Fitch Ratings has upgraded American Airlines Group Inc. (American, AAG)
to 'BB-' from 'B+'. The ratings also apply to American's primary
operating subsidiaries, American Airlines, Inc., US Airways Group, Inc.
and US Airways, Inc. The Ratings Outlook is Stable.
Fitch has also upgraded or affirmed various classes of American and US
Airways EETCs as described at the end of this release.
The corporate rating upgrade is supported by the strong financial
results that American has posted since its merger with US Airways and
concurrent emergence from bankruptcy. The upgrade also reflects fading
integration risk. Now nearly two years into the process, American's
integration with US Airways has gone smoothly. Fitch considers most of
the ratings pressure from integration risk to be in the past now that
the two companies have successfully merged on to one reservation system.
Fitch expects continued solid financial results from American over the
intermediate-term based on a stable domestic travel environment, low
fuel costs, and the benefits of the company's on-going integration and
fleet renewal processes. The ratings are also supported by American's
sizeable liquidity balance, which includes $8.9 billion in cash and
short-term investments and newly upsized revolver capacity of $2.4
billion.
The 'BB-' rating also incorporates the risks in American's credit
profile, including a significant debt balance and expectations for
leverage to be somewhat high for the rating over the next two years,
heavy upcoming capital requirements, and shareholder focused cash
deployment. Other rating concerns include risks that are inherent to the
airline industry including cyclicality, intense competition, sensitivity
to spikes in the price of jet fuel, and exposure to exogenous shocks
(i.e. war, terrorism, epidemics, etc.).
KEY RATING DRIVERS
Solid Financial Performance Since Merger
Fitch expects American to continue to generate solid financial results
in 2016 based on a relatively stable demand environment, manageable cost
pressures, and ongoing benefits to be gained from the merger integration
process. Although operating margins may be down from the peak levels
generated in 2015 due to Fitch's expectations for a soft unit revenue
environment and labor cost pressures, Fitch expects the company to
continue to produce margins well in excess of averages produced over the
past several years.
American's financial performance since its emergence from bankruptcy has
been notably positive. EBITDAR margins have expanded by more than 550
bps to 27.5% during the first nine months of 2015. Margin expansion is
notable compared to American's peers. Profitability has outpaced its
competitor United, and has recently surpassed Delta, which has been the
clear leader among legacy carriers for several years. Importantly,
American has been able to keep its operating costs in check during the
integration process. Excluding special items, American's mainline
casm-ex fuel increased a moderate 3.2% through the first nine months of
2015.
Integration Risks Waning
Merger integration has been a key concern since American's 2013 merger
with US Airways but most major integration related risks are now in the
past. The steps taken thus far, including the cut-over to a single
reservations system, progress towards reaching joint agreements with
various labor groups, re-banking certain hubs, etc. have all progressed
smoothly. While there is still considerable work to be done before the
integration is complete, such as moving to a single flight operating
system and reaching a combined pilots seniority list, American's success
in the process thus far gives Fitch confidence that the integration
risks are no longer primary drivers for the rating.
Credit Metrics Consistent with 'BB' Category Rating
Improved profitability driven by merger benefits and lower fuel prices
has allowed American to reduce its adjusted debt/EBITDAR to 3.8x as of
Sept. 30, 2015, down from more than 5.3x at year end 2013. Fitch expects
American's leverage to increase into the 4x - 4.5x range over the next 1
- 2 years, which Fitch views as being on the high end for a 'BB'
category rating. Higher leverage will be driven by incremental debt as
the company will likely have to borrow to fund its upcoming capital
expenditures. Other credit metrics are also supportive of the ratings
upgrade. Fitch expects FFO Fixed charge coverage to trend towards 3x
over the next several years (currently 2.8x) and EBITDAR margins should
remain above 20%.
Heavy Capital Spending
Fitch predicts that average annual capital expenditures will hover
around $5.5 billion through 2016 and 2017 or around 13% of annual
revenue, putting heavy pressure on free cash flow. Nevertheless, Fitch
expects FCF to be moderately positive, in the low-single digits as a
percentage of revenue, assuming a continued stable demand environment
and moderately increasing fuel prices. Capex should moderate over the
longer-term with heavy deliveries in the 2014-2017 timeframe making up
for significant under-investment in American's fleet over the last
decade.
