American Airlines Group Inc (AAL)

[Trance-Man]

Rating Action: Moody's assigns B1 CFR to American Airlines Group, outlook stable

https://www.moodys.com/research/Moodys-assigns-B1-CFR-to-American-Airlines-Group-outlook-stable--PR_288234?WT.mc_id=NLTITLE_YYYYMMDD_PR_288234

Global Credit Research - 05 Dec 2013
Resolves review of US Airways Group, Inc. ratings, upgrades CFR to B1, which will be withdrawn
New York, December 05, 2013 -- Moody's Investors Service has assigned corporate ratings to American Airlines Group, Inc. ("AAG"): Corporate Family ("CFR") of B1, Probability of Default of B1-PD, and Speculative Grade Liquidity of SGL-1. Moody's assigned a Ba2 rating to the $1.9 billion senior secured term loan facility of American Airlines, Inc. due in 2019 and to the $1.0 billion revolving credit facility maturing in 2018, both of which AAG, US Airways Group, Inc. and US Airways Inc. will each guarantee. Moody's also upgraded the ratings on the Series 2001-1 and Series 2011-1 Enhanced Equipment Trust Certificates ("EETCs") of American Airlines, Inc. as detailed in the accompanying debt list. The outlook is stable.

The ratings have been assigned in anticipation of completion of the stock-for-stock merger between AMR Corporation (unrated) and US Airways Group, Inc. scheduled to occur on or within days after December 9, 2013. The merger will occur simultaneously with AMR Corporation's (unrated) emergence from Chapter 11 bankruptcy protection. The ratings consider the company's post-merger, consolidated credit profile, including very good liquidity, a leading industry EBITDA margin, improved domestic network efficiencies that we believe will flow from combining the airlines under a single operating certificate and some balance sheet de-levering from cash on hand. Upon completion of the merger, US Airways Group, Inc. will become a holding company subsidiary of AMR Corporation, which will change its name to American Airlines Group, Inc. AAG and American Airlines, Inc. will become guarantors of US Airways, Inc.'s $1.0 billion term loan facility due 2019 and $600 million term loan facility due 2016 ("Airways' Term Loans") and US Airways Group Inc.'s $500 million, 6.125% Senior Unsecured Notes due June 2018 ("Airways' Notes").

Moody's has also resolved its review of its ratings of US Airways Group, Inc. that it had initiated on August 12, 2013. Moody's raised its family ratings of US Airways Group, Inc. by two notches: Corporate Family to B1 from B3 and Probability of Default to B1-PD from B3-PD. Moody's upgraded the rating on Airways' Term Loan to Ba2 from B2 and on Airways' Notes to B3 from Caa2. The assignments or upgrades of ratings on the companies' credit facilities or bonds in this transaction are based on a consolidated Loss Given Default waterfall. Moody's upgraded the ratings on each of US Airways, Inc's or America West Airlines' EETCs as detailed in the accompanying debt list. Moody's has withdrawn the SGL-3 Speculative Grade Liquidity rating assigned to US Airways Group, Inc. and changed the outlook to stable. Upon completion of the merger, Moody's will withdraw the B1 Corporate Family and B1-PD Probability of Default ratings assigned to US Airways Group, Inc.

RATINGS RATIONALE

The B1 CFR reflects AAG's leading position in the global passenger airline industry, the favorable operating performance momentum that US Airways brings to the combined company and the improved cost structure of American Airlines, Inc. following its reorganization under Chapter 11, supportive credit metrics and very good liquidity. At about $40 billion, the consolidated annual revenue of AAG will leap-frog that of United Continental Holdings, Inc, making AAG the largest passenger airline in the world, measured by annual revenues. "AMR utilized the bankruptcy process to achieve a leading airline industry operating cost structure that rivals that of Delta's," said Moody's Senior Credit Officer, Jonathan Root. "Combining with US Airways will provide a stronger domestic network that should increase appeal to corporate accounts as well as improve passenger feed to its international network," continued Root.

