Moody's affirms United Airlines Holdings' Ba2 corporate family rating, changes outlook to positive

New York, January 15, 2020 -- Moody's Investors Service affirmed its ratings assigned to United Airlines Holdings, Inc., including the Ba2 corporate family, Ba2-PD probability of default, Baa3 senior secured and Ba3 senior unsecured. Moody's also affirmed its ratings on 31 of the 32 of the company's Enhanced Equipment Trust Certificates (EETCs) it rates, except it downgraded the Class A of the UAL 2015-1 with scheduled final payment date of June 1, 2025 to A2 from A1. The rating outlook was changed to positive from stable.

"Operationally, 2020 is likely to be a replay of 2019 for United Airlines," said Moody's Senior Vice President and lead analyst, Jonathan Root.

"Ongoing network optimization focused on the mid-continent hubs, improving service delivery and ongoing cost management initiatives should hold margins steady in 2020 in light of cost growth pressures and as long as US GDP growth is at least in line with Moody's Macroeconomic Board's expectation of 1.7% for 2019," continued Root.

The positive outlook reflects expected benefits of United's strong business profile and execution of its current network strategy which should sustain good operating cash flow in upcoming years. Moody's also expects that the US airlines will continue to emphasize earning acceptable returns on invested capital, which will lead to capacity reductions and cost management when economic growth slows to mitigate downwards pressure on earnings and cash flows.

RATINGS RATIONALE

The Ba2 corporate family rating reflects United's favorable business profile as the third largest US and global airline based on revenue and the benefits to earnings of the improvements in service delivery and operational reliability of the past 24 months. The grounding of Boeing's 737 MAX modestly crimped execution of United's fleet and network strategy in 2019 and led to higher free cash flow because of lower capital expenditures. Investment will meaningfully increase in 2020, particularly if the US Federal Aviation Administration ungrounds the MAX in the first half of 2020. The rating considers that free cash flow will materially decline in 2020 to an estimated about $250 million, with an about doubling or more in 2021 as investment remains somewhat elevated. Funded debt will increase modestly because of expected ongoing share repurchases, with little consequence on credit metrics. Very good liquidity and expectations of maintaining a disciplined financial policy also support the Ba2 rating. Ongoing inflation in non-fuel costs will require disciplined capacity management and pricing, to limit pressure on margins. A larger trans-Pacific network can also pressure consolidated results, as occurred in 2019 because of trade war friction.

Moody's estimates debt-to-EBITDA at 3.2x on a Moody's-adjusted basis at December 31, 2019. Adjusted debt includes a non-standard adjustment of about $7 billion to capitalize variable rent leases, which have been excluded from the lease liability the company has booked pursuant to current lease accounting rules.

The ratings could be upgraded if metrics are at least sustained near September 30, 2019 levels. Debt to EBITDA of about 3x, Funds from Operations ("FFO") plus interest to interest of about 6x, and or retained cash flow to debt of above 22% could support a higher rating as could expectations of EBITDA margin being sustained above 18%. Cash and short-term investments of about $4 billion and undrawn revolver of at least $2 billion would also support an upgrade. The ratings could be downgraded if EBITDA margin is sustained near or below 17%, free cash flow is negative, cash and short-term investments fall below $3 billion or undrawn revolver is below $2 billion. Debt to EBITDA that approaches 4x, Funds from Operations ("FFO") plus interest to interest that approaches 4.5x and or retained cash flow to debt falls below 20% could also lead to a downgrade as could meaningful increases in debt while shares are repurchased.

The affirmations of the EETC ratings consider the loan-to-values of the respective transactions and Moody's views of the importance of the aircraft collateral to the network. The downgrade of the 2015-1 Class A EETC to A2 levels the rating on this transaction with other Class A's with similar attributes and or loan-to-values.

The methodologies used in these ratings were Passenger Airline Industry published in April 2018, and Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

United Airlines Holdings, Inc. is the holding company for United Airlines, Inc. United Airlines and regional operator United Express operate an average of 4,900 flights a day to 356 airports across five continents. The company reported $42.9 billion of revenue in the last 12 months ended September 2019.

The following rating actions were taken:

Affirmations:

..Issuer: United Airlines Holdings, Inc.

.... Corporate Family Rating, Affirmed Ba2

.... Probability of Default Rating, Affirmed Ba2-PD

....Senior Unsecured Shelf, Affirmed (P)Ba3

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3 (LGD5)

..Issuer: United Air Lines, Inc. (assumed by United Airlines, Inc.)

....Senior Secured Pass-Through, Series 2007-1 Class A, Affirmed Ba1

..Issuer: United Airlines, Inc.

....Senior Secured Bank Credit Facility, Affirmed Baa3 (LGD2)

....Senior Secured Enhanced Equipment Trust, Series 1999-2 Class A-1, Affirmed Baa1

....Underlying Senior Secured Enhanced Equipment Trust, Series 1999-2 Class A-1, Affirmed Baa1

....Senior Secured Enhanced Equipment Trust, Series 1999-2 Class B, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust, Series 2000-1 Class A1, Affirmed Baa1

....Senior Secured Enhanced Equipment Trust, Series 2000-1 Class B, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust, Series 2000-2 Class A1, Affirmed Baa1

....Senior Secured Enhanced Equipment Trust, Series 2001-A1, Affirmed A3

....Senior Secured Enhanced Equipment Trust, Series 2005-ERJ1, Affirmed Ba1

....Senior Secured Enhanced Equipment Trust, Series 2010-1 Class A, Affirmed A2

....Senior Secured Enhanced Equipment Trust, Series 2012-1 Class A, Affirmed A3

....Senior Secured Enhanced Equipment Trust, Series 2012-1 Class B, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust, Series 2012-2 Class A, Affirmed A3

....Senior Secured Enhanced Equipment Trust, Series 2012-2 Class B, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust, Series 2015-1 Class AA, Affirmed Aa3

....Senior Secured Enhanced Equipment Trust, Series 2016-1 Class A, Affirmed A2

....Senior Secured Enhanced Equipment Trust, Series 2016-1 Class AA, Affirmed Aa3

....Senior Secured Enhanced Equipment Trust, Series 2016-1 Class B, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust, Series 2016-2 Class A, Affirmed A2

....Senior Secured Enhanced Equipment Trust, Series 2016-2 Class AA, Affirmed Aa3

....Senior Secured Enhanced Equipment Trust, Series 2016-2 Class B, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust, Series 2018-1 Class A, Affirmed A2

....Senior Secured Enhanced Equipment Trust, Series 2018-1 Class AA, Affirmed Aa3

....Senior Secured Enhanced Equipment Trust, Series 2018-1 Class B, Affirmed Baa2

....Senior Secured Enhanced Equipment Trust, Series 2019-1 Class A, Affirmed A2

....Senior Secured Enhanced Equipment Trust, Series 2019-1 Class AA, Affirmed Aa3

....Senior Secured Enhanced Equipment Trust, Series 2019-2 Class A, Affirmed A2

....Senior Secured Enhanced Equipment Trust, Series 2019-2 Class AA, Affirmed Aa3

....Senior Secured Enhanced Equipment Trust, Series 2019-2 Class B, Affirmed Baa2

....Senior Secured Equipment Trust, Series 2007-1 Class A, Affirmed Baa1

....Senior Secured Equipment Trust, Series 2007-1 Class B, Affirmed Ba1

..Issuer: CLEVELAND (CITY OF) OH