S&P Cuts US Airways Rating to D

With nearly all of its debt secured or in leases, reducing financial obligations in Chapter 11 will be a tough job

By Philip Baggaley, CFA

On Sept. 13, 2004, Standard & Poor's Ratings Services lowered its ratings on US Airways Group (UAIR ) and its US Airways subsidiary, following the Sept. 12 bankruptcy filings by both entities. The corporate credit ratings were lowered to D from CCC-. Ratings for US Airways' enhanced equipment trust certificates (EETCs) are still current, despite the bankruptcy filing, due to availability of dedicated liquidity facilities and/or bond insurance. Downgrades of some noninsured EETCs reflect increased risk of eventual default, based on an assessment of collateral coverage and the likelihood of US Airways reorganizing.

US Airways enters Chapter 11 with relatively limited liquidity as it's approaching the slow winter travel season. Because all of its assets are already pledged as collateral, it will have to rely on existing unrestricted cash. US Airways reached an agreement with the Air Transportation Stabilization Board (ATSB), which guarantees a $717.6 million loan, providing access to "a portion of $750 million in cash," which forms part of the collateral backing that loan.

US Airways is expected to move quickly to seek revised labor contracts to lower operating costs and limit cash outflow. Management says it will seek to do so consensually, but it's prepared to ask the bankruptcy court to impose new contracts if necessary. At least some of the airline's unions will likely eventually agree to revised contracts, given the alternative of imposed changes, as did unions at bankrupt United Air Lines.


  US Airways listed assets of $8.8 billion (including $2.5 billion of goodwill from its previous reorganization) and liabilities of about $8.7 billion. Because virtually all of US Airways' debt is secured or in the form of leases, it will have less opportunity to reduce its financial obligations in Chapter 11 than would a company with substantial unsecured debt.

In addition to the ATSB, General Electric Capital Corp. (GECC) and regional jet manufacturers are major creditors. Adding more regional jets is important to US Airways' turnaround plan, but it's uncertain whether the jetmakers and GECC will be willing to extend financing for further aircraft deliveries.

Even if US Airways is able to reduce its costs and improve operating results, it may still face a challenge in attracting financing to exit from Chapter 11, as the federal loan guarantee program that it used before is no longer available, and it seems unlikely that its largest shareholder, the Retirement System of Alabama (RSA) will invest more equity.


  US Airways Inc., the seventh-largest U.S. airline, has a route system concentrated in the Eastern U.S. with major hubs at Charlotte, N.C., and Philadelphia. The carrier is expected to pursue basically the same "transformation plan" that it had begun to implement in recent months.

That includes a substantial reduction in operating costs, a simplified and lower fare structure (already introduced on many routes from Philadelphia in response to competition from Southwest Airlines), more point-to-point flights (rather than connecting through hubs), and further shrinkage of its former Pittsburgh hub.

US Airways is likely to face intensified competition from low-cost rivals that have entered its markets, and it could lose passengers if itss survival becomes uncertain.


  Liquidity is restrained. Unrestricted cash totaled $975 million at June 30, 2004, but has since declined. Total cash, restricted and unrestricted, was $1.45 billion upon filing. Under an agreement with the ATSB, US Airways has access to "a portion of $750 million." Further information about the airline's liquidity situation is expected shortly.

With no debtor-in-possession credit facility, the company will have to rely on existing cash reserves for working capital. During the first 60 days, US Airways can suspend payments on aircraft debt and leases, but will thereafter have to come current or risk having the planes repossessed. On Sept. 15, it has a large pension payment due, widely reported in the media to total $110 million, but is likely to delay that funding.

Unrestricted cash will be under some pressure as suppliers and credit-card processors seek more cash collateral to continue providing services. 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 increases by $20 million upon US Airways' unrestricted cash falling below $850 million.

In addition, if US Airways' regional jet financings are terminated or if it cannot demonstrate by Sept. 30 that it will be able to implement its transformation plan, added cash collateral of up to $55 million would be required.

Ratings Lowered; Outlook Negative    
Rated Entity/Rating Category To From
US Airways Group Inc.    
Corporate credit rating D CCC-
US Airways Inc.    
Corporate credit rating D CCC-
Equipment trust certificates CCC- CCC
Pass-through certificates    
Series 1998-1A BB+ BBB-
Series 1999-1A BB+ BBB-
Series 1998-1B CCC+ B-
Series 1999-1B CCC+ B-
Series 2000-3C CCC- CCC
Series 2001-1C CCC- CCC
Ratings Affirmed    
US Airways Inc.    
Pass-through certificates    
Series 2000-1G   AAA
Series 2000-2G   AAA
Series 2000-3G   AAA
Series 2001-1G   AAA
Series 1998-1C   CCC-
Series 1999-1C   CCC-

Baggaley is a credit analyst following the airline industry for Standard & Poor's Ratings Services

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