Fitch Rates US Airways' Proposed 2012-2 EETC Class A Certs 'A-' & Class B
NEW YORK -- November 29, 2012
Fitch Ratings assigns the following ratings to US Airways Inc.'s proposed
enhanced equipment trust certificates (EETC) series 2012-2:
--$364.9 million class A certificates (A-tranche) with an expected maturity of
June 2025 'A-';
--$111.8 million class B certificates (B-tranche) with an expected maturity of
June 2021 'BB-'.
The final legal maturities are scheduled to be 18 months after the expected
The proceeds of the certificates will be used to acquire the class A and class
B equipment notes (notes), i.e. the aircraft mortgage obligation issued by US
Airways, Inc. and fully and unconditionally guaranteed by US Airways Group,
Inc. (LCC; rated 'B-'/Outlook Stable). LCC may subsequently offer additional
subordinated class C certificates at a future date, as per the transaction
The notes will be secured by a perfected security interest in 10 brand-new
Airbus aircraft including seven A321-200 and three A330-200 (out of four)
scheduled for delivery between May-October 2013. The collateral aircraft,
classified as Fitch Tier 1, represent some of the newest and most
fuel-efficient airplanes in LCC's fleet and considered core to the airline's
operations. The A321-200s are LCC's preferred variant within the A320 family
to replace the aging narrowbody fleet (mostly classic 737s) while the
A330-200s are being inducted to support LCC's service into key international
Each aircraft's secured notes are fully cross-defaulted (from day one) and
cross-collateralized, key provisions of the modern EETC template that limits
LCC's ability to 'cherry-pick' aircraft in a potential distressed scenario,
and supports the high Affirmation Factor (i.e. Fitch's assessment of the
strategic value of the aircraft collateral to the carrier's fleet, and hence
the probability of affirmation in a potential Chapter 11 situation) for this
deal. The inclusion of the A330-200s enhances the cross-collateralization
feature in this deal relative to LCC 12-1 which includes only one aircraft
type, but with only 10 aircraft in the pool and only two aircraft types, the
potential benefit of cross-collateralization for this deal is limited relative
to larger EETCs that include more aircraft types.
Proceeds from the transaction will initially be held in escrow by the
designated depository, The Bank of New York Mellon (rated 'AA-/F1+'/Outlook
Stable) and withdrawn to purchase the notes as the aircraft are financed upon
delivery. The A and B tranches each have a dedicated liquidity facility
provided by Landesbank Hessen-Thueringen Girozentrale (Helaba) (rated
'A+/F1+'/Outlook Stable). The liquidity facility is intended to cover three
consecutive coupon payments over a period of 18 months in a potential default
The 'A-' rating for the A-tranche has been assigned as per Fitch's EETC
methodology which prescribes a 'top-down' analysis for the senior tranche
ratings that focuses primarily on the collateral, the structure's ability to
withstand severe stresses, and legal enhancements (Section 1110) with a
secondary dependence on the airline Issuer Default Rating (IDR). Accordingly,
the rating on LCC 12-2A is supported primarily by the significant level of
overcollateralization through the A-tranche and the inclusion of brand new,
high quality aircraft that are core to LCC's fleet. Loan-to-value [LTV]
through the A-tranche is initially estimated at 57.1% in Fitch's base case
(assuming no liquidity facility draw or value stresses), and remains below
100% even in its distressed scenario. Fitch rates all the aircraft collateral
as Tier 1 aircraft, but applies harsher stresses on the A330-200s than the
A321-200s. Given the LTV level and the inclusion of brand-new Tier 1
collateral, Fitch estimates that the structure can withstand acute stresses in
a potential aviation or economic downturn.
