Fitch Revises Outlook on AMR & American Airlines to Stable; Affirms Ratings
CHICAGO--(BUSINESS WIRE)--Feb. 2, 2006--Fitch has affirmed the ratings of AMR Corp. and its principal operating subsidiary, American Airlines, Inc. as follows:
AMR
-- Issuer Default Rating (IDR) 'CCC';
-- Senior unsecured debt 'CC/RR6'.
American
-- Issuer Default Rating (IDR) 'CCC';
-- Senior secured bank credit facility 'B/RR1'.
Fitch has also revised the Rating Outlook to Stable from Negative.
Ratings for AMR and American reflect the impact of very high leverage and ongoing cash flow pressures linked to heavy scheduled debt maturities, balanced against significant improvements in the U.S. airline industry revenue outlook for 2006. Despite another year of very high jet fuel prices (average 2006 price of $1.95 per gallon assumed by management), significant gains in passenger revenue per available seat mile (RASM) should put the airline in a position to report stronger free cash flow results this year. This in turn should allow the company to make progress toward its goal of driving debt levels lower in 2006. The return of pricing power over the past year appears to be sustainable in light of domestic capacity reduction linked to the Delta and Northwest bankruptcies, as well as the liquidation of Independence Air in January. Domestic pricing has also been supported by a re-allocation of seats to overseas markets and good capacity discipline by AMR in its current schedule plan. Both domestic and international booking trends appear favorable for 2006.
The Rating Outlook revision to Stable from Negative acknowledges the positive turn in the operating environment and the likely continuation of RASM increases over much of 2006. Notably, unit revenue comparisons will become more challenging in the second half of the year, as mid-2005 fare hikes will be factored into baseline unit revenue numbers. Clearly, AMR's heavy debt load and near-term maturities will require the carrier to drive major improvements in cash flow from operations this year. A reduction of targeted capital spending to $600 million this year creates an opportunity to direct more cash toward the $1.2 billion in scheduled debt principal payments during 2006. AMR will take only two mainline aircraft (B777) deliveries this year and has no further mainline or American Eagle fleet expansion planned over the near term. A modest decline in fuel prices this year, though not forecasted, would provide additional support for a cash flow turnaround and would allow AMR to make progress toward debt reduction without sacrificing its liquidity position. Management has recently emphasized the need for debt reduction and balance sheet repair as the next steps in the airline's financial recovery.
In addition to high jet fuel prices, AMR faces considerable non-fuel operating cost pressures this year. Contractual pay increases of 1.5% going into effect in May, along with significant facilities cost increases associated with airport projects at New York-JFK and Dallas-Ft. Worth, have led the company to target $700 million in cost-saving initiatives for 2006. Unit cost pressures have magnified the importance of ongoing labor-management discussions aimed at productivity improvements. Significantly, no contractual changes are assumed to be part of AMR's cost-reduction program for 2006.
With the improvement in the airline's liquidity position over the past three years (bolstered most recently by an equity offering) and stronger operating results expected in 2006, AMR is in a better position to reduce leverage by year-end. Unrestricted cash and equivalents totaled $3.8 billion at December 31, providing the carrier with a substantial liquidity cushion to support heavy debt principal payments of $1.2 billion this year and approximately $1.2 billion again in 2007. In addition, management has indicated that it expects to fund $250 million in cash payments to its under-funded defined benefit pension plans. AMR's unfunded pension liability ($2.7 billion on a GAAP projected benefit obligation basis at year-end 2004) remains far smaller then the deficits seen at the bankrupt U.S. carriers (Delta and Northwest), and management has not indicated a desire to freeze or terminate its defined benefit plans. This commitment appears to be unaffected by the potential passage of pension funding reform legislation by Congress this year.
In the event that incremental demand or fuel shocks intensify liquidity pressures, AMR retains more financing flexibility than its legacy carrier competitors due to its holdings of unencumbered assets (e.g., American Eagle, American Beacon Advisors and the AA Advantage frequent flyer program) that could be monetized if cash flow trends deteriorate.
Recovery ratings on both AMR's unsecured obligations and the fully-drawn $788 million secured credit facility reflect the variance in expected recovery in a post-default scenario. Strong overcollateralization associated with the pool of aircraft and route authorities backing the credit facility results in superior recovery prospects for lenders ('RR1'). Conversely, recovery on unsecured notes would likely be weak ('RR6'), a scenario that is consistent with recent U.S. airline bankruptcy history.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
And that's without touching a single contract
The contract damage has been done.
Since they wont be "touching" contracts That means we get nothing back. Should make everyone feel much better 8.5 hours a day.
😀
