Southwest Airlines affirmed at 'BBB' on solid liquidity profile

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Fitch Ratings has affirmed the issuer default rating of Southwest Airlines at "BBB" due to its strong liquidity, backed by a large unencumbered fleet, and low-cost structure.

The rating outlook is stable.

The ratings apply to approximately $2 billion in outstanding debt.

Fitch notes the airline's credit is supported by its "competitive strength across its extensive domestic markets, and relatively low cost structure, which has enabled the airline to be consistently profitable even through downturns." In addition, Southwest has regularly maintained a strong liquidity profile with a "sizeable unencumbered asset pool" of approximately $6.2 billion as of year-end 2011.

The company is currently in the middle of integrating the operations of AirTran Holdings, which it acquired last year, but didn't receive the single operating certificate until March.

Despite a strong second quarter, Fitch says Southwest's operating results have weakened over the last year due to higher costs stemming from the acquisition, fleet enhancements and rising fuel costs.

When combined with higher capital expenditures, increased dividend and a softening macro environment, Fitch expects free cash flow to come under pressure this year.

Southwest has repaid $964 million of debt since the AirTran acquisition closed.

It maintains a "strong balance sheet", with total debt of $3.3 billion relative to $3.3 billion of cash and short-term investments as of 30 June, 2012, according to Fitch.