As part of its efforts to bring operating costs down and retire aging
planes, AAG is in the midst of a major overhaul of its fleet. Between
2016 and 2017 AAG is scheduled to take delivery of 117 new mainline
aircraft, and 56 new regional jets. Near-term deliveries consist of 737
NGs and A320s which will be used to replace AAG's aging fleet of MD-80s.
The company is also taking new 777-300ERs and 787s. On the regional
side, AAG will take a mix of CRJ-900s and E175s, with the Bombardier
jets being delivered in 2015 and 2016 and the Embraers between 2015 and
2017.
While the new aircraft deliveries will represent a sizeable burden in
terms of capital investment, Fitch expects American to enjoy significant
benefits in terms of unit costs as the new planes are delivered.
Aggressive Cash Deployment Strategy Compared to Peers
American has taken a more aggressive approach to its capital structure
and cash deployment strategies compared to its peers, particularly given
that the company only emerged from bankruptcy and merged with US Airways
at the end of 2013. Fitch views American's credit profile as consistent
with a 'BB-' rating for many reasons including its status as the world's
largest airline, its operating margin profile and improving fixed charge
coverage. However, its cash deployment and leverage strategies are
limiting influences, which may delay further ratings upgrades over the
near-term. A key item to watch will be announcements from the company
clarifying its cash deployment strategy, which are expected to happen in
the first quarter of 2016.
LIQUIDITY
American's sizeable liquidity balance is supportive of the ratings. As
of the reporting of Sept. 30, 2015 financial results American had a
total unrestricted cash and short-term investments balance of $8.9
billion plus $2.4 billion in undrawn revolver capacity, equal to 27% of
latest-12-month (LTM) revenue. AAG's cash balance includes $609 million
held in Venezuelan Bolivars. American has held excess liquidity on its
balance sheet over the past two years as a precautionary measure as it
worked through its integration process and it will likely begin to pare
liquidity down over the next year. Fitch does not anticipate that
American will reduce liquidity to a point that puts pressure on the
ratings.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for American include;
--Low single-digit capacity growth through the forecast period;
--Continued stable/slow growth in demand for U.S. domestic travel;
--Mid-single-digit PRASM decline in 2015 followed by relatively flat
unit revenues thereafter;
--Conservative fuel price assumption which includes crude oil increasing
to $80+/barrel by 2018.
EETC Ratings
Fitch Ratings has also reviewed the ratings for multiple American
Airlines backed EETCs concurrent with its review and upgrade of
American's Issuer Default Rating (IDR). The rating affirmations cover
American Airlines Pass-Through Trust Series 2013-1, 2013-2, 2014-1 and
2015-1 and US Airways Pass-Through Trusts Series 2012-1, 2012-2, and
2013-1.
Fitch has upgraded the senior tranche ratings for the three series of US
Airways EETCs. The upgrades reflect the improvement in the company's
credit profile, which Fitch considers as a qualitative factor when
analysing senior EETC tranches. The US Airways transactions have also
exhibited stable loan-to-value ratios, as asset value degradation has
been offset by scheduled principal amortization.
Fitch has affirmed the senior tranche ratings for the American Airlines
EETCs. In general, stressed LTVs for these transactions have
deteriorated somewhat since our last review, due to higher than expected
depreciation rates for certain pieces of collateral, particularly on the
wide body side. Nonetheless the 2013-2 transaction continues to pass
Fitch's 'BBB' level stress test and the remaining transactions continue
to pass the agency's 'A' level stress test. Fitch expects these
transactions to de-lever incrementally over the near-to-intermediate
term.
Subordinated Tranche Ratings
Fitch has affirmed the ratings for the class B certificates across all
of the transactions. Ratings affirmations are due to ratings compression
that occurs as the airline's IDR moves up the ratings scale, per Fitch's
methodology. Various class C certificates have been upgraded by one
notch to remain in line with the airline IDR. The US Airways 2012-2
class C certificates matured in October of this year.