The 'BB-' rating of the subordinate B-tranche is assigned by a three notch
uplift from LCC's IDR of 'B-', based on the high Affirmation Factor (max is
four as per Fitch's methodology). The inclusion of the A330-200s in this deal
strengthen the Affirmation Factor relative to LCC 12-1B (also rated 'BB-'),
but mitigated by the higher leverage. Initial LTV through the B-tranche is
72.1% for this deal based on appraised values in the offering memorandum
versus 69%-70% for LCC 12-1B and LCC 11-1B. Nevertheless, the A330-200s make
the collateral package more attractive as they play a critical role in LCC's
fleet that includes relatively few widebodies, and would be needed to support
LCC's long-haul service in a potential default. The A321-200s form the
backbone of the LCC's domestic focused network (the A320 family is expected to
be the only narrowbody fleet for LCC). Fitch also takes into the consideration
the support provided by the liquidity facility, and legal protection offered
by Section 1110 in its B-tranche analysis.
AIRCRAFT COLLATERAL ANALYSIS
For its EETC analysis Fitch uses base values provided by an independent third
party appraiser not included in the transaction documents, in conjunction with
the appraised values in the offering memorandum. Fitch makes adjustments for
asset specific modifications (if necessary) and incorporates depreciation
assumptions that are generally more aggressive than the schedule provided in
the offering memorandum.
The collateral underlying the transaction consists of 10 new Airbus A321-200s
and three new A330-200s with expected deliveries from May-August 2013. Total
appraised value for all aircraft in the portfolio is $659.3 million as per the
prospectus (lesser of the average and median values provided by three
independent appraisers) which is in-line with Fitch's estimates.
Similar to LCC 12-1, the A321-200s in this transaction have reinforced
structures, and higher thrust engines: one aircraft with V2533-A5 from
International Aero Engines and six with CFM56-5B3P from CFM International.
Also, A321-200s in LCC fleet (which represent ~23% of total A321-200
deliveries to-date) feature higher maximum takeoff weights (MTOW) of ~93,000
tonnes versus MTOW of 89,000 or less in standard A321-200s, and two additional
center tanks (ACT) for fuel. Combined, these features increase the range of
these A321s more than otherwise available within the A320 family of aircraft.
Fitch gives merit to the two enhancements but makes more conservative
assumptions compared to industry sources when making these adjustments. No
adjustments have been made to the A330-200s, powered by Trent 772B-60 from
Collateral Coverage: LTV - Base Case
Fitch estimates the initial LTV at 57.1% for the A-tranche and 74.5% for the
B-tranche on a cumulative basis, slightly higher than the initial LTVs of
55.2% and 72.1% on the A and B respectively in the prospectus. Although
Fitch's portfolio value matches up to the prospectus, Fitch's initial LTVs (at
the end of the delivery period) are slightly higher due to the inclusion of
six months of depreciation not incorporated in the transaction documents.
Fitch's base case also projects LTVs through the life of the transaction using
more conservative depreciation assumptions (5% for the first 10 years, 6% for
the next five years and 8% for subsequent years). While these assumptions are
more conservative than the depreciation rates in the prospectus, they are in
accordance with the depreciation rates applied to Fitch's Tier 1 aircraft.
Using Fitch's steeper depreciation curve and the amortizing schedule outlined
in the prospectus and assuming no cyclical fluctuations, Fitch estimates the
LTV for the A-tranche to gradually decline through the life of the deal,
falling below 50% by 2020.
Collateral Coverage: LTV - Stress Case (Primary Rationale for A-Tranche
Fitch's stress case simulates a severe downside scenario which assumes
aircraft rejection during a downturn. Fitch puts the aircraft collateral and
structure through different ratings stress scenarios based on Fitch's aircraft
Tier classification, and recalculates collateral coverage after applying these
stresses to determine the highest rating category where the senior A-tranche
LTV does not exceed 100%, as per Fitch's EETC criteria. This downside case
reflecting a severe global aviation downturn is what drives Fitch's senior
tranche rating methodology.
Accordingly, in its stress case, Fitch assumes i) a full liquidity draw that
adds 6.3% LTV as the senior most claim, (ii) 5% repossession and remarketing
costs (iii) applies 10%-30% haircut (Tier 1 value stresses) to the aircraft
collateral to determine the highest rating category where the senior A-tranche
LTV does not exceed 100%. Fitch considers both the A321-200s and the A330-200s
in this pool to be Tier 1 aircraft, but applies harsher stresses on the
widebody A330s than the A321s.
