Fitch Ratings has revised its outlook on US Airways Group to 'Positive' from 'Negative', reflecting improvements in the company's debt maturity profile and liquidity position. In addition, Fitch has assigned a rating of 'B/RR1' to US Airways Group's (NYSE:LCC - News) $1.25 billion secured term loan facility administered by General Electric Capital Corporation (GECC). Fitch has also affirmed US Airways Group's Issuer Default Rating (IDR) of 'CCC' and senior unsecured rating of 'CC/RR6'. Fitch has withdrawn the IDR of 'CCC' and senior unsecured rating of 'CC/RR6' on US Airways Group's America West Airlines, Inc. (AWA) unit, as noteholders have converted the subsidiary's 7.5% convertible senior notes to equity.
Fitch's senior unsecured rating on US Airways applies to approximately $144 million in unsecured debt obligations. The recovery rating of 'RR6' indicates an expected recovery of less than 10% in a default scenario.
US Airways entered into its $1.25 billion secured term loan agreement with GECC on April 7, 2006. The loan is backed by essentially all of the company's otherwise unencumbered assets and includes hard assets, such as aircraft, spare parts and ground service equipment, as well as route authorities, slots and gates. The 'B/RR1' rating reflects the loan's substantial collateral coverage and very strong recovery prospects in a distressed scenario.
Proceeds from the loan have been used to repay approximately $1.16 billion of existing secured debt, including two loans formerly guaranteed by the Air Transportation Stabilization Board (ATSB), a loan provided to the company by Airbus and an existing GECC loan. With initial pricing of LIBOR plus 3.5%, the refinancing is expected to reduce the company's interest payments by $25 million in 2006 and $20 million in 2007. More importantly, however, the new GECC term loan has a bullet maturity in 2011, while the debt it has replaced was scheduled to amortize between 2006 and 2010. The refinancing has allowed US Airways to move nearly $1.1 billion in debt maturities that would have been due in the 2006 through 2010 timeframe out to 2011, improving the carrier's near term liquidity. Maturities in 2006, 2007 and 2008 have been reduced by $88 million, $171 million and $269 million, respectively.
On March 24, US Airways called for redemption of AWA's 7.5% convertible senior notes due 2009 at a redemption price of $1,052.50 per $1,000 principal amount of notes held. Holders also had the option of converting their notes into shares of US Airways common stock at a conversion price of $29.09 per share. On April 17, the company announced that nearly all of the holders of the notes had converted their holdings to common stock. The conversion of the debt to equity reduced the company's debt load by $112 million.
The improving domestic revenue environment has strengthened US Airways' liquidity position. Domestic capacity reductions resulting from the Delta and Northwest bankruptcies, the liquidation of Independence Air and US Airways' own capacity pull-back, have driven the first meaningful improvements in domestic industry unit revenue since the post-September 11 collapse. In the first quarter, US Airways' consolidated (mainline plus express) unit revenue growth was well above the industry average, with a year-over-year unit revenue increase of over 20%. US Airways ended the first quarter of 2006 with $2.6 billion in total cash and equivalents, including restricted cash, and the subsequent closing of the term loan provided the carrier with an additional $150 million in liquidity. Continued domestic industry capacity discipline and heavy demand should result in ongoing revenue improvement throughout 2006, even as year-over-year comparisons become more difficult later in the year.
Fuel will continue to be the potential spoiler in 2006, however, with volatility in crude and jet fuel prices potentially offsetting much of the improvement in revenue. US Airways' management expects fuel prices to average $2.11-$2.15 per gallon over the course of 2006, which is a more conservative estimate than many other carriers' predictions, but relatively close to current spot prices. The company has hedged 36% of its expected full-year 2006 fuel needs. As of year-end 2005, its hedges were primarily in the form of costless collars and carried average crude oil equivalent prices of no more than $67 per barrel. Despite the hedges, however, fuel price volatility will continue to pressure the company's consolidated cash flows, with the potential for further supply shocks a concern as political tensions with Iran increase and forecasters predict another active hurricane season.
In addition to fuel expense pressure, US Airways is contending with the costs and complexities of merging the US Airways and AWA units into one airline. Although much work toward co-locating facilities and re-branding the carriers has been completed, the integration of the company's unionized labor groups has been more difficult. Although flight attendants and pilots have made progress on developing transition processes, other groups, such as the fleet service workers, have had more trouble. Merging the labor groups will be a necessary step in combining the two carriers into one airline with a single operating certificate. However, any missteps in the process could damage employee relations or morale and weigh on the airline even after the integration of the two carriers is complete.
