TEXT-S&P revises US Airways Group outlook to positive

Thu Dec 20, 2012 11:07am EST

Overview
     -- US Airways Group Inc.'s financial profile has improved over the
past year because of stronger operating performance.
     -- We are affirming our ratings, including the 'B-' corporate credit 
rating, and revising the outlook to positive from stable.  
     -- We are also changing ratings on selected enhanced equipment trust 
certificates.  
     -- The positive outlook reflects our belief that the company's financial 
profile will continue to improve as a result of increased earnings and 
stronger cash flow generation.

Rating Action
On Dec. 20, 2012, Standard & Poor's Ratings Services affirmed its ratings, 
including its 'B-' corporate credit rating, on Tempe, Ariz.-based airline US 
Airways Group Inc. At the same time, we revised our outlook on the rating to 
positive from stable. We also raised or lowered our issue ratings on selected 
enhanced equipment trust certificates (EETCs) (see ratings list), based on our 
assessment of changes in collateral coverage.

Rationale
The outlook revision on US Airways is based on the company's improved 
financial profile over the past year because of stronger operating 
performance, which we expect to continue, assuming fuel prices remain 
relatively stable and the economy grows modestly. The company earned $600 
million in the first nine months of 2012, compared with $53 million in the 
prior year period. Revenues rose by $653 million, due to both traffic and 
yield (pricing) growth, while fuel expense rose by a modest $72 million. As a 
result, credit metrics improved: EBITDA interest coverage was 2.1x for the 12 
months ended Sept. 30, 2012, compared with 1.5x a year earlier; funds from 
operations (FFO) to debt was 19%, compared with 10%; and debt to EBITDA was 
5.8x, compared with 7.7x. We expect earnings and credit measures to continue 
to improve in 2013 despite anticipated slowing revenue gains. However, credit 
measures could deteriorate if a weaker-than-expected economic recovery causes 
traffic to soften or oil prices to spike. While improved, these credit 
measures continue to be consistent with a "highly leveraged" financial 
profile, as defined in our criteria.

The ratings on US Airways Group reflect its substantial debt and lease burden 
and participation in the high-risk U.S. airline industry. The ratings also 
incorporate the company's relatively low operating costs, compared with other 
"legacy" airlines. US Airways is the fifth-largest U.S. airline, carrying 
about 9% of industry traffic. Standard & Poor's characterizes the company's 
business profile as "weak," its financial profile as "highly leveraged," and 
its liquidity as "adequate" under our criteria. We have revised our assessment 
of the company's business risk profile to "weak" from "vulnerable" based on 
its improved operating profitability.

US Airways has indicated its desire to merge with AMR Corp. (D/--/--) (parent 
of American Airlines Inc. ), which has been operating under Chapter 
11 bankruptcy protection since Nov. 29, 2011. In September 2012, US Airways 
signed a nondisclosure agreement with AMR, following the agreements it signed 
with three of American's major unions in April 2012. The agreements with 
American's unions set terms that would govern collective bargaining agreements 
should both airlines merge. Any merger agreement would also need approval by 
management, the board, and AMR's creditors, some of which have indicated their 
desire to see the airlines merge. We will monitor the situation and take any 
necessary rating actions if a merger becomes more likely or more imminent.   

Our rating changes on selected EETCs are based on trends in collateral value 
that are outside of our previous expectations for the expected issues. The 
upgrades were all on older EETCs that have paid down debt more rapidly than 
the collateral aircraft value declined. The downgrades were also all on older 
EETCs that have amortized less rapidly than the collateral aircraft value 
declined.     

Liquidity
Liquidity is "adequate" under our criteria. Sources include unrestricted cash 
and short-term investments of $2.4 billion as of Sept. 30, 2012, and internal 
cash flow. The company has $395 million of maturities of debt and capital 
leases in 2013 and about $1.2 billion of capital spending commitments for new 
aircraft, a large proportion of which have already been financed through the 
issuance of two enhanced equipment trust certificates in 2012. 