With 636 aircraft in service among 65 global operators, the A321-200 currently
has better market penetration than its rival 737-900ER (even with the latter's
recent ramp-up in orders), but trails its smaller sister A320 and its
competing 737-800, which are considered the most liquid types of narrowbody
aircraft. The A321 program also has an order backlog of 431 aircraft, a number
exceeded by only a few other programs. The A330-200 is a popular widebody
aircraft that has outperformed its rival 767 over the last decade with a
current fleet of 450 aircraft operated by 69 carriers worldwide. With 97
outstanding orders, the backlog has remained healthy despite looming
competition from new aircraft programs for mid-sized widebodies (787/A350).
The structure for this transaction passes Fitch's 'A' rating category stresses
as A-tranche LTVs remain below 100% in Fitch's stress scenario through the
life of the security, which suggests a full recovery of principal for the
bondholders with some headroom. The highest LTVs in this stress scenario are
experienced early in the life of the deal and decline as the tranche
The Affirmation Factor
Fitch's estimates the Affirmation Factor for the aircraft in this portfolio to
be very high as it includes both narrowbody (A321-200) and widebody (A330-200)
aircraft that are core to LCC's fleet. The inclusion of the A330-200 makes the
Affirmation Factor for this deal even stronger than the LCC 2012-1 transaction
from April which included A321s only and a few vintage aircraft. All aircraft
in this transaction are brand new.
A321-200: The A320 family of aircraft expected to be the only single aisle
planes in LCC's fleet going forward, once LCC phases out the remaining 47 of
its Boeing 737 vintage aircraft over the next two years. Within the A320
family, the A321 is becoming the preferred variant as LCC (along with most of
its U.S. peers) looks to 'upgauge' in response to record load factors
sustained industry-wide over the last couple of years. With 75 aircraft in
service by year-end, the A321-200 currently represent about 24% of LCC's
narrowbody fleet but is expected to become the largest single-aisle fleet type
once the 737s are retired, and LCC inducts new deliveries from its current
orderbook. The flying range, seating capacity and enhancements of the A321
give it an important role in LCC's route map, making it an ideal plane for
routes between hub-to-hub or large cities. As the airline's preferred
single-aisle aircraft, Fitch believes it is highly unlikely that LCC would
reject these planes in the case of a Chapter 11 filing.
A330-200: With 24% of its network in foreign destinations, LCC has a limited
international footprint, but the A330s are core to serving those markets.
LCC's international fleet currently employs 26 widebody aircraft - seven
A330-200s, nine A330-300s, 10 767-200ERs, and a portion of its 757 fleet for
thin trans-Atlantic markets. Once LCC takes delivery of the remaining aircraft
from its current orderbook, the A330-200s will represent the largest portion
of the widebody fleet over the next several years. LCC has 22 A350 on order,
but the first delivery is not scheduled until 2017 and will likely replace the
older 767-200ERs. With an average age of 2.2 years, the A330-200s are the
youngest aircraft in LCC's fleet, and fully configured with the
industry-leading Envoy suite. Accordingly, the A330-200s serve important
business destinations across the Atlantic including London, Heathrow and
Paris, while the older 767-200ERs predominantly serve leisure markets like
Venice, Amsterdam and Rio de Janeiro. The A330s play a critical role in LCC's
international operations, therefore, Fitch believes it is highly unlikely that
LCC would reject these planes in a potential default.
US AIRWAYS RATINGS
Fitch's IDR of 'B-' for US Airways' Inc. and parent LCC reflect the
consolidated entity's high lease-adjusted leverage, and limited unencumbered
asset base balanced by a significant improvement in the carrier's traffic, and
operating results and liquidity profile. Other factors supporting the ratings
include structural changes in the U.S. airline industry and LCC's relative
cost position, including no defined-benefit pension plan. While significant
risks remain, Fitch believes LCC is in a better position to withstand a weak
operating environment than in the past.
