The Rating Outlook for American is Negative

WingNaPrayer

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[P][SPAN class=newsarttitle][STRONG][FONT size=3]Fitch Initiates American Airlines, Inc. Unsecured Rating at ''CCC+'' [/FONT][/STRONG][/SPAN]
[P][STRONG]CHICAGO, Jan 24, 2003 (BUSINESS WIRE)[/STRONG] -- Fitch Ratings has initiated coverage of American Airlines, Inc., a subsidiary of AMR Corp., and has assigned a rating of ''CCC+'' to the company''s senior unsecured debt. [EM]The Rating Outlook for American is Negative[/EM]. [/P]
[P]The ''CCC+'' rating reflects deepening concerns over American''s ability to respond to the continuing industry revenue crisis by quickly overhauling its labor costs and renegotiating union contracts. American management has made it clear that the current cost structure is unsustainable in light of the weak revenue environment and the changing competitive structure of the airline industry. This conclusion is reinforced by the magnitude of the losses seen in the fourth quarter and the dismal outlook for 2003. [/P]
[P]The industry revenue environment, characterized by persistent weakness in business travel demand and poor passenger yields, led American to report a discouraging 2% increase in revenue per available seat mile (RASM) in the fourth quarter on a 6% reduction in passenger yields. This performance fell short of the RASM performance of the other U.S. major carriers in the fourth quarter and reflected the vulnerability of American''s network to low-fare competition in the domestic market and weak macroeconomic conditions in Latin America and the Caribbean, where the airline has a leading market share position. In the domestic market, overlap with low-cost carriers such as Southwest, JetBlue and AirTran has now risen to approximately 82% of the U.S. routes that American serves. This does not reflect the route overlap with a potentially new United Airlines, against which American would be at a significant cost disadvantage following United''s restructuring of labor and aircraft ownership costs under Chapter 11 bankruptcy protection. In light of the structural weaknesses of the American network, the outlook for meaningful improvement in unit revenue during 2003 appears poor. [/P]
[P]Following a reported net loss of $529 million in the fourth quarter, American has indicated that losses of a similar magnitude are likely in the seasonally weak first quarter of 2003. Additional revenue risk tied to demand shocks following a potential war with Iraq presents American with further complications in building a recovery plan that reduces the large operating cash flow shortfalls that will result if far-reaching changes in unit labor costs are not forthcoming. Above and beyond the risks associated with a fall-off in traffic (particularly on international routes) following a new Gulf War, American is vulnerable to further jet fuel price spikes. American is currently 40% hedged against fuel price swings in the first quarter and 32% hedged for the remainder of the year (both periods hedged at an average crude oil price of $23 per barrel). This hedging position compares somewhat unfavorably to the other non-bankrupt major carriers (Continental, Northwest, Delta and Southwest), which have a larger portion of their jet fuel exposure hedged. [/P]
[P]On the cost side, American management has repeatedly stated its intention to pull approximately $4 billion in pre-2001 expenses out of the system by 2004. Clearly this implies a substantial contribution in the form of wage, benefit and work rule concessions as part of an effort to bring American''s unit labor costs closer to the new competitive standard being set by US Airways and United as a result of cost restructuring undertaken in the Chapter 11 reorganization process. With the wage and benefits expense line now representing almost 50% of American''s total operating revenues, it is no surprise that deep cuts in wages and benefits will become the top priority of the airline''s management as it seeks to avoid a significant decline in liquidity by mid-year. Management has noted that weekly meetings with unions are leading to a full and frank exchange of financial information; however, there have been few public signs of progress in recent weeks to suggest that the necessary labor cost restructuring effort is moving ahead. In light of the achieved and prospective concessions seen at US Airways and United, Fitch believes that unit labor cost reduction in the range of 20 to 25 percent will be essential if American is to remain on track to meet its broader cost reduction targets while lowering the cost premium over its restructured major airline competitors. [/P]
[P]Non-labor cost saving initiatives announced by the company in the months after September 11 appear to be gaining some traction, as seen in the 5% year-over-year decline in cost per available seat mile (holding fuel prices constant) in the fourth quarter. Improved asset utilization associated with the de-peaking of American''s Chicago-O''Hare and Dallas-Fort Worth hubs, along with lower distribution costs, are contributing to unit cost reduction. However, as American senior management has been quick to point out, the most straightforward sources of savings have already been identified. Despite savings achieved through capacity adjustments and headcount reduction since late 2001, the critical drivers of labor costs (pay rates, benefits and work rules) have not been addressed. [/P]
