US Airways ratings were cut by Moody’s Investor Service due to pressure on the airline’s liquidity profile and financial performance in a difficult operating environment.
US Airways corporate family and probability of default ratings were lowered to Caa1 from B3. The rating agency also lowered the ratings of the airline’s outstanding corporate debt instruments and certain enhanced equipment trust certificates.
Moody's further lowered the speculative grade liquidity assessment to SGL-4 from SGL-3. The rating outlook is negative.
US Airways reported a net loss (excluding special items) of $101 million for the second quarter of 2008, a sharp decline from a profit of $261 million in 2007, primarily due to the effects of higher fuel costs.
“Absent a significant improvement in its ability to recover fuel costs in ticket pricing, US Airways will continue to incur losses that will erode its financial profile,” the rating agency warns.
Moody's also notes that US Airway's non-fuel costs are higher than those of a number of other domestic airlines partly due to fleet age and the full consolidation of a regional airline subsidiary.
The SGL-4 reflects a weakening liquidity profile. Moody’s says US Airways $2.8 billion of cash and investments at 30 June ($2.3 billion of which was unrestricted) provides “important near term flexibility, but could erode rapidly over the coming months.”
US Airways has financed its 2008 aircraft deliveries and is pursuing initiatives to enhance its liquidity, but "absent full effectiveness" of these initiatives, continuing losses due to sustained high fuel costs "could decrease the cash balance during the seasonally weaker winter months."
The rating agency notes that US Airways' credit card processing banks have a credit card holdback to 25% of unused credit card receivables and “under certain circumstances could increase this amount further, which would increase US Airways' cash requirements.”
Also, the airline’s term loan facility requires US Airways to maintain unrestricted cash and equivalents of not less than $1.25 billion, with not less than $750 million of that amount held in cash control accounts, “which constrains financial flexibility.”