Dépêches

Fitch Upgrades US Airways' IDR to 'B-'; Outlook Stable

Dépèche transmise le 20 avril 2012 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded US Airways Group, Inc. (LCC) to 'B-' from 'CCC', and assigned an Issuer Default Rating (IDR) of 'B-' to US Airways, Inc. See the full list of ratings actions at the end of the release.

The Rating Outlook is Stable. Ratings apply to $1.1 billion of term loan debt and $179 million of convertible notes outstanding.

The upgrade of LCC's ratings follows a period of significant improvement in the carrier's business model evidenced in recent traffic results, operating earnings and cash flow from operations over the past two years. While significant risks remain, Fitch believes LCC is in a better position to withstand a weak operating environment or higher fuel costs, and the company's credit profile has improved beyond what was implied in the prior rating. 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. Concerns include the company's unhedged fuel position, high debt levels, debt maturity schedule, low margins, volatile cash flow, labor uncertainty, and the cyclicality and event risk inherent in the airline industry. Current ratings and Outlook reflect the standalone credit quality of LCC, which has improved over the last two years and does not incorporate Fitch's assessment of the credit impact of potential consolidation in the industry including a potential merger with American Airlines (AMR) or another carrier.

In 2011, LCC generated operating income of $452 million despite a $1.3 billion increase in fuel costs alone. While these results were weaker on a year-over-year basis, they are in stark contrast to 2008 when fuel spiked to similar levels, resulting in an operating loss of $606 million and LCC found itself in a liquidity crisis. While the macro environment has improved since 2008, the turnaround in profitability reflects a number of initiatives that LCC and the industry have implemented to transform the business, notably consolidation and capacity constraints that led to a firm pricing environment, ex-fuel cost control, ancillary revenue streams and a focus on profitable routes.

With hubs in smaller cities, and a few international routes, LCC's network is not as robust as its legacy peers, limiting its ability to increase share of business travelers over time. However, LCC commands top market positions with dominating share in its local markets which enables the carrier to be the best option for many corporate accounts. For perspective, Charlotte (LCC's largest hub) is a relatively small city but a powerful hub with a lot of business traffic in a unique catchment area that can aggregate connecting traffic from several smaller cities in the area. Charlotte is the fourth most profitable hub in the U.S. and LCC is the number one carrier with a 56% share of that market.

As part of a network overhaul initiated a couple of years ago, LCC has retrenched from non-core markets where it did not have a competitive advantage and redeployed capacity through its hubs. In December 2011, LCC closed on its asset swap with Delta Air Lines, Inc. (DAL) (after waiting for two years to get regulatory approval) whereby it received 42 round-trip slots at its focus airport Reagan Washington National (DCA), and the right to operate daily flights to Sao Paulo, Brazil in exchange for 132 round-trip slots at LaGuardia (LGA) which it divested to DAL. Once all the scheduled changes from this transaction take effect this summer, LCC will have nearly 99% of its capacity fly through its three hubs, DCA or through the Shuttle service, reflecting the full implementation of management's strategy.

Notwithstanding its network limitations, LCC's mainline operations have posted leading traffic performance over the last several quarters. Specifically, LCC's passenger revenue per available seat mile (PRASM) has either tracked or outperformed the industry since the beginning of 2011. LCC's monthly PRASM gains of 7%-10% during the first quarter trailed Delta's (which has cut more capacity than its peers) double-digit increase but was ahead of others. The current booking environment remains solid, but Fitch expects monthly PRASM gains to moderate as the year progresses and year-over-year comparisons become tougher as fare increases this year have not kept pace with last year. That said, there have been fewer fare sales in 2012 and capacity remains constrained, which supports the yield momentum that LCC and the industry is currently experiencing.

On the cost side, LCC maintains a non-fuel unit cost per available seat mile (CASM) advantage relative to its legacy peers, but is the only U.S. carrier that does not hedge for fuel costs. Management believes that hedging does not enable an airline to overcome these costs over the longer term given the persistent inflation of energy prices, and that the expensive premiums paid for managing its exposure erodes the cost advantage that the hedges deliver. For now, the strategy seems to be working as evidenced in updated guidance as LCC's average cost for jet fuel for the first quarter is actually lower than the hedged carriers and recent PRASM trends have also been favorable. In 2011, LCC was able to pass along 85% of higher fuel costs through higher fares, and an extension of industry capacity discipline should support continued yield gains. Nonetheless, Fitch views unhedged strategy as risky given the lack of downside protection in a potential fuel spike, especially when combined with a soft economy which would likely eradicate any pricing power.

