OREANDA-NEWS. S&P Global Ratings said today that it has affirmed its 'BB-' corporate credit rating on Fort Worth, Texas-based American Airlines Group Inc. and its subsidiaries American Airlines Inc. and US Airways Inc. The outlook is stable.

At the same time, we raised our ratings on the companies' unsecured debt to 'BB-' from 'B+' and revised our recovery ratings on the debt to '4' from '5' based on our expectation that the unsecured creditors would receive greater recovery in a default scenario because of American Airlines Inc.'s improving aircraft fleet. The '4' recovery rating indicates our expectation for average (30%-50%; lower end of the range) recovery in a default scenario.

Additionally, we affirmed our issue-level ratings on most of the companies' EETCs, though we also raised and lowered our ratings on select certificates. Specifically, we raised our issue-level ratings on America West Airlines' (now part of US Airways Inc.) 1998-1 class B pass-through certificates to 'A - (sf)' from 'BBB+ (sf)', US Airways Inc.'s 1998-1 class B certificates to 'A - (sf)' from 'BBB+ (sf)', US Airways Inc.'s 1999-1 class B certificates to 'A - (sf)' from 'BBB+ (sf)', and US Airways Inc.'s 1999-1 class C certificates to 'BBB - (sf)' from 'BB+ (sf)'. We lowered our issue-level ratings on American Airlines Inc.'s 2014-1 class B certificates to 'BBB (sf)' from 'BBB+ (sf)'. These rating actions are based on changes in collateral coverage as aircraft values have changed and the certificates have amortized.

"We expect AAG to report solid earnings and cash flow in 2016 and 2017, though at levels that are somewhat below the very strong results the company posted in 2015 (when it generated record pretax income of $4.6 billion)," said S&P Global credit analyst Philip Baggaley. Heightened competition in certain markets, which has forced the company to lower its pricing, and the negative effects of foreign currency translation are pressuring American's revenue. This is similar to the near-term challenges that are facing other U. S. airlines. However, measures of industry revenue, such as passenger revenue per available seat mile (PRASM), remain healthy in absolute terms. This pressure should be partly offset by lower average fuel prices (AAG does not hedge its fuel purchases, so all of the benefits flow through to their income statement). In the first quarter of 2016, AAG's pretax earnings were $1.1 billion, outpacing the $932 million the company reported in first-quarter 2015, though we expect that year-over-year comparisons of fuel prices and costs will become less favorable as the year progresses. AAG has heavy capital spending commitments (more than $5 billion expected this year) as it continues to modernize its fleet. In addition, management has elected to continue undertaking substantial share repurchases even though this will likely raise the company's leverage somewhat. In 2015, AAG's fully adjusted funds from operations (FFO)-to-debt ratio was 24.6% and its debt-to-EBITDA metric was 3.3x, both of which are strong for the current rating. We believe that these ratios will likely weaken to around 20% and 3.8x, respectively, this year, which should still be enough to support our corporate credit rating on the company.

We expect American Airlines Group's 2016 earnings and cash flow to be weaker than the very strong levels the company posted in 2015. Nonetheless, we anticipate that they will still be good in absolute terms and by historical standards. The company's credit ratios will likely deteriorate somewhat as management continues to spend heavily on new aircraft and share repurchases, pushing AAG's funds flow-to-debt ratio to around 20%.

We could lower our ratings on AAG if the company's revenue and earnings deteriorate and the decline is not offset by reductions in its share repurchases or capital spending, leading AAG's FFO-to-debt ratio to fall below 15% for a sustained period and causing us to revise our assessment of the company's liquidity to adequate.

Although unlikely, we could raise our ratings on AAG if stronger-than-expected earnings and cash flow or reduced levels of capital spending and share repurchases cause its funds flow-to-debt ratio to rise to more than 30% on a sustained basis.