S&P Raises Outlook on American Airlines Group (AAL) to Positive; Notes Strong H114 Performance
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Standard & Poor's Ratings Services said that it revised its rating outlooks on American Airlines Group Inc. (Nasdaq: AAL)(AAG) and its subsidiaries American Airlines Inc. and US Airways Inc. to positive from stable. At the same time, we affirmed our ratings on the companies, including the 'B' corporate credit ratings.
AAG reported strong earnings during the first half of 2014, with net income of $1.3 billion, and we expect that this trend will continue for the remainder of the year and into 2015. The company is benefiting from generally positive revenue conditions in the U.S. airline industry, since the largest four airlines, which have a combined market share of more than 80%, are adding capacity cautiously and focusing on raising load factors (utilization) and yield (pricing). AAG is also capturing merger cost and revenue synergies, which should increase further once regulatory approvals (a single operating certificate) allow the full operational integration of the company's two airline operating subsidiaries. That integration, which AAG expects to be complete in late 2015, also carries risks, since it will involve combining information technology systems and aircraft crews.
The outlook is positive. "We expect continued growth in AAG's earnings and cash flow, which should result in improved credit measures despite heavy capital spending and a share repurchase program," said Standard & Poor's credit analyst Philip Baggaley.
We could raise rating if AAG's FFO to debt exceeds 16% and we expect it to remain at that level, and if debt to EBITDA remains consistently below 4.5x. In addition, in assessing the sustainability of AAG's credit ratio improvements, we would consider its progress on merger integration as well as the general industry outlook.
We could revise the outlook to stable if the company's trend of improvement falters, funds flow to debt slips to the low-teens percent area, and debt to EBITDA rises above 4.5x. This could result from worse-than-expected merger integration problems, general industry challenges such as a fuel price spike, or a more aggressive financial policy.
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