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Rating Action:

Moody's upgrades Southwest Airlines sr uns to Baa2; outlook stable

05 Aug 2014

Approximately $2.0 billion of rated debt affected

New York, August 05, 2014 -- Moody's Investors Service upgraded most of its ratings of Southwest Airlines Co. ("Southwest") debt, including the senior unsecured to Baa2 from Baa3, the five pass-through trust certificates ("PTCs") to Baa1, and the A and C tranches of the AirTran Airways Series 1999-1 Enhanced Equipment Trust Certificates (EETC), to A3 from Baa1 and to Baa3 from Ba1, respectively. Moody's affirmed the A3 and Baa3 ratings on Southwest Airlines' 2007-1 EETC ("2007-1"). The outlook is stable.

RATINGS RATIONALE

"The upgrade to Baa2 reflects expectations of further strengthening of the credit metrics, building on the improvements in cash flow, earnings and financial leverage that Southwest has achieved since the end of 2012" said Moody's Senior Credit Officer, Jonathan Root. "Moody's believes that Southwest is better positioned than it has been historically to manage the next cyclical downturn because of its lower funded debt, broader network and improved liquidity," continued Root. Southwest is now the highest rated airline, and Moody's believes the company's credit profile is unlikely to weaken meaningfully as long as the US airlines maintain their uniform focus on earning acceptable returns on capital.

The one notch upgrade of the PTCs to Baa1 is one notch above Southwest's senior unsecured rating. Older Boeing B737-700 aircraft secure these instruments. Moody's estimates the loan-to-value ("LTV"s) for the two transactions maturing within the next 24 months at about 60% and 70%, while the three subsequent maturities have estimated LTVs at between 115% and 150%. The upgrade of the AirTran Series 1999-1 EETC reflects that both tranches are guaranteed by Southwest. Two Boeing B717-200 aircraft that will be sub-leased to Delta Air Lines secure this financing. Moody's estimates the LTVs of this financing at between 50% and 60%. The affirmation of the ratings on the Southwest Series 2007-1 EETC reflects estimated LTVs of about 90% and 110% on the A (rated A3) and B (rated Baa3) tranches. The A tranche is rated two notches higher than Southwest's senior unsecured rating, reflecting the favorable structural elements of the transaction, but also the higher than anticipated LTV when compared with expectations for aircraft value. Sixteen B737-700s collateralize this transaction. The Baa3 rating on the B tranche considers the cross-subordination feature of the EETC; that could result in a lower recovery than senior unsecured under a liquidation scenario when the LTVs are at or above the estimated levels.

The stable outlook reflects Moody's expectation of sustained demand for US domestic air travel and a continuing focus by Southwest and its peers on earning acceptable returns on capital, which should prevent debilitating, wide-spread battles for market share.

The ratings could be upgraded if Southwest is able to sustain credit metrics above the medians of the Baa1 rating category while it grows its network, which will increase ASMs but not necessarily the fleet. Stronger metrics than the Baa1 medians is appropriate for a higher rating given the industry's exposure to the economic cycle. Moody's would look for Debt to EBITDA to be sustained below 2.5 times, FFO + Interest to Interest at about 7.0 times, Retained Cash Flow to Net Debt above 30% and/or an EBITDA margin at about 20%.

A ratings downgrade could occur if the company was to lose market share, measured as a meaningful decline in revenue passengers boarded during a period when boarded passengers at its US peers grows. Cost pressures, such as terms of still to be negotiated labor contracts that result in higher labor costs that lead to a more than 2.5% decline in operating margin could also pressure the rating. Returns to shareholders that result in an increase in funded debt or adjusted debt from increased reliance on operating leases to fund the order book could also pressure the ratings as could sustained weaker credit metrics, such as Debt to EBITDA that exceeds 3.5 times, FFO + Interest to Interest that approaches 5.0 times, Retained Cash Flow to Net Debt that approaches 20% or an EBITDA margin of less than 17%. The ratings could also be pressured if unrestricted cash was sustained below $2.0 billion.

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. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Southwest Airlines Co., based in Dallas, Texas, is a leading low-cost airline in the United States, and the 4th largest airline overall measured by revenue passenger miles. Based on the most recent data available from the U.S. Department of Transportation, Southwest is also the largest carrier in the United States measured by domestic onboard passengers and scheduled domestic departures. The company reported revenue of $18.15 billion for the twelve months ended June 30, 2014.

Upgrades:

..Issuer: AirTran Airways, Inc.

....Senior Secured Enhanced Equipment Trust Apr 1, 2017, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Apr 1, 2017, Upgraded to Baa3 from Ba1

..Issuer: Love Field Airport Modernization Corporation

....Senior Secured Revenue Bonds, Upgraded to Baa2 from Baa3

....Senior Secured Revenue Bonds Nov 1, 2015, Upgraded to Baa2 from Baa3

....Senior Secured Revenue Bonds Nov 1, 2016, Upgraded to Baa2 from Baa3

....Senior Secured Revenue Bonds Nov 1, 2017, Upgraded to Baa2 from Baa3

....Senior Secured Revenue Bonds Nov 1, 2018, Upgraded to Baa2 from Baa3

....Senior Secured Revenue Bonds Nov 1, 2019, Upgraded to Baa2 from Baa3

....Senior Secured Revenue Bonds Nov 1, 2020, Upgraded to Baa2 from Baa3

....Senior Secured Revenue Bonds Nov 1, 2021, Upgraded to Baa2 from Baa3

....Senior Secured Revenue Bonds Nov 1, 2022, Upgraded to Baa2 from Baa3

....Senior Secured Revenue Bonds Nov 1, 2028, Upgraded to Baa2 from Baa3

..Issuer: Southwest Airlines Co.

....Multiple Seniority Shelf, Upgraded to (P)A3 from (P)Baa1

....Multiple Seniority Shelf, Upgraded to (P)Baa2 from (P)Baa3

....Senior Secured Equipment Trust Jul 2, 2019, Upgraded to Baa1 from Baa2

....Senior Secured Equipment Trust Jan 2, 2021, Upgraded to Baa1 from Baa2

....Senior Secured Equipment Trust Jan 1, 2018, Upgraded to Baa1 from Baa2

....Senior Secured Equipment Trust Jul 1, 2016, Upgraded to Baa1 from Baa2

....Senior Secured Equipment Trust Jun 29, 2015, Upgraded to Baa1 from Baa2

....Senior Unsecured Regular Bond/Debenture Oct 1, 2014, Upgraded to Baa2 from Baa3

....Senior Unsecured Regular Bond/Debenture Dec 15, 2016, Upgraded to Baa2 from Baa3

....Senior Unsecured Regular Bond/Debenture Mar 1, 2027, Upgraded to Baa2 from Baa3

....Senior Unsecured Regular Bond/Debenture Mar 1, 2017, Upgraded to Baa2 from Baa3

Outlook Actions:

..Issuer: AirTran Airways, Inc.

....Outlook, Remains Stable

..Issuer: Southwest Airlines Co.

....Outlook, Remains Stable

Affirmations:

..Issuer: Southwest Airlines Co.

....Senior Secured Equipment Trust Aug 1, 2022, Affirmed A3

....Senior Secured Equipment Trust Aug 1, 2022, Affirmed Baa3

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.

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 P Jankowitz
Associate Managing Director
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 Southwest Airlines sr uns to Baa2; outlook stable
No Related Data.
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