Fitch Upgrades US Airways Group IDR to ‘B-’; Outlook Positive
Fitch Ratings has upgraded its ratings on US Airways Group, Inc. (NYSE:LCC) (US Airways) as follows:
–Issuer Default Rating (IDR) to ‘B-’ from ‘CCC’;
–Secured term loan rating to ‘BB-/RR1′ from ‘B/RR1′;
–Senior unsecured rating to ‘CCC/RR6′ from ‘CC/RR6′.
Fitch’s ratings apply to approximately $1.9 billion in outstanding debt. In addition, Fitch has assigned a rating of ‘BB-/RR1′ to US Airways’ new $1.6 billion secured term loan facility that is currently in syndication. The Rating Outlook is Positive.
The upgrade in US Airways’ ratings reflects the substantial improvement in the airline’s credit profile that has occurred since the carrier exited Chapter 11 protection and merged with America West Holdings Corp. (America West) in September 2005. In addition, with the withdrawal of its acquisition offer for Delta Air Lines, Inc. (Delta) in late January, US Airways can focus on the few remaining tasks necessary to complete the full integration of the US Airways, Inc. and America West Airlines, Inc. (AWA) operating units. Fitch does not expect US Airways to seek another acquisition in the near term.
Over the past year, US Airways has posted relatively strong financial results, which have translated into credit metrics that place it among the better-performing hub-and-spoke airlines. Lease-adjusted leverage of 6 times (x) and EBITDA interest coverage of 3x are the strongest of the four solvent legacy carriers, while its 2006 EBITDAR margin of 7.8% is second only to AMR Corp. (AMR). Unrestricted cash and equivalents, at 20% of 2006 revenue, has increased by 500 basis points over the past year and is in the same range as AMR, UAL Corp. (UAL) and Continental Airlines, Inc. (Continental). US Airways’ financial performance relative to its peers has been driven primarily by cost savings that resulted from its Chapter 11 reorganization combined with revenue and expense synergies that have been realized through the merger with America West.
The new term loan, which will mature in 2014, is backed by hard assets, such as aircraft, spare parts and ground service equipment; soft assets, including route authorities, slots and gates; $750 million in cash held in control accounts; and certain accounts receivable assets. The ‘BB-/RR1′ rating reflects the loan’s substantial collateral coverage and very strong recovery prospects in a default scenario. Proceeds from the term loan will be primarily used to refinance US Airways’ existing $1.25 billion term loan facility, as well as pre-pay other outstanding secured and unsecured debt. In addition to more favorable pricing, the refinancing moves the company’s significant debt maturities three years further into the future, which will improve liquidity through 2013 and provide the airline with increased financial flexibility over a longer time horizon. The refinancing also removes several aircraft from collateral pools that are currently securing some of the existing debt. Releasing the aircraft increases US Airways’ unencumbered asset base, which could serve as collateral to secure future financings in the event of another industry downturn.
US Airways’ strengthened liquidity position and a lack of significant debt maturities over the next several years have significantly reduced the probability of a near-term cash crisis. Furthermore, unlike AMR, Continental, Delta and Northwest Airlines Corp. (Northwest), US Airways has no significant defined benefit (DB) pension plans in place. Although the Pension Protection Act has significantly reduced cash funding requirements for those airlines that maintain DB plans, US Airways’ lack of DB plans could provide the carrier with a competitive advantage over the longer term, particularly in the next industry down cycle.
Looking ahead, industry demand fundamentals are expected to remain fairly strong during 2007, while domestic capacity growth will continue to be limited. The pace of yield growth will likely slow, however, as year-over-year comparables become more difficult. Operating expenses will still be significantly affected by the price of jet fuel, although US Airways, along with most U.S. carriers, has taken advantage of dips in oil prices by increasing its fuel hedging position. As of January 30, US Airways had 43% of its estimated full-year fuel needs hedged using costless collars, with a jet fuel equivalent put price of $1.97 and a call price of $2.17. Operating expenses could see some pressure from increased wages, as the airline continues to seek integrated labor agreements with its pilots, flight attendants, mechanics and fleet service workers. The airline has stressed, however, that the status of its labor agreements is immaterial to its ability to combine the operations of US Airways, Inc. and AWA under a single Federal Aviation Administration (FAA) operating certificate, and it still plans to complete the full operational integration of the two airlines by mid-2007.
Fitch’s Recovery Ratings (RR) are a relative indicator of creditor recovery prospects on a given obligation within an issuers’ capital structure in the event of a default. A broad overview of Fitch’s RR methodology as it relates to specific sectors can be found at www.fitchratings.com/recovery.
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