Dépêches

Fitch Affirms AMR Corp. and American Airlines at 'CCC'

Dépèche transmise le 24 mars 2011 par Business Wire

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the debt ratings of AMR Corp. and its principal operating subsidiary American Airlines, Inc. as follows.

AMR Corp.

--Issuer Default Rating (IDR) at 'CCC';

--Senior Unsecured Rating at 'C/RR6'.

American Airlines, Inc.

--IDR at 'CCC'.

Fitch has also assigned a rating of 'B+/RR1' to American's recently issued $1 billion senior secured notes due 2016. The notes are collateralized by airport slots, gates and international route authorities. The senior unsecured rating at the parent level applies to approximately $885 million of outstanding debt.

The ratings affirmation and the 'CCC' IDRs reflect continuing concerns surrounding the airline's very weak free cash flow (FCF) generation profile, the need to meet heavy cash obligations and limited scope for debt reduction over the next several quarters. Although AMR's relatively strong liquidity position and its continued ability to access the capital markets should provide the carrier with sufficient flexibility to meet upcoming cash commitments, the cash flow margin of safety in 2011 has been eroded by the recent run-up in crude oil and jet fuel prices.

Ratings also capture AMR's exposure to a high level of event risk, reflected most recently in the disruption of global energy markets and post-earthquake demand effects in Japan, as well as the carrier's dependence upon open capital markets to support a highly leveraged capital structure (2011 lease-adjusted leverage in excess of 8x). Given the importance of AMR's re-fleeting requirements, which will drive approximately $1.6 billion in total capex this year, and large maturities ($2.5 billion in 2011), the airline faces further deterioration of credit protection measures and a challenging operating environment.

The rapid rise in crude oil and jet fuel prices during the first quarter has highlighted the vulnerability of AMR and the entire airline industry to sudden and largely uncontrollable increases in energy costs. With fuel driving more than 30% of AMR's operating costs, volatility in jet fuel prices this year will contribute to considerable uncertainty over 2011 cash flow and liquidity. AMR has a significant amount of near-term fuel exposure hedged (51% in 1Q'11 with an average jet fuel price cap of $2.48 per gallon). However, hedge protection trails off somewhat later in the year, and the airline has been forced to look for other sources of fuel cost recovery, notably fare hikes and capacity plan adjustments. For the full year, approximately 39% of expected fuel consumption has been hedged (primarily via heating oil-based derivatives) with an average cap of $2.59 per gallon of jet fuel.

Year to date, AMR and its U.S. competitors had successfully pushed through at least six domestic fare increases, initially targeting leisure-oriented markets and ultimately extending into some higher-yielding business routes. There has been no sign of significant demand destruction, with February passenger yields and revenue per available seat mile (RASM) increasing by 5% or more at most U.S. carriers. Still, the industry's ability to recover higher fuel costs will be seriously challenged later in the year if another surge in energy prices begins to slow economic growth and curtail air travel demand.

As fares rise and demand softens at the margin, American and other carriers are making adjustments to schedules. In early March, AMR announced that it would reduce its 2011 planned domestic capacity growth by one percentage point compared with January guidance. Relatively soft demand patterns in trans-Atlantic markets and in Japan may put continued pressure on AMR's unit revenue results through the remainder of the year. The airline's projected RASM growth rate in 1Q'11 of 4%-5% percent lags expected unit revenue growth rates at the other U.S. network carriers.

Fitch estimates that each 10-cent change in the price of jet fuel drives approximately $280 million in annual consolidated operating costs. AMR's forecast of full year 2011 jet fuel prices of $3.01 per gallon (factoring in hedge protection) will force the carrier to deliver solid annual RASM growth to offset the anticipated 30% rise in annual fuel expenses. Industry capacity cuts in the second half of the year should bolster unit revenue comparisons, but the durability of international demand strength and incremental benefits from the implemented trans-Atlantic joint business arrangement with British Airways and Iberia remain uncertain.

AMR faces some uniquely difficult challenges due to its position as the U.S. legacy carrier with the highest unit labor costs. In order to move from the bottom of the pack in margin potential and cash flow generation, it needs to either deliver a larger RASM premium relative to the other legacy carriers or push unit costs lower. Neither outcome is likely in the near term as AMR is lagging the industry on RASM growth in 1Q'11 and management remains locked in a struggle with the unions over new contracts that could push labor costs still higher. With the majority of U.S. airline collective bargaining agreements amendable by 2012, AMR hopes to bridge the cost gap as pay rates at other carriers rise.

AMR is facing another year of substantially negative free cash flow, and leverage is likely to move higher this year in response to fuel-driven operating weakness. Fixed cash obligations are large, with planned capex of $1.6 billion this year (about $1.1 billion of that total is tied to new aircraft deliveries) and scheduled debt maturities of $2.5 billion. Cash pension payments are expected to total $520 million this year (versus $640 million in accrued pension expense). Given these heavy cash obligations and the need to continue a multi-year fleet renewal program, AMR will not be in a position to begin reducing debt levels until solid RASM growth and moderating fuel prices push operating margins back to levels seen in 2006 and 2007 (the peak of the last demand cycle).

Following its $1 billion secured debt issuance, the airline's unrestricted liquidity position is relatively strong (about 25% of annual revenues). AMR expects to report total unrestricted cash and short-term investments of about $5.7 billion at the end of March (including approximately $370 million of cash collateral posted by fuel hedge counter-parties and held by AMR). Fitch views $4.5 billion of year-end 2011 unrestricted liquidity as a likely target for the company in light of Fitch-forecasted negative FCF of $700 million or more again in 2011.

AMR has been engaged in protracted, mediated negotiations with its principal unionized work groups (pilots, flight attendants and ramp workers/mechanics) since collective bargaining agreements became amendable in 2008. The unions remain steadfast in their position that the company must raise wage and benefit levels from contract rates that were put in place in 2003 as part of the airline's effort to stay out of bankruptcy. Even without pay rate increases, AMR's unit labor costs remain the highest in the industry, imposing a cost and margin penalty on the carrier that management hopes to eliminate.

While a strike or other labor action still appears unlikely, particularly in light of AMR's already weak operating profile and the fact that airline collective bargaining often proceeds for years after contract amendable dates, there is nevertheless an ongoing risk of intensifying labor-management tension that could ultimately affect operations or raise the company's labor costs further. A 2010 tentative agreement with the Transport Workers Union (TWU) for a new mechanics contract was ultimately voted down by union members. Fitch does not expect significant progress toward new contracts to be made in 2011, and labor action risk will continue to hang over the credit.

A downgrade to 'CC' or below could follow later in 2011 or next year if a combination of extreme fuel cost pressure (average 2011 jet fuel prices of $3.30 per gallon or higher) and weaker than expected unit revenue growth combine to erode AMR's liquidity position. A decline in unrestricted cash and short-term investment balances to less than $3.5 billion would likely lead to a negative rating action, particularly if it coincided with a period of constrained capital market access.

Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the ratings process other than through the medium of its public disclosure.

Applicable Criteria and Related Research:

--Corporate Finance Rating Criteria Hierarchy (Interactive Compendium of Criteria Reports) (Dec. 20, 2010);

--Evaluating Corporate Governance (Dec. 16, 2010);

--Corporate Rating Methodology (Aug. 13, 2010);

--Analysis of U.S. Corporate Pensions (Dec. 1, 2010);

--Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers (Nov. 24, 2009).

Applicable Criteria and Related Research:

Corporate Finance Rating Criteria Hierarchy (Interactive Compendium of Criteria Reports)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=520046

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Analysis of U.S. Corporate Pensions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578365

Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489006

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