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Rating Action:

Moody's upgrades American Airlines: CFR to Ba3, outlook stable

30 Jun 2015

New York, June 30, 2015 -- Moody's Investors Service upgraded most of its ratings of American Airlines Group, Inc. ("AAG"), including the Corporate Family Rating to Ba3 from B1, Senior Secured rating assigned to corporate obligations to Ba1 (LGD2) from Ba2 (LGD2), and Senior Unsecured to B1 (LGD5) from B3 (LGD5). Moody's also upgraded the majority of the senior tranches of the Enhanced Equipment Trust Certificate ("EETC") ratings and confirmed most of the ratings assigned to the junior tranche EETCs. The rating outlook is stable. Today's rating action resolves the review for upgrade initiated on 16 June 2015 following the implementation of Moody's change to its approach for standard adjustments for operating leases.

RATINGS RATIONALE

"The upgrade to Ba3 considers the benefits to American of key industry drivers including the expected sharply lower cost for jet fuel, a supportive outlook for passenger demand and ongoing capacity discipline in the pursuit of earning targeted returns on invested capital. Moody's expects these factors to contribute to strengthening of credit metrics through 2016 to levels reflective of the Ba-rating category," said Senior Credit Officer, Jonathan Root. The upgrade also reflects the reduction in adjusted debt due to changes in Moody's approach for capitalizing operating leases. Moody's reduced its debt adjustment to $14 billion from about $22.4 billion for AAG, providing a one turn decrease in Debt to EBITDA to 4.2 times at 2014 year end. AAG's adjusted debt is expected to be about $40 billion at 2015 year end.

The stable outlook reflects Moody's expectation that funded debt and adjusted debt are not likely to meaningfully decline because of the company's fleet replacement strategy, which will constrain free cash flow generation in upcoming years. AAG's annual capital investment of about $6.5 billion in 2015 and about $5.5 billion in 2016 will be one and one half to two times larger than those of its legacy peers. Moody's anticipates negative free cash flow for American in 2015 and positive free cash flow of between $1.0 billion and $1.5 billion in 2016, if the cost of fuel remains below $2.20 per gallon and passenger unit revenues do not meaningfully decline from current levels. Going forward, Moody's believes that more of positive free cash flow will likely fund returns to shareholders rather than debt reduction. The company's large order book will require higher capital investment than its peers after 2016. The larger investment and weaker free cash flow will likely lead to increases in funded debt, slowing the pace of improvement in AAG's credit metrics profile beyond 2016.

The Ba3 rating recognizes AAG's EBIT and EBITDA margins (Moody's adjusted basis) of about 20% and about 26%, respectively, which are competitive with those of Southwest Airlines and JetBlue and stronger than those of Delta and United. The large investment in new aircraft will support the company's profit margins in future years, given improvements in fuel efficiency and maintenance expense, helping to limit upward pressure on financial leverage with the increases in adjusted debt that Moody's anticipates. Moody's expects liquidity to remain very good, although it believes unrestricted cash and short-term investments is likely to decline towards about $4.0 billion starting in 2016, following completion of the integration of the airline operations.

Of the 17 A-tranche EETCs outstanding, ten have been upgraded by one notch in step with the upgrade of the Corporate Family rating and the remainder have been confirmed. Nine of the ten B-tranche EETCs have been confirmed and one upgraded and five of the six C-tranches have been confirmed and one upgraded. The ratings of the EETCs consider our estimates of the relative attractiveness or demand for particular aircraft models and vintages under a reorganization scenario, our estimates of loan-to-value and presence of cross-default and cross-collateralization across the transactions and the alignment of the LTVs with Moody's EETC notching grids found in our EETC rating methodology published in 2010. The actions on the EETCs reflect Moody's view that notwithstanding generally lower loans-to-value, older transactions with older vintage aircraft that lack cross-default or cross-collateralization have higher probabilities of default than more recent transactions that are crossed and are collateralized by younger vintage aircraft, some of which have significantly lower coupons.

A positive rating action could occur if AAG reduces debt to limit pressure on credit metrics when industry fundamentals weaken, including declines in demand or higher fuel prices that cannot be covered by higher fares. Maintaining unrestricted cash and availability on revolvers above $6.0 billion while adjusted debt remains above $35 billion following the completion of the merger integration could also support a positive rating action. A combination of Debt to EBITDA of less than 3.5 times, Funds from Operations + Interest to Interest of above 5 times and an EBITDA margin that is sustained near 25% could support an upgrade. Sustaining positive free cash flow that approaches 5% of debt, a majority of which is applied to debt reduction could also support a positive rating action as could applying any excess cash to the repayment of debt or buyout of aircraft leases rather than share repurchases. A negative rating action could occur if AAG's EBITDA margin approaches 17%. A sustained decline in demand that led to declines in yields of more than 8% with no corresponding offsets to costs could pressure the ratings as could aggregate liquidity (including availability on revolving credit facilities) of less than $5.0 billion. Debt to EBITDA that approaches 5.0 times, Funds from Operations + Interest to Interest that approaches 3.0 times, Retained Cash Flow to Net Debt that approaches 15%, or a sustained increase in the cost of jet fuel that is not offset by higher fares and or debt-funding of share repurchases could result in a negative rating action.

Changes in AAG's Corporate Family rating, in Moody's opinion of the importance of particular aircraft models to its network, or in Moody's estimates of aircraft market values, which will affect estimates of loan-to-value can result in changes to EETC ratings.