[P]The damage done to American''s operating profile as a result of weak pricing and high costs has been compounded by a rapid deterioration of its balance sheet over the past two years. As part of an effort to shore up liquidity in anticipation of a revenue rebound, American has tapped the debt markets on several occasions since September 2001. In 2002 alone, the airline issued almost $3 billion in new debt--including a $675 million enhanced equipment trust certificate (EETC) offering in December. In all, balance sheet debt at the AMR Corp. consolidated level rose from approximately $6.3 billion at year-end 2000 (prior to the TWA acquisition) to $12.5 billion at 9/30/02. On top of off-balance sheet aircraft and facilities leases, this leaves the airline with a lease-adjusted debt load of approximately $26.5 billion at 9/30/02, as compared with $16.7 billion at the end of 2000. With higher interest expense (up by about $100 million in 2003), substantial fixed lease obligations, and rising pension funding requirements, the increased liquidity associated with recent capital market transactions comes at a high price in the context of reduced capacity and substantially lower cash generation potential. [/P]
[P]Following the most recent EETC transaction, American''s total unencumbered asset base has been reduced to approximately $2.9 billion, of which only about $700 million represents Section 1110-eligible aircraft. Given the weakness of the aircraft securitization markets, this means that American''s further access to the capital markets is in question. Indeed, even if another deal can be completed, the amount of debt issued may be rather low in comparison with recent transactions. The obvious conclusion is that American''s capacity for establishing more liquidity buffers is very limited and the company will have to rely very heavily on cash flow from operations to meet liquidity needs in 2003. With maturities of about $800 million in 2003, $471 million in 2004 and $1.3 billion in 2005, refinancing risk is very high. [/P]
[P]American faces a fixed charge coverage covenant test related to its $834 million secured revolving credit facility on June 30. At this time, it appears likely that the company will fail that test, leading to an event of default on the facility and the potential acceleration of repayment on the bank facility. Considering the weakness of the used aircraft market and the reluctance of American''s banks to repossess pledged aircraft collateral in a default scenario, we believe that the negotiation of a waiver related to the covenant test is probable. [/P]
[P]Most of American''s near-term mainline aircraft purchase commitments have been pushed back to 2006 and beyond as a result of a delivery deferral agreement with Boeing. However, 11 aircraft (9 B767-300s and 2 B777-200s) must be taken this year. In light of its capacity reduction and the easy availability of parked aircraft, American has made it clear that it has no desire to take these 2003 deliveries. Boeing has agreed to provide backstop financing, presumably in the form of operating leases with Boeing Capital as the lessor. American Eagle, American''s regional feeder, is on track to take a steady stream of Embraer and Bombardier regional jets over the next few years. Regional jets continue to offer the best economics of any aircraft in the American/American Eagle route network. [/P]
[P]Like the other majors, American faces a large and growing underfunded pension liability that forced it to book a $1.1 billion charge to shareholders'' equity on the year-end 2002 balance sheet. Fitch believes that the underfunded pension obligation is in excess of $3 billion on a projected benefit obligation (PBO) basis. While American''s required cash contribution to its pension plans in 2003 is estimated to be only $200 million (versus booked pension expense of approximately $700 million on the income statement), the size of the funding gap suggests that annual cash contributions well above $200 million will be required in 2004 and beyond. In addition to pension expense, American has identified employee and retiree medical expenses as a major source of rising costs in 2003. Management estimates that employee medical costs could rise by as much as 15% this year, while retiree costs (influenced more closely by prescription drug price trends) will grow by as much as 25%. These benefit trends represent significant risk items that may undo some of the potential savings associated with labor contract restructuring later this year. [/P]
[P]One event-driven opportunity for American would appear if one or both of the bankrupt majors were to liquidate as a result of failure to reorganize successfully under Chapter 11. In the event of a United Chapter 7 filing, American would clearly see a large market share shift at Chicago-O''Hare, where it overlaps significantly with United. Revenue gains tied to a US Airways liquidation would be less dramatic, but under any such scenario a reduction in overall industry ASM capacity would certainly lead to a better unit revenue outlook for 2003. [/P]
[P]This rating was initiated by Fitch as a service to users of its ratings and is based on public information. [/P]
 

