-- U.S.-based Alaska Air Group Inc.'s cash flow has increased
despite weaker operating performance.
-- This, along with debt reduction, has resulted in reduced leverage.
-- We are affirming our 'BB-' corporate credit rating and revising our
outlook to positive from stable, based on our expectation that the company's
operating performance will recover, primarily from stable fuel prices.
-- We would likely raise the rating within the next year if continued
strong cash flow generation and debt reduction result in improved credit
metrics on a sustainable basis.
On July 20, 2012, Standard & Poor's Ratings Services revised its outlook to
positive on Seattle, Wash.-based Alaska Air Group Inc. and its Alaska Airlines
Inc. subsidiary, from stable. At the same time, we affirmed our 'BB-'
corporate credit ratings on the two companies.
We based the outlook revision on our expectation that Alaska Air Group's
recent strong cash flow generation and debt reduction will continue, resulting
in improved credit metrics. We would likely raise the rating within the next
year if the company's credit metrics improved on a sustainable basis. For the
12 months ended March 31, 2012, Alaska Air's EBITDA interest coverage was
5.4x, funds from operations (FFO) to debt was 30%, debt to capital was 66%,
and debt to EBITDA was 3x. If operating performance continues to improve due
to stable fuel prices, combined with continued debt reduction, we expect that
EBITDA interest coverage will increase to about 7x, FFO to debt will increase
to about 40%, debt to capital will decline to the mid-50% area and debt to
EBITDA will decline to about 2x over the next year, which would support an
The ratings reflect the company's position as a relatively small participant
in the cyclical and price-competitive U.S. airline industry; its improved
financial profile; and our believe that liquidity will remain comfortably
sufficient for operating needs and debt service. We view the company's
business risk profile as "weak," its financial risk profile as "significant,"
and its liquidity as "strong" under our criteria.
Alaska Air is the holding company for Alaska Airlines Inc. and Horizon Air
Industries Inc., a regional airline. Alaska Airlines, which accounts for about
80% of consolidated passenger revenues, operates hubs at Anchorage, Alaska;
Los Angeles; Seattle (its main hub); and Portland, Ore. It primarily serves
destinations along the West Coast of the U.S., Canada, Mexico, and routes to
Alaska from the lower 48 states. The airline also provides East/West service
to Hawaii and several other destinations, primarily from Seattle. In 2011,
Alaska Airlines flew 37% of its capacity in West Coast markets, 18% in Alaska
and between Alaska and the mainland U.S., 19% transcontinental, 16% to and
from Hawaii, and 10% to Mexico and Canada.
Although the company faces significant competition in its West Coast markets,
principally from Southwest Airlines Co. and United Air Lines Inc., but also
from JetBlue Airways Corp. Virgin America, and Allegiant Travel Co., Alaska
Airlines has a substantial market share on many of the routes it serves along
the West Coast, and dominates traffic between the West Coast and Alaska. The
company also benefits from alliances with many airlines, including American
Airlines Inc., Delta Air Lines Inc., and various non-U.S. airlines.
Horizon Air is a regional airline operating out of hubs at Seattle and
Portland. It primarily flies domestically, mostly along the West Coast.
Similar to other airlines, Alaska Air benefited from an upturn in demand for
air travel in recent quarters, but higher fuel prices more than offset the
higher revenues. For the 12 months ended March 31, 2012, the company's
operating margin declined to 11% from 17% a year earlier. However, with the
recent decline in fuel prices and continued strong demand, we expect the
company's operating performance to improve in the second quarter and over the
next year. Volatile fuel prices represent a risk to all airlines. Still,
Alaska Air has had one of the best fuel-hedging programs among U.S. airlines,
using call options that cap the cost of its fuel purchases. The company has
about 50% of its fuel needs hedged at about $100 a barrel through the second
quarter of 2013.
We characterize Alaska Air's liquidity as strong. As of March 31, 2012, the
company had about $1.1 billion in unrestricted liquidity (cash, short-term
investments, and availability under its $200 million credit facilities), equal
to 31% of trailing-12-month revenues. This places it above the 20%-25% average
for the U.S. airlines. We expect this figure to remain fairly consistent over
the next several quarters, with our expectation of free cash flow offset by
potential share repurchases. In February 2012, the company announced a $50
million share repurchase program, of which it has already purchased about $19
Debt maturities are only about $150 million through the end of 2012 and $166
million in 2013, and capital spending requirements are about $375 million
through the end of 2012 and around $440 million in 2013.
In accordance with Standard & Poor's methodology and assumptions, in our view,
the relevant aspects of Alaska Air's liquidity include:
-- Coverage of cash uses by cash sources of more than 2x, well in excess
of the minimum 1.5x threshold for a strong designation, for the next year;
-- Our expectation that net sources would be positive, even with a 30%
decline in EBITDA, consistent with our criteria standard of 30%;
-- Alaska Air's likely ability to absorb high-impact, low-probability
events without refinancing, in our opinion, given the minimal refinancing past
events have required; and
-- Its generally very prudent financial risk management, including
long-term balance sheet goals and a conservative fuel hedging program.
We expect that sources of funds will consist of:
-- FFO (as reported, not fully adjusted, based on our expectations) of at
least $600 million annually for the full years 2012 and 2013; and
-- Its undrawn credit facilities.
Major uses of funds include:
-- Debt maturities of about $300 million through 2013; and
-- Capital expenditures of about $800 million through 2013.
The outlook is positive. We could raise the rating if continued strong cash
flow and modest debt reduction resulted in FFO to debt increasing to at least
35% and the company maintaining strong liquidity, as per our criteria, on a
sustained basis. We could revise the outlook to stable if economic weakness
resulted in weaker demand or fuel prices increased sharply, resulting in FFO
to debt declining to less than 30% over a sustained period, and if we revised
our liquidity assessment to adequate.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Airline Industry, Oct 22,
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Affirmed; Outlook Action
Alaska Air Group Inc.
Alaska Airlines Inc.
Corporate credit rating BB-/Positive/-- BB-/Stable/--