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Rating Action:

Moody's upgrades Southwest Airlines ratings; senior unsecured to A3, stable outlook

Global Credit Research - 01 Jun 2017

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

No Related Data.
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