LCC's traffic performance has consistently outperformed the industry average
this year reflecting the carrier's dominant position at its hubs, albeit at
smaller cities. The company's decision to remain unhedged for fuel is a
long-term concern in the event of a fuel spike, but for now the strategy seems
to be working well, as LCC's fuel cost per gallon has been lower than its
hedged peers. Importantly, the continued capacity discipline exhibited by the
major airlines has enabled LCC and its peers to pass on fuel cost increases
through higher fares, albeit at a slower pace than last year.
Despite higher capital expenditures, LCC generated approximately $189 million
in free cash flow (2% margin) on an LTM basis, reflecting stronger
profitability and operating cash flow profile. As of Sept. 30, 2012, LCC's
lease-adjusted leverage as measured by debt/EBITDAR improved to 6.1x from 7.4x
end as of year-end 2011, in-line with Fitch's expecations. Nonetheless,
debt-levels remain elevated with looming maturities over the next two years,
including $1.1 billion term loan coming due in March 2014. Fitch expects LCC
to be able to refinance the term loan in advance of its maturity. With very
few unencumbered assets, LCC is highly reliant on capital markets and external
sources of liquidity, but has maintained good access to diverse sources of
funding over the past several years.
The Rating Outlook is Stable. A downgrade is unlikely absent a drastic and
sustained fuel or demand shock that would become a liquidity event, with
accompanying tightness in credit markets. Another positive action is also
unlikely as LCC's liquidity and credit metrics are expected to remain stable
through the course of the year.
LCC's interest in merging with AMR has no impact on current ratings or
outlook. Fitch views consolidation as a positive for the industry and a
potential combination with AMR would strengthen LCC's network, and credit
profile longer term despite near-term challenges with integration.
A potential concern for A321 future market values comes from the introduction
of the NEO (new engine option) version with CFM Leap-X engines or Pratt &
Whitney PW1100G engines, with anticipated fuel savings of 15% over the CEO
(current engine option) models. The advent of the A321neo could pressure
future market values of the A321ceos longer-term. However, Fitch views it as a
bigger threat to older generation aircraft rather than the aircraft in this
portfolio given that they are some of the youngest vintage of this aircraft
type. The first delivery of the NEO option for the A321 is not expected until
2017, and it will take some time to produce a significant number of the new
planes before it starts pressuring market values. The actual impact is hard to
quantify at this point without knowing the traded price of the new engine. By
the time the NEO gains significant market penetration, most of the debt
outstanding on the senior tranche will be paid down through scheduled
amortization (which also assumes an aggressive depreciation curve). Therefore,
Fitch does not expect the impact of the NEO to have a material effect on
portfolio values for transaction. Another factor that could become a concern
affecting valuations and depreciation rates is Airbus' high planned A320
family production rates.
The advent of new technology aircraft in the widebody category such as the 787
and A350 could pressure values of the A330 longer term. However, the higher
list prices and sold-out production slots of the new aircraft types should
support A330 (and similar widebodies) values over the near-to-intermediate
Fitch has assigned the following ratings:
US Airways 2012-2 Pass Through Trust
--Series 2012-2 class A certificates 'A-';
--Series 2012-2 class B certificates 'BB-'.
Fitch currently rates US Airways as follows:
US Airways Group, Inc
--Senior secured term loan due 2014 'BB-/RR1';
--Senior unsecured convertible notes due 2014 and 2020 'CCC/RR6'.
US Airways Inc.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Aircraft Enhanced Equipment Trust Certificates' (Sept. 14, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Nov. 13, 2012).
Applicable Criteria and Related Research:
Rating Aircraft Enhanced Equipment Trust Certificates
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
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Sara Rouf, +1-212-908-9147
One State Street Plaza
New York, NY 10004
Joseph Rohlena, CFA, +1-312-368-3112
Craig Fraser, +1-212-908-0310
Brian Bertsch, +1-212-908-0549
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