nyc6035

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To put this into perspective a little, historical trends show that 25% of Bonds rated C to CCC default within 12 months. That number rises to 45% over a 5 year period.

No one should question the seriousness of AMR's current situation.
 

TWAFA007

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[blockquote]
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On 1/27/2003 10:11:46 PM nyc6035 wrote:

To put this into perspective a little, historical trends show that 25% of Bonds rated C to CCC default within 12 months. That number rises to 45% over a 5 year period.

No one should question the seriousness of AMR's current situation.
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[/blockquote]
Aloha nyc6053,

Obviously the APFA does. They feel that AMR could still afford to give them a raise this month, with more to follow, just as more F/As hit the street.

ALOHA, 007
 

FA Mikey

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[blockquote]
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On 1/27/2003 10:24:55 PM TWAFA007 wrote:

[blockquote]
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On 1/27/2003 10:11:46 PM nyc6035 wrote:

To put this into perspective a little, historical trends show that 25% of Bonds rated C to CCC default within 12 months. That number rises to 45% over a 5 year period.

No one should question the seriousness of AMR's current situation.
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[/blockquote]
Aloha nyc6053,

Obviously the APFA does. They feel that AMR could still afford to give them a raise this month, with more to follow, just as more F/As hit the street.

ALOHA, 007
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[/blockquote]
Anything for a post. Has APFA said anywhere any of these things you claim?
 
OP
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WingNaPrayer

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So.....does this mean that 007 isn't entitled to an opinion, or to participate on this message board?

Man you people are like gossiping old queens in the corner of the Walmart dissin' the new whore in town!
 
[blockquote]
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On 1/27/2003 10:31:32 PM AA D2 TW SP wrote:

Disclaimer:

TWAFA007 is married to a UAL flight attendant.
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FA007 is also a furloughed TWA/AA flight attendant now working for JetBlue...

Talk about some conficts of interest!...
 

spacewaitress

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[blockquote]
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On 1/28/2003 9:45:04 AM WingNaPrayer wrote:

So.....does this mean that 007 isn't entitled to an opinion, or to participate on this message board?

Man you people are like gossiping old queens in the corner of the Walmart dissin' the new whore in town!
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[/blockquote]
Use whatever means which supports your denial, that's what I always say.
 
Another downgrade on the debt.


TEXT-Moody's may cut AMR, American Airlines ratings



Approximately $13 billion in Debt Securities Affected.

NEW YORK, Jan 28 - Moody's Investors Service placed its ratings of AMR Corp [AMR.N] (Senior Implied Rating B1) and its primary operating subsidiary American Airlines, Inc. ("American") on review for possible downgrade. The review was prompted by the uncertain prospects for a meaningful recovery in the company's cash flow in light of a continued weak revenue environment and high unit cost that have, to date, been stubbornly resistant to meaningful reductions. The review also considers the reduction in AMR's financial flexibility in light of increased use of secured financing and the probable need to renegotiate existing debt covenants. All ratings of debt issued by AMR and American Airlines, Inc. will be reviewed except for the American Airlines, Inc. Series 2002-1 Class G Enhanced Equipment Trust Certificates which are supported by a monoline insurance policy. In addition, the review will include all Industrial Revenue Bonds supported by loan or lease payments from American and the Notes and Certificates issued by the Regional Jets Equipment Trust, Series 2000-1 (supported by payments from American Eagle guaranteed by American Airlines, Inc.). The review will assess American's ability to positively impact cash flow through increased unit revenues and/or a meaningful and rapid reduction in unit costs without a disruption in operational efficiency. In addition, Moody's will review the company's ability to husband its current liquidity including its ability to renegotiate covenants on its existing bank line of credit and to meet demands on existing cash from capital expenditure commitments, working capital changes and demands from at risk suppliers of goods and services. The review will also include an assessment of the impact of changes in the value of the aircraft supporting the company's secured Equipment Trust Certificate and Enhanced Equipment Trust Certificate transactions. Ratings on these transactions will be affected by any change in the underlying rating of American as well as any changes in expected realizable values of the underlying collateral. AMR Corp and its primary subsidiary, American Airlines, Inc., the world's largest airline, are headquartered in Fort Worth, TX.

01/28/03 15:03 ET
 

TWAFA007

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Sep 2, 2002
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[blockquote]
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On 1/27/2003 10:46:58 PM FA Mikey wrote:

[blockquote]
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On 1/27/2003 10:24:55 PM TWAFA007 wrote:

Aloha nyc6053,

Obviously the APFA does. They feel that AMR could still afford to give them a raise this month, with more to follow, just as more F/As hit the street.

ALOHA, 007
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[/blockquote]
Anything for a post. Has APFA said anywhere any of these things you claim?
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[/blockquote]
Aloha Mike,

Didnt Carty ask all Unions to for go pay raise for 2003 to help AA survive in Dec.? Didnt the APFA say they wanted to look at the books first? Didnt the APFA decide to take a %3 raise this month? Isnt AA heading rapidly toward bankruptcy? Its not what APFA, "said," its what they did. Actions speak louder than words.

ALOHA, 007