New York, June 01, 2017 -- Moody's Investors Service ("Moody's") upgraded its ratings of Southwest
Airlines Co. ("Southwest"): senior unsecured to A3 from Baa1;
enhanced equipment trust certificates (EETCs): Class A to A1 from
A2 and Class B to Baa1 from Baa2 and equipment trust certificates (ETCs)
to A2 from A3. The rating outlook is stable.
Upgrades:
..Issuer: Southwest Airlines Co.
....Multiple Seniority Shelf, Upgraded
to (P)A3 from (P)Baa1
....Enhanced Equipment Trust Certificates
(EETCs) Class A, Upgraded to A1 from A2
....Enhanced Equipment Trust Certificates
(EETCs) Class B, Upgraded to Baa1 from Baa2
....Equipment Trust Certificates (ETCs),
Upgraded to A2 from A3
....Senior Unsecured Regular Bond/Debenture,
Upgraded to A3 from Baa1
..Issuer: Love Field Airport Modernization Corporation
....BACKED Senior Secured Industrial Revenue
Bonds, Upgraded to A3 from Baa1
Outlook Actions:
..Issuer: Southwest Airlines Co.
....Outlook, Changed To Stable From
Positive
RATING RATIONALE
"The upgrade to A3 reflects Moody's expectation that Southwest
will continue to conservatively manage its capital structure, allowing
it to sustain credit metrics supportive of the A3 rating category,"
said Moody's Senior Credit Officer, Jonathan Root.
Southwest is a leader in the US domestic passenger air travel market and
has been profitable in each of the last 44 years. "Bags Fly
Free", "No Change Fees" and "Transfarency"
are unique attributes along with the folksy manner of its employees that
help enhance the brand and distinguish Southwest amongst its competitors.
These features will sustain Southwest's attractiveness to travelers
as it continues to grow its network and its leading position in the industry.
"Moody's believes that Southwest remains well positioned to manage the
next cyclical downturn or periods of higher fuel prices because of its
strong liquidity, manageable funded debt, typically competitive
if not lower fares and expanding network," continued Root.
"The power of the brand, combined with a strengthening network
should lead to relatively favorable traffic performance for Southwest
compared to most US airlines," added Root.
Southwest's leading share of the US domestic market in terms of
passengers boarded, the efficiencies of its point-to-point
network and its proficiency in airline operations contribute to its competitive
operating margins and support the A3 rating. The company achieves
relatively strong margins notwithstanding having the highest reported
labor cost as a percent of revenue of the US airlines. Moody's
anticipates that Southwest will hold about $3 billion of cash on
hand and that funded debt will remain below $3.5 billion
absent a recession that lowers fares by at least 7% with oil prices
of at least $55 per barrel. The rating considers that the
majority of free cash flow, which Moody's estimates at about
$1 billion per year in each of 2017 and 2018, will be used
to repurchase shares. However, share repurchases will not
regularly exceed free cash flow except from the deployment of excess cash
on hand.
The rating also reflects that as an almost entirely domestic carrier,
Southwest is not exposed to meaningful competition from international
low-cost or other long-haul carriers as are the US Big Three,
or the challenges that European carriers face in their markets.
Moody's anticipates Debt to EBITDA of about 1.5 times,
EBIT to Interest of more than 10 times and Retained Cash flow to Net Debt
of at least 60% into 2019, particularly with its forecast
of Brent below $60 through at least 2018. Metrics would
weaken with Brent prices sustained well above $70 per barrel without
substantial coverage from higher fares; however current metrics provide
sufficient cushion. Moody's estimates that EBITDA margin
would remain above 20%, Debt to EBITDA below 2.5 times
and EBIT to Interest above 5 times in high-oil price (Brent above
$75) or recessionary demand scenarios with lower oil prices,
levels mostly supportive of the A3 rating, particularly during a
trough in the cycle.
The stable outlook reflects Moody's expectation of 1) steady demand for
US domestic air travel, 2) Moody's forecast for Brent of below
$60 per barrel through 2018 and 3) the cushion in current credit
metrics that would absorb the effects of a weaker than expected operating
environment.
The upgrades of the EETC by one notch accompany the one notch upgrade
of the senior unsecured rating and reflect the positioning of these claims
versus the unsecured rating, the enhanced protections afforded to
the Class A by the liquidity facility and the benefit of cross-subordination.
There is no liquidity facility for the B-tranche. The ETC
ratings, which are one notch above the senior unsecured rating,
reflect the security interest in the specific aircraft these instruments
finance, which would provide for better recoveries than unsecured
creditors would realize under a default scenario.
The ratings could be downgraded if Southwest was to adopt less conservative
financial policies, such as sustaining Debt to EBITDA above the
low 2 x level, using debt to repurchase shares or holding less than
$2.5 billion of cash or $3.5 billion of liquidity.
EBIT to Interest sustained below 6.0 times or Retained Cash Flow
to Net Debt sustained below 40% could also pressure the ratings.
The prospects for further upgrades are limited.
Southwest Airlines Co., based in Dallas, Texas,
is a leading low-cost airline in the United States. Southwest
operates more than 3,900 flights a day during peak periods,
serving 101 destinations across the United States and eight additional
countries. Based on the U.S. Department of Transportation's
most recent data, Southwest remains the nation's largest carrier
in terms of originating domestic passengers boarded. The company
reported revenue of $20.4 billion in 2016.
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 2015. Please see the Rating
Methodologies 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 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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
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: 1 212 553 0376
Client Service: 1 212 553 1653
Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
