Fitch Ratings has downgraded American Airlines to 'B-' from 'B'. The rating agency says that the downgrade is driven by a slower than expected rebound in air travel related to the coronavirus pandemic. The likelihood that air traffic will remain subdued for the next several years combined with American's heavy debt load create significant pressure on credit metrics throughout Fitch's forecast period. Reduced capacity to raise new capital as many of the company's previously unencumbered assets have already been pledged for secured financings also contributes to the negative rating action. The Negative Watch reflects the high degree of uncertainty remaining around the recovery in air traffic from the coronavirus pandemic and the possibility that American's cash flow and liquidity may come under further pressure in the next year absent a rebound in demand.
American expects to end the third quarter with more than $13 billion in total liquidity, which Fitch considers to be sufficient to avoid near-term distress. Liquidity is also well above Fitch's expectations from its prior forecast as American has raised significant new capital over the past several months. Liquidity is also bolstered by American's recently secured $5.5 billion loan under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which could expand up to $7.5 billion. A potential extension of the Payroll Support Program would also be positive for liquidity but is uncertain at this time.
However, Fitch notes that revenues remain stubbornly low and cash burn remains material. American's most recently reported cash burn was $30 million/day at the end of June, but 3Q20 average cash burn is likely to be higher based on the current pace of demand recovery. The company has a publicly stated goal to be cash flow positive in 2021, but Fitch's more conservative forecasts indicate that the company may still burn a significant amount of cash through next year absent a more robust recovery in demand. American does not have any major bullet maturities until its $750 million unsecured bonds mature in June 2022, but still has a considerable amount of principal amortization, interest costs and pension obligations to cover in 2021, all of which will be a drain on cash.
The company has some remaining options to raise new capital, providing a partial cushion against a slow recovery. However, the capacity to raise new debt is now materially lower than it was prior to the pandemic. Potential future funding includes up to $4 billion of additional pari passu debt allowed under the (intellectual property) IP notes secured by American's brand name and website domain name, additional capacity available under existing term loans and secured bonds and an estimated $3.77 billion in unencumbered assets. Remaining unencumbered assets primarily consist of aircraft, spare parts and equipment, and corporate real estate.
A slow recovery will be partly offset by a massive industry-wide cost-cutting effort, says the rating agency. American reduced its non-fuel operating expenses by 33% in 2Q20 compared to the same period in 2019. Variable costs will inevitably increase as flying levels rebound from current lows, but some cost-cutting efforts will prove longer lasting. For instance, fleet-simplification will lower maintenance and training costs while increasing fuel efficiency as older/less-efficient planes are retired. American announced earlier this year that it would permanently retire four aircraft types including its E-190s, 757s, 767s, and A330-300s along with older regional aircraft. The company also placed aircraft into temporary storage, reducing its active fleet count by more than 150 aircraft.
Fitch expects American to end the year with a total debt balance (including lease obligations) of nearly $47 billion, which is likely to lead to leverage being sustained above levels consistent with a 'B' rating through Fitch's forecast period. Fitch expects American to end the year with both a higher debt burden than either of its network competitors. Fitch rates United Airlines at 'BB-' and Delta Air Lines at 'BB+'. Both carriers remain on Negative Outlook, and their ratings may move lower as the downturn persists.
Fitch's updated forecast for American incorporates 2021 traffic that is down by around 40% relative to 2019 levels. Traffic is unlikely to return to 2019 levels by 2023.
American's enhanced equipment trust certificate (EETC) ratings were not covered in this review. Fitch states that it intends to review American's EETC ratings in the coming weeks.