary.
The benefits of the merger between US Airways and America West Airlines,
which have not yet been fully realized, continue to represent an
opportunity for non-fuel cost savings.
US Airways has initiated a number of actions to more effectively control
costs, including increasing its fuel hedges, planned capacity
cuts, workforce reductions, and other changes in its operations.
Yet even with these initiatives, a combination of deteriorating
economic conditions and sustained high fuel costs are likely to preclude
a return of financial metrics supportive of a rating above the Caa range
in the near term. Absent an improvement in the operating environment,
sustained cash operating losses, in conjunction with scheduled debt
maturities and capital expenditures, could cause a material deterioration
in the company's cash balance over the coming year.
The SGL-4 reflects a weakening liquidity profile. US Airways
$2.8 billion of cash and investments at June 30, 2008
($2.3 billion of which was unrestricted) provides important
near term flexibility, but could erode rapidly over the coming months.
The company has financed its 2008 aircraft deliveries and is actively
pursuing initiatives to enhance its liquidity through additional financings,
sale leaseback transactions and reduced capital spending. Absent
full effectiveness of these liquidity initiatives, continuing losses
due to sustained high fuel costs could meaningfully decrease the cash
balance during the seasonally weaker winter months, when air traffic
liability will reverse, and become a use of cash. US Airways'
credit card processing banks have a credit card holdback to 25%
of unused credit card receivables and under certain circumstances could
increase this amount further, which would increase US Airways'
cash requirements. As well, the company's term loan
facility requires US Airways to maintain unrestricted cash and equivalents
of not less than $1.25 billion, with not less than
$750 million of that amount held in cash control accounts,
which constrains financial flexibility.
The rating actions on US Airways' EETCs consider the underlying
Corporate Family rating of US Airways, the continuing availability
of liquidity facilities to meet interest payments for 18 months in the
event of a US Airways default, and the asset values of specific
aircraft which comprise the collateral pool for the EETCs. The
downgrades on the ratings on the junior certificates of the 1998-1
and 1999-1 EETCs reflect that the aircraft that secure the EETCs
are generally older aircraft, which may make their values more susceptible
to volatility if current market conditions persist.
The negative outlook considers the potential for continued deterioration
in US Airways' key credit metrics, such as interest coverage
and leverage during 2008, due primarily to high fuel costs and a
weak domestic demand environment. Although load factors remain
strong, fare increases are unlikely to fully offset the impact of
elevated fuel costs. US Airways' 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
US Airways' 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.
US Airways' 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.
..Issuer: Hillsborough County Aviation Authority,
....Senior Secured Revenue Bonds, Downgraded
to Caa3 from Caa2
..Issuer: Indianapolis Airport Authority, IN
....Revenue Bonds, Downgraded to Caa3
..Issuer: Phoenix Industrial Development Authority,
....Senior Unsecured Revenue Bonds,
Downgraded to Caa3 from Caa2
..Issuer: US Airways Group, Inc.
....Probability of Default Rating, Downgraded
to Caa1 from B3
....Speculative Grade Liquidity Rating,
Downgraded to SGL-4 from SGL-3
....Corporate Family Rating, Downgraded
to Caa1 from B3
....Senior Secured Bank Credit Facility,
Downgraded to B3 from B2
..Issuer: US Airways, Inc.
....Ser. 1998-1 Pass Through
C Certificates, Downgraded to Caa1 from B3
.....Ser. 1999-1 Pass
C Certificates, Downgraded to Caa1 from B3
US Airways Group, Inc., based in Tempe, Arizona,
through its subsidiaries operates the 5th largest airline in the U.S.
with service throughout the U.S. as well as Canada,
the Caribbean, Latin America and Europe.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
No Related Data.
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