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 December 7, 2015 - 2:28 PM EST
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Fitch Upgrades American Airlines to 'BB-'; Outlook Stable

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Joe Rohlena, CFA
Director
+1-312-368-3112
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (December 7, 2015 - 2:28 PM EST)

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