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