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Fitch Revises US Airways Outlook to Stable; Affirms Ratings

Posted on: Wednesday, 15 November 2006, 15:00 CST

Fitch Ratings has affirmed its ratings of US Airways Group, Inc. (NYSE:LCC) as follows:

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

--Secured Term Loan Rating at 'B/RR1';

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

Fitch's ratings apply to approximately $1.4 billion in debt obligations. The Rating Outlook has been revised to Stable from Positive.

The revision in Fitch's outlook on US Airways reflects the airline's announcement today that it has made an unsolicited offer to merge with Delta Air Lines, Inc. (OTC:DALRQ), which has been operating in Chapter 11 bankruptcy protection since September 2005. US Airways' offer totals $8 billion and consists of $4 billion in cash and 78.5 million shares of US Airways common stock, valued at $4 billion. US Airways has arranged $7.2 billion in committed financing from Citigroup to fund the cash portion of the transaction, as well as to refinance $1.25 billion in outstanding term loan obligations at US Airways and $1.9 billion in debtor-in-possession (DIP) financing currently outstanding at Delta.

US Airways estimates that the merger will produce $1.65 billion in annual synergies, primarily through network optimization initiatives valued at $935 million, as well as cost savings of $710 million. The combined carrier would operate under the Delta brand and would add Delta's extensive international presence to US Airways' existing low-cost domestic operations. Although achievement of synergy benefits has historically been difficult in airline mergers, the relative success of the US Airways/America West (AWA) merger lends credence to the synergy estimates and to management's ability to successfully combine the Delta and US Airways operations. The merged company would be highly levered, however, carrying over $20 billion of lease-adjusted debt.

As with all airline mergers, challenges include the merging of labor groups and fleet types. Approval from the Department of Justice could also require the sale of Delta's shuttle operation on the East Coast, which competes with US Airways' shuttle operation. Labor integration could be somewhat easier than with most other airline mergers, as most of Delta's labor force is non-union, the primary exception being its pilots. US Airways is still working through labor discussions with most of its own labor groups as a result of the AWA merger, however, and those discussions could be complicated by today's announcement. In terms of fleet, US Airways has recently tended to favor Airbus for its new aircraft, while Delta has favored Boeing. However, both carriers operate Boeing 737s, 757s and 767s, so there is some commonality between fleets.

As US Airways' offer was unsolicited, it is possible that other, competing offers for Delta could be made, either from another airline or from private equity. Although no other potential airline suitor has a strong balance sheet, United has been vocal about its desire to take part in airline consolidation and has hired Goldman Sachs as an advisor. It is unclear how US Airways would respond to a competing offer.

Prior to today's announcement, US Airways had shown good progress on attaining the synergies anticipated from its merger with AWA. As a result of the positive trends in its credit profile, Fitch's previous Rating Outlook on the airline was Positive. With today's announcement, the Rating Outlook has been revised to Stable, as the proposed transaction adds a level of risk to US Airways credit profile that lessens the likelihood of an upgrade in the near term. Fitch does not believe that the transaction, if successfully completed as envisioned today, would result in a downgrade of US Airways' ratings. The recovery rating of 'RR6' on US Airways' senior unsecured debt obligations reflects the very low level of recovery expected in a default scenario. Likewise, the recovery rating of 'RR1' on US Airways' term loan facility reflects the facility's strong collateral backing and outstanding recovery prospects in a default. It is important to note that the term loan facility would be refinanced with proceeds from the Citigroup term loan if the Delta merger is successful.

Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at www.fitchratings.com/recovery.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

Source: Business Wire

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