Fitch Ratings - Chicago - 10 Apr 2020: Fitch Ratings has taken negative rating actions across the North American airline sector after completing a portfolio review of most of the airlines in the region. The review resulted in eight rating downgrades and one rating affirmation, which are listed below and discussed in the Key Ratings Driver Section. Eight of the ratings have Negative Outlooks and one is on Rating Watch Negative. This is the second portfolio review Fitch has conducted since the coronavirus pandemic accelerated in North America and EMEA. The review included an analysis of monthly estimated liquidity and an analysis of projected credit profiles at the end of 2021, consistent with the firm's "through-the-cycle" rating approach. Fitch believes the pandemic will undo some of the credit improvement seen over the past decade at North American airlines. Most airlines will exit the worst of the crisis with higher debt levels and lower liquidity, leaving the sector more exposed to additional exogenous shocks.

The depth of the decline in traffic related to the pandemic is causing substantial cash outflows for airlines in the near-term. Looking past the worst of the crisis, it has become increasingly likely that the economic impact of the pandemic will cause a much slower than previously anticipated rebound in air traffic. A longer period of depressed airline traffic, combined with debt raised to manage liquidity, will cause all carriers to operate with weakened credit metrics and reduced financial flexibility at least through 2021. Airlines are one of the hardest hit sectors globally. While exogenous shocks have always posed risks for the sector, the severity of this disruption is materially different than what was contemplated in our ratings prior to the pandemic, contributing to the ratings downgrades.

Fitch forecasts the response to the pandemic will lead to a deep economic recession, including an elongated recovery for the transportation sector. Fitch has revised its North American airline forecasts to include revenues down roughly 90% through 2Q20, down as much as 60%-65% in the third quarter, and down at least 30% in the fourth quarter for domestic-focused carriers and closer to 50% for carriers with more international exposure. These assumptions result in annual revenue declines for 2020 of 50% or more.

Fitch's assumptions include the possibility of periodic restrictions on international travel in the second half of the year driven by potential resurgence of the pandemic in the fall or winter. The global economic impact of the pandemic will likely lead to reduced levels of traffic for longer than previously expected. Our current base case reflects traffic only slowly recovering toward 2019 levels by the end of 2021, with a full rebound to 2019 levels only occurring by 2022 or 2023.

Passage of the CARES Act provides material relief from near-term liquidity pressures for US carriers, and will likely reduce the amount of employee furloughs for the next six months. Under the legislation, US carrier are eligible for up to $25 billion in grants to cover payroll expenses, subject to the stipulation that the airlines refrain from involuntary furloughs or workforce reductions through September. The airlines will also have access to up to $25 billion in loans or loan guarantees from the government. Terms of the government loans are not fully clear at this time, but the government will require warrants or equity stakes in the airlines in exchange for any government backed loans, making them less palatable for carriers that have sufficient commercial alternatives available.

A key part of Fitch's review was a monthly analysis of estimated liquidity for each airline. Fitch believes carriers will be able to manage through the worst of the crisis without running out of cash as a result of the payroll grants, debt issuance that has either already been completed or is in progress, cost reductions, and beginning liquidity. However, most airlines will exit the year with higher debt and lower liquidity levels, including fewer unencumbered assets. Large-scale workforce reductions would have been likely without the government program. We anticipate that material reductions in workforce will be necessary beyond the six months covered by the CARES act as the airlines adjust to operating at a reduced size for at least the next two years. Fitch's ratings do not take into account the possibility of further government assistance.

Even with the actions listed above, cash burn over the next several months will be substantial. We believe that most carriers have sufficient alternatives that they may not need to access the $25 billion in available government loans, but for other carriers this loan program will provide a necessary backstop.

Lower fuel prices remain a key consideration, but will be more impactful in 2021 than 2020 as fuel usage is low due to substantial capacity reductions. Fitch believes that low fuel prices, driven by oversupply and macro weakness, could play a key part in airline recovery in 2021. Relatively low fuel prices combined with material cost reductions may push most North American airlines back to profitability in 2021 even at traffic levels that remain well below 2019 volumes.

Alternatively, Fitch believes that airlines would have a difficult time passing higher fuel costs through to customers amid ongoing economic pressures should crude prices rise above our current expectations. Such a scenario would delay airline recovery and potentially push further negative rating actions.

Fitch's rating review did not cover airline EETC transactions. Fitch expects to review its EETC ratings within the next one to two weeks.