RATING SENSITIVITIES
Positive Rating Sensitivities for the corporate rating include:
--Adjusted leverage sustained below 4x;
--FFO Fixed charge coverage sustained around 3x;
--Free cash flow generation above Fitch's base case expectation;
--Further progress towards reaching joint collective bargaining
agreements with various labor groups.
Future actions that may individually or collectively cause Fitch to take
a negative rating action include:
--Adjusted debt/EBITDAR sustained above 4.5x;
--EBITDAR margins deteriorating into the low double-digit range;
--Shareholder focused cash deployment at the expense of a healthy
balance sheet.
EETC Sensitivities
Senior Tranche Ratings are primarily based on a top-down analysis based
on the value of the collateral. Therefore, a negative rating action
could be driven by an unexpected decline in collateral values. Potential
risks for the A320 family aircraft include the introduction of the
updated NEO models, which could pressure secondary market values.
Likewise, values for the 777-300ER could be impacted over the longer
term by the entry of the 777x, which is scheduled to enter into service
in 2020, and current generation 737s could be impacted by the entry of
the MAX. Senior tranche ratings could also be affected by a perceived
change in the affirmation factor or deterioration in the underlying
airline credit.
Alternatively, senior tranche ratings could be upgraded if American's
credit ratings were to continue to improve. Fitch considers the
airline's IDR as a qualitative factor to the 'A' tranche ratings.
Subordinated tranche ratings are based off of the underlying airline
IDR. As such, Fitch may upgrade various B tranches to 'BBB+' if American
were upgraded to 'BB'. However, the B tranche may not be downgraded if
American were downgraded to 'B+', as Fitch's EETC criteria allows for a
wider notching differential for 'BB' and 'B' category rated airlines.
Alternatively, the B tranche could be downgraded by one notch if
collateral values were to weaken and recovery prospects were to fall.
Fitch has taken the following rating actions:
American Airlines Group Inc.
--IDR upgraded to 'BB-' from 'B+';
--Senior Unsecured Notes upgraded to 'BB-/RR4' from 'B+/RR4'.
American Airlines, Inc.
--IDR upgraded to 'BB-' from 'B+';
--Senior secured credit facility affirmed at 'BB+/RR1'.
US Airways Group, Inc.
--IDR upgraded to 'BB-' from 'B+';
--Senior Unsecured Notes upgraded to 'BB-/RR4' from 'B+/RR4'.
US Airways, Inc.
--IDR upgraded to 'BB-' from 'B+';
--Senior secured credit facility affirmed at 'BB+/RR1'.
American Airlines Pass Through Trust Certificates, Series 2013-1
--Class A Certificates affirmed at 'A-';
--Class B Certificates affirmed at 'BB+';
--Class C Certificates upgraded to 'BB-' from 'B+'.
American Airlines Pass Through Trust Certificates, Series 2013-2
--Class A Certificates affirmed at 'BBB+';
--Class B Certificates affirmed at 'BB+';
--Class C Certificates upgraded to 'BB-' from 'B+'.
American Airlines Pass Through Trust Certificates, Series 2014-1
--Class A Certificates affirmed at 'A';
--Class B Certificates affirmed at 'BBB-'.
American Airlines Pass Through Trust Certificates, Series
2015-1
--Class A Certificates affirmed at 'A';
--Class B Certificates affirmed at 'BBB'.
US Airways Pass Through Trust Certificates, Series 2012-1
--Class A Certificates upgraded to 'A' from 'A-';
--Class B Certificates affirmed at 'BB+'.
US Airways Pass Through Trust Certificates, Series 2012-2
--Class A Certificates upgraded to 'A' from 'A-';
--Class B Certificates at 'BB+';
--Class C Certificates upgraded to 'BB-' from 'B+'.
US Airways Pass Through Trust Certificates, Series 2013-1
--Class A Certificates upgraded to 'A' from 'A-';
--Class B Certificates affirmed at 'BB+'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Rating Aircraft Enhanced Equipment Trust Certificates (pub. 13 Oct 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871079
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996136
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996136
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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