On Your Six
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- Mar 8, 2004
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Not a big surprise. Sounds like UAL does have some assets that it can sell in a worst-case scenario to maintain the required liquidity... Read below:
Fitch Revises UAL & United Airlines' Outlook to Negative
Thursday May 29, 12:18 pm ET
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has revised the Rating Outlook for UAL Corp. and its principal operating subsidiary United Airlines, Inc. (United) to Negative from Stable. Debt ratings for both entities have been affirmed as follows:
--UAL & United Issuer Default Ratings (IDR) at 'B-';
--United's secured bank credit facility (Term Loan and Revolving Credit Facility) at 'BB-/RR1';
--Senior unsecured rating for United at 'CCC/RR6'.
The bank facility rating applies to approximately $1.3 billion of funded term loan debt, and the unsecured rating applies to approximately $1.4 billion of outstanding notes.
The Negative Rating Outlook reflects Fitch's view that the unprecedented rise in crude oil and jet fuel prices witnessed over the last several weeks will put increasing pressure on United's margins and cash flow generation capacity through the remainder of 2008, potentially forcing the carrier to consider asset sales or new financing to shore up liquidity in an increasingly challenging industry operating environment. United has taken steps in recent weeks to counter the fuel shock by cutting domestic available seat mile (ASM) capacity after the summer, while negotiating covenant waivers with its credit facility lenders to ensure access to its $1.5 billion secured credit facility. Still, the magnitude of the recent fuel price spike is leading United and other large U.S. carriers to pursue fare and fee increases that may well begin to crimp air travel demand and undermine the industry's ability to partially offset fuel-related cash outflows in a weak macroeconomic environment.
Ratings for UAL and United reflect the airline's highly levered balance sheet, volatile cash flow generation capacity, and ongoing susceptibility to intense fuel and revenue shocks in an industry that remains particularly vulnerable to macroeconomic risk. Following two years of improvements in cash flow generation and steady debt reduction in 2006 and 2007, United faces an increasingly difficult operating environment in 2008 that will likely lead to a deterioration in credit quality over the next few quarters.
In a prolonged high fuel cost scenario that assumes no significant pull-back in crude oil and jet fuel prices through early 2009, United and all of the major U.S. carriers will face intensifying liquidity pressures--particularly if an extended economic slowdown drives a sharp reduction in air travel demand. However, it is important to note that United's unencumbered asset holdings give it some room to maneuver with respect to liquidity preservation in a deep industry downturn. United's current unencumbered fleet of 113 aircraft could be financed to shore up cash balances if free cash flow trends deteriorate further. The potential sale of other assets such as United's maintenance, repair and overhaul (MRO) operations, spare parts, advance sales of Mileage Plus frequent flier miles and London Heathrow slots all represent sources of liquidity that could be tapped in the coming months if unrestricted cash balances fall closer to the $1.0 billion covenant level.
Taking into account the impact of fuel hedges, United remains highly sensitive to volatility in jet fuel prices. Fitch estimates that the annual mainline fuel cost impact of a 10-cent change in jet fuel prices is approximately $220 million. A full year 2008 post-hedge average fuel price of $3.20 per gallon (well below current spot prices of about $4.00 per gallon) would translate into approximately $2.2 billion of incremental mainline fuel costs this year versus 2007.
United's empty aircraft order book is a positive now, with no near-term aircraft capital commitments that would require access to debt capital markets. The large unencumbered asset base also offers United additional flexibility to reduce capacity further without incurring incremental aircraft ownership costs. Non-aircraft cash capital spending will be pulled down to approximately $450 million for the full year, and 2008 scheduled debt maturities total $678 million.
The credit facility covenant waiver negotiated earlier this month suspends compliance with the facility's fixed charge coverage test for four quarters beginning in the current period. Compliance with a modified fixed charge coverage test will be measured on a quarterly basis beginning at the end of the June 2009 quarter. The minimum unrestricted cash requirement is now $1.0 billion. Assuming steady fuel prices and worsening operating trends through the remainder of 2008, United is not likely to breach the minimum cash covenant this year. However, further energy price shocks could accelerate cash outflows late in the year and into the seasonally weak cash generation periods of Q408 and Q109--potentially forcing United to sell or mortgage unencumbered assets.
United's two primary credit card processing agreements provide for the holdback of cash by processors in certain circumstances. As of March 31, United reported $319 million in credit card holdbacks, classified as restricted cash on the balance sheet. United's largest processor agreement provides for additional holdbacks, but covenants are linked to those in the credit facility at a reduced threshold. There is no fixed charge coverage test for the next four quarters. For the second processing agreement, there are currently no holdbacks. However, the processing institution could require the posting of cash collateral if certain material adverse changes occur.
Although the Delta-Northwest merger announcement in April initially increased the likelihood of a follow-on consolidating transaction involving United, execution risk related to the closing of any airline merger by early 2009 is high, particularly in light of the fuel crisis and organized labor's skepticism about the merits of consolidation. Importantly, any capacity rationalization and cost savings linked to mergers would have to wait until early 2009 at the earliest--following a lengthy antitrust review by the U.S. Department of Justice. In Fitch's view, industry consolidation could lay the foundation for more rational capacity decision-making in highly competitive domestic markets and would mitigate the impact of economic cycles on airline cash flow.