KEY RATING DRIVERS

Southwest Airlines

Fitch has downgraded Southwest to 'BBB+' from 'A-', the rating Outlook remains Negative. Fitch views Southwest as the best positioned US carrier to manage through the pandemic given its strong balance sheet, unencumbered asset base and domestic focus. The downgrade reflects our view that additional borrowing to shore up near-term liquidity reduces financial flexibility by such a degree that the 'A' category rating is no longer appropriate. The downgrade also reflects risks to the airline sector in general, which is being particularly hard hit by the pandemic. Even assuming a relatively slow recovery to passenger traffic, Fitch expects that Southwest's credit metrics should rebound to levels that are supportive of the 'BBB+' rating by YE 2021 or early 2022. The Negative Outlook reflects our uncertainty around the trajectory and timing of a recovery.

Fitch believes that debt raised to date, along with proceeds from government grants under the CARES act, may be sufficient that Southwest can manage through the remainder of the year without raising additional funds. The company procured a $3.3 billion 364-day secured credit facility and fully drew on its $1 billion revolver in March. Southwest still maintains a fairly large balance of unencumbered assets that could be used for further funding if needed.

Delta Airlines

Fitch has downgraded Delta to 'BB+' from 'BBB-'; the Rating Outlook is Negative. Though Delta remains a stronger credit than its network peers, debt raised to sustain liquidity through the pandemic will drive credit metrics outside of a range supportive of investment-grade ratings at least through 2021 and likely into 2022. Fitch calculated adjusted debt/EBITDAR at just under 2x at YE 2019, which we considered to be strong for the 'BBB-' rating. In our initial assessment of the pandemic, Fitch forecasted that Delta could return leverage to the mid-to-high 2x range by YE 2021. We now expect leverage to remain above 3x through 2022 after spiking this year. The Negative Outlook reflects high levels of uncertainty around the length of the pandemic and pace of recovery.

Delta has already taken significant actions to raise liquidity as demand has fallen, and Fitch believes that the company will have sufficient liquidity when paired with government grants to manage through the crisis. Actions taken to date include a $2.6 billion secured term loan, a $1 billion EETC transaction to refinance a $1 billion unsecured maturity, a $3 billion draw on existing revolvers. In all, Fitch expects Delta to borrow more than $8 billion during the year, which is essential for near-term liquidity, but will raise leverage by more than a turn over prior expectations when combined with our forecasts for a smaller top line over the next several years.

Delta has more financial flexibility than some peers. The company's pension plan has no required funding through 2024, and it has announced that it will defer its previously planned $500 million pension payment this year. Delta has also deferred $3.5 billion in planned capex. They have also ceased share repurchases and dividends, which accounted for more than $3 billion in cash outflow in 2019.

American Airlines

Fitch has downgraded American Airlines by one notch to 'B', and the ratings are on Rating Watch Negative. This follows Fitch's downgrade of American to 'B+' from 'BB-' on March 20, 2020. Fitch expects that the company will have sufficient liquidity and access to capital to manage through the year, however significant additional borrowing and the likelihood of a slow recovery make it likely that the company's credit metrics will remain well outside of our prior expectations at least through 2021 or 2022. The company also has material debt payments this year and next, making continued access to capital markets essential.

Fitch's base case forecast from its 2019 review anticipated that total adjusted leverage would fall to the low 4x range by 2021 or 2022. We now anticipate that leverage could remain above 6x through 2022. American's credit metrics had already been under pressure prior to the pandemic from a combination of events including labor issues, the 737 MAX grounding, rising labor costs and an intensely competitive environment. Fitch had expected metrics to improve over the next one to two years, as declining capex allowed for debt reduction, and as various revenue initiatives took hold. However, the current environment pushes that improvement further into the future.

Cash burn over the next several months will be substantial. Near-term liquidity is supported by government grant money, debt issuances that have already been completed, and significant cost cutting measures. However, Fitch believes that American will need to raise significantly more capital this year and next to maintain sufficient liquidity. Fitch believes that American has remaining ability to raise additional funds, including government loans under the CARES Act, subordinate tranches on existing EETC transactions, and the potential to engage in forward sales of miles to credit card partners. Disruptions to the credit markets, or unexpected problems in obtaining government loans could quickly cause financial flexibility to deteriorate, which drives the Negative Rating Watch.

United Airlines

Fitch has downgraded United to 'BB-' from 'BB', and the Rating Outlook remains Negative. Fitch's forecasts indicate that United should be able manage through the worst of the pandemic without raising additional debt, assuming that it obtains government grants under the CARES Act. However, the additional debt raised to date and the likelihood of a smaller top-line over the next two to three years, along with the uncertain pace of recovery, push the one-notch downgrade. United is also the most international-focused US network carrier, with only 62.3% of its 2019 revenue coming from domestic service. International travel bears the risk of a prolonged drop in demand should certain countries or regions continue to restrict travel in the face of continued outbreaks. 17.1% of United's 2019 passenger revenue was derived from trans-Atlantic travel and 11.8% from the Pacific region, both of which are being severely restricted in the current environment.