LCC's liquidity has also improved with unrestricted cash of $2 billion as of year-end 2011, which represents 15% of revenues. Fitch views LCC's liquidity to be weaker than its peers but adequate to withstand a moderate fuel or demand shock. Fitch expects LCC to be in compliance with its only financial covenant under its credit facility that requires the company to maintain a minimum unrestricted cash balance of $850 million. Fitch also expects LCC to be in compliance with the minimum liquidity requirements (undisclosed) under its unsecured, frequent flier miles purchase agreement with Barclays. The company has no revolving credit facility nor does it have many unencumbered assets.

The airline's cash flow metrics have also improved in the past two years. Fitch forecasts (assuming very conservative PRASM and jet fuel assumption) 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. LCC's aircraft capex budget is for necessary fleet renewal as the carrier replaces older, less fuel efficient aircraft with newer ones, rather than growth. LCC's capacity guidance for 1% growth this year reflects the higher seat count on its A321-200s which are expected to replace classic 737s in its current narrowbody fleet. Non-aircraft capex primarily reflects investments in Wi-Fi and enhancements to its business-class.

Despite improving earnings and cash flow, LCC's debt levels remain high. LCC is also a heavy user of off-balance-sheet leases but Fitch expects LCC to own more of its aircraft over time. Total debt and capital leases at year-end 2011 stood at $4.6 billion with 91% of outstanding debt secured. Leverage (gross debt to EBITDA) in 2011 was 6.4 times (x) compared to 4.2x in 2010 and 9.8x in 2009. Lease adjusted leverage in 2011 was 7.4x compared to 6.2x in 2010 and 8.5x in 2009. Fitch estimates lease-adjusted leverage will improve with earnings this year, but it is expected to remain high at above 6x by year-end.

LCC also has looming maturities in 2014 when $1.1 billion of its term loan matures and $172 million of convertible notes come due in May 2014. The notes could likely convert into shares given the recent gains in LCC's stock price, but the company has enough liquidity to pay it down. Fitch expects LCC to refinance the term loan well in advance of its maturity. Aircraft commitments will likely be debt-funded. LCC has backstop financing for all its single-aisle aircraft through 2015, but Fitch expects the airline to use the loan and/or capital markets or sale leaseback to finance its aircraft deliveries. Fitch notes that LCC is highly reliant on capital markets and external sources of liquidity. However, LCC maintains a solid standing in the markets and has had access to diverse sources of funding over the past several years. Importantly, management has shown willingness in the past, to pull different levers including issuing equity even at distressed levels to preserve the balance sheet. Access to capital markets is a very important consideration for LCC's current ratings as the carrier has very few unencumbered assets.

The rating Outlook is Stable. 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. Another positive action is also unlikely as LCC's liquidity and credit metrics are expected to remain stable through the course of the year.

In Fitch's view, LCC's interest in acquiring AMR out of bankruptcy has no impact on current ratings or Outlook. No formal merger announcement has been announced, but LCC filed an 8-K this morning stating that it had reached an agreement on contract terms with major unions at AMR. This 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. Timing is important as the deadline to submit a merger plan competing with AMR's plan of reorganization in court is coming up soon. Although AMR management wants to stay independent through the bankruptcy process, it cannot steer the company's ultimate fate, as the bankruptcy judge and the unsecured creditors committee (which includes representatives from the three major unions) are now in control. A potential combination while AMR is still in bankruptcy would enable LCC management to use the Chapter 11 process to maximize the potential of the merged entity, as it did when it acquired legacy US Airways in 2005.

Fitch has taken the following ratings actions:

US Airways Group, Inc

-- IDR upgraded to 'B-' from 'CCC';

-- Senior Secured Term Loan due 2014 upgraded to 'BB-/RR1' from 'B+/RR1';

-- Senior Unsecured Convertible Notes due 2014 and 2020 upgraded to 'CC/RR6' from 'C/RR6'.

US Airways Inc.

-- Assigned an IDR of 'B-'.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

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

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

Applicable Criteria and Related Research:

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

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