Fitch Places America West Airlines on Rating Watch Negative

Business Wire, May 20, 2005

CHICAGO -- Fitch Ratings has placed the 'CCC' senior unsecured debt rating of America West Airlines, Inc. (AWA) and America West Holdings Corp. on Rating Watch Negative. This action follows yesterday's announcement by America West that it would seek to merge with US Airways Group, Inc., pending approvals from creditors and the U.S.

bankruptcy court overseeing US Airways' Chapter 11 case. Fitch's rating action affects approximately $600 million of AWA's outstanding debt obligations. E[acute accent]The strategic case for a merger between AWA and US Airways rests on the idea that route network scale and scope will be vital for both carriers to survive in an industry that is moving inexorably toward consolidation. With jet fuel prices still exceeding $1.50 per gallon and with domestic overcapacity continuing to undermine passenger yields and revenue per available seat mile performance, both AWA and US Airways face intensifying liquidity pressures moving into 2006. For US Airways in particular, a successful restructuring now appears largely dependent upon the availability of outside capital to support a postbankruptcy capital structure. E[acute accent]The carriers intend to finance the merger through the addition of up to $1.5 billion in new capital, including $350 million from four equity sponsors. Also included in the new capital is $250 million that would be loaned to the merged carrier by Airbus. The carriers contemplate obtaining the remaining funding through agreements with various suppliers and partners, the release of certain cash reserves, and a $150 million equity rights offering. If the full amount of targeted capital is raised, the company's cash balance could approach $2 billion at the time the merger is consummated. E[acute accent]Although the additional liquidity could provide critical support for the transaction and the viability of a postmerger entity, Fitch is concerned about the risk associated with integrating the carriers' labor forces and route networks. Optimization of a combined AWA-US Airways fleet could lead to capacity reduction and improved operating results versus the current scenario, but transition costs and potential labor disruption could drain cash from the merged airline. This could undermine liquidity at a time when reconstruction of highly levered balance sheets is essential. AWA faces scheduled principal payments of $86 million on its government-guaranteed term loan over the next year (next payment scheduled for September), but timely payment of obligations could be threatened if merger-related cash outflows complicate AWA's liquidity problems later in the year. E[acute accent]America West's 'CCC' rating reflects ongoing concerns over the airline's limited cash flow generation capacity in an industry operating environment that remains very difficult in light of high jet fuel prices and domestic overcapacity. Although AWA's relative unit revenue performance improved in the first quarter, partly as a result of easy comparisons versus weak 2004 yields, the company still faces a challenging operating outlook for the remainder of 2005 if jet fuel prices remain near current levels. AWA's attempts to enter traditional legacy carrier stronghold markets (e.g. transcontinental routes) were largely unsuccessful in 2004, and the carrier lacks attractive growth opportunities at current unit cost levels. 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. E[acute accent]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 only limited headway in its effort to build operating cash flow and liquidity. Unrestricted cash and investments on hand stood at $254 million on March 31, versus $306 million at year-end 2004. 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 in a stand-alone case could be undermined significantly by January 2006 if crude oil prices remain at or near $50 per barrel. E[acute accent]Resolution of the watch will likely follow the disclosure of the AWA-US Airways merger plan in future filings made to the SEC and the bankruptcy court, as well as the receipt of necessary approvals from relevant bodies (e.g. the ATSB, the bankruptcy court, and the U.S. Department of Justice). Fitch will be focused in particular on the scale of combined fleet restructuring, estimates of merger implementation costs, and the level of anticipated revenue and cost synergies. Potential labor disruption linked to the effort to resolve seniority and other integration issues will also be monitored closely. A downgrade could follow if AWA's liquidity profile in 2006 is eroded further or if timely payment of fixed obligations is jeopardized as a result of the proposed transaction.