Prior to the coronavirus pandemic, Fitch had viewed United's credit profile as improving. Credit metrics were solid for the 'BB' rating, and FCF was expected to improve over our forecast period. Should recovery occur in line with our forecasts, United's credit metrics could move back towards levels that support a 'BB' rating by 2022.

Like the other network carriers United has shored up liquidity to weather the downturn. United obtained a $2 billion term loan secured by aircraft and a $500 million spare parts facility, leaving it with more than $8 billion in liquidity going into this event. The company has also recently reported an unencumbered asset balance that it estimates at $20 billion, inclusive of its Mileage Plus plan, that can be leveraged to raise cash if needed. United announced a hiring freeze and is pursuing voluntary unpaid leave for its employees. The company cut its capex forecast for 2020 to $4.5 billion, down from roughly $7 billion in its prior plans. Debt maturities for the year are manageable. Total principal payments on debt and finance leases total roughly $1.5 billion for 2020, which should be addressable with cash on hand along with other available liquidity options.

Alaska Airlines

Fitch has downgraded Alaska Air to 'BB+' from 'BBB-', and the Rating Outlook remains Negative. Fitch views Alaska, along with Southwest and Delta, to be one of the better-positioned US carriers to weather the expected downturn. Fitch believes that ALK's credit metrics could return to levels supportive of a 'BBB-' rating within two years. However, the downgrade reflects Alaska's concentration along the West Coast where the coronavirus pandemic has been particularly severe, and which could see prolonged demand destruction. The downgrade also incorporates general industry uncertainty around the pace of recovery.

Alaska maintains a manageable debt balance that stood at $1.5 billion at YE 2019, leaving the company in a net cash position. 133 of the Alaska's 332 aircraft were unencumbered at YE 2019, providing a substantial base of assets on which to borrow to maintain liquidity. The company raised a significant amount of capital at attractive rates in a similar manner when it purchased Virgin America in 2016.

The company has recently drawn on its revolving credit facilities and procured a $425 million 364 day term loan secured by 25 of its previously unencumbered aircraft. Fitch believes that Alaska should have sufficient cash to manage through the crisis without raising additional debt assuming a modest recovery in the second half. The company has the capacity to raise additional capital if needed.

Debt maturities are manageable in the near-term, totaling $235 million in 2020, which can be addressed through cash on hand even in a sharp downturn scenario. Capex is also manageable, particularly as aircraft deliveries originally scheduled for this year consisted of 10 737 MAXs, which are unlikely to all be delivered in 2020 due to the ongoing grounding of that aircraft.

JetBlue Airways

Fitch has downgraded JetBlue to 'BB' from 'BB+'; the Rating Outlook remains Negative. The downgrade is primarily prompted by expectations for a slower recovery in demand such that credit metrics will be modestly outside of levels that support a 'BB+' rating at least through 2021. JetBlue is going in to this crisis with a material amount of liquidity and modest near-term cash needs, which should allow the company to maintain adequate cash on hand. JetBlue recently obtained a $1 billion term loan secured by aircraft and spare engines. After utilizing some of its unencumbered fleet to secure the new term loan, it maintains more than 60 unencumbered A320s. Near-term debt maturities are manageable at $341 million in 2020. Fitch believes that JetBlue should have sufficient cash to manage through the crisis without raising additional debt assuming a modest recovery in the second half, and should not have to rely on government sponsored loans under the CARES Act.

JBLU is also in a better position than some carriers as it does not have material pension obligations. The company has also cut off share repurchases, which accounted for $542 million in cash outflow in 2019. Like the other major carriers, JBLU has announced capex deferrals, payment delays to suppliers, and plans to defer maintenance on aircraft.

Spirit Airlines

Spirit Airlines has been downgraded to 'BB-' from 'BB'. The Rating Outlook is Negative. The downgrade is based on our revised forecasts, which anticipate additional borrowing and slower expected recovery will push leverage outside of our negative rating guidelines at least through 2021. The Negative Outlook reflects uncertainty around the pace of recovery and Fitch's view that Spirit may have fewer assets to tap to raise additional funds in the case of a prolonged downturn compared to some competitors.