American Airlines Group is the holding company for American Airlines and US Airways. Together with regional partners, operating as American Eagle and US Airways Express, the airlines operate an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries.

The methodologies used in these ratings were Global Passenger Airlines published in May 2012 and Enhanced Equipment Trust And Equipment Trust Certificates published in December 2010. 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.

Upgrades:

..Issuer: America West Airlines, Inc.

....Senior Secured Enhanced Equipment Trust Series 2000-1G1, Upgraded to Baa2 from Baa3

..Issuer: American Airlines Group Inc.

.... Probability of Default Rating, Upgraded to Ba3-PD from B1-PD

.... Corporate Family Rating, Upgraded to Ba3 from B1

....Senior Unsecured Regular Bond/Debenture, Upgraded to B1 (LGD5) from B3 (LGD5)

..Issuer: American Airlines, Inc.

....Senior Secured Bank Credit Facility, Upgraded to Ba1 (LGD2) from Ba2 (LGD2)

....Senior Secured Enhanced Equipment Trust Series 2001-1A1, Upgraded to B1 from B2

....Senior Secured Enhanced Equipment Trust Series 2011-1A, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Series 2001-1B, Upgraded to Caa2 from Caa3

....Senior Secured Enhanced Equipment Trust Series 2001-1C, Upgraded to Caa2 from Caa3

..Issuer: HILLSBOROUGH COUNTY AVIATION AUTHORITY, FL

....Senior Secured Revenue Bonds, Upgraded to B1 (LGD5) from B3 (LGD5)

..Issuer: Indianapolis Airport Authority, IN

....Revenue Bonds, Upgraded to B1 (LGD5) from B3 (LGD5)

..Issuer: Pennsylvania Economic Dev. Fin. Auth.

....Senior Unsecured Revenue Bonds, Upgraded to B1 (LGD5) from B3 (LGD5)

..Issuer: Phoenix Industrial Development Authority, AZ

....Senior Unsecured Revenue Bonds, Upgraded to B1 (LGD5) from B3 (LGD5)

..Issuer: US Airways Group, Inc.

....Senior Unsecured Regular Bond/Debenture, Upgraded to B1 (LGD5) from B3 (LGD5)

..Issuer: US Airways, Inc.

....Senior Secured Bank Credit Facility, Upgraded to Ba1 (LGD2) from Ba2 (LGD2)

....Senior Secured Enhanced Equipment Trust Series 2000-3C, Upgraded to Ba3 from B2

....Senior Secured Enhanced Equipment Trust Series 2012-1C, Upgraded to Ba3 from B1

....Senior Secured Enhanced Equipment Trust Series 2012-2C, Upgraded to Ba3 from B1

....Senior Secured Enhanced Equipment Trust Series 2013-1A, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Series 2012-2A, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Series 2011-A, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Series 2010-1A, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Series 2012-1A, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Series 2001-1G, Upgraded to Baa1 from Baa2

Confirmations:

..Issuer: America West Airlines, Inc.

....Senior Secured Enhanced Equipment Trust Series 2001-1G, Confirmed at Ba1

....Senior Secured Enhanced Equipment Trust Series 1998-1B, Confirmed at Ba1

....Senior Secured Enhanced Equipment Trust Series 1998-1A, Confirmed at Baa1

....Senior Secured Enhanced Equipment Trust Series 1999-1G1, Confirmed at Baa3

..Issuer: American Airlines, Inc.

....Senior Secured Enhanced Equipment Trust Series 2011-1B, Confirmed at Ba1

..Issuer: US Airways, Inc.

....Senior Secured Enhanced Equipment Trust Series 2001-C, Confirmed at Ba3

....Senior Secured Enhanced Equipment Trust Series 2011-B, Confirmed at Ba1

....Senior Secured Enhanced Equipment Trust Series 2012-2B, Confirmed at Ba1

....Senior Secured Enhanced Equipment Trust Series 2010-1B, Confirmed at Ba1

....Senior Secured Enhanced Equipment Trust Series 1999-1C, Confirmed at Ba3

....Senior Secured Enhanced Equipment Trust Series 2013-1B, Confirmed at Ba1

....Senior Secured Enhanced Equipment Trust Series 2012-1B, Confirmed at Ba1

....Senior Secured Enhanced Equipment Trust Series 1998-1B, Confirmed at Ba1

....Senior Secured Enhanced Equipment Trust Series 1999-1A, Confirmed at Baa1

....Senior Secured Enhanced Equipment Trust Series 1999-1A2, Confirmed at Baa1

....Senior Secured Enhanced Equipment Trust Series 2000-3G, Confirmed at Baa1

....Senior Secured Enhanced Equipment Trust Series 2000-2G, Confirmed at Baa1

....Senior Secured Enhanced Equipment Trust Series 1998-1A, Confirmed at Baa1

....Senior Secured Equipment Trust Series 1999-1B, Confirmed at Ba1

Outlook Actions:

..Issuer: America West Airlines, Inc.

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

..Issuer: American Airlines Group Inc.

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

..Issuer: American Airlines, Inc.

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

..Issuer: US Airways Group, Inc.

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

..Issuer: US Airways, Inc.

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

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 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 rating action, and whose ratings may change as a result of this 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.

he following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

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

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
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

Robert Jankowitz
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 upgrades American Airlines: CFR to Ba3, outlook stable
No Related Data.
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