By Philip Baggaley, CFA
On Sept. 8, 2004, Standard & Poor's Ratings Services lowered its ratings to CCC- on US Airways Group (UAIR ) and its US Airways Inc. subsidiary, because of a lack of progress in crucial labor negotiations and rapidly dwindling time to avert a second bankruptcy filing. On Sept. 6, US Airways' pilots' union reported that it would not submit management's contract proposal to membership for a vote, as the company had requested. Achievement of a cost-saving agreement with the pilots is considered a necessary first step toward securing contract revisions with other labor groups (see BW Online, 9/8/04, "US Airways' Numbers May Not Fly").
Time to negotiate such agreements is now very limited, as the company faces a large pension payment on Sept. 15. The size of the pension payment has not been disclosed, but US Airways has said that it faces pension payments of $133 million during the second half of 2004, and a substantial portion of that is due Sept. 15. If it's not close to agreement with its labor groups by that date, management may judge that it cannot further deplete its cash reserves by making the payment, and choose instead to file for Chapter 11.
In addition, after Sept. 30, US Airways could be in default under its federally guaranteed loan, lose access to financing arrangements for regional jet deliveries, and could be forced to post added cash collateral for a credit-card processor.
Ratings on senior classes of enhanced equipment trust certificates, which are either bond insured or well collateralized, were not lowered. The ratings outlook is negative.
US Airways has said that it expects to be in violation of certain financial covenants under its federally guaranteed loan following third-quarter 2004 financial results and would accordingly need to seek another waiver or amendment from the Air Transportation Stabilization Board (ATSB). Likewise, General Electric Capital Corp. (GECC) and regional jet manufacturers providing financing for new plane deliveries have waived covenant violations linked to credit ratings through Sept. 30 but may not extend them further without significant progress in labor talks. That financing could not likely be replaced, and these jets are important to US Airways' turnaround plan.
Ratings on US Airways reflect a high near-term risk of bankruptcy, a weak financial profile, mounting pressure from low-cost competitors, and the challenge of rapidly lowering the airline's operating costs in response to these threats. US Airways is the seventh-largest U.S. airline, with a route system concentrated in the Eastern U.S. and major hubs at Charlotte, N.C., and Philadelphia.
The airline and its parent emerged from bankruptcy reorganization Mar. 31, 2003, with reduced operating costs and an approximate one-quarter reduction in financial obligations, but have been mostly unprofitable since then.
In May 2004, Southwest Airlines, the largest low-cost airline, began operations at Philadelphia International Airport, and other low-cost carriers that are expanding into US Airways' markets. Although US Airways generates higher revenues than these competitors, due to the advantages of its hub-and-spoke route network and marketing alliance with United Air Lines (UAL ), its cost disadvantage is much wider than its revenue advantage.
Bruce Lakefield, who succeeded David Siegel as US Airways CEO in April 2004, is seeking to implement a plan that would significantly change the cost structure and operations, making them more like America West Airlines (AWA ), a low-cost, hub-and-spoke airline. During this process it's also possible that US Airways will, as part of its overall restructuring, seek to renegotiate public debt obligations.
Over the long term, acquisition by another airline or some other form of close integration into a broader alliance remains the best solution for US Airways.
Liquidity: Liquidity is constrained. Unrestricted cash totaled $975 million at June 30, 2004, but is expected to decline as the airline enters the seasonally weak period following Labor Day. The company faces pension payments of $133 million during the second half of 2004, a substantial (but undisclosed) portion of which is due Sept. 15.
US Airways announced on Aug. 16, 2004, that it will ask the IRS for permission to reschedule $67.5 million of upcoming minimum pension payments relating to the 2004 plan year. If the request is granted, the company could offset $28.6 million of that amount against the 2003 plan year amounts that are due Sept. 15, 2004.
Upon emergence from bankruptcy, US Airways obtained a $1 billion facility, with $900 million guaranteed by the U.S. government and $100 million provided by "at-risk" lenders (principal shareholder The Retirement Systems of Alabama [RSA] and Bank of America). The facility begins amortizing in 2006 and matures in 2009. The amortization schedule was accelerated in early July in return for a waiver of a potential covenant default in the second quarter (the earnings eventually reported would not have caused a default but the waiver was obtained before second-quarter results were finalized). The facility is secured by various aircraft, airport gates, takeoff and landing slots, and other assets.
Financial covenants include minimum unrestricted cash equal to the lower of $700 million or the loan balance at the end of each month (if US Airways' auditors remove the going-concern qualification included in the 2003 10K filing, the minimum cash balance would be lower). Also, unrestricted cash at all times must be at least the lesser of $575 million or the outstanding loan balance.
Other covenants, which include fixed-charge coverage and adjusted debt to EBITDAR, have been amended twice in 2004, but they still require that US Airways Inc. significantly improve its financial results for the remainder of 2004 and into 2005 to remain in compliance. The company has said that it will likely violate these covenants in the third quarter of 2004, absent a waiver or amendment from the ATSB.
GECC provides several fully drawn, secured credit facilities. US Airways has essentially no unsecured assets. Security deposits required by credit-card vendors concerned about US Airways' solvency were increased in the second quarter, and restricted cash was about $800 million at June 30, 2004. American Express Travel Related Services amended its agreement with US Airways on May 4, 2004, requiring $40 million in added cash collateral, an amount that could increase by $20 million should US Airways' unrestricted cash fall below $850 million.
In addition, if US Airways' regional jet financings are terminated or it cannot demonstrate by Sept. 30 that it will be able to implement its transformation plan, added cash collateral of up to $55 million may be required.
The airline has financing for 85% to 90% of its upcoming committed regional jet orders (which could be flown by owned regional subsidiaries or partner regional airlines) from GECC and manufacturers. However, at current credit ratings these commitments could be withdrawn when interim agreements with GECC and the manufacturers expire on Sept. 30, 2004. If US Airways cannot amend its agreements or obtain alternative financing, it would be required to pay damages of up to $27 million in 2004, $42 million in 2005, and $9 million in 2007.
Both GECC, which is US Airways' largest creditor, and the regional jet manufacturers have an incentive to keep their financing commitments in place if they see progress in US Airways' efforts to lower its costs, but they may change the commitments and preserve their right to withdraw support at a later date. Deliveries of large aircraft do not resume until 2007, when Airbus planes are received.
Outlook: The outlook is negative. US Airways needs to secure material labor cost concessions very quickly as part of a broader transformation plan, or it will very likely be forced to file for bankruptcy a second time.
|Rated Entity/Rating Category||To||From|
|US Airways Group Inc.|
|Corporate credit rating||CCC-||CCC|
|US Airways Inc.|
|Corporate credit rating||CCC-||CCC|
|Equipment trust certificates||CCC||CCC+|
|US Airways Inc.|
|ETC Repackaging Trust, Series 1998-1||AAA|
Baggaley is a credit analyst following the airline industry for Standard & Poor's Ratings Services