Further negative rating actions, including a downgrade of the IDR into the 'CCC' category) could follow if sustained high jet fuel prices (above $3.50 per gallon) through the summer, coupled with weakening revenue per available seat mile (RASM) trends and softening air travel demand drive substantially negative free cash flow and force United to borrow heavily to avoid intensifying liquidity pressure moving into 2009.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Revises UAL & United Airlines' Outlook to Negative
Thursday May 29, 12:18 pm ET
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has revised the Rating Outlook for UAL Corp. and its principal operating subsidiary United Airlines, Inc. (United) to Negative from Stable. Debt ratings for both entities have been affirmed as follows:
--UAL & United Issuer Default Ratings (IDR) at 'B-';
--United's secured bank credit facility (Term Loan and Revolving Credit Facility) at 'BB-/RR1';
--Senior unsecured rating for United at 'CCC/RR6'.
The bank facility rating applies to approximately $1.3 billion of funded term loan debt, and the unsecured rating applies to approximately $1.4 billion of outstanding notes.
The Negative Rating Outlook reflects Fitch's view that the unprecedented rise in crude oil and jet fuel prices witnessed over the last several weeks will put increasing pressure on United's margins and cash flow generation capacity through the remainder of 2008, potentially forcing the carrier to consider asset sales or new financing to shore up liquidity in an increasingly challenging industry operating environment. United has taken steps in recent weeks to counter the fuel shock by cutting domestic available seat mile (ASM) capacity after the summer, while negotiating covenant waivers with its credit facility lenders to ensure access to its $1.5 billion secured credit facility. Still, the magnitude of the recent fuel price spike is leading United and other large U.S. carriers to pursue fare and fee increases that may well begin to crimp air travel demand and undermine the industry's ability to partially offset fuel-related cash outflows in a weak macroeconomic environment.
Ratings for UAL and United reflect the airline's highly levered balance sheet, volatile cash flow generation capacity, and ongoing susceptibility to intense fuel and revenue shocks in an industry that remains particularly vulnerable to macroeconomic risk. Following two years of improvements in cash flow generation and steady debt reduction in 2006 and 2007, United faces an increasingly difficult operating environment in 2008 that will likely lead to a deterioration in credit quality over the next few quarters.
In a prolonged high fuel cost scenario that assumes no significant pull-back in crude oil and jet fuel prices through early 2009, United and all of the major U.S. carriers will face intensifying liquidity pressures--particularly if an extended economic slowdown drives a sharp reduction in air travel demand. However, it is important to note that United's unencumbered asset holdings give it some room to maneuver with respect to liquidity preservation in a deep industry downturn. United's current unencumbered fleet of 113 aircraft could be financed to shore up cash balances if free cash flow trends deteriorate further. The potential sale of other assets such as United's maintenance, repair and overhaul (MRO) operations, spare parts, advance sales of Mileage Plus frequent flier miles and London Heathrow slots all represent sources of liquidity that could be tapped in the coming months if unrestricted cash balances fall closer to the $1.0 billion covenant level.
Taking into account the impact of fuel hedges, United remains highly sensitive to volatility in jet fuel prices. Fitch estimates that the annual mainline fuel cost impact of a 10-cent change in jet fuel prices is approximately $220 million. A full year 2008 post-hedge average fuel price of $3.20 per gallon (well below current spot prices of about $4.00 per gallon) would translate into approximately $2.2 billion of incremental mainline fuel costs this year versus 2007.
United's empty aircraft order book is a positive now, with no near-term aircraft capital commitments that would require access to debt capital markets. The large unencumbered asset base also offers United additional flexibility to reduce capacity further without incurring incremental aircraft ownership costs. Non-aircraft cash capital spending will be pulled down to approximately $450 million for the full year, and 2008 scheduled debt maturities total $678 million.
The credit facility covenant waiver negotiated earlier this month suspends compliance with the facility's fixed charge coverage test for four quarters beginning in the current period. Compliance with a modified fixed charge coverage test will be measured on a quarterly basis beginning at the end of the June 2009 quarter. The minimum unrestricted cash requirement is now $1.0 billion. Assuming steady fuel prices and worsening operating trends through the remainder of 2008, United is not likely to breach the minimum cash covenant this year. However, further energy price shocks could accelerate cash outflows late in the year and into the seasonally weak cash generation periods of Q408 and Q109--potentially forcing United to sell or mortgage unencumbered assets.
United's two primary credit card processing agreements provide for the holdback of cash by processors in certain circumstances. As of March 31, United reported $319 million in credit card holdbacks, classified as restricted cash on the balance sheet. United's largest processor agreement provides for additional holdbacks, but covenants are linked to those in the credit facility at a reduced threshold. There is no fixed charge coverage test for the next four quarters. For the second processing agreement, there are currently no holdbacks. However, the processing institution could require the posting of cash collateral if certain material adverse changes occur.
Although the Delta-Northwest merger announcement in April initially increased the likelihood of a follow-on consolidating transaction involving United, execution risk related to the closing of any airline merger by early 2009 is high, particularly in light of the fuel crisis and organized labor's skepticism about the merits of consolidation. Importantly, any capacity rationalization and cost savings linked to mergers would have to wait until early 2009 at the earliest--following a lengthy antitrust review by the U.S. Department of Justice. In Fitch's view, industry consolidation could lay the foundation for more rational capacity decision-making in highly competitive domestic markets and would mitigate the impact of economic cycles on airline cash flow.
Further negative rating actions, including a downgrade of the IDR into the 'CCC' category) could follow if sustained high jet fuel prices (above $3.50 per gallon) through the summer, coupled with weakening revenue per available seat mile (RASM) trends and softening air travel demand drive substantially negative free cash flow and force United to borrow heavily to avoid intensifying liquidity pressure moving into 2009.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
