Dépêches

Fitch Rates US Airways' Proposed 2012-1 EETC Class C Certificates 'B'

Dépèche transmise le 30 avril 2012 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'B' rating to US Airways Inc's (US Airways) proposed $118.6 million of series 2012-1 class C pass-through certificates (C-tranche) with an expected maturity of October 2015.

The proceeds of this offering, along with the proceeds of the class A and B certificates will be used to acquire equipment notes (the notes) issued by US Airways ('B-'/Stable Outlook) and secured by 12 new Airbus A321-200 aircraft scheduled for delivery between September 2012 and March 2013 and two currently owned A321-200s (delivered in 2009). Proceeds from this transaction will initially be held in escrow and deposited with the designated Depository, Natixis S.A. ('A+/F1+'/Negative Outlook) and withdrawn to purchase the notes as the aircraft are financed upon delivery. The new delivery aircraft will replace older, less fuel efficient aircraft which US Airways is retiring.

US Airways' payment obligations under these notes will be fully and unconditionally guaranteed by US Airways Group, Inc. (LCC). A full list of LCC and US Airways Inc.'s corporate ratings are listed at the end of the release.

The rating of 'B' on the C-tranche is a modest one-notch uplift from US Airways' 'B-' IDR, as Fitch views the underlying risk of the most junior tranche to be most closely aligned to the airline's default ratings. Like the senior tranches, the C-tranche benefits from Section 1110 (which effectively lowers the probability of default compared to LCC's PD in Fitch's view), but it lacks the credit support from a liquidity facility (unlike the A and B tranches). Collateral coverage through the most subordinate tranche is considered weak if any, which combined with no liquidity facility supports the lower rating compared to the B-tranche rated 'BB-'.

Each note will be fully cross-collateralized, and all indentures will be fully cross-defaulted from the date of the issuance of each applicable note. Fitch believes these provisions which are standard enhancements of the modern EETC template, significantly increase the likelihood that US Airways would affirm these notes and the underlying aircraft, and continue to make payments on the certificates in a potential bankruptcy scenario. Taken together, these provisions treat all the aircraft as one pool of assets as the collateral supporting this transaction, effectively limiting LCC's ability to 'cherry-pick' which aircraft to affirm or reject in a potential bankruptcy restructuring.

With 14 aircraft, the size of the collateral pool is slightly bigger than the US Airways 2010-1 and 2011-1 EETCs but modest compared to some EETCs issued by other carriers. The aircraft will represent 4% of LCC's narrowbody fleet. The collateral in this transaction with only one aircraft type is also less diverse than US Airways' recent deals which included a mix of single-aisle (both A320 and A321) and twin-aisle (A330) aircraft types. The lack of diversity is mitigated by the high Affirmation Factor for this transaction. The A320 family is the only narrowbody fleet for US Airways and forms the backbone of the carrier's domestic focused route network. US Airway's recent deliveries and pending orders within the A320 family have primarily been for A321-200, and the collateral aircraft in this deal represent the youngest vintage in the carrier's fleet. Overall, Fitch considers the collateral quality to be fairly solid as these A321-200s are viewed as a (mid-range) Tier 1 aircraft that would have better liquidity and lower value declines than less attractive aircraft models in a potential aviation or economic downturn.

THE AFFIRMATION FACTOR (PRIMARY RATINGS RATIONALE FOR SUBORDINATED TRANCHES)

Fitch's considers the Affirmation Factor for the aircraft in this portfolio to be very high as the A321s are considered strategically important to LCC. The airline is moving towards becoming an all Airbus operator on the narrowbody side, with the A320 family of aircraft expected to be the only single aisle planes in LCC's fleet. Although LCC currently has 47 737 classics, management is currently in the process of phasing out all its older, less fuel efficient 737s by 2015.

The A320 family forms the backbone of LCC's domestic focused route network and aircraft constitute the newest and most efficient single aisle planes in LCC's fleet. The airline currently has 93 A319s, 72 A320s and 63 A321s. LCC's recent deliveries and pending orders within the A320 family have been for the A321. LCC's current orderbook includes an additional 58 A320 family aircraft remaining under its 2007 purchase agreement with Airbus, the bulk of which is for the A321 with firm orders of 36 with expected deliveries between 2012-2015. Notably, LCC is the world's largest operator of the model.

The A321 is the largest version of the A320 with a stretched fuselage that allows for 183 seats in a typical two-class configuration versus 150 for the A320. The trend to 'upgauge' for LCC (and several other carriers in the industry) is a response to the higher load factors that have been sustained at record levels over the last several quarters. The industry has been cutting back on capacity to keep traffic flows above supply to support yields. Better yield management and the ability to rightsize the network to demand (both in terms of fleet mix and putting the right kinds of planes on the right routes) has also enabled LCC and the industry to benefit from both higher loads as well as higher yields. Adding extra seats on a flight also enables the carrier to lower its unit costs. LCC's 2012 capacity guidance for 1% growth reflects the higher seat count on the A321s. The A321s are currently the only Wi-Fi (GoGo) enabled aircraft in the LCC fleet, although management is expanding Wi-Fi service on its entire domestic fleet this year.

The flying range, seating capacity and enhancements of the A321 give it an important role in LCC's route map, making it an ideal plane for routes between hub-to-hub or large cities. As the airline's preferred single-aisle aircraft, Fitch believes it is highly unlikely that LCC would reject these planes in the case of a Chapter 11 filing.

