Fitch Ratings has removed Alaska Air Group’s (ALK) ratings from Rating Watch Negative and affirmed the ratings at ‘BBB-’. The Rating Outlook is Stable. The rating action follows the Department of Justice’s decision, announced on December 6, to allow ALK’s acquisition of Virgin America to proceed, and Alaska’s settlement of a separate civil lawsuit, which was the last significant remaining hurdle to the completion of the acquisition. Fitch expects the transaction will now close in the next week.
Fitch placed ALK on Rating Watch Negative in April of 2016 after the acquisition was announced. The resolution of the ratings watch and affirmation of the rating reflects Fitch’s view that ALK will continue to maintain a credit profile that is consistent with an investment grade rating despite higher acquisition-driven leverage, reflecting credit metrics prior to the acquisition, which were strong for a ‘BBB-’ rating, management’s track record of conservative financial management, and Fitch’s expectations that the company will actively de-lever its balance sheet in the near-to-intermediate term.
Fitch also believes that the added risk involved with higher debt levels and integration of the two airlines are partially offset by the reduced geographic concentration and better competitive position that ALK gains through the acquisition of Virgin. The affirmation is also supported by ALK’s strong margins, solid free cash flow, attractive financing rates, and healthy liquidity, including a still substantial number of unencumbered aircraft.
Fitch views Alaska as temporarily having little cushion at its current rating following the acquisition. Greater than expected integration related problems, material weakening of the operating environment for the US airline industry or failure to pay down debt in the next 18 to 24 months could negatively impact the ratings.