Fitch Revises America West Airlines' Outlook to Negative; Affirms Ratings

Business Wire, Dec 21, 2004

CHICAGO -- Fitch Ratings has affirmed the senior unsecured debt rating of America West Airlines, Inc. (NYSE:AWA) at 'CCC'. The Rating Outlook has been revised to Negative from Stable. The rating action applies to approximately $600 million of outstanding unsecured debt.

The Rating Outlook revision follows a turn for the worse in AWA's revenue profile, as well as the difficult fuel price environment moving into 2005. America West's 'CCC' rating reflects ongoing concerns over the airline's limited cash flow generation capacity in an industry operating environment that remains difficult in light of high jet fuel prices and domestic overcapacity. After recovering somewhat in terms of relative unit revenue performance during 2003, the airline has failed to make progress in its attempts to enter traditional legacy carrier stronghold markets (e.g., transcontinental routes) this year. Moreover, revenue performance is likely to remain under pressure in 2005 as other low-cost carriers (LCCs), such as Southwest, AirTran and JetBlue, take new aircraft deliveries and add capacity in markets served by AWA.

Since the Air Transportation Stabilization Board (ATSB) approved a $429 million government-guaranteed loan that helped AWA avert a bankruptcy filing in January 2002, the airline has made limited headway in its effort to build operating cash flow and liquidity. Unrestricted cash and investments on hand stood at $417 million on Sept. 30, versus $517 million at year-end 2003. The poor operating outlook for the entire U.S. airline industry in 2005 provides little support for AWA's weak credit profile. Fitch believes that liquidity could be undermined significantly in 2005 if crude oil prices remain at or near $40 per barrel (translating into spot jet fuel prices of about $1.20 per gallon). While crude and jet fuel prices have fallen since November, there is little evidence to support the idea that oil prices will quickly fall to the $25-$35 per barrel range-where AWA and most other LCCs could remain profitable even in a tough fare environment.

Fixed financing obligations, including scheduled debt and enhanced equipment trust certificate (EETC) payments, represent a significant claim on cash flow in 2005. Principal payments on the ATSB term loan total $86 million annually through 2008. AWA has also signed a new agreement with Airbus that calls for the delivery of 22 new A320 family aircraft. The timing of these commitments is a concern, particularly in light of the challenging growth outlook in 2005. AWA recently scaled back its projected 2005 available seat mile (ASM) growth rate to between 3% and 5%. Still, the carrier plans to take delivery of as many as 11 new Airbus aircraft next year. This will push aircraft lease commitments and off balance sheet obligations higher at a time when operating cash flow is likely to remain weak.

A recovery in passenger unit revenue and some moderation in jet fuel prices remain the critical drivers of any prospective recovery in earnings and operating cash flow in 2005. AWA's forecasted average fuel price of $1.44 per gallon in the fourth quarter of 2004 is clearly unsustainable if another year of weak passenger yields unfolds next year. A 10-cent change in the price of jet fuel drives approximately $47 million in cash flow for AWA. A substantial move down in fuel prices, therefore, could lead to some stabilization of operating results next year. However, AWA's current fuel hedge portfolio -- comprised of cashless collars on a portion of expected fuel exposure through much of 2005-would provide only limited protection in a prolonged $40-plus crude oil environment.

Passenger revenue per ASM slipped badly in the third quarter of 2004, reflecting the impact of capacity additions by both legacy carriers and rapidly-growing LCCs in AWA markets. Passenger unit revenue fell by 9% year-over-year in the quarter, a weak showing even by industry standards. The announced pull-down of a majority of AWA's recently-launched transcontinental service indicates that AWA will be turning its attention elsewhere in the network for profitable growth opportunities in 2005. More capacity is being directed to non-hub flying in leisure markets such as California to the Mexican beach resorts. Revenue trends in connecting hub markets, however, have been very weak. Fitch believes that AWA will be hard pressed to deliver strong gains in revenue per ASM next year-contributing to the weak cash flow outlook.