US Airways' interest in acquiring American Airlines (AMR) in bankruptcy has no impact on the ratings for this transaction. Fitch expects the A321-200s to remain part of the core narrowbody fleet, even if US Airways were to merge with American. The lack of fleet commonality (AMR is primarily 'Boeing', and LCC is primarily 'Airbus') is more than offset by the sheer size of each fleet type (especially for narrowbody aircraft) which is large enough to support an infrastructure of pilots, crew, mechanics, and maintenance. In addition, American's current orderbook includes firm orders for 460 single-aisle aircraft including 260 from Airbus and the remaining from Boeing.

RATING RISK FACTORS FOR THE A321-200

Although the A321 has 65 operators, the fleet is moderately concentrated with about 51% of the A321s operated by 10 airlines but has broad geographic distribution among the key operators. Europe has the largest share with 40% followed by Asia with 36% share of the current fleet. Approximately 11% of the fleet is in North America, with US Airways being the largest operator (jetBlue and Spirit are the other two). Three of the top 10 operators are located in China, which is a dense and growing market where traffic trends are likely to remain strong for the foreseeable future.

A potential concern for the A321 future market values comes from the introduction of the NEO (new engine option) version with CFM Leap-X engines or Pratt & Whitney PW1100G engines, with anticipated fuel savings of 15% over the CEO (current engine option) models. The advent of the A321neo could pressure future market values of the A321ceos longer-term. However, Fitch views it as a bigger threat to older generation aircraft rather than the aircraft in this portfolio given that they are some of the youngest vintage of this aircraft type. The first delivery of the NEO option for the A321 is not expected until 2016/2017, and it will take some time to produce a significant number of the new planes before it starts pressuring market values. The actual impact is hard to quantify at this point without knowing the traded price of the new engine. By the time the NEO gains significant market penetration, most of the debt outstanding on the senior tranche will be paid down through scheduled amortization (which also assumes an aggressive depreciation curve). Therefore, Fitch does not expect the impact of the NEO to have a material effect on the risk of this transaction.

Another factor that could become a concern affecting valuations and depreciation rates is Airbus' high planned A320 family production rates. Airbus' A320 rates were at 34 per month in 2010, but the company has steadily raised rates to the current 40 per month rate. Rates will move to 42/month in 4Q'12, and the company is exploring pushing to 44/month.

US AIRWAYS RATINGS

Fitch's IDR of 'B-' for US Airways' Inc. and parent LCC reflect the consolidated entity's high lease-adjusted debt, sizeable upcoming maturities, limited unencumbered assets and historically volatile cash flow balanced by a significant improvement in the carrier's traffic performance, operating earnings and liquidity over the last two years. While significant risks remain, Fitch believes LCC is in a better position to withstand a weak operating environment or higher fuel costs than in the past. LCC's unhedged fuel strategy appears to be working for now but is risky given the lack of downside protection in a potential fuel spike. Other factors supporting the ratings include structural changes in the U.S. airline industry and LCC's relative cost position, including no defined-benefit pension plan. LCC's cash flow metrics have also improved in the past two years. Fitch forecasts (assuming very conservative PRASM and jet fuel assumptions) modestly negative free cash flow (FCF) this year as a result of higher aircraft capital expenditures, but net of aircraft related financing FCF should be positive. Despite improving earnings and cash flow, LCC's lease-adjusted debt level is expected to remain high at above 6 times by year-end, according to Fitch estimates. With $13 billion in revenues, LCC is the is the fifth largest U.S. airline with hubs in Philadelphia, Phoenix and Charlotte, in addition to a large focus city operation at Washington's Reagan National Airport (DCA) offering passenger service on more than 3,200 daily flights to over 200 airports in the U.S. and overseas.

Fitch expects LCC credit quality and ratings to remain stable through the course of the year. A downgrade is unlikely absent a drastic and sustained fuel or demand shock that would become a liquidity event, with accompanying tightness in credit markets. LCC's interest in acquiring American Airlines (AMR) out of bankruptcy has no impact on current ratings or Outlook. No formal merger announcement has been announced, but LCC's agreement on contract terms with major AMR unions is a critical step that will support LCC's efforts to potentially acquire AMR in bankruptcy. If there were a merger announcement, Fitch would review its ratings and outlook based on more details on synergies, labor negotiations, fleet plans and financing that are made public. Fitch views consolidation as a positive for the industry and a potential combination with AMR would likely strengthen LCC's network, and credit profile longer-term despite near-term challenges with integration.

For additional information, please see the following recent Fitch press releases:

--'Update: Fitch Rates US Airways' Proposed 2012-1 EETC Class A Certs 'A-' & Class B Certs 'BB-''(April 30, 2012);

--' Fitch Rates US Airways' Proposed 2012-1 EETC Class A Certs 'A-' & Class B Certs 'BB-''(April 30, 2012);

-- 'Fitch Upgrades US Airways' IDR to 'B-'; Outlook Stable' (April 20, 2012).

Fitch has assigned the following rating:

US Airways 2012-1 Pass Through Trust

--Series 2012-1 class C certificates 'B'.

Fitch currently rates US Airways as follows:

US Airways 2012-1 Pass Through Trust

--Series 2012-1 class A certificates 'A-';

--Series 2012-1 class B certificates 'BB-'.

US Airways Inc.

--IDR 'B-'.

US Airways Group, Inc

--IDR 'B-';

--Senior secured term loan due 2014 'BB-/RR1'

--Senior unsecured convertible notes due 2014 and 2020 'CC/RR6'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Rating Aircraft Enhanced Equipment Trust Certificates' (Sept. 15, 2011)

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (May 12, 2011).

Applicable Criteria and Related Research:

Rating Aircraft Enhanced Equipment Trust Certificates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=650820

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489

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