Fitch believes that Spirit's low cost structure and liquidity act as meaningful cushions to further downside risks. The company may fare better than larger network carriers due to its domestic focus and presence in Latin American markets which may recover more quickly than international travel. Spirit had $1.08 billion in cash and equivalents on the balance sheet at YE 2019 or 28% of LTM revenue, which is higher than most peers. Spirit already has committed funding for aircraft deliveries scheduled for this year, mitigating the cash burn from pending capex. The company has also recently procured a $110 million revolving credit facility that is undrawn to date. Though we expect cash balances to fall through the year, we believe that Spirit has sufficient liquidity to manage through the crisis with little need for additional borrowing. As of March 9, Spirit reported holding roughly $700 million in unencumbered assets, primarily consisting of aircraft that can be used to raise cash if needed, though a portion of that balance has been used to secure the revolver.

Air Canada

Fitch has affirmed Air Canada's IDR at 'BB' with a Negative Outlook. Given our expectation for a slower recovery in demand, we expect Air Canada's credit metrics will fall outside levels that would support a 'BB' rating during 2020 before returning to supportive levels around the end of 2021. The Negative Outlook reflects the still-evolving situation with the pandemic, and possibility of a material impact to its credit metrics should a substantial recovery be delayed beyond 2021.

The company has fully drawn its revolving credit facility, and is currently marketing a new secured $500 million term loan facility to aid liquidity. The company could raise further capital from financing its remaining unencumbered fleet valued at $3.5 billion. The company furloughed about 50% of its hourly staff, and recently announced that staff would be re-hired under a government program which would replace wages with a government subsidy. Fitch expects some 2020 capex will be delayed until 2021, and the company has announced delayed payments to suppliers and expectations of reduced maintenance.

AC entered 2020 in a strong liquidity position with over $6 billion in cash. Fitch believes that Air Canada should have sufficient liquidity to manage through the crisis assuming a modest recovery which begins in the 2H20 which continues into 2021.

Hawaiian Holdings

Fitch has downgraded Hawaiian to 'B+' from 'BB-'; the rating outlook is Negative. The downgrade reflects credit metrics that are likely to stay outside of Fitch's downgrade sensitives through YE 2021. Fitch is also concerned that Hawaiian may experience a slower recovery than some airlines from the prolonged economic effects of the pandemic given the premium/non-essential nature of Hawaiian vacations. Fitch previously expected leverage to spike in 2020 and decline to the mid 4x range in 2021 and into the 3x range in 2022. Our updated forecasts show leverage remaining above 5x through 2021. Metrics may move back to levels that support 'BB' category ratings beyond 2021 depending on the pace of recovery.

Despite the rating downgrade, we believe that Hawaiian has sufficient financial flexibility to manage through the crisis. Hawaiian has a manageable debt maturity schedule with $55.4 million due in 2020. As of Dec. 31, 2019, liquidity totaled $853.7 million, which consists of unrestricted cash and equivalents, short-term investments and a $235 million secured revolver, which has now been drawn. The airline also has 36 unencumbered planes, accounting for almost half of its fleet. Low planned capex in 2020 also provides some cushion for the downturn. Additional borrowings are likely with Hawaiian potentially utilizing some unencumbered assets to raise cash.

KEY ASSUMPTIONS

Key Assumptions in Fitch's rating case include a steep drop in demand through 2020, with full recovery only occurring by 2022 or 2023. During 2020 Fitch's base case includes revenues down roughly 90% through the second quarter of the year, down as much as 60%-65% in the third quarter, and down at least 30% in the fourth quarter for domestic focused carriers and closer to 50% for carriers with more international exposure. Our base case reflects traffic only slowly recovering toward 2019 levels by the end of 2021, with a full rebound to 2019 levels only occurring by 2022 or 2023. Jet fuel prices for the year are assumed at around $1.50/gallon, and rise to about $1.65/gallon in 2021. Fitch expects all US carriers to apply for and accept government grant money under the CARES Act. We also assume that airlines broadly reduce capex in 2020.

RATING SENSITIVITIES

Southwest Airlines

Factors that could, individually or collectively, lead to positive rating action/upgrade:

-- Positive rating actions are unlikely at this time

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-- Extended reduction in demand for air travel caused by the pandemic leading to additional borrowing that makes it unlikely for the company to return to 'BBB+' level credit metrics in the next one to two years

-- Sustained adjusted debt/EBITDAR above 2.5x

-- FCF margins declining to neutral on a sustained basis

-- FFO fixed-charge coverage falling below 4.0x on a sustained basis

-- A change in fuel-hedging policies leading to significant exposure to volatile crude oil

-- Change in management strategy that favors shareholder returns at the expense of a healthy balance sheet

Delta Air Lines

Factors that could, individually or collectively, lead to positive rating action/upgrade:

-- FCF margins moving back to the low single digits

-- EBIT margins in the midteens

-- Sustained commitment to conservative financial policies

-- Adjusted debt/EBITDAR sustained around or below 2.5x

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-- An extended drop in travel due to the coronavirus pandemic;

-- Sustained adjusted debt/EBITDAR above 3.3x

-- FCF margins declining to neutral on a sustained basis

-- FFO fixed-charge coverage falling below 3.5x on a sustained basis

-- Change in management strategy that favors shareholder returns at the expense of a healthy balance sheet

American Airlines

Factors that could, individually or collectively, lead to positive rating action/upgrade:

-- Adjusted debt/EBITDAR sustained below 4.3x

-- FFO fixed-charge coverage sustained around 2.5x

-- FCF generation above Fitch's base case expectations;

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-- Adjusted debt/EBITDAR sustained above 6x

-- Failure to obtain government grants and/or sufficient outside funds to maintain liquidity

-- Evidence of trouble refinancing pending debt maturities

-- EBIT margins failing to return to mid to high single digits

United Airlines

Factors that could, individually or collectively, lead to positive rating action/upgrade:

-- Adjusted debt/EBITDAR trending towards 3.25x

-- FFO fixed-charge sustained at or above 3x

-- Neutral to positive sustained FCF

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-- Adjusted debt/EBITDAR sustained above 4x

-- FFO fixed-charge coverage sustained below 2x

-- EBITDAR margins deteriorating into the low double-digit range

-- Persistently negative or negligible FCF

Alaska Air

Factors that could, individually or collectively, lead to positive rating action/upgrade:

-- Adjusted debt/EBITDAR sustained around or below 2.25x

-- FFO fixed-charge coverage increasing toward 4.0x

-- FCF margins sustained in the midsingle digits

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-- Gross adjusted leverage rising and remaining above 3.5x

-- FFO fixed-charge coverage towards 3x

-- Sustained EBIT margins in the single digits

JetBlue Airways

Factors that could, individually or collectively, lead to positive rating action/upgrade:

-- EBIT margins remaining in high single digits

-- Adjusted debt/EBITDAR sustained below 3.25x

-- FFO fixed-charge coverage remaining above 3.5x

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-- A prolonged downturn caused by the pandemic that strains liquidity and materially alters Fitch's forecasts for credit metrics to return to prior levels by YE 2021

--Sustained adjusted debt/EBITDAR above 3.75x

-- FFO fixed-charge coverage falling below 3.0x on a sustained basis

-- EBIT margins remaining in the mid-to-low single digits.

Spirit Airlines

Factors that could, individually or collectively, lead to positive rating action/upgrade:

-- Adjusted debt/EBITDAR sustained below 4.25x

-- FFO fixed-charge coverage sustained around 3.0x

-- FCF generation above Fitch's base case expectations

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-- Adjusted debt/EBITDAR sustained above 4.75x

-- EBITDAR margins deteriorating into the low double-digit range

-- FFO fixed-charge coverage sustained at 2x or below

-- Liquidity declining towards 10% of LTM revenue

Air Canada

Factors that could, individually or collectively, lead to positive rating action/upgrade:

-- Sustained adjusted debt/EBITDAR around 3.0x

-- FFO fixed-charge coverage sustained above 3.5x

--EBITDAR margins sustained above 15%, EBIT margins above 10%

-- Positive FCF generation over the intermediate term

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-- Weaker than expected margin performance or higher than expected borrowing causing leverage to reach or exceed 4.0x

-- FFO fixed-charge coverage around or below 3x

-- Weaker than expected financial performance causing FCF to be notably below Fitch's expectations

-- A decline in the company's EBIT margin to the low single digits, EBITDAR margins into the high single digits

Hawaiian Airlines

Factors that could, individually or collectively, lead to positive rating action/upgrade:

-- Sustained adjusted debt/EBITDAR below 3.75x

-- FFO fixed charge coverage at or above 2.75x

-- Expectations for sustained positive FCF generation

-- EBITDAR margins toward 20%

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-- Adjusted debt/EBITDAR rising and remaining at or above 4.5x

-- FFO fixed-charge coverage falling below 1.75x

-- A notable drop in tourism to Hawaii caused by a natural disaster or economic downturn

-- EBITDAR margins falling and remaining in the low teens or lower

BEST/WORST CASE RATING SCENARIO

Best/Worst Case Rating Scenarios Non-Financial Corporate:

Ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings https://www.fitchratings.com/site/re/10111579.

worst-case scenario credit ratings https://www.fitchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies).  For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.