In accordance with our methodology and assumptions, relevant aspects of US 
Airways' liquidity, in our view, are as follows:
     -- We expect that sources would cover uses in excess of 1.2x through 2013.
     -- We expect that net sources would be positive even with a 15% decline 
in EBITDA. Because airline earnings are volatile, our analysis also simulates 
a 30% decline in EBITDA, and net sources would still be positive in that 
scenario.
     -- We view US Airways' ability to absorb low probability, high-impact 
shocks with minimal refinancing as unlikely based on the cyclicality of the 
airline industry and less cash, although improved, relative to that of most 
U.S. airline peers.
     -- We view banking relationships as sound and standing in the credit 
markets as generally acceptable relative to peers.
     -- We have some concerns about financial risk management because of 
management's stated preference not to hedge fuel price exposure. However, 
other aspects of financial risk management, such as a focus on liquidity, are 
satisfactory.

In addition, the only financial covenant in US Airways' $1.14 billion secured 
term loan is minimum required unrestricted cash of $850 million, an amount 
that we believe it can comfortably maintain, even if EBITDA were to decline by 
up to 30%. The company has (undisclosed) financial covenants, including 
material adverse change clauses, in its credit card processing agreements, 
which allow the processors to hold back some amount of cash if specified 
conditions are not met.

We expect unrestricted cash and short-term investments to remain relatively 
consistent through 2013, at about 18% of annual revenues. This is still among 
the lowest of the U.S. airlines, but we consider it adequate, particularly 
given US Airways' lower debt maturities relative to annual revenues than those 
of peer U.S. airlines.

Recovery analysis
We rate US Airways' senior secured term loan 'B+' with a '1' recovery rating, 
indicating our expectation of very high (90%-100%) recovery in the event of a 
default. We rate US Airways' senior convertible notes 'CCC' with a '6' 
recovery rating, indicating our expectation of negligible (0-10%) recovery in 
the event of a default. 

For the complete analysis, see our recovery report on US Airways to be 
published later on RatingsDirect.

Outlook
The outlook is positive. We expect US Airways' financial profile to remain 
fairly consistent in 2013, with EBITDA interest coverage about 2x and FFO to 
debt in the mid to high teens. We could raise ratings if FFO to debt remained 
in the high-teens percent area, liquidity remained at least $2.5 billion, and 
the company refinanced its term loan that matures in March 2014 early in 2013. 
We could revise the outlook to stable if a stalled U.S. economic recovery or 
serious oil price spike caused losses, eroding liquidity to less than 10% of 
revenues. We will also monitor a potential merger with AMR.

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Criteria For Rating The Airline Industry, Oct. 22, 
2010
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008



Ratings List
Ratings Affirmed; Outlook To Positive
                                        To                 From
US Airways Group Inc.
US Airways Inc.
America West Holdings Corp.
America West Airlines Inc.
 Corporate Credit Rating                B-/Positive/--     B-/Stable/--

Downgraded
                                        To                 From
America West Airlines Inc.
Series 1998-1A Pass Through Trust       BBB(sf)            BBB+ (sf)
Series 1998-1B Pass Through Trust       BB-(sf)            BB(sf)
Series 1999-1G Pass Through Trust       BB+(sf)            BBB-(sf)

US Airways Inc.
Series 2000-3C Pass Through Trust       B(sf)              B+(sf)

Ratings Affirmed

US Airways Group Inc.
 Senior Secured                         B+                 
  Recovery Rating                       1                  
 Senior Unsecured                       CCC                
  Recovery Rating                       6                  

America West Airlines Inc.
 Equipment Trust Certificates           BB+                
 Equipment Trust Certificates           BBB                
 Equipment Trust Certificates           BBB-               

US Airways Inc.
 Equipment Trust Certificates           BB+                
 Equipment Trust Certificates           BBB                
 Equipment Trust Certificates           B                  
 Equipment Trust Certificates           BB                 
 Equipment Trust Certificates           BBB+               
 Equipment Trust Certificates           BBB-               
 Equipment Trust Certificates           B+                 
 Equipment Trust Certificates           B-                 


Upgraded
                                        To                 From
US Airways Inc.
Series 1999-1C Pass Through Trust       B(sf)              B-(sf)
Series 2001-1G Pass Through Trust       BBB-(sf)           BB(sf)     

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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