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Moody's affirms ATA Holdings
Monday February 2, 1:43 pm ET
NEW YORK, Feb 2 - Moody's Investors Service (News - Websites) confirmed its ratings assigned to ATA Holdings and its primary operating subsidiary ATA Airlines, Inc. (Senior Implied Rating, Caa2). The Outlook is Stable. This concludes Moody's review for possible downgrade initiated in August 2003. The ratings action reflects the company's announcement that it has reached an agreement with holders representing in excess of 85% of existing unsecured notes under which they will agree to an exchange of unsecured notes, due in 2004 and 2005, for new notes with, among other amended terms and conditions, longer maturities. In addition, the company has received consent for the exchange from the Air Transportation Stabilization Board ("ATSB"). The consent was necessary under the guarantee the ATSB has provided to certain of the company's bank debt. Reflected in the ratings is the continued weak earnings outlook for the company in a recovering but still uncertain revenue environment for the passenger airline industry. The ratings confirmation acknowledges the benefits to the company's liquidity provided by the completion of the exchange and related renegotiation of lease payments. Ratings affected by the current action include: ATA Holdings Corporation: Senior Unsecured Notes Ca American Trans Air, Inc.: Senior Implied Rating Caa2 Enhanced Equipment Trust Certificates: Series 1996-1A: Ba2 Series 1996-1B: Caa1 Series 1996-1C: Ca Series 1997-1A: Ba2 Series 1997-1B: Caa1 Series 1997-1C: Ca Series 2000-1C: Caa1 Series 2002-1A: Baa3 Series 2002-1B: B1 The Series 2000-1G EETC Aaa rating is not on review as the rating is supported by a monoline insurance policy. ATA has announced the completion of its exchange offer including the consent of the ATSB and amendment of lease terms by several of the company's primary lessors. The combination of the agreements will substantially reduce near term demands on cash. Major lessors have agreed to reductions in lease payments. The company's cash lease payments are heavily concentrated in the first quarter of the year. In addition, the exchange will reduce demands on cash from the maturity of unsecured debt obligations that were coming due in August of 2004 and December of 2005. The holders of in excess of 85% of this debt have agreed to extend the maturities of these obligations to 2009 and 2010. The ratings reflect continued earnings weakness at ATA as a result of low yields currently prevalent in the passenger airline industry in the United States. The company did report net earnings in the second quarter (assisted by $37 million in expense reimbursements from the Transportation Security Administration) and a $6.5 million net profit in the traditionally seasonally strong third quarter. The company has reported a full year profit but would have reported a small loss without the benefit of U.S. Government funds. Lease adjusted debt levels continue to increase as the company has continued to add to its fleet under previous agreements and is committed to taking delivery of one 757-200 and two 737-800s in 2004. The company's military charter operations are undertaken with B757 and L1011 aircraft. All of the L1011 aircraft are scheduled for major overhauls in 2006 and beyond. ATA will be required to decide whether to exit the military charter business, spend the capital to undertake the major maintenance required on the L1011's or replace these aircraft. It has publicly stated that it is looking at adding additional aircraft, possibly B767's, in order to continue its military charter business. A decision, other than to exit the business, would likely add to lease adjusted debt obligations. ATA has one of the lowest unit costs (costs per available seat mile) in the US passenger airline industry at 7.16 cents for the fourth quarter of 2003 (7.00 for 2003 excluding US Government funds). This is down from 7.96 cents for the fourth quarter of 2002 and 8.26 cents for the full year, excluding government funds. Low operating costs have allowed the company to post a small profit for the year. However, low scheduled service unit revenues (6.09 cents per available seat mile in the fourth quarter of 2003 and 6.49 cents for the full year) have constrained profitability and cash flow. ATA's full year also benefited from increased military charter flying done in conjunction with the war in Iraq. The company has reported that, based upon the latest information available from the military, 2004 revenues in this segment may approximate those seen in 2003. Moody's anticipates that earnings and cash flow will remain constrained for the intermediate term. Yields are expected to remain low as major hub and spoke carriers return capacity to the system and growth continues among low cost carriers. ATA has seen Southwest as a major competitor at Chicago Midway Airport, the company's primary hub. And, many of the company's major destinations, Florida, Mexico vacation destinations as well as Las Vegas and Hawaii have been and are expected to remain highly competitive markets. With already low costs, the company's recovery is, in Moody's opinion, highly dependent on increases in Unit Revenues. The company does have an opportunity to increase its load factors, low by industry standards at 72.5% for the third quarter and 68% for the first nine months. To increase revenue it must accomplish the difficult task of increasing load factors (the number of passengers on its aircraft) without further reducing yields (price). The stable ratings outlook reflects the company's low cost of operations and the potential to benefit from any increase in load factors or yields. In addition, the stable outlook reflects the benefits of the reduction in near term cash demands from lease obligations and debt maturities. However, these obligations have been deferred not eliminated. The company will need to see a meaningful increase in earnings in order to comfortably meet increases in debt maturities and lease obligations over the next several years. ATA Holdings and its primary operating subsidiary ATA Airlines, Inc. are headquartered in Indianapolis, IN.
