Posted on: Friday, April 11, 2003

Moody's downgrades 3 major airlines' debt

By Karren Mills
Associated Press

MINNEAPOLIS — Moody's Investor's Service has lowered its long-term debt ratings for three of the nation's largest airlines, citing higher risks for debtholders because of the drop in airline traffic.

Moody's yesterday downgraded the ratings of NWA Corp. and its Northwest Airlines subsidiary; Houston-based Continental Airlines; Atlanta-based Delta Air Lines; and ATA Holdings Corp., the parent of Indianapolis-based ATA Airlines Inc., the 10th-largest airline.

About $5.9 billion of debt securities were affected at Northwest, which had a rating below investment grade before the Moody's downgrade.

Northwest, which is based in Eagan, Minn., reported last week that its March traffic was down 6.4 percent from a year ago, including an 11 percent drop after the onset of the war in Iraq. About three of every four seats were filled on March flights, the airline said.

Northwest's approach to cost-cutting and managing liquidity were considered in its ratings downgrade, Moody's said, along with the possibility of government aid to the airline industry and the chance that airline traffic will increase as concerns lessen about the war in Iraq and severe acute respiratory syndrome, or SARS.

Even if airline traffic picks up, Moody's said pricing is expected to remain very competitive as some carriers reduce fares to generate short-term cash rather than long-term profits.

While Northwest has one of the strongest cash positions among U.S. carriers, Moody's said continued losses and increased borrowing has eroded the airline's financial strength.

At Continental, Moody's said, a failure to improve cash flow during the second and third quarters could cause limited liquidity and financial flexibility at the end of the year and during the first quarter of 2004. The airline's rating was below investment grade before the Moody's downgrade.

As for Delta, Moody's noted that the company has the highest pilot costs in the industry.

Since the Sept. 11 attacks, major airlines have laid off about 100,000 employees, and industrywide capacity has gone down about 14 percent from 2001.