Moody's believes that the risk of a disruption to operations arising from the integration of the operating companies will be moderate. Combining the operations and systems in a single airline operating company will be completed after receipt of a single operating certificate from the US Federal Aviation Administration, which will likely occur sometime in 2015. Moody's anticipates that the company will have more than $9 billion of consolidated unrestricted cash and a committed, undrawn $1.0 billion revolving credit facility upon closing of the merger after the distributions required by the Chapter 11 plan of reorganization will provide AAG with the strongest liquidity of any of the 14 airlines Moody's rates and further supports the ratings. While not impairing liquidity, the ratings anticipate that the company will use some of the cash to either repay debt, pay for new deliveries, or both, leading to improved credit metrics by 2015. Reducing debt in the near term will be helpful to limit upward pressure on financial leverage because of the company's large order book, which will stand at about $25 billion for more than 550 aircraft on a consolidated basis for deliveries through 2023. Moody's anticipates that a large portion of the order book will be financed with debt, or via operating leases, which will lead to some levering of the capital structure. However, the gains in fuel and maintenance efficiency by replacing more than half of the combined mainline fleet will be important for offsetting pressure on earnings beyond 2015 given the continuing cyclical nature of the industry.

The upgrades of the EETCs of US Airways and of America West Airlines accompany the upgrade of the CFR of AAG and are based on the B1 CFR rating of AAG, notwithstanding that neither AAG nor American Airlines will guarantee US Airways obligations under the equipment notes of the separate EETC financings. Certain tranches were upgraded by more than the two notch lift of the CFR based on Moody's estimates of loan-to-values and the relative importance of specific aircraft types to AAG's combined operations. We anticipate that the survivor of the legal merger of the airline operating companies that will likely occur following the receipt of a single operating certificate will become the obligor of the equipment notes of all of the combined companies EETCs.

Moody's also upgraded the ratings assigned to the Series 2001-1 and Series 2011-1 EETCs issued by American Airlines. The Series 2001-1 transaction finances 32 McDonnell Douglas MD80's, valued at about scrap value of about $1.0 million per airplane. Notwithstanding estimated significantly deficient LTVs, Moody's has upgraded the A-tranche to Caa1 and the junior tranche ratings to Ca to reflect the lower probability of default since this transaction survived AMR's reorganization and implicitly, the aircraft have a place in the combined company's fleet along with 147 more of this aircraft type. The upgrade of the A-tranche rating of Series 2011-1A by two notches to Baa1 considers an LTV near 55%, in line with six notches for other A-tranches of transactions that are cross-defaulted and cross-collateralized. The average age of the aircraft in this transaction approximates 13 years.

The stable outlook reflects the steady operating performance by the separate airline operating companies as AAG plans their integration in upcoming quarters. The bulk of the $900 million of run-rate net synergies, mostly from revenue gains of the improved network that the company expects to realize, will accrue incrementally during the period leading up to the receipt of a single operating certificate and thereafter. The company will also need to complete negotiations of work rules to finalize labor agreements with its respective unions, after the employees agree on common representation. Moody's also anticipates that improvements in the cost structure during this period will be measured, although benefits of fleet modernization will be realized with each delivery of a new aircraft. The stable outlook also considers Moody's view of about steady industry fundamentals for 2014 including an about steady price for fuel of about $3.05 per gallon.

There is little upwards pressure on the rating as the company prepares to execute the integration. A positive rating action could follow if the company was to sustain stronger credit metrics following the integration. Debt to EBITDA that approaches 4.5 times, Funds from operations + interest to interest that approaches 4.0 times, meaningful amounts of annual positive free cash flow and or an EBITDA margin that is sustained near 20% could support an upgrade. Growing passenger revenues and or revenue passenger miles ("RPMs") at meaningfully higher rates than Delta or United would indicate the realization of the planned revenue synergies, including from increasing share of corporate travel, which could also support a positive rating action. A negative rating action could follow if liquidity fell below $4.5 billion with no significant improvement in Debt to EBITDA. The inability to control non-fuel operating costs or to sustain competitive yields, either of which would challenge the company to maintain its operations over the long-term could also lead to a downgrade. Debt to EBITDA that approaches 6.5 times, FFO + Interest to Interest that approaches 2.3 times or sustained negative free cash flow generation could pressure the ratings.

US Airways, along with US Airways Shuttle and US Airways Express, operates nearly 3,200 flights per day and serves more than 200 communities in the U.S., Canada, Mexico, Europe, the Middle East, the Caribbean, Central and South America.

AMR Corporation, headquartered in Fort Worth, Texas, through its American Airlines, Inc. subsidiary, serves more than 260 airports in more than 50 countries and territories. American's fleet of nearly 900 aircraft flies more than 3,500 daily flights worldwide from hubs in Chicago, Dallas/Fort Worth, Los Angeles, Miami and New York. Upon completion of the merger, AMR will change its name to American Airlines Group, Inc. and will become the direct parent of US Airways Group, Inc., the direct parent of US Airways, Inc.